Valiant Energy Inc.
TSX : VLE

Valiant Energy Inc.

March 29, 2006 09:00 ET

Valiant Announces Year End Results

CALGARY, ALBERTA--(CCNMatthews - March 29, 2006) - Valiant Energy Inc. (TSX:VLE) ("Valiant" or the "Company") is pleased to announce its year end results.

Valiant was formed pursuant to the Plan of Arrangement between Forte Resources Inc. ("Forte"), Thunder Energy Inc. and Mustang Energy Inc. approved July 7, 2005. The Company's first year end represents a successful closing to the initial chapter of Valiant's growth. The initial objective of Valiant was to aggressively explore the undeveloped lands of Forte and capture the upside value for shareholders that would not have been fully recognized in a Royalty Trust structure. It is clear that by several measures Valiant has achieved that goal:

- Production increased substantially. Valiant began its operations in July 2005 with an initial production base of approximately 300 boe/d, and now expects to average approximately 1,200 boe/d for the first quarter of 2006.

- Net asset value increased by 43%. The net asset value in July 2005 was $2.52 per share and increased to $3.60 per share at December 31, 2005.

- Cash flow increased on an absolute and per share basis. Cash flow in Q3 was $1.655 million ($0.11 per share) increasing to $2.693 million ($0.16 per share) in Q4.

- Exploration and exploitation activities added 1,049 million boe to the Company's reserves, replacing 606% of the production for the same period. The year end reserves of 2.2 million boe were primarily proved and producing. In total, 87 percent of the reserves were in the proven category and 91 percent of proven reserves were producing.



2005 RESULTS

Valiant's results for 2005 are summarized below.

Q4 Q3 Total
------------------------------------------------------------------------
Production
Natural gas (mmcf/d) 2,815 1,549 2,254
Oil & liquids (bbls/d) 749 410 597
Barrels of oil equivalent (boe/d) 1,219 668 972


- Production grew steadily during the year as new wells were drilled and tied in, contributing to growth in production from 300 boe/d of production that was acquired from Forte on July 7, 2005, to an exit rate of 1,200 boe/d by December 31, 2005.



Q4 Q3 Total
------------------------------------------------------------------------
Revenue ($000's) 6,263 3,293 9,556
Cash flow from operations (000's) 2,693 1,655 4,348
Per basic share ($) 0.16 0.11 0.27
Net loss ($000's) (202) (62) (264)
Per basic share ($) (0.02) (0.00) (0.02)


- Revenue and cash flow increased in relation to the production increases. Revenue in Q4 also benefited from very strong natural gas prices which averaged $12.33 per mcf.

- The Company recorded a small loss during its start up year of operations, including non cash stock compensation expenses of $337,000 and deferred income taxes of $155,000.



Q4 Q3 Total
------------------------------------------------------------------------
Capital expenditures ($000's) 10,658 10,533 21,191
Net wells drilled
Completions 3.75 4.35 8.10
Dry 2.00 0.25 2.25
Total 5.75 4.6 10.35
Net success rate 65% 95% 78%


- The Company exceeded its budgeted capital expenditures. Two wells originally budgeted for 2006 were accelerated and drilled in December to take advantage of rig availability. Costs were also higher for completions due to the drilling success rate, which was higher than anticipated.

- The Company added 1.049 million boe of proven plus probable reserves through its drilling activity, replacing 606% of its production at a cost of $20.14 per boe.

Liquidity

The Company had a net working capital deficiency of $7,619 million at December 31, 2005. The credit limit with the Company's primary lender was $10.2 million at December 31, 2005 but was increased to $16.0 million in March, 2006.

Recent Developments

Valiant has drilled 6 gross (2.28 net) wells to date in 2006 resulting in 1 gross (0.25 net) gas well, 3 gross (3.21 net) oil wells and 2 gross (0.82 net) dry holes. Drilling has been focused primarily in Niton and West Central Alberta.

Leaman, Alberta

- Current production is approximately 575 boe/d representing slightly less than one half of corporate production;

- Valiant completed a 3D seismic program over its Pekisko C oil pool and anticipates its next round of drilling to occur early in the third quarter;

- Valiant installed water disposal facilities which are anticipated to reduce operating costs and provide pressure maintenance in the pool by up to $1.50 per boe.

Niton, Alberta

- Valiant drilled and completed three wells at Niton during the first quarter of 2006 at working interests ranging from 33% - 55%;

- Current production is approximately 180 boe/d with two additional wells completed but not yet tied in.

Bigstone, West Central Alberta

- Valiant drilled one (0.5 net) exploratory well which was dry and abandoned. A development well (0.25 net) was drilled and completed and should be tied in by the third quarter of 2006.

- Current production is approximately 165 boe/d net to the Company with three wells on-stream. Producing zones are the Gething and Cadomin. A review of the property for down-spacing potential is underway.

Peace River Arch

- During December, Valiant drilled a Halfway oil well in the Progress area (100% working interest). The well is being tied in with first production expected late in March, 2006;

- In the Grande Prairie area, the Company spudded an exploratory well which will test the Banff formation. Valiant will incur 35% of the drilling costs but will enjoy 61% of any revenue. The Banff formation can be a prolific producer in this area.

Northeast, British Columbia

- At Laprise, the Company drilled and cased a Bluesky well (32 % working interest).

Outlook

Having realized its initial objective of capturing the upside inherent in the Forte lands through its exploration program, the Company now enters a development and evaluation phase for many of its properties.

- At Leaman, Valiant is evaluating a 3D seismic program shot over the Pekisko C oil pool during Q1 2006. It has also instituted a water injection EOR scheme and is monitoring the production profile for this pool. Production appears to be stabilizing at approximately 500 boe/d from seven producing wells. We expect the seismic and reservoir evaluation to lead the drilling of an additional 2 - 6 wells in the second half of 2006.

- In the Bigstone, West Central Alberta area, Valiant has net production of approximately 165 boe/d from three wells. The Company is in the process of applying for down spacing approval from the EUB which could lead to the drilling of up to 12 additional infill wells, with drilling beginning in the winter drilling season of 2006/2007.

- At Niton, Valiant is in the process of completing, evaluating and tying in three Q1 2006 wells drilled into and extending the Rock Creek oil pool which is currently producing 180 boe/d net to Valiant's working interest from four wells. Following a more complete evaluation of the recent drilling, Valiant has plans to fully define and exploit this pool. Subject to regulatory approval, Valiant expects to continue its drilling in this area during the second half of 2006.

As Valiant moves to a development and exploitation phase on these properties, it is also beginning to see activity related to new exploration ideas generated since Valiant began operations. On lands purchased in Q4 2005 in Southern Alberta at a 50% working interest, the Company expects to initiate drilling activities in the summer of 2006. If the Company experiences initial drilling success potential exists for a number of follow-up wells.

Valiant will exit Q1 2006 with production of approximately 1,200 boe/d, and approximately 200 boe/d of near term production projects behind pipe providing for potential increases to production in Q2. While Valiant is excited about its production base and the potential of its exploration prospects, there remain several challenges for junior oil and gas companies. Cost and availability of services and lands and an increased regulatory environment contribute to high overall costs and longer project lead time. Natural gas prices, which were very high in Q4, have dropped by over 33% early in 2005 providing increased uncertainty with regard to 2006 cash flow estimates.

Valiant is well positioned to succeed in the current challenging environment:

- Valiant's estimated Q1 2006 and exit production is 1,200 boe/d with a further 200 boe/d behind pipe.

- Valiant has a solid inventory of prospects upon which it will build and anticipates a continuation of the historically successful drilling results it has experienced to date.

- Valiant has a highly committed staff who continues to strive to create value.

Nevertheless, Valiant is taking a prudent and pro-active approach with respect to these conditions. It is reviewing its capital budget with respect to the timing as well as the total expected expenditures. We expect the budget as a minimum to be reduced by $2.3 million to reflect wells which were in the 2006 budget, but that were drilled in December of 2005 to take advantage of rig availability. We also expect that the timing of expenditures will be shifted somewhat to later in the year due to normal break-up conditions in the second quarter and recognizing the regulatory and operating lead time we will require to develop our properties in the most efficient manner possible. The focus will remain in the Company's core areas with approximately two thirds of our wells expected to be drilled in the Leaman, Niton, West Central and Peach River Arch areas of Alberta. Gas prices will continue to be monitored for the potential effect on cash flow and capital spending.

