White Fire Energy Ltd.
TSX : WF

White Fire Energy Ltd.

November 07, 2005 09:00 ET

White Fire Energy Ltd.: Third Quarter Press Release & Interim Report for the Three Months Ended September 30, 2005

CALGARY, ALBERTA--(CCNMatthews - Nov. 7, 2005) - White Fire Energy Ltd. (TSX:WF) is pleased to present our financial and operating results for the three months and 162-day period ended September 30, 2005.



HIGHLIGHTS
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($000s, except per share data) (unaudited)

Financial
Oil and gas revenues 2,156 1,581 3,737
Funds flow from operations (1) 813 403 1,216
Per share - basic 0.03 0.01 0.04
Per share - diluted 0.02 0.01 0.04
Net income (loss) 87 (537) (450)
Per share - basic 0.00 (0.02) (0.02)
Per share - diluted 0.00 (0.02) (0.01)
Capital expenditures (net of initial
conveyance of properties) 7,114 463 7,577
Working capital 3,137 9,438 3,137
Shareholders' equity 44,283 44,143 44,283
Shares outstanding (#)
At end of period 30,978 30,978 30,978
Weighted average - basic 30,978 28,150 29,756
Weighted average - diluted 33,232 29,261 32,019
------------------------------------------------------------------------
Operating
Production
Oil and NGLs (bbls/d) 114 120 117
Natural gas (mmcf/d) 1.6 2.1 1.8
Total oil equivalent (boe/d) 375 464 414
Average wellhead prices
Oil and NGLs ($/bbl) 69.32 61.23 65.73
Natural gas ($/mcf) 9.71 7.38 8.54
Total oil equivalent ($/boe) 62.49 48.65 55.77
Gross (net) wells drilled
Oil 3.0 (1.5) - 3.0 (1.5)
Gas 4.0 (2.1) - 4.0 (2.1)
Dry and abandoned 0.0 (0.0) - 0.0 (0.0)
------------------------------------------------------------------------
Total 7.0 (3.6) - 7.0 (3.6)
Average working interest (%) 51 - 51
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) For the purposes of funds flow per share calculations, funds flow is
defined as "Funds flow from operations" before the change in
non-cash working capital.


LETTER TO SHAREHOLDERS

Third quarter operations have positioned White Fire to achieve our year-end production target of approximately 1,000 boe/d. We have enjoyed operational success in each of our core areas of Pembina, Wilson Creek and Ferrier as detailed below. Extremely wet weather this summer hindered our ability to translate our drilling success into production and cash flow growth in the third quarter, however we expect to record growth in these areas in the fourth quarter.

Accomplishments

- Drilled and cased 7 wells (3.6 net) for a 100% success ratio.

- Funds flow from operations totaled $813,000 or $0.03 per share, up 202% from the second quarter.

- 650 boe/d behind pipe production awaiting tie-in.

- Three drilling licenses were granted with an additional two licenses anticipated prior to year-end at Pembina.

- Two operated drilling rigs are contracted: one is currently active at Pembina, the second is scheduled to commence drilling in late November at Ferrier.

Operations

Drilling and completions operations were significantly hindered by extremely wet conditions encountered since the beginning of June. Despite that fact, White Fire has ramped up drilling operations and currently has two active drilling rigs under contract that are expected to continue working through 2006. Current November production stands at a field estimated rate of approximately 465 boe/d. We are on track to exit the year at an estimated 1,000 boe/d when we combine current November production with an estimated 650 boe/d of behind pipe production. We are currently drilling at Pembina and have an active drilling program planned for the balance of 2005 and into 2006. Operations will be concentrated in the Pembina, North Ferrier, Wilson Creek and Karr areas of west central Alberta where we expect to drill up to 8 additional wells (4.1 net) prior to year-end, thereby giving us 14 to 16 total wells (5.6 to 6.4 net) drilled in 2005.

Pembina

Previously we announced that we had been granted two licenses to drill Nisku tests. Subsequently, White Fire has been granted a third well license and we are expecting to be granted another two drilling licenses prior to year-end. We have initiated drilling operations on our scheduled multi-well program. Results from our first and highest risk well are disappointing in that we encountered non-reefal material which was evaluated as non-commercial and the well has been abandoned in the Nisku. The drilling rig will move to our second drilling location and commence drilling operations immediately.

In 2006, the Company is planning to drill 6 to 10 wells (2.0 to 3.3 net) and shoot 3-D seismic on select lands across our previously announced joint venture properties within the prolific Pembina Nisku fairway. White Fire has a total of 20 drilling locations that target the Nisku formation at an average working interest of approximately 33%. We continue to work closely with Pembina area stakeholders to expedite the licensing of our Nisku drilling program. Presently, there is 265 boe/d of tested, behind pipe production that is awaiting completion of production facility expansions, which are scheduled to be completed and operational in December.

