Celtic Reports 2007 Financial and Operating Results Highlighted by Significant Increases in Production and Reserves



    (Stock Symbol "CLT" - TSX)

    CALGARY, March 12 /CNW/ - Celtic Exploration Ltd. ("Celtic" or the
"Company") has released its financial and operating results for the three
months and twelve months ended December 31, 2007. Summary of results are as
follows:

    
    -------------------------------------------------------------------------
                         Three months ended           Twelve months ended
                            December 31,                  December 31,
    -------------------------------------------------------------------------
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    OPERATIONS
    -------------------------------------------------------------------------
    Production
    -------------------------------------------------------------------------
      Oil (BBLS/D)   3,230     3,290        -2%    3,107     3,284        -5%
    -------------------------------------------------------------------------
      Natural gas
       (MCF/D)      35,898    18,001        99%   28,599    16,072        78%
    -------------------------------------------------------------------------
      Combined
       (BOE/D)       9,213     6,290        46%    7,873     5,963        32%
    -------------------------------------------------------------------------
    Production
     per million
     shares
     (BOE/D)           245       196        25%      222       195        14%
    -------------------------------------------------------------------------
    Realized sales
     prices, after
     financial
     derivatives
    -------------------------------------------------------------------------
      Oil ($/BBL) $  73.30  $  58.68        25% $  68.95  $  63.78         8%
    -------------------------------------------------------------------------
      Natural gas
       ($/MCF)    $   7.29  $  10.10       -28% $   7.76  $   9.71       -20%
    -------------------------------------------------------------------------
    Operating
     netbacks
     ($/BOE)
    -------------------------------------------------------------------------
      Oil and gas
       revenue,
       before
       hedging    $  53.55  $  50.17         7% $  51.79  $  54.28        -5%
    -------------------------------------------------------------------------
      Increased
       price from
       physical
       fixed price
       contracts      0.41      3.82                0.91      4.69
    -------------------------------------------------------------------------
      Realized
       gain on
       financial
       derivatives    0.17      5.60                2.68      2.29
    -------------------------------------------------------------------------
        Realized
         sales
         price,
         after
         hedging  $  54.13  $  59.59        -9% $  55.38  $  61.26       -10%
    -------------------------------------------------------------------------
      Royalties     (12.31)    (9.67)       27%   (11.16)   (10.89)        2%
    -------------------------------------------------------------------------
      Production
       expense      (10.57)   (13.38)      -21%   (11.11)   (10.90)        2%
    -------------------------------------------------------------------------
      Transporta-
       tion and
       selling
       expense       (0.81)    (0.75)        8%    (0.87)    (0.66)       32%
    -------------------------------------------------------------------------
        Operating
         netback  $  30.44  $  35.79       -15% $  32.24  $  38.81       -17%
    -------------------------------------------------------------------------
    Drilling
     activity
    -------------------------------------------------------------------------
      Total wells        8        10       -20%       65        83       -22%
    -------------------------------------------------------------------------
      Working
       interest
       wells           8.0       8.4        -5%     56.0      62.8       -11%
    -------------------------------------------------------------------------
      Success rate
       on working
       interest
       wells           100%       65%       54%       81%       74%        9%
    -------------------------------------------------------------------------
    Undeveloped
     land
    -------------------------------------------------------------------------
      Gross acres                                327,050   323,821         1%
    -------------------------------------------------------------------------
      Net acres                                  248,135   235,308         5%
    -------------------------------------------------------------------------
    Reserves
    -------------------------------------------------------------------------
      Oil (MBBLs)                                 11,887    11,634         2%
    -------------------------------------------------------------------------
      Natural gas
       (MMCF)                                    131,253    88,327        49%
    -------------------------------------------------------------------------
      Combined
       (MBOE)                                     33,773    26,355        28%
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                         Three months ended           Twelve months ended
                            December 31,                  December 31,
    -------------------------------------------------------------------------
    ($ thousands,
     unless otherwise
     indicated)       2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    FINANCIAL
    -------------------------------------------------------------------------
    Revenue,
     before
     royalties
     and
     financial
     derivatives  $ 45,734  $ 31,241        46% $151,443  $128,344        18%
    -------------------------------------------------------------------------
    Funds from
     operations   $ 23,246  $ 19,183        21% $ 83,340  $ 78,541         6%
    -------------------------------------------------------------------------
    Funds from
     operations
     per share,
     diluted
     ($SHARE)     $   0.61  $   0.68       -10% $   2.32  $   2.50        -7%
    -------------------------------------------------------------------------
    Net earnings  $  3,507  $  6,599       -47% $  8,198  $ 35,231       -77%
    -------------------------------------------------------------------------
    Earnings per
     share,
     diluted
     ($/SHARE)    $   0.09  $   0.52       -83% $   0.23  $   1.12       -79%
    -------------------------------------------------------------------------
    Capital
     expenditures,
     net of
     dispositions $ 25,156  $ 32,051       -22% $179,789  $164,050        10%
    -------------------------------------------------------------------------
    Bank debt,
     net of
     working
     capital                                    $136,249  $ 98,236        39%
    -------------------------------------------------------------------------
    Common shares
     outstanding
     (000's)
    -------------------------------------------------------------------------
      Basic                                       37,666    32,180        17%
    -------------------------------------------------------------------------
      Diluted                                     40,492    34,810        16%
    -------------------------------------------------------------------------
    Net asset
     value, 8%
     discount,
     before tax
     ($/SHARE)                                  $  12.99  $  13.37        -3%
    -------------------------------------------------------------------------
    


    2007 HIGHLIGHTS

    The year ended December 31, 2007 was another successful year in the
execution of the Company's growth strategy. Highlights for 2007 are as
follows:

    
    -   Accumulated 89 (76 net) sections of land in the greater Kaybob area
        where the Company has made liquids-rich natural gas new pool
        discoveries in the Montney and Nordegg formations;

