Grey Wolf Exploration Inc.
TSX : GWE

Grey Wolf Exploration Inc.

August 08, 2005 17:35 ET

Grey Wolf Announces Record Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 8, 2005) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Grey Wolf Exploration Inc. (TSX:GWE) ("Grey Wolf") today released its results for the three and six month periods ended June 30, 2005, highlighted by record production, cash flow and net income for the second quarter of 2005:



$000's except Three months ended Six months ended
per share June 30, June 30, Percent June 30, June 30, Percent
amounts 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Oil and natural
gas revenue 9,452 6,380 48 17,479 11,343 54
Cash flow from
operations 6,289 3,071 105 9,944 5,187 92
Per share - basic
and diluted 0.20 0.24 (17) 0.40 0.40 -
Net income 1,999 11 307 395 (22)
Per share - basic
and diluted 0.06 0.00 0.01 0.03 (67)
Operating netback
($ per boe) 35.42 24.00 48 32.88 21.80 51
Average daily
sales (boe
per day) 2,128 1,718 24 2,070 1,581 31
Capital
expenditures 2,383 2,047 16 4,458 4,738 (6)
Weighted
average
common
shares
o/s 30,802,360 13,002,360 25,098,493 13,002,360

Note: The number of shares in 2004 are presented on a post-split basis.
------------------------------------------------------------------------

Operations
Daily Production
Crude oil
- barrels 252 129 95 235 114 106
Natural gas
- Mcf 10,052 8,646 16 9,796 7,912 24
NGLs
- barrels 201 147 37 202 148 36
boe
- barrels 2,128 1,718 24 2,070 1,581 31

Operating
netback
($ per boe) 35.42 24.00 48 32.88 21.80 51
------------------------------------------------------------------------

Abbreviations

bbl = barrels bbl/d = barrels per day
Mcf = thousand cubic feet Mcf/d = thousand cubic feet per day
boe = barrels of oil equivalent (000) = stated in thousands
NGL = natural gas liquids GJ = gigajoule


In the following discussion the management of Grey Wolf reviews the unaudited interim financial and operating results for the three and six months ended June 30, 2005, compared to the unaudited results for the three and six months ended June 30, 2004, including its financial condition, liquidity and capital resources, capital expenditure program, reserves additions and forward-looking operating and financial estimates.

This discussion should be read in conjunction with Grey Wolf's audited Financial Statements dated December 31, 2004. All dollar amounts are presented in Canadian dollars. The calculation of barrels of oil equivalent ("boe") is based on a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil to estimate relative energy content and does not represent a value equivalency. Boe's may be misleading, particularly if used in isolation. Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.



DETAILED REVIEW OF FINANCIAL RESULTS

Net Income and Cash Flow
Three months ended Six months ended
June 30, June 30, June 30, June 30,
($000's except per -------------------------------------------
share amounts) 2005 2004 2005 2004
-------------------------------------------
Net income $1,999 $ 11 $ 307 $ 395
Per share 0.06 0.00 0.01 0.03
Cash flow 6,289 3,017 9,944 5,187
Per share 0.20 0.24 0.40 0.40


Record earnings of $2.0 million were recorded in the second quarter of 2005, up significantly over the same period in 2004. Cash flow from operations increased 105 percent to $6.3 million in the second quarter of 2005 from $3.0 million in the second quarter of 2004. The growth in earnings and cash flow from operations in the second quarter of 2005 were attributable to an increase in both production levels and commodity prices. Net earnings for the second quarter of 2005 include a one-time recovery of $0.3 million for the reduction of the Company's future tax liability.

Net earnings of $0.3 million in the first six months of 2005 decreased from $0.4 million in the first six months of 2004. The increase in earnings from higher production levels and commodity prices in the first six months of 2005 was offset by the non-recurring expenses of $5.0 million related to the early repayment of a US$35.0 million term loan on February 28, 2005. Cash flow from operations increased 92 percent to $9.9 million in the first six months of 2005 from the $5.2 million in the first six months of 2004.



