White Fire Energy Ltd.
TSX : WF

White Fire Energy Ltd.

August 08, 2005 09:00 ET

White Fire Energy Ltd.: Second Quarter Press Release & Interim Report for the Period Ended June 30, 2005

CALGARY, ALBERTA--(CCNMatthews - Aug. 8, 2005) - White Fire Energy Ltd. (TSX:WF) is pleased to present the following results for our Company's first 70-day operational period that commenced April 22, 2005 and ended June 30, 2005.



HIGHLIGHTS

------------------------------------------------------------------------
Period Ended
June 30, 2005
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($000s, except per share data) (unaudited)

Financial
Oil and gas revenues 1,581
Cash flow from operations (1) 403
Per share - basic 0.01
Per share - diluted 0.01
Net loss (537)
Per share - basic (0.02)
Per share - diluted (0.02)
Capital expenditures (net of initial
conveyance of properties) 463
Working capital 9,438
Shareholders' equity 44,143
Shares outstanding (#)
At end of period 30,978
Weighted average - basic 28,150
Weighted average - diluted 29,261
------------------------------------------------------------------------
Operating
Production
Oil and NGLs (bbls/d) 120
Natural gas (mmcf/d) 2.1
Total (boe/d) 464
Average wellhead prices
Oil and NGLs ($/bbl) 61.23
Natural gas ($/mcf) 7.38
Total ($/boe) 48.65
Gross (net) wells drilled
Oil --
Gas --
Dry and abandoned --
Total --
Average working interest (%) --
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) For the purposes of cash flow per share calculations, cash flow is
defined as "Cash flow from operations" before the change in
non-cash working capital.


LETTER TO SHAREHOLDERS

Accomplishments

- Successfully launched White Fire Energy Ltd. with active oil and gas operations commencing April 22, 2005.

- Production averaged 464 boe/d.

- Revenue totaled $1,581,000, cash flow from operations was $403,000 or $0.01 per share and shareholders' equity amounted to $44,143,000.

- Completed a 45 square kilometre 3-D seismic processing and interpretation program at Wilson Creek that identified up to 12 drilling locations.

- Completed a private placement through the issuance 2,000,000 common shares at a price of $2.55 per share and 1,575,000 flow-through common shares at $3.18 per share for total gross proceeds of $10,108,500.

- Subsequent to quarter-end, entered into a joint venture agreement along the prolific Pembina Nisku bank oil trend, thereby expanding the Company's existing drilling inventory from 8 gross wells to 16 gross wells.

- Three rigs are currently active with two successful wells being drilled and cased since quarter-end.

Company Creation

On April 22, 2005, the combination of Lightning Energy Ltd. and Argo Energy Ltd. was completed, resulting in the creation of White Fire Energy Ltd. ("White Fire"). Common shares of White Fire began trading on the Toronto Stock Exchange on April 26, 2005 under the symbol WF.

Fundamentals

Management

White Fire has an experienced management team with over a century of combined, diverse and complementary experience in the Canadian oil and gas industry and a proven track record of successfully working together at Lightning Energy Ltd. ("Lightning") and Brooklyn Energy Corporation ("Brooklyn"), predecessor companies to White Fire. The majority of White Fire's employees and most of the Company's Board of Directors previously worked together at Lightning, Brooklyn or Tarragon Oil & Gas Ltd.

Strategy

Our operating and business strategy focuses on per share growth in reserves, production and cash flow. To deliver meaningful per share gains, the White Fire team is dedicated to a strategy driven by growth through lower risk development and exploitation drilling that is supplemented by strategic property and corporate acquisitions coupled with a prudent mix of higher impact exploration.

Operations

White Fire was launched with a strong "starter kit" of assets from which to build a successful exploration and production company. Since start-up and through the balance of 2005 and into 2006, our primary focus is on drilling as we take advantage of our existing drilling inventory on our undeveloped land base of over 30,000 net acres located in west central Alberta and northeastern British Columbia. Through the business combination discussed earlier, approximately 400 boe/d of production was conveyed from Lightning to White Fire. Our Company's current production is extracted from multiple wells and pools across several fields and is a composite of operated and non-operated production.

Finance

White Fire was initially capitalized on April 22, 2005 through a private placement of $6,000,000 at a price of $1.29 per share. The private placement was subscribed for entirely by employees and directors of White Fire who collectively own approximately 26% of the Company on a diluted basis.

On May 19, 2005, White Fire announced a private placement for the issuance of 2,000,000 common shares at an issue price of $2.55 per share and 1,575,000 flow-through common shares at $3.18 per share for total gross proceeds of $10,108,500. These funds will be used to fund the Company's ongoing exploration, development and acquisition activities.

