Cordero Energy Inc.
TSX : COR

Cordero Energy Inc.

August 03, 2006 07:01 ET

Cordero Energy Reports Second Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 3, 2006) - Cordero Energy Inc. (TSX:COR) ("Cordero" or the "Company") is pleased to report second quarter 2006 results and an update on ongoing operations.

Highlights

- Production averaged 3,072 boe/d for the quarter, representing a 5% increase over the first quarter of 2006. Current production is approximately 3,300 boe/d and total stabilized production awaiting tie-in is approximately 1,200 boe/d.

- Operating costs improved to $3.27/boe representing a 14% reduction from the previous quarter, ranking Cordero as one of the lowest cost operators in the Western Canadian Basin.

- Royalties fell to 13% of revenue for the quarter and are expected to average 16-17% for the remainder of the year.

- Despite a 20% decrease in natural gas prices, funds flow decreased by only 4% to $7.2 million ($0.22/share diluted) compared to the first quarter of 2006.

- Achieved a 100% success rate on the 10 (8.5) net) wells drilled during the quarter. A 91% success rate was achieved on the 39 (34.6 net) wells drilled year to date.

- Development in the southern portion of Malmo is progressing well. Gas production potential awaiting tie-in in this area is approximately 900 - 1,000 boe/d.

- Entered into an agreement at Bigoray with a junior oil and gas company who will pay an upfront fee of $2 million and will drill three pinnacle reef exploration targets defined by Cordero later this year. Cordero will operate and hold a 50% working interest after completion.

- Added 16,000 net acres of land during the past 6 months at Clear Hills, Alberta, increasing the area land total to 22,400 acres. The Company plans to follow-up on a Gething gas pool discovery and several multi-zone exploration prospects in the area this winter.

- Planning to drill a high impact Kiskatinaw prospect in northern Alberta later this year.

- Completed a bought deal equity financing for $19.9 million to strengthen the balance sheet.



Six Months
Quarter Ended Ended
June 30 June 30,
2006 2005(1) % Change 2006
------------------------------------------------------------------------
FINANCIAL
------------------------------------------------------------------------
Gross oil and natural gas
revenue ($000s) 10,521 2,875 266 22,396

Funds flow from
operations(2) ($000s) 7,178 1,440 398 14,677
Per share basic ($) 0.24 0.06 300 0.49
Per share diluted ($) 0.22 0.06 267 0.45

Net earnings ($000s) 105 16 556 2,029
Per share basic ($) - - - 0.07
Per share diluted ($) - - - 0.06

Net capital expenditures
($000s) 14,207 5,219 172 46,866
Net debt and working capital
(deficiency) ($000s) (17,536) 7,176 (344) (17,536)

Shares outstanding (000s)
At period end 32,623 27,125 20 32,623
Weighted average during
period, basic 29,822 23,339 28 30,214
Weighted average during
period, diluted 32,315 25,027 29 32,606

------------------------------------------------------------------------
OPERATING
------------------------------------------------------------------------
Production
Natural gas (mmcf/d) 17.5 6.6 164 17.1
Oil and natural gas liquids
(bbls/d) 161 1 160 145
Oil equivalent (boe/d) (6:1) 3,072 1,103 179 2,998

Average wellhead prices
Natural gas ($/mcf) 5.92 7.12 (17) 6.62
Oil and natural gas liquids
($/bbl) 75.99 41.40 84 71.25
Oil equivalent ($/boe) (6:1) 37.63 42.73 (12) 41.27

Operating expenses ($/boe)
(6:1) 3.27 6.53 (50) 3.53

Wells drilled (gross/net)
Natural gas 10/8.5 8/7.4 34/29.6
Oil - - 2/2.0
Dry - - 3/3.0
Total 10/8.5 8/7.4 39/34.6

Net success rate (%) 100 100 91

Undeveloped land holdings
(000s)
Gross acres 95 74 95
Net acres 83 61 83
Average working interest (%) 87 82 87
------------------------------------------------------------------------

(1) The Company commenced operations April 30, 2005, therefore this
period represents 62 days from April 30, 2005 to June 30, 2005.

(2) Funds flow from operations represents earnings before depletion,
depreciation, accretion, stock-based compensation and future income
taxes.


President's Message

I am pleased to report on Cordero's second quarter results and the progress the Company has made during the first half of 2006. Production averaged 3,072 boe/d for the quarter, up 5% from the first quarter. Current production is approximately 3,300 boe/d. The Company estimates initial production capacity from wells drilled but not on stream of over 2,000 boe/d and expects to add stabilized production of 1,200 boe/d over the next six to eight months.

The Company is pleased with its growing exploration prospect inventory and its ongoing development at Malmo. The Company achieved a 100% drilling success rate on the 10 (8.5 net) wells drilled during the quarter and an overall 91% success rate on the 39 (34.6 net) wells drilled year-to-date.

Cordero continues to increase its land inventory, acquiring over 36,000 net acres of land on conventional exploration opportunities and 5,600 net acres of land at Malmo during the first half of 2006. The Company will continue to pursue undeveloped lands in several areas to expand its prospect inventory. Our drilling inventory stands at 114 wells including 86 development wells at Malmo and 28 conventional exploration targets.

Financial Results

Natural gas prices fell by 20% to average $5.92/mcf for the quarter compared to $7.37/mcf during the first quarter of 2006. Despite significantly lower gas prices, funds flow for the quarter declined only 4% to $7.2 million ($0.22/share diluted) compared to $7.5 million ($0.23/share diluted) in the first quarter. Higher production, combined with lower royalties, operating costs and general and administrative expenses (G&A), softened the impact of the lower gas prices.

Operating expenses fell to $3.27/boe representing a 14% reduction from the first quarter. The Company is proud of this achievement and has become one of the lowest cost operators in the Western Canadian Basin. With respect to other cash costs, G&A fell 20% to $2.09/boe and royalties were reduced to 13% of revenue for the quarter due to a one-time gas cost allowance adjustment. Royalties are expected to average 16-17% for the remainder of the year.

A recently legislated change in corporate income tax rates resulted in a one-time adjustment to reduce the value of Cordero's future income tax asset. Consequently, the future income tax rate was 99% for the quarter, reducing earnings to $0.1 million.

Cordero's capital expenditures totaled $14.2 million during the second quarter and $46.9 million for the first half. The Company invested $9.0 million during the first six months of 2006 on land and seismic to expand its inventory of exploration prospects. A substantial proportion of incremental production capacity created from drilling activities and facility construction is expected to be brought on-stream over the next six to eight months.

Cordero completed a $19.9 million bought deal equity financing during the quarter as a means of strengthening its balance sheet and positioning the company for expanded business opportunities in a low natural gas price environment. At the end of the second quarter, Cordero had net debt of $17.5 million with approximately $50 million total debt capacity including capital leases.

