SignalEnergy Inc.
TSX : SGI

August 15, 2005 23:59 ET

SignalEnergy Inc. second quarter report for the period ending June 30, 2005

CALGARY--(CCNMatthews - Aug. 15) -

Signal is please to present its second quarter results for 2005. During the quarter, the Company continued to execute on its business plan which is a balance of grass roots shallow resource play development and conventional exploration and development, combined with a merger and acquisition strategy that allows the Company to maintain a balance of drilling opportunities while growing its production base.

Highlights for the first six months of 2005:

- Closed the corporate acquisitions of Predator Exploration Ltd. ("Predator") and a private oil and gas company ("Privateco") in January, the results of which have been included in the consolidated statements of operations from the effective dates.

- Entered into an agreement to acquire all of the outstanding common shares of Goose River Resources Ltd. ("Goose River") for $37.2 million. The transaction closed on August 9, 2005. The addition of Goose River is accretive to Signal's shareholders, expands the Company's production base and provides an inventory of additional low-risk drilling opportunities. Goose River's current production is approximately 600 boe/d of which the majority comes from its Redwater asset. Redwater has 15 drill ready infill locations to complete first phase development of the pool on 40 acre spacing basis of which five have been drilled and currently being tied-in and placed on production.

- Conducted 14 completions and work-overs in the six months ended June 30, 2005. Prolonged wet weather in the Carrot Creek, Kaybob and Buick Creek Area during the second quarter prevented the start of a six well drilling program in those areas. During the second quarter, Signal commenced completion operations of the 16-10 Grizzly well drilled in the first quarter and expects to finish completion operations in the third quarter.

- Closed the sale of the Twining assets on April 1, 2005 for cash proceeds of $13.25 million. Twining accounted for production of 170 boe/d or 18% of the Company's total production at the time of sale. The proceeds of the sale were used to reduce the Company's credit facility with its bank.

- Increased average production by 192% to 993 boe/d for the six months ended June 30, 2005 from 340 boe/d for the first six months of 2004. During the second quarter production averaged 1,020 boe/d compared to 966 boe/d during the first quarter of 2005. Approximately 80 boe/d of production was shut-in due to scheduled compressor maintenance at third party facilities. The Twining properties which were disposed of on April 1, 2005 accounted for a decrease of 170 boe/d during the quarter.

- Significantly reduced operating costs from $7.25 to $5.88 per boe after adjustments for prior periods. The lower operating cost was due to optimization work and the sale of its Twining property. The Company will continue with optimization work to further reduce operating cost.

- Production from 3-1 Carrot Creek in which Signal owns a 100% working interest was placed on stream during the second quarter with initial rates of 420 boe/d and is currently producing at variable rate of approximately 95 boe/d. Evaluation of this well and follow-up drilling locations is ongoing. This well contributed on average 150 boe/d of production during the quarter.

Outlook

On August 9, 2005 the business combination with Goose River closed. As a result of the transaction, Signal's production mix is 75% natural gas and 25% oil and is expected to remain this balance as it develops its prospect inventory.

Since the end of the second quarter, the Company has been very active drilling its prospect inventory. Signal has drilled nine wells (4.5 net) with a 100% success rate which are now into the completion and tie-in phase of operations. Signal plans to drill and participate in drilling 25 additional wells (13 net) before year end.

The combined current production is approximately 1,500-1,600 boe/d with an additional 250-300 boe/d of production expected to come on-stream in the third quarter primarily from increasing capacity of existing production facilities and the tie-in of five recently drilled wells. Signal anticipates additional increases in production in the fourth quarter from the tie-in of four additional wells drilled in the third quarter. Scheduled gas plant maintenance has shut-in approximately 370 boe/d for 10 days during the third quarter in the Buick Creek and Kaybob areas.

The Company will continue to execute on its business plan through a combination of internally developing its prospect inventory, reviewing potential acquisition targets and exploiting acquisition opportunities.

On behalf of the Board of Directors and Management,

J. Cameron Bailey, President and Chief Executive Officer



Highlights

(unaudited)
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
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Sales volume:
Natural gas (mcf/d) 5,100 1,667 5,015 1,322
Oil and NGLs (bbl/d) 170 132 157 120
Equivalence at 6:1 (boe/d) 1,020 410 993 340

Sales price:
Natural gas ($/mcf) 7.25 7.46 7.09 7.11
Oil and NGLs ($/bbl) 56.59 44.64 52.60 41.69
Equivalence at 6:1 ($/boe) 45.67 44.83 44.15 42.39

Financial: (000's)
Petroleum and natural gas sales 4,238 1,671 7,937 2,625
Net income (loss) 85 93 598 (20)
Net income (loss) per share
- basic and diluted - - 0.01 -
Capital expenditures 3,180 5,980 7,731 16,266
Corporate acquisitions, net (143) - 4,081 -
Weighted average shares
outstanding - basic 47,090 25,638 45,863 24,847
Weighted average shares
outstanding - diluted 47,090 25,638 46,284 24,847
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Management's Discussion and Analysis

For the three and six months ended June 30, 2005 and 2004

Management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements for SignalEnergy Inc. ("Signal" or the "Company") for the three and six months ended June 30, 2005, and the audited consolidated financial statements and MD&A for the year ended December 31, 2004. The unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). This MD&A is dated August 12, 2005.

