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Highpine Oil & Gas Limited Announces First Quarter 2006 Financial and Operating Results and Updates Its 2006 Production Guidance

Posted on: Tuesday, 9 May 2006, 21:04 CDT

CALGARY, May 9 /PRNewswire-FirstCall/ -- Highpine Oil & Gas Limited (TSX: HPX) ("Highpine" or the "Company") is pleased to announce financial and operational results for the first quarter of 2006, ended March 31, 2006.

First Quarter Highlights: - Total revenues increased 357% to $64.4 million from $14.1 million in the first quarter of 2005. - Cash flow from operations increased 354% to $31.5 million from $6.9 million in the same period in 2005. Cash-flow per diluted share increased 103% to $0.65 from $0.32 in 2005. - Average daily production increased 239% to 11,397 boe/d from 3,365 boe/d in the same period in 2005. Current production is approximately 14,000 boe/d. - Continued low operating costs reflecting higher volumes through Company owned facilities. - General and administrative costs were $1.94/boe in the first quarter as compared to $2.79/boe in the same period in 2005. - Achieved high operating netbacks of $33.55/boe, before hedging activities, which continues to demonstrate the Company's success in targeting high quality oil and gas reserves in Western Canada. - Significant progress made in obtaining drilling permits in West Pembina. Recent Pembina drilling resulted in 2 (0.75 net) cased potential Nisku producers awaiting completion and testing. Highpine has 4 (3.0 net) Nisku wells licenced for drilling after break-up and continues to work on many additional permits. - Drilled 28 gross (14.7 net) wells in the first quarter resulting in a 80% success rate in drilled wells. Results include the Pembina Nisku wells discussed above, a potential Nisku producer at Crystal and several successful gas wells in the West Central Alberta Gas Fairway at Joffre, Ante Creek, Goodwin and Ferrier. The Chickadee prospect was a dry hole. - Completed the merger with White Fire Energy Ltd. ("White Fire") adding complementary assets in the prolific Pembina Nisku play and West Central Alberta Gas Fairway. - Closed a bought deal equity financing raising gross proceeds of $100.6 million. Second Quarter Events: - On May 1, 2006 Highpine closed the purchase of selective producing assets in the West Pembina Nisku Fairway for a purchase price of approximately $12.3 million. - Executed costless collar hedging for 3,500 bbls/d of oil for calendar year 2007. Specifically 1,750 bbls/d is hedged at $US55.00 to $US86.15 per barrel and 1,750 bbls/d is hedged at $US60.00 to $US80.70 per barrel. Operations:

Highpine is pleased to report on operations for the quarter ended March 31, 2006. Production averaged 11,397 boe/d, comprised of 7,950 bbls/d of oil and natural gas liquids and 20.68 mmcf/d of natural gas. Current production in April 2006, has been averaging in the order of 14,000 boe/d. Production in the first quarter was curtailed due to a delayed start-up of a non-operated Violet Grove Oil Battery (16% ownership interest) and facility related production curtailment associated with the Easyford Oil Battery and the Brazeau North Gas Gathering System. Highpine's operated oil battery at Violet Grove has been running satisfactory since its re-start in December 2005.

Nisku reservoir management was a priority for the first quarter. Water injection is occurring in the Nisku "GG" and "HH" pools and pressure responses are starting to be realized. Water injection is set to commence in the prolific Nisku II and VV pools shortly. Good Production Practice (GPP) was granted to the Nisku SS Pool which contains the Company's 100% owned oil discovery at 3-34-48-8 W5M.

Drilling:

Highpine participated in the drilling of 28 gross (14.7 net) wells in the first quarter of 2006. Results consisted of 3 gross (1.8 net) oil wells, 19 gross (10.0 net) gas wells, 5 gross (2.6 net) dry holes and 1 gross (0.3 net) other well. Success rate in drilled wells was 80%. At Pembina, 2 gross (0.75 net) wells finished drilling and are awaiting completion and testing. Notable gas wells drilled include successful wells in Joffre, Goodwin, Ante Creek, Karr and Ferrier. At Crystal, 1 gross (0.6 net) potential Nisku well has been cased and is awaiting completion. The Company's Chickadee prospect was a dry hole.

Considerable success has been realized in progressing Highpine's Nisku drilling and well licencing activities in Pembina. Currently, Highpine has 2 gross (2.0 net) operated drilling licences and 2 gross (1.0 net) non- operated drilling licences in hand. These wells are expected to spud starting in the second quarter. Twelve other Nisku well drilling permits are in various stages of the approval process and are anticipated to be licenced and drilled as the year progresses.

Exploration:

Highpine's land holdings and seismic data base continued to grow in the first quarter. The Company spent $11.9 million in land and seismic acquisition programs in the quarter, boosting its undeveloped land base to 250,000 net acres which includes 97,000 net acres in West Pembina and 102,000 net acres in the West Central Alberta Gas Fairway. A 165 square mile 3D seismic survey was also completed in Pembina, covering recently acquired undeveloped lands, and is currently in for processing and interpretation. Additional Nisku drilling locations are expected to be developed upon completion of this review.

