##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-30586
 IVANHOE ENERGY INC.
 (Exact name of registrant as specified in its charter)
 Yukon, Canada
    
    98-0372413(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Suite 654  999 Canada PlaceVancouver, British Columbia, Canada
    
    V6C 3E1(Address of principal executive office)
    
    (zip code)
 (604) 688-8323  (registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ o
  o þ




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##### 



TABLE OF CONTENTS
 PagePART IFinancial InformationItem 1 Financial StatementsUnaudited Condensed Consolidated Balance Sheets as at March 31, 2006
and December 31, 2005
    
    3Unaudited Condensed Consolidated Statements of Operations and Accumulated
Deficit for the Three-Month Periods Ended March 31, 2006
and 2005
    
    4Unaudited Condensed Consolidated Statements of Cash Flow for the
Three-Month Periods Ended March 31, 2006 and 2005
    
    5Notes to the Unaudited Condensed Consolidated Financial
Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    36Item 4. Controls and Procedures
    
    36PART IIOther InformationItem 1. Legal Proceedings
    
    37Item 1A. Risk Factors
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    37Item 3. Defaults Upon Senior Securities
    
    37Item 4. Submission of Matters To a Vote of Securityholders
    
    37Item 5. Other Information
    
    37Item 6. Exhibits
    
    37
 2




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##### 



Part
I  Financial Information
 Item 1 Financial Statements
 IVANHOE ENERGY INC.
Unaudited Condensed Consolidated Balance Sheets
 March 31, 2006
    
    
    December 31, 2005AssetsCurrent AssetsCash and cash equivalents
    
    $
    7,460
    
    
    $
    6,724Accounts receivable (net of allowance for
doubtful accounts of $116 and $83 as at March 31,
2006 and December 31, 2005, respectively)
    
    
    7,193
    
    
    
    9,994Prepaid and other current assets
    
    
    607
    
    
    
    33815,260
    
    
    
    17,056Oil and gas properties and investments, net
    
    
    138,893
    
    
    
    119,654Intangible assets  technology
    
    
    102,077
    
    
    
    102,068Long term assets
    
    
    2,232
    
    
    
    2,099$
    258,462
    
    
    $
    240,877Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    22,328
    
    
    $
    25,791Notes payable  current portion
    
    
    3,689
    
    
    
    1,667Asset retirement obligations  current portion
    
    
    950
    
    
    
    95026,967
    
    
    
    28,408Long term debt
    
    
    8,919
    
    
    
    4,972Asset retirement obligations
    
    
    840
    
    
    
    830Long term obligation
    
    
    1,900
    
    
    
    1,900Commitments and contingenciesShareholders EquityShare capital, issued 229,430,769 common shares;
December 31, 2005 220,779,335 common shares
    
    
    311,237
    
    
    
    291,088Purchase warrants
    
    
    5,150
    
    
    
    5,150Contributed surplus
    
    
    4,116
    
    
    
    3,820Accumulated deficit
    
    
    (100,667
    )
    
    
    (95,291
    )219,836
    
    
    
    204,767$
    258,462
    
    
    $
    240,877
  3




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##### 



IVANHOE ENERGY INC.
Unaudited Condensed Consolidated Statements of Operations and Accumulated Deficit
Three-Month Periods Ended March 31
 2006
    
    
    2005RevenueOil and gas revenue
    
    $
    9,826
    
    
    $
    5,693Interest income
    
    
    38
    
    
    
    439,864
    
    
    
    5,736ExpensesOperating costs
    
    
    2,716
    
    
    
    1,762General and administrative
    
    
    2,000
    
    
    
    2,411Business and product development
    
    
    1,662
    
    
    
    719Depletion and depreciation
    
    
    7,847
    
    
    
    2,207Interest expense and financing costs
    
    
    265
    
    
    
    120Provision for impairment
    
    
    750
    
    
    
    15,240
    
    
    
    7,219Net Loss
    
    
    5,376
    
    
    
    1,483Accumulated Deficit, beginning of period
    
    
    95,291
    
    
    
    81,779Accumulated Deficit, end of period
    
    $
    100,667
    
    
    $
    83,262Net Loss per share  Basic and Diluted
    
    $
    0.02
    
    
    $
    0.01Weighted Average Number of Shares (in thousands)
    
    
    224,547
    
    
    
    169,816
  4




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##### 



IVANHOE ENERGY INC.
Unaudited Condensed Consolidated Statements of Cash Flow
Three-Month Periods Ended March 31
 2006
    
    
    2005Operating ActivitiesNet loss
    
    $
    (5,376
    )
    
    $
    (1,483
    )Items not requiring use of cash:Depletion and depreciation
    
    
    7,847
    
    
    
    2,207Provision for impairment
    
    
    750
    
    
    
    Stock based compensation
    
    
    353
    
    
    
    296Other
    
    
    98
    
    
    
    16Changes in non-cash working capital items
    
    
    (1,592
    )
    
    
    562,080
    
    
    
    1,092Investing ActivitiesCapital investments
    
    
    (4,892
    )
    
