Cyries Energy Inc.
TSX : CYS

Cyries Energy Inc.

November 10, 2005 09:00 ET

Cyries Energy Inc. Announces Third Quarter Results

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

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

Cyries Energy Inc. (TSX:CYS) ("Cyries") is pleased to announce its financial and operating results for the third quarter ended September 30, 2005.



Financial Highlights

------------------------------------------------------------------------
Three months Three months Nine months
ended ended ended
(000s, except September 30, September 30, % September 30,
as indicated) 2005 2004 Change 2005
------------------------------------------------------------------------

Petroleum and natural
gas sales 31,140 4,518 589 53,995

Net earnings 6,101 379 1,510 9,150
Per share basic 0.16 0.02 700 0.31
Per share diluted 0.15 0.01 1,400 0.27

Cash flow from
operations 17,650 2,167 714 30,003
Per share basic 0.47 0.09 422 1.00
Per share diluted 0.42 0.08 425 0.88

Capital expenditures 23,766 15,888 50 63,770
Acquisitions 129,229 - nm 125,229

Bank debt and working
capital (deficiency) (56,238) 3,581 (1,670) (56,238)

Weighted average
shares outstanding
Basic 37,285 23,062 62 29,936
Diluted 41,594 26,371 58 33,965

Average Sales Price
Oil $/bbl 69.10 50.50 37 64.13
Natural gas $/mcf 9.92 6.85 45 8.96
NGL $/bbl 57.87 44.32 31 51.08
------------------------------------------------------------------------
Total $/boe 61.26 43.95 39 55.48

Average Daily Production
Oil bbl 989 332 198 639
Natural gas mcf 25,816 1,142 2,161 16,512
NGL bbl 233 44 430 174
------------------------------------------------------------------------
Total boe 5,525 1,142 384 3,565

Production expenses $/boe 7.85 6.69 17 7.38

Operating netback $/boe 37.77 25.11 50 33.82

Undeveloped land gross 199,598 72,700 175 199,598
net 139,409 49,500 182 139,409
Farm-in acreage net acres 37,564 52,400 (28) 37,564

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


CHAIRMAN'S MESSAGE

To our Shareholders

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

The results of our most recent quarter represent continued success due to positive drilling performance in combination with the successful integration of two acquisitions completed during the quarter. During the three months ended September 30, 2005 Cyries:

- Increased production by 100 percent to average 5,525 boe per day, compared with 2,768 boe per day in the second quarter of 2005. Production in the third quarter increased 384 percent compared to average production of 1,142 boe per day in the third quarter of 2004. Production per share was up 214 percent compared with the third quarter of 2004.

- Increased cash flow by 157 percent to $17.7 million or 42 cents per share diluted compared with the second quarter. Cash flow increased 714 percent compared with the same period in 2004.

- Increased earnings 238 percent to $6.1 million or 15 cents per share diluted compared to the second quarter. Earnings increased 1,510 per cent compared with the third quarter in 2004.

- Drilled 18 wells (10 net) with a 71 percent success rate.

- Completed the acquisition of Devlan Exploration for $100 million on July 1, 2005 and the acquisition of a private oil and gas company in mid August for $57 million.

- Completed a $50 million financing to facilitate the purchase as well as an increase in the capital expenditure program.

Cyries has commenced its most aggressive drilling program, which is expected to carry through to the first quarter of 2006. Four rigs are currently active with a fifth rig to be active in December. Thirty to forty wells are scheduled for drilling prior to the end of the first quarter, 2006.

Current daily production is in the range of 7,000 boe per day with a projected exit production rate of 8,000 boe per day, a 600 percent increase in production since the company was launched in July 2004.

Third Quarter Operating Results

Cyries had an active quarter with 18 wells drilled. Fifteen of the 18 wells were drilled in the Deep Basin/Peace River Arch area. Two wells were drilled at Rainbow Lake and one well drilled at Mitsue.

The drilling program has been stepped-up in the third quarter with the addition of a fourth and fifth rig and this activity level is expected to continue into the first quarter of 2006. Active drilling programs will soon be underway on all four of our core properties with the concentration of activity continuing to be in the Deep Basin/Peace River Arch corridor.

Cyries achieved substantial production growth in the third quarter despite significant down-time at several key facilities. We lost over 400 boe per day at the Rainbow area for 10 days in September and a further 300 boe per day at Pouce Coupe for 10 days in September, both due to plant turnarounds. In addition, about 150 boe per day was down in Gold Creek for several weeks in September due to facility issues which have been subsequently resolved. These facilities are all currently operational.

