Defiant Resources Corporation

Defiant Resources Corporation

March 22, 2005 12:37 ET

Defiant Announces 2004 Year-End Financial Statements and Reserves, and Provides Operations Update




MARCH 22, 2005 - 12:37 ET

Defiant Announces 2004 Year-End Financial Statements
and Reserves, and Provides Operations Update

CALGARY, ALBERTA--(CCNMatthews - March 22, 2005) - Defiant Resources
Corporation (TSX:DFR) ("Defiant") is pleased to announce its December
31st, 2004 financial statements and reserves, and to provide an update
on current operations.

Defiant Resources Corporation was formed as a result of the sale of our
predecessor company, Defiant Energy Corporation ("Defiant Energy"), to
Advantage Energy Income Fund on December 21st, 2004 under terms of a
plan of arrangement. Our new company was formed to continue the
exploration programs begun on Defiant Energy's undeveloped land base. We
retained most of the key management and technical staff who had
initiated these programs in the predecessor company and, as part of the
plan of arrangement, our new company was the successor to the mineral
rights and farm-in arrangements associated with these developing plays.
Each shareholder of the predecessor company had the right to participate
in the growth of the new start-up company through the receipt of one
share of the new company for every six shares held in Defiant Energy.

Two private placements of common shares have provided the capital
necessary to accomplish our exploration and development drilling program
in 2005. Under the plan of arrangement, we raised $8.2 million from our
directors, management, staff and certain service providers, which
enabled us to acquire a producing property and thereby satisfy the
minimum threshold to qualify our common shares for listing on the
Toronto Stock Exchange. In March, 2005 we closed a second private
placement, raising net proceeds of $7.1 million to provide working

Our financial statements contained in this news release reflect only the
last 11 days of 2004 after the plan of arrangement was concluded and
operations commenced on December 21st. Our reserves, previously
evaluated effective October 31st, 2004 in the material circulated to
Defiant Energy shareholders and filed on SEDAR, were updated as at
December 31st, 2004.


The highlights of our accomplishments to date are:

- We began 2005 with 11.8 million shares outstanding, positive working
capital of $2.1 million and no debt. Subsequently, in March, we issued a
further 3.0 million common shares for net proceeds of $7.1 million.
These funds will enable us to stay debt-free until the third quarter of
this year as we undertake an ambitious $18.8 million capital program in
2005, directed towards the drilling of 22 gross, 18.5 net wells.

- At December 31st, 2004 our reserves were evaluated by Sproule
Associates Limited ("Sproule" and the "Sproule report"). Our proved and
probable reserves were 743,000 boe, with a net present value discounted
at 10% before income taxes of $7.8 million.

- Our undeveloped land amounted to 107,542 gross, 95,353 net acres,
which was valued by Sproule at $5.8 million. We control an additional
30,000 acres of undeveloped land as the successor to farm-in
arrangements entered into by Defiant Energy.

- We have drilled and cased for production four gross, 2.7 net wells to
date in 2005, and we have completed another wellbore obtained from
Defiant Energy. We expect that these wells will all be tied in and
producing by May 1st, 2005, boosting our production to over 400 boe/d
from the present level of 120 boe/d from the acquired properties.

- An exploratory well to test the Nisku formation, Defiant Pembina
09-03-050-09 W5M, spudded on March 17th, 2005. We expect that this well
will take three weeks to drill to a depth of 2,660 metres. Defiant is
paying 15% of the costs of this well to earn a 45% interest in
production. This well is characterized as high-risk by our management;
if successful, the well could have a material impact on the reserves,
production and cash flow of Defiant.

Our year-to-date drilling success rate is 100%. Of note, each of the
four wells drilled to date in 2005 were in new areas, representing
different play types. We have discoveries in the Rock Creek, Ellerslie,
Sparky and Viking zones in our West Pembina core area, and in the
Dunvegan in our South Peace River Arch core area. These initial
successes will lead to follow-up activity as new seismic and land is
acquired and step-out drilling opportunities are pursued. Our acquired
property, the Brazeau "DDD" pool, is also a candidate for expansion as
we optimize the waterflood. We plan to drill several development wells
on this property, and we may supplement this with the acquisition of
other working interests in the pool.

Our board of directors has approved an $18.8 million capital budget for
2005 that will be directed towards the drilling of 22 gross, 18.5 net
wells. Our target is to exit 2005 with production in excess of 1,000
boe/d, weighted approximately 60%/40% between natural gas and oil
production. We will target a mix of both long- and short-life reserves,
yielding a reserve life index of seven to eight years. We will maintain
our strong balance sheet, with debt at less than one times the trailing
quarter's annualized cash flow.


Our oil and natural gas reserves were evaluated as at December 31st 2004
by Sproule.