    
    (12,287
    )Merger and acquisition related costs
    
    
    (177
    )
    
    
    (730
    )Proceeds from sale of assets
    
    
    5,350
    
    
    
    Advance payments
    
    
    
    
    
    
    (300
    )Other
    
    
    (9
    )
    
    
    Changes in non-cash working capital items
    
    
    (1,085
    )
    
    
    6,883(813
    )
    
    
    (6,434
    )Financing ActivitiesProceeds from exercise of options
    
    
    91
    
    
    
    35Proceeds from debt obligations
    
    
    
    
    
    
    6,000Payments of debt obligations
    
    
    (622
    )
    
    
    (417
    )Other
    
    
    
    
    
    
    (263
    )(531
    )
    
    
    5,355Increase in cash and cash equivalents, for the period
    
    
    736
    
    
    
    13Cash and cash equivalents, beginning of period
    
    
    6,724
    
    
    
    9,322Cash and cash equivalents, end of period
    
    $
    7,460
    
    
    $
    9,335
  5




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##### 



Notes to the Condensed Consolidated Financial Statements
March 31, 2006
 1. BASIS OF PRESENTATION
 GAAP
  2. SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
 Ensyn Merger Merger Agreement
   3. OIL AND GAS PROPERTIES AND INVESTMENTS
  6




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##### 



As at March 31, 2006Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    TotalOil and Gas Properties:Proved
    
    $
    94,740
    
    
    $
    102,337
    
    
    $
    
    
    
    $
    
    
    
    $
    197,077Unproved
    
    
    10,578
    
    
    
    5,756
    
    
    
    
    
    
    
    
    
    
    
    16,334105,318
    
    
    
    108,093
    
    
    
    
    
    
    
    
    
    
    
    213,411Accumulated depletion
    
    
    (17,095
    )
    
    
    (21,458
    )
    
    
    
    
    
    
    
    
    
    
    (38,553
    )Accumulated provision for impairment
    
    
    (50,350
    )
    
    
    (5,750
    )
    
    
    
    
    
    
    
    
    
    
    (56,100
    )37,873
    
    
    
    80,885
    
    
    
    
    
    
    
    
    
    
    
    118,758GTL and EOR Investments:Feasibility studies and other deferred costs
    
    
    
    
    
    
    
    
    
    
    4,788
    
    
    
    6,495
    
    
    
    11,283Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,929
    
    
    
    9,929Accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,229
    )
    
    
    (1,229
    )
    
    
    
    
    
    
    
    4,788
    
    
    
    15,195
    
    
    
    19,983Furniture and equipment
    
    
    487
    
    
    
    95
    
    
    
    
    
    
    
    15
    
    
    
    597Accumulated depreciation
    
    
    (396
    )
    
    
    (41
    )
    
    
    
    
    
    
    (8
    )
    
    
    (445
    )91
    
    
    
    54
    
    
    
    
    
    
    
    7
    
    
    
    152$
    37,964
    
    
    $
    80,939
    
    
    $
    4,788
    
    
    $
    15,202
    
    
    $
    138,893
 As
at December 31, 2005Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    TotalOil and Gas Properties:Proved
    
    $
    99,721
    
    
    $
    71,760
    
    
    $
    
    
    
    $
    
    
    
    $
    171,481Unproved
    
    
    9,676
    
    
    
    5,320
    
    
    
    
    
    
    
    
    
    
    
    14,996109,397
    
    
    
    77,080
    
    
    
    
    
    
    
    
    
    
    
    186,477Accumulated depletion
    
    
    (15,920
    )
    
    
    (16,036
    )
    
    
    
    
    
    
    
    
    
    
    (31,956
    )Accumulated provision for impairment
    
    
    (50,350
    )
    
    
    (5,000
    )
    
    
    
    
    
    
    
    
    
    
    (55,350
    )43,127
    
    
    
    56,044
    
    
    
    
    
    
    
    
    
    
    
    99,171GTL and EOR Investments:Feasibility studies and other
deferred costs
    
    
    
    
    
    
    
    
    
    
    4,570
    
    
    
    6,142
    
    
    
    10,712Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,599
    
    
    
    9,599
    
    
    
    
    
    
    
    4,570
    
    
    
    15,741
    
    
    
    20,311Furniture and equipment
    
    
    485
    
    
    
    95
    
    
    
    
    
    
    
    15
    
    
    
    595Accumulated depreciation
    
    
    (380
    )
    
    
    (37
    )
    
    
    
    
    
    
    (6
    )
    
    
    (423
    )105
    
    
    
    58
    
    
    
    
    
    
    
    9
    
    
    
    172$
    43,232
    
    
    $
    56,102
    
    
    $
    4,570
    
    
    $
    15,750
    
    
    $
    119,654
  GTL EOR
   7




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##### 



RTP TM Technology TM RTP TM CDF TM TM TM TM
 4. INTANGIBLE ASSETS  TECHNOLOGY
  RTPTM Technology
 TM TM TM TM TM
 Syntroleum Master License
 Syntroleum
  5. NOTES PAYABLE
  8




