Defiant Resources Corporation
TSX : DFR

Defiant Resources Corporation

November 10, 2005 18:32 ET

Defiant Resources Corporation 2005 Third Quarter Report & News Release

CALGARY, ALBERTA--(CCNMatthews - Nov. 10, 2005) - Defiant Resources Corporation (TSX:DFR):

TO OUR SHAREHOLDERS

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

We have drilled 22 (17.3 net) wells to date, with 17 (13.5 net) wells cased for production. Of the 22 wells drilled, 16 (12.5 net) wells were classified as exploratory and 6 (4.8 net) as development. Given the high exploration component of our program to date, we are pleased with the net success rate of 78.0%. We believe that these exploration successes, representing eight new pool discoveries, have significant development potential for 2006.

These 17 successful wells have boosted production capability to between 1,200 and 1,350 boe/d. We will place the majority of these new reserves on production following the commissioning of two new pipelines. One new pipeline at our Tangent project is currently under construction, and is expected to be completed before year-end. This, combined with completions and re-completions in other areas, is budgeted to add 500 boe/d to our current production level of 550 boe/d, enabling us to attain our target rate of 1,000 boe/d. A second pipeline, at Grande Prairie, should be completed early in the first quarter, adding 200 to 350 boe/d of production by eliminating rate restrictions on an existing well and allowing the tie in of one new well.

REVIEW OF OPERATIONS

South Peace River Arch Core Area

Grande Prairie project, Cretaceous and Triassic, sour gas

Of the five (5.0 net) wells drilled to date, three are producing, the fourth is waiting on tie-in and looping of a sour gas gathering system and the fifth was abandoned. In September and early October, our production was constrained by 150 boe/d as the result of the Teepee Creek plant undergoing a major turnaround. In early 2006 we expect to resolve sour gas processing constraints by looping of a portion of the sour gas gathering system, thereby allowing us to bring on between 200 and 350 boe/d of production. With the plant turnaround completed and upon construction of the pipeline looping, we expect much more consistent production in the Grand Prairie area.

To build on the success we have had to date in this area, we have initiated the shooting of proprietary 3D seismic on several nearby projects. We also anticipate drilling another two wells in the area before year end.

Sheldon project, Triassic, light oil and sour gas

The company's initial well in the Sheldon area has been producing since August at 35 bopd plus a small amount of gas that is flared. In order to continue producing this well we have made application for GOR penalty relief and approval to continue flaring. Two additional wells are planned by year end to further assess the potential of this Triassic discovery. Should these two wells test at sufficient rates, the next step would be to build a gas sweetening and processing facility and an approximate 6 mile pipeline to tie in to a sales point, followed by a multi-well drilling program.

Tangent project, Triassic, light oil and sour gas

We have tested commercial rates out of two intervals in the first well drilled in October on our Tangent lands and a second well will be drilled by mid-November. Construction of a six mile pipeline is underway to tie in to third party gathering and processing facilities for initial deliveries on December 1st. We anticipate third party pipeline capacity will limit the initial production from this project to between 250 and 350 boe/day.

We will monitor the performance of the initial two wells for a few months before drilling additional wells or spending additional capital to resolve capacity limitations.

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

Our second exploratory well in this project is planned for the first quarter of 2006.

West Pembina Core Area

Carrot Creek project, Jurassic, light oil and sweet gas

Of the five (4.0 net) wells drilled to date, one is producing, three (2.0 net) are being completed and one was abandoned. Two of the three wells undergoing completion are expected to be on-stream by December, adding 75 boe/day of production. The third completion will test a potential new pool discovery in a Jurassic sand which, if successful, will be placed on production in 2006.

Two additional wells are planned for the first quarter of 2006.

Brazeau project, Belly River, light oil

Since commencing water injection at the newly converted 6-1-49-12W5M injector in June 2005, production volumes have increased slightly from 110 to 120 net boe/day. As the un-swept portion of the reservoir is re-pressured, we anticipate ongoing increases in production over the next several months, peaking at a rate of approximately 220 net boe/day in mid 2006.

A development well to extend this pool is planned for the first quarter of 2006.

