Fortress Energy Inc.
TSX : FEI

Fortress Energy Inc.

April 02, 2007 23:59 ET

Fortress Energy Inc. Announces 2006 Year End Financial Statements, Reserves and First Quarter Operations Update

CALGARY--(CCNMatthews - April 2, 2007) - Fortress Energy Inc., FEI:TSX ("Fortress" or the "Corporation") is pleased to announce its 2006 year end results and an update of its first quarter 2007 operations. The 2006 year can be characterized as a transition year where it has established a new foundation from which we can achieve significant growth.

Highlights of the 2006 year are as follows:

Significant Transactions

On March 10, 2006 Fortress sold:

- 3.4 million boe's Proven Reserves and

- 4.7 million boe's of Proven and Probable Reserves

And realized proceeds of $91.2 million cash consideration representing average disposition prices of:

- $26.83 per boe Proven and

- $19.41 per boe Proven and Probable Reserves.

The proceeds of the dispositions were sheltered from income tax by utilizing surplus tax pools.

On November 15, 2006, Fortress acquired a private company, Marauder Resources West Coast Inc. for total consideration of $40.5 million Marauder consisted of:

- 2.1 million boe's Proven reserves

- 3.1 million boe's Proven and Probable Reserves

- 66,000 acres of land

- $35 million tax pools.

The acquisition represented an acquisition cost of:

- $19.54 per boe Proven and

- $13.15 per boe Proven and Probable Reserves.

The acquisition provides Fortress with a new focus area that is 100% natural gas, operated, high working interest, significant development potential, and a number of exploration opportunities resulting in a two year drilling inventory on Corporation owned lands. The acquisition is consistent with the Corporation's "acquire and exploit" strategy.

Reserves (as Evaluated by Sproule Associates Limited based on forecast prices and costs)

At the year end the Corporation had established Total Proven Reserves of 2.8 million boe's and Proven and Probable Reserves of 4.3 million boe's comprised of 98% natural gas reserves and 2% oil and natural gas liquids.

Based on average production in January 2007 of 785 boe/d, the reserve life index is 15.0 years.

The Net Present Value before income tax of Proven and Probable Reserves using a 10% discount rate is $64.2 million.

The Pre-Tax Net Asset Value (less cash paid out to shareholders pursuant to the Arrangement) is estimated to be $5.82 per share using Proven and Probable pre-tax reserve values, a 10% discount rate and an undeveloped land value of $4.6 million based on an evaluation performed by Independent Land Evaluations Inc.

First Quarter 2007 Operations Update and Outlook

The Corporation drilled 11 development wells, 3 exploration wells and performed 7 recompletions all in the Ladyfern area. The capital expenditure program has resulted in 8 new producing natural gas wells raising total combined production to approximately 1000 boe/d. The Corporation is upgrading the processing capability at the EnCana-owned Ladyfern gas plant by adding refrigeration to allow the processing of greater volumes of liquids rich gas.

Through its exploration efforts the Corporation has identified two new gas accumulations at Mearon South and Square Creek areas. At Square Creek the Corporation successfully completed an existing wellbore testing 1.5 mmcf/d and 800 mcf/d from two separate zones. Following this initial success two follow-up locations were drilled, testing gas at rates of 4.6 mmcf/d and 1.5 mmcf/d respectively in the same zone. Fortress owns a 50% working interest in the wells and has a 26 gross (13 net) sections of land in the area. The Corporation has identified 6 additional follow-up location on its lands, which it plans to drill in the 2007/8 winter drilling season.

At Mearon South the Corporation owns an interest in 14 gross (4.5 net) sections of land and has re-completed two wells drilled in 2006, one of which tested gas rates of 400 mcf/d establishing the existence of a new pool. Further drilling in the area is planned in 2008.

The Corporation owns an interest in 4 gross (2 net) sections of land in the Velma area, and owns a 50% interest in two Blue Sky wells capable of producing in excess of net 200 boe/d production. The Corporation is currently building a pipeline to tie the wells into the Ladyfern facility, with the completion expected by the end of April, 2007.

Reorganization

At the Special General Meeting of Shareholders held on February 15, 2007, Shareholders voted 99% in favor of the Arrangement and the reorganization of the Corporation which was preceded with court approval of the Arrangement on February 20, 2007. Under the Arrangement, shareholders holding 63,400,000 elected to receive cash and such Shareholders received pro-rated to the maximum of $30,000,000 of available cash on the basis of $1.30 per share. The balance was satisfied, along with shareholders who elected or were deemed to elect to receive the share consideration, by the issuance of one share of Fortress Energy Inc. for every five Signal shares held. As a result of the reorganization Fortress has 13,307,815 shares issued and outstanding. As part of the Arrangement and reorganization of SignalEnergy Inc., the business and operations of the Corporation carries on under the name Fortress Energy Inc.

Reserves Data

The Corporation's Oil and Gas Reserves and Net Present Value of Future Net Revenues based on forecast prices and costs as of December 31, 2006 are as follows: (please refer to Annual Information Form filed on SEDAR at www.sedar.com for additional detailed disclosures):


Summary of Oil and Gas Reserves
As of December 31, 2006
Forecast Prices and Costs

Reserves
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Light/Medium Oil Natural Gas NGL
(MBbl) (MMcf) (MBbl)
------------------ ------------------ ------------------
Gross Net Gross Net Gross Net
-------- -------- -------- -------- -------- --------

Proved
Developed
Producing 6.2 4.9 8,121.7 6,992.4 56.0 44.6
Developed
Non-
Producing - - 1,581.4 1,341.9 - -
Undeveloped - - 7,101.2 6,500.3 - -
-------- -------- -------- -------- -------- --------
Total Proved 6.2 4.9 16,804.3 14,834.5 56.0 56.0
-------- -------- -------- -------- -------- --------
Probable 3.0 2.4 8,428.1 7,542.0 25.7 20.5
-------- -------- -------- -------- -------- --------
Total Proved
plus Probable 9.1 7.3 25,232.3 22,376.5 81.7 65.1
-------- -------- -------- -------- -------- --------


Summary of Net Present Values of Future Net Revenue
As of December 31, 2006
Forecast Prices and Costs

