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

Castle Rock Petroleum Ltd.

August 24, 2005 09:00 ET

Castle Rock Petroleum Ltd.: Interim Report for the Three Months Ended June 30, 2005

CALGARY, ALBERTA--(CCNMatthews - Aug. 24, 2005) - Castle Rock Petroleum Ltd. (TSX VENTURE:RCK.A) (TSX VENTURE:RCK.B):

Chairman's Letter to Shareholders

Castle Rock Petroleum Ltd. is pleased to present its interim report for the period ending June 30, 2005.

Exploration and Development

For the most part, Spring breakup and record wet weather during the second quarter did not affect Castle Rock's ability to get operations started on several projects. The Company commenced the drilling of four wells in three prospect areas. Two shallow wells were drilled at Medicine Hat, a medium depth well at Carbon and a deep Nisku well on a new prospect in southern Alberta.

Although gas was encountered in the two wells at Medicine Hat and the well at Carbon, the results did not justify tying the wells in for production and they will be abandoned. The fourth well has subsequently been cased for Nisku oil production.

A variety of geological, geophysical, engineering and land work was also undertaken on several other projects that will set Castle Rock up for a significant increase in activity in the balance of the year.

Morse

Due to impassable roads, Castle Rock was unable to access the first drilling location on this prospect during the second quarter but the Company expects to obtain access to the drilling site later in the summer. The location is a farmin well that will be part of an eight section block of land that will be earned by the drilling of four wells. Nonetheless, an agreement was reached to take over a 100% ownership of a suspended gas well on the prospect offsetting the planned drilling location.

Seismic Data Project

Geological and geophysical work is ongoing to map the five seismic data project areas encompassing 2,135 kilometres of 2D data. By the end of the second quarter, geophysical mapping had been completed on two of the project areas. The Empress South Project did not yield any prospects that merited further investigation. The Excelsior Project, though, has provided several prospects that are being pursued. Geophysical and geological interpretation is also underway on the other three project areas at Bruce, in central Alberta, Olds/Innisfail, in southern Alberta, and Provost in eastern Alberta. These project areas will be evaluated by additional seismic and drilling over the next twelve to eighteen months and should provide an excellent inventory of both oil and gas prospects.

Events Subsequent to the End of the Second Quarter

Subsequent to June 30, 2005, Castle Rock completed the drilling of two wells resulting in a dry hole on the Excelsior Project area that encountered an excellent reservoir sandstone that was not, unfortunately, gas bearing and also a successful 50% owned and operated oil well in southern Alberta that commenced drilling in the second quarter. This well will be discussed at a later date following completion results and when expected production rates are known.

At Morse, the 100% working interest well that was acquired in the second quarter has now been tested and is capable of producing at a sustained rate of around 400 MCFD with 15 barrels of light (33 degree API) oil per day. Additional drilling is required in the Morse area to determine the scope of the project, prior to the tie-in of the gas well, which is less than half a mile from an existing pipeline.

Outlook

Castle Rock is on target for meeting its budgetary and operational expectations as a start up exploration company following its initial public offering. The Company will see increasing activity as projects mature towards the drilling and production stage in the coming months. The prospect focus will continue to be on longer life, high netback natural gas and light oil opportunities in southern and central Alberta. Castle Rock is pleased with the early results on its Morse and southern Alberta gas and light oil plays, which have provided the Company with its first potentially productive reserves of oil and natural gas. We look forward to reporting more information on these two areas and others as the results become known to us.

Signed "Roger W. Hume", P. Geol.

Chairman and Chief Executive Officer

August 24, 2005

Management's Discussion and Analysis

This management's discussion and analysis of financial condition and results of operations ("MD&A") is dated August 24, 2005 and should be read in conjunction with the unaudited financial statements for the six months ended June 30, 2005, the audited financial statements for the eight months ended December 31, 2004 and MD&A for the eight months ended December 31, 2004.

This MD&A may contain forward-looking information. Such information is 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 in the forward-looking information. Readers are cautioned not to place undue reliance on forward-looking information, 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.

DESCRIPTION OF BUSINESS

Castle Rock is engaged in the acquisition, exploration, development and production of oil and natural gas reserves, primarily in Alberta. Castle Rock completed a $10.0 million initial public offering in late March 2005 and in April the Company's shares commenced trading on the TSX Venture Exchange. Although the Company was created in May 2004, exploration and development activities were relatively minor prior to the initial public offering.

