Duvernay Oil Corp.
TSX : DDV

Duvernay Oil Corp.

August 11, 2005 09:00 ET

Duvernay Achieves Record Production and Announces a Significant New Gas Pool Discovery in NEBC

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Duvernay Oil Corp. (TSX:DDV):

- Record second quarter production achieved the targeted average level of 10,000 boe/d.

- Second quarter 2005 production was 25% higher than first quarter 2005 and 62% higher than second quarter of 2004.

- Record quarterly cash flow of $26.5 million ($0.58/share), 77% higher than second quarter 2004 cash flow of $14.95 million ($0.37/share) and 24% higher than first quarter 2005.

- Record quarterly earnings of $8.54 million ($0.18/share), 72% higher than second quarter 2004.

- A reduction in cash general and administrative costs from $1.50/boe in second quarter 2004 to $0.88/boe in second quarter 2005.

- Duvernay has received approval to expand the 100% owned and operated Cecilia Gas plant in the Alberta Deep Basin to 100 mmcf/d.

- Duvernay drilled 41 wells (27.0 net) during the first half of 2005 with a 98% success rate (38 gas, 2 oil, 1 dry or suspended).

- Duvernay is currently operating 10 drilling and 10 service rigs and expects to continue this level of activity through to spring break-up in April 2006.

- The company has made a significant new Cretaceous Cadomin gas pool discovery in its Sunset-Groundbirch operating area.

Production Overview and Outlook

Second quarter 2005 production of 9986 boe/d was 62% higher than second quarter 2004 and 25% higher than first quarter 2005. All of the production increases were the result of the company's internal EP program. Second quarter 2005 production was slightly impacted (350 boe/d) due to the continuing shut-ins at non-equity interest gas producing facilities in the Alberta Deep Basin. The start-up of the company's Cecilia gas plant in May has eliminated this production issue. Wet field conditions during the second and third quarters have delayed the tie-in of certain wells to the Cecilia plant as well as the Groundbirch gas plant in British Columbia. The majority of these planned tie-ins are now underway or have been completed. The delays reduced second quarter volumes by 400 boe/d and third quarter volumes by approximately 250 boe/d. The Spirit River, Alberta sour gas facilities project was completed during the third week of July, later than the originally planned early April target start-up date.

Current production is approximately 11,700 boe/d and will exceed the 12,000 boe/d level with the start-up of the Sunset 5-3 facility expansion in early September. Duvernay remains on track to meet or exceed estimated 2005 average production levels of 11,000 - 11,500 boe/d and the target 2005 exit production level of 15,500 boe/d. With continued strong 2005 commodity prices, cash flow and earnings will continue to exceed original 2005 guidance.

Duvernay was pleased with the 25% quarter over quarter production increase. The high level of drilling and completion activity coupled with the steadily expanding company controlled gas facility infrastructure will allow for a continued quarter over quarter production growth range of between 12.5 and 25% per quarter through second quarter of 2006. The range in growth is related to timing of large facility start-ups within the quarter, the average quarter over quarter growth rate for the next four quarters is expected to be 15% or greater. Exploration success during the outlook period will be additive to these growth estimates.

Alberta Deep Basin

Duvernay continues to expand its land and drilling inventory, gas and liquid production levels, and processing facility capability in the Alberta Deep Basin.

Current Deep Basin production levels of approximately 50 mmcf/de are expected to reach 100 mmcf/de by mid 2006. The company has received approval to expand the 100% owned and operated Cecilia gas plant to 100 mmcf/d, and plans to have this project completed by April of 2006. Duvernay plans to continue operating six drilling and six service rigs in the Alberta Deep Basin on a continuous basis through to next spring break-up in 2006, providing the gas volumes for the expanded facility.

Duvernay has increased its overall land holdings in the Alberta Deep Basin by approximately 35% thus far in 2005 through a series of crown land sales and numerous land deals. The company now has in excess of 400 Cretaceous gas development drilling locations in inventory. First half 2005 operating costs of $5.55/boe were comparable to first half 2004 operating costs of $5.52/boe as the company has kept costs flat in an overall increasing cost pressure environment. Operating costs in the Deep Basin are expected to continue to drop as a steadily increasing percentage of area gas production will be processed at the company's own Cecilia facility.

The complementary Deep Basin deep play exploration program has commenced with two Devonian exploration wells underway at Fir and Edson. The company is planning a total of five Devonian Exploration new pool wildcats in both 2005 and 2006 in the Alberta Deep Basin. The company expects results during the third quarter from the initial two exploration wells.

Sunset-Groundbirch, British Columbia

Duvernay is currently operating three drilling rigs and three service rigs in the Sunset-Groundbirch core operating area. A total of 40 gas wells have now been drilled into the regional Doig gas pool as the company proceeds with large scale development of this extensive resource play. A total of 100 Doig gas wells are anticipated to have been drilled into the pool by the end of 2006.