Valiant Energy Inc. is a Calgary-based oil and natural gas production company with operations primarily in Alberta, Canada. The company has a record of successful growth through a combination of acquisitions, exploration and development. Valiant's common shares are listed on the Toronto Stock Exchange under the symbol VLE.

This news release may contain forward-looking statements including expectations of future production, cash flow and earnings. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry. (e.g. operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projects relating to production, costs and expenses, and health, safety and environmental risks), commodity price, price and exchange rate fluctuation and uncertainties resulting from the potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Additional information on these and other factors that could affect Valiant's operations or financial results are included in Valiant's reports on file with Canadian securities regulatory authorities.

MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)

Valiant Energy Inc. ("Valiant" or "the Company") is an exploration and development company pursuing conventional oil and natural gas production and reserve growth through the exploration and development of its landholdings and geological prospects in Alberta and British Columbia.

Commencement of Operations

Valiant commenced operations on July 7, 2005 as an exploration company following a major reorganization involving the creation of Thunder Energy Trust by Forte Resources Inc. ("Forte"), Thunder Energy Inc. and Mustang Resources Inc. The former shareholders of Forte received 0.3333 of a share of Valiant for each Forte share. Valiant acquired the majority of Forte's undeveloped lands and certain properties such as Leaman, Niton and Webster in Alberta and Laprise in British Columbia. Production from these acquired properties was approximately 300 boe/d at the commencement of operations.

Valiant commenced trading on the Toronto Stock Exchange on July 12, 2005 under the symbol "VLE"

Information is presented in the Management's Discussion and Analysis (MD&A) under the following headings which represent operations for the respective periods as follows:



Heading Represents operations for:
------------------------------------------------------------------------
2005 The 178 day period from July 7, 2005 to December 31, 2005
Q4 The 92 day quarter ended December 31, 2005
Q3 The 86 day quarter from July 7, 2005 to September 30, 2005


Amounts presented on a daily basis are calculated based on the number of days in the respective periods.

This MD&A describing the financial condition and the results of operations should be read in conjunction with the consolidated financial statements for the period ended December 31, 2005 together with the accompanying notes. Readers should be aware that historical results are not necessarily indicative of future performance. Additional information relating to the Company can be viewed or downloaded at www.valiantenergy.ca or www.sedar.com

Production information is commonly reported in units of barrel of oil equivalent ("boe") which may be misleading, particularly if used in isolation. For purposes of computing such units, barrel of oil equivalent amounts have been calculated using an energy equivalence conversion rate of six thousand cubic feet of natural gas to one barrel of oil (6:1). The conversion ratio of 6:1 is based on an energy equivalency conversion method, which is primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.

The financial information presented has been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). The reporting and measurement currency is the Canadian dollar.

Forward Looking Statements

The information herein contains forward-looking statements and assumptions. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "protect", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "would" and similar expressions. Such statements and assumptions also include those relating to guidance, results of operations and financial condition, capital spending, financing sources, commodity prices, costs of production and the magnitude of oil and gas reserves. By their nature, forward-looking statements are subject to numerous known and unknown risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, actual results may differ materially from those predicted. Valiant is exposed to numerous operational, technical, financial and regulatory risks and uncertainties, many of which are beyond its control and may significantly affect anticipated future results.

Operations may be unsuccessful or delayed as a result of competition for services, supplies and equipment, mechanical and technical difficulties, ability to attract and retain employees on a cost-effective basis, commodity and marketing risk and seasonality. The Company is subject to significant drilling risks and uncertainties including the ability to find oil and natural gas reserves on an economic basis and the potential for technical problems that could lead to well blowouts and environmental damage. The Company is also exposed to risks relating to the inability to obtain timely regulatory approvals, surface access, access to third party gathering and processing facilities, transportation and other third party related operational risks. Furthermore, there are numerous uncertainties in estimating the Company's reserve base due to the complexities in estimated future production, costs and timing of expenses and future capital. Financial risks Valiant is exposed to include, but are not limited to, access to debt or equity markets and fluctuations in commodity prices, interest rates and the Canadian/US dollar exchange rate. The Company is subject to regulatory legislation, the compliance with which may require significant expenditures and non-compliance with which may result in fines, penalties or production restrictions. For additional information on risk factors, refer to Valiant's annual information form, which will be posted at www.sedar.com prior to March 31, 2006.

The forward looking statements contained herein are as of March 22, 2006 and are subject to change after this date. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Except as required by law, Valiant disclaims any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Measures

Valiant management uses and reports certain measures not prescribed by generally accepted accounting principles (referred to as "non-GAAP measures") in the evaluation of operating and financial performance. Cash flow from operations, which is expressed before asset retirement expenditures and changes in non-cash working capital, is used by the Company to analyze operating performance, leverage and liquidity. Operating netback, which is calculated as average unit sales prices less royalties and operating expenses, and corporate netback, which further deducts administrative and interest expense, represent net cash margin calculations for every barrel of oil equivalent sold. Net debt and working capital, which is current assets less current liabilities and bank debt, is used to assess efficiency and financial strength. Cash flow from operations, operating netback, corporate netback and net debt and working capital do not have any standardized meanings prescribed by Canadian GAAP and therefore may not be comparable with the calculation of a similar measure for other companies. The Company uses these terms as an indicator of financial performance because such terms are often utilized by investors to evaluate junior producers in the oil and natural gas sector.



2005 Overview
Selected Quarterly Information

2005
----------------
Q4 Q3(1)
------------------------------------------------------------------------
Production
Natural gas (mmcf/d) 2,815 1,549
Oil and natural gas liquids (bbls/d) 749 410
Barrels of oil equivalent (boe/d) 1,219 668

Financial ($000s except as indicated)
Petroleum and natural gas revenue 6,263 3,293
Revenue net of royalties 4,372 2,681

Cash flow from operations 2,693 1,655
Per share basic ($) 0.16 0.11
Per share diluted ($) 0.16 0.10

Net earnings (loss) (202) (62)

Total assets 61,296 50,309
Capital expenditures 10,658 10,533
Net debt and working capital (deficiency) (7,619) 5,228
Total liabilities 15,813 10,919

Shares outstanding (000s) 17,277 16,186

Per unit information
Natural gas revenue ($/mcf) 12.33 8.95
Oil and natural gas liquids revenue ($/bbl) 44.53 54.18
Oil equivalent revenue ($/boe) 55.87 53.98

Operating netback ($/boe) 29.31 33.79

Net wells drilled
Natural gas 1.07 1.23
Oil 2.68 3.12
Dry 2.00 0.25
----------------
Total 5.75 4.60

Net success rate (%) 65% 95%

Undeveloped land holdings (net acres) 90,000 88,000
Average Working Interest 57% 57%
------------------------------------------------------------------------

(1) Represents the period from commencement of operations July 7, 2005
to September 30, 2005

See accompanying notes


Q3 Highlights

- acquired 300 boe/d of production from Forte Resources Inc. and commenced operations on July 7, 2005.

- closed a private placement and issued 1,587,572 shares at $2.52 per share for proceeds of $4.0 million.

- negotiated a $6.0 million revolving credit facility with built in increases of the credit limit up to $7.8 million by December 31, 2005.

- drilled 4.6 net wells resulting in 1.23 gas wells, 3.12 oil wells and 0.25 dry holes.

- incurred capital expenditures of $10.5 million on land acquisitions, geological and geophysical, drilling, exploration and equipping operations.

- increased production to 900 boe/d by September 30, 2005.

Q4 Highlights

- closed a private placement of 1,091,000 flow through common shares at $5.50 per share for gross proceeds of $6.0 million and net proceeds of $5.6 million.

- negotiated an increase in the revolving credit facility up to $10.2 million.

- drilled 5.75 net wells resulting in 1.07 gas wells, 2.68 oil wells and 2.0 net dry holes.

- incurred capital expenditures of $10.7 million on land acquisitions, geological and geophysical, drilling, exploration and equipping operations.

- increased production to 1,200 boe/d by December 31, 2005.

