Milagro Energy Inc.
TSX : MIG

Milagro Energy Inc.

November 14, 2005 13:00 ET

Milagro Energy Inc. Q3 Interim Report for the Nine Months Ended September 30, 2005

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2005) - Milagro Energy Inc. (TSX:MIG):



HIGHLIGHTS
Three months ended Sep 30, Nine months ended Sep 30,
(Unaudited) 2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

FINANCIAL
($000s except per
share amounts)
Oil and gas revenue 2,385 2,491 (4) 5,975 7,219 (17)
Cash flow from
operations 1,002 1,051 (5) 2,262 2,871 (21)
Per share - basic
and diluted 0.02 0.02 - 0.05 0.07 (29)
Net earnings (loss) (274) (16) (1613) 327 (470) 169
Per share - basic
and diluted (0.01) - - 0.01 (0.01) -
Capital expenditures 5,630 2,090 169 9,664 6,681 45
Debt and working
capital 2,862 3,117 (9)
Shareholders' equity 30,445 26,289 17
Total assets 40,232 34,750 16
------------------------------------------------------------------------

OPERATING
Production
Oil & NGLs
(bbls per day) 329 457 (28) 340 473 (28)
Natural gas
(mcf per day) 770 1,383 (44) 846 1,431 (41)
Equivalent barrels
(boe per day) 457 687 (33) 482 711 (32)
Average Selling Prices
Oil & NGLs
($ per bbl) 57.69 40.62 42 45.30 36.24 25
Natural gas
($ per mcf) 9.01 6.16 46 7.63 6.43 19
Equivalent barrels
($ per boe) 56.70 39.39 44 45.45 37.03 23
Field Netbacks
Oil & NGLs
($ per bbl) 27.22 20.92 30 20.28 18.61 9
Natural gas
($ per mcf) 4.69 3.34 40 4.45 3.74 19
Equivalent barrels
($ per boe) 27.48 20.63 33 22.14 19.90 11
Corporate Netbacks
($ per boe) 23.84 16.62 43 17.20 14.73 17
Wells Drilled
Gross 3 2 50 5 6 (17)
Net 3.0 2.0 50 4.5 6.0 (25)
Undeveloped land
(net acres) 50,488 51,100 (1)
------------------------------------------------------------------------

SHARE DATA
Weighted average
outstanding (000s)
Basic 52,318 47,780 10 49,532 43,630 14
Diluted 52,318 47,780 10 49,844 43,630 14

Equity outstanding
(at Sept. 30, 2005)
Common shares 53,473 47,780 12
Stock options 1,389 803 73
Warrants - 300 (100)
------------------------------------------------------------------------
Diluted 54,862 48,883 12


REPORT TO SHAREHOLDERS

Revenue for the first nine months of 2005 was $5,975,000. Revenue in the third quarter was $2,385,000 a 41 percent increase over second quarter 2005 revenue. During the nine months ended September 30, 2005, Milagro generated cash flow from operations of $2,262,000 ($0.05 per diluted share). Net earnings for the nine months ended September 30, 2005 were $327,000 ($0.01 per diluted share) compared to a net loss of $470,000 ($0.01 per diluted share) for the same period of 2004. For the three months ended September 30, 2005, Milagro recorded a loss of $274,000 ($0.01 per diluted share). Production for the nine months ended September 30, 2005 averaged 482 boe per day.

THIRD QUARTER ACCOMPLISHMENTS

Milagro's third quarter of operations resulted in the following operational and financial accomplishments:

1. Over the third quarter together with the previous 2 quarters Milagro has generated $5.6 million in proceeds from the sale of undeveloped lands with zero reserves assigned to them ($5.2 million), and from the sale of miscellaneous seismic and surplus equipment ($0.4 million).

2. Completed the acquisition of Tri Seven Resources for $2.06 million which closed on July 20, 2005 adding approximately 50 boe/d of production and an approximate 49 percent interest in the Judy Creek Gas Plant.

3. In the third quarter Milagro raised $6.8 million net from the sale of securities, and is utilizing those funds for development of petroleum and natural gas reserves.

4. Established a strategic partnership with Mahalo Energy Ltd. to explore the coal bed methane resources on Milagro's Judy Creek land base.

5. During Q3 Milagro had the Souris River zone tested at Battle Creek. The Souris River zone tested 93 percent pure nitrogen (N2) at an extended rate of 15.8 mmcf/day producing a cumulative 0.05 Bcf of N2 gas. The reservoir has high deliverability and showed no reservoir boundaries or depletion. Milagro has no reserves assigned to this asset within its engineering report. There is a growing market for nitrogen in the oil and gas sector, as a completion and coalbed methane stimulation gas. The fertilizer industry has always been a large user of nitrogen. In light of this new test data Milagro is reviewing its options for this 100 percent property.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the unaudited consolidated financial statements for the nine months ended September 30, 2005, the audited financial statements for the year ended December 31, 2004 and management's discussion and analysis for the year ended December 31, 2004.

This disclosure contains certain forward looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond our control, including: the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competitions, the lack of availability of qualified personnel or management, fluctuations in commodity prices, foreign exchange, interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that we will derive therefrom.

Per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil ("6:1"). The 6:1 conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boe disclosure may be misleading, particularly if used in isolation.

Readers should be aware that historical results are not necessarily indicative of future performance.

The MD&A contains the term cash flow from operations, which should not be considered an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles as an indicator of the Company's performance. Milagro's calculation of cash flow from operations may not be comparable to that reported by other companies. Cash flow from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of earnings per share. All references to cash flow throughout the MD&A are based on cash flow before changes in non-cash working capital.

OVERVIEW - THREE MONTHS ENDED SEPTEMBER 30, 2005

Production averaged 457 boe per day during the third quarter of 2005, comprised of 329 barrels of oil and NGLs and 770 mcf per day of natural gas. Compared to the second quarter of the year, average daily oil and NGL production increased 8 percent and natural gas production declined 7 percent. During the third quarter of 2005, three oil wells were placed on production in Alberta. Production from the new Alberta gas wells bought late in the third quarter, in the corporate acquisition, will increase the natural gas production for the fourth quarter. The new oil wells will result in incrementally higher production volumes, which will be more evident in the fourth quarter.

Milagro's third quarter 2005 average selling prices were $57.69 per barrel of oil and NGL and $9.01 per mcf of natural gas. Compared to the second quarter of 2005, oil and NGL prices increased 40 percent and natural gas prices increased 23 percent. None of Milagro's 2005 production is hedged so changes in selling prices reflect current market conditions.

