Valiant Energy Inc.
TSX : VLE

Valiant Energy Inc.

November 07, 2005 08:00 ET

Valiant Energy Inc. Announces Q3 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 7, 2005) - Valiant Energy Inc. (TSX:VLE) ("Valiant" or "the Company") is pleased to announce its results for its first quarter of operations which ended September 30, 2005 and to outline its plans for 2006.

Commencement of Operations

Valiant commenced operations on July 7, 2005 as a newly created exploration company following a Plan of Arrangement 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 certain Forte growth properties with production of approximately 300 boe/d at the commencement of operations.

Comparative Information

Because this is the first quarter of operations for Valiant, comparative information cannot be provided.



------------------------------------------------------------------------
HIGHLIGHTS Three months ended
September 30, 2005
------------------------------------------------------------------------
FINANCIAL
($ Thousands except per share data)
Oil and gas sales 3,293

Cash flow from operations 1,655
Per share - basic 0.11
Per share - fully diluted 0.10

Net income (loss) (62)
Per share - basic and diluted (0.005)

Capital expenditures 10,533
Net debt 672
Basic Shares at September 30, 2005 16,185,609

OPERATIONS

Daily production
Oil and NGL's (bbls/d) 410
Natural gas (mcf/d) 1,549
Barrels of oil equivalent (boe/d) 668

Average sales prices
Oil and NGL's ($/bbl) 54.30
Natural gas ($/mcf) 9.04

Barrels of oil equivalent are reported with a 6:1
conversion with six mcf equals one barrel
------------------------------------------------------------------------
------------------------------------------------------------------------


Production and Financial

Production, which was approximately 300 boe/d at the beginning of the quarter averaged 668 boe/d for the three months of operations. Production increased steadily throughout the quarter for a number of reasons:

- At Leaman, Alberta three wells were tied in to a newly constructed battery facility during the month of July.

- In September discoveries in the Niton and West Central areas of Alberta were brought on stream.

- Also in September the Alberta government relaxed its production restrictions on new wells. As a result, Valiant chose to moderately increase the production rates from its wells in the Leaman area.

As a result of these activities, Valiant's production volumes had increased to 900 boe/d by September 30, 2005; a 300% increase from Valiant's July production rate. We expect that Valiant will achieve its previously stated exit production rate guidance of 1,200 boe/d for the year end 2005.

Strong revenue and cash flow resulted from the production gains. Revenue for the quarter was $3.293 million and cash flow from operations was $1.655 million ($0.11 per share).

Operations

During the quarter the Company drilled 10 wells (4.6 net) resulting in five wells (3.12 net) cased for oil production, four wells (1.23 net) cased for natural gas production and one (0.25 net) dry and abandoned. Since the end of the quarter the Company has drilled and cased two (1.88 net) potential oil wells.

Valiant has now drilled ten successful wells in the Leaman area with eight drilled and cased in a newly defined Paleozoic medium gravity oil pool and two wells cased for potential natural gas production from shallow horizons. Currently, six wells are producing from the Paleozoic pool. Completion, testing and tie-in of two additional wells are expected to occur in November. At September 30, 2005 five wells were producing at an average rate of 125 boe/d per well. Current individual well production rates for wells in the Leaman property are greater than the normal allowable rate as the Alberta government has removed its Maximum Rate Limitation restrictions until at least November 30, 2005. If this relaxation does not extend beyond November 30, 2005 the production rates for the wells would be limited to 50 boe/d per well. Valiant has applied to the Alberta Energy and Utilities Board ("EUB") for Good Production Practice status for the pool. If granted, these wells will be produced at the Company's discretion at rates close to current rates, reflecting each well's productive capability, while maximizing pool recovery. The Company has also installed central fluid handling and gas conservation facilities for the Leaman pool.

At Niton, the Company drilled, completed and tied in a Rock Creek oil well during the quarter with initial productivity of greater than 200 (66 net) boe/d of light oil. Valiant is now producing approximately 180 boe/d from its net working interest in the four wells in the Niton pool. Valiant has also commenced an engineering study to optimize pool development.