Northwest Edmonton Core Area

Atim, Cardiff projects, Cretaceous, sweet gas

Three (1.2 net) wells have been drilled and one (0.4 net) well has been re-completed in the Atim project. In September, our production rate was constrained by approximately 75 boe/d to allow for the completion and testing of a second zone in our producing well. Currently, one well is producing, one well is suspended after an unsuccessful completion attempt, and tie-in of the remaining two wells adding approximately 50 net boe/day is imminent.

In conjunction with our partner, we are acquiring additional freehold land and are planning to expand our 3D seismic in this area. The drilling of one well in each of the Atim and Cardiff projects is planned before year end.

Gunn project, Cretaceous, sweet gas

The first well (0.5 net) which tested heavy oil at low rates and associated gas has been suspended. A second well (1.0 net) has been drilled and completed, is currently being equipped and tied-in and is expected to produce approximately net 50 boe/day.

Majeau project, Cretaceous, sweet gas

Our first well (1.0 net) has been drilled, cased and successfully completed. By itself, this well does not justify a five mile pipeline and we therefore do not plan to tie it in before year end. In an adjacent section where we own one quarter of the section, another operator has drilled a successful gas well. We are discussing pooling and equalizing alternatives with the other operator to allow it to be placed on production. With these two wells, plus other recently drilled and licensed wells in the area, we anticipate a pipeline will be built in the near future.

OUTLOOK

We have strengthened our balance sheet through the equity financing that closed on October 13th, 2005. We issued 2,298,851 common shares at $4.35 per share and 892,851 flow-through common shares at $5.60 per share for total net proceeds of approximately $14.2 million. This financing allows us to accelerate and increase our capital expenditures with several 3D seismic programs scheduled through this fall and winter. Our drilling program has also been expanded from the original plan for calendar 2005 of 22 gross wells to 29 gross wells.

On November 3rd, 2005 we announced a number of Management and Board appointments. Rick Ironside, previously President and Chief Operating Officer, became President and Chief Executive Officer. David Evans relinquished his CEO role while remaining as Chairman. Tim Dunne was appointed to the Board, handing over his responsibilities as Vice President, Finance and Chief Financial Officer to Rob Solinger. Arne Hamarsnes was promoted to the position of Vice President, Operations from Manager of Operations. These appointments represent a key step in the succession planning undertaken by the board of directors.

Results to date are very encouraging, as we have exceeded our plan to exit 2005 with 800 to 1000 boe/d resulting from 22 (18.5 net) wells. As noted, our current productive capacity is estimated at 1200 to 1350 boe/day from 22 (17.3 net) wells, an approximate 40% increase over our original estimates. With productive capacity to come on-stream in early 2006 and with a strong balance sheet the company is well positioned for accelerated growth throughout the year as we build on our exploration successes.



Respectfully submitted on behalf of the board of directors,

"Signed"
Rick J. Ironside
PRESIDENT AND CHIEF EXECUTIVE OFFICER

9th NOVEMBER, 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 November 9, 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 and net of Asset Retirement obligation payments. 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 THIRD 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.

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 and operating expenses 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 November 9, 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 22 (17.3 net) wells with a net success rate of 78%. During the third quarter, Defiant drilled and cased 10 (7.5 net) wells with a net success rate of 64%.



Drilling to November 9, 2005

------------------------------------------------------------------------
(Wells) GAS OIL GAS & OIL D&A TOTAL
------------------------------------------------------------------------
GROSS
PEACE RIVER ARCH 5 - 2 3 10
WEST PEMBINA 2 1 2 2 7
NORTHWEST EDMONTON 4 - 1 - 5
------------------------------------------------------------------------
TOTAL 11 1 5 5 22
------------------------------------------------------------------------
EXPLORATORY WELLS 9 1 2 4 16
DEVELOPMENT WELLS 2 - 3 1 6
------------------------------------------------------------------------
TOTAL 11 1 5 5 22
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
(Wells) GAS OIL GAS & OIL D&A TOTAL
------------------------------------------------------------------------
NET
PEACE RIVER ARCH 5.0 - 2.0 2.7 9.7
WEST PEMBINA 1.5 0.5 2.0 1.2 5.2
NORTHWEST EDMONTON 2.2 - 0.3 - 2.5
------------------------------------------------------------------------
TOTAL 8.7 0.5 4.3 3.8 17.3
------------------------------------------------------------------------
EXPLORATORY WELLS 7.2 0.5 2.0 2.8 12.5
DEVELOPMENT WELLS 1.5 - 2.3 1.0 4.8
------------------------------------------------------------------------
TOTAL 8.7 4.3 3.8 17.3
------------------------------------------------------------------------
------------------------------------------------------------------------

