Choice Resources Corp.
TSX VENTURE : CZE

Choice Resources Corp.

October 27, 2005 19:32 ET

Choice Announces Second Quarter Financials

CALGARY, ALBERTA--(CCNMatthews - Oct. 27, 2005) - Choice Resources Corp. (TSX VENTURE:CZE):

Six months ended August 31, 2005

President's message:

For the six month period;

- Net debt inclusive of working capital deficiency is reduced by 75% to $4.31 million

- Bank Debt has been reduced 95% to $0.65 million.

- Interest expense has been reduced 49%

- The Pincher Creek horizontal well was spud in August and completion operations are underway.

- The Company sold 25% of the Pincher Creek field for $6.1 million.

- Earnings are $1.5 million or 3 cents per share.

- Cash flow from operations is up 8% to $4.7 million and on target at 9 cents per share.

- Production averaged 1,360 boe/d after the sale of a non-core property, essentially flat with the previous year period. (Pincher Creek had significant downtime due to a pipeline repair)

- Operating expenses are $3.2 million compared to $3.1 million (Expenses for the period would be reduced 10% without the one time expense of a pipeline repair).

- G&A has increased to$0.79 from $0.59 reflecting the addition of operations staff and an increased effort to significantly increase the play inventory.

- Three development wells and one exploratory well were drilled during the period.

Debt reduction combined with the drilling of the Pincher Creek horizontal well was the primary focus for the last three months. Progress on exploration was also achieved as the Company made plans for an active winter drilling season with drilling of 6 high impact exploratory wells in the Snipe/Wallace area (average working interest will be approximately 50%). The weather continued to cause a delay in the testing and completion of some wells. A 3D seismic program in the Viking area was planned and will be implemented for Q3. The Company expects to drill up to four wells after completion of this program. (average working interest will be 85%)

The Corporation finalized plans to drill a horizontal well at Pincher Creek and the well was spudded in early August. The capital interest is 19% with a before payout interest in production of 30% and an after payout interest of 52.5%. The well as of this report was being prepared for completion and testing after encountering natural gas.

Production was down slightly during the period at 1,360 boe/d after the sale of a 60 b/d property in December last year and repairing a pipeline at Pincher Creek that resulted in the field being shut in for 5 weeks. This was an unusual event and other parts of the field were tested for integrity with no significant corrosion present. Production came back on stream in the third week of August and, while average production was reduced for the period, the flush production combined with increased prices, had a minimal effect on cash flow.

Cash flow at 9 cents per share is essentially on target with internal projections. Significant price increases and approximately 200 bpd behind pipe will be added in the near term to increase cash flow for the remainder of the year. The estimate for the Pincher Creek well is not included in this number and will not be estimated until the well is completed and tested.

Our exploration play inventory continues to grow as land and prospects were added. The Company purchased a partner's interest in the Snipe Lake and Wallace of approximately 20% area for $2 million. The Company's interest in this area ranges from 20% to 70% and a minimum of 6 wells will be drilled this winter. An election was made with Vecta Energy Corp. to drill an Elkton test well at Chambers. This well is expected to spud prior to yearend with a Choice working interest of 25%. (The program uses proprietary acquisition, processing and interpretation).

At the Snipe Lake area, subsequent to the quarter end, road construction was completed into one well to provide year round access for production and to provide access for further drilling opportunities. This well was brought on stream in October at 50 boe/d.

Results to date are excellent and while weather kept production from increasing, several new plays were tested and have set up several exploitation opportunities. Enclosed are the financial statements. Please refer to the associated notes filed on Sedar (in particular the notes to the annual audited statements), the operations summary and the management discussion and analysis.