Updated 2006 Production Guidance:

As a result of production curtailment in the first quarter of 2006, and anticipation of temporary production shut-ins due to timing of implementing water injection into selective Nisku pools, Highpine is reducing its 2006 production guidance at this time. Although Highpine is not altering its projected 2006 exit rate of producing in excess of 17,000 boe/d, it is reducing its 2006 average to be now estimated in the range of 14,000 to 16,000 boe/d. This reduction in no way reflects any variation of reservoir performance and/or drilling expectations, only production variance due to the factors outlined above.

Highpine has posted an updated corporate presentation on its website at http://www.highpineog.com/.

FINANCIAL AND OPERATING HIGHLIGHTS ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- ($000s, except per share and $/boe amounts) Financial Total revenue(1) 64,416 14,092 357 Cash flow from operations 31,546 6,940 354 Per share - diluted 0.65 0.32 103 Net earnings 1,291 768 68 Per share - diluted 0.03 0.04 (25) Net debt(2) 46,249 78,112 (41) Total assets 910,157 198,599 358 Corporate acquisitions(3) 89,651 -- 100 Capital expenditures(4) 46,769 34,757 35 Total shares outstanding (No.) 52,772 20,708 155 Weighted average shares outstanding (No.) Basic 47,796 20,708 131 Diluted 48,217 21,615 123 ------------------------------------------------------------------------- Operating Average daily production Crude oil and NGLs (bbls/d) 7,950 1,816 338 Natural gas (mcf/d) 20,681 9,293 123 ------------------------------------------------------------------------- Total (boe/d) 11,397 3,365 239 ------------------------------------------------------------------------- Average selling prices(5) Crude oil and NGLs ($/bbl) 64.80 54.04 20 Natural gas ($/mcf) 8.29 7.34 13 ------------------------------------------------------------------------- Total ($/boe) 60.26 49.45 22 ------------------------------------------------------------------------- Wells drilled - gross (net) (No.) Oil 3 (1.8) 2 (0.7) -- Gas 19 (10.0) 4 (1.6) -- Abandoned / other 6 (2.9) 3 (1.8) -- ------------------------------------------------------------------------- Total 28 (14.7) 9 (4.1) -- Drilling success rate (%) 80 75 -- ------------------------------------------------------------------------- Operating netback ($/boe) Oil and gas sales 60.26 49.45 22 Royalties (19.49) (12.60) 55 Operating costs (6.72) (4.61) 46 Transportation costs (0.50) (0.73) (32) Realized hedging gain (loss) 0.46 (2.91) -- ------------------------------------------------------------------------- Operating netback 34.01 28.60 19 ------------------------------------------------------------------------- (1) Total revenue is after realized and unrealized hedging losses and gains. (2) Net debt includes working capital excluding unrealized financial instruments. (3) Corporate acquisitions only include the amounts allocated to property, plant and equipment. (4) Capital expenditures are presented net of proceeds of disposals. (5) The average selling prices reported are before hedging activities. MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") is dated and based on information at May 9, 2006. This MD&A has been prepared by management and should be read in conjunction with the unaudited interim consolidated financial statements for the period ended March 31, 2006 and 2005 and the audited consolidated financial statements for the years ended December 31, 2005 and 2004 for a complete understanding of the financial position and results of operations of Highpine Oil & Gas Limited ("Highpine" or the "Company").

This MD&A uses the terms "cash flow from operations" and "cash flow", which are not recognized measures under Canadian generally accepted accounting principles ("GAAP"). Management believes that in addition to net earnings, cash flow is a useful supplemental measure as it provides an indication of the results generated by Highpine's principal business activities before the consideration of how these activities are financed or how the results are taxed. Investors are cautioned, however, that this measure should not be construed as an alternative to net earnings determined in accordance with GAAP, as an indication of Highpine's performance. Highpine's method of calculating cash flow may differ from other companies, especially those in other industries, and accordingly, it may not be comparable to measures used by other companies. Highpine calculates cash flow from operations as "funds from operations" before the change in non-cash working capital related to operating activities. Highpine also uses operating netbacks as an indicator of operating performance. Operating netback is calculated on a per boe basis taking the sales price and deducting royalties, operating costs, transportation costs and realized hedging gains and losses.

Where amounts are expressed on a barrel of oil equivalent ("boe") basis, natural gas volumes have been converted to equivalent barrels of oil using a conversion factor of six thousand cubic feet equal to one barrel of oil equivalent unless otherwise indicated. This conversion ratio of 6:1 is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boe figures may be misleading, particularly if used in isolation.

All references to dollar values refer to Canadian dollars unless otherwise stated.

Additional information relating to Highpine Oil & Gas Limited is available on the Company's website at http://www.highpineog.com/. All previous public filings, including the Company's annual information form, are available on SEDAR at http://www.sedar.com/.