Future net revenue
Company Interest Reserves before income taxes
Before Royalty discounted at the rate of
Gas Oil Liquids Total 0% 5% 10% 15%
mmcf mstb mstb mboe $m $m $m $m
producing 134.0 304.3 10.1 336.7 7,498 5,969 5,000 4,338
non-producing - - - -
------------------------------ --------------------------
developed 134.0 304.3 10.1 336.7 7,498 5,969 5,000 4,338
undeveloped - - - -
------------------------------ --------------------------
proved 134.0 304.3 10.1 336.7 7,498 5,969 5,000 4,338
Probable 600.0 281.7 24.7 406.4 5,567 3,812 2,797 2,160
------------------------------ --------------------------

probable 734.0 586.0 34.8 743.1 13,065 9,781 7,797 6,498
------------------------------ --------------------------
------------------------------ --------------------------

The future commodity prices forecasts used by Sproule were adjusted for
price differentials specific to the Company's reserves. The following
table summarizes the forecast benchmark prices:

WTI Foreign Par Price Alberta AECO-C
Oil Exchange 40 API Oil Spot Henry Hub
($US/bbl) Rate ($Cdn/bbl) ($Cdn/MMBtu) ($US/MMBtu)

2005 44.29 0.84 51.25 6.97 6.74
2006 41.60 0.84 48.03 6.66 6.48
2007 37.09 0.84 42.64 6.21 6.08
2008 33.46 0.84 38.31 5.73 5.70
2009 31.84 0.84 36.36 5.37 5.41
thereafter 1.5% 1.5% 1.5% 1.5%
------------------------------ --------------------------

Additional information concerning the Company's reserves, as required by
National Instrument 51-101, will be provided in the Company's annual
information form that will be filed on SEDAR on or before March 31st,



This management's discussion and analysis ("MD&A") complements and
supplements the disclosure in our audited financial statements and notes
and should be read in conjunction therewith.

Statements in the MD&A may contain forward-looking information including
expectations of future production, components of cash flow and earnings,
expected future events and/or financial results that are forward looking
in nature and subject to substantial risks and uncertainties. The reader
is cautioned that assumptions used in the preparation of such
information may prove to be incorrect. Defiant Resources Corporation
("Defiant" or the "Company") cautions the readers that actual
performance will be affected by a number of factors, as many may respond
to changes in economic and political circumstances throughout the world.
Events or circumstances may cause actual results to differ materially
from those predicted, a result of numerous known and unknown risks,
uncertainties, and other factors, many of which are beyond the control
of the Company. These risks include, but are not limited to; the risks
associated with the oil and gas industry, commodity prices and exchange
rate changes.

Within the MD&A we use certain financial terms that are commonly used in
the oil and gas industry, but which are not defined by generally
accepted accounting principles ("GAAP") and which regulators require
that we provide disclaimers.

1. The MD&A contains the term cash flow which is cash flow from
operations before the change in non-cash working capital items. The
non-GAAP measure used should not be considered an alternative to, or
more meaningful, than cash flow from operations. The Company considers
cash flow to be a key measure as it demonstrates the Company's ability
to generate funds for investing. Cash flow does not have any
standardized meaning prescribed by GAAP and therefore it may not be
comparable with the calculation of similar measures for other entities.
Cash flow per share is calculated using the same weighted average number
of common shares as used in calculating the earnings per share.

2. Barrel of oil equivalent ("boe") amounts have been calculated using a
conversion rate of 6 mcf of gas to one barrel of oil. Boe maybe
misleading if used in isolation. A boe conversion ratio of six mcf of
gas to one barrel of oil is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a
value equivalency at the well head.

3. Netbacks equal total revenue less royalties and operating costs on a
boe basis. Total boes are calculated by multiplying the daily production
by the number of days in the period.

Incorporation and commencement of operations

The Company was incorporated on November 1, 2004 and commenced
operations on December 21, 2004 following the sale of its predecessor
corporation, Defiant Energy Corporation ("Defiant Energy"), to Advantage
Energy Income Fund ("Advantage"), under terms of a plan of arrangement
(the "Plan"). Under the Plan, the Company acquired certain petroleum and
natural gas assets from Defiant Energy and Advantage, and was the
successor to certain rights and obligations under the majority of
Defiant Energy's industry farm-in agreements. The acquired assets
included 95,000 acres of undeveloped land and non-producing reserves.
The value of the net assets acquired was $7,349,400. The plan resulted
in the initial distribution of 5,522,408 common shares to the former
shareholders of Defiant Energy.

As part of the Plan, the Company raised $8,190,000 through a private
placement of 6,300,000 common shares and 2,746,599 warrants to
management, directors, employees, consultants and service providers. The
proceeds were used to exercise an option to purchase producing oil and
gas properties from Advantage for $5,810,000 and to provide working
capital. The acquisition provided the Company with a small initial
production base and monthly cash flow, and enabled the Company to meet
the threshold criteria for listing on the Toronto Stock Exchange
("TSX"). The Company's common shares commenced trading on the TSX on
December 23, 2004. The net assets acquired by the Company through the
Plan were:

Properties acquired from Defiant Energy $ 7,718,169
Asset retirement obligation assumed (368,769)
Properties acquired from Advantage 5,810,000
$ 13,159,400

Period of operations and comparative information

Because the Company was operational for only the last eleven days of
2004 (the "Period"), there are no comparative figures available. Certain
comparisons to industry or other available data are made in this review
to assist the reader in placing the historical results and expectations
in context.

