Cordero Energy Inc.
TSX : COR

Cordero Energy Inc.

November 02, 2006 08:14 ET

Cordero Energy Reports Third Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 2, 2006) - Cordero Energy Inc. (TSX:COR) ("Cordero" or the "Company") is pleased to report third quarter 2006 results and an update on ongoing operations.



Highlights

- Production averaged 3,261 boe/d for the quarter, representing a 129%
increase over the same period last year and a 6% increase over the second
quarter.

- Funds flow increased 63% to $7.0 million compared to $4.3 million for the
third quarter of 2005 despite significantly lower realized natural gas
prices.

- Cordero continues to improve its cost profile ranking it as one of the
lowest cost operators in Western Canada:

- Royalties as a percentage of revenue averaged 15.7% for the quarter
compared to 17.6% for the same quarter in 2005;

- Operating costs averaged $3.36/boe for the quarter, a 42% decrease over
$5.80/boe for the comparable period in 2005; and

- General and administrative expense per boe decreased by 50% to
$1.92/boe versus $3.86/boe for the same period in 2005.

- Participated in 16 (13.8 net) wells with a 93% success rate during the
quarter. Year-to-date, 55 (48.5 net) wells have been drilled at a success
rate of 92%.

- Expecting 1,200 boe/d of new production additions in the next three to
four months.

- Increased undeveloped land holdings by 83% (51,000 net acres) year-to-
date, significantly increasing Cordero's drilling inventory.

- Increased Malmo area drilling inventory to 110 wells.

- Bank credit facility increased to $55.0 million, raising total credit
capacity to approximately $59.0 million.

- Announced $10.6 million flow-through financing that is expected to close
on November 9, 2006.

Three Months Ended Period Ended
September 30 September 30
2006 2005 2006 2005(1)
----------------------------------- ------------------- -------------------
FINANCIAL
----------------------------------- ------------------- -------------------
Gross oil and natural gas revenue
($000s) 10,811 6,919 33,207 9,795

Funds flow from operations (2)
($000s) 6,967 4,268 21,643 5,711
Per share basic ($) 0.21 0.16 0.70 0.22
Per share diluted ($) 0.20 0.15 0.65 0.20

Net earnings ($000s) 762 1,057 2,791 1,073
Per share basic ($) 0.02 0.04 0.09 0.04
Per share diluted ($) 0.02 0.04 0.08 0.04

Net capital expenditures ($000s) 14,348 11,610 61,215 16,829
Net debt and working capital
(deficiency) ($000s) (25,074) 121 (25,074) 121

Shares outstanding (000s)
At period end 32,623 27,125 32,623 27,125
Weighted average during period,
basic 32,623 27,125 31,026 26,091
Weighted average during period,
diluted 34,970 29,433 33,346 28,245

----------------------------------- ------------------- -------------------
OPERATING
----------------------------------- ------------------- -------------------
Production
Natural gas (mmcf/d) 18.7 8.5 17.6 7.8
Oil and natural gas liquids
(bbls/d) 145 1 145 1
Oil equivalent (boe/d) 3,261 1,421 3,087 1,294

Average wellhead prices
Natural gas ($/mcf) 5.68 8.82 6.29 8.24
Oil and natural gas liquids
($/bbl) 77.33 51.13 73.30 50.03
Oil equivalent ($/boe) 36.03 52.93 39.41 49.46

Operating expenses ($/boe) 3.36 5.80 3.47 6.05

Wells drilled (gross/net)
Natural gas 15/12.8 - 49/42.5 8/7.4
Oil - - 2/2.0 -
Dry 1/1.0 - 4/4.0 -
Total 16/13.8 - 55/48.5 8/7.4

Net success rate (%) 93 - 92 100

Undeveloped land holdings (000s)
Gross acres 100 74 100 74
Net acres 91 62 91 62
Average working interest (%) 92 84 92 84
----------------------------------- ------------------- -------------------

(1) Represents the 154-day period from commencement of operations April 30,
2005 to September 30, 2005.

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


President's Message

Since our second quarter report, natural gas prices have remained soft. However, we believe in the fundamentals for natural gas and expect prices to strengthen over the long term. We are seeing activity levels decline significantly, particularly for natural gas related projects, resulting in lower service costs and less competition for lands and drilling opportunities. Accordingly, we have shifted our strategy to utilize our balance sheet and capitalize on opportunities in this weak price environment. To this end, we are focusing on the following:

1. Continuation of facility and tie-in activities to bring behind pipe volumes on-stream - 1,200 boe/d is expected to be added in the next three to four months.

2. Building development inventory in the Malmo area and deferring further drilling activities to maximize the economic value in a higher price environment. Our development inventory is now approximately 110 locations.

3. Acquiring lands at attractive prices and terms to secure additional high impact exploration prospects - 51,000 net acres of undeveloped land has been added year-to-date.

4. Drilling exploration prospects that have the potential to materially impact the Company - exploration drilling program ongoing.

5. Maintaining financial flexibility - CIBC credit facility expanded to $55.0 million, increasing total credit capacity including capital leases to approximately $59.0 million. Announced $10.6 million flow-through financing.

I am pleased with the execution of our strategy and believe that the aforementioned activities will result in superior growth for our shareholders over the long term.

Financial and Operating Results

Production for the quarter averaged 3,261 boe/d, representing a 129% increase over the third quarter of 2005 and a 6% increase over the second quarter of 2006. Production is expected to increase with additions of 1,200 boe/d over the next three to four months. Of this, over 1,100 boe/d is expected from the Malmo area with the remainder from Karr, Alberta where the Company has a Gething discovery that awaits the resolution of third party capacity constraints.

During the quarter, Cordero participated in 16 (13.8 net) wells with a 93% success rate.

