TEMPEST ENERGY CORP.
TSX : TMY.A
TSX : TMY.B

TEMPEST ENERGY CORP.

August 11, 2005 20:21 ET

Tempest Energy Corp. Announces Second Quarter Results and Asset Sale

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Tempest Energy Corp. (TSX:TMY.A) (TSX:TMY.B)

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.



SECOND QUARTER REPORT
For the six months ended June 30, 2005
------------------------------------------------------------------------
Operating and Financial Highlights

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Operating Results 2005 2004 2005 2004
------------------------------------------------------------------------
Production
Crude oil and NGLs
(bbls/d) 1,536 1,461 1,496 1,407
Natural gas (mcf/d) 7,611 14,409 8,486 11,945
-----------------------------------------------
Combined (boe/d @ 6:1) 2,804 3,862 2,911 3,398

Realized Product Prices $ $ $ $
Crude oil and
NGLs ($/bbl) 59.71 44.85 56.61 42.19
Natural gas ($/mcf) 7.43 7.11 7.20 6.71
-----------------------------------------------
Combined average
($/boe @ 6:1) 52.86 43.80 50.09 41.10

------------------------------------------------------------------------
Financial Results
($ except share data) $ $ $ $
Petroleum and natural
gas sales 13,487,057 15,393,517 26,390,883 25,419,746

Funds flow from
operations 5,837,183 8,762,816 11,608,055 14,109,490
Per basic share 0.28 0.47 0.55 0.75
Per diluted share 0.28 0.46 0.55 0.74

Net income 445,282 1,626,402 734,984 2,581,398
Per basic share 0.02 0.09 0.03 0.14
Per diluted share 0.02 0.09 0.03 0.14

Working capital
(deficit) (46,803,688)(1)(35,014,404)(46,803,688)(1)(35,014,404)

Capital
expenditures 5,118,560 4,103,528 27,444,894 28,391,566

Shareholders'
equity 59,848,806 47,674,076 59,848,806 47,674,076

Shares outstanding
Class A 19,395,480 17,440,319 19,395,480 17,440,319
Class B 653,476 653,476 653,476 653,476
Options 1,809,000 2,006,704 1,809,000 2,006,704

Weighted shares
outstanding
Class A 19,327,779 17,410,319 19,271,318 17,401,088
Class B 653,476 653,476 653,476 653,476
Options 1,773,844 2,021,290 1,666,762 2,038,228

Basic Shares
(weighted) 21,070,382 18,730,473 21,013,921 18,721,242
Diluted Shares
(weighted) 21,212,105 18,998,833 21,296,806 19,025,528
------------------------------------------------------------------------


(1) Asset sale effective July 1, 2005 reduced this amount to
approximately $35 million as of that date.


MESSAGE TO SHAREHOLDERS

Q2 2005 Highlights:

- Tempest's Board of Directors announced on May 5, 2005 that the Board is reviewing strategic alternatives that may be available to the Company to enhance shareholder value;

- Second quarter production averaged 2,804 boe per day, weighted 55 percent to crude oil;

- Funds flow totalled $5.8 million or $0.28 per basic share;

- Operated the drilling of two multi-leg horizontal oil wells at Chipman and re-entered one well (.375 net) at Tempest's new West Five exploration area;

- Interpreted and high-graded drilling locations on 240 km2 of new 3D seismic; and

- Completed an asset sale, effective July 1, 2005, generating net proceeds of $11.4 million, reducing the Company's debt and working capital deficiency as at July 1 to approximately $35 million.

Strategic Alternatives - Process Update

On May 5, 2005 Tempest's Board of Directors announced that it is reviewing strategic alternatives that may be available to the Company to enhance shareholder value. To reduce the working capital deficit Tempest conducted a market sale of its Looma/Joarcam property, which was identified as a non-core property suitable for divestiture. The sale closed on July 27 with an effective date of July 1, 2005.

The net proceeds of $11.4 million reduced Tempest's combined and reduced debt and working capital to approximately $35 million as of that date. This sale enhances the Board of Directors consideration of all alternatives in a comprehensive and timely manner.

Reserves and Net Asset Value

As Tempest disclosed with its report for the first quarter of 2005, the Company's independent reserves evaluators provided a reserves update effective May 1, 2005. At that date Tempest estimated its net asset value at $5.00-$5.30 per diluted share (discounted at NPV 10 percent and 8 percent, respectively). This net asset value is exclusive of value attributable to Tempest's extensive inventory of development, exploitation and exploration opportunities and does not consider recent drilling successes.

Operations

Northern Area

In Q2 Tempest prepared its five (4.2 net) well summer drilling program at Red Earth. Two wells were spud in early August and all five wells are expected to be completed by the end of Q3. Four (3.4 net) of these wells are high-impact development locations with one (0.8 net) significant exploration location. Additionally, Tempest may drill 5 (2.5 net) joint venture wells prior to year-end at Red Earth.

During Q2 Tempest's partner converted one (0.7 net) producing well into a water injector for pressure maintenance purposes. A Tempest-operated battery and full waterflood scheme covering the entire pool are planned to commence following additional pool delineation work.

