Trafalgar Energy Ltd. releases year end financial results and reserve information



    /NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR
    DISSEMINATION IN THE UNITED STATES/

    CALGARY, March 27 /CNW/ - Trafalgar Energy Ltd. (TSX:TFL) ("Trafalgar" or
the "Company") is pleased to announce the year end audited financial results
for the period from incorporation on April 25, 2006 to December 31, 2006, the
unaudited financial results for the quarter ended December 31, 2006 and 2006
year end reserve information.
    Based upon the success of our winter drilling program, Trafalgar is on
track to meet or exceed its 2007 guidance with production averaging
900-950 boe per day for the year and exiting 2007 between 950-1,050 boe per
day.

    
                             CORPORATE HIGHLIGHTS
                             --------------------
                                                                        From
                                                               Incorporation
                                                  Three Months   on April 25,
                                                         Ended       2006 to
                                                   December 31,  December 31,
                                                          2006          2006

    Petroleum and natural gas revenues ($)           2,532,804     2,717,637

    Funds from operations                            1,037,294       679,500
      Per basic and diluted shares ($)                    0.10          0.11

    Working capital ($)                             12,971,751    12,971,751

    Capital expenditures ($)                         5,424,221     8,277,085

    Weighted average number of shares outstanding
      Basic                                         10,220,039     6,129,799
      Diluted                                       10,997,162     6,579,343

    Number of shares outstanding at
     December 31, 2006
      Basic                                         11,835,883    11,835,883
      Diluted                                       12,730,633    12,730,633


                                                                        From
                                                                Commencement
                                                               of Operations
                                                  Three Months  on September
                                                         Ended   21, 2006 to
                                                   December 31,  December 31,
                                                          2006          2006
    Average Production(*)
      Light oil (bbls/d)                                    63            57
      Heavy oil (bbls/d)                                    40            46
      Total oil (bbls/d)                                   103           103
      Natural gas (mcf/d)                                3,351         3,329
                                                     ----------     ---------
      BOE (boe/d)                                          662           658
                                                     ----------     ---------
                                                     ----------     ---------


    (*) Trafalgar began producing oil and natural gas on September 21, 2006.

    The fourth quarter of 2006 represented Trafalgar's first full quarter of
operations. During this period, production averaged 662 boe per day of which
84% was natural gas.

    Trafalgar has evolved quickly, since inception in April 2006 we have
reached numerous milestones including:

    -   Successful initial equity financing of $15 million. (June 2006)
    -   Amalgamated with Triant Technologies Inc., providing significant tax
        pools to shelter future income.
    -   Signed an agreement to acquire producing assets of 625 boe per day
        and 45,000 net acres of undeveloped land from Daylight Energy Trust.
        (July 2006)
    -   Successful acquisition of the MacKay and Cherpeta exploration
        prospects through public land sale.
    -   Closed the Daylight asset transaction. (Sept. 2006)
    -   Successful public listing on the Toronto Stock Exchange. (Sept. 26,
        2006)
    -   Negotiated an $8 million revolving line of credit with a major
        Canadian Bank.
    -   Commenced field operations with workover and optimization programs at
        Grouard.
    -   Spud first exploration well at Grouard.
    -   Achieved an exit rate of 700 boe/d of production from Grouard and
        Cypress.
    -   Completed a $6 million equity financing. (Dec. 2006)
    -   Established a new core area at MacKay, Alberta.
    -   Achieved current production prior to tie in of the MacKay project, of
        approximately 850 boe per day.
    -   Achieved all in finding, development and acquisition costs of
        $19.31 per boe proved plus probable including future development
        capital.
    

    The Company is on solid financial footing with a working capital surplus
as at December 31, 2006 of $13 million, an un-drawn credit facility of
$8 million and approximately $52 million of tax pools to shelter future
income.
    On September 26, 2006, Trafalgar's common shares began trading on the
Toronto Stock Exchange. Since September 26, 2006, approximately 4.7 million
common voting shares of our 9.6 million outstanding common voting shares have
traded in a range of $3.27 to $4.60 per share.
    In addition to the Daylight acquisition, Trafalgar has been successful in
acquiring 23,000 net acres of prospective land in its key exploration and
development areas in North Central Alberta. Trafalgar now has over 68,000 net
undeveloped acres of land on which to drill.
    Through the Daylight acquisition and trade data purchases, Trafalgar has
acquired a significant seismic database in North Central Alberta totaling over
8,800 km of 2D data and 175 square km of 3D data. To date, several leads and
prospects have been identified; some of which we drilled this winter. Other
prospects have been placed in inventory, for our winter 2007/2008 drilling
program.
    Oil and natural gas prices fluctuated widely during the latter half of
2006 and the first quarter of 2007. We believe that price fluctuations, income
trust taxation changes and concerns respecting environmental legislation have
contributed to a degree of investor uncertainty regarding the energy sector.
We expect that these conditions could result in an increased level of merger
and acquisition activity within the energy sector which may provide Trafalgar
the opportunity to grow more rapidly through acquisitions at reasonable
prices. Trafalgar has positioned itself to take advantage of these market
conditions by maintaining a strong balance sheet and disciplined operating
philosophy.

    Trafalgar's strategy is simple and straightforward:

    
    -   Establish core areas that have the potential to produce a minimum of
        500 boe/d.
    -   Focus on investment efficiency - low finding and development costs,
        on-stream capital efficiency and low operating costs.
    -   Operate with 100% working interest to control our destiny.
    -   Focus exploratory efforts on North Central Alberta - the part of the
        basin we know best.
    

    Finally, I would like to take this opportunity to thank our employees,
board of directors and shareholders for their support, insight and guidance in
the growth of Trafalgar during the past year.

    Sincerely,

    Robert Wollmann
    President and CEO

    
                    MANAGEMENT'S DISCUSSION AND ANALYSIS
                    ------------------------------------
    

    Trafalgar Energy Ltd ("Trafalgar" or the "Company") is a Canadian public
company engaged in the exploration for and the development of crude oil and
natural gas in Western Canada. Trafalgar's corporate strategy is to grow and
develop an oil and gas exploration and production company through a
combination of internal drilling operations and acquisitions.
    The following management's discussion and analysis ("MD&A") reviews
Trafalgar's activities and results of operations for the period from
incorporation on April 25, 2006 to December 31, 2006 and for the three months
ended December 31, 2006. The MD&A should be read in conjunction with the
audited financial statements of Trafalgar from incorporation on April 25, 2006
to December 31, 2006 and the unaudited financial statements for the three
months ended December 31, 2006.

    GUIDANCE AND OUTLOOK

    The Trafalgar board of directors has approved a capital budget of
$14.2 million for 2007 which includes projected land and seismic expenditures
of $4.3 million. Based upon initial drilling and completion results, Trafalgar
is on track to achieve its forecasted average production of 900-950 boe per
day for 2007 and to exit 2007 between 950 - 1,050 boe per day.
    Trafalgar's 2006/2007 winter drilling program is complete and Trafalgar
has drilled nine wells, casing seven, with successful wells located in the
Grouard and Mackay areas of North Central Alberta. All successful wells are
scheduled to be on-stream prior to the end of the first quarter of 2007. Based
upon the favorable results to date, future drilling is planned for both areas.
    Trafalgar will continue to focus exploratory efforts in North Central
Alberta and will remain opportunistic in evaluating potential acquisitions.

    RESULTS OF OPERATIONS

    Production

    On September 21, 2006, Trafalgar acquired producing oil and natural gas
assets from Daylight Energy Trust as part of a plan of arrangement. The assets
are located at Grouard, Alberta and Cypress, British Columbia. At the time of
closing, the assets produced approximately 625 boe per day, 83% natural gas.
Current production from these assets has increased to approximately 850 boe
per day as a result of a successful workover program at Grouard during the
fourth quarter of 2006 and new production from Grouard.

    
    -------------------------------------------------------------------------
                                                                        From
                                                                Commencement
                                                               of Operations
                                                       Three    on September
                                                months ended     21, 2006 to
                                                 December 31,    December 31,
    Production by Product                               2006            2006
    -------------------------------------------------------------------------
    Oil (bbls/day)                                       103             103
    -------------------------------------------------------------------------
    Natural Gas (mcf/day)                              3,351           3,329
    -------------------------------------------------------------------------
    Total (boe/d) (6:1)                                  662             658
    -------------------------------------------------------------------------
    % Natural Gas                                        84%             84%
    -------------------------------------------------------------------------
    

    Trafalgar's 2006 gas and oil production is located in two primary areas:
Grouard and Cypress. Grouard is located near High Prairie, Alberta and
produces light oil from the Gilwood formation, heavy oil from the Bluesky zone
and natural gas from several Cretaceous horizons. Trafalgar owns and operates
most of the production from this area. Trafalgar also owns and operates a gas
plant, two oil batteries and approximately 113 kms of pipeline.
    Cypress is located approximately 145 kms northwest of Fort St. John,
British Columbia. Production in this area is primarily natural gas from the
Baldonnel, Halfway and Debolt formations. At Cypress, Trafalgar also has
operatorship of a compressor station and a significant gas gathering system.

