Grand Petroleum Inc.
TSX VENTURE : GPP

Grand Petroleum Inc.

May 24, 2005 21:06 ET

Grand Petroleum Inc. Announces First Quarter Results

CALGARY, ALBERTA--(CCNMatthews - May 24, 2005) - Grand Petroleum Inc. (TSX VENTURE:GPP) ("Grand" or the "Corporation") is pleased to announce results for the first quarter of 2005. The quarterly report to shareholders is posted on the Corporation's web site http://www.grandpetroleum.com and will be filed on http://www.sedar.com.



Financial and Operating Highlights

Three months ended
March 31, 2005 March 31, 2004 % Change
------------------------------------------------------------------------
Financial
Petroleum and natural gas sales $ 4,494,288 $ 1,933,131 132
Cash flow from operations 1,898,017 593,363 220
Per share - basic 0.10 0.04 150
Per share - diluted 0.10 0.04 150
Net earnings (164,229) (123,594) (33)
Per share - basic (0.01) (0.01) -
Per share - diluted (0.01) (0.01) -
Capital expenditures, net 9,297,220 5,608,875 66
Net working capital deficiency (10,013,868) (527,876) 1,797
Total assets 37,626,244 14,091,317 167
Shareholders' equity $ 19,557,714 $ 7,803,475 151
------------------------------------------------------------------------

Common shares outstanding
Weighted average (#)
Basic 18,552,523 13,452,523 38
Fully Diluted 19,220,342 14,537,523 32
End of period (#)
Basic 18,552,523 13,452,523 38
Fully Diluted 20,397,523 14,537,523 40

Operations
Average daily production
Crude oil & NGLs (bbls/day) 839 436 93
Natural gas (mcf/day) 1,518 640 137
------------------------------------------------------------------------
Total (boe/day) 1,092 542 101
------------------------------------------------------------------------

Netback ($/boe)
Average selling price 45.73 39.18 17
Royalties (5.01) (15.26) (5)
Production expense (17.52) (17.52) 0
------------------------------------------------------------------------
Realized netback 23.20 16.40 41
------------------------------------------------------------------------

Drilling
Gross (net) wells drilling (#)
Crude oil 2 (1.75) 1 (1) 75
Gas 3 (2.6) 1 (1) 160
Abandoned 2 (1.5) - -
------------------------------------------------------------------------
Total 7 (5.85) 2 (2) 193
------------------------------------------------------------------------


Highlights

- Cash flow up 220% to $1,898,017 in the first quarter of 2005 compared to $593,363 in the first quarter of 2004, and up 250% on a fully diluted per share basis to $0.10 from $0.04.

- Production rose to 1,092 boe/day, up 101% from 542 boe/day in the first quarter of 2004.

- Drilled seven (5.85 net) wells in the first quarter at a 74% success rate, setting up development drilling to begin in the second quarter.

- Established a commanding land position on a new exploration play at Hazelwood in Southeast Saskatchewan.

West Central Alberta

The first quarter of 2005 was an active and very constructive period for Grand. After much groundwork to establish a core land position on selected areas of West Central Alberta, we began to test our concepts with the drill bit and achieved important success in the quarter. Grand successfully drilled six (4.85 net) wells in West Central Alberta, including new pool discoveries at Pine Creek, Atim and St. Anne. We plan to drill additional wells in each area this summer.

At Pine Creek, northwest of Edmonton, Grand (75% before payout, 50% after payout) drilled, tested, completed and fracture-stimulated a successful Cardium oil and gas well. Work is underway to tie in the well, with production scheduled to commence late in the second quarter. Our discovery has set up three offset wells. If successful, this would set up an additional four locations on-trend on Grand's land.

At Atim, just west of Edmonton, Grand (60% working interest) drilled a three-zone gas well on a proprietary 12 square mile 3-D program. The Company has completed the discovery, which is expected to begin producing in June at an estimated 200 boe/day net to Grand. Grand intends to drill at least two (1.2 net) more wells on its land in the area this summer.

At St. Anne, west of Edmonton and Atim, Grand drilled two (2 net) gas wells. The first well has commenced production at approximately 500 mcf/day. The second well was cased and completed and is awaiting further stimulation this summer after additional drilling in the area is completed. This drilling includes another two (2 net) locations that are planned to be drilled this summer with the first set to spud in June.

At Sylvan, we will be drilling another exploration well this week (69.25% before payout, 49.25% after payout) and have one additional location to drill on a separate feature. After much delay, a partner-operated, potentially high-impact Nisku recompletion (Grand 50%) should begin production late in the second quarter or early in the third quarter.

