Chamaelo Exploration Ltd.
TSX : CXN

Chamaelo Exploration Ltd.

March 23, 2006 06:00 ET

Chamaelo Exploration Ltd.: 2005 Year-end Financial and Operating Results

CALGARY, ALBERTA--(CCNMatthews - March 23, 2006) - CHAMAELO EXPLORATION LTD. (TSX:CXN) is pleased to announce its financial and operating results for the period ended December 31, 2005 including audited financial statements, notes to the audited financial statements and Management's Discussion and Analysis. All dollar figures are Canadian dollars unless otherwise noted.

2005 HIGHLIGHTS

- Commenced operations on June 22, 2005, as a result of a Plan of Arrangement involving Chamaelo Exploration Ltd. (the "Company"), Chamaelo Energy Inc. and Vault Energy Trust, whereby the Company acquired certain oil and natural gas properties with production of approximately 1,000 boepd from Chamaelo Energy Inc. in exchange for common shares and common share purchase warrants of the Company.

- Commenced trading on the Toronto Stock Exchange on June 27, 2005 under the symbol "CXN".

- On July 27, 2005, Chamaelo completed a bought deal financing for 3,000,000 common shares priced at $7.50 per share for gross proceeds of $22,500,000.

- Drilled 23 (15.3) wells resulting in 16 (9.6 net) gas wells, 1 (0.50 net) oil well, and 6 (5.2 net) dry/uneconomic wells for an overall success rate of 66%.

- Subsequent to year-end, Chamaelo closed a business combination with two private companies - Tournament Energy Ltd. ("Tournament") and Tropic Networks Inc. ("Tropic") by way of Plan of Arrangement. Tournament has oil and gas assets located in Chamaelo's West Central Alberta core area producing approximately 3,100 boepd. Tropic is a company that sought to reorganize and enter the oil and gas business and has a technology business that will be distributed to its existing shareholders as part of the Plan of Arrangement.



--------------------------------------------------------------------
Three Months Ended Period Ended
FINANCIAL (1) December 31, 2005 December 31, 2005
--------------------------------------------------------------------
($, except where noted)
Oil and natural gas sales 7,104,881 13,663,150

Funds from operations 4,146,221 7,752,738
per share - basic 0.20 0.39
per share - diluted 0.19 0.37

Net earnings 1,395,765 2,528,270
per share - basic 0.07 0.13
per share - diluted 0.06 0.12

Capital expenditures 11,442,884 14,917,714
Net cash and working capital 17,575,176


Common shares outstanding
weighted average - basic 20,368,342 19,823,867
- diluted 21,506,122 21,088,684

end of period - basic 20,368,342
- diluted 25,892,600

(1) There are no comparative numbers as the Company was incorporated
on April 25, 2005 and began active operations on June 22, 2005.
Results from oil and natural gas activities take into account
only the 193-day period from June 22, 2005 to December 31, 2005.


--------------------------------------------------------------------
Three Months Ended Period Ended
OPERATING (1) December 31, 2005 December 31, 2005
--------------------------------------------------------------------

Number of producing days 92 193

Daily production
Oil and liquids - (bbls/d) 340 375
Natural gas - (mcf/d) 4,216 4,040
--------------------------------------------------------------------
Oil equivalent - (boe/d @6:1) 1,043 1,048

Revenue, net of transportation
Oil and liquids - ($/bbl) 69.80 69.09
Natural gas - ($/mcf) 12.31 10.75
--------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 72.53 66.16

Royalties
Oil and liquids - ($/bbl) 11.81 12.85
Natural gas - ($/mcf) 2.69 2.33
--------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 14.73 13.58

Production expenses
Oil and liquids - ($/bbl) 13.89 12.13
Natural gas - ($/mcf) 1.62 1.60
--------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 11.08 10.52

Operating netback
Oil and liquids - ($/bbl) 44.10 44.11
Natural gas - ($/mcf) 8.00 6.82
--------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 46.72 42.06

(1) There are no comparative numbers as the Company was incorporated
on April 25, 2005 and began active operations on June 22, 2005.
Results from oil and natural gas activities take into account
only the 193-day period from June 22, 2005 to December 31, 2005.


Management's Discussion and Analysis

March 21, 2006

Chamaelo Exploration Ltd. ("Chamaelo" or the "Company") is an emerging oil and natural gas company, actively engaged in the acquisition, development, exploration, and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. Chamaelo commenced trading on the Toronto Stock Exchange ("TSX") on June 27, 2005 under the symbol "CXN".

Chamaelo was incorporated under the Business Corporations Act (Alberta) on April 25, 2005 and commenced operations on June 22, 2005 under a Plan of Arrangement entered into by the Company, Chamaelo Energy Inc. and Vault Energy Trust. Under the Plan of Arrangement, the Company acquired certain oil and natural gas properties from Chamaelo Energy Inc. As a result, the financial statements for the period ended December 31, 2005 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 193-day period from June 22, 2005 to December 31, 2005.

The MD&A should be read in conjunction with the audited financial statements for the period ended December 31, 2005. The audited 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).

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 term "boe" may be misleading, particularly if used in isolation. A boe conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalence is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

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).

Funds from operations and operating netback as presented do 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 funds from operations is detailed on the Statement of Cash Flows. Operating netback, which is calculated as average unit sales price less royalties, production expenses, and transportation expenses, represents the cash margin for every barrel of oil equivalent sold.



