SignalEnergy Inc.
TSX : SGI

March 31, 2006 23:59 ET

SignalEnergy Inc. Announces 2005 Year End Results

CALGARY--(CCNMatthews - March 31) -

THIS NEWS RELEASE IS NOT FOR DISSEMINATION IN THE UNITED STATES OR TO ANY UNITED STATES NEWS SERVICES

SignalEnergy Inc. (TSX:SGI) ("Signal" or the "Company") is pleased to announce its 2005 year end results.

Highlights of the 2005 year are as follows:

Financial

- Revenue increased 301% to $23.7 million for the year compared to

$5.9 million in 2004.

- Funds from Operations increased 419% to $10.9 million for the year

compared to $2.1 million in 2004.

- Net Income increased to $2.1 million versus as loss of $1.1 million

in 2004.

- Operating net back increased 28% to $33.80 per boe for the year

versus $26.38 per boe in 2004.

Reserves

- Total Proven Reserves increased 309% to 4.5 million boe at year end

2005 versus 1.1 million boe at the year end 2004.

- Proven and Probable Reserves increased by 288% to 6.6 million boe at

year 2005 versus 1.7 million boe at year end 2004.

- Proven and Probable Reserves per share increased 169% at year end

2005 versus 2004.

- Proven and Probable Reserve Life Index increased to 15.5 years at

year ended 2005 versus 9.3 years in 2004.

- Net Present Value of Proven and Probable Reserves (using a 10%

discount rate) increased 462% to $148.4 million at year ended 2005

versus $26.4 million in 2004.

- Year End Pre Tax Net Asset Value per share increased to $1.82 per

share (using Proven and Probable reserves and 10% discount rate).

Operations

- Average production for the year increased 210% to 1,176 boe per day

versus 380 boe per day in 2004.

- Average production per share increase 66% to 7.8 boe per share for

the year versus 4.7 boe per share in 2004.

- Fourth quarter average production in 2005 increased 250% to

1,472 boe/d versus 421 boe/d 2004.

- Completed a $25.3 million capital expenditure program which resulted

in drilling 32 (20 net) wells with a 97% success rate.

Corporate

- Completed three corporate acquisitions for total consideration of

$75.1 million.

- Sold Total Proven Reserves of 364,000 boe and Proven and Probable

Reserves of 650,000 boe of reserves in the Twining area for

$13.3 million.

- Since the commencement of oil and gas operations, achieved Proven and

Probable Finding and Development Costs (excluding future capital)

$13.67 per boe and a recycle ratio of 2.5 times.

- Achieved Proven and Probable Finding and Development costs (excluding

future capital) of $14.98 per boe in 2005 and Recycle Ratio of

2.3 times.

- Subsequent to year-end the Company announced the disposition of a

significant portion of its assets, consisting of 3.4 million boe's

Proven and 4.7 million boe's of Proven and Probable Reserves for

$100 million.

- Realized average disposition prices of $30.93 per boe Proven and

$21.14 per boe Proven and Probable.

- Completed a $3.0 million flow through share offering at a price of

$1.52 per share.

Strategic Alternatives and Outlook

On March 10, 2006, the Company completed the sale of a significant portion of its asset for gross proceeds of approximately $100 million. The Company believed that the consideration received for the assets represented full value. While this disposition is outside the normal course of business, it provided an opportunity of significant and immediate cash realization for the shareholders on a tax effective basis. Signal also reiterated its intention to distribute to shareholders the net proceeds after repayment of all debt.

The decision to complete the sale allows the Company to be more competitive with the number of exploration focused companies created from recent trust conversions. The Company's intentions were to continue to aggressively pursue full-cycle exploration and development activities supplemented with a buy and exploit strategy.

On March 27, Pearl Exploration and Production Ltd ("Pearl") announced its intention to make an offer to acquire all of the issued and outstanding shares of Signal. In compliance with its fiduciary obligations, to maximize shareholder value, the Board of Directors has decided to defer the decision of a shareholder distribution so that it can consider other strategic alternatives. In this regard, the Company has engaged FirstEnergy Capital Corporation ("FirstEnergy") as its independent financial advisors to consider the proposed Pearl offer and consider alternative transactions which could return greater value to shareholders than the proposed distribution of sale proceeds and the retention or future sale of the remaining operating entity.

Reserves Data (Forecast Prices and Costs) - SIGNAL

The Company's Petroleum and Natural Gas Reserves and Present Worth Values based on forecast price assumptions as at December 31, 2005 are as follows (please refer to Annual Information Form filed on SEDAR at www.sedar.com for additional detailed disclosures):



Petroleum and Natural Gas Reserves
-------------------------------------------------------------------------
Light/Medium Oil Natural Gas NGL
(MSTB) (MMCF) (MSTB)
---------------- ---------------- ----------------
Gross Net Gross Net Gross Net
------- ------- ------- ------- ------- -------
Proved
Developed
Producing 1,142.8 907.5 13,614 10,828 253.6 205.2
Developed Non-
Producing 70.9 58.4 2,129 1,722 77.5 62.5
------- ------- ------- ------- ------- -------
Undeveloped 43.2 38.3 1,973 1,667 13.4 11.5
------- ------- ------- ------- ------- -------
Total Proved 1,256.9 1,004.3 17,177 14,217 344.5 279.2
------- ------- ------- ------- ------- -------
Probable 625.0 495.3 7,892 6,378 148.4 122.5
------- ------- ------- ------- ------- -------
Total Proved plus
Probable 1,881.9 1,499.5 25,609 20,595 492.9 401.7
------- ------- ------- ------- ------- -------


Corporation Share of Present Worth Values
-------------------------------------------------------------------------
Before Income Tax Discounted At
------------------------------------------------------
0% 5% 10% 15% 20%
(M$) (M$) (M$) (M$) (M$)
------------------------------------------------------
Proved
Developed
Producing 123,598.4 102,978.2 89,256.1 79,401.6 71,938.3
Developed Non-
Producing 17,307.2 14,403.7 12,514.2 11,177.6 10,172.5
Undeveloped 12,684.1 11,081.6 9,830.9 8,833.0 8,021.7
------------------------------------------------------
Total Proved 153,589.7 128,463.5 111,601.1 99,412.3 90,132.6
------------------------------------------------------
Probable 65,406.8 47,019.7 36,785.9 30,347.2 25,937.2
------------------------------------------------------
Total Proved plus
Probable 218,996.5 175,483.2 148,387.0 129,759.5 116,069.7
------------------------------------------------------


