Midnight Oil Exploration Ltd.

Midnight Oil Exploration Ltd.

March 21, 2005 21:58 ET

Midnight Oil Exploration Ltd. Announces Highly Successful Drilling Program and Releases 2004 Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: MIDNIGHT OIL EXPLORATION LTD.

TSX SYMBOL: MOX

MARCH 21, 2005 - 21:58 ET

Midnight Oil Exploration Ltd. Announces Highly
Successful Drilling Program and Releases 2004 Results

CALGARY, ALBERTA--(CCNMatthews - March 21, 2005) - Midnight Oil
Exploration Ltd. (TSX:MOX)is pleased to announce the drilling, financial
and operating results for the period ended December 31, 2004.

PRESIDENT'S MESSAGE
Midnight Oil Exploration Ltd. ("Midnight") has enjoyed a successful
commencement to its operations as a new junior oil and gas exploration
company. From the re-start of Midnight on November 30th 2004, we have
pursued an aggressive drilling program while growing our production base
and expanding our land base and play prospect portfolio. Midnight has
continued our solid record of drilling successes resulting in 16 gross
(3.9 net) gas wells, - for a 100% success rate. This program has
resulted in current production increasing to over 1,000 boe/d from an
average of 723 boe/d in December, with an additional 300 boe/d behind
pipe expected to brought on production in the second quarter. In
addition, through farm-in activities and crown sale acquisitions, we
have grown our net undeveloped land base to more than 144,000 acres.

Our formula for growth and success at Midnight Oil Exploration will be
the same proven formula that we employed at Midnight Oil & Gas Ltd. We
have a high-end team with proven technical expertise and strong business
execution skills. We continue to be focused in the high potential
multi-zone areas of West Central Alberta and the Peace River Arch. We
have started with an excellent foundation of properties to pursue a risk
balanced portfolio of prospects from our development activities in the
West Central area as well as a large exploratory prospect inventory in
the Peace River Arch area. Our existing property and prospect portfolio
offers excellent potential and we have the experience and expertise in
these areas to develop and grow our base. We will strive to own and
operate the drilling and facilities related to our activities in order
to maintain operational control for timing and costs. As a result of our
transaction which established Daylight Energy Trust ("Daylight") and the
new Midnight, we have ownership in strategic facilities in our core
areas that will provide Midnight with timely access and a competitive
edge in these multi-zone high potential areas. In addition, our ongoing
relationship with Daylight through joint holdings and a technical
services agreement provides for the entities to share certain personnel
and services. This gives Midnight greater technical breadth specifically
in drilling, completions and operations and provides Midnight, through
Daylight, access to the services and equipment that a new junior
exploration company would normally not have.

Drilling Activity

Midnight's drilling success continues as we enjoyed a 100% drilling
success rate since inception with 16 gross (3.9 net) gas wells including
five (1.4 net) gas wells in 2004.

In December 2004, our first month of operation, the Company drilled
three gross (0.8 net) natural gas wells in the West Central area. Two of
these wells were located in our core area of Fir/Pine and are part of
the large joint venture with Daylight. The Fir/Pine area holds
tremendous development potential for the Company and is the core
producing property within Midnight. Midnight has access to a large
(193,000 gross acres) land base through its relationship with Daylight
including over 69,000 net undeveloped acres. In the West Central area,
the Company is in the process of conducting a detailed geologic review
and evaluation of the potential within this multi-zone area and plans an
aggressive exploration program including a planned 30 gross (8 net) well
drilling program.

In the Peace River Arch area, the Company drilled two gross (0.6 net)
natural gas wells with a 100 percent success rate. The Company continues
to focus its activities in the Deep Basin area at Wapiti, Red Rock and
Elmworth. On the Company's Deep Basin Cadomin play, drilling success
continues and two new multi-zone prospect areas have already been
identified. Midnight has ownership in over (71,000 gross) 52,000 net
undeveloped acres and has planned a 20 gross (12 net) well drilling
program.

Substantially all of our December production (723 boe/d)was from our
joint production with Daylight in our West Central area. Our recent
drilling program and tie-ins has grown current production to over 1,000
boe/d with an additional 300 boe/d tested and behind pipe that is
expected to brought on production by mid April.

The early results of our drilling program indicate the tremendous
potential we believe these areas and our lands hold. We are very pleased
with these results and are confident in our ability to continue with
this success and deliver production growth through our drilling program



2004 Drilling Results
------------------------------------------------------------------------
West Central Peace River Arch
------------------------------------------------------------------------
Gross Net Gross Net
------------------------------------------------------------------------
Natural Gas 3 0.8 2 0.6
------------------------------------------------------------------------
Oil - - - -
------------------------------------------------------------------------
Total 3 0.8 2 0.6
------------------------------------------------------------------------
Success Rate 100% 100%
------------------------------------------------------------------------


2005 Outlook

Midnight Oil Exploration Ltd. effectively commenced operations on
November 30, 2004 with the closing of the Plan of Arrangement creating
our company and Daylight Energy Trust. There was an initial transition
phase as we exchanged and allocated the properties between the
respective parties and put in action our plans and our program. Strong
commodity prices have fueled the industry to record drilling and
activity levels. Industry wide, costs continue to increase and services
are in high demand causing delays and interruptions to programs.
As previously stated, Midnight has in place the key elements to deliver
excellent returns to our shareholders. Thanks to our high-end technical
team and to our large prospect inventory and undeveloped land base,
Midnight continues to produce a highly successful drilling program. From
the early success of our exploration activities and the exploitation
opportunities provided from our West Central asset base, we have already
expanded and broadened our large high potential play and prospect
inventory with additional farm-ins and crown sale acquisitions.

The Board of Directors of Midnight has set our 2005 capital budget at
$30 million. This budget will allow Midnight to drill approximately 50
gross (20 net) wells resulting in an anticipated forecast production
increase of over 235% to the 1,700 boe/d range.

Notwithstanding the short time since starting Midnight, we have quickly
shown the quality of our people and our prospects. Looking forward we
are very optimistic about Midnight's ability to continue to repeat its
success, based on our core strengths, our high-end technical team and a
highly prospective asset base. We are excited about the potential of the
new Midnight and we look forward to the next year, and the next steps we
take in the growth of Midnight.

Year End Results

The year end operational highlights are provided for one month of
operations.



