Orleans Energy Ltd.
TSX VENTURE : OEX

Orleans Energy Ltd.

November 28, 2006 16:30 ET

Orleans Energy Announces Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 28, 2006) - Orleans Energy Ltd. ("Orleans" or the "Company") (TSX VENTURE:OEX) is pleased to announce its financial and operating results for the interim period ended September 30, 2006.



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Financial Highlights (4) Three Months Ended Sep. 30,
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(all amounts in Cdn $ except share data) %
(6:1 oil equivalent conversion) 2006 2005 Change
------------------------------
Petroleum and natural gas revenue 9,776,954 6,980,395 40%
Per share - basic 0.32 0.46 (30%)
- diluted 0.31 0.44 (30%)
Cash flow from operations (1) 5,219,360 4,441,969 18%
Per share - basic 0.17 0.30 (43%)
- diluted 0.17 0.28 (39%)
Operating netback (2) ($/boe) 29.81 42.78 (30%)
Corporate netback (2) ($/boe) 26.02 40.23 (35%)
Net earnings / (loss) (127,759) 2,406,655 -
Per share - basic - 0.16 -
- diluted - 0.15 -
Net debt (3) - period end 47,756,144 2,170,227 2,101%
Weighted average basic shares 30,498,276 15,057,036 103%
Weighted average diluted shares 31,293,929 15,861,948 97%
Issued and outstanding shares 30,518,659 15,079,047 102%
Operating Highlights (4)
Average daily production:
Natural gas (mcf/d) 8,349 3,231 158%
Liquids (Oil & NGLs) (bbls/d) 789 662 19%
Oil equivalent (boe/d) 2,181 1,200 82%
Average sales price (after hedging):
Natural gas ($/mcf) 6.04 9.71 (38%)
Liquids (Oil & NGLs) ($/bbl) 70.81 67.25 5%
Oil equivalent ($/boe) 48.73 63.23 (23%)
Capital expenditures ($) 16,782,550 4,102,352 309%


Financial Highlights (4) Nine Months Ended Sep. 30,
-------------------------------
(all amounts in Cdn $ except share data) %
(6:1 oil equivalent conversion) 2006 2005 Change
-------------------------------
Petroleum and natural gas revenue 21,408,067 13,558,701 58%
Per share - basic 0.98 0.98 0%
- diluted 0.95 0.94 1%
Cash flow from operations (1) 11,758,440 8,087,693 45%
Per share - basic 0.54 0.58 (7%)
- diluted 0.52 0.56 (7%)
Operating netback (2) ($/boe) 31.49 37.30 (16%)
Corporate netback (2) ($/boe) 28.01 34.20 (18%)
Net earnings / (loss) (831,647) 3,331,896 -
Per share - basic (0.04) 0.24 -
- diluted (0.04) 0.23 -
Net debt (3) - period end 47,756,144 2,170,227 2,101%
Weighted average basic shares 21,825,061 13,829,074 58%
Weighted average diluted shares 22,647,956 14,486,897 56%
Issued and outstanding shares 30,518,659 15,079,047 102%
Operating Highlights (4)
Average daily production:
Natural gas (mcf/d) 5,388 2,347 130%
Liquids (Oil & NGLs) (bbls/d) 640 475 35%
Oil equivalent (boe/d) 1,538 866 78%
Average sales price (after hedging):
Natural gas ($/mcf) 6.59 8.64 (24%)
Liquids (Oil & NGLs) ($/bbl) 67.08 61.86 8%
Oil equivalent ($/boe) 51.00 57.34 (11%)
Capital expenditures ($) 143,894,725 17,205,287 736%
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Notes to the Highlights Table:
(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
("GAAP") and accordingly represents Funds from Operations before any
asset retirement obligation cash expenditures.
(2) Operating netback represents average sales price less royalties,
operating costs and transportation expenses. Corporate netback
represents operating netback less general and administrative costs and
interest expense. Both measures are not recognized measures under
Canadian GAAP.
(3) Net Debt refers to outstanding bank debt plus any working capital
deficit or minus any working capital surplus (excluding any current
income tax non-cash asset). Net debt is not a recognized measure under
Canadian GAAP.
(4) Orleans' 2006 financial and operating results for the nine months ended
September 30, 2006 includes the operating activities associated with the
acquisitions of: Mercury Energy Corporation from June 2, 2006 onwards
and Morpheus Energy Corporation from June 6, 2006 onwards.


Highlights

Highlights of the third quarter and year-to-date activity for Orleans include the following:

- Production averaged 2,181 boe/day, representing an 82% increase from the third quarter of 2005 (1,200 boe/day) and a 71% increase over the second quarter of 2006 (1,274 boe/day).

- Drilled 10 wells (7.75 net), including six gas wells, two oil wells, one standing and one D&A for a gross success rate of 80%. Through to the end of the third quarter, Orleans drilled 23 wells (16.0 net), resulting in 15 gas wells, four oil wells, one standing and three D&A for an overall success rate of 83%.

- Generated cash flow of $5.2 million or $0.17 per basic share in the third quarter, resulting in a corporate cash flow netback of $26.02 per boe, and representing an 18% increase over the aggregate cash flow realized in the third quarter of 2005.

- Executed two favourable oil hedges, resulting in 250 bbls/day locked in at an average price of US$75.44/bbl through to December 31, 2006 and 125 bbls/day at US$77.25/bbl from January 1, 2007 to July 31, 2007.

- Acquired 27 km2 of three dimensional seismic over Orleans' lands in Pine Creek to facilitate the further delineation of its multi-zone prospects.

- Subsequent to the third quarter, closed a $15.12 million "bought-deal" equity flow-though financing on November 14, enhancing Orleans' financial flexibility.

Operational Activities

Orleans successfully closed two private corporate acquisitions in June 2006 and commenced an aggressive drilling program immediately thereafter on several of the newly acquired properties and on Orleans' existing properties. The acquisitions transformed Orleans from predominantly a Central Alberta "West 4" producer to a West Central and Peace River Arch prospect-rich company, with six core operated properties. Orleans' undeveloped land base has increased to approximately 57,000 net acres, with over 200 Company-operated drilling locations identified.

In the third quarter of 2006, Orleans drilled 10 wells (7.75 net), incurring approximately $16.4 million in exploration and development capital expenditures, with capital deployment predominantly directed towards drilling opportunities ($11.6 million) and field facilities and well tie-ins ($4.2 million).

In Pine Creek, Orleans drilled three, 100% working interest gas wells in the third quarter. The wells have been completed and tested, with two wells brought on-stream in October and the third well scheduled to be on-stream in early December. All wells have encountered multiple sweet gas pay intervals with each well being completed as dual zone producers. In October 2006, Orleans drilled an additional, 100% working interest gas well that is currently undergoing a multi-zone completion. Pending positive completion results, Orleans anticipates having this well on-stream prior to year-end. Orleans has 7.75 sections (6.75 net) of high working interest, operated lands in Pine Creek. This area is characterized as multi-zone, liquids rich, sweet natural gas with long life reserves and low production declines after initial flush production. Across a majority of the lands in the immediate area, industry producers, along with Orleans, have applied for and are receiving approval for reduced spacing applications. In July, Orleans acquired three dimensional seismic across its lands that has allowed the Company to "high-grade" its drilling program. Assuming downspacing is approved, Orleans has developed an 18 to 20 well drilling program targeting multi-zone gas prospects in Pine Creek.

