Trafalgar Energy Ltd. releases second quarter results



    /NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR
    DISSEMINATION IN THE UNITED STATES/

    CALGARY, Aug. 13 /CNW/ - Trafalgar Energy Ltd. (TSX:TFL) ("Trafalgar" or
the "Company") is pleased to announce the interim unaudited financial results
for the three and six months ended June 30, 2007.

    
                            CORPORATE HIGHLIGHTS

    -------------------------------------------------------------------------
                                                Three Months      Six Months
                                                       Ended           Ended
                                               June 30, 2007   June 30, 2007


    Petroleum and natural gas revenues ($)         3,832,034       6,746,054

    Cash flow from operations ($)                  1,681,655       3,233,449
      Basic and diluted per share ($)                   0.14            0.27

    Net income (loss) ($)                           (272,642)      1,024,959
      Basic and diluted per share ($)                  (0.02)           0.09

    Working capital ($)                            2,653,386       2,653,386

    Capital expenditures ($)                       2,609,782      13,543,998

    Weighted number of shares outstanding
      Basic and diluted                           11,835,883      11,835,883

    Shares outstanding as at June 30, 2007
      Basic                                       11,835,883      11,835,883
      Diluted                                     12,927,133      12,927,133

    Average Production
      Light Oil (bbls/d)                                  41              46
      Heavy Oil (bbls/d)                                  52              48
      Total Oil (bbls/d)                                  93              94
      Natural Gas (mcf/d)                              5,367           4,630
      BOE (boe/d)                                        987             866

    Average Realized Prices(*)
      Light Crude Oil ($/bbl)                          71.24           69.08
      Heavy Crude Oil ($/bbl)                          47.65           40.84
      Natural Gas ($/mcf)                               7.13            7.24
      $/boe (6:1)                                      44.22           44.68

    Netback per boe
      Petroleum and natural gas revenue                44.22           44.68
      Royalties                                         9.21            9.26
      Operating expenses                                8.69            9.06
      Transportation expenses                           1.56            1.64
    Operating Netback                                  24.76           24.72
    -------------------------------------------------------------------------
    (*) Average realized prices are before transportation expenses.

                           LETTER TO SHAREHOLDERS

    We are very pleased to report on Trafalgar's progress through the second
quarter of 2007. Second quarter highlights include:

    -   Production up 33% with Q2 production of 987 boe/d compared to
        Q1 production of 744 boe/d.
    -   Proven plus probable reserves up 83% to 2.6 mmboe since year end
        based upon our mid year reserve report.
    -   Mid year finding and development costs on a proven plus probable
        basis excluding revisions were $11.87 per boe ($9.69 per boe
        including revisions).
    -   Operating costs decreased 9% in Q2 to $8.69 per boe from $9.57 in Q1.
    -   Maintained solid balance sheet with $2.7 million of positive working
        capital and zero debt at the end of Q2.
    -   Increased bank credit facility from $8 million to $12 million.
    -   Added to our exploitation and exploration portfolio increasing
        undeveloped land to 88,000 net acres.
    

    Trafalgar continues to grow quickly. Current production is averaging
1,000 boe/d and Trafalgar remains on track to achieve its 2007 average and
exit production forecasts of 900-950 and 950-1,050 boe/d, respectively.
Trafalgar has decided to increase its 2007 capital budget from $14.2 million
to $18.8 million dollars to accelerate exploration activities on recently
acquired lands, exploitation work on the Grouard waterflood and gas
recompletions at Cypress, and to take advantage of the decrease in service
costs related to the downturn in conventional gas activity in the Western
Canadian sedimentary basin over the past year.

    Properties

    Trafalgar's oil and natural gas producing assets are located in three
primary areas: Grouard and MacKay, Alberta and Cypress, British Columbia.

    Grouard, Alberta

    Grouard production at time of acquisition in September of 2006 was just
over 500 boe/d which we have grown 35% to 676 boe/d for the three months ended
June 30, 2007. This summer, Trafalgar is initiating a waterflood program on
the main Bluesky oil pool. Estimated original oil in place is approximately
17 million barrels with cumulative recovery to date of only 510,000 barrels or
approximately 3%. Similar pools in the area have shown significant success
with waterflood technology and we believe, if successful, ultimate recovery
could reach 6-10% of oil in place or an incremental 500 thousand to one
million barrels. We expect to complete the field work in September and would
hope to see response from the waterflood late in 2007 or early 2008.

    MacKay, Alberta

    During the fourth quarter of 2006 and the first quarter of 2007,
Trafalgar established a new core area at MacKay, Alberta. Trafalgar drilled
four 100% interest shallow gas wells in the area this past winter, all of
which were tied in and placed on production during the first quarter of 2007.
Production volumes were brought up slowly with current production at MacKay in
the 280-300 boe/d range. Through a series of crown land sales during the
second quarter, Trafalgar has increased its land position from six sections at
100% working interest to 22 sections at an average 85% working interest.
Additionally we have reached farmin terms on ten sections of land. With in
excess of 20 locations now identified at MacKay, we are planning a very active
2007/2008 winter drilling program and anticipate substantial production
growth.
    In the general MacKay vicinity we have identified several other
exploration features and look forward to reporting on their status in the near
future once land positions have been fully assembled.

    Cypress, British Columbia

    Cypress continues to be a solid cash flow generator. Production has been
stable with current rates in the 90-95 boe/d range with zero capital spent by
Trafalgar since acquisition of the asset in September 2006. We have identified
several re-completion opportunities, the first of which we intend to complete
this fall.

    Exploration

    Since the completion of our winter drilling program, the Trafalgar team
has been assembling land positions on four new exploratory prospects. These
prospects have five bcf or greater reserve potential, are close to existing,
underutilized infrastructure, and have attractive risked economics.
Trafalgar's intent will be to evaluate two to three of these prospects over
the next 12 months. Further information will be provided when ongoing land
work has been completed.

    Acquisitions

    There have been numerous property and corporate assets for sale over the
past six to nine months and Trafalgar has been actively evaluating prospective
transactions. To date, the assets in our view have been overpriced with
limited upside. With the downturn in gas prices we anticipate more assets to
become available over the next couple of quarters. If and when we find the
right asset, we will aggressively pursue it, until then we will continue to
grow value organically.

    Outlook

    With our strong balance sheet, and deep exploitation and exploration
inventory, Trafalgar is in an enviable position. We currently have the
inventory and the financial means to substantially grow the Company over the
next 12-24 months and weather the current short term slide in natural gas
prices without having to issue low priced equity or over lever the Company
with debt.

    On behalf of the Management, Staff and Board of Directors,


    (signed)

    Rob Wollmann
    President and CEO

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following management's discussion and analysis ("MD&A") reviews
Trafalgar Energy Ltd. ("Trafalgar" or the "Company") activities and results of
operations for the three and six months ended June 30, 2007. The MD&A should
be read in conjunction with the audited financial statements of Trafalgar from
incorporation on April 25, 2006 to December 31, 2006. The accompanying
unaudited interim financial statements of Trafalgar have been prepared by
management and approved by the Company's Audit Committee and Board of
Directors. These interim financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and the disclosure of contingent assets and
liabilities, at the date of the financial statements, and the reported amounts
of revenues and expenses during the period. Actual results could differ from
these estimates. This MD&A was reviewed and approved by the Company's Board of
Directors on August 9, 2007.