Summary of Financial Results (1) Period ended December 31, 2005
--------------------------------------------------------------------
$
Oil and natural gas sales 13,663,150

Funds from operations 7,752,738
per share - basic 0.39
per share - diluted 0.37

Net earnings 2,528,270
per share - basic 0.13
per share - diluted 0.12

Total assets 92,828,160

Net cash and working capital 17,575,176

Total long-term liabilities 4,876,979

(1) There are no comparative numbers as the Company was incorporated
on April 25, 2005 and began active operations on June 22, 2005.
Results from oil and natural gas activities take into account
only the 193-day period from June 22, 2005 to December 31, 2005.


Chamaelo Exploration Ltd.
Management Discussion & Analysis
Period ended December 31, 2005

Production
Period ended December 31, 2005
--------------------------------------------------------------------
Average Daily Production
Oil and liquids (bbls/d) 375
Natural gas (mcf/d) 4,040
--------------------------------------------------------------------
Total (boe/d) 1,048
--------------------------------------------------------------------
--------------------------------------------------------------------


The reported oil and natural gas production reflects operating activities for the Company's first 193 days of operations from June 22, 2005 to December 31, 2005. On a combined basis, average daily production totaled 1,048 boe/d. Crude oil and natural gas liquids production averaged 375 boe/d while natural gas production averaged 4,040 mcf/d over the 193 day period ended December 31, 2005.



Revenue
Period ended December 31, 2005
--------------------------------------------------------------------
$
Oil and liquids 5,114,820
Natural gas 8,548,330
--------------------------------------------------------------------
Total revenue 13,663,150
Transportation expenses (281,789)
--------------------------------------------------------------------
Total revenue, net of transportation 13,381,361
--------------------------------------------------------------------
--------------------------------------------------------------------

Average Sales Price
--------------------------------------------------------------------
Oil and liquids ($/bbl) 70.73
Natural gas ($/mcf) 10.96
--------------------------------------------------------------------
Average sales price ($/boe) 67.55
Transportation expenses ($/boe) (1.39)
--------------------------------------------------------------------
Average sales price ($/boe), net of transportation 66.16
--------------------------------------------------------------------
--------------------------------------------------------------------


Revenue totaled $13,663,150 for the period ended December 31, 2005. Currently, the Company sells all its oil, natural gas liquids and natural gas on the spot market. Future prices received from the sale of oil, natural gas liquids and natural gas may fluctuate as the result of market factors. The Company did not hedge any of its oil, natural gas liquids or natural gas production for the period. The following table outlines the Company's realized wellhead prices and industry benchmarks:



Commodity Pricing
(average unless otherwise stated) Period ended December 31, 2005
--------------------------------------------------------------------

$US $Cdn
Oil and liquids
Corporate Price $/bbl 70.73
West Texas Intermediate $/bbl 61.55
Edmonton Par $/bbl 74.35

Natural gas
Corporate Price $/mcf 10.96
AECO Daily Spot Price $/mcf 10.70

Exchange Rate
U.S./Cdn Dollar Average Exchange Rate 0.8406
--------------------------------------------------------------------
--------------------------------------------------------------------


Corporate average oil and natural gas liquids price was 95.1% of Edmonton Par price or a discount of $3.62 to Edmonton Par. A difference can be a result of quality (higher or lower API), sour content, natural gas liquids included in reporting and various other factors. Chamaelo's differences are mainly as a result of sour content in the oil and production of natural gas liquids that are priced lower than Edmonton Par. Note that these differences change on a monthly basis pending demand for each particular product.



Transportation Expenses
Period ended December 31, 2005
--------------------------------------------------------------------
Oil and liquids ($/bbl) 1.64
Natural gas ($/mcf) 0.21
--------------------------------------------------------------------
Total ($/boe) 1.39
--------------------------------------------------------------------
--------------------------------------------------------------------


Transportation expenses are third-party pipeline tariffs and trucking costs incurred to deliver the products to the purchasers at main hubs. The Company expects to have industry average transportation costs, as most of the current production and capital expenditure plans are located in West Central Alberta.



Royalties
Period ended December 31, 2005
--------------------------------------------------------------------
$
Oil and liquids 929,070
Natural gas 1,818,361
--------------------------------------------------------------------
Total royalties 2,747,431
--------------------------------------------------------------------
--------------------------------------------------------------------

Average Royalty Rate (% of sales)
--------------------------------------------------------------------
Oil and liquids 18.2
Natural gas 21.3
--------------------------------------------------------------------
Average royalty rate 20.1
--------------------------------------------------------------------
--------------------------------------------------------------------


Crude oil, natural gas liquids and natural gas royalties totaled $2,747,431 for the period ended December 31, 2005. The overall effective royalty rate was 20.1 percent of the Company's total revenue from the sale of crude oil, natural gas liquids and natural gas.



Production Expenses
Period ended December 31, 2005
--------------------------------------------------------------------

Oil and liquids ($/bbl) 12.13
Natural gas ($/mcf) 1.60
--------------------------------------------------------------------
Total ($/boe) 10.52
--------------------------------------------------------------------
--------------------------------------------------------------------


Per unit production expenses for the period ended December 31, 2005 were $10.52/boe ($12.13/bbl of oil and natural gas liquids and $1.60/mcf of gas). Chamaelo recognizes that controlling operating costs plays 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 netbacks.



Operating Netback
Period ended December 31, 2005
--------------------------------------------------------------------
Oil and liquids ($/bbl)
Revenue 70.73
Royalties 12.85
Production expenses 12.13
Transportation expenses 1.64
--------------------------------------------------------------------
Operating netback 44.11
--------------------------------------------------------------------
--------------------------------------------------------------------

--------------------------------------------------------------------
Natural gas ($/mcf)
Revenue 10.96
Royalties 2.33
Production expenses 1.60
Transportation expenses 0.21
--------------------------------------------------------------------
Operating netback 6.82
--------------------------------------------------------------------
--------------------------------------------------------------------

--------------------------------------------------------------------
Combined $/Boe (6:1)
Revenue 67.55
Royalties 13.58
Production expenses 10.52
Transportation expenses 1.39
--------------------------------------------------------------------
Operating netback 42.06
--------------------------------------------------------------------
--------------------------------------------------------------------


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, 2005, Chamaelo generated an operating netback of $42.06 per boe.