To June 30, 2005, Castle Rock has no oil and gas revenue.

INITIAL PUBLIC OFFERING AND OUTSTANDING SECURITIES

Castle Rock completed its initial public offering on March 29, 2005. A total of $10.0 million was raised through the issuance of 4,000,000 flow-through Class A shares at $0.25 per share and 900,000 flow-through Class B shares at $10.00 per share. Pursuant to the terms of the offering, Castle Rock has committed to spend $10.0 million on expenditures that qualify as Canadian Exploration Expense ("CEE") for income tax purposes. The CEE expenditures will be renounced to the flow-through share subscribers effective no later than December 31, 2005. Castle Rock has until December 31, 2006 to incur the qualifying expenditures. To June 30, 2005, approximately $1,075,000 of eligible expenditures have been incurred.

At June 30, 2005, Castle Rock had 8,000,000 Class A shares and 900,000 Class B shares outstanding. The Class B shares are convertible, at the option of Castle Rock, at any time on or after June 1, 2008 and on or before May 31, 2010 into Class A shares. The number of Class A shares obtained upon conversion of each Class B share will be equal to $10 divided by the greater of $1 and the then current market price of the Class A shares. If conversion has not occurred by the close of business on May 31, 2010, the Class B shares become convertible at the option of the shareholder into Class A shares on the same basis. Any Class B shares outstanding at the close of business on June 30, 2010 will be automatically converted into Class A shares.



SUMMARY OF QUARTERLY RESULTS

------------------------------------------------------------------------
2005 2004
----------------------------------------
Q2 Q1 Q4 Q3 Q2(1)
------------------------------------------------------------------------

Financial Highlights
($000s except per share amounts)

Interest income 51 3 - - -
Cash used by operations (187) (82) (17) (13) (4)
Per share - basic and diluted (0.01) (0.02) (0.01) (0.01) -
Net loss (200) (86) (17) (14) (4)
Per share - basic and diluted (0.01) (0.02) (0.01) (0.01) -
Issue of shares - 10,000 700 - 300
Capital expenditures 1,198 268 264 132 2
Working capital 7,835 9,220 562 148 294
Shareholders' equity 9,688 9,880 959 282 296
Total assets 10,194 10,216 1,111 327 299
------------------------------------------------------------------------

Common Share Information
Shares outstanding (000s)
Weighted average during
the period 13,625 4,433 2,702 1,200 1,020
Period end - Class A 8,000 8,000 4,000 1,200 1,200
Period end - Class B 900 900 - - -
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Two months ended June 30, 2004

THREE MONTHS ENDED JUNE 30, 2005
COMPARED TO
THREE MONTHS ENDED MARCH 31, 2005


Interest Income

Castle Rock earned interest income of $50,627 during the second quarter of 2005, compared to $3,223 in the first quarter of the year. Second quarter interest income was earned on the cash on hand from the initial public offering, which closed in late March.



General and Administrative Expenses
------------------------------------------------------------------------
Six Months Three Months Ended
Ended ------------------------------
June 30, 2005 June 30, 2005 March 31, 2005
------------------------------------------------------------------------

Personnel $ 247,859 $ 193,190 $ 54,669
Occupancy 64,953 46,222 18,731
Professional fees and
public company 58,624 51,300 7,324
Office and other 41,702 14,340 27,362
------------------------------------------------------------------------
Total general and
administrative costs 413,138 305,052 108,086
Capitalized to oil and
natural gas properties (69,044) (46,042) (23,002)
Overhead recoveries (21,468) (21,468) -
------------------------------------------------------------------------
Expensed general and
administrative costs $ 322,626 $ 237,542 $ 85,084
------------------------------------------------------------------------
------------------------------------------------------------------------


Total general and administrative costs for the second quarter of 2005 were $305,052, 182 percent higher than first quarter expenditures of $108,086. Personnel, occupancy and office related costs all increased as the people and infrastructure were put in place to manage Castle Rock's exploration and development program. At June 30, 2005, Castle Rock had eight salaried employees and one consultant. General and administrative costs capitalized to oil and natural gas properties increased to $46,042 in the second quarter from $23,002 in the first quarter. The quarter-over-quarter change reflects the increase in technical personnel. Overhead recoveries of $21,468 during the second quarter of 2005 are with respect to capital projects operated by Castle Rock. Castle Rock did not operate any capital projects prior to the second quarter of 2005.