Tempest's 22 (13 net) wells at Red Earth currently produce approximately 550 bbls per day net of 40 degrees API oil. Three key wells with higher production capability are currently restricted under Maximum Allowable Rates (MRL) by the provincial regulator. Once these wells have retired their over-production an additional 110 bbls per day will come back on-stream, yielding 660 bbls per day. The MRLs have no impact on reserves. Tempest's waterflood scheme; planned for the second half of 2006; combined with Good Production Practices (GPP) regulatory approvals, are expected to add 200-300 bbls per day of production at Red Earth. This rate could be further augmented by the drilling program described above.

Red Earth remains a long-term production growth area for Tempest. The Company has identified a further 16 (11.2 net) development locations and 20 (13.5 net) exploitation locations. This is primarily a winter-access area and Tempest currently anticipates drilling 15 (10 net) locations in the 2005-2006 winter season.

Central Area Natural Gas

Throughout the first half of 2005 Tempest prepared an extensive, carefully selected natural gas exploration drilling program in the Central Area, supported by 213 km2 of new 3-D seismic. To date in Q3 Tempest has drilled three (3.0 net) wells. Two, 3D-seismic-defined wells made natural gas discoveries while the other well, drilled on an exploration lead, was abandoned. The two wells will be on-stream by the fourth quarter and will add an estimated 2.0 mmcf per day of natural gas production. Given these favourable results, Tempest anticipates further natural gas opportunities in this proven multi-zone region. The Company currently plans to drill a number of key, high-graded natural gas targets before year-end.

Central Area Oil

Central Area oil production was stable in Q2, averaging 759 bbls per day. At the end of Q2 Tempest successfully drilled an additional two horizontal infill wells. These wells were both completed in Q3 and are now tied-in and on production. The Company is receiving very favourable pricing from this property, approximately midway between Edmonton light and Bow River heavy. The Company is continuing to follow several leads, enhanced with new 3-D seismic, for oil opportunities in the Central Area.

Emerging West Five Exploration Areas

During Q2 2005 the Company tested its second exploration well at Cygnet in its West Five multi-zone exploration area. Two (1.4 net) further wells were drilled in Q3 and all four wells are expected to be tied in by October 1, adding an estimated 500 mcf per day net to Tempest's production. The Company has more than 15 sections of contiguous land in the area for follow-up development and exploration.

West Central Farm-In

In Q1, Tempest negotiated a multi-section farm-in and option agreement with a large U.S. independent energy company to re-enter and re-complete a potential bypassed pay zone. This operation was successfully completed in Q2, earning Tempest the related exploration lands and potentially establishing a new West Five core area. One (.38 net) additional well was drilled in Q3.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis is a review of operations, current financial position and outlook for Tempest Energy Corp. for the three- and six-month periods ended June 30, 2005. It should be read in conjunction with the first quarter 2005 report, the 2004 Annual Report and the audited financial statements and related notes for the year ended December 31, 2004. These discussions are on a consolidated basis and are referred to as "Tempest" or "the Company", reflecting the combined totals of Tempest Energy Corp. and its wholly-owned subsidiaries 951554 Alberta Ltd. and Point Bar Petroleums Ltd., as well as their combined partnership arrangement, the Tempest Energy Production Partnership.

Statements in this document may contain forward-looking information. Estimates provided for 2005 and beyond are based on assumptions of future events, and actual results could vary significantly from these estimates. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. Events or circumstances may cause actual results to differ materially from those predicted as a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company. The reader is cautioned not to place undue reliance on this forward-looking information. Additional information relating to Tempest is available at www.sedar.com and on the Company's website www.tempestenergy.com.



2005 DRILLING ACTIVITY
------------------------------------------------------------------------
Exploration Development Total Success Average
Gross Net Gross Net Gross Net Rate W.I.
------------------------------------------------------------------------
Q1 5.0 4.0 7.0 5.2 12.0 9.2 75% 77%
Q2 0.0 0.0 2.0 2.0 2.0 2.0 100% 98%
------------------------------------------------------------------------
Total 5.0 4.0 9.0 7.2 14.0 11.2 79% 80%
------------------------------------------------------------------------
------------------------------------------------------------------------


Production

Production in Q2 averaged 2,804 boe per day, of which 55 percent or 1,536 bbls per day was crude oil. Production decreased by 27 percent from the same period last year, and was down by 7 percent from 3,019 boe per day in Q1 2005. The decrease was mainly as a result of regulatory restrictions on high-rate oil wells at Red Earth and the full impact of natural gas production decline at Otter. On a year-to-date basis higher production from light oil at Red Earth was more than offset with declines from Otter as Tempest produced 2,911 boe per day down from last years to date production of 3,398 boe per day.

By operating region, Northern Area production reached 1,050 boe per day in Q2 2005 (consisting of 777 bbls per day of crude oil and 1.6 mmcf per day of natural gas) down from 2,049 boe per day (24 percent oil-weighted) in Q2 2004. Central Area production during Q2 2005 averaged 1,754 boe per day (of which 57 percent was natural gas), down from 1,813 boe per day (47 percent natural gas-weighted) in Q2, 2004.

Light oil production additions at Red Earth increased Tempest's light oil weighting to almost 25 percent in Q2. Tempest anticipates Q3 production will be impacted by the sale of Looma/Joarcam, regulatory restrictions in Red Earth and planned maintenance at the Chipman oil battery offset by recent drilling additions.