Financial Results Acquisition

On February 21, 2006, Highpine acquired White Fire Energy Ltd. ("White Fire") for consideration of 4.1 million class A common shares ("Common Shares") of the Company with an ascribed value of $95.5 million (the "White Fire Acquisition"). Transaction costs of $0.5 million were also incurred by Highpine. White Fire was a public oil and gas exploration and production company active in the Western Canadian Sedimentary Basin. The transaction has been accounted for using the purchase method with $89.7 million allocated to property, plant and equipment and $36.0 million to goodwill. The property, plant and equipment allocation includes $25.8 million for unproved lands. A working capital deficiency of $13.8 million and bank debt of $4.5 million were assumed by Highpine. Asset retirement obligations of $1.1 million and future tax liabilities of $10.3 million were also recorded.

Oil and Gas Revenue ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- ($000s) Crude oil and NGLs revenue 46,368 8,833 425 Natural gas revenue 15,438 6,140 151 ------------------------------------------------------------------------- 61,806 14,973 313 Realized hedging gain (loss) 468 (881) -- Unrealized hedging gain 2,142 -- -- ------------------------------------------------------------------------- Total oil and gas revenue 64,416 14,092 357 -------------------------------------------------------------------------

Total oil and gas revenue for the first quarter ended March 31, 2006 totaled $64.4 million compared to $14.1 million recorded a year ago. The 357% improvement in revenue was attributable to increased production combined with increased prices and hedging gains.

Production ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Daily Production Crude oil and NGLs (bbls/d) 7,950 1,816 338 Natural gas (mcf/d) 20,681 9,293 123 ------------------------------------------------------------------------- Boe/d 11,397 3,365 239 ------------------------------------------------------------------------- Crude oil and NGLs 70% 54% -- Natural gas 30% 46% -- ------------------------------------------------------------------------- 100% 100% -- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- (boe/d) Daily Production by Area Pembina 8,486 1,451 485 West Central Alberta Gas Fairway 1,933 1,089 78 Bantry / Retlaw 495 518 (4) Other 483 307 57 ------------------------------------------------------------------------- Total 11,397 3,365 239 -------------------------------------------------------------------------

First quarter production in 2006 rose 239% to 11,397 boe/d compared to the same period in 2005 with significant increases realized at Pembina as a result of bringing on previously shut-in production through Highpine's 80% owned Violet Grove oil battery, including its 100% owned 9-35-48-8 W5M discovery. Production also increased in the West Central Alberta Gas Fairway due primarily to volumes added from the Vaquero acquisition in May 2005.

Pricing ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Selling Prices Before Hedges Crude oil and NGLs ($/bbl) 64.80 54.04 20 Natural gas ($/mcf) 8.29 7.34 13 ------------------------------------------------------------------------- Total combined ($/boe) 60.26 49.45 22 -------------------------------------------------------------------------

Realized natural gas prices increased 13% to $8.29/mcf in the first quarter of 2006 compared to the first quarter of 2005 primarily as a result of increases in the average AECO prices.

Realized crude oil and NGL prices increased 20% to $64.80/bbl in the first three months of 2006 versus the first three months of 2005 due to WTI increases that were partially offset by increases in the $US/$CDN exchange rate.

Commodity Price Risk Management ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Average volumes hedged (boe/d) 3,833 700 448 % of production hedged 34% 21% 62 Realized hedging gain (loss) ($000s) 468 (881) -- Realized hedging gain (loss) ($/boe) 0.46 (2.91) -- -------------------------------------------------------------------------

The Company realized a natural gas hedging gain of $0.5 million for the three months ended March 31, 2006 versus $nil at March 31, 2005 when the Company incurred an oil hedging loss of $0.9 million.

The following contracts are outstanding for 2006: ------------------------------------------------------------------------- Term Contract Volume Fixed Price ------------------------------------------------------------------------- Jan 06 to Dec 06 Oil Collar 2,000 bbls/d US $60.00 to $69.80/bbl Jan 06 to Dec 06 Oil Collar 1,000 bbls/d US $55.00 to $77.25/bbl Jan 06 to Dec 06 Gas Collar 5,000 GJs/d CDN $9.00 to $14.70/GJ -------------------------------------------------------------------------

If the contracts were terminated on March 31, 2006, the Company would have received $0.8 million.

On April 11, 2006, the Company entered into the following 2007 contracts: ------------------------------------------------------------------------- Term Contract Volume Fixed Price ------------------------------------------------------------------------- Jan 07 to Dec 07 Oil Collar 1,750 bbls/d US $55.00 to $86.15/bbl Jan 07 to Dec 07 Oil Collar 1,750 bbls/d US $60.00 to $80.70/bbl ------------------------------------------------------------------------- Royalty Expense ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Total royalties, net of ARTC ($000s) 19,994 3,816 424 As a % of oil and gas sales (before hedging) 32% 25% 28 $/boe 19.49 12.60 55 -------------------------------------------------------------------------

Royalties as a percentage of oil and gas sales before hedging averaged 32% for the first quarter of 2006 compared to 25% for the first quarter of 2005. Royalty rates as a percentage of oil and gas sales have been higher in 2006 due to gross overriding royalties on certain Pembina wells along with higher Crown royalty rates on wells in the Pembina area.