East Central Alberta

In East Central Alberta, Grand drilled a 100% oil well during the first quarter, but chose to delay further drilling until spring when costs are expected to be significantly lower. The Company began drilling a five well program in May and to date has drilled and cased four (3.5 net) wells as potential oil producers.

Grand has a large inventory of potential locations in East Central Alberta which can be used to offset natural declines in order to maintain, or potentially grow, the production base of approximately 1,000 boe/day. This base will continue to provide a strong cash flow to fund West Central Alberta exploration in 2005. We expect to spend at least 60% of our capital expenditure budget in West Central Alberta, compared to approximately 25% in 2004.

In total, Grand plans to drill nine (6 net) wells this summer 2005 in West Central Alberta, including wells at Atim, St. Anne, Pine Creek and Sylvan. By the third quarter, we expect to begin drilling the first of 12 (6 net) wells planned for Hazelwood, Saskatchewan, in which Grand has a 50% working interest. Grand and its partner have established a land base of 21 (10.5 net) sections and over 30 (15 net) sections of option lands along a new exploration trend. In the first quarter we acquired over 40 square miles of 3-D seismic setting up a very strong exploration trend for Grand.

Financing

Grand issued 1,820,000 flow-through shares at $3.30 for gross proceeds of $6 million. Funds from the issue, which closed on May 4, will be used in part to finance the acceleration of our drilling program. The issue ensures our debt does not exceed one times cash flow and will also allow us to pursue additional drilling and any potential acquisitions.

Production

Production in the first quarter averaged 1,092 boe/day, down slightly from the average of 1,195 boe/day in the fourth quarter. The drop in production was due to a conscious choice to delay East Central Alberta drilling, which allowed natural declines to outpace additions. This trend should change dramatically in the second quarter as first quarter discoveries are brought on-stream. With the success achieved to date in the second quarter drilling program Grand expects to see continued growth for the remainder of the year.

Work has begun on bringing our first quarter drilling successes on production. Grand entered the second quarter with approximately 500 boe/day of potential productive capacity awaiting tie-in. We anticipate that by the end of the second quarter production should exceed our annual average forecast rate of 1,600 boe/day, helping to solidify our forecast for annual fully diluted cash flow per share in excess of $0.75. This figure is based upon an April 1, 2005 price forecast by our independent engineers, Gilbert Laustsen and Jung Associates.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion is management's opinion about Grand's operating and financial results for the three months ended March 31, 2005 and 2004 and previous periods, and the outlook for Grand based on information available as at May 18th, 2005.

The following discussion and analysis should be read in conjunction with the audited financial statements and notes and management's discussion and analysis for the year ended December 31, 2004 and for the period ended December 31, 2003. Per barrel of oil equivalent amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil (6:1).

Management's discussion and analysis contains the term "cash flow from operations", which is calculated by adding non-cash items (stock-based compensation expense, future income tax provision and depletion, depreciation and accretion) to earnings for the period. Cash flow from operations is not a generally accepted accounting standard and therefore may not be comparable to similar benchmarks presented by issuers outside the oil and gas industry.

This discussion contains forward-looking statements. Forward-looking statements address future events and conditions, and are based on current expectations. Because of the nature of forward-looking statements, they involve inherent risks and uncertainties, and therefore actual results could differ materially from those currently anticipated.

Quarterly Financial Information

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



Three months ended
Mar 31 Dec 31 Sept 30 Jun 30 Mar 31
2005 2004 2004 2004 2004
------------------------------------------------------------------------
Petroleum and
natural gas
sales, net of
royalties $4,494,288 $4,648,270 $4,086,709 $3,067,504 $1,933,131
Funds from
operations 1,898,017 2,150,574 1,659,758 1,045,818 593,363
Per share
- Basic 0.10 0.15 0.12 0.08 0.04
- Diluted 0.10 0.14 0.12 0.08 0.04
Earnings
(deficit) (164,229) 2,716,318 357,052 36,010 (89,148)
Per share
- Basic (0.01) 0.19 0.02 0.00 (0.01)
- Diluted $ (0.01)$ 0.19 $ 0.02 $ 0.00 $ (0.01)
------------------------------------------------------------------------
Earnings
(deficit),
before income
tax recovery (316,758) (206,170) 357,052 36,010 (89,148)
Per share
- Basic (0.02) (0.01) 0.02 0.00 (0.01)
- Diluted $ (0.02)$ (0.01)$ 0.02 $ 0.00 $ (0.01)
------------------------------------------------------------------------
Two months
Three months ended ended
Dec 31 Sept 30 June 30
2003 2003 2003
------------------------------------------------------------------------
Petroleum and natural gas sales,
net of royalties $ 195,072 $ 65,095 $ 47,256
Funds from operations (9,442) (11,335) 2,735
Per share
- Basic (0.01) (0.01) 0.01
- Diluted (0.01) (0.01) 0.01
------------------------------------------------------------------------
Earnings (deficit) (64,260) (21,371) (2,984)
Per share
- Basic (0.01) (0.03) 0.00
- Diluted $ (0.01) $ (0.03) $ 0.00
------------------------------------------------------------------------
Earnings (deficit), before
income tax recovery (64,260) (21,371) (2,984)
Per share
- Basic (0.01) (0.03) (0.00)
- Diluted $ (0.01) $ (0.03) $ (0.00)
------------------------------------------------------------------------


