C1 Energy Ltd.
TSX : CTT

C1 Energy Ltd.

August 10, 2006 02:00 ET

C1 Energy Ltd. Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2006) - C1 Energy Ltd. (TSX:CTT) of Calgary, Alberta is pleased to report its operating and financial results for the six months ended June 30, 2006.

SECOND QUARTER HIGHLIGHTS

During the second quarter of 2006, C1 accomplished the following:

- Drilled a new natural gas discovery in our core Peace River Arch area

- Increased average production to 840 boe/d from 685 boe/d last quarter



FINANCIAL AND OPERATING HIGHLIGHTS
For the Three For the Six
Months Ended Months Ended
June 30 March 31 June 30
------------------------------------------------------------------------
(Unaudited) 2006 2005 2006 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Financial
($000s, except share
information)
Petroleum and natural gas
sales 3,616 3,699 3,273 6,889 6,875
Cash flow from operations (1) 1,323 1,864 1,376 2,699 3,180
Per share basic and diluted $ 0.04 $ 0.06 $ 0.04 $ 0.08 $ 0.11
Net income 245 331 128 373 243
Per share basic and diluted $ 0.01 $ 0.01 $ 0.00 $ 0.01 $ 0.01
Capital expenditures, net 5,913 5,060 5,765 11,678 16,872
Net debt 13,446 (2,559) 8,975 13,446 (2,559)
Total assets 79,324 61,868 75,358 79,324 61,868
Shareholders' equity 57,432 54,426 57,134 57,432 54,426
Common shares outstanding
(000s) 33,053 28,342 33,036 33,045 27,992

------------------------------------------------------------------------
------------------------------------------------------------------------
Operations
Crude oil and NGL's production
Barrels 20,989 26,837 23,153 44,142 62,103
Barrels per day 231 295 257 244 343
Average selling price ($/bbl) 73.52 59.18 66.77 69.99 60.22
WTI (US $/bbl) 70.61 52.08 63.39 67.00 51.39
Natural gas production
Thousand cubic feet 332,524 259,508 231,170 563,694 417,727
Thousand cubic feet per day 3,654 2,852 2,569 3,114 2,308
Average selling price ($/mcf) 6.24 8.13 7.47 6.74 7.50
Oil equivalent production
Barrels of oil equivalent 76,410 70,088 61,681 138,091 131,724
Barrels of oil equivalent per
day (6:1) 840 770 685 763 728
Average selling price ($/boe) 47.32 52.78 53.06 49.89 52.19
Average operating netback
($/boe) 26.24 31.56 29.09 27.52 30.41
Wells drilled
Gross 4 - 3 7 16
Net 0.9 - 2.0 2.9 10.7

(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

C1 participated in the drilling of 4 wells (0.9 net) during the second quarter. We drilled one well in the Peace River Arch area and farmed-out the drilling of three wells in Cardinal Lake.



Six Months Ended June 30, 2006 Six Months Ended June 30, 2005
Exploration Development Total Exploration Development Total
------------------------------------------------------------------------
Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net
------------------------------------------------------------------------
Oil 1 1.0 - - 1 1.0 1 1.0 - - 1 1.0
Gas 6 1.9 - - 6 1.9 6 3.7 6 3.5 12 7.2
D&A - - - - - - 1 0.5 2 2.0 3 2.5
------------------------------------------------------------------------
Total 7 2.9 - - 7 2.9 8 5.2 8 5.5 16 10.7
------------------------------------------------------------------------


Production Summary

Our production for the second quarter of 2006 averaged 840 boe/d comprised of 231 bbls/d of light oil and 3,654 mcf/d of natural gas and has averaged 763 boe/d for the six month period comprised of 244 bbls/d of light oil and 3,114 mcf/d of natural gas. This represents an increase of 31% compared to average production of 685 boe/d last quarter and is 9% higher than the second quarter of 2005 when we produced 770 boe/d. Our production mix has changed from the same period last year as we have averaged about 68% natural gas production compared to about 53% for the corresponding six month period last year. The increased production from last quarter primarily related to new production at Blueberry coming on-stream.

Outlook

During the third quarter, our plans include the start-up of compression for the Royce 08-28 well along with the tie-in of our new discovery in the Peace River Arch area. We will continue with our drilling program and expect to drill approximately 8 (4.0 net) new wells over the balance of 2006. The program will primarily consist of light oil and multi-zone gas drilling at Blueberry and Seal. C1's inventory of projects provides the company and its shareholders with strong potential for growth.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis ("MD&A") should be read in conjunction with the audited financial statements for the year ended December 31, 2005. This MD&A was written on August 8th, 2006.