2005 Performance Compared to Guidance

Valiant has achieved rapid growth during its initial months of operations. New producing fields have been developed which are in the early stages of their productive lives. The production profiles for these wells are not well established making forecasts of future production difficult. Valiant published two measures as guidance for its six months of operations in 2005:

- exit production rate of 1,200 boe/d

- capital expenditure budget of $15.8 million

Valiant achieved its exit rate production target of 1,200 boe/d at December 31, 2005. New wells drilled in the West Central and Leaman areas were placed on stream during the month of December increasing Valiant's production rate in early January to approximately 1,300 boe/d. It is expected this rate will decrease somewhat as well production rates decline from their initial flush volumes.

Valiant's capital expenditures totaled $21.2 million, $5.4 million over its budget. This can be attributed to three factors.

- continued industry wide escalation of the costs for drilling and completion services

- higher drilling success rate and therefore more completions than anticipated in the budget

- two wells drilled in 2005 which were originally in the 2006 capital plan. The timing was accelerated to avoid potential rig availability issues in the first quarter of 2006.

Operating results

Valiant's operating results include the start up period for the Company. Certain costs, expressed on a boe basis may not be reflective of what may be experienced in the future covering full year periods when production volumes are higher and therefore experiencing greater economics of scale. This is demonstrated in the $/boe operating and general and administrative expense comparison between Q3 and Q4 in the table below:



------------------------------------------------------------------------
2005(2) Q4 Q3(1)
-------------- ------------- --------------
$000's $/boe $000's $/boe $000's $/boe
------------------------------------------------------------------------
Revenue
Oil and liquids 5,092 47.92 3,071 44.53 2,021 54.18
Natural gas 4,464 66.78 3,192 73.98 1,272 53.67
---------------------------------------------
9,556 55.20 6,263 55.87 3,293 53.98
---------------------------------------------
Cash expenditures
Royalties 2,503 14.46 1,891 16.86 612 10.03
Operating 1,707 9.86 1,087 9.70 620 10.16
General and administrative 948 5.48 565 5.04 383 6.28
Interest 50 0.29 27 0.24 23 0.38
---------------------------------------------
5,208 30.09 3,570 31.84 1,638 26.85
---------------------------------------------

Corporate net back 4,348 25.11 2,693 24.03 1,655 27.13

Non cash expenditures
Stock based compensation 337 1.96 169 1.51 168 2.75
Depletion, depreciation
& accretion 4,120 23.80 2,608 23.27 1,512 24.79
Income taxes 155 0.89 118 1.05 37 0.61
---------------------------------------------

Net (loss) (264) (1.52) (202) (1.80) (62) (1.02)
---------------------------------------------
---------------------------------------------

------------------------------------------------------------------------
(1) Represents the period from commencement of operations July 7, 2005
to September 30, 2005
(2) Represents the period from commencement of operations July 7, 2005
to December 31, 2005

Revenue

Oil and gas revenue increased by 90% in the fourth quarter compared to
the third quarter as a result of higher production levels and higher
natural gas prices as shown in the table below:

$000's
------------------------------------------------------------------------
Q3 oil and gas revenue 3,293
Increased production impact 2,851
Natural gas price impact 483
Crude oil price impact (364)
--------
Q4 oil and gas revenue 6,263
--------
--------

Production growth accounted for substantially all the growth in
revenues. Production for the respective periods was as follows:

2005 Q4 Q3
------------------------------------------------------------------------
Oil and natural gas liquids (bbls/d) 597 749 410
Natural gas (mmcf/d) 2,254 2,815 1,549
Oil equivalent (boe/d) 972 1,219 668


In Q4 at Leaman, Alberta the Company tied in four additional wells in the Pekisko oil pool. At Niton one additional well was tied in for Rock Creek production. These wells contributed to the 339 barrels per day increase in crude oil production.

In West Central, Alberta area a well was tied in on September 1, 2005. The well averaged 760 mcf/d (net to the Company's interest) during the fourth quarter compared to 265 mcf/d during the third quarter and accounted for the largest portion of the increased gas production.

The Company also benefited from strong product prices. The Company's average prices realized as compared to benchmark prices were as follows:



Crude Oil and Liquids 2005 Q4 Q3
------------------------------------------------------------------------
Edmonton light 74.35 71.65 77.05
Company average 47.92 44.53 54.18
-----------------------
Differential (26.43) (27.12) (22.87)
-----------------------
-----------------------


Eighty percent of the Company's 2005 oil production came from the Leaman Pekisko oil pool which produces 23 degree gravity oil and receives a price of approximately $25 to $30 less than the Edmonton light oil benchmark price.



Natural Gas 2005 Q4 Q3
------------------------------------------------------------------------
AECO daily spot 10.33 11.36 9.30
Company average 11.13 12.33 8.94
-----------------------
0.80 0.97 (0.36)
-----------------------
-----------------------


The Company's natural gas is sold in the spot market and the prices received are generally tied to the AECO daily spot rate subject to adjustments for heating content of the sales gas.



Royalties

Detail of royalty expense is provided in the following table:

2005 Q4 Q3
------------------------------------------------------------------------
Royalty category
Crown 2,426 1,668 758
Freehold and gross overriding 540 454 86
Alberta royalty tax credit (ARTC) (463) (231) (232)
-----------------------
Total 2,503 1,891 612
-----------------------
-----------------------

Average royalty rates (% of revenue)
Crown 25.39 26.63 23.02
Freehold and gross overriding 5.65 7.25 2.61
Alberta royalty tax credit (ARTC) (4.85) (3.69) (7.05)
-----------------------
Total 26.19 30.19 18.58
-----------------------
-----------------------


Valiant's major oil properties in the Leaman area and its West Central gas property are subject to gross overriding royalties (GORR) which contribute to an overall average royalty rate of 26% of revenue for 2005. The increased portion of production from these properties in Q4 accounts for the percentage difference between the quarters. The maximum ARTC for Alberta companies is $0.5 million.



Operating Costs
2005 Q4 Q3
-------------- ------------- --------------
$000's $/boe $000's $/boe $000's $/boe
------------------------------------------------------------------------
Production expense 964 5.57 490 4.37 474 7.77
Facility fees and
transportation 743 4.29 597 5.33 146 2.39
---------------------------------------------
1,707 9.86 1,087 9.70 620 10.16
---------------------------------------------
---------------------------------------------


The high level of activity in the oil and gas sector is placing significant upward pressure on all costs. Increasing volumes create greater economics of scale and the growing portion of gas production account for the more favorable Q4 operating cost per boe.

Water trucking and water processing costs for our Leaman property will be eliminated as a new water injection well became operational in February 2006. Future operating costs should continue to decline due to the foregoing and as lower cost wells, particularly gas wells, comprise a higher portion of 2006 production.



General and Administrative ("G&A")

An analysis of G&A costs by their nature is provided in the table below:

2005 Q4 Q3
-------------- ------------- --------------
$000's % $000's % $000's %
------------------------------------------------------------------------
Human resource costs 816 51 458 51 358 51
Corporate and general 784 49 437 49 347 49
---------------------------------------------
1,600 100 895 100 705 100
Recoveries from partners (301) 19 (174) 19 (127) 18
Portion capitalized (351) 22 (156) 18 (195) 28
---------------------------------------------
Net expense 948 59 565 63 383 54
---------------------------------------------
---------------------------------------------


Valiant has assembled a strong team that is capable of managing considerably more production than that experienced during the start up phase of its operations. As production levels increase, the cost per boe for general and administrative will decrease as demonstrated by Q4's lower cost of $5.04 per boe compared to $6.28 in Q3.

Human resource costs are the largest component of general and administrative expense at 51% of the total period general and administrative costs of $1.6 million. General and administrative costs are reduced by amounts charged to joint venture partners on a cost recovery basis and by capitalized costs. Capitalized general and administrative costs represent the direct cost of geological salaries and services that are related to the Company's exploration program and are therefore capitalized as part of the cost of oil and gas property and deducted from general and administrative expense.

Interest and Financing

Interest on Valiant's revolving loan is based on the banker's prime rate plus 0.4% for the first $8 million and prime plus 2% on drawings thereafter. Commitment and facility fees account for the rest of this expense.

The first advance under the Company's revolving loan was in September 2005. The Company relied on its cash from share issues prior to that date. The flow through share issue on October 19, 2005 also reduced the need for the bank loan financing in October and November.



