Open Range Energy Corp.
TSX : ONR

Open Range Energy Corp.

August 10, 2006 20:14 ET

Open Range Energy Corp. Announces Second Quarter Operating Results Including Significant Drilling Success and Completion of 3D Seismic Program

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2006) -

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

Open Range Energy Corp. (TSX:ONR):



SECOND QUARTER REPORT
For the three months and six months ended June 30, 2006

Corporate Highlights
Three Months Three Months Six Months
Ended Ended Ended
June 30, 2006 March 31, 2006 June 30, 2006
Production
Crude oil and NGL
(bbls per day) 108 54 82
Natural Gas (mcf per day) 4,320 3,990 4,180
------------- -------------- -------------
Total (@ 6:1)
(boe per day) 828 719 778

Realized average sales
prices
Crude oil and NGL ($/bbl) 64.31 57.50 62.06
Natural gas ($/mcf) 6.28 7.93 7.06
------------- -------------- -------------
Combined average ($/boe) 41.14 48.31 44.43

Petroleum and natural gas
revenues $ 3,131,892 $ 3,126,563 $ 6,258,455

Funds from operations 1,314,094 1,279,970 2,594,064
Per basic share $ 0.09 $ 0.10 $ 0.19
Per diluted share $ 0.09 $ 0.10 $ 0.19

Net income (loss) (720,653) (407,742) (1,128,395)
Per basic share (0.05) (0.03) (0.08)
Per diluted share (0.05) (0.03) (0.08)

Debt Nil Nil Nil
Working capital (deficit) (2,441,567) (1,144,049) (2,441,567)

Capital expenditures $ 7,405,409 13,935,855 $21,341,264

Shares outstanding
Shares 14,410,941 13,561,941 14,410,941
Options 1,302,000 1,174,000 1,302,000

Weighted shares
outstanding
Shares 14,084,655 13,378,719 13,808,720
Options 1,189,834 1,167,778 1,211,648

Basic and diluted shares
(weighted) 14,084,655 13,378,719 13,808,720


LETTER TO SHAREHOLDERS

Open Range Energy Corp. is pleased to announce the results of its second full quarter of operations. Significant drilling success coupled with the completion of more than two townships of 3D seismic at Ansell/Sundance continued to add value at the Company's Deep Basin core properties. Positive well production results to date from the multi-zone Cretaceous sands at Ansell/Sundance support the possibility of a large volume of natural gas resource-in-place. The Company's growing land position at Ansell/Sundance is now supported by 3D seismic coverage, increasing the probability of drilling success on Open Range's extensive prospect inventory.

Highlights of Open Range's second quarter of operations:

- Production averaged 828 boe per day, up by 15 percent from the Q1 average;

- Drilled and cased eight gross (2.37 net) natural gas wells at 100 percent success;

- Behind-pipe production from Q2 activity is estimated at 260 boe per day and is forecast to be brought on-stream in the second half of 2006;

- Completed a 75-square-mile 3D seismic survey at Ansell/Sundance;

- Validated two gross (1.0 net) sections of farm-in lands and acquired an additional three gross (1.0 net) sections of land at Ansell/Sundance;

- Received first down-spacing approvals at Ansell/Sundance;

- Completed a $5.7 million flow-through equity financing at $5.70 per common share.

Drilling Activity

Open Range had its most active quarter to date, drilling and casing eight gross (2.37 net) wells with 100 percent success. This significant volume of activity was achieved largely by mobilizing equipment and commencing operations on three of the eight locations in late Q1, prior to spring road bans. The Company operated three of the eight gross wells. Drilling occurred at four Company properties, with two locations drilled at Ansell/Sundance, two at Ferrier, one at Garrington and three at Big Bend.

The two gross (1.0 net) exploration wells drilled at Ansell/Sundance intersected three natural gas pay zones. Completion operations commenced on one of these wells in July, and tested natural gas at approximately 80 boe per day net. Additional completion activity is planned in the second half of 2006. The Company anticipates drilling an additional six gross wells at Ansell/Sundance before year-end, bringing the year's total to approximately 10 gross (4.0 net) wells. Drilling results combined with interpretation of the new 3D seismic and market conditions will determine the number of wells included in the 2007 capital budget.

At Ferrier the Company participated in two gross (0.6 net) non-operated natural gas wells. These wells were drilled as infill locations inside an existing pool boundary, with one of the wells drilled to penetrate a deeper target. Both wells encountered significant gas pay in the primary target and substantiated additional acreage for incremental reserve assignments. The deeper well intersected additional gas-bearing sand with 7.5 metres of net gas pay. These two wells were completed during the second quarter and are to be tied-in and brought on production in early Q3, adding an initial 50 boe per day net to Company production. Further rate increases are expected from these wells later in the year, when additional third-party plant capacity is expected to become available.

