Vault Energy Trust
TSX : VNG.UN

Vault Energy Trust

August 11, 2006 23:57 ET

Vault Energy Announces Second Quarter Financial and Operating Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2006) - Vault Energy Trust (TSX:VNG.UN) ("Vault" or the "Trust") is pleased to present its consolidated financial and operating results for the six months ended June 30, 2006. 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 Vault for the first and second quarter of 2006 with income statement and cash flow statement comparatives being Chamaelo results from January 1, 2005 to June 21, 2005 and Vault results from June 22, 2005 to June 30, 2005. The balance sheet comparatives are Vault results at December 31, 2005.

HIGHLIGHTS

- Vault raised $50 million in convertible debentures to initially repay outstanding borrowings on credit facilities as well as to fund the 2006 capital expenditure program and other general corporate matters;

- Drilled 4 (3.15 net) wells with a 100% success rate;

- Sold non-core properties for proceeds of approximately $2 million, before closing adjustments; and

- Since inception, Vault has paid 13 consecutive distributions of $0.115 prior to period end for a total of $49.1 million.



---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
FINANCIAL 2006 2005 2006 2005
---------------------------------------------------------------------
($ thousands, except
per Trust unit amounts)
Oil and natural gas
sales (1) 36,310 15,993 72,475 29,482

Funds flow from
operations 15,499 (2,377) 31,078 4,526
per Trust unit basic 0.45 (0.15) 0.92 0.30
per Trust unit - diluted 0.35 (0.15) 0.72 0.29

Net income (loss) 2,607 (6,241) 1,327 (4,762)
per Trust unit - basic 0.08 (0.39) 0.04 (0.32)
per Trust unit - diluted 0.07 (0.39) 0.03 (0.32)

Distributions 11,805 7,327 23,372 7,327
Payout Ratio 76% - 75% -

Capital expenditures 8,049 2,439 26,117 10,148

Bank debt 49,280 80,508 49,280 80,508
Net working capital
deficit (2) 14,025 3,706 14,025 3,706

Trust units
outstanding (3)
Weighted
average - basic 34,305,847 15,873,849 33,692,958 14,967,448
- diluted 37,387,061 16,937,477 37,550,398 15,541,197
end of
period - basic 34,456,730 31,857,051 34,456,730 31,857,051
- diluted 50,366,066 42,280,574 50,366,066 42,280,574
---------------------------------------------------------------------


(1) Oil and natural gas sales are shown net of transportation costs.

(2) Net working capital as at June 30, 2006 includes $4.0 million payable to unitholders.

(3) Prior period per Trust unit amounts based on 2 Chamaelo shares for 1 Trust unit.



---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
OPERATING (1) 2006 2005 2006 2005
---------------------------------------------------------------------
Number of producing days 91 91 181 181

Daily production
Oil and NGL - (bbls/d) 3,041 1,475 2,977 1,429
Natural gas - (mcf/d) 29,502 11,611 29,465 10,969
---------------------------------------------------------------------
Oil equivalent - (boe/d @6:1) 7,958 3,410 7,888 3,257

Sales price before physical hedges(1)
Oil and NGL - ($/bbl) 72.84 59.48 69.29 57.64
Natural gas - ($/mcf) 5.81 7.58 6.59 7.34
---------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 49.22 51.54 50.62 50.00

Effect of physical hedges
Oil and NGL - ($/bbl) (3.10) - (2.77) -
Natural gas - ($/mcf) 0.52 - 0.28 -
---------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 0.91 - 0.14 -

Net sales price
Oil and NGL - ($/bbl) 69.74 59.48 66.52 57.64
Natural gas - ($/mcf) 6.33 7.58 6.87 7.34
---------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 50.13 51.54 50.76 50.00

Royalties
Oil and NGL - ($/bbl) 7.02 7.59 8.93 7.30
Natural gas - ($/mcf) 1.24 1.46 1.52 1.52
---------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 7.27 8.27 9.04 8.31

Production expenses
Oil and NGL - ($/bbl) 18.64 13.50 16.96 13.54
Natural gas - ($/mcf) 2.05 1.40 1.86 1.46
---------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 14.73 10.59 13.33 10.87

Operating netback
Oil and NGL - ($/bbl) 44.08 38.39 40.63 36.80
Natural gas - ($/mcf) 3.04 4.72 3.49 4.36
---------------------------------------------------------------------
Oil equivalent - ($/boe @6:1) 28.13 32.68 28.39 30.82

(1) Sales prices are shown net of transportation costs.


President's Message

Vault Energy is pleased to announce the results for the quarter ended June 30, 2006. The Funds flow from operations for the quarter was $15.5 million or $0.45 per unit. Distributions to our Unitholders for the quarter remained consistent at $0.115/unit per month representing a 76% payout ratio. This meets our goal of maintaining steady distributions for Unitholders.

During the quarter, production averaged 7,958 boe/d which was in line with our expectations.

In May, Vault raised $50 million in a 5 year convertible debentures offering with a 7.2% coupon rate convertible at $10.50. Proceeds from the offering were used to repay outstanding borrowings on existing credit facilities as well as to fund capital expenditures. Vault sold certain non-revenue generating assets for approximately $2 million and will continue to look at rationalizing additional non-producing, non-core assets.

During the second quarter Vault drilled 4 gross (3.15 net) wells resulting in 3 gross oil wells and 1 gross gas well. All 4 wells are expected to be on production within the next month.

Looking forward to the third quarter, Vault is planning for a regularly scheduled major turnaround and maintenance at its Wimborne facility. This significant type of maintenance is a key part of our overall health and safety program and is required to be performed every 3-4 years. We expect the overall cost of the operation to be approximately $5 million with the majority of that being charged to operating expenses for the period.

Vault will continue to develop and exploit its current asset base and look at joint venture opportunities on our undeveloped land. Vault remains active in looking for growth opportunities to expand the Trust's asset base and add Unitholder value through quality acquisitions. Vault remains committed to the goal of providing long term sustainable distributions to Unitholders.

Sincerely,

(signed)

Robert T. Jepson

President & CEO


Management's Discussion and Analysis

August 9, 2006

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the consolidated financial statements of Vault Energy Trust ("Vault" or the "Trust") as at and for the six months ended June 30, 2006 and the audited consolidated financial statements for the year ended December 31, 2005. 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 measures such as funds flow, payout ratio and operating netback as factors in evaluating performance. These measures do not have standardized meanings as prescribed by GAAP and as a result, 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. 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. Consequently, the income statement comparative figures have been restated to appropriately include these costs as a charge to the then current period earnings.

