ProspEx Reports 2006 Results and Announces Significant Exploration Discovery



    (All amounts are in Canadian dollars, unless stated otherwise)

    CALGARY, March 19 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the
"Company") is pleased to announce its financial and operating results for the
three month period and year ended December 31, 2006 and to provide an update
on current operations.
    "Overall, 2006 was a successful year at ProspEx, in a very challenging
business environment. With 64% annual average production growth and an exit
production rate of 3,600 barrels of oil equivalent per day, the Company was
successful in meeting its production growth goals. Going forward, the
principal challenge for the Company is to reduce the high finding and
development costs experienced in 2006," said John Rossall, President and Chief
Executive Officer. "As we enter 2007, we believe we have addressed these
issues and are also pleased with our 2006/07 winter drilling program,
highlighted by an exploration discovery that recently flow tested at a gross
rate of 20 million cubic feet per day (30% ProspEx interest)."

    
    HIGHLIGHTS

    -   Annual average production for 2006 was 3,186 barrels of oil
        equivalent ("boe") per day, a 64% increase over 2005 production of
        1,944 boe per day.
    -   ProspEx is pleased to announce its participation in an exploration
        discovery (30% ProspEx working interest) that recently flow tested at
        a gross rate of 20 million cubic feet ("mmcf") per day.  The Company
        expects that this well will come onstream in April.
    -   The Company participated in 12 (6.3 net) wells in the fourth quarter
        of 2006, and 41 (23.2 net) wells over the full year. Exploration and
        development spending for the full year 2006 was $73.5 million.
    -   Finding and development costs for 2006 were $32.76 per boe on a
        Proved basis and $30.40 per boe on a Proved plus Probable basis, not
        including acquisitions or revisions but including future development
        capital. Finding and development costs on an NI 51-101 standard were
        $31.14 per boe on a Proved basis, and $37.87 per boe on a Proved plus
        Probable basis (revisions and future development capital included but
        acquisitions excluded). These costs are a reflection of cost overruns
        in the first half of 2006, the costs of the Company's Raven
        exploration well, in addition to a revision to the Probable reserves
        of a well in West Central Alberta. See "Oil & Gas Reserves Data" for
        further information.
    -   The Company's financial position is strong, with net debt at
        December 31, 2006 was $29.7 million, equivalent to 1.0 years trailing
        quarterly cash flow on an annualized basis. This debt level is well
        within the Company's $50 million credit facility.
    -   Operating netbacks of $30.99 per boe in the fourth quarter improved
        over the prior quarter as gas prices increased 21% to $7.24 per
        thousand cubic feet ("mcf").
    -   Cash flow increased 5% to $7.6 million for the quarter, or $0.14 per
        share on a diluted basis. For the full year, cash flow was
        $28.0 million or $0.53 per diluted share.
    -   Net earnings for the quarter were $2.1 million. Earnings for the full
        year were $5.1 million, or $0.10 per share on a diluted basis.
    -   ProspEx has successfully drilled and cased all of its first quarter
        wells to date, including two (1.5 net) West Central Alberta wells and
        two (1.1 net) Deep Basin wells. A third West Central well (1.0 net)
        is currently drilling. In addition to the Company operated program,
        three successful wells were drilled on ProspEx lands, two at Granum
        in Southern Alberta and one in the Garrington area.
    -   Production is expected to reach 4,000 boe per day in the second
        quarter with the tie-in of wells drilled this winter and the
        completion of the Company's Harmattan project. Annual average
        production for 2007 is forecast to be in the 4,000 to 4,200 boe per
        day range, as per prior guidance.


    OPERATIONAL REVIEW

    Capital Program

    -------------------------------------------------------------------------
                                                                         Full
    Capital Expenditures ($000s)                           Q4 2006  Year 2006
    -------------------------------------------------------------------------
    Drilling & Completions                                  15,987    46,893
    -------------------------------------------------------------------------
    Facilities                                               7,562    17,785
    -------------------------------------------------------------------------
    Land and lease                                             612     5,230
    -------------------------------------------------------------------------
    Seismic                                                    922     1,603
    -------------------------------------------------------------------------
    Capitalized G&A                                            482     1,953
    -------------------------------------------------------------------------
    Total Exploration & Development                         25,565    73,464
    -------------------------------------------------------------------------
    Property Disposition                                         -   (10,842)
    -------------------------------------------------------------------------
    Net Exploration & Development                           25,565    62,622
    -------------------------------------------------------------------------
    

    Exploration and development capital expenditures were $25.6 million
during the fourth quarter and $73.5 million for the full year in 2006,
compared to $26.0 million in the fourth quarter of 2005 and $59.1 million for
the full year 2005. During 2006, the Company incurred $46.9 million in
drilling and completion expenditures to drill 41 gross (23.2 net) wells with a
95% net success rate. Land expenditures totaled $5.2 million, of which
$4.4 million was spent in West Central Alberta.
    Exploration success in 2005 and early 2006 identified new development
opportunities in Kakwa and Harmattan. Over the course of 2006, the Company
incurred substantial facilities construction expenditures ($17.8 million), a
large portion of which was spent on gathering system infrastructure in these
new areas. Approximately $6.2 million was spent in Kakwa to construct
gathering system and compression facilities to bring on production from a 2005
Cardium discovery. The Company also spent $2.9 million in 2006 to initiate
construction of pipelines and order process equipment for its Cardium oil pool
in Harmattan.
    Capital spending in 2006 exceeded the budget level of $65 million
announced in July, 2006 by $8.5 million. Cost overruns at the Company's Raven
well accounted for $2 million of this expenditure, with the remainder due to
acceleration of 2007 projects into 2006. ProspEx's 2007 capital spending
forecast has been reduced to $52 million from the prior budget of $60 million,
consistent with the acceleration of spending from 2007 into 2006.

    
    West Central Alberta

    Wells Drilled
                          Gross      Net
                        --------- ---------
    Q1                      1        0.6
    Q2                      -          -
    Q3                      6        4.0
    Q4                      3        2.3
                        --------- ---------
    Total 2006             10        6.9
    

    At Harmattan, ProspEx drilled two (1.3 net) wells in the fourth quarter
of 2006. Both of these wells were drilled into the Company's new Cardium pool
discovery (the Cardium W Pool), and have been successfully completed. ProspEx
estimates that the total initial production at Harmattan awaiting construction
of facilities and a regulatory good production practice ("GPP") approval is
approximately 600 boe per day (net) from the four wells drilled prior to
December 31, 2006. Construction of the pipeline gathering system is now
complete. Construction of the central oil battery has been delayed slightly
due to regulatory approvals related to the surface location. Heavy equipment
has been mobilized and construction will proceed during spring breakup, with
the facility expected to be onstream in May. The Company expects to receive
GPP approval by that time.
    In the first quarter of 2007, the Company drilled, cased and completed
two (1.5 net) additional wells in Harmattan. These wells are expected to add
approximately 300 boe per day of production net to ProspEx after spring
break-up, bringing anticipated total net production from the pool to 900 boe
per day.
    In Ricinus, ProspEx drilled one (1.0 net) well in the fourth quarter of
2006. This well is now onstream and producing at an initial rate of 300 boe
per day from the Cardium formation. The Company is currently drilling an
additional well (100% working interest) on the same trend.
    In the first quarter, a partner operated well was drilled to evaluate a
Mississippian prospect in the Garrington area (ProspEx 11.25% interest). This
well is cased and awaiting completion.

    
    Deep Basin

    Wells Drilled
                          Gross      Net
                        --------- ---------
    Q1                      4        4.0
    Q2                      1        0.5
    Q3                      1        0.3
    Q4                      2        2.0
                        --------- ---------
    Total 2006              8        6.8
    

    ProspEx drilled a winter program of four wells in the Deep Basin, two
(2.0 net) in the fourth quarter and two (1.1 net) in the first quarter. This
program included a Cardium development well and three deeper exploration
wells. All of the four wells were cased and completed, with approximately
500 boe per day of initial net production expected to be onstream prior to
spring break-up.

    
    Southern Alberta

    Wells Drilled
                          Gross      Net
                        --------- ---------
    Q1                     12        6.7
    Q2                      1        0.2
    Q3                      3        0.6
    Q4                      6        1.7
                        --------- ---------
    Total 2006             22        9.1
    

    In the fourth quarter of 2006, ProspEx participated in six (1.7 net)
partner operated wells at its Medallion property in Southern Alberta, all of
which were cased and completed. All of these wells have been completed, with
five wells tied in or expected to be tied in.
    ProspEx has 14,500 net acres of undeveloped land in the Granum area in
Southern Alberta. In the first quarter of 2007 a partner operated well (20%
ProspEx interest) tested at stable flow rates of approximately 2 mmcf per day
at high pressures. An offsetting well targeting the same pool has been drilled
and cased (20% ProspEx interest), with completion expected after breakup.
These wells are expected to come onstream after breakup.

