Tanganyika Oil Company Ltd.
TSX VENTURE : TYK

Tanganyika Oil Company Ltd.

August 02, 2005 18:23 ET

Tanganyika Oil Company Ltd.: Fourth Quarter Report May 31, 2005 (Unaudited)

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Aug. 2, 2005) - Tanganyika Oil Company Ltd. (TSX VENTURE:TYK)(NYA MARKNADEN:TYKS) -

- The Company's revenue amounted to $8.0 million (2004-$7.0 million) for the twelve-month period ended May 31, 2005 and $1.9 million (2004-$2.3 million) for the quarter.

- The Company's result after tax amounted to $1.1 million loss (2004-$0.2 million loss) for the twelve month period ended May 31, 2005 and $1.4 million loss (2004-$1.2 million profit) for the fourth quarter.

- The Company's result per share was $0.029 loss (2004-$0.006 loss) for the twelve-month period ended May 31, 2005 and $0.036 loss (2004-$0.036 profit) for the fourth quarter.

Tanganyika Oil Company Ltd. is an international Canadian oil and gas exploration and production Company with interests in exploration and development properties in Egypt and Syria. The Company is listed on the TSX Venture Exchange at Vancouver, Canada (TYK) and on the Nya Marknaden (The New Market) at Stockholm, Sweden (TYKS).

TANGANYIKA OIL COMPANY LTD.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Period ended May 31, 2005 as compared to May 31, 2004

Certain statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements containing the words believes, anticipates, estimates, expects, and words of similar import, constitute forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which could cause actual results to differ materially from those anticipated in these forward-looking statements. Among the key factors that could cause such differences are: fluctuations in oil prices, changes in oil and gas reservoir performance and political risks in the countries in which the company has operations.

We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable securities law.

The following discussion should be read in conjunction with the annual report for the year ended May 31, 2004.

Corporate Events

During the year ended May 31, 2005, the Company completed a private placement and issued 2,000,000 common shares at $6.75 per share for net proceeds of $12,825,000.

Subseqent to year end the Company also completed a private placement and issued 5,000,000 common shares at $7.60 per share. The net proceeds of approximately $37 million will be used for the development of the Oudeh field and Tishrine and Sheikh Mansour fields in Syria as well as for general working capital purposes.

The Company continued exploration and production operations in Egypt. In Syria, the Company continued production operations and commenced the process to assume operations under the new production contract at Tishrine and Sheikh Mansour.

Highlights include:

In Egypt:

- The Company tested three new oil discoveries at:

- Hoshia-1 at 620 barrels of oil per day ("bopd"), no water and 17 degrees API

- West Hoshia-1 at 300 bopd with a 40% watercut and 10 degrees API

- Fadl-1 was initially tested at 250 bopd, no watercut and 14 degrees API

The Company applied for development permits at all three new discoveries.

In Syria:

- The Company started the process of assuming operations of the new Tishrine - Sheikh Mansour fields.

- paid the US$ 1,300,000 signing bonus

- started the 90 day base production volume and operating costs measurement
period

- accessing the historic development and production history records

Results of Operations

The Company had a consolidated net loss for the fourth quarter and the twelve months ended May 31, 2005 of $1,356,000 ($0.036 per share) and $1,116,000 ($0.029 per share), compared to a consolidated net profit of $1,169,000 ($0.036 per share) and $199,000 net loss ($0.006 per share) for the same period in 2004.

For the twelve months ended May 31, 2005 revenue amounted to $7,917,000 compared to $7,042,000 for the same period of 2004. Revenue totaled $1,918,000 for the current quarter compared to $2,297,000 for the fourth quarter of 2004.

Sales of oil, reported on the consolidated statements of operations and deficit, derived entirely from the Hana field, Egypt amounted to $7,750,000 for the twelve months ended May 31, 2005, compared to $6,939,000 for the twelve months ended May 31, 2004.

Sales of oil from the Syria operations have been offset against oil and gas cost center. Please refer to note 7 (Incident Revenues).

The net back (sales of oil less production costs) on the Company's production at May 31, 2005 was $6,288,000 compared to $5,287,000 in the same period of 2004.

An amount of $1,721,000 (2004-$976,000) of exploration and development costs spent on unproved properties was excluded from the Egypt cost center and was used to calculate the depletion for the period. Subsequent to May 31, 2005, $1,164,000 was transferred from exploration and development cost to producing properties.

The average level of production and sale price in the year 2005 were higher than the production and sale price of 2004. As a result the sale of oil increased by $812,000.

Production costs increased from $437,000 in the three months ended May 31, 2004 to $624,000 in the current quarter and decreased from $1,652,000 in the twelve months ended May 31, 2004 to $1,462,000 in the same period of 2005. The decrease is mainly due to the successful workover program completed last year. Depletion charges increased from $24,000 in the fourth quarter of 2004 to $689,000 in the current quarter. For the twelve months ended May 31, 2005, depletion increased from $1,210,000 for the same period of 2004 to $1,665,000. The increase is due to the addition of the depletable cost of the Egyptian concession following the revision of future capital expenditure plans.

Interest income decreased by $26,000 in the current quarter from the previous year quarter and increased by $20,000 in the twelve months ended May 31, 2005 from the previous year period. This increase is due to surplus cash which was placed in short term deposits during the period.

