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

Peerless Energy Inc.

November 17, 2005 09:00 ET

Peerless Energy Inc. Announces Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 17, 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 third quarter of 2005.

REPORT TO SHAREHOLDERS

Peerless Energy Inc. ("Peerless" or the "Company") (TSX Venture: PRY.A and PRY.B) is pleased to announce its unaudited financial and operating results for the period ended September 30, 2005. During its first full quarter of operations, the Company accomplished significant achievements that have transformed Peerless into an emerging oil and gas exploration and production company.

Q3 2005 CORPORATE HIGHLIGHTS

- On August 26, 2005, Peerless closed the acquisition ($10.6 million) of a private Saskatchewan-based company with the primary asset being an operated 75% working interest in long life light oil reserves in its southeast Saskatchewan project area with daily production of 215 boepd.

- On September 7, 2005, the Company closed a bought deal equity offering of $10.05 million.

- Acquired approximately 1,800 acres of Crown land in the Company's Bakken project area.

- Identified, evaluated and negotiated two acquisitions ($48 million) providing high netback, long life, operated, liquids-rich natural gas assets in the Company's project area of northeast British Columbia, with 2.65 million boe (6:1) of proved plus probable reserves and daily production of 725 boepd. These acquisitions subsequently closed in early November 2005.

- On September 29, 2005, the Company arranged an equity offering for gross proceeds of $41.07 million which subsequently closed on November 9, 2005.

- Established a revolving loan credit facility with a major Canadian chartered bank that has subsequently been increased to $19 million.

As a result of these activities, management has positioned the Company with high quality, operated, long life natural gas and light oil reserves, production and a cash flow base in northeast British Columbia and southeast Saskatchewan. Peerless now has more than 40 net operated, drillable locations on its lands for long life, natural gas and light oil reserves which positions the Company for growth in 2006 and beyond.



HIGHLIGHTS
------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30, 2005 Sept. 30, 2005
------------------------------------------------------------------------

Financial ($, except share data)

Petroleum and natural gas revenues 454,397 454,397

Cash flow from (used in)
operations (1) 113,206 (107,407)
Per share - basic 0.01 (0.02)
Per share - diluted 0.01 (0.02)

Net loss (72,082) (300,086)
Per share - basic (0.01) (0.05)
Per share - diluted (0.01) (0.05)

Net debt and working capital 6,689,713 6,689,713

Capital expenditures 10,785,582 10,900,466

Shares outstanding
Class A 11,200,001 11,200,001
Class B 855,000 855,000
Options 948,000 948,000

Weighted average shares outstanding
Class A 8,982,610 5,430,330
Class B 855,000 419,671
Conversion of Class B shares (2) 855,000 419,671
--------------------------------
Total weighted average
shares outstanding 10,692,610 6,269,672
Stock option dilution
(treasury method) 768,701 364,849
--------------------------------
Weighted average diluted
shares outstanding 11,461,311 6,634,521
------------------------------------------------------------------------

Operating (units as noted)

Production
Crude oil and NGLs (bbls/d) 75 25
Natural gas (mcf/d) - -
--------------------------------
Barrels of oil equivalent
(6:1) (boe/d) 75 25
Average prices
Crude oil and NGLs ($/bbl) 65.57 65.57
Natural gas ($/mcf) - -
--------------------------------
Barrels of oil equivalent
(6:1) ($/boe) 65.57 65.57
Operating netback per boe ($)
Petroleum and natural gas sales 65.57 65.57
Royalties 12.06 12.06
Operating expenses 7.90 7.90
--------------------------------
Operating netback 45.61 45.61
Wells drilled
Gross - -
Net - -
Success rate (percent) - -
------------------------------------------------------------------------
------------------------------------------------------------------------

(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) For the period ended September 30, 2005, the Class B shares are
converted at the quarter-end Class A share price of $5.00 and added
to the Class A shares to calculate basic shares outstanding.


OPERATIONAL REVIEW

In its first full quarter of operations, Peerless aggressively implemented its business plan of assembling a high quality, long life reserve, production and cash flow base in its core areas of northeast British Columbia and southeast Saskatchewan.

- On August 26, 2005, Peerless closed the acquisition ($10.5 million) of an operated 215 boepd light oil property and associated reserves in Viewfield, Saskatchewan.

- In early November 2005, Peerless closed two acquisitions ($48 million) of an operated 725 boepd on long life, liquids-rich gas property and associated reserves in the Silver area of northeast British Columbia.