PRODUCTION AND SALES ANALYSIS
------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
DAILY SALES VOLUMES
LIGHT OIL (bbls/d) 141 124
NATURAL GAS (mcf/d) 1,407 697
NATURAL GAS LIQUIDS (bbls/d) 10 8
------------------------------------------------------------------------
TOTAL (boe/d @ 6:1) 386 248
------------------------------------------------------------------------
------------------------------------------------------------------------


In the third quarter of 2005, average daily sales volumes increased 58% to 386 bbls/d compared to 244 bbls/d for the second quarter of 2005. The volumes consisted of 141 bbls/d of oil, 1,407 mcf/d of natural gas and 10 bbls/d of natural gas liquids. The increase in production for the third quarter was a result of the Company's continued drilling program and tie-in of wells drilled in the first half of 2005. In the first nine months of 2005, wells contributing to the production increase included two wells at Carrot Creek and individual wells at Grand Prairie, Atim, Manir and Sheldon areas. The production volumes during the third quarter met our expectations, except that during September the Grande Prairie wells could not be produced during routine plant turnaround and maintenance operations.



Prices and Revenue
------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------

COMMODITY PRICING
BENCHMARKS
WEST TEXAS INTERMEDIATE US$/bbl 63.16 55.45
EXCHANGE RATE US$ 0.8317 0.8170
EDMONTON PAR $/bbl 76.48 67.95
NYMEX US$/mmbtu 9.91 7.77
ALBERTA SPOT $/mcf 9.35 7.88
------------------------------------------------------------------------
COMPANY PRICES
NATURAL GAS PRICE $/mcf 9.25 8.71
OIL PRICE $/bbl 75.55 68.21
LIQUIDS PRICE $/bbl 60.02 50.68
------------------------------------------------------------------------
REVENUE
NATURAL GAS SALES $m 1,197 1,656
OIL SALES $m 982 2,301
LIQUIDS SALES $m 58 109
------------------------------------------------------------------------
TOTAL $m 2,237 4,066
------------------------------------------------------------------------
------------------------------------------------------------------------


World oil prices showed continued strength during the third quarter of 2005, due to the recent hurricanes in the Gulf of Mexico, supply concerns surrounding OPEC's production levels and unrest in the Middle East. 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 third 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. We have no hedging contracts in place.

The Canadian dollar remained strong throughout the third 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 September 30, 2005, revenues increased by 79% over the second quarter 2005, mainly due to higher commodity prices and increased sales volumes.



Royalties

------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
CROWN ROYALTIES EXPENSE $m 224 419
CROWN ROYALTIES PER BOE $ 6.29 6.19
ROYALTY RATE 10% 10%
OTHER ROYALTIES EXPENSE $m 67 79
OTHER ROYALTIES PER BOE $ 1.89 1.17
ROYALTY RATE 3% 2%
------------------------------------------------------------------------
------------------------------------------------------------------------


Defiant's crown royalty rate was 10% for the three months ended September 30, 2005, effectively unchanged from the second 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 3% for the three months ended September 30, 2005, as a result of wells coming on stream which were earned through farm-in agreements.



Operating Expenses
------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
OPERATING EXPENSES $m 401 760
OPERATING EXPENSES PER BOE $ 11.28 11.24
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating expenses were $401,000 or $11.28 per boe for the three months ended September 30, 2005 compared to $206,000 or $9.28 per boe during the second quarter 2005. The increase per BOE is mainly the result of higher contract operating costs, third party gathering and processing charges and property taxes incurred during the third quarter.