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Before Income Tax
Discounted At
-------------------------------------------------------
0% 5% 10% 15% 20%
(M$) (M$) (M$) (M$) (M$)
-------------------------------------------------------
Proved
Developed
Producing 40,027.4 31,974.7 27,155.3 23,869.9 21,445.8
Developed
Non-Producing 7,622.7 6,706.6 5,971.0 5,370.1 4,871.9
Undeveloped 19,892.0 15,429.1 12,113.0 9,594.3 7,645.2
-------------------------------------------------------
Total Proved 67,542.1 54,110.4 45,239.2 38,834.4 33,962.9
-------------------------------------------------------
Probable 35,705.4 25,320.2 19,031.5 14,810.8 11,813.1
-------------------------------------------------------
Total Proved
plus Probable 103,247.5 79,430.6 64,270.7 53,645.2 45,776.0
-------------------------------------------------------


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After Income Tax
Discounted At
-------------------------------------------------------
0% 5% 10% 15% 20%
(M$) (M$) (M$) (M$) (M$)
-------------------------------------------------------
Proved
Developed
Producing 40,027.4 31,974.7 27,155.3 23,869.9 21,445.8
Developed
Non-Producing 7,622.7 6,706.6 5,971.0 5,370.1 4,871.9
Undeveloped 14,737.2 11,979.2 9,611.8 7,698.0 6,166.1
-------------------------------------------------------
Total Proved 62,387.4 50,660.4 42,738.0 36,938.1 32,483.8
-------------------------------------------------------
Probable 24,900.2 17,521.1 13,064.4 10,086.2 7,980.9
-------------------------------------------------------
Total Proved
plus Probable 87,287.6 68,181.5 55,802.4 47,024.3 40,464.7
-------------------------------------------------------
Notes:
(1) The Sproule Report estimates Fortress' share of future capital
expenditures necessary to achieve the estimated present worth of
future net cash flows based on escalating costs from Proved Reserves
to be $15,595,000 and Proved and Probable Reserves to be $23,165,000.


MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis ("MD&A") should be read in conjunction with the consolidated financial statements of Fortress Energy Inc. ("Fortress" or the "Company", formerly known as SignalEnergy Inc.) for the years ended December 31, 2006 and 2005. The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All tabular amounts in the following discussion are in thousands of Canadian dollars unless otherwise noted.

This MD&A provides management's analysis of Fortress' historical financial and operating performance based on information currently available. Actual results will vary from estimates and variances may be significant. Historical results are not indicative of future performance. This MD&A is dated April 2, 2007.

Non-GAAP Measurements

Management uses the term "funds from operations" to analyze operating performance and leverage, determined as cash flow from operating activities adjusted for changes in non-cash working capital balances. While widely used in the oil and gas industry, funds from operations does not have any standardized meaning prescribed by GAAP and therefore it may not be comparable to the calculation of similar measures for other entities. The Company considers funds from operations to be a key measure since it demonstrates the Company's ability to generate the cash necessary to fund future growth and repay debt. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period, nor should it be viewed as an alternative to cash flow from operating activities, net income (loss), or other measures of financial performance calculated in accordance with GAAP.

Management also uses certain key performance indicators ("KPI's") and industry benchmarks such as "operating netbacks" and funds from operations/boe to analyze financial and operating performance. These KPI's and benchmarks as presented do not have any standard meaning prescribed by GAAP and therefore may not be comparable with the calculation of similar measures for other entities.

BOE Presentation

Natural gas reserves and volumes recorded in thousand cubic feet are converted to barrels of oil equivalent ("boe") on the basis of six thousand cubic feet ("mcf") of gas to one barrel ("bbl") of oil. The term "barrels of oil equivalent" may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalent at the wellhead.

Forward Looking Statements

Statements in this MD&A may contain forward looking information including expectations of future production, components of cash flow and earnings, expected future events and/or financial results that are forward looking in nature and subject to substantial risks and uncertainties. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The Company cautions the readers that actual performance will be affected by a number of factors, as many may respond to changes in economic and political circumstances throughout the world. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company. These risks include, but are not limited to: the risks associated with the oil and gas industry, commodity prices and exchange rate changes; industry related risks could include, but are not limited to, operational risks in exploration, development and production, delays or changes in plans; risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses. These external factors beyond the Company's control may affect the marketability of oil and natural gas produced, industry conditions including changes in laws and regulations, changes in income tax regulations, increased competition, fluctuations in commodity prices, interest rates, and variations in the Canadian/United States dollar exchange rate. The reader is cautioned not to place undue reliance on this forward looking information.

Statements throughout this annual report that are not historical facts may be considered "forward looking statements". These forward looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe the Company's objectives, goals or future plans are forward looking statements. Since forward looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to any number of risks including, but not limited to:

a. Risks associated with the oil and gas industry and regulatory bodies (e.g. operational risks in exploration, development and production);

b. Delays or changes in plans with respect to exploration or development projects or capital expenditures;

c. Uncertainty of estimates and projections relating to recoverable reserves, costs and expenses;

d. Health, safety and environmental risks; and

e. Commodity price and exchange rate fluctuations.



HIGHLIGHTS

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2006 2005
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Sales volume:
Natural gas (mcf/d) 2,744 5,585
Oil and NGL's (bbl/d) 95 245
Equivalence at 6:1 (boe/d) 553 1,176
Sales price:
Natural gas ($/mcf) 6.95 8.93
Oil and NGLs ($/bbl) 59.94 61.15
Equivalence at 6:1 ($/boe) 44.92 55.16
Financial: (000's)
Petroleum and natural gas sales 9,090 23,670
Net income 8,088 2,086
Net income per share - basic and diluted 0.11 0.04
Funds from operations 2,614 10,933
Total assets 115,654 118,639
Capital expenditures 4,986 11,373
Net working capital (deficiency) 37,712 (29,480)
Weighted average shares outstanding - basic 74,494 55,077
Weighted average shares outstanding - diluted 74,494 55,370
Wells drilled:
Gross 2 32
Net 0.7 20
Success rate (%) 100 97
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CORPORATE OVERVIEW

In February 2006, the Company sold its Ferrier, Carrot Creek, Kaybob and Redwater properties for net cash proceeds of approximately $91.2 million, after adjustments. The Company retained its assets in the Chigwell, Bashaw and Buick Creek areas. After the completion of the sale, the Company announced its intention to distribute the net proceeds (after repayment of existing indebtedness) to shareholders.

On March 27, 2006, Pearl Exploration and Production Ltd. announced its intention to make an offer (the "Offer") to acquire all of the issued and outstanding shares of Fortress. The Offer was withdrawn on June 22, 2006 due to a lack of support by Fortress shareholders.