Valiant recently participated as to a 40% working interest in a potential Bluesky formation gas well at Laprise in northeast British Columbia. The initial completion operation encountered technical difficulties and the results are currently under evaluation.

Liquidity

The Company commenced operations in July 2005 with a strong balance sheet as a result of the completion of a private placement of 1,587,000 shares which generated just over $4 million of gross proceeds. A revolving credit facility was negotiated with the Company's lender providing for a credit limit of $6.0 million, increasing to $7.8 million by December 31, 2005. The credit facility is currently being reviewed with the Company's lender for a possible increase in the maximum credit limit. At September 30, 2005 the Company's debt was $672,000 and the net debt and working capital deficiency was $5.228 million. On October 19, 2005 the Company raised approximately $6.0 million through a bought deal financing that resulted in the issuance of 1.091 million flow-through shares at $5.50 per share.

Management

Valiant's executive and management team combines the proven team from Forte augmented by the addition of experienced geologists and engineers. The result is a team of successful and entrepreneurial people committed to creating value for Valiant's shareholders.

2006 Capital Budget

The 2006 capital budget has been approved by the Board of Directors at $33.5 million and includes the drilling of up to an estimated 45 wells (27 net) exploration and development wells in 2006.

Summary and Outlook

The July 7, 2005 Plan of Arrangement enabled the creation of an exploration-focused entity, Valiant, that is expected to grow through the drill bit at an accelerated pace. Our first quarter of operations saw the successful implementation of this strategy:

- The Company has drilled 12 wells to date with 11 cased for production, a 92% success rate.

- Production increased during the quarter from an initial rate of 300 boe/d to 900 boe/d, an increase of 300% in three months.

- The Company has reaffirmed its exit rate production guidance of 1,200 boe/d for December 31, 2005.

Looking forward, there will be a continued emphasis on growth through exploration and development. Of the 45 budgeted wells in 2006 approximately 80% are expected to be drilled in the Company's core focus areas and approximately 60% will be operated by Valiant.

Valiant has a strong balance sheet enabling the expected program to be financed from cash flow and bank debt while maintaining debt levels below one year's future cash flow.

Prices for both crude oil and natural gas remain at historically high levels. High prices, while favourable for cash flow, create an increasingly competitive environment for land, acquisitions, services and employees. Management is confident that Valiant, with a strong group of committed employee-shareholders working from a base of 94,000 net undeveloped acres of land, and an extensive inventory of drilling prospects, will be able to respond effectively to these competitive pressures.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis was prepared as at November 3, 2005 and is management's assessment of Valiant's historical financial and operating results in this first quarter of operations. The reader should be aware that historical results are not necessarily indicative of future performance. This discussion contains forward-looking statements that involve risks and uncertainties. Such information, although considered reasonable by Valiant at the time of preparation, may prove to be incorrect and actual results may differ materially from those anticipated in the statements made. Where converted to a barrel of oil equivalent basis, all natural gas production results have been converted at the rate of six thousand cubic feet to one barrel of oil equivalent ("boe").

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 certain Forte growth properties such as Leaman, Webster and Laprise. Production from these acquired properties was 300 boe/d at the commencement of operations.

Comparative Information

Because this is the first quarter of operations for Valiant, comparative information cannot be provided.

Management

Valiant's executive and management team combines the proven team from Forte supplemented with additional hires of experienced geologists and engineers. The result is a team of successful and entrepreneurial people committed to creating value for Valiant's shareholders.

Non-GAAP Measurements

The Management's Discussion and Analysis contains the term cash flow from operations, which should not be considered an alternative to, or more meaningful than, cash flow from operating activities or net income as determined in accordance with Canadian generally accepted accounting principles as an indicator of the Company's performance. Valiant's determination of cash flow from operations may not be comparable to that reported by other companies especially those in other industries. The reconciliation between net earnings and cash flow from operations can be found in the consolidated statements of cash flow in the unaudited interim consolidated financial statements. The Company also presents cash flow from operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of earnings per share.