    -   Generated gross proceeds of $70.9 million by completing an equity
        financing that resulted in the issuance of 3.2 million common shares
        at a price of $14.35 per share and a flow-through share private
        placement that resulted in the issuance of 1.5 million common shares
        at a price of $16.65 per share;

    -   Drilled 65 (56.0 net working interest) wells during the year
        resulting in 7 (5.7 net) oil wells, 38 (37.3 net) natural gas wells
        and 8 (2.6 net) coal bed methane wells, for an overall success rate,
        based on net wells, of 81%;

    -   Reported funds from operations per share, diluted, of $2.32, a
        decrease of 7% from $2.50 per share in the previous year;

    -   Generated an average operating netback of $32.24 per BOE, down 17%
        from $38.81 per BOE in 2006;

    -   Increased average daily production by 32% to 7,873 BOE per day, up
        from 5,963 BOE per day in 2006 and achieved daily average production
        per million shares of 222 BOE per day, up 14% in 2007 compared to
        195 BOE per day in the previous year;

    -   Increased proved plus probable reserves by 28% to 33.7 million BOE,
        up from 26.4 million BOE at December 31, 2006 and increased net
        undeveloped land holdings by 5% to 248,135 acres compared to
        235,308 acres at December 31, 2006; and

    -   Reported a net asset value per share at year-end of $12.99, based on
        net present value of reserves discounted at 8%, before tax and
        $11.80 per share using a 10% discount rate, before tax.
    

    PRESIDENT'S MESSAGE TO SHAREHOLDERS

    Celtic is pleased to report to shareholders on the Company's activities
in 2007. Once again, Celtic achieved considerable production and reserves
growth in 2007. This occurred during a period which saw industry wide natural
gas prices and associated cash flows continue to erode. Celtic was able to
maintain its active drilling program during the year with the help of higher
priced natural gas financial derivative and fixed price physical contracts. In
addition, the Company's production, with a 40% weighting to light oil and
liquids, helped enhance the company's cash flow during a period of rising oil
prices.
    Funds from operations of $83.3 million, along with new equity financings
totaling $70.8 million (net of costs), contributed towards financing the
Company's $179.8 million capital expenditure program in 2007.
    Along with an active drilling program, Celtic constructed and acquired
considerable facility and pipeline infrastructure at its main producing area
in Kaybob. Approximately $38.0 million was spent on building infrastructure in
2007 and was augmented with a $45.6 million acquisition in the Kaybob area,
which consisted of significant compression facilities and pipelines which were
already being used by Celtic. Ownership of these facilities will result in
lower operating costs in the Company's main operating area, as Celtic
continues to develop the newly discovered Montney natural gas pools over the
next several years. In addition, during the first quarter of 2008, Celtic
completed the installation of a third compressor at its 100% owned main
Kaybob South pool, bringing the total compression capacity in this block to
approximately 36.0 MMCF per day. With this increased compression capacity, the
Company has brought on-stream additional wells that were drilled at
Kaybob South in January and February 2008. Based on field estimates, Celtic's
current production now exceeds 10,000 BOE per day.
    Celtic presently owns 89 (76 net) sections of land in the Kaybob area of
Alberta. The Company has discovered and identified four Montney liquids-rich
natural gas pools on these lands, which Celtic commenced acquiring in 2005. To
date, only the Kaybob South pool has been down-spaced to three wells per
section and development is underway. Initially, the pools are being delineated
by drilling one well per section and then during the development stage,
horizontal wells are being drilled. The horizontal wells are completed using
multi-stage fracture technology with five to seven intervals resulting in
significantly higher production and reserve recovery rates compared to
vertical wells. These wells, at realized natural gas prices of $6.50 per mcf,
are expected to payout in less than one year and are forecasted to produce
over the next 20 to 30 years.
    Celtic added 10.3 million BOE of proved plus probable reserves in 2007.
This was done at competitive finding, development and acquisition ("FD&A")
costs of $19.27 per BOE (including future development capital costs),
especially considering the significant amount of land and facility
infrastructure expenditures that were included in the FD&A calculation in
2007. With an operating netback of $32.24 per BOE, Celtic achieved a recycle
ratio of 1.7 times for 2007. Since inception, the Company's recycle ratio is
2.1 times. Celtic's reserve life index as at December 31, 2007 was 10.0 years
and with a large portfolio of development drilling inventory at Kaybob, Celtic
will continue to add long-life and high net back reserves over the next
several years.
    With the recent strength in early 2008 in prices for both commodities,
Celtic is well positioned with its strong balance sheet and available bank
lines to continue an aggressive growth strategy. With an initial capital
budget of $120.0 million, the Company is currently in a strong financial
position and has the flexibility to either complete an acquisition or increase
its development drilling program at Kaybob.

    PRODUCTION

    Oil and gas production in 2007 increased 32% to average 7,873 BOE
(40% oil) per day compared to 5,963 BOE (55% oil) per day in 2006. Average
production in the fourth quarter of 2007 was 9,213 BOE (35% oil) per day.
Production per million shares outstanding in 2007 averaged 222 BOE per day, up
14% from 195 BOE per day in 2006.
    Celtic's production is entirely based in Alberta and is divided into four
core areas. In Southern Alberta, the Company's primary natural gas producing
properties are located at Drumheller, Michichi and Richdale and its primary
oil producing properties are located at Princess and Bantry. In East Central
Alberta, the principal producing asset is a shallow natural gas property at
Ashmont and Figure Lake. In Northern Alberta, the Company produces mainly
light oil from Ogston, Otter and Utikuma Lake. In West Central Alberta, Celtic
has both natural gas and light oil production at Kaybob South, Fox Creek and
Swan Hills. West Central Alberta will be the Company's most active drilling
area in 2008. In 2007, approximately 70% of Celtic's production came from this
area. The following table provides a summary of daily average production in
each core area:

    
    -------------------------------------------------------------------------
    PRINCIPAL PRODUCING PROPERTIES
    -------------------------------------------------------------------------
                                        Year ended   Year ended   Year ended
                                       December 31, December 31, December 31,
    (BOE/d)                                   2007         2006         2005
    -------------------------------------------------------------------------
    West Central Alberta                     5,498        3,049        1,530
    -------------------------------------------------------------------------
    Southern Alberta                         1,503        1,838        1,865
    -------------------------------------------------------------------------
    Northern Alberta                           438          605          638
    -------------------------------------------------------------------------
    East Central Alberta                       434          471          390
    -------------------------------------------------------------------------
    TOTAL                                    7,873        5,963        4,423
    -------------------------------------------------------------------------
    

    REVENUE

    Revenue, before royalties, and before realized and unrealized gains or
losses on financial derivatives, for the year ended December 31, 2007 was
$151.4 million, an increase of 18% compared to $128.3 million in the previous
year. For the three months ended December 31, 2007, revenue was $45.7 million,
up 46% from $31.2 million in the fourth quarter of 2006. The breakdown of
revenue for the past three years is summarized in the following table:

    
    -------------------------------------------------------------------------
    REVENUE
    -------------------------------------------------------------------------
                          Year ended          Year ended          Year ended
                         December 31,        December 31,        December 31,
                                2007                2006                2005
    -------------------------------------------------------------------------
                   ($000's)   ($/BOE)  ($000's)   ($/BOE)  ($000's)   ($/BOE)
    -------------------------------------------------------------------------
    Oil revenue     78,267     69.02    78,421     65.43    57,176     62.06
    -------------------------------------------------------------------------
    Natural gas
     revenue        73,176     42.06    49,923     51.12    40,031     57.78
    -------------------------------------------------------------------------
    Royalties      (32,062)   (11.16)  (23,710)   (10.19)  (17,730)   (10.98)
    -------------------------------------------------------------------------
    Realized gain
     (loss) on
     financial
     derivatives     7,702      2.68     4,993      2.29    (2,899)    (1.80)
    -------------------------------------------------------------------------
    Unrealized
     gain (loss)
     on financial
     derivatives   (12,711)    (4.42)   13,635      6.27         -         -
    -------------------------------------------------------------------------
    REVENUE        114,372     39.80   123,262     56.64    76,578     47.43
    -------------------------------------------------------------------------
    

    The combined average product price received for oil and gas sales,
adjusted for realized gains or losses on financial derivatives for the year
ended December 31, 2007 was $55.38 per BOE, a decrease of 10% compared to the
previous year. For the three months ended December 31, 2007, the average
adjusted product price received was $54.13 per BOE, down 9% from the average
adjusted price received in the fourth quarter of 2006.

    OIL OPERATIONS

    Oil production for the year ended December 31, 2007 averaged 3,107 bbls
per day, a decrease of 5% compared to the previous year. For the three months
ended December 31, 2007, average oil production was 3,230 bbls per day, down
2% from the fourth quarter of 2006.
    The average price received for oil sales, after realized financial
derivatives, for the year ended December 31, 2007 was $68.95 per bbl, an
increase of 8% compared to the previous year. For the three months ended
December 31, 2007, the average oil price received was $73.30 per bbl, up 25%
from the average price received in the fourth quarter of 2006.
    For the year ended December 31, 2007, average oil royalties were 22.5% of
sales, after financial derivatives (22.4% of sales, before financial
derivatives). In the previous year, average oil royalties were 21.0% of sales,
after financial derivatives (20.5% of sales, before financial derivatives).
    Transportation and selling expenses for oil production in 2007 averaged
$0.71 per bbl compared to $0.54 per bbl in 2006. The higher per unit cost in
2007 reflects the larger percentage of oil production that was trucked in
contrast to the previous year.
    For the year ended December 31, 2007, production expenses were $13.99 per
bbl. In the previous year, production expenses were $12.30 per bbl. The higher
per unit production expense in 2007 reflects the higher costs incurred to
operate oil handling facilities.

    The breakdown of oil netbacks is summarized in the following table:

    
    -------------------------------------------------------------------------
    OIL NETBACK
    -------------------------------------------------------------------------
                          Year ended          Year ended          Year ended
                         December 31,        December 31,        December 31,
                                2007                2006                2005
    -------------------------------------------------------------------------
                   (BBLS/d)   ($/BBL)  (BBLS/d)   ($/BBL)  (BBLS/d)   ($/BBL)
    -------------------------------------------------------------------------
    Daily average
     production      3,107               3,284               2,524
    -------------------------------------------------------------------------
    Sales price                69.02               65.43               62.06
    -------------------------------------------------------------------------
    Gain (loss)
     on financial
     derivatives               (0.07)              (1.65)              (3.15)
    -------------------------------------------------------------------------
    Royalties                 (15.49)             (13.40)             (10.58)
    -------------------------------------------------------------------------
    Production
     expense                  (13.99)             (12.30)             (10.93)
    -------------------------------------------------------------------------
    Transportation
     and selling
     expense                   (0.71)              (0.54)              (0.61)
    -------------------------------------------------------------------------
    OIL NETBACK                38.76               37.54               36.79
    -------------------------------------------------------------------------
    

