Regal Energy Ltd.
TSX VENTURE : REG

Regal Energy Ltd.

August 28, 2007 09:00 ET

Regal Energy Announces Third Quarter 2007 Results

CALGARY, ALBERTA--(Marketwire - Aug. 28, 2007) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OF AMERICA

Regal Energy Ltd. ("Regal" or the "Corporation") (TSX VENTURE:REG) announces its financial (unaudited) and operating results for the third quarter ended June 30, 2007.

Highlights

- Arranged private placement financings totaling $3.1 million of equity.



Three Months ended Nine Months ended
June 30, June 30,
(unaudited) 2007 2006 2007 2006

Financial (1)
Petroleum and natural
gas sales (1) $ 542,243 $ 321,021 $ 1,476,838 $ 695,981
Funds flow from
operations
(non-GAAP) (2) $ (29,834) $ (340,001) $ (195,776) $ (535,536)
Cash flow from
operations $ 165,025 $ (1,183,742) $ (160,588) $ (1,827,207)
Net earnings (loss) $ (429,510) $ (611,937) $(1,260,565) $ (676,509)
Capital
expenditures (3) $ 717,567 $ 1,750,766 $ 5,332,059 $ 6,140,596
Working capital
surplus (deficiency) $(3,110,490) $ (63,049)
Total assets $13,626,232 $ 14,419,990
Shareholders' equity $ 9,541,244 $ 12,181,577

Shares outstanding as
of August 28, 2007 48,137,590
Shares issuable for
warrants as of
August 28, 2007 6,005,810
Stock options
outstanding as of
August 28, 2007 2,951,000

Operations
Production
Natural gas (Mcf) 64,857 15,932 170,223 33,688
Oil and NGLs (Bbls) 2,362 3,449 7,355 9,472
Total production
(Boe) (4) 13,172 6,104 35,726 15,087

Natural gas (Mcf/d) 713 175 624 123
Oil and NGLs (Bbl/d) 26 38 27 35
Total production
(Boe/d) (4) 145 67 131 55

Average selling price
Natural gas ($/Mcf) 6.14 6.35 6.28 6.95
Oil and NGLs ($/Bbl) 60.85 63.74 55.44 48.75
Total production
($/Boe) (4) 41.17 52.59 41.34 46.13

Operating Netback
($/Boe) (4) (5) 17.76 (18.63) 14.90 (3.46)


Notes:

(1) Effective with the takeover of Regal Energy Corp. on December 31, 2005,
the Corporation began receiving a revenue stream from crude oil and
natural gas sales.
(2) Funds flow before net change in non-cash operating working capital
balances does not conform to Generally Accepted Accounting Principles
(GAAP). Refer to the "Non-GAAP Measurements" and "Net Earnings, Funds
Flow and Cash Flow from Operations" sections of the Management's
Discussion and Analysis.
(3) Amounts reported do not include amounts charged to capital as a result
of the takeover of Regal Energy Corp. on December 31, 2005, non-cash
capital recorded for asset retirement obligations and is net of
dispositions.
(4) Natural gas is converted to oil equivalent at 6 Mcf = 1 Bbl. A Boe
conversion ratio of 6 Mcf = 1 Bbl is based on an energy equivalency
conversion method and does not represent a value equivalency at the
wellhead; therefore Boe's may be misleading if used in isolation.
(5) Non-GAAP Measurement. Refer to the "Non-GAAP Measurements" section of
the Management's Discussion and Analysis.


MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is management's discussion and analysis ("MD&A") of Regal Energy Ltd.'s ("Regal" or "the Corporation") unaudited operating and financial results for the three and nine months ended June 30, 2007. This MD&A should be read in conjunction with Regal's unaudited interim financial statements and related notes for the three and nine months ended June 30, 2007 and the Audited Financial Statements for the year ended September 30, 2006. This MD&A is current as at August 28, 2007. The accompanying financial statements of Regal have been prepared by Management and approved by the Corporation's Audit Committee and Board of Directors. The financial data presented herein has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). Additional information relating to Regal is available on SEDAR at www.sedar.com and Regal's website (www.regalenergy.ca).

NON-GAAP FINANCIAL MEASUREMENTS

The Corporation has used certain measures of financial reporting that are commonly used benchmarks within the oil and natural gas industry in this MD&A that are considered to be non-GAAP measures. The measures used and referenced in this document include "operating netback" and "funds flow from operations". Operating netback is a benchmark used in the oil and gas industry to measure the contribution of crude oil and natural gas sales after deducting royalties and operating costs. Regal determines funds flow from operations to be the cash flow before changes in non-cash working capital. Management believes that in addition to net earnings, funds flow from operations is a useful supplemental measure to assess the financial performance and ability of Regal to finance future spending. These measures are not defined under GAAP and should not be considered in isolation or as an alternative to conventional GAAP measures. These non-GAAP measures do not have any standardized meaning prescribed by GAAP and they are therefore unlikely to be comparable to similarly titled measures used by other entities. Readers of this MD&A are cautioned in attempting to make such comparisons. When these non GAAP measures are used within this MD&A, they are defined as "non GAAP" and should be given careful consideration by the reader.

OTHER MEASUREMENTS

The reporting and measurement currency of this MD&A is the Canadian dollar. For the purposes of calculating unit costs, natural gas has been converted to a barrel of oil equivalent (Boe) using 6,000 cubic feet (6 Mcf) of natural gas equal to one barrel of oil (6:1), unless otherwise stated. The Boe conversion ratio of 6 Mcf to 1 Bbl is based on an energy equivalency conversion method and does not represent a value equivalency; therefore Boe's may be misleading if used in isolation. (This conversion conforms to NI 51-101). References to natural gas liquids ("NGLs") in this MD&A include condensate, propane, butane and ethane and one barrel of NGLs is considered to be equivalent to one barrel of crude oil equivalent (Boe).

ADVISORY REGARDING FORWARD LOOKING STATEMENTS

Certain information set forth in this MD&A, that are not historical facts, including Management's assessment of Regal's future plans and operations, contains "forward looking statements". All estimates and statements that describe the Corporation's objectives, goals, or future, including Management's assessment of future plans and operations, production estimates and expected production rates, timing of tie-ins and the effect of delays in tieing-in wells and the effects of third party compressor issues and other infrastructure issues, levels of decline rates and the effects thereof, expected royalty rates, expected general and administrative expenses and other expenses, effects of the results of successful wells, expected levels of capital expenditures and the method of funding them, the ability to incur qualifying expenditures renounceable to purchasers of flow-through shares and the expected levels of activities and results of operations of Regal may constitute forward looking information under securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals, the impact of general economic conditions and industry conditions, the lack of availability of qualified personnel or management, stock market volatility and the ability to access sufficient capital from internal and external sources.

As a consequence Regal's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward looking statements and, accordingly no assurance can be given that any events anticipated by the forward looking statements will transpire or occur, or, if any of them do so, what benefits Regal will derive there from. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect Regal's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) and Regal's website (www.regalenergy.ca). Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward looking statements. Furthermore, the forward looking statements contained in this MD&A are made as at the date of this MD&A and Regal does not undertake any obligation to update publicly or to revise any of the included forward looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

THE CORPORATION

The Corporation was incorporated pursuant to the Canada Business Corporations Act on August 7, 1998 as "3519309 Canada Incorporated". On September 28, 2002, 3519309 Canada Incorporated amalgamated to form SiberCore Technologies Incorporated. The Corporation at that time was a semiconductor company developing high value-added standard chips for intelligent hardware based switching and routing platforms.