In Gilby, Orleans participated in the drilling of three successful Edmonton Sand gas wells (1.4 net) in July. The wells were completed and brought on-stream in early November. Orleans has 14.5 contiguous sections of acreage in the heart of this large, aerially extensive Edmonton Sand fairway and has applied for reduced spacing for four wells per section across the majority of its lands. Assuming downspacing is approved, the Company has developed a 35 to 40 well drilling program targeting Edmonton Sands in Gilby and has recently drilled and cased an additional, operated Edmonton Sand well.

In Gordondale, the Company commenced drilling operations in June with the drilling of three wells, targeting a new light oil discovery in the Triassic Boundary Lake zone. In October, Orleans also successfully completed an existing well bore in the Boundary Lake zone. As well, the Company constructed an oil gathering system connected to its operated oil battery, expanded and modified the battery and built a solution gas pipeline to a nearby gas plant. The infrastructure was commissioned and five wells, producing light gravity crude oil and associated solution gas, were brought on-stream in November. Orleans is extremely excited with the potential of this oil pool, given its potential size and quality. The Company has developed a 15 to 20 well drilling inventory based on 160 acre spacing on its large contiguous asset base of 11 sections across the oil pool. With success, Orleans intends to infill drill the pool to 80 or 40 acre spacing and convert the pool to waterflood to maximize oil productivity and recovery, similar to several offset pools in the immediate area.

In Kaybob, Orleans has amassed 10 sections (8.4 net) of high working interest lands, targeting an emerging Triassic Montney gas prospect currently being developed by Orleans and other industry producers. Orleans has three producing gas wells in the Montney gas pool and has submitted reduced spacing applications over the majority of its lands with the intent to down space to three to four wells per section. Assuming downspacing is approved, Orleans has a 15 to 20 well drilling inventory in this gas pool and intends to commence drilling operations in the first quarter of 2007.

As a means to ensure the ongoing funding of the Company's capital programs, Orleans has undertaken a systematic commodity hedging methodology. In June and July of 2006, the Company entered into two fixed price oil hedges and subsequently in October entered into two costless collar winter gas hedges. The details of the hedges are outlined in the MD&A section of this Interim Report.

Outlook and Guidance

In the Outlook and Guidance section of Orleans' Second Quarter 2006 Interim Report, the Company indicated that the private company acquisitions, which closed in June 2006, provided Orleans with a transformation from primarily a "West 4" Central Alberta producer to a prospect-rich "West 5" and Peace River Arch Company with a significant inventory of Company-operated, medium-to-low risk, high impact oil and gas prospects. Notwithstanding the enhanced growth opportunities associated with a "West 5" and Peace River Arch asset base, the inherent operating conditions within this environment provides challenges in the form of longer lead times for well tie-ins due to delays with regulatory, surface access and infrastructure commissioning. Although Orleans has not been immune to these challenges, the Company believes that its very active and successful third quarter drilling program has validated its assertion of a prospective "new" Corporate asset base and has positioned Orleans to enter 2007 with operational momentum and exit this year with approximately 3,200 boe/day of high working interest, operated production. Orleans possesses a unique portfolio of assets which offer a platform for sustainable growth throughout 2007 and beyond, with up to 200 Company-operated drilling locations targeting a diverse suite of oil and gas prospects.

With respect to calendar 2007, the Company is presently in the process of preparing its capital budget and corresponding market guidance. The recent equity financing, which closed on November 14, has provided the Company with a greater degree of financial flexibility with which to facilitate the funding of a growth-focused capital expenditures program next year. Orleans expects to provide detailed 2007 market guidance in mid-January 2007, subsequent to the approval of Orleans' 2007 Capital Budget by the Company's Board of Directors.

Management's Discussion & Analysis ("MD&A")

The following discussion is intended to assist the reader in understanding the business and results of operations and financial condition, on a consolidated basis, of Orleans Energy Ltd. and its subsidiaries (the "Company" or "Orleans"). This MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the three month and nine month periods ended September 30, 2006 and the audited financial statements for the nine month fiscal period ended December 31, 2005.

Orleans Energy Ltd. is a Calgary, Alberta-based crude oil and natural gas exploration and production company. Orleans is incorporated under the laws of Alberta and its common shares are publicly listed and traded on the TSX Venture Exchange under the trading symbol "OEX".

Presented within this MD&A commentary is unaudited, consolidated financial and operating information for the three month interim period ended September 30, 2006 ("Q306") and the corresponding comparable quarterly period ended September 30, 2005 ("Q305"). Additional disclosure includes: unaudited, consolidated financial and operating information for the nine month period ended September 30, 2006 ("9M06") and the comparable prior year nine month period ended September 30, 2005 ("9M05").

In this MD&A, production data is commonly stated in barrels of oil equivalent ("boe") using a six (6) to one (1) conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one-to-one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of six (6) mcf: one (1) bbl is based on energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

As an indicator of the Company's performance, the term cash flow from operations or operating cash flow contained within the MD&A should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP"). This term does not have a standardized meaning under GAAP and may not be comparable to other companies. Orleans believes that cash flow from operations is a useful supplementary measure as investors may use this information to analyze operating performance, leverage and liquidity. Cash flow from operations, as disclosed within this MD&A, represents funds from operations before any asset retirement obligation cash expenditures and is expressed before changes in non-cash working capital. The Company presents cash flow from operations per share whereby per share amounts are calculated consistent with the calculation of earnings per share.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other similar statements that are not statements of fact. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement.

For additional information relating to Orleans, please refer to other filings as filed on SEDAR at www.sedar.com. All amounts are reported in Canadian dollars, unless otherwise stated. This MD&A includes information up to and including November 27, 2006.

Corporate Overview

Orleans is actively engaged in the exploration for, development and production of natural gas, crude oil and natural gas liquids reserves within the province of Alberta. Orleans' presently has a market capitalization of approximately $133 million. Current production is weighted approximately 65 percent natural gas and 35 percent light oil and NGLs. As a result of the two corporate acquisitions, which closed in early June, Orleans has substantially increased its inventory of drilling opportunities and now has a production base of six core producing areas throughout Central Alberta (Gilby/Medicine River and Halkirk/Leo/Killam), West Central Alberta (Pine Creek and Kaybob/Sturgeon Lake) and the Peace River Arch (Gordondale and Grimshaw). The Company also possesses a significant corporate undeveloped land base of approximately 75,000 gross acres with an average working interest of approximately 75%.

Significant Acquisitions

On June 2, 2006 the Company acquired all of the issued and outstanding shares of Mercury Energy Corporation ("Mercury"), a private oil and gas company. Total consideration paid by Orleans for the Mercury shares included 1,623,719 of Orleans' common shares and $9.835 million cash. This business combination has been accounted for using the purchase method with the results of Mercury's operations included in Orleans' financials results as of June 2, 2006 thereafter.

Additionally, on June 6, 2006 the Company acquired all of the issued and outstanding shares of Morpheus Energy Corporation ("Morpheus"), a private oil and gas company. Total consideration paid by Orleans for the Morpheus shares included 7,351,727 of Orleans' common shares and $29.203 million cash. The cash consideration component was funded through the net proceeds of the Company's previously disclosed $38.065 million bought-deal private placement financing which closed on April 27, 2006. This business combination has been accounted for using the purchase method with the results of Morpheus' operations included in Orleans' financials results as of June 6, 2006 thereafter.



Selected Period End and Quarterly Financial Information

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2006 2005
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($000s) Q306 Q206 Q106 Q405 Q305 Q205 Q105
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Petroleum and
natural gas
revenue 9,777 5,911 5,720 8,452 6,981 3,982 2,595
Cash flow from
operations 5,219 3,362 3,177 4,973 4,442 2,342 1,304
Net earnings /
(loss) (128) (1,346) 642 16,203 2,406 856 69
Total assets -
period end 192,609 180,598 55,109 50,684 32,196 28,795 24,216
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The following commentary will assist in providing the reader with factors that have caused variations over the aforementioned quarterly and period end results.

