Rock Energy Inc.
TSX : RE

Rock Energy Inc.

May 12, 2005 08:38 ET

Rock Energy Reports Results for the Quarter Ended March 31, 2005

CALGARY, ALBERTA--(CCNMatthews - May 12, 2005) - Rock Energy Inc. (TSX:RE) is pleased to announce the financial and operating results for Rock Energy Inc. for the fiscal quarter ended March 31, 2005:



CORPORATE SUMMARY

------------------------------------------------------------------------
Three months ended Three months ended
FINANCIAL March 31, 2005 March 31, 2004
------------------------------------------------------------------------
Oil and gas revenue $ 1,159,224 $ 666,797

Cash flow from operations (1) $ 392,392 $ 300,578
Per share - basic $ 0.04 $ 0.04
- diluted $ 0.04 $ 0.03

Net income $ 51,064 $ 158,282
Per share - basic $ 0.01 $ 0.02
- diluted $ 0.01 $ 0.02

Capital expenditures, net $ 2,138,251 $ 318,888

As at As at
March 31, 2005 December 31, 2004
------------------------------------------------------------------------
Working capital $10,297,127 $12,042,986

Common shares outstanding 9,259,453 8,993,152
Options outstanding 532,387 418,848


Three months ended Three months ended
OPERATIONS March 31, 2005 March 31, 2004
------------------------------------------------------------------------

Average daily production
Crude oil and NGLs (bbls/d) 176 101
Natural gas (mcf/d) 795 507
Barrels of oil equivalent (boe/d) 309 186

Average product prices
Crude oil (CDN$/bbl) $ 40.63 $ 40.58
NGLs (CDN$/bbl) $ 47.98 $ 36.51
Natural gas (CDN$/mcf) $ 6.93 $ 6.49
BOEs (CDN$/boe) $ 41.65 $ 39.48

Field netback (CDN$/boe) $ 22.43 $ 21.76
------------------------------------------------------------------------
------------------------------------------------------------------------


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

I am pleased to present the financial and operating results for Rock Energy Inc. for the quarter ended March 31, 2005.

During the quarter we completed and tied-in the wells drilled in the last quarter of 2004, continued to add to our undeveloped land base, identified our 2005 drilling targets in our Plains core area and announced on March 14, 2005 acquisitions of six private companies and eight partnerships (referred to as ELM/Optimum/Qwest). As a result of our completion and tie-in work in the quarter 4 (4.0 net) heavy oil wells came on production in February 2005 and 1 (1.0 net) gas well came on stream late in March 2005. We continue to be active at land sales and our undeveloped acreage grew to 13,500 net acres. During 2005 we expect to continue to build our land base but will begin to add land in the new core areas of west central Alberta and northeast BC that we will establish in conjunction with closing of the ELM/Optimum/Qwest acquisitions. Our 2005 drilling program in the Plains core area has been firmed up with seismic activity during the quarter and we expect to drill 15 (15.0 net) wells following spring break-up.

The ELM/Optimum/Qwest transactions will provide a foundation of growth for Rock. These assets represent non-operated interests in 65 different properties across the basin however the properties due tend to be clustered in west central Alberta and northeast BC. Working interests in the properties vary from 5% to 85% with an average of 28%. These transactions were planned to close on two separate dates and the first series of transactions, representing approximately 27% of the value, closed on April 7, 2005. The remainder of the transactions are anticipated to close in early June 2005. We have agreed to pay for the acquisitions by issuing 10.3 million shares and $25.3 million in cash (subject to closing adjustments). The transactions utilize Rock's assets of existing cash and tax pools and are expected to be accretive in 2005 more than doubling cash flow per share, tripling production and quadrupling reserves. Following closing of all the transactions we intend to rationalize the properties to increase our working interests in our core areas and over time begin to operate a greater percentage of our asset base. These acquisitions provide us with a base of production, cash flow and opportunity from which to grow our company.