    
    -------------------------------------------------------------------------
                                                                        From
                                                                Commencement
                                                               of Operations
                                                Three months    on September
                                                       ended     21, 2006 to
                                                 December 31,    December 31,
    Production by Area (boe/d)                          2006            2006
    -------------------------------------------------------------------------
    Grouard, Alberta                                     559             555
    -------------------------------------------------------------------------
    Cypress, British Columbia                            103             103
    -------------------------------------------------------------------------
    Total (boe/d) (6:1)                                  662             658
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                        From
                                                                Commencement
                                                               of Operations
                                                Three months    on September
                                                       ended     21, 2006 to
                                                 December 31,    December 31,
    Realized Product Prices                             2006            2006
    -------------------------------------------------------------------------
    Oil ($/bbl)                                        44.36           49.97
    -------------------------------------------------------------------------
    Natural Gas ($/mcf)                                 6.86            6.54
    -------------------------------------------------------------------------
    $/boe (6:1)                                        41.65           40.90
    -------------------------------------------------------------------------
    

    During the fourth quarter of 2006 and the first quarter of 2007,
Trafalgar established a new core area at MacKay, Alberta. MacKay is located
approximately 90 kms west of Fort McMurray, Alberta. Trafalgar has drilled
four shallow gas wells in the area which will be tied in prior to the end of
the first quarter of 2007. Trafalgar has a 100% working interest and
operatorship of the MacKay area and further drilling operations are expected
for the 2007/2008 winter drilling season.

    Revenue

    Oil and natural gas revenue recorded for the period from incorporation on
April 25, 2006 to December 31, 2006 was $2.7 million. Total oil and gas
revenue for the three months ended December 31, 2006 was $2.5 million.

    
    -------------------------------------------------------------------------
                                                                        From
                                                                Commencement
                                                               of Operations
                                                Three months    on September
                                                       ended     21, 2006 to
                                                 December 31,   December  31,
    Oil and Natural Gas Revenue ($)                     2006            2006
    -------------------------------------------------------------------------
    Oil                                              418,396         519,947
    -------------------------------------------------------------------------
    Natural Gas                                    2,114,408       2,197,690
    -------------------------------------------------------------------------
    Total Revenue                                  2,532,804       2,717,637
    -------------------------------------------------------------------------
    $/boe (6:1)                                        41.65           40.90
    -------------------------------------------------------------------------
    

    Royalties

    Total royalties for the period from incorporation on April 25, 2006 to
December 31, 2006 were $570,447 or $8.59 per boe, representing 21.0% of
revenue. For the three months ended December 31, 2006 royalties were $538,947
or $8.86 per boe or 21.3% of revenue.

    
    -------------------------------------------------------------------------
                                                                        From
                                                                Commencement
                                                               of Operations
                                                Three months    on September
                                                       ended     21, 2006 to
                                                 December 31,    December 31,
    Royalties                                           2006            2006
    -------------------------------------------------------------------------
    Royalties ($)                                    538,947         570,447
    -------------------------------------------------------------------------
    As a % of oil and gas revenue                      21.3%           21.0%
    -------------------------------------------------------------------------
    $/boe (6:1)                                        8.86            8.59
    -------------------------------------------------------------------------
    

    Interest and Other Income

    Interest and other income of $284,480 for the period from incorporation
on April 25, 2006 to December 31, 2006 and $119,482 for the three months ended
December 31, 2006 represents interest on Trafalgar's cash balances.

    Operating Expenses

    Operating expenses for the period from incorporation on April 25, 2006 to
December 31, 2006 were $808,420 or $12.17 per boe. For the three months ended
December 31, 2006, operating expenses were $740,920 or $12.18 per boe.
Trafalgar anticipates average production expenses of approximately $10.00 per
boe in 2007 as field operations are streamlined and production volumes are
increased.

    
    -------------------------------------------------------------------------
                                                                        From
                                                                Commencement
                                                               of Operations
                                                Three months    on September
                                                       ended     21, 2006 to
                                                 December 31,    December 31,
    Operating Expense                                   2006            2006
    -------------------------------------------------------------------------
    Operating Expense ($)                            740,920         808,420
    -------------------------------------------------------------------------
    $/boe (6:1)                                        12.18           12.17
    -------------------------------------------------------------------------
    

    General and Administrative Expenses

    General and administrative expenses ("G&A") for the period from
incorporation on April 25, 2006 to December 31, 2006 were $938,085 or $14.12
per boe. For the three months ended December 31, 2006, G&A expenses were
$388,049 or $6.38 per boe. Management expects administrative expenses per boe
for fiscal 2007 to decline as production volume increases continue to offset
general and administrative costs.

    
    -------------------------------------------------------------------------
                                                Three months        April 25,
                                                       ended         2006 to
                                                 December 31,    December 31,
    G & A Expenses                                      2006            2006
    -------------------------------------------------------------------------
    Expense ($)                                      388,049         938,085
    -------------------------------------------------------------------------
    $/boe (6:1)                                         6.38           14.12
    -------------------------------------------------------------------------
    

    Stock-based Compensation

    During the period from incorporation on April 25, 2006 to December 31,
2006, the Company expensed $3,758,483 in non-cash stock-based compensation.
$3,500,000 of the expense relates to the intrinsic value of 5.2 million flow-
through shares of a predecessor company purchased by management and directors
in June 2006. The intrinsic value was determined to be the difference between
the fair market value of the shares and the consideration received. The
Company has also recorded $258,483 of stock-based compensation for all stock
options granted for the same period. For the three months ended December 31,
2006, the Company recorded $163,649 of stock-based compensation for stock
options granted during the period.

    Interest Expense

    Interest expense for the period from incorporation on April 25, 2006 to
December 31, 2006 were $5,665 and a recovery of $52,924 for the three months
ended December 31, 2006. Recovery of interest relates to a reversal of
interest provisions on the Company's flow through share and convertible
debenture obligations. Interest is not required to be paid as Trafalgar has
met its flow through requirements and the convertible debentures have been
converted into non-voting common shares of Trafalgar with interest waived
subsequent to December 31, 2006.

    
    -------------------------------------------------------------------------
                                                Three months        April 25,
                                                       ended         2006 to
                                                 December 31,    December 31,
    Interest Expense                                    2006            2006
    -------------------------------------------------------------------------
    Interest Expense (recovery) ($)                  (52,924)          5,665
    -------------------------------------------------------------------------
    

    Asset Retirement Obligations

    Trafalgar's asset retirement obligations ("ARO") are a balance sheet
provision based on the Company's net ownership in wells and facilities.
Management estimates the cost to abandon and reclaim the wells and facilities
and the estimated time period during which these costs will be incurred in the
future. Management estimates the total undiscounted amount of future cash
flows required to abandon and reclaim wells and facilities as at December 31,
2006 to be approximately $4.0 million, to be incurred over the next three to
15 years. Trafalgar uses a discount rate of 7.8% to calculate ARO obligations.

    Depletion, Depreciation and Accretion

    The provision for depletion, depreciation and accretion for the period
from incorporation on April 25, 2006 to December 31, 2006 was $1,701,175 and
$1,544,620 for the three months ended December 31, 2006.

    Depletion and depreciation are calculated based upon capital, production
rates and reserves. Trafalgar will estimate depletion on a quarterly basis
throughout the year using independent reserve and land reports when available.
Trafalgar excludes undeveloped land, seismic and salvage value but includes
future development costs in the capital base used in this calculation.

    The petroleum and natural gas properties were subject to a ceiling test
as at December 31, 2006. No write-down was required as a result of this
calculation.

    Accretion represents the change in the time value of the ARO. The
underlying ARO may be increased over the period based on new obligations
incurred from drilling wells or constructing facilities. Similarly, this
obligation can be reduced as a result of abandonment work undertaken thereby
reducing future obligations. During the period from incorporation on April 25,
2006 to December 31, 2006, capital expenditure programs increased the ARO by
$1.4 million and there were no actual expenditures on abandonments.

