Verenex Energy Inc. - Fourth Quarter 2006 Operating and Financial Results (as amended)



    CALGARY, March 2 /CNW/ - Verenex Energy Inc. ("Verenex" or the "Company")
(TSX - VNX) is pleased to report its fourth quarter and year-end operating and
financial results for the three and twelve months ended December 31, 2006.
    Verenex is a Canada-based international exploration and production
company with a world-class exploration portfolio in the Ghadames Basin in
Libya and in the Bay of Biscay offshore France.

    
    Highlights

    Operations - Libya

    -  The Company announced a light sweet crude oil discovery on February 6,
       2007 at its first exploration well in Libya, A1-47/02 in Area 47 in
       the Ghadames Basin. The well flowed at rates up to 5,172 barrels of
       oil per day (gross) through a 3/4 inch choke at a wellhead pressure of
       1,221 pounds per square inch from an 82-foot interval in the Lower
       Acacus Formation at a depth of approximately 9,980 feet.

    -  The Libyan National Oil Corporation ("NOC") announced that the
       A1-47/02 well is the first discovery on exploration blocks awarded at
       the first international bid round in January 2005. The 11,550 foot
       well commenced drilling on September 29, 2006 and drilling, coring and
       logging was completed on December 25, 2006 (87 days), on-time and
       within budget.

    -  The Company's second exploration well in Libya, named B1-47/02 in
       Area 47, commenced drilling on January 12, 2007 and reached final
       depth of 11,030 feet in the Memouniat Formation on February 21,
       approximately 25 days ahead of plan. An extensive wireline logging and
       formation evaluation program is underway on the well. This well
       qualifies as the second of three minimum commitment wells under the
       Exploration and Production Sharing Agreement ("EPSA") for Area 47.

    -  The Company completed its 2006 seismic acquisition program in October
       2006 consisting of 480 square kilometers of 3D seismic and
       1,708 kilometres of 2D seismic. The program exceeded the minimum
       requirements for seismic acquisition under the EPSA, which required
       200 square kilometers of 3D and 1,000 kilometres of 2D seismic.

    -  The Company signed a contract amendment in November 2006 to extend its
       current seismic acquisition contract with Arab Geophysical Exploration
       Services Company ("AGESCO") to carry out the planned 2007 acquisition
       program of up to 585 square kilometers of 3D seismic. The program is
       expected to commence in June 2007.

    France

    -  In October 2006, the Company's wholly owned subsidiary, Vermilion
       Exploration SAS ("VEX"), entered into an agreement with Vermilion Rep
       SAS ("VREP"), a French subsidiary of Vermilion Energy Trust, for the
       sale of its 95% participating interest in the Marvilliers Permit,
       including the St. Lazare 2H well, and two drilling spacing units in
       the Parentis Concession, including the Parentis 222H well, located in
       France for Cdn $3.5 million. The transaction will be effective July 1,
       2006. Closing of the sale is subject to receipt of all regulatory
       approvals from the French government.

    -  In December 2006, VEX entered into an agreement with the Signature
       Capital Corporation ("Signature") to farm-out 27.5% of its beneficial
       interest in the Aquitaine Maritime exploration permit, offshore
       France, and thereby retain a 22.5% beneficial interest. VEX will be
       carried on its share of drilling and testing costs for the first well
       on the permit. Signature will earn a 30% beneficial interest by
       funding VEX's share of the drilling and testing of a well (up to a
       maximum of US $17 million (net)). VREP will operate the permit and
       hold the remaining 47.5% interest in the permit. Total estimated
       drilling and testing costs range between US $25 and US $30 million
       (gross). If total costs exceed US $34 million (gross), the excess cost
       will be shared by all the parties, in accordance with their beneficial
       interests.

    -  VREP has contracted a semi-submersible drilling rig to drill an
       exploration well on the Aquitaine Maritime Permit in the third quarter
       of 2007, subject to receipt of all regulatory approvals from the
       French government and the finalization of negotiations with partners.

    -  Oil sales from two wells in France in the fourth quarter of 2006
       averaged 56 barrels per day, a 21% decline from the third quarter of
       2006, reflecting increased water production and lower oil production
       from the St. Lazare 2H well.

    Financial

    -  In December 2006 the Company completed the sale, on a bought-deal
       basis, of 5,187,500 common shares at $6.40 per share for gross
       proceeds of $33.2 million. The net proceeds of the offering will be
       used to fund seismic and drilling operations in Libya in 2007.

    -  The Company had net income for the fourth quarter of 2006 of
       $0.1 million compared to an $8.4 million loss in the fourth quarter
       2005. The loss in 2005 was primarily due to a $7.5 million non-cash
       impairment write-down.

    -  Funds flow from operations in the fourth quarter of 2006 was
       $0.4 million compared to $0.7 million for the fourth quarter of 2005
       due to lower oil production in France.

    -  The Company's working capital surplus at December 31, 2006 was
       $40.6 million. This excludes restricted cash of $13.6 million
       ($6.8 million net to Verenex) associated with Letters of Credit
       entered into on behalf of Verenex (50%) and its partner Medco
       International Ventures Limited (50%) to back-stop early termination
       provisions under drilling rig contracts for Libya. Discussions are
       underway to provide other forms of security for the Letters of Credit
       to free up the restricted cash.


    Highlights

                          Three Months Three Months     Year         Year
                             Ended        Ended        Ended        Ended
                          December 31, December 31, December 31, December 31,
    (unaudited)               2006         2005         2006         2005
    -------------------------------------------------------------------------

    Financial (thousands
     of Cdn $, except share
     and per share amounts)

    Petroleum and natural
     gas revenues (net)           594        1,216        3,212        2,118
    Funds flow from
     operations                   418          735        2,797          942
    Net income/(loss)              63       (8,394)      (3,864)     (11,137)
    Capital expenditures        8,339        4,051       21,096       10,952
    Working capital surplus    40,642       33,665       40,642       33,665
    Common shares
     outstanding
      Basic                36,120,891   30,830,433   36,120,891   30,830,433
      Diluted              41,421,391   35,364,183   41,421,391   35,364,183
    Weighted average
     common shares
     outstanding
      Basic                31,410,864   23,998,775   31,020,555   22,971,271
      Diluted              34,027,051   25,112,787   33,698,168   24,517,041
    Share trading
      High                       6.99         4.52         6.99         7.25
      Low                        4.63         3.00         3.00         3.00
      Close                      6.69         3.21         6.69         3.21

    Operations

    Production
      Crude oil (bbls/d)           56          123           90           31
      Natural gas liquids
       (bbls/d)                    16           13           16           19
      Natural gas (mcf/d)         365          323          340          396
      Boe/d (6:1)                 133          190          163          116
    Average reference price
      WTI (US per bbl)          60.21        60.12        66.21        56.56
      Brent (US per bbl)        59.68        56.91        65.14        54.38
      AECO (Cdn per mcf)         6.91        11.43         6.53         8.77
    Average selling price
      Crude oil (Cdn per bbl)    73.08       64.97        72.12        64.97
      Natural gas liquids
       (Cdn per bbl)             41.39       79.40        50.98        50.47
      Natural gas (Cdn per mcf)   5.35       12.98         5.58         7.40

    Average Operating Netback
     (per BOE at 6:1)            46.63       61.60        48.00        47.60
    


    The above table includes non-GAAP measures, which may not be comparable
to other companies. See MD&A for further discussion.

    Capital Expenditures (Cdn $)

    During the fourth quarter of 2006, the Company invested approximately
$8.4 million. Libya accounted for the majority of the activity level with
approximately $0.8 million in seismic, $0.4 million in casing, tubing,
wellhead equipment and inventory burden costs, $5.6 million in drilling
related costs and $1.0 million in capitalized General and Administration
("G&A") and office set up costs. In France, approximately $0.6 million was
incurred relating to the Aquitaine Maritime permit and the ongoing farm-out
activities.