Gordon D. Harris
President and CEO


Highlights
2nd Quarter and Six months ended August 31, 2005

Financial:
($000 except per unit and where noted)
(Per share #'s are based on the weighted average # of shares issued and
outstanding during the period)

Q2 Q2 YTD YTD
2005 2004 2005 2004

Gross Sales Revenue 5,942 5,126 11,411 10,482
Net Sales Revenue 4,647 4,144 9,001 8,451

Cash Flow 2,268 2,078 4,771 4,313
Per Share (basic) 0.04 0.05 0.09 0.11

Net Income 653 418 1,449 1,325
Per Share (basic) 0.01 0.01 0.03 0.03

General & Administrative Expense 437 236 786 589

Capital Expenditures 2,790 3,786 5,974 5,370

Net Debt 4,407 17,425 4,407 17,425

Shares Outstanding (millions)
Weighted Average (basic) 57,245 44,209 53,443 40,536

Operations:
Production
Natural gas & sulphur (MCF/d) 7,752 7,804 7,761 8,004
NGL (BBL/d) 79 48 66 60
BOE per day 1,371 1,348 1,360 1,383

Prices
Gas $/MCF $ 7.63 $ 6.79 $ 7.41 $ 6.73
Liquids $/BBL $68.39 $57.23 $68.13 $51.25
$/BOE $47.10 $41.32 $45.60 $39.86


Management Discussion and Analysis

Management's discussion and analysis (MD&A) should be read in conjunction with the unaudited August 31, 2005 financial statements and accompanying notes as well as the MD&A for the year ended February 28, 2005 and the audited financial statements for that year. Where amounts are expressed on a barrel of oil equivalent basis (BOE), gas volumes have been converted to oil equivalents at a six to one ratio.

This commentary is based on information available at October 27, 2005. Additional information relating to Choice Resources Corp. is available on SEDAR at www.sedar.com.

The MD&A uses the terms "cash flow from operations" which is before non-cash working capital adjustments and "cash flow per share," also before non-cash working capital adjustments. Although these are not currently recognized measures under Canadian generally accepted accounting principles (GAAP), management believes that in addition to net earnings, cash flow is a useful additional measure or indication as to how the Company is performing. It provides an indication of what funds the Company is generating from its operations to deploy, along with other sources of capital, in financing its on going exploration and development efforts.

Overall performance

Choice ("Choice" or the "Company") is a publicly listed company on the TSX Venture Exchange trading under the symbol CZE. It is engaged in the business of exploration, development and production of oil and gas reserves in the Province of Alberta.

The Balance Sheet for the Company at August 31, 2005 indicates a very strong financial position and demonstrates just how far the management team has brought the Company over the past eighteen months. The Company, at the year ended February 29, 2004 had a debt and working capital deficit of nearly thirty million dollars. In comparison, the net debt and working capital deficit for the quarter ended August 31, 2005 is $4.41mm ($17.33mm at August 31, 2004) including bank debt of $0.65mm. The Company also has a bank line of credit of $20mm available.

The Company, since the new management group was installed eighteen months ago, has raised more than $20mm in new equity, sold certain non-core properties and has also divested a 25% interest in the Pincher Creek Unit for $6.10mm (in August 2005) to strengthen the balance sheet. These financial transactions, as well as a proper distribution of drilling risk, have allowed the Company to undertake the drilling of the high impact Pincher Creek horizontal well. Choice has taken a 19% capital interest in the well to earn a 52.5% working interest of the net production on an after-payout basis.

Choice Resources Corp. continues to report strong financial results and another successful quarter and six months ending August 31, 2005. Commodity prices have been strong through the spring and summer and have strengthened since the latter half of August. The Company expects a strong second half of the year for revenues and cash flow from operations. Sales production volumes for the six month period averaged 1,360 BOE per day compared to 1,383 BOE per day last year for the comparable period. Production for the three months to August 31, 2005 averaged 1,371 BOE per day compared to 1,348 BOE per day for the comparable period last year.

Choice has spent $5.97mm before dispositions in the first six months of the year on capital projects and including the funding of the Company's share of the Pincher Creek horizontal well to August 31, 2005. The Company plans to spend in excess of $10.00mm over the next six months to year end February 28, 2006 on new capital projects. These will be largely focused on our Snipe and Wallace areas, where we intend to drill at least six high impact exploration wells. Also in the capital budget for the balance of the fiscal year are plans to drill 15 wells in the Viking area and shoot and acquire 2D and 3D seismic.