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 when Valiant is in normal operating mode and production volumes are higher.

Valiant's operating results in dollar terms and on a boe basis for the three months ended September 30, 2005 are provided below:



Three months ended
September 30, 2005
--------------------
$000's $ boe
------------------------------------------------------------------------
Revenue
Oil and liquids 2,021 54.30
Natural gas 1,272 53.47
--------------------
3,293 53.98

Royalties 612 10.03
Operating 620 10.16
General and administrative 383 6.28
Stock based compensation 168 2.75
Interest 23 0.38
--------------------
1,806 29.60

Depletion, depreciation
and site restoration 1,512 24.79
Income taxes 37 0.61
--------------------

Net (loss) (62) (1.02)
--------------------
--------------------


Revenue and production were strong as several wells came into production during the quarter and the Company also benefited from higher commodity prices. The price for WTI, the benchmark crude, averaged $63.04 U.S. for the quarter and Edmonton, the light oil price, averaged $77.04 per barrel. Crude oil produced from the Leaman Paleozoic pool is a medium gravity grade crude oil and received a price approximately $20 less than Edmonton light. Natural gas prices averaged $8.91 per mcf during the quarter.



The following table shows the production for each product:

Three months ended
Production September 30,
2005
------------------------------------------------------------------------
Crude oil (bbls/d) 402
Liquids (bbls/d) 8
--------------------
410

Natural gas (mcf/d) 1,549

Total boe (boe/d) 668
--------------------
--------------------


Royalties (net of the royalty tax credit) averaged 18.6% of revenue for this quarter.

Operating costs were $10.16 per boe in this quarter of 2005. The high level of activity in the oil and gas sector is placing significant upward pressure on all costs, resulting in high operating costs.

General and administrative expenses in this quarter of 2005 were $6.28/boe. Certain non recurring start-up costs were a factor in this quarter. 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.

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. The impact of cost recoveries and capitalized amounts is summarized as follows:



General and Administrative Three months ended
($ Thousand) September 30,2005
------------------------------------------------------------------------
Gross expenditures 705
Recoveries from partners 127
--------------------
578
Capitalized portion 195
--------------------
383
--------------------
--------------------


Stock compensation expense of $168,000 or $2.75/boe relates to stock options and performance shares issued to employees, directors and certain service providers. This incentive scheme is described elsewhere and is consistent with industry practice.

Interest expense, including related fees, was $23,000 in this quarter of 2005, all related to a bank loan. Valiant's interest rate on its revolving loan is the bank prime rate plus 0.4%. The first advance was not until September 2005 as the Company relied on its cash balances to fund its operations during much of this quarter.

Depletion, depreciation and accretion (DD&A) expense is driven by production volumes and the cost base. The DD&A rate was $24.79 per boe for this quarter, totaling $1,512,000.

The provision for income taxes is greater than would be expected because of stock based compensation, which is not deductible for income tax purposes.



Capital expenditures are indicated below:

Capital Expenditures Three months ended
($ Thousands) September 30, 2005
------------------------------------------------------------------------
Acquisitions from Forte on start-up 35,100
--------------------
Exploration, land and seismic 1,361
Drilling, completion and workovers 5,296
Equipping 3,669
Other 207
--------------------
10,533
--------------------
--------------------


Liquidity - The Company drilled 10 wells (4.2 net) during the quarter. Valiant had a $6.0 million revolving line of credit of which $0.6 million was drawn at September 30, 2005. The credit limit increases to $7.8 million by December 30, 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 with the next review scheduled for early 2006. The Company meets all loan covenants including quarterly tests of the working capital ratio, debt to equity ratio and debt to cash flow ratio.

Valiant issued 1,587,572 common shares at $2.52 per share as a private placement on July 6, 2005. These proceeds of $4 million have funded its operations over much of the first three months.

On October 19, 2005 the Company issued 1.1 million flow through common shares on a bought deal basis at $5.50 per share to raise gross proceeds of $6.0 million. Share issue costs will result in a net amount of $5.6 million to be received by Valiant.