After Income Tax Discounted At
------------------------------------------------------
0% 5% 10% 15% 20%
(M$) (M$) (M$) (M$) (M$)
------------------------------------------------------
Proved
Developed
Producing 104,161.8 87,997.4 77,121.6 69,236.8 63,216.3
Developed Non-
Producing 11,398.2 9,467.9 8,218.7 7,339.2 6,680.5
Undeveloped 8,394.8 7,244.6 6,355.5 5,651.9 5,083.8
------------------------------------------------------
Total Proved 123,954.8 104,709.9 91,695.8 82,227.9 74,980.6
------------------------------------------------------
Probable 43,376.1 31,052.9 24,195.8 19,881.1 16,926.3
------------------------------------------------------
Total Proved plus
Probable 167,331.0 135,762.8 115,891.6 102,109.0 91,906.9
------------------------------------------------------
Notes:
(1) The Sproule Report estimates Signal's share of future capital
expenditures necessary to achieve the estimated present worth of
future net cash flows based on escalating costs from Proved Reserves
to be $3,684,800 and Proved and Probable Reserves to be $6,966,700.

Reserves Data (Forecast Prices and Costs) - RETAINED PROPERTIES

The Company's Petroleum and Natural Gas Reserves and Present Worth Values
for the Retained Properties based on forecast price assumptions as at
December 31, 2005 are as follows:


Petroleum and Natural Gas Reserves
-------------------------------------------------------------------------
Light/Medium Oil Natural Gas NGL
(MSTB) (MMCF) (MSTB)
---------------- ---------------- ----------------
Gross Net Gross Net Gross Net
------- ------- ------- ------- ------- -------
Proved
Developed
Producing 0 0 5,162 4,100 86.5 67.6
Developed
Non-Producing 0 0 105 89.4 0 0
------- ------- ------- ------- ------- -------
Undeveloped 0 0 1,599 1,356 0 0
------- ------- ------- ------- ------- -------
Total Proved 0 0 6,866 5,545 86.5 67.6
------- ------- ------- ------- ------- -------
Probable 0 0 3,865 3,158 39.3 32.8
------- ------- ------- ------- ------- -------
Total Proved plus
Probable 0 0 10,730 8,703 125.8 100.4
------- ------- ------- ------- ------- -------


-----------------------------------
Notes: Corporation Share of
Present Worth Values
-----------------------------------
Before Income Tax Discounted At
0% 5% 10% 15%
(M$) (M$) (M$) (M$)
------- ------- ------- -------
Proved
Developed Producing 34,089 26,729 22,486 19,710
Developed Non-Producing 710 663 622 587
Undeveloped 8,989 7,929 7,091 6,410
------- ------- ------- -------
Total Proved 43,787 35,321 30,198 26,707
------- ------- ------- -------
Probable 23,564 18,090 15,006 12,959
------- ------- ------- -------
Total Proved plus Probable 67,352 53,410 45,205 39,666
------- ------- ------- -------

(1) The above tables give effect to the sale of certain petroleum and
natural gas properties as announced by the Company on February 1,
2006, whereby the Corporation sold its interest in its Ferrier,
Carrot Creek, Kaybob, Redwater and other minor properties, related
tangible equipment and undeveloped land for cash proceeds of
approximately $100 million. The Company retained its interests in its
Chigwell/Bashaw, Alberta and Buick Creek, B.C. properties (the
"Retained Properties").



MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis ("MD&A") should be read in
conjunction with the consolidated financial statements of SignalEnergy Inc.
("Signal" or the "Company") for the years ended December 31, 2005 and 2004.
The consolidated financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). All tabular
amounts in the following discussion are in thousands of Canadian dollars
unless otherwise noted.
This MD&A provides managements analysis of Signal's historical financial
and operating performance based on information currently available. Actual
results will vary from estimates and variances may be significant. Historical
results are not indicative of future performance. This MD&A is dated March 27,
2006.

Non-GAAP Measurements

Management uses the term "funds from operations" to analyze operating
performance and leverage, determined as net income (loss) adjusted for certain
non-cash items such as depletion and depreciation expense, future income
taxes, stock-based compensation expense, and accretion of asset retirement
obligations. Funds from operations as presented does not have any standardized
meaning prescribed by GAAP and therefore it may not be comparable to the
calculation of similar measures for other entities. Funds from operations as
presented is not intended to represent operating cash flow or operating
profits for the period, nor should it be viewed as an alternative to cash flow
from operating activities, net income (loss), or other measures of financial
performance calculated in accordance with GAAP.
Management also uses certain key performance indicators ("KPI's") and
industry benchmarks such as "operating netbacks" to analyze financial and
operating performance. These KPI's and benchmarks as presented do not have any
standard meaning prescribed by GAAP and therefore may not be comparable with
the calculation of similar measures for other entities.

BOE Presentation

Natural gas reserves and volumes recorded in thousand cubic feet are
converted to barrels of oil equivalent ("boe") on the basis of six thousand
cubic feet ("mcf") of gas to one barrel ("bbl") of oil. The term "barrels of
oil equivalent" may be misleading, particularly if used in isolation. A boe
conversion ratio of 6 mcf to 1 bbl is based on an energy equivalent conversion
method primarily applicable at the burner tip and does not represent a value
equivalent at the wellhead.

Forward Looking Statements

Statements in this MD&A may contain forward looking information including
expectations of future production, components of cash flow and earnings,
expected future events and/or financial results that are forward looking in
nature and subject to substantial risks and uncertainties. The reader is
cautioned that assumptions used in the preparation of such information may
prove to be incorrect. The Company cautions the readers that actual
performance will be affected by a number of factors, as many may respond to
changes in economic and political circumstances throughout the world. Events
or circumstances may cause actual results to differ materially from those
predicted, a result of numerous known and unknown risks, uncertainties, and
other factors, many of which are beyond the control of the Company. These
risks include, but are not limited to: the risks associated with the oil and
gas industry, commodity prices and exchange rate changes; industry related
risks could include, but are not limited to, operational risks in exploration,
development and production, delays or changes in plans; risks associated with
the uncertainty of reserve estimates, health and safety risks and the
uncertainty of estimates and projections of production, costs and expenses.
These external factors beyond the Company's control may affect the
marketability of oil and natural gas produced, industry conditions including
changes in laws and regulations, changes in income tax regulations, increased
competition, fluctuations in commodity prices, interest rates, and variations
in the Canadian/United States dollar exchange rate. The reader is cautioned
not to place undue reliance on this forward looking information.

