Stylus Energy Inc. announces second quarter 2007 results



    CALGARY, Aug. 9 /CNW/ - Stylus Energy Inc. ("Stylus" or the "Company")
(TSX - STY) is pleased to present its unaudited financial and operational
results for the three months ended June 30, 2007.

    
    Highlights:

    ($ thousands except share and per share data)

                       Three       Three         Six         Six       Three
                      months      months      months      months      months
                       ended       ended       ended       ended       ended
    FINANCIAL        June 30     June 30     June 30     June 30    March 31
    -------------------------------------------------------------------------
                        2007        2006        2007        2006        2007
    -------------------------------------------------------------------------
    Natural gas
     sales             6,615       3,682      13,365       8,000       6,750
    Crude oil
     sales             1,368         868       2,708       1,695       1,340
    Natural gas
     liquids sales       564         213       1,080         367         516
    Royalty income        97          22         129          76          32
    Total
     production
     revenue           8,644       4,785      17,282      10,138       8,638
    Net loss
     after tax          (369)       (529)     (2,127)       (821)     (1,758)
    Per share
      Basic ($)        (0.01)      (0.02)      (0.08)      (0.03)      (0.06)
      Diluted ($)      (0.01)      (0.02)      (0.08)      (0.03)      (0.06)
    Funds from
     operations(1)     3,659       1,544       6,732       3,895       3,073
    Per share
      Basic ($)         0.13        0.06        0.24        0.16        0.11
      Diluted ($)       0.13        0.06        0.24        0.16        0.11
    Capital
     expenditures,
     net of
     dispositions(2) (11,802)      7,713      (5,507)     17,404       6,294
    Net debt(3)      (11,362)    (11,905)    (11,362)    (11,905)    (26,596)

    Shareholders'
     equity           51,973      55,336      51,973      55,336      52,175
    Weighted average
     common shares
     outstanding
      Basic       27,670,910  24,095,725  27,666,159  24,082,863  27,661,355
      Diluted     27,670,910  24,095,725  27,666,159  24,082,863  27,661,355
    Issued share
     capital at
     end of
     period
    Common
     shares       27,670,910  26,223,857  27,670,910  26,223,857  27,670,910


                       Three       Three         Six         Six       Three
                      months      months      months      months      months
                       ended       ended       ended       ended       ended
    OPERATIONS       June 30     June 30     June 30     June 30    March 31
    -------------------------------------------------------------------------
                        2007        2006        2007        2006        2007
    -------------------------------------------------------------------------
    Average daily
     production
    Crude oil
     (bbl/d)(4)          212         129         221         128         231
    Natural gas
     liquids
     (bbl/d)              86          42          90          35          93
    Natural gas
     (mcf/d)(5)        9,577       6,635       9,700       6,600       9,825
    Total oil
     equivalent
     (BOE/d)(6)        1,894       1,277       1,928       1,263       1,962

    Average
     sales price
    Crude oil
     ($/bbl)           70.96       73.91       67.55       72.90       64.38
    Natural gas
     liquids ($/bbl)   71.93       56.05       66.50       58.44       61.43
    Natural gas
     ($/mcf)            7.59        6.10        7.61        6.70        7.63

    Netback ($/BOE)
    Total production
     revenue           50.15       41.19       49.52       44.34       48.92
    Royalties         (11.81)      (8.26)     (12.16)      (7.81)     (12.51)
    Percent of
     production
     revenue            23.5        20.1        24.6        17.6        25.7
    Production
     expense(7)       (10.70)     (11.70)     (11.36)     (10.94)     (12.01)
    Transportation
     expense           (0.56)      (1.17)      (0.89)      (1.19)      (1.22)
    Operating netback  27.08       20.06       25.11       24.40       23.18
    Net interest
     expense(8)        (1.85)      (1.47)      (1.83)      (1.79)      (1.82)
    Net general and
     administration
     expense(9)        (4.21)      (5.29)      (4.13)      (5.58)      (4.05)
    Current tax
     recovery           0.21           -        0.15        0.01        0.09
    Netback            21.23       13.30       19.30       17.04       17.40

    Wells drilled -
     gross                 0           6          10          23          10
    Wells drilled -
     net                   0        4.52         5.3       14.83         5.3
    Net success rate
     (percent)             -         100          44          78          44
    -------------------------------------------------------------------------

    (1) Funds from operations is a non-GAAP measure. It is equal to the total
        cash provided from operating activities and changes in non-cash
        operating working capital as presented on the Statements of Cash
        Flows plus the asset retirement obligations.
    (2) Excludes capitalized non-cash additions to property, plant and
        equipment for asset retirement obligations and stock-based
        compensation expense
    (3) Net debt = working capital deficit = current
        assets less current liabilities
    (4) bbl/d = barrels per day
    (5) mcf/d = thousand cubic feet per day
    (6) BOE/d = barrels of oil equivalent per day, with gas
        converted at 6 mcf: 1 BOE
    (7) Production expenses includes operating costs, workover expenses and
        lease rentals
    (8) Net interest expense = interest expense less interest and
        other non-oil and gas income
    (9) Total general and administrative ("G&A") expense less overhead
        recoveries, capitalized overhead and non-cash stock based
        compensation expense


    2007 Highlights

    -   Second quarter production averaged 1,894 BOE per day, a 48 percent
        increase from production of 1,277 BOE per day in the same period a
        year ago and a 3 percent decrease relative to production of 1,962 BOE
        per day for the first quarter of 2007. Second quarter production per
        basic share outstanding was up 29 percent from the same period one
        year ago and down 2 percent from the first quarter of 2007. Natural
        gas represented 84 percent of second quarter production.

    -   Funds from operations were $3.66 million ($0.13 per diluted share) in
        the quarter, an increase of 137 percent from $1.54 million ($0.06 per
        diluted share) in the second quarter of 2006, and an increase of
        19 percent from $3.07 million ($0.11 per diluted share) in the first
        quarter of 2007. The Company recorded a loss of $0.13 million ($nil
        per diluted share) in the second quarter compared to a loss of
        $1.758 million ($0.06 per diluted share) in the first quarter of
        2007.

    -   The operating netback for the second quarter of 2007 was $27.08 per
        BOE, an increase of 35 percent from $20.04 per BOE in the same period
        of 2006 and an increase of 17 percent compared to the operating
        netback of $23.18 per BOE in the first quarter of 2007.

    -   Second quarter production expenses per BOE, including operating,
        workover and lease rental expenses, decreased 11 percent to
        $10.70 per BOE compared to first quarter 2007 production expenses of
        $12.01 per BOE.

    -   The Company's net debt at June 30, 2007 was $11.36 million, a
        decrease of 57 percent from net debt of $26.60 million at March 31,
        2007. During the second quarter, the Company sold non-core, non-
        producing assets for net proceeds of $12.15 million. Capital
        investment in the second quarter was $0.35 million (76 percent
        production equipment and facilities), a 94 percent decrease from
        $6.29 million in the first quarter of 2007.

    -   On June 25, 2007, the Company announced it had entered into an
        agreement with Compton Petroleum Acquisition Ltd. (a wholly owned
        subsidiary of Compton Petroleum Corporation) pursuant to which
        Compton Petroleum Acquisition Ltd. offered, by way of take-over bid,
        to acquire all of the issued and outstanding shares of Stylus for
        cash consideration of $2.70 per share. The total value of the offer
        is approximately $91 million. The initial expiry date under the offer
        is August 14, 2007.
    


    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
    OF OPERATIONS

    The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is provided by the management of Stylus
Energy Inc. ("Stylus" or the "Company") to review the financial position and
the results of its operations for the six months ended June 30, 2007 as
compared to the same period of the previous year. This MD&A should be read in
conjunction with the unaudited financial statements including notes for the
six months ended June 30, 2007, the unaudited consolidated financial
statements including notes for the six months ended June 30, 2006 and the
audited consolidated financial statements including notes for the year ended
December 31, 2006.
    This commentary is based upon information available to and is dated
August 8, 2007. Additional information relating to Stylus, including Stylus'
Annual Information Form, is available on SEDAR (www.sedar.com).

    Advisories

    Basis of Presentation: The financial data presented below has been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP"). The reporting and the measurement currency is the Canadian dollar.

    Non-GAAP Measurements: The MD&A contains the terms "funds from
operations", "net debt" and "netbacks", which are non-GAAP measures. The
Company uses these measures to help evaluate its performance. These
measurements should not be considered an alternative to, or more meaningful
than, net income (loss) or cash provided by operations as determined in
accordance with GAAP as indicators of the Company's performance. The
reconciliation between cash flow from operating activities and funds from
operations can be found in the Funds and Earnings table contained in this
MD&A. The Company presents funds from operations per share, whereby per share
amounts are calculated using weighted average shares outstanding consistent
with the calculation of earnings per share. These measurements are presented
because management believes the information is useful as a financial indicator
of a company's ability to generate cash to internally fund exploration and
development activities and to service debt. Funds from operations is also used
by research analysts to value and compare oil and gas exploration and
production companies, and is frequently included in published research when
providing investment recommendations. The Company considers corporate netbacks
a key measure as it demonstrates its profitability relative to current
commodity prices. Stylus' determination of these measurements may not be
comparable to that reported by other companies.

    BOE Presentation: The calculations of barrels of oil equivalent ("BOE")
are based on a conversion rate of six thousand cubic feet ("mcf") of natural
gas to one barrel ("bbl") of crude oil. BOE's may be misleading, particularly
if used in isolation. A BOE conversion ratio of 6 mcf: 1 bbl is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.