Focus Areas

Our Company's primary exploration drilling and development focus is in west central Alberta, an area where we have considerable experience and have enjoyed significant past success. The majority of our drilling inventory is concentrated in North Ferrier, Pembina and Wilson Creek, areas that are characterized by medium depth, multi-zone prospects, repeatable play types, land availability and access to infrastructure. The targeted commodity is typically light oil and/or natural gas and natural gas liquids that yield high netbacks.

Ferrier North

The Ferrier North property is a long-life multi-horizon natural gas and natural gas liquids area that is characterized by acceptable and predictable natural declines with access to infrastructure. Drilling operations on the first well in this area have recently completed, resulting in the well being cased for potential gas. Currently, drilling operations are underway on the second operated well and a third non-operated well has also commenced drilling. The wells are targeting liquids-rich natural gas within multiple zones in the Jurassic and Cretaceous formations. We maintain working interests ranging from 30% to 60% in the four wells. Given success in this area, we plan to drill up to three additional wells prior to year-end.

Pembina

White Fire entered into a joint venture agreement ("JV") along the prolific Pembina Nisku bank oil trend with a private and a publicly traded exploration and production company. The JV expands our Company's presence in this area by doubling our drilling inventory from 8 to 16 gross wells. The majority of drilling locations, which are targeting high quality light oil and natural gas with associated liquids in the Nisku formation, have been identified through 3-D seismic data and in many instances are further defined by offset drilling control. Overall, the JV serves to mitigate risk by exposing the Company to additional drilling opportunities at a reduced participation level while maintaining material corporate exposure to the Pembina Nisku play. We anticipate drilling operations to commence in the third quarter of 2005 with up to four wells drilled prior to year-end. Well licensing issues continue to challenge drilling and production timelines, but we remain committed to resolving these issues in order to build stakeholder confidence that should serve to minimize future time delays. Given these issues, corporate production guidance will be reviewed when there is additional clarity surrounding the timing of licensing, drilling and production of the proposed Pembina wells. Current tested behind pipe production capacity of 265 boe/d that is awaiting production facility completion is scheduled to come on-stream in late September.

Wilson Creek

At Wilson Creek, our Company will participate in the drilling of four gross wells during the third quarter of 2005. The locations, which were identified by our proprietary 3-D seismic data, are targeting medium grade crude oil and natural gas with associated liquids contained within multiple horizons in the Cretaceous stratigraphic column. The first well has been drilled and cased as a potential oil well with completion operations scheduled to commence within the month. The drilling rig has subsequently moved to the next location in our drilling sequence. Assuming success, the four wells will be connected to our existing production facilities and we expect to drill two additional wells prior to year-end. White Fire is participating for a 50% working interest in the drilling, completion and tie-in operations.

Outlook

We are excited about our Company's potential to grow production and reserves through our 2005 drilling program, which commenced in July and continues at a brisk pace. Prior to year-end, we expect to have participated in up to 16 gross wells (8 net), the majority of which have been developed from our existing inventory of drilling prospects. We have the financial strength to fund the 2005 program through a combination of cash on hand, cash flow and credit facilities.

Looking forward, I believe White Fire is well positioned to deliver profitable per share growth through drilling and acquisitions. We have a high quality portfolio of development drilling opportunities in three focus areas, but more importantly, we have the team in place to execute our strategy and opportunities. We look forward to reporting our results as we move through 2005 and beyond.



On behalf of the Board of Directors,

( signed )

BOB ROSINE
President & Chief Executive Officer
August 8, 2005


Forward-Looking Statements

Certain information regarding White Fire set forth in this interim report, including management's assessment of White Fire's future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These risks and uncertainties, many of which are beyond White Fire's control, include the impact of general economic conditions and specific industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, the lack of available qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. White Fire'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 events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits White Fire can derive therefrom.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis ("MD&A") of the financial condition and the results of operations should be read in conjunction with the unaudited interim financial statements for the period ended June 30, 2005 together with the accompanying notes. All financial measures are expressed in Canadian dollars unless otherwise indicated.

Production information is commonly reported in units of barrel of oil equivalent or boe. For purposes of computing such units, natural gas is converted to equivalent barrels of oil using a conversion factor of six thousand cubic feet to one barrel of oil. This conversion ratio of 6:1 is based on an energy equivalent wellhead value for the individual products. Such disclosure of boes may be misleading, particularly if used in isolation. Readers should be aware that historical results are not necessarily indicative of future performance.

