Defiant Resources Corporation
TSX : DFR

Defiant Resources Corporation

August 11, 2005 09:33 ET

Defiant Resources Corporation 2005 Second Quarter Report & News Release

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Defiant Resources Corporation (TSX:DFR):

To Our Shareholders

We are pleased to present our second quarter report to shareholders.

To date this year, we have drilled approximately one-half of the 22 gross, 18.5 net wells that we had originally budgeted for 2005. Our drilling program this year has gone well, with 13 gross (9.2 net) wells drilled to date. We have achieved an 80% net success rate, which we consider to be very satisfactory, particularly in view of the exploratory weighting of our drilling program: only three of the 13 wells drilled were classified as development wells and ten were classified as exploratory.

Based on field estimates, with four of the wells drilled this year now on stream, our current production is approximately 450 boe/d. We have another five wells standing cased, and we expect that these will be brought on stream by year-end. Of these five (4.5 net) wells, which were drilled and rig released between the end of May and the end of July, two have been completed and briefly tested and three are still to be completed. Four (3.5 net) wells are expected to produce natural gas, and one flowed both natural gas and light oil following completion.

Review of Operations

South Peace River Arch Core Area.

Grande Prairie project, Cretaceous and Triassic, natural gas.

Four (4.0 net) wells were drilled and cased as potential natural gas wells. Two are on production, one is undergoing extended flow testing, to be finalized before the end of August, and one is waiting on completion. Two of the wells drilled are subject to a 25% back-in right to farmors and our production will be from 3.5 net wells. We are evaluating tie-in and processing alternatives available to treat sour gas and liquids from the more prolific of the wells, as well as for future drilling planned for the area. Based on our successful drilling in this area we plan to expand our activity level.

Sheldon project, Triassic, light oil and natural gas

We drilled our first exploratory well on our Sheldon block of lands in June. Wet surface access conditions delayed completion until late July, when the well was fracture stimulated and flowed light oil and natural gas during cleanup. The well will be evaluated on a longer production test to assess the economics of production in an area well removed from existing facilities. This test is expected to begin in the second week of August and should last for two months. If this well tests successfully this project could grow into a significant Sunset Montney type pool.

Doris/Corbett project, Mannville natural gas sands and coal seams

Our first exploratory well (0.65 net well) drilled in July was dry and abandoned. Drilling of other seismic features is planned for late in the year.

West Pembina Core Area

Carrot Creek project, Jurassic, light oil and natural gas

We have drilled two more wells, both with 100% interest, targeting the Rock Creek sands in a major farm-in program assumed from our predecessor company. One well was cased and is producing light oil and natural gas since being placed on production after weather delays in the spring. The other well was dry and abandoned. In addition, we completed a 100% Rock Creek well acquired from our predecessor company. This well is also on production but at low rates.

Brazeau project, Belly River, light oil

In June Defiant commenced water injection into a portion of the Pembina (Brazeau) Belly River DDD oil pool that has not been benefiting from the existing waterflood. We have not yet observed any response but we expect indications of improved recovery within approximately six months.

Northwest Edmonton Core Area

Atim, Gunn, Majeau projects, mainly multi-zone natural gas in Cretaceous sands

We have just drilled the last of three (1.2 net) natural gas wells at Atim. One well is on production and two are waiting on completion services. One well (0.25 net) was drilled and completed at Gunn and encountered heavy oil only capable of a low rate, and small associated natural gas volumes were flared. The well has been suspended for further evaluation of other zones on the lands.

Outlook

While we still need to carry out additional testing procedures and to complete and tie-in the five wells standing cased to fully evaluate their productivity and reserves, the addition of these wells should result in corporate production increasing to approximately 800 boe/d by year end. Further increasing the production from these wells to their indicated potential is dependent on the resolution of sour gas processing limitations which we expect to have resolved in 2006. The remaining 9 gross wells originally planned for this year should enable us to achieve or surpass our year end production target exit rate of 1,000 boe/d.

This success in our exploratory program results in additional expenditures for processing and pipeline facilities not originally budgeted. In addition, the program has yielded an expanded inventory of drilling locations. As a result, we are currently reviewing our capital program for the remainder of 2005.