    Forward-looking Statements: Certain of the statements contained herein
including, without limitation, financial and business prospects and financial
outlook, management's assessment of future plans and operations, ,anticipated
transportation expenses, operating expenses, interest expenses, general and
administrative expenses and capital expenditures and the timing and the method
of funding thereof may be forward-looking statements. Words such as "may",
"will", "should", "could", "anticipate", "believe", "expect", "intend",
"plan", "potential", "continue" and similar expressions may be used to
identify these forward-looking statements. These statements reflect
management's current beliefs and are based on information currently available
to management. Forward-looking statements involve significant risk and
uncertainties. A number of factors could cause actual results to differ
materially from the results discussed in the forward-looking statements
including, but not limited to, 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 or delay in
obtaining required regulatory approvals and ability to access sufficient
capital from internal and external sources and the risk factors outlined under
"Risks and Uncertainty" in the attached MD&A and elsewhere herein. The
recovery and reserve estimates of Stylus' reserves are estimates only and
there is no guarantee that the estimated reserves will be recovered. 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 Stylus' 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) and at Stylus'
website (www.stylusenergy.com). Although the forward-looking statements
contained herein are based upon what management believes to be reasonable
assumptions, management cannot assure that actual results will be consistent
with these forward-looking statements. Investors should not place undue
reliance on forward-looking statements. These forward-looking statements are
made as of the date hereof and Stylus assumes no obligation to update or
review them to reflect new events or circumstances except as required by
applicable securities laws.
    Forward-looking statements and other information contained herein
concerning the oil and gas industry and Stylus' general expectations
concerning this industry are based on estimates prepared by management using
data from publicly available industry sources as well as from reserve reports,
market research and industry analysis and on assumptions based on data and
knowledge of this industry which Stylus believes to be reasonable. However,
this data is inherently imprecise, although generally indicative of relative
market positions, market shares and performance characteristics. While Stylus
is not aware of any misstatements regarding any industry data presented
herein, the industry involves risks and uncertainties and is subject to change
based on various factors.

    
    Production

                   Three    Three              Six      Six            Three
                  months   months           months   months           months
                   ended    ended            ended    ended            ended
                 June 30  June 30      %   June 30  June 30      %  March 31
    -------------------------------------------------------------------------
                    2007     2006 Change      2007     2006 Change      2007
    -------------------------------------------------------------------------
    Total
     Production
    Crude oil
     (bbl)        19,274   11,744     64    40,087    23,258    72    20,813
    NGL (bbl)      7,845    3,808    106    16,238     6,275   159     8,393
    Natural gas
     (mcf)       871,526  603,769     44 1,755,783 1,194,591    47   884,257
    Total (BOE)  172,373  116,180     48   348,955   228,631    53   176,583
    Daily
     Production
    Crude oil
     (bbl/d)         212      129     64       221       128    72       231
    NGL (bbl/d)       86       42    106        90        35   159        93
    Natural gas
     (mcf/d)       9,577    6,635     44     9,700     6,600    47     9,825
    Total
     equivalent
     (BOE/d)       1,894    1,277     48     1,928     1,263    53     1,962
    -------------------------------------------------------------------------
    

    Production for the three months ended June 30, 2007 increased 48 percent
to 1,894 BOE per day from 1,277 BOE per day for the three months ended
June 30, 2006. Natural gas production represented 84 percent of the Company's
average total production for the three months ended June 30, 2007, compared to
87 percent for the three months ended June 30, 2006.
    For the six months ended June 30, 2007, the Company's production
increased 53 percent to 1,928 BOE per day from 1,263 BOE per day a year
earlier. The year-over-year production increase for both the three and
six month periods ended June 30, 2007 is due primarily to the onset of new
production at the Company's Vulcan field in January 2007.
    Second quarter 2007 production declined 3 percent compared to the first
quarter of 2007. Maintenance of a third-party gas processing plant at Vulcan,
Alberta resulted in slightly lower natural gas and NGL production. Crude oil
production was lower in the second quarter due to the shut in and pressure
testing of the Company's Vulcan 'I' oil pool and an adjacent water injection
well in order to evaluate a water source project planned for the fourth
quarter of 2007.
    In the first quarter of 2007, the Company shut in 51 BOE per day of
natural gas production at Burnt Pine due to high third-party gas processing
fees. Burnt Pine remained shut in during the second quarter of 2007 while the
Company continues to renegotiate processing fees.
    The Sousa property that was shut in during the first quarter of 2007 due
to high operating costs was sold in June 2007.

    
    Prices

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Crude oil ($/bbl)  70.96   73.91      (4)  67.55   72.90      (7)  64.38
    NGL ($/bbl)        71.93   56.05      28   66.50   58.44      14   61.43
    Natural gas
     ($/mcf)            7.59    6.10      24    7.61    6.70      14    7.63
    Natural gas
     ($/BOE)           45.54   36.60      24   45.67   40.20      14   45.80
    -------------------------------------------------------------------------
    

    The Company's average natural gas selling price for the three months
ended June 30, 2007 increased 24 percent to $7.59 per mcf as compared to
$6.10 per mcf in the same period in 2006. The average natural gas selling
price for the six months ended June 30, 2007 increased 14 percent to $7.61 per
mcf from $6.70 for the six months ended June 30, 2006. The Company receives a
portion of its Vulcan natural gas liquids production as heating value in its
natural gas sales, resulting in a $0.53 per mcf premium to the second quarter
2007 average daily AECO Spot natural gas price of $7.06 per mcf.
    The average crude oil price for the three months ended June 30, 2007
decreased four percent to $70.96 per bbl from $73.91 per bbl in the same
period in 2006. For the six months ended June 30, 2007 the average crude oil
price declined seven percent to $67.55 per bbl from $72.90 per bbl for the
same period last year. The Company's crude oil price in the second quarter of
2007 averaged $0.46 per bbl less than the Edmonton Light Crude Oil benchmark
price of $71.41 per bbl.
    The Company did not employ commodity hedges during the six months ended
June 30, 2007 and does not have any hedges in place as of the date of this
report.

    
    Revenue

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Gross oil
     revenues          1,368     868      58   2,708   1,695      60   1,340
    Gross NGL revenues   564     213     164   1,080     367     194     516
    Gross natural
     gas revenues      6,615   3,682      80  13,365   8,000      67   6,750
    Royalty income        97      22     334     129      76      69      32
    -------------------------------------------------------------------------
    Total production
     revenue           8,644   4,785      81  17,282  10,138      70   8,638
    -------------------------------------------------------------------------
    Total production
     revenue ($/BOE)   50.15   41.19      22   49.52   44.34      12   48.92
    -------------------------------------------------------------------------
    Other income
     (expense)            14      (0) (7,589)     (4)      2    (265)    (18)
    -------------------------------------------------------------------------
    Total revenue      8,658   4,785      81  17,278  10,140      70   8,620
    -------------------------------------------------------------------------
    Total revenue
     ($/BOE)           50.23   41.19      22   49.51   44.35      12   48.82
    -------------------------------------------------------------------------
    

    Total production revenue for the three months ended June 30, 2007
increased 81 percent to $8.7 million from $4.8 million for the same period of
2006. For the six months ended June 30, 2007, total production revenues
increased 70 percent to $17.3 million from $10.1 million in the same period of
2006.
    On a BOE basis, total production revenue for the three months ended
June 30, 2007 increased 22 percent to $50.15 per BOE from $41.19 per BOE in
the same period of 2006. For the six months ended June 30, 2007, total
production revenue increased 12 percent to $49.52 per BOE from $44.34 per BOE
for the six months ended June 30, 2006.
    The increase in total production revenue for both the three and six month
periods ended June 30, 2007 compared to the same periods for 2006 is primarily
due to higher natural gas and NGL production volumes and higher natural gas
and NGL selling prices.

    
    Royalties

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Crown royalties    1,386   1,121      24   3,056   1,988      54   1,669
    Gross overriding
     and freehold
     royalties           990     326     204   1,840     797     131     850
    -------------------------------------------------------------------------
    Subtotal           2,376   1,447      64   4,896   2,785      76   2,519
    Alberta Royalty
     Tax Credit
     ("ARTC")            (63)   (105)    (40)    (50)   (170)    (71)     14
    ADOE Royalty
     credits(1)         (157)   (266)    (41)   (408)   (624)    (35)   (251)
    Alberta Capital
     and Processing
     Fee Credit
     ("GCA")            (121)   (116)      5    (194)   (206)     (6)    (73)
    -------------------------------------------------------------------------
    Net Royalties      2,035     960     112   4,244   1,785     138   2,209
    -------------------------------------------------------------------------
    $/BOE              11.81    8.26      43   12.16    7.81      56   12.51
    Average corporate
     royalty rate
     (percent)          23.5    20.1      17    24.6    17.6      40    25.7
    -------------------------------------------------------------------------

    (1) Royalty credits are related to the Alberta Department of Energy
        ("ADOE Royalty Credit") financial assistance program for operators of
        gas wells shut-in by the AEUB bitumen conservation policy, which
        became effective in October 2004. If the AEUB subsequently approves
        production from shut-in zones, gas producers will pay an incremental
        gross over-riding royalty ("GORR") to the Crown along with Crown
        royalties otherwise payable, based on the number of years the gas
        production was shut-in and triggered by the corresponding royalty
        credit to the operator. The GORR is established at one percent after
        the first year of shut-in, increasing at one percent per year based
        on the period of time such intervals received royalty credits, to a
        maximum GORR of 10 percent. The GORR recoverable by the Crown would
        be limited to the total royalty credit amount received by a gas well
        operator.
    