The shareholders of the Corporation approved a change of business direction on December 17, 2004 that resulted in the distribution of cash and technology assets to shareholders as a return of capital, the consolidation of the common shares of the Corporation on the basis of 1 for 30,000, conversion of the preferred shares of the Corporation on the basis of 0.012 common shares for each preferred share, and a change in the name of the Corporation from SiberCore Technologies Incorporated to Azeri Capital Inc. ("Azeri").

On December 30, 2004 the Corporation entered into a seismic joint venture agreement (the "Seismic JV") with Divestco Seismic Limited Partnership ("Divestco") and Spectrum Seismic Processors Ltd. The seismic underlying the Seismic JV is the majority of the proprietary seismic data of a senior Canadian integrated oil and gas company which consists of over 32,000 km of 2D data covering several areas throughout Alberta and Saskatchewan that was acquired by Divestco. Pursuant to the Joint Venture, the Corporation agreed to fund the estimated cost of reprocessing the seismic data of $1,375,000, and in exchange, the Corporation acquired for its own use a fully reprocessed copy of this seismic data as well as certain other geological and geophysical software usage, and a residual royalty on sales of the entire reprocessed database and individual line by line data sales. On November 9, 2006, this residual royalty was sold for $675,000.

On December 31, 2005, the Corporation acquired, by way of a Plan of Arrangement, all of the issued and outstanding shares of Regal Energy Corp., a public company listed on the TSX Venture Exchange, and changed the Corporation's name to Regal Energy Ltd. (the "Plan of Arrangement"). Pursuant to the Plan of Arrangement, the Corporation reorganized its share capital whereby the issued and issuable shares were split on a 7.37 for one basis. Shareholders of Regal Energy Corp. received one share of the Corporation for each five shares of Regal Energy Corp. previously held.

The Corporation was continued under the Business Corporations Act. (Alberta) on December 31, 2005. As the Plan of Arrangement occurred on December 31, 2005, results from Regal Energy Corp.'s operations are included in the Corporation's financial statements from January 1, 2006 forward.

The principal and head office of the Corporation is located at Suite 1520, Life Plaza 734 - 7th Avenue S.W., Calgary, Alberta T2P 3P8. The registered office of the Corporation is located at Suite 1600, Dome Tower, 333 - 7th Avenue S.W., Calgary, Alberta T2P 2Z1.

The Corporation has no subsidiaries.

Regal Energy Ltd.'s common shares are listed and posted for trading on the TSX Venture Exchange under the symbol REG.

RESULTS OF OPERATIONS

Highlights

During the third quarter of fiscal 2007, capital expenditures totaled $0.7 million, including $0.3 million for equipping and tie-in, $0.3 million for land and $0.1 million for drilling and completions. This was lower than the forecasted capital expenditures of $1.5 million for the quarter. Regal was unable to conduct field operations from mid-April until late July due to an extended spring breakup followed by wetter than usual weather. Operations have recommenced at Garrington, Alberta with the recent tie in of an oil well (0.12 net) and the completion of an Edmonton gas well (1.0 net). Regal is proceeding with plans to re-enter and test a previously completed Viking gas well (1.0 net) and recomplete an Edmonton gas well (0.5 net) in an upper zone at Garrington. Three gas wells (2.5 net) along with a previously completed Edmonton gas well (1.0 net) are expected to be placed on stream in September at Garrington. At Hanna, Alberta, Regal recently participated in the tie in of an exploratory gas well (0.43 net), completed during the second quarter, that commenced production at a rate of 240 Mcf/d (102 Mcf/d net) in July.

Regal's average production rate during the third quarter was 16 percent higher than the previous two quarters as a result of the tie in of two gas wells at Garrington. Current corporate production is estimated to be 170 Boe/d. Regal is continuing to develop its existing behind pipe natural gas inventory, presently estimated to be 310 Boe/d (Garrington - 135 Boe/d, Pica - 25 Boe/d and Eight Mile - 150 Boe/d), in order to increase its production rates and generate additional funds flow.

Regal's new 7-8-81-17 W6M Doig gas discovery well at Eight Mile, BC, which flowed gas at a rate of 3.5 MMcf/d (1.4 MMcf/d net) at 1,115 psi during a March 2007 production test, and a proposed offsetting development location in 14-5-81-17 W6M, if successful, are tentatively scheduled to be tied-in by the end of calendar 2007. The property requires facilities infrastructure, including a pipeline crossing the Peace River (presently under construction) and a pipeline to link the Eight Mile area to a planned compression and dehydration facility to the north of Eight Mile (scheduled for completion by the fourth quarter of calendar 2007).

During the fourth quarter of Fiscal 2007, Regal intends to spend a total of $1.4 million of capital including $0.8 million on completions and $0.6 million on pipelines and facilities. This total does not include the $0.7 million of capital required to drill and complete the 14-5-81-17 W6M well (0.4 net) at Eight Mile which is now expected to occur in October 2007 (Regal's first quarter of fiscal 2008).

In order to complete an expanded capital program, in advance of expected increases in production and associated funds flow and remain within existing banking facilities, the Corporation recently completed an equity financing. Total gross proceeds of $3.1 million raised through private placements of flow through shares and units of Regal will be used to fund exploration and development of Regal's properties located in Alberta and British Columbia and for general working capital purposes. Regal is also considering the sale of two non-core properties as a means of redeploying capital into its core operating areas, however this will depend on whether or not the Corporation receives acceptable values for these properties.

At Pica, Alberta the operator of a recently completed Gething gas well has informed Regal that they intend to tie-in the well as soon as they receive the necessary partner approvals. The well was flow tested over a 72 hour period with a final test rate of 1.1 MMcf/d (317 Mcf/d net) at a flowing pressure of 960 psi. Regal holds a 28% interest in the well that is expected to be tied-in and placed on production during the month of September.

FINANCIAL REVIEW

The Corporation did not have producing oil and gas operations until the completion of the Plan of Arrangement with Regal Energy Corp. on December 31, 2005, therefore operating results for the nine month period ended June 30, 2006 only include operations for the six month period from January 1, 2006 until June 30, 2006.



NET EARNINGS , FUNDS FLOW AND CASH FLOW FROM OPERATIONS:

Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Weighted Average
Shares Outstanding 37,394,212 22,709,179 33,168,370 20,700,290
Net Income (Loss) $ (429,510) $ (611,937) $ (1,260,565) $ (676,509)
Per Share Basic
and Diluted $ (0.01) $ (0.03) $ (0.04) $ 0.03
Funds Flow From
Operations (1) $ (29,834) $ (340,001) $ (195,776) $ (535,536)
Per Share Basic
and Diluted $ 0.00 $ (0.01) $ (0.01) $ (0.03)
Cash Flow From
Operations $ 165,025 $ (1,183,742) $ (160,588) $ (1,827,207)
Per Share Basic
and Diluted $ 0.00 $ (0.05) $ 0.00 $ (0.09)

Note:

(1) Funds flow from operations has been presented for information purposes
only and should not be considered an alternative to, or more meaningful
than, cash flow from operating activities as determined in accordance
with GAAP. The Corporation considers funds flow from operations to be a
key measure as it demonstrates the Corporation's ability to generate
the cash necessary to repay debt and to fund future growth through
capital investment.
The determination of Regal's funds flow from operations may not be
comparable to the same reported by other companies. The reconciliation
of net earnings and funds flow from operations can be found in the
statements of cash flow in the consolidated financial statements.
Funds flow from operations per share was calculated using the same
weighted average shares outstanding used in calculating net earnings
per share.