Operating Costs ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Operating costs ($000s) 6,895 1,396 394 $/boe 6.72 4.61 46 -------------------------------------------------------------------------

Operating costs on a per boe basis increased 46% in the 2006 three-month period due to higher volumes from Pembina, which has sour oil production that requires more processing as a result of the sour nature of the oil.

Transportation Costs ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Transportation costs ($000s) 518 220 135 $/boe 0.50 0.73 (32) -------------------------------------------------------------------------

Transportation costs for the first quarter of 2006 dropped 32% on a per boe basis from the first quarter of 2005 due to higher production volumes and lower sulphur trucking costs in 2006.

Operating Netbacks ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- ($/boe) Sales price before hedging 60.26 49.45 22 Royalties (19.49) (12.60) 55 Operating costs (6.72) (4.61) 46 Transportation costs (0.50) (0.73) (32) ------------------------------------------------------------------------- Netback before hedges 33.55 31.51 6 Realized hedging gain (loss) 0.46 (2.91) -- ------------------------------------------------------------------------- Operating netbacks 34.01 28.60 19 -------------------------------------------------------------------------

Operating netbacks before realized hedging gains or losses increased 6% to $33.55/boe for the first three months of 2006 compared to $31.51/boe for the first three months of 2005 as a result of higher commodity prices that were partially offset by higher royalties and operating costs.

General and Administrative Expenses ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Gross expenses ($000s) 2,591 990 162 Capitalized ($000s) (596) (144) 314 ------------------------------------------------------------------------- Net expenses ($000s) 1,995 846 136 ------------------------------------------------------------------------- $/boe 1.94 2.79 (30) % capitalized 23% 15% 53 -------------------------------------------------------------------------

Net expenses rose 136% from the first quarter of 2005 to the first quarter of 2006 as a result of staff increases necessary to manage the growth of the Company. General and administrative expenses dropped 30% on a per boe basis from $2.79/boe in the first quarter of 2005 to $1.94/boe in the first quarter of 2006 due to increased production volumes.

Stock-Based Compensation

Stock-based compensation expense of $1.5 million was recorded in the first three months of 2006 compared to $0.3 million in the first three months of 2005. The increase was primarily the result of stock options that were granted to former Vaquero and White Fire employees that have remained with Highpine.

Interest and Finance Costs

Interest and finance costs for the first quarter of 2006 were $1.1 million, a 39% increase over the $0.8 million recorded in the first quarter a year ago. Although March 31, 2006 bank debt was lower than March 31, 2005 bank debt, average year-over-year debt levels were higher resulting in increased interest and finance costs. The Company used the proceeds of its February 22, 2006 equity financing to reduce bank debt.

Depletion, Depreciation and Accretion ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Depletion, depreciation and accretion ($000s) 29,160 5,433 437 $/boe 28.43 17.94 58 -------------------------------------------------------------------------

Depletion, depreciation and accretion totaled $29.2 million or $28.43/boe for the first quarter of 2006 compared to $5.4 million or $17.94/boe a year ago, a 58% increase on a per boe basis. The increase is attributable to significant facility expenditures incurred in 2006 combined with the acquisition costs of Vaquero and White Fire.

Income Taxes

Cash taxes of $0.2 million for 2006 (2005 - $0.1 million) relate to the Federal Large Corporation Tax. Large Corporation Tax was higher in the first quarter of 2006 due to a higher capital tax base resulting from the Company's equity financings and corporate acquisitions. Although current tax horizons depend on product prices, production levels and the nature, magnitude and timing of capital expenditures, Highpine's management currently believes no cash income tax will be payable in 2006.

Cash Flow and Net Earnings ------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- Cash flow from operations ($000s) 31,546 6,940 354 Per diluted share ($) 0.65 0.32 103 Net earnings ($000s) 1,291 768 68 Per diluted share ($) 0.03 0.04 (25) -------------------------------------------------------------------------

Cash flow from operations increased 354% to $31.5 million for the three months ended March 31, 2006 compared to $6.9 million in the prior year as a result of stronger commodity prices and significantly higher production volumes. Net earnings rose 68% to $1.3 million in the first quarter of 2006 from $0.8 million a year ago. Year-over-year earnings per diluted share decreased 25% as a result of higher depletion, depreciation and accretion expense.

Liquidity and Capital Resources

At March 31, 2006, the Company had a revolving term credit facility of $130 million and a demand operating credit facility of $20 million. At March 31, 2006, Highpine had drawn $34.3 million against the facilities representing 23% of available credit facilities, providing excess credit capacity of $115.7 million. At March 31, 2006, Highpine had a working capital deficiency of $11.9 million and net debt of $46.2 million. The ratio of March 31, 2006 net debt to annualized first quarter 2006 cash flow was 0.37 times. Net debt decreased significantly from December 31, 2005 to March 31, 2006 as a result of applying $96.3 million of net proceeds from the February 22, 2006 issuance of 4.3 million Common Shares at a price of $23.40 per share against outstanding bank debt.