General and Administrative Expenses
------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
GROSS $m 532 1,668
CAPITALIZED $m (290) (900)
NET 242 768
------------------------------------------------------------------------
PER BOE:
GROSS $ 14.98 24.68
CAPITALIZED $ (8.16) (13.32)
NET $ 6.82 11.36
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative ("G&A") expenses were $242,000 for the three months ended September 30, 2005 compared to $255,000 during the second quarter of 2005. On a per unit basis, the G&A costs decreased to $6.82 per boe in the third quarter compared to $11.47 during the second quarter due to a larger production base during the third 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 the Company attains sufficient critical mass. The Company expects to achieve critical mass in early 2006.



Interest and Finance Charges
------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------

INTEREST AND FINANCE CHARGES $m 5 5
INTEREST AND FINANCE CHARGES
PER BOE $ 0.15 0.08
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion, Depreciation and Accretion

------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
DEPLETION, DEPRECIATION
AND ACCRETION $m 629 1,188
DEPLETION, DEPRECIATION
AND ACCRETION PER BOE $ 17.70 17.58
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion, depreciation and accretion expense for the three months ended September 30, 2005 amounted to $629,000 ($17.70 per boe) compared to $386,000 (17.38 per boe) in the second quarter of 2005. The slight change in the third quarter was due to the increase in the capital asset base, future development costs and the offsetting estimated reserve additions. For the purpose of calculating depletion, an internal estimate was made of the reserves added during the first nine months, with 65% of the estimated additions allocated to the proved category used for the depletion and depreciation calculation. Our independent reserve engineers have not reviewed or provided an opinion with respect to the estimated additional reserves for the year to date.



NETBACKS
------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
$/boe unless otherwise stated SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
PRICE 62.95 60.16
TRANSPORTATION EXPENSES (0.51) (0.40)
CROWN ROYALTIES (6.29) (6.19)
ROYALTY RATE 10% 10%
OTHER ROYALTIES (1.89) (1.17)
ROYALTY RATE 3% 2%
OPERATING EXPENSES (11.28) (11.24)
------------------------------------------------------------------------
FIELD NETBACK 42.98 41.16
------------------------------------------------------------------------
------------------------------------------------------------------------


Defiant's field netback per boe for the three months ended September 30, 2005 increased to $42.98 from $39.91 per boe for the second quarter of 2005. The increase is mainly due to higher commodity prices offset by increased crown, gross override royalties and operating expenses during the third quarter of 2005.



EARNINGS AND CASH FLOW

------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES
OUTSTANDING
BASIC m 14,772 14,102
DILUTED m 16,624 15,954
CASH FLOW FROM OPERATIONS $m 1,302 2,083
BASIC PER SHARE $ 0.09 0.15
DILUTED PER SHARE $ 0.08 0.13
EARNINGS $m 424 539
BASIC PER SHARE $ 0.02 0.03
DILUTED PER SHARE $ 0.02 0.03
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months ended September 30, 2005, cash flow from operations increased to $1,302,000 from $682,000 in the second quarter of 2005. The increase in comparative quarter-over-quarter cash flow was due to the significant increase in Defiant's overall production and higher commodity prices. The weighted average number of shares outstanding (diluted) was 16.6 million shares and cash flow per share (diluted) was $0.08, while the earnings per share (diluted) was $0.03.



CAPITAL EXPENDITURES

------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
$m SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
LAND AND LEASE RETENTIONS 1,763 1,911
SEISMIC 1,256 2,269
DRILLING AND COMPLETIONS 5,961 11,957
PRODUCTION FACILITIES,
PIPELINE, PLANT AND
EQUIPMENT 1,126 3,042
ACQUISITIONS - -
DISPOSITIONS - (51)
CAPITALIZED GENERAL AND
ADMINISTRATIVE EXPENSES 290 900
------------------------------------------------------------------------
10,396 20,028
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital expenditures, net of dispositions, were $10.4 million for the three months ended September 30, 2005. This year, Defiant drilled 6.7 net wells during the third 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 September 30, 2005, Defiant had a credit facility of $7.0 million with a Canadian chartered bank of which $3.1 million was drawn down. Defiant's net debt including working capital deficiency at September 30, 2005 was $8.7 million, comprised of $3.1 million drawn down under its credit facility and a working capital deficiency of $5.6 million. Defiant is not in breach of any covenants pertaining to its loan agreement. Defiant's working capital deficiency was a result of normal operating activities in periods during which we incur significant capital expenditures relative to revenue and cash flow.