    Outlook

    Libya

    The NOC and partner Medco International Ventures Limited ("Medco") have
endorsed a 2007 capital budget of up to US $91 million (gross) (up to Cdn
$52 million net Verenex) for Area 47 consisting of the drilling and testing of
up to six wells, the acquisition of up to 585 square kilometers of 3D seismic
and a workover and production test on the suspended oil and gas discovery well
A1-NC3A. The ultimate extent of operations will depend on several factors,
including well and seismic results, logistics and regulatory approvals.
    Production testing at the Company's first oil discovery well in Libya
A1-47/02 has been completed utilizing KCA DEUTAG Service Rig 32. Final results
are under review by the Company and Libyan regulatory authorities. The well
will be suspended in such a way that it can be re-entered in the future and
completed as a producing well.
    Drilling at the Company's second exploration well B1-47/02 in the eastern
part of Area 47 has been completed to a final depth of 11,030 feet in the
Memouniat Formation. An extensive wireline logging and formation evaluation
program is underway that could extend into mid-March. If the formation
evaluation program results are positive, production casing will be cemented
into the well and the KCA DEUTAG Service Rig 32 will be utilized to production
test any prospective intervals.
    The Company is seeking NOC approval to drill a third exploration well in
Area 47. If approved, this well is expected to spud by mid-April.
    The Company's second contracted drilling rig KCA DEUTAG Rig T-19 arrived
in Libya in January 2007 after being newly constructed in Dubai. The rig has
been assigned by the Company to another operator to drill a well in southeast
Libya. The Company expects to commence drilling in Area 47 with this second
rig early in the third quarter of 2007. The Company has the option to extend
the assignment agreement for one or two additional wells if such an extension
is requested by the assignee.
    The Company expects to commence its 2007 3D seismic acquisition program
in June 2007 utilizing a crew from AGESCO, the same seismic contractor
utilized by the Company in 2006. Under a contract extension negotiated in
November 2006, the Company has the option to employ an AGESCO crew for up to
1,000 square kilometers of 3D and 200 kilometers of 2D seismic acquisition in
2007 and 2008.
    The Company continues to await NOC approval for a re-entry, workover and
production test on the suspended oil and gas discovery well A1-NC3A in
Area 47.
    The Company has completed the drilling of two new water wells and has
refurbished a third well to support drilling operations in Area 47. Drilling
is underway on a third water well.

    France

    VREP has applied to the French government for approvals to drill an
offshore exploration well on the Aquitaine Maritime Permit in the Bay of
Biscay in the third quarter of 2007. VREP will operate the program and has
contracted AGR Peak Group to provide the semi-submersible drilling rig slot
for the well and other well management services.
    VEX and VREP are continuing to await a decision by the French government
on their application for exploration rights in the offshore Aquila permit (50%
Verenex participating interest). This permit area is adjacent to the Aquitaine
Maritime Permit. The Company expects a final decision in the second quarter of
2007.

    For further information, please contact:

    Jim McFarland, President & CEO
    Verenex Energy Inc.
    Telephone: (403) 536-8009

    or

    Ken Hillier, Chief Financial Officer
    Verenex Energy Inc.
    Telephone: (403) 536-8005


    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following is management's discussion and analysis (MD&A), dated
December 31, 2006, of the Company's operating and financial results for the
three and twelve months ended December 31, 2006. The financial data has been
prepared in Canadian dollars in accordance with Canadian Generally Accepted
Accounting Principles applied consistently with prior periods. This discussion
should be read in conjunction with the Company's interim unaudited
consolidated financial statements for the three and twelve months ended
December 31, 2006 and the audited consolidated financial statements for the
year ended December 31, 2005, together with the accompanying notes as
contained in the Company's 2005 Annual Report.
    Additional information relating to the Company, including its Annual
Information Form, NI 51-101 disclosure and details of outstanding share data
and the Company's Stock Option Plan, is available on SEDAR at www.sedar.com.

    Forward-Looking Information

    This report contains forward-looking financial and operational
information, including but not limited to operational information including
seismic and drilling operations, proposed budgets, earnings, funds flow,
production and capital investment projections. These projections are based on
current expectations and are subject to a number of risks and uncertainties
that could materially affect the results. These risks include, but are not
limited to, risks associated with the oil and gas industry (e.g. financing;
operational risks in exploration, production and development; delays or
changes in plans with respect to exploration or development projects or
capital expenditures; the uncertainty of estimates and projections in relation
to production, costs and expenses and health, safety and environmental risks),
drilling equipment availability and efficiency, the ability to attract and
retain key personnel, the risk of commodity price and foreign exchange rate
fluctuations, the uncertainty associated with dealing with foreign governments
and obtaining regulatory approvals and the risk associated with international
activity. Due to the risks, uncertainties and assumptions inherent in
forward-looking statements, prospective investors in the company's securities
should not place undue reliance on these forward-looking statements.

    Non-GAAP Measures

    Included in this report are references to terms commonly used in the oil
and gas industry, such as funds flow and funds flow per share which is
expressed before changes in non-cash working capital and are used by the
Company to analyze operating performance, leverage and liquidity. These terms
are not defined by Generally Accepted Accounting Principles ("GAAP").
Consequently, these are referred to as non-GAAP measures.

    Operating Results

    Asset Valuation

    The Company performs a review for asset impairment as required by the
Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent
upon an independent reservoir engineer's assessment of the deliverability and
reserves associated with certain wells and the outlook for world prices for
oil and natural gas.
    As a result of lower than expected production results in France during
the second quarter of 2006 compared to the first quarter of 2006, the Company
completed a review for asset impairment for the France full cost pool,
including the St. Lazare 2H and Parentis 222H wells. Based on an assessment of
the deliverability and reserves associated with the wells and the outlook for
world prices for oil and natural gas, it was determined that a $3.0 million
non-cash ceiling test write-down was required in the second quarter of 2006 to
reflect an impairment in these assets.

    Revenues

    Oil and gas production declined by 30% to 133 barrels of oil equivalent
per day ("boepd") in the fourth quarter of 2006 resulting in oil and gas
revenues of $0.6 million, net of royalties, compared to 190 boepd and revenues
of $1.2 million in the fourth quarter of 2005. The decrease in revenues during
the quarter compared to 2005 reflects the impact of lower oil production from
the St. Lazare 2H well in France and significantly lower natural gas and
natural gas liquids prices partially offset by higher realized prices in
France and increased gas production from the Bottrel, Alberta gross overriding
royalty (the "Bottrel GORR"). Production in the fourth quarter of 2006 was up
3% and revenues were flat compared to production of 129 boepd and $0.6 million
in revenues for the third quarter of 2006. The third quarter was impacted by
lower production volumes due to a week-long shut-in of production at Bottrel.
    Production in France was impacted by the continuing decline in
performance of the St. Lazare 2H well. Current production from the St. Lazare
2H well is approximately 25 to 30 barrels of oil per day ("bopd") with a water
cut of 65%. The Parentis 222H well continues to produce between approximately
25 to 30 bopd with a 68% watercut, which is in line with expectations.
Production in France was not recognized until the fourth quarter of 2005,
accounting for the year-to-date variance for oil production.
    During the fourth quarter of 2006 the Bottrel GORR provided production of
approximately 77 boepd and revenues of $0.2 million compared to 73 boepd and
$0.5 million for the same period in 2005 and 58 boepd and $0.2 million of
revenues during the third quarter of 2006. The third quarter 2006 results
reflect a one week shut-in of the Bottrel field in June, resulting in an over
accrual in the second quarter impacting the third quarter results. For the
twelve months ended December 31, 2006, the Bottrel GORR provided 73 boepd and
revenues of $1.0 million compared to 85 boepd and $1.4 million for the same
period in 2005. There were no other unusual cyclical or seasonal factors
impacting the Company's production in 2006.
    Average realized prices for the fourth quarter of 2006 were: oil $73.08
per bbl (2005 - $64.97); natural gas $5.35 per mcf (2005 - $12.98); and NGL
$41.39 per bbl (2005 - $79.40). These compare to prices of $62.71 per bbl for
oil, $4.16 per mcf for natural gas and $76.40 per bbl for NGL during the third
quarter of 2006.
    Interest of $0.2 million was earned in the fourth quarter of 2006 (2005 -
$0.1 million) compared to $0.3 million for the third quarter of 2006 on cash
balances invested in excess of expenditure requirements. The increase versus
2005 is due to the increased cash balance resulting from the December 2006
financing of approximately $31.7 million (net of issue costs).

    Stock Compensation

    Non-cash stock compensation expense related to stock options, performance
warrants and Stock Appreciation Rights ("SAR's") was $0.7 million and
$1.9 million for the three and twelve months ended December 31, 2006,
(December 31, 2005 - $0.4 million and $3.3 million respectively). The increase
in costs in the fourth quarter of 2006 to $0.7 million from $0.4 million in
the third quarter of 2006 is due to the recognition of the cost of the SAR's
associated with the higher Verenex closing stock price at the end of the
fourth quarter. The decrease in the twelve months of 2006 compared to the
twelve months of 2005 is primarily a result of the vesting of the performance
warrants in the first quarter of 2005 as noted below.
    The Company has adopted the fair value method of accounting for stock
options and performance warrants. With respect to the performance warrants,
the vesting conditions relating to the weighted average trading price of $3.75
and $4.25 were satisfied during the first quarter of 2005. As a result, the
vesting period over which the costs were amortized was shortened to reflect
the fact that only the timing conditions remain and a non-cash charge in the
amount of $1.8 million was taken in the first quarter of 2005 to reflect the
acceleration of the vesting period.

