Orleans Energy Announces Results of Its Transformational Second Quarter

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CALGARY, ALBERTA--(CCNMatthews - Aug. 29, 2006) - Orleans Energy Ltd. ("Orleans" or the "Company") (TSX VENTURE:OEX) is pleased to announce its financial and operating results for the interim period ended June 30, 2006. Orleans' second quarter results include only partial recognition of the quarterly financial and operating results associated with the acquisitions of both Mercury Energy Corporation and Morpheus Energy Corporation, as these transactions occurred on June 2, 2006 and June 6, 2006, respectively. The integration of the acquired assets has transformed Orleans into a significant explorer and producer of crude oil and natural gas within the deeper, longer reserve life, West-Central Alberta geographic corridor.



------------------------------------------------------------------------
Financial Highlights Three Months Ended June 30,
------------------------------------------------------------------------
------------------------------------------------------------------------
(all amounts in Cdn $ except share
data) %
(6:1 oil equivalent conversion) 2006 2005 Change
------------------------------------------------------------------------
------------------------------------------------------------------------
Petroleum & natural gas revenue 5,911,434 3,982,385 48%
------------------------------------------------------------------------
Per share - basic 0.30 0.26 15%
------------------------------------------------------------------------
- diluted 0.29 0.25 16%
------------------------------------------------------------------------
Cash flow from operations (1) 3,361,986 2,342,140 44%
------------------------------------------------------------------------
Per share - basic 0.17 0.16 6%
------------------------------------------------------------------------
- diluted 0.16 0.15 7%
------------------------------------------------------------------------
Operating netback (2) ($/boe) 32.78 34.21 (4%)
------------------------------------------------------------------------
Corporate netback (2) ($/boe) 29.00 30.92 (6%)
------------------------------------------------------------------------
Net earnings / (loss) (1,345,606) 855,785 -
------------------------------------------------------------------------
Per share - basic (0.07) 0.06 -
------------------------------------------------------------------------
- diluted (0.07) 0.05 -
------------------------------------------------------------------------
Net debt (3) - period end 36,218,786 2,527,797 1,333%
------------------------------------------------------------------------
Weighted average basic shares 19,708,637 15,054,047 31%
------------------------------------------------------------------------
Weighted average diluted shares 20,759,015 15,749,603 32%
------------------------------------------------------------------------
Issued & outstanding shares 30,459,493 15,054,047 102%
------------------------------------------------------------------------
Operating Highlights
------------------------------------------------------------------------
Average daily production:
------------------------------------------------------------------------
Natural gas (mcf/d) 4,334 2,385 82%
------------------------------------------------------------------------
Liquids (Oil & NGLs) (bbls/d) 552 435 27%
------------------------------------------------------------------------
Oil equivalent (boe/d) 1,274 832 53%
------------------------------------------------------------------------
Average sales price:
------------------------------------------------------------------------
Natural gas ($/mcf) 6.34 7.71 (18%)
------------------------------------------------------------------------
Liquids (Oil & NGLs) ($/bbl) 67.91 58.33 16%
------------------------------------------------------------------------
Oil equivalent ($/boe) 50.99 52.58 (3%)
------------------------------------------------------------------------
Capital expenditures ($) 119,462,351 8,262,787 -
------------------------------------------------------------------------


------------------------------------------------------------------------
Financial Highlights Six Months Ended June 30,
------------------------------------------------------------------------
------------------------------------------------------------------------
(all amounts in Cdn $ except share
data) %
(6:1 oil equivalent conversion) 2006 2005 Change
------------------------------------------------------------------------
------------------------------------------------------------------------
Petroleum & natural gas revenue 11,631,113 6,578,305 77%
------------------------------------------------------------------------
Per share - basic 0.67 0.38 76%
------------------------------------------------------------------------
- diluted 0.64 0.36 78%
------------------------------------------------------------------------
Cash flow from operations (1) 6,539,080 3,645,724 79%
------------------------------------------------------------------------
Per share - basic 0.38 0.28 36%
------------------------------------------------------------------------
- diluted 0.36 0.26 38%
------------------------------------------------------------------------
Operating netback (2) ($/boe) 33.03 32.50 2%
------------------------------------------------------------------------
Corporate netback (2) ($/boe) 29.84 28.92 3%
------------------------------------------------------------------------
Net earnings / (loss) (703,888) 925,241 -
------------------------------------------------------------------------
Per share - basic (0.04) 0.07 -
------------------------------------------------------------------------
- diluted (0.04) 0.07 -
------------------------------------------------------------------------
Net debt (3) - period end 36,218,786 2,527,797 1,333%
------------------------------------------------------------------------
Weighted average basic shares 17,416,576 13,204,917 32%
------------------------------------------------------------------------
Weighted average diluted shares 18,291,678 13,798,681 33%
------------------------------------------------------------------------
Issued & outstanding shares 30,459,493 15,054,047 102%
------------------------------------------------------------------------
Operating Highlights
------------------------------------------------------------------------
Average daily production:
------------------------------------------------------------------------
Natural gas (mcf/d) 3,882 1,897 105%
------------------------------------------------------------------------
Liquids (Oil & NGLs) (bbls/d) 564 380 48%
------------------------------------------------------------------------
Oil equivalent (boe/d) 1,211 696 74%
------------------------------------------------------------------------
Average sales price:
------------------------------------------------------------------------
Natural gas ($/mcf) 7.20 7.72 (7%)
------------------------------------------------------------------------
Liquids (Oil & NGLs) ($/bbl) 64.43 56.97 13%
------------------------------------------------------------------------
Oil equivalent ($/boe) 53.07 52.19 2%
------------------------------------------------------------------------
Capital expenditures ($) 127,112,176 13,102,935 -
------------------------------------------------------------------------

Notes to the Highlights Table:
(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
("GAAP") and accordingly represents Funds from Operations before any
asset retirement obligation cash expenditures.
(2) Operating netback represents average sales price less royalties,
operating costs and transportation expenses. Corporate netback
represents operating netback less general and administrative costs
and interest expense. Both measures are not recognized measures
under Canadian GAAP.
(3) Net Debt refers to outstanding bank debt plus any working capital
deficit or minus any working capital surplus (excluding any current
income tax non-cash asset). Net debt is not a recognized measure
under Canadian GAAP.
(4) Orleans' 2006 financial and operating results include the operating
activities associated with the acquisitions of: Mercury Energy
Corporation from June 2, 2006 onwards and Morpheus Energy
Corporation from June 6, 2006 onwards.

 


Highlights

Highlights of the second quarter and year-to-date activity for Orleans include the following:

- On June 6, acquired Morpheus Energy Corporation, adding 1,200 barrels oil equivalent per day ("boe/day") of production, approximately 4.0 million boe of proved and probable reserves and 26,400 undeveloped acres of land (average 63% working interest).

- On June 2, acquired Mercury Energy Corporation, adding 200 boe/day of production, approximately 0.9 million boe of proved and probable reserves and 15,715 undeveloped acres of land (average 82% working interest).

- On April 27, closed a bought-deal private placement financing for gross proceeds of $38 million, comprised of $33 million of common equity issued at $5.90 /share and $5.0 million of flow-through equity issued at $7.50 /share.

- Production in the second quarter averaged 1,274 boe/day, representing a 53% increase over the second quarter of 2005 (832 boe/day) and an 11% increase over the first quarter of 2006 (1,147 boe/day). For indicative purposes only, consolidated production "normalized" to reflect full quarter recognition of both Morpheus and Mercury, results in average daily production for the second quarter of approximately 2,300 boe/day.

- Drilled four operated wells (3.3 net) with a 75% gross success rate, including two gas wells, one oil well and one drilled and abandoned (D&A). For the first half of 2006, the Company drilled 13 wells (8.3 net) resulting in 9 gas wells, 2 oil wells and 2 D&A for a gross success rate of 85%.

- Brought on-stream six Horseshoe Canyon CBM gas wells (2.0 net) in the Oberlin / Nevis area with initial gas rates ranging between 80 to 350 mcf/day.

