Vault Energy Trust
TSX : VNG.UN

Vault Energy Trust

March 21, 2006 06:00 ET

Vault Energy Announces 2005 Year End Results

CALGARY, ALBERTA--(CCNMatthews - March 21, 2006) - Vault Energy Trust ("Vault" or the "Trust")(TSX:VGN.UN) is pleased to present its consolidated financial and operating results for the year ended December 31, 2005. Vault was created and commenced operations on June 22, 2005, subsequent to the reorganization of Chamaelo Energy Inc. ("Chamaelo") pursuant to a Plan of Arrangement. As Vault is a continuation of Chamaelo, these results reflect the operations of Chamaelo from January 1, 2005 to June 21, 2005 plus the operations of Vault for the 193-day period from June 22, 2005 to December 31, 2005.

HIGHLIGHTS

- Acquired $365.6 million of properties in West Central Alberta and North Eastern British Columbia for $23.19/BOE per proved reserve and $18.16/BOE per proved plus probable reserve, almost tripling our size;

- Raised $330 million in equity and convertible debentures;

- Paid 7 consecutive distributions of $0.115 prior to year end for a total of $29.7 million resulting in a 56% payout ratio;

- Drilled 44 (31.3 net) wells with a 93% success rate;

- Evaluated Vault's 65 sections of coalbed methane rights ("CBM") at Wimborne and based on recent land sale activity Vault's land value is $30-60 million;

- Built a top notch technical team to support our rapid growth and build for the future.



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Period Ended
December 31,
FINANCIAL(1) 2005 2004
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($ thousands, except per Trust unit amounts)

Oil and natural gas sales(2) 121,120 9,116

Funds flow from operations 52,475 3,996
per Trust unit - basic 2.21 0.57
per Trust unit - diluted 2.16 0.54

Net income 10,482 344
per Trust unit - basic 0.44 0.05
per Trust unit - diluted 0.43 0.05

Property acquisitions 365,592 84,181
Corporate acquisitions 23,598 18,680
Capital expenditures 35,003 10,256

Bank debt 81,500 12,965
Net working capital deficit(3) 17,293 1,674

Trust units outstanding (4)
weighted average - basic 23,741,790 7,041,145
- diluted 24,335,491 7,343,758

end of period - basic 32,785,833 14,039,893
- diluted 44,156,356 16,717,206
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(1) The results reflect the operations of Chamaelo from January 1,
2005 to June 21, 2005 plus the operations of Vault for the
193-day period from June 22, 2005 to December 31, 2005. The
period ended December 31, 2004 was the 214-day period from
June 1, 2004 when operations commenced.
(2) Oil and natural gas sales are shown net of transportation costs.
(3) Net working capital as at December 31, 2005 includes $3. 8
million payable to unitholders.
(4) Prior period per Trust unit amounts based on 2 Chamaelo shares
for 1 Trust unit.


OPERATING(1) 2005 2004
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Number of producing days 365 214

Daily production
Oil and NGL - (bbls/d) 2,278 440
Natural gas - (mcf/d) 20,630 3,009
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Oil equivalent - (boe/d @6:1) 5,716 942

Sales price before physical hedges(2)
Oil and NGL - ($/bbl) 64.90 50.06
Natural gas - ($/mcf) 9.43 6.84
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Oil equivalent - ($/boe @6:1) 59.90 47.37

Effect of physical hedges
Oil and NGL - ($/bbl) (1.29) -
Natural gas - ($/mcf) (0.37) -
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Oil equivalent - ($/boe @6:1) (1.84) -

Net sales price
Oil and NGL - ($/bbl) 63.61 50.06
Natural gas - ($/mcf) 9.06 6.84
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Oil equivalent - ($/boe @6:1) 58.06 47.37

Royalties
Oil and NGL - ($/bbl) 8.93 6.93
Natural gas - ($/mcf) 2.05 1.36
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Oil equivalent - ($/boe @6:1) 10.96 7.58

Production expenses
Oil and NGL - ($/bbl) 12.80 19.81
Natural gas - ($/mcf) 1.69 1.54
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Oil equivalent - ($/boe @6:1) 11.20 14.17

Operating netback
Oil and NGL - ($/bbl) 41.88 23.32
Natural gas - ($/mcf) 5.32 3.94
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Oil equivalent - ($/boe @6:1) 35.90 23.52



(1) The results reflect the operations of Chamaelo from January 1,
2005 to June 21, 2005 plus the operations of Vault for the
193-day period from June 22, 2005 to December 31, 2005. The
period ended December 31, 2004 was the 214-day period from
June 1, 2004 when operations commenced.
(2) Sales prices are shown net of transportation costs.


Management's Discussion and Analysis

March 16, 2006

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the audited consolidated financial statements of Vault Energy Trust ("Vault" or the "Trust") as at and for the year ended December 31, 2005 and the audited consolidated financial statements of Chamaelo Energy Inc. ("Chamaelo") as at and for the year ended December 31, 2004. Barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil ("6:1") unless otherwise stated. The financial statements and financial data contained in the MD&A have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") in Canadian currency (except where noted as being in another currency).

Additional information related to the Trust, including the Trust Indenture, may be found on the SEDAR website at www.sedar.com.

This MD&A may contain forward-looking information that involves a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For this purpose, any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. Such risks and uncertainties include, but are not limited to: risks associated with the oil and gas industry (e.g. - operational risks in exploration, development and production; changes and/or delays in the development of capital assets; uncertainty of reserve estimates; uncertainty of estimates and projections relating to production and costs; commodity price fluctuations; environmental risks; and industry competition).

Management uses funds flow as a factor in evaluating performance. Funds flow as presented does not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures used by other companies. The determination of funds flow from operations is detailed on the Statement of Cash Flows.

Plan of Arrangement

The reorganization of Chamaelo Energy Inc. into Vault Energy Trust and a newly created exploration focused junior oil and gas producer was completed on June 22, 2005 pursuant to a Plan of Arrangement ("Plan of Arrangement") involving Chamaelo Energy Inc. ("Chamaelo"), Vault Energy Inc. ("Vault Energy"), Vault Energy Trust ("Vault" or "the Trust") and a new exploration focused entity ("ExploreCo"). Concurrent with the Plan of Arrangement, Vault Energy acquired certain oil and natural gas properties in West Central Alberta and North Eastern British Columbia (the "June 2005 Acquisition") for approximately $365.6 million, including transaction costs, net of estimated closing adjustments. The operating results from the June 2005 Acquisition have been included in the Trust's operational results for 193 days from the closing date on June 22, 2005 to the end of the period. In addition, pursuant to the Plan of Arrangement, Vault Energy disposed of certain oil and natural gas assets to ExploreCo ("ExploreCo Dispostion"), on June 22, 2005. The results of operations from the ExploreCo Disposition assets have been included in results from operations of the Trust only up to the date of the disposition. The comparative figures used in the MD&A and consolidated financial statements are those of Chamaelo as the Trust is following the continuity of interests accounting method. After carefully considering the accounting guidance available, management has determined that the most appropriate method of accounting for the costs of the Plan of Arrangement is a charge to current period earnings as restructuring costs. These costs had previously been recorded as a charge to accumulated income.

Completion of the transactions under the Plan of Arrangement resulted in shareholders of Chamaelo exchanging each of their Chamaelo common shares for one Trust unit or exchangeable share and one ExploreCo share, prior to a 2 for 1 consolidation of the Trust units and a 5 for 1 consolidation of the ExploreCo shares. The maximum number of exchangeable shares available pursuant to the Plan of Arrangement was 5,000,000. Chamaelo shareholders elected to receive 3,889,462 exchangeable shares as a result of the Plan of Arrangement. The exchange ratio for exchangeable shares to trust units is increased every month to reflect the distribution paid to Trust unitholders. This increase in exchange ratio is based on the distribution paid to unitholders and the weighted average trading price of trust units for a six day period prior to each distribution. The intention of the increase in exchange ratio is to provide economic equivalence to exchangeable share holders and Trust unitholders. As of December 31, 2005, there have been 328,876 exchangeable shares exchanged for 340,532 Trust units. At December 31, 2005, there were 3,560,586 exchangeable shares outstanding at an exchange ratio of 1.07185.

On April 27, 2005, Vault completed a bought deal private placement financing issuing 42,312,000 Series E subscription receipts in the capital of the Trust at a price of $6.50 per Series E subscription receipt and 55,000 Series D subscription receipts in the capital of the Trust at a price of $1,000 per Series D subscription receipt for aggregate gross proceeds of $330,028,000.

Pursuant to the Plan of Arrangement, each Series E subscription receipt was converted into one Trust unit and one ExploreCo share, prior to a 2 for 1 consolidation of the Trust units and a 5 for 1 consolidation of the ExploreCo shares.

Pursuant to the Plan of Arrangement, each Series D subscription receipt was converted into one convertible debenture of the Trust. The convertible debentures have a face value of $1,000 per debenture and a maturity date of June 30, 2010. The convertible debentures pay interest semi-annually on June 30 and December 31 of each year at 8% per annum and are convertible into Trust units at a conversion price of $11.50 per Trust unit. Holders of the convertible debentures have the option of redeeming the convertible debentures at a price of $1,050 per convertible debenture after June 30, 2008 and on or before June 30, 2009 and thereafter until the maturity date at a price of $1,025 per convertible debenture. The Trust may repay the convertible debentures in cash or through the issue of additional Trust units at 95% of the market price. As of December 31, 2005, there were 48,671 convertible debentures remaining with 6,329 convertible debentures having been converted into 550,347 Trust units.

As a result of the consolidation of Trust units, prior period per Trust unit amounts are calculated assuming that each common share of Chamaelo was exchanged for 0.5 Trust units. Pursuant to EIC - 151, the exchangeable shares have been presented as a non-controlling interest and net income figures are presented after net income attributable to non-controlling interest. Income attributable to the non-controlling interest has been deducted from net income commencing on June 22, 2005.



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Year ended Period ended
December 31, December 31,
Summary of Financial Results(1) 2005 2004
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($ thousands, except per Trust unit amounts)

Oil and natural gas sales(2) 121,120 9,116

Funds flow from operations 52,475 3,996
per Trust unit - basic 2.21 0.57
per Trust unit - diluted 2.16 0.54

Net income 10,482 344
per Trust unit - basic 0.44 0.05
per Trust unit - diluted 0.43 0.05

Total assets 543,176 153,028

Bank debt 81,500 12,965
Net working capital (deficit) 17,293 1,674

Total long-term liabilities 91,779 21,212
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(1) The results reflect the operations of Chamaelo from January 1,
2005 to June 21, 2005 plus the operations of Vault for the
193-day period from June 22, 2005 to December 31, 2005. The
period ended December 31, 2004 was the 214-day period from June
1, 2004 when operations commenced.
(2) Oil and natural gas sales are shown net of transportation costs.
(3) Prior period per Trust unit amounts based on 2 Chamaelo shares
for 1 Trust unit.


Production

Daily production averaged 5,716 boe/d, a 507% increase over average production volumes of 942 boe/d in 2004.

Incremental production from the October 13, 2004 and November 30, 2004 property acquisitions added to production for 2005. Net production increases resulting from the June 2005 acquisition and the ExploreCo disposition have been reflected in operational results for 193 days.