    In the three months ended June 30, 2007, royalties, net of ARTC, GCA and
the ADOE Royalty Credit, increased 112 percent to $2.04 million from
$0.96 million in the same period of 2006. The average corporate royalty rate
for the three months ended June 30, 2007 increased 17 percent to 23.5 percent
compared to 20.1 percent for the three months ended June 30, 2006.
    In the six months ended June 30, 2007, royalties, net of the ARTC, GCA
and the ADOE Royalty Credit, increased 138 percent to $4.24 million from
$1.79 million in the same period of 2006. The average corporate royalty rate
for the six months ended June 30, 2007 increased 7.0 percent to 24.6 percent
compared to 17.6 percent for the six months ended June 30, 2006.
    Gross overriding and freehold royalties in the three months ended
June 30, 2007 increased 204 percent to $0.99 million from $0.33 million in the
same period of 2006. The Company pays gross overriding and freehold royalties
to third parties at Vulcan.
    During the six months ended June 30, 2007, the credits related to ARTC
decreased by $0.12 million relative to the six months ended June 30, 2006. The
ARTC program has been cancelled by the Alberta Government effective January 1,
2007, thereby eliminating the 25 percent ARTC on the first $2 million of
certain eligible crown royalties' payable each year. During the three and
six months ended June 30, 2007 the Company received adjustments to its ARTC
receivables due to minor prior year assessments and the results of an ARTC
audit of a predecessor company. In the first six months of 2007, the
elimination of ARTC increased the Company's net crown royalties by an
estimated $360,000 or $1.03 per BOE.
    The ADOE Royalty Credit decreased by $0.22 million in the six months
ended June 30, 2007 due to the payout of certain wells for which the credits
are granted and the 10 percent annual reduction of the ADOE Royalty Credit as
per the program and the reduction of the average natural gas reference price
used to calculate the ADOE royalty credit. On June 15, 2007 the Company closed
the sale of certain northern Alberta non-producing assets that included
approximately two-thirds of the total ADOE Royalty Credits. During the second
quarter of 2007, the Company recorded the ADOE Royalty Credit until the
closing date.
    The increase in the average corporate royalty rate for the three and six
months ended June 30, 2007 reflects the relative percentage decrease in ADOE
Royalty Credits as compared to total royalty payable and the impact of the
higher average royalty rates for the new Vulcan production. During the three
and six months ended June 30, 2007, the total ADOE Royalty Credits offset
approximately 11 percent and 13 percent, respectively, of the Crown royalties
payable, whereas in the three and six months ended June 30, 2006 the total
ADOE Royalty Credit offset approximately 24 percent and 31 percent,
respectively, of the Crown royalties payable.

    
    Production Expenses

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Operating
     expenses          1,705   1,294      32   3,568   2,314      54   1,863
    Workover expenses     53      60     (11)    197     104      89     143
    Lease rentals         87       6   1,344     200      84     138     114
    -------------------------------------------------------------------------
    Total production
     expenses          1,845   1,359      36   3,965   2,502      58   2,120
    -------------------------------------------------------------------------


    ($ per BOE)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Operating expenses  9.89   11.14     (11)  10.23   10.12       1   10.55
    Workover expenses   0.31    0.51     (40)   0.56    0.46      23    0.81
    Lease rentals       0.50    0.05     873    0.57    0.36      60    0.65
    -------------------------------------------------------------------------
    Total production
     expenses          10.70   11.70      (9)  11.36   10.94       4   12.01
    -------------------------------------------------------------------------
    

    Operating expenses (before workover and lease rentals) decreased
11 percent to $9.89 per BOE in the second quarter of 2007 compared to
$11.14 per BOE in the same period of 2006. Total production expenses per BOE
in the three months ended June 30, 2007 decreased 9 percent to $10.70 from
$11.70 in the same period of 2006. Operating expenses per BOE for the
six months ended June 30, 2007 increased one percent compared to the same
period of 2006 and total production expenses per BOE increased 4 percent over
the six months ended June 30, 2006.
    At Vulcan, which represented 51 percent of the Company's second quarter
production, operating expenses for the second quarter of 2007 averaged
approximately $6.40 per BOE.
    Ten percent ($0.98 per BOE) of the operating expenses of $10.23 per BOE
recorded in the six months ended June 30, 2007 relate to operating expenses
incurred at the Company's Burnt Pine and Sousa properties. Effective March 1,
2007, Stylus shut in the Burnt Pine and Sousa producing properties.
Decommissioning costs at Sousa recorded in the second quarter of 2007 totalled
$60,000 and contributed $0.35 per BOE to second quarter 2007 operating
expenses.
    During the second quarter of 2007, $46,000 of costs previously recorded
as transportation expense at Vulcan were reclassified as operating expense,
resulting in a non-recurring charge to operating expenses in the second
quarter of 2007 of $0.13 per BOE.
    Lease rentals in the three months ended June 30, 2007 increased by
$81,000 compared to the same period in 2006 due to the increase in annual
lease rental payments at Vulcan and Champion as a result of a significant
increase to the Company's land holdings in these areas.
    During the remainder of 2007, the Company expects the operating expenses
per BOE to continue to trend toward $9.00 per BOE.

    
    Transportation Expenses

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Transportation
     expenses             96     136     (30)    310     271      15     215
    -------------------------------------------------------------------------
    $/BOE               0.56    1.17     (53)   0.89    1.19     (25)   1.22
    -------------------------------------------------------------------------

    Transportation expense per BOE decreased for the three and six months
ended June 30, 2007 compared to the same periods of 2006 as a result of a
lower transportation rate in the Vulcan area and an adjustment to prior period
Vulcan transportation costs.
    The Company anticipates that transportation expenses per BOE for the
remainder of 2007 will be in the region of $1.00 per BOE.

    General and Administration Expenses

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Gross G&A
     expenses          1,028   1,000       3   2,116   1,994       6   1,088
    Less overhead
     recoveries         (245)   (275)    (11)   (560)   (498)     12    (315)
    Less capitalized
     overhead            (57)   (110)    (48)   (115)   (220)    (48)    (58)
    -------------------------------------------------------------------------
    Net G&A expenses     726     615      18   1,441   1,276      13     715
    -------------------------------------------------------------------------
    $/BOE               4.21    5.29     (20)   4.13    5.58     (26)   4.05
                     --------------------------------------------------------
    

    Gross general and administrative ("G&A") expenses for the three month
period ended June 30, 2007 increased three percent compared to the same period
in 2006. Net G&A expenses increased 18 percent in the three months ended
June 30, 2007 as a result of lower overhead recoveries and lower capitalized
overhead.
    Net G&A per BOE for the three months ended June 30, 2007 decreased
20 percent to $4.21 per BOE from $5.29 per BOE in the same period of 2006. For
the six months ended June 30, 2007, net G&A decreased 26 percent to $4.13 per
BOE as compared to the same period a year earlier.
    The Company-operated capital program and production operations generated
overhead recoveries of $245,000 in the second quarter of 2007, which
represents an 11 percent reduction compared to the same period in 2006. This
reduction is primarily due to the decreased capital recoveries related to
lower capital expenditures during the second quarter of 2007.
    The Company capitalizes a portion of the salaries of certain employees
directly related to exploration activities of the Company. Due to the
promotion of certain exploration staff to management positions in July, 2006,
the capitalized portion of the gross general and administration costs was
reduced by 48 percent during the three months ended June 30, 2007 compared to
the same period of 2006.

    
    Non-cash Stock-based Compensation Expense

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Total non-cash
     stock-based
     compensation
     expense             167      95      76     360     262      37     194
    Less: portion
     capitalized to
     property and
     equipment            (8)    (24)    (69)    (16)    (59)    (72)     (9)
    -------------------------------------------------------------------------
    Net non-cash
     stock-based
     compensation
     expense             159      71     125     344     203      69     185
    -------------------------------------------------------------------------
    $/BOE               0.92    0.61      52    0.99    0.89      11    1.05
    -------------------------------------------------------------------------
    

    The Company accounts for its stock-based compensation plan using the
fair-value method and a Black-Scholes option pricing model. Under this method,
compensation costs are charged over the vesting period for the stock options
with a corresponding increase to contributed surplus. Net non-cash stock-based
compensation expense increased for the three and six months ended June 30,
2007 compared to the same periods for 2006 due to additional stock options
granted in the third quarter of 2006.
    In the first quarter of 2007, 88,000 options were granted, 1,000 options
were cancelled and 20,000 options were exercised. There were no changes in
stock options during the second quarter of 2007.
    The Company capitalizes the stock-based compensation of employees
directly involved in exploration activities of the Company. In July 2006, two
of these employees moved into management with the result being a reduction in
the capitalized portion of their stock based compensation. This reduction is
reflected in the lower capitalized stock based compensation for the three and
six months ended June 30, 2007 compared to the same periods of 2006.

    
    Interest Expense

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Bank loan
     interest expense    333     171      95     637     254     150     304
    Part 12.6
     interest expense      -       -       -       -     158    (100)      -
    -------------------------------------------------------------------------
    Total interest
     expense             333     171      95     637     412      54     304
    -------------------------------------------------------------------------
    Total interest
     expense ($/BOE)    1.93    1.47      31    1.82    1.80       1    1.72
    -------------------------------------------------------------------------
    

    For the three months ended June 30, 2007, bank loan interest expense
increased 95 percent to $333,000 from $171,000 in the same period of 2006. For
the six months ended June 30, 2007, bank loan interest expense increased
150 percent as compared to the same period of 2006.
    The Company increased its bank loan during the third and fourth quarter
of 2006 in order to finance the development of the Vulcan field, and during
the first and second quarter of 2007 focussed on reducing the net debt through
non-core asset sales. On June 15, 2007 the Company closed the sale of
non-core, non-producing assets for proceeds of $12 million before closing
adjustments. On June 28, 2007, the Company sold other non-core assets with net
production of approximately 14 BOE per day for proceeds of $0.15 million. The
proceeds from asset sales were used to reduce the outstanding bank debt.
    At the current net debt level, the Company anticipates that interest
expense for the balance of 2007 will be approximately 50 percent of the total
interest expense for the six months ended June 30, 2007.