Operations Update

Malmo, Alberta

The Company drilled 28 (25.7 net) development wells targeting the Horseshoe Canyon coals and Belly River sands to date in 2006. The majority of the activity has been focused in the southern portion of Malmo. Estimated stabilized production awaiting tie-in is 900 - 1,000 boe/d. Most of this production will be brought on-stream pending completion of a TransCanada Pipeline expansion, completion of a planned Cordero pipeline project and further well operations. The Cordero pipeline project requires approval for a pipeline crossing underneath a narrow portion of Buffalo Lake which is situated at the southern end of Cordero's lands. The crossing application has been filed and is currently out for public notification. Shut-in volumes are expected to be brought on-stream in stages through to the end of March 2007.

Progress continues to be made by all stakeholders on surface access and regulatory issues for coalbed methane development in Alberta. This is improving the Company's ability to plan and execute its activities in the Malmo area.

A total of 25.9 net wells are currently awaiting completion and/or tie-in. The current drilling inventory in Malmo is approximately 86 (73.0 net) wells.

Conventional Exploration and Development

In spite of lower than forecasted netbacks and funds flow, the Company has enhanced its focus and capital resources to longer-term exploration activities. Our exploratory drilling inventory is approximately 28 wells with follow-up potential and has progressed to a new phase with the testing of several of its exploratory opportunities. The Company has expanded its exploration focus in several areas during the past year. We are hopeful that areas such as Bigoray, Clear Hills, Colorado, Trutch, Tupper and several others will become material production centers for the Company in the future. Cordero has plans to test up to seven gross (4.5 net) additional higher risk, high reward exploration targets before year-end. The Company is also considering several other opportunities.

At Bigoray, Alberta, Cordero entered into a farmout agreement where the farmee will pay an upfront fee of $2 million and will also drill three exploration tests on pinnacle reef targets defined by Cordero. The farmee will earn a 50% interest in the Company's prospective Nisku lands in the area upon completion of all its obligations and Cordero will retain operatorship following the drilling and completion phase. The Company believes that this method of farmout is an excellent way of exposing Cordero to higher risk, higher reward opportunities while maintaining operatorship and mitigating financial exposure. The three wells are expected to be drilled by year end and other targets have been identified pending the results of this initial program. A total of 16,480 acres have been acquired to date on the play.

At Clear Hills, Alberta, surveying has begun for an expanded exploration and development program during the winter of 2006/2007. Cordero plans to drill up to three development wells to follow-up a Gething discovery last winter and two to four additional multi-zone exploration prospects. The Company is also reviewing tie-in and facility options for the Clear Hills discovery. The area is not accessible during the summer months and most activities are winter access only. At Colorado, located at the eastern side of Clear Hills, the Company is planning to drill one to two exploration wells this winter. Total land holdings in the Clear Hills area have been expanded by 16,000 acres during the first half of 2006 to 22,400 acres.

In northern Alberta, Cordero plans to drill a high impact Kiskatinaw prospect which has been geologically and geophysically defined. The Company plans to drill this 100% prospect before year-end.

At Kakwa, Alberta, a successful Gething well drilled this past winter was pipeline connected in June, but has remained shut-in pending resolution of third-party facility constraints. We expect the well will be on-stream by the end of September.

At Trutch, British Columbia, the Company recently acquired 2,082 acres and now holds over 8,000 acres of land in the area. An exploration well for the Cretaceous is planned prior to year-end. Construction is also underway to tie-in an existing well as third party facilities are currently under construction in the area.

Outlook

I am pleased with the execution of our business plan and the progress we are making in growing our company while expanding our exploration and development prospects for the future. As detailed above, we are continuing to focus on adding high impact, internally generated exploration projects to our inventory as well as expanding our land holdings for Horseshoe Canyon CBM and Belly River development at Malmo.

Despite lower natural gas prices, our low-cost production profile is still enabling us to maintain relatively high netbacks and combined with our strong balance sheet, we are well positioned to execute on our growth opportunities. Our financial strength enables us to pursue incremental opportunities in a low natural gas price environment. We have added significant production capacity from drilling activities conducted during the first half of the year and hope to bring most of the production on-stream over the next 6-8 months in a more favorable natural gas price environment. Additionally, several higher risk, higher reward exploration targets are planned for the fall and winter that could have a significant impact on the Company.

Thank you for your continued interest and support of Cordero.

On behalf of our dedicated staff and the Board of Directors,

"signed"

David V. Elgie

President and CEO

August 2, 2006


MANAGEMENT'S DISCUSSION AND ANALYSIS

August 2, 2006

Description of Business

Cordero Energy Inc. ("Cordero" or "the Company") is a junior oil and gas company pursuing oil and natural gas production and reserve growth through the development of its coalbed methane (CBM) and Belly River lands in central Alberta as well as conventional exploration 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. Cordero commenced trading on the Toronto Stock Exchange on May 3, 2005 under the symbol "COR".

Reader Guidance

This Management's Discussion and Analysis (MD&A) of the financial condition and the results of operations should be read in conjunction with the audited consolidated financial statements for the period ended December 31, 2005 together with the related 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.

Unless otherwise indicated, the discussion in this MD&A with respect to results for the three months ended June 30, 2006 are compared with results for the 62-day period from commencement of operations on April 30, 2005 to June 30, 2005. For all periods amounts presented on a daily basis are calculated based on the number of days in the respective period.

Production information is commonly reported in units of barrel of oil (boe) equivalent which may be misleading, particularly if used in isolation. For purposes of computing such units, barrel of oil equivalent amounts have been calculated using an energy equivalence conversion rate of 6 thousand cubic feet of natural gas to one barrel of oil (6:1). The conversion ratio of 6:1 is based on an energy equivalency conversion method, which is primarily applicable at the burner tip. It does not represent equivalent wellhead value for the individual products.

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

Forward-Looking Statements

The information herein contains forward-looking statements and assumptions, such as those relating to guidance, 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. Cordero is exposed to numerous operational, technical, financial and regulatory risks and uncertainties, many of which are beyond its control and may significantly affect anticipated future results.

Operations may be unsuccessful or delayed as a result of competition for services, supplies and equipment, mechanical and technical difficulties, ability to attract and retain employees on a cost-effective basis, commodity and marketing risk and seasonality. The Company is subject to significant drilling risks and uncertainties including the ability to find oil and natural gas reserves on an economic basis and the potential for technical problems that could lead to well blowouts and environmental damage. The Company is also exposed to risks relating to the inability to obtain timely regulatory approvals, surface access, access to third party gathering and processing facilities, transportation and other third party related operational risks. Furthermore, there are numerous uncertainties in estimating the Company's reserve base due to the complexities in estimating future production, costs and timing of expenses and future capital. Financial risks Cordero is exposed to include, but are not limited to, access to debt or equity markets and fluctuations in commodity prices, interest rates and the Canadian/US dollar exchange rate. The Company is subject to regulatory legislation, the compliance with which may require significant expenditures and non-compliance with which may result in fines, penalties or production restrictions. For additional information on risk factors, refer to Cordero's annual information form at www.sedar.com or www.corderoenergy.com.