Average daily production for the years ended December 31, 2005 and 2004 are outlined below:



Average Daily Production(1) 2005 2004 % Change
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Natural gas (mcf/d) 20,630 3,009 586
Oil (bbls/d) 1,939 400 385
Natural gas liquids (bbls/d) 339 40 748
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Total (boe/d) 5,716 942 507
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(1) The results reflect the operations of Chamaelo from January 1,
2005 to June 21, 2005 plus the operations of Vault for the
193-day period from June 22, 2005 to December 31, 2005. The
period ended December 31, 2004 was the 214-day period from June
1, 2004 when operations commenced.


Pricing

Our earnings, funds flow and financial condition are dependent on the prices received for our natural gas and crude oil production. Natural gas and crude oil prices have fluctuated widely during recent years.



Average Sales Price(1) 2005 2004 % Change
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Before effect of physical hedges:
Oil ($/bbl) $ 65.89 $ 50.06 32
NGL ($/bbl) 59.16 45.06 31
Natural gas ($/mcf) 9.43 6.84 38
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Average sales price ($/boe) $ 59.90 $ 45.27 32
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Effect of physical hedges:
Oil ($/bbl) $ (1.51) $ -
NGL ($/bbl) - -
Natural gas ($/mcf) (0.37) -
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Average sales price ($/boe) $ (1.84) $ -
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Net sales price:
Oil ($/bbl) $ 64.38 $ 50.06 29
NGL ($/bbl) 59.16 45.06 31
Natural gas ($/mcf) 9.06 6.84 32
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Average sales price ($/boe) $ 58.06 $ 45.27 28
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(1) Net of oil and gas transportation costs


Average Benchmark Pricing 2005 2004 % Change
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Oil
West Texas Intermediate US$/bbl $ 56.45 44.92 26
West Texas Intermediate CDN$/bbl
equivalent 46.62 35.37 32
Edmonton Par CDN$/bbl 69.28 56.47 23

Natural Gas
AECO Daily Spot Price CDN$/mcf 8.40 6.81 23

Exchange Rates
US$/CDN$ Dollar Period-end 1.17 1.22 (4)
US$/CDN$ Dollar Average $ 1.21 1.27 (5)
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Commodity Price Risk Management

Currently, the Trust does not have any financial derivative instruments to hedge against future commodity price fluctuations. However, the Trust did enter into two physical sales contracts on April 13, 2005, which have been in effect since July 1, 2005. The floor price on these instruments was lower than market prices and as a result Vault's realized prices were less. Subsequent to December 31, 2005 the Trust entered into a physical sales contract for delivery of 1,000 bbls/d of crude oil at $68.00/bbl with 50% participation on prices in excess of $68.00/bbl.

The Trust will continue to monitor commodity prices and will implement price risk management programs as necessary to assist with the sustainability of distributions and growth of the organization given the risk inherent in the sale of oil and natural gas commodities.

The Trust has physical contracts in place representing approximately 30% of its 2006 estimated production. A summary of the physical instruments follows:



Product Volume Floor price Participation Remaining Term
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Natural
gas 11,000 GJ/d $7.00/GJ 60% above $7.00/GJ Jan 1, 2006 -
Dec 31, 2006

Oil 1,000 bbls/d $61.50/bbl 50% above $61.50/bbl Jan 1, 2006 -
Dec 31, 2006

Oil 1,000 bbls/d $68.00/bbl 50% above $68.00/bbl Jan 1, 2007 -
Dec 31, 2007
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Revenue

Crude oil and natural gas revenues, net of transportation totaled $121.1 million (2004 - $9.1 million) in 2005. The increase in revenue of $112.0 million or 1231% during 2005 is primarily due to the effect of the October 13, 2004 and November 30, 2004 acquisitions as well as 193 days of operations from the June 2005 acquisition. In addition, commodity prices have continued to rise, which has contributed to increased revenues.



Analysis of Sales Revenue(1) Natural
($ thousands) Gas Crude Oil NGLs Total
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2004 Sales Revenue $ 4,406 $ 4,325 $ 385 $ 9,116
Price Variance 1,429 1,183 120 2,732
Volume Variance 62,406 40,048 6,818 109,272
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2005 Sales Revenue $ 68,241 $ 45,556 $ 7,323 $ 121,120
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(1) Net of oil and gas transportation costs and including the effect
of physical hedges reflecting the operations of Chamaelo from
January 1, 2005 to June 21, 2005 plus the operations of Vault for
the 193-day period from June 22, 2005 to December 31, 2005. The
period ended December 31, 2004 was the 214-day period from June
1, 2004 when operations commenced.


Royalties

Royalties are paid to various government entities and other land and mineral rights owners. In 2005 royalties increased to $22.9 million or 19% of oil and natural gas sales compared to $1.5 million or 17% in 2004. The dollar increase is consistent with our increased production due to acquisitions. The percentage increase is also due to acquisitions, the full effect of which are expected to result in a 2006 average royalty rate of approximately 20%.

Production Expenses

Production expenses for the year ended December 31, 2005 were $23.4 million or $11.20/boe compared to $2.9 million or $14.17/boe in 2004. This represents a 21% decrease on a per boe basis. Production expenses have declined on a per boe basis primarily due to the addition of lower cost production through the October 2004, November 2004 and June 2005 acquisitions. Production expenses on a gross basis have increased primarily due to the larger asset base of the Trust in the first half of 2005, which increased further with the June 2005 acquisition.

Vault is committed to focusing efforts on opportunities that will improve operational efficiencies and reduce per boe production expenses to enhance operating netbacks. However, we also recognize that cost reductions may be difficult due to inflationary pressure on services required, increased power costs and the scheduled major turnaround at the Wimborne plant, which is required every three years. As such we are looking for operating efficiencies within the asset base as well as fixing certain costs, such as power, to gain a higher degree of certainty over our production expenses.



Three months ended Period ended
December 31, % December 31, %
Operating Netback(1) 2005 2004 Change 2005 2004 Change
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Oil and NGL ($/bbl)
Revenue 65.87 49.37 25 63.61 50.06 27
Royalties 7.72 6.77 12 8.93 6.93 29
Production expenses 10.77 16.27 (51) 12.80 19.81 (35)
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Operating Netback 47.38 26.33 44 41.88 23.32 80
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Natural gas ($/mcf)
Revenue 10.91 6.87 37 9.06 6.84 32
Royalties 2.38 1.37 42 2.05 1.36 51
Production expenses 1.79 1.48 17 1.69 1.54 10
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Operating Netback 6.74 4.02 40 5.32 3.94 35
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Combined ($/boe)
Revenue 65.60 44.69 32 58.06 45.27 28
Royalties 11.77 7.61 35 10.96 7.58 45
Production expenses 10.76 12.01 (12) 11.20 14.17 (21)
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Operating Netback 43.07 25.07 42 35.90 23.52 53
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(1) Revenue is shown net of oil and gas transportation costs and
including the effect of physical hedges. Results reflect the
operations of Chamaelo from January 1, 2005 to June 21, 2005 plus
the operations of Vault for the 193-day period from June 22, 2005
to December 31, 2005. The period ended December 31, 2004 was the
214-day period from June 1, 2004 when operations commenced.


The operating netback is a key indicator of the Trust's ability to generate cash flow for distribution and reinvestment. During 2005 Vault generated an operating netback of $35.90 (2004 - $23.52) per boe.

Plan of arrangement costs

Plan of arrangement costs of $8.2 million relate to the costs of restructuring into an oil and natural gas income trust. These costs are a one time charge to earnings and are comprised of $5.0 million in advisory fees, consulting and legal fees of $2.2 million and a $1.0 million fairness opinion.

General and Administrative Expenses ("G&A")

Net G&A costs totaled $6.3 million or $3.03/boe as compared to $0.7 million or $3.54/boe in 2004. Gross G&A costs have increased in 2005 primarily because the Trust has added technical staff to manage the increased asset and production base. In addition, Chamaelo paid out approximately $1.5 million in performance incentive bonuses in June of 2005. Previous to this, Chamaelo had not paid out any bonuses since its inception in June 2004. Vault also paid out year end bonuses to technical and administrative staff in the amount of $300,000.

G&A costs on a per boe basis decreased year over year due to the production increases from property acquisitions, which has reduced fixed G&A costs on a per boe basis. Management is committed to controlling G&A costs and as such is estimating G&A will be approximately $1.80/boe to $2.00/boe in 2006.

Stock-Based Compensation

During 2005, $4.3 million was charged to income in respect of stock-based payments as compared to $344,000 in 2004. The Trust uses the fair value method of allocating value to Trust unit rights. The stock-based compensation recognized represents the amortization of this fair value to income over the vesting period with an offset to contributed surplus.

On June 1, 2005, all of the stock options of Chamaelo's independent directors and officers (in their capacity as directors) vested and were exercised on June 22, 2005. In addition, on June 22, 2005, pursuant to the Plan of Arrangement, one-third of the options of employees and officers (in their capacity as employees) were vested and exercised and the remaining two-thirds of officer and employee options were settled by the Trust.

Canadian Institute of Chartered Accountants 3870 ("CICA 3870") provides guidance for the settling of unvested stock options. CICA 3870 states that any amount not exceeding the fair value of the stock options may be charged directly to equity when the options are settled. The amount paid in excess of fair value must be expensed. Pursuant to CICA 3870, the Trust charged $767,000 to stock-based compensation during the year ended December 31, 2005, representing the amount in excess of fair value paid by the Trust to settle employee stock options on June 22, 2005. The Trust also charged $2.3 million directly to unitholders' equity representing the fair value of the options settled.

CICA 3870 also states that any unamortized balances of fair value of stock options must be taken to income when options are settled by the Trust. The additional amounts expensed in 2005 represent the unamortized balance of the fair value of all the Chamaelo stock options, which either vested and were exercised or were settled by the Trust .

In total, $3.6 million of the stock-based compensation recognized for the year ended December 31, 2005, was non-cash as compared to $344,000 in 2004.

Depletion, Depreciation and Accretion ("DD&A")

During 2005, DD&A expense totaled $40.0 million or $19.16/boe as compared to $3.0 million or $14.93/boe in 2004. The DD&A rate partially reflects the higher cost of corporate and property acquisitions together with the inclusion of asset retirement obligations in the Trust's depletion base. During the year ended December 31, 2005, the provision for DD&A includes $1,398,000 million or $0.67/boe as compared to $113,000 or $0.56/boe in 2004, for accretion of asset retirement obligations.

For year ended December 31, 2005, $263,000 or $0.13/boe of accretion expense has been recognized in respect of the convertible debentures issued on April 27, 2005. See note 5. In addition, amortization of $280,060 or $0.13/boe of deferred financing charges relating to the issue of these convertible debentures has been recognized for the year ended December 31, 2005.

Interest Expense

The Trust incurred $5.3 million or $2.56/boe in interest expense for the year ended December 31, 2005. The increase in interest is a result of drawing on available lines of credit to fund acquisitions and capital development programs. In addition, interest accruing to holders of the $55,000,000 convertible debentures issued on April 27, 2005, at a rate of 8%, has increased overall interest expense. The Trust's average interest rate on credit facilities for the year was 4.50%.

Taxes

Capital taxes for the year ended December 31, 2005 were $546,000 as compared to $143,000 in 2004, both consisting primarily of Large Corporations Tax ("LCT"). The increase in capital taxes in 2005 is a result of increased debt and equity levels resulting from acquisitions. The estimated LCT for 2006 is $750,000.