At Big Bend the Company participated in three gross (0.57 net) wells. All were cased with tie-in and completion expected in mid Q3. Two wells encountered gas pay in the Mannville sands and will have a minimal impact on the Company due to their low working interest. The third well was at 50 percent working interest and was Company-operated. It was drilled as a low-risk offset to an existing location with bypassed gas pay. This well was completed in late June, testing natural gas from two zones. Production commenced in late July at a combined initial rate of 80 boe per day net. This well is expected to increase the Company's production at Big Bend by 35 percent.

At Garrington, Open Range participated in one gross (0.25 net) exploration well that encountered several gas-bearing Cretaceous sands. The well was cased and will be completed in August. Tie-in of the liquids rich-natural gas is expected in late Q3 at an estimated initial rate of 50 boe per day net.

Operations

The Company's production averaged 828 boe per day in the second quarter, of which 87 percent or 4.3 mmcf per day was natural gas. The 15 percent increase over Q1 volumes was primarily due to new production from one well at the Ansell/Sundance property and reconciled volumes for non-operated royalty and low-working-interest production. The third and fourth quarters are anticipated to be very active in terms of bringing on new production, with an estimated 260 boe per day behind-pipe from Q2 drilling activity.

During Q2 the Company initiated a multi-well recompletion and commingling program to bring additional untested pay zones on production in existing wells at the core Ansell/Sundance property. One well was recompleted in an up-hole pay zone and production was commingled with two producing zones, increasing the well's productivity by 50 boe per day gross. Further up-hole completion activities are scheduled for Q3 and Q4.

Exiting Q2 Ansell/Sundance had five natural gas wells on production from a total of nine pay zones. Cadomin production is averaging 750 mcf per day per well gross after 90 days of production history. Two other formations are also on production and show higher initial production rates than the Cadomin. In total well productivity is averaging 1,250 mcf per day gross 120 days after being brought on-stream. These rates are likely to improve through completion of additional pay zones and commingling.

The Company continues to work successfully with two large area operators at Ansell/Sundance to process its production on a third-party basis. With additional drilling success Open Range foresees the possibility of expanding its facilities and compression.

Land and Seismic

At Ansell/Sundance Open Range completed the first phase of its previously announced drill-to-earn nine section farm-in agreement. The first phase was completed with the drilling and casing of a well in June, validating two gross (1.0 net) sections of land. Two additional earning wells are expected to be drilled during the second half of 2006, earning a further five gross sections of land.

In the second quarter the Company also acquired three gross (1.0 net) sections of land. As of the end of Q2 the Company's land position in the area has grown to 34 gross (14 net) sections, representing an increase of 209 percent over the 11 gross sections held at year-end 2005.

In late May the Company completed its 75 square mile proprietary 3D seismic program at Ansell/Sundance at a cost of $3.1 million net. Open Range operated the program and has a 50 percent interest. Data interpretation is well underway with the initial focus being the identification of six drilling locations planned for the second half of 2006. The primary focus will be formations in the multi-zone Cretaceous sands offsetting recent discoveries. The seismic data will also be utilized to select lower-risk infill development drilling locations for the Company's 2007 capital program and to identify deeper, high-impact exploratory targets across the Company's land base.

Seismic option lands provided through the November 2005 Plan of Arrangement with Daylight Energy Trust did not result in any significant drilling opportunities and fully expired on May 31, 2006. Open Range chose instead to pursue its lower-risk, higher-return internally generated prospects.

To date Holding Application approvals have been received from the EUB on two sections of land in Ansell/Sundance. These approvals permit reduced-spacing drilling at up to four natural gas wells per section. Applications for nine further sections of land are in the final stages of approval. The precedent of increased drilling density was set by other area operators and is necessary to capture the natural gas resources in place within each section. This process is expected to add a significant development drilling inventory to the Company.

Financial

Since inception Open Range has grown production from the ongoing drilling success at its properties. Revenue and funds flow for the quarter were $3.1 million and $1.3 million ($0.09 per basic share), respectively. Revenues and funds flow were essentially flat from Q1, with increased production being offset by the negative impact of the recent softness in natural gas prices.

The Company recorded a net loss for the quarter, largely attributable to decreased natural gas prices, high general and administrative (G&A) costs as a result of start-up expenses and depletion, depreciation and amortization (DD&A) expense. The Company anticipates profitability improving in the second half of 2006. Capital expenditures in the quarter were $7.4 million, down from $14.0 million in Q1. During the first half of 2006 $9.0 million in capital was expended to acquire land and seismic data augmenting the Ansell/Sundance core growth property. In the second half of 2006 capital expenditures will be approximately $8.5 million and focused on drilling, completion and tie-in activities at Ansell/Sundance.

Operating costs in the first six months of 2006 were $1.3 million or $9.46 per boe, including transportation and previously forecast turn-around costs of $178,000. Exclusive of these turn-around costs, net year-to-date operating costs were $8.20 per boe. Annual operating costs are expected to average between $7.00 and $8.00 per boe in the remainder of 2006 due to higher production and no additional plant turn-arounds.

Corporate Developments

The Company will soon be announcing the appointment of a new Chief Financial Officer and Vice-President of Finance.