OPERATING NETBACK

The following table reconciles the Company's operating netback which is
considered to be a non-GAAP measure (1).

Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
Netback Per Boe 2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue $ 41.17 $ 52.59 $ 41.34 $ 46.13
Royalties (5.71) (5.99) (7.74) (6.63)
Operating Costs (17.70) (65.23) (18.70) (42.96)
----------------------------------------------------------------------------
Operating Netback $ 17.76 $ (18.63) $ 14.90 $ (3.46)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note:

(1) Operating netback is a non GAAP measure and is a benchmark used in the
oil industry to measure the contribution of crude oil and natural gas
sales, subsequent to the deduction of royalties and operating costs.
This measure is not necessarily comparable to "Operating Netback" as
reported by another entity.


The operating netback for the three months ended June 30, 2007 was $17.76 per Boe compared to $(18.63) per Boe in the comparable period in 2006. The negative netback experienced in the third quarter of 2006 of $(18.63) per Boe resulted from significant workover costs experienced at the Atlee Buffalo property. Since 2006, the Corporation has eliminated its maintenance expenditures at Atlee Buffalo and has shifted its operating focus to a higher netback area at Garrington, Alberta.

Total gross revenue per Boe declined by $11.42 per Boe during the quarter from 2006 and by $4.79 per Boe on a year to date basis. Softening natural gas prices as well as an increasing proportion of revenues of the Corporation being generated from the sale of natural gas are the primary reasons for the overall decline on per Boe basis of gross revenues. Royalty expense for the current quarter on a per Boe basis decreased from $5.99 per Boe in 2006 to $5.71 per Boe in 2007, while on a year to date basis royalties have increased by $1.11 per Boe during the current year. The increase on a year to date basis is a result of the elimination of the Alberta Royalty Tax Credit program by the Government of Alberta effective January 1, 2007 as well as increased royalties paid as a result of increased levels of production from lands on which overriding royalties are payable.

Total operating costs of $17.70 per Boe in the current fiscal quarter were $47.53 per Boe lower than the $65.23 per Boe level during the third quarter ended June 30, 2006. This reduction is a result of the Corporation shifting focus away from its heavy oil property at Atlee Buffalo in favor of more economic gas projects during the third and fourth quarters of fiscal 2006 and the first three quarters of fiscal 2007.

During the current quarter, on a volume basis, 82% of the Corporation's total production was natural gas while during the similar period in fiscal 2006, only 43% was natural gas. On a revenue dollar basis, 73% of working interest sales was from natural gas during the third quarter of 2007, versus 32% from natural gas during the similar period of 2006. The differential in percentages calculated on a volume basis versus a revenue basis confirms softer natural gas prices in comparison to crude oil prices.

Total operating netback at June 30, 2007 on a fiscal year to date basis amounted to $14.90 per Boe compared to $(3.46) per Boe for the nine months ended June 30, 2006. The explanations for the overall variance on a year to date basis are the same as the explanations provided above for the fiscal quarters.



Producing properties of the Corporation


Quarter Ended June, 2007 Quarter Ended June 30, 2006
Average Production Rate Average Production Rate
----------------------------------------------------------
Working Oil & Total Oil Oil Total Oil
Interest Gas NGLs Equivalent Gas & NGLs Equivalent
Area (%) (Mcf/d) (Bbl/d) (Boe/d) (Mcf/d) (Bbl/d) (Boe/d)
----------------------------------------------------------------------------
Atlee
Buffalo 50-100 57 - 9 83 9 23
Garrington 75-100 514 4 90 - - -
Kaybob 62 83 5 19 34 1 7
Viking
Kinsella 20 58 - 10 58 - 10
Veteran 30-50 - 15 15 - 13 13
Judy Creek 5 1 2 2 - 2 2
Other 5-100 - - - - 12 12
----------------------------------------------------------------------------
Total 713 26 145 175 37 67
----------------------------------------------------------------------------
----------------------------------------------------------------------------


REVENUE

Working Interest Sales

Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
Sales Volumes 2007 2006 2007 2006
----------------------------------------------------------------------------
Natural Gas (Mcf) 64,857 15,932 170,223 33,688
Crude Oil & NGLs (Bbls) 2,362 3,449 7,355 9,472
Total Oil Equivalent (Boe) 13,172 6,104 35,726 15,087
----------------------------------------------------------------------------
Total (Boe/d) 145 67 131 55 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note:
(1) Oil and gas producing operations commenced on January 1, 2006 with the
acquisition of Regal Energy Corp. therefore Boe/d are reduced
accordingly for the 9 month period.


Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
Sales Revenue 2007 2006 2007 2006
----------------------------------------------------------------------------
Natural Gas $ 398,524 $ 101,179 $ 1,069,090 $ 234,251
Crude Oil & NGLs 143,719 219,842 407,748 461,730
----------------------------------------------------------------------------
Total $ 542,243 $ 321,021 $ 1,476,838 $ 695,981
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
Sales Price Per Unit 2007 2006 2007 2006
----------------------------------------------------------------------------
Natural Gas ($/Mcf) 6.14 6.35 6.28 6.95
Crude Oil & NGLs ($/Bbl) 60.85 63.74 55.44 48.75
----------------------------------------------------------------------------
Total Blended ($/Boe) 41.17 52.59 41.34 46.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Total working interest revenue during the three months ended June 30, 2007 amounted to $542,243 (2006 - $321,021) and was made up of natural gas sales in the amount of $398,524 (2006 - $101,179) and crude oil and natural gas liquids sales of $143,719 (2006 - $219,842). During the quarter, 64,857 Mcf (2006 - 15,932 Mcf) of natural gas was sold (713 Mcf/d) (2006 - 175 Mcf/d) and 2,362 Boe (2006 - 3,449 Boe) of crude oil and natural gas liquids was sold (26 Boe/d) (2006 - 38 Boe/d) for a total of 13,172 Boe or 145 Boe/d sold (2006 - 6,104 Boe or 67 Boe/d). The average sales price for natural gas during the quarter amounted to $6.14 per Mcf compared to $6.35 per Mcf in the corresponding period of 2006, a decrease of $0.21 per Mcf year over year, reflecting a softer overall market for natural gas. The average sales price for crude oil and NGLs sales during the quarter amounted to $60.85 per Bbl compared to $63.74 per Bbl during the third quarter of 2006, a 5% decrease year over year. The current quarter blended price of $41.17 per Boe has declined by $11.42 per Boe or 22% from the prices received in the third quarter of 2006.

Sales volumes for the third quarter increased by 78 Boepd or 116% from the comparable period of 2006. On a year to date basis, sales volumes increased by 76 Boepd or 138% from the equivalent period in 2006. Extremely wet conditions in the Corporation's primary operating area of Garrington delayed planned operations originally scheduled to occur in June 2007. The Corporation recently commenced certain selected operations in areas where road bans have been lifted.