Each of these respective acquisitions is accretive on a reserve, production and cash flow per share basis. In addition, each of these long life properties has multiple development and exploitation drilling locations associated with them. They provide Peerless with an inventory of lower risk growth opportunities for 2006 and beyond.

Management's business strategy also involves the internal generation of multi-zone natural gas and light oil exploration prospects in the Peace River Arch and northeast British Columbia using our strong in-house technical expertise in these geographic areas. Peerless will use the internal cash flows from its low decline asset and production base to fund this high impact exploration program.

In the second quarter of 2005, Peerless negotiated and executed a 165 net section (105,000 net acres) natural gas and light oil farmin in the Red Earth area of Alberta. The farmin comes with access to 500 square kilometers of 3D seismic and 2,400 kilometers of 2D seismic. The first well on this asset is set to spud in the fourth quarter of 2005. An additional 7 gross (5.25 net) drilling locations in the first quarter of 2006 will be drilled on this asset base targeting light 42 degrees API oil and sweet natural gas.

In November 2005, Peerless negotiated and executed a high impact, multi-section farmin agreement. The prospect is located in northeast British Columbia, and targets a proven carbonate reservoir capable of significant sweet gas deliverability. A location immediately offsetting a raw gas pipeline has been identified by geology and 3D seismic, and will be drilled in the first quarter of 2006.

At the Company's operated natural gas property at Silver, British Columbia, 6 gross (4 net) Bluesky development drilling locations are planned for the first quarter of 2006. The Company sees an additional 15 gross (10 net) low risk development drilling locations at Silver for operated long life natural gas reserves.

Further exploration opportunities with natural gas potential have been identified in the Triassic aged formations on the Company's undeveloped land base and are currently being evaluated.

At the Company's operated property at Viewfield, Saskatchewan, the Company plans on drilling up to 3 wells in the first quarter of 2006 targeting the Frobisher formations and one horizontal Bakken well. Up to an additional 6 wells targeting the Frobisher and Bakken formations are planned for the third and fourth quarter of 2006.

OUTLOOK

In just a few months of operations, Peerless has established a long life reserve, production and cash flow base, an excellent inventory of low risk development drilling opportunities and two emerging high impact exploration plays. The Company also has an excellent balance sheet to seek out additional growth opportunities.

Today, Peerless can be characterized as having the following attributes:

- a high quality, low decline, light oil and sweet natural gas asset and opportunity base;

- operations strategically focused in three properties that are characterized by:

- large oil or gas in-place reservoirs

- operatorship

- high working interests

- low declines

- high netbacks

- 3.04 million boe of proven plus probable reserves (as evaluated by independent engineers), providing for a reserve life index of over 9 years;

- an inventory of more than 40 development and exploitation drilling locations on Company lands;

- a revolving term loan credit facility that has now been increased to $19 million;

- a suite of high impact, sweet natural gas and light oil exploration prospects in northeast British Columbia and the Peace River Arch region of Alberta.

The Company expects its 2005 exit rate to be approximately 900 - 950 boepd (65% natural gas; 35% oil) and its 2006 exit rate is estimated to be 1,400 - 1,450 boepd.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis ("MD&A") should be read in conjunction with the September 30, 2005 interim consolidated financial statements and notes thereto, and the June 30, 2005 interim financial statements and notes thereto for a full understanding of the financial position and results of operations of Peerless Energy Inc. ("Peerless" or the "Company"). All amounts are expressed in Canadian dollars.

Certain information in this document constitute forward-looking statements under applicable securities laws. Such statements are based on assumptions of future events and actual results could vary from these assumptions. Events or circumstances may cause actual results to differ materially from those predicted as a result of numerous known and unknown risks, uncertainties and other factors, many of which are beyond the control of the Company, and as such readers are cautioned not to place undue reliance on these forward-looking statements.

The terms "cash flow from operations" and "cash flow from operations per share" are not recognized measures under Canadian Generally Accepted Accounting Principles ("GAAP"). As such, Peerless' method of calculating cash flow from operations may differ from other companies and accordingly it may not be comparable to measures used by other companies. Readers are cautioned that this measure should not be construed as an alternative to net earnings as calculated under GAAP as an indication of Peerless' performance. The statements of cash flow in the financial statements present the reconciliation between net earnings and cash flow from operations. Peerless defines cash flow from operations as cash flow from operating activities before changes in non-cash working capital. Cash flow from operations is calculated using the weighted-average basic and diluted shares used in calculated earnings per share.