Acquired property operations

The following table summarizes the 2003 and 2004 quarterly operating
statistics of the properties acquired under the Plan.

2004 Q1 Q2 Q3 Q4
Total revenue $ 613,997 $ 474,422 $ 655,562 $ 600,518
Average daily production 150 105 136 129
Oil (bbls/d) 132 95 118 115
NGL (bbls/d) 7 3 8 6
Natural gas (mcf/d) 65 35 59 49
Total (boe/d) 150 104 136 129
Prices $ 41.77 $ 37.42 $ 40.37 $ 56.76
Royalties $ 4.78 $ 3.78 $ 4.13 $ 5.45
Operating expenses $ 10.61 $ 7.15 $ 10.31 $ 13.36
Operating netback $ 26.38 $ 26.49 $ 25.93 $ 37.95

2003 Q1 Q2 Q3 Q4
Total revenue $ 696,722 $ 441,387 $ 592,048 $ 597,174
Average daily production 155 116 155 164
Oil (bbls/d) 140 106 135 145
NGL (bbls/d) 3 2 7 7
Natural gas (mcf/d) 69 49 75 75
Total (boe/d) 155 116 155 164
Prices $ 49.77 $ 40.87 $ 40.31 $ 38.80
Royalties $ 6.37 $ 5.57 $ 5.62 $ 4.95
Operating expenses $ 15.46 $ 14.85 $ 30.38 $ 15.15
Operating netback $ 27.94 $ 20.45 $ 4.31 $ 18.70

Business strategy and key performance drivers

Defiant is a junior exploration company whose business activities are
focused in Western Canada. Our plan is to create value primarily through
the generation and drilling of prospects. With our experience and
talented people, our primary strategy of creating value and growth is
through the drill-bit. Key performance drivers such as reserve
additions, finding and development costs, operating and administration
costs are monitored. Defiant strives to ensure it receives competitive
prices for commodities sold. Performance measures which are monitored
are net income, cash flow, reserves added and production on a per common
share basis. These measurements are used to assess our performance in
adding oil and gas reserves and production.

Production and Sales Analysis

unit 2004
Natural gas mcf/d 32
Oil bbls/d 102
Liquids bbls/d 3
Barrels of oil equivalent BOE/D (6:1) 110

Average daily sales volumes for the Period were 110 bbls/d. The volumes
consisted of 32 mcf/d of natural gas, 102 bbls/d of oil and 3 bbls/d of
natural gas liquids. The production was all generated from the property
acquired form Advantage, the Brazeau "DDD" pool. The production volumes
met our expectations for the Period; for the first 10 months of 2004,
the property produced at an average rate of 130 boe/d. The Company has
completed a waterflood study of this property, and will implement this
plan during 2005 to increase production.

Prices and Revenue

Commodity Pricing Benchmarks for the year
West Texas Intermediate US$/bbl 41.44
Exchange rate US$ 0.7686
Edmonton Par $/bbl 52.54
NYMEX US$/mmbtu 6.03
Alberta Spot $/mcf 6.55
Company Prices for the Period
Natural gas price $/mcf 7.03
Oil price $/bbl 50.40
Liquids price $/bbl 38.23
Revenue ($ thousands)
Natural gas sales 2
Oil sales 51
Liquids sales 1
Total 55

Our production from the Belly River "DDD" Pool is approximately 40 API,
and receives close to the Edmonton Par price.

Commodity prices remained strong throughout 2004, with natural gas and
oil benchmark pricing up 1% and 21% respectively over 2003. The Canadian
dollar continued to strengthen over 2004, from an average US$0.7164 in
2003 to US$0.7686 in 2004. For Canadian producers this 7% appreciation
eroded some of the benefits of stronger prices. In the first month of
2005, the exchange rate has further strengthened to the US$0.82 level.


Defiant's crown royalty rate was 17% during the Period, compared to 14%
during the first 10 months of 2004.

Operating Expenses

Operating expenses were $15,000 or $13.18 per boe for the Period
compared to $14.13 per boe during the first 10 months of 2004. Defiant
has taken steps to reduce operating costs through increased production
as a result of the waterflood and by improving operating procedures at
the Pembina battery.

General and Administrative Expenses

Defiant has a staff of twelve professional and two administrative
employees, none of whom received a salary for the Period. General and
administrative expenses of $4,000 were incurred in the start-up
operations of the Company. In 2005, the Company's officers and key
senior technical staff have agreed to receive below-market salaries
until the Company's production exceeds 1,000 boe/d.

Interest and Finance Charges

At December 31, 2004, Defiant had $2.3 million cash in deposits and no
debt. These funds were raised from the private placement in 2004 and
will be drawn down to pay for expenditures as they are incurred.