The MD&A contains the term funds generated by operations, which should not be considered an alternative to or more meaningful than cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP") as an indicator of the Company's performance. Therefore, references to funds generated by operations or funds generated by operations per share (basic and diluted) may not be comparable with the calculation of similar measures for other entities. Management uses funds generated by operations to analyze operating performance and leverage, and considers funds generated by operations to be a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation between net earnings, funds generated by operations and cash flow from operations can be found in the statements of cash flows in the unaudited interim financial statements. Funds generated by operations per share is calculated using the basic and diluted weighted average number of shares for the period. The Company uses the term operating netback (defined as oil and gas revenues less royalties and operating costs) to analyze operating performance. Operating netback as used in the MD&A does not have a standardized meaning under GAAP, and therefore, it may not be comparable with the calculation of similar measures of other entities.

Basis of Presentation

White Fire Energy Ltd. ("White Fire" or "the Company") is a growing, independent oil and gas company actively pursuing petroleum and natural gas through exploration, development and production in Western Canada. Based in Calgary, Alberta, common shares of White Fire commenced trading on the Toronto Stock Exchange under the symbol WF on April 26, 2005.

White Fire was incorporated on March 14, 2005 and commenced active oil and gas operations on April 22, 2005 after closing a Plan of Arrangement between Lightning Energy Ltd. and Argo Energy Ltd. As a result of that transaction, White Fire was conveyed certain producing and non-producing assets, which are further described in note 2 of the accompanying financial statements. Accordingly, this MD&A focuses only on our initial operations for the 70 days ended June 30, 2005 with no comparative analysis available.



Financial and Operating Results of Oil and Gas Activities

Production, Price and Revenue
------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
Oil and NGL sales (bbls/d) 120
Natural gas sales (mmcf/d) 2.1
------------------------------------------------------------------------
Total sales (boe/d) 464
Total sales (boe) 32,508
------------------------------------------------------------------------
Liquid sales price ($/bbl) 61.23
Natural gas sales price ($/mcf) 7.38
Total sales price ($/boe) 48.65
------------------------------------------------------------------------
Total revenue ($000s) 1,581
------------------------------------------------------------------------
------------------------------------------------------------------------


During our initial operational reporting period of 2005, natural gas contributed 74% and liquids contributed 26% of our total sales volumes of 464 boe/d. The Wilson Creek area produced approximately 28%, Fox Creek 25% and East Arm 24% of these production sales volumes. Natural gas prices averaged $7.38/mcf and liquids prices averaged $61.23/bbl for a total of $48.65/boe. Revenue totaled $1,581,428 for the reporting period. Although our production is sold within Canada, we are sensitive to world crude and North American natural gas price variations in addition to the Canada/U.S. exchange rate changes.



Royalties

------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
($000s)
Revenue 1,581
Royalties
Crown 286
Other 93
------------------------------------------------------------------------
Total royalties 379
------------------------------------------------------------------------
------------------------------------------------------------------------
% of Revenue
Crown 18
Other 6
------------------------------------------------------------------------
Total 24
------------------------------------------------------------------------
------------------------------------------------------------------------


Total royalties were $379,100 in the reporting period reflecting a total royalty rate of 24%. Most royalties resulted from production on Crown lands with the remaining 6% due from gross overriding royalties. Currently, we have a royalty holiday on our well in the Karr area, which will increase our overall royalty rate to approximately 28% once the holiday is exhausted. We did not recognize any reduction in Crown royalties from the Alberta Royalty Tax Credit ("ARTC") program in the period as all properties conveyed to us through the Plan of Arrangement were restricted properties. As new production is brought on-stream by way of successful drilling operations on Crown lands, our Crown royalties will attract ARTC and reduce our incremental Crown royalty rates.



Operating Expenses
------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
($000s)
Operating expense 373
Transportation expense 14
Total operating expense 387
------------------------------------------------------------------------
Operating expense excluding transportation ($/boe) 11.48
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating expenses totaled $373,162, prior to the required adjustment for transportation from gas price revenue, in our initial reporting period of 2005. On a per unit basis, operating costs were $11.48/boe, which is reflective of a high proportion of fixed expenses in our areas of operations. As we continue to drill and increase our volumes, we expect we will be able to better absorb the fixed component of these expenses and reduce our per unit rate.



General and Administrative Expenses ("G&A")
------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
($000s)

G&A expenses, prior to stock-based compensation 601
G&A stock-based compensation (non-cash) 397
G&A capitalized (direct) (170)
G&A recoveries via operations (15)
------------------------------------------------------------------------
G&A expenses (net) 813
------------------------------------------------------------------------
------------------------------------------------------------------------
G&A expenses (net) ($/boe) 25.02
------------------------------------------------------------------------
------------------------------------------------------------------------


G&A expenses, prior to the non-cash stock-based compensation expense of $396,899, was $600,857 in the reporting period. We capitalized $169,735 in direct costs relating to our exploration and development and $14,635 relating to operating activities. A portion of the total G&A expense was related to the start-up of operations along with the costs associated with a new public company. We have a full staff of professionals that are focused on increasing shareholder value in the future.

