Grand Petroleum Inc.
TSX VENTURE : GPP

Grand Petroleum Inc.

November 21, 2006 19:35 ET

Grand Petroleum Inc. Announces Q3 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 21, 2006) - Grand Petroleum Inc. ("Grand" or the "Corporation") (TSX VENTURE:GPP) is pleased to announce another record set of results for the third quarter of 2006. Grand has submitted its unaudited financial statements for the period ended September 30, 2006, to www.sedar.com and has posted the results on the Corporation's web site, www.grandpetroleum.com . Certain selected operational and financial information for the third quarters and first nine months of 2006 and 2005 are set out below and should be read in conjunction with Grand's unaudited financial statements.



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Three months ended
Sept. 30, Sept. 30, %
2006 2005 Change
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Financial
Petroleum and natural gas sales $ 13,758,960 $ 11,797,209 17
Funds from operations 7,119,264 6,488,641 10
Per share - basic 0.30 0.27 11
Per share - diluted 0.29 0.26 12
Net income 486,770 1,964,197 (75)
Per share - basic 0.02 0.08 (75)
Per share - diluted 0.02 0.08 (75)
Capital expenditures 11,287,701 12,068,943 (6)
Net working capital (deficiency) (31,089,201) (12,067,675) 158
Total assets 86,162,203 62,958,155 37
Shareholders' equity $ 36,983,702 $ 38,380,852 (4)
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Common shares outstanding (#)
Weighted average
Basic 23,965,190 23,693,523 1
Fully diluted 24,920,583 24,784,014 1
End of period
Basic 23,965,190 23,693,523 1
Fully diluted 25,943,523 25,548,523 2

Operations
Average daily production
Crude Oil and NGL (bbls/d) 1,837 1,298 42
Natural gas (mcf/d) 5,512 4,782 15
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Total (boe/d) (1) 2,755 2,095 32
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Netback ($/boe)
Average selling price 54.21 61.20 (11)
Royalties (9.87) (10.36) (5)
Production expense (11.65) (13.00) (10)
Transportation expense (0.86) (0.93) (8)
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Netback prior to realized gain
on financial instruments 31.83 36.91 (14)
Realized gain on financial instruments 0.07 - -
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Realized netback 31.90 36.91 (14)
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Drilling Activity (2)
Gross (net) wells drilled (#)
Crude oil 11 (6.5) 7 (4.0) 63
Natural gas 1 (1.0) 6 (4.1) (76)
Standing cased 1 (0.5) - -
Abandoned 2 (1.5) 2 (1.6) (6)
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Total 15 (9.5) 15 (9.7) (2)
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Nine months ended
Sept. 30, Sept. 30, %
2006 2005 Change
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Financial
Petroleum and natural gas sales $ 41,676,581 $ 21,823,076 91
Funds from operations 20,565,263 10,746,679 91
Per share - basic 0.86 0.52 65
Per share - diluted 0.83 0.50 66
Net income 1,130,212 1,627,801 (31)
Per share - basic 0.05 0.08 (38)
Per share - diluted 0.05 0.08 (38)
Capital expenditures 35,973,160 36,031,923 0
Net working capital (deficiency) (31,089,201) (12,067,675) 158
Total assets 86,162,203 62,958,155 37
Shareholders' equity $ 36,983,702 $ 38,380,852 (4)
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Common shares outstanding (#)
Weighted average
Basic 23,929,058 20,677,186 16
Fully diluted 24,916,062 21,532,698 16
End of period
Basic 23,965,190 23,693,523 1
Fully diluted 25,943,523 25,548,523 2

Operations
Average daily production
Crude Oil and NGL (bbls/d) 1,845 989 87
Natural gas (mcf/d) 6,196 3,067 102
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Total (boe/d) (1) 2,878 1,500 92
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Netback ($/boe)
Average selling price 53.02 53.30 (1)
Royalties (10.54) (7.85) 34
Production expense (12.05) (14.84) (19)
Transportation expense (0.91) (0.96) (5)
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Netback prior to realized gain
on financial instruments 29.52 29.65 0
Realized gain on financial instruments 0.02 - -
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Realized netback 29.54 29.65 0
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Drilling Activity (2)
Gross (net) wells drilled (#)
Crude oil 27 (18.1) 10 (7.4) 145
Natural gas 2 (1.35) 15 (10.3) (87)
Standing cased 4 (2.5) - -
Abandoned 4 (3.5) 4 (3.1) 13
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Total 37 (25.45) 29 (20.8) 22
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(1) Per barrel of oil equivalent ("boe") amounts have been calculated using
a conversion rate of six thousand cubic feet of natural gas ("mcf") to
one barrel ("bbl") of oil (6:1).
(2) Percent changes are to net wells drilled.


President's Message

The third quarter was an important building period for Grand, with continued growth in productive capacity but restricted growth in average production due to regulatory constraints. These constraints were removed in the fourth quarter and current production is approximately 3,350 boe/d based upon field receipts, approximately 22 percent above third quarter average production of 2,755 boe/d.