Service income increased in the current quarter as the Company performed additional work as a joint venture operator in Egypt. As well, in the twelve months ended May 31, 2005 service income increased by $43,000 compared to the same period of 2004.

For the twelve month period ended May 31, 2005, total expenses were $5,906,000 compared to $4,646,000 in the same period of 2004.

Salaries and other benefits increased from $452,000 in the fourth quarter of 2004 to $688,000 in the current quarter and from $1,020,000 in the twelve months ended May 31, 2004 to $1,846,000 in the same period of 2005 as a result of the operations in the Syrian Arab Republic.

General and administration costs were almost the same in the twelve months ended May 31, 2004 and May 31, 2005.

The main reason for the decrease in interest and bank charges is the repayment of loans due to directors and a shareholder during 2004, in addition to the amortization of the deferred financing charge of $532,000 in year 2004.

During the current quarter, the Company expensed $1,138,000 compared to $74,000 in the prior year period for stock based compensation as the Company elected to apply the fair value method of accounting for stock options granted to directors, officers and employees on a prospective basis in accordance with the recommendations of the Canadian Institute of Chartered Accountants. During the current year, the Company expensed $1,352,000 (2004-$936,000) for stock based compensation as the Company adopted the provisions of CICA 3870 with respect to stock options granted to directors, officers and employees.

Travel costs decreased by $46,000 during the current quarter from the fourth quarter of 2004. However travel costs increased by $34,000 in the twelve months ended May 31, 2005 from the same period of 2004 due to expenses incurred by management to meet shareholders.

The Company's main operating investments are carried out in US dollars. Accordingly, the main exposure to currency exchange fluctuation is the conversion to equivalent Canadian dollars for reporting purposes. During the current quarter the Company reported a net foreign exchange gain of $463,000, compared to a net gain of $594,000 in the same period of 2004. For twelve months ended May 31, 2005 the net exchange loss was $619,000 compared to net gain of $731,000 in the same period of 2004.

Shareholder information and transfer agent expenses increased from $154,000 in the year ended May 31, 2004 to $226,000 for year ended May 31, 2005. The increase is mainly due to the expenses incurred by management to meet with shareholders and investors.

Reserve Additions

In Egypt during the current period the Company was conducting testing operations on 3 new discoveries at Hoshia, West Hoshia and Fadl. These fields will require additional appraisal testing and drilling. Once the development permits are granted by the Government of Egypt, reserves will be evaluated for these new fields under Canadian National Instrument 51-101 ("NI51-101") reporting regulations. The Company anticipates development lease approval prior to the new December 31, 2005 reporting year end.

For the year ended May 31, 2005, reserves for the Hana Field will be updated and disclosed in the annual report. During the current period the Company did not add new reserves by drilling or capital workovers in the Hana Field. However, the Company is in the process of obtaining an updated NI51-101 reserve report based on well performance, and will be net of production during the period.

Based on the new reserve report the depletion charges might change which would have an effect on the net result of the Company. The report is expected by mid-August 2005 and the effect would be included in May 31, 2005 annual report.

In Syria, the Company completed a work program required under the Concession Agreement with the Syrian Petroleum Company ("SPC"). In addition, the Company successfully drilled three wells on the Oudeh field. As at May 31, 2005, the Company succeeded in obtaining SPC's approval of oil sale invoices for the period January 2004 to May 2005 amounting to US$6,420,000 ($8,002,000). Please refer to note 7 Incidental Revenues.

For the year ended May 31, 2005, reserves for the Oudeh Field will be updated and disclosed in the annual report. The Company drilled 3 new horizontal wells over the period. The result of these wells, along with workovers and other capital projects will be incorporated in a May 31 year end NI51-101 reserves update for Oudeh.

The first part of the process to implement the production sharing contract at Tishrine-Sheikh Mansour was initiated. Pursuant to the contract, production sharing commences after:

- the initial base production rate, which belongs to the Government, is measured and agreed between the Company and the SPC; and

- the Company has completed 3 wells workover and 3 wells pump changes.

The Company anticipates completing this work to initiate production sharing at Tishrine-Sheikh Mansour during the period between May 31 and December 31, 2005. Reserves for Tishrine-Sheikh Mansour under NI51-101 reporting regulations will be estimated as of December 31, 2005.

Based on the new reserve report for Oudeh the depletion charges might change which would have an effect on the net result of the Company. The report is expected by mid-August 2005 and the effect would be included in May 31, 2005 annual report.

Financial Condition

As at May 31, 2005, total assets were $54,647,000 compared to $45,146,000 at May 31, 2004.

The Company had total liabilities of $5,080,000 as at May 31, 2005 compared to $9,336,000 at May 31, 2004.
The decrease is mainly due to the repayment of loans due to a shareholder of the Company.

Amounts payable and accrued liabilities at May 31, 2005 and at May 31, 2004 were almost the same.

The value of exploration and development stage properties amounts to $24,756,000 as at May 31, 2005 compared to $16,118,000 at May 31, 2004.

The Company's exploration and development stage properties comprise:



Oil and Gas cost centre
--------------------------------------------------------------------
May 31, 2005 May 31, 2004
------------------------------
Egypt 6,273,000 5,748,000
Syria 18,483,000 10,370,000
------------------------------
$ 24,756,000 $ 16,118,000
--------------------------------------------------------------------


During the current year, the Company invested $6,214,000 in Syria and $1,816,000 in Egypt. These additional oil and gas interest amounts were affected by depletion charges of $1,665,000. The Company invested $539,000 during the current year on property, plant and equipment, mainly to purchase new equipment for the Company's office in Syria and new vehicles for the Egypt operations.