    High Impact Exploration

    In the fourth quarter of 2006, ProspEx completed the drilling of its
Raven Swan Hills prospect, one of its higher risk/reward ("high impact")
prospects. The primary objective of this well, the Swan Hills formation, did
not present a commercial reservoir and was abandoned. However, a prospective
Cretaceous target was identified in the shallower portion of the wellbore and
has since been completed.
    ProspEx has "high impact" exploration prospects at Salter and Edson. Well
license applications have been submitted for drilling locations at both of
these prospects, and the Company is waiting for a ruling from the EUB as to
whether a well license will be granted in the near term, or if a public
hearing will be required prior to the granting of a license.
    The Company has also been adding to its "high impact" portfolio with two
new emerging opportunities. The first is at Puskwa where industry drilling in
the Beaverhill Lake/Granite Wash play has reached the edge of a six section
land block in which ProspEx has a 50% working interest. The Company is
acquiring a 3D seismic survey over its lands as well as over successful
offsetting wells. The second opportunity is at Shaw, southeast of Hinton,
Alberta, where ProspEx has recently concluded a land deal in which the Company
pooled lands to obtain a 30% interest in a 14 section land block on a
Cretaceous Foothills Play. Competitor wells have been licensed to both the
north and south of ProspEx's land block, and are expected to evaluate the
Company's lands.

    
    PRODUCTION AND GUIDANCE
                                           2006
                              Q4 2006    Annual
    Production (boe/d)        Average   Average
                             --------- ---------
    West Central                1,108     1,175
    Deep Basin                    913       828
    Medallion                   1,131     1,169
    Other                          12        14
                             --------- ---------
    Total                       3,164     3,186


    2007 Guidance Summary

    Production
    ----------
    Annual Average           4,000 to 4,200 boe per day

    Capital expenditures     $52 million
    Operating costs          $7.25 per boe
    G&A                      $1.75 per boe
    Royalties                24%
    

    Production for the fourth quarter was 3,164 boe per day, a 53% increase
over the fourth quarter of 2005, and a 13% decrease over the prior quarter.
The decline in production from the third quarter reflects the disposition of
190 boe per day of non-core production in the third quarter, the temporary
shut-in of 200 boe per day at Harmattan pending receipt of a GPP order, and
declines in initial "flush" production from new wells brought onstream in the
third quarter. Annual average production for 2006 was 3,186 boe per day, an
increase of 64% from the 2005 annual average.
    "Exit rate" production in December 2006 was 3,600 boe per day, at the
high end of the Company's guidance range of 3,400 to 3,600 boe per day. First
quarter 2007 production is expected to be less than the exit rate, as
production from new wells drilled in the winter program did not come onstream
early enough in the quarter to offset declines of existing production.
    As described earlier, ProspEx has a 30% working interest in a new
exploration discovery. This well tested at a stable rate of just over 20 mmcf
per day at a flowing pressure of 1,500 pounds per square inch. The Company
expects that this well will come onstream in April, although initial
production rates may be constrained by gathering system capacity. ProspEx is
currently working on securing additional mineral rights on this trend. Given
the uncertainty in potential facilities constraints on the new discovery and
the delay at Harmattan, ProspEx's annual average production guidance of 4,000
to 4,200 boe per day range is unchanged. This forecast equates to
approximately 30% production growth compared to 2006.
    The Board of Directors initially approved a 2007 capital budget of
$60 million. Consistent with the acceleration of capital spending from 2007
into 2006, ProspEx's 2007 capital spending is forecast to be $52 million.
    Operating cost guidance for 2007 is $7.25 per boe as per prior guidance.
    ProspEx has continued with its hedging program to provide greater
certainty that cash flow is available to fund the Company's ongoing
exploration and development program. At the present time, the Company has
entered into hedging agreements for the first quarter of 2007 for 10,000
gigajoules ("GJ") per day with floor prices of $8.00 to $8.50 per GJ at AECO.
Hedging agreements for 9,000 GJ per day are in place for the summer of 2007,
with floor prices of $7.00 per GJ at AECO, and ceilings of $8.05 to $9.07 per
GJ at AECO. Further details with respect to the Company's hedging program can
be found in the attached "Management Discussion and Analysis".
    The table below shows the sensitivity of cash flow to natural gas prices.
ProspEx expects that it will be able to fund its 2007 capital program from a
combination of cash flow at current market strip prices and existing credit
facilities.

    
    -------------------------------------------------------------------------
    Annual AECO gas price ($/GJ)                $   6.00  $   8.00  $   10.00
    Annual Cash flow ($ million)                $   34.2  $   42.4  $    50.9
    

    OIL AND GAS RESERVES DATA

    An independent evaluation of ProspEx's reserves at December 31, 2006 was
conducted by GLJ Petroleum Consultants Ltd. ("GLJ") and prepared in accordance
with the reporting guidelines of National Instrument 51-101 of the Canadian
Securities Administrators ("NI 51-101"). Under NI 51-101, the "best estimate"
for reserve balances and additions is the Proved plus Probable category. In
this category the Company added 7.7 billion cubic feet ("bcf") of gas and
716 thousand barrels ("mbbls") of oil and natural gas liquids for total
additions of 2,007 mboe in the period January 1, 2006 to December 31, 2006
(not including acquisitions and dispositions). On a Proved basis, ProspEx
added 9.3 bcf of gas and 830 mbbls of oil and natural gas liquids for total
additions of 2,383 mboe. The complete reserves disclosure as required under NI
51-101, will be contained in ProspEx's Annual Information Form, to be filed on
SEDAR on or before March 30, 2007.
    The Company replaced 205% of 2006 production through exploration and
development activities on a Proved basis, and 173% of 2006 production on a
Proved plus Probable basis. Taking into account the disposition of 340 mboe of
Proved and 393 mboe of Proved plus Probable reserves, reserves replacement was
176% on a Proved basis and 139% on a Proved plus Probable basis.
    The Proved reserve life index at December 31, 2006, calculated using
fourth quarter 2006 production on an annualized basis, was 4.9 years. The
Proved plus Probable reserve life index was 7.1 years.
    Reported reserves additions included a positive revision to Proved
reserves of 118 mboe. This revision was comprised of various revisions across
the Company's asset base, the largest of which was an 88 mboe positive
revision to a Cardium well in the Kakwa area of the Deep Basin. There was a
negative revision of 493 mboe on a Proved plus Probable basis. Approximately
80% of the Proved plus Probable revision is attributed to a single gas well in
the Willesden Green area of West Central Alberta. Probable reserves were
booked for the Willesden Green well at December 31, 2005 based on volumetric
parameters, with no production data available at that time. This well was
placed on production late in the second quarter of 2006, and subsequent
production history demonstrated that a revision to the Probable reserves was
required.
    Finding and development costs were $31.14 per boe on a Proved basis and
$37.87 per boe on a Proved plus Probable basis, including future development
costs (but not including acquisitions and dispositions). These costs were
adversely affected by three factors: reserves revisions, a high cost industry
environment, and the cost of the Company's unsuccessful Raven exploration
well.
    The revision to Proved plus Probable reserves booked in prior periods has
a significant impact on finding and development costs. Without this revision,
finding and development costs for 2006 were $32.76 per boe on a Proved basis
and $30.40 per boe on a Proved plus Probable basis, including future
development costs. The Company's Proved plus Probable finding and development
cost in 2005 would have increased from $17.06 per boe to $18.76 per boe if the
current Proved plus Probable reserves booking (i.e. reserves net of the
revision) had been booked in 2005.
    In late 2005 and early 2006 high levels of industry activity created
intense competition for oilfield services. As a comparatively new entrant to
the industry, ProspEx was disadvantaged in competing with more established
competitors for access to services. In the first half of 2006, the Company
experienced cost overruns on capital projects totaling approximately
$8 million, as a result of high service costs and inefficient execution in the
field. Later in the year, the Company spent $3.5 million (net to ProspEx) to
drill its Raven exploration well, approximately double the initial estimate.
Without these cost overruns, the Raven well costs and the reserve revision,
finding and development costs would be approximately $25 per boe on a Proved
plus Probable basis.
    With the decline in industry activity through 2006, ProspEx has been able
to secure more cost effective services and improve execution. Cost overruns in
the core West Central and Deep Basin capital program in the second half of the
year were minimal, with the overall program executed below project cost
estimates. This improved cost performance has continued through the winter
2007 drilling program.
    Recycle ratio is the ratio of operating netback to finding and
development costs, and is a measure of the economic efficiency of the capital
program. On a Proved basis a recycle ratio of 0.9 was achieved, with a recycle
ratio of 0.8 on a Proved plus Probable basis. These recycle ratios reflect
higher costs as described above, as well as operating netbacks 21% lower than
the prior year. Over the total 2005 and 2006 capital program, the Company has
achieved a 1.4 recycle ratio (on a Proved plus Probable basis, with future
development capital). ProspEx believes that this performance will improve in
the future, with stronger gas prices and improved cost performance
contributing to a higher recycle ratio.