Third Quarter Financial Results

The third quarter continued to demonstrate strong financial results for Cyries. Quarter over quarter, year over year gains have been tremendous. Through a combination of increased production, increased commodity prices and cost control Cyries has been able to maintain some of the best operating margins in the industry.

Operating netbacks during the third quarter were $37.77 per boe, a 23 percent increase compared to the second quarter and current netbacks are well over $40 per boe.

All of our gas production is un-hedged providing full participation in higher gas prices. Due to the high energy content of our product stream we continue to receive a premium price for our gas. In addition, operating costs, transportation costs and royalty rates have been maintained at a reasonable level and we have experienced a significant reduction in overhead costs as volumes grow without a corresponding increase in staff levels.

With the growth in production combined with higher commodity prices Cyries has reached the point of funding our capital program from cash flow much faster than expected. Current monthly cash flow is over $9 million with monthly capital expenditures in the range of $10 - $12 million. In addition Cyries maintains a conservative balance sheet, with debt at the end of the quarter of $55 million, less than six months cash flow.

Outlook

Beginning in the third quarter we have embarked on Cyries' most aggressive drilling program.

We believe that the recent acquisitions have added three new core areas for the company to exploit as well as enhancing our position in the core area of the Deep Basin/ Peace River Arch. The winter drilling program encompasses a multi zone, multi-well program in each of the Rainbow Lake, Hotchkiss and Marten Hills properties. Two to three rigs will be active on these properties through the winter months with another two to three rigs active in the Deep Basin/Peace River Arch.

The new core areas provide a good balance to the company's capital expenditure program with a roughly equal mix of exploration and development ideas. As we grow production from these areas along with the Deep Basin/Peace River Arch area we believe we are provided with a broader asset base and inventory of drilling prospects on which to grow the company into 2006 and 2007.

On behalf of the Board of Directors,

Donald F. Archibald

Chairman and CEO

MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements of Cyries Energy Inc. ("Cyries" or the "Company") for the three and nine month periods ended September 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 nine month period ended September 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 November 9, 2005. All amounts are reported in thousands except for per share amounts and as otherwise noted.



Highlights

Three months (1)Period Nine months
ended ended ended
($000s,except per September 30, September 30, September 30,
share amounts) 2005 2004 2005
------------------------------------------------------------------------
Net income 6,101 379 9,150
Net income per share - basic 0.16 0.02 0.31
Cash flow from operations 17,650 2,167 30,003
Cash flow from operations per
share - basic 0.47 0.09 1.00
Daily production (boe/d) 5,525 1,142 3,565
Capital:
Capital additions (net) 23,766 15,888 63,770
Acquisitions 125,229 - 125,229
------------------------------------------------------------------------
------------------------------------------------------------------------
Note:

(1) Period from July 2, 2004 to September 30, 2004


The third quarter was highlighted by two corporate acquisitions that added a combined 3,600 boe/d of production, weighted approximately 79 percent towards natural gas. The increase in production along with sustained high oil and natural gas prices resulted in increases to net income and cash flow compared to the same period in 2004. Cash flow per share increased 422 percent to $0.47 per share for the quarter ended September 30, 2005 compared with $0.09 per share for the period ended September 30, 2004. Net income per share increased 700 percent to $0.16 per share for the quarter ended September 30, 2005 compared with $0.02 in the comparative period. Oil and natural gas production in the third quarter increased 384 percent to 5,525 boe/d from 1,142 boe/d in the comparative period as a result of the Company's exploration program and acquisition activity.

On July 1, 2005 the Company closed the acquisition of Devlan Exploration Inc., a public oil and gas company. The transaction was completed by way of a Plan of Arrangement ("Arrangement") involving Cyries Energy Inc., Devlan Exploration Inc. ("Devlan") and Dual Energy Inc. ("Dual"). Cyries issued and aggregate of 8,558 common shares and assumed approximately $22,500 of Devlan net debt pursuant to the Arrangement. In addition, certain Devlan assets and $4,500 of debt were transferred to Dual, a newly formed oil and gas company.

On August 12, 2005 the company closed the acquisition of 1181608 Alberta ULC, a privately owned oil and gas company, for cash consideration of $57,000. The acquisition added approximately 1,300 boe/d of production.