The forward-looking statements contained herein are as of August 2, 2006 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. Except as required by applicable securities laws, 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. Funds flow from operations, which represents earnings before depletion, depreciation, accretion, stock-based compensation and future income taxes is used by the Company to evaluate operating performance, leverage and liquidity. Operating netback, which is calculated as average unit sales price less royalties, transportation costs and operating expenses, and corporate netback, which further deducts administrative and interest expense and current income tax, represents the cash margin for every barrel of oil equivalent sold. Net debt and working capital, which is current assets less debt, capital lease obligations and current liabilities, is used to assess efficiency and financial strength. Funds flow from operations, netback, and net debt and working capital 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.



2006 Guidance

Revised Revised Initial
August 2006 May 2006 November 2005
Low High Low High Low High
------------------------------------------------------------------------
Average Production 3,100 3,400 3,100 3,400 3,100 3,400

Royalties (% of
revenue) 16.0 18.0 18.5 20.5 17.5 19.0
Transportation
($/boe) 1.15 1.35 1.35 1.50 1.40 1.50
Operating ($/boe) 3.50 3.80 3.80 4.50 5.80 6.30
General and
administrative
($/boe) 2.10 2.40 2.10 2.40 2.10 2.40
Capital expenditures
($ million) 65.0 68.0 65.0 68.0 50.0 55.0
------------------------------------------------------------------------
------------------------------------------------------------------------


Production for the quarter was 3,072 boe/d and 2,998 boe/d for the first half of 2006, slightly below the low end of our annual guidance. The Company expects to be within the average production guidance range of 3,100 - 3,400 boe/d with planned production additions during the second half of the year. Exit production will depend primarily on the timing of bringing wells previously drilled on-stream and also on exploration drilling results.

Cordero has maintained relatively strong funds flow from its operations as a result of being a low cost producer. Guidance for royalties, transportation and operating expenses have all been reduced to reflect the current profile of Cordero's operations.

Cordero's capital budget was expanded to $65 million, enabling the Company to pursue additional opportunities in a lower gas price environment. The remaining planned capital program will be financed through operating funds flow and debt.



Selected Quarterly Information

2006 2005
Q2 Q1 Q4 Q3 Q2(1)
------------------------------------------------------------------------

Production
Natural gas (mmcf/d) 17.5 16.8 12.1 8.5 6.6
Oil and natural gas liquids
(bbls/d) 161 130 21 1 1
Barrels of oil equivalent
(boe/d) 3,072 2,923 2,039 1,421 1,103

Financial ($000s except as
indicated)
Petroleum and natural gas
revenue 10,521 11,874 12,637 6,919 2,875
Revenue net of royalties 9,150 9,600 10,029 5,710 2,359

Funds flow from operations 7,178 7,498 8,175 4,268 1,440
Per share basic ($) 0.24 0.25 0.29 0.16 0.06
Per share diluted ($) 0.22 0.23 0.27 0.15 0.06

Net earnings 105 1,924 3,453 1,057 16
Per share basic ($) - 0.06 0.12 0.04 -
Per share diluted ($) - 0.06 0.11 0.04 -

Total assets 128,962 120,045 104,923 67,316 65,656
Net capital expenditures 14,207 32,659 24,788 11,610 5,219
Net debt and working
capital (deficiency) (17,536) (29,296) (4,068) (121) 7,176

Shares outstanding (000s) 32,623 29,725 29,725 27,125 27,125

Per unit information
Natural gas ($/mcf) 5.92 7.37 11.22 8.82 7.12
Oil and natural gas liquids
($/bbl) 75.99 65.30 70.12 51.13 41.40
Oil equivalent ($/boe) 37.63 45.14 67.38 52.93 42.73

Operating expenses ($/boe) 3.27 3.80 5.27 5.80 6.53

Operating netback ($/boe) 28.31 31.51 46.82 36.57 27.40

Net wells drilled
Natural gas 8.5 21.2 36.6 - 7.4
Oil - 2.0 1.0 - -
Dry - 3.0 1.0 - -
Total 8.5 26.2 38.6 - 7.4

Net success rate (%) 100 89 97 - 100
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Represents the period from commencement of operations April 30,
2005 to June 30, 2005.

See accompanying notes.


Quarterly Summary

Q2 2005(1) - The Company commenced operations on April 30, 2005 with certain oil and gas properties transferred from Resolute, primarily coalbed methane and Belly River assets in the Malmo area of central Alberta. Production from these properties at inception was 683 boe/d and production averaged 1,103 boe/d for the 62-day period. Funds flow for the quarter was $1.4 million and net earnings of $16,000 was negatively affected by high stock-based compensation expense and the resultant future income tax rate of 90%. Cordero was initially capitalized with a private placement of 1.9 million common shares for proceeds of $5.5 million and subsequent proceeds of $5.3 million from the exercise of 1.9 million warrants granted to former Resolute shareholders. The Company completed a bought-deal private placement of 3.0 million common shares for proceeds of $14.0 million. A $12.0 million credit facility was obtained with a major Canadian chartered bank.

Q3 2005 - Funds flow from operations was $4.3 million and net earnings was $1.1 million for the quarter. The improved financial results over the previous period reflected several factors including average production of 1,421 boe/d, slightly better commodity prices and lower per unit cash costs. The Company focused its capital resources on installation of new compression equipment and relocation of existing compressors to more effectively match deliverability with previously-drilled and planned wells. Completion work was performed on 11 wells and in relation to the conventional exploration program, land and seismic expenditures were incurred in northwest Alberta and northeast British Columbia. The Company entered into a sale-leaseback transaction with a third party for the construction, sale and use of compression equipment resulting in a total obligation of $1.9 million at the end of the period. The Company expanded its credit facility to $25.0 million.

Q4 2005 - Quarterly financial results of $8.2 million in funds flow from operations and $3.5 million of net earnings were positively impacted by increased production volumes and higher commodity prices over the prior quarter. Average production for the three months was 2,039 boe/d and the exit rate, representing average production for the month of December, was 2,388 boe/d. Unit costs continued to decrease with operating costs of $5.27/boe and G&A expenses of $2.64/boe for the quarter. This quarter was the most capital-intensive of 2005 with 38.6 net wells drilled, completion work on 44 wells, compression installation, undeveloped acreage acquired and seismic purchased for total net expenditures of $24.8 million. Cordero entered into two additional sale lease-back transactions increasing the total obligation to $5.1 million at the end of the period. The Company completed a private placement for 2.6 million common shares for gross proceeds of $15.1 million.