The net debt and working capital deficiency of $5.2 million is approximately $0.8 million less than the authorized credit line. With the increased credit line, the proceeds of the flow through share issue in October, 2005 and with the anticipated cash flow, there should be sufficient finances to fund the balance of the 2005 capital budget.

Financial Instruments

The Company has not hedged any of its production.

Contractual Obligations

The Company has entered into various commitments related to the Calgary office lease. The following table summarizes the outstanding contractual obligations of the Company for its office lease for the next five years and thereafter:



------------------------------------------------------------------------
($000's) 2005 2006 2007 2008 2009 Total
------------------------------------------------------------------------
(unaudited) 298 298 298 298 99 1,291
------------------------------------------------------------------------


Off-Balance Sheet Arrangements and Related Party Transactions

The Company has not entered into any off-balance sheet transactions or any related party transactions except for the transfer of assets from Forte described in Note 4 to the consolidated financial statements.

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. A comprehensive discussion of the Company's significant accounting policies is contained 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) Full cost accounting

The Company follows the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized, whether successful or not. The aggregate of capitalized costs, net of certain costs related to unproven properties, and estimated future development costs is amortized using the unit-of-production method based on estimated proven reserves. Changes in estimated proven reserves or future development costs have a direct impact on depletion and depreciation expense.

Certain costs related to unproven properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be assigned, at which point they should be included in the depletion calculation, or for impairment, for which any write-down would be charged to depletion and depreciation expenses.

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.

(b) Oil and natural gas reserves

The Company's proved oil and gas reserves, which were acquired on the Forte share exchanges, were 100 percent evaluated and reported on by an independent petroleum engineering consultant as at March 31, 2005. 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 and depreciation. A revision to the reserve estimate could result in a higher or lower DD&A charge to net earnings. Downward revisions to reserve estimates could also result in a write-down of oil and natural gas property, plant and equipment under the ceiling test.

(c) Full cost accounting ceiling test

The carrying value of property, plant and equipment is reviewed for impairment. Impairment is determined by the carrying amount of the property, plant and equipment exceeding the sum of the undiscounted cash flows expected to result from the Company's proved reserves. Cash flows are calculated based on third party quoted forward prices and adjusted for the Company's contract prices and quality differentials. If there is impairment, the magnitude of such impairment would be calculated by comparing the carrying value of property, plant and equipment to the estimated net present value of future cash flow from proved plus risked probable reserves. A risk free interest rate is used to arrive at the net present value of the future cash flows. Any excess carrying value above the net present value of future cash flow would be recorded as a permanent impairment and charged as additional depletion expense in the consolidated statement of earnings. No write-down is required at September 30, 2005.

(d) Asset retirement obligation

The Company recognizes the fair value of an asset retirement obligation ("ARO") in the period in which it is incurred when a reasonable estimate of fair value can be made. The fair value of the estimated ARO is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset. The capitalized amount is depleted on a unit-of-production basis over the life of the reserves. The liability amount is increased each reporting period due to the passage of time and the amount of this accretion is charged to earnings in the period. Revisions to the estimated timing of cash flow or to the original estimated undiscounted cost would also result in an increase or decrease to the ARO. Actual costs incurred upon settlement of the ARO are charged against the ARO to the extent of the liability recorded. Any difference between the actual costs incurred upon settlement of the ARO and the recorded liability is recognized as a gain or loss in the Company's earnings in the period in which the settlement occurs.

Determination of the original undiscounted costs is based on estimates using current costs and technology in accordance with existing legislation and industry practice. The estimation of these costs can be affected by factors such as the number of wells drilled, well depth and area specific environmental legislation.

(e) Future income tax

The Company follows the liability method of accounting for income taxes. Under this method income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the financial statements and their respective tax base, using substantively enacted future 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 impact of the new legislation requires the Company to schedule out all existing temporary differences, identify the accounting and tax values during the five year phase-in period for the declining tax rates and recalculate the future income tax balance using tax rates in effect when temporary differences reverse. The above noted forecasts of estimated net revenue streams are utilized to calculate the future tax provision and, as such, 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.