Stock Based Compensation

2005 Q4 Q3
------- ------ -------
$000's $000's $000's
------------------------------------------------------------------------
Performance shares 329 165 164
Stock options 8 4 4
------------------------
337 169 168
------------------------
------------------------
Cash compensation 816 458 358
------------------------
------------------------
% of cash compensation 41.3% 36.9% 46.9%
------------------------
------------------------


Performance shares were issued to employees, directors and certain service providers. The performance shares (and stock options for more recently hired and future employees) are intended to be market competitive and provide the appropriate balance of short and long term employee incentives.



Depletion, Depreciation and Accretion (DD&A)

2005 Q4 Q3
------- ------ -------
$000's $000's $000's
------------------------------------------------------------------------
Depletion of oil and gas assets 4,034 2,558 1,476
Depreciation of office and other assets 41 23 18
Accretion retirement obligation 45 27 18
------------------------
Total 4,120 2,608 1,512
------------------------
------------------------


Depletion expense is driven by production volumes, the capital cost base and reserve levels. The DD&A rate was high at $23.80 per boe for this period and reflects the cost of the initial Forte acquisition of $26.28 per boe. We anticipate that the rate will decline on a per boe basis as additional reserves are developed in future years at costs comparable to the Company's organic finding and development cost experienced in 2005 of $20.14 per boe.

Income Tax

The provision is greater than would be expected because of expenses not deductible for income tax purposes, primarily stock based compensation and a portion of crown charges. Valiant's estimated tax pools at December 31, 2005 are listed below.



Annual Deduction
Available (%) $000s
------------------------------------------------------------------------
Canadian oil and gas property expense (COGPE) 10 30,863
Canadian development expense (CDE) 30 8,459
Canadian exploration expense (CEE) 100 2,486
Undepreciated capital cost of oil and gas equipment 25 13,107
Share issue and financing costs 20 1,288
Other 10-30 237
--------
56,440
--------
--------


The Company will renounce $6.0 million of CEE expenditures pursuant to its flow through share agreement. Included in the CEE balance above is $2.1 million of expenditures that will be renounced, leaving a balance of CEE of approximately $3.9 million to be incurred in 2006 to fulfill the renouncement.



Capital expenditures and capital assets (000's)

2005 Q4 Q3
------------------------------------------------------------------------
Land acquisitions and lease retention 1,917 783 1,134
Geological and geophysical 502 275 227
Drilling 7,921 4,375 3,546
Completion 4,139 2,389 1,750
Facilities and equipment 6,308 2,639 3,669
General and administrative capitalized 351 156 195
Other 53 41 12
------------------------

Capital expenditures 21,191 10,658 10,533
Acquisition from Forte 35,100 - 35,100
Asset retirement costs 387 275 112
------------------------

Total capital assets 56,678 10,933 45,745
Accumulated depletion and depreciation (4,075) (2,524) (1,551)
------------------------

Net capital assets 52,603 8,409 44,194
------------------------
------------------------


Capital expenditures related to the following:

- Drilling of 10.35 net wells: 2.3 net gas wells, 5.8 net oil wells and 2.25 dry wells. Drilling and completion costs averaged $1.165 million per net well drilled.

- Acquiring 6,000 net acres of land on which future drilling locations have been identified. Successful land bids at crown sales averaged $193 per acre during the year.

- Building a battery at Leaman in Q3 as well as initiating activity related to a water injection system which was completed in February 2006. These projects should contribute to lower operating costs in the area.

- Purchasing seismic data.

- Equipping and tie-in of 15 gross wells contributing to the increase in production levels throughout the year.



Finding, Development and Acquisition (FD&A) Costs
------------------------------------------------------------------------
Proved +
Probable Proved
---------- -------
2005 Capital Expenditures ($000's)
Acquisition from Forte (oil and gas assets only) 34,818 34,818
Valiant capital expenditures (oil and gas only) 21,138 21,138
Future capital - closing 1,454 1,449
Future capital - opening (1,464) (1,464)
----------------------
55,946 55,941
Reserve additions (boe)
Acquisition from Forte 1,327 1,111
Valiant drilling 1,049 889
----------------------
2,374 2,000
FD&A per boe ($/boe)
Acquisition from Forte 26.26 31.34
Valiant discoveries and extensions 20.14 23.76
Overall 23.56 27.97


Upon commencement of the Company's operations on July 7, 2005 Valiant acquired proved plus probable reserves and 84,000 net acres of undeveloped land in its core areas of Leaman, Niton, west central Alberta, and the Peace River Arch, Alberta as well as minor properties in Alberta, Saskatchewan, and B.C. At the time of acquisition, approximately 62 % of the total proved reserves as determined by Sproule in a report dated March 31, 2005 were not yet on production or had limited initial production history. During the second half of 2005 the shut-in properties were brought on production. Upon completion of the December 31, 2005 reserves report by Sproule, the proved plus probable reserves assigned to these properties were adjusted downward primarily due to poorer then anticipated performance from two wells. Neither of these wells was producing at the time of acquisition. These revisions totaled 439.3 mboe and represented 24 percent of the initial proved plus probable reserves of 1.8 million boe included in the March 31, 2005 report. The net balance of 1,327 mboe has been attributed to the acquisition of reserves in the reconciliation table included herein.

Subsequent to the initial property acquisition, Valiant commenced an active exploration and development drilling program on its core properties and, as a result, added 1,048.5 mboe of proved plus probable reserves as of December 31, 2005.

The crude oil, liquids and natural gas reserves of the Company were evaluated by the independent engineering firm of Sproule Associates Limited ("Sproule"). All of the Company's properties were evaluated by Sproule and each property, where proved or probable reserves were assigned, was evaluated with respect to geology, reservoir characteristics, production history and economic factors influencing the future revenue obtainable from the remaining reserves.

The reserve evaluation was reported to the Safety, Environmental and Reserve Committee of the Board of Directors for its review. The Committee conducted its due diligence and was satisfied with the process that had been used in the preparation of the reserve report. Presented below are summary tables of the Company's reserves as at December 31, 2005 based on Sproule's January 1, 2006 price forecast. All reserves are defined as the total remaining recoverable reserves owned by the Company before the deduction of royalties.



Oil & Natural
Gas Liquids Natural Gas
------------------------------------------------------------------------
Gross Net Gross Net(a)
Reserve Category (Mbbl) (Mbbl) (MMcf) (MMcf)
------------------------------------------------------------------------
Developed Producing 985.6 773.3 3,981.3 3,031.9
Developed Non-Producing 18.8 16.6 395.2 290.6
Undeveloped 90.8 71.7 23.4 32.1
Total Proved 1,095.1 861.6 4,399.9 3,354.5
Probable 157.4 128.6 1,297.2 1,010.1
------------------------------------------------------------------------
Total 1,252.6 990.3 5,697.1 4,364.7
------------------------------------------------------------------------
------------------------------------------------------------------------

(a) net of royalties

Before Income Taxes
Discounted at (%/Year) 0 5 8 10
------------------------------------------------------------------------
Reserves Category ($000's) ($000's) ($000's) ($000's)
------------------------------------------------------------------------
Proved
Developed Producing 49,762.6 43,787.3 41,045.8 39,458.8
Developed Non-Producing 3,706.9 3,482.7 3,362.1 3,286.7
Undeveloped 801.1 523.8 398.2 327.5
Total Proved 54,270.6 47,793.8 44,806.1 43,073.0
Probable 11,200.7 8,077.3 7,000.2 6,440.3
------------------------------------------------------------------------
Total 65,471.3 55,871.1 51,806.3 49,513.3
------------------------------------------------------------------------
------------------------------------------------------------------------

The reconciliation and continuity of opening and closing reserves is
provided below:

Oil & Liquids Natural Gas Total
------------------------------------------------------------------------
Proved Plus Proved Plus Proved Plus
Probable Probable Probable
(Mbbl) (Mmcf) (Mboe)
------------------------------------------------------------------------

Acquisition from Forte 780.4 3,278.1 1,326.6
Discoveries 58.0 1,984.4 388.7
Extensions 525.7 804.3 659.8
Production (111.5) (369.6) (173.1)
------------------------------------------------------------------------
December 31, 2005 1,252.6 5,697.1 2,202.0
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Asset Value (NAV)

