Rock Energy Inc.
TSX : RE

Rock Energy Inc.

November 14, 2005 08:00 ET

Rock Energy Reports Results for the Period Ended September 30, 2005

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2005) - Rock Energy Inc. (TSX:RE) is pleased to announce the financial and operating results for Rock Energy Inc. for the fiscal period ended September 30, 2005.



CORPORATE SUMMARY

------------------------------------------------------------------------
------------------------------------------------------------------------
FINANCIAL Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Oil and gas
revenue $ 7,030,543 $ 653,422 $11,113,636 $1,981,980

Cash flow from
operations (1) $ 3,551,607 $ 236,672 $ 5,412,843 $ 813,617
Per share
- basic $ 0.18 $ 0.03 $ 0.39 $ 0.09
- diluted $ 0.18 $ 0.03 $ 0.38 $ 0.09

Net income $ 633,953 $ 85,047 $ 762,418 $ 388,443
Per share
- basic $ 0.03 $ 0.01 $ 0.05 $ 0.04
- diluted $ 0.03 $ 0.01 $ 0.05 $ 0.04

Capital
expenditures,
net $ 7,919,974 $ 1,062,525 $76,469,036 $2,400,095

As at As at
September 30, December 31,
2005 2004
------------------------------------------------------------------------
Working capital $(22,642,983) $12,042,986

Common shares
outstanding 19,588,689 9,259,453
Options
outstanding 1,180,276 532,387


OPERATIONS Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Average daily
production
Crude oil and
NGLs (bbls/d) 345 86 246 95
Natural gas
(mcf/d) 5,985 476 3,239 472
Barrels of oil
equivalent
(boe/d) 1,343 165 786 174

Average product
prices
Crude oil
(CDN$/bbl) $ 58.59 $ 48.29 $ 50.73 $ 43.46
NGLs (CDN$/bbl) $ 59.73 $ 43.61 $ 54.86 $ 39.55
Natural gas
(CDN$/mcf) $ 9.37 $ 6.33 $ 8.65 $ 6.68
BOEs (CDN$/boe) $ 56.90 $ 42.90 $ 51.82 $ 41.72

Field netback
(CDN$/boe) $ 32.10 $ 19.05 $ 29.44 $ 21.62
------------------------------------------------------------------------
------------------------------------------------------------------------

Note (1) Cash flow from operations and cash flow from operations per
share are non GAAP terms that represent cash generated from operating
activities before changes in non-cash working capital. We consider it a
key measure as it demonstrates our ability to generate the cash flow
necessary to fund future growth through capital investment. Cash flow
from operations may not be comparable with the calculation of similar
measures for other companies. Cash flow from operations per share is
calculated using the same share basis which is used in the determination
of net income per share.


PRESIDENT'S MESSAGE

The third quarter has been Rock's busiest operational quarter to date. We have begun the process of assimilating the Elm/Optimum/Qwest acquisition into our Company, and embarked upon the rationalization of the asset base into our three core areas. At the same time, a total of 16 (12.8 net) wells were drilled in the quarter with an overall success rate of 80%. As we move into the fourth quarter we expect to continue this high level of activity as we drill another 12 (7.7 net) wells bringing our total count for the year to 37 (26.4 net). With the acquisition now completed, we have been pleased with the overall result, particularly the operational developments at Musreau and Wild River. These assets have proven to be very solid, and are providing additional development opportunities.

In our Plains core area we drilled 12 (12.0 net) wells in the quarter resulting in 9 heavy oil wells and 3 unsuccessful wells. All of the successful wells were brought on production by the end of October and we expect to see production increases materialize over the fourth quarter as start up operations are completed. We plan to drill 6 more heavy oil wells and 1 gas well in our Plains core area in the fourth quarter and will work to get production from the successful wells on stream by year end. For 2006 we have identified numerous drilling opportunities, many of which are on lands we already own, and we expect to drill 15 to 20 wells and grow our production base in this area to over 1,000 boe/day.

The West Central core area has also been very active for us, as we participated in 4 (0.8 net) wells all of which were successful and expect to participate in an additional 5 (0.7 net) wells in the fourth quarter. At Wild River, Rock's working interest reverted from 7.5% to 30% effective November 1, and increased our production by approximately 3 mmcf/d (500 boe/day). For 2006 we have identified 10 - 15 drilling locations on existing non-operated lands that will continue to grow this new core area, and will actively pursue acquisitions and property swaps in order to consolidate our position and gain a higher working interest and operatorship.

Production increased to 1,343 boe/d this quarter almost doubling from 693 boe/d in the second quarter and up from 309 boe/d in the first quarter. The third quarter benefited from having a full quarter of production from the ELM/Optimum/Qwest acquisitions. From a current production level of approximately 2,000 boe/d, Rock expects to add 250 boe/day from the Musreau area as 2 (0.26 net) wells are tied in and 450 boe/day (350 bbl/day of oil and 600 mcf/day of gas) of production from the Plains region. These additions will generate on average production of 2,100 boe/day for the fourth quarter and an exit rate of 2,600 -2,800 boe/day.

Financially, cash flow from operations increased 140% over the second quarter to $3.6 million ($0.18 per basic and fully diluted share) and net income increased six fold to $0.6 million ($0.03 per basic and fully diluted share) primarily due to higher production levels and product price realizations. With the high level of drilling activity, capital expenditures for the quarter were $7.9 million which resulted in an increase in total debt to $22.6 million.

