Chamaelo Exploration Ltd.
TSX : CXN

Chamaelo Exploration Ltd.

August 10, 2006 06:00 ET

Chamaelo Exploration Ltd.: Second Quarter Financial and Operating Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2006) - CHAMAELO EXPLORATION LTD. (TSX:CXN) is pleased to announce its results for the three and six months ended June 30, 2006.

Highlights

- Drilled 16 (12.5 net) wells, resulting in 9.3 net oil wells, 1.4 net natural gas wells, 1.0 net potential natural gas well, and 0.8 net dry holes for an overall success rate of 94%.

- Increased credit facilities to $110.0 million.

- Increased production 262% to 3,804 boepd in Q2 2006 from 1,050 boepd in Q2 2005(1).

- Signed agreement to purchase Pembina property for $8 million.



Three Months Ended June 30 Six Months Ended June 30
% %
FINANCIAL 2006 2005 (1) Change 2006 2005 (1) Change
------------------------------------------------------------------------
($000s, except per
share amounts)

Oil and natural gas
sales 19,296 488 3,854 37,549 488 7,594

Funds from operations 10,097 117 8,530 20,206 117 17,170
per share - basic 0.26 0.01 2,500 0.52 0.01 5,100
per share - diluted 0.25 0.01 2,400 0.51 0.01 5,000

Net loss (2,677) (23) 11,539 (2,567) (23) 11,061
per share - basic (0.07) - (100) (0.07) - (100)
per share - diluted (0.07) - (100) (0.06) - (100)

Capital expenditures 25,903 1,019 2,442 46,331 1,019 4,447

Debt and working
capital (79,993) 9,098 (979)

Common shares
outstanding (000s)
weighted average
- basic 39,344 17,367 127 38,924 17,367 124
weighted average
- diluted 39,892 18,720 113 39,706 18,720 112

end of period
- basic 39,344 17,367 127
end of period
- diluted 46,613 22,784 105

(1) The Company was incorporated on April 25, 2005 and began active
operations on June 22, 2005. As such, comparative results from oil
and natural gas activities take into account only the 9-day period
from June 22, 2005 to June 30, 2005.


Three Months Ended June 30 Six Months Ended June 30
% %
OPERATING 2006 2005 (1) Change 2006 2005 (1) Change
------------------------------------------------------------------------

Number of producing
days 91 9 181 9

Daily production
Oil and liquids
- (bbls/d) 1,784 431 314 1,706 431 296
Natural gas
- (mcf/d) 12,118 3,716 226 12,047 3,716 224
------------------------------------------------------------------------
Oil equivalent
- (boe/d @6:1) 3,804 1,050 262 3,714 1,050 254

Revenue, net of
transportation
Oil and liquids
- ($/bbl) 73.75 63.45 16 69.26 63.45 9
Natural gas
- ($/mcf) 6.21 6.87 (10) 7.01 6.87 2
------------------------------------------------------------------------
Oil equivalent
- ($/boe @6:1) 54.38 50.33 8 54.53 50.33 8

Royalties
Oil and liquids
- ($/bbl) 16.80 12.01 40 15.09 12.01 26
Natural gas
- ($/mcf) 1.72 1.55 11 1.72 1.55 11
------------------------------------------------------------------------
Oil equivalent
- ($/boe @6:1) 13.35 10.42 28 12.51 10.42 20

Production expenses
Oil and liquids
- ($/bbl) 7.56 11.32 (33) 7.38 11.32 (35)
Natural gas
- ($/mcf) 1.28 1.65 (22) 1.29 1.65 (22)
------------------------------------------------------------------------
Oil equivalent
- ($/boe @6:1) 7.62 10.48 (27) 7.57 10.48 (28)

Operating netback
Oil and liquids
- ($/bbl) 49.39 40.12 23 46.79 40.12 17
Natural gas
- ($/mcf) 3.21 3.67 (13) 4.00 3.67 9
------------------------------------------------------------------------
Oil equivalent
- ($/boe @6:1) 33.41 29.43 14 34.45 29.43 17

(1) The Company was incorporated on April 25, 2005 and began active
operations on June 22, 2005. As such, comparative 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

I am pleased to report that Chamaelo has continued to make progress in growing its production on a quarter over quarter basis and year over year basis in the second quarter of 2006 while continuing to generate strong overall netbacks. Strong oil netbacks of $49.39/boe were offset to a certain degree by natural gas netbacks of $19.26/boe resulting in a blended netback of $33.41.

In the second quarter, Chamaelo made the decision to focus almost all its capital on oil weighted properties which has resulted in current production being over 50% light oil and natural gas liquids. This decision has assisted us in continuing to generate strong cash flow given that world oil prices have risen to over $US75 per barrel.

Net debt has risen to approximately $80 million at the end of June due to a very active drilling program while credit facilities were renegotiated to $110 million. We anticipate that we will exit 2006 with no more than $90 million in net debt including the Pembina acquisition noted below.

Operationally, Chamaelo has continued to increase production and averaged approximately 4,450 boepd for the last week of July. An additional 300 boepd will come on during August with drilling continuing in various areas. Light oil drilling at Fireweed and Wilson Creek will commence in late August while drilling for liquids rich natural gas at Gosling and Willesden Green will start in early fall.

Chamaelo closed the acquisition of a Pembina property from a major producer in July for approximately $8 million. This acquisition resulted in Chamaelo increasing its working interest to 75% from 25% in two Nisku pools as well as assume operatorship. Chamaelo will focus some of its available third quarter capital on the optimization and exploitation of these two new pools.