Petroleum and Natural Gas Production

In the third quarter of 2006, Orleans' oil equivalent production increased 82 percent to 2,181 boe per day, as compared to the 1,200 boe per day produced in Q305. Contributing to this significant production increase is the recognition of the operating results for Q306 associated with the acquisitions of both Mercury and Morpheus. The integration of the acquired assets transformed Orleans into a significant explorer and producer of crude oil and natural gas within the deeper, longer reserve life, West-Central Alberta geographic corridor. With respect to a commodity breakdown, the Company's natural gas sales for Q306 averaged 8,349 mcf per day and crude oil and NGLs production averaged 789 bbls per day, resulting in a gas and oil/NGL weighting of 64 percent and 36 percent, respectively.

During the first nine months of this year, Orleans' natural gas production averaged 5,388 mcf per day and crude oil and NGLs production averaged 640 bbls per day. On a combined barrel of oil equivalent basis, average daily production for this nine month 2006 period was 1,538 boe per day.



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Average Daily Production
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Natural Gas Crude Oil & NGLs Oil Equivalent
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(mcf/d) (bbls/d) (boe/d)
Q105 1,404 325 559
Q205 2,385 435 832
Q305 3,231 662 1,200
Q405 4,160 685 1,378
Q106 3,426 576 1,147
Q206 4,334 552 1,274
Q306 8,349 789 2,181
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Petroleum and Natural Gas Revenue and Commodity Pricing

Orleans' total petroleum and natural gas revenue for the quarterly period ended September 30, 2006 amounted to $9.78 million (before royalties and transportation costs), representing a 40 percent increase from the corresponding Q305 period revenue of $6.98 million. Despite a significant decline in gas prices in Q306 as compared to Q305, the Company's production growth in Q306 more than offset the negative impact of lower gas prices. Orleans' petroleum and natural gas revenue for the nine months ended September 30, 2006 amounted to $21.4 million, representing a 58 percent increase from the corresponding 2005 nine month period.



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Third Quarter Nine Months
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($000s) Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ----------------------

Crude oil & NGLs 5,141 4,093 26 11,716 8,021 46
Natural gas 4,636 2,887 61 9,692 5,538 75
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Total 9,777 6,980 40 21,408 13,559 58
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The Company may utilize financial instruments to hedge future prices on a portion of its oil and gas production in order to achieve more predictable cash flows necessary to fund capital expenditures and to reduce exposure to downward commodity price fluctuations. Orleans had two fixed price oil swaps outstanding during Q306. Subsequent to September 30, 2006, it had entered into two gas collar hedge contracts, as outlined in the table below. The Company had no such contracts outstanding during the comparable period ended September 30, 2005. Orleans' financial instrument contracts qualify for hedge accounting, which the Company has elected to use. As such, derivative financial instruments accounted for as hedges are not recognized in Orleans' Balance Sheet. Gains and losses related to derivative financial instruments designated as commodity price hedges are deferred and recognized in product revenues upon sale of the related hedged production.

As a result of its hedging initiatives, Orleans' revenue stream is affected by the settlement of these hedge transactions by way of an opportunity gain or loss depending how the hedged commodity price fared in relation to the prevailing period market prices. Lower oil market prices in Q306, in comparison to the contracted price hedge arrangements, resulted in an increase to the Company's crude oil revenues of approximately $113 thousand or $1.56 per bbl.



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Physical/ Daily Notional
Product Index Financial Term Volume Price received
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Fixed oil W.T.I. Financial Jul 06 - 125 bbls US$ 73.62 per
swap Dec 06 bbl
Fixed oil W.T.I. Financial Aug 06 - 125 bbls US$ 77.25 per
swap Jul 07 bbl
Gas collar AECO-C Financial Nov 06 - 2,000 GJs C$6.50 - C$8.50
Mar 07 per GJ
Gas collar AECO-C Financial Dec 06 - 2,000 GJs C$7.00 - C$8.75
Mar 07 per GJ
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The aggregate fair value of these hedge contracts as at September 30, 2006
was a gain of approximately $566 thousand.



The following table highlights Orleans' corporate realized commodity
prices as well as benchmark market prices:

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Third Quarter Nine Months
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Q306 Q305 % Change 9M06 9M05 % Change
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Orleans' prices
(after hedging):
Natural gas ($/mcf) 6.04 9.71 (38) 6.59 8.64 (24)
Crude oil and NGLs ($/bbl) 70.81 67.25 5 67.08 61.86 8
Oil equivalent ($/boe) 48.73 63.23 (23) 51.00 57.34 (11)
Industry benchmark prices:
WTI Cushing oil (US$/bbl) 70.48 63.31 11 68.12 55.36 23
Edmonton Par oil ($/bbl) 79.69 77.02 3 76.02 67.86 12
Nymex Henry Hub (US$/mmbtu) 6.18 9.73 (36) 6.88 7.73 (11)
AECO gas ($/mcf) 5.58 9.36 (40) 6.26 7.75 (19)
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Petroleum and Natural Gas Royalties

The Company's petroleum and natural gas royalties for quarterly period ended September 30, 2006 amounted to $1.69 million, resulting in a corporate effective royalty rate of 17 percent. Approximately 48 percent of Orleans' total royalty burdens for Q306 relate to provincial Crown royalties with the residual pertaining to freehold and overriding royalties. During Q305 the Company's total royalties amounted to $1.322 million. The aggregate increase in royalties in Q306 of $366 thousand is attributable to higher production volumes and revenues realized in Q306 as compared to Q305, with this increase moderated by a lower effective royalty rate in Q306 versus Q305. The royalty rate in Q306 was marginally lower as a result of a recognized Alberta Royalty Tax Credit ("ARTC") recovery on Crown royalties associated with production from wells that the Company drilled and brought on-stream throughout 2006. Orleans' petroleum and natural gas royalties for the nine month period ended September 30, 2006 amounted to $3.88 million with a corporate effective royalty rate of 18 percent. In the corresponding nine month period ended September 30, 2005, the Company's total royalties amounted to $2.60 million. Higher production volumes realized in 9M06 as compared to 9M05 was the primary driver to increased royalties.



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Third Quarter Nine Months
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($000s) Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ---------------------
Crown, net ARTC 815 620 31 2,104 1,391 51
Freehold and overrides 873 702 24 1,771 1,217 46
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Total 1,688 1,322 28 3,875 2,608 49
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Corporate royalty rate (%) 17 19 18 19
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Operating Expenses

The Company's field operating costs for the quarterly period ended September 30, 2006 amounted to $1.97 million in the aggregate, a 142 percent increase over the $815 thousand reported in Q305 of last year. The ongoing expansion of Orleans' field operations and corresponding production levels continues to result in increases to the Company's aggregate operating costs. On a per unit basis, the Company's operating costs in Q306 were $9.82 per boe, as compared to $7.38 per boe in Q305. The prevailing high inflation cost environment within the upstream oil and gas industry activity throughout fiscal 2006, in addition to higher field power costs resulting from a sharp increase in market electricity prices in Q306, negatively impacted Orleans' cost effectiveness of its operations. The Company's operating costs for the nine month period ended September 30, 2006 amounted to $3.97 million, or $9.45 per boe.