Petroleum and natural gas volumes are converted to an equivalent measurement basis referred to as a "barrel of oil equivalent" ("boe") on the basis of 6 thousand cubic feet of natural gas equal to 1 barrel of oil. This conversion is based on an energy equivalency conversion method applicable at the burner tip and does not represent a value equivalency at the wellhead. Readers are cautioned that boe figures may be misleading, particularly if used in isolation.

Peerless' Board of Directors and Audit Committee have reviewed and approved the September 30, 2005 interim consolidated financial statements and related MD&A. This MD&A is dated as of November 15, 2005.

RESULTS OF OPERATIONS

The Company had producing properties for the final 30 days of the third quarter of 2005, thus marking it the first quarter of operations and the Company's initial period of revenue and expense generation. As such there are no comparative figures in the discussion of operations.

Production

Peerless' production grew from 0 to 75 boed during the third quarter as a result of the Acquisition, and averaged 25 boed for the nine month period. The production consists of 100% oil.

Realized Prices

Peerless' realized price for oil was $65.57 per barrel of oil (the Company had no natural gas production). All of the Company's production was marketed by a third party marketer and no commodity hedges were entered into during the quarter or subsequent to quarter-end.

Revenue

Revenues for the third quarter were $454,397, consisting of oil revenue and a nominal amount of processing revenue. This represents the first quarter of revenues for the Company.

Royalties

Royalty expense in the third quarter was $83,550, or 18% of revenue. Royalties consist of the following:



------------------------------------------------------------------------
Three months ended Nine months ended
Royalty expense September 30, 2005 September 30, 2005
------------------------------------------------------------------------
Crown $20,633 $20,633
Freehold production tax 21,246 21,246
Freehold 41,361 41,361
Gross overriding 310 310
------------------------------------------------------------------------
Total $83,550 $83,550
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating Expenses

Operating expenses in the third quarter were $49,463 or $7.14 per boe, and transportation expenses were $5,291 or $0.76 per boe.

Netbacks

Peerless realized an operating netback of $45.61 for the three and nine months ended September 30, 2005:



------------------------------------------------------------------------
Corporate average netbacks Three months ended Nine months ended
($/boe, except production) September 30, 2005 September 30, 2005
------------------------------------------------------------------------
Production for the period 6,930 6,930
Revenue $65.57 $ 65.57
Royalties 12.06 12.06
Operating costs (including
transportation) 7.90 7.90
------------------------------------------------------------------------
Operating netback $45.61 $ 45.61
Interest expense 0.82 0.82
General & administrative
expenses 26.10 57.93
------------------------------------------------------------------------
Corporate netback $18.69 $(13.14)
------------------------------------------------------------------------
------------------------------------------------------------------------


General and Administrative Expenses

General and administrative expenses increased 74% from $104,231 in the second quarter to $180,866 (after capitalized amounts of $84,489) in the third quarter resulting from an increase in salaried employees and consultants commensurate with the Company's increase in activity. There was also an increase in legal and regulatory fees resulting from the Company's financing and acquisition activities. Year-to-date general and administrative expenses were $401,479.

Interest Expense

Interest expense of $5,663 recorded in the third quarter was incurred on the Company's newly acquired credit facilities, which were used to finance a portion of the Company's corporate acquisition. The credit facilities were temporarily drawn on and the Company had positive debt and working capital at the end of the quarter.

Stock-Based Compensation

Peerless recorded stock-based compensation expense of $8,759 in the third quarter of 2005, calculated using the Black-Scholes option-pricing model. This is an increase of $6,920 over the $1,839 recorded in the second quarter of 2005 as a result of additional stock options granted in the third quarter with a higher fair value per option granted. The Company granted a total of 948,000 options in the nine months ended September 30, 2005 at a weighted-average fair value of $0.24 per option and recorded total stock-based compensation expense of $10,598. The following assumptions were used to calculate stock-based compensation: zero dividend yield; expected volatility of 34 - 38 percent; risk-free rate of 3.9 percent; and expected life of five years. The remaining expense of $224,772 calculated under the model will be expensed through future earnings over the vesting period of the options.

Depletion, Depreciation and Accretion

Depletion and depreciation are calculated based upon capital expenditures, production rates and proved reserves. Peerless recorded $208,700 or $30.11 per boe in depletion and depreciation expense for the third quarter of 2005 based on production volumes of 6,930 boe. The Company excluded from its depletion and depreciation calculation, unproved properties of $2,194,000.

The increase in depletion and deprecation from the second quarter provision of $5,552 (which was recorded on office-related assets only) is a result of the Company's newly acquired producing properties. The Company believes that with its drilling and exploitation program that the total proved reserves will increase thereby decreasing the accounting depletion rate on a go forward basis.