Respectfully submitted on behalf of the board,

David J. Evans Rick J. Ironside
Chairman and President and
Chief Executive Officer Chief Operating Officer

11 August, 2005


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Advisories

The following management's discussion and analysis ("MD&A") of financial results as provided by the management of Defiant Resources Corporation ("Defiant" or the "Company") should be read in conjunction with the audited financial statements for the period ended December 31, 2004. This commentary is based on information available as at August 11, 2005.

Statements in the MD&A may contain forward-looking information including expectations of future production, components of cash flow and earnings, expected future event 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 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.

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 of 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.

Barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of 6 mcf of gas to 1 barrel of oil. Boe maybe misleading if used in isolation. A boe conversion ratio of 6 mcf of gas to 1 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.

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.

REVIEW OF 2005 SECOND QUARTER

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. 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.

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 experienced 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.

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. The information in the MD&A is current to August 11, 2005. The following table summarizes the 2004 quarterly operating statistics of the properties acquired under the Plan.



Quarterly Data

------------------------------------------------------------------------
2004 Q1 Q2 Q3 Q4
------------------------------------------------------------------------
Total Revenue ($) 613,997 474,422 655,562 600,518
Average Daily Production
Oil (boe/d) 132 95 118 115
NGL (bbls/d) 7 3 8 6
Natural Gas (mmcf/d) 65 35 59 49
------------------------------------------------------------------------
Total (boe/d) 150 104 136 129
------------------------------------------------------------------------
Prices 41.77 37.42 40.37 56.76
Royalties ($) 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
------------------------------------------------------------------------
------------------------------------------------------------------------


Operations

To date in 2005, Defiant has drilled 13 (9.3 net) wells with a net success rate of 80.5%. During the second quarter, Defiant drilled and cased 5 (3.9 net) wells for a net success rate of 70.5%.



Drilling to August 11, 2005

------------------------------------------------------------------------
(Wells) Gas Gas & Oil D&A Total
------------------------------------------------------------------------
Gross
Peace River Arch 4 1 1 6
West Pembina - 1 2 3
Northwest Edmonton 3 1 - 4
------------------------------------------------------------------------
Total 7 3 3 13
------------------------------------------------------------------------
Exploratory wells 7 1 2 10
Development wells - 2 1 3
------------------------------------------------------------------------
Total 7 3 3 13
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
(Wells) Gas Gas & Oil D&A Total
------------------------------------------------------------------------
Net
Peace River Arch 4.0 1.0 0.7 5.7
West Pembina - 1.0 1.1 2.1
Northwest Edmonton 1.2 0.3 - 1.5
------------------------------------------------------------------------
Total 5.2 2.3 1.8 9.3
------------------------------------------------------------------------
Exploratory wells 5.2 1.0 0.8 7.0
Development wells - 1.3 1.0 2.3
------------------------------------------------------------------------
Total 5.2 2.3 1.8 9.3
------------------------------------------------------------------------
------------------------------------------------------------------------


Of the 13 wells drilled in 2005 to date, 3 were development wells, two drilled in the Peace River Arch area and one in West Pembina area. The 10 remaining wells were exploratory, prospective for new reserves outside known pools. To date Defiant drilled 3 (1.7 net) dry holes.



Production and Sales Analysis

------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------

Daily sales volumes
Light oil (bbls/d) 130 115
Natural gas (mcf/d) 630 336
Natural gas liquids (bbls/d) 10 7
------------------------------------------------------------------------
Total (boe/d @ 6:1) 244 177
------------------------------------------------------------------------
------------------------------------------------------------------------


In the second quarter of 2005, average daily sales volumes increased 124% to 244 bbls/d compared to 109 bbls/d for the first quarter of 2005. The volumes consisted of 130 bbls/d of oil, 630 mcf/d of natural gas and 10 bbls/d of natural gas liquids. The increase in production for the second quarter was a result of the Company's continued drilling program and tie-in of wells drilled in the first quarter of 2005. In the first six months of 2005, additional wells contributing to the production increase included two wells at Carrot Creek, one well at Grand Prairie, and one well in the Atim area. The Company has received approval for the water-flood optimization program at the Pembina unit and will implement this plan during the second half of 2005 with the objective of increasing production. The 6-01-49-12W5 oil well has been converted to a water injection well, resulting in a production decrease of 10 boe/d for the Pembina area. Oil production from this property is expected to increase by the end of 2005 and to peak at a rate in excess of 200 bbls/day in 2006.