    General and Administration ("G&A")

    The Company capitalized $0.7 million and $2.5 million of general and
administrative ("G&A") costs relating to exploration and development
activities for the three months and twelve months ended December 31, 2006
respectively (December 31, 2005 - $0.7 million and $1.7 million respectively).
The higher costs relate primarily to the growth in the Company's operational
staff in Tripoli. The net G&A amounts that are expensed represent salaries,
employee benefits, office costs, legal and related party services not directly
attributable to ongoing exploration and development capital projects.

    Effects of Exchange Rate Fluctuations

    The Company's operations are conducted primarily in jurisdictions where
the United States dollar (US$) and the European Euro ((euro)) are the business
currencies. A large proportion of the Company's costs, assets and liabilities
during the quarter ended December 31, 2006 were denominated in US$. As the
Canadian dollar fluctuated during the period, foreign exchange gains and
losses are reflected in both the earnings and funds flow amounts.

    Depletion and Depreciation

    Depletion and depreciation, excluding the $3.0 million impairment
write-down in the France properties in the second quarter of 2006 noted above,
of $0.4 and $2.0 million for the three and twelve months ended December 31,
2006 respectively (2005 - $1.1 million and $1.6 million respectively) relates
to the depletion of the France and Canadian assets. The 2005 depletion expense
related entirely to the Bottrel GORR production.

    Related Party Transactions

    Vermilion REP SAS ("VREP") is a 100% owned subsidiary of Vermilion Energy
Trust ("VET"). VET is a significant shareholder in Verenex. VREP, as contract
operator in France, paid for various expenditures on behalf of Verenex. These
transactions were measured at the exchange amount being the consideration
established and agreed to by the related parties. These transactions were
undertaken under the same terms and conditions as transactions with
non-related parties. Amounts due to related parties are comprised of an amount
due to VREP.
    The Bottrel GORR is a gross overriding royalty on VET's share of
production from specific wells at Bottrel, Alberta. The Bottrel GORR provided
$0.2 million and $1.0 million of royalty income during the three and twelve
months ended December 31, 2006 respectively (2005 - $0.5 million and
$1.4 million respectively).
    Verenex entered into a Technical and Administrative Services Agreement
with Vermilion Resources Limited ("Vermilion") on June 28, 2004, whereby
Vermilion provides certain financial and administrative services at a cost of
twenty thousand dollars per month and certain technical, marketing and other
services at cost plus 5%, for a period of eighteen months ending December 31,
2005. The Agreement is automatically renewed for one-year periods, unless one
party provides three months notice not to renew. Effective January 1, 2006,
the monthly charge was amended to eliminate the services provided for the
Canadian financial and administrative services, reducing the monthly charge to
ten thousand dollars per month in support of the France operations. During the
twelve months ending December 31, 2006 Verenex was billed one hundred and
twenty thousand dollars (2005 - two hundred and forty thousand dollars) for
services provided under this Agreement.
    The Company completed negotiations with Vermilion in the second quarter
of 2006 for the early termination of its current office lease. The Company
received a lump sum payment of $0.4 million in June 2006.
    On October 12, 2006, the Company's wholly owned subsidiary, Vermilion
Exploration SAS ("VEX"), entered into an agreement with Vermilion Rep SAS
("VREP"), a French subsidiary of Vermilion Energy Trust, for the sale of its
95% participating interest in the Marvilliers Permit, including the St. Lazare
2H well, and in two drilling spacing units in the Parentis Concession,
including the Parentis 222H well, located in France for Cdn $3.5 million. The
parties have executed a sale and purchase agreement, effective July 1, 2006,
which is subject to all conditions precedent, including the receipt of all
necessary regulatory approvals.

    Liquidity and Capital Resources

    Verenex will continue to rely primarily on equity to fund future working
capital requirements and capital obligations.
    In December 2006, the Company completed the sale, on a bought-deal basis,
of 5,187,500 common shares at $6.40 per share for gross proceeds of
$33.2 million (net $31.7 million after issue costs).
    The Company has issued two letters of credit ("LC's") relating to the
signing of two long-term drilling contracts that back-stop early termination
provisions. The terms of the contract call for the LC's to vary over the
period of the contract. The first LC expires on November 13, 2008 and is
exercisable by Oil Drilling & Exploration (Borneo) Pty Limited ("ODE"), a
subsidiary of Ensign Energy Services Inc. based in Calgary, Alberta. The ODE
contract required cash collateral of US $4.6 million (gross) to be put in
place by September 30, 2006. The second LC in favour of KCA DEUTAG Drilling
GmbH based in Germany ("KCA DEUTAG"), expires on April 30, 2009 and is
supported by cash collateral of US $7.2 million (gross) as at September 30,
2006. The LC's reach a maximum amount of US $12.0 million (gross) in aggregate
at the projected spud dates, after which the LC amounts decline as the rigs
are worked. The Company has received funds from its partner, Medco
International Ventures Limited, for its 50% share of the cash collateral and
all cash provided as support for the LC's has been reflected as restricted
cash on the balance sheet.
    On September 22, 2006, the Company signed a Letter of Intent ("LOI") with
RWE Dea NA/ME GmbH ("RWE") to sub-contract the KCA DEUTAG Rig T-19. The LOI
contains provision for RWE and Verenex to negotiate terms to effect the
assumption by RWE of up to 25% of the security provided in support of the
second LC noted above. A formal assignment agreement has been executed between
Verenex, RWE and KCA DEUTAG with an effective date of January 15, 2007.
    The Company had a working capital surplus of $40.6 million at
December 31, 2006 compared to $33.7 million as at December 31, 2005, including
cash and term deposits amounting to $49.4 million (December 31, 2005 -
$35.5 million) net of restricted cash amounting to $13.6 million ($6.8 million
net to Verenex) (December 31, 2006 - nil). The increase in working capital is
due primarily to the December 2006 equity financing offset by increased
activities in the Company's Libya operations, including the funding of the
cash balance required to support the LC's. Discussions are underway to provide
other forms of security for the Letters of Credit to free up the restricted
cash.
    The majority of the trade receivables relate to amounts associated with
the joint venture operations in France and an accrual for revenues associated
with the Bottrel GORR. The joint venture receivable relates to amounts owing
by the Company's partner in Libya. All receivables have been assessed for
credit risk and no allowance for doubtful accounts is necessary at this time.
    Accounts payable and accrued liabilities have increased since
December 31, 2005 due to the increased activity levels in Libya as the Company
commenced its seismic and drilling operations and entered into contracts to
purchase casing, tubing and wellhead equipment.
    The Company has sufficient resources to fulfill its short-term work
program commitments.
    Verenex is listed on the Toronto Stock Exchange under the stock symbol
VNX.

    Sale of France Onshore Producing Properties

    The Company's wholly owned subsidiary, Vermilion Exploration SAS ("VEX"),
has entered into an agreement with VREP for the sale of its 95% participating
interest in the Marvilliers Permit, including the St. Lazare 2H well, and in
two drilling spacing units in the Parentis Concession, including the Parentis
222H well, located in France for Cdn $3.5 million. VREP holds the remaining 5%
interest in these lands and wells.
    VEX currently produces approximately 50 to 60 barrels of oil per day
(net) from the two wells, has the right to drill an additional well in the
Parentis Concession and holds a participating interest in 46,481 acres (net)
of land in the Marvilliers Permit.
    The parties have executed a sale and purchase agreement, effective
July 1, 2006, which is subject to all conditions precedent, including the
receipt of all necessary regulatory approvals.

    Critical Accounting Estimates

    The amounts recorded for depletion and depreciation of property, plant
and equipment are based on estimates. By their nature, these estimates are
subject to measurement uncertainty and the effect on the consolidated
financial statements from changes in such estimates in future years could be
significant.
    The Company performs a review for asset impairment as required by the
Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent
upon an independent reservoir engineer's assessment of the deliverability and
reserves associated with certain wells and the outlook for world prices for
oil and natural gas.

    New Accounting Standards and Changes in Accounting Standards
    for 2006 and 2007

    In April, 2005 the Canadian Institute of Chartered Accountants issued the
following new Handbook Sections: Section 1530, Comprehensive Income; Section
3251, Equity; Section 3855, Financial Instruments - Recognition and
Measurement; and Section 3865, Hedges. The effective date for adoption for all
four sections for Verenex is January 1, 2007.
    These new accounting standards for Canadian GAAP converge more closely
with the US GAAP as all financial instruments will be recorded on the balance
sheet at fair value and changes in fair value will be included in earnings,
except for derivative financial instruments designated as hedges, for which
changes in fair value will be included in comprehensive income.
    The Company has not chosen early adoption of these new accounting
standards and is in the process of assessing the future impact these sections
will have on the financial statements.