Future income taxes arise from differences between the accounting and tax bases of the operating company's assets and liabilities. Payments are made between the operating company and the Trust in our current structure, which ultimately transfers both income and future tax liability to our unitholders. Therefore, it is Vault's opinion that no cash income taxes are expected to be paid by the operating entities in the near future. As a result, the future income tax liability recorded on the balance sheet should be recovered through earnings over time.

For the year ended December 31, 2005, a future tax recovery of $1.5 million was recorded as compared to a $417,000 expense recorded in 2004.

Funds Flow and Net Income

Funds flow from operations for the year ended December 31, 2005 was $52.5 million ($2.16 per diluted Trust unit) as compared to $4.0 million ($0.27 per diluted Trust unit) in 2004.

The Trust had net income of $10.5 million ($0.43 per diluted Trust unit) for the year ended December 31, 2005 compared to net income of $344,000 ($0.02 per Trust unit) in 2004.



Capital Expenditures(1)
($ thousands) 2005 2004
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Land 1,612 1,864
Drilling, completions and workovers 25,596 5,244
Equipment 3,593 581
Geological and Geophysical 1,842 2,432
Office 2,360 135
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Capital expenditures 35,003 10,256
Property acquisitions 365,592 84,181
Corporate acquisitions 23,598 18,680
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Total capital expenditures and
property acquisitions 424,193 113,117
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(1) Reflecting the operations of Chamaelo from January 1, 2005 to
June 21, 2005 plus the operations of Vault for the 193-day period
from June 22, 2005 to December 31, 2005. The period ended
December 31, 2004 was the 214-day period from June 1, 2004 when
operations commenced.


During the year ended December 31, 2005, Vault drilled 44 (31.3 net) wells. In addition, Vault completed numerous workovers and re-completions to improve production as well as continuing to enhance its future prospects by adding acreage to its land base. These activities resulted in capital expenditures of $35.0 million for the year ended December 31, 2005. The corporate acquisitions, which occurred in the fourth quarter, were financed by existing credit facilities. Office capital was spent on leaseholds as the Trust has expanded its head office to accommodate the talented technical team it has assembled.

On June 22, 2005, concurrent with the Plan of Arrangement, Vault completed the June 2005 acquisition for approximately $365.6 million including transaction costs, net of closing adjustments. The June 2005 acquisition complements Vault's existing assets and will help diversify the production base with which to sustain production and distributions. The acquisition was financed through a private placement of Trust units ($275 million) and convertible debentures ($55 million) as well as credit facilities provided by a syndicate of Canadian chartered banks.

Distributable Cash

Distributions are paid monthly on the 15th day of each month with the record date being the last business day of the preceding calendar month or such other date as may be determined by the board of directors. A portion of funds flow is retained to fund acquisitions and development activity.

The Trust will monitor the payout level with respect to funds flow, debt levels and spending plans. We anticipate that the payout ratio will be approximately 50-60%, however we are prepared to adjust the payout ratio in an effort to align the investors' desire for cash distributions with the Trust's requirement to maintain a prudent capital structure.

During the year ended December 31, 2005, Vault distributed $29.7 million or $0.81 per Trust unit to unitholders. This amount includes the special distribution made to unitholders of record on the date of the Plan of Arrangement on June 22, 2005. It should also be noted that the payout ratio calculated only includes distributions since the Plan of Arrangement, which is 193 days. The resulting payout ratio for the 193 days ended December 31, 2005 is 56%.



Reconciliation of Cash Available Three months 193 days
for Distribution ended ended(1)
($ thousands) December 31, 2005 December 31, 2005
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Cash flow from operating
activities 30,543 58,067
Change in non-cash working
capital (3,750) (4,727)
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Funds flow from operations 26,793 53,340
Cash withheld for acquisitions,
capital expenditures
and debt repayment(2) (15,484) (23,632)
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Cash available for distribution(3) 11,309 29,708
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Cash available for distribution
per Trust unit $ 0.35 $ 0.81
Payout ratio 42% 56%
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(1) Represents the period from the inception of the Trust on June 22,
2005 to December 31, 2005 and includes a special distribution on
June 30, 2005.
(2) Cash withheld for acquisition, capital expenditures and debt
repayment is a discretionary amount and represents the difference
between funds flow from operations and distributions.
(3) Cash available for distribution may differ from Distributions to
unitholders on the Consolidated Statements of Cash Flows due to
the timing of distribution announcements and the number of Trust
units outstanding on record dates.


Liquidity and Capital Resources

Bank debt was $81.5 million and the net working capital deficit was $17.3 million at December 31, 2005.

The Trust has, through its subsidiary, a credit agreement with a syndicate of Canadian banks to provide the Trust with $125,000,000 of total credit facilities. This is comprised of an extendible revolving term credit facility of $115,000,000 and a $10,000,000 operating facility each bearing interest at prime plus a premium ranging between 0% and 1.75% based on the Trust's debt to funds flow ratio. The credit facilities are secured by a $200,000,000 demand debenture on the assets of Vault Energy and are renewable on June 30, 2006.

Distributions paid to unitholders after the conversion of $29.7 million, and the 2005 capital program were funded using a portion of internally generated 2005 cash flow. Distributions declared subsequent to the trust conversion represented 56% of funds flow.

Under the terms of its trust indenture, the Trust is required to distribute all of its taxable income to unitholders. Distributions may be monthly or special and in cash or in trust units at the discretion of the Board of Directors. To the extent that additional cash distributions are paid and capital programs are not adjusted, debt levels may increase. In the event that a special distribution in the form of trust units is declared, the terms of the Trust Indenture require that the outstanding units be consolidated immediately subsequent to the distribution. The number of outstanding trust units would remain at the number outstanding immediately prior to the distribution of trust units and that portion of the Trust's taxable income would be allocated to the unitholders.

Quarterly Financial Information



Summary of Quarterly Results(1)

($ thousands) Q2/04 Q3/04 Q4/04 Q1/05 Q2/05(2) Q3/05(2) Q4/05
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Production:
Oil and NGL
(bbls/d) 62 233 729 1,383 1,475 3,200 3,025
Gas (mcf/d) 264 812 5,926 10,323 11,611 30,899 29,363
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Total BOE
(Gas 6:1) 106 368 1,717 3,104 3,410 8,350 7,919
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Oil and natural
gas sales(3) 446 1,614 7,057 13,489 15,993 43,847 47,791

Funds flow from
operations (7) 508 3,494 6,902 (2,655) 21,436 26,793

per Trust unit
- basic - 0.06 0.30 0.50 (0.17) 0.67 0.82
per Trust unit
- diluted - 0.06 0.28 0.46 (0.17) 0.57 0.80

Net income
(loss) (113) 16 441 1,479 (6,280) 11,272 4,011
per Trust unit
- basic (0.06) - 0.04 0.10 (0.40) 0.35 0.12
per Trust unit
- diluted (0.06) - 0.04 0.10 (0.40) 0.30 0.12
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(1) Seven quarters shown from the commencement of operations on
June 1, 2004.
(2) Restated to reflect the change in treatment of restructuring
costs.
(3) Oil and natural gas sales are shown net of transportation costs.


Summary Fourth Quarter Information

In comparing the fourth quarter of 2005 with the same period in 2004:

- Average daily production of 8,121 boe/d represents an increase of 6,202 boe/d or 361% primarily due to the June 2005 acquisition;

- Reported production of 7,919 boe/d for the fourth quarter includes a one-time accounting adjustment of 202 boe/d;

- Funds flow from operations increased 667% to $26.8 million and 66% on a boe basis as a result of higher production primarily from the June 2005 acquisition and higher selling prices;

- The average selling price per boe increased 47% due to stronger crude oil and natural gas prices slightly offset by physical sales contracts;

- Operating expenses decreased 10.4% to $10.76 per boe due to lower operating cost properties acquired in October 2004, November 2004 and June 2005;

- G&A expenses increased 62% to $3.16 per boe as the fourth quarter of 2005 had increased technical staff and compliance requirements; and

- Net income increased by $3.6 million or 809% to $4.0 million.

Trust Unit Information

The Trust is authorized to issue an unlimited number of Trust units. The Trust units are traded on the Toronto Stock Exchange under the symbol "VNG.UN". At December 31, 2004, Chamaelo had 33,434,412 common shares outstanding. Pursuant to the Plan of Arrangement 0.5 Trust units or exchangeable shares were granted for each outstanding common share of Chamaelo. As a result of this consolidation, the equivalent number of Trust units outstanding at December 31, 2004 was 16,717,206 assuming each former Chamaelo share was exchanged for 0.5 Trust units.

As at December 31, 2005, the Trust had 32,785,833 Trust units and 3,560,586 exchangeable shares outstanding. The increase in Trust units represents the equity offering in June 2005 of 21,156,000 Trust units. Additional equity was from debentures that were converted during the year into 550,347 Trust units and 35,411 Trust units issued pursuant to the Distribution Reinvestment and Optional Purchase Plan ("DRIP").

Income Taxes

The following is a general discussion of the Canadian tax consequences of holding Vault Trust units as capital property. The summary is not exhaustive in nature nor is it intended to provide advice on legal or tax matters. Current and prospective investors should consult their own legal or tax counsel as to their particular circumstances.

Canadian Unitholders

The Trust qualifies as a mutual fund trust under the Income Tax Act (Canada) and accordingly, Trust units are qualified investments for RRSP's, RRIF's, RESP's and DPSP's. Each year the Trust is required to file an income tax return and any taxable income in the Trust is allocated to the unitholders.

In computing income, unitholders are required to include their pro-rata share of any taxable income earned by the Trust in that year. The adjusted cost base ("ACB") of an investor's trust unit equals the purchase price of the Trust unit less any non-taxable cash distributions received from the date the unit was purchased. Should an investor's ACB be reduced below zero, the extent to which the ACB is below zero will be deemed to be a capital gain to the unitholder and the ACB of the unit will be brought to $nil.

We paid $0.92 per trust unit in cash distributions to unitholders during June 2005 to January 2006. For Canadian tax purposes, 30% of these distributions or $0.28 per trust unit was a tax deferred return of capital, 70% or $0.64 per trust unit was taxable to unitholders as other income.

For 2006, Vault estimates that 60-80% of cash distributions may be taxable and 20-40% may be a tax deferred return on capital. Actual taxable amounts may vary depending on actual distributions, which are dependent upon production, commodity prices and funds flow experienced throughout the year.

U.S. Unitholders

During 2005 U.S. unitholders who received cash dividends were subject to at least a 15% Canadian withholding tax, applied to the taxable portion of the distribution as computed under Canadian tax law. U.S. taxpayers may be eligible for a foreign tax credit with respect to Canadian withholding taxes paid.

The taxable portion of the cash distribution for U.S. tax purposes is determined by Vault in relation to its current and accumulated earnings and profits using U.S. income tax principles. The taxable portion determined is considered to be a dividend for U.S. tax purposes. For most U.S. taxpayers, this should be a "Qualified Dividend" eligible for the reduced tax rate. We believe Vault should not be classified as a Passive Foreign Investment Company for U.S. income tax purposes for 2005.

The non-taxable portion of the cash distribution is a return of the cost (or other basis). The cost (or other basis) is reduced by this amount for computing any gain or loss arising from disposition. However, if the full amount of the cost (or other basis) has been recovered, any further non-taxable distributions should be reported as gains.

We paid US $0.77 per trust unit to U.S. residents from July 2005 to January 2006, of which 23% or US $0.18 per trust unit was a tax deferred return of capital and 77% or US $0.59 per trust unit was a taxable qualified dividend.

