2M Energy Corporation

Overview

Highlighted by the positive outcome of its drilling program at Wild River, which resulted in significant increases in its oil and gas reserves, 2M had an excellent year in 2004

Review of 2005 Drilling Program

During 2005, 2M participated in 11 wells and the expansion of the Wild River gas plant in west central Alberta, incurring capital expenditures of approximately $9 million and earning net operating income before tax of $2.2 million.Shortly after year end, 2M sold its non-operated interests in 21 gas wells, related gas gathering and processing facilities and 14.25 sections of land at Wild River, as well as minor interests at Sylvan Lake, Paddle River and Edson, Alberta for $24 million.All of these assets were held through a joint venture agreement with a private company.After adjustments, net cash proceeds to 2M of $19.1 million resulted in a pre-tax capital gain of $4.4 million on this investment program.

Management felt that returns from the exploration and development of the Wild River property, while acceptable, were heavily reliant on the sustainability of high natural gas prices.Furthermore, the capital requirement to fully develop the property was likely to increase substantially, limiting Middlefield Bancorp ’s strategic flexibility.Finally, it was opportune to consider a divestiture in light of strong buyer demand for attractive oil and gas plays.The decision to divest was therefore made, culminating in the successful closing of the sale of these assets on November 17th at a satisfactory profit.

2006 Program and Outlook

Oil and gas interests owned by 2M remaining after the sale include a 33.3%interest in oil sands rights on 88 sections of land in the Panny region in northwest Alberta, operated by Devon Canada Corporation.The company also owns a 16.7%interest in approximately 4 sections of land with shallow gas potential in the Countess region of southern Alberta, operated by Encana Corporation.

Neither Panny nor Countess is currently producing, however, Devon has recently initiated the reactivation of one of the shut-in wells at Panny using new technology. There were 16 wells drilled on this property in the late 90 ’s, the most successful of which initially produced 150 boed.All of the producing wells have since been shut-in due to their low productivity and high operating costs.In combination with currently high oil prices, however, the new production techniques being experimented with by Devon may result in these properties becoming economically productive.

At Countess, Encana has recently applied for downspacing approval to permit up to four shallow gas wells to be drilled per section.Given 2M ’s small working interest and the low productivity of these types of wells, these holdings offer only modest potential for the company.

In 2006, 2M Energy will continue to pursue new opportunities to participate in oil and gas exploration and development joint ventures with quality operating companies that offer attractive potential returns.

Subsequent Event

On November 8, 2005, 2M entered into a binding agreement to sell its oil and gas interests located at Wild River, Alberta, along with some smaller related properties.The assets sold included non-operated interests in 21 gas wells, related gas gathering and processing facilities and 14.25 sections of land at Wild River, as well as minor interests at Sylvan Lake, Paddle River and Edson, Alberta.These assets were held through a joint venture exploration and development program operated by a private company.The sale transaction was completed on November 17, 2005 for a total selling price of $24 million which, after adjustments, generated net cash proceeds to the Company of $19.1 million. Management believes that it received an excellent price for these properties.The assets and liabilities that are the subject of the sale have been classified as “Assets Held for Sale ”in the consolidated balance sheets.

Review of 2004 Drilling Program

During 2004, the company participated with its joint venture partners in 10 wells and the construction of a gas plant in west central Alberta, incurring capital expenditures of approximately $4.9 million. Following is a summary of operations in 2004, which involved a five well program targeting the Bluesky zone, two wells farmed out to Talisman Energy Inc., three wells that targeted deep, multi-zone potential and participation in a 15 mmcfd gas plant built and operated by Encana Corp.

The Bluesky program exceeded our expectations. All five wells encountered good reservoir, in several zones in some wells, whereas we had anticipated only an 80% probability of success. Our independent engineering firm, Paddock Lindstrom and Associates Ltd. (“Paddock”), estimates that average production per well in the first year will be 974 mcfd of gas, plus associated liquids and that reserves are approximately 1.5 bcf per well. Paddock’s valuation of 2M’s 25% interest in these wells on a PV10 pre-tax, proved plus probable basis is $5.3 million as of October 31, 2004. The first well commenced production in early November and all five are expected to be completed, tied in to the Encana plant and producing in 2005.

The Talisman farmout wells were also successful. The joint venture partners therefore exercised their right to earn a 45% interest by paying that portion of the completion and tie-in costs. The wells are currently producing through Talisman’s facilities. The farmout reduced 2M’s capital risk, but diluted its ownership interest to 11.25%, which Paddock valued at $0.8 million as at fiscal year-end.

Up to three additional wells may be drilled in each of the Talisman farmout sections, but none has been included in our current capital budget for 2005. Our operating partner has indicated that it will likely take over operatorship on any new wells, which would reduce our drilling and completion costs.

