C1 Energy Ltd.
TSX : CTT

C1 Energy Ltd.

August 11, 2005 00:57 ET

C1 Energy Ltd. Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - C1 Energy Ltd. (TSX:CTT) of Calgary, Alberta is pleased to report its operating and financial results for the six months ended June 30, 2005.

SECOND QUARTER HIGHLIGHTS

During the second quarter of 2005, C1 accomplished the following:

- Modified our Seal battery to increase capacity, lower operating costs, decrease downtime, and improve measurement

- Completed a $12.5 million equity financing and increased our unutilized credit facilities to $15.0 million

- Increased our 2005 capital budget to $25.0 million and our drilling program to 30 gross wells

- Commenced two new joint ventures at Blueberry and acquired a large new seismic database in the area

- Commenced our drilling operations in high impact Sarcee exploration gas project

- Maintained our exit 2005 production target of 1,900 boe/d



FINANCIAL AND OPERATING HIGHLIGHTS

For the Three For the Six
Months Ended Months Ended
June 30 March 31 June 30
------------------------------------------------------------------------
(Unaudited) 2005 2004 2005 2005 2004
------------------------------------------------------------------------
Financial ($000s, except
share information)
Petroleum and natural
gas sales 3,699 2,578 3,176 6,875 4,139
Cash flow from
operations (1) 1,864 1,133 1,316 3,180 1,931
Per share basic and
diluted $ 0.06 $ 0.06 $ 0.05 $ 0.11 $ 0.10
Net income (loss) 331 (601) (88) 243 1,964
Per share basic and
diluted $ 0.01 $ (0.03) $ 0.00 $ 0.01 $ 0.11
Capital expenditures, net 5,060 1,549 11,812 16,872 10,331
Net debt (2,559) (10,008) 5,883 (2,559) (10,008)
Total assets 61,868 35,717 54,600 61,868 35,717
Shareholders' equity 54,426 33,536 42,133 54,426 33,536
Common shares outstanding
(000s) 28,342 19,644 27,612 27,992 18,699

------------------------------------------------------------------------
Operations
Crude oil and NGL's
production
Barrels 26,837 39,226 35,266 62,103 64,822
Barrels per day 295 431 392 343 356
Average selling price
($/bbl) 59.18 51.35 61.01 60.22 48.82
WTI (US $/bbl) 52.08 38.23 50.70 51.39 36.58

Natural gas production
Thousand cubic feet 259,508 100,456 158,219 417,727 167,695
Thousand cubic feet
per day 2,852 1,104 1,758 2,308 921
Average selling price
($/mcf) 8.13 7.03 6.47 7.50 6.73

Oil equivalent production
Barrels of oil equivalent 70,088 55,969 61,636 131,724 92,771
Barrels of oil equivalent
per day (6:1) 770 615 685 728 510
Average selling price
($/boe) 52.78 48.63 51.52 52.19 46.28
Average operating
netback ($/boe) 31.56 24.26 29.10 30.41 24.85

Wells drilled
Gross - - 16 16 5
Net - - 10.7 10.7 3.7

(1) The Company, in part, evaluates its performance based on cash flow
from operations. Cash flow from operations is a non-GAAP measure
that represents cash generated from operating activities before
changes in non-cash working capital items during the period. Cash
flow from operations may not be comparable to similar measures used
by other companies.

------------------------------------------------------------------------


OPERATIONS REVIEW

Drilling Activity

As expected, our second quarter drilling program was limited due to spring breakup and a prolonged period of wet field conditions that lasted throughout the second quarter. We incurred preliminary costs on our new deep foothills well that was spudded in July and performed recompletion and well stimulation activities on wells in Gift Lake. Due to seasonal access restrictions, no additional wells from our first quarter drilling program were tested or completed. We expect to recommence our drilling program in the third quarter with a 14 gross, 9.5 net well program scheduled for the balance of 2005. Recapping from our first two quarters of 2005 we have drilled 16 wells (10.7 net) providing the following results:

- 12 gross (7.2 net) cased potential gas wells, of which one (1.0 net) gas well is on production, five (2.7 net) wells will be completed and tested in the third and fourth quarters of 2005, six (3.5 net) wells have been initially tested and will be completed in the first quarter of 2006.