Revenue

Three months ended Six months ended
June 30, June 30,
($000's except per -------------------------------------------
barrel, Mcf and 2005 2004 2005 2004
boe amounts) -------------------------------------------

Oil and NGLs $ 2,473 $ 1,168 $ 4,673 $ 2,128
Per barrel 60.02 46.37 59.02 44.52
Natural gas 6,982 5,211 12,807 9,211
Per Mcf 7.63 6.62 7.22 6.40
Other revenue (3) 2 (1) 4
Total gross revenue 9,452 6,380 17,479 11,343
Per boe 48.81 40.82 46.65 39.42

Sales Volumes
Three months ended Six months ended
June 30, June 30,
-------------------------------------------
2005 2004 2005 2004
-------------------------------------------

Crude oil - barrels per day 252 129 235 114
Natural gas - Mcf per day 10,052 8,646 9,796 7,912
NGLs - barrels per day 201 147 202 148
boe - barrels per day 2,128 1,718 2,070 1,581


Production revenues from crude oil, liquids and natural gas sales increased to $9.5 million in the second quarter of 2005 from $6.4 million in the second quarter of 2004.Total production in the second quarter of 2005 averaged 2,128 boe per day which was a 24 percent increase over the 1,718 boe per day recorded in the same period of 2004. The removal of a production allowable at Knopcik resulting from the commencement of water flood on February 1, 2005 contributed to the increase in crude oil production in the second quarter of 2005. Natural gas production volumes increased to 10.1 MMcf per day in the second quarter of 2005 from 8.6 MMcf per day in the second quarter of 2004. The increase came primarily from Caroline area due to the tie in of gas wells that drilled in the fourth quarter of 2004.The increase in natural gas liquids production in the second quarter of 2005 was associated with higher natural gas production levels. The higher production and commodity prices were the major factors for the increase in production revenues in the second quarter of 2005 when compared to the same period in 2004.

The increase in both production and commodity prices in the first six months of 2005, compared to the first six months of 2004, were the primary reasons for a 54 percent increase in total revenues to $17.5 million from $11.3 million recorded in the first half of 2004. Total daily crude oil and liquids production increased 106 percent to 235 boe per day in the first six months of 2005 from 114 boe per day in the first six months of 2004. Natural gas production increased 24 percent during the first six months of 2005 to 9.8 MMcf per day from 7.9 MMcf per day in the first six months of 2004.



Royalties (net of ARTC)

Three months ended Six months ended
June 30, June 30,
($000's except per -------------------------------------------
barrel, Mcf and 2005 2004 2005 2004
boe amounts) -------------------------------------------

Oil and NGLs $ 495 $ 170 $ 902 $ 327
Per barrel 12.02 6.74 11.39 6.85
Percentage of revenue 20.0 14.5 19.3 15.4
Natural gas 950 947 2,117 1,688
Per Mcf 1.04 1.21 1.19 1.17
Percentage of revenue 13.6 18.2 16.5 18.3
Total royalties 1,445 1,117 3,019 2,015
Per boe 7.46 7.15 8.05 7.01
Percentage of revenue 15.3% 17.5% 17.3% 17.8%


Royalties, net of Alberta Royalty Tax Credit, increased to $1.4 million during the second quarter of 2005, up 29 percent from $1.1 million during the same period in 2004. The increase in total royalties was mainly due to the increase in production volumes. Higher oil production as a result of the successful waterflood program at Knopcik increased the royalty rate of oil production. Despite higher natural gas production, the total gas royalties remained relatively the same as the second quarter of 2004. During the second quarter of 2005, the Company received a refund of 2004 annual gas cost allowance adjustments from the Crown and a deep gas royalty reduction in one of our wells at Ladyfern in British Columbia. Without these adjustments, the natural gas royalty would have been higher by $0.4 million.