We also committed late in 2004 to participate in three, somewhat riskier wells further away from existing production, only one of which commenced drilling prior to year end. This well has since been successfully completed in several zones, including the Viking, which is a potentially prolific producer in this area. With the extension of this zone onto our lands now verified, we are optimistic that the second of these three wells may also encounter Viking reservoir. It is located between the first well and an excellent Viking producer to the northeast. We anticipate that all three of these wells, will be in production before year end.

The Encana gas plant, in which our joint venture owns 20% or 3 mmcfd of dedicated processing capacity, is built and fully operational. Fortunately, the plant has additional spare capacity available at the moment, which will allow the five Bluesky wells to be produced at initial combined total rates of up to 7 to 8 mmcfd. As other owners connect new wells to the plant, capacity limitations will constrain our production. However, plans are in place to double the size of the plant within the next year.

2005 Drilling Program and Outlook

Acceleration of activity at Wild River is being driven by several factors that have been making these deep, tight gas reservoirs more economically attractive to develop. An important contributor has been sophisticated new drilling and completion techniques that have substantially reduced costs and improved recovery and flow rates. The regulatory environment has also been helpful, including the willingness of the Alberta Energy and Utilities Board to allow drilling of up to four wells per section, and the co-mingling of production from several zones. Finally, the deeper wells qualify for an initial holiday from crown royalties. In conjunction with strong gas prices, our lands at Wild River have become a very valuable asset, but will require a substantial amount of capital to fully develop.

Our initial capital budget for 2005 is $7.5 million, all of which relates to the further development of our Wild River lands. The program includes participation in five wells, doubling the size of the Encana gas plant, and completing, equipping and tying in wells commenced in 2004. As the year progresses, however, we expect that our operating partner will likely be proposing to significantly increase the scale and pace of drilling activity and capital spending in this area.

Of the five new wells at a budgeted cost of $3.6 million in our initial 2005 program, four will target deep, tight gas at approximately 3, 200 metres, and one will target the shallower Cardium zone at a depth of approximately 2, 000 metres. Other industry participants have small interests in the mineral rights on these lands and are also expected to participate in these wells. A new rig has been contracted from Western Lakota Energy Services Ltd. and commenced this drilling program in January 2005.

The four deep wells will target primarily the Bluesky, Fahler, Notikewin and Cadomin zones. Multi-zone completions typically yield production rates of 500 mcfd to 1.5 mmcfd and reserves of 1.0 bcf to 2.5 bcf per well. It is quite possible that the shallower well targeting the Cardium zone may also be capable of being completed in more than one zone. Our previously drilled deep wells have encountered the potentially productive Cardium zone, but were not completed in this zone because it cannot be commingled with the much higher pressure deep zones. Cardium wells in the area typically produce at 500 mcfd to 1 mmcfd and have reserves of approximately 1 bcf.

Revenue Projections and Valuation

The following commentary contains forward-looking statements about expected future events and/or financial results that are subject to substantial risks and uncertainties. MBN cautions that actual performance will be affected by a number of factors, many of which are beyond its control. Actual results may differ materially from those reflected in the MD&A. Forward-looking statements are based on the estimates and opinions of MBNs management at the time the statements were made.

For fiscal 2005, projected net operating income from oil and gas production for 2M is $3.3 million assuming prices of US$6.10 mmbtu for gas and US$40 bbl for oil. Average production is forecast to be approximately 265 boed. These projections assume no contribution from the three wells drilled late in 2004 or from new wells in 2005. The 2005 projections therefore have some potential to the upside, but are subject to all of the normal industry risks including weather related and other operating challenges, as well as energy commodity price fluctuations.

Paddock valued 2M’s oil and gas reserves as at October 31, 2004 at $8.1 million on a PV10 pre-tax, proved plus probable basis which represents an increase in 2004 of $6.7 million from $1.4 million at the end of 2003.

Outlook for 2005

Natural gas reserve additions continue to lag depletion rates in North America. US production is declining and Canadian production, which currently supplies about 15% of US needs, appears to have peaked. Future growth in supply from sources such as coalbed methane, liquid natural gas imports and Arctic gas will take several years to have an impact and will be costly and capital intensive. We therefore expect natural gas prices to continue to fluctuate around current levels of US$6 to $7 per mcf due to strong demand growth and increasing finding, development and transportation costs.

Oil price drivers include growth in demand for transportation fuels from the developing world, particularly China and India, in the face of production constraints in several troubled producing nations. High oil prices also contribute to US dollar weakness by aggravating the US trade deficit, creating a spiral in which OPEC must increase its target price band to maintain purchasing power equivalency. Historically high oil prices in the range of US$40 per barrel appear likely to continue to prevail through 2005.

Although high energy prices will constrain global economic growth rates, they also will help to maintain interest rates at relatively low levels. Equities of Canadian and international oil and gas producers should therefore continue to perform well in these conditions. The positive outlook for the energy commodities and capital markets, combined with the company’s attractive exploration and development prospects, bode well for another good year in 2005 for 2M Energy Corp.

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