- One (1.0 net) oil well which was producing at the end of the first quarter

- Exploration drilling accounted for 8 (5.2 net) wells at a 88% success rate

- Development drilling accounted for 8 (5.5 net) wells at a 75% success rate



Six Months Ended June 30, 2005
Exploration Development Total
------------------------------------------------------------------------
Gross Net Gross Net Gross Net
------------------------------------------------------------------------
Oil 1 1.0 - - 1 1.0
Gas 6 3.7 6 3.5 12 7.2
D&A 1 0.5 2 2.0 3 2.5
------------------------------------------------------------------------
Total 8 5.2 8 5.5 16 10.7
------------------------------------------------------------------------
------------------------------------------------------------------------

Six Months Ended June 30, 2004
Exploration Development Total
------------------------------------------------------------------------
Gross Net Gross Net Gross Net
------------------------------------------------------------------------
Oil 2 1.2 - - 2 1.2
Gas 2 1.5 - - 2 1.5
D&A 1 1.0 - - 1 1.0
------------------------------------------------------------------------
Total 5 3.7 - - 5 3.7
------------------------------------------------------------------------
------------------------------------------------------------------------


Production Summary

Our production for the second quarter of 2005 averaged 770 boe/d comprised of 295 bbls/d of light oil and 2,852 mcf/d of natural gas and has averaged 728 boe/d comprised of 343 bbls/d of light oil and 2,308 mcf/d of natural gas for the six-month period ended June 30. This represents an increase of 25% compared to production of 615 boe/d during the second quarter last year and an increase of 43% over the six-month period last year. Average production increased 12% from 685 boe/d last quarter but was substantially less than our first quarter exit production of 1,240 boe/d primarily due to disappointing results from our first quarter Blueberry gas discovery. This well was production tested at over 2.0 mmcf/d (348 boe/d net) from each of two zones prior to being tied in at the end of the first quarter at an initial restricted producing rate of 2.0 mmcf/d (348 boe/d net). Subsequent drainage by a competitor's well has reduced the productivity of this well to 375 mcf/d at the end of the second quarter; a production decline of 1.6 mmcf/d (270 boe/d net) from our first quarter exit rate. Thus, our new compression project did not make the positive contribution that was expected when it was put into operation late in the second quarter.

We had previously estimated that our first quarter exit rate of 1,240 boe/d would translate into approximately 900 to 1,000 boe/d for our second quarter average due to the anticipated dissipation of flush production rates on new wells, normal declines, and typical interruptions. We had expected to offset this to some degree through well and facility optimization activities. However, declines and deferrals were much greater than expected particularly as the quarter closed out. Prolonged access restrictions severely limited our ability to perform remedial operations to restore and enhance production rates. The reconciliation of our second quarter average production rate to our first quarter exit rate is detailed below:

- 210 boe/d of production decline from our initial Blueberry discovery caused by offset drainage which also dissipated the contribution of flush production we had anticipated from the prolific well productivity demonstrated when initially tested

- 80 boe/d of deferred production from the Chipmunk gas field caused by third party transportation and processing limitations and interruptions

- 70 boe/d of deferred production from our first quarter exit rate due to mechanical failures not repairable in the quarter due to extenuating weather conditions and the resultant lingering road bans at Seal

- 50 boe/d of production decline from our first quarter oil discovery at Gift Lake

- 60 boe/d of deferred production from all other fields which was related to normal weather related access and third party processing issues

Our deferred production at Chipmunk, Seal and Gift Lake are being repaired in the third quarter now that field access and wet field conditions have subsided. We will be conducting further work on our Chipmunk wells in the third quarter which will necessitate up to six weeks of shut-in to a portion of our production to allow for facility modifications. These modifications are anticipated to provide more reliable operations to exploit our incremental production capacity from these wells.

We now estimate that our non-producing capacity is now comprised of 620 boe/d at the end of the second quarter. This is composed of 210 boe/d of deferred production, as described above, and 410 boe/d of productive potential as outlined below:



------------------------------------------------------------------------
C1 Energy Q1 Exit Summary Q2 Exit Summary Variance
Behind Pipe Gas Oil Gas Oil
Production (mcf/d) (bbls/d) boe/d (mcf/d) (bbls/d) boe/d %
------------------------------------------------------------------------

Deferred
production
in Q2 0 0 0 480 130 210
Compression
projects
operated 1225 10 214 852 0 142
Compression
projects
non-operated 722 10 130 103 10 27
Tie-ins of
existing
operated wells 600 100 934 15 171
Oil facility &
well optimization 0 30 30 0 33 33
Tie-ins of
existing
non-operated
wells 0 0 0 218 0 36
------------------------------------------------------------------------
Total
non-producing
capacity 2547 50 475 2,587 189 620 31%
------------------------------------------------------------------------
Q1 exit
production rate 4161 546 1240
Q2 average
production rate 2852 295 770
------------------------------------------------------------------------
Total producing
plus
non-producing
capacity 6708 596 1714 5439 484 1390 -19%
------------------------------------------------------------------------
------------------------------------------------------------------------


While we do not expect to fully attain our total production capacity on a sustainable basis due to normal run-time factors and unavoidable delays, we believe we have the capability for our existing production capacity to result in higher average production rates in due course. In addition we have 6 wells (3.5 net) that were drilled and cased in the first quarter and that are anticipated to be completed and tested in the first quarter of next year. Our drilling program is expected to contribute significantly to growth as described below.