- Incurred $8.9 million in capital expenditures (excluding acquisitions), focused on exploration and development drilling, facilities and crown land sales.

- Generated cash flow of $3.4 million or $0.17 per basic share, resulting in a corporate cash flow netback of $29.00 per boe. For indicative purposes only, consolidated cash flow "normalized" to reflect full quarter recognition of both Morpheus and Mercury, results in second quarter cash flow of approximately $6 million.

- Increased the Company's bank credit facility from $22.5 million to $53.0 million.

The second quarter of 2006 has been one of the busiest and most exciting periods in the Company's relatively short history. As a result of the two corporate acquisitions which closed in early June, Orleans has substantially increased its inventory of drilling opportunities in Central, West Central and the Peace River Arch areas of Alberta. The Company's asset portfolio is now comprised of six high working interest, Company-operated core areas, with significant, low-to-moderate risk, multi-zone drilling prospects that are generally Cretaceous and Triassic in age.

Operational Activities

During the second quarter of 2006, Orleans drilled 4 wells (3.3 net) with an overall success rate of 75%. Orleans incurred approximately $8.9 million in capital expenditures during this period. Approximately $4.6 million was focused on exploratory and development drilling opportunities, $3.0 million on acquiring additional acreage via crown land sales and $1.1 million was spent on facilities and tie-ins.

Immediately upon closing the acquisitions in early June, Orleans commenced drilling on new and existing prospects and since June 1, 2006, has drilled 12 wells (8.9 net) including 7 gas wells, 4 oil wells and one D&A for a 92% cased success rate. These wells are at various stages of completion and tie-in. The objective of this program was to prove up prospects and delineate infill and reduced spacing opportunities for the duration of 2006 and beyond. The Company is extremely pleased with its drilling results as they have validated the Company's drilling program objectives.

In July, on the Company-operated Pine Creek property, Orleans drilled one 100% gas well at 10-35-54-20W5, targeting deep, multi-zone, long-lived reserves in Cretaceous-aged horizons. The Company has completed and tested two zones at combined gas rates in excess of 1.5 mmcf/day and are subsequently proceeding with tie-in to a nearby, under-utilized gas plant. The Company has since drilled an additional 100% location at 6-05-56-19W5, has completed and tested two zones at combined rates in excess of 1.5 mmcf/day and is currently proceeding with tie-in operations. Orleans intends to spud two additional 100% locations in September and October, 2006. In the immediate Pine Creek area, several oil and gas producers are currently applying for and are drilling on reduced spacing of up to four wells per section. Based on Orleans' early drilling results, the Company has applied for similar reduced spacing across its lands and intends to commence a significant development program for the area in early 2007. Orleans has purchased two blocks of a recently shot extensive 3D seismic program, with the intent to high grade future drilling locations in this extremely active area. With the success of the Company's first two wells and the new 3D seismic, Orleans has identified 15 to 20 development locations pending downspacing approval.

In the Gordondale area on the Peace River Arch, the Company drilled one well in the second quarter and an additional two wells in July (net 2.5 wells), targeting a new light oil pool discovery in the Triassic Boundary Lake zone. All three wells have been completed and tested with positive results. Orleans is proceeding with facility modifications and pipelining to the Company's operated oil battery, with the intent to commence production in the fourth quarter of 2006. Orleans has a large contiguous operated land position in Gordondale and has developed an inventory in excess of 15 drilling locations based on primary, 160 acre spacing. Downspacing to 80 or 40 acre spacing, as the majority of offset pools are developed on, will significantly add to this inventory. Additionally, Orleans is evaluating the waterflood feasibility of the Boundary Lake zone as most of the offset pools appear to respond favourably to waterflooding, an enhanced reserves recovery method.

In Gilby, three successful Edmonton gas wells (1.4 net) were drilled in July and are currently awaiting completion. Additionally, Orleans has tied-in several Edmonton gas wells that were previously completed by Morpheus. Orleans' wells are currently producing at very economic rates, ranging from 250 to 600 mcf/day. The drilling of two additional, operated wells is scheduled for the fourth quarter. Orleans is presently in the process of finalizing its four well per section, downspacing application for the Edmonton Sand, as is typical in the area. Upon approval, there will be 30 to 35 development locations on Orleans lands.

In Kaybob, during the second quarter, Orleans was successful in acquiring additional crown lands immediately within this very active prospect area. In the fourth quarter of 2006, the Company plans to drill two 100% wells on its Kaybob Triassic gas prospect. Orleans and other operators in the area have applied for four wells per section spacing and pending downspacing approval, Orleans' has identified 18 to 20 development locations.

In Grimshaw, the Company drilled and cased two gas wells (1.3 net) in the second quarter. Completion operations will commence in the fourth quarter. Negotiations are ongoing with a nearby gas plant operator to provide processing capacity for Orleans gas volumes.

Outlook and Guidance

Orleans views the second quarter of 2006 as a transformational quarter in that it has successfully transitioned itself from a predominantly "West 4" shallow producer to a "West 5" company with significant undeveloped assets and resource play type potential with a large inventory of diverse oil and gas prospects. Orleans is extremely pleased with the early drilling results achieved in the second quarter and thus far in the third quarter. To-date in 2006, the Company has drilled 22 wells (14.8 net) with an 86% success rate. Orleans is very well positioned with operated, high-netback properties and an expanded inventory of high working interest, operated drilling projects to achieve its previously guided year-end 2006 exit rate of 3,500 boe/day and provide stable growth for the remainder of 2006 and 2007.

MANAGEMENT'S DISCUSSION & ANALYSIS ("MD&A")

The following discussion is intended to assist the reader in understanding the business and results of operations and financial condition of Orleans Energy Ltd. (the "Company" or "Orleans"). This MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the three month period ended June 30, 2006 and the audited financial statements for the nine month fiscal period ended December 31, 2005.

Orleans Energy Ltd. is a Calgary, Alberta-based crude oil and natural gas company. Orleans is incorporated under the laws of Alberta and its common shares are publicly listed and traded on the TSX Venture Exchange under the trading symbol "OEX".

Unaudited financial and operating information for the three month interim period ended June 30, 2006 ("Q206") and the corresponding comparable quarterly period ended June 30, 2005 ("Q205"), is presented within this MD&A commentary. Additionally, unaudited financial and operating information for the six month period ended June 30, 2006 ("H106") and the comparable prior year six month period ended June 30, 2005 ("H105") is disclosed as well.

In this MD&A, production data is commonly stated in barrels of oil equivalent ("boe") using a six (6) to one (1) conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one-to-one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of six (6) mcf: one (1) bbl is based on energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

As an indicator of the Company's performance, the term cash flow from operations or operating cash flow contained within the MD&A should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP"). This term does not have a standardized meaning under GAAP and may not be comparable to other companies. Orleans believes that cash flow from operations is a useful supplementary measure as investors may use this information to analyze operating performance, leverage and liquidity. Cash flow from operations, as disclosed within this MD&A, represents funds from operations before any asset retirement obligation cash expenditures and is expressed before changes in non-cash working capital. The Company presents cash flow from operations per share whereby per share amounts are calculated consistent with the calculation of earnings per share.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other similar statements that are not statements of fact. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement.

For additional information relating to Orleans, please refer to other filings as filed on SEDAR at www.sedar.com. All amounts are reported in Canadian dollars, unless otherwise stated. This MD&A includes information up to and including August 28, 2006.

Corporate Overview

The Company is actively engaged in the exploration for, development and production of natural gas, crude oil and natural gas liquids reserves within the province of Alberta. Orleans' presently has a market capitalization of approximately $175 million. Current production is weighted approximately 65 percent sweet natural gas and 35 percent light oil and natural gas liquids. As a result of the recently closed acquisitions of two private oil and gas companies, Orleans' production base has been expanded to include six core producing areas throughout central Alberta, west-central Alberta and the Peace River Arch with a significant corporate undeveloped land base of approximately 60,000 acres with an average working interest of approximately 75 percent.