Q1 2006 - Average production was 2,923 boe/d, representing a 43% increase over the previous quarter. Funds flow from operations was $7.5 million, a 9% reduction from the fourth quarter of 2005 due to declining natural gas prices. Partially offsetting the lower revenues were lower unit operating costs which improved to $3.80/boe, a 28% decline from the previous quarter. Cordero had an active quarter with $32.7 million in net capital expenditures. The Company drilled 17.5 net development wells and 8.7 net exploration wells at an 89% success rate, tie in and facilities work resulted in the addition of 24.1 net wells to the production profile, and over 18,000 net acres of land was purchased.

Q2 2006 - Funds flow from operations was $7.2 million, a 4% decrease from the first quarter of 2006, despite an increase in average production to 3,072 boe/d, as natural gas prices continued the downward slide from the high at the end of 2005. Positively impacting earnings were low operating costs which improved to $3.27/boe and a royalty rate of 13% resulting from a one time prior period adjustment. Negatively impacting earnings were DD&A expense of $17.62/boe which reflected the industry-wide increase in the cost of materials and services, and high future income tax expense as a result of the federal tax rate reductions for 2008 through 2010. The Company drilled 8.5 net wells at a 100% success rate and acquired an interest in over 17,000 net acres of land for exploration prospects. In April the credit facility was expanded from $25 million to $46 million. In June a bought-deal equity issue was completed for 2.8 million common shares and total gross proceeds of $19.9 million.

(1) Represents the period from commencement of operations April 30, 2005 to June 30, 2005



Production

Quarter Ended Six Months
June 30 Ended
2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Natural gas (mcf/d) 17,469 6,616 164 17,115
Oil and NGLs (bbls/d) 161 1 160 145
------------------------------------------------------------------------
Total (boe/d) 3,072 1,103 179 2,998
------------------------------------------------------------------------
------------------------------------------------------------------------


Average daily production for the three months ended June 30, 2006 was 3,072 boe/d, an increase of 179% compared to the quarter ended June 30, 2005 and an increase of 5% over the previous quarter's average production of 2,923 boe/d. Production for the six months ended June 30, 2006 was 2,998 boe/d.

Natural gas production for the second quarter of 2006 was 17.5 mmcf/d. The increase from the second quarter of 2005 was attributable to the Company's successful drilling program through which 78.7 net wells came on-stream from June 30, 2005 to June 30, 2006. During the current quarter 13.6 net wells were brought on production; 11.8 of which were in the Malmo area. The incremental production from these wells was partially offset by production declines and transportation curtailments currently in the process of being resolved. A total of 25.9 net wells are presently awaiting completion and/or tie-in. When these volumes can be brought to sales point will depend on timing of facilities work as well as pipeline and plant capacity.

Future average production will be determined by overall drilling success, the time required to place new wells on production, well performance, transportation curtailments and ultimate recoveries on existing wells.



Petroleum & Natural Gas Revenue

Quarter Ended Six Months
June 30 Ended
($000s) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Natural gas 9,410 2,874 227 20,522
Oil and NGLs 1,111 1 1,110 1,874
------------------------------------------------------------------------
Total 10,521 2,875 266 22,396
------------------------------------------------------------------------
------------------------------------------------------------------------


Prices and Marketing Quarter Ended Six Months
June 30 Ended
Benchmark prices: 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
AECO natural gas ($/mmbtu) 6.04 7.17 (16) 6.77
WTI oil (USD$/bbl) 70.70 53.20 33 67.09
CDN/USD foreign exchange
rate 0.891 0.801 11 0.879
WTI oil (CDN equivalent
$/bbl) 79.35 66.38 20 76.37
Edmonton Light ($/bbl) 78.55 65.52 20 73.76
------------------------------------------------------------------------
------------------------------------------------------------------------

Quarter Ended Six Months
June 30 Ended
Average Sale Price 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Natural gas ($/mcf) 5.92 7.12 (17) 6.62
Oil and NGLs ($/bbl) 75.99 41.40 84 71.25
------------------------------------------------------------------------
Total ($/boe) 37.63 42.73 (12) 41.27
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months ended June 30, 2006 P&NG revenue before royalties was $10.5 million, an increase of 266% over the second quarter of 2005, which represented only 62 days of operations. For the six months ended June 30, 2006 P&NG revenue before royalties was $22.4 million.

The Company's overall realized price for the second quarter of 2006 was $37.63/boe, 12% less than the realized price of $42.73 in the same period of the previous year. Approximately 15% of production for the quarter was dedicated to an aggregator contract with the remaining 85% sold at daily spot prices. As the Company's production profile is heavily weighted to natural gas, revenues are largely determined by AECO prices which are influenced by overall North American supply and demand balance, weather conditions, storage levels and transportation, gathering and processing capacity constraints. North American natural gas prices have declined substantially from the high reached at the end of 2005 as a result of mild winter weather and high gas storage levels. Periodic imbalances between supply and demand for natural gas are common and can result in volatile pricing.

The Company participates in risk management activities in order to manage its exposure to fluctuations in oil and natural gas prices. Cordero has agreed to sell 7.4 mmcf/d to a third party at monthly AECO July through October 2006 but has not hedged or entered into any fixed price arrangements during or subsequent to the period ended June 30, 2006. Prices received for future production will be determined by the Company's marketing arrangements and overall commodity market conditions.



Royalties

Quarter Ended Six Months
June 30 Ended
($000s) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Crown 753 388 94 2,615
Freehold, GORR 698 128 445 1,293
ARTC (80) - - (263)
------------------------------------------------------------------------
Total royalties 1,371 516 166 3,645
------------------------------------------------------------------------
------------------------------------------------------------------------


Average Royalty Rates
(average % of total sales)
------------------------------------------------------------------------
Crown 7.2 13.5 (47) 11.7
Freehold, GORR 6.6 4.5 47 5.8
ARTC (0.8) - - (1.2)
------------------------------------------------------------------------
Total royalties 13.0 18.0 (28) 16.3
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties as a percentage of revenue were 13% for the three months ended June 30, 2006 and 18% for the same period in the previous year. The royalty rate for the six months ended June 30, 2006 was 16%.

Crown royalties for the current quarter were abnormally low at 7% as they included a one time prior period adjustment. The Company's Freehold and GORR royalties have risen to almost 7% in the current quarter with increasing production from freehold wells.

Crown royalties paid on wells acquired from Resolute are not eligible for the Alberta Royalty Tax Credit (ARTC). As eligible production has been added from wells drilled by Cordero, the Company's ARTC has increased proportionately.

