ProspEx Announces Record Production in the Second Quarter of 2007



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

    CALGARY, Aug. 2 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the
"Company") is pleased to report its financial and operating results for the
three and six months ended June 30, 2007.
    "ProspEx achieved record production in the second quarter, and we are
well positioned to meet our targets for 2007. We look forward to the results
of our summer drilling program, which is currently underway in both West
Central and Southern Alberta," said John Rossall, President and Chief
Executive Officer. "The Company continues to maintain a strong financial
position, with net debt to annualized cash flow of 0.8 years."

    
    Second Quarter Highlights

    -   Second quarter production of 4,241 barrels of oil equivalent ("boe")
        per day exceeded guidance and represents an increase of 34% compared
        to the first quarter of 2007 production of 3,166 boe per day. These
        higher volumes were due to the commissioning of new facilities in
        Harmattan, and from production associated with discoveries in the
        Deep Basin and Granum.
    -   ProspEx's credit facility has been expanded to $60 million from the
        prior level of $50 million as a result of a semi-annual review of the
        Company's asset base. Net debt at June 30, 2007 was $38.0 million,
        equivalent to 0.8 years annualized cash flow. ProspEx has an active
        hedging program in place, with 9,000 GJ/d of production hedged with
        floor prices of $7.00/GJ at AECO until October 31, 2007. This hedging
        program, relatively low debt levels and the expansion of the
        Company's credit facility provides ProspEx with financial flexibility
        in an environment of softening natural gas prices.
    -   Summer drilling is planned for each of the Company's three core
        areas, with drilling currently underway in West Central and Southern
        Alberta. Drilling is scheduled to begin in the Deep Basin later in
        the third quarter.
    -   Capital expenditures on exploration and development totaled
        $7.8 million for the quarter, with total year to date spending of
        $26.4 million. In the second quarter, the focus of the Company's
        capital program was the construction and commissioning of facilities
        to bring wells drilled during the winter onstream, which accounted
        for $3.8 million of the capital spending. In the second quarter, the
        Company participated in the drilling of two (0.4 net) successful
        wells, both in the Granum area in Southern Alberta.
    -   Operating netbacks of $32.64 per boe increased versus the prior
        quarter netback of $31.12 per boe, as an 11% decrease in realized
        natural gas prices was more than offset by a reduction in royalty
        expense.
    -   Cash flow increased 49% to $11.2 million from $7.5 million in the
        first quarter of 2007 driven by increased production. Year to date
        cash flow is $18.7 million.

    OPERATIONAL REVIEW

    Production (boe/d)                           Q2 2007   Q1 2007   Q4 2006
    ------------------                           -------   -------   -------
    West Central                                   1,397     1,167     1,108
    Deep Basin                                     1,713       823       913
    Southern Alberta                               1,122     1,162     1,131
    Other                                              9        14        12
                                                       -        --        --
    Total                                          4,241     3,166     3,164
    

    Second quarter production of 4,241 boe per day increased 34% over the
first quarter of 2007. At Harmattan, new facilities were commissioned at the
Cardium W Pool in mid-May, and production averaged 900 boe per day net to
ProspEx over the balance of the quarter. Two (1.5 net) wells were drilled in
the W Pool in the first quarter, and tested at gross flow rates of 600 and
900 boe per day. These wells are scheduled for tie in during the third
quarter.
    New production from a first quarter exploration discovery was also
brought onstream at Granum in Southern Alberta in late May, with 140 boe per
day of production coming from two (0.4 net) wells. Two additional (0.4 net)
development wells were successfully drilled in the Granum pool during the
second quarter. These wells have since been completed and tested at gross flow
rates of 2 to 3 million cubic feet ("mmcf") per day from each well.
    In the Deep Basin, ProspEx brought a previously announced exploration
discovery onstream in late March that produced at a stable, facilities
constrained gross flow rate of over 16 mmcf per day (approximately 800 net boe
per day) over the second quarter.
    Capital expenditures for exploration and development totaled $7.8 million
for the quarter or $26.4 million for 2007 year to date. Operational activity
in the second quarter was focused on construction and commissioning of new
facilities to bring production from the winter drilling program onstream. In
the second quarter, $3.8 million was spent on facilities construction, mostly
at Harmattan. Drilling activity was modest in the second quarter due to the
usual "spring break-up" period, with ProspEx participating in two wells in the
Granum area as discussed above.
    The Company's summer drilling program is underway. In West Central
Alberta, a partner operated well has been cased in the Garrington area and is
awaiting completion. Company operated drilling has commenced with a step-out
well to the southeast of the Harmattan Cardium W Pool. ProspEx plans to
operate one drilling rig in West Central Alberta for the balance of the year.
A Company operated drilling program is also underway at Medallion in Southern
Alberta, where a 10 well drilling program is planned for the summer. In
Granum, one well (0.2 net) has been drilled and tested an aggregate gross flow
rate of 3.4 mmcf per day from two zones. In the Deep Basin, drilling is
expected to begin later in the third quarter in the Kakwa area.

    2007 Guidance

    ProspEx's 2007 annual average production guidance remains unchanged at
4,000 to 4,200 boe per day. Operating costs are expected to average $7.75 per
boe, an increase of $0.50 from the prior guidance of $7.25 per boe due to
processing fees associated with the prolific Deep Basin discovery and start-up
costs at the new Harmattan facility. Royalties are expected to average 17% of
revenue, a significant decrease from prior guidance of 24%, as additional
capital cost recovery credits received as a result of capital expenditures
incurred to build production facilities in 2006 and 2007 have lowered the
effective royalty rate. Expensed G&A costs are expected to be $2.00 per boe,
slightly higher than prior guidance of $1.75 per boe, as the Company has added
staff to facilitate the future growth of the Company. In aggregate, these
changes are expected to result in an increase in netback of approximately
$2.00 per boe.