General and Administrative Expenses ("G&A")
Period ended December 31, 2005
--------------------------------------------------------------------
$
G&A expenses (gross) 1,363,661
G&A capitalized (205,024)
G&A recoveries (136,408)
--------------------------------------------------------------------
G&A expenses (net) 1,022,229
--------------------------------------------------------------------
G&A expenses ($/boe) 5.05
--------------------------------------------------------------------
--------------------------------------------------------------------


G&A totaled $1,022,229 in the period ended December 31, 2005, or $5.05 per boe. The Company expects per-unit G&A costs will decline significantly as production levels increase.



Depletion, Depreciation and Accretion ("DD&A")
Period ended December 31, 2005
--------------------------------------------------------------------

DD&A ($) 3,039,390
DD&A ($/boe) 15.03
--------------------------------------------------------------------
--------------------------------------------------------------------


The Company's DD&A expense totaled $3,039,390 during the period. On a unit-of-production basis the DD&A provision was $15.03 per boe. During the period ended December 31, 2005, the provision for DD&A includes $126,161 ($0.62 per boe) for accretion of asset retirement obligations.



Taxes
Period ended December 31, 2005
--------------------------------------------------------------------
$
Capital taxes 54,521
Future income taxes 1,607,587
--------------------------------------------------------------------
1,662,108
Taxes ($/boe) 8.22
--------------------------------------------------------------------
--------------------------------------------------------------------


Capital taxes for the period ended December 31, 2005 were $54,521 consisting of Large Corporations Tax ("LCT"). Future income taxes are recorded using the liability method. At December 31, 2005, the Company had approximately $50 million in tax pools to shelter against future income.

Funds from Operations and Net Earnings

Funds from operations for the period ended December 31, 2005 was $7,752,738 ($0.37 per diluted share). Net earnings totaled $2,528,270 ($0.12 per diluted share) in the period ended December 31, 2005.

Capital Expenditures

On June 22, 2005, as a result of a Plan of Arrangement involving the Company, Chamaelo Energy Inc., and Vault Energy Trust, the Company acquired certain oil and natural gas properties from Chamaelo Energy Inc. in exchange for common shares and common share purchase warrants of the Company. Pursuant to the Plan of Arrangement, the Company issued 14,290,421 common shares and 699,322 common share purchase warrants of the Company to Chamaelo Energy Inc. shareholders on a pro-rata basis. As the Company and Chamaelo Energy Inc. are deemed to be related parties, the net assets acquired by the Company have been recorded at Chamaelo Energy Inc.'s net book value as follows:



Net assets acquired Amount ($)
--------------------------------------------------------------------
Oil and natural gas properties 44,694,608
Office and other equipment 32,426
Asset retirement obligation (3,206,034)
--------------------------------------------------------------------
41,521,000
--------------------------------------------------------------------
--------------------------------------------------------------------

Consideration of acquisition
Issuance of 14,290,421 common shares 41,389,355
Issuance of 699,322 warrants 131,645
--------------------------------------------------------------------
41,521,000
--------------------------------------------------------------------
--------------------------------------------------------------------

Net cash payments for capital expenditures are as follows:

Period ended December 31, 2005
--------------------------------------------------------------------
$
Land 2,179,735
Drilling, completions and workovers 8,559,631
Equipment 2,612,489
Geological and geophysical 1,396,860
Other 168,999
--------------------------------------------------------------------
14,917,714
--------------------------------------------------------------------


During the period ended December 31, 2005, the company drilled 23 (15.3) wells resulting in 16 (9.6 net) gas wells, 1 (0.50 net) oil well, and 6 (5.2 net) dry/uneconomic wells for an overall success rate of 66%. Two gas wells were tied-in late in 2005 while the remaining wells are anticipated to be tied-in during the first and second quarters of 2006.

Finding, Development and Acquisition Costs ("FD&A")

FD&A costs reflect the efficiency and value added by the Company's capital spending. While NI 51-101 requires that the effects of acquisitions and dispositions be excluded, Chamaelo has included these items because it believes that acquisitions can have a significant impact on the Company's ongoing reserve replacement costs and that excluding these amounts could result in an inaccurate portrayal of Chamaelo's cost structure. The Company's FD&A costs for the period ended December 31, 2005 are as follows:



Proved plus
Proved Probable
--------------------------------------------------------------------

Reserve additions (mboe) (1) 3,639,700 4,744,800

Capital expenditures ($) 14,917,714 14,917,714
Acquisition ($) 41,521,000 41,521,000
--------------------------------------------------------------------
Total, excluding future
capital ($) 56,438,714 56,438,714
Future capital costs ($) (2) 6,859,000 8,923,000
--------------------------------------------------------------------
Total, including future
capital ($) 63,297,714 65,361,714

FD&A costs, excluding future
capital costs ($/BOE) 15.51 11.89
FD&A costs, including future
capital costs ($/BOE) 17.39 13.78
--------------------------------------------------------------------

(1) Based on total company interest reserves before deduction of
royalties to others and including any royalty interest of
Chamaelo. Based on the evaluation by GLJ Petroleum Consultants
Ltd. ("GLJ").

(2) Future development capital expenditures required to recover
reserves estimated by GLJ. The aggregate of the exploration and
development costs incurred in the most recent financial period
and the change during that period in estimated future
development costs generally will not reflect total finding and
development costs related to reserve additions for that period.