ROYALTIES

Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Crown royalties $ 16,732 $ 24,376 $ 145,022 $ 95,570
Freehold royalties 8,413 7,690 24,334 13,737
Overriding royalties 40,735 4,504 111,671 8,531
ARTC 9,382 - (4,618) (17,800)
----------------------------------------------------------------------------
Total $ 75,262 $ 36,570 $ 276,409 $ 100,038
----------------------------------------------------------------------------
Total (per Boe) $ 5.71 $ 5.99 $ 7.74 $ 6.63
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Royalties, which include crown, freehold and overriding royalties paid on oil, natural gas liquids and gas production amounted to $75,262 ($276,409 year to date) during the third quarter of 2007 compared to $36,570 ($100,038 year to date) during the third quarter of 2006. Average royalties during the quarter amounted to $5.71 per Boe or 13.9% of sales (2006 - $5.99 per Boe or 11.4%). Year-to-date at September 30, 2007 total royalties amounted to $276,409 or $7.74 per Boe which represents 18.7% of sales. Total royalty expense for the equivalent period of 2006 amounted to $100,038 or $6.63 per Boe (14.4% of sales). During the third quarter, the Corporation received a capital cost allowance adjustment from the Alberta Government of approximately $28,000. This had the impact of reducing the current quarter royalty expense by $2.13 per Boe or 5.2% of gross revenue. Overall on a year-to-date basis royalty expense has increased by $1.11 per Boe. This increase in royalty expense on a year-to-date basis is due to the elimination of the Alberta Royalty Tax Credit announced by the Alberta Government on September 21, 2006 and effective January 1, 2007. In addition, a larger portion of the Corporation's production was subject to overriding royalties as a result of the activity on numerous farm-in agreements entered into during 2006 and resulting production gains on these lands during 2007. The Corporation expects the effective royalty rate experienced on a year-to-date 2007 basis to be representative of go-forward rates.



OPERATING EXPENSE

Three Months Ended
----------------------------------------------------------------------------
June 30, Per June 30, Per
Major Field 2007 Boe 2006 Boe
----------------------------------------------------------------------------
Atlee Buffalo $ 34,708 $ 40.31 $ 269,763 $ 127.80
Garrington 126,995 15.57 3,048 -
Kaybob 20,000 11.53 6,641 10.92
Morinville - - 9,476 12.05
Sounding Lake 3,500 n/a 53,250 -
Viking Kinsella 6,729 7.61 8,912 10.18
Veteran 38,585 28.54 44,701 36.43
Other 2,621 14.40 2,379 15.14
----------------------------------------------------------------------------
Total $ 233,138 $ 17.70 $ 398,170 $ 65.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine Months Ended
----------------------------------------------------------------------------
June 30, Per June 30, Per
Major Field 2007 Boe 2006 Boe
----------------------------------------------------------------------------
Atlee Buffalo $ 89,821 $ 34.87 $ 412,671 $ 59.54
Garrington 341,763 16.29 3,048 -
Kaybob 59,930 14.54 6,641 10.92
Morinville - - 21,835 14.22
Sounding Lake 6,345 n/a 85,104 127.58
Viking Kinsella 24,405 8.06 23,019 9.59
Veteran 139,289 31.11 91,023 35.80
Other 6,448 11.81 4,742 11.81
----------------------------------------------------------------------------
Total $ 668,001 $ 18.70 $ 648,083 $ 42.96
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Total operating costs for the quarter ended June 30, 2007 amounted to $233,138 or $17.70 per Boe (2006 - $398,170 or $65.23 per Boe). On a year-to-date basis operating costs for 2007 are $668,001 or $18.70 per Boe (2006 - 648,083 or $42.96 per Boe). It should be noted that during 2006, the Corporation did not have any field operations during the first fiscal quarter until the Plan of Arrangement with Regal Energy Corp. was completed on December 31, 2005. The significant decrease in operating costs on a year-over-year basis results from Management's decision during 2006 to reduce the level of operations at the Corporation's heavy oil property at Atlee Buffalo. On a year-to-date basis in 2006, significant workovers were required in an attempt to maintain production from the area. In addition, in 2006, extraordinary operating expenses were incurred at Sounding Lake. The well has since been abandoned and thus there are minimal operating costs incurred in 2007 on this property. Overall operating costs have declined from an average of $19.28 per Boe during the first six months of 2007 to the current quarter level of $17.70 per Boe. The Corporation expects per unit operating costs in our main core operating area of Garrington at $15.57 per Boe in the current quarter to continue to decline. With the addition of behind pipe production, certain fixed costs in the area will be spread over a larger production base and this is expected to provide some downward movement to per unit operating costs.



GENERAL AND ADMINISTRATIVE EXPENSE

Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006(1)
----------------------------------------------------------------------------
Salaries & Benefits $ 89,183 $113,318(1) $263,718 $226,945(1)
Office Costs 43,761 41,901 125,860 86,500
Legal, Audit Engineering
Fees 32,931 32,052 125,359 119,739
Other Consulting 37,418 19,705 115,936 38,145
Shareholder Services 8,709 5,218 33,531 31,771
Capital/Operating
Recoveries (12,444) (43,437) (75,920) (103,296)
----------------------------------------------------------------------------
$199,558 $ 168,757 $588,484 $ 399,804
----------------------------------------------------------------------------
G&A per Boe $ 15.15 $ 27.65 $ 16.47 $ 26.50
----------------------------------------------------------------------------

Note:
(1) Prior to the completion of the Plan of Arrangement with Regal Energy
Corp. that occurred on December 31, 2005, the Corporation had minimal
general and administrative expenditures. Included in the year to date
totals are costs relating to the first fiscal quarter of 2006 in the
amount of $51,894 which is not representative of the operation after the
Plan of Arrangement was completed. During the current quarter, $24,800
of salary expense was capitalized and $49,800 of salary expense was
capitalized year to date.
(2) After $ 49,800 of salary expense capitalized


Total general and administrative expense during the third quarter amounted to $199,558 or $15.15 per Boe (2006 - $168,757 or $27.65 per Boe). On a year to date basis, 2007 general and administrative expense amounted to $588,484 or $16.47 per Boe (2006 -$399,804 or $26.50 per Boe). During the 2006 period, $24,900 of salary expense was capitalized that effectively reduced the general and administrative cost by $2.77 per Boe. The Corporation has not capitalized any salary expense since June 30, 2006, since the departure of the Corporation's Vice President of Exploration and the Vice President of Operations. As well, it should be noted that for the first fiscal quarter of 2006 (October - December, 2005) prior to the Plan of Arrangement with Regal Energy Corp., there was minimal general and administrative costs. Other consulting costs have increased significantly on a quarter over quarter basis and on a year-date-basis in 2007 compared to 2006. These increases are primarily due to outside consultants being engaged to assist Management with increased Corporate Governance compliance requirements, the accrual of a fee to be paid to the Chairman of the Corporation in the amount of $30,000 as well as additional land and accounting contract staff. During the third fiscal quarter of 2007, capital and operating recoveries were reduced from those from the similar period in 2006 primarily due to a reduced level of capital expenditures during the third quarter and on a year-to-date basis. Per unit general and administrative costs are expected to decline as the Corporation continues to increase production rates with relatively nominal increases in overall general and administrative expenses.

INTEREST EXPENSE

Total interest expense for the quarter ended June 30, 2007 amounted to $49,551 compared to $77,210 during the equivalent quarter ended June 30, 2006. Year-to-date 2007 interest expense amounts to $125,479 compared to $167,375 experienced during 2006. Interest is payable and has been accrued to the Canada Revenue Agency on flow through share commitments that remain unexpended for each month starting on February 1 of the year following the year of renouncement. As a result of the significant flow-through share financing ($8,028,000) conducted in December, 2005, interest on unexpended amounts of the flow-through were significant for February to June 2006. During the current year, the Corporation has minimal remaining flow-through share expenditures required to be spent thus reducing accrued interest expense. Interest expense during 2007 on a current quarter and year to date basis is due to the increased level of the Corporation's borrowings on its credit facilities.