Revenue

Tempest's revenues in Q2 were driven by decreased production volumes more than offset by oil and natural gas price gains. Revenues of $13.5 million were generated 38 percent by natural gas sales and 62 percent by crude oil sales. Q2 revenues were up by 5 percent from $12.9 million in Q1 2005 but down by 12 percent from $15.4 million in Q2 2004. On a year to date basis, Tempest revenues were up 4% to $26.4 million from last years $25.4 million, again as price gains more than offset production declines.

In Q2 Tempest realized a loss of $13,545 (Q2 2004 - nil) on natural gas hedging. This was based on 5,000 GJs from April to June on a floor price of $6.21 per GJ, the sale of a $7.00 per GJ call and the purchase of an $8.68 per GJ call. The gas hedge expired in July 2005 and at June 30, 2005 Tempest had an unrealized mark-to-market loss of $6,429. The Company has no hedging in place at this date.

Prices

All of Tempest's oil production and approximately one third of its natural gas production was sold into the spot market during Q2 and the year to date. Combined realized average prices were up by 21 percent to $52.86 per boe in Q2 2005 from $43.80 per boe in Q2 2004. Realized oil prices increased by 33 percent while natural gas prices rose by 5 percent over Q2 2005.

The increase in oil price reflects the strength of benchmark WTI, which gained 40 percent on a year-over-year basis to average US$51.51 per bbl. In addition Bow River heavy was up by 11 percent to average Cdn$39.89 bbl in Q2 2005 and Alberta spot natural gas rose by 7 percent to $7.00 per mcf in the same period. There was also an increase in the Canada/U.S. dollar exchange rate, which rose to a value of US$0.8098 from US$0.7477 in Q2 2004, which had a slightly negative impact to Tempest.

Royalties

Royalties for Q2 were $2.2 million compared to $3.5 million in the same period last year. The average royalty rate in the quarter was 16 percent of revenues, versus 23 percent in the same period last year. On a year to date basis royalties were $4.2 million compared to last years $5.4 million. Both periods declined as a result of lower per well production rates and royalty holidays on some new Northern Area oil wells. The balance of 2005 is expected to yield an average royalty rate of approximately 20-25 percent of revenues.

Operating Costs

Operating costs in Q2 were $3.3 million or $12.86 per boe, up moderately from the $11.22 per boe in Q1 and up from $3.99 per boe in Q2 2004.Operating costs on a year to date basis were up to $6.3 million from $2.8 million in 2004. These costs were higher as a result of reduced production at Otter, the abnormally wet spring in Alberta, the increase in Tempest's oil weighting, and due to generally higher costs arising from the intense levels of industry activity. Going forward Tempest's transition towards oil-weighted production is anticipated to include higher average operating costs per unit of production. Tempest anticipates per unit operating costs will reduce as production increases through the fourth quarter and into Q1, 2006.

Transportation Costs

Transportation costs are comprised of services related to moving production to sales points, including emulsion hauling, pipeline tolls and third-party or custom processing charges. Tempest's transportation costs per unit of production averaged $2.26 per boe in Q2, up from $1.81 per boe in Q2 2004. 2005 year to date costs were $1.96 up from $1.32 in the same period last year. These increases are attributable to Tempest's production weighting shifting towards crude oil, incurring correspondingly higher emulsion-hauling charges. Tempest anticipates transportation costs to remain in the range of $2.00 per boe of production through year-end.



Corporate Average Netbacks
($ per boe except production figures)
------------------------------------------------------------------------
% Year to Year to %
Per boe Q2/2005 Q2/2004 Chg date 2005 date 2004 Chg
------------------------------------------------------------------------
Daily 2,804 3,862 boe 2,911 boe 3,398 boe
production (55% oil) (38% oil) -27 (51% oil) (41% oil) -14
Price $52.86 $43.80 21 $50.09 $41.10 22
Royalties 8.54 9.96 -14 8.01 8.67 -8
Operating
costs 12.86 3.99 222 12.01 4.57 163
Transportation 2.26 1.81 25 1.96 1.32 49
Netback $29.21 $28.05 4 $28.11 $26.55 6
Funds Flow $22.88 $24.93 -8 $22.03 $22.81 -3
------------------------------------------------------------------------
------------------------------------------------------------------------


Other Cash Items

General and administrative (G&A) costs were $1,180,671 after recoveries and capitalization of $161,493 in Q2, versus $790,928 after recoveries and capitalization of $93,547 in Q2 2004. The year-over-year increases, as well as the year to date costs of $2.4 million versus the 2004 year to date costs of $1.7 million, are due mainly to higher consulting fees as well as higher levels of overall activity. On a unit-of-production basis, G&A costs were $4.63 per boe in Q2, up from $2.23 per boe in Q2 2004. Tempest expects G&A costs to average $3.00-$4.00 per boe through year-end.

Interest expense was $347,983 in Q2, up from $272,634 in Q2 2004 as a result of higher corporate debt. On a unit-of-production basis, interest expense was $1.36 per boe in Q2, compared to $0.78 per boe in Q2 2004. Year to date costs are also up to $0.7 million from $0.6 million due to higher debt levels. Tempest expects full-year 2005 interest charges to average approximately $1.25 per boe.

