SignalEnergy Inc.
TSX : SGI

May 15, 2006 23:59 ET

SignalEnergy Inc. Announces First Quarter Results

CALGARY--(CCNMatthews - May 15) -

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

A number of very significant events have taken place in SignalEnergy Inc. (TSX:SGI) ("Signal" or the "Company") during the first quarter of 2006. Early in the quarter, the Company completed its Redwater development program and reached peak production of 2,300 boe/d. At that time, the Company had commenced optimizing field operations in Redwater thereby reducing operating costs and maximizing production rates.

On February 1, 2006, Signal announced that it had accepted an offer for a significant portion of its assets which provided $96.6 million of net sale proceeds. Following the completion of the sale on March 10, 2006, Pearl Exploration and Production Ltd. ("Pearl") announced its intention to acquire all of the shares of Signal for a combination of cash and shares. The Company engaged FirstEnergy as its financial advisor to assist in evaluating the transaction and manage a process to examine other alternatives. In a press release dated April 18, 2006, Pearl reiterated its intention to make an offer for Signal and that formal offer would be mailed to Signal shareholders by May 15, 2006. At this time Signal has no formal agreement with Pearl and is not certain of its intentions.

Signal continues to examine strategic alternatives which include the possibility of distributing surplus working capital to shareholders.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements of SignalEnergy Inc. ("Signal" or the "Company") for the three months ended March 31, 2006 and the audited consolidated financial statements as at and for the year ended December 31, 2005. The unaudited interim 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 May 15, 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. While widely used in the oil and gas industry, funds from operations 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. The Company considers funds from operations to be a key measure since it demonstrates the Company's ability to generate the cash necessary to fund future growth and repay debt. 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 MD&A 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

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March 31,
2006 2005
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Sales volume:
Natural gas (mcf/d) 4,366 4,929
Oil and NGL's (bbl/d) 263 145
Equivalence at 6:1 (boe/d) 991 966
Sales price:
Natural gas ($/mcf) 7.86 6.93
Oil and NGL's ($/bbl) 59.62 47.86
Equivalence at 6:1 ($/boe) 50.45 42.53
Financial: (000's)
Petroleum and natural gas sales 4,500 3,699
Net income 13,440 513
Net income per share - basic 0.19 0.01
Net income per share - diluted 0.19 0.01
Funds from operations 687 1,361
Total assets 101,467 70,140
Capital expenditures, net 3,205 4,551
Net working capital (deficiency) 64,868 (16,064)
Weighted average shares outstanding - basic 70,598 44,622
Weighted average shares outstanding - diluted 71,239 44,781
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CORPORATE OVERVIEW

In February 2006, the Company sold its Ferrier, Carrot Creek, Kaybob and Redwater properties for cash proceeds of approximately $96.6 million. The Company retained its assets in the Chigwell, Bashaw and Buick Creek areas.

After the completion of the sale, the Company announced its intention to distribute the net proceeds (after repayment of existing indebtedness) to shareholders. Management believe that this sale will allow the Company to be more competitive.

On March 27, 2006 and updated on April 18, 2006, Pearl Exploration and Production Ltd. ("Pearl") announced its intention to make an offer (the "Offer") to acquire all of the issued and outstanding shares of Signal. The announcements indicated that Pearl anticipated the Offer and related documents would be mailed to Signal shareholders no later than May 15, 2006. Signal has no formal agreement with Pearl respecting the Offer and can provide no assurance that the Offer will be made within the announced time, or that the terms of the Offer will be as announced.

In consideration of Pearl's announced intentions and in compliance with its fiduciary obligations to maximize shareholder value, the Company's Board of Directors has decided to defer the decision of a 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.



