Peerless Energy Inc.
TSX VENTURE : PRY.A
TSX VENTURE : PRY.B

Peerless Energy Inc.

August 15, 2005 16:05 ET

Peerless Energy Inc. Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 15 2005) - Peerless Energy Inc. (TSX VENTURE:PRY.A) (TSX VENTURE:PRY.B) ("Peerless" or the "Company") is pleased to announce its financial and operating results for the second quarter of 2005.

In the second quarter, Peerless successfully completed its initial public offering. The offering was fully subscribed with gross proceeds of $9,500,000 including the full exercise of the $500,000 over-allotment option. A total of 9,500 units were subscribed for at a price of $1,000 per unit. With the completion of this offering Peerless has 8,200,001 Class A shares and 855,000 Class B shares issued and outstanding.

In addition, on May 27, 2005 the Class A and Class B shares of Peerless initiated trading on the TSX Venture Exchange under the symbols PRY.A and PRY.B respectively.

The Company's strategy is to build a reserve, production and cash flow base in lower cost, proven growth areas by investing in high quality reservoirs in Alberta, Saskatchewan and British Columbia. Peerless will also be pursuing a focused exploration strategy for light oil and natural gas in northeast British Columbia, the West Peace River Arch areas of northern Alberta, and the W5M area of Alberta, utilizing the Company's in-house technical expertise.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis should be read in conjunction with the June 30, 2005 financial statements and the notes thereto for a full understanding of the financial position and results of operations of Peerless Energy Inc. All amounts are expressed in Canadian dollars. This Management's Discussion and Analysis ("MD&A") is dated as of August 10, 2005.

Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.

On November 26, 2004, 1139999 Alberta Ltd. was incorporated under the laws of the Province of Alberta. On January 14, 2005, the name was changed to Peerless Energy Inc. There were no operations in 2004.

During the first six months of 2005, Peerless focused on building a solid foundation for sustainable per share growth by assembling a strong technical team and raising equity in the public markets. Management's strategy is to utilize this base to fund internally generated, technically driven, exploration prospects for high quality, multi-zone liquids rich natural gas and light oil reservoirs and evaluate and acquire acquisition opportunities with significant reserve, production, and exploitation potential.

At June 30, 2005, the Company did not have any production from oil or natural gas, and thus there are no barrel of oil equivalent ("boe") or per boe comparisons or production statistics contained in this MD&A.

Liquidity and Capital Resources

In the second quarter of 2005, the resources utilized to implement the Company's business strategy were sourced as follows:



------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Private issuance of
common shares $ 280,000 $ 1,100,000
Initial public offering
of units (net of issue costs) 8,705,231 8,705,231
Bank debt - -
Cash used in start-up
operations (including
purchase of office equipment) (90,753) (302,131)
------------------------------------------------------------------------
Total $ 8,894,478 $ 9,503,100
------------------------------------------------------------------------
------------------------------------------------------------------------


At the end of the second quarter of 2005 Peerless was capitalized with zero debt and 100 percent equity.

Peerless raised $1,100,000 in the first six months of 2005 under private placements by issuing 4,400,000 Class A shares at $0.25 per share (one share was issued on incorporation at November 26, 2004).

On May 20, 2005, the Company completed its initial public equity offering. The offering was fully subscribed with gross proceeds of $9,500,000. A total of 9,500 units were subscribed for at a price of $1,000 per unit. Share issue costs totaled approximately $795,000. Each unit consisted of 400 Class A flow-through shares and 90 Class B flow-through shares, with a stated value of $0.25 and $10.00 respectively.

In accordance with the terms of the offering, Peerless is committed to incur and renounce, for income tax purposes, qualifying exploration and development expenditures to holders of Class A shares and Class B shares by December 31, 2005. The amount to be renounced is the total subscription price of both Class A and Class B shares of $9,500,000. With the completion of this offering the Company has 8,200,001 Class A shares and 855,000 Class B shares issued and outstanding.

On May 27, 2005, the Class A and Class B shares of the Company initiated trading on the TSX Venture Exchange under the symbols PRY.A and PRY.B respectively.

Capital Expenditures

Capital expenditures during the quarter consisted primarily of acquiring office furniture and equipment required to set up the Company's head office:



------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Land $ 3,852 $ 3,852
Exploratory and development drilling - -
Capitalized administration - -
Property acquisitions - -
Office furniture and equipment 12,186 111,032
------------------------------------------------------------------------
Total $ 16,038 $ 114,884
------------------------------------------------------------------------
------------------------------------------------------------------------


General and Administrative Expenses

General and administrative expenses in the six months ended June 30, 2005 were $220,613. These costs were related to the start-up of the head office, including salaries of employees and consultants costs. General and administrative expenses decreased 12% in the second quarter of 2005 to $104,231 from $116,382 recorded in the first quarter, as many start-up costs were one-time costs and thus not repeated in the second quarter. None of these expenses were capitalized.