Outlook

While the second quarter was very challenging from an operational perspective, we are committed to execute our action plan to get back on track. We believe that that we can partially redeem our existing productive base and grow our average production rates with the contribution of new wells including several high impact opportunities. We remain committed to our exit production rate target of 1,900 boe/d for 2005 while acknowledging that our cushion to do so has probably been reduced. We believe that our drilling program is statistically robust with the potential for significant upside results from our high impact wells that may contribute more that the risk-adjusted volumes we have assumed. We are focused on executing well on the things that we can control and we are optimistic that our program has the potential to deliver the positive results expected by our shareholders.

Our drilling and operations program has recommenced in the third quarter now that field access conditions have improved. Our second half drilling program of 14 gross wells (9.5 net) includes exploratory and development targets at Gift Lake, Utikoomak, Blueberry, Sarcee and Hobbema.

Sarcee

Our Sarcee drilling program commenced after the close of the second quarter with the spudding of the C1 et al Sarcee 12-13-23-4W5M exploratory test. The well is anticipated to reach its total depth of 3,200 meters in late September. The target is potentially a 25 to 50 Bcf liquids-rich natural gas resource identified on 3D seismic. Similar pools of this type in this region have demonstrated exceptionally high deliverability and very long reserve life indices that could be produced into available third party facilities. C1 is funding 25% of the capital interest of this well and retaining a 55% working interest in the well after drilling and completion. C1 is the operator of this well.

Further development projects have been identified in the adjacent Whiskey Creek project, immediately west of the 12-13 Sarcee exploration well. This existing producing pool provides a potentially significant, high impact, development project on our land. C1 is currently working with its partner in this project for potential operations in 2005 or early 2006. We currently have a 50% non-operated working interest in a well that produces at a relatively low rate resulting in a very long reserve life index. We believe that further operations have the potential of increasing production by several orders of magnitude from this well. The corresponding reserve potential from those operations could have an equal or greater reserve impact and its value.

Gift Lake and Utikoomak

At Gift Lake we recommenced our light oil exploratory program after completing our "G" Pool waterflood project late in 2004 with one light oil discovery in the first quarter. Our drilling program for the second half of 2005 includes three wells that will explore for three separate potential new oil pools similar to the producing Gift Lake "G" pool, which currently has an estimated 3 to 5 million barrels of in place of light oil. C1 is the operator all of these wells and holds a 100% working interest in the wells and surrounding lands.

Two of these medium risk exploratory wells will be on our Gift Lake lands. The third well, at Utikoomak will be on lands to the north of the Gift Lake "G" Pool and the Gift Lake Metis Settlement. Potential production from these wells could be brought on prior to year-end. All of these projects are defined by proprietary 3D seismic programs and are the established producing fairways.

Blueberry

At Blueberry, completion, testing and tie-in operations of a 100% working interest well, drilled in the first quarter, will occur in the third quarter. Our drilling program will recommence in this multi-zone exploratory gas project with the drilling of up to three new wells in the remainder of 2005.

During the second quarter we added 4,800 net acres (15 gross sections) through acquisition and crown land sales in the Blueberry and greater Blueberry area. These land additions were in part made through the two new exploration joint ventures we announced in the quarter. Joint Venture operations also included the start-up of a new 24 square mile 3D seismic program to evaluate a portion of the joint venture area.

This project remains, despite the disappointment of our Q1 discovery, a key focus area for C1 with over 30 sections (gross) of undeveloped land. With completion of our new 3D seismic program C1 will have 160 square miles of 3D coverage to continue to grow the exploration opportunities in this area.

Our existing productive capacity, our drilling inventory, and our exceptionally large land base are expected to provide strong opportunities for the foreseeable future

MANAGEMENT'S DISCUSSION AND ANALYSIS



Capital Expenditures

For the Three Months For the Six Months
Ended June 30 Ended June 30
($000s) 2005 2004 2005 2004
------------------------------------------------------------------------
Drilling and completions 1,168 531 9,765 7,115
Land 362 197 778 358
Equipment and facilities 939 178 2,680 1,411
Geological & geophysical 1,773 393 2,657 706
Asset retirement
obligations - - 115 46
Capitalized general and
administration expenses 374 122 422 172
Acquisitions 425 128 425 568
Other 19 - 30 1
------------------------------------------------------------------------
Total capital
expenditures 5,060 1,549 16,872 10,376
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital expenditures were $5.1 million in the second quarter and $16.9 million year-to-date compared to $1.5 million and $10.4 million respectively over the same periods a year ago. Capital expenditures for the quarter primarily related to some additional drilling costs on non-operated wells drilled late in the first quarter and preliminary costs incurred on the Sarcee well, completion costs on certain of the wells drilled in the first quarter along with recompletion and stimulation activities on three wells in Gift Lake, our share of seismic costs incurred in our new joint venture in the Blueberry area, the acquisition of a partner's interest in the Blueberry 11-3 wellbore and facilities costs related to the upgrade of our battery in Seal and compressor costs at the 02-18 well in Blueberry.