The restricted cash at May 31, 2005 is mainly a pledged amount of US$9,000,000 ($11,349,000) against the issuance of a letter of guarantee in favor of the Syria Petroleum Company for the Tishrine and Sheikh Mansour blocks. The May 31, 2004 amount of US$2,000,000 ($2,724,000) represents a letter of guarantee in favour of SPC on the Oudeh block. This amount was released during the twelve month period.

At May 31, 2005, US$1,372,000 ($1,730,000) and May 31, 2004 US$1,820,000 ($2,479,000) were held by EGPC in respect of an advance associated with the exension of the Egyptian Concession Exploration License for a further period of two years ending May 31, 2006. The reduction is due to the release of US$448,000 during the year as a result of the exploration payments.

At May 31, 2005 amounts receivable and other assets of $5,397,000 (2004-$1,003,000) include trade receivable balances aggregating $4,848,000 (2004-$859,000) in respect of the production and delivery of oil. These trade receivables include $3,012,000 due from EGPC related to five months oil deliveries from the Hana field in Egypt and $1,836,000 due from SPC related to two months of oil deliveries from the Oudeh field in Syria. Also included is $747,773 receivable from SPC in respect of costs incurred in connection with base production from the Oudeh field, for which the Company has recorded an account payable to SPC for an equivalent amount.

In accordance with the terms of the agreements in Egypt and Syria, the Company sells all oil to EGPC and SPC respectively. Management do not believe that this concentration of credit risk will result in any loss to the Company.

Amounts receivable at May 31, 2005 also includes approximately $366,000 (2004-$10,000) due from working interest partners in Egypt.

During the current year the Company advanced $2,789,000 (2004-$284,000) to contractors in Syria for services and equipment relating to drilling and workover programs.

Inventory decreased from $1,377,000 at May 31, 2004 to $1,061,000 at May 31, 2005. This decrease is due to the drilling program in Egypt.

Prepaid expenses decreased from $216,000 in May 31, 2004 to $145,000 at May 31, 2005.

During the period the Company repaid all loans due to directors and a shareholder of the Company.

Contractual Obligations



As at May 31, 2005 the Company's principal contractual obligations
are as set out below:

--------------------------------------------------------------------
Expressed in thousands of
Canadian dollars Total Less than 1 year
--------------------------------------------------------------------
Operating Leases 5080 5080
--------------------------------------------------------------------
Purchase Obligations 823 823
--------------------------------------------------------------------
Total Contractual Obligations 5903 5903
--------------------------------------------------------------------


Liquidity and Capital Resources

As at May 31, 2005 the Company held a free cash amount of $5,322,000 compared to $20,684,000 at May 31, 2004. The decrease is mainly due to the provision of a letter of guarantee in the amount of US$9,000,000 ($11,349,000) to SPC for the Tishrine and Sheikh Mansour fields.

The Company had a positive working capital position of $24,311,000 at May 31, 2005 compared to a working capital of $19,441,000 at May 31, 2004.

Net cash flow from operating activities was $61,000 for the current quarter compared to $899,000 in 2004.

Net cash used in investing activities was $17,238,000 for the twelve months ended May 31, 2005 compared to $10,096,000 for the same period in 2004.

Share capital increased by $13,766,000. The increase is mainly due to the issuance of 2,000,000 common shares at $6.75 per share and the exercise of stock options.

The increase in contributed surplus of $1,108,000 is due to the adoption of the fair market value method of accounting for certain stock options granted.

Management considers that the cash generated from the Hana field, after providing for related capital expenditure, will continue to significantly contribute towards funding the Company's further exploration and development activities in Egypt.

The Company does not generate sufficient cash flow from operations to fund its entire exploration and development activities and has therefore relied upon the issuance of securities and the sale of concession interests to provide additional finance. The Company intends to continue to rely upon the issuance of securities and sale of concession interests to finance its activities to the extent that sufficient cash flow from operations is unavailable in the future. Accordingly, the Company's financial statements are presented on a going concern basis.

Looking forward, the Company's main focus will be to further develop its oil and gas interest in the West Gharib block in Egypt, to develop and enhance oil production and reserves from the Oudeh field in Syria and to assess the value and potential of the Tishrine-Sheikh Mansour blocks in Syria.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the period reported. The amounts recorded for depletion and the ceiling test are based on estimates of proved reserves, production rates, oil prices, future costs and other relevant assumptions. Actual results could differ from those estimates.

Environmental Regulation

Drilling for and production, handling, transporting and disposing of oil and gas and petroleum by-products are subject to extensive regulation under national and local environmental laws, including those of the countries in which the Company currently operates. In most instances, the applicable regulations relate to water and air pollution control, waste management, permitting requirements and restrictions on operations in environmentally sensitive areas such as wetlands, wildlife habitats and coastal areas. Environmental protection requirements have not, to date, had a significant effect on the capital expenditures, results of operations and competitive position of the Company. However, environmental regulations are expected to become more stringent in the future and costs associated with compliance are expected to increase. Any penalties imposed on the Company for non-compliance with environmental regulations could have a material adverse effect on the Company's business and results of operations.