    
    2007 Guidance Summary

                                  Revised Guidance       Previous Guidance

    Annual Average Production   4,000 to 4,200 boe/d    4,000 to 4,200 boe/d
    Capital expenditures            $52 million             $52 million
    Operating costs                  $7.75/boe               $7.25/boe
    Royalties                     17% of revenues         24% of revenues
    Expensed G&A                     $2.00/boe               $1.75/boe
    

    Reader's Advisory

    ProspEx is a Calgary based junior oil and gas company focused on
exploration for natural gas in the Western Canadian Sedimentary Basin.

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

    Boe's may be misleading, particularly if used in isolation. A boe
conversion ratio of six thousand cubic feet to one barrel is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.

    
    ProspEx Resources Ltd.
    Consolidated Highlights
    For the periods ended
    (unaudited)
                                        Three     Three      Six       Six
                                        months    months    months    months
                                        ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
                                         2007      2006      2007      2006

    FINANCIAL ($000's)
    Oil and gas revenue                 17,165    12,375    30,941    23,374
    Net earnings                         2,235       868       441     2,497
    Cash flow(1)                        11,189     7,300    18,722    13,053
    Total assets                       171,361   141,265   171,361   141,265
    Net debt(1)                         37,956    33,176    37,956    33,176

    Net earnings per share
     ($ per share)
      basic                               0.04      0.02      0.01      0.05
      diluted                             0.04      0.02      0.01      0.05
    Cash flow per share
     ($ per share)(1)
      basic                               0.21      0.15      0.35      0.26
      diluted                             0.20      0.14      0.33      0.25
    Weighted average common shares
     (000's)
      basic                             53,912    49,705    53,859    49,324
      diluted                           56,560    52,373    56,428    51,799

    PRODUCTION VOLUMES
      Natural gas (mcf/d)               21,108    17,948    18,945    15,930
      Natural gas liquids (bbls/d)         513       287       402       250
      Crude oil (bbls/d)                   210        96       147        62
      Total (boe/d) (6:1)                4,241     3,375     3,707     2,967

    SALES PRICES
      Natural gas ($/mcf)                 7.15      6.35      7.53      6.98
      Natural gas liquids ($/bbl)        47.46     56.53     47.53     56.78
      Crude oil ($/bbl)                  63.91     59.72     62.19     60.53
      Total ($/boe)                      44.47     40.30     46.12     43.52

    NETBACKS ($/boe)
      Price(2)                           44.47     40.30     46.12     43.52
      Royalties                          (3.97)    (7.12)    (6.47)    (7.65)
      Operating costs                    (7.86)    (5.68)    (7.66)    (5.97)
      General and administrative         (2.13)    (2.13)    (2.18)    (2.18)
                                         ------    ------    ------    ------
      Total                              30.51     25.37     29.81     27.72

    CAPITAL ($000's)
      Drilling, completions and seismic  1,863     2,598    11,884    22,255
      Facilities                         3,801     2,518     9,732     8,008
      Land and lease                     1,369       987     3,557     4,236
      Capitalized general &
       administrative                      718       588     1,234       957
      Office and computer assets            34         -       108       186
                                         -----     -----    ------    ------
      Total                              7,785     6,691    26,515    35,642

    (1) Cash flow and net debt do not have a standardized measure prescribed
        by Canadian generally accepted accounting principles and therefore
        may not be comparable with calculations with similar measures for
        other companies. Net debt is defined as long-term debt plus total
        current assets less total current liabilities and cash flow is
        defined as cash flow from operations before changes in non-cash
        working capital to analyze operating results.
    (2) Price does not include unrealized financial instrument gain/loss.
    


    MANAGEMENT DISCUSSION & ANALYSIS

    Management's Discussion and Analysis ("MD&A") is management's assessment
of the historical financial and operating results of ProspEx Resources Ltd.
("ProspEx" and/or the "Company") as well as a prospective view of the
Company's activities. The MD&A for the three and six months ended June 30,
2007, was prepared as at August 2, 2007 and should be read in conjunction with
the audited consolidated financial statements and MD&A for the year ended
December 31, 2006 together with the notes related thereto.
    The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada. Readers are
referred to advisories detailing "Non-GAAP Measures" and "Forward-looking
Statements" contained in the back of this MD&A. Additional information
relating to ProspEx, including its Annual Information Form, can be found at
www.sedar.com.

    HIGHLIGHTS OF THE SECOND QUARTER OF 2007

    The second quarter of 2007 was highlighted by increased production
volumes as a result of a successful winter drilling program and construction
of new facilities. Cash flow was accordingly higher than both the prior
quarter and the second quarter of 2006 despite lower average natural gas
prices.
    During the quarter, the Company's capital program was focused on the
construction and start up of new facilities in its two growth areas, West
Central Alberta and the Deep Basin. Drilling activity was reduced from the
prior quarter as a result of spring break-up, with two (0.4 net) successful
wells drilled in the quarter.
    The Company realized a natural gas price of $7.15 per thousand cubic feet
("mcf") for the quarter, a 12% gain compared to the second quarter of 2006
realized price of $6.35 per mcf and an 11% decrease over the previous quarter.
The outlook for natural gas prices has deteriorated as concerns over abundant
North American natural gas supplies has lowered future gas prices into 2008.
    Cash flow for the quarter rose 53% over the prior year to $11.2 million,
driven by higher production volumes. The Company showed net earnings for the
quarter of $2.2 million. Net earnings for the quarter were driven by increased
revenues due to higher production levels and mark to market gains on financial
instruments, offset by higher depletion, depreciation and accretion charges
and operating costs compared to the prior year.
    The Company continues to maintain a strong balance sheet with net debt at
quarter end of $38.0 million. This is lower than the net debt of $44.1 million
at the end of the prior quarter, as free cash flow exceeded capital spending
over the "spring break-up" period during the second quarter.

