Prairie Schooner Petroleum Ltd.
TSX : PSL

Prairie Schooner Petroleum Ltd.

November 15, 2005 09:00 ET

Prairie Schooner Petroleum Ltd. Announces Third Quarter 2005 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 15, 2005) - Prairie Schooner Petroleum Ltd. (TSX:PSL) is pleased to announce its operating and financial results for the third quarter and nine months ended September 30, 2005.



Financial Highlights

Three months ended Nine months ended
September 30, September 30,
-------------- Percent -------------- Percent
2005 2004 Change 2005 2004 Change
------ ------ -------- ------ ------ --------

Financial (thousands
of dollars except
share data)

Petroleum and natural
gas revenue 16,172 4,369 270 35,002 13,372 162
Cash flow from
operations 9,403 1,968 378 20,484 6,485 216
Per share - basic 0.71 0.29 145 1.62 0.95 71
- diluted 0.67 0.27 148 1.53 0.87 76
Net earnings 2,812 844 233 5,989 2,741 118
Per share - basic 0.21 0.12 75 0.47 0.40 18
- diluted 0.20 0.11 82 0.45 0.37 22
Capital expenditures 5,536 4,339 28 23,603 7,310 223
Corporate
acquisitions 16,464 - n/a 23,593 - n/a
Debt, net 34,693 19,021 82
Weighted average
shares (thousands)
Basic 13,741 6,849 101 12,665 6,846 85
Diluted 14,600 7,482 95 13,422 7,478 79
Shares outstanding
(thousands)
Basic 17,027 6,849 149
Diluted 18,696 7,482 150

Operating (6:1 boe conversion)

Average daily production
Natural gas (mmcf/d) 18.9 7.0 170 15.2 6.9 120
Liquids (bbls/d) 171 62 176 154 88 75
Barrels of oil
equivalent (boe/d) 3,314 1,228 170 2,681 1,241 116

Average sales price
Natural gas ($/mcf) 8.80 6.14 43 7.89 6.42 23
Liquids ($/bbl) 57.70 62.23 (7) 55.65 47.15 18
Barrel of oil
equivalent ($/boe) 53.03 38.11 39 47.81 39.15 22

Drilling Activity
Gross 19 21 (10) 53 26 104
Net 6.0 21.0 (7) 34.4 24.5 40
Success rate 84% 100% (10) 85% 100% (16)


Highlights of our successful quarter follow:

- Third quarter production averaged 3,314 boe/d, an increase of 24 percent over the second quarter of 2005 and a 170 percent increase over the comparable quarter of 2004.

- Current production is approximately 6,600 boe/d with 800 boe/d of production awaiting tie-in. We remain on track to meet our 2005 production exit target of 7,200 boe/d.

- Record cash flow in the third quarter of 2005 of $9.4 million or $0.71 per share, an increase of 52 percent or $3.3 million or $0.25 per share over the second quarter and an increase of 145 percent over 2004 on a per share basis

- Drilling for the three months ended September 30, 2005 resulted in 19 gross (6.0 net) wells drilled with a success rate of 84 percent.

- Third quarter operating costs reduced to $5.57 from $7.34 in the prior year reflecting continued cost control by the Company.

- Third quarter G&A costs reduced 21 percent from $1.41 per boe in the second quarter to $1.11 per boe with further decrease expected in the fourth quarter.

- Significant expansion to the Company's undeveloped land and drilling inventory through the announcement of two major transactions which have now closed totaling $135 million

Corporate

On September 15, 2005, the Company acquired 100% of the issued and outstanding shares of a private company. Total consideration of approximately $27 million was paid, with approximately $16.4 million of cash and the issuance of 700,000 common shares of the Company. The acquired production from the associated properties was approximately 550 boe/d net to the Company of natural gas which has been expanded to over 700 boe/d through recently completed tie in operations.

On October 31, 2005, the Company announced the closing of the acquisition of producing properties and undeveloped lands predominantly in west central Alberta, for approximately $108 million. Total consideration was approximately $65.3 million of cash and the issuance of 2,800,340 common shares of the Company. 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 2,550 boe/d. Prairie Schooner has identified approximately 45 drilling locations, numerous recompletions and workovers, operating cost optimization and coal bed methane opportunities on the assets.