With our activity levels and the increase in product prices we are updating our 2005 guidance. This guidance is based on WTI oil price of US$58/bbl, AECO gas price of C$10.00/mcf and a $0.86 Cdn to US dollar for the last quarter of the year. We have increased our capital budget $3 million to $22 million to reflect the higher number of wells drilled, increased land budget and rising costs. Given the nature and timing of this activity we do not expect it to increase production this year but will contribute to our 2006 production volumes. With higher prices, cash flow from operations is expected to increase to $10.7 million ($0.68 per share) for the year and to $5.3 million ($0.31 per share) for the fourth quarter. Total debt is now expected to be approximately $24 million (with $21 million drawn against lines of $25 million) or still 1.1 times annualized fourth quarter cash flow.

We have approved our preliminary capital budget for 2006 of $30 million. Though the total capital spending will be split (50/50) between the Plains and West Central, the focus of the staff at Rock will be directed 70% toward the West Central core area. During 2006 we will be diligently building and consolidating our West Central core area while executing a solid development program in the Plains. We expect production for the Company in 2006 to average between 2,800 - 3,000 boe/d and to exit about 3,200 - 3,400 boe/day, representing significant growth over 2005 levels. Using the same pricing assumptions as our fourth quarter 2005 guidance update above, we expect to generate cash flow in the range of $26.5 million ($1.35 per share) to $28.5 million ($1.45 per share), which will essentially leave total debt at year-end of approximately $25.5 million or about 0.9 times cash flow.

As we move through the last quarter of 2005 we are pleased with the progress so far this year and excited about the year ahead. Rock has developed a solid capital program for 2006 that will generate strong growth from our asset base. We have expanded our team by adding another geologist, an engineer and support staff to accommodate our increased activity levels. As the year progresses, the rationalization process will provide additional opportunities for consolidation and growth in our core areas, and will lead to acquisitions that compliment our exploration activities. With our foundation set we are confident, and poised for continued growth.



On behalf of the Board of Directors,

signed "Allen J. Bey"

Allen J. Bey,
President and CEO
November 10, 2005


MANAGEMENT'S DISCUSSION AND ANALYSIS

Rock Energy Inc. ("Rock" or the "Company") is a public energy company engaged in the exploration for and development and production of crude oil and natural gas, primarily in Western Canada. Rock's corporate strategy is to grow and develop an oil and gas exploration and production company through internal operations and acquisitions. Rock's philosophy is to operate and have a high working interest in the majority of its production base.

Rock evaluates its performance based on net income, operating netback, cash flow from operations and finding and development costs. Cash flow from operations is used by the Company to analyze operations, performance, leverage and liquidity. Operating netback is a benchmark used in the oil and gas industry to measure the contribution of the oil and natural gas operations following the deduction of royalties, transportation costs, and operating expenses. Finding and development cost is another benchmark used in the oil and gas industry to measure the capital costs incurred by the Company to find and bring reserves on stream.

Rock faces competition in the oil and gas industry for resources, both technical personnel and third party services, and capital financing. The Company is addressing these issues through the addition of personnel with the expertise to develop opportunities on existing lands to control both operating and administrative cost structures. Rock also seeks to obtain the best commodity price available based on the quality of our produced commodities.

The following discussion and analysis is dated November 10, 2005 and is management's assessment of Rock Energy Inc.'s historical financial and operating results, together with future prospects, and should be read in conjunction with the unaudited interim consolidated financial statements of Rock Energy Inc. for the three and nine months ended September 30, 2005 and the consolidated financial statements for the fiscal year-ended December 31, 2004. The discussion provided herein is incremental to that included in management's discussion and analysis in respect of its audited consolidated financial statements for the fiscal year-ended December 31, 2004.

Basis of Presentation

Rock changed its year-end at December 31, 2004 from March 31. As a result the information presented for the nine month period ended September 30, 2004 has been compiled by combining the six month period ended September 30, 2004 with the three month period ended March 31, 2004.

Financial measures referred to in this discussion, such as cash flow from operations and cash flow from operations per share, are not prescribed by GAAP. Cash flow from operations is a key measure that demonstrates the ability to generate cash to fund expenditures. These non GAAP financial measures may not be comparable to similar measures presented by other companies. These financial measures are not intended to represent operating profits for the period nor should they be viewed as an alternative to cash provided by operating activities, net income or other measures of financial performance calculated in accordance with GAAP. Cash flow from operations per share is calculated using the same share basis which is used in the determination of net income per share.

Barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of six mcf to one barrel ("bbl") is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived by converting natural gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil. Certain financial values are presented on a boe basis and such measurements may not be consistent with those used by other companies.

This discussion contains forward-looking statements that involve risk and uncertainties. Such information, although considered reasonable by management at the time of preparation, may prove to be incorrect and actual results may differ materially from those anticipated in the statements made. All financial information is reported in Canadian dollars and in accordance with Canadian generally accepted accounting principles (GAAP) unless otherwise noted.

Outlook

Rock issued guidance on August 11, 2005 for projected 2005 results. Guidance for the Company is now being updated to reflect ongoing activity levels, pricing changes and increased costs in the industry. The table below provides Rock's updated guidance.



