Twin Butte Energy Reports 2006 Fourth Quarter Results & Year End Reserves



    CALGARY, March 26 /CNW/ -

    Highlights

    Twin Butte Energy Ltd. ("Twin Butte" or the "Company") (TSX: TBE) is
pleased to announce its financial and operational results for the three month
period and year ended December 31, 2006. Twin Butte's year ended 2006 results
reflect the acquisitions of Drilcorp Energy Ltd. ("Drilcorp") and Kerogen
Petroleum Ltd ("Kerogen") on June 1, 2006.

    
                                                Three months            Year
                                                       ended           ended
                                                 December 31,    December 31,
                                                        2006            2006

    -------------------------------------------------------------------------
    Financial ($'s, except per share amounts)
    -------------------------------------------------------------------------
      Petroleum and natural gas sales              4,855,475      11,149,649
      Cash flow(1)                                 2,054,011       4,504,454
        Per share basic                                 0.02            0.07
        Per share diluted                               0.02            0.07
      Net loss                                      (880,717)     (4,081,871)
        Per share basic                                (0.01)          (0.06)
        Per share diluted                              (0.01)          (0.06)
      Capital expenditures                         9,580,622      14,703,138
      Corporate acquisitions                               -      49,092,723
      Net debt and working capital deficiency    (14,557,549)    (14,557,549)

    -------------------------------------------------------------------------
    Operating
    -------------------------------------------------------------------------
    Average daily production
      Crude oil (bbl per day)                            298             183
      Natural gas (Mcf per day)                        4,499           2,577
      Natural gas liquids (bbl per day)                   41              20
      Barrels of oil equivalent (boe per day, 6:1)     1,089             632
    Average sales price
      Crude oil ($ per bbl)                            59.31           67.84
      Natural gas ($ per Mcf)                           7.29            6.57
      Natural gas liquids ($ per bbl)                  56.64           62.06
      Barrels of oil equivalent ($ per boe, 6:1)       48.48           48.33
    Operating netback ($ per boe)                      27.12           26.59

    -------------------------------------------------------------------------
    Common Shares
    -------------------------------------------------------------------------
    Shares outstanding, end of period             96,377,007      96,377,007
    Weighted average shares outstanding           95,274,437      63,814,349

    (1) Cash flow means earnings before future taxes, depletion, depreciation
        and accretion, and stock based compensation. See Management's
        Discussion & Analysis Non-GAAP Measures

    Report to Shareholders

    The Company's achievements in the fourth quarter and year ended 2006
include the following:

    -   Production grew to an average of 1,089 boe/d in the fourth quarter of
        2006 with seven (6.6 net) wells awaiting tie in at year end. First
        quarter 2007 production is anticipated to average approximately
        1,300 boe/d;
    -   Cash flow totaled $2.1 million or $0.02 per share in the fourth
        quarter;
    -   Successfully drilled seven (6.6 net) wells in the fourth quarter for
        a 100 percent success rate with all completion and tie in work
        finished after year end;
    -   For 2006, the Company successfully drilled ten (9.0 net) wells for an
        overall success rate of 100% percent;
    -   Year end 2006 independent engineering determined proved plus probable
        reserves of 3.8 MMboe. Based on Q1 2007 activity, 82% of proved plus
        probable reserves and 95% of total proved are now producing;
    -   Demonstrated cost effective reserves growth with proved plus
        probable:
        -  F&D including future development costs of $14.44/boe
        -  FD&A including future development costs of $23.00/boe
        -  RLI of 9.5 years (on Q4 2006 annualized production)
    -   Twin Butte ended the year with a net asset value of $0.67/share
        (basic) using a present value discounted at 10%, before tax;
    -   Subsequent to quarter end, closed a bought deal private placement of
        flow through shares for aggregate proceeds of $12.0 million to
        further strengthen the Company's balance sheet;
    -   Subsequent to year end initiated downspacing process at Jayar, a
        light oil pool with over 37.5 MMbbl of original oil in place;
    -   Exited the year with in excess of $120 million in tax pools.
    

    Operations Review

    Production for the fourth quarter of operations averaged 1,089 boe/d
comprised of 69 percent natural gas and 31 percent light oil and natural gas
liquids. The Company completed a Q4 capital program of $9.6 million drilling
three (2.5 net) wells in the Jayar core area, four (4.0 net) wells in the Oyen
core area and completed the phase one expansion and phase two planning at the
Jayar gas plant/oil battery facility. Additionally, the Company commenced the
drilling of an exploratory well in the Boundary Lake area in Q4. Three
previously announced Q3 wells came on production in Q4 but, as anticipated,
production from the Q4 drilling program did not impact fourth quarter
production numbers. Production from the first Q4 well commenced on January 15,
2007 and subsequent wells came on stream sequentially through mid February
2007. Compression to optimize production commenced at Oyen in mid-March and at
Jayar in late March, putting the Company in a position to meet its production
target for 2007.
    In the Oyen core area, the three wells completed at the end of Q3 (two
drills and one recompletion) were brought on production in late November and
December as planned. The Company drilled and cased four additional 100% WI
working interest gas wells in Q4 at Oyen. All wells were completed by year end
and subsequent to year end three of the new wells have been tied in and are on
production with the fourth well awaiting tie in, pending a joint interest
pipeline. Booster compression was started up on March 12th to restore
production backed out by high line pressures and all new wells are currently
being optimized.
    In the Jayar core area, the Company drilled and cased three (2.6 net)
operated wells in Q4 and two (1.7 net) wells subsequent to year end. All wells
are 85% working interest and have now been completed and tied in. The second
stage of our two-stage facility expansion was slightly delayed by equipment
delivery but work was completed in late March, increasing the plant capacity
to approximately 4.5 MMcf/d and allowing the last two wells to come on stream
March 23rd. All new Jayar wells are now on production and are currently being
optimized. Subsequent to year end the Company commenced the EUB notification
process for reduced spacing drilling on Company lands at Jayar. The Dunvegan
(40 degree API) light oil pool has 37.5MMbbl of original oil in place (OOIP)
and has a low historical production decline. Only 1.8MMbbl, or 4.8% of OOIP
has been recovered to-date. The EUB estimated ultimate recovery at current
well spacing is 7%. However, an offsetting analogous Dunvegan pool has been
successfully downspaced with a current EUB projected recovery of 14% which
presents a significant opportunity to the Company in terms of increased
reserves and net asset value. The Company will continue to pursue EUB
downspacing approval and, if successful, anticipates being in a position to
carry out initial downspaced drilling in late 2007.
    At Boundary Lake, the Company commenced drilling a Devonian exploratory
well in Q4 which was cased subsequent to year end with two potential
production zones. A completion program was carried out in Q1 2007 and test
data is currently being evaluated to determine tie-in and production options,
as facility limitations in the area may be a restriction to production from
the well. The Company is currently evaluating additional opportunities on the
Boundary Lake farm-in lands for future development. No reserves for this well
were booked at year end.
    Subsequent to year end the Company has entered into three fixed price
swap hedge arrangements on a total of 3,500 GJ/d for the period of April 1 to
October 31, 2007 at an average price of $6.99/GJ. In addition, the Company was
successful in converting non-producing reserves such that 82% of proved plus
probable and 95% of total proved reserves are now producing.

    Outlook

    We are excited about the upcoming year and the Company is well positioned
with a solid production base and strong balance sheet to take advantage of
opportunities created by the recent industry slow down. Certain industry
players are under pressure, facing a lack of available equity and limited debt
financing capabilities. However, the long term outlook for commodities remains
strong which should create near term acquisition opportunities. This combined
with an expected decrease in the cost of services sets up 2007 to be a
promising year for the Company to grow.
    The Board of Directors has approved an initial 2007 capital budget of
$16 million which will include the drilling of 10 wells in addition to
completion of the first quarter work summarized above. Cash flow is expected
to be between $12.5 and $13.0 million ($0.13/share), based on average
production of 1,575 boe/d per day, an average gas price of $6.17/GJ AECO, and
an oil price of US$55.00 WTI. The production mix is expected to remain at
approximately 70% natural gas and 30% oil. Additionally, with a current
capital project inventory in excess of $25 million the Company is positioned
to expand its capital program should conditions dictate.
    Subsequent to year end the Company closed a bought deal private placement
of 14.6 million flow through shares for gross proceeds of $12.0 million. The
financing has further strengthened the Company's balance sheet and will
provide additional flexibility to execute drilling plans and to take advantage
of additional drilling, farm-in and acquisition opportunities.
    Prior to the annual general meeting of the shareholders to be held on May
15, 2007 and subject to TSX approval, the Company intends to proceed with the
consolidation of the common shares of the Company on a one for five basis, as
approved at the annual and special meeting of the shareholders of the Company
held on June 6, 2006. Post consolidation the Company will have outstanding
basic shares of 22,202,401.
    The Company continues to be actively engaged in Crown land sales in both
the Company's core areas and new growth areas, adding to the existing land
base which now stands at 26,000 net undeveloped acres. Additionally, the
Company continues to evaluate numerous farm-in opportunities with industry
partners. The management team and Board of Directors remains focused on cost
effective per share growth in reserves, production and cash flow. This will be
achieved through exploitation of the existing asset base and the integration
of accretive acquisitions. The Company has a significant tax pool base in
excess of $120 million that will provide additional flexibility to
aggressively pursue management's "acquire and exploit" business strategy.