In August, the Company closed a Private Placement of 2,700,000 subscription receipts for gross proceeds of $41.3 million. The proceeds were held in escrow pending close of the above mentioned acquisition. As a result of closing of the property acquisition, the subscription receipts were deemed to be exercised for common shares of Prairie Schooner on October 28, 2005.

Operations


Third quarter capital operations were intentionally curtailed from an originally planned $11 million to $5.5 million to allow better planning and integration of the recently acquired assets. Third quarter drilling was focused at Huxley where a commercial development program for coal-bed methane (CBM) was conducted. Fourteen successful wells were drilled in the third quarter in the area for a total to date of 18 wells. A total of 44 wells are planned for this project. At Huxley and our recently acquired Penhold property, we will see in excess of 50 net CBM wells drilled over the next twelve months.

An active fourth quarter drilling program is underway with six rigs currently in operation. In southeastern Alberta, an eleven well program will sustain area production while starting to delineate our underexploited Merryflats property. In east central Alberta recent drilling successes have added 3.5 mmcf/d of net deliverability which will be on stream by year end. This area will continue to add quick cash flow and production to the company as our current inventory is drilled over the next three quarters. A significant farm-in arrangement has recently added 70 net sections of undeveloped land to this core area. In west central Alberta, our programs at Ferrier and Pembina have posted stellar results with operations continuing. These properties will see enhanced activity over the coming months based on positive results to date. Planning is underway for a winter based drilling program to commence in early December at Doris and Roche, which we anticipate will increase area production by 50 per cent.

In the fourth quarter we have drilled a total of fifteen net wells with a 93 percent success rate. These drilling results will ensure continued production growth into 2006 and will ultimately lead to an expanded inventory of opportunities in our core areas.

Outlook

With two significant transactions now under our belt, the team at Prairie Schooner is focused on the successful execution of the drilling phase of our growth strategy. Our drilling inventory of 300 identified net locations has never been stronger and positions the company for aggressive drill bit growth over the next number of quarters. With an anticipated $85 million base capital program in 2006 we expect the company will continue to set growth records in both production and cash flow. Anticipated strong commodity prices and the underleveraged nature of our balance sheet will allow, if prudent, future expansion of our base capital program.

We are extremely pleased with our results to date and anticipate further success as we move forward in 2005 and 2006.

Prairie Schooner's fundamental focus continues to be on increasing shareholder value through a combination of grassroots exploration, strategic acquisitions and subsequent exploitation. We are one of the highest natural gas weighted (93 per cent) junior exploration and production companies based in Alberta and this combined with our substantial capital inventory will ensure continued growth in shareholder value.



On behalf of the Board of Directors:

Jim Saunders
Chairman and Chief Executive Officer
November 14, 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 nine months ended September 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, November 14, 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 Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------
(thousands of dollars)

Natural gas revenue 15,937 3,832 32,825 11,822 178
Liquids revenue 881 332 2,253 1,068 111
Hedging gains (loss) (758) 50 (374) 99 378
Hedging gains unrealized - 62 - 62 -
Royalty and other 112 93 298 321 (7)
------------------- ------------------

16,172 4,369 35,002 13,372 162
------------------- ------------------
------------------- ------------------


The Company's production for the third quarter averaged 3,314 boe/d, an increase of 24 percent from the 2,664 boe/d in the second quarter of 2005, and an increase of 170 percent compared to the third quarter of 2004. Natural gas production increased to 18.9 mmcf/d in the third quarter from 14.8 mmcf/d in the second quarter. Liquids production decreased to 171 bbls/d from 197 bbls/d in the second quarter. This overall increase was attributable to a successful drilling program that resulted in an 85 percent drilling success rate for the nine months ended September 30, 2005 combined with the previously mentioned closing of the acquisition of a private company on September 15, 2005. Production for the nine months ended September 30, 2005 was 2,681 boe/d comprised of 15.2 mmcf/d of natural gas and 154 bbls/d of liquids. Average production volumes on a year-over-year basis in 2005 have increased by 116 percent when compared to 2004.