For 2006, Vault estimates that 60-80% of cash distributions may be taxable to most U.S. investors and 20-40% may be a tax deferred return on capital. Actual taxable amounts may vary depending on actual distributions, which are dependent upon production, commodity prices and funds flow experienced throughout the year.

As of February 2006, we estimated our non-resident ownership to be approximately 38%.

Commitments

The Trust is committed to payments under an operating lease for office space and capital leases for vehicles. The following table summarizes the Trust's commitments at December 31, 2005:



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Minimum Commitments Each Year Total
----------------------------------- Committed
($ thousands) 2006 2007 2008 2009 2010 After 2010 Total
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Capital lease
obligations 119 130 59 2 - - 310
Operating lease
obligation 610 745 758 780 782 847 4,522
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729 875 817 782 782 847 4,832
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Debt commitments are outlined in the Notes to the Consolidated
Financial Statements.


Critical Estimates

Management is required to make judgments, assumptions, and estimates in the application of generally accepted accounting principles that have a significant impact on the financial results of the Trust. The following summarizes the accounting policies that are critical to determining the company's financial results.

Oil and Natural Gas Reserves - The Trust's oil and natural gas reserves are evaluated and reported on by independent petroleum engineers. The estimates of reserves is a very subjective process as forecasts are based on engineering data, projected future rates of production, estimated future commodity prices and the timing of future expenditures, which are all subject to uncertainty and interpretation. Reserve estimates can have a significant impact on earnings, as they are a key component in the calculation of depletion. A downward revision to the reserve estimate could result in higher depletion and thus lower net earnings. In addition, estimated reserves are also used in the calculation of the impairment (ceiling) test.

Critical Accounting Policies

Full Cost Accounting - The Trust follows the full cost method of accounting whereby all costs related to the acquisition of, exploring for and developing oil and natural gas reserves are capitalized and charged against earnings. These costs, together with the estimated future costs to be incurred in developing proved reserves, are depleted or depreciated using the unit-of-production method based on the proved reserves before royalties as estimated by independent petroleum engineers. The costs of undeveloped properties are excluded from the costs subject to depletion and depreciation until it is determined whether proved reserves are attributable to the properties or impairment occurs. Oil and natural gas properties are evaluated each reporting period through an impairment test to determine the recoverability of capitalized costs. The carrying amount is assessed as recoverable when the sum of the undiscounted cash flows expected from proved reserves plus the cost of unproved interests, net of impairments, exceeds the carrying amount. When the carrying amount is assessed not to be recoverable, an impairment loss is recognized to the extent that the carrying amount exceeds the sum of the discounted cash flows from proved and probable reserves plus the cost of unproved interests, net of impairments.

The cash flows are estimated using expected future prices and costs and are discounted using a credit adjusted risk-free interest rate. Proceeds from the sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would result in a change in the depletion rate of 20% or more.

Goodwill - Goodwill, which represents the excess of purchase price over the fair value of net assets received in an acquisition, is tested for impairment on an annual basis in the fourth quarter. A goodwill impairment loss would be recognized when the carrying amount of goodwill exceeds its fair value. Should the test result in an impairment, it will be charged to income in the period of the impairment.

Asset Retirement Obligation - The Trust is required to provide for future abandonment and site restoration costs. These costs are estimated based on existing laws, contracts or other policies and are presented as asset retirement obligation. The obligation is initially measured at fair value and subsequently adjusted for the accretion of discount and any changes to the underlying cash flows. The asset retirement cost is capitalized to oil and natural gas properties and equipment and amortized into earnings on a basis consistent with depletion and depreciation. The estimate of the asset retirement obligation involves estimates relating to the timing of abandonment, the economic life of the underlying asset and the costs associated with abandonment and site restoration which are all subject to uncertainty and interpretation.

Exchangeable shares and Non-controlling Interests - Exchangeable shares in Vault Energy were issued pursuant to the Plan of Arrangement. The exchangeable shares are transferable and are retractable for Trust units. As such, they have been classified outside of equity as a non-controlling interest. Net income (loss) as reported is net of net income (loss) attributable to non-controlling interest.

Convertible debentures - Convertible debentures are initially recorded at the fair value of the obligation without the conversion feature. The difference between the principal amount and the fair value without the conversion feature is recorded in unitholders' equity as equity component of convertible debentures. The obligation is accreted through earnings using the effective interest rate method and the equity component of convertible debentures is increased as the debentures are converted for Trust units.

Recent Canadian Accounting and Related Pronouncements

Non-Controlling Interest

On January 19, 2005 the CICA issued EIC-151 "Exchangeable Securities Issued by Subsidiaries of Income Trusts" that states that exchangeable securities issued by a subsidiary of an income trust must meet certain criteria. The exchangeable shares issued by Vault Energy Inc., a wholly owned corporate subsidiary of the Trust, are publicly traded and therefore are considered, by EIC-151, to be transferable to third parties. EIC-151 states that if the exchangeable shares are "transferable" to a third party, they should be reflected as non-controlling interest. Accordingly, the Trust has reflected non-controlling interest of $25.2 million on the Trust's consolidated balance sheet as at December 31, 2005. In addition, the net income for the year then ended has been reduced by the net income attributable to non-controlling interest ($1.8 million).

Non-Monetary Transactions

In June 2005, the Accounting Standards Board ("AcSB") issued Section 3831, Non-Monetary Transactions, which replaces Section 3830 and requires all non-monetary transactions to be measured at fair value unless:

- The transaction lacks commercial substance.

- The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.

- Neither the fair value of the assets or services received nor the fair value of the assets or services given up is reliably measurable.

- The transaction is a non-monetary, non-reciprocal transfer to owners that represent a spin-off or other form of restructuring or liquidation.

The new requirements apply to non-monetary transactions initiated in periods beginning on or after January 1, 2006. Earlier adoption is permitted beginning on or after July 1, 2005. We do not expect the adoption of this standard will have any material impact on the Trust.

Financial Instruments - Recognition and Measurement, Hedges, and Comprehensive Income

On January 27, 2005 the Accounting Standard's Board (AcSB) issued CICA Handbook section 1530 "Comprehensive Income", CICA Handbook section 3855 "Financial Instruments - Recognition and Measurement", and CICA Handbook section 3865 "Hedges" that deal with the recognition and measurement of financial instruments and comprehensive income. The new standards are intended to harmonize Canadian standards with United States and International accounting standards and are effective for annual and interim periods in fiscal years beginning on or after October 1, 2006. These new standards will require the following:

- All trading financial instruments will be recognized on the balance sheet and will be fair valued through the income statement;

- All remaining financial assets will be recorded at cost and amortized through the financial statements;

- A new statement for comprehensive income that will include certain gains and losses on translation of assets and liabilities; and

- An update to Accounting Guideline 13 to incorporate the fair value changes currently recorded in the income statement to be recorded through the comprehensive income statement.

We have not assessed the impact on the financial statements of the Trust at this time.

Risk Assessment

The acquisition, exploration and development of oil and natural gas assets involves many risks common to all participants in the oil and natural gas industry. Vault's exploration and development activities are subject to various business risks such as unstable commodity prices, interest rate and foreign exchange fluctuations, the uncertainty of replacing production and reserves on an economic basis, government regulations, taxes and safety and environmental concerns. As such, the funds flow paid to unitholders as well as the value of Vault's trust units are subject to such risks. While the management of Vault realizes these risks cannot be eliminated, they are committed to monitoring and mitigating these risks.

Reserves and Reserve Replacement

The recovery and reserve estimates on Vault's properties are estimates only and the actual reserves may be materially different from that estimated. The estimates of reserve values are based on a number of variables including price forecasts, projected production volumes and future production and capital costs. All of these factors may cause estimates to vary from actual results.

Vault's future oil and natural gas reserves, production, and fund flows to be derived therefrom are highly dependent on Vault successfully acquiring new reserves and developing existing reserves.

To mitigate this risk, Vault has assembled a team of experienced technical professionals who have expertise operating and exploring in areas which Vault has identified as the most prospective for increasing Vault's reserves on an economic basis.

To further mitigate reserve replacement risk, Vault has targeted a majority of its prospects in areas which have multi-zone potential, year-round access and lower drilling costs. Also, Vault employs advanced geological and geophysical techniques to increase the likelihood of finding additional reserves.

Reserves that Vault may have at any particular time and the production therefrom will decline over time as such existing reserves are exploited. A future increase in Vault's reserves will depend on its abilities to acquire suitable prospects or properties and discover new reserves. Acquisitions of oil and gas assets depend upon the assessment of value that Vault makes at the time of acquisition, which are subject to the risk of incorrect assessments. Vault mitigates acquisition risk by performing due diligence, review and obtaining approval from the Board of Directors for potential acquisitions. Where required, evaluations from independent reserve engineers are also obtained.

Operational Risks

Vault's operations are subject to the risks normally incidental to the operation and development of oil and natural gas properties and the drilling of oil and natural gas wells. Continuing production from a property, and to some extent the marketing of production therefrom, are largely dependent upon the ability of the operator of the property.

Commodity Price Risk

The Company's oil and natural gas production is marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. Operating results and financial condition of the Trust are impacted by prices it receives for its production.

Interest Rate Risk

Vault has exposure to movements in interest rates, particularly those charged on the revolving credit facility entered into at the time of the Plan of Arrangement.

Foreign Currency Risk

The Trust is exposed to foreign currency fluctuations as crude oil prices received are referenced to U.S. dollar denominated prices. Currently, Vault sells natural gas in Canadian currency; however, if that were to change then Vault would be subject to foreign exchange risk on selling this product in U.S. dollar denominated indices.

Non-Resident Ownership and Mutual Fund Trust Status

As at February 2006, Vault estimates that non-residents own approximately 38% of the outstanding trust units.

Vault meets the requirements of a Mutual Fund Trust as prescribed by the Income Tax Act (Canada).

Safety and Environmental Risks

The oil and natural gas business is subject to extensive regulation pursuant to various municipal, provincial, national, and international conventions and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. Vault is committed to meeting and exceeding its environmental and safety responsibilities. Vault has implemented an environmental and safety policy that is designed, at a minimum to comply with current governmental regulations set for the oil and natural gas industry. Changes to governmental regulations are monitored to ensure compliance. Environmental reviews are completed as part of the due diligence process when evaluating acquisitions. Environmental and safety updates are presented and discussed at each Board of Directors' meeting. Vault maintains adequate insurance commensurate with industry standards to cover reasonable risks and potential liabilities associated with its activities as well as insurance coverage for officers and directors executing their corporate duties.

Regulatory Risk

There is risk that the Canadian government could change the regulations surrounding the taxation of trusts. During 2004, the government announced that it was studying the taxation of trusts, which included issues such as whether restrictions on non-resident ownership should be in place and whether there should be taxation at the trust level. In November 2005, the Canadian Liberal government announced it would not make changes to the trust tax regulations. Once the new Conservative government was elected in January 2006, they also stated that they did not intend to change the tax treatment of trusts. Regardless, there is always a risk that the government could change their position and propose changes to the regulations for the taxation of trusts.

Credit Risk

Vault is exposed to credit risk from sales of oil and natural gas as well as from joint venture participants. These customers are in the oil and natural gas industry, which makes Vault subject to normal industry credit risk. In order to limit this risk, the Fund selects financially sound counterparties to transact with and reviews its exposure to individual customers on a frequent basis.