Subsequent to the third quarter, the Company entered into a common share and flow-through share private placement agreement with a group of underwriters to issue 2,298,851 common shares at $4.35 per share and 892,858 common shares to be issued on a flow-through basis at $5.60 per share for total gross proceeds of $15,000,000. Defiant will renounce to purchasers of flow-through shares Canadian Exploration Expense effective in 2005 equal to $5.60 per flow-through share purchased. The private placement closed on October 11, 2005. The net proceeds received from the sale of the common shares and flow-through common shares was applied to the revolving credit facility and will be used for general corporate purposes, including an increase to planned capital expenditures in the fourth quarter.

As at the date hereof the company has 17,964,117 common shares, 425,000 options to purchase common shares and 2,746,599 share purchase warrants issued and outstanding.

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.

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

------------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31
2005 2004
------------------------------------------------------------------------
(unaudited)

ASSETS
CURRENT ASSETS
CASH $ - $ 2,273,563
ACCOUNTS RECEIVABLE 3,192,709 632,039
PREPAID EXPENSES AND
REFUNDABLE DEPOSITS 90,715 166,868
------------------------------------------------------------------------
3,283,424 3,072,470
------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
(note 4) 33,943,860 13,690,049
LESS: ACCUMULATED DEPLETION
AND DEPRECIATION (1,176,840) (21,838)
------------------------------------------------------------------------
32,767,020 13,668,211
------------------------------------------------------------------------
$ 36,050,444 $ 16,740,681
------------------------------------------------------------------------
------------------------------------------------------------------------


LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES $ 8,775,873 $ 827,410
REVOLVING CREDIT FACILITY (note 2) 3,127,659 -
CURRENT PORTION OF ASSET RETIREMENT
OBLIGATION (note 3) 98,588 100,000
------------------------------------------------------------------------
12,002,120 927,410
ASSET RETIREMENT OBLIGATION (note 3) 530,180 269,675
FUTURE INCOME TAXES 206,629 2,000
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 6) 22,786,032 15,539,401
CONTRIBUTED SURPLUS (note 7) 68,000 -
RETAINED EARNINGS 457,483 2,195
------------------------------------------------------------------------
23,311,515 15,541,596
------------------------------------------------------------------------
$ 36,050,444 $ 16,740,681
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


STATEMENT OF EARNINGS AND RETAINED EARNINGS

------------------------------------------------------------------------
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)

REVENUE
OIL AND NATURAL GAS SALES $ 2,236,723 $ 4,065,952
TRANSPORTATION (18,272) (27,203)
CROWN ROYALTIES (223,611) (418,566)
OTHER ROYALTIES (67,083) (78,774)
INTEREST INCOME 22,518 74,447
------------------------------------------------------------------------
1,950,275 3,615,856
EXPENSES
OPERATING 400,695 759,781
GENERAL AND ADMINISTRATIVE 241,978 767,845
STOCK-BASED COMPENSATION (note 6) 36,000 68,000
INTEREST 5,453 5,453
DEPLETION AND DEPRECIATION 615,000 1,155,000
ACCRETION ON ASSET
RETIREMENT OBLIGATION 13,870 33,489
------------------------------------------------------------------------
1,312,996 2,789,568
------------------------------------------------------------------------
EARNINGS BEFORE TAXES 637,279 826,288
TAXES
FUTURE INCOME TAXES (note 5) 297,000 371,000
------------------------------------------------------------------------
EARNINGS FOR THE PERIOD 340,279 455,288
RETAINED EARNINGS, BEGINNING OF PERIOD 117,204 2,195
------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 457,483 $ 457,483
------------------------------------------------------------------------
------------------------------------------------------------------------
EARNINGS PER SHARE
BASIC $ 0.02 $ 0.03
DILUTED $ 0.02 $ 0.03
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