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 shareholders and Trust unitholders. As of June 30, 2006, there have been 1,400,405 exchangeable shares exchanged for 1,522,822 Trust units. At June 30, 2006, there were 2,489,057 exchangeable shares outstanding at an exchange ratio of 1.15484.

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. These debentures are listed on the Toronto Stock Exchange under the symbol VNG.DB. As of June 30, 2006, there were 48,671 8% convertible debentures remaining with 6,329 convertible debentures having been converted into 550,347 Trust units.

On May 2, 2006, Vault closed a bought deal offering of $50,000,000 principle amount of convertible unsecured subordinated debentures. The convertible debentures have a face value of $1,000 per debenture, a maturity date of May 31, 2011 and a conversion price of $10.50 per Trust unit. These pay interest semi-annually at 7.2% per annum on May 31 and November 30 each year commencing on November 30, 2006. Holders of convertible debentures have the option of redeeming them at a price of $1,050 per debenture after May 31, 2009 and on or before May 31, 2010 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. These debentures are listed on the Toronto Stock Exchange under the symbol VNG.DB.A. As of June 30, 2006 there were 50,000, 7.2% convertible debentures remaining with no conversions having taken place as at the end of the period.

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.



---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
Summary of Financial Results (1) 2006 2005 2006 2005
---------------------------------------------------------------------
($ thousands, except per Trust
unit amounts)
Oil and natural gas sales (2) 36,310 15,993 72,485 29,482

Funds flow from operations 15,499 (2,377) 31,078 4,525
per Trust unit - basic 0.45 (0.15) 0.92 0.30
per Trust unit - diluted 0.35 (0.15) 0.72 0.29

Net income (loss) 2,607 (6,241) 1,327 (4,762)
per Trust unit - basic 0.08 (0.38) 0.04 (0.32)
per Trust unit - diluted 0.07 (0.38) 0.03 (0.32)

Total assets 530,377 502,289 530,377 502,289

Bank debt 49,280 80,508 49,280 80,508

Net working capital deficit 14,025 3,706 14,025 3,706

Total long-term liabilities 136,188 82,080 136,188 82,080
---------------------------------------------------------------------
---------------------------------------------------------------------


(1) Oil and natural gas sales are shown net of transportation costs.

(2) Prior period per Trust unit amounts based on 2 Chamaelo shares for 1 Trust unit.

Production

Daily production averaged 7,958 boe/d (2005 - 3,410 boe/d) and 7,888 boe/d (2005 - 3,257 boe/d) during the three and six months ended June 30, 2006 respectively. This represents a 133% and 142% increase over average production volumes for the same periods of 2005.

Incremental production from the June 2005 and December 2005 acquisitions added to production for the first two quarters of 2006.

A major facility turnaround at Wimborne scheduled for September 2006 will require the Wimborne area to be shut in for about two weeks while scheduled work is performed. A turnaround of this scope and magnitude is required every three to four years to ensure proper safety and maintenance standards. A scheduled turnaround at Keho in July required production to be shut in for seven days. It is important to note that some unscheduled maintenance by partners took place in the second quarter due to the softer gas prices during that time period. The Trust expects unscheduled maintenance may occur affecting production in smaller non operated properties in Q3 2006.

Average daily production for the three and six months ended June 30, 2006 is outlined below:



Three Months Six Months
ended ended
Average Daily June 30, June 30,
Production 2006 2005 % Change 2006 2005 % Change
---------------------------------------------------------------------
Natural gas (mcf/d) 29,502 11,611 154 29,465 10,969 169
Oil (bbls/d) 2,616 1,298 102 2,535 1,273 99
Natural gas liquids
(bbls/d) 425 177 140 442 156 183
---------------------------------------------------------------------
Total (boe/d) 7,958 3,410 133 7,888 3,257 142
---------------------------------------------------------------------
---------------------------------------------------------------------


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.



Three Months Six Months
ended ended
Average Sales June 30, June 30,
Price(1) 2006 2005 % Change 2006 2005 % Change
---------------------------------------------------------------------
Before effect of
physical hedges:
Oil ($/bbl) 71.84 61.24 17 68.80 59.17 16
NGL ($/bbl) 75.87 46.13 64 69.37 45.19 54
Natural gas
($/mcf) 5.81 7.58 (23) 6.59 7.34 (10)
---------------------------------------------------------------------
Average sales
price ($/boe) 49.22 51.54 (5) 50.62 50.00 1
---------------------------------------------------------------------
---------------------------------------------------------------------
Effect of
physical
hedges:
Oil ($/bbl) (3.10) - - (2.77) - -
NGL ($/bbl) - - - - - -
Natural gas
($/mcf) 0.52 - - 0.28 - -
---------------------------------------------------------------------
Average sales
price ($/boe) 0.91 - - 0.14 - -
---------------------------------------------------------------------
---------------------------------------------------------------------
Net sales price:
Oil ($/bbl) 68.74 61.24 12 66.03 59.17 12
NGL ($/bbl) 75.87 46.13 64 69.37 45.19 54
Natural gas
($/mcf) 6.33 7.58 (16) 6.87 7.34 (6)
---------------------------------------------------------------------
Average sales
price ($/boe) 50.13 51.54 (3) 50.76 50.00 2
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of oil and gas transportation costs


Three Months Six Months
ended ended
Average Benchmark June 30, June 30,
Pricing 2006 2005 % Change 2006 2005 % Change
---------------------------------------------------------------------
Oil
West Texas
Intermediate
US$/bbl 70.70 53.17 33 67.09 51.54 30
West Texas
Intermediate
CDN$/bbl
equivalent 79.44 66.46 20 76.24 63.59 20
Edmonton Par
CDN$/bbl 78.85 65.71 20 74.13 63.62 17

Natural Gas
AECO Daily Spot
Price
CDN$/mcf 6.01 7.38 (19) 6.79 7.04 (4)

Exchange Rates
US$/CDN$ Dollar
Period-end 1.12 1.23 (9) 1.12 1.23 (9)
US$/CDN$ Dollar
Average 1.12 1.24 (10) 1.14 1.24 (8)
---------------------------------------------------------------------


Commodity Price Risk Management

Currently, the Trust does not have any financial derivative instruments to hedge against future commodity price fluctuations. However, the Trust has entered into two physical sales contracts, which have provided some protection against downward movement in commodity prices. During the three months ended June 30, 2006 the Trust entered into two physical sales contracts for delivery of 4,000 GJ/d and 7,000 GJ/d of natural gas November 1, 2006 - March 31, 2007 and January 1, 2007 - March 31, 2007 respectively. The floor price for both contracts is set at $7.50/GJ and the upside participation is 61.75% and 61% for the 4,000 GJ/d and 7,000 GJ/d contracts respectively.