------------------------------------------------------------------------
New Guidance Previous Guidance Change
------------------------------------------------------------------------
2005 Production (boe/d)
------------------------------------------------------------------------
Current 2,000 1,400 43%
Annual 1,100 - 1,200 1,200 - 1,300 (8)%
Exit 2,600 - 2,800 2,600 - 2,800 0%
------------------------------------------------------------------------
2005 Cash Flow
------------------------------------------------------------------------
Annual (per share) $10.7 million $9.6 million 11%
($0.68/sh) ($0.61/sh)
Fourth Quarter
(per share) $5.3 million $4.9 million 8%
($0.31/sh) ($0.25/sh)
------------------------------------------------------------------------
Capital Budget
------------------------------------------------------------------------
2005 expenditures $22 million $19 million 16%
Wells Drilled 37 (26.4 net) 31 (24.7 net) 19%
------------------------------------------------------------------------
Total Debt $24 million $22 million 9%
------------------------------------------------------------------------
Pricing
Oil - WTI US$58.00/bbl US$55.00/bbl 5%
Gas - AECO $10.00/mcf $7.50/mcf 33%
Cdn/US dollar 0.86 0.82 5%
------------------------------------------------------------------------
------------------------------------------------------------------------


Cash flow from operations estimates will be positively impacted by higher prices, particularly for gas. The annual production average has been impacted by operational delays as a result of wet weather conditions during the third quarter. The capital budget has been increased to reflect the drilling of additional wells (although they don't affect production in 2005 as they are drilled later in the year), increased land budget which will contribute to 2006 operations and a general increase in industry costs. With increased capital expenditures the Company's total debt (bank debt and other working capital items) is now projected to be $24 million. The Company expects to have approximately $21 million of bank debt drawn against lines of $25 million at year-end.

The Company's initial 2006 budget has been approved by the board of directors. The budget is based on continuing exploration and development activities in its existing core areas. Approximately 25% of the budget is directed towards land and seismic, 40% to the Plains core area and 35% to the West Central and Northeast BC core areas. Rock intends to pursue acquisition opportunities that have not been included in this budget and financing of any such activities will be considered with the opportunity. The table below provides our initial budget projections.



------------------------------------------------------------------------
2006 2005 Change
------------------------------------------------------------------------
Production (boe/d)
Entry 2,600 - 2,800 200 1,250%
Annual 2,800 - 3,000 1,200 - 1,300 132%
Exit 3,200 - 3,400 2,600 - 2,800 22%
------------------------------------------------------------------------
Cash Flow
------------------------------------------------------------------------
Annual - $ $26.5 - $28.5 million $9.6 million 207%
Annual - $ per share $1.35 - $1.45 $0.68 106%
------------------------------------------------------------------------
Capital Budget
------------------------------------------------------------------------
Expenditures $30 million $22 million 36%
Wells Drilled 35 -40 37 0%
------------------------------------------------------------------------
Total Debt $25.5 - 27.5 million $24 million 10%
------------------------------------------------------------------------
Pricing
------------------------------------------------------------------------
Oil - WTI US$58.00/bbl US$56.00/bbl 4%
Gas - AECO $10.00/mcf $8.40/mcf 19%
Cdn/US dollar 0.86 0.83 4%
------------------------------------------------------------------------
------------------------------------------------------------------------

Production

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
Production 09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Gas (mcf/d) 5,985 476 1,157 % 3,239 472 586 %
Oil (bbl/d) 154 71 117 % 108 79 37 %
Heavy Oil (bbl/d) 107 - N.A. 88 - N.A.
NGL (bbl/d) 84 15 460 % 50 16 205 %
boe/d (6:1) 1,343 165 714 % 786 174 352 %
------------------------------------------------------------------------
------------------------------------------------------------------------


For the quarter and nine months ended September 30, 2005 boe production has increased due to the ELM/Optimum/Qwest acquisitions completed in the second quarter of 2005 and heavy oil additions throughout the year. Production levels are expected to increase in the fourth quarter due to the working interest reversion at Wild River that occurred November 1, 2005 which has increased gas production approximately 3 mmcf/d, gas wells coming onstream at Musreau in our West Central core area and additional heavy oil wells coming on production in our Plains core area.



Product Prices

------------------------------------------------------------------------
------------------------------------------------------------------------
Realized 3 Months 3 Months 9 Months 9 Months
Product Ended Ended Quarterly Ended Ended
Prices 09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Gas ($/mcf) 9.37 6.33 48 % 8.65 6.68 30 %
Oil ($/bbl) 71.13 48.29 47 % 65.81 43.46 51 %
Heavy Oil ($/bbl) 40.60 - N.A. 32.27 - N.A.
NGL ($/bbl) 59.73 43.61 37 % 54.86 39.55 39 %
------------------------------------------------------------------------
boe (6:1) 56.90 42.90 33 % 51.82 41.72 24 %

Average Benchmark
Prices
Gas - NYMEX
Daily Spot
(US$/mcf) 9.94 5.48 81 % 7.76 5.75 35 %
Gas - AECO C
Daily Spot
($/mcf) 9.37 6.21 51 % 7.88 6.54 21 %
Oil - WTI Cushing
(US$/bbl) 63.19 43.88 44 % 55.41 39.11 42 %
Oil - Edmonton
light ($/bbl) 76.51 56.25 36 % 67.91 50.82 34 %
Heavy Oil -
Llyodminster
blend ($/bbl) 53.27 40.57 31 % 43.38 36.60 19 %
US$/Cdn$
exchange rate 0.833 0.765 9 % 0.817 0.753 9 %
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenue

The vast majority of the Company's revenue is derived from oil and gas operations. Other income for 2005 is primarily royalty revenue where as in prior year periods it primarily represents interest income on cash balances.



------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Oil and Gas
Revenue $7,030,543 $653,422 976 % $11,113,636 $1,981,980 461 %

Other
Income $ 84,642 $ 64,361 32 % $ 216,668 $ 286,176 (24)%
------------------------------------------------------------------------
------------------------------------------------------------------------


Increased production and higher product prices resulted in an increase to oil and gas revenue for the quarter and nine months ended September 30, 2005 in comparison to the prior year periods.



