SignalEnergy Inc.
TSX : SGI

May 13, 2005 23:59 ET

SignalEnergy Inc. Announces First Quarter 2005 Results

CALGARY--(CCNMatthews - May 13) - SignalEnergy is pleased to announce its first quarter financial results for 2005. This report marks the first anniversary of the Company's re-organization to a full-cycle exploration and production company. As the Company has now completed five quarters of operations under a new management team, we are able to provide quarter over quarter comparisons for the first time.

During the first five quarters of operations as an oil and gas company, Signal has considerably increased the net asset value of the Company, while also building a solid foundation to continue the transformation of Signal into a viable oil and gas business for the long term. The Company's net asset value, proforma the Twining property sale, as at December 31, 2004 of $1.47 per share represents a 210% increase from December 31, 2003 when the Company was recapitalized by the current management team and directors.

The Company has successfully deployed its business plan of a balanced approach of grass roots shallow resource play development and conventional exploration and development, supplemented by a focused merger and acquisition strategy, to maintain a diversified balance of drilling opportunities and a growing production platform.

Highlights for the First Quarter 2005:

- Closed corporate acquisitions of Predator Exploration Ltd. and Privateco in January 2005. First quarter results include operating performance for Predator and Privateco from January 20, 2005 and January 26, 2005, respectively.

- Established production capability at the end of the quarter of 1600 boe/day, although exit rates where limited to 1000 boe/day due to third party processing constraints which have now been partially eliminated.

- Increased production by 256% over first quarter 2004 to an average of 966 boe/day while improving production per share by 192% over the same period.

- Drilled two gross (two net) wells at 100% success rate including one multi-zone well in Grizzly-Kaybob area with the other in the Twining CBM project.

- Conducted a total of 12 completions or workovers in the first quarter. This program focused on completing earning commitments on several Twining area wells, plus exploiting upside acquired in the Predator and Privateco acquisitions.

Subsequent to the end of the quarter, Signal closed the previously announced disposition of the Twining assets to a Private company for gross proceeds of $13.25 million. After giving effect to the closing of this property sale, Signal had the following attributes:

- Net asset value, proforma the Twining sale, as at December 31, 2004 of $1.47 per share representing a 210% increase from December 31, 2003, when the company was re-capitalized.

- Production capacity of 1400 boe/day weighted primarily towards long life liquids, rich reserves and production in Carrot Creek, Kaybob, Buick Creek, Chigwell and several minor properties acquired in the Predator and Privateco acquisitions.

- Proforma the Twining disposition, total net debt as at March 31, 2005 of $2.8 million consisting entirely of working capital deficit with nothing drawn on the Company's available lending facility of $15.0 million. The Company expects to exit spring break-up debt-free as field operations are essentially suspended waiting for improved access to the field to commence the balance of the 2005 capital development program.

Subsequent Event

On May 6, 2005, the Company announced a proposed business combination with Goose River Resources Ltd. (GRR - TSX-Venture) via a plan of arrangement. Under the terms of the arrangement, Signal will issue up to a maximum of 21.25 million shares plus $10.0 million to Goose River shareholders.

This transaction is accretive by all measures to Signal shareholders while also significantly expanding the Company's production base and prospect inventory. The Goose River assets are primarily low risk conventional play development opportunities plus a number of prospective exploration projects at various stages of development. The lower risk, conventional assets of Goose River provide an excellent compliment to Signal's growing inventory of higher impact prospects in Carrot Creek, Kaybob and Buick Creek, and low risk resource style play development opportunities in Chigwell.

Of particular interest is Goose River's Redwater asset located roughly 40 km North East of Edmonton. This property features current production of 500 boe/day with 15 drill ready infill locations to complete first phase development of the pool on 40 acre spacing basis. Numerous infill locations on 20 acre spacing may be drilled in follow-up development phases in conjunction, with possible water flooding, to improve ultimate recoverable reserves.

Outlook

The Goose River business combination represents the sixth significant transaction the Company has entered into since its recapitalization. Each of these transactions has been consistent with the strategy of building a high quality asset base capable of delivering top-quartile returns to shareholders. Relying on the strengths of the management team, Signal has been able to maximize the impact of these acquisitions by quickly and efficiently adding value by aggressively exploiting the upside of these assets, while also deploying the surplus tax pools to maximize the value of the combined entity.

On an aggregate basis, Signal's management team has been able to improve production capacity on the acquired assets by 50%, compared to the acquired volumes, while also delivering top-quartile performance as measured by capital efficiency and finding and development costs. The Goose River acquisition offers similar growth potential in the short term plus longer term growth opportunities on the acquired exploration projects.

The future is bright for SignalEnergy as the considerable efforts of our directors, management team and employees over the past 5 quarters has delivered a solid company poised for continued growth and value creation. The combination of the strategic acquisitions, internal prospect generation and solid financial footing will provide Signal with ample opportunity and increasing momentum to provide superior returns to our shareholders.