    
    -------------------------------------------------------------------------
                                                Three months        April 25,
                                                       ended         2006 to
    Depletion, Depreciation                      December 31,    December 31,
     and Accretion                                      2006            2006
    -------------------------------------------------------------------------
    D & D Expense ($)                              1,520,039       1,676,594
    -------------------------------------------------------------------------
    $/boe (6:1)                                        24.99           25.24
    -------------------------------------------------------------------------
    Accretion Expense ($)                             24,581          24,581
    -------------------------------------------------------------------------
    $/boe (6:1)                                         0.40            0.37
    -------------------------------------------------------------------------

    Income Taxes

    Trafalgar has approximately $52 million of tax pools available to be
applied against future income for tax purposes.

    Based on these available pools, Trafalgar does not expect to pay current
income taxes in 2007. Taxes payable beyond 2007 will become a function of
commodity prices, production volumes and capital expenditures.

    Cash Flow from Operations and Net Income (Loss)

    -------------------------------------------------------------------------
                                                Three months        April 25,
                                                       ended         2006 to
                                                 December 31,    December 31,
                                                        2006            2006
    -------------------------------------------------------------------------
    Cash flow from operations ($)                  1,037,294         679,500
    -------------------------------------------------------------------------
    $/boe (6:1)                                        17.06           10.23
    -------------------------------------------------------------------------
    $/share:
    -------------------------------------------------------------------------
      Basic and diluted                                 0.10            0.11
    -------------------------------------------------------------------------
    Net Loss ($)                                    (670,975)     (4,780,158)
    -------------------------------------------------------------------------
    $/boe (6:1)                                       (11.03)         (71.95)
    -------------------------------------------------------------------------
    $/share:
    -------------------------------------------------------------------------
      Basic and diluted                                (0.07)          (0.78)
    -------------------------------------------------------------------------
    Weighted average shares outstanding
    -------------------------------------------------------------------------
      Basic                                       10,220,039       6,129,799
    -------------------------------------------------------------------------
      Diluted                                     10,997,162       6,579,343
    -------------------------------------------------------------------------

    The net loss for the period from incorporation on April 25, 2006 to
December 31, 2006 was significantly impacted by a non-cash stock-based
compensation expense of $3,758,483 charged against earnings for the period.

    Capital Expenditures

                                                                        From
                                                               incorporation
                                                Three months     on April 25,
                                                       ended         2006 to
                                                 December 31,    December 31,
                                                        2006            2006
                                             --------------------------------
    Land(1)                                         $(12,230)     $1,317,472
    Seismic                                          262,787       1,160,510
    Drilling and Completion                        4,516,312       4,668,330
    Equipment, Facilities and Pipelines              581,007       1,030,783
    Other Assets                                      76,345          99,990
                                             --------------------------------
    Total Exploration and Development
     Expenditures                                  5,424,221       8,277,085
    Acquisitions                                           -      20,892,310
                                             --------------------------------
    Total Capital Expenditures                    $5,424,221     $29,169,395
                                             --------------------------------
                                             --------------------------------

    The $20.9 million of acquisition value for the period from incorporation
on April 25, 2006 to December 31, 2006 relates to the petroleum and natural
gas assets acquired from the Daylight and Sequoia arrangement (See Note 2 to
the financial statements).

    (1) Trafalgar had a net disposition of undeveloped land during the three
        months ended December 31, 2006.
    

