Vault Energy Trust
TSX : VNG.UN

Vault Energy Trust

March 22, 2005 06:00 ET

Chamaelo Energy Inc.: Corporate Update


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: CHAMAELO ENERGY INC.

TSX SYMBOL: CLO

MARCH 22, 2005 - 06:00 ET

Chamaelo Energy Inc.: Corporate Update

CALGARY, ALBERTA--(CCNMatthews - March 22, 2005) - CHAMAELO ENERGY INC.
(TSX:CLO) is pleased to announce its financial and operating results for
the three month period and year ended December 31, 2004 including
audited consolidated financial statements, notes to the audited
consolidated financial statements and Management's Discussion and
Analysis. All dollar figures are Canadian dollars unless otherwise noted.

2004 HIGHLIGHTS

- Completed Plan of Arrangement on June 1, 2004 involving Viracocha
Energy Inc. ("Viracocha"), Provident Energy Trust, Provident Energy
Ltd., and Chamaelo Energy Inc. ("Chamaelo"), whereby certain oil and
natural gas properties were acquired from Viracocha in exchange for
common shares in Chamaelo.

- Obtained a listing on the Toronto Stock Exchange and commenced trading
on June 8, 2004 under the symbol "CLO".

- Completed four equity financings totaling gross proceeds of $89.5
million.

- Acquired Capstone Energy Ltd. (600 boepd) on October 13, 2004 for
$18.7 million.

- Acquired properties (2,200 boepd) on November 30, 2004 for $83.7
million.

- Exited 2004 with 3,200 boepd of production.



------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months Ended Period Ended
FINANCIAL (1) December 31, 2004 December 31, 2004
------------------------------------------------------------------------
($, except where noted)
Oil and natural gas sales (2) 7,057,121 9,116,423

Cash flow from operations 3,494,405 3,995,942
per share - basic 0.15 0.28
per share - diluted 0.14 0.27

Net earnings 441,035 344,263
per share - basic 0.02 0.02
per share - diluted 0.02 0.02

Capital expenditures 7,315,289 10,256,042
Corporate acquisition 18,679,597 18,679,597
Property acquisitions 83,687,020 84,181,267

Net bank debt and working capital 14,639,135

Common shares outstanding
weighted average - basic 22,972,700 14,082,290
- diluted 24,105,999 14,687,515

end of period - basic 28,079,786
- diluted 33,434,412

(1) There are no comparative numbers as the Company was incorporated on
April 5, 2004 and began active operations on June 1, 2004. Results
from oil and natural gas activities take into account only the
214-day period from June 1, 2004 to December 31, 2004.

(2) Oil and natural gas sales are shown net of transportation costs



------------------------------------------------------------------------
Three Months Ended Period Ended
OPERATING (1) December 31, 2004 December 31, 2004
------------------------------------------------------------------------
Number of producing days 92 214

Daily production
Oil - (bbls/d) 729 440
Natural gas - (mcf/d) 5,926 3,009
------------------------------------------------------------------------
Oil equivalent - (boe/d @6:1) 1,717 942

Sales price (2)
Oil - ($/bbl) 49.37 50.06
Natural gas - ($/mcf) 6.87 6.84
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 44.69 45.27

Royalties
Oil - ($/bbl) 6.77 6.93
Natural gas - ($/mcf) 1.37 1.36
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 7.61 7.58

Production expenses
Oil - ($/bbl) 16.27 19.81
Natural gas - ($/mcf) 1.48 1.54
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 12.01 14.17

Operating netback (before hedges)
Oil - ($/bbl) 26.33 23.32
Natural gas - ($/mcf) 4.02 3.94
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 25.07 23.52

Hedges
Oil - ($/bbl) - -
Natural gas - ($/mcf) - -
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) - -

Operating netback (after hedges)
Oil - ($/bbl) 26.33 23.32
Natural gas - ($/mcf) 4.02 3.94
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 25.07 23.52

(1) There are no comparative numbers as the Company was incorporated on
April 5, 2004 and began active operations on June 1, 2004. Results
from oil and natural gas activities take into account only the
214-day period from June 1, 2004 to December 31, 2004.

(2) Sales prices are shown net of transportation costs



As at
RESERVES (1) December 31, 2004
------------------------------------------------------------------------

Total proved
Oil and NGLs (mbbls) 3,616
Natural gas (mmcf) 21,609
------------------------------------------------------------------------
Oil Equivalent (mboe @ 6:1) 7,218

Proved + probable
Oil and NGLs (mbbls) 4,427
Natural gas (mmcf) 27,642
------------------------------------------------------------------------
Oil Equivalent (mboe @ 6:1) 9,034


Pre-tax net present value of reserves @ 10% ($ thousands)
Total proved 91,092
Proved + probable 106,469

(1) Reserve data based on Gilbert Laustsen Jung Associates Ltd. reserve
report dated March 14, 2005 effective December 31, 2004. The
Statement of Reserves Data and Other Oil and Gas Information in
accordance with National Instrument 51-101 is included in the
Company's Annual Information Form (AIF) and may be found on the
SEDAR website at www.sedar.com.


Chamelo's gas reserves located in the disputed gas over bitumen area of
Northeastern Alberta are not included in the independent engineering
report prepared by Gilbert Laustsen Jung Associates Ltd. (GLJ) under NI
51-101 guidelines for year end. GLJ excluded these reserves from the
proved or probable categories due to uncertainty as to when production
of these gas reserves would occur. GLJ has prepared a separate report
classifying these reserves as Possible Developed Non-Producing. GLJ's
evaluation of the gas over bitumen reserves are summarized below:



As at
GAS OVER BITUMEN RESERVES December 31, 2004
------------------------------------------------------------------------

Natural gas (mmcf) 4,975
Oil Equivalent (mboe @ 6:1) 829


Pre-tax net present value of reserves @ 10% ($ thousands) 4,333


As at
RESERVE LIFE INDEX (years) December 31, 2004
------------------------------------------------------------------------

Total proved 6.2
Proved + probable 7.4

Total (including gas over bitumen) 8.1


PRICING ASSUMPTIONS
Foreign
WTI Oil AECO Gas Exchange
Year ($US/bbl) ($Cdn/mmbtu) Rate
------------------------------------------------------------------------

2005 42.00 6.60 0.820
2006 40.00 6.35 0.820
2007 38.00 6.15 0.820
2008 36.00 6.00 0.820
2009 34.00 6.00 0.820



As at
December 31, 2004
NET ASSET VALUE (NAV) ($ thousands)
------------------------------------------------------------------------

Pre-tax present value of P+P reserves @ at 10% 106,469
Pre-tax present value of gas over
bitumen reserves @ 10% 4,333
Value of undeveloped land (based on $100/acre) 12,000
Facilities 8,000
Proceeds from options and warrants 23,542
Net debt (14,639)
------------------------------------------------------------------------
Net asset value 139,705
------------------------------------------------------------------------
------------------------------------------------------------------------

Shares outstanding (diluted) 33,434

------------------------------------------------------------------------
Net asset value per share 4.18
------------------------------------------------------------------------
------------------------------------------------------------------------


Management's Discussion and Analysis

March 17, 2005

Chamaelo Energy Inc. ("Chamaelo" or the "Company") is an emerging oil
and natural gas company, actively engaged in the acquisition,
development, exploration for and production and marketing of oil and
natural gas reserves in the Western Canadian Sedimentary Basin.

Chamaelo was incorporated under the Business Corporations Act (Alberta)
on April 5, 2004 and commenced operations on June 1, 2004. On June 1,
2004, as a result of a plan of arrangement involving Viracocha Energy
Inc. ("Viracocha"), Provident Energy Trust, Provident Energy Ltd. and
Chamaelo Energy Inc., certain oil and natural gas properties were
acquired from Viracocha in exchange for common shares of Chamaelo. As a
result, the consolidated financial statements for the period ended
December 31, 2004 and the disclosure throughout the Management's
Discussion and Analysis ("MD&A") reflect Chamaelo's business from the
date of its inception with no comparative disclosure available. Results
from oil and natural gas activities take into account only the 214-day
period from June 1, 2004 to December 31, 2004.