------------------------------------------------------------------------
Annual Information February 28, February 29, February 28,
2005 2004 2003
------------------------------------------------------------------------

------------------------------------------------------------------------
Total Revenue $ 19,981,132 $ 16,617,958 $ 2,068,406
------------------------------------------------------------------------

------------------------------------------------------------------------
Net Income (loss) $ 2,965,072 $ (1,156,205) $ 188,484
------------------------------------------------------------------------

------------------------------------------------------------------------
Per Share - Basic $ 0.07 $ (0.10) $ 0.03
------------------------------------------------------------------------
- Diluted $ 0.07 $ (0.10) $ 0.03
------------------------------------------------------------------------

------------------------------------------------------------------------
Total Assets $ 55,015,661 $ 48,281,896 $ 5,651,705
------------------------------------------------------------------------
Current liabilities,
including bank debt $ 21,130,932 $ 30,626,711 $ 2,604,366
------------------------------------------------------------------------
Total Long-Term
Financial Liabilities $ 10,583,207 $ 8,480,622 $ 918,000
------------------------------------------------------------------------


Review of Major properties

PINCHER CREEK

100% Working Interest
41-section Choice Operated Unit
Extremely Long Life Reserves
3D&2D seismic data
Numerous High Impact Drill Locations
Horizontal Drilling at 01-05-003-28 W4M


Production from the Pincher Creek Unit averaged 400 BOE per day for the 3 month period ended August 31 2005. A pipeline leak was detected, analyzed and repaired during the quarter. Production was shut in from mid July to late August while these repairs and inspections were carried out. The results showed the break to be an isolated event. Approximately 40% of the costs were capitalized as an improvement to the gathering system.

The new Pincher Creek 01-05-003-28 W4M horizontal well was spud in early August. The well is being drilled under-balanced using compressed natural gas with returns separated and directed to the existing 15-05 gathering system.

At the end of quarter, the facilities for the drilling operation were built and the well was nearing total vertical depth and as of this report the drilling operations were completed and the well will be completed and flow-tested in November, 2005. (See Outlook section for future plans)



BOW ISLAND

100% Working Interest in Lands and Facilities
Choice Operated
Muti Zone Potentials


Production from the Bow Island Field remained steady through the quarter with the addition of an oil producer being equipped and placed on pumping production in July.



VIKING

Multi zone Potentials
Extensive high working interest lands and facilities
Choice Operated


Choice increased its activities in these areas over the quarter with the drilling of three development and one exploration well. All wells encountered hydrocarbons and were cased and completed. Most of these wells have multiple pay zones with stabilized flow rates ranging from 150 MCF per day to over 1.0 MMCF per day. Pipeline activities are under way.

A seismic program comprised of a 10 square mile 3-D shoot was planned and licensed. The program, as of the date of this report, has commenced.



SNIPE LAKE - WALLACE

Multi zone Potentials
Large tracts of Undeveloped lands
Mostly Choice Operated
High Impact Well Potentials


Choice added to the infrastructure in this remote area with the kick-off of a 2 mile all season road to the 07-10-070-16 W5M site. This access has been completed and the well is currently on stream at 50 BBL per day of sweet oil.

2005 Operation Summary

Choice derives 95% of its revenue from the sale of natural gas. In the first half of the year to August 31, 2005 the Company recorded natural gas sales volumes of 1,428,052 MCF which is comparable to natural gas sales volumes of 1,472,812 MCF recorded in the same period last year. Natural gas volumes produced and sold averaged 7,761 MCF per day compared to 8,004 MCF per day last year. Sulphur volumes were included in gas volumes on a 6:1 equivalency basis but are a very small percentage of these figures. The current year's gas production was affected by a shutdown at Pincher Creek for approximately five weeks to conduct certain repairs and maintenance on the gathering system. In the current quarter natural gas production averaged 7,752 MCF per day compared to 7,804 MCF per day for the second quarter last year.

Total oil and natural gas liquids (NGLs) production increased to 12,223 barrels in the first six months compared to 11,026 for the prior year. The 11% increase in oil and NGL production is largely due to new oil production coming on-stream in the period from the Kaybob well drilled in the first quarter of the year and placed on production in July.

On a BOE basis, average daily production rates for the six months ended August 31, 2005 were 1,360 barrels of oil equivalent per day (BOE per day) were comparable to the 1,383 BOE per day for the six month period last year. For the second quarter of this year, the average production was 1,371 compared to 1,348 from last year's second quarter. Approximately 14,000 BOE's (averaging 76 BOE per day for six months or 150 BOE per day for 3 months) were shut in and deferred due to the pipeline repair during the quarter.

