Chamaelo Exploration Ltd.
TSX : CXN

Chamaelo Exploration Ltd.

August 11, 2005 06:00 ET

Chamaelo Exploration Ltd.: Second Quarter Financial and Operating Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - CHAMAELO EXPLORATION LTD. (TSX:CXN) is pleased to announce its results for the period ended June 30, 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".

- Announced a bought deal financing for 3,000,000 common shares priced at $7.50 per share for gross proceeds of $22,500,000, which closed on July 27, 2005.



------------------------------------------------------------------------
Period Ended
FINANCIAL (1) June 30, 2005 (1)
------------------------------------------------------------------------
($, except where noted)
Oil and natural gas sales 488,479

Cash flow from operations 117,232
per share - basic 0.01
per share - diluted 0.01

Net loss (22,910)
per share - basic -
per share - diluted -

Capital expenditures 1,019,437

Net cash and working capital 9,097,796

Common shares outstanding (2)
weighted average - basic 17,367,345
- diluted 18,719,540

end of period - basic 17,367,345
- diluted 22,783,600

(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 9-day period from June 22, 2005 to June 30, 2005.

(2) Common shares outstanding does not include the 3,000,000 shares
issued on July 27, 2005.


------------------------------------------------------------------------
Period ended
OPERATING (1) June 30, 2005
------------------------------------------------------------------------
Number of producing days 9

Daily production
Oil and liquids - (bbls/d) 431
Natural gas - (mcf/d) 3,716
------------------------------------------------------------------------
Oil equivalent - (boe/d @6:1) 1,050

Revenue, net of transportation
Oil and liquids - ($/bbl) 63.45
Natural gas - ($/mcf) 6.87
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 50.33

Royalties
Oil and liquids - ($/bbl) 12.01
Natural gas - ($/mcf) 1.55
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 10.42

Production expenses
Oil and liquids - ($/bbl) 11.32
Natural gas - ($/mcf) 1.65
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 10.48

Operating netback
Oil and liquids - ($/bbl) 40.12
Natural gas - ($/mcf) 3.67
------------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 29.43

(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 9-day period from June 22, 2005 to June 30, 2005.


Message to Shareholders

Chamaelo Exploration Inc. ("Chamaelo" or the "Company") commenced operations on June 22, 2005 after completion of the Plan of Arrangement whereby Chamaelo Energy Inc. was split into two new entities.

We have made great strides in positioning the Company for growth by

- Hiring an experienced management team

- Assembling a strong board of directors

- Raising additional capital to strengthen the balance sheet equity

- Identifying a diverse number of opportunities on the current property base

Chamaelo is focused on light oil and natural gas in its core areas of West Central Alberta and North East BC. Initially, the bulk of its capital program will be targeting drilling for natural gas in West Central Alberta. As of the time of this release, the Company has drilled 3 successful wells in West Central Alberta and has plans to drill an additional 14-18 wells prior to year-end. We anticipate that we will augment the drilling inventory and production base with strategic acquisitions over the course of the next 12 months.



Sincerely,

'signed'

Rob Zakresky
President & Chief Executive Officer


Management's Discussion and Analysis

August 8, 2005

Chamaelo Exploration Ltd. "(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 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 interim financial statements for the period ended June 30, 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 9-day period from June 22, 2005 to June 30, 2005.

Chamaelo commenced trading on the Toronto Stock Exchange on June 27, 2005 under the symbol "CXN".

The MD&A should be read in conjunction with the unaudited interim financial statements for the period ended June 30, 2005. 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 unaudited interim 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).

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.



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

Summary of Financial Results (1) Period ended June 30, 2005 (1)
------------------------------------------------------------------------
($, except where noted)
Oil and natural gas sales 488,479

Cash flow from operations 117,232
per share - basic 0.01
per share - diluted 0.01

Net loss (22,910)
per share - basic 0.05
per share - diluted 0.05

Total assets 56,245,359

Net cash and working capital 9,097,796

Total long-term liabilities 3,230,512

(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 9-day period from June 22, 2005 to June 30, 2005.