Statements throughout this annual report that are not historical facts
may be considered "forward looking statements." These forward looking
statements sometimes include words to the effect that management believes or
expects a stated condition or result. All estimates and statements that
describe the Company's objectives, goals or future plans are forward looking
statements. Since forward looking statements address future events and
conditions, by their very nature they involve inherent risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to any number of risks including, but not limited to:

a. Risks associated with the oil and gas industry and regulatory bodies
(e.g. operational risks in exploration, development and production);
b. Delays or changes in plans with respect to exploration or development
projects or capital expenditures;
c. Uncertainty of estimates and projections relating to recoverable
reserves, costs and expenses;
d. Health safety and environmental risks; and
e. Commodity price and exchange rate fluctuations.


HIGHLIGHTS

-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 5,585 1,578
Oil and NGL's (bbl/d) 245 117
Equivalence at 6:1 (boe/d) 1,176 380
Sales price:
Natural gas ($/mcf) 8.93 6.90
Oil and NGLs ($/bbl) 61.15 44.87
Equivalence at 6:1 ($/boe) 55.16 42.56
Financial: (000's)
Petroleum and natural gas sales 23,670 5,919
Net income (loss) 2,086 (1,068)
Net income (loss) per share -
basic and diluted 0.04 (0.04)
Funds from operations 10,933 2,080
Total assets 118,639 35,076
Capital expenditures, net 11,373 22,547
Net working capital (deficiency) (29,480) 4,216
Weighted average shares outstanding - basic 55,077 29,591
Weighted average shares outstanding - diluted 55,370 29,675
Wells drilled:
Gross 32 23
Net 20 22
Success rate (%) 97 87
-------------------------------------------------------------------------

CORPORATE OVERVIEW

The end of 2005 marked the completion of Signal's second year of
operations as a full cycle oil and gas exploration and production company.
The Company closed three corporate acquisitions in 2005 which added
immediate production gains of approximately 750 boe/d. Predator Exploration
Ltd. ("Predator") was acquired on January 20, 2005 for $26.1 million,
consisting of $13.0 million of equity, $12.6 million of assumed liabilities,
and transaction costs of $0.5 million. The Company followed the acquisition of
Predator with the acquisition of a private oil and gas company on January 26,
2005 for $6.1 million, consisting of $1.3 of equity, $4.1 million of cash and
transaction costs, and $0.7 million of assumed liabilities. Finally, on August
9, 2005, the Company acquired Goose River Resources Ltd. ("Goose River") for
$42.9 million, consisting of $23.6 million of equity, $11.8 million of cash
and the assumption of $7.5 million of liabilities.
These corporate acquisitions added a substantial inventory of drill-ready
locations to the Company's prospect inventory. As a result, in 2005, the
Company drilled 32 wells (20 net) at a 97% success rate. Of these 32 gross
wells, 27 were tied in and on production by December 31st.
Total proven reserves at December 31, 2005 increased to 4.6 mmboe from
0.9 mmboe as at December 31, 2004 - an increase of 411%. Total proven and
probable reserves at December 31, 2005 increased to 6.7 mmboe from 1.3 mmboe
as at December 31, 2004. Present worth values of total proven reserves, using
a 10% discount rate, increased to $109.9 million at December 31, 2005 from
$17.5 million at December 31, 2004, and present worth values of total proven
and probable reserves, using a 10% discount rate, increased to $146.5 million
from $23.4 million over the same period.

In February 2006, the Company sold its Bodo, Ferrier, Carrot Creek,
Kaybob and Redwater properties for cash proceeds of approximately $100
million. The Company retained its assets in the Chigwell/Bashaw and Buick
Creek areas. After the completion of the sale, Signal now has:

- current production of approximately 400 boe/d with a 100% weighting to
natural gas and natural gas liquids;
- total proven reserves of 1.2 mmboe and total proven plus probable
reserves of 1.8 mmboe;
- prospect inventory of 12-18 gross CBM locations and 4-6 gross
conventional drilling opportunities;
- no bank indebtedness;
- high operating net back properties with operating costs of
approximately $5.00 /boe.

Management believes that this sale will allow the Company to be more
competitive with the large number of exploration focused companies created
from recent trust conversions. The Company will continue to aggressively
pursue full-cycle exploration and development activities supplemented with a
buy and exploit strategy.

SUMMARY OF QUARTERLY RESULTS


-------------------------------------------------------------------------
2005
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 6,253 5,990 5,100 4,929
Oil and NGL's (bbl/d) 430 242 170 145
Equivalence at 6:1 (boe/d) 1,472 1,240 1,020 966
Sales price:
Natural gas ($/mcf) 11.48 9.22 7.25 6.93
Oil and NGLs ($/bbl) 65.95 62.88 56.59 47.86
Equivalence at 6:1 ($/boe) 68.31 56.82 45.67 42.53
Benchmark prices:
AECO bench ($/gj) 10.84 8.76 6.98 6.49
Edmonton Par ($/bbl) 72.18 77.80 65.80 61.07
Financial ($000's):
Petroleum and natural gas sales 9,250 6,483 4,238 3,699
Net income (loss) 952 536 85 513
Net income (loss) per share -
basic and diluted ($) 0.02 0.01 - 0.01
Funds from operations 4,223 3,141 2,208 1,361
Operating costs ($/boe) 12.81 7.20 7.78 7.25
Weighted average shares
outstanding - basic 69,195 59,085 47,090 44,622
Weighted average shares
outstanding - diluted 69,525 61,240 47,090 44,781
-------------------------------------------------------------------------


-------------------------------------------------------------------------
2004
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 1,901 1,762 1,667 976
Oil and NGL's (bbl/d) 105 123 132 108
Equivalence at 6:1 (boe/d) 421 417 410 271
Sales price:
Natural gas ($/mcf) 6.94 6.50 7.46 6.52
Oil and NGLs ($/bbl) 50.04 46.58 44.64 38.10
Equivalence at 6:1 ($/boe) 43.18 41.30 44.83 38.70
Benchmark prices:
AECO bench ($/gj) 6.25 5.89 6.62 6.09
Edmonton Par ($/bbl) 58.16 56.99 51.30 46.65
Financial ($000's):
Petroleum and natural gas sales 1,708 1,586 1,671 954
Net income (loss) (548) (500) 93 (113)
Net income (loss) per share -
basic and diluted ($) (0.02) (0.02) - -
Funds from operations 486 526 775 298
Operating costs ($/boe) 10.58 7.32 4.80 3.68
Weighted average shares
outstanding - basic 30,666 30,666 25,636 24,056
Weighted average shares
outstanding - diluted 30,666 30,666 25,636 24,056
-------------------------------------------------------------------------

