Castle Rock Petroleum Ltd.
TSX VENTURE : RCK.A
TSX VENTURE : RCK.B

Castle Rock Petroleum Ltd.

November 24, 2006 09:00 ET

Castle Rock Petroleum Ltd.: Interim Report for the Nine Months Ended September 30, 2006

CALGARY, ALBERTA--(CCNMatthews - Nov. 24, 2006) - Castle Rock Petroleum Ltd. (TSX VENTURE:RCK.A) (TSX VENTURE:RCK.B) -



---------------------------------------------------------------------------
Financial and Operating Highlights
Nine Months Ended September 30, 2006
9 months Q3 Q2 Q1
---------------------------------------------------------------------------
($000s, except as noted)

Oil and gas revenue 969 264 411 294
Cash flow from (used by) operations (432) (168) (147) (117)
Per share (basic and diluted) $ (0.02) $ (0.01) $ (0.01) $ (0.01)
Net income (loss) (5,152) (2,833) (2,057) (262)
Per share (basic and diluted) $ (0.27) $ (0.10) $ (0.10) $ (0.02)
Capital expenditures 4,493 1,595 807 2,091
Property dispositions 3,082 2,891 191 -
Working capital 2,188 2,188 1,060 1,893
---------------------------------------------------------------------------

Sales Volumes
Natural gas (mcf/day) 542 472 730 425
Oil and NGLs (bbl/day) 1 2 2 1
Equivalent barrels (boe/day) 92 80 123 71
---------------------------------------------------------------------------

Shares Outstanding - Period End (000s)
Class A 10,702 10,702 10,702 10,702
Class B 900 900 900 900
Shares Outstanding - November 24, 2006
(000s)
Class A 11,902
Class B 900
---------------------------------------------------------------------------


Report to Shareholders

This has been a difficult year to date for Castle Rock. The Company has been adversely affected by poor exploration results, lower than expected natural gas prices, an environment of high capital and operating costs and lengthy regulatory delays in the field. These factors, combined with the downturn in equity markets for junior oil and gas companies in 2006, have severely limited the Company's access to new equity, which is a vital component for growth.

To maintain an active exploration program with limited capital and a small production base, Castle Rock had to be creative. As part of this process, $2.76 million of assets were sold in July 2006, reducing Castle Rock's interest by 50% in the Herronton, Hotchkiss, Morse, Pearce and Valhalla areas.

At Valhalla, the natural gas well drilled in the second quarter of 2006 to the Halfway Formation was completed during the third quarter and tied-in and placed on production in November. This is a Castle Rock operated well (12.5% working interest) and is capable of producing 1.5 mmcf of natural gas per day.

In the Hotchkiss area, planning and preparation is ongoing in anticipation of activity this winter. Early in the fourth quarter of 2006, two (1.0 net) wells were drilled at Hotchkiss, resulting in one gas well and one unsuccessful well that had to be junked before reaching the target depth due to drilling problems. This location may be re-drilled in December. Six more locations have been surveyed.

At Pearce, Castle Rock and its partners continue to experience longer than normal delays in obtaining regulatory approval for the installation of a single well battery on this large, Nisku light oil prospect. Castle Rock's independent engineers will not assign reserves to the project without a complete production test. Despite the delays, Castle Rock and its partners are positive about the potential of the property, which ultimately may be a candidate for horizontal drilling development.

During the third quarter of 2006, Castle Rock drilled one (0.6 net) well in the Keho area. The well was cased and, although the primary objective did not encounter hydrocarbons, the well will be evaluated for shallower potential.

Castle Rock's reserves were evaluated by Sproule Associates Limited as at September 30, 2006 utilizing Sproule's September 30, 2006 price forecast. The reserves and associated values from the report are summarized in the tables below.



Summary of Oil and Natural Gas Resereves - Forecast Prices and Costs

Working Interest Reserves Before Royalty
---------------------------------------------------------------------------
Light and Natural Natural Gas Barrels of Oil
Medium Oil Gas Liquids Equivalent
(Mbbl) (MMcf) (Mbbl) (Mboe)
---------------------------------------------------------------------------

Proved
Developed Producing 5.9 497 0.6 89.3
Developed Non-Producing - 90 - 15.0
---------------------------------------------------------------------------
Total Proved 5.9 587 0.6 104.3
---------------------------------------------------------------------------
Probable 2.3 334 5.4 63.4
---------------------------------------------------------------------------
Total Proved Plus Probable 8.2 921 6.0 167.7
---------------------------------------------------------------------------

Net Present Value of Future Net Revenue - Forecast Prices and Costs
---------------------------------------------------------------------------
Net Present Value - Before Income Taxes ($000s)
---------------------------------------------------------------------------
Discounted at
0% 5% 10% 15%
---------------------------------------------------------------------------

Proved
Developed Producing 2,157 1,977 1,832 1,711
Developed Non-Producing 240 205 177 156
---------------------------------------------------------------------------
Total Proved 2,397 2,182 2,009 1,867
---------------------------------------------------------------------------
Probable 1,091 888 737 621
---------------------------------------------------------------------------
Total Proved Plus Probable 3,488 3,070 2,746 2,488
---------------------------------------------------------------------------


In March 2005, Castle Rock completed a $10.0 million Initial Public Offering ("IPO") of flow-through shares. Pursuant to the terms of the offering and the subsequent renouncement of income tax deductions to subscribers, Castle Rock committed to spending $10.0 million by December 31, 2006 on expenditures that qualify as Canadian Exploration Expense ("CEE") for income tax purposes. To accomplish this, it was recognized that additional capital in the form of debt and/or new equity would be required. By the end of 2005, Castle Rock had spent $3.5 million on qualifying CEE expenditures, leaving a balance of $6.5 million to be spent in 2006. Working capital at the beginning of 2006 was $2.3 million; therefore, access to additional capital was required. Castle Rock attempted to complete a $5.0 million private placement in the first quarter of 2006. This effort coincided with the commencement of a long downturn in equity markets for the oil and gas industry. After some delay, Castle Rock closed the placement in March raising gross proceeds of $1.96 million. During the first three quarters of 2006, Castle Rock spent an additional $1.9 million on qualifying expenditures bringing the total as at September 30, 2006 to $5.4 million. With working capital at September 30, 2006 of $2.1 million, Castle Rock will need additional capital to satisfy the remaining $4.6 million commitment. To the extent Castle Rock does not satisfy this commitment by December 31, 2006, it will be required to compensate the flow-through share subscribers for income taxes payable caused by a reduction in income tax deductions ultimately renounced by Castle Rock. Additional information regarding the flow-through share commitment can be found in the "Contractual Obligations" section of the September 30, 2006 Management's Discussion and Analysis and in Note 11 to the September 30, 2006 unaudited financial statements.

