Flagship announces sale of properties, extension of credit facility and provides second quarter 2007 results



    CALGARY, Aug. 16 /CNW/ - Flagship Energy Inc. ("Flagship" or the
"Company") (TSXV - FG.A and FG.B) is pleased to announce that it has entered
into an arms-length purchase and sale agreement to dispose of certain of its
petroleum and natural gas properties in Southeast Saskatchewan for cash
consideration of $24.8 million, subject to closing adjustments. The average
production from these properties for the second quarter 2007 was 478 BOE/d,
with the disposition including approximately 16,000 acres of undeveloped land.
The proceeds will be used to repay a portion of the Company's bank debt.
Closing of the asset disposition is anticipated to occur on or before
September 13, 2007, subject to TSX Venture Exchange approval.
    The Company also announced that the loan review date of its current
credit facility has been further extended by its lender to provide for closing
of the asset disposition described above, and to continue to negotiate terms
for additional financing. The extension has been provided to September 13,
2007.
    The Company is also pleased to announce its financial and operational
results for the second quarter 2007.

    
    Highlights of the second quarter include:

    -   Operating netback was $4.3 million for the quarter, an increase of
        23% over second quarter 2006 and a decrease of 4% over first quarter
        2007. On a BOE basis, netbacks were $26.75/BOE for the second quarter
        2007 compared to $26.74/BOE for Q2 2006 and $26.60/BOE for Q1 2007.

    -   Funds flow from operations for the quarter was $2.5 million, a
        decrease of 10% over second quarter 2006 and a decrease of 23% over
        first quarter 2007. On a per share basis, funds flow from operations
        was $0.03 for Q2 2007, compared to $0.04 for Q1 2007 and $0.08 for
        second quarter 2006.

    -   Average production for the second quarter 2007 was 1,760 BOEPD,
        comprised of 665 bbls/d of crude oil and natural gas liquids and
        6.6 MMcf/d of natural gas. Second quarter 2007 production represents
        a 23% increase over second quarter 2006 production, and a decrease of
        6% from Q1 2007 production.

    -   A net loss of $1.1 million was incurred in the second quarter ($0.01
        per basic Class A share after taking into account the deemed
        conversion of Class B shares), compared to a net loss of $0.8 million
        in the first quarter 2007 and net earnings of $0.6 million in Q2
        2006.

    -   Flagship drilled and completed one new pool wildcat well (75%W.I.) at
        Alsask in southern Alberta.

    -   Exploration and development costs during second quarter 2007 totalled
        $1.6 million, with $0.8 million incurred on drilling, completions and
        workovers and $0.2 million on equipping, facilities and pipelines.
        Minor expenditures on land and seismic, as well as the capitalization
        of general and administrative and stock based compensation costs,
        make up the remainder of the Q2 2007 capital.
    

    Flagship is currently drilling at Carson Creek in north central Alberta
for a Devonian target. We expect to drill up to 10 more wells before year-end
on nine different exploration plays.
    The Pembina Nisku 3D seismic acquisition program was completed in
mid-August. The drilling of the two Nisku locations where Flagship has
significant carried working interests has been delayed due to surface
objections.

    
    RESULTS OF OPERATIONS

                       2nd Quarter   1st Quarter   4th Quarter   3rd Quarter
                              2007          2007          2006          2006

    Sales volumes
    Oil (bbls/d)               620           645           786           933
    Natural gas (Mcf/d)      6,571         7,062         7,462         8,148
    NGL's (bbls/d)              45            42            44            16
    -------------------------------------------------------------------------

    BOE/d (6:1)              1,760         1,863         2,074         2,307
    Daily BOE sales
     volumes per million
     Class A shares             56            59            66            73
    Prices
    Oil ($/bbl)              61.94         56.77         52.89         64.20
    Natural gas ($/Mcf)       6.98          7.34          6.49          5.61
    NGL's ($/bbl)            52.13         51.32         49.68        100.29