Royalties

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Royalties $1,434,913 $223,923 541 % $2,360,976 $584,851 304 %
As percentage
of oil and
gas revenue 20.4 % 34.3 % (41)% 21.2 % 29.5 % (28)%
Per boe
(6:1) $ 11.61 $ 14.70 (22)% $ 11.01 $ 12.31 (11)%
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties include crown, freehold and overriding royalties and for the quarter and nine month periods ended September 30, 2005 are higher on an absolute basis in comparison to the same periods of 2004, mainly as a result of higher production partially offset by an overall lower rate. On a per boe and percentage of revenue basis, rates are lower for the 2005 periods versus 2004 primarily due to negative prior period adjustments in the 2004 periods.



Operating Expense

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Operating
expense $1,630,223 $139,450 1,069 % $2,438,315 $369,925 559 %
Per boe
(6:1) $ 13.19 $ 9.15 44 % $ 11.37 $ 7.79 46 %
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating expenses have increased in 2005 on a per boe basis over the same periods in 2004 due to prior period adjustments associated with the acquired ELM/Optimum/Qwest properties and heavy oil start up operations. Costs tend to be higher during the start up phase for heavy oil wells as operations tend to run on purchased fuel instead of casing head gas produced form the well, higher trucking costs associated with load oil and increased maintenance. In addition, service costs on existing heavy oil wells also contributed to higher operating costs this quarter. Operating expenses are likely to trend down on a per boe basis in the coming quarters due to the absence of prior period adjustments and higher production levels from the heavy oil wells which will be partly offset by the start up of new heavy oil operations in the fourth quarter. Transportation costs of $91,330 ($0.74 per boe) for the quarter and $116,553 ($0.54 per boe) for the first nine months of 2005 have been included in operating expenses. Transportation expenses have increased as a result of the acquired ELM/Optimum/Qwest properties. Transportation costs were not applicable for the quarter and nine months ended June 30, 2004 due to marketing arrangements in place at that time.



General and Administrative (G&A) Expense

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
G&A Expense Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Gross $537,587 $349,436 54 % $1,461,493 $984,405 48 %
Per boe (6:1) $ 4.35 $ 22.93 (81)% $ 6.81 $ 20.72 (67)%
Capitalized $208,796 $122,813 69 % $ 577,133 $386,386 49 %
Per boe (6:1) $ 1.69 $ 8.06 (79)% $ 2.69 $ 8.13 (67)%
Net $328,791 $226,623 45 % $ 884,360 $598,019 48 %
Per boe (6:1) $ 2.66 $ 14.87 (82)% $ 4.12 $ 12.59 (67)%
------------------------------------------------------------------------
------------------------------------------------------------------------


G&A expenses increased on an absolute basis in 2005 over 2004 due to higher staffing levels associated with greater levels of activity but have dropped on a per boe basis with higher production. The Company capitalizes certain G&A expenses based on personnel involved in exploration and development activities, including certain salaries and related overhead costs. G&A expenses are expected to rise on an absolute basis in the future as additional staff is anticipated on being hired but should drop on a per boe basis with growth in production.



Interest Expense

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Interest
expense
(recovery) $152,095 $(108,885) N.A. $196,527 $(98,256) N.A.
Per boe (6:1) $ 1.23 $ (7.15) N.A. $ 0.92 $ (2.07) N.A.
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest in the quarter ended September 30, 2005 is as a result of bank borrowings. Interest recovery in the prior year period resulted from the reversal of accrued interest from a prior period.



Depletion, Depreciation and Accretion (DD&A)

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
D&D
expense $2,595,719 $97,327 2,567 % $4,216,914 $268,934 1,468 %
Per boe
(6:1) $ 21.01 $ 6.39 229 % $ 19.65 $ 5.66 247 %
------------------------------------------------------------------------
Accretion
expense 30,030 3,590 737 % 45,273 12,942 250 %
Per boe
(6:1) $ 0.24 $ 0.24 0 % $ 0.21 $ 0.27 (23)%
------------------------------------------------------------------------
------------------------------------------------------------------------


The depletion and depreciation expense and boe rate for the quarter and nine months ended September 30, 2005 were higher compared to the same periods in 2004 due to higher production and the cost base of the ELM/Optimum/Qwest acquisitions.

Accretion expense represents the change in the time value of the asset retirement obligation ("ARO") over the applicable period. The underlying ARO may be increased over a period based on new obligations incurred from drilling wells or constructing facilities. Similarly this obligation can also be reduced as a result of abandonment work undertaken and reducing future obligations. The ARO obligation increased during the quarter $146,300 as a result of drilling new wells.

Taxes

The Company has received an additional $5.2 million of tax pools with the ELM/Optimum/Qwest transactions. As a result the purchase price equation has been adjusted to reflect these additional pools, which has resulted in the reduction of the future tax liability and the associated goodwill.



Cash flow from Operations and Net Income

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Cash flow
from
Operations $3,551,607 $236,672 1389 % $5,412,843 $813,617 562 %
Per boe
(6:1) $ 28.75 $ 15.53 85 % $ 25.23 $ 17.13 47 %
Per share
- basic $ 0.18 $ 0.03 500 % $ 0.39 $ 0.09 333 %
- diluted $ 0.18 $ 0.03 500 % $ 0.38 $ 0.09 322 %

Net Income $ 633,953 $ 85,047 645 % $ 762,418 $388,443 96 %
Per boe
(6:1) $ 5.13 $ 5.58 (8)% $ 3.55 $ 8.18 (57)%
Per share
- basic $ 0.03 $ 0.01 200 % $ 0.05 $ 0.04 25 %
- diluted $ 0.03 $ 0.01 200 % $ 0.05 $ 0.04 25 %

Weighted
average
shares
outstanding
- basic 19,586,815 8,993,152 118 % 14,035,438 8,824,423 59 %
- diluted 19,708,878 9,019,277 119 % 14,114,534 8,962,871 57 %
------------------------------------------------------------------------
------------------------------------------------------------------------


Per share amounts have increased for the 2005 periods versus 2004 primarily due to the ELM/Optimum/Qwest acquisitions in the second quarter of 2005.