Detailed Financial Analysis

Production

Three months ended March 31
2005 2004 % Change
------------------------------------------------------------------------
Oil (bbls/day) 826 427 93
Gas (mcf/day) 1,518 640 137
NGLs (bbls/day) 13 8 63
------------------------------------------------------------------------
Total (boe/day) 1,092 542 102
------------------------------------------------------------------------


Grand's production increased from an average of 542 boe/d for the three months ended March 31, 2004 to 1,092 boe/d for the three months ended March 31, 2005. The increase in quarter-over-quarter production is due to an acquisition in March 2004 of approximately 375 boe/d, as well as increased production from the successful drilling and tie-in activities throughout 2004. The remaining successful wells, along with some of the wells drilled in Q1 of 2005 are expected to be on-production in the second quarter of 2005.



Petroleum and Natural Gas Sales

Three months ended March 31
2005 2004 % Change
------------------------------------------------------------------------
Revenue
Oil $ 3,491,196 $ 1,524,536 129
Gas 952,854 379,948 151
NGLs 50,238 28,647 75
------------------------------------------------------------------------
Total $ 4,494,288 $ 1,933,131 132
------------------------------------------------------------------------

Average sales price
Oil ($/bbl) $ 46.96 $ 39.20 20
Gas ($/mcf) $ 6.97 $ 6.53 7
NGLs ($/bbl) $ 42.94 $ 38.39 12
------------------------------------------------------------------------
Total ($/boe) $ 45.73 $ 39.20 17
------------------------------------------------------------------------


Revenue from petroleum and natural gas sales, before transportation costs, totaled $4,494,288 for the first quarter of 2005, compared with $1,933,131 for the first quarter of 2004. Revenues increased due to higher production and higher prices quarter-over-quarter.

In the three months ended March 31, 2005, crude oil prices averaged $46.96 per barrel (bbl), natural gas prices averaged $6.97 per thousand cubic feet (mcf) and natural gas liquids prices averaged $42.94/bbl. This compares to $39.20/bbl, $6.53/mcf and $38.39/bbl respectively, for the three months ended March 31, 2004. The Company sells all its oil and natural gas on the spot market; therefore, both the historical prices received and future prices expected fluctuate with the prevailing market prices of crude oil and natural gas. The Company did not hedge or enter into any fixed price arrangements in the period ended March 31, 2005.



Royalties

Three months ended March 31
2005 2004 % Change
------------------------------------------------------------------------
Royalties
Crown $ 132,272 $ 10,313 1,183
Freehold 282,858 202,778 39
GORR 77,732 47,567 63
------------------------------------------------------------------------
Total $ 492,862 $ 260,658 89
------------------------------------------------------------------------

Average percent of total sales
Crown 3.0% 0.5% 500
Freehold 6.3% 10.4% (39)
GORR 1.7% 2.5% (32)
------------------------------------------------------------------------
Total 11.0% 13.4% (18)
------------------------------------------------------------------------


Royalties for the three months ended March 31, 2005 totaled $492,862 net of Alberta Royalty Tax Credit, compared to $260,658 for the three month period ended March 31, 2004. The higher royalties reflect year-over-year production and price increases.

Royalties as a percentage of sales decreased to 11.0% for the three months ended March 31, 2005 from 13.5% for the three months ended March 31, 2004. Crown royalties increased due to new wells drilled or acquired on Crown lands; freehold royalties as a percentage of sales decreased due to the royalty-free leases that were acquired with the acquisition in March 2004.



Production Expenses

Three months ended March 31
2005 2004 % Change
------------------------------------------------------------------------
Production expenses $ 1,680,220 $ 834,829 101
Transportation expense 101,944 55,313 84
Overhead recoveries - operating (50,750) (22,750) 123
Water disposal income (9,222) (2,701) 241
------------------------------------------------------------------------
Total $ 1,722,192 $ 864,691 99
------------------------------------------------------------------------


Production expenses for the three month period ended March 31, 2005 were $1,722,192 compared to $864,691 for the three months ended March 31, 2004. The increase was due mainly to higher production. Grand expects operating costs to increase as production increases, but a lower operating cost per boe rate should be achieved due to higher impact wells coming on production in the second quarter of 2005.