Peerless uses the asset retirement obligation method to record the present value of estimated clean-up and restoration costs for its well sites, pipelines and facilities. 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. Peerless recorded accretion expense for the first time in the third quarter of 2005 resulting from newly acquired petroleum assets. Peerless recorded $3,386 of accretion expense in the third quarter of 2005 (and year-to-date), with a $536,880 associated liability recognized on the balance sheet.

Income and Other Taxes

The Company recorded a future income tax liability of $1,868,076 at September 30, 2005 on temporary differences between the book value of the Company's property and equipment and the related tax pools. The Company incurred no current taxes due to the period's loss, and recorded a future income tax recovery due mainly to the future tax benefit of unused share issue costs. The Company incurred capital tax, a non-earnings based tax, of $16,358 in the period ended September 30, 2005.

Net Earnings and Cash Flow

The nine months of operations ended September 30, 2005 reflect Peerless' initial stage of operations. The Company recorded a net loss of $72,082 or $0.01 per basic and diluted share during the quarter, and a net loss of $300,086 or $0.05 per basic and diluted share for the year-to-date.

Capital Expenditures

Capital expenditures in the third quarter of 2005 consisted primarily of the $8,660,272 acquisition on August 26, 2005 (refer to note 2 of the Company's interim financial statements) and further land acquisitions in Saskatchewan.



------------------------------------------------------------------------
Three months ended Nine months ended
Capital expenditures September 30, 2005 September 30, 2005
------------------------------------------------------------------------
Land and lease 1,954,554 1,958,406
Geological and seismic 15,690 15,690
Drilling and completions 1,370 1,370
Equipment and facilities 786 786
Acquisition 8,660,272 8,660,272
Office/corporate 152,910 263,942
------------------------------------------------------------------------
Total 10,785,582 10,900,466
------------------------------------------------------------------------
------------------------------------------------------------------------


Peerless is committed to fulfill the flow-through obligations pursuant to its public offering of shares in the second quarter of 2005. Under the flow-through share agreements, Peerless is obligated to incur and renounce, for income tax purposes, $9,500,000 of qualifying exploration and development expenditures to holders of its Class A and Class B shares by December 31, 2005. At September 30, 2005, the obligation was $9,484,310.

Liquidity and Capital Resources

At September 30, 2005, Peerless had positive working capital of $6,689,713. During the quarter, Peerless negotiated a revolving loan facility in the amount of $1 million with a Canadian chartered bank. The interest rate is the bank's prime lending rate plus 0.25% with interest payable monthly. No amounts were outstanding under the facility at September 30, 2005.

In conjunction with the Company's property acquisition on November 9, 2005, the facility was increased to $19 million. The loan facility will allow the Company to continue its capital program and pursue acquisition opportunities as they arise.

On September 7, 2005, the Company closed a private placement of 3,000,000 Class A shares at $3.35 per share for gross proceeds of $10,050,000. The shares are subject to a hold period of four months from closing. Proceeds of the private placement were used to fund the Company's corporate acquisition in the quarter. After giving effect to the private placement, the Company had 11,200,001 Class A and 855,000 Class B shares outstanding at September 30, 2005.

On October 31, 2005, the Corporation purchased all of the shares of a private Alberta oil & gas company ("Private Co") in a non-arms length transaction for $2.5 million. Certain officers, directors and employees of the Corporation had a 57% combined interest in Private Co. As consideration, the Corporation issued 595,238 of its Class A shares and paid $300,000 cash to the shareholders of Private Co.

On November 9, 2005, the Company completed a private placement of 9,800,000 Class A shares at $3.70 per share for gross proceeds of $36,260,000. The shares are also subject to a hold period of four months from closing. Proceeds of the private placement were used to fund the Company's property acquisition which it closed subsequent to quarter-end on November 9, 2005. After giving effect to the Private Co acquisition and the subsequent financing, the Company has 21,595,239 Class A and 855,000 Class B shares outstanding.

The Company intends to finance continued oil and gas operations through a combination of cash flow, equity financings and bank debt.

Commitments

In the normal course of operations, Peerless has entered into a Farmin Agreement with Storm Exploration Inc. ("Storm"). As a minimum, the Company has committed to drill eight wells on Farmout Lands on or before December 31, 2005, subject to drilling rig availability. For each well drilled, the Company 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. The Company has not incurred any costs under this commitment date, and due to equipment delays, the Company does not expect to incur costs until early 2006.