------------------------------------------------------------------------- As at March 31, December % 2006 31, 2005 Change ------------------------------------------------------------------------- ($000s) Capitalization Bank debt 34,356 104,707 (67) Working capital deficiency 11,893 4,892 143 ------------------------------------------------------------------------- Net debt 46,249 109,599 (58) ------------------------------------------------------------------------- Shares outstanding 52,772 44,250 19 Market price at end of period ($) 23.25 20.70 12 Market capitalization 1,226,949 915,975 34 ------------------------------------------------------------------------- Total capitalization 1,273,198 1,025,574 24 ------------------------------------------------------------------------- Net debt as a % of total capitalization 4% 11% (64) ------------------------------------------------------------------------- Annualized cash flow 126,184 74,550 69 ------------------------------------------------------------------------- Net debt to cash flow 0.37 1.47 (75) -------------------------------------------------------------------------

Highpine's remaining 2006 capital budget will be funded from available bank debt and cash flow from operations.

At May 9, 2006, Highpine's bank debt was approximately $55 million. Capital Expenditures

Capital expenditures, excluding corporate acquisitions and net of property dispositions, were $46.8 million for the quarter ended March 31, 2006 compared to $34.8 million in 2005. Highpine drilled 28 gross wells (14.7 net) during the quarter at a cost of $25.4 million. An additional $8.5 million was incurred equipping and tieing-in wells. Highpine acquired lands at Pembina and in the West Central Alberta Gas Fairway at Crown land sales at a cost of $9.0 million. Highpine also incurred $3.0 million of seismic expenditures primarily in the Pembina region.

------------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 % Change ------------------------------------------------------------------------- ($000s) Land 8,952 14,301 (37) Seismic 2,974 1,785 67 Drilling and completions 25,426 9,132 178 Facilities and equipment 8,478 9,344 (9) Property acquisitions and disposition (net) 210 -- 100 Capitalized general and administrative 596 144 314 Office and other 133 51 161 ------------------------------------------------------------------------- Total 46,769 34,757 35 ------------------------------------------------------------------------- Shareholders' Equity

On February 21, 2006, the Company issued 4.1 million Common Shares to acquire all of the issued and outstanding shares of White Fire. The Common Shares had an ascribed value of $95.5 million.

On February 22, 2006, the Company issued 4.3 million Common Shares at a price of $23.40 per share for gross proceeds totaling $100.6 million. Costs associated with the issuance of the Common Shares totaled $4.3 million resulting in net proceeds of $96.3 million.

Outstanding Common Shares

As at May 9, 2006, the Company had 52.8 million Common Shares outstanding and had granted options to employees to acquire a further 4.7 million Common Shares.

Future Accounting Change Financial Instruments

The CICA has issued a new accounting standard, CICA Accounting Standard Handbook section 3855, "Financial Instruments Recognition and Measurement." This standard prescribes how and at what amount financial assets, financial liabilities and non-financial derivatives are to be recognized on the balance sheet. The standard prescribes fair value in some cases, while cost-based measures are prescribed in other cases. It also specifies how financial instrument gains and losses are to be presented. The new standard is effective for fiscal years beginning on or after October 1, 2006. The Company has not assessed the impact of this standard on its financial statements.

Critical Accounting Estimates

The preparation of the Company's financial statements requires management to adopt accounting policies that involve the use of significant estimates and assumptions. These estimates and assumptions are developed based on the best available information and are believed by management to be reasonable under the existing circumstances. New events or additional information may result in the revision of these estimates over time. A summary of the significant accounting policies used by Highpine can be found in Note 2 to the December 31, 2005 consolidated financial statements. A summary of Highpine's critical accounting estimates can be found in the Company's Management's Discussion and Analysis for the year ended December 31, 2005.

Business Risks and Uncertainties

Highpine is exposed to numerous risks and uncertainties associated with the exploration for and development, production and acquisition of crude oil, natural gas and NGLs. Primary risks include:

- Uncertainty associated with obtaining drilling licenses; - Finding and producing reserves economically; - Marketing reserves at acceptable prices; and - Operating with minimal environmental impact. Highpine strives to minimize and manage these risks in a number of ways, including: - Employing qualified professional and technical staff; - Communicating openly with members of the public regarding its activities; - Concentrating in a limited number of areas; - Utilizing the latest technology for finding and developing reserves; - Constructing quality, environmentally sensitive, safe production facilities; - Maximizing operational control of drilling and producing operations; and - Minimizing commodity price risk through strategic hedging. Summary of Quarterly Results ------------------------------------------------------------------------- 2006 2005 Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- ($000s, except per share amounts) Financial Total revenue(1) 64,416 54,229 51,495 21,817 14,092 Net earnings (loss) 1,291 4,855 6,683 (32) 768 Per share - basic 0.03 0.11 0.15 (0.00) 0.04 Per share - diluted 0.03 0.11 0.15 (0.00) 0.04 Cash flow from operations 31,546 27,957 29,796 9,856 6,940 Per share - basic 0.66 0.63 0.67 0.31 0.34 Per share - diluted 0.65 0.62 0.65 0.31 0.32 Corporate acquisitions 89,651 - - 257,314 - Capital expenditures(2) 46,769 50,861 48,149 19,839 34,757 Total assets 910,157 753,690 715,360 677,834 198,599 ------------------------------------------------------------------------- Operating Average daily production Oil and NGLs (bbls/d) 7,950 5,881 5,562 2,617 1,816 Gas (mcf/d) 20,681 16,006 18,277 11,593 9,293 Total (boe/d) 11,397 8,549 8,608 4,549 3,365 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Total revenue is after realized and unrealized hedging losses and gains. (2) Capital expenditures are net of property dispositions. ------------------------------------------------------- 2004 Q4 Q3 Q2 ------------------------------------------------------- ($000s, except per share amounts) Financial Total revenue(1) 11,941 11,676 11,133 Net earnings (loss) 1,046 507 1,371 Per share - basic 0.05 0.03 0.09 Per share - diluted 0.05 0.03 0.09 Cash flow from operations 6,254 5,229 5,493 Per share - basic 0.31 0.31 0.36 Per share - diluted 0.31 0.31 0.36 Corporate acquisitions - - - Capital expenditures(2) 23,619 12,305 16,711 Total assets 163,388 138,941 129,187 ------------------------------------------------------- Operating Average daily production Oil and NGLs (bbls/d) 1,897 1,812 1,628 Gas (mcf/d) 6,784 7,091 6,759 Total (boe/d) 3,027 2,994 2,754 ------------------------------------------------------- ------------------------------------------------------- (1) Total revenue is after realized and unrealized hedging losses and gains. (2) Capital expenditures are net of property dispositions.

Highpine's revenue has increased through the previous eight quarters primarily as a result of production from the properties acquired on the acquisitions of Vaquero in May 2005 and White Fire in February 2006 as well as the Company's drilling programs.

CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------- As at March 31, December 31, 2006 2005 ------------------------------------------------------------------------- ($000s) (unaudited) Assets Current assets Accounts receivable 51,655 40,716 Prepaid expenses and deposits 1,526 1,795 Financial instruments (note 7) 2,905 763 ------------------------------------------------------------------------- 56,086 43,274 Property, plant and equipment (note 3) 601,040 493,330 Long-term investment, at cost 1,150 1,000 Deferred charges - 251 Goodwill (note 2) 251,881 215,835 ------------------------------------------------------------------------- 910,157 753,690 ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities 65,074 47,403 Bank indebtedness (note 5) 34,356 104,707 ------------------------------------------------------------------------- 99,430 152,110 Future income taxes 94,712 84,167 Asset retirement obligations (note 4) 7,493 5,898 Deferred lease inducements 471 492 Shareholders' equity Share capital (note 6) 673,885 479,496 Contributed surplus (note 6) 4,975 3,627 Retained earnings 29,191 27,900 ------------------------------------------------------------------------- 708,051 511,023 ------------------------------------------------------------------------- 910,157 753,690 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS ------------------------------------------------------------------------- For the Three Months Ended March 31, 2006 2005 ------------------------------------------------------------------------- ($000s, except per share amounts) (unaudited) Revenues Oil and gas revenues 61,806 14,973 Royalties, net of Alberta Royalty Tax Credits (19,994) (3,816) Financial instruments Realized gains (losses) 468 (881) Unrealized gains 2,142 - ------------------------------------------------------------------------- 44,422 10,276 Interest and other income 18 - ------------------------------------------------------------------------- 44,440 10,276 Expenses Operating costs 6,895 1,396 Transportation costs 518 220 General and administrative 1,995 846 Depletion, depreciation and accretion 29,160 5,433 Interest and finance costs 1,143 824 Stock-based compensation (note 6) 1,520 278 ------------------------------------------------------------------------- 41,231 8,997 ------------------------------------------------------------------------- Earnings before taxes 3,209 1,279 ------------------------------------------------------------------------- Taxes Current 180 50 Future 1,738 461 ------------------------------------------------------------------------- 1,918 511 ------------------------------------------------------------------------- Net earnings 1,291 768 Retained earnings, beginning of period 27,900 23,992 Stock dividend and adjustment - (8,366) ------------------------------------------------------------------------- Retained earnings, end of period 29,191 16,394 ------------------------------------------------------------------------- Net earnings per share (note 6) Basic 0.03 0.04 Diluted 0.03 0.04 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------- For the Three Months Ended March 31, 2006 2005 ------------------------------------------------------------------------- ($000s) (unaudited) Cash provided by (used in): Operating Activities Net earnings 1,291 768 Items not involving cash: Depletion, depreciation and accretion 29,160 5,433 Future income taxes 1,738 461 Stock-based compensation 1,520 278 Unrealized gains on financial instruments (2,142) - Amortization of deferred lease inducements (21) - ------------------------------------------------------------------------- Funds from operations 31,546 6,940 Change in non-cash operating working capital (16,121) (5,857) ------------------------------------------------------------------------- 15,425 1,083 ------------------------------------------------------------------------- Financing Activities Common shares issued for cash, net of share issue costs 96,281 1 Proceeds on exercise of stock options 998 - (Decrease) increase in bank indebtedness (74,821) 29,145 Deferred charges - (658) ------------------------------------------------------------------------- 22,458 28,488 ------------------------------------------------------------------------- Investing Activities Property, plant and equipment additions (46,769) (34,757) Purchase of investments (150) - Net cash paid on business combination (note 2) (527) - Deferred charges 251 - Change in non-cash investing working capital 9,312 5,186 ------------------------------------------------------------------------- (37,883) (29,571) ------------------------------------------------------------------------- Change in cash and cash equivalents - - Cash and cash equivalents, beginning of period - - ------------------------------------------------------------------------- Cash and cash equivalents, end of period - - ------------------------------------------------------------------------- Cash interest paid 748 407 Cash taxes paid 280 216 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended March 31, 2006 and 2005 1. Significant Accounting Policies The interim consolidated financial statements of Highpine Oil & Gas Limited (the "Company") have been prepared by management in accordance with Canadian generally accepted accounting principles and follow the same accounting policies as the most recent audited annual consolidated financial statements. Certain disclosures normally required to be included in the notes to the annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto for the year ended December 31, 2005. 2. Acquisition of White Fire Energy Ltd. On February 21, 2006, Highpine acquired White Fire Energy Ltd. ("White Fire") for consideration of 4.1 million class A common shares with an ascribed value of $95.5 million. White Fire was a public oil and gas exploration and production company active in the Western Canadian Sedimentary Basin. The transaction has been accounted for using the purchase method with the allocation of the purchase price as follows: --------------------------------------------------------------------- ($000s) Net assets acquired and liabilities assumed Property, plant and equipment (including unproved properties totaling $25,800) 89,651 Goodwill 36,046 Working capital (deficiency) (13,810) Bank debt (4,470) Asset retirement obligations (1,145) Future income taxes (10,265) --------------------------------------------------------------------- 96,007 --------------------------------------------------------------------- Consideration Acquisition costs 527 Class A common shares issued 95,480 --------------------------------------------------------------------- 96,007 --------------------------------------------------------------------- --------------------------------------------------------------------- The above amounts are estimates made by management based on currently available information. Amendments may be made to the purchase equation as the cost estimates and balances are finalized. 3. Property, Plant and Equipment At March 31, 2006, approximately $141.1 million (December 31, 2005 - $112.4 million) of unproved property costs were excluded from the depletion calculation. Future development costs of $15.7 million (December 31, 2004 - $13.3 million) were included in the depletion calculation. During the three months ended March 31, 2006, general and administrative expenses of $0.6 million (March 31, 2005 - $0.1 million) were capitalized. 4. Asset Retirement Obligations At March 31, 2006, the estimated total undiscounted cash flows required to settle asset retirement obligations were $12.4 million. Expenditures to settle asset retirement obligations will be incurred between 2006 and 2026. Estimated cash flows have been discounted using an annual credit adjusted risk-free interest rate of 8.0% per annum and have been inflated using an inflation rate of 2.0% per annum. Changes to asset retirement obligations were as follows: --------------------------------------------------------------------- Three Months Year Ended Ended March 31, December 31, 2006 2005 --------------------------------------------------------------------- ($000s) Asset retirement obligations, beginning of period 5,898 1,974 Liabilities acquired 1,145 1,903 Liabilities incurred 332 1,694 Liabilities disposed of - - Accretion expense 118 327 --------------------------------------------------------------------- Asset retirement obligations, end of period 7,493 5,898 --------------------------------------------------------------------- --------------------------------------------------------------------- 5. Bank Indebtedness At March 31, 2006, the Company had available a $130 million revolving term credit facility and a $20 million demand operating credit facility with Canadian financial institutions. The revolving term credit facility revolves until May 31, 2006 unless it is extended for a 364-day period. The revolving term credit facility bears interest within a range of the lender's prime rate to prime plus 0.25% depending on the Company's ratio of consolidated debt to net income before interest, taxes, depletion, depreciation, accretion and compensation expense. The demand operating facility bears interest at the lender's prime rate. The facilities are secured by a general security agreement and a first floating charge over all of the Company's assets. 6. Share Capital --------------------------------------------------------------------- Three Months Ended March 31, 2006 Shares Amount --------------------------------------------------------------------- (000s) (No.) ($) Class A common shares Balance, beginning of period 44,250 479,496 Issued to acquire White Fire Energy Ltd. 4,089 95,480 Issued for cash 4,300 100,620 Stock options exercised 133 998 Contributed surplus transferred on exercise of stock options - 172 Share issue costs less tax effect of $1,458 - (2,881) --------------------------------------------------------------------- Balance, end of period 52,772 673,885 --------------------------------------------------------------------- --------------------------------------------------------------------- Per Share Amounts --------------------------------------------------------------------- Three Months Ended March 31, 2006 2005 --------------------------------------------------------------------- (No. 000s) Weighted average number of common shares outstanding Basic 47,796 20,708 Dilutive effect of stock options 421 907 --------------------------------------------------------------------- Diluted 48,217 21,615 --------------------------------------------------------------------- --------------------------------------------------------------------- Stock Options The Company has a stock option plan pursuant to which options to purchase class A common shares of the Company may be granted to directors, officers, employees and consultants. The outstanding stock options of the Company are exercisable for a period of six years and vest over a period of four years. A summary of changes is as follows: --------------------------------------------------------------------- Three Months Ended Year Ended March 31, 2006 December 31, 2005 --------------------------------------------------------------------- Class A Class A Common Common Shares Shares Issuable Weighted Issuable Weighted Upon Average Upon Average Exercise Exercise Exercise Exercise of Options Price of Options Price --------------------------------------------------------------------- (No. 000s) ($) (No. 000s) ($) Balance, beginning of period 3,652 13.06 1,542 5.26 Granted 1,116 21.69 2,308 18.96 Exercised (133) (7.82) (47) (3.89) Cancelled - - (224) (17.00) Stock dividend adjustment - - 73 - --------------------------------------------------------------------- Balance, end of period 4,635 15.51 3,652 13.06 --------------------------------------------------------------------- Exercisable, end of period 635 4.60 556 4.33 --------------------------------------------------------------------- --------------------------------------------------------------------- The fair value of stock options granted is estimated using the Black- Scholes option pricing model. The following assumptions were used for the 2006 grants: --------------------------------------------------------------------- Expected volatility 29% Risk-free rate of return 5.25% Expected option life 4 years Weighted average fair market value per option $7.70 --------------------------------------------------------------------- The Company does not anticipate paying any dividends during the expected life of the options. Contributed Surplus --------------------------------------------------------------------- Three Months Year Ended Ended March 31, December 31, 2006 2005 --------------------------------------------------------------------- ($000s) Balance, beginning of period 3,627 511 Compensation expense, net of recovery 1,520 3,151 Transferred to share capital on exercise of stock options (172) (35) --------------------------------------------------------------------- Balance, end of period 4,975 3,627 --------------------------------------------------------------------- --------------------------------------------------------------------- 7. Commodity Price Risk Management The Company uses a variety of derivative instruments to reduce its exposure to fluctuations in commodity prices. The Company considers all of these transactions to be effective economic hedges, however, these transactions may not qualify as effective hedges for accounting purposes. The following commodity price risk management agreements have been entered into: Financial WTI Crude Oil Contracts --------------------------------------------------------------------- Unrealized Gain (Loss) As at Fixed March 31, Term Contract Volume Price 2006 --------------------------------------------------------------------- (bbls/d) ($/bbl) (CDN $000s) Jan 06 to Dec 06 Collar 2,000 US $60.00 to $69.80 (1,702) Jan 06 to Dec 06 Collar 1,000 US $55.00 to $77.25 (366) Jan 07 to Dec 07 Collar 1,750 US $55.00 to $86.15 - Jan 07 to Dec 07 Collar 1,750 US $60.00 to $80.70 - --------------------------------------------------------------------- --------------------------------------------------------------------- Financial AECO Natural Gas Contract --------------------------------------------------------------------- Unrealized Gain (Loss) As at Fixed March 31, Term Contract Volume Price 2006 --------------------------------------------------------------------- (GJs/d) ($/GJ) (CDN $000s) Jan 06 to Dec 06 Collar 5,000 CDN $9.00 to $14.70 2,905 --------------------------------------------------------------------- --------------------------------------------------------------------- The financial AECO natural gas contract has not been designated as an effective accounting hedge. Accordingly, the financial AECO natural gas contract has been accounted for as an asset in the consolidated balance sheet based on its fair value. Reader Advisory