Liquidity and Capital Resources

Net cash and working capital was $17,575,176 at December 31, 2005.

On June 21, 2005, the Company completed a private placement financing for an aggregate of 3,076,923 units at a price of $3.25 per unit for gross proceeds of $10,000,000. Each unit is comprised of one non-voting common share and one non-voting common share purchase warrant of the Company.

On June 22, 2005, as a result of a Plan of Arrangement involving the Company, Chamaelo Energy Inc., and Vault Energy Trust, the Company acquired certain oil and natural gas properties from Chamaelo Energy Inc. in exchange for common shares and common share purchase warrants of the Company. Pursuant to the Plan of Arrangement, the Company issued 14,290,421 common shares and 699,322 common share purchase warrants of the Company to Chamaelo Energy Inc. shareholders on a pro-rata basis.

On July 27, 2005, the Company completed a private placement financing for an aggregate of 3,000,000 common shares priced at $7.50 per common share for gross proceeds of $22,500,000.

Subsequent to December 31, 2005, the Company entered into a Plan of Arrangement whereby it combined with two private companies - Tournament Energy Ltd. ("Tournament") and Tropic Networks Inc. ("Tropic"). Tournament has oil and gas assets located in Chamaelo's West Central Alberta core area. Tropic is a company that sought to reorganize and enter the oil and gas business and has a technology business that will be distributed to its existing shareholders as part of the Plan of Arrangement. The combined entity will carry on with the name Chamaelo Exploration Ltd. and will continue to trade on the Toronto Stock Exchange under the symbol "CXN".

Before the Plan of Arrangement, Tropic and Tournament closed equity financing agreements, on a "bought deal" private placement basis as more fully described below.

Tropic issued 13,000,000 subscription receipts ("Subscription Receipts") at a price of $6.75 per Subscription Receipt for gross proceeds of $87,750,000. Each Subscription Receipt was exchanged for one voting common share of Chamaelo pursuant to the Plan of Arrangement.

Tournament issued 800,000 flow-through special warrants ("Special Warrants") for gross proceeds of $6,000,000. The Special Warrants were converted into voting common shares of Chamaelo pursuant to the Plan of Arrangement at a ratio of 0.8928 of a voting common share per Special Warrant. Conversion of the Special Warrants resulted in 714,240 voting common shares of Chamaelo at an implied issue price of $8.40 per share.

5,255,483 voting common shares were also issued as the result of the Plan of Arrangement as non-cash consideration for the business combination.

The Company has a revolving operating demand loan credit facility available up to $10.5 million bearing interest at prime with a Canadian bank. The credit facility is secured by a $30 million fixed and floating charge debenture on the assets of the Company. Subsequent to December 31, 2005, the Company amended its credit facility with a Canadian bank. Under the amended agreement, the amount available on the revolving operating demand loan increased to $60 million bearing interest at prime plus a premium ranging between 0% and 1.00% based on the Company's debt to cash flow ratio. The security on the credit facility now includes a $100 million supplemental fixed and floating charge debenture on the assets of the Company.

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.



Summary of Quarterly Results (1) Period ended
December 31,
Q2/05 Q3/05 Q4/05 2005
--------------------------------------------------------------------

Number of producing
days 9 92 92 193

$ $ $ $
--------------------------------------------------------------------

Oil and natural gas
sales 488,479 6,069,790 7,104,881 13,663,150

Funds from operations 117,232 3,489,285 4,146,221 7,752,738
per share - basic 0.01 0.18 0.20 0.39
per share - diluted 0.01 0.17 0.19 0.37

Net earnings (loss) (22,910) 1,155,415 1,395,765 2,528,270
per share - basic - 0.06 0.07 0.13
per share - diluted - 0.06 0.06 0.12
--------------------------------------------------------------------

(1) There are not eight quarters of information as the Company was
incorporated on April 25, 2005 and began active operations on
June 22, 2005.
Results from oil and natural gas activities take into account
only the 193-day period from June 22, 2005 to December 31, 2005.


Fourth Quarter 2005

On a combined basis, average daily production totaled 1,043 boe/d for the fourth quarter of 2005. Crude oil and natural gas liquids production averaged 340 boe/d while natural gas production averaged 4,216 mcf/d. Average prices received during the fourth quarter of 2005 were $71.12/bbl for oil and natural gas liquids and $12.57/mcf for natural gas. The overall royalty rate in the fourth quarter of 2005 was 20.0%, production expenses were $11.08/boe, and transportation costs were $1.50/boe. The overall operating netback for the fourth quarter was $46.72 compared to $42.06 for the period from June 22, 2005 to December 31, 2005 resulting from higher natural gas prices realized during the fourth quarter of 2005.

Outstanding Share Data

The Company is authorized to issue an unlimited number of voting common shares and non-voting common shares. The voting common shares of the Company are traded on the TSX under the symbol "CXN". The non-voting common shares have the same rights and privileges as the voting common shares except for the voting feature. The non-voting common shares can be converted to voting common shares at any time by the Company subject to TSX approval. The following table summarizes the common shares outstanding and the number of shares exercisable into common shares from options and warrants:



December 31, 2005 March 21, 2006
--------------------------------------------------------------------

Voting common shares 17,291,419 36,267,302
Non-voting common shares 3,076,923 3,076,923
Options 1,749,000 2,696,600
Warrants 3,775,258 3,769,098
--------------------------------------------------------------------
Total 25,892,600 45,809,923
--------------------------------------------------------------------
--------------------------------------------------------------------


Commitments

The Company is committed to payments under an operating lease for office space as follows:



Amount ($)
--------------------------------------------------------------------
2006 313,261
2007 313,261
2008 313,261
2009 243,968
2010 -
--------------------------------------------------------------------
1,183,751
--------------------------------------------------------------------


Critical Accounting Policies and Significant Estimates

Management is required to make judgments, assumptions, and estimates in the application of Canadian GAAP 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. 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. 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 Natural Gas Reserves - The Company's oil and natural 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.