Cash flow from operations and net income improved over the prior year periods due to higher production levels and prices partially offset by higher operating costs and interest expenses. Net income was also negatively impacted by the increase in depletion and depreciation charges, which are primarily related to the acquisitions in the second quarter.



Capital Expenditures

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Quarterly Ended Ended
09/30/05 09/30/04 Change 09/30/05 09/30/04 Change
------------------------------------------------------------------------
Land $ 301,598 $ 274,480 10 % $ 2,048,851 $1,096,130 87 %
Seismic 224,568 192,894 16 % 869,034 515,168 69 %
Drilling
and
completion
6,886,036 464,501 1,382 % 9,883,171 393,984 2,409 %
Capitalized
G&A 208,796 122,813 70 % 577,113 386,386 49 %
------------------------------------------------------------------------
Total
exploration
and
production
$7,620,998 $1,054,688 623 % $13,378,169 $2,391,668 459 %
Facilities
&
equipment 289,388 Nil N.A. 2,439,966 $ nil N.A.
------------------------------------------------------------------------
Total
operations
$7,910,386 $1,054,688 650 % $15,818,135 $2,391,668 561 %
------------------------------------------------------------------------
Property
acquisitions Nil Nil N.A. 60,593,475 Nil N.A.
Office
equipment 9,588 7,837 22 % 57,426 8,427 581 %
------------------------------------------------------------------------
Total $7,919,974 $1,062,525 645 % $76,469,036 $2,400,095 3,086 %
------------------------------------------------------------------------
------------------------------------------------------------------------


During the quarter 16 (12.8 net) wells were drilled bringing the total wells drilled for the year to 25 (18.7 net) with an overall success rate of approximately 80%. Of these wells 12(12.0 net) were drilled in our Plains core area and 4 (0.8 net) were drilled in our West Central core area. Plains drilling focused mainly on heavy oil targets while the West Central drilling mainly focused on gas. Production from the successful operations is expected to be brought on stream towards the end of the fourth quarter. The capital expenditures for the nine months ended September 30, 2005 include the $60.6 million acquisition of ELM/Optimum/Qwest. The Company drilled 2 (2.0 net) wells in the prior year period. The Company's current capital budget for 2005 is $22 million (excluding the cost of acquisitions), which includes the drilling of an additional 12 (7.7 net) wells in the fourth quarter of the year.

Liquidity and Capital Resources

Rock currently projects capital expenditures for the remainder of the year of approximately $5.9 million and cash flow from operations of approximately $5.3 million. The Company's initial budget for 2006 projects capital expenditures of $30 million and cash flow from operations of $26.5 to $28.5 million. Rock intends to fund capital expenditures in excess of cash flow from its bank facility.

The Company has a demand operating loan facility with a Canadian chartered bank. The facility is subject to the bank's valuation of the Company's oil and gas assets and the initial credit available is $25 million. The facility bears interest at the bank's prime rate or at prevailing banker's acceptance rate plus an applicable bank fee. The facility also bears a standby charge for un-drawn amounts. The facility is secured by a first ranking floating charge on all real property of the Company, its subsidiary and partnership and a general security agreement. The facility is currently under an interim review with a formal year end review scheduled for March, 2006. As at November 10, 2005 approximately $19.3 million was drawn under the facility.

Selected Quarterly Data

The following table provides selected quarterly information for Rock with the exception of the quarter ended December 31, 2003 which is quarterly information for Rock Energy Ltd.



------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
09/30/05 06/30/05 03/31/05 12/31/04
(unaudited) (unaudited) (unaudited) (unaudited)
------------------------------------------------------------------------
Production (boe/d) 1,343 693 309 201

Oil and gas
revenues $ 7,030,543 $ 2,923,869 $ 1,159,224 $ 863,290

Price realizations
($/boe) $ 56.90 $ 46.36 $ 41.65 $ 46.48
Royalties
($/boe) $ 11.61 $ 10.39 $ 9.73 $ 3.73
Operating expense
($/boe) $ 13.19 $ 8.62 $ 9.49 $ 8.48
Field netback
($/boe) $ 32.10 $ 27.35 $ 22.43 $ 34.27

Net G&A expense $ 328,791 $ 281,850 $ 273,718 $ 361,173

Stock-based
compensation $ 131,467 $ 54,810 $ 41,523 $ 58,279

Cash flow from
operations $ 3,551,607 $ 1,468,845 $ 392,392 $ 404,397
Per share
- basic $ 0.18 $ 0.11 $ 0.04 $ 0.04
- diluted $ 0.18 $ 0.11 $ 0.04 $ 0.04

Net income $ 633,953 $ 77,365 $ 51,100 $ 182,577
Per share
- basic $ 0.03 $ 0.01 $ 0.01 $ 0.02
- diluted $ 0.03 $ 0.01 $ 0.01 $ 0.02

Capital
expenditures $ 7,919,974 $ 66,410,812 $ 2,138,251 $ 3,852,222
------------------------------------------------------------------------
------------------------------------------------------------------------

As at As at As at As at
06/30/05 06/30/05 03/31/05 12/31/04
------------------------------------------------------------------------
Working capital
($000) $ (22,643) $ (18,093) $ 10,297 $ 12,043
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
09/30/04 06/30/04 03/31/04 12/31/03
(unaudited) (unaudited) (unaudited) (unaudited)
------------------------------------------------------------------------
Production (boe/d) 165 171 186 192