Depreciation and Accretion Expense

Second quarter 2005 depreciation and accretion expense of $4,600 is comprised of $4,400 for depreciation of office equipment and $200 for accretion of asset retirement obligations. These amounts are very similar to first quarter charges. Castle Rock did not record depletion and depreciation expense for the first six months of 2005. Castle Rock expects its first producing well to be placed on-stream during the third quarter, at which time depletion and depreciation expense will commence.

Stock-based Compensation

First half 2005 stock-based compensation expense of $8,200 was recorded during the second quarter. All of Castle Rock's outstanding stock options were granted on March 30, 2005. The stock-based compensation expense calculation, which considers the number of days during the reporting period that the options are outstanding, resulted in an insignificant amount for the first quarter.

Net Loss

The second quarter loss of $199,715 ($0.01 per share) is higher than the first quarter loss of $86,293 ($0.02 per share) primarily as a result of higher general and administrative expenses. The quarter-over-quarter loss per share decreased as a result of the increase in the average number of shares outstanding.



Capital Expenditures
------------------------------------------------------------------------
Six Months Three Months Ended
Ended ------------------------------
June 30, 2005 June 30, 2005 March 31, 2005
------------------------------------------------------------------------

Geological and geophysical $ 382,907 $ 258,943 $ 123,964
Drilling and completions 927,097 884,370 42,727
Production equipment 3,016 3,016 -
Capitalized general and
administrative expenses 69,044 46,042 23,002
Office and other 83,652 5,136 78,516
------------------------------------------------------------------------
Total $ 1,465,716 $ 1,197,507 $ 268,209
------------------------------------------------------------------------
------------------------------------------------------------------------


Second quarter 2005 capital expenditures totaled $1,197,507, up substantially from the $268,209 spent during the first quarter. Castle Rock drilled 4 (3.0 net) wells during the second quarter of 2005 (first quarter - nil), three of which were company operated. The increase in activity is also evident in geological and geophysical expenditures, which were $258,943 in the second quarter (first quarter - $123,964). Most first half 2005 geological and geophysical expenditures were incurred with respect to a Seismic Access Agreement, which gives Castle Rock unrestricted access to a 2,135 kilometre 2D seismic data base. Processing and interpretation of the data began at the end of the first quarter.



SIX MONTHS ENDED JUNE 30, 2005
COMPARED TO
TWO MONTHS ENDED JUNE 30, 2004


Castle Rock commenced operations in May 2004. Activities that affected the financial statements for the two months ended June 30, 2004 were minor.

Interest Income

Castle Rock earned interest income of $53,918 during the first half of 2005, most of which was earned on the cash balance on hand from the initial public offering. There was no interest income earned in 2004.

General and Administrative Expenses

Total general and administrative costs were $413,138 in the first half of 2005. Of the total, $69,044 was capitalized to oil and natural gas properties, $21,468 was charged to capital projects and $322,626 was expensed. The magnitude of general and administrative costs incurred during the first half of 2005 reflects the completion of the initial public offering in March and the increase in personnel and related infrastructure to manage Castle Rock's exploration and development program.

During the two months ended June 30, 2004, Castle Rock incurred office related general and administrative costs of $4,258.

Depreciation and Accretion Expense

First half 2005 depreciation and accretion expense of $9,100 is comprised of $8,700 for depreciation of office equipment and $400 for accretion of asset retirement obligations. Depletion and depreciation of costs capitalized to oil and natural gas properties will be recorded with the commencement of production.

Castle Rock's total property and equipment at June 30, 2004 consisted of $1,744 of pre-drilling costs for a well that was drilled during the third quarter of 2004. Depletion and depreciation expense was not recorded for the two months ended June 30, 2004.

Stock-based Compensation

On March 30, 2005, options to acquire 800,000 Class A shares at $0.35 per share were granted to employees, consultants and directors. This resulted in stock-based compensation expense of $8,200 for the six months ended June 30, 2005. There were no stock options outstanding in 2004.

Net Loss

Castle Rock's net loss for the six months ended June 30, 2005 was $286,008 ($0.03 per share), resulting primarily from general and administrative expenses exceeding interest income. For the two months ended June 30, 2004, Castle Rock recorded a net loss of $4,258 (nil per share). There was no revenue during the two months ended June 30, 2004 to offset general and administrative expenses.