SUMMARY OF QUARTERLY RESULTS

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2006 2005 2004
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
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Sales volume:
Natural
gas (mcf/d) 4,366 6,253 5,990 5,100 4,929 1,901 1,762 1,667
Oil and NGL's
(bbl/d) 263 430 242 170 145 105 123 132
Equivalence at
6:1 (boe/d) 991 1,472 1,240 1,020 966 421 417 410
Sales price:
Natural gas
($/mcf) 7.86 11.48 9.22 7.25 6.93 6.94 6.50 7.46
Oil and NGL's
($/bbl) 59.62 65.95 62.88 56.59 47.86 50.04 46.58 44.64
Equivalence at
6:1 ($/boe) 50.45 68.31 56.82 45.67 42.53 43.18 41.30 44.83
Benchmark prices:
AECO bench
($/gj) 7.19 10.84 8.76 6.98 6.49 6.25 5.89 6.62
Edmonton Par
($/bbl) 68.90 72.18 77.80 65.80 61.07 58.16 56.99 51.30
Financial ($000's):
Petroleum and
natural gas
sales 4,500 9,250 6,483 4,238 3,699 1,708 1,586 1,671
Net income
(loss) 13,440 952 536 85 513 (548) (500) 93
Net income
(loss) per
share -
basic ($) 0.19 0.02 0.01 - 0.01 (0.02) (0.02) -
Net income
(loss) per
share -
diluted ($) 0.19 0.02 0.01 - 0.01 (0.02) (0.02) -
Funds from
operations 687 4,223 3,141 2,208 1,361 486 526 775
Operating costs
($/boe) 13.07 12.81 7.20 7.78 7.25 10.58 7.32 4.80
Weighted average
shares
outstanding
- basic 70,598 69,195 59,085 47,090 44,622 30,666 30,666 25,636
Weighted average
shares
outstanding
- diluted 71,239 69,525 61,240 47,090 44,781 30,666 30,666 25,636
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In February 2006, the Company sold its interest in certain oil and gas assets, as previously noted, resulting in a decrease in sales volumes in the first quarter of 2006 from the fourth quarter of 2005. 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 production gains of approximately 750 boe/d at the time of acquisition. In addition to improved sales volumes throughout 2005, the Company benefited from significantly increased commodity prices in the third and fourth quarters of 2005.

Net income for the first quarter of 2006 includes a gain on the sale of oil and gas properties of $20,087,000. Net income for the first quarter of 2005 is attributable to the recognition of a portion of previously unrecognized tax assets as a result of 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 previous quarter due to record commodity prices and increased sales volumes resulting from the Goose River acquisition and the Company's drilling program which included the drilling of 31 gross wells (19 net wells) in the last half of 2005.

Funds from operations in the first quarter of 2006 decreased from the prior quarter due to the sale of oil and gas properties and substantially lower natural gas prices realized. Funds from operations improved throughout 2005 as a result of production increases and record 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

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March 31,
2006 2005
-------------------------------------------------------------------------
Petroleum and natural gas sales ($000's) 4,500 3,699
Sales volume:
Natural gas (mcf/d) 4,366 4,929
Oil and NGL's (bbl/d) 263 145
Equivalence at 6:1 (boe/d) 991 966
Sales price:
Natural gas ($/mcf) 7.86 6.93
Oil and NGL's ($/bbl) 59.62 47.86
Equivalence at 6:1 ($/boe) 50.45 42.53
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Revenues from petroleum and natural gas sales have increased in the first quarter of 2006 when compared to the first quarter of 2005, due to significantly increased oil and natural gas liquids production and a 24.6% increase in the average price realized by the Company for these products. Decreased sales volumes of natural gas over this period have been neutral having been offset by an increase in natural gas prices realized.

The average sales volume in the first quarter of 2006 was 991 boe/d compared to 966 boe/d for the first quarter of 2005. The sale of certain oil and gas assets in February 2006 resulted in a decrease in sales volumes for the first quarter of 2006. These properties accounted for average sales volumes of approximately 674 boe/d in the first quarter of 2006. The Company completed the acquisition of Predator Exploration Ltd. ("Predator") and a private company in January 2005 which added production gains of approximately 510 boe/d in the first quarter of 2005.

Natural gas sales accounted for 69% of revenues in the first quarter of 2006. The price of natural gas realized by the Company increased in the first quarter of 2006 to $7.86/mcf from $6.93/mcf in the first quarter of 2005, compared to an average price received for all of 2005 of $8.93/mcf. 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 the three months ended March 31, 2006 was $59.62/bbl, an increase from $47.86/bbl in the first quarter of 2005. 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

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March 31,
2006 2005
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Royalties (net of Alberta Royalty Tax Credit)
($000's) 951 1,000
$/boe 10.66 11.49
Percentage of petroleum and natural gas sales 21.1 27.0
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Royalties, consisting of crown, gross-overriding and freehold royalties were $951,000 for the three months ended March 31, 2006 - a decrease of $49,000 from the three months ended March 31, 2005. The acquisition of Goose River in August 2005 added a higher component of gross-overriding and freehold royalties resulting in a lower overall royalty rate to the Company as a percentage of revenue, in the first quarter of 2006, as compared to the first quarter of 2005. The Company sold its interest in certain oil and gas properties in February 2006. Royalties for the remaining properties averaged 21.8% of revenue in 2005 and it is expected that royalties will trend to this figure in 2006.