Net asset value calculations and the related assumptions are provided in
the following table:

Sproule Constant
000's except per share Price Forecast Price Forecast
------------------------------------------------------------------------
Net present value of pre-tax
proved plus probable
reserves discounted at 8% 51,806 53,541
Undeveloped land ($200/acre) 18,077 18,077
Net debt (includes working
capital deficiency) (7,619) (7,619)
----------------------------------
Net asset value 62,264 63,999

Basic shares 17,277 17,277

NAV ($/share) - December 31, 2005 3.60 3.70

Replacement
Reserve Replacement Ratio mboe Ratio
------------------------------------------------------------------------
Production 173.1

Reserve additions
Proved plus probable 1,049 6.06

Recycle Ratio
------------------------------------------------------------------------
Operating netback ($/boe) 30.88
Corporate netback ($/boe) 25.11

FD&A ($/boe) 20.14

Operating recycle ratio 1.53
Corporate recycle ratio 1.25


Liquidity

Valiant had a $10.2 million revolving line of credit of which $1.6 million was drawn at December 2005. The revolving loan is demand in nature, however, the credit limits are based on a borrowing base calculation as determined by estimates of future cash flow from Valiant's assets. The borrowing base calculation is subject to review at least annually. A review in early 2006 resulted in an increase in the credit facility limit to $16 million. The Company meets all of its loan covenants which include quarterly tests of the working capital ratio and debt to trailing cash flow ratio. The Company may also borrow by way of a Guaranteed Note (equivalent to banker's acceptance) with its lender which is subject to a stamping fee but lower overall borrowing costs.

Valiant issued 1,587,572 common shares at $2.52 per share as a private placement on July 6, 2005. On October 19, 2005 the Company issued 1,091,000 flow through common shares on a bought deal basis at $5.50 per share to raise gross proceeds of $6.0 million (net $5.6 million after issue costs). This equity capital significantly reduced its borrowing needs in 2005. Valiant anticipates funding its 2006 capital program with increased credit lines, funds from operations and equity issues if required.



Share Trading Information

000's except for per share figures 2005
------------------------------------------------------------------------
Trading volume 8,528
Daily average 72
Trading value ($) 35,134

Share price ($)
High 5.25
Low 3.76
Average 4.09

Market capitalization - December 31, 2005
Shares outstanding (000's) 17,277
Period end share price ($/share) 4.12
Total ($000) 71,180


Contractual Obligations

The Company's office lease expires in 2009 and requires the following
payments:

------------------------------------------------------------------------
($000's) 2006 2007 2008 2009 Total
------------------------------------------------------------------------
(unaudited) 298 298 298 99 993
------------------------------------------------------------------------


Off-Balance Sheet Arrangements, Related Party Transactions and Financial Instruments

The Company has not entered into any off-balance sheet transactions, derivative or hedging contracts or any related party transactions except for the transfer of assets from Forte in July, 2005.

Critical Accounting Estimates

Management is often required to make judgments, assumptions and estimates in the application of generally accepted accounting principles that may have a significant impact on the financial results of the Company. The Company's significant accounting policies are described in Note 2 to the consolidated financial statements. The following is a discussion of the accounting estimates that are critical in determining the Company's financial results.

(a) Petroleum and natural gas property and equipment

(i) Oil and natural gas reserves

The Company's proved oil and gas reserves at December 31, 2005 were 100 percent evaluated and reported on by an independent petroleum engineering consultant. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production, estimated commodity price forecasts and the timing of future expenditures, all of which are subject to a number of uncertainties and various interpretations. The Company expects that over time its reserve estimates will be revised upward or downward based on updated information such as the results of future drilling, testing and production levels. Reserve estimates can have a significant impact on net earnings, as they are a key component in the calculation of depletion on a unit of production basis. Downward revisions to reserve estimates could also result in an impairment of oil and natural gas property, plant and equipment and then depleted.

(ii) Full cost accounting and depletion

The alternative method of accounting for oil and natural gas properties and equipment is the successful efforts method. A major difference in applying the successful efforts method is that exploratory dry holes and geological and geophysical exploration costs would be charged against net earnings in the year incurred rather than being capitalized to property, plant and equipment.

The unit-of-production method of depletion is based on estimated proven reserves. Changes in estimated proven reserves or future development costs have a direct impact on depletion and depreciation expense.

(iii) Impairment-ceiling test

The ceiling test using future prices considered reasonable and relevant to Valiant's products showed no impairment. Valiant's proven reserves of 1.85 mmboe are being carried at an average of $28.41/boe while proved plus probable reserves of 2.23 mmboe are being carried at $23.57/boe.

(b) Asset retirement obligation

Valiant's asset retirement obligation is based on the Company's net ownership in wells and facilities.

Determination of the current retirement costs is based on amounts obtained from the Alberta Energy Utilities Board (AEUB) for each well depending on its geographic area, depth and extent of equipment. To estimate future retirement costs, Valiant applied a 2% inflation factor which it believes is reasonable over the long term and is consistent with rates used by others in the industry. The credit adjusted risk free rate of 8% is also reasonable in the current environment and consistent with rates used by others in the industry. Expected retirement dates range from 2007 to 2024 with an average of just under 10 years. This estimate is based on the wells expected productive life and regulatory requirements. The following table presents sensitivity analysis of these estimates on the amount of the liability at December 31, 2005 and depletion depreciation and accretion expense for the period then ended.



------------------------------------------------------------------------
Asset Retirement Obligation Sensitivity Analysis

Depletion,
Depreciations and
Accretion for
Liability at the period ended
December 31, December 31,
2005 (000's) 2005 (000's)
------------------------------------------------------------------------
Change in inflation rate to 3% Increase by $124 Increase by $11
Change in discount rate to 9% Decrease by $104 Decrease by $9
Increase in average retirement
years from 10 years to 12 years Decrease by $226 Decrease by $22
Decrease in average retirement
years from 10 years to 8 years Increase by $84 Increase by $8
------------------------------------------------------------------------


(c) Stock-based compensation

Valiant used the Black Scholes model to determine the fair value of stock based compensation at the grant date using the following estimates:

(i) Fair value of shares

The value of Valiant's share price at July 6, 2005, the date of granting the performance shares, was determined to be $2.52. This was the estimated net asset value of the company based on the engineering evaluation of its reserves at March 31, 2005 and rolled forward to July 2005. On July 6, 2005 the Company issued 1,580,000 shares at $2.52 pursuant to a private placement.

Risk free interest rate

Four year Bank of Canada bonds yielded just under 4% in 2005.

(ii) Volatility

It was not feasible to estimate Valiant's volatility at the date of granting. Consequently reference was made to Valiant's peer group and volatility was estimated at 60%.

Stock based compensation is sensitive to these estimates as follows:

- 1% higher interest rate would increase stock based compensation expense by $5,300.

- 10% higher volatility would increase stock based compensation expense by $39,500.

(d) Future income tax

The liability method of accounting for income taxes requires determination of substantially enacted income tax rates. In June 2003, the Federal Government introduced a gradual reduction in the general corporate income tax rate over a five year period starting January 1, 2003. The Company estimates the accounting and tax values during the five year phase-in period and tax rates expected to be effective when temporary differences reverse. The estimated future tax provisions are subject to revisions, both upwards and downwards, that are not known at this time. In addition to these revisions, future capital activities can impact the timing of the reversal of any temporary differences. These differences can have an impact on the amount of future taxes determined at a point in time, and to the extent that these differences are created, they can impact the charge against earnings for future taxes.

New Standards in 2006 and 2007

In April 2005, the Canadian Institute of Chartered Accountants issued the following new Handbook Sections: Section 1530, Comprehensive Income; Section 3251, Financial Instruments - Recognition and Measurement; and Section 3865, Hedges. The effective date for adoption for all sections is for fiscal years beginning on or after October 1, 2006. Earlier adoption is permitted only as of the beginning of a fiscal year ending on or after December 31, 2004, however, an entity that has previously issued interim financial statements prepared in accordance with generally accepted accounting principles for a period within a particular fiscal year is precluded from adopting this section until the beginning of its next fiscal year. As well, early-adoption of any one of these standards also requires early adoption of the others.