    Disclosure Controls and Procedures Over Financial Reporting

    The Company evaluated the effectiveness and design of its disclosure
controls and procedures for the year ended December 31, 2006, and based on
this evaluation have determined these controls to be effective.
    The Company's financial reporting procedures and practices have enabled
the certification of Verenex Energy Inc.'s annual filings in compliance with
Multilateral Instrument 52-109 "Certification of Disclosure in Issuer's Annual
and Interim Filings". Management has designed such internal controls over
financial reporting to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements and other
annual filings in accordance with Canadian Generally Accepted Accounting
Principles, except as noted below:
    Given the small size of the Company, the evaluation of internal controls
over financial reporting for the Company resulted in the identification of the
following weaknesses:

    
    -  Management is aware that due to its relatively small scale of
       operations there is a lack of segregation of duties due to the limited
       number of employees dealing with accounting and financial matters.
       However, management has concluded that considering the employees
       involved and the control procedures in place, including management and
       Audit Committee oversight, risks associated with such lack of
       segregation are not significant enough to justify the expense
       associated with adding employees to clearly segregate duties.
    -  Management is aware that in-house expertise to deal with complex
       taxation, accounting and reporting issues may not be sufficient. The
       Company requires outside assistance and advice on taxation, new
       accounting pronouncements and complex accounting and reporting issues,
       which is common with companies of a similar size.
    -  Management is aware that in-house expertise to deal with information
       technology and information systems may not be sufficient. The company
       has engaged a third party to provide the required expertise and
       support.
    

    There have been no significant changes in the fourth quarter of 2006 to
the Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.


    
    Verenex Energy Inc.
    Consolidated Balance Sheets
    (thousands of Cdn $)
    unaudited

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

    Assets

    Current assets
      Cash and cash equivalents                          49,369       35,546
      Accounts receivable                                   352          711
      Joint venture receivable                            2,292            -
      Inventory                                              61           74
      Prepaid expenses and other                            136           13
                                                    -------------------------
                                                         52,210       36,344
                                                    -------------------------

    Restricted cash (Note 14)                            13,625            -
                                                    -------------------------

    Capital assets (Note 3)                              31,322       18,277
                                                    -------------------------

    Assets held for sale (Notes 3 & 15)                   3,117            -
                                                    -------------------------
                                                        100,274       54,621
                                                    -------------------------
                                                    -------------------------

    Liabilities and Shareholders' Equity

    Current liabilities
      Accounts payable and accrued liabilities           11,049          946
      Due to related party (Note 5)                         519        1,660
      Taxes payable                                           -           73
                                                    -------------------------
                                                         11,568        2,679
    Joint venture payables related to
     restricted cash (Note 14)                            6,812            -

    Asset retirement obligations related to
     assets held for sale (Notes 4 & 15)                     37           37
                                                    -------------------------
                                                    -------------------------
                                                         18,417        2,716
                                                    -------------------------
                                                    -------------------------

    Commitments and Contingencies (Note 13)

    Shareholders' equity
      Share capital (Note 7)                             92,566       60,560
      Contributed surplus (Note 7)                        5,402        3,592
      Deficit                                           (16,111)     (12,247)
                                                    -------------------------
                                                         81,857       51,905
                                                    -------------------------
                                                        100,274       54,621
                                                    -------------------------
                                                    -------------------------

    See accompanying notes to the Consolidated Financial Statements



    Verenex Energy Inc.
    Consolidated Statements of Loss and Deficit
    (thousands of Cdn $, except share and per share amounts)
    unaudited

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

    Revenue
      Petroleum & natural
       gas, net                   594        1,179        3,212        2,118
      Interest income             227          115        1,036          476
      Lease inducement
       payment (Notes 5
       & 13)                        -            -          400            -
                          ---------------------------------------------------
                                  821         1294        4,648        2,594
                          ---------------------------------------------------

    Expenses
      Production                   87           77          373           77
      Transportation               16           25           85           25
      General and
       administration             333          409        1,383        1,478
      Stock based
       compensation
       (Note 8)                   743          445        1,948        3,264
      Depletion and
       depreciation
       (Note 3)                   422        1,057        1,956        1,559
      Impairment
       write-down (Note 3)          -        7,541        2,979        7,541
      Foreign exchange
       (gain)/loss               (810)          86         (222)        (286)
                          ---------------------------------------------------
                                  791        9,640        8,502       13,658

    Income/(Loss) before
     taxes                         30       (8,346)      (3,854)     (11,064)
    Taxes (Note 6)                (33)          48           10           73
                          ---------------------------------------------------

    Net Income/ (Loss)             63       (8,394)      (3,864)     (11,137)
                          ---------------------------------------------------

    Deficit, beginning
     of period                (16,174)      (3,853)     (12,247)      (1,110)
                          ---------------------------------------------------

    Deficit, end of period    (16,111)     (12,247)     (16,111)     (12,247)
                          ---------------------------------------------------
                          ---------------------------------------------------

    Net loss per share
     basic and diluted
     (Note 9)                       -        (0.35)       (0.12)       (0.48)
                          ---------------------------------------------------
                          ---------------------------------------------------

    Weighted average
     number of shares
     outstanding (Note 9):
      Basic                31,410,864   23,998,775   31,020,555   22,971,271
                          ---------------------------------------------------
                          ---------------------------------------------------
      Diluted              34,027,051   25,112,787   33,698,168   24,517,041
                          ---------------------------------------------------
                          ---------------------------------------------------

    See accompanying notes to the Consolidated Financial Statements



    Verenex Energy Inc.
    Consolidated Statements of Cash Flows
    (thousands of Cdn $)
    unaudited

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

    Cash and cash
     equivalents provided
     by (used in):

    Operating activities:
      Net income/(loss)            63       (8,394)      (3,864)     (11,137)
      Items not affecting
       cash:
        Stock based
         compensation             743          445        1,947        3,264
        Depletion and
         depreciation             422        1,057        1,956        1,559
        Impairment write-down       -        7,541        2,979        7,541
        Unrealized foreign
         exchange
         (gain)/loss             (810)          86         (222)        (286)
                          ---------------------------------------------------
      Funds flow from
       operations before
       changes in non-cash
       working capital            418          735        2,797          941
      Changes in non-cash
       operating working
       capital                    233          116          317          420
                          ---------------------------------------------------
                                  651          851        3,114        1,361

    Investing activities:
      Acquisition and
       expenditures on
       petroleum and
       natural gas
       properties              (1,713)      (4,052)     (13,456)     (10,286)
                          ---------------------------------------------------

    Financing activities:
      Issue of common
       shares for cash,
        net of share
        issue costs            31,700       24,685       31,869       25,109
      Restricted cash            (235)           -      (13,625)           -
      Joint venture
       payables related to
       restricted cash            117            -        6,812            -
      Payments to related
       party (Note 3)             514       (1,460)      (1,180)      (7,525)
                          ---------------------------------------------------
                               32,096       23,225       23,876       17,584

    Foreign exchange gain
     (loss) on cash held
     in a foreign currency        768           50          289         (350)
                          ---------------------------------------------------

    Net change in cash
     and cash equivalents      31,802       20,074       13,823        8,309
    Cash and cash
     equivalents,
     beginning of period       17,567       15,472       35,546       27,237
                          ---------------------------------------------------

    Cash and cash
     equivalents, end of
     period                    49,369       35,546       49,369       35,546
                          ---------------------------------------------------
                          ---------------------------------------------------


    Cash taxes paid               (33)           -           75           28
                          ---------------------------------------------------
                          ---------------------------------------------------

    Cash interest received        227          115        1,036          476
                          ---------------------------------------------------
                          ---------------------------------------------------

    See accompanying notes to the Consolidated Financial Statements


    Verenex Energy Inc.
    Notes to the Consolidated Financial Statements
    For the year ended December 31, 2006
    (thousands of Cdn $, except as noted)
    unaudited


    1.  Basis of Presentation

        Verenex Energy Inc. (the "Company" or "Verenex") was established on
        June 29, 2004, by way of a "reverse takeover" pursuant to an
        amalgamation agreement dated May 27, 2004. Verenex is a public
        company listed on the Toronto Stock Exchange on April 19, 2005.

    2.  Significant Accounting Policies

        a) Principles of consolidation

        The consolidated financial statements have been prepared in
        accordance with Canadian Generally Accepted Accounting Principles and
        include the accounts of the Company and its subsidiaries, all of
        which are wholly owned, on a consolidated basis. All material
        intercompany accounts and transactions have been eliminated upon
        consolidation.

        The Company conducts most of its exploration, development and
        production activities jointly with others and these financial
        statements reflect only Verenex's proportionate interest.

        b) Cash and cash equivalents

        Cash and cash equivalents include monies on deposit and short-term
        investments accounted for at cost having a maturity date of not more
        than 90 days.

        c) Petroleum and natural gas operations

        The Company uses the full-cost method of accounting for petroleum and
        natural gas operations and accordingly, capitalizes all exploration
        and development costs into country-by-country cost centers. These
        costs include land acquisition, geological and geophysical costs,
        drilling (including related overhead) on producing and non-producing
        properties and other carrying charges on unproven properties.
        Proceeds of disposition are applied against net costs capitalized
        with no gain or loss recognized except when the disposition results
        in a greater than 20% change in the rate of depletion and
        depreciation.