Stock-based compensation was $434,353 in Q2, down from $461,769 in Q2 2004. The decrease, as well as the year to date decrease, was attributable to the reduction in average stock options outstanding during the period.

In Q2 Tempest realized a gain on the sale of 200,000 Class A shares of Rock Creek Resources Ltd. on June 20, 2005 at $2.20 per share, having acquired these shares in 2002 at $0.25 per share.

Combined Cash Costs per Unit of Production

Tempest's combined cash costs; defined as transportation, operating, G&A and interest expenses, were $21.11 per boe in Q2, up from $8.73 per boe in Q2 2004 mainly. The increase was mainly as a result of higher operating costs and lower 2005 production volumes. Normalized cash costs for the balance of 2005 are expected to average $16.00-$19.00 per boe.

Funds Flow

Lower production volumes and higher operating costs, partially offset by strong commodity prices, reduced Tempest's funds flow from operations by 33 percent to $5.8 million in Q2 from $8.8 million in Q2 2004. These factors had the same impact on the year to date 2005 declining to $11.6 million from the 2004 year to date $14.1 million. Q2 funds flow was essentially unchanged from Q1 2005, and amounted to $0.28 per basic and diluted share.

Depletion, depreciation and accretion

Corporations calculate depreciation, depletion and asset retirement obligation based upon capital expenditures, production rates and reserves. Depletion, depreciation and accretion amounted to $5.0 million or $19.41 per boe of production during Q2 up from the $17.87 per boe incurred in Q1 2005. The unit cost was 37 percent higher than $14.17 per boe recorded in Q2 2004. Capital increasing relative to reserves also accounted for the year to date increase to $18.61 per boe over last years $14.49 per boe.

Costs associated with unproven properties excluded from costs subject to depletion for 2005 totaled $34,800,000 (2004 ? $26,600,000).

Net Income

Future taxes amounted to $0.5 million during Q2, providing Tempest with net income of $0.4 million for the quarter. This was 73 percent lower than net income generated in Q2 2004. Approximately one half of this change was due to cost escalations and the balance is attributable to the revenue decline based on the 27 percent production volume reduction. These factors also impacted the year to date net income of $0.7 million versus 2004's net income of $2.6 million.

Capital Expenditures

Tempest's capital program totalled $5.1 million during Q2. The capital budget funded drilling and completions for two horizontal wells in the Central Area, a West five re-entry and some facility work at Red Earth, as well as some smaller strategic land acquisitions and tangible equipment and facilities.

Tempest capital spending for Q3 has been budgeted at approximately $12 million, weighted towards drilling. This will bring combined capital expenditures to approximately $40 million by the end of Q3.

Effective December 31, 2004 the Company renounced tax pools (CEE) worth $10 million for new Class A flow-through shares. The unexpended balance of $9,013,294 at December 31, 2004 had been expended by the end of Q1 2005. Accordingly, Tempest has no flow-through obligations outstanding.



Capital Expenditure Summary ($ millions)
------------------------------------------------------------------------
Year to Year to 2005
Q2/2005 Q2/2004 date 2005 date 2004 Estimate
------------------------------------------------------------------------
Land 0.4 1.4 2.2 3.9 5.0
Seismic - 0.2 7.3 2.0 8.0
Drilling and intangibles 1.1 1.0 12.2 11.7 25.0
Facilities and equipment 3.6 1.5 5.7 10.8 7.0
Dispositions - - - - -
Acquisitions - - - - -
------------------------------------------------------------------------
Total 5.1 4.1 27.4 28.4 45.0
------------------------------------------------------------------------
------------------------------------------------------------------------


Debt and Working Capital

Tempest's combined debt and working capital deficiency decreased to $46.8 million during Q2 from Q1, as the Company's funds flow exceeded capital expenditures during the quarter. Effective July 1 Tempest sold its Looma/Joarcam property for $11.4 million. The proceeds were used to reduce net debt to approximately $35 million. Tempest anticipates capital expenditures will slightly exceed funds flow for the balance of 2005. Through a combination of funds flow, non-core asset rationalization and slight additional borrowing, the Company expects to exit 2005 with net debt of $38-$40 million.

Following the Looma/Joarcam sale Tempest has a $35 million banking facility with the National Bank of Canada. This credit facility is secured by a first fixed and floating charge debenture in the minimum face amount of $100 million.

Share Capital

As at August 11, 2005 there were 19,395,480 Class A shares, 653,476 Class B shares and 1,809,000 stock options and no flow-through obligations outstanding.



Class A Shares
------------------------------------------------------------------------
Closing December 31, 2004 19,060,810
Exercise of stock options 334,670
Closing June 30, 2005 19,395,480
Held by management and directors 11%
------------------------------------------------------------------------

Weighted Shares June 30, 2005 December 31, 2004
------------------------------------------------------------------------
Weighted Class A Shares 19,271,318 17,536,445
Weighted Class B Shares 653,476 653,476
Conversion of Class B shares 1,089,127 323,319
------------------------------------------------------------------------
Basic shares outstanding (1) 21,013,921 18,513,240
------------------------------------------------------------------------
------------------------------------------------------------------------

Stock option dilution (treasury method) 282,885 411,074
Weighted diluted shares outstanding 21,296,806 18,924,314
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The Class B shares are converted at the period-end Class A share
price of $3.75 for June 30, 2005 (December 31, 2004 - $6.69) and
added to the Class A shares to calculate basic shares outstanding.