Natural gas prices increased to average $7.41 per MCF for the six months compared to $6.73 for the same six month period last year. This 10% increase in prices reflects the continuing strong demand for natural gas over the summer months. However, the significant increases in natural gas pricing which occurred toward the end of August of this year will not be reflected until the latter half of the Company's fiscal year. Natural gas prices in the second quarter averaged $7.63 per MCF compared to $6.73 for the second quarter of last year.

Oil and natural gas liquids prices were also up significantly to average $68.13 for the six months compared $51.25 last year. Prices for the current quarter averaged $68.39 compared to $57.23 last year. Overall, prices per BOE for the six months increased to $45.60 per BOE compared to $39.86 per BOE for the comparable period last year. This is an increase in the price per BOE of 14% above last year and reflects the general price increases experienced in the upstream sector of the oil and gas industry this past year. Prices per BOE in the quarter averaged $47.10, a 14% increase over the comparable quarter last year ($41.32 per BOE).



Summary of Quarterly Results (8 quarters)

2nd Quarter 1st Quarter 4th Quarter 3rd Quarter
31-Aug-05 31-May-05 28-Feb-05 30-Nov-04
------------------------------------------------------------------------

Gross revenue $ 5,941,944 $ 5,468,893 $ 5,650,846 $ 4,309,546

Net income (loss) $ 652,535 $ 796,323 $ 1,018,089 $ 621,829

Net income (loss)
per share - basic
and diluted $ 0.01 $ 0.02 $ 0.02 $ 0.01


2nd Quarter 1st Quarter 4th Quarter 3rd Quarter
31-Aug-04 31-May-04 29-Feb-04 30-Nov-03
------------------------------------------------------------------------

Gross revenue $ 5,125,820 $ 5,356,382 $ 6,714,141 $ 4,025,200

Net income (loss) $ 418,070 $ 907,083 $ (70,897) $ (991,587)

Net income (loss)
per share - Basic
and diluted $ 0.01 $ 0.03 $ (0.00) $ (0.05)


Revenue:

Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------
Volumetrics:
Natural gas
- MCF 713,165 717,991 -1% 1,428,052 1,472,812 -3%
Oil & natural
gas liquids
- barrels 7,305 4,378 67% 12,223 11,026 11%
MCF
equivalent
(Oil &
NGL's
converted
at 1:6) 756,995 744,259 2% 1,501,390 1,538,968 -2%
MCF
equivalent
/day 8,228 8,090 8,160 8,364
BOE
equivalent
(Natural
gas
converted
at 6:1) 126,166 124,043 2% 250,232 256,495 -2%
BOE
equivalent
/day 1,371 1,348 1,360 1,383

Revenue:
Natural
gas
revenue $5,442,366 $4,875,286 12% $10,578,048 $ 9,917,072 7%
Oil and
natural
gas
liquids
revenue 499,578 250,534 99% 832,789 565,130 47%
---------------------- ------------------------
Total
revenue $5,941,944 $5,125,820 16% $11,410,837 $10,482,202 9%

Average
natural
gas &
sulphur
price
($/MCF) $ 7.63 $ 6.79 12% $ 7.41 $ 6.73 10%
Average oil
& natural
gas liquids
price
($/BBL) $ 68.39 $ 57.23 20% $ 68.13 $ 51.25 33%
Average price
per MCF
($/MCF) $ 7.85 $ 6.89 14% $ 7.60 $ 6.81 12%
Average price
per BOE
($/BBL) $ 47.10 $ 41.32 14% $ 45.60 $ 39.86 14%

BOE/day 1,371 1,348 2% 1,360 1,383 -2%


Gross revenue from natural gas, oil and related products for the six months period increased 9% to $11.41mm over the prior year total gross revenue of $10.48mm. For the current three month quarterly period to August 31, 2005 revenues were up 16% to $5.94mm. The total increases in revenue are attributable to a 14% increase in commodity prices; offset by a 2% decrease in sales volumes for the six-month period.

In the current quarter volumes were up 2% and prices were up 14% compared to the second quarter last year. Revenue and operating expenses have been restated for the prior year to reclassify natural gas transportation costs as operating costs rather than netting these from revenue, as required by the new accounting guidelines. (Refer to Financial Statement note 2(a), Changes in Accounting Policies.)