------------------------------------------------------------------------
Financial Period from November 30
($thousands, except per share data) to December 31, 2004
------------------------------------------------------------------------
Petroleum and natural gas sales
(net of transportation) 976
------------------------------------------------------------------------
Royalties 211
------------------------------------------------------------------------
Production expenses 249
------------------------------------------------------------------------
Net backs 516
------------------------------------------------------------------------
Cash flow from operations 397
------------------------------------------------------------------------
Per share - Basic .02
------------------------------------------------------------------------
- Diluted .02
------------------------------------------------------------------------
Net income 15
------------------------------------------------------------------------
Per share - Basic .00
------------------------------------------------------------------------
- Diluted .00
------------------------------------------------------------------------
Additions to capital assets 2,680
------------------------------------------------------------------------
Working capital surplus 2,902
------------------------------------------------------------------------
Total assets 42,120
------------------------------------------------------------------------
Shares outstanding
------------------------------------------------------------------------
Basic 26,328
------------------------------------------------------------------------
Diluted 28,661
------------------------------------------------------------------------
Operations
------------------------------------------------------------------------
Average daily production
------------------------------------------------------------------------
Natural gas (mcf/d) 3,549
------------------------------------------------------------------------
Liquids & crude oil (bbls/d) 132
------------------------------------------------------------------------
Combined (boe/d) 723
------------------------------------------------------------------------
Average prices received
------------------------------------------------------------------------
Natural gas ($/mcf) 7.00
------------------------------------------------------------------------
Liquids & crude oil ($/bbl) 50.75
------------------------------------------------------------------------
Combined ($/boe) 43.58
------------------------------------------------------------------------
Royalties ($/boe) 9.40
------------------------------------------------------------------------
Operating expenses ($/boe) 11.14
------------------------------------------------------------------------
Netback received ($/boe) 23.04
------------------------------------------------------------------------


Annual Meeting

The Company's Annual Meeting is scheduled for 2:00 p.m. on Thursday May
5, 2005 at the Sunlife Conference Centre, 2nd Level Sunlife Plaza, 140
4th Ave. S.W., Calgary, Alberta.

Amendment to the Company's Stock Option Plan to allow for a Rolling
Maximum Number of Shares issuable thereunder

On January 1, 2005, the Toronto Stock Exchange (the "TSX") amended
certain parts of the TSX Company Manual including amendments to share
compensation arrangements (collectively the "TSX Amendments"). The TSX
amendments provide, among other things, for the removal of the
requirement for a fixed maximum number of securities issuable under a
share compensation arrangement, thereby allowing issuers to have a
rolling maximum number of securities based on a percentage of its
outstanding securities. At a Special Meeting of shareholders held on
November 29, 2004, the shareholders of the Company passed a resolution
approving a rolling maximum number of common shares issuable under the
Company's stock option plan to be effective upon the TSX Amendments
becoming effective and accordingly, the stock option plan of the Company
has been amended by: (i) changing the number of authorized but unissued
Common Shares that may be subject to options granted under the Company's
stock option plan at any time to 10% of the number of outstanding Common
Shares of the Company from time to time; and (ii) providing that: (A)
any increase in the issued and outstanding Common Shares of the Company
will result in an increase in the available number of Common Shares
issuable under the Company's stock option plan; and (B) any increase in
the number of options granted under the Company's stock option plan
will, if exercised, make new grants available under the Company's stock
option plan.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Midnight Oil Exploration Ltd. ("Midnight" or the "Company") was
incorporated on September 10, 2004, capitalized by way of a private
placement on November 29, 2004 and commenced operations on November 30,
2004 under a Plan of Arrangement entered into by Midnight Oil & Gas Ltd.
("MOG") Daylight Energy Trust, Daylight Acquisition Corp. and Midnight
(the "Plan of Arrangement"). Under the Plan of Arrangement, Daylight
Acquisition Corp., a subsidiary of Daylight Energy Trust, acquired all
the issued and outstanding shares of Vintage Petroleum Canada, Inc
("Vintage") along with the shares of MOG. As a part of the Plan of
Arrangement certain assets of MOG and Vintage were transferred to
Midnight, and in return the shareholders of MOG and the Series U
subscription holders of Daylight Energy Trust received voting common
shares of Midnight.

The financial information presented includes the operating results of
Midnight from the effective date of the Plan of Arrangement, November
30, 2004 to December 31, 2004. As a result, there is no comparative
information.

The Management Discussion and Analysis for Midnight should be read in
conjunction with the audited Financial Statements and accompanying notes
for the period ended December 31, 2004. Additional information relating
to Midnight, including a detailed reserve analysis, will be included in
our Initial Annual Information Form, which may be found on SEDAR at
www.sedar.com.

Basis of Presentation - The financial data presented below has been
prepared in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP"). The reporting and the measurement currency is the
Canadian dollar. For the purpose of calculating unit costs, natural gas
is converted to a barrel equivalent ("boe") using six thousand cubic
feet of natural gas equal to one barrel of oil unless otherwise stated.

Non-GAAP Measurements - Within the Management Discussion and Analysis
references are made to terms commonly used in the oil and gas industry.
Cash flow and cash flow per share are not defined by GAAP in Canada and
are referred to as non-GAAP measures. Cash flow represents funds from
operations as detailed on the Statement of Cash Flows. Cash flow per
share is calculated based on the weighted average number of common
shares outstanding consistent with the calculation of net income per
share. Netbacks equal total revenue less royalties and operating costs
calculated on a boe basis. Total boes are calculated by multiplying the
daily production by the number of days in the period.

Forward Looking Statements- Certain information regarding Midnight Oil
Exploration Ltd. set forth in this document, including management's
assessment of the Company's future plans and operations, contains
forward looking statements that involve substantial known and unknown
risks and uncertainties. By their very nature, these forward looking
statements are subject to numerous risks and uncertainties, certain of
which are beyond Midnight's control. Actual results could differ
materially from those currently anticipated due to any number of factors
including such variables as new information regarding recoverable
reserves, volatility of commodity prices, competition from other
producers, environmental, legislative, regulatory and political changes
along with other factors discussed in our annual information form.
Accordingly, no assurance can be given that any events anticipated by
the forward looking statements will transpire or occur, or if any of
them do, what the impact to Midnight will be.

This Management Discussion and Analysis is dated as of March 15, 2005.

Business Objectives

Midnight targets to deliver above average growth and share price
appreciation through execution of a well defined business strategy. To
accomplish this, Midnight focuses on growing its production and reserves
through a program of exploratory and development drilling and strategic
acquisitions within its core project areas in the Western Canadian
Sedimentary Basin.

The Company is focusing on exploration and development drilling of
prospects in its core areas in West Central Alberta and Peace River
Arch. Midnight will also pursue strategic acquisitions that meet its
business objectives.

Midnight is a grass roots exploration and development company that
internally generates opportunities in certain high potential multi-zone
areas in the deeper part of the Western Canadian Sedimentary Basin. The
Company strives to maintain a risk balance between exploration,
development and exploitation projects combined with strategic
acquisition opportunities that meet Midnight's business parameters.
Midnight has an Administrative and Technical Services Agreement with
Daylight Energy that provides for the sharing of certain personnel and
services including drilling and field operations. Midnight, or Daylight
on its behalf, aims to operate its activities as it believes that
controlling the timing and costs of its projects wherever possible is
essential to achieve its objectives. In the Pine Creek Block of West
Central Alberta although Midnight initially has a relatively small
interest, the Company will seek to become the operator of its properties
in this area, either on its own or through Daylight. In its higher
working interest areas, either in the West Central area or on the Peace
River Arch Midnight generally is the operator of these properties.
Further, to maintain cost control and reasonable access to facilities
within its geographic areas of interest, Midnight strives to establish
and optimize its working interest ownership in facilities and
infrastructure where reasonably possible.