Outlook

In a relatively brief time Open Range has created a significant growth story at its primary Ansell/Sundance property. The new 3D seismic coverage over 34 gross sections of working interest lands and the area's multi-zone potential on reduced well-spacing create a potential drilling inventory representing up to three years of exploration and development activity.

Open Range anticipates that capital and operating cost efficiencies will be realized over time as we further optimize our drilling and completion techniques and establish additional facility infrastructure in the area. An initiative by the EUB is underway to establish blanket approval for commingling in our Deep Basin area for the Cretaceous sands. This is expected to cover most of Open Range's land at Ansell/Sundance and should result in reduced completion costs.

The Company is currently maintaining its previously announced $30.0 million capital program for 2006 with six gross drilling locations planned at Ansell/Sundance for the second half of 2006. Production guidance remains at an average of 900 boe per day for 2006 with an exit rate of 1,200 boe per day. Open Range's first and second quarter drilling and production results are affirming the potential of our prospects to deliver per share growth in reserves, production and funds flow.



On behalf of the Board of Directors,

"SIGNED"

A. Scott Dawson
President, Chief Executive Officer and Director


Management's Discussion and Analysis

Open Range Energy Corp. ("Open Range" or the "Corporation") was formed on November 30, 2005 pursuant to a Plan of Arrangement including Daylight Energy Trust and Tempest Energy Corp. Open Range was formed through the amalgamation of 1198311 Alberta Ltd. (Daylight's exploreco), 1198249 Alberta Ltd. (Tempest's exploreco), and Open Range Finance Corp., all of which were incorporated on October 13, 2005.

The following discussion and analysis is a review of operations, current financial position and outlook for the Corporation for the three and six month periods ended June 30, 2006 (which will be described below as "Q2" and the "first half", respectively). As the Corporation commenced operations on November 30, 2005, there are no prior-year comparative figures for the three months and the six months ended June 30, 2006. This information should be read in conjunction with the audited financial statements and related notes for the period from November 30, 2005 to December 31, 2005, the unaudited financial statements for the three months ended March 31, 2006 and the unaudited financial statements for the three and six months ended June 30, 2006. Additional information relating to Open Range is available at www.sedar.com or on the Corporation's website at www.openrangeenergy.com.

The terms "funds from operations", "funds from operations per share" and "debt-to-cash-flow ratio" in this discussion are not recognized measures under Canadian generally accepted accounting principles (GAAP). Open Range management believes that in addition to net earnings, funds from operations is a useful supplemental measure as it provides an indication of the results generated by the Corporation's principal business activities before the consideration of how those activities are financed or how the results are taxed. Users are cautioned, however, that this measure should not be construed as an alternative to net earnings determined in accordance with GAAP as an indication of Open Range's performance.

Open Range's method of calculating funds from operations may differ from that of other corporations, and accordingly it may not be comparable to measures used by those corporations. Open Range calculates funds from operations by taking cash flow from operating activities as determined under GAAP before the change in non-cash working capital related to operating activities. The following is reconciliation between cash flow from operating activities and funds from operations:



Reconciliation of "Funds from Operations" to Cash Flow per GAAP
Three and six months ended June 30, 2006

Three months Six months
ended ended
June 30, 2006 June 30, 2006

Funds from operations $ 1,314,094 $ 2,594,064
Change in non-cash working capital (411,595) (38,511)
------------------------------
Cash flow from operating activities
(per GAAP) $ 902,499 $ 2,555,553


All barrel of oil equivalent (boe) numbers are calculated by converting a given volume of natural gas to boe at a ratio of six thousand cubic feet (mcf) to one boe.

This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Open Range's control. These include, but are not limited to: the impact of general economic conditions in Canada and the United States, commodity price fluctuations, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations), changes in how those laws and regulations are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of corporations with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Open Range's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, Open Range will derive there from.

This Management's Discussion and Analysis is dated August 10, 2006.

Production

Production in Q2 averaged 828 boe per day, of which 87 percent or 4.3 mmcf per day was natural gas. This was an increase of 109 boe per day or 15 percent over the Q1 average of 719 boe per day. The increase was primarily a result of the tie-in of one new well at the Ansell/Sundance property and reconciled volumes for non-operated royalty and low-working-interest production. These volumes more than offset reduced volumes in April and May for facility turn-arounds at Big Bend and Ansell/Sundance which impacted Q2 average production by approximately 30 boe per day. Production in the first half of the year averaged 778 boe per day. Open Range estimates that its production will average 900 boe per day in 2006, representing a 76 percent increase over the December 2005 average rate of 512 boe per day.



Drilling Activity

Exploration Development Total Success Average
Gross Net Gross Net Gross Net Rate W.I.
Q1 3.0 1.24 0.0 0.00 3.0 1.24 100% 41.3%
Q2 3.0 1.25 5.0 1.12 8.0 2.37 100% 29.6%
------ ------ ------- ------ ------- ------ -------- --------
YTD 6.0 2.49 5.0 1.12 11.0 3.61 100% 32.8%


Open Range drilled eight gross (2.37 net) natural gas wells in Q2 with 100 percent success. Drilling operations occurred at four of the Company's properties: two locations were drilled at Ansell/Sundance, two at Ferrier, one at Garrington and three at Big Bend. Open Range plans to drill up to six additional gross wells in 2006, all at Ansell/Sundance.