Unitholder Liability

Previously, there has been some concern that trust unitholders may be held personally liable for the indebtedness of the Fund. In Alberta in June 2004 there was legislation passed that provides statutory protection for unitholders which is similar to protection to shareholder of a corporation. Therefore, since Vault is registered in Alberta, the risk of Unitholder Liability is removed.

Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Trust's disclosure controls and procedures as of December 31, 2005 and concluded that the Trust's disclosure controls and procedures were effective.

Additional information related to Vault, including the Annual Information Form (AIF), may be found on the SEDAR website at www.sedar.com.



VAULT ENERGY TRUST
Consolidated Balance Sheets

As at December 31, ($thousands) 2005 2004
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Assets
Current assets:
Cash $ 5,769 $ -
Accounts receivable 17,564 6,490
Prepaid expenses and deposits 2,074 235
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25,407 6,725

Oil and gas properties and equipment (Note 4) 511,069 142,124

Deferred financing charges (Note 6) 2,521 -
Goodwill 4,179 4,179
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$ 543,176 $ 153,028
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Liabilities and Unitholders' Equity
Current liabilities:
Revolving credit facility (Note 5) $ - $ 12,965
Accounts payable and accrued liabilities 38,930 8,398
Distributions payable to unitholders 3,770 -
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42,700 21,363

Capital lease obligation 166 29
Natural gas sales contract 1,598 2,846
Revolving credit facility (Note 5) 81,500 -
Convertible debentures (Note 6) 46,616 -
Asset retirement obligation (Note 7) 29,560 15,563
Future income taxes (Note 11) 13,839 2,774


Non-controlling interest (Note 8) 24,856 -

Unitholders' equity:
Trust units/common shares (Note 9) 317,193 109,765
Contributed surplus (note 10) 1,729 344
Equity component of convertible
debentures (Note 6) 2,301 -
Accumulated (deficit) income (18,882) 344
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302,341 110,453
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$ 543,176 $ 153,028
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See accompanying notes to the consolidated financial statements


Approved by the Board of Directors:


Robert Jepson Sean Monaghan
President, Chief Executive Chairman of the Board of Directors
Officer and Director


VAULT ENERGY TRUST
Consolidated Statements of Income

For the period ended December 31, ($ thousands) 2005 2004
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Revenue:
Oil and natural gas $ 124,672 $ 9,341
Transportation expense (3,552) (225)
Royalties (22,858) (1,527)
Interest income - 231
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98,262 7,820

Expenses:
Production 23,369 2,853
Plan of arrangement (Note 2) 8,176 -
General and administrative 6,327 712
Interest 5,333 -
Depletion, depreciation and accretion 39,968 3,007
Stock-based compensation (Note 10) 4,321 344
Foreign exchange 13
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87,507 6,916

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Income before taxes 10,755 904
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Taxes:
Current taxes 546 143
Future income tax (recovery) expense (Note 11) (1,462) 417
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Net income before non-controlling interest 11,671 344
Non-controlling interest (Note 8) (1,189) -
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Net income $ 10,482 $ 344
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Net income per Trust unit (Note 12)
Basic 0.44 0.05
Diluted 0.43 0.05


Consolidated Statements of Accumulated (Deficit) Income

For the period ended December 31, ($ thousands) 2005 2004
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Accumulated income, beginning of period $ 344 $ -
Net income 10,482 344
Accumulated cash distributions (29,708) -
Accumulated (deficit) income, end of period $ (18,882) $ 344
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See accompanying notes to the consolidated financial statements
2005 represents a full year whereas 2004 represents the 214-day from
the commencement of operations on June 1, 2004



VAULT ENERGY TRUST
Consolidated Statements of Cash Flows

For the period ended December 31, ($ thousands) 2005 2004
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Cash provided by (used in):

Operating:
Net income $ 10,482 $ 344
Items not affecting cash:
Depletion, depreciation and accretion 39,968 3,007
Amortization of natural gas sales contract (1,248) (116)
Stock-based compensation 3,554 344
Future income taxes (1,462) 417
Non-controlling interest 1,189 -
Asset retirement expenditures (8) (3)
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Funds flow from operations 52,475 3,993
Net change in non-cash operating
working capital 5,734 (2,937)
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58,209 1,056
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Financing:
Increase (decrease) in revolving credit
facility 68,535 12,965
Convertible debenture issue, net of costs 52,199 -
Increase (decrease) in capital lease obligation 136 (1)
Trust units issued, net of costs 261,258 84,698
Warrants exercised 1,940 -
Options exercised, net of settled 811 -
Distributions to unitholders (29,708) -
Change in non-cash financing working capital 3,770 -
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358,941 97,662
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Investments:
Property acquisitions, net of dispositions (365,592) (84,181)
Capital expenditures (35,003) (10,256)
Corporate acquisitions (23,598) (8,026)
Change in non-cash investing working capital 12,812 3,745
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(411,381) (98,718)
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Change in cash 5,769 -
Cash, beginning of period - -
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Cash, end of period $ 5,769 $ -
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See accompanying notes to the consolidated financial statements
2005 represents a full year whereas 2004 represents the 214-day from
the commencement of operations on June 1, 2004


Vault Energy Trust
Notes to the Consolidated Financial Statements
Year ended December 31, 2005
(Tabular amounts in thousands of Canadian dollars,
except per unit amounts)


Vault Energy Trust ("Vault" or the "Trust") is an open-ended, unincorporated investment trust governed by the laws of the province of Alberta pursuant to a Trust Indenture. Valiant Trust Company has been appointed trustee under the Trust Indenture. The beneficiaries of the Trust are the holders of the Trust units ("unitholders").

The Trust was formed on April 25, 2005, completed a private placement on April 27, 2005 and began active oil and gas operations through its subsidiary, Vault Energy Inc. ("Vault Energy") as part of a plan of arrangement ("Plan of Arrangement") on June 22, 2005 involving Chamaelo Energy Inc. ("Chamaelo"), a new exploration focused entity ("ExploreCo"), Vault Energy and the Trust.

While the Trust was created on June 22, 2005, these audited consolidated financial statements follow the continuity of interests basis of accounting as if the Trust was a continuation of Chamaelo. As a result, the comparative figures are those of Chamaelo, while the results of operations include Chamaelo's results for the period up to and including June 21, 2005, and the Trust's results of operations from June 22, 2005 to December 31, 2005.

The period ended December 31, 2004 reflects the 214-day period from the commencement of operations on June 1, 2004.

Structure of the Trust

Vault Energy Trust (the "Trust") is an open-ended, unincorporated investment trust governed by the laws of the Province of Alberta. The Trust was established as part of a Plan of Arrangement (the "Arrangement" that became effective on June 22, 2005. The purpose of the Trust is to indirectly explore for, develop and hold interests in petroleum and natural gas properties, through investments in securities of subsidiaries and royalty interests in oil and natural gas properties. The business of the Trust is carried on by Vault Energy Inc. The Trust owns, directly and indirectly, 100% of the common shares, (excluding the exchangeable shares - see note 8) of Vault Energy Inc. The activities of Vault Energy Inc. are financed through interest bearing notes from the Trust and third party debt as described in the notes to the financial statements. The convertible debentures are direct obligations of the Trust.

Pursuant to the terms of an agreement (the "NPI Agreement"), the Trust is entitled to a payment from Vault Energy Inc. each month equal to the amount by which 99% of the gross proceeds from the sale of production exceed 99% of certain deductible expenditures (as defined). Under the terms of the NPI Agreement, deductible expenditures may include amounts, determined on a discretionary basis, to fund capital expenditures, to repay third party debt and to provide for working capital required to carry out the operations of Vault Energy Inc.

The Trustee may declare payable to the Trust Unitholders all or any part of the net income of the Trust earned from interest income on the notes and from the income generated under the NPI Agreement, and from any dividends paid on the common shares of Vault Energy Inc., less any expenses of the Trust including interest on the convertible debentures.

1. SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

These consolidated financial statements include the accounts of the Trust and its wholly-owned subsidiaries. These financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada.

b) Oil and natural gas properties and equipment

The Trust follows the full cost method of accounting whereby all costs related to the acquisition of, exploring for and developing oil and natural gas reserves are capitalized and charged against earnings as set out below. Such costs include land acquisition costs, geological and geophysical expenses, production equipment, carrying charges of non-producing properties, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities.

These costs, together with the estimated future costs to be incurred in developing proved reserves, are depleted or depreciated using the unit-of-production method based on the proved reserves before royalties as estimated by independent petroleum engineers. Oil and natural gas reserves and production are converted into equivalent units based upon estimated relative energy content of six thousand cubic feet of natural gas to one barrel of oil. The costs of undeveloped properties are excluded from the costs subject to depletion and depreciation until it is determined whether proved reserves are attributable to the properties or impairment occurs.

Oil and natural gas properties are evaluated each reporting period through an impairment test to determine the recoverability of capitalized costs. The carrying amount is assessed as recoverable when the sum of the undiscounted cash flows expected from proved reserves plus the cost of unproved interests, net of impairments, exceeds the carrying amount. When the carrying amount is assessed not to be recoverable, an impairment loss is recognized to the extent that the carrying amount exceeds the sum of the discounted cash flows from proved and probable reserves plus the cost of unproved interests, net of impairments. The cash flows are estimated using expected future prices and costs and are discounted using a credit adjusted risk-free interest rate.

Proceeds from the sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would result in a change in the depletion rate of 20% or more.

Portions of the Trust's oil and natural gas activities are conducted jointly with others and accordingly these financial statements reflect only the Trust's proportionate interest in such activities.

c) Office and other equipment

Office and other equipment are depreciated using the straight-line method over the estimated useful life of three years.

d) Goodwill

Goodwill, which represents the excess of purchase price over the fair value of net assets received in an acquisition, is tested for impairment on an annual basis in the fourth quarter. A goodwill impairment loss would be recognized when the carrying amount of goodwill exceeds its fair value. Should the test result in impairment, it will be charged to income in the period of the impairment.

e) Asset retirement obligations ("ARO")

The Trust recognizes the liability associated with future site reclamation costs in the financial statements at the time when the liability is incurred. ARO obligations are initially measured at fair value and subsequently adjusted for the accretion of discount and any changes to the underlying cash flows. The asset retirement cost is capitalized to oil and natural gas properties and equipment and amortized into earnings on a basis consistent with depletion and depreciation.

f) Use of estimates

The amounts recorded for depletion and depreciation, asset retirement obligations and the amounts used in impairment test calculations are based on estimates of proved reserves, production rates, oil and natural gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.

g) Revenue recognition

Oil and natural gas revenues are recognized when title and risks pass to the purchaser.

h) Income taxes

The Trust is a taxable entity under the Income Tax Act (Canada) and is taxable only on income that is not distributed or distributable to the Trust's unitholders. As the Trust distributes all of its taxable income to the unitholders and meets the requirements of the Income Tax Act (Canada) applicable to the Trust, no provision for income tax has been made by the Trust, except for its subsidiaries as noted below.