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Third Quarter Nine Months
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Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ---------------------
Total ($000s) 1,970 815 142 3,965 1,903 108
Per unit ($/boe) 9.82 7.38 33 9.45 8.05 17
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Transportation Expenses

Orleans' cost of transporting and distributing its crude oil and natural gas production to market delivery points in Q306 amounted to $138 thousand, as compared to Q305 of $120 thousand. On a unit-of-production basis, transportation costs in Q306 were $0.69 per boe as compared to the $1.09 per boe realized in Q305. The Company's higher natural gas and NGL weighting in Q306 as compared to Q305 has resulted in lower per unit costs as the associated transportation costs for gas and NGLs are typically more efficient than crude oil trucked to market pipeline terminals. For the nine month period ended September 30, 2006, the Company's transportation expenses amounted to $348 thousand, as compared to 9M05 of $228 thousand. On a unit-of-production basis, transportation costs in 9M06 were $0.83 per boe as compared to the $0.96 per boe realized in 9M05.



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Third Quarter Nine Months
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Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ---------------------
Total ($000s) 138 120 15 348 228 53
Per unit ($/boe) 0.69 1.09 (37) 0.83 0.96 (14)
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General and Administrative Expenses

Orleans' general and administrative ("G&A") expenses related to its Calgary-based, head office operations amounted to $329 thousand in Q306 or $1.64 on an oil-equivalent per unit basis. Orleans' Q306 G&A costs in absolute dollars increased $71 thousand or 28 percent as compared to Q305. The aggregate increase in G&A costs in Q306 is primarily related to costs for additional head office staff necessary to manage a significantly larger asset base. The Company presently employs 12 head office personnel, including seven geological and engineering technical personnel, and engages the services of five consultants on a part-time basis. The Company applies the full cost method of accounting for its oil and gas operations. Accordingly, it capitalized employee compensation and associated direct overhead costs of its technical personnel in the amount of $135 thousand during the quarterly period ended September 30, 2006. In Q305, capitalized G&A amounted to $110 thousand.



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Third Quarter Nine Months
-------------------- ---------------------
($000s) Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ---------------------
Gross, net recoveries 464 368 26 1,316 1,040 27
Capitalized (135) (110) 23 (447) (363) 23
-------------------- ---------------------
Expensed 329 258 28 869 677 28
Per unit ($/boe) 1.64 2.34 (30) 2.07 2.86 (28)
-------------------- ---------------------
-------------------- ---------------------
% Capitalized 29% 37% 34% 35%
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Stock-Based Compensation

Orleans utilizes the fair value assessment methodology for measuring stock option expenses. During the quarterly period ended September 30, 2006 and September 30, 2005, the Company recorded non-cash stock-based compensation charges of $364 thousand and $97 thousand, respectively. The provision for Q306 was recognized in connection with the amortization, over the vesting period, of the fair value of stock options granted in prior periods to employees, directors and consultants.



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Third Quarter Nine Months
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($000s) Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ---------------------
Stock-based compensation 364 97 275 695 488 42
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Interest Charges

Orleans' interest expenses in Q306, net of earned interest income, amounted to $433 thousand or $2.16 per boe, entirely attributable to bank borrowing interest charges on its outstanding bank debt. As at September 30, 2006, the Company had $40.38 million of bank debt, as compared to $1.73 million of outstanding bank indebtedness at September 30, 2005 and $719 thousand at December 31, 2005. Orleans' bank debt increased in Q306 primarily as a result of the bank indebtedness assumed through the acquisitions of both Morpheus and Mercury.



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Third Quarter Nine Months
-------------------- ---------------------
($000s) Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ---------------------
Interest charges, net 433 23 1,783 593 55 978
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Depletion, Depreciation and Accretion

The Company's depletion and depreciation expense for the quarterly period ended September 30, 2006 amounted to $4.84 million. This provision for the depletion and depreciation of Orleans' property, plant and equipment asset base, in absolute dollars, was $2.96 million higher than Q305. On a unit-of-production rate basis, the depletion and depreciation provision for Q306 was $24.13 per boe (excluding the accretion on the Company's asset retirement obligation), as compared to $18.16 per boe for the comparable Q305 period. Notwithstanding a successful Q306 drilling program, which resulted in substantial new reserve additions, the relatively higher cost of acquiring the proved reserves of both Morpheus and Mercury has resulted in a higher depletion and depreciation rate in Q306. The Company's depletion and depreciation expense for the nine month period ended September 30, 2006 amounted to $10.26 million or $24.44 per boe, as compared to $4.11 million or $17.38 per boe in 9M05.

Orleans' accretion expense pertaining to its asset retirement obligations ("ARO") amounted to $105 thousand for the quarterly period ended September 30, 2006, as compared to $56 thousand for the comparable Q305. Higher accretion has been recognized as a result of the additional ARO recognized pursuant to the acquisition of both Morpheus and Mercury.



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Third Quarter Nine Months
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($000s) Q306 Q305 % Change 9M06 9M05 % Change
-------------------- ----------------------
Depletion & depreciation 4,841 1,882 157 10,258 4,110 150
Accretion on ARO 105 56 88 235 158 49
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Total 4,946 1,938 155 10,493 4,268 146
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Per unit ($/boe) 24.65 17.55 40 25.00 18.05 39
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Income and Capital Taxes

Orleans follows the liability method of accounting for income taxes whereby future income taxes are calculated based on temporary differences arising from the variance between the tax basis of an asset or liability and the carrying value of its property, plant and equipment. Changes in these temporary differences from third quarter 2006 activity resulted in the Company recognizing a future tax expense in Q306 of $38 thousand.

During the three month and nine month periods ended September 30, 2006, the Company was not liable for any corporate income tax. As a result of Orleans' significant tax pool balances, which aggregate to approximately $152 million, Orleans' does not expect to be subject to corporate cash income tax in the foreseeable future. Additionally, during the quarterly period ended September 30, 2006, the Company was not liable for the payment of the large corporation capital tax as this tax was retroactively eliminated at January 1, 2006 by the Federal government. The following table outlines projected tax pools available to Orleans for deduction against future taxable income (net of estimated pool usage necessary to offset 9M06 taxable income).



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Tax Pool Categories Access Rate Balance
($ millions)
Canadian exploration expense (CEE) 100% $ 19.64
Canadian development expense (CDE) 30% 43.10
Canadian oil and gas property expense (COGPE) 10% 30.42
Undepreciated capital cost (UCC) 25% 30.84
Non-capital losses (NCL) 100% 24.54
Share issue costs 20% 3.11
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Total $ 151.65
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Operating Cash Flow and Net Earnings

In the quarterly period ended September 30, 2006, Orleans recorded $5.22 million in cash flow from operations ($0.17 per basic share) and a net loss $128 thousand ($nil per basic share). For the corresponding period in Q305, the Company generated $4.44 million in cash flow from operations ($0.30 per basic share) and $2.41 million in net earnings ($0.16 per basic share). During the nine month period ended September 30, 2006, Orleans realized $11.76 million in cash flow from operations ($0.54 per basic share) and a net loss of $832 thousand ($0.04 per basic share). For the comparable period in 9M05, the Company generated $8.09 million in cash flow from operations ($0.58 per basic share) and $3.33 million in net earnings ($0.24 per basic share).