Chamaelo commenced trading on the Toronto Stock Exchange on June 8, 2004
under the symbol "CLO".

Management's Discussion and Analysis should be read in conjunction with
the audited consolidated financial statements for the period ended
December 31, 2004. Barrel of oil equivalent ("boe") amounts have been
calculated using a conversion rate of six thousand cubic feet of natural
gas to one barrel of oil ("6:1") unless otherwise stated. The audited
consolidated financial statements and financial data contained in the
MD&A have been prepared in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP") in Canadian currency (except
where noted as being in another currency).

This MD&A may contain forward-looking information that involve a number
of risks and uncertainties that could cause actual results to differ
materially from those anticipated. For this purpose, any statements
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Such risks and uncertainties include, but
are not limited to: risks associated with the oil and gas industry (e.g.
- operational risks in exploration, development and production; changes
and/or delays in the development of capital assets; uncertainty of
reserve estimates; uncertainty of estimates and projections relating to
production and costs; commodity price fluctuations; environmental risks;
and industry competition).

Management uses cash flow as a factor in evaluating performance. Cash
flow as presented does not have any standardized meaning prescribed by
Canadian GAAP and therefore may not be comparable to similar measures
used by other companies. The determination of cash flow from operations
is detailed on the Statement of Cash Flows.



------------------------------------------------------------------------
Period ended
Summary of Financial Results (1) December 31, 2004
------------------------------------------------------------------------
($, except where noted)
Oil and natural gas sales (2) 9,116,423

Cash flow from operations 3,995,942
per share - basic 0.28
per share - diluted 0.27

Net earnings 344,263
per share - basic 0.02
per share - diluted 0.02

Total assets 153,027,991

Net bank debt and working capital 14,639,135

Total long-term liabilities 21,211,585

(1) There are no comparative numbers as the Company was incorporated on
April 5, 2004 and began active operations on June 1, 2004. Results from
oil and natural gas activities take into account only the 214-day
period from June 1, 2004 to December 31, 2004.

(2) Oil and natural gas sales are shown net of transportation costs


Fourth Quarter Update

During the fourth quarter of 2004, Chamaelo closed two significant
acquisitions ("Acquired Properties") that will have a material impact on
the Company's operations and operating results going forward. On October
13, 2004, Chamaelo closed the corporate acquisition of Capstone Energy
Ltd. ("Capstone") with production of approximately 600 boepd for
consideration of approximately $18.7 million. On November 30, 2004,
Chamaelo closed a property acquisition with production of approximately
2,200 boepd for consideration of approximately $83.7 million. The
Company's production profile, as a result of the two acquisitions, has
increased to approximately 3,200 boepd (45% oil and 55% natural gas).

The acquisitions are comprised of high quality light oil and natural gas
production that attract favourable pricing with production expenses
lower than our current corporate average. As a result of the
acquisitions, Chamaelo will have significantly higher production and
cash flow per share while lowering production and general and
administrative costs per boe.

As a result of the two acquisitions, Chamaelo has added to its existing
Southern Alberta core area and established new core areas in the West
Central and Peace River Arch areas of Alberta.



Production Period Ended
December 31, 2004
------------------------------------------------------------------------
Average Daily Production
Oil (bbls/d) 440
Natural gas (mcf/d) 3,009
------------------------------------------------------------------------
Total (boe/d) 942
------------------------------------------------------------------------
------------------------------------------------------------------------


The reported oil and natural gas production for the period ended
December 31, 2004, reflects operating activities for the Company's first
214 days of operations from June 1, 2004 to December 31, 2004.

Crude oil and natural gas liquids production averaged 440 bbls/d while
natural gas production averaged 3,009 mcf/d for a total of 942 boe/d
during the period ended December 31, 2004. The December 31, 2004 exit
production rate was 3,200 boe/d comprised of 1,450 bbls/d crude oil and
natural gas liquids and 10,500 mcf/d natural gas.



Revenue Period Ended
December 31, 2004
------------------------------------------------------------------------
$
Oil 4,710,151
Natural gas 4,406,272
------------------------------------------------------------------------
Total Revenue 9,116,423
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Sales Price
------------------------------------------------------------------------
Oil ($/bbl) 50.06
Natural gas ($/mcf) 6.84
------------------------------------------------------------------------
Average sales price ($/boe) 45.27
------------------------------------------------------------------------
------------------------------------------------------------------------


Oil revenue (before royalties, and net of transportation costs of
$98,922) totaled $4,710,151 for the period ended December 31, 2004.
Natural gas revenue (before royalties, and net of transportation costs
of $126,172) totaled $4,406,272 for the period ended December 31, 2004.
During the period ended December 31, 2004, the Company sold all its oil
and a majority of its natural gas on the spot market. The Company
acquired a natural gas sales contract in conjunction with the purchase
of oil and natural gas properties on November 30, 2004. The natural gas
sales contract represents approximately 14.3% percent of the Company's
natural gas production (7.7% of total production). The fair value of the
contract has been recorded as a liability and will be amortized over the
life of the contract, which expires in October 2007. Future prices
received from the sale of oil and natural gas may fluctuate as the
result of market factors. The Company did not hedge any of its oil
production for the period ended December 31, 2004.

The following table outlines the Company's realized wellhead prices and
industry benchmarks:



Commodity Pricing Period Ended
(average unless otherwise stated) December 31, 2004
------------------------------------------------------------------------
$US $Cdn
Oil
Corporate Price $/bbl 50.06
West Texas Intermediate $/bbl 44.92
Edmonton Par $/bbl 56.47

Natural Gas
Corporate Price $/mcf 6.84
AECO Daily Spot Price $/mcf 6.81

Exchange Rates
U.S./Cdn Dollar Year-end Exchange Rate 0.822
U.S./Cdn Dollar Average Exchange Rate 0.785
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties Period Ended
December 31, 2004
------------------------------------------------------------------------
$
Oil 652,486
Natural gas 874,761
------------------------------------------------------------------------
Total Royalties 1,527,247
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Royalty Rate (% of sales)
------------------------------------------------------------------------
Oil 13.9
Natural gas 19.9
------------------------------------------------------------------------
Average royalty rate 16.8
------------------------------------------------------------------------
------------------------------------------------------------------------


Oil and natural gas royalties totaled $1,527,247 during the period ended
December 31, 2004. The overall effective royalty rate was 16.8 percent
of the Company's total revenue from the sale of oil and natural gas. The
Company was able to benefit from royalty relief programs and eligible
Capital Cost Allowance deductions to reduce its average royalty rate.
Royalty rates from the Acquired Properties are similar to Chamaelo's
original production base, and as such are expected to remain at or about
the current levels.



Production Expenses Period Ended
December 31, 2004
------------------------------------------------------------------------

Oil ($/bbl) 19.81
Natural gas ($/mcf) 1.54
------------------------------------------------------------------------
Total ($/boe) 14.17
------------------------------------------------------------------------
------------------------------------------------------------------------


During the fourth quarter of 2004 the Company completed two significant
acquisitions, each with per boe production expenses less than the
original production base owned by the Company. The reduction in the per
boe production expenses resulting from the Acquired Properties is
partially reflected in the fourth quarter operating results. During the
quarter, per unit production expenses declined to $12.01 per boe from
$22.01 per boe reported for the period ended September 30, 2004. The
full effect of the production expense reduction resulting from the
Acquired Properties will be realized beginning in Q1 2005 when operating
results will include the Acquired Properties for the entire quarter.