Highlights of the third quarter included:

- Funds from operations were up by 10 percent, increasing from $6,488,641 in the third quarter of 2005 to $7,119,264 in the third quarter of 2006, and funds from operations per fully diluted share increased by 12 percent, from $0.26 in the third quarter of 2005 to $0.29 in the third quarter of 2006;

- Average production increased by 32 percent, from 2,095 boe/d in the third quarter of 2005 to 2,755 boe/d in the third quarter of 2006;

- Current production (as of mid-November 2006) is estimated from field receipts to be approximately 3,350 boe/d, with forecasted productive capability of between 3,700 and 4,000 boe/d by year-end 2006, with additional gains to be achieved in the first quarter of 2007 from wells drilled in the fourth quarter of 2006.;

- The Company drilled 15 gross (9.5 net) wells, achieving a success rate of 84 percent; and

- Grand's balance sheet remained strong, with net debt of approximately $31 million at the end of the quarter, which represents 1.1 times annualized third quarter funds from operations and approximately 0.8 times forecast 2007 funds from operations.

DRILLING AND OPERATIONS

Grand was once again very active with the drill bit in the third quarter of 2006, drilling 15 gross (9.5 net) wells. This drilling resulted in 11 (6.5 net) oil wells, one (1.0) gas well, one (0.5 net) standing cased well and two (1.5) dry and abandoned wells, for a drilling success rate of 84 percent. Grand continues to be active in the fourth quarter with plans to drill three 100 percent working interest wells at Sylvan Lake and eight gross (4.0 net) wells in Southeast Saskatchewan.

At Sylvan Lake we drilled one (1.0 net) successful Mississippian gas well, which was completed in the fourth quarter and should commence production late in the year or early in the first quarter of 2007. Grand has continued to accumulate lands in the Sylvan Lake area and is planning to drill at least two and potentially three 100 percent wells prior to year-end. Our prolific, 100 percent working interest Elkton producer at 5-6-37-3W5 finally received its expected regulatory approval of Good Production Practice (GPP) and in October the well recommenced production, stabilizing in November at approximately 750 boe/d. We submitted an application on September 11, 2006 for GOR penalty relief for our 1-6-37-5W5 oil and natural gas well, which is currently shut in, and hope to receive approval for this pool within the next few months.

At Hazelwood in Southeast Saskatchewan, Grand and its partner drilled 11 (5.5 net) wells in the third quarter with nine (4.5 net) cased and completed as oil wells, one (0.5 net) standing cased and one (0.5 net) D&A well. We continue to be encouraged by the results of the drilling program. We currently have access to two drilling rigs in the Hazelwood area, which will help us to meet our 2006 target to drill up to 30 gross (15 net) wells in the area.

At Galahad, our main East Central Alberta operating area, Grand drilled three 100 percent working interest wells in the third quarter, resulting in two oil wells and one dry and abandoned well. One of the oil wells was a development horizontal in the Schneider Lake field on which Grand pays no production royalties. Another 100 percent working interest horizontal oil well was drilled at Schneider Lake in November, and should commence production in December. The other oil well drilled in the third quarter discovered a new Ellerslie oil pool, setting up additional development opportunities which are expected to be drilled in 2007.

CAPITAL EXPENDITURES

Capital expenditures in the third quarter totalled $11,287,701, bringing our total for the first nine months of 2006 to $35,973,160. Approximately $7.4 million, or 66 percent of the third quarter's total, was invested in drilling and recompletions. There were no significant acquisitions during the quarter as Grand continued to exercise restraint during a period of escalating asset price expectations combined with an uncertain short-term outlook for commodity prices. A further $2.3 million, or 21 percent of the total, was spent on equipment and facilities.

We continue to forecast total 2006 capital spending of approximately $50-55 million, not including potential acquisitions. Grand continues to focus on maintaining a strong balance sheet exiting the third quarter, with net debt of approximately $31 million, which represents approximately 0.8 times forecast 2007 funds from operations. Grand's bank lines total $43 million and we expect that continued drilling success will expand our bank line which is due for review prior to year-end.

HEDGING GAIN

For the period July 1, 2006 to December 31, 2006, Grand has hedged 500 bbls/day of its oil production with a floor price of US$65 per barrel WTI and a ceiling price of US$85 per barrel WTI based on the monthly weighted average price. This hedge created a gain of $18,702 in September, which is recorded in the financial statements as petroleum and natural gas sales. Additional gains should be recorded in the fourth quarter. Grand has no hedges in place for 2007.

PRODUCTION AND FUNDS FROM OPERATIONS GUIDANCE UPDATED

We are now forecasting productive capability to be between 3,700 and 4,000 boe/d by year-end 2006, with additional gains to be achieved in the first quarter of 2007 from wells drilled in the fourth quarter of 2006. Utilizing GLJ Petroleum Consultants Ltd.'s updated October 1, 2006 price forecast of 2006 commodity prices averaging US$67.00 per bbl of WTI crude oil and Cdn$6.75 per mcf of spot natural gas at AECO, Grand would generate 2006 funds from operations of $27 million or $1.05 per fully diluted share.

Grand's board of directors has approved an initial budget for 2007 that contemplates capital expenditures of approximately $40 to $45 million and average production of 4,000 boe/d (approximately 60 percent oil and NGL and 40 percent natural gas), generating funds from operations of $38 million or $1.47 per fully diluted share. This is based upon GLJ's October 1, 2006 price forecasts of WTI crude oil averaging US$65.00 per barrel and AECO-C natural gas averaging Cdn$7.30 per mmbtu.