In consideration of its fiduciary obligations to maximize shareholder value, the Company's Board of Directors decided to defer the decision of a distribution so that it could consider other strategic alternatives. In this regard, the Company engaged FirstEnergy Capital Corporation ("FirstEnergy") as its independent financial advisors to consider alternative transactions which could return greater value to shareholders than the proposed distribution and the retention or future sale of the remaining operating entity or properties.

On November 8, 2006, the Company announced that it had entered into an agreement to acquire Marauder Resources West Coast Inc. ("Marauder") and proposed to proceed with a plan of arrangement to reorganize its share capital. The consideration for the acquisition of Marauder was $15.0 million cash, 16.3 million common shares of Fortress and the assumption of approximately $8.2 million of indebtedness. Marauder's production at the time of the acquisition was approximately 440 boe/d with an additional 200 boe/d behind pipe. In addition, Marauder held 14,000 net acres of undeveloped land with an average working interest of 54% and options to earn an additional 52,800 gross acres of undeveloped lands with up to 40 development drilling locations with access to production facilities. Marauder's lands are all located in the Ladyfern area straddling the borders of Alberta and British Columbia.

In conjunction with the acquisition of Marauder, the Company proposed an arrangement with its shareholders whereby existing shareholders could elect to receive one share of Fortress (a newly formed Alberta company) for every five shares of Signal held, $1.30 cash for each Signal share or a combination thereof provided that the maximum amount of cash to be paid out to shareholders was $30 million.

Following the completion of the arrangement and the acquisition of Marauder, Fortress has approximately 13.3 million common shares outstanding. The Company's 2007 capital budget is $15 million which will fund the drilling of 10 infill development wells and 5 exploration wells in the Ladyfern area, all expected to be drilled by the end of the first quarter of 2007.



QUARTERLY HIGHLIGHTS

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2006 2005
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
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Sales volume:
Natural gas
(mcf/d) 3,010 1,777 1,833 4,366 6,253 5,990 5,100 4,929
Oil and NGL's
(bbl/d) 20 35 69 263 430 242 170 145
Equivalence at
6:1 (boe/d) 522 331 375 991 1,472 1,240 1,020 966
Sales price:
Natural gas
($/mcf) 7.19 5.31 6.04 7.86 11.48 9.22 7.25 6.93
Oil and NGLs
($/bbl) 57.19 65.43 57.08 59.62 65.95 62.88 56.59 47.86
Equivalence at
6:1 ($/boe) 44.13 35.46 40.08 50.45 68.31 56.82 45.67 42.53
Benchmark prices:
AECO bench
($/gj) 6.53 5.39 5.71 7.19 10.84 8.76 6.98 6.49
Edmonton Par
($/bbl) 65.24 80.26 80.43 68.90 72.18 77.80 65.80 61.07
Financial ($000's):
Petroleum and
natural gas
sales 2,149 1,079 1,362 4,500 9,250 6,483 4,238 3,699
Net income
(loss) (5,635) (13) 270 13,440 952 536 85 513
Net income
(loss) per
share -
basic and
diluted ($) (0.08) (0.00) 0.00 0.19 0.02 0.01 - 0.01
Funds from
operations 1,089 821 17 687 4,223 3,141 2,208 1,361
Operating costs
($/boe) 5.73 8.51 13.13 13.07 12.81 7.20 7.78 7.25
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In February 2006, the Company sold its interest in certain oil and gas assets. The sale resulted in substantially lower sales volumes in the first three quarters of 2006 when compared to the same period in 2005. Effective November 15, 2006, the Company acquired Marauder Resources West Coast Inc. ("Marauder") which was producing at a rate of 440 boe/d at the time of acquisition. Significant increases in sales volumes were realized in the first and third quarters of 2005 with the acquisitions of Predator Exploration Ltd. ("Predator") and a private oil and gas company in January, and with the acquisition of Goose River Resources Ltd. ("Goose River") in August. These three acquisitions added production gains of approximately 750 boe/d at the time of acquisition. In addition to improved sales volumes throughout 2005, the Company benefited from significantly increased commodity prices in the third and fourth quarters of 2005.

The Company recorded a net loss of $13,000 and a net loss of $5,635,000 in the third and fourth quarters of 2006, respectively, compared to net income in the previous six calendar quarters. The net loss recorded in the fourth quarter of 2006 was attributed to a goodwill impairment charge of $4,548,000 and additional costs incurred to fulfill the Company's commitments to the purchaser of the oil and gas properties that were sold in the first quarter of 2006. The net loss realized in the third quarter was mainly the result of decreased natural gas prices realized by the Company. Net income for the second quarter of 2006 is attributed to a future income tax recovery of $1,068,000 recorded in that period. Net income for the first quarter of 2006 included a gain on the sale of oil and gas properties of $20,087,000, before adjustments. Net income for the first quarter of 2005 is attributable to the recognition of a portion of previously unrecognized tax assets as a result of a 2004 flow-through share renouncement for which the income tax effects were recorded in March 2005. Net income in the fourth quarter of 2005 improved over the previous quarter due to record commodity prices and increased sales volumes resulting from the Goose River acquisition and the Company's drilling program which included the drilling of 31 gross wells (19 net wells) in the last half of 2005.

The Company recorded funds from operations in the fourth quarter of 2006 of $1,089,000 compared to $821,000 for the prior quarter. These increases from the funds provided from operations for the second quarter of 2006 of $17,000 reflects decreases in royalties, operating expenses, and general and administrative expenses in the third and fourth quarters of 2006. Funds from operations in the second quarter of 2006 reflects substantially lower operating netbacks and certain one-off charges related to the sale of oil and gas properties and the failed Pearl offer. Funds from operations in the first quarter of 2006 decreased from the prior quarter due to the sale of oil and gas properties and substantially lower natural gas prices realized. Funds from operations improved throughout 2005 as a result of production increases and record commodity prices realized by the Company.



FOURTH QUARTER HIGHLIGHTS

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Three months ended Three months ended
December 31, 2006 December 31, 2005
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($000's) $/boe ($000's) $/boe
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Petroleum and natural gas sales 2,149 44.13 9,250 68.31
Royalties (net of ARTC) (24) (0.49) (2,036) (15.03)
Operating expenses (279) (5.73) (1,733) (12.80)
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1,846 37.91 5,481 40.48
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Funds from operations 1,089 22.36 4,223 31.18
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The Company's sales volume decreased in the fourth quarter of 2006 to 522 boe/d from 1,472 boe/d for the fourth quarter of 2005. This decrease is primarily due to the sale of oil and gas properties in the first quarter of 2006. Marauder added sales volumes of 460 boe/d for 46 days from the closing of this acquisition - or 230 boe/d of additional production in the fourth quarter of 2006.