Management uses the term "funds from operations" to analyze operating performance and leverage, determined as net income (loss) adjusted for certain non-cash items. Funds from operations as presented does not have any standardized meaning prescribed by GAAP and therefore it may not be comparable the calculation of similar measures for other entities. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period, nor should it be viewed as an alternative to cash flow from operating activities, net income (loss), or other measures of financial performance calculated in accordance with GAAP.

Management 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.

All amounts are presented in Canadian dollars unless otherwise noted. 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.

Statements throughout this MD&A 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 MD&A.

Summary of Quarterly Results

The Company commenced operations as an oil and gas company on January 1, 2004. Accordingly, only the six most recently completed quarters show the results of Signal's oil and gas operations.



2005 2004
($000's except
per share amounts) Q2 Q1 Q4 Q3 Q2 Q1
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Petroleum and natural gas
sales 4,238 3,699 1,708 1,586 1,671 954
Net income (loss) 85 513 (548) (500) 93 (113)
Net income (loss) per share
- basic and diluted - 0.01 (0.02) (0.02) - -
Funds from operations 2,208 1,361 486 521 775 298
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Petroleum and Natural Gas Sales

Sales increased to $4,238,000 in Q2 of 2005 from $3,699,000 in the previous quarter -- an increase of $539,000 -- due to the addition of Predator Exploration Ltd. ("Predator") on January 20, 2005 and a private oil and gas company ("Privateco") on January 26, 2005.

Sales for Q1 of 2005 increased by $1,991,000 from Q4 of 2004 as a result of strong commodity prices and increased production resulting from the acquisition of Predator and Privateco.

Q1 of 2004 recorded sales from producing properties that were acquired early in that quarter. Quarter-over-quarter growth in sales in 2004 is attributable to the increased production resulting from the Company's drilling program combined with the increased commodity prices.

Net Income (Loss)

The net income for Q2 of 2005 was $85,000 compared to $513,000 for the prior quarter. The net income for Q1 of 2005 was attributed to a future income tax recovery recorded in that period of $1,195,000 that resulted from a flow-through share financing in 2004.

With the exception of Q2, the Company recorded net losses throughout 2004. These losses were attributed to the high general and administrative expenses associated with the start-up of Signal's oil and gas operations and the impact of high depletion and depreciation expenses.

Funds from Operations

Funds from operations increased in Q2 of 2005 to $2,208,000 from $1,361,000 in the prior quarter primarily as a result of a future income tax recovery which reduced funds from operations in Q1.

Funds from operations throughout 2004 remained consistent quarter-over- quarter with an increase of $875,000 in Q1 of 2005 from Q4 of 2004 as a result of additional profit margins realized on increased production volumes.



Results of Operations
Production
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 5,100 1,667 5,015 1,322
Oil and NGLs (bbl/d) 170 132 157 120
Equivalence at 6:1 (boe/d) 1,020 410 993 340
Sales price:
Natural gas ($/mcf) 7.25 7.46 7.09 7.11
Oil and NGLs ($/bbl) 56.59 44.64 52.60 41.69
Equivalence at 6:1 ($/boe) 45.67 44.83 44.15 42.39


The average sales volume increased from 340 boe/d for the six months ended June 30, 3004 to 993 boe/d for the six months ended June 30, 2005 -- an increase of 653 boe/d or 192%, mainly due to the acquisition of Predator and Privateco which brought a total of 21 producing wells. The major producing areas acquired where Kaybob, Buick Creek, and Chigwell. These areas added additional production for the six months ended June 30, 2005 of 631 boe/d from the effective dates of the Predator and Privateco acquisitions. In addition, during the six months ended June 30, 2005 the Company conducted 14 completions and workovers. Poor weather conditions in the second quarter of 2005 in the Carrot Creek, Kaybob and Buick Creek areas delayed the start of a six well drilling program which will now be completed in the third quarter. This increase in production for the six months ended June 30, 2005 was partially offset by the Company's sale of the Twining assets which were sold on April 1, 2005 for proceeds of $13,250,000. At the time of its sale, Twining production was approximately 170 boe/d.

Sales volumes for the three months ended June 30, 2005 were 1,020 boe/d compared to 410 boe/d for the same period in 2004. As previously noted, this increase of 610 boe/d is primarily the result of the corporate acquisitions which came on stream late in January 2005.