    
    Reserve Balance

    Company Interest (working interest plus royalties receivable)
    December 31, 2006
    (forecasted prices)
    -------------------------------------------------------------------------
                                                           Natural     Oil
                                           Oil      NGLs     Gas   Equivalent
                                        (mbbls)   (mbbls)   (mmcf)    (mboe)
    -------------------------------------------------------------------------
    Proved Producing                        75       651    23,796     4,693
    Proved Developed Non-Producing         129       137     1,910       585
    Proved Undeveloped                       -         6     2,596       439
                                      ---------------------------------------
    Total Proved                           205       794    28,303     5,716
    Proved Plus Probable(1)                272     1,082    41,413     8,257
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Columns may not add due to rounding


    Company Interest
    Reserves Reconciliation

    -------------------------------------------------------------------------
                              Proved                 Proved Plus Probable
                  -----------------------------------------------------------
                     Oil &   Natural      Oil      Oil &   Natural     Oil
                     NGLs      Gas    Equivalent   NGLs      Gas   Equivalent
                    (mbbls)   (mmcf)    (mboe)    (mbbls)   (mmcf)   (mboe)
    -------------------------------------------------------------------------
    Opening Balance
     - Jan. 1, 2006    477    26,158     4,837       971    41,019     7,807
    Drilling
     additions
     and improved
     recovery          783     8,893     2,265       704    10,772     2,500
    Technical
     Revisions &
     economic
     factors            47       426       118        12    (3,029)     (493)
    Acquisitions/
     Divestitures     (155)   (1,111)     (340)     (179)   (1,286)     (393)
                  -----------------------------------------------------------
    Net additions      675     8,208     2,043       537     6,457     1,614
    Production        (153)   (6,063)   (1,164)     (153)   (6,063)   (1,164)
                  -----------------------------------------------------------
    Closing balance
     - Dec. 31,
     2006(1)           999    28,303     5,716     1,355    41,413     8,257
                  -----------------------------------------------------------
                  -----------------------------------------------------------
    (1) Columns may not add due to rounding


    Performance Metrics

    -------------------------------------------------------------------------
                                                                      Proved
                                                             Total      Plus
                                                            Proved  Probable
    -------------------------------------------------------------------------
    Capital ($000's)
    Future development capital
      January 1, 2006                                       11,413    17,671
      December 31, 2006                                     12,155    20,210
    -------------------------------------------------------------------------
    Change in future development capital                       742     2,539
    Exploration & development capital                       73,464    73,464
    Total 2006 capital expenditures                         74,206    76,003
    -------------------------------------------------------------------------
    Acquisition & disposition capital                      (10,842)  (10,842)
    Total 2006 capital expenditures including acquisitions  63,364    65,161
    Reserves
    -------------------------------------------------------------------------
    Net reserves additions for the period (mboe)
     (excluding acquisitions & dispositions)                 2,383     2,007
    Net reserves additions for the period (mboe)
     (including acquisitions & dispositions)                 2,043     1,614
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    2006 Finding & Development Costs ($/boe)                 31.14     37.87
    2006 Finding, Development & Acquisition Costs ($/boe)    31.02     40.37
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    2005 Finding & Development Costs ($/boe)                 31.14     17.06
    2005 Finding, Development & Acquisition Costs ($/boe)    31.14     17.06
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Life to date Finding & Development Costs ($/boe)         31.20     23.83
    Life to date Finding, Development & Acquisition
     Costs ($/boe)                                           31.15     23.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      Operating Netback ($/boe)                              28.59     28.59
    -------------------------------------------------------------------------
      Finding & Development Costs ($/boe)                    31.14     37.87
    -------------------------------------------------------------------------
    2006 Recycle Ratio                                         0.9       0.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      Reserves additions including revisions (mboe)          2,383     2,007
      Production (mboe)                                      1,164     1,164
    -------------------------------------------------------------------------
    2006 Reserves Replacement without disposition (%)         205%      173%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      Reserves at Dec 31, 2006                               5,716     8,257
      Fourth Quarter Production (boe/d)                      3,164     3,164
    -------------------------------------------------------------------------
    2006 Reserves Life based on fourth quarter production
     annualized (years)                                        4.9       7.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Present Value of Cash Flows

    ProspEx's reserves were evaluated using GLJ's December 31, 2006 price
forecast. Cash flows are prior to income taxes and general and administrative
expenses. Undeveloped land values are not included. Well abandonment costs
have been included for wells that have reserves assigned.

    
    -------------------------------------------------------------------------
                                                     Discount Rate
    $thousands                              0%        8%       10%       12%
    -------------------------------------------------------------------------
    Proved Producing                   125,475    97,221    92,368    88,076
    Proved Developed Non-Producing      15,502    11,696    10,980    10,333
    Proved Undeveloped                   7,188     4,429     3,916     3,457
                                      ---------------------------------------
    Total Proved(1)                    148,165   113,345   107,264   101,866
    Total Proved plus Probable         219,020   156,141   145,987   137,169

    (1) Columns may not add due to rounding
    

    Reader's Advisory

    ProspEx Resources Ltd. is a Calgary based junior oil and gas company
focused on exploration for natural gas in the Western Canadian Sedimentary
Basin.
    Certain information regarding ProspEx Resources Ltd. including
management's assessment of future plans and operations, constitutes
forward-looking information or statements under applicable securities law and
necessarily involve assumptions regarding factors and risks that could cause
actual results to vary materially, including, without limitation, assumptions
and risks associated with oil and gas exploration, development, exploitation,
production, marketing and transportation, loss of markets, volatility of
commodity prices, currency fluctuations, imprecision of reserve estimates,
environmental risks, competition, incorrect assessment of the value of
acquisitions, failure to realize the anticipated benefits of acquisitions and
ability to access sufficient capital from internal and external sources.
    The reader is cautioned that these factors and risks are difficult to
predict and that the assumptions used in the preparation of such information,
although considered reasonably accurate by ProspEx at the time of preparation,
may prove to be incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein and the
variations may be material. Readers are also cautioned that the foregoing list
of factors is not exhaustive. Additional information on these and other
factors that could affect ProspEx's operations or financial results are
included in ProspEx's reports on file with Canadian securities regulatory
authorities. In particular see ProspEx's MD&A and the Risk Factors and
Industry Conditions sections of ProspEx's Annual Information Form. ProspEx's
reports may be accessed through the SEDAR website (www.sedar.com), at
ProspEx's website (www.psx.ca) or by contacting the Company directly.
Consequently, there is no representation by ProspEx that actual results
achieved will be the same in whole or in part as those set out in the
forward-looking information.
    Furthermore, the forward-looking statements contained in this news
release are made as of the date of this news release, and ProspEx does not
undertake any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise. The forward-looking statements contained herein are
expressly qualified by this cautionary statement.
    Boe's may be misleading, particularly if used in isolation. A boe
conversion ratio of six thousand cubic feet to one 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. The aggregate of
the exploration and development costs incurred in the most recent financial
year and the change during that year in estimated future development costs
generally will not reflect total finding and development costs related to
reserves additions for that year.



    
    ProspEx Resources Ltd.
    Consolidated Highlights
    For the periods ended
    (unaudited)
                                         Three     Three
                                        months    months      Year      Year
                                         ended     ended     ended     ended
                                       Dec. 31,  Dec. 31,  Dec. 31,  Dec. 31,
                                          2006      2005      2006      2005
    -------------------------------------------------------------------------
    FINANCIAL ($000's)
    Oil and gas revenue                 13,255    12,496    50,372    35,472
    Net earnings                         2,143     3,850     5,080    12,831
    Cash flow (1)                        7,641     8,198    27,962    23,351
    Total assets                       161,736   120,970   161,736   120,970
    Total net debt                      29,709    18,020    29,709    18,020

    Net earnings per share ($ per
     share)
      basic                               0.04      0.08      0.10      0.27
      diluted                             0.04      0.08      0.10      0.26
    Cash flow per share ($ per
     share)(1)
      basic                               0.15      0.17      0.56      0.49
      diluted                             0.14      0.16      0.53      0.47
    Weighted average common shares
     (000's)
      basic                             52,628    47,640    50,378    47,239
      diluted                           55,264    50,059    53,004    49,976

    PRODUCTION VOLUMES
      Natural gas (mcf/d)               16,221    11,651    16,610    11,087
      Natural gas liquids (bbls/d)         276        91       324        72
      Crude oil (bbls/d)                   184        28        94        24
      Total (boe/d) (6:1)                3,164     2,062     3,186     1,944

    SALES PRICES
      Natural gas ($/mcf)                 7.24     10.98      6.77      8.29
      Natural gas liquids ($/bbl)        48.57     63.46     59.16     51.37
      Crude oil ($/bbl)                  72.00     73.41     68.92     68.27
      Total ($/boe)                      45.54     65.89     43.32     50.00

    NETBACKS ($/boe)
      Price                              45.54     65.89     43.32     50.00
      Financial instrument                4.17      4.94      2.69     (0.07)
      Royalties                          (7.16)   (10.15)    (7.76)    (7.93)
      Operating costs                    (7.39)    (6.77)    (6.97)    (5.78)
      General and administrative         (2.17)    (2.34)    (2.07)    (2.54)
                                         ------    ------    ------    ------
      Total                              32.99     51.57     29.21     33.68

    CAPITAL ($000's)
      Drilling and completions          15,987    20,504    46,893    39,622
      Facilities                         7,562     3,977    17,785     9,990
      Land and lease                       612       946     5,230     6,289
      Seismic                              922       239     1,603     1,760
      Capitalized general and
       administrative                      482       336     1,953     1,402
      Property disposition                   -         -   (10,842)        -
      Other capital assets                  18         6       269        94
                                         ------    ------    ------    ------
      Total                             25,583    26,008    62,891    59,157

    (1) Cash flow is defined as cash flow from operations before changes in
        non-cash working capital to analyze operating results. Cash flow does
        not have a standardized measure prescribed by Canadian generally
        accepted accounting principles and therefore may not be comparable
        with calculations with similar measures for other companies.
    