The Trust follows the liability method of accounting for future income taxes, whereby temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate future income tax liabilities or assets. Future income tax liabilities or assets are calculated using tax rates anticipated to apply in the periods that the temporary differences are expected to reverse.

i) Stock-based compensation

The Trust has a unit rights incentive plan ("TURIP"), which is described in note 10. The Trust applies the fair value method for valuing unit rights granted to officers, directors, employees and consultants. Under this method, compensation cost attributable to unit rights granted to officers, directors, employees and consultants is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon the exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus is recorded as an increase to unitholders' capital.

j) Flow-through shares

The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow-through share arrangements are renounced to investors in accordance with income tax legislation. Share capital is reduced and future income tax liability is increased by the tax cost of these renounced expenditures.

k) Per unit information

Per unit information is computed using the weighted average number of trust units outstanding during the period. Diluted per unit information is calculated using the treasury stock method, which assumes that any proceeds from the exercise of stock options, trust unit rights and warrants would be used to purchase trust units at the average market price during the period. No adjustment to diluted earnings per trust unit is made if the result of these calculations is anti-dilutive.

l) Exchangeable shares - non-controlling interest

Exchangeable shares in Vault Energy were issued pursuant to the Plan of Arrangement. The exchangeable shares are transferable and are retractable for Trust units. As such, they have been classified outside of equity as a non-controlling interest. Net income (loss) as reported is net of net income (loss) attributable to non-controlling interest. Retractions of exchangeable shares are accounted for using step acquisition accounting. As a result, any excess between the fair market value of the trust units issued upon retraction and the book value of the corresponding exchangeable shares is recorded as an increase to property, plant and equipment. In addition, future taxes are recorded as a result of differences between fair market values and tax bases.

m) Convertible debentures

Convertible debentures are initially recorded at the fair value of the obligation without the conversion feature. The difference between the principal amount and the fair value without the conversion feature is recorded in unitholders' equity as equity component of convertible debentures. The obligation is accreted through earnings using the effective interest rate method and the equity component of convertible debentures is increased as the debentures are converted for Trust units.

2. PLAN OF ARRANGEMENT

The Plan of Arrangement involved the conversion of Chamaelo into the Trust, the acquisition by Vault Energy of certain petroleum and natural gas assets in West Central Alberta and North Eastern British Columbia (the "June 2005 acquisition") and the conveyance of certain assets to ExploreCo. As a result of the Plan of Arrangement former Chamaelo shareholders received 0.2 shares of ExploreCo and either 0.5 Trust units or 0.5 exchangeable shares for each Chamaelo share held.

a) June 2005 acquisition

On June 22, 2005, pursuant to the Plan of Arrangement, Vault Energy acquired certain petroleum and natural gas producing assets in West Central Alberta and North Eastern British Columbia. The total costs of the acquisition may change as the Trust completes the closing adjustment process.



---------------------------------------------------------------------
June 2005 acquisition ($ thousands)
---------------------------------------------------------------------
Purchase price:
Contract purchase price 395,000
Reduction to purchase price (10,666)
Deal costs 2,490
Closing adjustments (21,232)
---------------------------------------------------------------------
365,592
---------------------------------------------------------------------
---------------------------------------------------------------------

Net assets acquired:
Petroleum and natural gas assets 377,732
Asset retirement obligations (12,140)
---------------------------------------------------------------------
365,592
---------------------------------------------------------------------
---------------------------------------------------------------------


b) ExploreCo

Under the Plan of Arrangement, certain assets of Vault Energy were transferred to ExploreCo. At the time of the transaction, the entities were related and therefore the assets and liabilities of ExploreCo have been transferred to ExploreCo at Vault's net book value as follows:



---------------------------------------------------------------------
ExploreCo ($ thousands)
---------------------------------------------------------------------
Net assets transferred:
Petroleum and natural gas assets 44,695
Office equipment 32
Asset retirement obligations (3,206)
---------------------------------------------------------------------
41,521
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
Common shares 41,389
Warrants 132
---------------------------------------------------------------------
41,521
---------------------------------------------------------------------
---------------------------------------------------------------------


c) Plan of arrangement costs

Certain costs were incurred as a result of the Plan of Arrangement, which have been charged to restructuring costs in the period. The costs are as follows:



---------------------------------------------------------------------
Plan of arrangement costs ($ thousands)
---------------------------------------------------------------------
Advisory fees 5,000
Consulting and legal fees 2,142
Fairness opinion 1,034
---------------------------------------------------------------------
Plan of Arrangement costs, before tax 8,176
---------------------------------------------------------------------


d) Formation of Chamaelo Energy Inc. ("Chamaelo")

On June 1, 2004, as a result of a plan of arrangement involving Viracocha Energy Inc. ("Viracocha"), Provident Energy Trust, Provident Energy Ltd., and Chamaelo (now Vault), certain oil and natural gas properties were acquired from Viracocha in exchange for common shares in Chamaelo. Chamaelo issued 5,678,786 Chamaelo common shares to Viracocha shareholders on a pro-rata basis. Pursuant to the Plan of Arrangement resulting in the formation of the Trust (note 2), these shares were consolidated on a 2:1 basis and exchanged for Trust units or exchangeable shares.

As Vault and Viracocha were deemed to be related parties, the net assets acquired by Vault have been recorded at Viracocha's net book value as follows:



---------------------------------------------------------------------
Consideration for acquisition ($ thousands)
---------------------------------------------------------------------
Issuance of 5,678,786 common shares 14,136
Purchase price adjustment 155
---------------------------------------------------------------------
14,291
---------------------------------------------------------------------
---------------------------------------------------------------------

Net assets acquired ($ thousands)
---------------------------------------------------------------------
Oil and natural gas properties 15,138
Office and other equipment 149
Asset retirement obligation (996)
---------------------------------------------------------------------
14,291
---------------------------------------------------------------------
---------------------------------------------------------------------


3. ACQUISITIONS

a) Private Company 1 ("PC1"):

On December 1, 2005, the Trust acquired all of the issued and outstanding shares of PC1, a private company involved in the exploration, development and production of oil and natural gas in Western Canada for a total purchase price, inclusive of transaction costs, of $10,788,000. The financial statements of the Trust include the accounts of PC1 from the date of acquisition.

b) Private Company 2 ("PC2"):

On December 21, 2005, the Trust acquired all of the issued and outstanding shares of PC2, a private company involved in the exploration, development and production of oil and natural gas in Western Canada for a total purchase price, inclusive of transaction costs, of $12,810,000. The financial statements of the Trust include the accounts of PC2 from the date of acquisition.

The PC1 and PC2 acquisitions have been accounted for by the purchase method of accounting as follows:



---------------------------------------------------------------------
Corporate acquisitions ($ thousands) PC1 PC2 Total
---------------------------------------------------------------------
Property plant & equipment 14,999 17,969 32,968
Asset retirement obligation (283) (99) (382)
Future income taxes (4,089) (5,824) (9,913)
---------------------------------------------------------------------
10,627 12,046 22,673
Working capital 161 764 925
---------------------------------------------------------------------
Net assets acquired 10,788 12,810 23,598
---------------------------------------------------------------------
---------------------------------------------------------------------


c) Capstone Energy Ltd. ("Capstone"):

On October 13, 2004, the Trust acquired all of the issued and outstanding shares of Capstone, a private company involved in the exploration, development and production of oil and natural gas in Western Canada for a total purchase price of $18,680,000. The financial statements of the Trust include the accounts of Capstone from the date of acquisition. The acquisition has been accounted for by the purchase method of accounting as follows:



Consideration for acquisition ($ thousands)
---------------------------------------------------------------------
Cash 8,975
Issuance of 2,002,850 common shares 9,013
Issuance of 667,626 share purchase warrants 600
Transaction costs 92
---------------------------------------------------------------------
18,680
---------------------------------------------------------------------
---------------------------------------------------------------------

Net assets acquired ($ thousands)
---------------------------------------------------------------------
Cash 1,041
Working capital (853)
Oil and natural gas properties and equipment 19,500
Asset retirement obligation (1,512)
Goodwill 4,179
Future income taxes (3,675)
---------------------------------------------------------------------
18,680
---------------------------------------------------------------------
---------------------------------------------------------------------


d) Property acquisition:

On November 30, 2004, the Trust acquired certain oil and natural gas properties for a total purchase price of $83,687,000, including transaction costs. The acquired properties are located mainly in the West Central and Peace River Arch areas of Alberta. The Trust allocated the purchase price as follows:



Consideration for acquisition ($ thousands)
---------------------------------------------------------------------
Cash 83,687
---------------------------------------------------------------------
---------------------------------------------------------------------

Net assets acquired ($ thousands)
---------------------------------------------------------------------
Oil and natural gas properties and equipment 99,275
Asset retirement obligation (12,626)
Natural gas sales contract (2,962)
---------------------------------------------------------------------
83,687
---------------------------------------------------------------------
---------------------------------------------------------------------


4. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT

Oil and natural gas properties and equipment
($ thousands) 2005 2004
---------------------------------------------------------------------
Oil and natural gas properties 549,336 144,692
Office and other equipment 2,639 327
---------------------------------------------------------------------
Cost of oil and natural gas properties
and equipment 551,975 145,019
---------------------------------------------------------------------

Accumulated depletion of oil and natural
gas properties (40,531) (2,844)
Accumulated depreciation of office and
other equipment (375) (51)
---------------------------------------------------------------------
Accumulated depletion and depreciation (40,906) (2,895)
---------------------------------------------------------------------
Net oil and natural gas properties
and equipment 511,069 142,124
---------------------------------------------------------------------
---------------------------------------------------------------------


As at December 31, 2005, the cost of oil and natural gas properties includes $18,953,000 (2004 - $12,307,000) relating to properties from which there is no proved reserves and which have been excluded from costs subject to depletion and depreciation. During the year ended December 31, 2005, the provision for depletion, depreciation and accretion includes $1,398,000 (2004 - $113,000) for accretion of asset retirement costs. During the period ended December 31, 2005, the Trust capitalized $111,000 (2004 - $139,000) of general and administrative costs. Future development costs of $28,277,000 (2004 - $5,572,000) have been included in the calculation of depletion, depreciation and accretion.

The Trust performed an impairment (ceiling) test at December 31, 2005 to assess the recoverable value of the oil and natural gas properties. The oil and natural gas future prices are based on January 1, 2006 commodity price forecasts of the Trust's independent reserve evaluators. These prices have been adjusted for commodity price differentials specific to the Trust. 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.



---------------------------------------------------------------------
Foreign Edmonton Light
WTI Oil Exchange Crude Oil AECO Gas
Year ($US/bbl) Rate ($Cdn/bbl) ($Cdn/mmbtu)
---------------------------------------------------------------------

2006 60.81 0.850 70.07 11.58
2007 61.61 0.850 70.99 10.84
2008 54.60 0.850 62.73 8.95
2009 50.19 0.850 57.53 7.87
2010 47.76 0.850 54.65 7.57
2011 48.48 0.850 55.47 7.70
2012 49.20 0.850 56.31 7.83
2013 49.94 0.850 57.16 7.96
2014 50.69 0.850 58.02 8.09
2015 51.45 0.850 58.89 8.23
2016 52.22 0.850 59.78 8.37
Escalate 1.5% per
Thereafter year 1.5% per year 1.5% per year
---------------------------------------------------------------------
---------------------------------------------------------------------


5. REVOLVING CREDIT FACILITY

Concurrent with the Plan of Arrangement, Vault Energy entered into a credit agreement with a syndicate of Canadian banks to provide the Trust with $125,000,000 of total credit facilities. This is comprised of an extendible revolving term credit facility of $115,000,000 and a $10,000,000 operating facility each bearing interest at prime plus a premium ranging between 0% and 1.75% based on the Trust's debt to cash flow ratio. The credit facilities are secured by a $200,000,000 demand debenture on the assets of Vault Energy and are renewable on June 30, 2006. Should the facilities not be renewed they convert to 366-day non-revolving term facilities on the renewal date. Payment will not be required under the facilities for more than 365 days from the conversion date and, as such, the revolving credit facility has been classified as non-current. The effective interest rate as at December 31, 2005 was 5.40%.