The realized average natural gas price fell 36% to $5.68/mcf compared to $8.82/mcf for the same quarter in 2005. Despite significantly lower gas prices, funds flow was up 63% to $7.0 million ($0.20/share diluted) compared to $4.3 million ($0.15/share diluted) for the same three months in 2005 due to higher production and lower costs. The lower prices reduced earnings to $0.8 million ($0.02/share diluted) for the quarter from $1.1 million ($0.04/share diluted) for the same period in 2005.

Cordero has established itself as having one of the lowest cost profiles in the Western Canadian Basin. Royalties as a percentage of revenue averaged 15.7% for the quarter compared to 17.6% for the same quarter in 2005. Operating costs averaged $3.36/boe for the quarter, a 42% decrease over $5.80 for the comparable period in 2005 while transportation expenses dropped 18% to $1.08/boe from $1.31/boe respectively. General and administrative expenses improved by 50% to $1.92 per boe versus $3.86 per boe for the same period in 2005.

Net capital expenditures for the quarter totaled $14.3 million bringing the year-to-date total to $61.2 million.

The Company entered into a bought deal flow-through financing private placement on October 24, 2006 and is expected to close on November 9, 2006. The financing included the issue of 1.2 million shares at a price of $8.80 per share for gross proceeds of $10.56 million. As a result, the Company increased its 2006 capital program from its previously announced guidance of $65-68 million to $77-80 million to include the expansion of land acquisitions; exploration and development activities; and facility construction.

Combined bank debt and working capital deficiency at the end of the quarter was $25.1 million. CIBC has increased Cordero's credit facility to $55.0 million from $46.0 million. The revised credit facility increases the Company's total credit capacity including capital leases to $58.7 million.

Operations Update

Malmo, Alberta

The Company has continued to focus its efforts in the Buffalo Lake region which is located at the Southern end of the Malmo project area. At this time, an extensive pipelining, compression and meter station project is underway which will significantly expand the future growth potential in this area. The Company estimates initial test production capacity from wells drilled but not on-stream in the Buffalo Lake area is approximately 1,700 boe/d. The Company has recently obtained regulatory approval for its tie-in project at Buffalo Lake and expects to add stabilized production of approximately 1,050 boe/d in the first quarter of 2007. The project, which involves pipelining under a portion of Buffalo Lake, will inter-connect pipe and compression facilities from both the east, north and west sides to a new TCPL meter station. When completed, the Company will have solidified its position as a dominant CBM and Belly River player in this area. Approval of this project is a major accomplishment, as it exemplifies how Cordero is committed to working with the area residents and stakeholders to minimize its operating footprint while continuing to develop the area's natural gas resources.

Cordero has also experienced third party facility restrictions at the south end of the area limiting production to only two of the four wells tied in. A plan is now in place that is expected to alleviate this restriction before year end.

Cordero has been successful in acquiring additional land in the Malmo area along the Horseshoe Canyon fairway. Even with its ongoing drilling program in the Malmo area the Company continued to increase its drilling inventory. The Malmo drilling inventory has increased to 110 net wells from 73 net wells reported in the second quarter report.

Conventional Exploration and Development

In spite of continuing lower natural gas prices and resulting cash flows, Cordero remains focused on expanding its opportunity base for the future. The Company has approximately 30 exploratory opportunities in its inventory and has expanded its exploration focus in several areas during this past year. More recently, land was acquired in the Goose River (three prospects), Clear Hills (three prospects), Puskwaskau (one prospect) and Bigoray (one prospect) areas in Alberta. Additional land was also acquired at Trutch (two prospects) in British Columbia while other opportunities are in various stages of development.

As previously announced, Cordero farmed out three exploration wells at Bigoray for the deeper Nisku zone. Pursuant to the farmout agreement, the Company received two million dollars up front and the farmee has since drilled the first two of three commitment wells without further capital exposure to Cordero. Cordero's technical interpretation is that the Nisku formation, although present, is not commercial in these two wells. The third commitment well is still in the planning stages. Also in Bigoray, the Company was successful in negotiating a farmin for a Nordegg and Wabamun test, which is planned to spud in late November. The Nordegg and Wabamun opportunities were defined with proprietary seismic. The Company has also acquired lands for a prospective Ostracod channel play, also defined on proprietary seismic.

At Clear Hills, Alberta, the Company is planning to drill three to four exploration wells this year. Subsequent to successful crown land purchases this summer, Cordero holds the Gething rights in the lands surrounding the discovery well drilled last winter. Following other recent crown land purchases, the Company now holds over 39,000 acres in the greater Clear Hills area which includes prospects in strike areas called Rambling and Colorado.

In Bonanza, Alberta, Cordero drilled and cased a 100% working interest exploration well. The completion work is scheduled to start early November.

In Trutch, British Columbia, the Company has acquired a total of over 9,000 acres so far in 2006 and now holds over 12,000 acres of land in the area. In the most recent land sale, Cordero tested the lower end of land prices and was rewarded with 6,900 acres of land for an average price of $116/hectare. The area has several exploration targets and the Company expects to stack opportunities for the Bluesky, A Marker and Halfway zones.

Outlook

Although the lower natural gas price environment has its challenges, I am pleased with our continued progress in bringing on significant production increases while expanding our exploration and development opportunities. Our strong balance sheet, low cost profile and substantial behind pipe volumes provides us with the financial strength and confidence to aggressively seek opportunities in this environment.

Looking to 2007, we anticipate a capital program of approximately $55 million. Although natural gas prices have firmed in recent days, we are still budgeting for lower prices at this time. We have a strong inventory of prospects to accelerate our growth plans and will revisit our capital budget mid-year. At this time, we are forecasting production to reach 4,300-4,500 boe/d by mid-year.

We assure our investors that we are executing our business plan and are making significant progress in growing our production and opportunity base.