Prices and Revenue

------------------------------------------------------------------------
Three months Six months
ended ended
UNIT June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Commodity Pricing
Benchmarks
West Texas Intermediate US$/bbl 53.17 51.54
Exchange rate US$ 0.8039 0.8097
Edmonton Par $/bbl 65.71 63.62
NYMEX US$/mmbtu 6.93 6.68
Alberta Spot $/mcf 7.37 7.14
------------------------------------------------------------------------
Company Prices
Natural gas price $/mcf 7.54 7.55
Oil price $/bbl 65.68 63.61
Liquids price $/bbl 45.04 43.10
------------------------------------------------------------------------
Revenue
Natural gas sales $m 432 459
Oil sales 776 1,319
Liquids sales 39 51
------------------------------------------------------------------------
Total $m 1,247 1,829
------------------------------------------------------------------------
------------------------------------------------------------------------


US dollar world oil prices showed continued strength during the second quarter of 2005, due to supply concerns surrounding OPEC's production levels, unrest in the Middle East, and supply uncertainty in Russia. Our oil is light oil (40 API) and commands pricing close to the Edmonton Par benchmark price.

North American natural gas prices increased in the second quarter of 2005. Natural gas pricing tends to be volatile and is affected by supply and demand, inventory level, weather conditions and fuel switching to less expensive sources of energy. Concerns over winter supply may continue to buoy up prices during the traditionally soft summer months. Our gas sales mostly occurred during the second quarter and slightly exceeded the Alberta spot price benchmark. We have no hedging contracts in place.

The Canadian dollar remained strong throughout the second quarter of 2005. For Canadian producers the appreciation in the dollar eroded some of the benefits of stronger commodity prices.

For the three months ended June 30, 2005, revenues increased by 114% over the first quarter 2005, in line with increases in production volumes.



Royalties
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Crown royalties expense $m 133 195
Crown royalties per boe $ 5.99 6.08
Royalty rate 11% 11%
Gross overriding royalties expense $m 12 12
Gross overriding royalties per boe $ 0.53 0.36
Royalty rate 1% 1%
------------------------------------------------------------------------
------------------------------------------------------------------------


Defiant's crown royalty rate was 11% for the three months ended June 30, 2005, effectively unchanged from the first quarter of 2005. Royalty rates can vary based on a number of factors such as reference pricing, royalty holidays, individual well production and proportionate or sliding scale types of royalties. The low royalty rate experienced to date is the result of wells on royalty holiday status and some wells classified as low producers. We expect that the overall rate per well will increase as our new gas wells are brought on production.

The gross overriding royalty rate (GORR) increased to 1% for the three months ended June 30, 2005, as a result of wells coming on stream which were earned through farm-in agreements.



Operating Expenses
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Operating expenses $m 206 359
Operating expenses per boe $ 9.28 11.20
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating expenses were $206,000 or $9.28 per boe for the three months ended June 30, 2005 compared to $153,000 or $15.55 per boe during the first quarter 2005. The lower per BOE rate is mainly the result of lower operating cost production added during the second quarter.

General and Administrative Expenses

General and administrative ("G&A") expenses were $255,000 for the three months ended June 30, 2005 compared to $271,000 during the first quarter of 2005. On a per unit basis, G & A costs were $11.47 per boe in the second quarter compared to $27.53 per boe during the first quarter due to a larger production base during the second quarter. Defiant has a staff of thirteen professionals, one administrative employee and three consultants. In 2005, the Company's officers and certain key senior technical staff have agreed to receive salaries that are below those paid by junior exploration and producing companies until, in the opinion of the Compensation Committee, the Company attains sufficient critical mass.

Interest and Finance Charges

At June 30, 2005, Defiant had $4,187,324 cash in deposits and no debt. These funds were raised from the private placement in March 2005 and will be drawn down to pay for capital expenditures as they are incurred.