Royalty rates in subsequent periods may fluctuate based on future reference prices relative to average wellhead prices, type of royalties (Crown vs. Freehold), the proportion of production additions qualifying for royalty holidays and the Crown royalties associated with wells that are eligible for ARTC. It is expected that the total royalty rate for the remainder of the year will be approximately 16%-17%, assuming that natural gas prices do not change significantly.



Operating Expenses

Quarter Ended Six Months
June 30 Ended
($000s) except per boe) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Operating expenses
(gross) 1,713 452 279 3,273
Processing income (798) (13) 6,038 (1,358)
------------------------------------------------------------------------
Operating expenses
(net, as reported) 915 439 108 1,915
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating expenses
per boe (net) 3.27 6.53 (50) 3.53
------------------------------------------------------------------------
------------------------------------------------------------------------


Unit operating expenses of $3.27/boe were 50% lower in the second quarter of 2006 compared to $6.53/boe for the second quarter of 2005. Operating expenses for the six months ended June 30, 2006 were $3.53/boe.

Total quarterly operating expenses have increased over the past year with the additional wells on production and higher prices for supplies and services. However, the Company operates substantially all of its production and has a high level of ownership in gathering and processing facilities, allowing it to effectively manage its costs to every extent possible. The declining costs on a boe basis are directly attributable to the production additions through the year.

Processing income represents the recovery of processing costs, incurred at Cordero's facilities, for production from wells associated with third parties. The substantial increase in the second quarter of 2006 compared to the same period in the previous year is relative to the increase in the number of Cordero-owned facilities as well as an increase in applicable production going through these facilities.

In the future, anticipated conventional production additions will likely increase per unit costs, the magnitude of which is unknown at this time. The cost of field supplies and services, which are currently in an escalating trend, and the Company's future operatorship over gathering and processing facilities will also determine future operating expenses.



Transportation Expenses

Quarter Ended Six Months
June 30 Ended
($000s) except per boe) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Transportation expenses -
$000s 319 76 320 631
------------------------------------------------------------------------
------------------------------------------------------------------------
Transportation expenses -
$/boe 1.14 1.13 1 1.16
------------------------------------------------------------------------
------------------------------------------------------------------------


Transportation expenses on a unit basis were $1.14/boe for the three months ended June 30, 2006, relatively consistent with $1.13/boe for the three months ended June 30, 2005. Year-to-date, transportation expenses were $1.16/boe as the expense for the first quarter of 2006 was $1.19/boe.

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, the amount of unutilized firm service contracted by the Company and the method of transporting oil (pipeline versus trucking).



General and Administrative Expenses (G&A)

Quarter Ended Six Months
June 30 Ended
($000s) except per boe) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
G&A expenses (gross) 1,503 766 96 2,992
Overhead recoveries (402) (94) 328 (711)
------------------------------------------------------------------------
1,101 672 64 2,281
Allocated to capital
projects (516) (316) 63 (1,007)
------------------------------------------------------------------------
G&A expenses 585 356 64 1,274
------------------------------------------------------------------------
------------------------------------------------------------------------
G&A expenses per boe 2.09 5.29 (60) 2.35
------------------------------------------------------------------------
------------------------------------------------------------------------


G&A expenses were $0.6 million in the second quarter of 2006 compared to $0.4 million in the second quarter of 2005. On a per unit basis, expenses declined 60% from $5.29 to $2.09, primarily as a result of the production additions from one period to the next, but also because the second quarter of 2005 was the Company's first reporting period and included one-time start up costs. For the six months ended June 30, 2006 G&A expenses were $1.3 million and $2.35/boe.

G&A expenses are reported net of overhead recoveries and allocated capital. Overhead recoveries are the allocation and recovery from partners of G&A expenses on Cordero-operated properties and have increased each reporting period due to the increase in the Company's capital activities. G&A expenses allocated to capital projects represent salaries and other costs directly associated with property acquisition, exploration and development activities. This proportion capitalized is regularly reviewed by management and, in future periods, will depend on the type of actual capital activities carried out.

Stock-Based Compensation

Stock-based compensation expense for the three months ended June 30, 2006 was $0.5 million compared to $0.4 million for the same period in 2005. For the six months ended June 30, 2006 the expense was $0.9 million. The increase in stock-based compensation in this quarter is due to 623,000 stock options that were granted in the current year, particularly 18,000 of these that vested upon grant.



Depletion, Depreciation and Amortization (DD&A)

Quarter Ended Six Months
June 30 Ended
($000s) except per boe) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Depletion, depreciation
and amortization - $000s 4,925 849 480 8,888
------------------------------------------------------------------------
------------------------------------------------------------------------
Depletion, depreciation
and amortization - $/boe 17.62 12.62 40 16.38
------------------------------------------------------------------------
------------------------------------------------------------------------


DD&A expense per boe increased by 40% from $12.62/boe in the second quarter of 2005 to $17.62/boe in the second quarter of 2006. The expense for the six months ended June 30, 2006 was $16.38/boe. The higher DD&A expense reflects the industry-wide increase in the cost of materials and services. As well, a significant portion of the capital costs in 2006 have been incurred in conjunction with the Company's exploration program for which future reserve additions are anticipated, but not yet reflected in the depletion calculation.

Cordero's DD&A expense in future periods will reflect finding, development and acquisition costs for proved reserves.



Accretion

Quarter Ended Six Months
June 30 Ended
($000s) except per boe) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Accretion -- $000s 83 20 315 152
------------------------------------------------------------------------
------------------------------------------------------------------------
Accretion -- $/boe 0.30 0.30 - 0.28
------------------------------------------------------------------------
------------------------------------------------------------------------


Accretion of Cordero's asset retirement obligations is calculated at the Company's credit-adjusted, risk-free rate of 7.5%. The expense will continue to increase with the obligation as additional wells are drilled and facilities added.

Income Taxes

For the three and six month periods ended June 30, 2006 the Company recorded current income tax recoveries of $94,000 and $60,000, respectively. During the current quarter the federal large corporation tax (LCT) was eliminated, effective January 1, 2006, therefore previously recorded amounts were reversed. Also contributing to the recovery was an adjustment for lower than anticipated LCT for 2005. Presently the Company does not expect to pay current income tax until 2008 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 and future reporting periods.

The future income tax expense for the three months ended June 30, 2006 was $1.6 million and for the six months ended June 30, 2006 was $2.8 million, resulting in future tax rates of 99% and 58%, respectively. The large expense in the current quarter was due to the 2006 federal budget and the substantive enactment of corporate tax rate reductions for 2008 to 2010, inclusive. With lower future tax rates, the value of the Company's future tax asset is less and a one-time adjustment of $1.0 million was required to update its estimated value.