Thank you for your continued interest and support of Cordero.

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

David V. Elgie, President and CEO

November 1, 2006


MANAGEMENT'S DISCUSSION AND ANALYSIS

November 1, 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 northeast 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 period ended September 30, 2006 are compared with results for the 154-day period from commencement of operations on April 30, 2005 to September 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. Cordero is exposed to financial risks which 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 November 1, 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 Initial
November 2006 November 2005
Low High Low High
---------------------------------------------------------------------------
Average Production 3,100 3,200 3,100 3,400

Royalties (% of revenue) 16.0 17.0 17.5 19.0
Transportation ($/boe) 1.10 1.20 1.40 1.50
Operating ($/boe) 3.40 3.60 5.80 6.30
General and administrative ($/boe) 2.10 2.40 2.10 2.40
Capital expenditures ($ million) 77.0 85.0 50.0 55.0
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The Company expects to achieve its average production guidance for 2006. Cordero has approximately 1,200 boe/d of production additions that it expects to bring on-stream by the end of the first quarter of 2007 from wells already drilled but in the process of tie-in or adding facilities. The Company has improved its cost profile, particularly for royalties, transportation and operating expenses through the year. Budgeted capital has increased during the year to reflect an expanded land budget, expanded drilling program, a significant investment in pipelines and facilities in the Malmo/Bashaw area and also higher service costs. An additional $5.0 million of capital may be accelerated from the 2007 budget into 2006 pending the timing of certain projects.



2007 Guidance

November 2006
Low High
---------------------------------------------------------------------------
Average Production 4,200 4,600

Royalties (% of revenue) 17.5 19.5
Transportation ($/boe) 1.10 1.30
Operating ($/boe) 3.80 4.20
General and administrative ($/boe) 1.90 2.20
Capital expenditures ($ million) 50.0 55.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Production is expected to average 4,200 to 4,600 boe/d in 2007. A significant portion of the production additions are expected to be from wells drilled in 2006. Royalties as a percentage of revenue is expected to increase as a result of the elimination of the Alberta Royalty Tax Credit effective January 1, 2007. Operating costs reflect the blending of higher cost production outside of Malmo. Base capital expenditures are forecast at approximately $55.0 million and approximately $5.0 million of projects may be accelerated from 2007 into 2006 depending on the timing of the activities relative to year end. The Company will consider expanding its budget after spring breakup.



Selected Quarterly Information

2006 2005
Q3 Q2 Q1 Q4 Q3 Q2(1)
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Production
Natural gas (mmcf/d) 18.7 17.5 16.8 12.1 8.5 6.6
Oil and natural gas
liquids (bbls/d) 145 161 130 21 1 1
Barrels of oil
equivalent (boe/d) 3,261 3,072 2,923 2,039 1,421 1,103

Financial ($000s
except as indicated)
Petroleum and
natural gas revenue 10,811 10,521 11,874 12,637 6,919 2,875
Revenue net of
royalties 9,117 9,150 9,600 10,029 5,710 2,359

Funds flow from
operations 6,967 7,178 7,498 8,175 4,268 1,440
Per share basic ($) 0.21 0.24 0.25 0.29 0.16 0.06
Per share diluted ($) 0.20 0.22 0.23 0.27 0.15 0.06

Net earnings 762 105 1,924 3,453 1,057 16
Per share basic ($) 0.02 - 0.06 0.12 0.04 -
Per share diluted ($) 0.02 - 0.06 0.11 0.04 -

Total assets 135,797 128,962 120,045 104,923 67,316 65,656
Net capital
expenditures 14,348 14,207 32,659 24,788 11,610 5,219
Net debt and working
capital (deficiency) (25,074) (17,536) (29,296) (4,068) (121) 7,176

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

Per unit information
Natural gas ($/mcf) 5.68 5.92 7.37 11.22 8.82 7.12
Oil and natural gas
liquids ($/bbl) 77.33 75.99 65.30 70.12 51.13 41.40
Oil equivalent ($/boe) 36.03 37.63 45.14 67.38 52.93 42.73

Operating expenses
($/boe) 3.36 3.27 3.80 5.27 5.80 6.53

Operating netback
($/boe) 25.94 28.31 31.51 46.82 36.57 27.40

Net wells drilled
Natural gas 12.8 8.5 21.2 36.6 - 7.4
Oil - - 2.0 1.0 - -
Dry 1.0 - 3.0 1.0 - -
Total 13.8 8.5 26.2 38.6 - 7.4

Net success rate (%) 93 100 89 97 - 100

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(1) Represents the 62-day period from commencement of operations April 30,
2005 to June 30, 2005.

See accompanying notes.


Quarterly Summary

Q2 2005(1) - Cordero commenced operations on April 30, 2005. At inception, production from the Company's coalbed methane and Belly River property in the Malmo area of central Alberta was 683 boe/d and 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 private placement of 3.0 million common shares for proceeds of $14.0 million.

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. 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 $12.0 million 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. 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 and compression installation 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, as natural gas prices continued the downward slide. Positively impacting earnings were low operating costs which improved to $3.27/boe and a royalty rate of 13% resulting from a gas cost allowance. 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 to $46 million and in June, an equity issue was completed for 2.8 million common shares and total gross proceeds of $19.9 million.

Q3 2006 - The Company's financial results continued to be affected by declining natural gas prices with $7.0 million in funds flow, down 3% compared to the second quarter. Cordero's average realized natural gas price for the three month period was $5.68/mcf, a decrease of 4% from the previous quarter. Net capital expenditures totaled $14.3 million with 1.0 net exploration and 12.8 net development wells drilled and over 13,000 net acres added to the Company's land inventory. Subsequent to the end of the quarter, the Company entered into a flow-through common share issuance for 1.2 million shares and total gross proceeds of $10.6 million. The issue is scheduled to close on or before November 9, 2006 and is conditional upon TSX approval. In conjunction with the financing, Cordero increased its 2006 capital program from $65-68 million to $77-80 million. Also subsequent to the end of the quarter, the Company increased its credit facility from $46.0 million to $55.0 million.