    On behalf of the Board of Directors,


    Ron Cawston
    President and C.E.O.
    March 26, 2007

    Reserves

    McDaniel & Associates Consultants Ltd. have recently completed the
December 31, 2006 reserve evaluation which indicated 3.8 MMboe proved plus
probable reserves. Because a number of the wells evaluated in the report were
not completed at year end, non-producing reserve classification was given to
these wells. Subsequent to year end the majority of the reserves associated
with these wells were converted such that 82% percent of the year end proved
plus probable reserves are now in a producing category. Finding and
development costs including future development capital were $14.44 on a proved
plus probable basis.
    The following tables outline the Company's reserves as at December 31,
2006 as independently evaluated by McDaniel & Associates Consultants Ltd. in
accordance with National Instrument 51-101 Standards of Disclosure of Oil and
Gas Activities ("NI 51-101"). For the complete NI 51-101 disclosures please
refer to the Company's Annual Information Form which will be filed on SEDAR on
or before March 31, 2007.

    
    Summary of Oil & Gas Reserves
    -------------------------------------------------------------------------
                                                                    Total
                                                                    Proved
                                  Proved        Total    Total      plus
                                  Producing     Proved   Probable   Probable
    --------------------------------------------------------------------------

    --------------------------------------------------------------------------
    Light/Medium Oil (Mbbl)
    Working Interest                  387.0      715.3      452.0    1,167.2
    Net After Royalty                 362.5      643.7      409.3    1,053.0

    Natural Gas (MMcf)
    Working Interest                5,480.6    8,676.9    5,490.4   14,167.3
    Net After Royalty               4,363.9    6,665.9    4,157.8   10,823.6

    Natural Gas Liquids (Mbbl)
    Working Interest                   94.0      152.6      107.2      259.8
    Net After Royalty                  66.3      107.4       75.2      182.6

    Oil Equivalent (Mboe)
    Working Interest                1,394.4    2,314.0    1,474.3    3,788.3
    Net After Royalty               1,156.1    1,862.1    1,177.4    3,039.5
    -------------------------------------------------------------------------
    Before Tax Present Value ($M)
    -------------------------------------------------------------------------
    Discounted @
    0%                             32,475.4   57,503.7   36,849.2   94,353.0
    5%                             29,458.8   51,028.7   27,410.1   78,438.8
    10%                            26,961.9   45,807.9   20,829.2   66,637.2
    15%                            24,878.4   41,539.1   16,099.0   57,638.1
    -------------------------------------------------------------------------


    Corporate Reserves Reconciliation (Forecast Prices and Costs)

    Oil Equivalent (Mboe)          TP      TP+P
    --------------------------------------------
    Opening Balance               3.8       4.7
    Extensions/Discoveries    1,005.7   1,946.1
    Acquisitions              1,535.2   2,068.2
    Production                 -230.7    -230.7
    Closing Balance           2,314.1   3,788.2
    --------------------------------------------

    At December 31, 2005 the Company's only reserves were a 12% working
interest in a producing well at Lochend.  Reserve growth over 2006 was from a
combination of the exploration and development capital program and the
acquisitions of Drilcorp and Kerogen.


    Finding, Development, and Acquisition Costs

                                                                      Proved
                                                                        plus
    Capital Costs ($MM)                               Proved        Probable
    -------------------------------------------------------------------------
    Exploration & Development, with FDC                 17.9            28.1
    Acquisitions, with FDC                              66.0            66.0
    Total Expenditures, with FDC                        82.2            92.3
    Total FDC (discounted 10%)                           5.6            15.8
    -------------------------------------------------------------------------

                                                                      Proved
                                                                        plus
    FD&A Costs ($/boe)                                Proved        Probable
    -------------------------------------------------------------------------
    Exploration & Development including
     capitalized G&A, with FDC                         17.83           14.44
    All-in FD&A, with FDC                              32.33           23.00

    F&D costs associated with the Company's 2006 capital program were $17.83
per boe proved and $14.44 per boe proved plus probable including FDC. The
Company is confident that its current inventory of opportunities can be
developed at similarly favorable F&D costs.


    Reserve Life Index

                                                                    Proved
                                                                    plus
                                                      Proved        Probable
    -------------------------------------------------------------------------

    Total Company Interest Reserves (Mboe)             2,314           3,788
    Fourth quarter 2006 production (boe/d)             1,089           1,089
    RLI based on fourth quarter annualized
     production (years)                                  5.8             9.5
    -------------------------------------------------------------------------

    December 31, 2006 Net Asset Value per Fully Diluted Share Information

    Using Reserve Value at December 31, 2006 - Forecast Pricing and Costs:

    ($MM except share amounts)                 5% Before Tax  10% Before Tax
    -------------------------------------------------------------------------
    Proved Plus Probable Reserve Value                  78.4            66.6
    Undeveloped Land                                     3.9             3.9
    Tax Pools(1)                                         6.8             8.6
    Estimated Net Debt                                 -14.6           -14.6
    Option Proceeds                                      5.6             5.6
    Total Net Assets                                    80.2            70.2
    Fully Diluted Shares Outstanding (MM)              104.2           104.2
    Estimated Net Asset Value per Fully
     Diluted Share                                     $0.77           $0.67
    -------------------------------------------------------------------------
    (1) Tax pool valuation only for pools in excess of reserve NPV.
    

    Certain information regarding the Company contained herein may constitute
forward-looking statements within the meaning of applicable securities laws.
Forward-looking statements may include estimates, plans, anticipations,
expectations, intentions, opinions, forecasts, projections, guidance or other
similar statements that are not statements of fact. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
be correct. These statements are subject to certain risks and uncertainties
and may be based on assumptions that could cause actual results to differ
materially from those anticipated or implied in the forward-looking
statements. The Company's forward-looking statements are expressly qualified
in their entirety by this cautionary statement.
    In this news release, reserves and production data are commonly stated in
barrels of oil equivalent ("boe") using a six to one conversion ratio when
converting thousands of cubic feet of natural gas ("Mcf") to barrels of oil
("bbl") and a one to one conversion ratio for natural gas liquids ("NGLs" or
"ngls"). Such conversion may be misleading, particularly if used in isolation.
A boe conversion ratio of 6 Mcf: 1 bbl is based on energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.

    Management's Discussion and Analysis

    Dated as of March 26, 2007

    The following discussion and analysis as provided by the management of
Twin Butte Energy Ltd. ("Twin Butte" or the "Company") should be read in
conjunction with the audited financial statements for the years ended
December 31, 2005 and 2006, and the unaudited financial statements for the
three quarters ended March 31, 2006, June 30, 2006, and September 31, 2006.

    Basis of Presentation - Twin Butte commenced current operations on
June 1, 2006 by amalgamating with Drilcorp Energy Ltd. ("Drilcorp") and
Kerogen Petroleum Ltd. ("Kerogen").  There is no comparative period as prior
year numbers are not relevant.

    Non-GAAP Measures - The Management's Discussion and Analysis ("MD&A")
contains the term cash flow from operations or cash flow which should not be
considered an alternative to, or more meaningful than, cash flow from
operating activities as determined in accordance with Canadian generally
accepted accounting principles ("GAAP") as an indicator of the Company's
performance. The Company also presents cash flow from operations per share
whereby per share amounts are calculated using weighted average shares
outstanding consistent with the calculation of earnings per share. These
measures may not be comparable to other companies.

    boe Presentation - Barrels of oil equivalent ("boe") may be misleading,
particularly if used in isolation. A boe conversion rate of 6 Mcf: 1 bbl is
based on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead. All boe
conversions in the report are derived by converting gas to oil at the ratio of
six thousand cubic feet of gas to one barrel of oil.

