Rally Energy Announces 2nd Quarter 2004 Results

In the second quarter of 2004, Rally Energy continued to make significant progress in Egypt. Increases were achieved in oil production, revenue and cash flow from operations. Highlights of the second quarter are as follows:

Oil production reached a new high daily average of 1,829 bbls/d, up 5% from the first quarter (1,739 bbls/d) and 104% compared to the second quarter of 2003 (896 bbls/d).

- Revenue at $5.4 million, was up 21% compared to the first quarter ($4.45 million) and 194% compared to the second quarter of 2003 ($1.84 million).

- Cash flow from operations increased to $2.2 million ($0.03 per share) up 28% from $1.72 million reported in the first quarter of 2004 ($0.02 per share). Compared to $94,414 reported in the second quarter of 2003, cash flow from operations increased over 23 fold in the second quarter of 2004.

Rally Energy ended the second quarter with a working capital position of $3.0 million, including $2.86 million in cash. This working capital position, combined with increased cash generated from operations and with $1.24 million in capital inventory in the Issaran field, positions the Corporation to proceed actively with development of its core producing assets in Egypt.

For the six month period ending June 30, 2004, Rally Energy's daily oil production averaged 1,784 bbls/d compared to 1,012 bbls/d for the same period in 2003, a 76% increase. Revenue increased to $9.9 million, up 94% compared to revenue of $5.1 million reported in the first six months of 2003. Cash flow from operations was $3.9 million ($0.05 per share), a 524% increase over cash flow from operations of $0.6 million ($0.01 per share) reported for the six months ending June 30, 2003.

Issaran Oilfield, Egypt

During the second quarter of 2004, two new oil wells were drilled in the Issaran field. One was drilled in the Northern Area of the field offsetting well #25, which continues to produce in excess of 850 bbls/d. This new well encountered substantive thicknesses of heavily fractured dolomites in both the Upper and Lower Dolomite Formations. As a result of lost circulation problems, the well was completed only in the top 150 feet of an estimated 450 foot Lower Dolomite section; nevertheless, it is currently producing oil at a rate of approximately 250 bbls/d. Additional development wells will be drilled in this area to penetrate deeper into the thick fractured Lower Dolomite sections.

The second well was drilled in the Southern Area of the field and encountered thick sections of porous oil-saturated carbonates in both the Upper and Lower Dolomite Formations. In this area, productive Dolomite formations are not heavily fractured. Production obtained from the Lower Dolomite stabilized at approximately the 40 bbls/d level. Currently steam is being injected into the Lower Dolomite zone to test the production enhancement potential of thermal recovery in the Lower Dolomites in the Southern Area. When this Lower Dolomite injection test is completed, steam injection into the thick Upper Dolomite section will commence. Our reservoir modeling study indicates that cyclic steam stimulation, followed by steam-drive in the Upper Dolomite Formation could result in the recovery of an estimated 24% or more of original oil-in-place, compared to less than a 1% expected primary recovery rate. Rally Energy plans to drill two additional Upper Dolomite cyclic steam injection wells later this year to complete the Upper Dolomite Steam Pilot drilling program. The currently mapped Issaran Upper Dolomite contains an estimated 300 million barrels of original oil-in-place. A successful steam pilot test will have significant implications in connection with Issaran oil production and with the capital budget required for establishment of full-scale commercial operations.

In July and August, three new wells were drilled in the Northern Area targeting the Nukhul Formation. These wells are currently in various stages of completion and production testing. All three wells drilled after the end of the second quarter are wells offsetting existing producing oil wells.

Western Canada

Rally Energy increased Western Canadian production in the second quarter to 29 barrels of oil equivalent per day ("boe/d"), up from 9 boe/d in the first quarter. Current production is approximately 32 boe/d in Western Canada. The Corporation's Travers, Alberta gas well, completed in the second quarter of 2004, is producing natural gas at a rate of approximately 175 mcf/d with 2 bbls/d of liquids (27 boe/d) net to Rally Energy's 25% interest. The balance of current production is from the Corporation's Wauchope, Saskatchewan oil well, which produces 5 bbls/d net to Rally Energy's 37.5% interest.

New Western Canadian exploration and development projects are currently being reviewed, with seismic and drilling activities expected to proceed within the guidelines of a $2.3 million Canadian exploration and development budget for the remainder of 2004.

Prince Edward Island

On Prince Edward Island ("PEI"), Rally Energy now holds working interests of 92% in three oil and natural gas permits encompassing 373,917 acres. On July 21, 2004, seven of Rally Energy's then eight existing permits expired. Major portions of those seven former permits were posted in four newly-configured permits by the Prince Edward Island Department of Environment and Energy. Rally Energy was successful in acquiring two of these permit blocks covering an aggregate of 308,000 acres. One block, Permit No. 04-01, is to the east of our existing permit No. 02-01 and includes lands on which we drilled two exploration wells in 2003. Our new permits, No. 04-01 and No. 04-04 both contain prospects identified through analysis of our seismic data and our aeromagnetic and gravity surveys.

Safed Koh, Pakistan

On April 20, 2004, Rally Energy announced an agreement had been reached to sell a 57.5% working interest in the Safed Koh license to Dewan Mushtaq Group in return for their commitment to carry Rally Energy's remaining 22.5% working interest share of Phase II drilling operations expenditures. The agreed effective date of the transaction is May 6, 2004. Finalization of this transaction is expected to occur before the end of September once all consents are received from the Ministry of Petroleum and Natural Resources. The effect of this agreement is to leave Rally Energy with a 22.5% working interest in the Safed Koh block that is carried for its share of up to US$2.5 million in Phase II drilling operations expenditures.

Overview

Rally Energy intends to accelerate development of the Issaran oilfield, the pace of which will be governed by the degree of success realized over the next few months. Current oil production from the Issaran field is approximately 2,200 bbls/d. Coupled with strong crude oil prices, this increased production is generating increasingly higher levels of cash flow from operations. We ended the second quarter with a working capital position of $3.0 million, including $2.86 million in cash. This working capital position, combined with increased cash generated from operations and with $1.24 million in capital inventory in the Issaran field, positions us to proceed actively with development of our core producing assets in Egypt. At the same time, growth opportunities in Canada can proceed without any material requirement for outside capital.

At this time we are currently drilling our tenth well of 2004. It is expected that up to seven new wells will be drilled prior to year end. This includes two Steam Pilot wells expected to be drilled in the third quarter, one or two development wells in the Northern Area offsetting well #25, and three additional wells in the northern portion of the field targeting the Nukhul formation. We are now confident that we have accurately mapped major faults and that we now have a clear image of the complex, fault controlled carbonate reservoir in the Issaran field. We believe this is our key to succeeding in future efforts to drill successfully to increase both our recognized reserves and our production.
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