Oil and gas
revenues $ 653,422 $ 661,851 $ 666,707 $ 613,277

Price realizations
($/boe) $ 42.90 $ 42.54 $ 39.48 $ 34.78
Royalties
($/boe) $ 14.70 $ 11.08 $ 11.16 $ 8.36
Operating expense
($/boe) $ 9.15 $ 7.67 $ 6.56 $ 5.24
Field netback
($/boe) $ 19.05 $ 23.79 $ 21.76 $ 21.18

Net G&A expense $ 226,623 $ 160,375 $ 211,021 $ 145,888

Stock-based
compensation $ 50,708 $ 46,294 $ 46,295 $ nil

Cash flow from
operations $ 236,672 $ 276,367 $ 301,161 $ 105,465
Per share
- basic $ 0.03 $ 0.03 $ 0.04 $ 0.03
- diluted $ 0.03 $ 0.03 $ 0.03 $ 0.03

Net income $ 85,047 $ 145,120 $ 158,282 $ 23,380
Per share
- basic $ 0.01 $ 0.02 $ 0.02 $ 0.01
- diluted $ 0.01 $ 0.02 $ 0.02 $ 0.01

Capital
expenditures $ 1,062,525 $ 1,018,682 $ 318,888 $ 192,625
------------------------------------------------------------------------
------------------------------------------------------------------------

As at As at As at As at
09/30/04 06/30/04 03/31/04 12/31/03
------------------------------------------------------------------------
Working capital
($000) $ 14,497 $ 15,323 $ 16,065 $ 2,881
------------------------------------------------------------------------
------------------------------------------------------------------------


The three months ended September 30, 2005 have been significantly impacted due to the ELM/Optimum/Qwest acquisitions in the second quarter of 2005.

Contractual Obligations

The Company signed a two year office lease that expires on October 31, 2006. Under the lease the Company is committed to future payments of approximately $0.2 million.

Outstanding Share Data

Subsequent to September 30, 2005 the Company did not issue any stock options. At the date of this report there are 19,588,689 common shares outstanding and 1,180,276 options to purchase common shares outstanding.



ROCK ENERGY INC.
Consolidated Balance Sheets

September 30, 2005 and December 31, 2004

------------------------------------------------------------------------
------------------------------------------------------------------------
September 30, 2005 December 31, 2004
(unaudited)
------------------------------------------------------------------------
Assets

Current Assets:
Cash and cash equivalents $ 358,749 $ 8,631,810
Accounts receivable 6,760,979 484,714
Prepaids 290,921 5,119,154
------------------------------------------------------------------------
7,410,649 14,235,678

Property, plant and equipment
(note 1) 87,595,890 9,450,555
Accumulated depletion
and depreciation (4,898,140) (681,225)
------------------------------------------------------------------------
82,697,750 8,769,330

Goodwill 5,008,092 2,051,967

------------------------------------------------------------------------
$95,116,491 $25,056,975
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable and
accrued liabilities $10,393,128 $ 2,192,692
Bank debt (note 4) 19,660,504 -
------------------------------------------------------------------------
30,053,632 2,192,692

Future tax liability 3,657,812 -
Asset retirement obligation
(note 5) 2,221,829 500,256

Shareholders' Equity:
Share capital (note 2) 57,124,154 21,275,627
Contributed surplus (note 2) 409,823 201,577
Retained earnings 1,649,241 886,823
------------------------------------------------------------------------
59,183,218 22,364,027

------------------------------------------------------------------------
$95,116,491 $25,056,975
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

Approved by the Board:

signed "Stuart G. Clark" signed "Allen J. Bey"

Stuart G. Clark Allen J. Bey
Director Director


ROCK ENERGY INC.
Consolidated Statements of Income and Retained Earnings
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Revenues
Oil and gas
revenue $7,030,543 $ 653,422 $11,113,636 $1,981,980
Royalties,
net of ARTC (1,434,913) (223,923) (2,360,976) (584,851)
Other income 84,642 64,361 216,668 286,176
------------------------------------------------------------------------
5,680,272 493,860 8,969,328 1,683,305

Expenses:
General and
administrative 328,791 226,623 884,360 598,019
Operating 1,630,223 139,450 2,438,315 369,925
Interest
(recovery) 152,095 (108,885) 196,527 (98,256)
Stock based
compensation
(note 3) 131,467 50,708 227,800 143,298
Depletion,
depreciation
and accretion 2,625,749 100,917 4,262,187 281,876
------------------------------------------------------------------------
4,868,325 408,813 8,009,189 1,294,862

------------------------------------------------------------------------
Income before
income taxes 811,947 85,047 960,139 388,443

Taxes
Current (recovery)
(note 6) - - (8,167) -
Capital 17,556 - 45,450 -
Future taxes
(note 6) 160,438 - 160,438 -
------------------------------------------------------------------------
Net income for
the period 633,953 85,047 762,418 388,443

Retained earnings,
beginning
of period 1,015,288 619,199 886,823 315,803

------------------------------------------------------------------------
Retained earnings,
end of period $1,649,241 $ 704,246 $ 1,649,241 $ 704,246
------------------------------------------------------------------------
------------------------------------------------------------------------

Basic and diluted
earnings per
share (note 2) $ 0.03 $ 0.01 $ 0.05 $ 0.04
------------------------------------------------------------------------
------------------------------------------------------------------------


See accompanying notes to consolidated financial statements.