Operating Netbacks

Barrels of oil Three months ended March 31
equivalent ($/boe) 2005 2004 % Change
------------------------------------------------------------------------
Sales price $ 45.73 $ 39.18 17
Royalties (5.01) (5.26) (5)
Production expense (16.52) (16.40) 1
Transportation expense (1.00) (1.12) (11)
------------------------------------------------------------------------
Operating netback $ 23.20 $ 16.40 41
------------------------------------------------------------------------


Grand's average operating netback for the three months ended March 31, 2005 was $23.20/boe, compared to $16.40/boe for the three months ended March 31, 2004. The higher netback was primarily due to higher oil prices. Operating costs per boe for the period ended was $16.52/boe compared to $16.40/boe in 2004.



General and Administrative Expense

Three months ended March 31
2005 2004 % Change
------------------------------------------------------------------------
General and administrative
expense $ 669,842 $ 338,345 98
Overhead recoveries - capital (169,110) (40,476) 318
Interest income - (13,744) (100)
Capitalized general and
administrative expense (127,378) (103,989) (22)
------------------------------------------------------------------------
Total $ 373,354 $ 180,136 107
------------------------------------------------------------------------
Total - net ($/boe) $ 3.80 $ 3.65
------------------------------------------------------------------------


Net general and administrative expense (G&A) for the three month period ended March 31, 2005 totaled $373,354, compared to $180,136 for the three month period ended March 31, 2004. The most significant components of the increase are employee and consultant compensation and rent. For the three months ended March 31, 2005 the Company capitalized the compensation of geological and geophysical employees and consultants of $127,378 compared to $103,989 for the same period in 2004.

Depletion, Depreciation and Accretion

For the three month period ended March 31, 2005, depletion, depreciation and accretion totaled $2,080,838, or $21.17/boe, compared with $673,061 or $13.64/boe for the three month period ended March 31, 2004. Total costs subject to depletion and depreciation in the first three months of 2005 include approximately $2.3 million relating to future development costs estimated to complete oil and gas wells for which proved reserves have been assigned. Undeveloped land with a value of approximately $1.8 million has been excluded from the costs subject to depletion. Undeveloped land is included in the depletion and deprecation calculation once it is considered to be developed. Accretion of the asset retirement obligation was $70,417 and depletion and depreciation totaled $2,010,421. The increase in the depletion and depreciation per boe is mainly due to the large amount of capital expenditures in 2004 and the first quarter of 2005 for seismic and drilling in West Central Alberta which did not have reserves assigned at the end of the first quarter of 2005.

Income Taxes

At December 31, 2004, Grand recorded a future tax asset of $3,180,535 on the balance sheet and corresponding future tax recovery of $2,922,488 on the income statement, with the difference of $258,047 recorded to share capital as the tax effect of the share issue costs. Grand's future tax asset was created at December 31, 2004 using tax pools acquired from the amalgamation with RightsMarket Inc. During the three month period ended March 31, 2005, Grand recorded current income taxes of $nil. On September 30, 2004 Grand completed a flow-through share issue and at March 31, 2005, renounced $5.24 million of Canadian Exploration Expense and $1.0 million of Canadian Development Expense to shareholders. The effect of the renunciation was to reduce the future tax asset on the balance sheet to $1,216,103. At February 28, 2005 the spending for the commitment had been completed. Grand does not expect to pay any cash income taxes in 2005.

Net Earnings and Cash Flow

For the three month period ended March 31, 2005 Grand recorded a net loss of ($164,229) or ($0.01) per share including a future tax recovery of $152,529, compared with ($89,148) or ($0.01) per share for the three months ended March 31, 2004. Cash flow from operations increased to $1,898,017 or $0.10 per fully diluted share for the three months ended March 31, 2005 from $593,363 or $0.04 per share for the three months ended March 31, 2004. The increase in cash flow is due to higher production and commodity prices.



Capital Expenditures

East West
Central Central
2005 Capital Expenditures Saskatchewan Alberta Alberta Total
------------------------------------------------------------------------
Land and property
acquisitions 6,255 32,987 820,706 859,948
Geological and geophysical 493,264 223,840 521,729 1,238,833
Drilling and completions 58,316 600,915 4,669,072 5,328,303
Equipment and facilities - 1,034,555 730,330 1,764,885
Other - 105,251 - 105,251
------------------------------------------------------------------------
Total 557,835 1,997,548 6,741,837 9,297,220
------------------------------------------------------------------------


For the three months ended March 31, 2005 the Company's capital expenditures totaled $9,297,220, with approximately 73% of the total spent in the Company's West Central Alberta area.