    RESULTS OF OPERATIONS

    Revenue

    Operating revenue for the second quarter was $17.2 million, a 25%
increase over first quarter revenue of $13.8 million and a 39% increase over
revenues of $12.4 million during the second quarter of 2006. These higher
revenues were primarily driven by an increase in production volumes compared
to last year and the prior quarter.

    Production
    Production for the second quarter of the year averaged 4,241 barrels of
oil equivalent ("boe") per day, an increase of 34% over the previous quarter's
average of 3,166 boe per day and 26% higher than second quarter of 2006
production of 3,375 boe per day. Overall production grew in the second quarter
as the Company tied-in the majority of its wells from the winter drilling
season, with new production coming from West Central Alberta, Southern Alberta
and the Deep Basin. Natural gas volumes increased 26% over the first quarter
to average 21.1 mmcf per day and oil and NGL volumes increased 94% to 723 boe
per day.

    Average Selling Price
    Realized gas prices for the second quarter of 2007 averaged $7.15 per
mcf, less than the $8.02 per mcf realized in the first quarter of 2007, but
more than the $6.35 per mcf price realized in the second quarter of 2006.
Overall natural gas prices continue to be low due to concerns over high North
American natural gas storage levels. During the quarter, the Company realized
$0.4 million in financial instrument gains as 9,000 gigajoules ("GJ's") per
day were subject to natural gas collars with floors at $7.00 per GJ.

    Financial Instruments

    ProspEx utilizes financial instruments to reduce the price volatility
associated with the natural gas markets. This reduces the uncertainty of
operating cash flows and allows the Company to better plan and execute its
future capital programs.
    At June 30, 2007, ProspEx had natural gas contracts for 9,000 GJs per day
from April 1, 2007 to October 31, 2007, with a floor price of $7.00 per GJ and
ceilings ranging from $8.05 to $9.07 per GJ at AECO. The fair value of these
financial instruments at June 30, 2007 was an unrealized gain of $1.4 million.
    Subsequent to quarter-end, the Company entered into a fixed price
contract for 2,000 GJ's per day from September 1, 2007 to October 31, 2007 at
$5.40 per GJ at AECO.

    Royalty Expense

    Royalties totaled $1.5 million or 9% of revenue for the quarter ended
June 30, 2007 versus last year's $2.2 million and 18% of revenue. Royalty
expense decreased significantly due to an additional $1.2 million of capital
cost recovery credits received as a result of capital expenditures incurred to
build production facilities. ProspEx's royalty expense remains slightly lower
than industry average, due to the benefit of capital cost recovery credits and
lower freehold royalty rates.
    For 2007, royalty rates are expected to average approximately 17% of
revenues, compared to prior guidance of 24% of revenues.

    Operating Costs

    Operating costs for the second quarter of the year totaled $3.0 million
compared to last year's costs of $1.7 million. On a per unit basis, operating
costs are up 38% to $7.86 per boe compared to $5.68 per boe last year. This
increase in operating costs reflects production growth in areas with higher
operating costs, including processing fees associated with a prolific Deep
Basin well as well as additional start-up costs incurred for the Harmattan oil
facilities.
    Operating costs for 2007 are anticipated to average $7.75 per boe,
compared to prior guidance of $7.25 per boe.

    General and Administrative Expenses

    Total general and administration costs ("G&A") for the quarter were
$1.5 million compared to last year's total of $1.2 million. G&A costs
increased in the second quarter compared to last year as the Company has
increased its overall staffing levels to manage growth in the Company. On a
unit basis expensed G&A costs were $2.13 per boe, equivalent to the second
quarter of 2006. ProspEx follows the full-cost method of accounting for its
petroleum and natural gas operations with approximately 50% of exploration and
development related G&A costs capitalized leaving $0.8 million expensed.
    G&A costs are expected to average $2.00 per boe for 2007, an increase
compared to prior guidance of $1.75 per boe due to increased staff levels.

    Interest and Bank Charges

    Interest and bank charges for the second quarter were $0.6 million
compared to $0.5 million last year. This increase in costs reflects the
greater utilization of the Company's credit facility in the second quarter of
2007 compared to 2006.

    Depletion, Depreciation and Accretion

    Depletion, depreciation, and accretion was $9.1 million or $23.52 per boe
for the second quarter of the year. This is $3.2 million higher than last
year's $5.9 million and 22% higher on a per boe basis of $19.23. Depletion,
depreciation and accretion has increased compared to last year due to
increased production coupled with a higher cost environment which resulted in
increased depletion, depreciation and accretion rates.

    Stock-Based Compensation

    Stock-based compensation for the second quarter totaled $0.5 million,
compared to last year's $0.6 million consistent with the prior year. Stock
based compensation is accounted for using the fair value method of accounting.
Under the fair-value method of accounting, this compensation expense is
recorded in the earnings statement over the vesting period and approximately
50% of these costs are capitalized, resulting in a net compensation expense of
$0.3 million for the second quarter compared to $0.3 million last year.

    Income Taxes

    Future income taxes were $1.1 million for the quarter, compared to
$0.9 million last year, as higher operating revenues created higher future
income taxes for the quarter. ProspEx has approximately $141.6 million of
income tax pools at June 30, 2007 and does not anticipate being cash taxable
in the near to mid term.