        The carrying value of the Company's petroleum and natural gas
        properties is limited to the sum of the undiscounted cash flows
        expected to result from the Company's proved reserves using forecast
        prices. If the carrying value is not fully recoverable, the amount of
        impairment is measured by comparing the carrying amounts of the
        capital assets to an amount equal to the estimated net present value
        of future cash flows from proven plus probable reserves. This
        calculation incorporates risks and uncertainties in the expected
        future cash flows, which are discounted using a risk-free rate. Any
        excess carrying value above the net present value of the future cash
        flows would be recorded as a permanent impairment and charged to
        earnings.

        d) Depletion and Depreciation and Impairment

        Cost centers from which there has been no commercial production are
        not subject to depletion until commercial production commences. The
        capitalized costs are periodically evaluated to determine whether it
        is likely such costs will be recovered in the future. To the extent
        there are costs that are unlikely to be recovered in the future, they
        would be recorded as a permanent impairment and charged to earnings.

        Depletion of petroleum and natural gas costs is calculated for each
        cost center on the unit-of-production method based on estimated
        proven reserves, before royalties, as determined by independent
        engineers. The cost of significant unevaluated properties is excluded
        from the calculation of depletion. For purposes of depletion
        calculations, oil and gas reserves are converted to a common unit of
        measure on the basis of their relative energy content based on a
        conversion ratio of six thousand cubic feet of natural gas to a
        barrel of oil.

        Furniture and equipment are recorded at cost and are being amortized
        on a declining-balance basis at rates of 20% to 50% per year.

        e) Asset Retirement Obligations

        The Company accounts for its asset retirement obligations under
        Canadian Institute of Chartered Accountants ("CICA") Handbook,
        section 3110, Asset Retirement Obligations. This standard focuses on
        the recognition and measurement of liabilities related to legal
        obligations associated with the future retirement of property, plant
        and equipment. Under this standard, these obligations are initially
        measured at fair value determined as the estimated future costs
        discounted to the present value and subsequently adjusted for the
        accretion of the discount factor and any changes in the underlying
        cash flows. The asset retirement cost is capitalized to the related
        asset and amortized into earnings over time. The Bottrel GORR
        properties have no obligations for abandonment or reclamation.

        f) Revenue recognition

        Revenues associated with the sale of crude oil, natural gas and
        liquids are recorded when title passes to the customer. Oil and gas
        revenues represent Verenex's share and are recorded net of royalty
        payments to governments and other mineral interest owners.

        g) Stock-based compensation plan

        The Company has a stock-based compensation plan for employees,
        directors and officers of the Company and its subsidiaries. The
        Company has also issued performance warrants in conjunction with a
        private placement to certain employees, officers and directors as
        described in Note 8. The fair value of the options and performance
        warrants is estimated using the Black-Scholes option-pricing model
        that takes into account, as of the grant date: exercise price,
        expected life, current price, expected volatility, expected
        dividends, and risk-free interest rates.

        The fair value of the stock based compensation is recognized over
        the vesting period of the stock options granted and the estimated
        life of the performance warrants as a compensation cost with a
        corresponding increase recorded to contributed surplus.

        Upon exercise of the stock options or performance warrants,
        consideration paid together with the amount previously recognized in
        contributed surplus is recorded as an increase to share capital.

        See Note 8 for a description of the plan.

        h) Foreign currency translation

        Foreign currency balances of foreign subsidiaries that are considered
        to be integrated are translated on the following basis:

        -  Monetary assets and liabilities are translated at the rates of
           exchange prevailing at the balance sheet dates;

        -  Non-monetary assets, liabilities and related depreciation and
           depletion expense are translated at historical rates; and

        -  Sales, other revenues, royalties and all other expenses are
           translated at the average rate of exchange during the month in
           which they are recognized.

        Any resulting foreign exchange gains and losses are included in
        earnings in the period.

        i) Income taxes

        Income taxes are calculated using the liability method of accounting
        for income taxes. Under this method, income tax liabilities and
        assets are recognized for the estimated tax consequences attributable
        to differences between the amounts reported in the consolidated
        financial statements of the Company and their respective tax bases,
        using substantively enacted income tax rates and tax laws that will
        be in effect when the differences are expected to reverse. Future
        income tax assets are recognized to the extent it is more likely than
        not that sufficient future taxable income will be available to allow
        the future income tax asset to be realized. The effect of a change in
        income tax rates on future tax liabilities and assets is recognized
        in earnings in the period in which the change occurs.

        j) Measurement uncertainty and use of estimates

        The preparation of financial statements in conformity with generally
        accepted accounting principles requires management to make estimates
        and assumptions that affect the reported amounts of assets,
        liabilities, revenues and expenses including asset retirement
        obligations, depletion, depreciation and the fair value of stock
        options and performance warrants. The ceiling test is based upon
        estimates of fair values of unproved properties, proved reserves,
        petroleum and natural gas prices, future costs and other assumptions.
        These estimates are subject to measurement uncertainty and the effect
        on the consolidated financial statements of changes in such estimates
        could be significant.

        k) Per share amounts

        Net loss per share is calculated using the weighted average number of
        shares outstanding during the period. Diluted net loss per share is
        calculated using the treasury stock method to determine the dilutive
        effect of stock options and performance warrants. The treasury stock
        method assumes that the proceeds received from the exercise of "in
        the money" stock options and performance warrants are used to
        purchase shares at the average market share price during the period.

    3.  Capital Assets


                                                 December 31, 2006
        ---------------------------------------------------------------------
                                                    Accumulated
                                                     Depletion,       Net
                                                   Depreciation &     Book
                                            Cost    Amortization     Value
                                       --------------------------------------
        Petroleum and natural gas      $    31,444  $     1,508  $    29,936
         properties and equipment
        Furniture and equipment              1,633          247        1,386
                                       --------------------------------------
                                       $    33,077  $     1,755  $    31,322
                                       --------------------------------------
                                       --------------------------------------



                                                 December 31, 2005
        ---------------------------------------------------------------------
                                                    Accumulated
                                                     Depletion,       Net
                                                   Depreciation &     Book
                                            Cost    Amortization     Value
                                       --------------------------------------
        Petroleum and natural gas
         properties and equipment      $    27,242  $     9,244  $    17,998
        Furniture and equipment                332           53          279
                                       --------------------------------------
                                       $    27,574  $     9,297  $    18,277
                                       --------------------------------------
                                       --------------------------------------

        The balances as at December 31, 2006 have been adjusted to reflect
        that the Company has segregated assets held for sale. These assets
        have a historical cost value of $15.6 million, associated accumulated
        depletion of $12.5 million and a net book value of $3.1 million.

        The Company capitalized $0.7 million and $2.5 million of general and
        administrative costs relating to exploration and development
        activities for the three months and year ended December 31, 2006
        respectively (December 31, 2005 - $0.7 million and $1.7 million
        respectively).

        The Company has included $3.9 million in petroleum and natural gas
        properties and equipment costs in Libya to the end of the fourth
        quarter 2006 (2005 - $nil) relating to casing, tubing and wellhead
        equipment, an increase of $0.4 million over the third quarter of
        2006.

        As a result of lower than expected production in France during the
        second quarter of 2006, the Company completed a review for asset
        impairment for the France full cost pool, including the St. Lazare 2H
        and Parentis 222H wells. Based on an assessment of the deliverability
        and reserves associated with the wells and the outlook for world
        prices for oil and natural gas, it was determined that a $3.0 million
        non-cash ceiling test write-down was required to reflect an
        impairment in these assets.

        Depletion and depreciation, excluding the impairment noted above, of
        $0.4 million and $2.0 million for the three months and year ended
        December 31, 2006 respectively (2005 - $1.1 million and $1.6 million
        respectively) relates to the depletion of the France and Canadian
        assets. Approximately $5.6 million in undeveloped properties (2005 -
        $6.0 million) in France and $20.0 million in Libya (2005 -
        $1.0 million) was excluded from the depletion calculation.