The start-up of the expanded Sunset 5-3 facility in early September will bring gas production levels at Sunset-Groundbirch to approximately 25 mmcf/d with significant further increases resulting from new facility construction at Sundown and Brassey in the second half of 2005 and early in 2006.

The company is pleased to announce the discovery of a significant new gas pool in the Cretaceous Cadomin formation at South Groundbirch. Duvernay has successfully drilled and completed three Cadomin gas wells into the pool and plans to drill an additional six pool delineation wells prior to year-end. The company estimates that it controls over 100 future Cadomin gas development locations in this gas pool covering over 40 sections. Initial sustained production rates of between 1.0 to 1.5 mmcf/d have been observed thus far. Based on well-bore petrophysics and production performance to date, the company is initially estimating average per well-bore Cadomin gas reserves of 1.5 bcf. At a depth of 1900 metres, these development wells can be drilled, completed and fracture stimulated for $1.0 million Cdn. or less. Many of the locations are well situated for both Cadomin and the deeper Doig gas reservoir. A separate Cadomin gas processing facility is being planned with a first quarter 2006 start-up targeted.

The Cadomin gas discovery provides the company with a second, pervasive, predictable gas horizon with significant reserve and production upside to complement the large Triassic Doig gas discovery made by the company in late 2002.

Management Discussion and Analysis

Certain information set forth in this management discussion and analysis contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Duvernay's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Duvernay's actual results, performance or achievement could differ materially from those expressed in or implied by these forward-looking statements, and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Duvernay will derive therefrom. Duvernay disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Funds from operations and operating netback are not recognized measures under GAAP. Management believes that in addition to net income, funds from operations and operating netback are useful supplemental measures as they demonstrate the Corporation's ability to generate the cash necessary to repay debt or fund future growth through capital investment. Investors are cautioned, however, that these measures should not be construed as an alternative to net income determined in accordance with GAAP as an indication of Duvernay's performance. Duvernay's method of calculating these measures may differ from other companies and accordingly, they may not be comparable to measures used by other companies. For these purposes, Duvernay defines funds from operations as cash provided by operations before changes in non-cash operating working capital and defines operating netback as revenue less royalties and operating expenses.

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

This management's discussion and analysis should be read in conjunction with Duvernay's unaudited financial statements for the period ended June 30, 2005 and comparative information included therein.

This management's discussion and analysis is dated August 10, 2005.

Production

The Corporation achieved record production volumes and industry leading quarter over quarter production growth for the three months ended June 30, 2005 averaging 9,986 boe/d compared with 6,166 boe/d for the same period in 2004, an increase of 62%. When compared to the first quarter of 2005 production increased by 25%. Production for the first six months of 2005 averaged 9,007 boe/d including natural gas production of 42.3 mmcf/d and oil and liquids production of 1,951 bopd, an increase of 65 %. This growth in production is entirely the result of successful internally generated drilling projects. The Corporation did not participate in any significant property or corporate acquisitions during the quarter. Duvernay has constructed a new gas plant at Cecilia which started operation in April 2005 allowing Duvernay access to 25 mmcf/d of sales gas capacity. The following table summarizes production volumes by product:



Three Months Ended June 30

2005 2004 % change
---------- --------- ---------
Crude oil and liquids (bbls/d) 2,259 1,423 59%
Natural gas (mcf/d) 45,923 28,458 61%
Oil equivalent - boe's 908,690 561,127 62%
Oil equivalent -boe/d 9986 6,166 62%


Production increases occurred as a result of growth primarily from the Wild River, Fir-Bigstone and Wroe Creek areas of the Deep Basin where 9 new wells have been tied in during the second quarter. Duvernay's Deep Basin production for the quarter averaged 5,222 boe/d for an increase of 73% compared to the second quarter of 2004. In a like manner Groundbirch/Sunset Production improved to 2,910 boe/d for a production increase of 22% from the same quarter in 2004 as two new Doig Gas wells were tied in during the quarter. The company also commenced production in June from its Pembina Nisku Bank Edge well observing gross commercial rates of over 1,000 boe/d. This well will be subject to a maximum rate limitation of 225 barrels of oil per day plus associated natural gas in accordance with AEUB regulation.

Revenue and Royalties

Revenue includes all petroleum and natural gas sales and income from third party natural gas processing, reduced for field transportation costs and the effects of commodity hedging. Revenue from petroleum and natural gas sales for the three months ended June 30, 2005 was $42.7 million, a 76% increase over revenue of $24.2 million for the same period in 2004. The revenue increase attributed to volume growth was $16.3 million in addition to a revenue increase of $2.2 million attributed to product price improvement during the quarter. Wellhead oil and liquids prices for the second quarter of 2005 averaged $51.48 per barrel (including realized hedging losses of $2.90 per barrel) compared with $43.71 per barrel for the same period in 2004 (including realized hedging losses of $3.10 per barrel). When comparing Duvernay's second quarter 2005 oil and liquids price to the second quarter of 2004, wellhead prices improved 18%. World oil price benchmarks improved by $14.94 U.S. in the second quarter of 2005 when compared to the same time period in 2004, or 39%.