The crude oil and liquids royalties increased from $6.85 per boe in the first six months of 2004 to $11.39 per boe in the first six months of 2005. As the oil royalty rate is progressive with higher production, the increased oil production resulted in an elevated royalty rate per boe in the first six months of 2005. Natural gas royalties increased slightly to $1.19 per Mcf in the first six months of 2005 from $1.17 per Mcf in the first six months of 2004. The natural gas royalties in the first six months of 2005, without the prior year's adjustment of $0.4 million, would have been $1.42 per Mcf. The expiry of the deep gas royalty exemption at Caroline was the major reason for this increase.



Production Expense

Three months ended Six months ended
June 30, June 30,
-------------------------------------------
($000's except per boe) 2005 2004 2005 2004
-------------------------------------------

Total production expense $ 1,015 $ 1,342 $ 1,882 $ 2,765
Per boe 5.24 8.59 5.02 9.61


Operating costs in the second quarter of 2005 dropped to $1.0 million or $5.24 per boe compared to $1.9 million or $8.59 per boe for the same period of 2004. Operating costs for the second quarter of 2005 were lower on a boe basis, primarily as a result of the elimination of transportation and gathering fees of $529,000 incurred in connection with the pipeline payout account in the Widewater area. The pipeline costs were fully paid in June 2004. Excluding the transportation and gathering fees, operating expenses of $5.24 per boe in the second quarter of 2005 were comparable to the $5.20 per boe realized for the same period in 2004. Operating expenses on a unit of production basis decreased 48 percent to $5.02 per boe from $9.61 per boe in the first six months of 2004. The decrease was also due to the elimination of transportation and gathering fees at Widewater area.



Netbacks

Three months ended Six months ended
June 30, June 30,
-------------------------------------------
($ per boe) 2005 2004 2005 2004
-------------------------------------------

Revenue $ 48.81 $ 40.82 $ 46.65 $ 39.42
Royalty (7.46) (7.15) (8.05) (7.01)
Production expense (5.24) (8.59) (5.02) (9.61)
Transportation expense (0.69) (1.08) (0.70) (1.00)

Netback $ 35.42 $ 24.00 $ 32.88 $ 21.80
-------------------------------------------
-------------------------------------------


Operating netback of $35.42 per boe improved significantly in the second quarter of 2005, compared to the $24.00 per boe in the second quarter of 2004. The increase was the result of higher commodity prices, lower operating and transportation costs, offset somewhat by the increase in royalty burdens. Operating netbacks rose 51 percent to $32.88 per boe for the first six months of 2005 compared to the $21.80 per boe for the first six months of 2004. The Company was able to eliminate excess firm transportation which resulted in lower transportation cost per unit.



General and Administrative Expense

Three months ended Six months ended
June 30, June 30,
-------------------------------------------
($ per boe) 2005 2004 2005 2004
-------------------------------------------

General and administrative
expense $ 576 $ 688 $ 1,468 $ 1,054
Per boe 2.97 4.40 3.92 3.66


General and administrative costs decreased from $0.7 million during the second quarter of 2004 to $0.6 million in 2005. This decrease was principally related to the $0.3 million bonus payment made during the second quarter of 2004. Without the bonus payment, the general administrative expenses for the second quarter of 2005 actually increased when compared to the second quarter of 2004 and is attributable to the addition of new staff and additional costs associated with being a public company. The general and administrative expenses increased 39 percent to $1.5 million in the first six months of 2005 from $1.1 million in the first six months of 2004. On a unit of production basis, general and administrative expenses rose slightly to $3.92 per boe in the first six months of 2005 compared to $3.66 per boe for the same period in 2004.

Interest Expense

There was no interest expense incurred for the second quarter of both 2005 and 2004. Interest income earned on surplus cash resulted from the Company recording a credit balance. Interest expense of $0.9 million in the first six months of 2005 was primarily related to the US$35.0 million Term Loan secured on October 28, 2004. The actual interest rate paid on the loan for the first two months of 2005 was 11 percent. Pursuant to the terms of the Loan Agreement, the Company was also responsible for the 10 percent withholding tax on interest payments to non-residents and this amount was included in interest expense. The US$35.0 million Term Loan was fully repaid on February 28, 2005.



