Cordero Energy Inc.
TSX : COR

Cordero Energy Inc.

August 11, 2005 16:13 ET

Cordero Energy Reports Second Quarter 2005 Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Cordero Energy Inc. (TSX:COR) is pleased to announce operational and financial results for the period ended June 30, 2005. Cordero commenced operations on April 30, 2005.

Highlights

- Production doubled to over 1,400 boe/d at the end of June from 700 boe/d at the end of April. Daily production averaged 1,103 boe/d for the second quarter.

- The Company continued to be active at Malmo, Alberta drilling 8 successful natural gas wells and installing 1,370 hp of compression. The Company has ordered an additional 2,675 hp of compression for the Malmo area to be commissioned in November.

- With additional compression installed, Cordero is on target to reach a year-end rate of 2,000 boe/d from wells drilled to date.

- Cordero completed a private placement of 3 million shares in June that raised net proceeds of $13.1 million, enabling the Company to expand activities at Malmo as well as its conventional exploration program.

- Cordero is aggressively pursuing its exploration prospects and has plans to drill several wells during the winter.



Period Ended
June 30, 2005(1)
------------------------------------------------------------------------
FINANCIAL
------------------------------------------------------------------------
Gross oil and natural gas revenue ($000s) 2,875

Cash flow from operations ($000s) 1,440
Per share basic ($) 0.06
Per share diluted ($) 0.06

Net earnings ($000s) 16
Per share basic ($) -
Per share diluted ($) -

Capital expenditures ($000s) 6,178
Working capital surplus ($000s) 7,176

Shares outstanding (000s)
At period end 27,125
Weighted average during period, basic 23,339
Weighted average during period, diluted 25,027

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OPERATING
------------------------------------------------------------------------
Production
Natural gas (mmcf/d) 6.6
Oil and natural gas liquids (bbls/d) 1
Oil equivalent (boe/d) (6:1) 1,103

Average wellhead prices
Natural gas ($/mcf) 7.12
Oil and natural gas liquids ($/bbl) 41.40
Oil equivalent ($/boe) (6:1) 42.73

Operating expenses ($/boe) (6:1) 6.53

Wells drilled (gross/net)
Natural gas 8/7.4
Oil -
Dry -
Total 8/7.4

Net success rate (%) 100

Undeveloped land holdings (000s)
Gross acres 74
Net acres 61
Average working interest (%) 82
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------------------------------------------------------------------------

(1) The Company was incorporated on March 30, 2005 but commenced
operations April 30, 2005.


President's Message

Creation of Cordero Energy Inc.

Cordero Energy Inc. is pleased to provide its initial report to shareholders and its financial and operating results for the period April 30, 2005 to June 30, 2005. Cordero was incorporated on March 30, 2005 but commenced commercial operations April 30, 2005 through the closing of the plan of arrangement between Resolute Energy Inc. and Esprit Energy Trust. Cordero shares commenced trading on the TSX on May 3, 2005.

Cordero remains committed to its initial plan to aggressively develop its coalbed methane (CBM) and Belly River assets in the Malmo area of central Alberta, while building a promising inventory of exploration prospects. The progress on both fronts have been very encouraging to date. We have assembled an exceptional team capable of growing the Company well beyond the development of Malmo.

Strong Operating Base

Pursuant to the plan of arrangement, the Company received interests in certain oil and gas assets including approximately 700 boe/d in the Malmo area of central Alberta. The production base is diversified among numerous wellbores that produce from the Horseshoe Canyon CBM and Belly River formations. The Company operates all of its production and has 31,000 (17,000 undeveloped) net acres of land in the area.

Cordero commenced operations with 89,000 (68,600 undeveloped) net acres of land in southern, central and northwest Alberta. The Company has been actively high-grading its land base with acquisitions, swaps and dispositions.

Strong Financial Base

Cordero was initially capitalized with a private placement of $5.5 million at a price of $2.87 per share. The private placement was subscribed for entirely by the employees and directors of Cordero and will be released from escrow over a three-year period.

The Company also granted transaction warrants to its original shareholders at $2.87 per share, which expired on May 30, 2005. The Company issued 1.86 million shares on conversion, raising $5.34 million.

On June 28, 2005, Cordero completed a $13.95 million financing, issuing 3.0 million shares at $4.65 per share. The funds will be used to expand the Company's capital expenditure program in 2005.

At June 30, 2005, Cordero had working capital of $7.2 million and an unutilized credit facility of $12.0 million.

Operational Update

We are pleased with our results to date at Malmo. During the period, the Company drilled 8 (7.5 net) successful natural gas wells and added 1,370 hp of compression, increasing production to more than 1,400 boe/d. Cordero currently has 37 (35.0 net) wells on production with an additional 28 (22.2 net) wells in various stages of completion, tie-in or awaiting facilities. The Company has ordered an additional 2,675 hp of compression to put excess gas production capacity on-stream.

Outlook

Cordero's CBM and Belly River development program at Malmo is progressing as planned. Our drilling inventory of 70 (60.0 net) wells has the potential to provide meaningful growth over the next 18 months. We are confident of attaining our year-end production target of 2,000 boe/d from wells already drilled, based on completing planned compression and tie-in work.

Prior to year-end, the Company expects to drill 15 (12.0 net) additional wells at Malmo and has additional follow-up programs planned for 2006.

We are very pleased with the progress of our exploration program to date. We remain convinced that our prospecting efforts will provide the next leg of growth beyond our Malmo development project. To this end, we have allocated a significant proportion of our 2005 exploration budget to seismic and land. Our early investment in seismic and land is critical to our future growth as a higher proportion of the capital budget will be allocated towards exploration projects in 2006. In addition, we are planning to test three prospects on existing lands prior to year-end; a multi-zone opportunity in Knopcik, the Bow Island formation in Claresholm and Cardium oil in Willesden Green.