    MANAGEMENT DISCUSSION & ANALYSIS

    Management's Discussion and Analysis ("MD&A") is management's assessment
of the historical financial and operating results of ProspEx Resources Ltd.
("ProspEx" or the "Company") as well as a prospective view of the Company's
activities. The MD&A is for the three and twelve months ended December 31,
2006 and was prepared as at March 16, 2007 and should be read in conjunction
with the audited consolidated financial statements and MD&A for the years
ended December 31, 2006 and 2005, together with the notes related thereto. The
reader should be aware that historical results are not necessarily indicative
of future performance.

    HIGHLIGHTS OF 2006

    The year was highlighted by a 64% increase in overall production from
1,944 barrels of oil equivalent ("boe") per day in 2005 to 3,186 boe per day
in 2006. This resulted in oil and gas revenues in 2006 of $50.4 million, an
increase of $14.9 million from 2005 levels. This increase in revenues can be
attributed to production growth in the Company's two growth areas, West
Central Alberta and the Deep Basin. Revenues in 2006 increased by 42% despite
a declining natural gas environment which saw realized natural gas prices fall
by 18% in the year.
    Cash flow increased 20% in 2006 to $28.0 million or $0.53 per diluted
share, compared to 2005 cash flow of $23.4 million or $0.47 per diluted share.
    In 2006, ProspEx executed a $62.6 million capital program resulting in a
205% reserves replacement ratio on a Proved basis, equivalent to 25% growth in
Proved reserves (prior to dispositions). Finding and development costs
(including future development capital) were $31.14 on a Proved basis and
$37.87 per boe on a Proved plus Probable basis. These high costs are
attributed to high levels of industry activity creating an environment of
increased service costs and poor field execution in the first half of 2006
coupled with a technical revision to reserves booked to a well in West Central
Alberta in 2005.
    During the year, the Company took steps to maintain a strong balance
sheet and enhance its financial capacity in the face of lower gas prices.
These steps included the disposition of non-core properties producing 190 boe
per day for net proceeds of $10.8 million, an expansion of credit facilities
from $40.0 million at the start of the year to $50.0 million at year end,
completion of two common share offerings for gross proceeds of $22.1 million
and the hedging of production throughout 2006 resulting in realized hedging
gains of $2.3 million.
    The final quarter of 2006 was highlighted by commencement of the 2006/07
winter drilling program. A total of 12 gross (6.3 net) wells were drilled in
the fourth quarter. This program included Cardium wells at Ricinus and
Harmattan in West Central Alberta, at Kakwa in the Deep Basin, as well as
partner operated wells at Medallion in Southern Alberta. The Company also
drilled its high impact Raven prospect during the fourth quarter, which did
not yield commercial results in the primary Swan Hills target. Total
exploration and development capital spent during the quarter was
$25.6 million.
    ProspEx exited 2006 with production of approximately 3,600 boe per day,
which was at the upper end of the Company's guidance.
    The fourth quarter of 2006 was also highlighted by a rise in natural gas
prices from a realized average of $5.98 per thousand cubic feet ("mcf") in the
third quarter of 2006 to $7.24 per mcf in the fourth quarter, but still well
below the fourth quarter 2005 average of $10.98 per mcf.

    
    RESULTS OF OPERATIONS

    Revenue

    ($000's)                             Three     Three
                                        months    months      Year      Year
                                         ended     ended     ended     ended
                                       Dec. 31,  Dec. 31,  Dec. 31,  Dec. 31,
                                          2006      2005      2006      2005
                                      ---------------------------------------
    Natural gas revenue               $ 10,801  $ 11,771  $ 41,018  $ 33,531
    Oil and NGL revenue                  2,454       725     9,354     1,941
                                      ---------------------------------------
    Total operating revenue             13,255    12,496    50,372    35,472
    Unrealized financial instrument
     gain (loss)                         1,213       937     3,132       (51)
                                      ---------------------------------------
    Total revenue                     $ 14,468  $ 13,433  $ 53,504  $ 35,421
                                      ---------------------------------------
    

    Operating revenue from natural gas, oil and natural gas liquids ("NGLs")
increased by $0.8 million to $13.3 million in the fourth quarter of 2006
compared to the fourth quarter of 2005. This increase in revenue was driven by
higher production levels offset by weaker natural gas prices compared to the
fourth quarter of 2005. Natural gas, oil and NGL revenue for the year totaled
$50.4 million consisting of natural gas revenue of $41.0 million and oil and
NGL revenue of $9.4 million.

    Production

    Production for the fourth quarter of the year averaged 3,164 boe per day,
an increase of 53% over the previous year's average of 2,062 boe per day.
Production growth was due to the tie-in of wells in the Company's two growth
areas, West Central Alberta and the Deep Basin, partially offset by natural
production declines in the Medallion area. Natural gas volumes increased over
the prior year's quarter to average 16,221 mcf per day and oil and NGL volumes
increased 285% to 460 boe per day. Oil and NGL volumes increased over the
prior year's quarter due to increased production of liquids rich gas and oil
in West Central Alberta and the Deep Basin.
    ProspEx's production mix has changed from 95% natural gas production at
the start of the year to a production mix for the fourth quarter of 2006 of
85% natural gas. The production mix for the full year 2006 was 87% natural
gas. Production was relatively evenly distributed across the Company's three
core areas in 2006, with 37% of total production coming from West Central
Alberta, 37% of total production coming from the Medallion property, and 26%
coming from the Deep Basin.

    
    Average Selling Price
                                         Three     Three
                                        months    months      Year      Year
                                         ended     ended     ended     ended
                                       Dec. 31,  Dec. 31,  Dec. 31,  Dec. 31,
                                          2006      2005      2006      2005
                                      ---------------------------------------
    Natural gas ($/mcf)               $   7.24  $  10.98  $   6.77  $   8.29
    Oil ($/bbl)                          72.00     73.41     68.92     68.27
    NGL ($/bbl)                          48.57     63.46     59.16     51.37
    Average realized price ($/boe)       45.54     65.89     43.32     50.00
    Unrealized financial instrument
     gain ($/boe)                         4.17      4.94      2.69     (0.07)
    Total average price ($/boe)       $  49.71  $  70.83  $  46.01  $  49.93
    

    Realized natural gas prices for the fourth quarter of 2006 averaged
$7.24 per mcf, down 34% from $10.98 per mcf realized in the fourth quarter of
2005. Natural gas prices have decreased compared to the prior year as high
natural gas storage levels have depressed prices. Average total price for the
fourth quarter of the year, before financial instrument gain, was $45.54 per
boe, down 31% from the prior year's fourth quarter average realized price of
$65.89 per boe. ProspEx currently markets approximately 50% of its gas at the
AECO monthly index while the remaining 50% is marketed at the AECO daily
index.

    Financial Instruments

    In an effort to mitigate the effects of volatile commodity prices and
ensure cash flow to fund its exploration and development programs, ProspEx
enters into physical and financial swap contracts. These financial
instruments, which are predominantly costless collars, allow the Company to
better forecast operating cashflow, which in-turn provides the Company with
greater confidence in funding for its operations. These instruments are
described in the financial instruments and risk management note to the interim
consolidated financial statements. The fair value of these instruments at
December 31, 2006 was $3.1 million.
    Subsequent to year end, ProspEx entered into a collar for 3,000
gigajoules ("GJ") per day from April 1, 2007 to October 31, 2007, with a floor
price of $7.00 per GJ and a ceiling of $8.27 per GJ at AECO.

    Royalty Expense

    Royalties totaled $2.1 million or 16% of oil and gas revenue for the
quarter ended December 31, 2006. This compares to $1.9 million or 15% of
revenue for the last quarter of 2005. This increase in royalties as a
percentage of revenues is a reflection of production growth in areas that
attract higher royalty rates. Royalties as a percentage of revenue decreased
in the fourth quarter of 2006 compared to the third quarter of 2006 as an
increase in estimated royalty deductions for 2006, the recognition of royalty
holiday wells and the realization of natural gas hedging gains all contributed
to a lower royalty as a percentage of revenue for the quarter.
    ProspEx's royalty expense remains slightly lower than industry average,
as a significant portion of current production is subject to lower freehold
royalty rates.
    For the full year 2006 royalties averaged 18% of revenues, slightly less
than the Company's guidance of 20% of revenues.
    For 2007, the royalty rate is expected to be approximately 24%, as
anticipated production growth will continue to be in areas with higher royalty
rates.

    Operating Costs

    Fourth quarter 2006 operating costs of $2.2 million or $7.39 per boe
increased from $1.3 million or $6.77 per boe in the fourth quarter of 2005.
The increase in costs on an absolute dollar basis is a result of increased
overall production. Increases in operating costs on a boe basis are due to
production growth occurring in areas where the Company incurs processing fees
to utilize third party facilities, along with increases due to overall
industry cost pressures.
    Full year 2006 operating costs of $8.1 million or $6.97 per boe were
consistent with the Company's guidance of $7.00 per boe.
    Operating costs in 2007 are expected to increase to $7.25 per boe due to
an increase in the proportion of the Company's production from higher cost
areas in West Central Alberta and the Deep Basin, where the Company pays fees
to utilize third party facilities.

    General and Administrative Expenses

    Total general and administration costs ("G&A") for the year were
$4.4 million. ProspEx follows the full-cost method of accounting for its
petroleum and natural gas operations and as such approximately 45% of
exploration and development related G&A costs were capitalized leaving $2.4
million expensed or $2.07 per boe for the year, in line with the Company's
guidance.