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 contracts follows:



Product Volume Floor price Participation
------------------------------------------------------------
Natural gas 11,000 GJ/d $ 7.00/GJ 60% above $7.00/GJ
Natural gas 4,000 GJ/d $ 7.50/GJ 61.75% above $7.50/GJ
Natural gas 7,000 GJ/d $ 7.50/GJ 61% above $7.50/GJ
Oil 1,000 bbls/d $ 61.50/bbl 50% above $61.50/bbl
Oil 1,000 bbls/d $ 68.00/bbl 50% above $68.00/bbl


Product Term
--------------------------------------
Natural gas Jan 1, 2006 - Dec 31, 2006
Natural gas Nov 1, 2006 - Mar 31, 2007
Natural gas Jan 1, 2007 - Mar 31, 2007
Oil Jan 1, 2006 - Dec 31, 2006
Oil Jan 1, 2007 - Dec 31, 2007


Revenue

Crude oil and natural gas revenues, net of transportation totaled $36.3 million (2005 - $16.0 million) and $72.5 million (2005 - $29.5 million) in the three and six months ending June 30, 2006. The increase in revenue in 2006 is primarily due to the June and December 2005 acquisitions. In addition, oil prices have continued to remain strong, which has contributed to increased revenues.



For the Three Months Ended June 30, 2006
Analysis of Sales
Revenue(1)
($ thousands) Natural Gas Crude Oil NGLs Total
---------------------------------------------------------------------
2005 Sales Revenue $ 8,010 $ 7,231 $ 752 $ 15,993
Price Variance (1,318) 888 471 41
Volume Variance 10,310 8,258 1,708 20,276
---------------------------------------------------------------------
2006 Sales Revenue $ 17,002 $ 16,377 $ 2,931 $ 36,310
---------------------------------------------------------------------
---------------------------------------------------------------------

For the Six Months Ended June 30, 2006
Analysis of Sales
Revenue(1)
($ thousands) Natural Gas Crude Oil NGLs Total
---------------------------------------------------------------------
2005 Sales Revenue $ 14,572 $ 13,631 $ 1,279 $ 29,482
Price Variance (932) 1,579 683 1,330
Volume Variance 22,996 15,094 3,583 41,673
---------------------------------------------------------------------
2006 Sales Revenue $ 36,636 $ 30,304 $ 5,545 $ 72,485
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of oil and gas transportation costs and including
the effect of physical hedges.


Royalties

Royalties are paid to various government entities and other land and mineral rights owners. In the second quarter of 2006, oil and natural gas royalties totaled $5.3 million or 14% of revenues as compared to $2.6 million and 16% of revenues in the same period during 2005. For the six months ended, oil and natural gas royalties totaled $12.9 million or 17% of revenues as compared to $4.9 million and 17% of revenues in the same period during 2005.

The increase in gross royalties is due to the growth in the operations of the Trust, primarily from the June 2005 and December 2005 acquisitions. Royalties as a percentage of revenues have decreased largely due to a capital cost allowance adjustment received in the second quarter.

Production Expenses

Production expenses for the three and six months ended June 30, 2006 were $10.7 million or $14.73/boe (2005 -$3.3 million or $10.59/boe) and $19.0 million or $13.33/boe (2005 - $6.4 million or $10.87/boe) respectively. During the second quarter we performed seasonal maintenance on facilities and worked over a number of wells requiring production to be shut in for periods of time, resulting in lowered production volumes and higher costs per boe. We also experienced unanticipated prior period charges from partner operated properties. We continue to encounter increased production costs and cost pressures due to the competitive market for service providers and increased utilities and other routine costs. Production expenses on a gross basis have increased primarily due to the larger asset base of the Trust that resulted from the June 2005 and December 2005 acquisitions.

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. The turnaround at Wimborne is currently expected to cost approximately $5.0 million, all of which will be realized in the third quarter.



Three Months Ended Six Months Ended
June 30, June 30,
Operating Netback(1) 2006 2005 2006 2005
---------------------------------------------------------------------
Oil and NGL ($/bbl)
Revenue 69.74 59.48 66.52 57.64
Royalties 7.02 7.59 8.93 7.30
Production expenses 18.64 13.50 16.96 13.54
---------------------------------------------------------------------
Operating Netback 44.08 38.39 40.63 36.80
---------------------------------------------------------------------
---------------------------------------------------------------------

Natural gas ($/mcf)
Revenue 6.33 7.58 6.87 7.34
Royalties 1.24 1.46 1.52 1.52
Production expenses 2.05 1.40 1.86 1.46
---------------------------------------------------------------------
Operating Netback 3.04 4.72 3.49 4.36
---------------------------------------------------------------------
---------------------------------------------------------------------

Combined ($/boe)
Revenue 50.13 51.54 50.76 50.00
Royalties 7.27 8.27 9.04 8.31
Production expenses 14.73 10.59 13.33 10.87
---------------------------------------------------------------------
Operating Netback 28.13 32.68 28.39 30.82
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Revenue is shown net of oil and gas transportation costs and
including the effect of physical hedges


The operating netback is a key indicator of the Trust's ability to generate cash flow for distribution and reinvestment. During the three and six months ended June 30, 2006, Vault generated an operating netback of $28.13 (2005 - $32.68) and $28.39 (2005 - $30.82) on a per boe basis.

General and Administrative Expenses ("G&A")

Net G&A costs for the three and six months ended totaled $2.1 million or $2.88/boe (2005 - $2.0 million or $6.56 per boe) and $3.9 million or $2.73/boe (2005 - $2.6 million or $4.42 per boe) respectively. G&A costs on both a gross and per BOE basis has increased in 2006 primarily because the Trust has added technical staff to manage the increased asset and production base.

Plan of Arrangement Costs

Plan of arrangement costs of $7.9 million, incurred in June of 2005, relate to the costs of restructuring into an oil and natural gas income trust. There has not been any plan of arrangement costs incurred in 2006.

Stock-Based Compensation

During the three and six months ended June 30, 2006, $658,000 and $1.5 million was charged to income in respect of non-cash stock-based payments as compared to $2.4 million and $2.6 million for the same periods in 2005. 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. In the second quarter an amount was recovered that was previously charged to stock based compensation. This recovery is the result of Chamaelo Energy Inc. retention payments being lower then originally estimated.

