Virtus Energy Ltd.
TSX VENTURE : VEL

Virtus Energy Ltd.

May 26, 2005 09:00 ET

Virtus Energy Ltd.: First Quarter News Release & Interim Report For the Three Months Ended March 31, 2005

CALGARY, ALBERTA--(CCNMatthews - May 26, 2005) - Virtus Energy Ltd. (TSX VENTURE:VEL) is pleased to present its operating and financial results for the first quarter ended March 31, 2005.



PERFORMANCE HIGHLIGHTS

------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004 Change
------------------------------------------------------------------------
(%)
Operating Results
Production
Oil & NGLs (bbls/d) 551 577 (5)
Natural gas (mcf/d) 1,702 1,110 53
------------------------------------------------------------------------
Total (boe/d) 834 762 9
------------------------------------------------------------------------
($) ($) (%)
Financial Results
Petroleum & natural gas sales 3,570,389 2,670,820 34
Cash flow from operations 1,388,464 870,889 59
Per share 0.03 0.02 59
Net loss (134,137) (184,001) 27
Per share -- -- --
Capital expenditures 1,058,428 2,883,870 (63)
------------------------------------------------------------------------
As at March 31, December 31,
2005 2004
------------------------------------------------------------------------
($) ($) (%)
Financial Position
Total assets 24,017,478 24,771,418 (3)
Bank debt 4,150,000 2,350,000 77
Working capital deficit
excluding bank debt 627,584 2,742,256 (77)
Shareholders' equity 13,004,287 13,929,532 (7)
Common shares outstanding (#)
Basic 39,813,687 39,813,687 --
Fully diluted 42,562,437 42,846,604 (1)
------------------------------------------------------------------------

Cash flow from operations is not a recognized measure under Canadian
generally accepted accounting principles. Management believes that cash
flow from operations is a useful measure of financial performance. For
the purposes of cash flow from operations, cash flow is defined as "Cash
flow from operating activities" before changes in non-cash operating
working capital.


PRESIDENT'S MESSAGE

Operations

During the first three months of 2005, Virtus initiated the completion of two wells that were drilled in the fourth quarter of 2004. An operated well at Aitken Creek, in the greater Fort St. John region of northeastern British Columbia, was completed in two of four prospective zones. Completion and flow testing of the well resulted in combined natural gas rates of approximately 1.0 mmcf/d with significant associated water, and as a result, the well is uneconomic in the completed intervals. The completion of an additional zone in the well and an extensive seismic program to evaluate offsetting Virtus-interest lands is scheduled for later in 2005.

At Wildwood in west central Alberta, the completion of the Nordegg formation in an exploratory step-out well that was drilled late in 2004 resulted in uneconomic natural gas rates. This well will either be abandoned or may be utilized as a potential water disposal well. Also in the Leaman/Wildwood region, operations commenced for the drilling of one farmin well and the re-completion of three wells in accordance with the terms of the recently announced farmin agreements. Due to the onset of an early spring break-up, field operations were suspended on all but one re-completion project. This workover of a Nordegg producing gas well was successful and was placed back on production in March, resulting in a net production addition of 60 mcf/d for a net cost of approximately $14,000. Field operations are expected to re-commence in early June once surface access is permitted.

Production for the first quarter of 2005 averaged 834 boe/d consisting of 1,702 mcf/d of natural gas and 551 bbls/d of crude oil and natural gas liquids versus 1,110 mcf/d and 577 bbls/d, respectively, a year ago. Operating costs in the three-month period were $13.81/boe compared to $11.61/boe in 2004.

Financial

For the three months ended March 31, 2005, Virtus recorded petroleum and natural gas sales of $3,570,389 and cash flow from operations of $1,388,464 or $0.03 per share, representing 34% and 59% period-over-period increases, respectively. Average operating netbacks rose 29% to $25.79/boe primarily as a result of higher commodity prices. Capital expenditures for the quarter totaled $1,058,428. As at March 31, 2005, the Company's bank debt and working capital deficit totaled $4,777,584.

