Prairie Schooner Petroleum Ltd.
TSX : PSL

Prairie Schooner Petroleum Ltd.

August 11, 2005 15:07 ET

Prairie Schooner Petroleum Ltd. Announces Second Quarter 2005 Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Prairie Schooner Petroleum Ltd. (TSX:PSL) is pleased to announce its operating and financial results for the second quarter and six months ended June 30, 2005.



Financial Highlights

Three months Six Months
ended June 30, ended June 30,
--------------- Percent --------------- Percent
2005 2004 Change 2005 2004 Change
-------------------------------------------------

Financial (thousands
of dollars except
share data)

Petroleum and
natural gas
revenue 10,727 4,579 134 18,830 9,003 109
Cash flow from
operations 6,175 2,350 163 11,081 4,517 145
Per share - basic 0.46 0.34 35 0.91 0.66 38
- diluted 0.43 0.31 39 0.86 0.60 43
Net earnings (loss) 1,601 1,012 58 3,177 1,897 67
Per share - basic 0.11 0.15 (27) 0.26 0.28 (7)
- diluted 0.11 0.14 (21) 0.25 0.26 (4)
Capital expenditures 11,475 1,238 827 18,067 2,971 508
Corporate acquisition 7,129 - n/a 7,129 - n/a
Debt, net 22,143 17,773 25
Weighted average
shares (thousands)
Basic 13,432 6,842 96 12,118 6,844 77
Diluted 14,158 7,480 89 12,828 7,486 71
Shares outstanding
(thousands)
Basic 13,626 6,849 99
Diluted 15,091 7,491 101

Operating
(6:1 boe conversion)

Average daily
production
Natural gas
(mmcf/d) 14.8 7.0 111 13.3 6.9 93
Liquids (bbls/d) 197 90 119 145 101 44
Barrels of oil
equivalent
(boe/d) 2,664 1,260 111 2,360 1,247 89

Average sales price
Natural gas ($/mcf) 7.24 6.60 10 7.24 6.57 10
Liquids ($/bbl) 54.06 44.76 21 54.41 42.47 28
Barrel of oil
equivalent
($/boe) 44.25 39.95 11 44.09 39.67 11


Highlights of our successful quarter follow:

- Second quarter production averaged 2,664 boe/d, an increase of 30 percent over the first quarter of 2005 and a 111 percent increase over the comparable quarter of 2004. Current production is up approximately 25 percent from the second quarter average.

- Record cash flow in the second quarter of 2005 of $6.2 million or $0.46 per share, an increase of $1.3 million or $0.01 per share over the first quarter and an increase of 163 percent over 2004. The weighted average number of shares increased by 25 percent in the second quarter as a result of the Company's Initial Public Offering which closed in March 2005.

- Drilling for the three months ended June 30, 2005 resulted in 25 gross (21.5 net) wells drilled with a success rate of 84 percent.

- Significant expansion to the Company's west central Alberta asset base through the acquisition, in April, of a private company with a 72 section block of land at Ferrier.

- Unit operating costs reduced to $5.55 from $7.62 in the prior year reflecting improved cost control initiated by the Company.

Corporate

On April 15, 2005, the Company acquired 100% of the issued and outstanding shares of a private company. Total consideration of approximately $26 million was paid, with approximately $9 million of cash and the issuance of 1,181,089 common shares of the Company. This acquisition provided Prairie Schooner with a 50 percent working interest in a contiguous 72 section block of land (18,900 net undeveloped acres) in the Ferrier area of west central Alberta. The current production from the area is approximately 650 boe/d net to the Company of liquids rich, high heat content natural gas. The lands are covered with a three dimensional seismic survey and Prairie Schooner has initially identified a minimum of 12 exploratory and development prospects on the lands.

On August 2, 2005 the Company announced the acquisition of a group of natural gas weighted producing properties and undeveloped land predominantly in west central Alberta for $108 million. The assets are characterized by high working interests, significant undeveloped land with a sizeable seismic database in addition to considerable owned and controlled facilities and infrastructure. Current production from the assets is approximately 2,450 boe/d. Prairie Schooner has identified approximately 40 drilling locations, numerous recompletions and workovers, operating cost optimization and coal bed methane opportunities on the assets. The acquisition cost is payable in $62.3 million cash and approximately 3,000,000 shares of the Company. The cash to close the acquisition will be funded through a combination of bank debt and the issuance of 2,700,000 Subscription Receipts at a price of $15.30 per Subscription Receipt.

Operations

During the second quarter of 2005, the Company drilled 25 gross (21.5 net) wells with an 84 percent success rate spending approximately $12 million. Facility and infrastructure expenditures were incurred late in the second quarter to bring on stream the increased production from the drilling program. These activities will lead to record production and cash flow for the third quarter of 2005. In light of the significance of our recently announced property acquisition and financing, the Company will curtail its third quarter capital program to approximately $5 million from an originally planned $12 million to maintain corporate debt subsequent to the acquisition, at less than one times current cash flow. Plans for the fourth quarter forecast the Company spending $15 million on the combined asset base.

At Irvine in southeastern Alberta, Prairie Schooner completed an 11 (11.0 net) well delineation program with 100 percent success. Although pipeline and facility construction was delayed by record rainfall, Prairie Schooner brought on-stream an incremental 2.5 mmcf/d of net production. Prairie Schooner plans a further drilling program at Irvine in the fourth quarter. Dependant on production performance of this long-life asset, down-spacing of this property may occur in 2006.