Overall, we believe we have developed a large opportunity base that will yield continued production and cash flow growth for the foreseeable future while still maintaining a solid capital structure.



Thank-you for your continued support of Chamaelo.

On behalf of the Board of Directors,

(signed)
Rob Zakresky, CA
President & CEO
August 10, 2006


Management's Discussion and Analysis

August 8, 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 interim consolidated financial statements for the three and six months ended June 30, 2006 and the disclosure throughout the Management's Discussion and Analysis ("MD&A") reflect Chamaelo's business for the first six months of 2006 with comparative disclosure reflecting results from oil and natural gas operations for the 9-day period from June 22, 2005 to June 30, 2005.

The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the three and six months ended June 30, 2006 and the audited annual financial statements for the period ended December 31, 2005. The unaudited interim consolidated financial statements and financial data contained in the MD&A have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") in Canadian currency (except where noted as being in another currency).

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 involves 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 Consolidated 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.



Three Months Ended June 30 Six Months Ended June 30
Summary of % %
Financial Results 2006 2005 (1) Change 2006 2005 (1) Change
------------------------------------------------------------------------
($000s, except per
share amounts)

Oil and natural gas
sales 19,296 488 3,854 37,549 488 7,594

Funds from operations 10,097 117 8,530 20,206 117 17,170
per share - basic 0.26 0.01 2,500 0.52 0.01 5,100
per share - diluted 0.25 0.01 2,400 0.51 0.01 5,000

Net loss (2,677) (23) 11,539 (2,567) (23) 11,061
per share - basic (0.07) - (100) (0.07) - (100)
per share - diluted (0.07) - (100) (0.06) - (100)

Total assets 302,558 56,245 438

Debt and working
capital (79,993) 9,098 (979)

(1) The Company was incorporated on April 25, 2005 and began active
operations on June 22, 2005. As such, comparative results from oil
and natural gas activities take into account only the 9-day period
from June 22, 2005 to June 30, 2005.


Three Months Ended June 30 Six Months Ended June 30
% %
Production 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Average Daily
Production
Oil and liquids
(bbls/d) 1,784 431 314 1,706 431 296
Natural gas (mcf/d) 12,118 3,716 226 12,047 3,716 224
------------------------------------------------------------------------
Total (boe/d) 3,804 1,050 262 3,714 1,050 254
------------------------------------------------------------------------
------------------------------------------------------------------------


Daily production for the three months ended June 30, 2006 increased 262% to 3,804 boe/d compared to 1,050 boe/d for the 9-day period ended June 30, 2005. Year-to-date, daily production averaged 3,714 boe/d, up 254% from 1,050 boe/d in the 9-day period ended June 30, 2005. Crude oil and natural gas liquids production increased 314% to 1,784 bbls/d for the three months ended June 30, 2006 and increased 296% to 1,706 bbls/d for the six months ended June 30, 2006, compared to 431 bbls/d for the 9-day period ended June 30, 2005. Natural gas production increased 226% to 12,118 mcf/d for the three months ended June 30, 2006 and increased 224% to 12,047 mcf/d for the six months ended June 30, 2006, compared to 3,716 mcf/d for the 9-day period ended June 30, 2005.

Production increased as a result of the Plan of Arrangement with Tournament Energy Ltd. ("Tournament") and Tropic Networks Inc. ("Tropic") that closed on January 5, 2006. Oil and natural gas assets acquired upon the Plan of Arrangement produced approximately 2,500 boe/d at the time of closing. Additional production increases resulted from successful drilling efforts during the first six months of 2006, which saw 23 (18.2 net) wells drilled at a success rate of 77%. During the three months ended June 30, 2006, 16 (12.5 net) wells were drilled at a success rate of 94%.



Three Months Ended June 30 Six Months Ended June 30
Revenue % %
($000s) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Oil and liquids 12,182 251 4,753 21,793 251 8,582
Natural gas 7,114 237 2,889 15,756 238 6,520
------------------------------------------------------------------------
Total revenue 19,296 488 3,854 37,549 488 7,594
Transportation
expenses (470) (13) 3,515 (893) (13) 6,769
------------------------------------------------------------------------
Total revenue, net
of transportation 18,826 475 3,863 36,656 475 7,617
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Sales Price
------------------------------------------------------------------------
Oil and liquids
($/bbl) 75.02 64.72 16 70.57 64.72 9
Natural gas ($/mcf) 6.45 7.11 (9) 7.23 7.11 2
------------------------------------------------------------------------
Average sales price
($/boe) 55.74 51.69 8 55.86 51.69 8
Transportation
expenses ($/boe) (1.36) (1.36) - (1.33) (1.36) (2)
------------------------------------------------------------------------
Average sales price
($/boe), net 54.38 50.33 8 54.53 50.33 8
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenue, before transportation, totaled $19.3 million for the three months ended June 30, 2006, up 3,854% from $0.5 million for the 9-day period ended June 30, 2005. Year-to-date, revenue, before transportation, totaled $37.5 million, an increase of 7,594% from $0.5 million for the 9-day period ended June 30, 2005. Revenue increased as a result of the Plan of Arrangement involving Tournament and Tropic that closed January 5, 2006, successful drilling efforts in the first six months of 2006, and the fact that the comparative period only had nine days of operations.