Petroleum and Natural Gas Revenues

Open Range's revenues in Q2 when compared to the first quarter were driven by a combination of increased production offset by natural gas price declines. Revenues totalled $3.1 million in Q2, comprised mainly of natural gas sales totalling $2.5 million. In the first half Open Range's revenues were $6.3 million. In Q2 Open Range received weighted average prices (before transportation and marketing fees) of $75.74 per barrel for its crude oil, $6.28 per mcf for natural gas and $60.49 per barrel for its natural gas liquids.

These realized prices compare to the following Q2 average benchmarks: West Texas Intermediate (WTI) oil price of US$70.51 per barrel, Edmonton oil par price of $79.06 per barrel and Alberta natural gas spot price of $5.87 per mcf.

Financial Instruments

In April 2006 Open Range entered into a natural gas hedging transaction for 2,500 GJ per day for the period May 1, 2006 through December 31, 2006. This transaction consisted of the purchase of a $5.00 per GJ put (floor) and the sale of a $10.50 per GJ call (ceiling).

In June 2006 Open Range entered into a second natural gas hedging transaction for 2,500 GJ per day for the period January 1, 2007 through December 31, 2007. This transaction consisted of the purchase of a $7.00 per GJ put (floor) and the sale of a $10.20 per GJ call (ceiling).

These hedging contracts are marked to market with the corresponding valuation recorded on the balance sheet. No settlement payments were paid or received on the transactions during the period.

Open Range's management considers hedging a risk management technique to mitigate commodity price fluctuations.

Royalties

Royalty expense in Q2 was $0.4 million or $5.12 per boe of production, representing 12.5 percent of revenue. Royalties on a per boe basis were down from the first quarter due to the receipt of some of the deep well royalty holiday payment for wells at Ansell/Sundance and the commencement of Alberta Royalty Tax Credits. For the remainder of 2006 Open Range anticipates an average royalty rate of approximately 20 to 22 percent of revenue.

Operating Costs

Operating costs in the first half of 2006 were $1.3 million or $9.46 per boe. In Q2 these costs were $0.9 million or $12.37 per boe due to previously forecast turn-around costs of $178,000. Operating costs on a unit-of-production basis increased from $6.04 per boe in Q1 due to scheduled plant turn-arounds at Big Bend and Ansell/Sundance as well as property taxes and third-party processing fees related to Q1 operations. Open Range expects operating costs to average $7.00-$8.00 per boe in the remainder of the year.

When operating costs are combined with transportation, third-party processing, plant turn-around costs and royalty expense, Open Range's operating income was $1.8 million in Q2.



Corporate Average Netbacks

Three months Three months Six months
($ per boe except ended ended ended
production figures) June 30, 2006 March 31, 2006 June 30, 2006

Average production
(boe per day) 828 719 778
Average realized sales
price $ 41.14 $ 48.31 $ 44.43
Royalty expense 5.12 13.47 8.96
Operating costs 12.37 6.04 9.39
------------------------------------------------------------------------
Average netback from
production 23.65 28.80 26.08
G&A and interest expenses 6.51 9.02 7.91
------------------------------------------------------------------------
Funds flow $ 17.14 $ 19.78 $ 18.17


Other Cash Items

General and administrative (G&A) costs in Q2 totalled $0.5 million after recoveries and capitalization of $0.5 million. In the first half G&A costs were $1.1 million after recoveries and capitalization of $0.9 million. On a unit-of-production basis, net G&A costs have declined from $9.31 per boe in Q1 to $6.72 per boe in Q2 due to high initial G&A costs on start-up. In addition the Corporation has a full complement of management and staff in place to explore the full potential of its Deep Basin asset base. Salaries and office rent represent approximately 51 percent of the gross G&A costs.

Recoveries and capitalization in Q2 equated to 49 percent of total G&A costs as Open Range is in a high-growth phase with a substantial proportion of costs being directly attributable to exploration activity. Open Range expects its overall G&A costs to remain relatively flat over the short-term and to decrease on a per boe basis as production increases. In the first six months recoveries and capitalization represented 47 percent of total G&A costs.

During Q2 $16,204 or $0.21 per boe of interest income was earned on available cash balances through short-term interest-bearing instruments. As the Corporation grows and continues its exploration activity management anticipates incurring some debt. However, management intends to carefully manage debt levels, which is expected to result in relatively low interest expense.

Stock-based compensation in Q2 totalled $173,000, or $2.27 per boe of production, of which $88,000 was capitalized. Open Range expects stock-based compensation to remain relatively flat for the balance of 2006 as the Corporation is sufficiently staffed in anticipation of future growth, including the appointment of a new Chief Financial Officer and Vice-President of Finance, to be announced shortly.

