C1 Energy Ltd.
TSX : CTT

C1 Energy Ltd.

November 10, 2005 08:18 ET

C1 Energy Ltd. Announces Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 10, 2005) - C1 Energy Ltd. (TSX:CTT) of Calgary, Alberta is pleased to report its operating and financial results for the nine months ended September 30, 2005.

THIRD QUARTER HIGHLIGHTS

- Exploration drilling at Sarcee, Blueberry, and Hobbema continues to advance our business plan to a high impact development stage. As was discussed in our November 1st Operations Update production gains have come slower than expected in the latter half of 2005.

- Production for the third quarter averaged 570 boe/d, up 18% subsequent to the quarter end to 670 boe/d with an additional 570 boe/d of behind-pipe production.

- Drilled a successful gas well in Sarcee that has an estimated 20 - 30 bcf of original gas in place. Completion of this well has commenced in Q4.

- Cash flow per share of $0.06 for the quarter, up 50% from the same period last year.

- Operating netbacks of $37.95 per barrel, up 38% from the same period last year



FINANCIAL AND OPERATING HIGHLIGHTS
For the Three For the Nine
Months Ended Months Ended
September 30 June 30 September 30
------------------------------------------------------------------------
(Unaudited) 2005 2004 2005 2005 2004
------------------------------------------------------------------------
Financial ($000s, except
share information)
Petroleum and natural
gas sales 3,286 2,124 3,699 10,161 6,417
Cash flow from
operations (1) 1,790 904 1,864 4,970 2,835
Per share basic
and diluted $0.06 $0.04 $0.06 $0.17 $0.14
Net income (loss) 446 (612) 331 689 1,352
Per share basic
and diluted $0.01 $(0.04) $0.01 $0.02 $0.07
Capital expenditures, net 6,655 2,083 5,060 23,527 12,427
Working capital (deficiency) (1,463) 8,785 2,559 (1,463) 8,785
Total assets 67,302 33,669 61,868 67,302 33,669
Shareholders' equity 56,008 33,062 54,426 56,008 33,062
Common shares
outstanding (000s) 33,037 21,754 28,342 33,037 21,754
Weighted average common
shares outstanding (000s) 32,954 21,754 28,364 29,664 19,725
------------------------------------------------------------------------
Operations
Crude oil and NGL's
production
Barrels 25,435 28,760 26,837 87,538 93,582
Barrels per day 276 313 295 298 342
Average selling
price ($/bbl) 72.35 54.00 59.18 64.12 50.42
WTI (US $/bbl) 63.31 44.07 52.08 55.53 39.80

Natural gas production
Thousand cubic feet 162,284 87,007 259,508 580,011 254,702
Thousand cubic feet
per day 1,769 946 2,852 2,125 930
Average selling
price ($/mcf) 8.65 6.56 8.13 7.82 6.67

Oil equivalent production
Barrels of oil equivalent 52,482 43,261 70,088 184,207 136,032
Barrels of oil equivalent
per day (6:1) 570 470 770 675 496
Average selling
price ($/boe) 62.62 49.09 52.78 55.16 47.18
Average operating
netback ($/boe) 37.95 27.47 31.56 32.56 25.68
Wells drilled
Gross 3 - - 19 5
Net 2.1 - - 12.8 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

We drilled 3 wells (2.1 net) during the third quarter which resulted in the following::

- 3 gross (2.1 net) cased potential gas wells, one in Sarcee, one in Hobbema and the other in Gift Lake.

- Exploration drilling accounted for 2 (1.6 net) wells at a 67% success rate

- Development drilling accounted for 1 (0.5 net) wells at a 100% success rate

Our results to date are shown on the table below.



Nine Months Ended September 30, 2005
Exploration Development Total
------------------------------------------------------------------------
Gross Net Gross Net Gross Net
------------------------------------------------------------------------
Oil 1 1.0 - - 1 1.0
Gas 8 5.3 7 4.0 15 9.3
D&A 1 0.5 2 2.0 3 2.5
------------------------------------------------------------------------
Total 10 6.8 9 6.0 19 12.8
------------------------------------------------------------------------
------------------------------------------------------------------------


Nine Months Ended September 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
------------------------------------------------------------------------
------------------------------------------------------------------------


During the quarter, we performed five well optimizations in Seal and saw increased production at each of the wells beginning in late September. We have further development drilling planned for one to four new locations now that processing capacity is available at our battery. This drilling program is planned to commence in the fourth quarter and continue into 2006.