Significant Acquisitions

On June 2, 2006 the Company acquired all of the issued and outstanding shares of Mercury Energy Corporation ("Mercury"), a private oil and gas company. Total consideration paid by Orleans for the Mercury shares included 1,623,719 of Orleans' common shares and $9.835 million cash. This business combination has been accounted for using the purchase method with the results of Mercury's operations included in Orleans' financials results June 2, 2006 thereafter.

Additionally, on June 6, 2006 the Company acquired all of the issued and outstanding shares of Morpheus Energy Corporation ("Morpheus"), a private oil and gas company. Total consideration paid by Orleans for the Morpheus shares included 7,351,727 of Orleans' common shares and $29.203 million cash. The cash consideration component was funded through the net proceeds of the Company's previously disclosed $38.065 million bought-deal private placement financing which closed on April 27, 2006. This business combination has been accounted for using the purchase method with the results of Morpheus' operations included in Orleans' financials results June 6, 2006 thereafter.



Selected Period End and Quarterly Financial Information

2006 2005 Quarterly Comparison
------------------------------------------------------------------------
($000s) Q206 Q106 Q405 Q305 Q205 Q105
------------------------------------------------------------------------

------------------------------------------------------------------------
Petroleum & natural
gas revenue 5,911 5,720 8,452 6,981 3,982 2,595
------------------------------------------------------------------------
Cash flow from
operations 3,362 3,177 4,973 4,442 2,342 1,304
------------------------------------------------------------------------
Net earnings / (loss) (1,346) 642 16,203 2,406 856 69
------------------------------------------------------------------------
Total assets
- period end 180,598 55,109 50,684 32,196 28,795 24,216
------------------------------------------------------------------------

 


The following commentary will assist in providing the reader with factors that have caused variations over the aforementioned quarterly and period end results.

Petroleum and Natural Gas Production

During the second quarter of 2006, the Company's production on an oil equivalent basis increased 53 percent to 1,274 boe per day, as compared to the 832 boe per day in Q205. Orleans' gas sales for Q206 averaged 4,334 mcf per day and crude oil and NGLs production averaged 552 bbls per day. The Company's production levels in June 2006 were hampered to a certain extent by down-time experienced at both a non-operated gas plant at Killam/Leo in central-Alberta and an operated compressor station at Gilby in west-central Alberta. Of note, reported production for Q206 includes only 29 days of operating activities relating to the acquisition of Mercury, which closed on June 2, 2006, and only 25 days of operating activities relating to the acquisition of Morpheus, which closed on June 6, 2006.

During the first six months of this year, Orleans' natural gas production averaged 3,882 mcf per day and crude oil and NGLs production averaged 564 bbls per day. On a combined barrel of oil equivalent basis, average daily production for this six month 2006 period was 1,211 boe per day.



------------------------------------------------------------------------
Average Daily Production
------------------------------------------------------------------------
Natural Gas Crude Oil & NGLs Oil Equivalent
------------------------------------------------------------------------
(mcf/d) (bbls/d) (boe/d)
------------------------------------------------------------------------
Q105 1,404 325 559
------------------------------------------------------------------------
Q205 2,385 435 832
------------------------------------------------------------------------
Q305 3,231 662 1,200
------------------------------------------------------------------------
Q405 4,160 685 1,378
------------------------------------------------------------------------
Q106 3,426 576 1,147
------------------------------------------------------------------------
Q206 4,334 552 1,274
------------------------------------------------------------------------

 


Petroleum and Natural Gas Revenue and Commodity Pricing

The Company's total petroleum and natural gas revenue (before royalties and transportation costs) for the three month period ended June 30, 2006 amounted to $5.91 million, representing a 48 percent increase from the corresponding Q205 period. This $1.93 million increase over Q205 is primarily due to increased production volumes in Q206. Orleans' petroleum and natural gas revenue for the six months ended June 30, 2006 amounted to $11.63 million, representing a 77 percent increase from the corresponding 2005 six month period. Of this $5.05 million increase over H105, 98 percent is due to increased production volumes.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Crude oil & NGLs 3,410 2,308 48 6,575 3,929 67
------------------------------------------------------------------------
Natural gas 2,502 1,674 49 5,056 2,651 91
------------------------------------------------------------------------
Total 5,911 3,982 48 11,631 6,580 77
------------------------------------------------------------------------

 


Orleans may utilize derivative instruments to hedge future prices on a portion of its oil and gas production in order to achieve more predictable cash flows to fund capital expenditures and to reduce exposure to downward commodity price fluctuations. The Company entered into a fixed price oil swap during Q206 and subsequent to June 30, 2006 entered into another fixed price oil swap, as outlined in the following table. The Company had no such contracts outstanding during the comparable period ended June 30, 2005. The Company's financial instrument contracts qualify for hedge accounting, which Orleans has elected to use. As such, derivative financial instruments accounted for as hedges are not recognized in the Company's Balance Sheet. Gains and losses related to derivative financial instruments designated as commodity price hedges are deferred and recognized in product revenues upon sale of the related hedged production.



------------------------------------------------------------------------
Daily
Physical/ notional
Product Financial Term volume Price received
------------------------------------------------------------------------
Fixed oil swap Financial Jul 06 - Dec 06 125 bbls US$ 73.62 per bbl
Fixed oil swap Financial Aug 06 - Jul 07 125 bbls US$ 77.25 per bbl
------------------------------------------------------------------------


The following table highlights Orleans' corporate realized commodity
prices as well as benchmark market prices:

------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Orleans' prices:
------------------------------------------------------------------------
Natural gas ($/mcf) 6.34 7.71 (18) 7.20 7.72 (7)
------------------------------------------------------------------------
Crude oil and NGLs
($/bbl) 67.91 58.33 16 64.43 57.09 13
------------------------------------------------------------------------
Oil equivalent ($/boe) 50.99 52.58 (3) 53.07 52.19 2
------------------------------------------------------------------------
Industry benchmark prices:
------------------------------------------------------------------------
WTI Cushing oil (US$/bbl) 70.51 53.22 33 66.93 51.53 30
------------------------------------------------------------------------
Edmonton Par oil ($/bbl) 79.06 65.66 20 74.16 63.93 16
------------------------------------------------------------------------
Nymex Henry Hub
(US$/mmbtu) 6.65 6.95 (4) 7.16 6.73 6
------------------------------------------------------------------------
AECO gas ($/mcf) 5.87 7.37 (20) 6.66 7.08 (6)
------------------------------------------------------------------------

 


Petroleum and Natural Gas Royalties

Orleans' petroleum and natural gas royalties for the three month period ended June 30, 2006 amounted to $983 thousand, resulting in a corporate effective royalty rate of 17 percent. Approximately 57 percent of the Company's total royalties for this period relate to Alberta Crown royalties with the remaining 43 percent pertaining to freehold and overriding royalties. During Q205 the Company's total royalties amounted to $739 thousand. The aggregate increase in Q206 of $244 thousand is to a large extent attributable to higher production volumes realized in Q206 vis-a-vis Q205. However, this overall increase was tempered by the year-end 2005 Crown capital cost credit recovery adjustment received by the Company during Q206. As well, the Company's Pine Creek gas wells continue to be exempt from Crown royalties due to their deep gas Crown royalty holiday status, which results in a lower corporate effective royalty rate. The assets acquired through the acquisition of both Morpheus and Mercury are subject to relatively higher effective royalty rates as compared to Orleans' Halkirk and Pine Creek areas. Consequently, on a go forward basis, the Company is projecting a corporate effective royalty rate in excess of 20 percent.