Natural gas accounted for 84% of the Company's total production in the first six months of 2005. Natural gas prices remained strong through this period but have decreased slightly from prices realized in the same six month period in 2004. The average natural gas price received by the Company for the six months ended June 30, 2005 was $7.09/mcf compared to $7.11/mcf for the six months ended June 30, 2004. Natural gas prices realized for the three months ended June 30, 2005 averaged $7.25/mcf and $7.46/mcf for the same period in 2004. These prices are comparable to the average AECO benchmark price of $7.19/mcf for the six months ended June 30, 2005, $7.45/mcf for the three months ended June 30, 2005, compared to $6.79/mcf and $7.07/mcf for the same six and three month periods ended in 2004.

The sales volume of oil and natural gas liquids increased in the six month period ended June 30, 2005 to 157 bbl/d compared to 120 bbl/d for the six months ended June 30, 2004. Although sales volumes of oil and natural gas liquids account for only 16% of total sales volumes for the six months ended June 30, 2005, revenue from the sale of oil and natural gas liquids accounted for 21% of total revenues due to an increase in the average price received to $52.60/bbl from $41.69/bbl for the same six month period in 2004. This increase is consistent with the change in the average Edmonton Par benchmark price which increased to $64.48/bbl for the six months ended June 30, 2005 from $48.98/bbl for the six months ended June 30, 2004.

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



Revenues
Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
-------------------------------------------------------------------------
Petroleum and natural gas sales 4,238 1,671 7,937 2,625
$/boe 45.67 44.83 44.15 42.39
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Revenue from petroleum and natural gas sales for the six months ended June 30, 2005 increased to $7,937,000 from $2,625,000 for the six months ended June 30, 2004. Natural gas production increased from 1,322 mcf/d for the six months ended June 30, 2004 to 5,015 mcf/d for the six months ended June 30, 2005 -- resulting from corporate acquisitions and the Company's drilling activity in 2005. Natural gas sales in the three months ended June 30, 2005 increased to 5,110 mcf/d from 1,667 mcf/d for the three months ended June 30, 2004. Increase in production from the acquisitions of Predator and Privateco and the Company's drilling program more than offset the lost production from the sale of the Twining property.



Royalties
Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
------------------------------------------------------------------------
Royalties (net of ARTC) 600 380 1,600 625
$/boe 6.47 10.20 8.90 10.09
Percentage of petroleum and
natural gas sales 14.2 22.8 20.2 23.8
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Royalties, which consists of crown, gross-overriding and freehold royalties, have increased in the six months ended June 30, 2005 to $1,600,000 from $625,000 for the same six month period in 2004 due to increased production volumes resulting from the acquisition of Predator and Privateco in January 2005, and drilling activity in the first six months of 2005.

Royalties have increased in the three months ended June 30, 2005 to $600,000 from $380,000 for the three months ended June 30, 2005 for reasons previously noted. However, royalties have decreased substantially on $/boe basis to $6.47/boe from $10.20/boe for the three months ended June 30, 2005 and 2004, respectively, or 14.2% and 22.8% of petroleum and natural gas sales. This sharp decrease is attributed to the sale of the Twining property which carried typically higher gross-overriding and freehold royalties than the Company's other properties.



Operating Expenses
Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
------------------------------------------------------------------------
Operating expenses 722 179 1,353 271
$/boe 7.78 4.80 7.53 4.38
Operating expenses (adjusted) 546 179 1,353 271
$/boe 5.88 4.80 7.53 4.38
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The Company's operating costs increased from $271,000 for the six months ended June 30, 2004 to $1,353,000 for the six months ended June 30, 2005. This increase of $1,082,000 is attributed to increased production and higher fixed costs for compressor rentals, gas gathering and processing fees incurred in 2005 when compared to 2004. The Twining property, which was sold on April 1, 2005, had significantly higher gas compression rental costs than the Company's other properties.

Operating costs for the three months ended June 30, 2005 increased to $722,000 from $179,000 for the comparable three month period in 2004 as a result of increased production volumes from higher operating cost areas. In addition, the three months ended June 30, 2005 included operating costs that pertained to the prior quarter of approximately $176,000 related to properties acquired on the acquisition of Predator. Due to a lack of information available and experience with respect to the underlying properties, the Company underestimated the operating costs for these properties in the first quarter of 2005 -- that is, additional operating costs pertaining to the first quarter are reflected in the second quarter of 2005. Operating costs for the second quarter of 2005 if adjusted for first quarter costs captured in the second quarter would have been approximately $546,000 or $5.88/boe.

The Company's management team continues to look for ways to reduce its operating costs and to obtain operational efficiencies.



General and Administrative Expenses

Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
-------------------------------------------------------------------------
General and administrative expense
(gross) 1,024 523 1,741 994
General and administrative costs
capitalized (452) (106) (549) (220)
General and administrative expenses
(net) 572 417 1,192 774
$/boe 6.16 11.19 6.63 12.50
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General and administrative expenses increased in the six months ended June 30, 2005 to $1,192,000 from $774,000 for the six months ended June 30, 2004 as Signal transitioned from a start-up company to an oil and gas exploration and development company. This transition resulted in the hiring of additional administrative staff, increased office premises, and other corporate and infrastructure related costs required to support the Company's operations.