On behalf of the Board of Directors and Management,

J. Cameron Bailey, President and Chief Executive Officer



HIGHLIGHTS
(unaudited)
Three Months Ended
(in thousands, except production March 31,
data and per share figures) 2005 2004 variance (%)
-------------------------------------------------------------------------

Sales volume
Natural gas (mcf/day) 4,929 976 405
Oil and NGLs (bbl/day) 145 108 34
Equivalence at 6:1 (boe/day) 966 271 256

Sales price
Natural gas ($/mcf) 6.93 6.52 6
Oil and NGLs ($/bbl) 47.86 38.10 26
Equivalence at 6:1 ($/boe) 42.53 38.70 10
Operating netback ($/boe) 23.79 24.68 (4)
-------------------------------------------------------------------------

Financial
Petroleum and natural gas sales 3,699 954 288
Net income (loss) 513 (113) 554
per share - basic and diluted 0.01 - -
Funds from operations(1) 1,361 298 357
Capital expenditures 4,551 10,286 (55)
Corporate acquisitions, net 4,224 - -
Working capital (16,064) - -
Weighted average shares outstanding
- basic 44,622 24,056 85
Weighted average shares outstanding
- diluted 44,781 24,056 86
-------------------------------------------------------------------------
(1) Funds from operations is a non-GAAP measure and represents earnings
adjusted for non-cash items including depletion and depreciation,
accretion and stock-based compensation.


MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three months ended March 31, 2005 and 2004

May 11, 2005

The following discussion is management's discussion and analysis ("MD&A") of SignalEnergy Inc.'s ("Signal" or the "Company") operating and financial data for three months ended March 31, 2005 and 2004, as well as estimates and financial performance based on information currently available. The information is reported on a consolidated basis with Signal's wholly-owned subsidiaries Nanodesign Inc., Blairmore Energy Ltd. ("Blairmore"), Predator Exploration Ltd. ("Predator") and Private Company ("privateco").

Forward Looking Statements

Statements throughout this report that are not historical facts may be considered to be "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 factors, including such variables as new information regarding recoverable reserves, changes in demand for and commodity prices of crude oil and natural gas, legislative, environmental and other regulatory or political changes, competition in areas where the Company operates and other factors discussed in this report.

Related Financial Information

The following discussion and analysis should be read in conjunction with the Company's unaudited interim consolidated financial statements for the three months ended March 31, 2005 and 2004 and the audited consolidated financial statements for the years ended December 31, 2004 and 2003.

Basis of Presentation

The financial data below has been prepared in accordance with Canadian generally accepted accounting principles (GAAP). All dollar amounts are presented in thousands of Canadian dollars, unless otherwise noted.

The MD&A contains the term "funds from operations" and "operating netback" which should not be considered an alternative to, or more meaningful than, cash flow from operating activities or net income (loss) as determined in accordance with Canadian GAAP as an indicator of the Company's performance. The Company's determination of funds from operations may not be comparable to that reported by other companies. The reconciliation between net income (loss) and funds from operations can be found in the Statements of Cash Flows included in the financial statements noted above.

Operating netback is a non-GAAP measurement that represents profit margins realized by the production and sale of petroleum and natural gas. The reconciliation between operating netback and funds from operations can be found in the "Results of Operations - Cash Flows and Netbacks" section of the MD&A.

Barrel of Oil Equivalency

Natural gas reserves and volumes contained herein 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 equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

RESULTS OF OPERATIONS

On January 20, 2005 and January 26, 2005, SignalEnergy acquired all of the issued and outstanding shares of Predator and privateco. The purchase prices of these acquisitions were $13.4 million and $5.5 million, including transaction costs, respectively. These acquisitions were financed through the credit facility with the National Bank, cash and common shares of SignalEnergy.

The assets included 17 producing wells from Predator and four producing wells from privateco. The results of operations from these wells have been included in the Company's statement of operations and deficit from January 20, 2005 and January 26, 2005, respectively.

As reflected in the next table, SignalEnergy increased production from 271 boe/day in 1Q 2004 to 966 boe/day in 1Q 2005, an average increase of 256%, due to the acquisitions of Predator and privateco, and additions through the capital program.



Production
Three Months Ended
March 31, variance
2005 2004 (%)
-------------------------------------------------------------------------

Sales volumes
Natural gas (mcf/day) 4,929 976 405
Oil and NGLs (bbl/day) 145 108 34
Equivalence at 6:1 (boe/day) 966 271 256
Sales price
Natural gas ($/mcf) 6.93 6.52 6
Oil and NGLs ($/bbl) 47.86 38.10 26
Equivalence at 6:1 ($/boe) 42.53 38.70 10
-------------------------------------------------------------------------


Sales volumes during 1Q 2005 increased over those in the same period of 2004, mainly due to the acquisitions mentioned above. The major producing areas acquired from Predator and privateco, Kaybob, Buick Creek and Chigwell, added 127% to Signal's daily production, compared to last year at this time. Signal's core asset Carrot Creek produced 203 boe/day or 24% of production in 1Q 2005 compared to 271 boe/day in 1Q 2004.