Depletion, Depreciation and Accretion
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Depletion, depreciation and accretion $m 375 540
Depletion, depreciation and
accretion per boe 17.38 17.46
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion, depreciation and accretion expense for the three months ended June 30, 2005 amounted to $375,000 ($17.38 per boe) compared to $165,000 (17.63 per boe) in the first quarter of 2005. The slight change in the second quarter was due to the increase in the capital asset base and the estimated reserve additions. For the purpose of calculating depletion, an internal estimate was made of the reserves added during the first six months, with 50% of the estimated additions allocated to the proved category used for the depletion calculation. Our independent reserve engineers have not reviewed or provided an opinion with respect to the estimated additional reserves for the quarter.



Netbacks
------------------------------------------------------------------------
Three months Six months
ended ended
$ per boe June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Price 56.11 57.06
Transportation expenses (0.40) (0.28)
Crown royalties (5.99) (6.08)
Royalty rate 0.11 0.11
Gross overriding royalties (0.53) (0.36)
Royalty rate 0.01 0.01
Operating expenses (9.28) (11.20)
------------------------------------------------------------------------
Field netback 39.91 39.14
------------------------------------------------------------------------
------------------------------------------------------------------------


Defiant's field netback per boe for the three months ended June 30, 2005 increased to $39.91 from $37.38 per boe for the first quarter of 2005. The increase is mainly due to decreased operating expenses during the second quarter of 2005.



Earnings and Cash Flow
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Weighted average shares outstanding
Basic m 14,772 13,762
Diluted m 16,274 15,263
Funds from operations $m 682 781
Basic per share $ 0.05 0.06
Diluted per share $ 0.04 0.05
Earnings $m 193 115
Basic per share $ 0.01 0.01
Diluted per share $ 0.01 0.01
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months ended June 30, 2005, funds from operations increased to $682,000 from $97,000 in the first quarter of 2005. The increase in comparative quarter-over-quarter cash flow was due to the significant increase in Defiant's overall production. The weighted average number of shares outstanding (diluted) was 16.3 million shares and cash flow per share (diluted) was $0.04, while the earnings per share (diluted) was $0.01.



Capital Expenditures
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Land and lease retentions 120 148
Seismic 879 1,013
Drilling and completions 2,806 5,996
Production facilities, pipeline,
plant and equipment 1,044 1,916
Acquisitions - -
Dispositions (51) (51)
Capitalized general and administrative
expenses 290 610
Office - -
------------------------------------------------------------------------
5,088 9,632
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital expenditures, net of dispositions, were $5.1 million for the three months ended June 30, 2005. This year, Defiant drilled 3.9 net wells during the second quarter, undertook a large proprietary 3-D seismic program, and incurred costs to tie in wells and bring them into production.

Liquidity and Capital Resources

At June 30, 2005, Defiant had a credit facility of $2.0 million with a Canadian chartered bank, none of which was drawn down. At that date, we had $4.2 million in cash in deposits. These funds were raised from the private placements in 2004 and 2005. The funds will be drawn down to pay for expenditures as they are incurred. Our working capital surplus at June 30, 2005 was $373,000. We estimate that our line of credit will be used during the third quarter.

Outlook for 2005

By the end of July we had drilled slightly more than half of the number of wells planned in the 2005 drilling program. We expect to have four more wells drilled by the end of August, two at Carrot Creek and one each at Majeau and Gunn.

We are on track to meet our year-end production target of 1,000 boe/d. Testing of certain new discoveries should be complete by September and we will then have an updated forecast for activity levels for the remainder of this year and 2006.

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.

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



BALANCE SHEETS
-----------------------------------------------------------------------
JUNE 30 DECEMBER 31
2005 2004
-----------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
CASH $ 4,187,324 $ 2,273,563
ACCOUNTS RECEIVABLE 2,074,606 632,039
PREPAID EXPENSES AND
REFUNDABLE DEPOSITS 141,951 166,868
-----------------------------------------------------------------------
6,403,881 3,072,470
-----------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT (note 4) 23,447,100 13,690,049
LESS: ACCUMULATED DEPLETION
AND DEPRECIATION (561,838) (21,838)
-----------------------------------------------------------------------
22,885,262 13,668,211
-----------------------------------------------------------------------
$ 29,289,143 $ 16,740,681
-----------------------------------------------------------------------
-----------------------------------------------------------------------

LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES $ 5,932,099 $ 827,410
CURRENT PORTION OF
ASSET RETIREMENT OBLIGATION (note 3) 98,588 100,000
-----------------------------------------------------------------------
6,030,687 927,410
ASSET RETIREMENT OBLIGATION (note 3) 413,591 269,675
FUTURE INCOME TAXES - 2,000
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 6) 22,695,661 15,539,401
CONTRIBUTED SURPLUS (note 7) 32,000 -
RETAINED EARNINGS 117,204 2,195
-----------------------------------------------------------------------
22,844,865 15,541,596
-----------------------------------------------------------------------
$ 29,289,143 $ 16,740,681
-----------------------------------------------------------------------
-----------------------------------------------------------------------
See accompanying notes to financial statements.