Following a successful drilling program in the first and second quarters at Two Hills, a new 100 percent owned compression facility has been completed. This has resulted in incremental net production of approximately 2 mmcf/d. In the second half of 2005, the Company plans an additional 2 to 3 well drilling program at Two Hills.

The balance of Prairie Schooner's third quarter program will see two Belly River wells in addition to a deep Pekisko test drilled at Ferrier in west central Alberta, two recompletions at Innisfail and our participation in a 15 well Coal Bed Methane ("CBM") program at Huxley.

It is anticipated that activity will ramp up significantly in the fourth quarter with active programs at Faith, Cypress, Ferrier and Irvine in addition to multiple wells on the proposed newly acquired asset base.

Outlook

Prairie Schooner's growth since restructuring Piper Energy Inc. in October 2004 has been rapid and successful. Since October we have grown corporate production from 1,200 boe/d to an anticipated 2005 exit of approximately 6,200 boe/d while more than doubling per share net asset value.

Everyone at Prairie Schooner remains extremely focused on the successful implementation of our aggressive growth strategy. In addition to the two major transactions completed for $135 million, the Company is on track to complete a $38 million base exploration and exploitation capital program in 2005. We are extremely pleased with these results to date and anticipate further success as we move forward in 2005.

With a growing west central Alberta focus, Prairie Schooner's fundamental focus continues to be on increasing shareholder value through a combination of grassroots exploration, strategic acquisitions and subsequent exploration.



On behalf of the Board of Directors:


Jim Saunders
Chairman and Chief Executive Officer
August 11, 2005


MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis as provided by the management of Prairie Schooner Petroleum Ltd. ("Prairie Schooner" or the "Company") should be read in conjunction with the unaudited consolidated financial statements for the six months ended June 30, 2005 and 2004 and the audited consolidated financial statements for the year ended December 31, 2004. This discussion is based on information available to and is dated, August 11, 2005. The financial data presented is in accordance with Canadian generally accepted accounting principles in Canadian dollars, except where indicated otherwise.

The Management's Discussion and Analysis ("MD&A") contains the term cash flow from operations which should not be considered an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP") as an indicator of the Company's performance. The reconciliation between net earnings and cash flow from operations can be found in the consolidated statement of cash flow in the audited consolidated financial statements and the unaudited interim consolidated financial statements. The Company presents cash flow from operations per share whereby per share amounts are calculated consistent with the calculation of earnings per share.

The MD&A also contains other terms such as net debt and operating netbacks, which are not recognized measures under GAAP. Management believes these measures are useful supplemental measures of firstly, the total amount of current and long-term debt the Company has, and secondly, the amount of revenues received after royalties and operating costs. Readers are cautioned however, that these measures should not be construed as an alternative to other terms such as current and long-term debt or net earnings in accordance with GAAP as measures of performance. The Company's method of calculating these measures may differ from other companies, and accordingly, may not be comparable to measures used by other companies.

The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per boe amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. This equivalence is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.



Petroleum and Natural Gas Revenue

Three months ended Six months ended
June 30, June 30,
---------------- ---------------- Percent
2005 2004 2005 2004 Change
---------------- ---------------- ---------
(thousands of dollars)

Natural gas revenue 9,717 4,225 16,888 7,942 113
Liquids revenue 940 392 1,372 784 75
Hedging gains (loss) (37) (148) 384 49 684
Royalty and other 107 110 186 228 (18)
---------------- ----------------

10,727 4,579 18,830 9,003 109
---------------- ----------------
---------------- ----------------


The Company's production for the second quarter averaged 2,664 boe/d, an increase of 30 percent from the 2,052 boe/d in the first quarter of 2005, and an increase of 111 percent compared to the second quarter of 2004. Natural gas production increased to 14.8 mmcf/d in the second quarter from 11.8 mmcf/d in the first quarter. Liquids production increased to 197 bbls/d from 92 bbls/d in the first quarter. This increase was attributable to a successful drilling program that resulted in a 85 percent drilling success rate for the six months ended June 30 2005 combined with the previously mentioned closing of the acquisition of a private company on April 15, 2005. Production for the six months ended June 30, 2005 was 2,360 boe/d comprised of 13.3 mmcf/d of natural gas and 145 bbls/d of liquids. Average production volumes on a year-over-year basis in 2005 have increased by 89 percent when compared to 2004.

Petroleum and natural gas revenue in the second quarter of 2005 increased by 32 percent to $10.7 million from the $8.1 million recorded in the first quarter of 2005. Strong natural gas prices, combined with increased production, resulted in the increase for the quarter. Year-over-year, revenue increased by 38 percent as a result of an 8 percent increase in commodity prices and a successful drilling program which resulted in a 32 percent increase in production volumes.

Prairie Schooner, as part of our financial management strategy, has adopted a disciplined commodity hedging program. The objective of the hedging program is to reduce volatility in the financial results, protect acquisition economics and stabilize cash flow against the unpredictable commodity price environment. Our strategy is restricted to a maximum hedge of 40% of forecast production, allowing the Company to participate in commodity price increases while limiting exposure to declines in commodity prices.