DETAILED FINANCIAL ANALYSIS

Petroleum and Natural Gas Production

Period
Q3 Q2 Q1 Q4 ended Sept.
2005 2005 2005 2004 30, 2004
------------------------------------------------------------------------
Oil (bbls/d) 989 474 448 382 332
Natural gas (mcf/d) 25,816 13,011 10,540 7,041 4,593
Natural gas liquids (bbls/d) 233 125 164 88 44
------------------------------------------------------------------------
Total (boe) 5,525 2,768 2,368 1,644 1,142
------------------------------------------------------------------------
------------------------------------------------------------------------


Production for the three months ended September 30, 2005 increase increased 100 percent to 5,525 boe/d from 2,768 boe/d in the second quarter of 2005. The increase from the prior quarter is due primarily to the production added through the acquisitions of 1181608 Alberta ULC. and Devlan Exploration Inc. The Devlan acquisition closed July 1, 2005, adding approximately 2,300 boe/d of production in the quarter. The acquisition of 1181608 Alberta ULC resulted in an increase of approximately 700 boe/d for the quarter.

Following the acquisitions, the company's production continues to be weighted toward natural gas. Natural gas production in the three-month period ended September 30, 2005 increased to 25,816 mcf/d compared to 13,011 mcf/d in the second quarter of 2005. Oil and liquids production in the three month period ended September 30, 2005 increased to 1,222 barrels per day compared to 599 barrels per day in the second quarter of 2005.



Revenue

Three months Nine months
ended Period ended ended
September 30, September 30, September 30,
2005 2004 2005
------------------------------------------------------------------------
Revenue ($000s)
Oil 6,288 1,511 11,186
Natural gas 23,569 2,831 40,379
Natural gas liquids 1,283 176 2,430
Total 31,140 4,518 53,995

Average sales price
Oil ($/bbl) 69.10 50.50 64.13
Natural gas liquids ($/bbl) 59.79 44.32 51.08
------------------------------------------------------------------------
Average liquids price 66.77 49.77 61.14
Natural gas ($/mcf) 9.92 6.85 8.96
Total per boe ($/boe) 61.26 43.95 55.48

Benchmark pricing
Edmonton par - light oil ($/bbl) 77.02 56.58 68.55
AECO-C Spot 9.39 6.22 7.90
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenues for the three months ended September 30, 2005 increased 589 percent to $31,140 from $4,518 in the comparative period. The increase in revenue was a result of the 384 percent increase in production volumes and a 39 percent increase in the average sales price. The increase in the average sales price realized by Cyries is consistent the increase in benchmark oil and natural gas prices. 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.

As part of the Devlan acquisition the company acquired a fixed price crude oil collar to sell 200 boe/d of crude oil between $ 38.00 USD/bbl and $ 48.50 USD/bbl. The contract expires December 31, 2005. All the Company's remaining production is sold 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 September 30, 2005.

Royalties

Oil and natural gas royalties, net of the Alberta Royalty Tax Credit ("ARTC") increased to $7,125 in the third quarter of 2005 compared to $1,086 in the comparative period. The increase is due to the increase in petroleum and natural gas sales. The overall royalty rate of 23 percent of revenue was consistent with the royalty rate of 24 percent in the third quarter of 2004. The Company expects the royalty rate to remain consistent in the fourth quarter. ARTC for the quarter ended September 30, 2005 increased to $125 from $nil in the comparative period. ARTC was not recorded in the comparative period, as Cyries did not have any production from eligible wells.



Operating Netback and Production Expenses

Three months Nine months
ended Period ended ended
September 30, September 30, September 30,
($000s) 2005 2004 2005
------------------------------------------------------------------------
Revenue 31,140 4,518 53,995
Royalty income 39 - 66
------------------------------------------------------------------------
31,179 4,518 54,061
Royalties (7,125) (1,086) (12,355)
Production expense (net) (3,992) (688) (7,184)
Transportation expense (862) (163) (1,602)
------------------------------------------------------------------------
Operating netback 19,200 2,581 32,920
------------------------------------------------------------------------
Operating netback ($/boe) 37.77 25.11 33.82
------------------------------------------------------------------------
------------------------------------------------------------------------

Three months Nine months
ended Period ended ended
September 30, September 30, September 30,
($000s) 2005 2004 2005
------------------------------------------------------------------------
Production expense gross 4,378 791 7,953
Overhead recoveries (216) (85) (530)
Processing income (169) (18) (239)
------------------------------------------------------------------------
Production expense (net) 3,992 688 7,184
------------------------------------------------------------------------
Production expense ($/boe) 7.85 6.69 7.38
------------------------------------------------------------------------
------------------------------------------------------------------------