Royalties:

Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------

Royalties,
net of
ARTC $1,295,292 $ 981,586 32% $2,410,028 $2,031,490 19%
% of
natural
gas and
liquids
sales 22% 19% 21% 19%
Per BOE $ 10.27 $ 7.91 30% $ 9.63 $ 7.98 21%


Royalties, net of ARTC, for the first six months increased to $2.41mm from $2.03mm. These increases are commensurate with the increases in product prices as royalties expressed as a percentage of gross revenue remained largely unchanged at 21% compared to 20% for the six months last year.



Production and Operating Expenses:

Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------

Operating
expenses $1,829,673 $1,582,671 16% $3,224,983 $3,121,832 3%
% of
natural
gas and
liquids
sales 31% 31% 28% 30%
Per BOE $ 14.50 $ 12.76 14% $ 12.89 $ 10.94 18%


Operating expenses for the first six months increased by 3% over the prior years' six months to $3.22mm compared to $3.12mm. Costs to repair the Pincher Creek gathering system were $0.29mm. On a BOE basis the cost of this one-time pipeline repair increased overall operating costs by $2.29 per BOE for the three month period and $1.16 per BOE on a six month basis. Excluding this repair, operating costs were consistent with prior years operating costs.



General and administrative expenses:

Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------

Gross G&A $ 584,894 $ 361,126 $1,115,779 $ 893,798
Capitalized
G&A 147,947 125,133 329,621 305,051
---------------------- ------------------------
Net G&A $ 436,947 $ 235,993 85% $ 786,158 $ 588,747 34%

% of
natural
gas and
liquids
sales 7% 5% 7% 6%
Per BOE
- before
recovery $ 4.64 $ 2.91 59% $ 4.46 $ 3.48 28%
Per BOE
- net of
recovery $ 3.46 $ 1.90 82% $ 3.14 $ 2.30 37%


General and administrative expenses (G&A), net of recoveries for the six months were, $0.79mm compared to $0.59mm, an increase of 34%. This reflects increased payroll and consultants costs to maintain a growing full cycle exploration junior oil and gas company and is also necessary to support an increased activity level in the Company as the prospect inventory grows. The Company anticipates that G&A per BOE will decrease as production volumes increase as most G&A expenses are fixed.

G&A for the six months rose to $3.14 per BOE compared to $2.30 per BOE last year. The Company capitalized $0.33mm in G&A for the six months to property, plant and equipment in the current year compared to $0.31mm in the prior year. Approximately 30% of all G&A costs are directed toward longer term exploration efforts and accordingly, these costs are capitalized as property, plant and equipment assets.



Interest and financing expense:

Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------

Interest on
long term
debt and
capital
lease $111,851 $247,353 -55% $217,914 $426,740 -49%
Per BOE $ 0.89 $ 1.99 -56% $ 0.87 $ 1.68 -48%


Interest expense for the six months decreased substantially to $0.22mm from $0.43mm. This 49% reduction from the first six months of last year reflects the Company's commitment to reduce its overall levels of debt. At August 31, 2005 the Company had a bank loan balance of $0.65mm on an available bank credit facility of $20.00mm.



Depletion, depreciation, and accretion:

Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------

DD&A $1,086,565 $1,094,647 -1% $2,241,345 $2,119,813 6%
% of
natural
gas and
liquids
sales 18% 21% 20% 20%
Per BOE $ 8.61 $ 8.82 -2% $ 8.96 $ 8.33 8%


The depletion, depreciation and accretion provision remained steady on a year-over-year basis for the six month periods at 20% of gross revenue. The provision increased marginally to $2.24mm from $2.12mm or $8.96 per BOE compared to $8.33 last year. For the current and prior second quarters, the DD&A provision has remained consistent at $1.09mm or 18% and 21% of revenue respectively.



Net income and cash flow from operations:

Cash flow:
Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------

Cash flow
from
operations
$2,268,181 $2,078,217 9% $4,771,754 $4,313,393 11%
Cash flow
per
share $ 0.04 $ 0.05 0.09 0.11
Per BOE $ 17.98 $ 16.75 $ 19.07 $ 16.82


Cash flow from operations for the current six months (defined as operational cash flow computed by subtracting general and administrative expenses, interest expense and cash income taxes from gross revenues net of royalties and operating and production expenses) increased by 11% to $4.77mm ($0.09 per share) compared to $4.31mm ($0.11 per share) in the first six months of last year. Increases in commodity prices and decreased interest expense have contributed to this positive cash flow increment.