The following contracts were outstanding as at August 11, 2005:



Commodity Type Term Volume Price Index
------------------------------------------------------------------------

Natural gas Fixed June 2005 - September 2005 4,500 GJ/d $7.00/GJ AECO

Natural gas Fixed October 2005 - December 2005 6,500 GJ/d $8.80/GJ AECO

Natural gas Fixed January 2006 - March 2006 6,000 GJ/d $9.30/GJ AECO

Natural gas Fixed April 2006 - October 2006 5,000 GJ/d $8.13/GJ AECO


Royalties

Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
2005 2004 2005 2004 Change
--------------------------------------------------
(thousands of dollars)

Crown 964 236 1,802 616 193
Freehold and GORR 1,547 459 2,269 940 141
Alberta Royalty
Tax Credit (75) (57) (150) (152) (1)
----------------------------------------
2,436 638 3,921 1,404 179
----------------------------------------
----------------------------------------

Percent of total
revenue 22.7% 13.9% 20.8% 15.6% 33
Per boe ($) 10.05 5.56 9.18 6.18 49


For the three months ended June 30, 2005, royalty expense net of ARTC, and royalty rates increased compared to the same quarter of 2004 as a result of an 111% increase in production and an 11% increase in commodity prices. On a per unit basis, royalties have increased reflecting the impact of higher commodity prices. Royalties increased in the second quarter of 2005 when compared to the first quarter of 2005 due to the acquisition of Westrock Energy. The production base of Westrock is located entirely on Indian lands which has a higher royalty burden averaging approximately 36%.

For the first six months of 2005, crown royalty rates increased due to a higher number of wells drilled on crown land when compared to 2004. Royalties on a percent of total revenue basis were positively impacted by the hedging gains incurred in the six months ended June 30, 2005. These gains marginally decreased the royalty rate for the six months ended June 30, 2005.



Operating Expenses
Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
2005 2004 2005 2004 Change
--------------------------------------------------
Total operating costs
($000's) 1,345 874 2,317 1,615 43
Percent of total
revenue 12.5% 19.1% 12.3% 17.9% (31)
Per boe ($) 5.55 7.62 5.43 7.12 (24)


Operating costs for the second quarter of 2005 increased to $1.3 million from the $1.0 million incurred in the first quarter of 2005 primarily as a result of the 30 percent increase in production volumes. Unit operating expenses have increased from the first quarter of 2005 by 6 percent. The increase is due to an increase in third party gas gathering and processing expenses combined with the Westrock acquisition whose properties had a slightly higher operating cost.

On a per unit basis, operating expenses were 24 percent lower at $5.43 per boe for the six months ended June 30, 2005 compared to $7.12 per boe during 2004. This decrease reflects the efficiencies initiated by Prairie Schooner in field operations as well as economies of scale from higher volumes.



Transportation Expenses


Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
2005 2004 2005 2004 Change
--------------------------------------------------
Total transportation
costs ($000's) 200 170 404 323 25
Percent of total
revenue 1.9% 3.7% 2.1% 3.6% (42)
Per boe ($) 0.83 1.48 0.95 1.42 (33)


Effective January 1, 2004, the Company has classified transportation costs as an expense. Previously, these transportation costs were netted from revenue.



General and Administrative Expenses

Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
2005 2004 2005 2004 Change
--------------------------------------------------
(thousands of dollars)

General and
administrative 662 386 1,100 816 35
Overhead recoveries (169) (36) (260) (88) 195
Capitalized G & A (152) - (252) - 100
----------------------------------------

Net 341 350 588 728 19
----------------------------------------
----------------------------------------

Percent of total
revenue 3.2% 7.6% 3.1% 8.1% (62)
Per boe ($) 1.41 3.05 1.38 3.21 (57)


General and administrative expenses for the second quarter were $341 thousand after recoveries and capitalized costs, a decrease from $350 thousand in the second quarter of 2004, as the Company capitalized $152 thousand of G & A in the quarter due to increased exploration activity. The Company did not capitalize G & A in the comparable period of 2004.

General and administrative expenses on a gross basis increased in the second quarter of 2005 from the first quarter. In the second quarter, costs have increased reflecting the personnel required to administer the increased production base while continuing to generate exploration and exploitation opportunities. Additionally, the Westrock acquisition increased the personnel complement of the Company. In the second quarter, the technical and operational personnel of the Company was expanded with the addition of three employees. The Company currently employs 19 full-time head office staff. On a per unit basis, general and administrative have been reduced on both a gross and net basis in 2005 due to the 89 percent increase in production volumes.

Overhead recoveries were higher in the second quarter due to a substantial increase in capital activity when compared to the first quarter of 2005.



Stock-based Compensation

Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
2005 2004 2005 2004 Change
--------------------------------------------------
(thousands of dollars)
Stock-based compensation 286 1 459 10 n/a
Percent total of revenue 2.7% - 2.4% 0.1% n/a
Per boe ($) 1.18 - 1.08 0.04 n/a


The Company applies the fair value method for valuing stock option expenses. For the six months ended June 30, 2005, Prairie Schooner recorded a stock-based compensation charge of $459 thousand in connection with the issuance of stock options. This charge was primarily related to options granted late in 2004. As Prairie Schooner was a private company in 2004, there was nominal stock-based compensation expense in the first six months of 2004.



Financial Charges

Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
2005 2004 2005 2004 Change
--------------------------------------------------

Total financial charges
($000's) 160 189 428 393 9
Percent of total
revenue 1.5% 4.1% 2.3% 4.4% (48)
Per boe ($) 0.66 1.65 1.00 1.73 (42)


Compared to the first quarter of 2005, interest expense decreased by $108 thousand due to the previously mentioned Initial Public Offering which initially reduced bank debt by approximately $23 million. Debt levels subsequently increased as a result of the previously mentioned Westrock acquisition combined with an aggressive capital expenditure program for the second quarter.