Net production expense increased in the third quarter of 2005 to $3,992 compared to $688 in the period ended September 30, 2004. The increase in production expense is due to the increase in oil and natural gas production costs per barrel. Production costs per barrel increased to $7.85 from $6.69 in the comparative period for two reasons. Firstly, activity levels in the Deep Basin and Peace River Arch has increased steadily over the past year resulting in higher demand for services and materials. This trend is expected to continue in the foreseeable future. Secondly, the operating costs per barrel for the assets acquired in the third quarter are higher than the historical operating costs of Cyries. It is anticipated that operating costs will remain at current levels in the fourth quarter of 2005.

The operating netback increased to $37.77 per boe from $25.11 per boe in the third quarter of 2004. The increase in the operating netback is due primarily to an increase in average sales price.

Transportation expense relates primarily to the cost of transporting natural gas on the main natural gas pipelines and a lesser amount for clean oil trucking charges. An increase in production volumes caused an increase in transportation costs to $862 in the third quarter of 2005 from $163 in the comparative period.



General and Administrative Expenses

Three months Nine months
ended Period ended ended
September 30, September 30, September 30,
($000s) 2005 2004 2005
------------------------------------------------------------------------
General and administrative
expense (gross) 914 613 2,679
Overhead recoveries (266) (178) (792)
------------------------------------------------------------------------
General and administrative
expense (net) 648 435 1,887
------------------------------------------------------------------------
General and administrative
($/boe) 1.27 4.23 1.94
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months ended September 30, 2005 general and administrative expense ("G&A") was $648, compared to $435 in the period ended September 30, 2004. G&A has increased as the overall size of the business has grown. Measured on a per barrel basis, G&A expense has decreased 70 percent to $1.27 per boe as compared to $4.23 in the third quarter of 2004 mainly as a result of increased production volumes in 2005. G&A expense per barrel is expected to continue at the current level. The Company does not capitalize corporate general and administrative expenses.

Depreciation, Depletion and Accretion

Depletion, depreciation and accretion ("DD&A") increased to $7,967 in the three months ended September 30, 2005 compared to $1,279 in the three months ended September 30, 2004. The increase is due to higher average production in 2005 and an increase in DD&A per boe. DD&A expense per boe increased to $15.67 from $12.44 in the comparative period. In determining the Company's depletion and depreciation, $13,411 of costs related to unproven properties and $15,902 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 $6,467 were added to the Company's net book value in the depletion calculation.

Stock Based Compensation

During the quarter, stock-based compensation expense related to the outstanding stock options and Class B performance shares increased to $506 from $236 in the period ended September 30, 2004. The increase in stock compensation expense is due to the expense associated with the stock options issued subsequent to September 30, 2004. At September 30, 2005 there were 1,328 stock option outstanding compared to 390 at September 30, 2004.

Income Taxes

For the quarter ended September 30, 2005 the Company recorded future income tax of $3,076 and current income taxes of $530 for an overall effective tax rate of 37 percent. In the period ended September 30, 2004 future income taxes were $273 and current income tax was $nil for an overall effective tax rate of 42%. For the nine months ended September 30, 2005 the Company recorded future income taxes of $5,438 and current income taxes of $569 for an effective tax rate of 40 percent.



Capital Expenditures

Three months Nine months
ended Period ended ended
September 30, September 30, September 30,
($000s) 2005 2004 2005
------------------------------------------------------------------------
Corporate acquisitions 125,229 - 125,229
Land and property acquisitions 2,658 5,547 7,447
Property dispositions (244) - (559)
Geological and geophysical 1,544 908 3,037
Drilling and completions 16,388 8,531 43,752
Equipment and facilities 3,388 855 10,039
Other 31 47 54
------------------------------------------------------------------------
Total capital expenditures 148,994 15,888 188,999
------------------------------------------------------------------------
------------------------------------------------------------------------


In the three months ended September 30, 2005, Cyries' capital expenditure program was focused primarily on drilling in the Deep Basin. In the quarter the Company drilled 18.0 wells (10.5 net) with a success rate of 64%. Facility expenditures in the quarter relate primarily to two additional compressor stations and the costs associated with connecting successful wells to existing infrastructure and processing facilities.