Sales volumes for the third quarter of 2006 were 472 mcf of natural gas per day and 2 barrels of oil and natural gas liquids ("NGLs") per day. On a barrel of oil equivalent ("boe") per day basis, sales volumes were 80 and 92 boe per day for the three months and nine months ended September 30, 2006, respectively. Third quarter 2006 volumes were 35% less than second quarter volumes of 123 boe per day. The quarter-over-quarter decline was due to lower natural gas production at Hotchkiss and Vulcan and the property disposition in July. Second quarter volumes at Hotchkiss benefited from flush production from new wells, which declined in the third quarter. At Vulcan, lower third quarter volumes were caused by a plant turn-around.

In October, the previously announced acquisition of minor interests in Castle Rock operated properties in the Crossfield, Vulcan and Herronton areas was completed. The purchase price was satisfied through the issuance of 1.2 million Class A Shares of Castle Rock. The transaction will be recorded based on a price of $0.30 per share or $360,000. This acquisition adds 20 boe per day to Castle Rock's production.

Based on field estimates, Castle Rock expects average sales volumes in the fourth quarter of 2006 to be approximately 100 boe per day.

Since the spring of 2006, Castle Rock has been actively pursuing various strategies for enhancing shareholder value. The Company has two large projects at Hotchkiss and Pearce and some new exploration projects in southern Alberta that all have good upside value for shareholders. Realizing this potential value will be a major focus for the Company over the next several months.

On behalf of the Board of Directors

Signed "Roger W. Hume", P. Geol., Chief Executive Officer

November 24, 2006

Management's Discussion and Analysis

This management's discussion and analysis of financial condition and results of operations ("MD&A") is dated November 24, 2006 and should be read in conjunction with the unaudited financial statements for the nine months ended September 30, 2006, the audited financial statements for the year ended December 31, 2005 and the MD&A for the year ended December 31, 2005.

This document may contain forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that could influence actual results or events and cause actual results or events to differ materially from those stated, anticipated or implied. Such forward-looking statements necessarily involve risks associated with oil and gas exploration, property development, production, marketing and transportation, such as dry holes and non-commercial wells, facility and pipeline damage, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers and the ability to access sufficient capital from internal and external sources. Readers are cautioned not to place undue reliance on forward-looking statements, as no assurances can be given as to future results, levels of activity or achievements.

The MD&A contains the terms cash flow from operations and cash used by operations, which should not be considered an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles as an indicator of the Company's performance. Castle Rock's calculation of cash flow from operations may not be comparable to that reported by other companies. Cash flow from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of earnings per share. All references to cash flow throughout the MD&A are based on cash flow before changes in non-cash working capital.

Barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet ("mcf") of natural gas to one barrel of oil ("6:1"). The 6:1 conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boe disclosure may be misleading, particularly if used in isolation.

DESCRIPTION OF BUSINESS AND COMPARISONS TO PRIOR PERIODS

Castle Rock is engaged in the acquisition, exploration, development and production of oil and natural gas reserves, primarily in Alberta. The Company's shares commenced trading on the TSX Venture Exchange in April 2005 shortly after completing an initial public offering. Castle Rock was created in May 2004 and exploration and development activities prior to the initial public offering were minor. Oil and gas production commenced in September 2005. As a result, a comparison of certain operating information for the nine months ended September 30, 2006 to prior periods may not be meaningful.



SUMMARY OF QUARTERLY RESULTS
2006
-----------------------
Q3 Q2 Q1
---------------------------------------------------------------------------

Financial Highlights
($000s except per share amounts)

Oil and gas revenue 264 411 294
Royalties (51) (79) (61)
Interest income 31 27 21
Production and transportation (138) (166) (77)
General and administrative (197) (254) (242)
Financing charges (77) (86) (52)
Cash flow from (used by) operations (168) (147) (117)
Per share - basic and diluted (0.01) (0.01) (0.01)
Depletion, depreciation and accretion (3,903) (1,793) (252)
Stock-based compensation (7) (13) (9)
Goodwill impairment - (1,000) -
Future income tax recoveries 1,244 897 116
Net loss (2,833) (2,057) (262)
Per share - basic and diluted (0.14) (0.10) (0.02)

Issue of shares - - 1,952
Capital expenditures 1,595 807 2,091
Proceeds on property dispositions 2,891 191 -
Corporate acquisition (net of
working capital acquired) - - -
Working capital 2,188 1,060 1,823
Shareholders' equity 4,292 7,118 9,161
Total assets 9,010 12,322 15,682
---------------------------------------------------------------------------

Operating Highlights

Average daily production (boe/day) 80 123 71

Selling prices:
Natural gas ($/mcf) 5.78 6.01 7.58
Oil and natural gas liquids ($/bbl) 86.44 74.37 79.07

Field netbacks ($/boe):
Selling price 35.76 36.58 45.75
Royalties (6.90) (6.98) (9.56)
Production and transportation (18.74) (14.79) (11.94)
---------------------------------------------------------------------------
Field netbacks 10.12 14.81 24.25
---------------------------------------------------------------------------

Share Capital Information

Shares outstanding (000s):
Weighted average during the period 19,702 19,702 16,973
Period end - Class A 10,702 10,702 10,702
Period end - Class B 900 900 900
---------------------------------------------------------------------------

2005 2004
--------------------------------------
Q4 Q3 Q2 Q1 Q4
---------------------------------------------------------------------------

Financial Highlights
($000s except per share amounts)