Sales volumes have consistently increased quarter-over-quarter throughout
the Company's first two years of operations as a full cycle oil and gas
company. Significant increases in sales volumes were realized in the first and
third quarters of 2005 with the acquisitions of Predator and a private oil and
gas company in January and with the acquisition of Goose River in August.
These three acquisitions added immediate production gains of approximately 750
boe/d. In addition to improved sales volumes, the Company has significantly
benefited from increased commodity prices in the third and fourth quarters of
2005.
Net income per quarter improved through 2005 with the exception of the
second quarter. Net income for the first quarter of 2005 is attributable to a
2004 flow-through share renouncement for which the income tax effects were
recorded in March 2005. Net income in the fourth quarter of 2005 improved over
the prior quarter due to record commodity prices and increased sales volumes
resulting from the Goose River acquisition and the Company's drilling program.
In the last two quarters of 2005 the Company drilled a total of 31 gross wells
(19 net wells).
As with net income, funds from operations also continued to improve
throughout 2005 as a result of production increases and improved commodity
prices. Funds from operations for the third quarter of 2004 decreased from the
prior quarter due to a decline in commodity prices received.

RESULTS OF OPERATIONS

Sales


-------------------------------------------------------------------------
December 31,
2005 2004
-------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 5,585 1,578
Oil and NGL's (bbl/d) 245 117
Equivalence at 6:1 (boe/d) 1,176 380
Sales price:
Natural gas ($/mcf) 8.93 6.90
Oil and NGLs ($/bbl) 61.15 44.87
Equivalence at 6:1 ($/boe) 55.16 42.56
-------------------------------------------------------------------------

The Company recorded average sales volumes in 2005 of 1,176 boe/d
compared to 380 boe/d in 2004 - an increase of 209%. This increase is
primarily the result of the three corporate acquisitions, as noted earlier in
this MD&A. The major producing areas that were acquired were Kaybob, Buick
Creek, Chigwell/Bashaw and Redwater.
The acquisition of Goose River added immediate incremental production of
approximately 490 boe/d. Much of the focus of the Company's drilling program
in the third and fourth quarters of 2005 has been on the development of Goose
River's Redwater asset. As a result of the completion of various operations,
the daily average production rate from the Redwater asset was increased from
360 boe/d at the time it was acquired to an exit rate of 662 boe/d.
In September 2005, the Company's 2005 capital budget was increased from
$14.8 million to $25.8 million to reflect improved commodity prices and the
Company's expanding prospect inventory. In 2005, the Company completed a
record number of operations, drilling 32 wells (20 net wells) with a 97%
success rate. 27 of these wells were completed and on production by the end of
2005. Poor weather conditions in the second quarter of 2005 in the Carrot
Creek, Kaybob and Buick Creek areas deferred the start of the Company's
drilling program in those areas to the third quarter. These production
increases were partially offset by the sale of the Twining assets on April 1,
2005 which were producing at an average rate of 170 boe/d at the time of sale.
Natural gas sales accounted for 78% of revenues as the Company continues
to have a high natural gas weighting. The price of natural gas realized by the
Company increased substantially in the third and fourth quarters of 2005 to
$9.22/mcf and $11.48/mcf, respectively. The average natural gas price received
for all of 2005 was $8.93/mcf compared to $6.90/mcf for 2004. Quarter over
quarter, the average sales price per mcf realized by the Company is consistent
with the AECO spot price, adjusted for heat content and transportation costs.
The combined average price realized for oil and natural gas liquids sales
in 2005 was $61.15/bbl which is up from $44.87/bbl from 2004. The price
realized by the Company is slightly lower than the average Edmonton par
posting as a result of quality differentials and transportation costs.
All of the Company's production is marketed in the Alberta spot market
and is unhedged.

Royalties


-------------------------------------------------------------------------
December 31,
2005 2004
-------------------------------------------------------------------------
Royalties (net of Alberta Royalty
Tax Credit) ($000's) 5,262 1,290
$/boe 12.26 9.28
Percentage of petroleum and natural gas sales 22.2 21.8
-------------------------------------------------------------------------

Royalties, consisting of crown, gross-overriding and freehold royalties,
increased to $5,262,000 in 2005 from $1,290,000 in 2004. The increase is
attributable to increased sales volumes and improved commodity prices realized
in 2005. Overall, as a percentage of sales, royalties are relatively
consistent on a year-over-year basis.

Operating Expenses


-------------------------------------------------------------------------
December 31,
2005 2004
-------------------------------------------------------------------------
Operating ($000's) 3,908 959
$/boe 9.10 6.90
-------------------------------------------------------------------------

The Company's operating expenses increased to $3,908,000 in 2005 from
$959,000 in 2004 - an increase of $2,949,000. This increase is mainly
attributed to production increases and higher costs for field services and
materials directly related to increased industry activity. In particular, the
Company's Redwater asset posted higher than average operating costs due to
additional costs incurred for compressor and pump jack rentals, trucking, and
salt water disposal. These additional charges in Redwater amounted to
approximately $470,500 in 2005 or $1.10/boe (or $2.32/boe in the fourth
quarter of 2005). The Company recently completed the construction of an oil
emulsion pipeline connecting its Redwater assets to the processing facility to
eliminate the need for expensive trucking costs.

General and Administrative Expenses


-------------------------------------------------------------------------
December 31,
($000's) 2005 2004
-------------------------------------------------------------------------
General and administrative expense 3,817 2,274
General and administrative costs capitalized (979) (476)
-------------------------------------------------------------------------
General and administrative expenses (net) 2,838 1,798
$/boe 6.61 12.93
-------------------------------------------------------------------------

General and administrative expenses increased to $3,817,000 in 2005 from
$2,274,000 in 2004 as the Company transitioned from a start-up company to a
full cycle oil and gas company throughout 2004. This transition resulted in
the hiring of additional administrative, land, accounting and technical staff
and also additional corporate infrastructure costs required to support the
Company's expanded operations. The decrease on a $/boe basis in 2005 is due to
efficiencies realized with increased production volumes. The Company continues
to strive to reduce its overall general and administrative costs which remain
higher than its peer group due to the administrative resources required to
support the Company's aggressive corporate acquisition strategy.
The Company capitalized general and administrative costs of $979,000 in
2005 compared to $476,000 in 2004. In 2004, the Company was primarily focused
on exploration activities and capitalized all of its geological and
engineering costs. With the increase in development activities, the Company
capitalized only a portion of its engineering costs in 2005.