The majority of SignalEnergy's production and revenue is generated from natural gas sales. Natural gas prices remained strong in 1Q 2005. Signal's average natural gas price/mcf was six percent higher in 1Q 2005 at $6.93/mcf versus 1Q 2004 at $6.52/mcf. The reported average sales price per mcf of $6.93 is comparable to the AECO benchmark (spot) price, adjusted for heat content and transportation, of $6.94 in 1Q 2005 (1Q 2004 - reported sales price per mcf - $6.52; AECO benchmark, adjusted - $6.78/mcf).

The Company's production is marketed in the Alberta spot market and is unhedged.



Revenues
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Petroleum and natural gas sales 3,699 954 288
$/boe 42.53 38.70 10
-------------------------------------------------------------------------


Revenues increased in the three months ended March 31, 2005, versus the comparable period in 2004, as a result of the 256% increase in daily barrel of oil equivalent production and corresponding 10% increase to the $/boe received.

Of the $3.7 million of sales in 1Q 2005, natural gas revenue accounted for $3.1 million or 84%. The majority of these revenues resulted from an increase in natural gas production to 4,929 mcf/day in 1Q 2005 from 976 mcf/day in 1Q 2004, attributable primarily to the Predator and privateco acquisitions.



Royalties
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Royalties 1,000 245 308
$/boe 11.49 9.80 17
% of sales 27% 26% 4
-------------------------------------------------------------------------


The increase in total royalties from 1Q 2004 to 1Q 2005 is a result of the acquisitions described above. The change in royalty expense is directly related to changes in sales prices and sales volumes. The increase in royalties from 1Q 2004 to 1Q 2005 reflects changes to sales prices and volumes.

Royalty expense is comprised of crown, gross-overriding and freehold royalties and the Alberta Royalty Tax Credit. Although the corporate acquisitions resulted in significant increases to gross-overriding and freehold expenditures, the royalty rate as a percent of sales or 27% (1Q 2004 - 26%) is still in line with the overall government rate of 25%.



Operating Expenses
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Operating 631 92 586
$/boe 7.25 3.68 97
-------------------------------------------------------------------------


Operating costs rose dramatically from $92,000 in 1Q 2004 to $631,000 in 1Q 2005. This rise is attributable to increased production and production from acquired higher operating cost areas. With this increased production, SignalEnergy has incurred higher fixed costs on compressor rentals, gas gathering and processing fees, and contract operating from that experienced in 1Q 2004. These costs comprise 54% of the total operating expenditures of $631,000 reported.

On a go-forward basis, the Company will continue to find ways to minimize operational expenses and operate efficiently and competitively in an overly aggressive industry.



Interest Income
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Interest income 6 76 (92)
$/boe 0.07 3.04 (98)
-------------------------------------------------------------------------


Interest income has decreased in the three months ended March 31, 2005, versus the same period in 2004, due to reduced investable cash, as a result of increased capital expenditures and acquisitions. During 1Q 2004 excess cash from the 2003 financing was available to reinvest in short-term money market instruments. No additional interest is expected to be earned in the future, as the Company is now accessing its credit facilities.



General and Administrative Expenses
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

General and administrative expenses,
including stock-based compensation
expense 893 417 114
$/boe (excluding non-cash items) 7.17 15.80 (55)
-------------------------------------------------------------------------


General and administrative (g&a) costs increased significantly in 1Q 2005 compared to the same three month period in 2004. The increase in general and administrative costs is due to the the full operating status of the Company operations versus the start-up status in 1Q 2004. Higher levels of activity have resulted in increased staffing, office space and corporate expenses associated with a publicly traded company. Share compensation expense increased as a result of the issuance of options that commenced in 4Q 2004 and continued in 1Q 2005.

In 1Q 2004, the Company recorded a $60,000 expense related to a phantom stock plan. This expense was reversed later in 2004 upon expiration of the phantom stock plan.

The Company has experienced a reduction in capitalized g&a from $114,000 in 1Q 2004 to $97,000 in 1Q 2005. In 2004, Signal was primarily an exploration company and 100% of geological and engineering overhead was capitalized. In 1Q 2005, with the growth of the Company and increased development activities, the Company has reduced the portion of capitalized overhead to 100% geological and 30% of engineering overhead incurred.

Although the 1Q 2004 to 1Q 2005 increase in total general and administrative expense was 114%, the per boe change was a decrease of 55% due to increased production and the fixed nature of many general and administrative costs.



Interest Expense
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Interest expense 85 - -
$/boe 0.98 - -
-------------------------------------------------------------------------


In 1Q 2004, SignalEnergy was in a strong cash position. In 1Q 2005, the Company was indebted to the National Bank. As of March 31, 2005, the Company had utilized $13.2 million of its revolving credit facility (1Q 2004 - $nil). Interest on the credit facilities is prime + 0.75%. The debt was incurred to finance the Predator and privateco acquisitions and for funding of on-going operations.



Depletion and Depreciation
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Depletion and depreciation 1,714 390 339
$/boe 19.71 15.60 26
-------------------------------------------------------------------------


Depletion and depreciation (d&d) for the three months ended March 31, 2005 increased over the comparative period due to higher property, plant and equipment balances. D&D on a boe basis has grown to $19.71/boe from $15.60/boe in 1Q 2004 as reserves determinations could not be made on corresponding capital expenditures of $11.0 million in the Twining area, as this project is in an initial phase of development. Subsequent to March 31, 2005, with the disposition of the Company's Twining asset, the D&D rate is expected to decline.