We have expanded our budget from $18-24 million to $28-30 million to allocate additional funds to seismic and land, extra flow-line and compression capacity at Malmo, and to drill 3 exploration wells.

Board Changes

Mr. Douglas Baldwin has resigned from the Board of Directors. We are very grateful for Doug's outstanding guidance and support of Cordero and its predecessor Resolute Energy. On behalf of the employees, Board and shareholders we offer our sincere thanks for his contributions in the building of both companies.

At the same time, we are pleased to announce the appointment of Donald Driscoll to the Board of Directors. Don, who recently retired as President and CEO of NAL Energy Inc., was also instrumental in guiding Resolute Energy through its formative years until its sale last April.



On behalf of the Board of Directors,


"signed"
David V. Elgie
President and CEO
August 11, 2005


Management's Discussion and Analysis

August 11, 2005

Cordero Energy Inc. ("Cordero" or "the Company") is an exploration and coalbed methane development company pursuing oil and natural gas production and reserve growth through the development of its extensive coalbed methane and Belly River sand assets in central Alberta as well as its conventional exploration program in Alberta and British Columbia.

Cordero is based in Calgary, Alberta and was incorporated on March 30, 2005 under the Business Corporations Act (Alberta). The Company commenced operations on April 30, 2005 when certain oil and gas properties were transferred to Cordero in exchange for common shares of the Company under a plan of arrangement involving Resolute Energy Inc. (Resolute), Esprit Energy Trust, Esprit Exploration Ltd., Cordero and Cordero Finance Corp. As a result, the financial statements and Management's Discussion and Analysis (MD&A) for the period ended June 30, 2005, represent operations for the period April 30, 2005 to June 30, 2005 with no comparative disclosure available. Amounts presented on a daily basis are calculated based on the number of days in the period April 30, 2005 to June 30, 2005. Cordero commenced trading on the Toronto Stock Exchange on May 3, 2005 under the symbol "COR".

This MD&A of the financial condition and the results of operations should be read in conjunction with the unaudited interim financial statements for the period ended June 30, 2005 together with the accompanying notes. Readers should be aware that historical results are not necessarily indicative of future performance. Additional information relating to the Company can be viewed or downloaded at www.corderoenergy.com or www.sedar.com.

Production information is commonly reported in units of barrel of oil equivalent or boe. For purposes of computing such units, 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).

The financial information presented has been prepared in accordance with Canadian Generally Accepted Accounting Principles (Canadian GAAP). The reporting and measurement currency is the Canadian dollar.

Forward-Looking Statements

The information contained herein contains forward-looking statements and assumptions, such as those relating to results of operations and financial condition, capital spending, financing sources, commodity prices, costs of production and the magnitude of oil and gas reserves. By their nature, forward-looking statements are subject to numerous risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, actual results may differ materially from those predicted. The forward-looking statements contained herein are as of August 11, 2005 and are subject to change after this date. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Cordero disclaims any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Measures

Cordero management uses and reports certain non-GAAP measures in the evaluation of operating and financial performance. Cash flow, which is expressed before changes in non-cash working capital, is used by the Company to analyze operating performance, leverage and liquidity. Income from operations, which represents net income excluding gains or losses on foreign currency translation and on disposal of assets, is used by the Company to evaluate operating performance. Operating netback, which is calculated as average unit sales price less royalties, transportation costs and operating expenses, and corporate netback, which deducts administrative and interest expense and current income tax, represents the cash margin for every barrel of oil equivalent sold. Cash flow, income from operations and netback do not have any standardized meanings prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measure for other companies.



Petroleum & Natural Gas Revenue

Revenue Average Daily Average
Period ended June 30, 2005 (000s) Production Sales Price
------------------------------------------------------------------------
Natural gas $2,874 6,616 mcf/d $ 7.12 /mcf
Oil - - bbls/d - /bbl
NGL 1 1 bbls/d 41.40 /bbl
------------------------------------------------------------------------
Total $2,875 1,103 boe/d $42.73 /boe
------------------------------------------------------------------------
------------------------------------------------------------------------


For the period ended June 30, 2005, petroleum and natural gas revenue before royalties was $2.9 million, almost entirely derived from natural gas production.

For the period ended June 30, 2005, natural gas production averaged 6,616 mcf/d. Substantially all production was associated with wells in the Company's Malmo area in central Alberta that were transferred to Cordero pursuant to the plan of arrangement. At the commencement of operations, these properties produced approximately 4,200 mcf/d, which increased throughout the period with the tie-in of 17 (15.3 net) wells and the addition of compression equipment. Cordero currently has 37 (35.0 net) wells on production with an additional 28 (22.2 net) wells in various stages of completion, tie-in or awaiting facilities.

The Company sells all of its natural gas on the spot market. Cordero received an average price of $7.12/mcf for its natural gas production during the period. The Company's realized natural gas price is primarily determined by the AECO Hub in Alberta and will fluctuate depending on market conditions. Cordero did not hedge or enter into any fixed price arrangements in the period ended June 30, 2005.



Royalties

Period Ended
($000s) June 30, 2005
---------------------------------------------------------------------
Crown 388
Freehold, GORR 128
ARTC -
---------------------------------------------------------------------
Total royalties 516
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Average Royalty Rate
(average % of sales)
---------------------------------------------------------------------
Crown 14
Freehold, GORR 4
ARTC -
---------------------------------------------------------------------
Total royalties 18
---------------------------------------------------------------------
---------------------------------------------------------------------


Royalties for the period ended June 30, 2005 were $516,000 for an average royalty rate of 18%. The Company did not record Alberta Royalty Tax Credit (ARTC) for the period as Codero is not eligible to claim ARTC for Crown royalties paid on production related to wells acquired from Resolute. Royalty rates in subsequent periods may fluctuate based on future reference prices relative to average wellhead prices, the proportion of new production additions qualifying for royalty holidays and the Crown royalties associated with wells that are eligible for ARTC.