Depletion, Depreciation and Accretion

Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
(thousands of dollars) 2005 2004 2005 2004 Change
----------------------------------------
Depletion and
depreciation 3,148 698 5,562 1,450 284
Accretion 74 41 128 81 58
--------------------------------------------------------------
3,222 739 5,690 1,531 272
--------------------------------------------------------------
--------------------------------------------------------------
Percent of total
revenue 30.0% 16.1% 30.2% 17.0% 78
Per boe ($) 13.29 6.79 13.32 6.74 98


Depletion and depreciation expense for the second quarter was $3.2 million, substantially higher than the $2.5 million recorded in the first quarter of 2005. This increase in depletion expense was primarily attributable to a 30 percent increase in production in the quarter. On a unit of production basis, the provision was $13.29 per boe for the second quarter, consistent with the $13.36 per boe in the first quarter of 2005. In addition, capital expenditures during the second quarter of 2005 included several exploration and development projects for which no new reserves have yet been recognized due to the overall timing of the projects. The Company anticipates that reserve additions for these projects will be included in the third quarter 2005 interim report. The acquisition cost of Westrock has been factored in the second quarter of 2005.

Comparing the depletion rate for 2005 to 2004, as part of the restructuring that occurred in 2004, management retained Gilbert Laustsen Jung Associates Ltd. as independent engineers to review the Company's reserve base. This review resulted in negative revisions to the beginning of the 2004 year reserve balance and accordingly, the Company's fourth quarter depletion rate was substantially higher than the previous nine months of 2004. Additionally, depletion has been adjusted to factor an increase in the depletion base in accordance with new rules regarding Asset Retirement Obligations.

Accretion increased in the second quarter of 2005 to $74 thousand from the $54 thousand recorded in the first quarter of 2005. The Westrock Energy acquisition in April 2005 increased accretion for the second quarter. Accretion represents the time value of the asset retirement obligation and is calculated at the Company's credit adjusted risk-free rate of 8 percent. It will continue to increase with the passage of time and the increases in asset retirement obligations.

Income and Capital Taxes

For the six months ended June 30, 2005, capital taxes were $61 thousand which is comprised of the Federal Large Corporations Tax (LCT). The LCT increased in the second quarter corresponding with the increase in the Company's taxable capital base resulting from the Initial Public Offering in March 2005 and the corporate acquisition that closed in April 2005. Future income tax expense for the six months ended June 30, 2005 was $1.8 million and reflects an effective tax rate of 36%. The total liability for future income tax was $15.4 million as at June 30, 2005.

Cash Flow from Operations and Net Income

Cash flow from operations for the three months ended June 30, 2005 was $6.2 million ($0.46 per share) compared to $4.9 million ($0.45 per share) in the first quarter. In the second quarter the Company had net earnings of $1.6 million ($0.11 per share) compared to net earnings of $1.6 million ($0.15 per share) in the first quarter.

For the six months ended June 30, 2005, cash flow from operations was $11.1 million or $0.91 per share as compared to $4.5 million and $0.66 per share in 2004.



Capital Expenditures

Three months ended Six Months ended
June 30, June 30,
---------------------------------------- Percent
2005 2004 2005 2004 Change
--------------------------------------------------
(thousands of dollars)

Land 348 150 871 230 279
Geological and
geophysical 207 16 362 60 503
Drilling and
completions 5,714 588 9,106 801 1,037
Production facilities 5,192 484 7,684 1,794 328
Other 14 - 44 86 (49)
--------------------------------------------------------------

Total 11,475 1,238 18,067 2,971 508
--------------------------------------------------------------
--------------------------------------------------------------


Of the total capital spent in the first six months of 2005, $9.0 million was incurred on the Company's drilling program. The Company drilled 34 gross (28.4 net) wells during the six months of 2005 with an 85 percent success rate. Drilling for the three months ended June 30, 2005 resulted in 25 gross (21.5 net) wells drilled with a success rate of 84 percent. The second quarter drilling program was concentrated at Irvine where the Company drilled 11 gross (11.0 net) wells, at Two Hills with 6 gross (4.0 net) wells and at Faith with 5 gross (5.0 net) wells drilled. This program resulted in 21 successful natural gas wells, one oil well and four abandoned wells.

During the first six months of 2005, the Company increased its undeveloped land base by incurring $871 thousand of crown and freehold land acquisitions. Facility and infrastructure expenditures were incurred in the Company's core areas of Two Hills, Faith and Irvine primarily for compressor facilities and pipelines to tie-in and bring production on-stream.

Liquidity and Capital Resources

At June 30, 2005, total net debt (including the working capital deficiency) was $22.0 million compared to net debt of $29.4 million at December 31, 2004. For the six months ended June 30, 2005, cash flow of $11.1 million, common share equity issuance net proceeds of $23.6 million and a decrease in net debt of $9.5 million, were utilized to fund $18.1 million of capital expenditures and the $7.1 million of funds for the corporate acquisition.

During the six months ended June 30, 2005, the Company issued common shares as follows:

- 1,924,000 common shares issued on the Company's Initial Public Offering for net proceeds of $23.1 million

- 40,000 common shares issued on a private placement for gross proceeds of $240 thousand

- 70,000 common share options exercised for gross proceeds of $352 thousand

- 1,481,089 common shares issued as part consideration in the Westrock acquisition

On March 16, 2005, the Company completed a public offering by way of a long form prospectus for the issuance of 1,924,000 common shares for gross proceeds of $25 million. Common shares of Prairie Schooner commenced trading on March 16, 2005 on the Toronto Stock Exchange under the symbol "PSL".

On July 25, 2005, the Company increased its credit facility to $40 million.