Stock-based Compensation Expense


-------------------------------------------------------------------------
December 31,
2005 2004
-------------------------------------------------------------------------
Stock-based compensation expense 1,080 172
($000's)
Stock-based compensation expense capitalized (170) -
-------------------------------------------------------------------------
Stock-based compensation expense, 910 172
net
$/boe 2.12 1.24
-------------------------------------------------------------------------

Stock-based compensation expense reflects the value attributed to stock
options granted to employees, officers, directors and consultants to the
Company. Stock-based compensation expense increased to $1,080,000 in 2005
reflecting the significant stock option grants in the fourth quarter of 2004
and the first quarter of 2005. In 2005, the Company capitalized stock-based
compensation expense of $170,000 (2004 - $nil) related to exploration and
development activities.

Interest Expense


-------------------------------------------------------------------------
December 31,
2005 2004
-------------------------------------------------------------------------
Interest expense ($000's) 693 -
$/boe 1.62 -
-------------------------------------------------------------------------

Interest expense increased to $693,000 in 2005 as the Company accessed
its available credit facility to fund its corporate acquisition strategy. This
facility was not utilized in 2004.

Depletion and Depreciation Expense


-------------------------------------------------------------------------
December 31,
2005 2004
-------------------------------------------------------------------------
Depletion and depreciation expense 8,879 2,898
($000's)
$/boe 20.69 20.84
-------------------------------------------------------------------------

Depletion and depreciation expense increased to $8,879,000 in 2005 from
$2,898,000 in 2004 - $20.69/boe and $20.84/boe, respectively. Over this
period, the Company's proven reserves increased to 4.6 mmboe from 0.9 mmboe at
December 31, 2004 as a result of three corporate acquisitions and the
Company's capital program. The carrying amount of property and equipment
increased to $102,503,000 at December 31, 2005 from $22,930,000 at December
31, 2004. This change amounts to a cost of $21.50/boe of reserves added in
2005 compared to $25.47/boe in 2004.

Accretion of Asset Retirement Obligations


-------------------------------------------------------------------------
December 31,
2005 2004
-------------------------------------------------------------------------
Accretion of asset retirement obligations 253 117
($000's)
$/boe 0.59 0.84
-------------------------------------------------------------------------

Accretion expense increased to $253,000 in 2005 from $117,000 in 2004 as
a result of an increase in the number of wells and facilities added in 2005.
The Company drilled 32 gross wells (20 net) in 2005, as noted earlier in this
MD&A. The Company estimates the net present value of its asset retirement
obligations at December 31, 2005 to be $4.4 million (December 31, 2004 - $1.6
million) based on a total future liability of $8.9 million (December 31, 2004 -
$2.9 million) which will be incurred between 2006 and 2029. The Company used
an inflation rate of 3% and a credit-adjusted risk free rate of 6% to
determine the fair value of its asset retirement obligations.

Income Tax

The current income tax expense for 2005 consists of Large Corporations
Tax ("LCT"). As a result of corporate acquisitions that were completed in
2005, the Company's taxable capital base has increased such that it is now
required to pay LCT and, accordingly, the Company recorded current income tax
expense of $95,000.
The Company also recorded a future income tax recovery of $1,195,000 in
2005 as a result of a flow-through share offering in 2004. The full
expenditure commitment of $3,553,000 was renounced to investors at December
31, 2004 and the related income tax effects were reflected in the consolidated
statement of operations in the first quarter of 2005.
The Company has significant income tax pools available that can be used
to reduce future income taxes. The Company intends to apply these available
pools against the proceeds from the sale of oil and gas properties announced
in February 2006 to minimize the tax liability.

Operating Netback

-------------------------------------------------------------------------
December 31,
($/per boe) 2005 2004
-------------------------------------------------------------------------
Petroleum and natural gas sales 55.16 42.56
Less: Royalties (net of ARTC) (12.26) (9.28)
Operating expenses (9.10) (6.90)
-------------------------------------------------------------------------
Operating netback 33.80 26.38
Less: General and administrative expenses (6.61) (12.93)
Stock-based compensation (2.12) (1.21)
Interest expense (1.62) -
Depletion and depreciation (20.69) (20.84)
Accretion expense (0.59) (0.84)
Other 0.14 1.32
-------------------------------------------------------------------------
Net income (loss) before income taxes 2.31 (8.12)
Income tax expense (recovery) 0.22 (0.42)
Future income tax recovery (2.78) -
-------------------------------------------------------------------------
Net income (loss) 4.87 (7.70)
-------------------------------------------------------------------------
Funds from operations 25.48 14.96
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The operating netback for 2005 increased by approximately 28.1% primarily
due to an increase in commodity prices realized in 2005.
Funds from operations for 2005 were $25.48/boe for 2005 compared to
$14.96/boe for 2004. This increase is due to high general and administrative
expenses incurred in 2004 due to the start-up stage of operations and the
lower production base that existed at that time.

Net Income (Loss)


-------------------------------------------------------------------------
December 31,
($000's except per share amounts) 2005 2004
-------------------------------------------------------------------------
Net income (loss) 2,086 (1,068)
Net income (loss) per share - basic and diluted 0.04 (0.04)
-------------------------------------------------------------------------

Net income for 2005 was $2,086,000 compared to a net loss of $1,068,000
for 2004. This translates into basic and diluted net income (loss) per share
amount of $0.04 for 2005 (2004 - ($0.04)). A significant portion of the net
income for 2005 is attributable to the income tax effects of the 2004 flow
through share renouncement, as noted earlier in this MD&A.

