10QSB

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

þ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2005; 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 0-18596

American Natural Energy Corporation

(Exact name of small business issuer as specified in its charter)

Oklahoma	73-1605215
(State or other jurisdiction of incorporation of organization)	(I.R.S employer identification no.)

One Warren Place, 6100 South Yale, Suite 300, Tulsa, Oklahoma 74136

(Address of principal executive offices, zip code)

(918) 481-1440

(Issuer’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act). Yes o No þ

     Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ                    No  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

     As of November 14, 2005, 50,664,342 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

1

AMERICAN NATURAL ENERGY CORPORATION

QUARTERLY REPORT ON FORM 10-QSB

INDEX

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets — September 30, 2005 and December 31, 2004		3
Condensed Consolidated Statements of Operations — Three Months and Nine Months Ended September 30, 2005 and September 30, 2004		4
Condensed Consolidated Statements of Cash Flows — Three Months and Nine Months Ended September 30, 2005 and September 30, 2004		5
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis or Plan of Operation		16
Item 3. Controls and Procedures		24
PART II — OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 6. Exhibits		25

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements
AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)

	September 30, 2005			December 31, 2004
	$			$
ASSETS
Current assets:
Cash and cash equivalents		83,507			303,817
Accounts receivable — joint interest billing		236,699			468,737
Accounts receivable — oil and gas sales		603,060			910,496
Accounts receivable — other		13,654			7,893
Prepaid expenses		289,245			95,739
Oil inventory		7,773			21,968
Total current assets		1,233,938			1,808,650
Proved oil and natural gas properties, net of accumulated depletion, depreciation, amortization and impairment of $19,189,149 and $18,456,138		2,234,159			1,878,100
Unproved oil and natural gas properties		3,732,698			3,445,522
Equipment and other fixed assets, net of accumulated depreciation of $489,334 and $361,954		612,293			712,395
Deferred expenses, net of accumulated amortization of $671,276 and $322,163, and prepaid costs		274,936			321,454
Total assets		8,088,024			8,166,121
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		3,010,897			4,031,055
Revenue payable		3,762,710			4,302,834
Accrued interest		6,000			6,000
Notes payable (Note 4)		1,032,999			12,910
Current portion of convertible secured debentures, net of discount of $270,043 and $3,868,386 (Note 4)		10,904,957			7,806,614
Total current liabilities		18,717,563			16,159,413
Noncurrent notes payable (Note 4)		213,932			—
Asset retirement obligation		1,736,665			1,603,064
Total liabilities		20,668,160			17,762,477
Commitments and contingencies (Note 5)
Stockholders’ equity:
Common stock
Authorized — 250,000,000 shares with par value of $0.001 (2004 — 100,000,000 with par value $0.01)
Issued — 50,664,342 (2004 — 35,138,219) shares		50,664			351,382
Additional paid-in capital		19,966,340			17,435,536
Accumulated deficit, since January 1, 2002 (in conjunction with the quasi-reorganization stated capital was reduced by an accumulated deficit of $2,015,495)		(34,812,938	)		(29,299,486	)
Accumulated other comprehensive income		2,215,798			1,916,212
Total stockholders’ equity		(12,580,136	)		(9,596,356	)
Total liabilities and stockholders’ equity		8,088,024			8,166,121

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
For the three-month and nine-month periods ended September 30, 2005 and September 30, 2004

	Three months ended September 30,						Nine months ended September 30,
	2005 $			2004 $			2005 $			2004 $
Revenues:
Oil and gas sales		387,581			785,554			1,897,896			2,380,616
Operations income		31,019			35,324			76,896			86,372
Interest and other income		10			167			28			1,887
		418,610			821,045			1,974,820			2,468,875
Expenses:
Lease operating expense		112,850			109,007			381,984			305,481
Production taxes		47,494			67,046			186,000			169,829
General and administrative		306,427			363,953			1,234,372			1,414,129
Litigation costs		—			54,722			—			215,769
Foreign exchange loss		501,274			546,525			299,586			187,398
Interest and financing costs		248,467			934,895			2,883,661			2,454,744
Impairment of oil and gas properties		—			3,937,009			—			3,937,009
Write-down of inventory to market		—			3,556			—			3,556
Depletion, depreciation and amortization — oil and gas properties		211,264			879,222			879,503			1,593,297
Depreciation and amortization — other assets		69,601			112,718			476,492			306,045
Loss on extinguishment of debt		—			—			1,146,674			—
Total expenses		1,497,377			7,008,653			7,488,272			10,587,257
Loss before income tax expense and cumulative effect of accounting change		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,118,382	)
Income tax expense		—			—			—			—
Net loss before cumulative effect of accounting change		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,118,382	)
Cumulative effect of accounting change		—			—			—			(326,381	)
Net loss		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,444,763	)
Other comprehensive income (loss) — net of tax:
Foreign exchange translation		501,273			546,316			299,586			187,329
Other comprehensive income (loss)		501,273			546,316			299,586			187,329
Comprehensive loss		(577,494	)		(5,641,292	)		(5,213,866	)		(8,257,434	)
Basic and diluted loss per share before cumulative effect of accounting change		(0.02	)		(0.18	)		(0.14	)		(0.28	)
Cumulative effect of accounting change		—			—			—			(0.01	)
Net loss per share		(0.02	)		(0.18	)		(0.14	)		(0.29	)
Weighted average number of shares outstanding
Basic		43,684,177			33,637,725			38,433,032			29,604,454
Diluted		43,684,177			33,637,725			38,433,032			29,604,454

     The accompanying notes are an integral part of these condensed consolidated financial statements.

4

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the three-month and nine-month periods ended September 30, 2005 and September 30, 2004

	Three months						Nine months
	ended September 30,						ended September 30,
	2005			2004			2005			2004
	$			$			$			$
Cash flows from operating activities:
Net loss		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,444,763	)
Non cash items:
Depreciation, depletion and amortization		280,865			991,940			1,355,995			1,899,342
Impairment of oil and gas properties		—			3,937,009			—			3,937,009
Interest and financing costs		63,190			872,743			2,451,667			2,164,291
Foreign exchange (gain) loss		501,274			546,525			299,586			187,398
Write-down of inventory to market		—			3,556			—			3,556
Loss on extinguishment of debt		—			—			1,146,674			—
Cumulative effect of accounting change		—			—			—			326,381
Non cash compensation expense		6,750			—			47,250			—
Changes in working capital items:
Accounts receivable		(292,616	)		(34,031	)		587,900			154,711
Oil inventory		809			15			(478	)		4,820
Prepaid expenses		(90,150	)		103,194			20,628			91,566
Accounts payable, accrued liabilities and interest		377,898			(434,410	)		145,723			1,694,072
Net cash (used in) provided by operating activities		(230,747	)		(201,067	)		541,493			2,018,383
Cash flows from investing activities:
Purchase and development of oil and gas properties		(571,381	)		(1,466,194	)		(1,847,046	)		(5,203,034	)
Purchase of fixed assets		(1,085	)		(34,855	)		(27,534	)		(94,866	)
Net cash used in investing activities		(572,466	)		(1,501,049	)		(1,874,580	)		(5,297,900	)
Cash flows from financing activities:
Issuance of notes payable		—			—			100,000			—
Payment of notes payable		(170,030	)		(37,814	)		(367,465	)		(117,840	)
Proceeds from issuance of common stock for private placement		863,913						1,463,167			—
Private placement/debenture amendment costs		(23,914	)		—			(87,650	)		—
Other		—			—			4,724			—
Issuance of capital stock (net of Costs of $233,095)		—			1,432,844			—			1,432,844
Exercise of stock options		—			64,000			—			416,000
Cash provided by financing activities		669,969			1,459,030			1,112,776			1,731,004
Effect of exchange rate changes on cash		—			(209	)		—			(69	)
Increase (decrease) in cash and cash equivalents		(133,243	)		(243,295	)		(220,310	)		(1,548,582	)
Cash beginning of period		216,750			344,823			303,817			1,650,110
Cash end of period		83,507			101,528			83,507			101,528