STATEMENT OF EARNINGS AND RETAINED EARNINGS

-----------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
-----------------------------------------------------------------------
(unaudited) (unaudited)
REVENUE
OIL AND NATURAL GAS SALES $ 1,247,033 $ 1,829,229
TRANSPORTATION EXPENSE (8,931) (8,931)
CROWN ROYALTIES (133,131) (194,955)
OTHER ROYALTIES (11,691) (11,691)
INTEREST INCOME 51,875 51,929
-----------------------------------------------------------------------
1,145,155 1,665,581
EXPENSES
OPERATING 206,208 359,086
GENERAL AND ADMINISTRATIVE 255,046 525,867
STOCK-BASED COMPENSATION (note 6) 29,000 32,000
DEPLETION AND DEPRECIATION 375,000 540,000
ACCRETION ON ASSET
RETIREMENT OBLIGATION 11,302 19,619
-----------------------------------------------------------------------
876,556 1,476,572
-----------------------------------------------------------------------
EARNINGS BEFORE TAXES 268,599 189,009
TAXES
FUTURE INCOME TAXES (note 5) 76,000 74,000
-----------------------------------------------------------------------
76,000 74,000
EARNINGS FOR THE PERIOD 192,599 115,009

RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD, (75,395) 2,195
-----------------------------------------------------------------------
RETAINED EARNINGS, END OF
PERIOD $ 117,204 $ 117,204
-----------------------------------------------------------------------
-----------------------------------------------------------------------
EARNINGS PER SHARE
BASIC $ 0.01 $ 0.01
DILUTED $ 0.01 $ 0.01
-----------------------------------------------------------------------
-----------------------------------------------------------------------
See accompanying notes to financial statements.



STATEMENT OF CASH FLOWS

-----------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
-----------------------------------------------------------------------
(unaudited) (unaudited)
CASH PROVIDED BY (USED IN):

OPERATIONS
EARNINGS FOR THE PERIOD $ 192,599 $ 115,009
ADD: NON-CASH ITEMS
DEPLETION AND DEPRECIATION 375,000 540,000
ACCRETION ON ASSET
RETIREMENT OBLIGATION 11,303 19,619
STOCK-BASED COMPENSATION 29,000 32,000
FUTURE INCOME TAXES 76,000 74,000
-----------------------------------------------------------------------
FUNDS FROM OPERATIONS 683,902 780,628
ASSET RETIREMENT
OBLIGATIONS PAID (1,412) (1,412)
CHANGES IN NON-CASH OPERATING
WORKING CAPITAL (1,393,782) (515,021)
-----------------------------------------------------------------------
(711,292) 264,195

FINANCING
ISSUANCE OF COMMON SHARES - 7,522,500
COST OF ISSUING SHARES (25,954) (442,240)
-----------------------------------------------------------------------
(25,954) 7,080,260

INVESTMENTS
ADDITIONS TO PROPERTY, PLANT
AND EQUIPMENT (5,088,814) (9,632,754)
CHANGES IN NON-CASH INVESTING
WORKING CAPITAL (113,768) 4,202,060
-----------------------------------------------------------------------
(5,202,582) (5,430,694)

INCREASE (DECREASE) IN CASH (5,939,828) 1,913,761
CASH, BEGINNING OF PERIOD 10,127,152 2,273,563
-----------------------------------------------------------------------
CASH, END OF PERIOD $ 4,187,324 $ 4,187,324
-----------------------------------------------------------------------
-----------------------------------------------------------------------
See accompanying notes to financial statements.


Notes to Interim Financial Statements

Six months ended June 30, 2005 (Unaudited)

The interim financial statements of Defiant Resources Corporation ("Defiant" or "the Company") have been prepared by the management in accordance with accounting principles generally accepted in Canada. The interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the fiscal period ended December 31, 2004, except as described below. The disclosures included below are incremental to those included with the annual financial statements. The interim financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's annual report for the period ended 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 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 Income Fund for cash consideration.