Production Period ended June 30, 2005
------------------------------------------------------------------------
Average Daily Production
Oil and liquids (bbls/d) 431
Natural gas (mcf/d) 3,716
------------------------------------------------------------------------
Total (boe/d) 1,050
------------------------------------------------------------------------
------------------------------------------------------------------------


The reported oil and natural gas production reflects operating activities for the Company's first 9 days of operations from June 22, 2005 to June 30, 2005. On a combined basis, average daily production totaled 1,050 boe/d. Crude oil and natural gas liquids production averaged 431 boe/d while natural gas production averaged 3,716 mcf/d over the nine-day period.



Revenue

Period ended June 30, 2005
------------------------------------------------------------------------
$
Oil and liquids 250,805
Natural gas 237,674
------------------------------------------------------------------------
Total revenue 488,479
Transportation expenses (12,851)
------------------------------------------------------------------------
Total revenue, net of transportation 475,628
------------------------------------------------------------------------
------------------------------------------------------------------------


Average Sales Price
------------------------------------------------------------------------
Oil and liquids ($/bbl) 64.72
Natural gas ($/mcf) 7.11
------------------------------------------------------------------------
Average sales price ($/boe) 51.69
Transportation expenses ($/boe) (1.36)
------------------------------------------------------------------------
Average sales price ($/boe), net of transportation 50.33
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenue totaled $488,479 for the period. 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 June 30, 2005
------------------------------------------------------------------------
$US $Cdn

Oil and liquids
Corporate Price $/bbl 64.72
West Texas Intermediate $/bbl 56.25
Edmonton Par $/bbl 70.05

Natural gas
Corporate Price $/mcf 7.11
AECO Daily Spot Price $/mcf 7.08

Exchange Rates
U.S./Cdn Dollar Average Exchange Rate 0.8057


Corporate average oil and natural gas liquids price was 92.4% of Edmonton Par price or a discount of $5.33 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 June 30, 2005
------------------------------------------------------------------------
Oil and liquids ($/bbl) 1.27
Natural gas ($/mcf) 0.24
------------------------------------------------------------------------
Total ($/boe) 1.36
------------------------------------------------------------------------
------------------------------------------------------------------------


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 June 30, 2005
------------------------------------------------------------------------
$
Oil and liquids 46,522
Natural gas 51,947
------------------------------------------------------------------------
Total royalties 98,469
------------------------------------------------------------------------
------------------------------------------------------------------------


Average Royalty Rate (% of sales)
------------------------------------------------------------------------
Oil and liquids 18.5
Natural gas 21.9
------------------------------------------------------------------------
Average royalty rate 20.2
------------------------------------------------------------------------
------------------------------------------------------------------------


Crude oil, natural gas liquids and natural gas royalties totaled $98,469 in the period. The overall effective royalty rate was 20.2 percent of the Company's total revenue from the sale of crude oil, natural gas liquids and natural gas.



Production Expenses

Period ended June 30, 2005
------------------------------------------------------------------------
Oil and liquids ($/bbl) 11.32
Natural gas ($/mcf) 1.65
------------------------------------------------------------------------
Total ($/boe) 10.48
------------------------------------------------------------------------
------------------------------------------------------------------------


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 netbacks.



Operating Netback

Period ended June 30, 2005
------------------------------------------------------------------------
Oil and liquids ($/bbl)
Revenue 64.72
Royalties 12.01
Production expenses 11.32
Transportation expenses 1.27
------------------------------------------------------------------------
Operating netback 40.12
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Natural gas ($/mcf)
Revenue 7.11
Royalties 1.55
Production expenses 1.65
Transportation expenses 0.24
------------------------------------------------------------------------
Operating netback 3.67
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Combined $/Boe (6:1)
Revenue 51.69
Royalties 10.42
Production expenses 10.48
Transportation expenses 1.36
------------------------------------------------------------------------
Operating netback 29.43
------------------------------------------------------------------------
------------------------------------------------------------------------


The operating netback is a key indicator of an exploration and production Company's ability to generate cash flow for reinvestment. During the period, Chamaelo generated an operating netback of $29.43 per boe.

General and Administrative Expenses

General and administrative costs ("G&A") totaled $160,879 in the period. On a unit-of-production basis, G&A costs were $17.02 per boe. The amount per boe is unusually high due to costs associated with the start-up of the business and commencement of operations over only a nine-day period. For the remainder of 2005, Chamaelo anticipates it will incur approximately $765,000 of G&A costs. The Company expects per-unit G&A costs will decline significantly as production levels increase. No G&A costs were capitalized during the period.