Chamaelo recognizes that controlling operating costs play an integral
role in the effective exploitation of reserves typically found today in
the Western Canadian Sedimentary Basin. Chamaelo is committed to
focusing efforts on opportunities that will improve operational
efficiencies and reduce per boe production expenses to enhance operating
netbacks.



Operating Netback Period Ended
December 31, 2004
------------------------------------------------------------------------
Oil and Liquids ($/bbl)
Revenue 50.06
Royalties 6.93
Production expenses 19.81
------------------------------------------------------------------------
Operating Netback 23.32
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Natural gas ($/mcf)
Revenue 6.84
Royalties 1.36
Production expenses 1.54
------------------------------------------------------------------------
Operating Netback 3.94
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Combined $/Boe (6:1)
Revenue 45.27
Royalties 7.58
Production expenses 14.17
------------------------------------------------------------------------
Operating Netback 23.52
------------------------------------------------------------------------
------------------------------------------------------------------------


The operating netback is a key indicator of an exploration and
production Company's ability to generate cash flow for reinvestment.
During the period ended December 31, 2004, Chamaelo generated an
operating netback of $23.52 per boe.



General and Administrative Expenses ("G&A") Period Ended
December 31, 2004
------------------------------------------------------------------------
$
G&A expenses (gross) 1,039,686
G&A capitalized (138,886)
G&A recoveries (188,393)
------------------------------------------------------------------------
G&A expenses (net) 712,407
------------------------------------------------------------------------
G&A expenses ($/boe) 3.54
------------------------------------------------------------------------
------------------------------------------------------------------------


Net G&A costs totaled $712 thousand in the period ended December 31,
2004, or $3.54 per boe. Included in the year to date amount is
approximately $90 thousand associated with the startup of the business
and the commencement of operations. G&A costs per unit have declined
dramatically quarter over quarter due to the significant increases in
production volumes combined with the Company's focus on G&A cost
control. In 2005, the Company anticipates further declines resulting in
per unit G&A under $2.00 per boe.



Depletion, Depreciation and Accretion ("DD&A") Period Ended
December 31, 2004
------------------------------------------------------------------------

DD&A ($) 3,007,395
DD&A ($/boe) 14.93
------------------------------------------------------------------------
------------------------------------------------------------------------


During the period ended December 31, 2004, DD&A expense totaled $3.0
million, or $14.93 per boe. The DD&A rate partially reflects the higher
cost of corporate and property acquisitions together with the inclusion
of asset retirement obligations in the Company's depletion base. During
the period ended December 31, 2004, the provision for DD&A includes $113
thousand ($0.56 per boe) for accretion of asset retirement obligations.

Interest Income

Net interest income for the period ended December 31, 2004 of $232
thousand is comprised of $287 thousand of interest income and $55
thousand of interest expense. Interest income was earned as a result of
using cash from the issuance of common shares to purchase short-term
investments. The Company used its cash and a portion of its banking
facility to acquire oil and natural gas properties late in the year,
which resulted in the Company incurring interest expense.

Taxes

Capital taxes for the period ended December 31, 2004 were $143 thousand
consisting of Large Corporations Tax ("LCT"). Future income taxes are
recorded using the liability method.

Cash Flow and Net Earnings

Cash flow from operations for the period ended December 31, 2004 was
$4.0 million ($0.27 per diluted share). Net earnings totaled $344
thousand ($0.02 per diluted share) in the period ended December 31, 2004.

Capital Expenditures

On June 1, 2004, as a result of a plan of arrangement involving
Viracocha Energy Inc., Provident Energy Trust, Provident Energy Ltd.,
and Chamaelo Energy Inc., certain oil and natural gas properties were
acquired from Viracocha in exchange for common shares in Chamaelo.
Pursuant to the plan of arrangement, Chamaelo issued 5,678,786 Chamaelo
common shares to Viracocha shareholders on a pro-rata basis. As Chamaelo
and Viracocha are deemed to be related parties, the net assets acquired
by Chamaelo have been recorded at Viracocha's net book value as follows:



Net assets acquired Amount ($)
------------------------------------------------------------------------
Oil and natural gas properties 15,138,088
Office and other equipment 149,325
Asset retirement obligation (995,733)
------------------------------------------------------------------------
14,291,680
------------------------------------------------------------------------
------------------------------------------------------------------------

Consideration of acquisition
Issuance of 5,678,786 common shares 14,136,275
Purchase price adjustment 155,405
------------------------------------------------------------------------
14,291,680
------------------------------------------------------------------------
------------------------------------------------------------------------


Net capital expenditures, excluding the assets acquired in the plan of
arrangement but taking into account the purchase price adjustment, are
as follows:



Period Ended
December 31, 2004
------------------------------------------------------------------------
$
Acquisitions - Corporate 18,679,597
Acquisitions - Property 84,181,267
Land 1,863,755
Drilling, completions and workovers 5,244,406
Equipment 581,378
Geological and Geophysical 2,431,883
Other 134,620
------------------------------------------------------------------------
113,116,906
------------------------------------------------------------------------
------------------------------------------------------------------------


During the period ended December 31, 2004, Chamaelo drilled 12 (9.7 net)
wells, resulting in 3 (1.7 net) oil wells, 6 (5.25 net) natural gas
wells and 3 (2.75 net) dry holes. In addition, Chamaelo completed 16
workovers and continued to enhance its future prospects by adding
acreage to its land base.

Liquidity and Capital Resources

The Company anticipates it will make substantial capital expenditures
for the acquisition, exploration, development and production of oil and
natural gas reserves in the future. The Company will utilize current
cash reserves, internally generated cash flow from operations, debt
where deemed appropriate and equity financing if market conditions are
favourable to finance its capital expenditures.

Net bank debt adjusted for working capital was $14.6 million at December
31, 2004.

On May 26, 2004, the Company completed a private placement financing for
an aggregate of 3,250,000 units priced at $2.60 per unit for gross
proceeds of $8.45 million. Each unit is comprised of one common share
and one common share purchase warrant of the Company. 3,209,000 of these
units were issued to officers, directors, and employees of the Company
with a service commitment of three years. If the three-year obligation
is not met, the Company will have the option to buy back the units at
the original $2.60 issue price on a pro-rata basis reflecting the time
of service completed. The holder of each warrant may acquire a Common
Share at $4.25 per share for period of 5 years.

On June 1, 2004, as a result of a plan of arrangement involving
Viracocha Energy Inc., Provident Energy Trust, Provident Energy Ltd.,
and Chamaelo Energy Inc., certain oil and natural gas properties were
acquired from Viracocha in exchange for common shares in Chamaelo.
Pursuant to the plan of arrangement, Chamaelo issued 5,678,786 Chamaelo
common shares to Viracocha shareholders on a pro-rata basis.

On June 24, 2004, the Company completed a bought deal private placement
financing for an aggregate of 6,000,000 common shares priced at $4.00
per common share for gross proceeds of $24.0 million.

On October 13, 2004, Chamaelo acquired all of the issued and outstanding
shares of Capstone for a total purchase price of approximately $18.7
million. Consideration paid by Chamaelo included $9.0 million cash,
2,002,850 common shares and 667,626 share purchase warrants. The holder
of each warrant may acquire a Common Share at $4.75 per share for period
of 2.5 years.

On October 19, 2004, the Company completed a bought deal private
placement financing comprised of 2,222,222 common shares priced at $4.50
per share and 925,926 flow through common shares priced at $5.40 per
share for aggregate gross proceeds of $15.0 million. Of these shares,
84,767 were issued to directors and officers of the Company.

On November 18, 2004, the Company completed a bought deal private
placement financing for an aggregate of 8,000,000 common shares priced
at $5.25 per share for gross proceeds of $42.0 million.