Oil and gas revenue was $2,385,000 in the third quarter of 2005, up 41 percent from the second quarter of the year. Quarter-over-quarter there was both an increase in oil revenue and natural gas revenue.

Oil and NGL field netbacks were $27.22 per barrel in the third quarter of 2005, up 55 percent from the second quarter. Compared to the previous quarter, higher selling prices overcame higher royalties, production expenses and transportation costs. Natural gas netbacks were $4.69 per mcf in the third quarter, up 4 percent from $4.49 in the second quarter. Third quarter natural gas netbacks were influenced by the higher selling prices which were partially offset by and higher royalties and higher production expenses.

Cash flow from operations for the three months ended September 30, 2005 was $1,002,000 or $0.02 per share (basic and diluted). The net loss for the quarter was $274,000 ($0.01 per share).

Capital expenditures were $5,630,000 during the third quarter of 2005, and $2,061,000 on a corporate acquisition. Milagro spent $3,530,000 on intangible drilling and completions and $1,662,000 on production equipment and facilities and $438,000 on geophysical. In the third quarter of 2005, all within Alberta, three (100%) oil wells were drilled, and 4 gross (2.7 net) gas wells plus a gas plant were purchased in the corporate acquisition.



SUMMARY OF QUARTERLY RESULTS

2005 2004 2003
---------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
------------------------------------------------------------------------

Financial Highlights
($000s except per
share amounts)
Oil and gas
revenue 2,385 1,696 1,894 1,987 2,491 2,297 2,430 1,832
Cash flow from
operations 1,002 598 661 587 1,051 892 928 219
Per share
- basic 0.02 0.01 0.01 0.01 0.02 0.02 0.02 -
Per share
- diluted 0.02 0.01 0.01 0.01 0.02 0.02 0.02 -
Net earnings
(loss) (1) (274) 737 (136)(2,029) (16) (170) (284) (691)
Per share
- basic (0.01) 0.02 - (0.04) - - (0.01) (0.02)
Per share
- diluted (0.01) 0.02 - (0.04) - - (0.01) (0.02)
Capital
expenditures
(net) 4,583 3,166 (3,648) 3,279 2,090 1,309 3,282 8,096
Debt and
working capital 2,862 3,798 1,253 5,702 3,117 2,063 5,253 2,879
Shareholders'
equity(1) 30,445 23,776 22,986 24,280 26,289 26,297 22,774 23,026
Total assets(1) 40,232 32,564 29,918 34,152 34,750 33,501 33,470 31,897
------------------------------------------------------------------------

Operating Highlights
Average daily
production
volumes
Oil & NGLs
(bbls/day) 329 305 388 427 457 440 522 339
Natural gas
(mcf/day) 770 831 940 1,044 1,383 1,402 1,510 2,015
------------------------------------------------------------------------
Oil equivalent
(boe/day) 457 443 545 601 687 673 774 675
------------------------------------------------------------------------

Field netbacks
- oil & NGLs
($/bbl)
Selling price 57.69 41.16 38.13 34.78 40.62 35.54 32.97 27.32
Royalties (8.85) (6.90) (5.46) (4.92)(10.28) (5.92) (8.48) (6.32)
Production
expenses (19.88)(15.70)(12.08) (9.79) (7.44) (7.23) (7.00)(12.12)
Transportation (1.74) (1.04) (2.48) (1.72) (1.98) (2.29) (2.18) (2.07)
------------------------------------------------------------------------
Field netback 27.22 17.52 18.11 18.35 20.92 20.10 15.31 6.81
------------------------------------------------------------------------

Field netbacks
- natural gas
($/mcf)
Selling price 9.01 7.32 6.67 6.45 6.16 6.86 6.29 5.82
Royalties (0.84) (0.60) (0.57) (0.60) (0.85) (0.70) (0.96) (0.97)
Production
expenses (3.30) (2.04) (2.41) (2.33) (1.79) (1.63) (1.56) (1.26)
Transportation (0.18) (0.18) (0.17) (0.20) (0.18) (0.18) (0.22) (0.19)
------------------------------------------------------------------------
Field netback 4.69 4.49 3.52 3.32 3.34 4.35 3.55 3.40
------------------------------------------------------------------------

Field netbacks
- equivalent
units ($boe)
Selling price 56.70 42.02 38.67 35.91 39.39 37.49 34.52 31.11
Royalties (7.80) (5.87) (4.87) (4.54) (8.54) (5.32) (7.60) (6.06)
Production
expenses (19.86)(14.63)(12.76)(11.01) (8.54) (8.12) (7.76) (9.87)
Transportation (1.57) (1.05) (2.06) (1.57) (1.68) (1.87) (1.91) (1.62)
------------------------------------------------------------------------
Field netback 27.47 20.47 18.98 18.79 20.63 22.18 17.25 13.56
------------------------------------------------------------------------

Corporate cash
netbacks ($/boe)
Field netback 27.48 20.47 18.98 18.79 20.63 22.18 17.25 13.56
General and
administrative
expenses (2.23) (3.88) (4.39) (4.43) (2.34) (5.66) (2.83) (5.85)
Financing
charges (0.14) (0.59) (0.62) (0.84) (0.75) (1.15) (0.35) (0.01)
Current income
and Capital
taxes (1.27) (1.17) (0.49) (0.99) (0.92) (0.82) (0.89) (4.18)
------------------------------------------------------------------------
Cash flow from
operating
activities 23.84 14.83 13.48 12.53 16.62 14.55 13.18 3.52
------------------------------------------------------------------------

Common Share
Information
Shares
outstanding
(000s)
Weighted average
during the
period 52,318 48,155 48,077 47,780 47,780 41,568 41,497 40,366
Period end
- basic 53,473 48,161 48,131 47,780 47,780 47,780 41,499 41,465
Period end
- diluted 54,862 49,488 49,458 49,458 48,883 49,133 42,969 42,969
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Certain 2003 amounts have been restated to reflect the retroactive
application of adopting CICA Handbook Section 3110, Asset Retirement
Obligations in the fourth quarter of 2003.