Oil and gas revenue 463 130 - - -
Royalties (106) (23) - - -
Interest income 23 37 51 3 -
Production and transportation (67) (28) - - -
General and administrative (275) (226) (238) (85) (17)
Financing charges - - - - -
Cash flow from (used by) operations 38 (110) (187) (82) (17)
Per share - basic and diluted - (0.01) (0.01) (0.02) (0.01)
Depletion, depreciation and accretion (342) (41) (5) (4) -
Stock-based compensation (8) (8) (8) - -
Goodwill impairment (141) - - - -
Future income tax recoveries 122 22 - - -
Net loss (331) (137) (200) (86) (17)
Per share - basic and diluted (0.02) (0.01) (0.01) (0.02) (0.01)

Issue of shares - 1,720 - 10,000 700
Capital expenditures 970 2,529 1,198 268 264
Proceeds on property dispositions 60 - - - -
Corporate acquisition (net of
working capital acquired) - 3,765 - - -
Working capital 2,279 3,150 7,835 9,220 562
Shareholders' equity 10,957 11,280 9,688 9,880 959
Total assets 13,938 14,218 10,194 10,216 1,111
---------------------------------------------------------------------------

Operating Highlights

Average daily production (boe/day) 69 20 - - -

Selling prices:
Natural gas ($/mcf) 12.22 11.54 - - -
Oil and natural gas liquids ($/bbl) 66.75 81.49 - - -

Field netbacks ($/boe):
Selling price 73.23 69.39 - - -
Royalties (16.78) (12.27) - - -
Production and transportation (10.61) (14.73) - - -
---------------------------------------------------------------------------
Field netbacks 45.84 42.39 - - -
---------------------------------------------------------------------------

Share Capital Information

Shares outstanding (000s):
Weighted average during the period 14,881 14,064 13,625 4,433 2,702
Period end - Class A 9,075 9,075 8,000 8,000 4,000
Period end - Class B 900 900 900 900 -
---------------------------------------------------------------------------


RESULTS OF OPERATIONS

Sales Volumes

Third quarter 2006 sales volumes averaged 80 boe per day, broken down as to 472 mcf per day of natural gas and 2 boe per day of oil and natural gas liquids ("NGLs"). This compares to second quarter 2006 sales volumes of 123 boe per day, comprised of 730 mcf per day of natural gas and 2 boe per day of NGLs. The quarter-over-quarter decline in natural gas sales volumes was caused by lower volumes in the Hotchkiss, Vulcan and Crossfield areas and to a lesser extent, the property disposition that was completed in late July. Sales volumes for the second quarter of 2006 benefited from flush production from three new wells in the Hotchkiss area. Volumes from these wells fell sharply in the third quarter.

Castle Rock had no oil and gas production until September 9, 2005. For the last 22 days of September 2005, sales volumes averaged 85 boe per day, almost all of which was natural gas. For interim reporting purposes, these volumes equate to 20 boe per day for the three months ended September 30, 2005 and seven boe per day for the nine months ended September 30, 2005.

Oil and Gas Revenue

Oil and gas revenue was $264,000 in the third quarter of 2006, based on average selling prices of $5.78 per mcf of natural gas and $86.44 per barrel of oil and NGL (equivalent unit price - $35.76 per boe). Comparing the third quarter of 2006 to the second quarter of the year, revenue decreased 36 percent as a result of a 35 percent decrease in natural gas sales volumes and a 4 percent decline in natural gas selling prices. For the nine months ended September 30, 2006, oil and gas revenue was $969,000, based on average selling prices of $6.34 per mcf of natural gas and $80.15 per barrel of oil and NGL. All of Castle Rock's 2006 sales volumes were sold at daily posted prices. Castle Rock has no immediate plans to enter into any arrangements to fix or hedge commodity prices.

Oil and gas revenue was $130,000 for the three months and nine months ended September 30, 2005, based on average selling prices of $11.54 per mcf of natural gas and $81.49 per barrel of oil and NGL.

Interest Income

Castle Rock recorded interest income of $31,000 during the third quarter of 2006, compared to $37,000 during the same period in 2005. Comparing the two quarters, average cash balances were higher in the third quarter of 2005 but interest rates were slightly lower. Interest income was $79,000 for the nine months ended September 30, 2006, compared to $91,000 for the first nine months of 2005. Interest income was higher in 2005 primarily as a result of higher average daily cash balances remaining from the initial public offering that was completed in March 2005.

Royalties

Royalties were $51,000 ($6.90 per boe) during the three months ended September 30, 2006. The total is comprised of freehold royalties (57%), Crown charges (24%) and overriding royalties (19%). Crown charges are net of ARTC. The effective royalty rate during the third quarter of 2006 was 19%. For the nine months ended September 30, 2006, royalties were $191,000 ($7.62 per boe) and the effective royalty rate was 20%.

Castle Rock paid royalties of $23,000 ($12.27 per boe) for the three months and nine months ended September 30, 2005.

Production and Transportation Expenses

Production and transportation expenses were $138,000 ($18.74 per boe) during the third quarter of 2006, up from $14.79 per boe during the second quarter. Higher quarter-over-quarter unit costs are primarily the result of fixed well operating expenses spread over lower sales volumes, most notably on low productivity natural gas wells.

For the nine months ended September 30, 2006, production and transportation expenses were $381,000 ($15.23 per boe), up from $28,000 ($14.73 per boe) for the same period in 2005. Production and transportation costs were minimal in 2005 because Castle Rock had no oil and gas production prior to September 2005.

During the third quarter of 2006, Castle Rock completed a review of the accounting classification of tariffs paid to move natural gas through third party gathering systems and pipelines. The review resulted in a reclassification of certain costs from transportation expenses to production expenses. As some of these costs were incurred in the first and second quarters of 2006, the reclassification created an anomalous third quarter balance for transportation expenses. Transportation expenses and production expenses for the nine months ended September 30, 2006 include the reclassification.