The Company has total credit facilities of $52.5 million with a Canadian
bank. This is comprised of a revolving operating demand loan of $40.0
million bearing interest at prime plus a premium ranging between 0% and
1.25% based on the Company's debt to cash flow ratio, a $7.5 million
non-revolving development demand loan bearing interest at prime plus
0.75%, and a treasury risk line of $5.0 million. The credit facilities
are secured by a $150 million fixed and floating charge debenture on the
assets of the Company. The average effective interest rate for the
period ended December 31, 2004 was 4.25%.



------------------------------------------------------------------------
Period Ended
Summary of December
Quarterly Results Q2/04 Q3/04 Q4/04 31, 2004
------------------------------------------------------------------------
$ $ $ $

Oil and natural
gas sales (1) 445,594 1,613,708 7,057,121 9,116,423

Cash flow from
operations (6,606) 508,143 3,494,405 3,995,942
per share - basic - 0.03 0.15 0.28
per share - diluted - 0.03 0.14 0.27

Net earnings (loss) (112,768) 15,996 441,035 344,263
per share - basic (0.03) - 0.02 0.02
per share - diluted (0.03) - 0.02 0.02
------------------------------------------------------------------------
(1) Oil and natural gas sales are shown net of transportation costs


Outstanding Share Data

The Company is authorized to issue an unlimited number of common shares
and an unlimited number of preferred shares. No preferred shares have
been issued. The common shares of the Company are traded on the Toronto
Stock Exchange under the symbol "CLO". The following table summarizes
the common shares outstanding and the number of shares exercisable into
common shares from options and warrants:



December 31, 2004 March 17, 2005
------------------------------------------------------------------------
Common Shares 28,079,786 28,142,126
Options 1,437,000 1,477,000
Warrants 3,917,626 3,855,286
------------------------------------------------------------------------
Total 33,434,412 33,474,412
------------------------------------------------------------------------
------------------------------------------------------------------------


Commitments

The Company is committed to payments under an operating lease for office
space and a capital lease for a vehicle. The following table summarizes
the Company's commitments at December 31, 2004:



2005 2006 2007 2008 2009 Total
------------------------------------------------------------------------
$ $ $ $ $ $
Capital lease
obligation 15,409 14,720 17,208 - - 47,337
Operating lease
obligation 301,231 313,261 313,261 313,261 243,968 1,484,982
------------------------------------------------------------------------
316,640 327,981 330,469 313,261 243,968 1,532,319
------------------------------------------------------------------------
------------------------------------------------------------------------


Critical Accounting Policies

Management is required to make judgments, assumptions, and estimates in
the application of generally accepted accounting principles that have a
significant impact on the financial results of the Company. The
following summarizes the accounting policies that are critical to
determining the company's financial results.

Full Cost Accounting - The Company follows the full cost method of
accounting whereby all costs related to the acquisition of, exploring
for and developing oil and natural gas reserves are capitalized and
charged against earnings.
These costs, together with the estimated future costs to be incurred in
developing proved reserves, are depleted or depreciated using the
unit-of-production method based on the proved reserves before royalties
as estimated by independent petroleum engineers. The costs of
undeveloped properties are excluded from the costs subject to depletion
and depreciation until it is determined whether proved reserves are
attributable to the properties or impairment occurs. Oil and natural gas
properties are evaluated each reporting period through an impairment
test to determine the recoverability of capitalized costs. The carrying
amount is assessed as recoverable when the sum of the undiscounted cash
flows expected from proved reserves plus the cost of unproved interests,
net of impairments, exceeds the carrying amount. When the carrying
amount is assessed not to be recoverable, an impairment loss is
recognized to the extent that the carrying amount exceeds the sum of the
discounted cash flows from proved and probable reserves plus the cost of
unproved interests, net of impairments.

The cash flows are estimated using expected future prices and costs and
are discounted using a credit adjusted risk-free interest rate. Proceeds
from the sale of oil and natural gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale
would result in a change in the depletion rate of 20% or more.

Oil and Gas Reserves - The Company's oil and gas reserves are evaluated
and reported on by independent petroleum engineers. The estimates of
reserves is a very subjective process as forecasts are based on
engineering data, projected future rates of production, estimated future
commodity prices and the timing of future expenditures, which are all
subject to uncertainty and interpretation. Reserve estimates can have a
significant impact on earnings, as they are a key component in the
calculation of depletion. A downward revision to the reserve estimate
could result in higher depletion and thus lower net earnings. In
addition, estimated reserves are also used in the calculation of the
impairment (ceiling) test.

Goodwill - Goodwill, which represents the excess of purchase price over
the fair value of net assets received in an acquisition, is tested for
impairment on an annual basis in the fourth quarter. The goodwill was a
result of the Capstone acquisition on October 13, 2004. A goodwill
impairment loss would be recognized when the carrying amount of goodwill
exceeds its fair value. Should the test result in an impairment, it will
be charged to income in the period of the impairment.

Outlook

The information below represents Chamaelo's 2005 guidance based on
Management's best estimates and the assumptions noted. The guidance was
released on January 11, 2005 and is still valid in all material respects.



Estimated Production Guidance
2005
------------------------------------------------------------------------
Average Daily Production
Oil (bbls/d) 1,500
Natural gas (mcf/d) 12,600
------------------------------------------------------------------------
Total (boe/d) 3,600
------------------------------------------------------------------------
------------------------------------------------------------------------


Estimated Financial Results Guidance
2005
------------------------------------------------------------------------

Oil and natural gas sales, net ($) 52,400,000

Cash flow from operations ($) 28,000,000
$ per share - basic 1.00
$ per share - diluted 0.96

Capital expenditures ($) 28,200,000

West Texas Intermediate $US/bbl 38.00
AECO Daily Spot Price $Cdn/mcf 6.25
U.S./Cdn Dollar Average Exchange Rate 0.810
------------------------------------------------------------------------
------------------------------------------------------------------------


Sensitivity Analysis

The above outlook is based on estimates of key external market factors.
Chamaelo's actual results will be affected by fluctuations in commodity
prices as well as the U.S./Canadian dollar exchange rate. The following
table provides a summary of estimates for 2005 of the sensitivity of
Chamaelo's cash flows from operations to changes in commodity prices and
the U.S./Canadian dollar exchange rate.



Guidance Variance in Variance in
2005 factor cash flows
------------------------------------------------------------------------
West Texas Intermediate $US/bbl 38.00 US $1.00/bbl Cdn $570,000
AECO Daily Spot Price $Cdn/mcf 6.25 Cdn $0.10/mcf Cdn $349,000
U.S./Cdn Dollar Average
Exchange Rate 0.810 Cdn $0.01 Cdn $569,600
------------------------------------------------------------------------
------------------------------------------------------------------------


Risk Assessment

The acquisition, exploration and development of oil and natural gas
assets involves many risks common to all participants in the oil and gas
industry. Chamaelo's exploration and development activities are subject
to various business risks such as unstable commodity prices, interest
rate and foreign exchange fluctuations, the uncertainty of replacing
production and reserves on an economic basis, government regulations,
taxes and safety and environmental concerns. While the management of
Chamaelo realizes these risks cannot be eliminated, they are committed
to monitoring and mitigating these risks.

Reserves and Reserve Replacement

The recovery and reserve estimates on Chamaelo's properties are
estimates only and the actual reserves may be materially different from
that estimated. The estimates of reserve values are based on a number of
variables including price forecasts, projected production volumes and
future production and capital costs. All of these factors may cause
estimates to vary from actual results.

Chamaelo's future oil and natural gas reserves, production, and cash
flows to be derived there from are highly dependent on Chamaelo
successfully acquiring or discovering new reserves. Without the
continual addition of new reserves, any existing reserves Chamaelo may
have at any particular time and the production therefrom will decline
over time as such existing reserves are exploited. A future increase in
Chamaelo's reserves will depend on its abilities to acquire suitable
prospects or properties and discover new reserves.