    LIQUIDITY AND CAPITAL RE

SOURCES Trafalgar's current approved capital budget for 2007 includes capital spending of $14.2 million for the year. Capital spending in excess of cash flow will be funded using currently available cash balances. As at December 31, 2006, Trafalgar had a working capital surplus of approximately $13 million. Trafalgar has an $8 million revolving term credit facility for general corporate purposes including capital expenditures. The credit facility revolves for a period of 364 days from closing followed by a one year term out period. The revolving period may be extended annually at the option of the lender. Rates of interest on the credit facility vary based on Trafalgar's debt to cash flow ratio. The credit facility is secured by a floating charge debenture over all of Trafalgar's assets and a general security agreement. As at December 31, 2006, no amounts were outstanding under this facility. RESERVES Trafalgar's reserves have been independently evaluated by GLJ Petroleum Consultants Ltd. ("GLJ"). The reserves as at December 31, 2006 have been evaluated in accordance with National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). The reserves as at December 31, 2006 do not include favorable results of Trafalgar's winter drilling program. Forecast prices and costs are the GLJ forecast effective January 1, 2007. The following is a summary of reserve information with regard to oil and gas reserves as at December 31, 2006. Other detailed information as required under NI 51-101 will be included in Trafalgar's Annual Information Form available at www.sedar.com. RECONCILIATION OF COMPANY INTEREST RESERVES BY PRINCIPAL PRODUCT TYPE FORECAST PRICES AND COSTS Light and Medium Oil Heavy Oil ----------------------------------------------------------- Proved + Proved + Proved Probable Probable Proved Probable Probable FACTORS (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) ------------------------------------------------------------------------- December 31, 2005 - - - - - - Discoveries - - - - - - Extensions - - - - - - Infill Drilling(1) - - - - - - Improved Recovery - - - - 167 167 Technical Revisions - - - - - - Acquisitions 78 4 82 14 2 16 Dispositions - - - - - - Economic Factors - - - - - - Production (7) - (7) (3) - (3) --------------------------------------------------------- December 31, 2006 71 4 75 11 169 180 --------------------------------------------------------- --------------------------------------------------------- Conventional Natural Gas BOE(2) ----------------------------------------------------------- Proved + Proved + Proved Probable Probable Proved Probable Probable FACTORS (MMcf) (MMcf) (MMcf) (Mboe) (Mboe) (Mboe) ------------------------------------------------------------------------- December 31, 2005 - - - - - - Discoveries - - - - - - Extensions - - - - - - Infill Drilling(1) - - - - - - Improved Recovery 2,041 609 2,650 340 268 608 Technical Revisions - - - - - - Acquisitions 3,252 1,481 4,733 634 253 887 Dispositions - - - - - - Economic Factors - - - - - - Production (336) - (336) (66) - (66) --------------------------------------------------------- December 31, 2006 4,957 2,090 7,047 908 521 1,429 --------------------------------------------------------- --------------------------------------------------------- Note: (1) The change categories correspond to standards set out in the COGE Handbook for reporting under NI 51-101, reserves additions under Infill Drilling and Improved Recovery should be combined and reported as Improved Recovery. (2) Oil equivalent amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. BOE's may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 mcf:1 bbl is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The following tables summarize Trafalgar's remaining oil and gas reserve volumes along with the value of future net revenue utilizing GLJ's forecast pricing and cost estimates effective January 1, 2007. SUMMARY OF OIL AND GAS RESERVES AS OF DECEMBER 31, 2006 FORECAST PRICES AND COSTS OIL AND GAS RESERVES ----------------------------------------------------------- Light and Medium Oil Heavy Oil Natural Gas ------------------- ------------------- ------------------- RESERVES Gross Net Gross Net Gross Net CATEGORY (Mbbls) (Mbbls) (Mbbls) (Mbbls) (MMcf) (MMcf) ------------------------------------------------------------------------- Proved Developed Producing 70 62 11 10 4,058 3,236 Developed Non-Producing - - - - 899 698 Undeveloped - - - - - - --------- --------- --------- --------- -------- ---------- Total Proved 70 62 11 10 4,957 3,934 Probable 5 4 168 157 2,090 1,655 --------- --------- --------- --------- -------- ---------- Total Proved Plus Probable 75 66 179 167 7,047 5,590 --------- --------- --------- --------- -------- ---------- --------- --------- --------- --------- -------- ---------- OIL AND GAS RESERVES --------------------------------------- Natural Gas Liquids Boe ------------------- ------------------- Gross Net Gross Net RESERVES CATEGORY (Mbbls) (Mbbls) (MBoe) (Mboe) --------------------------------- --------- --------- --------- --------- Proved Developed Producing - - 757 611 Developed Non-Producing - - 150 116 Undeveloped - - - - --------- --------- --------- --------- Total Proved - - 907 727 Probable - - 521 437 --------- --------- --------- --------- Total Proved Plus Probable - - 1,428 1,165 --------- --------- --------- --------- --------- --------- --------- --------- SUMMARY OF NET PRESENT VALUES OF FUTURE NET REVENUE AS OF DECEMBER 31, 2006 FORECAST PRICES AND COSTS NET PRESENT VALUES OF FUTURE NET REVENUE BEFORE INCOME TAXES DISCOUNTED AT (%/YEAR) RESERVES CATEGORY 0 5 10 15 20 ($000s) ($000s) ($000s) ($000s) ($000s) PROVED Developed Producing 19,616 17,472 15,786 14,431 13,320 Developed Non-Producing 4,337 3,375 2,660 2,121 1,707 Undeveloped - - - - - ------- ------- ------- ------- ------- TOTAL PROVED 23,954 20,847 18,447 16,552 15,027 PROBABLE 12,364 8,402 6,102 4,650 3,671 ------- ------- ------- ------- ------- TOTAL PROVED PLUS PROBABLE 36,318 29,248 24,549 21,201 18,698 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- NET PRESENT VALUES OF FUTURE NET REVENUE AFTER INCOME TAXES DISCOUNTED AT (%/YEAR) RESERVES CATEGORY 0 5 10 15 20 ($000s) ($000s) ($000s) ($000s) ($000s) PROVED Developed Producing 19,616 17,472 15,786 14,431 13,320 Developed Non-Producing 4,337 3,375 2,660 2,121 1,707 Undeveloped - - - - - ------- ------- ------- ------- ------- TOTAL PROVED 23,954 20,847 18,447 16,552 15,027 PROBABLE 12,364 8,402 6,102 4,650 3,671 ------- ------- ------- ------- ------- TOTAL PROVED PLUS PROBABLE 36,318 29,248 24,549 21,201 18,698 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- GLJ SUMMARY OF PRICING AND INFLATION RATE ASSUMPTIONS FORECAST PRICES AND COSTS EFFECTIVE JANUARY 1, 2007 Edmonton Hardisty Cromer WTI Par Price Heavy Medium Cushing 40 degrees 12 degrees 29.3 degrees Year Oklahoma API API API Forecast ($US/Bbl) ($Cdn/Bbl) ($Cdn/Bbl) ($Cdn/Bbl) ---------- ---------- ----------- ------------ ----------- 2007 62.00 70.25 39.25 61.25 2008 60.00 68.00 40.00 59.25 2009 58.00 65.75 39.75 57.25 2010 57.00 64.50 39.75 56.00 2011 57.00 64.50 40.25 56.00 2012 57.50 65.00 41.50 56.50 2013 58.50 66.25 42.50 57.75 2014 59.75 67.75 43.50 59.00 2015 61.00 69.00 44.25 60.00 2016 62.25 70.50 45.25 61.25 2017 63.50 71.75 46.00 62.50 2018+ +2.0%/yr +2.0%/yr +2.0%/yr +2.0%/yr GLJ SUMMARY OF PRICING AND INFLATION RATE ASSUMPTIONS FORECAST PRICES AND COSTS EFFECTIVE JANUARY 1, 2007 NATURAL NYMEX GAS NATURAL AECO Gas INFLATION EXCHANGE Year GAS Price RATES(1) RATE(2) Forecast (US$/MMBtu) ($Cdn/MMBtu) (%/Year) ($US/$Cdn) ---------- ----------- ------------ ------------ ----------- 2007 7.25 7.20 2.0 0.870 2008 7.50 7.45 2.0 0.870 2009 7.50 7.75 2.0 0.870 2010 7.50 7.80 2.0 0.870 2011 7.50 7.85 2.0 0.870 2012 7.50 8.15 2.0 0.870 2013 7.90 8.30 2.0 0.870 2014 8.05 8.50 2.0 0.870 2015 8.20 8.70 2.0 0.870 2016 8.40 8.90 2.0 0.870 2017 8.55 9.10 2.0 0.870 2018+ +2.0%/yr +2.0%/yr 2.0 0.870 Notes: (1) Inflation rates for forecasting prices and costs. (2) Exchange rates used to generate the benchmark reference prices in this table. FINDING, DEVELOPMENT AND ACQUISITION COSTS The following table summarizes Trafalgar's finding, development and acquisition costs for the period from April 25, 2006 to December 31, 2006. Trafalgar's successful winter drilling program occurred primarily in Q1 of 2007, so the associated reserves will be booked in 2007. ------------------------------------------------------------------------- Capital Expenditures $ ------------------------------------------------------------------------- Acquisitions 20,892,310 ------------------------------------------------------------------------- Total Exploration and Development Expenditures(*) 7,541,046 ------------------------------------------------------------------------- Future Development Capital (xx) 500,000 ------------------------------------------------------------------------- Total Capital Expenditures 28,933,356 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Proved + Proved Probable Per boe Costs ($/boe) ($/boe) ------------------------------------------------------------------------- Acquisition Costs 32.95 23.55 ------------------------------------------------------------------------- Finding and development costs with future development capital 22.18 13.23 ------------------------------------------------------------------------- Combined 29.19 19.35 ------------------------------------------------------------------------- (*) Excludes $736,039 of equipment held in inventory. (xx) Associated with the probable reserves only. There is no future development capital associated with the proved reserves. LAND HOLDINGS The following table summarizes Trafalgar's land holdings as at December 31, 2006. ------------------------------------------------------------------------- Land Holding (acres) December 31, 2006 ------------------------------------------------------------------------- Developed ------------------------------------------------------------------------- Gross 25,917 ------------------------------------------------------------------------- Net 21,118 ------------------------------------------------------------------------- Undeveloped ------------------------------------------------------------------------- Gross 91,307 ------------------------------------------------------------------------- Net 68,565 ------------------------------------------------------------------------- Total ------------------------------------------------------------------------- Gross 117,224 ------------------------------------------------------------------------- Net 89,683 ------------------------------------------------------------------------- NET ASSET VALUE The following table summarizes Trafalgar's net asset value and net asset value per share as at December 31, 2006. ------------------------------------------------------------------------- Proved plus probable reserves at NPV10(1) $24.5 million ------------------------------------------------------------------------- Inventory(2) $0.7 million ------------------------------------------------------------------------- Working capital $13.0 million ------------------------------------------------------------------------- Undeveloped Land(3) $8.6 million ------------------------------------------------------------------------- Net Asset Value $46.8 million ------------------------------------------------------------------------- ------------------------------------------------------------------------- Fully diluted shares as at December 31, 2006(4) 12.7 million ------------------------------------------------------------------------- Proceeds from stock options $3.6 million ------------------------------------------------------------------------- Net