2. Bank Facility

At June 30, 2005 the Company had a $2 million revolving term credit facility and a US$0.5 million 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 floating charge over all of the Company's assets.

3. 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 required to settle its asset retirement obligations is approximately $823,000, the majority of which will be incurred after 2020. A credit-adjusted, risk-free rate of 9% and an inflation rate of 2% were used to calculate the fair value of the asset retirement obligation.



A reconciliation of the asset retirement obligation is provided below:
------------------------------------------------------------------------
Three months Six months
Period ended Period ended
Asset retirement obligations June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Balance, beginning of period $ 377,992 $ 369,675
Liabilities incurred in period 124,297 124,297
Liabilities settled in period (1,412) (1,412)
Accretion expense 11,302 19,619
------------------------------------------------------------------------
Balance, end of period $ 512,179 $ 512,179
------------------------------------------------------------------------
------------------------------------------------------------------------
Current $ 98,588
Long-term 413,591
------------------------------------------------------------------------
$ 512,179
------------------------------------------------------------------------
------------------------------------------------------------------------

4. Property, Plant and Equipment

------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------------------------------------------------------------------
Petroleum and natural gas assets $ 23,447,100 $ 13,690,049
Accumulated depletion and depreciation (561,838) (21,838)
------------------------------------------------------------------------
$ 22,885,262 $ 13,668,211
------------------------------------------------------------------------
------------------------------------------------------------------------


During the three and six months ended June 30, 2005, the Company capitalized $290,000 and $610,000, respectively, of general and administrative expenses directly related to exploration and development activities.

Estimated future development costs of $450,000 were included in the calculation of depletion expense for the second quarter ended June 30, 2005. As at June 30, 2005, undeveloped land costs of $5,503,290 were excluded from assets subject to depletion (December 31, 2004 - $5,837,400).

The Company performed a ceiling test calculation at June 30, 2005 to assess the recoverable value of the property, plant and equipment and other assets. The future commodity prices used in the ceiling test were based on June 30, 2005 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 benchmark prices used in the ceiling test calculation for the impairment test. Based on these assumptions, the undiscounted value of the future net revenues from the Company's proved reserves exceeded the carrying value of property, plant and equipment and other assets at June 30, 2005.



------------------------------------------------------------------------
WTI Foreign Edmonton AECO-C
Oil Exchange Light Oil Spot Gas
($US/bbl) Rate ($Cdn/bbl) ($Cdn/mcf)
------------------------------------------------------------------------
2005 $ 53.46 0.82 $ 65.24 $ 7.60
2006 55.85 0.84 66.63 8.42
2007 51.42 0.84 61.21 7.55
2008 43.92 0.84 52.04 6.62
2009 42.45 0.84 50.24 6.39
Annual escalation thereafter 1.5% - 1.5% 1.5%
------------------------------------------------------------------------
------------------------------------------------------------------------


5. 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 37.62% (2004 - 38.62%) to earnings before taxes. The reasons for the differences are as follows:



------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Expected income tax expense $ 101,045 $ 71,105
Add (deduct):
Non-deductible crown payments 25,715 37,429
Resource allowance (50,591) (59,456)
Valuation allowance (23,086) -
Non-deductible stock-based compensation 10,910 12,038
Other 12,008 12,883
------------------------------------------------------------------------
Future income tax $ 76,000 $ 74,000
------------------------------------------------------------------------
------------------------------------------------------------------------


The tax effects of temporary differences that give rise to the future tax assets and liabilities at June 30, 2005 are as follows:



------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Tax liabilities:
Property, Plant and equipment
- differences in net book value and
tax basis $ (302,613) $ (144,768)
Tax assets:
Share issue costs 141,241 -
Asset retirement obligation 161,372 142,768
------------------------------------------------------------------------
Future Income Tax (Reduction) $ - $ (2,000)
------------------------------------------------------------------------
------------------------------------------------------------------------