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
For the three-month and nine-month periods ended September 30, 2005 and September 30, 2004

	Three months				Nine months
	ended September 30,				ended September 30,
	2005		2004		2005		2004
	$		$		$		$
Supplemental disclosures:
Interest paid, net of capitalized interest		184,977		63,472		431,553		290,454
Non cash investing and financing activities:
Common stock issued for professional services provided relating to restructuring of Debentures		250,000		—		250,000		—
Principal amount of 8% debentures converted to common stock		—		—		500,000		140,000
Prepaid expenses financed		—		—		215,219		155,744
Accounts payable refinanced with notes payable		991,821		—		1,261,821		—

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

1	Significant accounting policies
	The accounting policies and methods followed in preparing these unaudited condensed consolidated financial statements are those used by American Natural Energy Corporation (the “Company”) as described in Note 1 of the notes to consolidated financial statements included in the Annual Report on Form 10-KSB. However, the unaudited condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2005 and 2004 do not conform in all respects to the disclosure and information that is required for annual consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These interim condensed consolidated financial statements should be read in conjunction with the most recent annual consolidated financial statements of the Company.
	In the opinion of management, all adjustments considered necessary for fair statement have been included in these interim condensed consolidated financial statements. Operating results for the three-month and nine-month periods ended September 30, 2005 are not indicative of the results that may be expected for the full year ending December 31, 2005.
	Stock-based compensation
	The Company has a stock-based compensation plan, and accounts for stock options granted to employees under this plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”). Pursuant to provisions of APB 25, compensation expense is recognized based on the difference, if any, on the measurement date, as defined, between the estimated fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Compensation expense is recognized immediately for past services and ratably for future services over the option-vesting period. Compensation expense is recognized for any grants to individuals who do not meet the definition of employee.
	The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS 123, Accounting for Stock-Based Compensation, and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services (“EITF 96-18”). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.
	The following table illustrates the pro-forma effect of stock-based employee compensation on net loss and loss per share had the Company applied the fair value measurement and recognition provisions of SFAS 123 to such compensation.

7

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

	Three Months Ended,						Nine Months Ended,
	September 30						September 30
	2005			2004			2005			2004
	$			$			$			$
Net loss, as reported		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,444,763	)
Add back: Total stock-based compensation expense included in net loss, net of related tax effects		6,750			—			47,250			—
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(53,656	)		(26,836	)		(344,218	)		(188,508	)
Pro forma net loss		(1,125,673	)		(6,214,444	)		(5,810,420	)		(8,633,271	)
Loss per share:
Basic and diluted-as reported		(0.02	)		(0.18	)		(0.14	)		(0.29	)
Basic and diluted-pro forma		(0.03	)		(0.18	)		(0.15	)		(0.29	)

For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period, which is two years. Due to the timing of the option grants in 2004 and shareholder approval in 2005, the vesting period for the 2004 options is eighteen months. Because the Company’s stock options vest normally over two years and additional awards may be made each year, the above pro forma disclosures may not be representative of the effects on pro forma net income for future quarters.

Income tax expense

SFAS 109 requires that the Company record a valuation allowance when it is more likely than not that a portion or all of the deferred tax asset will not be realized. As a result of such evaluation as of December 31, 2004 and September 30, 2005, the Company concluded that it is more likely than not that no benefit from deferred tax assets will be realized. Therefore, for all periods presented, a full valuation allowance was recorded, causing the effective income tax expense to be zero.

Interest and financing costs

Interest expense is recognized in the period incurred, and consists primarily of interest cost associated with the Company’s 8% convertible secured debentures (the “Debentures”) issued in October 2003. Interest cost on the debentures includes interest expense at the stated rate and accretion of discount, which is determined using the effective interest method. Discount accretion during the three and nine months ended September 30, 2005 was $63,000 and $2,326,000,

8

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

respectively. Additionally, upon conversion of the debentures, any unamortized balance of the discount associated with principal converted is included in interest cost, net of any amounts capitalized. During the nine months ended September 30, 2005, $125,000 of unamortized discount was written off to interest expense in conjunction with conversions of the debentures. All components of interest cost, except interest costs associated with Debenture conversions and amortization of Debenture discount, qualify for capitalization to oil and gas properties. A portion of interest cost is capitalized on significant investments in unproved properties that were not being depreciated, depleted or amortized and on which exploration and development activities were in progress during the reporting period. The amount of interest cost to be capitalized is primarily determined using the weighted average interest rate on the outstanding borrowings. During the three and nine months ended September 30, 2005, interest cost capitalized amounted to $86,000 and $328,000, respectively.

	New pronouncements
	In December 2004, the FASB issued Statement on Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” revising FASB Statement No. 123, “Accounting for Stock-Based Compensation” and superseding APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement requires a public entity to measure the cost of services provided by employees and directors received in exchange for an award of equity instruments, including stock options, at a grant-date fair value. The fair value cost is then recognized over the period that services are provided.
	In April 2005, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) to provide additional guidance regarding the application of FAS 123 (Revised 2004). SAB 107 permits registrants to choose an appropriate valuation technique or model to estimate the fair value of share options, assuming consistent application, and provides guidance for the development of assumptions used in the valuation process. Additionally, SAB 107 discusses disclosures to be made under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in registrants’ periodic reports.
	Based upon SEC rules issued in April 2005, FAS 123 (Revised 2004) is effective for fiscal years that begin after June 15, 2005 and will be adopted by the Company in the first quarter of 2006. See Note 1 of these financial statements for a disclosure of the effect on net income and earnings per share for the first three months of 2004 and 2005 as if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.
2	Earnings (loss) per share
	Basic earnings (loss) per share is computed by dividing net income or loss (the numerator) by the weighted average number of shares outstanding during the period (the denominator). The computation of diluted earnings per share is the same as for basic earnings per share except the denominator is increased to include the weighted average additional number of shares that would

9

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

have been outstanding if previously granted stock options had been exercised, unless they are anti-dilutive.

A reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share were as follows:

							Nine Months Ended
	Three Months Ended September 30,						September 30,
	2005 (1)			2004 (2)			2005 (1)			2004 (2)
	$			$			$			$
Numerator — net loss before cumulative effect of accounting change
Basic		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,118,382	)
Diluted		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,118,382	)
Cumulative effect of accounting change		—			—			—			(326,381	)
Net loss — basic		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,444,763	)
Net loss — diluted		(1,078,767	)		(6,187,608	)		(5,513,452	)		(8,444,763	)
Denominator — weighted average number of shares outstanding
Basic		43,684,177			33,637,725			38,433,032			29,604,454
Diluted		43,684,177			33,637,725			38,433,032			29,604,454

⁽¹⁾ Does not include 1,600,000 outstanding potentially dilutive options at a weighted average price of $0.50 per share, and the effects of 74,500,000 common shares issuable upon conversion of 8% debentures due to the net loss.