In reviewing potential drilling or acquisition opportunities, Midnight
uses a similar methodology previously employed by MOG giving
consideration to the following criteria including a ranking or
prioritizing of opportunities based on available capital, resources and
timing:

- risk capital required to secure or evaluate the investment opportunity;

- potential return on the project, if successful;

- likelihood of success; and

- risked return versus cost of capital.

In general, Midnight uses a portfolio approach in developing a large
number of opportunities with a balance of risk profiles in an attempt to
generate sustainable high levels of profitable production and financial
growth.

Creation of Midnight Oil Exploration Ltd.

Under the Plan of Arrangement made effective on November 30, 2004,
certain assets of MOG and Vintage were transferred to Midnight. The MOG
shareholders along with the Daylight Energy Trust Series U subscription
receipt holders effectively received 0.50 of a voting share of Midnight
for every common share of MOG and for every Series U subscription
receipt of Daylight Energy Trust.

The conveyed assets included petroleum and natural gas properties that
produced approximately 700 boe/d at closing comprised of 15% percent of
Vintage's interest in its properties in West Central Alberta (the "Pine
Creek Block"), and 142,000 acres of undeveloped land in West Central
Alberta and Peace River Arch areas. In addition, Midnight has an option
to farm-in on approximately 20,000 net acres of former Vintage
exploratory lands retained by Daylight on standard industry terms,
thereby providing Midnight with an additional portfolio of opportunities.

Relationship with Daylight

In conjunction with the Plan of Arrangement, Midnight and Daylight
entered into an Administrative and Technical Services Agreement which
provides for the sharing of services required to manage Midnight's
activities and govern the allocation of general and administration
expenses between the entities. The Administrative and Technical Services
Agreement has no set termination date and will continue until terminated
by either party with three months prior written notice. Under this
agreement, Daylight receives payment for certain technical and
administration services provided to Midnight on a cost recovery basis as
well as reimbursement for any costs incurred on Midnight's behalf.
Pursuant to the Administrative and Technical Services Agreement, from
November 30, 2004 to December 31, 2004, $110,000 of fees were charged
relating to general and administration activities and $99,000 of fees
were charged relating to capital expenditures for the period.

As a result of this technical services arrangement, the majority of the
Company's accounts receivable and accounts payable as at December 31,
2004 are due from (to) Daylight.

Petroleum and Natural Gas Sales

For the period November 30, 2004 to December 31, 2004, petroleum and
natural gas sales totalled $977,000 comprised of natural gas sales of
$770,000, natural gas liquid sales of $118,000 and crude oil sales of
$89,000.

Production for the month of December was 723 boe/d comprised of 3,549
mcf/d and 77 bbls/d of natural gas liquids and 55 bbls/d of oil. The
production mix was 81% natural gas, 11% Natural gas liquids and 8% light
quality crude oil.

The following table indicates the average daily production from the
important fields comprising the Company's assets for the one month ended
December 31, 2004.



Light Crude
Oil and NGL Gas Boe
(bbls/d) (mcf/d) (boe/d)
------------- --------- --------

Pine Creek 22 990 187
Oldman 38 816 174
Other - Minor 72 1,743 362
------------- --------- --------
Total 132 3,549 723
------------- --------- --------
------------- --------- --------


The following table outlines Midnight's achieved pricing comparable to
Industry benchmark pricing:



------------------------------------------------------------------------
Prices and Marketing December 2004
------------------------------------------------------------------------
Benchmark Prices
------------------------------------------------------------------------
AECO gas ($/mcf) $ 6.87
------------------------------------------------------------------------
WTI oil ($US/bbl) 43.23
------------------------------------------------------------------------
CDN/US average exchange rate 0.821
------------------------------------------------------------------------
Edmonton Par ($CDN/bbl) 51.48
------------------------------------------------------------------------
Midnight's Average Selling Price
------------------------------------------------------------------------
Natural gas ($/mcf) $ 7.00
------------------------------------------------------------------------
Liquids & Oil ($/bbl) 50.75
------------------------------------------------------------------------
Total ($/boe) $ 43.58
------------------------------------------------------------------------
------------------------------------------------------------------------


Midnight markets its natural gas on a daily spot market basis at various
delivery points in Alberta and therefore the average AECO spot market
price in Canadian dollars per mcf is an appropriate benchmark for our
gas.

Midnight did not buy or sell any commodity or currency hedges in 2004.

Royalties

For the period November 30, 2004 to December 31, 2004, Midnight had an
average royalty rate of 21.6% of revenues or $9.40 per boe. Since all of
Midnight's production was derived from original Vintage properties, all
the production was obtained from "over-the-limit" corporations, and
therefore Midnight's production does not qualify for the Alberta Royalty
Tax Credit for this time period.

By product, gas royalties averaged 21%, associated liquids averaged 28%
and oil averaged 18%. In 2005, the Company expects the overall royalty
rate to remain substantially the same.

Operating Expenses

Operating costs for the period totalled $249,000 or $11.14 per boe. The
operating costs for November 30 to December 31, 2004 are lower than the
historical operating costs due to lower turnaround expenses and reduced
processing fees resulting from a new operating agreement with the
operator of one of our major non-operated facilities. As gas production
is brought on stream at a lower cost, we expect the 2005 operating costs
to decrease to $9 to $10 per boe.

Other Income

Other income is comprised of interest income of $12,000. At December 31,
2004, Midnight had a cash balance totalling $5,031,000 from the proceeds
of the private placements, net of the $2 million debt settlement on the
conveyance of assets. Midnight expects to utilize this cash and be in a
net debt position by the end of the first quarter of 2005.

General and Administration Expenses

During the period, net general and administration ("G&A") expenses
totalled $126,000 or $5.63 per boe. For 2004, the G&A costs on a per boe
basis are higher than our expected G&A costs on a normalized basis as
certain costs such as the year end audit, reserve report and annual
report which accounts for approximately 63% of our general and
administrative expenses were incurred during the period. Annualizing
these costs, our general and administration expenses would have averaged
$2.35 per boe for this period. In 2005, we anticipate our net G&A
expenses to decrease to $2 to $3 per boe.

Midnight's general and administration expenses have been allocated based
on the Administrative and Technical Service Agreement with Daylight and
are comprised of the following components:



------------------------------------------------------------------------
Period from November 30 to
General and Administration Expense (000's) December 31, 2004
------------------------------------------------------------------------
Direct general and administration $ 106
Technical service fee from Daylight 119
Capitalized general and administration (99)
------------------------------------------------------------------------
Net general and administrative $ 126
------------------------------------------------------------------------
$/boe $ 5.63
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion, Depreciation and Accretion

For the reported period, depletion and depreciation of the petroleum and
natural gas assets and the accretion of the asset retirement obligation
was $329,000. On a per boe basis, depletion, depreciation and accretion
was $14.70 per boe. The assets allocated to Midnight in connection with
the Plan of Arrangement were transferred at fair market value
establishing the starting point for the depletable base. We expect to be
able to maintain the depletion rate on a per boe basis in 2005.

