Fairborne Energy Ltd.

Fairborne Energy Ltd.

March 09, 2005 06:00 ET

Fairborne Energy Ltd. Announces Financial, Reserve and Operating Results for the Year Ended December 31, 2004


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: FAIRBORNE ENERGY LTD.

TSX SYMBOL: FEL

MARCH 9, 2005 - 06:00 ET

Fairborne Energy Ltd. Announces Financial, Reserve and
Operating Results for the Year Ended December 31, 2004

CALGARY, ALBERTA--(CCNMatthews - March 9, 2005) - Fairborne Energy Ltd.
("Fairborne" or "the Company") (TSX:FEL) is pleased to present the
results of its operations for the year ended December 31, 2004 including
its oil and natural gas reserves as a result of its capital program in
2004.

2004 HIGHLIGHTS

- Oil and natural gas production more than doubled in 2004 to average
8,089 BOE per day from 3,787 BOE per day in 2003 (an increase of 40% on
a per share basis).

- A 109 well drilling program achieved a 94% success rate and
contributed to significant gains in production and reserves.

- Total proved plus probable reserves, after production and revisions,
increased 179% over the previous year from 13.8 MMBOE to 38.6 MMBOE (an
increase of 83% on a per share basis).

- The Company added these reserves at a finding and development cost of
$7.12 per BOE without future capital and $9.73 per BOE including future
capital and at a finding, development and acquisition cost of $10.98 per
BOE without future capital and $12.76 per BOE including future capital.

- The Company replaced its 2004 production by 836%.

- Select property and corporate acquisitions strengthened the Company's
position in its core areas of operations resulting in increased
production, cash flow and an expanded inventory of exploration and
development opportunities.

- Acquisition of properties in West Pembina effective March 31, 2004
strengthened Fairborne's position as a natural gas producer (natural gas
is currently 75% of production).

- Two major gas development projects (Columbia/Harlech and Clive coal
bed methane) began in 2004, with current combined production of 13 MMcf
per day.

- Corporate acquisition of Case Resources Inc., financed through a share
for share exchange, added properties directly contiguous to the
Company's existing core areas in central Alberta and a substantial
increase in the Company's coal bed methane acreage position.

- Equity financings during 2004 raised a total of $97.1 million,
including $24.7 million from the issue of flow-through shares.

- Funds generated from operations per share increased 42% from $1.16 per
share in 2003 to $1.65 per share in 2004.

- The trading price of Fairborne common shares on the Toronto Stock
Exchange closed at $12.05 on December 31, 2004 (2003 - $5.50), trading
as high as $13.20 (2003 - $6.07) during the year. In addition, Fairborne
common shares were added to the S&P/TSX Composite Index during 2004.

2005 UPDATE

- Current production is approximately 12,000 BOE per day, an increase of
48% over 2004 average production.

- A total of 13 wells have been drilled to date in 2005.

- The Company currently has 42 coal bed methane wells producing 6.3 MMcf
per day.

- Recent production additions are the result of exploration discoveries
in the fourth quarter of 2004 and include wells at Columbia/Harlech,
Brazeau and the Peace River Arch.

- Activity will continue at a number of locations through breakup
including deep exploration tests at Pedley (5,100m Leduc target),
Brazeau (3,000m Mannville target), Wild River (3,800m Nisku target) and
Saddle Hills (3,600m Wabamun target).

- An expansion of the Columbia/Harlech complex has been completed and is
operating at approximately 7.0 MMcf per day, net to Fairborne.

- During May 2005, Fairborne's production will be affected by scheduled
maintenance projects at two facilities, resulting in May production
being reduced by approximately 4,500 BOE per day for 18 to 21 days.

RESERVES

The Company's independent engineering evaluations, effective December
31, 2004, were prepared by the independent engineering firms of Gilbert
Laustsen Jung Associates Ltd. ("GLJ") and Sproule Associates Ltd.
("Sproule") with respect to the Company's coal bed methane reserves
only, in accordance with the definitions set out under National
Instrument 51-101 Standards of Disclosure for Oil and Gas Activities
("NI 51-101"). One hundred percent of the Company's reserves were
evaluated by independent engineering firms.

The reserve highlights are;

- Gross proved reserves at December 31, 2004 increased 152 percent to
25.3 million BOE compared to 10.1 million BOE at December 31, 2003 and
gross proved plus probable reserves at December 31, 2004 increased 179
percent to 38.6 million BOE compared to 13.8 million BOE at December 31,
2003.

- Proved plus probable finding, development and acquisition costs were
$10.98 per BOE ($16.69 per BOE on a proved basis). Including future
development costs, finding, development and acquisition costs were
$12.76 per BOE and $18.42 per BOE on a proved plus probable and proved
basis, respectively.



FORECAST PRICES AND COSTS

Summary of Oil and Gas Reserves - Gross (1) and Net (2) Reserves

------------------------------------------------------------------------
Light and Natural
Medium Heavy Gas
Crude Oil Oil Liquids
------------------------------------------------------------------------
Gross Net Gross Net Gross Net
(Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl)
------------------------------------------------------------------------
Proved reserves
Developed
producing 4,332 3,652 94 83 940 651
Developed
non-producing 523 465 295 264 389 278
Undeveloped 1,089 906 44 34 291 204
------------------------------------------------------------------------
Total Proved 5,944 5,022 433 381 1,621 1,133
Probable 2,308 1,978 321 282 772 540
------------------------------------------------------------------------
Total Proved
plus Probable 8,252 7,001 754 663 2,393 1,673
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Natural 2004
Gas BOE
------------------------------------------------------------------------
Gross Net Gross Net
(Bcf) (Bcf) (MBOE) (MBOE)
------------------------------------------------------------------------
Proved reserves
Developed producing 62.6 48.3 15,804 12,442
Developed
non-producing 17.4 13.7 4,099 3,286
Undeveloped 24.0 18.9 5,432 4,288
------------------------------------------------------------------------
Total Proved 104.0 80.9 25,335 20,016
Probable 58.9 47.4 13,223 10,697
------------------------------------------------------------------------
Total Proved
plus Probable 163.0 128.3 38,558 30,713
------------------------------------------------------------------------
------------------------------------------------------------------------

NOTE: May not add due to rounding.
(1) "Gross" reserves means the total working interest (operating and
non-operating) share before deduction of royalties payable to
others and without including any royalty interest of Fairborne.
(2) "Net" reserves means the total working interest (operating and
non-operating) share after deduction of royalty obligations plus
Fairborne's royalty interests in reserves.


Net Present Value of Reserves, before income taxes
------------------------------------------------------------------------
December 31, 2004
(1),(2),(3) Discounted at
($thousands) Undiscounted 5% 10% 15% 20%
------------------------------------------------------------------------
Proved reserves
Developed producing 338,573 288,974 254,584 228,968 209,003
Developed non-producing 79,359 64,682 54,463 46,991 41,314
Undeveloped 81,621 63,713 50,788 41,111 33,647
------------------------------------------------------------------------
Total Proved 499,553 417,369 359,835 317,070 283,964
Probable 260,409 174,350 126,154 96,107 75,969
------------------------------------------------------------------------
Total Proved
plus Probable 759,962 591,719 485,989 413,177 359,933
------------------------------------------------------------------------
------------------------------------------------------------------------

NOTE: May not add due to rounding.
(1) Utilizing GLJ January 1, 2005 price forecast
(2) As required by NI 51-101, undiscounted well abandonment costs of
$8.4 million for total proved reserves and $10.5 million for
total proved plus probable reserves are included in the Net Present
Value determination
(3) Prior to provision of income taxes, interest, debt service charges
and general and administrative expenses. It should not be assumed
that the undiscounted and discounted future net revenues estimated
by GLJ represent the fair market value of the reserves.


PRICING ASSUMPTIONS

The January 1, 2005 pricing forecasts presented below have been prepared
by GLJ. These prices have been utilized in determining the preceding
reserves and cash flow forecasts.



------------------------------------------------------------------------
Crude Oil Natural Gas Inflation Rate
------------------------------------------------------------------------
Edmonton
WTI Oil Light AECO
Year ($U.S./bbl) ($Cdn/bbl) ($Cdn/MMbtu) (%/year)
------------------------------------------------------------------------
2005 42.00 50.25 6.60 2.0
2006 40.00 47.75 6.35 2.0
2007 38.00 45.50 6.15 2.0
2008 36.00 43.25 6.00 2.0
2009 34.00 40.75 6.00 2.0
2010 33.00 39.50 6.00 2.0
2011 33.00 39.50 6.00 2.0
2012 33.00 39.50 6.00 2.0
2013 33.50 40.00 6.10 2.0
2014 34.00 40.75 6.20 2.0
2015 34.50 41.25 6.30 2.0
------------------------------------------------------------------------


CONSTANT PRICES AND COSTS

Net Present Value of Reserves, before income taxes
------------------------------------------------------------------------
December 31, 2004
(1),(2),(3) Discounted at
($thousands) Undiscounted 5% 10% 15% 20%
------------------------------------------------------------------------
Proved reserves
Developed producing 383,591 321,349 279,092 248,195 224,489
Developed non-producing 92,680 74,382 61,902 52,912 46,159
Undeveloped 97,315 75,737 60,339 48,913 40,165
------------------------------------------------------------------------
Total Proved 573,586 471,468 401,333 350,020 310,813
Probable 305,797 203,498 146,808 111,630 88,115
------------------------------------------------------------------------
Total Proved
plus Probable 879,383 674,966 548,141 461,650 398,928
------------------------------------------------------------------------
------------------------------------------------------------------------

NOTE: May not add due to rounding.

(1) Price assumptions: CDN$46.54/bbl Crude oil Edmonton light and
CDN$6.79/MMbtu AECO "C".

(2) As required by NI 51-101, undiscounted well abandonment costs of
$8.4 million for total proved reserves and $10.5 million for total
proved plus probable reserves are included in the Net Present
Value determination

(3) Prior to provision of income taxes, interest, debt service charges
and general and administrative expenses. It should not be assumed
that the undiscounted and discounted future net revenues estimated
by GLJ represent the fair market value of the reserves.