Operating Expenses

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March 31,
2006 2005
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Operating expenses ($000's) 1,170 631
$/boe 13.07 7.25
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The Company's operating expenses increased to $1,170,000 for the three months ended March 31, 2006 from $631,000 for the comparable 2005 period. 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 property posted higher than average operating costs due to additional costs incurred for compressor and pump jack rentals, trucking, and salt water disposal fees. The Company completed the construction of an oil emulsion pipeline in the fourth quarter of 2005 connecting its Redwater property to the processing facility reducing its expensive trucking costs. This property was sold in February 2006. As a result of the sale, the Company expects operating costs to trend downward.



General and Administrative Expenses

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March 31,
($000's) 2006 2005
-------------------------------------------------------------------------
General and administrative expenses 1,687 719
General and administrative costs capitalized (110) (97)
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General and administrative expenses (net) 1,577 622
$/boe 17.68 5.07
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General and administrative expenses increased to $1,687,000 in the first quarter of 2006 compared to $728,000 in the first quarter of 2005. The increase is attributed to severance and retention costs of approximately $900,000 recorded in the first quarter of 2006 due to the downsizing that resulted from the sale of oil and gas properties in February 2006.

The Company capitalized general and administrative costs of $110,000 in the three months ended March 31, 2006 compared to $97,000 in the three months ended March 31, 2005. The Company capitalizes a portion of its geological and engineering costs related to exploration and development activities.



Stock-based Compensation Expense

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March 31,
2006 2005
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Stock-based compensation expense ($000's) 852 271
$/boe 9.55 3.11
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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 $852,000 in the three months ended March 31, 2006 from $271,000 for the three months ended March 31, 2005. As a result of the sale of oil and gas properties in February 2006 and the substantial reduction in the Company's asset base, all stock options outstanding on March 1, 2006 were vested. The stock-based compensation expense for the three months ended March 31, 2006 reflects this accelerated vesting.



Interest Expense

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March 31,
2006 2005
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Interest expense ($000's) 234 85
$/boe 2.62 0.98
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Interest expense increased to $234,000 in the three months ended March 31, 2006 from $85,000 in the three months ended March 31, 2005. This increase is attributed to an increase in the prime lending rate and an increase in the average operating loan balance in the first quarter of 2006. The Company repaid its revolving operating loan on February 28, 2006, as noted previously in this MD&A.

The Company has utilized its operating loan facility to fund the cash portion of acquisitions completed in 2005 and its capital program expenditures incurred in the fourth quarter of 2005.



Depletion and Depreciation Expense

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March 31,
2006 2005
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Depletion and depreciation expense ($000's) 1,932 1,714
$/boe 21.66 19.71
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Depletion and depreciation expense was $1,932,000 for the first quarter of 2006 compared to $1,714,000 for the first quarter of 2005. The increase in depletion and depreciation expense in the first quarter of 2006 reflects an increase in production when compared to the first quarter of 2005. The rate of $21.66/boe reflects a mix of the properties sold and those retained. The rate attributed to the retained properties is approximately $20.27/boe and it is expected that the depletion and depreciation rate should trend to this rate in the second quarter of 2006.



Accretion of Asset Retirement Obligations

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March 31,
2006 2005
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Accretion of asset retirement obligations ($000's) 43 58
$/boe 0.48 0.67
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Accretion expense was $43,000 in the three months ended March 31, 2006 compared to $58,000 in the three month period ended March 31, 2005. The sale of oil and gas properties in February 2006 resulted in a reduction in the asset retirement obligations of the Company, which have been assumed by the purchaser, and a reduction in the accretion expense for the three months ended March 31, 2006.

Income Tax

The current income tax expense of $20,000 for the three months ended March 31, 2006 consists of Large Corporations Tax ("LCT"). This compared to a current income tax expense of $6,000 for the three months ended March 31, 2005.

The Company also recorded a future income tax expense of $4,507,000 in the three months ended March 31, 2006 and a future income tax recovery of $1,195,000 in the three months ended March 31, 2005. In February 2006, the Company completed a sale of oil and gas properties and intends to apply its available tax pools to the sale proceeds to minimize the overall tax liability. The future income tax expense recorded in the three months ended March 31, 2006 reflects the difference between the carrying amount of the remaining asset base and available tax pools.



Operating Netback

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March 31,
($/per boe) 2006 2005
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Petroleum and natural gas sales 50.45 42.53
Less: Royalties (net of ARTC) (10.66) (11.49)
Operating expenses (13.07) (7.25)
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Operating netback 26.72 23.79
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Funds from operations 7.70 15.64
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The operating netback for the three months ended March 31, 2006 increased by approximately 12.3% primarily due to an increase in commodity prices realized in the first quarter of 2006 and a decrease in the overall royalty rate experienced by the Company. This increase was offset by higher operating costs, as discussed previously in this MD&A.