Management's Discussion and Analysis

The following discussion is management's opinion about the operating and financial results of Grand Petroleum Inc. ("Grand", the "Corporation", or the "Company") for the three and nine months ended September 30, 2006 and 2005 and previous periods, and the outlook for Grand based on information available as at November 21, 2006.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes for the period ended September 30, 2006 and with the unaudited financial statements and management's discussion and analysis for the period ended September 30, 2005. Per barrel of oil equivalent (boe) amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil (6:1).

This management's discussion and analysis contains the terms "funds from operations" and "operating netbacks". Funds from operations is calculated by taking cash flow from operating activities as determined under GAAP before the change in non-cash working capital related to operating activities. Operating netbacks are calculated by subtracting royalties, production expenses and transportation expenses per boe from the average sales price per boe. Management uses funds from operations and operating netbacks to analyze operating performance and leverage and to provide shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance operating activities and capital expenditures. Funds from operations and operating netbacks are not standards under Canadian generally accepted accounting principles (GAAP) and, therefore, may not be comparable to similar benchmarks presented by issuers outside the oil and natural 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:

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Three months ended
Sept. 30, June 30, March 31, Dec. 31,
2006 2006 2006 2005
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Petroleum and natural
gas sales, before
royalties and
transportation $13,758,960 $15,523,694 $12,393,927 $15,698,695
Average production
(boe/d) 2,755 3,074 2,803 2,727
Funds from operations $ 7,119,264 $ 7,405,030 $ 6,040,969 $ 7,876,357
Per share - basic 0.30 0.31 0.25 0.33
- diluted 0.29 0.30 0.24 0.32
Earnings (loss) before
income tax 762,212 724,047 (249,793) 1,224,844
Per share - basic 0.03 0.03 (0.01) 0.05
- diluted $ 0.03 $ 0.03 $ (0.01) $ 0.05
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Earnings (loss) 486,770 846,284 (202,842) 504,644
Per share - basic 0.02 0.04 (0.01) 0.02
- diluted 0.02 0.03 (0.01) 0.02
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Three months ended
Sept. 30, June 30, March 31, Dec. 31,
2005 2005 2005 2004
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Petroleum and natural
gas sales, before
royalties and
transportation $11,797,209 $ 5,531,579 $ 4,494,288 $ 4,648,270
Average production
(boe/d) 2,095 1,302 1,092 1,195
Funds from operations $ 6,488,641 $ 2,360,021 $ 1,898,017 $ 2,150,574
Per share - basic 0.27 0.12 0.10 0.15
- diluted 0.26 0.12 0.10 0.14
Earnings (loss) before
income tax 2,502,101 (79,282) (316,758) (206,170)
Per share - basic 0.11 (0.00) (0.02) (0.01)
- diluted $ 0.10 $ (0.00) $ (0.02) $ (0.01)
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Earnings (loss) 1,964,197 (172,167) (164,229) 2,716,318
Per share - basic 0.08 (0.00) (0.01) 0.19
- diluted 0.08 (0.00) (0.01) 0.19
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RESULTS OF OPERATIONS

In the third quarter of 2006 Grand continued to execute its drilling program, drilling an additional 11 gross (5.5 net) wells in Southeast Saskatchewan, three more gross (3.0 net) wells in East Central Alberta, including one successful horizontal well in Schneider, and one additional well (1.0 net) in Sylvan Lake. Third quarter and nine months ended 2006 drilling results are outlined in the tables below. Grand expects to drill an additional eight (4.0 net) oil wells in Southeast Saskatchewan in the fourth quarter, one more in Schneider Lake in East Central Alberta and three more in Sylvan Lake in West Central Alberta, bringing the total wells drilled in 2006 to 49 gross wells. An additional eight (4.0 net) wells will be drilled in Southeast Saskatchewan early in the first quarter of 2007.



Drilling results for the three months ended September 30, 2006

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Gas Oil D&A Standing Total Net % Success(1)
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West Central Alberta 1 - - - 1 1 100
East Central Alberta - 2 1 - 3 3 67
Southeast Saskatchewan - 9 1 1 11 5.5 91
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Total 1 11 2 1 15 9.5 84
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Drilling results for the nine months ended September 30, 2006

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Gas Oil D&A Standing Total Net % Success(1)
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West Central Alberta 2 4 1 - 7 8.45 88
East Central Alberta - 6 2 4 12 8 67
Southeast Saskatchewan - 17 1 - 18 9 94
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Total 2 27 4 4 37 25.45 86
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(1) Percent successes are for net wells drilled.


Revenue and funds from operations increased by 17 percent and 10 percent, respectively, year over year as a result of a 32 percent increase in production, partially offset by a decrease in commodity prices of 11 percent. Grand's third quarter operating netback of $31.90 is a slight decrease from the $36.91 operating netback in the third quarter of 2005. This is largely attributable to 40 percent lower realized natural gas prices. Royalties, production expenses and transportation costs all decreased quarter over quarter on a per boe basis. Royalties per boe decreased due to lower commodity prices while production expenses and transportation costs decreased per boe due to increased production.



DETAILED FINANCIAL ANALYSIS

Production

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Three months ended Sept. 30 %
2006 2005 Change
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Crude oil (bbls/d) 1,660 1,202 38
Natural gas (mcf/d) 5,512 4,782 15
NGL (bbls/d) 177 96 84
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Total (boe/d) 2,755 2,095 32
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Nine months ended Sept. 30 %
2006 2005 Change
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Crude oil (bbls/d) 1,692 948 78
Natural gas (mcf/d) 6,196 3,067 102
NGL (bbls/d) 153 41 273
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Total (boe/d) 2,878 1,500 92
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Grand's production increased to an average of 2,755 boe/d in the three months ended September 30, 2006 from 2,095 boe/d in the three months ended September 30, 2005. The increase of 32 percent was due to increased production from the Company's successful drilling program.