Depletion, Depreciation and Accretion

Depletion, depreciation and accretion expense for the Period amounted to
$22,000 ($20.67 per boe). For the Period, depletion was calculated using
proved reserves from the Sproule report as at December 31, 2004.


$ per boe

Price 49.68

Crown royalties (8.64)

Operating expenses (13.18)
Field netback 27.86

Income Taxes

Defiant paid no capital tax for 2004. The Company will be subject to
large corporation capital tax of 0.2% per year when its stated capital
exceeds $50 million.

At December 31, 2004 Defiant had the following tax pools available to
shelter future income.

$ thousands

Canadian Development Expense 215
Canadian Oil and Gas Property Expense 13,057
Undepreciated Capital Cost 22

Earnings and Cash Flow


Weighted average shares outstanding

Basic m 1,938

Diluted m 3,473

Funds from operations $m 27

Basic per share $ 0.01

Diluted per share $ 0.01

Earnings $m 2

Basic per share $ -

Diluted per share $ -

For the Period, cash flow from operations was $27,000. The weighted
average number of shares outstanding (diluted) was 3.47 million shares
and cash flow per share (diluted) was $0.01, while earnings per share
(diluted) were nil.

Capital Expenditures

$ thousands 2004
Drilling and completions 207

Production facilities, pipeline, plant and equipment 30

Acquisitions 13,084


Capital expenditures, net of dispositions, were $13.3 million for the
Period, reflecting the initial acquisition for $7.3 million of
undeveloped lands and non-producing reserves pursuant to the Plan, and
the exercise of the option to purchase the Brazeau "DDD" Pool from
Advantage for $5.8 million. Defiant also initiated the drilling of one
well (0.5 net) on December 21, 2004.

Liquidity and Capital Resources

At December 31, 2004, Defiant had a credit facility of $2.0 million with
a Canadian chartered bank, none of which was drawn down. Defiant's
working capital surplus at December 31, 2004 was $2.1 million.

Subsequent to year end 2004, the Company entered into a private
placement and issued 2,950,000 common shares at $2.55 per share for
total gross proceeds of $7,522,500 pursuant to certain exemptions from
prospectus requirements. The private placement closed on March 3, 2005.
The net proceeds received from the sale of the common shares will be
used for general corporate purposes.

As at the date hereof the company has 14,772,408 common shares, 100,000
options to purchase common shares and 2,746,599 share purchase warrants
issued and outstanding.

Outlook for 2005

In 2005, the Company's Board of Directors has approved an $18.8 million
capital expenditure budget. The Company expects to drill 22 (18.5 net)
wells, and has budgeted to add production at a rate of approximately
$20,000 per daily boe. This program, if successful, will see the Company
exit 2005 with production in excess of 1,000 boe/d split approximately
60%/40% natural gas/oil. We expect to fund the $18.5 million capital
program as follows:

$ millions

Opening working capital $ 2.1
Cash flow from operations 6.1
Capital expenditures (18.8)
Net proceeds from equity issue 7.1
Closing net debt $ (3.5)

At least monthly, we update our budget models with actual historical
results, revised expectations for production, commodity price and
exchange rate outlooks and other major factors. When such changes result
in material changes to our expectations, we intend to update our
investor presentations and publish these on our website.

Operational and Other Business Risks

Industry related risks could include, but are not limited to,
operational risks in exploration, development and production, delays or
changes in plans, risks associated with the uncertainty of reserve
estimates, health and safety risks and the uncertainty of estimates and
projections of production, costs and expenses. These external factors
beyond the Company's control may affect the marketability of oil and
natural gas produced, industry conditions including changes in laws and
regulations, changes in income tax regulations, increased competition,
fluctuations in commodity prices, interest rates, and variations in the
Canadian/United States dollar exchange rate. The reader is cautioned not
to place undue reliance on this forward-looking information.

Defiant's production and exploration activities are concentrated in the
Western Canadian Sedimentary Basin, where activity is highly competitive
and includes a variety of different sized companies ranging from smaller
junior producers to the much larger integrated petroleum companies.
Defiant is subject to the various types of business risks and
uncertainties including:

- Finding and developing oil and natural gas reserves at economic costs;

- Production of oil and natural gas in commercial quantities; and

- Marketability of oil and natural gas produced.

In order to reduce exploration risk, the Company strives to employ
highly qualified and motivated professional employees with a
demonstrated ability to generate quality proprietary geological and
geophysical prospects. To help maximize drilling success, Defiant
combines exploration in areas that afford multi-zone prospect potential,
targeting a range of low to moderate risk prospects with some exposure
to select high-risk with high-reward opportunities. Defiant also
explores in areas where the Company has significant drilling experience.

The Company mitigates its risk related to producing hydrocarbons through
the utilization of the most appropriate technology and information
systems. In addition, Defiant seeks to maintain operational control of
the majority of its prospects.

Oil and gas exploration and production can involve environmental risks
such as pollution of the environment and destruction of natural habitat,
as well as safety risks such as personal injury. In order to mitigate
such risks, Defiant conducts its operations at high standards and
follows safety procedures intended to reduce the potential for personal
injury to employees, contractors and the public at large. The Company
maintains current insurance coverage for general and comprehensive
liability as well as limited pollution liability.