    Forward-Looking Information - Certain information regarding the Company
presented in this document, including management's assessment of the Company's
future plans and operations, may constitute forward-looking statements under
applicable securities law and necessarily involve risk associated with oil and
gas exploration, production, marketing, and transportation such as loss of
market, volatility of commodity prices, currency fluctuations, imprecision of
reserve estimates, environmental risk, competition from other producers and
ability to access sufficient capital from internal and external resources; as
a consequence, actual results may differ materially from those anticipated in
the forward-looking statements.

    
    Petroleum and Natural Gas Sales

    Twin Butte realized the following production volumes, commodity prices and
revenues:

                                                Three months            Year
                                                       ended           ended
                                                 December 31,    December 31,
                                                        2006            2006
    -------------------------------------------------------------------------
    Average Realized Commodity Prices
    -------------------------------------------------------------------------
    Crude oil ($ per bbl)                              59.31           67.84
    Natural gas ($ per Mcf)                             7.29            6.57
    Natural gas liquids ($ per bbl)                    56.64           62.06

    $'s
    Crude oil                                      1,624,100       4,520,834
    Natural gas                                    3,016,495       6,177,856
    Natural gas liquids                              214,880         450,958
    -------------------------------------------------------------------------
    Total petroleum and natural gas sales          4,855,474      11,149,649
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Average Daily Production
    -------------------------------------------------------------------------

    Crude oil & natural gas liquids (bbl/day)            339             202
    Natural gas (mcf/day)                              4,499           2,577
    -------------------------------------------------------------------------
    Total (boe/d)                                      1,089             632
    -------------------------------------------------------------------------
    

    For the three month period ended December 31, 2006, Twin Butte recorded
$4.9 million in petroleum and natural gas sales and to $11.1 million for the
year ended December 31, 2006.
    The Company's production for the fourth quarter averaged 1,089 boe/d,
representing a slight increase from the third quarter average of 1,047 boe/d.
Production for the fourth quarter consists of 413,925 Mcf of gas, 27,381 bbl
of oil and 3,794 bbl of natural gas liquids. The company's sales volumes are
69% natural gas for the fourth quarter compared to 68% on a year to date
basis.

    Royalties

    For the three months ended December 31, 2006 total royalties net of ARTC
were $0.7 million or $7.21 per boe resulting in an average royalty rate of
15%. For the year ended December 31, 2006, total royalties were $1.8 million
or $7.86 per boe resulting in an average royalty rate for the year to date of
16%.
    The Company's royalty burdens are predominantly Crown, along with some
overriding and freehold royalties. The Company average royalty rate of 16% for
the year is net of ARTC amounting to a reduction in royalty rate of
approximately 2%. With the elimination of ARTC effective January 1, 2007, the
Company expects to realize an increase in the overall royalty rate for 2007.

    Operating Expenses

    For the three months ended December 31, 2006 operating expenses were
$1.1 million or $11.38 per boe, compared to operating expenses of
$2.6 million, or $11.32 per boe, for the year ended December 31, 2006.
    Management is continuing an examination of the current operational
efficiency of the Company's assets and undertaking steps to reduce the
operating costs. Included in that examination is the purchase of one or more
rental compressors that are a component of the Company's operating expenses.
Further to that, expected increases in sales volumes in 2007 should contribute
to reducing operating expenses on a boe basis.

    Transportation Expenses

    For the three months ended December 31, 2006 transportation expenses were
$0.3 million or $2.77 per boe compared to $0.6 million, or $2.56 per boe for
the year ended December 31, 2006. Transportation costs are expected to remain
fairly consistent on a per boe basis throughout 2007.


    
    General and Administrative Expenses

                                                Three months            Year
                                                       ended           ended
                                                 December 31,    December 31,
                                                        2006            2006

    -------------------------------------------------------------------------
    General and administrative expenses
    -------------------------------------------------------------------------
    General and administrative expenses              831,581       1,620,738
    Recoveries                                       (99,338)       (132,194)
    Capitalized general and administrative
     expenses                                       (212,431)       (379,609)
    -------------------------------------------------------------------------
    Total net general and administrative expenses    519,812       1,108,935
    -------------------------------------------------------------------------
    

    General and administrative expenses for the fourth quarter were
$0.5 million, or $5.19 per boe after recoveries and capitalized costs. For the
year ended December 31, 2006, general and administrative expenses were
$1.1 million or $4.81 per boe after recoveries and capitalized costs.
    General and administrative expenses for the fourth quarter were increased
from the third quarter and included a one time TSX listing fee in the amount
of $85 thousand.  With the exception of minor changes when required, the
Company believes that it is adequately staffed to execute the currently
planned 2007 operational and capital expenditure program.

    Stock Based Compensation Expense

    During the three month period ended December 31, 2006, the Company
expensed $1.6 million in stock based compensation expense relating to the
outstanding stock options and management warrants, of which $1.5 million
relates to management warrants. Stock based compensation expense for the year
ended December 31, 2006 amounts to $3.8 million of which $3.4 million relates
to management warrants. No expense for management warrants is anticipated
going forward as all warrants were exercising prior to December 31, 2006, and
the related expenses have been fully recognized.
    The majority of the expense is comprised of stock based compensation
expense relating to the management warrants in the amount of $1.5 million for
the fourth quarter and $3.4 million for the year ended December 31, 2006. All
management warrants were exercised during the year. No further stock based
compensation expense will be recognized on these management warrants as the
full fair value of the warrants has been recognized.

    Interest Expense

    Interest expense for the three month period ended December 31, 2006
amounting to $141,797 consists of interest on bank indebtedness in the amount
of $110,436 and flow through interest expense charges in the amount of
$31,361.
    Interest expense for the year ended December 31, 2006 amounts to
$553,653. This consists of interest expense of $118,948 incurred in the first
quarter for interest expense on convertible debentures. All debentures were
converted to Common Shares in March 2006. The remaining balance consists of
$255,583 related to interest on bank indebtedness and $179,122 related to flow
through interest expense charges.

    Income Taxes

    Future income tax recovery amounted to $1.8 million for the three month
period ended December 31, 2006 and $3.1 million for the year period ended
December 31, 2006.  The Company has existing tax losses and pools of
approximately $124.8 million of which $77.9 are non-capital losses. The
Company has no current tax expense and based on current reserve forecasts will
be able to realize the benefit of the majority of the non-capital losses and
remain non-taxable to at least 2011.

    Depletion, Depreciation and Accretion Expense

    For the three month period ended December 31, 2006, depletion and
depreciation of capital assets and the accretion of the asset retirement
obligations was $3.1 million. Depletion of capital assets amounts to $30.87
per boe for the quarter, compared to $33.87 year ended December 31, 2006. The
cost of undeveloped property excluded from the depletion base as at
December 31, 2006 was $5.6 million.
    For the year period ended December 31, 2006, depletion, depreciation, and
accretion expense was $7.9 million, with depletion of capital assets amounting
to $33.87 per boe. The Company expects the depletion rate per boe to decline
in 2007 as reserves in the probable category convert to proven.

    Cash Flow from Operations and Net Earnings

    Cash flow from operations for the three month period ended December
31, 2006 was $2.1 million equating to basic and diluted cash flow from
operations of $0.02 per share. Cash flow from operations for the year ended
December 31, 2006 was $4.5 million equating to basic and diluted cash flow
from operations of $0.07 per share.
    The Company incurred a net loss of $0.9 million for the three month
period ended December 31, 2006, equating to a basic and diluted net loss per
share of $0.01, compared to a net loss of $4.1 million for the year period
ended December 31, 2006, equating to basic and diluted net loss per share of
$0.06.
    The following table summarizes netbacks on a barrel of oil equivalent
basis:

    

                                                Three months            Year
                                                       ended           ended
                                                 December 31,    December 31,
                                                        2006            2006
    -------------------------------------------------------------------------
    ($ per boe)
    -------------------------------------------------------------------------
    Petroleum and natural gas sales                    48.48           48.33
    Royalties                                          (7.21)          (7.86)
    -------------------------------------------------------------------------
                                                       41.27           40.47
    Operating expenses                                (11.38)         (11.32)
    Transportation expenses                            (2.77)          (2.56)
    -------------------------------------------------------------------------
    Operating netback                                  27.12           26.59
    General and administrative expenses                (5.19)          (4.81)
    Interest expense                                   (1.42)          (2.40)
    -------------------------------------------------------------------------
    Cash flow from operations                          20.51           19.38
    -------------------------------------------------------------------------