We also commenced the completion of our 100%-owned Blueberry 11-3 well. The completion and subsequent production test, which was finished in the fourth quarter, resulted in the well testing at a stabilized rate of 2 mmcf/d (330 boe/d) at 950 psi. We plan to tie-in the well prior to year-end, pending regulatory approval and third party services. Follow-up drilling to develop this new discovery is planned in the first quarter of 2006.

Production Summary

Our production for the third quarter of 2005 averaged 570 boe/d comprised of 276 bbls/d of light oil and 1,769 mcf/d of natural gas and has averaged 675 boe/d comprised of 298 bbls/d of light oil and 2,125 mcf/d of natural gas for the nine-month period ended September 30. This represents an increase of 21% compared to production of 470 boe/d during the second quarter last year and an increase of 36% over the nine-month period last year. Average production decreased 12% from 770 boe/d last quarter primarily related to delays in surface access due to wet weather conditions, third party gas plant turnarounds in Chipmunk, Blueberry and Sarcee as well as field declines. Our current production capacity is estimated to be 1,240 boe/d consisting of 670 boe/d of on-stream production, and 570 boe/d of behind pipe production. We currently estimate that 480 boe/d of the total behind-pipe production of 570 boe/d will be placed on production by year-end with the remaining 90 boe/d to be brought on-stream during 2006.

2005 Production Exit Rate

While we have had strong results with successful wells at Sarcee, Hobbema and Blueberry, continuing restricted access to services and uncertainty in timing for approvals has made it necessary for us to revise our 2005 exit production guidance, as was reported on our November 1st Operations Update.

Our estimated exit rate for 2005 has been revised from 1,900 boe/d to a range of 1,100 to 1,300 boe/d pending tie-in of the 11-3 discovery. This consists of our current production plus 480 boe/d of the total behind-pipe production to be brought on stream. This estimate does not include any contribution from the Sarcee 12-13 discovery announced in September 2005, or possible additions from the remaining drilling program for 2005. The projects that have been delayed will be completed as services and approvals are acquired through the balance of 2005 and early 2006.

Pending the results from the balance of our operations in 2005, and the impact of the Sarcee 12-13 completion, as discussed below, we anticipate that we will achieve our previous exit target of 1,900 boe/d of production in early to mid 2006.

Sarcee Completion and Possible Production Impact

We commenced completion of the jointly owned Sarcee 12-13 on October 26, 2005 and expect to conclude the operation by the end of November. The operation includes a routine acid stimulation treatment which is typically required to establish commercial productivity in this type of well.

We estimate that the potential productivity could be up to 3.2 mmcf/d of natural gas and 210 bbl/d of NGLs (740 boe/d in total) net to C1's 55% working interest. This estimate is based on analogous producing wells in the region. If successful, C1 will attempt to secure third party processing capacity as soon as possible. Discussions to date with third party operators suggest that it could possibly mid year 2006 before firm processing capacity is available. The well may be produced on an interruptible basis prior to that time. The inclusion of production from this well could cause C1 to meet or exceed its earlier production target of 1,900 boe/d

Updated Reserve Valuation and Net Asset Value

Sproule Associates Limited ("Sproule") has prepared an independent reserve evaluation December 31, 2004. Sproule has updated this evaluation mechanically to subtract production for the nine months ended September 30, 2005 and to reflect the higher commodity price assumptions as of September 30, 2005. No adjustment has been made for new discoveries, reserve revisions or additions or cost changes in 2005, which may be material when taken into account. Our actual production has tracked very closely to that forecast by Sproule in the December 31, 2004 report.