    
    Depletion, Depreciation and Accretion Expense ("DD&A")

    ($ thousands except as indicated)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Depletion and
     depreciation      4,275   2,700      58   9,498   5,262      81   5,223
    Accretion expense     65      42      56     131      85      55      66
    -------------------------------------------------------------------------
    Total DD&A         4,340   2,742      58   9,629   5,347      80   5,289
    -------------------------------------------------------------------------
    Total DD&A ($/BOE) 25.18   23.60       7   27.60   23.39      18   29.95
    -------------------------------------------------------------------------
    

    For the Company's interim quarterly financial statements, management
prepares an estimate of the proved and probable reserves of the Company that
it believes is consistent with the independent engineering consultants'
December 31, 2006 reserve evaluation and the guidelines of the Canadian
Securities Administrator's National Instrument 51-101 ("NI 51-101") relating
to reserve estimates. Under NI 51-101, proved reserves are defined as having a
high degree of certainty to be recoverable and the targeted level of
certainty, in aggregate, is at least 90 percent probability that the
quantities actually recovered will equal or exceed the estimated proved
reserves. The DD&A expense calculation uses only proved reserves.
    During the three months ended June 30, 2007 the Company had capital
expenditures of $0.35 million, resulting in minimal additions to the
depletable cost pool. On June 15, 2007 the Company closed the sale of certain
non-producing, non-core assets for total proceeds of $12.0 million before
closing adjustments. On June 28, 2007 the Company closed the sale of
additional minor assets for total proceeds of $0.15 million. Proceeds from
these sales reduced the depletable full cost asset pool by $12.15 million with
no material reduction of the total proved reserves, resulting in a reduction
of the DD&A rate of $4.77 per BOE.
    The asset sales concluded during the second quarter of 2007 did not
result in the recognition of a gain or loss on sale of assets, in accordance
with the Canadian Institute of Chartered Accountants Handbook, Accounting
Guideline No. 16, Oil and Gas Accounting - Full Cost.
    At June 30, 2007, the DD&A pool excludes $7.7 million (June 30, 2006 -
$6.7 million) of net book value for undeveloped land and $15.4 (June 30, 2006
- $10.2 million) million for seismic.
    For the six months ended June 30, 2007, accretion expense was
$0.13 million versus $0.85 million for the six months ended June 30, 2006. For
the three months ended June 30, 2007 accretion expense was $0.65 million
compared to $0.42 million for the three months ended June 30, 2006.

    
    Income Taxes

    ($ thousands except as indicated)

                               Three     Three       Six       Six     Three
                              months    months    months    months    months
                               ended     ended     ended     ended     ended
                             June 30   June 30   June 30   June 30  March 31
    -------------------------------------------------------------------------
                                2007      2006      2007      2006      2007
    -------------------------------------------------------------------------
    Large corporations tax       (36)        -       (52)       (1)      (15)
    Future income tax recovery  (471)     (740)   (1,114)     (834)     (643)
    -------------------------------------------------------------------------
    Total tax recovery          (507)     (740)   (1,166)     (835)     (658)
    -------------------------------------------------------------------------
    Total tax recovery
     ($/BOE)                   (2.94)    (6.37)    (3.34)    (3.65)    (3.73)
    -------------------------------------------------------------------------
    

    The Company records future tax assets and liabilities to account for the
expected future tax consequences of events that have been recorded in its
financial statements and its tax returns. These amounts are estimates and the
actual tax consequences may differ from the estimates due to changing tax
rates and regimes, as well as changing estimates of cash flows and capital
expenditures in current and future periods. A valuation allowance is recorded
to the extent that there is uncertainty regarding utilization of future tax
assets.
    Stylus recorded an income tax recovery in the three months ended June 30,
2007 of $0.51 million compared to a recovery of $0.74 million in the same
period of 2006. The recovery recorded in the three months ended June 30, 2007
included adjustments to the future tax payable due to asset sales recorded in
the quarter.
    On June 30, 2006, the Company issued 2,106,000 flow-through common shares
at $4.75 per share for gross proceeds of $10,003,500 less share issue costs of
$648,763. In February 2007, in accordance with the terms of its flow-through
offering described above and pursuant to certain provisions of the Income Tax
Act (Canada), the Company, effective as of December 31, 2006, renounced to the
holders, for income tax purposes, exploration expenditures to be incurred in
the aggregate amount of $10,003,500. As a result, share capital was reduced
and the future income tax liability was increased by $2,901,015 in the first
quarter of 2007 to reflect the effect of the expenditures renounced. Funds
raised from this flow-through offering have been used to help finance the
Company's exploration program.
    On December 6, 2006, the Company issued 1,341,500 flow-through common
shares at $4.10 per share for gross proceeds of $5,500,150 less share issue
costs of $361,770. In February 2007, in accordance with the terms of its
flow-through offering described above and pursuant to certain provisions of
the Income Tax Act (Canada), the Company, effective as of December 31, 2006,
renounced to the holders, for income tax purposes, exploration expenditures to
be incurred in the aggregate amount of $5,500,150. As a result, share capital
was reduced and the future income tax liability was increased by $1,595,044 in
the first quarter of 2007 to reflect the effect of the expenditures renounced.
Funds raised from this flow-through offering have been used to help finance
the Company's exploration program.

    
    Funds and Earnings

    ($ thousand except per share data)

                       Three   Three             Six     Six           Three
                      months  months          months  months          months
                       ended   ended           ended   ended           ended
                        June    June            June    June           March
                          30      30       %      30      30       %      31
    -------------------------------------------------------------------------
                        2007    2006  Change    2007    2006  Change    2007
    -------------------------------------------------------------------------
    Net loss for
     the period         (369)   (529)    (75) (2,127)   (821)    130  (1,758)
    Net loss per share
      Basic ($)        (0.01)  (0.02)    (77)  (0.08)  (0.03)    101   (0.06)
      Diluted ($)      (0.01)  (0.02)    (77)  (0.08)  (0.03)    101   (0.06)

    Add (deduct)
     items not
     requiring cash:
    Depletion and
     depreciation      4,275   2,700      58   9,498   5,262      81   5,223
    Stock-based
     compensation        159      71     125     344     203      69     185

    Accretion expense     65      42      55     131      85      55      66
    Future income
     tax recovery       (471)   (740)     (5) (1,114)   (834)     62    (643)
    -------------------------------------------------------------------------
    Funds from
     operations(1)     3,659   1,544     137   6,732   3,895      73   3,073
    Funds from
     operations per
     share(1)
      Basic and
       diluted ($)      0.13    0.06     106    0.24    0.16      50    0.11
    -------------------------------------------------------------------------

    (1) See "Non-GAAP Measurements" in Advisories.
    

    Total funds from operations increased 137 percent during the three months
ended June 30, 2007 to $3.7 million compared to $1.5 million for the same
period of 2006. For the six months ended June 30, 2007, funds from operations
increased 73 percent to $6.7 million from $3.9 million for the same period in
2006. The increase in funds from operations is due to higher production and
higher natural gas pricing in the three and six months ended June 30, 2007
versus the same period in 2006. As a result of equity financings in June 2006
and December 2006, funds from operations per share for the three and
six months ended June 30, 2007 increased 106 percent and 50 percent
respectively compared to the same period in 2006.
    The higher production volumes and higher operating netbacks in the second
quarter of 2007 reduced the net loss in the three months ended June 30, 2007
compared to the same period in 2006. The increase in the net loss for the
six months ended June 30, 2007 compared to the same period in 2006 results
from the higher DD&A expense recorded in the first six months of 2007.

    
    Additions to Property and Equipment Expenditures

    ($ thousands)

                               Three     Three       Six       Six     Three
                              months    months    months    months    months
                               ended     ended     ended     ended     ended
                             June 30   June 30   June 30   June 30  March 31
    -------------------------------------------------------------------------
                                2007      2006      2007      2006      2007
    -------------------------------------------------------------------------
    Undeveloped land              14       208        74     1,106        60
    Geological and geophysical     5     1,131       162     1,452       157
    Exploration and
     development drilling
     and completions              36     4,570     5,289    11,755     5,252
    Production equipment
     and facilities              267     1,731     1,027     2,961       761
    Proceeds on the disposal
     of properties           (12,154)        -   (12,154)        -         -
    -------------------------------------------------------------------------
    Total exploration and
     development
     expenditures            (11,832)    7,640    (5,602)   17,274     6,230

    Other                         30        73        95       130        64
    -------------------------------------------------------------------------
    Total expenditures
     before the following    (11,802)    7,713    (5,507)   17,404     6,294

    Asset retirement costs       192     1,094       575     1,669       383
    Capitalized stock-based
     compensation                  8        25        16        60         9
    -------------------------------------------------------------------------
    Total property and
     equipment expenditures  (11,602)    8,832    (4,916)   19,133     6,686
    -------------------------------------------------------------------------
    

    During the three months ended June 30, 2007, the Company did not initiate
any new drilling or completion operations or facility construction.
    Effective May 1, 2007 and closing June 15, 2007 and June 28, 2007, the
Company sold certain non-producing, non-core assets for total proceeds of
$12.2 million before closing adjustments.  The Company has recognized revenues
and expenses from these properties until the closing date. The assets sold
include approximately five percent of both the Company's undeveloped land and
its total proved and probable reserves as at December 31, 2006.

    Liquidity and Capital

    As at June 30, 2007, the Company had a working capital deficiency of
$11.4 million, which included bank debt of $11.8 million.
    During the six months ended June 30, 2007, capital expenditures were
financed from funds from operations, proceeds from the sale of non-core
assets, bank debt, working capital and the net proceeds of the December 6,
2006 financing.
    The main investing activities of the Company in the six months ended
June 30, 2007 were in exploration and development drilling, completions and
tie-ins.
    The Company's current budgeted investing activities, which consist
primarily of capital expenditures on oil and gas activities, are expected to
be funded with funds from operations and bank debt.
    At June 30, 2007, the Company had a $24.0 million extendable revolving
credit facility with a Canadian chartered bank. Under the terms of this
facility, interest is paid monthly in arrears at the bank's prime lending rate
("prime"). The extendable revolving term credit specifies no specific
repayment terms. A first floating-charge debenture over all properties of the
Company has been provided as security. As of June 30, 2007, $11.8 million
(year ended December 31, 2006 - $20.8 million) has been drawn against the
facility with an effective interest rate of 6.0 percent (2006 - 6.0 percent).
    The Company's $2.5 million subordinated facility was drawn and repaid
during the three months ended June 30, 2007 and is no longer available.
    The Company had no commodity hedges in place at June 30, 2007 or June 30,
2006.