The Company capitalized general and administrative costs of $549,000 in the six months ended June 30, 2005 compared to $220,000 in the six months ended June 30, 2004. In 2004 the Company was primarily focused on exploration activities and accordingly capitalized all of its geological and engineering costs. In 2005 with the increase in its development activities, the Company now only capitalizes a portion of it engineering costs.

General and administrative expenses for the three months ended June 30, 2005 increased to $572,000 from $417,000 for the same three month period in 2004. General and administrative expenses decreased on a $/boe basis to $6.16/boe for the three months ended June 30, 2005 from $11.19/boe for the three months ended June 30, 2004. This decrease is due to efficiencies realized as the Company ramps up its production volumes.

In the three month period ended June 30, 2005, the Company capitalized $452,000 of general and administrative expenses compared to $106,000 in the three month period ended June 30, 2004 - an increase of $346,000. This is the result of an increase in the number of geological and engineering staff in 2005 required to support the Company's production base and capital programs.



Stock-based Compensation Expense

Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
-------------------------------------------------------------------------
Stock-based compensation expense 309 (28) 580 32
$/boe 3.32 (0.75) 3.23 0.52
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Stock-based compensation expense reflects the value attributed to stock options granted to employees, directors and consultants to the Company. For the three and six months ended June 30, 2005, stock-based compensation expense increased to $309,000 and $580,000, respectively, which reflects the stock options granted in the latter part of fiscal 2004 and into 2005.



Interest Expense
Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
-------------------------------------------------------------------------
Interest expense 138 - 223 -
$/boe 1.49 - 1.24 -
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Interest expense increased in the three and six months ended June 30, 2005 to $138,000 and $223,000 as the Company accessed its available credit facilities to fund it capital program and its acquisition strategy. These facilities were not utilized in 2004.



Depletion and Depreciation Expense

Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
-------------------------------------------------------------------------
Depletion and depreciation
expense 1,786 666 3,500 1,056
$/boe 19.25 17.87 19.47 17.05
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Depletion and depreciation expense for the six months ended June 30, 2005 increased to $3,500,000 from $1,056,000 for the six months ended June 30, 2004 due to higher property, plant and equipment balances which increased from $17,393,000 at June 30, 2004 to $46,474,000 at June 30, 2005. On a boe basis depletion and depreciation expense has increased from $17.05/boe for the six months ended June 30, 2004 to $19.47/boe for the six months ended June 30, 2005. This increase is a result of a reduction in the estimated reserves used in the determination of depletion expense resulting from a substantial decrease in the production rate from the 3-1 Carrot Creek well which was placed on stream in April 2005.

Depletion and depreciation expense for the three months ended June 30, 2005 was $1,786,000 - an increase of $1,120,000 from the same period in the prior year. Depletion and depreciation increased on a boe basis for the three months ended June 30, 2005 to $19.25/boe from $17.87/boe for the same three month period in 2004. The reasons for this increase are as noted above.



Accretion of Asset Retirement Obligation

Three months ended Six months ended
June 30, June 30,
($000's) 2005 2004 2005 2004
-------------------------------------------------------------------------
Accretion of asset retirement
obligation 28 44 86 44
$/boe 0.30 1.18 0.48 0.71
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Accretion expense increased for the six months ended June 30, 2005 to $86,000 from $44,000 for the six months ended June 30, 2004 as a result of an increase in the number of wells and facilities over that period.

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

Income Tax

The current income tax expense for the three and six month periods ended June 30, 2005 consists of Large Corporations Tax ("LCT"). As a result of the acquisitions completed in 2005, the Company's taxable capital has increased such that it is now required to pay LCT.

The Company recorded a future income tax recovery of $1,195,000 in the six months ended June 30, 2005 as a result of a flow-through share issue in 2004. The full expenditure commitment of $3,553,000 was renounced to investors at December 31, 2004 and the related income tax effects were reflected in the consolidated statement of operations for the three months ended March 31, 2005.

As at June 30, 2005, the Company has approximately $25,000,000 of resource tax pools, $22,000,000 of non-capital losses and $33,600,000 of scientific research and experimental development expenditures to that can be applied to reduce future income taxes.