Ferrier North

At Ferrier North, during the quarter we drilled and cased 3 wells (1.6 net), completed 1 well (0.5 net) and subsequent to quarter-end, a fourth well has also been drilled and cased. Completion of the first well resulted in test rates in excess of 2 mmcf/d and 80 bbls/d of natural gas liquids. We are currently completing and testing the 3 remaining cased wells. Production from the wells is expected to be connected and on-stream prior to year-end. Also by December 31, 2005, 3 additional wells (1.5 net) are scheduled to be drilled. White Fire plans to drill as many as 6 wells (3.0 net) in this area during 2006.

Wilson Creek

During the quarter, we drilled and cased 4 wells (2.0 net), of which all 4 wells have been completed. Currently, we are producing 210 boe/d from the property and have approximately 125 boe/d of tested, behind pipe production awaiting tie-in that should be completed by the end of November. Up to 2 additional wells (1.0 net) are scheduled to be drilled and completed prior to year-end. During 2006, we plan to drill 5 to 8 wells (2.5 to 4.0 net) in the Wilson Creek area.

Karr

At Karr, we are targeting multi-zone natural gas and natural gas liquids potential within the Cretaceous stratigraphic column. We have identified up to five multi-zone drilling locations on 3-D seismic covering our lands. The initial well is planned for late December with follow-up contingent wells scheduled for 2006. White Fire has access to 3,264 net undeveloped acres and is operator.

Outlook

Exit rate production for 2005 is estimated to be 1,000 boe/d, while the average 2006 production estimates remain unchanged at 2,000 boe/d. As production volumes increase through the balance of 2005 and into 2006, we expect our "$/boe" metrics to improve significantly. Capital expenditures are expected to total $21 million for 2005 with over $23 million anticipated to be expended in 2006.

We are excited about our Company's potential to grow production and reserves through 2005 and into 2006 with our current drilling program. At year-end, we expect to have participated in 14 to 16 wells (5.6 to 6.4 net) with 21 wells (9.0 net) scheduled to be drilled in 2006. We will fund the balance of the 2005 capital program through a combination of funds flow and existing 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 and exploration drilling opportunities in four focus areas, but more importantly, we have the team in place to execute on the opportunities. I look forward to reporting our results as we move through the balance of 2005 and into 2006.



On behalf of the Board of Directors,

"signed"

BOB ROSINE
President & Chief Executive Officer
November 7, 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 three months ended September 30, 2005, the 70-day period ended June 30, 2005 and 162-day period ended September 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 flow from 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 flow from operations or funds flow from operations per share (basic and diluted) may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations to analyze operating performance and leverage, and considers funds flow from 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 flow from operations and cash flow from operations can be found in the statements of cash flows in the unaudited interim financial statements. Funds flow from operations per share is calculated using the basic and diluted weighted average number of shares for the period. The Company uses the terms operating and corporate netbacks (defined as oil and gas revenues less royalties and operating costs) to analyze operating performance. Operating and corporate netbacks used in the MD&A do 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 on the three months ended September 30, 2005 compared to the 70-day period ended June 30, 2005 and our operations for the 162 days ended September 30, 2005 with no prior year comparative analysis available.



Financial and Operating Results of Oil and Gas Activities

Production, Price and Revenue
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
Oil and NGL sales (bbls/d) 114 120 117
Natural gas sales (mmcf/d) 1.6 2.1 1.8
------------------------------------------------------------------------
Total sales (boe/d) 375 464 414
Total sales (boe) 34,487 32,508 66,995
------------------------------------------------------------------------
------------------------------------------------------------------------
Liquid sales price ($/bbl) 69.32 61.23 65.73
Natural gas sales price ($/mcf) 9.71 7.38 8.54
Total sales price ($/boe) 62.49 48.65 55.77
------------------------------------------------------------------------
------------------------------------------------------------------------
Total revenue ($000s) 2,156 1,581 3,737
------------------------------------------------------------------------
------------------------------------------------------------------------


For the 162-day period ended September 30, 2005, we recorded $3,736,606 in revenue on sales volumes of 414 boe/d, which was comprised of approximately 72% natural gas and 28% oil and NGLs. On a core area basis, the Wilson Creek area produced approximately 32%, Fox Creek 27% and Karr 25% of these sales volumes. Comparing our first full quarter of operations ended September 30, 2005 to the 70-day period ended June 30, 2005, revenue increased 36% primarily as a result of a 28% increase in commodity prices. Although our sales volumes have declined slightly on a boe/d basis, our total sales have increased as the previous period ended June 30, 2005 was a partial 70-day reporting period. Our production is sold within Canada and we are sensitive to world crude and North American natural gas price variations in addition to the Canada/U.S. currency exchange rate changes.