Orleans' petroleum and natural gas royalties for the six month period ended June 30, 2006 amounted to $2.19 million with a corporate effective royalty rate of 19 percent. In the corresponding six month period ended June 30, 2005, the Company's total royalties amounted to $1.29 million. Notwithstanding a marginal increase in the corporate effective royalty rate in H106, the aggregate $902 thousand increase in royalties in H106 is primarily the result of higher production volumes realized in H106 as compared to H105.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Crown 564 405 39 1,225 771 59
------------------------------------------------------------------------
Freehold and overrides 419 334 26 963 515 87
------------------------------------------------------------------------
Total 983 739 33 2,188 1,286 70
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Corporate royalty rate (%) 17 19 19 17
------------------------------------------------------------------------

 


Operating Expenses

Orleans' field operating expenditures for the three month period ended June 30, 2006 amounted to $1.03 million. In the aggregate, this was a 75 percent increase over the $587 thousand reported in the same period last year. This increase is attributable to an expansion in Orleans' field operations through the acquisitions of both Morpheus and Mercury, resulting in a greater number of producing wells and increased production over the corresponding period last year. As well, oil and gas services continue to be subject to inflationary cost increases due to the high level of industry activity and the prevailing vibrant Alberta economy. On a per unit basis, Orleans' reported operating costs were $8.84 per boe in Q206, compared to $7.75 per boe in Q205. The Company's operating costs for the six month period ended June 30, 2006 amounted to $2.00 million, or $9.10 per boe.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Total ($000s) 1,025 587 75 1,995 1,088 83
------------------------------------------------------------------------
Per unit ($/boe) 8.84 7.75 14 9.10 8.63 5
------------------------------------------------------------------------

 


Transportation Expenses

In Q206, Orleans' cost of transporting and distributing its crude oil and natural gas production to market delivery points amounted to $103 thousand, as compared to Q205 transportation expenses of $66 thousand. On a unit-of-production basis, transportation costs in Q206 were $0.89 per boe as compared to the $0.87 per boe realized in Q205. For the six month period ended June 30, 2006, the Company's transportation expenses amounted to $209 thousand, as compared to H105 transportation expenses of $107 thousand. On a unit-of-production basis, transportation costs in H206 were $0.96 per boe as compared to the $0.85 per boe realized in Q205.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Total ($000s) 103 66 56 209 107 95
------------------------------------------------------------------------
Per unit ($/boe) 0.89 0.87 2 0.96 0.85 13
------------------------------------------------------------------------

 


General & Administrative Expenses

The Company's general and administrative ("G&A") expenses related to its Calgary-based, head office operations amounted to $327 thousand during the three month period ended June 30, 2006, (excluding the non-cash stock-based compensation provision), or $2.82 on an oil-equivalent per unit basis. Orleans' aggregate G&A costs in Q206 increased $70 thousand or 27 percent as compared to Q205. The higher G&A expenses in Q206 are related to costs incurred for: additional head office staff necessary to manage a significantly larger asset base, the Company's annual meeting of shareholders held on June 7, 2006 and related shareholder reporting information, and additional bank fees pursuant to the Company's expanded bank credit facility. The Company's per unit G&A costs are anticipated to decrease as production levels increase over the balance of this year.

The Company presently employs 13 head office personnel, including eight geological and engineering technical personnel, and engages the services of four consultants on a part-time basis. As a result of the acquisition of both Morpheus and Mercury, Orleans expanded its head office personnel by three employees in June 2006.

The Company applies the full cost method of accounting for its oil and gas operations. Accordingly, it capitalized employee compensation and associated direct overhead costs of its technical personnel in the amount of $172 thousand during the three month period ended June 30, 2006. In Q205, capitalized G&A amounted to $150 thousand.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Gross, net recoveries 499 407 23 852 672 27
------------------------------------------------------------------------
Capitalized (172) (150) 15 (312) (253) 23
------------------------------------------------------------------------
Expensed 327 257 27 540 419 29
------------------------------------------------------------------------
Per unit ($/boe) 2.82 3.39 (17) 2.46 3.32 (26)
------------------------------------------------------------------------
------------------------------------------------------------------------
% Capitalized 34 37 37 38
------------------------------------------------------------------------

 


Stock-Based Compensation

The Company utilizes the fair value method for measuring stock option expenses. During the three month period ended June 30, 2006 and June 30, 2005, the Company recorded non-cash stock-based compensation charges of $202 thousand and $143 thousand, respectively. The provision for Q206 was recognized in connection with stock options granted on June 16, 2006 (as previously announced) and the amortization of stock options granted in prior periods.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Stock-based compensation 202 143 41 331 391 (15)
------------------------------------------------------------------------

 


Interest Charges

The Company's interest expenses in Q206 amounted to $111 thousand, entirely attributable to bank borrowing interest charges on its outstanding bank debt. As at June 30, 2006, the Company had $34.2 million of bank debt, as compared to $100 thousand of outstanding bank indebtedness at June 30, 2005 and $719 thousand at December 31, 2005. Orleans' bank debt increased in Q206 primarily as a result of the assumption of the bank indebtedness of both Morpheus and Mercury pursuant to the acquisitions of such.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Interest charges 111 - - 161 41 293
------------------------------------------------------------------------

 


Depletion, Depreciation and Accretion

Orleans' depletion and depreciation expense for the three month period ended June 30, 2006 amounted to $3.55 million. This provision for the depletion and depreciation of the Company's asset base, in absolute dollars, was $2.26 million higher than Q205. On a unit-of-production rate basis, the depletion and depreciation provision for Q206 was $30.65 per boe (excluding the accretion on the Company's asset retirement obligation), as compared to $17.05 per boe for the comparable Q205 period. The higher depletion and depreciation rate is directly attributable to the cost of acquiring the proved reserves of both Morpheus and Mercury through the aforementioned corporate acquisitions. The Company's depletion and depreciation expense for the six month period ended June 30, 2006 amounted to $5.42 million or $25.31 per boe, as compared to $2.23 million or $18.48 per boe in H105.

The Company's accretion expense relating to its asset retirement obligations ("ARO") amounted to $73 thousand for the three month period ended June 30, 2006, as compared to $52 thousand for the comparable Q205. Higher accretion has been reported as a result of the additional ARO recognized pursuant to the acquisition of both Morpheus and Mercury.



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Depletion & depreciation 3,553 1,291 175 5,416 2,228 143
------------------------------------------------------------------------
Accretion on ARO 73 52 40 131 102 28
------------------------------------------------------------------------
Total 3,626 1,343 170 5,547 2,330 138
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Per unit ($/boe) 31.28 17.73 76 25.31 18.48 37
------------------------------------------------------------------------

 


Income and Capital Taxes

The Company follows the liability method of accounting for income taxes whereby future income taxes are calculated based on temporary differences arising from the variance between the tax basis of an asset or liability and the carrying value of its property, plant and equipment. On April 10, 2006, the Alberta government substantially enacted a decrease of 1.5% to the provincial corporate income tax rate. Additionally, the Federal government substantially enacted a 2% decrease to the federal corporate income tax rate for the years 2008 through to 2010. These rate reductions, net of the changes in temporary differences from second quarter 2006 activity, resulted in the Company recognizing a future tax expense provision in the three months ended June 30, 2006 of $879 thousand as the Company's recognized income tax asset at December 31, 2005 was measured at a higher tax rate which prevailed at that time and preceded the recently enacted income tax rate reductions.

During the three month and six month periods ended June 30, 2006, the Company was not liable for any corporate income tax. As a result of Orleans' significant tax pool balances, which aggregate to approximately $145 million, Orleans' does not expect to be subject to corporate cash income tax in the foreseeable future. Additionally, during the three month period ended June 30, 2006, the Company was not liable for the payment of the large corporation capital tax as this tax was retroactively eliminated at January 1, 2006 by the Federal government. The following table outlines the Company's projected tax pools available for deduction against future taxable income (net of anticipated pool usage necessary to offset estimated H106 taxable income).