Depletion, Depreciation, Amortization and Accretion ("DDA&A")

DDA&A expense totaled $17.6 million or $24.34/boe (2005 - $5.4 million or $17.42/boe) and $34.9 million or $24.47/boe (2005 - $10.2 million or $17.27/boe) for the three and six months ended June 30, 2006. The DDA&A rate reflects the higher cost of corporate and property acquisitions that took place during fiscal 2005 as well as the downward revision of reserves in the fourth quarter of 2005. During the three and six months ended June 30, 2006, the provision for DDA&A includes $515,000 or $0.71/boe (2005 - $142,000 or $0.46/boe) and $1.0 million or $0.72/boe (2005 - $536,000 or $0.91/boe) for accretion of asset retirement obligations.

For the three months ended June 30, 2006, $202,000 or $0.28/boe (2005 - $72,000 or $0.12/boe) of accretion expense has been recognized in respect of the two convertible debentures issued on April 27, 2005 and May 2, 2006. During the six months then ended $294,000 or $0.21/boe ((2005 - $72,000 or $0.12/boe) of accretion on convertible debentures was recognized. See note 5. In addition, amortization of $215,000 or $0.30/boe (2005 - nil) and $355,000 or $0.25/boe (2005 - nil) of deferred financing charges relating to the issue of these convertible debentures has been recognized for the three and six months ended June 30, 2006.

Interest Expense

The Trust incurred $2.5 million or $3.45/boe (2005 - $1.3 million or $4.26/boe) for the three months ended June 30, 2006 and $4.5 million or $3.12/boe (2005 - $1.5 million or $2.53/boe) for the six months ended June 30, 2006 in interest. Interest accruing to holders of the $55 million ($48.7 million remaining principle) 8% convertible debentures issued on April 27, 2005, and the $50 million ($50 million remaining principle) 7.2% convertible debentures issued May 2, 2006 have both contributed to an increase in interest expense. The Trust's average interest rate on bank credit facilities for the three and six months ended was 6.40% and 5.55% respectively.

Taxes

Capital taxes for the three months ended June 30, 2006 were a $179,000 recovery due to the elimination of Large Corporation Tax effective retroactively to January 1, 2006. For the six months ended June 30, 2006 capital taxes were $8,000 representing Saskatchewan capital tax. This compares to $170,000 and $220,000 during the three and six months ended June 30, 2005 when Large Corporation Tax was still in effect.

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 three and six months ended June 30, 2006, future tax recoveries of $5.2 million (2005 - recovery of $3.0 million) and $5.7 million (2005 - recovery of $2.2 million) were realized. During the second quarter of 2006, Vault realized $2.1 million of the total $5.2 million recovery due to enacted changes to statutory tax rates.

Funds Flow and Net Income

Funds flow from operations for the three months ended June 30, 2006 was $15.5 million ($0.35 per diluted Trust unit) as compared to $2.4 million loss ($0.15 loss per diluted Trust unit) in for the same period of 2005. For the six months ended June 30, 2006 funds flow from operations was $31.1 million ($0.72 per diluted Trust unit) whereas for that same period in 2005 the funds flow from operations was $4.5 million ($0.29 per diluted Trust unit).

The Trust had income of $2.6 million ($0.07 per diluted Trust unit) for the three months ended June 30, 2006 and income of $1.3 million ($0.03 per diluted Trust unit) for the six months ending June 30, 2006. This can be compared to a net loss of $6.2 million ($0.39 loss per diluted Trust unit) for the three months ending June 30, 2005 and a net loss of $4.8 million ($0.32 loss per diluted Trust unit) for the six months ending June 30, 2005.



Three Months Ended Six Months Ended
June 30, June 30,
Capital Expenditures
($ thousands) 2006 2005 2006 2005
---------------------------------------------------------------------

Land 368 220 708 622
Drilling, completions and
workovers 4,608 1,271 15,382 7,150
Equipment 3,243 415 8,465 914
Geological and Geophysical (182) 498 624 1,312
Other 12 35 938 150
---------------------------------------------------------------------
Capital expenditures 8,049 2,439 26,117 10,148
Property acquisitions 412 - 412 -
Dispositions (2,052) - (2,052) -
---------------------------------------------------------------------
Net Capital Expenditures 6,409 2,439 24,477 10,148
---------------------------------------------------------------------
---------------------------------------------------------------------


During the three and six months ended June 30, 2006, Vault drilled 4 (3.15 net) and 9 (5.85 net) wells respectively. In addition, Vault completed numerous workovers and re-completions to improve production. Vault also monetized several non-producing, non-core properties, resulting in net proceeds before closing adjustments of $2.1 million. Vault will continue to assess its portfolio of non-producing, non-core properties and make decisions regarding monetization or development on a case by case basis.

These activities resulted in capital expenditures of $6.4 million and $24.5 million for the three and six months ended June 30, 2006.

Distributable Cash

Distributions are paid monthly on the 15(th) 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.

During the three and six months ended June 30, 2006, Vault distributed $11.8 million or $0.35 per Trust unit and $23.4 million or $0.69 per Trust unit to unitholders. The resulting payout ratio for the 91 days ended June 30, 2006 is 76% and for the 181 days then ended is 75%.



Reconciliation of Cash
Available for Distribution Three months ended Six months ended
($ thousands) June 30, 2006 June 30, 2006
---------------------------------------------------------------------

Cash flow from operating
activities (1,378) 12,634
Change in non-cash working
capital 16,877 18,444
---------------------------------------------------------------------
Funds flow from operations 15,499 31,078
Cash withheld for acquisitions,
capital expenditures
and debt repayment(1) (3,694) (7,706)
---------------------------------------------------------------------
Cash available for distribution(2) 11,805 23,372
---------------------------------------------------------------------
---------------------------------------------------------------------
Cash available for distribution
per Trust unit $0.345 $0.690
Payout ratio 76% 75%
---------------------------------------------------------------------
---------------------------------------------------------------------


(1) Cash withheld for acquisition, capital expenditures and debt repayment is a discretionary amount and represents the difference between funds flow from operations and distributions.

(2) 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 totaled $49.3 million which is comprised of $47.5 million outstanding on the credit facility and $1.8 million on the operating line. Also, the net working capital deficit was $14.0 million at June 30, 2006.

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 have been renewed to June 29, 2007.