Additional reserves data will be disclosed in our Initial Annual
Information Form filed on SEDAR.

Stock Based Compensation

The Company applies the fair value method for valuing stock option
grants and warrants. Under this method, compensation cost attributable
to all share options granted and warrants issued are measured at fair
value at the grant and issuance date and expensed over the vesting
period with a corresponding increase to contributed surplus. For the
period November 30, 2004 to December 31, 2004 Midnight recognized a
stock based compensation expense of $15,000 on its outstanding warrants.
Midnight's unamortized portion of stock-based compensation totalled
$522,000 at December 31, 2004.

Taxes

Midnight's future tax asset was acquired on the Plan of Arrangement and
relates to a temporary difference on asset retirement obligations. The
petroleum and natural gas assets conveyed were acquired at fair market
value thus has full tax basis. The future tax expense for the period
November 30, 2004 to December 31, 2004 was $43,000 resulting in an
effective tax rate of 74.1%. The difference in the expected rate of
38.6% and the effective rate is from permanent differences relating to
stock based compensation and the difference between non-deductible crown
royalties and the resource allowance.

Midnight had no current income taxes payable in 2004 and was under the
corporate exemption level for Large Corporation's Tax. Midnight does not
expect to become taxable on an income tax basis in 2005. The Company has
approximately $36 million in tax pools to shelter taxable income in
future years. The estimated tax pools are as follows:



------------------------------------------------------------------------
Tax Pools (000's) 2004
------------------------------------------------------------------------
Canadian exploration expense $ 3,300
Canadian development expense 1,179
Canadian oil and gas property expense 27,477
Undepreciated capital cost 3,753
------------------------------------------------------------------------
Total $ 35,709
------------------------------------------------------------------------
------------------------------------------------------------------------


Cash Flow and Net Income

Cash flow from operations totalled $402,000, before abandonment
expenditures of $5,000, for the period November 30, 2004 to December 31,
2004. Cash flow per basic and diluted share averaged $0.02 for 2004. Net
income for the period totalled $15,000. Net income per share on a basic
and diluted basis was $0.00.

The following table summarizes the netbacks on a barrel of oil
equivalent basis for the period November 30 to December 31, 2004.



Period from November 30 to
($/boe) December 31, 2004
------------------------------------------------------------------------
Sales price $ 43.58
Royalties 9.40
Operating expense 11.14
------------------------------------------------------------------------
Operating netback $ 23.04
General and administration 5.63
Interest (income) (0.53)
------------------------------------------------------------------------
Cash flow netback $ 17.94
Depletion, depreciation and accretion 14.70
Stock-based compensation 0.68
Future tax 1.89
------------------------------------------------------------------------
Net income $ 0.67
------------------------------------------------------------------------
------------------------------------------------------------------------


Netbacks

As the Company reported only one month of operations, certain
expenditures on an annualized basis may produce different results from
the table illustrated above.

Equity

On November 29, 2004, prior to the completion of the Plan of
Arrangement, Midnight completed a private placement of 4,666,666 common
shares for gross proceeds of $7 million. In a separate private
placement, Midnight issued 2,333,333 warrants for proceeds of $47,000.
Each warrant is exercisable into one common share of the Company at a
price of $3.00 per share. The warrants vest over three years providing
specific performance conditions are met (see note 6(e) to the audited
financial statements).

On November 30, 2004, 21,661,162 shares were issued under the Plan of
Arrangement to shareholders and stock option holders of Midnight Oil &
Gas Ltd. and to holders of the Series U subscription receipts of
Daylight Energy Trust.

The Company had no stock options outstanding as at December 31, 2004.
Midnight intends to limit option grants under its Stock Option Plan to
5% of the number of outstanding Midnight shares until December 1, 2005
and to 7.5% of the outstanding number of Midnight shares until December
1, 2006. On February 14, 2005, stock options were granted to
non-executive service providers to acquire 160,000 common shares at the
market price of $3.75. The stock options vest equally over three years
from the date of grant and expire on February 14, 2010.



Share Information 2004
------------------------------------------------------------------------
Shares outstanding (000's)
Basic 26,328
Diluted 28,661

Weighted average shares outstanding (000's)
Basic 25,651
Diluted 25,804
------------------------------------------------------------------------
------------------------------------------------------------------------


As at March 15, 2005 the Company had outstanding 26,327,829 common
shares, 160,000 stock options and 2,333,333 warrants.

Capital Expenditures

The Company commenced its operations on November 30, 2004 and conducted
a successful 5 well drilling program prior to year end. By December 31,
2004 Midnight had incurred $2,680,000 of expenditures as follows:



------------------------------------------------------------------------
Capital Expenditures (000's) 2004
------------------------------------------------------------------------
Land $ 72
Geological and geophysical 99
Drilling 1,594
Completions 261
Facilities pipelines and equipment 654
------------------------------------------------------------------------
Petroleum and natural gas expenditures $ 2,680
------------------------------------------------------------------------
------------------------------------------------------------------------


During the period, the Company incurred $1.6 million to drill five (1.4
net) gas wells for a 100 % success rate. The Plan of Arrangement
contemplated $3.5 million of capital expenditures to be spent on the
Midnight lands between July 1 and November 30, 2004, the closing of the
transaction. Actual expenditures totaled $4.1 million offset by
operating cash flow left in Daylight Energy Trust of $1.8 million.

For 2005, the Company anticipates drilling 20 to 25 net wells of which
10 are planned for the West Central Alberta and 10 to 15 wells are
planned for in the Peace River Arch area.

Liquidity and Capital Resources

Midnight Oil Exploration Ltd. was listed as a senior producer on the
Toronto Stock Exchange on December 2, 2004 trading under the symbol
"MOX". The Company's market capitalization at December 31, 2004 was
$89.5 million.



------------------------------------------------------------------------
Trading History on the TSX Q4 2004
------------------------------------------------------------------------
High $ 4.20
------------------------------------------------------------------------
Low $ 3.20
------------------------------------------------------------------------
Close $ 3.40
------------------------------------------------------------------------
Volume (000's) 6,559
------------------------------------------------------------------------
------------------------------------------------------------------------


At December 31, 2004, Midnight had $2.9 million in cash and working
capital and an undrawn credit facility of $8 million. Midnight expects
to be in a net debt position by the end of the first quarter of 2005.
Midnight has no off balance sheet arrangements.

The credit facility is available by way of Canadian and US dollar prime
rate based loans, bankers' acceptances, Libor borrowings and letters of
credit. The facility is available on a revolving basis until June 30,
2005. On this date and at the Company's discretion, the facility is
available on a non-revolving basis for a period of 366 days, at which
time the facility would be due and payable. Alternatively, the facility
may be extended for a further 364-day period at the request of the
Company and subject to approval by the bank. The credit facility bears
interest at the bank prime rate and is secured by a $50 million first
floating charge debenture and a general securities agreement.