Based on this reserve update, C1's net asset value is $2.00 per share on a fully diluted basis using forecast prices and $2.36 per share using constant prices for proved plus probable reserves on a fully diluted basis using a 10% discount rate before tax. C1 has 35,028,707 fully diluted shares outstanding as at September 30, 2005 (assuming exercise of all options and conversion of performance shares as at that date). This estimate incorporates $18 million of value for undeveloped lands (at $85 per acre), including certain lands subject to exclusive access by C1 (valued at $35 per acre), and our net debt of $1.5 million as of September 30, 2005. It does not include seismic assets, which we currently estimate to have a value of $11 million, which would add an additional $0.17 per share to the net asset value if included. In C1's press release of September 22, 2005, Sproule estimated that the previously announced Sarcee 12-13 may contain original gas in place of between 20 to 30 bcf. C1 believes that this well and the possible associated pool development could have a significant positive impact to C1's net asset value.

Outlook

While our near term production results are below our original target, we remain optimistic that we will achieve those targets in early to mid 2006. Our exploration projects at Sarcee, Blueberry, Seal and Hobbema are continuing to advance our business plan to a high impact development stage as a result of our exploration drilling. These projects are expected to provide the production growth and as a result the cash flow to fund our ongoing development and exploration programs.

Our current exploration at Gift Lake, Blueberry and Chipmunk is expected to provide further successful projects that could move to a development stage. We believe our drilling success is achieving a significant reduction in the risk of our ability to grow our production and reserves. We are on track to providing our shareholders with a premium opportunity inventory for growth.



MANAGEMENT'S DISCUSSION AND ANALYSIS

Capital Expenditures
For the Three Months For the Nine Months
Ended September 30 Ended September 30
($000s) 2005 2004 2005 2004
------------------------------------------------------------------------
Drilling and completions 3,956 544 13,721 7,488
Land 427 284 1,205 642
Equipment and facilities 1,300 458 3,980 2,042
Geological & geophysical 516 631 3,173 1,337
Asset retirement obligations 77 - 192 46
Capitalized general and
administration expenses 359 124 781 296
Acquisitions - 38 425 605
Other 20 4 50 4
------------------------------------------------------------------------
Total capital expenditures 6,655 2,083 23,527 12,460
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital expenditures were $6.7 million in the third quarter and $23.5million year-to-date compared to $2.1 million and $12.5 million respectively over the same periods a year ago. Capital expenditures for the quarter primarily related to drilling costs on three wells, seismic expenditures in Blueberry, battery modifications and well optimizations in Seal and completion and land costs in Blueberry.

CAPABILITIES

Funding of Capital Program

Capital expenditures for the nine months ended September 30, 2005 were $23.5 million. These expenditures were funded primarily by cash flow, new equity raised during the second quarter and available working capital.

Working Capital

C1 had a working capital deficiency of $1.5 million at September 30, 2005. This represents a decrease in working capital of $4.0 million from the last quarter primarily resulting from a more active drilling program in the third quarter.

Bank Facilities

C1 has total available credit facilities of $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. There was no amount outstanding at September 30, 2005.

Share Capital

At September 30, 2005, C1 had 33,036,726 shares issued and outstanding an increase of 311,182 from last quarter primarily due to the exercise of warrants. The weighted average number of shares outstanding for the nine-month period was 29,664,036.



SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS

For the Three Months Ended September 30
2005 2004
------------------------------------------------------------------------
Operations
Natural gas (mcf/d) 1,769 946
Oil and NGL's (bbls/d) 276 313
Boe/d (6:1) 570 470
------------------------------------------------------------------------
------------------------------------------------------------------------
Financial ($000s except
per unit amounts) $ $/boe $ $/boe
------------------------------------------------------------------------

Oil and gas production 3,286 62.62 2,124 49.10
Royalties (net of ARTC) (471) (8.97) (506) (11.70)
Operating (767) (14.61) (371) (8.57)
Transportation (57) (1.09) (59) (1.36)
------------------------------------------------------------------------
Operating netback 1,991 37.95 1,188 27.47
General and administrative (186) (3.55) (270) (6.24)
Current taxes (15) (0.29) (14) (0.32)
------------------------------------------------------------------------
Cash flow from operations 1,790 34.11 904 20.91
Depletion, depreciation and accretion (732) (13.95) (1,333) (30.81)
Stock-based compensation (212) (4.04) (183) (4.25)
Future tax expense (400) (7.62) - -
------------------------------------------------------------------------
Net income (loss) 446 8.50 (612) (14.15)
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings (loss) per share 0.01 (0.03)
------------------------------------------------------------------------
------------------------------------------------------------------------
Working capital
Total assets
------------------------------------------------------------------------
------------------------------------------------------------------------