Operating Expenses

Period Ended
($000s, except per boe) June 30, 2005
---------------------------------------------------------------------
Operating expense (gross) 439
Processing income -
------------------------------------------------------------------------
Operating expense (net, as reported) 439
------------------------------------------------------------------------
------------------------------------------------------------------------

Operating expense per boe (net) 6.53
------------------------------------------------------------------------
------------------------------------------------------------------------


For the period ended June 30, 2005, total operating expenses were $439,000 or $6.53/boe. Operating expenses on a per unit basis are expected to decline as new production volumes are added, but will ultimately be determined by the level of ownership in gathering and processing facilities and the cost escalation for supplies and services.



Transportation and Selling Expenses

Period Ended
($000s, except per boe) June 30, 2005
---------------------------------------------------------------------
Transportation and selling expenses 76
---------------------------------------------------------------------

Transportation and selling expenses per boe 1.13
---------------------------------------------------------------------
---------------------------------------------------------------------


Transportation expenses were $76,000 or $1.13/boe for the period ended June 30, 2005. Future transportation expenses on a boe basis will depend on the type of production additions (oil versus natural gas), distance from wellhead to sales point, ownership of gathering and pipeline facilities and, if oil production increases, the method of transporting oil (pipeline versus trucking).



General and Administrative Expense (G&A)

Period Ended
($000s, except per boe) June 30, 2005
---------------------------------------------------------------------
G&A expense (gross) 766
Overhead recoveries (94)
---------------------------------------------------------------------
672
Allocated to capital projects (316)
---------------------------------------------------------------------
G&A expense 356
---------------------------------------------------------------------
---------------------------------------------------------------------

G&A expense per boe 5.29
---------------------------------------------------------------------
---------------------------------------------------------------------


For the period ended June 30, 2005, G&A expenses net of capitalized overhead were $356,000 or $5.29/boe. On a unit-of-production basis, G&A expenses are anticipated to decrease with incremental production volumes expected in future periods.

Stock-Based Compensation

Stock-based compensation expense for the period ended June 30, 2005 was $358,000. This expense represents the fair value of the Company's stock options, performance warrants and performances shares, amortized over the respective vesting periods. The expense for the current period is uncharacteristically high because $184,000 was recorded for 115,000 stock options for directors that vested upon grant.



Depletion, Depreciation and Amortization (DD&A)

Period Ended
June 30, 2005
---------------------------------------------------------------------
Depletion, depreciation and amortization - $000s 849
---------------------------------------------------------------------
---------------------------------------------------------------------

Depletion, depreciation and amortization - $/boe 12.62
---------------------------------------------------------------------
---------------------------------------------------------------------


The Company's DD&A expense for the period ended June 30, 2005 was $849,000 or $12.62/boe. The assets transferred to Cordero in the plan of arrangement represent the majority of the depletable base and were transferred at the historic net book value of Resolute. In accordance with oil and gas full cost accounting policies, the net book value transferred to Cordero was determined based on the ratio of discounted future net revenue of the property transferred to the discounted future net revenue of Resolute's total proved reserves. Cordero's future DD&A expense will reflect finding, development and acquisition costs for proved reserves.



Accretion

Period Ended
June 30, 2005
---------------------------------------------------------------------
Accretion - $000s 20
---------------------------------------------------------------------
---------------------------------------------------------------------

Accretion - $/boe 0.30
---------------------------------------------------------------------
---------------------------------------------------------------------


Accretion of Cordero's asset retirement obligations is calculated at the Company's credit-adjusted, risk-free rate of 7.5%. Pursuant to the plan of arrangement, the Company recorded a liability of $1,250,000 associated with the assets transferred to Cordero. An additional $547,000 of future obligations was calculated for wells drilled by Cordero in the current period.

Income Taxes

Current income tax expense represents Large Corporation Tax (LCT). The Company does not expect to pay current taxes other than LCT in 2005 based on existing tax pools, planned capital activities and current forecasts of taxable income. However, the current tax horizon will ultimately depend on several factors including commodity prices, future production, corporate expenses and both the type and amount of capital expenditures incurred during the remainder of the year.

Future income tax expense as a percentage of net earnings before tax is unusually high due to the combination of high stock-based compensation expense, as previously discussed, and low earnings before tax. As net earnings before tax represents the period from April 30, 2005 to June 30, 2005, it is expected that the Company's income tax rate will decrease in subsequent periods with normalized quarterly earnings.

Cash Netbacks

The components of the Company's operating and corporate netbacks are summarized below:



Period Ended
($/boe) June 30, 2005
---------------------------------------------------------------------
Sales price 42.73
Royalties (7.67)
Transportation costs (1.13)
Operating expenses (6.53)
---------------------------------------------------------------------
Operating netback 27.40
G&A (5.29)
Interest (net) (0.60)
Current income taxes (0.10)
---------------------------------------------------------------------
Corporate netback 21.41
---------------------------------------------------------------------
---------------------------------------------------------------------


Capital Expenditures

On April 30, 2005, as a result of the plan of arrangement, Resolute transferred certain oil and gas properties to Cordero. As Cordero and Resolute were related parties at the time of the transaction, net assets acquired by Cordero were recorded at Resolute's net book value as follows:



Net Assets Acquired Amount ($000s)
---------------------------------------------------------------------
Petroleum and natural gas interests and equipment 29,344
Undeveloped lands 5,166
Accounts receivable 1,380
Future income tax asset 12,737
Asset retirement obligations (1,250)
---------------------------------------------------------------------
47,377
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Consideration of Acquisition
---------------------------------------------------------------------
Issuance of 20,347,222 common shares 33,024
Cash - purchase price adjustment 14,353
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47,377
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Period Ended
($000s) June 30, 2005
---------------------------------------------------------------------
Land and lease retention 49
Geological and geophysical 247
Drilling and completions 1,734
Facilities and equipment 2,875
Other 776
Property acquisitions 497
---------------------------------------------------------------------
Total capital expenditures 6,178
Dispositions (959)
---------------------------------------------------------------------
Net capital expenditures 5,219
---------------------------------------------------------------------
---------------------------------------------------------------------


Capital expenditures for the period from April 30, 2005 to June 30, 2005 totaled $5.2 million, net of property dispositions of approximately $1.0 million. Capital expenditures related to the Company's properties prior to April 30, 2005 totaled $13.0 million and were included in the purchase price adjustment. Facilities and equipping costs of $2.9 million were incurred for 17 tie-ins and compression equipment at Malmo. Drilling and completion expenditures of $1.7 million included 8 (7.4 net) wells drilled at Malmo. The Company's drilling success rate for the period was 100%.

Property acquisitions of $497,000 represent undeveloped acreage in Malmo considered to be strategic to the Company's existing holdings in the area. To maximize cash and capitalize on the Company's opportunities, Cordero disposed of certain properties in southwest Alberta that were determined to be outside the Company's overall exploration and development focus.

In June 2005, upon completion of financing for $13.95 million, the Company increased its initial capital budget of $18-24 million to $28-30 million for the period April 30, 2005 to December 31, 2005. Actual costs may vary materially from budget as a result of numerous factors including, but not limited to, changes in the timing and scope of activities and changes in costs for land, services, equipment and materials.

Liquidity and Capital Resources

In exchange for the oil and gas properties transferred from Resolute, former Resolute shareholders received a total of 20,347,222 common shares of Cordero, as well as the same number of arrangement warrants which expired on May 30, 2005. Prior to May 30, 2005, warrants were exercised for 1,861,190 common shares for proceeds of $5.3 million.

On April 29, 2005, the Company issued 1,916,376 common shares and warrants in conjunction with an initial private placement of its common shares. The common shares issued under this private placement are subject to escrow conditions and the vesting of the warrants is subject to time and certain performance conditions.

On June 28, 2005, the Company closed a bought deal private placement whereby 3,000,000 common shares were issued at a price of $4.65 per share for total gross proceeds of $13.95 million. The common shares issued pursuant to the second private placement have a hold period which expires on October 29, 2005.

The Company has a $12 million credit facility that was utilized from time to time throughout the period but was not drawn upon as at June 30, 2005. The facility is with a major Canadian chartered bank, is subject to periodic review and is secured by the Company's petroleum and natural gas assets.

As at June 30, 2005, the Company has a working capital surplus, however, it is anticipated that the capital intensive nature of the Company's plans may create a working capital deficit in periods with high levels of capital activity. In the current period, capital expenditures were funded through the issue of common shares and performance shares with a cash surplus remaining at the end of the period. Cordero expects to finance the capital program for the remainder of the year through existing cash reserves, internally generated cash flow, debt, and if necessary, disposition of non-strategic properties or equity issues. Oil and natural gas prices have a significant impact on cash flows and, should commodity prices decline significantly, the Company has the ability to reduce its capital expenditure program accordingly. Cordero expects to have the ability to fulfill all of its contractual obligations at June 30, 2005 as summarized below:



Contractual Less Than 1-3 4-5 After 5
Obligations ($000s) Total 1 Year Years Years Years
------------------------------------------
Operating lease obligations 1,124 310 630 184 -
------------------------------------------
Total contractual obligations 1,124 310 630 184 -
------------------------------------------
------------------------------------------


Outstanding Share Data

Outstanding at period-end (000s) August 10, 2005 June 30, 2005
------------------------------------------------------------------------
Common shares 27,125 27,125
Common shares issuable on conversion:
Performance warrants 1,916 1,916
Performance shares 726 726
Stock options 955 955
------------------------------------------------------------------------
Total 30,722 30,722
------------------------------------------------------------------------
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2005 Guidance and Sensitivities

The following table outlines guidance for the period April 30, 2005
to December 31, 2005:

Guidance: Low High
------------------------------------------------------------------------

Average production - natural gas (mmcf/d) 8.5 9.5

Royalties (% of revenue) 18.5 19.5
Transportation ($/boe) 1.17 1.20
Operating ($/boe) 6.20 6.50
General and administrative ($/boe) 3.50 3.75
Available tax deduction ($ million) 14.0 16.0
Capital expenditures ($ million) 28.0 30.0
------------------------------------------------------------------------
------------------------------------------------------------------------


Sensitivities:

Based on the above assumptions, the following sensitivities are provided to demonstrate the impact on cash flow from operations and earnings from changes in natural gas prices and interest rates for the period:



$000s Cash Flow Earnings
------------------------------------------------------------------------

Change in average field price
for natural gas by Cdn $0.25/mcf 650 440
Change of 1% in prime interest rates 20 13
------------------------------------------------------------------------
------------------------------------------------------------------------


Critical Accounting Estimates

Management makes certain judgments and estimates in preparing financial statements in accordance with Canadian GAAP. Changes to these judgments and estimates could have a material effect on Cordero's financial statements and financial position.

Proved Petroleum and Natural Gas Reserves

Proved reserves, the estimated quantities of natural gas, crude oil and natural gas liquids that can be recovered in future years under future economic and operating conditions, are critical to many aspects of the Company's financial statements. These estimates are made with reasonable certainty using all available geological and reservoir data as well as historical production data and are subject to revisions based on changes in reservoir performance and the pricing environment.