Production was lower than expected in the third quarter, primarily due to the delayed granting of Good Production Practice (GPP) for the Sylvan Lake 05-06-037-03W5 well (100 percent working interest). Grand had expected the well to come back on-production during the third quarter, however GPP was not granted until early October, with production resuming October 10. This well produced for only 35 days at a rate of approximately 500 boe/d during the second quarter, for average production over the three months of 175 boe/d, and was shut-in throughout the third quarter. Production from this well stabilized in November at approximately 750 boe/d.

With the addition of the Sylvan Lake 05-06-037-03-W5 well in October, two successful horizontal wells at Schneider and additional production from Southeast Saskatchewan, Grand expects 2006 average production to be approximately 3,000 boe/d.



Petroleum and Natural Gas Sales

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Three months ended Sept. 30 %
2006 2005 Change
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Revenue
Crude oil $ 9,722,618 $ 6,864,471 42
Natural gas 3,008,552 4,368,094 (31)
NGL 1,009,088 564,644 79
Realized gain on financial instrument 18,702 - -
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Total $ 13,758,960 $ 11,797,209 17
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Average sales price (1)
Crude Oil ($/bbl) $ 63.66 $ 62.05 3
Natural gas ($/mcf) 5.93 9.93 (40)
NGL ($/bbl) 61.97 63.98 (3)
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Combined average ($/boe) $ 54.21 $ 61.20 (11)
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Nine months ended Sept. 30 %
2006 2005 Change
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Revenue
Crude oil $ 27,632,315 $ 13,877,522 99
Natural gas 11,460,390 7,283,357 57
NGL 2,565,174 662,197 287
Realized gain on financial instrument 18,702 - -
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Total $ 41,676,581 $ 21,823,076 91
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Average sales price (1)
Crude Oil ($/bbl) $ 59.82 $ 53.62 12
Natural gas ($/mcf) 6.78 8.70 (22)
NGL ($/bbl) 61.41 59.88 3
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Combined average ($/boe) $ 53.02 $ 53.30 (1)
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(1) The average selling prices reported are before realized gains from
financial instrument and transportation charges.


Revenue from petroleum and natural gas sales, before royalties, transportation costs and after financial instrument gains, totalled $13,758,960 in the third quarter of 2006, compared to $11,797,209 in the third quarter of 2005. Revenues increased due to higher production, partially offset by lower commodity prices. Average prices decreased by approximately 11 percent, while production increased by 32 percent period-over-period.

In the three months ended September 30, 2006, Grand's realized crude oil prices averaged $63.66 per bbl, natural gas prices averaged $5.93 per mcf and NGL prices averaged $61.97 per bbl. This compares to $62.05 per bbl, $9.93 per mcf and $63.98 per bbl, respectively, in the three months ended September 30, 2005.

The Company sells the majority of its oil and natural gas on the spot market and, therefore, both the historical prices received and future prices expected fluctuate with the prevailing market prices of crude oil and natural gas. In April 2006 the Company entered into a costless collar contract for the period of July 1, 2006 to December 31, 2006 for 500 bbls per day with a floor price of US$65.00 per bbl WTI and a ceiling price of US$85.00 per bbl WTI. The realized gain from the hedge for the period of July 1, 2006 to September 30, 2006 was $18,702.



Royalties

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Three months ended Sept. 30 %
2006 2005 Change
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Royalties
Crown $ 1,299,978 $ 646,593 101
Freehold 678,250 1,020,695 (34)
GORR 523,489 329,947 59
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Total $ 2,501,717 $ 1,997,235 25
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Average percentage of total sales
Crown 9.5% 5.5% 73
Freehold 4.9% 8.7% (44)
GORR 3.8% 2.8% 36
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Total 18.2% 17.0% 7
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Nine months ended Sept. 30 %
2006 2005 Change
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Royalties
Crown $ 4,475,391 $ 995,537 350
Freehold 2,429,890 1,609,513 51
GORR 1,378,309 610,045 126
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Total $ 8,283,590 $ 3,215,095 158
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Average percentage of total sales
Crown 10.8% 4.6% 135
Freehold 5.8% 7.4% (22)
GORR 3.3% 2.8% 18
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Total 19.9% 14.8% 34
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Royalties in the three months ended September 30, 2006 totalled $2,501,717 net of Alberta Royalty Tax Credit, compared to $1,997,235 in the comparable period in 2005. The higher royalties reflect year-over-year production and oil price increases, as well as higher royalty obligations on new wells in West Central Alberta and Southeast Saskatchewan.

Royalties as a percentage of sales increased to 18.2 percent in the three months ended September 30, 2006 from 17.0 percent in the three months ended September 30, 2005. Crown royalties increased due to new wells drilled or acquired on Crown lands, while freehold royalties as a percentage of revenue decreased primarily due to increased production from royalty-free wells. By Company operating area, West Central Alberta's royalties as a percentage of sales were 19.5 percent, East Central Alberta's 16.8 percent and Southeast Saskatchewan's 21.2 percent. The West Central Alberta properties produced 36 percent of the Company's production in the third quarter of 2006, East Central Alberta produced 53 percent and Southeast Saskatchewan produced 11 percent. As production increases in West Central Alberta and Southeast Saskatchewan, the Company's royalties as a percentage of sales are expected to increase. In the third quarter in East Central Alberta, Grand brought on production of more than 350 boe/d (average of 150 boe/d during the quarter) from two horizontal wells in the Galahad area. As these wells are royalty-free, the impact was to reduce freehold royalties as a percentage of sales in the third quarter, with the impact expected to be more significant in the fourth quarter, as the wells are expected to produce for the entire quarter.