    Net G&A expenses were $0.6 million or $2.17 per boe for the fourth
quarter of 2006, compared to $0.4 million or $2.34 per boe in the same period
of 2005. Net G&A expenses increased due to an increase in staffing levels
during the year.
    G&A costs are expected to decrease on a unit basis to $1.75 per boe in
2007. The projected decrease is a result of an anticipated increase in overall
production levels.

    Interest and Bank Charges

    Interest and bank charges in 2006 resulted in an expense of $1.1 million
for the year and an expense of $0.2 million in the fourth quarter. This
compares to a $nil expense in the final quarter of 2005. Interest income of
$0.1 million in 2005 was the result of the funds received from ProspEx's share
issuance on December 3, 2004.

    Depletion, Depreciation and Accretion

    Depletion, depreciation and accretion for the year was $23.8 million or
$20.43 per boe. On a quarterly basis, depletion, depreciation and accretion
was $6.6 million or $22.81 per boe for the fourth quarter compared to
$3.5 million or $18.68 per boe in the last quarter of 2005. The depletion rate
on a per barrel basis rose consistently as the current cost environment is
higher than the historical costs. It is anticipated that the depletion rate
will continue to increase marginally as the capital program is executed.

    Stock-Based Compensation

    Stock-based compensation is accounted for using the fair-value method.
Under the fair-value method of accounting, this compensation expense is
recorded in the earnings statement over the vesting period. Full year expensed
stock-based compensation costs for 2006 were $1.2 million. During the fourth
quarter of 2006 stock-based compensation costs expensed were $0.3 million
compared to $0.4 million during the fourth quarter of 2005.

    Income Taxes

    ProspEx did not pay any income taxes in 2006. The Company's future income
taxes resulted in an expense of $2.8 million for the year and an expense of
$0.3 million in the fourth quarter compared to an expense of $1.9 million in
the final quarter of 2005. In 2005, an additional $5.1 million was recorded as
a future income tax asset and a corresponding increase in income as greater
certainty on the utilization of remaining income tax pools was obtained, due
to positive drilling results and a higher commodity price forecast.
    ProspEx has approximately $149.7 million of income tax pools at
December 31, 2006 and does not anticipate being cash taxable in 2007. ProspEx
has committed to incur $20.7 million in qualifying expenditures related to
flow-through share financings. As at December 31, 2006, the Company has
approximately $3.5 million remaining to incur.

    Net Income and Cash Flow

    Net earnings decreased to $2.1 million in the fourth quarter compared to
the prior year's fourth quarter net earnings of $3.9 million. The decrease
over the prior year is primarily due to the lower realized natural gas prices
and higher depletion costs, offset by higher production levels.
    Cash flow for the fourth quarter of the year decreased from $8.2 million
in the last quarter of 2005 to $7.6 million due to lower natural gas prices.
In the fourth quarter, cash flow was $0.14 per diluted share compared to
$0.16 per diluted share in 2005. Full year cash flow was $0.53 per diluted
share in 2006 compared to $0.47 per diluted share in 2005.

    Capital Expenditures

    Capital expenditures were $25.6 million during the fourth quarter and
$62.9 million for the year, compared to $26.0 million in the fourth quarter of
2005 and $59.2 million for the full year 2005. Details of these expenditures
for the period ended December 31 were as follows:

    
                                   Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
    ($000's)                        2006        2005        2006        2005
                               ----------------------------------------------
    Drilling and completions    $ 15,987    $ 20,504    $ 46,893    $ 39,622
    Facilities                     7,562       3,977      17,785       9,990
    Land and lease                   612         946       5,230       6,289
    Seismic                          922         239       1,603       1,760
    Capitalized G&A                  482         336       1,953       1,402
    Property disposition               -           -     (10,842)          -
    Other capital assets              18           6         269          94
                               ----------------------------------------------
    Total capital expenditures  $ 25,583    $ 26,008    $ 62,891    $ 59,157
                               ----------------------------------------------
    

    During the year, the Company incurred $46.9 million in drilling and
completion expenditures to drill 41 gross (23.2 net) wells. Of the capital
expenditures, $26.8 million was spent in the Deep Basin, $24.5 million in West
Central Alberta and $9.3 million in Southern Alberta.
    Of the $62.9 million in capital expenditures, $16.0 million was spent in
the fourth quarter to drill 12 wells (6.4 net). ProspEx accelerated
approximately $8.5 million of its 2007 capital program into the fourth quarter
of 2006.
    An independent evaluation of ProspEx's reserves at December 31, 2006 was
conducted by GLJ Petroleum Consultants Ltd. ("GLJ") and prepared in accordance
with the reporting guidelines of National Instrument 51-101 of the Canadian
Securities Administrators ("NI 51-101"). Under NI 51-101, the "best estimate"
for reserve balances and additions is the Proved plus Probable category. In
this category the Company added 7.7 billion cubic feet ("bcf") of gas and
716 thousand barrels ("mbbls") of oil and natural gas liquids for total
additions of 2,007 mboe in the period January 1, 2006 to December 31, 2006
(not including acquisitions and dispositions). On a Proved basis, ProspEx
added 9.3 bcf of gas and 830 mbbls of oil and natural gas liquids for total
additions of 2,383 mboe. The complete reserves disclosure as required under NI
51-101, will be contained in ProspEx's 2006 Annual Information Form, to be
filed on SEDAR on or before March 30, 2007.
    The Company replaced 205% of 2006 production through exploration and
development activities on a Proved basis, and 173% of 2006 production on a
Proved plus Probable basis. Taking into account the disposition of 340 mboe of
Proved and 393 mboe of Proved plus Probable reserves, reserves replacement was
176% on a Proved basis and 139% on a Proved plus Probable basis.
    Reported reserves additions included a positive revision to Proved
reserves of 118 mboe. This revision was comprised of various revisions across
the Company's asset base, the largest of which was an 88 mboe positive
revision to a Cardium well in the Kakwa area of the Deep Basin. There was a
negative revision of 493 mboe on a Proved plus Probable basis. Approximately
80% of the Proved plus Probable revision is attributed to a single gas well in
the Willesden Green area of West Central Alberta. Probable reserves were
booked for the Willesden Green well at December 31, 2005 based on volumetric
parameters, with no production data available at that time. This well was
placed on production late in the second quarter of 2006, and subsequent
production history demonstrated that a revision to the Proved plus Probable
reserves was required.
    Finding and development costs were $31.14 per boe on a Proved basis and
$37.87 per boe on a Proved plus Probable basis, including future development
costs (but not including acquisitions and dispositions). These costs were
adversely affected by three factors: reserves revisions, a high cost industry
environment, and the cost of the Company's unsuccessful Raven exploration
well.
    The revision to Proved plus Probable reserves booked in prior periods has
a significant impact on finding and development costs. Without this revision,
finding and development costs for 2006 were $32.76 per boe on a Proved basis
and $30.40 per boe on a Proved plus Probable basis, including future
development costs. The Company's Proved plus Probable finding and development
cost in 2005 would have increased from $17.06 per boe to $18.76 per boe if the
current Proved plus Probable reserves booking (i.e. net of the revision) had
been booked in 2005.
    In late 2005 and early 2006 high levels of industry activity created
intense competition for oilfield services. As a comparatively new entrant to
the industry, ProspEx was disadvantaged in competing with more established
competitors for access to services. In the first half of 2006, the Company
experienced cost overruns on capital projects totaling approximately
$8 million, as a result of high service costs and inefficient execution in the
field. Later in the year, the Company spent $3.5 million (net to ProspEx) to
drill its Raven exploration well, approximately double the initial estimate.
Without these cost overruns, the Raven well costs and the reserve addition,
finding and development costs would be approximately $25 per boe on a Proved
plus Probable basis.
    With the decline in industry activity through 2006, ProspEx has been able
to secure more cost effective services and improve execution. Cost overruns in
the core West Central and Deep Basin capital programs in the second half of
the year were minimal, with the overall program executed below project cost
estimates. This improved cost performance has continued through the winter
2007 drilling program.
    Recycle ratio is the ratio of operating netback to finding and
development costs, and is a measure of the economic efficiency of the capital
program. On a Proved basis a recycle ratio of 0.9 was achieved, with a recycle
ratio of 0.8 on a Proved plus Probable basis. These recycle ratios reflect
higher costs as described above, as well as operating netbacks 21% lower than
the prior year. Over the total 2005 and 2006 capital program, the Company has
achieved a 1.4 recycle ratio (on a Proved plus Probable basis, with future
capital). ProspEx believes that this performance will improve in the future,
with stronger gas prices and improved cost performance contributing to a
higher recycle ratio.

    Liquidity & Capital Resources

    At December 31, 2006, ProspEx had the following resources available to
fund its capital expenditure program.

    
                                                                     ($000's)
    -------------------------------------------------------------------------
    Working capital deficiency                                     $ (12,943)
    Long-term debt                                                   (16,766)
    Bank facilities available                                         50,000
    -------------------------------------------------------------------------
    Total capital resources                                        $  20,291
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    ProspEx expects that it will be able to fund its remaining 2007 capital
program from cash flow at current strip prices and the capital resources
listed in the table above.

    Bank Debt

    At December 31, 2006, the Company had a total credit facility of
$50.0 million. The facility is available by way of Canadian and US dollar
prime rate based loans, LIBOR advances, bankers' acceptances and letters of
credit. The credit facility is fully revolving until June 30, 2007 and may be
extended at the mutual agreement of ProspEx and its lender for an additional
year. If the credit facility is not extended, a balloon payment is required on
July 1, 2008. This facility is secured by a $200 million demand debenture and
a first floating charge on all petroleum and natural gas assets of ProspEx.