Accretion of Asset Retirement Obligation

Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Accretion of asset retirement
obligation 58 - -
$/boe 0.67 - -
-------------------------------------------------------------------------


Accretion expense increased in 1Q 2005 versus 1Q 2004, as the Company has a larger number of wells and additional facilities. The 1Q 2005 expense assumes inflation of 3% and a credit-adjusted risk-free rate of 6%, with production life of wells between one and 25 years.

In the first three months of 2004, the Company did not report any accretion expense as it was in a start-up stage.

Taxes

Current taxes reported in the financial statements for 1Q 2005 of $6,000 ( 1Q 2004 - $nil) is comprised of Large Corporations Tax (LCT). As a result of the acquisitions, the Company's taxable capital has grown such that LCT is now payable.

Signal incurred a future income tax recovery of $1.2 million as a result of a flow through share issue in June 2004. The full expenditure commitment of $3.6 million had been renounced to investors at December 31, 2004. The related tax affect has been recognized in 1Q 2005.

Signal has approximately $25.0 million of resource tax pools at March 31, 2005. The Company has approximately $22.0 million of non-capital losses and $33.6 million of scientific research and experimental development expenditures to be applied against future income.



Cash Flows and Netbacks
Three Months Ended
March 31,
2005 2004 variance
$/boe $/boe (%)
-------------------------------------------------------------------------

Sales prices 42.53 38.16 11
less: Royalties (11.49) (9.80) 17
Operating expenses (7.25) (3.68) 97
-------------------------------------------------------------------------
Operating netback 23.79 24.68 (4)
less: G&A (net of non-cash items) (7.17) (15.80) (55)
Interest expenses (0.98) - -
Interest income 0.07 3.04 (98)
Income taxes (current) (0.07) - -
-------------------------------------------------------------------------
Corporate netback 15.64 11.92 31
-------------------------------------------------------------------------
Funds from operations ($000's) 1,361 298 357
-------------------------------------------------------------------------


Operating netback per boe has decreased by 4% quarter over quarter, due to the increases in operating costs and royalty expenses, which more than offset the 11% increase in revenues recognized.

Corporate netback per boe increased 31% as g&a expenses decreased significantly on a per boe basis from $15.80/boe in 1Q 2004 to $7.17/boe in 1Q 2005.



Net Income (Loss)
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Net income (loss) 513 (113) 554
$/boe 5.89 (4.52) 230
-------------------------------------------------------------------------


The tax effect of the 2004 flow through share renouncement of $1.2 million was recognized and taken into income in the first three months of 2005, resulting in a reported net income of $513,000, versus the loss reported in the same three month period of 2004.

Net losses before income taxes were reported in 1Q 2005 and 1Q 2004. Revenue in both periods were more than offset by costs of royalties, operating and g&a, as well as high d&d rates.



Capital Expenditures
Three Months Ended
March 31,
2005 2004
Additions to property and equipment $ $
-------------------------------------------------------------------------
Land and rentals 260 478
Seismic 60 174
Drilling and completions 2,833 997
Equipping and tie-in 1,221 112
Property acquisitions - 8,359
Capitalized overhead 97 114
Other 80 52
-------------------------------------------------------------------------
4,551 10,286
-------------------------------------------------------------------------


SignalEnergy participated and was successful in two land sales in the first quarter of 2005, in the Chigwell and Buick Creek areas, for approximately $260,000. The Company's drill program for 1Q 2005 incurred costs of $2.8 million, of which $1.6 million was spent on the West Pembina 3-1 location that was completed and on production in late March 2005. Two other locations had commenced drill operations - Grizzly 16-10 and Innisfail 16-29 - adding a further $694,000 for drilling and completions. Completion work in the Kaybob and Buick Creek areas added further to the capital expenditures for the quarter ending March 31,2005.



Liquidity and Capital Resources
Three Months Ended
March 31,
2005 2004 variance
$ $ (%)
-------------------------------------------------------------------------

Working capital (net debt) (16,064) 4,216 (481)
Shareholder's equity 44,461 30,607 45
-------------------------------------------------------------------------


The $16.1 million working capital deficiency at March 31, 2005 includes an outstanding revolving loan balance of $13.2 million. At December 31, 2004 SignalEnergy reported $nil outstanding debt and a small accounts payable. The capital expenditure program for 2004 was funded by cash generated from operations and the June 2004 private placement of common shares and flow through shares.

Debt was used in 1Q 2005 to fund the corporate acquisitions of Predator and privateco, utilizing the credit facilities available.

Working capital at the end of March 31, 2005 includes $2.1 million of revenue to be collected for March 2005 production, current accounts payable of $4.6 million for capital expenditures and operating costs incurred during 1Q 2005, and $2.8 million of costs accrued of which $1.5 million relates to further capital projects.

Subsequent to March 31, 2005, the Company entered into an agreement to sell all of its interest in the Twining area for a purchase price of approximately $13.25 million, with a closing date of April 28, 2005. As of April 28, 2005, the outstanding revolving operating loan had been repaid in full.