To mitigate this risk, Chamaelo has assembled a team of experienced
technical professionals who have expertise operating and exploring in
areas which Chamaelo has identified as being the most prospective for
increasing Chamaelo's reserves on an economic basis. To further mitigate
reserve replacement risk, Chamaelo has targeted a majority of its
prospects in areas which have multi-zone potential, year-round access
and lower drilling costs and employs advanced geological and geophysical
techniques to increase the likelihood of finding additional reserves.

Operational Risks

Chamaelo's operations are subject to the risks normally incidental to
the operation and development of oil and natural gas properties and the
drilling of oil and natural gas wells. Continuing production from a
property, and to some extent the marketing of production therefrom, are
largely dependent upon the ability of the operator of the property.

Commodity Price Risk

The Company's oil and natural gas production is marketed and sold on the
spot market to area aggregators based on daily spot prices that are
adjusted for product quality and transportation costs. The Company is
exposed to foreign currency fluctuations as crude oil prices received
are referenced to U.S. dollar denominated prices.

Safety and Environmental Risks

The oil and natural gas business is subject to extensive regulation
pursuant to various municipal, provincial, national, and international
conventions and regulations. Environmental legislation provides for,
among other things, restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with oil and
natural gas operations. Chamaelo is committed to meeting and exceeding
its environmental and safety responsibilities. Chamaelo has implemented
an environmental and safety policy that is designed, at a minimum to
comply with current governmental regulations set for the oil and natural
gas industry. Changes to governmental regulations are monitored to
ensure compliance. Environmental reviews are completed as part of the
due diligence process when evaluating acquisitions. Environmental and
safety updates are presented and discussed at each Board of Directors'
meeting. Chamaelo maintains adequate insurance commensurate with
industry standards to cover reasonable risks and potential liabilities
associated with its activities as well as insurance coverage for
officers and directors executing their corporate duties.

Additional information related to the Company, including the Annual
Information Form (AIF), may be found on the SEDAR website at
www.sedar.com.



Chamaelo Energy Inc.
Consolidated Balance Sheets

As at As at
December 31 April 5
2004 2004
------------------------------------------------------------------------
$ $
------------------------------------------------------------------------

Assets
Current assets:
Cash - 2
Accounts receivable 6,489,451 -
Prepaid expenses and deposits 234,993 -
------------------------------------------------------------------------
6,724,444 2

Oil and natural gas properties
and equipment (note 4) 142,124,354 -

Goodwill 4,179,193 -
------------------------------------------------------------------------
153,027,991 2
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility (note 5) 12,965,269 -
Accounts payable and accrued liabilities 8,007,248 -
Capital and current income taxes payable 391,062 -
------------------------------------------------------------------------
21,363,579 -

Capital lease obligation (note 6) 29,328 -

Natural gas sales contract (note 10) 2,846,002 -

Asset retirement obligations (note 7) 15,562,509 -

Future income taxes (note 8) 2,773,746 -

Shareholders' equity:
Share capital (note 9) 109,764,820 2
Contributed surplus 343,744 -
Retained earnings 344,263 -
------------------------------------------------------------------------
110,452,827 2

Commitments (notes 2 and 12)
------------------------------------------------------------------------
153,027,991 2
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements

Approved by the Board of Directors

Director, "signed" Rob Zakresky

Director, "signed" Rob Jepson



Chamaelo Energy Inc.
Consolidated Statement of Operations and Retained Earnings

Period Ended
December 31, 2004
------------------------------------------------------------------------
$
------------------------------------------------------------------------
Revenue:
Oil and natural gas 9,341,517
Transportation expense (225,094)
Royalties (1,527,247)
Interest income (note 11) 231,650
------------------------------------------------------------------------
7,820,826
Expenses:
Production 2,853,348
General and administrative 712,407
Stock-based compensation 343,744
Depletion, depreciation and accretion 3,007,395
------------------------------------------------------------------------
6,916,894

------------------------------------------------------------------------
Earnings before taxes 903,932

Taxes (note 8):
Capital taxes 143,000
Future income taxes 416,669
------------------------------------------------------------------------
559,669

Net earnings 344,263
Retained earnings, beginning of period -
------------------------------------------------------------------------
Retained earnings, end of period 344,263
------------------------------------------------------------------------
------------------------------------------------------------------------

Net earnings per share:
Basic 0.02
Diluted 0.02
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements

(1) Period from April 5, 2004 (incorporation) to December 31, 2004.



Chamaelo Energy Inc.
Consolidated Statement of Cash Flows

Period ended
December 31, 2004 (1)
------------------------------------------------------------------------
$
------------------------------------------------------------------------
Cash provided by (used in):

Operating:
Net earnings 344,263
Items not affecting cash:
Depletion, depreciation and accretion 3,007,395
Amortization of natural gas sales contract (116,129)
Stock-based compensation 343,744
Future income taxes 416,669
------------------------------------------------------------------------
Cash flow from operations 3,995,942
Asset retirement expenditures (2,916)
Net change in non-cash operating
working capital (note 11) (2,937,302)
------------------------------------------------------------------------
1,055,724
------------------------------------------------------------------------

Financing:
Increase in revolving credit facility 12,965,269
Decrease in capital lease obligation (1,011)
Increase in share capital 89,450,000
Share issue costs (4,752,180)
------------------------------------------------------------------------
97,662,078
------------------------------------------------------------------------
------------------------------------------------------------------------

Investing:
Corporate acquisition (note 3) (8,026,044)
Purchase and development of oil and natural
gas properties and equipment (94,487,116)
Sale of oil and natural gas properties and equipment 49,807
Net change in non-cash investing working capital
(note 11) 3,745,549
------------------------------------------------------------------------
(98,717,804)
------------------------------------------------------------------------

Change in cash (2)
Cash, beginning of period 2
------------------------------------------------------------------------
Cash, end of period -
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements

(1) Period from April 5, 2004 (incorporation) to December 31, 2004.


Chamaelo Energy Inc.

Notes to the Consolidated Financial Statements

Period ended December 31, 2004

Chamaelo Energy Inc. ("Chamaelo" or the "Company") was incorporated
under the Business Corporations Act (Alberta) on April 5, 2004 and
commenced operations on June 1, 2004 when certain oil and natural gas
assets were acquired by Chamaelo under a plan of arrangement dated April
27, 2004 (note 2). The Company commenced trading on the Toronto Stock
Exchange on June 8, 2004 under the symbol "CLO". The Company is engaged
in the acquisition, development and exploration for and production and
marketing, of oil and natural gas reserves in the Western Canadian
Sedimentary Basin.

1. SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. These financial statements have
been prepared by management in accordance with accounting principles
generally accepted in Canada.

b) Oil and natural gas properties and equipment

The Company follows the full cost method of accounting whereby all costs
related to the acquisition of, exploring for and developing oil and
natural gas reserves are capitalized and charged against earnings as set
out below. Such costs include land acquisition costs, geological and
geophysical expenses, production equipment, carrying charges of
non-producing properties, costs of drilling both productive and
non-productive wells and overhead charges directly related to
acquisition, exploration and development activities.

These costs, together with the estimated future costs to be incurred in
developing proved reserves, are depleted or depreciated using the
unit-of-production method based on the proved reserves before royalties
as estimated by independent petroleum engineers. Oil and natural gas
reserves and production are converted into equivalent units based upon
estimated relative energy content of six thousand cubic feet of natural
gas to one barrel of oil. The costs of undeveloped properties are
excluded from the costs subject to depletion and depreciation until it
is determined whether proved reserves are attributable to the properties
or impairment occurs.