Duvernay's oil and liquids price improvement was muted by three factors; a higher percentage of the liquids volumes were natural gas liquids, the Canadian dollar strengthened relative to the U.S. dollar by 9%, and the Corporation's oil hedges. Duvernay's realized corporate gas price for the second quarter of 2005 continued to outperform the AECO spot price ($7.58 versus $7.37). AECO natural gas prices increased by 5% in the second quarter of 2005 compared to the second quarter of 2004. Duvernay continues to have 300 bopd of oil hedged at prices below the current market until the end of 2005. During 2006, the Corporation has small volumes contracted with the use of "puts" which serve to provide a price floor. Duvernay's realized natural gas price increased by 7% when comparing these quarters partially due to strengthening AECO index prices and partially due to Duvernay entering into full month natural gas contracts yielding better netbacks than daily indices. Transportation costs for the second quarter of 2005 were 2.6% of gross revenue or $1.27/boe, compared to 2.4% of gross revenue or $1.15/boe in the first quarter of 2005.

For the six months ended June 30, 2005, revenues increased to $76.5 million or 87% from the comparable period in 2004. This increase is due to the combined effect of the 65% increase in production with a 10% improvement in wellhead product prices.



Duvernay Wellhead Prices

Three Months Ended June 30

2005 2004 % change
---------- --------- ---------
Crude oil and liquids ($/bbl) $ 51.48 $ 43.71 18%
Natural gas ($/mcf) $ 7.58 $ 7.11 7%
Oil equivalent ($/boe) $ 47.16 $ 42.92 10%




Benchmark Oil & Gas Prices
Three Months Ended June 30

2005 2004 % change
---------- --------- ---------
Oil

NYMEX U.S. $ 53.22 $ 38.28 39%
Edmonton Par Cdn. $ 66.81 $ 49.26 36%

Natural Gas
NYMEX Henry Hub U.S. $ 6.95 $ 6.16 13%
AECO $ 7.37 $ 7.00 5%


Three Months Ended June 30

Currency - Exchange Rates 2005 2004 % change
---------- --------- ---------
Cdn/U.S.$ $ 0.8038 $ 0.7360 9%


Revenue is analyzed as follows:
Three Months Ended June 30

Revenue 2005 2004 % change
---------- --------- ---------
Oil and NGL's $ 10,580 $ 5,661 87%

Natural gas 31,959 18,423 73%
Processing and other income 140 103 36%
Gross revenue $ 42,679 $ 24,187 76%
Interest -- 10
Total revenue $ 42,679 $ 24,197 76%


Duvernay's royalties are summarized as follows:

Three Months Ended June 30

Royalties 2005 2004 % change
---------- --------- ---------
Oil and liquids $2,952 $1,472 101%
Natural gas 6,635 3,955 68%
ARTC (125) (125) -
Total royalties $ 9,462 $ 5,302 79%


For the three months ended June 30, 2005, the average effective royalty rate was 22%, unchanged from the same period in 2004. Commodity price increases driving royalty rates higher have been offset by the effects of royalty holidays on new deep gas wells in Alberta. In addition, Duvernay continued to benefit from the new royalty relief programs put into place by the Ministry of Energy and Mines for British Columbia in May 2003, allowing explorers to access reduced royalty rates for low-productivity natural gas wells, royalty credits for deep gas wells and royalty credits for wells drilled in the summer months. The Corporation estimates the total impact of the above mentioned incentive program's to be approximately $900,000 in the second quarter of 2005. For the six months ended June 30, 2005, the average effective royalty rate was 21% compared to 20% for the same period in 2004.

Operating Expenses

Operating expenses include all periodic lease and field level expenses and include no income recoveries for processing third party volumes. Operating expenses of $5.44/boe for the second quarter of 2005 compared to the second quarter of 2004 operating expenses of $4.85/boe increased slightly due to higher than expected annual property tax costs and third party processing fees being incurred in the second quarter. For the first six months of 2005, unit lease operating costs were $5.55 per boe, essentially unchanged from the same period in 2004, when these costs averaged $5.52 per boe. New high pressure, high deliverability gas wells in the Wild Hay/Fir/Bigstone areas helped keep per unit operating costs down as did economies of scale related to growth in overall corporate gas production. Total operating expenses for the quarter were $4.9 million compared to $2.7 million in the second quarter of 2004. The corporation's operating expenses include third party processing, gathering and compression fees of $1.80 or 33% of total operating costs for the second quarter of 2005. As the new 100% Duvernay gas plant has now become fully operational a large percentage of these fees will be eliminated having a beneficial impact on unit operating expenses through the balance of the year.