    Quarterly Information

    ($ thousands except
    per share data)
    Jun          Mar          Dec          Sep
    30           31           31           30
    Three months ended           2007         2007         2006         2006
    -------------------------------------------------------------------------
    Production volume
    Crude oil (bbl/d)             212          231          204          230
    NGL (bbl/d)                    86           93           76           52
    Natural gas (mmcf/d)          9.6          9.8          7.2          7.5
    Total (BOE/d)               1,894        1,962        1,479        1,523
    Commodity price
    Crude oil ($/bbl)           70.96        64.38        54.80        76.45
    NGL ($/bbl)                 71.93        61.43        66.56        68.65
    Natural gas ($/mcf)          7.59         7.63         7.23         5.78
    Production revenue(1)       8,644        8,638        6,283        5,934
    Royalty expense            (2,035)      (2,209)      (1,282)      (1,425)
    Production expense(3)      (1,941)      (2,335)      (2,048)      (1,503)
    General & administrative
    expense (net)               (726)        (715)        (731)        (589)
    Net interest expense(2)      (319)        (321)        (277)        (154)
    Current taxes                  37           15           14           (2)
    Funds from operations(4)    3,659        3,073        1,960        2,261
    Per share - basic            0.13         0.11         0.08         0.09
    - diluted          0.13         0.11         0.08         0.08
    Stock-based compensation     (159)        (185)        (158)        (162)
    Depletion, depreciation &
    accretion                 (4,340)      (5,289)      (3,902)      (3,685)
    Future income tax
    (expense) recovery           471          643          406          461
    Net earnings (loss)          (369)      (1,758)      (1,694)      (1,125)
    Per share - basic and
    diluted                    (0.01)       (0.09)       (0.06)       (0.04)


    Jun          Mar          Dec          Sep
    30           31           31           30
    Three months ended           2006         2006         2005         2005
    -------------------------------------------------------------------------
    Production volume
    Crude oil (bbl/d)             129          128          114          103
    NGL (bbl/d)                    42           27           40           38
    Natural gas (mmcf/d)          6.6          6.6          6.2          5.9
    Total (BOE/d)               1,277        1,250        1,181        1,126
    Commodity price
    Crude oil ($/bbl)           73.91        71.87        68.24        70.47
    NGL ($/bbl)                 56.05        62.13        55.93        60.71
    Natural gas ($/mcf)           6.1         7.31         11.4         9.25
    Production revenue(1)       4,785        5,353        7,415        5,954
    Royalty expense              (960)        (825)      (1,117)      (1,017)
    Production expense(3)      (1,495)      (1,277)      (1,383)      (1,326)
    General & administrative
    expense (net)               (615)        (661)        (646)        (639)
    Net interest expense(2)      (171)        (238)        (103)        (122)
    Current taxes                   -           (1)         (15)           -
    Funds from operations(4)    1,544        2,351        4,151        2,850
    Per share - basic            0.06         0.10         0.19         0.13
    - diluted          0.06         0.10         0.18         0.13
    Stock-based compensation      (71)        (133)        (198)         (98)
    Depletion, depreciation &
    accretion                 (2,742)      (2,604)      (2,366)      (2,099)
    Future income tax
    (expense) recovery           740           94         (535)        (136)
    Net earnings (loss)          (529)        (292)       1,052          517
    Per share - basic and
    diluted                    (0.02)       (0.01)        0.04         0.02

    (1) Shown after restatement for transportation expense adjustment and
    changes to capital structure, and before royalties.
    (2) Net interest expense is interest expense less interest and other
    non-oil and gas income.
    (3) Includes transportation expense.
    (4) See "Non-GAAP Measurements" in Advisories.


    Refer to the Company's MD&A for the year ended December 31, 2006 for a
more complete list of factors that caused variation over the previous
quarters.
    At some of its properties, the Company conducts its maintenance and
workover operations only in the winter months. As such, production expenses
are usually higher in the first quarter of each year.
    During the three months ended March 31, 2007, the Company's sales volumes
increased 32.6 percent from 1,479 BOE per day to 1,962 boe per day. This
increase is the result of bringing on new production volumes at Vulcan,
Alberta. The increased volumes resulted in an increase in production revenues,
total royalties and operating costs. During the three months ended June 30,
2007, a third party gas plant turnaround resulted in certain Vulcan wells
being shut in during June.
    During the first quarter of 2007 the Company drilled three 100% wells in
the Monarch area which did not result in any additions to the Company's total
proved reserves. These increased capital costs and higher sales volumes led to
an increase in the total DD&A expense in the first quarter of 2007.
    During the second quarter of 2007 the Company did not initiate any new
drilling or completion operations or facility construction. On June 15, 2007
the Company closed the sale of certain non-producing, non-core assets for
total proceeds of $12.0 million before closing adjustments. On June 28, 2007
the Company closed the sale of additional minor assets for total proceeds of
$0.15 million. Proceeds from these sales reduced outstanding bank debt and the
depletable full cost asset pool which has reduced the second quarter DD&A per
BOE rate. The sale did not require the recognition of a gain or loss on sale
of assets under the Canadian Institute of Chartered Accountants Handbook,
Accounting Guideline No. 16, Oil and Gas Accounting - Full Cost.
    Net earnings are influenced by depletion, depreciation, accretion and
future income taxes. The Company estimates its reserves quarterly based on its
acquisition and drilling activities. The annual reserves are determined by
independent reservoir engineers annually. Future income taxes have been
impacted by changes to the federal and provincial income tax rates for the oil
and gas industry.

    Share Capital

    On June 30, 2006, the Company issued 2,106,000 flow-through common shares
for $4.75 per share for net proceeds of $9.4 million after deducting issuance
costs. On December 6, 2006, the Company issued 1,341,500 flow-through common
shares for $4.10 per share for aggregate net proceeds of $5.1 million after
deducting issuance costs. The 2006 flow-through share financings require the
Company to incur a total of $15.5 million of qualified Canadian Exploration
Expense ("CEE") by December 31, 2007.
    As at June 30, 2007, the Company had incurred $13.0 million of qualified
CEE expenditures, leaving a remaining qualified CEE expenditure commitment of
$2.5 million for 2007 to be incurred on or prior to December 31, 2007. Funds
raised from these flow-through offerings are being used to finance the
Company's exploration program.
    At June 30, 2007, and as of the date of this report, the number of issued
and outstanding common shares of the Company was 27,670,910 and there were
outstanding options to purchase an aggregate of 2,348,472 common shares.
    During the three months ended June 30, 2007 there were no new option
transactions. During the three months ended March 31, 2007, there were 20,000
options exercised, 88,000 new options granted and 1,000 options were
cancelled.

    
    Contractual Obligations

    ($)             2007    2008-2009    2010-2011         2012        Total
    -------------------------------------------------------------------------
    Operating
     leases     $161,000     $477,000     $113,000            -     $751,000
    

    Operating leases include $54,500 per quarter for an office lease which
expires April 30, 2010. In addition, the Company has annual operating leases
for certain field equipment that are recorded as production expenses.

    Related Party Transactions

    There were no related party transactions during the six months ended
June 30, 2007.

    Accounting Policy and Critical Accounting Estimate Changes During the
    Current Period

    As of January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 1506 "Accounting Changes;"
Section 1530 "Comprehensive Income;" Section 3251 "Equity;" Section 3855
"Financial Instruments - Recognition and Measurement;" Section 3861,
"Financial Instruments - Disclosure and Presentation" and Section 3865
"Hedges."
    CICA Section 1506, "Accounting Changes," provides expanded disclosures
for changes in accounting policies, accounting estimates and corrections of
errors. Under the new standard, accounting changes should be applied
retrospectively unless otherwise permitted or where impracticable to
determine. As well, voluntary changes in accounting policy are made only when
required by a primary source of GAAP or the change results in more relevant
and reliable information. The Company has not had any such changes which
impacted the interim financial statements.
    CICA Section 1530 introduces a new requirement to temporarily present
certain gains and losses from changes in fair value outside net income. It
includes unrealized gains and losses, such as: changes in the currency
translation adjustment relating to self-sustaining foreign operations;
unrealized gains or losses on available-for-sale investments; and the
effective portion of gains or losses on derivatives designated as cash flow
hedges. The application of this revised standard did not result in
comprehensive income (loss) being different from the net loss for the periods
presented.
    CICA Section 3855 prescribes when a financial instrument is to be
recognized on the balance sheet and at what amount. It also specifies how
financial instrument gains and losses are to be presented. All financial
instruments are classified into one of the following five categories: held for
trading, held-to-maturity, loans and receivables, available-for-sale financial
assets, or other financial liabilities. Initial and subsequent measurement and
recognition of changes in the value of financial instruments depends on their
initial classification:

    Held-to-maturity investments, loans and receivables, and other financial
    liabilities are initially measured at fair value and subsequently
    measured at amortized cost. Amortization of premiums or discounts and
    losses due to impairment are included in current period net earnings
    using the effective interest rate method.

    Available-for-sale financial assets are measured at fair value.
    Revaluation gains and losses are included in other comprehensive income
    until the asset is removed from the balance sheet.

    Held for trading financial instruments are measured at fair value. All
    gains and losses are included in net earnings in the period in which they
    arise.

    All derivative financial instruments are classified as held for trading
    financial instruments and are measured at fair value, even when they are
    part of a hedging relationship. All gains and losses are included in net
    earnings in the period in which they arise.

    The application of CICA Section 3855 did not have an impact on the
Company's interim financial statements.
    CICA Section 3865 provides alternative treatments to Section 3855 for
entities which choose to designate qualifying transactions as hedges for
accounting purposes. It replaces and expands on Accounting Guideline 13
"Hedging Relationships", and the hedging guidance in Section 1650 "Foreign
Currency Translation" by specifying how hedge accounting is applied and what
disclosures are necessary when it is applied. The Company does not have any
hedges in place which fall under the guidelines of this section.

    Changes In Internal Control Over Financial Reporting

    During the most recent interim period, there have been no changes in the
Company's policies and procedures and other processes that comprise its
internal controls over financial reporting, that have materially affected, or
are reasonably likely to materially affect, the Company's internal control
over financial reporting. For further discussion of internal controls over
financial reporting and disclosure controls refer to the Company's 2006 MD&A
for the year ended December 31, 2006.