    Quarterly Financial Summary

    The following table highlights Twin Butte's performance by quarter and in
total for 2006:

    -------------------------------------------------------------------------
                                Three months ended                      Year
                                                                       ended
    -------------------------------------------------------------------------

                                March 31  June 30   Sep 30   Dec 31   Dec 31
    -------------------------------------------------------------------------
    ($ thousands, except per
     share amounts)
    -------------------------------------------------------------------------
    Average production (boe/d)         1      357    1,047    1,089      632
    Petroleum and natural
     gas sales                         6    1,719    4,569    4,855   11,150
    Operating netback (per boe)   $56.80    28.38    25.38    27.12    26.59

    Cash flow from operations       (156)     745    1,861    2,054    4,504
      Per share basic              (0.01)    0.01     0.02     0.02     0.07
      Per share diluted            (0.01)    0.01     0.02     0.02     0.07

    Net earnings (loss)             (156)    (778)  (2,267)     881    4,082
      Per share basic              (0.00)   (0.02)   (0.03)   (0.01)   (0.06)
      Per share diluted            (0.00)   (0.01)   (0.03)   (0.01)   (0.06)

    Capital expenditures               -      457    4,666    9,580   14,703
    Corporate acquisitions             -   49,093        -        -   49,093
    Total assets                   3,869   66,609   67,060   78,697   78,697
    Net debt and working capital
     surplus (deficiency)          3,440   (8,358)  (7,517) (14,578) (14,578)
    -------------------------------------------------------------------------

    Capital Expenditures

    During the fourth quarter of 2006, the Company incurred $9,580,287 of
capital expenditures. Capital expenditures for the year ended December 31,
2006 were $14,702,816.


                                                Three months            Year
                                                       ended           ended
                                                 December 31,    December 31,
                                                        2006            2006

    -------------------------------------------------------------------------
    Land acquisition                                 188,325         574,320
    Geological and
     geophysical                                      82,344       1,105,597
    Drilling and
     completions                                   6,997,275       7,860,139
    Equipping and
     facilities                                    2,101,425       2,335,808
    Property acquisitions                            (29,805)      2,402,542
    Other                                            241,058         424,732
    -------------------------------------------------------------------------
    Total capital
     expenditures                                  9,580,622      14,703,138
    -------------------------------------------------------------------------
    

    Capital expenditures for the fourth quarter consisted primarily of
drilling and completing seven successful (6.6 net) wells.
    At the core area of Oyen, four successful (4.0 net) wells were drilled
late in the fourth quarter with the majority of the completions underway
before year end. These wells came on production in February and March 2007.
    At the core area of Jayar, three successful (2.6 net) wells were drilled
late in the fourth quarter. Drilling of an additional well at Jayar was begun
before year end, with rig release in January. A fifth well was drilled and
completed subsequent to year-end. These wells were brought onto production
during the first quarter of 2007.
    At Boundary Lake the Company began drilling an exploratory (0.4 net) well
with drilling completed after year end. Completion of the well commenced in
March 2007.
    For the year ended December 31, 2006, capital expenditures totaled
$14.7 million. The majority of the costs of the year are a result of the
Company drilling a total of ten successful (9.0 net) wells and related
completion, equip and facilities costs. The Company completed the first phase
of a plant expansion at Jayar in the amount of $0.9 million included in
equipping and facilities expenditures. In addition, the Company completed a
$2.4 million property acquisition to consolidate working interest and land
ownership in its south east Alberta core area of Oyen. Other expenditures
include crown land acquisition costs and seismic activity to acquire and
identify future drilling inventory.
    The above capital expenditures exclude the acquisition expenditures
related to the acquisitions of Drilcorp and Kerogen.

    Liquidity and Capital Resources

    At December 31, 2006, the Company had a net debt and working capital
deficiency of $14.6 million. The Company has a demand revolving operating
credit facility of $17.0 million with a Canadian chartered bank. The annual
review of the existing credit facility is expected to be completed in
April 2007.
    Subsequent to December 31, 2006 the Company closed a bought deal private
placement of 14,635,000 flow-through Common Shares at a price of $0.82 per
share for gross proceeds of $12.0 million.

    Share Capital

    As at March 26, 2007, the Company has 111,012,007 Common Shares
outstanding, reflecting the issuance of 14,635,000 flow-through Common Shares
since December 31, 2006. There are also 7,075,000 stock options outstanding.

    Contractual Obligations

    The issuance of flow through shares in February 2007 for proceeds of
$12.0 million will require the Company to spend $12.0 million of flow-through
share eligible Canadian Exploration Expenditures, as defined in the Canadian
Income Tax Act, by December 31, 2008.
    The Company has other commitments and guarantees in the normal course of
business, consisting of an office space lease and equipment rentals which are
not considered material.
    Subsequent to year end the Company has entered into fixed price swap
hedge arrangements on a total of 3,500 GJ/d for the period of April 1, 2007 to
October 31, 2007 at an average price of $6.99/GJ.

    Related Party Transactions

    During the year the Company expensed and capitalized legal fees totaling
$433,102 for services rendered by a professional firm related to a director of
the Company. The fees were incurred in the normal course of business and
recorded at the exchange amount.

    Newly Adopted Accounting Policies

    There were no significant accounting policies newly adopted during the
three months ended December 31, 2006.

    Critical Accounting Estimates

    Management is required to make judgments and use estimates in the
application of generally accepted accounting principles that have a
significant impact on the financial results of the Company.

    Full Cost Accounting

    The Company follows the Canadian Institute of Chartered Accountants'
guideline on full cost accounting in the oil and gas industry to account for
oil and gas properties. Under this method, all costs associated with the
acquisition of, exploration for and development of natural gas and crude oil
reserves are capitalized and costs associated with production are expensed.
The capitalized costs are depreciated, depleted and amortized using the
unit-of-production method based on estimated proved reserves. Reserve
estimates can have a significant impact on earnings, as they are a key
component in the calculation of depreciation, depletion and accretion
("DD&A"). A downward revision in a reserve estimate could result in a higher
DD&A charge to earnings. In addition, if net capitalized costs are determined
to be in excess of the calculated ceiling, which is based largely on reserve
estimates, the excess must be written off as a expense and charged against
earnings. In the event of a property disposition, proceeds are normally
deducted from the full cost pool without recognition of a gain or loss unless
there is a change in the DD&A rate of 20 percent or greater.

    Asset Retirement Obligations

    The Company records a liability for the fair value of legal obligation
associated with the retirement of long-lived tangible assets in the period in
which they are incurred, normally when the asset is purchased or developed. On
recognition of the liability there is a corresponding increase in the carrying
amount of the related asset and the asset retirement obligation. The total
amount of asset retirement obligation is an estimate based on the company's
net ownership interest in all wells and facilities and the estimated costs to
abandon and reclaim the wells and facilities and the estimated timing of the
costs to be incurred in the future periods. The total amount of the estimated
cash flows required to settle the asset retirement obligation; the timing of
those cash flows are estimates subject to measurement uncertainty. Any changes
in these estimates would impact the asset retirement liability.

    Reserves Determination

    The proved crude oil, natural gas and natural gas liquid reserves used in
determining our depletion rates, the magnitude of the borrowing base available
to us from our lender and the ceiling test are based upon management's best
estimates, and are subject to uncertainty. Through the use of geological,
geophysical and engineering data, the reservoirs and deposits of natural gas,
crude oil and natural gas liquids are examined to determine quantities
available for future production, given existing operating and economic
conditions and technology. The evaluation of recoverable reserves is an
ongoing process impacted by current production, continuing development
activities and changing economic conditions as reflected in crude oil and
natural gas prices and costs. Consequently, the reserves are estimates which
are subject to variability. To assist with the reserve evaluation process, we
employ the services of independent oil and gas reservoir engineers.

    Income Taxes

    The determination of the Company's income and other tax liabilities
require interpretation of complex laws and regulations often involving
multiple jurisdictions. All tax filings are subject to audit and potential
reassessment after lapse of considerable time. Accordingly, the actual income
tax liability may differ significantly from the liability estimated or
recorded.

    Other Estimates

    The accrual method of accounting requires management to incorporate
certain estimates including estimates of revenues, royalties and production
costs as at a specific reporting date, but for which actual revenues and costs
have not yet been received, and estimates on capital projects which are in
progress or recently completed where actual costs have not been received at a
specific reporting date.