Petroleum and natural gas sales decreased to $2,149,000 for the fourth quarter of 2006 from $9,250,000 for the comparable period in 2005. This decrease is due to substantially lower commodity prices and the sale of oil and gas properties, as previously noted.

Royalties decreased substantially in the fourth quarter of 2006 due to previously unrecorded Alberta Royalty Tax Credits of approximately $426,000. When adding back this previously unrecorded amount, royalties as a percentage of sales is 20.9% for the fourth quarter of 2006 which is consistent with 22.2% recorded for the fourth quarter of 2005. In addition, the Redwater property, which was sold in the first quarter of 2006, had a substantially higher royalty rate due to substantial freehold and overriding royalties charged on this property, which typically carry a higher charge than crown royalties. The majority of the properties retained from the sale are on crown lands.

Operating expenses decreased to $279,000 for the fourth quarter of 2006, or $5.73/boe, compared to $1,733,000, or $12.80/boe for the fourth quarter of 2005. This decrease is due to the sale of oil and gas properties in the first quarter of 2006. Particularly, the Redwater property, posted higher than average operating costs due to additional costs incurred for compressor and pump jack rentals, trucking, salt water disposal, and oil treating fees at third party facilities.

Funds from operations, decreased to $1,089,000 for the fourth quarter of 2006 compared to $4,223,000 for the fourth quarter of 2005 as a result of lower commodity prices and the sale of oil and gas assets in the first quarter of 2006. In addition, the Company incurred significant severance and retention costs and legal and advisory fees related to the downsizing of the Company as a result of the sale of oil and gas properties and an unsuccessful takeover bid for the Company in the first quarter of 2006.



RESULTS OF OPERATIONS

Sales

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December 31,
2006 2005
-------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 2,744 5,585
Oil and NGL's (bbl/d) 95 245
Equivalence at 6:1 (boe/d) 553 1,176
Sales price:
Natural gas ($/mcf) 6.95 8.93
Oil and NGLs ($/bbl) 59.94 61.15
Equivalence at 6:1 ($/boe) 44.92 55.16
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Revenues from petroleum and natural gas sales decreased substantially from 2005 levels, as a result of the sale of oil and gas assets in the first quarter of 2006 and lower natural gas prices realized by the Company. Sales improved in the fourth quarter of 2006 over the prior two quarters due to the acquisition of Marauder which added gas sales of 450 boe/d from the closing.

Average sales volumes for 2006 were 553 boe/d compared to 1,176 boe/d for 2005. This decrease is a result of the sale of oil and gas properties in the first quarter of 2006 which was producing at a rate of approximately 1,100 boe/d at the time of sale.

Natural gas accounted for 83% of sales volumes for 2006 compared to 79% for 2005. This increase is due to the change in sales mix resulting from the sale of oil and gas properties in the first quarter of 2006 and the acquisition of Marauder in November 2006. As a result of the acquisition of Marauder, the Company's production is now weighted 95% to natural gas. The natural gas price realized by the Company in 2006 decreased to $6.95/mcf from $8.93/mcf a year earlier. The average sales price per mcf realized by the Company is consistent with the AECO spot price, adjusted for heat content and transportation costs.

The average price realized by the Company for oil and natural gas liquids sales for 2006 was $59.94/bbl - a slight decrease from $61.15/bbl for 2005. The price realized by the Company is slightly lower than the average Edmonton Par posting as a result of quality differentials and transportation costs.

All of the Company's production is marketed in the Alberta spot market and is unhedged.



Royalties

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December 31,
2006 2005
-------------------------------------------------------------------------
Royalties (net of Alberta Royalty Tax Credit) ($000's) 1,398 5,262
$/boe 6.93 12.26
Percentage of petroleum and natural gas sales 15.4 22.2
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Royalties, consisting of crown, gross-overriding and freehold royalties were $1,398,000 for 2006 - a decrease of $3,864,000 from 2005, reflecting the sale of oil and gas properties and substantially lower sales. Alberta Royalty Tax Credits of $426,000 recorded in 2006 reduced the overall crown royalty rate by 4.7%. In addition, in July of 2006, the Company was advised of an adjustment to its Capital Cost and Custom Processing Fee Adjustments (formerly "Gas Cost Allowance") that resulted from an under estimation of these amounts in 2005, resulting in a further reduction to the crown royalty rate of 1.8%.



Operating Expenses

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December 31,
2006 2005
-------------------------------------------------------------------------
Operating ($000's) 2,161 3,908
$/boe 10.71 9.10
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The Company's operating expenses decreased to $2,161,000 for 2006 from $3,908,000 for 2005. This decrease can be attributed to the sale of oil and gas assets. On a per boe basis, operating expenses have increased in 2006 to $10.71/boe, compared to $9.10/boe in 2005. A substantial portion of this increase is due to the acquisition of the Redwater property in August 2005 which posted higher than average operating costs due to additional costs incurred for compressor and pump jack rentals, trucking, salt water disposal, and oil treating fees at third party facilities. Operating costs have trended downward in the third and fourth quarters of 2006.



General and Administrative Expenses

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December 31,
($000's) 2006 2005
-------------------------------------------------------------------------
General and administrative expense 4,760 3,817
General and administrative costs capitalized (410) (979)
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General and administrative expenses (net) 4,350 2,838
$/boe 21.57 6.61
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General and administrative expenses increased to $4,760,000 in 2006 compared to $3,817,000 in 2005. This increase is attributed to severance and retention costs of approximately $959,000 recorded in the period due to the downsizing that occurred as a result of the sale of oil and gas properties in February 2006. Also, advisory and legal costs of approximately $360,000 related to the failed Pearl offer were incurred in the second quarter of 2006. These one-time charges amount to $6.53/boe. The Company's strategy has been to acquire oil and gas companies and to exploit the acquired assets, which results in higher levels of administrative and support staff to integrate the systems and operations of the acquired business than what might otherwise be required.

The Company capitalized general and administrative costs of $410,000 in 2006 compared to $979,000 in 2005. This decrease is due to a reduction in exploration and development activities conducted in the first three quarters of 2006 due to the sale of oil and gas properties in the first quarter of 2006 and the Board initiated process to review strategic alternatives.