Risks and Uncertainties

The Company's business is subject to all of the risks associated with exploration for, and the development, production and marketing of oil.

It is impossible to ensure that the exploration drilling program will result in commercial operations. In addition, revenue will remain substantially dependent upon prevailing prices of oil which are effected by factors beyond the control of the Company.

Research and Development

The Company does not have a research and development program. The Company does not rely on patents or technological licenses in any significant way in the conduct of its business.




TANGANYIKA OIL COMPANY LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in Canadian Dollars)

May 31 May 31
2005 2004
---- ----

ASSETS
Current Assets:
Cash and short-term deposits $ 5,321,958 $ 20,683,843
Restricted cash 12,141,364 2,724,000
Advance relating to
exploration commitment 1,730,298 2,478,840
Advances to Contractor 2,789,049 284,166
Amounts receivable and other assets 6,202,629 1,012,853
Inventory 1,060,513 1,377,261
Prepaid expenses 145,211 215,703
------------ ------------
29,391,022 28,776,666
------------ ------------
Long Term Assets:
Oil and gas interests 24,756,109 16,117,872
Property, plant and equipment,
net of accumulated depreciation
of $ 1,087,852 (2004 - $798,384) 500,293 251,142
------------ ------------
25,256,402 16,369,014
------------ ------------
$ 54,647,424 $ 45,145,680
------------ ------------
------------ ------------
LIABILITIES
Current Liabilities:
Amounts payable and accrued
liabilities $ 5,080,254 $ 5,147,249
Amounts due to directors - 347,889
Loan payable and advances due
to shareholder - 3,840,998

------------ ------------
5,080,254 9,336,136

SHAREHOLDERS' EQUITY
Share capital $ 79,838,325 $ 66,072,705
Contributed surplus 7,203,760 6,095,846
Deficit (37,474,915) (36,359,007)
------------ ------------
49,567,170 35,809,544
------------ ------------
$ 54,647,424 $ 45,145,680
------------ ------------
------------ ------------

Approved by the Board:

Gary Guidry John H. Craig
Director Director


TANGANYIKA OIL COMPANY LTD.
STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(In Canadian Dollars)

May 31, 2005
------------

Share Contributed
Capital Surplus Deficit Total
------- ------- ------- -----

As on 1 June 2004 66,072,705 6,095,846 (36,359,007) 35,809,544
Issue of shares 13,521,919 - - 13,521,919
Stock based
compensation
(options exercised
during the year)
Note 5 243,701 (243,701) - -
Loss for the year - - (1,115,908) (1,115,908)
Stock based
compensation - 1,351,615 - 1,351,615
----------------------------------------------
As at 31 May 2005 79,838,325 7,203,760 (37,474,915) 49,567,170
----------------------------------------------
----------------------------------------------

May 31, 2004
------------

Share Contributed
Capital Surplus Deficit Total
------- ------- ------- -----

As on 1 June 2003 34,687,988 5,159,958 (36,159,666) 3,688,280
Issue of shares 31,384,717 - - 31,384,717
Stock bassed
compensation - 935,888 - 935,888
Loss for the year - - (199,341) (199,341)

----------------------------------------------
As at 31 May 2004 66,072,705 6,095,846 (36,359,007) 35,809,544
----------------------------------------------
----------------------------------------------


TANGANYIKA OIL COMPANY LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Unaudited)
(in Canadian Dollars)

Three months ended May 31 Year ended May 31
2005 2004 2005 2004

Revenue:
Sale of oil $ 1,876,378 $ 2,261,254 $ 7,750,389 $ 6,938,825
Interest
income 17,701 43,907 102,139 81,512
Service
income 24,158 (7,779) 64,554 21,512
------------ ------------ ------------ ------------
1,918,237 2,297,382 7,917,082 7,041,849
------------ ------------ ------------ ------------
Cost of
oil sold:
Production
costs 623,813 437,212 1,461,983 1,651,610
Depletion 689,474 24,058 1,665,410 1,210,162
------------ ------------ ------------ ------------
1,313,287 461,270 3,127,393 2,861,772

Expenses:
Salaries
and other
benefits 688,420 452,178 1,846,331 1,019,804
Travel 47,044 92,878 192,548 158,308
General and
administration 125,568 385,874 632,107 621,248
Management
fees 54,000 50,000 198,000 185,000
Legal and
accounting 248,096 204,466 402,456 267,183
Interest
and bank
charges 19,160 116,791 147,610 712,919
Amortization
of deferred
finance
charge - - - 532,405
Shareholder
information
and transfer
agent 49,158 56,340 226,210 153,922
Listing in
Stockholm - 41,567 - 636,866
Stock based
compensation 1,137,644 74,343 1,351,615 935,888
Depreciation 54,768 53,193 289,468 154,180
Foreign
exchange
(gain)/loss (463,205) (593,805) 619,252 (731,347)
------------ ------------ ------------ ------------
1,960,653 933,825 5,905,597 4,646,376

Write-back of
oil and gas
concession
interest - (266,958) - (266,958)
------------ ------------ ------------ ------------
Earnings /
(loss) for
the year (1,355,703) 1,169,245 (1,115,908) (199,341)