Funds from operations for the three months ended March 31, 2006 were $7.70/boe compared to $15.64/boe for the three months ended March 31, 2005. The decrease is due to severance and retention liabilities of $900,000, or $10.09/boe, recorded in the first quarter of 2006, as noted earlier.



Net Income

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March 31,
($000's except per share amounts) 2006 2005
-------------------------------------------------------------------------
Net income 13,440 513
Net income per share - basic 0.19 0.01
Net income per share - diluted 0.19 0.01
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Net income for the three months ended March 31, 2006 was $13,440,000 compared to $513,000 for the three months ended March 31, 2005. This translates into basic and diluted net income per share amounts of $0.19 for the first quarter of 2006 and $0.01 for the first quarter of 2005. Net income for the three months ended March 31, 2006 can be attributed to a gain on sale of oil and gas assets recorded in the period of $20,087,000. Net income for the three month period ended March 31, 2005 is attributable to the income tax effects of the 2004 flow-through share renouncement, as noted earlier in this MD&A.



Capital Expenditures, net

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March 31,
($000's) 2006 2005
-------------------------------------------------------------------------
Land and rentals 104 260
Seismic 56 60
Drilling and completions 908 2,833
Equipment and tie-ins 1,562 1,221
Property acquisitions 465 -
Property dispositions, net of transaction costs (95,477) -
Capitalized overhead costs 110 97
Other - 80
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(92,272) 4,551
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Signal participated and was successful at the crown land sale in January 2006 at a cost of approximately $465,000. The Company incurred additional costs in the first quarter of 2006 to complete and tie-in wells that were drilled in the Redwater area in the fourth quarter of 2005 and were brought onto production early in 2006. Property dispositions reflect the sale of oil and gas properties in February 2006, as noted earlier.

Liquidity and Capital Resources

Cash provided by operating activities was $2,083,000 for the three months ended March 31, 2006, compared to $3,679,000 for the three months ended March 31, 2005. Funds from operations for the three months ended March 31, 2006 decreased to $687,000 from $1,361,000 for the three month period ended March 31, 2005 as a result of increased operating costs and general and administrative expenses, as noted previously in this MD&A.

Cash used in financing activities for the three months ended March 31, 2006 was $21,411,000 compared to cash provided by financing activities of $13,209,000 for the three months ended March 31, 2005. In February 2006, the Company used the proceeds of the sale of oil and gas properties to repay its revolving operating loan which had $28,550,000 drawn at the time of repayment. Also, the exercise of stock options resulted in cash proceeds to the Company of $1,564,000, in the first quarter of 2006. In the first quarter of 2005, the Company used its revolving operating loan to fund the cash portion of two corporate acquisitions that were completed in January 2005.

Cash provided by investing activities for the three months ended March 31, 2006 was $82,907,000 compared to cash used in investing activities of $18,055,000 in the first quarter of 2005. Cash provided by investing activities for the first quarter of 2006 is attributed to proceeds on the sale of oil and gas assets of $96,627,000. The Company incurred additional costs of $3,205,000 to tie-in and equip wells drilled in the fourth quarter of 2005 in the Redwater area, as noted earlier. In the first quarter of 2005, the Company incurred capital costs of $4,551,000 related to the acquisition of undeveloped land in the Buick Creek and Chigwell areas, the tie-in of the West Pembina 3-1 well, the commencement of drilling of the Grizzly 16-10 and Innisfail 16-29 wells, and various completions in the Kaybob and Buick Creek areas.

Subsequent Events

Subsequent to March 31, 2006, options to purchase 490,500 common shares were exercised for cash proceeds to the Company of $671,625.

On March 27, 2006 and updated on April 18, 2006, Pearl Exploration and Production Ltd. ("Pearl") announced its intention to make an offer (the "Offer") to acquire all of the issued and outstanding shares of Signal. The announcements indicated that Pearl anticipated the Offer and related documents would be mailed to Signal shareholders no later than May 15, 2006. Signal has no formal agreement with Pearl respecting the Offer and can provide no assurance that the Offer will be made within the announced time, or that the terms of the Offer will be as announced.

Securities Outstanding

Securities outstanding as of the date of this MD&A consist of 72,491,448 issued and outstanding common shares, and 2,120,000 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 March 31, 2006. 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. These have been summarized in the Company's MD&A for the year ended December 31, 2005.