General and Administrative Expenses
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
($000s)

Personnel 155 198 562 446
Occupancy 49 48 151 113
Professional fees and public company 39 33 137 92
Office and other 20 27 78 69
---------------------------------------------------------------------------
Total general and administrative costs 263 306 928 720
Capitalized to oil and gas properties (20) (45) (111) (114)
Overhead recoveries (46) (35) (124) (57)
---------------------------------------------------------------------------
Expensed general and administrative costs 197 226 693 549
---------------------------------------------------------------------------


Total general and administrative costs were $263,000 during the third quarter of 2006, 14 percent lower than the $306,000 incurred during the same period in 2005. Castle Rock's disappointing exploration and development program has led to a reduction in personnel, primarily in the exploration area. Commencing in the third quarter of 2006, personnel costs and amounts capitalized to oil and gas properties have decreased.

Comparing the first nine months of 2006 to the first nine months of 2005, total general and administrative costs increased 29 percent to $928,000 from $720,000. Most of the year-over-year increase is caused by very low general and administrative costs in the first quarter of 2005, prior to the completion of Castle Rock's initial public offering. The reduction in personnel described above was initiated at the end of the second quarter of 2006 and did not materially impact nine month results. General and administrative expenses capitalized to oil and gas properties decreased marginally to $111,000 in 2006 from $114,000 in 2005, which is consistent with the exploration personnel in place throughout the two periods. Overhead recoveries increased to $124,000 in 2006 from $57,000 in 2005. The increase was caused by a higher ratio of facility and pipeline projects completed in 2006 and an overall increase in capital expenditures. Facility and pipeline projects are often burdened with a higher overhead rate.

Financing Charges

Castle Rock recorded financing charges of $215,000 during the first nine months of 2006, comprised of $52,000, $86,000 and $77,000 in the first, second and third quarters, respectively. Virtually all of the financing charges are on account of Part XII.6 tax. The tax, which is calculated monthly, is based on the difference between the flow-through share tax deductions renounced effective December 31, 2005 and the eligible expenditures incurred. The shortfall, which declines as eligible expenditures are incurred, attracts the tax.



Depletion, Depreciation and Accretion Expense (DD&A expense)

Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
($000s)

Depletion and depreciation - oil and gas
properties 463 36 1,389 36
Ceiling test impairment - oil and gas
properties 3,432 - 4,532 -
Accretion of asset retirement obligations 4 - 11 -
Depreciation - office equipment 4 4 16 13
---------------------------------------------------------------------------
Total depletion, depreciation and accretion
expense 3,903 40 5,948 49
---------------------------------------------------------------------------


DD&A expense for the nine months ended September 30, 2006 was $5,948,000, comprised primarily of ceiling test write downs totaling $4,532,000 (see below) and depletion and depreciation of oil and gas properties of $1,389,000. The oil and gas depletion and depreciation rate of $55.44 is high as a result of low proven reserve assignments relative to capital expenditures incurred.

DD&A expense for the first nine months of 2005 was $49,000, which included depletion and depreciation of oil and gas properties of $36,000. The $36,000 reflects the commencement of production in September 2005.

Write down of Oil and Gas Properties and Goodwill Impairment

Castle Rock performs an impairment test effective the end of each reporting period. The June 30, 2006 and September 30, 2006 tests indicated that the carrying amounts of Castle Rock's identifiable net assets exceeded their fair values by $2,100,000 and $3,432,000, respectively. This resulted in a $4,532,000 write down of oil and natural gas properties, which is included in depletion, depreciation and accretion (see above), and a goodwill impairment of $1,000,000. The June 30, 2006 calculation was based on Castle Rock's evaluation of reserves and net present values, whereas the September 30, 2006 calculation was based on an evaluation prepared by Castle Rock's independent reserves engineers. Estimated reserves and net present values declined from June 30 to September 30, 2006. Reserves were negatively affected by production performance at Hotchkiss and net present values declined due to lower reserves and a lower price forecast.

Stock-based Compensation

Stock-based compensation expense was $29,000 for the nine months ended September 30, 2006, compared to $16,000 for the same period in 2005. Stock-based compensation was recorded for the first, second and third quarters of 2006, but only the second and third quarters in 2005. There were no stock options outstanding for most of the first quarter of 2005.

Income Taxes

Castle Rock recorded future income tax recoveries of $2,257,000 for the first nine months of 2006, comprised of $116,000, $897,000 and $1,244,000 for the first, second and third quarters, respectively. Almost half of the second quarter recovery relates to a reduction in income tax rates enacted by the Alberta and Federal governments in June 2006. Most of the third quarter recovery relates to the significant loss from operations.

Effective December 31, 2005, Castle Rock renounced $10.0 million of income tax deductions to the subscribers of its initial public offering. To September 30, 2006, approximately $5,385,000 has been incurred, leaving $4,600,000 to be incurred by December 31, 2006 (see Contractual Obligations). The income tax deductions generated by these expenditures will not be available to Castle Rock.

Cash Used by Operations and Net Loss

Cash used by operations was $168,000 ($0.01 per share) for the third quarter of 2006 compared to $110,000 ($0.01 per share) for the same period in 2005. For the first nine months of 2006, cash used by operations was $432,000 ($0.02 per share), compared to $379,000 ($0.04 per share) used in the first nine months of 2005. In 2006, cash used by general and administrative expenses and financing changes exceeded net oil and gas revenue. In 2005, general and administrative expenses exceeded net oil and gas revenue.

Castle Rock recorded a net loss of $2,833,000 ($0.14 per share) and $5,152,000 ($0.27 per share) for the three months and nine months ended September 30, 2006, respectively. The loss for the nine months ended September 30, 2006 was increased by goodwill and oil and gas property impairments totalling $5,532,000 and decreased by income tax recoveries of $2,257,000. In 2005, Castle Rock's net losses were $137,000 ($0.01 per share) for the third quarter and $423,000 ($0.04) for the nine months ended September 30, 2005. There were no unusual charges to earnings in the nine months ended September 30, 2005.