Capital Expenditures

Capital expenditures were $1,465,716 during the six months ended June 30, 2005. During the first half of 2005, Castle Rock drilled 4 (3.0 net) wells and commenced processing and interpreting the 2,135 kilometre 2D seismic data base provided by the Seismic Access Agreement.

During the two months ended June 30, 2004, Castle Rock's capital expenditures consisted of pre-drilling costs of $1,744.

New Equity

Castle Rock completed a $10.0 million public offering in March 2005. During the two months ended June 30, 2004, Castle Rock issued initial equity of $300,000.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005, Castle Rock had working capital of $7,835,315, which included cash of $8,132,806. Castle Rock expects to fund its 2005 capital expenditure program from existing working capital. Expenditures over and above planned activities, such as acquisitions, will be funded by new equity and/or bank debt. Castle Rock intends to negotiate a borrowing facility when the need arises.

OUTSTANDING SHARE DATA

As of June 30, 2005 and the date of this MD&A, Castle Rock had the following securities outstanding: 8,000,000 Class A shares; 900,000 Class B shares; and options to acquire 800,000 Class A shares at $0.35 per share.

CONTRACTUAL OBLIGATIONS

At December 31, 2004, Castle Rock had a commitment to renounce $200,000 of CEE to subscribers of two private placements of flow-through shares completed in 2004. This obligation has been satisfied.

Pursuant to the provisions of its initial public offering completed in March 2005 (see above), Castle Rock is committed to spend $10.0 million by December 31, 2006 on expenditures that will qualify as CEE.

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 $166,000.

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

During the first half of 2005, Castle Rock entered into commercial business transactions with two related parties, both of whom are Castle Rock directors. One of the related parties is a partner of a law firm that provides legal services to Castle Rock and the other is a partner of a consulting firm that provides oil and gas property evaluation services to Castle Rock. The following table summarizes the payments made by Castle Rock to these two entities for the periods indicated.



------------------------------------------------------------------------
Six Months Three Months Ended
Ended ------------------------------
June 30, 2005 June 30, 2005 March 31, 2005
------------------------------------------------------------------------

Legal fees $ 105,748 $ 11,118 $ 94,630
Oil and gas property
evaluation services $ 6,323 $ 6,323 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Of the $105,748 in legal fees paid during the six months ended June 30, 2005, $97,178 was charged to share issuance costs and $8,570 was charged to general and administrative expenses. All of the $6,323 paid with respect to oil and gas property evaluation services was charged to general and administrative expenses.

RISKS AND UNCERTAINTIES

The following discussion summarizes the risks and uncertainties facing most participants in the oil and gas industry and Castle Rock's approach to managing these risks.

Castle Rock is committed to a high level of exploration activity. Oil and natural gas exploration, by its nature, involves a high degree of risk. Castle Rock's primary method of managing exploration risk is by focusing in areas where management's expertise and experience is greatest. In addition, the Company looks for multi-zone play types, uses geophysical techniques when appropriate and limits financial exposure to any one event.

Castle Rock has a limited history of operations and limited capital resources. All of the Company's exploration activities have been, and in the near term will likely continue to be, funded with equity. A shortage of additional equity would hinder the Company's ability to undertake new projects. Castle Rock's shares are listed on the TSX Venture Exchange and an active investor relations program is in place to foster strong relationships with existing shareholders and members of the investment community.

Future revenue, profitability and the carrying value of Castle Rock's oil and natural gas properties depend on commodity prices. Fluctuating oil and natural gas prices, which are driven by market forces outside of Castle Rock's control, may have a material negative affect on operating results, the ability to maintain a borrowing base and the ability to raise equity on acceptable terms. Furthermore, oil and natural gas prices are typically denominated in US dollars and changes in exchange rates may have a negative impact on realized selling prices. Without limiting the upside associated with strengthening oil and natural gas prices, Castle Rock may use financial instruments to ensure that the adverse effect of fluctuating prices and exchange rates does not have a severe impact on its business plan.

