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

Peerless Energy Inc.

August 24, 2006 12:44 ET

Peerless Energy Inc. Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 24, 2006) - Peerless Energy Inc. (TSX VENTURE:PRY.A) (TSX VENTURE:PRY.B) ("Peerless" or the "Company") is pleased to report its operating results and the filing of its unaudited interim financial statements and related management discussion and analysis ("MD&A") for the quarter ending June 30, 2006. Select operational and financial results are outlined below and should be read in conjunction with the Company's unaudited interim financial statements and related MD&A which can be found at www.peerlessenergyinc.com or www.sedar.com.

In this report, all references to barrels of oil equivalent (boe) are calculated converting natural gas to oil at a ratio of six thousand cubic feet to one barrel of oil.

Q2 2006 CORPORATE HIGHLIGHTS

- Achieved our fifth consecutive quarterly increase in average production, with 1,016 boe/d average production for the quarter.

- Achieved continued success with the drill bit by drilling and completing the initial 2 wells (1.5 net) of a 13 well development drilling program, resulting in 2 (1.5 net) producing light oil wells (with associated solution gas) for a 100% drilling success rate.

- Increased and re-focused our capital program, targeting high netback light oil development locations in the Bakken at Viewfield and a mixture of exploration and development locations in the Granite Wash and Slave Point at Red Earth.

- Increased the Company's operating netback by 10% to $37.20/boe from $33.67/boe in the first quarter of 2006.

- Reduced operating expenses by 22% to $7.73/boe from $9.86/boe in the first quarter of 2006.

- Corporate royalty rate dropped to 13% from 16% in the first quarter of 2006.

- Negotiated an increase in the Company's credit facility from $19 million to $28 million.

Subsequent to June 30, 2006, the Company achieved the following:

- Signed an agreement to acquire, by way of a Plan of Arrangement, Valiant Energy Inc. Valiant's properties consist of high quality, long life oil and natural gas pools with high operatorship (greater than 85%) and more than 60 infill drilling locations. The transaction is set to close on or about September 15, 2006.

- With current production of about 1,300 boe/d, comprised of approximately 55% light oil and 45% natural gas. The Company is confident it will meet or exceed its 2006 exit production guidance of 2,600 boe/d (including the Valiant acquisition).

- Continued its light oil Bakken development drilling program in Viewfield, drilling an additional 2 (2 net) light oil (and associated solution gas) wells for a 100% success rate. The Company has reduced its average time from spud to on-production to 25 days.

- Drilled and cased for completion an exploratory Granite Wash well at Red Earth.

- Completed a bought deal private placement of 1,950,000 Class 'A' flow-through shares at a price of $4.20 per share for gross proceeds of $8,190,000.



FINANCIAL AND OPERATIONAL HIGHLIGHTS

Three months ended Six months ended
June 30, 2006 March 31, 2006 June 30, 2006
------------------------------------------------------------------------
Financial
($, except share data)

Petroleum and natural
gas revenue 5,067,890 4,765,340 9,833,230

Cash flow from
operations (1) 2,852,540 2,706,904 5,559,444
Per share - basic 0.11 0.11 0.22
Per share - diluted 0.11 0.11 0.21

Net income (2) 2,847,947 105,874 2,953,821
Per share - basic 0.11 0.00 0.11
Per share - diluted 0.11 0.00 0.11

Net debt and working
capital (17,748,707) (15,423,300) (17,748,707)

Capital expenditures 5,199,321 15,246,847 20,446,168

Shares outstanding
Class A 23,018,572 23,018,572 23,018,572
Class B 855,000 855,000 855,000
Options 1,607,667 1,398,167 1,607,667

Weighted average
shares outstanding
Class A 23,018,572 22,989,924 23,004,327
Class B 855,000 855,000 855,000
Conversion of Class B
shares (3) 1,957,500 1,389,095 1,957,500
------------------------------------------------------------------------
Weighted average basic
shares outstanding 25,831,072 25,234,019 25,816,827
Stock option dilution
(treasury method) 238,695 534,846 262,280
------------------------------------------------------------------------
Weighted average diluted
shares outstanding 26,069,767 25,768,865 26,079,107

Operating (units as noted)

Production
Crude oil (bbl/d) 373 381 377
Natural gas (mcf/d) 3,283 3,049 3,167
Natural gas liquids (bbl/d) 96 87 91
Barrels of oil equivalent
(6:1) (boe/d) 1,016 976 996

Exit rate (end of period)
(boe/d) 1,200 1,025 1,200

Average prices
Crude oil ($/bbl) 77.62 60.07 68.80
Natural gas ($/mcf) 6.07 8.02 7.01
Natural gas liquids ($/bbl) 70.33 64.96 68.00
Barrels of oil equivalent
(6:1) ($/boe) 54.81 54.28 54.55

Operating netback per boe ($)
Petroleum and natural gas
revenue 54.81 54.28 54.55
Royalties (7.42) (8.34) (7.86)
Operating expenses (7.73) (9.86) (8.77)
Transportation expenses (2.46) (2.41) (2.44)
------------------------------------------------------------------------
Operating netback 37.20 33.67 35.48

Wells drilled
Gross 2 15 17
Net 1.5 9.4 10.9
Net success rate (percent) 100 88 90


(1) Management uses cash flow from operations (before changes in non-
cash working capital) to analyze operating performance and leverage.
Cash flow from operations as presented does not have any
standardized meaning prescribed by Canadian GAAP and therefore it
may not be comparable with the calculation of similar measures for
other entities.