Depletion Expense

In accordance with the full cost method of accounting for exploration and development activities, all costs associated with exploration and development are capitalized, whether successful or not. The aggregate of capitalized costs and future development costs, net of costs related to unproved properties, is amortized using the unit-of-production method based on estimated proved reserves. Changes in estimated proved reserves or future development costs have a direct impact on depletion expense.

Certain costs related to unproved properties may be excluded from costs subject to depletion until proved reserves have been determined or their value impaired. These properties are reviewed quarterly to be determined if proved reserves should be assigned or if impairment exists.

Full Cost Accounting Ceiling Test

The Company reviews the carrying value of all petroleum and natural gas assets for potential impairment on a quarterly basis. Impairment is indicated if the carrying value of the assets is not recoverable by the future undiscounted cash flows. This impairment test is based on estimates of proved reserves, production rates, petroleum and natural gas prices, future costs and other relevant assumptions. If impairment exists, the amount by which the carrying value exceeds the estimated fair value of the assets will be charged to earnings.

Asset Retirement Obligations

The provision for asset retirement obligations is estimated based on costs to abandon and reclaim wells and facilities, timing of abandonment and reclamation of wells and facilities, and inflation and discount rates over the life of the reserves. Changes to any assumptions used in the calculation will have an impact on the provision and the accretion expense included in earnings.

Income Taxes

The determination of the Company's income tax liabilities requires interpretation of complex laws and regulations and all tax filings are subject to audit and potential reassessment. Future income tax expense is calculated using tax rates based on the estimated timing of reversal of temporary differences between accounting and tax values of certain assets and liabilities. The actual current and future tax expenses recorded may differ from those actually incurred.

Notice of Conference Call

Cordero will host a conference call to discuss these results on August 12, 2005 at 11:00 a.m. ET, or 9:00 a.m. MT. Participants may access the call, toll-free at 1-877-323-2093 or direct at 416-695-9715. This call will also be available by webcast and can be accessed from Cordero's website: www.corderoenergy.com. A telephone replay of the call will be available through August 19, 2005 by dialing toll-free at 1-888-509-0081 or 416-695-5275.



Consolidated Balance Sheet
(unaudited) As at
($000s) June 30, 2005
------------------------------------------------------------------------

Assets

Current
Cash 9,626
Accounts receivable 3,773
------------------------------------------------------------------------
13,399

Petroleum and natural gas interests (note 4) 39,427

Future income tax asset (note 11) 12,830
------------------------------------------------------------------------

65,656
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities

Current
Accounts payable and accrued liabilities 6,223

Asset retirement obligations (note 6) 1,817

Shareholders' equity
Share capital (notes 7 and 8) 57,242
Contributed surplus 358
Retained earnings 16
------------------------------------------------------------------------
57,616
------------------------------------------------------------------------

65,656
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes.


Consolidated Statement of Operations and Retained Earnings

(unaudited) Period Ended
($000s, except per share amounts) June 30, 2005(1)
------------------------------------------------------------------------

Revenue
Gross oil and natural gas revenue 2,875
Royalties (516)
------------------------------------------------------------------------
2,359
------------------------------------------------------------------------

Expenses
Operating 439
Transportation and selling 76
Administrative 356
Interest (note 5) 41
Depletion, depreciation and amortization 849
Accretion (note 6) 20
Stock-based compensation (note 9) 358
------------------------------------------------------------------------
2,139
------------------------------------------------------------------------

Earnings before income taxes 220

Income taxes (note 11)
Current income taxes 7
Future income taxes 197
------------------------------------------------------------------------
204

Net earnings 16

Retained earnings, beginning of period -
Retained earnings, end of period 16
------------------------------------------------------------------------
------------------------------------------------------------------------

Net earnings per share (note 10)
Basic -
Diluted -
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) There is no year-to-date statement of operations and retained
earnings as operations commenced in the current period (April
30, 2005) and, as such, there was no activity in the previous
interim period ended March 31, 2005. These results comprise the
period from commencement of operations, April 30, 2005, to
June 30, 2005.

See accompanying notes.


Consolidated Statement of Cash Flows

(unaudited) Period Ended
($000s) June 30, 2005(1)
------------------------------------------------------------------------
Cash flows from the following:

Operating activities
Net earnings 16
Items not affecting cash
Depletion, depreciation and amortization 849
Accretion (note 6) 20
Future income taxes 197
Stock-based compensation 358
------------------------------------------------------------------------
Cash flow from operations 1,440
Asset retirement obligation expenditures -
Changes in non-cash working capital (note 12) (190)
------------------------------------------------------------------------
1,250
------------------------------------------------------------------------

Financing activities
Issue of common shares and performance shares (note 7) 24,799
Share issue costs (871)
------------------------------------------------------------------------
23,928
------------------------------------------------------------------------

Investing activities
Purchase of petroleum and natural gas
assets and equipment (note 3) (12,973)
Petroleum and natural gas expenditures (6,178)
Disposition of petroleum and natural gas interests 959
Purchase of accounts receivable (note 3) (1,380)
Changes in non-cash working capital (note 12) 4,020
------------------------------------------------------------------------
(15,552)
------------------------------------------------------------------------

Net increase in cash 9,626

Cash, beginning of period -

------------------------------------------------------------------------
Cash, end of period 9,626
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) There is no year-to-date statement of cash flows as operations
commenced in the current period (April 30, 2005) and, as such, there
was no activity in the previous interim period ended March 31, 2005.
These results comprise the period from commencement of operations,
April 30, 2005, to June 30, 2005.

See accompanying notes.


CORDERO ENERGY INC.