---------------------------------------------------------------------------
Third Quarter Nine Months
--------------------- -----------------------
($000s except share data) Q306 Q305 % Change 9M06 9M05 % Change
--------------------- -----------------------

Cash flow from operations (1) 5,219 4,442 17 11,758 8,087 45
Per share - basic ($) 0.17 0.30 (43) 0.54 0.58 (7)
Per share - diluted ($) 0.17 0.28 (39) 0.52 0.56 (7)
Net Earnings / (loss) (128) 2,406 - (832) 3,332 -
Per share - basic ($) - 0.16 - (0.04) 0.24 -
Per share - diluted ($) - 0.15 - (0.04) 0.23 -
---------------------------------------------------------------------------

(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian GAAP and accordingly represents Funds from
Operations before any asset retirement obligation cash expenditures.
As an indicator of the Company's performance, the term cash flow from
operations or operating cash flow contained within should not be
considered as an alternative to, or more meaningful than, cash flow
from operating activities as determined in accordance with Canadian
GAAP.


Capital Expenditures

During the three month period ended September 30, 2006, Orleans was very active in undertaking internal exploration and development capital activities. The Company drilled ten (7.7 net) wells, of which seven were operated, resulting in six gas wells, two oil wells, one standing well and one D&A. Additionally, the Company expanded its undeveloped land acreage by approximately 2,000 acres through Crown land sale participation and freehold rights purchases. Overall, Orleans invested $16.45 million in oil and gas exploration and development capital expenditures in Q306. The allocation of the Company's capital expenditures are outlined as follows:



---------------------------------------------------------------------------
Third Quarter Nine Months
--------------------- -----------------------
($000s) Q306 Q305 % Change 9M06 9M05 % Change
--------------------- -----------------------

Land 243 41 493 5,722 1,727 231
Seismic 400 - - 601 41 1,366
Drilling & completions 11,599 2,607 345 19,146 8,171 134
Facilities & well equipment 4,207 1,269 232 5,995 2,458 144
---------------------- -----------------------
Exploration & development 16,449 3,917 320 31,464 12,397 154
Other 183 174 5 542 508 7
Property purchases 6 11 (45) 1,163 712 63
Corporate acquisitions (1) 144 - - 110,725 3,588 2,986
---------------------- -----------------------
Total capital expenditures 16,782 4,102 309 143,894 17,205 736
---------------------------------------------------------------------------

(1) Includes total consideration paid (cash, shares issued and transactions
costs) for acquisitions and working capital and assumption of debt.


Goodwill

The Company recorded additional goodwill of approximately $35 thousand in the three month period ended September 30, 2006, bringing its balance as of September 30, 2006 to $16.5 million. The change in the amount recognized in Q306 as compared to the preceding quarter ended June 30, 2006 relates to adjustments made to the purchase price equation on the acquisition of Morpheus. The carrying value of the Company's recorded goodwill will be tested for impairment on an annual basis commencing in the fourth quarter of 2006.

Liquidity and Capital Resources

At September 30, 2006, Orleans had a working capital deficit of $47.76 million (including bank debt of $40.38 million), and 30.52 million common shares outstanding with a book capitalization of $109.80 million and a market capitalization of $123.60 million. At December 31, 2005, the Company had a working capital deficit of $4.61 million (including bank debt of $719 thousand), and 15.10 million common shares outstanding with a book capitalization of $19.94 million and a market capitalization of $93.16 million.



---------------------------------------------------------------------------
($000) September 30, 2006 Dec. 31, 2005 % Change
----------------------------------------------

Bank debt 40,378 719 5,516
Working capital deficit (1) 7,378 3,894 89
------------------- --------------
Net debt 47,756 4,613 935
------------------- --------------
------------------- --------------

Book capitalization (2) 109,800 19,938 451
Market capitalization (3) 123,601 93,161 33
---------------------------------------------------------------------------

Note 1: Reflects current assets (excluding any current income tax asset)
less current liabilities (excluding any outstanding bank debt).
Note 2: Reflects the book value of share capital, as reported on the
Company's respective balance sheets.
Note 3: Based on the market closing price of Orleans stock and the
outstanding number of common shares at period end.


The increase in the net debt position of the Company at September 30, 2006, as compared to December 31, 2005, is attributable to capital investments incurred in the first nine months of 2006 exceeding the cash generated through operating activities within that period and the assumption of the bank indebtedness of both Morpheus and Mercury.

At September 30, 2006, Orleans had borrowings of $40.38 million under its bank facility with a Canadian commercial bank and was in compliance with all covenant terms of the bank facility agreement. As a result of the acquisition of Morpheus and Mercury, the bank facility borrowing base was increased to $53.0 million, as compared to the previous $22.5 million bank facility in effect prior to June 2006.

Orleans' main sources of liquidity are internally-generated cash flow from its oil and gas operations, undrawn bank credit facilities and access to equity capital markets. Because of the liquidity and capital resource alternatives available to the Company, including internally-generated cash flow, Orleans believes its liquidity is sufficient to fund operating, general and administrative and interest expenses, including planned spending on exploration and development projects and undeveloped acreage. The Company anticipates that public capital markets will serve as the principal source of capital to finance any future substantial corporate acquisitions and/or significant property purchases.



Common Share Information

---------------------------------------------------------------------------
2006
---------------------------------------------------------------------------
Q306 Q206 Q106
Share Price: High 6.60 $ 6.50 $ 6.99
Low 3.45 $ 5.11 $ 5.05
Close 4.05 $ 5.85 $ 6.35
Avg. daily trading volume (1) 51,083 25,109 25,560
Shares outstanding -
period end (2,3,4) 30,518,659 30,459,493 15,099,047
Weighted average basic 30,498,276 19,708,637 15,099,047
Weighted average diluted 31,293,929 20,759,015 16,047,634
---------------------------------------------------------------------------

2005
----------------------------------------------------------------------------
Q405 Q305 Q205 Q105
Share Price: $ 6.35 $ 6.25 $ 3.90 $ 4.20
$ 5.60 $ 3.68 $ 3.21 $ 3.00
$ 6.17 $ 5.80 $ 3.74 $ 3.65
Avg. daily trading volume 25,624 95,242 33,320 85,336
Shares outstanding - peri 15,099,047 15,079,047 15,054,047 15,054,047
Weighted average basic 15,084,264 15,057,036 15,054,047 11,335,241
Weighted average diluted 15,979,723 15,861,948 15,749,603 11,859,756
---------------------------------------------------------------------------

Note 1: The common shares of Orleans commenced trading on the TSX Venture
Exchange on January 31, 2005.

Note 2: At the Company's June 15, 2005 Shareholders Meeting, the Company's
articles were amended to reorganize its authorized share capital.
Specifically, a resolution was approved to change the outstanding
3,950,610 non-voting common shares into voting common shares on a
1 for 1 basis and to reduce the maximum number of non-voting
common shares that the Company is authorized to issue to zero.

Note 3: On November 14, 2006 the Company issued by way of a bought deal
private placement, 2,630,000 common shares of the Company on a
"flow-through" basis pursuant to the Income Tax Act (Canada), at
$5.75 per share for total gross proceeds of $15,122,500.

Note 4: As of the date of this MD&A, total common shares issued and
outstanding are 33,148,659.


Contractual Obligations

Orleans is committed to various contractual obligations and commitments in the normal course of operations and financing activities. These are outlined as follows:



---------------------------------------------------------------------------
($000s) Less than Beyond 5 Total
1 Year 1 - 3 Years 4 - 5 Years Years
--------- ----------- ----------- -------- -------


Bank debt (1) 40,378 - - - 40,378
Operating lease
obligations (2) 58 387 - - 445
Asset retirement
obligations (3) 147 1,360 1,271 9,496 12,274
--------- ----------- ----------- -------- -------
Total obligations 40,583 1,747 1,271 9,496 53,097
---------------------------------------------------------------------------

Note 1: Revolving credit facility with a commercial bank. Refer to Note 5
to the unaudited financial statements for the three month period
ended September 30, 2006.