RESERVE RECONCILIATION

Reconciliation of Company Gross Reserves (1),(2) by Principal Product
Type

FORECAST PRICES AND COSTS
------------------------------------------------------------------------
Crude Oil & NGLs Natural Gas Total
(Mbbls) (Bcf) (MBOE)
------------------------------------------------------------------------
Total Total Total
Proved Proved Proved
plus plus plus
Proved Probable Proved Probable Proved Probable
------------------------------------------------------------------------
Opening,
January 1, 2004 4,798 6,003 31.7 46.9 10,073 13,811
Extensions 709 1,292 36.7 68.2 6,826 12,653
Improved recovery 35 40 - - 35 40
Technical revisions (139) (255) 2.1 1.7 211 20
Discoveries 341 410 27.5 35.1 4,924 6,260
Acquisition 3,941 5,761 20.0 26.0 7,267 10,114
Disposition (625) (790) (2.5) (3.5) (1,041) (1,380)
Economic factors - - - - - -
Production (1,062) (1,062) (11.4) (11.4) (2,960) (2,960)
----------------------------------------------------
Closing,
December 31, 2004 7,998 11,399 104.1 163.0 25,335 38,558
------------------------------------------------------------------------
------------------------------------------------------------------------

NOTE: May not add due to rounding.
(1) "Gross" reserves means the total working interest (operating and
non-operating) share before deduction of royalties payable to
others and without including any royalty interest of Fairborne.
(2) The Company's Net (after royalty) opening balance as of January 1,
2004 was 8,231 MBOE Proved and 1,315 MBOE Proved plus Probable


FINDING AND DEVELOPMENT COSTS (F&D)

AND FINDING, DEVELOPMENT AND NET ACQUISITION COSTS (FD&A)

NI 51-101 specifies how finding and development ("F&D") costs should be
calculated if they are reported. Essentially NI 51-101 requires that the
exploration and development costs incurred in the year along with the
change in estimated future development costs be aggregated and then
divided by the applicable reserve additions. The calculation
specifically excludes the effects of acquisitions and dispositions on
both reserves and costs. By excluding the effects of acquisitions and
dispositions Fairborne believes that the provisions of NI 51-101 do not
fully reflect Fairborne's ongoing reserve replacement costs. Since
acquisitions can have a significant impact on Fairborne's annual reserve
replacement costs, excluding these amounts could result in an inaccurate
portrayal of Fairborne's cost structure. Accordingly, Fairborne will
also report finding, development and acquisition ("F,D&A") costs that
will incorporate all acquisitions net of any dispositions during the
year.



------------------------------------------------------------------------
Total Proved
Proved (2) plus Probable (2)
------------------------------------------------------------------------
2004 CAPITAL COSTS ($thousands)
Exploration and development 135,174 135,174
Acquisitions, net of dispositions 168,988 168,988
--------------------------------
304,162 304,162
Change in future development costs (1) 31,498 49,488
--------------------------------
335,660 353,650
--------------------------------
2004 RESERVE ADDITIONS (2) (MBOE)
Exploration and development 11,996 18,973
Acquisitions, net of dispositions 6,226 8,734
--------------------------------
18,222 27,707
--------------------------------
FINDING & DEVELOPMENT COSTS ($/BOE)
2004 F&D costs 13.89 9.73
2004 FD&A costs 18.42 12.76
2004 F&D costs, excluding future capital 11.27 7.12
2004 FD&A costs, excluding future capital 16.69 10.98
--------------------------------
--------------------------------

(1) The aggregate of the exploration and development costs incurred in
the most recent financial year and the change during that year in
estimated future development costs generally will not reflect total
finding and development costs related to reserve additions for that
year.

(2) Based on Gross reserves additions meaning the total working
interest (operating and non-operating) share before deduction of
royalties payable to others and without including any royalty
interest of Fairborne.


RESERVE LIFE INDEX

The Company's reserve life index using annualized fourth quarter
production is 6.5 years (2003 - 5.8 years) for proved BOE reserves and
9.9 years (2003 - 7.9 years) for proved plus probable BOE reserves.
Reserve life calculated using annualized fourth quarter production may
be more reflective of reserve life due to the level of new production
added during the year.



------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Using Using
Annualized Using Annualized Using
Q4 Average Q4 Average
Production Production Production Production
--------------------------------------------
Production (BOE per day) 10,633 8,089 4,799 3,787
Proved reserves (1) (MBOE) 25,335 25,335 10,073 10,073
Proved reserve life index
(years) 6.5 8.6 5.8 7.3
Proved plus probable reserves
(1) (MBOE) 38,558 38,558 13,811 13,811
Proved plus probable reserve
life index (years) 9.9 13.1 7.9 10.0
--------------------------------------------
--------------------------------------------

(1) Based on Gross reserves meaning the total working interest
(operating and non-operating) share before deduction of royalties
payable to others and without including any royalty interest of
Fairborne.


Reserve Replacement

The Company's 2004 capital investment program replaced production by a
factor of 6.2 times on a proved basis and 9.4 times on a proved plus
probable basis.



------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Production (MBOE) 2,960 1,382
Proved reserves additions (1) (MBOE) 18,222 6,075
Proved reserve replacement ratio 6.2 4.4
Proved plus probable reserves additions (1) (MBOE) 27,708 8,972
Proved plus probable reserve replacement ratio 9.4 6.5
----------------------
----------------------

(1) Based on Gross reserves meaning the total working interest
(operating and non-operating) share before deduction of royalties
payable to others and without including any royalty interest of
Fairborne.


Recycle Ratio

The recycle ratio is a measure for evaluating the effectiveness of a
company's re-investment program. The ratio measures the efficiency of
capital investment. It accomplishes this by comparing the operating
netback per barrel of oil equivalent to that year's reserve finding and
development costs.



------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Operating netback ($/BOE) 25.51 23.93
Proved FD&A costs,
including future development ($/BOE) 18.42 14.46
Proved recycle ratio 1.4 1.7
Proved plus probable FD&A costs,
including future development ($/BOE) 12.76 9.90
Proved plus probable recycle ratio 2.0 2.4
---------------------------
---------------------------


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

The following Management Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") was prepared at, and is dated, March
8, 2005. This MD&A is provided by the management of Fairborne Energy
Ltd. ("Fairborne" or the "Company") to review 2004 activities and
results as compared to the previous year, and should be read in
conjunction with the audited consolidated financial statements including
notes for the years ended December 31, 2004 and 2003. Additional
information relating to Fairborne, including Fairborne's annual
information form, is available on SEDAR at www.sedar.com.

Fairborne was incorporated as a private company and commenced active
operations in June, 2002. In 2003, Fairborne became a publicly traded
company. The Company maintains its head office in Calgary and is engaged
in the business of exploring for, developing, acquiring and producing
crude oil and natural gas in Western Canada. Fairborne follows a
strategy of balancing risk and reward by focusing on opportunities by
geographic area and prospect type. Within these selected areas, the
Company develops a portfolio of exploration and development prospects in
conjunction with an active acquisition strategy.

Forward Looking Statements: This MD&A contains forward-looking
statements. Forward-looking statements are based on current expectations
that involve a number of risks and uncertainties which could cause
events or results to differ materially from those reflected in the MD&A.
Forward-looking statements are based on the estimates and opinions of
Fairborne's management at the time the statements were made. Fairborne
assumes no obligation to update forward-looking statements should
circumstances or management's estimates change.

Non-GAAP Terms: This document contains the terms "funds generated from
operations" and "netbacks" which are non-GAAP terms. The Company uses
these measures to help evaluate its performance. The Company considers
corporate netbacks a key measure as it demonstrates its profitability
relative to current commodity prices. The Company considers funds
generated from operations a key measure as it demonstrates the Company's
ability to generate funds necessary to repay debt and to fund future
growth through capital investment. Funds generated from operations
should not be considered as an alternative to, or more meaningful than,
cash flow from operating activities as determined in accordance with
Canadian GAAP as an indicator of Fairborne's performance. Fairborne's
determination of funds generated from operations may not be comparable
to that reported by other companies. The reconciliation between net
income and funds generated from operations can be found in the statement
of cash flows in the financial statements. Fairborne also presents funds
generated from operations per share whereby per share amounts are
calculated using weighted average shares outstanding consistent with the
calculation of income per share.

BOE Conversions: Barrel of oil equivalent ("BOE") amounts may be
misleading, particularly if used in isolation. A BOE conversion ratio
has been calculated using a conversion rate of six thousand cubic feet
of natural gas to one barrel and is based on an energy equivalent
conversion method application at the burner tip and does not necessarily
represent an economic value equivalent at the wellhead.

HIGHLIGHTS

- Production more than doubled in 2004 to an average of 8,089 BOE per
day from 3,787 BOE per day in 2003.

- A successful drilling program including 109 wells contributed to gains
in production and reserves.

- Select property and corporate acquisitions strengthened the Company's
position in its core areas of operations bringing increased production
and funds generated from operations and an expanded inventory of
exploration and development opportunities.

- Acquisition of properties in West Pembina effective March 31, 2004
strengthened Fairborne's position as a natural gas producer.

- Corporate acquisition of Case Resources Inc. ("Case"), financed
through a share for share exchange, added properties contiguous to the
Company's existing core areas in central Alberta.

- Equity financings during 2004 raised a total of $97.1 million,
including $24.7 million from the issue of flow-through shares.

- Funds generated from operations per share increased 42% from $1.16 per
share in 2003 to $1.65 per share in 2004.

- Share price closed at $12.05 on December 31, 2004 (2003 - $5.50),
trading as high as $13.20 (2003 - $6.07) during the year.



Financial Highlights ($ thousands, except per share amounts)
-------------------------------------------------------------------
2004 2003(1) % change
------------------------------------------------------------------------
Petroleum and natural gas sales, before
royalties 125,604 51,159 146%
Funds generated from operations 66,399 29,151 128%
Per share - basic $ 1.65 $ 1.16 42%
Per share - diluted $ 1.54 $ 1.10 40%
Net income 13,702 10,322 33%
Per share - basic $ 0.34 $ 0.41 (17%)
Per share - diluted $ 0.32 $ 0.39 (18%)
Exploration and development expenditures 135,174 34,496 292%
Acquisitions, net of dispositions 168,988 45,883 268%
Working capital deficit, including bank
debt 98,058 9,371 946%
------------------------------
------------------------------
(1) Restated due to change in accounting policy with respect to Asset
Retirement Obligations

Operations Highlights (Units as noted)
------------------------------------------------------------------------
2004 2003(1) % change
------------------------------------------------------------------------
Average production
Natural gas (Mcf per day) 31,116 10,640 192%
Crude oil (bbls per day) 2,593 1,850 40%
Natural gas liquids (bbls per day) 309 164 88%
Total (BOE per day) 8,089 3,787 114%
Average sales price
Natural gas ($ per Mcf) 6.68 6.24 7%
Crude oil ($ per bbl) 46.40 35.70 30%
Natural gas liquids ($ per bbl) 44.23 35.00 26%
Total ($ per BOE) 42.26 36.54 16%
Netback ($ per BOE)
Petroleum and natural gas sales 42.42 37.01 15%
Royalties 8.96 6.83 31%
Operating expenses 7.95 6.25 27%
Operating netback 25.51 23.93 7%
------------------------------
------------------------------
(1) Restated due to change in accounting policy with respect to Asset
Retirement Obligations