Capital Expenditures

For the Three Months For the Six Months
Ended June 30 Ended June 30
($000s) 2006 2005 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Drilling and completions 2,815 1,168 5,770 9,765
Land 794 362 1,462 778
Equipment and facilities 1,861 939 3,584 2,680
Geological & geophysical (6) 1,773 - 2,657
Asset retirement obligations 120 - 234 115
Capitalized general and
administration expenses 329 374 621 422
Acquisitions - 425 - 425
Other - 19 7 30
------------------------------------------------------------------------
Total capital expenditures 5,913 5,060 11,678 16,872
------------------------------------------------------------------------
------------------------------------------------------------------------



Capital expenditures were $5.9 million in the second quarter and $11.7 million year-to-date compared to $5.1 million and $16.9 million respectively over the same periods a year ago. Capital during the second quarter was spent primarily on land, drilling and facilities in the core Blueberry area as well as drilling and completion costs at Utikoomak.

LIQUIDITY AND CAPITAL RESOURCES

Funding of Capital Program

Capital expenditures for the six months ended June 30, 2006 were $11.7 million. These expenditures were funded primarily by cash flow, and available working capital and bank debt. C1 expects the capital expenditures for the balance of the year to be funded by cash flow, bank debt and by new equity that was raised subsequent to the end of the quarter.

Working Capital

C1 had a working capital deficiency of $13.4 million at June 30, 2006. This represents an increase in net debt of $4.5 million from last quarter in order to fund our capital program.

Bank Facilities

C1 has $17.0 million of credit facilities available with a Canadian chartered bank. The facilities were composed of an $13.0 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 0.5% respectively. The facilities are secured by a floating charge over all of C1's assets. There was $12.3 million drawn at June 30, 2006. In July 2006 the credit facilities were modified so that the entire $17.0 million facility is composed of a revolving demand loan.

Share Capital

At June 30, 2006, C1 had 33,074,220 shares issued and outstanding, an increase of 37,494 from last quarter due to conversion of performance shares. The weighted average number of shares outstanding for the six month period was 33,045,113 (2005 -27,992,008). Subsequent to the end of the quarter, C1 raised $4.0 million of gross proceeds through the issuance of 2,666,668 flow-through common shares at a price of $1.50 per share. Current outstanding shares at August 8th, 2006 are 35,074,220 and 1,064,667 performance shares which, on August 8, 2006, would be convertible into approximately 73,400 common shares of C1.

RESULTS OF OPERATIONS

Revenue

Oil and natural gas sales were $6.9 million for the six months ended June 30, 2006, similar to the same period last year. For the three months ended June 30, 2006, oil and natural gas sales decreased 2% to $3.6 million compared to $3.7 million for the same period last year and increased 10% from $3.3 million last quarter. The decrease in revenue compared to last year was due to lower commodity prices which were only partially offset by higher production volumes.




Oil and Gas Sales
Three Months Six Months
Ended June 30 Ended June 30
($000s) 2006 2005 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Crude oil and NGL sales 1,543 1,588 3,089 3,740
Natural gas sales 2,073 2,111 3,800 3,135
------------------------------------------------------------------------
Total petroleum and natural
gas sales 3,616 3,699 6,889 6,875
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Selling Prices
Three Months Six Months
Ended June 30 Ended June 30
2006 2005 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Crude oil and NGL's ($/bbl) 73.52 59.18 69.99 60.22
Natural gas ($/mcf) 6.24 8.13 6.74 7.50
Total average realized price
($/boe) 47.34 52.78 49.89 52.19
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties

Royalty costs net of ARTC were $0.6 million for the quarter ($7.90/boe) and $1.2 million ($8.81/boe) for the six-month period ended June 30 compared to $0.6 million ($9.11/boe) and $1.4 million ($10.41/boe) for the same periods last year. Royalty costs were lower than last quarters' royalties of $0.6 million ($9.94/boe) due to gas cost allowance adjustments related to 2005 royalties. For the quarter, crown royalties before ARTC averaged 17.2% and were 17.4% year-to-date while freehold and other royalties averaged 3.2% of total revenue for the quarter and averaged 3.8% of total revenue for the six-month period. In 2005, crown royalties before ARTC averaged 15.2% and 17.4% of total revenue for the three and six-month periods and other royalties averaged 5.1% and 5.4% of total revenue during the same periods.