Royalties
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($000s)

Revenue 2,156 1,581 3,737
Royalties
Crown 466 286 752
Other 100 93 193
------------------------------------------------------------------------
Total royalties 566 379 945
------------------------------------------------------------------------
------------------------------------------------------------------------
% of Revenue
Crown 21 18 20
Other 5 6 5
------------------------------------------------------------------------
Total 26 24 25
------------------------------------------------------------------------
------------------------------------------------------------------------


Total royalties incurred during the 162-day period ended September 30, 2005 were $944,946 or 25% of revenue. During the third quarter, royalties were $565,846 reflecting a royalty rate of 26% compared to 24% for the period ended June 30, 2005. In the previous reporting period, we had a royalty holiday on our well in the Karr area that was exhausted during the third quarter, and as a result, slightly increased our overall royalty rate. Most royalties resulted from production on Crown lands with the remaining 5% due from gross overriding royalties. 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
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($000s)

Operating expense 401 373 774
Transportation expense 7 14 21
------------------------------------------------------------------------
Total operating expense 408 387 795
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating expense ($/boe) 11.82 11.90 11.86
------------------------------------------------------------------------
------------------------------------------------------------------------


Total operating expenses were $794,585 or $11.86/boe for the 162-day period ended September 30, 2005. Operating expenses for the third quarter totaled $407,773 compared to $386,812 in the previous 70-day period ended June 30, 2005. On a per unit basis, operating costs in the quarter decreased slightly to $11.82/boe from $11.90/boe in the previous period. 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")
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($000s)

G&A expenses, prior to stock-based
compensation 747 601 1,348
G&A stock-based compensation (non-cash) 53 397 450
G&A capitalized (direct) (230) (170) (400)
G&A recoveries via operations (92) (15) (107)
------------------------------------------------------------------------
G&A expenses (net) 478 813 1,291
------------------------------------------------------------------------
------------------------------------------------------------------------
G&A expenses (net) ($/boe) 13.84 25.02 19.27
------------------------------------------------------------------------
------------------------------------------------------------------------


G&A expenses incurred, prior to the non-cash stock-based compensation expense of $449,559, were $1,348,155 for the 162-day period ended September 30, 2005. Expenses for the third quarter, prior to the non-cash stock-based compensation expense of $52,660, were $747,298 compared to $600,857 the previous 70-day reporting period. We capitalized $230,013 in direct costs relating to our exploration and development and $92,543 primarily relating to capital expenditures, which substantially increased in the third quarter. Overall, the increased costs, prior to stock-based compensation, were reflective of a full quarter of operations compared to the partial 70-day period ended June 30, 2005. We have a full staff of professionals that are focused on increasing shareholder value in the future.

Interest Income

Interest income in the period ended September 30, 2005 was $69,116, 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
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($/boe)

Sales prices 62.49 48.65 55.77
Royalties (16.41) (11.66) (14.11)
Operating (11.82) (11.90) (11.86)
------------------------------------------------------------------------
Operating netback 34.26 25.09 29.80
G&A and other (excludes non-cash items) (10.68) (12.69) (11.66)
------------------------------------------------------------------------
Corporate netback 23.58 12.40 18.14
------------------------------------------------------------------------
------------------------------------------------------------------------
Funds flow from operations ($000s) 813 403 1,216
------------------------------------------------------------------------
------------------------------------------------------------------------


Funds flow from operations totaled $1,216,206 or $0.04 per share for the 162-day period ended September 30, 2005. Both our operating and corporate netbacks increased substantially in the third quarter due to increased commodity prices.



Depletion, Depreciation and Accretion ("DD&A")
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
DD&A provision ($000s ) 503 585 1,088
------------------------------------------------------------------------
------------------------------------------------------------------------
DD&A provision ($/boe) 14.60 18.00 16.25
------------------------------------------------------------------------
------------------------------------------------------------------------


DD&A provision was $1,088,728 for the 162-day period ($16.25/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 expense was $127,785 for the 162-day period. This recovery reflects the Company's future tax rate applied to the net earnings adjusted for permanent timing differences.

Net Income

For the three months ended September 30, 2005, we recorded net income of $86,266 ($0.00 per share) but a net loss of $449,865 ($0.02 per share) for the 162-day period ended September 30, 2005.