On March 1, 2005, the Company signed a Participation Agreement with StarPoint Energy Trust. No consideration was paid and no amounts have been recorded in the financial statements.

Peerless leases its office space under an operating lease until April 30, 2006. The minimum monthly lease payment is $12,815.

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

Risk Factors

Risk factors can be found in the Company's Prospectus dated May 11, 2005 under the heading "Risk Factors."

CRITICAL ACCOUNTING ESTIMATES

Oil and Gas Reserves Determination

The process of estimating reserves is complex. It requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. Reserve estimates are based on current production forecasts, prices and economic conditions. These estimates may change substantially as additional data from ongoing development and production activities becomes available and as economic conditions impact oil and gas prices and costs. The Company's properties are evaluated by independent petroleum engineering consultants.

Depletion Expense

The Company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development activities are capitalized whether successful or not. The aggregate of net capitalized costs (less costs of unproved properties) and estimated future development costs (less estimated salvage values) is amortized using the unit-of-production method based on estimated proved oil and gas reserves. An increase in estimated proved oil and gas reserves would result in a corresponding reduction in depletion and depreciation expense. A decrease in estimated future development costs would result in a corresponding reduction in depletion and depreciation expense.

Impairment of Petroleum and Natural Gas Assets

The Company is required to review the carrying value of all petroleum and natural gas assets for potential impairment. Impairment is indicated if the carrying amount of the oil and gas property and equipment is not recoverable by the future undiscounted cash flows. If impairment is indicated, the amount by which the carrying value exceeds the estimated fair value of the property and equipment is charged to earnings. The assessment of impairment is dependent on estimates of reserves, production rates, prices, future costs and other relevant assumptions.

Asset Retirement Obligations

The Company is required to provide for future removal and restoration costs. The Company must estimate these costs in accordance with existing laws, contracts or other policies. The fair value of the liability for the Company's asset retirement obligations is recorded in the period in which it is expected to be incurred, discounted to its present value using the Company's risk-adjusted interest rate and expected inflation rate. The offset to the liability is recorded in the carrying amount of property and equipment. 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 could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded.

Income Tax Accounting

The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.

Changes In Accounting Policies

The Company has adopted CICA Handbook Section 3062, Goodwill and Other Intangibles, in the third quarter of 2005. Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the fair value for accounting purposes of its net identifiable assets and liabilities. The goodwill balance is assessed for impairment annually at year-end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. To test impairment, the fair value of the reporting entity is compared with its carrying amount. If any potential impairment is indicated, it is quantified by comparing the carrying value of goodwill to its fair value, based on the fair value of the assets and liabilities of the reporting entity. Impairment, if any, is charged to income in the period in which it occurs.



PEERLESS ENERGY INC.
Consolidated Balance Sheets

September 30, 2005 December 31, 2004
------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalent $ 7,230,145 $ 1
Accounts receivable 601,029 -
Prepaid expenses and deposits 55,229 -
-----------------------------------------------------------------------
7,886,403 1

Property and equipment (note 3) 10,686,214 -
Goodwill (note 2) 4,527,992 -
------------------------------------------------------------------------
$ 23,100,609 $ 1
------------------------------------------------------------------------
------------------------------------------------------------------------


Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued
liabilities $ 1,196,690 $ 1
-----------------------------------------------------------------------
1,196,690 -

Asset retirement obligations (note 5) 536,880 -

Future income taxes (note 6) 1,868,076 -

Shareholders' equity:
Share capital (note 7) 19,788,451 1
Contributed surplus (note 7) 10,598 -
Deficit (300,086) -
-----------------------------------------------------------------------
19,498,963 1

------------------------------------------------------------------------
$ 23,100,609 $ 1
------------------------------------------------------------------------
------------------------------------------------------------------------

Commitments (note 8)
Subsequent events (note 10)

See accompanying notes to financial statements.




PEERLESS ENERGY INC.
Consolidated Statements of Operations and Deficit

Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue
Oil and gas sales $ 454,397 $ 454,397
Royalties (83,550) (83,550)
-----------------------------------------------------------------------
370,847 370,847
Expenses
Operating 49,463 49,463
Transportation 5,291 5,291
General and administrative (note 3) 180,866 401,479
Interest 5,663 5,663
Stock-based compensation (note 7) 8,759 10,598
Depletion, depreciation and accretion 212,086 217,638
Capital taxes 16,358 16,358
-----------------------------------------------------------------------
478,486 706,490

------------------------------------------------------------------------
Loss before income taxes (107,639) (335,643)

Future income tax recovery (note 6) 35,557 35,557

------------------------------------------------------------------------
Net loss (72,082) (300,086)

Deficit, beginning of period (228,004) -

------------------------------------------------------------------------
Deficit, end of period $ (300,086) $ (300,086)
------------------------------------------------------------------------
------------------------------------------------------------------------

Loss per share (note 7)
Basic $ (0.01) $ (0.05)
Diluted $ (0.01) $ (0.05)
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.