THREE MONTHS ENDED SEPTEMBER 30, 2005
COMPARED TO
THREE MONTHS ENDED JUNE 30, 2005


Quarter-over-quarter oil and NGL production increased eight percent to 329 barrels per day and natural gas production declined seven percent to 770 mcf per day. On a barrel-of-equivalent basis, third quarter production of 457 boe per day is up three percent from second quarter volumes of 443 boe per day. Milagro's average daily production by area for the third and second quarters of 2005 is broken down as follows:



------------------------------------------------------------------------
Three months ended Three months ended
September 30, 2005 June 30, 2005
------------------------------------------------------------------------
Oil & NGLs Gas Total Oil & NGLs Gas Total
------------------------------------------------------------------------
(bbls/day) (mcf/day)(boe/day) (bbls/day) (mcf/day)(boe/day)
Southwest
Saskatchewan 239 607 340 272 683 386
Alberta 90 163 117 33 148 57
------------------------------------------------------------------------
Total 329 770 457 305 831 443
------------------------------------------------------------------------
------------------------------------------------------------------------


Southwest Saskatchewan oil production is decreasing as a result of natural reservoir decline. In Alberta, overall quarter-over-quarter production has increased in both oil and gas. The new Judy Creek oil wells were added to production for a portion of the third quarter. In the last 10 days of the third quarter additional gas production was brought into the corporation from its corporate acquisition.

Compared to the second quarter of 2005, third quarter oil and NGL selling prices increased 40 percent to $57.69 per barrel and natural gas prices increased 23 percent to $9.01 per mcf. Milagro has not hedged any production in 2005 so changes in benchmark oil and natural gas prices will have an immediate impact on the company's selling prices. Comparing the third quarter of 2005 to the second quarter of the year, changing benchmark prices positively effected Milagro's selling prices.

Royalties were $327,000 in the third quarter of 2005, up 37percent from $238,000 in the second quarter. On a unit of production basis, oil and NGL royalties increased 28 percent to $8.85 per barrel (Q2 2005 - $6.90 per barrel) and natural gas royalties increased 40 percent to $0.84 per mcf (Q2 2005 - $0.60 per mcf). The quarter-over-quarter increase was caused by increases in the Saskatchewan crown royalties due to increased prices for products and the new Judy Creek production crown royalties.

Production expenses were $838,000 in the third quarter, up 42 percent from $590,000 in the second quarter. The quarter-over-quarter increase in production expenses is a result of work over and repairs and maintenance expense. Oil and NGL costs increased 26 percent to $19.88 per barrel (Q2 2005 - $15.70 per barrel) and natural gas costs increased 62 percent to $3.30 per mcf (Q2 2005 - $2.04 per mcf). In southwest Saskatchewan, which generated 74 percent of Milagro's third quarter 2005 production volumes, production expenses were $15.59 per barrel of oil and $3.14 per mcf of natural gas. Natural gas expenses increased during the third quarter in southwest Saskatchewan as a result of a work over of a natural gas well. In Alberta, third quarter 2005 production expenses were $31.39 per barrel of oil and NGL and $4.01 per mcf of natural gas. Repairs and maintenance on Alberta wells has brought the operating expenses higher in the third quarter.

During the third quarter of 2005, Milagro incurred transportation costs of $66,000 up 53 percent from the $43,000 incurred in the second quarter. Milagro's transportation costs are 100 percent variable, based on volumes shipped. During the third quarter of 2005, transportation costs were $1.74 per barrel of oil and NGL (Q2 2005 - $1.04 per barrel) and $0.18 per mcf of natural gas (Q2 2005 - $0.18 per mcf). Within the second quarter, oil transportation costs were lower as a result of a credit on transportation costs from 2004 received and booked within the second quarter.

Third quarter 2005 oil and NGL field netbacks increased fifty-five percent to $27.22 per barrel (Q2 2005 - $17.52 per barrel) due to higher selling prices which was partially offset by higher production expenses, royalties and transportation costs. Natural gas field netbacks increased 4 percent to $4.69 per mcf (Q2 2005 - $4.49 per mcf) as a result of higher selling prices which was partially offset by higher royalties and production expenses.

Third quarter 2005 general and administrative costs expensed decreased 29 percent to $110,000 from $156,000 in the second quarter. During the third quarter, Milagro incurred none of the annual public company costs thereby reducing the general and administrative costs for the third quarter. On a quarter-over-quarter basis, the lower expenses and the small increase in production volumes resulted in a decrease in unit costs to $2.64 per boe in the third quarter of 2005 from $3.88 in the second quarter.

Financing charges were $6,000 ($0.14 per boe) in the third quarter of 2005, down from $24,000 ($0.59 per boe) in the second quarter. Equity raised was placed in a cash management system and earned interest for two months which offset the interest expense recorded within the third quarter. The corporation has also negotiated a lower cost of debt which contributed to the reduced financing charges.

Third quarter 2005 depletion, depreciation and accretion expense ("DD&A expense") was $838,000 ($19.93 per boe) compared to $715,000 ($17.72 per boe) for the second quarter. Depletion and depreciation of oil and gas properties, which is calculated using the unit-of-production method based on proved reserves, accounts for over 95 percent of DD&A expense. The higher third quarter 2005 DD&A expense rate is a result of the larger property and equipment account.

For the first nine months of 2005, Capital taxes are comprised exclusively of Saskatchewan capital taxes, and are estimated until the year end tax returns are prepared. Taxes for the third quarter of 2005 were $53,000 ($1.27 per boe), up from $47,000 ($1.17 per boe) in the first quarter. From the second quarter 2005 to the third quarter of 2005, Milagro's revenue from Saskatchewan increased.

Cash flow from operations was $1,002,000 in the third quarter of 2005, up 68 percent from second quarter cash flow of $598,000. Compared to the second quarter of 2005, third quarter cash flow was positively affected by higher revenue and lower general and administrative expenses, lower financing and negatively affected by higher royalties, higher transportation and higher production expenses. Cash flow from operations was $0.02 per share (basic and diluted) for the third quarter, which is a one hundred percent increase from the second quarter $0.01 per share (basic and diluted).

For the third quarter of 2005, Milagro recorded a net loss of $274,000 ($0.01 per share), a decline from the second quarter net income of $737,000 ($0.02 per share).