Subsequent to March 31, 2005, the Company entered into a letter of intent with Goose River Resources Ltd. ("Goose River"), to effect a business combination by way of plan of arrangement. The transaction, which is subject to the approval of the Boards of Directors of both companies, regulatory authorities and Goose River's shareholders, will result in the shareholders of Goose River becoming shareholders of two companies, SignalEnergy and a newly created exploration company, which will hold certain properties now held by both Goose River and SignalEnergy.

Under the terms of the proposed transaction, all of the outstanding shares of Goose River shall be exchanged for, at the election of a Goose River shareholder: (i) 0.83 SignalEnergy shares per Goose River share; (ii) $1.00 in cash per Goose River share; or (iii) a combination thereof, provided that the maximum aggregate SignalEnergy shares issued shall be limited to 21.25 million shares plus $10.0 million in cash. Upon conclusion, Goose River shareholders will hold up to approximately 30% of SignalEnergy on a fully diluted basis, with SignalEnergy shareholders holding the balance.

In addition, the shareholders of Goose River will receive, for each share of Goose River, 1/20th of a share of Exploreco. Shareholders of SignalEnergy will hold an equivalent number of non-voting shares in the new exploration company.

Securities outstanding as of the date of this MD&A consist of 42,089,869 issued and outstanding common shares, 5,240,754 class A, non-voting common shares, as well as 2,967,000 stock options with an average exercise price of $1.86/share and 1,600,000 class A, non-voting common share stock options having an average price of $1.04/share.

The Company has no off-balance sheet arrangements.

The Company has no related party transactions.

The Company has no commodity price, interest rate swaps or fixed price contracts in place as of March 31, 2005.

Summary of Quarterly Results

The Company commenced operations as an oil and gas enterprise on January 1, 2004 and, accordingly, only the five most recently completed quarters show the results of its oil and gas operations.



Three months ended (unaudited)

2005 2004
March December September June March
31 31 30 30 31
-------------------------------------------------------------------------

Petroleum and natural
gas sales 3,699 1,708 1,586 1,671 954
Net income (loss) 513 (548) (500) 93 (113)
per share - basic
and diluted 0.01 (0.02) (0.02) - -
Funds from operations 1,361 486 521 775 298
Capital expenditures, net 4,551 645 5,637 5,980 10,286
-------------------------------------------------------------------------


During the first quarter of 2005, revenue rose over the last quarter of 2004, as a result of the strong commodity prices and the increased production from the corporate acquisitions mentioned above.

The first quarter of 2004 recognized the revenue from the producing properties acquired early in the quarter. Quarter over quarter growth in revenue was due to the increased production received from the Company's drill program, combined with the increasing commodity prices received in 2004.

During 2004, the Company incurred net losses. These losses were a combination of the rise in general and administrative expenses associated with the set-up of a new company and the impact of high depletion and depreciation.

The first quarter of 2005, Signal reported net income of $513,000, due to the recognition of the tax effect from the flow through share issue that had been renounced to investors in December 2004.

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 SignalEnergy'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.

SignalEnergy does not currently have any hedges in place that carry into 2006 so the impact would not be significant based on the current positions.

Risks and Uncertainties

Kyoto

The Kyoto protocol, ratified by the Canadian Federal Government in December 2002, came into force on February 16, 2005. The protocol commits Canada to reducing greenhouse gas emissions to six percent below 1990 levels over the period 2008-2012. The Federal Government released a framework outlining its Climate Change action plan on April 13, 2005. The plan as released contains few technical details regarding the implementation of the Government's greenhouse gas reduction strategy. The Climate Change Working Group of Canadian Association of Petroleum Producers continues to work with the Federal and Alberta governments to develop an approach for implementing targets and enabling greenhouse gas control legislation, which protects the industry's competitiveness, limits the cost and administrative burden of compliance and supports continued investment in the sector.

As the federal government has yet to release a detailed Kyoto compliance plan, SignalEnergy is unable to predict the impact of potential regulations upon its business; however, it is possible that the Company would face increases in operating costs in order to comply with the greenhouse gas emissions legislation.



CONSOLIDATED BALANCE SHEETS
(unaudited)

As at March 31 December 31
(in thousands) 2005 2004
-------------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents (note 3) $ 1,551 $ 2,718
Accounts receivable 4,065 4,143
Prepaid expenses 361 191
-------------------------------------------------------------------------
5,977 7,052

Goodwill 4,548 4,548

Deferred acquisition costs - 546

Property and equipment (note 5) 59,615 22,930
-------------------------------------------------------------------------
$ 70,140 $ 35,076
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 8,810 $ 2,836
Income taxes payable 6 -
Revolving operating loan (note 7) 13,225 -
-------------------------------------------------------------------------
22,041 2,836

Asset retirement obligation (note 6) 3,638 1,633

Shareholders' Equity
Share capital (note 8) 110,984 97,914
Contributed surplus 580 309
Deficit (67,103) (67,616)
-------------------------------------------------------------------------
44,461 30,607
-------------------------------------------------------------------------
$ 70,140 $ 35,076
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements



CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(unaudited)

Three months ended March 31
(in thousands, except per share amounts) 2005 2004
-------------------------------------------------------------------------

Revenues
Petroleum and natural gas sales $ 3,699 $ 954
Royalties (net of ARTC) (1,000) (245)
-------------------------------------------------------------------------
2,699 709
Interest income 6 76
-------------------------------------------------------------------------
2,705 785
-------------------------------------------------------------------------

Expenses
Operating 631 92
General and administrative 622 357
Stock-based compensation (note 9) 271 60
Interest expense 85 -
Foreign exchange gain - (1)
Depletion and depreciation 1,714 390
Accretion expense (note 6) 58 -
-------------------------------------------------------------------------
3,381 898
-------------------------------------------------------------------------

Loss before income taxes (676) (113)
Income tax (note 10) 6 -
Future income tax recovery (1,195) -
-------------------------------------------------------------------------

Net income (loss) for the period 513 (113)

Deficit, beginning of period (67,616) (66,548)
-------------------------------------------------------------------------
Deficit, end of period $ (67,103) $ (66,661)
-------------------------------------------------------------------------

Per share amounts (note 8)
Basic $ 0.01 -
Diluted $ 0.01 -
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements



CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31
(in thousands) 2005 2004
-------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 513 $ (113)
Items not affecting cash flows:
Stock-based compensation (note 9) 271 60
Non-cash general administrative costs - (39)
Depletion and depreciation 1,714 390
Accretion expense 58 -
Future income tax recovery (1,195) -
-------------------------------------------------------------------------
Funds from operations 1,361 298
Changes in non-cash working capital related
to operating activities (note 11) 2,318 799
-------------------------------------------------------------------------
Cash provided by operating activities 3,679 1,097
-------------------------------------------------------------------------

Financing Activities
Increase in revolving operating loan 13,225 -
Issue costs (16) (23)
-------------------------------------------------------------------------
Cash provided by (used in) financing activities 13,209 (23)
-------------------------------------------------------------------------

Investing Activities
Expenditures on property and equipment (4,551) (1,927)
Expenditures on property acquisitions - (8,359)
Corporate acquisitions, net (note 4) (4,224) -
Net working capital acquired upon acquisitions - 1,598
Changes in non-cash working capital related to
investing activities (note 11) (9,280) -
-------------------------------------------------------------------------
Cash used in investing activities (18,055) (8,688)
-------------------------------------------------------------------------
Net change in cash position (1,167) (7,614)

Cash and cash equivalents - beginning of period 2,718 13,424
-------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 1,551 $ 5,810
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)
March 31, 2005 and 2004
(Tabular figures are in thousands of dollars unless otherwise indicated)

1 Nature of Operations

On August 22, 2003, the shareholders of SignalGene Inc. (now SignalEnergy
Inc.) (the "Company" or "SignalEnergy") entered into a subscription
agreement with Network Capital Inc. ("Network") to exit the business of a
drug discovery enterprise and pursue oil and natural gas exploration and
development opportunities in Western Canada. With a special general
meeting of shareholders on November 6, 2003, the private placement was
approved.

With the completion of one oil and gas producing property acquisition and
the acquisition of a private oil and gas company early in January 2004,
the Company became a full cycle oil and natural gas enterprise with
activities involving land acquisition, geological assessment, drilling
and completion, and production.

On March 8, 2004, the Company amended its articles of incorporation to
change its name to SignalEnergy Inc.

2 Significant Accounting Policies

The unaudited consolidated financial statements of the Company have been
prepared by management in accordance with Canadian generally accepted
accounting principles using the same accounting policies as those set out
in Note 2 to the audited consolidated financial statements of the Company
for the year ended December 31, 2004. Certain information and disclosures
normally required to be included in notes to annual consolidated
financial statements have been condensed or omitted. Accordingly, these
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December
31, 2004.

3 Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and money market
instruments as follows:
March 31 December 31
2005 2004
$ $
-------------------------------------------------------------------------
Cash on hand 1,551 1,720
Short-term investment - 998
-------------------------------------------------------------------------
1,551 2,718
-------------------------------------------------------------------------

Short-term investment at December 31, 2004 consisted of $998,000 invested
in a 30-day term deposit at a rate of 2.45%, that expired January 21,
2005.

4 Corporate Acquisitions

a) In November 2004, the Company entered into an agreement to acquire
Predator Exploration Ltd. ("Predator"), a public oil and gas corporation.
The acquisition closed on January 20, 2005 with the Company providing
10,424,097 voting common shares valued at $13,030,121; and incurred cash
transaction costs of $398,894. The common shares have been valued at
$1.25 per share, based upon the Company's trading price for its common
shares for the five day period prior to the announcement of the
transaction.