Corporate Sale

In early April 2005, the Board of Directors of Virtus engaged FirstEnergy Capital Corp. ("FirstEnergy") to assist the Company in a review of strategic alternatives in an effort to maximize shareholder value on a go-forward basis. Consequently, the Board determined that a targeted sale process would be pursued with the objective of concluding a merger or sale of the Company in 2005. A number of identified companies were contacted and after confidentiality agreements were executed, certain operational and financial information was provided. This process garnered a number of bids, which resulted in the Board of Directors recommending the negotiation and eventual acceptance of Titan Exploration Ltd.'s ("Titan") offer to purchase. On April 14, 2005, Virtus and Titan signed a Letter of Intent, and subsequently, due diligence was completed, a formal Arrangement Agreement was executed on April 26, 2005 and the proposed transaction was announced on April 27, 2005. The corporate sale of Virtus is expected to be accomplished by effecting a Plan of Arrangement and is subject to regulatory approval and the approval of 66-2/3% of the votes cast by the shareholders and option holders.

On May 24, 2005, a formal Plan of Arrangement was mailed to all registered shareholders. In the event the planned corporate sale of Virtus is approved by shareholders at the Company's Annual and Special Meeting to be held on Thursday, June 23, 2005 at 3:00 p.m. (Calgary time) in the Plus 15 Level Conference Room of Phoenix Place, 840 Seventh Avenue S.W., Calgary, Alberta, it is anticipated that all current Virtus directors and officers will tender their resignations.

On May 2, 2005, Mr. Dave M. Humphreys, Vice President, Operations of Virtus, tendered his resignation in order to pursue another business opportunity.

On behalf of its Board of Directors, management of Virtus would like to thank the Company's shareholders for their support and our employees and consultants for their efforts.



On behalf of the Board of Directors,

( signed )

PETER A. CARWARDINE
President & Chief Executive Officer
May 25, 2005


MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis has been prepared by management and reviewed and approved by the Board of Directors of Virtus Energy Ltd. The discussion and analysis is a review of the operational results and a review of the financial results of the Company based upon accounting principles generally accepted in Canada. Its focus is primarily a comparison of the operational and financial performance for the quarters ended March 31, 2005 and 2004 and should be read in conjunction with the accompanying interim unaudited financial statements and the audited financial statements for December 31, 2004 included in the Company's Annual Report. The discussion and analysis has been prepared as of May 18, 2005.

For the purpose of calculating unit costs, natural gas volumes have been converted to a barrel equivalent (boe) using six thousand cubic feet equal to one barrel unless otherwise stated. A boe conversion ratio of 6:1 is based upon an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. This conversion conforms with Canadian Securities Regulators National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101). Boes may be misleading, particularly if used in isolation.

Cash flow from operations is not a recognized measure under Canadian generally accepted accounting principles. Management believes that cash flow from operations is a useful measure of financial performance. For the purposes of cash flow from operations calculations, cash flow is defined as "Funds from Operations" before changes in non-cash operating working capital. The Company also presents cash flow from operations per share whereby amounts per share are calculated using weighted average shares outstanding consistent with the calculation of earnings per share. Cash flow from operations and funds from operations as noted in the financial statements are terms that are used synonymously.

Forward-Looking Statements. Certain information regarding Virtus Energy Ltd. set forth in this document, including management's assessment of the Company's future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond the Company's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other oil and gas companies, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from both internal and external sources. The Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur. The Company assumes no obligation to publicly update or revise any forward-looking information.

Operational Review and Analysis

Drilling and Completion Activity

The Company did not participate in the drilling of any wells during the first three months of 2005, but did participate in the completion of three wells: one at Aitken Creek, British Columbia and one at each of Wildwood and Leaman, Alberta. The Aitken Creek well was completed in two zones but was uneconomic in these completed intervals due to high rates of water production. The Wildwood well, drilled in the fourth quarter of 2004, was completed in the Pekisko and Nordegg zones resulting in uneconomic flow rates. At Leaman, the re-completion of the first earning well under the previously announced farmin agreements was successful and was on-stream during the quarter.