Q2 2005 Stock Option Activity
------------------------------------------------------------------------
Opening Issued Exercised Cancelled Closing
------------------------------------------------------------------------
1,684,668 485,000 160,668 200,000 1,809,000
Average price Average price Average price
of $4.44 of $4.21 of $4.41
------------------------------------------------------------------------


There were no stock options exercised between July 1 and August 11, 2005 and no options were granted during that same period.

Other Items

Other than the new office lease and other items previously discussed there has been no change to commitments, off-balance-sheet transactions, related-party transactions, changes in policies or critical estimates from those outlined in the 2004 MD&A.



Class A Trading Information
------------------------------------------------------------------------
High Low Close Avg. Price Daily Volume
------------------------------------------------------------------------
Q1, 2005 7.00 5.25 5.60 6.36 55,810
April 5.90 4.31 4.31 5.12 71,252
May 4.70 3.75 4.15 4.34 48,281
June 4.15 3.70 3.75 3.98 38,409
Q2, 2005 5.90 3.70 3.75 4.59 52,425
------------------------------------------------------------------------


Risk, Liquidity and Capital Resources

The financial risks of commodity prices and interest rates are largely beyond Tempest's control. The Company's approach to managing these risks is to maintain a prudent level of debt and to employ conservative forecasting and budgeting projections. As a guideline for monitoring maximum debt leverage, Tempest uses a 1:1 debt-to-equity ratio and 1.5 times debt-to-forward funds flow.

On May 5, 2005 Tempest disclosed that its independent reserves evaluators had updated the Company's reserves effective May 1. Effective that date Tempest estimated its asset value net of all debt to be $5.00-$5.30 per diluted share, discounted at NPV 10 percent and 8 percent, respectively. This net asset value did not attribute value to the Company's extensive inventory of development, exploitation and exploration opportunities.

With debt and working capital towards the upper end of Tempest's target ratios during the first half of 2005, the Company opted to obtain additional liquidity through the sale of non-strategic, non-core assets. This would reduce debt leverage while providing capital resources for Tempest to enhance capital efficiencies by investing in its extensive development drilling inventory. To this end, Tempest sold its Looma/Joarcam property effective July 1, realizing gross proceeds of $11.7 million.

The $7.3 million use of funds in the change in non-cash operating working capital was due mainly the reduction of accrued liabilities. The $2.2 million source of funds in the change in non-cash investing working capital was due mainly to higher trade payables on the reduction of accruals in Q2.

Following the Looma/Joarcam sale, the Company has a $35 million demand credit facility. At June 30, 2005 a balance of $35 million had been drawn on Tempest's previous credit facility, with an effective interest rate of prime plus 175 basis points. The current borrowing base is net of the Looma/Joarcam asset sale and will be reviewed at the end of September, following completion of the drilling program at Red Earth.

Outlook

Tempest's Board of Directors continues to review strategic alternatives to enhance shareholder value. Alternatives under consideration include a merger or sale of the Company, acquisitions, possible asset rationalization or conversion of the Company into a royalty trust. These options are being considered so as to ensure that Tempest's assets, including in particular its significant Red Earth light oil play, can be optimized in the most effective manner. Each alternative and opportunity will be assessed and evaluated accordingly.

Management's Report to Shareholders

The management of Tempest Energy Corp. is responsible for the integrity of the information contained in this quarterly report and for the consistency between the MD&A and the financial statements. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgements and have been properly reflected. The financial statements have been prepared using policies and procedures established by management and reflect fairly Tempest's financial position, results of operations and funds flow. Management has established and maintains a system of internal controls designed to ensure that financial information is reliable and accurate and to provide assurance that assets are safeguarded from loss or unauthorized use.

The Board of Directors and the Audit Committee have reviewed and approved the financial statements and the MD&A.



Results of last Eight quarters
Revenues Net Income Basic and Diluted
($ millions) ($ millions) Earnings per share ($)
Q2, 2005 13.5 0.4 .02
Q1, 2005 12.9 0.3 .01
Q4, 2004 14.6 0.5 .03
Q3, 2004 15.4 1.1 .06
Q2, 2004 15.4 1.6 .09
Q1, 2004 10.0 1.0 .05
Q4, 2003 7.3 (1.2) (.06)
Q3, 2003 7.8 0.6 .04
Q2, 2003 8.7 (0.1) .00


This Management's Discussion and Analysis is for the three- and six-month periods ended June 30, 2005 and is dated August 11, 2005.