Interest Income

Interest income in the period was $12,685, which reflected the balance of cash on deposit from our equity placement of $9,519,032 (net of commissions) that closed on June 9, 2005.



Funds Flow and Netbacks
------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
($/boe)

Sales prices 48.65
Royalties (11.66)
Operating (11.90)
------------------------------------------------------------------------
Operating netback 25.09
G&A and other (excludes non-cash items) (12.69)
------------------------------------------------------------------------
Corporate netback 12.40
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash flow from operations ($000s) 403
------------------------------------------------------------------------
------------------------------------------------------------------------


For our initial reporting period ended June 30, 2005, cash flow from
operations totaled $403,033 or $0.01 per share or $12.40/boe.


Depletion, Depreciation and Accretion ("DD&A")
------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
DD&A provision ($000s ) 585
------------------------------------------------------------------------
------------------------------------------------------------------------
DD&A provision ($/boe) 18.00
------------------------------------------------------------------------
------------------------------------------------------------------------


DD&A provision was $585,216 in the period ($18.00/boe) primarily reflecting the conveyance of $34,749,151 of petroleum and natural gas properties pursuant to the Plan of Arrangement on April 22, 2005.

Income Taxes

Future tax recovery was $42,452 for the period. This recovery reflects the Company's future tax rate applied to the net earnings adjusted for permanent timing differences.

Net Earnings

For the period ended June 30, 2005, the Company recorded a net loss of $536,630 or $0.02 per share.



Capital Expenditures

------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
($000s)

Conveyance of assets pursuant to the Plan of Arrangement 34,749
Drilling and completions 105
Equipment and facilities 27
Geological and geophysical 10
Land and lease retention 149
Capitalized G&A and other 172
------------------------------------------------------------------------
Total capital expenditures 35,212
------------------------------------------------------------------------
------------------------------------------------------------------------


Our capital expenditures for the period ended June 30, 2005 totaled $463,127 after deducting the conveyance of $34,749,151 of petroleum and natural gas properties pursuant to the Plan of Arrangement. The primary expenditures included a land purchase in the North Ferrier core area, capitalization of exploration overhead and completion costs on a North Ferrier well that was in progress during our conveyance period. We did not drill any wells during the reporting period.



Liquidity and Capital Resources

The following table summarizes the working capital activity during the
period ended June 30, 2005:

------------------------------------------------------------------------
Period Ended
June 30, 2005
------------------------------------------------------------------------
($000s)

Working capital, beginning of period --
Cash flow from operations 403
Issue of capital stock for cash (net of $590 of share
issue expense) 15,519
Capital expenditures (463)
Deficit assumed on business combination (6,021)
------------------------------------------------------------------------
Working capital, end of period 9,438
------------------------------------------------------------------------
------------------------------------------------------------------------


On April 22, 2005, we completed a private placement to the directors, officers and employees of White Fire of 4,651,165 common shares and 4,651,162 share purchase warrants. These warrants can be exercised into common shares at $1.55 per share as to one-half on April 22, 2006 and the balance on April 22, 2007. On June 9, 2005, we issued 2,000,000 common shares at a price of $2.55 per common share and 1,575,000 flow-through common shares at a price of $3.18 per flow-through common share, for total gross proceeds of $10,108,500. In addition to the funds we currently have on account, we have access to a $9,000,000 credit facility which, in combination with our expected cash flow, will allow us to complete our capital program and grow our production base into the next fiscal period.

As at August 8, 2005, White Fire had 30,977,939 common shares, 300,000 stock options and 5,026,162 common share purchase warrants outstanding. Further details can be found in note 5 of the accompanying financial statements.

At period-end, we had contractual obligations for our office lease totaling $767,808 and $5,008,500 in flow-through obligations to incur.

Critical Estimates

Management is required to make judgements and use estimates in the application of generally accepted accounting principals that have significant impact on the financial results of the Company. The following discussion outlines the accounting policies and practices that are critical to determining our financial results.

Full Cost Accounting

We follow the Canadian Institute of Chartered Accountants' guideline on full cost accounting in the oil and gas industry to account for oil and gas properties. Under this method, all costs associated with the acquisition of, exploration for and development of crude oil and natural gas reserves are capitalized and costs associated with production are expensed. The capitalized costs are depreciated, depleted and amortized using the unit-of-production method based on estimated proved reserves. Reserve estimates can have a significant impact on earnings, as they are a key component in the calculation of DD&A. A downward revision in a reserve estimate could result in a higher DD&A charge to earnings. In addition, if capitalized costs are determined to be in excess of the calculated ceiling, which is based largely on reserve estimates, the excess must be written off as an expense charged against earnings. In the event of a property disposition, proceeds are normally deducted from the full cost pool without recognition of a gain or loss unless there is a change in the DD&A rate of 20% or greater.