    Share Capital

    On December 21, 2005, ProspEx issued 1.4 million common shares on a flow-
through basis at a price of $4.35 per share for total gross proceeds of
$6.1 million. ProspEx has committed to incur $6.1 million in qualifying
expenditures related to the flow-through share financing by December 31, 2006.
The Company met this commitment during the first quarter of 2006.
    On May 5, 2006, ProspEx issued 1.2 million common shares on a flow-
through basis at a price of $5.75 per share for total gross proceeds of
$7.0 million. ProspEx has committed to incur $7.0 million in qualifying
expenditures related to the flow-through share financing by December 31, 2007.
The Company met this commitment in 2006.
    On November 1, 2006, ProspEx issued 1.4 million common shares on a flow-
through basis at a price of $5.40 per common share and 1.8 million common
shares at a price of $4.20 per common share for total gross proceeds of
$15.1 million. With this share offering ProspEx has committed to incur
$7.6 million in qualifying expenditures related to the flow-through share
financing by December 31, 2007. The Company estimates that $3.5 million
remains to be spent to meet this commitment.
    As at December 31, 2006, ProspEx had 53,790,113 common shares,
2,907,811 warrants, 435,994 special performance units and 3,353,725 options
issued and outstanding.
    As at March 16, 2007, ProspEx had 53,840,111 common shares, 2,857,813
warrants, 435,994 special performance units and 3,738,725 options issued and
outstanding.

    Commitments

    The Company has committed to certain payments over the next five years as
follows:

    
                                                                      There-
    Payments due ($000's)       2007      2008      2009      2010     after
    -------------------------------------------------------------------------
    Long-term debt            $     -   16,766         -         -         -
    Office lease                  353      353        29         -         -
    Drilling rig contract       4,586    1,529         -         -         -
    Processing fees               550      300       225       169        27
    Seismic purchase              660        -         -         -         -
    Other                          10        4         -         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total                     $ 6,159   18,952       254       169        27


    ProspEx has committed to incur $20.7 million in qualifying expenditures
related to the December 2005, May 2006 and November 2006 flow-through share
financings. The Company has estimated $3.5 million of expenditures are
required to fulfill these obligations.

    OFF-BALANCE SHEET ARRANGEMENTS

    The Company has not entered into any off-balance sheet transactions.

    Summary of Quarterly Results

                                                        2005
                                          Q1        Q2        Q3        Q4
    -------------------------------------------------------------------------
    Financial ($000's, except
     per share amounts)
    Oil and gas revenue                  6,426     7,447     9,103    12,496
    Net earnings                           827     1,829     6,325     3,850
      Per share - basic                   0.02      0.04      0.13      0.08
                - diluted                 0.02      0.03      0.13      0.08

    Average Daily Production
    Oil (bbls/d)                            14        21        32        28
    NGL (bbls/d)                            47        52        96        91
    Natural Gas (mcf/d)                 10,712    10,963    11,013    11,651
    Total (boe/d)                        1,846     1,901     1,963     2,062

    Operating Netbacks ($/boe)
    Price(1)                             38.68     43.05     50.40     65.89
    Royalties                            (6.41)    (6.24)    (8.59)   (10.15)
    Operating Cost                       (5.73)    (5.42)    (5.14)    (6.77)
                                        -------   -------   -------   -------
    Operating Netback                    26.54     31.39     36.67     48.97
                                        -------   -------   -------   -------


                                                        2006
                                          Q1        Q2        Q3        Q4
    -------------------------------------------------------------------------
    Financial ($000's, except
     per share amounts)
    Oil and gas revenue                 10,999    12,375    13,743    13,255
    Net earnings                         1,629       868       440     2,143
      Per share - basic                   0.03      0.02      0.01      0.04
                - diluted                 0.03      0.02      0.01      0.04

    Average Daily Production
    Oil (bbls/d)                            28        96        67       184
    NGL (bbls/d)                           212       287       515       276
    Natural Gas (mcf/d)                 13,890    17,948    18,335    16,221
    Total (boe/d)                        2,555     3,375     3,639     3,164

    Operating Netbacks ($/boe)
    Price(1)                             47.83     40.30     41.05     45.54
    Royalties                            (8.36)    (7.12)    (8.46)    (7.16)
    Operating Cost                       (6.34)    (5.68)    (8.21)    (7.39)
                                        -------   -------   -------   -------
    Operating Netback                    33.13     27.50     24.38     30.99
                                        -------   -------   -------   -------

    (1) Price does not include unrealized financial instrument loss.
    


    NEW ACCOUNTING PRONOUNCEMENTS

    Non-Monetary Transactions

    During the quarter ending March 31, 2006, ProspEx adopted Section 3831
"Non-Monetary Transactions" as issued by the Canadian Institute of Chartered
Accountants (CICA). This section sets new standards for the measurement and
disclosure of non-monetary transactions. It requires non-monetary transactions
to be measured at the more reliably measurable of the fair value of the asset
given up and the fair value of the asset received. The Company does not expect
application of this new standard to have a material impact on its consolidated
financial statements.

    Comprehensive Income/Financial Instruments/Hedges

    The CICA has issued new standards with respect to Comprehensive Income
(CICA Handbook section 1530), Financial Instruments (CICA Handbook section
3855) and Hedges (CICA Handbook section 3865) that will become effective in
fiscal 2007. The standards will introduce the concept of "Comprehensive
Income" to Canadian General Accepted Accounting Principals ("GAAP") whereby an
entity will be required to classify certain items as comprehensive income and
record the accumulated balance of comprehensive income separately from
retained earnings and additional paid-up capital in the equity section of the
statement of financial position. For example, gains or losses on any
derivative that is identified as a cash flow hedge will flow initially to
comprehensive income and brought into net income at the time the underlying
hedged item is settled. Gains or losses on instruments that are identified as
fair value hedges will be recognized into net income concurrently with the
changes in the fair value of the hedged items. Any derivative instrument that
does not qualify for hedge accounting will be marked to market with the
adjustment (tax effected) reflected directly into net income on the income
statement.
    ProspEx does not have any derivative contract that has been designed as a
hedge for the purposes of these standards and thus does not expect that these
standards will have a material impact on the results of operations or net
financial position of the Company.

    Non-GAAP Measures

    Within the MD&A references are made to terms commonly used in the oil and
gas industry. The following terms are not defined by GAAP in Canada and are
referred to as non-GAAP measures.

    
    1.  Cash flow is defined as cash flow from operations before the change
        in non-cash working capital. The MD&A contains the term "cash flow"
        which should not be considered an alternative to, or more meaningful
        than "cash flow from operations" as determined in accordance with
        GAAP. The Company considers cash flow to be a key measure as it
        demonstrates the Company's ability to generate the cash necessary to
        fund capital projects and to repay debt. Cash flow presented does not
        have any standardized meaning prescribed by Canadian GAAP and
        therefore it may not be comparable with the calculation of similar
        measures for other entities. Cash flow per share is calculated using
        the same weighted average number of common shares for the period as
        used in calculating the net earnings per share calculation.
    2.  Boe amounts have been calculated using a conversion rate of six mcf
        of gas to one barrel of oil. Boe's may be misleading if used in
        isolation. A boe conversion ratio of one barrel of oil to six mcf of
        gas is based on an energy equivalency conversion method primarily
        applicable at the burner tip and does not represent a value
        equivalency at the well head.
    3.  Netbacks equal total revenue less royalties, operating costs and
        general and administrative costs on a boe basis. Total boes are
        calculated by multiplying the daily production by the number of days
        in the period.
    

    Forward-looking statements

    Certain information regarding ProspEx including management's assessment
of future plans and operations, constitutes forward-looking information or
statements under applicable securities law and necessarily involve assumptions
regarding factors and risks that could cause actual results to vary
materially, including, without limitation, assumptions and risks associated
with oil and gas exploration, development, exploitation, production, marketing
and transportation, loss of markets, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental risks,
competition, incorrect assessment of the value of acquisitions, failure to
realize the anticipated benefits of acquisitions and ability to access
sufficient capital from internal and external sources.
    The reader is cautioned that these factors and risks are difficult to
predict and that the assumptions used in the preparation of such information,
although considered reasonably accurate by ProspEx at the time of preparation,
may prove to be incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein and the
variations may be material. Readers are also cautioned that the foregoing list
of factors is not exhaustive. Additional information on these and other
factors that could affect ProspEx's operations or financial results are
included in ProspEx's reports on file with Canadian securities regulatory
authorities. In particular see the Risk Factors and Industry Conditions
sections of ProspEx's Annual Information Form. ProspEx's reports may be
accessed through the SEDAR website (www.sedar.com), at ProspEx's website
(www.psx.ca) or by contacting the Company directly. Consequently, there is no
representation by ProspEx that actual results achieved will be the same in
whole or in part as those set out in the forward looking information.
    Furthermore, the forward-looking statements contained in this MD&A are
made as of the date of this MD&A, and ProspEx does not undertake any
obligation to update publicly or to revise any of the included forward-looking
statements, whether as a result of new information, future events or
otherwise. The forward-looking statements contained herein are expressly
qualified by this cautionary statement.