(1) Represents the 62-day period from commencement of operations April 30, 2005 to June 30, 2005.



Production

Three Months Ended Period Ended
September 30 September 30
2006 2005 2006 2005
----------------------------------- ------------------- -------------------

Natural gas (mcf/d) 18,697 8,520 17,648 7,762
Oil and NGLs (bbls/d) 145 1 145 1
----------------------------------- ------------------- -------------------
Total (boe/d) 3,261 1,421 3,087 1,294
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Average daily production volumes for the three months ended September 30, 2006 were 3,261 boe/d, a 6% increase over the previous quarter and a 129% increase over the third quarter of 2005. Year-to-date production of 3,087 boe/d represents a 139% increase over the period ended September 30, 2005.

Natural gas production increased to 18.7 mmcf/d and 17.6 mmcf/d for the respective three and nine month periods ended September 30, 2006 as a result of the Company's drilling program at Malmo. During the current quarter 7.0 net wells came on production and since September 30, 2005 the Company has brought 72.3 net wells on-stream. Partially offsetting production additions from new wells were normal production declines and transportation and gathering system curtailments in certain areas. The transportation curtailments were resolved prior to the end of the quarter and the gathering system curtailments are currently in the process of being resolved.

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



Petroleum & Natural Gas (P&NG) Revenue

Three Months Ended Period Ended
September 30 September 30
($000s) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

Natural gas 9,778 6,915 30,300 9,790
Oil and NGLs 1,033 4 2,907 5
----------------------------------- ------------------- -------------------
Total 10,811 6,919 33,207 9,795
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Prices and Marketing

Three Months Ended Period Ended
September 30 September 30
Benchmark prices: 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

AECO natural gas ($/mmbtu) 5.65 9.37 6.40 8.49
WTI oil (USD$/bbl) 70.48 63.19 68.22 59.19
CDN/USD foreign exchange rate 0.892 0.833 0.883 0.820
WTI oil (CDN equivalent $/bbl) 79.01 75.89 77.26 72.17
Edmonton Light ($/bbl) 79.08 76.51 75.53 72.11
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Three Months Ended Period Ended
September 30 September 30
Average Sale Price 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

Natural gas ($/mcf) 5.68 8.82 6.29 8.24
Oil and NGLs ($/bbl) 77.33 51.13 73.30 50.03
----------------------------------- ------------------- -------------------
Total ($/boe) 36.03 52.93 39.41 49.46
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Current year quarterly P&NG revenue of $10.8 million was 56% higher than the third quarter of 2005, directly attributable to the increase in production volumes over the year, which more than compensated for the Company's lower realized natural gas price in 2006. Cordero's realized price for the three months ended September 30, 2006 was $5.68, a decrease of 36% compared to the realized price for the three months ended September 30, 2005. Cordero's average realized natural gas price year-to-date was $6.29, 24% less than the price for the period ended September 30, 2005.

The decrease in the average sales price realized by Cordero is consistent with the decrease in benchmark and natural gas prices. Cordero's natural gas price is highly-correlated with the AECO price index which is influenced by overall North American supply and demand balance, weather conditions, storage levels and transportation, gathering and processing capacity constraints. 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. The Company has not hedged or entered into any fixed price arrangements during or subsequent to the period ended September 30, 2006, although it has contracted to sell 6.7 mmcf/d of October production to a third party at the monthly AECO price. For the third quarter of 2006, approximately 10% of production was dedicated to an aggregator contract, 34% of production was sold at monthly AECO and the remainder was sold at the AECO daily spot price. Prices received for future production will continue to be determined by the Company's marketing arrangements and overall commodity market conditions.



Royalties

Three Months Ended Period Ended
September 30 September 30
($000s) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------
Crown 1,031 1,001 3,646 1,389
Freehold, GORR 788 208 2,081 337
Alberta Royalty Tax Credit (ARTC) (125) - (388) -
----------------------------------- ------------------- -------------------
Total royalties 1,694 1,209 5,339 1,726
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------

Average Royalty Rates
(average % of total sales)
----------------------------------- ------------------- -------------------
Crown 9.5 14.5 11.0 14.2
Freehold, GORR 7.4 3.1 6.3 3.4
ARTC (1.2) - (1.2) -
----------------------------------- ------------------- -------------------
Total royalties 15.7 17.6 16.1 17.6
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Royalties as a percentage of revenue were approximately 16% for the three and nine months ended September 30, 2006 and 18% for the comparable periods in 2005. The decrease in the royalty rate from 2005 is primarily due to the increase in ARTC in 2006, but also attributed to higher gas cost allowance deductions and the lower Alberta reference price from which Crown royalties are calculated. Crown royalties paid on wells acquired from Resolute are not eligible for ARTC therefore as eligible production has been added from wells drilled by Cordero, the Company's ARTC has increased proportionately. The Company's freehold royalties have increased over the year with increasing production from freehold wells.

Royalty rates in subsequent periods may fluctuate based on future reference prices relative to average wellhead prices, type of royalties (Crown vs. Freehold) and the proportion of production additions qualifying for royalty holidays. It is expected that the total royalty rate for the remainder of the year will be approximately 16% to 17%, assuming relatively low fluctuations in natural gas prices for the remainder of the year. During the current quarter, the Alberta Government announced the elimination of ARTC effective January 1, 2007. As a result the Company's royalty rate in 2007 will increase accordingly.