During the three month period, the Company drilled seven (5.85 net) wells, resulting in three (2.6 net) gas wells, two (1.75 net) oil wells and two D&A (1.5 net) wells. Six (4.85 net) of these wells were in West Central Alberta. Additional equipment and facilities costs were incurred to bring on production from wells drilled in the fourth quarter of 2004 as well as the ones drilled in the first quarter of 2005. During the quarter, Grand also spent $800,000 to upgrade a battery in East Central Alberta. The result of the upgrade has been an increase in production and water handling capability in the Schneider/Galahad area. As well, the upgrade will enable further development and drilling in this area, which is planned to begin in the third quarter of 2005.

Liquidity and Capital Resources

For the three months ended March 31, 2005, Grand's capital expenditures of $9.3 million were funded by cash flow from operations, the bank line and proceeds from the September, 2004 flow-through share issue. Grand has access to a $9.0 million revolving loan facility and a $5.0 million acquisition and development loan. Subsequent to March 31, 2005, the lender has increased the bank line to $11.6 million revolving and $7.5 million acquisition and development. In addition, Grand has contractual obligations for office rent totaling $409,776 (2005 - $142,014; 2006 - $199,536; 2007 - $68,226).

Commodity prices and production volumes have the largest impact on Grand's ability to generate adequate cash flow to meet its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the size of the available bank loan.

In May, 2005 Grand closed a bought-deal financing by issuing 1,820,000 flow-through shares at $3.30 per share for gross proceeds of $6,006,000. At this time the Company expects to spend between $20 and $30 million on capital expenditures in 2005. The Company may adjust its capital expenditure program depending on the outlook for commodity prices. The Company believes that the financing completed in May, internally-generated cash flow and incremental bank debt should be sufficient to finance current operations and planned capital spending in 2005.

Share Capital

Grand is authorized to issue an unlimited number of common shares as well as first preferred shares and second preferred shares, all without nominal or par value. To date, no preferred shares have been issued. The Company's share capital at March 31, 2005 is outlined below:



Shares Amount
------------------------------------------------------------------------
Outstanding shares at December 31, 2004 18,552,523 $ 18,438,151
Tax effect of flow-through shares issued
September 2004 (2,116,608)
Share issue costs - 647
------------------------------------------------------------------------
Balance, March 31, 2005 18,552,523 $ 16,322,190
------------------------------------------------------------------------


During the first quarter of 2005, the Company issued 90,000 stock options to employees and directors. The options vest over two years and are exercisable into common shares at an average price of $2.84.

Subsequent Event

On May 4, 2005 Grand closed a bought-deal financing by issuing 1,820,000 flow-through common shares at a price of $3.30 per flow-through share, for gross proceeds of $6,006,000. The proceeds of this offering will be utilized by Grand to fund a portion of the Company's 2005 budget and drilling program.

Business Conditions and Risk

The business of exploration, development and acquisition of oil and gas reserves involves a number of uncertainties and as a result Grand is exposed to certain business risks inherent in the oil and gas industry which affect results. These business risks can generally be grouped into two major areas: operations, including environmental, and financial.

Operationally the Company faces risks associated with finding, developing and producing oil and gas reserves. The Company attempts to control operating risks by maintaining a disciplined approach to implementation of the exploration and development program. Exploration risks are managed by hiring experienced technical staff and by concentrating the exploration activity on specific core regions where the Company has experience and expertise. The Company also attempts to operate associated projects where its level of ownership is sufficient. Operational control allows the Company to manage costs, timing and sales of production.

Estimates of economically recoverable reserves and the future net cash flow they will generate are based on a number of factors and assumptions, such as commodity prices, projected production and future operating costs. All of these estimates may vary from actual results. The Company has its reserves evaluated annually by an independent engineering firm and reviews their findings with the Reserves Committee and the Board of Directors.

Environmental risks are also associated with field operations. The Company has health and safety programs and procedures, and an environmental standards policy. These policies and procedures are designed to protect and maintain the environment with respect to all Company operations. The Company performs an annual third party audit of the safety and environmental policies designed to ensure compliance. Grand also carries environmental liability, property, drilling and general liability insurance.

The Company is exposed to financial risks in the form of commodity prices, interest rates, the Canadian to U.S. dollar exchange rate and inflation. Grand manages commodity price risks by focusing its capital program on are expected to generate attractive rates of return even at substantially lower commodity prices than the industry is currently receiving.

Additional Information

Additional information regarding Grand and its business and operations is available on the SEDAR website at http://www.sedar.com, as well as at Grand's website at http://www.grandpetroleum.com, or by calling (403) 231-8400.