Deficit,
beginning
of year (36,119,212) (37,528,252) (36,359,007) (36,159,666)
------------ ------------ ------------ ------------
Deficit,
end of
year $(37,474,915) $(36,359,007) $(37,474,915) $(36,359,007)
------------ ------------ ------------ ------------
Earnings /
(loss) per
share
Basic $ (0.036) $ 0.036 $ (0.029) $ (0.006)
Diluted $ (0.035) $ 0.036 $ (0.028) $ (0.006)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted
average
number of
shares
outstanding
Basic 38,138,151 32,273,394 38,138,151 32,273,394
Diluted 39,172,196 32,758,199 39,172,196 32,758,199
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

TANGANYIKA OIL COMPANY LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in Canadian Dollars)

Three Months ended May 31 Year ended May 31
2005 2004 2005 2004
------------ ------------ ------------ ------------
OPERATING
ACTIVITIES
(Loss)/
earnings for
the year $ (1,355,703) $ 1,169,245 $ (1,115,908) $ (199,341)

Adjustment
for items not
affecting
cash:
Stock based
compensation 1,137,644 74,343 1,351,615 935,888
Amortization
of deferred
finance
charge - - - 532,405
Interest
expense - (7,118) 109,325 571,717
Depreciation 54,768 53,193 289,468 154,180
Depletion 689,474 24,058 1,665,410 1,210,162
Unrealised
foreign
exchange
(gain)/loss (465,250) (147,658) 9,882 (107,283)
Write back
of oil
and gas
concession
interests - (266,958) - (266,958)
------------ ------------ ------------ ------------
60,933 899,105 2,309,792 2,830,770
Changes in
non-cash
operating
working
capital:
Increase
(decrease)
in amounts
receivable
and other
assets. (1,165,448) 1,730,599 (7,747,880) 909,257
(Increase) /
decrease in
inventory 115,470 (592,763) 360,087 (1,158,918)
(Increase)
decrease
in prepaid
expenses (29,240) 43,057 70,492 (207,850)
Decrease
in amount
due to
directors (12,818) (212,675) (354,290) (212,675)
(Decrease) /
increase
in amounts
payable and
accrued
liabilities 1,378,864 (131,762) (2,340,184) (546,924)
------------ ------------ ------------ ------------
Net
(decrease)/
increase in
non-cash
operating
working
capital. 286,828 836,456 (10,011,775) (1,217,110)
------------ ------------ ------------ ------------
Cash flow
(used in) /
from
operating
activities 347,761 1,735,561 (7,701,983) 1,613,660
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

INVESTING
ACTIVITIES
Investment
in oil
and gas
interests (4,736,766) (2,677,499) (16,032,469) (7,307,719)
Incidental
revenues
from Syria 2,710,642 - 8,002,011 -
Investment
in property,
plant and
equipment (132,797) (152,465) (538,619) (360,941)
Pledged
deposits
for bank
guarantee
issued (999,364) (23,265) (12,141,364) 51,975
Deposit in
lieu of
guarantee for
exploration
license - - 2,724,000 -
Advance
relating to
exploration
commitment - (2,478,840) - (2,478,840)
Release of
exploration
commitment 748,542 - 748,542 -
------------ ------------ ------------ ------------
Cash used in
investing
activities (2,409,743) (5,332,069) (17,237,899) (10,095,525)
FINANCING
ACTIVITIES
Issuance
of common
shares 73,709 91,489 13,521,919 31,384,717
Repayment
of loan 30,309 27,790 (3,943,922) (2,744,210)
------------ ------------ ------------ ------------
Cash flow from
financing
activities 104,018 119,279 9,577,997 28,640,507
------------ ------------ ------------ ------------

INCREASE /
(DECREASE)
IN CASH AND
SHORT-TERM
DEPOSITS
DURING THE
YEAR. (1,957,964) (3,477,229) (15,361,885) 20,158,642
Beginning
of year 7,279,922 24,161,072 20,683,843 525,201
------------ ------------ ------------ ------------
End of
year $ 5,321,958 $ 20,683,843 $ 5,321,958 $ 20,683,843
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED May 31, 2005
(Unaudited)

1. Significant Accounting Policies

The consolidated financial statements of Tanganyika Oil Company Ltd. (the "Company") are prepared in accordance with accounting principles generally accepted in Canada, except as discussed in Note 3 to the Company's consolidated financial statements for the years ended May 31, 2004 and 2003 and have been prepared on a basis consistant with the last Annual Report.

These consolidated financial statements do not contain all of the information required by generally accepted accounting principles for annual financial statements and therefore should be read in conjunction with the consolidated financial statements included in the Company's 2003 Annual Report.

2. Accounting Change

In 2003 the Company elected to apply the fair value method of accounting for stock options granted to directors, officers and employees on a prospective basis in accordance with the recommendation of the Canadian Institute of Charted Accountants. Accordingly, effective June 1, 2003 the fair value of all stock options granted is recorded as a charge to operations and a credit to contributed surplus. Options which vest over time are charged to operations over the vesting period. Any consideration paid on the exercise of options, plus a proportionate amount of the contributed surplus recorded on the granting of the options, is credited to share capital. The Company uses the Black-Scholes option value method to determine fair values.

During the fourth quarter, the Company has, prospectively from the start of the year, adopted the provisions of CICA 3870 with respect to stock based compensation for employees. The effect of the adoption was to reduce the earnings previously reported for the first three quarters by $935,888.