SELECTED ANNUAL INFORMATION
------------------------------------------------------------------------
7 Months
ended
December 31,
($ thousands, except per share amounts) 2004 2003(1) 2002(1)
------------------------------------------------------------------------
Petroleum and natural gas sales, before
royalties 125,604 51,159 16,376
Funds generated from operations 66,399 29,151 8,774
Per share - basic $ 1.65 $ 1.16 $ 0.44
Per share - diluted $ 1.54 $ 1.10 $ 0.44
Net income 13,702 10,322 2,508
Per share - basic $ 0.34 $ 0.41 $ 0.13
Per share - diluted $ 0.32 $ 0.39 $ 0.13
Total assets 434,830 139,925 51,544
Working capital deficit, including bank
debt 98,058 9,371 (2,130)
Long term financial liabilities
Equipment leases - - 2,573
Asset retirement obligations 13,196 6,165 4,135
Future income taxes 35,860 15,913 1,022
Shareholders' Equity 247,777 86,201 36,945
------------------------------
------------------------------
(1) Restated due to change in accounting policy with respect to Asset
Retirement Obligations


Fairborne was incorporated as a private company and commenced active
operations in June, 2002. In 2003, Fairborne became a publicly traded
company and completed a merger with Pivotal Energy Ltd ("Pivotal"),
increasing production by over 50 per cent. Fairborne also spent $34.5
million in 2003 on exploration and development activities which included
drilling 30 wells. In 2004, Fairborne drilled 109 wells as part of an
extensive exploration and development program which resulted in average
production doubling from the previous year. Also in 2004, Fairborne
successfully completed a significant property acquisition in West
Pembina and a corporate acquisition of Case. The Company has financed
its acquisition, exploration and development activities through a
combination of funds generated from operations, bank debt and common
share equity financings which included the issue of flow-through shares.
The net result of Fairborne's balanced acquisition, exploration and
development strategy has been two consecutive years of growth in
production, revenue, funds generated from operations and net income.

QUARTERLY FINANCIAL INFORMATION

The following is a summary of selected financial information for the
quarterly periods indicated:



2004
------------------------------------------------------------------------
Q4 Q3 Q2 Q1
------------------------------------------------------------------------
Financial ($ thousands, except
per share amounts)
Petroleum and natural gas sales,
before royalties 41,976 35,391 29,787 18,450
Funds generated
from operations 21,569 19,784 15,083 9,963
Per share - basic $ 0.47 $ 0.48 $ 0.39 $ 0.31
Per share - diluted $ 0.46 $ 0.44 $ 0.36 $ 0.28
Net income 4,158 3,463 2,786 3,295
Per share - basic $ 0.09 $ 0.08 $ 0.07 $ 0.10
Per share - diluted $ 0.08 $ 0.08 $ 0.07 $ 0.09
Total assets 434,830 379,450 272,115 266,338
Working capital deficit,
including bank debt 98,058 95,091 84,785 90,870
-----------------------------------
-----------------------------------
Operations
Average production
Natural gas (Mcf per day) 43,480 32,569 30,410 17,853
Crude oil (bbls per day) 2,892 3,038 2,492 1,956
Natural gas liquids (bbls per day) 495 348 241 139
Total (BOE per day) 10,633 8,814 7,801 5,071
-----------------------------------
-----------------------------------

2003 (restated)
------------------------------------------------------------------------
Q4 Q3 Q2 Q1
------------------------------------------------------------------------
Financial ($ thousands,
except per share amounts)
Petroleum and natural gas sales,
before royalties 15,523 15,779 10,254 9,603
Funds generated from operations 8,409 9,056 5,985 5,701
Per share - basic $ 0.27 $ 0.30 $ 0.30 $ 0.29
Per share - diluted $ 0.23 $ 0.28 $ 0.30 $ 0.29
Net income 2,308 3,069 2,723 2,222
Per share - basic $ 0.06 $ 0.10 $ 0.14 $ 0.11
Per share - diluted $ 0.06 $ 0.09 $ 0.13 $ 0.11
Total assets 139,925 121,124 60,629 55,769
Working capital deficit,
including bank debt 9,371 17,463 Nil Nil
-----------------------------------
-----------------------------------
Operations
Average production
Natural gas (Mcf per day) 14,835 14,265 7,283 5,596
Crude oil (bbls per day) 2,144 2,291 1,542 1,497
Natural gas liquids (bbls per day) 182 147 167 162
Total (BOE per day) 4,799 4,815 2,922 2,592
-----------------------------------
-----------------------------------


FOURTH QUARTER 2004 RESULTS

Having assimilated the West Pembina property acquisition from the first
quarter and the corporate acquisition of Case in the third quarter,
Fairborne was able to focus on exploration, development and operating
activities in the fourth quarter of 2004. During the fourth quarter the
Company spent $59.1 million on exploration and development projects
which included drilling 31 (26.1 net) wells. The capital program was
financed through a combination of funds generated from operations,
drawings on credit facilities and proceeds from equity issues.

Operationally, the Company brought on new production from both the
Columbia/Harlech property and the coal bed methane development at Clive.
With these new properties on-stream, Fairborne increased its average
production to 10,633 BOE per day in the fourth quarter from 8,814 BOE
per day in the third quarter of 2004. Consistent with increased
production, Fairborne recorded gains in total revenue (Q4 2004 - $42
million), funds generated from operations (Q4 2004 - $21.6 million) and
net income (Q4 2004 - $4.2 million) in the fourth quarter of 2004 as
compared to the immediately preceding third quarter and also compared to
the fourth quarter of 2003.

In December 2004, the Company completed an equity financing including
2.7 million common shares issued at $11.50 per share and 322,000
flow-through shares issued at $14.50 per share for gross proceeds of
$36.0 million. As a result of the flow-through component of the December
2004 financing, the Company has a commitment to spend $4.7 million on
qualifying Canadian exploration expenditures prior to December 31, 2005;
all of which have been renounced to subscribers effective December 31,
2004.

Also in December 2004, the Company increased its available credit
facility to $125.0 million from $105 million at the end of the third
quarter 2004. After applying the proceeds of the equity financing, the
Company reduced its bank debt to $77.2 million at December 31, 2004
leaving $47.8 million of available bank debt.

2004 FINANCIAL RESULTS



Production and Prices
------------------------------------------------------------------------
(units as noted) 2004 2003(1) % change
------------------------------------------------------------------------
Production
Natural gas (Mcf per day) 31,116 10,640 192%
Oil and NGLs (bbls per day) 2,902 2,014 44%
------------------------------
Total (BOE per day) 8,089 3,787 114%
------------------------------
Prices
Natural gas ($ per Mcf) 6.68 6.24 7%
Oil and NGLs ($ per bbl) 46.17 35.86 29%
------------------------------
Total ($ per BOE) 42.26 36.54 16%
------------------------------
------------------------------


Production

Fairborne's average 2004 production of 8,089 BOE per day more than
doubled 2003 production of 3,787 BOE per day. Select acquisitions and a
focused drilling program strengthened the Company's position as a
natural gas producer with natural gas representing 64% of the Company's
2004 production compared to 47% in 2003.

Natural gas production averaged 31.1 MMcf per day in 2004, almost three
times the 2003 average of 10.6 MMcf per day. Increases in natural gas
production were a direct result of successful exploration and
development drilling on the Company's Rycroft, Basset Lake and Wild
River areas as well as the acquisition of West Pembina properties.
Production from West Pembina is included in the Company's results
beginning April 1, 2004. Production from Rycroft and Wild River occurred
late in the third quarter of 2004 with the start-up of an expanded
Rycroft gas processing facility and completion of a new pipeline at Wild
River. In the fourth quarter the Company brought on new production from
its Columbia/Harlech property as well as coal bed methane wells in the
Clive area. Natural gas production in 2005 is expected to increase
further with a full year of production from all areas added in 2004 as
well as new 2005 drilling including an extensive coal bed methane
development program.

Crude oil and NGL production for 2004 averaged 2,902 bbls per day,
representing a 44 per cent increase from the 2003 average of 2,014 bbls
per day. The increase in oil production is primarily attributable to the
acquisition of Case on July 27, 2004 with some incremental oil
production from West Pembina. Case's production was heavily weighted
towards oil, with the majority of production coming from the Haynes
property, located adjacent to the Company's Clive and Wood River
properties in central Alberta. With the Company's increased emphasis on
natural gas, crude oil production is expected to remain flat, but
concurrent with increased natural gas production, the Company expects to
further increase NGL production in 2005 with full year production from
properties added in 2004 and new 2005 drilling prospects.

Fairborne expects to record higher average production levels in 2005
compared to 2004. However, Fairborne's production will be affected by
scheduled maintenance projects at two facilities which will result in
production being reduced by approximately 4,500 BOE per day for 18-21
days in May 2005.

Commodity Prices & Hedging Activities

Fairborne recorded a crude oil and NGL price of CDN$46.17 per bbl in
2004 (2003 - CDN$35.86), which reflected strengthened world oil prices.
Fairborne realized a natural gas price of $6.68 per Mcf in 2004 compared
to $6.24 per Mcf in 2003.

Fairborne's realized prices reflect the impact of fixed price contracts
utilized by the Company as part of its hedging program. When Fairborne
hedges oil and gas prices, the intention is to provide certainty to cash
flow by fixing the price on a portion of the production portfolio.
During 2004, Fairborne hedged an average of 388 barrels per day (13%) of
crude oil production, which reduced the crude oil price received by
$2.52 per bbl. Natural gas hedges in 2004 applied to an average of 1.1
MMcf per day (3.5%) of natural gas production, which increased the
natural gas price received by $0.01 per Mcf. Comparably, the Company did
not hedge any of its production in 2003.

Commodity prices for both crude oil and natural gas were generally
strong throughout 2004 and the outlook for future prices remains high.
Two fixed price sales contracts are in place for 2005 including a crude
oil contract for 1,000 bbls per day from January 1, 2005 to March 31,
2005 at a price of WTI US$34.70. A natural gas contract for 10,000 GJ
per day is also outstanding from February 1, 2005 to March 31, 2005 with
a floor price of AECO CDN$6.50 and a settlement price of CDN$6.50 plus
50% of the AECO C Monthly Index over $6.50.