        The Company performs a review for asset impairment as required by the
        Full Cost Accounting Guideline, AcG-16. The Company applied a ceiling
        test to its oil and gas assets using expected future market prices
        of:

                                        Foreign
                         WTI Oil     Exchange Rate      Brent     AECO-C Gas
           Year         (US$/bbl)      (US/Cdn$)      (US$/bbl)  (Cdn$/mmbtu)
        ---------------------------------------------------------------------

           2007           62.00           0.87          60.50           7.20
           2008           60.00           0.87          58.50           7.45
           2009           58.00           0.87          56.50           7.75
           2010           57.00           0.87          55.50           7.80
           2011           57.00           0.87          55.50           7.85
           2012           57.50           0.87          56.00           8.15
           2013           58.50           0.87          57.00           8.30
           2014           59.75           0.87          58.25           8.50
           2015           61.00           0.87          59.50           8.70
           2016           62.25           0.87          60.75           8.90
           2017           63.50           0.87          62.00           9.10
        Thereafter      +2%/year          0.87        +2%/year       +2%/year


    4.  Asset Retirement Obligations

        The Company records the fair value of legal obligations associated
        with the retirement of all of its long-lived tangible assets,
        including its producing well sites but excluding the assets
        associated with the Bottrel royalty for which the Company has no
        retirement obligations. The estimation of these costs is based on
        engineering estimates using current costs and technology and in
        accordance with current legislation and industry practice.

        Verenex has recognized a thirty-seven thousand dollar liability
        associated with the St. Lazare 2H and Parentis 222H wells. These
        costs are assumed to be paid in 40 to 45 years. The Company used a
        credit risk adjusted risk-free rate of 8% and an inflation rate of
        1.5% to calculate the net present value of the future retirement
        obligation. The Company's gross obligation is currently estimated at
        approximately 0.4 million (approximately (euro) 0.3 million).

    5.  Related Party Transactions

        Vermilion REP SAS ("VREP") is a 100% owned subsidiary of Vermilion
        Energy Trust ("VET"). VET is a significant shareholder in Verenex.
        VREP, as contract operator in France, paid for various expenditures
        on behalf of Verenex. These transactions were measured at the
        exchange amount being the consideration established and agreed to by
        the related parties. These transactions were undertaken under the
        same terms and conditions as transactions with non-related parties.
        Amounts due to related parties are comprised of an amount due to
        VREP. The balance has declined as a result of payments made to date.

        The Bottrel GORR is a gross overriding royalty on VET's share of
        production from specific wells at Bottrel, Alberta. The Bottrel GORR
        provided $0.3 million and $1.0 million of royalty income during the
        three and twelve months ended December 31, 2006 (2005 - $0.4 million
        and $1.4 million respectively).

        Verenex entered into a Technical and Administrative Services
        Agreement with Vermilion Resources Limited ("Vermilion") on June 28,
        2004, whereby Vermilion provides certain financial and administrative
        services at a cost of twenty thousand dollars per month and certain
        technical, marketing and other services at cost plus 5%, for a period
        of eighteen months ending December 31, 2005. The Agreement is
        automatically renewed for one-year periods, unless one party provides
        three months notice not to renew. Effective January 1, 2006, the
        monthly charge was amended to eliminate the services provided for the
        Canadian financial and administrative services, reducing the monthly
        charge to ten thousand dollars per month in support of the France
        operations. During the twelve months ending December 31, 2006,
        Verenex was billed one hundred and twenty thousand dollars (2005 -
        two hundred and forty thousand dollars) for services provided under
        this Agreement.

        The Company completed negotiations with Vermilion in the second
        quarter of 2006 for the early termination of its current office
        lease. The Company received a lump sum payment of $0.4 million in
        June 2006.

        On October 12, 2006, the Company's wholly owned subsidiary, Vermilion
        Exploration SAS ("VEX"), entered into an agreement with VREP for the
        sale of its 95% participating interest in the Marvilliers Permit,
        including the St. Lazare 2H well, and in two drilling spacing units
        in the Parentis Concession, including the Parentis 222H well, located
        in France for Cdn $3.5 million. (See note 15)

    6.  Taxes

        Taxes relate to capital taxes. The Company has an unrecognized future
        income tax asset of $9.8 million (December 31, 2005 - $4.3 million)
        relating to the difference in the carrying values and the tax bases
        of the assets in France (2006 - $7.5 million; 2005 - $2.7 million)
        and Canada (2006 - $2.3 million; 2005 - $1.6 million).

        As at December 31, 2006 the Company had estimated tax losses of
        approximately $3.6 million in Canada (2005 - $1.7 million) and
        approximately Canadian equivalent $13.5 million (2005 -
        $10.5 million) in France. The Canadian tax losses expire between 2014
        and 2016 and the France tax losses have no expiry date. No future tax
        benefit has been recorded relating to these tax losses.

    7.  Share Capital

        Authorized

        Unlimited number of common shares
        Unlimited number of preferred shares

                                                       Number
        Issued                                       of Shares      Amount
        ---------------------------------------------------------------------

        Opening balance as at January 1, 2005        22,514,600  $    35,308

        Issued for cash on warrant and option
         exercise                                       153,333          424
        Issued through financing for cash             8,162,500       26,120
        Share issue costs                                             (1,435)
        Transferred from contributed surplus on
         warrant and option exercise                                     143
                                                    -------------------------

        Opening balance as at January 1, 2006        30,830,433  $    60,560

        Issued through financing for cash             5,187,500       33,200
        Issued for cash on warrants and options
         exercised                                      102,958          261
        Share issue costs                                             (1,592)
        Transferred from contributed surplus on
         warrants and options exercised                                  137
                                                    -------------------------

        Balance as at December 31, 2006              36,120,891       92,566
                                                    -------------------------
                                                    -------------------------


        Contributed Surplus

                                                    December 31, December 31,
                                                           2006         2005
        ---------------------------------------------------------------------
        January 1 opening balance                   $     3,592  $       471

        Stock compensation expense                        2,071        3,264
        Reversed on cancellation of unvested options        (89)           -
        Reversed on cancellation of unvested
         performance warrants                               (26)           -
        Reversed on cancellation of unvested SAR's           (9)           -
        Transferred to share capital on performance
         warrant and option exercise                       (137)        (143)
                                                    -------------------------

        December 31 ending balance                  $     5,402  $     3,592
                                                    -------------------------
                                                    -------------------------

    8.  Stock Compensation Plan

        a) The Company has a stock option plan that allows the directors,
           officers and employees of the Company to be granted rights to
           acquire common shares of the Company. Shareholders approved an
           amendment to the Company's Stock Option Plan (the "Plan") at the
           Company's Annual General Meeting on May 4, 2005. Under the
           amendment, the Company adopted a "rolling" stock option plan that
           reserves a maximum of 10% of the aggregate number of issued and
           outstanding common shares. The Plan previously in place reserved a
           fixed number of common shares. Shareholders approved an additional
           amendment to the Plan at the Company's Annual General Meeting on
           May 3, 2006 to authorize the Board of Directors to increase the
           term of option grants to up to ten years from five years. The
           terms of the amended Plan are otherwise unchanged. The current
           outstanding terms for options has not been amended for this change
           in the Plan.

           Stock option exercise prices are equal to the market price for the
           common shares on the date immediately prior to the date the stock
           option is granted. Stock options currently granted vest over three
           years and expire five years after the grant date.

           The assumptions used in the computation of the fair value of the
           stock options granted in 2005 and 2006 are as follows:

                                                                       Stock
                                                                     Options

           Risk free interest rate                                      4.5%
           Expected dividends                                            nil
           Expected life                                             5 years
           Volatility                                                    50%


           The fair value of the options granted during 2006 is $2.74
           (2005 - $1.72).


           The following table summarizes information about the stock option
           plan:

                                                       For the year ended
                                                        December 31, 2006
           ------------------------------------------------------------------
                                                                   Weighted
                                                       Number      Average
                                                      of Stock     Exercise
                                                       Options      Price
                                                    -------------------------

           Opening balance, January 1, 2005           1,535,000  $      2.51



           Granted                                    1,212,000         3.54
           Exercised                                    (53,333)        2.50
           Cancelled                                   (106,667)        2.50
                                                    -------------------------

           Opening balance, January 1, 2006           2,587,000  $      2.99

           Granted                                    1,198,000         5.62
           Exercised                                    (53,333)        2.55
           Cancelled                                   (308,667)        3.59
                                                    -------------------------

           Closing balance, December 31, 2006         3,423,000         3.87
                                                    -------------------------
                                                    -------------------------

           The following table summarizes information about options
           outstanding and exercisable as at December 31, 2006:


                                          Remaining                 Remaining
                                         Contractual              Contractual
           Exercise Price   Options         Life     Exercisable       Life
                ($)       Outstanding      (Years)     Options        (Years)
           ------------------------------------------------------------------
           ------------------------------------------------------------------

           2.50 - 3.00     1,215,000          2.5       810,000          2.5
           3.01 - 3.50       900,000          3.9       300,000          3.0
           3.51 - 4.00       440,000          4.4             -            -
           4.01 - 4.50        15,000          4.3             -            -
           4.51 - 5.00       150,000          4.0        36,667          3.8
           6.51 - 7.00       703,000          5.2             -            -
           ------------------------------------------------------------------

           2.50 - 7.00     3,423,000          3.7     1,146,667          2.7
           ------------------------------------------------------------------
           ------------------------------------------------------------------

        b) The Company has also issued performance warrants. One-half of the
           performance warrants became exercisable if the holder continued in
           their capacity with the Company until April 15, 2005 and if at any
           time during the term, the one-month weighted average trading price
           of the shares is equal to or greater than $3.75 per share. One-
           half became exercisable if the one-month weighted average trading
           price of the shares is equal to or greater than $4.25 per share
           and the holder continues in their capacity until April 15, 2006.
           The performance warrants expire at the close of business on
           June 28, 2011.