Stock-based Compensation Expense

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December 31,
2006 2005
-------------------------------------------------------------------------
Stock-based compensation expense ($000's) 822 1,080
Stock-based compensation expense capitalized - (170)
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Stock-based compensation expense, net 822 910
$/boe 4.08 2.12
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Stock-based compensation expense reflects the value attributed to stock options granted to employees, officers, directors and consultants to the Company. Stock-based compensation expense for 2006 was $822,000 compared to $1,080,000 for 2005. As a result of the sale of oil and gas properties in February 2006 and the substantial reduction in the Company's asset base, all stock options outstanding that had not previously vested were vested on March 1, 2006. Stock-based compensation expense reflects the early vesting of these options.



Interest Expense

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December 31,
2006 2005
-------------------------------------------------------------------------
Interest expense ($000's) 498 693
$/boe 2.47 1.62
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Interest expense decreased to $498,000 for 2006 from $693,000 for 2005. The Company repaid its operating loan on February 28, 2006 with the proceeds from the sale of oil and gas assets. Interest expense for the second, third, and fourth quarters of 2006 represents accrued interest on unspent flow-through funds that were raised in December 2005. Interest expense incurred in prior periods represents interest on the Company's operating loan, the proceeds of which were used to fund the cash portion of three corporate acquisitions and the Company's capital program.



Depletion and Depreciation Expense

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December 31,
2006 2005
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Depletion and depreciation expense ($000's) 4,865 8,879
$/boe 24.12 20.69
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Depletion and depreciation expense was $4,865,000 for 2006 compared to $8,879,000 for 2005. This decrease results from the sale of oil and gas assets in the first quarter of 2006. The depletion and depreciation expense rate for 2006 increased to $24.12/boe from $20.69/boe for 2005. This increase is a result of a reduction in proven reserves for the Bashaw 10-7 and Buick Creek B-22-C/94 wells. These reductions were partially offset by new reserves related to 2 gross (0.7 net) wells in the Bashaw area that were brought onto production in the third quarter of 2006. The increase in the depletion and depreciation expense rate for 2006 reflects the mix of the properties sold and retained, reserve adjustments, and estimated future development costs of approximately $15.6 million relating to the Marauder properties, which significantly increases the depletion and depreciation rate.



Accretion of Asset Retirement Obligations

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December 31,
2006 2005
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Accretion of asset retirement obligations ($000's) 90 253
$/boe 0.45 0.59
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Accretion expense was $90,000 for 2006 compared to $253,000 for 2005. The sale of oil and gas properties in February 2006 resulted in a reduction in asset retirement obligations by $3,387,000 which has been assumed by the purchaser.

Income Tax

The Company recorded future income tax expense of $36,000 for 2006 compared to a future income tax recovery for 2005 of $1,100,000. The Company intends to apply its available tax pools to the sale proceeds to minimize the overall tax liability. In addition, the Company recorded the income tax effect of the 2005 flow-through share issuance in the first quarter of 2006 amounting to $1,022,000. In the first quarter of 2005 the Company recorded a future income tax recovery of $1,195,000 which reflects the income tax effect of a 2004 flow-through share issuance.



Operating Netback

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December 31,
($/per boe) 2006 2005
-------------------------------------------------------------------------
Petroleum and natural gas sales 44.92 55.16
Less: Royalties (net of ARTC) (6.93) (12.26)
Operating expenses (10.71) (9.10)
-------------------------------------------------------------------------
Operating netback 27.28 33.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Funds from operations 12.96 25.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The operating netback for 2006 decreased to $27.28/boe from $33.80/boe for 2005, due to lower commodity prices realized in 2006.

Funds from operations for 2006 were $12.95/boe compared to $25.48/boe for 2005. This decrease is a result of lower operating netbacks and substantially higher general and administrative costs Incurred in 2006, as previously noted in this MD&A.



Net Income

-------------------------------------------------------------------------
December 31,
($000's except per share amounts) 2006 2005
-------------------------------------------------------------------------
Net income 8,088 2,086
Net income per share - basic and diluted 0.11 0.04
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The Company recorded net income of $8,088,000 for 2006 compared to net income of $2,086,000 for 2005. Net income for 2006 is attributed to the gain on sale of oil and gas assets of $15,835,000. The effect of this gain was reduced by a goodwill impairment charge of $4,548,000 which resulted from the Company's assessment of goodwill, based on the latest available information including the market capitalization of the Company as indicated by the Company's share price.



Capital Expenditures

-------------------------------------------------------------------------
December 31,
($000's) 2006 2005
-------------------------------------------------------------------------
Land and rentals 76 2,317
Seismic 18 320
Drilling and completions 1,343 13,525
Equipment and tie-ins 2,293 7,013
Property acquisitions 720 840
Capitalized overhead costs 410 1,149
Other 126 199
-------------------------------------------------------------------------
4,986 25,363
-------------------------------------------------------------------------
-------------------------------------------------------------------------


In 2006, the Company recompleted 2 gross (0.7 net) wells and upgraded its gas gathering systems in the Bashaw area. In addition, the Company conducted 4 workover operations on wells in the Chigwell, Bashaw, and Buick Creek areas. This reflects a substantial reduction in activity levels compared to the previous year when the Company drilled 32 gross wells (20 net), mainly in the last two quarters. This reduction in activity level was facilitated by the Board initiated process announced in March 2006 to review strategic alternatives to maximize shareholder value.

Liquidity and Capital Resources

Cash provided by operating activities was $741,000 for 2006 compared to $4,323,000 for 2005. This decrease in cash provided by operating activities is due to decreased activity in the field due to the sale of oil and gas assets in the first quarter to 2006, lower operating netbacks and substantially higher general and administrative expenses realized.

Cash used in financing activities for 2006 was $19,776,000 compared to cash provided by financing activities of $25,314,000 for 2005. Cash provided by financing activities for 2005 represented an increase to the Company's operating loan to fund three corporate acquisitions and the 2005 drilling program. In the first quarter of 2006, the Company used the proceeds from the sale of oil and gas properties to repay its revolving operating loan which had $28,550,000 drawn at the time of repayment. The exercise of stock options resulted in cash proceeds to the Company of $3,199,000 in 2006.