Interest Expense and Income

As at June 30, 2005, the Company had no bank debt and cash and working capital of $9,469,735. Peerless earned $27,486 of interest income in the second quarter which was used to reduce general and administrative expenses.

Stock-based Compensation

The Company issued 820,000 stock options at an exercise price of $0.35 per share on May 24, 2005. The options vest as to one-third per year over the first three years and have a life of five years. Stock-based compensation expense of $1,839 for the quarter was calculated in accordance with the fair-value method of recognition using the Black-Scholes option pricing model using assumptions contained in the notes to the June 30, 2005 financial statements.

Depreciation, Depletion and Accretion

Depreciation, depletion and accretion are calculated based upon capital expenditures, production rates and reserve size. Depreciation expense for the quarter ended June 30, 2005 of $5,552 consists of depreciation of office furniture and computers.

Income and Other Taxes

The Company uses the liability method for accounting for income taxes.

At June 30, 2005, the Company had future income tax assets of $374,400 relating to non-capital loss carryforwards and share issue costs. As it is more likely than not that these assets will be recovered in the future, the Company has taken a full valuation allowance against these assets and thus they are not reflected in the financial statements.

Net Earnings and Cash Flow

Due to the inclusion of all the administrative costs associated with the start-up of the Company and no production, Peerless generated negative cash flow from operations of ($74,715) and ($187,247) for the three and six months ended June 30, 2005, respectively, and recorded a net loss of ($111,622) or ($0.02) per share, and ($228,004) or ($0.06) per share for the three and six months ended June 30, 2005, respectively.

Hedging

Management of cash flow variability comprises an integral component of Peerless' business strategy. Changing business conditions are monitored and reviewed with the Board of Directors to establish hedging guidelines used by management in carrying out the Company's strategic hedging program. The risk exposure inherent in movements in the price of crude oil and natural gas, fluctuations in the US/Canadian dollar exchange rate and interest rate movements on long term debt levels are all proactively managed by Peerless through the use of forward sale financial transactions with reputable counterparties.

The Company has no hedges in place as at June 30, 2005.

Business Risks and Prospects

Peerless is exposed to several operational risks inherent in exploring, developing, producing and marketing crude oil and natural gas. These risks include:

- economic risk of finding and producing reserves at a reasonable cost;

- financial risk of marketing reserves at an acceptable price given market conditions;

- cost of capital risk associated with securing the needed capital to carry out the Company's operations; and

- the risk of carrying out operations with minimal environmental impact.

Peerless strives to manage or minimize these risks in a number of ways, including:

- employing and retaining qualified professional and technical staff;

- concentrating in a limited number of areas with low cost exploration and development objectives;

- reducing high risk exploration exposure through joint venture relationships;

- utilizing the latest technology for finding and developing reserves;

- constructing quality, environmentally sensitive, safe production facilities;

- maximizing operational control of drilling and producing operations;

- mitigating price risk through strategic hedging; and

- adhering to conservative borrowing guidelines.

Health, Safety and Environmental Policy

The health and safety of employees, contractors, visitors, and the public, as well as the protection of the environment, is of utmost importance to Peerless. The Company endeavours to conduct its operations in a manner that will minimize both adverse effects and consequences of emergency situations by:

- complying with government regulations and standards;

- conducting its operations consistent with industry codes, practices and guidelines;

- ensuring prompt, effective response and repair to emergency situations and environmental incidents;

- providing training to employees and contractors to ensure compliance with Company safety and environmental rules and procedures;

- promoting the aspects of careful planning, good judgement, implementation of the Company's procedures and monitoring Company activities;

- communicating openly with members of the public regarding our activities; and

- amending the Company's policies and procedures as may be required from time to time.

Peerless believes that all employees have a vital role in achieving excellence in environmental, health and safety performance. This is best achieved through careful planning and the support and active participation of everyone involved.

Outlook

At June 30, 2005, Peerless has a strong balance sheet and is well positioned to compete both in the acquisitions market and in developing its own internal exploration and development opportunities. Specifically, the Company plans to acquire interests in oil and gas exploration and development prospects in Alberta, Saskatchewan and British Columbia through internal generation and through its farmin at Red Earth with Storm Exploration Inc. and other industry partners yet to be determined. With the solid foundation established in the initial months of operation, the Company believes that it will be able to establish and sustain per share growth in all relevant areas.