Net income:

Three months ended August 31, Six months ended August 31,
% %
2005 2004 change 2005 2004 change
------------------------------------------------------------------------

Net income
(loss) $652,535 $418,070 56% $1,448,859 $1,325,153 9%
% of natural
gas and
liquids
sales 11% 8% 13% 13%
Net income
per share $ 0.01 $ 0.01 $ 0.03 $ 0.03
Per BOE $ 5.17 $ 3.37 $ 5.79 $ 5.21


Net income was comparable to the prior year first six months at $1.44mm ($0.03 per share) versus net income of $1.33mm ($0.03 per share) last year.

Current year per share calculations include an equity placement completed in May of this year.

Also, per share amounts have been reported as basic and fully diluted as the share purchase warrants are considered non-dilutive. (Refer to Financial Statement note 6, Equity Instruments.)

Capital Expenditures:

For the six months ended August 31, 2005 the Company incurred $5.97 mm in capital projects ($2.79mm for the three months ended). Major capital projects in the first six months of the year included initial drilling costs of the Pincher Creek horizontal well, which was spud on August 6, 2005, ($0.42mm), the drilling of three wells in the Bow Island and Viking areas ($1.26mm) and the drilling of wells in the Kaybob and Chigwell areas ($0.89mm).

Liquidity and capital resources:

In the first six months of this fiscal year, Choice essentially eliminated its bank debt. Net debt and working capital levels are currently less than 0.3 times the expected annual operational cash flow. The equity placement of $7.5mm, which closed in May, 2005, and the disposition of 25% working interest in the Pincher Creek Unit for $6.11mm allowed the Company to reduce its bank debt to $0.65mm at August 31, 2005. The Company is in a strong financial position and will be able to fund its capital projects for the balance of the year from cash flow from operations and by utilizing a portion of its $20.00mm bank credit facility.

The Company is obligated under a long term capital lease for a compressor at one of its facilities. Choice has an obligation to purchase this compressor when the lease ends in October, 2006 for a one-time payment of $391,508.

The Company had no off balance sheet financial arrangements or interests in any partnership or any minority interests not recorded in the financial statements as presented.

Hedging:

In the first quarter ended May 31, 2005, the Company entered into a fixed price swap for 1,000 GJ per day at a price of $7.11 / GJ for the period April 1, 2005 to October 31, 2005. The Company's policy is to hedge no more than 25% of production at any given time and to reduce risk due to price volatility. In September 2005 the company entered into another transaction entering into a costless collar with the floor and ceiling prices set at $11.00 to $19.00 for the winter months commencing in November 2005 and ending April 2006.

Related party transactions:

(a) Other than as disclosed elsewhere, the Company paid or accrued the following during the six months ended August 31, 2005

(i) consulting fees of $292,611 for the six month period (2004 - $208,619) and $140,898 for the three month period (2004 - $112,942) to companies controlled by senior officers of the Company.

These transactions are in the normal course of operations and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.

Outlook:

Choice expects to conduct an active exploration program in the second half of this fiscal year. The Company plans to drill up to eight exploratory tests on its high impact plays. Also Choice will drill up to fifteen development locations in the Viking area and Choice is currently shooting a 3D seismic program in this area to further delineate prospects in this multi zone operation.

One of the Company's major objectives was to drill and evaluate the horizontal development well in the Pincher Creek area. This well will be completed and tested in the third quarter.

Critical accounting estimates:

The preparation of financial statements that conform with Canadian generally accepted accounting principles requires management to make the following estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended.

Full Cost Accounting - The Company follows the full cost method of accounting. All costs for exploration and development of reserves are capitalized in a country by country cost centre; the costs are then depleted on the unit of production method based on estimated proved reserves. The capitalized costs can not exceed a ceiling amount. If the capitalized costs are determined to be in excess of this reserve based ceiling amount, the excess is written off. An alternative method of accounting for oil and natural gas operations is the successful efforts method. Under this method the cost centre is defined to be a property rather than a country cost centre and exploratory dry holes and geological and geophysical costs are charged to earnings when incurred.