    NON-GAAP FINANCIAL MEASURES

    Trafalgar evaluates performance based on net income and cash flow from
operations. Cash flow from operations and cash flow from operations per share
are not measurements based on GAAP, but are financial terms commonly used in
the oil and gas industry. The Company's cash flow from operations is detailed
on the Statements of Cash Flows and may not be comparable to other companies.
Trafalgar calculates cash flow from operations per share using the same method
and shares outstanding which are used in the determination of net income
(loss) per share. The Company considers it a key measure as it demonstrates
the ability of the Company to generate the funds necessary to finance future
capital investments.
    Trafalgar also uses "operating netbacks" as a key performance indicator.
Operating netbacks do not have a standardized meaning prescribed by Canadian
GAAP and therefore may not be comparable with the calculation of similar
measures by other companies. Operating netbacks are determined by deducting
royalties, operating expenses, processing fees and transportation from
petroleum and natural gas sales revenue.
    Cash flow from operations and operating netbacks are not intended to
represent operating profits, nor should they be viewed as an alternative to
cash flow provided by operating activities, net income or other measures of
financial performance calculated in accordance with GAAP.

    BOE PRESENTATION

    In conformity with National Instrument 51-101, Standards for Disclosure
of Oil and Gas Activities ("NI 51-101"), natural gas volumes have been
converted to barrels of oil equivalent ("boe") using a conversion rate of
six thousand cubic feet of natural gas to one barrel of oil. This ratio is
based on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead. Readers
are cautioned that the term "boe" may be misleading, particularly if used in
isolation.

    DESCRIPTION OF COMPANY

    Trafalgar is a Calgary, Alberta based oil and natural gas exploration,
production and development company, with operations in the Canadian provinces
of Alberta and British Columbia. Trafalgar was established in April 2006 and
began trading on the Toronto Stock Exchange ("TSX") on September 26, 2006
under the symbol TFL.

    FORWARD-LOOKING STATEMENTS

    This discussion and analysis contains forward-looking statements related
to future events or future performance. Certain statements regarding Trafalgar
include management's assessment of future plans and operations and may
constitute forward-looking statements under applicable securities laws and
necessarily involve known and unknown risks and uncertainties, most of which
are beyond Trafalgar's control. These risks may cause actual financial and
operating results, performance, levels of activity and achievements to differ
materially from those expressed in, or implied by, such forward-looking
statements.
    Such factors include, but are not limited to: the impact of general
economic conditions in Canada and the United States; industry conditions
including changes in laws and regulations including adoption of new
environmental laws and regulations, and changes in how they are interpreted
and enforced; competition from other producers, the lack of availability of
drilling rigs and other field services, the lack of availability of qualified
personnel; fluctuations in commodity prices, the results of exploration and
development drilling related activities; imprecision in reserve estimates; the
production and growth potential of Trafalgar's various assets; fluctuations in
foreign exchange or interest rates; the ability to access sufficient capital
from internal and external sources; and obtaining required approvals of
regulatory authorities.
    Accordingly, Trafalgar gives no assurance nor makes any representations
or warranty that the expectations conveyed by the forward-looking statements
will prove to be correct and actual results may differ materially from those
anticipated in the forward-looking statements. Readers should not place undue
reliance on any such forward-looking statements, which speak only as of the
date they were made. Trafalgar disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise except as required by law.
    Additional information regarding Trafalgar is available under the
Company's profile on SEDAR at www.sedar.com or on the Company's website at
www.trafalgarenergy.ca

    RESULTS OF OPERATIONS

    Production

    For the three months ended June 30, 2007, production from Trafalgar's
assets has increased 33% over the first quarter of 2007 as a result of new
production coming on stream at Grouard and MacKay. Production averaged 987
boe/d for the three months ended June 30, 2007. Grouard continues to be our
largest producing asset at 676 boe/d followed by MacKay at 214 boe/d and
Cypress at 97 boe/d. Production for the quarter ended June 30, 2007 was
weighted approximately 91% to natural gas and 9% to crude oil.
    Average daily production for the six months ended June 30, 2007 was 866
boe/d including 94 bbls per day of oil and 4,630 mcf per day of natural gas.
The Company's production portfolio for the six months ended June 30, 2007 was
weighted 89% to natural gas and 11% to crude oil.


    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
                                       ended           ended           ended
    Production by Product      June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Oil (bbls/day)                        93              96              94
    -------------------------------------------------------------------------
    Natural Gas (mcf/day)              5,367           3,886           4,630
    -------------------------------------------------------------------------
    Total (boe/d) (6:1)                  987             744             866
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                Three months    Three months      Six months
    Production by Area                 ended           ended           ended
     (boe/d)                   June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Grouard, Alberta                     676             640             658
    -------------------------------------------------------------------------
    MacKay, Alberta                      214               4             109
    -------------------------------------------------------------------------
    Cypress, British Columbia             97             100              99
    -------------------------------------------------------------------------
    Total (boe/d) (6:1)                  987             744             866
    -------------------------------------------------------------------------
    

    Reserves

    On August 9, 2007, the Trafalgar Board of Directors approved an updated
independent reserve report (the "Interim GLJ Report"). The reserves have been
evaluated by GLJ Petroleum Consultants ("GLJ"), the independent reserve
evaluator for all of Trafalgar's oil and natural gas properties. The Interim
GLJ Report is effective June 30, 2007 and has been prepared in accordance with
National Instrument 51-101. The reserves include the impact of Trafalgar's
2006/2007 winter drilling program.
    The reserves data summarizes our crude oil and natural gas reserves and
the net present values of future net revenue for these reserves using forecast
 prices and costs. The information set forth below is derived from the Interim
GLJ Report that was prepared in accordance with the standards contained in the
COGE Handbook and the reserves definitions contained in NI 51-101 COGE
Handbook.
    All evaluations of future revenue are before the deduction of future
income tax expenses, administrative costs, overhead costs and miscellaneous
expenses but after royalties, development costs, production costs and well
abandonment costs. It should not be assumed that the estimates of future net
revenues presented in the tables below represent the fair market value of the
reserves. There is no assurance that the forecast price and cost assumptions
will be attained and variences could be material. The recovery and reserve
estimates of our crude oil and natural gas reserves provided below are
estimates only and there is no guarantee that the estimated reserves will be
recovered. Actual crude oil and natural gas reserves may be greater than or
less than the estimates provided. Forecast prices used are as published by GLJ
 as of July 1, 2007.