Net capital expenditures totaled $4,583,000 in the third quarter of 2005, up from $3,166,000 in the second quarter of the year. Capital expenditures by quarter and by area for the nine months ended September 2005 are as follows:



------------------------------------------------------------------------
Nine months ended September 30, 2005
------------------------------------------------------------------------
($000s) 9 months Q3 Q2 Q1
------------------------------------------------------------------------
Corporate acquisition 2,061 2,061 - -
Southwest Saskatchewan (4,228) 236 (134) (4,330)
Alberta 8,176 4,314 3,261 601
Corporate 135 33 39 63
------------------------------------------------------------------------
Total 6,144 6,644 3,166 (3,666)
------------------------------------------------------------------------
------------------------------------------------------------------------


During the third quarter of 2005, capital expenditures included intangible drilling and completion costs of $3,530,000, tangible costs of $1,662,000, and corporate acquisitions of $2,061,000. The drilling expenditures can be attributed to 3 wells in Judy Creek.

Thirty-five percent of Milagro's third quarter 2005 capital expenditure program was funded by cash flow from operations, compared to second quarter funding by cash flow of 18 percent. On July 20, 2005 within the third quarter, Milagro completed a private placement of new equity. The net proceeds of the placement were used to temporarily reduce bank debt, and incur interest revenue. During the third quarter, bank debt decreased by $949,000. At September 30, 2005, Milagro's net debt (bank debt adjusted for working capital) was $2,862,000.



THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005
COMPARED TO
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004

Production
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Oil & NGLs (bbls/day) 329 457 (28) 340 473 (28)
Natural gas (mcf/day) 770 1,383 (44) 846 1,431 (41)
------------------------------------------------------------------------
Boe (boe/day) 457 687 (33) 482 711 (32)
------------------------------------------------------------------------
------------------------------------------------------------------------


Average daily production decreased 32 percent to 482 boe per day in the nine months ended September 30, 2005 compared to 711 boe per day during the same period of 2004. The 28 percent decrease in oil and NGL production to 340 barrels per day was caused by a combination of natural decline together with shut in production in southwest Saskatchewan. The 41 percent decrease in natural gas production was caused primarily by natural declines in southwest Saskatchewan, and a period of shut-in production in central Alberta.

Compared to the same period in 2004, production for the third quarter of 2005 decreased 43 percent to 457 boe per day. The primary reasons for the decrease are the natural reservoir declines within the Saskatchewan field.



Selling Prices

Milagro Average Prices
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Oil & NGLs
($ per bbl) 57.69 40.62 42 45.30 36.24 25
Natural gas
($ per mcf) 9.01 6.16 46 7.63 6.43 19
------------------------------------------------------------------------
Boe ($ per boe) 56.70 39.39 44 45.45 37.03 23
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Benchmark Prices
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Oil - Edmonton Light
($/bbl) 76.50 54.12 41 67.91 52.54 29
Oil - Flint Medium
($/bbl) 55.71 38.81 44 45.42 38.63 18
Gas - AECO-C daily
spot (Cdn $/mcf) 8.17 6.24 31 7.41 6.57 13


During the nine months ended September 30, 2005, oil and NGL selling prices averaged $45.30 per barrel, a 25 percent increase compared to the same period in 2004. Milagro sold all of its 2004 and 2005 oil and NGL production at daily posted prices. Changes in Milagro's oil and NGL selling prices typically track changes in Canadian posted prices noted above as benchmark prices.

Natural gas prices during the first three quarters of 2005 averaged $7.63 per mcf, up 19 percent from the $6.43 per mcf realized during the same period last year. All of Milagro's 2005 natural gas production was sold at spot prices. Milagro receives a premium from AECO - C on its Saskatchewan sales due to proximity to eastern markets.



Revenue
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
($000s) 2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Oil & NGLs 1,738 1,707 2 4,196 4,696 (11)
Natural gas 647 784 (17) 1,779 2,523 (29)
------------------------------------------------------------------------
Total 2,385 2,491 (4) 5,975 7,219 (17)
------------------------------------------------------------------------
------------------------------------------------------------------------


Compared to the same periods in 2004, oil and NGL revenue for the nine months ended September 30, 2005 and the three months ended September 30, 2005 decreased 11 percent and increased 2 percent, respectively. The decrease in the nine month comparison is due to declines in the production which were partially offset by increases in the prices received for products. The increase in the three month comparison is due to the increase in prices received for products. Compared to the same periods in 2004, natural gas revenue for the nine months ended September 30, 2005 and the three months ended September 30, 2005 decreased 29 percent and 17 percent, respectively. Lower production is the primary reason for the decreases in natural gas revenue for both comparative periods.



Royalties
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

($000s)
Crown 233 406 (43) 553 1,047 (47)
Overriding & freehold 94 134 (30) 249 354 (30)
------------------------------------------------------------------------
Total 327 540 (40) 802 1,401 (43)
------------------------------------------------------------------------
Royalty rate
(% of revenue) 14 22 (37) 13 19 (32)
------------------------------------------------------------------------

(per unit)
Oil & NGLs
($ per bbl) 8.85 10.28 (14) 6.99 8.27 (15)
Natural gas
($ per mcf) 0.84 0.85 (1) 0.66 0.84 (21)
------------------------------------------------------------------------
BOE ($ per boe) 7.80 8.54 (9) 6.11 7.19 (15)
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties for the nine months ended September 30, 2005 were $802,000 (13 percent of revenue), down 43 percent from $1,401,000 (19 percent of revenue) for the nine months ended September 30, 2004. Comparing the first nine months of 2005 to the same period in 2004, royalties are reduced due to the decline in production plus the royalty free period received on some of the new Alberta production.



Production Expenses
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Oil & NGLs
($ per bbl) 19.88 7.44 167 16.23 7.21 125
Natural gas
($ per mcf) 3.30 1.79 84 2.34 1.66 41
------------------------------------------------------------------------
Boe ($ per boe) 19.92 8.54 133 15.60 8.12 92
------------------------------------------------------------------------
------------------------------------------------------------------------


Production expenses for the nine months ended September 30, 2005 increased 92 percent per boe when compared to the nine month period ending September 30, 2004. 80 percent of the production expenses increase can be attributed to the increase in repairs and maintenance and work overs, while the balance is due to the spreading of fixed costs over reduced volumes.

Production expenses for the three months ended September 30, 2005 increased 133 percent per boe when compared to the three month period ending September 30, 2004. As noted above the majority of the production expenses increase can be attributed to the increase in repairs and maintenance and work overs, while the smaller amount can be attributed to the spreading of fixed costs over reduced volumes.