PEERLESS ENERGY INC.
Consolidated Statements of Cash Flows

Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)
Cash provided by (used in):

Operating:
Net loss $ (72,082) $ (300,086)
Items not involving cash
Depletion, depreciation and accretion 212,086 217,638
Stock-based compensation 8,759 10,598
Future income tax recovery (35,557) (35,557)
-----------------------------------------------------------------------
113,206 (107,407)
Change in non-cash working capital 341,476 333,341
-----------------------------------------------------------------------
454,682 225,934

Financing:
Issue of common shares,
net of issue costs 9,399,942 19,205,173
Change in non-cash working capital 23,213 61,247
-----------------------------------------------------------------------
9,423,155 19,266,420

Investing:
Additions to property and equipment (2,125,310) (2,240,194)
Business acquisition (note 2) (10,606,402) (10,606,402)
Change in non-cash working capital 580,919 584,386
-----------------------------------------------------------------------
(12,150,793) (12,262,210)

------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (2,272,956) 7,230,144

Cash and cash equivalents,
beginning of period 9,503,101 1

------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 7,230,145 $ 7,230,145
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash interest paid $ 5,663 $ 5,663
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash taxes paid $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements.


PEERLESS ENERGY INC.
Notes to Financial Statements
For the three and nine months ended September 30, 2005 (unaudited)


Incorporation

On November 26, 2004, 1139999 Alberta Ltd. was incorporated under the laws of the Province of Alberta. The name was changed to Peerless Energy Inc. (the "Corporation") on January 14, 2005. The Corporation is engaged in the acquisition of, exploration for and development of crude oil and natural gas in Western Canada, and commenced active operations with the purchase of certain oil and gas properties and equipment on August 26, 2005.

1. Significant accounting policies

(a) Basis of presentation

The preparation of the consolidated financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary. All inter-company transactions and balances have been eliminated.

(b) Oil and gas operations

(i) Capitalization of costs:

The Corporation follows the full cost method of accounting for petroleum and natural gas operations whereby all costs associated with the exploration for, and acquisition and development of oil and gas properties are capitalized in one Canadian cost center. Such costs include expenditures relating to land acquisition, geological and geophysical activities, carrying charges on non-producing properties, drilling both productive and non-productive wells, installation of production equipment, construction of processing facilities and overhead related to exploration and development activities.

Proceeds received on the disposition of oil and gas properties are credited against property and equipment except when the disposition results in a change in the depletion rate of 20% or more, in which case a gain or loss is recognized.

(ii) Depletion and depreciation:

Capitalized costs, excluding costs relating to unproven properties and salvage values, are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves before royalties as determined by independent engineers after conversion to units of common measure based on relative energy content.

Office equipment is depreciated on a declining balance basis at 20% per annum.

(iii) Ceiling test:

In applying the full cost method, the Corporation calculates a cost center impairment test to ensure the total capitalized costs less accumulated depletion and depreciation are limited to a "ceiling" amount as described below.

The ceiling amount for a cost center is based on the undiscounted future cash flows from proved reserves using management's best estimate of forward indexed prices and the lower of cost and market of undeveloped land. If the costs are determined to be not fully recoverable, they are written down to fair value. Fair value is estimated as the present value of expected future cash flows from proved and probable reserves, discounted at a risk-free rate, and the lower of cost and market of undeveloped land.

(c) Asset retirement obligations

The Corporation records the fair value of an asset retirement obligation ("ARO") as a liability in the period in which it incurs a legal obligation associated with the retirement of long-lived assets that result from the acquisition, construction and development of the assets. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depleted and depreciated using a unit of production method over estimated proved reserves. The recorded ARO increases over time for changes in the fair value of the liability through accretion charges to earnings. Revisions to the estimated amount or timing of the obligations are reflected as increases or decreases to the ARO. Actual asset retirement expenditures are charged to the ARO to the extent of the recorded liability with any difference recorded as a gain or loss in the period in which settlement occurs.

(d) Joint operations

A portion of the Corporation's exploration and development activities are conducted jointly with others. Accordingly, the financial statements reflect only the Corporation's proportionate interest in such activities.