On a per unit basis, revenue, before transportation, increased 8% to $55.74/boe for the three months ended June 30, 2006 and 8% to $55.86/boe for the six months ended June 30, 2006 compared to $51.69/boe for the 9-day period ended June 30, 2005. The increase was the result of a significant increase in oil and natural gas liquids commodity prices in the first six months of 2006, which was partially offset by a decrease in natural gas prices in the second quarter of 2006.

During the first six months of 2006, the Company sold 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 first six months of 2006. Effective July 1, 2006, the Company entered into two physical sales contracts for the sale of crude oil and natural gas. The first contract is for 500 bbls/d of crude oil, with a floor price of US$64.00/bbl and a ceiling price of US$81.50/bbl, referenced to West Texas Intermediate (WTI). The second contract is for 3,000 GJ/d of natural gas, with a floor price of CDN$5.50/GJ and a ceiling price of CDN$8.85/GJ, referenced to AECO. Each contact expires on December 31, 2006.



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

Three Months Ended June 30 Six Months Ended June 30
Commodity % %
Pricing 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------

Oil and liquids
Corporate Price
($Cdn/bbl) 75.02 64.72 16 70.57 64.72 9
West Texas
Intermediate
($/USbbl) 70.36 56.25 25 66.86 56.25 19
Edmonton Par
($Cdn/bbl) 78.85 70.05 13 74.13 70.05 6

Natural gas
Corporate Price
($Cdn/mcf) 6.45 7.11 (9) 7.23 7.11 2
AECO Daily Spot Price
($Cdn/mcf) 6.01 7.08 (15) 6.78 7.08 (4)

Exchange Rates
U.S./Cdn. Dollar
Average Exchange
Rate 0.8911 0.8057 11 0.8785 0.8057 9
------------------------------------------------------------------------
------------------------------------------------------------------------


Corporate average oil and natural gas liquids prices were 95.1% and 95.2% of Edmonton Par price for the three and six months ended June 30, 2006, respectively. A difference can be a result of quality/grade (higher or lower API), sour content, natural gas liquids included in reporting and various other factors. Chamaelo's differences are mainly the result of sour content in some of its oil production and its average blend 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.



Three Months Ended June 30 Six Months Ended June 30
Transportation % %
Expenses 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Oil and liquids
($/bbl) 1.27 1.27 - 1.31 1.27 3
Natural gas ($/mcf) 0.24 0.24 - 0.22 0.24 (8)
------------------------------------------------------------------------
Total ($/boe) 1.36 1.36 - 1.33 1.36 (2)
------------------------------------------------------------------------
------------------------------------------------------------------------


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.



Three Months Ended June 30 Six Months Ended June 30
Royalties % %
($000s) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Oil and liquids 2,728 47 5,704 4,660 47 9,815
Natural gas 1,893 52 3,540 3,749 52 7,110
------------------------------------------------------------------------
Total royalties 4,621 99 4,568 8,409 99 8,394
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Royalty Rate
(% of sales)
------------------------------------------------------------------------
Oil and liquids 22.4 18.5 21 21.4 18.5 16
Natural gas 26.6 21.9 21 23.8 21.9 9
------------------------------------------------------------------------
Average royalty rate 23.9 20.2 18 22.4 20.2 11
------------------------------------------------------------------------
------------------------------------------------------------------------


Crude oil, natural gas liquids and natural gas royalties totaled $4.6 million for the three months ended June 30, 2006, up 4,568% from $0.1 million for the 9-day period ended June 30, 2005. Year-to-date, crude oil, natural gas liquids and natural gas royalties totaled $8.4 million, an increase of 8,394% from $0.1 million for the 9-day period ended June 30, 2005. The overall effective royalty rates were 23.9% and 22.4% for the three and six months ended June 30, 2006, respectively, compared to 20.2% for the 9-day period ended June 30, 2005. The increase in the effective royalty rate is a result of higher royalty rates associated with the assets acquired upon the Plan of Arrangement with Tournament and Tropic that closed on January 5, 2006.



Three Months Ended June 30 Six Months Ended June 30
Production % %
Expenses 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Oil and liquids
($/bbl) 7.56 11.32 (33) 7.38 11.32 (35)
Natural gas ($/mcf) 1.28 1.65 (22) 1.29 1.65 (22)
------------------------------------------------------------------------
Total ($/boe) 7.62 10.48 (27) 7.57 10.48 (28)
------------------------------------------------------------------------
------------------------------------------------------------------------


Per unit production expenses for the three months ended June 30, 2006 were $7.62/boe, down 27% from $10.48/boe for the 9-day period ended June 30, 2005. Year-to-date, per unit production expenses were $7.57/boe, a decrease of 28% from $10.48/boe for the 9-day period ending June 30, 3005. Per unit production expenses decreased as a result of lower per unit production expenses incurred on the oil and gas assets acquired by Chamaelo through the January 5, 2006 Plan of Arrangement. Chamaelo recognizes that controlling production expenses 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.