    Per BOE ($)
    Gross revenues           49.51         48.81         44.78         46.59
    Royalties                (8.06)        (8.21)        (6.65)        (7.03)
    Operating costs         (13.23)       (12.64)       (13.47)       (12.55)
    Transportation
     charges                 (1.47)        (1.36)        (2.19)        (1.49)
    -------------------------------------------------------------------------

    Operating netback        26.75         26.60         22.47         25.52
    Other revenue                -          0.02             -          0.03
    General and
     administrative          (2.90)        (2.49)        (3.05)        (1.68)
    Interest expense         (6.39)        (4.02)        (3.82)        (2.81)
    Current tax expense      (2.16)        (1.16)        (0.64)        (0.17)
    -------------------------------------------------------------------------

    Funds flow from
     operations              15.30         18.95         14.96         20.89
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                       2nd Quarter   1st Quarter   4th Quarter   3rd Quarter
                              2006          2006          2005          2005
    Sales volumes
    Oil (bbls/d)               418             -             -             -
    Natural gas (Mcf/d)      5,993         3,434         3,359         2,116
    NGL's (bbls/d)              13             8             7             6
    -------------------------------------------------------------------------

    BOE/d (6:1)              1,430           581           567           358
    Daily BOE sales
     volumes per million
     Class A shares             59            35            39            32
    Prices
    Oil ($/bbl)              66.12             -             -             -
    Natural gas ($/Mcf)       5.49          7.07         10.86          9.25
    NGL's ($/bbl)            39.75         67.75        112.55         74.71

    Per BOE ($)
    Gross revenues           42.91         43.52         66.40         56.44
    Royalties                (7.97)        (9.61)       (16.82)       (14.36)
    Operating costs          (7.43)        (8.17)       (10.31)        (5.03)
    Transportation
     charges                 (0.77)        (1.04)        (1.21)        (1.07)
    -------------------------------------------------------------------------

    Operating netback        26.74         24.70         38.06         35.98
    Other revenue             0.11          1.68          1.37          0.29
    General and
     administrative          (3.19)        (3.82)        (5.65)        (8.11)
    Interest expense         (3.39)        (0.11)        (0.22)        (0.54)
    Current tax (expense)
     recovery                 0.57         (0.78)        (1.78)            -
    -------------------------------------------------------------------------

    Funds flow from
     operations              20.84         21.67         31.78         27.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                       2nd Quarter   1st Quarter   4th Quarter   3rd Quarter
    Financial ($)             2007          2007          2006          2006

    Gross revenues       7,930,197     8,185,700     8,543,811     9,890,010
    Royalties           (1,291,163)   (1,376,177)   (1,269,057)   (1,491,419)
    Operating costs     (2,118,292)   (2,119,730)   (2,569,640)   (2,664,461)
    Transportation
     charges              (235,066)     (227,473)     (417,377)     (316,841)
    -------------------------------------------------------------------------
    Operating netback    4,285,676     4,462,320     4,287,737     5,417,289
    Other revenue                -         2,709           471         6,836
    General and
     administrative       (464,445)     (417,080)     (581,868)     (357,612)
    Interest expense    (1,023,987)     (674,404)     (729,076)     (595,453)
    Current tax expense   (345,293)     (194,000)     (122,678)      (36,663)
    -------------------------------------------------------------------------
    Funds flow from
     operations          2,451,951     3,179,545     2,854,586     4,434,397
    Stock-based
     compensation            7,187      (268,302)     (132,969)     (284,155)
    Depletion,
     depreciation,
     amortization
     and accretion      (4,024,449)   (4,276,880)   (8,424,270)   (5,780,462)
    Write-down of
     property, plant
     and equipment               -             -   (70,300,000)            -
    Write-down of
     goodwill                    -             -   (34,458,000)            -
    Future income
     tax recovery          450,972       584,731    20,985,214       107,353
    -------------------------------------------------------------------------
    Net loss            (1,114,339)     (780,906)  (89,475,439)   (1,522,867)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets       114,615,763   119,086,521   122,459,884   226,484,532
    Exploration and
     development costs   1,578,008     3,964,223     5,079,498    11,508,622
    Weighted average
     outstanding
     Class A shares
     - basic(1)         83,072,625    83,052,185    71,166,423    53,622,604
    Earnings (loss)
     per share
     - basic(1)              (0.01)        (0.01)        (1.26)        (0.03)
    Funds flow
     from operations
     per issued
     Class A share            0.08          0.10          0.09          0.14
    Funds flow from
     operations per
     share - basic(1)         0.03          0.04          0.04          0.08


