Fair Sky Resources Inc.
TSX VENTURE : FSK

Fair Sky Resources Inc.

August 29, 2007 09:00 ET

Fair Sky Resources Files Second Quarter 2007 Quarterly Financial Statements

CALGARY, ALBERTA--(Marketwire - Aug. 29, 2007) -

(NOT INTENDED FOR DISSEMINATION IN THE UNITED STATES)

Fair Sky Resources Inc. ("Fair Sky") (TSX VENTURE:FSK) today filed its Unaudited Consolidated Financial Statements for the quarter ended June 30, 2007 and the related Management's Discussion and Analysis and its Quarterly Report for the quarter ended June 30, 2007.

All of these filings can be accessed electronically on SEDAR at www.sedar.com.

Hereafter follows the Message to the Shareholders, Highlights and Management's Discussion and Analysis:

Message to our Shareholders

It is with pleasure that I submit to you, on behalf of the Board of Directors of Fair Sky Resources Inc. ("Fair Sky" or the "company"), the company's 2007 second quarter report.

The quarter ended June 30, 2007 was a period of exceptional wet field conditions brought on by heavier than normal snow pact run off and acute rain fall on the company's prospect areas. Fair Sky did not have any strategically significant events during the second quarter; however, a number of projects were concluded:

- Fair Sky, with its partners, completed the Swan Hills 2D seismic program of approximately 75 kilometres in June, after having to delay operations due to weather in February.

- A Moose Jaw 2D seismic program of approximately 80 kilometres was acquired in May to supplement the geophysical interpretation that covers the lands obtain by the Fair Sky. Two additional wells were perforated late June and are awaiting additional completion activities.

- A Carbondale Oil/Gas well lease was prepared in late June and was drilled in early July 2007. The well was cased and is waiting on further completion operations.

- Fair Sky issued 1,698,900 common shares on a flow-through basis at a price of $2.05 per share for a total of $3,482,745.

Fair Sky anticipates weak natural gas prices for the remainder of the year and being a gas-weighted company will be reducing its anticipated 2007 capital budget for the remainder of the year. As these weaker gas prices reflect lower revenues, the company is looking to aggressively explore and develop more oil opportunities on the corporations existing land base and investigate farm-in possibilities. Following an active year in 2006, the company plans to postpone and defer drilling on high impact gas plays and increase the oil mix in its production. Using prudent business judgment the company is also exploring divestiture of some of its properties. These funds will then be used to draw down the company's existing line of credit and fund operations. In the current environment, selective exploitation of company lands will be directed at adding moderate volume growth while minimizing finding and development costs.

Moose Jaw

Fair Sky has now acquired approximately 600 kilometres of 2D seismic over 125 sections of land wholly-owned by the company. Fair Sky has drilled and cased a total of five wells in the Moose Jaw area of Central Saskatchewan. The wells encountered gas shows while drilling and log analysis indicated shallow gas in the Belly River and Manville zone and deeper oil in the Bakken zone. Stimulation has been carried out on two of the four shallow gas wells and the one Bakken well without success. Results to date have shown a lack of permeability in the formations that stimulation was unable to address. A larger program is needed to thoroughly evaluate this large area. A Frac program is being scheduled for the fourth quarter of 2007 on the existing wells, with no anticipated drilling for the remainder of the year. Emphasis on this natural gas asset has been scaled back with the decline in gas prices and will continue to be evaluated based on gas prices in the future. Regional geological work including cross-section interpretation and reservoir development will be carried out over the next few months.

Westerose

The natural gas production at Westerose continued to complement the company's revenue in the second quarter with the wells flowing at approximately 550 mcf/d net (850mcf/d gross). Approximately 20 days of production were lost in June due to the partner operator carrying out routine maintenance on the compression facilities. Fair Sky is presently preparing a development oil prospect at Westerose to be drilled in the fall of 2007 with the existing partner.

Boian

Pipeline constrictions were overcome in the first quarter of 2007. After weather improved, activity commenced to install a compressor at the battery to increase line pressure. A completion program is presently being developed to exploit gas in the Viking which initially tested at approximately 200 mcf/d net (800mcf/d gross). Operations will be carried out as soon as possible.

Fair Sky is preparing to drill an exploration well on adjacent lands in the fall of 2007 to test the Camrose formation. Upper zones in the area also have hydrocarbon potential and will be evaluated.