"SIGNED" "SIGNED"
A. Scott Dawson, P. Eng. Douglas N. Penner, CFA, CA, CIA
President, Chief Executive Officer Vice President, Finance and
and Director Chief Financial Officer




TEMPEST ENERGY CORP.
Consolidated Balance Sheets

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------------------------------------------------------------------
(Unaudited)
Assets

Current assets:
Cash and cash equivalents $ 510,258 $ -
Accounts receivable 8,178,076 6,847,540
Prepaid expenses and deposits 629,792 248,617
-----------------------------------------------------------------------
9,318,126 7,096,157

Petroleum and natural gas properties (note 2) 134,274,692 116,261,646

------------------------------------------------------------------------
$143,592,818 $123,357,803
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 21,121,814 $ 15,117,756
Bank debt (note 3) 35,000,000 24,145,439
-----------------------------------------------------------------------
56,121,814 39,263,195

Future income taxes 23,918,659 19,606,659

Asset retirement obligations (note 4) 3,703,539 3,384,304

Shareholders' equity:
Share capital (note 5) 49,014,200 51,215,640
Contributed surplus (note 5) 2,990,174 2,778,557
Retained earnings 7,844,432 7,109,448
-----------------------------------------------------------------------
59,848,806 61,103,645
Future operations (note 1)
Commitments (note 6)
Subsequent event (note 7)
------------------------------------------------------------------------
$143,592,818 $123,357,803
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.



TEMPEST ENERGY CORP.
Consolidated Statements of Operations and Retained Earnings
(Unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
------------------------------------------------------------------------

Revenues:
Petroleum and
natural gas $13,487,057 $15,393,517 $26,390,883 $25,419,746
Royalties (net of
Alberta Royalty
Tax Credit) (2,178,154) (3,498,858) (4,219,224) (5,359,352)
-----------------------------------------------------------------------
11,308,903 11,894,659 22,171,659 20,060,394

Expenses:
Operating 3,280,878 1,402,020 6,328,024 2,825,390
Transportation 575,942 636,261 1,032,409 814,882
Interest 347,983 272,634 661,782 554,931
General and
administrative 1,180,671 790,928 2,425,143 1,695,701
Stock-based
compensation 434,353 461,769 762,008 923,537
Depletion,
depreciation and
accretion 4,953,814 4,979,145 9,807,329 8,959,555
Gain on sale of
investment (390,020) - (390,020) -
-----------------------------------------------------------------------
10,383,621 8,542,757 20,626,675 15,773,996

------------------------------------------------------------------------
Earnings before
income taxes 925,282 3,351,902 1,544,984 4,286,398

Income taxes:
Current 30,000 30,000 60,000 60,000
Future 450,000 1,695,500 750,000 1,645,000
-----------------------------------------------------------------------
480,000 1,725,500 810,000 1,705,000

------------------------------------------------------------------------
Net earnings 445,282 1,626,402 734,984 2,581,398

Retained earnings,
beginning of period 7,399,150 3,893,609 7,109,448 2,938,613

------------------------------------------------------------------------
Retained earnings,
end of period $ 7,844,432 $ 5,520,011 $ 7,844,432 $ 5,520,011
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per share:
Basic $ 0.02 $ 0.09 $ 0.03 $ 0.14
Diluted $ 0.02 $ 0.09 $ 0.03 $ 0.14
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.



TEMPEST ENERGY CORP.
Consolidated Statements of Cash Flows
(Unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
------------------------------------------------------------------------

Cash provided by
(used in):

Operations:
Net earnings $ 445,282 $ 1,626,402 $ 734,984 $ 2,581,398
Items not involving
cash:
Depletion,
depreciation and
accretion 4,953,814 4,979,145 9,807,329 8,959,555
Future income tax
expense 450,000 1,695,500 750,000 1,645,000
Stock-based
compensation 434,353 461,769 762,008 923,537
Reclamation costs (56,246) - (56,246) -
Gain on sale of
investment (390,020) - (390,020) -
----------------------------------------------------------------------
Funds from
operations 5,837,183 8,762,816 11,608,055 14,109,490
Change in non-cash
working capital (7,315,527) (1,928,907) (3,316,060) (123,527)
-----------------------------------------------------------------------
(1,478,344) 6,833,909 8,291,995 13,985,963

Financing:
Issue of Class A
shares, net of
issue costs 272,665 111,143 810,169 127,143
Bank debt 4,155,368 4,100,000 10,854,561 14,500,000
-----------------------------------------------------------------------
4,428,033 4,211,143 11,664,730 14,627,143

Investments:
Petroleum and natural
gas properties (5,118,560) (4,103,528) (27,444,894) (28,391,566)
Change in non-cash
working capital 2,239,109 (6,693,995) 7,558,407 467,170
Proceeds from sale
of investment 440,020 - 440,020 -
-----------------------------------------------------------------------
(2,439,431) (10,797,523) (19,446,467) (27,924,396)

------------------------------------------------------------------------
Increase in cash 510,258 247,529 510,258 688,710

Outstanding cheques,
beginning of period - (186,367) - (627,548)

------------------------------------------------------------------------
Cash, end of period $ 510,258 $ 61,162 $ 510,258 $ 61,162
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest paid $ 343,241 $ 235,117 $ 646,639 $ 454,636
Taxes paid $ 5,045 $ - $ 5,045 $ 75,957
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to the interim consolidated financial statements.



TEMPEST ENERGY CORP.
Notes to Interim Consolidated Financial Statements

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


The interim consolidated financial statements of Tempest Energy Corp. (the "Corporation") have been prepared by management in accordance with Canadian generally accepted accounting principles. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the year ended December 31, 2004. The following disclosure is incremental to the disclosure included with the annual financial statements. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's annual report for the year ended December 31, 2004.