Petroleum and natural gas revenue in the third quarter of 2005 increased by 51 percent to $16.2 million from the $10.7 million recorded in the second quarter of 2005. Strong natural gas prices, combined with a 24 percent increase in production, resulted in the increase for the quarter. Year-over-year, revenue increased by 162 percent as a result of a 22 percent increase in commodity prices and a 116 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 November 14, 2005:



Commodity Type Term Volume Price Index
----------- ------ ---------------- ----------- ----------- ------
Natural gas Fixed October 2005 -
December 2005 6,833 GJ/d $9.21/GJ AECO

Natural gas Collar November 2005 - $12.00/GJ -
March 2006 2,000 GJ/d $14.70/GJ AECO

Natural gas Fixed January 2006 -
March 2006 8,000 GJ/d $9.87/GJ AECO

Natural gas Fixed April 2006 -
October 2006 7,000 GJ/d $8.36/GJ AECO

Natural gas Collar April 2006 - $9.50/GJ -
October 2006 2,000 GJ/d $10.86/GJ AECO



Royalties
Three months ended Nine Months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------
(thousands of dollars)

Crown 1,644 352 3,446 968 256
Freehold and GORR 2,577 527 4,846 1,467 230
Alberta Royalty Tax Credit (75) (49) (225) (201) 12
------------------- ------------------
4,146 830 8,067 2,234 261
------------------- ------------------
------------------- ------------------

Percent of total revenue 25.6% 19.0% 23.0% 16.7% 38
Per boe ($) 13.59 7.34 11.02 6.58 67


For the three months ended September 30, 2005, royalty expense net of ARTC, and royalty rates increased compared to the same quarter of 2004 as a result of a 17% increase in production and a 39% increase in commodity prices. On a per unit basis, royalties have increased reflecting the impact of higher commodity prices. Royalties increased in the third quarter of 2005 when compared to the second quarter of 2005 due to the acquisition of Westrock Energy in the second quarter. The production base of Westrock is located entirely on First Nation lands which have a higher royalty burden averaging approximately 36%.

For the first nine months of 2005, crown royalty rates increased due to a higher number of wells drilled on crown land when compared to 2004.



Operating Expenses

Three months ended Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------

Total operating
costs ($000's) 1,698 644 4,015 2,259 78
Percent of total revenue 10.5% 14.7% 11.5% 16.9% (32)
Per boe ($) 5.57 5.70 5.48 6.64 (17)


Operating costs for the third quarter of 2005 increased to $1.7 million from the $1.3 million incurred in the second quarter of 2005 primarily as a result of the 24 percent increase in production volumes. Unit operating expenses are consistent with the second quarter of 2005. With the closing of the property acquisition in October, Prairie Schooner anticipates an increase in per unit operating expenses of approximately 15 percent for the fourth quarter leading into a budgeted 2006 per unit rate of $7 per boe. This increase is primarily attributable to the crude oil production component of the property acquisition. Through a planned aggressive cost reduction program on the acquired properties, we anticipate per unit cost will decrease in 2006.

On a per unit basis, operating expenses were 17 percent lower at $5.48 per boe for the nine months ended September 30, 2005 compared to $6.64 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 Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------
Total transportation
costs ($000's) 309 292 713 615 16
Percent of total revenue 1.9% 6.7% 2.0% 4.6% (57)
Per boe ($) 1.01 2.58 0.97 1.81 (46)


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 Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------
(thousands of dollars)

General and
administrative 649 374 1,749 1,190 47
Overhead recoveries (162) (60) (422) (148) 185
Capitalized G & A (147) - (399) - 100
------------------- ------------------

Net 340 314 928 1,042 (11)
------------------- ------------------
------------------- ------------------

Percent of total revenue 2.1% 7.9% 2.7% 8.0% (66)
Per boe ($) 1.11 3.00 1.27 3.14 (60)


General and administrative expenses for the third quarter were $340 thousand after recoveries and capitalized costs, a marginal increase from $314 thousand in the third quarter of 2004.