Carbondale

Fair Sky continues to produce approximately 950mcf/d of net production in the Carbondale area. A number of wells are constricted due to pipeline pressure constraints and some re-completion work-over operations are being contemplated for the latter part of 2007.

A Devonian drilling prospect was prepared at the end of June and drilled early July, based on interpretation of 3D seismic. The well was completed and after testing approximately 13 meters of carbonate, un-economical hydrocarbon volumes were encountered. Up hole potential is now being evaluated for potential completion work in the third or fourth quarter of 2007.

A number of additional exploration and development prospects have been interpreted in the Carbondale area with both oil and gas potentials. The company will be focusing on developing its prospects in the area to maximize its return on investment.

Macleans Creek

Macleans Creek production has decreased due to a significant pressure drop on the 7-1 well and production of water in the 12-2 well. A lower capacity pump is being reviewed for installation on the 7-1 well and a chemical program on the 12-2 well is being implemented to minimize water production. Production is expected to stabilize as wells in this area have shown significant longevity with many upwards of 20+ years. In the long term Fair Sky may look at enhancing recovery on the properties through water injection to increase reservoir pressure.

Swan Hills

The 2D seismic program originally underway in February but was halted due to adverse weather conditions, was finally completed in June of 2007. Interpretation of the 75 kilometers is now being carried out with Fair Sky and the partners investigating the potential to drill an exploratory well in the up coming winter season. Analogous pools in the area have produced in excess of 45 million barrels of oil and gas. Supplementary data may be acquired to delineate additional prospect locations.

Boundary Lake

At Boundary Lake, a gas well was drilled and tested at 5.3 mmcf/day (FSK 60% WI) in 2006. In February of 2007 a pipeline was constructed and completed to bring the well on production. However, due to regulatory problems encountered over the second quarter and into the third quarter of 2007 involving EUB plant proliferation concerns and as a result of objections by a competitor, facility construction has been put on hold while these issues are addressed. Resolution is expected sometime in the third or fourth quarter of 2007. Fair Sky has varying working interests (50%-100%) on 1,920 acres in the area.

Utah Uranium Mineral Property

Fair Sky engaged Associated Geosciences Ltd. to complete a NI 43-101 compliant report for its Iron-Beaver Uranium property in southwestern Utah, held by its 94.7% owned subsidiary, Fair Sky Minerals Inc. This document has now been filed on Sedar. The Iron-Beaver Project comprises two distinct claims areas located approximately 50 km northwest of Cedar City, Utah, encompassing 10,680 ha (26,391 acres) of land. The Iron-Beaver project has been valued at C$4.8 million in the NI 43-101 report.

Future Guidance

In the current environment of lower natural gas prices, Fair Sky plans to be selective in exploiting its existing land base to minimize exploration and development costs. Activity on larger area operations such as Moose Jaw will be measured until prices of commodities increase. Oil opportunities will be emphasized. The company is exploring the divestiture of certain properties in order to address the working capital deficit. These funds will then be used to pay down the company's existing line of credit and fund future operations.

Tim Kemp, President and Chief Executive Officer



Q2 2007 HIGHLIGHTS

----------------------------
Q2 2007 Q1 2007
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OPERATIONAL (units as noted)
Production behind pipe (BOE/D) 465 550
Average daily production
Oil (barrel per day) 17 41
Natural gas (mcf per day) 1,268 1,884
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FINANCIAL (000's except per share)
Revenues $ 1,060 $ 1,246
Cash flow from Operations $ 50 $ 451
Per share - basic $ 0.00 $ 0.03
Per share - diluted $ 0.00 $ 0.03
Net loss $ (528) $ (342)
Per share - basic $ (0.03) $ (0.03)
Per share - diluted $ (0.03) $ (0.03)
Net capital expenditures $ (828) $ (2,274)
Working Capital $ (5,004) $ (7,852)
Shareholders' equity $ 20,425 $ 17,403
Common shares outstanding 14,983 13,284

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Average price realization ($Cdn.)
Oil (per barrel) $ 71.76 $ 65.83
Natural gas (per mcf) $ 7.79 $ 7.41
Combined (per BOE) $ 48.85 $ 47.07
Operating expenses (per BOE) $ 13.78 $ 7.53
Operating net back (per BOE) $ 28.89 $ 29.83
Undeveloped land (net acres) 107,000 107,000
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Management Discussion and Analysis

For the quarter ended June 30, 2007

The following management's discussion and analysis ("MD&A") is dated August 29, 2007 and has been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP) and should be read in conjunction with the Quarterly Unaudited Consolidated Financial Statements of Fair Sky Resources Inc. ("Fair Sky" or the "company") for the quarter ended June 30, 2007 and Fair Sky's statement of reserves data and other oil and gas information dated April 30, 2007, both available on the SEDAR website at www.sedar.com.