The ownership of oil and natural gas wells, processing facilities and pipelines presents a number of operational risks such as breakage, spills and blowouts. An unexpected event in the field could result in damage to Castle Rock's assets or a third party liability. Third party costs or the costs incurred to repair or replace damaged or destroyed assets may exceed amounts recoverable from insurance. The primary means of managing operational risk is to engage qualified personnel for each phase of a project's development. In addition, Castle Rock maintains general liability insurance and insurance to protect against destruction of assets, blowouts and pollution.

Estimates of oil and natural gas reserves change, and a material reduction in reserves could reduce Castle Rock's net asset value and affect debt covenants and the ability to raise equity. The process of estimating reserves is subjective, involving a significant number of decisions and assumptions in evaluating available geological, geophysical, engineering and economic data. These estimates may change as additional information from ongoing development and production activities becomes available and as economic conditions affecting oil and natural gas prices and costs change. Castle Rock's management team includes professionals who estimate reserves for Company use. In addition, the Board of Directors engages an independent firm of engineers to evaluate Castle Rock's reserves.

The oil and gas industry is subject to environment, health and safety regulations pursuant to local, provincial and federal legislation. A failure to meet minimum standards or a breach of a specific requirement could result in a monetary fine or an order to comply. Castle Rock has an environment, health and safety program and an emergency response plan, both of which are administered by experienced personnel.

Castle Rock has committed to renouncing a substantial amount of Canadian Exploration Expense to flow-through share subscribers. If Castle Rock fails to meet the spending commitment or if the income tax authorities determine that Castle Rock's securities or expenditures do not qualify, there may be adverse consequences to the Company and/or its shareholders. Castle Rock monitors all capital expenditures on an ongoing basis with a view to ensuring proper classification for income tax purposes. To the extent possible, Castle Rock may use external sources such as regulatory authorities and external auditors for substantiation or assistance.

CRITICAL ACCOUNTING ESTIMATES

Castle Rock's financial statements have been prepared in accordance with Canadian GAAP. A comprehensive discussion of Castle Rock's significant accounting policies is contained in Note 1 to the audited financial statements for the eight months ended December 31, 2004 and changes thereto as described in Note 1 to the unaudited financial statements for the six months ended June 30, 2005. Castle Rock's significant accounting policies are subject to estimates and key judgments about future events, many of which are beyond management's control. The following is a discussion of the accounting estimates that are critical to the financial statements.

Oil and Gas Accounting - Reserves Recognition

Castle Rock retains independent petroleum engineering consultants Sproule Associates Limited to evaluate the Company's oil and natural gas reserves and prepare an evaluation report. Reserve estimates are based on a number of assumptions such as projected production, selling prices, operating expenses and the impact of government regulation. By their nature, these estimates change as additional production and economic information becomes available. Reserves can be classified as proved, probable or possible with decreasing levels of certainty as to the likelihood that the reserves will be ultimately produced.

Oil and Gas Accounting - Depletion and Depreciation

Under the full cost method of accounting for exploration and development activities, all costs associated with exploration and development are capitalized. The aggregate of net capitalized costs and estimated future development costs, less estimated salvage values, is amortized using the unit-of-production method based on estimated proved oil and gas reserves (depletion and depreciation expense). In addition to estimated proved reserves, depletion and depreciation expense is also affected by estimated future development costs and the cost of unproved properties. Changes in any of these estimates could have an impact on Castle Rock's earnings.

Oil and Gas Accounting - Impairments

Under the full cost method of accounting, the carrying amount of Castle Rock's oil and gas properties cannot exceed the estimated net present value of future cash flows expected from proved plus probable reserves (the "ceiling test"). Reserve estimates, estimates of revenues, royalties and operating costs and the timing of future cash flows are critical components of the ceiling test. Revisions of these estimates could result in a write down of the carrying amount of oil and gas properties.

Oil and Gas Accounting - Excluded Costs

Full cost accounting provides for the costs of unproven properties to be excluded from the calculation of depletion and depreciation and from the ceiling test. These costs are excluded until proved reserves have been assigned or their value is impaired. Judgment is required to assess these costs on a quarterly basis for possible impairment or reserve assignment.

Asset Retirement Obligations

Estimates of the costs associated with abandonment and reclamation activities require judgment concerning the method, timing and extent of future retirement activities. Judgments affecting the current and annual expense are subject to future revisions based on changing technology, abandonment timing, discount rates and the political and regulatory environment.