Net Earnings

Net earnings in 2006 were negatively impacted by the $1.0 million adjustment to the future income tax asset. For the three and six month periods ended June 30, 2006, earnings were $0.1 million and $2.0 million respectively. Net earnings for the 62-day period ended June 30, 2005 were $16,000. Earnings in the current quarter were positively impacted by lower operating expenses, royalties and current income taxes. In addition to future tax expense, earnings were reduced by lower gas prices, higher DD&A costs, future tax expense and stock-based compensation expense.



Cash Netbacks

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

Quarter Ended Six Months
June 30 Ended
($/boe) 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Sales price 37.63 42.73 (12) 41.27
Royalties (4.91) (7.67) (36) (6.72)
Transportation costs (1.14) (1.13) 1 (1.16)
Operating expenses (3.27) (6.53) (50) (3.53)
------------------------------------------------------------------------
Operating netback 28.31 27.40 3 29.86
G&A (2.09) (5.29) (60) (2.35)
Interest (net) (0.88) (0.60) 47 (0.58)
Current income taxes 0.34 (0.10) (440) 0.11
------------------------------------------------------------------------
Corporate netback 25.68 21.41 20 27.04
------------------------------------------------------------------------
------------------------------------------------------------------------

Capital Expenditures











Quarter Ended Six Months
June 30 Ended
$000s 2006 2005 % Change June 30, 2006
------------------------------------------------------------------------
Land and lease retention 3,095 49 6,216 6,419
Geological and geophysical 220 247 (11) 2,561
Drilling and completions 6,750 1,734 289 23,264
Facilities and equipment 4,003 2,875 39 13,533
Property acquisitions 352 497 (29) 885
Other 787 776 1 1,502
------------------------------------------------------------------------
Total capital
expenditures 15,207 6,178 146 48,164
Purchase price adjustment - 12,973 (100) -
Dispositions (1,000) (959) 4 (1,298)
------------------------------------------------------------------------
Net capital expenditures 14,207 18,192 (22) 46,866
------------------------------------------------------------------------
------------------------------------------------------------------------


Net capital expenditures were $14.2 million for the quarter ended June 30, 2006 and $46.9 million year to date. In the current period 8.2 net wells were drilled (7.9 at Malmo) and completion work was performed on 14.0 net wells, resulting in drilling and completion expenses of $6.8 million. Facilities and equipping expenses of $4.0 million were related to tie in and facilities work at various locations, but primarily Malmo. The Company's prospect inventory was further expanded with the purchase of over 17,000 net acres of land; 16,000 of which was in the Company's Clear Hills exploration area. During the current quarter the Company received the first of two $1.0 million installments pursuant to a farmout agreement under which a third party will drill three exploration wells and earn a 50% interest in Cordero's lands. If any of these wells are successful Cordero will have an interest in the production and retain operatorship.

The 2006 capital budget is currently set at $65-68 million, approximately $33 million of it dedicated to further development of the Company's Malmo interests with the remaining funds allocated to conventional exploration and development activities.

Liquidity and Capital Resources

In April 2006, Cordero's credit facility was expanded from $25 million to $46 million. In June 2006 a bought-deal equity offering was completed whereby 2.8 million common shares were issued at $7.25/share for total gross proceeds of $19.9 million. In conjunction with the funds received from the financing, the capital budget was increased from $50-55 million to $65-68 million.

At June 30, 2006, the Company had $7.7 million drawn on its credit facility and net debt and working capital deficiency was $17.5 million, including $3.8 million relating to three capital leases. During the second quarter of 2006, capital expenditures were funded through internally generated cash flow and debt. The proceeds from the equity offering were used to draw down the Company's credit facility. Due to the nature of the oil and gas industry, significant cash is required to fund capital programs necessary to maintain and increase production and proved developed reserves and to acquire strategic oil and gas assets. Cordero expects to finance the remainder of its 2006 capital program and all other commitments through a combination of internally generated cash flow and debt.

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 fulfil all of its contractual obligations at June 30, 2006 as summarized below:



Less
than
1 1-3 4-5 After 5
($000s) Total Year Years Years Years
------------------------------------------------------------------------
Operating lease obligations (office
space) 835 312 523 - -
Transportation obligations 3,080 1,052 1,578 450 -
Capital lease obligations 4,810 653 1,208 947 2,002
------------------------------------------------------------------------
Total contractual obligations 8,725 2,017 3,309 1,397 2,002
------------------------------------------------------------------------
------------------------------------------------------------------------


Outstanding Shares, Options and Warrants

Outstanding at period-end (000s) August 2, 2006 June 30, 2006
------------------------------------------------------------------------
Common shares 32,623 32,623
Common shares issuable on conversion:
Performance warrants 1,916 1,916
Performance shares 484 484
Stock options 1,729 1,729
------------------------------------------------------------------------
Total 36,752 36,752
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Balance Sheets
(Unaudited)









June 30, December 31,
($000s) 2006 2005
------------------------------------------------------------------------
Assets

Current
Cash and cash equivalents - 11,027
Accounts receivable 7,353 8,799
------------------------------------------------------------------------
7,353 19,826

Petroleum and natural gas interests (note 3) 113,527 74,623

Future income tax asset (note 10) 8,082 10,474
------------------------------------------------------------------------

128,962 104,923
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities

Current
Accounts payable and accrued liabilities 13,377 19,825
Bank indebtedness (note 4) 7,666 -
Current portion of obligations under capital
leases (note 5) 452 446
------------------------------------------------------------------------
21,495 20,271

Obligations under capital leases (note 5) 3,394 3,623

Asset retirement obligations (note 6) 4,710 3,695

Shareholders' equity
Share capital (notes 7 and 8) 91,102 71,747
Contributed surplus 1,706 1,061
Retained earnings 6,555 4,526
------------------------------------------------------------------------
99,363 77,334
------------------------------------------------------------------------
128,962 104,923
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes.


Consolidated Statements of Operations
Six Three
Months Months Period
Ended Ended Ended


(Unaudited) June 30, June 30, June 30,

($000s, except per share amounts) 2006 2006 2005(1)
------------------------------------------------------------------------

Revenue
Gross oil and natural gas revenue 22,396 10,521 2,875
Royalties (3,645) (1,371) (516)
------------------------------------------------------------------------
18,751 9,150 2,359
------------------------------------------------------------------------

Expenses
Operating 1,915 915 439
Transportation 631 319 76
General and administrative 1,274 585 356
Net interest (notes 4 and 5) 314 247 41
Depletion, depreciation and amortization
(note 3) 8,888 4,925 849
Accretion (note 6) 152 83 20
Stock-based compensation (note 8) 853 493 358
------------------------------------------------------------------------
14,027 7,567 2,139
------------------------------------------------------------------------

Earnings before income taxes 4,724 1,583 220

Income taxes (note 10)
Current income taxes (60) (94) 7
Future income taxes 2,755 1,572 197
------------------------------------------------------------------------
2,695 1,478 204

------------------------------------------------------------------------
Net earnings 2,029 105 16
------------------------------------------------------------------------
------------------------------------------------------------------------

Net earnings per share (note 9)
Basic 0.07 - -
Diluted 0.06 - -
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Statements of Retained Earnings

Six Three
Months Months Period
Ended Ended Ended


(Unaudited) June 30, June 30, June 30,

($000s) 2006 2006 2005(1)
------------------------------------------------------------------------
Retained earnings, beginning of period 4,526 6,450 -
Earnings for the period 2,029 105 16
------------------------------------------------------------------------
Retained earnings, end of period 6,555 6,555 16
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Represents the period from commencement of operations April 30, 2005
to June 30, 2005.