    Risks and Uncertainty

    The oil and gas industry is intensely competitive and is subject to
numerous risks that can affect the growth and profitability of the Company.
Corporate success is dependant on the ability of the Company to select and
acquire or find and develop oil and gas reserves in economic quantities.
Economic reserves must be marketed in an environment that is affected by many
factors which cannot be accurately predicted or controlled. These factors
include oil and gas price fluctuations, the supply and demand for oil and gas,
the ability to access financing, the ability to process and deliver the
commodities to the marketplace and extensive government regulation of taxation
and the environment.

    (i) Environmental Regulation and Risk

    All phases of the oil and natural gas business present environmental
risks and hazards and are subject to environmental regulation pursuant to a
variety of federal, provincial and local laws and regulations. Compliance with
such legislation can require significant expenditures and a breach may result
in the imposition of fines and penalties, some of which may be material.
Environmental legislation is evolving in a manner expected to result in
stricter standards and enforcement, larger fines and liability and potentially
increased capital expenditures and operating costs. In 2002, the Government of
Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to
reduce its greenhouse gas emissions to specified levels. There has been much
public debate with respect to Canada's ability to meet these targets and the
Government's strategy or alternative strategies with respect to climate change
and the control of greenhouse gases. Implementation of strategies for reducing
greenhouse gases whether to meet the limits required by the Protocol or as
otherwise determined, could have a material impact on the nature of oil and
natural gas operations, including those of the Company.
    The Federal Government released on April 26, 2007, its Action Plan to
Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as
ecoACTION and which includes the Regulatory Framework for Air Emissions. This
Action Plan covers not only large industry, but regulates the fuel efficiency
of vehicles and the strengthening of energy standards for a number of
energy-using products. Regarding large industry and industry related projects
the Government's Action Plan intends to achieve the following: (i) an absolute
reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing
mandatory targets; and (ii) air pollution from industry is to be cut in half
by 2015 by setting certain targets. New facilities using cleaner fuels and
technologies will have a grace period of three years. In order to facilitate
the companies' compliance of the Action Plan's requirements, while at the same
time allowing them to be cost-effective, innovative and adopt cleaner
technologies, certain options are provided. These are: (i) in-house
reductions; (ii) contributions to technology funds; (iii) trading of emissions
with below-target emission companies; (iv) offsets; and (v) access to Kyoto's
Clean Development Mechanism.
    On March 8, 2007, the Alberta Government introduced Bill 3, the Climate
Change and Emissions Management Amendment Act, which intends to reduce
greenhouse gas emission intensity from large industries. Bill 3 states that
facilities emitting more than 100,000 tonnes of greenhouse gases a year must
reduce their emissions intensity by 12% starting July 1, 2007; if such
reduction is not initially possible the companies owning the large emitting
facilities will be required to pay $15 per tonne for every tonne above the 12%
target. These payments will be deposited into an Alberta-based technology fund
that will be used to develop infrastructure to reduce emissions or to support
research into innovative climate change solutions. As an alternative option,
large emitters can invest in projects outside of their operations that reduce
or offset emissions on their behalf, provided that these projects are based in
Alberta. Prior to investing, the offset reductions, offered by a prospective
operation, must be verified by a third party to ensure that the emission
reductions are real.
    Given the evolving nature of the debate related to climate change and the
control of greenhouse gases and resulting requirements, it is not possible to
predict the impact of those requirements on the Company and its operations and
financial condition.

    (ii) Review of Alberta Royalty and Tax Regime

    On February 16, 2007, the Alberta Government announced that a review of
the province's royalty and tax regime (including income tax and freehold
mineral rights tax) pertaining to oil and gas resources, including oil sands,
conventional oil and gas and coalbed methane, will be conducted by a panel of
experts, with the assistance of individual Albertans and key stakeholders. The
review panel is to produce a final report that will be presented to the
Minister of Finance by August 31, 2007.
    Refer to the 2006 Annual Information Form of the Company and the
Company's MD&A for the year ended December 31, 2006 for a more complete list
of factors that might affect the Company.


    
    Stylus Energy Inc.
    BALANCE SHEETS
    (unaudited)

    -------------------------------------------------------------------------
    As at                                               June 30  December 31
    -------------------------------------------------------------------------
                                                           2007         2006
    -------------------------------------------------------------------------
    ASSETS (note 5)
      Current
    Cash                                            $     7,803  $   138,182
    Accounts receivable                               5,278,919    8,461,400
    Inventory                                         1,005,614    1,005,614
    Prepaid expenses and deposits                       383,247      435,400
    -------------------------------------------------------------------------
                                                      6,675,583   10,040,596
    Property and equipment (note 4)                  72,582,053   86,996,721

      Goodwill                                           65,795       65,795
    -------------------------------------------------------------------------
                                                    $79,323,431  $97,103,112
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
      Current
    Accounts payable and accrued liabilities        $ 6,283,321  $12,268,297
    Bank loan (note 5)                               11,753,767   20,796,260
    -------------------------------------------------------------------------
                                                     18,037,088   33,064,557

    Asset retirement obligations (note 3)             5,273,587    5,164,747

    Future income taxes (note 6)                      4,039,819      658,980

    Commitments (note 6)

    Shareholders' equity
    Share capital (note 6)                           53,288,429   57,761,502
    Contributed surplus (note 6)                      1,412,008    1,053,894

    Deficit                                          (2,727,500)    (600,568)
    -------------------------------------------------------------------------
                                                     51,972,937   58,214,828
    -------------------------------------------------------------------------
                                                    $79,323,431  $97,103,112
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      See accompanying notes

      On behalf of the Board:
      "Signed"                     "Signed"
     ---------------------------- -------------------------
      Richard A. Walls, Director   Paul D. Evans, Director



    Stylus Energy Inc.
    STATEMENTS OF LOSS AND RETAINED EARNINGS
    (unaudited)

    -------------------------------------------------------------------------
                                      Three months                Six months
                                     ended June 30             ended June 30
    -------------------------------------------------------------------------
                                 2007         2006         2007         2006
      REVENUE
    Production revenue    $ 8,643,996  $ 4,785,438  $17,281,626  $10,138,033
    Royalties, net of
     Alberta Royalty Tax
     Credit                (2,035,300)    (959,593)  (4,244,070)  (1,784,643)
    Interest and other
     income                    13,944          264       (3,571)       2,159
    -------------------------------------------------------------------------
                            6,622,640    3,826,109   13,033,985    8,355,549
    -------------------------------------------------------------------------
      EXPENSES
    Production              1,845,088    1,359,399    3,965,302    2,502,170
    Transportation expense     95,765      136,496      310,441      270,978
    General and
     administration
     (note 4)                 725,924      614,723    1,441,086    1,275,531
    Stock-based compensation
     (note 6)                 159,025       70,678      343,728      203,434
    Interest expense          332,894      171,123      636,607      412,474
    Depletion, depreciation
     and accretion (notes 3
     and 4)                 4,340,396    2,742,297    9,629,685    5,346,860
    -------------------------------------------------------------------------
                            7,499,092    5,094,716   16,326,849   10,011,447
    -------------------------------------------------------------------------
    Loss before income
     taxes                   (876,452)  (1,268,607)  (3,292,864)  (1,655,898)
    Income tax recoveries

    Current tax recovery      (36,544)           -      (51,557)      (1,067)
    Future income tax
     recovery (note 6)       (470,896)    (739,907)  (1,114,375)    (834,109)
    -------------------------------------------------------------------------
                             (507,440)    (739,907)  (1,165,932)    (835,176)
    -------------------------------------------------------------------------
    Net loss and
     comprehensive loss
     for the period          (369,012)    (528,700)  (2,126,932)    (820,722)
    Retained earnings
     (deficit), beginning
     of period             (2,358,488)   2,747,864     (600,568)   3,039,886
    -------------------------------------------------------------------------
    Retained earnings
     (deficit), end of
     period               $(2,727,500) $ 2,219,164  $(2,727,500) $ 2,219,164
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net loss per common
     share - basic and
     diluted (note 6)     $     (0.00) $     (0.02) $     (0.07) $     (0.03)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Weighted average
     number of shares
      - basic (note 6)     27,670,910   24,095,725   27,666,159   24,082,863
      - diluted (note 6)   27,670,910   24,959,590   27,666,159   24,883,236
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    Stylus Energy Inc.
    STATEMENTS OF CASH FLOWS
    (unaudited)

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

    OPERATING ACTIVITIES
    Net loss for the
     period                $ (369,012) $  (528,700) $(2,126,932) $  (820,722)
    Add (deduct) items not
     requiring cash:
      Depletion and
       depreciation         4,274,752    2,699,878    9,498,223    5,262,022
      Stock-based
       compensation
       (note 6)               159,025       70,678      343,728      203,434
      Accretion expense
       (note 3)                65,644       42,419      131,462       84,838
      Future income tax
       recovery              (470,896)    (739,907)  (1,114,375)    (834,109)
    Asset retirement
     expenditures (note 3)   (227,292)    (197,722)    (597,878)    (726,155)
    Net change in non-cash
     working capital
     (note 7)                (403,869)  (1,557,078)     543,595      106,962
    -------------------------------------------------------------------------
                            3,028,352     (210,432)   6,677,823    3,276,270
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Proceeds from issuance
     of common shares
     (note 6)                       -   10,095,800            -   10,095,800
    Share issue costs
     (note 6)                       -     (648,021)      (2,911)    (675,538)
    Proceeds from options
     exercised for cash
     (note 6)                       -            -       23,000            -
    Increase (decrease) in
     bank loan             (9,556,739)    (315,482)  (9,042,493)   6,303,822
    -------------------------------------------------------------------------
                           (9,556,739)   9,132,297   (9,022,404)  15,724,084
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Expenditures on
     property and
     equipment               (352,269)  (7,713,103)  (6,646,136) (17,404,130)
    Proceeds on disposal
     of properties
     (note 4)              12,154,275            -   12,154,275            -
    Net change in non-cash
     working capital
     (note 7)              (5,282,088)  (1,226,434)  (3,293,937)  (1,837,717)
    -------------------------------------------------------------------------
                            6,519,918   (8,939,537)   2,214,202  (19,241,847)
    -------------------------------------------------------------------------

    Decrease in cash           (8,469)     (17,672)    (130,379)    (241,493)

    Cash, beginning of
     period                    16,272       28,436      138,182      252,257
    -------------------------------------------------------------------------
    Cash, end of period   $     7,803  $    10,764  $     7,803  $    10,764
    -------------------------------------------------------------------------

    Cash interest paid    $   332,894  $   171,123  $   636,607  $   412,474
    Cash income taxes
     recovered            $   (36,544) $         -  $   (51,557) $    (1,067)

    See accompanying notes



    1.  DESCRIPTION OF BUSINESS

        On January 1, 2007, Stylus Energy Inc. and its wholly owned
        subsidiary, 904217 Alberta Ltd., were amalgamated and the combined
        entity continues operations as a new company, also called Stylus
        Energy Inc. (the "Company" or "Stylus").