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##### 



March 31,
    
    
    December 31,2006
    
    
    2005Variable rate bank note, 7.375% as at March 31, 2006 and
December 31, 2005, due 2006 though 2007
    
    $
    2,222
    
    
    $
    2,6398% promissory note, due 2007
    
    
    4,000
    
    
    
    4,000Non-interest bearing promissory note, due 2006 through 2009
    
    
    6,385
    
    
    
    12,608
    
    
    
    6,639Less:Unamortized discount
    
    
    (795
    )
    
    
    Current maturities
    
    
    (3,689
    )
    
    
    (1,667
    )(4,484
    )
    
    
    (1,667
    )$
    8,123
    
    
    $
    4,972
 Bank Note
  Promissory Notes
    Revolving Line of Credit
  9




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##### 



2006
    
    $
    3,0952007
    
    
    7,4322008
    
    
    2,4602009
    
    
    416$
    13,403
 6. ASSET RETIREMENT OBLIGATIONS
 TM
 Balance as at December 31, 2005
    
    $
    1,780Liabilities transferred
    
    
    (32
    )Accretion expense
    
    
    13Revisions in estimated cash flows
    
    
    29Balance as at March 31, 2006
    
    
    1,790Less: current portion
    
    
    (950
    )$
    840
  7. COMMITMENTS AND CONTINGENCIES
 Zitong Block Exploration Commitment
 Phase 1
 Mitsubishi CNPC Zitong Partners Phase 2
 10




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##### 



Long Term Obligation
 TM
 Other Commitments
   8. SHARE CAPITAL
  Common Shares
    
    
    
    
    
    
    Stock OptionsWeightedAverageExerciseNumber
    
    
    
    
    
    
    Contributed
    
    
    Number
    
    
    Price(thousands)
    
    
    Amount
    
    
    Surplus
    
    
    (thousands)
    
    
    Cdn.$Balance December 31, 2005
    
    
    220,779
    
    
    $
    291,088
    
    
    $
    3,820
    
    
    
    10,278
    
    
    $
    2.21Shares issued for:Acquisition of oil and
gas assets
    
    
    8,592
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options
    
    
    60
    
    
    
    149
    
    
    
    (57
    )
    
    
    (60
    )
    
    $
    1.98Options:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    $
    3.53Stock based compensation
    
    
    
    
    
    
    
    
    
    
    353
    
    
    
    
    
    
    
    Balance March 31, 2006
    
    
    229,431
    
    
    $
    311,237
    
    
    $
    4,116
    
    
    
    10,298
    
    
    $
    2.10
 11




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##### 



Purchase Warrants
  CommonPurchase
    
    
    SharesWarrants
    
    
    Issuable(thousands)Balance December 31, 2005
    
    
    25,469
    
    
    
    21,883Purchase warrants expired
    
    
    (7,173
    )
    
    
    (3,587
    )Balance March 31, 2006
    
    
    18,296
    
    
    
    18,296
  Purchase WarrantsPrice per
    
    
    
    
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    ExerciseYear of
    
    Special
    
    
    
    
    
    
    
    
    
    
    Shares
    
    
    
    
    
    
    
    
    
    
    Price perIssue
    
    Warrant
    
    
    Issued
    
    
    Exercisable
    
    
    Issuable
    
    
    Value
    
    
    Expiry Date
    
    
    Share(thousands)
    
    
    ($U.S. 000)2005
    
    Cdn.  $3.10
    
    
    4,100
    
    
    
    4,100
    
    
    
    4,100
    
    
    $
    2,412
    
    
    April 2007
    
    Cdn. $3.502005
    
    Cdn.  $3.10
    
    
    1,000
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    534
    
    
    July 2007
    
    Cdn. $3.502005
    
    
    U.S. $1.63
    
    
    
    11,196
    
    
    
    11,196
    
    
    
    11,196
    
    
    
    1,891
    
    
    November 2007
    
    
    U.S. $2.502005
    
    
    n/a
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    313
    
    
    November 2007
    
    
    U.S. $2.0018,296
    
    
    
    18,296
    
    
    
    18,296
    
    
    $
    5,150
  9. STOCK BASED COMPENSATION
   10. PROVISION FOR IMPAIRMENT
 PRC Windfall Levy Measures Windfall Levy ceiling test
 12




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##### 



11. SEGMENT INFORMATION
  Oil and Gas
  GTL
 MOU
 EOR
 TM TM TM
 .
  13




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##### 



Three-Month Period Ended March 31, 2006Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    2,991
    
    
    $
    6,835
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,826Interest income
    
    
    14
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    383,005
    
    
    
    6,837
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    9,864Operating costs
    
    
    1,204
    
    
    
    1,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,716General and administrative
    
    
    373
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    1,282
    
    
    
    2,000Business and product development
    
    
    
    
    
    
    
    
    
    
    352
    
    
    
    1,310
    
    
    
    
    
    
    
    1,662Depletion and depreciation
    
    
    1,188
    
    
    
    5,424
    
    
    