Operating Expenses

Three Months Ended Period Ended
September 30 September 30
($000s, except per boe) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

Operating expenses (gross) 1,802 894 5,076 1,346
Processing income (794) (136) (2,152) (149)
----------------------------------- ------------------- -------------------
Operating expenses (net, as reported) 1,008 758 2,924 1,197
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------

Operating expenses per boe (net) 3.36 5.80 3.47 6.05
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Third quarter 2006 operating expenses of $3.36/boe represented a 42% decrease over $5.80 for the comparable period in 2005. Year-to-date operating expenses of $3.47/boe were 43% less than the period ended September 30, 2005. Although total operating expenses have increased over the year with more wells and higher prices for supplies and services, the unit price has decreased with the increase in production volumes over the year. As well, the Company has been effective at controlling a significant portion of its operating costs by operating substantially all of its production and maintaining a high level of ownership in gathering and processing facilities.

Processing income represents the recovery of processing costs, incurred at Cordero's facilities, for production from wells associated with third parties. The substantial increase 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 future reporting periods, 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 and the Company's future operatorship over gathering and processing facilities will also determine future operating expenses.



Transportation Expenses

Three Months Ended Period Ended
September 30 September 30
($000s, except per boe) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

Transportation expenses - $000s 325 172 956 248
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------

Transportation expenses - $/boe 1.08 1.31 1.14 1.25
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Transportation costs per unit have decreased from the previous year for both the three and nine month periods ended September 30, 2006. Costs for the third quarter of 2006 were $1.08/boe and for the period ended September 30, 2006 were $1.14/boe due to improved utilization of the Company's transportation contracts.

Management expects unit transportation costs to be between $1.14/boe and $1.35/boe for 2006 although actual 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)

Three Months Ended Period Ended
September 30 September 30
($000s, except per boe) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

G&A expenses (gross) 1,271 1,121 4,263 1,887
Overhead recoveries (253) (127) (964) (221)
----------------------------------- ------------------- -------------------
1,018 994 3,299 1,666
Allocated to capital projects (443) (489) (1,450) (805)
----------------------------------- ------------------- -------------------
G&A expenses 575 505 1,849 861
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------

G&A expenses per boe 1.92 3.86 2.19 4.35
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Total G&A expenses increased in 2006 as the result of increased operations. However, as a result of increased production volumes, unit G&A expenses declined by 50% for both the three months and period ended September 30, 2006 at $1.92/boe and $2.19/boe, respectively.

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 and 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

Cordero's stock-based compensation expense represents the portion of the aggregate fair value of options, performance warrants and performance shares applicable to the period. The amount of the expense in a period is primarily determined by the number of stock-based securities outstanding as well as the calculated fair value of those options and the vesting period. The expense in the current year was $0.5 million for the quarter and $1.3 million year-to-date. In 2005 it was $0.4 million for the quarter and $0.7 million for the period ended September 30, 2005. At September 30, 2006 there were 1.8 million stock options outstanding compared to 1.1 million at September 30, 2005.



Depletion, Depreciation and Amortization (DD&A)

Three Months Ended Period Ended
September 30 September 30
($000s, except per boe) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

Depletion, depreciation and
amortization - $000s 5,099 1,943 13,987 2,793
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------

Depletion, depreciation and
amortization - $/boe 16.99 14.87 16.60 14.10
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


DD&A expense for the three months ended September 30, 2006 was $5.0 million or $16.99/boe compared to $1.9 million or $14.87/boe for the three months ended September 30, 2005. For the period ended September 30, 2006, DD&A expense was $14.0 million or $16.60/boe compared to $2.8 million or $14.10/boe for the period ended September 30, 2005. The increase in the total expense is reflective of the increase in the Company's capital base and the increase in production. The increase on a unit basis is attributable to the rising cost of materials and services.

Total costs subject to depletion included $60.0 million of estimated future development costs for proved reserves. Excluded from the depletable base was $18.8 million related to unproved properties and $1.6 million for other petroleum and natural gas assets which consisted of drilling supplies for future exploration and development activities.

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



Accretion

Three Months Ended Period Ended
September 30 September 30
($000s, except per boe) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------

Accretion - $000s 89 34 241 55
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------

Accretion - $/boe 0.30 0.26 0.29 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

With the elimination of federal large corporation tax, the Company did not have any current tax in the third quarter of 2006. For the period ended September 30, 2006, the Company recorded a recovery in the second quarter to adjust for the elimination of the tax. The expense for the third quarter and period ended September 30, 2005 was $11,000 and $17,000 respectively. Based on existing tax pools, planned capital activities and current forecasts of taxable income, the Company does not expect to pay current income tax in 2006 or 2007. 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.

Future income tax expense was $0.6 million for the three months and $3.3 million for the period ended September 30, 2006. The 2006 year-to-date expense was relatively high at 55% of earnings before taxes because the second quarter included an adjustment for the substantive enactment of federal corporate tax rate reductions which effectively reduced the estimated value of the Company's future tax asset.

Net Earnings

Net earnings for the third quarter of 2006 were $0.8 million compared to $1.1 million in the third quarter of 2005. Net earnings for the period ended September 30, 2006 of $2.8 million were significantly higher than $1.1 million for the period ended September 30, 2005 primarily because the 2005 reporting period did not commence until April 30. Net earnings in 2006 were impacted by higher production volumes, lower realized natural gas prices and higher DD&A expense.