As at August 10, 2005, the Company had the following changes to its share capital from that disclosed in notes 7 and 8 to the unaudited consolidated financial statements for the six months ended June 30, 2005:

- 60,000 common share options granted

Contractual Obligations

Prairie Schooner has assumed various contractual obligations and commitments in the normal course of operations and financing activities. We consider these obligations when assessing cash requirements in the discussion of future liquidity that follows:



Contractual Obligations

------------------------------------------------------------------------
Payments due
by Period Less than 1 to 3 4 to 5 After
($ thousands) 1 Year Years Years 5 Years Total
------------------------------------------------------------------------
Long term
debt (note 1) 18,283 - - - 18,283
Capital lease
obligations - - - - -
Operating lease
obligations
(note 2) 102 273 - - 375
Firm transportation
commitments 92 368 10 - 470
Asset retirement
obligation 63 507 126 10,621 11,317
------------------------------------------------------------------------
Total contractual
obligations 18,540 1,148 136 10,621 30,445
------------------------------------------------------------------------
------------------------------------------------------------------------

1. Revolving credit facility with a major Canadian chartered bank. The
credit facility bears interest at the bank's prime rate. See note 6
to the unaudited consolidated financial statements for the six
months ended June 30, 2005.

2. Operating lease obligations consist of the office lease.


Contractual obligations include both financial and non-financial obligations. Financial obligations represent known future cash payments that Prairie Schooner is required to make under existing contractual arrangements, such as debt and lease arrangements. Non-financial obligations represent contractual obligations to perform specified activities such as work commitments.

Firm transportation commitments relate to agreements that Prairie Schooner has with pipeline companies to send a certain volume of our product through their pipelines.

At June 30, 2005, total future asset retirement obligation costs to be accrued over the life of the remaining proved reserves were estimated, net of recoveries, at $11.3 million. This estimate is subject to change based on amendments to environmental laws and as new information concerning operations becomes available. The timing of any payments is difficult to determine with certainty and the table has been prepared using best estimates.

Off-Balance Sheet Arrangements

There are currently no off-balance sheet arrangements.

This disclosure contains certain forward looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Prairie Schooner's control, including: the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Prairie Schooner's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will transpire or occur, or it any of them do so, what benefits, including the amount of proceeds, that Prairie Schooner will derive therefrom.



Corporate Information

Board of Directors Officers

MURRAY COBBE (1)(3) JAMES SAUNDERS
President, Trican Well Chairman & CEO
Service Ltd.
Calgary, Alberta NEIL ROSZELL, P. Eng.
President & COO
JAMES SAUNDERS
Chairman & CEO, Prairie BRUCE ROBERTSON
Schooner Petroleum Ltd. Executive Vice President
Calgary, Alberta
JERRY SAPIEHA, CA
HARVEY TRIMBLE (2)(3) Vice President, Finance & CFO
Independent Businessman
Okotoks, Alberta SHANE PEET, P. Eng.
Vice President, Engineering
WARREN STECKLEY (1)(2)(3)
President, Barnwell of STEVE DELAHAY, P. Geol.
Canada, Limited Vice President, Exploration
Calgary, Alberta
Head Office
BOB CHAISSON (2) Suite 1000, 520 - 5th Avenue SW
V.P. Operations, Atlas Calgary, Alberta T2P 3R7
Energy Ltd. Tel: (403) 266-6400
Calgary, Alberta Fax: (403) 266-8681

KEVIN OLSON (1) Bankers
Fund Manager, Energy One Bank of Montreal
Equity Inc. Calgary, Alberta
Calgary, Alberta
Auditors
GARY BUGEAUD KPMG LLP
(Corporate Secretary) Calgary, Alberta
Burnet Duckworth & Palmer LLP
Independent Reservoir Consultants
Gilbert Laustsen Jung Associates Ltd.
Calgary, Alberta

Members of the following committee:

(1) Audit Committee

(2) Reserve Committee

(3) Compensation and Corporate Governance



PRAIRIE SCHOONER PETROLEUM LTD.

CONSOLIDATED BALANCE SHEET


June 30, 2005 December 31, 2004
------------------------------------------------------------------------
(thousands) (unaudited)
$ $
ASSETS

Current assets
Accounts receivable 5,820 3,099
Prepaid expenses 683 689
------------------------------------------------------------------------
6,503 3,788
Property and equipment (note 4(c) and 5) 103,582 68,789
Goodwill (notes 2(b) and 4(a)) 8,634 -
------------------------------------------------------------------------
118,719 72,577
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable 10,265 4,631
Bank debt (note 6) 18,283 28,508
------------------------------------------------------------------------
28,548 33,139
Future income taxes 12,339 6,083
Asset retirement obligations (note 9) 3,358 3,001
------------------------------------------------------------------------
47,329 42,223
------------------------------------------------------------------------

Shareholders' equity
Share capital (note 7) 62,951 22,452
Contributed surplus 589 145
Retained earnings 10,934 7,757
------------------------------------------------------------------------
74,474 30,354
------------------------------------------------------------------------

Subsequent event (note 11)
118,719 72,577
------------------------------------------------------------------------
------------------------------------------------------------------------

(See accompanying notes to the unaudited consolidated financial
statements)



PRAIRIE SCHOONER PETROLEUM LTD.

CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS

Three months ended Six months ended
June 30, June 30,
--------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
(thousands except per share data) (unaudited) (unaudited)
$ $ $ $

Revenue
Petroleum and natural gas sales 10,727 4,579 18,830 9,003
Royalties, net (2,436) (638) (3,921) (1,404)
------------------------------------------------------------------------
8,291 3,941 14,909 7,599
------------------------------------------------------------------------

Expenses
Operating 1,345 874 2,317 1,615
Transportation 200 170 404 323
General and administrative 341 350 588 728
Stock-based compensation 286 1 459 10
Financial charges 160 189 428 393
Depletion, depreciation and
accretion (note 5 & 9) 3,222 739 5,690 1,531
------------------------------------------------------------------------
5,554 2,323 9,886 4,600
------------------------------------------------------------------------

Earnings before taxes 2,737 1,618 5,023 2,999

Capital taxes 51 8 61 22
Future income taxes 1,085 598 1,785 1,080
------------------------------------------------------------------------
1,136 606 1,846 1,102
------------------------------------------------------------------------

Net earnings 1,601 1,012 3,177 1,897

Retained earnings,
beginning of period 9,333 5,958 7,757 5,073
------------------------------------------------------------------------

Retained earnings, end of period 10,934 6,970 10,934 6,970
------------------------------------------------------------------------
------------------------------------------------------------------------

Net earnings per share
Basic 0.11 0.15 0.26 0.28
Diluted 0.11 0.14 0.25 0.26

(See accompanying notes to the unaudited consolidated financial
statements)



PRAIRIE SCHOONER PETROLEUM LTD.

CONSOLIDATED STATEMENT OF CASH FLOW

Three months ended Six months ended
June 30, June 30,
--------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
(thousands) (unaudited) (unaudited)
$ $ $ $

Cash flow related to the
following activities

Operating
Net earnings for the period 1,601 1,012 3,177 1,897
Items not affecting cash:
Depletion, depreciation and
accretion 3,222 739 5,690 1,531
Future income taxes 1,085 598 1,785 1,080
Stock-based compensation 286 1 459 10
Asset retirement expenditures (19) - (30) (1)
------------------------------------------------------------------------

Funds from operations 6,175 2,350 11,081 4,517

Changes in non-cash operating
working capital 23 (866) (185) (1,712)
------------------------------------------------------------------------
6,198 1,484 10,896 2,805
------------------------------------------------------------------------

Financing
Change in bank debt 13,069 (613) (10,225) 1,083
Share issuance, net (64) - 23,606 66
------------------------------------------------------------------------
13,005 (613) 13,381 1,149
------------------------------------------------------------------------

Cash available for investment
activities 19,203 871 24,277 3,954
------------------------------------------------------------------------

Investing
Property and equipment additions (11,475) (1,238) (18,067) (2,971)
Corporate acquisition (note 4(a)) (7,129) - (7,129) -
Changes in non-cash investing
working capital (599) 367 919 (1,434)
------------------------------------------------------------------------
(19,203) (871) (24,277) (4,405)
------------------------------------------------------------------------

Change in cash - - - (451)

Cash, beginning of period - - - 451
------------------------------------------------------------------------

Cash, end of year - - - -
------------------------------------------------------------------------
------------------------------------------------------------------------

(See accompanying notes to the unaudited consolidated financial
statements)


PRAIRIE SCHOONER PETROLEUM LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2005

(unaudited)

(tabular amounts in thousands of dollars, unless otherwise stated)

1. NATURE OF OPERATIONS

Prairie Schooner Petroleum Ltd. ("the Company") is engaged primarily in the exploration for and development and production of petroleum and natural gas in western Canada. The Company was incorporated under the laws of the Province of Alberta.

The shareholders of the Company approved a name change at the Special Meeting held on December 20, 2004.

2. SIGNIFICANT ACCOUNTING POLICIES

a) Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

The unaudited interim consolidated financial statements and the notes thereto of the Company have been prepared following the same accounting policies and methods of computation as the audited consolidated financial statements of the Company as at December 31, 2004 except as mentioned below. These unaudited interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2004.

b) Goodwill

Goodwill, which represents the excess of purchase price over fair value of net assets received, is tested for impairment on an annual basis in the fourth quarter. If indications of impairment are present, a loss would be charged to earnings for the amount that the carrying value of goodwill exceeds its fair value.

3. INITIAL PUBLIC OFFERING

On March 16, 2005, pursuant to its Initial Public Offering (the "Offering"), the Company issued a total of 1,924,000 common shares at a price of $13.00 per common share for gross proceeds of $25 million. The net proceeds of approximately $23.1 million were initially applied to reduce bank debt. The Company commenced trading on the Toronto Stock Exchange on March 16, 2005.

4. ACQUISITIONS

a) Corporate Acquisition

On April 15, 2005, the Company acquired 100% of the issued and outstanding shares of Westrock Energy Ltd. ("Westrock"). Total consideration of approximately $34 million ($26.4 million net of working capital) was paid, with approximately $17.2 million of cash and the issuance of 1,181,089 common shares of the Company. Westrock was involved in oil and gas exploration, development and production in west central Alberta. The transaction was accounted for using the purchase method. The purchase price allocation resulted in an excess purchase price over the fair value of assets acquired of approximately $8.6 million, which has been reflected as goodwill.



Cost of Acquisition

Common shares issued 17,126
Transaction costs 98
Cash 17,179
-------------------------

34,403
-------------------------
-------------------------

Allocated at estimated fair values

Cash 10,149
Accounts receivable 1,410
Prepaid expenses 71
Property and equipment 22,347
Goodwill 8,634
Accounts payable (3,724)
Future income taxes (4,225)
Asset retirement obligations (259)
-------------------------

34,403
-------------------------
-------------------------


b) Merger Agreement

On October 13, 2004, through an amalgamation of the Company's wholly owned subsidiary 1130975 Alberta and Prairie Schooner Energy Inc. ("PSEI"), the Company indirectly acquired all of the outstanding common shares of PSEI in exchange for 3,000,000 common shares. The assets of PSEI were comprised of approximately $9 million of cash.