6. CONVERTIBLE DEBENTURES

On April 27, 2005, Chamaelo completed a bought deal private placement financing issuing 55,000 Series D subscription receipts at a price of $1,000 per Series D subscription receipt for aggregate gross proceeds of $55,000,000. Issue costs of $2,801,000 have been classified as deferred financing charges and will be amortized over the life of the debentures. For the period ended December 31, 2005 amortization of $280,000 has been included in the income of the Trust.

Pursuant to the Plan of Arrangement, each Series D subscription receipt was converted into one convertible debenture of the Trust. The convertible debentures have a face value of $1,000 per debenture and a maturity date of June 30, 2010. The convertible debentures pay interest semi-annually on June 30 and December 31 of each year at 8% per annum and are convertible into Trust units at a conversion price of $11.50 per Trust unit. Holders of convertible debentures have the option of redeeming them at a price of $1,050 per debenture after June 30, 2008 and on or before June 30, 2009 and thereafter until the maturity date at a price of $1,025 per debenture. The Trust may repay the convertible debentures in cash or through the issue of additional Trust units at 95% of the market price.

The debentures were initially recorded at the fair value of the obligation without the conversion feature. This fair value to make future payments of principal and interest was determined to be $52,400,000. The difference between the principal amount of $55,000,000 and the fair value of the obligation is $2,600,000 and has been recorded in unitholders' equity as the fair value of the conversion feature of the debentures. The following table shows the convertible debenture activities for the year ended December 31, 2005:



Number of Debt Component Equity component
Convertible Debentures Debentures ($ thousands) ($ thousands)
---------------------------------------------------------------------
Issued April 27, 2005 55,000 52,400 2,600
Accretion 263 -
Conversion to Trust units (6,329) (6,047) (299)
---------------------------------------------------------------------
Balance at December 31,
2005 48,671 46,616 2,301
---------------------------------------------------------------------
---------------------------------------------------------------------


7. ASSET RETIREMENT OBLIGATION

The Trust's asset retirement obligation result from net ownership interests in oil and natural gas properties including well sites, gathering systems and processing facilities. The Trust estimates the total undiscounted amount of cash flows (adjusted for inflation using a rate of 2%) required to settle its asset retirement obligation is approximately $112,000,000 (2004 - $48,000,000) which will be incurred during years ranging from 2006 to 2035. A credit-adjusted risk-free rate of 7% was used to calculate the fair value of the asset retirement obligation.

A reconciliation of the asset retirement obligations is provided below:



---------------------------------------------------------------------
Asset retirement obligation ($ thousands) 2005 2004
---------------------------------------------------------------------
Balance, beginning of year 15,563 -
Liabilities acquired, net 9,316 15,134
Liabilities incurred in period 897 319
Liabilities resulting from changes in estimates 2,394
Accretion expense 1,398 113
Liabilities settled in period (8) (3)
---------------------------------------------------------------------
Balance, end of year 29,560 15,563
---------------------------------------------------------------------
---------------------------------------------------------------------


8. NON-CONTROLLING INTEREST

Vault Energy Inc. is authorized to issue an unlimited number of exchangeable shares. Exchangeable shares are convertible into Trust units based on the exchange ratio, which is adjusted monthly to reflect the distributions paid on the Trust units. Cash distributions are not paid on exchangeable shares, however the exchangeable shareholders do have the right to vote at the meetings of unitholders. The exchangeable shares must be exchanged for Trust units by June 22, 2008.

Pursuant to the Plan of Arrangement, former shareholders of Chamaelo had the option to receive 0.5 exchangeable shares of Vault Energy Inc. for each Chamaelo share held to a maximum of 5,000,000 exchangeable shares. As a result, 3,889,462 exchangeable shares were issued in exchange for 7,778,924 common shares of Chamaelo.


The following summarizes the exchangeable shares outstanding and the non-controlling interest ("NCI") as at December 31, 2005:



---------------------------------------------------------------------
Exchangeable Non-controlling
Shares Interest ($ thousands)
---------------------------------------------------------------------
Balance, beginning of year - -
Plan of Arrangement 3,889,462 25,881
Retracted for Trust units (328,876) (2,214)
Net income attributable to NCI 1,189
---------------------------------------------------------------------
Balance, end of year 3,560,586 24,856
Exchange ratio, end of year 1.07185
---------------------------------------------------------------------
Trust units issuable upon conversion,
end of year 3,816,414
---------------------------------------------------------------------
---------------------------------------------------------------------


Exchangeable share retractions are accounted for using the step acquisition method of accounting. A summary of these acquisitions as at December 31, 2005 follows:



---------------------------------------------------------------------
Acquisition of non-controlling interest ($ thousands)
---------------------------------------------------------------------

Retraction of exchangeable shares
reflected in property, plant and equipment 2,706
Future taxes on acquisition of exchangeable shares (923)
---------------------------------------------------------------------
Excess of fair market value over book value 1,783
---------------------------------------------------------------------


Exchangeable share retractions are accounted for using the step acquisition method of accounting. A summary of these acquisitions as at December 31, 2005 follows:

9. UNITHOLDERS' EQUITY

The Trust Indenture provides that an unlimited number of Trust units may be authorized and issued. Each Trust unit is transferable, carries the right to one vote and represents an equal undivided beneficial interest in any distributions from the Trust and in the assets of the Trust in the event of termination or winding-up of the Trust. All Trust units are of the same class with equal rights and privileges.



a) Trust units:

---------------------------------------------------------------------
Number of Amount
Unitholders' equity Shares ($ thousands)
---------------------------------------------------------------------

Common shares of Chamaelo Energy Inc.
Balance, April 5, 2004 2 -
Issued in private placements 19,472,222 83,030
Issued in private placement of
flow-through shares 925,926 5,000
Issued upon plan of arrangement 5,678,786 14,136
Issued upon corporate acquisition (Note 3) 2,002,850 9,013
Share issue costs (net of future taxes
of $1,318,000) - (3,434)
---------------------------------------------------------------------
Balance, December 31, 2004 28,079,786 107,745
Exercise of warrants 421,020 2,226
Exercise of options 680,200 5,280
Options repurchased by Trust (Note 10) - (2,299)
Shares exchanged for exchangeable shares
(Note 8) (7,778,924) (25,881)
Share issue costs (net of future taxes
of $2,487) - (5)
Future tax effect of $5.0 million
flow-through share renunciation - (1,695)
---------------------------------------------------------------------
Balance, June 21, 2005 21,402,082 85,371

Shares cancelled on conversion to
Trust units (21,402,082) -
Trust units issued on cancellation
of common shares 10,701,051 -
Plan of Arrangement (Note 2(b)) - (41,389)
---------------------------------------------------------------------
Balance, June 22, 2005 10,701,051 43,982

Trust units issued in private placement 21,156,000 275,028
Trust unit issue costs - (14,174)
Trust units issued on conversion of
debentures 550,347 6,346
Trust units issued on retraction of
exchangeable shares 340,532 3,996
Trust units issued through Distribution
Re-investment and Optional Purchase Plan 35,411 411
Trust units issued on exercise of warrants 2,492 23
---------------------------------------------------------------------
Balance, December 31, 2005 32,785,833 315,612
---------------------------------------------------------------------
---------------------------------------------------------------------

Warrants (note 9(b)) - 1,581
---------------------------------------------------------------------
Total Unitholders' equity 32,785,833 317,193
---------------------------------------------------------------------


On April 27, 2005, Chamaelo completed a bought deal private placement issuing 42,312,000 Series E subscription receipts in the capital of the Trust at a price of $6.50 per Series E subscription receipt for aggregate gross proceeds of $275,028,000.

Pursuant to the Plan of Arrangement, each Series E subscription receipt was converted into 0.5 Trust Units and 0.2 ExploreCo shares.

On May 26, 2004, Chamaelo completed a private placement financing for an aggregate of 3,250,000 units priced at $2.60 per unit for gross proceeds of $8,450,000. Each unit is comprised of one common share and one common share purchase warrant of Chamaelo. 3,209,000 of these units were issued to officers, directors, and employees of Chamaelo with a service commitment of three years. Pursuant to the Plan of Arrangement resulting in the formation of the Trust, the shares and warrants were consolidated on a 2:1 basis.

If the three-year obligation is not met, Vault will have the option to buy back the units at the original $2.60 issue price on a pro-rata basis reflecting the time of service completed. The fair value of the warrants at issue date was estimated at $1,420,000 using the Black-Scholes option pricing model with the following assumptions: Dividend yield - nil; expected volatility - 30%; risk-free interest rate - 4.0%; and expected life of 5 years.

The 667,626 warrants issued in connection with the corporate acquisition of Capstone are exercisable into 0.5 Trust units at any time commencing at issuance and ending April 12, 2007 at an exercise price of $8.50 per Trust unit. The exercise price declines with each distribution paid by the Trust. The fair value of the warrants at issue date was estimated at $600,000 using the Black-Scholes option pricing model with the following assumptions: Dividend yield - nil; expected volatility - 30%; risk-free interest rate - 3.16%; and expected life of 2.5 years.

Distribution Re-investment and Optional Purchase Plan ("DRIP")

The DRIP provides unitholders the opportunity to reinvest their distributions in additional Trust units at 95% of the weighted average market price of Trust units for the 10-day trading period prior to a distribution payment date. Participants in the plan may also purchase, to a maximum of $50,000 annually, additional Trust units at 100% of the weighted average market price for Trust units for the 10-day trading period prior to a distribution payment date.

Redemption Right

Unitholders may redeem their Trust units for cash at any time, up to a maximum of $250,000 in any calendar month, by delivering their unit certificates to the Trust, together with a properly completed notice of redemption. The redemption amount per Trust unit will be the lesser of 90 percent of the market price of the Trust units on the principal market on which they are traded during the 10 day trading period after the Trust units have been validly tendered for redemption and the closing market price on the principal market on which they are traded on the date which they were validly tendered for redemption, or if there was no trade of the Trust units on that date, the average of the last bid and ask prices of the Trust units on that date.

b) Warrants

As a result of the Plan of Arrangement, unexercised warrants of Chamaelo were converted into 0.5 warrants of the Trust and 0.2 warrants of ExploreCo. Warrants of the trust allow the holder to purchase units of the Trust at the specified warrant exercise price. The exercise price of each warrant is reduced as of the date of conversion by the cumulative cash distributions attributable to one Trust unit. As at December 31, 2005, the remaining warrants outstanding have been reduced in exercise price by $0.81 per warrant.

The following summarizes the warrants outstanding as at December 31, 2005:



---------------------------------------------------------------------
Weighted
Number of Average Amount
Warrants Warrants Price ($) ($ thousands)
---------------------------------------------------------------------
Initially issued and
balance beginning of year 3,917,626 4.34 2,020
Exercised for shares (421,020) 4.56 (305)
---------------------------------------------------------------------
Balance at June 22, 2005 3,496,606 4.31 1,715
---------------------------------------------------------------------
---------------------------------------------------------------------

Trust warrants granted on
cancellation of share
purchase warrants 1,749,061 7.65 1,715
Plan of arrangement (132)
---------------------------------------------------------------------
1,749,061 7.65 1,583

Exercised for Trust units (2,492) 8.13 (2)
---------------------------------------------------------------------
Balance, end of year 1,746,569 6.96 1,581
---------------------------------------------------------------------
---------------------------------------------------------------------


c) Stock options

On June 1, 2005, all of the stock options of Chamaelo's independent directors and officers (in their capacity as directors) vested and were exercised on June 22, 2005. In addition, on June 22, 2005, pursuant to the Plan of Arrangement, one-third of the options of employees and officers (in their capacity as employees) were vested and exercised and the remaining two-thirds of officer and employee options were settled by the Trust.