Oil and natural gas properties are evaluated each reporting period
through an impairment test to determine the recoverability of
capitalized costs. The carrying amount is assessed as recoverable when
the sum of the undiscounted cash flows expected from proved reserves
plus the cost of unproved interests, net of impairments, exceeds the
carrying amount. When the carrying amount is assessed not to be
recoverable, an impairment loss is recognized to the extent that the
carrying amount exceeds the sum of the discounted cash flows from proved
and probable reserves plus the cost of unproved interests, net of
impairments. The cash flows are estimated using expected future prices
and costs and are discounted using a credit adjusted risk-free interest
rate.

Proceeds from the sale of oil and natural gas properties are applied
against capitalized costs, with no gain or loss recognized, unless such
a sale would result in a change in the depletion rate of 20% or more.

Portions of the Company's oil and natural gas activities are conducted
jointly with others and accordingly these financial statements reflect
only the Company's proportionate interest in such activities.

c) Office and other equipment

Office and other equipment is depreciated using the straight-line method
over the estimated useful life of three years.

d) Goodwill

Goodwill, which represents the excess of purchase price over the fair
value of net assets received in an acquisition, is tested for impairment
on an annual basis in the fourth quarter. A goodwill impairment loss
would be recognized when the carrying amount of goodwill exceeds its
fair value. Should the test result in an impairment, it will be charged
to income in the period of the impairment.

e) Asset retirement obligations ("ARO")

The Company recognizes the liability associated with future site
reclamation costs in the financial statements at the time when the
liability is incurred. ARO obligations are initially measured at fair
value and subsequently adjusted for the accretion of discount and any
changes to the underlying cash flows. The asset retirement cost is
capitalized to oil and natural gas properties and equipment and
amortized into earnings on a basis consistent with depletion and
depreciation.

f) Use of estimates

The amounts recorded for depletion and depreciation, asset retirement
obligations and the amounts used in impairment test calculations are
based on estimates of proved reserves, production rates, oil and natural
gas prices, future costs and other relevant assumptions. By their
nature, these estimates are subject to measurement uncertainty and the
effect on the financial statements of changes in such estimates in
future periods could be significant.

g) Revenue recognition

Oil and natural gas revenues are recognized when title and risks pass to
the purchaser.

h) Income taxes

The Company follows the liability method of accounting for future income
taxes, whereby temporary differences arising from the difference between
the tax basis of an asset or liability and its carrying amount on the
balance sheet are used to calculate future income tax liabilities or
assets. Future income tax liabilities or assets are calculated using tax
rates anticipated to apply in the periods that the temporary differences
are expected to reverse.

i) Stock-based compensation

The Company has a stock-based compensation plan, which is described in
note 9. The Company applies the fair value method for valuing stock
options granted to officers, directors, employees and consultants. Under
this method, compensation cost attributable to stock options granted to
officers, directors, employees and consultants is measured at fair value
at the grant date and expensed over the vesting period with a
corresponding increase to contributed surplus. Upon the exercise of the
stock options, consideration paid together with the amount previously
recognized in contributed surplus is recorded as an increase to share
capital.

j) Flow-through shares

The resource expenditure deductions for income tax purposes related to
exploratory and development activities funded by flow-through share
arrangements are renounced to investors in accordance with income tax
legislation. Share capital is reduced and future income tax liability is
increased by the tax cost of these renounced expenditures.

k) Per share information

Per share information is computed using the weighted average number of
common shares outstanding during the period. Diluted per share
information is calculated using the treasury stock method, which assumes
that any proceeds from the exercise of stock options and warrants would
be used to purchase common shares at the average market price during the
period. No adjustment to diluted earnings per share is made if the
result of these calculations is anti-dilutive.

2. PLAN OF ARRANGEMENT

On June 1, 2004, as a result of a plan of arrangement involving
Viracocha Energy Inc. ("Viracocha"), Provident Energy Trust (the
"Trust"), Provident Energy Ltd., and Chamaelo Energy Inc., certain oil
and natural gas properties were acquired from Viracocha in exchange for
common shares in Chamaelo. Pursuant to the plan of arrangement, Chamaelo
issued 5,678,786 Chamaelo common shares to Viracocha shareholders on a
pro-rata basis. As Chamaelo and Viracocha are deemed to be related
parties, the net assets acquired by Chamaelo have been recorded at
Viracocha's net book value as follows:



Consideration for acquisition Amount ($)
------------------------------------------------------------------------
Issuance of 5,678,786 common shares 14,136,275
Purchase price adjustment 155,405
------------------------------------------------------------------------
14,291,680
------------------------------------------------------------------------
------------------------------------------------------------------------

Net assets acquired Amount ($)
------------------------------------------------------------------------
Oil and natural gas properties 15,138,088
Office and other equipment 149,325
Asset retirement obligation (995,733)
------------------------------------------------------------------------
14,291,680
------------------------------------------------------------------------
------------------------------------------------------------------------


As part of the plan of arrangement, the Company is committed to spending
$6 million pursuant to a farm-in agreement on certain lands currently
held by Viracocha and the Trust for a two-year term ending May 27, 2006.

3. ACQUISITIONS

a) Corporate acquisition:

On October 13, 2004, the Company acquired all of the issued and
outstanding shares of Capstone Energy Ltd. ("Capstone"), a private
company involved in the exploration, development and production of oil
and natural gas in Western Canada for a total purchase price of
$18,679,597. The financial statements of the Company include the
accounts of Capstone from the date of acquisition. The acquired oil and
natural gas properties are located primarily within the Company's
Southern Alberta core area with the remaining significant properties
located in Central Alberta. The acquisition has been accounted for by
the purchase method of accounting as follows:



Consideration for acquisition Amount ($)
------------------------------------------------------------------------
Cash 8,975,112
Issuance of 2,002,850 common shares 9,012,825
Issuance of 667,626 share purchase warrants 600,000
Transaction costs 91,660
------------------------------------------------------------------------
18,679,597
------------------------------------------------------------------------
------------------------------------------------------------------------


Net assets acquired Amount ($)
------------------------------------------------------------------------
Cash 1,040,728
Working capital (853,017)
Oil and natural gas properties and equipment 19,500,000
Asset retirement obligation (1,512,332)
Goodwill 4,179,193
Future income taxes (3,674,975)
------------------------------------------------------------------------
18,679,597
------------------------------------------------------------------------
------------------------------------------------------------------------


The net cash consideration for the acquisition was $8,026,044 comprised
of the original $8,975,112 cash, transaction costs of $91,660, less a
$1,040,728 cash balance acquired from Capstone.

b) Property acquisition:

On November 30, 2004, the Company acquired certain oil and natural gas
properties for a total purchase price of $83,687,020, including
transaction costs. The acquired properties are located mainly in the
West Central and Peace River Arch areas of Alberta. The Company
allocated the purchase price as follows:



Consideration for acquisition Amount ($)
------------------------------------------------------------------------
Cash 83,687,020
------------------------------------------------------------------------
------------------------------------------------------------------------

Net assets acquired Amount ($)
------------------------------------------------------------------------
Oil and natural gas properties and equipment 99,274,747
Asset retirement obligation (12,625,596)
Natural gas sales contract (2,962,131)
------------------------------------------------------------------------
83,687,020
------------------------------------------------------------------------
------------------------------------------------------------------------

4. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT

Accumulated
Depletion and Net Book
Cost Depreciation Value
$ $ $
------------------------------------------------------------------------
Oil and natural gas properties 144,691,600 2,844,259 141,847,341
Office and other equipment 326,886 49,873 277,013
------------------------------------------------------------------------
145,018,486 2,894,132 142,124,354
------------------------------------------------------------------------
------------------------------------------------------------------------


As at December 31, 2004, the cost of oil and natural gas properties
includes $12,307,349 relating to properties from which there is no
production and which have been excluded from costs subject to depletion
and depreciation. During the period ended December 31, 2004, the
provision for depletion, depreciation and accretion includes $113,263
for accretion of asset retirement costs. During the period ended
December 31, 2004, the Company capitalized $138,886 of general and
administrative costs.