Depletion, Depreciation and Accretion Expense

Three months ended Six months ended
June 30, June 30,
($000's except per -------------------------------------------
boe amounts) 2005 2004 2005 2004
-------------------------------------------
Depletion, depreciation
and accretion $ 3,089 $ 1,964 $ 5,930 $ 3,816
Per boe 15.95 12.56 15.82 13.26


Depletion, depreciation and accretion ("DD&A") provision for the second quarter of 2005 was 57 percent higher than the comparable period in 2004. Increased production accounted for a large part of the increase, however, a decrease in proven reserves due to the adoption of a new method of evaluating reserves under National Instrument 51-101 in September 2004 also contributed to the higher DD&A rate for the 2005 period.

Stock Compensation Expense

The Company recorded $0.1 million and $0.3 million stock compensation expenses in the first three months and six months of 2005 respectively. As Grey Wolf became a public Company on February 28, 2005, there were no stock compensation expenses recorded in the prior period.

Income Taxes

The Company had a future tax provision of $1.0 million in the second quarter of 2005, down from the $1.1 million recorded in the comparable period of 2004. This decrease was mainly due to the one-time recovery of $0.3 million for the reduction of the Company's future tax liability. In the first six months of 2005, future tax provision decreased 79 percent to $0.2 million from $1.0 million in the first six months of 2004. The decrease was primarily due to the non-recurring expenses related to the early repayment of a US$35 million term loan.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005, Grey Wolf had a $10.0 million revolving credit facility with a Canadian Chartered Bank. Under the terms of the facility, it bears interest at the Bank's prime rate plus 25 basis points per annum. The Company intends to fund its 2005 exploration and development activities mainly from internally generated cash flow. There were no amounts drawn on the credit facility as at June 30, 2005. At the end of second quarter of 2005, the Company had a positive working capital of $5.0 million. The unprecedented long spring break up this year has delayed our planned capital expenditures. Cash flow generated from operations was significantly higher than the capital expenditures incurred, and resulted in a surplus cash balance of $5.3 million.



CAPITAL EXPENDITURES

Three months ended Six months ended
June 30, June 30,
-------------------------------------------
($000's) 2005 2004 2005 2004
-------------------------------------------
Land and seismic $ 1,644 $ 770 $ 2,131 $ 998
Drilling and completion 391 1,045 952 2,702
Facilities and equipment 335 232 1,362 1,038
Other 13 - 13 -

Total 2,383 2,047 4,458 4,738
-------------------------------------------
-------------------------------------------


Capital expenditures for the second quarter of 2005 were $2.4 million, a slight increased from the $2.0 million spent during the same period in 2004. Land acquisitions accounted for the majority of the capital expenditures in the second quarter of 2005. The early spring break up and unprecedented heavy rainfall for the entire month of June has delayed our planned capital expenditures to the second half of 2005. Capital expenditures for the first six months of 2005 totalled $4.5 million, which was comparable to the $4.7 million spent during the first six months of 2004.

CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

Grey Wolf's commitment is related to office lease and to compressor leases:



($000's) Expected payment date
Contractual obligations 2005 2006 2007 2008 Total
----------------------------------------------
Office lease(1) $ 210 $ 222 $ 222 $ 222 $ 876
Compressor leases 341 180 - - 521

Total $ 551 $ 402 $ 222 $ 222 $1,397
----------------------------------------------
----------------------------------------------

Note: (1) Including estimated operating costs.


OFF-BALANCE SHEET ARRANGEMENTS

Grey Wolf did not enter into any off-balance sheet arrangements.

ACCOUNTING POLICIES

Grey Wolf's accounting policies are set out in note 2 to the audited Financial Statements for December 31, 2004 and 2003. Grey Wolf follows policies that are in accordance with Canadian Generally Accepted Accounting Principles.

RISKS AND UNCERTAINTIES

The Company is subject to normal industry credit risk on its accounts receivable with customers and joint venture partners. The Company mitigates these risks by maintaining credit management policies.

The Company is exposed to fluctuations in commodity prices for natural gas, crude oil and natural gas liquids. Commodity prices are affected by many factors including supply and demand. The Company monitors these risks and when appropriate, utilizes financial instruments to manage its exposure to these risks.