Asset Value per fully diluted share $3.97 ------------------------------------------------------------------------- (1) As evaluated by GLJ as at December 31, 2006. Net present value of future net reserves does not represent fair market value of the reserves. (2) Value at cost of a compressor held in inventory. (3) As evaluated by Trafalgar as at December 31, 2006, 68,565 acres of undeveloped land at $125 per acre. (4) Fully diluted shares as at December 31, 2006 includes outstanding common voting shares of 9,594,590, outstanding non-voting common shares of 2,241,293 and outstanding options of 894,750 for a total of 12,730,633. CONTRACTUAL OBLIGATIONS Trafalgar has various contractual obligations and commitments arising in the normal course of operations and financing activities. These obligations and commitments have been considered when assessing the cash requirements in the above discussion of future liquidity. The Company's bank credit facilities are subject to periodic review. Trafalgar does not expect any material changes to the bank credit facility resulting from these reviews. Obligations with a fixed term are as follows: ------------------------------------------------------------------------- 2007 2008 2009 2010 2011 ------------------------------------------------------------------------- Office Lease 175,870 175,870 175,870 175,870 - ------------------------------------------------------------------------- OFF BALANCE SHEET ARRANGEMENTS Trafalgar does not have any arrangements or obligations that are not reflected or disclosed in the consolidated financial statements. RELATED PARTY TRANSACTIONS The Company's related party transactions are disclosed in Note 14 to the financial statements. BOE PRESENTATION In conformity with National Instrument 51-101, Standards for Disclosure of Oil and Gas Activities ("NI 51-101"), natural gas volumes have been converted to barrels of oil equivalent ("boe") using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. This ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Readers are cautioned that the term "boe" may be misleading, particularly if used in isolation. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This discussion and analysis contains forward-looking statements related to future events or future performance. Certain statements regarding Trafalgar include management's assessments of future plans and operations, may constitute forward-looking statements under applicable securities laws and necessarily involve known and unknown risks and uncertainties, most of which are beyond Trafalgar's control. These risks may cause actual financial and operating results, performance, levels of activity and achievements to differ materially from those expressed in, or implied by, such forward-looking statements. Such factors include, but are not limited to: the impact of general economic conditions in Canada and the United States; industry conditions including changes in laws and regulations including adoption of new environmental laws and regulations, and changes in how they are interpreted and enforced; competition from other producers, the lack of availability of drilling rigs and other field services, the lack of availability of qualified personnel; fluctuations in commodity prices, the results of exploration and development drilling related activities; imprecision in reserve estimates; the production and growth potential of Trafalgar's various assets; fluctuations in foreign exchange or interest rates; the ability to access sufficient capital from internal and external sources; and obtaining required approvals of regulatory authorities. Accordingly, Trafalgar gives no assurance nor makes any representations or warranty that the expectations conveyed by the forward-looking statements will prove to be correct and actual results may differ materially from those anticipated in the forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Trafalgar undertakes no obligation to publicly update or revise any forward-looking statements. ADDITIONAL INFORMATION Further information regarding the Company, including the Annual Information Form, can be accessed under Trafalgar's public filings found on the SEDAR web site at www.sedar.com. Information can also be obtained by contacting the Company at Trafalgar Energy Ltd., Suite 920, 521 3rd Avenue SW, Calgary, Alberta T2P 3T3. TRAFALGAR ENERGY LTD. BALANCE SHEET December 31, 2006 $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents (Note 4) 15,705,365 Accounts receivable (Note 5) 2,605,143 Prepaid expenses and deposits 450,134 ------------------------------------------------------------------------- 18,760,642 Petroleum and natural gas assets (Note 6) 28,881,664 ------------------------------------------------------------------------- 47,642,306 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 5,788,891 ------------------------------------------------------------------------- 5,788,891 Asset retirement obligation (Note 9) 1,413,444 ------------------------------------------------------------------------- 7,202,335 ------------------------------------------------------------------------- Commitments (Note 13) Shareholders' equity Share capital (Note 10) 42,617,771 Contributed surplus (Note 10) 494,038 Deficit (2,671,838) ------------------------------------------------------------------------- 40,439,971 ------------------------------------------------------------------------- 47,642,306 ------------------------------------------------------------------------- ------------------------------------------------------------------------- see accompanying notes to the financial statements TRAFALGAR ENERGY LTD. STATEMENT OF OPERATIONS AND DEFICIT From incorporation Three months on April 25, ended 2006 to December 31, December 31, 2006 2006 $ $ ------------------------------------------------------------------------- Revenue Oil and natural gas revenue 2,532,804 2,717,637 Less: Royalties (538,947) (570,447) ------------------------------------------------------------------------- 1,993,857 2,147,190 Interest and other income 119,482 284,480 ------------------------------------------------------------------------- 2,113,339 2,431,670 ------------------------------------------------------------------------- Expenses Operating 740,920 808,420 General and administrative 388,049 938,085 Stock-based compensation (Note 10) 163,649 3,758,483 Interest (52,924) 5,665 Depletion, depreciation and accretion (Note 6 and Note 9) 1,544,620 1,701,175 ------------------------------------------------------------------------- 2,784,314 7,211,828 ------------------------------------------------------------------------- Net loss (670,975) (4,780,158) Deficit, beginning of period (2,000,863) - Adjustment relating to business combination (Note 1) - 2,108,320 ------------------------------------------------------------------------- Deficit, end of period (2,671,838) (2,671,838) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net loss per share (Note 10) Basic and diluted (0.07) (0.78) Weighted average number of shares outstanding (Note 10) Basic and diluted 10,220,039 6,129,799 ------------------------------------------------------------------------- ------------------------------------------------------------------------- see accompanying notes to the financial statements TRAFALGAR ENERGY LTD. STATEMENT OF CASH FLOWS From incorporation Three months on April 25, ended 2006 to December 31, December 31, 2006 2006 $ $ ------------------------------------------------------------------------- Operating activities Net loss for the period (670,975) (4,780,158) Add items not involving cash Depletion, depreciation and accretion 1,544,620 1,701,175 Stock-based compensation (Note 10) 163,649 3,758,483 ------------------------------------------------------------------------- 1,037,294 679,500 Change in non-cash working capital items related to operating activities (Note 12) (749,469) (1,052,527) ------------------------------------------------------------------------- 287,825 (373,027) ------------------------------------------------------------------------- Financing activities Cash received upon business combination (Note 1) - 276,916 Intercompany loan payment - (146,357) Shareholder loan repayment - (170,000) Issuance of shares 6,300,992 21,355,656 Exercise of arrangement warrants 143,864 143,864 Share issue costs (235,851) (922,818) ------------------------------------------------------------------------- 6,209,005 20,537,261 ------------------------------------------------------------------------- Investing activities Acquisition of property and equipment (5,424,221) (8,277,085) Deferred charges - (214,000) Change in non-cash working capital items related to investing activities (Note 12) 2,520,357 4,032,216 ------------------------------------------------------------------------- (2,903,864) (4,458,869) ------------------------------------------------------------------------- Increase in cash and cash equivalents 3,592,966 15,705,365 Cash and cash equivalents, beginning of period 12,112,399 - ------------------------------------------------------------------------- Cash and cash equivalents, end of period (Note 4) 15,705,365 15,705,365 ------------------------------------------------------------------------- ------------------------------------------------------------------------- see accompanying notes to the financial statements TRAFALGAR ENERGY LTD. NOTES TO THE FINANCIAL STATEMENTS From incorporation on April 25, 2006 to December 31, 2006 1. NATURE OF BUSINESS AND BUSINESS COMBINATION 1238364 Alberta Ltd. ("1238364") was incorporated April 25, 2006, in the province of Alberta, as a private oil and gas business. Pursuant to an amalgamation agreement dated June 6, 2006, 1238364, 1211413 Alberta Ltd. ("1211413") and Triant Technologies Inc. ("Triant") amalgamated resulting in the creation of Trafalgar Energy Ltd. ("Trafalgar" or the "Company"). This transaction is accounted for as the acquisition of 1211413 and Triant by 1238364, which was renamed Trafalgar upon amalgamation. The amalgamation did not constitute a business combination for accounting purposes. These financial statements of Trafalgar represent the continuation of 1238364. Prior to incorporation, the Company had no operations. Accordingly, comparative statements of operations and deficit and cash flows have not been provided. Pursuant to the amalgamation agreement described above, the shareholders of the common shares of 1211413 received one common share of Trafalgar for every share owned. The common shareholders of Triant received one common share of Trafalgar for every share owned. The common shareholders of 1238364, voting and non-voting, received one voting common share and one non-voting common share of Trafalgar for every share owned. Trafalgar also assumed the covenants and obligations of the $1.5 million convertible debentures from Triant which are convertible into 500,000 non-voting common shares of Trafalgar at the rate of $3 per share (see Note 8). The following summarizes the value of the assets and liabilities assumed as a result of the acquisitions: 1211413 Alberta Ltd.: --------------------------------------------------------------------- $ --------------------------------------------------------------------- Cash and cash equivalents 26,916 Accounts receivable 22,502 Prepaid expenses 27,573 Property and equipment 115,686 Intercompany payable (146,357) Due to shareholders (170,000) --------------------------------------------------------------------- (123,680) --------------------------------------------------------------------- --------------------------------------------------------------------- Consideration received: three (3) common shares of Trafalgar Triant Technologies Inc.: --------------------------------------------------------------------- $ --------------------------------------------------------------------- Cash and cash equivalents 250,000 Accounts payable (18,000) Liability component of convertible debentures (1,465,116) Equity component of convertible debentures (34,884) --------------------------------------------------------------------- (1,268,000) --------------------------------------------------------------------- --------------------------------------------------------------------- Consideration received: 250,000 common shares of Trafalgar As the acquisitions do not constitute business combinations, the accumulated deficit, share capital and contributed surplus of the acquired companies are allocated to the contributed surplus of the acquirer with the remainder to the deficit. This resulted in the accumulated deficit ($40,030,571), share capital $35,489,398 and contributed surplus $3,149,493 of the acquired companies being allocated to the contributed surplus of 1238364 in the amount of $3,500,000 and $2,108,320 allocated to the deficit of 1238364. Trafalgar is engaged in oil and gas exploration, development and production in Western Canada. 