Second Quarter 1998
For the period ended June 30, 1998

MMRL Reports Second Quarter Results

Message to Shareholders

We are pleased to report on the operations and financial performance of Morrison Middlefield Resources Limited for the three and six month periods ended June 30, 1998.

Important events during the quarter included the following:

• a new Saltfleetby gas well in the UK tested at 10 mcf of gas and 230 barrels of natural gas liquids per day;
• the Kyle offshore well in the North Sea was spudded;
• the Company completed the exchange agreement with Northstar Energy Corporation;
• the Company completed the sale of certain Canadian assets for $17 million; and
• oil prices were 29% lower than the comparable quarter last year thereby causing a significant reduction in cash flow and earnings.

SECOND QUARTER RESULTS

Financial

Cash flow from operations totalled $5.0 million in the second quarter or $0.25 per share fully diluted as compared to $9.7 million or $0.52 per share a year earlier and $5.2 million in the first quarter of 1998. A net loss of $1.5 million was recorded in the second quarter or $0.08 per share fully diluted compared to net earnings of $2.1 million last year. The year to date net loss was $3.5 million or $0.18 per share fully diluted compared to net earnings of $6.0 million in 1997.

Production

Total production averaged 7,102 boe/d in the second quarter down 8% from the first quarter and down 15.5% from a year earlier. Oil and natural gas liquids averaged 5,871 bbls/d in the second quarter of 1998 as compared to 6,735 bbls/d a year earlier. Natural gas production averaged 11.7 mmcf/d in the second quarter of 1998 versus 16.0 mmcf/d in 1997. The decline in production was caused in part by the sale of Canadian assets during the quarter and the shutting in of the 250 bopd Cold Hanworth well. This well is being sidetracked with the goal of doubling oil production.

The Keddington discovery well drilled in the last quarter of 1997 has continued to produce oil during 1998 on an extended well test following a fracture stimulation. The oil rates are encouraging and we continue to await development approval for two appraisal wells. Production facilities are currently being installed on the field.

Drilling

During the three month period ended June 30, 1998, MMRL participated in the drilling of 11 wells which resulted in six oil wells, three gas wells and two wells that were abandoned for an overall success ratio of 82%. Four exploration wells were drilled resulting in a success ratio of 50% and the seven development wells were all successful.

In the UK onshore, two wells were drilled in the three months ending June 30, 1998 which resulted in one oil well and one gas well. The gas well was drilled on the Saltfleetby gas field and flowed at a stable rate of 10 million standard cubic feet/day on a three day test. The resulting pressure information from the well has confirmed connectivity in the reservoir and should lead to a significant upgrade in proved gas reserves. The gas has a high condensate yield of 23 barrels/million cubic feet which adds value to these reserves. A follow up well targetted at a separate fault compartment in the Saltfleetby field between the existing wells was spudded during the quarter. It has penetrated a gas bearing reservoir section but has yet to be tested and completed.

A 3D seismic program was acquired and processed over and around the Cold Hanworth discovery drilled in the fourth quarter of 1997. Based upon initial results from this data, MMRL elected to sidetrack the discovery well to an updip location and this well is currently drilling. In the first half of 1998, the discovery well produced steadily at 250 bopd, but had a 50% water cut from what was believed to be communication with a lower water zone. The goal of the sidetrack is to double production of oil. Production facilities are now in place and the new horizontal section is expected on stream in early September.

During the second quarter, of the nine wells drilled in Canada, four were in the Halkirk area and four were in the Liege area. All of these wells were on lands disposed of as part of the Mountain asset exchange with Northstar. The remaining Canadian well drilled was in the Alderson area and resulted in a successful gas well.

In the North Sea, a development well in the Kyle field operated by Ranger Oil was spudded in mid-July and work continued during the second quarter on the Floating Production Storage and Offtake ("FPSO") vessel. Contractual agreements were established between the Banff and the Kyle field owners and a development plan is being finalized. Production is now expected to commence in the first quarter of 1999 following sub-sea completion and installation of a pipeline.

Acquisitions of interests in four offshore fields from BP ("Dolphin" assets) and an additional 4% interest in the Chestnut field were completed in July 1998. Petrobras, the operator of the Dolphin assets, has initiated detailed technical evaluations and is currently in discussion with joint venture partners regarding Extended Well Test options for these fields. Negotiations with several FPSO vessel owners have continued throughout the first half of 1998 for both the Dolphin assets and Chestnut. Although no agreement has yet been made, a letter of intent has been agreed with a vessel owner to conduct a detailed feasibility study by year end 1998.

Corporate Developments

During the second quarter of 1998 MMRL completed the sale of certain of its non-core Canadian oil and gas properties located in the Gilby and Niton/Shiningbank areas of Alberta and used the proceeds to primarily reduce long term debt.

On July 31, 1998, MMRL completed the exchange of certain Canadian assets held through Mountain Energy Inc. for Northstar's shareholding of MMRL. As a result, the management agreement with Northstar and Middlefield has been terminated. Going forward MMRL has hired its own accounting and administrative staff and has negotiated a new services agreement where it has retained the services of selected personnel to act as senior officers of the Company. It is anticipated that overall G&A costs will decline significantly as a result of these changes.

Effective July 31, 1998, Mr. John A. Hagg and Mr. Jerry L. Rochon resigned as directors of the Company and Mr. Anthony P. Traub was appointed a director.

Outlook

MMRL has a very strong asset base including a strategic position onshore in the UK and interests in several North Sea licences. Due to current low oil prices, we are developing a strategy to conserve cash and expend capital only on projects which generate positive returns at current oil prices. As a result, the capital spending budget for 1998 has been reduced to $47 million. While this will slow down our drilling program in the short term, it is believed this is the optimum plan for the long term future of the Company.

Peter A. Braaten
President and C.E.O.

August 11, 1998