CAPABILITIES

Funding of Capital Program

Capital expenditures for the six months ended June 30, 2005 were $16.9 million. These expenditures were funded primarily by cash flow, new equity raised during the second quarter and available working capital.

Working Capital

C1 had working capital of $2.6 million at June 30, 2005. This represents an increase in working capital of $8.4 million from last quarter primarily resulting from the $12.5 equity offering that closed in June partially offset by capital expenditures in the quarter.

Bank Facilities

After the annual review, C1 was able to obtain an increase in total available credit facilities from $8.5 million to $15.0 million. The facilities are composed of an $11.0 million revolving demand loan plus a $4.0 million non-revolving acquisition/development demand loan. The interest rate on outstanding debt is set at the bank's prime lending rate plus 0.25% and 0.50% respectively. The facilities are secured by a floating charge over all of C1's assets. No amount was outstanding at June 30, 2005.

Share Capital

At June 30, 2005, C1 had 32,725,544 shares issued and outstanding an increase of 5,116,136 from year end December 31, 2004 primarily due to the equity offering of 5,088,654 that closed on June 18, 5,482 shares issued on conversion of performance shares and 22,000 issued upon the exercise of stock options. The weighted average number of shares outstanding for the period was 27,992,008.



SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS

For the Three Months Ended June 30
2005 2004
------------------------------------------------------------------------
Operations
Natural gas (mcf/d) 2,852 1,104
Oil and NGL's (bbls/d) 295 431
Boe/d (6:1) 770 615
------------------------------------------------------------------------

Financial ($000s except
per unit amounts) $ $/boe $ $/boe
------------------------------------------------------------------------
Oil and gas production 3,699 52.78 2,722 48.63
Royalties (net of ARTC) (638) (9.11) (736) (13.15)
Operating (770) (10.99) (484) (8.65)
Transportation (78) (1.11) (144) (2.57)
------------------------------------------------------------------------
Operating netback 2,213 31.57 1,358 24.26
General and
administrative (349) (4.97) (208) (3.71)
Current taxes - - (18) (0.32)
------------------------------------------------------------------------
Cash flow from operations 1,864 26.60 1,132 20.23
Depletion, depreciation
and accretion (1,124) (16.04) (1,579) (28.21)
Stock-based compensation (137) (1.96) (155) (2.77)
Future tax expense (272) (3.88) 1 0.01
------------------------------------------------------------------------
Net income (loss) 331 4.72 (601) (10.74)
------------------------------------------------------------------------
Earnings (loss) per share 0.01 (0.03)
------------------------------------------------------------------------
Working capital
Total assets
------------------------------------------------------------------------
------------------------------------------------------------------------


For the Six Months Ended June 30
2005 2004
------------------------------------------------------------------------
Operations
Natural gas (mcf/d) 2,308 921
Oil and NGL's (bbls/d) 343 356
Boe/d (6:1) 728 510
------------------------------------------------------------------------

Financial ($000s except
per unit amounts) $ $/boe $ $/boe
------------------------------------------------------------------------
Oil and gas production 6,875 52.19 4,294 46.29
Royalties (net of ARTC) (1,371) (10.41) (1,037) (11.18)
Operating (1,345) (10.21) (797) (8.59)
Transportation (153) (1.16) (155) (1.67)
------------------------------------------------------------------------
Operating netback 4,006 30.41 2,305 24.85
General and
administrative (826) (6.27) (348) (3.75)
Current taxes - - (26) (0.28)
------------------------------------------------------------------------
Cash flow from operations 3,180 24.14 1,931 20.81
Depletion, depreciation
and accretion (2,270) (17.23) (2,546) (27.44)
Stock-based compensation (286) (2.17) (308) (3.32)
Future tax expense (381) (2.89) 2,887 31.12
------------------------------------------------------------------------
Net income (loss) 243 1.85 1,964 21.17
------------------------------------------------------------------------
Earnings (loss) per share 0.01 0.11
------------------------------------------------------------------------
Working capital 2,561 10,008
Total assets 62,084 35,717
------------------------------------------------------------------------
------------------------------------------------------------------------


RESULTS OF OPERATIONS

Oil and Gas Production

Three Months Six Months
Ended June 30 Ended June 30
2005 2004 2005 2004
------------------------------------------------------------------------
Crude oil and NGL sales 1,588 2,015 3,740 3,165
Natural gas sales 2,111 707 3,135 1,129
------------------------------------------------------------------------
Total petroleum and
natural gas sales 3,699 2,722 6,875 4,294
------------------------------------------------------------------------


Average Selling Prices

Three Months Six Months
Ended June 30 Ended June 30
2005 2004 2005 2004
------------------------------------------------------------------------
Crude oil and NGL's ($/bbl) 59.18 51.35 60.22 48.82
Natural gas ($/mcf) 8.13 7.03 7.50 6.73
Total average realized
price ($/boe) 52.78 48.63 52.19 46.29
------------------------------------------------------------------------


Crude Oil Pricing

C1 received a price of $59.18/bbl for its crude oil and NGL's for the quarter and $60.22/bbl year-to-date compared to $51.35 and $48.82 respectively for the same periods last year. Crude prices were 3% lower than the first quarter price of $61.01. West Texas Intermediate prices have remained strong in 2005, averaging more than US $51.00/bbl and are generally forecast to remain strong for the balance of the year. The high crude oil prices continue to be bolstered by strength in world oil demand and low levels of spare production capacity worldwide.