    Net Earnings and Cash Flow

    Net earnings were $2.2 million in the second quarter, representing a 158%
increase over the prior year of $0.9 million. This increase over last year is
due to a 39% increase in operating revenues and a $1.5 million unrealized gain
on financial instruments offset by an increase in the depletion, depreciation
and accretion expense and operating expenses.
    Cash flow for the second quarter of the year increased by 53% from
$7.3 million in the prior year to $11.2 million. This increase in cash flow as
discussed before can be largely attributed to the increase in production
levels.
    For the second quarter of 2007, diluted cash flow per share was $0.20
compared to $0.14 last year, consistent with the increase in overall cash
flow.

    Capital Expenditures

    Capital expenditures were $7.8 million during the second quarter and
$26.5 million for the first six months of 2007. Details of these expenditures
are as follows:

    
    ($000's)                            Three     Three      Six       Six
                                        months    months    months    months
                                        ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
                                         2007      2006      2007      2006
                                      ---------------------------------------
    Drilling, completions & seismic   $  1,863  $  2,598  $ 11,884  $ 22,255
    Facilities                           3,801     2,518     9,732     8,008
    Land and lease                       1,369       987     3,557     4,236
    Capitalized G&A                        718       588     1,234       957
    Office and computer assets              34         -       108       186
                                      ---------------------------------------
    Total Capital Expenditures        $  7,785  $  6,691  $ 26,515  $ 35,642
                                      ---------------------------------------
    

    Capital expenditures of $7.8 million for the quarter were lower than the
prior quarter of $18.7 million, due to the onset of the annual "spring
break-up" period in the second quarter. Expenditures in the second quarter of
this year were marginally greater than last year's expenditures of $6.7
million. During the quarter the Company focused on facilities and tie-in
projects to bring new production onstream, which accounted for approximately
half of the capital expenditures in the quarter.
    The full year exploration & development capital spending budget for 2007
is $52 million.

    Liquidity & Capital Resources

    As at June 30, 2007, ProspEx had the following cash resources available
to fund its capital expenditure program.

    
                                                                     ($000's)
    -------------------------------------------------------------------------
    Working capital                                                $   4,568
    Long-term debt                                                   (42,523)
    Bank facilities available                                         50,000
    -------------------------------------------------------------------------
    Total resources available                                      $  12,045
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Accounts receivable are with customers and joint-venture partners in the
oil and gas industry and are subject to normal industry credit risks. Accounts
receivable of $2.5 million from joint venture partners are past due at
June 30, 2007. Due to the deterioration of North American gas price
fundamentals, industry access to capital markets may become increasing
difficult raising the credit risk on accounts receivable. The Company has not
recorded an allowance for doubtful accounts at June 30, 2007.
    ProspEx expects that it will be able to fund its remaining 2007 capital
program from cash flow from operations and existing capital resources.

    Bank Debt

    At June 30, 2007, the Company had a total credit facility of $50 million.
The facility is available by way of Canadian and US dollar prime rate based
loans, LIBOR advances, bankers' acceptances and letters of credit. The credit
facility is fully revolving until June 30, 2008 and may be extended at the
mutual agreement of ProspEx and its lender for an additional year. If the
credit facility is not extended, a balloon payment is required on July 1,
2009. This facility is secured by a $200 million demand debenture and a first
floating charge on all petroleum and natural gas assets of ProspEx.
    Subsequent to the quarter-end the Company has expanded its credit
facility by an additional $10 million bringing the total credit facility to
$60 million.

    Share Capital

    As at June 30, 2007, ProspEx had 53,955,551 common shares, 2,792,218
warrants, 435,994 special performance units and 4,520,917 options issued and
outstanding.
    As at August 2, 2007, ProspEx had 53,955,551 common shares, 2,792,218 
warrants, 435,994 special performance units and 4,595,917 options issued and
outstanding.

    Commitments

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

    
                                                                       There-
    Payments due ($000's)       2007    2008    2009    2010    2011   after
    -------------------------------------------------------------------------
    Long-term debt                 -       -  42,523       -       -       -
    Building lease               176     353      29       -       -       -
    Drilling rig contract      2,629   3,924       -       -       -       -
    Process fees                 252     400     300     225      36       -
    Seismic purchase             110       -       -       -       -       -
    Other                          3       4       -       -       -       -
    -------------------------------------------------------------------------
    Total                      3,170   4,681  42,852     225      36       -
    -------------------------------------------------------------------------
    

    ProspEx has met its commitment to incur $14.6 million in qualifying
expenditures related to the flow-through share financings in 2007.

    Off-Balance Sheet Arrangements
    The Company has not entered into any off-Balance Sheet transactions.

    Summary of Quarterly Results

    The following table summarizes the quarterly operating statistics of the
Company.