2. PLAN OF ARRANGEMENT On July 17, 2006, Trafalgar entered into a Proposed Business Combination Agreement ("Agreement") between Daylight Energy Trust ("Daylight"), Daylight Energy Ltd. ("DEL"), Sequoia Oil & Gas Trust ("Sequoia"), Sequoia Oil & Gas Ltd. ("SOGL") pursuant to which the Company would participate as the ExplorCo in a proposed arrangement between Daylight, DEL, Sequoia and SOGL (the "Original Parties") pursuant to which the Original Parties agreed, subject to certain conditions, to implement an arrangement whereby, among other things, certain of DEL's assets would be transferred directly or indirectly to the Company (the "Arrangement"). The Arrangement was approved by shareholders of the Original Parties on September 19, 2006 and completed on September 21, 2006. Pursuant to the Arrangement, holders of Daylight units and Sequoia units received common shares ("Trafalgar common shares") of Trafalgar on the basis of 0.0417 of a Trafalgar common share for each Daylight unit and 0.0517 of a Trafalgar common share for each Sequoia unit. In addition, under the Arrangement, each holder of Daylight units received 0.0116 of a warrant ("Trafalgar arrangement warrant") of Trafalgar for each Daylight unit held and each holder of Sequoia units received 0.0144 of a Trafalgar arrangement warrant for each Sequoia unit held. Each full Trafalgar arrangement warrant was exercisable for a period of 30 days following completion of the Arrangement into one Trafalgar common share at an exercise price of $4.02 per share. Pursuant to the Arrangement, Trafalgar received petroleum and natural gas assets valued at approximately $22.1 million and assumed related asset retirement obligations of approximately $1.3 million. As the Daylight and Sequoia security holders received in excess of 50% of the outstanding shares of Trafalgar, the oil and natural gas properties being transferred from Daylight have been recorded following the continuity of interests method with the assets and liabilities transferred at their book value. --------------------------------------------------------------------- $ --------------------------------------------------------------------- Net assets acquired: Petroleum and natural gas assets 22,105,006 Asset retirement obligations (1,328,382) --------------------------------------------------------------------- Net assets transferred 20,776,624 --------------------------------------------------------------------- Share capital issued 20,534,363 Warrants 242,261 --------------------------------------------------------------------- 20,776,624 --------------------------------------------------------------------- --------------------------------------------------------------------- The above amounts are estimates made by management based on currently available information. Amendments may be made to the purchase equation as the cost estimates and balances are finalized. 3. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") and reflect the significant accounting policies outlined below. a. Measurement uncertainty The operations of the Company are complex and regulations and legislation affecting the Company are continually changing. Although the ultimate impact of these matters on the net income or loss cannot be determined at this time, it could be material for any one quarter or year. The amounts recorded for depletion and depreciation of petroleum and natural gas assets and other assets, the provision for asset retirement obligations, and the ceiling test calculation are based on estimates of proven or proven and probable reserves, production rates, petroleum and natural gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. b. Cash and cash equivalents The Company invests certain of its excess cash in cash equivalents which are highly liquid money market instruments with an original maturity of 90 days or less. c. Petroleum and natural gas properties and production equipment The Company follows the full cost method of accounting for oil and natural gas operations whereby all costs relating to the acquisition, exploration and development of oil and gas reserves, including asset retirement costs, are capitalized in a single Canadian cost centre. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non- producing properties, costs of drilling both productive and non- productive wells, related production equipment costs, asset retirement and abandonment costs and overhead charges directly related to acquisition, exploration and development activities. Capitalized costs, excluding costs related to unproven properties, will be depleted and depreciated using the unit-of- production method based on estimated proven oil and natural gas reserves before deduction of royalties as determined by independent petroleum engineers. Petroleum and natural gas reserves and production are converted to equivalent barrels of oil using a ratio of six thousand cubic feet of natural gas to one barrel of oil. Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired the costs of the property or the amount of the impairment is added to costs subject to depletion. Proceeds from the sale of petroleum and natural gas properties will be applied against capitalized costs, with no gain or loss recognized, unless such a sale would result in a greater than 20 percent change in the depletion and depreciation rate. The Company applies a two-stage ceiling test to capitalized costs to ensure that such costs do not exceed the undiscounted future cash flows from production of proved reserves. Undiscounted future cash flows are calculated based on management's best estimate of forward indexed prices applied to estimated future production of proved reserves plus cost of undeveloped properties, net of any impairment, less estimated future operating costs. When the carrying amount of a cost centre is not recoverable, the second stage process will determine the impairment whereby the cost centre would be written down to its fair value. The second stage requires the calculation of discounted future cash flows from proved plus probable reserves using the Company's risk free interest rate plus the cost of undeveloped land, net of any impairment. The fair value is estimated using accepted present value techniques, which incorporate risks and other uncertainties when determining expected cash flows. The Company records the fair value of asset retirement obligations as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long- lived assets that result from the acquisition, construction, development and/or normal use of assets. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets and depleted and depreciated using a unit-of-production method over gross proved reserves. Subsequent to the initial measurement of the asset retirement obligations, the obligations are adjusted at the end of each period to reflect the passage of time (accretion) and changes in the estimated future cash flows underlying the obligation. Equipment is recorded at cost and amortized over the estimated useful lives of the assets on the following basis: Computer hardware and software 30% per annum declining balance Furniture and equipment 20% per annum declining balance Leasehold improvements straight-line over the lesser of the lease term or useful life of the improvements The Company periodically evaluates the recoverability of its equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimates of future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. d. Revenue recognition The Company's revenue is derived from the following sources: (i) Oil and natural gas Revenues derived from crude oil and gas is recognized when title passes from the Company to its purchaser. (ii) Interest Interest and other income is recognized monthly, as earned. e. Stock-based compensation The Company follows the fair-value method of accounting for stock options granted to employees and directors. Fair value is determined at the grant date using the Black-Scholes options- pricing model and recognized over the vesting period of the options granted as stock-based compensation expense with a corresponding credit to contributed surplus. The contributed surplus balance is reduced as the options are exercised with the amount initially recorded being credited to share capital. f. Flow-through shares The resource expenditure deductions related to exploratory activities funded by flow-through share arrangements are renounced to investors in accordance with tax legislation. A future tax liability is recognized and share capital is reduced by the estimated cost of the renounced expenditures when the renunciation is made. g. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are determined based on the differences between the carrying value and the tax basis of assets and liabilities, and measured using the substantively enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The effect on future tax assets and liabilities of a change in tax rates is recognized in net income in the period in which the change occurs. A valuation allowance is recorded to the extent that the realization of future tax assets is not more likely than not. h. Per share amounts The Company utilizes the treasury stock method in the determination of diluted per share amounts. Under this method, the diluted weighted average number of shares is calculated assuming the proceeds that arise from the exercise of outstanding, in-the-money options are used to purchase common shares of the Company at their average market price for the period. 4. CASH AND CASH EQUIVALENTS --------------------------------------------------------------------- $ --------------------------------------------------------------------- Cash on hand (116,620) Restricted cash 187,632 Short-term investment 15,634,353 --------------------------------------------------------------------- 15,705,365 --------------------------------------------------------------------- --------------------------------------------------------------------- "Restricted cash" are funds (held with a legal firm) associated with final negotiations relating to the Triant acquisition and the funds used to refinance and restructure Triant (see Note 1 and Note 8). Short-term investment at December 31, 2006 consisted of $15.6 million invested as "Fixed Day Deposits" with terms of 90 days or less to maturity and interest calculated at 3.95% per annum. 