Production

During the first quarter of 2005, production averaged 834 boe/d, a 9% increase over the 762 boe/d average achieved a year ago. Oil and natural gas liquids production decreased 5% to average 551 bbls/d compared to 577 bbls/d in 2004, while natural gas production rose 53% to 1,702 mcf/d versus 1,110 mcf/d in 2004. The improvement in natural gas production was primarily due to re-completion work at Seal and the acquisition of an increased interest in the Wildwood natural gas producing property in the fourth quarter of 2004.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 551 577
Natural gas (mcf/d) 1,702 1,110
------------------------------------------------------------------------
Total (boe/d) 834 762
------------------------------------------------------------------------


Financial Review and Analysis

Petroleum and Natural Gas Sales

Petroleum and natural gas sales increased 34% to $3,570,389 from $2,670,820 recorded in the first quarter of 2004. Oil and natural gas liquids sales were up 27% over the prior year, while natural gas revenues improved 64% over 2004. Improved realized prices contributed to the period-over-period increase in oil and liquids revenues. Natural gas revenues were driven by a 53% increase in production volumes and an 8% improvement in price. Royalty and other income was significantly less than in the comparative 2004 period due to the sale in mid-2004 of a property with an overriding royalty.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Oil & NGLs 2,521,309 1,988,579
Natural gas 1,047,248 638,310
Royalty & other 1,832 43,931
------------------------------------------------------------------------
3,570,389 2,670,820
------------------------------------------------------------------------


Realized Prices

Oil prices received by the Company were up 42% to $50.87/bbl in the first quarter compared to $35.83/bbl in 2004, which was after a net settlement payment on hedging of $2.04/bbl. Realized natural gas prices increased 8% to $6.84/mcf from $6.32/mcf a year ago for a total average price of $47.55/boe compared to $38.52/boe in 2004.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Oil & NGLs price before hedges ($/bbl) 50.87 37.87
Hedges ($/bbl) -- (2.04)
------------------------------------------------------------------------
Oil & NGLs price after hedges ($/bbl) 50.87 35.83
------------------------------------------------------------------------
Natural gas ($/mcf) 6.84 6.32
------------------------------------------------------------------------
Average ($/boe) 47.55 38.52
------------------------------------------------------------------------


Royalties

Royalties for the three months ended March 31, 2005 totaled $597,015 (16.7% of sales) compared to $475,614 (17.8% of sales) a year ago. The 26% increase in royalties was due to higher production volumes offset by a slightly lower average royalty rate.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Royalties, net of ARTC 597,015 475,614
------------------------------------------------------------------------
Percentage of sales (%) 16.7 17.8
------------------------------------------------------------------------


Production Expenses

Operating costs were up 29% to $1,036,638 from $805,332 in 2004 due to a 9% increase in production volumes and a large number of pumping equipment repairs that occurred in the quarter. Operating costs per boe were $13.81 in the first quarter compared to $11.61 in the previous year.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Production expenses 1,036,638 805,332
------------------------------------------------------------------------
Operating costs ($/boe) 13.81 11.61
------------------------------------------------------------------------


Operating Netbacks

Operating netbacks for the first quarter of 2005 on a boe basis improved 29% primarily due to higher realized prices and lower average royalty rates, which were partially offset by increased operating costs.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Average realized price ($/boe) 47.55 38.52
Royalties, net of ARTC ($/boe) (7.95) (6.87)
Production expenses ($/boe) (13.81) (11.61)
------------------------------------------------------------------------
Operating netback ($/boe) 25.79 20.04
------------------------------------------------------------------------


General and Administrative Expenses

General and administrative expenses were virtually unchanged at $480,250 compared to $485,045 a year ago. The Company has a policy of not capitalizing general and administrative expenses.

Stock-Based Compensation Expense

Stock-based compensation expense for the three months ended March 31, 2005 was $58,217 compared to $32,601 in 2004.

Interest

Interest charges for the first quarter of 2005 totaled $43,412 versus $48,326 a year ago. The 2004 amount included $10,039 of interest costs associated with a flow-through share issue in 2003.

Depletion and Depreciation

During the three months ended March 31, 2005, Virtus incurred depletion and depreciation costs of $1,394,391 compared to $1,056,175 a year ago. The 32% increase was a combination of improved production volumes and a higher average depletion and depreciation rate, which was $18.57/boe compared to $15.23/boe the previous year.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Properties & production equipment ($/boe) 17.19 13.73
Asset retirement costs & accretion expense ($/boe) 1.28 1.39
Office furniture & equipment ($/boe) 0.10 0.11
------------------------------------------------------------------------
Depletion & depreciation ($/boe) 18.57 15.23
------------------------------------------------------------------------


Future Income Taxes

The Company incurred estimated taxes payable in the first quarter of 2005 of $80,280 of which $19,433 (2004 - $17,000) was for Saskatchewan resource surcharge. The provision for future income taxes was an expense of $58,830 compared to a reduction of $31,407 in the first quarter of 2004. At March 31, 2005, Virtus had a future tax liability of $1,878,500 because the tax basis was less than the carrying value of the assets and liabilities on the balance sheet. The significant increase in the future income tax liability was a result of recognizing the future income tax liability associated with tax deductions renounced to flow-through share investors.