3. Contingencies

The Company is a defendant in a lawsuit filed for non-payment of rent and abandonment of premises in March 1990. This event took place prior to the change in control of the Company and current management believe that the claim is without merit. The amount of the claim is $513,000 including costs.

4. Dividend Policy

The Company has not paid dividends to date on its common shares and has no plan to pay dividends in the near future. The Company dividend policy is to give funding priority to ongoing exploration and development projects and other immediate capital requirments prior to distributing dividends to the shareholder.

The decision to pay dividends will be based on the Company's earnings and financial requirments and other factors that the Company's Board of Directors may consider appropriate in the circumstances.

5. Stock Based Compensation Plans

During the year ended May 31, 2004, the Company elected to apply the fair value method of accounting for stock options granted to directors, officers and employees on a prospective basis in accordance with the recommendations of the Canadian Institute of Chartered Accountants. Accordingly, effective June 1, 2003 the fair value of all stock options granted is recorded as a charge to operations and a credit to contributed surplus. Options which vest over time are charged to operations over the vesting period. Any consideration paid on the exercise of options, plus a proportionated amount of the contributed surplus recorded on the granting of the options, is credited to share capital. The Company uses the Black-Scholes option value method to determine fair values.

6. Restricted Cash

At May 31, 2005 and 2004 the Company has provided cash security for certain letters of guarantee issued to third parties. The letters of guarantee in connection with development and production agreements with the Government of the Syrian Arab Republic and the Syrian Petroleum Company amount to US$9 million ($11,349,000) at May 31, 2005 and US$2 million ($2,724,000) at May 31, 2004. The remaining letters of guarantee were issued in connection with certain supplies required for the Egyptian operations.

7. Incidental Revenues

During the twelve months ended May 31, 2005, the total sales invoices for oil in Syria from January 2004 to May 2005 amounted to US$6,420,000 ($8,002,000). According to our accounting policy under Oil and Gas interests, incidental revenues from the production of oil and gas are offset against capitalized costs of the related cost center until quantities of proven reserves are determined and commercial production has commenced. This amount was offset against the Syria cost center. However, we anticipate reporting proven and probable reserves for the Oudeh field in Syria effective May 31, 2005 in the annual report and these sales will be reported as revenues instead of an offset to capital costs.



TANGANYIKA OIL COMPANY LTD.
SUPPLEMENTARY INFORMATION
(Unaudited)

1. FOR THE CURRENT FISCAL YEAR-TO-DATE

(a) Oil and Gas Interest

EGYPT May 31, 2005 May 31, 2004
------------- -------------
Drilling $ 10,971,000 $ 9,255,000
Production facilities 1,742,000 1,517,000
Concession Acquisition 858,000 814,000
Seismic Acquisition 3,185,000 3,185,000
Seismic Interpretation and
Reprocessing 513,000 363,000
Others 271,000 216,000
------------- -------------
17,540,000 15,350,000
Less depletion (9,962,000) (8,297,000)
Write-down/ imperments (1,305,000) (1,305,000)
------------- -------------
Sub-Total 6,273,000 5,748,000

SYRIA
Concession Acquisition $ 2,603,000 $ 964,000
Seismic Interpretation and
Reprocessing 20,000 112,000
Drilling and work over 15,768,000 9,386,000
------------- -------------
Sub-Total $ 18,482,000 $ 10,370,000
------------- -------------
TOTAL $ 24,756,000 $ 16,118,000
------------- -------------
------------- -------------

(b) General and Administrative Expenses

General and administrative expenses comprise the following:

Three Months Ended May 31 Year ended May 31
----------------------- -----------------
2005 2004 2005 2004
---- ---- ---- ----
Rent 43,870 54,105 82,802 138,454
Telephone & Fax 19,536 22,218 123,577 54,371
Courier 1,497 1,175 6,397 5,916
Consultants - 178,406 133,956 207,100
General off. exp. 33,201 111,205 200,003 177,267
Vehicle expenses 24,934 18,765 82,172 36,703
Others 2,530 - 3,200 1,437
--------- --------- --------- ---------
$ 125,568 $ 385,874 $ 632,107 $ 621,248
--------- --------- --------- ---------
--------- --------- --------- ---------

2. Reconciliation of shareholders' equity between CGAAP and
IFRS - in Canadian dollars

May 31, 2005 May 31, 2004
------------ ------------
Shareholders' equity as per CGAAP 49,567,170 35,809,544
Adjustments:
Equity adjustment (brought forward) 1,338,747 1,650,468
Effect of asset impairment (6,984,179) (511,062)
------------ ------------
Net adjustment (5,645,432) 1,139,406
------------ ------------
Shareholders' equity in accordance
with IFRS 43,921,738 36,948,950
------------ ------------
------------ ------------

3. Reconciliation of profit between CGAAP and IFRS -
in Canadian dollars

Three months ended May 31 Year ended May 31
2005 2004 2005 2004
---- ---- ---- ----
Profit/ (loss) as
per CGAAP (1,355,703) 1,169,245 (1,115,908) (199,341)
Adjustments:
Effect of asset
impairment (6,194,871) (350,551) (6,984,179) (311,721)
Net proceeds from
sale of oil (3,646,957) - - -
-------------------------------------------
Net adjustment (9,841,828) (350,551) 6,984,179 (311,721)
-------------------------------------------
Net results in
accordance with IFRS (11,197,531) 818,694 8,100,087 (511,062)
-------------------------------------------
-------------------------------------------

4. Other information:

- The registered office of the Company is in Vancouver, Canada.
- The corporate number of the Company is 318368-8.
- This report has not been subject to review by the Company's
auditors.
- The proposed date for the Annual Meeting of Shareholders of the
Company is October 7, 2005 and will be held at the Company's
offices in Vancouver, Canada.
- Gary Guidry and John Craig, directors of the Company, signed
these statements on July 29, 2005.