Netbacks
Three months ended Six months ended
June 30, June 30,
($ per boe) 2005 2004 2005 2004
-------------------------------------------------------------------------
Sales price 45.67 44.83 44.15 42.39
Less: Royalties (6.47) (10.20) (8.90) (10.09)
Operating expenses (7.78) (4.80) (7.53) (4.38)
-------------------------------------------------------------------------
Operating netback 31.42 29.83 27.72 27.92
Less: General and
administrative expenses (6.16) (11.19) (6.63) (12.50)
Non-cash general and
administrative expenses - - - (0.64)
Foreign exchange gain - 0.08 - 0.06
Interest expense (1.49) - (1.24) -
Interest income 0.01 0.49 0.04 1.52
Income tax 0.01 1.58 (0.04) 0.96
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Corporate net back 23.79 20.79 19.85 17.32
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Funds from operations ($000's) 2,208 775 3,569 1,073
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Operating netback for the six months ended June 30, 2005 has remained consistent with that of the comparable period in 2004. Operating netback has increased in the three months ended June 30, 2005 compared to the second quarter of 2004 due to lower royalties, despite an increase in operating expenses, realized in the three months ended June 30, 2005.

Corporate netback increased in the three and six month periods ended June 30, 2005 when compared to the same periods in 2004 as a result of significantly lower general and administrative costs incurred in 2005.



Net Income (Loss)
Three months ended Six months ended
($000's except per share June 30, June 30,
amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Net income (loss) 85 93 598 (20)
Net income (loss) per share
- basic and diluted - - 0.01 -
-------------------------------------------------------------------------


Net income for the six months ended June 30, 2005 increased to $598,000 from a net loss of $20,000 for the six months ended June 30, 2004. This translates into a basic and diluted per share amounts of $0.01 and $(0.00) respectively. Net income for the six months ended June 30, 2005 is largely the result of the income tax effects of the 2004 flow-through share renouncement of $1,195,000 which was recognized in the first three months of 2005.



Capital Expenditures
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Land and rentals 663 450 923 928
Seismic 142 - 202 174
Drilling and completions 1,148 3,916 3,981 4,913
Equipment and tie-ins 655 1,508 1,876 1,620
Property acquisitions - - - 8,359
Capitalized overhead 452 106 549 220
Other 119 - 199 52
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3,179 5,980 7,730 16,266
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Signal participated and was successful in two land sales in the six months ended June 30, 2005, in the Chigwell and Buick Creek areas, for approximately $260,000. The Company's drilling program for the first six months of 2005 incurred costs of $3,981,000, of which $1,600,000 related to the development of the West Pembina 3-1 location that was completed and brought on stream in late March 2005. Two other locations commenced drilling operations in the first quarter of 2005 - Grizzly 16-10 and Innisfail 16-29 - for an additional $1,400,000 of drilling and completion costs. Completion work in the Kaybob and Buick Creek areas also required additional capital expenditures.

Liquidity and Capital Resources

Cash used in operating activities for the six months ended June 30, 2005 was $2,049,000 compared with cash provided by operating activities of $1,080,000 for the six months ended June 30, 2004. Funds from operations (defined as cash provided by (used in) operating activities before changes to non-cash operating working capital balances) increased to $3,569,000 for the six months ended June 30, 2005 from $1,073,000 for the same six month period in 2004 as a result of a significant increase in operating activities in 2005. For the three months ended June 30, 2005, cash used in operating activities was $5,724,000 compared to $17,000 for the three months ended June 30, 2004.

Cash provided by financing activities for the six months ended June 30, 2005 amounted to $7,116,000 million compared to $10,829,000 for the six months ended June 30, 2004. In the first six months of 2004 the Company completed a flow-through share issuance of 1,615,000 common shares and an additional issuance of 4,485,000 common shares for gross proceeds of $3,553,000 and $7,849,000 respectively. These funds were used to finance the Company's capital program. In the six months ended June 30, 2005, the Company borrowed (net of repayments) $7,675,000 against its operating loan facility which was used to fund its capital program. Cash used in financing activities increased to $6,093,000 for the three months ended June 30, 2005 compared to cash provided by financing activities of $10,852,000 for the same three month period in 2004. In April 2005, the Company used the $13,250,000 of proceeds from the sale of the Twining property to repay the operating loan balance that existed at that time. In the three months ended June 30, 2004, the Company completed two equity financings, as noted above.

Cash used in investing activities increased to $4,868,000 in the six months ended June 30, 2005 compared to $11,266,000 for the six months ended June 30, 2004. In the first six months of 2005 the Company had incurred expenditures related to its capital program of $7,730,000, incurred $4,081,000 related to corporate acquisitions, and sold its Twining property. Cash provided by investing activities for the three months ended June 30, 2005 was $13,183,000 compared to cash used in investing activities of $2,578,000 for the three months ended June 30, 2004.

Subsequent Events

- On May 6, 2005, the Company entered into a letter of intent with Goose River Resources Ltd. ("Goose River"), to acquire all of the issued and outstanding common shares of Goose River for $37.2 million, consisting of 21,250,000 common shares of Signal valued at $1.20 per share, $9,931,000 of cash, additional cash of $1,022,000 paid on the cash buyout of the Goose River stock options, and estimated transaction and severance costs of $750,000, by way of plan of arrangement.

