Cyries Energy Inc.
TSX : CYS

Cyries Energy Inc.

August 10, 2005 09:30 ET

Cyries Energy Inc. Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2005) -

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

Cyries Energy Inc. ("Cyries")(TSX:CYS) is pleased to announce its financial and operating results for the three months and six months ended June 30, 2005.

Financial Highlights



------------------------------------------------------------------------
Three months Three months
ended ended
June 30, 2005 March 31, 2005 % Change
------------------------------------------------------------------------

Petroleum and natural
gas sales 12,787 10,069 27

Net earnings 1,822 1,227 48
Per share basic 0.07 0.05 40
Per share diluted 0.06 0.04 50

Cash flow from operations 6,857 5,496 25
Per share basic 0.26 0.21 24
Per share diluted 0.22 0.19 16

Capital expenditures 14,148 25,857 (45)

Bank debt and working
capital deficiency 18,322 10,654 72

Weighted average shares
outstanding
Basic 26,659 25,736 4
Diluted 30,544 29,556 3

Average Sales Price
Oil $/bbl 60.01 57.31 5
Natural gas $/mcf 8.14 7.56 8
NGL $/bbl 48.85 40.09 22
------------------------------------------------------------------------
Total $/boe 50.77 47.24 7

Average Daily Production
Oil bbl 474 448 6
Natural gas mcf 13,011 10,540 23
NGL bbl 125 164 (24)
------------------------------------------------------------------------
Total boe 2,768 2,368 17

Production expenses $/boe 6.97 6.74 3

Operating netback $/boe 30.80 27.98 10

Undeveloped land gross 97,480 72,680 34
net 71,108 51,364 38
Farm-in acreage
net acres 38,524 50,240 (23)


To Our Shareholders

Cyries Energy Inc. is pleased to report to shareholders the financial and operating results for the three months and six months ended June 30, 2005.

The results for our most recent quarter demonstrate our continuing success since Cyries' inception. We achieved growth following our 2005 first quarter despite lower activity levels caused by the lengthy spring break-up and annual facility turnarounds that interrupt normal production. During the three months ended June 30, 2005, Cyries:

- increased production by 17 percent to average of 2,768 boe/d;

- increased cash flow by 25 percent to $6.9 million or $0.26 per share;

- increased net income by 48 percent to $1.8 million or $0.07 per share;

- drilled six wells (4.5 net) with an 83 percent success rate; and,

- completed the acquisition of Devlan Exploration for approximately $100 million which added approximately 2,300 boe/d of production. The transaction involved an exchange of common shares.

Subsequent to June 30, Cyries also announced:

- a $20 million expansion of the 2005 capital program to $85 million;

- the proposed acquisition of a private oil and gas company for $57 million;

- a $50 million bought-deal financing agreement with a syndicate of underwriters. We will use the proceeds to finance the expansion of our capital program as well as to help finance the $57 million acquisition.

In just over twelve months of operation and assuming the most recent acquisition successfully closes in August, we expect to achieve the following results:

- increase production from 1,000 boe/d to approximately 7,000 boe/d by the end of August;

- increase production per share. While production volumes have increased 600 percent, the number of common shares outstanding has increased by only 62 percent;

- significant growth in cash flow and cash flow per share. At inception, cash flow totaled $0.7 million per month. By the end of the 2005 third quarter, we expect cash flow to be approximately $6.0 million per month.

Second Quarter Operating Results

The second quarter was less active operationally due to the early and longer spring break-up. During the quarter, we drilled six wells (4.5 net) with an 83 percent success rate. We concentrated in the Deep Basin area where we drilled five wells. We drilled the remaining well in our Peace River Arch area. Since inception Cyries has drilled 37 wells with a 94 percent success rate.

Although production during the quarter was sustainable at approximately 3,000 boe/d, required plant turnarounds resulted in average production for the quarter of 2,768 boe/d.

Cyries stepped-up drilling activity by the end of the second quarter with three rigs active. We expect to maintain activity with three drilling rigs working through to the end of the year. Having received board of directors' approval for our expanded capital expenditure program, we now expect to drill 45 - 50 wells during 2005.

Outlook

We anticipate that the acquisition of the private oil and gas company will close in mid August. At that time, Cyries will acquire 1,300 boe/d of production, 4.29 mmboe of proved plus probable reserves, and 19,076 net acres of undeveloped land. Cyries will assume no debt or other obligations as elements of this transaction. The acquisition is positive for several reasons because it will:

- complement Cyries' existing assets in the Peace River Arch by adding approximately 600 boe/d of production in that area;

- add a new core area at Hotchkiss in northwestern Alberta with approximately 550 boe/d of production;

- expand our drilling inventory by adding 20 new locations. Our current drilling inventory has more than 100 potential locations, sufficient to fulfill our capital program for 2005 and launch us well into 2006.