(f) Stock-based compensation

The Company grants performance shares and stock options to directors, officers and employees. Compensation costs attributable to share options or performance shares granted are measured at fair value at the grant date and expensed over the expected exercise time frame with a corresponding increase to contributed surplus. Upon exercise of the stock options, consideration paid by the option holder, together with the amount previously recognized in contributed surplus is recorded as an increase to share capital.

On July 6, 2005 Valiant issued 1,580,000 performance shares to employees which entitled the holder to receive Valiant common shares over a three year period (equal thirds) as described in Note 7 to the consolidated financial statements. In September 2005, 20,000 stock options were issued.

Business Risks

The business of exploration, development and acquisition of oil and gas reserves involves a number of uncertainties and as a result Valiant is exposed to certain 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. Exploration risks are managed by hiring experienced technical staff and by concentrating the exploration activity on specific core regions where the Company has experience and expertise. The Company also attempts to operate associated projects where its level of ownership is sufficient to justify same. Operational control allows the Company to manage costs, timing and sales of production.

Estimates of economically recoverable reserves and the future net cash flow they will generate are based on a number of factors and assumptions, such as 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 their findings 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 also carries environmental liability, property, drilling and general liability insurance and recently increased its limits.

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 also periodically considers a price-hedging program designed to mitigate large downward movements in commodity prices.

Outlook

Valiant is a junior exploration and development company that is focused on building a strong asset base through a strategic grass roots exploration program followed by production enhancement and optimization operations. The Company emphasizes exploration and development activities to provide growth.

For 2005 the Board of Directors has approved a capital expenditure budget of $15.0 million to be expended on exploration and development activities. The budget provides for drilling of approximately 20 gross (10 net) wells in 2005.

For 2006 the Board of Directors has approved a capital expenditure budget of $33.5 million to be expended on exploration and development activities. The budget provides for drilling of up to approximately 45 gross (27 net) wells in 2006. Drilling activity will be focused in our four core property areas where approximately 80% of the budgeted wells will be drilled.

The precise timing of drilling in the fourth quarter of 2005 and the first quarter of 2006 will depend upon rig availability, land owner concerns, lease preparation and EUB approvals. Our near term activity will be as follows:

- Continued drilling and extensions to the Leaman Paleozoic pool with an additional four development wells expected to be drilled prior to March 31, 2006. In addition, one exploratory well will be drilled.

- Continued drilling in the West Central area with two development wells and one exploratory well expected to be drilled. As well, two wells (25% working interest) that were drilled in the third quarter are expected to be tied in during the fourth quarter of 2005.

- Subject to a satisfactory resolution of surface and land owner issues at Grand Prairie, the Company anticipates drilling a Banff formation exploratory test (35% working interest). As well, a Halfway test (100% working interest) will be drilled in the Progress area.

- Two additional wells (40% working interest) will be drilled for Bluesky gas production in the Laprise area.

Valiant has an extensive inventory of drilling locations. With a strong balance sheet that includes the funds generated from the recent flow through share issuance, expected credit lines and anticipated cash flow from operations, the Company is well positioned to execute its drilling program for the remainder of 2005 and for the 2006 year.



VALIANT ENERGY INC
STATEMENT OF LOSS AND DEFICIT
(unaudited)
------------------------------------------------------------------------

Three months
ended September 30,
2005
$
--------------------

REVENUE
Oil and gas 3,293
------------------------------------------------------------------------

EXPENSES
Royalties (net of royalty tax credit) 612
Production 620
General and administrative (note 5) 383
Stock based compensation (note 7) 168
Interest 23
Depletion, depreciation and accretion
expense (note 5) 1,512
------------------------------------------------------------------------
3,318
------------------------------------------------------------------------

LOSS BEFORE INCOME TAXES (25)

Future income taxes (note 8) 37
------------------------------------------------------------------------

LOSS FOR THE PERIOD AND DEFICIT END OF PERIOD (62)
------------------------------------------------------------------------