Cash Netbacks

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

Three Months Ended Period Ended
September 30 September 30
($/boe) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------
Sales price 36.03 52.93 39.41 49.46
Royalties (5.65) (9.25) (6.34) (8.71)
Transportation costs (1.08) (1.31) (1.14) (1.25)
Operating expenses (3.36) (5.80) (3.47) (6.05)
----------------------------------- ------------------- -------------------
Operating netback 25.94 36.57 28.46 33.45
G&A (1.92) (3.86) (2.19) (4.35)
Interest (net) (0.81) (0.12) (0.66) (0.28)
Current income taxes - (0.08) 0.07 (0.09)
----------------------------------- ------------------- -------------------
Corporate netback 23.21 32.51 25.68 28.73
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------

Capital Expenditures

Three Months Ended Period Ended
September 30 September 30
($000s) 2006 2005 2006 2005
----------------------------------- ------------------- -------------------
Land and lease retention 2,317 1,742 8,737 1,791
Geological and geophysical 52 1,101 2,614 1,348
Drilling and completions 9,810 2,966 33,074 4,700
Facilities and equipment 2,559 4,877 16,092 7,752
Property acquisitions - 256 885 753
Other 610 681 2,111 1,457
----------------------------------- ------------------- -------------------
Total capital expenditures 15,348 11,623 63,513 17,801
Dispositions (1,000) (13) (2,298) (972)
----------------------------------- ------------------- -------------------
Net capital expenditures 14,348 12,883 61,215 16,829
----------------------------------- ------------------- -------------------
----------------------------------- ------------------- -------------------


Net capital expenditures were $14.3 million for the three months and $61.2 million for the period ended September 30, 2006. Drilling and completions of $9.8 million in the current quarter were incurred for 1.0 net exploration well at Bonanza for which the completion work is scheduled to start early November and 12.8 net development wells in Malmo. Substantially all of the $2.6 million in facilities and equipping expenditures for the quarter represented tie-in and pipelining activity at Malmo. During the quarter, the Company added over 8,600 net acres of Crown Land to its exploration inventory and an additional 4,400 net acres in the Malmo area. Dispositions of $1.0 million represented the second of two equal installments pursuant to a farmout agreement entered into in the previous quarter.

On October 24, 2006, the Company increased its 2006 capital budget from $65-68 million to $77-80 million to include the expansion of land acquisitions, exploration and development activities and facility construction in Alberta and northeast British Columbia. As well, an additional $5.0 million of capital may be accelerated from the 2007 budget into 2006, pending timing of certain projects.

Liquidity and Capital Resources

In April 2006, Cordero's credit facility was expanded from $25.0 million to $46.0 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.

In October 2006, the Company entered into a flow-through common share issuance for 1.2 million shares at $8.80/share for total gross proceeds of $10.6 million. The offering is scheduled to close on or before November 9, 2006 and is conditional upon receiving regulatory approval of the TSX Exchange and completion of definitive documentation. The net proceeds from the financing will be used to advance Cordero's exploration program and increase the total capital budget from $65-68 million to $77-80 million.

Also subsequent to the end of the period, the Company's credit facility was increased from $46.0 million to $55.0 million. The revised credit facility increases the Company's total credit capacity, including capital leases, to $58.7 million.

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's 2006 capital program has been funded by cash provided from operating activities, equity financing and the Company's revolving credit facility. During times of low commodity prices the Company has the ability to defer or reduce its capital expenditure program accordingly. However, currently the Company plans to focus on utilizing its balance sheet to capitalize on opportunities in this weak price environment. The remainder of the 2006 capital program and the 2007 program are expected to be funded through proceeds of the recent financing, internally-generated cash flow and debt. Cordero expects to fulfil all of its contractual obligations at September 30, 2006 as summarized below:



Less than 1-3 4-5 After 5
($000s) Total 1 Year Years Years Years
---------------------------------------------------------------------------
Operating lease obligations
(office space) 759 316 443 - -
Transportation obligations 4,363 1,178 1,765 475 945
Capital lease obligations 4,642 645 1,191 1,058 1,748
---------------------------------------------------------------------------
Total contractual obligations 9,764 2,139 3,399 1,533 2,693
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Outstanding Shares, Options and Warrants

Outstanding at period-end (000s) November 1, 2006 September 30, 2006
---------------------------------------------------------------------------

Common shares 32,623 32,623
Common shares issuable on conversion:
Stock options 1,729 1,729
Performance warrants 1,916 1,916
Performance shares 484 484
---------------------------------------------------------------------------
Total 36,752 36,752
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Consolidated Balance Sheets

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

Assets

Current
Cash and cash equivalents - 11,027
Accounts receivable 5,134 8,799
---------------------------------------------------------------------------
5,134 19,826

Petroleum and natural gas
interests, net (note 3) 123,134 74,623

Future income tax asset (note 10) 7,529 10,474
---------------------------------------------------------------------------
135,797 104,923
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities

Current
Accounts payable and accrued liabilities 13,186 19,825
Bank indebtedness (note 4) 13,287 -
Current portion of obligations
under capital leases (note 5) 455 446
---------------------------------------------------------------------------
26,928 20,271

Obligations under capital leases (note 5) 3,280 3,623

Asset retirement obligations (note 6) 5,057 3,695

Shareholders' equity
Share capital (notes 7 and 8) 91,047 71,747
Contributed surplus 2,168 1,061
Retained earnings 7,317 4,526
---------------------------------------------------------------------------
100,532 77,334
---------------------------------------------------------------------------

135,797 104,923
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes.