Three Months Ended June 30 Six Months Ended June 30
% %
Operating Netback 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Oil and liquids ($/bbl)
Revenue 75.02 64.72 16 70.57 64.72 9
Royalties 16.80 12.01 40 15.09 12.01 26
Production expenses 7.56 11.32 (33) 7.38 11.32 (35)
Transportation
expenses 1.27 1.27 - 1.31 1.27 3
------------------------------------------------------------------------
Operating netback 49.39 40.12 23 46.79 40.12 17
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Natural gas ($/mcf)
Revenue 6.45 7.11 (9) 7.23 7.11 2
Royalties 1.72 1.55 11 1.72 1.55 11
Production expenses 1.28 1.65 (22) 1.29 1.65 (22)
Transportation
expenses 0.24 0.24 - 0.22 0.24 (8)
------------------------------------------------------------------------
Operating netback 3.21 3.67 (13) 4.00 3.67 9
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Combined ($/boe - 6:1)
Revenue 55.74 51.69 8 55.86 51.69 8
Royalties 13.35 10.42 28 12.51 10.42 20
Production expenses 7.62 10.48 (27) 7.57 10.48 (28)
Transportation
expenses 1.36 1.36 - 1.33 1.36 (2)
------------------------------------------------------------------------
Operating netback 33.41 29.43 14 34.45 29.43 17
------------------------------------------------------------------------
------------------------------------------------------------------------


The operating netback is a key indicator of an exploration and production company's ability to generate cash flow for reinvestment. During the three months ended June 30, 2006, Chamaelo generated an operating netback of $33.41/boe, up 14% from $29.43/boe for the 9-day period ended June 30, 2005. Year-to-date, Chamaelo generated an operating netback of $34.45, an increase of 17% from $29.43/boe for the 9-day period ended June 30, 2005. The increase in the operating netback for both the three and six month periods ended June 30, 2006 compared to the 9-day period ended June 30, 2005 was a result of stronger oil and natural gas liquids commodity prices and lower production expenses, which more than offset a decrease in natural gas commodity prices.



General and
Administrative Three Months Ended June 30 Six Months Ended June 30
Expenses % %
($000s) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
G&A expenses (gross) 1,324 161 722 2,579 161 1,502
G&A capitalized (190) - (100) (379) - (100)
G&A recoveries (430) - (100) (742) - (100)
------------------------------------------------------------------------
G&A expenses (net) 704 161 337 1,458 161 806
------------------------------------------------------------------------
G&A expenses ($/boe) 2.03 17.02 (88) 2.17 17.02 (87)
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative expenses ("G&A") totaled $0.7 million for the three months ended June 30, 2006, up 337% from $0.2 million for the 9-day period ended June 30, 2005. Year-to-date, G&A expenses totaled $1.5 million, an increase of 806% from $0.2 million for the 9-day period ended June 30, 2005. On a per unit basis, G&A decreased 88% to $2.03/boe for the three months ended June 30, 2006 and 87% to $2.17/boe for the six months ended June 30, 2006 compared to $17.02/boe for the 9-day period ended June 30, 2005.



Depletion, Three Months Ended June 30 Six Months Ended June 30
Depreciation % %
and Accretion 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------

DD&A ($000s) 9,677 137 6,964 19,067 137 13,818
DD&A ($/boe) 27.96 14.47 93 28.36 14.47 96
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion, depreciation and accretion ("DD&A") totaled $9.7 million and $19.1 million for the three and six months ended June 30, 2006, respectively. On a per unit basis, DD&A increased 93% to $27.96/boe for the three months ended June 30, 2006 and increased 96% to $28.36/boe for the six months ended June 30, 2006 compared to $14.47/boe for the 9-day period ended June 30, 2005. Included in the provision for DD&A for the three and six months ended June 30, 2006, respectively, are $0.1 million ($0.29/boe) and $0.2 million ($0.30/boe) for accretion of asset retirement obligations.

The increase in the DD&A rate resulted from the classification of a large portion of the reserves acquired in the Plan of Arrangement with Tournament and Tropic as "probable" (which are not recognized for depletion) as the wells were relatively new. The Company expects the DD&A rate per boe to decrease over time as the reserves acquired from Tournament move from probable to proved due to a longer production history, allowing for a higher confidence in reserve estimates.



Three Months Ended June 30 Six Months Ended June 30
Interest % %
($000s) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Interest expense 851 - 100 1,546 - 100
Interest income (6) - (100) (33) - (100)
------------------------------------------------------------------------
Interest expense (net) 845 - 100 1,513 - 100
------------------------------------------------------------------------

Interest expense
($/boe) 2.44 - 100 2.25 - 100
------------------------------------------------------------------------
------------------------------------------------------------------------


Net interest expense totaled $0.8 million for the three months ended June 30, 2006, or $2.44/boe, and $1.5 million for the six months ended June 30, 2006, or $2.25/boe. The increase in net interest expense is a result of a significant increase in outstanding bank debt, which was used to facilitate the Plan of Arrangement with Tournament and Tropic and support drilling activity conducted during the first half of 2006.



Three Months Ended June 30 Six Months Ended June 30
Taxes % %
($000s) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Capital taxes (79) - (100) (17) - (100)
Future income taxes 2,565 - 100 2,792 - 100
------------------------------------------------------------------------

Taxes ($/boe) 7.18 - 100 4.12 - 100
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital taxes for the three and six months ended June 30, 2006 were in a recovery position as a result of the elimination of the Large Corporations Tax ("LCT"), effective January 1, 2006. Future income taxes are recorded using the liability method. For the three and six months ended June 30, 2006, future taxes amounted to $2.6 million and $2.8 million, respectively. The future tax expense was the result of federal and provincial corporate tax rate deductions, which effectively lowered the Company's future tax asset. The Company has approximately $294 million in tax pools and approximately $19 million in investment tax credits to shelter against future income.