Operationally, average production has grown from 201 boe/d from the fourth quarter of 2004 to 309 boe/d this quarter as result of the new heavy oil and gas wells in the Plains area coming on production. Overall our production mix for the quarter is 43% gas, 30% light oil and liquids and 27% heavy oil. Once the ELM/Optimum/Qwest acquisitions close we expect our gas weighting to increase to average 70% during the year as these assets are approximately 90% gas weighted.

Financially, cash flow from operations of $0.4 million ($0.04 per basic and fully diluted share) improved from year ago levels and was essentially flat to the preceding quarter ended December 31, 2004. Higher production levels primarily offset by lower interest income due to lower cash balances have contributed to the changes. Net income of $50,000 ($0.01 per basic and fully diluted share) decreased from year ago levels and the preceding quarter primarily due to higher depletion and depreciation costs associated with a higher level of capital spending. Product prices continued to be strong and our sales price realizations are up 5% to year ago levels but down about 11% to the fourth quarter of 2004 due to our new heavy oil component. Capital expenditures exceeded $2 million for the quarter and are expected to grow as our 2005 drilling program commences and we close all the ELM/Optimum/Qwest acquisitions. At the quarter end, the balance sheet remained strong with $10.3 million of positive working capital, however as we close the acquisitions and continue our internal capital program we will draw against our bank operating line, which will be set at $25 million once all the acquisitions are closed. Based on our current 2005 capital program we expect year end debt levels to be $16.5 million.

With the closings of the ELM/Optimum/Qwest transactions we are strengthening our team and pleased to have recently hired Scott Wilhelm (Senior Engineer), James Elliott (Financial Reporting Manager) and Jan Rintoul (Engineering Administration). James is replacing Adeline Roth who has left Rock to pursue a more senior financial role and we wish her the best of luck and thank her for her contribution.

Through 2005 we will continue to build our grass roots efforts and look forward to assimilating the ELM/Optimum/Qwest assets. We expect to commence our Plains core area drilling program following break-up and become proactive with the new acquired assets. The ELM/Optimum/Qwest acquisition, along with our grass roots efforts, are expected to bring Rock's 2005 exit production rate to range from approximately 2,700 to 2,900 boe/d, and provide a foundation from which to grow our company into 2006.



On behalf of the Board of Directors,


Allen J. Bey
President and CEO
May 11, 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.

While there is greater 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 and 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 May 11, 2005 and is management's assessment of Rock Energy Inc.'s historical and operating results, together with future prospects, and should be read in conjunction with the unaudited consolidated financial statements of Rock Energy Inc. for the three months ended March 31, 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

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.



Production

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
Production 03/31/05 03/31/04 Change
------------------------------------------------------------------------
Gas (mcf/d) 795 507 57%
Oil (bbl/d) 71 85 (16)%
Heavy Oil (bbl/d) 82 - N.A.
NGL (bbl/d) 23 16 44%
boe/d (6:1) 309 186 66%
------------------------------------------------------------------------
------------------------------------------------------------------------


For the quarter ended March 31, 2005 boe production increased by 66% over the equivalent quarter in 2004 primarily as a result of heavy oil and gas additions during the quarter from the Plains core area. At our Medicine River property, production has remained flat quarter over quarter as increased gas production has offset oil declines. Production levels are expected to increase during the year based on our grass roots activities and the ELM/Optimum/Qwest acquisitions (see Liquidity and Capital Resources below).



Product Prices

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
Realized Product Prices 03/31/05 03/31/04 Change
------------------------------------------------------------------------
Gas ($/mcf) 6.95 6.49 7%
Oil ($/bbl) 58.89 40.58 45%
Heavy Oil ($/bbl) 24.91 - N.A.
NGL ($/bbl) 47.98 36.51 31%
------------------------------------------------------------------------
boe (6:1) 41.65 39.48 5%

Average Benchmark Prices
Gas - NYMEX Daily Spot (US$/mcf) 6.42 5.65 14%
Gas - AECO C Daily Spot ($/mcf) 6.89 6.41 7%
Oil - WTI Cushing (US$/bbl) 49.84 35.14 42%
Oil - Edmonton light ($/bbl) 61.45 45.60 35%
Heavy Oil - Llyodminster blend
($/bbl) 37.13 33.03 12%
US$/Cdn$ exchange rate 0.815 0.759 7%
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenue

The vast majority of the Company's revenue is derived from oil and gas operations. Other income represents interest income earned from cash invested in term deposits.