For the Nine Months Ended September 30
2005 2004
------------------------------------------------------------------------
Operations
Natural gas (mcf/d) 2,125 930
Oil and NGL's (bbls/d) 298 342
Boe/d (6:1) 675 496
------------------------------------------------------------------------
------------------------------------------------------------------------
Financial ($000s except
per unit amounts) $ $/boe $ $/boe
------------------------------------------------------------------------
Oil and gas production 10,161 55.16 6,417 47.17
Royalties (net of ARTC) (1,842) (10.00) (1,543) (11.34)
Operating (2,112) (11.46) (1,168) (8.58)
Transportation (210) (1.14) (213) (1.56)
------------------------------------------------------------------------
Operating netback 5,997 32.56 3,493 25.69
General and administrative (1,012) (5.49) (618) (4.54)
Current taxes (15) (0.08) (40) (0.29)
------------------------------------------------------------------------
Cash flow from operations 4,970 26.99 2,835 20.86
Depletion, depreciation and accretion (3,002) (16.30) (3,879) (28.51)
Stock-based compensation (498) (2.71) (491) (3.61)
Future tax expense (781) (4.24) 2,887 21.22
------------------------------------------------------------------------
Net income (loss) 689 3.74 1,352 9.96
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings (loss) per share 0.02 0.07
------------------------------------------------------------------------
------------------------------------------------------------------------
Working capital (1,463) 8,785
Total assets 67,302 33,699
------------------------------------------------------------------------
------------------------------------------------------------------------


RESULTS OF OPERATIONS

Oil and Gas Production
Three Months Nine Months
Ended Ended
September 30 September 30
2005 2004 2005 2004
------------------------------------------------------------------------
Crude oil and NGL sales 1,882 1,553 5,624 4,718
Natural gas sales 1,404 571 4,537 1,699
------------------------------------------------------------------------
Total petroleum and
natural gas sales 3,286 2,124 10,161 6,417
------------------------------------------------------------------------
------------------------------------------------------------------------


During the nine-month period, revenues increased 58% compared to last year. Of the increase approximately 53% results from increased production volumes while the balance relates to higher prices. Revenues were lower than last quarter due to lower production volumes that were partially offset by higher commodity prices. Additional volumes came back on stream late in the third quarter and early fourth quarter as third party gas plant turnarounds were completed and the battery and well optimizations at Seal were finished.



Average Selling Prices

Three Months Nine Months
Ended Ended
September 30 September 30
2005 2004 2005 2004
------------------------------------------------------------------------
Crude oil and NGL's ($/bbl) 72.35 54.00 64.12 50.42
Natural gas ($/mcf) 8.65 6.56 7.82 6.67
Total average realized price ($/boe) 62.62 49.09 55.16 47.18
------------------------------------------------------------------------
------------------------------------------------------------------------


Crude Oil Pricing

C1 received a price of $72.35/bbl for its for its crude oil and NGL's for the quarter and $64.12/bbl year-to-date compared to $54.00 and $50.42 respectively for the same periods last year. Crude prices were 22% higher than the second quarter price of $59.18, primarily due to tight supplies that were exacerbated by hurricane related shut-downs in the US Gulf Coast during September. West Texas Intermediate prices have remained strong in 2005, averaging more than US $55.00/bbl and are forecast to remain strong for the balance of 2005 and into 2006. The high crude oil prices continue to be bolstered by low levels of spare production capacity worldwide which were demonstrated by the price spikes that occurred in the third quarter resulting from supply disruptions from hurricanes that shut down production in the US Gulf Coast. In addition, the release of strategic reserves by the IEA in the wake of Hurricanes Katrina and Rita will act as a demand supporting component over the coming months as the process of replenishing these strategic reserves gets underway.