Capital Expenditures

-------------------------------------------------------------------------
December 31,
($000's) 2005 2004
-------------------------------------------------------------------------
Land and rentals 2,317 1,715
Seismic 320 174
Drilling and completions 13,525 9,524
Equipment and tie-ins 7,013 3,740
Property acquisitions 840 8,359
Property dispositions (13,990) (1,500)
Capitalized overhead costs 1,149 476
Other 199 59
-------------------------------------------------------------------------
11,373 22,547
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Signal participated and was successful in several crown land sales in
2005 in the Chigwell, Buick Creek and Carrot Creek areas, at a cost of
approximately $2,317,000. The Company also acquired additional interests in
the Redwater area immediately offsetting company land and operated
infrastructure in a private transaction for $840,000. In addition, the Company
sold its Twining asset in April 2005 for proceeds of $13,250,000; its Paradise
Valley asset for $650,000 in December 2005; and undeveloped land in North
Redwater for $90,000 in November.
In September 2005, the Company increased the 2005 capital budget to
$25,800,000 - the Company's actual costs incurred were $25,363,000
($11,373,000 net of proceeds from property dispositions). The capital budget
was exclusive of the three corporate acquisitions that were completed in 2005
and reflected the growing project inventory on Signal's lands and improved
commodity prices.
The Company drilled 26 gross (18 net) wells and 6 gross (2 net) coal bed
methane ("CBM") wells with a 97% success rate in 2005 compared to 23 gross
wells (22 net wells) drilled in 2004 at a 87% success rate. Of the 32 gross
wells drilled, 31 were drilled in the third and fourth quarters of 2005. 27 of
the gross wells drilled in 2005 were on production by December 31, 2005.

Liquidity and Capital Resources

Cash provided by operating activities was $4,323,000 in 2005 compared to
$2,307,000 in 2004. Funds from operations increased to $10,933,000 in 2005
from $2,080,000 in 2004 as a result of a significant increase in operating
activities in 2005 as the Company transitioned from the start-up stage. As
discussed earlier in this MD&A, average production increased to 1,176 boe/d in
2005 from 380 boe/d in 2004. In addition, the Company realized substantially
increased commodity prices in 2005 over 2004 levels.
Cash provided by financing activities in 2005 was $25,314,000 compared to
$10,131,000 in 2004. The Company completed a flow-through share offering in
2004 of 1,615,000 common shares and an additional issuance of 4,485,000 common
shares for total gross proceeds of $11,402,000, to fund its capital program.
In December 2005, the Company completed an additional flow-through offering of
common shares for gross proceeds of $3,040,000. In addition, the Company
increased its available credit facility with its bank from $15,000,000 to
$34,000,000 in December 2005 reflecting the increased reserve base from three
corporate acquisitions completed in 2005. At December 31, 2005, the Company
had drawn $22,975,000 on this facility - $ nil at December 31, 2004. The
facility was used to fund the cash portion of the corporate acquisitions,
noted earlier. In April 2005, the Company used the proceeds from the sale of
the Twining properties of $13,250,000 to repay the operating loan balance that
existed at that time.
Cash used in investing activities increased to $32,294,000 in 2005
compared to $23,144,000 in 2004. In 2005 the Company incurred expenditures
related to its capital program of $25,365,000, incurred costs of $15,907,000
related to three corporate acquisitions, and realized proceeds from the sale
of its Twining assets and other minor properties of $13,990,000.

Subsequent Events

Effective February 1, 2006, the Company entered into an agreement with a
private company to sell certain oil and gas properties, tangible equipment and
undeveloped land for cash proceeds of approximately $100 million, subject to
certain adjustments. The transaction involved the sale of the Company's Bodo,
Ferrier, Carrot Creek, Kaybob and Redwater properties with the Company
retaining its Chigwell/Bashaw and Buick Creek properties. The transaction
closed in two stages on February 27 and March 9, 2006.
On February 27, 2006, concurrent with the first closing of the sale of
properties, the Company repaid its revolving operating loan which had
$28,550,000 drawn. In addition, as a result of the sale and the substantial
reduction in the Company's asset base, the Company's Board of Directors vested
all outstanding stock options. The vested options will expire at dates between
March 31, 2006 and June 30, 2006.

Securities Outstanding

Securities outstanding as of the date of this MD&A consist of 70,520,948
issued and outstanding common shares, and 4,090,500 stock options.

Off-balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Related Party Transactions

The Company has no related party transactions.

Commitments and Contingencies

The Company has no commodity price, interest rate swaps or fixed price
contracts in place as of December 31, 2005. The Company has a lease for office
premises which expires in November 2006.

New Canadian Accounting Pronouncements

The Canadian Institute of Chartered Accountants (CICA) has issued a
number of accounting pronouncements, some of which may impact the Company's
reported results and financial position in future periods.

Comprehensive Income/Financial Instruments/Hedges

The CICA issued new standards in early 2005 for Comprehensive Income
(CICA 1530), Financial Instruments (CICA 3855) and Hedges (CICA 3865), which
will be effective for the reporting year-end 2007. The new standards will
bring Canadian rules in line with current rules in the US. The standards will
introduce the concept of "Comprehensive Income" to Canadian GAAP and will
require that an enterprise (a) classify items of comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Derivative
contracts will be carried on the balance sheet at their mark-to-market value,
with the change in value flowing to either net income or comprehensive income.
Gains and losses on instruments that are identified as hedges will flow
initially to comprehensive income and be brought into net income at the time
the underlying hedged item is settled. It is expected that this standard will
be effective for Signal's 2007 reporting. Any instruments that do not qualify
for hedge accounting will be marked-to-market with the adjustment (tax
effected) flowing through the income statement.
Signal does not currently have any hedges in place so the impact of these
recommendations would not be significant.

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Company is accumulated and
communicated to the Company's management as appropriate to allow timely
decisions regarding required disclosure. The Company's Chief Executive Officer
and Chief Financial Officer have concluded, based on their evaluation as of
the end of the period covered by the annual filings, that the Company's
disclosure controls and procedures as of the end of such period are effective
to provide reasonable assurance that material information related to the
Company, including its consolidated subsidiaries, is made known to them by
others within those entities. It should be noted that while the Company's
Chief Executive Officer and Chief Financial Officer believe that the Company's
disclosure controls and procedures provide a reasonable level of assurance
that they are effective, they do not expect that the disclosure controls and
procedures will prevent all errors and fraud. A control system, no matter how
well conceived or operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.

BUSINESS RISKS and UNCERTAINTIES

Signal's production and exploration activities are concentrated in the
Western Canadian Sedimentary Basin, where activity is highly competitive and
includes a variety of different sized companies ranging from smaller junior
producers to the much larger integrated petroleum companies. Signal is subject
to the various types of business risks and uncertainties including:

- finding and developing oil and natural gas reserves at economic costs;
- production of oil and natural gas in commercial quantities; and
- marketability of oil and natural gas produced.