The following table summarizes the stock options outstanding at December 31, 2005:



Weighted Weighted
Number of Average Average
Options Price ($) Years to Expiry
---------------------------------------------------------------------
Balance, beginning of year 1,437,000 4.56 4.02
Options granted 100,000 5.94 4.66
Options exercised (680,200) 4.57 4.06
Options cancelled (856,800) 4.65 4.06
---------------------------------------------------------------------
Balance, end of year - - -
---------------------------------------------------------------------
---------------------------------------------------------------------


d) Trust Unit Rights Incentive Plan

On July 1, 2005, the Trust introduced its Trust Unit Rights Incentive Plan. The rights vest over three years, expire five years from the date of grant and have an exercise price that declines by the amount of distributions paid per Trust unit.

The following table summarizes the rights outstanding at December 31, 2005:



Weighted Weighted
Average Average Weighted
Number of Original Reduced Average
Rights Price ($) Price ($) Years to Expiry
---------------------------------------------------------------------
Balance, beginning
of year -
Rights granted 1,618,950 10.94 10.36 4.59
Rights cancelled (15,000) 10.45 9.76 4.51
---------------------------------------------------------------------
Balance,
end of year 1,603,950 10.94 10.37 4.59
---------------------------------------------------------------------
---------------------------------------------------------------------

Exercisable,
end of year - - - -
---------------------------------------------------------------------


The following table summarizes information with respect to
outstanding rights as at December 31, 2005:


Weighted Weighted Weighted
Number of Rights Average Average Average Rights
Outstanding at Exercise Reduced Years to Exercisable at
December 31, 2005 Price ($) Price ($) Expiry December 31, 2005
---------------------------------------------------------------------
1,306,670 10.56 9.84 4.54 -
53,025 12.43 11.99 4.65 -
190,525 13.27 12.94 4.71 -
53,730 10.67 10.64 4.88 -
---------------------------------------------------------------------
1,603,950 10.94 10.37 4.59 -
---------------------------------------------------------------------
---------------------------------------------------------------------


10. STOCK-BASED COMPENSATION

During the year ended December 31, 2005, $4,321,000 was charged to income in respect of stock-based compensation cost. These charges comprise amortization of the fair value of stock options and Trust unit rights as well as the excess over fair value paid by the Trust to settle unexercised options with employees on June 22, 2005. The details of these costs follow:



Year Ended
Chamaelo Stock Options December 31, 2005
Stock-based compensation ($ thousands)
---------------------------------------------------------------------
Amortization of Fair value 1,825
Excess over fair value on settlement 767
---------------------------------------------------------------------
Chamaelo stock-based compensation 2,592
---------------------------------------------------------------------
---------------------------------------------------------------------

Contributed surplus
---------------------------------------------------------------------
Balance, beginning of period 344
Amortization of fair value 1,825
Reclased to equity(1) (2,169)
---------------------------------------------------------------------
Balance, end of period -
---------------------------------------------------------------------
(1) The contributed surplus value was reclassified to equity on June
22, 2005 when all of the outstanding options were exercised or
settled by the Trust.


The fair value of Chamaelo options granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:



---------------------------------------------------------------------
Fair value per option $1.90
Risk-free rate 3.6%
Expected life 4 years
Expected volatility 34.0%
Dividend yield -
---------------------------------------------------------------------


On July 1, 2005, the Trust introduced its Trust Unit Rights Incentive Plan (the "Plan"). The Trust has granted 1,618,950 (Note 9(d)) rights to employees as of December 31, 2005. The rights vest over three years, expire five years from the date of grant and have an exercise price that declines by the amount of distributions paid per Trust unit. Under the terms of the Plan employees are not entitled to cash payments.



Year Ended
Vault Unit Rights December 31, 2005
Stock-based compensation ($ thousands)
---------------------------------------------------------------------
Amortization of Fair value 1,729
---------------------------------------------------------------------
Vault stock-based compensation 1,729
---------------------------------------------------------------------
---------------------------------------------------------------------

Contributed surplus
Balance, beginning of period -
Amortization of fair value 1,729
---------------------------------------------------------------------
Balance, end of period 1,729
---------------------------------------------------------------------
---------------------------------------------------------------------


The fair value of each right granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:



---------------------------------------------------------------------
Fair value per right $4.72
Risk-free rate 3.8%
Expected life 5.0
Expected forfeitures 10%
Expected volatility 19.0%
Dividend yield $1.38
---------------------------------------------------------------------


11. TAXES

a) Vault Energy Trust

The Trust is an inter-vivos trust for income tax purposes. As such, the Trust's income that is not allocated to the Trust's unitholders is taxable.

For 2005, the Trust had taxable income, before distributions, of $20,610,000. Taxable income of the Trust comprises net profit interests of corporate subsidiaries, interest income, less deductions for Canadian oil and gas property expense ("COGPE") and issue costs.

The amounts of COGPE and issue costs remaining in the Trust at December 31, 2005 are $220,700,000 and $14,674,000, respectively.

b) Corporate Subsidiaries

The future tax liability on the balance sheet arises as a result of the following temporary differences:



($ thousands) 2005 2004
---------------------------------------------------------------------

Future income tax liabilities:
Capital assets 25,475 10,459
Future income tax assets:
Asset retirement obligations (9,976) (5,232)
Share issue costs and other (1,660) (2,453)
---------------------------------------------------------------------
Net future income tax liability 13,839 2,774
---------------------------------------------------------------------
---------------------------------------------------------------------


The provision for income taxes varies from the amount that would be computed by applying the combined Canadian federal and provincial tax rates for the following reasons:



Income tax rate 37.62% 38.62%

($ thousands) 2005 2004
---------------------------------------------------------------------
Expected income tax expense 4,046 349
Increase (decrease) in income taxes
resulting from:
Effect of change in tax rate 47 -
Net income attributed to the Trust (6,853) -
Non-deductible crown charges 2,483 304
Resource allowance (2,778) (301)
Alberta royalty tax credit (68) (68)
Non-deductible stock-based compensation 1,337 133
Other 324 -
---------------------------------------------------------------------
Future income tax (recovery) expense (1,462) 417
---------------------------------------------------------------------
---------------------------------------------------------------------


12. PER TRUST UNIT INFORMATION

The weighted average number of Trust units outstanding for the determination of basic and diluted per Trust unit amounts are as follows:



2005 2004
---------------------------------------------------------------------
Basic 23,741,790 7,041,145
Dilution on account of:
Trust unit rights - -
Stock options - 60,925
Warrants 593,701 241,688
---------------------------------------------------------------------
Diluted 24,335,491 7,343,758
---------------------------------------------------------------------
---------------------------------------------------------------------


The weighted average and diluted calculations, as well as all per unit amounts presented, assume that the outstanding shares and dilutive instruments of Chamaelo have been consolidated to equivalent Trust units and dilutive instruments of Trust units as of the first period presented.

13. SUPPLEMENTAL CASH FLOW INFORMATION



($ thousands) 2005 2004
---------------------------------------------------------------------
Cash interest paid 5,315 (55)

Cash taxes paid 245,880 -
---------------------------------------------------------------------
---------------------------------------------------------------------

Taxes paid in 2005 relate to tax liabilities of entities acquired in
2004.

14. PHYSICAL SALES CONTRACTS

On April 13, 2005, Vault entered into physical delivery contracts as
follows:

Floor Upside
Product Volume price Participation Remaining Term
---------------------------------------------------------------------
Natural
gas 11,000 GJ/d $7.00/GJ 60% above $7.00/GJ Jan 1, 2005 -
Dec 31, 2006

Oil 1,000 bbls/d $61.50/bbl 50% above $61.50/bbl Jan 1, 2005 -
Dec 31, 2006

Oil(1) 1,000 bbls/d $68.00/bbl 50% above $68.00/bbl Jan 1, 2007 -
Dec 31, 2007
---------------------------------------------------------------------
(1) Contract entered into subsequent to December 31, 2005


15. FINANCIAL INSTRUMENTS

The Trust's financial instruments presented on the balance sheet consist of current assets, current liabilities, capital lease obligations, revolving credit facility and convertible debentures.

a) Fair values

The carrying value of current assets and current liabilities approximate their fair value due to the near term maturity of these instruments. Due to the revolving credit facility's floating interest rate, carrying value approximates fair value. Convertible debentures on the balance sheet are allocated between convertible debentures and equity component of convertible debentures. See note 6. The fair value of the remaining convertible debentures as at December 31, 2005 is $53,460,000.

The estimated fair values have been determined based on available market information and appropriate valuation methods. The actual amounts realized may differ from these estimates.

b) Credit risk

A substantial portion of the Trust's accounts receivable are with customers and joint venture partners in the oil and gas industry and are subject to normal industry credit risks. The Trust manages this credit risk by entering into sales contracts with only highly rated entities and reviewing its exposure to individual entities on a regular basis.

c) Interest Rate Risk

The Trust is exposed to movements in interest rates. The revolving credit facility is a variable rate facility. The Trust is monitoring this risk by examining the interest rate forward market for opportunities to fix the rate on a portion of its variable rate debt. As at December 31, 2005, The Trust has not fixed the rate on any portion of the revolving credit facility.

d) Commodity price risk

Natural gas sales contract - This contract was acquired in conjunction with the purchase of certain oil and natural gas properties on November 30, 2004. At the date of the acquisition, the fair value of the contract was a liability of $2,962,000. This value was recorded as a liability and is being amortized over the life of the contract, which expires in October 2007.

Other than the natural gas sales contract and the physical sales contracts outlined in Note 14, the Trust's oil and natural gas production was marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs.

e) Currency Risk

The Trust is exposed to foreign currency fluctuations as crude oil prices received are referenced to U.S. dollar denominated prices. As at December 31, 2005, The Trust has not entered into any foreign currency derivatives with respect to oil and natural gas sales.

16. COMMITMENTS

The Trust is committed to payments under an operating lease for office space and capital leases for leased vehicles as at December 31, 2005:



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Minimum Commitments Each Year Total
---------------------------------- Committed
($ thousands) 2006 2007 2008 2009 2010 After 2010 Total
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Capital lease
obligations 119 130 59 2 - - 310
Operating lease
obligation 610 745 758 780 782 847 4,522
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729 875 817 782 782 847 4,832
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Contact Information

  • Vault Energy Trust
    Robert Jepson
    President and Chief Executive Officer
    (403) 444-9662
    or
    Vault Energy Trust
    Greg Fisher
    VP, Finance and Chief Financial Officer
    (403) 444-9651
    or
    Vault Energy Trust
    Nicole Collard
    Investor Relations
    (403) 444-9657
    or
    Vault Energy Trust
    Suite 2100, 635 8th Avenue SW
    Calgary, Alberta T2P 3M3
    (403) 444-9500
    (403) 444-9494 (FAX)
    Email: info@vaultenergy.com
    Website: www.vaultenergy.com