Operating Expenses

Operating costs for the quarter were $1.0 million ($12.83/boe) and are $1.8 million ($12.82/boe) year-to-date compared to $ million ($10.99/boe) and $1.3 million ($10.21/boe) last year and $0.8 million ($12.81/boe) for the last quarter. Operating costs are higher than last year due to increased cost of services.

Transportation

Transportation costs were $27,000 for the three month period ($0.35/boe) and $102,000 ($0.74/boe) year-to-date compared $78,000 ($1.11/boe) and $153,000 ($1.16/boe) over the same periods a year ago and $75,000 ($1.21/boe) last quarter Transportation costs were lower this quarter primarily due to a change in our production mix.



General and Administrative Expenses

For the Three Months For the Six Months
Ended June 30 Ended June 30
2006 2005 2006 2005
------------------------------------------------------------------------
($000s except per
unit amounts) $ $/boe $ $/boe $ $/boe $ $/boe
------------------------------------------------------------------------
------------------------------------------------------------------------
Gross G&A 781 10.22 777 11.09 1,499 10.86 1,442 10.95
Capitalized
overhead (329) (4.30) (374) (5.34) (621) (4.50) (421) (3.20)
Overhead
recoveries (62) (0.81) (88) (1.26) (135) (0.98) (236) (1.80)
------------------------------------------------------------------------
390 5.11 315 4.49 743 5.38 785 5.96
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative expenses were $0.4 million for the quarter ($5.11/boe) and $0.7 million ($5.38/boe) year-to-date compared to $0.3 million ($4.49/boe) and $0.8 million ($5.96/boe) over the corresponding periods last year and $0.4 million ($5.72/boe) last quarter. Gross administrative costs during the three and six month periods were slightly higher than the same periods last year and were higher than last quarter primarily due to higher salary and office costs.

Interest

Interest expense was $285,000 ($3.73/boe) for the quarter and $345,000 ($2.50/boe) year-to-date compared to $34,000 ($0.48/boe) and $41,000 ($0.31/boe) during the same periods last year and $60,000 ($0.98/boe) last quarter. Interest costs were higher than last year due to higher average outstanding bank debt. Interest was higher last quarter primarily due to approximately $122,000 of interest relating to the timing of expenditures on C1's 2005 flow-through obligation.

Stock-based Compensation

Stock-based compensation was $24,000 ($0.31/boe) for the quarter and $168,000 ($1.22/boe) for the six months ended June 30 compared to last years' charges of $137,000 ($1.96/boe) and $286,000 ($2.17/boe) for the same periods and was also lower than last quarter when we incurred costs of $144,000 ($2.33/boe). The decrease from last quarter resulted from the expiration of certain stock options that offset the charges for new options issued late in the quarter.

Depletion, Depreciation and Accretion

Depletion, depreciation, and accretion amounted to $1.5 million ($19.11/boe) for the quarter and $2.5 million ($18.13/boe) year-to-date compared to $1.1 million ($16.04/boe) and $2.3 million ($17.23/boe) respectively last year and $1.0 million ($16.93/boe) last quarter. Depletion was higher this quarter as our internal assessment of proved reserves was adjusted downwards for certain wells that have not performed as well as expected.

Capital and Income Taxes

Capital taxes were $7,000 (0.09/boe) for the quarter and $13,000 ($0.09/boe) for the six month period compared to $nil last year. Future tax recovery was $406,000 ($5.32/boe) for the quarter and $346,000 ($2.50/boe) for the six month period compared to an expense of $272,000 ($3.88/boe) and $381,000 ($2.89/boe) during the same periods last year. The recovery during the second quarter primarly resulted from the reduction of provincial and federal tax rates contained in legislation that was passed by the respective bodies during the quarter. C1 has estimated tax pools of $57.5 million as at June 30, 2006. These tax pools are available to reduce taxes otherwise payable in the future.

Cash Flow from Operations and Net Income

Cash flow from operations was $1.3 million for the quarter and $2.7 million for the six-month period compared to $1.9 million and $3.2 million for the same periods last year. We had net income of $245,000 for the quarter ($0.01/share) and net income of $373,000 ($0.01/share) year-to-date compared to net income of $331,000 ($0.01/share) and net income of $243,000 ($0.01/share) over the same periods last year.