Our strong balance sheet demonstrates Cyries' continued solid financial position. Following the completion of the $50 million equity financing and the acquisition, we expect debt and working capital deficiency will total approximately $50 million, representing about eight months cash flow.

We anticipate that Cyries' daily production will continue to increase as we approach year-end. After the close of the most recent acquisition, we are projecting production at 7,000 boe/d which should increase to exit 2005 at 8,000 boe/d as we tie-in production from our drilling activity throughout the second half of 2005.



On behalf of the Board of Directors,

Donald F. Archibald
Chairman and Chief Executive Officer


MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements of Cyries Energy Inc. ("Cyries" or the "Company") for the three and six month periods ended June 30, 2005 and the audited financial statements for the period ended December 31, 2004. As the Company commenced operations July 2, 2004, no comparative financial information is available for the three and six month periods ended June 30, 2005. As a result, the Company has used the three months ended March 31, 2005 as a means of comparison with the three months ended June 30, 2005.

The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil ("6:1"). A boe conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

This MD&A contains forward-looking statements. Forward-looking statements are based on current expectations that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those reflected in the MD&A. Forward-looking statements are based on the estimates and opinions of Cyries' management at the time the statements were made. The reader should be aware that historical results are not necessarily indicative of future performance.

Cyries evaluates performance based on net income, operating netback and cash flow from operations. Cash flow from operations, which is expressed before changes in non-cash working capital and site restoration expenditures, is used by the Company to analyze operations, performance, leverage and liquidity. Operating netback is a benchmark used in the oil and gas industry to measure the contribution of oil and natural gas sales following the deduction of royalties, production expenses and transportation costs. Cash flow from operations and operating netback do not have a standard meaning prescribed by Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to other companies.

This MD&A is dated as of August 9, 2005. All amounts are reported in thousands except for per share amounts and as otherwise noted.



Highlights

Three months ended
June 30, March 31,
($000s,except per share amounts) 2005 2005
------------------------------------------------------------------------
Net income 1,822 1,227
Net income per share - basic 0.07 0.05
Cash flow from operations 6,857 5,496
Cash flow from operations per share - basic 0.26 0.21
Daily production (boe/d) 2,768 2,368
Net capital expenditures 14,149 25,857
------------------------------------------------------------------------


In the second quarter Cyries improved net income and cash flow compared to the first quarter of 2005. Driving these increases was a 17 percent increase in production and a 7 percent increase in oil and natural gas prices. Production averaged 2,768 boe/d in the second quarter compared to 2,368 boe/d in the first quarter.

Capital expenditures decreased 45 percent to $14,149 in the second quarter from $25,857 in the three months ended March 31, 2005. Capital spending decreased from the first quarter as most drilling operations are suspended from April through to mid-June due to spring break-up in northern Alberta. The Company has budgeted capital spending to be approximately $45 million in the second half of 2005.



DETAILED FINANCIAL ANALYSIS

Petroleum and natural gas production

Three months ended
June 30, March 31,
2005 2005
------------------------------------------------------------------------
Oil (bbls/d) 474 448
Natural gas (mcf/d) 13,011 10,540
Natural gas liquids (bbls/d) 125 164
------------------------------------------------------------------------
Total (boe) 2,768 2,368
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months ended June 30, 2005, Cyries production increased 17 percent to 2,768 boe/d from 2,368 boe/d in the first quarter of 2005. The increase in average production is a result of a full quarter of production from the successful wells drilled and tied-in in the first quarter. Natural gas production in the three-month period ended June 30, 2005 increased to 13,011 mcf/d compared to 10,540 mcf/d in the first quarter of 2005. Gas production has increased at a greater rate than oil and liquids production as the Company's drilling program has focused on drilling natural wells. Oil and liquids production in the three month period ended June 30, 2005 decreased slightly to 599 barrels per day compared to 612 barrels per day in the first quarter of 2005.

Second quarter production was reduced by third party plant turnarounds that affected the company's production in the Wapiti, Valhalla and Karr areas. It is estimated that approximately 250 boe/d of production was lost due to the plant turnarounds.