These new accounting standards for Canadian GAAP will converge more closely with US GAAP as all financial instruments will be recorded on the balance sheet at fair value and changes in fair value will be included in earnings, except for derivative financial instruments designated as hedges, for which changes in fair value will be included in comprehensive income.

The Company has not assessed the future impact these sections will have on the financial statements.

Disclosure Controls and Procedures Over Financial Reporting

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding disclosure. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filings, that the Company's disclosure controls and procedures are effective to provide reasonable assurance that material information related to the Company, including its consolidated subsidiaries, is made known to them by others within those entities. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they cannot guarantee that the disclosure controls and procedures or internal controls over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Business Risks

The business of exploration, development and acquisition of oil and gas reserves involves a number of business risks inherent in the oil and gas industry which may impact Valiant's results. These business risks can be generally grouped into two major areas: operational risks, which includes environmental risks, and financial risks.

Operationally, the Company faces risks associated with finding, developing and producing oil and gas reserves. The Company attempts to control operating risks by:

- maintaining a disciplined approach to implementation of the exploration and development program.

- hiring experienced technical staff.

- concentrating the exploration activity on regions where the Company has experience and expertise.

- striving for ownership levels and operator status which allows Valiant to manage costs, timing and sales of production.

Recoverable reserves and their future net cash flow are based on estimates of commodity prices, projected production and future operating costs. All of these estimates may vary from actual results. The Company has its reserves evaluated annually by an independent engineering firm and reviews the reserve estimates with the Board of Directors.

Environmental risks are also associated with field operations. The Company has health and safety programs and procedures, and an environmental standards policy. These policies and procedures are designed to protect and maintain the environment with respect to all company operations on behalf of the shareholders, employees and public. Valiant regularly reviews its environmental liability, property, drilling and general liability insurance with its independent insurance broker to ensure appropriate limits and terms.

The Company is also exposed to financial risks in the form of commodity prices, interest rates, the Canadian to U.S. dollar exchange rate and inflation. Valiant manages commodity price risks by focusing its capital program on areas that will generate attractive rates of return even at substantially lower commodity prices than the industry is currently receiving. The Company periodically considers derivative or hedging contracts but chose not to enter any such contract in 2005.

Outlook

Several factors are expected to have a significant impact on 2006 operations:

Product Prices

The 2006 year began with strong oil prices and historically high natural gas prices in spite of very high natural gas storage levels entering the winter heating season. Natural gas prices declined steadily thereafter in response to mild wither weather conditions in North America. Oil prices have generally stayed at the same level as supply seemed sufficient to meet demand with spikes from time to time in response to political uncertainty in certain producing countries. The decline in natural gas prices has resulted in increased uncertainty regarding anticipated 2006 cash flows and funds expected to be available to support the capital program.

Service Costs

The costs for all types of service or equipment related to the industry have continued to increase throughout 2005 and 2006. This is driven by heightened activity levels and strong demand for equipment and expertise.

Service Availability

The heightened activity levels that are the prime driver of increased costs have put tremendous strains on the service industry such that wells and operations are delayed because drilling rigs, service rigs or other key drilling supplies are not available on a timely basis.

Land Availability

To date in 2006 prices for land at crown land sales in the Company's preferred areas have increased by more than 50% over the prior year. As well companies with land are less inclined to farm out properties on terms acceptable to us.

Regulatory Environment

Operations continue to be impacted by regulatory processes that lead to longer lead times to obtain well licenses, approvals and other required permits. This is acerbated by more activist land owners objecting to drilling operations, further increasing the costs and the delays.

Summary

The current environment can be summarized as follows:

- product price uncertainty in the near term, particularly for natural gas

- increasing costs

- longer lead time to plan and execute exploration and development activities

Valiant's Approach

Valiant has arranged for a drilling rig and service rig to be dedicated to our use to overcome some of these operational challenges. We are reviewing our 2006 budget to ensure that our plans fully reflect the higher cost structure, longer lead times and available resources.

As previously announced, our capital budget anticipates drilling 42 wells (27 net) and spending $33.7 million. The drilling will be focused in our core areas of Leaman, Niton and West Central Alberta regardless of any changes that may result from our review process. We anticipate drilling, as a minimum, the following:

- eight (3.75 net) wells at Niton

- four (4.0 net) wells at Leaman

- five (1.93 net) wells at West Central

- four (2.6 net) wells at Grand Prairie

Production in Q1, 2006 is expected to be approximately 1,200 boe/d and should increase in Q2 as we bring on stream five (net 2.4) gross wells now behind pipe.

Consolidated Financial Statements of

VALIANT ENERGY INC.

December 31, 2005


Management's Report

To the Shareholders of Valiant Energy Inc.:

All of the information in this annual report is the responsibility of management. The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. The financial information elsewhere in the annual report has been reviewed to ensure consistency in all material respects with that in the financial statements.

The Company maintains appropriate systems of internal control to give reasonable assurance that transactions are appropriately authorized, assets are safeguarded from loss or unauthorized use and financial records provide reliable and accurate information for the preparation of financial statements.

Deloitte & Touche LLP, an independent firm of chartered accountants, has been engaged to examine the financial statements and provide their auditors' report. Their report is presented with the financial statements.

The directors are responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The directors exercise this responsibility through the audit committee. This committee, which is comprised of directors who are not employees of the Company, meets with management and the external auditors to satisfy itself that management responsibilities are properly discharged and to review the financial statements before they are presented to the directors for approval. The financial statements have been approved by the Board of Directors on the recommendation of the Audit Committee.



Douglas N. Baker
Vice President and Chief Financial Officer

T.J. MacKay
Chairman and Chief Executive Officer

March 9, 2006



Auditors' Report

To the Shareholders of Valiant Energy Inc.:

We have audited the consolidated balance sheet of Valiant Energy Inc., as at December 31, 2005 and the consolidated statements of operations and deficit and of cash flows for the period from incorporation on May 31, 2005 to December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and the results of its operations and its cash flows for the period from incorporation on May 31, 2005 to December 31, 2005 in accordance with Canadian generally accepted accounting principles.



Deloitte & Touche LLP
Chartered Accountants

Calgary, Alberta
March 8, 2006



VALIANT ENERGY INC
STATEMENT OF OPERATIONS AND DEFICIT
------------------------------------------------------------------------
Period ended
December 31,
2005 (1)
$000's
--------------
REVENUE
Oil and gas 9,556
------------------------------------------------------------------------
EXPENSES
Royalties (net of Alberta Royalty Tax Credits) 2,503
Production 1,707
General and administrative (note 4) 948
Stock based compensation (note 7) 337
Interest 50
Depletion, depreciation and accretion expense (note 4) 4,120
------------------------------------------------------------------------
9,665
------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (109)

Future income tax expense (note 8) (155)
------------------------------------------------------------------------
LOSS FOR THE PERIOD AND DEFICIT END OF PERIOD (264)
------------------------------------------------------------------------
Loss per common share
Basic and diluted ($/share) (0.02)
------------------------------------------------------------------------
Weighted average number of common shares outstanding
Basic and diluted 16,178,587
------------------------------------------------------------------------
(1) These results comprise the period from incorporation on May 31, 2005
to December 31, 2005.