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) Q3/04 Q4/04 Q1/05 Q2/05(2) Q3/05(2) Q4/05
---------------------------------------------------------------------
Production:
Oil and NGL
(bbls/d) 233 729 1,383 1,475 3,200 3,025
Gas (mcf/d) 812 5,926 10,323 11,611 30,899 29,363
---------------------------------------------------------------------
---------------------------------------------------------------------
Total BOE (Gas 6:1) 368 1,717 3,104 3,410 8,350 7,919
---------------------------------------------------------------------
---------------------------------------------------------------------

Oil and natural
gas sales (3) 1,614 7,057 13,489 15,993 43,847 47,791

Funds flow from
operations
508 3,494 6,902 (2,377) 21,188 26,761
per Trust unit
- basic 0.06 0.30 0.50 (0.15) 0.66 0.82
per Trust unit
- diluted 0.06 0.28 0.46 (0.15) 0.60 0.73

Net income (loss) 16 441 1,479 (6,241) 10,671 4,573
per Trust unit
- basic - 0.04 0.10 (0.39) 0.33 0.14
per Trust unit
- diluted - 0.04 0.10 (0.39) 0.32 0.14
---------------------------------------------------------------------
---------------------------------------------------------------------


($ thousands) Q1/06 Q2/06
----------------------------------------------
Production:
Oil and NGL (bbls/d) 2,912 3,041
Gas (mcf/d) 29,428 29,502
----------------------------------------------
Total BOE (Gas 6:1) 7,817 7,958
----------------------------------------------
----------------------------------------------

Oil and natural gas sales (3) 36,175 36,310

Funds flow from operations
15,578 15,499
per Trust unit - basic 0.47 0.45
per Trust unit - diluted 0.42 0.35

Net income (loss) (1,280) 2,607
per Trust unit - basic (0.04) 0.08
per Trust unit - diluted (0.04) 0.07
----------------------------------------------
----------------------------------------------

(1) Eight 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.


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, 2005, Vault had 32,785,833 Trust units and 3,560,586 exchangeable shares outstanding.

As at June 30, 2006, the Trust had 34,456,730 Trust units and 2,489,057 exchangeable shares outstanding. The increase in Trust units from December 31, 2005 to June 30, 2006 is a result of 1,182,290 issued for exchangeable shares, 39,150 issued for warrants exercised, and 449,457 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.

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 June 30, 2006:



Minimum Commitments Each Year Committed
---------------------------------------------------------------------
($ thousands) 2006 2007 2008 2009 2010 After 2010 Total
---------------------------------------------------------------------
Capital lease
obligations 90 193 170 13 13 - 479
Operating lease
obligation 305 1,427 1,501 1,543 1,547 4,769 11,092
---------------------------------------------------------------------
395 1,620 1,671 1,556 1,560 4,769 11,571
---------------------------------------------------------------------
---------------------------------------------------------------------


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.

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.

Mutual Fund Trust Status

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.

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
June 30, 2006 December 31, 2005
---------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash $ - $ 5,769
Accounts receivable 11,823 17,563
Prepaid expenses and deposits 1,437 2,074
---------------------------------------------------------------------
13,260 25,406
Oil and gas properties and
equipment (Note 4) 508,558 511,069
Deferred financing charges
(Note 6) 4,380 2,521
Goodwill 4,179 4,179
---------------------------------------------------------------------
$ 530,377 $ 543,175
---------------------------------------------------------------------
Liabilities and Unitholders'
Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 23,323 $ 38,930
Distributions payable to
unitholders 3,962 3,770
---------------------------------------------------------------------
27,285 42,701

Capital lease obligation 239 166
Natural gas sales contract 1,091 1,598
Revolving credit facility (Note 5) 49,280 81,500
Convertible debentures (Note 6) 94,510 46,616
Asset retirement obligation (Note 7) 30,152 29,560
Future income taxes 10,196 13,839

Non-controlling interest (Note 8) 17,458 24,856

Unitholders' equity:
Trust units/common shares (Note 9) 332,913 317,193
Contributed surplus (Note 10) 3,479 1,729
Equity component of convertible
debentures (Note 6) 4,701 2,301
Accumulated deficit (40,927) (18,882)
---------------------------------------------------------------------
300,166 302,340
---------------------------------------------------------------------
$ 530,377 $ 543,175
---------------------------------------------------------------------
---------------------------------------------------------------------
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

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(Unaudited) 2006 2005 2006 2005
------------------------------------------------------------------------
(Restated) (Restated)

Revenue:
Oil and natural gas $ 37,495 $ 16,310 $ 75,100 $ 30,194
Transportation
expense (1,185) (317) (2,615) (712)
Royalties (5,267) (2,565) (12,913) (4,898)
------------------------------------------------------------------------
31,043 13,427 59,572 24,583

Expenses:
Production 10,670 3,288 19,034 6,411
Restructing Costs - 7,898 - 7,898
General and
administrative 2,086 2,036 3,899 2,608
Interest 2,497 1,322 4,461 1,493
Depletion,
depreciation and
accretion 7,627 5,407 34,940 10,180
Stock-based
compensation
(Note 10) 658 2,416 1,465 2,592
Foreign exchange - - - -
------------------------------------------------------------------------
33,538 22,366 63,799 31,183

------------------------------------------------------------------------
Income (loss)
before taxes (2,495) (8,939) (4,227) (6,599)
------------------------------------------------------------------------

Taxes:
Current taxes (179) 170 8 220
Future income tax
expense (5,206) (2,966) (5,698) (2,155)
------------------------------------------------------------------------
Net income (loss)
before
non-controlling
interest 2,890 (6,143) 1,463 (4,664)
Non-controlling
interest (Note 8) (283) (98) (136) (98)
------------------------------------------------------------------------
Net income (loss) $ 2,607 $ (6,241) $ 1,327 $ (4,762)
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Income per Trust
unit (Note 11)
Basic 0.08 (0.39) 0.04 (0.32)
Diluted 0.07 (0.39) 0.03 (0.32)


Consolidated Statements of Accumulated (Deficit) Income

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(Unaudited) 2006 2005 2006 2005
------------------------------------------------------------------------
(Restated) (Restated)
Accumulated
(deficit) income,
beginning of period (31,729) 1,823 (18,882) 344
Net (loss) income 2,607 (6,241) 1,327 (4,762)
Accumulated cash
distributions (11,805) (7,327) (23,372) (7,327)
------------------------------------------------------------------------
Accumulated deficit,
end of period (40,927) (11,745) (40,927) (11,745)
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements


VAULT ENERGY TRUST
Consolidated Statements of Cash Flows

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(Unaudited) 2006 2005 2006 2005
------------------------------------------------------------------------
(Restated) (Restated)