The amount and terms of this insurance are reviewed on an ongoing basis
and adjusted as necessary to reflect changing corporate requirements, as
well as industry standards and government regulations. Defiant may
periodically use financial or physical delivery hedges to reduce its
exposure against the potential adverse impact of commodity price
volatility, as governed by formal policies approved by senior management
subject to controls established by the Board of Directors.

Critical Accounting Estimates

The reader is cautioned that the preparation of financial statements in
accordance with GAAP requires management to make certain judgments and
estimates that affect the reported amounts of assets, liabilities,
revenues and expenses. Estimating reserves is also critical to several
accounting estimates and requires judgments and decisions based upon
available geological, geophysical, engineering and economic data. These
estimates may change, having either a negative or positive effect on net
earnings as further information becomes available, and as the economic
environment changes. Changes in these judgments and estimates could have
a material impact on the financial results and financial condition. The
following discussion outlines accounting policies and practices that are
critical to determining Defiant's financial results.

Reserves are critical to several accounting estimates, affecting net
income through depletion, site restoration and abandonment estimates and
the ceiling test calculation. Estimating reserves is very complex,
requiring many judgments based on available geological, geophysical,
engineering and economic data. Estimated reserves are also utilized by
Defiant's lender in determining credit facilities. Changes in these
judgments could have a material impact on the estimated reserves, and
subsequently the Company's financial results and financial condition.

In following the liability method of accounting for income taxes,
related assets and liabilities are recognized for the estimated tax
consequences between amounts included in the financial statements and
their tax base using substantively enacted future income tax rates.
Timing of future revenue streams and future capital spending changes can
affect the timing of any temporary differences, and accordingly affect
the amount of the future income tax liability calculated at a point in
time. These differences could materially impact earnings.

The Company is involved in various claims and litigation arising in the
normal course of business. While the outcome of these matters is
uncertain and there can be no assurance that such matters will be
resolved in the Company's favor, the Company does not currently believe
that the outcome of adverse decisions in any pending or threatened
proceeding related to these and other matters or any amount which it may
be required to pay by reason thereof would have a material adverse
impact on its financial position or results of operations.

With the above risks and uncertainties, the reader is cautioned that
future events and results may vary substantially from those that Defiant
currently foresees.

New Accounting Pronouncements

Earnings Per Share

In July 2004, the CICA issued an exposure draft for a new method for
calculating year to date fully diluted earnings per share for fiscal
years beginning on or after January 1, 2005. Under the new method, the
incremental shares included in the year-to-date diluted earnings per
share will be computed using the average market price of Common Shares
for the year-to-date period. The Company will adopt this new guideline
on January 1, 2005 and it is not expected to have a material impact on
its financial position or results of operations.

Subsequent Events

In March 2004, the CICA issued an exposure draft that proposes to extend
the period during which subsequent events are required to be considered
to include those events that occur between the date of the balance sheet
and the date when the financial statements are authorized for issue, and
require disclosure in the financial statements of the date the financial
statements were authorized for issue and who gave that authorization.
Currently, subsequent events are only disclosed if they occur prior to
the audit report date. This proposed exposure draft is effective for
fiscal periods beginning on or after January 1, 2005. Defiant will adopt
this new guideline in the first quarter of 2005.


We have audited the balance sheet of Defiant Resources Corporation as at
December 31, 2004 and the statements of earnings and retained earnings
and cash flows for the period from commencement of operations on
December 21, 2004 to December 31, 2004. These financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all
material respects, the financial position of the company as at December
31, 2004 and the results of its operations and retained earnings and its
cash flows for the period from commencement of operations on December
21, 2004 to December 31, 2004 in accordance with Canadian generally
accepted accounting principles.

Chartered Accountants

Calgary, Canada

March 14, 2005

Balance Sheet

As at December 31, 2004
Current assets
Cash $ 2,273,563
Accounts receivable 632,039
Prepaid expenses and refundable deposits 166,868

Property, plant and equipment 13,690,049
Less: accumulated depletion and depreciation (21,838)

$ 16,740,681

Liabilities and Shareholders' Equity
Current liabilities:

Accounts payable and accrued liabilities $ 827,410
Current portion of asset retirement obligation (note 4) 100,000

Asset retirement obligation (note 4) 269,675

Future income taxes (note 6) 2,000
Shareholders' equity

Share capital (note 7) 15,539,401
Retained earnings 2,195
Commitments (note 10)
Subsequent event (note 11)

$ 16,740,681
See accompanying notes to financial statements.

On behalf of the Board:

(Ray Chan) Director

(Naveen Dargan) Director

Statement of Earnings and Retained Earnings

For the period from commencement of operations on December 21, 2004
to December 31, 2004

Oil and natural gas sales $ 54,731
Crown royalties (9,520)

Operating 14,522
General and administrative 3,750
Depletion and depreciation 21,838
Accretion on asset retirement obligation (note 4) 906

Earnings before taxes 4,195

Future income taxes (note 6) 2,000

Net earnings, being retained earnings at
end of period $ 2,195

Earnings per share (note 7)
Basic $ 0.00
Diluted $ 0.00

See accompanying notes to financial statements.