See accompanying notes


VALIANT ENERGY INC
BALANCE SHEET
------------------------------------------------------------------------
As at
December 31, 2005
$000's
-------------------

ASSETS

CURRENT
Accounts receivable 6,715
Prepaid expenses 129
------------------------------------------------------------------------
6,844
------------------------------------------------------------------------
Future income taxes (note 8) 1,849

Capital assets (notes 3 and 4) 52,603
------------------------------------------------------------------------
61,296
------------------------------------------------------------------------
LIABILITIES

CURRENT
Accounts payable and accrued liabilities 12,847
Revolving bank loan (note 5) 1,616
------------------------------------------------------------------------
14,463
Asset retirement obligation (note 6) 1,350
------------------------------------------------------------------------
15,813
------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (note 7) 45,410
Contributed surplus (note 7) 337
Deficit (264)
------------------------------------------------------------------------
45,483
61,296
------------------------------------------------------------------------
On behalf of the Board
------------------------------------------------------------------------
Director Director

See accompanying notes


VALIANT ENERGY INC
STATEMENT OF CASH FLOWS
------------------------------------------------------------------------
Period ended
December 31,
2005 (1)
$000's
--------------
OPERATING ACTIVITES
Loss for the period (264)
Add items not requiring cash:
Depletion, depreciation and accretion 4,120
Future income taxes 155
Stock-based compensation expense 337
------------------------------------------------------------------------
4,348
Net change in non-cash working capital (note 11) (1,306)
------------------------------------------------------------------------
Cash provided by operating activities 3,042
------------------------------------------------------------------------

FINANCING
Increase in bank loan 1,616
Issue of common shares, net of issue costs 9,590
------------------------------------------------------------------------
Cash provided by financing activities 11,206
------------------------------------------------------------------------

INVESTING
Acquisition from Forte Resources Inc. (note 3) (366)
Petroleum and natural gas property and equipment (21,191)
Net change in non-cash working capital (note 11) 7,309
------------------------------------------------------------------------
Cash used in investing activities (14,248)
------------------------------------------------------------------------

NET CHANGE IN CASH POSITION -
------------------------------------------------------------------------
CASH BEGINNING AND END OF PERIOD -
------------------------------------------------------------------------
Supplementary Information
Interest received -
------------------------------------------------------------------------
Interest and financing costs paid 50
------------------------------------------------------------------------
Taxes paid -
------------------------------------------------------------------------
(1) These results comprise the period from incorporation on May 31, 2005
to December 31, 2005.

See accompanying notes


VALIANT ENERGY INC

Notes to the Consolidated Financial Statements

For the Period Ended December 31, 2005

1. ORGANIZATION

Valiant Energy Inc. ("Valiant" or the "Company") was incorporated on May 31, 2005 under the laws of the Province of Alberta by Articles of Incorporation and commenced operations on July 7, 2005. The Company is engaged in the exploration and development of petroleum and natural gas properties. The Company was essentially dormant between May 31, 2005 and July 7, 2005.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the Company and its wholly owned subsidiary Denison Resources Inc. and have been prepared in accordance with Canadian generally accepted accounting principles.

(a) Petroleum and natural gas property and equipment

The Company follows the full cost method of accounting for petroleum and natural gas interests, whereby all costs of exploring for and developing petroleum and natural gas properties are capitalized into a single Canadian cost centre. Such costs include land acquisition costs, geological and geophysical expenses, costs for drilling both productive and non-productive wells and tangible equipment and administrative costs directly related to acquisition, exploration and development activities. Proceeds from the disposal of properties are normally deducted from the full cost pool without recognition of gain or loss unless that deduction would result in a change to the rate of depletion of 20 percent or greater in which case a gain or loss is recorded.

Depletion and Depreciation

Petroleum and natural gas interests are depleted using the unit-of-production method based on an independent engineering estimate of the Company's share of proved reserves, before royalties, with natural gas converted to its energy equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil. Included in the depletion base are estimated costs to be incurred in developing proved reserves and excluded are estimated salvage values and the original cost of acquiring and evaluating unproved properties.

Other assets are depreciated using the diminishing balance method using the following annual rates:

- office equipment and software: 25%

- field vehicles: 50%

Impairment

The carrying value of petroleum and natural gas property and equipment is evaluated quarterly to determine whether the capitalized costs are impaired. An impairment loss is recognized in net earnings when the carrying amount of the full cost pool is not recoverable and the carrying amount of the cost centre exceeds its fair value. The carrying amount is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows from proved reserves. If the sum of the cash flows is less than the carrying amount, the impairment loss is the amount by which the carrying amount exceeds the sum of:

i. the fair value of proved and probable reserves determined by computing the discounted cash flows expected from the production of proved and probable reserves; and

ii. the costs of unproved properties that have been subject to a separate impairment test.

(b) Joint ventures

A significant portion of the Company's exploration and development activities are conducted jointly with others and accordingly, the financial statements reflect only the Company's proportionate interest in such activities.

(c) Income taxes

The Company follows the liability method of accounting for income taxes. Under this method, future income taxes are recorded for the effect of any difference between the accounting and income tax basis of an asset or liability, using the substantively enacted income tax rates. Accumulated future income tax balances are adjusted to reflect changes in income tax rates that are substantively enacted with the adjustment being recognized in earnings in the period that the change occurs.

(d) Flow-through shares

The Company finances a portion of its exploration and development activities through the issue of flow-through shares. Under the terms of the flow-through share agreements, the tax attributes of the related expenditures are renounced to the subscribers. Share capital is reduced and the future income tax asset is reduced or future income tax liability is increased by the estimated cost of the renounced tax deductions at the time expenditures are renounced.

(e) Revenue recognition

Petroleum and natural gas sales are recognized when commodities are delivered to purchasers.

(f) Derivative Financial Instruments

In certain circumstances, the Company may enter into derivative instrument contracts to manage its exposure to fluctuations in foreign exchange rates, interest rates and commodity prices. It does not enter into derivative instrument contracts for trading or speculative purposes.

Derivative instruments that do not qualify as hedges, or are not designated as hedges, are recorded using the mark-to-market method of accounting whereby instruments are recorded as either an asset or liability with changes in fair value recognized in earnings.

The Company did not enter into any derivative instrument or hedging contracts in 2005.

(g) Stock-based compensation expense

The Company follows the fair value method of accounting for stock options and performance shares granted to employees, directors and certain service providers. Stock-based compensation expense is recorded for all performance shares and options granted with the corresponding amount recorded as contributed surplus. Stock-based compensation expense is based on the estimated fair value of the related performance share or stock option at the time of the grant and is expensed on a straight line basis over the vesting period of the option. When performance shares or stock options are exercised, the amounts previously accumulated as contributed surplus and the consideration (if any) received are recorded as an increase to share capital.

(h) Earnings per share

Earnings per share are calculated using the total weighted average number of common shares outstanding during the period. Diluted per share calculations reflect the exercise or conversion of potentially dilutive securities at the later of the date of grant of such securities or the beginning of the period. The Company computes diluted earnings per share using the treasury stock method which assumes that proceeds from the exercise of in the money stock options or performance shares would be used to purchase common shares at the average market price during the period.

(i) Asset retirement obligations

The Company recognizes the fair value of estimated asset retirement obligations related to well bores and well sites as a liability when new wells are drilled. The asset retirement cost is recorded as part of the cost of the related long lived asset at an amount that is equal to the initially estimated fair value of the asset retirement obligation. Changes in the estimated obligation resulting from revisions to estimated timing or amount of undiscounted cash flows are recognized as a change in the asset retirement obligation and the related asset retirement cost. The asset retirement cost is recorded as part of the cost of the related long lived asset, at an amount that is equal to the initially estimated fair value of the asset retirement obligation.

Asset retirement costs are amortized using the unit-of-production method and are included in depletion and depreciation expense. Increases in the asset retirement obligations resulting from the passage of time are recorded as accretion expense.

(j) Measurement Uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.

The amount recorded for depletion and deprecation of petroleum and natural gas interests and for asset retirement obligations are based on estimates of petroleum and natural gas reserves and future costs. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements of future periods could be material.

3. TRANSFER OF ASSETS AND LIABILITIES

Valiant commenced operations on July 7, 2005 as a newly created exploration company following a major reorganization involving the creation of Thunder Energy Trust by Forte Resources Inc. (Forte), Thunder Energy Inc. and Mustang Resources Inc. The former shareholders of Forte received 0.3333 of a share of Valiant for each Forte share.

In conjunction with this reorganization, Forte transferred certain assets and liabilities to Valiant on July 7, 2005 at their carrying value. The assets and liabilities were transferred at carrying value because the companies were related parties at that time. A future income tax asset has been recorded due to transferring tax pools of $38.5 million, which are in excess of the carrying value of the related assets of $35.1 million and an asset retirement obligation of $0.9 million.



Period ended
December 31, 2005
Assets and liability transferred $000's
-------------------
Capital assets - primarily oil and
gas properties 35,100
Future income taxes 1,452
Asset retirement obligation (918)
-------------------
Net assets transferred 35,634
-------------------
-------------------

Consideration given:
Common shares issued - net of issue costs 35,268
Cash 366
-------------------
35,634
-------------------
-------------------

4. CAPITAL ASSETS

Period ended
December 31, 2005
$000's
-------------------

Petroleum and natural gas properties 56,343
Office furniture and equipment 335
-------------------
56,678

Accumulated depletion and depreciation (4,075)
-------------------
52,603
-------------------
-------------------


The Company capitalized general and administrative costs of $351,000 for the period ended December 31, 2005 relating to exploration and development activity.