Natural Gas Pricing

C1 received a price of $8.65/mcf for its natural gas production for the quarter and $7.82 year-to-date compared to $6.56/mcf and $6.67/mcf over the same periods last year and $8.13/mcf for the last quarter. Natural gas prices have been very strong due to the affect on natural gas storage of a very hot summer, especially in the densely populated areas of the eastern half of North America, combined with the supply disruptions that occurred as a result of Hurricanes Katrina and Rita.

Royalties

Royalty costs net of ARTC were $0.5 million for the quarter ($8.97/boe) and $1.8 million ($10.00/boe) for the nine-month period ended September 30, 2005 compared to $0.5 million ($11.70/boe) and $1.5 million (11.34/boe) for the same periods last year. Royalty costs were $0.2 million lower than last quarters' royalties of $0.6 million ($9.11/boe). The reduction in royalties in the quarter primarily resulted from lower average production volumes. For the quarter, crown royalties before ARTC averaged 12.4% and were 15.8% year-to-date while freehold and other royalties averaged 4.5% of total revenue for the quarter and averaged 5.1% of total revenue for the nine-month period. In 2004, crown royalties before ARTC averaged 21.7% and 22.8% of total revenue for the three and nine-month periods and other royalties averaged 4.9% and 4.3% of total revenue during the same periods.

Operating Expenses

Operating costs for the quarter were $0.8 million ($14.61/boe) and were $2.1 million ($11.46/boe) year-to-date compared to $0.4 million (8.57/boe) and $1.2 million ($8.58/boe) last year and $0.8 million ($10.99/boe) for the last quarter. Costs per boe were higher this quarter primarily due to lower production volumes. Operating expenses have been higher than last year due to higher costs of services in the industry. Wet weather conditions also resulted in higher maintenance and workover costs, especially in Gift Lake, Seal and Chipmunk due to surface access difficulties.

Transportation

Transportation costs were $57,000 ($1.09/boe) for the three month period and $210,000 ($1.14/boe) for the nine-month period compared to $59,000 ($1.36/boe) and $213,000 ($1.56/boe) over the same periods a year ago and $78,000 ($1.11/boe) last quarter.

General and Administrative Expenses

General and administrative expenses were $0.2 million ($3.55/boe) for the quarter and $1.0 million ($5.49/boe) for the nine months compared to $0.3 million ($6.24/boe) and $0.6 million ($4.54/boe) over the corresponding periods last year and $0.3 million ($4.97/boe) last quarter. Costs were higher than last year primarily due to higher staff levels, costs associated with having our own office space and higher costs for consulting services. Costs were lower than last quarter primarily due to lower costs for outside services and higher investment income.

Stock-based Compensation

Stock-based compensation was $212,000 ($4.04/boe) for the quarter and $498,000 ($2.71/boe) for the nine months ended September 30, 2005 compared to last years' charges of $183,000 ($4.25/boe) and $491,000 ($3.61/boe) for the same periods and was also higher than last quarter when we incurred costs of $137,000 ($1.96/boe). Costs were higher than last year due to a larger number of stock options outstanding partially offset by a lower number of performance shares outstanding. Stock-based compensation 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 $0.7 million ($13.95/boe) for the quarter and $3.0 million ($16.30/boe) year-to-date compared to $1.3 million ($30.81/boe) and $3.9 million ($28.51/boe) respectively last year and $1.1 million ($16.04/boe) last quarter. Depletion was lower this quarter primarily due to reserves additions from new drilling during the quarter.

Capital and Income Taxes

We have accrued $15,000 for capital taxes for the nine-month period compared to $40,000 last year due to changes in tax regulations.

Future tax expense was $0.4 million for the quarter and $0.8 million for the nine-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 $1.8 million for the quarter and $5.0 million for the nine-month period compared to $0.9 million and $2.8 million for the same period last year. We had a net income of $447,000 ($0.01/share) for the quarter and net income of $690,000 ($0.02/share) year-to-date compared to a net loss of $612,000 ($0.04/share) and net income of $1.4 million ($0.07/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 therefrom.

Financial statements for the nine months ended September 30, 2005 and 2004 are attached.



C1 ENERGY LTD.

