Production:

Oil and gas production in the first quarter of 2009 raised 35% to average 13,219 BOE per day compared to 9,762 BOE per day in the year-ago quarter. Production per million shares outstanding for the first quarter of 2009 averaged 320 BOE per day, up 24% from 259 BOE per day in the in the year ago quarter.

Celtic Exploration production is entirely based in Alberta and is divided into four core areas. In Southern Alberta, the company’s main natural gas producing properties are situated at Drumheller and Michichi and its primary oil producing properties are positioned at Princess and Bantry. In East Central Alberta, the principal producing asset is a shallow natural gas property at Ashmont, with future oil development potential at Edwand/Figure Lake.

In Northern Alberta, Celtic Exploration produces light oil mainly from Utikuma Lake. In West Central Alberta, Celtic Exploration has both natural gas and light oil production at Kaybob, Fox Creek and Swan Hills. West Central Alberta was the Celtic Exploration’s most active drilling area in the first three months of 2009.

Revenue:

Lower revenue in 2009 was because of lower commodity prices that more than counterbalanced increased production levels.

The combined average product price received for oil and gas sales, adjusted for realized gains or losses on financial derivatives for the first quarter of 2009 was CAD44.54 per BOE, a decline of 27% compared to the corresponding three month period of the earlier year.

Oil Operations:

Oil production for the first quarter of 2009 averaged 3,601 barrels per day, a raise of 9% compared to the year-ago quarter.

The average price received for oil sales, after realized financial derivatives, for the first quarter of 2009 was CAD79.01 (CAD45.01 before financial derivatives) per barrel, decreased 3% from the average price of CAD81.17 (CAD88.61 before financial derivatives) per barrel received in the year-ago quarter.

For the first quarter of 2009, average oil royalties were 18.3% of revenue, after financial derivatives (32.3% of sales, before financial derivatives). In the first quarter of the earlier year, average oil royalties were 27.0% of revenue, after financial derivatives (24.8% of sales, before financial derivatives). Higher royalty rates in 2009, before financial derivatives, were mainly a result of the new royalty framework implemented by the Alberta government effective January 1, 2009 which utilizes two month lagging oil prices in order to compute the applicable royalty rate applied to existing oil sales.

Transportation expenses for oil production in the first quarter of 2009 averaged CAD0.34 per barrel compared to CAD0.66 per barrel in the year-ago quarter. Lower per unit transportation expenses in 2009 reflect the larger portion of newer NGL production which is mostly pipeline related and therefore less expensive to transport compared to trucking oil.

For the first quarter of 2009, oil production expenses were CAD13.87 per barrel. In the same quarter of the previous year, oil production expenses were CAD14.54 per barrel. Lower per unit production expenses in 2009 reflect the increasing portion of newer NGL production which is less expensive to produce than oil.

Gas Operations:

Gas production for the first quarter of 2009 averaged 57,706 MCF per day, a raise of 49% compared to the year-ago quarter. Increases in gas production in 2009 were mainly a result of Celtic Exploration’s successful drilling results in its resource development prospect situated at Kaybob, Alberta.

The average price received for gas sales, after realized financial derivatives, the first quarter of 2009 was CAD5.36 (CAD5.17 before financial derivatives) per MCF, down 37% from the average price of CAD8.51 (CAD8.71 before financial derivatives and physical fixed price contracts) per MCF received in the year-ago quarter.

For the quarter ended March 31, 2009, average gas royalties were 19.8% of revenue, after financial derivatives (20.7% of sales, before financial derivatives). In the year-ago quarter, average gas royalties were 22.7% of revenue, after financial derivatives (22.5% of sales, before financial derivatives). Lower gas royalty rates in 2009, before financial derivatives, were mainly a result of lower natural gas selling prices and longer depth horizontal wells which receive favorable treatment under the new royalty framework program.

Transportation expenses for the first quarter of 2009 were CAD0.09 per MCF, a decline of 31% compared to CAD0.13 per MCF in the year-ago quarter. Lower transportation expenses in 2009 reflect Celtic Exploration’s ownership in the majority of the pipeline infrastructure at its main producing area of Kaybob, Alberta, where the company has been increasing production.

For the first quarter of 2009, production expenses of CAD1.47 per MCF were 7% greater than CAD1.38 per MCF in the year-ago quarter. Higher production expenses in 2009 reflect certain one time expenses that are being incurred at Kaybob as a result of turnaround operations at the KA Gas Plant where the majority of Celtic Exploration’s gas is processed.

Other Expenses:

For the first quarter of 2009, general and administrative expenses were CAD1 million (CAD0.86 per BOE), interest expense was CAD0.9 million, and depletion, depreciation and accretion expenses were CAD24.7 million (CAD20.78 per BOE). In the previous year, for the quarter ended March 31, 2008, general and administrative expenses were CAD1.1 million (CAD1.18 per BOE), interest expense was CAD1.8 million, and depletion, depreciation and accretion expenses were CAD20.2 million (CAD22.69 per BOE). Lower interest expense in 2009 reflects declining interest rates and higher depletion, depreciation and accretion expenses reflect higher production volumes.

Taxes:

For the quarter ended March 31, 2009, Celtic Exploration provided for a recovery of future income taxes in the amount of CAD1.9 million, compared to a recovery of CAD2.9 million in the year-ago quarter. For the first quarter of 2009, Celtic Exploration is not required to pay existing income taxes as it has sufficient income tax deductions available to shelter taxable income for the period.

Earnings And Funds From Operations:

On a barrel of oil equivalent basis, funds from operations in the first quarter of 2009 were CAD23.65 per BOE, down 26% from CAD31.86 per BOE in the year-ago quarter. The main reason for the decrease in funds from operations per BOE in 2009 was lower commodity prices.

Financial turmoil and the global recession carry on remaining in the headlines and could continue to put pressure on oil and gas prices in the future. The high demand for oil by countries such as India and China, in the past two years, has temporarily slowed down. As a result of these and other factors, Celtic Exploration anticipates oil prices to be considerably lower in 2009 compared with the previous year. Industrial demand for natural gas in North America has also been decreased because of the weakening economy, at the same time when natural gas supply in the US was increasing.

Both these factors have contributed to lower natural gas prices, in spite of the raised demand for natural gas that was created by a colder than average winter. Celtic Exploration also anticipates much weaker average natural gas prices in 2009 compared to 2008. However, with the rapid decline in active rigs drilling for gas in North America and with the anticipated decline of new flush natural gas production recently brought on-stream in the US, Celtic Exploration is optimistic that natural gas prices may recover towards the end of 2009 or early in 2010.