Revenue

Three months ended
June 30, March 31,
($000s) 2005 2005
------------------------------------------------------------------------
Revenue
Oil 2,588 2,310
Natural gas 9,642 7,169
Natural gas liquids 556 590
Total 12,787 10,069

Average sales price
Oil ($/bbl) 60.01 57.31
Natural gas liquids ($/bbl) 48.85 40.09
------------------------------------------------------------------------
Average liquids price 57.68 52.70
Natural gas ($/mcf) 8.14 7.56
Total per boe ($/boe) 50.77 47.24

Benchmark pricing
Edmonton par - light oil ($/bbl) 66.42 62.02
AECO-C Spot 7.45 6.75
------------------------------------------------------------------------
------------------------------------------------------------------------


In the three months ended June 30, 2005 oil and natural gas revenue increased 27 percent to $12,787 from $10,069 in the comparative period. The increase in revenue was a result of the 17 percent increase in production volumes and a 7 percent increase in the average sales price. The increase in the average sales price realized by Cyries is consistent the increase in benchmark prices in the quarter. The average sales price for natural gas is at a premium to the AECO-C spot price due to the high energy content of the company's natural gas production.

The Company sells all its oil and natural gas on the spot market. Therefore, both the historical prices received and future prices expected fluctuate with the prevailing market prices of crude oil and natural gas. The Company did not hedge or enter into any fixed price arrangements in the period ended June 30, 2005.

Royalties

Oil and natural gas royalties totaled $2,882 in the period, net of Alberta Royalty Tax Credit ("ARTC") of $125. The overall royalty rate of 23 percent of revenue was consistent with the first quarter of 2005.



Operating netback and production expenses

Three months ended
June 30, March 31,
($000s) 2005 2005
------------------------------------------------------------------------
Revenue 12,787 10,069
Royalty income 19 9
------------------------------------------------------------------------
12,806 10,078
Royalties (2,882) (2,348)
Production expense (net) (1,755) (1,438)
Transportation expense (411) (329)
------------------------------------------------------------------------
Operating netback 7,758 5,963
------------------------------------------------------------------------
Operating netback ($/boe) 30.80 27.98
------------------------------------------------------------------------
------------------------------------------------------------------------


Three months ended
June 30, March 31,
($000s) 2005 2005
------------------------------------------------------------------------
Production expense gross 1,965 1,611
Overhead recoveries (167) (147)
Processing income (43) (26)
------------------------------------------------------------------------
Production expense (net) 1,755 1,438
------------------------------------------------------------------------
Production expense ($/boe) 6.97 6.74
------------------------------------------------------------------------
------------------------------------------------------------------------


Net production expense increased 22 percent in the period to $1,755 compared to $1,438 in the first quarter of 2005. The increase in production expense is primarily due to the 17 percent increase in oil and natural gas production in the second quarter. Production costs per barrel in the second quarter remained consistent to the first quarter.

Cyries' operating netback increased 10 percent to $30.80 per boe from $27.98 per boe in the first quarter of 2005. The increase in the operating netback is due primarily to an increase in average sales price of 7 percent.

Transportation expense relates primarily to the cost of transporting natural gas on the main natural gas pipelines and a lesser amount for oil trucking charges. An increase in production volumes caused an increase in transportation costs to $411 in the second quarter from $329 in the comparative period.



General and Administrative Expenses

Three months ended
June 30, March 31,
($000s) 2005 2005
------------------------------------------------------------------------
General and administrative expense (gross) 929 836
Overhead recoveries (152) (374)
------------------------------------------------------------------------
General and administrative expense (net) 777 462
------------------------------------------------------------------------
General and administrative ($/boe) 3.08 2.17
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months ended June 30, 2005 general and administrative expense ("G&A") was $777, net of capital overhead recoveries of $152. Per barrel, G&A expense was $3.09 per boe as compared to $2.17 in the first quarter of 2005 mainly as a result of decreased overhead recoveries in the quarter. The Company expects that the G&A expense per boe will decrease as production levels increase. The Company does not capitalize corporate general and administrative expenses.

Depreciation, Depletion and Accretion

Depletion, depreciation and accretion ("DD&A") increased 17 percent to $3,227 in the three months ended June 30, 2005 compared to $2,763 in the three months ended March 31, 2005. The increase is due to higher average production in the second quarter of 2005. DD&A expense per boe decreased slightly to $12.81 from $12.96 in the comparative period. In determining the Company's depletion and depreciation, $7,503 of costs related to unproven properties and $3,661 of estimated salvage value was excluded from the costs subject to depletion. Future development costs required to complete wells for which proved reserves have been assigned of $3,475 were added to the Company's net book value in the depletion calculation.