Capital Expenditures
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
($000s)

Lease acquisition and retention 304 206 560 206
Geological and geophysical 107 412 180 795
Drilling and completions 884 1,816 1,800 2,743
Production equipment and facilities 205 50 1,765 53
Property acquisition 75 - 75 -
Capitalized general and administrative
expenses 20 45 111 114
Office and other - - 2 84
---------------------------------------------------------------------------
1,595 2,529 4,493 3,995
Corporate acquisition (net of working
capital) - 3,765 - 3,765
---------------------------------------------------------------------------
Total 1,595 6,294 4,493 7,760
---------------------------------------------------------------------------


Capital expenditures were $1,595,000 during the three months ended September 30, 2006. Lease acquisition and retention costs were $304,000, most of which was spent to acquire exploratory Crown mineral rights. Castle Rock spent $107,000 on geological and geophysical, primarily to acquire and reprocess existing geophysical data. Over half of the drilling and completion expenditures of $884,000 was spent drilling one (0.60 net) unsuccessful well in the Keho area. Approximately half of the $205,000 in tangible field expenditures was incurred in the Herronton area, where a well originally tied-in as a gas well was equipped to produce oil. During the third quarter of 2006, Castle Rock acquired a partner's interest in a Company operated gas well for $75,000.

For the nine months ended September 30, 2006, proceeds on sales of property and equipment totaled $3,082,000. Property dispositions were $191,000 and $2,891,000 in the second and third quarters, respectively. Third quarter dispositions included $2,763,000 on the sale of 50 percent of Castle Rock's interests in the Pearce, Hotchkiss, Valhalla, Herronton and Morse areas. This disposition was completed in July 2006. In September, Castle Rock entered into two separate arrangements whereby a partner acquired a portion of a Crown lease held by Castle Rock and then participated with Castle Rock in the drilling of a well. Proceeds received on the disposition of the leases totaled $128,000. These transactions provided Castle Rock with additional capital to fund its exploration and development program and reduce its flow-through share commitment.

Equity

On March 28, 2006, Castle Rock completed a private placement of 1,626,625 Class A Shares at $1.20 per share for gross proceeds of $1.95 million. Castle Rock incurred expenses of $200,000 to complete the issue.

In October 2006, Castle Rock completed the acquisition of additional interests in Company operated oil and gas properties from an arms-length private company. The purchase price was satisfied through the issuance of 1.2 million Class A Shares of Castle Rock. The transaction will be recorded in the fourth quarter based on a price of $0.30 per share or $360,000. The final purchase price will include a cash adjustment to reflect an effective date of July 1, 2006. The shares issued pursuant to this transaction are subject to a four month hold.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2006, Castle Rock had working capital of $2,188,000 and no debt. Castle Rock has a $400,000 revolving operating demand loan facility with a Canadian chartered bank.

To fund the balance of its 2006 capital expenditure program and meet its contractual obligations (see below), Castle Rock will have to raise additional funds through equity sales or property dispositions.

OUTSTANDING SHARE DATA

As of the date of this MD&A, Castle Rock had the following securities outstanding: 11,901,625 Class A Shares; 900,000 Class B Shares; and options to acquire 670,000 Class A Shares at an exercise price of $0.35 per share.

CONTRACTUAL OBLIGATIONS

Flow-through Shares

Pursuant to the provisions of its initial public offering which was completed in March 2005, Castle Rock is committed to spending $10.0 million by December 31, 2006 on expenditures that will qualify as Canadian Exploration Expense for income tax purpose. To September 30, 2006, approximately $5,400,000 of eligible expenditures has been incurred, leaving $4,600,000 to be incurred by December 31, 2006.

At September 30, 2006, Castle Rock had working capital of $2,188,000. Operating activities for the last quarter of 2006 are expected to use cash at about the same rate as experienced in the nine months ended September 30, 2006. Therefore, Castle Rock's capacity to extinguish the flow through share commitment by December 31, 2006 is dependant on its ability to secure additional sources of financing. These sources of financing could include, but are not necessarily limited to, new equity and/or asset dispositions. To the extent Castle Rock falls short of the $10.0 million commitment, it will be required to reimburse the flow-through share subscribers for any income taxes payable caused by a reduction in the income tax deductions ultimately renounced to such subscribers. In addition, there is a penalty imposed by Canada Revenue Agency which is based on the shortfall. The combination of the indemnity and the penalty is estimated to be 50 percent of the shortfall in the commitment. Using the September 30, 2006 commitment of $4,600,000 as an example, the total payable by Castle Rock would be an estimated $2,300,000. If Castle Rock does not meet its flow-through share commitment, the Company's December 31, 2006 financial statements will reflect a current liability for the estimated payable.

Hotchkiss Area Work Commitment

Castle Rock is a party to an agreement whereby $2.7 million of expenditures must be incurred by May 31, 2007. These expenditures relate to the completion, re-working, equipping, pipelining and/or abandoning of certain non-producing wells in the Hotchkiss area of Alberta. To September 30, 2006, approximately $1,323,000 has been spent on work commitment related items. Castle Rock (50%) and its partner (50%) will be required to make a lump sum payment for any shortfall in the commitment.

Office Space

Castle Rock has entered into a lease for office space that expires on February 28, 2010. The annual amount due under the lease, including rent and related operating expenses and taxes, is $174,000.

OFF-BALANCE SHEET ARRANGEMENTS

Castle Rock does not have any special purpose entities nor is it a party to any arrangements that would be excluded from the balance sheet.

RELATED PARTY TRANSACTIONS

A director of Castle Rock is a partner of a law firm that provides legal services to Castle Rock. For the nine months ended September 30, 2006, Castle Rock paid a total of $60,613 (2005 - $141,351) to this firm for legal fees and disbursements. Of this amount, $21,982 (2005 - $97,178) was charged to share issuance costs, $7,196 was charged to acquisition transaction costs (2005 - $35,603) and $31,435 (2005 - $8,570) was charged to general and administrative expenses. September 30, 2006 accounts payable and accrued liabilities includes $22,834 regarding these payments.

RISKS AND UNCERTAINTIES

There has been no material change in the risks and uncertainties affecting Castle Rock's business since the date of the MD&A for the year ended December 31, 2005.

CRITICAL ACCOUNTING ESTIMATES

There has been no material change in the accounting estimates critical to the financial statements since the date of the MD&A for the year ended December 31, 2005.

ADDITIONAL INFORMATION

Additional information regarding Castle Rock is available on SEDAR at www.sedar.com or on Castle Rock's website at www.castlerockpetroleum.com.