Production and Transportation Expenses

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Three months ended Sept. 30 %
2006 2005 Change
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Production expenses $ 3,009,066 $ 2,569,149 17
Transportation expenses 218,281 180,004 21
Overhead recoveries - operating (48,600) (54,250) (10)
Water disposal income (8,035) (6,271) 28
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Total $ 3,170,712 $ 2,688,632 18
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Nine months ended Sept. 30 %
2006 2005 Change
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Production expenses $ 9,648,758 $ 6,253,750 54
Transportation expenses 715,528 393,170 82
Overhead recoveries - operating (167,000) (156,750) 7
Water disposal income (16,574) (20,789) (20)
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Total $ 10,180,712 $ 6,469,381 57
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Production and transportation expenses in the three months ended September 30, 2006 were $3,170,712 compared to $2,688,632 in the comparable period in 2005. The increase of 18 percent was due mainly to the 32 percent increase in production. Costs per unit of production, including transportation, decreased in the third quarter of 2006 to $12.51 per boe from $13.93 per boe in the third quarter of 2005. Production expenses averaged $8.06 per boe in West Central Alberta, in East Central Alberta $14.60 per boe and in Southeast Saskatchewan $9.10 per boe.

Production expenses per unit in East Central Alberta were positively impacted by the addition of more than 350 boe/d (average of 150 boe/d over the quarter) in new volumes during the third quarter from two horizontal wells that were drilled on the Schneider Lake property in Galahad. Due to this additional production, the fourth quarter of 2006 should show slightly lower operating costs per unit in East Central Alberta.

In West Central Alberta, the addition of production from Grand's Sylvan Lake 05-06 and 01-06 wells should result in lower production expenses per unit. As well, Southeast Saskatchewan should show lower per unit operating costs in the fourth quarter due to new wells coming on-stream and trucking costs falling due to the completion of the Hazelwood East pipeline.



Operating Netbacks

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Three months ended Sept. 30 %
(boe) 2006 2005 Change
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Average realized sales price $ 54.21 $ 61.20 (11)
Royalties (9.87) (10.36) (5)
Production expense (11.65) (13.00) (10)
Transportation expense (0.86) (0.93) (8)
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Operating netback prior to realized
gain on financial instruments $ 31.83 $ 36.91 (14)
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Realized gain on financial instruments 0.07 - -
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Average operating netback $ 31.90 $ 36.91 (14)
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Nine months ended Sept. 30 %
(boe) 2006 2005 Change
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Average realized sales price $ 53.02 $ 53.30 (1)
Royalties (10.54) (7.85) 34
Production expense (12.05) (14.84) (19)
Transportation expense (0.91) (0.96) (5)
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Operating netback prior to realized
gain on financial instruments $ 29.52 $ 29.65 0
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Realized gain on financial instruments 0.02 - -
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Average operating netback $ 29.54 $ 29.65 0
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Grand's average operating netback, prior to the gain on financial instruments, was $31.83 per boe in the three months ended September 30, 2006, compared to $36.91 per boe in the three months ended September 30, 2005. The lower netback was due primarily to lower commodity prices, offset by lower royalties and production expenses per boe. Production expenses per boe, including transportation, decreased to $12.51 in the current quarter from $13.93 in the comparable prior period primarily as a result of increased production from two Schneider Lake wells at Galahad and increased production in Southeast Saskatchewan. Royalties decreased in the third quarter of 2006 to $9.87 per boe from $10.36 per boe in the third quarter of 2005, primarily due to increased production in the royalty-free areas in East Central Alberta.



General and Administrative Expense

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Three months ended Sept. 30 %
2006 2005 Change
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General and administrative expense $ 695,198 $ 602,298 15
Overhead recoveries - capital (125,798) (199,814) (37)
Capitalized general and
administrative expense (88,750) (81,593) 9
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Net general and administrative expense $ 480,650 320,891 50
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Per unit of production ($/boe) $ 1.90 $ 1.66 14
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Nine months ended Sept. 30 %
2006 2005 Change
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General and administrative expense $ 2,493,377 $ 1,832,356 36
Overhead recoveries - capital (492,638) (511,512) (4)
Capitalized general and
administrative expense (345,027) (292,527) 18
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Net general and administrative expense $ 1,655,712 $ 1,028,317 61
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Per unit of production ($/boe) $ 2.11 $ 2.51 (16)
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Net general and administrative expense in the three months ended September 30, 2006 totalled $480,650, compared to $320,891 in the three months ended September 30, 2005. On a unit-of-production basis, this expense increased to $1.90 per boe from $1.66 per boe period-over-period. The increase stems from an increase in salaries year-over-year due to the addition of technical staff, as well as associated costs such as software rental, and the cost of employee benefits. In addition, capitalized overhead decreased 37 percent due to a greater proportion of non-operated expenditures. Grand expects general and administrative costs to remain fairly constant in dollar terms throughout the remainder of 2006, decreasing on a unit-of production basis as production continues to increase.