STATEMENT OF CASH FLOWS

------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATIONS
EARNINGS FOR THE PERIOD $ 340,279 $ 455,288
ADD: NON-CASH ITEMS
DEPLETION AND DEPRECIATION 615,000 1,155,000
ACCRETION ON ASSET RETIREMENT
OBLIGATION 13,870 33,489
STOCK-BASED COMPENSATION 36,000 68,000
FUTURE INCOME TAXES 297,000 371,000
ASSET RETIREMENT OBLIGATIONS PAID - (1,412)
CHANGES IN NON-CASH OPERATING
WORKING CAPITAL 538,894 23,873
------------------------------------------------------------------------
1,841,043 2,105,238
FINANCING
ISSUANCE OF COMMON SHARES - 7,522,500
COST OF ISSUING SHARES - (442,240)
INCREASE IN REVOLVING
CREDIT FACILITY 3,127,659 3,127,659
------------------------------------------------------------------------
3,127,659 10,207,919
INVESTMENTS
ADDITIONS TO PROPERTY, PLANT
AND EQUIPMENT (10,394,039) (20,026,793)
CHANGES IN NON-CASH INVESTING
WORKING CAPITAL 1,238,013 5,440,073
------------------------------------------------------------------------
(9,156,026) (14,586,720)
DECREASE IN CASH (4,187,324) (2,273,563)
CASH, BEGINNING OF PERIOD 4,187,324 2,273,563
------------------------------------------------------------------------
CASH, END OF PERIOD $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


NOTES TO INTERIM FINANCIAL STATEMENTS

Nine months ended September 30, 2005 (Unaudited)

The interim financial statements of Defiant Resources Corporation ("Defiant" or the "Company") have been prepared by 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 Corporation Act (Alberta) on November 1, 2004, changed its name to Defiant Resources Corporation 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 as 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. REVOLVING CREDIT FACILITY

At September 30, 2005 the Company had a $7 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 per annum and the swap facility bears interest at the U.S. base rate. The credit facility is structured as a 364 days 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. 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 $962,000, 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 MONTH NINE MONTH
Asset retirement PERIOD ENDED PERIOD ENDED
obligations ($000's) SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 512,179 $ 369,675
LIABILITIES INCURRED 102,719 227,016
LIABILITIES SETTLED - (1,412)
ACCRETION EXPENSE 13,870 33,489
------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 628,768 $ 628,768
------------------------------------------------------------------------
------------------------------------------------------------------------
CURRENT $ 98,588
LONG-TERM 530,180
------------------------------------------------------------------------
$ 628,768
------------------------------------------------------------------------
------------------------------------------------------------------------


4. PROPERTY, PLANT AND EQUIPMENT

------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------------------------------------------------------------------
PETROLEUM AND NATURAL GAS ASSETS $ 33,943,860 $ 13,690,049
ACCUMULATED DEPLETION
AND DEPRECIATION (1,176,840) (21,838)
------------------------------------------------------------------------
$ 32,767,020 $ 13,668,211
------------------------------------------------------------------------
------------------------------------------------------------------------


During the three and nine months ended September 30, 2005, the Company capitalized $290,000 and $900,000, respectively, of general and administrative expenses directly related to exploration and development activities.

Estimated future development costs of $1,706,250 were included in the calculation of depletion expense for the third quarter ended September 30, 2005. As at September 30, 2005, undeveloped land costs of $6,906,353 were excluded from assets subject to depletion (December 31, 2004 - $5,837,400).

The Company performed a ceiling test calculation at September 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 September 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 September 30, 2005.



------------------------------------------------------------------------
WTI FOREIGN EDMONTON AECO-C
OIL EXCHANGE LIGHT OIL SPOT GAS
($US/BBL) RATE ($CDN/BBL) ($CDN/MCF)
------------------------------------------------------------------------
2005 $ 58.09 0.81 $ 71.25 $ 8.47
2006 67.41 0.84 80.73 10.97
2007 61.17 0.84 73.10 9.57
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% to earnings before taxes. The reasons for the differences are as follows:



------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
EXPECTED INCOME TAX EXPENSE $ 239,744 $ 310,850
ADD (DEDUCT):
NON-DEDUCTIBLE CROWN PAYMENTS 65,571 103,000
RESOURCE ALLOWANCE (3,544) (63,000)
NON-DEDUCTIBLE STOCK-BASED
COMPENSATION 13,543 25,582
REDUCTION IN EFFECTIVE RATE
AND OTHER (18,314) (5,432)
------------------------------------------------------------------------
FUTURE INCOME TAX $ 297,000 $ 371,000
------------------------------------------------------------------------
------------------------------------------------------------------------

The tax effects of temporary differences that give rise to the future
tax assets and liabilities are as follows:

------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------------------------------------------------------------------
TAX LIABILITIES:
PROPERTY, PLANT AND EQUIPMENT
- DIFFERENCES IN NET BOOK VALUE
AND TAX BASIS $ (544,429) $ (144,768)
TAX ASSETS:
SHARE ISSUE COSTS 126,400 -
ASSET RETIREMENT OBLIGATION 211,400 142,768
------------------------------------------------------------------------
FUTURE INCOME TAX $ (206,629) $ (2,000)
------------------------------------------------------------------------
------------------------------------------------------------------------


6. SHARE CAPITAL

------------------------------------------------------------------------
NUMBER OF SHARES AMOUNT
------------------------------------------------------------------------
BALANCE, JANUARY 1, 2005 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 $166,371 - (275,869)
------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2005 14,772,408 $ 22,786,032
------------------------------------------------------------------------
------------------------------------------------------------------------

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

------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
BASIC 14,772,408 14,102,445
DILUTED 16,624,005 15,954,042
------------------------------------------------------------------------
------------------------------------------------------------------------


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.



SEPTEMBER 30, 2005
------------------------------------------------------------------------
NUMBER WEIGHTED
OF AVERAGE
OPTIONS EXERCISE PRICE
------------------------------------------------------------------------
OUTSTANDING, JANUARY 1, 2005 - $ -
GRANTED 455,000 $ 2.95
CANCELLED (30,000) $ 3.00
------------------------------------------------------------------------
OUTSTANDING, SEPTEMBER 30, 2005 425,000 $ 2.94
------------------------------------------------------------------------
------------------------------------------------------------------------


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 2.50 years. As at September 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 $36,000 for the third quarter. The fair value of the options granted in the nine months ended September 30, 2005 was $1.00 per share.

The fair market 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 - YEARS 3
------------------------------------------------------------------------
------------------------------------------------------------------------

7. CONTRIBUTED SURPLUS

------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD - -
STOCK-BASED COMPENSATION EXPENSE 36,000 68,000
------------------------------------------------------------------------
BALANCE, END OF PERIOD 36,000 68,000
------------------------------------------------------------------------
------------------------------------------------------------------------


8. SUBSEQUENT EVENT

Subsequent to the third quarter the Company entered into a common share and flow-through share private placement agreement with a group of underwriters to issue 2,298,851 common shares at $4.35 per share and 892,858 common shares to be issued on a flow-through basis at $5.60 per share for total gross proceeds of $15,000,000. Defiant will renounce to purchasers of flow-through shares Canadian Exploration Expense effective in 2005 equal to $5.60 per flow-through share purchased. The private placement closed on October 11, 2005. The net proceeds received from the sale of the common shares and flow-through common shares were applied to repay the revolving credit facility and will be used for general corporate purposes, including an increase to planned capital expenditures in the fourth quarter.



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: www.defiantresources.com

BOARD OF DIRECTORS

David J. Evans
Chairman
Defiant Resources Corporation
Calgary AB

Rick J. Ironside
President & Chief Executive 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

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

Naveen Dargan 1,3
Independent Businessman
Calgary AB

Timothy V. Dunne
Independent Businessman
Calgary AB

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

OFFICERS

Rick J. Ironside
President
& Chief Executive Officer

Rob H. Solinger
Vice President Finance
& Chief Financial Officer

Arne Hamarsnes
Vice President Operations

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: 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
    (403) 218-4101
    or
    Defiant Resources Corporation
    Rick J. Ironside
    President & C.E.O.
    (403) 218 4104
    or
    Defiant Resources Corporation
    Rob H. Solinger
    Vice President Finance & C.F.O.
    (403) 218-4106
    Email: info@defiantresources.com
    Website: www.defiantresources.com