Cash provided by investing activities for 2006 was $55,730,000 compared to cash used in investing activities of $32,294,000 in 2005. Cash provided by investing activities for 2006 reflects capital expenditures, a reduction in non-cash working capital balances as a result of the substantial decrease in the field activity levels, the proceeds from the sale of oil and gas properties, and the cash component of the acquisition of Marauder in November. The cash component of the Marauder acquisition was $23,208,000, consisting of cash of $15,000,000, transaction and severance costs of $1,660,000, and the assumption of Marauder's operating line of credit which had $6,548,000 drawn at the time of acquisition. The line was subsequently repaid by the Company. Cash used in financing activities for 2005 reflects property and equipment expenditures, the proceeds of sale on the Company's Twining property for proceeds of $13,250,000 in the second quarter of 2005, and the cash component of the purchase price for three companies acquired in 2005. In 2005, the Company drilled 32 gross (20 net) wells compared to only 2 gross and 0.7 net wells in 2006. As noted previously in this MD&A, this decrease was the result of the Board initiated process to review strategic alternatives.

Securities Outstanding

Securities outstanding as of the date of this MD&A consist of 13,307,815 issued and outstanding common shares and 970,000 stock options. These figures reflect the reorganization of Signal on February 20, 2007, which resulted in the redemption of 23,076,923 common shares for $30 million of cash based on a redemption price of $1.30 per share. This redemption left 66,539,059 common shares of Signal which were exchanged for 13,307,815 common shares of Fortress, based on a conversion factor of one share of Fortress for every five shares of Signal held. 4,850,000 options of Signal outstanding at the time of this reorganization were exchanged on a five for one basis resulting in the issuance of 970,000 options of Fortress. As a result of this reorganization, Fortress now holds all of the assets formerly held by Signal.

Off-balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Related Party Transactions

The Company has no related party transactions.

Commitments and Contingencies

The Company has no commodity price, interest rate swaps or fixed price contracts in place as of December 31, 2006.

The Company is committed to minimum annual lease payments under operating leases for office premises and office equipment to March, 2013, as follows:



-------------------------------------------------------------------------
($000's)
-------------------------------------------------------------------------
2007 395
2008 431
2009 430
2010 435
2011 439
Thereafter 549
-------------------------------------------------------------------------
2,679
-------------------------------------------------------------------------


Subsequent Events

A Reorganization (the "Reorganization") of SignalEnergy Inc. (Signal"), including an arrangement (the "Arrangement") under the Companies Act (Quebec), was approved by the shareholders at a Special General Meeting of Shareholders held on February 15, 2007 and was effective on February 20, 2007.

Under the Arrangement, shareholders of Signal could elect to receive cash, common shares of Fortress, or a combination of both, subject to total cash available of $30 million. Shareholders representing 63,400,000 common shares of Signal elected to receive cash which resulted in a cash distribution to shareholders of $30 million to redeem 23,076,923 common shares of Signal at $1.30 per share. The remaining 66,539,059 common shares of Signal were exchanged for common shares of Fortress on a basis of one common share of Fortress for every five common shares of Signal, resulting in the issuance of 13,307,815 common shares of Fortress.

On January 15, 2007, after giving effect to the Reorganization, the Company granted options to acquire 948,000 common shares of the Company at an exercise price of $4.75 per share, expiring January 15, 2012.

Upon completion of the Reorganization, Fortress holds all of the assets formerly held by Signal.

New Canadian Accounting Pronouncements

The Canadian Institute of Chartered Accountants (CICA) has issued a number of accounting pronouncements, some of which may impact the Company's reported results and financial position in future periods.

Comprehensive Income/Financial Instruments/Hedges

The CICA issued new standards in early 2006 for Comprehensive Income (CICA 1530), Financial Instruments (CICA 3855) and Hedges (CICA 3865), which will be effective for the reporting year-end 2007. The new standards will bring Canadian rules in line with current rules in the US. The standards will introduce the concept of "Comprehensive Income" to Canadian GAAP and will require that an enterprise (a) classify items of comprehensive income by their nature in a financial statement and (b) display the accumulated balance of comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Derivative contracts will be carried on the balance sheet at their mark-to-market value, with the change in value flowing to either net income or comprehensive income. Gains and losses on instruments that are identified as hedges will flow initially to comprehensive income and be brought into net income at the time the underlying hedged item is settled. It is expected that this standard will be effective for Fortress' 2007 reporting. Any instruments that do not qualify for hedge accounting will be marked-to-market with the adjustment (tax effected) flowing through the income statement.

Fortress does not currently have any hedges in place so the impact of these recommendations would not be significant.

Changes in Accounting Policies and Estimates, and Errors

In July 2006, the CICA issued a new standard for Changes in Accounting Policies and Estimates, and Errors (CICA 1300). The new standard applies to interim and annual financial statements for fiscal years beginning on or after January 1, 2007. The standard permits changes to accounting policies only when it is required by a primary source of GAAP, or when the change results in a reliable and more relevant presentation in the financial statements. The standard requires expanded disclosure about the effects of changes in accounting policy, estimates and errors on financial statements, and disclosure of new primary sources of GAAP that have been issued but have not yet come into effect and have not been adopted by the Company. Management expects that this new standard will not have a significant impact on future financial statements of the Company.

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filings, that the Company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the Company, including its consolidated subsidiaries, is made known to them by others within those entities. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Internal Controls over Financial Reporting

Internal controls over financial reporting are defined in MI 52-109 as "... a process designed by, or under the supervision of, the issuer's chief executive officer and chief financial officer, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP and includes those policies and procedures that:

(a) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the acquisitions and dispositions of the assets of the issuer;

(b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the issuer's GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

(c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the annual financial statements or interim financial statements.

The Company has conducted a review of the design of its internal controls over financial reporting, with the conclusion that as at December 31, 2006, the Company's system of internal controls over financial reporting as defined under MI 52-109 is sufficiently designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the Company's GAAP. In its assessment, the Company identified certain material weaknesses in the design of its internal controls over financial reporting:

a) due to the small number of staff, it is not feasible to achieve the complete segregation of incompatible duties;

b) due to the small number of staff, the Company relies upon third parties as participants in the Company's internal controls over financial reporting and accounting for income taxes; and

c) due to the small number of staff, weaknesses may be caused by the number of corporate acquisitions and restructuring activities conducted in 2005 and 2006.

The Company believes these weakness are mitigated by: the active involvement of senior management and the board of directors in all the affairs of the Company; open lines of communication within the Company; the present levels of activities and transactions within the Company being readily transparent; the thorough review of the Company's financial statements by management, the board of directors and by the Company's auditors. In addition, the Company is increasing the size of its finance team. However, these mitigating factors will not necessarily prevent the likelihood that a material misstatement will not occur as a result of the aforesaid weaknesses in the Company's internal controls over financial reporting. A system of internal controls over financial reporting, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the internal controls over financial reporting are met.