For the nine months ended September 30 ,2005, the Company drilled 38.0 gross wells (25.9 net) with a 71 percent success rate. The year to date drilling results include 3.0 wells (2.7 net) that were abandoned in the third quarter but were originally cased and thought to be successful wells. Of the total wells drilled, 23.0 (16.4 net) were natural gas wells and 6.0 (2.0 net) were oil wells.

Corporate acquisitions for the three and nine month periods ended September 30, 2005 of $125,229 is the fair value of the property, plant and equipment acquired through acquisition. The fair value assigned to the property, plant and equipment for the Devlan and 1181608 Alberta ULC acquisitions was $70,512 and $54,717, respectively.



Three months Three months Nine months
ended ended ended
September 30, September 30, September 30,
2005 2004 2005
Gross Net Gross Net Gross Net
wells wells wells wells wells wells
------------------------------------------------------------------------
Gas 9.0 5.9 5.0 4.5 23.0 16.4
Oil 4.0 0.8 2.0 1.6 6.0 2.0
Dry 5.0 3.8 - - 9.0 7.5
------------------------------------------------------------------------
Total 18.0 10.5 7.0 6.1 38.0 25.9
------------------------------------------------------------------------
Success (%) 64% 100% 71%
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Share Capital

(000s)
Weighted average common shares outstanding for the nine months
ended September 30, 2005
Basic 29,936
Diluted 33,965

Outstanding Securities at November 9, 2005
Common shares 39,259
Warrants 3,968
Performance shares 605
Stock options 1,328
------------------------------------------------------------------------
Total outstanding securities at November 9, 2005 45,160
------------------------------------------------------------------------
------------------------------------------------------------------------


On February 3, 2005 the Company closed a bought deal private placement whereby the Company issued 2,440 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 8,558 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 consisted of 803,300 units sold on a private placement basis at a price of $62.25 per unit or $12.45 per common share. Each unit was comprised of two common shares of Cyries and three subscription receipts of Cyries. The subscription receipts were issued as common shares when the Company completed the acquisition of 1181608 Alberta ULC. August 12, 2005.

Liquidity and Capital Resources

At September 30, 2005 the Company had bank debt of $35,445 and a working capital deficiency of $20,793. The Company's bank lines were increased in the quarter following the two acquisitions and are currently limited to $64 million. The growth in production and higher commodity prices has increased the Company's ability to fund the capital program with internally generated funds. Fourth quarter cash flows are expected to fund 75 to 90 percent of capital expenditures. The Company expects to fund the remainder of the capital program through increased bank borrowings.

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 operations 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.



Quarterly Financial Summary

Period
(000's except per Q3 Q2 Q1 Q4 ended Sept.
share amounts) 2005 2005 2005 2004 30, 2004
------------------------------------------------------------------------
Petroleum and natural
gas sales 31,140 12,787 10,069 6,834 4,518

Net earnings 6,101 1,822 1,227 1,171 379
Per share basic 0.16 0.07 0.05 0.05 0.02
Per share diluted 0.15 0.06 0.04 0.04 0.01

Total assets 326,177 100,490 94,901 69,711 59,537
Bank debt and working
capital deficiency
(excess) 56,238 18,322 10,654 9,313 (3,581)

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


Quarterly petroleum and natural gas sales and net earnings have increased over the past five quarters beginning July 2, 2004 due to increased production resulting from a successful drilling program, increased oil and natural gas prices and two corporate acquisitions. The bank and working capital deficiency has increased as a result of funding the corporation's drilling and acquisition program.

Risks

The business of Cyries is subject to certain risks. Prior to making any investment decision regarding Cyries investors should carefully consider, among other things, the risks described under the heading "Risks and Uncertainties" set forth in Cyries Management's Discussion and Analysis (the "Annual MD&A") for the period July 2, 2004, the date that Cyries commenced operations, to December 31, 2004 and under the heading "Risk Factors" in the Revised Initial Annual Information Form of Cyries (the "AIF") for the period ended December 31, 2004. These risk factors are incorporated by reference herein.

Cyries' Annual MD&A and AIF can be located at www.sedar.com or www.cyries.com. To the extent investors do not have access to the internet, copies of the Annual MD&A can be obtained on request without charge by contacting Cyries at(403) 262-9609 at 3200, 500 - 4th Avenue S.W., Calgary, Alberta T2P 2V6.