        Stylus Energy Inc. was formed by the amalgamation on March 1, 2005 of
        Stylus Exploration Inc. and Kinloch Resources Inc. ("Kinloch").
        Stylus is involved in the exploration, development and production of
        natural gas, natural gas liquids and crude oil in Alberta. The
        primary operating areas of Stylus include the northeast Alberta
        shallow gas region and the southern Alberta plains and deep basin
        region. Common shares of Stylus trade on the Toronto Stock Exchange
        ("TSX") under the symbol 'STY'.

    2.  SUMMARY OF ACCOUNTING POLICIES

        The unaudited interim financial statements of Stylus have been
        prepared by management following the same accounting policies and
        methods of computation as the audited consolidated financial
        statements of the Company for the year ended December 31, 2006 except
        as noted below. The disclosures provided below are incremental to
        those included with the annual consolidated financial statements, and
        certain disclosures which are normally required to be included in the
        notes to the annual consolidated financial statements have been
        condensed or omitted. These interim unaudited financial statements
        should be read in conjunction with the financial statements and notes
        thereto in the Company's annual report for the year ended
        December 31, 2006.

        As of January 1, 2007, the Company adopted the Canadian Institute of
        Chartered Accountants ("CICA") Handbook Section 1506 "Accounting
        Changes;" Section 1530 "Comprehensive Income;" Section 3251 "Equity;"
        Section 3855 "Financial Instruments - Recognition and Measurement;"
        Section 3861, "Financial Instruments - Disclosure and Presentation"
        and Section 3865 "Hedges."

        CICA Section 1506, "Accounting Changes," provides expanded
        disclosures for changes in accounting policies, accounting estimates
        and corrections of errors. Under the new standard, accounting changes
        should be applied retroactively unless otherwise permitted or where
        impracticable to determine. As well, voluntary changes in accounting
        policy are made only when required by a primary source of GAAP or the
        change results in more relevant and reliable information. The Company
        has not had any such changes which impacted the interim financial
        statements.

        CICA Section 1530 introduces a new requirement to temporarily present
        certain gains and losses from changes in fair value outside net
        income. It includes unrealized gains and losses, such as: changes in
        the currency translation adjustment relating to self-sustaining
        foreign operations; unrealized gains or losses on available-for-sale
        investments; and the effective portion of gains or losses on
        derivatives designated as cash flow hedges. The application of this
        revised standard did not result in comprehensive income (loss) being
        different from the net loss for the periods presented.

        CICA Section 3855 prescribes when a financial instrument is to be
        recognized on the balance sheet and at what amount. It also specifies
        how financial instrument gains and losses are to be presented. All
        financial instruments are classified into one of the following five
        categories: held for trading, held-to-maturity, loans and
        receivables, available-for-sale financial assets, or other financial
        liabilities. Initial and subsequent measurement and recognition of
        changes in the value of financial instruments depends on their
        initial classification:

           Held-to-maturity investments, loans and receivables, and other
           financial liabilities are initially measured at fair value and
           subsequently measured at amortized cost. Amortization of premiums
           or discounts and losses due to impairment are included in current
           period net earnings using the effective interest rate method.

           Available-for-sale financial assets are measured at fair value.
           Revaluation gains and losses are included in other comprehensive
           income until the asset is removed from the balance sheet.

           Held for trading financial instruments are measured at fair value.
           All gains and losses are included in net earnings in the period in
           which they arise.

           All derivative financial instruments are classified as held for
           trading financial instruments and are measured at fair value, even
           when they are part of a hedging relationship. All gains and losses
           are included in net earnings in the period in which they arise.

        The application of CICA Section 3855 did not have an impact on the
        Company's interim financial statements.

        CICA Section 3865 provides alternative treatments to Section 3855 for
        entities which choose to designate qualifying transactions as hedges
        for accounting purposes. It replaces and expands on Accounting
        Guideline 13 "Hedging Relationships", and the hedging guidance in
        Section 1650 "Foreign Currency Translation" by specifying how hedge
        accounting is applied and what disclosures are necessary when it is
        applied. The Company does not have any hedges in place which fall
        under the guidelines of this section.

    3.  ASSET RETIREMENT OBLIGATIONS

        A reconciliation of the Company's asset retirement obligation ("ARO")
        estimate is provided below.

        Six months ended June 30                           2007         2006
        ---------------------------------------------------------------------
        ARO, beginning of period                    $ 5,164,747  $ 3,338,000
        Liabilities incurred in the period               85,834      397,028
        Change in estimate                                    -      682,956
        Liabilities settled                            (108,456)    (137,257)
        Accretion expense                               131,462       84,838
        ---------------------------------------------------------------------
        ARO, end of period                          $ 5,273,587  $ 4,365,565
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The total ARO was estimated based on the Company's net ownership
        interest in all wells and facilities, the estimated costs to abandon
        and reclaim the wells and facilities and the estimated timing of the
        costs to be incurred in future periods. During the six months ended
        June 30, 2007, the Company spent $597,878 (2006 - $726,155) on
        abandonments, of which $108,456 (2006 - $137,257) was applied against
        the ARO obligation and $489,422 (2006 - $588,898) was recorded as an
        increase in fixed assets, as this was the amount of the actual
        abandonment costs incurred in excess of the accrued ARO obligation.
        The Company estimates the total undiscounted ARO to be approximately
        $9.3 million, which will be incurred between 2007 and 2019. The
        majority of the costs will be incurred between 2011 and 2019. The
        credit-adjusted risk-free rate used in the calculation of the fair
        value of the ARO was 5.0 percent for obligations assumed up to
        February 28, 2005 and 6.5 percent for obligations assumed after that
        date. The inflation rate used was 2.0 percent.

    4.  PROPERTY AND EQUIPMENT

        As at June 30, 2007
        ---------------------------------------------------------------------
                                                     Accumulated
                                                   depletion and         Net
                                              Cost  depreciation  book value
        ---------------------------------------------------------------------
                                                 $            $            $
        ---------------------------------------------------------------------
        Petroleum and natural gas
         properties and production
         equipment                     120,538,708   48,125,051   72,413,657
        Other assets                     1,210,682    1,042,286      168,396
        ---------------------------------------------------------------------
                                       121,749,390   49,167,337   72,582,053
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        As at December 31, 2006
        ---------------------------------------------------------------------
                                                     Accumulated
                                                   depletion and         Net
                                              Cost  depreciation  book value
        ---------------------------------------------------------------------
                                                 $            $            $
        ---------------------------------------------------------------------
        Petroleum and natural gas
         properties and production
         equipment                     125,549,709   38,738,556   86,811,153
        Other assets                     1,116,126      930,558      185,568
        ---------------------------------------------------------------------
                                       126,665,835   39,669,114   86,996,721
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company capitalizes the salaries of those employees directly
        involved in exploration activities. For the six months ended June 30,
        2007, the Company capitalized $114,500 (year ended December 31,
        2006 - $349,583) of salaries and $16,438 (year ended December 31,
        2006 - $81,079) of stock-based compensation related to exploration
        staff.

        On June 15, 2007 the Company closed the sale of certain non-
        producing, non-core assets for total proceeds of $12.0 million before
        closing adjustments. On June 28, 2007 the Company closed the sale of
        additional minor assets for total proceeds of $0.15 million. No gain
        or loss was required to be booked on these sales under the full cost
        accounting guideline.

        At June 30, 2007, petroleum and natural gas properties and production
        equipment costs include $23.2 million (year ended December 31, 2006 -
        $22.9 million) relating to undeveloped land and seismic expenditures
        that have been excluded from the depletion calculation. Included in
        the depletion calculation are future development costs of
        $7.1 million (year ended December 31, 2006 - $7.2 million).

    5.  BANK LOAN

        At June 30, 2007, the Company had a $24.0 million extendable
        revolving credit facility with a Canadian chartered bank. Under the
        terms of this facility, interest is paid monthly in arrears at the
        bank's prime lending rate ("prime"). The extendable revolving term
        credit specifies no specific repayment terms. A first floating-charge
        debenture over all properties of the Company has been provided as
        security. As of June 30, 2007, $11.8 million (year ended December 31,
        2006 - $20.8 million) has been drawn against the facility with an
        effective interest rate of 6.0 percent (2006 - 6.0 percent).

        The Company's $2.5 million subordinated facility was drawn and repaid
        during the three months ended June 30, 2007 and is no longer
        available.

    6.  SHARE CAPITAL

        Authorized
        Unlimited number of voting common shares, with no par value
        Unlimited number of non-voting preferred shares

        Common Share                                                    2007
        ---------------------------------------------------------------------
        Issued                                           Number       Amount
        ---------------------------------------------------------------------
        Balance, January 1                           27,650,910   57,761,502
        Cash proceeds from options exercised             20,000       23,000
        Tax effect of flow through share
         renunciation (see (a) and (b) below)                     (4,496,058)
        Non-cash transfer from contributed surplus                     2,052
        Share issue costs                                             (2,911)
        Tax effect of share issue costs                                  844
        ---------------------------------------------------------------------
        Balance, June 30                             27,670,910   53,288,429
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (a) On June 30, 2006, the Company issued 2,106,000 flow-through
            common shares at $4.75 per share for gross proceeds of
            $10,003,500 less share issue costs of $648,763. In February 2007,
            in accordance with the terms of its flow-through offering
            described above and pursuant to certain provisions of the Income
            Tax Act (Canada), the Company, effective as of December 31, 2006,
            renounced to the holders, for income tax purposes, exploration
            expenditures to be incurred in the aggregate amount of
            $10,003,500. As a result, share capital was reduced and the
            future income tax liability of the Company was increased by
            $2,901,015 in the first quarter of 2007 to reflect the effect of
            the expenditures renounced. Funds raised from this flow-through
            offering have been used to help finance the Company's exploration
            program.