In order to reduce exploration risk, the Company strives to employ highly
qualified and motivated professional employees with a demonstrated ability to
generate quality proprietary geological and geophysical prospects. To help
maximize drilling success, Signal combines exploration in areas that afford
multi-zone prospect potential, targeting a range of low to moderate risk
prospects with some exposure to select high-risk with high-reward
opportunities. The Company explores in areas where the Company has drilling
experience.
The Company mitigates its risk related to producing hydrocarbons through
the utilization of the most appropriate technology and information systems. In
addition, the Company seeks to maintain operational control of its prospects.
Oil and gas exploration and production can involve environmental risks
such as pollution of the environment and destruction of natural habitat, as
well as safety risks such as personal injury. In order to mitigate such risks,
Signal conducts its operations at high standards and follows safety procedures
intended to reduce the potential for personal injury to employees, contractors
and the public at large. The Company maintains current insurance coverage for
general and comprehensive liability as well as limited pollution liability.
The amount and terms of this insurance are reviewed on an ongoing basis and
adjusted as necessary to reflect changing corporate requirements, as well as
industry standards and government regulations. Signal may periodically use
financial or physical delivery hedges to reduce its exposure against the
potential adverse impact of commodity price volatility, as governed by formal
policies approved by senior management subject to controls established by the
Board of Directors.

CRITICAL ACCOUNTING ESTIMATES

The reader is advised that the critical accounting estimates, policies,
and practices as described in this MD&A and Report continue to be critical in
determining Signal's financial results.
The reader is further cautioned that the preparation of financial
statements in accordance with GAAP requires management to make certain
judgments and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses. Estimating reserves is also critical to
several accounting estimates and requires judgments and decisions based upon
available geological, geophysical, engineering and economic data. These
estimates may change, having either a negative or positive effect on net
earnings as further information becomes available, and as the economic
environment changes. Changes in these judgments and estimates could have a
material impact on the financial results and financial condition. The
following discussion outlines accounting policies and practices that are
critical to determining the Company's financial results:

Accounting for Petroleum and Natural Gas Operations

The Company follows the full cost method of accounting whereby all costs
relating to the acquisition of, exploration for and development of oil and gas
reserves are capitalized in a single Canadian cost center. Such costs include
lease acquisition, lease rentals on undeveloped properties, geological and
geophysical costs, drilling both productive and non-productive wells,
production equipment and overhead charges directly related to acquisition,
exploration and development activities
The application of the full cost method of accounting requires
management's judgment to determine the proper designation of well as either
developmental or exploratory, which will ultimately determine the proper
income tax treatment of the costs incurred.

Reserve Estimates

Full cost accounting depends on the estimated proven reserves that are
believed to be recoverable from the Company's oil and gas properties. The
process of estimating reserves is complex. It requires significant judgments
and decisions based on available geological, geophysical, engineering, and
economic data. These estimates may change substantially as additional data
from ongoing development activities and production performance becomes
available and as economic conditions impacting oil and gas prices and costs
change. Our reserve estimates are based on current production forecasts,
prices and economic conditions. Signal's reserves were evaluated two
independent engineering firms, Gilbert Lausten and Jung Associates Ltd. and
Sproule Associates Ltd.

Reserve estimates are critical to many of our accounting estimates,
including:

- Calculating our unit-of-production depletion and future site
restoration rates. Proven reserve estimates are used to determine
rates that are applied to each unit-of-production in calculating
depletion expense.
- Assessing when necessary, oil and gas assets for possible impairment.
Estimated future undiscounted cash flows are determined using proven
reserves. The criteria used to assess impairment, including the impact
of changes in reserve estimates, are discussed below.

As circumstances change and additional data becomes available, reserve
estimates also change, possibly materially impacting net income. Estimates
made are reviewed and revised, either upward or downward, as warranted by the
new information. Revisions are often required due to changes in well
performance, prices, economic conditions and governmental restrictions.
Although we make every reasonable effort to ensure that our reserve
estimates are accurate, reserve estimation is an inferential science. As a
result, the subjective decisions, new geological or production information and
a changing environment may impact these estimates. Revisions to our reserve
estimates can arise from changes in oil and gas prices, and reservoir
performance. Such revisions can be either positive or negative.
It would take a very significant decrease in our proven reserves to limit
our ability to borrow money under our credit facility.

Impairment of Petroleum and Natural Gas Properties

The Company reviews its full cost pool for impairment annually. An
impairment provision is recorded whenever events or circumstances indicate
that the carrying value of the Company's properties may not be recoverable.
The impairment provision is based on the excess of carrying value over fair
value. Fair value is defined as the present value of the estimated future net
revenues from production of total proved and probable petroleum and natural
gas reserves, as estimated by the Company on the balance sheet date. Reserve
estimates, as well as estimates for petroleum and natural gas prices and
production costs may change, and there can be no assurance that impairment
provisions will not be required in the future.
Management's assessment of, among other things, the results of
exploration activities, commodity price outlooks, and planned future
development and sales, impacts the amount and timing of impairment provisions.

Asset Retirement Obligations

The asset retirement obligations provision recorded in the consolidated
financial statements is based on an estimate for total costs for future site
restoration and abandonment of the Company's petroleum and natural gas
properties. This estimate is based on management's analysis of production
structure, reservoir characteristics and depth, market demand for equipment,
currently available procedures, and discussions with construction and
engineering consultants. Estimating these future costs requires management to
make estimates and judgments that are subject to future revisions based on
numerous factors, including changing technology, political and regulatory
environments.

Income Taxes

The Company records future tax assets and liabilities to account for the
expected future tax consequences of events that have been recorded in its
consolidated financial statements and its tax returns. These amounts are
estimates; the actual tax consequences may differ from the estimates due to
changing tax rates and regimes, as well as changing estimates of cash flows
and capital expenditures in current and future periods. The Company
periodically assesses its ability to realize on its future tax assets. If
Signal concluded that it is more likely than not that some portion or all of
the deferred tax assets will not be realized under accounting standards, the
tax asset will be reduced by a valuation allowance.