Grey Wolf Exploration Inc.
Balance Sheets
(unaudited) ($000's)

As of June 30, 2005 December 31, 2004
-----------------------------------
Assets
Current
Cash $ 5,250 $ 835
Accounts receivable 1,906 3,429
Prepaids 150 75
-----------------------------------
7,306 4,339
Deferred financing costs (Note 3) - 2,311

Future income taxes (Note 5) 3,175 1,976

Property and equipment 53,454 54,790

-----------------------------------
$63,935 $63,416
-----------------------------------
-----------------------------------


Liabilities and Shareholders'
Equity
Current
Accounts payable and accrued
liabilities $ 2,326 $ 6,346
Due to parent company (Note 2) - 1,256
Current portion of long term
debt (Note 3) - 2,111
-----------------------------------

2,326 9,713
Long term debt (Note 3) - 40,106
Asset retirement obligation 2,135 2,075

-----------------------------------
4,461 51,894
-----------------------------------

Share capital (Note 4) 63,265 15,926
Contributed surplus 306 -
Deficit (4,097) (4,404)
-----------------------------------
59,474 11,522
-----------------------------------

$63,935 $63,416
-----------------------------------
-----------------------------------


Grey Wolf Exploration Inc.
Statements of Operations and Deficit
(unaudited) ($000's except per share amounts)

Three months Six months
ended June 30, ended June 30,
--------------------------------------------
2005 2004 2005 2004
--------------------------------------------
Revenue
Petroleum and natural
gas sales $ 9,452 $ 6,380 $17,479 $11,343
Royalties, net of royalty
tax credits (1,445) (1,117) (3,019) (2,015)

--------------------------------------------
8,007 5,263 14,460 9,328
--------------------------------------------

Expenses
Depletion, depreciation
and accretion 3,089 1,964 5,930 3,816
General and administrative 576 688 1,468 1,054
Production 1,015 1,342 1,882 2,765
Interest (13) (2) 873 (4)
Transportation 134 147 259 289
Stock compensation expense
(Note 4) 230 - 306 -
Deferred financing costs
(Note 3) - - 2,311 -
Foreign exchange loss
(Note 3) (1) 2 906 2
--------------------------------------------
5,030 4,141 13,935 7,922
--------------------------------------------
Income before taxes 2,977 1,122 525 1,406
--------------------------------------------

Tax expense (recovery)
Large corporation tax 7 15 10 35
Future income tax 971 1,096 208 976
--------------------------------------------
978 1,111 218 1,011
--------------------------------------------

Net income for the period 1,999 11 307 395

Deficit, beginning of period (6,096) (7,303) (4,404) (7,687)
--------------------------------------------

Deficit, end of period $ (4,097) $ (7,292) $ (4,097) $(7,292)
--------------------------------------------
--------------------------------------------

Basic and diluted earnings
per share (Note 4) $ 0.06 $ 0.00 $ 0.01 $ 0.03
--------------------------------------------
--------------------------------------------

Weighted average number
of shares outstanding
- Basic and diluted 30,802,360 13,002,360 25,098,493 13,002,360
--------------------------------------------
--------------------------------------------


Grey Wolf Exploration Inc.
Statements of Cash Flows
(unaudited) ($000's except per share amounts)

Three months Six months
ended June 30, ended June 30,
--------------------------------------------
2005 2004 2005 2004
--------------------------------------------
Cash flows from operating
activities
Net income for the period $ 1,999 $ 11 $ 307 $ 395
Adjustments for:
Depletion, depreciation
and accretion 3,089 1,964 5,930 3,816
Future income tax 971 1,096 208 976
Stock compensation expense 230 - 306 -
Deferred financing costs - - 2,311 -
Foreign exchange loss - - 882 -
--------------------------------------------

6,289 3,071 9,944 5,187
Site restoration costs
incurred 4 (55) (75) (99)
Changes in non-cash working
capital related to
operating activities 395 (1,171) 387 (55)
--------------------------------------------