    Ceiling Test

    Under the full cost accounting method, a ceiling test is performed at
least annually to ensure that the net capitalized costs in each country do not
exceed the undiscounted future net revenues from proved plus probable
reserves, plus the cost of unproved properties. Any excess capitalized costs
will be written off as an expense and charged to earnings; however, future
depletion and depreciation expense would be reduced.

    Financial Instruments

    The following standards regarding financial instruments are effective for
January 1, 2007; 3855 "Financial Instruments - Recognition and Measurement",
3861 "Financial Instruments - Disclosure and Presentation", 1530
"Comprehensive Income", and 3865 "Hedges". The standards require all financial
instruments other than held-to-maturity investments, loans and receivables to
be included on a company's balance sheet at their fair value date. The
standards create a new statement for comprehensive income that will include
changes in the fair value of certain financial instruments. As a result of
these new standards, the Company will record the fair value of any derivative
contracts under its risk management program.

    Internal Control Reporting

    In March 2006 Canadian Securities Administrators decided to not proceed
with proposed multilateral instrument 52-111 "Reporting on Internal Controls
over Financial Reporting" and instead proposed to expand multilateral
instrument 52-109 "Certification of Disclosure in Issuers' Annual and Interim
Fillings." The major changes resulting from this are that the Chief Executive
Officer and Chief Financial Officer will be required to certify in the annual
certificates that they have evaluated the effectiveness of internal controls
over financial reporting ("ICOFR") as of the end of the financial year and
disclose in the annual MD&A their conclusions about the effectiveness of
ICOFR. There will be no requirement to obtain an internal control audit
opinion from the issuer's auditors concerning management's assessment of the
effectiveness of ICOFR. There is also no requirement to design and evaluate
internal controls against an external control framework. This proposed
amendment is expected to apply for the year ended December 31, 2008. Twin
Butte is continuing with its evaluation of ICOFR to ensure it meets the
criteria for the proposed certification of December 31, 2008.
    To ensure sound corporate governance, we continue to commit ourselves to
establishing and maintaining adequate disclosure controls and procedures, as
well as internal control over financial reporting in order to provide
reasonable assurance regarding the reliability of our financial disclosure,
and ultimately, maintaining our clients' trust and investors' confidence.

    Internal Control Over Financial Reporting

    Twin Butte has implemented a system of internal controls that it believes
adequately protects the assets of the Company and is appropriate for the
nature of its business and the size of its operations. These internal controls
include disclosure controls and procedures designed to ensure that information
required to be disclosed by the Company is accumulated and communicated to
management as appropriate to allow timely decisions regarding required
disclosure. The Company's Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) have concluded, based on their evaluation, that Twin Butte's
disclosure controls and procedures are effective to provide reasonable
assurance that material information related to the Company is made known to
them and have been operating effectively during 2006. It should be noted that
while the Company's CEO and CFO believe that Twin Butte's disclosure controls
and procedures provide a reasonable level of assurance that the system of
internal controls are effective, they do not guarantee that the disclosure
controls and procedures will prevent all errors and fraud. A control system,
no matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
    In addition, in accordance with Multilateral Instrument 52-109, the
Company has, under the supervision of its CEO and CFO, designed a process of
internal control over financial reporting, which has been affected by the
Company's board of directors and management. The process was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with Canadian generally accepted accounting principles ("GAAP").
    Based on the CEO and the CFO's review of the design of internal controls
over financial reporting, the CEO and CFO have concluded that the design of
internal controls is adequate for the nature of the Corporation's business and
size of its operations. As a small organization, and similar to other small
organizations, the Company's management is composed of a small number of key
individuals, resulting in a situation where limitations on the segregation of
duties as well as expertise in such areas as complex calculations and
estimations do not exist, as such these risks are compensated by more
effective supervision and monitoring by the CEO and CFO as well as reliance on
third party expertise where appropriate. It is important to note that in order
to eliminate the potential risk associated with these issues the Company would
be required to hire additional staff in order to provide greater segregation
of duties and expertise in certain areas. Since the increased costs of such
hiring would be financially constrictive to Twin Butte, the Corporation has
chosen to disclose the potential risk in its annual filings and proceed with
increased staffing as the Company's growth supports such overhead expansion.

    Additional Information

    Additional information relating to Twin Butte, including Twin Butte's AIF
and financial statements (to be filed before March 31, 2007) can be found on
SEDAR at www.sedar.com.



    
    TWIN BUTTE ENERGY LTD
    Balance Sheets

    -------------------------------------------------------------------------
                                                 December 31     December 31
                                                        2006            2005
    -------------------------------------------------------------------------

    Assets

    Current Assets
      Cash and cash equivalents                 $          -    $  3,625,587
      Accounts receivable                          4,554,362             884
      Deposits and prepaid expenses                  606,175               -
      -----------------------------------------------------------------------
                                                   5,160,537       3,626,471

    Future income taxes                            2,029,400               -

    Property and equipment (note 3)               71,506,633          62,500

    -------------------------------------------------------------------------
                                                $ 78,696,570    $  3,688,971
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current Liabilities
      Accounts payable and accrued liabilities  $ 13,399,101    $     31,051
      Bank indebtedness (note 4)                   6,318,985               -
      Convertible demand notes (note 5)                    -       4,770,985
      -----------------------------------------------------------------------
                                                  19,718,086       4,802,036

    Asset retirement obligation (note 6)           3,073,325               -

    -------------------------------------------------------------------------
                                                  22,791,411       4,802,036

    Shareholders' Equity
      Share capital (note 7)                      66,397,721       5,713,339
      Contributed surplus (note 7)                   415,713               -
      Deficit                                    (10,908,275)     (6,826,404)
      -----------------------------------------------------------------------
                                                  55,905,159      (1,113,065)

    -------------------------------------------------------------------------
                                                $ 78,696,570    $  3,688,971
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Commitments (note 11)

    See accompanying notes to financial statements


    TWIN BUTTE ENERGY LTD
    Statements of Operations and Deficit

    -------------------------------------------------------------------------
                          Three Months Ended             Year Ended
                              December 31                December 31
                          2006          2005          2006          2005
    -------------------------------------------------------------------------

    Revenue:
      Petroleum and
       natural gas
       sales          $  4,855,475  $          -  $ 11,149,649  $          -
      Royalties, net
       of ARTC            (722,516)            -    (1,812,873)            -
      -----------------------------------------------------------------------
                         4,132,959             -     9,336,776             -

      Interest income            2         5,161        33,049        16,648

    Expenses:
      Operating          1,139,496             -     2,612,084             -
      Transportation       277,845             -       590,699             -
      General and
       administrative      519,812        27,198     1,108,935        41,247
      Stock based
       compensation      1,644,167             -     3,819,663             -
      Interest             141,797       124,225       553,653       481,199
      Depletion,
       depreciation
       and accretion     3,122,048             -     7,878,607             -
      -----------------------------------------------------------------------
                         6,845,165       151,423    16,563,641       522,446

    -------------------------------------------------------------------------
    Loss before income
     taxes              (2,712,204)     (146,262)   (7,193,816)     (505,798)

    Income taxes
      Future tax
       recovery         (1,831,487)            -    (3,111,945)            -
      -----------------------------------------------------------------------
                        (1,831,487)            -    (3,111,945)            -

    -------------------------------------------------------------------------
    Net loss              (880,717)     (146,262)   (4,081,871)     (505,798)

    Deficit, beginning
     of period         (10,027,558)   (6,680,142)   (6,826,404)   (6,320,606)

    -------------------------------------------------------------------------
    Deficit, end of
     period           $(10,908,275) $ (6,826,404) $(10,908,275) $ (6,826,404)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Basic loss per
     share            $      (0.01) $      (0.02) $      (0.06) $      (0.06)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Diluted loss per
     share            $      (0.01) $      (0.02) $      (0.06) $      (0.06)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average
     common shares
     outstanding
      Basic             95,274,437     8,549,485    63,814,349     8,473,607
      Diluted           95,274,437     8,549,485    63,814,349     8,473,607


    See accompanying notes to financial statements


    TWIN BUTTE ENERGY LTD
    Statements of Cash Flows

    -------------------------------------------------------------------------
                          Three Months Ended             Year Ended
                              December 31                December 31
                          2006          2005          2006          2005
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operations:
      Net loss        $   (880,717) $   (146,262) $ (4,081,871) $   (505,798)
      Items not
       involving cash:
        Depletion,
         depreciation
         and accretion   3,122,048             -     7,878,607             -
        Future income
         taxes          (1,831,487)            -    (3,111,945)            -
        Stock based
         compensation    1,644,167             -     3,819,663             -
        ---------------------------------------------------------------------
                         2,054,011      (146,262)    4,504,454      (505,798)