Loss per common share
Basic and diluted $0.00
------------------------------------------------------------------------
Weighted average number of common
shares outstanding
Basic 15,296,290
------------------------------------------------------------------------
Diluted 15,871,713
------------------------------------------------------------------------
------------------------------------------------------------------------


VALIANT ENERGY INC
BALANCE SHEET

As at
September 30,
2005
$
(unaudited)
--------------------
ASSETS

CURRENT
Accounts receivable 4,666
Prepaid expenses 34
------------------------------------------------------------------------
4,700
------------------------------------------------------------------------

Future income taxes (note 8) 1,415
Capital assets (note 4 and 5) 44,194

50,309
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES

CURRENT
Accounts payable and accrued liabilities 9,256
Revolving bank loan (note 6) 672
------------------------------------------------------------------------
9,928

Asset retirement obligation (note 3) 991
------------------------------------------------------------------------
10,919
------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share capital (note 7) 39,284
Contributed surplus (note 7) 168
Deficit (62)
------------------------------------------------------------------------
39,390
------------------------------------------------------------------------

50,309
------------------------------------------------------------------------
------------------------------------------------------------------------

On behalf of the Board


Director Director


VALIANT ENERGY INC
STATEMENT OF CASH FLOWS
(unaudited)
------------------------------------------------------------------------
Three months
ended September 30,
2005
$
--------------------

OPERATING
Loss for the period (62)
Add items not requiring cash:
Depletion, depreciation and accretion 1,512
Future income taxes 37
Stock-based compensation expense 168
------------------------------------------------------------------------
Cash flow from operations 1,655
Net change in non-cash working capital (note 11) (1,957)
------------------------------------------------------------------------
Cash used in operating activities (302)
------------------------------------------------------------------------

FINANCING
Increase in bank loan 672
Issue of common shares, net of issue costs 4,016
------------------------------------------------------------------------
Cash provided by financing activities 4,688
------------------------------------------------------------------------

INVESTING
Acquisition from Forte Resources Inc. (note 4) (366)
Expenditures on capital assets (10,532)
Net change in non-cash working capital (note 11) 6,513
------------------------------------------------------------------------
Cash used in investing activities (4,386)
------------------------------------------------------------------------

NET CHANGE IN CASH POSITION -
------------------------------------------------------------------------
------------------------------------------------------------------------
CASH BEGINNING AND END OF PERIOD -
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplementary Information
Interest received -
------------------------------------------------------------------------
Interest paid 23
------------------------------------------------------------------------
Taxes paid -
------------------------------------------------------------------------
------------------------------------------------------------------------


VALIANT ENERGY INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 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.

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 Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results can differ from those estimates.

Capital assets

The Company follows the full cost method of accounting for petroleum and natural gas operations, whereby all costs of exploring for and developing petroleum and natural gas properties and related reserves are capitalized into a single Canadian cost centre. Such costs include land acquisition costs, costs of drilling both productive and non-productive wells, geological and geophysical expenditures, well equipment and certain other overhead expenditures related to exploration.

Capitalized costs, including tangible well equipment, are depleted using the unit-of-production method based on estimated proven reserves of petroleum and natural gas before royalties. Unproven properties are excluded from the depletion calculation until quantities of proven reserves or impairment can be determined. Depreciation of office equipment is computed using the diminishing-balance method at an annual rate of 25%.

Gains or losses on the sale or disposition of petroleum and natural gas properties are not recognized except under circumstances, which result in a major revision of the depletion rate.

The Company calculates a ceiling test whereby the carrying value of property and equipment is compared to the sum of the undiscounted cash flows expected to result from the future production of proved reserves and the sale of unproved properties. Cash flows are based on third party quoted prices, adjusted for transportation and quality differentials. Should the ceiling test result in excess carrying value, the Company would then measure the amount of the impairment by comparing the carrying amounts of property and equipment to an amount equal to the net present value of future cash flows from proved plus probable reserves and the sale of unproved properties.

The Company's risk-free interest rate is used to arrive at net present value of future cash flows, any excess carrying amount would be recorded as a permanent impairment.