⁽²⁾ Does not include 900,000 outstanding potentially dilutive options at a weighted average price of $0.53 per share, and the effects of 26,355,556 common shares issuable upon conversion of 8% debentures due to the net loss. Does not include the potentially dilutive effects of options to purchase 1,000,000 shares of common stock at a price of $0.45 per share provisionally granted by our Board of Directors on April 22, 2004 subject to the approval of the shareholders.

3

Liquidity and Capital Resources

The Company has no current borrowing capacity with any lender. The Company has sustained substantial losses during the first three quarters of 2005 and during the year ended December 31, 2004 totaling approximately $5.5 million and $14.9 million, respectively, and has a working capital deficiency and an accumulated deficit at September 30, 2005, which leads to questions concerning the ability of the Company to meet its obligations as they come due. The Company also has a need for substantial funds to develop its oil and gas properties and repay borrowings as well as to meet its

10

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

	other current liabilities.
	The accompanying financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the losses incurred and current negative working capital, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. The ability of the Company to continue as a going concern is dependent upon adequate sources of capital and the Company’s ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop its oil and gas reserves and pay its obligations.
	In the ordinary course of business, the Company makes substantial capital expenditures for the exploration and development of oil and natural gas reserves. Historically, the Company has financed its capital expenditures, debt service and working capital requirements with the proceeds of debt and private and public offering of its securities. Cash flow from operations is sensitive to the prices the Company receives for its oil and natural gas. A reduction in planned capital spending or an extended decline in oil and gas prices could result in less than anticipated cash flow from operations and an inability to sell more of its common stock or refinance its debt with current lenders or new lenders, which would likely have a further material adverse effect on the Company.
	Management’s strategy is to obtain additional financing or participation with industry partners. Certain covenants included in the 8% convertible secured debentures in the amount of $11,175,000 due September 30, 2006, limit the amount of additional indebtedness the Company can incur to $2 million. It is management’s intention to raise additional debt or equity financing to either repay or refinance these debentures and to fund its operations and capital expenditures. Failure to obtain additional financing can be expected to adversely affect the Company’s ability to pay its obligations, further the development of its properties, including the ExxonMobil area of mutual interest (the “AMI”), grow revenues, oil and gas reserves and achieve and maintain a significant level of revenues, cash flows, and profitability. During the third quarter of 2005, the Company completed a private sale of 12,193,333 shares of common stock for gross proceeds of $1,463,000 ($1,428,000 net) of which $599,000 had been received as of June 30, 2005 and the remaining balance received during the quarter ended September 30, 2005. Additionally, 2,170,000 shares were issued as payment for professional services in the amount of $250,000 relating to restructuring of the 8% Convertible Secured Debentures. The securities have been issued in reliance upon the exemption from the registration requirements of the US Securities Act of 1933, as amended (the “Act”), afforded by Regulation D and Section 4(2) and pursuant to Regulation S under the Act. The shares sold may not be reoffered or resold by the purchasers absent registration under the Act or an applicable exemption from the registration requirements of the Act. There can be no assurance that the Company will obtain this additional financing at the time required, at rates that are favorable to the Company, or at all. Further, any additional equity financing that is obtained may result in material dilution to the current holders of common stock.
4	Notes Payable and Long Term Debt

11

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

8% Convertible secured debentures

On October 21, 2003 and October 31, 2003, the Company completed financing transactions of $11.695 million and $305,000, respectively, by issuing the Debentures. The Debentures were repayable on September 30, 2005 with interest payable quarterly commencing December 31, 2003 at 8% per annum. At the dates of issuance, the outstanding principal of the Debentures was convertible by the holders into common shares of the Company at any time prior to maturity at a conversion price of $0.45 per share, subject to antidilution adjustment, and the Debentures are redeemable by the Company at any time after October 1, 2004 if the weighted average price per share on the TSX Venture Exchange for a 20 consecutive trading day period prior to the date notice of redemption is given has exceeded 166 2/3% of the conversion price. A finder’s fee in the amount of $360,000 was paid to Middlemarch Partners Limited of London, England in connection with the financing. The Debentures are collateralized by substantially all of the Company’s assets. The Debentures have covenants limiting unsecured borrowings to $2 million and restricting the payment of dividends and capital distributions.

During the third quarter of 2004, the company completed a Rights Offering. Due to the antidilution adjustment provisions contained in the Debenture Agreement, such transaction changed the conversion price of the debentures from $0.45 to $0.43 per share and as a result changed the related Beneficial Conversion Feature by $858,000. The change in the Beneficial Conversion Feature caused the effective rate of the debentures to increase from 55% to 62%.

In June 2005, the Debentures were amended with approval by approximately 86% of the Debentureholders. The amendments extended the maturity date of the Debentures by one year to September 30, 2006, reduced through the maturity date of the Debentures the per share price at which the principal of the Debentures could be converted into shares of Common Stock to US$0.15 per share, and provided for the partial release of the lien collateralizing the Debentures in the event a third party entered into an agreement with the Company pursuant to which the third party is granted the right to drill one or more wells on any of the Company’s properties and commenced that drilling activity. Under the amendments, 74,500,000 shares may be issued upon full conversion of the Debentures at the reduced conversion price. On June 23, 2005, stockholders of the Company voted to amend the Certificate of Incorporation to increase the number of shares of Common Stock of the Company from 100 million to 250 million and adjust par value from $0.01 to $0.001 per share. This increase in authorized shares, along with the approval of the TSX Venture Exchange to the transactions, provided final approval of the Debenture amendments.

The amendments to the Debentures resulted in the extinguishment of debt and recognition of a loss of $1,147,000. At the date of the amendment and at September 30, 2005, $11,175,000 in Debentures was outstanding. As a result of the extinguishment and recognition of loss, these Debentures were recorded at their fair market value on June 23, 2005 reflecting the present value of future cash flows and the option value of the underlying convertible shares.

The Company has agreed to file a registration statement and post-effective amendment under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”), to enable, upon effectiveness of the registration statement and post-effective amendment, the resale of the shares to be issued on conversion of the Debentures.