    A summary of reserves and values are as follows:

    
                                      SUMMARY OF OIL AND GAS RESERVES
                                           AND NET PRESENT VALUES
                                        OF FUTURE NET REVENUE AS OF
                                               JUNE 30, 2007
                                          FORECAST PRICES AND COST

                                Light and
                                Medium Oil       Heavy Oil      Natural Gas

    Reserves Category        Gross(1)  Net(2) Gross(1) Net(2) Gross(1) Net(2)
                              (Mbbls) (Mbbls) (Mbbls) (Mbbls)  (MMcf)  (MMcf)
    -------------------------------------------------------------------------
    Proved Producing              64      57      65      61   7,461   5,945
                           --------------------------------------------------
    Total Proved                  64      57      65      61   8,546   6,796
    Probable                       9       9     156     145   5,393   4,279
                           --------------------------------------------------
    Total Proved plus
     Probable                     73      66     221     206  13,939  11,075
                           --------------------------------------------------
                           --------------------------------------------------



                  Natural Gas                       Value ($000's)

                  Liquids          BOE(3)         Before Income Tax
             Gross(1)  Net(2) Gross(1) Net(2)
              (Mbbls) (Mbbls) (Mbbls) (Mbbls)     0%      8%     10%     12%
    -------------------------------------------------------------------------
    Proved
     Producing     -       -   1,372   1,109  33,501  27,328  26,156  25,093
              ---------------------------------------------------------------
    Total
     Proved        -       -   1,553   1,251  38,001  30,589  29,181  27,905
    Probable       -       -   1,065     867  25,217  12,524  10,833   9,457
              ---------------------------------------------------------------
    Total
     Proved
     plus
     Probable      -       -   2,618   2,118  63,218  43,113  40,014  37,362
              ---------------------------------------------------------------
              ---------------------------------------------------------------

    (1)  In relation to the above table, "Gross" reserves means, in relation
         to our interest in production and reserves, our interests (operating
         and non-operating) before deduction of royalties and without
         including any of our royalty interests.
    (2)  In relation to the above table, "Net" means, in relation to our
         interest in production and reserves, our interest (operating and
         non-operating) after deduction of royalty obligations, plus our
         royalty interest in production or reserves.
    (3)  Oil equivalent amounts have been calculated using a conversion rate
         of six thousand cubic feet of natural gas to one barrel of oil.
         BOE's may be misleading, particularly if used in isolation. A BOE
         conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency
         conversion method primarily applicable at the burner tip and does
         not represent a valve equivalency at the wellhead.

    As compared to the 2006 year end reserve report total proved reserves
increased 71% to 1.6 million boe from 0.9 million boe. On a proved + probable
basis, reserves increased 83% to 2.6 million from 1.4 million boe.
    Proved finding and development costs including changes to future
development capital for the first half of 2007 were $16.26 per boe. Proved +
probable finding and development costs (including future development capital)
were $9.69 per boe.



    Reserves Reconciliation for 2007 Mid Year Update

    -------------------------------------------------------------------------
                           Light and Medium Oil             Heavy Oil
    -------------------------------------------------------------------------
                                            Proved                     Proved
                                              Plus                       Plus
    FACTORS              Proved  Probable Probable  Proved  Probable Probable
                          (Mbbl)   (Mbbl)   (Mbbl)   (Mbbl)   (Mbbl)   (Mbbl)
    -------------------------------------------------------------------------
    December 31, 2006        71        5       76       11      169      179
    -------------------------------------------------------------------------
    Discoveries               0        0        0        0        0        0
    -------------------------------------------------------------------------
    Extensions                0        0        0        0        0        0
    -------------------------------------------------------------------------
    Infill Drilling           0        0        0        0        0        0
    -------------------------------------------------------------------------
    Improved Recovery         0        0        0       64      (12)      52
    -------------------------------------------------------------------------
    Technical Revisions       1        5        6        0       0         0
    -------------------------------------------------------------------------
    Acquisitions              0        0        0        0        0        0
    -------------------------------------------------------------------------
    Dispositions              0        0        0        0        0        0
    -------------------------------------------------------------------------
    Economic Factors          0        0        0        0        0        0
    -------------------------------------------------------------------------
    Production               (8)       0       (8)      (9)       0       (9)
    -------------------------------------------------------------------------
    June 30, 2007            64       10       73       65      156      221
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                          Conventional Natural Gas             BOE
    -------------------------------------------------------------------------
                                            Proved                     Proved
                                              Plus                       Plus
    FACTORS              Proved  Probable Probable  Proved  Probable Probable
                          (MMcf)   (MMcf)   (MMcf)   (Mboe)   (Mboe)   (Mboe)
    -------------------------------------------------------------------------
    December 31, 2006      4957     2090     7047      908      521     1429
    -------------------------------------------------------------------------
    Discoveries               0        0        0        0        0        0
    -------------------------------------------------------------------------
    Extensions             3784     3051     6835      631      508     1139
    -------------------------------------------------------------------------
    Infill Drilling           0        0        0        0        0        0
    -------------------------------------------------------------------------
    Improved Recovery       419       84      503      134        1      135
    -------------------------------------------------------------------------
    Technical Revisions     225      169      394       37       35       72
    -------------------------------------------------------------------------
    Acquisitions              0        0        0        0        0        0
    -------------------------------------------------------------------------
    Dispositions              0        0        0        0        0        0
    -------------------------------------------------------------------------
    Economic Factors          0        0        0        0        0        0
    -------------------------------------------------------------------------
    Production             (840)       0     (840)    (157)       0     (157)
    -------------------------------------------------------------------------
    June 30, 2007          8546     5393    13939     1553     1065     2618
    -------------------------------------------------------------------------

    Net Asset Value

    Net asset value before tax increased 10% from $3.97/share as at December
31, 2006 to $4.37/share as at June 30, 2007, reflecting the substantial growth
in reserves partially offset by the decline in forecasted natural gas pricing
and a decrease in undeveloped land value.

                                                     June 30         Dec. 31
                                                        2007            2006
    -------------------------------------------------------------------------
    Proved + Probable NPV(10) ($MM)(1)                  40.0            24.5
    Inventory ($MM)(2)                                   0.7             0.7
    Working Capital ($MM)                                2.6            13.0
    Land ($MM)(3)                                        8.3             8.6
    -------------------------------------------------------------------------
                                                        51.7            46.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Common & non-voting common shares (MM)              11.8            11.8
    NAV per share ($/share)                             4.37            3.97

    (1) As evaluated by GLJ as at June 30, 2007 and December 31, 2006. Net
        present value of future net reserves does not represent fair market
        value of the reserves.
    (2) Value at cost of a natural gas compressor held in inventory.
    (3) As was evaluated by Trafalgar at June 30, 2007, 87,605 acres of
        undeveloped land at $95 per acre. As at December 31, 2006, 68,565
        acres of undeveloped land was evaluated by Trafalgar at $125 per
        acre.
    

    Revenue

    Petroleum and natural gas revenues were $3.8 million for the three months
ended June 30, 2007 representing a 32% increase over the three months ended
March 31, 2007 primarily from higher natural gas production at MacKay. Natural
gas revenues for the three months ended June 30, 2007 were 35% higher than the
first quarter of 2007 due to the substantial volume growth, despite lower
realized natural gas prices quarter over quarter. Oil revenues were 12% higher
than the first quarter of 2007 due to higher realized prices for crude oil.
For the six months ended June 30, 2007, petroleum and natural gas revenues
totaled $6.7 million.