    
    ProspEx Resources Ltd.
    Consolidated Balance Sheets

    As At December 31,
    (Stated in thousands of dollars)
    (audited)                                              2006         2005
                                                           ----         ----

    Assets

    Current assets

      Accounts receivable                           $    13,220  $    12,615
      Prepaid expenses                                      746          619
      Unrealized financial instrument gain                3,081            -
                                                     ------------------------
                                                         17,047       13,234

    Property, plant and equipment, net                  142,649      101,695
    Asset held for resale (note 1)                          937            -
    Future income tax asset (note 2)                      1,103        6,041
                                                     ------------------------

                                                    $   161,736  $   120,970
                                                     ------------------------
                                                     ------------------------

    Liabilities

    Current liabilities
      Accounts payable and accrued liabilities      $    29,990  $    30,150
      Unrealized financial instrument loss                    -           51
                                                     ------------------------
                                                         29,990       30,201

    Long term debt (note 3)                              16,766        1,053
    Asset retirement obligation                           4,157        5,762
                                                     ------------------------

    Total liabilities                                    50,913       37,016
                                                     ------------------------

    Shareholders' Equity

    Share capital (note 4)                               87,459       67,067
    Contributed surplus                                   4,348        2,951
    Retained earnings                                    19,016       13,936
                                                     ------------------------
                                                        110,823       83,954
                                                     ------------------------

                                                    $   161,736  $   120,970
                                                     ------------------------
                                                     ------------------------

    See accompanying notes to consolidated financial statements.



    ProspEx Resources Ltd.
    Consolidated Statements of Earnings and Retained Earnings


                            For the      For the
                         Three Months Three Months    For the      For the
                             Ended        Ended     Year Ended   Year Ended
    ($000's, except       December 31, December 31, December 31, December 31,
     per share amounts)       2006         2005         2006         2005
    -------------------------------------------------------------------------
                          (unaudited)   (unaudited)    (audited)   (audited)

    Revenue
      Oil and gas         $    13,255  $    12,496  $    50,372  $    35,472
      Unrealized financial
       instrument gain
       (loss)                   1,213          937        3,132          (51)
      Royalties                (2,083)      (1,923)      (9,024)      (5,620)
                           -----------  -----------  -----------  -----------

                               12,385       11,510       44,480       29,801
                           -----------  -----------  -----------  -----------

    Expenses
      Operating                 2,152        1,284        8,104        4,102
      Depletion,
       depreciation
       and accretion            6,638        3,544       23,758       10,124
      General and
       administrative             632          444        2,406        1,803
      Interest and
       bank charges               176           42        1,133          (64)
      Stock-based
       compensation               321          405        1,181        1,947
                           -----------  -----------  -----------  -----------

                                9,919        5,719       36,582       17,912
                           -----------  -----------  -----------  -----------

    Earnings before taxes       2,466        5,791        7,898       11,889
                           -----------  -----------  -----------  -----------

    Taxes (note 2)
      Capital                       -           34           20           61
      Future income taxes
       (recovery)                 323        1,907        2,798       (1,003)
                           -----------  -----------  -----------  -----------

                                  323        1,941        2,818         (942)
                           -----------  -----------  -----------  -----------

    Net earnings for
     the period                 2,143        3,850        5,080       12,831

    Retained earnings,
     beginning of period       16,873       10,086       13,936        1,105
                           -----------  -----------  -----------  -----------

    Retained earnings,
     end of year          $    19,016  $    13,936  $    19,016  $    13,936
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------

    Net earnings per share
      Basic               $      0.04  $      0.08  $      0.10  $      0.27
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------
      Diluted             $      0.04  $      0.08  $      0.10  $      0.26
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------

    See accompanying notes to consolidated financial statements.



    ProspEx Resources Ltd.
    Consolidated Statements of Cash Flow


                            For the      For the
                         Three Months Three Months    For the      For the
                             Ended        Ended     Year Ended   Year Ended
                          December 31, December 31, December 31, December 31,
    ($000's)                  2006         2005         2006         2005
    -------------------------------------------------------------------------
                          (unaudited)   (unaudited)    (audited)   (audited)

    Operations
    Net earnings for
     the period           $     2,143  $     3,850  $     5,080  $    12,831
    Items not involving
     cash
      Depletion,
       depreciation
       and accretion            6,638        3,544       23,758       10,124
      Stock-based
       compensation               321          405        1,181        1,947
      Future income
       taxes (recovery)           323        1,907        2,798       (1,003)
      Unrealized financial
       instrument (gain)
       loss                    (1,243)        (937)      (3,131)          51
    Asset retirement
     expenditures                (541)        (571)      (1,724)        (599)
                           -----------  -----------  -----------  -----------
                                7,641        8,198       27,962       23,351
    Changes in non-cash
     working capital              161        5,002       (3,874)       2,233
                           -----------  -----------  -----------  -----------
                                7,802       13,200       24,088       25,584
                           -----------  -----------  -----------  -----------

    Financing
      Issuance of shares       14,456        5,968       21,045        5,946
      Increase in
       long-term debt           2,987        1,053       15,713        1,053
                           -----------  -----------  -----------  -----------
                               17,443        7,021       36,758        6,999
                           -----------  -----------  -----------  -----------

    Investments
      Exploration and
       development
       expenditures           (25,565)     (26,002)     (73,464)     (59,063)
      Expenditures on
       asset held for
       resale                    (937)           -         (937)           -
      Proceeds of property
       disposition                  -            -       10,842            -
      Other capital
       expenditures               (18)          (6)        (269)         (94)
                           -----------  -----------  -----------  -----------
                              (26,520)     (26,008)     (63,828)     (59,157)
    Changes in non-cash
     working capital            1,275        4,785        2,982        6,355
                           -----------  -----------  -----------  -----------
                              (25,245)     (21,223)     (60,846)     (52,802)
                           -----------  -----------  -----------  -----------

    Change in cash                  -       (1,002)           -      (20,219)

    Cash, beginning of
     period                         -        1,002            -       20,219
                           -----------  -----------  -----------  -----------

    Cash, end of year     $         -  $         -  $         -  $         -
                           -----------  -----------  -----------  -----------
                           -----------  -----------  -----------  -----------

    See accompanying notes to consolidated financial statements.
    


    Notes to Consolidated Financial Statements
    For the three months and year ended December 31, 2006
    (unaudited)

    The interim unaudited consolidated financial statements of ProspEx
Resources Ltd. ("the Company" or "ProspEx") have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP"). The Company
is engaged in the acquisition, exploration, development and production of oil
and natural gas in Canada.
    The interim unaudited consolidated financial statements have been
prepared by management following the same accounting policies and methods of
computation as the audited consolidated financial statements for the year
ended December 31, 2005. Preparation of financial statements in conformity
with Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results may differ from these estimates. The disclosures
included below are incremental to those included with the annual consolidated
financial statements. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto in the Company's annual report for the year ended December 31, 2005.
    ProspEx was incorporated on August 13, 2004 and commenced operations on
October 1, 2004 when certain assets of Esprit Exploration Ltd. ("Esprit") were
transferred to ProspEx under a Plan of Arrangement (the "Plan of
Arrangement"). The Plan of Arrangement resulted in, amongst other matters,
Esprit shareholders becoming shareholders of ProspEx. ProspEx is engaged in
the acquisition, exploration, development and production of oil and natural
gas in Canada.

    
    1.  ASSET HELD FOR RESALE

    During 2006, the Company had $0.9 million of equipment assembled. The
    Company expects that this equipment will be sold in 2007 at its
    approximate cost resulting in no loss or gain on the disposition.

    2.  FUTURE INCOME TAXES

    The provision for future income taxes differs from the amount computed by
    applying the combined expected Canadian Federal and Provincial tax rates
    to earnings before income taxes. The reasons for these differences are as
    follows:

    ($000's)             Three months Three months
                             ended        Ended     Year ended   Year ended
                          December 31, December 31, December 31, December 31,
                              2006         2005         2006         2005
    -------------------------------------------------------------------------
    Earnings before taxes  $    2,466   $    5,791   $    7,898   $   11,889
    Rate                       34.50%       37.62%       34.50%       37.62%
    -------------------------------------------------------------------------
    Computed expected
     provision for future
     income taxes                 851        2,179        2,725        4,473
    Increase (decrease) in
     taxes resulting from:
      Valuation allowance
       changes                      -            -            -       (5,131)
      Non-deductible crown
       payments                   217          120          835          374
      Resource allowance         (239)        (409)        (914)      (1,415)
      Stock-based
       compensation               111          811          407        1,176
      Effect of change
       in tax rate               (216)        (248)          91         (248)
      Alberta royalty
       deduction pool
       additions                 (251)           -         (251)           -
      Other                      (150)        (546)         (95)        (232)
    -------------------------------------------------------------------------
                                  323        1,907        2,798       (1,003)
    Capital taxes                   -           34           20           61
    -------------------------------------------------------------------------
    Income tax expense
     (recovery)            $      323   $    1,941   $    2,818   $     (942)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The components of the future income tax asset at December 31, are as
    follows:

    ($000's)                                               2006         2005
    -------------------------------------------------------------------------
    Tax assets:
      Property, plant and equipment                  $    1,482   $    5,097
      Asset retirement obligation                           533        1,082
      Share issue costs                                     578          362
      Unrealized financial instrument gain                 (990)           -
    -------------------------------------------------------------------------
                                                          1,603        6,541
    Valuation allowance                                    (500)        (500)
    -------------------------------------------------------------------------
    Future income tax asset                          $    1,103   $    6,041
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At December 31, 2006, the Company had estimated tax deductions available
    to reduce future taxable income of $149.7 million (2005 -
    $116.0 million). ProspEx has an estimated remaining commitment to incur
    $3.5 million in qualifying Canadian Exploration Expenditures related to
    the flow-through share financing by December 31, 2007.