BUSINESS RISKS and UNCERTAINTIES

Fortress' production and exploration activities are concentrated in the Western Canadian Sedimentary Basin, where activity is highly competitive and includes a variety of different sized companies ranging from smaller junior producers to the much larger integrated petroleum companies. Fortress is subject to the various types of business risks and uncertainties including:

- finding and developing oil and natural gas reserves at economic costs;

- production of oil and natural gas in commercial quantities; and

- marketability of oil and natural gas produced.

In order to reduce exploration risk, the Company strives to employ highly qualified and motivated professional employees with a demonstrated ability to generate quality proprietary geological and geophysical prospects. To help maximize drilling success, Fortress combines exploration in areas that afford multi-zone prospect potential, targeting a range of low to moderate risk prospects with some exposure to select high-risk with high-reward opportunities. The Company explores in areas where the Company has drilling experience.

The Company mitigates its risk related to producing hydrocarbons through the utilization of the most appropriate technology and information systems. In addition, the Company seeks to maintain operational control of its prospects.

Oil and gas exploration and production can involve environmental risks such as pollution of the environment and destruction of natural habitat, as well as safety risks such as personal injury. In order to mitigate such risks, Fortress conducts its operations at high standards and follows safety procedures intended to reduce the potential for personal injury to employees, contractors and the public at large. The Company maintains current insurance coverage for general and comprehensive liability as well as limited pollution liability. The amount and terms of this insurance are reviewed on an ongoing basis and adjusted as necessary to reflect changing corporate requirements, as well as industry standards and government regulations. Fortress may periodically use financial or physical delivery hedges to reduce its exposure against the potential adverse impact of commodity price volatility, as governed by formal policies approved by senior management subject to controls established by the Board of Directors.

CRITICAL ACCOUNTING ESTIMATES

The reader is advised that the critical accounting estimates, policies, and practices as described in this MD&A and report continue to be critical in determining Fortress' financial results.

The reader is further cautioned that the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes. Changes in these judgments and estimates could have a material impact on the financial results and financial condition. The following discussion outlines accounting policies and practices that are critical to determining the Company's financial results:

Accounting for Petroleum and Natural Gas Operations

The Company follows the full cost method of accounting whereby all costs relating to the acquisition of, exploration for and development of oil and gas reserves are capitalized in a single Canadian cost center. Such costs include lease acquisition, lease rentals on undeveloped properties, geological and geophysical costs, drilling both productive and non-productive wells, production equipment and overhead charges directly related to acquisition, exploration and development activities.

The application of the full cost method of accounting requires management's judgment to determine the proper designation of wells as either developmental or exploratory, which will ultimately determine the proper income tax treatment of the costs incurred.

Full cost accounting depends on the estimated proven reserves that are believed to be recoverable from the Company's oil and gas properties. The process of estimating reserves is complex. It requires significant judgments and decisions based on available geological, geophysical, engineering, and economic data. These estimates may change substantially as additional data from ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and costs change. Our reserve estimates are based on current production forecasts, prices and economic conditions. Fortress' reserves were evaluated by the independent engineering firm Sproule Associates Ltd.

Reserve estimates are critical to many of our accounting estimates, including:

- Calculating our unit-of-production depletion and future site restoration rates. Proven reserve estimates are used to determine rates that are applied to each unit-of-production in calculating depletion expense.

- Assessing when necessary, oil and gas assets for possible impairment. Estimated future undiscounted cash flows are determined using proven reserves. The criteria used to assess impairment, including the impact of changes in reserve estimates, are discussed below.

As circumstances change and additional data becomes available, reserve estimates also change, possibly materially impacting net income. Estimates made are reviewed and revised, either upward or downward, as warranted by the new information. Revisions are often required due to changes in well performance, prices, economic conditions and governmental restrictions.

Although we make every reasonable effort to ensure that our reserve estimates are accurate, reserve estimation is an inferential science. As a result, the subjective decisions, new geological or production information and a changing environment may impact these estimates. Revisions to our reserve estimates can arise from changes in oil and gas prices, and reservoir performance. Such revisions can be either positive or negative.

It would take a very significant decrease in our proven reserves to limit our ability to borrow money under our credit facility.

Impairment of Petroleum and Natural Gas Properties

The Company reviews its full cost pool for impairment annually. An impairment provision is recorded whenever events or circumstances indicate that the carrying value of the Company's properties may not be recoverable. The impairment provision is based on the excess of carrying value over fair value. Fair value is defined as the present value of the estimated future net revenues from production of total proved and probable petroleum and natural gas reserves, as estimated by the Company on the balance sheet date. Reserve estimates, as well as estimates for petroleum and natural gas prices and production costs may change, and there can be no assurance that impairment provisions will not be required in the future.

Management's assessment of, among other things, the results of exploration activities, commodity price outlooks, and planned future development and sales, impacts the amount and timing of impairment provisions.

Asset Retirement Obligations

The asset retirement obligations provision recorded in the consolidated financial statements is based on an estimate for total costs for future site restoration and abandonment of the Company's petroleum and natural gas properties. This estimate is based on management's analysis of production structure, reservoir characteristics and depth, market demand for equipment, currently available procedures, and discussions with construction and engineering consultants. Estimating these future costs requires management to make estimates and judgments that are subject to future revisions based on numerous factors, including changing technology, political and regulatory environments.

Income Taxes

The Company records future tax assets and liabilities to account for the expected future tax consequences of events that have been recorded in its consolidated financial statements and its tax returns. These amounts are estimates; the actual tax consequences may differ from the estimates due to changing tax rates and regimes, as well as changing estimates of cash flows and capital expenditures in current and future periods. The Company periodically assesses its ability to realize on its future tax assets. If Fortress concluded that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, the tax asset will be reduced by a valuation allowance.

Goodwill

The Company recognizes goodwill on corporate acquisitions when the total purchase price exceeds the fair value of the net identifiable assets and liabilities of the acquired entity. Goodwill is tested annually at year-end for impairment or as events occur that could result in impairment. Impairment is recognized based on the fair value of the Company compared to the book value of the Company. If the fair value of the Company is less than the book value, impairment is measured allocating the fair value to the identifiable assets and liabilities as if the Company had been acquired in a business combination for its fair value. The excess of the fair value over the amounts assigned to the identifiable assets and liabilities is the fair value of goodwill. Any excess of the book value over this implied fair value of goodwill is the impairment amount. Impairment is charged to the statement of operations in the period which it occurs. Goodwill is stated at cost less impairment and is not amortized.