Balance Sheet
(dollars in thousands) (unaudited)

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

September 30 December 31
2005 2004
--------------------------

ASSETS

Current assets
Cash and cash equivalents $ 2,306 $ 6,930
Accounts receivable 4,404 3,754
Prepaid expenses 66 80
--------------------------
6,776 10,764

Property and equipment (note 2) 54,746 34,158
Goodwill 5,780 5,780
Future income tax (note 6) - 1,983
--------------------------
$ 67,302 $ 52,685
--------------------------
--------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities $ 8,239 $ 6,296


Asset retirement obligations 791 536

Future income tax (note 6) 2,264 -
--------------------------
11,294 6,832
--------------------------

SHAREHOLDERS' EQUITY

Share capital (note 4) 51,136 42,072
Warrants (note 4) - 91
Contributed surplus (note 4) 1,192 699
Retained earnings 3,680 2,991
--------------------------
56,008 45,853
--------------------------
$ 67,302 $ 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 Nine months ended
September 30 September 30
2005 2004 2005 2004
----------------------------------------

Revenue
Petroleum and natural
gas sales $ 3,286 $ 2,124 $ 10,161 $ 6,417
Royalties, net of Alberta
Royalty Tax Credit (471) (506) (1,842) (1,543)
----------------------------------------
2,815 1,618 8,319 4,874
----------------------------------------

Expenses
Operating 767 371 2,112 1,168
Transportation 57 59 210 213
General and administrative 186 270 1,012 618
Stock-based compensation
(note 4) 212 183 498 491
Depletion, depreciation
and accretion 732 1,333 3,002 3,879
----------------------------------------
1,954 2,216 6,834 6,369
----------------------------------------

Income (loss) before
income taxes 861 (598) 1,485 (1,495)
----------------------------------------
Income taxes (recovery)
Current 15 14 15 40
Future 400 - 781 (2,887)
----------------------------------------
415 14 796 (2,847)
----------------------------------------

Net income (loss) 446 (612) 689 1,352

Retained earnings (deficit),
beginning of period 3,234 1,964 2,991 (3,060)
Elimination of accumulated
deficit - - - 3,060
----------------------------------------

Retained earnings,
end of period $ 3,680 $ 1,352 $ 3,680 $ 1,352
----------------------------------------
----------------------------------------

Earnings(loss) per common share
- Basic $ 0.01 $ (0.04) $ 0.02 $ 0.07
- Diluted $ 0.01 $ (0.04) $ 0.02 $ 0.07
----------------------------------------
----------------------------------------


See accompanying notes to the financial statements.



C1 ENERGY LTD.

Statement of Cash Flows
(dollars in thousands) (unaudited)

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

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
----------------------------------------
Cash provided by (used in)

Operating activities
Net income (loss) $ 446 $ (612) $ 689 $ 1,352
Add:
Future income taxes (recovery) 400 - 781 (2,887)
Depletion, depreciation
and accretion 732 1,333 3,002 3,879
Stock-based compensation 212 183 498 491
----------------------------------------
Cash flow from operations 1,790 904 4,970 2,835
Net change in non-cash working
capital (note 7) 4,851 (851) (1,512) (812)
----------------------------------------
6,641 53 3,458 2,023
----------------------------------------

Investing activities
Property and equipment
expenditures (6,578) (2,083) (23,335) (12,414)
Net change in non-cash
working capital (note 7) (2,240) 161 2,819 (404)
----------------------------------------
(8,818) (1,922) (20,516) (12,818)
----------------------------------------

Financing activities
Issuance of common shares 804 - 13,359 10,000
Redemption of performance
shares - - (2) -
Share issue costs (39) (46) (923) (618)
----------------------------------------
765 (46) 12,434 9,382
----------------------------------------

Net change in cash and
cash equivalents (1,412) 1,915 (4,624) (1,413)

Cash and cash equivalents,
beginning of period 3,718 10,462 6,930 9,960
----------------------------------------

Cash and cash equivalents,
end of period $ 2,306 $ 8,547 $ 2,306 $ 8,547
----------------------------------------
----------------------------------------


See accompanying notes to the financial statements.


C1 ENERGY LTD.