    3.  LONG-TERM DEBT

    At December 31, 2006, the Company had a $50.0 million credit facility
    with a Canadian chartered bank. The facility is available by way of
    Canadian and US dollar prime rate based loans, LIBOR advances, bankers'
    acceptances and letters of credit. The credit facility is fully revolving
    until June 30, 2007 and may be extended at the mutual agreement of
    ProspEx and its lender for an additional year. If the credit facility is
    not extended, a balloon payment is required on July 1, 2008. This
    facility is secured by a $200 million demand debenture and a first
    floating charge on all petroleum and natural gas assets of ProspEx.

    4.  SHARE CAPITAL

    (a) Common Shares & Common Share Performance Warrants Issued

                                      2006                      2005
    -------------------------------------------------------------------------
                            Number of                 Number of
                               Shares/                   Shares/
                             Warrants       Amount     Warrants       Amount
                               (000's)     ($000's)      (000's)     ($000's)
    -------------------------------------------------------------------------
    Common shares
    -------------------------------------------------------------------------
      Balance at the
       beginning of the
       year                    48,932   $   65,214       47,111   $   58,116
      Issued on exercise
       of options                  22           71            -            -
      Flow-through shares
       issued - May 5, 2006     1,220        7,015            -            -
      Flow-through shares
       issued - November 1,
       2006                     1,400        7,560            -            -
      Shares issued -
       November 1, 2006         1,800        7,560            -            -
      Flow-through shares
       issued - December 21,
       2005                         -            -        1,400        6,090
      Flow-through shares
       tax adjustment               -       (2,047)           -            -
      Shares issued under
       special performance
       unit plan                  294            3          277            3
      Shares issued on
       exercise of warrants       122          245          151          322
      Common shares
       repurchased                  -            -           (7)          (8)
      Issue costs, net of
       future tax reduction         -         (905)           -         (240)
      Stock options
       exercised                    -          965            -          931
    -------------------------------------------------------------------------
      Balance at the end
       of the year             53,790   $   85,681       48,932   $   65,214
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Common share performance
     warrants
    -------------------------------------------------------------------------
      Balance at the beginning
       of the year              3,032   $    1,853        3,214   $    1,965
      Exercised                  (122)         (75)        (151)         (93)
      Cancelled                    (2)           -          (31)         (19)
    -------------------------------------------------------------------------
      Balance at the end
       of the year              2,908   $    1,778        3,032   $    1,853
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Share Capital at
     end of year                        $   87,459                $   67,067
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On December 21, 2005, ProspEx issued 1.4 million common shares on a
    flow-through basis at a price of $4.35 per share for total gross proceeds
    of $6.1 million. ProspEx has met its commitment to incur the $6.1 million
    in qualifying expenditures related to the flow-through share arrangement
    by December 31, 2006.

    On May 5, 2006, ProspEx issued 1.2 million common shares on a flow-
    through basis at a price of $5.75 per share for total gross proceeds of
    $7.0 million. ProspEx has met its commitment to incur $7.0 million in
    qualifying expenditures related to the flow-through share financing by
    December 31, 2007.

    On November 1, 2006, ProspEx issued 1.4 million common shares on a flow-
    through basis at a price of $5.40 per common share and 1.8 million shares
    at a price of $4.20 per common share for total gross proceeds of
    $15.1 million. ProspEx has committed to incur $7.5 million in qualifying
    expenditures related to the flow-through share financing by December 31,
    2007, of which the estimated remaining obligation is $3.5 million.

    (b) Contributed Surplus

    ($000's)                                               2006         2005
    -------------------------------------------------------------------------
    Balance at the beginning of the year             $    2,951   $      756
    Stock-based compensation                              2,362        3,126
    Exercise of stock options & SPU's                      (965)        (931)
    -------------------------------------------------------------------------
    Balance at the end of the year                   $    4,348   $    2,951
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (c) Stock Options and Special Performance Units

    Changes in outstanding stock options during the years ended December 31,
    2006 and 2005 are summarized below:

                                        2006                    2005
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                            Average                 Average
                                Options     Exercise    Options     Exercise
                                (000s)       Price      (000s)       Price
    -------------------------------------------------------------------------
    Outstanding at beginning
     of year                      2,314   $     3.27      1,862   $     3.23
    Granted                       1,096         3.93        452         3.45
    Exercised                       (22)        3.22          -            -
    Cancelled                       (34)        3.37          -            -
    -------------------------------------------------------------------------
    Outstanding at December 31    3,354   $     3.49      2,314   $     3.27
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Changes in special performance units during the years ended December 31,
    2006 and 2005 are as follows:

    (000s)                                                 2006         2005
    -------------------------------------------------------------------------
    Outstanding at beginning of year                        872        1,308
    Exercised                                              (436)        (436)
    -------------------------------------------------------------------------
    Outstanding at December 31                              436          872
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The fair value of each stock option and special performance unit granted
    is estimated on the date of the grant using the Black-Scholes option
    pricing model with the following weighted average assumptions for grants
    as follows:

                                                           2006         2005
    -------------------------------------------------------------------------
    Risk free interest rate                                  4%           4%
    Expected life                                       5 years      5 years
    Expected volatility                                     46%          45%
    Expected dividend yield                                 Nil          Nil
    -------------------------------------------------------------------------

    The estimated fair values of the options and the special performance
    units are being amortized to expense over the vesting period.
    $1.2 million (2005 - $1.9 million) of stock and unit-based compensation
    was recorded against income in 2006 and $1.2 million (2005 -
    $1.2 million) was capitalized.

    (d) Per Share Amounts

    In computing diluted net earnings per share for the year ended
    December 31, 2006, 2,625,929 (2005 - 2,736,927) common shares were added
    to the weighted average number of common shares outstanding of
    50,378,377 (2005 - 47,239,317). A total of 1,096,500 (2005 - 201,500)
    options were excluded from the diluted calculations as they were not
    dilutive. For the quarter ended December 31, 2006, 2,636,406 common
    shares (2005 - 2,419,644) were added to the weighted average number of
    common shares outstanding of 52,627,783 (2005 - 47,639,690) and 1,096,500
    options were excluded from the diluted calculations.

    5.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

    The Company uses derivative financial instruments to manage its exposure
    to volatility in commodity prices. These financial instruments are
    entered into solely for hedging purposes and are not used for trading or
    other speculative purposes. Financial instruments and physical contracts
    in place at December 31, 2006 are summarized below.

    Type      Amount (GJ/d)   Term                Price ($/GJ)     Type
    ----      -------------   ----                ------------     ----
    Collar    2,000           January 1 -         $8.00 - $11.60   Financial
                               March 31, 2007      at AECO
    Put       2,000           January 1 -         $8.00 at AECO    Financial
                               March 31, 2007
    Collar    2,000           January 1 -         $8.50 - $12.20   Physical
                               March 31, 2007      at AECO
    Collar    2,000           January 1 -         $8.00 - $11.90   Physical
                               March 31, 2007      at AECO
    Collar    2,000           January 1 -         $8.00 - $10.56   Physical
                               March 31, 2007      at AECO
    Collar    2,000           April 1 -           $7.00 - $8.05    Financial
                               October 31, 2007    at AECO
    Collar    2,000           April 1 -           $7.00 - $8.50    Financial
                               October 31, 2007    at AECO
    Collar    2,000           April 1 -           $7.00 - $9.07    Physical
                               October 31, 2007    at AECO

    The majority of the Company's accounts receivable are with customers and
    joint-venture partners in the oil and gas industry and are subject to
    normal industry credit risks. Customers and joint-venture partners are
    subject to an internal credit review to minimize the risk of non-payment.

    The Company is exposed to a floating rate of interest on its long-term
    debt. The Company is also exposed to foreign currency fluctuations as oil
    prices received are referenced to US dollar denominated prices and
    natural gas and natural gas liquids prices are influenced by US dollar
    denominated markets. The Company has no financial contracts in place at
    December 31, 2006 to manage the foreign currency and interest rate
    exposure.

    The fair values of the financial instruments, including accounts
    receivable, accounts payable, accrued liabilities and bank loans
    approximate their carrying values.

    Subsequent to the quarter the Company entered into the following physical
    contract:

    Type      Amount (GJ/d)   Term                Price ($/GJ)     Type
    ----      -------------   ----                ------------     ----
    Collar    3,000           April 1 -           $7.00 - $8.27    Physical
                               October 31, 2007    at AECO


    6.  ADDITIONAL DISCLOSURES

    Net cash interest paid during the year was $1.4 million (2005 - interest
    received $0.1 million) and interest paid during the quarter was
    $0.3 million. Cash taxes paid during the year was $nil (2005 - $nil) and
    during the quarter was $nil.
    

    %SEDAR: 00021285E




For further information:

For further information: John Rossall, President & CEO, jrossall@psx.ca,
(403) 268-3941 or George Yee, Vice President Finance & Chief Financial
Officer, gyee@psx.ca, (403) 268-3942.

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