Funds from Operations

The Corporation generated funds from operations of $2.6 million in the first half, or $0.19 per basic and diluted share. Funds from operations in Q2 were $1.3 million or $0.09 per basic and diluted share. On an equalized basis funds flow from operations was flat compared to Q1 due to softening natural gas prices being offset by the increase in average production.

Depletion, Depreciation and Accretion

Open Range's depletion, depreciation and accretion expense in Q2 totalled $2.0 million or $26.68 per boe of production, an increase from $1.6 million or $24.43 per boe in Q1. The increase was due to the additional cost of the leasehold improvements completed in Q2 increasing the depreciation expense. The Corporation anticipates this rate to decrease to approximately $20-$23 per boe for the balance of the year as reserve additions from the drilling program are realized and average production increases.

Net Loss

The future tax reduction amounted to $90,000 in Q2, leaving Open Range with a loss of $0.7 million or $0.05 per basic and diluted share. The net loss was due primarily to decreased natural gas prices and start-up G&A costs. The net loss in the first half was $1.1 million or $0.08 per basic and diluted share.

The Corporation also realized the impact of the federal and provincial governments' rate reduction, which increased the future tax expense recorded for Q2 due to the Corporation having a future tax asset as at June 30, 2006.

The tax effect of the $5.7 million of flow-through shares issued during the quarter will be recorded when the expenditures are renounced to investors.

Capital Expenditures

Open Range's capital program in Q2 totalled $7.4 million. The majority of the capital spending occurred at the Ansell/Sundance property, funding the drilling and completion of two wells, finalizing the 3D seismic program and initiating a multi-well recompletion and commingling program on existing wells in the area. Open Range also participated in non-operated activities with the drilling and completion of two wells at its Ferrier property, one well at its Garrington property and three wells at Big Bend.

Open Range's capital spending for the balance of 2006 has been budgeted at approximately $8.5 million and will be focused on drilling, completion and tie-in activities at its Ansell/Sundance property. This will bring combined capital expenditures to approximately $30.0 million by the end of the year.



Capital Expenditure Summary

Three months Three months Six months 2006
ended Ended ended Estimate
June 30, 2006 March 31, 2006 June 30, 2006
(millions)
------------------------------------------------------------------------
Land $ 0.1 $ 5.3 $ 5.3 $ 5.3
Seismic 2.1 1.2 3.3 3.3
Drilling and
intangibles 4.4 4.7 9.0 16.5
Facilities and
equipment 0.0 0.8 0.8 1.1
Corporate assets 0.0 2.0 2.0 2.0
Capitalized G&A 0.9 0.0 0.9 1.8
------------------------------------------------------------------------
Total $ 7.5 $ 14.0 $ 21.5 $ 30.0
------------------------------------------------------------------------


Liquidity

Open Range had a working capital deficiency as at June 30, 2006 of $2.4 million, which will be funded through a combination of funds from operations, existing cash of $2.3 million and the Company's unutilized bank line. Open Range currently has a $10.0 million extendable revolving-credit facility and a $2.4 million acquisition/development facility with a Canadian chartered bank. Open Range uses bank lines to facilitate short-term liquidity management and has raised equity to reduce debt leverage and increase the Corporation's flexibility.



Share Capital

As at August 10, 2006 there were 14,391,541 common shares and 1,313,000
stock options outstanding.

----------------------------------------------------
Common Shares
----------------------------------------------------
Closing December 31, 2005 11,912,941
----------------------------------------------------
January 10, 2006 private placement 1,649,000
----------------------------------------------------
May 16, 2006 private placement 1,000,000
----------------------------------------------------
Repurchase of stock (151,000)
----------------------------------------------------
Closing June 30, 2006 14,410,941
----------------------------------------------------
Proportion held by management and
directors 16%
----------------------------------------------------


------------------------------------------------------------------------
Weighted Shares June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Weighted Common Shares 13,808,720 10,467,302
------------------------------------------------------------------------

------------------------------------------------------------------------
Stock option dilution
(treasury method) Nil Nil
------------------------------------------------------------------------
Weighted diluted shares outstanding 13,808,720 10,467,302
------------------------------------------------------------------------


Q2 2006 Stock Option Activity

------------------------------------------------------------------------
Opening Issued Exercised Cancelled Closing
------------------------------------------------------------------------
1,174,000 204,000 Nil 76,000 1,302,000
------------------------------------------------------------------------
Average price Average price Average price
of $4.61 of $4.00 of $4.53
------------------------------------------------------------------------


During Q2 the Corporation issued 1,000,000 flow-through common shares at a price of $5.70 per share for total gross proceeds of $5.7 million and net proceeds of approximately $5.3 million.

Also during the quarter Douglas N. Penner, Vice-President of Finance and Chief Financial Officer, resigned from the Corporation for personal reasons. Open Range repurchased and subsequently cancelled Mr. Penner's 151,000 escrowed initial private placement shares at their original price of $3.10 per share for a total cost of $468,100. In addition Mr. Penner's 75,000 options have been cancelled.