Transportation Expenses
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Oil & NGLs
($ per bbl) 1.74 1.98 (12) 1.80 2.14 (16)
Natural gas
($ per mcf) 0.18 0.18 - 0.18 0.20 (10)
------------------------------------------------------------------------
Boe ($ per boe) 1.57 1.68 (7) 1.59 1.82 (13)
------------------------------------------------------------------------
------------------------------------------------------------------------


For the nine months ended September 30, 2005 transportation expenses were $210,000 ($1.59 per boe) down 42 percent from $355,000 ($1.82 per boe) for the same period in 2004. The nine month comparative decrease is mainly due to a decrease in average daily production volumes.

Comparing the third quarter of 2005 to the third quarter of 2004, transportation costs decreased 39 percent to $66,000 ($1.57 per boe) from $106,000 ($1.68 per boe). The three month comparative decrease is primarily due to a decrease in average daily production volumes.



Field Netbacks
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Oil & NGLs
($ per bbl) 27.22 20.92 30 20.28 18.61 9
Natural gas
($ per mcf) 4.69 3.34 40 4.45 3.74 19
------------------------------------------------------------------------
Boe ($ per boe) 27.48 20.63 33 22.14 19.90 11
------------------------------------------------------------------------
------------------------------------------------------------------------


Compared to the same periods in 2004, oil and NGL netbacks for the nine months ended September 30, 2005 and the three months ended September 30, 2005 increased 9 percent and 30 percent, respectively. The nine month comparative increase was caused primarily by higher selling prices due to increased higher priced production coming on stream from the Judy Creek field. The three month comparative increase was caused also by higher priced production coming on stream from the Judy Creek field.

On a year-over-year basis, natural gas netbacks increased 19 percent for the nine month comparative and 40 percent for the three month comparative. The increase for both comparative periods was caused by higher prices being received for natural gas sales.



General and Administrative Expenses
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
($000s) 2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Total 222 248 (10) 794 998 (20)
Overhead recoveries (96) (70) 37 (236) (212) 11
Capitalized (33) (30) 10 (94) (92) 2
------------------------------------------------------------------------
Expensed 93 148 (37) 464 694 (33)
------------------------------------------------------------------------
------------------------------------------------------------------------


Total general and administrative costs were $794,000 in the first nine months of 2005, down 20 percent from the same period last year. Costs were higher in 2004 primarily due to employee severance costs (recorded in the second quarter). Overhead recoveries and capitalized general and administrative costs had no significant changes. The nine month general and administrative expensed of $3.53 per boe is a decrease of one percent over the 2004 expensed unit rate of $3.56 per boe.

Total general and administrative costs were $222,000 in the third quarter of 2005, down 10 percent from the $248,000 incurred during the third quarter of 2004. The increase in overhead recoveries contributed mainly to the 26 percent decrease in general and administrative costs expensed during the third quarter. The decrease in general and administrative costs expensed resulted in a five percent decrease in the expensed unit rate to $2.23 per boe (three months ended September 30, 2004 - $2.34 per boe).

Financing Charges

Compared to the same periods in 2004, financing charges for the nine months ended September 30, 2005 decreased 58 percent to $60,000 ($0.46 per boe) compared to financing charges for the nine months ended September 30, 2004 at $143,000 ($0.73 per boe). Third quarter 2005 financing charges decreased 87 percent to $6,000 ($0.14 per boe) compared to financing charges for the three months ended September 30, 2004 at $48,000 ($0.75 per boe). In 2005 financing charges decreased as a result of internal equity raised throughout the year and new equity raised in July.



Depletion, Depreciation and Accretion Expense
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------
($000s)
Depletion and
depreciation of oil
and gas properties 805 1,034 (22) 2,254 3,293 (31)
Accretion of asset
retirement
obligations 27 21 29 69 63 10
Depreciation of
office equipment 6 6 - 18 18 -
------------------------------------------------------------------------
Total 838 1,061 (21) 2,341 3,374 (31)
------------------------------------------------------------------------
($/boe)
Depletion and
depreciation of oil
and gas properties 19.15 16.35 17 17.13 16.89 1
Accretion of asset
retirement
obligations 0.64 0.33 94 0.52 0.32 63
Depreciation of
office equipment 0.14 0.10 40 0.14 0.10 40
------------------------------------------------------------------------
Total 19.93 16.78 19 17.79 17.31 4
------------------------------------------------------------------------


Depletion, depreciation and accretion expense ("DD&A expense") was $2,341,000 for the nine months ended September 30, 2005, down 31 percent from $3,374,000 for the nine months ended September 30, 2004. Lower DD&A expense was caused primarily by the 32 percent decrease in the production volumes. Depletion and depreciation of the carrying amount of oil and gas properties is calculated using the unit-of-production method based on proved reserves.

Taxes

Current taxes of $124,000 for the nine months ended September 30, 2005 are exclusively Saskatchewan Resource Surcharge and Capital taxes. Saskatchewan Resource Surcharge and Capital tax is calculated as a percentage of the corporation's Saskatchewan based production revenues adjusted to approximate well head prices.

Future income taxes for the nine months ended September 30, 2005 resulted in a recovery of $504,000. This is primarily as a result of the tax treatment of the gain on the sale of the CO2 asset as a capital gain which is subject to tax on 50 percent of the gain.

Cash Flow from Operations

Cash flow from operations for the first nine months of 2005 was $2,262,000 which is a 21 percent decline from the $2,871,000 recorded for the first nine months of 2004. Compared to 2004, cash flow for 2005 was negatively affected by lower revenue and increases in production expenses which was partially offset by lower depletion, transportation, financing and general and administrative expenses. Cash flow from operations per share decreased 43 percent to $0.04 per share (basic and diluted) for the nine months ended September 30, 2005 from $0.07 per share (basic and diluted) for the same period in 2004. The decrease in cash flow from operations per share was caused mainly by the lower revenue received.



Corporate Cash Netbacks
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
($ per boe) 2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Field netbacks 27.48 20.63 33 22.14 19.90 11
General &
administrative
expenses (2.23) (2.34) 13 (3.53) (3.56) 3
Financing charges (0.14) (0.75) 135 (0.46) (0.73) 53
Capital taxes (1.27) (0.92) 38 (0.95) (0.88) 8
------------------------------------------------------------------------
Cash flow from
operations 23.84 16.62 43 17.20 14.73 17
------------------------------------------------------------------------
------------------------------------------------------------------------


Net Earnings (Loss)

For the nine months ended September 30, 2005, Milagro incurred net earnings from operations of $327,000 ($0.01 per share) compared to a net loss of $470,000 ($0.01 per share) for the same period of 2004. Compared to the same period in 2004, results for the first nine months of 2005 were improved due to improved pricing received for products.