The transaction closed on August 9, 2005 and resulted in the shareholders of Goose River becoming shareholders of two companies, Signal and G2 Resources Inc. ("G2"), a newly created exploration company, which now holds certain properties previously held by both Goose River and Signal. Each former shareholder of Goose River received 0.05 of a share of G2 for each share of Goose River held and each shareholder of Signal received 0.037537 of a G2 share for each share of Signal held.

- Concurrent with the closing of the acquisition of Goose River, the Company's revolving operating demand loan facility with its bank was increased to a maximum borrowing amount of $24,000,000. In addition, the Company's non-revolving acquisition demand loan was increased to a maximum of $1,500,000.

- Subsequent to June 30, 2005, an additional 30,000 common shares were purchased under the normal course issuer bid at an average price of $1.22 per share.

- Subsequent to June 30, 2005, an additional 205,000 stock options were granted at an average exercise price of $1.17 per share.

- Effective August 4, 2005, 5,240,754 outstanding Class A Shares were converted to Common Shares of the Company on a one-for-one basis.

Securities Outstanding

Securities outstanding as of the date of this MD&A consist of 68,067,923 issued and outstanding common shares, and 4,707,000 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 June 30, 2005.

New Canadian Accounting Pronouncements

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

Comprehensive Income/Financial Instruments/Hedges

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

Signal does not currently have any hedges in place so the impact of these recommendations would not be significant.



CONSOLIDATED BALANCE SHEETS

(unaudited)

As at June 30 December
(in thousands) 2005 31 2004
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ASSETS
Current
Cash and cash equivalents (note 3) $ 2,917 $ 2,718
Accounts receivable 4,486 4,143
Prepaid expenses 157 191
-------------------------------------------------------------------------
7,560 7,052

Goodwill 4,548 4,548

Deferred acquisition costs - 546

Property and equipment (notes 4 and 5) 46,474 22,930
-------------------------------------------------------------------------
$ 58,582 $ 35,076
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 3,753 $ 2,836
Income taxes payable 125 -
Revolving operating loan (note 7) 7,675 -
-------------------------------------------------------------------------
11,553 2,836
-------------------------------------------------------------------------

Asset retirement obligations (note 6) 2,717 1,633

Shareholders' Equity
Share capital (note 8) 109,722 97,914
Contributed surplus (note 8) 1,608 309
Deficit (67,018) (67,616)
-------------------------------------------------------------------------
44,312 30,607
-------------------------------------------------------------------------
$ 58,582 $ 35,076
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements



CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

(unaudited)

Three months ended Six months ended
(in thousands except per June 30 June 30
share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------

Revenues
Petroleum and natural gas
sales $ 4,238 $ 1,671 $ 7,937 $ 2,625
Royalties (net of Alberta
Royalty Tax Credit) (600) (380) (1,600) (625)
-------------------------------------------------------------------------
3,638 1,291 6,337 2,000
Interest income 1 18 7 94
-------------------------------------------------------------------------
3,639 1,309 6,344 2,094
-------------------------------------------------------------------------
Expenses
Operating 722 179 1,353 271
General and administrative 572 417 1,192 774
Stock-based compensation
(note 9) 309 (28) 580 32
Interest expense 138 - 223 -
Foreign exchange gain - (3) - (4)
Depletion and depreciation 1,786 666 3,500 1,056
Accretion expense note 6) 28 44 86 44
-------------------------------------------------------------------------
3,555 1,275 6,934 2,173
-------------------------------------------------------------------------

Income (loss) before income
taxes 84 34 (590) (79)
Current income tax (1) (59) 7 (59)
Future income tax recovery
(note 8) - - (1,195) -
-------------------------------------------------------------------------

Net income (loss) for the period 85 93 598 (20)

Deficit, beginning of period (67,103) (66,661) (67,616) (66,548)
-------------------------------------------------------------------------
Deficit, end of period $(67,018) $(66,568) $(67,018) $(66,568)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Per share amounts (note 8)
Basic $ 0.00 $ 0.00 $ 0.01 $ 0.00
Diluted $ 0.00 $ 0.00 $ 0.01 $ 0.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements



CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three months ended Six months ended
June 30 June 30
(in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income (loss) from operations $ 85 $ 93 $ 598 $ (20)
Items not affecting cash flows:
Stock-based compensation
(note 9) 309 (28) 580 32
Non-cash general and
administrative costs - - - (39)
Depletion and depreciation 1,786 666 3,500 1,056
Accretion expense 28 44 86 44
Future income tax recovery - - (1,195) -
-------------------------------------------------------------------------
Funds from operations 2,208 775 3,569 1,073
Changes in non-cash working
capital related to operating
activities (note 10) (7,932) (792) (5,618) 7
-------------------------------------------------------------------------
Cash provided by (used in)
operating activities (5,724) (17) (2,049) 1,080
-------------------------------------------------------------------------