Other Items

Other than the hedging transactions and the mark-to-market policy adopted by the Corporation for those transactions as discussed earlier in the MD&A and the flow-through share commitment of $5.7 million to be renounced effective December 31, 2006, of which $5.0 million remains to be incurred prior to December 31, 2007, there have been no changes to commitments, off-balance-sheet transactions, related-party transactions, or changes in policies or critical estimates from those outlined in the 2005 MD&A.



Common Share Trading information

------------------------------------------------------------------------
Average
Daily
High Low Close Average Price Volume
------------------------------------------------------------------------
Q1, 2006 5.01 3.61 4.55 4.44 81,033
------------------------------------------------------------------------
April 4.60 4.16 4.46 4.40 27,289
May 4.48 3.76 4.03 4.12 29,009
June 4.00 3.21 3.60 3.56 38,486
------------------------------------------------------------------------
Q2, 2006 4.60 3.21 3.60 3.95 31,800
------------------------------------------------------------------------


Summary Quarterly Information

Basic and
Diluted
Earnings
Revenue Net Income per share

($ millions) ($ millions) ($)

Period ended December 31, 2005 1.2 0.1 0.01

Three months ended March 31, 2006 3.1 (0.4) (0.03)

Three months ended June 30, 2006 3.1 (0.7) (0.05)


Outlook

Open Range is amassing extensive undeveloped lands, key infrastructure, a growing 3D seismic database and an inventory of exploration and development drilling locations in its focused Deep Basin properties. Combined, these attributes enable the Corporation to direct its resources towards drilling and completing these locations. With only 14.4 million shares issued and outstanding, Open Range is positioned for significant per share growth in reserves, production and funds flow.

Management's Report to Shareholders

The management of Open Range Energy Corp. is responsible for the integrity of the information contained in this quarterly report and for the consistency between the MD&A and the financial statements. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgements and have been properly reflected. The financial statements have been prepared using policies and procedures established by management and reflect fairly Open Range's financial position, results of operations and funds flow. Management has established and maintains a system of internal controls designed to ensure that financial information is reliable and accurate and to provide assurance that assets are safeguarded from loss or unauthorized use.

The Board of Directors and the Audit Committee have reviewed and approved the financial statements and the MD&A.

This Management's Discussion and Analysis is for the six-month period ended June 30, 2006 and is dated August 10, 2006.



OPEN RANGE ENERGY CORP.
Balance Sheets

(Unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
As at June 30, December 31,
2006 2005
------------------------------------------------------------------------

Assets

Current assets:
Cash and cash equivalents $ 2,328,176 $ 7,028,049
Accounts receivable 9,257,751 8,665,108
Prepaid expenses and deposits 728,067 613,783
------------------------------------------------------------------------
12,313,994 16,306,940

Future income taxes 1,449,262 1,022,539

Petroleum and natural gas properties
(note 2) 48,995,614 30,989,097

------------------------------------------------------------------------
$62,758,870 $48,318,576
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $14,747,108 $11,309,933
Unrealized loss on commodity derivatives
(note 6) 8,453 -
------------------------------------------------------------------------
14,755,561 11,309,933

Asset retirement obligations (note 4) 2,044,349 1,896,045

Shareholders' equity:
Share capital (note 5) 46,549,339 34,925,714
Contributed surplus (note 5) 409,858 58,726
Retained earnings (deficit) (1,000,237) 128,158
------------------------------------------------------------------------
45,958,960 35,112,598
Commitments (note 6)

------------------------------------------------------------------------
$62,758,870 $48,318,576
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.

Approved on behalf of the Board:

(Signed) Dean R. Jensen Director
-------------------------------

(Signed) Kenneth S. Woolner Director
-------------------------------


OPEN RANGE ENERGY CORP.
Statements of Operations and Retained Earnings (Deficit)

(Unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------

Revenues:
Petroleum and natural gas $ 3,131,892 $ 6,258,455
Royalties (net of Alberta Royalty Tax
Credit) (390,099) (1,261,899)
Interest 16,204 34,892
Unrealized loss on commodity derivatives
(note 6) (8,453) (8,453)
------------------------------------------------------------------------
2,749,544 5,022,995

Expenses:
Operating 932,069 1,322,803
General and administrative 511,834 1,114,581
Stock-based compensation 85,259 267,900
Depletion, depreciation and accretion 2,031,270 3,612,341
------------------------------------------------------------------------
3,560,432 6,317,625

------------------------------------------------------------------------
Loss before income taxes (810,888) (1,294,630)

Future income tax reduction 90,235 166,235

------------------------------------------------------------------------
Net loss (720,653) (1,128,395)

Retained earnings (deficit), beginning
of period (279,584) 128,158

------------------------------------------------------------------------
Deficit, end of period $(1,000,237) $(1,000,237)
------------------------------------------------------------------------
------------------------------------------------------------------------

Loss per share (note 5):
Basic $ (0.05) $ (0.08)
Diluted $ (0.05) $ (0.08)
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