In addition to fixed price commodity contracts, Fairborne also had a
foreign exchange hedge in place from January 27, 2004 to June 30, 2004
on US$1.6 million at a rate of Cdn $1.323 to U.S. $1.00 (U.S. $0.7559 to
Cdn $1.00). From July 1 to September 30, 2004, the Company hedged U.S.
$1.0 million of foreign exchange exposure at a rate of Cdn $1.3468 to
U.S. $1.00 (U.S. $0.7425 to Cdn $1.00). The Company recognized a nominal
gain from the exchange hedges, with no additional exchange hedges
outstanding for 2005.



Petroleum and Natural Gas Revenue
------------------------------------------------------------------------
2004 2003 % change
------------------------------------------------------------------------
Revenue ($ thousands)
Natural gas 76,073 26,363 189%
Oil and NGLs 49,048 24,413 101%
Other income 483 383 26%
------------------------------
Total 125,604 51,159 146%
------------------------------
------------------------------
Revenue per BOE $ 42.42 $ 37.01 15%
------------------------------
------------------------------


Increases in production levels and commodity prices resulted in a
substantial increase in revenues from both crude oil and natural gas.
Total revenues of $125.6 million in 2004 were 146% higher than the 2003
level of $51.1 million, primarily as a result of increased production.



Royalties
------------------------------------------------------------------------
(units as noted) 2004 2003 % change
------------------------------------------------------------------------
Royalties ($ thousands)
Crown 20,567 6,235 230%
Freehold and overriding 5,959 3,201 86%
------------------------------
Total 26,526 9,436 181%
------------------------------
------------------------------
Royalty Rates
Crown 16.4% 12.2% 34.4%
Freehold and overriding 4.7% 6.3% (25.4%)
------------------------------
Total 21.1% 18.4% 14.7%
------------------------------
------------------------------
Royalties per BOE $ 8.96 $ 6.83 31.2%
------------------------------
------------------------------


The Company recorded $26.5 million in royalties in 2004 (2003 - $9.4
million), representing a royalty rate of 21.1% (2003 - 18.4%).
Fairborne's average royalty rate began to increase in the latter part of
2003 with further increases throughout 2004 as a result of new property
acquisitions. Each of the new properties acquired by Fairborne including
Pivotal (July 2003), West Pembina (March 2004) and Case (July 2004),
have royalty rates in excess of the rates associated with Fairborne's
initial properties which formed the Company's revenue base until July
2003.

Fairborne's 2004 crown royalty rate also reflects a deep well royalty
holiday on the Company's new gas well at Wild River, which is expected
to continue through the first quarter of 2005. Based on the Company's
current production profile, the combined effective royalty rate for 2005
is expected to increase slightly from 2004 to average between 21% and
23%.



Production Expenses
------------------------------------------------------------------------
2004 2003 % change
------------------------------------------------------------------------
Operating expenses ($ thousands)
Natural gas 16,485 4,116 301%
Crude oil and NGLs 7,071 4,520 56%
------------------------------
Total 23,556 8,636 173%
------------------------------
------------------------------
Operating expenses per BOE $ 7.95 $ 6.25 27%
------------------------------
------------------------------


The addition of new properties at West Pembina, Basset Lake and Wild
River along with general increases in industry service related charges
have contributed to an increase in unit operating costs from $6.25 per
BOE in 2003 to $7.95 per BOE in 2004. Operating costs in West Pembina at
the time of acquisition were significantly higher than the Company's
core producing properties due primarily to the sour nature of the
production. Basset Lake, which commenced production in 2004, is a
winter-access only area and the remote nature of the operations results
in higher transportation and field operating costs. At Wild River, the
existence of elemental sulphur deposits require on-going maintenance
resulting in scheduled downtime and high maintenance costs.

As operator, Fairborne continually evaluates the operating netbacks on
its core properties and works to achieve operating efficiencies to
reduce operating costs. Since taking over as operator of the West
Pembina properties in May 2004, the Company has been working to optimize
field operations and reduce operating costs by increasing facility
on-line time, optimizing liquids handling and increasing overall plant
throughput with the addition of the Columbia/Harlech production. At
Basset Lake, the Company is converting the operation from a fly-in
facility to camp based operations. At Wild River, the installation of a
down-hole injection string scheduled for May 2005, along with additional
surface facilities will be a more cost effective treatment for the
sulphur deposition issue resulting in substantially less downtime. By
making these operational improvements, Fairborne expects to reduce
operating costs in 2005 to average between $7.00 and $7.50 per BOE.



Operating Netbacks
------------------------------------------------------------------------
($ per BOE) 2004 2003 % change
------------------------------------------------------------------------
Revenue 42.42 37.01 15%
Royalties 8.96 6.83 31%
Operating costs 7.95 6.25 27%
------------------------------
Operating netback 25.51 23.93 7%
------------------------------
------------------------------


Despite increased unit operating costs and higher royalty rates,
stronger commodity prices resulted in an increase in Fairborne's
operating netback of $25.51 per BOE in 2004 compared to $23.93 per BOE
in 2003.

General and Administrative Expenses

The substantial growth in Fairborne's production and asset base combined
with the active acquisition, exploration and development programs
undertaken by the Company has led to an increased need for staff, office
space and support services. General and administrative expenses
(excluding non-cash compensation expense) of $5.9 million in 2004 (2003
- $3.2 million) reflects the Company's growth. On a BOE basis,
Fairborne's general and administrative costs have been reduced from
$2.32 per BOE in 2003 to $2.01 per BOE in 2004. Also included in general
and administrative costs is $873,000 (2003 - $154,000) in non-cash stock
based compensation expense recorded with the issue of stock options
during the year. Fairborne expects to see a further increase in total
general and administrative expenses in 2005 with continued growth in
operations and an extensive capital expenditure program. However, with
anticipated increases in production levels, on a BOE basis, general and
administrative expenses for 2005 should decrease.

Interest Expense

Prior to the acquisition of Pivotal in July 2003, Fairborne did not have
bank debt. The Pivotal acquisition and subsequent corporate and property
acquisitions have been financed through a combination of debt and
equity. As such, interest expense increased in 2004 to $2.5 million from
$0.5 million in 2003. At December 31, 2004, the Company had $125 million
of available operating credit facilities and had drawn $77.2 million
under the facilities. The Company will continue to use a combination of
funds generated from operations, bank debt and equity financing to fund
its 2005 capital program as well as to pursue future acquisition
opportunities.

Depletion, Depreciation and Accretion

Fairborne recorded $41.9 million of depletion and depreciation expense
in 2004 (2003 - $12.8 million), representing a rate of $14.16 per BOE
(2003 - $8.99 per BOE). The increase in depletion expense from 2003 is a
result of increased production levels and increased depletion rates. The
increase in BOE rates during 2004 is primarily attributable to the
acquisition of West Pembina properties and the acquisition of Case.

Acquisitions completed in 2004 also resulted in an increased liability
for asset retirement costs and associated accretion expense. The Company
estimates its total undiscounted future liability for asset retirement
obligations to be $44.0 million, the present value of which is $13.2
million at December 31, 2004. Accretion of asset retirement obligations
in 2004 was $918,000 (2003 - $558,000).

Taxes

Fairborne's effective tax rate for 2004 was 41.3% (2003 - 34.9%), the
majority of which was future income taxes. Based on expected capital
expenditures and revenues for 2005, the Company does not anticipate
paying cash income taxes other than capital taxes in 2005.

Funds Generated from Operations and Net Income



Funds Generated from Operations and Net Income
------------------------------------------------------------------------
($ thousands except per share amounts) 2004 2003 % change
------------------------------------------------------------------------
Funds generated from operations 66,399 29,151 128%
Per share - basic $ 1.65 $ 1.16 42%
Per share - diluted $ 1.54 $ 1.10 40%
Net income 13,702 10,322 33%
Per share - basic $ 0.34 $ 0.41 (17%)
Per share - diluted $ 0.32 $ 0.39 (18%)
------------------------------
------------------------------


Strong commodity prices and increased production levels contributed to
the increase in funds generated from operations to $66.4 million ($1.65
per share) in 2004. Higher depletion, depreciation and future income tax
charges impacted net income at $13.7 million ($0.34 per share) for the
year.

Unit Analysis



------------------------------------------------------------------------
Year ended December 31 2003 $/BOE
($ thousands except per unit amounts) 2004 $/BOE (restated) (restated)
------------------------------------------------------------------------
Production revenue 125,604 42.42 51,159 37.01
Royalties 26,526 8.96 9,436 6.83
Operating expenses 23,556 7.95 8,636 6.25
General & administrative (1) 5,946 2.01 3,215 2.32
Interest 2,532 0.86 517 0.37
Capital taxes 645 0.22 204 0.15
-----------------------------------
Funds generated from operations 66,399 22.42 29,151 21.09
Compensation expense 873 0.29 154 0.11
Depletion, depreciation and accretion 42,846 14.47 13,340 9.65
Future income taxes 8,978 3.03 5,335 3.86
-----------------------------------
Net Income 13,702 4.63 10,322 7.47
-----------------------------------
-----------------------------------
(1) net of compensation expense (non-cash)


LIQUIDITY AND CAPITAL RESOURCES

Capital Expenditures

Fairborne's exploration and development program for 2004 totaled $135.2
million primarily focused on drilling and completion activities.
Acquisitions in 2004 included $111.5 million for the West Pembina
property in the first quarter and $68.1 million for the third quarter
acquisition of Case. Disposition of several minor properties was
completed in the second quarter for proceeds of $10.7 million. The
following table provides a summary of expenditures compared to the
previous year:



------------------------------------------------------------------------
($ thousands ) 2004 2003
------------------------------------------------------------------------
Exploration and development
Land and lease acquisitions 6,873 4,297
Geological and geophysical 7,741 1,704
Drilling, completions and workovers 79,731 19,371
Well equipment and facilities 40,394 8,843
Corporate assets 435 281
---------------------------
135,174 34,496

Acquisitions, net of dispositions
Acquisitions
Property 111,535 -
Corporate 68,121 47,426
Dispositions (10,668) (1,543)
---------------------------
168,988 45,883
---------------------------
Total 304,162 80,379
---------------------------
---------------------------


Expenditures for land and leases during 2004 combined with the
acquisition of Case resulted in Fairborne holding 232,600 net acres of
undeveloped land at December 31, 2004 with an average working interest
of 66%.

Fairborne's exploration and development program included a very
successful drilling program in 2004. The Company drilled a total of 109
(85.2 net) wells resulting in 100 (77.2 net) natural gas wells, 3 (3.0
net) oil wells and 6.0 (5.0 net) dry holes for an overall net success
rate of 94 percent. Facility projects included construction of a ten
mile, six inch pipeline and associated dehydration facilities at Wild
River as well as completion of a new gas processing facility at Rycroft.

Exploration and development expenditures were financed through a
combination of funds generated from operations ($66.4 million), bank
debt and equity financings. Acquisitions were also financed through a
combination of debt and equity.

