Quarter Financial Highlights - Ivanhoe Energy 3Q Highlights 2006

Source: www.gulfoilandgas.com 11/9/2006, Location: North America

Ivanhoe Energy Inc. has announced its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

Summary of Third Quarter
We took a number of steps in the third quarter in key areas required to build an energy company based on advanced technologies. In particular, we have sharpened our focus on our Heavy Oil Upgrading (HTL) business activities by adding global banking and engineering expertise and have continued to advance the development of the technology. Our cash flow from operating activities generated a record US$5.6 million in the third quarter and we took steps to improve the liquidity of the company in anticipation of future growth.

We made significant progress this quarter in building the relationships that will be required as we move towards obtaining our first commercial project using the HTL technology. We appointed AMEC as preferred engineering contractor for the HTL technology and appointed LaSalle Bank N.A., who along with their parent, ABN AMRO Incorporated, will act as our lead corporate bank to support our technology implementation activities worldwide. The agreement with LaSalle, combined with a new US$15 million credit facility, will enhance our financial flexibility as we move forward with HTL projects.

Internally, we increased our focus on building an HTL business by realigning some resources to provide additional support to the HTL team and assigning individual board members to “champion” business development activities for specific HTL projects. In addition, our 2007 capital and operating budgets have been built with a significant emphasis on the development of the HTL technology. And, in a further move to sharpen our focus on the HTL technology, we sold our interest in the LAK Ranch Project as we determined that this project was not large enough to support a HTL facility.

We continued to work on advancing the technology, with our activities in the quarter centered on improving the operability of the commercial demonstration facility (CDF) in California. Considerable enhancements to the facility were made as we prepare it for upcoming test runs.

HTL Technology Development Activities
Our significant activities in the HTL technology development program were primarily related to the appointment of AMEC as our preferred engineering contractor and advancing CDF test operations.

The agreement with AMEC brings Ivanhoe Energy a core team, knowledgeable in the HTL technology and in the deployment of new technologies, that can be readily initiated when feasibility and engineering work is required on a global basis. In addition, through AMEC’s varied client relationships, particularly in countries with potential for HTL application, AMEC may be able to provide access to alternative opportunities for Ivanhoe Energy.

We made a number of modifications in the third quarter to the HTL heavy oil upgrading CDF that demonstrates a processing capacity of 1,000-barrels-per-day, located in the Belridge heavy oil field in California. The work at the CDF largely centered on improvements to the distillation and handling of upgraded product; however we also undertook other previously identified modifications.

The CDF has demonstrated the operation of the core upgrading technology and produced High Yield product, which has correlated with the Ottawa pilot plant data. The High Yield configuration is focused on viscosity reduction and maximization of liquid product yields. It is appropriate for a broad range of heavy oil resources that are “stranded” and cannot be developed due to the inability to transport heavy crude from the field to market. Field opportunities that are suited to the High Yield configuration are found throughout the world’s oil basins and a number of opportunities internationally have been identified and are being actively pursued.

We have shifted our concentration over the past two quarters from the High Yield configuration to extended runs and the High Quality configuration, with our recent work centered on producing High Quality product in the CDF. The High Quality, or recycle, configuration takes upgraded High Yield product and separates any heavy or residual component that has survived the initial upgrading process and recycles it back through the core upgrading process. The CDF was originally designed and constructed to provide a balance between cost and capability. As we moved to the High Quality configuration, we identified a number of additional enhancements and operating adjustments which have taken longer to implement than originally anticipated and extended High Quality runs have not yet been completed.

The High Quality configuration, appropriate for numerous resource opportunities in North America and other parts of the world, including the oil sands in Western Canada, produces higher amounts of by-product energy that can be used as a heat source to facilitate heavy oil production and creates a more fully upgraded product. There are numerous heavy oil fields in many parts of the world that are “stranded” or economically challenged because they lack suitable energy sources to extract the heavy oil.

We will continue with a systematic progression of runs at the CDF, to generate data in support of our commercial discussions with resource owners in both the High Yield and High Quality configurations. We are continuing our discussions with heavy oil resource owners for the potential commercial deployment of our HTL upgrading technology where we believe we can use the technology to create opportunities to acquire interests, and actively participate, in heavy oil development projects by building and owning the facilities.

U.S. Oil and Gas Operations

South Midway
We have 67 wells in the 1,400-acre South Midway heavy oil field in California, with a working interest of 100%. Production performance is stable with good response to both cyclic and continuous steam injection. Consistent with our production strategy of developing our existing fields, we drilled and completed 10 wells in the third quarter. The new wells are in various stages of primary or enhanced steam production and early indications are that production rates are as expected.