Financial Statements

Balance Sheets

September 30, December 31,
2006 2005
---------------------------------------------------------------------------
(Unaudited) (Audited)

Assets
Current assets
Cash and cash equivalents $ 3,553,909 $ 3,811,011
Accounts receivable 1,514,107 663,345
Prepaid expenses and deposits 22,240 38,834
---------------------------------------------------------------------------
5,090,256 4,513,190
Property and equipment
(Notes 2 and 3) 3,919,642 8,424,420
Goodwill (Note 3) - 1,000,000
---------------------------------------------------------------------------
$ 9,009,898 $13,937,610
---------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 2,902,215 $ 2,234,316
Future income taxes 1,576,000 538,000
Asset retirement obligations (Note 5) 240,000 208,000
---------------------------------------------------------------------------
$ 4,718,215 $ 2,980,316
---------------------------------------------------------------------------

Shareholders' equity
Share capital (Note 6) $10,179,211 $11,722,061
Contributed surplus 53,400 24,400
Deficit (5,940,928) (789,167)
---------------------------------------------------------------------------
4,291,683 10,957,294
---------------------------------------------------------------------------
$ 9,009,898 $13,937,610
---------------------------------------------------------------------------

Commitments (Note 11)
Subsequent Event (Note 12)

See accompanying notes


Statements of Operations and Deficit

Three Months Nine Months
Ended September 30, Ended September 30,
(Unaudited) 2006 2005 2006 2005
---------------------------------------------------------------------------

Revenue
Oil and gas sales $ 264,515 $ 129,618 $ 969,371 $ 129,618
Royalties, net of ARTC (51,036) (22,924) (190,826) (22,924)
---------------------------------------------------------------------------
213,479 106,694 778,545 106,694
Interest income 31,125 36,729 79,277 90,647
---------------------------------------------------------------------------
244,604 143,423 857,822 197,341
---------------------------------------------------------------------------

Expenses
Transportation (32,253) 3,783 17,557 3,783
Production 170,899 23,730 363,929 23,730
General and administrative 196,765 226,383 693,264 549,009
Financing charges (Note 9) 76,551 - 214,633 -
Depletion, depreciation
and accretion (Note 3) 3,903,000 40,400 5,948,000 49,500
Goodwill impairment
(Note 3) - - 1,000,000 -
Stock-based compensation 7,000 8,100 29,000 16,300
---------------------------------------------------------------------------
4,321,962 302,396 8,266,383 642,322
---------------------------------------------------------------------------

Loss before income taxes (4,077,358) (158,973) (7,408,561) (444,981)

Future income tax
recoveries 1,244,000 22,000 2,256,800 22,000
---------------------------------------------------------------------------
Net loss (2,833,358) (136,973) (5,151,761) (422,981)
Deficit, beginning of
period (3,107,570) (321,401) (789,167) (35,393)
---------------------------------------------------------------------------
Deficit, end of period $ (5,940,928) $ (458,374) $ (5,940,928) $ (458,374)
---------------------------------------------------------------------------

Net loss per share,
basic and diluted
(Note 7) $ (0.14) $ (0.01) $ (0.27) $ (0.04)
---------------------------------------------------------------------------

See accompanying notes


Statements of Cash Flows

Three Months Nine Months
Ended September 30, Ended September 30,
(Unaudited) 2006 2005 2006 2005
---------------------------------------------------------------------------

Cash provided by (used for)

Operations
Net loss $(2,833,358) $ (136,973) $(5,151,761) $ (422,981)
Items not affecting cash
Depletion, depreciation
and accretion 3,903,000 40,400 5,948,000 49,500
Goodwill impairment - - 1,000,000 -
Stock-based compensation 7,000 8,100 29,000 16,300
Future income tax
recoveries (1,244,000) (22,000) (2,256,800) (22,000)
---------------------------------------------------------------------------
(167,358) (110,473) (431,561) (379,181)
Changes in non-cash
working capital (Note 8) (147,726) (683,914) (714,992) (629,272)
---------------------------------------------------------------------------
(315,084) (794,387) (1,146,553) (1,008,453)
---------------------------------------------------------------------------

Financing
Issue of common shares - - 1,951,950 10,000,000
Share issue costs - - (200,000) (992,000)
Changes in non-cash
working capital (Note 8) - (1,029) 38,909 (6,355)
---------------------------------------------------------------------------
- (1,029) 1,790,859 9,001,645
---------------------------------------------------------------------------

Investing
Expenditures on property
and equipment (1,595,382) (2,529,353) (4,493,141) (3,995,069)
Decrease in deposits (280,000) - - -
Cash cost of business
combination, net of cash
acquired - (2,016,573) - (2,016,573)
Proceeds on sales of
property and equipment 2,890,669 - 3,081,919 -
Changes in non-cash
working capital (Note 8) 1,034,532 1,235,611 509,814 1,394,299
---------------------------------------------------------------------------
2,049,819 (3,310,315) (901,408) (4,617,343)
---------------------------------------------------------------------------

Increase (decrease)
in cash and cash
equivalents 1,734,735 (4,105,731) (257,102) 3,375,849
Cash and cash
equivalents, beginning
of the period 1,819,174 8,132,806 3,811,011 651,226
---------------------------------------------------------------------------
Cash and cash
equivalents, end
of the period $ 3,553,909 $4,027,075 $ 3,553,909 $4,027,075
---------------------------------------------------------------------------

See accompanying notes


Notes to Financial Statements
Nine Months Ended September 30, 2006
(Unaudited)


Castle Rock Petroleum Ltd. ("Castle Rock" or the "Company") was incorporated under the laws of the province of Alberta on March 17, 2004 and commenced operations on May 1, 2004. The Company completed an initial public offering on March 29, 2005, and on April 8, 2005 Castle Rock's Class A and Class B shares commenced trading on the TSX Venture Exchange. Castle Rock is engaged in the acquisition, exploration, development and production of petroleum and natural gas reserves in western Canada.