General & Administrative Expenses

General and administrative expenses ("G&A") are summarized on the table below as follows:


Three Months Ended June 30

2005 2004 % change
---------- --------- ---------
G&A expenses $2,464 $1,636 51%
Administrative and operating recovery (487) (97) 402%
Capital recovery (821) (244) 237%
Capitalized G&A (360) (453) 21%
Stock based compensation 1,011 238 325%
Total G&A $1,807 $1,080 68%
Oil equivalent ($/boe) $ 1.99 $ 1.93 3%
Oil equivalent cash costs ($/boe) $ 0.88 $ 1.50 41%


G&A expenses for the three months ending June 30, 2005 increased to $1.8 million from $1.1 million for the same period in 2004. On a net basis, G&A for the second quarter of 2005 increased to $1.99/boe from $1.93/boe in 2004 as stock based compensation, a non cash cost, more than tripled compared to the second quarter of 2004. When stock based compensation of $1.11/boe is removed, the Corporation's cash general and administrative costs improved to $0.88/boe from $1.50/boe for the same period in 2004 as fixed costs are spread over a larger production volume and a larger operated capital program has resulted in higher capital recoveries. The percentage of head office expenses capitalized as attributable to exploration activities was 35%, consistent with the second quarter of 2004.

For the first six months ended June 30, 2005, G & A expenses increased to $3.1 million ($1.90/boe) from $1.9 million ($1.90/boe) for the same period in 2004. On a cash basis, G&A per unit of production improved to $0.95/boe in the first six months of 2005 from $1.43/boe in the first six months of 2004.

Depletion, Depreciation and Amortization

Depletion, depreciation and amortization expense ("DD&A") increased to $12.0 million during the second quarter of 2005 from $6.7 million during the same period in 2004. On a dollars per boe basis, DD&A increased to $13.22 from $11.93 in the second quarter of 2004 but have decreased compared to the first quarter of 2005 ($14.02/boe). On a quarterly basis, the management updates reserve additions based on the latest available information. The percentage of the property, plant and equipment investment excluded from the Corporation's depletable base (10% in 2005; 13% in 2004) declined when comparing the second quarter of 2004 with 2005.

Income Taxes

The Corporation did not pay any cash taxes in the second quarter of 2005 other than Large Corporation Tax, a non-earnings based tax. Other than these taxes, the Corporation does not expect to pay any cash taxes in 2005 based on existing tax pools, planned capital expenditures and the most recent forecast of 2005 taxable income. Although current tax horizons depend on product prices, production levels, and the nature, magnitude and timing of capital spending, the Corporation currently believes that no cash income tax will be payable for two to three years. As a percentage of book pretax earnings, future income taxes for the second quarter of 2005 are 35.9% compared to 37.4% for the same period in 2004. This reduction is due to the overall reduction in the combined federal and provincial corporate tax rates.

Funds From Operations and Earnings

Funds from operations increased to $26.5 million ($0.55 per diluted equity share) for the three months ending June 30, 2005, from $15.0 million ($0.36 per diluted equity share) for the comparable period in 2004. On a per share basis, funds from operations increased by 53% due to stronger operating results combined with increased commodity prices. For the six months ending June 30, 2005, per share diluted funds from operations improved by 71% compared to the same period in 2004, while per share diluted earnings improved by 79%. The Corporation's full year 2005 forecast funds from operations is $130.6 million or $2.66 on a per share basis. After tax earnings improved by 70% for the second quarter of 2005 when compared to the same period in 2004 to $8.5 million from $5.0 million. On a per share basis, diluted earnings increased to $0.18 from $0.12, a 50% improvement. The Corporation's full year earnings per share forecast is $0.96.


Three Months Ended June 30

2005 2004 % change
---------- --------- ---------

Funds from operations per equity
share (1) $ 0.55 $ 0.36 53%
Earnings per equity share (1) $ 0.18 $ 0.12 50%
Operating netback per boe $31.19 $28.62 9%

note:
(1) diluted


Liquidity and Capital Resources

The Corporation invested $84.5 million in the second quarter of 2005 compared to $29.1 million in the second quarter of 2004, as set out in the following table.



Three Months Ended June 30

($ thousands) 2005 2004 % change
---------- --------- ----------


Land and seismic $26,222 $ 4,664 462%
Drilling and completions 34,436 19,217 79%
Facilities 18,350 4,711 290%
Property Acquisitions 5,097 (60) -
Other 376 551 (32)%
Total $84,481 $29,083 191%


On April 5, 2005, the Corporation issued 1,150,000 flow through common shares as a private placement with an underwriting syndicate at $35.50 per share. Gross proceeds of $40.8 million were dedicated to the expansion of the corporation's 2005 Capital budget to $180 million. On June 28, 2005, the Corporation issued 1,800,000 common shares at $27.75 per share pursuant to a short form prospectus filed on June 17, 2005. This transaction yielded gross proceeds of $49.95 million and was completed by an underwriting syndicate on a bought deal basis, at approximately a 3% discount to the prevailing market price on the Toronto Stock Exchange at the date the transaction was entered into on June 7, 2005. The proceeds from this issue move the full year capital budget up to $230 million which will be directed to land acquisition and drilling in 2005 for the new Cadomin resource play in NE B.C. as well as the next recently approved expansion of the Cecilia gas plant to 100 MMCFPD. At June 30, 2005, Duvernay's net debt is $87.8 million or .76x the prospective 12 month cash flow forecast. Subsequent to the end of the first quarter, Duvernay successfully renegotiated its credit facility with a Canadian chartered bank, resulting in a bank line increase to $160 million.