Statement of Cash Flows

For the period from commencement of operations on December 21, 2004
to December 31, 2004
Cash provided (used in):

Earnings for the period $ 2,195

Add: non-cash items

Depletion and depreciation 21,838

Accretion on asset retirement obligation 906

Future income taxes 2,000
Funds from operations 26,939
Changes in non-cash operating
working capital (55,602)


Issuance of
Common shares and warrants 8,190,000

Properties acquired pursuant to plan of arrangement (5,810,000)
Other assets purchased (161,879)
Changes in non-cash investing working capital 84,105

Increase in cash, being cash at end of period $ 2,273,563

See accompanying notes to financial statements.

Notes to Financial Statements

From the period from commencement of operations on December 21, 2004 to
December 31, 2004

1. Plan of arrangement / related party transaction

1135488 Alberta Ltd. was incorporated pursuant to the Business
Corporations Act (Alberta) on November 1, 2004, changed its name to
Defiant Resources Corporation (the "Company") on November 12, 2004 and
commenced commercial production on December 21, 2004 when certain assets
of Defiant Energy Corporation were transferred to the Company under a
plan of arrangement (the "Plan"). The Plan resulted in, amongst other
matters, Defiant Energy Corporation shareholders becoming the
shareholders of the Company. The Plan was approved on December 21, 2004
and the common shares of the Company commenced trading on the Toronto
Stock Exchange on December 23, 2004. The principal business activity of
the Company is exploration for, development and production of oil and
natural gas in Western Canada.

Pursuant to the Plan, Defiant Energy Corporation ("DEC") transferred
certain properties to the Company in exchange for 5,522,407 common
shares. At the time of the transaction, DEC and the Company were related
companies resulting in the transfer of assets being recorded at DEC's
carrying value. As part of the Plan, the Company also acquired certain
properties, including access to seismic, from Advantage Energy Trust for
cash consideration.

The net assets acquired by the Company through the Plan were as follows:

Properties acquired from DEC $ 7,718,169
Asset retirement obligation (368,769)
Properties acquired from Advantage 5,810,000
$ 13,159,400

Pursuant to the Plan, DEC distributed the 5,522,407 common shares of the
Company to its shareholders (one share for every six common shares of
DEC held).

2. Significant accounting policies

Use of estimates

The preparation of the financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.

Capitalized costs

The Company follows the full cost method of accounting whereby all costs
associated with the exploration for and development of petroleum and
natural gas reserves are capitalized. Such costs include land
acquisition costs, geological and geophysical costs, lease rental costs
on non-producing properties, costs of both productive and unproductive
drilling and production equipment and facilities. Gains or losses are
not recognized upon disposition of petroleum and natural gas properties
unless crediting the proceeds against accumulated costs would result in
a change in the rate of depletion of 20% or more.

Depletion and depreciation

The accumulated costs in a cost centre from which there is production
are depleted and depreciated using the unit of production method based
on total proved reserves before royalties as determined by independent
consultants. Natural gas reserves and production are converted into
equivalent barrels of oil ("boe") using a boe conversion ratio of 6 mcf
of natural gas equals 1 bbl of oil. The depletable cost base includes
capitalized costs plus estimated future development costs less estimated
future salvage values and the costs, net of impairments, of unproved

The costs of acquiring and evaluating unproved properties are excluded
from costs subject to depletion until it is determined whether or not
proved reserves are attributable to the properties. These properties are
assessed periodically to ascertain whether impairment has occurred. When
proved reserves are assigned or the property is considered to be
impaired, the cost of the property or the amount of impairment is added
to the costs subject to depletion.

Joint ventures

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

Ceiling test

The Company has adopted Accounting Guideline #16 for the full cost
method of accounting for oil and gas activities. The guideline requires
a detailed impairment calculation when events or circumstances indicate
a potential impairment of the carrying amount of oil and gas assets may
have occurred, but at least annually.

An impairment loss is recognized when the carrying amount of a cost
centre is not recoverable and exceeds its fair value. The carrying
amount is assessed to be recoverable when the sum of the undiscounted
future cash flows from proved reserves plus the cost of unproved
interests, net of impairments, exceeds the carrying amount of the cost
centre. When the carrying amount is assessed not to be recoverable, an
impairment loss is recognized to the extent that the carrying amount of
the cost centre exceeds the sum of the discounted future cash flows from
proved and probable reserves plus the cost of unproved interests, net of
impairments. The cash flows are estimated using forecast prices and
costs and are discounted using a credit adjusted risk-free interest rate.