    
                                Three months    Three months      Six months
    Petroleum and                      ended           ended           ended
    Natural Gas Revenues ($)   June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Oil                              476,023         426,630         902,653
    -------------------------------------------------------------------------
    Natural Gas                    3,356,011       2,487,390       5,843,401
    -------------------------------------------------------------------------
    Total Revenue                  3,832,034       2,914,020       6,746,054
    -------------------------------------------------------------------------
    $/boe (6:1)                        42.66           43.54           43.04
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                Three months    Three months      Six months
                                       ended           ended           ended
    Trafalgar Realized Prices  June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Light Crude Oil ($/bbl)            69.57           65.66           67.41
    -------------------------------------------------------------------------
    Heavy Crude Oil ($/bbl)            46.00           30.90           39.01
    -------------------------------------------------------------------------
    Natural Gas ($/mcf)                 6.87            7.11            6.97
    -------------------------------------------------------------------------
    $/boe (6:1)                        42.66           43.54           43.04
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                Three months    Three months      Six months
                                       ended           ended           ended
    Market Prices              June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Oil WTI (US$/bbl)                  64.94           57.98           61.46
    -------------------------------------------------------------------------
    Edmonton Par (C$/bbl)              72.66           67.76           70.21
    -------------------------------------------------------------------------
    Lloydblend (C$/bbl)                49.40           48.45           48.92
    -------------------------------------------------------------------------
    Gas AECO ($/mcf)                    7.46            7.39            7.44
    -------------------------------------------------------------------------
    Exchange Rate (US$/C$)            0.9104          0.8537          0.8821
    -------------------------------------------------------------------------
    

    Royalties

    Royalty expense consists of royalties paid to provincial governments,
freehold land owners and overriding royalty owners. For the three months ended
June 30, 2007 royalties were $827,059 or $9.21 per boe or 21% of revenue.
Royalties were 32% higher in the second quarter of 2007 compared to the first
quarter of 2007 due to higher revenues resulting from higher production
levels. For the six months ended June 30, 2007, royalties were $1.5 million or
$9.26 per boe or 21% of revenue. Based on current commodity prices, management
anticipates that the average royalty rate for the remainder of 2007 will
remain in the 21% range.

    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
                                       ended           ended           ended
    Royalties                  June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Royalties ($)                    827,059         624,302       1,451,361
    -------------------------------------------------------------------------
    As a % of oil and gas
     revenue                              21              21              21
    -------------------------------------------------------------------------
    $/boe (6:1)                         9.21            9.33            9.26
    -------------------------------------------------------------------------
    

    Interest and Other Income

    Interest and other income is comprised primarily of interest on
Trafalgar's cash balances. For the three months ended June 30, 2007, interest
and other income totaled $39,687 as compared to $136,281 for the first quarter
of 2007. For the six months ended June 30, 2007, interest and other income
totaled $175,968.

    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
    Interest and                       ended           ended           ended
    Other Income               June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Interest and Other
     Income ($)                       39,687         136,281         175,968
    -------------------------------------------------------------------------
    

    Operating Expenses

    For the three months ended June 30, 2007, operating expenses were
$780,403 or $8.69 per boe as compared to operating expenses of $640,205 or
$9.57 per boe during the first three months of 2007. On a boe basis, operating
expenses for the three months ended June 30, 2007 were approximately 9% lower
than the three months ended March 31, 2007. Lower per boe operating expenses
are due to increased volumes and operating efficiencies in Trafalgar's core
areas. For the six months ended June 30, 2007, operating expenses were
$1.4 million or $9.06 per boe. Trafalgar anticipates average production
expenses below $10.00 per boe for the remainder of 2007, in line with our
original guidance.

    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
                                       ended           ended           ended
    Operating Expenses         June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Operating Expenses ($)           780,403         640,205       1,420,608
    -------------------------------------------------------------------------
    $/boe (6:1)                         8.69            9.57            9.06
    -------------------------------------------------------------------------
    

    General and Administrative Expenses

    General and administrative expenses ("G&A") net of overhead recoveries
and capitalized geological and geophysical ("G&G") expenses for the three
months ended June 30, 2007 were $577,041 or $6.42 per boe as compared to
$231,945 or $3.47 per boe for the first three months of 2007. The increase in
G&A quarter over quarter is the result of lower overhead recoveries due to low
Q2 field activity, higher professional and consulting fees associated with
Trafalgar's year end reporting and annual bonuses paid to management and staff
during the quarter. For the six months ended June 30, 2007, net G&A expenses
were $808,986 or $5.16 per boe. Management expects future G&A expenses on a
boe basis to decline as production volumes increase.

    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
                                       ended           ended           ended
    G & A Expenses             June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Gross G&A Expenses($)            722,680         505,406       1,228,086
    -------------------------------------------------------------------------
    Capitalized G&G Expenses($)     (128,386)        (93,237)       (221,623)
    -------------------------------------------------------------------------
    Overhead Recovery($)             (17,253)       (180,224)       (197,477)
    -------------------------------------------------------------------------
    Net G&A Expenses($)              577,041         231,945         808,986
    -------------------------------------------------------------------------
    $/boe (6:1)                         6.42            3.47            5.16
    -------------------------------------------------------------------------
    

    Stock-based Compensation Expense

    For the three months ended June 30, 2007, the Company recorded $164,783
of stock-based compensation for stock options outstanding during the period.
For the six months ended June 30, 2007, the Company recorded $351,469 of
stock-based compensation.

    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
    Stock-Based                        ended           ended           ended
    Compensation Expense       June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Stock-Based Compensation($)      164,783         186,686         351,469
    -------------------------------------------------------------------------
    $/boe (6:1)                         1.83            2.79            2.24
    -------------------------------------------------------------------------
    

    Interest Expense

    For the three months ended June 30, 2007, the Company recorded interest
expense of $5,563 representing interest on financed insurance premiums and
standby fees paid on the existing bank credit facility. For the six months
ended June 30, 2007, interest expenses were $7,618.

    Depletion, Depreciation and Accretion

    The provision for depletion, depreciation and accretion for the
three months ended June 30, 2007 was $1,789,514 as compared to $2,500,541 for
the three months ended March 31, 2007. Depletion and depreciation are
calculated based upon capital, production rates and reserves. Trafalgar
estimates depletion on a quarterly basis throughout the year using independent
reserve and land reports when available. Trafalgar excludes undeveloped land,
seismic and salvage value but includes future development costs in the capital
base used in this calculation.
    The depletion and depreciation calculation for the three months ended
June 30, 2007 utilized figures from an updated independent reserve report
which includes higher reserve levels resulting from the 2006/2007 winter
drilling program. This results in lower depletion and depreciation expenses
for the three months ended June 30, 2007 as compared to the first three months
of 2007. For the six months ended June 30, 2007 depletion and depreciation
expenses were $4,290,055 or $27.37 per boe.
    Trafalgar's asset retirement obligations ("ARO") are a Balance Sheet
provision based on the Company's net ownership in wells and facilities.
Management estimates the cost to abandon and reclaim the wells and facilities
and the estimated time period during which these costs will be incurred in the
future. Management estimates the total undiscounted amount of future cash
flows required to abandon and reclaim wells and facilities as at June 30, 2007
to be approximately $4.2 million, to be incurred over the next three to
20 years. Trafalgar uses a discount rate of 7.8% to calculate ARO obligations.
    Accretion represents the change in the time value of the ARO. The
underlying ARO may be increased over the period based on new obligations
incurred from drilling wells or constructing facilities. Similarly, this
obligation can be reduced as a result of abandonment work undertaken thereby
reducing future obligations. There has been $26,514 recognized as an accretion
expense for the three months ended June 30, 2007 and $53,026 for the
six months ended June 30, 2007. The accretion expense is included in the
depletion, depreciation and accretion expense.
    The petroleum and natural gas properties were subject to a ceiling test
as at June 30, 2007. No write-down was required as a result of this
calculation.