ROCK ENERGY INC.
Consolidated Statements of Cash Flows
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Cash provided
by (used in):

Operating:
Net income for
the period $ 633,953 $ 85,047 $ 762,418 $ 388,443
Add: Non-cash
items:
Depletion,
depreciation
and accretion 2,625,749 100,917 4,262,187 281,876
Stock-based
compensation 131,467 50,708 227,800 143,298
Future taxes
(recovery) 160,438 - 160,438 -
------------------------------------------------------------------------
3,551,607 236,672 5,412,843 813,617
Changes in
non-cash
working capital (1,014,411) (54,750) (3,584,898) 338,112
------------------------------------------------------------------------
2,537,196 181,922 1,827,945 1,151,729

Financing:
Issuance of
common shares 19,554 - 19,554 14,136,868
Shareholder loan - - - (250,000)
Bank debt 3,201,584 - 19,660,504 -
Repurchase of
stock options (19,554) (19,554)
Changes in
non-cash working
capital - (8,151) - (777,481)
------------------------------------------------------------------------
3,201,584 (8,151) 19,660,504 13,109,387

Investing:
Property, plant
and equipment (7,919,974) - (15,875,560) (1,337,570)
Acquisitions
property, plant
and equipment - (1,062,525) (23,879,684) (1,062,525)
Changes in
non-cash working
capital 2,426,114 176,050 9,993,734 176,050
------------------------------------------------------------------------
(5,493,860) (886,475) (29,761,510) (2,224,045)
------------------------------------------------------------------------

Increase/(decrease)
in cash and cash
equivalents 244,920 (712,704) (8,273,061) 12,037,071

Cash and cash
equivalents,
beginning
of period 113,829 15,693,151 8,631,810 2,943,376

------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 358,749 $14,980,447 $ 358,749 $14,980,447
------------------------------------------------------------------------
------------------------------------------------------------------------

Interest and cash
taxes paid
and received:
Interest paid $ 152,095 $ - $ 196,527 $ 10,153
Interest received (350) 64,361 36,029 285,921
Cash taxes paid - - - -
Cash taxes
received - - - -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Notes to the Consolidated Financial Statements

For the Period Ended September 30, 2005

These unaudited interim consolidated financial statements include the accounts of Rock Energy Inc. ("Rock" or the "Company") and its wholly-owned subsidiary, Rock Energy Ltd. These unaudited interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the year-ended December 31, 2004. The disclosures herein are incremental to those included with the annual consolidated financial statements. These unaudited interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company's annual report for the year-ended December 31, 2004.

1. Acquisition of ELM/Optimum/Qwest

On March 14, 2005 the Company agreed to acquire in two separate closings from 14 different entities (six private companies and eight drilling fund partnerships) petroleum and natural gas properties mainly through their various subsidiary companies. The transactions have been accounted for using the purchase method with the results of operations for each transaction included in the Financial Statements from the date of acquisition.

The first closing of the Elm/Optimum Properties occurred on April 7th, 2005. The Company purchased all of the outstanding shares of 1143734 Alberta Ltd. and assets were purchased directly from three private entities and four drilling fund partnerships. The purchase price equation is as follows:



---------------------------------------------------------------------
Property, plant and equipment $16,483,019
Note payable (1) (309,082)
Asset retirement obligation (372,600)
---------------------------------------------------------------------
$15,801,337
---------------------------------------------------------------------
Consideration provided:
Cash $4,575,017
Common shares (3,091,483) 10,943,843
Transaction costs 282,477
---------------------------------------------------------------------
$15,801,337
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Due to vendors on final adjustments


The second closing of the Qwest properties occurred on June 17th, 2005. The Company purchased all of the outstanding shares of 1156168 Alberta Ltd., 1159203 Alberta Ltd. and 1140511 Alberta Ltd. The purchase price equation is as follows:



---------------------------------------------------------------------
Property, plant and equipment $45,490,456
Note receivable (1) 147,512
Goodwill 3,679,374
Future income taxes (3,679,374)
Asset retirement obligation (1,007,400)
---------------------------------------------------------------------
$44,630,568
---------------------------------------------------------------------
Consideration provided:
Cash $18,504,190
Common shares (7,234,005) 25,608,378
Transaction costs 518,000
---------------------------------------------------------------------
$44,630,568
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Due from vendors on final adjustments


The purchase price allocations for both transactions were preliminary and are based on best estimates as certain items such as the fair values of the assets and liabilities as of the closing date, purchase price adjustments, transaction costs and holdback amounts. Subsequent to the period ended June 30, 2005 additional tax pools were received which resulted in a net reduction of the future tax liability and goodwill amounts associated with the Elm/Optimum acquisition. As such the purchase price allocation for the second closing outlined above was adjusted by reducing both the future tax liability and goodwill by $1,777,516.



2. Share Capital and Contributed Surplus

Authorized:

Unlimited number of voting common shares, without stated par value.
300,000 preference shares, without stated par value.

Common Shares issued:

------------------------------------------------------------------------
Number Consideration
------------------------------------------------------------------------
Issued and outstanding on
December 31, 2004 9,259,453 $21,275,627
------------------------------------------------------------------------
Future tax effect of flow-through
share renouncements (723,247)
Issued for property acquisitions 10,325,488 36,552,221
Issued for flow-through shares 3,748 19,553
------------------------------------------------------------------------

------------------------------------------------------------------------
Issued and outstanding on
September 30, 2005 19,588,689 $57,124,154
------------------------------------------------------------------------
------------------------------------------------------------------------


As of December 31, 2004 Rock had fulfilled the required drilling and exploration activities pursuant to the flow through share commitments and renounced all expenditures in February 2005.

Per share amounts:

Per share amounts have been calculated on the weighted average number of shares outstanding. The weighted average shares outstanding of the three month period ended September 30, 2005 was 19,586,815 (September 30, 2004 - 8,993,152). The weighted average shares outstanding of the nine month period ended September 30, 2005 was 14,035,438 (September 30, 2004 - 8,824,423).