Cash provided by
(used in):

Operating:
Net income (loss) $ 2,607 $ (6,241) $ 1,327 $ (4,762)
Items not affecting
cash:
Depletion,
depreciation and
accretion 17,627 5,407 34,940 10,180
Amortization of
natural gas sales
contract (248) (324) (506) (662)
Stock-based
compensation 658 1,649 1,465 1,826
Future income
taxes (5,206) (2,966) (5,698) (2,155)
Non-controlling
interest 283 98 136 98
Asset retirement
expenditures (222) - (586) -
------------------------------------------------------------------------
Funds flow from
operations 15,499 (2,377) 31,078 4,525
Net change in
non-cash operating
working capital (16,877) 3,675 (18,444) 4,449
------------------------------------------------------------------------
(1,378) 1,298 12,634 8,974
------------------------------------------------------------------------

Financing:
Increase (decrease)
in revolving
credit facility (42,395) 69,815 (32,219) 67,543
Convertible
debenture issue,
net of costs 47,787 52,199 47,787 52,199
Increase (decrease)
in capital lease
obligation (36) (4) 73 (7)
Trust units issued,
net of costs 3,626 261,125 3,828 261,118
Warrants exercised 24 1,624 262 1,920
Options exercised,
net of settled - 811 - 811
Distributions to
unitholders (11,805) (7,327) (23,372) (7,327)
Change in non-cash
financing working
capital 74 2,602 192 2,602
------------------------------------------------------------------------
(2,725) 380,846 (3,449) 378,860
------------------------------------------------------------------------

Investments:
Property
acquisitions (412) (372,667) (412) (372,667)
Property
dispositions 2,052 - 2,052 -
Capital
expenditures (8,049) (2,439) (26,117) (10,148)
Change in non-cash
investing working
capital 8,672 (3,349) 9,523 (1,330)
------------------------------------------------------------------------
2,263 (378,455) (14,954) (384,144)
------------------------------------------------------------------------

Change in cash (1,840) 3,690 (5,769) 3,690
Cash, beginning of
period 1,840 - 5,769 -
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash, end of period $ - $ 3,690 $ - $ 3,690
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements


Vault Energy Trust
Notes to the Consolidated Financial Statements
Three months ended June 30, 2006
(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 interim consolidated financial statements follow the continuity of interests basis of accounting as if the Trust was a continuation of Chamaelo. As Vault is a continuation of Chamaelo, these results reflect the operations of Vault for the first and second quarter of 2006 with income statement and cash flow statement comparatives being Chamaelo results from January 1, 2005 to June 21, 2005 and Vault results from June 22, 2005 to June 30, 2005. The balance sheet comparatives are Vault results at December 31, 2005.

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

The interim consolidated financial statements of Vault have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the audited consolidated financial statements of Vault for the period ended December 31, 2005. The disclosures provided below are incremental to those included with the audited annual consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in Vault Energy Trust's annual report for the period ended December 31, 2005.

Comparative information for 2005 has been restated to reflect the change in treatment of restructuring costs. See note 2(C) for further details.

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. The Trust had conducted a joint venture audit on the closing adjustments and as at June 30, 2006 the results of the audit had not been finalized. The Trust will adjust the purchase price, if necessary, when the results of the joint venture audit are finalized.



-----------------------------------------------
June 2005 acquisition ($ thousands)
-----------------------------------------------
Purchase price:
Contract purchase price 395,000
Reduction to purchase price (10,666)
Deal costs 2,490
Closing adjustments (21,405)
-----------------------------------------------
365,419
-----------------------------------------------
-----------------------------------------------


Net assets acquired:
Petroleum and natural gas assets 377,559
Asset retirement obligations (12,140)
-----------------------------------------------
365,419
-----------------------------------------------
-----------------------------------------------


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


Prior to December 31, 2005 these costs had previously been recorded as a charge to accumulated income. Consequently, the income statement comparative figures have been restated to appropriately present these costs as a charge to income. This decreased the net income for the six months ended June 30, 2005 by $5.2 million or $0.35 per unit and decreased the net income for the nine months ended September 30, 2006 by $5.4 million or $0.31 per unit.

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

4. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT

June 30, December 31,
Oil and natural gas properties and equipment
($ thousands) 2006 2005
---------------------------------------------------------------------
Oil and natural gas properties 579,149 549,336
Office and other equipment 3,548 2,639
---------------------------------------------------------------------
Cost of oil and natural gas properties and
equipment 582,697 551,975
---------------------------------------------------------------------
Accumulated depletion of oil and natural gas
properties (73,221) (40,531)
Accumulated depreciation of office and other
equipment (918) (375)
---------------------------------------------------------------------
Accumulated depletion and depreciation (74,139) (40,906)
---------------------------------------------------------------------
Net oil and natural gas properties and
equipment 508,558 511,069
---------------------------------------------------------------------
---------------------------------------------------------------------


As at June 30, 2006, the cost of oil and natural gas properties includes $15,554,022 (2005 - $18,953,000) relating to properties from which there is no proved reserves and which have been excluded from costs subject to depletion and depreciation. During the six months ended June 30, 2006, the provision for depletion, depreciation, amortization and accretion includes $1,030,769 (2005 - $393,000) for accretion of asset retirement costs. The Trust capitalized $136,000 (2005 - $51,000) of general and administrative costs for this same period. Future development costs at June 30 were $14,262,500 in 2006 and $5,572,000 in 2005. These have been included in the calculation of depletion, depreciation, amortization and accretion in their respective period.

The Trust performed an impairment (ceiling) test at June 30, 2006 to assess the recoverable value of the oil and natural gas properties. The oil and natural gas future prices are based on July 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. Based on these assumptions, there was no impairment at June 30, 2006.

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 have been renewed to June 29, 2007. 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 June 30, 2006 was 6.30% .