1. Basis of Presentation

The interim financial statements of Castle Rock have been prepared in accordance with Canadian generally accepted accounting principles and are consistent with the presentation and disclosure in the audited financial statements and notes thereto for the year ended December 31, 2005. The interim financial statements contain disclosures which are supplemental to Castle Rock's annual audited financial statements. Certain disclosures, which are normally required to be included in the notes to the annual audited financial statements, have been condensed or omitted. The interim financial statements should be read in conjunction with Castle Rock's audited financial statements and notes thereto for the year ended December 31, 2005.



2. Property and Equipment

September 30, 2006 December 31, 2005
---------------------------------------------------------------------------

Oil and natural gas properties $ 10,137,947 $ 8,707,686
Office equipment 100,195 98,234
---------------------------------------------------------------------------
10,238,142 8,805,920
Accumulated depletion and depreciation (6,318,500) (381,500)
---------------------------------------------------------------------------
$ 3,919,642 $ 8,424,420
---------------------------------------------------------------------------


At September 30, 2006, unproved property costs of $583,000 (December 31, 2005 - $2,617,000) were excluded from the depletion and depreciation calculation.

For the nine months ended September 30, 2006, Castle Rock capitalized general and administrative expenses of $111,284 (nine months ended September 30, 2005 - $113,891) to oil and natural gas properties.

3. Write Down of Oil and Natural Gas Properties and Goodwill Impairment

Impairment tests effective June 30, 2006 and September 30, 2006 indicated that the carrying amounts of Castle Rock's identifiable net assets exceeded their fair values by $2,100,000 and $3,432,000, respectively. This resulted in a $4,532,000 write down of oil and natural gas properties, which is included in depletion, depreciation and accretion, and a goodwill impairment of $1,000,000.



Three Months Ended Nine Months Ended
June 30, September 30, September 30,
2006 2006 2006
---------------------------------------------------------------------------

Write down of oil
and gas properties $ 1,100,000 $ 3,432,000 $ 4,532,000
Goodwill impairment 1,000,000 - 1,000,000
---------------------------------------------------------------------------
Total $ 2,100,000 $ 3,432,000 $ 5,532,000
---------------------------------------------------------------------------


4. Operating Demand Loan Facility

Castle Rock has a $400,000 revolving operating demand loan facility with a Canadian chartered bank. The credit facility bears interest at the bank's prime rate plus 1.0 percent per annum and is secured by a general assignment of book debts and a $5.0 million debenture that provides for a floating charge over all of Castle Rock's present and future assets. The terms of the facility require Castle Rock to meet certain financial covenants.

5. Asset Retirement Obligations

Castle Rock has estimated the net present value of its total asset retirement obligations to be $240,000, based on a total future liability of $334,000, discounted at an average credit adjusted risk free rate of approximately 6.0%. These obligations are not expected to be paid for several years and will be funded from general corporate resources at the time of abandonment. The following table reconciles Castle Rock's asset retirement obligations:



Nine Months Ended Year Ended
September 30, 2006 December 31, 2005
---------------------------------------------------------------------------

Balance, beginning of period $ 208,000 $ 7,300
Liabilities incurred 90,000 165,200
Decrease due to property disposition (69,000) -
Liabilities acquired - 84,500
Liabilities settled - (60,000)
Accretion expense 11,000 11,000
---------------------------------------------------------------------------
Balance, end of period $ 240,000 $ 208,000
---------------------------------------------------------------------------


6. Share Capital

a) Shares Issued

Number of Shares Amount
---------------------------------------------------------------------------

Class A Shares

Balance, December 31, 2005 9,075,000 $ 3,614,861
Issued for cash 1,626,625 1,951,950
Share issue costs - (200,000)
Income tax effect of share issue costs - 67,200
Income tax effect of flow-through shares - (336,000)
---------------------------------------------------------------------------
Balance, September 30, 2006 10,701,625 $ 5,098,011
---------------------------------------------------------------------------

Class B Shares

Balance, December 31, 2005 900,000 $ 8,107,200
Income tax effect of flow-through shares - (3,026,000)
---------------------------------------------------------------------------
Balance, September 30, 2006 900,000 $ 5,081,200
---------------------------------------------------------------------------
Total share capital, September 30, 2006 $ 10,179,211
---------------------------------------------------------------------------


b) Initial Public offering of Flow-through Shares

Castle Rock completed a $10.0 million initial public offering of flow-through shares in March 2005. Four million flow-through Class A Shares at $0.25 per share and 900,000 flow-through Class B Shares at $10.00 per share were issued. Pursuant to the terms of the offering (see Note 11), Castle Rock renounced $10.0 million of income tax deductions to the subscribers in March 2006, effective December 31, 2005. The income tax effect of the renunciation was recorded in the first quarter of 2006.

c) Share Capital Offering

On March 28, 2006, Castle Rock completed a private placement of 1,626,625 Class A Shares at $1.20 per share for gross proceeds of $1,951,950.



d) Stock Options

---------------------------------------------------------------------------
Weighted Average
Number Exercise Price
of Options (per share)
---------------------------------------------------------------------------

Balance, December 31, 2005 800,000 $ 0.39
Granted 100,000 0.35
Cancelled (130,000) 0.57
---------------------------------------------------------------------------
Balance, September 30, 2006 770,000 $ 0.35
---------------------------------------------------------------------------


In September 2006, Castle Rock granted an option to purchase 100,000 Class A shares at $0.35 per share to an employee. These options vest as to one-third per year on each of the first, second and third anniversaries of the date of grant and expire five years from the date of grant.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes options pricing model. The fair value of the options granted and the assumptions used in the model are set forth below.



---------------------------------------------------------------------------
Fair value of options granted ($/share) $ 0.11
Risk-free interest rate (%) 3.9
Expected life (years) 4.0
Expected volatility (%) 50
Expected dividend yield (%) -
---------------------------------------------------------------------------


e) Shares in Escrow

At September 30, 2006, 2,400,000 Class A Shares were held in escrow pursuant to the requirements of the TSX-V. One quarter of these shares will be released from escrow in six month intervals over an 18 month period, with the next release on October 9, 2006. The above escrow release schedule is subject to acceleration in accordance with National Policy 46-201 - "Escrow for Initial Public Offerings" and the policies of the TSX-V in the event that Castle Rock subsequently meets certain listing requirements.