Funds from Operations and Net Loss

Funds from operations for the three and six months ended June 30, 2006 were $10.1 million ($0.25 per diluted share) and $20.2 million ($0.51 per diluted share), respectively. The Company had a net loss of $2.7 million ($0.07 per diluted share) for the three months ended June 30, 2006. Year-to-date, the Company had a net loss of $2.6 million ($0.06 per diluted share). The net loss for each of the three and six month periods ended June 30, 2006 arose mainly due to a significant future tax expense recorded in the second quarter as a result of federal and provincial corporate tax rate deductions, which effectively lowered the Company's future tax asset.

Capital Expenditures

On January 5, 2006, the Company entered into a Plan of Arrangement whereby it combined with Tournament and Tropic. The following table details the purchase price allocation for the business combination:



Net assets acquired Amount
------------------------------------------------------------------------
($000s)
Working capital 10,098
Oil and natural gas properties and equipment 163,000
Asset retirement obligation (1,896)
Goodwill 27,460
Future income tax benefit 19,138
------------------------------------------------------------------------
217,800
------------------------------------------------------------------------
------------------------------------------------------------------------

Consideration of acquisition
Cash 84,701
Issuance of 18,969,724 common shares 129,940
Transaction costs 2,884
Purchase price adjustment 275
------------------------------------------------------------------------
217,800
------------------------------------------------------------------------
------------------------------------------------------------------------


The net cash consideration for the business combination was $74.4 million comprised of the original $84.7 million cash, transaction costs of $2.9 million, and purchase price adjustments of $0.3 million, less a $13.5 million cash balance acquired from Tournament. Of the $74.4 million cash consideration, $68.1 million was paid upon closing of the Plan of Arrangement on January 5, 2006, while $6.3 million was paid in 2005 and recorded as deferred business combination costs.



Net cash payments for capital expenditures are as follows:

Capital Three Months Ended June 30 Six Months Ended June 30
Expenditures % %
($000s) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Land 1,392 - 100 4,391 - 100
Drilling, completions,
and workovers 17,348 846 1,951 26,564 846 3,040
Equipment 6,245 - 100 13,579 - 100
Geological and
geophysical 864 173 399 1,662 173 838
Other 54 - 100 135 - 100
------------------------------------------------------------------------
Total capital
expenditures 25,903 1,019 2,442 46,331 1,019 4,447
------------------------------------------------------------------------
------------------------------------------------------------------------


During the quarter, Chamaelo drilled 16 (12.5 net) wells, which resulted in 10 (9.3 net) oil wells, 3 (1.4 net) natural gas wells, 1 (1.0 net) potential natural gas well, and 2 (0.8 net) dry holes. Year-to-date, Chamaelo drilled 23 (18.2 net) wells, which resulted in 12 (10.9 net) oil wells, 4 (2.0 net) natural gas wells, 1 (1.0 net) potential gas well, and 6 (4.3 net) dry holes.

Liquidity and Capital Resources

The Company had a working capital deficiency of $80.0 million at June 30, 2006.

On January 5, 2006, the Company entered into a Plan of Arrangement whereby it combined with Tournament and Tropic. Before the Plan of Arrangement, Tournament and Tropic 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 714,241 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.

In May 2006, the Company received approval from shareholders and from the Toronto Stock Exchange to convert all non-voting common shares to voting common shares and to convert all non-voting warrants to warrants to acquire voting common shares.

Subsequent to June 30, 2006, the Company increased its available credit facilities. The Company now has two credit facilities with two separate financial institutions. The first is a $66.0 million revolving operating demand loan bearing interest at prime plus a premium ranging between 0% and 1.00% based on the Company's debt to cash flow ratio. The revolving facility is secured by a $100 million fixed and floating charge debenture on the assets of the Company. The second is a $110 million non-revolving facility bearing interest at prime plus 2.00% repayable by March 31, 2007. The amount available under the non-revolving facility is restricted by the amount drawn on the revolving operating demand loan. The non-revolving facility is secured by a $200 million subordinated fixed and floating charge debenture on the assets of the Company.



Summary of Quarterly Results (1)

Q2/05 Q3/05 Q4/05 Q1/06 Q2/06
------------------------------------------------------------------------

Number of producing
days 9 92 92 90 91

($000s, except per
share amounts) $ $ $ $ $
------------------------------------------------------------------------

Oil and natural
gas sales 488 6,070 7,105 18,253 19,296

Cash flow from
operations 117 3,489 4,146 10,109 10,097
per share - basic 0.01 0.18 0.20 0.26 0.26
per share - diluted 0.01 0.17 0.19 0.26 0.25

Net earnings (loss) (23) 1,155 1,396 110 (2,677)
per share - basic - 0.06 0.07 - (0.07)
per share - diluted - 0.06 0.06 - (0.07)
------------------------------------------------------------------------
------------------------------------------------------------------------

(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.


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 Toronto Stock Exchange ("TSX") under the symbol "CXN". The following table summarizes the common shares outstanding and the number of shares exercisable into common shares from options and warrants:



(000s) June 30, 2006 August 8, 2006
------------------------------------------------------------------------

Voting common shares 39,344 39,349
Options 3,500 3,605
Warrants 3,769 3,765
------------------------------------------------------------------------
Total 46,613 46,719
------------------------------------------------------------------------
------------------------------------------------------------------------

Commitments

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

Amount
------------------------------------------------------------------------
($000s)
2006 157
2007 313
2008 313
2009 244
2010 -
------------------------------------------------------------------------
1,027
------------------------------------------------------------------------
------------------------------------------------------------------------


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.

