Verenex Energy Reports 4Q05 Results

Verenex Energy reports its fourth quarter and year-end operating and financial results for the three months and twelve months ended December 31, 2005.

Verenex is a Canada-based international exploration and production company with a world-class exploration portfolio in the Ghadames Basin in Libya and in the Bay of Biscay offshore France. The Company has $33.7 million in working capital to fund its planned 2006 program in Libya, including the drilling of four exploration and appraisal wells, a workover on an existing oil discovery well and an extensive seismic program.

	    Highlights

	    Financial

	    -  In December 2005 Verenex completed the sale, on a bought-deal basis,
	       of 8,162,500 common shares at $3.20 per share for gross proceeds of
	       $26.1 million. The net proceeds of the offering will be used primarily
	       to accelerate the Company's seismic and drilling operations in Libya.

	    -  As indicated in the 2005 third quarter report, the Company completed
	       an asset impairment review for its participating interests in the
	       Marvilliers, Les Trois Lagunes and Nemours exploratory permits and
	       Parentis concession in France. In 2004 and 2005, the Company drilled
	       two oil wells (St. Lazare 2H and Parentis 222H), which had lower than
	       expected production rates, and one dry hole (La Tonnelle 1). Based on
	       a review of well performance, reserves and economic value for the two
	       oil wells by the Company's independent evaluation engineers, a
	       non-cash write-down of $7.5 million was taken in the fourth quarter.

	    -  Cash flow from operations in the fourth quarter was $735,000
	       reflecting the inclusion of revenues from oil production in France
	       (effective October 1), which averaged 123 barrels per day in the
	       fourth quarter.

	    -  The Company's net proved and probable reserves at January 1, 2006 are
	       approximately 795,000 barrels of oil equivalent, compared to 299,000
	       barrels of oil equivalent at January 1, 2005, reflecting reserve
	       additions in France.

	    Operations - Libya

	    -  The Company achieved a breakthrough in its North African expansion
	       strategy in January 2005 when it won operatorship and a 50% interest
	       in an exploration and production sharing agreement ("EPSA") for Area
	       47, a prospective 6,182 square kilometre block in the proven Ghadames
	       Basin of northwest Libya.

	    -  The Company has developed an inventory of more than 25 prospects and
	       leads, defined a multi-year work program, secured budget approval and
	       financing for its 2006 work program, built an in-country organization
	       and initiated an extensive seismic program. The Company is poised to
	       begin drilling, subject to contracting a suitable drilling rig.

	    -  In December 2005, the Company received approval from the Area 47
	       Management Committee ("Area 47 MC") for its proposed 2006 budget of
	       US $48 million (gross) or Cdn $29 million (net Verenex 50% share). The
	       program includes four exploration and appraisal wells on prospects
	       identified from existing seismic and well control, a workover on a
	       suspended oil well and a 480 square kilometre 3-D and 1,500 kilometre
	       2-D seismic program.

	    -  The Company awarded a contract for its 2006 seismic program in
	       November 2005 and work began in late December on surveying for the
	       initial 243 square kilometre 3-D seismic shoot in the southern part of
	       Area 47. Approximately 50% of the acquisition phase of this 3-D survey
	       has been completed to date.

	    -  The Company awarded a contract for casing and tubing in February 2006
	       to equip the four 12,000 foot wells planned for 2006. Delivery to
	       Libya is expected to be completed by the end of April 2006. Success in
	       sourcing in-stock material has removed this procurement step as a
	       potential critical path item for drilling.

	    -  The Company has received a number of bids for up to two drilling rigs,
	       potentially available at staggered times in 2006, and is nearing
	       completion of bid evaluations and selected rig inspections. The
	       Company is targeting to award a contract in March 2006 for at least
	       one rig to start drilling as soon as possible after the casing is
	       available in Libya.

	    -  The Company appointed Don Shepherd as General Manager, Libya in
	       January 2006. The Tripoli office currently employs seven people,
	       including two senior expatriates. A financial manager will join the
	       Tripoli organization in March 2006. The in-country organization is
	       expected to double by mid-2006.

	    France

	    -  In the fourth quarter of 2005, a 775 square kilometre 3-D and
	       462 kilometre 2-D seismic shoot was completed on the Aquitaine
	       Maritime offshore exploratory permit (Verenex 50% participating
	       interest). The new seismic is currently being interpreted to remap
	       leads and prospects with expected completion by the end of April 2006.

	    -  The Company completed a water shut-off workover on the suspended
	       St. Lazare 2H well and placed it on pump in late October 2005. The
	       well is currently producing about 100 barrels of oil per day (net) at
	       a 15% watercut. The Company is continuing to monitor well performance
	       and is evaluating the potential for follow-up drilling.

	    -  The Parentis 222H was drilled in December 2004 and put on production
	       in March 2005. The well is currently producing about 30 barrels of oil
	       per day (net) at a 65% watercut. The Company does not plan to carry
	       out a workover on the well at this time but is continuing to evaluate
	       the merits of injecting water in offsetting wells owned by Vermilion
	       Rep SAS to increase reservoir pressure and fluid rates.