    3
    
    
    
    1,231
    
    
    
    1
    
    
    
    7,847Interest expense and financing costs
    
    
    62
    
    
    
    45
    
    
    
    
    
    
    
    1
    
    
    
    157
    
    
    
    265Write-downs and provision for impairment
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7502,827
    
    
    
    8,076
    
    
    
    355
    
    
    
    2,542
    
    
    
    1,440
    
    
    
    15,240Net (Income) Loss
    
    $
    (178
    )
    
    $
    1,239
    
    
    $
    355
    
    
    $
    2,542
    
    
    $
    1,418
    
    
    $
    5,376Capital Investments
    
    $
    1,274
    
    
    $
    2,717
    
    
    $
    218
    
    
    $
    683
    
    
    $
    
    
    
    $
    4,892Identifiable Assets (As at March 31, 2006)
    
    $
    46,441
    
    
    $
    87,223
    
    
    $
    14,822
    
    
    $
    107,316
    
    
    $
    2,660
    
    
    $
    258,462Identifiable Assets (As at December 31, 2005)
    
    $
    48,070
    
    
    $
    65,020
    
    
    $
    14,609
    
    
    $
    107,869
    
    
    $
    5,309
    
    
    $
    240,877
 Three-Month Period Ended March 31, 2005Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    2,869
    
    
    $
    2,824
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,693Interest income
    
    
    6
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    432,875
    
    
    
    2,826
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    5,736Operating costs
    
    
    1,116
    
    
    
    646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,762General and administrative
    
    
    157
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    2,030
    
    
    
    2,411Business and product development
    
    
    
    
    
    
    
    
    
    
    404
    
    
    
    315
    
    
    
    
    
    
    
    719Depletion and depreciation
    
    
    1,167
    
    
    
    1,034
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    2,207Interest expense and financing costs
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    1202,510
    
    
    
    1,904
    
    
    
    407
    
    
    
    317
    
    
    
    2,081
    
    
    
    7,219Net (Income) Loss
    
    $
    (365
    )
    
    $
    (922
    )
    
    $
    407
    
    
    $
    317
    
    
    $
    2,046
    
    
    $
    1,483Capital Investments
    
    $
    807
    
    
    $
    9,551
    
    
    $
    215
    
    
    $
    1,714
    
    
    $
    
    
    
    $
    12,287
 14




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##### 



12. SUPPLEMENTAL CASH FLOW INFORMATION
  2006
    
    
    2005Cash paid during the period for:Income taxes
    
    $
    6
    
    
    $
    2Interest
    
    $
    171
    
    
    $
    56Investing and Financing activities, non-cash:Acquisition of oil and gas assetsShares issued
    
    $
    20,000
    
    
    $
    Debt issued
    
    
    6,547
    
    
    
    Receivable applied to acquisition
    
    
    1,746
    
    
    
    $
    28,293
    
    
    $
    Changes in non-cash working capital itemsOperating Activities:Accounts receivable
    
    $
    (1,021
    )
    
    $
    261Prepaid and other current assets
    
    
    (254
    )
    
    
    (130
    )Accounts payable and accrued liabilities
    
    
    (317
    )
    
    
    (75
    )(1,592
    )
    
    
    56Investing ActivitiesAccounts receivable
    
    
    2,076
    
    
    
    (837
    )Prepaid and other current assets
    
    
    (15
    )
    
    
    223Accounts payable and accrued liabilities
    
    
    (3,146
    )
    
    
    7,497(1,085
    )
    
    
    6,883$
    (2,677
    )
    
    $
    6,939
 13. MERGER AND ACQUISITIONS
 Merger Shares
 Richfirst Sunwing
 15




---



##### 



CMA
 14. ENSYN AGREEMENTS
 ConocoPhillips Canada Resources Corp.
 IE HTL ConocoPhillips
Canada
 15. SUBSEQUENT EVENT
   16. ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP
  Condensed Consolidated Balance Sheets
 Shareholders Equity and Oil and Gas Properties and Investments
 16




---



##### 



As at March 31, 2006Shareholders EquityOil and GasProperties and
    
    
    Share Capital
    
    
    Contributed
    
    
    AccumulatedInvestments
    
    
    and Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    TotalCanadian GAAP
    
    $
    138,893
    
    
    $
    316,387
    
    
    $
    4,116
    
    
    $
    (100,667
    )
    
    $
    219,836Adjustments for:Reduction in stated capital
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based compensation
    
    
    
    
    
    
    (373
    )
    
    
    (3,375
    )
    
    
    3,748
    
    
    
    Ascribed value of shares issued for U.S.
royalty interests, net
    
    
    1,358
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment
    
    
    (14,600
    )
    
    
    
    
    
    
    
    
    
    
    (14,600
    )
    
    
    (14,600
    )Depletion adjustments due to differences in
provision for impairment
    
    
    1,847
    
    
    
    
    
    
    
    
    
    
    
    1,847
    
    
    
    1,847GTL and EOR development costs expensed
    
    
    (11,283
    )
    
    
    
    
    
    
    