6. Share Capital

------------------------------------------------------------------------
Number of Shares Amount
------------------------------------------------------------------------
Balance, beginning of period 11,822,408 $ 15,539,401
Issue of common shares for cash 2,950,000 7,522,500
Share issue costs, net of future
income taxes of $76,000 (366,240)
------------------------------------------------------------------------
Balance, end of period 14,772,408 $ 22,695,661
------------------------------------------------------------------------
------------------------------------------------------------------------


The weighted average number of shares outstanding for the determination of basic and diluted per share amount are as follows:



------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Basic 14,772,408 13,761,911
Diluted 16,273,532 15,263,035
------------------------------------------------------------------------
------------------------------------------------------------------------


Options

The Company has a stock option plan under terms of which it grants
options to acquire common shares to certain officers, directors,
employees and consultants. Under terms of the plan, up to 10% of the
issued and outstanding common 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. The following table summarizes the
change in the outstanding options.



------------------------------------------------------------------------
Weighted
Number average
of exercise
Options price
------------------------------------------------------------------------
Outstanding, beginning of period - $ -
Granted 455,000 $ 2.95
------------------------------------------------------------------------
Outstanding, end of period 455,000 $ 2.95
------------------------------------------------------------------------
------------------------------------------------------------------------


The options granted have a term of three years to expiry and vest equally over a thirty-four month period starting on the first anniversary date of the grant. The options granted have an exercise price between $2.75 and $3.00, and a weighted-average contractual life of 2.75 years. As at June 30, 2005 no outstanding options were exercisable.

Stock-based Compensation

Options granted are accounted for using the fair value method. The compensation cost that has been charged against income for the stock option plan was $29,000 for the second quarter. The fair value of the options granted in the six months ended June 30, 2005 was $1.06 per share.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



------------------------------------------------------------------------
Dividend yield zero
Volatility 50%
Risk-free rates 3.5%
Expected life 3
------------------------------------------------------------------------
------------------------------------------------------------------------

7. Contributed Surplus

------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Balance, beginning of period - -
Stock-based compensation expense 29,000 32,000
------------------------------------------------------------------------
Balance, end of period 29,000 32,000
------------------------------------------------------------------------
------------------------------------------------------------------------

CORPORATE INFORMATION


HEAD OFFICE


Defiant Resources Corporation
1800, 800 Sixth Avenue SW
Calgary AB T2P 3G3
tel: (403) 266 5587
fax: (403) 266 5506
e-mail: ir@defiantresources.com
web: http://www.defiantresources.com


BOARD OF DIRECTORS


David J. Evans
Chairman
& Chief Executive Officer
Defiant Resources Corporation
Calgary AB


Rick J. Ironside
President
& Chief Operating Officer
Defiant Resources Corporation
Calgary AB


Gary R. Bugeaud 2,3
Partner
Burnet, Duckworth & Palmer LLP
Calgary AB


Richard M. Cooper 1,2
President & Director
T.R.L. Investments Limited
Toronto ON


Naveen Dargan 1,3
Independent Businessman
Calgary AB


Raymond T. Chan 1,2,3
President & CEO
Baytex Energy Trust
Calgary AB


1 Audit Committee
2 Reserves Committee
3 Compensation & Corporate Governance
Committee


OFFICERS


David J. Evans
Chairman
& Chief Executive Officer


Rick J. Ironside
President
& Chief Operating Officer


Timothy V. Dunne
Vice President Finance
& Chief Financial Officer


Dwight D. Fieseler
Controller


LEGAL COUNSEL


Burnet, Duckworth & Palmer LLP
Calgary AB


AUDITORS


KPMG LLP
Calgary AB


BANKERS


CIBC
Calgary AB


QUALIFIED INDEPENDENT
EVALUATION ENGINEERS


Sproule Associates Limited
Calgary AB


LISTING INFORMATION


Toronto Stock Exchange (TSX)
Symbol: DFR


REGISTRAR AND TRANSFER AGENT


Valiant Trust Company
510, 550 Sixth Avenue SW
Calgary AB T2P 0S2
tel: (403) 233 2801
fax: (403) 233 2857
e-mail: valiant@telusplanet.net



WEBSITE

Shareholders and other interested individuals can access current public information about Defiant Resources Corporation via the internet at this website:

http://www.defiantresources.com

Defiant's website includes: annual and quarterly interim reports, corporate profile, news releases, the most recent corporate presentation and historical information as well as trading and contact information.

Contact Information

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