Notes to the Financial Statements
For the nine months ended September 30, 2005 and 2004
(all 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

September 30, 2005 December 31, 2004
------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment $ 65,444 $ 41,917
Accumulated depletion
and depreciation (10,698) (7,759)
------------------------------------------------------------------------
Net book value $ 54,746 $ 34,158
------------------------------------------------------------------------
------------------------------------------------------------------------


At September 30, 2005, $20.4 million (December 31, 2004 - $16.7 million) of costs relating to unproved properties and seismic were excluded from costs subject to depletion.

During the nine months ended September 30, 2005, $780,900 (September 30, 2004 - $296,000) of general and administrative expenses relating to exploration and development activities were capitalized.

3. BANK LOAN

On September 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 September 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 - 22
Issuance of common shares on exercise of warrants 311,182 804
Ascribed value of warrants exercised 74
Tax effect of renunciation of resource
expenditures on flow-through shares (ii) - (3,823)
Share issue costs, net of future tax
benefit of $356,675 - (566)
------------------------------------------------------------------------
Balance, September 30, 2005 33,036,726 $ 51,125
------------------------------------------------------------------------
------------------------------------------------------------------------

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, September 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 371,116 $ 91
Exercised (311,182) (74)
Expired (59,934) (17)
------------------------------------------------------------------------
Balance, September 30, 2005 - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

i) On the acquisition of Extreme Energy Corporation ("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. In July a total of 311,182 warrants that were due to expire
on July 27, 2005 were exercised for proceeds of $804,251. The balance
of the warrants expired on August 31, 2005.


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

Balance, January 1, 2005 $ 699
Stock-based compensation 498
Exercise of options and conversion of performance shares (22)
Exercise and expiry of warrants 17
------------------------------------------------------------------------
Balance, September 30, 2005 $ 1,192
------------------------------------------------------------------------
------------------------------------------------------------------------


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
September 30, 2005 are as follows:

Exercise Number of Contractual Options
Price Options Life Exercisable
($/share) (000's) (years) (000s)
------------------------------------------------------------------------
1.75 325,000 4.13 years -
1.91 175,000 3.72 years 58,333
1.95 125,000 3.75 years 41,667
2.10 75,000 4.36 years -
2.31 635,410 4.50 years -
------------------------------------------------------------------------
2.08 1,335,410 4.23 years 100,000
------------------------------------------------------------------------
------------------------------------------------------------------------


The activity related to the plan is as follows:

Number Weighted
of options Average Price
------------------------------------------------------------------------
Balance, January 1, 2005 625,000 1.83
Granted 732,410 2.29
Exercised (22,000) 2.50
------------------------------------------------------------------------
Balance, September 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 nine months ended September 30, 2005 included the weighted average number of shares outstanding of 32,953,568 and 29,664,036 respectively plus 1,232,252 shares related to the dilutive effects of the exercise of stock options and the conversion of Performance Shares (three and nine months ended September 30, 2004 - 21,754,416 and 19,725,219 plus 429,584 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:


September 30, December 31,
2005 2004
------------------------------------------------------------------------
Future income tax liabilities (assets)
Property and equipment $ 3,137 $ (1,314)
Share issue costs (791) (620)
Resource allowance (82) (49)
------------------------------------------------------------------------
Total $ 2,264 $ (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 Nine months Nine months
ended ended ended ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
------------------------------------------------------------------------
Accounts receivable $ (748) $ 832 $ (650) $ (304)
Prepaid expenses 84 55 14 115
Accounts payable and
accrued liabilities 3,275 (1,577) 1,943 (1,027)
------------------------------------------------------------------------
Change in non-cash
working capital $ 2,611 $ (690) $ 1,307 $ (1,216)
------------------------------------------------------------------------
------------------------------------------------------------------------

Operating activities $ 4,851 $ (851) $ (1,512) $ (812)
Investing activities (2,240) 161 2,819 (404)
------------------------------------------------------------------------
Change in non-cash
working capital $ 2,611 $ (690) $ 1,307 $ (1,216)
------------------------------------------------------------------------
------------------------------------------------------------------------


There was $3,600 and $44,600 paid during the three and nine month periods ended September 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