	    -  The Company participated in the Lundin-operated La Tonnelle 1
	       exploration well in the Nemours Permit (Verenex 31.67%), which was
	       completed in October 2005, but failed to find productive hydrocarbons.
	       The Company chose not to participate in a subsequent sidetrack
	       operation which found a potentially productive section in the Chaunoy
	       formation. After assessing potential well productivity and economics,
	       the Company waived its option to participate, which would have
	       required the payment of a 600% penalty on the sidetrack costs.


	    <<

	    Highlights
	                                                 Three Months  Twelve Months
	                                                      Ended         Ended
	                                                   December 31,  December 31,
	    (unaudited)                                        2005         2005
	    -------------------------------------------------------------------------
	    Financial (thousands of Cdn $, except
	     share and per share amounts)

	    Petroleum and natural gas revenues (net)        $    1,216    $    2,118
	    Cash flow from operations                              735           942
	    Net loss                                            (8,394)      (11,137)
	    Capital expenditures                                 4,051        10,952
	    Working capital surplus                                           33,665
	    Common shares outstanding
	      Basic                                                       30,830,433
	      Diluted                                                     35,364,183
	    Weighted average common shares outstanding
	      Basic                                                       22,971,271
	      Diluted                                                     24,517,041
	    Share trading
	      High                                                        $     7.25
	      Low                                                         $     3.00
	      Close                                                       $     3.21

	    Operations

	    Production
	      Crude oil (bbls/d)                                   123            31
	      Natural gas liquids (bbls/d)                          13            19
	      Natural gas (mcf/d)                                  323           396
	      Boe/d (6:1)(x)                                       190           116
	    Average reference price
	      WTI (US per bbl)                              $    60.02    $    56.56
	      Brent (US per bbl)                                 56.91         54.38
	      AECO (Cdn per mcf)                                 11.43          8.77
	    Average selling price
	      Crude oil (Cdn per bbl)                       $    64.97    $    64.97
	      Natural gas liquids (Cdn per bbl)                  79.40         50.47
	      Natural gas (Cdn per mcf)                          12.98          7.40

	    Operating Netback (per BOE at 6:1)              $    61.60    $    47.60

	    (x) Includes 2004 production allocation adjustment increase from a gross
	        overriding royalty ("GORR") at Bottrel, Alberta but excludes test oil
	        production from France to September 30, 2005, the proceeds from which
	        were offset against cumulative well costs.

The above table includes non-GAAP measures, which may not be comparable to other companies. See MD&A for further discussion.

Capital Expenditures (Cdn $)

During the fourth quarter of 2005, the Company invested $4.1 million. In France, $1.3 million was invested in the Aquitaine Maritime offshore seismic program, $0.5 million in the St. Lazare 2H well workover and replacement pump and approximately $0.8 million to complete the drilling of the La Tonnelle 1 exploration well. In Libya, the Company invested $1.0 million in Area 47 related to capitalized costs, the completion of the baseline Environmental Impact Assessment and commencement of the seismic operations. In Canada, a further $0.5 million was spent on office equipment and capitalized General and Administration ("G&A") related to New Ventures activities.

For the full year 2005, the Company invested a total of $11.0 million, including $7.8 million in France, $1.9 million in Libya and $1.3 million in Canada. These investments included $1.8 million to tie-in the Parentis 222H and St. Lazare 2H wells, $1.5 million in drilling the La Tonnelle 1 well, $0.7 million in workover costs on the St. Lazare 2H well, $4.5 million in seismic data acquisition and geological and geophysical studies and $2.5 million in capitalized costs related to new ventures projects, office equipment purchases and the set up of the Libyan operations.

	    Outlook

	    Libya

In December 2005, the Company received unanimous approval for its proposed firm 2006 work program and budget for Area 47 in Libya from the Area 47 Management Committee ("Area 47 MC"), which includes representatives from Verenex, 50% partner Medco International Ventures Limited ("Medco") and the Libyan National Oil Company ("NOC"). The approved firm 2006 budget for Area 47 is approximately US $48 million (gross) or Cdn $29 million (net Verenex 50% share) and includes the following elements:

	        -  Four exploration and appraisal wells to be drilled on prospects
	           identified from existing seismic and well control. Estimated cost
	           to drill and production test each well is approximately
	           US $8.5 million (gross).
	        -  A workover and production test on an existing suspended well in an
	           undeveloped oil discovery with an estimated cost of
	           US $2.0 million (gross).
	        -  480 square kilometres of 3-D seismic and 1,500 kilometres of 2-D
	           seismic at an estimated cost of US $7.5 million (gross).
	        -  Other geophysical and geological studies, technical and
	           administrative support from Calgary, local office capital and
	           other Libyan administrative expenses which total approximately
	           US $5 million (gross).

The seismic contract was awarded in November 2005 and surveying began in late December for the initial 243 square kilometre 3-D seismic shoot in the southern part of Area 47. This area encompasses two existing oil discoveries at the suspended B1-70 and A1-NC3A wells and two of the four planned well locations in 2006. Approximately 50% of the acquisition phase of this 3-D survey has been completed to date and full completion is targeted for late March. The Company plans to accelerate the interpretation of the seismic in order to finalize the location for the first planned exploration well within the 3-D survey area.