The Company capitalized $147 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 were consistent in the third quarter of 2005 with the second quarter but were reduced by 21 per cent on a per unit basis. In the second quarter, costs 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 while in the third quarter, three additional employees were added in operations and finance. On a per unit basis, general and administrative have been reduced on both a gross and net basis in 2005 due to the 116 percent increase in production volumes.

Overhead recoveries were consistent in the third quarter when compared to the second quarter of 2005. On a year over year basis, overhead recoveries for the first nine months of 2005 have increased by 185 percent due to a substantial increase in capital activity when compared to 2004.



Stock-based Compensation

Three months ended Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------
(thousands of dollars)

Stock-based compensation 325 20 784 30 n/a
Percent total of revenue 2.0% 0.5% 2.2% 0.2% n/a
Per boe ($) 1.06 0.18 1.07 0.09 n/a


The Company applies the fair value method for valuing stock option expenses. For the nine months ended September 30, 2005, Prairie Schooner recorded a stock-based compensation charge of $784 thousand in connection with the issuance of stock options. This charge is related to options granted late in 2004 as well as the options granted in 2005. As Prairie Schooner was a private company in 2004, there was nominal stock-based compensation expense in the first nine months of 2004.



Financial Charges

Three months ended Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------

Total financial
charges ($000's) 221 259 649 652 -
Percent of total revenue 1.4% 5.9% 1.9% 4.9% (61)
Per boe ($) 0.73 2.29 0.89 1.92 (54)


Compared to the second quarter of 2005, interest expense increased by $61 thousand due to the previously mentioned private company acquisition combined with an aggressive capital expenditure program for the second and third quarters. Additionally, the cost of capital increased in the third quarter with an increase in the bank Prime rate.



Depletion, Depreciation and Accretion

Three months ended Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------
(thousands of dollars)

Depletion and
depreciation 4,363 1,019 9,925 2,550 289
Accretion 124 124 252 124 103
------------------- ------------------

4,487 1,143 10,177 2,674 281
------------------- ------------------
------------------- ------------------

Percent of total revenue 27.8% 26.2% 29.1% 20.1% 45
Per boe ($) 14.72 10.12 13.90 7.87 77


Depletion and depreciation expense for the third quarter was $4.5 million, substantially higher than the $3.2 million recorded in the second quarter of 2005. This increase in depletion expense was primarily attributable to a 24 percent increase in production in the quarter. On a unit of production basis, the provision was $14.72 per boe for the third quarter, an increase of $1.43 per boe from the $13.29 per boe over the second quarter of 2005. This increase was primarily attributable to the September 15 acquisition of a private company. This private company had a larger allocation of probable reserves which Prairie Schooner through drilling and facility construction anticipates moving to the proven category over the next six to nine months. In addition, capital expenditures during the third 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 fourth quarter 2005. The acquisition cost of the private Company has been factored in the third 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 third quarter of 2005 to $252 thousand from the $74 thousand recorded in the second quarter of 2005. The private Company acquisition in September 2005 increased accretion for the third 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 nine months ended September 30, 2005, capital taxes were $130 thousand which is comprised of the Federal Large Corporations Tax (LCT). The LCT increased in the third quarter corresponding with the increase in the Company's taxable capital base resulting from the corporate acquisition that closed in September 2005. Future income tax expense for the nine months ended September 30, 2005 was $3.6 million and reflects an effective tax rate of 37%. The total liability for future income tax was $21.9 million as at September 30, 2005.

Cash Flow from Operations and Net Income

Cash flow from operations for the nine months ended September 30, 2005 was $9.4 million ($0.71 per share) compared to $6.2 million ($0.46 per share) in the second quarter. In the third quarter the Company had net earnings of $2.8 million ($0.21 per share) compared to net earnings of $1.6 million ($0.11 per share) in the second quarter.

For the nine months ended September 30, 2005, cash flow from operations was $20.5 million or $1.62 per share as compared to $6.5 million and $0.95 per share in 2004.