------------------------------------------------------------------------
Access Rate Balance
------------------------------------------------------------------------
($ millions)
------------------------------------------------------------------------
Canadian exploration expense (CEE) 100% $ 25.25
------------------------------------------------------------------------
Canadian development expense (CDE) 30% 29.85
------------------------------------------------------------------------
Canadian oil and gas property expense (COGPE) 10% 27.40
------------------------------------------------------------------------
Undepreciated capital cost (UCC) 25% 26.11
------------------------------------------------------------------------
Non-capital losses (NCL) 100% 32.74
------------------------------------------------------------------------
Share issue costs 20% 3.29
------------------------------------------------------------------------
Total $ 144.64
------------------------------------------------------------------------

 


Operating Cash Flow and Net Earnings

In the three month period ended June 30, 2006, Orleans recorded $3.36 million in cash flow from operations ($0.17 per basic share) and a net loss of $1.35 million ($0.07 per basic share). Higher depletion and depreciation non-cash charges in addition to the non-cash future tax provision in the period negatively impacted the Company's earnings recognition. For the corresponding period in Q205, the Company generated $2.34 million in cash flow from operations ($0.16 per basic share) and $856 thousand in net earnings ($0.06 per basic share). During the six month period ended June 30, 2006, Orleans realized $6.54 million in cash flow from operations ($0.38 per basic share) and a net loss of $704 thousand ($0.04 per basic share). For the comparable period in H105, the Company generated $3.62 million in cash flow from operations ($0.27 per basic share) and $925 thousand in net earnings ($0.07 per basic share).



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s except share data) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Cash flow from
operations (1) 3,361 2,342 44 6,539 3,646 79
------------------------------------------------------------------------
Per share - basic ($) 0.15 0.16 (6) 0.38 0.28 36
------------------------------------------------------------------------
Per share - diluted ($) 0.15 0.15 - 0.36 0.26 38
------------------------------------------------------------------------
Net Earnings / (loss) (1,346) 856 - (704) 925 -
------------------------------------------------------------------------
Per share - basic ($) (0.07) 0.06 - (0.04) 0.07 -
------------------------------------------------------------------------
Per share - diluted ($) (0.07) 0.05 - (0.04) 0.07 -
------------------------------------------------------------------------

(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian GAAP and accordingly represents Funds from
Operations before any asset retirement obligation cash expenditures.
As an indicator of the Company's performance, the term cash flow
from operations or operating cash flow contained within should not
be considered as an alternative to, or more meaningful than, cash
flow from operating activities as determined in accordance with
Canadian GAAP.

 


Capital Expenditures

During the three month period ended June 30, 2006, Orleans invested $8.70 million in oil and gas exploration and development capital expenditures. The Company drilled and/or participated in drilling a total of 4 (3.33 net) wells with an 75 percent success rate. In Q206 Orleans expanded its undeveloped acreage position in west-central Alberta with the acquisition of 3,200 net acres through Crown land sale participation and was successful in acquiring 2,560 net acres of freehold lands at Killam in central-Alberta. Additionally, as previously discussed, the Company closed the strategic acquisitions of two private oil and gas companies, Morpheus Energy Corporation and Mercury Energy Corporation in early June 2006. The breakdown of Orleans' capital expenditures programs are outlined below:



------------------------------------------------------------------------
Second Quarter First Half
------------------------------------------------------------------------
% %
($000s) Q206 Q205 Change H106 H105 Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Land 3,011 1,159 160 5,478 1,686 225
------------------------------------------------------------------------
Seismic 14 7 100 201 41 390
------------------------------------------------------------------------
Drilling & completions 4,569 3,084 48 7,548 5,564 36
------------------------------------------------------------------------
Facilities & well
equipment 1,108 695 59 1,787 1,189 50
------------------------------------------------------------------------
Exploration & development 8,702 4,945 76 15,014 8,480 77
------------------------------------------------------------------------
Other 209 160 31 359 334 7
------------------------------------------------------------------------
Property purchases (30) 142 (121) 1,157 701 65
------------------------------------------------------------------------
Corporate
acquisitions (1) 110,581 3,016 3,567 110,581 3,588 2,982
------------------------------------------------------------------------
Total capital
expenditures 119,462 8,263 1,346 127,111 13,103 870
------------------------------------------------------------------------

(1) Includes total consideration paid (cash, shares issued and
transactions costs) for acquisitions and working capital and
assumption of debt.

 


Goodwill

In the three month period ended June 30, 2006, Orleans recorded goodwill of $16.47 million in connection with the acquisition of Morpheus Energy Corporation. The carrying value of the Company's recorded goodwill will be tested for impairment on an annual basis commencing in the fourth quarter of 2006.

Liquidity and Capital Resources

At June 30, 2006, Orleans had a working capital deficit of $36.22 million (including bank debt of $34.21 million), and 30.46 million common shares outstanding with a book capitalization of $109.72 million and a market capitalization of $178.19 million. At December 31, 2005, the Company had a working capital deficit of $4.61 million (including bank debt of $719 thousand), and 15.10 million common shares outstanding with a book capitalization of $19.94 million and a market capitalization of $93.16 million.



------------------------------------------------------------------------
($000) June 30, 2006 Dec. 31, 2005 % Change
------------------------------------------------------------------------

------------------------------------------------------------------------
Bank debt 34,212 719 4,658
------------------------------------------------------------------------
Working capital deficit(1) 2,006 3,894 (49)
------------------------------------------------------------------------
Net debt 36,219 4,613 685
------------------------------------------------------------------------

------------------------------------------------------------------------
Book capitalization (2) 109,723 19,938 450
------------------------------------------------------------------------
Market capitalization (3) 178,188 93,161 91
------------------------------------------------------------------------

Note 1: Reflects current assets (excluding any current income tax asset)
less current liabilities (excluding any outstanding bank debt).
Note 2: Reflects the book value of share capital, as reported on the
Company's respective balance sheets.
Note 3: Based on the market closing price of Orleans stock and the
outstanding number of common shares at period end.

 


The increase in the net debt position of the Company at June 30, 2006, as compared to December 31, 2005, is attributable to capital investments incurred in the first six months of 2006 exceeding the cash generated through operating activities within that period and the assumption of the bank indebtedness of both Morpheus and Mercury pursuant to the acquisitions of such.

At June 30, 2006, Orleans had borrowings of $34.21 million under its bank facility with a Canadian commercial bank and was in compliance with all covenant terms of the bank facility agreement. As a result of the acquisition of Morpheus and Mercury, the bank facility borrowing base was increased to $53.0 million in early June 2006, as compared to the previous $22.5 million bank facility in effect at March 31, 2006.

Orleans' main sources of liquidity are internally-generated cash flow from its oil and gas operations, undrawn bank credit facilities and access to equity capital markets. Because of the liquidity and capital resource alternatives available to the Company, including internally-generated cash flow, Orleans believes its liquidity is sufficient to fund operating, general and administrative and interest expenses, including planned spending on exploration and development projects and undeveloped acreage. The Company anticipates that public capital markets will serve as the principal source of capital to finance any future substantial corporate acquisitions and/or significant property purchases.



Common Share Information

------------------------------------------------------------------------
Q405 Q305 Q205
------------------------------------------------------------------------
Share Price: High $ 6.35 $ 6.25 $ 3.90
------------------------------------------------------------------------
Low $ 5.60 $ 3.68 $ 3.21
------------------------------------------------------------------------
Close $ 6.17 $ 5.80 $ 3.74
------------------------------------------------------------------------
Avg. daily trading volume(1) 25,624 95,242 33,320
------------------------------------------------------------------------
Shares outstanding-period end(2) 15,099,047 15,079,047 15,054,047
------------------------------------------------------------------------
Weighted average basic 15,084,264 15,057,036 15,054,047
------------------------------------------------------------------------
Weighted average diluted 15,979,723 15,861,948 15,749,603
------------------------------------------------------------------------


------------------------------------------------------------------------
Q105 Q106 Q206
------------------------------------------------------------------------
Share Price: High $ 4.20 $ 6.99 $ 6.50
------------------------------------------------------------------------
Low $ 3.00 $ 5.05 $ 5.11
------------------------------------------------------------------------
Close $ 3.65 $ 6.35 $ 5.85
------------------------------------------------------------------------
Avg. daily trading volume(1) 85,336 25,560 25,109
------------------------------------------------------------------------
Shares outstanding-period end(2) 15,054,047 15,099,047 30,459,493
------------------------------------------------------------------------
Weighted average basic 11,335,241 15,099,047 19,708,637
------------------------------------------------------------------------
Weighted average diluted 11,859,756 16,047,634 20,759,015
------------------------------------------------------------------------

Note 1: The common shares of Orleans commenced trading on the TSX
Venture Exchange on January 31, 2005.