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American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

	Notes payable
	On February 2, 2005, the Company entered into a $100,000 unsecured short-term note with a New York Prime floating interest rate with Citizens Bank of Oklahoma. The maturity date of the note is November 6, 2005, which was subsequently extended to February 6, 2006. All principal and interest is due at maturity.
	On March 15, 2005, the Company converted its $270,000 accounts payable balance to Halliburton Energy Services to a note payable. As of September 30, 2005, two monthly payments of $45,000 remain to be made with interest at the rate of 10% per annum.
	On April 15, 2005, the Company entered into an agreement to finance its insurance premiums totaling $215,000. As of September 30, 2005, the note balance was $70,000 and will be paid by four monthly payments of $17,705, which include interest at the rate of 8% per annum.
	On August 24, 2005, the Company converted an accounts payable balance of $486,000 to Parker Drilling Company to a note payable. Monthly payments of $25,000, which include interest at the rate of 7% per annum, are to be made through June 2007.
	On September 7, 2005, the Company converted its $86,000 accounts payable balance to Eaton Oil Tools to a note payable. Beginning September 15, 2005, twelve monthly payments of $7,435 will be made with the final payment including all interest accrued at the rate of 6.5% per annum.
	On September 22, 2005, the Company agreed to convert its $420,000 accounts payable balance to Ambar Drilling Fluids to a note payable. Beginning September 22, 2005, interest is accrued at 4% per annum with payment of the principal balance and interest due on or before March 22, 2006.
5	Commitments and contingencies
	Bank of Oklahoma, N.A. has issued an irrevocable standby letter of credit, dated December 24, 2004 and expiring December 24, 2005, in the amount of $125,000 drawn in favor of RLI Insurance Company securing a surety bond in favor of the Louisiana Office of Conservation for plugging and abandonment obligations, which may occur as a result of drilling operations in St. Charles Parish, Louisiana.
	As part of the purchase price of the assets acquired in 2001, the Company agreed that the holders of unsecured claims aggregating approximately $4.9 million would receive payment of 100% of their allowed claim out of a net profits interest and overriding royalty in the production from existing wells on the Bayou Couba lease and new wells drilled on an area of mutual interest covering an approximately 23.5 square mile area outside the area covered by the Bayou Couba lease. The net profits interest and overriding royalty provide that such creditors will be allocated 50% of the net profits from production from the workover of wells existing on December 31, 2001 on the Bayou Couba lease acreage, 15% of the net profits from production from the drilling after December 31, 2001 of new wells on the Bayou Couba lease acreage and 6% of the net profits from production from

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American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

	the drilling after December 31, 2001 of new wells on the AMI. The net profits interest and overriding royalty interest terminate upon repayment of the unsecured claims. As new wells are drilled, the overriding royalty interest and net profits interest will reduce net amounts received by the Company from the sale of oil and natural gas. Additionally, the Company agreed that, after repayment to it of 200% of all costs of bankruptcy, drilling, development and field operations from net revenues of the Bayou Couba lease and the area of mutual interest, the former holders of equity securities of Couba will be entitled to a reversionary interest in the wells in the Bayou Couba lease equal to 25% of the working interest obtained by the Company directly from Couba at the time of confirmation and as a result of the plan of reorganization of Couba.
6	Subsequent events
	On October 19, 2005 the Company executed the definitive Exploration and Development Agreement (the “Agreement”) with Dune Energy, Inc. (“Dune”), providing for the creation of an area of mutual interest covering an area of approximately 31,367 acres. A preliminary agreement which provided for the execution of a definitive agreement was entered into on September 12, 2005.
	Pursuant to the terms of the Agreement, Dune agreed to pay to the Company a prospect fee in the amount of $1.0 million, of which $225,000 was paid on September 14, 2005, $225,000 was paid on September 30, 2005, $225,000 was paid on October 19, 2005, $162,500 is due on November 30, 2005 and $162,500 is due on January 10, 2006. In the event the Company and Dune elect to complete the first two exploratory wells drilled pursuant to the Agreement, upon the receipt by Dune of a log from either of those two wells, Dune will pay to the Company an additional prospect fee of $500,000.
	The area of mutual interest created by the Agreement, in which the Company and Dune have agreed to share all rights, title and interest owned or acquired on an equal basis, includes the Company’s Bayou Cuba lease acreage of approximately 1,319 acres, the acreage covered by the Company’s development agreement with ExxonMobil Corporation (“ExxonMobil”) of approximately 11,486 acres and an additional 31,367 acre area, as well as any additional acreage offered to the Company or Dune by ExxonMobil as the result of the acquisition of additional 3-D seismic data by the parties under the terms of the Agreement. If either party acquires any interests in lands included in the area of mutual interest created by the Agreement, the acquiring party is required to notify the non-acquiring party which will have the opportunity to participate in the acquisition by paying its proportionate share of the price for such properties.
	Under the terms of the Agreement, the Company agreed to share with Dune the Company’s 3-D seismic data covering an area of approximately 23.138 square miles within the area of mutual interest. The Company and Dune agreed to initiate discussions with ExxonMobil to acquire additional 3-D seismic data with each party to pay equally for the cost of acquiring the data.
	The Agreement provides that either party can propose drilling prospects with the non-proposing party given the right to participate in the drilling prospect and pay its proportionate share of all drilling and completion costs. The Company will be the operator of each drilling prospect and

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American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2005 and 2004

completed well, subject to the rights of ExxonMobil under its development agreement with the Company.

The Agreement will remain in effect so long as the Company’s development agreement with ExxonMobil remains in effect. The Agreement excludes certain specified existing wells of the Company, certain litigation rights of the Company, and the Company’s production facility and equipment and personal property. The Company’s interest in the area of mutual interest created by the Agreement is subject to the terms of other agreements to which the Company is a party.

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Item 2. Management’s Discussion and Analysis or Plan of Operation

General

     We are engaged in the acquisition, development, exploitation and production of oil and natural gas. Our revenues and profitability are dependent, to a significant extent, upon prevailing spot market prices for oil and natural gas. Additionally, our revenues and profitability are dependent upon the quantities of oil and natural gas produced and sold. Prices for oil and natural gas are subject to wide fluctuations in response to changes in supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. Such factors include political conditions, weather conditions, government regulations, the price and availability of alternative fuels and overall economic conditions.

     Our financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. We have sustained substantial losses in years 2004 and 2003, totaling approximately $14.9 and $5.7 million, respectively, and have a net loss of $5.5 million in the nine month period ended September 30, 2005, and have a working capital deficiency and an accumulated deficit at September 30, 2005 all of which lead to questions concerning our ability to meet our obligations as they come due. We also have a need for substantial funds to develop our oil and gas properties and repay borrowings. We have principally financed our activities using debt and private and public equity financing. We have no line of credit or other financing agreement providing borrowing availability. As a result of the losses incurred and current negative working capital and other matters described above, there is no assurance that the carrying amounts of our assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. Our ability to continue as a going concern is dependent upon adequate sources of capital and our ability to attain positive results of operations and cash flows sufficient to continue to explore for and develop our oil and gas reserves. See the discussion under the caption “How We Have Financed Our Activities”.

     The report of our independent registered public accountants on our financial statements as of and for the year ended December 31, 2004 includes an explanatory paragraph which states that we have sustained substantial losses in 2004 and 2003 and had a working capital deficiency and an accumulated deficit at December 31, 2004, thereby raising substantial doubt about our ability to continue as a going concern .

     In the ordinary course of business, we have made and intend to seek to continue to make substantial capital expenditures for the exploration and development of oil and natural gas reserves. In the past, we have financed our capital expenditures, debt service and working capital requirements with the proceeds of debt and public and private offerings of our securities. Our cash flow from operations is sensitive to the prices we receive for our oil and natural gas as well as the quantities of oil and gas we produce. A reduction in and limitations on planned capital spending or an extended decline in oil and gas prices or decline in the quantities of oil and gas we produce would result in less than anticipated cash flow from operations, a lessened ability

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to raise capital through a sale of shares of our common stock, and a lessened ability to refinance our debt with current lenders or new lenders, which would likely have a further material adverse effect on us. The uncertainty as to whether or not we can raise additional capital in the future is likely to have an effect on our future revenues and operations if we are unable to raise additional capital.