------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
03/31/05 03/31/04 Change
------------------------------------------------------------------------
Oil and Gas Revenue $1,159,224 $666,797 74%

Other Income $ 33,747 $154,006 (78)%
------------------------------------------------------------------------
------------------------------------------------------------------------


Increased production primarily resulted in an increase to oil and gas revenue for the quarter ended March 31, 2005 in comparison to the prior year periods.

Other income decreased 78% over the same quarter of 2004 as a result of lower cash balances from previous financings being invested. Interest income is expected to be negligible for the rest of the year as the Company's capital program is expected to be in excess of cash generated from operations.



Royalties

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
03/31/05 03/31/04 Change
------------------------------------------------------------------------
Royalties $270,802 $188,367 44%
As percentage of oil
and gas revenue 23.4% 28.2% (17)%
Per boe (6:1) $ 9.73 $ 11.16 (13)%
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties for the quarter ended March 31, 2005 are higher on an absolute basis in comparison to the same period 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 first quarter of 2005 versus 2004 as the new heavy oil production is at an overall lower royalty rate.



Operating Expense

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
03/31/05 03/31/04 Change
------------------------------------------------------------------------
Operating expense $264,262 $110,715 127%
Per boe (6:1) $ 9.49 $ 6.56 45%
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating expenses have increased over the same quarter ended March 31, 2004 due to higher production and relatively higher costs related to the start up of heavy oil operations in the quarter. Costs on heavy oil operations are expected to decrease in the coming quarters as overall sand production decreases. Transportation costs of $13,155 or $0.48 per boe have been included in operating expenses. Transportation costs were not applicable for the quarter ended March 31, 2004 due to marketing arrangements in place at that time.



General and Administrative (G&A) Expense

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
G&A Expense 03/31/05 03/31/04 Change
------------------------------------------------------------------------
Gross $436,044 $352,918 24%
Per boe (6:1) $ 15.67 $ 20.90 (25)%
Capitalized $162,326 $141,897 14%
Per boe (6:1) $ 5.83 $ 8.40 (31)%
Net $273,718 $211,021 30%
Per boe (6:1) $ 9.83 $ 12.50 (21)%
------------------------------------------------------------------------
------------------------------------------------------------------------


G&A expenses increased on an absolute basis due to higher staffing levels and office costs partially offset by the absence of year end reporting costs but have dropped on a per boe basis with higher production. The Company capitalizes certain G&A expenses based on personal 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 has been hired but should drop on a per boe basis with production increases from grass roots activities and the ELM/Optimum/Qwest acquisitions (see Liquidity and Capital Resources below).



Interest Expense

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
03/31/05 03/31/04 Change
------------------------------------------------------------------------
Interest expense (recovery) $nil $10,032 N.A.
Per boe (6:1) $nil $ 0.59 N.A.
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest in the quarter ended March 31, 2004 was recorded in conjunction with flow through share issues. All flow through share obligations have been renounced as of the first quarter of 2005. In the future the Company will incur interest expense as a result of borrowings from its bank operating line.



Depletion, Depreciation and Accretion (DD&A)

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
03/31/05 03/31/04 Change
------------------------------------------------------------------------
D&D expense $294,241 $91,957 220%
Per boe (6:1) $ 10.57 $ 5.45 94%
------------------------------------------------------------------------
Accretion expense 5,528 4,049 37%
Per boe (6:1) $ 0.20 $ 0.24 (17)%
------------------------------------------------------------------------
------------------------------------------------------------------------


The depletion and depreciation expense and boe rate for the quarter ended March 31, 2005 were higher compared to the same quarter in 2004 due to a higher capital base.

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. No new obligations were added or reduced during the quarter.

Income Tax

One of the Company's subsidiaries received an income tax recovery of $8,167 as a result of actual tax expense for a prior period being less than the installment paid.