The Company's capital program for 2005 has been budgeted at $150 million
and includes the drilling of 130 wells. This capital program is expected
to be funded by funds generated from operations and additional available
bank debt.

Working Capital Deficit

Fairborne had a total working capital deficit of $98.1 million (2003 -
$9.4 million) at December 31, 2004 which included bank debt of $77.2
million (2003 - $7.9 million). Bank debt is included in current
liabilities due to the demand nature of the facility. The Company has
selected a demand credit facility as it offers increased flexibility and
reduced carrying costs compared to many long-term debt arrangements.
Based on the Company's current property base, planned exploration and
development activities and expected future cash flows, the Company does
not expect to have any requirement to repay the facility within the next
year.

Excluding bank debt and equipment leases, Fairborne had a working
capital deficiency of $20.9 million at December 31, 2004 compared to
$1.4 million at December 31, 2003. The increase is consistent with the
substantial increase in spending on exploration and development projects
in 2004 as well as the significant growth in the Company's operations
over the past year.

Bank Indebtedness

Fairborne has a revolving demand loan based on a borrowing base
determined by the Company's bankers. During 2004, the amount available
under the loan was increased first to $85 million at the end of the
first quarter in connection with the acquisition of West Pembina
properties, then to $105 million in the third quarter coincident with
the Case acquisition and subsequently to $125 million in December 2004.
At December 31, 2004, the Company had drawn $77.2 million on the
facility, leaving $47.8 million of available borrowing capacity.

Share Capital

During 2004, Fairborne issued a total of 16.9 million common shares, of
which 6.2 million were issued in connection with the West Pembina
acquisition; 5.4 million were issued on the acquisition of Case; 1.9
million were issued under flow-through financing; 2.7 million were
issued as common equity financing; and 0.7 million were issued on
exercise of stock options. In connection with these offerings, the
Company received $98.8 million of new equity financing in addition to
deemed proceeds of $51.5 million for shares issued to former Case
shareholders.

Common shares issued during 2004 included shares issued to officers and
directors of the Company as follows: 58,950 flow-through shares issued
for cash; 20,000 common shares issued for cash; and 483,000 common
shares issued on the exercise of stock options.

The Company is authorized to issue an unlimited number of common shares
and an unlimited number of preferred shares. The following table
provides a summary of outstanding common shares and other equity
instruments as at the dates indicated:



------------------------------------------------------------------------
March 8 December 31,
(thousands ) 2005 2004 2003
------------------------------------------------------------------------
Common shares 49,204 49,202 32,328
Warrants 1,960 1,960 1,960
Stock options 3,630 3,624 2,861
Weighted average common shares
Basic n/a 40,293 25,178
Diluted n/a 43,213 26,424
------------------------------
------------------------------


CONTRACTUAL OBLIGATIONS & COMMITMENTS

Fairborne has certain lease commitments for its office premises through
to September 30, 2008. As at December 31, 2004, the annual payments due
under these leases is approximately $460,000 for the next four years.

Fairborne has a commitment to spend $7.4 million on qualifying Canadian
exploration expenditures prior to December 31, 2005 pursuant to
flow-through share issues in August 2004 and December 2004.

OFF-BALANCE-SHEET ARRANGEMENTS

Fairborne has no off-balance-sheet arrangements.

SUBSEQUENT EVENT

On March 8, 2005 the Company's Board of Directors unanimously approved a
proposal to create Fairborne Energy Trust (the "Trust"), a new oil and
gas trust and a public exploration-focused junior producer, Exploreco
Energy Ltd. ("Exploreco") pursuant to a Plan of Arrangement (the
"Arrangement"). Upon completion of the Arrangement, shareholders of
Fairborne will receive one trust unit of Fairborne Energy Trust (or
exchangeable share subject to a maximum number of exchangeable shares
being issued) and one third of a share in Exploreco for each Fairborne
share held. An information circular detailing the Arrangement is
anticipated to be mailed to security holders in April 2004. A meeting of
security holders to consider the reorganization is expected to occur in
late May 2005. The Plan of Arrangement will require the approval of 66
2/3% of the votes cast by the shareholders and optionholders of
Fairborne voting at the security holder meeting as a single class and
the approval of the majority of the shareholders excluding certain
related parties. In addition, the approval of the Court of Queen's Bench
and certain regulatory agencies will also be required.

BUSINESS ENVIRONMENT AND RISK

The business risks the Company is exposed to are those inherent in the
oil and gas industry as well as those governed by the individual nature
of Fairborne's operations. Geological and engineering risks, the
uncertainty of discovering commercial quantities of new reserves,
commodity prices, interest rate and foreign exchange risks, competition
and government regulations - all of these govern the businesses and
influence the controls and management at the Company. Fairborne manages
these risks by:

- attracting and retaining a team of highly qualified and motivated
professionals who have a vested interest in the success of the Company;

- operating properties in order to identify and capitalize on
opportunities;

- employing risk management instruments to minimize exposure to
fluctuations in commodity prices, interest rates and foreign exchange
rates;

- maintaining a strong financial position; and

- maintaining strict environmental, safety and health practices.

CRITICAL ACCOUNTING ESTIMATES

Depletion and depreciation expense

The Company uses the full cost method of accounting for exploration and
development activities whereby all costs associated with these
activities are capitalized, whether successful or not. The aggregate of
capitalized costs, including future development costs, net of certain
costs related to unproved properties is subject to amortization as
depletion and depreciation expense. Depletion and depreciation expense
is calculated on a unit-of-production based on estimated proved reserves.

The costs of acquiring and evaluating unproved properties are initially
excluded from depletion calculations. These properties are assessed
periodically to ascertain whether impairment has occurred. When proved
reserves are assigned or the property is considered to be impaired, the
cost of the property or the amount of impairment is added to the costs
subject to depletion.

Full cost accounting ceiling test

The carrying value of petroleum and natural gas properties and equipment
is reviewed at least annually for impairment. Any impairment would be
included as additional depletion and depreciation in the period which it
occurred. The carrying value is based on estimates of proved reserves,
production rates, commodity prices, future capital costs, royalty rates
and other assumptions. By their nature, these estimates are subject to
measurement uncertainty and the effect on the financial statements of
changes in such estimates in future periods could be significant.

Asset Retirement Obligation ("ARO")

The Company estimates the fair value of ARO in the period in which it is
incurred and records an ARO liability with a corresponding increase in
the carrying amount of the related asset. The capitalized amount is
depleted on the unit-of-production method based on estimated proved
reserves. The liability amount is increased each reporting period due to
the passage of time based on an estimated risk-free interest rate, and
the amount of accretion is expensed to income in the period.

Income Taxes

The Company follows the liability method of accounting for income taxes.
The determination of the Company's income and other tax liabilities
requires interpretation of laws and regulations, which are revised
periodically. All tax filings are subject to audit and could be
reassessed after a considerable period of time. Future tax assets and
liabilities are booked at substantively enacted future income tax rates
which include changes over a period of time. The rate used by the
Company is based on estimated future net revenues, estimated future
depletion rates and other assumptions. Accordingly, the actual income
tax liability may differ significantly from the amounts estimated and
can impact the current and future income tax expense recorded in future
periods.

CHANGES IN ACCOUNTING POLICIES

During 2004, Fairborne implemented changes in accounting policies as
required by Canadian generally accepted accounting principles.

Full cost accounting guideline

Effective January 1, 2004, Fairborne adopted a new accounting standard
relating to full cost accounting for oil and gas entities. Fairborne
places a limit on the carrying value of petroleum and natural gas
properties and equipment, which may be depleted against revenues of
future periods (the "ceiling test"). The carrying value is assessed to
be recoverable when the sum of the undiscounted cash flows expected from
the production of proved reserves, the lower of cost and market of
unproved properties and the cost of major development projects exceeds
the carrying value. When the carrying value is not assessed to be
recoverable, an impairment loss is recognized to the extent that the
carrying value of assets exceeds the sum of the discounted cash flows
expected from the production of proved and probable reserves, the lower
of cost and market of unproved properties and the cost of major
development projects. The cash flows are estimated using expected future
product prices and costs and are discounted using a risk-free interest
rate.

Prior to adopting the new standards, the limit on aggregate carrying
value of the petroleum and natural gas properties and equipment that may
be carried forward for depletion against future revenues was based on
the sum of the undiscounted cash flows expected from the production of
proved reserves, the lower of cost or market of unproved properties and
the cost of major development projects less the estimated future costs
for administration, financing, asset retirement obligations and income
taxes.

There were no changes to net income, petroleum and natural gas
properties and equipment or any other reported amounts in the financial
statements as a result of adopting the standard.

Asset retirement obligations ("ARO")

Effective January 1, 2004, Fairborne retroactively adopted, with
restatement of prior periods, a new accounting standard relating to
asset retirement obligations.

Fairborne recognizes the fair value of ARO in the period in which it is
incurred when a reasonable estimate of the fair value can be made. The
fair value of the estimated ARO is recorded as a liability, with a
corresponding increase in the carrying amount of the related asset. The
capitalized amount is depleted on the unit-of-production method based on
proved reserves. The liability amount is increased each reporting period
due to the passage of time and the amount of accretion is expensed to
income in the period. Actual costs incurred upon the settlement of the
ARO are charged against the ARO.

Prior to adopting the standard, Fairborne recognized a provision for
future site restoration costs over the life of the oil and gas
properties and facilities using a unit of production method.

The effect of adopting the new ARO accounting standard is presented
below as increases (decreases):



------------------------------------------------------------------------
As at December 31, 2003 2002
------------------------------------------------------------------------

Balance sheet
Net asset retirement costs, included in
fixed assets 3,740 3,158
Asset retirement obligations 6,165 4,135
Accumulated provision for future site restoration (2,764) (1,086)
Future income taxes 122 40
Retained earnings 217 69
---------------------------
---------------------------


------------------------------------------------------------------------
Year ended December 31, 2004 2003
------------------------------------------------------------------------

Statement of operations
Accretion expense 918 558
Depletion and depreciation on asset retirement
costs 1,083 619
Future site restoration expense (3,835) (1,405)
Future income taxes 660 82
Net income impact 1,174 146
Per share impact
Basic $ 0.03 $ 0.01
Diluted $ 0.03 $ 0.01
---------------------------
---------------------------


Flow-through shares

Effective January 1, 2004, Fairborne prospectively adopted a new
accounting standard for flow-through shares. Under this standard, the
resource expenditure deductions for income tax purposes related to
exploratory and development activities funded by flow-through share
arrangements are renounced to investors in accordance with tax
legislation. A future tax liability is recognized upon the renunciation
of tax pools and share capital is reduced by a corresponding amount.