5. ACCOUNTS RECEIVABLE A substantial portion of the Company's accounts receivable is with oil and gas marketing entities. The Company generally extends unsecured credit to these companies, and therefore, the collection of accounts receivable may be affected by changes in economic or other conditions and may accordingly impact the Company's overall credit risk. Management believes the risk is mitigated by the size, reputation and diversified nature of the companies to which they extend credit. The Company has not previously experienced any material credit losses on the collection of receivables. Of the Company's significant individual accounts receivable at December 31, 2006, approximately 85% was owed from two customers. 6. PETROLEUM AND NATURAL GAS ASSETS --------------------------------------------------------------------- As at December 31, 2006 $ --------------------------------------------------------------------- Petroleum and natural gas assets 30,458,268 Equipment 99,990 Accumulated depletion and depreciation, petroleum and natural gas assets (1,661,000) Accumulated amortization and depreciation, equipment (15,594) --------------------------------------------------------------------- Net book value 28,881,664 --------------------------------------------------------------------- --------------------------------------------------------------------- In 2006 the Company capitalized general and administrative expenses of $198,200 directly attributable to exploration activities. Estimated future development costs of $1.5 million were included in the calculation of depletion expense for the year ended December 31, 2006. As at December 31, 2006, undeveloped land costs of $6.0 million and seismic costs of $1.1 million were excluded from assets subject to depletion. Ceiling Test The Company performed a ceiling test calculation at December 31, 2006 in which the estimated undiscounted future cash flows associated with the Company's proved reserves exceeded the carrying amount of the Company's petroleum and natural gas assets. The oil and natural gas prices used in the ceiling test calculation are based on the January 1, 2007 commodity price forecast as follows: Natural gas ($/mcf) Oil ($/bbl) 2007 7.63 58.09 2008 7.89 65.20 2009 8.19 62.95 2010 8.24 61.70 2011 8.30 61.70 Prices increase at a rate of 4% per year after 2011. The benchmark prices were adjusted for quality and transportation. Based on these assumptions, the carrying value of petroleum and natural gas assets exceeds the undiscounted value of net revenues from the Company's proved reserves at December 31, 2006 and, accordingly, no impairment write down was recorded. 7. CREDIT FACILITY The Company has a revolving term credit facility with a Canadian chartered bank to a maximum of $8 million. The facility bears interest at the bank's prime lending or banker's acceptance rates plus applicable margins. The borrowing base is subject to re- determination semi-annually. At December 31, 2006, no amounts were drawn against this facility. The Company's lending facilities are secured by a floating charge debenture over all of the Trafalgar's assets, a general security agreement, and a floating charge debenture. 8. CONVERTIBLE DEBENTURES In accordance with the recommendations of the Canadian Institute of Chartered Accountants, the convertible debentures issued were segregated into their liability and equity components. The liability component, representing the value allocated to the liability at inception, was classified as "liability component of convertible debentures". The remaining component, representing the value ascribed to the holders' option to convert the principal balance into common shares, was classified in shareholders' equity as "equity component of convertible debentures". These components were measured at their respective fair values at the date the convertible debentures were acquired by Trafalgar as follows: ----------------------------------------------------------------- $ ----------------------------------------------------------------- Liability component of convertible debentures 1,465,116 Equity component of convertible debentures 34,884 ----------------------------------------------------------------- 1,500,000 ----------------------------------------------------------------- ----------------------------------------------------------------- Conversion notices were signed by the debenture holders in December 2006, agreeing to convert all of the convertible debentures to 500,000 non-voting common shares. As at December 31, 2006, the convertible debentures were converted to 500,000 non-voting common shares. The liability and equity components have been reflected in Share Capital (see Note 10). 9. ASSET RETIREMENT OBLIGATIONS --------------------------------------------------------------------- As at December 31, 2006 $ --------------------------------------------------------------------- Balance, beginning of period - Liabilities acquired (Note 2) 1,328,382 Liabilities incurred 12,401 Changes in estimates 48,080 Accretion 24,581 --------------------------------------------------------------------- Balance, end of period 1,413,444 --------------------------------------------------------------------- --------------------------------------------------------------------- The total future asset retirement obligations result from the Company's net ownership interest in wells and facilities. Management estimates the total undiscounted amount of future cash flows required to reclaim and abandon wells and facilities as at December 31, 2006 is approximately $4.0 million, to be incurred over the next three to 15 years. Estimated cash flow has been discounted at a credit- adjusted risk free rate of 7.8% and an inflation rate of 2.0% to arrive at the recorded liability acquired of $1.4 million at December 31, 2006. There has been $24,581 recognized at December 31, 2006 as an accretion expense. 10. SHARE CAPITAL a. Authorized An unlimited number of voting common shares An unlimited number of non-voting common shares An unlimited number of first preferred shares, issuable in series ----------------------------------------------------------------- Number of Common Shares, voting Shares $ ----------------------------------------------------------------- Issued through private placement(i) 8,872,894 11,554,664 ----------------------------------------------------------------- Prior to amalgamation, June 6, 2006 8,872,894 11,554,664 Redemption of 1238364 Alberta Ltd. common shares (8,872,894) (11,554,664) Issued Trafalgar common shares (Note 1) 8,872,894 11,554,664 ----------------------------------------------------------------- Balance, June 30, 2006 8,872,894 11,554,664 Share consolidation(ii) 1:3 - ----------------------------------------------------------------- 2,957,636 11,554,664 Issued pursuant to the Arrangement (Notes 2 and (ii)) 5,236,707 20,534,363 Exercise of warrants pursuant to the Arrangement (Note 2) 35,787 143,864 Fair value recognized on warrant exercise(e) - 6,706 Issued through private placement(iii) 1,364,460 6,300,992 Issue costs - (922,818) ----------------------------------------------------------------- Balance, December 31, 2006 9,594,590 37,617,771 ----------------------------------------------------------------- ----------------------------------------------------------------- Number of Common Shares, non-voting Shares $ ----------------------------------------------------------------- Issued through private placement of flow through shares(i) 5,223,880 3,500,000 ----------------------------------------------------------------- Prior to amalgamation, June 6, 2006 5,223,880 3,500,000 Redemption of 1238364 Alberta Ltd. common shares, non-voting (5,223,880) (3,500,000) Issued Trafalgar common shares, non-voting (Note 1) 5,223,880 3,500,000 ----------------------------------------------------------------- Balance, June 30, 2006 5,223,880 3,500,000 Share consolidation(ii) 1:3 - ----------------------------------------------------------------- 1,741,293 3,500,000 Issued on conversion of convertible debentures (Note 8) 500,000 1,500,000 ----------------------------------------------------------------- Balance, December 31, 2006 2,241,293 5,000,000 ----------------------------------------------------------------- ----------------------------------------------------------------- Total common shares (voting and non-voting), December 31, 2006 11,835,883 42,617,771 ----------------------------------------------------------------- ----------------------------------------------------------------- Number of First Preferred Shares Shares $ ----------------------------------------------------------------- Issued through private placement(iv) 1 100 ----------------------------------------------------------------- Prior to amalgamation, June 6, 2006 1 100 Cancellation of preferred share (Note 1) (1) (100) ----------------------------------------------------------------- Balance, December 31, 2006 - - ----------------------------------------------------------------- ----------------------------------------------------------------- (i) In June 2006, 1238364 issued 8.6 million common shares at $1.34 per share for gross proceeds of $11.6 million. Management and directors of 1238364 subscribed for approximately 5% of the issue. In June 2006, 1238364 issued 5.2 million non-voting common shares on a flow through tax basis at $0.67 per share for gross proceeds of $3.5 million. Management and directors subscribed for 100% of the issue. Under the terms of this private placement, 1238364 was committed to expend the proceeds on qualifying exploration drilling and seismic prior to December 31, 2007 and renounce the benefits to subscribers by December 31, 2006. This commitment has been assumed by Trafalgar. Tax effect on the flow through will be recognized when the renouncement filing is completed in February 2007. (ii) On September 21, 2006, pursuant to the Arrangement, the Company's outstanding common shares, voting and non-voting, were consolidated to a one for three basis. Trafalgar entered into a business combination between Daylight, DEL, Sequoia, SOGL, whereby certain Daylight Energy Ltd.'s assets would be transferred to the Company. Pursuant to completion of the Arrangement, Trafalgar issued to the holders of the trust units of Daylight, holders of exchangeable shares of Daylight and holders of trust units of Sequoia, 5.2 million common shares valued at $4.02 per share, and 1.3 million arrangement warrants. (iii) In December 2006, through a private placement, Trafalgar issued 572,360 common shares at $4.02 per share for gross proceeds of $2.3 million, and 792,100 common shares on a flow through tax basis at $5.05 per share for gross proceeds of $4.0 million. The flow through benefits have been renounced to the subscribers at December 31, 2006. Tax effect pertaining to the December 2006 flow through program will be recognized in February 2007. (iv) On June 5, 2006, 1238364 issued one preferred share to Triant for gross proceeds of $100. The preferred share entitled the holder to 60% of the votes attaching to the common shares of 1238364 at any time and have a cumulative dividend of 4% per annum, were redeemable in their entirety only by the holder of their face value plus accrued and unpaid dividends and are entitled to preference in liquidation for their issue price plus accrued and unpaid dividends. This preferred share was cancelled as part of the business combination on June 6, 2006 (Note 1). b. Contributed surplus $ ----------------------------------------------------------------- Intrinsic value of 5.2 million flow through shares(v) (3,500,000) Adjustment for acquisitions (Note 1) 3,500,000 ----------------------------------------------------------------- Balance, June 30, 2006 - Stock-based compensation expense 258,483 Unrecognized fair value of warrants, unexercised 235,555 ----------------------------------------------------------------- Balance, December 31, 2006 494,038 ----------------------------------------------------------------- ----------------------------------------------------------------- (v) 