5. As at May 31, 2005:

(a) The authorized share capital of the Company consisted of an unlimited number of common shares without par value of which 39,129,641 were issued and outstanding. Please refer to note 1 on statement of changes in equity. As at May 31, 2005, the share capital amounted to $79,838,325.

(b) Incentive stock options outstanding and held by directors, officers and employees of the Company are as follows:



Number of Shares Exercise Price per Share Expiry Date
50,000 $ 5.25 December 11, 2005
29,000 $ 6.50 April 27, 2006
65,000 $ 7.25 July 29, 2006
325,000 $ 3.75 October 8, 2006
12,500 $ 7.20 October 13, 2006
40,000 $ 3.90 October 28, 2006
575,000 $ 6.90 May 4, 2007
54,601 $ 1.95 June 29, 2008

(c) The directors of the Company are:
Lukas H. Lundin
Gary Guidry
Mamdouh Nagati
Keith Hill
William A. Rand
John H. Craig
Bryan Benitz

The officers of the Company are:
Lukas H. Lundin, Chairman
Gary Guidry, President & C.E.O.
Mamdouh Nagati, Executive Vice President
Hazem Farid, Controller/Treasurer
Jean R. Florendo, Corporate Secretary

6. SEGMENTED INFORMATION

Year ended May 31, 2005

Syria Egypt Corporate Total
$ $ $ $
Sale of oil - 7,750,389 - 7,750,389
Interest income 3,924 - 98,215 102,139
Service income - 64,554 - 64,554
Production cost and
depletion - 3,127,393 - 3,127,393
Depreciation 251,906 37,562 - 289,468
Foreign exchange
(gain)/loss (275,593) 291,875 602,970 619,252
Other expenses 1,795,376 249,140 2,952,361 4,996,877
----------- ----------- ----------- -----------
Segment (profit)
loss $ 1,767,765 $(4,108,973)$ 3,457,116 $ 1,115,908
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Other non-cash
items - Interest
expense $ - $ - $ 109,325 $ 109,325
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Segment assets $26,277,815 $15,535,004 $12,834,605 $54,647,424
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Segment
expenditures:
--------------
Oil and gas
interests $ 6,214,047 $ 1,816,411 - $ 8,030,458
Property, plant and
equipment $ 391,394 $ 147,225 - $ 538,619
----------- ----------- ----------- -----------
$ 6,605,441 $ 1,963,636 $ - $ 8,569,077
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Year ended May 31, 2004

Tanzania Syria Egypt Corporate Total
$ $ $ $ $
Sale of oil - - 6,938,825 - 6,938,825
Interest
income - 1,259 - 80,253 81,512
Service
income - - 21,512 - 21,512
Production
cost and
depletion - - 2,861,772 - 2,861,772
Depreciation - 78,045 76,135 - 154,180
Foreign
exchange
(gain)/
loss (167,130) (95,835) (37,619) (430,763) (731,347)
Other
expenses 8,067 1,161,792 281,641 3,772,043 5,223,543
Write back
of oil and
gas
Concession
interests (266,958) - - - (266,958)
--------- ----------- ----------- ----------- -----------
Segment
(profit)
loss (426,021) 1,142,743 (3,778,408) 3,261,027 199,341
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Other non-
cash
items -
Interest
expense - - - 571,717 571,717
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------

Segment
assets $ 812 $12,197,591 $12,178,780 $20,768,497 $45,145,680
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------

Segment
expend-
itures:
--------
Oil and gas
interests - 6,405,551 902,168 - 7,307,719
Property,
plant and
equipment - 329,187 31,754 - 360,941
--------- ----------- ----------- ----------- -----------
$ - $ 6,734,738 $ 933,922 $ - $ 7,668,660
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------

Three months ended May 31, 2005

Syria Egypt Corporate Total
$ $ $ $
Sale of oil - 1,876,378 - 1,876,378
Interest income 825 - 16,876 17,701
Service income - 24,158 - 24,158
Production cost and
depletion - 1,313,287 - 1,313,287
Depreciation 24,735 30,033 - 54,768
Foreign exchange
(gain)/loss 379,459 (143,872) (698,792) (463,205)
Other expenses 489,163 63,312 1,816,615 2,369,090
----------- ----------- ----------- -----------
Write back of oil
and gas
Segment (profit)
loss $ 892,532 $ (637,776)$ 1,100,947 $ 1,355,703
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Other non-cash
items - Interest
expense $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Segment assets $ 3,485,816 $ 1,419,929 $(3,334,896)$ 1,570,849
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Segment
expenditures:
--------------
Oil and gas
interests $(3,636,065)$ 370,820 - $(3,265,245)
Property, plant and
equipment $ 28,672 $ 104,125 - $ 132,797
----------- ----------- ----------- -----------
$(3,607,393)$ 474,945 $ - $(3,132,448)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------