    
                                              2005                2006
                                          Q3        Q4        Q1        Q2
    -------------------------------------------------------------------------
    Financial ($000's, except
     per share amounts)

    Oil and gas revenue                  9,103    12,496    10,999    12,375
    Net earnings (loss)                  6,325     3,850     1,629       868
      Per share - basic                   0.13      0.08      0.03      0.02
                - diluted                 0.13      0.08      0.03      0.02

    Average Daily Production

    Oil (bbls/d)                            32        28        28        96
    NGL (bbls/d)                            96        91       212       287
    Natural Gas (mcf/d)                 11,013    11,651    13,890    17,948
    Total (boe/d)                        1,963     2,062     2,555     3,375

    Overall Netbacks ($/boe)

    Price(1)                             50.40     65.89     47.83     40.30
    Royalties                            (8.59)   (10.15)    (8.36)    (7.12)
    Operating Cost                       (5.14)    (6.77)    (6.34)    (5.68)
                                        -------   -------   -------   -------
    Operating Netback                    36.67     48.97     33.13     27.50
                                        -------   -------   -------   -------


                                              2006                2007
                                          Q3        Q4        Q1        Q2
    -------------------------------------------------------------------------
    Financial ($000's, except
     per share amounts)

    Oil and gas revenue                 13,743    13,255    13,766    17,165
    Net earnings (loss)                    440     2,143    (1,794)    2,235
      Per share - basic                   0.01      0.04     (0.03)     0.04
                - diluted                 0.01      0.04     (0.03)     0.04

    Average Daily Production

    Oil (bbls/d)                            67       184        83       210
    NGL (bbls/d)                           515       276       290       513
    Natural Gas (mcf/d)                 18,335    16,221    16,757    21,108
    Total (boe/d)                        3,639     3,164     3,166     4,241

    Overall Netbacks ($/boe)

    Price(1)                             41.05     45.54     48.35     44.47
    Royalties                            (8.46)    (7.16)    (9.85)    (3.97)
    Operating Cost                       (8.21)    (7.39)    (7.38)    (7.86)
                                        -------   -------   -------   -------
    Operating Netback                    24.38     30.99     31.12     32.64
                                        -------   -------   -------   -------
    (1) Price does not include unrealized financial instrument gain/loss.
    


    NEW ACCOUNTING PRONOUNCEMENTS

    Accounting Standards Adopted

    On January 1, 2007 the Company adopted the new accounting standards for
financial instrument-recognition and measurement financial
instruments-presentation and disclosures, hedging and comprehensive income.
    The standards require that financial assets and liabilities be carried at
fair value on the balance sheet, except for loans and receivables, securities
designated as held-to-maturity and non-trading financial liabilities which are
carried at amortized cost unless designated as held-for-trading.
    The Company uses derivative financial instruments to manage its exposure
to volatility in commodity prices. Prior to January 1, 2007 and to date, the
derivative financial instruments used have not been designated as hedges; they
were recorded at fair value at inception and unrealized gains or losses are
reflected in earnings (loss).
    Prior to adoption of the new standards, physical receipt and delivery
contacts were not within the scope of the definition of a financial
instrument. On adoption of the new standards, the Company elected to account
for its commodity sales contracts and other non-financial contracts as
non-financial derivatives.
    The new standards require a statement of comprehensive income comprised
of net earnings plus other comprehensive income. The Company does not have any
other comprehensive income to report on the adoption of the new standards.
    The adoption of these new standards on January 1, 2007 did not have a
material impact on the reported results of operations or net financial
position of the Company.

    Disclosure Controls and Policies

    Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Company is accumulated and
communicated to the Company's management as appropriate to allow timely
decisions regarding required disclosure. The Company's Chief Executive Officer
(CEO) and Chief Financial Officer (CFO) have concluded, based on their
evaluation as of June 30, 2007, that the Company's disclosure controls and
procedures as of the end of such period are effective to provide reasonable
assurance that material information related to the Company, including its
consolidated subsidiary, is made known to them by others within those
entities. It should be noted that while the Company's Chief Executive Officer
and Chief Financial Officer believe that the Company's disclosure controls and
procedures provide a reasonable level of assurance that they are effective,
they do not expect that the disclosure controls and procedures will prevent
all errors and fraud. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.

    Internal Controls over Financial Reporting

    The CEO and CFO of the Company are able to certify the design of the
Company's internal controls over financial reporting as required under
Multilateral Instrument 52-109 of the Canadian Securities Administration with
no significant weaknesses in design of these internal controls.
    For the second quarter of 2007 there were no changes to the design of
internal controls over financial reporting.

    Non-GAAP Measures

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

    
    1.  Cash flow is defined as cash flow from operations before the change
        in non-cash working capital. The MD&A contains the term "cash flow"
        which should not be considered an alternative to, or more meaningful
        than "cash flow from operations" as determined in accordance with
        GAAP. The Company considers cash flow to be a key measure as it
        demonstrates the Company's ability to generate the cash necessary to
        fund capital projects and to repay debt. Cash flow presented does not
        have any standardized meaning prescribed by Canadian GAAP and
        therefore it may not be comparable with the calculation of similar
        measures for other entities. Cash flow per share is calculated using
        the same weighted average number of common shares for the period as
        used in calculating the net earnings per share calculation.

    2.  Barrel of oil equivalent ("boe") amounts have been calculated using a
        conversion rate of six thousand cubic feet ("mcf") of gas to one
        barrel of oil. Boe's may be misleading if used in isolation. A boe
        conversion ratio of one barrel of oil to six mcf of gas is based on
        an energy equivalency conversion method primarily applicable at the
        burner tip and does not represent a value equivalency at the well
        head.

    3.  Netbacks equal total revenue less royalties, operating costs and
        general and administrative costs on a boe basis. Total boes are
        calculated by multiplying the daily production by the number of days
        in the period.