Asset Retirement Obligations - The Company is required to provide for future abandonment and site restoration costs. These costs are estimated based on existing laws, contracts or other policies. The 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. The estimate of future abandonment and site restoration costs involves estimates relating to the timing of abandonment, the economic life of the asset and the costs associated with abandonment and site restoration which are all subject to uncertainty and interpretation.

Outlook

The information below represents Chamaelo's guidance for 2006 based on Management's best estimates and the assumptions noted.



Estimated Production Guidance
2006
--------------------------------------------------------------------

Average Daily Production
Oil (bbls/d) 2,100
Natural gas (mcf/d) 17,400
--------------------------------------------------------------------
Total (boe/d) 5,000
--------------------------------------------------------------------
--------------------------------------------------------------------

Estimated Financial Results Guidance
2006
--------------------------------------------------------------------

Oil and natural gas sales ($) 100,000,000

Funds from operations ($) 60,000,000
$ per share - basic 1.55
$ per share - diluted 1.49

Capital expenditures ($) 80,000,000

West Texas Intermediate $US/bbl 64.00
AECO Daily Spot Price $Cdn/mcf 7.50
U.S./Cdn Dollar Average Exchange Rate 0.870
--------------------------------------------------------------------
--------------------------------------------------------------------


Sensitivity Analysis

The 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 2006 of the sensitivity of Chamaelo's funds from operations to changes in commodity prices and the U.S./Canadian dollar exchange rate.



Guidance Variance in Variance in
2006 factor cash flows
---------------------------------------------------------------------

West Texas Intermediate
$US/bbl 64.00 US $1.00/bbl Cdn $680,000
AECO Daily Spot Price
$Cdn/mcf 7.50 Cdn $0.10/mcf Cdn $495,000
U.S./Cdn Dollar Average
Exchange Rate 0.870 Cdn $0.01 Cdn $499,000
---------------------------------------------------------------------
---------------------------------------------------------------------


Risk Assessment

The acquisition, exploration and development of oil and natural gas properties involves many risks common to all participants in the oil and natural 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. The Company currently does not have any commodity price, interest rate, or foreign exchange contracts in place.

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 funds from operations to be derived therefrom 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. To the knowledge of management, there are no legal proceedings to which Chamaelo is a party or of which any of its property is the subject matter, nor are any such proceedings known to Chamaelo to be contemplated.

Disclosure Controls and Procedures over Financial Reporting

Although the Company continues to refine its disclosure controls and procedures from time to time, the CEO and CFO have concluded that, during 2005, the process was effective enough to ensure material information was accumulated and communicated up to management in sufficient time for management to make decisions regarding the Company's disclosure required by securities legislation.

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



Chamaelo Exploration Ltd.
Balance Sheet

As at December 31, 2005
--------------------------------------------------------------------

$
--------------------------------------------------------------------

Assets
Current assets:
Cash and cash equivalents 23,001,687
Accounts receivable 5,998,265
Prepaid expenses and deposits 224,574
--------------------------------------------------------------------
29,224,526

Oil and natural gas properties and
equipment (note 3) 57,294,611
Deferred business combination costs 6,309,023

--------------------------------------------------------------------
92,828,160
--------------------------------------------------------------------
--------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities 11,594,829
Capital taxes payable 54,521
--------------------------------------------------------------------
11,649,350

Asset retirement obligations (note 5) 3,775,385
Future income taxes (note 6) 1,101,594

Shareholders' equity:
Capital stock (note 7) 73,076,168
Contributed surplus 697,393
Retained earnings 2,528,270
--------------------------------------------------------------------
76,301,831

Commitments (note 10)
Subsequent events (note 11)
--------------------------------------------------------------------
92,828,160
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying notes to the financial statements


Chamaelo Exploration Ltd.
Statement of Operations and Retained Earnings

Period ended(1)
December 31, 2005
--------------------------------------------------------------------

$
--------------------------------------------------------------------

Revenue:
Oil and natural gas 13,663,150
Transportation expense (281,789)
Royalties (2,747,431)
Interest income 322,980
--------------------------------------------------------------------
10,956,910
Expenses:
Production 2,127,422
General and administrative 1,022,229
Stock-based compensation 577,491
Depletion, depreciation and accretion 3,039,390
--------------------------------------------------------------------
6,766,532

--------------------------------------------------------------------
Earnings before taxes 4,190,378

Taxes (note 6):
Capital taxes 54,521
Future income taxes 1,607,587
--------------------------------------------------------------------
1,662,108

Net earnings 2,528,270
Retained earnings, beginning of period -
--------------------------------------------------------------------
Retained earnings, end of period 2,528,270
--------------------------------------------------------------------
--------------------------------------------------------------------

Net earnings per share:
Basic 0.13
Diluted 0.12
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying notes to the financial statements

(1) Period from commencement of operations on June 22, 2005 to
December 31, 2005


Chamaelo Exploration Ltd.
Statement of Cash Flows

Period ended(1)
December 31, 2005
--------------------------------------------------------------------

$
--------------------------------------------------------------------
Cash provided by (used in):