    NATURAL GAS OPERATIONS

    Natural gas production for the year ended December 31, 2007 averaged
28,599 mcf per day, an increase of 78% compared to the previous year. For the
three months ended December 31, 2007, average natural gas production was
35,898 mcf per day, up 99% from the fourth quarter of 2007. Increases in
natural gas production in 2007 were primarily a result of Celtic's successful
drilling results at Kaybob South, Alberta.
    The average price received for natural gas sales, after realized
financial derivatives, for the year ended December 31, 2007 was $7.76 per mcf,
a decrease of 20% compared to the previous year. For the three months ended
December 31, 2007, the average natural gas price received was $7.29 per mcf,
down 28% from the average price received in the fourth quarter of 2006.
    For the year ended December 31, 2007, average natural gas royalties were
17.9% of sales, after financial derivatives (19.8% of sales, before financial
derivatives). In the previous year, average natural gas royalties were
13.4% of sales, after financial derivatives (15.3% of sales, before financial
derivatives). Lower royalty rates in 2006 were primarily a result of
significant increases in revenue resulting from physical fixed price contracts
and realized gains on financial derivatives. Actual royalties payable are
based on an Alberta reference price and not on actual corporate realized
prices. In addition, higher royalty rates in 2007 reflect the expiration of
certain royalty holiday wells during the year and the acquisition of certain
higher royalty rate wells that were completed in 2007.
    Transportation and selling expenses for the year ended December 31, 2007
were $0.16 per mcf, an increase of 23% compared to $0.13 per mcf for the
previous year. With a 78% increase in natural gas production in 2007 over the
previous year, per unit transportation costs were higher in 2007 as a result
of the higher per unit costs relating to the increased production.
    For the year ended December 31, 2007, production expenses were relatively
unchanged from the previous year. In 2007 production expenses were $1.54 per
mcf compared to $1.53 per mcf in the previous year.

    The breakdown of natural gas netbacks is summarized in the following
table:

    
    -------------------------------------------------------------------------
    NATURAL GAS NETBACK
    -------------------------------------------------------------------------
                          Year ended          Year ended          Year ended
                         December 31,        December 31,        December 31,
                                2007                2006                2005
    -------------------------------------------------------------------------
                    (MCF/d)   ($/MCF)   (MCF/d)   ($/MCF)   (MCF/d)   ($/MCF)
    -------------------------------------------------------------------------
    Daily average
     production     28,599              16,072              11,396
    -------------------------------------------------------------------------
    Sales price                 7.01                8.52                9.63
    -------------------------------------------------------------------------
    Gain on
     financial
     derivatives                0.75                1.19                   -
    -------------------------------------------------------------------------
    Royalties                  (1.39)              (1.30)              (1.92)
    -------------------------------------------------------------------------
    Production
     expense                   (1.54)              (1.53)              (1.27)
    -------------------------------------------------------------------------
    Transportation
     and selling
     expense                   (0.16)              (0.13)              (0.15)
    -------------------------------------------------------------------------
    NATURAL GAS
     NETBACK                    4.67                6.75                6.29
    -------------------------------------------------------------------------
    

    FUTURE CHANGES TO ROYALTIES

    On October 25, 2007, the Government of Alberta released a report entitled
"The New Royalty Framework" ("NRF") whereby Crown royalty rates will change
effective January 1, 2009. Included in the NRF is a lower royalty rate
incentive for deep natural gas wells which Celtic is assuming will apply to
qualifying wells, regardless of when they were drilled.
    The Company has not used the new proposed royalty rates in its
December 31, 2007 independent reserves evaluation, as these changes had not
been enacted into law as at December 31, 2007. However, Celtic has prepared an
internal re-run of its December 31, 2007 reserves evaluation using the new
royalty rates proposed in NRF, without changing the forecasted commodity
prices in the evaluation. The results indicate that royalties' payable in 2009
would increase by 5.6% and therefore, negatively affect estimated 2009 cash
flow by 2.6%. However, the net present value of reserves, using a 10% discount
rate, before tax, and proved plus probable reserves, would increase by 2.0%.
    The government is currently reviewing certain possible unintended
consequences of NRF and Celtic expects further clarification from the
government soon. The Company has been pro-active during the process and has
provided the government with documentation that Celtic believes highlights
possible unintended consequences that require further attention.

    INTEREST EXPENSE

    The Company has a committed term credit facility. The authorized
borrowing amount under this facility is $165.0 million. Interest is payable
monthly for borrowings through direct advances. Under the credit facility,
borrowings through the use of bankers' acceptances are also available.
Security is provided for by a floating charge debenture over all assets in the
amount of $250.0 million, general assignment of book debts and a fixed charge
on the Company's major producing petroleum and natural gas properties.
Repayments of principal are not required provided that the borrowings under
the facility do not exceed the authorized borrowing amount and the Company is
in compliance with all covenants, representations and warranties. The credit
facility revolves until May 3, 2008, at which time the financial institutions
will complete their annual review.
    Interest expense for the year was $6.3 million at an average rate of 5.8%
compared to $4.0 million at an average rate of 5.6% in 2006.

    GENERAL AND ADMINISTRATIVE EXPENSES

    General and administrative expenses for the year ended December 31, 2007
were $3.0 million or $1.06 per BOE compared to $2.0 million or $0.91 per BOE
in 2006. General and administrative expenses are reduced by overhead recovered
on Company operated properties. In addition, salaries relating to geological
and geophysical personnel are capitalized.

    STOCK BASED COMPENSATION EXPENSE

    For the year ended December 31, 2007, stock based compensation expense
was $1.5 million, compared to $1.1 million in 2006. The fair value of each
option granted is estimated on the date of grant using the Black-Scholes
option pricing model.

    DEPLETION, DEPRECIATION AND AMORTIZATION

    The Company follows the full cost method of accounting whereby all costs
relating to the exploration and development of oil and gas reserves are
capitalized. These capitalized costs along with estimated future capital
expenditures to be incurred in order to develop proved reserves, are depleted
and depreciated on a unit of production basis using estimated proved oil and
gas reserves.
    Depreciation of furniture and office equipment is provided using the
declining balance method at a rate of 25%. Estimated future costs relating to
asset retirement obligations are provided for on a unit of production basis,
and the provision is included in depletion, depreciation and amortization.
    Depletion, depreciation and amortization expense for the period ended
December 31, 2007 was $63.2 million or $21.98 per BOE, compared to the
previous year's amount of $43.4 million or $19.96 per BOE.

    CEILING TEST

    The Company performed a ceiling test calculation at December 31, 2007 in
accordance with the CICA full cost accounting guidelines. As a result of the
calculation, Celtic was not required to record an impairment loss. In
addition, based on the calculation in the previous year conducted at
December 31, 2006, there was no impairment loss required.