Asset Retirement Obligations

We record a liability for the fair value of our legal obligations associated with the retirement of long-lived assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying value of the related asset and the asset retirement obligation. The total amount of the asset retirement obligation is an estimate based on our net ownership in all wells and facilities, the estimated cost to abandon and reclaim the wells and facilities, the estimated timing of those cash flows and the discount rate used to calculate the present value of those cash flows are estimates subject to measurement uncertainty. Any change in these estimates would impact the asset retirement liability.

Reserves Determination

The proved crude oil, natural gas and natural gas liquids reserves that are used in determining our depletion rates, the magnitude of the borrowing base available to us from our lender and the ceiling test are based on management's best estimates, and are subject to uncertainty. Through the use of geological, geophysical and engineering data, the reservoirs and deposits of natural gas, crude oil and natural gas liquids are examined to determine quantities available for future production, given existing operation and economic conditions and technology. The evaluation of recoverable reserves is an ongoing process impacted by current production, continuing development activities and changing economic conditions as reflected in crude oil and natural gas prices. Consequently, the reserves are estimated, which are subject to variability. To assist with the reserve evaluation process, we employ the services of independent oil and gas reservoir engineers.

Income Taxes

The determination of our income and other tax liability requires interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from the liability estimated or recorded.

Other Estimates

The accrual method of accounting will require management to incorporate certain estimates including estimates of revenues, royalties and production costs as at a specific reporting date but for which actual revenue and royalties have not yet been received, and estimates on capital projects that are in progress or recently completed where actual costs have not been received at a specific reporting date.



( signed )

STUART C. SYMON
Vice President Finance & Chief Financial Officer

August 8, 2005
Calgary, Alberta


BALANCE SHEET

------------------------------------------------------------------------
As at June 30, 2005
------------------------------------------------------------------------
($000s) (unaudited)
Assets
Current assets
Cash and cash equivalents 9,180
Accounts receivable 1,595
------------------------------------------------------------------------
10,775
Property and equipment (note 3) 34,632
Future tax asset 792
------------------------------------------------------------------------
46,199
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 1,337
Asset retirement obligations (note 4) 719
Shareholders' equity
Share capital (note 5) 44,283
Contributed surplus (note 5 (C)) 397
Deficit (537)
------------------------------------------------------------------------
44,143
------------------------------------------------------------------------
46,199
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the financial statements.


On behalf of the Board of Directors,

( signed ) ( signed )

Ken S. Woolner James Finkbeiner
Director Director


STATEMENT OF OPERATIONS AND DEFICIT

------------------------------------------------------------------------
For the Period April 22 to June 30, 2005
------------------------------------------------------------------------
($000s, except per share data) (unaudited)
Revenue
Oil and gas revenues 1,581
Royalty expense (379)
Interest revenue 13
------------------------------------------------------------------------
1,215
------------------------------------------------------------------------
Expenses
Operating 387
General and administrative 813
Interest and bank charges 9
Depletion and depreciation 581
Accretion of asset retirement obligations (note 4) 4
------------------------------------------------------------------------
1,794
------------------------------------------------------------------------
Loss before income taxes (579)
------------------------------------------------------------------------
Income taxes
Future tax reduction (42)
------------------------------------------------------------------------
Net loss (537)
------------------------------------------------------------------------
Retained earnings (deficit), beginning of period --
------------------------------------------------------------------------
Deficit, end of period (537)
------------------------------------------------------------------------
------------------------------------------------------------------------
Net loss per share
Basic and diluted (0.02)
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the financial statements.


STATEMENT OF CASH FLOWS

------------------------------------------------------------------------
For the Period April 22 to June 30, 2005
------------------------------------------------------------------------
($000s) (unaudited)
Cash provided by (used in):
Operating
Net loss (537)
Items not involving cash
Depletion and deprecation 581
Accretion of asset retirement obligations 4
Future tax reduction (42)
Stock-based compensation 397
------------------------------------------------------------------------
403
Change in non-cash working capital (220)
------------------------------------------------------------------------
183
------------------------------------------------------------------------
Financing
Bank loan (6,021)
Issue of share capital 16,109
Share issue costs (590)
------------------------------------------------------------------------
9,498
------------------------------------------------------------------------
Investing
Property and equipment additions (463)
Change in non-cash working capital (38)
------------------------------------------------------------------------
(501)
------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 9,180
------------------------------------------------------------------------
Cash and cash equivalents
Beginning of period --
End of period 9,180
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplementary information
Interest paid 9
Interest received 13
Taxes paid --
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the financial statements.