    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
    Depletion, Depreciation            ended           ended           ended
    and Accretion              June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Depletion, Depreciation
     and Accretion ($)             1,789,514       2,500,541       4,290,055
    -------------------------------------------------------------------------
    $/boe (6:1)                        19.92           37.36           27.37
    -------------------------------------------------------------------------
    

    Income Taxes

    Trafalgar has approximately $55 million of tax pools available to be
applied against future income for tax purposes net of all flow through
obligations.
    Based on these available pools, Trafalgar does not expect to pay current
income taxes in 2007. Taxes payable beyond 2007 will become a function of
commodity prices, production volumes and capital expenditures.

    Cash Flow from Operations and Net Income and Comprehensive Income

    Cash flow from operations for the three months ended June 30, 2007 was
$1,681,655 representing an 8% increase over cash flow from operations for the
three months ended March 31, 2007. The increase is due to a higher average
production and lower operating expenses for the period offset by higher G&A
expenses.
    Net loss for the three months ended June 30, 2007 was $272,642 as
compared to net income of $1,297,601 for the three months ended March 31,
2007. Net income and comprehensive income for the first quarter of 2007
included an income tax recovery of $2,433,034 representing a recovery of
future taxes on flow through common shares (see Note 5 to the financial
statements).

    
    -------------------------------------------------------------------------
                                Three months    Three months      Six months
    Cash Flow from Operations          ended           ended           ended
    and Net Income             June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Cash flow from
     operations ($)                1,681,655       1,551,794       3,233,449
    -------------------------------------------------------------------------
    $/boe (6:1)                        18.72           23.19           20.63
    -------------------------------------------------------------------------
    $/share:
    -------------------------------------------------------------------------
      Basic and diluted                 0.14            0.13            0.27
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net Income (Loss) ($)           (272,642)      1,297,601       1,024,959
    -------------------------------------------------------------------------
    $/share:
    -------------------------------------------------------------------------
      Basic and diluted                (0.02)           0.11            0.09
    -------------------------------------------------------------------------


    Capital Expenditures

    -------------------------------------------------------------------------
                                Three months    Three months      Six months
                                       ended           ended           ended
    Capital Expenditures       June 30, 2007  March 31, 2007   June 30, 2007
    -------------------------------------------------------------------------
    Land                           1,305,111         531,144       1,836,255
    -------------------------------------------------------------------------
    Seismic                          485,818         413,218         899,036
    -------------------------------------------------------------------------
    Drilling and Completion          574,395       6,288,654       6,863,049
    -------------------------------------------------------------------------
    Equipment Facilities and
     Pipelines                       240,603       3,698,434       3,939,037
    -------------------------------------------------------------------------
    Other Assets                       3,855           2,766           6,621
    -------------------------------------------------------------------------
    Total Exploration and
     Development Expenditures      2,609,782      10,934,216      13,543,998
    -------------------------------------------------------------------------
    Acquisitions                           -               -               -
    -------------------------------------------------------------------------
    Total Capital Expenditures     2,609,782      10,934,216      13,543,998
    -------------------------------------------------------------------------
    