Midnight anticipates that it will make substantial capital expenditures
for the acquisition, exploration, development and production of
petroleum and natural gas reserves in the future. To execute its 2005
capital of program of $30 million, the Company will require additional
debt or equity financing. Failure to obtain such financing on a timely
basis could cause Midnight to delay its capital program and as a result
potentially forfeit its interest in certain properties or miss certain
acquisition opportunities. If Midnight's revenues from its production
decrease as a result of lower oil and natural gas prices or otherwise,
it will affect Midnight's ability to expend the necessary capital to
replace its reserves or to maintain its production. If Midnight's cash
flow from operations is not sufficient to satisfy its capital
expenditure requirements, there can be no assurance that additional debt
or equity financing will be available to meet these requirements or
available on terms acceptable to Midnight.

Contractual Obligations

The contractual obligations for which the Company is responsible are as
follows:



------------------------------------------------------------------------
Less than 1-3 4-5 After 5
Contractual Obligations (000's) Total 1 Year Years Years Years
------------------------------------------------------------------------
Technical Service Agreement $ 1,100 1,100 -- -- --
------------------------------------------------------------------------
Total Contractual Obligations $ 1,100 1,100 -- -- --
------------------------------------------------------------------------
------------------------------------------------------------------------


Midnight enters into many contractual obligations in the course of
conducting its day to day business. Material contract obligations
consist only of our Administrative and Technical Service Agreement. As
the Company continues to spend money as part of its capital program, we
will draw on our bank facility and will have the related contractual
obligation. Midnight has not entered into any firm transportation
commitments to date.

Outlook

The one month of operations prior to the December 31, 2004 year end and
large undeveloped land base has provided Midnight a platform for
multi-year exploration and development opportunities in its core areas
of West Central Alberta and the Peace River Arch.

Midnight has a 2005 capital budget of $30 million which provides for the
drilling of over 20 net wells. Production for the year should average
between 1,650 and 1,750 boe/d to generate cash flow of $11 to $14
million or $0.05 to $0.07 per diluted share. Forecasts are based on a
gas price of $6.60/mcf and a WTI oil price of $42US/bbl with an exchange
rate of $0.82. Midnight expects to decrease operating costs near
$9.00/boe while decreasing general and administrative expenses to the $2
to $3/boe range.

Reserves

The reserves data set forth below (the "Reserves Data") is based upon an
evaluation by Gilbert Laustsen Jung Associates Ltd ("GLJ") with an
effective date of December 31, 2004 contained in a report of March 11,
2005 (the "GLJ Report"). The Reserves Data summarizes the oil, liquids
and natural gas reserves of the Company and the net present values of
future net revenue for these reserves using constant prices and costs
and forecast prices and costs. The Reserves Data conforms with the
requirements of National Instrument 51-101 Standards of Disclosure for
Oil and Gas Activities ("NI 51-101"). Midnight engaged GLJ to provide an
evaluation of proved and proved plus probable reserves and no attempt
was made to evaluate possible reserves.

All of the Company's reserves are in Canada and, specifically, in the
provinces of Alberta and British Columbia.

It should not be assumed that the estimates of future net revenues
presented in the tables below represent the fair market value of the
reserves. There is no assurance that the constant prices and costs
assumptions and forecast prices and costs assumptions will be attained
and variances could be material. The recovery and reserve estimates of
crude oil, natural gas liquids and natural gas reserves provided herein
are estimates only and there is no guarantee that the estimated reserves
will be recovered. Actual crude oil, natural gas and natural gas liquid
reserves may be greater than or less than the estimates provided herein.

The following reserve tables may not add due to rounding.



FORECAST PRICES AND COSTS

Company Reserves
------------------------------------------------------------------------
Light and Natural Gas
Reserves Category Medium Oil Natural Gas Liquids Total BOE
------------------------------------------------------------------------
Gross Gross Gross Gross
------------------------------------------------------------------------
(mbbl) (mmcf) (mbbl) (mboe)
Proved
Developed Producing 55 6,165 173 1,256
Developed Non-Producing 0 634 8 114
Undeveloped 0 1,512 6 258
------------------------------------------------------------------------
Total Proved 55 8,311 187 1,627
Probable 16 2,540 48 488
------------------------------------------------------------------------
Total Proved Plus Probable 71 10,850 236 2,115
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Present Values of Future Net Revenue
($ thousands) Before Income Taxes Discounted at %/year
------------------------------------------------------------------------
0% 5% 10% 15%
------------------------------------------------------------------------
Proved
Developed Producing 24,673 20,529 17,839 15,926
Developed Non-Producing 2,070 1,677 1,450 1,301
Undeveloped 2,892 2,251 1,769 1,396
------------------------------------------------------------------------
Total Proved 29,635 24,457 21,057 18,623
Probable 9,219 6,357 4,917 4,041
------------------------------------------------------------------------
Total Proved Plus Probable 38,854 30,814 25,975 22,665
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Present Values of Future Net Revenue
($ thousands) After Income Taxes Discounted at %/year
------------------------------------------------------------------------
0% 5% 10% 15%
------------------------------------------------------------------------
Proved
Developed Producing 24,409 20,283 17,610 15,712
Developed Non-Producing 1,634 1,271 1,056 913
Undeveloped 2,283 1,705 1,289 980
------------------------------------------------------------------------
Total Proved 28,326 23,259 19,955 17,605
Probable 7,858 5,123 3,790 3,004
------------------------------------------------------------------------
Total Proved Plus Probable 36,184 28,382 23,745 20,609
------------------------------------------------------------------------
------------------------------------------------------------------------


Forecast Pricing Assumptions

The following sets for the benchmark reference prices, as at
December 31, 2004, reflected in the reserves data. These price
assumptions were provided by GLJ.


OIL
-----------------------
Edmonton
Par Price
WTI Cushing 40 degrees NATURAL GAS Inflation Exchange
Oklahoma API AECO Gas Rates(a) Rate(b)
Year ($US/bbl) ($Cdn/bbl) ($Cdn/mmbtu) %/Year ($US/$Cdn)
---- ------------ ---------- ------------ ---------- ----------
Forecast

2005 42.00 50.25 6.60 2.0 0.820
2006 40.00 47.75 6.35 2.0 0.820
2007 38.00 45.50 6.15 2.0 0.820
2008 36.00 43.25 6.00 2.0 0.820
2009 34.00 40.75 6.00 2.0 0.820
2010 33.00 39.50 6.00 2.0 0.820
2011 33.00 39.50 6.00 2.0 0.820


Notes:
(a) Inflation rates for forecasting prices and costs.
(b) Exchange rates used to generate the benchmark reference prices in
this table.