NOTES TO FINANCIAL STATEMENTS

For the Period Ended June 30, 2005

1. Incorporation and Financial Presentation

White Fire Energy Ltd. ("White Fire" or "the Company") was incorporated on March 14, 2005 and commenced active oil and gas operations on April 22, 2005 after the closing of a Plan of Arrangement between Lightning Energy Ltd. and Argo Energy Ltd. As a result of that transaction, White Fire was conveyed certain producing and non-producing assets and these transaction details are further described in note 2. Accordingly, these financial statements focus only on the Company's operations for 70 days between April 22, 2005 and June 30, 2005 with no comparative analysis available.

(a) Basis of Presentation

These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") within the framework of the accounting policies summarized below. These principles require management to use estimates and assumptions that affect the reported amounts of assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results may differ from these estimates and assumptions.

(b) Use of Estimates

The amounts recorded for depletion and depreciation of petroleum and natural gas property, plant and equipment and the provision for asset retirement obligations are based on estimates. The cost recovery ceiling test is based on estimates of proved reserves, production rates, petroleum and natural gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.

(c) Cash and Cash Equivalents

The Company considers deposits in banks, certificates of deposit and short-term investments with original maturities of three months or less as cash and cash equivalents. Bank borrowings are considered to be financing activities.

(d) Property and Equipment

The Company follows the full cost method of accounting for petroleum and natural gas operations whereby all costs related to the acquisition, exploration and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition costs, geological and geophysical costs, carrying charges of non-producing properties, asset retirement costs, costs of drilling both productive and non-productive wells, the cost of petroleum and natural gas production equipment and overhead charges related to exploration and development activities.

Petroleum and natural gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the petroleum and natural gas assets. If the carrying value of the petroleum and natural gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate.

Proceeds from the disposition of petroleum and natural gas properties are applied against capitalized costs except for dispositions that would change the rate of depletion and depreciation by 20% or more, in which case a gain or loss would be recorded.

Depletion and Depreciation

Capitalized costs, together with estimated future capital costs associated with proved reserves, are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of oil based on relative energy content of six thousand cubic feet of gas to one barrel of oil. Costs of significant unproved properties, net of impairments, are excluded from the depletion and depreciation calculation.

Other assets, which are comprised of office equipment and furniture and fixtures, are recorded at cost and are depreciated over their useful lives on a declining balance basis at rates ranging from 25% to 50%.

(e) Interest in Joint Ventures

Substantially all of the Company's oil and gas exploration and development activities are conducted jointly with others, and accordingly, the financial statements reflect only the Company's proportionate interest in such activities.

(f) Asset Retirement Obligations

An asset retirement obligation is recorded as a liability in the period in which a legal obligation is incurred as a result of an acquisition, construction, development and/or normal use of the assets.

The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depleted and depreciated using a unit-of-production method over the estimated gross proved reserves. Subsequent to the initial measurement of the asset retirement obligations, the obligations are adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. Actual costs incurred on settlement of the retirement obligation are charged against the obligation.

(g) Flow-Through Shares

The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow-through share arrangements are renounced to investors in accordance with tax legislation. Future tax liabilities and share capital are adjusted by the estimated cost of the tax deductions when the expenditures are renounced.

(h) Foreign Currency Translation

Monetary items denominated in foreign currency are translated to Canadian dollars at the rate in effect at the balance sheet date and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in income.

(i) Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.

(j) Per Share Information

Per share information is calculated on the basis of the weighted average number of common shares outstanding during the fiscal year. Diluted per share information reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common shares. Diluted per share information is calculated using the treasury stock method that assumes any proceeds received by the Company upon the exercise of in-the-money stock options plus the unamortized stock compensation cost would be used to buy back common shares at the average market price for the period.

(k) Stock-Based Compensation Plans

The Company has one stock-based compensation plan described in detail in note 5. The fair value for each stock option and warrant granted is estimated on the date of the grant using the modified Black-Scholes option pricing model. These fair value costs are recognized in general and administrative expenses with a corresponding increase to contributed surplus over the vesting period of the grant. As the instruments are exercised, the consideration paid together with the amount previously recognized in contributed surplus is recorded as an increase to share capital.

(l) Financial Instruments

Financial instruments consist primarily of accounts receivable, accounts payable, bank and term loans. There are no significant differences between the carrying value of these financial instruments and their estimated fair value.