Stock-based Compensation

Under the fair value method of accounting for stock options, compensation expense is determined on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Castle Rock's stock options are not transferable, cannot be traded and are subject to vesting restrictions that would tend to reduce value. The Black-Scholes model requires the input of several variables including estimated volatility of Castle Rock's stock price over the life of the option, estimated forfeitures and the estimated life of the option. Changes in these estimates will alter the option's fair value and the related expense as determined by the Black-Scholes model.

Other Accounting Estimates

The accrual method of accounting requires management to incorporate certain estimates in Castle Rock's financial and operating results. This includes estimates of production volumes, revenues, royalties and production costs at a specific reporting date but for which actual revenues and costs have not yet been received; and estimates on capital projects which are in progress or recently completed where actual costs have not been received at a specific reporting date.

ADDITIONAL INFORMATION

Additional information regarding Castle Rock is available on SEDAR at www.sedar.com.



Balance Sheets

June 30, December 31,
2005 2004
------------------------------------------------------------------------
(Unaudited) (Audited)
Assets
Current assets
Cash and cash equivalents $ 8,132,806 $ 651,226
Accounts receivable 109,302 19,095
Prepaid expenses 9,188 36,750
------------------------------------------------------------------------
8,251,296 707,071
Property and equipment (Note 2) 1,943,045 404,229
------------------------------------------------------------------------
$ 10,194,341 $ 1,111,300
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 415,981 $ 145,332
Asset retirement obligations (Note 3) 89,500 7,300
------------------------------------------------------------------------
505,481 152,632
------------------------------------------------------------------------

Shareholders' equity
Share capital (Note 4) 10,002,061 994,061
Contributed surplus 8,200 -
Deficit (321,401) (35,393)
------------------------------------------------------------------------
9,688,860 958,668
------------------------------------------------------------------------
$ 10,194,341 $ 1,111,300
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Statements of Operations and Deficit

Three Two Six Two
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(Unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------

Revenue
Interest income $ 50,627 $ - $ 53,918 $ -
------------------------------------------------------------------------
50,627 - 53,918 -
------------------------------------------------------------------------

Expenses
General and
administrative 237,542 4,258 322,626 4,258
Depreciation and
accretion 4,600 - 9,100 -
Stock-based compensation 8,200 - 8,200 -
------------------------------------------------------------------------
250,342 4,258 339,926 4,258
------------------------------------------------------------------------

Net loss (199,715) (4,258) (286,008) (4,258)
Deficit, beginning
of period (121,686) - (35,393) -
------------------------------------------------------------------------
Deficit, end of period $ (321,401) $ (4,258) $ (321,401) $ (4,258)
------------------------------------------------------------------------

Net loss per share,
basic and diluted
(Note 6) $ (0.01) $ - $ (0.03) $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Statements of Cash Flows

Three Two Six Two
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(Unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------

Cash provided by (used for)

Operations
Net loss $ (199,715) $ (4,258) $ (286,008) $ (4,258)
Items not affecting
cash
Depreciation and
accretion 4,600 - 9,100 -
Stock-based
compensation 8,200 - 8,200 -
------------------------------------------------------------------------
(186,915) (4,258) (268,708) (4,258)
Changes in non-cash
working capital
(Note 7) 32,385 1,514 54,642 1,514
------------------------------------------------------------------------
(154,530) (2,744) (214,066) (2,744)
------------------------------------------------------------------------

Financing
Issue of shares - 300,000 10,000,000 300,000
Share issue costs - - (992,000) -
Changes in non-cash
working capital
(Note 7) (112,165) - (5,326) -
------------------------------------------------------------------------
(112,165) 300,000 9,002,674 300,000
------------------------------------------------------------------------

Investing
Expenditures on
property and
equipment (1,197,507) (1,744) (1,465,716) (1,744)
Changes in non-cash
working capital
(Note 7) 118,688 1,744 158,688 1,744
------------------------------------------------------------------------
- (1,078,819) (1,307,028) -
------------------------------------------------------------------------

Increase in cash and
cash equivalents (1,345,514) 297,256 7,481,580 297,256
Cash and cash
equivalents, beginning
of the period 9,478,320 - 651,226 -
------------------------------------------------------------------------
Cash and cash
equivalents,
end of the period $8,132,806 $ 297,256 $8,132,806 $ 297,256
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Notes to Financial Statements
Six months ended June 30, 2005
(Unaudited)


Castle Rock Petroleum Ltd. ("Castle Rock") was incorporated under the laws of the province of Alberta on March 17, 2004 and commenced operations on May 1, 2004. On February 15, 2005, Castle Rock's articles were amended to create Class A shares and Class B shares.