ADVISORY

This press release may contain forward-looking statements including management's assessment of future plans and operations, expectations of future production, cash flow and earnings. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), acquisitions, commodity price and exchange rate fluctuation and uncertainties resulting from competition from other producers and ability to access sufficient capital from internal and external sources. Additional information on these and other factors that could affect Peerless' operations and/or financial results are included in Peerless' reports on file with Canadian securities regulatory authorities.



PEERLESS ENERGY INC.
Balance Sheet

June 30, December 31,
2005 2004
------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Cash $ 9,503,101 $ 1
Accounts receivable 27,466 -
Prepaids and deposits 22,996 -
------------------------------------------------------------------------
9,553,563 1
------------------------------------------------------------------------
------------------------------------------------------------------------

Property, plant and equipment (note 4) 109,332 -
------------------------------------------------------------------------

$ 9,662,895 $ 1
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 83,828 $ -
------------------------------------------------------------------------
83,828 -

Shareholders' Equity
Shareholders' equity
Share capital (note 5) 9,805,232 1
Contributed surplus (note 5) 1,839
Deficit (228,004) -
------------------------------------------------------------------------
9,579,067 1

------------------------------------------------------------------------
$ 9,662,895 $ 1
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


PEERLESS ENERGY INC.
Statement of Operations and Deficit

Three months ended Six months ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)

Expenses
General and administrative $ 104,231 $ 220,613
Stock-based compensation (note 5) 1,839 1,839
Depreciation 5,552 5,552
------------------------------------------------------------------------
111,622 228,004

------------------------------------------------------------------------
Net loss (111,622) (228,004)

Deficit, beginning of period (116,382) -

------------------------------------------------------------------------
Deficit, end of period $ (228,004) $ (228,004)
------------------------------------------------------------------------
------------------------------------------------------------------------

Per share amounts (note 3)
Net loss per share, basic and diluted $ (0.02) $ (0.06)
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


PEERLESS ENERGY INC.
Statement of Cash Flows

Three months ended Six months ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)

Cash provided by (used in):

Operating
Net loss $ (111,622) $ (228,004)
Stock-based compensation expense 1,839 1,839
Depreciation expense 5,552 5,552
Increase in accounts receivable (15,226) (27,466)
Increase in prepaids and deposits (18,413) (22,996)
Increase in accounts payable
and accrued liabilities 63,155 83,828
------------------------------------------------------------------------
(74,715) (187,247)
Financing
Issuance of share capital,
net of issue costs 8,985,231 9,805,231
------------------------------------------------------------------------
8,985,231 9,805,231
Investing
Additions to property,
plant and equipment (16,038) (114,884)
------------------------------------------------------------------------
(16,038) (114,884)

------------------------------------------------------------------------
Increase in cash 8,894,478 9,503,100

Cash, beginning of period 608,623 1
------------------------------------------------------------------------
Cash, end of period $ 9,503,101 $ 9,503,101
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


PEERLESS ENERGY INC.
Notes to Financial Statements
Three and Six Months Ended June 30, 2005 (unaudited)

1. Incorporation

On November 26, 2004, 1139999 Alberta Ltd. was incorporated under the laws of the Province of Alberta. On January 14, 2005, the name was changed to Peerless Energy Inc. (the "Corporation"). There were no operations in 2004.

2. Significant accounting policies

Basis of presentation

The financial statements of the Corporation have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements.

(a) Property, plant and equipment

The Corporation follows the full cost method of accounting for petroleum and natural gas operations. The Corporation's current activities are considered to be in the pre-production state. The Corporation will review its investments periodically for impairment. The ultimate recovery of the Corporation's investments is dependent upon the discovery of petroleum and natural gas reserves in commercial quantities.

Costs of exploring for and developing petroleum and natural gas properties and related reserves will be capitalized into a single cost centre. Such costs include those related to lease acquisition, geological and geophysical activities, lease rentals on non-producing properties, drilling of productive and non-productive wells, tangible production equipment, and that portion of general and administrative expenses directly attributable to exploration and development activities. Proceeds received from the disposal of properties are normally deducted from the full cost pool without recognition of a gain or loss. When a significant portion of properties is sold, a gain or loss is recorded and reflected in the statement of operations.