June 30, December 31,
Credit Facility ($ thousands) 2006 2005
---------------------------------------------------------
Revolving Term Credit Facility 47,500 81,500
Operating Line 1,780 -
---------------------------------------------------------
Total 49,280 81,500
---------------------------------------------------------
---------------------------------------------------------


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 six months ended June 30, 2006 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 six months ended June 30, 2006:



Debt Equity
Number of Component component
Convertible Debentures - 8% Debentures ($ thousands) ($ thousands)
-----------------------------------------------------------------------
Balance at January 1, 2006 48,671 46,616 2,301
Accretion - 187 -
-----------------------------------------------------------------------
Balance at June 30, 2006 48,671 46,803 2,301
-----------------------------------------------------------------------
-----------------------------------------------------------------------


On May 2, 2006, Vault closed a bought deal offering of $50,000,000 principle amount of convertible unsecured subordinated debentures. The convertible debentures have a face value of $1,000 per debenture, a maturity date of May 31, 2011 and a conversion price of $10.50 per Trust unit. These pay interest semi-annually at 7.2% per annum on May 31 and November 30 each year commencing on November 30, 2006. Holders of convertible debentures have the option of redeeming them at a price of $1,050 per debenture after May 31, 2009 and on or before May 31, 2010 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. Issue costs of $2,200,000 have been classified as deferred financing charges and will be amortized over the life of the debentures. For the six months ended June 30, 2006 amortization of $75,000 has been included in the income of the Trust.

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 $47,600,000. The difference between the principal amount of $50,000,000 and the fair value of the obligation is $2,400,000 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 six months ended June 30, 2006:



---------------------------------------------------------------------
Debt Equity
Number of Component component
Convertible Debentures - 7.2% Debentures ($ thousands) ($ thousands)
---------------------------------------------------------------------
Balance at January 1, 2006 - - -
Issued on May 2, 2006 50,000 47,600 2,400
Accretion - 107 -
---------------------------------------------------------------------
Balance at June 30, 2006 50,000 47,707 2,400
---------------------------------------------------------------------
---------------------------------------------------------------------


7. ASSET RETIREMENT OBLIGATION

The Trust's asset retirement obligation results 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 $112,200,000 (2005 - $112,000,000) 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:



June 30, December 31,
Asset retirement obligation ($ thousands) 2006 2005
---------------------------------------------------------------------
Balance, beginning of period 29,560 15,563
Liabilities acquired, net - 9,316
Liabilities incurred in period 148 897
Liabilities resulting from changes in
estimates - 2,394
Accretion expense 1,030 1,398
Liabilities settled in period (586) (8)
---------------------------------------------------------------------
Balance, end of period 30,152 29,560
---------------------------------------------------------------------
---------------------------------------------------------------------


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 June 30, 2006:



June 30, 2006 December 31, 2005
-----------------------------------------------------------------------
Non- Non-
controlling Exchang- controlling
Exchangeable Interest eable Interest
Shares ('000s) Shares ('000s)
-----------------------------------------------------------------------
Balance, beginning of
period 3,560,586 24,856 - -
Plan of Arrangement - - 3,889,462 25,881
Retracted for Trust units (1,071,529) (7,534) (328,876) (2,214)
Net income attributable
to NCI 136 1,189
-----------------------------------------------------------------------
Balance, end of period 2,489,057 17,458 3,560,586 24,856
Exchange ratio, end of
period 1.15484 1.07185
-----------------------------------------------------------------------
Trust units issuable upon
conversion, end of period 2,874,463 3,816,414
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Exchangeable share retractions are accounted for using the step acquisition method of accounting. A summary of these acquisitions as at June 30, 2006 follows:



June 30, December 31,
2006 2005
---------------------------------------------------------------------
Acquisition of non-controlling interest ($ thousands) ($ thousands)
---------------------------------------------------------------------
Retraction of exchangeable shares
reflected in property, plant and
equipment 6,152 2,706
Future taxes on acquisition of
exchangeable shares (2,055) (923)
---------------------------------------------------------------------
Excess of fair market value over book
value 4,097 1,783
---------------------------------------------------------------------
---------------------------------------------------------------------


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:
----------------------------------------------------------------------
June 30, 2006 December 31, 2005
----------------------------------------------------------------------
Number of Amount Number of Amount
Shares ('000s) Shares ('000s)
----------------------------------------------------------------------
Balance, beginning of the
period 32,785,833 315,612 28,079,786 107,745
Exercise of warrants - - 421,020 2,226
Exercise of options - - 680,200 5,280
----------------------------------------------------------------------
Options repurchased by
Trust - - (2,299)
Shares exchanged for
exchangeable shares - - (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)
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)

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 1,182,290 11,630 340,532 3,996
Trust units issued
through Distribution
Re-investment
and Optional Purchase
Plan 449,457 3,828 35,411 411
Trust units issued on
exercise of warrants 39,150 298 2,492 23
----------------------------------------------------------------------
Balance, end of the
period 34,456,730 331,368 32,785,833 315,612
----------------------------------------------------------------------
----------------------------------------------------------------------

Warrants (note 9(b)) - 1,545 - 1,581
----------------------------------------------------------------------
----------------------------------------------------------------------
Total Unitholders'
equity 34,456,730 332,913 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. Pursuant to the Plan of Arrangement resulting in the formation of the Trust, the shares and warrants were consolidated on a 2:1 basis.

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 and Premium Distribution Re-investment and Optional Purchase Plan

The Trust has initiated a distribution reinvestment plan (the "Regular DRIP") and a premium distribution reinvestment plan (the "Premium DRIP"). The Regular DRIP permits eligible unitholders to direct their distributions to the purchase of additional units at 95 percent of the weighted average market price of Trust units for the 10-day trading period prior to a distribution payment date. The Premium DRIP permits eligible unitholders to elect to receive 102 percent of the cash the unitholder would otherwise have received on the distribution date. The additional cash distributed to the Premium DRIP unitholders is funded through the issuance of additional trust units in the open market. Participation in the Regular and Premium DRIP is subject to proration by the Trust. Unitholders who participate in either the Regular DRIP or the Premium DRIP are also eligible to participate in the Optional Unit Purchase Plan as defined in the plan.

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 June 30, 2006, the remaining warrants outstanding have been reduced in exercise price by $1.50 per warrant.