Claims and Litigation

The Company is involved in various claims and litigation arising in the normal course of business. The outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in the Company's favor. If the outcome is unfavorable, it could have a materially adverse impact on the Company's financial position or results of operations.

With the above risks and uncertainties, the reader is cautioned that future events and results may vary significantly from that which Fortress currently foresees.

MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

The accompanying consolidated financial statements and all information in this report are the responsibility of management. The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Financial statements are not precise since they include certain amounts based upon estimates and judgments. When alternative accounting methods exist, management has chosen those it deems to be the most appropriate to ensure fair and consistent presentation. The financial information presented elsewhere in this report is consistent with that in the financial statements.

Management maintains financial and operating systems that include appropriate and effective internal controls. Such systems are designed to provide reasonable assurance that the financial information is reliable and relevant, and the Company's assets are appropriately accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board of Directors carries out this responsibility principally through its Audit Committee.

The Audit Committee, with all of its members being outside directors, is appointed by the Board of Directors and reviews the financial statements and Management's Discussion and Analysis; assesses the adequacy of the internal controls of the Company; considers the report of the external auditors; examines the fees and expenses for audit services; and recommends to the Board of Directors the independent auditors for appointment by the shareholders. The Audit Committee reports its findings to the Board of Directors for consideration when approving the annual financial statements for issuance to the shareholders.

These consolidated financial statements have been audited by Ernst & Young LLP, the external auditors, in accordance with Canadian generally accepted auditing standards, on behalf of the shareholders. Ernst & Young LLP have full and free access to, and meet periodically with, the Audit Committee.



"signed" "signed"
J. Cameron Bailey Jamie Jeffs, CA
President & CEO Chief Financial Officer


AUDITORS' REPORT

To the Shareholders of Fortress Energy Inc.

We have audited the consolidated balance sheets of Fortress Energy Inc. (formerly SignalEnergy Inc.) as at December 31, 2006 and 2005 and the consolidated statements of operations and deficit 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, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.


"signed"
Ernst & Young LLP
Calgary, Canada

April 2, 2007 Chartered Accountants



-------------------------------------------------------------------------
FORTRESS ENERGY INC.
(Formerly SignalEnergy Inc.)
CONSOLIDATED BALANCE SHEETS
As at December 31
(in thousands)
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents (note 3) $ 36,756 $ 61
Accounts receivable 7,951 11,269
Prepaid expenses 368 258
-----------------------------------------------------------------------
45,075 11,588
Property and equipment (note 6) 70,579 102,503
Goodwill (note 7) - 4,548
-------------------------------------------------------------------------
$ 115,654 $ 118,639
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 7,080 $ 17,810
Income taxes payable 283 283
Revolving operating loans (note 8) - 22,975
-----------------------------------------------------------------------
7,363 41,068

Future income tax liability (note 9) 5,052 -
Asset retirement obligations (note 10) 1,678 4,428
-------------------------------------------------------------------------
14,093 45,496
-------------------------------------------------------------------------

Commitments and contingencies (notes 11 and 14)

Shareholders' Equity
Share capital (note 11) 157,508 136,817
Contributed surplus (note 11) 1,779 2,140
Deficit (57,726) (65,814)
-----------------------------------------------------------------------
101,561 73,143

-------------------------------------------------------------------------
$ 115,654 $ 118,639
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Subsequent events (note 16)

See accompanying notes to consolidated financial statements.

On behalf of the Board of Directors:


"signed" "signed"
J. Cameron Bailey Barry Giovanetto
Director Director



-------------------------------------------------------------------------
FORTRESS ENERGY INC.
(Formerly SignalEnergy Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the years ended December 31
(in thousands, except per share amounts)
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------

REVENUE
Petroleum and natural gas sales $ 9,090 $ 23,670
Royalties (net of Alberta Royalty Tax Credit) (1,398) (5,262)
-----------------------------------------------------------------------
7,692 18,408
Interest income 1,931 59
-----------------------------------------------------------------------
9,623 18,467
-----------------------------------------------------------------------
EXPENSES
Operating 2,161 3,908
General and administrative 4,350 2,838
Stock-based compensation (note 12) 822 910
Interest 498 693
Depletion and depreciation 4,865 8,879
Accretion of asset retirement obligations
(note 10) 90 253
-----------------------------------------------------------------------
12,786 17,481
-----------------------------------------------------------------------

Income (loss) from operations before the
following (3,163) 986
-------------------------------------------------------------------------
OTHER ITEMS
Gain on sale of oil and gas properties
and equipment (note 5) 15,835 -
Goodwill impairment (note 7) (4,548) -
-------------------------------------------------------------------------
11,287 -
-------------------------------------------------------------------------
Income before income taxes 8,124 986
-------------------------------------------------------------------------
Income tax expense (recovery) (note (9)
Current - 95
Future 36 (1,195)
-----------------------------------------------------------------------
36 (1,100)
-------------------------------------------------------------------------
Net income for the year 8,088 2,086

Deficit, beginning of year (65,814) (67,616)
Distribution to shareholders (note 4 (b)) - (284)
-------------------------------------------------------------------------
Deficit, end of year $ (57,726) $ (65,814)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income per share (note 11)
Basic $0.11 $0.04
Diluted $0.11 $0.04
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



-------------------------------------------------------------------------
FORTRESS ENERGY INC.
(Formerly SignalEnergy Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31
(in thousands)
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the year $ 8,088 $ 2,086
Items not affecting cash flows:
Stock-based compensation 822 910
Depletion and depreciation 4,865 8,879
Accretion of asset retirement obligations 90 253
Gain on sale of oil and gas properties
and equipment (15,835) -
Goodwill impairment 4,548 -
Future income tax expense (recovery) 36 (1,195)
-----------------------------------------------------------------------
2,614 10,933
Change in non-cash operating working capital
(note 15) (1,873) (6,610)
-------------------------------------------------------------------------
Cash provided by operating activities 741 4,323
-------------------------------------------------------------------------

FINANCING ACTIVITIES
Change in revolving operating loan (22,975) 22,975
Share buy back (note 11) - (579)
Issuance of common shares on exercise of
stock options

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