Stock Based Compensation

During the period, stock-based compensation expense related to the outstanding stock options and Class B performance shares decreased to $250 from $702 in the first quarter of 2005. Cyries issued 674,000 stock options in the first quarter with 20 percent of the issue vesting immediately. As a result $620 or 20 percent of the total stock option expense was recognized in the first quarter.

Income Taxes

There is no current income tax expense in the six months ended June 30, 2005. In the quarter ended June 30, 2005 the Company recognized $30 of large corporations tax compared to $9 in the first quarter.



Capital Expenditures

Three months Three months Six months
ended ended ended
($000s) June 30, 2005 March 31, 2005 June 30, 2005
------------------------------------------------------------------------
Land and property
acquisitions 3,150 1,639 4,789
Property dispositions - (315) (315)
Geological and geophysical 769 724 1,493
Drilling and completions 8,694 18,669 27,363
Equipment and facilities 1,513 5,137 6,650
Other 22 3 25
------------------------------------------------------------------------
Total capital expenditures 14,148 25,857 40,005
------------------------------------------------------------------------
------------------------------------------------------------------------


In the six months ended June 30, 2005, Cyries' capital expenditure program was focused primarily on drilling natural gas prospects in the Deep Basin. The Company drilled 20 gross wells (15.4 net) with a 94 percent success rate. Of the total wells drilled, 17.0 (13.2 net) were natural gas wells and 2.0 (1.2 net) were oil wells. Facility expenditures in the quarter relate primarily to the costs associated with connecting successful wells to existing infrastructure and processing facilities.



Three months ended Six months ended
June 30, 2005 June 30, 2005
Gross wells Net wells Gross wells Net wells
------------------------------------------------------------------------
Gas 5.0 2.7 17.0 13.2
Oil - - 2.0 1.2
Dry 1.0 1.0 1.0 1.0
------------------------------------------------------------------------
Total 6.0 3.7 20.0 15.4
------------------------------------------------------------------------
Success (%) 73% 94%
------------------------------------------------------------------------
------------------------------------------------------------------------


Share Capital
------------------------------------------------------------------------
(000s)

Weighted average common shares outstanding for
the six months ended June 30, 2005
Basic 26,201
Diluted 30,055

Outstanding Securities at August 9, 2005
Common shares 35,242
Warrants 3,968
Performance shares 605
Stock options 1,247
------------------------------------------------------------------------
Total outstanding securities at August 9, 2005 41,062
------------------------------------------------------------------------
------------------------------------------------------------------------


On February 3, 2005 the Company closed a bought deal private placement whereby the Company issued 2,440,000 common shares, at a price of $8.20 per common share, for gross proceeds of $20,008. Proceeds of the equity issue allowed the 2005 capital budget to be increased to $55 million from $35 million.

On July 1, 2005 the Company completed the acquisition of Devlan Exploration Inc. An aggregate of 8,557,625 common shares were issued to Devlan shareholders upon closing of the transaction.

On July 25, 2005 the Company announced a $50 million bought-deal financing agreement with a syndicate of underwriters. The bought deal financing arrangement consists of 803,300 units to be sold on a private placement basis at a price of $62.25 per unit or $12.45 per common share. Each unit will be comprised of two common shares of Cyries and three subscription receipts of Cyries. The subscription receipts will only be issued as common shares if the Company's proposed acquisition of a private oil and gas company is completed. If the proposed acquisition closes on or before August 31, 2005 the net proceeds of the offering of subscription receipts will be released to the Company to finance a portion of the proposed acquisition. If the proposed acquisition does not close prior to August 31, 2005, the escrow agent will return to the holders of subscription receipts the issue price of each subscription receipt and such holder's pro-rata entitlement to interest earned thereon. Completion of the financing is expected to close on or about August 11, 2005. If all the common shares including subscription receipts are issued, the company will then have 39,258,047 common shares outstanding.

Liquidity and Capital Resources

At June 30, 2005 the Company had bank debt of $10,909 and a working capital deficiency of $7,413. On July 1, 2005, following the completion of the acquisition of Devlan Exploration Inc. ("Devlan"), the Company assumed approximately $19,500 of additional debt from Devlan. The Company's bank lines following the completion of the Devlan transaction were increased to $48 million.

On July 25, 2005, the Company announced a $50 million bought deal financing arrangement at a price of $12.45 per common share. The financing is split between 1,606,600 common shares and 2,409,900 subscription receipts. The gross proceeds of the common shares of $20 million will be available to Cyries upon the closing of the financing on August 10, 2005. The gross proceeds of $30 million from the subscription receipts will be available to Cyries if the proposed transaction of a private oil and gas company closes prior to August 31, 2005.