As at June 30, 2005, the Corporation had 47,829,491 shares outstanding and 4,061,601 stock options outstanding. As at August 10, 2005, the Corporation has 47,852,791 shares outstanding and 4,038,301 stock options outstanding. During the period from June 30, 2005 until August 10, 2005, 23,300 common shares were issued on the conversion of employee stock options and no new stock options were issued.

During the first half of 2005, The Corporation drilled 41 gross wells (27 net) of which 38 are gas wells, 2 are oil wells and one is abandoned for an overall commercial success rate of 98%, Additional facility expenditures for the 100% owned Cecilia gas plant (initially commissioned April 18/05), an 8 MMCFPD expansion of the Sunset 5-3 gas plant to start up in the third quarter of 2005, and the 70% owned Spirit River sour gas systems (to be commissioned in the summer of 2005) are included in the second quarter. Approximately $22.5 million was invested at crown land sales in N.E-B.C. ($17.5 million) and the Alberta Deep Basin ($5.0 million). During the first six months of 2005, Duvernay has leased 26,000 new undeveloped net acres averaging $865/acre. A minor property acquisition was also completed in the second quarter by issuing 110,000 common shares for a non cash capital addition of $4.1 million, including a related future tax liability of $1.2 million.

Financial Instruments

The Corporation makes use of specific commodity hedging instruments that serve two primary business objectives. The first objective is to reduce the variability in cash flows from fluctuations in product prices to ensure a source of funding for the 2005 and 2006 capital program. The second objective is to fix the rate of return on capital invested in the gas prone resource projects. The Board of Directors has approved a policy permitting management to hedge up to a fixed percentage of budgeted corporate production.

Duvernay has entered into all hedging transactions with the same party that the commodity is physically sold to, avoiding the need to provide credit in the event that the hedges are at prices below prevailing prices. Note 6 in the Corporation's second quarter 2005 interim financial statements include details of all Financial Instruments as at June 30, 2005.

The Corporation has adopted Accounting Guideline 13 "Hedging Relationships" that deals with the identification, designation, documentation and measurement of effectiveness of hedging relationships for the purpose of applying hedge accounting. The Corporation records the realized portion of each hedge in Petroleum and Natural Gas Sales and the unrealized portion is disclosed in the Financial Statement notes.



DUVERNAY OIL CORPORATION
SELECTED FINANCIAL INFORMATION

2005
Q2 Q1
--------------------------------------------------

PRODUCTION
Crude oil and liquids (bbls) 205,527 147,723
Gas (mcf) 4,218,977 3,443,570
Oil equivalent (boe) 908,690 721,651

Crude oil and liquids
(bbls/d) 2,259 1,641
Gas (mcf/d) 45,923 38,262
Oil equivalent (boe/d) 9,986 8,018
--------------------------------------------------

FINANCIAL
($ thousands, except as noted)
Revenue, net of royalties
and transportation 33,217 26,906

Funds flow from operations 26,495 21,372
Per share basic 0.58 0.48


Net earnings 8,537 7,719
Per share basic 0.19 0.17
Per share diluted 0.18 0.16

Total Assets 548,268 474,245

Bank Debt 79,190 68,859

Cash and Working capital
(deficiency) (8,602) (52,366)

Basic Outstanding Shares 45,844 44,436
--------------------------------------------------

PER UNIT
Gas, net of transportation
($/mcf) 7.58 7.59

Crude oil and liquids, net
of transportation ($/bbl) 51.48 48.76

Revenue, net of
transportation ($/boe) 47.16 46.22

Operating netback ($/boe) 31.19 31.02
--------------------------------------------------


2004
Q4 Q3 Q2 Q1
------------------------------------------------------------------------

PRODUCTION
Crude oil and liquids (bbls) 120,282 132,187 129,507 122,884
Gas (mcf) 3,293,899 2,719,770 2,589,721 1,842,678
Oil equivalent (boe) 669,265 585,482 561,127 429,997

Crude oil and liquids
(bbls/d) 1,307 1,437 1,423 1,350
Gas (mcf/d) 35,803 29,563 28,458 20,249
Oil equivalent (boe/d) 7,275 6,364 6,166 4,725
------------------------------------------------------------------------

FINANCIAL
($ thousands, except as noted)
Revenue, net of royalties
and transportation 24,904 19,393 18,895 13,774

Funds flow from operations 19,064 15,570 14,951 10,091
Per share basic 0.44 0.37 0.37 0.26