See accompanying notes.


Consolidated Statements of Cash Flows

Six Three
Months Months Period
Ended Ended Ended


(Unaudited) June 30, June 30, June 30,

($000s) 2006 2006 2005(1)
------------------------------------------------------------------------
Cash flows from the following:

Operating activities
Net earnings 2,029 105 16
Items not affecting cash
Depletion, depreciation and amortization 8,888 4,925 849
Accretion 152 83 20
Future income taxes 2,755 1,572 197
Stock-based compensation 853 493 358
Asset retirement obligation
expenditures (note 6) (62) (31) -
Changes in non-cash working capital
(note 11) 152 (3,261) (190)
------------------------------------------------------------------------
14,767 3,886 1,250
------------------------------------------------------------------------

Financing activities
Drawdown of revolving credit facility
(note 4) 7,666 (2,893) -
Payment of capital lease obligations
(note 5) (223) (112) -
Issue of common shares 19,938 19,938 24,799
Share issue costs (1,155) (1,117) (871)
------------------------------------------------------------------------
26,226 15,816 23,928
------------------------------------------------------------------------

Investing activities
Petroleum and natural gas expenditures (48,164) (15,207) (6,178)
Purchase of petroleum and natural gas - - (14,353)
assets and equipment
Disposition of petroleum and natural
gas interests 1,298 1,000 959
Changes in non-cash working capital
(note 11) (5,154) (5,495) 4,020
------------------------------------------------------------------------
(52,020) (19,702) (15,552)
------------------------------------------------------------------------

(Decrease) increase in cash and cash
equivalents (11,027) - 9,626

Cash and cash equivalents, beginning of
period 11,027 - -
------------------------------------------------------------------------
Cash and cash equivalents, end of period - - 9,626
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Represents the period from commencement of operations April 30, 2005
to June 30, 2005.

See accompanying notes.



CORDERO ENERGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

For the three and six month periods ended June 30, 2006 (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.

2. Significant Accounting Policies and Basis of Presentation

The accounting principles applied to the consolidated interim financial statements are consistent with those described in note 2 to the audited consolidated financial statements for the period ended December 31, 2005. Certain information and disclosures normally required in the notes to the annual financial statements have been condensed or omitted, and therefore, these interim financial statements and notes thereto should be read in conjunction with the audited financial statements for the period ended December 31, 2005.



3. Petroleum and Natural Gas Interests

Accumulated
Depletion and Net Book
At June 30, 2006 Cost Depreciation Value
------------------------------------------------------------------------
Petroleum and natural gas interests 120,751 (13,767) 106,984
Assets under capital leases (note 5) 4,149 (342) 3,807
Other assets 2,858 (122) 2,736
------------------------------------------------------------------------
127,758 (14,231) 113,527
------------------------------------------------------------------------
------------------------------------------------------------------------

At December 31, 2005
------------------------------------------------------------------------
Petroleum and natural gas interests 73,996 (5,092) 68,904
Assets under capital leases (note 5) 4,149 (180) 3,969
Other assets 1,822 (72) 1,750
------------------------------------------------------------------------
79,967 (5,344) 74,623
------------------------------------------------------------------------
------------------------------------------------------------------------


As at June 30, 2006, unproved properties of $16.8 million (December 31, 2005 - $12.0 million) and other petroleum and natural gas assets of $2.1 million (December 31, 2005 - $1.2 million) which consisted of drilling supplies for future exploration and development, were not subject to depletion.

The Company capitalized direct overhead expenses of $0.5 million and $1.0 million relating to petroleum and natural gas exploration and development activities for the three month and six month periods ended June 30, 2006, respectively.

4. Revolving Credit Facility

In April 2006 the Company increased its revolving credit facility from $25.0 million to $46.0 million. The facility is provided by a Canadian chartered bank, is subject to semi-annual review and is secured by an $80.0 million first floating charge debenture over all of the Company's assets. Borrowings are made by way of prime loans with interest at the bank's prime lending rate, banker's acceptances or LIBOR advances at LIBOR plus a stamping fee of 1.10%. Interest paid on the facility for the three and six month periods ended June 30, 2006 was $190,000 and $214,000, respectively.



5. Obligations Under Capital Leases

Future minimum lease payments under the Company's capital leases are as
follows:

Year Amount
------------------------------------------------------------------------
2006 332
2007 637
2008 604
2009 571
2010 537
2011 504
Thereafter 1,625
------------------------------------------------------------------------
Total minimum lease payments 4,810
Less amount representing interest at 5.18% to 5.91% 964
------------------------------------------------------------------------
Present value of obligations under capital leases 3,846
Due within one year 452
------------------------------------------------------------------------
Long-term portion of obligations under capital leases 3,394
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest expense incurred on the obligations under capital leases was $57,000 and $115,000, respectively for the three and six month periods ended June 30, 2006. Leased assets are depreciated using the unit-of-production method (see note 3).

6. Asset Retirement Obligations

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

Total undiscounted cash flows required to settle the Company's asset retirement obligations are estimated to be $10.8 million. Payments to settle these obligations will occur over the operating lives of the underlying assets, estimated to be from 0 to 28 years, with the majority of costs expected to occur between 2013 and 2018. Estimated costs have been discounted at Cordero's credit-adjusted, risk-free interest rate of 7.5% .



Six Months Three Months
Ended Ended Period Ended
June 30, 2006 June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Asset retirement obligations,
beginning of period 3,695 4,461 -
Liabilities transferred
upon plan of arrangement - - 1,250
Obligations incurred in
period 925 197 547
Obligations settled during
period (62) (31) -
Accretion 152 83 20
------------------------------------------------------------------------
Asset retirement
obligations, end of period 4,710 4,710 1,817
------------------------------------------------------------------------
------------------------------------------------------------------------

7. Share Capital

(a) Authorized

At June 30, 2006, 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
------------------------------------------------------------------------
Balance, December 31, 2005 29,724,789 71,740
Equity offering June 2, 2006 2,750,000 19,938
Exercise of performance shares 148,124 2
Transfer from contributed surplus on exercise
of performance shares - 208
Share issue costs (net of future income
tax effect) - (791)
------------------------------------------------------------------------
Balance, June 30, 2006 32,622,913 91,097
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Performance Shares Number Consideration
------------------------------------------------------------------------
Balance, December 31, 2005 725,900 7
Exercised (241,967) (2)
------------------------------------------------------------------------
Balance, June 30, 2006 483,933 5
------------------------------------------------------------------------
------------------------------------------------------------------------


On June 2, 2006 the Company closed a bought deal private placement whereby 2.75 million common shares were issued at a price of $7.25/share for total gross proceeds of $19.9 million. In May 2006 241,967 performance shares vested and were automatically converted into 148,124 common shares.