Capital Expenditures
------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($000s) (excluding asset retirement
obligations)

Conveyance of assets pursuant to
the Plan of Arrangement - 34,749 34,749
Drilling and completions 5,929 105 6,034
Equipment and facilities 740 27 767
Geological and geophysical 108 10 118
Land and lease retention 82 149 231
Capitalized G&A and other 255 172 427
------------------------------------------------------------------------
Total capital expenditures 7,114 35,212 42,326
------------------------------------------------------------------------
------------------------------------------------------------------------


Our capital expenditures for the 162-day period ended September 30, 2005 totaled $7,576,946 excluding the conveyance of $34,749,151 of petroleum and natural gas properties pursuant to the Plan of Arrangement. Most of these expenditures occurred during the third quarter and were focused on the drilling of seven wells. We did not drill any wells during the previous 70-day reporting period.



Liquidity and Capital Resources

The following table summarizes the change in working capital during the
162-day period ended September 30, 2005:

------------------------------------------------------------------------
162-Day
Period
Ended
September
30,
2005
------------------------------------------------------------------------
($000s)

Working capital, beginning of period -
Funds flow from operations 1,216
Issue of capital stock for cash
(net of $590 of share issue expense) 15,519
Capital expenditures (7,577)
Deficit assumed on business combination (6,021)
------------------------------------------------------------------------
Working capital, end of period 3,137
------------------------------------------------------------------------
------------------------------------------------------------------------


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. This initial private placement essentially eliminated the debt that was conveyed through the Plan of Arrangement described previously. The 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 November 7, 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 $639,000 and $4,203,000 in flow-through obligations to incur.

Critical Estimates

Management is required to make judgements and use estimates in the application of generally accepted accounting principles 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 it is 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 crude oil, natural gas 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

November 7, 2005
Calgary, Alberta



BALANCE SHEET

------------------------------------------------------------------------
As at September 30, 2005
------------------------------------------------------------------------
($000s) (unaudited)

Assets
Current assets
Cash and cash equivalents 8,391
Accounts receivable 2,419
------------------------------------------------------------------------
10,810
Property and equipment (note 3) 41,379
Future tax asset 623
------------------------------------------------------------------------
52,812
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 7,673
Asset retirement obligations (note 4) 856

Shareholders' equity
Share capital (note 5) 44,283
Contributed surplus (note 5 (c)) 450
Deficit (450)
------------------------------------------------------------------------
44,283
------------------------------------------------------------------------
52,812
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the financial statements.


On behalf of the Board of Directors,


"signed" "signed"

Ken S. Woolner James Finkbeiner
Director Director



STATEMENTS OF OPERATIONS AND DEFICIT

------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($000s, except per share data) (unaudited)

Revenue
Oil and gas revenues 2,156 1,581 3,737
Royalty expense (566) (379) (945)
Interest revenue 56 13 69
------------------------------------------------------------------------
1,646 1,215 2,861
------------------------------------------------------------------------
Expenses
Operating 408 387 795
General and administrative 478 813 1,291
Interest and bank charges - 9 9
Depletion and depreciation 490 581 1,071
Accretion of asset retirement
obligations (note 4) 13 4 17
------------------------------------------------------------------------
1,389 1,794 3,183
------------------------------------------------------------------------
Income (loss) before income taxes 257 (579) (322)
------------------------------------------------------------------------
Income taxes
Future tax expense (reduction) 170 (42) 128
------------------------------------------------------------------------
Net income (loss) 87 (537) (450)
------------------------------------------------------------------------
Deficit, beginning of period (537) - -
------------------------------------------------------------------------
Deficit, end of period (450) (537) (450)
------------------------------------------------------------------------
------------------------------------------------------------------------
Net income (loss) per share
Basic and diluted 0.00 (0.02) (0.02)
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the financial statements.



STATEMENTS OF CASH FLOWS

------------------------------------------------------------------------
Three 70-Day 162-Day
Months Period Period
Ended Ended Ended
September June September
30, 30, 30,
2005 2005 2005
------------------------------------------------------------------------
($000s) (unaudited)

Cash provided by (used in):
Operating
Net income (loss) 87 (537) (450)
Items not involving cash
Depletion and deprecation 490 581 1,071
Accretion of asset retirement obligations 13 4 17
Future tax expense (reduction) 170 (42) 128
Stock-based compensation 53 397 450
------------------------------------------------------------------------
Funds flow from operations 813 403 1,216
Change in non-cash working capital 960 (220) 740
------------------------------------------------------------------------
1,773 183 1,956
------------------------------------------------------------------------
Financing
Bank loan - (6,021) (6,021)
Issue of share capital - 16,109 16,109
Share issue costs - (590) (590)
------------------------------------------------------------------------
- 9,498 9,498
------------------------------------------------------------------------
Investing
Property and equipment additions (7,114) (463) (7,577)
Change in non-cash working capital 4,552 (38) 4,514
------------------------------------------------------------------------
(2,562) (501) (3,063)
------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (789) 9,180 8,391
------------------------------------------------------------------------
Cash and cash equivalents
Beginning of period 9,180 - -
End of period 8,391 9,180 8,391
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplementary information
Interest paid - 9 9
Interest received 50 13 63
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the financial statements.