This MD&A refers to operating netback which is not a recognized measure under GAAP. Management believes that in addition to net income (loss) and cash flow from operating activities, operating netback is a useful supplemental measure as it demonstrates the company's ability to generate the cash necessary to repay debt or fund future growth through capital investment. Investors are cautioned, however, that this measure should not be construed as an alternative to net income determined in accordance with GAAP as an indication of Fair Sky's performance. Fair Sky's method of calculating this measure may differ from the method used by other companies and, accordingly, this measure may not be comparable to measures used by other companies.

ADVISORY: Natural gas volumes have been converted to barrels ("bbl") of oil equivalent ("boe") using six thousand cubic feet ("mcf") of natural gas equal to one boe. This conversion conforms to NI51-101. Use of the term boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-Looking Information

Certain statements contained in this MD & A constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Fair Sky to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risk, uncertainties and assumptions include, among other things: general economic and business conditions; changing foreign exchange rates; the receipt of required regulatory approvals; the availability of sufficient capital; the estimated cost and availability of funding for the continued exploration and development of Fair Sky's prospects; political and economic conditions; and commodity prices.

Overview

Fair Sky Resources Inc. is a domestic energy company dedicated to building shareholder value by acquiring land, exploring and developing oil and gas assets within Western Canada. The company began operations in early 2004 and became a public company in March 2006, trading on the TSX Venture Exchange under the symbol "FSK".

The company's oil and natural gas operations are situated in the Western Canadian Basin. Activities are currently focused in the Carbondale, Boian, Westerose areas of Central Alberta; Boundary Lake and Valleyview areas of Northwest Alberta, and Moose Jaw in Central Saskatchewan. The Corporation currently has producing operations as well as active exploration and development programs and prospect inventories with exposure to approximately 107,000 net acres to the company of developed and undeveloped lands. The company's subsidiary, Fair sky Minerals Inc., has acquired approximately 25 sections of a potential uranium prospect in Southern Utah, USA.

Selected Quarterly Information

Unless otherwise noted, all currency amounts are stated in Canadian dollars.

The following tables summarize selected financial data for the company:



($000's) except per
share amounts Q207 Q107 Q406 Q306 Q206 Q106
----------------------------------------------------------------------------
Total Revenues 1,060 1,246 880 1,127 910 185
Expenses 1,674 1,665 1,978 1,326 690 377
Net income (loss) (744) (342) (710) (199) 221 (192)
Net income (loss) per
share - Basic $(0.03) $(0.03) $(0.06) $(0.02) $0.02 $(0.02)
Net income (loss) per $(0.03) $(0.03) $(0.06) $(0.02) $0.02 $(0.02)
share - Diluted
Total Assets 31,362 32,263 30,695 26,711 26,748 18,104
Total short term
liabilities 6,285 10,225 8,352 8,895 8,862 4,802


Six Months Ended Six Months Ended
($000's) except per share amounts June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
Total Revenues 2,630 1,177
Expenses 3,339 1,067
Net income (loss) (1,163) 29
Net loss per share - Basic ($0.06) $0.00
Net loss per share - Diluted ($0.06) $0.00


In the second quarter of 2007, Fair Sky showed an increase in total revenues of 7% compared to the same period of 2006. Year over year production has primarily increased as a result of the Carbondale well brought on production in January offset by the natural declines over time at existing wells. June revenue was hindered in the quarter as a result of a plant turnaround in the Westerose area which resulted in two of the company's gas wells being shut in for approximately 20 days of the month.