    TAXES

    For the year ended December 31, 2007, Celtic provided for a recovery of
future income taxes in the amount of $2.5 million. This amount differs from
the expected provision for income taxes of $1.8 million based on the statutory
combined income tax rate of 32.1% due to the differences between
non-deductible stock based compensation costs and the recognition of a benefit
of $4.8 million primarily relating to substantively enacted changes to future
federal income tax rates. An analysis of the income tax provision is included
in the notes to the financial statements. At December 31, 2007, Celtic had
unused income tax deductions available of approximately $304.5 million.

    NET EARNINGS AND FUNDS FROM OPERATIONS

    Net earnings for the year ended December 31, 2007 was $8.2 million
($0.23 per share, basic and $0.23 per share, diluted). During the same period,
funds from operations were $83.3 million ($2.34 per share, basic and
$2.32 per share, diluted).
    On a barrel of oil equivalent basis, funds from operations in 2007 were
$29.00 per BOE, down 20% from $36.08 per BOE in 2006. The primary reason for
the decrease in 2007 was a result of lower natural gas prices realized during
the year. The following table provides detailed unit statistics on a barrel of
oil equivalent basis:

    
    -------------------------------------------------------------------------
    UNIT STATISTICS
    -------------------------------------------------------------------------
                          Year ended          Year ended          Year ended
                         December 31,        December 31,        December 31,
                                2007                2006                2005
    -------------------------------------------------------------------------
                    (BOE/d)   ($/BOE)   (BOE/d)   ($/BOE)   (BOE/d)   ($/BOE)
    -------------------------------------------------------------------------
    Daily average
     production      7,873               5,963               4,423
    -------------------------------------------------------------------------
    Sales price                52.70               58.97               60.21
    -------------------------------------------------------------------------
    Gain (loss)
     on financial
     derivatives                2.68                2.29               (1.80)
    -------------------------------------------------------------------------
    Royalties                 (11.16)             (10.89)             (10.98)
    -------------------------------------------------------------------------
    Production
     expense                  (11.11)             (10.90)              (9.51)
    -------------------------------------------------------------------------
    Transportation
     and selling
     expense                   (0.87)              (0.66)              (0.72)
    -------------------------------------------------------------------------
    OPERATING
     NETBACK                   32.24               38.81               37.20
    -------------------------------------------------------------------------
    General and
     administra-
     tive expense              (1.06)              (0.91)              (1.18)
    -------------------------------------------------------------------------
    Interest
     expense                   (2.18)              (1.82)              (0.67)
    -------------------------------------------------------------------------
    Capital tax                    -                   -               (0.06)
    -------------------------------------------------------------------------
    FUNDS FROM
     OPERATIONS                29.00               36.08               35.29
    -------------------------------------------------------------------------
    Unrealized
     gain (loss)
     on financial
     derivatives               (4.42)               6.27                   -
    -------------------------------------------------------------------------
    Stock based
     compensation
     expense                   (0.51)              (0.52)              (0.52)
    -------------------------------------------------------------------------
    Depletion,
     depreciation
     and
     amortization             (21.98)             (19.96)             (17.89)
    -------------------------------------------------------------------------
    Accretion of
     asset
     retirement
     obligation                (0.11)              (0.24)              (0.13)
    -------------------------------------------------------------------------
    Future income
     tax                        0.87               (5.45)              (5.44)
    -------------------------------------------------------------------------
    NET EARNINGS                2.85               16.18               11.31
    -------------------------------------------------------------------------
    

    CAPITAL EXPENDITURES

    Celtic is committed to future growth through its strategy to augment
strategic oil and gas acquisitions with exploitation upside, and at the same
time, implement a full cycle exploration and development program. Since the
Company began active oil and gas operations in September 2002, Celtic has
completed several acquisitions in order to establish a cash flow platform and
an inventory of exploration and development prospects from which the Company
can grow through the drill bit. Examples of where Celtic has successfully
employed its strategy to acquire an initial position in an area and
subsequently expand the area making it core to the Company include
Princess/Bantry, Ashmont, Fox Creek and Swan Hills.
    During the year ended December 31, 2007, Celtic incurred $135.6 million
on exploration and development activity, $45.6 million on property
acquisitions and recorded net proceeds of $1.4 million from property
dispositions. Drilling and completion operations accounted for $90.9 million
and equipment and facility expenditures were $38.1 million. The balance of
$6.6 million was spent on land and seismic, building the Company's inventory
of prospects for future drilling. Approximately 74% of net wells drilled were
development and 26% were exploratory.

    UNDEVELOPED LAND

    As at December 31, 2007, Celtic owned 248,135 net acres of undeveloped
land, representing a 5% increase compared to 235,308 net acres at the end of
2006. Approximately 5% of the Company's undeveloped land position is subject
to expiry in 2008, if not developed. Celtic holds an average working interest
of 76% in its undeveloped lands.
    In 2007, Celtic incurred $4.0 million at Alberta Crown land sales
acquiring 27,824 net acres of petroleum and natural gas rights at an average
cost of $144 per acre; compared to an industry average of $150 per acre. These
prices were significantly lower than the previous year in which Celtic spent
$20.2 million acquiring 68,950 net acres at an average cost of $293 per acre,
compared to the 2006 industry average of $325 per acre. Over 55% of Celtic's
2007 land expenditures were directed towards expanding the Company's acreage
position at Kaybob, Alberta, primarily focused on the acquisition of highly
prospective Montney rights.
    Since inception, Celtic's land acquisition strategy has been focused on
building a significant land base of high working interest prospects. During
the past two years, Celtic has been successful with this strategy at Kaybob,
Alberta, where the Company has an average working interest of 85% in
approximately 57,000 acres of developed and undeveloped lands.
    Looking ahead to 2008, Celtic will continue its internally generated,
prospect-driven land acquisition strategy. This strategy will be complemented
by third party farm-in arrangements in core exploration areas. Celtic's land
acquisition strategy remains focused on building a significant base of high
working interest operated prospects, ensuring the Company is in a position to
control its capital expenditure program.