Natural Gas Pricing

C1 received a price of $8.13/mcf for its natural gas production for the quarter and $7.50 year-to-date compared to $7.03/mcf and $6.73/mcf over the same periods last year and $6.47/mcf for the last quarter. C1markets its gas to a third party based on the daily index price at AECO.

Royalties

Royalty costs net of ARTC were $0.6 million for the quarter ($9.11/boe) and $1.4 million ($10.41/boe) for the six-month period ended June 30 compared to $0.7 million ($13.15/boe) and $1.0 million (11.18/boe) for the same periods last year. Royalty costs were higher than last quarters' royalties of $0.7 million ($11.89/boe). The reduction in royalty costs in the quarter primarily resulted from gas cost allowance adjustments related to 2004 royalties. For the quarter, crown royalties before ARTC averaged 15.2% and were 17.4% year-to-date while freehold and other royalties averaged 5.1% of total revenue for the quarter and averaged 5.4% of total revenue for the six-month period. In 2004, crown royalties before ARTC averaged 24.9% and 23.3% of total revenue for the three and six-month periods and other royalties averaged 5.8% and 3.9% of total revenue during the same periods.

Operating Expenses

Operating costs for the quarter were $0.8 million ($10.99/boe) and are $1.3 million ($10.21/boe) year-to-date compared to $0.5 million (8.65/boe) and $0.8 million ($8.59/boe) last year and $0.6 million ($9.32/boe) for the last quarter. Overall lease operating expenses have been higher than last year due to higher costs of services in the industry. The upgrades that have been made to the Seal battery will allow for additional throughput once the wells have been optimized which should result in more efficient and cost effective operations in that area. The well optimizations will commence in the third quarter. The battery facilities at Gift Lake are also capable of handling substantially more emulsion volumes once the new wells planned for the area have been drilled in the third and fourth quarters. This would reduce operating costs on a boe basis.

Transportation

Transportation costs were $78,000 for the three month period ($1.11/boe) and $153,000 ($1.16/boe) compared to $144,000 ($2.57/boe) and $155,000 ($1.67/boe) over the same periods a year ago and $75,000 ($1.21/boe) last quarter.

General and Administrative Expenses

General and administrative expenses were $0.3 million for the quarter ($4.97/boe) and $1.0 million ($6.27/boe) compared to $0.2 million ($3.71/boe) and $0.3 million ($3.75/boe) over the corresponding periods last year and $0.5 million ($7.74/boe) last quarter. Costs were higher than last year primarily due to higher staff levels, costs associated with having our own office space and increased interest and bank charges as C1 began utilizing its credit facilities in the second quarter. Costs were lower than last quarter due to higher capitalized amounts.

Stock-based Compensation

Stock-based compensation was $137,000 ($1.96/boe) for the quarter and $286,000 ($2.17) for the six months ended June 30 compared to last years' charges of $155,000 ($2.77/boe) and $308,000 ($3.32/boe) for the same periods and were also slightly lower than last quarter when we incurred costs of $149,000 ($2.42/boe). The decrease resulted from the redemption of certain performance shares during the period. This represents a non-cash charge resulting from applying a Black-Scholes model to determine the fair value of Performance Shares and options that were issued. The charge is amortized over the respective vesting periods.

Depletion, Depreciation and Accretion

Depletion, depreciation, and accretion amounted to $1.1 million ($16.04/boe) for the quarter and $2.3 million ($17.23/boe) year-to-date compared to $1.6 million ($28.21/boe) and $2.5 million ($27.44/boe) respectively last year and $1.1 million ($18.59/boe) last quarter. Depletion was lower this quarter primarily due to proved reserves being assigned to certain wells that were drilled last quarter.

Capital and Income Taxes

C1 has made no accrual for capital taxes this year compared to $26,000 last year due to changes in tax regulations.

Future tax expense was $201,000 for the quarter and $310,000 for the six-month period compared to $1,000 of future tax expense and $2.9 million of future tax benefits recorded during the same periods last year. The effective tax rate is higher than the statutory rate of 38% as a result of non-deductible expenses such as stock-based compensation and crown royalties only partially offset by the resource allowance deduction. Last year's recovery resulted from recognizing future tax benefits due to the renunciation of $7.3 million of resource expenditures to flow through shareholders during the period.