STOCK BASED COMPENSATION EXPENSE

The Corporation accounts for its stock-based compensation program using the fair-value method. Under this method, compensation expense related to this program is recorded in the statement of operations over the vesting terms of the options. During the third quarter of 2007, $22,895 of stock based compensation expense was recognized as compared to $46,192 as stock compensation expense during the third quarter of fiscal 2006. On a year-to-date basis at June 30, 2007, $181,775 of stock based compensation was recognized compared to $599,063 during 2006. On February 12, 2007, 575,000 options were granted to directors of the Corporation and 1,125,000 options were granted to employees and consultants. Director's options vest immediately and employee's options vest 1/2 on the date of grant and 1/2 on the first anniversary of the date of grant. In connection with this stock option grant $113,578 of stock compensation expense was recognized immediately while the expense on the unvested employee portion, stock compensation expense will be recognized over the vesting period. During the first fiscal quarter of 2006 as a result of the acquisition of Regal Energy Corp., replacement options were issued to officers, directors and employees that continued with Regal Energy Ltd. and $128,000 of expense was recognized as part of the acquisition.



DEPLETION AND DEPRECIATION

Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Depletion $343,616 $172,921 $796,018 $438,493
Depreciation 5,611 4,178 15,163 7,546
----------------------------------------------------------------------------
Total $349,227 $177,099 $811,181 $446,039
----------------------------------------------------------------------------
Total (per Boe) $ 26.51 $ 29.01 $ 22.71 $ 29.56
----------------------------------------------------------------------------


Total depletion and depreciation expense for the quarter ended June 30, 2007 amounted to $349,227 or $26.51 per Boe (2006 - $177,099 or $29.01 per Boe). On a year-to-date basis, depletion and depreciation expense amounted to $811,181 or $22.71 per Boe (2006 - $446,039 or $29.56 per Boe). The depletion calculation is based on reserves as calculated by the Corporation's independent engineers as at September 30, 2006 and updated with internal Management estimates of reserve additions since September 30, 2006 and associated capital spent to place the added reserves on stream.

AMORTIZATION INTANGIBLE ASSET

As a result of the acquisition of Regal Energy Corp. on December 31, 2005, an intangible asset has been recognized on the balance sheet of $500,000 that represented the value placed on the Management team under contract and continuing with Regal Energy Ltd. as well as a value for the public listing of Regal Energy Corp. The costs of the intangible asset are excluded from the depletion calculation and are being amortized over a period of three years. The Corporation tests for impairment of this asset at each reporting period. At September 30, 2006 as a result of the resignation of two senior officers of the Corporation, an impairment of $149,960 was recorded against this asset. The remaining balance continues to be amortized over the original term of three years. At June 30, 2007 the remaining unamortized balance is $149,960 as compared to $416,600 on June 30, 2006.

ACCRETION

Accretion expense represents the increase in the present value of the asset retirement obligation for the current period. During the quarter ended June 30, 2007 accretion expense amounted to $8,902 compared to $6,945 during the similar period in 2006. On a year-to-date basis at June 30, 2007 total accretion expense amounted to $30,525 compared to $12,471 in 2006. The increased expense on a current quarter and year to date results from additional wells drilled during the fiscal 2007 and the resulting increase in the asset retirement obligation.

INCOME TAXES

During fiscal 2007, the Corporation recorded a future tax recovery of $19,000 compared to a future tax recovery of 1,000,000 during the equivalent period in 2006. Effective February 28, 2007, the Corporation renounced $1.1 million of flow-through expenditures to investors as a result of the flow-through share financing that was completed in November, 2006. The tax impact of the renouncement required the recording of a future tax liability in the amount of $319,000 being recognized in the second quarter of 2007. As at September 30, 2006 the Corporation recognized a future tax asset in the amount of $300,000 leaving a remaining future tax liability of $19,000. As a result of the existing unutilized tax pools of the Corporation, the criteria for recognizing an additional $19,000 of future tax asset was met, this amount was recorded in the financial statements.

The Corporation estimates that it has approximately $65.0 million of tax pools available to shelter taxable income in future years. Due to the existence of these income tax pools, the Corporation does not expect to be taxable for a minimum of three years. The future tax benefit of the tax pools has not been recognized in the financial statements as the criteria for recognition has not been met.

Canada Revenue Agency ("CRA") has conducted an audit of transfer pricing on international transactions between SiberCore Technologies Incorporated and its United States subsidiary, SiberCore America Inc. for the years 2000, 2001 and 2002. SiberCore Technologies Incorporated was the predecessor company of Azeri and ultimately Regal Energy Ltd. The Corporation has received a proposed settlement letter from CRA that would result in a reduction of tax pools in the amount of $1,501,453. CRA has also proposed to charge a cash penalty of 10% of the adjustments. The Corporation has responded to the proposed settlement letter and provided further information supporting Management's view that CRA's position has no merit. During the current quarter, CRA has requested further information in connection with the audit and this information has been provided. The outcome of this audit is uncertain at this time and as such no provisions have been made in these financial statements.

CAPITAL EXPENDITURES

During the third quarter of 2007, the Corporation recorded $717,567 ($5,332,059 year-to-date) of capital expenditures compared to $1,750,766 ($6,140,596 year to date) during the third quarter of 2006. Amounts reported in the following tables do not include non-cash capital recorded for asset retirement obligation in the amount of $2,260 in the third quarter of 2007 ($81,208 year to date) or $32,603 in the third quarter of 2006 ($86,136 year to date). In addition, amounts charged to capital as a result of the takeover of Regal Energy Corp. on December 31, 2005 in the amount of $5,146,851 are not included in the nine months ended June 30, 2006 capital expenditures. During the current quarter, the Corporation's capital activities were mainly focused on the acquisition of a key parcel of land at Garrington from the Crown and tie-in activities on two wells in the Garrington area in early April.



Three Months Ended Nine Months Ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Land $258,423 $ - $ 258,423 $ 14,433
Geological, Geophysical
and Seismic 3,700 28,037 281,748 223,059
Drilling and Completions 69,756 1,138,379 3,877,972 4,970,906
Equipping and tie-ins 380,359 556,270 1,059,567 868,033
Property Acquisition /
Disposition 4,644 - 515,665 -
Seismic Disposition - - (675,000) -
Furniture and Fixtures 685 3,180 13,684 14,335
Capitalized Salaries - 24,900 - 49,800
----------------------------------------------------------------------------
$717,567 $1,750,766 $5,332,059 $6,140,566
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The following table summarizes the Corporation's drilling activity for the
quarter and year to date June 30, 2007 with comparative results for 2006:

Three Months Ended Nine Months Ended
--------------------------------------------------------------
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
--------------------------------------------------------------
Gross Net Gross Net Gross Net Gross Net
Wells Wells Wells Wells Wells Wells Wells Wells
----------------------------------------------------------------------------
Oil - - - - 1 0.12 2 1.60
Natural Gas - - 1 0.85 7 4.68 4 3.62
Dry & Abandoned - - - - 1 0.25 1 0.60
----------------------------------------------------------------------------
Total - - 1 0.85 9 5.05 7 5.82
----------------------------------------------------------------------------
----------------------------------------------------------------------------

FINANCIAL RESOURCES AND LIQUIDITY

At June 30, 2007, the Corporation had a working capital deficiency of
$3,110,490 compared to a working capital deficiency of $63,049 at June 30,
2006. Components of t he working capital deficiency are contained in the
following table.