    4.  Net debt is calculated using long-term debt plus total current assets
        less total current liabilities.
    

    Forward-looking statements

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


    
    ProspEx Resources Ltd.
    Consolidated Balance Sheets
    (Stated in thousands of dollars)
    (unaudited)

                                                      June 30,   December 31,
                                                         2007           2006
                                                         ----           ----
    Assets

    Current assets

      Accounts receivable                           $  14,466         13,220
      Prepaid expenses                                  1,068            746
      Unrealized financial instrument gain              1,380          3,081
                                                     ------------------------
                                                       16,914         17,047

    Property, plant and equipment, net                154,447        142,649
    Asset held for resale (note 2)                          -            937
    Future income tax asset (note 3)                        -          1,103
                                                     ------------------------

                                                    $ 171,361        161,736
                                                     ------------------------
                                                     ------------------------

    Liabilities

    Current liabilities
      Accounts payable and accrued liabilities      $  12,347         29,990

    Long term debt (note 4)                            42,523         16,766

    Asset retirement obligation                         4,241          4,157

    Future income tax liability (note 3)                4,076              -
                                                     ------------------------

    Total liabilities                                  63,187         50,913
                                                     ------------------------

    Shareholders' Equity

    Share capital (note 5)                             83,441         87,459
    Contributed surplus                                 5,276          4,348
    Retained earnings                                  19,457         19,016
                                                     ------------------------
                                                      108,174        110,823
                                                     ------------------------
                                                    $ 171,361        161,736
                                                     ------------------------
                                                     ------------------------

    See accompanying notes to consolidated financial statements



    ProspEx Resources Ltd.
    Consolidated Statements of Earnings, Comprehensive Income and
    Retained Earnings
    (unaudited)

                                        Three     Three      Six       Six
                                        months    months    months    months
                                        ended     ended     ended     ended
    (Stated in thousands of dollars,   June 30,  June 30,  June 30,  June 30,
     except per share amounts)           2007      2006      2007      2006
    -------------------------------------------------------------------------

    Revenue
      Oil and gas                     $ 17,165    12,375    30,941    23,374
      Unrealized financial instrument
       gain (loss)                       1,529       663    (1,701)      809
      Royalties                         (1,533)   (2,185)   (4,340)   (4,108)
                                       --------------------------------------

                                        17,161    10,853    24,900    20,075
                                       --------------------------------------
    Expenses
      Depletion, depreciation and
       accretion                         9,078     5,905    15,875    10,194
      Operating                          3,034     1,745     5,137     3,203
      General and administrative           822       652     1,461     1,170
      Interest and bank charges            559       471       956       658
      Stock-based compensation             286       293       521       545
                                       --------------------------------------

                                        13,779     9,066    23,950    15,770
                                       --------------------------------------

    Earnings before income taxes         3,382     1,787       950     4,305
                                       --------------------------------------

    Income Tax (note 3)
      Current                                -       (20)        -         -
      Future income taxes                1,147       939       509     1,808
                                       --------------------------------------

                                         1,147       919       509     1,808
                                       --------------------------------------

    Net earnings and comprehensive
     income                              2,235       868       441     2,497

    Retained earnings, beginning of
     period                             17,222    15,565    19,016    13,936
                                       --------------------------------------

    Retained earnings, end of period  $ 19,457    16,433    19,457    16,433
                                       --------------------------------------
                                       --------------------------------------

    Net earnings per share
      Basic                           $   0.04      0.02      0.01      0.05
                                       --------------------------------------
                                       --------------------------------------
      Diluted                         $   0.04      0.02      0.01      0.05
                                       --------------------------------------
                                       --------------------------------------

    See accompanying notes to consolidated financial statements.



    ProspEx Resources Ltd.
    Consolidated Statements of Cash Flow
    (unaudited)

                                        Three     Three      Six       Six
                                        months    months    months    months
                                        ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30
    (Stated in thousands of dollars)     2007      2006      2007      2006
    -------------------------------------------------------------------------

    Operations
    Net earnings and comprehensive
     income                           $  2,235       868       441     2,497
    Items not involving cash
      Depletion, depreciation and
       accretion                         9,078     5,905    15,875    10,194
      Stock-based compensation             286       293       521       545
      Unrealized financial instrument
       loss (gain)                      (1,529)     (663)    1,701      (809)
      Future income taxes                1,147       939       509     1,808
    Asset retirement expenditures          (28)      (42)     (325)   (1,182)
                                       --------------------------------------
                                        11,189     7,300    18,722    13,053
    Changes in non-cash working
     capital                            (3,744)   (4,249)   (9,912)  (10,855)
                                       --------------------------------------
                                         7,445     3,051     8,810     2,198
                                       --------------------------------------

    Financing
      Issuance of shares                   271     6,684       310     6,624
      Increase in long-term debt         2,972     2,848    25,757    32,094
                                       --------------------------------------
                                         3,243     9,532    26,067    38,718
                                       --------------------------------------

    Investments
      Exploration and development
       expenditures                     (6,814)   (6,691)  (25,470)  (35,456)
      Other capital assets                 (34)        -      (108)     (186)
                                       --------------------------------------
                                        (6,848)   (6,691)  (25,578)  (35,642)
    Changes in non-cash working
     capital                            (3,840)   (5,892)   (9,299)   (5,274)
                                       --------------------------------------
                                       (10,688)  (12,583)  (34,877)  (40,916)
                                       --------------------------------------

    Change in cash                           -         -         -         -

    Cash, beginning of period                -         -         -         -
                                       --------------------------------------

    Cash, end of period               $      -         -         -         -
                                       --------------------------------------
                                       --------------------------------------

    See accompanying notes to consolidated financial statements.



    Notes to Consolidated Financial Statements
    For the three and six months ended June 30, 2007 and 2006
    (unaudited)

    The interim unaudited consolidated financial statements of ProspEx
    Resources Ltd. (the "Company" and/or "ProspEx") have been prepared in
    accordance with Canadian generally accepted accounting principles
    ("GAAP"). The Company is engaged in the acquisition, exploration,
    development and production of oil and natural gas in Canada.