      Changes in
       non-cash working
       capital          (2,697,272)     (762,151)   (4,081,809)     (450,086)
      -----------------------------------------------------------------------

                          (643,261)     (908,413)      422,645      (955,884)

    Financing:
      Change in bank
       debt                771,644             -    (5,126,820)            -
      Issuance of share
       capital, net of
       share issue costs   485,942     4,013,323    13,021,809     4,013,323
      Changes in non-cash
       working capital      37,354             -             -             -
      -----------------------------------------------------------------------
                         1,294,940     4,013,323     7,894,989     4,013,323

    Investing:
      Expenditures on
       property and
       equipment        (9,580,622)      (62,500)  (14,703,138)      (62,500)
      Acquisition
       expenditures
       (note 2)                  -             -    (8,252,364)            -
      Changes in
       non-cash
       working capital   8,928,943             -    11,012,281             -
      -----------------------------------------------------------------------
                          (651,679)      (62,500)  (11,943,221)      (62,500)

    -------------------------------------------------------------------------
    Decrease in cash and
     cash equivalents            -     3,042,410    (3,625,587)    2,994,939

    Cash and cash
     equivalents,
     beginning of period         -       583,177     3,625,587       630,648
    -------------------------------------------------------------------------

    Cash and cash
     equivalents,
     end of period    $          -  $  3,625,587  $          -  $  3,625,587
    -------------------------------------------------------------------------

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

    Cash interest
     paid             $    291,673             -  $    553,054       911,242


    See accompanying notes to financial statements


    Notes to Financial Statements - December 31, 2006

    Twin Butte is engaged in the acquisition of, exploration for, and
development of petroleum and natural gas properties in Western Canada. On
February 3, 2004, a Plan of Arrangement was completed involving Twin Butte
(formerly AltaRex Corp.), AltaRex Medical Corp., and Nova Bancorp Investments
Ltd. Pursuant to the Arrangement, Twin Butte was transformed into an oil and
gas exploration and production company.

    1.  SIGNIFICANT ACCOUNTING POLICIES

    Management is required to make estimates and assumptions that affect the
    reported amounts of assets and liabilities and the disclosure of
    contingent assets and liabilities as at the date of the financial
    statements and the reported amounts of revenue and expenses. The amounts
    recorded for depletion and amortization of petroleum and natural gas
    properties and equipment and the provision for future asset retirement
    obligation costs are based on estimates. The ceiling test is based on
    estimates of proved reserves, production rates, future oil and gas
    prices, future costs and other relevant assumptions. The amounts recorded
    for future taxes are based on estimates of future taxable income and
    anticipated income tax rates. The fair value of stock options is based on
    estimates using the Black-Scholes option pricing model and is recorded as
    stock-based compensation expense in the financial statements. 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.

    Summary of significant accounting policies

    These financial statements have been prepared by management in accordance
    with accounting principles generally accepted in Canada. Because the
    precise determination of many assets, liabilities, revenues and expenses
    are dependent on future events, the preparation of financial statements
    for a period necessarily includes the use of estimates and approximations
    which have been made using careful judgment. Actual results could differ
    from the estimates. These financial statements have, in management's
    opinion, been properly prepared within reasonable limits of materiality
    and within the framework of the accounting policies summarized below:

        a) Oil and gas operations

              i)   Capitalization of costs

              The Company follows the full-cost method of accounting for oil
              and natural gas properties whereby all costs of acquisition,
              exploration and development of petroleum and natural gas
              reserves are capitalized and accumulated in a single cost
              centre representing the Company's activity undertaken
              exclusively in Canada. Such costs include land acquisition
              costs, geological and geophysical expenses, lease rentals costs
              on non-producing properties, costs of drilling both productive
              and non-productive wells, related production equipment costs,
              and overhead charges directly related to these activities.

              Proceeds received on the disposition of oil and gas properties
              are credited against property and equipment except when the
              disposition results in a change in the depletion rate of 20% or
              more, in which case a gain or loss is recognized.

              Office and computer equipment are depreciated using the
              straight line method ranging between three and five years.

              ii)  Depletion and depreciation

              Capitalized costs, excluding costs related to unproven reserves
              and salvage values, are depleted and depreciated using the
              unit-of-production method based on the estimated gross proven
              oil and natural gas reserves before royalties as determined by
              independent engineers. Oil and natural gas reserves are
              converted on an energy equivalent basis.

              iii) Ceiling test

              Petroleum and natural gas assets are evaluated on an annual
              basis to determine that the costs are recoverable and do not
              exceed the fair value of the properties (the "ceiling test").
              The costs are assessed to be recoverable if the sum of the
              undiscounted cash flows expected from the production of proved
              reserves and the lower of cost and fair value of unproved
              properties exceed the carrying value of the petroleum and
              natural gas assets. If the carrying value of the petroleum and
              natural gas is not assessed to be recoverable, an impairment
              loss is recognized to the extent that the carrying value
              exceeds the sum of the discounted cash flows expected from the
              production of proved and probable reserves and the lower of
              cost and fair value of unproved properties. The cash flows are
              estimated using future commodity prices and costs and are
              discounted using the Company's risk-free rate.

        b) Asset retirement obligations

              The Company records the fair value of an asset retirement
              obligation ("ARO") as a liability in the period in which it
              incurs a legal obligation associated with the retirement of
              long-lived assets that result from the acquisition,
              construction and development of the assets. The associated
              asset retirement costs are capitalized as part of the carrying
              amount of the long-lived asset and depleted and depreciated
              using a unit of production method over estimated proved
              reserves. The recorded ARO increases over time through
              accretion charges to earnings. Revisions to the estimated
              amount and timing of the obligations are reflected as increases
              or decreases to the ARO. Actual asset retirement expenditures
              are charged to the ARO to the extent of the recorded liability
              with any difference recorded as a gain or loss in the period in
              which settlement occurs.

        c) Joint Operations

              A portion of the company's exploration and development
              activities are conducted jointly with others. Accordingly, the
              financial statements reflect only the company's proportionate
              interest in such activities.

        d) Flow-through common shares

              The Company has financed a portion of its exploration and
              development activities through the issuance of flow-through
              common shares. Under the terms of the flow-through shares, the
              income tax attributes of the related expenditures are renounced
              to the subscribers. To recognize the foregone tax benefits to
              the Company, the flow-through shares issued are recorded net of
              the tax benefits when renouncement documents are filed with the
              tax authorities.

        e) Foreign currency translation

              Monetary assets and liabilities denominated in foreign
              currencies are translated at exchange rates in effect at the
              balance sheet date. Non-monetary assets and liabilities
              denominated in foreign currencies are translated at rates in
              effect on the dates the assets were acquired or liabilities
              were assumed. Revenues and/or losses on these items are
              included in the statements of operations.

        f) Income taxes

              The Company follows the liability method of income tax
              allocation. Under this method, future income taxes are
              recognized for the future income tax consequences attributable
              to differences between the carrying values of assets and
              liabilities and their respective income tax basis. Future
              income tax assets and liabilities are measured using
              substantively enacted income tax rates expected to apply to
              taxable income in the years in which temporary differences are
              expected to be recovered or settled. The effect on future
              income tax assets and liabilities of a change in rates is
              included in earnings in the period that includes the date of
              substantial enactment. Future income tax assets are recorded in
              the financial statements if realization is considered more
              likely than not.

        g) Stock-based compensation and other stock-based payments

              The Company grants stock options to executive officers,
              directors, employees and consultants pursuant to a stock option
              plan. Awards of stock options granted to employees, officers
              and directors are accounted for in accordance with the fair
              value method and result in compensation expense. The expense is
              recognized in income over the shorter of the service period of
              the employees to whom the option was granted or the vesting
              period of the specific option. The corresponding credit is
              recorded as a contributed surplus. Any consideration paid on
              the exercise of stock options is credited to share capital.

        h) Per share information

              Basic per share amounts are calculated using the weighted
              average number of common shares outstanding during the period.
              Diluted per share amounts are calculated adjusting the weighted
              average number of shares for the dilutive effect of options,
              using the treasury stock method. Under this method, the
              dilutive effect of options uses proceeds received on the
              exercise of options plus the unamortized portion of stock-based
              compensation to purchase common shares at the average price
              during the period. The weighted average number of shares
              outstanding is then adjusted by the net change.

        i) Financial instruments

              The fair market values of cash and cash equivalents,
              receivables, other current assets, payables and bank
              indebtedness approximate their carrying value. From time to
              time, the Company may use derivative financial instruments to
              manage exposure to fluctuations in commodity prices and foreign
              currency exchange rates. All transactions of this nature
              entered into by the Company are related to an underlying
              financial position or to future petroleum and natural gas
              production. The Company does not use derivative financial
              instruments for speculative trading purposes.

        j) Cash and cash equivalents

              Cash and cash equivalents consist of cash and term deposits
              with a maturity date of three months or less.

        k) Revenue recognition

              Revenue associated with the sale of crude oil and natural gas
              is recognized when title passes to the purchaser.