    
    
    
    (11,283
    )
    
    
    (11,283
    )U.S. GAAP
    
    $
    116,215
    
    
    $
    391,827
    
    
    $
    741
    
    
    $
    (195,410
    )
    
    $
    197,158
 As
at December 31, 2005Shareholders EquityOil and GasProperties and
    
    
    Share Capital
    
    
    Contributed
    
    
    AccumulatedInvestments
    
    
    and Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    TotalCanadian GAAP
    
    $
    119,654
    
    
    $
    296,238
    
    
    $
    3,820
    
    
    $
    (95,291
    )
    
    $
    204,767Adjustments for:Reduction in stated capital
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based compensation
    
    
    
    
    
    
    (316
    )
    
    
    (3,432
    )
    
    
    3,748
    
    
    
    Ascribed value of shares issued for U.S.
royalty interests, net
    
    
    1,358
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment
    
    
    (8,150
    )
    
    
    
    
    
    
    
    
    
    
    (8,150
    )
    
    
    (8,150
    )Depletion adjustments due to differences in
provision for impairment
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    1,562
    
    
    
    1,562GTL and EOR development costs expensed
    
    
    (10,712
    )
    
    
    
    
    
    
    
    
    
    
    (10,712
    )
    
    
    (10,712
    )U.S. GAAP
    
    $
    103,712
    
    
    $
    371,735
    
    
    $
    388
    
    
    $
    (183,298
    )
    
    $
    188,825
 Shareholders Equity
   17




---



##### 



FASB SFAS No. 123(R)
 Oil and Gas Properties and Investments
   Ceiling Test Impairments
    
    
    (Increase)U.S. GAAP
    
    
    Canadian GAAP
    
    
    DecreaseU.S. PropertiesPrior to 2004
    
    $
    34,000
    
    
    $
    34,000
    
    
    $
    2004
    
    
    15,000
    
    
    
    16,350
    
    
    
    1,3502005
    
    
    2,800
    
    
    
    
    
    
    
    (2,800
    )2006
    
    
    
    
    
    
    
    
    
    
    51,800
    
    
    
    50,350
    
    
    
    (1,450
    )China PropertiesPrior to 2004
    
    
    10,000
    
    
    
    
    
    
    
    (10,000
    )2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    1,700
    
    
    
    5,000
    
    
    
    3,3002006
    
    
    7,200
    
    
    
    750
    
    
    
    (6,450
    )18,900
    
    
    
    5,750
    
    
    
    (13,150
    )$
    70,700
    
    
    $
    56,100
    
    
    $
    (14,600
    )
   18




---



##### 



Condensed Consolidated Statements of Operations
  Three-Month Periods Ended March 31,2006
    
    
    2005Net
    
    
    Net Loss
    
    
    Net
    
    
    Net LossLoss
    
    
    Per Share
    
    
    Loss
    
    
    Per ShareCanadian GAAP
    
    $
    5,376
    
    
    $
    0.02
    
    
    $
    1,483
    
    
    $
    0.01Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    (232
    )
    
    
    Provision for impairment
    
    
    6,450
    
    
    
    0.03
    
    
    
    
    
    
    
    Depletion adjustments due to differences in
provision for impairment
    
    
    (285
    )
    
    
    
    
    
    
    (172
    )
    
    
    GTL and EOR development costs expensed, net
    
    
    571
    
    
    
    
    
    
    
    1,929
    
    
    
    0.01U.S. GAAP
    
    $
    12,112
    
    
    
    0.05
    
    
    $
    3,008
    
    
    $
    0.02Weighted Average Number
of Shares under U.S. GAAP (in thousands)
    
    
    
    
    
    
    224,547
    
    
    
    
    
    
    
    169,816
    Stock Based Compensation
  19




---



##### 



B-S
 Expected term (in years)
    
    
    4.00Expected volatility
    
    
    83.42
    %Dividend yield
    
    
    0.00
    %Risk-free rate
    
    
    4.08
    %
   Weighted-
    
    
    Weighted-
    
    
    AggregateNumber
    
    
    Average
    
    
    Average
    
    
    Intrinsicof Stock
    
    
    Exercise
    
    
    Contractual
    
    
    ValueOptions
    
    
    Price
    
    
    Term
    
    
    (Cdn.$ in(thousands)
    
    
    (Cdn.$)
    
    
    
    
    
    
    thousands)Outstanding as at December 31, 2005
    
    
    10,278
    
    
    $
    2.21Granted
    
    
    80
    
    
    $
    3.53Exercised
    
    
    (60
    )
    
    $
    1.98Outstanding as at March 31, 2006
    
    
    10,298
    
    
    $
    2.22
    
    
    
    2.9
    
    
    $
    12,390Options exercisable as at March 31, 2006
    
    
    6,612
    
    
    $
    1.76
    
    
    
    2.4
    
    
    $
    11,036
   20




---



##### 



Weighted-Number
    
    
    Averageof Stock
    
    
    Grant DateOptions
    
    
    Fair Value(thousands)
    