     A Comparison of Operating Results For The Nine Months Ended September 30, 2005 and September 30, 2004

     We incurred a net loss of $5,513,000 during the nine months ended September 30, 2005 compared to a net loss of $8,445,000 for the nine months ended September 30, 2004. During the nine months ended September 30, 2005, our revenues were comprised of oil and gas sales and operations income totaling $2,272,000 before a reduction of $297,000 due to the allocation of a pre-existing overriding royalty between various working interest owners. This compares with oil and gas sales and operations income of $2,467,000 during the same period of 2004. Our oil and gas sales and operations income for the nine months ended September 30, 2005 decreased due to a decline in production which was offset by higher oil and gas prices. Our net average daily production for the nine-month period ended September 30, 2005 decreased by 36% over the same period of the prior year, from 926 (240 net) barrels of oil equivalent per day to 574 (154 net) barrels of oil equivalent per day. Partially offsetting this decline in production was the higher average realized prices from oil and natural gas sales, which increased by 43%, from an average of $36.38 per barrel of oil equivalent for the nine months ended September 30, 2004 to $52.09 per barrel of oil equivalent for the nine months ended September 30, 2005. Production from our existing wells is subject to fluctuation from time to time based upon the zones of the wells where we are obtaining production. Additionally, wells drilled during the quarter are expected to increase production in subsequent quarters.

     Our total expenses were $7,488,000 for the nine months ended September 30, 2005 compared to $10,587,000 for the nine months ended September 30, 2004. Our general and administrative expenses during the nine months ended September 30, 2005 were $1,234,000 compared to $1,414,000 during the nine months ended September 30, 2004. These expenses decreased in 2005 largely because professional services fees decreased during 2005 compared to 2004. We had no litigation expenses during the nine months ended September 30, 2005 compared to $216,000 of such expense during the nine months ended September 30, 2004 attributable to the defense and settlement of various lawsuits.

     Interest and financing costs increased from $2,455,000 for the nine months ended September 30, 2004 to $2,884,000 for the nine months ended September 30, 2005. Interest and financing costs incurred during the nine-month period ended September 30, 2005 consist primarily of interest cost associated with our 8% convertible secured debentures issued in October 2003. Interest cost on the debentures includes interest expense at the stated rate and accretion of discount, which is determined using the effective interest method. Discount accretion during the nine months ended September 30, 2005 was $2,326,000. Discount accretion for the three months ended September 30, 2005 of $63,000 was significantly lower than discount accretion incurred for the six months ended June 30, 2005 of $2,263,000 due to the extinguishment of debt resulting from the amendments to the Debentures in June 2005.

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Additionally, upon conversion of the debentures, the unamortized balance of the discount associated with the principal converted is included in interest cost during the period. During the nine months ended September 30, 2005, $125,000 of unamortized discount was written off to interest expense in conjunction with conversions of the Debentures. All components of interest cost, except interest costs associated with Debenture conversions and amortization of Debenture discount, qualify for capitalization to oil and gas properties. A portion of interest cost is capitalized on significant investments in unproved properties that were not being depreciated, depleted or amortized and on which exploration and development activities were in progress during the reporting period. The amount of interest cost to be capitalized is primarily determined using the weighted average interest rate on the outstanding borrowings. Interest and financing costs incurred during the nine-month period ended September 30, 2005 amounted to $3,212,000, of which $328,000 was capitalized to oil and gas properties.

     Lease operating expenses of $382,000, production taxes of $186,000 and depletion, depreciation and amortization of $1,356,000 during the nine months ended September 30, 2005 changed from $305,000, $170,000, and $1,899,000, respectively, during the nine months ended September 30, 2004. Lease operating expenses increased due to the overall higher costs for all services. Production taxes increased as a result of higher commodity prices and certain wells no longer being tax exempt. Higher production taxes for the first nine months of 2005 were partially offset by a reduction of $22,000 due to the allocation of a pre-existing overriding royalty between various working interest owners The decrease in depletion, depreciation and amortization is a result of a lower depreciable basis due to impairments of oil and gas properties recorded in 2004.

     During the nine months ended September 30, 2005, we had a foreign exchange loss of $300,000, compared to a foreign exchange loss of $187,000 for the nine months ended September 30, 2004. The foreign exchange loss recognized during the nine months ended September 30, 2005 and 2004 was caused by the weakening of the US dollar against the Canadian dollar.

     The amendments to the Debenture Indenture executed in June 2005, which extended the maturity date of the Debentures for one year to September 30, 2006 and reduced the conversion price from $0.43 per share to $0.15 per share, subject to anti dilution adjustment, among other things, was treated under generally accepted accounting principles as an extinguishment of debt and resulted in a loss of $1,147,000 during the nine months ended September 30, 2005. There was no comparable charge during the nine months ended September 30, 2004. At the date of the amendments and at September 30, 2005, $11,175,000 principal amount of Debentures was outstanding. As a result of the extinguishment and recognition of loss, these Debentures were recorded on our balance sheet at their fair market value on June 23, 2005 reflecting the present value of future cash flows and the option value of the underlying convertible shares. As of September 30, 2005 a discount amount of $270,000 is being amortized to interest expense over the life of the Debentures using the effective interest method. In the event any Debentures are converted prior to September 30, 2006, any unamortized discount attributed to those proportionate holdings will be reflected in interest expense at the time of conversion. Through September 30, 2005, approximately $825,000 principal amount of Debentures had been

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converted into 1,904,133 shares of our common stock, resulting in a write-off of unamortized discount to interest expense of $263,000.

Liquidity and Capital Resources

A Comparison of Cash Flow For The Nine Months Ended September 30, 2005 and September 30, 2004

     Our net cash provided by operating activities was $541,000 for the nine months ended September 30, 2005 as compared to net cash provided by operating activities of $2,018,000 for the nine months ended September 30, 2004, a decrease of $1,477,000. Changes in working capital items had the effect of increasing cash flows from operating activities by $754,000 and $1,945,000 during the nine months ended September 30, 2005 and 2004, respectively, because accounts receivable turnover exceeded that of accounts payable, revenues payable and accrued liabilities.

     We used $1,875,000 of net cash in investing activities during the nine months ended September 30, 2005 compared to net cash used of $5,298,000 in 2004. The cash used in investing activities in 2004 includes $5,203,000 for the purchase and development of oil and gas properties and $95,000 for the purchase of fixed assets compared to $1,847,000 and $28,000, respectively, in 2005. Higher expenditures for the purchase and development of oil and gas properties during the first nine months of 2004 are a result of higher drilling activity as compared to the same period of 2005. The 2005 expenditures are primarily a result of the recompletion of wells drilled in prior periods by us and the recompletion of existing wellbores on the Bayou Couba lease.

     We had $1,113,000 net cash provided by financing activities for the nine months ended September 30, 2005 compared to $1,731,000 provided in 2004. Cash inflows provided by financing activities during the nine months ended September 30, 2005 were primarily due to a private sale of our common stock resulting in gross proceeds of $1,463,000 ($1,428,000 net) and a short-term bank loan in the amount of $100,000, partially offset by scheduled payments on certain of our obligations. For the nine months ended September 30, 2004 net cash inflows from financing activities were primarily a result of the completion of a Rights Offering for net proceeds of $1,433,000, and the exercise of employee stock options for the total proceeds of $416,000, partially offset by scheduled payments on certain of our obligations.