Reserves - The Company engages independent qualified reserve evaluators to evaluate its reserves each year. Reserve determinations involve forecasts based on property performance, future prices, future production and the timing of expenditures; all these are subject to uncertainty. Reserve estimates have a significant impact on reported financial results as they are the basis for the calculation of depreciation and depletion. Revisions can change reported depletion and depreciation and earnings; downward revisions could result in a ceiling test write down.

Asset Retirement Obligation - The company provides for the estimated abandonment costs using a fair value method based on cost estimates determined under current legislative requirements and industry practice. The amount of the liability is affected by the estimated cost per well, the timing of the expenditures and the discount factor used. These estimates will change and the revisions will impact future depletion and depreciation rates.

Stock Based Compensation - The stock option plan provides for granting of stock options to directors, officers, employees and consultants. Beginning in 2003, the Company is recording a charge against earnings for all options granted after March 1, 2003. The basis for this expense is the Black-Sholes valuation model. None of the Company's awards call for settlement in cash or other assets.

Change in Accounting Policies - Transportation Costs - Effective for fiscal years beginning on or after October 1, 2003, the CICA issued Handbook Section 1100 "Generally Accepted Accounting Principles" which defines the sources of GAAP that companies must use and effectively eliminates industry practice as a source of GAAP. In prior years, it had been industry practice for companies to net transportation charges against revenue rather than showing transportation charges as a component of operating expense on the consolidated statement of income. Effective March 1, 2003, the Company has recorded revenue gross of transportation charges and has recorded transportation charges as an operating expense on the consolidated statement of income.

Forward looking Statements:

Certain information regarding the Company as set forth in the MD&A, including management's assessment of the Company's future plans and operations, contain forward looking statements that involve substantial known and unknown risks and uncertainties. These forward looking statements are subject to numerous risks and uncertainties, certain of which are beyond the control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuation, imprecision of reserve estimates , environmental risks, taxation policies, competition from other producers, the lack of qualified personnel or management, stock market volatility and the ability to access sufficient capital from external or internal sources. The actual results, performance or achievement could materially differ from those expressed in, or implied by, these forward looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them does, what benefits the Company will derive there from.



Choice Resources Corp.
Consolidated Balance Sheets
As at August 31, 2005 and February 28, 2005
------------------------------------------------------------------------
------------------------------------------------------------------------

August 31, February 28,
2005 2005
unaudited audited
Assets
Current assets
Accounts receivable and prepaid expenses $ 5,814,244 $ 4,464,828
Property, plant and equipment (note 3) 42,899,223 45,519,928
Goodwill 5,030,905 5,030,905
-------------- -------------
$53,744,372 $55,015,661
-------------- -------------
-------------- -------------

Liabilities
Current liabilities
Cheques in transit $ 280,176 $ 1,095,511
Accounts payable and accrued liabilities 9,185,872 7,458,904
Obligation under capital lease (note 4) 105,629 101,517
Bank loan 650,000 12,475,000
-------------- -------------
10,221,677 21,130,932

Obligation under capital lease (note 4) 409,943 463,805

Asset retirement obligations (note 5) 2,264,509 2,225,402

Future income taxes 10,219,655 7,894,000
-------------- -------------
23,115,784 31,714,139
-------------- -------------

Shareholders' Equity

Equity instruments (note 6) 35,031,402 29,401,947

Contributed surplus (note 8) 1,327,094 1,078,342

Deficit (5,729,908) (7,178,767)
-------------- -------------
30,628,588 23,301,522
-------------- -------------
$53,744,372 $55,015,661
-------------- -------------
-------------- -------------

The accompanying notes are an integral part of these financial
statements.