NETBACK, CASH FLOW AND NET INCOME

For the Three Months For the Six Months
Ended June 30 Ended June 30
2006 2005 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Operations
Natural gas
(mcf/d) 3,654 2,852 3,114 2,308
Oil and NGL's
(bbls/d) 231 295 244 343
Boe/d (6:1) 840 770 763 728
------------------------------------------------------------------------
------------------------------------------------------------------------
Financial ($000s
except per
unit amounts) $ $/boe $ $/boe $ $/boe $ $/boe
------------------------------------------------------------------------
------------------------------------------------------------------------
Oil and gas
production 3,616 47.32 3,699 52.78 6,889 49.89 6,875 52.19
Royalties
(net of ARTC) (604) (7.90) (638) (9.11) (1,217) (8.81) (1,371)(10.41)

Operating (980)(12.83) (770)(10.99) (1,770)(12.82) (1,345)(10.21)
Transportation (27) (0.35) (78) (1.11) (102) (0.74) (153) (1.16)
------------------------------------------------------------------------
Operating
netback 2,005 26.24 2,213 31.57 3,800 27.52 4,006 30.41
General and
administrative(390) (5.11) (315) (4.49) (743) (5.38) (785) (5.96)
Interest (285) (3.73) (34) (0.48) (345) (2.50) (41) (0.31)
Current taxes (7) (0.09) - - (13) (0.09) - -
------------------------------------------------------------------------
Cash flow
from
operations 1,323 17.31 1,864 26.60 2,699 19.55 3,180 24.14
Depletion,
depreciation
and
accretion (1,460)(19.11) (1,124)(16.04) (2,504)(18.13) (2,270)(17.23)
Stock-based
compensation (24) (0.31) (137) (1.96) (168) (1.22) (286) (2.17)
Future taxes 406 5.32 (272) (3.88) 346 2.50 (381) (2.89)
------------------------------------------------------------------------
Net income 245 3.21 331 4.72 373 2.70 243 1.85
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per
share 0.01 0.01 0.01 0.01
------------------------------------------------------------------------
------------------------------------------------------------------------


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.



C1 ENERGY LTD.
Balance Sheets
(dollars in thousands) (unaudited)

------------------------------------------------------------------------
June 30 December 31
2006 2005
-----------------------------

ASSETS

Current assets
Cash and cash equivalents $ - $ 864
Accounts receivable 4,873 4,975
Prepaid expenses 201 220
-----------------------------
5,074 6,059

Property and equipment (note 2) 67,679 58,448

Goodwill 6,571 6,532
-----------------------------
$ 79,324 $ 71,039
-----------------------------
-----------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities $ 6,175 $ 9,028
Bank loan (note 3) 12,345 1,650
-----------------------------
18,520 10,678

Asset retirement obligations (note 4) 1,196 996

Future income tax liability (note 7) 2,176 1,621
-----------------------------
21,892 13,295
-----------------------------

SHAREHOLDERS' EQUITY

Share capital (note 5) 50,421 51,190
Contributed surplus (note 5) 1,456 1,372
Retained earnings 5,555 5,182
-----------------------------
57,432 57,744
-----------------------------
$ 79,324 $ 71,039
-----------------------------
-----------------------------

See accompanying notes to the financial statements.



C1 ENERGY LTD.
Statements of Operations and Retained Earnings
(dollars in thousands) (unaudited)

------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------
Revenue
Petroleum and natural
gas sales $ 3,616 $ 3,699 $ 6,889 $ 6,875
Royalties, net of Alberta
Royalty Tax Credit (604) (638) (1,217) (1,371)
-------------------------------------------
3,012 3,061 5,672 5,504
-------------------------------------------
Expenses
Operating 980 770 1,770 1,345
Transportation 27 78 102 153
General and administrative 390 315 743 785
Interest 285 34 345 41
Stock-based compensation
(note 5) 24 137 168 286
Depletion, depreciation
and accretion 1,460 1,124 2,504 2,270
-------------------------------------------
3,166 2,458 5,632 4,880
-------------------------------------------

Income (loss) before income
taxes (154) 603 40 624
-------------------------------------------
Income taxes (recovery)
Current 7 - 13 -
Future (406) 272 (346) 381
-------------------------------------------
(399) 272 (333) 381
-------------------------------------------
-------------------------------------------

Net income $ 245 $ 331 $ 373 $ 243

Retained earnings,
beginning of period 5,310 2,903 5,182 2,991
-------------------------------------------
Retained earnings, end
of period $ 5,555 $ 3,234 $ 5,555 $ 3,234
-------------------------------------------
-------------------------------------------
Earnings per common share
(note 6)
- Basic and diluted $ 0.01 $ 0.01 $ 0.01 $ 0.01
-------------------------------------------
-------------------------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.
Statements of Cash Flows
(dollars in thousands) (unaudited)