Claims and Litigation

The Company could become involved in various claims and litigation
arising in the normal course of business in the future. While the outcome of
these matters would be uncertain and there could be no assurance that such
matters could be resolved in the Company's favor. If the outcome would be
unfavorably, it could have a materially adverse impact on its financial
position or results of operations.
With the above risks and uncertainties, the reader is cautioned that
future events and results may vary significantly from that which Signal
currently foresees.

MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

The accompanying consolidated financial statements and all information in
this report are the responsibility of management. The consolidated financial
statements have been prepared by management in accordance with Canadian
generally accepted accounting principles. Financial statements are not precise
since they include certain amounts base upon estimates and judgments. When
alternative accounting methods exist, management has chosen those it deems to
be the most appropriate to ensure fair and consistent presentation. The
financial information presented elsewhere in this report is consistent with
that in the financial statements.
Management maintains financial and operating systems that include
appropriate and effective internal controls. Such systems are designed to
provide reasonable assurance that the financial information is reliable and
relevant, and the Company's assets are appropriately accounted for and
adequately safeguarded.
The Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the financial statements. The Board of
Directors carries out this responsibility principally through its Audit
Committee.
The Audit Committee, with all of its members being outside directors, is
appointed by the Board of Directors and reviews the financial statements and
Management's Discussion and Analysis; assesses the adequacy of the internal
controls of the Company; considers the report of the external auditors;
examines the fees and expenses for audit services; and recommends to the Board
of Directors the independent auditors for appointment by the shareholders. The
Audit Committee reports its findings to the Board of Directors for
consideration when approving the annual financial statements for issuance to
the shareholders.
These consolidated financial statements have been audited by Ernst &
Young LLP, the external auditors, in accordance with Canadian generally
accepted auditing standards, on behalf of the shareholders. Ernst & Young LLP
have full and free access to, and meet periodically with, the Audit Committee.


"signed" "signed"
J. Cameron Bailey Jamie Jeffs, CA
President & CEO Chief Financial Officer


AUDITORS' REPORT

To the Shareholders of SignalEnergy Inc.

We have audited the consolidated balance sheets of SignalEnergy Inc. as
at December 31, 2005 and 2004 and the consolidated statements of operations
and deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2005 and 2004 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.

"signed"
Calgary, Canada Ernst & Young LLP
March 27, 2006 Chartered Accountants


-------------------------------------------------------------------------
SIGNALENERGY INC.
CONSOLIDATED BALANCE SHEETS
As at December 31
(in thousands)
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
ASSETS (note 6)
Current
Cash and cash equivalents (note 3) 61 2,718
Accounts receivable (note 11) 11,269 4,143
Prepaid expenses 258 191
-------------------------------------------------------------------------
11,588 7,052
Property and equipment (note 5) 102,503 22,930
Goodwill 4,548 4,548
Deferred acquisition costs (note 4) - 546
-------------------------------------------------------------------------
118,639 35,076
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 17,810 2,836
Income taxes payable 283 -
Revolving operating loan (note 6) 22,975 -
-------------------------------------------------------------------------
41,068 2,836

Asset retirement obligations (note 7) 4,428 1,633

Commitments (note 12)

Shareholders' Equity
Share capital (note 8) 136,817 97,914
Contributed surplus (note 8) 2,140 309
Deficit (65,814) (67,616)
-------------------------------------------------------------------------
73,143 30,607
-------------------------------------------------------------------------

118,639 35,076
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Subsequent events (note 14)

See accompanying notes to consolidated financial statements.

On behalf of the Board of Directors:


"signed" "signed"
J. Cameron Bailey Barry Giovanetto
Director Director



-------------------------------------------------------------------------
SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the years ended December 31
(in thousands, except per share amounts)
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
REVENUE
Petroleum and natural gas sales 23,670 5,919
Royalties (net of Alberta Royalty Tax Credit) (5,262) (1,290)
-------------------------------------------------------------------------
18,408 4,629
Other income 59 184
-------------------------------------------------------------------------
18,467 4,813
-------------------------------------------------------------------------
EXPENSES
Operating 3,908 959
General and administrative 2,838 1,794
Stock-based compensation (note 9) 910 172
Interest 693 -
Depletion and depreciation 8,879 2,898
Accretion of asset retirement
obligations (note 7) 253 117
-------------------------------------------------------------------------
17,481 5,940
-------------------------------------------------------------------------
Income (loss) before income taxes 986 (1,127)
-------------------------------------------------------------------------
Income taxes (note 10)
Current income tax expense (recovery) 95 (59)
Future income tax recovery (1,195) -
-------------------------------------------------------------------------
(1,100) (59)
-------------------------------------------------------------------------
Net income (loss) for the year 2,086 (1,068)

Deficit, beginning of year (67,616) (66,548)
Distribution to shareholders (note 4 (c)) (284) -
-------------------------------------------------------------------------
Deficit, end of year (65,814) (67,616)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income (loss) per share (note 8)
Basic 0.04 (0.04)
Diluted 0.04 (0.04)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



-------------------------------------------------------------------------
SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31
(in thousands)
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) for the year 2,086 (1,068)
Items not affecting cash flows:
Stock-based compensation expense 910 172
Non-cash general and administrative costs - (39)
Depletion and depreciation 8,879 2,898
Accretion of asset retirement obligations 253 117
Future income tax recovery (1,195) -
-------------------------------------------------------------------------
Funds from operations 10,933 2,080
Change in non-cash operating working
capital (note 13) (6,610) 227
-------------------------------------------------------------------------
Cash provided by operating activities 4,323 2,307
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in revolving operating loan,
net of repayments 22,975 -
Purchase of common shares (note 8) (579) -
Issuance of common shares - 7,124
Issuance of flow-through common shares 3,040 3,553
Share Issuance costs (122) (546)
-------------------------------------------------------------------------
Cash provided by financing activities 25,314 10,131
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (25,363) (15,688)
Proceeds on sale of property and equipment 13,990 1,500
Acquisition of oil and gas properties - (8,359)
Acquisition of businesses, net of cash
acquired (note 4) (15,907) 1,776
Change in non-cash investing working
capital (note 13) (5,014) (2,373)
-------------------------------------------------------------------------
Cash used in investing activities (32,294) (23,144)
-------------------------------------------------------------------------
Net change in cash (2,657) (10,706)
Cash and cash equivalents - beginning of year 2,718 13,424
-------------------------------------------------------------------------
Cash and cash equivalents - end of year 61 2,718
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash flow information:
Interest paid 693 -
Income taxes paid

Contact Information