Cyries Energy Inc.
Consolidated Balance Sheets
(unaudited)

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

September 30, December 31,
($000) 2005 2004

Assets
Current assets
Accounts receivable 23,008 8,916
Deposits and prepaid expenses 1,915 606
------------------------------------------------------------------------
24,923 9,522

Future income tax asset - 3,267

Property and equipment, net (note 5) 232,820 56,922

Goodwill (note 4) 68,434 -
------------------------------------------------------------------------

326,177 69,711
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities 44,120 15,743
Income taxes payable 1,596 -
Revolving demand loan (note 6) 35,445 3,092
------------------------------------------------------------------------
81,161 18,835

Future income tax liability 28,592
Asset retirement obligation (note 10) 8,183 2,519
------------------------------------------------------------------------
Total liabilities 117,936 21,354
------------------------------------------------------------------------

Shareholders' Equity
Share capital (note 7) 195,732 46,441
Contributed surplus (note 8) 1,808 365
Retained earnings 10,701 1,551
------------------------------------------------------------------------
208,241 48,357
------------------------------------------------------------------------

326,177 69,711
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Cyries Energy Inc.
Consolidated Statement of Earnings and Retained Earnings
(unaudited)

------------------------------------------------------------------------
Nine months
Three months ended ended
($000) September 30, September 30, September 30,
2005 2004 2005
------------------------------------------------------------------------

Revenue
Petroleum and natural
gas sales 31,140 4,518 53,995
Royalties (net of Alberta
Royalty Tax Credit) (7,125) (1,086) (12,355)
------------------------------------------------------------------------
24,015 3,432 41,640

Other income 47 36 100
------------------------------------------------------------------------
24,062 3,468 41,740
------------------------------------------------------------------------

Expenses
Production 3,992 688 7,184
Transportation 862 163 1,602
General and administrative 648 435 1,887
Interest 380 15 495
Stock compensation 506 236 1,458
Depletion, depreciation and
accretion 7,967 1,279 13,957
------------------------------------------------------------------------
14,355 2,816 26,583
------------------------------------------------------------------------

Earnings before taxes 9,707 652 15,157

Taxes
Current income taxes 530 - 569
Future income taxes 3,076 273 5,438
------------------------------------------------------------------------

Net earnings for the period 6,101 379 9,150

Retained earnings, beginning
of period 4,600 - 1,551
Retained earnings, end of period 10,701 379 10,701
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Earnings Per Share
Basic 0.16 0.02 0.31
Diluted 0.15 0.01 0.27
------------------------------------------------------------------------
------------------------------------------------------------------------

Weighted Average Common Shares
Outstanding (note 9)
Basic 37,285 23,062 29,936
Diluted 41,594 26,371 33,965
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Cyries Energy Inc.
Consolidated Statement of Cash Flows
(unaudited)

Nine Months
Three Months Ended Ended
($000) September 30, September 30, September 30,
2005 2004 2005
------------------------------------------------------------------------

Cash provided by (used in):

Operating Activities
Net earnings for the period 6,101 379 9,150
Items not affecting cash
Depletion, depreciation
and accretion 7,967 1,279 13,957
Future income taxes 3,076 273 5,438
Stock compensation 506 236 1,458
------------------------------------------------------------------------
Cash flow from operations,
before non-cash working
capital changes 17,650 2,167 30,003
Net changes in non-cash
operating working capital
(note 11) 1,317 (1,034) 2,349
------------------------------------------------------------------------
18,967 1,133 32,352
------------------------------------------------------------------------

Financing Activities
Issue of common shares 50,005 28,506 70,014
Issue of common shares on
exercise of options and
warrants 33 - 65
Share issue costs (2,490) (1,204) (3,485)
Increase in bank debt 5,328 (10,000) 13,145
------------------------------------------------------------------------
52,876 17,302 79,739
------------------------------------------------------------------------

Investing Activities
Additions to property and
equipment (24,140) (15,888) (64,328)
Corporate acquisitions (57,062) - (57,466)
Disposition of property and
equipment 374 - 558
Net changes in non-cash
investing working capital
(note 11) 8,985 7,725 9,145
------------------------------------------------------------------------
(71,843) (8,163) (112,091)
------------------------------------------------------------------------

Decrease in cash - 10,272 -
Cash, beginning of period - - -
------------------------------------------------------------------------

Cash, end of period - 10,272 -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


NOTES TO THE INTERIM FINANCIAL STATEMENTS
Three and Nine Month Periods Ended September 30, 2005
All number in thousands except 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 consolidated 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 consolidated 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 consolidated 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 16,230 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. CORPORATE ACQUISITIONS

a) Devlan Exploration Inc.