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 financial statements 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 accounting policies and practices that are critical to the determination of the Company's financial results are summarized in the Company's MD&A for the year ended December 31, 2005.



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SIGNALENERGY INC.
CONSOLIDATED BALANCE SHEETS
As at
(in thousands)
(unaudited)
-------------------------------------------------------------------------
March 31, December 31,
2006 2005
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ASSETS
Current
Cash and cash equivalents (note 3) 63,640 61
Accounts receivable 7,907 11,269
Prepaid expenses 198 258
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71,745 11,588
Property and equipment (notes 4 and 5) 24,999 102,503
Deferred costs (note 6) 175 -
Goodwill 4,548 4,548
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101,467 118,639
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 6,574 17,810
Income taxes payable 303 283
Revolving operating loan (note 7) - 22,975
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6,877 41,068
Future income tax liability (note 11) 5,529 -
Asset retirement obligations (note 8) 1,084 4,428
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13,490 45,496
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Commitment (note 9)

Shareholders' Equity
Share capital (note 9) 137,996 136,817
Contributed surplus (note 9) 2,355 2,140
Deficit (52,374) (65,814)
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87,977 73,143

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101,467 118,639
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See accompanying notes to consolidated financial statements.




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SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the three months ended March 31
(in thousands, except per share amounts)
(unaudited)
-------------------------------------------------------------------------
2006 2005
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REVENUE
Petroleum and natural gas sales 4,500 3,699
Royalties (net of Alberta Royalty Tax Credit) (951) (1,000)
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3,549 2,699
Other income 139 6
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3,688 2,705
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EXPENSES
Operating 1,170 631
General and administrative 1,577 622
Stock-based compensation (note 10) 852 271
Interest 234 85
Depletion and depreciation 1,932 1,714
Accretion of asset retirement obligations
(note 8) 43 58
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5,808 3,381
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Loss from operations before the following (2,120) (676)

OTHER INCOME
Gain on sale of oil and gas properties and
equipment (note 4) 20,087 -
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Income (loss) before income taxes 17,967 (676)
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Income taxes (note 11)
Current income tax expense 20 6
Future income tax expense (recovery) 4,507 (1,195)
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4,527 (1,189)
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Net income for the period 13,440 513

Deficit, beginning of period (65,814) (67,616)
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Deficit, end of period (52,374) (67,103)
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Net income per share (note 9)
Basic 0.19 0.01
Diluted 0.19 0.01
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See accompanying notes to consolidated financial statements.




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SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31
(in thousands)
(unaudited)
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the period 13,440 513
Items not affecting cash flows:
Stock-based compensation expense 852 271
Depletion and depreciation 1,932 1,714
Accretion of asset retirement obligations 43 58
Gain on sale of oil and gas properties and
equipment (note 4) (20,087) -
Future income tax expense (recovery) 4,507 (1,195)
-----------------------------------------------------------------------
Funds from operations 687 1,361
Change in non-cash operating working capital
(note 12) 1,396 2,318
-------------------------------------------------------------------------
Cash provided by operating activities 2,083 3,679
-------------------------------------------------------------------------

FINANCING ACTIVITIES
Change in revolving operating loan (22,975) 13,225
Issuance of common shares on exercise of
stock options 1,564 -
Share Issuance costs - (16)
-------------------------------------------------------------------------
Cash provided by (used in) financing activities (21,411) 13,209
-------------------------------------------------------------------------

INVESTING ACTIVITIES
Property and equipment expenditures (3,205) (4,551)
Proceeds on sale of property and equipment,
net of transaction costs 95,477 -
Acquisition of businesses, net of cash acquired - (4,224)
Deferred costs (175) -
Change in non-cash investing working capital
(note 12) (9,190) (9,280)
-------------------------------------------------------------------------
Cash provided by (used in) investing activities 82,907 (18,055)
-------------------------------------------------------------------------

Net change in cash 63,579 (1,167)
Cash and cash equivalents - beginning of period 61 2,718
-------------------------------------------------------------------------
Cash and cash equivalents - end of period 63,640 1,551
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash flow information:
Interest paid 234 85
Income taxes paid - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.





-------------------------------------------------------------------------
SIGNALENERGY INC.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
(Tabular figures are in thousands of Canadian dollars unless otherwise
indicated)
(unaudited)
-------------------------------------------------------------------------

1. NATURE OF OPERATIONS

SignalEnergy Inc. ("Signal" or the "Company") is a Calgary-based
junior oil and gas exploration and development company. All activity
is conducted in Western Canada and comprises a single operating
segment.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of presentation

The unaudited interim 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, 2005. Certain information or disclosures
normally required to be included in notes to annual audited
financial statements have been condensed or omitted. Accordingly,
the unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2005.