    2.  ACQUISITION EXPENDITURES

    On June 1, 2006, the Company closed the amalgamation agreements dated
    April 1, 2006 with Drilcorp Energy Ltd. ("Drilcorp") and Kerogen
    Petroleum Ltd. ("Kerogen") to acquire all the issued and outstanding
    shares of Drilcorp and Kerogen. Twin Butte indirectly acquired each of
    Drilcorp and Kerogen by creating two wholly-owned subsidiaries that
    amalgamated with Drilcorp and Kerogen, respectively. The two wholly-owned
    subsidiaries were subsequently wound up into Twin Butte such that Twin
    Butte owns all assets formerly owned by Drilcorp and Kerogen.

    The purchase price paid by Twin Butte for all of Drilcorp's shares was a
    total of 19,630,062 common shares of Twin Butte and $7,856,597. The
    purchase price paid by Twin Butte for all of Kerogen's shares was a total
    of 14,392,170 common shares of Twin Butte.

    The acquisition was accounted for using the purchase method of accounting
    as follows:

    Consideration

      -----------------------------------------------------------------------
                                      Drilcorp       Kerogen        Total
      -----------------------------------------------------------------------
      Shares                        $ 23,569,792  $ 17,270,567  $ 40,840,359
      Cash                             7,856,597             -     7,856,597
      Transaction costs                  255,123       140,644       395,767
      -----------------------------------------------------------------------

      Total consideration           $ 31,681,512  $ 17,411,211  $ 49,092,723
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------


    Purchase Price at Fair Value

      -----------------------------------------------------------------------
                                      Drilcorp       Kerogen        Total
      -----------------------------------------------------------------------

      Petroleum and natural gas
       properties                   $ 44,784,967  $ 18,823,624  $ 63,608,591
      Future income tax asset            131,236       138,939       270,175
      Net working capital deficiency (11,477,777)   (1,245,954)  (12,723,731)
      Asset retirement obligation     (1,756,914)     (305,398)   (2,062,312)
      -----------------------------------------------------------------------

      Total purchase price          $ 31,681,512  $ 17,411,211  $ 49,092,723
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------


    The net working capital deficiency consists of the following:

      -----------------------------------------------------------------------
                                      Drilcorp       Kerogen        Total
      -----------------------------------------------------------------------

      Accounts receivable           $  3,292,113  $    856,979  $  4,149,092
      Deposits and prepaid expenses      331,961        54,436       386,397
      Accounts payable and accrued
       liabilities                    (4,443,943)   (1,369,472)   (5,813,415)
      Bank indebtedness              (10,657,908)     (787,897)  (11,445,805)
      -----------------------------------------------------------------------

      Net working capital
       deficiency                   $(11,477,777) $ (1,245,954) $(12,723,731)
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------


    3.  PROPERTY AND EQUIPMENT

      -----------------------------------------------------------------------
                                                  Accumulated       Net
                                                  Depletion &       Book
                                        Cost      Depreciation      Value
      -----------------------------------------------------------------------

      Petroleum and natural gas
       properties                   $ 79,282,575  $  7,813,637  $ 71,468,938
      Office and computer equipment       44,800         7,105        37,695
      -----------------------------------------------------------------------

      Total                         $ 79,327,375  $  7,820,742  $ 71,506,633
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------


    The Company has capitalized $379,609 of general and administrative
    expenses directly related to exploration and development activities for
    the years ended December 31, 2006 ($ nil - year ended December 31, 2005).

    The cost of undeveloped property excluded from the depletion base as at
    December 31, 2006 was $5,630,449 (December 31, 2005 - $nil). Future
    development costs on proved reserves of $5,785,700 as at December 31,
    2006 are included in the calculation of depletion and depreciation
    (2005 - $nil).

    The Company performed a ceiling test calculation as at December 31, 2006
    to assess the recoverable value of the property and equipment. The oil
    and gas future price is based on the January 1, 2007 commodity price
    forecast of the Company's independent reserve evaluators. The Company had
    no impairment under the December 31, 2006 year end ceiling test.

    For calculation of the December 31, 2006 ceiling test, the benchmark
    prices used were as follows:

                                Oil                           Natural Gas
                                Edmonton Par Price 40 API     AECO - C Spot
                                CAD $/bbl                     CAD $/MMbtu
      -----------------------------------------------------------------------

      2007                      70.80                         6.85
      2008                      69.30                         7.05
      2009                      67.70                         7.40
      2010                      66.10                         7.50
      2011                      64.20                         7.70
      2012                      65.60                         7.90
      2013                      66.80                         8.10
      2014                      68.20                         8.25
      2015                      69.50                         8.45
      2016                      70.90                         8.60
      2017                      72.30                         8.75
      2018                      73.80                         8.95

      % increase thereafter     2.00%                         2.00%
    -----------------------------------------------------------------------


    4.  BANK INDEBTEDNESS:

    The Company has a $17.0 million demand revolving operating credit
    facility with a Canadian chartered bank. The credit facility provides
    that advances may be made by way of direct advances, banker's
    acceptances, or standby letters of credit/guarantees. Advances bear
    interest at the bank's prime lending rate plus 0.25%. The credit facility
    is secured by a demand debenture and a general security agreement
    covering all assets of the Company.


    5.  CONVERTIBLE DEMAND NOTES:

    On February 3, 2004, the Company issued $4, 770,985 10% demand notes,
    convertible into non-voting, common shares of the Company at a ratio of
    2,583 non-voting shares per $1,000 or principle outstanding. The fair
    value of the equity component of these notes associated with the
    conversion option has been estimated to be $nil. The convertible demand
    notes were converted to 12,323,429 Common Shares of the Company (note 7)
    in March 2006.


    6.  ASSET RETIREMENT OBLIGATIONS

    Asset retirement obligations are based on the Company's net ownership in
    wells and facilities, and management's estimate of future costs to
    abandon and reclaim those wells and facilities as well as an estimate of
    the future timing of the costs to be incurred.

    The Company has estimated the present value of its total asset retirement
    obligation to be $3,073,325 at December 31, 2006, based on a total future
    liability of $3,818,400. Payments to settle asset retirement obligations
    occur over the operating lives of the underlying assets, estimated to be
    from 1 year to 19 years with the majority of the costs to be incurred
    between 2008 and 2016. A credit-adjusted risk free rate of eight percent
    and an inflation rate of two percent were used to calculate the present
    value of the asset retirement obligation.

    Changes to the asset retirement obligation are as follows:


                                                                        2006
      -----------------------------------------------------------------------
      Carrying amount, beginning of year                        $          -

      Liabilities incurred                                            76,481
      Acquisitions (note 2)                                        2,062,312
      Revisions in estimated cash outflows                           876,988
      Accretion of asset retirement obligation                        57,544
      -----------------------------------------------------------------------

      Asset retirement obligation, end of year                  $  3,073,325
      -----------------------------------------------------------------------


    7.  SHARE CAPITAL

    Authorized

    An unlimited number of voting Common Shares and an unlimited number of
    Preferred Shares.

    Issued


                                                     Number of
                                                        shares        Amount
      -----------------------------------------------------------------------

      Common Shares

      Balance, December 31, 2004                     8,448,036  $  1,700,016

      Issuance of flow-through shares                9,333,310     4,013,323
      -----------------------------------------------------------------------

      Balance, December 31, 2005                    17,781,346  $  5,713,339

      Issued on conversion of convertible demand
       notes                                        12,323,429     4,770,984

      Issued pursuant to exercise of flow-through
       share warrants for cash                       7,000,000     3,010,000

      Issued pursuant to private placement for
       cash                                         17,000,000     6,800,000

      Issued pursuant to acquisitions (note 2)      34,022,232    40,840,359

      Issued pursuant to exercise of management
       warrants for cash                             8,250,000     3,300,000

      Contributed surplus related to management
       warrants exercised                                    -     3,403,950

      Tax effect of flow through share issuance              -    (1,352,720)

      Share issue and financing costs net of tax             -       (88,191)
      -----------------------------------------------------------------------

      Balance, December 31, 2006                    96,377,007  $ 66,397,721
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------


    Issue of Common Shares

    On June 7, 2006, the Company amended and restated its articles and
    converted the previously issued and outstanding non-voting Common Shares
    of the Company to voting Common Shares on a one for one basis.
    Accordingly, all Common Shares are disclosed as voting Common Shares.