Concurrent with this amalgamation, restructuring charges of $1.1 million were incurred of which $1.0 million was related to severance costs.

c) Property Acquisition

On December 17, 2004, the Company completed an acquisition of producing properties in southern Alberta for a purchase price of $20.5 million after adjustments. This acquisition was funded through enhanced credit facilities.

5. PROPERTY AND EQUIPMENT



June 30, 2005
-----------------------------------
Accumulated Net
Depletion & Book
Cost Depreciation Value
-----------------------------------
$ $ $

Petroleum and natural
gas properties 124,325 20,945 103,380
Office equipment 587 385 202
--------------------------------------------------------------
124,912 21,330 103,582
--------------------------------------------------------------
--------------------------------------------------------------


December 31, 2004
-----------------------------------
Accumulated Net
Depletion & Book
Cost Depreciation Value
-----------------------------------
$ $ $

Petroleum and natural
gas properties 84,014 15,437 68,577
Office equipment 543 331 212
--------------------------------------------------------------
84,557 15,768 68,789
--------------------------------------------------------------
--------------------------------------------------------------

The Company has capitalized, as part of petroleum and natural
gas properties, indirect exploration overhead relating to
property acquisition, exploration and development activities of
$251 thousand for the six months ended June 30, 2005 ($ nil for
the six months ended June 30, 2004).

At June 30, 2005, undeveloped land costs of $8.3 million
(December 31, 2004 - $4.6 million) have been excluded from the
amount subject to depletion and depreciation.

6. BANK DEBT
June 30, December 31,
2005 2004
-----------------------
$ $
--------------------------------------------------------------
Prime rate advances 18,283 5,008
Bankers' acceptances - 23,500
--------------------------------------------------------------
18,283 28,508
--------------------------------------------------------------
--------------------------------------------------------------

The Company has a demand revolving credit facility to a maximum
of $40 million. The credit facility bears interest at the
lenders' prime rate or at the Bankers' Acceptance rate plus a
stamping fee of 1.25%. The $40 million borrowing base is subject
to an annual review by the lender. The credit facility is secured
by a first fixed and floating charge debenture in the amount of
$150 million covering all the Company's assets.

7. SHARE CAPITAL

a) Authorized

Unlimited number of common shares
Unlimited number of preferred shares, issuable in series

b) Issued

Number
of Shares Amount
--------------------------------------------------------------
$
Balance, December 31, 2003 6,829,067 9,490
Exercise of stock options 582,500 2,901
Repayment of shareholder loans
and accrued interest - 1,061
Issued on acquisition of PSEI
(note 4(b) & 7(d)) 3,000,000 9,000
--------------------------------------------------------------
Balance, December 31, 2004 10,411,567 22,452
Exercise of stock options 70,000 352
Issue on Private Placement 40,000 240
Issued on Initial
Public Offering 1,924,000 25,012
Issued on acquisition of
Westrock (note 4(a)) 1,181,089 17,126
Tax effect of 2004
flow-through shares - (1,014)
Share issue costs, net of
tax affect - (1,217)
--------------------------------------------------------------

Balance, June 30, 2005 13,626,656 62,951
--------------------------------------------------------------
--------------------------------------------------------------

c) Conversion

At the Company's Special Meeting on December 20, 2004 the
shareholders approved a resolution to convert all of the issued and
un-issued class A voting shares of the Company to common shares of
the Company on a one-for-one basis and to delete the class A voting
shares. The table above reflects the change on a retroactive basis.

d) Flow Through Shares

PSEI issued a total of 4,375,000 flow through common shares for
gross proceeds of $2.6 million. With the amalgamation of PSEI and
the Company, these flow through shares were exchanged for 1,087,053
common shares of the Company. Under the terms of the flow through
agreement, the Company is required to expend $2.6 million on
qualifying crude oil and natural gas expenditures prior to December
31, 2005.

e) Contributed Surplus

June 30, December 31,
2005 2004
-----------------------
$ $
--------------------------------------------------------------

Balance, beginning of year 145 24
Stock-based compensation expense 459 145
Options exercised (15) (24)
--------------------------------------------------------------

Balance, end of period 589 145
--------------------------------------------------------------
--------------------------------------------------------------

f) Per share amounts

Basic per share amounts are calculated using the weighted average
number of shares outstanding during the year.

The reconciling items between the basic and diluted average common
shares outstanding are outstanding stock options.


Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
--------------------------------------

Weighted average shares
outstanding (thousands)
Basic 13,432 6,842 12,118 6,844
Diluted 14,158 7,480 12,828 7,486


8. STOCK-BASED COMPENSATION

The Company has implemented a Stock Option Plan for directors and
employees. Options granted under the Plan vest over a three year
period with 33% vesting upon each anniversary date of the grant. At
June 30, 2005, 1,464,000 (December 31, 2004 - 1,119,000) options with
exercise prices between $5.50 and $14.50 were outstanding.