Prior to adopting this standard, the future tax liability and share
capital were adjusted when the shares were issued. There were no changes
to net income, petroleum and natural gas properties and equipment or any
other reported amounts in the financial statements as a result of
adopting the standard.

Per barrel of oil equivalent ("BOE") amounts may be misleading,
particularly if used in isolation. A BOE conversion ratio has been
calculated using a conversion rate of six thousand cubic feet of natural
gas to one barrel and is based on an energy equivalent conversion method
application at the burner tip and does not represent an economic value
equivalency at the wellhead.

Forward Looking Statements - Certain information regarding Fairborne
Energy Ltd. set forth in this document, including management's
assessment of Fairborne Energy Ltd's future plans and operations,
contains forward-looking statements that involve substantial known and
unknown risks and uncertainties. These forward-looking statements are
subject to numerous risks and uncertainties, certain of which are beyond
Fairborne Energy Ltd.'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 producers, the lack of
availability of qualified personnel or management, stock market
volatility and ability to access sufficient capital from internal and
external sources. Fairborne Energy Ltd.'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 events anticipated by the forward-looking statements
will transpire or occur, or if any of them do so, what benefits that
Fairborne Energy Ltd. will derive therefrom.

TO THE SHAREHOLDERS OF FAIRBORNE ENERGY LTD.

The accompanying consolidated financial statements of Fairborne Energy
Ltd. and all the information in this Annual Report are the
responsibility of management and have been approved by the Board of
Directors.

The consolidated financial statements have been prepared by management
in accordance with Canadian generally accepted accounting principles.
When alternative accounting methods exist, management has chosen those
it deems most appropriate in the circumstances. Financial statements are
not precise since they include certain amounts based on estimates and
judgments. Management has determined such amounts on a reasonable basis
in order to ensure that the consolidated financial statements are
presented fairly, in all material respects. The financial information
contained elsewhere in this report has been reviewed to ensure
consistency with the consolidated financial statements.

Management has established systems of internal controls, which are
designed to provide reasonable assurance that assets are safeguarded
from loss or unauthorized use and to produce reliable accounting records
for the preparation of financial information.

The Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal
controls. It exercises its responsibilities primarily through the Audit
Committee, which is comprised of independent, non-management directors.
The Audit Committee has reviewed the consolidated financial statements
with management and the auditors and has reported to the Board of
Directors which have approved the consolidated financial statements.

The consolidated financial statements have been audited by KPMG LLP, the
external auditors, in accordance with auditing standards generally
accepted in
Canada on behalf of the shareholders.



Signed by:

Richard A. Walls
President and Chief Executive Officer

Signed by:

Robert A. Maitland, CA
Vice-President, Finance and Chief Financial Officer

Calgary, Canada
March 8, 2005


TO THE SHAREHOLDERS OF FAIRBORNE ENERGY LTD.

We have audited the consolidated balance sheets of Fairborne Energy Ltd.
as at December 31, 2004 and 2003 and the consolidated statements of
operations and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
December 31, 2004 and 2003 and the results of its operations and its
cash flows for the years then ended in accordance with Canadian
generally accepted accounting principles.

Signed by:

KPMG LLP

Chartered Accountants

Calgary, Canada

March 8, 2005




CONSOLIDATED BALANCE SHEETS
As at December 31

------------------------------------------------------------------------
($thousands) 2004 2003
------------------------------------------------------------------------
(restated,
see Note 2)

ASSETS

Current assets
Cash and cash equivalents $ 241 $ 6,152
Accounts receivable 36,608 14,126
Prepaid expenses and deposits 3,090 1,997
-----------------------
39,939 22,275
Capital assets (Note 4) 378,721 111,290
Goodwill (Note 3) 16,170 6,360
-----------------------
$ 434,830 $ 139,925
-----------------------
-----------------------
LIABILITIES

Current liabilities
Accounts payable and accrued liabilities $ 60,778 $ 21,132
Equipment lease (Note 5) - 2,573
Bank indebtedness (Note 6) 77,219 7,941
-----------------------
137,997 31,646
Asset retirement obligation (Note 7) 13,196 6,165
Future income taxes (Note 8) 35,860 15,913

SHAREHOLDERS' EQUITY

Capital stock (Note 9) 220,151 73,040
Contributed surplus (Note 9) 1,094 331
Retained earnings 26,532 12,830
-----------------------
247,777 86,201
-----------------------
-----------------------
Commitments (Notes 9 and 11)
Subsequent event (Note 12)
$ 434,830 $ 139,925
-----------------------
-----------------------

See accompanying notes to the consolidated financial statements


Signed by: Signed by:

Michael E.J. Phelps Gary F.Aitken
Director Director
Calgary, Alberta
March8, 2005



CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the years ended December 31,

------------------------------------------------------------------------
($thousands) 2004 2003
------------------------------------------------------------------------
(restated,
see Note 2)
Revenue
Petroleum and natural gas $125,604 $ 51,159
Less: royalties 26,526 9,436
-----------------------
99,078 41,723
Expenses
Production 23,556 8,636
General and administrative 6,819 3,369
Interest 2,532 517
Depletion, depreciation and accretion 42,846 13,340
-----------------------
75,753 25,862
-----------------------
Income before taxes 23,325 15,861
Taxes (Note 8)
Future 8,978 5,335
Capital 645 204
-----------------------
9,623 5,539
-----------------------
Net Income 13,702 10,322
Retained earnings beginning of year,
as previously reported 12,830 2,439
Retained earnings adjustment,
asset retirement obligation (Note 2) - 69
-----------------------
Retained earnings, end of year $ 26,532 $ 12,830
-----------------------
-----------------------
Net income per share (Note 9)
Basic $ 0.34 $ 0.41
Diluted $ 0.32 $ 0.39
-----------------------
-----------------------

See accompanying notes to the consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,

------------------------------------------------------------------------
($thousands) 2004 2003
------------------------------------------------------------------------
(restated,
see Note 2)
Cash provided by (used in):
Operating activities
Net income $ 13,702 $ 10,322
Items not involving cash
Depletion, depreciation and accretion 42,846 13,340
Compensation expense 873 154
Future income taxes 8,978 5,335
-----------------------
66,399 29,151
Asset retirement expenditures (189) (783)
Change in non-cash working capital (14,807) (7,513)
-----------------------
51,403 20,855
-----------------------
Financing activities
Issuance of common shares, net of costs 93,620 10,939
Equipment lease payments (2,573) (125)
Bank indebtedness 56,762 (4,295)
-----------------------
147,809 6,519
-----------------------
Investing activities
Capital expenditures (135,174) (34,496)
Disposition of petroleum
and natural gas properties 10,668 1,543
Acquisition of petroleum
and natural gas properties (Note 3) (111,535) -
Corporate acquisition costs (Note 3) (400) (800)
Change in non-cash working capital 31,318 8,944
-----------------------
(205,123) (24,809)
-----------------------
Change in cash and cash equivalents (5,911) 2,565
Cash and cash equivalents, beginning of year 6,152 3,587
-----------------------
Cash and cash equivalents, end of year $ 241 $ 6,152
-----------------------
-----------------------

Cash interest paid $ 2,532 $ 517
Capital taxes paid $ 160 $ 104
-----------------------

See accompanying notes to the consolidated financial statements


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2004 and 2003
(tabular amounts are stated in thousands or thousands of dollars except
per share amount)


NATURE OF OPERATIONS:

Fairborne Energy Ltd. (the "Company" or "Fairborne") is a resource-based
company engaged in the exploration for, and the development and
production of natural gas, natural gas liquids and crude oil in Western
Canada. The Company was incorporated under the laws of the Province of
Alberta on January 9, 2002 and commenced active operations with the
purchase of certain petroleum and natural gas properties and equipment
on May 31, 2002.

1. SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

The consolidated financial statements of the Company have been prepared
by management in accordance with generally accepted accounting
principles in Canada and they include the accounts of the Company and
its wholly owned subsidiaries. All inter-company transactions have been
eliminated.

b) Petroleum and natural gas operations

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

The accumulated costs, less the costs of unproved properties, are
depleted and depreciated using the unit-of-production method based on
total proved reserves before royalties as determined by independent
evaluators. Natural gas reserves and production are converted into
equivalent barrels of oil based upon the estimated relative energy
content.

The costs of acquiring and evaluating unproved properties, are initially
excluded from depletion calculations. These properties are assessed
periodically to ascertain whether impairment has occurred. When proved
reserves are assigned or the property is considered to be impaired, the
cost of the property or the amount of impairment is added to the costs
subject to depletion.

The Company places a limit on the carrying value of petroleum and
natural gas properties and equipment, which may be depleted against
revenues of future periods (the "ceiling test"). The carrying value is
assessed to be recoverable when the sum of the undiscounted cash flows
expected from the production of proved reserves, the lower of cost and
market of unproved properties and the cost of major development projects
exceeds the carrying value. When the carrying value is not assessed to
be recoverable, an impairment loss is recognized to the extent that the
carrying value of assets exceeds the sum of the discounted cash flows
expected from the production of proved and probable reserves, the lower
of cost and market of unproved properties and the cost of major
development projects. The cash flows are estimated using expected future
product prices and costs and are discounted using a risk-free interest
rate.

c) Asset retirement obligations ("ARO")

The Company recognizes the fair value of ARO in the period in which it
is incurred when a reasonable estimate of the fair value can be made.
The fair value of the estimated ARO is recorded as a liability, with a
corresponding increase in the carrying amount of the related asset. The
capitalized amount is depleted on the unit-of-production method based on
proved reserves. The liability amount is increased each reporting period
due to the passage of time and the amount of accretion is expensed to
income in the period. Actual costs incurred upon the settlement of the
ARO are charged against the ARO.

d) Interest in joint ventures

Substantially all of the Company's oil and gas exploration and
development activities are conducted jointly with others and,
accordingly, the financial statements reflect only the Company's
proportionate interest in such activities.

e) Goodwill

The Company records goodwill relating to acquisitions when the total
purchase price exceeds the fair value of the net identifiable assets and
liabilities acquired. Goodwill is assessed for impairment annually at
year-end or if events occur that could result in an impairment.
Impairment is recognized if the estimated fair value of the Company is
less than the book value of the Company. If the fair value of the
Company is less than the book value, impairment is measured by
allocating the fair value to the identifiable assets and liabilities as
if the Company had been acquired for a purchase price equal to its fair
value. The excess of the fair value of the Company over the amounts
assigned to the assets and liabilities is the fair value of the
goodwill. Any excess of the book value of goodwill over this implied
fair value of goodwill is the impairment amount. Impairment is charged
to income in the period in which it occurs.

f) Risk management

Financial instruments may be utilized by the Company to manage its
exposure to commodity price fluctuations and foreign currency exposures.
The Company's practice is not to utilize financial instruments for
trading or speculative purposes.