                       2nd Quarter   1st Quarter   4th Quarter   3rd Quarter
    Financial ($)             2006          2006          2005          2005

    Gross revenues       5,585,974     2,273,999     3,460,863     1,861,426
    Royalties           (1,036,941)     (502,037)     (876,617)     (473,589)
    Operating costs       (967,409)     (426,841)     (537,397)     (165,986)
    Transportation
     charges              (100,490)      (54,239)      (63,178)      (35,267)
    -------------------------------------------------------------------------
    Operating netback    3,481,134     1,290,882     1,983,671     1,186,584
    Other revenue           13,692        87,917        71,555         9,436
    General and
     administrative       (415,311)     (199,449)     (294,363)     (267,601)
    Interest expense      (441,128)       (5,985)      (11,461)      (17,808)
    Current tax
     (expense) recovery     73,697       (41,000)      (93,000)
    -------------------------------------------------------------------------
    Funds flow from
     operations          2,712,084     1,132,365     1,656,402       910,611
    Stock-based
     compensation         (294,473)     (179,884)     (232,790)     (146,954)
    Depletion,
     depreciation,
     amortization
     and accretion      (4,458,022)   (1,563,067)   (1,167,667)     (687,234)
    Future income tax
     recovery            2,650,077             -             -             -
    -------------------------------------------------------------------------
    Net earnings (loss)    609,666      (610,586)      255,945        76,423
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets       222,173,949    57,557,035    57,159,072    26,833,964
    Exploration and
     development costs   5,242,560    11,840,979    12,724,502     3,333,466
    Weighted average
     outstanding
     Class A shares
     - basic(1)         33,463,379    18,723,034    15,301,724    12,828,678
    Earnings (loss)
     per share
     - basic(1)               0.02         (0.03)         0.02          0.01
    Funds flow from
     operations per
     issued Class A
     share                    0.11          0.07          0.12          0.08
    Funds flow from
     operations per
     share - basic(1)         0.08          0.06          0.11          0.07

    (1) includes deemed conversion of Class B shares, with conversion rate
        based on the Class A share price at each balance sheet date.



    Flagship Energy Inc.
    Balance Sheets
    (unaudited)
                                                       June 30,  December 31,
    As at                                                 2007          2006
    -------------------------------------------------------------------------
                                                             $             $
    Assets
    Current assets
    Accounts receivable                              4,691,283     6,016,497
    Prepaid expenses and deposits                      775,458       749,178
    -------------------------------------------------------------------------
                                                     5,466,741     6,765,675

    Property, plant and equipment                  101,631,813   108,177,000
    Goodwill                                         7,517,209     7,517,209
    -------------------------------------------------------------------------

                                                   114,615,763   122,459,884
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities
    Current liabilities
    Bank indebtedness                                1,410,368       557,318
    Accounts payable and accrued liabilities         5,003,699     9,936,401
    Bank loan                                       44,475,000    46,275,000
    -------------------------------------------------------------------------
                                                    50,889,067    56,768,719

    Future income taxes                              4,016,525             -
    Asset retirement obligations                     9,315,872     9,080,132
    -------------------------------------------------------------------------
    Total liabilities                               64,221,464    65,848,851
    -------------------------------------------------------------------------

    Shareholders' equity
    Capital stock                                  134,817,543   139,710,337
    Carry-over warrants                                      1             1
    Contributed surplus                              2,885,200     2,313,895
    Deficit                                        (87,308,445)  (85,413,200)
    -------------------------------------------------------------------------
                                                    50,394,299    56,611,033
    -------------------------------------------------------------------------
                                                   114,615,763   122,459,884
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Flagship Energy Inc.
    Statements of Operations and Retained Earnings (Deficit)
    (unaudited)