On April 21, 2005 the Company announced an increase in the 2005 capital program to $65 million from $55 million. Concurrent with the July 25, 2005 equity issue and proposed acquisition of a private company, Cyries announced a further increase in the 2005 capital program, not including acquisitions to $85 million from $65 million. The second half capital program of $45 million will be funded by cash flow from operation in the second half of 2005, proceeds of the August equity financing and the existing bank line.

Commodity prices and production volumes have the largest impact on the ability for Cyries to generate adequate cash flow to meet all its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If the capital expenditure program does not result in sufficient additional reserves and/or production it would likely have a negative impact on the Company's ability to carry out its planned capital program.

Cyries may adjust its capital expenditure program depending on the commodity price outlook. The Company believes that internally generated cash flow and incremental bank debt should be sufficient to finance current operations and planned capital spending in the next year.

Subsequent Events

On July 1, 2005 the Company completed the acquisition of all of the issued and outstanding common shares of Devlan Exploration Inc. ("Devlan") pursuant to a plan of arrangement ("the "Plan of Arrangement") in accordance with an arrangement agreement dated as of April 20, 2005 among Cyries, Devlan and Dual Exploration Inc., formerly 1165473 Alberta Ltd. ("Dual"). In accordance with the Plan of Arrangement, each common share of Devlan was exchanged for 0.25 of a Cyries common shares and 0.5 of a Dual common share. As part of the Plan of Arrangement certain petroleum and natural gas assets and approximately $4.5 million in debt were transferred from Devlan to Dual.

Concurrent with the closing of the Plan of Arrangement, the Company and its lenders agreed to amend the company's revolving bank loan facility to increase the maximum borrowing capacity to $48 million. As a result of the completion of the Plan of Arrangement on July 1, 2005, the number of issued and outstanding common shares of Cyries was 35,221,547 on that date.

On July 25, 2005 the Company announced an increase in the 2005 capital program to $85 million from $65 million. The Company expects to drill 25-30 wells in the second half of 2005.

On July 25, 2005 the Company also announced a $50 million bought-deal financing agreement with a syndicate of underwriters and a proposed $57 million acquisition of a private oil and gas company. The proceeds of the financing will partly be used to fund the increase in the 2005 capital program and partly fund the proposed acquisition. If successful, Cyries will acquire 1,300 boe/d of production, 4.29 million proved plus probable reserves, and 19,068 net acres of undeveloped land. The acquisition of the private oil and gas company is expected to close by mid August. Cyries will assume no debt or other obligations as part of the acquisition. Assuming all of the above transactions close, Cyries will have 39,258,047 common shares outstanding.



Cyries Energy Inc.
Balance Sheets
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, December 31,
($000) 2005 2004

Assets
Current assets
Accounts receivable 6,803 8,916
Deposits and prepaid expenses 610 606
------------------------------------------------------------------------
7,413 9,522

Future income tax asset 1,254 3,267

Deferred costs (note 3) 404 -

Property and equipment, net (note 4) 91,419 56,922
------------------------------------------------------------------------

100,490 69,711
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities 14,826 15,743
Revolving demand loan (note 5) 10,909 3,092
------------------------------------------------------------------------
25,735 18,835

Asset retirement obligation (note 9) 3,001 2,519
------------------------------------------------------------------------
Total liabilities 28,736 21,354
------------------------------------------------------------------------

Shareholders' Equity
Share capital (note 6) 65,852 46,441
Contributed surplus (note 7) 1,302 365
Retained earnings 4,600 1,551
------------------------------------------------------------------------
71,754 48,357
------------------------------------------------------------------------

100,490 69,711
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes


On behalf of the Board:

Signed: "Donald F. Archibald" Signed: "Douglas A. Dafoe"

Donald F. Archibald Douglas A. Dafoe
Chairman, CEO & Director Director


Cyries Energy Inc.
Statement of Earnings and Retained Earnings
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Six months
ended ended
($000) June 30, 2005 June 30, 2005

Revenue
Petroleum and natural gas sales 12,787 22,855
Royalties (net of Alberta Royalty Tax Credit) (2,882) (5,230)
------------------------------------------------------------------------
9,905 17,625
Other income 20 53
------------------------------------------------------------------------
9,925 17,678

Expenses
Production 1,755 3,192
Transportation 411 740
General and administrative 777 1,239
Interest 95 115
Stock compensation 250 952
Depletion, depreciation and accretion 3,227 5,990
------------------------------------------------------------------------
6,515 12,228
------------------------------------------------------------------------