Notes to Consolidated Interim Financial Statements
(unaudited)


For the period ended June 30, 2005 (tabular amounts in thousands of dollars, except share and per share data):

1. Description of Business

Cordero Energy Inc. ("Cordero" or "the Company") is an independent exploration and development company pursuing conventional oil and natural gas production and reserves as well as coalbed methane development in western Canada. Cordero is based in Calgary, Alberta and was incorporated under the Business Corporations Act (Alberta) on March 30, 2005. The Company commenced operations on April 30, 2005 when certain oil and gas properties of Resolute Energy Inc. (Resolute) were transferred to Cordero under a plan of arrangement (note 3).

2. Significant Accounting Policies and Basis of Presentation

The consolidated financial statements are presented in accordance with Canadian Generally Accepted Accounting Principles (GAAP) and are expressed in Canadian dollars.

(a) Joint Venture Activities

A portion of the Company's exploration, development and production activities are conducted jointly with others. These financial statements reflect the Company's proportionate interest in such activities.

(b) Cash

Cash includes cash and short-term investments with a maturity of 90 days or less at the time of issue.

(c) Petroleum and Natural Gas Interests

The Company follows the full cost method of accounting for petroleum and natural gas interests whereby all costs relating to exploration for and development of petroleum and natural gas reserves are capitalized in one cost centre. Such costs include land acquisition costs, geological and geophysical expenses, costs of drilling both productive and non-productive wells and tangible equipment and administrative costs directly related to acquisition, exploration and development activities. Gains or losses are not recognized upon disposition of oil and natural gas properties unless crediting the proceeds against accumulated costs would result in a change in the rate of depletion of 20% or more.

Depletion and Depreciation

Petroleum and natural gas interests are depleted or depreciated using the unit-of-production method based on an independent engineering estimate of the Company's share of proved reserves, before royalties, with natural gas converted to its energy equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil. Included in the depletion base are estimated costs to be incurred in developing proved reserves and, excluded, are estimated salvage values and the cost of acquiring and evaluating unproved properties.

Impairment

Petroleum and natural gas interests are evaluated quarterly to determine whether the costs capitalized are impaired. The costs are assessed to be impaired if the carrying value of the assets exceeds the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties. If the carrying value is assessed as impaired, an impairment loss is recognized to the extent that the carrying value of assets exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using expected future product prices and costs, discounted using a risk-free rate. Unproved properties are assessed for impairment in a separate impairment test.

Asset Retirement Obligations

The fair value of a liability for asset retirement obligations is recorded in the period when a reasonable estimate of the fair value can be determined, with a corresponding increase to the carrying amount of the related asset. Increases in the fair value of the asset retirement obligations due to the passage of time are recorded as accretion expense. Actual expenditures incurred are charged against the obligations.

(d) Revenue Recognition

Revenue is recognized when title passes to the customer.

(e) Stock-Based Compensation Plans

The Company has stock-based compensation plans described in notes 8 and 9 and accounts for its plans using the fair value method. Under this method, compensation cost attributable to stock options, performance warrants and performance shares granted to officers, directors, and employees is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Consideration paid upon the exercise of stock options, performance warrants or performance shares, together with corresponding amounts previously recognized in contributed surplus, is recorded as an increase to share capital. In the event that vested options or warrants expire without being exercised, previously recognized compensation costs associated with such stock options are not reversed.

(f) Income Taxes

The Company follows the liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the financial statements and their respective tax bases, using enacted income tax rates. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs.

(g) Earnings per Share

Per share information is calculated on the basis of the weighted average number of common shares outstanding during the period. Diluted per share information is calculated using the treasury stock method which assumes that any proceeds received by the Company upon the exercise of in-the-money stock options, performance warrants, performance shares and share appreciation rights, plus unamortized stock compensation costs, would be used to buy back common shares at the average market price for the period.

(h) Measurement Uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.

The amounts recorded for depletion and deprecation of petroleum and natural gas interests and for asset retirement obligations are based on estimates of petroleum and natural gas reserves and future costs. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements of future periods could be material.

3. Plan of Arrangement

On April 30, 2005, as a result of the plan of arrangement, Resolute transferred certain oil and gas properties to Cordero. In exchange, Resolute shareholders received a total of 20,347,222 common shares of Cordero, as well as the same number of arrangement warrants. Each arrangement warrant entitled the holder to acquire 0.0269 Cordero common shares, exercisable for 30 days after the effective date of the arrangement, at a price of $2.87 per Cordero common share. As Cordero and Resolute were related parties at the time of the transaction, net assets acquired by Cordero were recorded at Resolute's net book value as follows:



Net Assets Acquired Amount
------------------------------------------------------------------------
Petroleum and natural gas interests and equipment 29,344
Undeveloped lands 5,166
Accounts receivable 1,380
Future income tax asset 12,737
Asset retirement obligations (1,250)
------------------------------------------------------------------------
47,377
------------------------------------------------------------------------
------------------------------------------------------------------------

Consideration of Acquisition
------------------------------------------------------------------------
Issuance of 20,347,222 common shares 33,024
Cash - purchase price adjustment 14,353
------------------------------------------------------------------------
47,377
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Petroleum and Natural Gas Interests

Accumulated
Depletion and Net Book
At June 30, 2005 Cost Depreciation Value
------------------------------------------------------------------------
Petroleum and natural gas interests 39,708 (837) 38,871
Other assets 568 (12) 556
------------------------------------------------------------------------
40,276 (849) 39,427
------------------------------------------------------------------------
------------------------------------------------------------------------


As at June 30, 2005, unproved properties of $4,290,000 and other P&NG assets of $165,000, which consisted of drilling supplies for future exploration and development, were not subject to depletion.

The Company capitalized overhead expenses of $316,000 relating to petroleum and natural gas exploration and development activities for the period ended June 30, 2005.

Cordero performed a ceiling test calculation at June 30, 2005 to assess whether petroleum and natural gas interests are impaired. The oil and gas future prices are based on July 1, 2005 benchmark prices in the futures market. These prices have been adjusted for commodity price differentials specific to Cordero.