Depletion, Depreciation and Accretion ("DD&A")

Period ended June 30, 2005
------------------------------------------------------------------------
DD&A ($) 136,742
DD&A ($/boe) 14.47
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company's DD&A expense totaled $136,742 during the period. On a unit-of-production basis the DD&A provision was $14.47 per boe. During the period ended June 30, 2005, the provision for DD&A includes $3,787 ($0.40 per boe) for accretion of asset retirement obligations.

Taxes

A valuation allowance has been realized against the future tax asset, which results from tax pools exceeding carrying values of the net assets. The Company has approximately $42.5 million in tax pools to shelter against future income.

Cash Flow and Net Loss

The recognition of operating results from the shortened period for oil and natural gas activities, combined with the costs associated with the corporate start-up, initial business development and the commencement of operations, resulted in only slightly positive cash flow for the period of $117,232 and an operating loss of $22,910 in its abbreviated first quarter of operations.

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 acquisition of assets by the Company will be accounted for as a continuity of interests under which the assets and liabilities will be 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 capital expenditures, excluding the assets acquired in the Plan of
Arrangement, totalled $1,019,437 as tabled below:


Period ended June 30, 2005
------------------------------------------------------------------------
$
Drilling, completions and workovers 846,237
Geological and Geophysical 173,200
------------------------------------------------------------------------
1,019,437
------------------------------------------------------------------------
------------------------------------------------------------------------


During the first 9 days of operations from June 22, 2005 to June 30, 2005, Chamaelo worked over two wells and commenced drilling its first successful natural gas well.

Liquidity and Capital Resources

Net cash and working capital was $9.1 million at June 30, 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 June 30, 2005, the Company received a letter proposal from a Canadian bank for a revolving credit facility available up to $10.5 million bearing interest at prime. The security on the credit facility would include a $30 million 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 Period ended June 30, 2005
------------------------------------------------------------------------
$

Oil and natural gas sales 488,479

Cash flow from operations 117,232
per share - basic 0.01
per share - diluted 0.01

Net loss (22,910)
per share - basic -
per share - diluted -
------------------------------------------------------------------------


Outstanding Share Data

The Company is authorized to issue an unlimited number of voting common shares, non-voting common shares and preferred shares. No preferred shares have been issued. The voting common shares of the Company are traded on the Toronto Stock Exchange ("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:



------------------------------------------------------------------------
June 30, 2005 August 8, 2005
------------------------------------------------------------------------
Voting common shares 14,290,422 17,290,422
Non-voting common shares 3,076,923 3,076,923
Options 1,640,000 1,640,000
Warrants 3,776,255 3,776,255
------------------------------------------------------------------------
Total 22,783,600 25,783,600
------------------------------------------------------------------------
------------------------------------------------------------------------

Commitments

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

Amount ($)
------------------------------------------------------------------------
2005 150,616
2006 313,261
2007 313,261
2008 313,261
2009 243,968
------------------------------------------------------------------------
1,334,367
------------------------------------------------------------------------


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. 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 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.

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 the remainder of 2005 based on Management's best estimates and the assumptions noted.



Estimated Production

Guidance
Remainder of 2005
------------------------------------------------------------------------
Average Daily Production
Oil (bbls/d) 431
Natural gas (mcf/d) 3,716
------------------------------------------------------------------------
Total (boe/d) 1,050
------------------------------------------------------------------------
------------------------------------------------------------------------

Estimated Financial Results

Guidance
Remainder of 2005
------------------------------------------------------------------------
Oil and natural gas sales ($) 8,664,000

Cash flow from operations ($) 3,885,000
$ per share - basic 0.19
$ per share - diluted 0.18

Capital expenditures ($) 10,000,000

West Texas Intermediate $US/bbl 46.50
AECO Daily Spot Price $Cdn/mcf 6.75
U.S./Cdn Dollar Average Exchange Rate 0.800
------------------------------------------------------------------------
------------------------------------------------------------------------


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 the remainder of 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
Remainder of 2005 factor cash flows
------------------------------------------------------------------------
West Texas Intermediate
$US/bbl 46.50 US $1.00/bbl Cdn $60,300
AECO Daily Spot Price
$Cdn/mcf 6.75 Cdn $0.10/mcf Cdn $55,700
U.S./Cdn Dollar Average
Exchange Rate 0.800 Cdn $0.01 Cdn $34,600
------------------------------------------------------------------------
------------------------------------------------------------------------


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 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, may be found on the SEDAR website at www.sedar.com.