Net Loss

The Company recorded a net loss for the quarter of $134,137 compared to a net loss of $184,001 in the first quarter of 2004. On a per share basis, the net loss was $nil per share in both periods.

Cash Flow from Operations

Operating cash flow rose 59% to $1,388,464 or $0.03 per share in 2005 from $870,889 or $0.02 per share a year ago primarily due to higher commodity prices.

Capital Expenditures

During the first three months of 2005, cash flow and available credit facilities funded the Company's $1,058,428 capital expenditure program, representing a 63% decrease from the 2004 expenditure amount of $2,883,870. Approximately 35% of the expenditures were made in northeastern British Columbia with the balance being incurred in the Wildwood area of Alberta. Capital expenditures for the quarters ended March 31, 2005 and 2004 are summarized below.



------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Land 88,906 562,967
Geological & geophysical 50,439 68,555
Drilling & completions 778,304 1,339,895
Production equipment 127,114 383,060
Acquisition of properties & equipment -- 517,180
Office furniture & equipment 13,665 12,213
------------------------------------------------------------------------
1,058,428 2,883,870
------------------------------------------------------------------------


Liquidity and Capital Resources

Share Capital

As at March 31, 2005, the Company had 39,813,687 common shares and 2,748,750 stock options outstanding. As at May 15, 2005, these amounts were unchanged.

Bank Debt

As at March 31, 2005, the Company had outstanding bank debt of $4,150,000. Virtus currently has a revolving operating loan facility with a Canadian chartered bank totaling $6,000,000. Advances bear interest at the bank prime rate plus 0.625% and are secured by a $22,000,000 debenture with a floating charge over all the assets of the Company. Virtus also has an undrawn acquisition/development loan facility of $2,000,000 and advances bear interest at the bank prime rate plus 1%.

Working Capital

At March 31, 2005, Virtus had a working capital deficit, excluding bank debt, of $627,584 compared to a deficit of $2,742,256 at December 31, 2004. This improvement in working capital position was a result of operating cash flow in excess of capital expenditures and an increase in bank debt.

Commitments

Virtus has an obligation to incur qualifying exploration expenditures of approximately $200,000 to satisfy the terms of flow-through common shares issued in 2004.

The Company is committed to an operating lease for its office premises until January 31, 2006 with payments as follows: 2005 - $236,250 and 2006 - $26,250. The Company has sublet approximately one-half of its office premises, at the Company's lease rate per square foot, from April 1, 2005 to January 31, 2006, which is not reflected in the amounts above.

Business Risks

Virtus is subject to a number of business risks that are typical of the nature of the Company's operations. These risks and the Company's philosophy and risk management program are described in public documents previously provided by Virtus, including its Annual Report for the year ended December 31, 2004.

At March 31, 2005, the Company had fixed the future Canadian/U.S. dollar exchange rates through the following forward contract:



------------------------------------------------------------------------
Type of
Time Period Contract Quantity Price
------------------------------------------------------------------------
July 1, 2004 - June 30, 2005 Financial US$1,800,000 $1.34
------------------------------------------------------------------------


As at March 31, 2005, the settlement value of the derivative instrument was $177,309 (December 31, 2004 - $191,019) and the change of $13,710 has been recorded as an unrealized loss in the quarter.

SEDAR

A more comprehensive discussion of the Company's business strategies and objectives can be found in the Company's 2004 Annual Report and other public information, which can be accessed on the Company's website at http://www.virtusenergy.com and on SEDAR at http://www.sedar.com.