Net earnings 6,213 5,881 4,962 3,198
Per share basic 0.14 0.14 0.12 0.08
Per share diluted 0.14 0.13 0.11 0.08

Total Assets 393,440 327,031 287,471 266,207

Bank Debt 40,724 27,597 23,678 17,728

Cash and Working capital
(deficiency) (13,439) (18,184) 443 (15,678)

Basic Outstanding Shares 42,857 41,671 39,992 38,096
------------------------------------------------------------------------

PER UNIT
Gas, net of transportation
($/mcf) 7.12 6.65 7.11 6.32

Crude oil and liquids, net
of transportation ($/bbl) 42.81 47.95 43.71 39.55

Revenue, net of
transportation ($/boe) 42.74 41.74 42.92 38.38

Operating netback ($/boe) 30.89 27.55 28.62 24.86
------------------------------------------------------------------------


2003
Q4 Q3
--------------------------------------------------

PRODUCTION
Crude oil and liquids (bbls) 143,005 125,171
Gas (mcf) 1,420,988 914,077
Oil equivalent (boe) 379,836 277,517

Crude oil and liquids
(bbls/d) 1,554 1,360
Gas (mcf/d) 15,446 9,936
Oil equivalent (boe/d) 4,129 3,016
--------------------------------------------------

FINANCIAL
($ thousands, except as noted)
Revenue, net of royalties
and transportation 11,612 7,522

Funds flow from operations 7,443 5,037
Per share basic 0.27 0.15


Net earnings 1,727 1,505
Per share basic 0.05 0.05
Per share diluted 0.04 0.04

Total Assets 220,546 198,026

Bank Debt 32,666 12,983

Cash and Working capital
(deficiency) (15,942) (19,481)

Basic Outstanding Shares 34,895 32,452
--------------------------------------------------

PER UNIT
Gas, net of transportation
($/mcf) 6.20 5.28

Crude oil and liquids, net
of transportation ($/bbl) 35.80 41.70

Revenue, net of
transportation ($/boe) 37.47 36.21

Operating netback ($/boe) 22.64 20.38
--------------------------------------------------


DUVERNAY OIL CORP.
Balance Sheets

(Thousands of Dollars)
------------------------------------------------------------------------
June 30 December 31
2005 2004
(Unaudited) (Audited)
------------------------------------------------------------------------

Assets

Current assets:
Cash and cash equivalents $ 145 $ 143
Accounts receivable 32,774 30,920
Prepaid expenses and deposits 784 962
------------------------------------------------------------------------
33,703 32,025

Capital assets (note 3) 514,565 361,415

------------------------------------------------------------------------
$ 548,268 $ 393,440
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 42,305 $ 45,464

Long term debt (Note 4) 79,190 40,724

Asset retirement obligations (Note 2) 7,841 5,849

Future income tax 36,581 20,553

Shareholders' equity:
Share capital (note 5) 332,529 248,651
Contributed surplus (note 5) 2,694 1,327
Retained earnings 47,128 30,872
------------------------------------------------------------------------
382,351 280,850

------------------------------------------------------------------------
$ 548,268 $ 393,440
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements


DUVERNAY OIL CORP.
Statements of Earnings and Retained Earnings


(Unaudited)
(thousands of dollars, except per share data)
------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
------------------------------------------------------------------------

Revenue:
Petroleum and natural
gas sales $ 43,830 $ 24,484 $ 78,438 $ 41,691
Royalties (9,462) (5,302) (16,333) (8,367)

Transportation (1,151) (297) (1,983) (696)

Interest income - 10 - 41
------------------------------------------------------------------------
33,217 18,895 60,122 32,669

Expenses:
Operating 4,948 2,724 9,048 5,471
General and administration 796 842 1,550 1,416
Stock based compensation 1,011 238 1,550 464
Interest 725 231 1,254 456
Depletion, depreciation
and accretion 12,014 6,692 22,131 11,280
------------------------------------------------------------------------
19,494 10,727 35,533 19,087

------------------------------------------------------------------------
Earnings before taxes 13,723 8,168 24,589 13,582

Taxes:
Capital 253 148 403 285
Future 4,933 3,058 7,930 5,137
5,186 3,206 8,333 5,422

------------------------------------------------------------------------
Net earnings 8,537 4,962 16,256 8,160

Retained earnings,
beginning of period 38,591 13,815 30,872 10,617

Retained earnings,
end of period $ 47,128 $ 18,777 $ 47,128 $ 18,777
Earnings per share:
Basic $ 0.19 $ 0.12 $ 0.36 $ 0.20
Diluted $ 0.18 $ 0.12 $ 0.34 $ 0.19

See accompanying notes to financial statements


DUVERNAY OIL CORP.
Statements of Cash Flows

(Unaudited)
(Thousands of Dollars)
------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004

Cash provided by (used in):