The third quarter 2005 net loss from operations of $274,000 ($0.01 per share) compares to a net loss of $16,000 (nil per share) for the same period in 2004. The results for third quarter in 2005, when compared to the same period in 2004 are lower due to the future income taxes expense related to the sale of P&NG rights within the third quarter.



Capital Expenditures
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
($000s) 2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Lease acquisitions
and retention 2 45 (96) 187 179 4
Geological and
geophysical 438 - - 521 57 814
Drilling and
completions 3,525 1,515 131 6,567 3,373 95
Production equipment
and facilities 1,635 496 229 2,293 2,976 (23)
Capitalized overhead 33 30 10 94 92 2
Office 0 4 (100) 2 4 (50)
------------------------------------------------------------------------
Dispositions (1,050) - - (5,581) - -
------------------------------------------------------------------------
Total 4,583 2,090 119 4,083 6,681 (39)
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital expenditures for the nine months ended September 30, 2005 were $4,083,000 a 39 percent decrease compared to the first nine months of 2004. The nine months of 2005 expenditures by area were: Saskatchewan - $(4,228,000); Alberta - $8,158,000; and Corporate - $153,000. Expenditures in Alberta for the nine months ended September 30, 2005 include the drilling of 5 oil wells. The dispositions involve the sale of undeveloped land with zero reserves assigned to them ($5.2 million) and miscellaneous seismic rights and surplus assets ($380 thousand).

In the third quarter the corporation completed an acquisition of a private corporation's shares for $2,061,000 thereby gaining control of the private corporation's assets, which include 2.7 gas wells and 50 percent ownership in a Judy Creek gas plant.

LIQUIDITY AND CAPITAL RESOURCES

During the first nine months of 2005, Milagro received $162,629 and issued 418,926 common shares at an average of $0.39 per share pursuant to the exercise of stock options.

During the third quarter of 2005, Milagro completed a private placement of 2,000,000 Canadian Exploration Expense ("CEE") flow-through common shares, 1,131,500 Canadian Development Expense ("CDE") flow-through common shares and 2,143,000 common shares at a price of $1.50, $1.44 and $1.19 per share, respectively. Completion of the private placement resulted in the issuance of 5,274,500 common shares for total gross proceeds of $7,179,530. Milagro will incur eligible CEE and CDE expenditures and renounce the related tax deductions to the private placement subscribers. The net proceeds from the placement were used to temporarily reduce bank debt.



------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
($000s) 2005 2004 % Change 2005 2004 % Change
------------------------------------------------------------------------

Cash flow from
operations 1,002 1,051 (5) 2,262 2,871 (21)
Increase (decrease)
in bank debt (949) 1,604 (159) (2,704) 1,566 (273)
Issue of common
shares (net) 6,753 - - 6,897 3,672 88
Working capital (178) (550) (68) (327) (1,329) (75)
Abandonment costs 16 (15) 207 16 (99) 116
------------------------------------------------------------------------
Total funding 6,644 2,090 218 6,144 6,681 (8)
------------------------------------------------------------------------


Milagro's capital expenditure program for the nine months ended September 30, 2005 was funded 15 percent by cash flow from operations, and 58 percent from internally generated cash. The remaining 27 percent was funded by new equity (as described above).

At September 30, 2005 Milagro's net debt (bank debt adjusted for working capital) was $2,862,000. This amount is expected to increase during the balance of 2005 as planned capital expenditures will exceed cash flow from operations. Milagro has a $7.0 million demand revolving production loan with its principal lender.

On September 30, 2005, Milagro had the following securities outstanding: 53,473,072 common shares; 1,389,516 stock options with a weighted average exercise price of $0.68 per share.

OUTSTANDING SHARE DATA

There were no changes in Milagro's outstanding securities from September 30, 2005 to the date of this report.

CONTRACTUAL OBLIGATIONS

Except for obligations with respect to flow-through share commitments, Milagro's identified contractual obligations as at September 30, 2005 have not changed materially since December 31, 2004. Milagro's expenditure obligation related to the June 2004 issuance of flow-through common shares has been satisfied.

On July 20, 2005 Milagro completed a private placement of flow-through common shares for total proceeds of $7,179,530. Under the terms of the placement, Milagro is obligated to incur eligible CEE expenditures of $3,000,000 and eligible CDE expenditures of $1,629,360 and renounce the related income tax deductions to the subscribers. Although the renouncement must be effective December 31, 2005, Milagro has until December 31, 2006 to incur the expenditures. From July 20, 2005 to September 30, 2005, Milagro incurred eligible CEE expenditures of approximately $600,000 and CDE expenditures of approximately $1,350,000 which can be allocated to this renunciation.

OFF-BALANCE SHEET ARRANGEMENTS

Milagro does not have any special purposes entities nor is it a party to any arrangement that would be excluded from the balance sheet.

RELATED PARTY TRANSACTIONS

During the first nine months of 2005, Milagro entered into commercial business transactions with two related parties, both of whom are Milagro directors. One of the related parties is a partner of a law firm that provides legal services to Milagro and the other is the President and significant shareholder of a corporation that provides well logging and perforating services to Milagro. The following table summarizes the payments made by Milagro to these two entities during the first nine months of 2005 and 2004.



------------------------------------------------------------------------
Three months ended Nine months ended
Sept 30, Sept 30,
--------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
Legal fees $51,489 $ 4,149 $88,461 $63,862
Well logging and
perforating services $44,381 $32,183 $60,127 $87,110
------------------------------------------------------------------------


Of the $88,461 in legal fees paid during the nine months ended September 30, 2005, $37,754 was charged to general and administrative expenses, $35,854 was charged to share issue costs, and $14,853 was charged as acquisition costs of the corporate acquisition. All of the $60,127 in well logging and perforating services paid during the nine months ended September 30, 2005 was charged to property and equipment.

DATE

This Management's Discussion and Analysis is dated November 4, 2005.

ADDITIONAL INFORMATION

Additional information regarding Milagro, including the Annual Information Form for the year ended December 31, 2004, is available on SEDAR at www.sedar.com.