                              Three months ended           Six months ended
                                    June 30,                    June 30,
    -------------------------------------------------------------------------
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
                                 $             $             $             $
    Revenue
    Natural gas, oil
     and liquids         7,930,197     5,585,974    16,115,897     7,859,973
    Royalty expense     (1,291,163)   (1,036,941)   (2,667,340)   (1,538,978)
    Interest and other           -        13,692         2,709       101,609
    -------------------------------------------------------------------------

                         6,639,034     4,562,725    13,451,266     6,422,604
    -------------------------------------------------------------------------

    Expenses
    Operating            2,118,292       967,409     4,238,022     1,394,250
    Transportation         235,066       100,490       462,539       154,729
    General and
     administrative        464,445       415,311       881,525       614,760
    Stock-based
     compensation           (7,187)      294,473       261,115       474,357
    Depletion,
     depreciation,
     amortization and
     accretion           4,024,449     4,458,022     8,301,329     6,021,089
    Interest             1,023,987       441,128     1,698,391       447,113
    -------------------------------------------------------------------------

                         7,859,052     6,676,833    15,842,921     9,106,298
    -------------------------------------------------------------------------

    Loss before taxes   (1,220,018)   (2,114,108)   (2,391,655)   (2,683,694)
    Provision for
     (recovery of) taxes
    Recovery of future
     income taxes         (450,972)   (2,650,077)   (1,035,703)   (2,650,077)
    Current taxes          345,293       (73,697)      539,293       (32,697)
    -------------------------------------------------------------------------

                          (105,679)   (2,723,774)     (496,410)   (2,682,774)
    -------------------------------------------------------------------------

    Net earnings (loss)
     and comprehensive
     earnings (loss)    (1,114,339)      609,666    (1,895,245)         (920)
    Retained earnings
     (deficit),
     beginning of
     period            (86,194,106)    5,115,534   (85,413,200)      177,620
    Elimination of
     future income tax
     liability                   -             -             -     5,548,500
    -------------------------------------------------------------------------

    Retained earnings
     (deficit), end of
     period            (87,308,445)    5,725,200   (87,308,445)    5,725,200
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings (loss)
     per common share
      Basic and diluted      (0.01)         0.02         (0.02)        (0.00)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Flagship Energy Inc.
    Statements of Cash Flows
    (unaudited)

                              Three months ended           Six months ended
                                    June 30,                    June 30,
    -------------------------------------------------------------------------
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
                                 $             $             $             $

    Operating activities

    Net earnings
     (loss)             (1,114,339)      609,666    (1,895,245)         (920)
    Depletion,
     depreciation,
     amortization and
     accretion           4,024,449     4,458,022     8,301,329     6,021,089
    Recovery of future
     income taxes         (450,972)   (2,650,077)   (1,035,703)   (2,650,077)
    Stock-based
     compensation           (7,187)      294,473       261,115       474,357
    -------------------------------------------------------------------------

                         2,451,951     2,712,084     5,631,496     3,844,449
    Change in non-cash
     working capital
     items                 566,575   (10,219,241)   (1,322,457)   (8,961,276)
    -------------------------------------------------------------------------

    Cash provided by
     (used in) operating
     activities          3,018,526    (7,507,157)    4,309,039    (5,116,827)
    -------------------------------------------------------------------------
    Investing activities

    Acquisition of Hawk
     Energy Corp.                -   (37,300,000)            -   (37,300,000)
    Exploration and
     development costs  (1,578,008)   (5,242,560)   (5,542,231)  (17,083,539)
    Proceeds on
     disposition of oil
     and gas properties  1,461,222             -     4,470,152             -
    Change in non-cash
     working capital
     items              (1,018,356)    5,856,773    (2,311,309)    5,415,918
    -------------------------------------------------------------------------