Depletion, Depreciation and Accretion

In the three months ended September 30, 2006, depletion, depreciation and accretion expense totalled $6,223,757 or $24.56 per boe, compared to $4,090,673 or $21.19 per boe in the three months ended September 30, 2005. Total costs subject to depletion and depreciation in the third quarter of 2006 include approximately $6.2 million relating to future development costs estimated to complete oil and natural gas wells for which proved reserves have been assigned. Undeveloped land with a value of approximately $4.0 million and salvage value of $3.4 million were excluded from the costs subject to depletion. Undeveloped land is included in the depletion and depreciation calculation once it is considered to be developed or impaired.

Income Taxes

During the third quarter of 2006, Grand recorded an increase in the future tax liability and a corresponding increase to the future tax expense of $272,636. The increase in the liability was attributable to increased taxable income. Although current tax horizons depend on product prices, production levels and the nature, magnitude and timing of capital expenditures, Grand's management currently believes no income tax will be payable in 2006.

Net Earnings and Funds from Operations

In the three months ended September 30, 2006 Grand recorded net earnings of $486,770 or $0.02 per fully diluted share, compared with net earnings of $1,964,197 or $0.08 per fully diluted share in the three months ended September 30, 2005. Funds from operations increased to $7,119,264 or $0.29 per fully diluted share in the three months ended September 30, 2006 from $6,488,641 or $0.26 per fully diluted share in the three months ended September 30, 2005. Grand's operating netbacks remained strong in the third quarter of 2006 despite lower commodity prices, and combined with a 32 percent increase in production this created a 10 percent increase in funds from operations as compared to the third quarter of 2005.



Capital Expenditures

---------------------------------------------------------------------------
West Central East Central Southeast
Alberta Alberta Saskatchewan Total
---------------------------------------------------------------------------

Land $ 1,229,451 $ 241,376 $ 31,356 $ 1,502,183
Geological and
geophysical 1,710,132 823,081 64,657 2,597,870
Drilling and
completions 9,624,348 7,483,745 4,903,119 22,011,212
Well equipment/tie-ins 4,892,586 2,845,338 1,347,125 9,085,049
Administrative capital - - - 44,635
Equipment inventory - - - 732,211
---------------------------------------------------------------------------
Total $ 17,456,517 $ 11,393,540 $ 6,346,257 $ 35,973,160
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In the nine months ended September 30, 2006, the Company's capital expenditures totalled $35,973,160, with 49 percent of this amount spent in West Central Alberta, 32 percent in East Central Alberta and 18 percent in Southeast Saskatchewan. During the three months ended September 30, 2006, the Company spent $11,287,701 representing 32 percent of the year-to-date total. $7.4 million of the three month total was spent on drilling and recompletions including $2.9 million in Southeast Saskatchewan where the Company drilled eleven (5.5 net) wells. A further $3.5 million of the third quarter drilling expenditures was spent in the Galahad area.

Liquidity and Capital Resources

In the nine months ended September 30, 2006, Grand's capital expenditures of $36 million were funded by funds from operations and the Corporation's bank line. Grand has access to a $35.5 million revolving loan facility and a $7.5 million acquisition and development loan, for a total of $43 million, of which $28.3 million was drawn at September 30, 2006.

Commodity prices and production volumes are the factors with 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 funds from operations and would also likely result in a reduction in the size of available bank loans. Normal production declines, without additional production through drilling or acquisitions, would negatively impact cash flow even in times of high commodity prices. This could also result in a reduction of bank lines available as well as access to capital markets.

At this time the Company expects to spend approximately $50-55 million on capital expenditures in 2006, including funds spent in the first three quarters. The Corporation believes that internally-generated funds from operations and incremental bank debt should be sufficient to finance current operations and planned capital spending in 2006. Other sources of financing, including equity offerings, may be considered.

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 September 30, 2006 is outlined below:



---------------------------------------------------------------------------
Shares (#) Amount
---------------------------------------------------------------------------
Outstanding shares at December 31, 2005 23,693,523 $ 32,474,271
Shares issued on exercise of stock options 271,667 426,618
Transfer from contributed surplus on exercise
of stock options - 176,137
Tax effect of flow-through share offerings, 2005 - (4,003,938)
---------------------------------------------------------------------------
Balance September 30, 2006 23,965,190 $ 29,073,088
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During the third quarter of 2006, the Company issued 40,000 stock options to employees. The options vest over two years and are exercisable into common shares at an average price of $4.39. Total outstanding stock options at September 30, 2006 were 1,978,333.

At November 21, 2006 there were 23,965,190 outstanding shares and 1,978,333 options.

Additional Information

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



Balance Sheets

---------------------------------------------------------------------------
Sept. 30, 2006 Dec. 31, 2005
As at ($) ($)
---------------------------------------------------------------------------
(unaudited)

---------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------

Current assets
Cash - -
Accounts receivable 9,198,735 9,876,601
Prepaids and deposits 372,904 627,132
---------------------------------------------------------------------------
9,571,639 10,503,733

Future income tax asset - 193,409
---------------------------------------------------------------------------
Property, plant and equipment 76,590,564 58,652,978
---------------------------------------------------------------------------
86,162,203 69,350,120

---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------

Current liabilities
Accounts payable and accrued liabilities 12,342,759 15,704,653
Bank debt (note 2) 28,318,081 10,907,002
---------------------------------------------------------------------------
40,660,840 26,611,655

Asset retirement obligation 4,604,101 4,077,474
Future income tax liability 3,913,560 -

Shareholders' equity
Share capital (note 3) 29,073,088 32,474,271
Contributed surplus (note 4) 1,662,171 1,068,489
Retained earnings 6,248,443 5,118,231
---------------------------------------------------------------------------
36,983,702 38,660,991
---------------------------------------------------------------------------

Commitment (note 7)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
86,162,203 69,350,120
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the financial statements.