------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------
Cash provided by (used in)

Operating activities
Net income $ 245 $ 331 $ 373 $ 243
Add:
Future income taxes (recovery) (406) 272 (346) 381
Depletion, depreciation and
accretion 1,460 1,124 2,504 2,270
Stock-based compensation 24 137 168 286
-------------------------------------------
Cash flow from operations 1,323 1,864 2,699 3,180
Asset retirement
expenditures (note 4) (1) - (92) -
Net change in non-cash
working capital (note 8) (855) (3,255) (5,246) (6,363)
-------------------------------------------
467 (1,391) (2,639) (3,183)
-------------------------------------------
Investing activities
Property and equipment
expenditures (5,793) (5,060) (11,444) (16,757)
Net change in non-cash
working capital (note 8) 694 (2,347) 2,514 5,059
-------------------------------------------
(5,099) (7,407) (8,930) (11,698)
-------------------------------------------
Financing activities
Issuance of common shares - 12,500 - 12,555
Redemption of performance
shares - (2) - (2)
Share issue costs - (860) 10 (884)
Increase in bank indebtedness 4,632 - 10,695 -
-------------------------------------------
4,632 11,638 10,705 11,669
-------------------------------------------
Net change in cash and cash
equivalents - 2,840 (864) (3,212)
Cash and cash equivalents,
beginning of period - 878 864 6,930
-------------------------------------------
Cash and cash equivalents,
end of period $ - $ 3,718 $ - $ 3,718
-------------------------------------------
-------------------------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.
Notes to the Financial Statements
For the six months ended June 30, 2006 and 2005
(all tabular dollars in thousands except share amounts)


1. BASIS OF PRESENTATION

The interim financial statements of C1 Energy Ltd. (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, 2005. Certain information and footnote disclosures normally included in the annual financial statements have been condensed or omitted. Accordingly, these 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, 2005.



2. PROPERTY AND EQUIPMENT

June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment $ 81,830 $ 70,153
Accumulated depletion and
depreciation (14,151) (11,705)
------------------------------------------------------------------------
Net book value $ 67,679 $ 58,448
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2006, $20.3 million (June 30, 2005 - $19.5 million) of costs relating to unproved properties and seismic were excluded from costs subject to depletion.

During the six months ended June 30, 2006, $621,000 (June 30, 2005 - $421,600) of general and administrative expenses relating to exploration and development activities were capitalized.

3. BANK LOAN

On June 30, 2006, the Company had $17,000,000 of credit facilities available with a Canadian chartered bank. The facilities are composed of a $13,000,000 revolving demand loan facility plus a $4,000,000 non-revolving reducing acquisition/development demand loan. The interest rate on outstanding debt is set at the bank's prime lending rate plus 0.25% and 0.5% respectively. The facilities are secured by a floating charge over all of C1's assets. In July 2006, the non-revolving reducing acquisition/development demand loan facility was rolled into the revolving demand loan facility. The overall facility has remained at $17,000,000.

4. ASSET RETIREMENT OBLIGATIONS

The following table presents the reconciliation of the beginning and ending aggregate carrying amount of the obligation associated with the retirement of oil and gas properties:



2006
------------------------------------------------------------------------

Asset retirement obligations, December 31, 2005 $ 996
Liabilities incurred 123
Settlement of liabilities (92)
Disposition of liabilities (5)
Accretion expense 58
Change in estimates 116
------------------------------------------------------------------------
Asset retirement obligations, June 30, 2006 $ 1,196
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2006, the total undiscounted asset retirement obligations are estimated to be $6.2 million. A 2 percent inflation rate and a 9 percent discount rate assumption have been used to estimate the obligations. Most of the obligations related to oil and natural gas wells are expected to be settled from 2015 to 2025 and those related to facilities are expected to be settled up to 2039 with all being funded from general corporate resources at the time of settlement.



5. 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 at December 31, 2005 33,036,726 $ 51,178
Issued on conversion of performance shares 37,494 1
Tax effect of renunciation of resource
expenditures on flow-through shares (i) - (863)
Compensation expense related to
performance shares converted 84
Share issue costs 10
------------------------------------------------------------------------
Balance at June 30, 2006 33,074,220 $ 50,410
------------------------------------------------------------------------
------------------------------------------------------------------------

i) 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 issuance of its flow-through
shares in the aggregate of $2,500,000.