Note 2: At the Company's June 15, 2005 Shareholders Meeting, the
Company's articles were amended to reorganize its authorized
share capital. Specifically, a resolution was approved to
change the outstanding 3,950,610 non-voting common shares into
voting common shares on a 1 for 1 basis and to reduce the
maximum number of non-voting common shares that the Company
is authorized to issue to zero.

Note 3: As of the date of this MD&A, total common shares issued and
outstanding are 30,518,659.


Contractual Obligations

Orleans is committed to various contractual obligations and commitments
in the normal course of operations and financing activities. These are
outlined as follows:

------------------------------------------------------------------------
($000s) Less
than 1 - 3 4 - 5 Beyond 5
1 Year Years Years Years Total
------------------------------------------------------------------------
Bank debt(1) 34,212 - - - 34,212
------------------------------------------------------------------------
Operating lease obligations(2) 97 387 - - 484
------------------------------------------------------------------------
Asset retirement obligations(3) 147 1,329 1,244 9,080 11,800
------------------------------------------------------------------------
Total obligations 34,456 1,716 1,244 9,080 46,496
------------------------------------------------------------------------

Note 1: Revolving credit facility with a commercial bank. Refer to
Note 5 to the unaudited financial statements for the three
month period ended June 30, 2006.

Note 2: Operating lease obligations pertain to the Company's Calgary,
Alberta head office lease.

Note 3: As at June 30, 2006, total undiscounted future asset retirement
obligation costs to be accrued over the life of the remaining
total proved are estimated at $11.8 million (adjusted for
inflation). This estimate is subject to change based on
amendments to environmental laws and as new information with
respect to the Company's operations become available. Refer to
Note 6 to the unaudited financial statements for the three month
period ended June 30, 2006.

 


Off-Balance Sheet Arrangements

The Company did not enter into any off-balance sheet transactions during the three month period ended June 30, 2006.

Related Party Transactions

A director and the corporate secretary of the Company are partners at a law firm that provide legal services to the Company. During the three month period ended June 30, 2006, the Company accrued $180 thousand to this firm for legal fees primarily associated with the acquisition of both Morpheus and Mercury.

Disclosure Controls and Procedures

Orleans' disclosure controls and procedures, as defined in Multilateral Instrument 52-109 "Certification of Disclosure in Issuers' Annual and Interim Filings", were reviewed by the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based on this review and given the size and nature of the Company's operations, the Company's CEO and CFO believe the Company's disclosure controls and procedures to be effective as of June 30, 2006. All control systems by their nature have inherent limitations and therefore Orleans' disclosure controls and procedures are believed to provide reasonable, but not absolute assurance, that: i) the Company's communications with the public are timely, factual and accurate and broadly disseminated in accordance with all applicable legal and regulatory requirements, ii) non-publicly disclosed information remains confidential, and iii) trading of the Company's common shares by Orleans' directors, officers and employees remain in compliance with applicable securities laws.

The unaudited financial statements for the interim period ended June 30, 2006 are enclosed at the end of this news release.

Orleans Energy Ltd. is a Calgary, Alberta-based emerging crude oil and natural gas company, with common shares trading on the TSX Venture Exchange under the symbol "OEX". Orleans is a team of dedicated, experienced professionals focused on the creation of shareholder value via acquisition and development of crude oil and natural gas assets in Alberta.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, anticipations, expectations, opinions, forecasts, projections, guidance or other similar statements that are not statements of fact. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties, including the risk that the proposed corporate acquisitions as disclosed may not close as planned, and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement.

In this news release, reserves and production data are commonly stated in barrels of oil equivalent ("boe") using a six to one conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one to one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.



------------------------------------------------------------------------
Orleans Energy Ltd.
Consolidated Balance Sheets
(unaudited)
------------------------------------------------------------------------
June 30, 2006 December 31, 2005
ASSETS

Current Assets

Cash and cash equivalents $ 516 $ -
Accounts receivable 8,068,637 3,397,255
Prepaid expenses and deposits 796,241 305,762
Current income tax asset - 6,633,855
----------------------------------------
8,865,394 10,336,872
Property, plant and equipment
(Note 3,4) 155,267,827 33,346,079

Goodwill (Note 3) 16,465,304 -

Future income tax asset - 7,001,232
----------------------------------------
$ 180,598,525 $ 50,684,183
----------------------------------------
LIABILITIES

Current Liabilities

Accounts payable and accrued
liabilities $ 10,871,403 $ 7,597,341
Bank loan (Note 5) 34,212,778 718,800
----------------------------------------
45,084,181 8,316,141
Asset retirement obligations
(Note 6) 4,604,885 2,484,234

Future income tax liability 1,692,840 -
----------------------------------------
$ 51,381,906 $ 10,800,375
----------------------------------------
SHAREHOLDERS' EQUITY

Share capital (Note 7) 109,723,616 19,937,717
Contributed surplus (Note 8) 816,159 565,359
Retained earnings 18,676,844 19,380,732
----------------------------------------
129,216,619 39,883,808
----------------------------------------
$ 180,598,525 $ 50,684,183
----------------------------------------

Nature of Operations and Organization and Basis of Presentation
(Notes 1 & 2)

See accompanying notes to the unaudited consolidated financial
statements.


------------------------------------------------------------------------
Orleans Energy Ltd.
Consolidated Statements of Operations
(unaudited)
------------------------------------------------------------------------

Three Months Ended, Six Months Ended,
-------------------- ------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-------- ------------ ------------- ------------
Revenue
Petroleum and
natural gas
sales $ 5,911,434 $ 3,982,385 $ 11,631,113 $ 6,578,305
Royalties (983,414) (738,451) (2,187,596) (1,286,212)
----------------------------------------------------
4,928,020 3,243,934 9,443,517 5,292,093
Interest income 146,620 8,330 146,620 8,330
----------------------------------------------------
5,074,640 3,252,264 9,590,137 5,300,423
----------------------------------------------------

Expenses
Operating 1,025,177 586,963 1,994,682 1,087,722
Transportation 102,898 66,130 209,386 107,431
General and
administrative 327,270 257,031 539,707 419,040
Interest 257,309 - 307,282 40,506
Stock-based
compensation 202,231 143,325 331,022 390,707
Depletion,
depreciation and
accretion 3,626,301 1,343,030 5,547,071 2,329,776
----------------------------------------------------
$ 5,541,186 $ 2,396,479 $ 8,929,150 $ 4,375,182
----------------------------------------------------

Earnings (loss)
before taxes (466,546) 855,785 660,987 925,241

Future income taxes 879,060 - 1,364,875 -
----------------------------------------------------
Net earnings (loss) $(1,345,606) $ 855,785 $ (703,888) $ 925,241

Retained earnings
(deficit),
beginning of
period 20,022,450 (84,734) 19,380,732 (154,190)

----------------------------------------------------
Retained earnings,
end of period $18,676,844 $ 771,051 $ 18,676,844 $ 771,051
----------------------------------------------------
----------------------------------------------------

Net earnings per
share (Note 11)
Basic $ (0.07) $ 0.06 $ (0.04) $ 0.07
----------------------------------------------------
----------------------------------------------------
Diluted $ (0.07) $ 0.05 $ (0.04) $ 0.07
----------------------------------------------------
----------------------------------------------------

See accompanying notes to the unaudited consolidated financial
statements.