           The performance warrant vesting conditions relating to the
           weighted average trading price of $3.75 and $4.25 were satisfied
           in the first quarter of 2005. As a result, the vesting period over
           which the compensation costs were amortized was reduced and a non-
           cash expense in the amount of $1.8 million was charged in the
           first quarter of 2005 to reflect the acceleration in the vesting
           period.

           There were no performance warrants issued in 2006. The assumptions
           used in the computation of the fair value of the performance
           warrants for 2005 are as follows:

                                                                 Performance
                                                                    Warrants
           Risk free interest rate                                      4.5%
           Expected dividends                                            nil
           Expected life                                             7 years
           Volatility                                                    50%


           The following table summarizes information about the performance
           warrants:

                                                       For the year ended
                                                        December 31, 2006
          -------------------------------------------------------------------
                                                                   Weighted
                                                       Number of    Average
                                                      Performance  Exercise
                                                       Warrants     Price
                                                    -------------------------
           Opening balance, January 1, 2005           1,944,250  $      2.50

           Granted                                      112,500         3.40
           Exercised                                    (55,000)        2.50
           Cancelled                                    (55,000)        2.50
                                                    -------------------------

           Opening balance, January 1, 2006           1,946,750  $      2.55

           Exercised                                    (49,625)        2.52
           Cancelled                                    (19,625)        2.55
                                                    -------------------------

           Closing balance, December 31, 2006         1,877,500  $      2.55
                                                    -------------------------
                                                    -------------------------


           The following table summarizes information about performance
           warrants outstanding and exercisable as at December 31, 2006:


                                         Remaining                 Remaining
             Exercise     Performance   Contractual  Exercisable  Contractual
               Price       Warrants        Life      Performance     Life
                ($)       Outstanding     (Years)     Warrants      (Years)
           ------------------------------------------------------------------
           ------------------------------------------------------------------

           2.50 - 3.00     1,765,000          4.5     1,765,000          4.5
           3.01 - 3.50       112,500          5.0        56,250          5.0
           ------------------------------------------------------------------

           2.50 - 3.50     1,877,500          4.5     1,821,250          4.5
           ------------------------------------------------------------------
           ------------------------------------------------------------------

           For the three and twelve months ended December 31, 2006, non-cash
           stock compensation expense related to stock options and
           performance warrants was $0.5 million and $1.5 million
           respectively (December 31, 2005 - $0.4 million and $3.3 million).

           The fair value of the performance warrants granted during 2005 was
           $1.85.

        c) During the fourth quarter of 2005 410,000 share appreciation
           rights were granted to three employees at an exercise price of
           $3.24. Each right entitles the participant to receive from the
           Company an amount equal to the positive difference, if any,
           obtained by subtracting the assigned amount from the closing
           trading price of the common shares on the Toronto Stock Exchange,
           subject to a maximum difference as set forth in the individual
           grant contracts. The share appreciation rights vest over three
           years. During the second quarter of 2006, 110,000 share
           appreciation rights were cancelled. As at December 31, 2006, the
           trading price of the Company's stock on the Toronto Stock Exchange
           was $6.69. Therefore $0.4 million in non-cash costs have been
           recognized for the period ended December 31, 2006 (2005 - $nil).

    9.  Per Share Amounts
                              For the      For the
                                Three        Three
                               Months       Months      For the      For the
                                Ended        Ended   Year Ended   Year Ended
                             December     December     December     December
                             31, 2006     31, 2005     31, 2006     31, 2005
        ---------------------------------------------------------------------
        Weighted average
         number of common
         shares
         outstanding       31,410,864   23,998,775   31,020,555   22,971,271

        Shares issuable
         pursuant to stock
         options            1,445,055      455,952    1,490,769      695,689

        Shares issuable
         pursuant to
         performance
         warrants           1,171,132      658,060    1,186,844      850,081
                          ---------------------------------------------------

        Weighted average
         number of diluted
         common shares
         outstanding       34,027,051   25,112,787   33,698,168   24,517,041
                          ---------------------------------------------------
                          ---------------------------------------------------

        The weighted average diluted shares outstanding include all stock
        options in the money from the date of grant or the beginning of the
        period. The weighted average diluted shares include the performance
        warrants which are treated as contingently issuable shares and are
        included from the beginning of the period that all of the conditions
        for issue were satisfied.

        The impact of options and performance warrants is not included in the
        calculation of net loss per share as they would be anti-dilutive.

    10. Segmented Information

        The Company operates in three different geographical locations and
        has chosen to disclose key financial data based on those
        jurisdictions. Where not specifically identified, income statement
        line items, such as interest revenue, relate to Canada. Any
        allocations of costs between segments are done at cost and based on
        time allocated to the various projects.

                              For the      For the      For the      For the
                                Three        Three       Twelve       Twelve
                               Months       Months       Months       Months
                                Ended        Ended        Ended        Ended
                             December     December     December     December
                             31, 2006     31, 2005     31, 2006     31, 2005
        ---------------------------------------------------------------------
        Petroleum & natural
         gas revenues, net:
          Canada                  244          459          987        1,398
          France                  350          720        2,225          720
                          ---------------------------------------------------
                           $      594  $     1,179  $     3,212  $     2,118
                          ---------------------------------------------------
        Net earnings (loss):
          Canada                  (28)        (439)      (1,579)      (3,342)
          France                   91       (7,955)      (2,285)      (7,795)
                          ---------------------------------------------------
                           $       63  $    (8,394) $    (3,864) $   (11,137)
                          ---------------------------------------------------

        Funds flow generated
         from (used in)
         operations:
          Canada                  237          186        1,255          603
          France                  181          549        1,542          338
                          ---------------------------------------------------
                           $      418  $       735  $     2,797  $       941
                          ---------------------------------------------------


        Capital expenditures:
          Canada                 (128)         424        1,168        1,270
          France                  656        2,618          614        7,765
          Libya                 7,811        1,009       19,314        1,917
                          ---------------------------------------------------
                                8,339        4,051       21,096       10,952

        Changes in non-cash
         investing working
         capital               (6,626)           1       (7,640)        (666)
                          ---------------------------------------------------
        Net investment     $    1,713  $     4,052  $    13,456  $    10,286
                          ---------------------------------------------------


                                                   December 31,  December 31,
                                                          2006          2005
        ---------------------------------------------------------------------
        Identifiable assets:
          Canada                                    $    46,142  $    38,406
          France                                         10,048       13,804
          Libya                                          44,084        2,411
                                                   --------------------------
                                                    $   100,274  $    54,621
                                                   --------------------------
                                                   --------------------------

    11. Financial Instruments

        The carrying values of cash and cash equivalents, accounts
        receivable, accounts payable and accrued liabilities and the amount
        due to related party approximated their fair values as at
        December 31, 2006 as a result of the short-term nature of these
        instruments.

        The oil and gas industry is subject to risks including fluctuations
        in foreign exchange rates and commodity prices. The Company's
        operating results and financial condition will be dependent on the
        prices it receives for oil and natural gas production. Oil and
        natural gas prices have fluctuated during recent years and are
        determined by supply and demand factors, including weather and
        general economic conditions as well as conditions in other oil and
        natural gas regions. While Verenex manages its operations in order to
        minimize exposure to these risks, the Company has not entered into
        any derivatives or contracts to hedge or otherwise mitigate these
        fluctuations.