Capital Expenditures

The following summarizes Fair Sky's capital expenditure:



Quarter Ended Quarter Ended
($000's) June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
Land acquisitions and retentions 175 1,013
Seismic 264 649
Drilling & completions 249 6,900
Equipping, tie-ins and facilities 67 840
Capitalized G&A 47 147
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Total 802 9,549


Six Months Ended Six Months Ended
($000's) June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
Land acquisitions and retentions 647 1,093
Seismic 170 1,049
Drilling & completions 1,080 11,544
Equipping, tie-ins and facilities 983 1,446
Capitalized G&A 82 147
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Total 2,962 15,279


For the second quarter of 2007, Fair Sky had minimal operations in the field. On the company's Central Alberta Swan Hills prospect, a 2D seismic program that was initiated in the first quarter was completed. Analysis of the seismic for the development of potential drilling prospects is ongoing. Stimulation has been carried out on two of the four shallow gas wells and the one Bakken well without success. Results to date have shown a lack of permeability in the formations that stimulation was unable to address. Substantially all of the completion costs in the quarter related to the work performed on wells in the Moose Jaw area.

Results of Operations



Oil & gas sales:
Quarter Ended Quarter Ended
June 30, 2007 June 30, 2006
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Oil sales (BOE) 1,533 2,391
Gas sales (Mcf) 115,369 111,506
NGL sales (BOE) 939 790
Total BOE (6:1) 21,700 21,765
Average BOE/day 238 239
Oil sales $ 110,000 $ 169,000
Gas sales $ 899,000 $ 777,000
NGL sales $ 51,000 $ 45,000


Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
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Oil sales (BOE) 5,179 2,908
Gas sales (Mcf) 284,938 127,788
NGL sales (BOE) 2,384 1,354
Total BOE (6:1) 55,053 25,560
Average BOE/day 304 141
Oil sales $ 350,000 $ 198,000
Gas sales $2,155,000 $ 904,000
NGL sales $ 125,000 $ 75,000


Sales of oil decreased 36% from a year ago as a result of production declines at Macleans Creek. The company has experienced a significant increase in the water cut on the highest producing Macleans Creek well which as caused the production decline. Gas sales increased 3% as a result of the new production brought on in December at Carbondale offset by normal declines on the companies existing production at Westerose. Production was also negatively impacted by a plant turnaround in the Westerose area which shut in production for approximately 20 days in June. The company continued to have approximately 465 net BOE/day behind pipe and/or choked back at the end of the second quarter, a significant percentage of which is from the Boundary Lake area.

Oil prices averaged $71.76/bbl for the second quarter of 2007 and $67.59/bbl for the year-to-date compared to $70.80/bbl for the second quarter of 2006 and $68.16 for the year-to-date. Gas sold for $7.79/mcf for the second quarter of 2007 and $7.52/mcf compared to $6.87/mcf for second quarter of 2006 and $6.98/mcf for the year-to-date. Natural gas liquids prices were $55.01/bbl for the second quarter of 2007 and $52.66/bbl for the year-to-date compared to $56.56/bl for the second quarter of 2006 and $55.00/bbl for the year-to-date.

Royalties and operating expenses:



Quarter Ended Quarter Ended
June 30, 2007 June 30, 2006
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Royalties $ 134,000 $ 82,000
Royalties/BOE $ 6.18 $ 3.77
Royalty rate 12.6% 8.3%
Operating expenses $ 299,000 $ 156,000
Operating expenses/BOE $ 13.78 $ 7.17
Operating net back/BOE $ 28.89 $ 34.60


Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
Royalties $ 458,000 $ 104,000
Royalties/BOE $ 8.32 $ 4.07
Royalty rate 17.4% 8.8%
Operating expenses $ 550,000 $ 204,000
Operating expenses/BOE $ 9.99 $ 7.98
Operating net back/BOE $ 29.46 $ 34.00


The company was under a royalty holiday for its Maclean's Creek oil production until the end of June. It is now subject to normal royalty rates.



General & administrative ("G&A") expenses

Quarter Ended Quarter Ended
June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
G&A expenses $ 493,000 $ 248,000

G&A/BOE $ 22.72 $ 11.39


Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
G&A expenses $ 980,000 $ 480,000

G&A/BOE $ 17.80 $ 18.78


The components of G&A are as follows:

Quarter Ended Quarter Ended
($000's) June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
Salaries, benefits and consultants 272 198
Other 296 308
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G&A expense, gross 568 506
Overhead recoveries (28) (111)
Capitalized G&A (47) (147)
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G&A expense, net 493 248


Six Months Ended Six Months Ended
($000's) June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
Salaries, benefits and consultants 598 310
Other 531 508
----------------------------------------------------------------------------
G&A expense, gross 1,129 818
Overhead recoveries (67) (191)
Capitalized G&A (82) (147)
----------------------------------------------------------------------------
G&A expense, net 980 480


G&A for the second quarter was consistent with the first quarter. The company currently has all of the employees in place it needs to develop its land base and move the company forward. Going forward, the company should see nominal G&A increases and as such per BOE G&A costs should decline as future production increases.