Financing Activities
Increase (decrease) in revolving
operating loan (5,550) - 7,675 -
Share buy back (note 8) (542) - (542) -
Issue of common shares - 7,849 - 7,849
Issue of flow-through common
shares - 3,553 - 3,553
Issue costs (1) (550) (17) (573)
-------------------------------------------------------------------------
Cash provided by (used in)
financing activities (6,093) 10,852 7,116 10,829
-------------------------------------------------------------------------

Investing Activities
Expenditures on property and
equipment (3,179) (5,980) (7,730) (7,907)
Disposition of property and
equipment (note 5) 13,250 - 13,250 -
Expenditures on property
acquisitions - - - (8,359)
Corporate acquisitions, net
(note 4) 143 - (4,081) -
Net working capital acquired
upon acquisitions - - - 1,598
Changes in non-cash working
capital related to investing
activities (note 10) 2,969 3,402 (6,307) 3,402
-------------------------------------------------------------------------
Cash provided by (used in)
investing activities 13,183 (2,578) (4,868) (11,266)
-------------------------------------------------------------------------
Net change in cash position 1,366 8,257 199 643

Cash and cash equivalents
- beginning of period 1,551 5,810 2,718 13,424
-------------------------------------------------------------------------
Cash and cash equivalents
- end of period $ 2,917 $ 14,067 $ 2,917 $ 14,067
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements



-------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
-------------------------------------------------------------------------
(unaudited)
June 30, 2005 and 2004 (Tabular figures are in thousands of dollars
unless otherwise indicated)

1 Nature of Operations

SignalEnergy Inc. (the "Company" or "Signal") is a full cycle oil and
natural gas enterprise with activities involving land acquisition,
geological assessment, drilling and completion, and production throughout
Western Canada.

2 Significant Accounting Policies

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 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 Company's consolidated financial statements
for the year ended December 31, 2004, included in the Company's 2004
annual report.

Certain comparative figures have been reclassified to conform with the
current period's financial statement presentation.

3 Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and money market
instruments as follows:

June 30 December 31
2005 2004
$ $
-------------------------------------------------------------------------
Cash on hand 2,917 1,720
Short-term investment - 998
-------------------------------------------------------------------------
2,917 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 incurring cash
transaction costs of $436,692. 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 26,950
Non-cash working capital deficiency (12,333)
Asset retirement obligations (1,563)
-------------------------------------------------------------------------
Total 13,467
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The results of 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
Private Co. ("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 $3,970,380. Transaction costs of $87,406 were incurred
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 5,951
Non-cash working capital deficiency (325)
Asset retirement obligations (318)
-------------------------------------------------------------------------
Total 5,308
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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
June 30, 2005 $ $ $
-------------------------------------------------------------------------
Oil and gas properties 52,767 6,364 46,403
Other 105 34 71
-------------------------------------------------------------------------
52,872 6,398 46,474
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 and six month periods ended June 30, 2005, the Company
capitalized $452,000 and $549,000, respectively (2004 - $106,000 and
$219,369) related to overhead costs directly attributable to exploration
and development activities. Included in the oil and gas properties value
at June 30, 2005 was $2.5 million (2004 - $1.8 million) for unproved
properties, which has been excluded from the depletion calculation.

In April 2005, the Company disposed of its Twining property for
consideration of $13.25 million. The proceeds of $13.25 million, as well
as the elimination of the related asset retirement amount of $949,047
have been accounted for as a reduction to the net book value of oil and
gas properties at June 30, 2005.

6 Asset Retirement Obligations

The Company's asset retirement obligations result 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 $3.2 million as of June 30, 2005
(December 31, 2004 - $1.9 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 obligations.

During the six months ended June 30, 2005, the Company's asset retirement
obligations changed as follows:

Asset Retirement Obligations $
-------------------------------------------------------------------------
Balance, December 31, 2004 1,633
Obligation incurred 66
Obligation acquired (note 4) 1,881
Obligation disposed (note 5) (949)
Accretion expense 86
-------------------------------------------------------------------------
Balance, June 30, 2005 2,717
-------------------------------------------------------------------------
-------------------------------------------------------------------------

7 Revolving Operating Loan

At June 30, 2005, the Company has utilized $7.7 million of the
$ 15.0 million credit lines available. The borrowing base of the Company
is subject to periodic review, the next review is scheduled on or before
April 30, 2006.

8 Share Capital

Share capital is comprised of:

June 30 December 31
2005 2004
$ $
-------------------------------------------------------------------------
Common shares 109,002 97,194
Additional paid-in capital (ii) 720 720
-------------------------------------------------------------------------
109,722 97,914
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Common Shares Issued:

Number of
Class A Number of
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
normal course issuer bid(ii) (482,700) (1,261)
share issue costs (1)
-------------------------------------------------------------------------
Balance, June 30, 2005 5,240,754 41,607,169 109,002
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(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 was renounced at
March 31, 2005 at a rate of 33.62% or $1,194,519, and has been
reported as a reduction to share capital with a corresponding
offset to future income taxes.