(b) Comparative figures

Certain comparative figures have been reclassified to conform to
the presentation adopted in the current period.

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash on hand and short-term
investments as follows:

---------------------------------------------------------------------
March 31, December 31,
2006 2005
$ $
---------------------------------------------------------------------
Cash on hand 1,140 61
Short-term investments 62,500 -
---------------------------------------------------------------------
63,640 61
---------------------------------------------------------------------
---------------------------------------------------------------------

Short-term investments at March 31, 2006 consist of investments in
commercial paper and banker's acceptances at interest rates of 3.65%
and 3.7%, maturing April 3, 2006 and April 7, 2006.

4. PROPERTY DISPOSITION

Effective February 27, 2006, the Company sold certain oil and gas
properties, tangible equipment and undeveloped land for cash proceeds
of $96,627,000. The transaction involved the sale of the Company's
Ferrier, Carrot Creek, Kaybob, Redwater and certain other minor
properties (the "Sold Properties"). The Company retained its
Chigwell, Bashaw and Buick Creek properties (the "Retained
Properties"). The transaction closed in two stages on February 27 and
March 9, 2006. The transaction costs associated with this transaction
were $1,150,000.

The carrying amount of the Sold Properties at the time of sale was
$75,390,000 and the related asset retirement obligation was
$3,387,000. Included in accounts receivable at March 31, 2006 is
$1,476,000 that is receivable from the purchaser for estimated final
adjustments on the sale. In the three months ended March 31, 2006,
the Company recorded a gain on sale of oil and gas properties and
equipment of $20,087,000.

5. PROPERTY AND EQUIPMENT

---------------------------------------------------------------------
Accumulated
Depletion
and Net Book
Cost Depreciation Value
March 31, 2006 $ $ $
---------------------------------------------------------------------
Oil and gas properties 28,718 3,779 24,939
Other 110 50 60
---------------------------------------------------------------------
28,828 3,829 24,999
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
Accumulated
Depletion
and Net Book
Cost Depreciation Value
December 31, 2005 $ $ $
---------------------------------------------------------------------
Oil and gas properties 114,170 11,730 102,440
Other 110 47 63
---------------------------------------------------------------------

114,280 11,777 102,503
---------------------------------------------------------------------
---------------------------------------------------------------------

In the three months ended March 31, 2006, the Company capitalized
general and administrative expenses of $110,000 (March 31, 2005 -
97,000) directly attributable to exploration and development
activities.

As at March 31, 2006, undeveloped land costs of $1.2 million
(March 31, 2005 - $1.5 million) were excluded from assets subject to
depletion.

6. DEFERRED COSTS

Deferred costs at March 31, 2006, consist of advisory fees pertaining
to a proposed transaction (refer to note 13).

7. BANK FACILITIES

The Company has a revolving operating loan facility with a Canadian
chartered bank to a maximum of $34,000,000. The operating loan bears
interest at the bank's prime lending rate plus an applicable margin
of between 0.125% and 1.5%. In addition, the Company has a non-
revolving acquisition loan of $1,500,000 which bears interest at the
bank's prime lending rate plus 0.5%. These facilities are secured by
a floating debenture of $75,000,000 over all assets of the Company
with a negative pledge and undertaking to provide fixed charges on
the Company's major producing oil and gas properties at the request
of the bank.

On February 28, 2006, the Company repaid the operating loan which had
$28,550,000 drawn at the time of repayment.


8. ASSET RETIREMENT OBLIGATIONS

The Company's asset retirement obligations result from net ownership
interests in oil and gas assets including well sites, gathering
systems and processing facilities. The Company estimates the net
present value of its total asset retirement obligations at March 31,
2006 to be $1.1 million (December 31, 2005 - $4.4 million) based on a
total future liability of $2.0 million (December 31, 2005 -
$8.9 million) which will be primarily incurred between 2006 and 2029.
An inflation rate of 3.0% and a credit-adjusted risk-free rate of
6.0% were used to calculate the fair value of the asset retirement
obligations.

---------------------------------------------------------------------
Asset Retirement Obligations $
---------------------------------------------------------------------
Balance, December 31, 2005 4,428
Obligations disposed (note 4) (3,387)
Accretion expense 43
---------------------------------------------------------------------
Balance, March 31, 2006 1,084
---------------------------------------------------------------------
---------------------------------------------------------------------

9. SHARE CAPITAL

(a) Authorized:

Unlimited number of voting common shares without par value.