Liquidity & capital resources

As of June 30, 2007, the company had a net bank indebtedness of $5,072,000 compared to $3,905,000 at December 31, 2006. Working capital deficiency, including bank indebtedness, was $5,004,000 compared to 6,039,459 at December 31, 2006.

As a small exploration oil and gas company, Fair Sky continues to require greater funds than its operations can provide to fully exploit its inventory of opportunities. As well, the company continues to be negatively impacted by the ongoing negotiations over the Boundary Lake area which has kept the company from bringing onto production a significant amount of production. These delays, combined with normal production declines on existing production have restricted the company's financial flexibility. The company is currently in ongoing discussions with its bank regarding the levels of financing that will be available going forward. However, the likely result will be a decline in the available credit facility. As such, the company is actively pursuing divestiture options with respect to some of its properties in order to strengthen the balance sheet and provide the company with greater flexibility going forward. At present, the company intends to limit expenditures to ongoing operations with minimal capital spending until such time as the balance sheet is strengthened. In the current environment of lower natural gas prices, Fair Sky plans to be selective in exploiting its existing land base. Activity on larger area operations such as Moose Jaw will be scaled back until prices of commodities increase. A number of oil opportunities will be emphasized. The extent to which the company can execute on its business plan in second half of fiscal 2007 and continue to operate as a going concern will be dependent on the level of funding that can be raised in the near term.

At June 30, 2007, the company had various tax pools totalling $13.2 million available for use in future years to reduce taxable income. $9 million in tax pools were renounced to shareholders during the first six months as a result of the company's obligations under flow through share issuances.

Commitments

Under the terms of flow-through share agreements entered into in 2006, the company is committed to spend $3.4 million on expenditures qualifying as Canadian exploration expenditures before December 31, 2007. The company had spent approximately $1.1 million on qualifying expenditures by the end of the second quarter and $1.9 million by the date of this MD&A. The company needs to spend approximately $1.5 million more by the end of the year and will require further funding in order to meet the commitment.

Outstanding Shares

As at August 29, 2007, our outstanding shares were 14,983,288.

Financial Instruments and Other Instruments

Fair Sky's financial instruments consist of cash, accounts receivable and accounts payable. Unless otherwise noted, it is management's opinion that Fair Sky is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying value due to their short-term maturity and capacity for prompt liquidation.

Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the CEO and CFO, on a timely basis so that appropriate decisions can be made regarding public disclosure. Management, with the participation of the certifying officers, has evaluated the effectiveness of the design and operation, as of June 30, 2007, of the company's disclosure controls and procedures (as defined by the Canadian Securities Administrators). Based on that evaluation, the certifying officers have concluded that such disclosure controls and procedures are effective and designed to provide reasonable assurance that material information relating to the company and its subsidiaries is made known to them by others within those entities.

Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of our financial reporting and compliance with Canadian generally accepted accounting principles in our financial statements. Management has evaluated the design of internal controls over financial reporting and has concluded that such internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in Canada. In addition, there have been no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Approval

The board of directors of Fair Sky has approved the disclosure contained in this Quarterly MD & A. A copy of this MD & A will be provided to anyone who requests it.

Additional Information

Additional information relating to Fair Sky is on SEDAR at www.sedar.com

ADVISORY: Natural gas volumes have been converted to barrels ("bbl") of oil equivalent ("boe") using six thousand cubic feet ("mcf") of natural gas equal to one boe. This conversion conforms to NI51-101. Use of the term boe may be misleading, particularly if used in isolation. A boe conversion ration of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Certain information in this news release, including management's assessment of future plans and operations, number of locations in drilling inventory and wells to be drilled, timing of drilling and tie-in of wells, productive capacity of the new wells and productive capacity from different wells, costs, timing and other matters, may constitute forward-looking statements under applicable securities laws. Such forward looking statements necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, wells not performing as expected. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could effect Fair Sky's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website at www.sedar.com . The forward-looking statements contained in this news release are made as at the date of this news release and Fair Sky does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

The TSX Venture Exchange Inc. has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

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