Earnings before taxes 3,410 5,450

Taxes
Large corporations tax 30 39
Future income taxes 1,558 2,362
------------------------------------------------------------------------

Net earnings for the period 1,822 3,049

Retained earnings, beginning of period 2,778 1,551
Retained earnings, end of period 4,600 4,600
------------------------------------------------------------------------
Net Earnings Per Share
Basic 0.07 0.12
Diluted 0.06 0.10
------------------------------------------------------------------------
------------------------------------------------------------------------

Weighted Average Common Shares Outstanding
Basic 26,659 26,201
Diluted 30,544 30,055
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Cyries Energy Inc.
Statement of Cash Flows
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Six months
ended ended
($000) June 30, 2005 June 30, 2005
------------------------------------------------------------------------

Cash provided by (used in):

Operating Activities
Net earnings for the period 1,822 3,049
Items not affecting cash
Depletion, depreciation and accretion 3,227 5,990
Future income taxes 1,558 2,362
Stock compensation 250 952
------------------------------------------------------------------------
Cash flow from operations, before non-cash
working capital changes 6,857 12,353
Net changes in non-cash operating working
capital (note 10) 1,839 1,033
------------------------------------------------------------------------
8,696 13,386
------------------------------------------------------------------------

Financing Activities
Issue of common shares - 20,008
Issue of common shares on exercise of options 28 33
Share issue costs (1) (995)
Increase in bank debt 10,909 7,817
------------------------------------------------------------------------
10,936 26,863
------------------------------------------------------------------------

Investing Activities
Additions to property and equipment (14,148) (40,189)
Plan of arrangement (404) (404)
Disposition of property and equipment - 184
Net changes in non-cash investing working
capital (note 10) (5,543) 160
------------------------------------------------------------------------
(20,095) (40,249)
------------------------------------------------------------------------

Decrease in cash (463) -
Cash, beginning of period 463 -
------------------------------------------------------------------------

Cash, end of period - -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


NOTES TO THE INTERIM FINANCIAL STATEMENTS
Three and Six Month Periods Ended June 30, 2005
All number in thousands except share and per share amounts


1. NATURE OF BUSINESS

Cyries Energy Inc. ("Cyries" or the "Company") was incorporated May 20, 2004 and commenced operations on July 2, 2004 when certain assets of Cequel Energy Ltd. ("Cequel") were transferred to Cyries under a Plan of Arrangement entered into by Progress Energy Ltd. ("Progress"), Cequel, Progress Energy Trust, Cyries and ProEx Energy Ltd. (the "Arrangement"). Cyries is engaged in the exploration, development and production of crude oil and natural gas in the province of Alberta.

2. SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles (GAAP), using the same accounting policies as those set out in note 1 to the financial statements for the period from July 2, 2004 to December 31, 2004. The disclosures in these interim financial statements are incremental to those included in the annual financial statements and certain disclosures which are required to be included in the notes to the annual financial statements have been condensed or omitted. The interim financial statements should be read in conjunction with the financial statements for the period from July 2, 2004 to December 31, 2004.

3. PLAN OF ARRANGEMENT

On July 2, 2004, as a result of the Arrangement, Cequel transferred certain oil and natural gas properties to Cyries. In exchange, the former Cequel and Progress shareholders received a total of 16,229,882 common shares of Cyries. As Cyries and Cequel were related parties at the time of the transaction, the transfer of assets and related liabilities was recorded at the underlying carrying value of the assets and liabilities transferred.



Amount
------------------------------------------------------------------------
Oil and natural gas assets
(net of accumulated depletion and depreciation of $5,787) $ 26,895
Future income tax asset 3,839
------------------------------------------------------------------------
Total assets transferred 30,734
Bank debt (10,000)
Asset retirement obligations (2,013)
------------------------------------------------------------------------
Net assets received and common shares issued $ 18,721
------------------------------------------------------------------------
------------------------------------------------------------------------

4. PROPERTY, PLANT AND EQUIPMENT

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

June 30, 2005
------------------------------------------------------------------------
Petroleum and natural gas property and equipment 106,001
Other 50
------------------------------------------------------------------------
106,051
Accumulated depletion and depreciation (14,632)
------------------------------------------------------------------------
Net book value 91,419
------------------------------------------------------------------------
------------------------------------------------------------------------


In determining the Company's depletion and depreciation, $7,503 of costs related to unproven properties and $3,661 of estimated salvage value was excluded from the costs subject to depletion. Future development costs required to complete wells for which proved reserves have been assigned of $3,475 were added to the Company's net book value for purposes of the depletion calculation.