CONSTANT PRICES AND COSTS

Company Reserves
------------------------------------------------------------------------
Light and Natural Gas
Reserves Category Medium Oil Natural Gas Liquids Total BOE
------------------------------------------------------------------------
Gross Gross Gross Gross
------------------------------------------------------------------------
(mbbl) (mmcf) (mbbl) (mboe)
Proved
Developed Producing 56 6,406 177 1,301
Developed Non-Producing 0 658 8 118
Undeveloped 0 1,529 6 261
------------------------------------------------------------------------
Total Proved 56 8,593 192 1,680
Probable 17 2,647 52 510
------------------------------------------------------------------------
Total Proved Plus Probable 73 11,240 244 2,190
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Present Values of Future Net Revenue
($ thousands) Before Income Taxes Discounted at %/year
------------------------------------------------------------------------
0% 5% 10% 15%
------------------------------------------------------------------------
Proved
Developed Producing 30,035 24,528 20,961 18,447
Developed Non-Producing 2,396 1,934 1,660 1,477
Undeveloped 3,669 2,878 2,287 1,834
------------------------------------------------------------------------
Total Proved 36,100 29,339 24,907 21,759
Probable 12,019 8,301 6,319 5,093
------------------------------------------------------------------------

Total Proved Plus Probable 48,120 37,640 31,227 26,852
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Present Values of Future Net Revenue
($ thousands) After Income Taxes Discounted at %/year
------------------------------------------------------------------------
0% 5% 10% 15%
------------------------------------------------------------------------
Proved
Developed Producing 29,280 23,847 20,343 17,883
Developed Non-Producing 1,781 1,378 1,138 977
Undeveloped 2,728 2,050 1,568 1,213
------------------------------------------------------------------------
Total Proved 33,789 27,275 23,049 20,073
Probable 9,506 6,215 4,543 3,550
------------------------------------------------------------------------

Total Proved Plus Probable 43,295 33,490 27,592 23,623
------------------------------------------------------------------------
------------------------------------------------------------------------


Constant Pricing Assumptions

The following sets for the benchmark reference prices, as at December
31, 2004, reflected in the reserves data. These price assumptions were
provided by GLJ.



OIL
------------------------------
Edmonton NATURAL
WTI Cushing Par Price GAS AECO EXCHANGE
Oklahoma 40 degrees API Gas Price RATE
Year ($US/bbl) ($Cdn/bbl) ($Cdn/mmbtu) ($US/$Cdn)
------------------------------------------------------------------------
December 31, 2004 43.45 46.54 6.79 0.8308


MIDNIGHT OIL EXPLORATION LTD.
Balance Sheet

December 31, 2004
(In Thousands of Dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
---------------------------------------------------------------------

Assets

Current assets:
Cash and cash equivalents $ 5,031
Accounts receivable 1,132
--------------------------------------------------------------------
6,163

Future taxes (note 7) 145

Petroleum and natural gas assets (note 3) 35,812

---------------------------------------------------------------------
$ 42,120
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 3,261

Asset retirement obligations (note 5) 542

Shareholders' equity:
Share capital (note 6) 38,240
Warrants (note 6) 47
Contributed surplus 15
Retained earnings 15
--------------------------------------------------------------------
38,317
---------------------------------------------------------------------
$ 42,120
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to financial statements.


Statement of Income and Retained Earnings

Period from November 29, 2004 to December 31, 2004
(In Thousands of Dollars, except per share amounts)

---------------------------------------------------------------------
---------------------------------------------------------------------
2004
---------------------------------------------------------------------
Revenues:
Petroleum and natural gas sales $ 977
Royalties (211)
Other income 12
--------------------------------------------------------------------
778

Expenses:
Operating 249
Transportation 1
General and administration 126
Stock-based compensation 15
Depletion, depreciation and accretion 329
--------------------------------------------------------------------
720
---------------------------------------------------------------------
Income before taxes 58

Taxes (note 7):
Future 43
--------------------------------------------------------------------
43

---------------------------------------------------------------------
Net income 15

Retained earnings, beginning of period -
---------------------------------------------------------------------
Retained earnings, end of period $ 15
---------------------------------------------------------------------
---------------------------------------------------------------------

Income per share (note 6(c)):
Basic $ 0.00
Diluted $ 0.00
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to financial statements.


Statement of Cash Flows

Period from November 29, 2004 to December 31, 2004
(In Thousands of Dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
---------------------------------------------------------------------
Cash provided by (used in):

Operations:
Net income $ 15
Items not involving cash:
Depletion, depreciation and accretion 329
Stock-based compensation 15
Future taxes 43
Abandonment expenditures (5)
-------------------------------------------------------------------
Funds from operations 397
Changes in non-cash working capital (551)
--------------------------------------------------------------------
(154)

Financing:
Issue of common shares 7,000
Issue of warrants 47
Debt assumed on conveyance of assets (note 2) (2,000)
Changes in non-cash working capital 138
--------------------------------------------------------------------
5,185

Investments:
Petroleum and natural gas additions (2,680)
Changes in non-cash working capital 2,680
--------------------------------------------------------------------
-
---------------------------------------------------------------------
Changes in cash 5,031

Cash, beginning of period -

---------------------------------------------------------------------
Cash, end of period $ 5,031
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to financial statements.


Midnight Oil Exploration Ltd.

Notes to Financial Statements

Period from November 29, 2004 to December 31, 2004

(Tabular amounts are stated in thousands of dollars except share and per
share amounts)

Nature of operations:

Midnight Oil Exploration Ltd. ("Midnight" or the "Company") was
incorporated on September 10, 2004 and commenced operations on November
30, 2004 under a Plan of Arrangement entered into by Midnight Oil & Gas
Ltd., Daylight Energy Trust ("Daylight"), Daylight Acquisition Corp. and
Midnight ("Plan of Arrangement"). Under the Plan of Arrangement,
Daylight Acquisition Corp. acquired all the issued and outstanding
shares of Vintage Petroleum Canada, Inc ("Vintage") and Midnight Oil &
Gas Ltd., with certain assets of Midnight Oil & Gas Ltd. and Vintage
transferred to Midnight Oil Exploration Ltd. As a result, the financial
statements presented are for the period from November 29, 2004 to
December 31, 2004.

The principal business of the Company is the exploration for,
exploitation, development and production of oil and natural gas
reserves. All activity is conducted in Western Canada and comprises a
single business segment.

1. Significant accounting policies:

The financial statements of the Company have been prepared in accordance
with Canadian generally accepted accounting principles. The preparation
of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and revenues and expenses during the reporting
period. Actual results could differ from those estimated.

Specifically, the amounts recorded for depletion, depreciation and
accretion of petroleum and natural gas assets and asset retirement
obligations are based on estimates. The ceiling test is based on
estimates of reserves, production rates, oil and gas prices, future
costs and other relevant assumptions. By their nature, these estimates
are subject to measurement uncertainty and the effect on the financial
statements of changes in such estimates in future periods could be
significant.

(a) Cash and cash equivalents:

Cash and cash equivalents are comprised of cash and all investments with
a maturity date of three months or less.

(b) Petroleum and natural gas assets:

(i) Capitalized costs:

The Company follows the full cost method of accounting for petroleum and
natural gas assets. Under this method, all costs related to the
acquisition of, exploration for and development of petroleum and natural
gas reserves are capitalized. These costs include land acquisition
costs, geological and geophysical expenditures, rentals and other
carrying charges on undeveloped properties, costs of drilling both
productive and non-productive wells, oil and gas production equipment
and facilities, asset retirement costs and administration expenses
directly related to the acquisition, exploration and development
activities. Proceeds from the disposition of oil and natural gas
properties are accounted for as a reduction of capitalized costs, with
no gain or loss recognized, unless such disposition would result in a
change greater than 20% in the depletion or depreciation rate.