Capital Expenditures

Three months ended Nine months ended
September 30, September 30,
------------------- ------------------ Percent
2005 2004 2005 2004 Change
------------------- ------------------ ---------
(thousands of dollars)

Land 431 387 1,302 618 111
Geological and geophysical 150 35 512 95 439
Drilling and completions 3,123 2,915 12,229 3,716 229
Production facilities 1,826 1,002 9,510 2,795 240
Other 6 - 50 86 (42)
------------------- ------------------

Total 5,536 4,339 23,603 7,310 223
------------------- ------------------
------------------- ------------------


Of the total capital spent in the first nine months of 2005, $12.2 million was incurred on the Company's drilling program. The Company drilled 53 gross (34.4 net) wells during the first nine months of 2005 with an 85 percent success rate. During the third quarter of 2005, Prairie Schooner participated with an industry major in the commercial development program for CBM in the Huxley area. Drilling for the three months ended September 30, 2005 resulted in 19 gross (6.0 net) wells drilled with a success rate of 84 percent. The third quarter drilling program was concentrated at Huxley where the Company drilled 14 gross (2.5 net) wells, at Irvine with 2 gross (1.4 net) wells and at Two Hills with 1 gross (0.9 net) wells drilled. This program resulted in 16 successful natural gas wells and 3 abandoned wells.

During the first nine months of 2005, the Company increased its undeveloped land base by incurring $1.3 million 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 September 30, 2005, total net debt (including the working capital deficiency) was $34.7 million compared to net debt of $29.4 million at December 31, 2004. For the nine months ended September 30, 2005, cash flow of $20.5 million, common share equity issuance net proceeds of $23.6 million and an increase in net debt of $3.1 million, were utilized to fund $23.6 million of capital expenditures and the $23.6 million of funds for the corporate acquisition.

During the nine months ended September 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

- 1,181,089 common shares issued as part consideration in the private company
acquisition in April 2005

- 700,000 common shares issued as part consideration in the private company
acquisition in September 2005

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 September 15, 2005, the Company increased its credit facility to $53 million. On October 28, 2005 the credit facility was increased to $80 million concurrent with the closing of the $108 million property acquisition.

As at November 14, 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 nine months ended September 30, 2005:

- 2,800,340 common shares issued as partial consideration in the acquisition of properties

- 226,000 common share options exercised

- 526,667 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 5
($ thousands) 1 Year Years Years Years Total
------------------------------------------------------------------------
Long term
debt (note 1) 34,853 - - - 34,853
Operating lease
obligations (note 2) 102 228 - - 330
Firm transportation
commitments 92 333 - - 425
Asset retirement
obligations 63 1,283 141 11,560 13,042
------------------------------------------------------------------------
Total contractual
obligations 35,110 1,844 141 11,560 48,655
------------------------------------------------------------------------
------------------------------------------------------------------------

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 nine
months ended September 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 September 30, 2005, total future asset retirement obligation costs to be accrued over the life of the remaining proved reserves were estimated at $13.0 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 Chairman & CEO
Well Service Ltd.
Calgary, Alberta

JAMES SAUNDERS NEIL ROSZELL, P. Eng.
Chairman & CEO, Prairie President & COO
Schooner Petroleum Ltd.
Calgary, Alberta

HARVEY TRIMBLE (2)(3) BRUCE ROBERTSON
Independent Businessman Executive Vice President
Okotoks, Alberta

WARREN STECKLEY (1)(2)(3) JERRY SAPIEHA, CA
President, Barnwell of Vice President, Finance & CFO
Canada, Limited
Calgary, Alberta

BOB CHAISSON (2) SHANE PEET, P. Eng.
V.P. Operations, Atlas Vice President, Engineering
Energy Ltd.
Calgary, Alberta

KEVIN OLSON (1) STEVE DELAHAY, P. Geol.
Fund Manager, Energy One Vice President, Exploration
Equity Inc.
Calgary, Alberta

GARY BUGEAUD Head Office
(Corporate Secretary)
Burnet Duckworth & Palmer LLP Suite 1000,
520 - 5th Avenue SW
Calgary, Alberta T2P 3R7
Tel: (403) 266-6400
Fax: (403) 266-8681

Members of the following committee: Bankers
Bank of Montreal
(1) Audit Committee Calgary, Alberta

(2) Reserve Committee Auditors
KPMG LLP
(3) Compensation and Corporate Governance Calgary, Alberta

Independent Reservoir
Consultants
Gilbert Laustsen Jung
Associates Ltd.
Calgary, Alberta


PRAIRIE SCHOONER PETROLEUM LTD.