The Company performed an impairment (ceiling) test calculation at
December 31, 2004 to assess the recoverable value of the oil and natural
gas properties. The oil and natural gas future prices are based on
January 1, 2005 commodity price forecasts of the Company's independent
reserve evaluators. These prices have been adjusted for commodity price
differentials specific to the Company. The following table summarizes
the benchmark prices used in the ceiling test calculation. Based on
these assumptions, there was no impairment at December 31, 2004.



Foreign Edmonton Light
WTI Oil Exchange Crude Oil AECO Gas
Year ($US/bbl) Rate ($Cdn/bbl) ($Cdn/mmbtu)
------------------------------------------------------------------------
2005 42.00 0.820 50.25 6.60
2006 40.00 0.820 47.75 6.35
2007 38.00 0.820 45.50 6.15
2008 36.00 0.820 43.25 6.00
2009 34.00 0.820 40.75 6.00
2010 33.00 0.820 39.50 6.00
2011 33.00 0.820 39.50 6.00
2012 33.00 0.820 39.50 6.00
2013 33.50 0.820 40.00 6.10
2014 34.00 0.820 40.75 6.20
2015 34.50 0.820 41.25 6.30
Escalate
Thereafter 2.0% per year 2.0% per year 2.0% per year
------------------------------------------------------------------------
------------------------------------------------------------------------


5. REVOLVING CREDIT FACILITY

The Company has total credit facilities of $52.5 million with a Canadian
bank. This is comprised of a revolving operating demand loan of $40.0
million bearing interest at prime plus a premium ranging between 0% and
1.25% based on the Company's debt to cash flow ratio, a $7.5 million
non-revolving development demand loan bearing interest at prime plus
0.75%, and a treasury risk line of $5.0 million. The credit facilities
are secured by a $150 million fixed and floating charge debenture on the
assets of the Company. The average effective interest rate for the
period ended December 31, 2004 was 4.25%.

6. CAPITAL LEASE OBLIGATIONS

The Company has classified an automobile lease with an initial cost of
$42,941 as a capital lease and has included this capital lease in office
and other equipment. The capital lease obligations reflect the present
value of future minimum payments under the lease, discounted at the
interest rate implicit in the lease of 7.8%. At December 31, 2004, the
future minimum lease payments under the capital lease were:



Amount ($)
------------------------------------------------------------------------

2005 15,409
2006 14,720
2007 17,208
------------------------------------------------------------------------
Total minimum lease payments 47,337
Less: Amount representing interest 5,407
------------------------------------------------------------------------
Present value of minimum lease payments 41,930
Less: Current portion included in accounts
payable and accrued liabilities 12,602
------------------------------------------------------------------------
29,328
------------------------------------------------------------------------
------------------------------------------------------------------------


7. ASSET RETIREMENT OBLIGATIONS

The Company's asset retirement obligations result from net ownership
interests in oil and natural gas properties including well sites,
gathering systems and processing facilities. The Company estimates the
total undiscounted amount of cash flows (adjusted for inflation using a
rate of 2%) required to settle its asset retirement obligations is
approximately $47.9 million which will be incurred between 2005 to 2032.
A credit-adjusted risk-free rate of 7 percent was used to calculate the
fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided below:

Amount ($)
------------------------------------------------------------------------

Balance at April 5, 2004, date of incorporation -
Liabilities transferred upon plan of arrangement (note 2) 995,733
Liabilities obtained through acquisition
of Capstone (note 3) 1,512,332
Liabilities obtained through acquisition of oil and
natural gas properties 12,625,596
Liabilities incurred in period 318,501
Liabilities settled in period (2,916)
Accretion expense 113,263
------------------------------------------------------------------------
Balance at December 31, 2004 15,562,509
------------------------------------------------------------------------
------------------------------------------------------------------------


8. TAXES

a) The provision for income taxes on the statement of operations and
retained earnings differs from the amount that would be computed by
applying the expected tax rates to earnings before taxes. The reasons
for the difference between such expected income tax expense and the
amount recorded are as follows:



Income tax rate 38.62%

Amount ($)
------------------------------------------------------------------------
Expected income tax expense 349,099
Increase (decrease) in income taxes resulting from:
Non-deductible crown charges 303,525
Resource allowance (300,988)
Capital taxes 143,000
Reduction of tax rates (67,721)
Non-deductible stock-based compensation 132,754
------------------------------------------------------------------------
559,669
------------------------------------------------------------------------
------------------------------------------------------------------------

b) The components of the net future income tax liability at December 31,
2004 are as follows:

Amount ($)
------------------------------------------------------------------------

Future income tax liabilities:
Capital assets 10,459,200
Future income tax assets:
Asset retirement obligations (5,232,116)
Natural gas sales contract (1,025,984)
Capital lease obligation (9,860)
Share issue costs (1,417,494)
------------------------------------------------------------------------
Net future income tax liability 2,773,746
------------------------------------------------------------------------
------------------------------------------------------------------------


9. SHARE CAPITAL

a) Authorized:

Unlimited number of common shares
Unlimited number of preferred shares


b) Issued and outstanding:

Number of
Share Capital Shares Amount ($)
------------------------------------------------------------------------

Common Shares:
Balance at April 5, 2004, Incorporation 2 2
Issued for cash
Private placement (note 9 (c)) 3,250,000 7,030,000
Private placement 6,000,000 24,000,000
Private placement 2,222,222 10,000,000
Private placement of flow-through shares 925,926 5,000,000
Private placement 8,000,000 42,000,000
Issued upon plan of arrangement (note 2) 5,678,786 14,136,275
Issued upon corporate acquisition (note 3) 2,002,850 9,012,825
Share issue costs (net of future taxes of
$1,317,898) - (3,434,282)
------------------------------------------------------------------------
Balance at December 31, 2004 28,079,786 107,744,820
------------------------------------------------------------------------

Warrants (note 9(c)) - 2,020,000
------------------------------------------------------------------------
Total Share Capital 28,079,786 109,764,820
------------------------------------------------------------------------

No preferred shares have been issued

c) Warrants

The Company had the following warrants outstanding at December 31, 2004:

Weighted
Number of Average Expiry
Warrants Price ($) Amount ($) Date
------------------------------------------------------------------------
Balance at April 5,
2004, Incorporation - - - -
Private placement 3,250,000 4.25 1,420,000 May 26, 2009
Corporate acquisition
(note 3) 667,626 4.75 600,000 April 12, 2007
------------------------------------------------------------------------
Balance at December
31, 2004 3,917,626 4.34 2,020,000
------------------------------------------------------------------------
------------------------------------------------------------------------


On May 26, 2004, the Company completed a private placement financing for
an aggregate of 3,250,000 units priced at $2.60 per unit for gross
proceeds of $8,450,000. Each unit is comprised of one common share and
one common share purchase warrant of the Company. 3,209,000 of these
units were issued to officers, directors, and employees of the Company
with a service commitment of three years. If the three-year obligation
is not met, the Company will have the option to buy back the units at
the original $2.60 issue price on a pro-rata basis reflecting the time
of service completed. The fair value of the warrants at issue date was
estimated at $1,420,000 using the Black-Scholes option pricing model
with the following assumptions: Dividend yield - nil; expected
volatility - 30%; risk-free interest rate - 4.0%; and expected life of 5
years.