Castle Rock's Class A and Class B shares commenced trading on the TSX Venture Exchange ("TSX-V") on April 8, 2005. 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, except as described below, are consistent with the presentation and disclosure in the audited financial statements and notes thereto for the eight months ended December 31, 2004. 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 period ended December 31, 2004.

Cash and Cash Equivalents

Cash and cash equivalents includes highly liquid, short-term investments with a maturity of 90 days or less at the time of issue.

Per Share Amounts

Basic per share amounts are calculated using the aggregate of the weighted average number of Class A and Class B shares outstanding during the period. For the purpose of the per share calculation, the Class B shares are converted into Class A shares. The number of Class A shares obtained upon conversion of each Class B share is equal to $10 divided by the greater of $1 or the then current market price of the Class A shares. Diluted per share amounts are calculated based on the treasury stock method, whereby the effect of in-the-money instruments such as stock options affect the calculation. The treasury stock method uses proceeds received on the exercise of in-the-money options plus the unamortized portion of stock-based compensation to purchase Class A shares at the average price during the period. The weighted average number of shares outstanding is then adjusted by the net change.



2. Property and Equipment

June 30, 2005 December 31, 2004
------------------------------------------------------------------------
Oil and natural gas properties $ 1,860,000 $ 396,119
Office equipment 92,745 9,110
------------------------------------------------------------------------
1,952,745 405,229
Accumulated depreciation (9,700) (1,000)
------------------------------------------------------------------------
$ 1,943,045 $ 404,229
------------------------------------------------------------------------
------------------------------------------------------------------------


For the six months ended June 30, 2005, Castle Rock capitalized general and administrative expenses of $69,044 (2004 - $Nil).

3. Asset Retirement Obligations

Castle Rock has estimated the net present value of its total asset retirement obligations to be $89,500, based on a total future liability of $95,000, discounted at an average credit adjusted risk free rate of 5.50%. The following table reconciles Castle Rock's asset retirement obligations:



------------------------------------------------------------------------
Balance, December 31, 2004 $ 7,300
Additions due to new drilling 81,800
Accretion expense 400
------------------------------------------------------------------------
Balance, June 30, 2005 $ 89,500
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Share Capital

Shares Issued
------------------------------------------------------------------------
Number of
Shares Amount
------------------------------------------------------------------------
Class A shares

Balance, December 31, 2004 4,000,000 $ 994,061
Issued for cash pursuant to initial
public offering 4,000,000 1,000,000
Share issue costs - (99,200)
------------------------------------------------------------------------
8,000,000 1,894,861
------------------------------------------------------------------------
Class B shares

Issued for cash pursuant to initial
public offering 900,000 9,000,000
Share issue costs - (892,800)
------------------------------------------------------------------------
900,000 8,107,200
------------------------------------------------------------------------
Total share capital, June 30, 2005 $ 10,002,061
------------------------------------------------------------------------
------------------------------------------------------------------------


Share Capital Offering

On March 29, 2005, Castle Rock completed its initial public offering of 4,000,000 Class A flow-through shares at a price of $0.25 per share and 900,000 Class B flow-through shares at a price of $10.00 per share for gross proceeds of $10.0 million. Pursuant to the terms of the offering, Castle Rock has committed to spend $10.0 million on expenditures that qualify as Canadian Exploration Expense ("CEE") for income tax purposes. The CEE expenditures will be renounced to the flow-through share subscribers effective no later than December 31, 2005. The related estimated future tax cost will be recorded on the date of renouncement, which is expected to occur during the first quarter of 2006. Castle Rock has until December 31, 2006 to incur the qualifying expenditures.



Stock Options

------------------------------------------------------------------------
Number of Exercise Price
Options (per share)
------------------------------------------------------------------------
Balance, December 31, 2004 - $ -
Granted 800,000 0.35
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Balance, June 30, 2005 800,000 $ 0.35
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Castle Rock has a stock option plan (the "Plan") pursuant to which options to purchase Class A shares may be granted by the board of directors to directors, officers, employees of and consultants to Castle Rock. All options granted will be in compliance with the requirements of any stock exchange on which Castle Rock's shares are listed. Options granted under the Plan will have an exercise price which is not less than the price allowed by regulatory authorities, will be non-transferable and will be exercisable for a period not to exceed five years. The aggregate number of Class A shares subject to options granted under the Plan, from time to time, cannot exceed 10% of the Class A shares then outstanding and no one optionee is permitted to hold options entitling such optionee to purchase more than 5% of the issued and outstanding Class A shares.