    
    (Cdn.$)Unvested as at December 31, 2005
    
    
    3,731
    
    
    $
    1.47Granted
    
    
    80
    
    
    $
    1.68Vested
    
    
    (125
    )
    
    $
    1.57Unvested as at March 31, 2006
    
    
    3,686
    
    
    $
    1.47
   For the three-month period ended March 31, 2005:Net loss under U.S. GAAP
    
    $
    3,008Stock-based compensation expense determined under the fair value based method for employee and director awards
    
    
    263Pro forma net loss under U.S. GAAP
    
    $
    3,271Basic loss per common share under U.S. GAAP:As reported
    
    $
    0.02Pro forma
    
    $
    0.02Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    169,816
  Pro Forma Effect of Merger and Acquisition
  Three-Month Period EndedMarch 31, 2005Net
    
    
    Net LossRevenue
    
    
    Loss
    
    
    Per ShareAs reported
    
    $
    5,736
    
    
    $
    3,008
    
    
    $
    0.02Pro forma adjustments
    
    
    730
    
    
    
    180
    
    
    
    $
    6,466
    
    
    $
    3,188
    
    
    $
    0.02Weighted Average Number
of Shares (in thousands)
    
    
    
    
    
    
    
    
    
    
    192,127
  21




---



##### 



Three Months Ended March 31,2006
    
    
    2005Net (Income)
    
    
    Net (Income)
    
    
    
    
    
    
    Net (Income)
    
    
    Net (Income)Revenue
    
    
    Loss
    
    
    Loss Per Share
    
    
    Revenue
    
    
    Loss
    
    
    Loss Per ShareAs reported
    
    $
    9,864
    
    
    $
    12,112
    
    
    $
    0.05
    
    
    $
    5,736
    
    
    $
    3,008
    
    
    $
    0.02Pro forma adjustments
    
    
    1,051
    
    
    
    (809
    )
    
    
    
    
    
    
    1,535
    
    
    
    (305
    )
    
    
    (0.01
    )$
    10,915
    
    
    $
    11,303
    
    
    $
    0.05
    
    
    $
    7,271
    
    
    $
    2,703
    
    
    $
    0.01Weighted Average Number
of Shares (in thousands)
    
    
    
    
    
    
    
    
    
    
    229,415
    
    
    
    
    
    
    
    
    
    
    
    178,407
 Condensed Consolidated Statements of Cash Flow
  Impact of New and Pending Canadian GAAP Accounting Standards
 S.1530 S.3855 S.3865
  Impact of New and Pending U.S. GAAP Accounting Standards
 SFAS No. 154
 22




---



##### 



SFAS No. 155
    Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 23
        Executive Overview of 2006 Results
  TM
  Three-Month Periods Ended March 31,(stated in thousands of U.S. dollars, except per share and production amounts)
    
    2006
    
    2005Oil and gas revenue
    
    $
    9,826
    
    
    $
    5,693Net loss
    
    $
    5,376
    
    
    $
    1,483Net loss per share
    
    $
    0.02
    
    
    $
    0.01Average production (Boe/d)
    
    
    2,013
    
    
    
    1,664Net operating revenue per Boe
    
    $
    39.25
    
    
    $
    26.25Capital investments
    
    $
    4,892
    
    
    $
    12,287Cash flow from operating activities
    
    $
    2,080
    
    
    $
    1,092
 Financial
Results  Quarter to Quarter Change in Net Loss
  24




---



##### 



(stated in thousands of U.S. Dollars)
    
    2006 vs. 2005Net Loss for the three-month period ended March 31, 2005
    
    $
    1,483Favorable (unfavorable) variances:Cash Items:Net Operating Revenues:Production volumes
    
    
    1,243Oil and gas prices
    
    
    2,890Less: Operating costs
    
    
    (954
    )3,179General and administrative
    
    
    429Business and product development
    
    
    (904
    )Net interest
    
    
    (68
    )Total Cash Variances
    
    
    2,636Non-Cash Items:Depletion and depreciation
    
    
    (5,640
    )Stock based compensation
    
    
    (57
    )Impairment of China oil and gas properties
    
    
    (750
    )Other
    
    
    (82
    )Total Non-Cash Variances
    
    
    (6,529
    )Net Loss for the three-month period ended March 31, 2006
    
    $
    5,376
   Net Operating Revenues
 
    
    Production Volumes 2006 vs. 2005
  China
   25




---



##### 



U.S.
       Quarters ended March 31,Net
Boes
    
    
    Percentage2006
    
    
    2005
    
    
    ChangeChina:Dagang
    
    
    117,915
    
    
    
    60,236
    
    
    
    96
    %Daqing
    
    
    5,579
    
    
    
    11,999
    
    
    
    -54
    %123,494
    
    
    
    72,235
    
    
    
    71
    %U.S.:South Midway
    
    
    46,075
    
    
    
    49,768
    
    
    
    -7
    %Citrus
    
    
    4,341
    
    
    
    9,528
    
    
    
    -54
    %Knights Landing
    
    
    42
    
    
    
    11,300
    
    
    
    -100
    %Others
    
    
    7,211
    
    
    
    6,941
    
    
    
    4
    %57,669
    
    
    
    77,537
    
    
    
    -26
    %181,163
    
    
    
    149,772
    
    
    
    21
    %
 
    
    Oil and Gas Prices 2006 vs. 2005
  26




---



##### 




    
    Operating Costs 2006 vs. 2005
  China
   U.S.
   27




---



##### 



Three-Month Periods Ended March 31,2006
    
    
    2005U.S.
    