The following table summarizes the benchmark prices used in the ceiling test calculation. Based on these assumptions, there was no impairment at June 30, 2005.



Foreign Edmonton Light
WTI Oil Exchange Crude Oil AECO Gas
Year (US$/bbl) Rate (Cdn$/bbl) (Cdn$/mmbtu)
------------------------------------------------------------------------
2005 54.33 0.82 66.26 8.10
2006 54.64 0.82 66.63 8.41
2007 50.19 0.82 61.21 7.55
2008 42.67 0.82 52.04 6.62
2009 41.20 0.82 50.24 6.39
2010 41.82 0.82 51.00 6.42
Escalate
thereafter 2.0% per year 2.0% per year 2.0% per year
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Revolving Credit Facility

The Company has a $12 million extendible revolving term credit facility provided by a Canadian chartered bank. Direct borrowings bear interest at the bank's prime lending rate and banker's acceptances and LIBOR advances bear interest at LIBOR plus a stamping fee of 1.10%. The facility is subject to periodic review and is secured by a $40 million first floating charge debenture over all the Company's assets. During the period ended June 30, 2005, the Company incurred $41,000 of interest on this facility and as at June 30, 2005, there was no balance outstanding.

6. Asset Retirement Obligations

Cordero's asset retirement obligations are based on the Company's net ownership in wells and facilities and management's estimate of costs to abandon and reclaim those wells and facilities and the potential future timing of the costs to be incurred.

The Company has estimated the present value of its total asset retirement obligations to be $1,817,000 at June 30, 2005 based on a total future liability, after adjusting for inflation at 2.0%, of $5,349,000. Payments to settle asset retirement obligations occur over the operating lives of the underlying assets, estimated to be from zero to 30 years, with the majority of costs expected to occur between 2012 and 2020. Estimated costs have been discounted at Cordero's credit-adjusted, risk-free rate of 7.5%.



Period Ended
June 30, 2005
------------------------------------------------------------------------
Asset retirement obligations, date of incorporation -
Liabilities transferred upon plan of arrangement (note 3) 1,250
Liabilities incurred in period 547
Liabilities settled during period -
Accretion 20
------------------------------------------------------------------------
Asset retirement obligations, June 30, 2005 1,817
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Share Capital

(a) Authorized

At June 30, 2004, the Company had authorized an unlimited number of common shares and an unlimited number of preferred shares.



(b) Issued and Outstanding

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

Common Shares Number Consideration
------------------------------------------------------------------------

Issued on incorporation, March 30, 2005 1 1
Issued on completion of plan of arrangement
(note 3) 20,347,222 33,024
Initial private placement 1,916,376 5,500
Exercise of arrangement warrants 1,861,190 5,341
Private placement, June 28, 2005 3,000,000 13,950
Share issue costs (net of future tax effect) - (581)
------------------------------------------------------------------------
Balance, June 30, 2005 27,124,789 57,235
------------------------------------------------------------------------
------------------------------------------------------------------------


Of the 20,347,222 arrangement warrants issued to Resolute shareholders in conjunction with the plan of arrangement (note 3), 19,908,347 were exercised by the expiry date of May 30, 2005 for 1,861,190 common shares and total gross proceeds of $5,341,000.

On April 29, 2005, the Company issued 1,916,376 common shares and performance warrants in conjunction with an initial private placement of its common shares. On June 28, 2005, the Company closed a bought deal private placement whereby 3,000,000 common shares were issued at a price of $4.65 per share for total gross proceeds of $13,950,000. The common shares issued pursuant to the second private placement have a hold period of four months which expires on October 29, 2005.

Each performance warrant is exercisable into one common share of the Company at a price of $2.87 per share. The performance warrants have a term of five years and one-third will vest on each of the first, second and third anniversaries of April 29, 2005 as long as the twenty-day weighted average trading price of the common shares of Cordero reach 1.5 times, 2.0 times and 2.5 times the market value of $2.87 as at or after each respective anniversary date. As at June 30, 2005, the performance clause of 1.5 times the market value has been met.



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

Performance Shares Number Consideration
------------------------------------------------------------------------
Initial private placement 725,900 7
------------------------------------------------------------------------
Balance, June 30, 2005 725,900 7
------------------------------------------------------------------------
------------------------------------------------------------------------


Each performance share was issued for a price of $0.01 per share and will be convertible into the percentage of a Cordero common share equal to the closing trading price of the Cordero common shares less market value of $2.87 if positive, divided by the Cordero closing share price. The Cordero performance shares will automatically convert into Cordero common shares as to one-third on each of the first, second and third anniversaries of the closing of the arrangement if the holder is a service provider on such date.

8. Stock-Based Compensation Plans

(a) Stock Option Plan

The Company has established a stock option plan whereby officers, directors and employees may be granted options to purchase common shares at a fixed price not less than the volume-weighted five-day average on the day preceding grant. During the period, 955,400 stock options were granted of which 115,000 issued to directors vested upon grant. Vesting and expiry provisions vary for each grant and are determined at the date of grant. The aggregate number of common shares reserved for issuance under the stock option plan, and any other security based share compensation of Cordero, is fixed at a rolling maximum of 10% of the issued and outstanding common shares calculated on a non-diluted basis.

The following table summarizes information about the Company's stock options outstanding at June 30, 2005:



------------------------------------------------------------------------
Remaining Remaining
Options Contractual Options Contractual
Exercise Price Outstanding Life (years) Exercisable Life (Years)
------------------------------------------------------------------------
$4.43 672,000 4.87 - -
$4.84 283,400 4.96 115,000 4.96
------------------------------------------------------------------------
$4.43 - $4.84 955,400 4.90 115,000 4.96
------------------------------------------------------------------------
------------------------------------------------------------------------


(b) Share Appreciation Rights Plan

The Company has established a share appreciation rights plan whereby share appreciation rights (rights) may be granted to directors, officers, employees and other individuals who perform services for the Company or any subsidiary of the Company. The maximum number of rights which may be outstanding at any one time under the plan is 2% of the total number of issued and outstanding common shares of the Company, calculated on a non-diluted basis.