The Company formally documents relationships between hedging instruments
and hedged items, as well as its risk management objective and strategy
for undertaking various hedge transactions. This process includes
linking derivatives to specific assets and liabilities on the balance
sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair value or
cash flows of hedged items.

Foreign exchange gains and losses on foreign currency exchange swaps
used to hedge US dollar denominated commodity contracts are recognized
in income as a component of oil and gas sales during the same period as
the corresponding hedged position.

The Company may use forwards, futures and swap contracts to manage its
exposure to commodity price fluctuations. The net receipts or payments
arising from these contracts are recognized in income as a component of
oil and gas sales during the same period as the corresponding hedged
position.

g) Stock-Based Compensation

The Company has a stock based compensation plan, which is described in
Note 9. Compensation expense associated with the stock based
compensation plan is recognized in income over the vesting period of the
plan with a corresponding increase in contributed surplus. Compensation
expense is based on the fair value of the stock based compensation at
the date of the grant using a Black-Scholes option pricing model.

Any consideration received upon exercise of the stock based compensation
together with the amount of non-cash compensation expense recognized in
contributed surplus is recorded as an increase in capital stock.

h) Income Taxes

The Company uses the liability method of accounting for future income
taxes. Under the liability method, future income tax assets and
liabilities are determined based on "temporary differences" (differences
between the accounting basis and the tax basis of the assets and
liabilities), and are measured using the currently enacted, or
substantively enacted tax rates and laws expected to apply when these
differences reverse. A valuation allowance is recorded against any
future income tax assets if it is more likely than not that the asset
will not be realized.

i) Flow-through Shares

The resource expenditure deductions for income tax purposes related to
exploratory and development activities funded by flow-through share
arrangements are renounced to investors in accordance with tax
legislation. A future tax liability is recognized upon the renunciation
of tax pools and share capital is reduced by a corresponding amount.

j) Office furniture and equipment

Office furniture and equipment is stated at cost. Depreciation is
provided on a declining balance basis at a rate of 20%.

k) Cash and cash equivalents

The Company considers cash and short term deposits with original
maturities of three months or less as cash and cash equivalents.

l) Measurement uncertainty

The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and
revenue and expenses for the period then ended. Actual results could
differ from those estimates.

The amounts recorded for depletion and depreciation and the provision
for asset retirement obligations are based on estimates. The ceiling
test calculation is based on estimates of proved and probable reserves,
production rates, petroleum and natural gas prices, future costs and
relevant assumptions. By their nature, these estimates are subject to
measurement uncertainty and may impact the consolidated financial
statements of future periods.

m) Per Share Information

Basic per share amounts are calculated using the weighted average number
of shares outstanding during the year. Diluted per share amounts are
calculated based on the treasury-stock method, which assumes that any
proceeds obtained on the exercise of in the money options and warrants
would be used to purchase common shares at the average market price
during the period. The weighted average number of shares outstanding is
then adjusted by the net change.

n) Revenue Recognition

Revenue from the sale of oil and natural gas is recognized when the
product is delivered. Revenue from processing and other miscellaneous
sources is recognized upon completion of the relevant service.

o) Comparative Numbers

Certain of the comparative numbers have been restated to conform to the
current year presentation.

2. CHANGES IN ACCOUNTING POLICIES

a) Full cost accounting guideline

Effective January 1, 2004, Fairborne adopted a new accounting standard
relating to full cost accounting for oil and gas entities as described
in Note 1(b). Prior to adopting the new standards, the ceiling test was
based on the sum of the undiscounted cash flows expected from the
production of proved reserves, the lower of cost or market of unproved
properties and the cost of major development projects less the estimated
future costs for administration, financing, asset retirement obligations
and income taxes.

There were no changes to net income, petroleum and natural gas
properties and equipment or any other reported amounts in the financial
statements as a result of adopting the standard.

b) Asset retirement obligations ("ARO")

Effective January 1, 2004, Fairborne retroactively adopted, with
restatement of prior periods, a new accounting standard relating to
asset retirement obligations as described in Note 1(C). Prior to
adopting the standard, Fairborne recognized a provision for future site
restoration costs over the life of the oil and gas properties and
facilities using a unit of production method.

The effect of adopting the new ARO accounting standard is presented
below as increases (decreases):



BALANCE SHEET
------------------------------------------------------------------------
As at December 31, 2003 2002
------------------------------------------------------------------------
Net asset retirement costs, included in fixed assets 3,740 3,158
Asset retirement obligations 6,165 4,135
Accumulated provision for future site restoration (2,764) (1,086)
Future income taxes 122 40
Retained earnings 217 69
-----------------------
-----------------------


STATEMENT OF OPERATIONS
------------------------------------------------------------------------
Year ended December 31, 2004 2003
------------------------------------------------------------------------
Accretion expense 918 558
Depletion and depreciation on asset retirement costs 1,083 619
Future site restoration expense (3,835) (1,405)
Future income taxes 660 82
-----------------------
Net income impact 1,174 146
-----------------------
Per share impact
Basic $ 0.03 $ 0.01
Diluted $ 0.03 $ 0.01
-----------------------
-----------------------


c) Flow through shares

Effective March 16, 2004, Fairborne prospectively adopted a new
accounting standard for flow-through shares as described in Note 1(i).
Prior to adopting this standard, the future tax liability associated
with flow-through shares was recorded when the shares were issued. There
were no changes to net income, or any other reported amounts in the
financial statements as a result of adopting the standard.

3. ACQUISITIONS

On July 27, 2004 the Company acquired all of the outstanding shares of
Case Resources Inc. ("Case") pursuant to an Arrangement Agreement dated
June 25, 2004 between Case and Fairborne. Case was a publicly traded oil
and gas company with properties located in western Canada. As
consideration for the transaction, Case shareholders received 0.0909 of
a Fairborne common share for each Case common share held. Fairborne
issued 5.4 million shares to acquire Case at a deemed value of $51.5
million, based on the trading price of Fairborne shares on or about the
date of acquisition. The results of operations for Case have been
included in Fairborne's financial statements beginning July 27, 2004.
Details of the acquisition are as follows:



------------------------------------------------------------------------
Cost of acquisition:
Shares $ 51,518
Transaction costs 400
-----------------------
$ 51,918
-----------------------
-----------------------
Allocated:
Current assets $ 1,443
Petroleum and natural gas properties and equipment 68,121
Goodwill (no tax base) 9,810
Current liabilities (1,003)
Bank debt (12,516)
Asset retirement obligations (1,105)
Future income taxes (12,832)
-----------------------
$ 51,918
-----------------------
-----------------------


On March 31, 2004, the Company acquired certain petroleum and natural
gas assets located in the West Pembina area of West Central Alberta. The
acquisition has been accounted for by the purchase method. The results
of operations from the assets acquired have been included in Fairborne's
financial statements beginning March 31, 2004. Details of the
acquisition are as follows:



3. ACQUISITIONS
------------------------------------------------------------------------
Cost of acquisition:
Petroleum and natural gas properties and equipment $115,904
Asset retirement obligations (4,664)
-----------------------
$111,240
-----------------------
-----------------------
Allocated:
Cash $ 71,907
Cash from private placement of common shares 38,859
Transaction costs 474
-----------------------
$111,240
-----------------------
-----------------------


On July 2, 2003 the shareholders of the Company and Pivotal Energy Ltd.
("Pivotal") approved an Arrangement Agreement to merge the two companies
and continue as a publicly listed company named Fairborne Energy Ltd. As
consideration for the transaction, Pivotal shareholders received 0.485
of a Fairborne common share for each Pivotal common share held. In
addition, options to acquire Pivotal shares were exchanged for 778,162
options to acquire Fairborne shares. Upon closing of the arrangement,
Fairborne had approximately 30.3 million common shares outstanding, of
which prior Fairborne shareholders held approximately 65% of outstanding
common shares and prior shareholders of Pivotal held approximately 35%.
As such, the transaction was accounted for as an acquisition of Pivotal
by Fairborne. The results of operations for Pivotal have been included
in Fairborne's financial statements beginning July 2, 2003.
Details of the acquisition are as follows:



------------------------------------------------------------------------
Cost of acquisition:
Shares $ 31,048
Transaction costs 800
Options 633
-----------------------
$ 32,481
-----------------------
-----------------------
Allocated:
Current assets $ 3,976
Petroleum and natural gas properties and equipment 47,426
Goodwill (no tax base) 6,360
Current liabilities (6,221)
Bank indebtedness (12,236)
Asset retirement obligations (1,055)
Future income taxes (5,769)
-----------------------
-----------------------
$ 32,481
-----------------------
-----------------------


4. CAPITAL ASSETS

------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Petroleum and natural gas properties
and equipment $ 436,826 $ 127,902
Corporate assets 1,032 607
-----------------------
437,858 128,509
Accumulated depletion and depreciation (59,137) (17,219)
-----------------------
$ 378,721 $ 111,290
-----------------------
-----------------------


Fairborne performed a ceiling test calculation at December 31, 2003 and
December 31, 2004 to assess the recoverable value of petroleum and
natural gas properties and equipment. The oil and gas future prices for
the December 31, 2004 ceiling test are based on the January 1, 2005
commodity price forecast of our independent reserve evaluators. These
prices have been adjusted for commodity price differentials specific to
Fairborne. The following table summarizes the benchmark prices used in
the ceiling test calculation. Based on these assumptions, the
undiscounted value of future net revenues from Fairborne's proved
reserves exceeded the carrying value of petroleum and natural gas
properties and equipment at December 31, 2004.



------------------------------------------------------------------------
Edmonton
Foreign Light
WTI Oil Exchange Crude Oil AECO Gas
Year ($U.S./bbl) Rate ($Cdn/bbl) ($Cdn/mmbtu)
------------------------------------------------------------------------
2005 42.00 0.82 50.25 6.60
2006 40.00 0.82 47.75 6.35
2007 38.00 0.82 45.50 6.15
2008 36.00 0.82 43.25 6.00
2009 34.00 0.82 40.75 6.00
2010-2012 33.00 0.82 39.50 6.00
2013 33.50 0.82 40.00 6.10
2014 34.00 0.82 40.75 6.20
2015 34.50 0.82 41.25 6.30
Escalate thereafter
2.0% per year
-------------------------------------------------


As at December 31, 2004, costs of acquiring unproved properties in the
amount of $31.2 million (2003 - $9.7 million) were excluded from the
depletion calculation. Included in the Company's petroleum and natural
gas properties and equipment balance is $7.9 million (2003 - $3.8
million) relating to asset retirement obligation, net of accumulated
depletion.