------------------------------------------------------------------------
Orleans Energy Ltd.
Consolidated Statements of Cash Flow
(unaudited)
------------------------------------------------------------------------

Three Months Ended, Six Months Ended,
-------------------- ------------------
Cash provided from June 30, June 30, June 30, June 30,
(used in): 2006 2005 2006 2005
-------- ------------ ------------- ------------

Operating activities
Net earnings
(loss) $(1,345,606) $ 855,785 $ (703,888) $ 925,241
Items not affecting
cash:
Depletion,
depreciation
and accretion 3,626,301 1,343,030 5,547,071 2,329,776
Stock-based
compensation 202,231 143,325 331,022 390,707
Future income
taxes 879,060 - 1,364,875 -
Asset retirement
expenditures - (22,631) - (22,631)
----------------------------------------------------

Funds from
operations 3,361,986 2,319,509 6,539,080 3,623,093
Change in non-cash
working capital 2,719,881 (60,011) 2,723,680 1,527,673
----------------------------------------------------
6,081,867 2,259,498 9,262,760 5,150,766
----------------------------------------------------

Financing activities
Increase in bank
loan 3,102,939 100,000 9,844,035 100,000
Repayment bank loan
and promissory
notes - - - (6,750,124)
Exercise of stock
options 136,600 - 136,600 50,817
Share issue
proceeds, net
issue costs 35,875,704 - 35,875,704 13,032,990
----------------------------------------------------
39,115,243 100,000 45,856,339 6,433,683
----------------------------------------------------

Investing activities
Corporate
acquisitions
(Note 3) (39,352,980) (2,861,229) (39,352,980) (2,861,229)
Property, plant
and equipment
additions (8,881,052) (5,401,558) (16,530,877) (9,611,150)
Cash acquired
through Arrangement - - - 258,087
Change in non-cash
working capital 3,036,208 2,804,005 765,274 883,148
----------------------------------------------------
(45,197,824) (5,458,782) (55,118,583) (11,331,144)
----------------------------------------------------

Increase (decrease)
in cash and cash
equivalents (714) (3,099,284) 516 253,305

Cash and cash
equivalents,
beginning of
period 1,230 3,352,589 - -

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

Cash and cash
equivalents, end
of period $ 516 $ 253,305 $ 516 $ 253,305
----------------------------------------------------
----------------------------------------------------

See accompanying notes to the unaudited consolidated financial
statements.


------------------------------------------------------------------------
Orleans Energy Ltd.
Notes to the Interim Consolidated Financial Statements
For the six month period ended June 30, 2006
------------------------------------------------------------------------

 


1. Nature of Operations and Organization

Orleans Energy Ltd. (the "Company" or "Orleans") is actively engaged in the exploration for, and development and production of natural gas, natural gas liquids and crude oil in the Western Canadian Sedimentary Basin. Orleans is incorporated under the laws of Alberta and its common shares are traded on the TSX Venture Exchange under the trading symbol "OEX".

2. Basis of Presentation

The interim consolidated financial statements included herein have been prepared by the Company without audit and include all adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company's interim results. These interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. These interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the Company's audited financial statements for the period ended December 31, 2005, and are in accordance with Canadian generally accepted accounting principles ("GAAP"). The unaudited interim consolidated financial statements contain disclosures which are incremental to the Company's financial statements for the period ended December 31, 2005. Certain disclosures, which are normally required to be included in the notes to annual financial statements, have been condensed or omitted. The interim consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the period ended December 31, 2005.

3. Corporate Acquisitions

Mercury Energy Corporation

On June 2, 2006 the Company acquired all the issued and outstanding shares of Mercury Energy Corporation ("Mercury"), a private company involved in the exploration and production of crude oil and natural gas in Central Alberta for total consideration of approximately $19.5 million. This business combination has been accounted for using the purchase method. The allocation of net assets acquired is based on the best available information at this time and could be subject to further change. The allocation of the purchase price and consideration paid is as follows:



------------------------------------------------------------------------
Consideration:
Issue of 1,623,719 common shares of Orleans $ 9,579,942
Cash 9,835,115
Transaction costs 79,548
-------------
Total consideration 19,494,605
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Assets Acquired (allocated at estimated fair values):
Property, plant and equipment $ 23,977,381
Current assets 1,289,872
Current liabilities (3,760,751)
Asset retirement obligation (525,631)
Future income tax liability (1,486,266)
-------------
Total net assets acquired 19,494,605
------------------------------------------------------------------------
------------------------------------------------------------------------

 


Morpheus Energy Corporation

On June 6, 2006 the Company acquired 99.32% of the issued and outstanding shares of Morpheus Energy Corporation ("Morpheus"), a private company involved in the exploration and production of natural gas and natural gas liquids in West Central Alberta. Orleans acquired the remaining 0.67% on July 4, 2006 pursuant to the compulsory business acquisition provisions of the Business Corporations Act (Alberta). The total consideration paid by Orleans to acquire all of the issued and outstanding shares of Morpheus was approximately $72.8 million. This business combination has been accounted for using the purchase method. The allocation of net assets acquired is based on the best available information at this time and could be subject to further change. The allocation of the purchase price and consideration paid is as follows:



------------------------------------------------------------------------
Consideration:
Issue of 7,351,727 common shares of Orleans $ 43,375,189
Cash 29,202,548
Transaction costs 235,769
-------------
Total consideration 72,813,506
------------------------------------------------------------------------
------------------------------------------------------------------------

Net Assets Acquired (allocated at estimated fair values):
Property, plant and equipment $ 86,641,203
Current assets 6,422,431
Current liabilities (22,224,740)
Goodwill 16,465,304
Asset retirement obligation (1,275,664)
Future income tax liability (13,215,028)
-------------
Total net assets acquired 72,813,506
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Property, Plant and Equipment

------------------------------------------------------------------------
June 30, 2006 December 31, 2005
---------------------------------
Petroleum and natural gas properties $ 167,032,688 $ 39,743,164
Accumulated depletion (11,856,647) (6,447,902)
---------------------------------
155,176,041 33,295,262
---------------------------------

Office equipment and other 119,033 70,583
Accumulated depreciation (27,247) (19,766)
---------------------------------
91,786 50,817
---------------------------------

Net property, plant and equipment $ 155,267,827 $ 33,346,079
------------------------------------------------------------------------
------------------------------------------------------------------------

 


During the six month period ended June 30, 2006, the Company capitalized, as part of property, plant and equipment, certain overhead expenses of $312 thousand directly related to exploration and development activities ($253 thousand for the six month period ended June 30, 2005).

At June 30, 2006, property, plant and equipment included $14.2 million relating to unproved properties (December 31, 2005: $2.72 million), which have been excluded from the amount subject to depletion and depreciation. Future development costs related to proved non-producing developed reserves of $9.19 million have been included in the amount subject to depletion (December 31, 2005: $5.01 million).

5. Bank Facility

As at June 30, 2006, the Company had a demand revolving credit facility of $53 million with a Canadian commercial bank. Amounts drawn on the bank facility bear interest at the lender's prime rate per annum. At June 30, 2006, the Company had $34.21 million of bank debt outstanding (December 31, 2005: $719 thousand). The bank facility is secured through a floating charge over all of the Company's assets and the lender reserves the right to require fixed charge security at its discretion. Under the terms of the banking arrangement, the Company is required to meet certain financial and engineering reporting requirements.

6. Asset Retirement Obligations

Orleans' asset retirement obligations are based on the Company's net ownership in wells and facilities and management's estimate of the timing and expected future costs associated with site reclamation, facilities dismantlement, and the plugging and abandonment of wells.

At June 30, 2006, the estimated present value of the total amount required to settle the asset retirement obligations was $4.60 million (December 31, 2005: $2.48 million), based on a total undiscounted future liability amount of $11.8 million (inflation adjusted) (December 31, 2005: $5.85 million). These obligations are to be settled based on the economic lives of the underlying assets, which is currently projected to be from zero to 34 years. The Company used a credit-adjusted risk free rate of 10 percent and an inflation rate of 1.5 percent to calculate the present value of the asset retirement obligations.