Costs of acquiring unproved properties are initially excluded from the full cost pool and are assessed yearly to ascertain whether impairment has occurred. When proved reserves are assigned to the property or the property is considered to be impaired, the cost of the property or the amount of impairment is added to the full cost pool. Depletion of petroleum and natural gas properties and depreciation of production equipment will be calculated using the unit-of-production method based upon estimated proved reserves, before royalties, as determined by an independent engineer. For purposes of the calculation, natural gas reserves and production will be converted to equivalent volumes of petroleum based upon relative energy content. Office furniture and equipment is depreciated on a declining basis at 20% per annum.

The Corporation will place a limit on the aggregate carrying value of property, plant and equipment ("PP&E"), which may be amortized against revenues of future periods ("ceiling test"). An impairment loss is recognized if the carrying value exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the Corporation's proved reserves. Cash flows are based on third party quoted forward prices, adjusted for the Corporation's contract prices and quality differentials. The cost of unproved properties that contain no probable reserves and have been excluded from depletion and depreciation are subject to a separate test for impairment. Upon recognition of impairment, the Corporation would then measure the amount of impairment by comparing the carrying amounts of the PP&E to the fair value of the PP&E which will usually be an amount equal to the estimated net present value of future net cash flows from proved plus probable reserves. The Corporation's risk-free interest rate is used to calculate the Corporation's net present value of the future cash flows.

(b) Revenue recognition

Revenues associated with the sales of crude oil, natural gas and natural gas liquids are recognized when title passes to the purchaser.

(c) Joint operations

Substantially all of the Corporation's exploration and development activities will be conducted jointly with others and, accordingly, the financial statements will reflect only the Corporation's proportionate interest in such activities.

(d) Asset retirement obligations ("ARO")

The Corporation will recognize legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of assets. A liability for the asset retirement obligation will be recognized when incurred, recorded at fair value and classified as a long term liability in the balance sheet. When the liability is initially recorded, the entity will record the net present value of the cost with an increase in the carrying value of the related long-lived asset. The capitalized amount is depleted on a unit of production basis over the life of the reserves. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost would also result in an increase or decrease to the ARO. Actual costs incurred upon settlement of the ARO are charged against the ARO to the extent of the liability recorded. Any differences between the actual costs incurred upon settlement of the ARO and the recorded liability is recognized as a gain or loss in the Corporation's earnings in the period in which settlement occurs.

(e) Future income taxes

The Corporation will use the liability method of tax allocation accounting. Temporary differences arising from the differences between the tax basis of an asset or liability and the carrying amount on the balance sheet will be used to calculate future income tax assets or liabilities. Future income tax assets or liabilities will be calculated using substantially enacted tax rates anticipated to apply in the periods that the temporary differences are expected to reverse.

(f) Flow-through shares

The Corporation issues flow-through shares to fund a portion of its exploration and development expenditures within a defined time period. The income tax deductions associated with the expenditures funded by flow-through arrangements are renounced to investors in accordance with the appropriate tax legislation. A future tax liability is recognized upon the renunciation of tax pools and share capital is reduced by the estimated costs of the renounced tax deductions.

(g) Stock-based compensation

The Corporation follows the fair value method for recognition of stock and stock options awarded to directors, officers and employees. Under this method the equity instruments are recorded at their fair value based on the market price of stock on the date of grant. For stock options, the fair value is estimated using the Black-Scholes option-pricing model. Compensation costs are recognized over the vesting period of the stock options.

3. Per share information

Basic per share amounts are calculated using the weighted average number of Class A and Class B shares outstanding during the period. Class B shares are converted to Class A shares at $10 divided by the greater of $1 and the Class A market price for the period. Diluted per share amounts are calculated based on the treasury stock method. The weighted average number of shares is adjusted for the dilutive effect of options. The diluted effect of options uses proceeds received on the exercise of options plus the unamortized portion of stock-based compensation to purchase Class A shares at the average price during the period. The weighted average number of shares outstanding is then adjusted by the net change.



4. Property, plant and equipment

------------------------------------------------------------------------
Accumulated
depletion and
June 30, 2005 Cost depreciation Net
------------------------------------------------------------------------
Petroleum and natural gas properties $ 3,852 $ - $ 3,852
Office furniture and equipment 111,032 5,552 105,480
------------------------------------------------------------------------
$114,884 $ 5,552 $109,332
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Share capital

(a) Authorized

Unlimited number of preferred shares

Unlimited number of voting Class A shares

Unlimited number of voting Class B shares, convertible (at the option of the Corporation) at any time after July 1, 2008 and before July 1, 2010, into Class A shares. The fraction is calculated by dividing $10 by the greater of $1 and the then current market price of Class A shares. If conversion has not occurred by the close of business on July 1, 2010, the Class B shares become convertible (at the option of the shareholder) into Class A shares on the same basis. Effective August 2, 2010, all remaining Class B shares will be deemed to be converted to Class A shares.