Choice Resources Corp.
Consolidated Statements of Earnings and Deficit
Six months Ended August 31, 2005 and 2004 (unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------

Three Months Ended Six Months Ended
Aug 31 2005 Aug 31 2004 Aug 31 2005 Aug 31 2004
Restated Restated
Revenue
Oil and
natural
gas sales $ 5,941,944 $ 5,125,820 $11,410,837 $ 10,482,202
Royalties (1,295,292) (981,586) (2,410,028) (2,031,490)
------------- ------------ ------------ -------------
4,646,652 4,144,234 9,000,809 8,450,712
------------- ------------ ------------ -------------
Expenses
Production 1,829,673 1,582,671 3,224,983 3,121,832
General and
administrative 436,947 235,993 786,158 588,747
Interest on bank
loan, loan payable
and capital
lease (note 7) 111,851 247,353 217,914 426,740
Stock based
compensation
(note 8) 125,070 68,000 248,750 176,844
Depletion,
depreciation
and accretion 1,086,565 1,094,647 2,241,345 2,119,813
------------- ------------ ------------ -------------
3,590,106 3,228,664 6,719,150 6,433,976
------------- ------------ ------------ -------------

Earnings before
income tax 1,056,546 915,570 2,281,659 2,016,736

Income taxes
Future 404,011 497,500 832,800 691,583
------------- ------------ ------------ -------------
Net earnings 652,535 418,070 1,448,859 1,325,153

Deficit, beginning
of period (6,382,443) (9,236,756) (7,178,767) (10,143,839)
------------- ------------ ------------ -------------
Deficit, end
of period $(5,729,908) $(8,818,686) $(5,729,908) $ (8,818,686)
------------- ------------ ------------ -------------

Net earnings per
share
Basic $ 0.01 $ 0.01 $ 0.03 $ 0.03
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Diluted $ 0.01 $ 0.01 $ 0.03 $ 0.03
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------

Basic
Weighted average
common shares 57,274,900 44,208,868 53,442,675 40,535,794
Diluted weighted
average common
shares 58,670,222 44,208,868 54,441,694 40,535,794

The accompanying notes are an integral part of the financial statements.


Choice Resources Corp.
Consolidated Statements of Cash Flows
Six months Ended August 31, 2005 and 2004 (unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------

Three Months Ended Six Months Ended
Aug 31 2005 Aug 31 2004 Aug 31 2005 Aug 31 2004
Restated Restated
Cash provided
by (used for):
Operating activities
Net earnings $ 652,535 $ 418,070 $ 1,448,859 $ 1,325,153
Items not
affecting cash
Depletion,
depreciation
and accretion 1,086,565 1,094,647 2,241,345 2,119,813
Stock-based
compensation
expense 125,070 68,000 248,750 176,844
Future income
taxes 404,011 497,500 832,800 691,583
------------- ------------ ------------ -------------
2,268,181 2,078,217 4,771,754 4,313,393
Changes in
non-cash
working
capital
(note 9) 975,267 941,964 120,819 478,749
------------- ------------ ------------ -------------
3,243,448 3,020,181 4,892,573 4,792,142
------------- ------------ ------------ -------------

Financing
activities
Repayment of
obligation
under capital
lease (25,123) (23,204) (49,751) (45,953)
Increase
(repayment)
of bank loan (8,475,000) (2,775,000) (11,825,000) (2,100,000)
Repayment of
loan payable - - - (10,000,000)
Proceeds on
finder's fee
pursuant to
private
placement - - - 292,225
Proceeds on
issuance of
common shares,
net of
issuance costs - (5,396) 1,861,160 6,457,536
Proceeds on
issuance of
flow through
shares, net
of issuance
costs - - 4,987,500 3,842,850
Proceeds on
exercise
of brokers'
warrants 267,150 - 267,150 -
Proceeds on
exercise of
stock options 6,000 - 6,000 -
------------- ------------ ------------ -------------
(8,226,473) (2,803,600) (4,752,441) (1,553,342)
------------- ------------ ------------ -------------
Investing activities
Property, plant
and equipment
expenditures (2,789,517) (3,787,293) (5,973,517) (5,371,291)
Change in
non-cash
working
capital
(note 9) 2,072,440 2,001,675 256,736 1,017,342
Property
dispositions 6,079,517 - 6,448,517 -
Property
abandonment
expenditures (56,533) - (56,533) -
------------- ------------ ------------ -------------
5,305,907 (1,785,618) 675,203 (4,353,949)
Increase
in cash 322,882 (1,569,037) 815,335 (1,115,149)
Cash and cash
equivalents,
beginning
of period (603,058) 1,302,748 (1,095,511) 848,860
------------- ------------ ------------ -------------
Cash and cash
equivalents,
end of period $ (280,176) $ (266,289) $ (280,176) $ (266,289)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------

The accompanying notes are an integral part of these financial
statements.



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

Contact Information