    DRILLING

    During the year ended December 31, 2007, Celtic drilled 65 (56.0 net)
wells compared to 83 (62.8 net) wells in the previous year, with an overall
success rate of 81% (74% in 2006) on net wells drilled. The Company's average
working interest in wells drilled during 2007 increased to 86% compared to an
average working interest of 76% in 2006. The split between development
drilling and exploratory drilling was 74% (53% in 2006) and 26% (47% in 2006),
respectively. The average measured depth of net wells drilled was
2,200 metres, 5% less deep than the average drilling depth of 2,311 metres in
2006.

    RESERVES

    Celtic retains Sproule Associates Limited ("Sproule"), an independent
qualified reserve evaluator to prepare a report on 100% of its oil and gas
reserves. The Company has a Reserves Committee which oversees the selection,
qualifications and reporting procedures of the independent engineering
consultants.
    Reserves as at December 31, 2007 were determined using the guidelines and
definitions set out under National Instrument 51-101 ("NI 51-101").
    At December 31, 2007, Celtic's proved plus probable reserves were
33.8 million BOE, up 28% from 26.4 million BOE at the end of 2006. The
following table outlines the change in the Company's reserves year-over-year
including discoveries, drilling extensions and improved recoveries, technical
revisions, economic factors, dispositions, and production:

    
    -------------------------------------------------------------------------
    RESERVES RECONCILIATION
    -------------------------------------------------------------------------
                          OIL              NATURAL GAS           COMBINED
    -------------------------------------------------------------------------
                     Total  Proved +     Total  Proved +     Total  Proved +
                    Proved  Probable    Proved  Probable    Proved  Probable
                    (MMBLs)   (MBBLs)    (MMCF)    (MMCF)    (MBOE)    (MBOE)
    -------------------------------------------------------------------------
    Balance,
     December 31,
     2006            6,770    11,634    48,999    88,327    14,937    26,355
    -------------------------------------------------------------------------
    Technical
     revisions         (75)   (1,788)   12,617       164     2,028    (1,761)
    -------------------------------------------------------------------------
    Discoveries         61        81     1,691     2,249       343       456
    -------------------------------------------------------------------------
    Extensions and
     improved
     recoveries        752     1,290    17,029    33,106     3,590     6,808
    -------------------------------------------------------------------------
                       337       514    11,738    18,711     2,293     3,633
    -------------------------------------------------------------------------
    Economic
     factors            78       177       266       490       121       259
    -------------------------------------------------------------------------
    Acquisitions       958     1,637    10,005    17,356     2,626     4,530
    -------------------------------------------------------------------------
    Dispositions         -         -         -         -         -         -
    -------------------------------------------------------------------------
    Net additions    1,774     1,397    41,608    53,365     8,708    10,292
    -------------------------------------------------------------------------
    Production      (1,134)   (1,134)  (10,439)  (10,439)   (2,874)   (2,874)
    -------------------------------------------------------------------------
    Balance,
     December 31,
     2007            7,410    11,897    80,168   131,253    20,771    33,773
    -------------------------------------------------------------------------
    Percentage
     increase in
     reserves            9%        2%       64%       49%       39%       28%
    -------------------------------------------------------------------------
    

    The Company increased the net present value of proved plus probable
reserves, discounted at 10% before tax, to $538.7 million, up 14% from
$470.6 million at December 31, 2006. The reserve life index remains strong at
10.0 years compared to 11.5 years at December 31, 2006. At December 31, 2006,
proved plus probable reserves were 35% oil and 65% natural gas.
    Oil prices have steadily increased over the past five years; whereas,
natural gas prices have traded in a narrow range, except in 2005 when gas
prices were higher due to the impact of supply interruptions resulting from
hurricane activity. However, current futures contracts indicate that prices
for both oil and gas, are expected to be higher in future years compared to
historical averages.
    Sproule is forecasting WTI oil prices to average US$85.06 per bbl over
the next five years, 59% higher than the average price of US$53.48 per bbl
over the past five years. Similarly for natural gas, Henry Hub NYMEX natural
gas prices are forecasted to average US$8.40 per mmbtu over the 2008 to 2012
period, an increase of 23% from the average price of US$6.85 per mmbtu during
the 2003 to 2007 period.
    During 2007, the Company's capital expenditures, net of dispositions,
resulted in proved plus probable reserve additions of 10.3 million
(10.0 million in 2006) BOE, resulting in finding, development and acquisition
("FD&A") costs of $17.47 ($16.40 in 2006) per BOE, before future capital and
$19.27 ($19.56 in 2006) per BOE, including future capital.
    The recycle ratio is a measure for evaluating the effectiveness of a
company's re-investment program. The ratio measures the efficiency of capital
investment. It accomplishes this by comparing the operating netback per BOE to
that years' reserve FD&A cost per BOE. Since incorporation, Celtic has
successfully achieved a recycle ratio of 2.1 times on a proved plus probable
basis.
    The following table provides detailed calculations relating to FD&A costs
and recycle ratios for 2007:

    
    -------------------------------------------------------------------------
    FINDING, DEVELOPMENT   Year ended   Year ended   Year ended    Cumulative
     AND ACQUISITION      December 31, December 31, December 31,        since
     COSTS                       2007         2006         2005 incorporation
    -------------------------------------------------------------------------
    PROVED RESERVES
    -------------------------------------------------------------------------
    Capital expenditures
     ($000's)                 179,789      164,050      119,230      604,397
    -------------------------------------------------------------------------
    Change in future capital
     costs required to
     develop reserves
     ($000's)                   6,998       18,811        7,211       37,850
    -------------------------------------------------------------------------
    Total capital costs
     ($000's)                 186,787      182,861      126,441      642,247
    -------------------------------------------------------------------------
    Reserve additions, net
     (MBOE)                     8,708        6,010        5,631       29,500
    -------------------------------------------------------------------------
    FD&A cost, before future
     capital ($/BOE)            20.65        27.30        21.17        20.49
    -------------------------------------------------------------------------
    FD&A cost, including
     future capital ($/BOE)     21.45        30.43        22.45        21.77
    -------------------------------------------------------------------------
    Operating netback
     ($/BOE)                    32.24        38.81        37.20        33.56
    -------------------------------------------------------------------------
    Recycle ratio - proved        1.5          1.3          1.7          1.5
    -------------------------------------------------------------------------
    PROVED PLUS PROBABLE
     RESERVES
    -------------------------------------------------------------------------
    Capital expenditures
     ($000's)                 179,789      164,050      119,230      604,397
    -------------------------------------------------------------------------
    Change in future
     capital costs
     required to develop
     reserves ($000's)         18,508       31,690       13,856       72,106
    -------------------------------------------------------------------------
    Total capital costs
     ($000's)                 198,297      195,740      133,086      676,503
    -------------------------------------------------------------------------
    Reserve additions,
     net (MBOE)                10,292       10,005        9,089       42,502
    -------------------------------------------------------------------------
    FD&A cost, before
     future capital
     ($/BOE)                    17.47        16.40        13.12        14.22
    -------------------------------------------------------------------------
    FD&A cost, including
     future capital
     ($/BOE)                    19.27        19.56        14.64        15.92
    -------------------------------------------------------------------------
    Operating netback
     ($/BOE)                    32.24        38.81        37.20        33.56
    -------------------------------------------------------------------------
    Recycle ratio -
     proved plus
     probable                     1.7          2.0          2.5          2.1
    -------------------------------------------------------------------------
    

    Celtic's 2007 capital investment program replaced 2007 production by a
factor of 3.0 (2.8 in 2006) times on a proved basis and 3.6 (4.6 in 2006)
times on a proved plus probable basis.

    NET ASSET VALUE

    Celtic's net asset value at December 31, 2007, discounting the present
value of reserves at 10% before tax, increased to $477.9 million
($526.1 million using an 8% discount rate, before tax), up 12% from
$426.4 million at December 31, 2006. On a per share basis, net asset value
decreased by 4% to $11.80 per share ($12.99 per share using an 8% discount
rate, before tax).
    The present value of petroleum and natural gas ("P&NG") reserves were
determined by Sproule in their year-end evaluation report. Undeveloped land at
December 31, 2007 was valued at an average price of $182 per acre. The
components of net asset value are summarized in the following table:

    
    -------------------------------------------------------------------------
    NET ASSET VALUE
    -------------------------------------------------------------------------
                                       December 31, December 31, December 31,
                                              2007         2007         2006
                                          Forecast     Forecast     Forecast
                                            Prices       Prices       Prices
                                       8% Discount 10% Discount 10% Discount
                                              Rate         Rate         Rate
                                           ($000's)     ($000's)     ($000's)
    -------------------------------------------------------------------------
    Present value of P&NG reserves,
     discounted, before tax                586,964      538,719      470,559
    -------------------------------------------------------------------------
    Undeveloped land                        45,195       45,195       32,949
    -------------------------------------------------------------------------
    Bank debt, net of working capital     (136,249)    (136,249)     (98,236)
    -------------------------------------------------------------------------
    Proceeds from exercise of stock
     options                                30,197       30,197       21,097
    -------------------------------------------------------------------------
    Net asset value                        526,107      477,862      426,369
    -------------------------------------------------------------------------
    Diluted common shares outstanding
     (000's)                                40,492       40,492       34,810
    -------------------------------------------------------------------------
    Net asset value per share ($/SHARE)      12.99        11.80        12.25
    -------------------------------------------------------------------------
    

    