The following interim financial statements of the Company have not been reviewed by the Company's auditors.



Chamaelo Exploration Ltd.
Balance Sheet

As at June 30, 2005
------------------------------------------------------------------------

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

Assets
Current assets:
Cash 9,999,993
Accounts receivable 488,479
Prepaid expenses and deposits 122,680
------------------------------------------------------------------------
10,611,152

Oil and natural gas properties and equipment
(note 3) 45,634,207

------------------------------------------------------------------------
56,245,359
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities 1,513,356

Asset retirement obligations (note 4) 3,230,512

Shareholders' equity:
Share capital (note 6) 51,521,001
Contributed surplus 3,400
Deficit (22,910)
------------------------------------------------------------------------
51,501,491

Commitments (note 8)
Subsequent events (note 9)
------------------------------------------------------------------------
56,245,359
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the financial statements


Chamaelo Exploration Ltd.
Statement of Operations and Deficit

Period ended June 30, 2005
------------------------------------------------------------------------

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

Revenue:
Oil and natural gas 488,479
Transportation expense (12,851)
Royalties (98,469)
------------------------------------------------------------------------
377,159
Expenses:
Production 99,048
General and administrative 160,879
Stock-based compensation 3,400
Depletion, depreciation and accretion 136,742
------------------------------------------------------------------------
400,069

------------------------------------------------------------------------
Earnings before taxes (22,910)

Taxes:
Future income taxes (note 5) -

Net loss (22,910)
Deficit, beginning of period -
------------------------------------------------------------------------
Deficit, end of period (22,910)
------------------------------------------------------------------------
------------------------------------------------------------------------


Net loss per share:
Basic -
Diluted -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the financial statements


Chamaelo Exploration Ltd.
Statement of Cash Flows

Period ended June 30, 2005
------------------------------------------------------------------------

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

Operating:
Net loss (22,910)
Items not affecting cash:
Depletion, depreciation and accretion 136,742
Stock-based compensation 3,400
------------------------------------------------------------------------
Cash flow from operations 117,232
Net change in non-cash operating working capital (117,240)
------------------------------------------------------------------------
(8)
------------------------------------------------------------------------
------------------------------------------------------------------------

Financing:
Issuance of share capital 10,000,001
------------------------------------------------------------------------
10,000,001
------------------------------------------------------------------------
------------------------------------------------------------------------

Investing:
Purchase and development of oil and natural gas
properties and equipment (1,019,437)
Net change in non-cash investing working capital 1,019,437
------------------------------------------------------------------------
-
------------------------------------------------------------------------

Change in cash 9,999,993
Cash, beginning of period -
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash, end of period 9,999,993
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the financial statements


Chamaelo Exploration Ltd.
Notes to the Financial Statements
Period ended June 30, 2005


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. As a result, the financial statements prepared are for the period from June 22, 2005 to June 30, 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 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 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.

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.

g) 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.

h) Stock-based compensation

The Company has a stock-based compensation plan, which is described in note 6. 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.

i) 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 acquisition of assets by the Company will be accounted for as a continuity of interests under which the assets and liabilities will be 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 45,734,736 132,955 45,601,781
Office and other equipment 32,426 - 32,426
------------------------------------------------------------------------
45,767,162 132,955 45,634,207
------------------------------------------------------------------------
------------------------------------------------------------------------


As at June 30, 2005, the cost of oil and natural gas properties includes $6,000,000 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 June 30, 2005 the provision for depletion, depreciation and accretion includes $3,787 for accretion of asset retirement obligations. During the period ended June 30, 2005, the Company did not capitalize any general and administrative costs.

The Company performed an impairment (ceiling) test calculation at June 30, 2005 to assess the recoverable value of the oil and natural gas properties. The oil and natural gas future prices are based on July 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 June 30, 2005.