(e) Flow-through common shares

The Corporation has financed a portion of its exploration and development activities through the issue of flow-through common shares. Under the terms of the flow-through shares, the income tax attributes of the related expenditure are renounced to the subscribers. To recognize the foregone tax benefits to the Corporation, the flow-through shares issued are recorded net of the tax benefits when renounced to the subscribers.

(f) Income taxes

The Corporation uses the asset and liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded against any future income tax assets if it is more likely than not that the asset will not be realized.

The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the date of substantive enactment.

(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 the 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.

(h) 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 by adjusting the weighted average number of shares for the dilutive effect of options, using on the treasury stock method. Under this method, the dilutive 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.

(i) Derivative instruments

The Corporation may enter into derivative instrument contracts to manage its exposure related to oil and gas prices. The Corporation does not enter into derivative instrument contracts for trading or speculative purposes.

(j) Cash and cash equivalents

Cash and cash equivalents consist of cash and term deposits with a maturity date of three months or less.

(k) Revenue recognition

Revenues associated with the sale of crude oil and natural gas are transferred when title passes to the purchaser.

(l) Goodwill

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the fair value for accounting purposes of its net identifiable assets and liabilities. The goodwill balance is assessed for impairment annually at year-end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. To test impairment, the fair value of the reporting entity is compared with its carrying amount. If any potential impairment is indicated, it is quantified by comparing the carrying value of goodwill to its fair value, based on the fair value of the assets and liabilities of the reporting entity. Impairment, if any, is charged to income in the period in which it occurs.

2. Business acquisition

On August 26, 2005, the Corporation acquired all of the issued and outstanding shares of a private oil company operating in Saskatchewan. As consideration, the Corporation paid cash of $10,606,402. The transaction was measured at the exchange value and accounted for using the purchase method. The operating results were included in the accounts of the Corporation from August 26, 2005. The purchase price was allocated as follows:



Net assets acquired:
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Working capital $ 438,542
Petroleum and natural gas properties and equipment 8,660,272
Asset retirement obligations (533,494)
Future income tax liability (2,486,910)
Goodwill 4,527,992
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$ 10,606,402
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Consideration:
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Cash consideration $ 10,525,788
Transaction costs 80,614
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$ 10,606,402
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3. Property and equipment

---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated
depletion and Net book
September 30, 2005 Cost depreciation value
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Petroleum and natural gas
properties and equipment $ 10,777,155 $ 202,800 $ 10,574,355
Office equipment 123,311 11,452 111,859
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$ 10,900,466 $ 214,252 $ 10,686,214
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During the three months ended September 30, 2005, the Corporation capitalized approximately $84,500 (nine months ended - $84,500) of administrative costs relating to exploration and development activities.

At September 30, 2005, the cost of unproved properties of approximately $2,194,000 and salvage values of approximately $15,000 have been excluded from oil and gas properties for the purposes of calculating depletion and future development costs totaling $434,000 were included in the depletion calculation.

4. Bank debt

The Corporation has established credit facilities with a chartered bank consisting of a $1,000,000 revolving operating loan. The loan is secured by a $50,000,000 demand debenture secured by a first floating charge over the assets of the Corporation. The loan is due on demand and is scheduled to be reviewed in May 2006. The interest rate is the bank's prime lending rate plus 0.25% with interest payable monthly. The loan was undrawn at September 30, 2005.

5. Asset retirement obligations

The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $869,700 which will be incurred between 2007 and 2020. The majority of the costs will be incurred between 2007 and 2012. A credit-adjusted risk-free rate of 7% per annum and an inflation rate of 1.5% per annum were used to calculate the fair value of the asset retirement obligations.

A reconciliation of the asset retirement obligations is provided below:



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

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Asset retirement obligations, December 31, 2004 $ -
Liabilities incurred on acquisition 533,494
Accretion expense 3,386

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Asset retirement obligations, September 30, 2005 $ 536,880
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6. Income taxes

The major components of the net future income tax liability are as
follows:

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September 30, 2005 December 31, 2004
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Future income tax liabilities:
Property and equipment $ 2,594,602 $ -

Future income tax assets:
Share issue costs (531,263) -
Asset retirement obligations (195,263) -
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$ 1,868,076 $ -
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7. Share capital

(a) Authorized

Unlimited number of preferred shares

Unlimited number of voting Class A common shares

Unlimited number of 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

---------------------------------------------------------------------
---------------------------------------------------------------------
Number of shares Amount
---------------------------------------------------------------------