On July 1, 2005 Cyries acquired all of the outstanding common shares of Devlan Exploration Ltd. ("Devlan") pursuant to a Plan of Arrangement. Devlan shareholders received 0.25 Cyries common shares for each Devlan common share outstanding, for a total of 8,558 Cyries shares. The business combination was accounted for using the purchase method. As part of the Arrangement, Devlan transferred certain oil and natural gas properties and $4,500 of debt to a new company, Dual Exploration Inc., the shares of which were distributed to shareholders of Devlan on the basis of 0.5 of a Dual share for each Devlan share outstanding.

The acquisition was funded by the issuance of common shares. The trading price ascribed to the common shares of $9.52 per share is based on the trading prices of Cyries common shares on the five days following and five days prior to the announcement of the Arrangement.



------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Consideration:
Common shares $ 81,469
Transaction costs 372
------------------------------------------------------------------------
81,841
Allocated to:
Current assets 9,602
Current liabilities (12,680)
Bank debt (19,208)
------------------------------------------------------------------------
(22,286)

Property, plant and equipment 70,512
Goodwill 49,745
Asset retirement obligations (3,560)
Future income taxes (12,570)
------------------------------------------------------------------------
$ 81,841
------------------------------------------------------------------------
------------------------------------------------------------------------


b) 1181608 Alberta ULC

Pursuant to a share purchase agreement Cyries acquired all of the outstanding common shares of 1181608 Alberta ULC a private oil and natural gas exploration and production company, for cash consideration of $57,000. The acquisition closed on August 12, 2005.



------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Consideration:
Cash $ 57,000
Transaction costs 93
------------------------------------------------------------------------
57,093
------------------------------------------------------------------------

Property, plant and equipment 54,717
Goodwill 18,689
Asset retirement obligations (1,249)
Future income taxes (15,064)
------------------------------------------------------------------------
$ 57,093
------------------------------------------------------------------------
------------------------------------------------------------------------


5. PROPERTY, PLANT AND EQUIPMENT

------------------------------------------------------------------------
September 30, 2005
------------------------------------------------------------------------
Petroleum and natural gas property and equipment $ 255,209
Other 80
------------------------------------------------------------------------
255,289
Accumulated depletion and depreciation (22,469)
------------------------------------------------------------------------
Net book value $ 232,820
------------------------------------------------------------------------
------------------------------------------------------------------------


In determining the Company's depletion and depreciation, $13,411 of costs related to unproven properties and $15,902 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 $6,467 were added to the Company's net book value for purposes of the depletion calculation.

6. REVOLVING DEMAND LOAN

The Company has a demand revolving operating credit facility provided by a Canadian chartered bank. The credit facility is limited to $64 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.

7. SHARE CAPITAL

Authorized

At September 30, 2005, the Company had authorized an unlimited number of common shares, an unlimited number of preferred shares, 3,988 warrants and 605 Class B performance shares.



Issued

The Company had the following shares outstanding at September 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
Acquisition of Devlan, July 1, 2005 8,558 81,467
Private placement August 11, 2005 4,017 50,005
Exercise of stock options 6 48
Exercise of warrants 20 40
Share issue costs - (3,485)
Tax effect of share issue costs - 1,214
------------------------------------------------------------------------
Common shares September 30, 2005 39,259 $ 194,297
------------------------------------------------------------------------
------------------------------------------------------------------------


Number of
Warrants Warrants Amount
Balance - December 31, 2004 3,988 $ 1,436
Exercise of warrants (20) (7)
------------------------------------------------------------------------
3,968 1,429
------------------------------------------------------------------------
------------------------------------------------------------------------


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


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

On August 11, 2005 the Company closed a private placement of 803 units at a price of $62.25 per unit for gross proceeds of $50,005. Each unit was comprised of two common shares at a price of $12.45 per share and three subscription receipts of Cyries at a price of $12.45 per share. Each subscription receipt was exchanged into a common share upon closing of the acquisition of 1181608 Alberta ULC on August 12, 2005.

Share capital includes common shares of $194,297; warrants of $1,429 and performance shares of $6 for a total of $195,732.