Goodwill - Goodwill, which represents the excess of purchase price of a business over the fair value of net assets acquired in an acquisition, is tested for impairment on an annual basis in the fourth quarter. A goodwill impairment loss would be recognized when the carrying amount of goodwill exceeds its fair value. Should the test result in an impairment, it will be charged to income in the period of the impairment. The goodwill recorded in the interim consolidated financial statements was a result of the Plan of Arrangement with Tournament and Tropic that closed on January 5, 2006.

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.

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 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 the Company'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 also 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 the first six months of 2006, 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 may be found on the SEDAR website at www.sedar.com.



Chamaelo Exploration Ltd.
Consolidated Balance Sheets

As at As at
June 30, December 31,
($000s) 2006 2005
------------------------------------------------------------------------
(Unaudited) (Audited)

Assets
Current assets:
Cash and cash equivalents - 23,002
Accounts receivable 10,424 5,998
Prepaid expenses and deposits 962 225
------------------------------------------------------------------------
11,386 29,225

Oil and natural gas properties and equipment
(note 3) 248,467 57,295
Deferred business combination costs - 6,309
Future income tax asset 15,245 -
Goodwill 27,460 -

------------------------------------------------------------------------
302,558 92,829
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility (note 4) 65,786 -
Accounts payable and accrued liabilities 25,594 11,595
Capital taxes payable - 55
------------------------------------------------------------------------
91,380 11,650

Asset retirement obligations (note 5) 6,410 3,775
Future income tax liability - 1,102

Shareholders' equity:
Capital stock (note 6) 203,026 73,076
Contributed surplus 1,781 698
Retained earnings (deficit) (39) 2,528
------------------------------------------------------------------------
204,768 76,302
Subsequent events (notes 4 and 9)
------------------------------------------------------------------------
302,558 92,829
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements

Approved by the Board of Directors:

Director, "signed" Rob Zakresky Director, "signed" Larry Moeller

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


Chamaelo Exploration Ltd.
Consolidated Statements of Operations and Retained Earnings (Deficit)
(Unaudited)

Three months Six months
ended June 30 ended June 30
($000s, except per share amounts) 2006 2005 2006 2005
------------------------------------------------------------------------

Revenue:
Oil and natural gas sales 19,296 488 37,549 488
Transportation (470) (13) (893) (13)
Royalties (4,621) (98) (8,409) (98)
------------------------------------------------------------------------
14,205 377 28,247 377
Expenses:
Production 2,638 99 5,087 99
General and administrative 704 161 1,458 161
Interest 845 0 1,513 0
Depletion, depreciation and accretion 9,677 137 19,067 137
Stock-based compensation 532 3 914 3
------------------------------------------------------------------------
14,396 400 28,039 400

------------------------------------------------------------------------
Earnings (loss) before taxes (191) (23) 208 (23)

Taxes:
Capital taxes (79) 0 (17) 0
Future income taxes 2,565 0 2,792 0
------------------------------------------------------------------------
2,486 0 2,775 0

Net loss (2,677) (23) (2,567) (23)
Retained earnings, beginning of period 2,638 0 2,528 0
------------------------------------------------------------------------
Deficit, end of period (39) (23) (39) (23)
------------------------------------------------------------------------
------------------------------------------------------------------------


Net loss per share:
Basic (0.07) - (0.07) -
Diluted (0.07) - (0.06) -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements


Chamaelo Exploration Ltd.
Consolidated Statements of Cash Flows
(Unaudited)

Three months Six months
ended June 30 ended June 30
($000s) 2006 2005 2006 2005
------------------------------------------------------------------------
Cash provided by (used in):

Operating:
Net earnings (2,677) (23) (2,567) (23)
Items not affecting cash:
Depletion, depreciation and accretion 9,677 137 19,067 137
Stock-based compensation 532 3 914 3
Future income taxes 2,565 - 2,792 -
------------------------------------------------------------------------
Funds from operations 10,097 117 20,206 117
Net change in non-cash operating
working capital (note 7) 1,550 (117) (1,355) (117)
------------------------------------------------------------------------
11,647 - 18,851 -
------------------------------------------------------------------------

Financing:
Increase in revolving credit facility 9,361 - 65,786 -
Issuance of capital stock - 10,000 13 10,000
Share issue costs - - (3) -
------------------------------------------------------------------------
9,361 10,000 65,796 10,000
------------------------------------------------------------------------
------------------------------------------------------------------------

Investing:
Business combination (note 2) (275) - (68,058) -
Purchase and development of oil
and natural gas properties
and equipment (25,903) (1,019) (46,331) (1,019)
Net change in non-cash investing
working capital (note 7) 5,170 1,019 6,740 1,019
------------------------------------------------------------------------
(21,008) - (107,649) -
------------------------------------------------------------------------
------------------------------------------------------------------------

Change in cash and cash equivalents - 10,000 (23,002) 10,000
Cash and cash equivalents, beginning
of period - - 23,002 -
------------------------------------------------------------------------
Cash and cash equivalents, end of
period - 10,000 - 10,000
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements


Chamaelo Exploration Ltd.
Notes to the Consolidated Financial Statements
Three and six months ended June 30, 2006
------------------------------------------------------------------------
(Tabular amounts in 000s, unless otherwise stated)


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.

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.

1. SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

The interim consolidated financial statements of Chamaelo have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the period ended December 31, 2005. The disclosures provided below are incremental to those included with the audited annual financial statements. The interim consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto in the Company's annual report for the period ended December 31, 2005.

These interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

b) Goodwill

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

2. PLAN OF ARRANGEMENT

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 had oil and gas assets located in Chamaelo's West Central Alberta core area. Tropic was a company that sought to reorganize and enter the oil and gas business and had a technology business that was distributed to its existing shareholders as part of the Plan of Arrangement. The combined entity carried on with the name Chamaelo Exploration Ltd. and continued to trade on the Toronto Stock Exchange under the symbol "CXN". Chamaelo was treated as the deemed acquirer for accounting purposes and the continuing entity.



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

Net assets acquired Amount ($)
------------------------------------------------------------------------
Working capital 10,098
Oil and natural gas properties and equipment 163,000
Asset retirement obligation (1,896)
Goodwill 27,460
Future income tax benefit 19,138
------------------------------------------------------------------------
217,800
------------------------------------------------------------------------
------------------------------------------------------------------------

Consideration of acquisition
Cash 84,701
Issuance of 18,969,724 common shares 129,940
Transaction costs 2,884
Purchase price adjustment 275
------------------------------------------------------------------------
217,800
------------------------------------------------------------------------
------------------------------------------------------------------------


The net cash consideration for the business combination was $74.4 million comprised of the original $84.7 million cash, transaction costs of $2.9 million, and purchase price adjustments of $0.3 million, less a $13.5 million cash balance acquired from Tournament. Of the $74.4 million cash consideration, $68.1 million was paid upon closing of the Plan of Arrangement on January 5, 2006, while $6.3 million was paid in 2005 and recorded as deferred business combination costs.



3. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT

Accumulated
Depletion and Net Book
Cost Depreciation Value
$ $ $
------------------------------------------------------------------------
Oil and natural gas properties 269,925 21,707 248,218
Office and other equipment 318 69 249
------------------------------------------------------------------------
270,243 21,776 248,467
------------------------------------------------------------------------
------------------------------------------------------------------------


As at June 30, 2006, the cost of oil and natural gas properties includes $26.0 million 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. During the three and six months ended June 30, 2006, the provision for depletion, depreciation and accretion includes $0.1 million and $0.2 million, respectively, for accretion of asset retirement obligations. During the three and six months ended June 30, 2006, the Company capitalized $0.2 million and $0.4 million, respectively, of general and administrative costs.

The Company performed an impairment test calculation at June 30, 2006 to assess the recoverable value of the oil and natural gas properties. The oil and natural gas future prices are based on July 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 June 30, 2006.



Foreign Edmonton Light
WTI Oil Exchange Crude Oil AECO Gas
Year ($US/bbl) Rate ($Cdn/bbl) ($Cdn/mmbtu)
------------------------------------------------------------------------
2006 68.50 0.885 76.00 7.20
2007 65.00 0.890 72.00 8.45
2008 60.00 0.890 66.50 8.30
2009 55.00 0.890 60.75 7.95
2010 52.00 0.890 57.50 7.55
2011 53.00 0.890 58.50 7.35
2012 54.00 0.890 59.75 7.50
2013 55.25 0.890 61.00 7.65
2014 56.25 0.890 62.25 7.85
2015 57.50 0.890 63.50 8.00
2016 58.50 0.890 64.75 8.20
Escalate
Thereafter 2.0% per year 2.0% per year 2.0% per year
------------------------------------------------------------------------
------------------------------------------------------------------------


4. CREDIT FACILITIES

Subsequent to June 30, 2006, the Company increased its available credit facilities. The Company now has two credit facilities with two separate financial institutions. The first is a $66.0 million revolving operating demand loan bearing interest at prime plus a premium ranging between 0% and 1.00% based on the Company's debt to cash flow ratio. The revolving facility is secured by a $100 million fixed and floating charge debenture on the assets of the Company. The second is a $110 million non-revolving facility bearing interest at prime plus 2.00% repayable by March 31, 2007. The amount available under the non-revolving facility is restricted by the amount drawn on the revolving operating demand loan. The non-revolving facility is secured by a $200 million subordinated 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 to be approximately $20.0 million which will be incurred between 2006 and 2032. A credit-adjusted risk-free rate of seven percent was used to calculate the fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided below:

Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
$ $
------------------------------------------------------------------------
Balance, beginning of period 5,990 3,775
Liabilities transferred upon Plan of
Arrangement (note 2) - 1,896
Liabilities incurred in period 493 648
Liabilities settled in period - -
Accretion expense 102 205
Revisions to estimate (175) (114)
------------------------------------------------------------------------
Balance, end of period 6,410 6,410
------------------------------------------------------------------------
------------------------------------------------------------------------

6. SHARE CAPITAL

a) Authorized

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

b) Issued and outstanding

Number of
Shares Amount ($)
------------------------------------------------------------------------
Voting common shares

Balance at December 31, 2005 17,291 62,945
Issued upon Plan of Arrangement (note 2) 18,970 129,940
Conversion of non-voting shares to voting shares 3,077 8,923
Exercise of Warrants 6 14
Share issue costs - (3)
------------------------------------------------------------------------
39,344 201,819
Non-voting common shares
Balance at December 31, 2005 3,077 8,923
Conversion of non-voting shares to voting shares (3,077) (8,923)
------------------------------------------------------------------------
- -

------------------------------------------------------------------------
Balance at June 30, 2006 39,344 201,819
------------------------------------------------------------------------

------------------------------------------------------------------------
Warrants (note 6(c)) - 1,207
------------------------------------------------------------------------