The Company may use financial instruments for non-trading purposes to manage fluctuations in commodity prices. Hedge accounting is used when there is a high degree of correlation between price movements in the financial instrument and the item designated as being hedged. Gains and losses are recognized in the same period as the hedged item. If correlation ceases, hedge accounting is terminated and future changes in the market value of the financial instrument are recognized as gains or losses in the period.

(m) Revenue Recognition

Liquids and natural gas revenues are recognized in earnings when title passes from the Company to its customer.

2. Plan of Arrangement

Coincident with a Plan of Arrangement primarily involving Argo Energy Ltd. ("Argo") and Lightning Energy Ltd. ("Lightning") and their security holders, certain assets were transferred from Lightning to White Fire. The Company has assumed all liabilities, including environmental liabilities, relating to these assets. The Plan of Arrangement was closed on April 22, 2005 following shareholder approval. At the time of the transaction, the entities were related, and therefore, the assets and liabilities transferred have been accounted for on a "continuity of interests" basis.



Conveyance Transaction to White Fire

------------------------------------------------------------------------
($000s)
Property and equipment 34,749
Future tax asset 543
Asset retirement obligation (715)
------------------------------------------------------------------------
Total assets transferred 34,577
Bank indebtedness assumed (6,021)
------------------------------------------------------------------------
Net assets transferred 28,556
------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration given:
Common shares issued (net of initial deficit) 28,556
------------------------------------------------------------------------
------------------------------------------------------------------------


3. Property and Equipment

------------------------------------------------------------------------
Accumulated
Depletion and Net Book
Cost Depreciation Value
------------------------------------------------------------------------
($000s)
June 30, 2005
Exploration and development costs 28,176 563 27,613
Production equipment and facilities 6,963 15 6,948
Office equipment 73 2 71
------------------------------------------------------------------------
35,212 580 34,632
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company capitalized $0.2 million of general and administrative costs related to its exploration and development activity in the period.

Unevaluated and undeveloped properties with a cost of $2.1 million, included in property and equipment, have not been subject to depletion for the period April 22, 2005 to June 30, 2005.

4. Asset Retirement Obligation

The Company recorded an asset retirement obligation associated with the present value of the estimated future cost to abandon its petroleum and natural gas properties. To determine the value of this obligation, the Company utilized an inflation rate of 2% and a credit adjusted risk-free interest rate of 8% to discount the future estimated cash flows of $1.1 million, which is expected to be incurred over a period of 1 to 14 years. At period-end, the obligation consisted of:



------------------------------------------------------------------------
($000s)
Balance, beginning of period --
Liabilities transferred concurrent with the Plan of Arrangement 715
Accretion of asset retirement obligation 4
------------------------------------------------------------------------
Balance, end of period 719
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Share Capital

(a) Authorized

An unlimited number of voting common shares without nominal
or par value.

(b) Common Shares Issued

------------------------------------------------------------------------
Shares Amount
------------------------------------------------------------------------
(#) ($000s)
Common shares issued pursuant to the Plan
of Arrangement(net of elimination of initial
deficit of $794) 22,751,774 28,556
Initial private placement on April 22, 2005 4,651,165 6,000
Private placement on June 9, 2005 3,575,000 10,109
Share issue expense (net of tax effect of $208) -- (382)
------------------------------------------------------------------------
Balance at June 30, 2005 30,977,939 44,283
------------------------------------------------------------------------
------------------------------------------------------------------------


On April 22, 2005, 22,751,774 common shares were issued pursuant to the Plan of Arrangement to the former shareholders of Argo and Lightning and a private placement to the directors, officers and employees of White Fire of 4,651,165 common shares and 4,651,162 share purchase warrants was completed. These warrants can be exercised into common shares at $1.55 per share as to one-half on April 22, 2006 and the balance on April 22, 2007. Also pursuant to the Plan of Arrangement, 375,000 share purchase warrants were issued exercisable immediately at a price of $1.29 per share.

On June 9, 2005, 2,000,000 common shares were issued at a price of $2.55 per common share and 1,575,000 flow-through common shares at a price of $3.18 per flow-through common share for total gross proceeds of $10,108,500. At period-end, the Company had $5,008,500 in flow-through obligations to incur.

(c) Stock-Based Compensation

The Company has a stock-based compensation plan under which options to purchase common shares have been issued to outside directors. The Board has a policy of reserving up to 10% of the outstanding common shares for issuance to eligible participants. Under the plan, all options awarded have a maximum term of five years and have immediate vesting or vest over a three-year period at a rate of one-third per year. At period-end, the Company had 300,000 options to purchase common shares at an exercise price of $2.73 per share outstanding, of which 250,000 vest immediately and 50,000 vest equally over a three-year period. The Company has calculated compensation expense on the options, share purchase warrants as well as a stock appreciation rights plan under which there exists 110,000 rights at a price of $2.73 per common share to an outside director. These rights vest as to 3,333 rights on June 8, 2006 and 53,333 rights each on June 8, 2007 and 2008, respectively.