Unlimited number of class A, non-voting common shares without
par value.

Unlimited number of non-voting, non-retractable, non-redeemable
preferred shares without par value to be issued in series as
determined by the Company.

-----------------------------------------------------------------
March 31, December 31,
Share capital is comprised of: 2006 2005
$ $
-----------------------------------------------------------------
Common shares 137,276 136,097
Additional paid-in capital 720 720
-----------------------------------------------------------------
137,996 136,817
-----------------------------------------------------------------
-----------------------------------------------------------------

(b) Common shares issued and outstanding:

-----------------------------------------------------------------
Number of
Common
Shares $
-----------------------------------------------------------------
Balance, December 31, 2005 70,520,948 136,097
Tax effect of 2005 flow-through
share issuance (i) - (1,022)
Issued on exercise
of stock options (ii) 1,480,000 2,201
-----------------------------------------------------------------
Balance, March 31, 2006 72,000,948 137,276
-----------------------------------------------------------------

(i) On December 1, 2005, the Company closed a private placement
of 2,000,000 flow-through common shares at $1.52 per share
for total gross proceeds of $3,040,000 ($2,935,000 net of
share issuance costs). The full expenditure commitment was
renounced to subscribers at December 31, 2005 with all
expenditures to be incurred by December 31, 2006. The tax
effect related to this flow-through offering of $1,022,048
was recorded at March 31, 2006 using a tax rate of 33.62%.
As at March 31, 2006, the Company has not incurred any
expenditure in relation to this flow-through share
obligation.

(ii) During the three months ended March 31, 2006, options to
purchase common shares were exercised for proceeds of
$1,564,000. The additional $637,000 credited to share
capital represents a transfer of the contributed surplus in
respect of these options.

(c) Contributed surplus:

-----------------------------------------------------------------
$
-----------------------------------------------------------------
Balance, December 31, 2005 2,140
Stock-based compensation expense 852
Reclassification to share capital for stock options
exercised (637)
-----------------------------------------------------------------
Balance, March 31, 2006 2,355
-----------------------------------------------------------------

(d) Stock option plan:

The following table summarizes stock option transactions during
the period:

-----------------------------------------------------------------
March 31, 2006
----------------------------

Weighted
average
exercise
Number price
$
-----------------------------------------------------------------
Outstanding, beginning of period 4,385,500 2.01
Cancelled (295,000) 1.17
Exercised (1,480,000) 1.06
-----------------------------------------------------------------
Outstanding, March 31, 2006 2,610,500 1.54
------------------------

The Company has the following stock options outstanding:

-----------------------------------------------------------------
Outstanding at March 31, 2006 Exercisable at March 31,
2006
Weighted
average
Exercise years to Exercise Exercise
Price Number expiry Price Number Price
$ $ $
-----------------------------------------------------------------

1.00 - 1.20 460,500 0.3 1.13 460,500 1.13
1.21 - 2.00 1,985,000 0.3 1.39 1,985,000 1.39
3.00 - 4.00 102,000 0.3 3.91 102,000 3.91
4.01 - 5.00 59,000 0.3 4.96 59,000 4.96
10.00 4,000 0.3 10.00 4,000 10.00
-----------------------------------------------------------------
Outstanding,
March 31,
2006 2,610,500 0.3 1.54 2,610,500 1.54
-----------------------------------------------------------------
-----------------------------------------------------------------

As a result of the sale of oil and gas properties (note 4) and
the substantial reduction in the Company's asset base, all stock
options outstanding on March 1, 2006 were vested and will expire
on June 1, 2006.

(e) Per share amounts:

The weighted average number of common shares outstanding for the
three months ended March 31, 2006 and 2005 are as follows:

-----------------------------------------------------------------
March 31, March 31,
2006 2005
-----------------------------------------------------------------
Weighted average - basic 70,598,169 44,621,978
Weighted average - diluted 71,239,284 44,781,442
-----------------------------------------------------------------
-----------------------------------------------------------------

The dilutive effect of the Company's issuable securities at
March 31, 2006, which consists of 2,610,500 stock options
(March 31, 2005 - 4,567,000) to issue common shares, was
641,115 shares (March 31, 2005 - 159,464 shares).