------------------------------------------------------------------------
Total value of common shares and warrants 203,026
------------------------------------------------------------------------
------------------------------------------------------------------------

c) Warrants

Weighted
Number of Average
Warrants Price ($) Amount ($)
------------------------------------------------------------------------
Balance at December 31, 2005 3,775 5.12 1,208
Exercised for shares (6) 2.10 (1)
------------------------------------------------------------------------
Balance at June 30, 2006 3,769 5.12 1,207
------------------------------------------------------------------------
------------------------------------------------------------------------


d) Stock options

The Company has authorized the issuance 3.9 million common shares under a stock option plan enabling certain officers, directors, employees and consultants to purchase common shares. The Company has reserved for issuance 3.9 million common shares for this purpose. The Company will not issue options exceeding 10% of the shares outstanding at the time of the option grants. Under the plan, the exercise price of each option equals the market price of the Company's shares on the date of the grant. The options vest over a period of 3 years and an option's maximum term is 5 years. As at June 30, 2006, 3.5 million options have been granted and are outstanding at prices ranging from $5.68 - $8.08 per share with expiry dates ranging from June 30, 2010 to March 23, 2011.



The Company had the following stock options outstanding at June 30,
2006:

Weighted
Weighted Average
Number of Average Years to
Options Price ($) Expiry
------------------------------------------------------------------------
Balance at December 31, 2005 1,749 7.62 4.01
Options granted 1,751 6.78 4.62
------------------------------------------------------------------------
Balance at June 30, 2006 3,500 7.20 4.32
------------------------------------------------------------------------
------------------------------------------------------------------------

Exercisable at June 30, 2006 547 7.60 4.00
------------------------------------------------------------------------
------------------------------------------------------------------------


e) Stock-based compensation

The compensation cost recognized during the three months ended June 30, 2006 for the stock option plan was $0.6 million, of which $0.5 million has been charged against income and $0.1 million has been capitalized. For the six months ended June 30, 2006, the compensation cost recognized for the stock option plan was $1.1 million, of which $0.9 million has been charged against income and $0.2 million 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:



Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------
Fair value per option $2.07 $2.07
Risk-free rate 4.0% 4.0%
Expected life 4.0 years 4.0 years
Expected volatility 31.0% 31.0%
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:

Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------
Basic 39,344 38,924
Diluted 39,892 39,706
------------------------------------------------------------------------
------------------------------------------------------------------------

7. SUPPLEMENTAL CASH FLOW INFORMATION

a) Net change in non-cash working capital

Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------
$ $
Accounts receivable 1,262 (4,426)
Prepaid expenses and deposits (429) (737)
Accounts payable and accrued liabilities 6,003 13,999
Capital taxes payable (116) (55)
Non-cash working capital deficiency
acquired on Plan of Arrangement
(see Note 2) - (3,396)
------------------------------------------------------------------------
Net change in non-cash working capital 6,720 5,385
------------------------------------------------------------------------
------------------------------------------------------------------------

Relating to:
Investing 5,170 6,740
Operating 1,550 (1,355)
------------------------------------------------------------------------
Net change in non-cash working capital 6,720 5,385
------------------------------------------------------------------------
------------------------------------------------------------------------

b) Interest and taxes
Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------
$ $
Cash interest received 6 74
Cash interest paid (851) (1,546)
------------------------------------------------------------------------
(845) (1,472)

Cash taxes paid 38 -
------------------------------------------------------------------------
------------------------------------------------------------------------


8. RELATED PARTY TRANSACTIONS

Chamaelo has joint interest operations with a private company that is owned by a director of the Company. At June 30, 2006, the Company had a net balance outstanding from the related party of $0.3 million.



9. SUBSEQUENT EVENTS

Subsequent to June 30, 2006, the Company entered into physical purchase
and sales contracts as follows:

Reference Ceiling
Product Volume Price Floor Price Price Term
------------------------------------------------------------------------

Oil 500 bbls/d WTI US$64.00/bbl US$81.50/bbl July 1, 2006 -
December 31, 2006
Natural 3,000 GJ/d AECO CDN$5.50/GJ CDN$8.85/GJ July 1, 2006 -
gas December 31, 2006
------------------------------------------------------------------------
------------------------------------------------------------------------



CORPORATE INFORMATION

OFFICERS AND DIRECTORS
BANK
Robert J. Zakresky, CA National Bank of Canada
President, CEO and Director 2700, 530 - 8th Avenue S.W.
Calgary, Alberta T2P 3S8
Nolan Chicoine, MPAcc, CA
VP Finance and CFO TRANSFER AGENT
Valiant Trust Company
Terry L. Trudeau, P.Eng. 310, 606 - 4th Street S.W.
VP Operations and COO Calgary, Alberta T2P 1T1

Weldon Dueck, BSc., P.Eng. LEGAL COUNSEL
VP Business Development Gowling Lafleur Henderson LLP
1800, 350 - 7th Avenue S.W.
R.D. (Rick) Sereda, M.Sc., P.Geol. Calgary, Alberta T2P 3N9
VP Exploration
AUDITORS
Helmut R. Eckert, P.Land KPMG LLP
VP Land 1200, 205 - 5th Avenue S.W.
Calgary, Alberta T2P 4B9
Larry G. Moeller, CA, CBV
Chairman of the Board INDEPENDENT ENGINEERS
Gilbert Laustsen Jung
Daryl H. Gilbert, P.Eng. 4100, 400 - 3rd Avenue S.W.
Director Calgary, Alberta T2P 4H2

Don Cowie
Director

Brian Krausert
Director


FORWARD LOOKING STATEMENTS

This Interim Report 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