Cash Flow from Operations and Net Loss

Cash flow from operations was $1.9 million for the quarter and $3.2 million for the six-month period compared to $1.1 million and $1.9 million for the same period last year. We had a net income of $331,000 for the quarter ($0.01/share) and net income of $243,000 ($0.01/share) year-to-date compared to a net loss of $601 ($0.03/share) and net income of $2.0 million ($0.11/share) over the same periods last year.

Additional information relating to the Company can be found on SEDAR at www.sedar.com.

Forward Looking Statements

This disclosure contains forward looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond C1's control, including: the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. C1's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that C1 will derive there from.

Financial statements for the six months ended June 30, 2005 and 2004 are attached.



C1 ENERGY LTD.

Balance Sheet
(dollars in thousands) (unaudited)
------------------------------------------------------------------------

June 30 December 31
2005 2004
-----------------------

ASSETS

Current assets
Cash and cash equivalents $ 3,718 $ 6,930
Accounts receivable 3,656 3,754
Prepaid expenses 150 80
-----------------------
7,524 10,764

Property and equipment (note 2) 48,780 34,158
Goodwill 5,780 5,780
Future income tax (note 6) - 1,983
-----------------------
$ 62,084 $ 52,685
-----------------------
-----------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities $ 4,965 $ 6,296

Asset retirement obligations 670 536

Future income tax (note 6) 1,878 -
-----------------------
7,513 6,832
-----------------------

SHAREHOLDERS' EQUITY

Share capital (note 4) 50,282 42,072
Warrants 91 91
Contributed surplus (note 4) 964 699
Retained earnings 3,234 2,991
-----------------------
54,571 45,853
-----------------------
$ 62,084 $ 52,685
-----------------------
-----------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.

Statement of Operations and Retained Earnings
(dollars in thousands except per share amounts) (unaudited)
------------------------------------------------------------------------

Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------------------------------
Revenue
Petroleum and natural gas sales $ 3,699 $ 2,722 $ 6,875 $ 4,294
Royalties, net of Alberta Royalty
Tax Credit (638) (736) (1,371) (1,037)
--------------------------------------
3,061 1,986 5,504 3,257
--------------------------------------
Expenses
Operating 770 484 1,345 797
Transportation 78 144 153 155
General and administrative 349 208 826 348
Stock-based compensation (note 4) 137 155 286 308
Depletion, depreciation and
accretion 1,124 1,579 2,270 2,546
--------------------------------------
2,458 2,570 4,880 4,154
--------------------------------------
Income (loss) before income taxes 603 (584) 624 (897)
--------------------------------------
Income taxes (recovery)
Current - 18 - 26
Future 272 (1) 381 (2,887)
--------------------------------------
272 17 381 (2,861)
--------------------------------------

Net income (loss) $ 331 $ (601) $ 243 $ 1,964

Retained earnings (deficit),
beginning of period 2,903 (495) 2,991 (3,060)
Elimination of accumulated deficit - 3,060 - 3,060
--------------------------------------

Retained earnings, end of period $ 3,234 $ 1,964 $ 3,234 $ 1,964
--------------------------------------
--------------------------------------

Earnings(loss) per common share
- Basic $ 0.01 $ (0.03) $ 0.01 $ 0.11
- Diluted $ 0.01 $ (0.04) $ 0.01 $ 0.10
--------------------------------------
--------------------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.

Statement of Cash Flows
(dollars in thousands except per share amounts) (unaudited)

Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------------------------------
Cash provided by (used in)

Operating activities
Net income (loss) $ 331 $ (601) $ 243 $ 1,964
Add:
Future income taxes (recovery) 272 (1) 381 (2,887)
Depletion, depreciation and
accretion 1,124 1,579 2,270 2,546
Stock-based compensation 137 156 286 308
--------------------------------------
Cash flow from operations 1,864 1,133 3,180 1,931
Net change in non-cash working
capital (note 7) (3,255) (3,255) (6,363) 39
--------------------------------------
(1,391) (2,122) (3,183) 1,970
--------------------------------------
Investing activities
Property and equipment
expenditures (5,060) (1,549) (16,757) (10,331)
Net change in non-cash working
capital (note 7) (2,347) (1,268) 5,059 (565)
--------------------------------------
(7,407) (2,817) (11,698) (10,896)
--------------------------------------
Financing activities
Issuance of common shares 12,500 10,000 12,555 10,000
Redemption of performance shares (2) - (2) -
Share issue costs (860) (570) (884) (572)
--------------------------------------
11,638 9,430 11,669 9,428
--------------------------------------
Net change in cash and cash
equivalents 2,840 4,491 (3,212) 502
Cash and cash equivalents,
beginning of period 878 5,971 6,930 9,960
--------------------------------------
Cash and cash equivalents,
end of period $ 3,718 $10,462 $ 3,718 $10,462
--------------------------------------
--------------------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.