June 30, September 30, June 30,
2007 2006 2006
----------------------------------------------------------------------------
Cash and cash equivalents $ - $ - $ 935,725
Accounts receivable 510,873 617,852 847,234
Deposits and prepaid expenses 79,113 57,858 71,668
Bank indebtedness (2,424,713) (359,036) -
Accounts payable and accrued
liabilities (1,275,763) (1,561,234) (1,917,676)
----------------------------------------------------------------------------
Total Working Capital $ (3,110,490) (1,244,560) $ (63,049)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Company considers all accounts receivables to be valued fairly and to be collectible.

At March 31, 2007, the Company was not in compliance with a covenant in our agreement with our lender regarding working capital. In order to rectify this non-compliance and allow the Company to proceed with the capital expenditure program necessary to increase our production and cash flow base, a flow-through share financing and a common share equity financing have been completed at the date of this MD&A as described below.

On June 28, 2007, the Corporation closed a portion of its announced private placement of flow-through shares totaling 3,234,200 shares at a price of $0.30 per share for gross proceeds to the Corporation of $970,260. Subsequent to the end of the third quarter, on July 16, 2007, the Corporation completed the remainder of its announced flow-through share financing by issuing an additional 3,765,800 shares at a price of $0.30 per share for gross proceeds of $1,129,740.

On July 16, 2007, the Corporation completed its previously announced private placement of 3,850,000 units of the Corporation at a price of $0.26 per unit for gross proceeds of $1,001,000. Each unit consisted of one common share of the Corporation and one share purchase warrant of the Corporation that entitles the holder to purchase one common share of the Corporation at a price of $0.35 per share for a period of two years.

In order to re-deploy capital, the Corporation has engaged an agent to divest two non-core properties currently producing approximately 24 Boe per day. If acceptable bids for the properties are received, the Corporation expects closing would occur prior to December 31, 2007.

The following projections are based on average wellhead prices of $56.55/Bbl for oil and NGLs for fiscal 2007 (4% higher than previous forecast), and $6.17/Mcf for natural gas for fiscal 2007 (10% lower than previous forecast). The previous forecast in May 2007 assumed stronger natural gas prices during the summer of 2007, based on recovering natural gas prices in North America as a result of natural gas storage inventory levels being lower than the previous year. Since then, natural gas storage inventory levels have increased to record levels causing downward pressure on gas prices. The current spot natural gas price is significantly lower than the price that was predicted in May 2007 for the summer of 2007. Since Regal is mainly a producer of natural gas, lower natural gas prices will contribute to lower than previously forecasted funds flow for fiscal 2007. In addition, as previously discussed, Regal was delayed in conducting certain field operations to tie-in behind pipe production, until recently, due to a much longer than normal spring breakup followed by wet weather. This delay in the timing of placing additional production on stream has reduced the anticipated funds flow from operations over the forecast period, however Management expects to tie-in new production at Garrington and Pica in early September, and at Eight Mile late in calendar 2007 which is expected to generate additional funds flow on a go-forward basis. The following projections make assumptions regarding the timing of tie-ins of wells and deliverabilities of wells that Management considers appropriate. The following table shows Management's current estimate of fiscal 2007 results and outlines the Corporation's expected working capital position at September 30, 2007:



Working capital surplus
(deficiency) June 30, 2007 $ (3,110,490)
Balance of financings closed in
July 2007 (net of estimated costs) 1,960,000
Expected funds flow July 1, 2007
- September 30, 2007 38,000
Projected capital expenditures July 1, 2007
- September 30, 2007 (1,353,000)
----------------------------------------------------------------------------
Expected working capital (deficiency)
September 30, 2007 (1) $ (2,465,490)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note:
(1) Total available banking facilities as at the date of this report -
$3,250,000


LENDING FACILITY

The Corporation has a revolving operating demand facility of $2,750,000 that bears interest at the bank prime rate plus 1/2 percent. Repayments of the facility are not required provided the amounts borrowed do not exceed $2,750,000 or an amount to be determined from time to time. The Corporation also has a non-revolving acquisition/development facility of $500,000 that was fully drawn at June 30, 2007. This facility bears interest at the bank prime rate plus 1.0 percent. The loan facilities are subject to quarterly interim reviews and an annual review by the bank and are secured by a $5,000,000 floating charge demand debenture over all assets of the Corporation. The Company is in compliance with the covenants contained within the loan agreements at June 30, 2007. At June 30, 2007 there was $1,575,000 drawn on the operating demand facility.

SHARE CAPITAL

At June 30, 2007 Regal had 40,521,790 common shares outstanding. In addition, there were 2,155,810 share purchase warrants outstanding of which 905,643 are exercisable until December 31, 2007 at a price of $0.95 per share, 916,667 are exerciseable until May 30, 2008 at a price of $0.20 per share and 333,500 are exercisable at a price of $0.20 per share until August 1, 2008.

Subsequent to quarter-end on July 16, 2007, the Company closed the remainder of its private placement of flow-through shares. An additional 3,765,800 common shares were issued on a flow-through basis at a price of $0.30 per share for gross proceeds of $1,129,740.

In addition, on July 16, 2007, the Company completed an additional private placement of 3,850,000 units at a price of $0.26 per unit for gross proceeds of $1,001,000. Each Unit consists of one common share and one share purchase warrant to purchase one common share of the Company at a price of $0.35 per share for a period of two years.



Equity instrument continuity for the nine months ended June 30, 2007:


Common shares issued: Shares Amount
----------------------------------------------------------------------------
Balance, September 30, 2006 22,709,179 $ 70,172,113
November 2006 private placement
issued for cash 5,000,000 976,268
November 2006 private placement
issued for cash on a flow-through basis 4,583,333 1,073,894
December 2006 rights offering 1,660,078 332,016
February 2007 private placement
issued for cash 3,335,000 626,740
June 2007 private placement issued
for cash on a flow-through basis 3,234,200 970,260
Tax impact of flow-through share issue - (319,000)
Share issuance costs (1) - (407,370)
----------------------------------------------------------------------------
Balance, June 30, 2007 40,521,790 $ 73,424,921
----------------------------------------------------------------------------
Note:
(1) No tax benefit has been recorded as the ultimate realization of such
benefit is uncertain.



Shares Amount
----------------------------------------------------------------------------
Balance, September 30, 2005 7,466,576 $ 59,640,080
December 2005 private placements
issued for cash 737,000 650,000
December 2005 private placements
issued for cash on a flow-through basis 8,217,506 8,028,000
Tax impact of flow through share issue - (2,700,000)
Share issuance costs (1) - (804,912)
Shares issued on acquisition of
Regal Energy Corp. 6,147,469 5,225,349
Shares issued as success fee
on transaction 140,628 133,596
----------------------------------------------------------------------------
Balance, September 30, 2006 22,709,179 $ 70,172,113
----------------------------------------------------------------------------
Note:
(1) No tax benefit has been recorded as the ultimate realization of such
benefit is uncertain.