    The interim unaudited consolidated financial statements have been
    prepared by management following the same accounting policies and methods
    of computation as the audited consolidated financial statements for the
    year ended December 31, 2006 except as disclosed below in note 1.
    Preparation of financial statements in conformity with Canadian GAAP
    requires management to make estimates and assumptions that affect the
    reported amounts of assets, liabilities, revenue and expenses and
    disclosure of contingent assets and liabilities at the date of the
    financial statements. Actual results may differ from these estimates. The
    disclosures included below are incremental to those included with the
    annual consolidated financial statements. The interim consolidated
    financial statements should be read in conjunction with the consolidated
    financial statements and the notes thereto in the Company's annual report
    for the year ended December 31, 2006.

    1.  CHANGE IN ACCOUNTING POLICY

    On January 1, 2007 the Company adopted the new accounting standards for
    financial instrument-recognition and measurement, financial instruments-
    presentation and disclosures, hedging and comprehensive income.

    The standards require that financial assets and liabilities be carried at
    fair value on the balance sheet, except for loans and receivables,
    securities designated as held-to-maturity and non-trading financial
    liabilities which are carried at amortized cost unless designated as
    held-for-trading.

    The Company uses derivative financial instruments to manage its exposure
    to volatility in commodity prices. Prior to January 1, 2007 and to date,
    the derivative financial instruments used have not been designated as
    hedges; they were recorded at fair value at inception and unrealized
    gains or losses are reflected in earnings (loss).

    Prior to adoption of the new standards, physical receipt and delivery
    contacts were not within the scope of the definition of a financial
    instrument. On adoption of the new standards, the Company elected to
    account for its commodity sales contracts and other non-financial
    contracts as non-financial derivatives.

    The new standards require a statement of comprehensive income comprised
    of net earnings plus other comprehensive income. The Company does not
    have any other comprehensive income to report on the adoption of the new
    standards.

    The adoption of these new standards on January 1, 2007 did not have a
    material impact on the reported results of operations or net financial
    position of the Company.

    2.  ASSET HELD FOR RESALE

    The Company had $0.9 million of equipment assembled which it intended to
    resell. The Company no longer expects to sell this equipment, as it is
    expected that this equipment will be utilized in the Company's field
    operations.

    3.  FUTURE INCOME TAXES

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

                                        Three     Three      Six       Six
                                        months    months    months    months
                                        ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30
    ($000's)                             2007      2006      2007      2006
    -------------------------------------------------------------------------
    Earnings before taxes             $  3,382  $  1,787  $    950  $  4,305
    Rate                                32.12%    34.50%    32.12%    34.50%
    -------------------------------------------------------------------------
    Computed expected provision for
     future income taxes                 1,086       617       305     1,485
    Increase (decrease) in taxes
     resulting from:
      Non-deductible crown payments          -       200         -       331
      Resource allowance                     -      (225)        -      (442)
      Stock-based compensation              92       196       167       376
      Effect of change in tax rate         (20)      322      (105)      266
      Other                                (11)     (171)      142      (208)
    -------------------------------------------------------------------------
                                         1,147       939       509     1,808
    Capital taxes                            -       (20)        -         -
    -------------------------------------------------------------------------
    Income tax expense                $  1,147  $    919  $    509  $  1,808
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The components of the future income tax liability at June 30, 2007 are as
    follows:

    ($000's)
    -----------------------------------------------------
    Tax (liabilities) assets:
      Property, plant and equipment            $  (4,285)
      Asset retirement obligation                    481
      Share issue costs                              604
      Other                                         (376)
    -----------------------------------------------------
                                                  (3,576)
    Valuation allowance                             (500)
    -----------------------------------------------------
    Future income tax liability                $  (4,076)
    -----------------------------------------------------
    -----------------------------------------------------

    At June 30, 2007, the Company had estimated tax deductions available to
    reduce future taxable income of $141.6 million (2006 - $132.1 million).

    4.  LONG-TERM DEBT

    At June 30, 2007 the Company had a $50 million credit facility with a
    Canadian chartered bank. The facility is available by way of Canadian and
    US dollar prime rate based loans, LIBOR advances, bankers' acceptances
    and letters of credit. The credit facility is fully revolving until
    June 30, 2008 and may be extended at the mutual agreement of ProspEx and
    its lender for an additional year. If the credit facility is not
    extended, a balloon payment is required on July 1, 2009. This facility is
    secured by a $200 million demand debenture and a first floating charge on
    all petroleum and natural gas assets.

    Subsequent to quarter end, the Company expanded its credit facility to
    $60 million, all other terms remain the same.

    5.  SHARE CAPITAL

    (a) Common Shares & Common Share Performance Warrants Issued

                                         June 30, 2007       June 30, 2006
    -------------------------------------------------------------------------
                                     Number of           Number of
                                       Shares/             Shares/
                                      Warrants    Amount  Warrants    Amount
                                       (000's)   ($000's)   (000's)   (000's)
    -------------------------------------------------------------------------
    Common shares
    -------------------------------------------------------------------------
      Balance at the beginning of the
       period                           53,790  $ 85,682    48,932  $ 64,283
      Flow-through shares tax
       adjustment                            -    (4,461)        -    (2,048)
      Warrants cancelled                     -        13         -         -
      Shares issued for warrants            94       188        30        60
      Options exercised                     72       242         4        12
      Adjustment for contributed
       surplus reclass - option              -       114         -         -
      Issued for cash as private
       placement - May 5, 2006               -         -     1,220     7,015
      Issue costs, net of future tax
       reduction                             -       (44)       -      (279)
    -------------------------------------------------------------------------
      Balance at the end of the
       period                           53,956  $ 81,734    50,186  $ 69,043
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Common share performance warrants
    -------------------------------------------------------------------------
      Balance at the beginning of
       the period                        2,908  $  1,778     3,032  $  1,853
      Exercised                            (94)      (58)      (30)      (18)
      Cancelled                            (22)      (13)        -         -
    -------------------------------------------------------------------------
      Balance at the end of the period   2,792  $  1,707     3,002  $  1,835
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Share Capital at end of period              $ 83,441            $ 70,878
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (b) Stock Options and Special Performance Units