8. Stock-Based Compensation Plans

(a) Stock Option Plan

The following table summarizes information regarding the Company's stock
option activity during the six months ended June 30, 2006.

------------------------------------------------------------------------
Number of Weighted Average
Options Exercise Price ($)
------------------------------------------------------------------------
Outstanding at December 31, 2005 1,105,800 4.69
Granted 623,000 6.40
------------------------------------------------------------------------
Outstanding at June 30, 2006 1,728,800 5.30
------------------------------------------------------------------------
------------------------------------------------------------------------

The following table summarizes information about the Company's stock
options outstanding at June 30, 2006:

------------------------------------------------------------------------
Remaining Remaining
Contractual Contractual
Options Life Options Life
Exercise Price ($) Outstanding (Years) Exercisable (Years)
------------------------------------------------------------------------
4.43 - 5.00 955,400 3.90 471,807 3.92
5.01 - 6.00 192,900 4.28 20,000 4.13
6.01 - 7.00 468,000 4.66 - -
7.01 - 7.40 112,500 4.86 18,000 4.86
------------------------------------------------------------------------
4.43 - 7.40 1,728,800 4.21 509,807 3.96
------------------------------------------------------------------------
------------------------------------------------------------------------


(b) Share Appreciation Rights Plan

As at June 30, 2006, no share appreciation rights had been granted.

(c) 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. Weighted average assumptions and resulting fair value for stock options granted during the three and six month periods ended June 30, 2006 are as follows:



------------------------------------------------------------------------
Six Months Three Months
Ended Ended Period Ended
June 30, 2006 June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Risk-free interest rate (%) 4.02 4.15 3.16
Expected life (years) 3.5 3.5 3.5
Expected volatility (%) 40 40 40
Dividend yield (%) - - -

Weighted average fair value ($) 2.057 2.541 1.507
------------------------------------------------------------------------
------------------------------------------------------------------------

9. Net Earnings per Share

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

------------------------------------------------------------------------
Six Months Three Months
Common Shares Ended Ended Period Ended
June 30, 2006 June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Weighted average basic 30,214,499 29,822,453 23,339,269
Dilutive securities
Stock options 612,456 679,455 -
Performance warrants 1,238,384 1,275,784 863,013
Performance shares 540,861 537,721 825,103
------------------------------------------------------------------------
Weighted average diluted 32,606,200 32,315,413 25,027,385
------------------------------------------------------------------------
------------------------------------------------------------------------


10. 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:



------------------------------------------------------------------------
Six Months Three Months
Ended Ended Period Ended
June 30, 2006 June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Earnings before income taxes 4,724 1,583 220

Expected income taxes at the
statutory rate of 34.49% 1,629 546 82
Increase (decrease) resulting from:
Non-deductible Crown charges 294 83 95
Resource allowance (384) (172) (81)
Stock-based compensation 294 165 135
Canadian Large Corporate Tax (60) (94) 7
Income tax rate reduction 982 1,007 -
Other (60) (57) (34)
------------------------------------------------------------------------
Income taxes 2,695 1,478 204
------------------------------------------------------------------------
------------------------------------------------------------------------

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

------------------------------------------------------------------------
As at As at
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Petroleum and natural gas interests 5,988 8,701
Asset retirement obligations 1,397 1,242
Share issue costs 742 508
Other (45) 23
------------------------------------------------------------------------
8,082 10,474
------------------------------------------------------------------------
------------------------------------------------------------------------

11. Supplementary Information for Statement of Cash Flows

------------------------------------------------------------------------
Six Months Three Months
Changes in non-cash Ended Ended Period Ended
working capital June 30, 2006 June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Accounts receivable 1,446 (659) (3,773)
Accounts payable and
accrued liabilities (6,448) (8,097) 6,223
------------------------------------------------------------------------
Change in non-cash working
capital relating to: (5,002) (8,756) 2,450
------------------------------------------------------------------------
Operating activities 152 (3,261) (190)
Investing activities (5,154) (5,495) 2,640
------------------------------------------------------------------------
------------------------------------------------------------------------


12. Commitments

The Company is committed to future minimum payments for natural gas transportation contracts and office space. Payments required under these commitments for each of the next five years are as follows:



Year 1 Year 2 Year 3 Year 4 Year 5
------------------------------------------------------------------------
Office space 312 327 196 - -
Transportation 1,052 976 602 342 108
------------------------------------------------------------------------
Total commitments 1,364 1,303 798 342 108
------------------------------------------------------------------------
------------------------------------------------------------------------


Corporate Information Officers

Board of Directors David V. Elgie
President and Chief Executive Officer
Brian K. Lemke
Chairman Richard Gleasure
Cordero Energy Inc. Vice President, Engineering and Chief
Calgary, Alberta Operating Officer

Donald P. Driscoll(1)(3) C. Dean Setoguchi
Corporate Director Vice President and Chief Financial
Calgary, Alberta Officer

David V. Elgie
President and Chief Executive Head Office
Officer
Cordero Energy Inc. 2400 Bow Valley Square 3
Calgary, Alberta 255 - 5th Avenue SW
Calgary, Alberta T2P 3G6
S. Barry Jackson (2)(3) Tel: (403) 265-7006
Corporate Director Fax: (403) 265-7050
Calgary, Alberta Email: info@corderoenergy.com
Website: www.corderoenergy.com
Douglas G. Manner (1)(2)
President and Chief
Executive Officer Banker
Westside Energy Corporation
Dallas, Texas Canadian Imperial Bank of Commerce

Robert R. Rooney (2)(3)
Corporate Director Auditors
Calgary, Alberta
Deloitte & Touche LLP
Jeffrey T. Smith(1)(2) Calgary, Alberta
Corporate Director
Calgary, Alberta
Independent Reservoir Consultants
Philip C. Swift(1)(3)
Co-Chairman Sproule Associates Ltd.
ARC Financial Corporation Calgary, Alberta
Calgary, Alberta

Members of the following Transfer Agent
Committees:
Valiant Trust Company
(1) Audit and Finance Calgary, Alberta

(2) Technical
Stock Exchange Listing
(3) Human Resources and
Governance 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