(ii) Depletion and depreciation:

Depletion of petroleum and natural gas assets and depreciation of
production equipment are calculated using the unit-of-production method,
based on production volumes before royalties in relation to estimated
proven reserves as determined by an independent petroleum engineering
firm. Natural gas reserves and production are converted to equivalent
barrels of oil based upon the relative energy content of six thousand
cubic feet of gas to one barrel of oil.

The cost of acquisition and evaluation of unproved properties are
initially excluded from the depletion calculation. A separate impairment
test is performed on these assets to determine whether the carrying
value exceeds the fair value. Any excess in carrying value over fair
value is an impairment. When proved reserves are assigned or a property
is considered to be impaired, the cost of the property or the amount of
the impairment will be added to the capitalized costs for the
calculation of depletion.

Other assets are depreciated on a declining balance basis at rates
ranging from 20% to 35%.

(iii) Ceiling test:

Petroleum and natural gas assets are evaluated in each reporting period
to determine that the carrying amount is recoverable and does not exceed
the fair value of the properties.

The carrying amounts are assessed to be recoverable when the sum of the
undiscounted cash flows expected from the production of proved reserves,
the lower of cost and market of unproved properties and the cost of
major development projects exceeds the carrying amount of the cost
centre. When the carrying amount is not assessed to be recoverable, an
impairment loss is recognized to the extent that the carrying amount of
the cost centre exceeds the sum of the discounted cash flows expected
from the production of proved and probable reserves, the lower of cost
and market of unproved properties and the cost of major development
projects of the cost centre. The cash flows are estimated using expected
future product prices and costs and are discounted using a risk-free
interest rate.

(c) Asset retirement obligations:

The Company recognizes the asset retirement obligations for the future
cost associated with removal, site restoration and asset retirement
costs. The fair value of the liability for the Company's asset
retirement obligation is recorded in the period in which it is incurred,
discounted to its present value using the Company's credit adjusted
risk-free interest rate and the corresponding amount recognized by
increasing the carrying amount of petroleum and natural gas assets. The
asset recorded is depleted on a unit of production basis over the life
of the reserves. The liability amount is increased each reporting period
due to the passage of time and the amount of accretion is charged to
earnings in the period. Revisions to the estimated timing of cash flows
or to the original estimated undiscounted cost could also result in an
increase or decrease to the obligation. Actual costs incurred upon
settlement of the retirement obligation are charged against the
obligation to the extent of the liability recorded.

(d) Joint interest operations:

Substantially all of the Company's exploration, development and
production activities related to oil and gas operations are conducted
jointly with others and accordingly the accounts reflect only the
Company's proportionate interest in such activities.

(e) Revenue recognition:

Revenue from the sale of petroleum and natural gas is recognized during
the month when title passes to a third party.

(f) Income taxes:

The Company uses the liability method of tax allocation accounting.
Under this method, future tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of
assets and liabilities, and measured using the substantially enacted tax
rates and laws that will be in effect when the differences are expected
to reverse.

(g) Stock-based compensation plans:

The Company applies the fair value method for valuing stock option
grants and warrants. Under this method, compensation cost attributable
to all share options granted and warrants issued are measured at fair
value at the grant and issuance date and expensed over the vesting
period with a corresponding increase to contributed surplus. Upon the
exercise of the stock options and warrants, consideration received
together with the amount previously recognized in contributed surplus is
recorded as an increase to share capital.

(h) Per share information:

Basic per share information is computed by dividing income by the
weighted average number of common shares outstanding for the period. The
treasury stock method is used to determine the diluted per share
amounts, whereby any proceeds from the stock options, warrants or other
dilutive instruments are assumed to be used to purchase common shares at
the average market price during the period. The weighted average number
of shares outstanding is then adjusted by the net change.

2. Transfer of assets and commencement of commercial operations:

Under the Plan of Arrangement certain assets of Midnight Oil & Gas Ltd.
and Vintage were transferred to the Company. The Midnight Oil & Gas Ltd.
shareholders along with the Daylight Energy Trust investors effectively
received 0.50 of a voting share of the Company for every common share of
Midnight Oil & Gas Ltd and for every Series U subscription of Daylight
Energy Trust. At the time of the transaction, the entities were related
and therefore the assets and liabilities of Midnight have been accounted
for on a "continuity of interests" basis.



------------------------------------------------------------------------
------------------------------------------------------------------------

Net assets acquired:
Petroleum and natural gas assets $ 33,456
Future taxes 188
Accounts receivable (1) 138
Debt assumed on conveyance of assets (2,000)
Asset retirement obligations (542)
------------------------------------------------------------------------
Net assets transferred and share capital issued $ 31,240
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Options were transferred on the Plan of Arrangement and were
exercised for proceeds of $138,000.


Relationship with Daylight

In conjunction with the Plan of Arrangement, Midnight and Daylight
entered into an Administrative and Technical Services Agreement which
provides for the shared services required to manage Midnight's
activities and govern the allocation of general and administration
expenses between the entities. Under this agreement, Daylight receives
payment for certain technical and administration services provided to
Midnight on a cost recovery basis. The Administrative and Technical
Service Agreement has no set termination date and will continue until
terminated by either party upon three months prior written notice to the
other party. Pursuant to the Administrative and Technical Services
Agreement, $110,000 of fees were charged relating to general and
administration activities and $99,000 of fees were charged relating to
capital expenditures for the period from commencement of operations on
November 29, 2004 to December 31, 2004.

As a result of this technical service arrangement, the majority of the
Company's accounts receivable and accounts payable as at December 31,
2004 are due from (to) Daylight.

3. Petroleum and natural gas assets:



------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated
depletion and Net book
2004 Cost depreciation value
------------------------------------------------------------------------

Petroleum and natural gas properties $ 36,138 326 $ 35,812
------------------------------------------------------------------------
$ 36,138 326 $ 35,812
------------------------------------------------------------------------
------------------------------------------------------------------------


During the period, the Company capitalized $99,000 of general and
administration expenses related to exploration and development
activities.

The cost of unproven properties at December 31, 2004 of $14,542,000 has
been excluded from the depletion and depreciation calculation. Future
development costs of proven reserves of $3,500,000 have been included in
the depletion and depreciation calculation.

At December 31, 2004, the Company applied a ceiling test to its
petroleum and natural gas assets using expected future market prices of:



------------------------------------------------------------------------
------------------------------------------------------------------------
Benchmark reference price forecast 2005 2006 2007 2008 2009
------------------------------------------------------------------------

WTI ($US/bbl) 42.00 40.00 38.00 36.00 34.00
AECO ($Cdn/mcf) 6.60 6.35 6.15 6.00 6.00
------------------------------------------------------------------------
------------------------------------------------------------------------
After 2009 the change in future prices are escalated at 2% per year to
the end of the reserve life.