The acquisition has been recorded using the purchase method as at the
date of the closing of the transaction on January 20, 2005 as follows:

$
-------------------------------------------------------------------------
Cash received 413
Property and equipment 26,797
Non-cash working capital deficiency (12,218)
Asset retirement obligation (1,563)
-------------------------------------------------------------------------
Total 13,429
-------------------------------------------------------------------------

The results of the operations of Predator have been included in the
consolidated financial statements since January 20, 2005.

b) In November 2004, the Company entered into an agreement to acquire
PrivateCo. ("privateco"), a private oil and gas corporation.
The acquisition closed on January 26, 2005 with the Company providing
1,000,000 voting common shares valued at $1,250,000 and cash
consideration of $4,190,094. Transaction costs of $48,174 were incurred
in connection with this transaction. The common shares have been valued
at $1.25 per share, based upon the Company's trading price for its common
shares for the five day period prior to the announcement of the
transaction.

The acquisition has been recorded using the purchase method as at the
date of the closing of the transaction on January 26, 2005 as follows:

$
-------------------------------------------------------------------------
Property and equipment 6,439
Non-cash working capital deficiency (633)
Asset retirement obligation (318)
-------------------------------------------------------------------------
Total 5,488
-------------------------------------------------------------------------

The results of the operations of privateco have been included in the
consolidated financial statements since January 26, 2005.

5 Property and Equipment

Accumulated
Depletion and Net Book
Cost Depreciation Value
March 31, 2005 $ $ $
-------------------------------------------------------------------------
Oil and gas properties 64,134 4,585 59,549
Other 93 27 66
-------------------------------------------------------------------------
64,227 4,612 59,615
-------------------------------------------------------------------------


Accumulated
Depletion and Net Book
Cost Depreciation Value
December 31, 2004 $ $ $
-------------------------------------------------------------------------
Oil and gas properties 25,750 2,876 22,874
Other 78 22 56
-------------------------------------------------------------------------
25,828 2,898 22,930
-------------------------------------------------------------------------

During the three months ended March 31, 2005, the Company capitalized
$97,000 (2004 - $113,634) related to overhead costs directly attributable
to exploration and development activities. Included in the oil and gas
properties value at March 31, 2005 was $1.5 million (2004 - $2.3 million)
for unproved properties, which has been excluded from the depletion
calculation.

6 Asset Retirement Obligation

The Company's asset retirement obligation results from net ownership
interests in petroleum and natural gas assets including well sites,
gathering systems and processing facilities. The Company estimates the
total undiscounted amount of cash flows required to settle its asset
retirement obligation is approximately $4.5 million as of March 31, 2005
(2004 - $2.9 million) which will be primarily incurred between 2015 and
2029. An inflation rate of 3.00% and a credit-adjusted risk-free rate of
6.00% were used to calculate the fair value of the asset retirement
obligation.

During the three months ended March 31, 2005, the Company's asset
retirement obligation changed as follows:

Asset Retirement Obligation $
-------------------------------------------------------------------------
Balance, December 31, 2004 1,633
Obligation incurred 66
Obligation acquired (note 4) 1,881
Accretion expense 58
-------------------------------------------------------------------------
Balance, March 31, 2005 3,638
-------------------------------------------------------------------------

7 Bank Facilities

At March 31, 2005, the Company has utilized $13.2 million of its
available credit lines. The borrowing base of the Company is subject to
periodic review. The next review is scheduled on or before April 30,
2005. The Company is subject to financial and non-financial covenants.
At March 31, 2005, the Company had breached its requirement to maintain a
working capital ratio of 1:1. The Company has received confirmation from
the bank that it is not their intention to call the loan. As a result of
events subsequent to March 31, 2005, the Company repaid the outstanding
loan (refer to note 12).

8 Share Capital

Share capital is comprised of:
March 31 December 31
2005 2004
$ $
-------------------------------------------------------------------------
Common shares 110,264 97,194
Additional paid-in capital 720 720
-------------------------------------------------------------------------
110,984 97,914
-------------------------------------------------------------------------

Common Shares Issued:
Number of Number of
Class A Non-Voting Voting
Common Shares Common Shares $
-------------------------------------------------------------------------
Balance, December 31, 2004 5,240,754 30,665,772 97,194
shares issued on corporate
acquisitions (note 4) 11,424,097 14,281
tax effect on 2004 flow
through share renouncement(i) (1,195)
share issue costs (16)
-------------------------------------------------------------------------
Balance, March 31, 2005 5,240,754 42,089,869 110,264
-------------------------------------------------------------------------

(i) On June 16, 2004, the Company closed a private placement of 4,485,000
common shares and 1,615,000 flow-through shares, with values of
$7,848,750 and $3,553,000, respectively. The tax effect related to
the flow through offering has been renounced at March 31, 2005 at a
rate of 33.62% or $1,194,519.

Per Share Amounts:

Per share amounts have been calculated using the weighted average number
of common shares outstanding for the three months ended March 31, 2005 of
44,621,978 (2004 - 24,055,882). The diluted per share amounts are
calculated assuming the exercise of outstanding, in the money dilutive
securities, resulting in a weighted average number of common shares for
the three months ended March 31, 2005 of 44,781,442 (2004 - 24,055,882).

Stock Options:

The following is a continuity of stock options outstanding for which
shares have been reserved:
Weighted
Average
Exercise
Number of Price
Options $
-------------------------------------------------------------------------
Stock options outstanding, December 31, 2004 2,412,500 2.01
Granted 2,154,500 1.09
-------------------------------------------------------------------------
Stock options outstanding, March 31, 2005 4,567,000 1.58
-------------------------------------------------------------------------

The weighted average remaining contractual life of options outstanding at
March 31, 2005 is 2.2 years.