Note 2: Operating lease obligations pertain to the Company's Calgary,
Alberta head office lease.

Note 3: As at September 30, 2006, total undiscounted future asset
retirement obligation costs to be accrued over the life of the
remaining total proved reserves are estimated at $12.27 million
(adjusted for inflation). This estimate is subject to change based
on amendments to environmental laws and as new information with
respect to the Company's operations become available. Refer to Note
6 to the unaudited consolidated financial statements for the three
month period ended September 30, 2006.


Additionally, on November 14, 2006, Orleans issued 2,630,000 flow-through common shares for gross proceeds of $15.122 million which will require the Company to spend the equivalent amount on flow-through share eligible Canadian Exploration Expenditures, as defined in the Income tax Act (Canada), by December 31, 2007.

Off-Balance Sheet Arrangements

The Company did not enter into any off-balance sheet transactions during the three month period ended September 30, 2006.

Related Party Transactions

A director and the corporate secretary of the Company are partners at a law firm that provide legal services to the Company. During the three month period ended September 30, 2006, the Company disbursed and/or accrued an aggregate of $250 thousand to this firm for legal fees primarily associated with the acquisition of both Morpheus and Mercury and the April 2006 private placement.

Disclosure Controls and Procedures

Orleans' disclosure controls and procedures, as defined in Multilateral Instrument 52-109 "Certification of Disclosure in Issuers' Annual and Interim Filings", were reviewed by the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based on this review and given the size and nature of the Company's operations, the Company's CEO and CFO believe the Company's disclosure controls and procedures to be effective as of September 30, 2006. All control systems by their nature have inherent limitations and therefore Orleans' disclosure controls and procedures are believed to provide reasonable, but not absolute assurance, that: i) the Company's communications with the public are timely, factual and accurate and broadly disseminated in accordance with all applicable legal and regulatory requirements, ii) non-publicly disclosed information remains confidential, and iii) trading of the Company's common shares by Orleans' directors, officers and employees remain in compliance with applicable securities laws.

The unaudited financial statements for the interim period ended September 30, 2006 are enclosed at the end of this news release.

Orleans Energy Ltd. is a Calgary, Alberta-based emerging crude oil and natural gas company, with common shares trading on the TSX Venture Exchange under the symbol "OEX". Orleans is a team of dedicated, experienced professionals focused on the creation of shareholder value via acquisition and development of crude oil and natural gas assets in Alberta.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, anticipations, expectations, opinions, forecasts, projections, guidance or other similar statements that are not statements of fact. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement.

In this news release, reserves and production data are commonly stated in barrels of oil equivalent ("boe") using a six to one conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one to one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.



---------------------------------------------------------------------------
Orleans Energy Ltd.
Consolidated Balance Sheets
(unaudited)
---------------------------------------------------------------------------
September 30, December 31,
2006 2005

ASSETS

Current Assets

Cash and cash equivalents $ 236,894 $ -
Accounts receivable 8,097,063 3,397,255
Prepaid expenses and deposits 545,300 305,762
Current income tax asset - 6,633,855
-----------------------------------
8,879,257 10,336,872

Property, plant and equipment(Note 3,4) 167,229,784 33,346,079

Goodwill(Note 3) 16,499,984 -

Future income tax asset - 7,001,232
-----------------------------------
$ 192,609,025 $ 50,684,183
-----------------------------------
-----------------------------------

LIABILITIES

Current Liabilities

Accounts payable and accrued
liabilities $ 16,256,978 $ 7,597,341
Bank loan(Note 5) 40,378,421 718,800
-----------------------------------
56,635,399 8,316,141

Asset retirement obligations(Note 6) 4,846,209 2,484,234

Future income tax liability 1,636,896 -
-----------------------------------
$ 63,118,504 $ 10,800,375
-----------------------------------

SHAREHOLDERS' EQUITY

Share capital(Note 7) 109,800,339 19,937,717
Contributed surplus(Note 8) 1,141,097 565,359
Retained earnings 18,549,085 19,380,732
-----------------------------------
129,490,521 39,883,808
-----------------------------------
$ 192,609,025 $ 50,684,183
-----------------------------------

Nature of Operations and Organization and Basis of Presentation (Notes
1 & 2)

See accompanying notes to the unaudited consolidated financial statements.


---------------------------------------------------------------------------
Orleans Energy Ltd.
Consolidated Statements of Operations
(unaudited)
---------------------------------------------------------------------------
Three Months Ended, Nine Months Ended,
Sep. 30, 2006 Sep. 30, 2005 Sep. 30, 2006 Sep. 30, 2005
-----------------------------------------------------------
Revenue
Petroleum and
natural gas
sales $ 9,776,954 $ 6,980,395 $ 21,408,067 $ 13,558,701
Royalties (1,687,520) (1,321,929) (3,875,116) (2,608,141)
-----------------------------------------------------------
8,089,434 5,658,466 17,532,951 10,950,560
Interest income 5,729 100 152,349 19,374
-----------------------------------------------------------
8,095,163 5,658,566 17,685,300 10,969,934
-----------------------------------------------------------

Expenses
Operating 1,970,268 814,875 3,964,950 1,902,597
Transportation 138,127 120,074 347,513 227,506
General and
administrative 328,916 258,270 868,623 677,309
Interest 438,492 23,378 745,774 74,829
Stock-based
compensation 363,665 97,421 694,687 488,128
Depletion,
depreciation and
accretion 4,945,807 1,937,893 10,492,878 4,267,669
-----------------------------------------------------------
$ 8,185,275 $ 3,251,911 $ 17,114,425 $ 7,638,038
-----------------------------------------------------------

Earnings (loss)
before taxes (90,112) 2,406,655 570,875 3,331,896

Future income taxes 37,647 - 1,402,522 -
-----------------------------------------------------------

Net earnings
(loss) $ (127,759) $ 2,406,655 $ (831,647) $ 3,331,896

Retained earnings
(deficit),
beginning of
period 18,676,844 771,051 19,380,732 (154,190)

-----------------------------------------------------------
Retained earnings,
end of period $ 18,549,085 $ 3,177,706 $ 18,549,085 $ 3,177,706
-----------------------------------------------------------
-----------------------------------------------------------

Net earnings per
share(Note 12)
Basic $ - $ 0.16 $ (0.04) $ 0.24
-----------------------------------------------------------
-----------------------------------------------------------

Diluted $ - $ 0.15 $ (0.04) $ 0.23
-----------------------------------------------------------
-----------------------------------------------------------

See accompanying notes to the unaudited consolidated financial statements.