Statement Of Operations and Retained Earnings

---------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
(unaudited) ($) ($) ($) ($)
---------------------------------------------------------------------------

Revenue
Petroleum and natural
gas sales 13,758,960 11,797,209 41,676,581 21,823,076
Royalties expense, net
of Alberta
Royalty Tax Credit (2,501,717) (1,997,235) (8,283,590) (3,215,095)
Interest income 571 403 9,378 1,791
---------------------------------------------------------------------------
11,257,814 9,800,377 33,402,369 18,609,772
---------------------------------------------------------------------------
Expenses
Production 2,952,431 2,508,628 9,465,184 6,076,211
Transportation 218,281 180,004 715,528 393,170
General and
administrative 480,650 320,891 1,655,712 1,028,317
Interest 389,263 49,246 778,195 105,093
Stock-based
compensation 231,220 148,834 769,819 429,497
Depletion and
depreciation 6,135,633 4,011,476 18,531,210 8,248,747
Accretion 88,124 79,197 250,255 222,676
---------------------------------------------------------------------------
10,495,602 7,298,276 32,165,903 16,503,711
---------------------------------------------------------------------------
Net income before taxes 762,212 2,502,101 1,236,466 2,106,061
Current tax (2,806) - (3,223) -
Future income tax
expense (272,636) (537,904) (103,031) (478,260)
---------------------------------------------------------------------------

Net income 486,770 1,964,197 1,130,212 1,627,801

Retained earnings,
beginning of period 5,761,673 2,649,391 5,118,231 2,985,787

---------------------------------------------------------------------------
Retained earnings, end
of period 6,248,443 4,613,588 6,248,443 4,613,588
---------------------------------------------------------------------------

Earnings per share
Basic 0.02 0.08 0.05 0.08
Diluted 0.02 0.08 0.05 0.08
---------------------------------------------------------------------------

Weighted average number
of shares outstanding
Basic 23,965,190 23,693,523 23,929,058 20,677,186
Diluted 24,920,583 24,784,014 24,916,062 21,532,698
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the financial statements.


Statement of Cash Flows

---------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
(unaudited) ($) ($) ($) ($)
---------------------------------------------------------------------------

Cash provided by (used
in):
Operations
Net income 486,770 1,964,197 1,130,212 1,627,801
Add items not
affecting cash:
Future income tax
expense 272,636 537,904 103,031 478,260
Stock-based
compensation 231,220 148,834 769,819 429,497
Depletion and
depreciation 6,135,633 4,011,476 18,531,210 8,248,747
Accretion 88,124 79,197 250,255 222,676
Abandonment
expenditures (95,119) (252,967) (219,264) (260,302)
---------------------------------------------------------------------------
Funds from operations 7,119,264 6,488,641 20,565,263 10,746,679
Change in non-cash
working capital 2,150,973 (660,655) (668,850) (2,859,416)
---------------------------------------------------------------------------
9,270,237 5,827,986 19,896,413 7,887,263
---------------------------------------------------------------------------

Investing
Expenditures on
property, plant and
equipment (11,287,701) (12,068,943) (35,973,160) (27,890,030)
Acquisitions of
property, plant and
equipment - - - (8,141,893)
Change in non-cash
working capital (3,982,250) 3,958,885 (1,760,950) 5,417,978
---------------------------------------------------------------------------
(15,269,951) (8,110,058) (37,734,110) (30,613,945)
---------------------------------------------------------------------------

Financing
Issue of capital stock
for cash - - 426,618 16,893,700
Share issue costs - (25,434) - (1,060,466)
Bank indebtedness 5,999,714 2,307,506 17,411,079 5,048,430
---------------------------------------------------------------------------
5,999,714 2,282,072 17,837,697 20,881,664
---------------------------------------------------------------------------
Increase (decrease) in
cash - - - (1,845,018)
Cash, beginning of
period - - - 1,845,018
---------------------------------------------------------------------------
Cash, end of period - - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the financial statements.


Notes to Financial Statements

Three and nine months ended September 30, 2006 and three and nine months ended September 30, 2005

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 (GAAP). The preparation of interim financial statements in conformity with Canadian GAAP 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 management's opinion, been properly prepared using careful judgments 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, 2005. The significant accounting policies follow those of the most recently reported annual financial statements.

2. BANK LOAN

The Company has a revolving demand credit facility with a Canadian chartered bank in the amount of $35,500,000. The facility bears interest at a rate ranging from the bank's prime rate plus 0.125 percent to the bank's prime rate plus 1.250 percent per annum. The rate is adjusted quarterly based upon the Company's debt to cash flow ratio, calculated using unaudited preceding quarterly financial statements in accordance with the credit facility agreement. As at September 30, 2006 the rate was prime plus 0.125 percent. The facility is secured by a $15,000,000 debenture with a floating charge over all assets of the Company, a $50,000,000 supplemental debenture and a general security agreement. The Company also has available a $7,500,000 non-revolving acquisition development demand loan. This facility bears interest at the bank's prime rate plus 0.75 percent per annum, with a drawdown rate of 0.25 percent.