1238364 recorded $3.5 million of non-cash compensation expenses in respect of the intrinsic value of 5.2 million flow-through shares purchased by management and directors (see Note 10(a)(i)). The compensation expense is recognized in the statement of operations for the period ending December 31, 2006, with a corresponding adjustment to the deficit as the result of the acquisition of 1238364 (see Note 1). c. Stock-based compensation The Company has recorded stock-based compensation for stock options granted. The compensation expense is calculated based upon the fair value of stock options on the date of the grant using the Black-Scholes pricing model with the following assumptions: 2006 ----------------------------------------------------------------- Risk-free interest rate (%) 6 Volatility (%) 40 Expected life in years 3 Expected future dividends Nil The compensation expense is recognized over the vesting period of the stock options. For the period ended December 31, 2006 $258,483 has been recognized as stock-based compensation expense with a corresponding increase to contributed surplus. The weighted average fair value of options granted during the year was $1.36 per option. d. Stock options Weighted Average Exercise Price Number $ ----------------------------------------------------------------- Balance, April 25, 2006 - - Granted 894,750 4.02 ----------------------------------------------------------------- Balance, December 31, 2006 894,750 4.02 ----------------------------------------------------------------- ----------------------------------------------------------------- As at December 31, 2006, there were no options exercisable. The following table summarizes information about stock options outstanding at December 31, 2006: Weighted Weighted Fair Value Average Average Average Exercise Price Remaining Price Grant Price Number $ Term (yrs) $ ----------------------------------------------------------------- $4.02 894,750 4.02 4.7 1.36 e. Arrangement warrants Pursuant to the Plan of Arrangement, on September 21, 2006 warrants totaling 1,302,480 were issued to Daylight and Sequoia security holders at an exercise price of $4.02 per warrant for a term of 30 days. The fair value of the warrants granted was estimated on the date of grant using the Black-Scholes option- pricing model with following weighted average assumptions: expected volatility of 40 percent; risk-free rate of 6 percent; and expected life of 30 days. The fair value of warrants granted during the period was $0.186 per warrant or $242,261, which was part of the consideration given on the transfer of assets (Note 2). Number $ ----------------------------------------------------------------- Balance, April 25, 2006 - - Fair value of warrants granted (Note 2) 1,302,480 242,261 Exercise of warrants (35,787) (6,706) Unrecognized fair value of unexercised warrants (1,266,693) (235,555) ----------------------------------------------------------------- Balance, December 31, 2006 - - ----------------------------------------------------------------- ----------------------------------------------------------------- On October 23, 2006, the arrangement warrants expired. Of the 1.3 million outstanding warrants, 35,787 were exercised at a price of $4.02 per warrant. f. Reduction in deficit As the acquisitions of 1211413 and Triant did not constitute business combinations, the accumulated deficit, share capital and contributed surplus have been adjusted (Note 1). g. Earnings (loss) per share From incorporation on April 25, 2006 to December 31, 2006 --------------------------------------------------------------------- Number --------------------------------------------------------------------- Weighted average number of common shares outstanding 6,129,799 Diluted effect of stock options and warrants 449,544 --------------------------------------------------------------------- Weighted average number of diluted common shares outstanding 6,579,343 --------------------------------------------------------------------- --------------------------------------------------------------------- As the Company has reported a net loss from incorporation on April 25, 2006 to December 31, 2006, all options are anti-dilutive. 11. INCOME TAXES The Company's future income tax assets and liabilities as at December 31, 2006 are as follows: $ --------------------------------------------------------------------- Temporary differences related to: Oil and gas properties 32,036 Asset retirement obligation 458,521 Issue costs 258,354 ACRI 28,107 Non-capital losses 5,781,400 SR & ED carry forward 1,719,320 --------------------------------------------------------------------- Future tax asset, December 31, 2006 8,277,738 Less: valuation allowance items (8,277,338) --------------------------------------------------------------------- Recognized future income tax asset (liability) - --------------------------------------------------------------------- --------------------------------------------------------------------- A valuation allowance of $8.3 million has been recorded to reduce the amount of future tax assets available to the amount that is more likely than not to be recovered. The Company has accumulated non-capital losses for income tax purposes of approximately $17.6 million, which can be used to offset income in future periods. These losses expire as follows: Year of Expiry $ --------------------------------------------------------------------- 2007 1,464,000 2008 3,111,000 2009 3,660,000 2010 3,111,000 2014 4,758,000 2015 1,464,000 --------------------------------------------------------------------- 17,568,000 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company also has approximately $5.3 million of Scientific Research and Experimental Development Expenses available to reduce future years' income tax payable. These deductions can be carried forward for an indefinite period. The provision for income tax differs from that which would be obtained from applying the combined Canadian federal provincial income tax rate to income before taxes. The difference results from the following: 2006 --------------------------------------------------------------------- Corporate tax rate 34.44% Expected income tax expense (recovery) (1,646,170) Increase (decrease) resulting from: Stock compensation expense 1,294,330 Non-deductible crown charges 54,770 Resource allowance (20,892) Other non-deductible charges 5,401 ACRI (28,107) Change in valuation allowance 340,668 --------------------------------------------------------------------- Current period provision - --------------------------------------------------------------------- --------------------------------------------------------------------- 12. SUPPLEMENTAL CASH FLOW INFORMATION From incorporation on April 25, 2006 to December 31, 2006 $ --------------------------------------------------------------------- Changes in non-cash operating working capital: Accounts receivable (2,397,016) Prepaid expenses and deposits (422,561) Accounts payable and accrued liabilities 1,767,050 --------------------------------------------------------------------- (1,052,527) --------------------------------------------------------------------- --------------------------------------------------------------------- Changes in non-cash investing working capital: Accounts receivable (185,625) Accounts payable and accrued liabilities 4,217,841 --------------------------------------------------------------------- 4,032,216 --------------------------------------------------------------------- --------------------------------------------------------------------- There have not been any cash outlays for interest and/or current income taxes for the period ending December 31, 2006. 13. COMMITMENTS a. Office space 1238364 had an operating lease for office premises expiring December 30, 2010. This commitment was assumed by Trafalgar and requires minimum monthly payments of $14,656 or $175,870 per year to December 30, 2010. b. Short-term financing Corporate insurance for petroleum and operators extra expense coverage was financed beginning September 1, 2006, with the last payment to be made June 1, 2007. An amount of $40,298 was financed at a rate of 11.6 percent per annum, with ten monthly payments, including interest of $4,247. At December 31, 2006, a liability of $24,179 has been included in the Balance Sheet under accounts payable and accrued liabilities. 14. RELATED PARTY TRANSACTIONS During the period from incorporation on April 25, 2006 to December 31, 2006, Trafalgar entered into the following transactions with related parties: a. In June 2006, issued 5.2 million (1.7 million post consolidation) flow through common shares to management and directors at a price of $0.67 per share ($2.01 per share post consolidation) for gross proceeds of $3.5 million; b. In June 2006, issued 422,000 (140,667 post consolidation) common shares to management and directors at a price of $1.34 per share ($4.02 per share post consolidation) for gross proceeds of $565,000; c. In June 2006, issued 750,000 (250,000 post consolidation) common shares at a price of $1.34 per share ($4.02 per share post consolidation) for gross proceeds of $1.0 million to a company controlled by a director of a related company. d. In December 2006, issued 105,350 flow through common shares to officers and directors at a price of $5.05 per share for gross proceeds of $532,018 and 7,464 common shares at a price of $4.02 per share for gross proceeds of $30,005. e. During the year ended December 31, 2006, the Company utilized legal services totaling $211,229, including applicable taxes, which were provided by a firm in which a Director of the Company is a partner. These services were measured at fair market value. As at December 31, 2006, $207,815 was payable. The above noted transactions with related parties have occurred in the normal course of business and are measured at the exchange amount which is the amount of consideration established and agreed by the related parties. 15. SUBSEQUENT EVENT Subsequent to the period ending December 31, 2006, 27,000 stock options were issued to a director at a grant price of $4.02 per option. 16. FINANCIAL INSTRUMENTS a. Fair value The Company has financial instruments which include cash and cash equivalents, accounts receivable, accounts payable, convertible debentures and due to shareholders. The fair value of these financial instruments approximates their carrying amounts due to their short term to maturity. b. Concentration of credit risk, economic dependence and related party transactions The Company currently derives revenue primarily from customers in the oil and gas industry. These customers are geographically dispersed and the Company closely monitors credit granted to each customer. Therefore, credit risks are considered to be minimal. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. c. Price risk The Company undertakes transactions denominated in foreign currencies (mainly in United States dollars) and as such is exposed to price risk due to fluctuations in foreign exchange rates. The Company currently does not have fixed price contracts associated with future production. d. Interest rate risk The Company is exposed to interest rate risk in relation to interest expense associated with any outstanding revolving operating loan balances.

For further information:

For further information: TRAFALGAR ENERGY LTD., Robert Wollmann,
President and CEO, Telephone (403) 216-2706, Email
rwollmann@trafalgarenergy.ca; Daniel Belot, Vice President Finance and CFO,
Telephone (403) 216-2707, Email dbelot@trafalgarenergy.ca; or visit
www.trafalgarenergy.ca, Toll-free: 1-877-216-2705

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TRAFALGAR ENERGY LTD.

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