OPEN RANGE ENERGY CORP.
Statements of Cash Flows

(Unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------

Cash provided by (used in):

Operating:
Net loss $ (720,653) $(1,128,395)
Items not involving cash:
Depletion, depreciation and accretion 2,031,270 3,612,341
Future income tax reduction (90,235) (166,235)
Stock-based compensation 85,259 267,900
Unrealized loss on commodity derivatives 8,453 8,453
------------------------------------------------------------------------
1,314,094 2,594,064
Change in non-cash working capital (411,595) (38,511)
------------------------------------------------------------------------
902,499 2,555,553

Financing:
Issue of common shares, net of issue costs 5,270,350 11,785,179
Repurchase of common shares (468,100) (468,100)
------------------------------------------------------------------------
4,802,250 11,317,079

Investing:
Petroleum and natural gas properties (7,405,409) (21,341,264)
Change in non-cash working capital 3,025,840 2,768,759
------------------------------------------------------------------------
(4,379,569) (18,572,505)

------------------------------------------------------------------------
Change in cash 1,325,180 (4,699,873)

Cash, beginning of period 1,002,996 7,028,049

------------------------------------------------------------------------
Cash, end of period $ 2,328,176 $ 2,328,176
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Interest received $ 16,204 $ 34,892
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to financial statements.


OPEN RANGE ENERGY CORP.
Notes to Financial Statements

For the three and six months ended June 30, 2006
(Unaudited)


The interim financial statements of Open Range Energy Corp. ("Open Range" or the "Corporation") have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP). The interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the period ended December 31, 2005, except as noted below. The following disclosure is incremental to the disclosure included with the annual financial statements. These interim financial statements should be read in conjunction with the financial statements and notes thereto in the Corporation's annual report for the year ended December 31, 2005. As the Corporation commenced operations on November 30, 2005 there are no comparable figures for the three and six months ended June 30, 2006.

1. Significant accounting policies:

Financial Instruments:

The Corporation uses various types of derivative financial instruments to manage risk associated with crude oil and natural gas price fluctuations. These instruments are not used for trading or speculative purposes. Proceeds and costs realized from holding the related contracts are recognized in petroleum and natural gas revenues at the time that each transaction under a contract is settled. For the unrealized portion of such contracts, the Corporation utilizes the fair value method of accounting. The fair value is based on an estimate of the amounts that would have been paid to or received from counterparties to settle these instruments given future market prices and other relevant factors. The method requires the fair value of the derivative financial instruments to be recorded at each balance sheet date.



2. Petroleum and natural gas properties:

------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated Net Book
June 30, 2006 Cost Depletion Value
------------------------------------------------------------------------

Petroleum and natural gas
properties $52,871,395 $ 3,875,781 $48,995,614
------------------------------------------------------------------------
------------------------------------------------------------------------

December 31, 2005
------------------------------------------------------------------------

Petroleum and natural gas
properties $31,329,513 $ 340,416 $30,989,097
------------------------------------------------------------------------
------------------------------------------------------------------------


The Corporation capitalized for the three- and six-month periods ended June 30, 2006 $493,436 and $897,356, respectively, of overhead-related costs to petroleum and natural gas properties, of which $87,762 related to stock-based compensation for each period. The future tax liability of $41,528 associated with the capitalized stock-based compensation has also been capitalized.

Costs associated with unproven properties excluded from costs subject to depletion for the period ended June 30, 2006 totalled $10,520,000. Future development costs of proved reserves of $671,000 have been included in the depletion calculation.

3. Bank debt:

The Corporation has a $10,000,000 extendable revolving credit facility and a $2,400,000 non-revolving acquisition/development demand facility. These facilities are with a Canadian chartered bank and bear interest at bank prime rates plus one-eighth of one percent per annum. The credit facilities are secured by a first fixed and floating charge debenture in the minimum face amount of $25,000,000 and a general security agreement. A re-determination of the borrowing base will occur on or before August 31, 2006. As at June 30, 2006, no amounts had been drawn against these facilities.

4. Asset retirement obligations:

The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $5,600,000, which will be incurred between 2006 and 2040. The majority of the costs will be incurred between 2020 and 2040. A credit-adjusted risk free rate of 8 percent was used to calculate the fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided below:

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, December 31,
2006 2005
------------------------------------------------------------------------

Balance, beginning of period $ 1,896,045 $ -
Transfer through Plan of Arrangement - 1,199,710

Accretion expense 76,976 13,000
Liabilities incurred 71,328 48,490
Revisions to estimates - 634,845

------------------------------------------------------------------------
Balance, end of period $ 2,044,349 $ 1,896,045
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Share capital:

(a) Issued and outstanding:

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

Common shares:
Issued on incorporation 1 $ 1
Issued pursuant to private placement 2,000,000 6,200,000
Issued pursuant to Plan of Arrangement 8,407,108 23,889,068
Share issue costs (net of tax of $24,605) - (47,571)
Share repurchase (3,300) (10,230)
For cash on exercise of warrants 1,509,132 4,678,309
Stock-based compensation on exercise of
warrants - 216,137