6,688 1,845 10,256 5,033
--------------------------------------------

Cash flows from financing
activities
Issue of common shares,
net of costs (449) - 45,932 -
Advance from (repayment to)
parent company - (32) (1,256) 335
Repayment of term loan - - (43,099) -
--------------------------------------------
(449) (32) 1,577 335
--------------------------------------------

Cash flows from investing
activities
Capital additions and
purchases of property
and equipment (2,383) (2,047) (4,458) (4,738)
Changes in non-cash working
capital related to
investing activities (129) (189) (2,960) (409)
--------------------------------------------

(2,512) (2,236) (7,418) (5,147)
--------------------------------------------

Increase (decrease) in cash 3,727 (423) 4,415 221

Cash, beginning of period 1,523 1,281 835 637
--------------------------------------------

Cash, end of period $ 5,250 $ 858 $ 5,250 $ 858
--------------------------------------------
--------------------------------------------

Supplementary cash flow
information
Cash interest paid $ - $ - $ 888 $ -
Cash taxes paid $ 5 $ - $ 5 $ -


Notes to Financial Statements (unaudited)

(tabular amounts shown in $000's unless otherwise specified)

1. Basis of Presentation

The interim financial statements of 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 management's opinion, been properly prepared using careful judgements within reasonable limits of materiality.

These interim financial statements do not include all disclosures required in year end financial statements and 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. Initial Public Offering

On February 28, 2005, pursuant to its Initial Public Offering (the "Offering"), Grey Wolf issued a total of 17,800,000 Common Shares at a price of $2.80 per common share for proceeds of $49,840,000. The net proceeds from the Offering were partially used by Grey Wolf to repay inter-company debt owing to Abraxas and to repay the outstanding term loan balance. The remaining net proceeds of the Offering were used to eliminate Grey Wolf's working capital deficiency. In addition, Abraxas Petroleum Corporation, Grey Wolf's sole shareholder ("Abraxas"), sold an aggregate of 9,100,000 common shares of Grey Wolf, offered on a secondary basis at a price of $2.80 per common share for proceeds of $25,480,000. After the completion of the share offering on February 28, 2005, Grey Wolf became an independent junior oil and gas company and began trading on the Toronto Stock Exchange.

3. Long Term Debt

(a) On February 28, 2005, the Term Loan of US$35.0 million was repaid in its entirety with proceeds of the Offering. As a result, the remaining $2.3 million of deferred financing costs related to the term loan were expensed during the first quarter of 2005. In addition, the Company recorded a non-recurring foreign exchange loss of $0.9 million during the first quarter of 2005, due to the change in the exchange rate from December 31, 2004 to February 28, 2005.

(b) After the completion of the Offering, the Company obtained a $10.0 million revolving credit facility with a Canadian Chartered bank. Under the terms of the facility, interest is payable at the bank's prime rate plus 0.25 percent. The revolving credit facility is subject to semi-annual review and the Company has pledged a $30.0 million floating charge debenture over all its present and after-acquired properties. No amount was drawn on the facility at June 30, 2005.



(b) Issued

June 30, 2005 December 31, 2004
----------------------------------------------
Number Number
of shares Amount of shares Amount
----------------------------------------------
Common shares
Balance, beginning
of period 13,002,360 $ 15,926 13,002,360 $ 47,188
Issued for cash 17,800,000 49,840 - -
Shared issue costs,
net of tax effect - (2,501) - -
Reduction of stated
capital (1) - - - (31,262)

Balance, end of period 30,802,360 $ 63,265 13,002,360 $ 15,926
----------------------------------------------
----------------------------------------------

(1) By special resolution of the sole shareholder, the Company reduced
its stated capital by $31,262,000 on October 28, 2004.


(c) Options & Warrants

On March 1, 2005, the Company granted 2,977,000 options at an exercise price of $2.80 per share to directors, officers and employees of the Company. On June 7, 2005, the Company granted an additional 12,000 options at an exercise price of $2.80 per share to an employee of the Company. Options granted under the option plan will vest 33 1/3% on each of the first three anniversaries from the grant date and will be exercisable for a period not to exceed five years. The aggregate number of common shares subject to the options under the plan will not exceed 10% of the common shares then outstanding.