1. Future operations

The financial statements have been prepared on a basis applicable to a continuing entity. At June 30, 2005 the Corporation had $46.8 million in debt and working capital deficiency. Continuing operations are dependent on the ability of the Corporation to secure sufficient funds through financings, borrowings and operations to be able to meet obligations as they become due. The Board of Directors has announced that it is reviewing strategic alternatives including merger or sale of the Corporation, acquisitions, possible asset rationalization or conversion of the Corporation into a royalty trust. If the assumption regarding future operations were not appropriate, adjustments would be necessary to recorded assets and liabilities and reported revenues and expenses. Subsequent to June 30, 2005 the Corporation disposed of certain petroleum and natural gas properties and related assets for net consideration of $11.4 million as described in note 7.



2. Petroleum and natural gas properties:

------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated Net Book
June 30, 2005 Cost Depletion Value
------------------------------------------------------------------------

Petroleum and natural
gas properties $185,724,285 $51,449,593 $134,274,692
------------------------------------------------------------------------
------------------------------------------------------------------------

December 31, 2004
------------------------------------------------------------------------

Petroleum and natural
gas properties $158,044,274 $41,782,628 $116,261,646
------------------------------------------------------------------------
------------------------------------------------------------------------


The Corporation capitalized for the six month and three month periods ended June 30, 2005 $643,000 (2004 - $240,000) and $89,000 (2004 - $71,000), respectively, of overhead-related costs to petroleum and natural gas properties.

Costs associated with unproven properties excluded from costs subject to depletion for 2005 totaled $34,800,000 (2004 - $26,600,000).

The Corporation performed a ceiling test calculation at June 30, 2005 to assess the recoverable value of the property, plant and equipment and other assets. The oil and gas future prices are based on the April 1, 2005 commodity price forecast of our independent reserve evaluators. The following table summarizes the benchmark prices used in the ceiling test calculation.



------------------------------------------------------------------------
------------------------------------------------------------------------
WTI Foreign WTI Tempest AECO Tempest
Oil Exchange Oil Price Gas Price
($US/bbl) Rate ($Cdn/bbl) Oil ($Cdn/mcf) Gas
------------------------------------------------------------------------

2005 $54.00 0.82 $65.85 $56.56 $7.70 $7.48
2006 50.00 0.82 60.98 54.38 7.20 6.97
2007 47.50 0.82 57.93 52.25 6.95 6.72
2008 45.00 0.82 43.90 50.05 6.75 6.52
2009 42.00 0.82 54.88 47.07 6.50 6.27
2010 40.00 0.82 48.78 44.72 6.50 6.26
2011 40.00 0.82 48.78 44.66 6.50 6.26
2012 40.00 0.82 48.78 44.62 6.50 6.25
2013 40.50 0.82 49.39 45.22 6.65 6.40
2014 41.25 0.82 50.30 45.90 6.75 6.50
2015 41.75 0.82 50.91 46.66 6.85 6.60
2016 42.59 0.82 51.94 47.49 6.99 6.80
------------------------------------------------------------------------
------------------------------------------------------------------------


3. Bank debt:

The Corporation currently has a $35,000,000 revolving operating demand facility. The facility is with a Canadian chartered bank and bears interest at bank prime rates adjusted quarterly based on debt to cash flow ratios as defined in the agreement. The credit facilities are secured by a first fixed and floating charge debenture in the minimum face amount of $100,000,000 and a general security agreement with an annual re-determination of the borrowing base. Letters of credit amounting to $361,000 are held against the operating demand facility. As at June 30, 2005, a balance of $35,000,000 had been drawn on this facility with an effective rate of 6% at June 30, 2005.

4. Asset retirement obligations:

The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $6,500,000 which will be incurred between 2005 and 2020. The majority of the costs will be incurred between 2006 and 2020. A credit-adjusted risk free rate of eight percent was used to calculate the fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided below:

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------------------------------------------------------------------

Balance, beginning of period $ 3,384,304 $ 2,105,719

Accretion expense 140,364 203,745
Liabilities incurred 235,117 1,335,207
Reclamation costs (56,246) (260,367)

------------------------------------------------------------------------
Balance, end of period $ 3,703,539 $ 3,384,304
------------------------------------------------------------------------
------------------------------------------------------------------------

5. Share capital:

(a) Issued and outstanding:

------------------------------------------------------------------------
------------------------------------------------------------------------
Number of
Shares Amount
------------------------------------------------------------------------

Class A shares:

Balance, December 31, 2003 17,370,319 $ 35,535,715
For cash pursuant to flow-through share
offering 1,162,791 10,000,003
Share issue costs - (689,593)
Tax effect of share issue costs - 231,841
For cash on exercise of share options 527,700 1,546,578
Stock-based compensation on exercised options - 970,839
------------------------------------------------------------------------
Balance, December 31, 2004 19,060,810 $ 47,595,383
For cash on exercise of share options 334,670 810,169
Stock-based compensation on exercised options - 550,391
Tax effect of flow-through shares issued in 2004 - (3,562,000)
------------------------------------------------------------------------
Balance, June 30, 2005 19,395,480 $ 45,393,943
------------------------------------------------------------------------
------------------------------------------------------------------------