8. 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 Price
Options ($)
------------------------------------------------------------------------

Balance - December 31, 2004 460 5.41
Granted 874 11.03
Exercised (6) 5.21
------------------------------------------------------------------------
Balance - September 30, 2005 1,328 9.11
------------------------------------------------------------------------
------------------------------------------------------------------------


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 September 30, 2005, 338 stock options have vested and the average remaining life of the outstanding stock options is 4.3 years.

The fair value of each stock option granted in the nine month period ended September 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 $4.86 per share, using an average risk-free interest rate of 2.8 percent, volatility of 50 percent and an expected life of 4.5 years. The Company has not re-priced any stock options.

For the nine month period ended September 30, 2005, $1,363 of expense related to the stock options and $95 of expense related to the performance shares is included in stock compensation expense.



The following table reconciles the Company's contributed surplus:

------------------------------------------------------------------------
September 30, 2005
------------------------------------------------------------------------
Contributed surplus December 31, 2004 $ 365
Stock based compensation expense 1,458
Exercise of stock options (15)
------------------------------------------------------------------------
Carrying amount, end of period $ 1,808
------------------------------------------------------------------------
------------------------------------------------------------------------


9. PER SHARE AMOUNTS

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

------------------------------------------------------------------------
Three months Three months Nine months
ended ended ended
Weighted average common September 30, September 30, September 30,
shares 2005 2004 2005
------------------------------------------------------------------------
Basic 37,285 23,062 29,936
Warrants 3,528 2,873 3,413
Performance shares 538 436 521
Options 243 - 95
Diluted 41,594 26,371 33,965
------------------------------------------------------------------------
------------------------------------------------------------------------

The calculation of diluted common shares excludes anti-dilutive stock
options.


10. 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 $8,183 (2004 - $2,214) as at September 30, 2005 based on a total future liability of $20,907 (2004 - $6,000). Asset retirement expenditures are expected to be made over the next 25 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.



------------------------------------------------------------------------
Three months Three months Nine months
ended ended ended
September 30, September 30, September 30,
2005 2004 2005
------------------------------------------------------------------------
Balance, beginning of period $ 3,001 $ 2,013 $ 2,519
Increase in liabilities 243 163 624
Acquisitions 4,809 - 4,809
Accretion 130 38 231
------------------------------------------------------------------------
Carrying amount, end of period $ 8,183 $ 2,214 $ 8,183
------------------------------------------------------------------------
------------------------------------------------------------------------


11. SUPPLEMENTAL CASH FLOW INFORMATION

------------------------------------------------------------------------
Three months Three months Nine months
ended ended ended
Changes in non-cash September 30, September 30, September 30,
working capital 2005 2004 2005
------------------------------------------------------------------------
Accounts Receivable $ (7,586) $ (3,398) $ (5,473)
Prepaid expenses and deposits (322) (173) (325)
Accounts payable and accrued
liabilities 18,210 10,262 17,292
------------------------------------------------------------------------
Net change in non-cash
working capital 10,302 6,691 11,494
Investing activities $ 8,985 $ 7,725 $ 9,145
------------------------------------------------------------------------
Operating activities $ 1,317 $ (1,034) $ 2,349
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company made the following cash outlays in respect of interest
expense and current income taxes:

------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30, September 30,
2005 2004 2005
------------------------------------------------------------------------
Interest $ 328 $ 15 $ 412
Income taxes - - -
------------------------------------------------------------------------
------------------------------------------------------------------------


FORWARD LOOKING STATEMENTS

Certain information included in this press release is forward-looking. Forward-looking statements regarding possible events, conditions or results are based on assumptions about future economic conditions and courses of action and include future orientated financial information with respect to prospective results of operations, financial position and cash flows of Cyries. Forward-looking statements may include, without limitation, statements relating to the future financial position, business strategy, budgets, projected costs, capital expenditures, financial results, taxes and plans and objectives of or involving Cyries and, in certain circumstances, potential acquisitions. Many of these statements can be identified by looking for words such as "believe", "expects", "expected", "will", "intends", "projects", "anticipates", "estimates", "continues", or similar words.

Although Cyries believes the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties some of which are described in Cyries' annual information form and other continuous disclosure documents. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause Cyries' actual performance and financial results in future periods to differ materially from any conclusion, forecast, projection of future performance or results of operations expressed or implied by such forward-looking statements. Any forward-looking statements are made as of the date hereof and Cyries does not undertake any obligation, except as required under applicable law, to publicly update or revise such statements to reflect new information, subsequent or otherwise.

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)