     Revenues during the year ended December 31, 2004 and the first nine months of 2005, have not been sufficient to fund our operations and drilling program during those periods. We have funded our capital expenditures and operating activities through a series of public and private debt and equity transactions. At September 30, 2005, we do not have any available borrowing capacity under existing credit facilities. During the third quarter of 2005, we completed a private sale of 12,193,333 shares of our common stock for gross proceeds of $1,463,000 ($1,428,000 net). Additionally, 2,170,000 shares were issued as payment for professional services in the amount of $250,000 relating to restructuring of the 8% Convertible

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Secured Debentures. The securities have been issued in reliance upon the exemption from the registration requirements of the US Securities Act of 1933, as amended (the “Act”), afforded by Regulation D and Section 4(2) and pursuant to Regulation S under the Act. The shares sold may not be reoffered or resold by the purchasers absent registration under the Act or an applicable exemption from the registration requirements of the Act.

     We have substantial needs for funds to develop our oil and gas prospects and opportunities identified in the AMI we share with ExxonMobil Corp. Any capital expenditures we currently intend to make will be funded from our available cash flows and the proceeds of the private sale of our securities referred to above. To the extent additional funds are required to fully exploit and develop the ExxonMobil Corp. AMI, it is management’s plan to raise additional capital through the private or public sale of our equity securities, borrowings, or the sale of interests in our drilling activities; however, we currently have no firm commitment from any potential investors, other than the agreement with Dune Energy, Inc. discussed below, and such additional capital may not be available to us in the future.

     On August 26, 2005, we commenced operations to re-enter an existing wellbore located on the Bayou Couba lease and drill to a location which is deemed to be a developmental location. Our expenditure share for this activity is approximately $400,000.

     On October 19, 2005, we executed the definitive Exploration and Development Agreement (the “Agreement”) with Dune Energy, Inc. (“Dune”), providing for the creation of an area of mutual interest covering an area of approximately 31,367 acres. A preliminary agreement which provided for the execution of a definitive agreement was entered into on September 12, 2005.

     Pursuant to the terms of the Agreement, Dune agreed to pay us a prospect fee in the amount of $1.0 million, of which $225,000 was paid on September 14, 2005, $225,000 was paid on September 30, 2005, $225,000 was paid on October 19, 2005, $162,500 is due on November 30, 2005 and $162,500 is due on January 10, 2006. In the event we and Dune elect to complete the first two exploratory wells drilled pursuant to the Agreement, upon the receipt by Dune of a log from either of those two wells, Dune will pay us an additional prospect fee of $500,000.

     The area of mutual interest created by the Agreement, in which we have agreed with Dune to share all rights, title and interest owned or acquired on an equal basis, includes our Bayou Cuba lease acreage of approximately 1,319 acres, the acreage covered by our development agreement with ExxonMobil Corporation (“ExxonMobil”) of approximately 11,486 acres and an additional 31,367 acre area, as well as any additional acreage offered to us or Dune by ExxonMobil as the result of the acquisition of additional 3-D seismic data by the parties under the terms of the Agreement. If either party acquires any interests in lands included in the area of mutual interest created by the Agreement, the acquiring party is required to notify the non-acquiring party which will have the opportunity to participate in the acquisition by paying its proportionate share of the price for such properties.

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     Under the terms of the Agreement, we have agreed to share with Dune our 3-D seismic data covering an area of approximately 23.138 square miles within the area of mutual interest. We agreed with Dune to initiate discussions with ExxonMobil to acquire additional 3-D seismic data with each party to pay equally for the cost of acquiring the data.

     The Agreement provides that either party can propose drilling prospects with the non-proposing party given the right to participate in the drilling prospect and pay its proportionate share of all drilling and completion costs. We will be the operator of each drilling prospect and completed well, subject to the rights of ExxonMobil under its development agreement with us.

     The Agreement will remain in effect so long as our development agreement with ExxonMobil remains in effect. The Agreement excludes certain specified existing wells of ours, certain of our litigation rights, and our production facility and equipment and personal property. Our interest in the area of mutual interest created by the Agreement is subject to the terms of other agreements to which we are a party.

     Other than the costs to complete the well commenced on August 26, 2005, we have no other commitments to expend additional funds for drilling activities for the rest of 2005.

How We Have Financed Our Activities

     Our activities since 2002 have been financed primarily from public and private sales of debt and equity securities. In August 2004, we completed the sale of 6,941,414 shares of our Common Stock pursuant to a rights offering to our stockholders for gross proceeds of $1,666,000 ($1,433,000 net) with the proceeds used primarily for the drilling of the ExxonMobil Fee 2 ST well. Prior thereto, in October 2003, we completed the private sale of $12.0 million principal amount of the Debentures which bear interest at 8% per annum payable quarterly commencing December 31, 2003. The Debentures are redeemable by us at any time after October 1, 2004 if the average weighted price per share of our common stock on the TSX Venture Exchange for a 20 consecutive trading day period prior to the date notice of redemption is given has exceeded 166-2/3% of the conversion price. The Debentures are collateralized by substantially all of our assets.

     On June 24 and July 6, 2004, we issued an aggregate of 1,300,000 shares of our Common Stock. Included among the purchasers were Mr. Michael K. Paulk, our President and a Director, 325,000 shares, Mr. Steven P. Ensz, our Vice-President, Finance and Chief Financial Officer and a Director, 325,000 shares, and Mr. Brian Bayley, a Director, 200,000 shares. The shares were issued on exercise of options granted under our 2001 Stock Incentive Plan. The exercise price of the options was $0.32 per share and we realized gross proceeds of $416,000.

     On June 23, 2005 our stockholders voted to amend our Certificate of Incorporation to increase the number of shares of Common Stock from 100 million to 250 million and reduce the

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par value from $0.01 to $0.001 per share. The increases in authorized shares, along with the approval of the TSX Venture Exchange to the transactions, were the final conditions to effecting an amendment of our outstanding Debentures. The amendment, which had previously been approved by the holders of the Debentures, extended the maturity date of the Debentures by one year to September 30, 2006, reduced through the maturity date of the Debentures the per share price at which the principal of the Debentures could be converted into shares of common stock to $0.15 per share, and provided for the partial release of the lien collateralizing the Debentures in the event a third party entered into an agreement with us pursuant to which the third party is granted the right to drill one or more wells on our properties and commences that drilling activity. Under the amendments, up to 74,500,000 shares may be issued upon full conversion of the Debentures at the reduced conversion price.

     During the third quarter of 2005, we completed a private sale of 12,193,333 shares of our common stock for gross proceeds of $1,463,000 ($1,428,000 net). Additionally, 2,170,000 shares were issued as payment for professional services in the amount of $250,000 relating to restructuring of the 8% Convertible Secured Debentures.

Future Capital Requirements and Resources

     Our capital requirements relate to the acquisition, exploration, enhancement, development and operation of oil and natural gas properties. In general, because our oil and natural gas reserves will be depleted by production over time, the success of our business strategy is dependent upon our enhancement of our reserves as they are depleted through a continuous acquisition, exploitation, enhancement, and development program. In order to achieve profitability and generate cash flow, we are dependent upon acquiring or developing additional oil and natural gas properties or entering into joint oil and natural gas well development arrangements.