Consolidated Statements of Operations

(Unaudited) Three Months Ended Period Ended
($000s, except September 30 September 30
per share amounts) 2006 2005 2006 2005(1)
---------------------------------------------------------------------------

Revenue
Gross oil and natural gas
revenue 10,811 6,919 33,207 9,795
Royalties (1,694) (1,209) (5,339) (1,726)
---------------------------------------------------------------------------
9,117 5,710 27,868 8,069
---------------------------------------------------------------------------

Expenses
Operating 1,008 758 2,924 1,197
Transportation 325 172 956 248
General and administrative 575 505 1,849 861
Net interest (notes 4 and 5) 242 (4) 556 35
Depletion, depreciation and
amortization (note 3) 5,099 1,943 13,987 2,793
Accretion (note 6) 89 34 241 55
Stock-based compensation (note 8) 462 362 1,315 721
---------------------------------------------------------------------------
7,800 3,770 21,828 5,910
---------------------------------------------------------------------------

Earnings before income taxes 1,317 1,940 6,040 2,159

Income taxes (note 10)
Current income taxes - 11 (60) 17
Future income taxes 555 872 3,309 1,069
---------------------------------------------------------------------------
555 883 3,249 1,086
---------------------------------------------------------------------------
Net earnings 762 1,057 2,791 1,073
---------------------------------------------------------------------------

Net earnings per share (note 9)
Basic 0.02 0.04 0.09 0.04
Diluted 0.02 0.04 0.08 0.04
---------------------------------------------------------------------------


Consolidated Statements of Retained Earnings

Three Months Ended Period Ended
(Unaudited) September 30 September 30
($000s) 2006 2005 2006 2005(1)
---------------------------------------------------------------------------
Retained earnings, beginning
of period 6,555 16 4,526 -
Earnings for the period 762 1,057 2,791 1,073
---------------------------------------------------------------------------
Retained earnings, end of period 7,317 1,073 7,317 1,073
---------------------------------------------------------------------------

(1) Represents the 154-day period from commencement of operations April
30, 2005 to September 30, 2005.

See accompanying notes.


Consolidated Statements of Cash Flows

Three Months Ended Period Ended
(Unaudited) September 30 September 30
($000s) 2006 2005 2006 2005(1)
---------------------------------------------------------------------------
Cash flows from the following:

Operating activities
Net earnings 762 1,057 2,791 1,073
Items not affecting cash
Depletion, depreciation and
amortization 5,099 1,943 13,987 2,793
Accretion 89 34 241 55
Future income taxes 555 872 3,309 1,069
Stock-based compensation 462 362 1,315 721
Asset retirement obligation
expenditures (note 6) (99) (5) (161) (5)
Changes in non-cash working capital
(note 11) 3,649 (166) 647 (1,139)
---------------------------------------------------------------------------
10,517 4,097 22,129 4,567
---------------------------------------------------------------------------

Financing activities
Drawdown of revolving credit
facility (note 4) 5,621 - 13,287 -
Payment of capital lease
obligations (note 5) (111) (11) (334) (11)
Proceeds from sale-lease back
transactions - 1,504 - 1,504
Issue of common shares - - 19,938 24,799
Share issue costs (56) (1) (1,211) (873)
---------------------------------------------------------------------------
5,454 1,492 31,680 25,419
---------------------------------------------------------------------------

Investing activities
Petroleum and natural gas
expenditures (15,348) (11,623) (63,513) (17,801)
Purchase of petroleum and
natural gas assets and
equipment - (1,273) - (14,245)
Disposition of petroleum and
natural gas interests 1,000 13 2,298 972
Changes in non-cash working
capital (note 11) (1,623) (876) (3,621) 2,544
---------------------------------------------------------------------------
(15,971) (13,759) (64,836) (28,530)
---------------------------------------------------------------------------

(Decrease) increase in cash and
cash equivalents - (8,170) (11,027) 1,456

Cash and cash equivalents, beginning
of period - 9,626 11,027 -
---------------------------------------------------------------------------

Cash and cash equivalents, end of period - 1,456 - 1,456
---------------------------------------------------------------------------

(1) Represents the 154-day period from commencement of operations April
30, 2005 to September 30, 2005.

See accompanying notes.

CORDERO ENERGY INC.
Notes to Consolidated Financial Statements
(Unaudited)


For the three and nine month periods ended September 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 unaudited 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.

The period ended September 30, 2005 represents the 154-day period from commencement of operations April 30, 2005 to September 30, 2005.



3. Petroleum and Natural Gas Interests

---------------------------------------------------------------------------
Accumulated
Depletion and Net Book
At September 30, 2006 Cost Depreciation Value
---------------------------------------------------------------------------
Petroleum and natural
gas interests 135,947 (18,867) 117,080
Assets under capital
leases (note 5) 4,149 (330) 3,819
Other assets 2,369 (134) 2,235
---------------------------------------------------------------------------
142,465 (19,331) 123,134
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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 September 30, 2006, unproved properties of $18.8 million (December 31, 2005 - $12.0 million) and other petroleum and natural gas assets of $1.6 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 $0.4 million and $1.5 million relating to petroleum and natural gas exploration and development activities for the three month and nine month periods ended September 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. In October 2006, the facility was further increased to $55.0 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 and fees paid on the facility for the three and nine month periods ended September 30, 2006 was $194,000 and $408,000, respectively.



5. Obligations Under Capital Leases

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

---------------------------------------------------------------------------
Year Amount
---------------------------------------------------------------------------
2006 164
2007 637
2008 604
2009 571
2010 537
2011 504
Thereafter 1,625
---------------------------------------------------------------------------
Total minimum lease payments 4,642
Less amount representing interest at 5.18% to 5.91% 907
---------------------------------------------------------------------------
Present value of obligations under capital leases 3,735
Due within one year 455
---------------------------------------------------------------------------
Long term portion of obligations under capital leases 3,280
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Interest expense incurred on the obligations under capital leases was $57,000 and $172,000, respectively for the three and nine month periods ended September 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.

Cordero has estimated the net present value of its asset retirement obligations to be $5.1 million at September 30, 2006 based on a total future liability of $11.5 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. The Company used a credit-adjusted risk free rate of 7.5% and an inflation rate of 2.0% to calculate the present value of the asset retirement obligations.