    LIQUIDITY AND CAPITAL RE

SOURCES As at June 30, 2007, Trafalgar had a positive working capital of $2.7 million. In addition, Trafalgar has a $12.0 million revolving term credit facility with a major Canadian Bank for general corporate purposes including capital expenditures. The credit facility revolves for a period of 364 days followed by a one year term out period. The revolving period may be extended annually at the option of the lender. Rates of interest on the credit facility vary depending on Trafalgar's debt to cash flow ratio. The credit facility is secured by a floating charge debenture over all of Trafalgar's assets and a general security agreement. OUTSTANDING SHARE DATA Trafalgar began trading on the TSX on September 26, 2006 and its common voting shares trade on the TSX under the symbol TFL. A summary of Trafalgar's trading history on the TSX is as follows: ------------------------------------------------------------------------- Per Share Q2 2007 Q1 2007 Q4 2006 ------------------------------------------------------------------------- High 4.70 4.43 4.60 ------------------------------------------------------------------------- Low 3.80 3.50 3.27 ------------------------------------------------------------------------- Close 4.14 4.05 4.10 ------------------------------------------------------------------------- Average Daily Volume 15,809 14,887 52,067 ------------------------------------------------------------------------- As at June 30, 2007, there were 9,594,590 voting common shares outstanding, 2,241,293 non-voting common shares outstanding and 1,091,250 options to purchase common shares outstanding. CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS Trafalgar has various contractual obligations and commitments arising in the normal course of operations and financing activities. These obligations and commitments have been considered when assessing the cash requirements in the above discussion of future liquidity. The Company's bank credit facilities are subject to periodic review. Trafalgar does not expect any material changes to the bank credit facility resulting from these reviews. Obligations with a fixed term for the remainder of 2007 and the next four years are as follows: ------------------------------------------------------------------------- 2007 2008 2009 2010 2011 ------------------------------------------------------------------------- Office Lease 87,936 175,870 175,870 175,870 - ------------------------------------------------------------------------- Trafalgar does not have any arrangements or obligations that are not reflected or disclosed in the consolidated financial statements. DISCLOSURE CONTROLS AND PROCEDURES As required by Multilateral Instrument 52-109, the Company evaluated the effectiveness of its disclosure controls and procedures and the internal control over financial reporting as of June 30, 2007 under the supervision and with the participation of the President and CEO and the Vice President Finance and CFO. Based on the results of this evaluation, the President and CEO, the Vice President Finance and CFO, and the Audit Committee of the Board of Directors concluded that the design and operation of these disclosure controls and procedures were generally effective. The only issue identified during the process was related to internal control over financial reporting. The issue identified, the concentration of some duties, is one that affects small companies. As a small organization, the Company's management is composed of a small number of key individuals, resulting in a situation where limitations in segregation of duties have to be compensated by more effective supervision and monitoring by the CEO and CFO. The Company's officers will continue to monitor very closely all financial activities of the Company and increase the level of supervision in key areas. It is important to note that this issue would also require the Company to hire additional staff in order to provide greater segregation of duties. Since the increased funding costs of such hiring could negatively affect the Company's financial position, the Company's management has chosen to disclose the potential risk and proceed with increased staffing when budgets enable. Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements, error or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute assurance, that the objectives of the control system are met. 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 $15 per tonne for every tonne above the 12% target. These payments will be deposited into an Alberta-based technology fund that will be used to develop infrastructure to reduce emissions or to support research into innovative climate change solutions. As an alternate option, large emitters can invest in projects outside of their operations that reduce or offset emissions on their behalf, provided that these projects are based in Alberta. Prior to investing, the offset reductions, offered by a prospective operation, must be verified by a third party to ensure that the emission reductions are real. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict the impact of those requirements on the Company and its operations and financial condition. For a detailed discussion of Risks and Uncertainties, refer to the Trafalgar Annual Information Form filed on SEDAR at www.sedar.com. Review of Alberta Royalty and Tax Regime On February 16, 2007, the Alberta Government announced that a review of the province's royalty and tax regime (including income tax and freehold mineral rights tax) pertaining to oil and gas resources, including oil sands, conventional oil and gas and coalbed methane, will be conducted by a panel of experts, with the assistance of individual Albertans and key stakeholders. The review panel is to produce a final report that will be presented to the Minister of Finance by August 31, 2007. SELECTED QUARTERLY DATA The following table provides selected quarterly information for Trafalgar. ------------------------------------------------------------------------- 2006 Q3(1) 2006 Q4 2007 Q1 2007 Q2 ------------------------------------------------------------------------- Production (boe/d) 625 662 744 987 Petroleum and natural gas revenue ($) 184,833 2,532,804 2,914,020 3,832,034 Realized product prices Oil ($/bbl) 59.57 44.36 49.37 56.43 Natural gas ($/mcf) 4.54 6.86 7.11 6.87 $/boe (6:1) 32.87 41.65 43.54 42.66 Royalties ($/boe) 5.60 8.86 9.33 9.21 Operating expense ($/boe) 12.00 12.18 9.57 8.69 Netback ($/boe) 15.27 20.60 24.65 24.76 Cash flows from operations ($) (357,794) 1,037,294 1,551,794 1,681,655 Per share, basic and diluted (0.10) 0.10 0.13 0.14 Net income (loss) ($) (4,109,183) (670,975) 1,297,601 (272,642) Per share, basic and diluted (1.10) (0.07) 0.11 (0.02) Capital expenditures ($) 2,852,864 5,424,221 10,934,216 2,609,782 Working capital ($) 9,684,557 12,971,751 3,581,513 2,653,386 ------------------------------------------------------------------------- note: numbers may not add due to rounding (1) Q3 values are from incorporation on April 25, 2006 to September 30, 2006. Trafalgar became a public reporting issuer effective September 26, 2006, with oil and gas activity commencing on September 21, 2006. The 625 boe/d of production is for the last nine days of activity from September 21, 2006 to September 30, 2006. BALANCE SHEETS June 30, December 31, 2007 2006 (unaudited) $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 649,395 15,705,365 Accounts receivable 3,118,917 2,605,143 Prepaid expenses and deposits 603,530 450,134 ------------------------------------------------------------------------- 4,371,842 18,760,642 Petroleum and natural gas assets (Note 2) 38,366,075 28,881,664 ------------------------------------------------------------------------- 42,737,917 47,642,306 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 1,718,456 5,788,891 ------------------------------------------------------------------------- 1,718,456 5,788,891 Asset retirement obligations (Note 4) 1,597,464 1,413,444 ------------------------------------------------------------------------- 3,315,920 7,202,335 ------------------------------------------------------------------------- Commitments (Note 7) Shareholders' equity (Note 5) Share capital 40,176,919 42,617,771 Contributed surplus 891,957 494,038 Deficit (1,646,879) (2,671,838) ------------------------------------------------------------------------- 39,421,997 40,439,971 ------------------------------------------------------------------------- 42,737,917 47,642,306 ------------------------------------------------------------------------- ------------------------------------------------------------------------- see accompanying notes to the financial statements approved by the Board of Directors: "signed" "signed" Murray Nunns Steven Nielsen TRAFALGAR ENERGY LTD. STATEMENTS OF NET INCOME (LOSS), COMPREHENSIVE INCOME (LOSS) AND DEFICIT From From incorpor- incorpor- Three ation on Six ation on months April 25, months April 25, ended 2006 to ended 2006 to June 30, June 30, June 30, June 30, 2007 2006 2007 2006 (unaudited) $ $ $ $ ------------------------------------------------------------------------- Revenue Oil and natural gas revenue 3,832,034 - 6,746,054 - Less: Royalties (827,059) - (1,451,361) - ------------------------------------------------------------------------- 3,004,975 5,294,693 Interest and other income 39,687 39,848 175,968 39,848 ------------------------------------------------------------------------- 3,044,662 39,848 5,470,661 39,848 ------------------------------------------------------------------------- Expenses Operating 780,403 - 1,420,608 - General and administrative 577,041 102,312 808,986 102,312 Interest expense 5,563 7,133 7,618 7,133 Stock-based compensation (Note 5) 164,783 3,500,000 351,469 3,500,000 Depletion, depreciation and accretion (Notes 2 and 4) 1,789,514 - 4,290,055 - ------------------------------------------------------------------------- 3,317,304 3,609,445 6,878,736 3,609,445 ------------------------------------------------------------------------- Net loss before taxes (272,642) (3,569,597) (1,408,075) (3,569,597) Future income taxes (recovery) (Note 5) - - (2,433,034) - ------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) (272,642) (3,569,597) 1,024,959 (3,569,597) Deficit, beginning of period (1,374,237) - (2,671,838) - Adjustment relating to business combination - 2,108,320 - 2,108,320 ------------------------------------------------------------------------- Deficit, end of period (1,646,879) (1,461,277) (1,646,879) (1,461,277) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income (loss) per share (Note 5) Basic and diluted (0.02) (0.70) 0.09 (0.70) Weighted average number of shares outstanding (Note 5) Basic and diluted 11,835,883 5,126,081 11,835,883 5,126,081 ------------------------------------------------------------------------- ------------------------------------------------------------------------- see accompanying notes to the financial statements TRAFALGAR ENERGY LTD. STATEMENTS OF CASH FLOWS From From incorpor- incorpor- Three ation on Six ation on months April 25, months April 25, ended 2006 to ended 2006 to June 30, June 30, June 30, June 30, 2007 2006 2007 2006 (unaudited) $ $ $ $ ------------------------------------------------------------------------- Operating activities Net income (loss) for the period (272,642) (3,569,597) 1,024,959 (3,569,597) Add items not involving cash: Depletion, depreciation and accretion 1,789,514 - 4,290,055 - Stock-based compensation 164,783 3,500,000 351,469 3,500,000 Future income tax recovery - - (2,433,034) - ------------------------------------------------------------------------- 1,681,655 (69,597) 3,233,449 (69,597) Change in non-cash working capital items related to operating activities (Note 6) (950,239) 366,753 (1,175,287) 366,753 ------------------------------------------------------------------------- 731,416 297,156 2,058,162 297,156 ------------------------------------------------------------------------- Financing activities Cash received upon business combination - 276,816 - 276,816 Repayment of intercompany loan - (146,357) - (146,357) Repayment of shareholder loan - (170,000) - (170,000) Issuance of shares - 15,054,765 - 15,054,765 Share issue costs - - (7,818) - ------------------------------------------------------------------------- - 15,015,224 (7,818) 15,015,224 ------------------------------------------------------------------------- Investing activities Acquisition of property and equipment (2,609,782) (280,393) (13,543,998) (280,393) Deferred charges - (214,000) - (214,000) Change in non-cash working capital items related to investing activities (Note 6) (5,027,910) 214,000 (3,562,316) 214,000 ------------------------------------------------------------------------- (7,637,692) (280,393) (17,106,314) (280,393) ------------------------------------------------------------------------- Increase in cash and cash equivalents (6,906,276) 15,031,987 (15,055,970) 15,031,987 Cash and cash equivalents, beginning of period 7,555,671 - 15,705,365 - ------------------------------------------------------------------------- Cash and cash equivalents, end of period 649,395 15,031,987 649,395 15,031,987 ------------------------------------------------------------------------- ------------------------------------------------------------------------- see accompanying notes to the financial statements Trafalgar Energy Ltd. Notes to the Financial Statements For three and six months ended June 30, 2007 (unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The unaudited interim financial statements of Trafalgar Energy Ltd. have been prepared in accordance with Canadian generally accepted accounting principles, following the same accounting policies and methods of computation as the financial statements of the Company for the period from incorporation on April 25, 2006 to December 31, 2006 except as disclosed below. These unaudited financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the Company's annual financial statements and notes thereto for the period from incorporation on April 25, 2006 to December 31, 2006. Changes in accounting policies Effective January 1, 2007, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) under CICA Handbook 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. These new handbook sections, which apply to fiscal years beginning on or after October 1, 2006, provide requirements for the recognition and measurement of financial instruments and on the use of hedge accounting. Section 1530 establishes standards for reporting and presenting comprehensive income which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income but that are excluded from net income calculated in accordance with generally accepted accounting principles. Under Section 3855, all financial instruments are classified into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments and derivatives are measured in the Balance Sheet either at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classifications, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income. Available-for- sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized or impaired. All derivative instruments, including embedded derivatives, are recorded in the Balance Sheet at fair value unless they qualify for the normal sale and purchase exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. As a result of the adoption of these new standards, the Company has classified its cash and cash equivalents as held-for-trading. Accounts receivable are classified as loans and receivables. Bank indebtedness, operating bank loans, accounts payable and accrued charges, long-term debt, including interest payable, and redeemable preferred shares are classified as other liabilities, all of which are measured at amortized cost. The Company has elected to measure all derivatives and embedded derivatives at fair value and the Company has maintained its policy not to use hedge accounting. Section 3855 also provides guidance on accounting for transaction costs incurred upon the issuance of debt instruments or modification of a financial liability. Transaction costs are now deducted from the financial liability and are amortized using the effective interest method over the expected life of the related liability. As a result of the application of Section 3855, the Company does not have any unamortized financing costs of this nature and no reclassification has been required. The adoption of these new standards had no impact on the Company's deficit position at December 31, 2006 and for the three and six months ending June 30, 2007. Carrying value and fair value of financial assets and liabilities are summarized as follows: ------------------------------------------------------------------------- Classification Carrying value Fair value $ $ ------------------------------------------------------------------------- Held-for-trading 649,395 649,395 Loans and receivables 3,118,917 3,118,917 Held-to-maturity - - Available-for-sale - - Other liabilities 1,718,456 1,718,456 The Company, also adopted Section 1506, Accounting Changes - the only impact of which is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. This is the case with Section 3862, Financial Instruments Disclosures and Section 3863, Financial Instruments Presentations - which are required to be adopted for fiscal years beginning on or after October 1, 2007. The Company will adopt these standards on January 1, 2008 and it is expected the only effect on the Company will be incremental disclosures regarding the significance of financial instruments for the entity's financial position and performance; and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. The Company also adopted Section 3251, Equity, Section 3251 replaces Section 3250, Surplus, and describes standards for the presentation of equity and changes in equity for reporting period as a result of the application of Section 1530, Comprehensive Income. 2. PETROLEUM AND NATURAL GAS ASSETS ------------------------------------------------------------------------- June 30, December 31, 2007 2006 ------------------------------------------------------------------------- Petroleum and natural gas assets $ 44,173,057 $ 30,458,268 Equipment 106,641 99,990 Accumulated depletion and depreciation, petroleum and natural gas assets (5,886,000) (1,661,000) Accumulated amortization and depreciation, equipment (27,623) (15,594) ------------------------------------------------------------------------- $ 38,366,075 $ 28,881,664 ------------------------------------------------------------------------- For the six months ended June 30, 2007, $268,073 was capitalized (2006-nil). Of this amount, $46,450 is associated with stock-based compensation. As at June 30, 2007, $6,900,000 (2006 - $6,000,000) of costs related to undeveloped lands and $1,832,000 (2006 - $1,100,000) of seismic expenses were excluded from costs subject to depletion. Future development costs of proven reserves of $811,000 (2006 - $1,500,000) were included in the costs subject to depletion. 3. CREDIT FACILITY The Company has a revolving term credit facility with a Canadian chartered bank to a maximum of $12.0 million. The facility bears interest at the bank's prime lending or banker's acceptance rates plus applicable margins. The borrowing base is subject to re-determination semi-annually. At June 30, 2007, no amounts were drawn against this facility other than a letter of credit in the amount of $238,481 as a drilling deposit with the Province of British Columbia. The Company's lending facilities are secured by a floating charge debenture over all of Trafalgar's assets, a general security agreement and a floating charge debenture. 