---------------------------------------------------------------------------
Orleans Energy Ltd.
Consolidated Statements of Cash Flow
(unaudited)
---------------------------------------------------------------------------
Cash provided Three Months Ended, Nine Months Ended,
from(used in): Sep. 30, 2006 Sep. 30, 2005 Sep. 30, 2006 Sep. 30, 2005
-----------------------------------------------------------
Operating
activities
Net earnings
(loss) $ (127,759) $ 2,406,655 $ (831,647) $ 3,331,896
Items not
affecting cash:
Depletion,
depreciation and
accretion 4,945,807 1,937,893 10,492,878 4,267,669
Stock-based
compensation 363,665 97,421 694,687 488,128
Future income
taxes 37,647 - 1,402,522 -
Asset retirement
expenditures - (816) - (23,447)
-----------------------------------------------------------
-----------------------------------------------------------

Funds from
operations 5,219,360 4,441,153 11,758,440 8,064,246
Change in non-cash
working capital 2,231,429 (776,093) 5,200,664 (2,094,259)
-----------------------------------------------------------
7,450,789 3,665,060 16,959,104 5,969,987
-----------------------------------------------------------

Financing activities
Increase in
bank loan 6,165,643 1,625,000 16,009,679 1,725,000
Repayment bank
loan and
promissory notes - - - (6,750,124)
Exercise of stock
options 65,832 18,768 202,432 69,585
Share issue
proceeds, net
issue costs (39,999) - 35,835,705 13,032,990
-----------------------------------------------------------
6,191,476 1,643,768 52,047,816 8,077,451
-----------------------------------------------------------

Investing activities
Corporate
acquisitions
(Note 3) (143,861) - (39,496,841) (2,861,229)
Property, plant
and equipment
additions (16,638,689) (4,102,352) (33,169,565) (13,713,502)
Cash acquired
through
Arrangement - - - 258,087
Change in non-cash
working capital 3,376,663 (1,212,538) 3,896,380 2,516,449
-----------------------------------------------------------
(13,405,887) (5,314,890) (68,770,026) (13,800,195)
-----------------------------------------------------------

Increase (decrease)
in cash and cash
equivalents 236,378 (6,062) 236,894 247,243

Cash and cash
equivalents,
beginning of
period 516 253,305 - -
-----------------------------------------------------------

Cash and cash
equivalents,
end of period $ 236,894 $ 247,243 $ 236,894 $ 247,243
-----------------------------------------------------------
-----------------------------------------------------------

See accompanying notes to the unaudited consolidated financial statements.

Orleans Energy Ltd.
Notes to the Interim Consolidated Financial Statements
For the nine month period ended September 30, 2006


1. Nature of Operations and Organization

Orleans Energy Ltd. (the "Company" or "Orleans") is actively engaged in the exploration for, and development and production of natural gas, natural gas liquids and crude oil in the Western Canadian Sedimentary Basin. Orleans is incorporated under the laws of Alberta and its common shares are traded on the TSX Venture Exchange under the trading symbol "OEX".

2. Basis of Presentation

The interim consolidated financial statements included herein have been prepared by the Company without audit and include all adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company's interim results. These interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. These interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the Company's audited financial statements for the period ended December 31, 2005, and are in accordance with Canadian generally accepted accounting principles ("GAAP"). The unaudited interim consolidated financial statements contain disclosures which are incremental to the Company's financial statements for the period ended December 31, 2005. Certain disclosures, which are normally required to be included in the notes to annual financial statements, have been condensed or omitted. The interim consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the period ended December 31, 2005.

3. Corporate Acquisitions

Mercury Energy Corporation

On June 2, 2006 the Company acquired all the issued and outstanding shares of Mercury Energy Corporation ("Mercury"), a private company involved in the exploration and production of crude oil and natural gas in Central Alberta for total consideration of approximately $19.5 million. This business combination has been accounted for using the purchase method. The allocation of net assets acquired at fair value is based on the best available information at this time and could be subject to further change. The allocation of the purchase price and consideration paid is as follows:



Consideration:
Issue of 1,623,719 common shares of Orleans $ 9,579,942
Cash 9,835,115
Transaction costs 98,482
--------------
Total consideration 19,513,539
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net Assets Acquired (allocated at estimated fair values):
Property, plant and equipment $ 24,005,135
Current assets 1,289,872
Current liabilities (3,760,751)
Asset retirement obligation (525,631)
Future income tax liability (1,495,086)
--------------
Total net assets acquired 19,513,539
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Morpheus Energy Corporation

On June 6, 2006 the Company acquired 99.32% of the issued and outstanding shares of Morpheus Energy Corporation ("Morpheus"), a private company involved in the exploration and production of natural gas and natural gas liquids in West Central Alberta. Orleans acquired the remaining 0.67% on July 4, 2006 pursuant to the compulsory business acquisition provisions of the Business Corporations Act (Alberta). The total consideration paid by Orleans to acquire all of the issued and outstanding shares of Morpheus was approximately $72.9 million. This business combination has been accounted for using the purchase method. The allocation of net assets acquired at fair value is based on the best available information at this time and could be subject to further change. The allocation of the purchase price and consideration paid is as follows:



Consideration:
Issue of 7,351,727 common shares of Orleans $ 43,375,189
Cash 29,202,548
Transaction costs 360,696
--------------
Total consideration 72,938,433
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net Assets Acquired (allocated at estimated fair values):
Property, plant and equipment $ 86,641,203
Current assets 6,422,431
Current liabilities (22,224,740)
Goodwill 16,499,984
Asset retirement obligation (1,275,664)
Future income tax liability (13,124,781)
--------------
Total net assets acquired 72,938,433
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. Property, Plant and Equipment

September 30, December 31,
2006 2005
------------------------------
Petroleum and natural gas properties $183,805,564 $ 39,743,164
Accumulated depletion (16,691,903) (6,447,902)
------------------------------
167,113,661 33,295,262
------------------------------

Office equipment and other 149,534 70,583
Accumulated depreciation (33,411) (19,766)
------------------------------
116,123 50,817
------------------------------

Net property, plant and equipment $167,229,784 $ 33,346,079
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During the nine month period ended September 30, 2006, the Company capitalized, as part of property, plant and equipment, certain overhead expenses of $447 thousand directly related to exploration and development activities ($363 thousand for the nine month period ended September 30, 2005).

At September 30, 2006, property, plant and equipment included $13.4 million relating to unproved properties (December 31, 2005: $2.72 million), which have been excluded from the amount subject to depletion and depreciation. Future development costs related to proved non-producing developed reserves of $9.19 million have been included in the amount subject to depletion (December 31, 2005: $5.01 million).

5. Bank Facility

As at September 30, 2006, the Company had a demand revolving credit facility of $53 million with a Canadian commercial bank. Amounts drawn on the bank facility bear interest at the lender's prime rate per annum. At September 30, 2006, the Company had $40.38 million of bank debt outstanding (December 31, 2005: $719 thousand). The bank facility is secured through a floating charge over all of the Company's assets and the lender reserves the right to require fixed charge security at its discretion. Under the terms of the banking arrangement, the Company is required to meet certain financial and engineering reporting requirements.

6. Asset Retirement Obligations

Orleans' asset retirement obligations are based on the Company's net ownership in wells and facilities and management's estimate of the timing and expected future costs associated with site reclamation, facilities dismantlement, and the plugging and abandonment of wells.

At September 30, 2006, the estimated present value of the total amount required to settle the asset retirement obligations was $4.85 million (December 31, 2005: $2.48 million), based on a total undiscounted future liability amount of $12.27 million (inflation adjusted) (December 31, 2005: $5.85 million). These obligations are to be settled based on the economic lives of the underlying assets, which is currently projected to be from zero to 34 years. The Company used a credit-adjusted risk free rate of 10 percent and an inflation rate of 1.5 percent to calculate the present value of the asset retirement obligations.