CONSOLIDATED BALANCE SHEET

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

Current assets
Accounts receivable 6,204 3,099
Prepaid expenses 983 689
Deferred financing expenses (note 7(c)) 1,133 -
------------------------------------------------------------------------
8,320 3,788
Property and equipment (notes 4 and 5) 132,207 68,789
Goodwill (notes 2(b) and 4) 17,114 -
------------------------------------------------------------------------
157,641 72,577
------------------------------------------------------------------------
------------------------------------------------------------------------


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable 8,160 4,631
Bank debt (note 6) 34,853 28,508
------------------------------------------------------------------------
43,013 33,139
Future income taxes 21,874 6,083
Asset retirement obligations (note 9) 4,474 3,001
------------------------------------------------------------------------
69,361 42,223
------------------------------------------------------------------------

Shareholders' equity
Share capital (note 7) 73,621 22,452
Contributed surplus 913 145
Retained earnings 13,746 7,757
------------------------------------------------------------------------
88,280 30,354
------------------------------------------------------------------------

Subsequent event (note 12) 157,641 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 Nine months ended
September 30, September 30,
--------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
(thousands except per share data) (unaudited) (unaudited)
$ $ $ $

Revenue
Petroleum and natural gas sales 16,172 4,369 35,002 13,372
Royalties, net (4,146) (830) (8,067) (2,234)
------------------------------------------------------------------------
12,026 3,539 26,935 11,138
------------------------------------------------------------------------

Expenses
Operating 1,698 644 4,015 2,259
Transportation 309 292 713 615
General and administrative 340 314 928 1,042
Stock-based compensation 325 20 784 30
Financial charges 221 259 649 652
Depletion, depreciation and
accretion (note 5 & 9) 4,487 1,143 10,177 2,674
------------------------------------------------------------------------
7,380 2,672 17,266 7,272
------------------------------------------------------------------------

Earnings before taxes 4,646 867 9,669 3,866

Capital taxes 69 - 130 22
Future income taxes 1,765 23 3,550 1,103
------------------------------------------------------------------------
1,834 23 3,680 1,125
------------------------------------------------------------------------

Net earnings 2,812 844 5,989 2,741

Retained earnings, beginning
of period 10,934 6,970 7,757 5,073
------------------------------------------------------------------------

Retained earnings, end
of period 13,746 7,814 13,746 7,814
------------------------------------------------------------------------
------------------------------------------------------------------------

Net earnings per share
Basic 0.21 0.12 0.47 0.40
Diluted 0.20 0.11 0.45 0.37

(See accompanying notes to the unaudited consolidated financial
statements)



PRAIRIE SCHOONER PETROLEUM LTD.

CONSOLIDATED STATEMENT OF CASH FLOW

Three months ended Nine months ended
September 30, September 30,
--------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
(thousands) (unaudited) (unaudited)
$ $ $ $

Cash flow related to the
following activities

Operating
Net earnings for the period 2,812 844 5,989 2,741
Items not affecting cash:
Depletion, depreciation
and accretion 4,501 1,143 10,177 2,674
Future income taxes 1,765 23 3,550 1,103
Stock-based compensation 325 20 784 30
Risk management gain - (62) - (62)
Asset retirement expenditures - - (16) (1)
------------------------------------------------------------------------

Funds from operations 9,403 1,968 20,484 6,485

Changes in non-cash operating
working capital (1,827) 1,114 (2,012) (598)
------------------------------------------------------------------------
7,576 3,082 18,472 5,887
------------------------------------------------------------------------