------------------------------------------------------------------------
Asset retirement obligations -- December 31, 2005 $ 2,484,234
------------------------------------------------------------------------
Liabilities incurred during the period 188,513
------------------------------------------------------------------------
Liabilities acquired during the period 1,801,295
------------------------------------------------------------------------
Liabilities settled during the period -
------------------------------------------------------------------------
Accretion of discount 130,843
------------------------------------------------------------------------
Asset retirement obligations -- June 30, 2006 $ 4,604,885
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Share Capital

a) Authorized

- Unlimited number of voting common shares.

b) Issued and outstanding

------------------------------------------------------------------------
Common Shares Amount
------------------------------------------------------------------------
Balance - December 31, 2005 15,099,047 $ 19,937,717
------------------------------------------------------------------------
Issued on flow-through private placement 670,000 5,025,000
------------------------------------------------------------------------
Issued on equity private placement 5,600,000 33,040,000
------------------------------------------------------------------------
Combined issue costs, net tax affect
of $738,242 (1,451,054)
------------------------------------------------------------------------
Issued on acquisition of Mercury (Note 3) 1,623,719 9,579,942
------------------------------------------------------------------------
Issued on acquisition of Morpheus (Note 3) 7,351,727 43,375,189
------------------------------------------------------------------------
Exercise of stock options 115,000 216,822
------------------------------------------------------------------------
Balance - June 30, 2006 30,459,493 $ 109,723,616
------------------------------------------------------------------------
------------------------------------------------------------------------

 


c) Shares in escrow

Of the total common shares issued through to June 30, 2006, 6,737,549 shares are currently held in escrow and may not be released from escrow and traded without the written consent of the appropriate regulatory authorities.

d) Flow-though shares

On April 27, 2006, the Company issued 670,000 flow-through common shares on a private placement basis at a price of $7.50 per share for gross proceeds of $5.025 million. Under the terms of the flow-through share agreement, the Company is committed to spend 100% of the gross proceeds on qualifying exploration expenditures prior to December 31, 2007. As at June 30, 2006, the Company has not incurred any qualifying expenditures in connection with this flow-through share financing.

8. Stock Based Compensation

a) Outstanding stock options

The Company has a stock option plan for the benefit of its directors, officers, employees and certain consultants. The Company has granted options to purchase common shares, whereby each option permits the holder to purchase one share of the Company at the stated exercise price. The options vest over a two-to-three year term and are exercisable on a cumulative basis over five years. At June 30, 2006, 2,647,905 options with a weighted average exercise price of $3.47 were outstanding and exercisable at various dates through to June 16, 2011.



The following table summarizes outstanding stock options:

------------------------------------------------------------------------
Weighted Avg.
Number Exercise Price
------------------------------------------------------------------------
Outstanding - December 31, 2005 1,509,905 $ 1.77
Granted 1,253,000 5.30
Exercised (115,000) 1.19
------------------------------------------------------------------------
Outstanding - June 30, 2006 2,647,905 $ 3.47
------------------------------------------------------------------------
------------------------------------------------------------------------

Options exercisable - June 30, 2006 660,545 $ 1.34
------------------------------------------------------------------------
------------------------------------------------------------------------


b) Exercise price range for options outstanding as at June 30, 2006:

------------------------------------------------------------------------
Outstanding Options Exercisable Options
------------------------------------------------------------------------
Weighted Weighted Avg. Weighted
Price Range Number Avg. Price Remaining Life Number Avg. Price
------------------------------------------------------------------------
$ 0.80 - 1.00 828,817 $ 0.80 3.58 years 505,878 $ 0.80
$ 3.00 - 3.74 516,588 $ 3.10 3.65 years 154,667 $ 3.09
$ 5.25 - 5.87 1,302,500 $ 5.31 4.94 years - $ -
------------------------------------------------------------------------
Total 2,647,905 $ 3.47 4.26 years 660,545 $ 1.34
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company determined the fair value of stock options granted in the
six month period ended June 30, 2006 using the modified Black-Scholes
evaluation stock option pricing model under the following assumptions:

------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Weighted-average fair value
($/option) 2.59 1.35
------------------------------------------------------------------------
Risk-free interest rate (%) 4.25 3.69
------------------------------------------------------------------------
Estimated hold period prior to
exercise (years) 5 5
------------------------------------------------------------------------
Volatility in the price of Orleans
shares (%) 50.9 67.0
------------------------------------------------------------------------
Dividend yield (%) Nil nil
------------------------------------------------------------------------


c) Contributed surplus

The following table reconciles contributed surplus as at June 30, 2006:

------------------------------------------------------------------------
June 30, December 31,
2006 2005
---------------------------
Contributed surplus, beginning of period $ 565,359 $ 217,447
Stock-based compensation recognition 331,022 369,119
Exercise of stock options (80,222) (21,207)
------------------------------------------------------------------------
Contributed surplus, ending of period $ 816,159 $ 565,359
------------------------------------------------------------------------
------------------------------------------------------------------------

 


9. Future Income Taxes

On April 10, 2006, the Alberta government substantially enacted a decrease of 1.5% to the provincial corporate income tax rate. Additionally, the Federal government substantially enacted a 2% decrease to the federal corporate income tax rate for the years 2008 through to 2010. These rate reductions, net of the changes in temporary differences from second quarter 2006 activity, resulted in the Company recognizing a future tax expense provision in the three months ended June 30, 2006 of $879 thousand as the Company's recognized income tax asset at December 31, 2005 was measured at a higher tax rate which prevailed at that time and preceded the recently enacted income tax rate reductions.

10. Hedging Instruments

From time to time, the Company may employ derivative financial instruments, primarily commodity price hedges, to manage fluctuations in oil and gas market prices. The Company may use fixed physical price arrangements, futures contracts, swaps, collars and put options with respect to a portion of its oil and gas production in order to achieve a more predictable cash flow. The Company does not utilize derivative financial instruments for speculative purposes. The Company's financial instrument contracts qualify for hedge accounting, which Orleans has elected to use. As such, derivative financial instruments accounted for as hedges are not recognized in the Company's Balance Sheet. Gains and losses related to derivative financial instruments designated as commodity price hedges are deferred and recognized in product revenues upon sale of the related hedged production.

The following table outlines the financial hedge agreement that was outstanding as at June 30, 2006. The fair value of this financial hedge agreement at June 30, 2006 was a loss of approximately C$31 thousand.



------------------------------------------------------------------------
Daily
Contract notional
Commodity Date Type Term Volume Index Price
------------------------------------------------------------------------
Crude Oil June 9, Fixed Jul '06 - 125 bbls W.T.I. US$ 73.62/bbl
2006 Swap Dec '06
------------------------------------------------------------------------


Subsequent to June 30, 2006, the Company entered into the following
financial hedge agreement:

------------------------------------------------------------------------
Daily
Contract notional
Commodity Date Type Term Volume Index Price
------------------------------------------------------------------------
Crude Oil July 6, Fixed Aug '06 - 125 bbls W.T.I. US$ 77.25/bbl
2006 Swap Jul '07
------------------------------------------------------------------------


11. Supplemental Cash Flow Information

------------------------------------------------------------------------
Three Months Ended, Six Months Ended,
------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Interest paid (net
of interest income) $ 110,689 $ - $ 160,662 $ 40,506
------------------------------------------------------------------------
Income taxes paid - - - -
------------------------------------------------------------------------

 


12. Per Share Amounts

In the calculation of diluted per share amounts, options under the Company's stock option plan are assumed to have been converted or exercised on the later of the beginning of the year and the date granted. The treasury stock method is used to determine the dilutive effect of stock options. The treasury stock method assumes that proceeds received from the exercise of in-the-money stock options in addition to the unrecognised stock-based compensation expense are used to repurchase common shares at the average market price during the respective reporting period.



------------------------------------------------------------------------
Three Months Ended, Six Months Ended,
------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Weighted average shares:
------------------------------------------------------------------------
Basic 19,708,637 15,054,047 17,416,576 13,204,917
------------------------------------------------------------------------
Diluted 20,759,015 15,749,603 18,291,678 13,798,681
------------------------------------------------------------------------

 



The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this news release. Orleans Energy Ltd.
Barry Olson
President & CEO
(403) 215-2941
Email: bolson@orleansenergy.com

or

Orleans Energy Ltd.
Dean Bernhard
Vice President, Finance & CFO
(403) 215-2945
Email: dbernhard@orleansenergy.com

or

Orleans Energy Ltd.
Head office:
Suite 1250, 521-3rd Avenue S.W.
Calgary, Alberta, T2P 3T3
(403) 261-8850 (FAX)
Website: www.orleansenergy.com