Statements in this press release contain forward-looking information including expectations of future production and components of cash flow and earnings. Readers are cautioned that assumptions used in the preparation of such information may prove to be incorrect. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company. These risks include, but are not limited to; the risks associated with the oil and gas industry, commodity prices and exchange rate changes. Industry related risks include, but are not limited to; operational risks in exploration, development and production, delays or changes in plans, risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses. The risks outlined above should not be construed as exhaustive. The reader is cautioned not to place undue reliance on this forward-looking information. The Company undertakes no obligation to update or revise any forward-looking statements except as required by applicable securities laws.

Highpine is a Calgary-based oil and natural gas company engaged in exploration for and the acquisition, development and production of natural gas and crude oil in western Canada. Highpine's current exploration and development efforts are focused in the West Pembina Nisku and West Central Alberta Gas Fairway both located in Central Alberta. The Company's class A common shares trade on the Toronto Stock Exchange under the symbol "HPX".

The Toronto Stock Exchange has neither approved nor disapproved

the information contained herein.

Highpine Oil & Gas Limited

CONTACT: A. Gordon Stollery, Chairman, and Chief Executive Officer, GregN. Baum, President and Chief Operating Officer, Harry D. Cupric, VicePresident, Finance and Chief Financial Officer, Telephone: (403) 265-3333,Facsimile: (403) 265-3362; Media Contact: Shauna MacDonald,(403) 538-5645

Source: PRNewswire-FirstCall

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