7. Per Share Amounts

Three Months Nine Months
Ended September 30, Ended September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------

Weighted average number of
Class A Shares
outstanding 10,701,625 6,344,022 10,189,208 6,167,216
Conversion of Class B
Shares using a Class A
Share value of $1.00
(2005 - $1.55) 9,000,000 5,806,452 9,000,000 3,956,045
---------------------------------------------------------------------------
Weighted average number
of shares outstanding,
basic and diluted 19,701,625 12,150,474 19,189,208 10,123,261
---------------------------------------------------------------------------


The weighted average number of shares outstanding was not increased for outstanding stock options for purposes of calculating diluted shares outstanding as the effect would be anti-dilutive.



8. Supplemental Cash Flow Information

Three Months Nine Months
Ended September 30, Ended September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------

Changes in Non-cash Working
Capital Balances

Accounts receivable $ (215,404) $ (653,834) $ (850,762) $(744,041)
Prepaid expenses and
deposits 24,983 (101,177) 16,594 (73,615)
Accounts payable and
accrued liabilities 1,077,227 1,305,679 667,899 1,576,328
---------------------------------------------------------------------------
$ 886,806 $ 550,668 $ (166,269) $ 758,672
---------------------------------------------------------------------------

Changes in Non-cash Working
Capital Related to:

Operating activities $ (147,726) $ (683,914) $ (714,992) $(629,272)
Financing activities - (1,029) 38,909 (6,355)
Investing activities 1,034,532 1,235,611 509,814 1,394,299
---------------------------------------------------------------------------
$ 886,806 $ 550,668 $ (166,269) $ 758,672
---------------------------------------------------------------------------


9. Financing Charges

Financing charges consist almost entirely of Part XII.6 tax, which is based on the difference between flow-through share tax deductions renounced and eligible expenditures incurred. The shortfall and the tax are calculated monthly, commencing in February 2006.

10. Related Party Transactions

A director of Castle Rock is a partner of a law firm that provides legal services to Castle Rock. For the nine months ended September 30, 2006, Castle Rock paid a total of $60,613 (2005 - $141,351) to this firm for legal fees and disbursements. Of this amount, $21,982 (2005 - $97,178) was charged to share issuance costs, $7,196 was charged to acquisition transaction costs (2005 - $35,603) and $31,435 (2005 - $8,570) was charged to general and administrative expenses. September 30, 2006 accounts payable and accrued liabilities includes $22,834 regarding these payments.

These transactions have been recorded at the exchange amount, which is the amount of consideration established, agreed to and paid by the related parties based on standard commercial terms.

11. Commitments

a) Flow-through Shares

Pursuant to the terms of its initial public offering of flow-through shares, Castle Rock is committed to spending $10.0 million by December 31, 2006 on expenditures that will qualify as Canadian Exploration Expense for income tax purposes. Castle Rock has indemnified subscribers in an amount equal to the income taxes payable by the subscribers should Castle Rock fail to incur the full $10.0 million of qualifying expenditures by December 31, 2006. To September 30, 2006, approximately $5,400,000 of eligible expenditures have been incurred, leaving a $4,600,000 commitment.

At September 30, 2006, Castle Rock had working capital of $2,188,000. Operating activities for the last quarter of 2006 are expected to use cash at about the same rate as experienced in the nine months ended September 30, 2006. Therefore, Castle Rock's capacity to extinguish the flow through share commitment by December 31, 2006 is dependant on its ability to secure additional sources of financing. These sources of financing could include, but are not necessarily limited to, new equity and/or asset dispositions. To the extent Castle Rock falls short of the $10.0 million commitment, it will be required to reimburse the flow-through share subscribers for any income taxes payable caused by a reduction in the income tax deductions ultimately renounced to such subscribers. In addition, there is a penalty imposed by Canada Revenue Agency which is based on the shortfall. The combination of the indemnity and the penalty is estimated to be 50 percent of the shortfall in the commitment. Using the September 30, 2006 commitment of $4,600,000 as an example, the total payable by Castle Rock would be an estimated $2,300,000. If Castle Rock does not meet its flow-through share commitment, the Company's December 31, 2006 financial statements will reflect a current liability for the estimated payable.

b) Hotchkiss Area Work Committment

In November 2005, Castle Rock entered into an agreement with a major oil and gas producer (the "Farmor") regarding the Hotchkiss area of northern Alberta (the "Hotchkiss Agreement"). In July 2006, Castle Rock entered into a participation agreement with an industry partner pursuant to which Castle Rock and the partner (the "Farmees") will share equally the rights and obligations of the Hotchkiss Agreement. The Hotchkiss Agreement gives the Farmees access to 36 non-producing wells and a large tract of undeveloped mineral rights held by the Farmor. The farmees are committed to a $2.7 million work program (complete, re-work, equip, pipeline or abandon) to evaluate the non-producing wells. When the $2.7 million commitment is reached, the Farmees will earn 50 percent of the Farmor's interest in all 36 wells, regardless of their status. If the minimum commitment is not reached by May 31, 2007, the Farmees will be required to pay the shortfall in cash. As at September 30, 2006, approximately $1,323,000 has been spent on work commitment related items. Any cash payment would be shared equally between Castle Rock and its partner. In addition to the work commitment, the Farmees are committed to drilling two Lower Cretaceous wells to earn an interest in six sections of mineral rights and an option to continue drilling to earn additional rights.

12. Subsequent Event

In October 2006, Castle Rock completed the acquisition of additional interests in Company operated oil and gas properties from an arms-length private company. The purchase price was satisfied through the issuance of 1.2 million Class A Shares of Castle Rock. The transaction will be recorded based on a price of $0.30 per share or $360,000. The final purchase price will include a cash adjustment to reflect an effective date of July 1, 2006. The shares issued pursuant to this transaction are subject to a four month hold.

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of the information contained in this news release.

Contact Information

  • Castle Rock Petroleum Ltd.
    Roger Hume
    Chief Executive Officer
    (403) 290-3262
    or
    Castle Rock Petroleum Ltd.
    Michael Makinson
    Chief Financial Officer
    (403) 290-3261 or Toll Free: 1-888-290-3255
    Website: www.castlerockpetroleum.com