(b) Issued and outstanding

------------------------------------------------------------------------
Number of
shares Amount
------------------------------------------------------------------------
Class A shares
For cash as initial private capital 4,400,001 $1,100,001
For cash pursuant to initial public offering 3,800,000 950,000
------------------------------------------------------------------------
Balance, June 30, 2005 8,200,001 2,050,001
------------------------------------------------------------------------
------------------------------------------------------------------------
Class B shares
For cash pursuant to initial public offering 855,000 8,550,000
------------------------------------------------------------------------
Balance, June 30, 2005 855,000 8,550,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Share issue costs (794,769)
------------------------------------------------------------------------
Total share capital on June 30, 2005 $9,805,232
------------------------------------------------------------------------
------------------------------------------------------------------------


(c) Stock options

The Corporation has a stock option plan under which it is authorized to grant options to purchase Class A shares of the Corporation up to the equivalent of 10% of the number of Class A shares outstanding.

Options granted under the stock option plan vest as to one-third per year over a three year term and expire after a five year term. The following tables summarize changes in stock options outstanding and information about stock options outstanding at June 30, 2005:



------------------------------------------------------------------------
Weighted
Number average
of exercise
options price
------------------------------------------------------------------------
Stock options outstanding, December 31, 2004 - $ -
Granted 820,000 0.35
------------------------------------------------------------------------
Stock options outstanding, June 30, 2005 820,000 $ 0.35
------------------------------------------------------------------------
------------------------------------------------------------------------

Weighted Weighted Weighted
average average average
Exercise Number exercise remaining Number exercisable
price outstanding price life (years) exercisable price
------------------------------------------------------------------------
$ 0.35 820,000 $ 0.35 4.9 - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


(d) Stock-based compensation

The fair value of each stock option grant is estimated using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2005: zero dividend yield, expected volatility of 38 percent; risk-free rate of 3.9 percent; and expected life of 5 years. The Corporation has not incorporated an estimated forfeiture rate for stock options that will not vest; rather the Corporation accounts for actual forfeitures as they occur. The weighted average fair value of stock options granted during the period was $0.06 per share.



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

Contributed surplus, December 31, 2004 $ -
Compensation expense 1,839
------------------------------------------------------------------------
Contributed surplus, June 30, 2005 $ 1,839
------------------------------------------------------------------------
------------------------------------------------------------------------


6. Commitments

In the normal course of business, the Corporation has entered into a Farmin Agreement with Storm Exploration Inc. As a minimum, the Corporation has committed to drill eight wells on Farmout Lands on or before December 31, 2005. For each well drilled, the Corporation will pay 100% of the cost of drilling, casing or abandoning (and in certain cases, completion costs) to earn an undivided 60% of Storm's interest in two sections of land, subject to any existing encumbrances and rights of conversion held by third parties. Funds to meet these commitments will come from working capital or proceeds from the Corporation's initial public offering. The Corporation has not incurred any costs under this commitment to date.

On March 1, 2005, the Corporation signed a Participation Agreement with StarPoint Energy Trust. No consideration was paid and is recorded in the financial statements at nil value.

The Corporation has signed an office lease until April 30, 2006. The monthly lease payment is $12,815.

7. Taxes

The Corporation has taken a full valuation allowance against the future potential recovery of its income tax assets relating to share issue costs and non-capital loss carryforwards.



------------------------------------------------------------------------
Future income tax assets
Share issue costs $ 292,500
Non-capital loss carryforwards 81,900
------------------------------------------------------------------------
374,400
Less valuation allowance (374,400)
------------------------------------------------------------------------
Net future income tax asset $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Non-capital losses of $222,450 will expire in 2012.

8. Financial instruments

The Corporation's financial instruments include cash, accounts receivable and accounts payable and accrued liabilities, which approximate their fair value due to their short term to maturity.


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

Contact Information

  • Peerless Energy Inc.
    Wade Becker
    President and Chief Executive Officer
    (403) 263-1590
    or
    Peerless Energy Inc.
    Dan Toews
    Vice President, Finance and Chief Financial Officer
    (403) 263-1590
    (403) 263-1591 (FAX)
    Website: www.peerlessenergyinc.com