Warrants:

Number of Number of
Warrants Shares Amount
----------------------------------------------------------------------------
Balance September 30, 2005 - - -
December 15, 2005 private
placement (1) 817,923 817,923 $ 188,000
Warrants issued as success fee
on acquisition of Regal
Energy Corp.(2) 905,643 905,643 218,300
----------------------------------------------------------------------------
Warrants outstanding Dec.31,
2005 and September 30, 2006 1,723,566 1,723,566 406,300
Warrants issued November, 2006
private placement (3) 916,667 916,667 49,838
Warrants issued February 1, 2007
private placement (4) 333,500 333,500 40,260
Warrants expired June 30, 2007 (1) (817,923) (817,923) (188,000)
----------------------------------------------------------------------------
Warrants outstanding June 30, 2007 2,155,810 2,155,810 308,398
----------------------------------------------------------------------------
Total Equity Instruments
Outstanding June 30, 2007 $ 73,733,319
----------------------------------------------------------------------------
Notes:
(1) In connection with the private placement of common and flow-through
common shares on December 15, 2005, the Corporation issued 817,923
warrants that entitle the holder to purchase one common share of the
Corporation for each warrant held at a price of $0.88 until June 30,
2007. The fair value of the warrants was determined using the
Black-Scholes option pricing model using an expected volatility of
50%, a risk free rate of return of 3.5% and a weighted average life of
1.5 years.
(2) Pursuant to the acquisition of Regal Energy Corp. the Corporation
issued 905,643 warrants as a success fee that entitle the holder to
purchase one common share of the Corporation for each warrant held at
a price of $0.95 per share until December 31, 2007. The fair value of
the warrants was determined using the Black-Scholes option pricing
model using an expected volatility of 50%, a risk free rate of return
of 3.5% and a weighted average life of 2.0 years.
(3) In connection with the private placement of common and flow through
common shares on November 30, 2006, the Corporation issued 916,667
warrants that entitle the holder to purchase one common share of the
Corporation for each warrant held at a price of $0.20 until May 30,
2008. The fair value of the warrants was determined using the
Black-Scholes option pricing model using an expected volatility of
58%, a risk free rate of return of 5.0% and a weighted average life of
1.5 years.
(4) In connection with the private placement of common shares on February
1, 2007, the Corporation issued 335,500 warrants that entitle the
holder to purchase one common share of the Corporation for each warrant
held at a price of $0.20 until August 1, 2008. The fair value of the
warrants was determined using the Black-Scholes option pricing model
using an expected volatility of 57%, a risk free rate of return of
5.0% and a weighted average life of 1.5 years.


Options:

The following table summarizes the status of the Corporation's stock option plan and the activity during the current fiscal year to date and the year ended September 30, 2006.



Nine months ended Year ended
June 30, 2007 September 30, 2006
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
Balance, beginning of
period 1,626,000 $0.96 - -
Granted (1) 1,675,000 $0.30 2,086,000 $0.96
Cancelled(3) (350,000) $0.95 (460,000) $0.96
----------------------------------------------------------------------------
Balance, end of
period 2,951,000 $0.58 1,626,000 $0.96
----------------------------------------------------------------------------
Exercisable, end of
period 2,241,000 $0.63 1,306,000 $0.96
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Weighted
Average
Remaining Number
Contractual Exercisable
Number Exercise Life at June 30,
Date of Grant Outstanding Price (Years) Date of Expiry 2007
----------------------------------------------------------------------------
Dec. 31, 2005(2) 86,000 $1.00 .50 Dec. 31, 2007 86,000
Dec. 31, 2005(2) 80,000 $1.00 1.59 Jan. 30, 2009 80,000
Dec. 31, 2005(2) 50,000 $0.90 2.13 Aug. 17, 2009 50,000
Dec. 31, 2005(2) 55,000 $1.00 2.79 Apr. 13, 2010 55,000
Jan. 1, 2006 1,005,000 $0.95 3.51 Jan. 1, 2011 845,000
Feb. 12, 2007(1) 1,675,000 $0.30 4.62 Feb. 12, 2012 1,125,000
----------------------------------------------------------------------------
2,951,000 $0.58 2,241,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) On February 12, 2007, 575,000 options were granted to directors and
1,100,000 options were granted to officers, employees and consultants.
Under the terms of the option agreements, options granted to directors
vest immediately while those options granted to officers, employees and
consultants vest one-half on the date of grant and one half on the first
anniversary of the date of grant. The fair value of each option is
estimated using the Black-Scholes option pricing model and assumes an
expected volatility of 50%, a risk free rate of return of 5.0%, and a
weighted average life of 5 years.
(2) Pursuant of the acquisition of Regal Energy Corp. replacement options
were issued to directors and officers of Regal Energy Corp. These
options vested upon the completion of the transaction as the change of
control provision of the option plan was triggered.
(3) Options were cancelled as a result of the resignation of two Directors
and the reconstitution of the Board of Directors that occurred on
November 30, 2006.

As of the date of this MD&A, the Corporation has the following outstanding
equity instruments:

Shares outstanding 48,137,590
Shares issuable upon exercise of warrants 6,005,810
Stock options outstanding 2,951,000
----------------------------------------------------------------------------
Total equity instruments outstanding 57,094,400
----------------------------------------------------------------------------
----------------------------------------------------------------------------


A total of 48,137,590 common shares are currently issued and outstanding. A further total of 8,956,810 shares are reserved for the exercise of options and warrants, bringing the total diluted number of shares to 57,094,400.

COMMITMENTS

Pursuant to flow-through financing obligations of Regal Energy Ltd., the Corporation is committed to spend $1,100,000 on qualified exploration and development expenditures by December 31, 2007. As at June 30, 2007, the Corporation had expended approximately $1,035,200 related to these commitments. As at the date of this MD&A, the Corporation has expended the full amount related to these commitments.

Pursuant to flow-through financing obligations of Regal Energy Ltd., as a result of a recent financing closed on June 28, 2007 and July 16, 2007, the Corporation is committed to spend $2,100,000 on qualified exploration and development expenditures by December 31, 2008. As at June 30, 2007, the Corporation had expended nil related to these commitments and at the date of this MD&A, the Corporation has expended approximately $375,000 related to these commitments.

In order to fully earn lands where the Corporation has participated in the drilling of a gas well at Hanna, Alberta, the Corporation was required to tie-in the well at a net cost of $127,500. At June 30, 2007, the well had not been tied in, however in July 2007 the well was tied in and placed on production, fulfilling this commitment.

In order to fully earn lands on which the Corporation has participated in the drilling of a gas well at Pica, Alberta, the well must be tied in at a projected net cost to the Corporation of $132,000. This tie-in has not been completed at the date of this MD&A, however the operator of the well expects it will be tied in during September 2007.

In order to fully earn lands on which the Corporation drilled an Edmonton gas well at Garrington, Alberta, the Corporation was required to complete and tie-in the well at a projected cost of $408,000. At June 30, 2007, the well had not been completed, however subsequent to quarter end, the well was completed at an approximate cost of $338,000 and as at the date of this MD&A, approximately $85,000 of the commitment remains to be spent for the tie-in of the well which is expected to occur within the next three weeks.

The Corporation has signed a farm-in agreement with a third party and is committed to re-enter, complete and tie-in a Viking gas well at Garrington, Alberta at a projected cost to the Corporation of $337,000. This work has commenced and to date $84,000 has been spent with the remainder of the work expected to be concluded within the next three weeks.

The Corporation has signed a farm-in agreement with a third party and is committed to re-complete a well in the Garrington area at an estimated cost of $90,000. This work has commenced and to date $18,000 has been spent with the remainder of the work expected to be concluded within the next week.

The Corporation has exercised its option to drill and complete its first option location at Eight Mile, BC at an estimated cost of $660,000. The operator of the property has advised that this well is now expected to be drilled in October, 2007.