The test for impairment of the Company's oil and gas carrying value was calculated at September 30, 2005 using the following product price assumptions, which were based upon the average of the current price assumptions of the Company's independent engineers and the forward strip of the New York Mercantile Exchange:



------------------------------------------------------------------------
Year Oil WTI US$ Natural Gas AECO Cdn$
------------------------------------------------------------------------

2005 64.30 7.89
2006 65.21 7.73
2007 61.59 6.75
2008 53.46 5.92
2009 51.23 5.55
Thereafter 52.20 5.63


Joint ventures

Substantially, all 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.

Income taxes

The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are measured based upon temporary differences between the carrying values of assets and liabilities and their tax basis. Income tax expense (recovery) is computed based on the change during the year in the future tax assets and liabilities. Effects of changes in tax laws and tax rates are recognized when substantially enacted.

Flow-through shares

The Company will finance 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 future income tax liability is increased by the estimated cost of the renounced tax deductions at the time expenditures are renounced.

Revenue recognition

Revenue from the sale of oil and gas is recognized based on volume delivered at contractual delivery points and rates. The costs associated with the delivery, including operating and maintenance costs, transportation and production-based royalty expenses, are recognized in the same period in which the related revenue is earned and recorded.

Financial instruments

The Company may enter into financial instruments to hedge against adverse fluctuations in foreign exchange rates, electricity rates, interest rates and commodity prices. Payments or receipts on financial instruments that are designated and effective as hedges are recognized in income concurrently with the hedged transaction. If the hedge of an anticipated future transaction is terminated or if a hedge ceases to be effective, the gain or loss at that date is deferred and recognized concurrently with the anticipated transaction. Subsequent changes in the value of the financial instrument are reflected in income. Any financial instrument that does not constitute a hedge is recorded at fair value with any resulting gain or loss reflected in income.

Stock-based compensation expense

The Company has adopted 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 a corresponding increase 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 recognized over the vesting period of the option. When performance shares or stock options are exercised, the amounts previously accumulated as contributed surplus are credited to share capital at that time.

Per share amounts

Per share amounts are calculated using the total weighted average number of common shares outstanding during the year. 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 year. The Company computes diluted earnings per share using the treasury stock method to determine the dilutive effect of stock options.

Asset retirement obligations

The fair value of obligations associated with the retirement of long-lived assets are recorded in the period the asset is put into use, with a corresponding increase to the carrying amount of the related asset. The obligations recognized are statutory, contractual or legal obligations. The liability is accreted over time for changes in the fair value of the liability with the accretion amount included in depletion, depreciation and accretion expense. The costs capitalized to the related assets are amortized to earnings in a manner consistent with the depletion and depreciation of the underlying assets.

Hedging relationships

All derivative instruments that do not qualify as a hedge, or are not properly designated as a hedge, are recorded on the balance sheet as either an asset or a liability with changes in fair value recognized in earnings. The Company had no hedging relationships in the quarter but may enter into such relationship in the future.

3. ASSET RETIREMENT OBLIGATIONS

At September 30, 2005, the estimated total undiscounted amount required to settle the asset retirement obligations was $1,658,000. These obligations will be settled based on the useful lives of the underlying assets, which currently extend up to 10 years into the future. This amount has been discounted using a credit adjusted interest rate of 8% and an inflation rate of 1.5%.



Changes to asset retirement obligations were as follows:

Three Months
ended September 30,
2005
$000's
--------------------

Liabilities transferred from Forte 918
Liabilities incurred through operations 55
Liabilities settled -
Accretion 18
Change in estimates -
------------------------------------------------------------------------
Asset retirement obligations, end of period 991
------------------------------------------------------------------------
------------------------------------------------------------------------


4. 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 considered to be related. 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 $35.1 million and an asset retirement obligation of $.9 million.



Three Months
ended September 30,
2005
$000's
--------------------
Assets and liability transferred
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 35,268
Cash 366
--------------------
35,634
--------------------
--------------------


5. CAPITAL ASSETS

Three Months
ended September 30,
2005
$000's
--------------------
Petroleum and natural gas properties 45,339
Office furniture and equipment 406
--------------------
45,745

Accumulated depletion and depreciation (1,551)
--------------------
44,194
--------------------
--------------------


The Company capitalized general and administrative costs of $195,000 for the period ended September 30, 2005 relating to exploration and development activity.