Operations:
Net earnings $ 8,537 $ 4,962 $ 16,256 $ 8,160
Items not involving cash:
Depletion, depreciation and
accretion 12,014 6,692 22,131 11,280
Stock-based compensation 1,011 238 1,550 464
Future income taxes 4,933 3,058 7,930 5,137
------------------------------------------------------------------------
26,495 14,950 47,867 25,041
Change in non-cash working
capital 6,782 (13,106) (481) (13,286)
------------------------------------------------------------------------
33,277 1,844 47,386 11,755

Financing:
Issue of common shares,
net of share issue costs 87,285 24,305 87,658 73,223
Increase (decrease) in
long-term debt 10,331 5,949 38,466 (8,989)
------------------------------------------------------------------------
97,616 30,254 126,124 64,234

Investments:
Additions to property,
plant and equipment (79,384) (29,143) (168,191) (72,949)
Property acquisitions and
dispositions (964) 60 (964) 60
Change in non-cash working
capital (50,400) (534) (4,353) -
(130,748) (29,617) (173,508) (72,889)

------------------------------------------------------------------------
Increase (decrease) in cash 145 2,481 2 3,100

Cash (bank indebtedness),
beginning of period - - 143 (619)

Cash, end of period $ 145 $ 2,481 $ 145 $ 2,481
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash is defined as cash and cash equivalents

See accompanying Notes to Financial Statements


DUVERNAY OIL CORP.
Notes to Financial Statements

Period ended June 30, 2005
(Unaudited)


1. Significant accounting policies:

The financial statements of the Corporation have been prepared by management in accordance with Canadian generally accepted accounting principles. These interim financial statements follow the same accounting policies and methods as the financial statements for the year ended December 31, 2004 and include all adjustments necessary to present fairly the results for the interim period. Certain information and footnote disclosure normally included in the annual financial statements has been omitted. These interim financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2004.

2. Asset retirement obligations:

The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations to be approximately $14.4 million (December 31, 2004 - $10.6 million) which will be incurred between 2010 and 2017. A credit-adjusted risk-free rate of 7% was used to calculate the fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided below:

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, 2005 December 31, 2004
------------------------------------------------------------------------

Balance, beginning of period $ 5,848,599 $ 3,916,015
Accretion expense 255,658 382,619
Liabilities incurred 1,736,436 1,549,965

------------------------------------------------------------------------
Balance, end of period $ 7,840,693 $ 5,848,599
------------------------------------------------------------------------
------------------------------------------------------------------------


3. Capital assets:

The cost of unproven lands at June 30, 2005 of $56,737,000 (December 31, 2004 - $51,005,000) has been excluded from the depletion calculation. Future development costs of proven reserves of $16,852,000 (December 31, 2004 - $67,408,000) have been included in the depletion calculation.

General and administrative expenditures of $757,000 for six months (2004 - $763,000) have been capitalized and included as costs of petroleum and natural gas properties. For the second quarter of 2005 $360,000 was capitalized (2004 - $453,000).

4. Long-term debt:

The Corporation has a financing arrangement with a Canadian chartered bank for an extendible revolving term loan in the amount of $130 million. As at June 30, 2005, $79,190,262 of this term loan was drawn. Cash interest paid during the six months was $1,133,069 (2004 - $418,615).

On July 27, 2005, the Corporation completed an expansion of its extendible revolving term loan from $130 million to $160 million. All other terms of the loan arrangement remain unchanged.

5. Share capital:

(a) Authorized:

Unlimited number of common shares and Class A common shares

Unlimited number of first preferred shares and second preferred shares, each issuable in series

(b) Common shares issued:



------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Shares Amount
------------------------------------------------------------------------
Balance, December 31, 2004 44,286,924 $ 248,650,892

For cash on exercise of stock options 482,567 1,841,950
For cash on private placement of
flow through shares 1,150,000 40,825,000
For cash on public share issue 1,800,000 49,950,000
For acquisition of property 110,000 2,915,000
Contributed surplus on exercise of
stock options - 183,940
Share issue costs - (4,958,699)
Tax effect on share issue costs - 1,702,000
Tax effect on flow through
renunciation - (8,581,000)

------------------------------------------------------------------------
Balance, June 30, 2005 47,829,491 $ 332,529,083
------------------------------------------------------------------------


During the quarter the Corporation issued 110,000 common shares to a company controlled by a director of Duvernay to purchase a producing property from that company. The asset has been recorded at the exchange value of $4.1 million including $1.2 million of future income tax liability.

The Corporation estimates that as at June 30, 2005 $35,000,000 of the $40,825,000 in flow through proceeds remains to be spent on exploration before December 31, 2006.



(c) Contributed surplus:

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, 2005
------------------------------------------------------------------------
Contributed surplus, December 31, 2004 $ 1,327,450
Stock-based compensation 1,550,150
Exercise of stock options (183,940)
------------------------------------------------------------------------
Contributed surplus, June 30, 2005 $ 2,693,660
------------------------------------------------------------------------


(d) Stock options:

The Corporation has a fixed stock option plan. Under the employee stock option plan, the Corporation may grant options to its employees for up to 4,782,949 shares of common stock. The exercise price of each option equals the market price of the Corporation's stock on the date of grant and an option's maximum term is five years. Options are granted throughout the year and vest 1/3 on each of the first, second and third anniversaries from the date of grant.