Operating:
Net earnings 2,528,270
Items not affecting cash:
Depletion, depreciation and accretion 3,039,390
Stock-based compensation 577,491
Future income taxes 1,607,587
--------------------------------------------------------------------
Funds from operations 7,752,738
Net change in non-cash operating
working capital (note 9) (3,518,054)
--------------------------------------------------------------------
4,234,684
--------------------------------------------------------------------

Financing:
Issuance of share capital 32,502,344
Share issue costs (1,453,169)
--------------------------------------------------------------------
31,049,175
--------------------------------------------------------------------
--------------------------------------------------------------------

Investing:
Purchase and development of oil and
natural gas properties and equipment (14,917,714)
Deferred business combination costs (6,309,023)
Net change in non-cash investing
working capital (note 9) 8,944,565
--------------------------------------------------------------------
(12,282,172)
--------------------------------------------------------------------

Change in cash and cash equivalents 23,001,687
Cash and cash equivalents, beginning of period -
--------------------------------------------------------------------

Cash and cash equivalents, end of period 23,001,687
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying notes to the financial statements

(1) Period from commencement of operations on June 22, 2005 to
December 31, 2005

Chamaelo Exploration Ltd.
Notes to the Financial Statements
Period ended December 31, 2005


1. SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

Chamaelo Exploration Ltd. ("Chamaelo" or the "Company") was incorporated under the Business Corporations Act (Alberta) on April 25, 2005 and commenced operations on June 22, 2005 under a Plan of Arrangement entered into by the Company, Chamaelo Energy Inc., and Vault Energy Trust. Under the Plan of Arrangement, the Company acquired certain oil and natural gas properties from Chamaelo Energy Inc. (see note 2). As a result, the financial statements prepared are for the period from June 22, 2005 to December 31, 2005.

The Company commenced trading on the Toronto Stock Exchange on June 27, 2005 under the symbol "CXN". The Company is engaged in the acquisition, development, exploration, and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin.

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) 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. Actual costs incurred upon settlement of the obligations are charged against the liability.

e) 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.

f) Revenue recognition

Oil and natural gas revenues are recognized when title and risks pass to the purchaser, normally at the pipeline delivery point.

g) Cash and cash equivalents

Cash and cash equivalents includes short-term investments, such as money market deposits or similar type instruments, with maturity of three months or less when purchased.

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 7. 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) 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 22, 2005, as a result of a Plan of Arrangement involving the Company, Chamaelo Energy Inc., and Vault Energy Trust, the Company acquired certain oil and natural gas properties from Chamaelo Energy Inc. in exchange for common shares and common share purchase warrants of the Company. Pursuant to the Plan of Arrangement, the Company issued 14,290,421 common shares and 699,322 common share purchase warrants of the Company to Chamaelo Energy Inc. shareholders on a pro-rata basis. As the Company and Chamaelo Energy Inc. are deemed to be related parties, the net assets acquired by the Company have been recorded at Chamaelo Energy Inc.'s net book value as follows:



Net assets acquired Amount ($)
--------------------------------------------------------------------
Oil and natural gas properties 44,694,608
Office and other equipment 32,426
Asset retirement obligation (3,206,034)
--------------------------------------------------------------------
41,521,000
--------------------------------------------------------------------
--------------------------------------------------------------------

Consideration of acquisition
Issuance of 14,290,421 common shares 41,389,355
Issuance of 699,322 warrants 131,645
--------------------------------------------------------------------
41,521,000
--------------------------------------------------------------------
--------------------------------------------------------------------

3. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT

Accumulated
Depletion and
Cost Depreciation Net Book Value
$ $ $
-------------------------------------------------------------------
Oil and natural
gas properties 60,006,415 2,891,542 57,114,873
Office and other
equipment 201,425 21,687 179,738
-------------------------------------------------------------------
60,207,840 2,913,229 57,294,611
-------------------------------------------------------------------


As at December 31, 2005, the cost of oil and natural gas properties includes $6,956,507 relating to properties from which there is no production and no reserves assigned and which have been excluded from costs subject to depletion and depreciation. As at December 31, 2005, future development capital of $6,859,000 required to recover reserves has been included in the costs subject to depletion and depreciation. During the period ended December 31, 2005, the provision for depletion, depreciation and accretion includes $126,121 for accretion of asset retirement obligations. During the period ended December 31, 2005, the Company capitalized $205,024 of general and administrative costs and $119,902 of stock-based compensation.

The Company performed an impairment test calculation at December 31, 2005 to assess the recoverable value of the oil and natural gas properties. The oil and natural gas future prices are based on January 1, 2006 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, 2005.



Edmonton
Foreign Light
WTI Oil Exchange Crude Oil AECO Gas
Year ($US/bbl) Rate ($Cdn/bbl) ($Cdn/mmbtu)
-------------------------------------------------------------------

2006 57.00 0.850 66.25 10.60
2007 55.00 0.850 64.00 9.25
2008 51.00 0.850 59.25 8.00
2009 48.00 0.850 55.75 7.50
2010 46.50 0.850 54.00 7.20
2011 45.00 0.850 52.25 6.90
2012 45.00 0.850 52.25 6.90
2013 46.00 0.850 53.25 7.05
2014 46.75 0.850 54.25 7.20
2015 47.75 0.850 55.50 7.40
2016 48.75 0.850 56.50 7.55
Escalate
Thereafter 2.0% per year 2.0% per year 2.0% per year
-------------------------------------------------------------------
-------------------------------------------------------------------


4. REVOLVING CREDIT FACILITY

The Company has a revolving operating demand loan credit facility available up to $10.5 million bearing interest at prime with a Canadian bank. The credit facility is secured by a $30 million fixed and floating charge debenture on the assets of the Company.

5. 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) required to settle its asset retirement obligations is approximately $13.8 million which is estimated to be incurred between 2006 to 2032. A credit-adjusted risk-free rate of 7% was used to calculate the fair value of the asset retirement obligations.