Financing
Change in bank debt 16,569 534 6,344 1,617
Share issuance, net (7) - 23,599 66
------------------------------------------------------------------------
16,562 534 29,943 1,683
------------------------------------------------------------------------

Cash available for
investment activities 24,138 3,616 48,415 7,570
------------------------------------------------------------------------

Investing
Property and equipment additions (5,536) (4,339) (23,603) (7,310)
Corporate acquisitions (note 4) (16,464) - (23,593) -
Changes in non-cash investing
working capital (2,138) 723 (1,219) (711)
------------------------------------------------------------------------
(24,138) (3,616) (48,415) (8,021)
------------------------------------------------------------------------

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

NINE MONTHS ENDED SEPTEMBER 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 September 15, 2005, the Company acquired 100% of the issued and outstanding shares of 1161646 Alberta Ltd. ("1161646") a private company. Total consideration of approximately $27 million was paid, with approximately $16.4 million of cash and the issuance of 700,000 common shares of the Company. 1161646 was involved in oil and gas exploration, development and production in east 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 $8.5 million, which has been reflected as goodwill. The under-noted amounts are estimates made by management based on information currently available. Amendments may be made to the purchase equation as the cost estimates and tax balances are finalized.



Cost of Acquisition

Common shares issued 10,675
Transaction costs 55
Cash 16,404
--------
27,139
--------
--------

Allocated at estimated fair values

Property and equipment 27,194
Goodwill 8,480
Future income taxes (7,771)
Asset retirement obligations (764)
--------
27,139
--------
--------


b) Westrock 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. The under-noted amounts are estimates made by management based on information currently available. Amendments may be made to the purchase equation as the cost estimates and tax balances are finalized.



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


c) 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.

d) 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

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

Petroleum and natural
gas properties 157,308 25,279 132,029
Office equipment 593 415 178
------------------------------------------------------------------------
157,901 25,694 132,207
------------------------------------------------------------------------
------------------------------------------------------------------------


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 $399 thousand for the nine months ended September 30, 2005 ($ nil for the nine months ended September 30, 2004).

At September 30, 2005, undeveloped land costs of $9.3 million (December 31, 2004 - $4.6 million) have been excluded from the amount subject to depletion and depreciation.




6. BANK DEBT
September 30, December 31,
2005 2004
-----------------------------
$ $

Prime rate advances 19,853 5,008
Bankers' acceptances 15,000 23,500
------------------------------------------------------------------------
34,853 28,508
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company has a demand revolving credit facility to a maximum of $53 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 $53 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) Common Shares Issued


Number Amount
of Shares $
------------------------------------------------------------------------

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(b)) 1,181,089 17,126
Issued on acquisition
of 1161646 (note 4(a)) 700,000 10,675
Tax effect of 2004 flow-through shares - (1,014)
Share issue costs, net of tax affect - (1,222)
------------------------------------------------------------------------
Balance, September 30, 2005 14,326,656 73,621
------------------------------------------------------------------------
------------------------------------------------------------------------


c) Subscription Receipts

On August 2, 2005, the Company announced that is had entered into a definitive agreement to acquire natural gas weighted producing properties and undeveloped lands predominantly in west central Alberta, for a purchase price of approximately $108 million. The acquisition cost, is payable with $65.3 million cash and 2,800,340 shares of the Company.

The funds required to close the acquisition of approximately $62 million are to be funded through a combination of bank debt and a private placement of subscription receipts ("Subscription Receipts"), and as a result, Prairie Schooner entered into an agreement to sell, on a bought deal basis, 2,700,000 Subscription Receipts at a price of $15.30 per Subscription Receipt for gross proceeds of $41.3 million. The Company, as part of the Purchase and Sale Agreement, placed into escrow a deposit for $11.3 million by way of a Letter of Credit.

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 were deposited in escrow pending closing of the acquisition.