The following table summarizes the information about the share options
as at June 30, 2005:

------------------------------------------------------------------------
Weighted
Average
Share Exercise
Options Price
------------------------------------------------------------------------
(#) ($)
Outstanding, beginning of period -- --
Granted 300,000 2.73
Exercised, expired or cancelled -- --
------------------------------------------------------------------------
Outstanding, end of period 300,000 2.73
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercisable, end of period 250,000 2.73
------------------------------------------------------------------------
------------------------------------------------------------------------


Compensation expense for options and share purchase warrants granted is based on the estimated fair values at the time of the grant and is recognized as expense over the vesting period of the options. Accordingly, the Company has recognized $396,899 for non-cash stock-based compensation expense in the period. The fair value was determined as at each stock option and warrant grant date using the Black-Scholes model with the following assumptions: risk-free rate of 3%, expected life of 3 years and volatility of 40%. The weighted average fair market value during the period ended June 30, 2005 was $0.83 per option and $0.37 per share purchase warrant.

Compensation expense for each stock appreciation right granted is based on the difference between the exercise price of the right and the weighted average market trading price at period-end over the vesting period of three years. Accordingly, the Company has recognized $2,962 in compensation expense for the period.

(d) Per Share Amounts

Per share amounts have been calculated on the weighted average number of shares outstanding. The weighted average shares outstanding for the period ended June 30, 2005 was 28,150,414. In computing diluted earnings per share, 1,110,239 shares were added to the weighted average number of shares outstanding for the period. As the Company recorded a loss for the period, these shares were anti-dilutive.

6. Revolving Bank Demand Loan

The Company has executed a revolving demand credit facility with a major chartered bank with an initial borrowing base of $9.0 million. Interest is charged at prime rates, borrowings can be made in Canadian or U.S. dollars and the facility is secured by a general security agreement. As at period-end, the Company had no bank loan outstanding.

7. Financial Instruments

Credit Risk Management

Accounts receivable include amounts receivable for oil and gas sales, which are generally made to large credit worthy purchasers, and amounts receivable from joint venture partners, which are recoverable from production. Accordingly, the Company views credit risks on these amounts as low.

The Company is exposed to losses in the event of non-performance by counter-parties to these financial instruments. The Company deals with major institutions and believes these risks are minimal.

Fair Value of Financial Assets and Liabilities

The carrying values of cash and cash equivalents, accounts receivable and other, accounts payable and bank loan approximate their value due to the relatively short period to maturity of the instrument.



CORPORATE INFORMATION

Board of Directors Head Office

Ken S. Woolner Suite 850, 400 Third Avenue S.W.
Executive Chairman Calgary, Alberta T2P 4H2
White Fire Energy Ltd. Phone: (403) 296-4772
Fax: (403) 296-4777
Bob Rosine Website: www.white-fire.ca
President & Chief Executive Officer
White Fire Energy Ltd. Auditors
KPMG LLP
John Brussa(3)
Partner Banker
Burnet, Duckworth & Palmer LLP RBC Royal Bank of Canada

James Finkbeiner(1)(3) Evaluation Engineers
Independent Businessman Gilbert Laustsen Jung
Associates Ltd.
Ted Hanbury (1)(2)
Chief Operating Officer Legal Counsel
Sequoia Oil & Gas Trust Burnet, Duckworth & Palmer LLP

Garry A. Tanner (1)(2) Transfer Agent
Senior Vice President & Valiant Trust Company
Chief Operating Officer
Enerplus Resources Corporation Stock Exchange Listing
Toronto Stock Exchange
(1) Audit Committee Member Trading Symbol: WF
(2) Reserve Committee Member
(3) Governance & Compensation Abbreviations
Committee Member
bbls barrels
Officers bbls/d barrels per day
boe barrels of oil
Ken S. Woolner equivalent
Executive Chairman boe/d barrels of oil
equivalent per day
Bob Rosine mcf thousand cubic feet
President & Chief Executive Officer mcf/d thousand cubic feet
per day
Robert B. Fryk mmcf million cubic feet
Chief Operating Officer mmcf/d million cubic feet
per day
Stuart C. Symon
Vice President Finance & Chief
Financial Officer

Dave Humphreys
Vice President Operations

Tony Izzo
Vice President Engineering

Rob Pinckston
Vice President Exploration


Contact Information

  • White Fire Energy Ltd.
    Bob Rosine
    President & CEO
    (403) 232-4850
    or
    White Fire Energy Ltd.
    Stuart Symon
    CFO
    (403) 232-4851