NOTES TO FINANCIAL STATEMENTS

For the 162-Day Period Ended September 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 162 days between April 22, 2005 and September 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) 28,356
Warrants issued 200
------------------------------------------------------------------------
28,556
------------------------------------------------------------------------
------------------------------------------------------------------------


3. Property and Equipment
------------------------------------------------------------------------
Accumulated
Depletion and Net Book
Cost Depreciation Value
------------------------------------------------------------------------
($000s)

September 30, 2005
Exploration and development costs 34,650 (945) 33,705
Production equipment and facilities 7,703 (120) 7,583
Office equipment 97 (6) 91
------------------------------------------------------------------------
42,450 (1,071) 41,379
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company capitalized $0.4 million of general and administrative costs related to its exploration and development activity in the period ended September 30, 2005.

Unevaluated and undeveloped properties with a cost of $6.0 million, included in property and equipment, have not been subject to depletion for the period April 22, 2005 to September 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 $1.3 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
New liabilities added 124
Accretion of asset retirement obligation 17
------------------------------------------------------------------------
Balance, end of period 856
------------------------------------------------------------------------
------------------------------------------------------------------------


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 and warrants 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 September 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 $4,203,000 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 September 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 $449,559 for non-cash stock-based compensation expense in the period of which $52,660 was recorded for the quarter ended September 30, 2005. 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 was $0.83 per option and $0.23 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 closing market trading price at period-end over the vesting period of three years. Accordingly, the Company has recognized $5,740 in compensation expense for the period of which $2,778 was recorded for the quarter ended September 30, 2005.

(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 September 30, 2005 was 29,756,169 and 30,977,939 for the quarter ended September 30, 2005. In computing diluted earnings per share, 2,262,986 shares were added to the weighted average number of shares outstanding for the period and 2,253,954 for the quarter ended September 30, 2005. 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

Ken S. Woolner
Executive Chairman
White Fire Energy Ltd.

Bob Rosine
President & Chief Executive Officer
White Fire Energy Ltd.

John Brussa (3)
Partner
Burnet, Duckworth & Palmer LLP

James Finkbeiner (1)(3)
Independent Businessman

Ted Hanbury (1)(2)
Chief Operating Officer
Sequoia Oil & Gas Trust

Garry A. Tanner (1)(2)
Senior Vice President & Chief Operating Officer
Enerplus Resources Corporation

(1) Audit Committee Member
(2) Reserve Committee Member
(3) Governance & Compensation Committee Member


Officers

Ken S. Woolner
Executive Chairman

Bob Rosine
President & Chief Executive Officer

Robert B. Fryk
Chief Operating Officer

Stuart C. Symon
Vice President Finance & Chief Financial Officer

Dave Humphreys
Vice President Operations

Tony Izzo
Vice President Engineering

Rob Pinckston
Vice President Exploration


Head Office

Suite 850, 400 Third Avenue S.W.
Calgary, Alberta T2P 4H2
Phone: (403) 296-4772
Fax: (403) 296-4777
Website: www.white-fire.ca


Auditors

KPMG LLP


Banker

RBC Royal Bank of Canada


Evaluation Engineers

Gilbert Laustsen Jung Associates Ltd.


Legal Counsel

Burnet, Duckworth & Palmer LLP


Transfer Agent

Valiant Trust Company


Stock Exchange Listing

Toronto Stock Exchange
Trading Symbol: WF


Abbreviations

bbls barrels
bbls/d barrels per day
boe barrels of oil equivalent
boe/d barrels of oil equivalent per day
mcf thousand cubic feet
mcf/d thousand cubic feet per day
mmcf million cubic feet
mmcf/d million cubic feet per day


Contact Information

  • White Fire Energy Ltd.
    Bob Rosine
    President & CEO
    (403) 232-4850
    (403) 296-4777 (FAX)
    or
    White Fire Energy Ltd.
    Stuart Symon
    CFO
    (403) 232-4851
    (403) 296-4777 (FAX)
    Website: www.white-fire.ca