    The convertible demand notes were converted to Common Shares in
    March 2006 (note 5).

    At December 31, 2005, a total of 7,000,000 warrants ("warrants") to
    acquire Common Shares at an exercise price of $0.43 per share were
    outstanding. The warrants were issued pursuant to a private placement of
    flow-through shares with an expiry of December 31, 2006. All warrants
    were exercised in 2006.

    During the second quarter of 2006 the Company pursuant to a private
    placement issued 17 million Common Shares at a price of $0.40 per share
    for gross proceeds of $6.8 million.

    Management Warrants

    The Company has issued 8.25 million warrants ("management warrants") that
    are registered in the name of Twin Butte Energy Ltd. and are held
    pursuant to the terms of an employee benefit trust. Each management
    warrant entitles the holder to acquire one Common Share at an exercise
    price of $0.40 per share with each management warrant expiring
    December 31, 2006. The warrants are to be exercised at the discretion of
    the Company within 10 business days of notice to exercise.

    The management warrants and the Common Shares to be acquired on exercise
    of the management warrants are to be held pursuant to a private escrow
    agreement and the Common Shares on exercise of the management warrants
    will remain registered in the name of the Company. The Common shares are
    to be released from escrow with 50% of the Common Shares released May 31,
    2007 and the remaining 50% on May 31, 2008.

    All management warrants were exercised during the year.


    Stock Options

    The following table sets forth a reconciliation of stock option plan
    activity through to December 31, 2006

                                                                    Weighted
                                                                     Average
                                                     Number of      Exercise
                                                       Options         Price
      -----------------------------------------------------------------------

      Outstanding at December 31, 2005                       -  $          -
      Granted                                        7,875,000          0.80
      Forfeited                                       (550,000)         0.80
      -----------------------------------------------------------------------
      Outstanding at December 31, 2006               7,325,000  $       0.80
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------

    There were no options exercisable as at December 31, 2006.


    Stock Based Compensation

    The Company accounts for its stock based compensation plan using the fair
    value method. Under this method, a compensation cost is charged over the
    vesting period for options or warrants granted to employees, consultants,
    officers, and directors with a corresponding increase to contributed
    surplus.

    The following table reconciles the Company's contributed surplus balance.

                                                                        2006
      -----------------------------------------------------------------------

      Contributed surplus balance at beginning of year          $          -

      Stock based compensation charged for stock options             415,713
      Stock based compensation charged for management warrants     3,403,950
      Transfer to share capital on exercise of management
       warrants                                                   (3,403,950)
      -----------------------------------------------------------------------

      Contributed surplus balance at end of period              $    415,713
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------

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

                                                                        Year
                                                                       ended
                                                           December 31, 2006
      -----------------------------------------------------------------------

      Expected volatility                                                50%
      Risk free rate of return                                          4.5%
      Expected stock option life                                     3 years
      Expected management warrant life                              7 months
      -----------------------------------------------------------------------

    The weighted average fair value of stock options granted during 2006 was
    $0.30 per option.  The weighted average fair value of management warrants
    granted during 2006 was $0.41 per warrant.


    Earnings Per Share

    The following table sets forth the details of the denominator used for
    the computation of basic and diluted earnings per share:

                                                                 Years Ended
      -----------------------------------------------------------------------
                                                          2006          2005
      -----------------------------------------------------------------------

      Weighted average number of basic shares       63,814,349     8,473,607
      Effect of dilutive securities:
        Employee stock options                               -             -
      -----------------------------------------------------------------------
      Weighted average number of diluted shares     63,814,349     8,473,607
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------


    8.  TAXES

    Tax Expense

    The combined provision for taxes in the statement of operations and
    retained deficit  reflects an effective tax rate which differs from the
    expected statutory tax rate. Differences were accounted for as follows:


                                                          2006          2005
      -----------------------------------------------------------------------

      Earnings before taxes                       $ (7,193,816) $   (505,798)
      Statutory income tax rate                         34.50%        33.62%
      Expected income taxes                         (2,481,867)     (170,000)
        Non-deductible crown charges                    88,789             -
        Resource allowance                            (179,190)            -
        Stock based compensation                     1,317,784             -
        Utilization of previously unrecognized
         non-capital loss carryforwards             (2,160,373)            -
        Change in expected tax rate                    302,912
        Other                                                -       170,000

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

      Future income tax recovery                  $ (3,111,945) $          -
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------


    Future Income Taxes

                                                          2006          2005
      -----------------------------------------------------------------------

      Property, plant, and equipment              $ 12,213,900  $          -
      Asset retirement obligations                    (930,900)            -
      Share issue cost                                (386,600)            -
      Eligible scientific research &
       experimental development expenditures        (4,393,000)
      Non-capital loss carryforwards               (23,603,800)  (27,691,199)
      Valuation allowance                           15,071,000    27,691,199

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

      Future income tax asset                     $ (2,029,400) $          -
      -----------------------------------------------------------------------
      -----------------------------------------------------------------------

    As at December 31, 2006, the Company has tax deductions of approximately
    $124.8 million that is available to shelter future taxable income.
    Included in the above is $77.9 million in non-capital losses that expire
    as follows:

      ---------------------------------------------------------
      Year of expiry ($millions)
      ---------------------------------------------------------

      2007                                        $       16.5
      2008                                                31.5
      2009                                                 8.8
      2014                                                 3.9
      2015                                                 1.1
      2026                                                16.1

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


    9.  RELATED PARTY TRANSACTIONS

    During the year the Company expensed and capitalized legal fees totaling
    $433,102 (2005 - $nil) for services rendered by a professional firm
    related to a director of the Company. As at December 31, 2006, no amount
    is included in accounts payable and accrued liabilities related to these
    transactions. These fees were incurred in the normal course of business
    and recorded at the exchange amount.


    10. FINANCIAL INSTRUMENTS

    Financial instruments of the Company carried on the balance sheet consist
    mainly of cash and short-term investments, accounts receivable and
    current liabilities including bank indebtedness. The estimated fair value
    of the financial instruments approximates their carrying values due to
    their short terms to maturity. Substantially all of the Company's
    accounts receivable are due from customers in the oil and gas industry
    and are subject to normal industry credit risk. The Company is exposed to
    interest rate risk to the extent that changes in market interest rates
    will impact any bank indebtedness that has a floating interest rate.


    11. COMMITMENTS

    As at December 31, 2006, the Company had contractual obligations and
    commitments for office space and equipment:


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

        2007                                        $    464,194
        2008                                              16,587

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

    Subsequent to year end the Company completed a bought deal private
    placement of flow through shares (note 12) that will require the Company
    to spend $12.0 million of flow-through share eligible Canadian
    Exploration Expenditures, as defined in the Canadian Income Tax Act, by
    December 31, 2008.


    12. SUBSEQUENT EVENTS

    Fixed Price Swap Hedges

    In January 2007 the Company entered into three fixed price swap hedge
    arrangements on a total of 3,500 GJ/d for the period of April 1, 2007 to
    October 31, 2007 at an average price of $6.99/GJ as follows:

         Volume (GJ/d)    Price ($/GJ)    Index

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

         1,500 GJ         $6.80/GJ        AECO Monthly
         1,500 GJ         $7.04/GJ        AECO Monthly
         500 GJ           $7.40/GJ        AECO Monthly
         ----------------------------------------------

    Private Placement Financing

    On February 27, 2007 the Company closed a bought deal private placement
    of 14,635,000 flow-through Common Shares at a price of $0.82 per share,
    for aggregate proceeds of $12,000,700.
    

    The TSX does not accept responsibility for the adequacy or accuracy of
    this news release.

    %SEDAR: 00001562E




For further information:

For further information: Ron Cawston, President and Chief Executive
Officer, Twin Butte Energy Ltd., Telephone: (403) 215-2040, Fax: (403)
215-2055

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Twin Butte Energy Ltd.

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