Changes in the number of options, with their weighted average exercise
price, are summarized below:

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, 2005
------------------------------------------------------------------------
Weighted
average
exercise Number of
price options
------------------------------------------------------------------------
Stock options outstanding,
beginning of period $ 6.55 3,924,168
Granted 27.01 620,000
Exercised 3.82 (482,567)
Cancelled - -

------------------------------------------------------------------------
Stock options outstanding,
end of period $ 10.00 4,061,601
------------------------------------------------------------------------
------------------------------------------------------------------------


The fair value of each option granted is estimated on the date of grant using the Black - Scholes option pricing model with weighted average assumptions for grants as follows:



Assumptions
Risk free rate 4.5%
Expected life (years) 3.5
Expected volatility 40%
Expected dividend $ -
Average fair value of options granted $12.86


(e) Per share amounts:

Per share amounts have been calculated on the weighted average number of shares outstanding. The weighted average shares outstanding for the quarter ended June 30, 2005 was 45,843,702 (45,078,541 six months).

In computing diluted earnings per share for the quarter ended June 30, 2005, 2,274,789 (2,188,787 six months) shares were added to the weighted average number of common shares outstanding for the dilution from the stock options.

6. Financial instruments:

Commodity price risk management:

As at June 30, 2005, the Corporation had fixed the price applicable to future production as follows:



Type of
Year Time Period Contract Quantity Contract Price
------------------------------------------------------------------------
2005 July Collar 200 bbls/day $31.00 U.S. W.T.I. Floor
- December $37.43 U.S. W.T.I. Ceiling

2005 July Physical 100 bbls/day $46.60 U.S. W.T.I.
- December (swap)

2005 July - 2006 Put 140 bbls/day $50.00 U.S. W.T.I.
September (floor)

2005 July Collar 2,000 gj's/day $5.87 Cdn/gj Floor
- October $7.92 Cdn/gj Ceiling

2005 July Physical 3,000 gj's/day $ 6.50 Cdn/gj
- October (Swap)

2005 July Physical 2,000 gj's/day $ 6.60 Cdn/gj
- October (swap)

2005 July Physical 2,000 gj's/day $ 6.64 Cdn/gj
- October (swap)

2005 July Physical 4,000 gj's/day $ 6.89 Cdn/gj
- October (swap)

2005 July Physical 3,000 gj's/day $ 7.45 Cdn/gj
- December (Swap)

2005 July Physical 3,000 gj's/day $ 7.20 Cdn/gj
- October (swap)

2005 November Physical 4,000 gj's/day $ 8.74 Cdn/gj
- 2006 March (Swap)

2005 July Physical 3,000 gj's/day $ 8.00 Cdn/gj
- December (Swap)

2005 November Physical 2,000 gj's/day $ 8.65 Cdn/gj
- 2006 March (Swap)

2005 November Physical 2,000 gj's/day $ 8.92 Cdn/gj
- 2006 March (Swap)

2005 November Physical 2,000 gj's/day $ 9.02 Cdn/gj
- 2006 March (Swap)


The estimated fair value of the fixed price contracts based on the amounts the Corporation would pay if the contracts were terminated as at June 30, 2005 is approximately $700,000.

Disclosure

The term 'boe' or 'barrel of oil equivalent' and 'mmcf/de' or 'million cubic feet per day equivalent' may be misleading, particularly if used in isolation. A boe conversion ratio of 6mcf:1bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

This press release contains certain forward-looking statements, including expectations of future production, operating and financial results. These statements are based on Duvernay's current expectations and assumptions that could prove to be incorrect. The forward-looking statements are not guarantees of future performance and undue reliance should not be placed on them. Actual results may differ materially as a result of risks, uncertainties and other factors, such as: changes in the general economic, market, regulatory, industry and business conditions; fluctuations in commodity prices and currency exchange rates; the successful and timely implementation of growth projects; imprecision of reserve estimates; environmental risks; competition from other industry participants; availability of capital; and uncertainties resulting from potential delays or changes in plans, among others. See Duvernay's recent prospectus and other documents Duvernay files with Canadian securities regulatory authorities for further details, copies of which are available from Duvernay directly or on its website; www.duvernayoil.com or on the SEDAR website www.sedar.com


Contact Information

  • Duvernay Oil Corp.
    Michael Rose
    President and C.E.O.
    (403) 571-3600
    or
    Duvernay Oil Corp.
    Brian Robinson
    Vice-President - Finance and C.F.O.
    (403) 571-3609
    or
    Duvernay Oil Corp.
    Scott Kirker
    Manager - Corporate Affairs
    (403) 571-3683
    Website: www.duvernayoil.com