On March 30, 2005, Castle Rock granted options to purchase an aggregate 800,000 Class A shares at $0.35 per share. These options were granted to employees, directors and consultants, 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) $0.12
Risk-free interest rate (%) 3.7
Expected life (years) 4.0
Expected volatility (%) 72
Expected dividend yield (%) -
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Shares in Escrow

At June 30, 2005, 3,600,000 Class A shares were held in escrow pursuant to the requirements of the TSX-V. One sixth of these shares will be released from escrow in six month intervals over a 36 month period, commencing October 7, 2005. 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.

5. Income Taxes

Castle Rock has an unrecognized future tax asset of approximately $351,000 relating to share issue costs and cumulative losses to June 30, 2005. This amount has been reduced for the effect of flow-through shares issued in 2004 but is exclusive of the effect of income tax deductions to be renounced to subscribers of Castle Rock's initial public offering (see Note 4).



6. Per Share Amounts

------------------------------------------------------------------------
Three Two Six Two
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------------------------------------------------------------------

Class A shares 8,000,000 1,019,672 6,077,348 1,019,672
Conversion of Class B
shares using a Class A
share value of $1.60 5,625,000 - 2,921,269 -
------------------------------------------------------------------------
Average number of shares
outstanding, basic and
diluted 13,625,000 1,019,672 8,998,617 1,019,672
------------------------------------------------------------------------
------------------------------------------------------------------------


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

7. Supplemental Cash Flow Information

------------------------------------------------------------------------
Three Two Six Two
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------------------------------------------------------------------

Changes in Non-cash Working
Capital Balances

Accounts receivable $ (67,384) $ (289) $ (90,207) $ (289)
Prepaid expenses 18,374 - 27,562 -
Accounts payable and
accrued liabilities 87,918 3,547 270,649 3,547
------------------------------------------------------------------------
$ 38,908 $ 3,258 $ 208,004 $ 3,258
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Changes in Non-cash Working Capital Related to

Operating activities $ 32,385 $ 1,514 $ 54,642 $ 1,514
Financing activities (112,165) - (5,326) -
Investing activities 118,688 1,744 158,688 1,744
------------------------------------------------------------------------
$ 38,908 $ 3,258 $ 208,004 $ 3,258
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8. Related Party Transactions

A director of Castle Rock is a partner of a law firm that provides legal services to Castle Rock. For the three months ended June 30, 2005, Castle Rock paid a total of $11,118 to this firm for legal fees and disbursements, $8,570 of which was charged to general and administrative expenses and $2,548 was charged to share issuance costs accrued for at March 31, 2005. Of the total, $9,291 is included in accounts payable and accrued liabilities at June 30, 2005. For the six months ended June 30, 2005, Castle Rock paid a total of $105,748 to this firm for legal fees and disbursements, of which $97,178 was charged to share issuance costs and $8,570 was charged to general and administrative expenses.

A director of Castle Rock is a partner of a consulting firm that provides oil and gas property evaluation services to Castle Rock. For the three months and six months ended June 30, 2005, Castle Rock paid fees and disbursements of $6,323 to this firm, all of which was charged to general and administrative expenses.

These transactions have been recorded at the exchange amount.

9. Commitments

Castle Rock is committed to spend $10.0 million by December 31, 2006 on expenditures that will qualify as Canadian Exploration Expense for income tax purposes (see Note 4). To June 30, 2005, approximately $1,075,000 of eligible expenditures have been incurred.

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Castle Rock Petroleum Ltd. is an emerging company engaged in the acquisition, exploration, development and production of oil and natural gas reserves in western Canada.

The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Castle Rock Petroleum Ltd.
    Roger Hume
    Chairman and CEO
    (403) 290-3262 or Toll free: 1-888-290-3255
    or
    Castle Rock Petroleum Ltd.
    Michael Makinson
    VP, Finance and CFO
    (403) 290-3261 or Toll free: 1-888-290-3255