5. REVOLVING DEMAND LOAN

The Company has a demand revolving operating credit facility provided by a Canadian chartered bank. The credit facility is limited to $27 million and provides that advances may be made by way of direct advances or bankers' acceptances. Direct advances bear interest at the bank's prime lending rate plus a variable rate and bankers' acceptances bear interest at the applicable bankers' acceptances rate plus a variable rate stamping fee. The variable rate charged by the bank is dependent upon the Company's debt to trailing cash flow ratio. Currently, the variable rate being charged to the Company is nil for prime loans and 1.05% for the variable rate on the stamping fees for bankers' acceptances. The credit facility is subject to periodic review and is secured by a $100 million demand fixed and floating charge debenture over all of the Company's assets.

Concurrent with the closing of the acquisition of Devlan Exploration Inc ("Devlan") described in Note 11, the lender increased the maximum borrowing capacity to $48 million.

6. SHARE CAPITAL

Authorized

At June 30, 2005, the Company had authorized an unlimited number of common shares, an unlimited number of preferred shares, 3,987,730 warrants and 605,280 Class B performance shares.

Issued

The Company had the following shares outstanding at June 30, 2005:



------------------------------------------------------------------------
Number of
Common Shares Shares Amount
------------------------------------------------------------------------
Common shares December 31, 2004 24,218 $ 45,000
Private placement, February 3, 2005 2,440 20,008
Exercise of stock options 6 48
Share issue costs - (995)
Tax effect of share issue costs - 349
------------------------------------------------------------------------
Common shares June 30, 2005 26,664 $ 64,410
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Number of
Warrants Warrants Amount
------------------------------------------------------------------------
Balance - December 31, 2004 and June 30, 2005 3,988 $ 1,436
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Number of
Performance Shares Performance Shares Amount
------------------------------------------------------------------------
Balance - December 31, 2004 and June 30, 2005 605 $ 6
------------------------------------------------------------------------
------------------------------------------------------------------------


On February 3, 2005 the Company closed a private placement of 2,440,000 common shares at a price of $8.20 per common share for gross proceeds of $20,008.

Share capital includes common shares of $64,410; warrants of $1,436 and performance shares of $6 for a total of $65,852.

7. STOCK BASED COMPENSATION

The Company accounts for its stock based compensation plan (the "Plan") using the fair value method. Under this method, a compensation cost is charged over the vesting period for stock options and Class B performance shares with a corresponding increase to contributed surplus.



Stock option activity related to the Plan was as follows:
------------------------------------------------------------------------
Weighted
Number of Average
Options Price ($)
------------------------------------------------------------------------

Balance - December 31, 2004 459,720 5.41
Granted 674,000 10.40
Exercised (6,309) 5.21
------------------------------------------------------------------------
Balance - June 30, 2005 1,127,411 8.39
------------------------------------------------------------------------
------------------------------------------------------------------------


The Plan is for the benefit of employees, officers and directors. Stock options granted under the Plan vest over a four year period with 20 percent of the options vesting immediately upon grant and a further 20 percent vesting upon each anniversary date. The options expire, if unexercised, five years from the date of the initial grant. At June 30, 2005, 220,435 stock options have vested and the average remaining life of the outstanding stock options is 4.5 years.

The fair value of each stock option granted in the six month period ended June 30, 2005 was estimated on the date of grant using the Black-Scholes model. The weighted average fair value of the stock options granted in the period was $4.60 per share, using a risk-free interest rate of 2.9 percent, volatility of 50 percent and an expected life of 4.5 years. The Company has not re-priced any stock options.

For the six month period ended June 30, 2005, $891 of expense related to the stock options and $61 of expense related to the performance shares is included in stock compensation expense.



The following table reconciles the Company's contributed surplus:

------------------------------------------------------------------------
June 30, 2005
------------------------------------------------------------------------
Contributed surplus December 31, 2004 $ 365
Stock based compensation expense 952
Exercise of stock options (15)
------------------------------------------------------------------------
Carrying amount, end of period $ 1,302
------------------------------------------------------------------------
------------------------------------------------------------------------

8. PER SHARE AMOUNTS

The following table details the components of diluted common shares
outstanding:

------------------------------------------------------------------------
Three months Six months
ended ended
Weighted average common shares June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Basic 26,659 26,201
Warrants 3,373 3,346
Performance shares 512 508
Options - -
Diluted 30,544 30,055
------------------------------------------------------------------------
------------------------------------------------------------------------


The calculation of diluted common shares excludes 1,127,411 stock options that are anti-dilutive.