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

2005 55.00 0.820 66.00 7.65
2006 55.00 0.820 66.00 7.75
2007 52.00 0.820 62.75 7.35
2008 48.00 0.820 57.75 7.10
2009 45.00 0.820 54.25 6.80
2010 42.00 0.820 50.50 6.50
2011 40.00 0.820 48.00 6.50
2012 40.00 0.820 48.00 6.50
2013 40.75 0.820 49.00 6.65
2014 41.50 0.820 50.00 6.85
2015 42.50 0.820 51.00 7.00
Escalate
Thereafter 2.0% per year 2.0% per year 2.0% per year
------------------------------------------------------------------------
------------------------------------------------------------------------


4. 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 $11.7 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 25, 2005, date of incorporation -
Liabilities transferred upon Plan of Arrangement (note 2) 3,206,034
Liabilities incurred in period 20,691
Liabilities settled in period -
Accretion expense 3,787
------------------------------------------------------------------------
Balance at June 30, 2005 3,230,512
------------------------------------------------------------------------
------------------------------------------------------------------------


5. TAXES

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



Income tax rate 37.62%
------------------------------------------------------------------------
$
Expected income tax recovery (8,619)
Increase in income taxes resulting from:
Non-deductible crown charges 15,869
Resource allowance (11,295)
Non-deductible stock-based compensation 1,279
Provision against realization 2,766
------------------------------------------------------------------------
-
------------------------------------------------------------------------
------------------------------------------------------------------------

b) The components of the net future income tax liability at June 30,
2005 are as follows:

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

Future income tax liabilities:
Oil and natural gas properties and equipment (1,083,332)
Future income tax assets:
Asset retirement obligations 1,086,098
Provision against realization (2,766)
------------------------------------------------------------------------
Net future income tax liability -
------------------------------------------------------------------------
------------------------------------------------------------------------

6. SHARE CAPITAL

a) Authorized:

Unlimited number of voting common shares
Unlimited number of non-voting common shares
Unlimited number of preferred shares

b) Issued and outstanding:

Number of
Shares Amount ($)
------------------------------------------------------------------------
Voting common shares
Issued on incorporation 1 1
Issued pursuant to Plan of Arrangement (note 2) 14,290,421 41,389,355
------------------------------------------------------------------------
14,290,422 41,389,356
Non-voting common shares
Private placement (note 6(c)) 3,076,923 8,923,077

------------------------------------------------------------------------
Balance at June 30, 2004 17,367,345 50,312,433
------------------------------------------------------------------------

------------------------------------------------------------------------
Warrants (note 6(c)) - 1,208,568
------------------------------------------------------------------------

------------------------------------------------------------------------
Total value of common shares and warrants 51,521,001
------------------------------------------------------------------------
------------------------------------------------------------------------

No preferred shares have been issued.


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 6(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 at April 25,
2005, Incorporation - - - -
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
------------------------------------------------------------------------
Balance at June 30,
2005 3,776,255 5.12 1,208,568
------------------------------------------------------------------------
------------------------------------------------------------------------


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 6 (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%; and expected life of 4 years.

d) Stock options

The Company has authorized the issuance of 1,729,042 common shares under a stock option plan enabling certain officers, directors, employees and consultants to purchase common shares. The Company has reserved for issuance 1,729,042 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. On June 30, 2005, the company granted 1,640,000 options at an exercise price of $7.60 expiring on June 30, 2010. At June 30, 2005 there were no options exercisable.

e) Stock-based compensation

The compensation cost that has been charged against income for the stock option plan during the period ended June 30, 2005 was $3,400.

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 June 30, 2005
------------------------------------------------------------------------
Fair value per option $2.27
Risk-free rate 3.1%
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 17,367,345
Diluted 18,719,540
------------------------------------------------------------------------


7. FINANCIAL INSTRUMENTS

a) Fair values

The carrying value of cash, accounts receivable, 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

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.



8. COMMITMENTS

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

Amount ($)
------------------------------------------------------------------------
2005 150,616
2006 313,261
2007 313,261
2008 313,261
2009 243,968
------------------------------------------------------------------------
1,334,367
------------------------------------------------------------------------
------------------------------------------------------------------------


9. SUBSEQUENT EVENTS

a) Subsequent to June 30, 2005, the Company received a letter proposal from a Canadian bank for a revolving credit facility available up to $10.5 million bearing interest at prime. The security on the credit facility would include a $30 million fixed and floating charge debenture on the assets of the Company.

b) 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.



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

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
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).


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.
    Suite 700, 639 - 5th Avenue S.W.
    Calgary, Alberta T2P 0M9
    (403) 705-3135
    (403) 705-3130 (FAX)
    Website: www.chamaelo.ca