Notes to the Financial Statements
For the three months ended March 31, 2005 and 2004
(tabular dollar amounts in thousands except per share amounts)


1. BASIS OF PRESENTATION

The interim financial statements of C1 Energy Ltd. ("C1" or the "Company") have been prepared following the same accounting policies and methods of computation as the audited financial statements for the year ended December 31, 2004. The interim financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's annual report for the year ended December 31, 2004.



2. PROPERTY AND EQUIPMENT

June 30, 2005 December 31, 2004
------------------------------------------------------------------------
Petroleum and natural gas properties
and equipment $ 58,789 $ 41,917
Accumulated depletion and depreciation (10,009) (7,759)
------------------------------------------------------------------------
Net book value $ 48,780 $ 34,158
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2005, $19.5 million (December 31, 2004 - $16.7 million) of costs relating to unproved properties and seismic were excluded from costs subject to depletion.

During the six months ended June 30, 2005, $421,600 (June 30, 2004 - $172,000) of general and administrative expenses relating to exploration and development activities were capitalized.

3. BANK LOAN

On June 30, 2005, the Company had $15,000,000 of credit facilities available with a Canadian chartered bank. The facilities are composed of an $11,000,000 revolving demand loan facility plus a $4,000,000 non-revolving acquisition/development demand loan. The interest rate on outstanding debt is set at the bank's prime lending rate plus 0.25% and 0.05% respectively. The facilities are secured by a floating charge over all of C1's assets. No amount was outstanding at June 30, 2005.



4. SHARE CAPITAL

a) Authorized
The Company is authorized to issue an unlimited number of common
shares and 1,442,000 performance shares.

b) Issued and outstanding

Number of
Common shares shares Amount
------------------------------------------------------------------------

Balance,January 1, 2005 27,609,408 $42,059
Issued on conversion of performance shares 5,482 -
Issued on exercise of stock options 22,000 55
Issuance of common shares (i) 4,255,320 10,000
Issuance of flow-through shares (i) 833,334 2,500
Compensation expense related to options exercised
and performance shares converted - 21
Tax effect of renunciation of resource
expenditures on flow-through shares (ii) - (3,823)
Share issue costs, net of future tax benefit
of $342,947 - (541)
------------------------------------------------------------------------
Balance, June 30, 2005 32,725,544 $50,271
------------------------------------------------------------------------
------------------------------------------------------------------------

i) On June 18, 2005 C1 completed a private placement equity financing
to issue 4,255,320 common shares plus 833,334 common shares on a
flow-through basis at a price of $2.35 and $3.00 per share
respectively for total proceeds of $12,500,000 prior to share
issuance costs of $857,000.
ii) In accordance with the terms of the Company's various flow-through
share offerings, and pursuant to certain provisions of the Income
Tax Act (Canada), the Company renounced, for income tax purposes,
exploration expenditures related to the purchases of its
flow-through shares in the aggregate of $9,900,000.


Number of
Performance shares shares Amount
------------------------------------------------------------------------
Balance, January 1, 2005 1,344,000 $ 13
Conversion into common shares (25,335) -
Redemption upon termination of
services agreement (i) (169,665) (2)
------------------------------------------------------------------------
Balance, June 30, 2005 1,149,000 $ 11
------------------------------------------------------------------------
------------------------------------------------------------------------

The fair value of each Performance Share was determined, at date of
issuance, using the Black-Scholes model with the variables described in
note 5(c). This value is amortized over the expected life of the
Performance Shares and is included in stock-based compensation expense.

i) The Company terminated a services agreement with Navigo Energy Inc.
("Navigo") whereby certain administrative services were performed for
C1 by Navigo. As a result, certain performance shares that were
issued to Navigo employees did not vest and were redeemed by C1 as
the individuals were no longer service providers to C1.


Number of
Warrants warrants Amount
------------------------------------------------------------------------
Balance, January 1, 2005 and June 30, 2005 371,116 $ 91
------------------------------------------------------------------------
------------------------------------------------------------------------

i) On the acquisition of Extreme, C1 issued 371,116 share purchase
warrants to Extreme warrant holders with an ascribed price of
$91,100 on the same pro rata terms as the Extreme common
shareholders. The fair value of each warrant was determined, at the
date of issuance, using the Black-Scholes model. The fair value of
the warrants issued was estimated to be $0.24 per share using a risk
free interest rate of 4.0%, volatility of 50%, and an average
expected life of 0.6 years. This amount is amortized over the life
of the warrant and is included in stock-based compensation expense.
Subsequent to June 30, 2005, a total of 311,182 warrants that were
due to expire on July 27, 2005 were exercised for proceeds of
$804,251. Additional details on the share purchase warrants
outstanding at December 31, 2004 are as follows:


Exercise Price Number of Contractual
($/share) Warrants (000's) Life (years) Expiry Date
------------------------------------------------------------------------
2.25 55,500 0.17 August 31, 2005
2.48 (i) 272,514 0.07 July 27, 2005
2.70 43,602 0.07 July 27, 2005
------------------------------------------------------------------------
2.47 371,116 0.09
------------------------------------------------------------------------
------------------------------------------------------------------------

i) Each warrant entitles the holder to purchase one Common Share of the
company at a price of $2.48 per share or one flow through common
share at a price of $2.93 per share until expiry on July 27, 2005.