The facilities are subject to a semi-annual review, which was last completed in April, 2006. The bank is currently reviewing the line. This review includes a borrowing base re-determination, including any completed acquisitions, and a full assessment of the Company's financial position and operations.

3. SHARE CAPITAL

a) Authorized

Unlimited number of common shares without par value

Unlimited number of first preferred shares, of which none have been issued

Unlimited number of second preferred shares, of which none have been issued

b) Issued and Outstanding



---------------------------------------------------------------------------
Shares Amount
($)
---------------------------------------------------------------------------

Common shares
Balance, December 31, 2005 23,693,523 32,474,271
Shares issued on exercise of stock options 271,667 426,618
Transfer from contributed surplus
on exercise of stock options - 176,137
Tax effect of flow-through share offerings - (4,003,938)
---------------------------------------------------------------------------
Balance, September 30, 2006 23,965,190 29,073,088
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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 September 30, 2006, there were 1,978,333 stock options outstanding, with an exercise price between $1.00 and $5.00.



The following table sets forth a reconciliation of the Plan activity to
September 30, 2006:

---------------------------------------------------------------------------
Weighted average
Options exercise price
outstanding ($)
---------------------------------------------------------------------------

Balance, December 31, 2005 1,975,000 1.89
Granted 280,000 4.81
Cancelled (5,000) 2.32
Exercised (271,667) 1.57
---------------------------------------------------------------------------
Balance, September 30, 2006 1,978,333 2.35
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The range of exercise prices of the Company's outstanding options is as
follows:

---------------------------------------------------------------------------
OUTSTANDING OPTIONS EXERCISABLE OPTIONS

Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Exercise Price Options life (years) Price Options Price
---------------------------------------------------------------------------

$1.00 - $1.50 760,000 2.28 $ 1.02 760,000 $ 1.02
$1.51 - $2.00 140,000 2.41 1.86 140,000 1.86
$2.01 - $3.00 658,333 3.20 2.40 620,673 2.39
$4.01 - $5.00 420,000 4.41 4.82 224,472 4.83
--------------------------------------------------------------------------
$1.00 - $5.00 1,978,333 3.05 $ 2.35 1,745,145 $ 2.07
---------------------------------------------------------------------------
---------------------------------------------------------------------------


d) 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 the nine months ended September 30, 2006 and 2005 and the assumptions used in their determination are as follows:



---------------------------------------------------------------------------
Nine months ended September 30 2006 2005
---------------------------------------------------------------------------

Weighted average fair value per option ($) 2.46 1.11
Risk-free interest rate (%) 5 5
Volatility (%) 50 42
Expected life (years) 5 5
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Company has recorded an expense for stock options during the nine months ended September 30, 2006 of $769,819 (nine months ended September 30, 2005 - expense of $429,497).



4. CONTRIBUTED SURPLUS

---------------------------------------------------------------------------
Sept. 30, 2006 Dec. 31, 2005
---------------------------------------------------------------------------

Balance, beginning of period $ 1,068,489 $ 280,029
Stock-based compensation expense 769,819 788,460
Transfer to share capital on exercise
of options (176,137) -
---------------------------------------------------------------------------
Balance, end of period $ 1,662,171 $ 1,068,489
---------------------------------------------------------------------------
---------------------------------------------------------------------------


5. FINANCIAL INSTRUMENTS

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

The carrying value of accounts receivable, accounts payable and accrued liabilities and bank debt approximates their fair market value.

The Company has a risk management program whereby the commodity price associated with a portion of its future production is fixed. The policy is in place to limit exposure to downturns in commodity prices and/or foreign exchange rates which may adversely affect funds from operations, and in turn shareholder value. In the second quarter of 2006, the Company entered into a costless collar contract for the period of July 1, 2006 to December 31, 2006 for 500 bbls per day with a floor price of US$65.00 per bbl WTI and a ceiling price of US$85.00 per bbl WTI. The realized gain at September 30, 2006 was $18,702, and the mark-to-market value at September 30, 2006 for the existing contract in place was $38,837.



6. SUPPLEMENTAL CASH FLOW INFORMATION

---------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
($) ($) ($) ($)
---------------------------------------------------------------------------

Accounts receivable $ 1,756,663 $ (1,311,240) $ 677,866 $(5,125,270)
Prepaid expenses 116,453 29,550 254,228 (439,340)
Accounts payable and
accrued liabilities (3,704,393) 4,579,920 (3,361,894) 8,123,172
---------------------------------------------------------------------------
Change in non-cash
working capital (1,831,277) 3,298,230 (2,429,800) 2,558,562
---------------------------------------------------------------------------
Investing activities (3,982,250) 3,958,885 (1,760,950) 5,417,978
Operating activities $ 2,150,973 $ (660,655) $ (668,850) $(2,859,416)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The following cash payments have been included in the determination of
earnings:

---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------

Interest paid $ 389,069 $ 49,246 $ 778,001 $ 105,093
Taxes paid $ - $ - $ 67,917 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


7. COMMITMENT

The Company is committed to payments under an operating lease for office space through April 30, 2007 totaling $118,812 (2006 - $51,520; 2007 - $67,292).

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: www.grandpetroleum.com