The following summarizes the warrants outstanding as at June 30, 2006:



---------------------------------------------------------------------
Weighted
Number of Average Amount
Warrants Warrants Price ($) ($ thousands)
---------------------------------------------------------------------
Initially issued and balance
beginning of 2005 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, at December 31, 2005 1,746,569 6.96 1,581
---------------------------------------------------------------------
Exercised for Trust units (39,150) 6.70 (36)
---------------------------------------------------------------------
Balance, at June 30, 2006 1,707,419 6.27 1,545
---------------------------------------------------------------------
---------------------------------------------------------------------


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 June 30, 2006:



Weighted
Weighted Average
Number of Average Years to
Options Price ($) Expiry
----------------------------------------------------------------
Balance, January 1, 2005 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, December 31, 2005 - - -
----------------------------------------------------------------
----------------------------------------------------------------


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 June 30, 2006:



Weighted Weighted Weighted
Average Average Average
Number of Original Reduced Years to
Rights Price ($) Price ($) Expiry
-----------------------------------------------------------------------
Balance, January 1, 2006 1,603,950 10.94 9.68 4.34
Rights granted 791,790 8.35 8.27 4.93
Rights cancelled (62,450) 10.72 9.88 4.34
-----------------------------------------------------------------------
Balance, June 30, 2006 2,333,290 10.14 9.25 4.40
-----------------------------------------------------------------------
-----------------------------------------------------------------------


The following table summarizes information with respect to outstanding rights as at June 30, 2006:



Number of Rights Average Average Average Rights
Outstanding at Exercise Reduced Years to Exercisable
June 30, 2006 Price ($) Price ($) Expiry at June 30, 2006
-------------------------------------------------------------------
1,292,670 10.56 9.25 4.07 -
33,075 12.35 11.20 4.15 -
183,025 13.25 12.13 4.19 -
53,730 10.67 9.81 4.40 -
25,650 9.82 9.32 4.64 -
745,140 8.30 8.23 4.94 -
-------------------------------------------------------------------
2,333,290 10.14 9.25 4.40 -
-------------------------------------------------------------------
-------------------------------------------------------------------


10. STOCK-BASED COMPENSATION

During the six months ended June 30, 2006, $1,465,000 was charged to income in respect of stock-based compensation cost. These charges comprise amortization of the fair value Trust unit rights as well as a one time adjustment relating to the payment of Chamaelo Energy Inc. stock option plan payouts which were lower than accrued at the time of the transaction.

On July 1, 2005, the Trust introduced its Trust Unit Rights Incentive Plan (the "Plan"). The Trust has granted 2,333,290 (Note 9(d)) rights to employees as of June 30, 2006. 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.



Vault Unit Rights
Six Months Ended
Stock Based Compensation ($ thousands) June 30, 2006
-----------------------------------------------------------
Amortization of Fair value 1,750
-----------------------------------------------------------
One Time Adjustment (1) (285)
-----------------------------------------------------------
Vault stock based compensation expense 1,465
-----------------------------------------------------------

Contributed Surplus ($ thousands)
Balance, beginning of period 1,729
Amortization of fair value 1,750
-----------------------------------------------------------
Balance, end of period 3,479
-----------------------------------------------------------
(1) Difference between what was accrued for payouts under
the Chamaelo Energy Inc. stock option plan and what was
actually paid in May 2006


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 $ 4.70
Risk-free rate 3.9%
Expected life 5.0
Expected forfeitures 10%
Expected volatility 22.0%
Dividend yield $ 1.38
------------------------------------------------


11. 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:



Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------
Basic 34,305,847 33,692,958
Dilution on account of:
Exchangeable Shares 2,725,956 3,386,663
Warrants 355,258 470,777
------------------------------------------------------------------
Diluted 37,387,061 37,550,398
------------------------------------------------------------------
------------------------------------------------------------------


Trust unit rights and convertible debentures are anti-dilutive for the three and six months ended June 30, 2006, and as a result, they have not been included in the table above. The if-converted method used to calculate dilution of certain dilutive instruments may cause differences in the diluted trust unit figures used to determine earnings per trust unit and funds flow per trust unit.

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.

12. SUPPLEMENTAL INFORMATION



($ thousands)
2006 2005
---------------------------------------------------------
Cash interest paid
2,529 171
Cash taxes paid
8 247
---------------------------------------------------------
---------------------------------------------------------


Vault realized a $2.1 million recovery in future income tax expense due to enacted changes to statutory tax rates that took place during the second quarter of 2006.

13. PHYSICAL CONTRACTS

Vault has entered into physical purchase and sales contracts as follows:



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

61.75%
above Nov 1, 2006 -
Natural gas 4,000 GJ/d $ 7.50/GJ $7.50/GJ Mar 31, 2007


61% above Jan 1, 2007 -
Natural gas 7,000 GJ/d $ 7.50/GJ $7.50/GJ Mar 31, 2007

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

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

Apr 1, 2006 -
Electricity 5 MW/day $ 60.75/MW N/A Dec 31, 2008


14. 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 June 30, 2006 is $49,644,000 for the June 2005 issue and $50,125,000 for the May 2006 issue.

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 June 30, 2006, 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 13, 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 June 30, 2006, The Trust has not entered into any foreign currency derivatives with respect to oil and natural gas sales.

15. COMMITMENTS

The Trust is committed to payments under an operating lease for office space and capital leases for leased vehicles as at June 30, 2006:



------------------------------------------------------------------------
Total
Minimum Commitments Each Year Committed
--------------------------------
($ thousands) 2006 2007 2008 2009 2010 After 2010 Total
------------------------------------------------------------------------
Capital lease
obligations 90 193 170 13 13 - 479
Operating lease
obligation 305 1,427 1,501 1,543 1,547 4,769 11,092
------------------------------------------------------------------------
395 1,620 1,671 1,556 1,560 4,769 11,571
------------------------------------------------------------------------
------------------------------------------------------------------------


CORPORATE INFORMATION

OFFICERS LEAD BANK

CIBC
Robert T. Jepson, BBA, PLM 309 8th Avenue SW
President, CEO Calgary, Alberta T2P 2P2

Rick P. Marshall, RET
VP Operations, COO TRANSFER AGENT

Greg Fisher, B.Mgt. Valiant Trust Company
VP Finance, CFO Suite 310, 606 - 4th Street SW
Calgary, Alberta T2P 1T1
Mark Kuhn, BS, MA, MBA
VP Exploitation and Business LEGAL COUNSEL
Development Gowling Lafleur Henderson LLP


DIRECTORS 1400, 700 - 2nd Street SW
Calgary, Alberta T2P 0S2
Sean M. Monaghan, CA, CBV
Chairman of the Board AUDITORS

Robert T. Jepson, BBA, PLM KPMG LLP
Director 1200, 205 - 5th Avenue SW
Calgary, Alberta T2P 4B9
Rick P. Marshall, RET
Director INDEPENDENT ENGINEERS

T.S. (Ted) Rozsa Sproule Associates Limited
Director 900, North Tower, Sun Life Plaza
140 4th Avenue SW
R. Shawn Kirkpatrick, MBA Calgary, Alberta T2P 3N3
Director

A.B. (Sandy) McArthur
Director


FORWARD LOOKING STATEMENTS

The Interim Report 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).

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
    Email: info@vaultenergy.com
    Website: www.vaultenergy.com