9 Stock-Based Compensation

The fair value of common share options granted for three months ended
March 31, 2005 is estimated to be $3.1 million as at the date of grant
using the Black-Scholes option pricing model and the following weighted
average assumptions:

2005
-------------------------------------------------------------------------
risk-free interest rate (%) 3.51
expected life (years) 5.00
expected volatility (%) 75.00
expected dividend yield (%) -
-------------------------------------------------------------------------

The estimated fair value of the options is amortized to expense over the
options' vesting period on a straight-line basis. For three months ended
March 31,2005 $271,000 has been recognized as non-cash compensation
expense and contributed surplus. As of March 31, 2005, the Company has
$2.9 million of compensation not yet expensed.

Phantom Stock Plan

In December 2003, the Company adopted a plan to compensate certain
employees and directors for increases in the Company's share price. For
the three months ended March 31, 2004, stock-based compensation of
$60,000 was recognized under the phantom stock plan. Effective July 1,
2004, the phantom stock plan expired.

10 Income Taxes

The provision for income tax (recovery) recorded in the consolidated
financial statements differs from the amount which would be obtained by
applying the statutory income tax rate to the earnings (loss) before tax
as follows:

Three months ended March 31, 2005 2004
-------------------------------------------------------------------------
Statutory income tax rate 37.62% 38.87%

$ $
-------------------------------------------------------------------------
Net loss before tax (676) (113)
-------------------------------------------------------------------------
Anticipated income taxes (254) (44)
Non-deductible crown royalties 207 60
Resource allowance (128) (25)
Stock-based compensation 102 20
Non-deductible expenses and other permanent
differences 7 4
Large corporation tax 6 -
Change in valuation allowance on unrecognized
benefit of tax assets (1,129) (15)
-------------------------------------------------------------------------
(1,189) -
-------------------------------------------------------------------------

11 Changes in Non-Cash Working Capital

Changes in non-cash working capital balances are comprised of the
following:
March 31 March 31
2005 2004
$ $
-------------------------------------------------------------------------
Accounts receivable 78 (1,064)
Prepaid expenses (170) (54)
Deposits - 975
Accounts payable and accrued liabilities 5,974 942
Income taxes payable 6 -
-------------------------------------------------------------------------
Change per balance sheet items 5,888 799
Less: working capital acquired on acquisitions (12,850) -
-------------------------------------------------------------------------
(6,962) 799
Attributable to investing activities (9,280) -
-------------------------------------------------------------------------
Attributable to operating activities 2,318 799
-------------------------------------------------------------------------

12 Subsequent Events

Subsequent to March 31, 2005, the Company finalized an agreement to sell
all of its interest in the Twining area for a purchase price of
approximately $13.25 million.

Subsequent to March 31, 2005, SignalEnergy Inc. announced that, subject
to regulatory approval, it intends to purchase certain of its common
shares by way of a normal course issuer bid through the facilities of the
Toronto Stock Exchange. The Company may purchase up to a maximum of
2,104,493 common shares, which represents approximately five percent of
its current issued and outstanding common shares, during the twelve month
term of the Bid, which will commence on April 21, 2005 and terminate on
April 20, 2006 or at such earlier date as Signal completes its purchases.
In any 30 day period during the term of the Bid, Signal may purchase up
to, but not more than, two percent of its issued and outstanding common
shares. As of April 19, 2005, the Corporation has 42,089,869 issued and
outstanding common shares.

Subsequent to March 31, 2005, the Company entered into a letter of intent
with Goose River Resources Ltd. ("Goose River"), to effect a business
combination by way of plan of arrangement. The transaction, which is
subject to the approval of the Boards of Directors of both companies,
regulatory authorities and Goose River's shareholders, will result in the
shareholders of Goose River becoming shareholders of two companies,
SignalEnergy and a newly created exploration company which will hold
certain properties now held by both Goose River and SignalEnergy.

Under the terms of the proposed transaction, all of the outstanding
shares of Goose River shall be exchanged for, at the election of a Goose
River shareholder: (i) 0.83 SignalEnergy shares per Goose River share;
(ii) $1.00 in cash per Goose River share; or (iii) a combination thereof,
provided that the maximum aggregate SignalEnergy shares issued shall be
limited to 21.25 million shares plus $10.0 million in cash. Upon
conclusion, Goose River shareholders will hold up to approximately 30% of
SignalEnergy on a fully diluted basis, with SignalEnergy shareholders
holding the balance.

In addition, the shareholders of Goose River will receive, for each share
of Goose River, 1/20th of a share of Exploreco. SignalEnergy will hold an
equivalent number of non-voting shares in the new exploration company.

The ultimate effect this transaction will have on the Company's financial
statements going forward is currently not determinable.

Contact Information

  • SIGNALENERGY INC.
    J. Cameron Bailey
    President and Chief Executive Officer
    (403) 398-3345
    (403) 398-3366(FAX)