Contributed surplus Amount
------------------------------------------------------------------------
Balance, beginning of period $ 699
Stock-based compensation 286
Exercise of options and conversion of performance shares (21)
------------------------------------------------------------------------
Balance, June 30, 2005 $ 964
------------------------------------------------------------------------
------------------------------------------------------------------------


c) Stock-based compensation

C1 issued 710,410 options to purchase C1 Common Shares to certain officers and employees during the period that have a term of five years and vest over three years on the basis of one-third per year at exercise prices of $2.10 and $2.31 per share. An additional 22,000 options were issued to a former employee of Extreme Energy Corporation, a company acquired by C1 in 2004 at an exercise price of $2.50 per share. The options extended to the former employee of Extreme expired in March 2005. The fair value of each option was determined at the stock option grant date using the Black-Scholes model. The fair value was estimated to be an average of $0.81 per share using a risk free interest rate of 4.0%, volatility of 50%, and an expected life of three years. This value is amortized over the expected life of the options and is included in stock-based compensation expense.



Additional details on the Company's stock options outstanding at June
30, 2005 are as follows:

Exercise Price Number of Contractual Options
($/share) Options (000's) Life (years) Exercisable (000s)
------------------------------------------------------------------------
1.75 325,000 4.38 years -
1.91 175,000 3.97 years -
1.95 125,000 4.01 years -
2.10 75,000 4.61 years -
2.31 635,410 4.75 years -
------------------------------------------------------------------------
2.08 1,335,410 4.48 years -
------------------------------------------------------------------------
------------------------------------------------------------------------


The activity related to the plan is as follows:

Number of Weighted
options Average Price
------------------------------------------------------------------------
Balance, January 1, 2005 625,000 1.83
Granted 732,410 2.29
Exercised (22,000) 2.50
------------------------------------------------------------------------
Balance, June 30, 2005 1,335,410 2.08
------------------------------------------------------------------------
------------------------------------------------------------------------


5. EARNINGS PER SHARE

C1 uses the treasury stock method to determine dilution resulting from the issuance of stock options, warrants and other dilutive instruments. The number of shares used to calculate the diluted net income per share for the three and six months ended June 30, 2005 included the weighted average number of shares outstanding of 28,341,841 and 27,992,008 respectively plus 2,343,345 shares related to the dilutive effects of the exercise of stock options and the conversion of Performance Shares (three and six months ended June 30, 2004 - 19,644,526 and 18,699,471 plus 444,675 shares related to the dilutive effect of the conversion of Performance Shares).



6. INCOME TAXES

The components of the future income tax liability (asset) are as
follows:

June 30, December 31,
2005 2004
------------------------------------------------------------------------
Future income tax liabilities (assets)
Property and equipment $ 2,783 $ (1,314)
Share issue costs (835) (620)
Resource allowance (69) (49)
------------------------------------------------------------------------
Net future income tax liability (asset) $ 1,879 $ (1,983)
------------------------------------------------------------------------
------------------------------------------------------------------------


7. SUPPLEMENTARY CASH FLOW INFORMATION

Changes in non-cash working capital items increased (decreased) cash
and cash equivalents as follows:

Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Accounts receivable $ (749) $ 249 $ 98 $ (1,136)
Prepaid expenses 52 37 (70) 60
Accounts payable and
accrued liabilities (4,905) (4,089) (1,332) 550
------------------------------------------------------------------------
Change in non-cash
working capital $ (5,602) $ (4,523) $ (1,304) $ (526)
------------------------------------------------------------------------
------------------------------------------------------------------------

Operating activities $ (3,255) $ (3,255) $ (6,363) $ 39
Investing activities (2,347) (1,268) 5,059 (565)
------------------------------------------------------------------------
Change in non-cash
working capital $ (5,602) $ (4,523) $ (1,304) $ (526)
------------------------------------------------------------------------
------------------------------------------------------------------------


There was $34,000 and $41,000 paid during the three and six month periods ended June 30, 2005 respectively for interest expense (2004 - $nil) and there were no income and capital taxes paid during the same periods this year or last.

Contact Information

  • C1 Energy Ltd.
    Hugh Pattillo
    President & CEO
    (403) 232-1115 ext 107
    or
    C1 Energy Ltd.
    Gary Lobb
    Vice-President, Finance & CFO
    (403) 232-1115 ext 106
    Website: www.c1energy.ca