Costs attributed to undeveloped land of $8,163,000 for the period ended September 30, 2005 have been excluded from the calculation of depletion and depreciation.

6. REVOLVING BANK LOAN

The Company had a demand revolving credit facility with a limit of $6.0 million at September 30, 2005, of which $0.6 million had been drawn down. The credit limit increases to $7.8 million by December 31, 2005. 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 at the bank prime rate plus 0.4%.

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
Three Months
ended September 30,
2005
# $000's
-----------------------
Common shares
Issued in Forte share exchange (note 4) 14,598,037 35,268
Issued in private placement - July 6, 2005 (i) 1,587,572 4,000
-----------------------
16,185,609 39,268
----------

Issued performance shares - July 6, 2005 (ii) 1,580,000 16
-----------------------

Total share capital 39,284
-----------
-----------


(i) The private placement of 1,587,572 shares occurred on July 6, 2005
for $2.52/share. Shares were purchased by employees, directors and
certain service providers and are held in escrow for up to 2
years.

(ii) 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 equals B x ((C-2.52)/C)

Where,
A equals number of common shares to be issued
B equals number of performance shares held
C equals 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 September 30,
2005.

(iii) 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 September 30, 2005, 20,000
options were granted at an exercise price of $4.20. None were
exercisable at September 30, 2005 and none were cancelled during
the period ended September 30, 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 for the
period ended September 30, 2005 is $168,000 which was credited to
contributed surplus. The weighted average fair value of stock
options and performance shares granted during the period ended
September 30, 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:



--------------------
Three Months
ended September 30,
2005
$000's
--------------------

Loss before income taxes (25)

Corporate income tax rate 37.6%
--------------------
(10)
Increase from
Non-deductible crown charges 25
Other non-deductible expenses 63
Rate reductions (41)
--------------------

Future income tax expense 37
--------------------
--------------------


The major component of the future income tax asset at September 30,
2005, using a combined federal and provincial rate of 33.6% are as
follows:


-----------------------
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 4,211 1,415
-----------------------
-----------------------


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 foreign currency risk is the risk that a variation in exchange rates between the Canadian dollar and the U.S. dollar will affect the price the Company receives for its sale of crude oil, natural gas and natural gas liquids.

The Company's revolving bank loan bears interest at bank prime plus 0.4%. The interest rate risk is the risk that the bank prime rate may fluctuate in the future.

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.

Forward sales contracts

The Company has no forward sales contracts during this quarter.



10. COMMITMENT, GUARANTEES AND CONTINGENCIES

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

---------
$
---------
2005 298,000
2006 298,000
2007 298,000
2008 298,000
2009 99,000


The Company has various guarantees and indemnifications in place in the ordinary course of business, none of which, as assessed by management, are expected to have a significant impact on the Company's financial statements or operations.



11. CHANGES IN NON-CASH WORKING CAPITAL

$000's
Investing Operating Total
---------------------------------

September 30, 2005
Accounts payable and accrued
liabilities 7,737 1,519 9,256
Accounts receivable (1,224) (3,442) (4,666)
Prepaid expenses (34) (34)
---------------------------------

Change in non-cash working capital 6,513 (1,957) 4,556
---------------------------------
---------------------------------


12. SUBSEQUENT EVENTS

On October 19, 2005 the Company issued 1,091,000 flow through common shares at $5.50 per share for gross proceeds of $6,000,000.

Valiant 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.

Contact Information

  • Valiant Energy Inc.
    Douglas N. Baker
    Vice President and Chief Financial Officer
    (403) 237-5163
    (403) 237-5256 (FAX)
    Email: info@valiantenergy.ca
    Website: www.valiantenergy.ca
    or
    Valiant Energy Inc.
    2450, 500 - 4th Avenue S.W.
    Calgary, AB T2P 2V6