Costs attributed to undeveloped land of $8,962,000 for the period ended December 31, 2005 have been excluded from the calculation of depletion and depreciation.

The test for impairment of the petroleum and natural gas properties was calculated at December 31, 2005 based upon management's estimates of future oil and gas prices with reference to benchmark prices in the futures market, and reputable industry forecasts.

The following table summarizes the benchmark prices used in the ceiling test calculation. Based on these assumptions, there was no impairment at December 31, 2005.



------------------------------------------------------------------------
Year Oil WTI US$ Natural Gas AECO Cdn$
------------------------------------------------------------------------
2006 60.81 11.58
2007 61.61 10.84
2008 54.60 8.95
2009 50.19 7.87
2010 47.76 7.57
2011 48.48 7.70
Escalate Thereafter 1.5% 1.5% - 1.7%


5. REVOLVING BANK LOAN

The Company had a demand revolving credit facility with a limit of $10,200,000 at December 31, 2005, of which $1,616,000 had been drawn. The facility is secured by a general security agreement and an unlimited first floating charge debenture covering all of the Company's assets. Interest is payable as follows:

- for credit up to $8 million - lender's prime plus 0.4%

- for credit over $8 million - lender's prime plus 2.00%

In March 2006 a new credit facility limit of $16 million was arranged to replace the above facility. The facility is secured by a general security agreement and an unlimited first floating charge debenture covering all of the Company's assets. The facility bears interest at lender's prime plus 0.25%, provided prescribed financial ratios are maintained and increasing to lender's prime plus 0.4% otherwise.

6. ASSET RETIREMENT OBLIGATION

At December 31, 2005, the estimated total undiscounted amount required to settle the asset retirement obligation was $2,320,000. This obligation will be settled based on the operating lives of the underlying assets, which currently are estimated to be from 2 to 25 years with the majority of costs expected to occur between 2015 and 2020. Estimated costs have been determined using an inflation rate of 2.0 % and have been discounted using a credit adjusted risk free rate of 8%.



Changes to the asset retirement obligation were as follows:

Period ended
December 31, 2005
$000's
-------------------
Liabilities transferred from Forte (note 3) 918
Liabilities incurred through operations 243
Liabilities settled -
Accretion 45
Change in estimates 144
------------------------------------------------------------------------
Asset retirement obligation, end of period 1,350
------------------------------------------------------------------------


7. SHARE CAPITAL

Authorized

The Company is authorized to issue an unlimited number of voting common shares, an unlimited number of non voting common shares and 2 million performance shares. The Company is also authorized to issue an unlimited number of first preferred shares, issuable in series.



Issued
Period ended
December 31, 2005
Common shares # $000's
------------------------
Issues during the period
Forte share exchange (note 3) 14,598,037 36,268
Private placement (i) 1,587,572 4,001
Flow through shares (ii) 1,091,000 6,001
Share issue costs (1,427)
Related income tax effect 551
------------------------
17,276,609 45,394
-----------
Performance shares (iii) 1,580,000 16
------------------------

Total share capital 45,410
---------
---------


(i) Private Placement

The private placement of 1,587,572 shares occurred on July 6, 2005 for $2.52 per share. Shares were purchased by employees, directors and certain service providers and are held in escrow. One third of the escrow shares will be released on each of January 7, 2006, July 7, 2006 and July 7, 2007. Should the holder cease being an employee, director or service provider before these release dates, the remaining shares are repurchased at the lower of the issue price and the market value on that date.

(ii) Flow Through

On October 19, 2005 the Company issued 1,091,000 flow through common shares at $5.50 per share for gross proceeds of $6,001,000 and total issue costs of $395,000. The shares issued are subject to a hold period under applicable securities laws expiring February 19, 2006. Under the look back provision governing flow-through shares, the Company is required to incur eligible exploration expenditures prior to December 31, 2006. To December 31, 2005 approximately $2.1 million of these expenditures had been incurred. In March 2006 the Company renounced expenditures of $6 million to the shareholders effective December 31, 2005.

(iii) Performance shares

Valiant granted 1,580,000 performance shares for $0.01 per share to employees, directors and certain service providers on July 6, 2005 which are convertible to common shares based upon the following formula:



A = B x ((C-2.52)/C)

Where, A = number of common shares to be issued
B = number of performance shares held
C = share price at date of exercise


The performance shares have a four year life and vest 1/3 annually over a three year period. None were exercisable at December 31, 2005 and none were cancelled or exercised during the period ended December 31, 2005.

(iv) Stock options

The Company may grant stock options to directors, employees and certain service providers. The number of performance shares and stock options is limited to 10% of the issued and outstanding common shares. Under the stock option plan, options vest 1/3 annually over a three year period and an option's maximum term is five years. During the period ended December 31, 2005, 20,000 options were granted at an exercise price of $4.20. None were exercisable at December 31, 2005 and none were cancelled or exercised during the period ended December 31, 2005.

The fair value of the performance shares and stock options were estimated at the grant dates using the Black-Scholes option-pricing model with a risk free interest rate of 4%, the expected life (4 years for performance shares and 5 years for stock options) and 60% volatility. The stock based compensation expense and increase to contributed surplus for the period ended December 31, 2005 is $337,000. The weighted average fair value of stock options and performance shares granted during the period ended December 31, 2005 was $1.26 per unit.

8. PROVISION FOR INCOME TAXES

The provision for future income taxes varies from the amounts that would be computed by applying the effective Canadian federal and provincial income tax rates to the income before income taxes as follows:



Period ended
December 31, 2005
$000's
-------------------
Loss before income taxes (109)

Expected income tax recovery at 37.62% (41)
Increases (decreases) from
Non-deductible crown charges less resource allowance 141
Stock based compensation 113
Attributed Canadian Royalty Income (82)
Income tax rate reductions 4
Other 20
-------------------
Future income tax expense 155
-------------------
-------------------

The major components of the future income tax asset at December 31,
2005 follow:

------------------------
2005
------------------------
Future
Income
Amount Taxes
$000's $000's
------------------------
Temporary differences:
Future income tax asset
Carrying value of capital assets at
less than tax basis 2,599 874
Asset retirement obligation 1,350 454
Share issue and financing costs 1,288 439
Attributed royalty income deducted
for provincial purposes 713 82
------------------------
5,950 1,849
------------------------
------------------------


9. FINANCIAL INSTRUMENTS

The Company's accounts receivable, accounts payable and accrued liabilities and revolving bank loan constitute financial instruments. The fair values of these financial instruments approximate their carrying amount due to the short-term maturity of these financial instruments.

The Company is exposed to credit related losses, in the event of default by counterparties to financial instruments. The Company's accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks.

The Company's revolving bank loan bears interest at bank prime plus 0.4% for loans up to $8 million and prime plus 2.0% thereafter. This variable rate loan creates interest rate risk.

The Company's revenues are generated from the sale of crude oil, natural gas and natural gas liquids. The prices for these commodities are subject to considerable risk of fluctuation due to various factors, including changes to world supply and demand, local supply and demand and geopolitical issues.




10. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Payments under the Company's office lease are required as follows:

$000's
--------
2006 298
2007 298
2008 298
2009 99


11. CHANGES IN NON-CASH WORKING CAPITAL

$000's
Investing Operating Total
------------------------------------------------------------------------
December 31, 2005
Accounts payable and accrued
liabilities 10,491 2,356 12,847
Accounts receivable (3,182) (3,533) (6,715)
Prepaid expenses - (129) (129)
-----------------------------------
Change in non-cash working capital 7,309 (1,306) 6,003
-----------------------------------
-----------------------------------


Contact Information

  • Valiant Energy Inc.
    Douglas N. Baker
    Vice President and Chief Financial Officer
    (403) 237-5163
    or
    Valiant Energy Inc.
    2400, 500 - 4th Avenue SW
    Calgary, AB T2P 2V6
    (403) 237-5163
    Email: info@valiantenergy.ca
    Website: www.valiantenergy.ca