Class A shares
Balance, December 31, 2004 1 $ 1
Issued as initial private
capital 4,400,000 1,100,000
Issued as initial public
offering (flow-through shares) 3,800,000 950,000
Issued on private placement 3,000,000 10,050,000
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Balance, September 30, 2005 11,200,001 $12,100,001
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Class B shares
Balance, December 31, 2004 - $ -
Issued as initial pubic offering
(flow-through shares) 855,000 8,550,000
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Balance, September 30, 2005 855,000 $ 8,550,000
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Share issue costs (net of future
tax benefit of $583,277) - $ (861,550)
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Total share capital
on September 30, 2005 $19,788,451
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(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 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 September 30, 2005:



---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted
Number average
of exercise
options price
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Stock options outstanding,
December 31, 2004 - $ -
Granted 948,000 0.77
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Stock options outstanding,
September 30, 2005 948,000 $ 0.77
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---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Exercise Number remaining exercise Number exercisable
price outstanding life (years) price exercisable price
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$0.35 820,000 4.7 $0.30 273,333 $ 0.30
$3.50 128,000 4.9 $0.47 42,667 $ 0.47

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$0.35 to 948,000 4.7 $0.77 316,000 $ 0.77
$3.50
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---------------------------------------------------------------------


(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 34%; risk-free rate of 3.9%; 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 for the three months ended September 30, 2005 was $1.26 (nine months ended - $0.24) per share.



(e) Contributed surplus

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

Contributed surplus, December 31, 2004 $ -
Stock-based compensation 10,598

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Contributed surplus, September 30, 2005 $ 10,598
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(f) Per share amounts

The weighted average number of share outstanding used to calculate basic per share amounts for the three and nine month periods ended September 30, 2005 were 10,692,610 and 6,689,342, respectively. The Class B shares were converted at the quarter-end Class A price of $5.00 and added to the Class A shares to calculate basic shares outstanding.

In computing diluted per share amounts, 768,701 and 364,849 shares were added to the weighted average number of shares outstanding during the three and nine month periods ended September 30, 2005, respectively, for the dilutive effect of employee stock options.

8. Commitments

At September 30, 2005 the Corporation has an obligation to incur eligible expenditures under existing flow-through share commitments of approximately $9,484,300 prior to December 31, 2005.

In the normal course of business, the Corporation has entered into a Farmin Agreement with Storm Exploration Inc. ("Storm"). As a minimum, the Corporation has committed to drill eight wells on Farmout Lands on or before December 31, 2005, subject to drilling rig availability. 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 leases its office space under an operating lease until April 30, 2006. The minimum monthly lease payment is $12,815.

9. Financial instruments

(a) Fair values

The Corporation's financial instruments reflected on the balance sheet consist of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities. The fair value of these financial instruments approximated their carrying amounts as at September 30, 2005.

(b) Credit risk

The Corporation is exposed to credit risk from financial instruments to the extent of non-performance by third parties. A substantial portion of the Corporation's accounts receivable and accounts payable are with customers and joint venture partners in the petroleum and natural gas industry and are subject to normal credit risks.

10. Subsequent events:

(a) Stock options

On October 11, 2005, the Corporation granted options to certain officers and directors to acquire 257,500 Class A shares of the Corporation. The options expire on October 11, 2010 and are exercisable as to one-third per year and have an exercise price of $4.70 per share. There are now outstanding options to purchase an aggregate of 1,205,500 of the Corporation's Class A shares.

(b) Purchase of Private Company

On October 31, 2005, the Corporation purchased all of the shares of a private Alberta oil and gas company ("Private Co") in a non-arms length transaction for $2.5 million. Certain officers, directors and employees of the Corporation have a 57% combined interest in Private Co. As consideration, the shareholders of Private Co received 595,238 of the Corporation's Class A shares and $300,000 cash. Private Co was amalgamated with the Corporation effective October 31, 2005.

(c) Underwriting agreement and equity financing

On November 9, 2005, the Corporation and a group of underwriters (the "Underwriters") closed a bought deal equity financing in which the Underwriters sold 9,800,000 Class A shares of the Corporation at $3.70 per share for total gross proceeds of $36.26 million. The shares are subject to a hold period of four months from closing.

(d) Purchase of Northeast British Columbia properties

On November 9, 2005, the Corporation purchased properties in Northeast British Columbia for total consideration of $45.5 million. The aggregate consideration is comprised of $40,690,000 in cash and 1,300,000 of the Corporation's Class A shares.

(e) Credit facilities

The Corporation's demand loan facilities were increased to $19,000,000 in conjunction with the Northeast British Columbia property and Private Co acquisitions.

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