OUTLOOK

Milagro continues to work on its exploration and development drilling program. As of September 30, $10,500,000 of this year's $19,300,000 CAPEX budget has been spent. Five wells were drilled at Judy Creek in the first nine months of 2005. Since the end of the third quarter 3 more wells have been drilled and cased. A fourth well commenced drilling in November. Completion operations have commenced and are expected to be concluded by year end. A pipeline project to tie-in the solution gas to the newly acquired Judy Creek Gas Plant was started early in November, and it is planned to have that sales gas on-stream before year end. Subsequent to the end of the third quarter, two Judy Creek asset acquisitions were closed for an estimated combined amount of $860,000. The acquisitions added approximately 18 boe/day and an additional 11 percent working interest in the Judy Creek Gas Plant.

Milagro continues to look for ways to enhance shareholder value with the addition of new production through the drill bit or an accretive acquisition that adds to the cash flow per share from operating activities.



On behalf of the Board of Directors


Jeffrey C. Rekunyk
President and CEO
November 4, 2005




CONSOLIDATED BALANCE SHEETS

September 30, 2005 December 31, 2004
------------------------------------------------------------------------
Assets (Unaudited) (Audited)
Current asset
Accounts receivable $ 1,462,261 $ 702,716
Property, plant and equipment 38,769,842 33,449,393
------------------------------------------------------------------------
$ 40,232,103 $ 34,152,109
------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 3,700,334 $ 3,170,472
Bank debt (Note 3) 624,279 3,234,164
------------------------------------------------------------------------
4,324,613 6,404,636

Future income taxes 3,967,000 2,295,000
Asset retirement obligations 1,495,741 1,172,005
------------------------------------------------------------------------
9,787,354 9,871,641
------------------------------------------------------------------------

Shareholders' equity
Share capital (Note 4) 31,304,360 25,564,487
Contributed surplus 160,900 63,300
Deficit (1,020,511) (1,347,319)
------------------------------------------------------------------------
30,444,749 24,280,468
------------------------------------------------------------------------
$ 40,232,103 $ 34,152,109
------------------------------------------------------------------------

See accompanying notes


CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)

Three months ended Nine months ended
September 30, September 30,
(Unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------

Revenue
Oil and gas
sales $ 2,385,383 $2,491,149 $ 5,975,138 $7,218,916
Royalties (327,093) (540,147) (802,620) (1,401,201)
------------------------------------------------------------------------
2,058,290 1,951,002 5,172,518 5,817,715
------------------------------------------------------------------------

Expenses
Production 837,713 539,880 2,053,353 1,583,844
Transportation 66,351 106,371 209,805 354,975
General and
administrative 93,298 147,673 463,508 693,986
Financing charges 5,902 47,782 59,925 142,896
Depletion, depreciation
and accretion 838,200 1,061,000 2,341,400 3,374,000
Stock-based
compensation 34,500 8,100 97,600 24,300
------------------------------------------------------------------------
1,875,964 1,910,806 5,225,591 6,174,001
------------------------------------------------------------------------

Earnings (loss)
before taxes 182,326 40,196 (53,073) (356,286)
------------------------------------------------------------------------

Taxes
Capital taxes 52,707 58,197 124,158 171,387
Future income
taxes (recoveries) 404,000 (2,000) (504,039) (58,000)
------------------------------------------------------------------------
456,707 56,197 (379,881) 113,387
------------------------------------------------------------------------

Net earnings (loss) (274,381) (16,001) 326,808 (469,673)
Retained earnings
(deficit), beginning
of period (746,130) 698,419 (1,347,319) 1,152,091
------------------------------------------------------------------------
Retained earnings
(deficit), end of
period $(1,020,511) $ 682,418 $(1,020,511) $ 682,418
------------------------------------------------------------------------

Net earnings (loss)
per share (Note 5)
Basic $ (0.01) $ 0.00 $ 0.01 $ (0.01)
Diluted $ (0.01) $ 0.00 $ 0.01 $ (0.01)
------------------------------------------------------------------------

See accompanying notes


CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended Nine months ended
September 30, September 30,
(Unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------
Cash provided by (used for)

Operations
Net earnings (loss) $ (274,381) $ (16,001) $ 326,808 $ (469,673)
Items not
affecting cash
Depletion,
depreciation and
accretion 838,200 1,061,000 2,341,400 3,374,000
Future income
taxes (recoveries) 404,000 (2,000) (504,039) (58,000)
Stock-based
compensation 34,500 8,100 97,600 24,300
------------------------------------------------------------------------
1,002,319 1,051,099 2,261,769 2,870,627
Net change in
non-cash working
capital (Note 6) (178,480) (550,222) (326,941) (1,328,602)
Abandonment costs 16,603 (15,004) 16,603 (99,367)
------------------------------------------------------------------------
840,442 485,873 1,951,431 1,442,658
------------------------------------------------------------------------

Financing
Issue of common
shares 7,198,159 - 7,342,159 3,775,207
Increase (decrease)
in bank debt (949,460) 1,604,164 (2,704,475) 1,566,425
Share issue costs (445,247) - (445,247) (103,357)
------------------------------------------------------------------------
5,803,452 1,604,164 4,192,437 5,238,275
------------------------------------------------------------------------

Investing
Expenditures on
property and
equipment (5,629,550) (2,090,037) (9,663,564) (6,680,933)
Net cash paid on
business combination (2,060,616) - (2,060,616) -
Proceeds on sale
of property and
equipment 1,046,272 - 5,580,312 -
------------------------------------------------------------------------
(6,643,894) (2,090,037) (6,143,868) (6,680,933)
------------------------------------------------------------------------
Change in cash - - - -
Cash, beginning and
end of period $ - $ - $ - $ -
------------------------------------------------------------------------

See accompanying notes


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2005
(Unaudited)


1. Basis of Presentation

The interim consolidated financial statements of Milagro Energy Inc. ("Milagro") have been prepared in accordance with Canadian generally accepted accounting principles and are consistent with the presentation and disclosure in the audited financial statements and notes thereto for the year ended December 31, 2004, except as noted below. The interim consolidated financial statements contain disclosures which are supplemental to Milagro's annual financial statements. Certain disclosures, which are normally required to be included in the notes to the annual financial statements, have been condensed or omitted. The interim consolidated financial statements should be read in conjunction with Milagro's audited financial statements and notes thereto for the year ended December 31, 2004.

Principles of Consolidation

The consolidated financial statements include the accounts of Milagro and, since September 20, 2005 (note 2) it's wholly owned subsidiary Tri Seven Resources Ltd (Tri Seven).