(2) The three and six month periods ended June 30, 2006 include a non-
cash future income tax recovery of $2,648,195 and $2,453,487,
respectively.

(3) To calculate weighted average basic shares outstanding, the Class B
shares were converted at the Class A share price for the final 30
days of the period ended June 30, 2006 of $3.04 (period ended March
31, 2006 - $3.81) and added to the Class A shares.


OPERATIONS OVERVIEW

In the second quarter of 2006, Peerless continued to execute its business plan to build a balanced foundation for growth. Taking advantage of the relative strength of light oil, Peerless initiated multi-well drilling programs in its light oil core areas of Viewfield, Saskatchewan and Red Earth, Alberta. These programs continued throughout the third quarter of 2006.

Following spring break up, Peerless drilled two development wells in the second quarter, resulting in 2 (1.5 net) producing oil wells for a success rate of 100%. The drilling activity consisted of a Bakken horizontal well at Viewfield, Saskatchewan, and a Slave Point and Granite Wash test well at Red Earth, Alberta.

Each of the Company's operating areas is characterized by a mix of low-risk development opportunities, medium risk exploitation opportunities, and exploration locations, all within a well developed and accessible producing infrastructure.

Core Area Review

Viewfield, Saskatchewan

In the Viewfield area, Peerless successfully drilled 1 (1 net) tri-lateral Bakken horizontal well that came on production on the last day of the quarter at 150 bbl/d of clean oil with associated natural gas. This well was a follow-up to similar Bakken horizontal wells drilled in the first quarter of 2006, and was part of the Company's ongoing multi-well drilling program. Peerless has budgeted to drill an additional 7 (6.5 net) tri-lateral Bakken horizontals through the remainder of 2006.

Peerless has now assimilated 13.1 (11.9 net) sections of land in the Bakken play, leading to 103 (94.3 net) low risk horizontal drilling locations and exposure to 7.5 mmboe of reserves (proved plus probable). All of Peerless' land is situated within what has been defined through industry drilling activity as the "sweet spot" of the Bakken prospective fairway. Overall, reservoir quality as been excellent and the Company's drilling activity is focused where natural reservoir permeability is sufficient to sustain very economic flow rates without requiring fracture stimulations. Furthermore, Peerless owns and operates all production facilities and infrastructure which allows for rapid and cost-effective tie-in, including gas conservation.

In addition to the Bakken activity, Peerless plans on drilling 2 (1.5 net) Mississippian horizontal wells targeting light oil in the Viewfield and Steelman areas before the end of 2006.

Red Earth, Alberta

At Red Earth, Peerless drilled 1 (0.5 net) well in the second quarter, resulting in a Granite Wash oil well that came onto production subsequent to quarter-end. The well was drilled as a follow-up to a prolific Granite Wash producing oil well that Peerless drilled in late 2005. Early production rates are encouraging, at about 250 bbl/d (113 bbl/d net) of clean, 42 degrees API sweet oil. The well was the first of a multi-well drilling program undertaken by Peerless and its joint interest partner.

During the remainder of 2006, Peerless expects to drill between 4 and 6 (gross) additional wells targeting Granite Wash and Slave Point targets. The program will be a mixture of exploration and low risk development locations off-setting earlier successes. Peerless continues to work closely with its joint interest partner and together have identified more than 25 potential locations on the Company's extensive 3-D seismic database.

Silver, British Columbia

Owing to limited accessibility and relatively weak natural gas prices, activity in the second quarter was minimal at Peerless' Silver property. The Company has 200-250 boe/d behind pipe from a 7 (4.8 net) well first quarter drilling program. Peerless is now putting together tie-in programs and arranging services to get the wells on production by late 2006 or early 2007.

In addition, Peerless plans on drilling two more (gross) wells at Silver through the remainder of the year for Bluesky and Halfway targets.

OUTLOOK

The current business environment for the oil and gas sector remains attractive. Although the price for natural gas is expected to be soft in the short term, longer term prices are expected to be strong. Relatively low interest rates, high demand for energy and reasonable access to capital markets provide for a strong business environment in the oil and gas sector. This strong environment also creates challenges with respect to cost pressures and availability of equipment.

In the third and fourth quarters of 2006, Peerless plans to integrate the Valiant assets, by focusing on its low risk development opportunities and prioritizing its large exploration drilling inventory. Peerless' capital budget calls for the drilling of an additional 11 (7.8 net) wells for the balance of 2006, targeting primarily light oil. In total for 2006, the Company expects to drill 31 (20.4 net) wells in its three project areas targeting high quality, long life sweet natural gas and light oil.

Peerless aims to be a top quartile performer among the junior oil and gas sector in growth of reserves, production and cash flow per share. In 2006, with a focused corporate strategy, Peerless continues to build upon its strong asset base developed in 2005. Our high quality oil and natural gas assets and considerable undeveloped land holdings offer significant opportunities to increase production through infill drilling, production optimization and exploration drilling.

Peerless will continue to seek out new opportunities and assets that fit within the Company's business model through proactive management. Peerless has assembled a high quality asset base while protecting its balance sheet - a balanced foundation for growth.

As referred to above, to view Peerless' unaudited interim financial statements and accompanying MD&A, please visit www.peerlessenergyinc.com or www.sedar.com.

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.

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