Number of
Performance shares shares Amount
------------------------------------------------------------------------

Balance at December 31, 2005 1,178,000 $ 12

Conversion into common shares (113,333) (1)
------------------------------------------------------------------------
Balance at June 30, 2006 1,064,667 $ 11
------------------------------------------------------------------------
------------------------------------------------------------------------


Contributed surplus Amount
------------------------------------------------------------------------

Balance at December 31, 2005 $ 1,372
Conversion of performance shares (84)
Stock-based compensation 168
------------------------------------------------------------------------
Balance at June 30, 2006 $ 1,456
------------------------------------------------------------------------


c) Stock-based compensation

During the first six months of 2006, C1 recorded $168,000 (2005 - $286,000) of compensation expense related to the performance shares and stock options. The fair value of each performance share and option was determined at the share issuance and stock option grant date respectively using the Black-Scholes model. This value is amortized over the expected life of the instruments and is included in stock-based compensation expense.

C1 issued 415,000 options during the period to officers and employees that have a term of five years and vest over three years on the basis of one-third per year at exercise prices of $1.62 and $1.40 per share. 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 $0.62 per share using a risk free interest rate of 4.5%, volatility of 55%, 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. Details on the Company's stock options outstanding at June 30, 2006 are as follows:



Exercise Number of
Price Options Contractual Options Exercisable
($/share) (000's) Life (years) (000s)
------------------------------------------------------------------------
1.40 157,000 4.97 years -
1.62 258,000 4.95 years -
1.75 325,000 3.38 years 108,333
1.91 175,000 2.97 years 58,333
1.95 125,000 3.00 years 41,667
2.10 25,000 3.61 years 25,000
2.31 547,810 3.75 years 211,803
------------------------------------------------------------------------
1.93 1,612,810 3.84 years 445,136
------------------------------------------------------------------------
------------------------------------------------------------------------


The activity related to the stock option plan is as follows:

Number of Weighted Average
options Price
------------------------------------------------------------------------
Balance, December 31, 2005 1,335,410 2.08
Granted 415,000 1.54
Expired (137,600) 2.23
------------------------------------------------------------------------
Balance, June 30, 2006 1,612,810 1.93
------------------------------------------------------------------------
------------------------------------------------------------------------


6. 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, 2006 included the weighted average number of shares outstanding of 33,053,466 and 33,045,113 respectively plus 793,593 shares related to the dilutive effects of the exercise of stock options and the conversion of Performance Shares (June 30, 2005 - 28,341,841 and 27,992,008 plus 2,343,345 shares related to the dilutive effects of the exercise of stock options and the conversion of Performance Shares).



7. INCOME TAXES

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

June 30, December 31,
2006 2005
------------------------------------------------------------------------
Future income tax liabilities (assets)
Property and equipment $ 3,417 $ 2,991
Asset retirement obligations (347) (335)
Attributed Canadian Royalty Income
benefit ("ACRI") (435) (436)
Share issue costs (476) (616)
Other 17 17
------------------------------------------------------------------------
Net future income tax liability $ 2,176 $ 1,621
------------------------------------------------------------------------
------------------------------------------------------------------------


8. 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,
2006 2005 2006 2005
------------------------------------------------------------------------
Accounts receivable $ 492 $ (749) $ 102 $ 98
Prepaid expenses 12 52 19 (70)
Accounts payable and
accrued liabilities (665) (4,905) (2,853) (1,332)
------------------------------------------------------------------------
Change in non-cash
working capital $ (161) $ (5,602) $ (2,732) $ (1,304)
------------------------------------------------------------------------
------------------------------------------------------------------------

Operating activities $ (855) $ (3,255) $ (5,246) $ (6,363)
Investing activities 694 (2,347) 2,514 5,059
------------------------------------------------------------------------
Change in non-cash
working capital $ (161) $ (5,602) $ (2,732) $ (1,304)
------------------------------------------------------------------------
------------------------------------------------------------------------


There was $285,000 and $345,000 paid during the three and six month periods for interest expense (2005 - $34,000 and $41,000) and there were no income or capital taxes paid during the same period this year or last.

9. SUBSEQUENT EVENT

On July 28, 2006, the Company closed an equity offering issuing 2,666,668 common shares on a flow-through basis at a price of $1.50 per share for gross proceeds of $4,000,000.

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