Asset retirement obligations - December 31, 2005 $ 2,484,234
Liabilities incurred during the period 325,451
Liabilities acquired during the period 1,801,295
Liabilities settled during the period -
Accretion of discount 235,229
---------------------------------------------------------------------------
Asset retirement obligations - September 30, 2006 $ 4,846,209
---------------------------------------------------------------------------
---------------------------------------------------------------------------


7. Share Capital

a) Authorized

- Unlimited number of voting common shares.

b) Issued and outstanding

Common Shares Amount
------------------------------
Balance - December 31, 2005 15,099,047 $ 19,937,717
Issued on flow-through private placement 670,000 5,025,000
Issued on equity private placement 5,600,000 33,040,000
Combined issue costs, net tax affect of
$750,406 (1,478,890)
Issued on acquisition of Mercury (Note 3) 1,623,719 9,579,942
Issued on acquisition of Morpheus (Note 3) 7,351,727 43,375,189
Exercise of stock options 174,166 321,381
---------------------------------------------------------------------------
Balance - September 30, 2006 30,518,659 $109,800,339
---------------------------------------------------------------------------
---------------------------------------------------------------------------


c) Shares in escrow

Of the total common shares issued through to September 30, 2006, there are no common shares that are presently held in escrow.

d) Flow-though shares

On April 27, 2006, the Company issued 670,000 flow-through common shares on a private placement basis at a price of $7.50 per share for gross proceeds of $5.025 million. Under the terms of the flow-through share agreement, the Company is committed to spend 100% of the gross proceeds on qualifying exploration expenditures prior to December 31, 2007. As at September 30, 2006, the Company had fully incurred and discharged these expenditure commitments.

Also refer to Note 13 - Subsequent Event.

8. Stock Based Compensation

a) Outstanding stock options

The Company has a stock option plan for the benefit of its directors, officers, employees and certain consultants. The Company has granted options to purchase common shares, whereby each option permits the holder to purchase one share of the Company at the stated exercise price. The options vest over a two-to-three year term and are exercisable on a cumulative basis over five years. At September 30, 2006, 2,418,739 options with a weighted average exercise price of $3.40 were outstanding and exercisable at various dates through to June 16, 2011.



The following table summarizes outstanding stock options:

Weighted Avg.
Number Exercise Price
---------------------------------------------------------------------------
Outstanding - December 31, 2005 1,509,905 $ 1.77
Granted 1,253,000 5.30
Exercised (174,166) 1.16
Cancelled (170,000) 5.30
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Outstanding - September 30, 2006 2,418,739 $ 3.40
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Options exercisable - September 30, 2006 605,575 $ 1.37
---------------------------------------------------------------------------
---------------------------------------------------------------------------


b) Exercise price range for options outstanding as at September 30, 2006:

Outstanding Options Exercisable Options
-------------------------------------- --------------------
Weighted Weighted Avg. Weighted
Price Range Number Avg. Price Remaining Life Number Avg. Price
-------------- ----------- ----------- --------------- -------- -----------
$ 0.80 - 1.00 777,984 $ 0.80 3.32 years 455,045 $ 0.80
$ 3.00 - 3.74 508,255 $ 3.10 3.39 years 150,530 $ 3.11
$ 5.25 - 5.87 1,132,500 $ 5.31 4.69 years - $ -
---------------------------------------------------------------------------
Total 2,418,739 $ 3.40 3.98 years 605,575 $ 1.37
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Company determined the fair value of stock options granted in the nine month period ended September 30, 2006 using the modified Black-Scholes evaluation stock option pricing model under the following assumptions:



Nine Months Nine Months
Ended Ended
September 30, September 30,
2006 2005
------------------------------
Weighted-average fair value ($/option) 2.59 0.93
Risk-free interest rate (%) 4.25 3.67
Estimated hold period prior to exercise
(years) 5 5
Volatility in the price of Orleans shares (%) 50.9 67.0
Dividend yield (%) Nil Nil


c) Contributed surplus

The following table reconciles contributed surplus as at September 30,
2006:

September 30, December 31,
2006 2005
------------------------------
Contributed surplus, beginning of period $ 565,359 $ 217,447
Stock-based compensation recognition 694,687 369,119
Exercise of stock options (118,949) (21,207)
---------------------------------------------------------------------------
Contributed surplus, ending of period $ 1,141,097 $ 565,359
---------------------------------------------------------------------------
---------------------------------------------------------------------------


9. Future Income Taxes

The Company follows the liability method of accounting for income taxes whereby future income taxes are calculated based on temporary differences arising from the variance between the tax basis of an asset or liability and the carrying value of its property, plant and equipment. Changes in these temporary differences from third quarter 2006 activity resulted in the Company recognizing a future tax expense in the third quarter of $38 thousand.

10. Hedging Instruments

From time to time, the Company may employ derivative financial instruments, primarily commodity price hedges, to manage fluctuations in oil and gas market prices. The Company may use fixed physical price arrangements, futures contracts, swaps, collars and put options with respect to a portion of its oil and gas production in order to achieve a more predictable cash flow. The Company does not utilize derivative financial instruments for speculative purposes. The Company's financial instrument contracts qualify for hedge accounting, which Orleans has elected to use. As such, derivative financial instruments accounted for as hedges are not recognized in the Company's Balance Sheet. Gains and losses related to derivative financial instruments designated as commodity price hedges are deferred and recognized in product revenues upon sale of the related hedged production.

The following table outlines the financial hedge agreements that were outstanding as at September 30, 2006. The aggregate fair value of these financial hedge agreements at September 30, 2006 was a gain of approximately C$ 566 thousand.



Daily
notional
Commodity Contract Date Type Term Volume Index Price
---------------------------------------------------------------------------

Fixed Jul '06 - US$ 73.62
Crude Oil June 9, 2006 Swap Dec '06 125 bbls W.T.I. /bbl
Fixed Aug '06 - US$ 77.25
Crude Oil July 6, 2006 Swap Jul '07 125 bbls W.T.I. /bbl


Subsequent to September 30, 2006, the Company has entered into the
following financial hedge agreements:

Daily
notional
Commodity Contract Date Type Term Volume Index Price
---------------------------------------------------------------------------

Nov '06 - C$ 6.50 -
NatGas Oct. 17, 2006 Collar Mar '07 2,000 GJs AECO-C C$8.50 /GJ
Dec '06 - C$ 7.00 -
NatGas Nov. 9, 2006 Collar Mar '07 2,000 GJs AECO-C C$8.75 /GJ


11. Supplemental Cash Flow Information

Three Months Ended, Nine Months Ended,
---------------------------------------------------------
Sep. 30, 2006 Sep. 30, 2005 Sep. 30, 2006 Sep. 30, 2005
---------------------------------------------------------
Interest paid
(net of interest
income) $ 432,763 $ 23,278 $ 593,425 $ 55,455
Income taxes paid - - - -


12. Per Share Amounts

In the calculation of diluted per share amounts, options under the Company's stock option plan are assumed to have been converted or exercised on the later of the beginning of the year and the date granted. The treasury stock method is used to determine the dilutive effect of stock options. The treasury stock method assumes that proceeds received from the exercise of in-the-money stock options in addition to the unrecognised stock-based compensation expense are used to repurchase common shares at the average market price during the respective reporting period.



Three Months Ended, Nine Months Ended,
---------------------------------------------------------
Sep. 30, 2006 Sep. 30, 2005 Sep. 30, 2006 Sep. 30, 2005
---------------------------------------------------------

Weighted average
shares:
Basic 30,498,276 15,057,036 21,825,061 13,829,074
Diluted 31,293,929 15,861,948 22,647,956 14,486,897


13. Subsequent Event

On November 14, 2006 the Company issued by way of a bought deal private placement, 2,630,000 common shares of the Company on a "flow-through" basis pursuant to the Income Tax Act (Canada), at $5.75 per share for total gross proceeds of $15,122,500. The flow-through common shares issued are subject to a four-month hold period which expires on March 15, 2007. The Company will use the net proceeds of the private placement to incur Canadian exploration expenses prior to December 31, 2007 in the aggregate amount of not less than the total amount of the gross proceeds raised from the issue of the flow-through common shares. The Company will renounce the expenditures to the purchasers of the flow-through common shares for the fiscal year ended December 31, 2006.

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this news release.

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