(see note 12).

d) 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.

e) 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.



f) Contributed Surplus

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

Balance, beginning of year 145 24
Stock-based compensation expense 783 145
Options exercised (15) (24)
------------------------------------------------------------------------
Balance, end of period 913 145
------------------------------------------------------------------------
------------------------------------------------------------------------


g) 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 Nine months ended
September 30, September 30,
--------------------------------------
2005 2004 2005 2004
--------------------------------------
Weighted average shares
outstanding (thousands)
Basic 13,741 6,842 12,665 6,844
Diluted 14,600 7,480 13,422 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 September 30, 2005, 1,669,000 (December 31, 2004 - 1,119,000) options with exercise prices between $5.50 and $17.05 were outstanding.

The following tables summarize the information about the share options:



Nine months ended Year ended
September 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 620,000 $13.10 1,079,000 $5.53
Exercised (70,000) $ 4.81 (582,500) $4.94
Cancelled - - (15,000) $5.10
------------------------------------------------------------------------

Outstanding at end
of period 1,669,000 $ 8.32 1,119,000 $5.46
------------------------------------------------------------------------

Options exercisable
at period end nil - 70,000 $4.81
------------------------------------------------------------------------


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

$5.50 - $7.00 1,149,000 3.0 $ 5.59 - -
$7.01 - $10.00 40,000 3.3 $ 7.50 - -
$10.01 - $14.50 275,000 3.5 $14.09 - -
$14.51 - $17.05 205,000 3.9 $16.08 - -
------------------------------------------------- ----------------------
1,669,000 $ 8.32 nil -
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------


The weighted average fair market value of options granted in the nine months ended September 30, 2005 is $3.93 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:



Nine months ended
September 30
-------------------
2005 2004
-------------------
Risk-free interest rate (%) 4.5 4.5
Expected life (years) 4 4
Expected volatility (%) 29 30
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 $4.4 million at September 30, 2005 based on a total future liability of $13.0 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.



Nine months ended
September 30
-------------------
2005 2004
-------------------
Asset retirement obligations, beginning of year 3,001 2,226
Liabilities incurred during period 1,237 31
Liabilities settled during period (16) (1)
Accretion 252 124
-------------------
Asset retirement obligations, end of period 4,474 2,380
-------------------
-------------------


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 nine months ended September 30, 2005 include losses of $374 thousand (2004 - $99 thousand gains) on those transactions.

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



Commodity Type Term Volume Price Index
----------- ------ ---------------- ----------- ----------- ------
Natural gas Fixed October 2005
- December 2005 6,833 GJ/d $9.21/GJ AECO

Natural gas Collar November 2005 $12.00/GJ -
- March 2006 2,000 GJ/d $14.70/GJ AECO

Natural gas Fixed January 2006
- March 2006 8,000 GJ/d $9.87/GJ AECO

Natural gas Fixed April 2006
- October 2006 7,000 GJ/d $8.36/GJ AECO

Natural gas Collar April 2006 $9.50/GJ -
- October 2006 2,000 GJ/d $10.86/GJ AECO


The estimated fair value at September 30, 2005 of these transactions, had the contracts been settled at that time, would be a loss of $8.2 million.

11. SUPPLEMENTAL CASH FLOW INFORMATION

Amounts paid during the nine months ended September 30, 2005 relating to interest expense and capital taxes are as follows:



Nine months ended
September 30
-------------------
2005 2004
-------------------
Interest paid 642 652
Capital taxes 50 22


12. SUBSEQUENT EVENT

On October 31, 2005, the Company announced the closing of the acquisition of producing properties and undeveloped lands for approximately $108 million. Total consideration was paid with approximately $65.3 million of cash and the issuance of 2,800,340 common shares of the Company.

As a result of the closing of the property acquisition, the gross proceeds of $41.3 million from the August 2005 private placement of subscription receipts (note 7(C)) were released from escrow and applied as partial payment of the purchase price of the properties. In accordance with the subscription receipt agreement, the subscription receipts will be deemed to be exercised for common shares of Prairie Schooner on October 28, 2005 without any further action on the part of the holders of subscription receipts.

Concurrent with the closing of the above mentioned property acquisition, the Company's credit facility has been increased to a maximum of $80 million, with similar terms as outlined in note 6.

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)