The 667,626 warrants issued in connection with the corporate acquisition
of Capstone are exercisable into one common share of the Company at any
time commencing at issuance and ending April 12, 2007 at an exercise
price of $4.75 per share. The fair value of the warrants at issue date
was estimated at $600,000 using the Black-Scholes option pricing model
with the following assumptions: Dividend yield - nil; expected
volatility - 30%; risk-free interest rate - 3.16%; and expected life of
2.5 years.

d) Flow-through shares

During the year ended December 31, 2004, the Company issued 925,926
common shares on a flow-through basis for cash consideration of
$5,000,000. Of these shares, 84,767 were issued to directors and
officers of the Company. The Company is committed to spending $5,000,000
on qualified expenditures by December 31, 2005. As of December 31, 2004,
the Company had expended $1,718,260 on qualified expenditures.

e) Stock options

The Company has authorized the issuance of 1,500,000 common shares under
a stock option plan enabling certain officers, directors, employees and
consultants to purchase common shares. The Company has reserved for
issuance 1,500,000 common shares for this purpose. The Company will not
issue options exceeding 10% of the shares outstanding at the time of the
option grants. Under the plan, the exercise price of each option equals
the market price of the Company's shares on the date of the grant. The
options vest over a period of 3 years and an option's maximum term is 5
years. As at December 31, 2004, 1,437,000 options have been granted and
are outstanding at prices ranging from $4.35 - $5.30 per share with
expiry dates ranging from June 14, 2009 to November 18, 2009.

The Company had the following stock options outstanding at December 31,
2004:



Weighted Weighted
Number of Average Average
Options Price ($) Years to Expiry
------------------------------------------------------------------------
Balance at April 5, 2004,
Incorporation - - -
Options granted 1,437,000 4.56 3.52
------------------------------------------------------------------------
Balance at December 31, 2004 1,437,000 4.56 3.52
------------------------------------------------------------------------
------------------------------------------------------------------------

Exercisable at December 31,
2004 - - -
------------------------------------------------------------------------


f) Escrow

At December 31, 2004, there were 1,460,775 common shares held in escrow
pursuant to the Escrow Agreement and Toronto Stock Exchange listing
requirements. The shares will be released in stages over the next
12-month period.

g) Stock-based compensation

The compensation cost that has been charged against income for the stock
option plan during the period ended December 31, 2004 was $343,744.

The fair value of each option granted is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted average assumptions:



------------------------------------------------------------------------
Fair value per option $1.38
Risk-free rate 4.1%
Expected life 4 years
Expected volatility 30.0%
Dividend yield -
------------------------------------------------------------------------
------------------------------------------------------------------------


h) Per share information

The weighted average number of shares outstanding for the determination
of basic and diluted per share amounts are as follows:



------------------------------------------------------------------------
Basic 14,082,290
Diluted 14,687,515
------------------------------------------------------------------------
------------------------------------------------------------------------


In calculating diluted earnings per share for the period ended December
31, 2004, the Company excluded 45,000 options, as the exercise price was
greater than the weighted average market price.

10. FINANCIAL INSTRUMENTS

a) Fair values

The carrying value of accounts receivable, revolving credit facility,
capital taxes payable, and accounts payable and accrued liabilities
approximate their fair value due to the near term maturity of these
instruments.

b) Credit risk

A substantial portion of the Company's accounts receivable are with
customers and joint venture partners in the oil and gas industry and are
subject to normal industry credit risks. The credit risk on receivables
is mitigated by selling to a number of purchasers as well as review of
customer credit worthiness.

c) Commodity price risk

Natural gas sales contract - This contract was acquired in conjunction
with the purchase of certain oil and natural gas properties on November
30, 2004. At the date of the acquisition, the fair value of the contract
was a liability of $2,962,131. This value was recorded as a liability
and is being amortized over the life of the contract, which expires in
October 2007.

Other than outlined above, the Company's oil and natural gas production
was marketed and sold on the spot market to area aggregators based on
daily spot prices that are adjusted for product quality and
transportation costs.

The Company is exposed to foreign currency fluctuations as crude oil
prices received are referenced to U.S. dollar denominated prices.



11. SUPPLEMENTAL CASH FLOW INFORMATION

a) Net change in non-cash working capital
Amount ($)
------------------------------------------------------------------------

Accounts receivable (4,931,864)
Prepaid expenses and deposits (218,008)
Accounts payable and accrued liabilities 5,815,119
Capital taxes payable 143,000
------------------------------------------------------------------------
Net change in non-cash working capital 808,247
------------------------------------------------------------------------
------------------------------------------------------------------------

Relating to:
Investing 3,745,549
Operating (2,937,302)
------------------------------------------------------------------------
Net change in non-cash working capital 808,247
------------------------------------------------------------------------
------------------------------------------------------------------------

b) Interest and taxes
$
------------------------------------------------------------------------

Cash interest received 286,925
Cash interest paid (55,275)
------------------------------------------------------------------------
231,650

Cash taxes paid -
------------------------------------------------------------------------
------------------------------------------------------------------------

12. COMMITMENTS

The Company is committed to payments under an operating lease for office
space as follows:
$
------------------------------------------------------------------------
2005 301,231
2006 313,261
2007 313,261
2008 313,261
2009 243,968
------------------------------------------------------------------------
1,484,982
------------------------------------------------------------------------
------------------------------------------------------------------------


CORPORATE INFORMATION

OFFICERS AND DIRECTORS

Robert J. Zakresky, CA
President, CEO and Director

Robert T. Jepson, BBA, PLM
Executive VP and Director

R. P. (Rick) Marshall, RET
VP Operations, COO and Director

Greg Fisher, B.Mgt.
VP Finance, CFO & Corporate Secretary

R.D. (Rick) Sereda, M.Sc., P.Geol.
VP Exploration

Jeff Peterson, M.Sc., P.Geol.
VP Geology

Weldon Dueck, BSc., P.Eng.
VP Exploitation

Sean M. Monaghan, CA, CBV
Chairman of the Board

T.S. (Ted) Rozsa
Director

R. Shawn Kirkpatrick, MBA
Director

A. B. (Sandy) McArthur
Director

BANK
National Bank of Canada
2700, 530 - 8th Avenue S.W.
Calgary, Alberta T2P 3S8

TRANSFER AGENT
Valiant Trust Company
310, 606 - 4th Street S.W.
Calgary, Alberta T2P 1T1

LEGAL COUNSEL
Gowling Lafleur Henderson LLP
1400, 700 - 2nd Street S.W.
Calgary, Alberta T2P 4V5

AUDITORS
KPMG LLP
1200, 205 - 5th Avenue S.W.
Calgary, Alberta T2P 4B9

INDEPENDENT ENGINEERS
Gilbert Laustsen Jung
4100, 400 - 3rd Avenue S.W.
Calgary, Alberta T2P 4H2


FORWARD LOOKING STATEMENTS

This Press Release may contain forward-looking information that involve
a number of risks and uncertainties that could cause actual results to
differ materially from those anticipated. For this purpose, any
statements herein that are not statements of historical fact may be
deemed to be forward-looking statements. Such risks and uncertainties
include, but are not limited to: risks associated with the oil and gas
industry (e.g. - operational risks in exploration, development and
production; changes and/or delays in the development of capital assets;
uncertainty of reserve estimates; uncertainty of estimates and
projections relating to production and costs; commodity price
fluctuations; environmental risks; and industry competition).

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    Chamaelo Energy Inc.
    Robert J. Zakresky
    President & CEO
    (403) 232-8575 ext. 226
    or
    Chamaelo Energy Inc.
    Robert T. Jepson
    Executive Vice President
    (403) 232-8575 ext. 225
    or
    Chamaelo Energy Inc.
    Greg Fisher
    VP Finance & CFO
    (403) 232-8575 ext. 229
    or
    Chamaelo Energy Inc.
    Suite 700, 639 - 5th Avenue S.W.
    Calgary, Alberta T2P 0M9
    (403) 232-8575
    (403) 232-0061 (FAX)
    Website: www.chamaelo.ca