     Management’s strategy is to obtain additional financing or participation with industry partners. Certain covenants included in our Debentures, limit the amount of additional indebtedness we can incur to $2.0 million. It is management’s intention to raise additional debt or equity financing to either repay or refinance our Debentures and to fund our operations and capital expenditures. Failure to obtain additional financing can be expected to adversely affect our ability to further the development of its properties, including the ExxonMobil area of mutual interest (the “AMI”), grow revenues, oil and gas reserves and achieve and maintain a significant level of revenues, cash flows, and profitability. There can be no assurance that we will obtain this additional financing at the time required, at rates that are favorable to the Company, or at all. Further, any additional equity financing that is obtained may result in material dilution to the current holders of common stock.

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     We intend, as opportunities arise, to evaluate the acquisition and development of additional leasehold interests. We are unable at this time to state whether or where any such additional properties may be acquired, to estimate the purchase price for any properties we may acquire or to state the terms on which financing for these purposes can be obtained.

Accounting Matters

     In December 2004, the FASB issued Statement on Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” revising FASB Statement No. 123, “Accounting for Stock-Based Compensation” and superseding APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement requires a public entity to measure the cost of services provided by employees and directors received in exchange for an award of equity instruments, including stock options, at a grant-date fair value. The fair value cost is then recognized over the period that services are provided.

     In April 2005, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) to provide additional guidance regarding the application of FAS 123 (Revised 2004). SAB 107 permits registrants to choose an appropriate valuation technique or model to estimate the fair value of share options, assuming consistent application, and provides guidance for the development of assumptions used in the valuation process. Additionally, SAB 107 discusses disclosures to be made under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in registrants’ periodic reports.

     Based upon SEC rules issued in April 2005, FAS 123 (Revised 2004) is effective for fiscal years that begin after June 15, 2005 and will be adopted by the Company in the first quarter of 2006. See Note 1 of these financial statements for a disclosure of the effect on net income and earnings per share for the first three months of 2004 and 2005 as if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

     With the exception of historical matters, the matters we discussed below and elsewhere in this Report are “forward-looking statements” as defined under the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. The forward-looking statements appear in various places including under the headings Item 1. Financial Information and Item 2. Management’s Discussion and Analysis or Plan of Operation. These risks and uncertainties relate to our capital requirements, business strategy, ability to raise capital and fund our oil and gas well drilling and development plans, our ability to fund the repayment of our outstanding indebtedness, our ability to attain and maintain profitability and cash flow and continue as a going concern, our ability to increase our reserves of oil and gas through drilling activities and acquisitions, our ability to enhance and maintain production from existing wells and successfully develop additional producing wells and reserves, our access to debt and equity capital and the availability of joint venture development arrangements, our ability to remain in compliance with

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the terms of any agreements pursuant to which we borrow money and to repay the principal and interest when due, our estimates as to our needs for additional capital and the times at which additional capital will be required, our expectations as to our sources for this capital and funds, our ability to successfully implement our business strategy, our ability to identify and integrate successfully any additional producing oil and gas properties we may acquire and operate such properties profitably, our ability to maintain compliance with covenants of our loan documents and other agreements pursuant to which we issue securities or borrow funds and to obtain waivers and amendments when and as required, our ability to borrow funds or maintain levels of borrowing availability under our borrowing arrangements, our ability to meet our intended capital expenditures, our statements and estimates about quantities of production of oil and gas as it implies continuing production rates at those levels, proved reserves or borrowing availability based on proved reserves and our future net cash flows and their present value.

     Readers are cautioned that the risk factors described in our Annual Report on Form 10-KSB for the year ended December 31, 2004 and other reports filed with the Commission, as well as those described elsewhere in this Report, in some cases have affected, and in the future could affect, our business plans and actual results of operations and could cause our actual consolidated results during 2005 and beyond, to differ materially from those expressed in any forward-looking statements made by or on our behalf.

     Our common shares have no trading market in the United States, and there can be no assurance as to the liquidity of any markets that may develop for our common shares, the ability of the holders of common shares to sell their common shares in the United States or the price at which holders would be able to sell their common shares. Any future trading prices of the common shares will depend on many factors, including, among others, our operating results and the market for similar securities.

ITEM 3. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of our management, including Michael K. Paulk, our President, and Steven P. Ensz, our Vice President, Finance, we have evaluated our disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluation, Mr. Paulk and Mr. Ensz have concluded that these controls and procedures are effective. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

     Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the

24

Exchange Act is accumulated and communicated to our management, including Mr. Paulk and Mr. Ensz, as appropriate, to allow timely decisions regarding required disclosure.

PART II — OTHER INFORMATION

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     During the quarter ended September 30, 2005, we issued and sold an aggregate of 12,193,333 shares of our common stock to 25 persons for an aggregate consideration of $1,463,000 paid in cash. Each person has represented his intention to acquire the securities for investment only and not with a view to distribution. The subscribers agreed that legends are to be affixed to the stock certificates.

     During the quarter we also issued 2,170,000 shares in satisfaction of an invoice for services rendered in the restructuring of the 8% Convertible Secured Debentures.

     The securities were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), afforded by Regulation D and Section 4(2) and pursuant to Regulation S under the Act. No underwriter was involved in the sale of the securities.

     Of the shares issued during the quarter, we previously reported the issuance of the 12,193,333 shares on Current Reports on Form 8-K for July 29, 2005 and August 15, 2005.

Item 6. Exhibits

     (a) Exhibits

     (c) Exhibits:

Exhibit Number	Description of Document
10.1(1)	Letter Agreement between the Company and Dune Energy, Inc.*
10.2 (1)	Consent accepted September 12, 2005 received from Exxon Mobil Production Corporation*
31.1 (1)	Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2 (1)	Certification of Chief Financial Officer Pursuant to Rule 13a- 14(a)
32.1 (1)	Certification of President and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)
32.2 (1)	Certification of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)

⁽¹⁾ Filed or furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMERICAN NATURAL ENERGY CORPORATION (Registrant)
Date: November 14, 2005	/s/ Michael K. Paulk
	Michael K. Paulk
	President and Chief Executive Officer
	/s/ Steven P. Ensz
	Steven P. Ensz
	Principal Financial and Accounting Officer

26

EX-10.1

Exhibit 10.1

August 26, 2005

Alan Gaines
Dune Energy, Inc.
3050 Post Oak Blvd., Suite 695
Houston, Texas 77056

Reference:	Letter Agreement
	Bayou Couba Field
	St. Charles Parish Louisiana

Dear Alan,

     The following is an outline of terms and conditions relative to Dune Energy, Inc., acquiring 50% of ANEC’s interest in the Exxon Mobil Development Agreement which presently covers approximately 10,900 acres as depicted on the attached plat.

1.

Upon execution of this letter agreement, Dune will pay to ANEC Dune’s 50% share, proportionately reduced, of the costs incurred in the drilling and completion of the DSCI Well # 92 ST (approximately $187,500.00 to date). Upon making such payment, Dune shall be entitled to an assignment of its working interest in such well. ANEC agrees that Dune’s net revenue interest in said well shall not be less than 70% nor shall it be burdened by any obligations created pursuant ANEC’s reorganization of Couba Operating Company.

2.

Both parties agree to drill the proposed DSCI Well # 51 ST on a 50/50 basis, proportionately reduced. Payment of Dune’s share of the dryhole costs will be due on or before August 29, 2005 in the amount of $187,119.90 and Dune’s share of completion costs will be due upon determination of actual completion costs.