5. EQUIPMENT LEASE

The Company repaid the equipment lease in April 2004. Prior thereto, the
lease was payable in monthly installments of $29,977, including interest
at 8.9%.

6. BANK INDEBTEDNESS

At December 31, 2004 the Company has available $125 million of demand
operating credit facilities from two Canadian chartered banks subject to
the bank's valuation of the Company's petroleum and natural gas
properties. The facilities bear interest at the bank's prime rate or at
prevailing banker's acceptance rates plus an applicable bank fee
depending on the nature of the advance. At December 31, 2004 $77.2
million was drawn under the facilities. The scheduled review date of the
facilities is May 30, 2005. The facilities are secured by a first
ranking floating charge on all real property of the Company and a
general security agreement.

7. ASSET RETIREMENT OBLIGATIONS

The Company's asset retirement obligations result from net ownership
interests in petroleum and natural gas assets including well site,
gathering systems and processing facilities. The Company estimated the
total undiscounted amount required to settle its asset retirement
obligations to be approximately $44 million (2003 - $22 million) which
is scheduled to be incurred between 2014 and 2034. The majority of the
costs are scheduled to be incurred between 2014 and 2020. A
credit-adjusted risk-free interest rate of 8.5 percent and an inflation
rate of 1.5 percent was used to calculate the fair value of the asset
retirement obligations.

A reconciliation of the asset retirement obligations is provided below:



------------------------------------------------------------------------
Year ended December 31, 2004 2003
------------------------------------------------------------------------
Balance, beginning of year $ 6,165 $ 4,135
Acquisitions 5,769 1,055
Liabilities incurred 1,176 1,200
Dispositions (643) -
Liabilities settled (189) (783)
Accretion expense 918 558
-----------------------
Balance, end of year $ 13,196 $ 6,165
-----------------------
-----------------------


8. FUTURE INCOME TAXES

The provision for income taxes in the financial statements differs from
the result, which would have been obtained in applying the combined
federal and provincial tax rate to the Company's earnings before income
taxes. The difference results from the following items:



------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Earnings before taxes $ 23,325 $ 15,861
Combined federal and provincial tax rate 38.62% 40.62%
-----------------------
Computed "expected" income tax expense 9,008 6,443
Increase (decrease) in income
taxes resulting from:
Non-deductible crown charges 6,021 2,037
Non-deductible stock based compensation 337 63
Resource allowance (6,313) (2,738)
Effect of changes in tax rates (346) (879)
Other 271 409
-----------------------
Future income taxes 8,978 5,335
Capital taxes 645 204
-----------------------
Total taxes $ 9,623 $ 5,539
-----------------------
-----------------------


The components of the future income tax liability at December 31, 2004
and 2003 are as follows:

------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Future income tax liabilities:
Petroleum and natural gas
properties and equipment $ 43,475 $ 17,552
-----------------------
Future income tax assets:
Asset retirement obligations (4,519) (839)
Share issue costs (1,898) (800)
Loss carryforwards (expire 2006 to 2011) (1,198) -
-----------------------
(7,615) (1,639)
-----------------------
Net future income tax liability $ 35,860 $ 15,913
-----------------------
-----------------------


The components of the future income tax liability at December 31, 2004
and 2003 are as follows:

9. CAPITAL STOCK

a) Authorized

(I) Unlimited number of common shares; and

(II) Unlimited number of preferred shares, issuable in series, rights
and privileges to be determined upon issue, of which none have been
issued.

b) Common Shares, Issued and Outstanding



------------------------------------------------------------------------
2004 2003
Number Number
of Shares Amount of Shares Amount
------------------------------------------------------------------------
Balance, beginning of period 32,328 $ 73,040 19,750 $34,437
Issued for cash 8,903 72,421 - -
Issued on acquisition
of Case (Note 3) 5,423 51,518 - -
Flow-through shares
issued for cash 1,922 24,669 1,500 10,125
Issued on exercise of options 626 1,741 501 1,807
Issued on acquisition
of Pivotal (Note 3) - - 10,577 31,048
Share issue costs - (5,101) - (590)
Future tax benefit
of issue costs - 1,863 - 224
Future tax impact of
flow-through shares - - - (4,011)
------------------------------------------
49,202 $220,151 32,328 $ 73,040
------------------------------------------
------------------------------------------


Common shares issued during 2004 included shares issued to directors and
officers of the Company as follows: 58,950 flow-through shares issued
for cash; 20,000 common shares issued for cash; and 483,000 common
shares issued on the exercise of options.

In conjunction with the acquisition of Pivotal on July 2, 2003, all
existing Fairborne common shares and Class A common shares were
converted into new common shares of Fairborne.

Fairborne is required to spend $24.7 million on qualifying Canadian
exploration expenditures pursuant to flow-through share issues in August
2004 and December 2004. Of the required expenditures, $17.3 million were
incurred prior to December 31, 2004 and the remaining $7.4 million must
be incurred prior to December 31, 2005.

c) Contributed Surplus



------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Balance, beginning of year $ 331 $ -
Options granted 880 154
Options issued on acquisition of Pivotal (Note 3) - 633
Options exercised (110) (403)
Options cancelled and expired (7) (53)
-----------------------
$ 1,094 $ 331
-----------------------
-----------------------


The weighted average fair value of stock options granted in 2004 was
$2.44 per option (2003 - $2.90 per option) using the Black-Scholes
option pricing model with the following weighted average assumptions:
risk free rate of 4 percent (2003 - 4 per cent), expected volatility of
30-40 percent (2003 - 30 per cent) and expected life of 3 years (2003 -
3 years).

d) Per Share Amounts

The following table summarizes the weighted average common shares used
in calculating net income per share:



------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Basic 40,293 25,178
Diluted 43,213 26,424
-----------------------



The reconciling item between the basic and diluted average common shares
are outstanding stock options and warrants. Excluded from the diluted
number of common shares are 1,351,000 stock options (2003 - 176,889)
which are out-of-the-money based on the fourth quarter average trading
price.

e) Stock Options

There are 3,624,583 stock options outstanding at December 31, 2004 with
a weighted average exercise price of $5.40 per share. Options vest
evenly over a three year period and expire five years from the date of
grant. The outstanding options expire between January 23, 2006 and
December 16, 2009.

The following table sets forth a reconciliation of the stock option plan
activity for the years ended December 31, 2004 and 2003:



------------------------------------------------------------------------
2004 2003
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
------------------------------------------------------------------------
Outstanding, beginning of year 2,861 $ 2.90 1,903 $ 2.40
Granted 1,395 $ 9.29 759 $ 4.17
Options issued on acquisition
of Pivotal (Note 3) - $ - 778 $ 3.10
Exercised (626) $ 2.61 (501) $ 2.80
Expired and cancelled (6) $10.20 (78) $ 5.82
---------------------------------------
Outstanding, end of year 3,624 $ 5.40 2,861 $ 2.90
---------------------------------------
Exercisable, end of year 1,098 $ 2.76 841 $ 2.52
---------------------------------------


The following table summarizes stock options outstanding under the plan
at December 31, 2004:



------------------------------------------------------------------------
Remaining
Options Term Options
Exercise Price Outstanding (years) Exercisable
------------------------------------------------------------------------
$ 1.75 46 1.1 46
$ 2.40 - $ 3.09 1,555 2.5 874
$ 3.42 353 3.4 101
$ 5.20 - $ 5.92 354 3.0 77
$ 8.00 - $ 11.90 1,316 4.0 -
-------------------------------------
3,624 3.4 1,098
-------------------------------------
-------------------------------------


f) Warrants

There are 1,960,000 warrants outstanding to purchase common shares at
$3.50 per share exercisable at any time prior to close of business on
May 31, 2006.

10. FINANCIAL INSTRUMENTS

a) Credit Risk:

A significant portion of the Company's accounts receivable are from
joint venture partners in the oil and gas industry and are subject to
normal industry credit risks.

b) Fair value of financial instruments:

The carrying value of the Company's financial instruments, other than
bank indebtedness, approximate their fair value due to their short
maturity. The fair value of the bank indebtedness approximates its
carrying value as it bears interest at a floating rate.

c) Forward Sales Contracts:

The Company has a price risk management program whereby the Company
sells forward a portion of its future production through fixed price
physical sales contracts with customers. At December 31, 2004, Fairborne
had two fixed price physical sales contracts outstanding, one contract
for crude oil and one contract for natural gas.

The crude oil contract is for 1,000 bbls per day from January 1, 2005 to
March 31, 2005 at a price of WTI US$34.70.

The natural gas contract is for 10,000 GO per day from February 1, 2005
to March 31, 2005 at a price of CDN$6.50 per GO plus 50 percent of the
AECO C Monthly Index over $6.50 with a floor of CDN$6.50 per GO.

11. COMMITMENTS

The Company has certain lease commitments for its office premises
through to September 30, 2008. As at December 31, 2004 the payments due
under these commitments are approximately:



------------------------------------------------------------------------
Year
------------------------------------------------------------------------
2005 $ 460
2006 $ 460
2007 $ 460
2008 $ 345
--------


12. SUBSEQUENT EVENT

On March 8, 2005 the Company's Board of Directors unanimously approved a
proposal to create Fairborne Energy Trust (the "Trust"), a new oil and
gas trust and a public exploration-focused junior producer, Exploreco
Energy Ltd. ("Exploreco") pursuant to a Plan of Arrangement (the
"Arrangement"). Upon completion of the Arrangement, shareholders of
Fairborne will receive one trust unit of Fairborne Energy Trust (or
exchangeable share subject to a maximum number of exchangeable shares
being issued) and one third of a share in Exploreco for each Fairborne
share held. An information circular detailing the Arrangement is
scheduled to be mailed to security holders in April 2004. A meeting of
security holders to consider the reorganization is scheduled to occur in
late May 2005. The Plan of Arrangement will require the approval of
662/3% of the votes cast by the shareholders and optionholders of
Fairborne voting at the security holder meeting as a single class and
the approval of the majority of the shareholders excluding certain
related parties. In addition, the approval of the Court of Queen's Bench
and certain regulatory agencies will also be required.


-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    Fairborne Energy Ltd.
    Richard A. Walls
    President and Chief Executive Officer
    (403) 290-7754
    (403) 290-7751 (FAX)
    Email: rwalls@fairborne-energy.com
    or
    Fairborne Energy Ltd.
    Robert A. Maitland
    Vice President, Finance and Chief Financial Officer
    (403) 290-7755
    (403) 290-7751 (FAX)
    Email: rmaitland@fairborne-energy.com