Knights Landing
We completed interpretation of the 3-D seismic acquisition program at the Knights Landing natural gas project in California’s Sacramento Basin in the third quarter of 2006, and identified a number of potential drilling locations. We plan to drill four wells in 2007.

LAK Ranch
On October 25, 2006 we announced our intention to sell our interest in the LAK Ranch Project in Wyoming to Derek Oil & Gas Corporation for US$800,000. We determined that this project is not large enough to support a HTL facility and does not fit with our strategy of deploying capital to further the development of the HTL technology.

Other U.S. Activities
We have farmed out three wells to be drilled at the Citrus prospect in California at no cost to us. We will retain 35% in any development that takes place on this 2,415-acre prospect.

In December 2005, drilling commenced on the North Yowlumne exploration prospect to a total depth of 13,000 feet to test the Stevens Sand which has produced over 110 million barrels of oil in the nearby Yowlumne field. The test program is proceeding from the lowest zone to the highest zone in the well. The lower zones tested a small amount of light 32° and 36° API gravity oil, however production rates were not at commercial levels. The operator is continuing with the test program of the upper intervals. Early results are not encouraging; however a determination on the well will not be made until final results are available.

China Oil and Gas Operations

Dagang
The gross production rate at the end of the third quarter of 2006 at the Dagang project was approximately 2,148 barrels of oil per day, compared to 2,383 barrels per day at the end of the second quarter of 2006. At the end of the third quarter we had two wells on workovers and 41 wells on production. In the third quarter, we fracture stimulated four wells and recompleted two wells. We presented a Modified Overall Development Program to our Chinese partner in the third quarter in which we proposed up to five additional wells to be drilled in the project by October 31, 2007 and are awaiting their formal response.

Zitong
The second exploratory well on the Zitong natural gas exploration block, Yixin #1, was spudded on October 23, 2006. There will be insufficient time however, to complete drilling and testing of the well before the expiry of the first exploration period on November 30, 2006. Consequently, in September 2006 we requested a further extension to the Phase 1 exploration program, to a date 90 days following the completion of testing of the second well, which is expected in the second quarter of 2007. We have received preliminary approval of the revised timetable and are awaiting formal approval of the extension.

After the drilling of the Yixin #1 well, we will evaluate the results and make an election, along with our partner Mitsubishi Gas Chemical Company Inc., whether to enter into the next three-year exploration phase. We have a 90% working interest in this project and are the operator.

Other China Activities
In May, we signed an agreement for the proposed merger of Sunwing Energy Ltd., Ivanhoe Energy’s wholly owned China subsidiary, with China Mineral Acquisition Corporation (CMA), a U.S. public corporation. CMA’s amended and restated Certificate of Incorporation required it to liquidate if it did not complete a business combination by August 30, 2006. CMA requested an extension from its shareholders to March 31, 2007, however insufficient support was received for the extension proposal and the business combination did not proceed.

Gas-to-Liquids Activities

We have a memorandum of understanding with Egyptian Natural Gas Holding Company (EGAS) to prepare a feasibility study to construct and operate a gas-to-liquids (GTL) plant in Egypt. Based on review of the feasibility study and commercial proposal, we submitted a redrafted proposal in October 2006, which, if approved, could lead to negotiations for a definitive agreement for the development of a project.

Consolidated Financial Highlights

Cash flow from operating activities remained positive for the eighth consecutive quarter, generating a record US$5.6 million, with capital investments for the quarter at US$5.0 million. Revenue continued to grow, increasing 7% from the second quarter of 2006 and 57% from the third quarter of 2005, due to continued high oil prices and higher production. This increase in revenue was offset by higher depletion and depreciation expense and by increased business and product development and general and administrative expenses over the same quarter a year ago. Our net loss for the quarter was US$4.4 million.

Liquidity and Capital Resources
On September 30, 2006, our cash position was US$19.5 million. Our operating activities provided US$5.6 million in cash for the third quarter of 2006 and US$11.3 million for the first nine months of 2006. Capital investments for the third quarter of 2006 were US$5.0 million and for the first nine months of 2006 were US$13.6 million. Our capital investment budget for 2006 of $37.4 million has been reduced to US$16.4 million, principally as a result of a significant curtailment of our California exploration program and later than anticipated commencement of drilling on the Zitong block in China.

On November 6, 2006 we appointed LaSalle Bank N.A. as our lead corporate bank for business transactions worldwide. LaSalle Bank is a subsidiary of ABN AMRO Bank N.V. As an initial step, a subsidiary of Ivanhoe Energy obtained a US$15 million Senior Secured Revolving/Term Credit Facility, with an Initial Borrower Base of US$8 million from LaSalle Bank, which will be available for the development of oil and gas properties, general corporate purposes and for the commencement of engineering of HTL commercial facilities.


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