The Company continues to optimize the remaining seismic program, which is expected to extend into the fourth quarter of 2006, as its database and understanding of Area 47 and the Ghadames Basin grows. The Company is currently planning to reconfigure the 2-D component of the seismic program in the southern part of Area 47 to include a number of new leads identified towards the eastern boundary of the block. These areas are on trend and between the Area 47 discoveries at B1-70 and A1-NC3A and two recently reported oil discoveries by AGOCO (an NOC affiliate) near the Tlacsin field approximately 12 kilometres east of Area 47.

The Company has identified four drill-ready prospects, based on existing seismic and well control, that are budgeted for drilling in 2006. An additional two prospects have been identified that could be drilled, contingent on early drilling success in Area 47. The Company plans to begin drilling as soon as a rig can be secured.

The Company issued tender documents for casing, tubing, wellheads and other drilling supplies in December 2005 to equip four 12,000 foot exploration and appraisal wells and four shallow water wells to supply water requirements for drilling. Following analysis of the bids and approval by the Area 47 MC, the Company awarded a contract in late February 2006 for the casing and tubing for the four exploration and appraisal wells from a supplier who could provide in-stock material. Delivery of the materials to Libya is expected to be completed by the end of April 2006, which has removed this procurement step as a potential critical path item for drilling.

Tender documents were also issued to 10 drilling contractors in December 2005. The Company has received a number of quotations for up to two drilling rigs, potentially available at staggered times in 2006, and is nearing completion of bid evaluations and selected rig inspections. The Company is targeting to award a contract in March 2006 for at least one rig to start drilling as soon as possible after the casing is available in Libya.

The Company is currently working with a number of consultants to develop the mechanical design of the well completions and the full suite of well tests for the planned workover on the suspended A1-NC3A well and for each of the new wells to be drilled. This work is expected to be completed by the end of March to support tendering for a service rig that would initially carry out a workover on the A1-NC3A well. This well was drilled by AGOCO in 1998 and based on DST test results, AGOCO calculated that the well could be capable of producing 7,500 barrels of oil per day from two zones. Verenex plans to re-enter and log the well, perforate productive zones, carry out an extended production test to confirm deliverability and capture additional well and fluid data to support reserve assessments and development planning.

The Company appointed Don Shepherd as General Manager, Libya in January 2006. Mr. Shepherd has more than 35 years of engineering, operations and management experience in the oil and gas industry in Canada and internationally, including postings in Libya and Saudi Arabia. The Tripoli office currently employs seven people, including two senior Canadian expatriates in the positions of General Manager and Drilling and Completions Superintendent. An experienced financial manager will join the Area 47 organization in March 2006. The in-country organization is expected to double by mid-2006.

France

A 775 square kilometre 3-D and 462 kilometre 2-D seismic shoot was completed on the Aquitaine Maritime offshore exploratory permit in October 2005. Verenex has a 50% participating interest in the permit which has world-class exploration potential given the seven leads that had been identified on previous 2-D seismic. The new seismic is currently being interpreted to remap the leads and to define one or more drillable prospects. When this work is completed in April 2006, Vermilion and Verenex will be assessing possible partnering strategies to facilitate potential drilling of the first exploration well in 2007. Drilling rig availability is also being determined at this time.

The Company completed a water shut-off workover on the suspended St. Lazare 2H well and placed it on pump in late October 2005. The well was drilled in the fourth quarter of 2004 but was suspended in April 2005 after the well watered out soon after its initial completion. Production averaged 118 barrels of oil per day (net Verenex 95% share) in November and December 2005 with minimal water. About five days of downtime were required in November to replace the down-hole pump. The well is currently producing about 100 barrels of oil per day (net) at a 15% watercut. The Company is continuing to monitor well performance and is evaluating the potential for follow-up drilling.

The Parentis 222H well was drilled in December 2004 and put on production in March 2005. Oil production averaged 33 barrels per day (net Verenex 95% share) in the fourth quarter of 2005. The well is currently producing about 30 barrels of oil per day (net) at a 65% watercut. The Company does not plan to carry out a workover on the well at this time but is continuing to evaluate the merits of injecting water in offsetting wells owned by Vermilion Rep SAS in order to increase reservoir pressure and fluid production.

The Company participated in the Lundin-operated La Tonnelle 1 exploration well in the Nemours Permit (Verenex 31.67%), which was completed in October 2005, but failed to find productive hydrocarbons. The Company chose not to participate in a subsequent sidetrack operation which found a potentially productive section in the Chaunoy formation. After assessing potential well productivity and economics, the Company waived its option to participate, which would have required payment of a 600% penalty on the sidetrack costs.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is management's discussion and analysis (MD&A), dated February 23, 2006, of the Company's operating and financial results for the three and twelve months ended December 31, 2005. The financial data has been prepared in Canadian dollars in accordance with Canadian Generally Accepted Accounting Principles applied consistently with prior periods. This discussion should be read in conjunction with the Company's audited consolidated financial statements for the period ended December 31, 2004, together with the accompanying notes as contained in the Company's 2004 Annual Report.

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