Pearl, Cipher to Merge

Pearl Exploration and Production Ltd. said that it has signed a Letter of Intent to acquire all of the issued and outstanding shares of Cipher Exploration Inc., a privately held oil and gas company with heavy oil assets in western Canada. Pursuant to the Letter of Intent, Pearl proposes to enter into a formal agreement with the shareholders of Cipher through which all of the issued and outstanding shares of Cipher will be transferred to Pearl by the holders thereof in exchange for common shares of Pearl with a deemed total gross value of $20 million. As a result of the proposed transaction, Cipher will become a wholly owned subsidiary of Pearl.

The gross purchase price of $20 million in shares will be reduced by an amount equal to the aggregate of all long and short-term debt of Cipher outstanding as at the closing of the transaction, such that the net purchase price will be an amount equal to $20 million minus the debt. Pearl Shares will be issued, at closing, to the Cipher shareholders pro-rata to their holdings in Cipher. No fractional Pearl Shares will be issued and any fractional Pearl Share to which a Cipher Shareholder is otherwise entitled will be rounded up to the nearest whole Pearl Share.

The foregoing transaction is subject to all requisite regulatory approvals.

Cipher is a privately held oil and gas company with heavy oil assets in synergistic areas of western Canada. Key assets of Cipher consist of properties which are either co-owned or are directly adjacent to existing Pearl properties, including properties at Ear Lake, Reward and Eagle Creek, Saskatchewan. These properties contain producing wells together with approximately 100 potential drilling locations.

For the three months ended December 31, 2006, Cipher's production from the above areas averaged approximately 350 boe/d with reserves estimated to be 3,509 Mboe on a proved plus probable basis. The reserves noted are based on an independent reserve evaluation prepared by Sproule Associates Limited as at June 30, 2006. These reserves estimates have been prepared utilizing definitions as set out under National Instrument 51-101. The $20 million consideration, including the assumption of any debt, represents a valuation of $5.70/boe proved plus probable reserves.

Asset Highlights

Ear Lake - Cipher currently has 11 producing wells (100% ownership) operated by Cipher. Cipher has 2,760 net acres of land in this area. Currently a majority of the producing wells in this field have been electrified. The solution gas and produced water from these wells is flow lined to the Cipher battery for collection/sales (gas) and disposal (water) via Cipher facilities.

Reward - Cipher currently operates 19 wells (43% - 100% ownership) in the area. Cipher has 6,930 net acres of land in this area.

Eagle Creek - Cipher currently holds an overriding 2.5% Gross Overriding Royalty over 3,520 net acres of land in this area. Cipher receives this royalty on nine producing oil and gas wells operated by Pearl and two gas wells operated by Nuvista Energy Ltd. A horizontal well pilot waterflood (in the oil pool) has been initiated and is beginning to show a positive response. The gas volumes from these wells are flowed to Pearl's facilities for sale.

Lightyear Capital Inc. is acting as financial advisor to Cipher.

Pearl is a public company focused on delivering disciplined growth by establishing a North American portfolio of oil and gas projects with an emphasis on large resource opportunities.

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