---------------------------------------------------------------------------
Three Months Ended Period Ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Asset retirement obligations,
beginning of period 4,710 1,817 3,695 -
Liabilities transferred upon
plan of arrangement - - - 1,250
Obligations incurred in period 357 142 1,282 688
Obligations settled during period (99) (5) (161) (5)
Accretion 89 34 241 55
---------------------------------------------------------------------------
Asset retirement obligations,
end of period 5,057 1,988 5,057 1,988
---------------------------------------------------------------------------

7. Share Capital

(a) Authorized

At September 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) - (846)
---------------------------------------------------------------------------
Balance, September 30, 2006 32,622,913 91,042
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


On June 2, 2006, the Company closed an equity offering 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.

On October 24, 2006, Cordero entered into a flow-through common share placement on a bought-deal basis. Pursuant to the offering Cordero will issue 1.2 million flow-through common shares at a price of $8.80 per share for total gross proceeds of $10.6 million. The offering is expected to close on or before November 9, 2006 and is conditional upon receiving regulatory approval of the TSX Exchange and completion of definitive documentation.

8. Stock-Based Compensation Plans

(a) Stock Option Plan

The following table summarizes information regarding the Company's stock option activity during the nine months ended September 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 September 30, 2006 1,728,800 5.30
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

---------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------------
Weighted Weighted
Remaining Average Remaining Average
Exercise Contractual Exercise Contractual Exercise
Price ($) Number Life (Years) Price ($) Number Life (Years) Price ($)
---------------------------------------------------------------------------
4.43 -
5.00 955,400 3.65 4.55 471,807 3.67 4.65
5.01 -
6.00 192,900 4.02 5.64 76,801 3.89 5.54
6.01 -
7.00 468,000 4.41 6.20 - - -
7.01 -
7.40 112,500 4.61 7.40 18,000 4.61 7.40
---------------------------------------------------------------------------
4.43 -
7.40 1,728,800 3.96 5.30 566,608 3.73 4.85
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(b) Share Appreciation Rights Plan

Pursuant to the share appreciation rights plan, rights were available for grant from the date of plan approval through October 29, 2006. As there were no share appreciation rights granted within this specified period the rights under this plan have been terminated.

(c) Performance Warrants

On April 29, 2006, one-third or 638,797 of the 1,916,376 warrants outstanding vested. As at September 30, 2006, no warrants were exercised.

(d) 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 nine month period ended September 30, 2006 are as follows:



---------------------------------------------------------------------------
Three Months Ended Period Ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Risk-free interest rate (%) - 3.05 4.02 3.15
Expected life (years) - 3.5 3.5 3.5
Expected volatility (%) - 40 40 40
Dividend yield (%) - - - -

Weighted average fair value ($) - 1.863 2.057 1.547
---------------------------------------------------------------------------
---------------------------------------------------------------------------


9. Net Earnings per Share

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

---------------------------------------------------------------------------
Three Months Ended Period Ended
September 30 September 30
Common Shares 2006 2005 2006 2005
---------------------------------------------------------------------------
Weighted average basic 32,622,913 27,124,789 31,026,125 26,091,148
Dilutive securities
Stock options 602,281 388,454 582,372 313,840
Performance warrants 1,212,350 1,099,171 1,203,881 1,009,584
Performance shares 532,650 820,463 533,236 830,826
---------------------------------------------------------------------------
Weighted average diluted 34,970,194 29,432,877 33,345,614 28,245,398
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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:



---------------------------------------------------------------------------
Three Months Ended Period Ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Earnings before income taxes 1,317 1,940 6,040 2,159

Expected income taxes at the
statutory rate 454 730 2,083 812
Increase (decrease) resulting from:
Non-deductible Crown charges 118 239 412 333
Resource allowance (169) (230) (553) (311)
Stock-based compensation 159 136 454 271
Canadian Large Corporate Tax - 11 (60) 17
Income tax rate reduction (5) - 977 -
Other (2) (3) (64) (36)
---------------------------------------------------------------------------
Income taxes 555 883 3,249 1,086
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

---------------------------------------------------------------------------
As at September 30, 2006 As at December 31, 2005
---------------------------------------------------------------------------
Petroleum and natural
gas interests 5,416 8,701
Asset retirement obligations 1,500 1,242
Share issue costs 697 508
Other (84) 23
---------------------------------------------------------------------------
7,529 10,474
---------------------------------------------------------------------------
---------------------------------------------------------------------------


11. Supplementary Information for Statement of Cash Flows

---------------------------------------------------------------------------
Three Months Ended Period Ended
Changes in non-cash September 30 September 30
working capital 2006 2005 2006 2005
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Accounts receivable 2,219 378 3,665 (3,395)
Accounts payable and accrued
liabilities (193) (1,422) (6,639) 4,801
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Change in non-cash working
capital relating to: 2,026 (1,044) (2,974) 1,406
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Operating activities 3,649 (166) 647 (1,139)
Investing activities (1,623) (876) (3,621) 2,544
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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:

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Year 1 Year 2 Year 3 Year 4 Year 5
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Office space
(operating leases) 316 331 113 - -
Transportation 1,178 1,090 675 439 129
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Total commitments 1,494 1,421 788 439 129
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Corporate Information


Board of Directors Officers

Brian K. Lemke
Chairman David V. Elgie
Cordero Energy Inc. President and Chief Executive
Calgary, Alberta Officer

Donald P. Driscoll(1)(3) Richard Gleasure
Corporate Director Vice President, Engineering and
Calgary, Alberta Chief Operating Officer

David V. Elgie C. Dean Setoguchi
President and Chief Executive Officer Vice President and Chief
Cordero Energy Inc. 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
President and Chief Executive Officer Email: info@corderoenergy.com
Westside Energy Corporation Website: www.corderoenergy.com
Dallas, Texas
Banker
Robert R. Rooney (2)(3)
Corporate Director Canadian Imperial Bank of
Calgary, Alberta Commerce

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