Cash flow from Operations and Net Income

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
03/31/05 03/31/04 Change
------------------------------------------------------------------------
Cash flow from Operations $392,392 $300,578 31%
Per boe (6:1) $ 14.10 $ 17.76 (21)%
Per share - basic $ 0.04 $ 0.04 nil
- diluted $ 0.04 $ 0.03 33%

Net Income $ 51,100 $158,282 (68)%
Per boe (6:1) $ 1.84 $ 9.35 (80)%
Per share - basic $ 0.01 $ 0.02 (50)%
- diluted $ 0.01 $ 0.02 (50)%

Weighted Average Shares 9,259,453 4,790,196 93%
Outstanding - diluted 9,333,067 4,842,848 93%
------------------------------------------------------------------------
------------------------------------------------------------------------


Per share amounts have been restated for the March 31, 2004 period to include the effect of the 30 for 1 share consolidation that occurred in February 2004. Weighted average per share amounts increased for the quarter ended March 31, 2005 due to the acquisition of Rock Energy Ltd. in January 2004 and the equity issue completed in October 2004.

Cash flow from operations improved over the prior year quarter due to higher production levels and prices primarily offset by lower interest income and higher operating expenses. Net income decreased over the prior year quarter primarily due to higher depletion and depreciation charges.



Capital Expenditures

------------------------------------------------------------------------
3 Months Ended 3 Months Ended Quarterly
03/31/05 03/31/04 Change
------------------------------------------------------------------------
Land $ 545,021 $ 41,209 1,223%
Seismic 453,378 212,556 113%
Drilling and completion 155,226 (77,364) N.A.
Capitalized G&A 162,326 141,897 14%
------------------------------------------------------------------------
Total exploration and
production $1,315,951 $318,298 313%
Facilities 809,901 $ nil N.A.
------------------------------------------------------------------------
Total operations $2,125,852 $318,298 568%
Office equipment 12,398 590 2,001%
------------------------------------------------------------------------
Total $2,138,250 $318,888 571%
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital expenditures for the quarter ended March 31, 2005 reflect the Company's continued efforts to build our grass roots program. The undeveloped land base continued to grow to approximately 13,500 net acres at quarter end, the majority of which is located in our Plains core area. Seismic activity in the quarter has firmed up drilling locations for our 2005 program which will commence after spring break-up. Facility expenditures result from wells drilled in the fourth quarter of 2004 brought onto production in this quarter. The Company's current capital budget for 2005 is $16 million (excluding the cost of acquisitions), which includes $11 million of spending on existing operations and $5 million of spending on the properties to be acquired in the ELM/Optimum/Qwest transactions (see Liquidity and Capital Resources below).

Liquidity and Capital Resources

Our net working capital position as at March 31, 2005 totaled $10.3 million ($12.0 million at December 31, 2004), consisting mostly of term deposits or cash and a $5 million refundable deposit associated with the ELM/Optimum/Qwest transactions (see below). The decrease from December 31, 2004 levels primarily reflects the capital expenditures for the period. Rock had no debt at March 31, 2005 ($nil at December 31, 2004), other than trade payables of $1.2 million ($2.2 million at December 31, 2004).

The Company announced on March 14, 2005, it has agreed to acquire non-operated petroleum and natural gas properties from 14 different entities (referred to as ELM/Optimum/Qwest) for aggregate consideration of 10.3 million shares and $25.4 million in two series of closings. In aggregate, the properties are currently expected to produce 1,250 boe/day and produce 2,000 boe/day in December 2005, following identified capital spending of $5 million. The reserves were evaluated by Gilbert Laustsen Jung Associates Ltd. effective January 1, 2005, totaling 2.899 million boe on a proved basis and 4.058 million boe on a proved plus probable basis. Included in the acquisitions are approximately 19,600 net (72,000 gross) acres of undeveloped land and seismic data. Rock intends to rationalize the working interests in these properties through acquisitions, divestitures and swapping of interests whereby Rock will have higher working interests in the remaining properties and ultimately work towards operating these properties. Through the rationalization process, Rock plans to establish two new core areas in west central Alberta and northeast British Columbia along with the Company's existing Plains core area.