4. Bank facility:

Midnight has a revolving term credit facility available up to $8 million
with a Canadian chartered bank. The facility is available on a revolving
basis until June 30, 2005. On June 30, 2005, at the Company's
discretion, the facility is available on a non-revolving basis for a
period of 366 days, at which time the facility would be due and payable.
Alternatively, the facility may be extended for a further 364-day period
at the request of the Company and subject to approval by the bank. The
credit facility bears interest at the bank prime rate and is secured by
a $50 million first floating debenture and a general securities
agreement. At December 31, 2004, no funds were drawn on this facility.
The $8 million borrowing base is subject to a semi-annual and annual
review by the bank.

Cash interest income received during the period totaled $12,000.

5. Asset retirement obligations:

The Company's asset retirement obligations result from net ownership
interests in petroleum and natural gas assets including well sites,
gathering systems and processing facilities. The Company estimates the
total undiscounted amount of cash flow required to settle its asset
retirement obligations is approximately $1,627,000 which will be
incurred between 2005 to 2054. The majority of the costs will be
incurred between 2010 and 2020. An inflation factor of 2% has been
applied to the estimated asset retirement cost. A credit-adjusted
risk-free rate of 8% was used to calculate the fair value of the asset
retirement obligations.

A reconciliation of the asset retirement obligations is provided below:



------------------------------------------------------------------------
------------------------------------------------------------------------
2004
------------------------------------------------------------------------

Transfer of assets through Plan of Arrangement $ 542
Liabilities incurred 2
Liabilities settled (5)
Accretion expense 3
------------------------------------------------------------------------
Balance, December 31, 2004 $ 542
------------------------------------------------------------------------
------------------------------------------------------------------------


6. Share capital:

(a) Authorized:

The authorized share capital consists of an unlimited number of common
shares without par value.

(b) Issued and outstanding:

On November 29, 2004, prior to the completion of the Plan of
Arrangement, Midnight completed a private placement of 4,666,666 common
shares for gross proceeds of $7 million.



------------------------------------------------------------------------
------------------------------------------------------------------------
Number of
Shares Amount
------------------------------------------------------------------------

Common shares:
Issued on incorporation 1 $ -
Issued pursuant to private placement 4,666,666 7,000
Issued pursuant to the Plan of Arrangement
(note 2) 21,661,162 31,240
------------------------------------------------------------------------
Balance, December 31, 2004 26,327,829 $ 38,240
------------------------------------------------------------------------
------------------------------------------------------------------------


On November 30, 2004 the common shares were consolidated on a two for
one basis, all number of shares and warrants and per share amounts have
been restated to reflect the consolidation.

(c) Per share amounts:

Per share amounts have been calculated on the weighted average number of
shares outstanding. The weighted average shares outstanding for 2004
were 25,650,919.

Diluted per share amounts are calculated based on the diluted weighted
average number of shares outstanding. The diluted weighted average
shares outstanding for 2004 were 25,804,126 because of the dilutive
effect of warrants.

(d) Stock options:

The Company has reserved 2,581,670 common shares for granting under
option to employees, directors and other persons who provide ongoing
management or consulting services to the Company. Stock options are
granted for a term up to five years and vest one third per year over
three years on the anniversary from the date granted. The exercise price
of each option equals the market price of the Company's common shares on
the date of the grant. There were no options granted as at December 31,
2004.

(e) Warrants:

On November 29, 2004, Midnight issued by way of private placement,
2,333,333 warrants for gross proceeds of $47,000 to officers, service
providers and directors of the Company. Each warrant is exercisable into
one common share of the Company at a price of $3.00 per share, subject
to the achievement of certain performance criteria. One-third of the
warrants will vest on November 29, 2005 and will only be exercisable if
the ten day weighted average trading price of Midnight shares is equal
to or greater than $3.00/share. An additional one-third of the warrants
will vest on November 29, 2006 and will only be exercisable if the ten
day weighted average trading price of Midnight shares is equal to or
greater than $3.75/share. The balance of the warrants will vest on
November 29, 2007 and will only be exercisable if the ten day weighted
average trading price of Midnight shares is equal to or greater than
$4.50/share. The warrants expire on November 29, 2008. The fair value of
the warrants was $0.23 and will be amortized to income over the vesting
period.

(f) Stock-based compensation:

The Company accounts for its stock-based compensation plan using the
fair value method. Under this method, a compensation cost is charged
over the vesting period for warrants and options granted to employees,
officers, directors and other service providers to Midnight Oil
Exploration Ltd.

The Company has not incorporated an estimated forfeiture rate for stock
options that will not vest, rather the Company accounts for actual
forfeitures as they occur.

The fair value of warrants granted were estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used:



------------------------------------------------------------------------
------------------------------------------------------------------------
2004
------------------------------------------------------------------------

Weighted average fair value of warrants granted $0.23
Risk free interest 4.25%
Estimated hold period prior to exercise 4 years
Expected volatility 40%
Dividend per share $0.00
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Taxes:

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



------------------------------------------------------------------------
------------------------------------------------------------------------
2004
------------------------------------------------------------------------

Income before taxes $ 58
------------------------------------------------------------------------
------------------------------------------------------------------------

Combined federal and provincial tax rate 38.6%

Computed "expected" tax expense $ 22

Increase (decrease) in taxes resulting from:
Non-deductible crown charges 55
Resource allowance (39)
Other 5
------------------------------------------------------------------------
Future taxes $ 43
------------------------------------------------------------------------
------------------------------------------------------------------------


The components of the Company's future income tax liability at December
31 are as follows:



------------------------------------------------------------------------
------------------------------------------------------------------------
2004
------------------------------------------------------------------------

Future tax assets:
Asset retirement obligations $ 188

------------------------------------------------------------------------
188
Future tax liabilities:
Petroleum and natural gas assets (43)

------------------------------------------------------------------------
Net future tax asset $ 145
------------------------------------------------------------------------
------------------------------------------------------------------------


8. Risk management:

(a) Credit risk:

Portions of the Company's accounts receivable are with joint venture
partners in the oil and gas industry and are subject to normal industry
credit risks. Purchasers of the Company's oil and natural gas products
are subject to an internal credit review designed to mitigate the risk
of non-payment.

(b) Commodity price risk:

There were no financial instruments in place to manage commodity prices
during the period ended December 31, 2004.

(c) Foreign currency:

While substantially all of the Company's sales are denominated in
Canadian dollars, the market prices in Canada for oil and natural gas
are impacted by changes in the exchange rate between the Canadian and
United States dollar.

(d) Fair value of financial instruments:

Financial instruments comprise cash and cash equivalents, accounts
receivable and accounts payable and accrued liabilities. The fair values
of these financial instruments approximate their carrying amounts due to
their short-term maturities.

(e) Interest rate risk:

The Company is exposed to interest rate risk to the extent that changes
in market interest rates will impact the Company's cash and cash
equivalents that have a floating interest rate. The bank facility is
also based on a floating interest rate. The Company had no interest rate
swaps or hedges at December 31, 2004.

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    Midnight Oil Exploration Ltd.
    Fred Woods
    President & CEO
    (403) 303-8505
    Email: fwoods@midnightoil.ca