Class B shares:

------------------------------------------------------------------------
Balance, December 31, 2004 and June 30, 2005 653,476 $ 3,620,257
------------------------------------------------------------------------
------------------------------------------------------------------------

Total share capital on June 30, 2005 $ 49,014,200
------------------------------------------------------------------------
------------------------------------------------------------------------

(b) Share option plan:

------------------------------------------------------------------------
------------------------------------------------------------------------
Period ended Year ended
June 30, 2005 December 31, 2004
-------------------- -------------------
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
------------------------------------------------------------------------

Stock options outstanding,
beginning of period 1,499,004 $3.69 2,076,704 $3.45
Granted 925,000 5.22 40,000 6.45
Exercised (334,670) 2.42 (527,700) 2.93
Cancelled or expired (280,334) 5.58 (90,000) 3.77
------------------------------------------------------------------------
Stock options outstanding,
end of period 1,809,000 $4.41 1,499,004 $3.69
------------------------------------------------------------------------
------------------------------------------------------------------------

Exercisable at period-end 609,333 $3.98 817,337 $3.25
------------------------------------------------------------------------
------------------------------------------------------------------------


(c) Stock-based compensation:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the period ended June 30, 2005: zero dividend yield; expected volatility of 103 - 107 percent; risk-free rate of 3.19 - 3.62 percent; and expected life of 5 years. The weighted average fair value of stock options granted during the six month period ended June 30, 2005 was $4.07 per option. No options were granted during the six months ended June 30, 2004.



(d) Contributed surplus:

------------------------------------------------------------------------
------------------------------------------------------------------------
Balance, December 31, 2003 $ 1,947,413
Compensation expense 1,856,210
Exercise of share options (970,839)
Cancellation of share options (54,227)
------------------------------------------------------------------------
Balance, December 31, 2004 2,778,557
Compensation expense 861,006
Exercise of share options (550,391)
Cancellation of share options (98,998)
------------------------------------------------------------------------
Balance, June 30, 2005 $ 2,990,174
------------------------------------------------------------------------
------------------------------------------------------------------------


(e) Per share amounts:

Per share amounts have been calculated using the weighted average number of class A shares outstanding and the conversion of the class B shares at the period-end class A share price of $3.75 for June 30, 2005. The basic weighted average shares outstanding for the six month and three month periods ended June 30, 2005 were 21,013,921 (2004 - 18,721,242) and 21,070,382 (2004 - 18,730,473), respectively.

In computing diluted per share amounts, 282,885 (2004 - 304,286) and 141,723 (2004 - 268,360) shares were added to the weighted average number of shares outstanding during the six and three month periods ended June 30, 2005, respectively, for the dilutive effect of employee stock options.

For the three months ended June 30, 2005, options to purchase 1,038,333 (2004 - 1,153,000) class A shares were not included in the computation because they were anti-dilutive.

6. Commitments:

(a) On December 13, 2004, the Corporation issued 1,162,791 flow-through Class A common shares for gross proceeds of $10,000,003. During the six months ended June 30, 2005, the Corporation incurred the remaining $9,013,294 of eligible exploration expenditures to satisfy the terms of the flow-through share offering.

(b) Commodity price risk management:

In July 2004 the Corporation entered into a natural gas hedging transaction for 5,000 gigajoules per day for the period August 2004 to July 2005. This transaction consisted of the purchase of a $6.21 per gigajoule put and an $8.68 per gigajoule call and the sale of a $7.00 per gigajoule call. The Corporation made net settlement payments of $50,205 during the period ended June 30, 2005 which are included in petroleum and natural gas revenues. The Corporation would have paid $6,429 if the hedge had been settled at June 30, 2005.

(c) During the six months ended June 30, 2005 the Corporation entered into a lease for office space with the following future minimum lease payments:



------------------------------------------------------------------------
------------------------------------------------------------------------

2005 $ 336,474
2006 817,198
2007 827,147
2008 837,395
2009 847,951
2010 500,980

------------------------------------------------------------------------
$ 4,167,145
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Subsequent event:

Effective July 27, 2005 the Corporation disposed of certain petroleum and natural gas properties and related assets for net consideration of $11.4 million. The asset retirement obligation related to these properties was $0.5 million.

Disclaimers

The terms "funds flow from operations", "funds flow", "funds flow per share" and "debt-to-funds-flow ratio" in this discussion are not recognized measures under Canadian generally accepted accounting principles (GAAP). Company management believes that in addition to net earnings, funds flow is a useful supplemental measure as it provides an indication of the results generated by the Company's principal business activities before the consideration of how those activities are financed or how the results are taxed. Investors are cautioned, however, that this measure should not be construed as an alternative to net earnings determined in accordance with GAAP, as an indication of Tempest's performance.

Tempest's method of calculating funds flow may differ from that of other companies, and accordingly it may not be comparable to measures used by other companies. Tempest calculates funds from operations as "funds from operating activities" before the change in non-cash working capital. The consolidated statements of cash flows in the audited consolidated financial statements present the reconciliation between earnings and cash flow. All boe figures are calculated by converting natural gas mcf to boe at 6:1.

This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Tempest's control, including: the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Tempest's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that Tempest will derive there from.

The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein.

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