Asset Retirement Obligation

The Company records the fair value of an asset retirement obligation as
a liability in the period in which it incurs a legal obligation
associated with the retirement of long-lived tangible assets that result
from the acquisition, construction and development of the assets. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and depleted and depreciated
using a unit of production method over estimated gross proved reserves.
Subsequent to the initial measurement of the asset retirement
obligation, the obligations are adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash
flows underlying the obligation.

Income taxes

The Company provides for income taxes using the asset and liability
method. Under this method income taxes are recognized for the estimated
income taxes payable for the current year and future income taxes are
recognized for temporary differences between the tax and accounting
bases of assets and liabilities and for the benefit of losses available
to be carried forward for tax purposes that are likely to be realized.
Future income tax liabilities and assets are measured using tax rates
expected to apply in the years in which temporary differences are
expected to be recovered or settled. Any change to the net future income
tax assets and liabilities is included in operations in the year it

Stock based compensation

The Company follows the fair value method of accounting for the
stock-based compensation plan described in note 7. The fair value is
measured at the grant date and charged to earnings over the vesting
period with a corresponding increase in contributed surplus. For awards
that vest on a graded basis, compensation cost is recognized on a
pro-rata basis over the vesting period. Consideration paid on exercise
of options is credited to share capital.

Per share amounts

Basic per share amounts are computed by dividing the net earnings by the
weighted average number of common shares outstanding during the period.
Diluted per share amounts are calculated giving effect to the potential
dilution that would occur if stock options were exercised and the
warrants were converted to common shares. The treasury stock method is
used to determine the dilutive effect of stock options. The treasury
stock method assumes that proceeds received from the exercise of options
for which exercise price is less than market price are used to
repurchase common shares at the prevailing market rate.

Financial instruments

The Company uses certain derivative financial instruments to manage its
commodity price, foreign currency and interest rate exposures. These
financial instruments are entered into solely for hedging purposes and
are not used for trading or other speculative purposes. The Company has
elected to use hedge accounting for qualifying instruments. These
instruments are not recognized in the financial statements on inception.
Gains and losses arising from financial instruments on commodity prices
and foreign currency are recognized as adjustments to the related
revenue accounts when the gain or loss is realized.

3. Long Term Debt

The Company has a $2 million revolving term credit facility and a $0.5
million $U.S. swap facility with a Canadian chartered bank. The credit
facility bears interest at the bank's prime rate plus 0.375% per annum
and the swap facility bears interest at the U.S. base rate plus 0.375%
per annum. The credit facility is structured as a 364 days or less
revolving facility, and is subject to a review each year. The swap
facility is structured such that each swap will not exceed one year.
Borrowings under the credit facility are limited to a borrowing base
determined by the bank and the swap facility is not to exceed the value
of 60% of the average daily production. Principal repayments are
required only if the borrowing base is exceeded. The facilities are
secured by a $20 million floating charge over all of the Company's

4. Asset Retirement Obligation

The asset retirement obligations result from net ownership interests in
petroleum and natural gas assets, including well sites, gathering
systems and processing facilities. The Company estimates the total
undiscounted amount of cash flows required to settle its asset
retirement obligations is approximately $670,000, the majority of which
will be incurred after 2020. A credit-adjusted rate of 9% and an
inflation rate of 2% were used to calculate the fair value of the asset
retirement obligations.

A reconciliation of the asset retirement obligations is provided below:

Asset retirement obligations 2004
Balance, beginning of period $ -
Assumed liability pursuant to Plan 368,769
Accretion expense 906
Balance, end of period $ 369,675

Current $ 100,000
Long-term 269,675
$ 369,675

5. Property, Plant and Equipment

Petroleum and natural gas rights, including exploration
and development 13,690,049
Accumulated depletion and depreciation (21,838)

During the period ended December 31, 2004, no general and administrative
costs were capitalized.

At December 31, 2004, undeveloped land costs of $5,837,400 were excluded
from assets subject to depletion.

The future commodity prices used in the ceiling test were based on
December 31, 2004 commodity price forecasts of the Company's independent
reserve engineers adjusted for price differentials specific to the
Company's reserves. The following table summarizes the future benchmark
prices the Company used in the ceiling test:

WTI Exchange WTI Company AECO Company
Oil Rate Oil Price Gas Price
($US/bbl) ($US) ($Cdn/bbl) Oil ($Cdn/mcf) Gas
2005 44.29 0.84 51.25 50.66 6.97 7.94

2006 41.60 0.84 48.03 47.54 6.66 7.81

2007 37.09 0.84 42.64 42.18 6.21 7.14

2008 33.46 0.84 38.31 37.82 5.73 6.67

2009 31.84 0.84 36.36 35.82 5.37 5.91
thereafter 1.5% 1.5% 1.5% 1.5% 1.5%

6. Future income taxes

Future income tax expense differs from the amount that would be computed
by applying the basic combined federal and provincial statutory income
tax rate of 38.62% to earnings before taxes. The reasons for the
differences are as follows:

Expected income tax expense $ 1,620
Add (deduct):
Non-deductible crown royalties 2,757
Resource allowance (2,574)
Other 197
Future income tax $ 2,000
Large corporation tax -
Provision for income taxes $ 2,000

The tax effects of temporary differences that give rise to the future
tax assets and liabilities at December 31, 2004 are as follows:

Tax liabilities:
Property, Plant and equipment - differences in
net book value and tax basis $(144,768)

Tax assets:
Asset retirement obligation 142,768
Net future tax liability - closing $ (2,000)

7. Share Capital


Unlimited number of common shares and an unlimited number of preferred
shares, issuable in series.