    
    China
    
    
    Total
    
    
    U.S.
    
    
    China
    
    
    TotalNet Production:Boe
    
    
    57,669
    
    
    
    123,494
    
    
    
    181,163
    
    
    
    77,537
    
    
    
    72,235
    
    
    
    149,772Boe/day for the period
    
    
    641
    
    
    
    1,372
    
    
    
    2,013
    
    
    
    862
    
    
    
    803
    
    
    
    1,664
 Per Boe
    
    
    Per BoeOil and gas revenue
    
    $
    51.86
    
    
    $
    55.35
    
    
    $
    54.24
    
    
    $
    37.00
    
    
    $
    39.09
    
    
    $
    38.01Field operating costs
    
    
    15.52
    
    
    
    11.50
    
    
    
    12.78
    
    
    
    10.76
    
    
    
    7.76
    
    
    
    9.31Production taxes
    
    
    1.32
    
    
    
    
    
    
    
    0.42
    
    
    
    0.50
    
    
    
    
    
    
    
    0.26Engineering support
    
    
    4.04
    
    
    
    0.74
    
    
    
    1.79
    
    
    
    3.13
    
    
    
    1.18
    
    
    
    2.1920.88
    
    
    
    12.24
    
    
    
    14.99
    
    
    
    14.39
    
    
    
    8.94
    
    
    
    11.76Net operating revenue
    
    
    30.98
    
    
    
    43.11
    
    
    
    39.25
    
    
    
    22.61
    
    
    
    30.15
    
    
    
    26.25Depletion
    
    
    20.37
    
    
    
    43.90
    
    
    
    36.41
    
    
    
    14.77
    
    
    
    14.30
    
    
    
    14.54Net revenue from operations
    
    $
    10.61
    
    
    $
    (0.79
    )
    
    $
    2.84
    
    
    $
    7.84
    
    
    $
    15.85
    
    
    $
    11.71
 General and Administrative 2006 vs. 2005
  2006 vs.2005Favorable (unfavorable) variances:Oil and Gas Activities:China
    
    $
    (188
    )U.S.
    
    
    (149
    )Corporate
    
    
    748411Less: stock based compensation
    
    
    18$
    429
 SOX
 Business and Product Development 2006 vs. 2005
  28




---



##### 



2006 vs.2005Favorable (unfavorable) variances:GTL
    
    $
    52EOR
    
    
    (995
    )(943
    )Less: stock based compensation
    
    
    39$
    (904
    )
 TM TM
 Depletion and Depreciation 2006 vs. 2005
 TM
 China
  
    
    As noted in prior periodic reports on Form 10K and in related shareholder
communications, we have suspended new drilling activity at our Dagang field in order that
we may assess production decline performances on recently drilled wells, as well as
maximizing cash flow from these operations. As a result, we have reduced our estimate of
the overall development program and our independent engineering evaluators, GLJ Petroleum
Consultants Ltd., revised downward their estimate of our proved reserves as at December 31,
2005.
    
    In the second quarter of 2005, we impaired the cost of our first Zitong block
exploration well, Dingyuan 1, resulting in $12.2 million of those and other associated
costs being included with our proved properties and therefore subject to depletion.
  U.S.
  29




---



##### 



EOR
 TM TM TM
 Impairment of Oil and Gas Properties 2006 vs. 2005
   Capital Investments
  Three-Month Periods EndedMarch 31,(Increase)2006
    
    
    2005
    
    
    DecreaseOil and Gas Activities:China
    
    $
    2,716
    
    
    $
    9,551
    
    
    $
    6,835U.S.
    
    
    1,275
    
    
    
    807
    
    
    
    (468
    )EOR
    
    
    683
    
    
    
    1,714
    
    
    
    1,031GTL
    
    
    218
    
    
    
    215
    
    
    
    (3
    )$
    4,892
    
    
    $
    12,287
    
    
    $
    7,395
 Oil and Gas Activities  China
    30




---



##### 



Oil and Gas Activities  U.S.
  Knights Landing
  North Yowlumne
  LAK Ranch
  Citrus
  Northwest Lost Hills
 Aera
 31




---



##### 



Enhanced Oil Recovery and Heavy-To-Light Oil Activities
  RTPTMCommercial Demonstration Facility
 TM TM
 TM TM TM
 TM
 TM
   RTPTMPlant Design Package
 Colt RTP TM Plant o
 32




---



##### 



TM
 Iraq
 o
 TM
   Colombia
  Gas-To-Liquids Activities
 MOU EGAS
 33




---



##### 



Liquidity and Capital Resources
 Sources and Uses of Cash
  Operating Activities
  Investing Activities
  Financing Activities
  TM
  34