The Company closed the first series of transactions on April 7, 2005 constituting approximately 27% of the value for 3.1 million shares and $4.6 million in cash. The cash was funded from existing balances. The second series of transactions is anticipated to close in early June 2005. The Company expects to finance the remainder of the cash purchase price through a new operating loan facility (described below) and existing working capital. Following closing of all the transactions Rock expects to have $14.5 million of total debt against a credit facility of $25 million.

The Company's existing 2005 capital spending program of $11 million plus the additional $5 million of 2005 capital spending currently identified on the acquired properties will be funded through cash flow and the operating loan facility. At the end of 2005 the Company expects to have total debt of $16.5 million based on these capital spending plans.

The Company entered into a demand operating loan facility with a Canadian chartered bank on April 7, 2005. 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 subject to closing of the ELM/Optimum/Qwest transactions. Based on the April 7, 2005 closings the Company has $12.5 million of the facility available. 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 and its subsidiaries and a general security agreement. The next schedule review date of the facility is September 30, 2005. As at May 11, 2005 approximately $0.3 million was outstanding under the facility.

Selected Quarterly Data

The following table provides selected quarterly information for Rock. With the exception of the quarters ended September 30 and June 30, 2004, all previous quarterly information is that for Rock Energy Ltd. which commenced oil and gas operations January 2003.



------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
03/31/05 12/31/04 09/30/04 06/30/04
(unaudited)(unaudited)(unaudited)(unaudited)
------------------------------------------------------------------------
Production (boe/d) 309 201 165 171
Oil and gas revenues $1,159,224 $ 863,290 $ 653,422 $ 661,851
Price realizations ($/boe) $ 41.65 $ 46.48 $ 42.90 $ 42.54
Royalties ($/boe) $ 9.73 $ 3.73 $ 14.70 $ 11.08
Operating expense ($/boe) $ 9.49 $ 7.59 $ 9.15 $ 7.67
Field netback ($/boe) $ 22.43 $ 34.27 $ 19.05 $ 23.79

Net G&A expense $ 273,718 $ 361,173 $ 226,623 $ 160,375
Stock-based compensation $ 41,523 $ 58,279 $ 50,708 $ 46,294
Cash flow from operations $ 392,392 $ 404,397 $ 236,672 $ 276,367
Per share - basic $ 0.04 $ 0.04 $ 0.03 $ 0.03
- diluted $ 0.04 $ 0.04 $ 0.03 $ 0.03
Net income $ 51,100 $ 182,577 $ 85,047 $ 145,120
Per share - basic $ 0.01 $ 0.02 $ 0.01 $ 0.02
- diluted $ 0.01 $ 0.02 $ 0.01 $ 0.02
Capital expenditures $2,138,251 $3,852,222 $1,062,525 $1,018,682
------------------------------------------------------------------------
------------------------------------------------------------------------

As at As at As at As at
03/31/05 12/31/04 09/30/04 06/30/04
------------------------------------------------------------------------
Working capital ($000) $ 10,297 $ 12,043 $ 14,497 $ 15,323
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
03/31/04 12/31/03 09/30/03 06/30/03
(unaudited)(unaudited)(unaudited)(unaudited)
------------------------------------------------------------------------
Production (boe/d) 186 192 174 155
Oil and gas revenues $ 666,707 $ 613,277 $ 564,491 $ 524,146
Price realizations ($/boe) $ 39.48 $ 34.78 $ 35.25 $ 37.13
Royalties ($/boe) $ 11.16 $ 8.36 $ 9.81 $ 7.54
Operating expense ($/boe) $ 6.56 $ 5.24 $ 7.91 $ 8.56
Field netback ($/boe) $ 21.76 $ 21.18 $ 17.53 $ 21.03