9. ASSET RETIREMENT OBLIGATIONS

The total future asset retirement obligation was estimated by management based on the Company's net ownership interest in all wells and facilities, estimated costs to reclaim and abandon the wells and facilities and the estimated timing of the costs to be incurred in future periods. The Company has estimated the net present value of its asset retirement obligations to be $3,001 as at June 30, 2005 based on a total future liability of $7,243. Asset retirement expenditures are expected to be made over the next 15 years. The Company used a credit adjusted risk free rate of 7 percent and an inflation rate of 1.5 percent to calculate the present value of the asset retirement obligation. The following table reconciles the Company's total asset retirement obligation.



------------------------------------------------------------------------
June 30, 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Carrying amount, December 31, 2004 $ 2,519
Increase in liabilities in the period 381
Accretion 101
------------------------------------------------------------------------
Carrying amount, end of period $ 3,001
------------------------------------------------------------------------
------------------------------------------------------------------------

10. SUPPLEMENTAL CASH FLOW INFORMATION

------------------------------------------------------------------------
Three months Six months
ended ended
Changes in non-cash working capital June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Accounts receivable $ 3,884 $ 2,113
Prepaid expenses and deposits (14) (3)
Accounts payable and accrued liabilities (7,574) (917)
------------------------------------------------------------------------
Net change in non-cash working capital 3,704 1,193
Investing activities $ (5,543) $ 160
------------------------------------------------------------------------
Operating activities $ 1,839 $ 1,033
------------------------------------------------------------------------
------------------------------------------------------------------------

During the period ended March 31, 2005 the Company made the following
cash outlays in respect of interest expense and current income taxes.
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------

Interest $ 65 $ 85
Income taxes $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


11. SUBSEQUENT EVENTS

On July 1, 2005 the Company completed the acquisition of all of the issued and outstanding common shares of Devlan Exploration Inc. ("Devlan") pursuant to a plan of arrangement ("the "Plan of Arrangement") in accordance with an arrangement agreement dated as of April 20, 2005 among Cyries, Devlan and Dual Exploration Inc., formerly 1165473 Alberta Ltd. ("Dual"). In accordance with the Plan of Arrangement, each common share of Devlan was exchanged for 0.25 of a Cyries common shares and 0.5 of a Dual common share. As part of the Plan of Arrangement certain petroleum and natural gas assets and approximately $4.5 million in debt were transferred from Devlan to Dual.

Concurrent with the closing of the Plan of Arrangement, the Company and its lenders agreed to amend the company's revolving bank loan facility to increase the maximum borrowing capacity to $48 million. As a result of the completion of the Plan of Arrangement on July 1, 2005, the number of issued and outstanding common shares of Cyries was 35,221,547 on that date.

As at June 30, 2005, the Company has incurred $404 in costs relating to the acquisition of Devlan. These costs have been deferred on the Company's balance sheet and will be allocated to Devlan assets acquired on the closing of the transaction in July 2005.

On July 25, 2005 the Company announced a bought-deal financing agreement at a price of $12.45 per share with a syndicate of underwriters and the proposed acquisition of all the outstanding shares of a private oil and gas company for $57 million.

The bought deal financing arrangement consists of 803,300 units to be sold on a private placement basis at a price of $62.25 per unit for gross proceeds of $50 million. Each unit will be comprised of two common shares of Cyries and three subscription receipts of Cyries. The proceeds from the sale of the common shares will be released to the Company upon closing of the offering. The proceeds of the subscription receipts will be held in escrow. If the proposed acquisition closes on or before August 31, 2005 the net proceeds of the offering of subscription receipts will be released to the Company to finance a portion of the proposed acquisition. If the proposed acquisition does not close prior to August 31, 2005, the escrow agent will return to the holders of subscription receipts the issue price of each subscription receipt and such holder's pro-rata entitlement to interest earned thereon. Completion of the financing is expected to close on or about August 11, 2005. Assuming all of the above transactions close, Cyries will have 39,258,047 common shares outstanding.

Cyries Energy Inc. is a publicly traded Canadian energy company involved in the exploration, development and production of natural gas and crude oil in western Canada. Its common shares trade on the TSX under the symbol "CYS".

This news release shall not constitute an offer to sell or the solicitation of any offer to buy securities in any jurisdiction. The Cyries Energy Inc. common shares have not been nor will be registered under the United States Securities Act of 1933, and they may not be offered or sold in the United States absent registration or an exemption from registration.


The Toronto Stock Exchange does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Cyries Energy Inc.
    Donald F. Archibald
    Chairman & C.E.O.
    (403) 262-9609
    (403) 262-0055 (FAX)