BALANCE SHEETS

------------------------------------------------------------------------
As At March 31, December 31,
2005 2004
------------------------------------------------------------------------
(unaudited) ($) ($)
Assets
Current assets
Accounts receivable 2,684,499 3,134,579
Prepaid expenses 66,367 64,997
------------------------------------------------------------------------
2,750,866 3,199,576
Property and equipment (note 2) 21,266,612 21,571,842
------------------------------------------------------------------------
24,017,478 24,771,418
------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Outstanding cheques 831,834 450,008
Accounts payable and accrued liabilities 2,546,616 5,491,824
Bank debt (note 3) 4,150,000 2,350,000
------------------------------------------------------------------------
7,528,450 8,291,832
------------------------------------------------------------------------
Asset retirement obligations 1,606,241 1,578,054
------------------------------------------------------------------------
Future income taxes 1,878,500 972,000
------------------------------------------------------------------------
Shareholders' equity (note 4)
Share capital 14,295,107 15,144,432
Contributed surplus 535,479 477,262
Deficit (1,826,299) (1,692,162)
------------------------------------------------------------------------
13,004,287 13,929,532
------------------------------------------------------------------------
Commitment (note 2)
Subsequent event (note 7)
24,017,478 24,771,418
------------------------------------------------------------------------
See accompanying notes to financial statements.



On behalf of the Board of Directors,

( signed ) ( signed )

OWEN C. PINNELL KEITH E. MACDONALD
Director Director



STATEMENTS OF OPERATIONS

------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
(unaudited) ($) ($)
Revenues
Petroleum and natural gas sales 3,570,389 2,670,820
Royalties, net of ARTC (597,015) (475,614)
Unrealized loss on derivative instrument (13,710) --
Other income -- 1,264
------------------------------------------------------------------------
2,959,664 2,196,470
------------------------------------------------------------------------
Expenses
Production 1,036,638 805,332
General and administrative 480,250 485,045
Interest 43,412 48,326
Depletion and depreciation 1,394,391 1,056,175
------------------------------------------------------------------------
2,954,691 2,394,878
------------------------------------------------------------------------
Income (loss) before taxes 4,973 (198,408)
------------------------------------------------------------------------
Current taxes 80,280 17,000
Future income taxes (reduction) 58,830 (31,407)
------------------------------------------------------------------------
139,110 (14,407)
------------------------------------------------------------------------
Net loss (134,137) (184,001)
------------------------------------------------------------------------
Loss per share (note 4)
Basic and diluted -- --
------------------------------------------------------------------------
See accompanying notes to financial statements.



STATEMENTS OF DEFICIT

------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
(unaudited) ($) ($)
Deficit, beginning of period (1,692,162) (692,073)
Net loss (134,137) (184,001)
------------------------------------------------------------------------
Deficit, end of period (1,826,299) (876,074)
------------------------------------------------------------------------
See accompanying notes to financial statements.



STATEMENTS OF CASH FLOWS

------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
(unaudited) ($) ($)
Cash provided by (used in):
Operations
Net loss (134,137) (184,001)
Items not involving cash:
Depletion and depreciation 1,394,391 1,056,175
Stock-based compensation 58,217 32,601
Unrealized loss on derivative instrument 13,710 --
Future income taxes (reduction) 58,830 (31,407)
Asset retirement expenditures (2,547) (2,479)
------------------------------------------------------------------------
Funds from operations 1,388,464 870,889
Change in non-cash operating
working capital (note 5) (1,808,381) 1,019,905
------------------------------------------------------------------------
(419,917) 1,890,794
------------------------------------------------------------------------
Financing
Issue of common shares, net (costs) (1,655) 151,666
Bank debt 1,800,000 625,000
------------------------------------------------------------------------
1,798,345 776,666
------------------------------------------------------------------------
Investments
Expenditures on property and equipment (1,058,428) (2,883,870)
Proceeds from disposition of property
and equipment -- 613,410
Change in non-cash investing working
capital (320,000) (397,000)
------------------------------------------------------------------------
(1,378,428) (2,667,460)
------------------------------------------------------------------------
Change in cash -- --
Cash, beginning of period -- --
------------------------------------------------------------------------
Cash, end of period -- --
------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid 43,412 38,287
Taxes paid 12,198 13,291
------------------------------------------------------------------------
See accompanying notes to financial statements.



NOTES TO FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2005 and 2004
(unaudited)


1. Significant Accounting Policies

The interim financial statements of Virtus Energy Ltd. (the "Company") are presented in accordance with Canadian generally accepted accounting principles. The interim financial statements have been prepared following the same accounting policies and methods as the audited financial statements of the Company for the year ended December 31, 2004. The unaudited interim financial statements of the Company contain disclosures that are supplemental to the Company's annual financial statements. Certain disclosures, which are normally required to be included in the notes to the annual financial statements, have been condensed or omitted. The interim financial statements should be read in conjunction with the Company's audited financial statements and notes thereto in the Company's Annual Report for the year ended December 31, 2004.