Net G&A expense $ 211,021 $ 145,888 $ 190,526 $ 175,093
Stock-based compensation $ 46,295 $ nil $ nil $ nil
Cash flow from operations $ 301,161 $ 105,465 $ 88,383 $ 111,324
Per share - basic $ 0.04 $ 0.03 $ 0.03 $ 0.04
- diluted $ 0.03 $ 0.03 $ 0.03 $ 0.04
Net income $ 158,282 $ 23,380 $ 12,178 $ 57,807
Per share - basic $ 0.02 $ 0.01 $ 0.00 $ 0.02
- diluted $ 0.02 $ 0.01 $ 0.00 $ 0.02
Capital expenditures $ 318,888 $ 192,625 $ 386,392 $ 125,874
------------------------------------------------------------------------
------------------------------------------------------------------------

As at As at As at As at
03/31/04 12/31/03 09/30/03 06/30/03
------------------------------------------------------------------------
Working capital ($000) $ 16,065 $ 2,881 $ 2,377 $ 2,675
------------------------------------------------------------------------
------------------------------------------------------------------------


Note: Quarterly information has been re-stated for the retroactive adoption of the ARO accounting standard.

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 $0.25 million.

Outstanding Share Data

Subsequent to March 31, 2005 the Company issued 81,000 stock options and 33,000 options were cancelled. At the date of this report there are 9,259,453 common shares outstanding and 580,387 options to purchase common shares outstanding.



ROCK ENERGY INC.
Consolidated Balance Sheets

March 31, 2005 and 2004

------------------------------------------------------------------------
------------------------------------------------------------------------
March 31, 2005 December 31, 2004
(unaudited)
------------------------------------------------------------------------
Assets

Current Assets:
Cash and cash equivalents $ 5,363,910 $ 8,631,810
Accounts receivable 958,460 484,714
Refundable deposit 5,000,000 5,000,000
Prepaids 170,990 119,154
------------------------------------------------------------------------
11,493,360 14,235,678

Property, plant and equipment 11,588,805 9,450,555
Accumulated depletion and depreciation (975,466) (681,225)
------------------------------------------------------------------------
10,613,339 8,769,330

Goodwill 1,328,720 2,051,967

------------------------------------------------------------------------
$23,435,419 $25,056,975
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable and accrued
liabilities $ 1,196,232 $ 2,192,692

Asset retirement obligation (note 2) 505,784 500,256

Shareholders' Equity:
Share capital (note 1) 20,552,380 21,275,627
Contributed surplus (note 1) 243,100 201,577
Retained earnings 937,923 886,823
------------------------------------------------------------------------
21,733,403 22,364,027
Subsequent Events (note 4)
------------------------------------------------------------------------
$23,435,419 $25,056,975
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

Approved by the Board:

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


ROCK ENERGY INC.
Consolidated Statements of Income and Retained Earnings
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Three months
ended ended
March 31, 2005 March 31, 2004
------------------------------------------------------------------------
Revenues
Oil and gas revenue $ 1,159,224 $ 666,707
Royalties, net of ARTC (270,802) (188,367)
Other income 33,783 154,006
------------------------------------------------------------------------
922,205 $ 632,346

Expenses:
General and administrative 273,718 211,021
Operating 264,262 110,715
Interest (recovery) - 10,032
Stock based compensation 41,523 46,296
Depletion, depreciation and accretion 299,769 96,006
------------------------------------------------------------------------
879,272 474,070

------------------------------------------------------------------------
Income before income taxes 42,933 158,276

Income taxes
Current (recovery) (note3) (8,167) -
------------------------------------------------------------------------
Net Income for the period 51,100 158,276

Retained earnings, beginning of period 886,823 315,803

------------------------------------------------------------------------
Retained earnings, end of period $ 937,923 $ 474,079
------------------------------------------------------------------------
------------------------------------------------------------------------

Basic and diluted earnings per share
(note 1) $ 0.01 $ 0.01
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


ROCK ENERGY INC.
Consolidated Statements of Cash Flows
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Three months
ended ended
March 31, 2005 March 31, 2004
------------------------------------------------------------------------
Cash provided by (used in):

Operating:
Net income for the period $ 51,100 $ 158,276
Add: Non-cash items:
Depletion, depreciation and accretion 299,769 91,957
Stock-based compensation 41,523 46,296
------------------------------------------------------------------------
392,392 300,578
Changes in non-cash working capital (1,232,042) 231,539
------------------------------------------------------------------------
(839,650) 532,117