Using the fair value method of accounting for stock options issued to employees and directors on March 1 and June 7, 2005, the Company recognized $230,000 ($nil per share) and $306,000 ($nil per share) for the three and six months periods ended June 30, 2005 respectively of compensation expense in the statement of operations, with a corresponding increase recorded to contributed surplus. The weighted average fair value of options granted during the quarter ended June 30, 2005 was $0.92 per option, which was estimated using the Black-Scholes option-pricing model, assuming a risk free interest rate of 3.5%, expected volatility of 30%, expected life of five years and no annual dividends paid.

(d) Per Share Amounts

For the three and six months ended June 30, 2005, there were no potentially dilutive securities outstanding.

5. Income and Capital Taxes

The effective rate of income tax varies from the combined federal and provincial statutory rate as follows:



Three Months Six Months
Ended June 30, Ended June 30,
--------------------------------
2005 2005

Combined tax rates 37.62% 37.62%

Expected income tax provisions
at statutory rate $ 1,113 $ 201
Resource allowance (378) (664)
Non-deductible crown charges 374 789
Non-deductible capital losses 245 245
Alberta Royalty Tax Credits (36) (75)
Adjustment to tax pools (325) (325)
Other differences, including
change in future tax rate (22) 37

--------------------------------
Actual income tax provision $ 971 $ 208
--------------------------------
--------------------------------



6. Related Party Transactions

Pursuant to a Corporate Services Agreement, during the three and six months ended June 30, 2005, the Company paid fees to Abraxas in the amount of US$25,000 and US$50,000 respectively (2004 - US$25,000 and US$50,000 respectively).

Complete financial information for the three months and six months ended June 30, 2005, is provided in the Corporation's unaudited financial statements and management's discussion and analysis ("MD&A") available on SEDAR at www.sedar.com or on the Corporation's website located at www.greywolf.ca.

Drilling Update

Our drilling program is now progressing rapidly. Three wells - Pouce 14-27-077-11 W6M (GWE 100% WI), Valhalla 10-12-076-10 W6M (GWE 75% WI) and PWEI 102 Ricinus 10-13-34-08 W5M (GWE 40% WI) have all been drilled and cased. Operations are proceeding to complete and test each well. "Initial indications are encouraging and completion test results will be released as soon as they become available" said Robert L. G. Watson, Chairman and Chief Executive Officer.

We have also re-entered the well located at Knopcik 8-16-74-10 W6M (GWE 100% WI). The Boundary Lake interval was completed and fracture-stimulated with initial testing during post-frac cleanup indicating commercial quantities of oil at a preliminary rate of approximately 120 barrels per day.

Grey Wolf has now successfully completed drilling five of its 20 well program. Drilling continues with two wells scheduled in our Peace River Arch area and one currently underway at Caroline.

Outlook

"Grey Wolf continues to deliver strong financial and operating performance. We are committed to building the value of every share by growing production through the drill bit, increasing reserves, and achieving top-quartile performance" stated Mr. Watson. "Heading into the last half of 2005, we are well positioned to continue our record setting pace, while maintaining a strong balance sheet."

Grey Wolf is an independent Alberta-based, junior oil and natural gas company involved in the development and production of natural gas and crude oil in the Western Canadian Sedimentary Basin. Its common shares trade on the Toronto Stock Exchange under the symbol "GWE".

Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Grey Wolf's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Grey Wolf's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. 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, undue reliance should not be placed on forward-looking statements. Grey Wolf's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements. No assurance can be given that any of the events anticipated will transpire or occur, or if any of them do so, what benefits Grey Wolf will derive from them. Grey Wolf disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Contact Information

  • Grey Wolf Exploration Inc.
    Dawne L. Stirling
    Manager, Investor Relations and Corporate Secretary
    (403) 218-1473
    Email: dstirling@greywolf.ca
    Website: greywolf.ca