BALANCE SHEETS

March 31, 2005 December 31, 2004
As at ($) ($)
------------------------------------------------------------------------
(unaudited)

Assets
Current assets
Cash - 1,845,018
Accounts receivable 3,843,855 3,482,274
Prepaids and deposits 386,443 251,019
------------------------------------------------------------------------
4,230,298 5,578,311

Future income tax asset (note 6) 1,216,103 3,180,535

Property, plant and equipment
(note 2) 32,179,843 24,719,570
------------------------------------------------------------------------
37,626,244 33,478,416
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued
liabilities 10,565,867 8,193,976
Bank debt (note 4) 3,678,299 -
------------------------------------------------------------------------
14,244,166 8,193,976

Asset retirement obligation (note 3) 3,824,364 3,580,474

Shareholders' equity
Share capital (note 5) 16,322,190 18,438,151
Contributed surplus (note 5(f)) 413,966 280,029
Retained earnings 2,821,558 2,985,786
------------------------------------------------------------------------
19,557,714 21,703,966
------------------------------------------------------------------------
Commitment (note 8)
Subsequent events (notes 4 and 9)
------------------------------------------------------------------------
37,626,244 33,478,416
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the financial statements.


On behalf of the Board of Directors,

(Signed) (Signed)
J.C. (JIM) SMITH ANDREW L. HOGG
Director Director


STATEMENT OF OPERATIONS AND RETAINED EARNINGS

2005 2004
Three months ended March 31, ($) ($)
------------------------------------------------------------------------
(unaudited)

Revenue
Petroleum and natural gas sales 4,494,288 1,933,131
Royalties expense, net of Alberta
Royalty Tax Credit (492,862) (260,658)
Interest income 1,335 -
------------------------------------------------------------------------
4,002,761 1,672,473
------------------------------------------------------------------------
Expenses
Production 1,620,248 809,378
Transportation 101,944 55,313
General and administrative 373,354 180,136
Interest 9,198 34,283
Stock-based compensation 133,937 9,450
Depletion and depreciation 2,010,421 630,182
Accretion 70,417 42,879
------------------------------------------------------------------------
4,319,519 1,761,621
------------------------------------------------------------------------
Net loss for the period before taxes (316,758) (89,148)

Future income tax recovery (note 6) 152,529 -
------------------------------------------------------------------------

Net loss for the period (164,229) (89,148)

Retained earnings (deficit),
beginning of period 2,985,787 (88,615)
Adjustment due to ARO
retroactive adoption - 54,169
------------------------------------------------------------------------
Retained earnings (deficit),
end of period 2,821,558 (123,594)
------------------------------------------------------------------------
Loss per share
Basic and diluted (0.01) (0.01)
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the financial statements.


STATEMENT OF CASH FLOWS

2005 2004
Three months ended March 31, ($) ($)
------------------------------------------------------------------------
(unaudited)

Cash provided by (used in):
Operations
Net loss for the period (164,229) (89,148)
Add items not affecting cash:
Stock-based compensation 133,937 9,450
Future income tax provision (152,529) -
Depletion and depreciation 2,010,421 630,182
Accretion 70,417 42,879
------------------------------------------------------------------------
Funds from operations 1,898,017 593,363

Change in non-cash operating
working capital

Accounts receivable (361,581) (511,792)
Prepaids and deposits (135,424) (22,074)
Accounts payable 139,438 206,135
------------------------------------------------------------------------
Net change in non-cash
working capital (357,567) (327,731)
------------------------------------------------------------------------
(1,540,450) 265,632
------------------------------------------------------------------------

Investing
Expenditures on property,
plant and equipment (9,293,938) (2,157,307)
Acquisitions of property,
plant and equipment (3,282) (3,451,569)
Change in non-cash investing
working capital 2,232,453 1,080,538
------------------------------------------------------------------------
(7,064,767) (4,528,338)
------------------------------------------------------------------------

Financing
Share issue costs (note 5(b)) 1,000 -
Increase in bank debt (note 4) 3,678,299 (4,120)
------------------------------------------------------------------------
3,679,299 (4,120)
------------------------------------------------------------------------
Decrease in cash (1,845,018) (4,266,826)
Cash, beginning of period 1,845,018 4,923,460
------------------------------------------------------------------------
Cash, end of period - 656,634
------------------------------------------------------------------------

------------------------------------------------------------------------
Interest paid 9,198 -
Taxes paid - -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the financial statements


NOTES TO FINANCIAL STATEMENTS
Three months ended March 31, 2005 and three months ended March 31, 2004


1. BASIS OF PRESENTATION

The interim financial statements of Grand Petroleum, Inc. (the Company) have been prepared by management in accordance with Canadian generally accepted accounting principles. The preparation of interim financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the interim financial statements and accompanying notes. Actual results could differ from those estimates. The interim financial statements have, in managements opinion, been properly prepared using careful judgements within reasonable limits of materiality.