The following tables summarize the information about the share
options:

Six months ended Year ended
June 30, 2005 December 31, 2004
-------------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------------------------------------------------------------------

Outstanding at beginning
of period 1,119,000 $ 5.46 637,500 $4.84
Granted 415,000 $11.63 1,079,000 $5.53
Exercised (70,000) $ 4.81 (582,500) $4.94
Cancelled - - (15,000) $5.10
------------------------------------------------------------------
Outstanding at end
of period 1,464,000 $ 7.24 1,119,000 $5.46
------------------------------------------------------------------
Options exercisable at
period end nil - 70,000 $4.81
------------------------------------------------------------------

Options Outstanding Options exercisable
--------------------------------------------- -------------------
Weighted
average
Number remaining Weighted Number Weighted
Range of outstanding contractual average exercisable average
exercise at June 30, life exercise at June 30, exercise
prices 2005 (years) price 2005 price
--------------------------------------------- ---------------------

$5.50 - $7.00 1,149,000 3.6 $ 5.59 - -
$7.01 - $10.00 40,000 3.8 $ 7.50 - -
$10.01 - $14.50 275,000 4.0 $13.50 - -
--------------------------------------------- ---------------------
1,464,000 $ 5.86 nil -
--------------------------------------------- ---------------------
--------------------------------------------- ---------------------

The weighted average fair market value of options granted in the
six months ended June 30, 2005 is $3.43 per option. The fair market
of each option granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

Six months ended
June 30
-----------------
2005 2004
-----------------
Risk-free interest rate (%) 4.5 4.5
Expected life (years) 4 4
Expected volatility (%) 28% -
Dividend per share nil nil

9. ASSET RETIREMENT OBLIGATIONS

The Company's asset retirement obligations are based on the
Company's net ownership in wells and facilities and management's
estimate of costs to abandon and reclaim those wells and facilities
as well as an estimate of the future timing of the costs to be
incurred.

The Company has estimated the present value of its total asset
retirement obligations to be $3.4 million at June 30, 2005 based on
a total future liability of $11.3 million. Payments to settle asset
retirement obligations occur over the operating lives of the
underlying assets, estimated to be from zero to 25 years, with the
majority of costs incurred between 2011 and 2030. Estimated cash
flows have been discounted at the Company's credit-adjusted risk
free rate of 8 percent and an inflation rate of 2 percent.

Six months ended
June 30
-----------------
2005 2004
-----------------

Asset retirement obligations, beginning of year 3,001 2,226
Liabilities incurred during period 259 15
Liabilities settled during period (30) (1)
Accretion 128 81
-----------------

Asset retirement obligations, end of period 3,358 2,321
-----------------
-----------------

10. FINANCIAL INSTRUMENTS

The Company is exposed to fluctuations in commodity prices, interest
rates and Canada/U.S. exchange rates. The Company, when appropriate,
utilizes financial instruments to manage its exposure to these risks.

a) Commodity Price Risk Management

Financial instruments are entered into by the Company to protect the
downside prices received on the sale of a portion of its crude oil
and natural gas production. The agreements entered into are forward
transactions providing the Company with a range of fixed prices on
the commodities sold. Petroleum and natural gas revenue for the six
months ended June 30, 2005 include gains of $384 thousand (2004 - $49
thousand) on those transactions.


The following contracts were outstanding as at June 30, 2005:


Commodity Type Term Volume Price Index
---------------------------------------------------------------------
July 2005 -
Natural gas Fixed October 2005 3,500 GJ/d $6.85/GJ AECO


The estimated fair value at June 30, 2005 of these transactions,
had the contracts been settled at that time, would be a loss of $62
thousand.

11. SUBSEQUENT EVENT

On August 2, 2005, the Company announced that is has entered into a
definitive agreement to acquire natural gas weighted producing
properties and undeveloped lands predominantly in west central
Alberta for a purchase price, including adjustments at closing, of
approximately $108 million. The acquisition cost, is payable with
$62.3 million cash and approximately 3,000,000 shares of the Company.
The acquisition has an effective date of July 1, 2005, with the
closing expected by October 31, 2005. The completion of the
acquisition is subject to customary regulatory approvals and other
conditions.

The funds required to close the acquisition of approximately $62
million will be funded through a combination of bank debt and an
issuance of subscription receipts ("Subscription Receipts"). In
conjunction with the acquisition, Prairie Schooner has entered into
an agreement to sell, on a bought deal basis, 2,455,000 Subscription
Receipts at a price of $15.30 per Subscription Receipt for gross
proceeds of $37.6 million on a private placement basis through a
syndicate of underwriters. The underwriters have the option to
increase the offering by an additional 245,000 Subscription Receipts,
also for $15.30 per receipt, which if exercised in full would
increase the total gross proceeds to $41.3 million. The issuance of
the Subscription Receipts is subject to regulatory approval.

Each Subscription Receipt represents the right to receive one share
of Prairie Schooner on the closing of the acquisition. The proceeds
from the offering of Subscription Receipts will be deposited in
escrow pending closing of the acquisition. If the proposed
acquisition closes on or before November 15, 2005, the net proceeds
from the offering of Subscription Receipts will be released to
Prairie Schooner to finance a portion of the acquisition. However,
if the acquisition fails to close by November 15, 2005 the escrow
agent will return the net proceeds and pro rate entitlement to
interest thereon to holders of the Subscription Receipts.


Contact Information

  • Prairie Schooner Petroleum Ltd.
    Mr. Jim Saunders
    Chairman and Chief Executive Officer
    (403) 303-3750
    (403) 266-8681 (FAX)
    or
    Prairie Schooner Petroleum Ltd.
    Mr. Jerry Sapieha, CA
    Vice President, Finance and Chief Financial Officer
    (403) 303-3762
    (403) 266-8681 (FAX)