        (b) On December 6, 2006, the Company issued 1,341,500 flow-through
            common shares at $4.10 per share for gross proceeds of $5,500,150
            less share issue costs of $361,770. In February 2007, in
            accordance with the terms of its flow-through offering described
            above and pursuant to certain provisions of the Income Tax Act
            (Canada), the Company, effective as of December 31, 2006,
            renounced to the holders, for income tax purposes, exploration
            expenditures to be incurred in the aggregate amount of
            $5,500,150. As a result, share capital was reduced and the future
            income tax liability of the Company was increased by $1,595,043
            in the first quarter of 2007 to reflect the effect of the
            expenditures renounced. Funds raised from this flow-through
            offering have been used to help finance the Company's exploration
            program.

        As at June 30, 2007, the Company had incurred $13.0 million of
        qualified CEE expenditures, leaving a remaining qualified CEE
        expenditure commitment of $2.5 million for 2007 to be incurred on or
        prior to December 31, 2007.

        Stock Options

        The Company has a stock option plan pursuant to which options may be
        granted to the Company's directors, officers and employees for up to
        10 percent of the issued and outstanding common shares of the
        Company. As at June 30, 2007, the Company could grant up to 2,767,091
        options. The exercise price of each option is set by the directors at
        the date of grant, but must be no lower than the closing trading
        price per common share on the Toronto Stock Exchange on the date
        before the day of the grant. An option's maximum term is 10 years,
        but is typically granted for five years, vesting equally over three
        years beginning on the first anniversary of the date of grant.

        The following is a reconciliation of the stock option plan activity
        for the six months ended June 30, 2007.

                                                                    Weighted
                                                                     Average
                                                                    Exercise
        Options Outstanding                              Number        Price
        ---------------------------------------------------------------------
        Balance, January 1, 2007                      2,281,472  $      2.46
        Exercised                                       (20,000)        1.15
        Granted                                          88,000         2.81
        Cancelled                                        (1,000)        3.40
        ---------------------------------------------------------------------
        Balance, June 30, 2007                        2,348,472  $      2.48
        ---------------------------------------------------------------------

        The following table summarizes the stock options outstanding and
        exercisable under the plan at June 30, 2007.

            Six months ended                                         Options
               June 30, 2007           Options Outstanding       Exercisable
    -------------------------------------------------------------------------
                             Weighted Weighted                      Weighted
    Range of          Number  Average  Average    Weighted   Number  Average
    Exercise            Out- Years to Exercise     Average   Exer-  Exercise
    Price           standing   Expiry   Price   Fair Value  cisable    Price
    -------------------------------------------------------------------------
    $1.15 to $1.25   695,808    0.46    $1.15      $0.10    695,808    $1.15
    $2.06 to $2.40   889,665    2.81    $2.35      $1.04    593,110    $2.35
    $2.81 to $3.75   197,999    3.38    $3.05      $0.80     70,000    $2.95
    $3.90 to $4.15   565,000    4.06    $4.14      $1.32          -      n/a
                   ----------------------------------------------------------
                   2,348,472    2.46    $2.48      $0.81  1,358,918    $1.77
                   ----------------------------------------------------------

        Stock-based Compensation

        The Company accounts for its stock-based compensation plan using the
        fair value method and a Black-Scholes option-pricing model. Under
        this method, compensation costs are charged over the vesting period
        for the stock options with a corresponding increase to contributed
        surplus.

        The Company issued 88,000 new stock options during the six months
        ended June 30, 2007. No new options were granted during the second
        quarter of 2007. For the new stock options granted in the first
        quarter of 2007 and the year ended December 31, 2006, the following
        assumptions were used in the calculation of the fair value of these
        options.

                                                     Six months
                                                          ended   Year ended
                                                        June 30, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------
        Expected volatility                                 43%       38-46%
        Risk-free interest rate                            4.1%     3.9-4.3%
        Dividend yield                                      Nil          Nil
        Expected hold period to exercise                3 years      3 years

        The remaining stock-based compensation expense related to the options
        outstanding to be recorded in future periods totals $454,055.

        Contributed Surplus
        The following table reconciles the Company's contributed surplus.

        ---------------------------------------------------------------------
        Six months ended June 30                           2007         2006
        ---------------------------------------------------------------------
        Opening                                       1,053,894      504,508
        Stock-based compensation - expensed             343,728      203,434
        Stock-based compensation - capitalized to
         property and equipment                          16,438       59,620
        Non-cash transfer to share capital               (2,052)     (32,134)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Closing                                       1,412,008      735,428
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Per Share Amounts

        The treasury stock method is used to determine the weighted average
        number of basic and diluted shares outstanding used in calculating
        per share amounts. The effect of any potential exercise of stock
        options outstanding during the periods shown was included in the
        calculation of diluted net income (loss) per share. During the six
        month period ended June 30, 2007 no dilution occurred because the
        Company recorded a net loss. There are 695,808 shares related to
        options that were excluded from the per share calculations because
        they are anti-dilutive in that the Company recorded a net loss.

    7.  NET CHANGE IN NON-CASH WORKING CAPITAL

        ---------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30      June 30      June 30      June 30
        ---------------------------------------------------------------------
                                 2007         2006         2007         2006
        ---------------------------------------------------------------------
        Accounts
         receivable       $ 2,198,117  $ 1,138,744  $ 3,182,481  $  (625,055)
        Inventory                   -     (624,848)           -     (624,848)
        Prepaid expenses
         and deposits         162,115      (10,252)      52,153      (95,183)
        Accounts payable
         and accrued
         liabilities       (8,046,189)  (3,287,156)  (5,984,976)    (385,669)
        ---------------------------------------------------------------------
        Change in non-cash
         working capital  $(5,685,957) $(2,783,512) $(2,750,342) $(1,730,755)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Relating to:
        Operating         $  (403,869)  (1,557,078)     543,595      106,962
        Investing          (5,282,088)  (1,226,434)  (3,293,937)  (1,837,717)
        ---------------------------------------------------------------------
                          $(5,685,957) $(2,783,512) $(2,750,342) $(1,730,755)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    8.  SUBSEQUENT EVENT

        On June 25, 2007, the Company announced it had entered into an
        agreement with Compton Petroleum Acquisition Ltd. (a wholly owned
        subsidiary of Compton Petroleum Corporation) pursuant to which
        Compton Petroleum Acquisition Ltd. offered, by way of take-over bid,
        to acquire all of the issued and outstanding shares of Stylus for
        cash consideration of $2.70 per share. The total value of the offer
        is approximately $91 million. The initial expiry date under the offer
        is August 14, 2007.As described in the Stylus Directors Circular
        released July 5, 2007, the proposed transaction had the unanimous
        support of the Board of Directors of Stylus.
    

    Forward-looking Statements

    Certain of the statements contained herein including, without limitation,
financial and business prospects and financial outlook, management's
assessment of future plans and operations, anticipated transportation
expenses, royalty rates, operating expenses, interest expenses and capital
expenditures and the timing and the method of funding thereof may be forward-
looking statements. Words such as "may", "will", "should", "could",
"anticipate", "believe", "expect", "intend", "plan", "potential", "continue"
and similar expressions may be used to identify these forward-looking
statements. These statements reflect management's current beliefs and are
based on information currently available to management. Forward-looking
statements involve significant risk and uncertainties. A number of factors
could cause actual results to differ materially from the results discussed in
the forward-looking statements including, but not limited to, 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 or delay in obtaining required regulatory approvals and
ability to access sufficient capital from internal and external sources and
the risk factors outlined under "Risks and Uncertainty" in the attached MD&A
and elsewhere herein. The recovery and reserve estimates of Stylus' reserves
are estimates only and there is no guarantee that the estimated reserves will
be recovered. 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 Stylus' 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) and
at Stylus' website (www.stylusenergy.com). Although the forward-looking
statements contained herein are based upon what management believes to be
reasonable assumptions, management cannot assure that actual results will be
consistent with these forward-looking statements. Investors should not place
undue reliance on forward-looking statements. These forward-looking statements
are made as of the date hereof and Stylus assumes no obligation to update or
review them to reflect new events or circumstances except as required by
applicable securities laws.
    Forward-looking statements and other information contained herein
concerning the oil and gas industry and Stylus' general expectations
concerning this industry are based on estimates prepared by management using
data from publicly available industry sources as well as from reserve reports,
market research and industry analysis and on assumptions based on data and
knowledge of this industry which Stylus believes to be reasonable. However,
this data is inherently imprecise, although generally indicative of relative
market positions, market shares and performance characteristics. While Stylus
is not aware of any misstatements regarding any industry data presented
herein, the industry involves risks and uncertainties and is subject to change
based on various factors.

    BOE Presentation: The calculations of barrels of oil equivalent ("BOE")
are based on a conversion rate of six thousand cubic feet ("mcf") of natural
gas to one barrel ("bbl") of crude oil. BOE's may be misleading, particularly
if used in isolation. A BOE conversion ratio of 6 mcf: 1 bbl is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.

    %SEDAR: 00021888E




For further information:

For further information: Paul Evans, President and Chief Executive
Officer, tel: (403) 517-8791, e-mail: pevans@stylusenergy.com; William Dyer,
Vice-President, Finance and Chief Financial Officer, tel: (403) 517-8790,
e-mail: bdyer@stylusenergy.com

Organization Profile

STYLUS ENERGY INC.

More on this organization


Custom Packages

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

Start today.

CNW Membership

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

Learn about CNW services

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