These interim financial statements should be read in conjunction with the most recent annual financial statements for the year ended December 31, 2004. The significant accounting policies follow those of the most recently reported annual financial statements.



2. PROPERTY, PLANT AND EQUIPMENT

Accumulated
depletion and Net book
March 31, 2005 Cost depreciation value
------------------------------------------------------------------------

Petroleum and natural
gas properties $ 27,516,398 $ (4,956,400) $ 22,559,998
Production equipment 7,760,401 (913,300) 6,847,101
Asset retirement costs 3,496,472 (1,005,091) 2,491,381
Furniture, fixtures
and office equipment 304,861 (23,498) 281,363
------------------------------------------------------------------------
Balance March 31, 2005 $ 39,078,132 $ (6,898,289) $ 32,179,843
------------------------------------------------------------------------


Accumulated
depletion and Net book
December 31, 2004 Cost depreciation value
------------------------------------------------------------------------
Petroleum and natural
gas properties $ 20,468,673 $ (3,431,900) $ 17,036,773
Production equipment 5,616,157 (598,500) 5,017,657
Asset retirement
obligation 3,322,999 (840,391) 2,482,608
Furniture, fixtures
and office equipment 199,609 (17,077) 182,532
------------------------------------------------------------------------
Balance December
31, 2004 $ 29,607,438 $ (4,887,868) $ 24,719,570
------------------------------------------------------------------------


In calculating the Company's depletion and depreciation, approximately $1.8 million (December 31, 2004 - $1.3 million) of unproven properties were excluded from the depletion calculation. Future development costs required to complete wells for which proved reserves have been assigned of approximately $2.3 million (December 31, 2004 - $2.8 million) were added to the Company's net book value for the purposes of the depletion calculation.

The Company does not capitalize corporate general and administrative expenses. The compensation of geological and geophysical employees and consultants is charged directly to capital.

3. ASSET RETIREMENT OBLIGATION (ARO)

The Company's asset retirement obligations result from working interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Company estimates the total undiscounted amount of cash flows required to settle its asset retirement obligation, over the next twenty-three years, is approximately $7.7 million. The amount has been discounted using a credit adjusted risk-free interest rate of 8% and an inflation rate of 1.5%. A reconciliation of the ARO is provided below:



March 31, 2005
------------------------------------------------------------------------
Beginning of period 3,580,474
Liabilities incurred during the period 173,473
Liabilities settled during the period -
Revisions in estimate of timing of cash flows -
Accretion expense 70,417
------------------------------------------------------------------------
End of period 3,824,364
------------------------------------------------------------------------



4. BANK LOAN

The Company has a financing commitment with a Canadian chartered bank for a revolving demand credit facility in the amount of $9,000,000. The facility bears interest at bank prime rate plus 0.50% payable monthly and is secured by a $15,000,000 demand debenture and a general security agreement. The Company also has available a $5,000,000 non-revolving acquisition development demand loan. This facility bears interest at the bank prime rate plus 0.75% with a drawdown rate of 0.25% on the amount drawn for acquisitions and 0.50% on development expenditures. Subsequent to March 31, 2005, the total amount of credit under the revolving demand credit facility was increased to $11,600,000, and the non-revolving acquisition development demand loan was increased to $7,500,000 under similar terms and conditions.

The facilities are subject to a semi-annual review. The next review is to be undertaken before October 31, 2005. This review includes a borrowing base re-determination, including any completed acquisitions, and a full assessment of the Company's financial position and operations.



5. SHARE CAPITAL

a) Authorized

Unlimited number of common shares without par value
Unlimited number of first preferred shares, of which none has been
issued
Unlimited number of second preferred shares, of which none has
been issued

b) Issued and Outstanding

Shares Amount
(#) ($)
------------------------------------------------------------------------
Common shares
Balance, December 31, 2004 18,552,523 18,438,151
Common shares issued - -
Flow-through shares issued - -
Tax effect of flow-through shares issued
September 2004 - (2,116,608)
Share issue costs
(net of tax effect of $353) - 647
------------------------------------------------------------------------
Balance, March 31, 2005 18,552,523 16,322,190
------------------------------------------------------------------------


c) Stock Options

The Company has adopted a stock option plan (the "Plan") for directors, senior officers, employees and key consultants of the Company. Options granted pursuant to the Plan will not exceed a term of five years, and are granted at an option price and on other terms that the directors determine are necessary to achieve the goal of the Plan and in accordance with regulatory policies. Options vest one-third immediately, one-third one year later, and one-third one year after that. As at March 31, 2005, there were 1,845,000 stock options outstanding with an exercise price between $1.00 and $2.90.