4. ASSET RETIREMENT OBLIGATIONS The total future asset retirement obligations result from the Company's net ownership interest in wells and facilities. Management estimates the total undiscounted amount of future cash flows required to reclaim and abandon wells and facilities as at June 30, 2007 is approximately $4.2 million, to be incurred over the next three to 20 years. Estimated cash flow has been discounted at a credit-adjusted risk free rate of 7.8% and an inflation rate of 2% to arrive at the recorded liability of $1.6 million at June 30, 2007. There has been $53,026 recognized as an accretion expense for the six months ended June 30, 2007 and for the three months ended June 30, 2007 $26,514 has been recognized (2006-nil). A reconciliation of the asset retirement obligation is provided below: ------------------------------------------------------------------------- June 30, December 31, 2007 2006 ------------------------------------------------------------------------- Balance, beginning of period $ 1,413,444 $ - Liabilities incurred 130,994 12,401 Acquired on property acquisition - 1,328,382 Accretion expense 53,026 24,581 Changes in estimates - 48,080 ------------------------------------------------------------------------- Balance, end of period $ 1,597,464 $ 1,413,444 ------------------------------------------------------------------------- 5. SHARE CAPITAL Authorized Unlimited number of voting common shares Unlimited number of non-voting common shares Unlimited number of first preferred shares, issuable in series ------------------------------------------------------------------------- Issued Number of Shares $ ------------------------------------------------------------------------- Common shares, voting Balance, as at January 1, 2007 9,594,590 37,617,771 Future taxes on flow through common shares (i) - (1,297,634) Issue costs - (7,818) ------------------------------------------------------------------------- Balance, as at June 30, 2007 9,594,590 36,312,319 ------------------------------------------------------------------------- Common shares, non-voting Balance, as at January 1, 2007 2,241,293 5,000,000 Future taxes on flow through common shares (ii) - (1,135,400) ------------------------------------------------------------------------- Balance, as at June 30, 2007 2,241,293 3,864,600 ------------------------------------------------------------------------- Share capital, as at June 30, 2007 11,835,883 40,176,919 ------------------------------------------------------------------------- Contributed surplus: The following table reconciles Trafalgar's contributed surplus: ------------------------------------------------------------------------- June 30, December 31, 2007 2006 ------------------------------------------------------------------------- Balance, beginning of period $ 494,038 $ - Stock-based compensation expense(iii) 397,919 258,483 Cancellation of warrants - 235,555 ------------------------------------------------------------------------- Balance, end of period $ 891,957 $ 494,038 ------------------------------------------------------------------------- (i) In December 2006, the Company issued under private placement a total of 792,100 flow through common shares at $5.05 per share for proceeds of $4,000,105 and 572,360 common shares at $4.02 per share for proceeds of $2,300,887. The tax benefit of the flow through shares was renounced in its entirety in February, 2007, and all required capital commitments have been met. (ii) In June 2006, the Company issued under private placement a total of 1,741,293 flow through common shares, non-voting at $2.01 per share for proceeds of $3,499,999 and 2,874,297 common shares voting for proceeds of $11,554,674. The tax benefit of the flow through shares was renounced in its entirety in February, 2007, with all capital commitments met. (iii) Non-cash compensation expense is comprised of the stock option benefit for all outstanding options amortized over the vesting period of the options. Per share amounts Per share amounts have been calculated using the weighted average number of common shares (voting and non-voting) and options outstanding during the three and six months ended June 30, 2007: ------------------------------------------------------------------------- From From incorpor- incorpor- Three ation on Six ation on months April 25, months April 25, ended 2006 to ended 2006 to June 30, June 30, June 30, June 30, 2007 2006 2007 2006 ------------------------------------------------------------------------- Weighted average shares outstanding, voting and non- voting: Basic and diluted 11,835,883 5,126,081 11,835,883 5,126,081 ------------------------------------------------------------------------- Stock option plan The Company has a stock option plan authorizing the grant of options to purchase shares to designated participants, being directors, officers, employees or consultants. Options are priced at the closing price of the shares one day prior to the grant date of the options. The vesting for options granted occurs over a three year period, with one third of the number granted vesting on each of the first, second and third anniversary dates of the grant, expiring over a five year period. The following is a continuity of stock options for which shares have been reserved: ------------------------------------------------------------------------- Weighted Average Exercise Number Price of Options ($) ------------------------------------------------------------------------- Balance, beginning of period 894,750 4.02 Granted 196,500 4.49 ------------------------------------------------------------------------- Balance, end of period 1,091,250 4.10 ------------------------------------------------------------------------- As at June 30, 2007, there were no options exercisable. The following table summarizes information about stock options outstanding at June 30, 2007: ------------------------------------------------------------------------- Weighted Weighted Fair Average Average Value Exercise Remaining Average Grant Price Price Term Price $ Number $ (Years) $ ------------------------------------------------------------------------- 4.00-5.00 1,091,250 4.10 4.3 1.39 ------------------------------------------------------------------------- The fair value of stock options granted to employees, directors and consultants during the three and six months ended June 30, 2007 was estimated on the date prior to that of grant using the Black Scholes option pricing model with the following weighted average assumptions: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Weighted average fair value of option granted $ 1.39 $ 1.36 Risk-free interest (%) 6 6 Volatility (%) 40 40 Expected life in years 3 3 Expected future dividends $ 0.00 $ 0.00 ------------------------------------------------------------------------- A total of $351,469 has been recognized as stock compensation expense. Offsetting credits of $211,233 and $397,919 has been charged to contributed surplus for the three and six months ended June 30, 2007, respectively (2006 - $3,500,000). Of the $397,919 of contributed surplus for the six months ended June 30, 2007, $46,450 of this stock compensation has been capitalized. 6. SUPPLEMENTAL CASH FLOW INFORMATION ------------------------------------------------------------------------- From From incorpor- incorpor- Three ation on Six ation on months April 25, months April 25, ended 2006 to ended 2006 to June 30, June 30, June 30, June 30, 2007 2006 2007 2006 ------------------------------------------------------------------------- Changes in non-cash operating working capital: Accounts receivable $ (451,731) $ (26,689) $ (402,021) $ (26,689) Prepaid expenses and deposits (164,135) (62,635) (153,396) (62,635) Accounts payable and accrued liabilities (334,373) 456,077 (619,870) 456,077 ------------------------------------------------------------------------- $ (950,239) $ 366,753 $(1,175,287) $ 366,753 ------------------------------------------------------------------------- Changes in non-cash investing working capital: Accounts receivable $ 199,663 $ - $ (111,753) $ - Accounts payable and accrued liabilities (5,227,573) 214,000 (3,450,563) 214,000 ------------------------------------------------------------------------- $(5,027,910) $ 214,000 $(3,562,316) $ 214,000 ------------------------------------------------------------------------- There have not been any cash outlays for interest and/or current income taxes for the three and six months ended June 30, 2007, (2006 - nil). 7. COMMITMENTS The Company has an operating lease for office premises expiring December 30, 2010 which requires minimum monthly payments of $14,656 or $175,870 per year. 8. RELATED PARTY TRANSACTIONS During the three and six month period ending June 30, 2007, the Company utilized legal services totaling $21,000. Legal services were provided by a firm in which two Directors of the Company are partners. As at June 30, 2007, there are no amounts outstanding or owing for legal services in accounts payable and accrued liabilities. The Company has a natural gas marketing contract with Daylight Energy Ltd. ("Daylight"). The Company has a director that is an officer of Daylight. Under the contract, Daylight accepts all of the Company's natural gas production into Daylight's supply portfolio and sells the Company's natural gas production with the same operational arrangements, transportation and pricing as Daylight receives. The original term of the contract is one year from November 1, 2006 to October 31, 2007. Either party may terminate the contract with 30 days written notice. The contract continues on a year to year basis unless terminated by either party. The Company pays a fee to Daylight of $2,500 per month for marketing services supplied under the contract. Included in accounts receivable as of June 30, 2007 is an amount of $2.2 million representing one month of actual and one month of accrued revenue for the Company's natural gas marketed by Daylight. The related transactions were incurred during the normal course of operations on similar terms and conditions to those entered into with unrelated parties. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to between the related parties. 9. FINANCIAL INSTRUMENTS Fair value of financial instruments Financial instruments recognized on the Balance Sheet consist of cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities. As at June 30, 2007, there were no significant differences between the carrying amounts of these financial instruments reported on the Balance Sheet and their estimated fair values. It is management's opinion that the Company is not exposed to significant credit risk. (Refer to Note 1) Concentration of credit risk, economic dependence and related party transactions The Company currently derives revenue primarily from customers in the oil and gas industry. The Company closely monitors credit granted to each customer; therefore, credit risks are considered to be minimal. The Company routinely assesses the financial strength of its customers. Interest rate risk The Company is exposed to interest rate risk in relation to interest expense associated with any outstanding revolving operation loan balances. At June 30, 2007, the Company has no outstanding revolving loan balances. Commodity price risk management As at June 30, 2007, the Company had no fixed price contracts associated with future production. /NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/

For further information:

For further information: TRAFALGAR ENERGY LTD.: Robert Wollmann,
President and CEO, Telephone (403) 216-2706, Email
rwollmann@trafalgarenergy.ca; Daniel Belot, Vice President Finance and CFO,
Telephone (403) 216-2707, Email dbelot@trafalgarenergy.ca, or visit
www.trafalgarenergy.ca, Toll-free: 1-877-216-2705; Investor Relations,
info@trafalgarenergy.ca

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TRAFALGAR ENERGY LTD.

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