RELATED PARTY TRANSACTIONS

During fiscal 2007, Regal had the following related party transaction. All related party transactions are in the normal course of operations and have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is similar to those that would be negotiated with third parties.

a) Two directors of the Corporation are also directors and shareholders of a firm that acted as agent in the February 1, 2007 financing. The agent was granted 333,500 warrants exercisable at a price of $0.20 until August 1, 2008. In addition, this firm was paid a commission of $46,690 as a result of the financing. The two directors of the Corporation abstained from the approval process for the financing.

b) Two directors of the Corporation are also directors and shareholders of a firm that acted as a co-agent in a private placement financing announced on June 4, 2007. On June 28, 2007 the Corporation closed a portion of the financing totaling $970,260 in gross proceeds and the agents were paid a cash commission of $67,918.20. Subsequent to quarter end, on July 16, 2007, the Company closed the remainder of the financing totaling $1,129,740 and the agents were paid a cash commission of $79,081.80. The two directors of the Corporation abstained from the approval process for the financing.



SUMMARY OF SHARE TRADING DURING THE FIRST THREE QUARTERS OF 2007 AND 2006

Price Range
High Low Close Volume Value
Period of Fiscal 2007 ($) ($) ($) Traded ($)
----------------------------------------------------------------------------
First Quarter 0.24 0.165 0.18 3,145,159 580,356
Second Quarter 0.39 0.18 0.26 2,448,675 593,969
Third Quarter 0.30 0.215 0.30 2,232,367 578,557
----------------------------------------------------------------------------
Total First Three Quarters 0.39 0.165 0.30 7,826,201 1,752,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Price Range
High Low Close Volume Value
Period of Fiscal 2006 ($) ($) ($) Traded ($)
----------------------------------------------------------------------------
First Quarter Not Publicly Traded
Second Quarter (1) 1.40 0.60 0.60 969,217 795,667
Third Quarter 0.74 0.38 0.495 718,439 431,444
Fourth Quarter 0.42 0.17 0.19 1,197,762 355,748
----------------------------------------------------------------------------
Total Year 1.40 0.17 0.19 2,885,418 1,582,859
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note:
(1) On January 19, 2006 Regal's shares commenced trading on the TSX Venture
Exchange under the symbol "REG".


DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Corporation is accumulated and communicated to our Management as appropriate to allow timely decisions regarding required disclosure. The Corporation's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of June 30, 2007, that the Corporation's disclosure controls and procedures are effective to provide reasonable assurance that material information related to Regal, is made known to them by employees or third party consultants working for the Corporation. It should be noted that while the Corporation's Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures will provide a reasonable level of assurance and that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met.

CHANGES TO INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes to Regal's internal control over financial reporting since September 30, 2006, which have materially affected, or are reasonably likely to materially affect Regal's internal control over financial reporting.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principals requires the Corporation to make assumptions, judgments and estimates that may have a significant impact on the financial statements. Estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period they become known. A summary of the Corporation's significant accounting policies can be found in Note 2 of the September 30, 2006 audited financial statements.

ACCOUNTING CHANGES

Effective October 1, 2006, the Corporation has adopted the following new Canadian Institute of Chartered Accountants ("CICA") Handbook sections:



a) Section 1530, Comprehensive Income;
b) Section 3251, Equity;
c) Section 3855, Financial Instruments - Recognition and Measurement; and
d) Section 3865, Hedges


For a detailed discussion about the accounting policies adopted effective October 1, 2006, please see Note 2 of the interim financial statements for the three month period ended June 30, 2007.

CANADIAN ACCOUNTING PRONOUNCEMENTS

Effective October 1, 2007, the Corporation will be required to adopt the CICA Handbook Section 1506 Accounting Changes that provides expanded disclosures for changes in accounting policies, accounting estimates and corrections of errors. Under the new standard, accounting changes should be applied retroactively unless otherwise permitted or where impracticable to determine. As well, voluntary changes in accounting policy are made only when required by a primary source of GAAP or the change results in more relevant and reliable information.

Effective October 1, 2007, the Corporation will be required to adopt two new CICA standards, Handbook Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation which will replace Section 3861, Financial Instruments - Disclosure and Presentation. The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. The new financial instruments presentation and disclosure requirements were issued in December, 2006 and the Corporation is assessing the impact on its Financial Statements.

Effective October 1, 2007, the Corporation will be required to adopt the CICA Handbook Section 1535 - Capital Disclosures which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements. The new capital disclosure requirements were issued in December, 2006 and the Corporation is assessing the impact on its Financial Statements.

In 2006, Canada's Accounting Standards Board ratified a strategic plan that will result in Canadian GAAP, as used by public companies, being converged with International Financial Reporting Standards over a transitional period currently expected to be about five years. The precise timing of convergence will depend on an Accounting Standards Board progress review to be undertaken by early 2008. The impact of this transition on the Corporation's financial statements has not yet been determined; however, Management continues to monitor these regulatory developments.

RISKS AND UNCERTAINTIES

The business of exploring for, developing and producing oil and gas reserves is inherently risky. There is a risk that the sale of the Corporation's reserves may be delayed indefinitely die to process constraints, lack of pipeline capacity or lack of markets. The price the Corporation receives for its crude oil and natural gas fluctuates continuously and for the most part is beyond its control. The Corporation is also subject to the risks associated with oil and gas properties, including exploration, development and production risks, and environmental risks such as the pollution of air, land and water. In all areas of the Corporation's business, it competes against entities that have greater technical and financial resources. The Corporation's growth is dependent upon external sources of financing which may not be available on acceptable terms.

ADDITIONAL INFORMATION REGARDING REGAL ENERGY LTD.

Additional information regarding Regal Energy Ltd. is available on the internet at www.sedar.com and Regal's website, (www.regalenergy.ca).

NATIONAL INSTRUMENT 51-102

The Corporation's independent auditor has not performed an audit or review of the June 30, 2007 financial statements in accordance with the standards of the Canadian Institute of Chartered Accountants.

ADVISORY REGARDING OIL EQUIVALENT CONVERSIONS

Natural gas has been converted to a barrel of oil equivalent (Boe) using 6,000 cubic feet (6 Mcf) of natural gas equal to one barrel of oil (6:1), unless otherwise stated. The Boe conversion ratio of 6 Mcf to 1 Bbl is based on an energy equivalency conversion method and does not represent a value equivalency; therefore Boe's may be misleading if used in isolation. (This conversion conforms to NI 51-101). References to natural gas liquids ("NGLs") in this news release include condensate, propane, butane and ethane and one barrel of NGLs is considered to be equivalent to one barrel of crude oil equivalent (Boe).

ADVISORY REGARDING FORWARD LOOKING STATEMENTS

Certain information regarding Regal set forth in this news release, including management's assessment of the Company's future plans, operations and operational results may constitute forward-looking statements under applicable securities law and necessarily involve risks associated with oil and gas exploration, production, marketing, and transportation such as loss of market, volatility of prices, currency fluctuations, imprecision of reserves estimates, environmental risks, competition from other producers and ability to access sufficient capital from internal and external sources. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements.

Issued and Outstanding Common Shares: 48,137,590

The TSX Venture has not reviewed and does not accept any responsibility for the adequacy or accuracy of this release.

Contact Information

  • Regal Energy Ltd.
    Douglas O. McNichol
    President and Chief Executive Officer
    (403) 509-2581
    Email: dmcnichol@regalenergy.ca
    or
    Regal Energy Ltd.
    Wayne R. Wilson
    Vice President Finance and Chief Financial Officer
    (403) 509-2584
    Email: wwilson@regalenergy.ca
    or
    Regal Energy Ltd.
    Suite 1520, Life Plaza
    734 - 7th Avenue S.W.
    Calgary, Alberta T2P 3P8
    Website: www.regalenergy.ca