2. Business Combination

On September 20, 2005, Milagro acquired all of the outstanding common shares of Tri Seven for total consideration of $2,210,000 less working capital adjustments. Tri Seven is a private oil and gas exploration and production company active in the Western Canadian sedimentary basin. The acquisition has been accounted for using the purchase method with the allocation of the purchase price as follows:



Net assets acquired and liabilities assumed
------------------------------------------------------------------------
Property, plant and equipment $ 3,345,464
Working capital deficiency (97,258)
Bank debt (94,590)
Asset retirement obligations (74,000)
Future income taxes (1,019,000)
------------------------------------------------------------------------
$ 2,060,616
------------------------------------------------------------------------
Consideration
Acquisition costs 42,464
Cash 2,018,152
------------------------------------------------------------------------
$ 2,060,616
------------------------------------------------------------------------


3. Bank Debt

Milagro's $7 million revolving production loan was renegotiated with its existing lender in June 2005. The loan remained at $7 million and the interest rate was reduced to prime plus 0.375%. The loan is secured by a general security agreement covering all present and after acquired property, accounts, and proceeds.



4. Share Capital

Common shares issued
------------------------------------------------------------------------
Number of
Shares Stated Value
------------------------------------------------------------------------
Balance outstanding, December 31, 2004 47,779,646 $ 25,564,487
Exercise of stock options 418,926 162,629
Tax benefit renounced to shareholders - (1,313,039)
Private placements 5,274,500 7,179,530
Share issue costs, net of future income
taxes of $156,000 (289,247)
------------------------------------------------------------------------
Balance outstanding, Sept. 30, 2005 53,473,072 31,304,360
------------------------------------------------------------------------


Share Capital Offerings

On July 20, 2005, Milagro completed a private placement of 2,000,000 Canadian Exploration Expense flow-through common shares, 1,131,500 Canadian Development Expense flow-through common shares, and 2,143,000 common shares at a price of $1.50, $1.44 and $1.19 per share, respectively. Completion of the private placement resulted in the issuance of 5,274,500 common shares for total gross proceeds of $7,179,530. The shares issued pursuant to the private placement are subject to a hold period that expires on November 21, 2005. The private placement of flow-through common shares resulting in foregone income tax benefits of approximately $2,513,000. Pursuant to EIC 146, Milagro will not record the future income tax liability until the income tax deductions are renounced. Under the terms of the placement, Milagro is obligated to incur eligible CEE expenditures of $3,000,000 and eligible CDE expenditures of $1,629,360 and renounce the related income tax deductions to the subscribers. Although the renouncement must be effective December 31, 2005, Milagro has until December 31, 2006 to incur the expenditures.



Stock options
------------------------------------------------------------------------
Weighted Average
Number of Exercise Price
Shares (per share)
------------------------------------------------------------------------
Balance outstanding, December 31, 2004 1,678,442 $ 0.56
Exercised (418,926) 0.39
Cancelled (15,000) 0.74
Granted 145,000 1.17
------------------------------------------------------------------------
Balance outstanding, September 30, 2005 1,389,516 0.68
------------------------------------------------------------------------

The company has calculated its stock based compensation expense using
the Black-Scholes option pricing model to estimate the fair value of
stock options issued at the date of the grant. The relevant assumptions
used are as follows:

Weighted average fair value per option $0.63
Risk free interest rate (%) 3.46%
Volatility (%) 68%
Expected life (years) 4

5. Per Share Amounts

The following table summarizes the weighted average number of common
shares used in calculating net earnings (loss) per share.

------------------------------------------------------------------------
Three months ended Nine months ended
Sept 30, Sept 30,
--------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------

Weighted average number
of shares outstanding:
Basic 52,317,937 47,779,646 49,532,422 43,629,891
Diluted 52,317,937 47,779,646 49,844,024 43,629,891
------------------------------------------------------------------------


The calculation of diluted earnings (loss) per share for the three months ended September 30, 2005 does not include 1,389,516 (2004 - 803,441) stock options priced at an average of $0.68 (2004 - $0.54) as the inclusion of these items would be anti-dilutive. The calculation of diluted earnings (loss) per share for the nine months ended September 30, 2005 does not include 175,000 (2004 - 803,441) stock options priced at an average of $1.24 (2004 priced at $0.54) as the inclusion of these items would be anti-dilutive.



6. Supplemental Cash Flow Information

------------------------------------------------------------------------
Three months ended Nine months ended
Sept 30, Sept 30,
--------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------

Changes in non-cash
working capital:

Working capital
deficiency assumed
on business
combination (note 2) $ (97,258) - $ (97,258) -
Accounts receivable $(504,381) $(112,985) $(759,545) $ 602,923
Accounts payable
and accrued
liabilities 423,159 (437,237) 529,862 (1,931,525)
------------------------------------------------------------------------
$(178,480) $(550,222) $(326,941) $(1,328,602)
------------------------------------------------------------------------

Cash payments included
in the statements of
cash flows:

Capital taxes $ 60,000 $ 71,588 $ 180,000 $ 390,588
Financing charges $ 5,902 $ 38,781 $ 59,925 $ 124,896
------------------------------------------------------------------------


7. Related Party Transactions

A director of Milagro is a partner of a law firm that provides legal services to Milagro. During the three months ended September 30, 2005, Milagro paid this firm $51,489 (2004 - $4,149) for legal fees, of which $14,853 is included in accounts payable and accrued liabilities at September 30, 2005 (2004 - $2,913). During the nine months ended September 30, 2005, Milagro paid this firm $88,461 (2004 - $63,862), of which $37,754 was charged to general and administrative expenses, $35,854 was charged to share issue costs, and $14,853 was charged as acquisition costs of the business combination (note 2).

A director of Milagro is the President and significant shareholder of a corporation that provides well logging and perforating services to Milagro. During the three months ended September 30, 2005, Milagro paid this corporation $44,381 (2004 - $32,183) for well logging and perforation services. During the nine months ended September 30, 2005, Milagro paid this corporation $60,127 (2004 - $87,110), all of which was charged to property and equipment.

These transactions have been recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Milagro is an exploration and production company engaged in the acquisition, exploration, development and production of oil and gas reserves in western Canada. Milagro is listed for trading on the Toronto Stock Exchange.

Contact Information

  • Milagro Energy Inc.
    Jeffrey Rekunyk
    President and CEO
    (403) 693-4000
    or
    Milagro Energy Inc.
    Brad Haack
    CFO
    (403) 693-4000
    Website: www.milagroenergy.com