Each right entitles the holder to receive from the Company either: 1) an amount (the appreciation amount) per right being exercised equal to the positive difference, if any, obtained by subtracting $2.87 from the volume weighted average trading price of the common shares on the Toronto Stock Exchange for the five trading days immediately preceding the date of exercise or; 2) the number of common shares of the Company per right being exercised determined by the fraction equal to the appreciation amount divided by the five-day volume weighted average trading price.

As at June 30, 2005, no share appreciation rights had been granted.

9. Stock-Based Compensation

The fair value of each stock option, performance warrant and performance share granted is estimated on the date of grant using the Black-Scholes option pricing model with weighted average assumptions and resulting values as follows:



------------------------------------------------------------------------
Performance Performance
Stock Options Warrants Shares
------------------------------------------------------------------------
Risk-free interest rate (%) 3.16 3.30 3.30
Expected life (years) 3.5 3.5 3.5
Expected volatility (%) 40 40 40
Dividend yield (%) - - -

Weighted average fair value ($) 1.507 0.637 0.955
------------------------------------------------------------------------
------------------------------------------------------------------------


The aggregate fair value of the options, performance warrants and performance shares is expensed over the respective vesting periods.

10. Net Earnings per Share

The following reconciles the number of shares used in the basic and diluted net earnings per share calculations:



------------------------------------------------------------------------
Period Ended
Common Shares June 30, 2005
------------------------------------------------------------------------

Weighted average basic 23,339,269
Dilutive securities
Stock options -
Performance warrants 863,013
Performance shares 825,103
------------------------------------------------------------------------
Weighted average diluted 25,027,385
------------------------------------------------------------------------
------------------------------------------------------------------------


11. Income Taxes

The Company has a future income tax asset resulting from the plan of arrangement pursuant to which tax pools associated with the assets transferred from Resolute exceeded the net book value of the assets. The future income tax provision reflects an effective tax rate which differs from the expected statutory tax rate. Differences were accounted for as follows:



------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
Earnings before income taxes 220

Expected income taxes at the Canadian statutory
rate of 37.62% 82
Increase (decrease) in income tax expense resulting from
Non-deductible Crown charges 95
Resources allowance (81)
Stock-based compensation 135
Other (27)
------------------------------------------------------------------------
204
------------------------------------------------------------------------
------------------------------------------------------------------------


The major components of the future income tax asset are as follows:


------------------------------------------------------------------------
As at June 30, 2005
------------------------------------------------------------------------
Petroleum and natural gas interests 11,840
Asset retirement obligations 610
Share issue costs 280
Other 100
------------------------------------------------------------------------
12,830
------------------------------------------------------------------------
------------------------------------------------------------------------


12. Statements of Cash Flows

Period Ended
Changes in non-cash working capital June 30, 2005
------------------------------------------------------------------------
Accounts receivable (3,773)
Accounts payable and accrued liabilities 6,223
------------------------------------------------------------------------
Change in non-cash working capital relating to: 2,450
Operating activities (190)
Investing activities 2,640
------------------------------------------------------------------------
------------------------------------------------------------------------


Corporate Information

Board of Directors Officers

Brian K. Lemke David V. Elgie
Executive Chairman President and
Chief Executive Officer
Cordero Energy Inc.
Calgary, Alberta Richard Gleasure
Vice President, Engineering and
Don Driscoll(1)(3) Chief Operating Officer
Corporate Director
Calgary, Alberta Brian K. Lemke
Executive Chairman
David V. Elgie
President and C. Dean Setoguchi
Chief Executive Officer Vice President and
Cordero Energy Inc. Chief Financial Officer
Calgary, Alberta
Head Office
S. Barry Jackson (2)(3) 2400 Bow Valley Square 3
Corporate Director 255 - 5th Avenue SW
Calgary, Alberta Calgary, Alberta T2P 3G6
Tel: (403) 265-7006
Douglas G. Manner (1)(2) Fax: (403) 265-7050
Senior Vice President and Email: info@corderoenergy.com
Chief Operating Officer Website: www.corderoenergy.com
Kosmos Energy LLC
Dallas, Texas Solicitors

Robert R. Rooney (2)(3) Bennett Jones LLP
Partner, Bennett Jones LLP Calgary, Alberta
Barristers and Solicitors
Calgary, Alberta Banker

Jeffrey T. Smith(1)(2) Canadian Imperial Bank
Corporate Director of Commerce
Calgary, Alberta
Auditors
Philip Swift(1)(3)
Co-Chairman Deloitte & Touche LLP
ARC Financial Corporation Calgary, Alberta
Calgary, Alberta
Members of the Independent Reservoir Consultants
following Committees:
(1) Audit and Sproule Associates Ltd.
(2) Technical Calgary, Alberta
(3) Human Resources
and Governance Transfer Agent

Valiant Trust Company
Calgary, Alberta

Stock Exchange Listing

Toronto Stock Exchange
Trading symbol: COR


Contact Information

  • Cordero Energy Inc.
    David V. Elgie
    President and Chief Executive Officer
    (403) 265-7006 or Toll Free: 1-888-266-6608
    or
    Cordero Energy Inc.
    C. Dean Setoguchi
    Vice President and Chief Financial Officer
    (403) 265-7006 or Toll Free: 1-888-266-6608
    Email: info@corderoenergy.com
    Website: www.corderoenergy.com