(ii) Commencing April 27, 2005, the Company initiated the normal course
issuer bid process whereby a maximum of 2,104,493 common shares can
be repurchased beginning April 21, 2005 and terminating
April 20, 2006. As at June 30, 2005, the Company has purchased
482,700 common shares at an average price of $1.12 per share or
$542,196. The historical value of these shares reduced share
capital by $1,261,000 and the excess over the repurchase price has
been accounted for as an increase to contributed surplus capital of
$717,651.

Per Share Amounts:
Per share amounts have been calculated using the weighted average number
of common shares outstanding for the three and six months ended
June 30, 2005 of 47,090,244 and 45,862,930 (2004 - 25,638,299 and
24,847,091). 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 six months ended
June 30, 2005 of 46,284,031 (2004 - 24,847,091). For the three months
ended June 30, 2005 and 2004, the diluted per share amounts have been
calculated using the basic weighted average number of common shares
outstanding as all of the Company's issuable securities were
anti-dilutive.

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 2,164,500 1.09
Cancelled (75,000) 1.40
-------------------------------------------------------------------------
Stock options outstanding, June 30, 2005 4,502,000 1.58
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Outstanding Options Exercisable Options
---------------------------------------------
Weighted Weighted
Weighted Average Average
Range of Average Exercise Exercise
Exercise Prices Number Years to Price Number Price
$ Outstanding Expiry $ Exercisable $
-------------------------------------------------------------------------
1.00 - 2.00 4,189,500 3.2 1.24 1,028,386 1.17
3.00 - 4.00 202,000 2.1 3.91 202,000 3.91
4.00 - 5.00 69,000 1.1 4.88 69,000 4.88
9.00 - 10.00 6,500 3.4 10.00 6,500 10.00
18.00 - 19.00 30,000 0.3 19.00 30,000 19.00
29.00 - 30.00 5,000 0.3 29.60 5,000 29.60
-------------------------------------------------------------------------
4,502,000 3.1 1.58 1,340,886 2.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Included in the outstanding options are 1,400,000 incentive options
having a strike price of $1.00 (exercisable - 575,342) that expire
March 1, 2006.

9 Stock-Based Compensation

The fair value of common share options granted for six months ended
June 30, 2005 is estimated to be $919,000 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 the three and six
months ended June 30, 2005 $309,000 and $580,000 has been recognized as
non-cash compensation expense and contributed surplus. As of
June 30, 2005, the Company has $2.5 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 six months ended June 30, 2004, stock-based compensation of $38,000
was recognized under the phantom stock plan. Effective July 1, 2004, the
phantom stock plan expired.

10 Changes in Non-Cash Working Capital

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

Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
$ $ $ $
-------------------------------------------------------------------------
Accounts receivable (421) (70) (343) (1,134)
Prepaid expenses 204 (129) 34 (183)
Deposits - - - 975
Accounts payable and accrued
liabilities (5,057) 2,831 917 4,027
Income taxes payable 119 (22) 125 (22)
-------------------------------------------------------------------------
Change per balance sheet items (5,155) 2,610 733 3,663
Less: working capital acquired
on acquisitions 192 - (12,658) (254)
-------------------------------------------------------------------------
(4,963) 2,610 (11,925) 3,409
Attributable to investing
activities 2,969 3,402 (6,307) 3,402
-------------------------------------------------------------------------
Attributable to operating
activities (7,932) (792) (5,618) 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------

11 Subsequent Events

On May 6, 2005, the Company entered into a letter of intent with
Goose River Resources Ltd. ("Goose River"), to acquire all of the issued
and outstanding common shares of Goose River for $37.2 million,
consisting of 21,250,000 common shares of Signal valued at $1.20 per
share, $9,931,000 of cash, additional cash of $1,022,000 paid on the cash
buyout of the Goose River stock options, and estimated transaction and
severance costs of $750,000, by way of plan of arrangement.

The transaction closed on August 9, 2005 and resulted in the shareholders
of Goose River becoming shareholders of two companies, Signal and
G2 Resources Inc. ("G2"), a newly created exploration company, which now
holds certain properties previously held by both Goose River and Signal.
Each former shareholder of Goose River received 0.05 of a share of G2 for
each share of Goose River held and each shareholder of Signal received
0.037537 of a G2 share for each share of Signal held.

Concurrent with the closing of the acquisition of Goose River, the
Company's revolving operating demand loan facility with its bank was
increased to a maximum borrowing amount of $24,000,000. In addition, the
Company's non-revolving acquisition demand loan was increased to a
maximum of $1,500,000.

Subsequent to June 30, 2005, an additional 30,000 common shares were
purchased under the normal course issuer bid at an average price of $1.22
per share.

Subsequent to June 30, 2005, an additional 205,000 stock options were
granted at an average exercise price of $1.17 per share.

Effective August 4, 2005, 5,240,754 outstanding Class A Shares were
converted to Common Shares of the Company on a one-for-one basis.

Contact Information