A reconciliation of the asset retirement obligations is provided below:



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

Balance, beginning of period -
Liabilities transferred upon Plan of
Arrangement (note 2) 3,206,034
Liabilities incurred in period 443,190
Accretion expense 126,161
--------------------------------------------------------------------
Balance at December 31, 2005 3,775,385
--------------------------------------------------------------------


6. 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 net earnings before income taxes. The reasons for the difference between such expected income tax expense and the amount recorded are as follows:



Income tax rate 37.62%
--------------------------------------------------------------------
$
Expected income tax expense 1,576,420
Increase in income taxes resulting from:
Non-deductible crown charges 550,586
Resource allowance (555,881)
Capital taxes 54,521
Reduction of tax rates (182,717)
Non-deductible stock-based compensation 217,252
Other non-deductible items 1,927
--------------------------------------------------------------------
1,662,108
--------------------------------------------------------------------


b) The components of the net future income tax liability at December
31, 2005 are as follows:


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

Future income tax liabilities:
Oil and natural gas properties and equipment (2,807,557)
Future income tax assets:
Asset retirement obligations 1,269,284
Share issue costs 436,679
--------------------------------------------------------------------
Net future income tax liability (1,101,594)
--------------------------------------------------------------------


7. CAPITAL STOCK

a) Authorized:

Unlimited number of voting common shares and non-voting common shares.

b) Issued and outstanding:



Number Amount ($)
--------------------------------------------------------------------
Voting common shares
Issued for cash
Incorporation 1 1
Private placement 3,000,000 22,500,000
Exercise of warrants 997 2,682
Issued upon Plan of
Arrangement (note 2) 14,290,421 41,389,355
Share issue costs (net of
future taxes of $505,993) - (947,176)
--------------------------------------------------------------------
17,291,419 62,944,862
Non-voting common shares
Private placement (note 7(c)) 3,076,923 8,923,077

--------------------------------------------------------------------
Balance at December 31, 2005 20,368,342 71,867,939
--------------------------------------------------------------------

--------------------------------------------------------------------
Warrants (note 7(c)) 3,775,258 1,208,229
--------------------------------------------------------------------

--------------------------------------------------------------------
Total net book value of
common shares and warrants 73,076,168
--------------------------------------------------------------------


On June 21, 2005, the Company completed a private placement financing for an aggregate of 3,076,923 units at a price of $3.25 per unit for gross proceeds of $10,000,000. Each unit is comprised of one non-voting common share and one non-voting common share purchase warrant of the Company. The fair value of the warrants was $1,076,923 (see note 7(C)). 2,256,500 of these units were issued to officers, directors, and employees of the Company with service commitments ranging from one to three years. If the service commitment is not met, the Company will have the option to buy back the units at the original $3.25 issue price on a pro-rata basis reflecting the time of service completed.



c) Warrants

Weighted
Number of Average Expiry
Warrants Price ($) Amount ($) Date
--------------------------------------------------------------------
Balance, beginning
of period - - - -
Plan of Arrangement
(note 2) 618,100 2.10 103,754 May 26,
2009
Plan of Arrangement
(note 2) 81,232 2.35 27,891 April 12,
2007
Private placement 3,076,923 5.80 1,076,923 June 21,
2010
Exercised for
shares (997) 2.35 (339)
--------------------------------------------------------------------
Balance at
December 31, 2005 3,775,258 5.12 1,208,229
--------------------------------------------------------------------


On June 21, 2005, the Company issued 3,076,923 non-voting common share purchase warrants as part of the initial private placement (see note 7(b)). The fair value of the warrants at issue date was estimated at $1,076,923 using the Black-Scholes option pricing model with the following assumptions: dividend yield - nil; expected volatility - 32%; risk-free interest rate - 3.1%; expected life - 4 years; and estimated value of underlying shares - $2.90.

d) Stock options

The Company has authorized the issuance of 1,749,000 common shares under a stock option plan enabling certain officers, directors, employees and consultants to purchase common shares. The Company has reserved for issuance 1,749,000 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 is not less than the weighted average trading price of the Company's shares for the five day period preceding 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, 2005, 1,749,000 options have been granted and are outstanding at prices ranging from $7.60 - $8.08 per share with expiry dates ranging from June 30, 2010 to October 3, 2010.



The Company had the following stock options outstanding at December
31, 2005:

Weighted
Weighted Average
Number of Average Years to
Options Price ($) Expiry
---------------------------------------------------------------------
Balance, beginning of period - - -
Options granted 1,749,000 7.62 4.51
---------------------------------------------------------------------
Balance at December 31, 2005 1,749,000 7.62 4.51
---------------------------------------------------------------------
---------------------------------------------------------------------

Exercisable at December 31, 2005 - - -
---------------------------------------------------------------------
---------------------------------------------------------------------


e) Stock-based compensation

The compensation cost recognized during the period ended December 31, 2005 for the stock option plan was $697,393, of which $577,491 has been charged against income and $119,902 has been capitalized.

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



Period Ended December 31, 2005
--------------------------------------------------------------------
Fair value per option $2.28
Risk-free rate 3.2%
Expected life 4 years
Expected volatility 32.0%
Dividend yield -
--------------------------------------------------------------------


f) Per share information

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


--------------------------------------------------------------------
Basic 19,823,867
Dilutive effect of warrants 1,264,817
--------------------------------------------------------------------
Diluted 21,088,684
--------------------------------------------------------------------
--------------------------------------------------------------------


For the period ended December 31, 2005, 1,749,000 stock options were not included in the calculation of dilutive common shares as they were anti-dilutive.