    Cash used in
     investing
     activities         (1,135,142)  (36,685,787)   (3,383,388)  (48,967,621)
    -------------------------------------------------------------------------
    Financing activities

    Share issue costs            -       (54,014)          299       (82,706)
    Proceeds on exercise
     of options and
     warrants               21,000        28,034        21,000       (34,072)
    Increase (decrease)
     in bank loan          550,000    36,895,176    (1,800,000)   36,895,176
    Change in non-cash
     working capital
     items                       -        33,661             -             -
    -------------------------------------------------------------------------

    Cash provided by
     (used in) financing
     activities            571,000    36,902,857    (1,778,701)   36,846,542
    -------------------------------------------------------------------------

    Increase (decrease)
     in cash and cash
     equivalents         2,454,384    (7,290,087)     (853,050)  (17,237,906)
    Cash and cash
     equivalents,
     beginning of
     period             (3,864,752)    6,887,924      (557,318)   16,835,743
    -------------------------------------------------------------------------

    Cash and cash
     equivalents, end
     of period          (1,410,368)     (402,163)   (1,410,368)     (402,163)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash and cash
     equivalents consist
     of bank
     indebtedness

    Cash interest paid     946,612       408,979     1,609,645       410,914
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash taxes paid         76,048        98,425       106,048        98,425
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Flagship is an emerging oil and gas company focused on the acquisition,
exploration, exploitation and development of oil and natural gas in Western
Canada. Flagship's business plan is to grow reserves and production to
increase shareholder value through a focused and balanced exploration program,
strategic acquisitions and value-added exploitation. Copies of Flagship's
first quarter 2007 disclosure documents may be obtained on its website at
www.flagshipenergy.ca. or at www.sedar.com.

    NOTE: Natural gas and liquids reserves and volumes are converted to a
common unit of measure on a basis of six thousand cubic feet ("Mcf") of gas to
one barrel (bbl) of oil. Disclosure provided herein in respect of barrels of
oil equivalent ("BOE") may be misleading, particularly if used in isolation. A
BOE conversion ratio of 6 mcf:1 bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.

    ADVISORY: Certain information regarding Flagship Energy Inc. in this news
release including management's assessment of future plans and operations,
reserve and production estimates, drilling inventory and wells to be drilled,
timing of drilling and tie in of wells, productive capacity of new wells,
capital expenditures and timing thereof, may constitute forward-looking
statements under applicable securities laws and necessarily involve risks
including, without limitation, risks associated with oil and gas exploration,
development, exploitation, production, marketing and transportation, loss of
markets, volatility of commodity prices, currency fluctuations, imprecision of
reserve estimates, environmental risks, competition from other producers,
inability to retain drilling rigs and other services, incorrect assessment of
the value of acquisitions, failure to realize the anticipated benefits of
acquisitions, delays resulting from or inability to obtain required regulatory
approvals and ability to access sufficient capital from internal and external
sources. As a consequence, actual results may differ materially from those
anticipated in the forward-looking statements. Readers are cautioned that the
foregoing list of factors is not exhaustive. Additional information on these
and other factors that could affect Flagship's operations and financial
results are included in reports on file with Canadian securities regulatory
authorities and may be accessed through the SEDAR website (www.sedar.com), or
Flagship's website (www.flagshipenergy.ca). Furthermore, the forward looking
statements contained in this news release are made as at the date of this news
release and Flagship does not undertake any obligation to update publicly or
to revise any of the included forward looking statements, whether as a result
of new information, future events or otherwise, except as may be required by
applicable securities laws.

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

    %SEDAR: 00003847E




For further information:

For further information: Glenn R. Carley, Executive Chairman, (403)
513-8300, gcarley@flagshipenergy.ca; Bradley Maynes, President and Chief
Operating Officer, (403) 513-8301, bmaynes@flagshipenergy.ca; Stuart Jaggard,
Vice President Finance and Chief Financial Officer, (403) 513-8302,
sjaggard@flagshipenergy.ca

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FLAGSHIP ENERGY INC.

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