In computing the diluted per share amount for the three and nine month periods ended September 30, 2005 the following shares were added to the weighted average number of shares outstanding for the dilutive effect of employee stock options:

Three months ended September 30, 2005: 122,063 (September 30, 2004 - 26,615),

Nine months ended September 30, 2005: 79,096 (September 30, 2004 - 138,448).

Stock options:

The Company has a stock option plan ("Plan") under which it may grant options to directors, officers and employees for the purchase of up to 10% of the issued and outstanding common shares of the Company. Options are granted at the discretion of the board of directors. The exercise price, vesting period and expiration period are also fixed at the time of grant at the discretion of the board of directors. The options vest yearly in one-third tranches beginning on the first anniversary of the grant date and expire one year after vesting. The following tables summarize the stock options outstanding at September 30, 2005.



------------------------------------------------------------------------
Number Weighted Average
Of Options Exercise Price
------------------------------------------------------------------------
December 31, 2004 532,387 $3.49
Granted 712,944 $4.95
Exercised (10,685) $3.39
Cancelled (54,370) $3.58
------------------------------------------------------------------------
September 30, 2005 1,180,276 $4.37
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Outstanding Options Exercisable Options
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Exercise Years to Number Exercise
Prices Of Options Price Expiry Of Options Price
------------------------------------------------------------------------
$3.39 - 3.90 467,332 $3.47 1.45 124,944 $3.39
$4.00 - 5.09 712,944 $4.95 2.87 - -
------------------------------------------------------------------------
1,180,276 $4.37 2.31 124,944 $3.39
------------------------------------------------------------------------
------------------------------------------------------------------------


Contributed Surplus:

The contributed surplus as at September 30, 2005 of $409,823 increased $111,913 for stock based compensation charges net of the repurchased stock options during the quarter and $208,246 for the first nine months of 2005.


3. Stock Based Compensation

Options granted are accounted for using the fair value method. The fair value of the 626,944 common share options granted during the three months ended September 30, 2005 was estimated to be $1,359,972. The fair value of the common share options as at the grant dates is determined using a Black-Scholes option pricing model and the following assumptions:



Risk free interest rate: 4.25%
Expected life: 3 year average
Expected volatility: 60%
Expected dividend yield: 0%


4. Bank Debt

The Company has a demand operating facility with a Canadian chartered bank subject to the bank's valuation of the Company's oil and gas properties. The current limit under the facility is $25 million. The facility is secured by a first ranking floating charge on all real property of the Company, its subsidiary and partnership and a general security agreement. The facility bears interest at the bank's prime rate or at prevailing banker's acceptance rate plus an applicable bank fee it also bears a standby charge for un-drawn amounts. The facility is currently under an interim review with a formal year end review scheduled for March, 2006.

5. Asset Retirement Obligation

The asset retirement obligation result from net ownership interests in petroleum and natural gas assets including well sights, gathering systems and processing facilities. The Company estimates the total undiscounted amount of cash flows required to settle its asset retirement obligation at September 30, 2005 at approximately $3,430,176 (December 31, 2004 - $744,000). A credit adjusted risk free rate of 8% was used to calculate the fair value of the asset retirement obligation.

The following table outlines a reconciliation of the asset retirement obligation:



------------------------------------------------------------------------
Asset retirement obligation September 30, 2005 December 31, 2004
------------------------------------------------------------------------
Opening balance $ 500,256 $282,090
Liabilities incurred during period 1,676,300 203,260
Accretion 45,273 14,906
------------------------------------------------------------------------
Closing balance $2,221,829 $500,256
------------------------------------------------------------------------
------------------------------------------------------------------------


6. Income Taxes

The provision for income taxes in the consolidated statements of income and retained earnings varies from the amount that would be computed by applying the expected tax rate to net income before income taxes. The expected tax rate used was 37.62% (September 30, 2004: 38.12%). The principal reasons for differences between such "expected" income tax expense and the amount actually recorded are as follows:



------------------------------------------------------------------------
September 30, 2005 September 30, 2004
------------------------------------------------------------------------
Net income before taxes $ 960,139 $ 388,443
Statutory income tax rate 37.62% 38.12%
------------------------------------------------------------------------
Expected income taxes 361,204 148,074
Add (deduct):
Stock-based compensation 85,698 54,625
Non-deductible crown charges 453,817 84,599
Resource allowance (458,805) (18,962)
Change in Rate (91,659)
Other 10,221 -
Change in valuation allowance (200,038) (268,337)
------------------------------------------------------------------------
Provision for income taxes 160,438 Nil
Current tax recovery of prior period (8,167) Nil
------------------------------------------------------------------------
Provision for income taxes $ 152,271 $ Nil
------------------------------------------------------------------------
------------------------------------------------------------------------


At March 31, 2005 the Company had an unrecorded future tax asset of $11.4 million which was recognized at the time of the ELM/Optimum/Qwest acquisitions.

Advisory

This press release contains forward-looking statements that involve known and unknown risks, uncertainties, assumptions and other factors, some of which are beyond Rock's control, that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Rock believes that the expectations reflected in those forward-looking statements are reasonable at the time made but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in, or incorporated by reference into, this press release should not be unduly relied upon. These statements speak only as of the date of such information, as the case may be, and may be superseded by subsequent events. Rock does not intend, and does not assume any obligation, to update these forward-looking statements.

This press release contains references to barrels of oil equivalent (boe), boes maybe misleading, particularly if used in isolation. A boe conversion of 6 mcf to 1 barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Contact Information

  • Rock Energy Inc.
    Allen Bey
    President & CEO
    (403) 218-4380
    or
    Rock Energy Inc.
    Peter D. Scott
    Vice President, Finance & CFO
    (403) 218-4380
    Website: www.rockenergy.ca