3.	Dune agrees to pay to ANEC a prospect fee in the amount of $1,000,000 in exchange for an assignment, of mutually agreeable form, conveying 50% of ANEC’s rights in and to the lands contributed by ANEC, being the Delta Securities Corporation, Inc. lease dated November 14, 1941, (DSCI Lease) subject to the Exxon Mobil Development Agreement providing for a lease net revenue interest to be no less than 70% and any conveyance of interest to Dune of lands outside of the DSCI Lease will be no less than a 75% lease net revenue interest. Upon Exxon Mobil’s approval of Dune as a participant in the Development Agreement, payment of the $1,000,000 prospect fee will be made in four installments as follows:
	$225,000           immediately upon Exxon Mobil’s approval of Dune;    $225,000           September 30, 2005;    $225,000           January 15, 2006; and    $325,000           March 15, 2006
4.	Upon each installment payment of the above referenced prospect fee by Dune to ANEC, Dune shall have been deemed to have earned its pro rata share of ANEC’s interest in the lands described in paragraph 3 above.
5.	Dune will pay to ANEC an additional prospect fee in the amount of $500,000.00 within 5 days from receipt of a log from which both parties agree to attempt a completion of an exploratory well drilled on the Exxon Mobil acreage contributed to the Development Agreement. ANEC shall be entitled to such prospect fee if Dune chooses to complete either of the first two exploratory wells after receipt of corresponding logs.
6.	Should Dune achieve equity financing in the minimum amount of $5,000,000.00 the payment schedule outlined in paragraph 3 above will be accelerated and all remaining payments will be due 30 days from the closing of said financing.
7.	ANEC and Dune agree to jointly approach Exxon Mobil and initiate discussions to acquire additional 3-D seismic as proposed by SEI, Inc., on a 50/50 basis. Any lands added to the Exxon Mobil Development Agreement as a result of jointly acquiring the new 3-D data will be shared by Dune and ANEC 50/50. Should either party pay a disproportionate share of the seismic acquisition cost that party will be entitled the same disproportionate share of the acreage acquired. ANEC agrees that Dune shall have the rights to possess and utilize all existing 3-D seismic data pertaining to lands set forth herein.
8.	Any additional projects offered by Exxon Mobil to ANEC for future development will be offered to Dune 50/50.
9.	This agreement will be further memorialized in a mutually acceptable formal agreement.
10.	This transaction has been approved of the board of directors of American Natural Energy.

11.	This letter and the final agreement will be subject to all of the terms and conditions of the Exxon Mobil Development Agreement and any place where this agreement is silent or ambiguous the Exxon Mobil Development Agreement will prevail.
12.	Specifically excluded from this agreement and reserved by American Natural Energy will be any settlement, payment, redrill or any other manner of reconciliation agreed to between the relevant parties to the currently pending lawsuit American Natural Energy Corporation vs. Workstrings, et al which covers all operations conducted on the Exxon Mobil Fee # 2 Well with a surface location in Section 15-T15S-R21E and a bottom hole location of Section 14-T15S-R21E St. Charles Parish Louisiana along with any and all reserves associated with the initial wellbore and subsequent sidetracking operations. In a similar manner Dune will be indemnified and held harmless from any action of the courts relative to this case. Should the Fee#2 be redrilled by ANEC, Dune will have the option to participate with 50% proportionately reduced, by paying its share of all costs.
13.	Specifically excluded from this agreement are all wells currently producing.
14.	Subject to any restrictions contained in the Joint Operating Agreement, ANEC will support Dune’s election to operate specific wells to be drilled.

Sincerely

/s/ Michael Paulk

Mike Paulk

President

Agreed an accepted this ___day of August, 2005.

Dune Energy, Inc

     /s/ Alan Gaines                              
Alan Gaines, Chairman and CEO

EX-10.2

Exhibit 10.2

ExxonMobil Production Company U.S.
Production
PO Box 4610
Houston, Texas 77210-4610

September 9, 2005

American Natural Energy Corporation
Attn: Michael Paulk
6100 South Yale Avenue, Suite 300
Tulsa, Oklahoma 74136

Consent to Assign
ExxonMobil Contract No. 1029365
Bayou Couba Field
St. Charles Parish. LA

Gentlemen:

This will reference your letter of August 25,2005, soliciting ExxonMobil’s consent for an assignment of fifty percent (50%) of American Natural Energy Corporation’s (ANEC) interest in the captioned Contract to Dune Energy, Inc.

Exxon Mobil hereby grants its consent to such assignment conditioned on the following:

Dune Energy, Inc. as assignee agrees to comply with all obligations set forth in · the above referenced contract and any !eases(s) earned thereunder, and further agrees that no further assignment of interest will be made without the prior written consent of ExxonMobil.

ANEC will retain operatorship of the Bayou Couba field for operations conducted under the captioned Contract subject to ExxonMobil’s option to assume operatorship thereunder.

• ANEC, as assignor of its interest under the captioned trade, agrees to remain liable to ExxonMobil for all obligations set forth in the above referenced Contract and any leases(s) earned thereunder; and further agrees to defend, hold harmless and indemnify ExxonMobil against ANY liability, including attorney’s fees and/or P&A costs arising from operation on the lease(s) conducted by ANEC’s assignee or successors thereto, such liability arising from the failure by ANEC’s assignee or successors thereto to comply with the obligations of such lease(s).

If the above is acceptable please have both ANEC and Dune Energy, Inc. so sign below and return an executed copy of this letter to my attention. If necessary, this conditional consent to assign letter may be executed in counterpart.

Please provide the undersigned a copy of the executed assignment of interest into Dune energy, Inc. when available.

Very truly yours,
 

/s/ David Fassnacht  

David G. Fassnacht  

Phone: 713/431 -2056
Fax: 713/431-1467 CORP-OCG-620 

ACCEPTED AND AGREED TO this 12 day of. September, 2005.

Assignor:		Assignee:
American Natural Energy Corporation		Dune Energy, Inc,
By:	/s/ Michael Paulk	By:	/s/ Amiel David

EX-31.1

Exhibit 31.1

Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a)

I, Michael K. Paulk, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of American Natural Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: November 14, 2005	/s/ Michael K. Paulk
	Michael K. Paulk
	President

EX-31.2

Exhibit 31.2

Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a)

I, Steven P. Ensz, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of American Natural Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: November 14, 2005	/s/ Steven P. Ensz
	Steven P. Ensz
	Vice President, Finance

EX-32.1

Exhibit 32.1

Principal Executive Officer’s Certification Pursuant To
Section 1350
(furnished, but not filed)

In connection with the Quarterly Report of American Natural Energy Corporation (the Company) on Form 10-QSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael K. Paulk, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

     1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael K. Paulk

Michael K. Paulk
Chief Executive Officer
November 14, 2005

     A signed original of this written statement required by Section 906 has been provided to American Natural Energy Corporation and will be retained by American Natural Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Principal Executive Officer’s Certification Pursuant To
Section 1350
(furnished, but not filed)

In connection with the Quarterly Report of American Natural Energy Corporation (the Company) on Form 10-QSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Steven P. Ensz, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

     1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Steven P. Ensz

Steven P. Ensz
Chief Financial Officer
November 14, 2005

     A signed original of this written statement required by Section 906 has been provided to American Natural Energy Corporation and will be retained by American Natural Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.