The following table sets forth a reconciliation of the Plan activity
to March 31, 2005:

Weighted average
Options outstanding exercise price
(#) ($)
------------------------------------------------------------------------
Balance, December 31, 2004 1,755,000 1.61
Granted 90,000 2.84
Cancelled - -
Exercised - -
------------------------------------------------------------------------
Balance, March 31, 2005 1,845,000 1.67
------------------------------------------------------------------------

Weighted average
contractual life
Exercise Price Options outstanding (years)
------------------------------------------------------------------------
$1.00 - $1.50 860,000 3.8
$1.51 - $2.25 285,000 3.9
$2.26 - $2.32 620,000 4.7
$2.33 - $2.90 80,000 4.9
------------------------------------------------------------------------
$1.00 - $2.90 1,845,000 4.1
------------------------------------------------------------------------


d) Flow-through Shares

Pursuant to the September 30, 2004 flow-through share offering, the Company renounced $6,240,000 of qualifying expenditures effective December 31, 2004. All of the total qualifying expenditures were expended by February 28, 2005.

e) Per Share Amounts

Per share amounts have been calculated based on the weighted average number of shares outstanding. The basic weighted average shares outstanding at March 31, 2005 was 18,552,523. The diluted weighted average shares outstanding at March 31, 2005 was 19,220,342.

f) Stock-based Compensation

The Company has calculated its stock-based compensation expense using the Black-Scholes option pricing model to estimate the fair value of stock options issued at the date of the grant. The weighted average fair market value per option granted in 2005 and the assumptions used in their determination are as follows:



Three months ended March 31, 2005
------------------------------------------------------------------------
Weighted average fair value per option $ 1.06
Risk-free interest rate (%) 5
Volatility (%) 40
Expected life (years) 5


6. INCOME TAXES

a) Future income tax recovery

The provision for income tax reflects an effective tax rate, which
differs from Federal and Provincial statutory tax rates. The main
difference is as follows:

Three months ended Year ended
Mar 31 Dec 31
2005 2004
------------------------------------------------------------------------
Earnings before tax $ (316,758) $ 97,744
Enacted tax rate 38.62% 38.62%
------------------------------------------------------------------------
Computed income taxes at the enacted rate (122,332) 37,749

Increase (decrease) in taxes
resulting from:
Non-deductible Crown payments 42,988 201,333
Resource allowance (121,158) (362,742)
Income tax rate reduction (3,753) (16,193)
Change in valuation allowance - (2,892,671)
Stock-based compensation 51,726 108,147
Other - 1,889
------------------------------------------------------------------------
Provision (recovery) for income taxes $ (152,529) $ (2,922,488)
------------------------------------------------------------------------


b) The components of the net future income tax asset are as follows:

Mar 31 Dec 31
2005 2004
------------------------------------------------------------------------
Future income tax assets:
Non-capital losses $ 3,556,099 $ 3,863,306
Asset retirement obligation 1,284,114 1,202,246
Share issue costs 275,159 295,346
------------------------------------------------------------------------
5,115,372 5,360,898
------------------------------------------------------------------------
Future income tax liabilities:
Property, plant and equipment (3,899,269) (2,180,363)
Valuation allowance - -
------------------------------------------------------------------------
(3,899,269) (2,180,363)
------------------------------------------------------------------------

Net future tax asset $ 1,216,103 $ 3,180,535
------------------------------------------------------------------------


7. FINANCIAL INSTRUMENTS

The Company's financial instruments recognized in the balance sheet consist of accounts receivable, accounts payable and accrued liabilities.

The carrying value of accounts receivable, accounts payable and accrued liabilities approximate their fair market value.

8. COMMITMENT

The Company is committed to payments under an operating lease for office space through April 30, 2007 totaling $409,776 (2005 - $142,014; 2006 - $199,536; 2007 - $68,226).

9. SUBSEQUENT EVENT

On May 4, 2005 the Company closed a financing by issuing 1,820,000 flow-through common shares at a price of $3.30 per flow-through share for total gross proceeds of $6,006,000.

Certain information set forth in this press release contains forward-looking statements. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, reliance should not be placed on forward-looking statements. Grand's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Grand will derive therefrom. Grand disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The TSX Venture Exchange has neither approved nor disapproved the contents of this press release.

Contact Information

  • Grand Petroleum Inc.
    Andrew Hogg
    President and CEO
    (403) 231-8403
    or
    Grand Petroleum Inc.
    Brenda Galonski
    Vice President Finance and CFO
    (403) 231-8402
    Website: http://www.grandpetroleum.com