    12. Statements of Cash Flow

        Changes in non-cash working capital:

                                                    Year ended    Year ended
                                                   December 31,  December 31,
                                                          2006          2005
        ---------------------------------------------------------------------

        Accounts receivable                         $       359  $       711
        Inventory                                            13          (74)
        Prepaid expenses and other                         (123)         (10)
        Joint venture receivable                         (2,292)           -
        Accounts payable and accrued liabilities         10,034          666
        Due to related party                             (1,141)      (7,777)
        Taxes payable                                       (73)          45
                                                    -------------------------
                                                    $     6,777  $    (6,439)
                                                    -------------------------
                                                    -------------------------

        Changes in non-cash working capital
         relating to:
          Operating activities                      $       317  $       420
          Investing activities                            7,640          666
          Financing activities                           (1,180)      (7,525)
                                                    -------------------------
                                                    $     6,777  $    (6,439)
                                                    -------------------------
                                                    -------------------------

    13. Commitments and Contingencies

                                        Payments Due by Period
        ---------------------------------------------------------------------
                                                    Thirteen to   More than
        Contractual                      Next 12     Thirty-six   Thirty-six
         Obligations         Total        Months       Months       Months
        ---------------------------------------------------------------------

        Operating Leases  $     1,608  $       415  $       698  $       495
                          ---------------------------------------------------

        Work Program
         Commitments in
         Libya                  1,250            -            -        1,250
                          ---------------------------------------------------

        Total Contractual
         Obligations      $     2,858  $       415  $       698  $     1,745
                          ---------------------------------------------------
                          ---------------------------------------------------


        Office leases

        On June 12, 2005, Verenex Energy Area 47 Libya Limited, a 100% owned
        subsidiary, entered into a one-year contract effective October 1,
        2006 to sublease office space in Tripoli, Libya at a cost of
        approximately twenty-one thousand, eight hundred and eighty-three
        dollars per month, six months payable in advance. The Company was
        required to provide a security deposit equivalent to two month's
        rent. The Company has the option to extend the term of the lease for
        an additional term under the same terms and conditions subject to the
        Landlord's ability to increase the rent by no more than ten percent.
        Under the terms of the Joint Operating Agreement with Medco
        International Ventures Limited ("Medco"), 50% of these costs are
        expected to be recoverable.

        Effective May 1, 2005, the Company agreed to sublease additional
        floor space in Calgary from Vermilion. The terms of the amended
        agreement provide office space at a cost of six thousand, three
        hundred and thirty-nine dollars per month plus a monthly operating
        cost charge of six thousand, one hundred and twelve dollars per
        month. This agreement expires October 30, 2007.

        The Company completed negotiations with Vermilion in the second
        quarter of 2006 for the early termination of its current office lease
        in Calgary. In return for a lease buy-out, the Company received a
        lump sum payment of $0.4 million in June 2006. Effective March 14,
        2006, the Company agreed to lease floor space in Calgary commencing
        June 1, 2006. The terms of the agreement provide office space at a
        cost of nineteen thousand, nine hundred and twenty-eight dollars per
        month plus a monthly operating cost charge of nine thousand, one
        hundred and seventy-five dollars per month.

        Libya

        On January 30, 2005 the Company announced it had been selected as a
        successful bidder in Libya's Bid Round 1 for an Exploration and
        Production Sharing Agreement ("EPSA"). Verenex has the right to
        explore for oil and gas in Area 47, a 6,182 square kilometre area in
        the Ghadames Basin in northwest Libya. Verenex is the Operator with a
        50% interest in Area 47 in partnership with Medco, which holds the
        remaining 50% interest. The EPSA sets out the required minimum work
        program during the initial 5-year exploration and appraisal period
        and defines the terms for development, during a 25-year exploitation
        period, of any commercial discoveries made during the initial 5-year
        period.

        Under the terms of the EPSA for Area 47, Verenex and Medco (the
        "contractor group") are required to acquire new seismic, including
        1,000 kilometres of 2-D and 200 square kilometres of 3-D, and drill
        three exploration wells during the 5-year exploration and appraisal
        period. All exploration and appraisal costs during this period,
        including the minimum commitment program and any additional seismic
        and drilling, will be borne 100% by Verenex and Medco. If the minimum
        commitment program is not carried out, the contractor group will be
        liable for a specified unit cost for seismic and wells which in
        aggregate is a maximum of approximately US $20 million
        (US $10 million net to Verenex).

        If a discovery is made on the block and the Parties (the Libyan
        National Oil Corporation ("NOC") and the contractor group)
        unanimously agree that it is commercial, a joint operating company
        would be established to operate the discovery. Development capital
        expenditures would be shared 50% by the contractor group and 50% by
        the NOC. Operating costs would be shared on the basis of the
        production allocation split, with the contractor group paying 13.7%
        of these costs and the NOC 86.3%. The NOC pays 100% of all royalties
        and Libyan taxes incurred on each discovery, including the contractor
        group share.

        The Contractor group awarded a Canadian equivalent $9.0 million (US
        $7.5 million) (gross) (Cdn $4.5 million net to Verenex) contract for
        its 2006 seismic program and work began in late December 2005. This
        contract has now been completed and the Contractor group has met its
        seismic obligations under the EPSA. In addition, contracts have been
        awarded to purchase casing, tubulars and wellhead equipment in
        advance of the 2006/2007 drilling program in the amount of
        $8.2 million (US $7.2 million) (gross) (Cdn $4.1 million net to
        Verenex). As at the end of December 2006, approximately $7.5 million
        (gross) of the inventory had been shipped to Libya.

        On August 24, 2006 the Company entered into a long term contract with
        I.L.I. Corporation, a subsidiary of KCA DEUTAG Drilling GmbH ("KCA
        DEUTAG") for Service Rig 32 to complete and test new wells, drill
        shallow water wells and to carry out other well work. The initial
        one-year term of the contract commences on the start of any well
        operations, but no later than January 1, 2007. The contract can be
        extended at the option of the Company for three additional one year
        periods, subject to 60 days notice prior to the start of each one
        year period. In the event of early termination of the contract, the
        Company is liable for a Termination Fee of US $0.15 million, if the
        termination occurs up to the point in time that the first nine months
        of uninterrupted operations has been completed, plus any costs
        incurred to date and demobilization costs. The termination fee is
        reduced to zero at the commencement of the tenth month of
        uninterrupted operations.

    14. Restricted Cash

        On April 11, 2006 the Company announced it had executed contracts for
        two drilling rigs for its operations in Area 47 in Libya. The first
        rig ODE Rig 28 spudded the Company's first well on September 29,
        2006. The Company's second contracted drilling rig, KCA DEUTAG Rig
        T-19, arrived in Libya in January 2007 and has been assigned to
        another operator until early in the third quarter of 2007.

        Both contracts include an initial two-year term, with two one-year
        extension options exercisable by the Company. Under the contract
        terms, the Company retains the ability to assign the rigs to third
        parties, with the approval of the contractor, if circumstances
        warrant. Maximum early termination exposure under the two contracts
        in aggregate is US $12.0 million (net Verenex 50% share
        Cdn $6.8 million).

        The contracts require that Letters of Credit ("LC's") be entered into
        in support of maximum termination amounts, which vary over the life
        of the contract. As a result, the Company has issued two letters of
        credit ("LC's") relating to the signing of the drilling contracts
        that back-stop early termination provisions. The first LC expires on
        November 13, 2008 and required that cash collateral of
        US $4.6 million (gross) be put in place as at December 31, 2006. The
        second LC expires on April 30, 2009 and is supported by cash
        collateral of US $7.2 million (gross) as at December 31, 2006. The
        LC's reach a maximum amount of US$ 12.0 million (gross) in aggregate
        at the projected spud dates, after which the LC amounts decline as
        the rigs are worked.

        The Company has received funds from its partner, Medco, for its 50%
        share of the cash collateral and the total amount of cash provided as
        support for the LC's, in the amount of $13.6 million, has been
        reflected as restricted cash on the balance sheet. The joint venture
        payable related to restricted cash amounting to $6.8 million due to
        Medco has also been segregated on the balance sheet. Discussions are
        currently underway to provide other forms of security for the Letters
        of Credit to free up the restricted cash.

        On September 22, 2006, the Company signed a Letter of Intent ("LOI")
        with RWE Dea NA/ME GmbH ("RWE") to sub-contract the KCA DEUTAG Rig
        T-19. The LOI contains provision for RWE and Verenex to negotiate
        terms to effect the assumption by RWE of up to 25% of the security
        provided in support of the second LC noted above. A formal assignment
        agreement has been executed between Verenex, RWE and KCA DEUTAG with
        an effective date of January 15, 2007.

    15. Assets Held for Sale

        On October 12, 2006, the Company's wholly owned subsidiary, Vermilion
        Exploration SAS ("VEX"), entered into an agreement with Vermilion Rep
        SAS ("VREP"), a French subsidiary of Vermilion Energy Trust, for the
        sale of its 95% participating interest in the Marvilliers Permit,
        including the St. Lazare 2H well, and in two drilling spacing units
        in the Parentis Concession, including the Parentis 222H well, located
        in France for $3.5 million. The parties have executed a sale and
        purchase agreement, effective July 1, 2006, which is subject to all
        conditions precedent, including the receipt of all necessary
        regulatory approvals. VREP holds the remaining 5% interest in these
        lands and wells.

    





For further information:

For further information: Jim McFarland, President & CEO, Verenex Energy
Inc., Telephone: (403) 536-8009; or Ken Hillier, Chief Financial Officer,
Verenex Energy Inc., Telephone: (403) 536-8005

Organization Profile

VERENEX ENERGY INC.

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890