Issued and outstanding common shares and common share warrants

December 31, 2004

Number of
Shares Amount
Balance, at incorporation 1 $ 1

Issue of common shares pursuant to Plan (note 1) 5,522,407 7,349,400

Issue of common shares for cash to directors,
officers, employees and consultants 5,493,198 5,822,790

Issue of share purchase warrants for cash to
directors, officers, employees and consultants 1,318,367

Issue of common shares to service providers 806,802 1,048,843

Balance, end of period 11,822,408 $15,539,401

In December 2004 the Company raised $8,190,000 through a private
placement of units and common shares. 5,493,198 units were sold to
directors, officers, employees and consultants; 806,802 common shares
were issued to service providers. Each unit consisted of one common
share, subject to a contractual escrow period, at an ascribed value of
$1.06, and one-half of one share purchase warrant at a value of $0.24.
The value of the share purchase warrant was determined using the Black
Scholes option pricing model using the following assumptions:

Dividend yield zero
Volatility 50%
Risk-free rates 3.5%
Expected life 2 years

One-half of the share purchase warrants vest on the first anniversary of
the closing of the private placement and are exercisable only if the
weighted average trading price of the common shares is equal to or
greater than $1.95 for a 20 day trading period. The balance of the share
purchase warrants will vest on the second anniversary of the closing of
the private placement and will only be exercisable if the weighted
average trading price of the shares is equal to or greater than $2.60
for a 20 day trading period. Each share purchase warrant entitles the
holder to acquire one common share of the Company for $1.30 per common


The Company has a stock option plan under terms of which it will grant
options to acquire common shares to certain officers, directors,
employees and consultants. Under terms of the plan, up to 1.2 million
shares have been reserved for issuance, and no more than 5% of the
outstanding shares may be issued to any one insider as defined by such
plan. As at December 31, 2004 no options had been granted.

Per share amounts

The weighted average numbers of shares outstanding for the determination
of basic and diluted per share amount for the period from incorporation
on November 1, 2004 to December 31, 2004 are as follows:


Basic 1,938,100

Diluted 3,472,781


8. Financial instruments

The Company is exposed to fluctuations in commodity prices, exchange and
interest rates. The Company monitors and, when applicable, utilizes
financial instruments to manage these exposures.

Financial instruments are subject to fluctuations in prices and rates
but, by nature of being hedges of actual or anticipated transactions,
any gains or losses are offset by gains or losses on the hedged
transaction. The Company is exposed to losses in the event of
non-performance by counter-parties to the instruments.

Commodity risk management

The Company markets its production through short-term Alberta-based

Foreign currency risk management

The Company is exposed to foreign exchange rate fluctuations as oil and
gas prices are referenced to U.S. dollar denominated prices.

Interest rate risk

The Company is exposed to a floating interest rate on its bank

Credit risk management

Accounts receivable include amounts receivable for oil and gas sales; as
these sales are generally made to large, credit worthy purchasers, the
Company views the credit risks on these items as low. Amounts receivable
from joint venture partners included in accounts receivable are
recoverable from production and, accordingly, the Company views credit
risks on these amounts as minimal.

Fair values of financial statements

Accounts receivable, accounts payable, and accrued liabilities have
carrying values that approximate fair value due to the near term
maturity of these instruments; the bank loan carrying value approximates
the fair value due to the floating interest rate.

9. Cash Flow Disclosures

Increase in accounts receivable $ (632,039)
Increase in prepaid expenses and refundable deposits (166,868)
Increase in accounts payable and accrued liabilities 827,410
Less: change in non-cash working capital related to investing 84,105
Change in non-cash working capital related to operations $ (55,602)

10. Commitments:

The Company has commitments in respect of the lease of its office space,
before sub-lease rental income, as follows:


2005 $ 498,919
2006 432,748
2007 435,593
2008 444,128
2009 333,096

11. Subsequent event:

Subsequent to the year-end the Company entered into a common share
private placement agreement with a group of underwriters to issue
2,950,000 common shares at $2.55 per share for total gross proceeds of
$7,522,500. The private placement closed on March 3, 2005. The net
proceeds received from the sale of the common shares will be used for
general corporate purposes, including an increase to planned capital


Contact Information

    Defiant Resources Corporation
    David J. Evans
    Chairman of the Board & C.E.O.
    (403) 218-4101
    Defiant Resources Corporation
    Rick J. Ironside
    President & COO
    (403) 218-4104
    Defiant Resources Corporation
    Timothy V. Dunne
    V.P., Finance & C.F.O.
    (403) 218-4111