------------------------------------------------------------------------
Balance, December 31, 2005 11,912,941 $34,925,714

Issued pursuant to private placement 1,649,000 7,008,250
Share issue costs (net of tax of $167,862) - (325,559)
Share repurchase (151,000) (463,570)
For cash pursuant to flow-through share
offering 1,000,000 5,700,000
Share issue costs (net of tax of $134,154) - (295,496)
------------------------------------------------------------------------
Balance, June 30, 2006 14,410,941 $46,549,339
------------------------------------------------------------------------
------------------------------------------------------------------------


(b) Share option plan:

------------------------------------------------------------------------
------------------------------------------------------------------------
Period ended Period ended
June 30, 2006 December 31, 2005
---------------------- --------------------
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
------------------------------------------------------------------------
Stock options outstanding,
beginning of period 1,034,000 $ 4.61 - $ -
Granted 344,000 4.31 1,034,000 4.61
Cancelled (76,000) 4.61 - -
------------------------------------------------------------------------
Stock options outstanding,
end of period 1,302,000 $ 4.53 1,034,000 $ 4.61
------------------------------------------------------------------------
------------------------------------------------------------------------

Exercisable at period-end - $ - - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


(c) Stock-based compensation:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the six-month period ended June 30, 2006: zero dividend yield; expected volatility of 40 percent; risk-free rate of 3.81-4.22 percent; and expected life of five years. The weighted average fair value of stock options granted during the six month period ended June 30, 2006 was $1.78 per option.



(d) Contributed surplus:

------------------------------------------------------------------------
------------------------------------------------------------------------
Compensation expense $ 34,050
Expired warrants 24,676
------------------------------------------------------------------------
Balance, December 31, 2005 58,726
Compensation expense 355,662
Excess of share redemption amount over
share stated amount (note 5(a)) (4,530)
------------------------------------------------------------------------
Balance, June 30, 2006 $ 409,858
------------------------------------------------------------------------
------------------------------------------------------------------------


(e) Per share amounts:

Per share amounts have been calculated using the weighted average number of shares outstanding. The weighted average shares outstanding for the three and six month periods ended June 30, 2006 were 14,084,655 and 13,808,720, respectively.

In computing diluted per share amounts, no shares were added to the weighted average number of shares outstanding during the three- and six-month periods ended June 30, 2006 for the dilutive effect of employee stock options due to the options being anti-dilutive. Options to purchase 1,302,000 common shares were not included in the computation because they were anti-dilutive.



6. Commitments:

(a) Future minimum lease payments relating to operating lease
commitments are:

------------------------------------------------------------------------
------------------------------------------------------------------------
2006 $ 412,284
2007 824,568
2008 824,568
2009 824,568
2010 824,568

------------------------------------------------------------------------
Total $ 3,710,556
------------------------------------------------------------------------
------------------------------------------------------------------------


(b) Commodity price risk management:

During April 2006, the Corporation entered into a natural gas hedging transaction for 2,500 GJ per day for the period May 1, 2006 to December 31, 2006. This transaction consisted of the purchase of a $5.00 per GJ put option and the sale of a $10.50 per GJ call option. During the six months ended June 30, 2006 there were no net settlement payments. The Corporation would have received $7,408 if the contract had been settled at June 30, 2006.

During June 2006, the Corporation entered into a natural gas hedging transaction for 2,500 GJ per day for the period January 1, 2007 to December 31, 2007. This transaction consisted of the purchase of a $7.00 per GJ put option and the sale of a $10.20 per GJ call option. During the six months ended June 30, 2006 there were no net settlement payments The Corporation would have paid $15,861 if the contract had been settled at June 30, 2006.

(c) On May 16, 2006 the Corporation issued 1,000,000 flow-through common shares for gross proceeds of $5,700,000. Under the terms of the flow-through share agreements, the Corporation is required to renounce the $5,700,000 of qualifying oil and natural gas expenditures effective December 31, 2006 and has until December 31, 2007 to incur the expenditures. At June 30, 2006 the Corporation had incurred $694,000 of qualifying expenditures and is required to incur an additional $5,006,000.

OPEN RANGE ENERGY CORP. IS A PUBLICLY TRADED CANADIAN ENERGY COMPANY INVOLVED IN THE EXPLORATION, DEVELOPMENT AND PRODUCTION OF NATURAL GAS AND CRUDE OIL IN WESTERN CANADA.

Reader Advisory

This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Open Range's control, including: the impact of general economic conditions in Canada and the United States, fluctuations in commodity prices, 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 competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or 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. Open Range's actual results, performance or achievements 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, what benefits, including the amount of proceeds, Open Range will derive there from. All amounts are denominated in Canadian funds unless otherwise specified.

The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein.

Contact Information

  • Open Range Energy Corp.
    A. Scott Dawson, P.Eng.
    President and Chief Executive Officer
    (403) 205-3704
    Website: www.openrangeenergy.com