SOURCE OF FUNDS Investment funding for capital expenditures incurred in 2007 was provided by proceeds from equity financings, bank debt and cash provided by operating activities. In February 2007, the Company issued 1.5 million common shares on a flow-through basis by way of private placement, at a price of $16.65 per share and in June 2007, Celtic completed the issuance of 3.2 million common shares by way of private placement, at a price of $14.35 per share. These equity offerings resulted in gross proceeds of $70.9 million. The Company has in place a committed term credit facility with Canadian financial institutions. The maximum amount available to be drawn under this facility at December 31, 2007 was $165.0 million. At December 31, 2007, Celtic had drawn $119.9 million, leaving sufficient unused credit lines available to fund on-going capital expenditures. Repayments of principal are not required provided that the borrowings under the facility do not exceed the authorized borrowing amount and the Company is in compliance with all covenants, representations and warranties. The maximum amount available under this credit facility may increase after the Company's lenders complete their annual review in May 2008. In order to fund all capital expenditures incurred in 2007, the Company augmented its equity financing and bank borrowings by generating $85.1 million in cash provided by operating activities for the year ended December 31, 2007. Celtic expects to fund future capital expenditures through the use of a combination of cash provided by operating activities and bank debt, supplemented by new equity share offerings, as required. WORKING CAPITAL The capital intensive nature of Celtic's activities may create a working capital deficiency position during periods with high levels of capital investment. However, during such periods, the Company maintains sufficient unused bank credit lines to satisfy such working capital deficiencies. At December 31, 2007, the working capital amount plus outstanding bank debt represented 83% of the Company's maximum authorized bank borrowing credit limit. Celtic actively manages the pace of its capital spending program by monitoring forecasted production and commodity prices and resulting cash flows. Should circumstances affect cash flow in a detrimental way, the Company is capable of reducing capital investment levels. SHARE INFORMATION The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares. As at December 31, 2007, there were 37.7 million common shares outstanding. There were no preferred shares outstanding. As at December 31, 2007, directors, employees and consultants have been granted options to purchase 2.8 million common shares of the Company at an average exercise price of $10.69 per share. Detailed information regarding the Company's stock options outstanding is contained in the notes to the financial statements. The Company's common shares trade on the Toronto Stock Exchange ("TSX") under the symbol "CLT". ADVISORY REGARDING FORWARD-LOOKING STATEMENTS Certain information with respect to Celtic contained herein, including management's assessment of future plans and operations, contains forward-looking statements. These forward-looking statements are based on assumptions and are subject to numerous risks and uncertainties, certain of which are beyond Celtic's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency exchange rate fluctuations, imprecision of reserve estimates, environmental risks, competition from other explorers, stock market volatility and ability to access sufficient capital. As a result, Celtic'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. In addition, the reader is cautioned that historical results are not necessarily indicative of future performance. 2008 GUIDANCE Celtic remains optimistic about its future prospects. Since commencing operations, the Company was successful in establishing a production base during the early months that provides a cash flow stream that can be re-invested into Celtic's ongoing exploration and development activity. Celtic is opportunity driven and is confident that it can continue to grow the Company's production base by building on its current inventory of development prospects and by adding new exploration prospects. Celtic will endeavour to maintain a high quality product stream that on a historical basis receives a superior price with reasonably low production costs. In addition, the Company takes advantage of royalty incentive programs in order to further increase netbacks. Celtic will continue to focus its exploration efforts in areas of multi-zone potential. Celtic's Board of Directors has approved a capital expenditure budget in the amount of $120 million for 2008. This capital spending will be financed by funds from operations and available bank credit lines. After forecasting risked production discoveries, timing of production on-stream dates resulting from the Company's planned capital expenditures for 2008 and estimated decline rates on existing volumes, Celtic expects production in 2008 to average between 10,500 and 10,700 BOE/d (34% oil and 66% gas). This represents a 33% to 36% increase from average production of 7,873 BOE/d in 2007. Political turmoil in major oil producing regions around the world continues to remain in the headlines and could potentially put a strain on stable world oil supply in the future. The insatiable appetite for oil demonstrated by countries such as India and China, in the past two years, could continue and therefore keep demand for oil growing. As a result of these and other factors, Celtic expects oil prices to be higher in 2008 compared to 2007. Natural gas demand in North America in 2007 was higher than in 2006 and appears to be increasing, particularly in the area of electric power. However, increased demand was offset by increases in supply in 2007, mainly due to larger LNG imports. However, natural gas prices in 2008 should benefit from the reduced supply resulting from a slow down in natural gas drilling in Canada and a diversion of LNG's to Europe and Asia, as has been the case in the past few months. The Company's commodity price assumptions for 2008 are US$84.00 per barrel for WTI oil, US$8.50 per mmbtu for NYMEX natural gas and a US/Canadian exchange rate of US$1.000. These prices compare to 2007 average prices of US$72.34 per barrel for WTI oil, US$6.92 per mmbtu for NYMEX natural gas and a US/Canadian exchange rate of US$0.931. Given the strength of the Canadian dollar, actual realized oil and gas prices are affected negatively. After giving effect to the aforementioned production and commodity price assumptions and taking into effect commodity risk price management contracts in place (as outlined in detail in the notes to the financial statements), funds from operations for 2008 is forecasted to be approximately $120.0 million or $3.19 per share ($3.11 per share, diluted) and net earnings is forecasted to be approximately $19.5 million or $0.52 per share ($0.51 per share, diluted). Changes in forecasted commodity prices and variances in production estimates can have a significant impact to estimated funds from operations and net earnings. Please refer to the advisory regarding forward-looking statements shown above. Bank debt, net of working capital, is estimated to reach $136.9 million by the end of 2008 or approximately 1.1 times forecasted 2008 funds from operations. Celtic's capital expenditure budget for 2008 will see the Company participate at high working interests in the drilling of approximately 58 to 62 wells during the year, of which approximately 35 wells will be horizontals. Celtic continues to pursue property acquisitions that would complement its existing asset base and completion of such acquisitions would be over and above the Company's planned capital expenditure budget. Celtic is excited about the growth prospects being generated in the Company and remains optimistic about the Company's ability to deliver continued per share growth in production, reserves, net asset value, earnings and funds from operations. With Celtic's current land position and extensive infrastructure in the Kaybob area, along with its strong employee base both at head office and in the field, the Company has the ability to provide continued growth without making any significant land or staff additions. Given the Company's strong inventory of drilling locations, we look forward to continued growth in 2008. NON-GAAP FINANCIAL MEASUREMENTS This document contains the terms "funds from operations", "operating netbacks", "net asset value per share" and "production per share" which do not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures by other companies. Funds from operations and operating netbacks are used by Celtic as key measures of performance. Funds from operations and operating netbacks are not intended to represent operating profits nor should they be viewed as an alternative to cash flow provided by operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. The reconciliation between net earnings and funds from operations can be found in the statement of cash flows included in the audited financial statements. Operating netbacks are determined by deducting royalties, production expenses and transportation and selling expenses from oil and gas sales revenue. The Company calculates funds from operations per share using the same method and shares outstanding which are used in the determination of earnings per share. OTHER MEASUREMENTS All dollar amounts are referenced in Canadian dollars, except when noted otherwise. Where amounts are expressed on a barrel of oil equivalent ("BOE") basis, natural gas volumes have been converted to oil equivalence at six thousand cubic feet per barrel. The term BOE may be misleading, particularly if used in isolation. A BOE conversion ratio of six thousand cubic feet per barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. References to oil in this discussion include crude oil and natural gas liquids ("NGLs"). NGLs include condensate, propane, butane and ethane.

For further information:

For further information: CELTIC EXPLORATION LTD., Suite 500, 505-3rd
Street SW, Calgary, Alberta, Canada T2P 3E6; David J. Wilson, President and
Chief Executive Officer, (403) 201-5340, or Sadiq H. Lalani, Vice President,
Finance and Chief Financial Officer, (403) 215-5310; Or visit our website site
at www.celticex.com

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Celtic Exploration Ltd.

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