2. Property and Equipment

------------------------------------------------------------------------
Accumulated
Depletion and Net Book
Cost Depreciation Value
------------------------------------------------------------------------
($) ($) ($)
March 31, 2005
Petroleum and natural
gas properties 24,051,544 10,493,621 13,557,923
Production equipment 11,700,032 4,098,228 7,601,804
Furniture and office
equipment 244,637 137,752 106,885
------------------------------------------------------------------------
35,996,213 14,729,601 21,266,612
------------------------------------------------------------------------
December 31, 2004
Petroleum and natural
gas properties 23,123,377 9,572,134 13,551,243
Production equipment 11,568,808 3,662,876 7,905,932
Furniture and office
equipment 244,841 130,174 114,667
------------------------------------------------------------------------
34,937,026 13,365,184 21,571,842
------------------------------------------------------------------------


As at March 31, 2005, costs in the amount of $2,592,190 (2004 - $2,861,681) representing unproved properties were excluded from depletion calculations and future development costs of $1,440,000 (2004 - $1,149,000) have been included in costs subject to depletion. At March 31, 2005, Virtus had an obligation to incur qualifying exploration expenditures of approximately $200,000 to satisfy the terms of flow-through common shares issued in 2004.

The Company does not capitalize any direct or indirect general and administrative costs.

3. Bank Debt

As at March 31, 2005, the Company had outstanding bank debt of $4,150,000 and a working capital deficit of $627,584. The Company currently has a revolving operating loan facility with a Canadian chartered bank totaling $6,000,000. Advances bear interest at the bank prime rate plus 0.625% and are secured by a $22,000,000 debenture with a floating charge over all the assets of the Company. The Company also has an acquisition/development loan facility of $2,000,000 and advances bear interest at the bank prime rate plus 1%.



4. Share Capital

(a) Issued and Outstanding
------------------------------------------------------------------------
Shares Amount
------------------------------------------------------------------------
(#) ($)
December 31, 2004 39,813,687 15,144,432
Share issue costs -- (1,655)
Tax effect of flow-through common shares -- (847,670)
------------------------------------------------------------------------
March 31, 2005 39,813,687 14,295,107
------------------------------------------------------------------------

(b) Stock Options

In the three months ended March 31, 2005, 284,167 options of a former
officer expired.

------------------------------------------------------------------------
Weighted
Average
Options Exercise
Outstanding Price
------------------------------------------------------------------------
(#) ($)
December 31, 2004 3,032,917 0.54
Options expired (284,167) 0.52
------------------------------------------------------------------------
March 31, 2005 2,748,750 0.54
------------------------------------------------------------------------

(c) Contributed Surplus

------------------------------------------------------------------------
($)
December 31, 2004 477,262
Stock-based compensation expense 58,217
------------------------------------------------------------------------
March 31, 2005 535,479
------------------------------------------------------------------------


(d) Weighted Average Number of Shares

The weighted average number of common shares issued and outstanding for the three months ended March 31, 2005 was 39,813,687 (2004 - 36,382,724). In calculating the loss per share, options and warrants totaling 2,748,750 (2004 - 2,934,083) were excluded from the dilution calculation, as they were antidilutive.



5. Change in Non-Cash Operating Working Capital

------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------
($) ($)
Accounts receivable 436,371 (159,918)
Prepaid expenses (1,370) (68,398)
Outstanding cheques 381,826 403,171
Accounts payable and accrued liabilities (2,625,208) 845,050
------------------------------------------------------------------------
(1,808,381) 1,019,905
------------------------------------------------------------------------


6. Financial Instruments

The Company has fixed the future Canadian/U.S. dollar exchange rates through the following forward contract:



------------------------------------------------------------------------
Type of
Time Period Contract Quantity Price
------------------------------------------------------------------------
July 1, 2004 - June 30, 2005 Financial US$1,800,000 $1.34
------------------------------------------------------------------------


As at March 31, 2005, the settlement value of the derivative instrument was $177,309 (December 31, 2004 - $191,019) and the change of $13,710 has been recorded as an unrealized loss in the quarter.