Three months ended May 31, 2004

Tanzania Syria Egypt Corporate Total
$ $ $ $ $
Sale of oil - - 2,261,254 - 2,261,254
Interest
income - 293 - 43,614 43,907
Service
income - - (7,779) - (7,779)
Production
cost and
depletion - - 461,270 - 461,270
Depreciation - 62,886 (9,693) - 53,193
Foreign
exchange
(gain)/
loss (167,130) (51,507) (76,788) (298,380) (593,805)
Other
expenses 8,067 619,135 67,160 780,075 1,474,437
Write back
of oil and
gas (266,958) - - - (266,958)
Concession
interests
--------- ----------- ----------- ----------- -----------
Segment
(profit)
loss $(426,021)$ 630,221 $(1,811,526)$ 438,081 $(1,169,245)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Other
non-cash
items -
Interest
expense $ - $ (115,689)$ - $ 108,571 $ (7118)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------

Segment
assets $ 812 $ 6,001,596 $ 2,291,713 $(4,469,871)$ 3,824,250
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------

Segment
expend-
itures:
--------
Oil and gas
interests $ - $ 2,616,899 $ 60,600 - $ 2,677,499
Property,
plant and
equipment $ - $ 149,464 $ 3,001 - $ 152,465
--------- ----------- ----------- ----------- -----------
$ - $ 2,766,363 $ 63,601 $ - $ 2,829,964
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------

TANGANYIKA OIL COMPANY LTD.

Key Data

Three months ended May 31 Year ended May 31
2005 2004 2005 2004
---- ---- ---- ----
Return on equity, %(1) -3.18% 5.92% -2.61% -1.01%
Return on capital
employed, %(2) -3.03% 5% 81.11% 1%
Debt/equity ratio, %(3) 0% 12% 4.225% 12%
Equity ratio, %(4) 91% 79% 91% 79%
Share of risk
capital, %(5) 91% 79% 91% 79%
Interest of coverage
ratio, %(6) 0% -16327% -921% 65%
Operating cash flow/
interest expenses, %(7) 0% -25516% 5811% 929%
Yield, %(8) 0% 0% 0% 0%


(1) Return on equity is defined as the Company's net results divided
by average shareholders' equity (the average over the financial
period).
(2) Return on capital employed is defined as the Company's profit
before tax and minority interest plus interest expenses plus/less
exchange differences on financial loans divided by the total
average capital employed (the average balance sheet total less
non interest-bearing liabilities).
(3) Dept/equity ratio is defined as the Company's interest-bearing
liabilities in relation to shareholders' equity.
(4) Equity ratio is defined as the Company's shareholders' equity,
including minority interest, in relation to balance sheet total.
(5) Share of risk capital is defined as the sum of the Company's
shareholders' equity and deferred taxes, including minority
interest, in relation to balance sheet total.
(6) Interest coverage ratio is defined as the Company's profit
before tax and minority interest plus interest expenses plus/less
exchange differences on financial loans divided by interest
expenses.
(7) Operating cash flow/interest ratio is defined by the Company's
operating income less production costs and less current taxes
divided by the interest charge for the financial period.
(8) Yield is defined as divided in relation to quoted share price at
the end of the financial period.

Data per share

Three months ended May 31 Year ended May 31
2005 2004 2005 2004
---- ---- ---- ----
Shareholders'
equity, CAD(1) 1.27 0.97 1.27 0.97
Operating cash flow,
CAD(2) 0.03 0.06 0.17 0.16
Cash flow used in
operations(3) 0 0.03 0.06 0.0877
Earnings(4) (0.036) 0.036 (0.029) (0.006)
Earnings (fully
diluted)(5) (0.035) 0.036 (0.028) (0.006)
Dividend 0 0 0 0
Quoted price at the
end of the financial
period 6.7 7.05 6.7 7.05
P/E-ratio(6) (188) 195 (229) (1,141)
Number of shares at
financial period end 39,129,641 36,891,166 39,129,641 36,891,166
Weighted average number
of shares for the
financial period(7) 38,138,151 32,273,394 38,138,151 32,273,394
Weighted average number
of shares for the
financial period
(fully diluted)(5),(7) 39,172,196 32,758,199 39,172,196 32,758,199


(1) Shareholders' equity per share defined as the Company's equity
divided by the number of shares at period end.
(2) Operating cash flow per share defined as the Company's operating
income less production costs and less current taxes divided by
the weighted average number of shares for the financial period.
(3) Cash flow from operations per share defined as cash flow from
operations in accordance with the consolidated summarized cash
flow statements divided by the weighted average number of shares
for the financial period.
(4) Earnings per share defined as the Company's net result divided
by the weighted average number of shares for the financial
period.
(5) Earnings per share defined as the Company's net result
divided by the weighted average number of shares for the
financial period after considering the dilution effect of
outstanding options and warrants.
(6) P/E-ratio defined as quoted price at the end of the period
divided by earnings per share.
(7) Weighted average number of shares for the financial period is
defined as the number of shares at the beginning of the
financial period with new issue of shares weighted for the
proportion of the period they are in issue.



Contact Information

  • Tanganyika Oil Company Ltd.
    Lukas Lundin
    (604) 689-7842
    (604) 689-4250 (FAX)
    or
    Tanganyika Oil Company Ltd.
    Sophia Shane
    (604) 689-7842
    (604) 689-4250 (FAX)
    www.Tanganyikaoil.com