8. FINANCIAL INSTRUMENTS

a) Fair values

The carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and deposits, 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 large credit worthy purchasers. As at December 31, 2005, $1,774,574 was receivable from Vault Energy Trust, which included standard joint venture amounts and revenue from purchasers collected on Chamaelo's behalf.

c) 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.



9. SUPPLEMENTAL CASH FLOW INFORMATION

a) Net change in non-cash working capital

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

Accounts receivable (5,998,265)
Prepaid expenses and deposits (224,574)
Accounts payable and accrued liabilities 11,594,829
Capital taxes payable 54,521
--------------------------------------------------------------------
Net change in non-cash working capital 5,426,511
--------------------------------------------------------------------
--------------------------------------------------------------------

Relating to:
Operating (3,518,054)
Investing 8,944,565
--------------------------------------------------------------------
Net change in non-cash working capital 5,426,511
--------------------------------------------------------------------
--------------------------------------------------------------------

b) Interest and taxes

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

Cash interest received 295,611
Cash interest paid (13,631)
--------------------------------------------------------------------
281,980

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

10. COMMITMENTS

The Company is committed to payments under an operating lease for
office space as follows:

Amount ($)
--------------------------------------------------------------------
2006 313,261
2007 313,261
2008 313,261
2009 243,968
2010 -
--------------------------------------------------------------------
1,183,751
--------------------------------------------------------------------
--------------------------------------------------------------------


11. SUBSEQUENT EVENTS

a) On January 5, 2006, the Company entered into a Plan of Arrangement whereby it combined with two private companies - Tournament Energy Ltd. ("Tournament") and Tropic Networks Inc. ("Tropic"). Tournament has oil and gas assets located in Chamaelo's West Central Alberta core area. Tropic is a company that sought to reorganize and enter the oil and gas business and has a technology business that will be distributed to its existing shareholders as part of the Plan of Arrangement. The combined entity will carry on with the name Chamaelo Exploration Ltd. and will continue to trade on the Toronto Stock Exchange under the symbol "CXN". Chamaelo is treated as the deemed acquirer for accounting purposes and the continuing entity.

The following table details the preliminary purchase price allocation for the business combination including Tropic and Tournament, which is subject to final adjustments:



Net assets acquired Amount ($)
--------------------------------------------------------------------
Working capital 10,097,506
Oil and natural gas properties and equipment 163,000,000
Asset retirement obligation (1,896,117)
Goodwill 23,808,613
Future income tax benefit 22,130,686
--------------------------------------------------------------------
217,140,688
--------------------------------------------------------------------
--------------------------------------------------------------------

Consideration of business combination
Cash 84,700,690
Issuance of 18,969,723 common shares 129,939,998
Transaction costs 2,500,000
--------------------------------------------------------------------
217,140,688
--------------------------------------------------------------------
--------------------------------------------------------------------


The net cash consideration for the business combination was $73,707,083 comprised of the original $84,700,690 cash, transaction costs of $2,500,000 less a $13,493,607 cash balance acquired from Tournament.

b) Before the Plan of Arrangement, Tropic and Tournament closed equity financing agreements, on a "bought deal" private placement basis as more fully described below.

Tropic issued 13,000,000 subscription receipts ("Subscription Receipts") at a price of $6.75 per Subscription Receipt for gross proceeds of $87,750,000. Each Subscription Receipt was exchanged for one voting common share of Chamaelo pursuant to the Plan of Arrangement.

Tournament issued 800,000 flow-through special warrants ("Special Warrants") for gross proceeds of $6,000,000. The Special Warrants were converted into voting common shares of Chamaelo pursuant to the Plan of Arrangement at a ratio of 0.8928 of a voting common share per Special Warrant. Conversion of the Special Warrants resulted in 714,240 voting common shares of Chamaelo at an implied issue price of $8.40 per share.

Share issue costs of $5,665,295 were deducted from the gross proceeds of $93,750,000.

The remaining 5,255,483 voting common shares issued as the result of the Plan of Arrangement were issued as non-cash consideration for the business combination.

c) Subsequent to December 31, 2005, the Company amended its credit facility with a Canadian bank. Under the amended agreement, the amount available on the revolving operating demand loan increased to $60.0 million bearing interest at prime plus a premium ranging between 0% and 1.00% based on the Company's debt to cash flow ratio. The security on the credit facility now includes a $100 million supplemental fixed and floating charge debenture on the assets of the Company.



CORPORATE INFORMATION

OFFICERS AND DIRECTORS

Robert J. Zakresky, CA
President, CEO and Director

Nolan Chicoine, MPAcc, CA
VP Finance and CFO

Terry L. Trudeau, P.Eng.
VP Operations and COO

Weldon Dueck, BSc., P.Eng.
VP Business Development

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

Helmut R. Eckert, P.Land
VP Land

Larry G. Moeller, CA, CBV
Chairman of the Board

Daryl H. Gilbert, P.Eng.
Director

Don Cowie
Director

Brian Krausert
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
1800, 350 - 7th Avenue S.W.
Calgary, Alberta T2P 3N9

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

INDEPENDENT ENGINEERS
GLJ Petroleum Consultants Ltd.
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).

Contact Information

  • Chamaelo Exploration Ltd.
    Robert J. Zakresky
    President & CEO
    (403) 705-3006
    or
    Chamaelo Exploration Ltd.
    Nolan Chicoine
    VP Finance & CFO
    (403) 705-3022
    or
    Chamaelo Exploration Ltd.
    700, 639 -5th Ave SW
    Calgary, Alberta T2P 0M9
    (403) 705-3135
    (403) 705-3130 (FAX)
    Website: www.chamaelo.ca