Financing:
Issuance of common shares - 14,136,868
Shareholder loan - (250,000)
Changes in non-cash working capital - (750,000)
------------------------------------------------------------------------
- 13,136,868

Investing:
Property, plant and equipment (2,138,250) (318,888)
Changes in non-cash working capital (290,000) -
------------------------------------------------------------------------
(2,428,250) (318,888)

------------------------------------------------------------------------
Increase/(decrease) in cash and
cash equivalents (3,267,900) 13,350,097

Cash and cash equivalents,
beginning of period 8,631,810 2,943,376

------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 5,363,910 $16,293,473
------------------------------------------------------------------------
------------------------------------------------------------------------

Interest and cash taxes paid and received:
Interest paid $ - $ 10,032
Interest received 33,783 154,006
Cash taxes paid - -
Cash taxes received $ 8,167 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


Notes to the Consolidated Financial Statements

For the Period Ended March 31, 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 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. 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:

------------------------------------------------------------------------
------------------------------------------------------------------------
Common shares of Rock 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 and outstanding on March 31, 2005 9,259,453 $20,552,380
------------------------------------------------------------------------


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:

The 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 March 31, 2005 was 9,259,453 (March 31, 2004 - 4,790,196).

In computing the diluted per share amount for the three month period ended March 31, 2005, 73,614 shares (52,652 as at March 31, 2004) were added to the weighted average number of shares outstanding during the three months ended March 31, 2005 for the dilutive effect of employee stock options.

Stock options:

The Company has a stock option plan (the "Plan") under which it may grant options to directors, officers and employees for the purchase of up to 865,617 common shares. 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. As at March 31, 2005 and December 31, 2004, the Company had 532,387 options outstanding under the Plan with a weighted average exercise price of $3.49 per share. Weighted average life of the options as at March 31, 2005 was 2 years.

Contributed Surplus:

The contributed surplus as at March 31, 2005 of $243,100 increased $41,523 for stock based compensation charges during the quarter.

2. 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 March 31, 2005 at approximately $744,000. (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:

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------------------------------------------------------------------------
Asset retirement obligation March 31, 2005 December 31, 2004
------------------------------------------------------------------------
Opening balance $500,256 $282,090
Liabilities incurred during period Nil 203,260
Accretion 5,528 14,906
------------------------------------------------------------------------
Closing balance $505,784 $500,256
------------------------------------------------------------------------


3. 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% (March 31, 2004: 38.12%). The principal reasons for differences between such "expected" income tax expense and the amount actually recorded are as follows:



------------------------------------------------------------------------
------------------------------------------------------------------------
March 31, 2005 March 31, 2004
------------------------------------------------------------------------
Net income before taxes $ 42,933 $158,276
Statutory income tax rate 37.62% 38.12%
------------------------------------------------------------------------
Expected income taxes 16,151 60,335
Add (deduct):
Stock-based compensation 15,621 17,648
Non-deductible crown charges 57,330 23,937
Resource allowance (36,416) (10,884)
Change in valuation allowance (52,686) (91,036)
------------------------------------------------------------------------
Provision for income taxes Nil Nil
Current tax recovery of prior period (8,167) Nil
------------------------------------------------------------------------
Provision for income taxes $ (8,167) $ Nil
------------------------------------------------------------------------


4. Subsequent Events

On March 14, 2005 the Company agreed to acquire in two separate closings form 14 different entities petroleum and natural gas properties for aggregate consideration of 10.3 million shares and $25.4 million. On April 7, 2005 the Company closed the first series of transactions and issued 3.1 million shares and paid $4.6 million. The second series of closings are anticipated to close in early June 2005. Funds for these transactions will come from the operating line facility described below and the refundable deposit.

On April 7, 2005 the Company entered into 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 $12.5 million which will increase to $25 million once the second series of asset acquisition transactions close, which are currently anticipated to close in early June 2005. The facility is secured by a first ranking floating charge on all real property of the Company and its subsidiaries 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. The facility also bears a standby charge for un-drawn amounts. The next schedule review date of the facility is September 30, 2005.

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: http://www.rockenergy.ca