7. Subsequent Event

On April 14, 2005, Virtus and Titan Exploration Ltd. ("Titan") signed a Letter of Intent for the corporate sale of Virtus to Titan. A formal Arrangement Agreement was executed on April 26, 2005 and the proposed transaction was announced on April 27, 2005. The corporate sale of Virtus is expected to be accomplished by effecting a Plan of Arrangement (the "Plan").

Titan has agreed to pay Virtus a non-completion fee in the amount of $500,000 in certain circumstances if the Plan is not completed. Virtus has agreed to terminate any discussions with other parties and has agreed not to solicit or initiate discussion or negotiation with any third party with respect to alternate transactions involving Virtus and has granted Titan a right to match any other proposals Virtus may receive. In addition, Virtus has agreed to pay Titan a non-completion fee in the amount of $850,000 in certain circumstances if the Plan is not completed.

The transaction is subject to regulatory approval and the approval of 66-2/3% of the votes cast by the shareholders and option holders.



CORPORATE INFORMATION

Board of Directors Head Office

Peter A. Carwardine (3) Suite 750
President & Chief Executive Officer 840 Seventh Avenue S.W.
Virtus Energy Ltd Calgary, Alberta.
T2P 3G2
Ian M. Fergusson (2)(3) Phone: (403) 266-2002
Vice President Fax: (403) 266-2218
Camcor Capital Inc. Toll Free: 1-888-200-2218
Website: http://www.virtusenergy.com
Keith E. Macdonald (1)(2)
Independent Businessman Auditors

Owen C. Pinnell (1)(3) KPMG LLP
Chairman
Virtus Energy Ltd. Banker

J. Ronald Woods (1)(2) National Bank of Canada
Independent Businessman
Independent Engineers
(1) Audit & Reserves
Committee Member Gilbert Laustsen Jung
Associates Ltd.
(2) Compensation
Committee Member Legal Counsel

(3) Environmental & Safety Burstall Winger LLP
Committee Member
Transfer Agent
Officers
Olympia Trust Company
Peter A. Carwardine
President & Exchange Listing
Chief Executive Officer
TSX Venture Exchange
Ross O. Drysdale Stock Symbol: VEL
Corporate Secretary

Andy M. St.Onge
Vice President, Exploration

James H. Tyndall
Vice President, Engineering

Senior Management

Peter A. Carwardine
President &
Chief Executive Officer

Chris Bradley
Consultant, Finance

Andy M. St.Onge
Vice President, Exploration

James H. Tyndall
Vice President, Engineering


ABBREVIATIONS
2-D two dimensional
3-D three dimensional
AECO Alberta Energy Company Storage Facility
ARTC Alberta Royalty Tax Credit
API American Petroleum Institute
bbl barrel
bbls/d barrels per day
bcf billion cubic feet
boe barrels of oil equivalent
boe/d barrels of oil equivalent per day
km kilometre
mbbls thousand barrels
mboe thousand barrels of oil equivalent
mcf thousand cubic feet
mcf/d thousand cubic feet per day
mmboe million barrels of oil equivalent
mmcf million cubic feet
mmcf/d million cubic feet per day
MMBTU million British Thermal Units
NGLs natural gas liquids
WTI West Texas Intermediate
TSX TSX Venture Exchange


CONVERSION OF UNITS

1.0 acre equals 0.40 hectares
2.5 acres equals 1.0 hectare
1.0 bbl equals 0.159 cubic metres
6.29 bbls equals 1.0 cubic metre
1.0 foot equals 0.3048 metres
3.281 feet equals 1.0 metre
1.0 mcf equals 28.2 cubic metres
0.035 mcf equals 1.0 cubic metre
1.0 mile equals 1.61 kilometres
0.62 miles equals 1.0 kilometre
1.0 MMBTU equals 1.054 GJ
0.949 MMBTU equals 1 GJ

Natural gas is equated to oil on the basis of 6 mcf equals 1 boe



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Contact Information

  • Virtus Energy Ltd.
    Peter A. Carwardine
    President and CEO
    (403) 266-2002 or Toll Free 1-888-200-2218
    (403) 266-2218 (FAX)
    Email: peterc@virtusenergy.com
    or
    Virtus Energy Ltd.
    Suite 750, 840 - 7th Avenue S.W.
    Calgary, Alberta T2P 3G2
    Website: http://www.virtusenergy.com