10. STOCK-BASED COMPENSATION

The Company records compensation costs on the granting of stock
options using the fair value based method. Compensation expense is
calculated using the Black-Scholes option pricing model with the
following weighted average assumptions:

---------------------------------------------------------------------
March 31, March 31,
2006 2005
---------------------------------------------------------------------
Risk-free interest rate (%) 3.51 3.51
Expected life (years) 0.3 5.0
Expected volatility (%) 60.0 75.0
Expected dividend yield (%) - -
---------------------------------------------------------------------

The estimated fair value of stock options of $0.71 per share is
amortized to expense over the vesting period on a straight-line
basis. As a result of the sale of oil and gas properties (note 4)
and the substantial reduction in the Company's asset base, all stock
options outstanding on March 1, 2006 were vested and will expire on
June 1, 2006. Accordingly, stock-based compensation expense for the
three months ended March 31, 2006 of $852,000 represents the
accelerated vesting of these options.

11. INCOME TAXES

The provision for income tax expense (recovery) recorded in the
consolidated statement of operations differs from the amount that
would be obtained by applying the statutory income tax rate to the
income (loss) before tax as follows:

---------------------------------------------------------------------
March 31, March 31,
2006 2005
$ $
---------------------------------------------------------------------
Net income (loss) before tax 17,967 (676)
---------------------------------------------------------------------
---------------------------------------------------------------------
Expected tax expense (recovery) at 33.62%
(2005 - 37.62%) 6,041 (254)
Add (deduct) income tax effect of:
Non-deductible crown royalties 77 207
Resource allowance (46) (128)
Stock-based compensation 287 102
Non-deductible expenses and other
permanent differences 9 7
Large Corporations Tax 20 6
Change in valuation allowance on
unrecognized benefit of tax assets (1,861) (1,129)
---------------------------------------------------------------------
Income tax expense (recovery) 4,527 (1,189)
---------------------------------------------------------------------
---------------------------------------------------------------------

12. CHANGE IN NON-CASH WORKING CAPITAL

Changes in non-cash working capital balances are comprised of the
following:

---------------------------------------------------------------------
March 31, March 31,
2006 2005
$ $
---------------------------------------------------------------------
Accounts receivable 3,362 78
Prepaid expenses 60 (170)
Accounts payable and accrued liabilities (11,236) 5,974
Income taxes payable 20 6
---------------------------------------------------------------------
(7,794) 5,888
Less: working capital acquired on acquisitions - (12,850)
---------------------------------------------------------------------
(7,794) (6,962)
Attributable to investing activities (9,190) (9,280)
---------------------------------------------------------------------
Attributable to operating activities 1,396 2,318
---------------------------------------------------------------------
---------------------------------------------------------------------

13. SUBSEQUENT EVENTS

(a) Subsequent to March 31, 2006, options to purchase 490,500 common
shares were exercised for cash proceeds to the Company of
$671,625.

(b) On March 27, 2006 and updated on April 18, 2006, Pearl
Exploration and Production Ltd. ("Pearl") announced its intention
to make an offer (the "Offer") to acquire all of the issued and
outstanding shares of Signal. The announcements indicated that
Pearl anticipated the Offer and related documents would be mailed
to Signal shareholders no later than May 15, 2006. Signal has no
formal agreement with Pearl respecting the Offer and can provide
no assurance that the Offer will be made within the announced
time, or that the terms of the Offer will be as announced.


Advisory Regarding Forward Looking Statements

This press release contains forward-looking statements which include, but
are not limited to: reserve estimates, operations plan and outlook,
expectations, opinions, forecasts, projections, guidance or other statements
that are not statements of fact. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurance that such expectations will prove to be correct.
Results of the Company may be affected by a variety of variables and risks
associated with oil and gas exploration, production and transportation, such
as loss of market, volatility of oil and gas prices, currency fluctuations,
imprecision of reserve estimates, environmental risks, competition from other
producers, ability to access sufficient debt and equity capital from internal
and external sources, ability to replace and expand oil and gas reserves,
ability to generate sufficient cash flow from operations to meet its current
and future obligations, and risks associated with existing and potential
future lawsuits and regulatory actions made against the Company; as a
consequence, actual results could differ materially from those anticipated or
implied in the forward-looking statements.
The Company's forward-looking statements are expressly qualified in their
entirety by this cautionary statement and are made as of the date of this news
release. Unless otherwise required by applicable securities laws, the Company
does not intend nor does it undertake any obligation to update or review any
forward-looking statements to reflect subsequent information, event, results
or circumstances or otherwise.

This news release is not for dissemination in the United States or to any
United States news services. The common shares of Signal have not and will not
be registered under the United States Securities Act of 1933, as amended (the
"U.S. Securities Act") or any state securities laws and may not be offered or
sold in the United States or to any U.S person except in certain transactions
exempt from the registration requirements of the U.S. Securities Act and
applicable state securities laws.

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