---



##### 



Three Months Ended March 31,2006
    
    
    2005Cash flow from operating activities
    
    $
    2,080
    
    
    $
    1,092Investing ActivitiesCapital investments, after changes in non-cash working capital
    
    
    (5,977
    )
    
    
    (5,404
    )Equity investment and Merger related costs
    
    
    (177
    )
    
    
    (730
    )Proceeds from sale of assets
    
    
    5,350
    
    
    
    Advance payments
    
    
    
    
    
    
    (300
    )Other
    
    
    (9
    )
    
    
    (813
    )
    
    
    (6,434
    )Financing ActivitiesProceeds from exercise of options
    
    
    91
    
    
    
    35Net debt financing
    
    
    (622
    )
    
    
    5,583Other
    
    
    
    
    
    
    (263
    )(531
    )
    
    
    5,355Net sources of Cash
    
    $
    736
    
    
    $
    13
 Outlook for 2006
  Contractual Obligations
  Payments Due by Year(stated in thousands of U.S. dollars)Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    After 2009Purchase Agreement:
    
    $
    50
    
    
    $
    50
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheets:Note payable
 current portion
    
    
    3,689
    
    
    
    2,751
    
    
    
    938
    
    
    
    
    
    
    
    
    
    
    
    Long term debt
    
    
    8,919
    
    
    
    
    
    
    
    6,182
    
    
    
    2,325
    
    
    
    412
    
    
    
    Asset retirement obligation
    
    
    1,790
    
    
    
    950
    
    
    
    101
    
    
    
    148
    
    
    
    27
    
    
    
    564Long term obligation
    
    
    1,900
    
    
    
    
    
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    Other Commitments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest payable
    
    
    1,433
    
    
    
    677
    
    
    
    617
    
    
    
    135
    
    
    
    4
    
    
    
    Lease commitments
    
    
    2,133
    
    
    
    595
    
    
    
    611
    
    
    
    473
    
    
    
    287
    
    
    
    167Zitong exploration commitment
    
    
    4,300
    
    
    
    4,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    24,214
    
    
    $
    9,323
    
    
    $
    10,349
    
    
    $
    3,081
    
    
    $
    730
    
    
    $
    731
 Off Balance Sheet Arrangements
  35




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##### 



Outstanding Share Data
  Quarterly Financial Data In Accordance With Canadian and U.S. GAAP (Unaudited)
 QUARTER ENDED2006
    
    2005
    
    20041st Qtr
    
    4th Qtr
    
    3rd Qtr
    
    2nd Qtr
    
    1st Qtr
    
    4th Qtr
    
    3rd Qtr
    
    2nd QtrTotal revenue
    
    $
    9,864
    
    
    $
    8,651
    
    
    $
    8,907
    
    
    $
    6,645
    
    
    $
    5,736
    
    
    $
    6,212
    
    
    $
    4,932
    
    
    $
    3,521Net loss:Canadian GAAP
    
    $
    5,376
    
    
    $
    8,885
    
    
    $
    2,113
    
    
    $
    1,031
    
    
    $
    1,483
    
    
    $
    17,184
    
    
    $
    951
    
    
    $
    1,298U.S. GAAP
    
    $
    12,112
    
    
    $
    8,557
    
    
    $
    1,843
    
    
    $
    1,564
    
    
    $
    3,008
    
    
    $
    15,736
    
    
    $
    980
    
    
    $
    1,510Net loss per share:Canadian GAAP
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    0.01U.S. GAAP
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    0.01
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
   36




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##### 



Part
II  Other Information
 Item 1. Legal Proceedings: None
 Item 1A. Risk Factors:
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None
 Item 3. Defaults Upon Senior Securities: None
 Item 4. Submission of Matters To a Vote of Securityholders: None
 Item 5. Other Information: None
 Item 6. Exhibits
 EXHIBITNUMBER
    
    DESCRIPTION4.1
    
    Special Warrant Indenture dated April 7, 2006 between the Company and CIBC Mellon Trust Company10.1 Terms of Agreement
 Conversion of Participating Interest by Richfirst Holdings Limited,
Pan-China Resources Limited, Sunwing Energy Ltd. and the Company (Incorporated by reference to
Exhibit 10.2 of Form 8-K filed with the Securities and Exchange Commission on February 24, 2006).31.1
    
    Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  By: /s/
Name:
    
    W. Gordon Lancaster

W. Gordon LancasterTitle:
    
    Chief Financial Officer
  37




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##### 



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description4.1
    
    Special Warrant Indenture dated April 7, 2006 between the Company and CIBC Mellon Trust
Company10.1
    
    Terms of Agreement  Conversion of Participating Interest by Richfirst Holdings
Limited, Pan-China Resources Limited, Sunwing Energy Ltd. and the Company (Incorporated by
reference to Exhibit 10.2 of Form 8-K filed with the Securities and Exchange Commission on
February 24, 2006).31.1
    
    Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 38