    Changes in outstanding stock options during the period ended June 30 are
    summarized below:

                                             2007                2006
    -------------------------------------------------------------------------
                                                Weighted            Weighted
                                                 Average             Average
                                       Options  Exercise   Options  Exercise
                                        (000s)    Price     (000s)    Price
    -------------------------------------------------------------------------
    Outstanding at beginning of
     the period                          3,354   $  3.49     2,314   $  3.27
    Granted                              1,300      4.16     1,006      3.94
    Exercised                              (72)     3.38        (4)     3.22
    Cancelled                              (61)     3.60         -         -
    -------------------------------------------------------------------------
    Outstanding at the end of the
     period                              4,521   $  3.68     3,316   $  3.47
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The fair value of options granted during the six months of 2007 was
    $2.2 million (2006 - $1.6 million) using the Black-Scholes option pricing
    model with the following weighted average assumptions for grants as
    follows:

    ---------------------------------------------------------------
    Risk free interest rate                                     4%
    Expected life                                          5 years
    Expected volatility                                        48%
    Expected dividend yield                                    Nil
    ---------------------------------------------------------------

    The estimated fair values of the options and the special performance
    units are being amortized to expense over the vesting period.
    $0.5 million (2006 - $0.5 million) of stock and unit-based compensation
    was recorded against income in 2007 and $0.5 million (2006 -
    $0.5 million) was capitalized.

    There were no changes in the number of outstanding special performance
    units during the first six months of the year.

    (c) Per Share Amounts

    In computing diluted net earnings per share for the quarter ended
    June 30, 2007, 2,648,791 (2006 - 2,668,144) common shares were added to
    the weighted average number of common shares outstanding of 53,911,553
    (2006 - 49,705,095). A total of 2,136,500 (2006 - 1,223,000) options were
    excluded from the diluted calculations as they were not dilutive.

    In computing diluted net earnings per share for the six months ended
    June 30, 2007, 2,569,467 (2006 - 2,475,522) common shares were added to
    the weighted average number of common shares outstanding of 53,859,424
    (2006 - 49,323,675). A total of 2,136,500 (2006 - 1,223,000) options were
    excluded from the diluted calculations as they were not dilutive.

    6.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

    In addition to physical swap contracts, the Company uses derivative
    financial instruments to manage its exposure to volatility in commodity
    prices. These financial instruments are not used for trading or other
    speculative purposes. As all the derivative financial instruments entered
    into by the Company have not been formally designated as hedges, they are
    recorded at fair value at inception. Realized gains or losses on these
    physical and financial instruments are reflected as adjustments to the
    related revenue when the gain or loss is realized; unrealized gains and
    losses on these instruments are recognized as adjustments to the related
    revenue at the end of each reporting period. The estimated fair value of
    these financial instruments and physical contracts is based on quoted
    market prices, or if quotes are not available, third party market
    indications and forecasts are used. During the period ending June 30,
    2007 a $0.4 million (2006 - $nil) gain was realized on physical and
    financial swap contracts. Financial instruments and physical contracts in
    place at June 30, 2007 are summarized below.

             Amount
    Type     (GJ/d)   Term                Price ($/GJ)             Type
    ----     ------   ----                ------------             ----
    Collar   2,000    April 1 -           $7.00 - $8.05 at AECO    Financial
                       October 31, 2007
    Collar   2,000    April 1 -           $7.00 - $8.50 at AECO    Financial
                       October 31, 2007
    Collar   2,000    April 1 -           $7.00 - $9.07 at AECO    Physical
                       October 31, 2007
    Collar   3,000    April 1 -           $7.00 - $8.27 at AECO    Physical
                       October 31, 2007

    Subsequent to the quarter the Company entered into the following
    financial instrument:

             Amount
    Type     (GJ/d)   Term                Price ($/GJ)             Type
    ----     ------   ----                ------------             ----
    Fixed    2,000    September 1 -       $5.40 at AECO            Financial
     Price             October 31, 2007

    Accounts receivable are with customers and joint-venture partners in the
    oil and gas industry and are subject to normal industry credit risks.
    Accounts receivable of $2.5 million from joint venture partners are past
    due at June 30, 2007. Due to the deterioration of North American gas
    price fundamentals, industry access to capital markets may become
    increasingly difficult raising the credit risk on accounts receivable.
    The Company has not recorded an allowance for doubtful accounts at
    June 30, 2007.

    The Company is exposed to a floating rate of interest on its long-term
    debt. The Company is also exposed to foreign currency fluctuations as oil
    prices received are referenced to US dollar denominated prices and
    natural gas and natural gas liquids prices are influenced by US dollar
    denominated markets. The Company has no financial contracts in place at
    June 30, 2007 to manage the foreign currency and interest rate exposure.

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

    7.  ADDITIONAL DISCLOSURES

    Net cash interest paid during the quarter was $0.9 million (2006 -
    $0.9 million interest received). Cash taxes paid during the period was
    $nil (2006 - $nil).

    
    %SEDAR: 00021285E




For further information:

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

Organization Profile

PROSPEX RESOURCES LTD.

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