UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

IVANHOE ENERGY INC.

Suite 654 — 999 Canada Place
Vancouver, British Columbia, Canada
V6C 3E1

(604) 688-8323

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: Not Applicable

Indicate by check mark 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     x                     No     o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes     x                     No     o

The number of shares of the registrant’s capital stock outstanding as of September 30, 2004 was 169,604,911 Common Shares, no par value.

TABLE OF CONTENTS

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Part I — Financial Information

Item 1 Financial Statements

IVANHOE ENERGY INC.
Unaudited Consolidated Balance Sheets
(stated in thousands of U.S. Dollars except share amounts)

(See accompanying notes)

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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Loss and Deficit
(stated in thousands of U.S. Dollars except per share amounts)

(See accompanying notes)

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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Cash Flow
(stated in thousands of U.S. Dollars)

(See accompanying notes)

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Notes to the Consolidated Financial Statements
September 30, 2004
(all tabular amounts are expressed in thousands of U.S. dollars except per share data)
(Unaudited)

1. BASIS OF PRESENTATION

The Company’s accounting policies are in accordance with accounting principles generally accepted in Canada. These policies are consistent with accounting principles generally accepted in the U.S., except as outlined in Note 13. The unaudited consolidated financial statements have been prepared on a basis consistent with the accounting principles and policies reflected in the December 31, 2003 consolidated financial statements, except for a change in the policy of accounting for stock based compensation which has been implemented retroactively with a restatement of prior period financial statements, and should be read in conjunction therewith. These interim consolidated financial statements do not include all disclosures normally provided in annual consolidated financial statements and should be read in conjunction with the most recent annual consolidated financial statements. The December 31, 2003 consolidated balance sheet, as restated, was derived from the audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (“GAAP”) in Canada and the U.S. In the opinion of management, all adjustments (which included normal recurring adjustments) necessary for the fair presentation for the interim periods have been made. The results of operations and cash flows are not necessarily indicative of the results for a full year.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts and other disclosures in these consolidated financial statements. Actual results may differ from those estimates.

2. CHANGE IN ACCOUNTING POLICY

Prior to January 1, 2004, the Company accounted for options granted to employees and directors using the intrinsic-value of the options. Under this method, compensation costs were not recognized in the financial statements for share options granted at market value but rather disclosure was required, on a pro forma basis, of the impact on net income of using the fair value at the option grant date. The Company does, however, recognize compensation costs in its financial statements for options granted to non-employees after January 1, 2002 based on the fair value of the options at the date granted. The Company uses the Black-Scholes option pricing model for determining the fair value of options issued at grant date.

For fiscal years beginning on or after January 1, 2004, Canadian GAAP requires compensation costs to be recognized in the financial statements using the fair value based method of accounting for all stock options granted after January 1, 2002. Implementation of this change in accounting policy requires retroactive application with the option of restating financial statements of prior periods.

Accordingly, effective January 1, 2004, the Company changed its accounting policy, for Canadian GAAP purposes, to recognize compensation costs using the fair value based method of accounting for stock options granted to employees and directors after January 1, 2002. This change has been adopted retroactively and the Company has elected to restate the financial statements of prior periods (See Note 7).

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3. OIL AND GAS PROPERTIES, EQUIPMENT AND INVESTMENTS

Capital assets categorized by geographical location are as follows:

In January 2004, the Company signed farm-out and joint operating agreements with Richfirst Holdings Limited (“Richfirst”), a wholly owned subsidiary of China International Trust & Investment Company to jointly develop the Dagang oil project. Richfirst acquired a 40% working interest in the project for $20.0 million following Chinese regulatory approvals, which were finalized in June 2004 (See Note 9). The carrying value of the Company’s oil and gas assets was reduced by $13.5 million for the amount of the proceeds associated with the sale of the working interest. The reduction in the carrying value does not significantly alter the depletion rate of the China oil and gas assets. The $6.5 million balance of the proceeds will fund a portion of Richfirst’s share of future Dagang oil project costs and the unspent balance was $0.8 million as at September 30, 2004.

As a result of the Company’s on-going evaluation of its GTL investments, $0.3 million of its investments were written down for the three-month period ended June 30, 2004 as the opportunity to build a 45,000-barrels per day GTL fuels plant in Oman failed to materialize due to a lack of sufficient uncommitted gas volumes to support a plant of that size.

4. LONG TERM ASSETS

In January 2004, the Company signed a Stock Purchase and Shareholders’ Agreement with Ensyn Group Inc. (“Ensyn Group”) and its subsidiary, Ensyn Petroleum International Ltd. (“Ensyn”), pursuant to which the Company acquired a 10% equity interest in Ensyn and exclusive rights to deploy the proprietary Ensyn RTPTM Process in several key international markets. The Company paid $2.0 million and will grant Ensyn rights to acquire equity interests in the Company’s international oil development projects that use the Ensyn RTPTM Process.

In August 2004, the Company acquired an additional 5% equity interest in Ensyn for $1.0 million. As at September 30, 2004, the 15% investment in Ensyn and related costs of $0.7 million are included in long-term assets (See Note 12).

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5. SEGMENT INFORMATION

The following tables present the Company’s interim segment information for the three-month and nine-month periods ended September 30, 2004 and 2003 and identifiable assets as at September 30, 2004 and December 31, 2003:

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6. SHARE CAPITAL

Following is a summary of the changes in share capital and stock options outstanding for the nine-month period ended September 30, 2004:

In the first quarter of 2004, the Company closed two special warrant financings to advance its international and North American oil and gas operations and for general corporate purposes. The financings consisted of 7,172,414 special warrants at $2.90 per special warrant. Each special warrant entitles the holder to acquire one common share and one common-share purchase warrant at no additional cost. Two common-share purchase warrants are exercisable to purchase an additional common share at $3.00 at any time on or prior to the first anniversary date following the special warrant date of issue and at $3.20 thereafter until the second anniversary date of the special warrant date of issue. The net proceeds from the special warrant financings have been apportioned to the common shares. No amounts have been apportioned to the purchase warrants.

The following common-share purchase warrants are outstanding and exercisable as at September 30, 2004:

7. STOCK BASED COMPENSATION

The Company accounts for all stock options granted using the fair value based method of accounting. This method was adopted retroactively effective January 1, 2004 for stock options granted to employees and directors after January 1, 2002. Under this method, compensation costs are recognized in the financial statements over the options’ vesting period using an option-pricing model for determining the fair value of the options at the grant date.

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The effect of the accounting change on the net loss for the three-month and nine-month periods ended September 30, 2004 was an increase of $0.4 million and $0.9 million, respectively, and on the net loss for the three-month and nine-month periods ended September 30, 2003, as previously reported, was an increase of $0.1 million and $0.4 million, respectively. There is negligible effect on the net loss per share for the periods presented. The deficit as at the beginning of the nine-month periods ended September 30, 2004 and 2003 has increased $0.8 million and $0.3 million, respectively, to reflect the retroactive adoption of the fair value based method of accounting for stock options granted to employees and directors after January 1, 2002. Additionally, 0.3 million options granted to employees and directors after January 1, 2002 were exercised during the third and fourth quarters of 2003 resulting in a $0.3 million increase in share capital as at December 31, 2003 with a corresponding reduction in contributed surplus.

The fair values were calculated in accordance with the Black-Scholes option pricing model, using the following data and assumptions: 72% to 110% expected price volatility, using the prior two years weekly average prices of the Company’s common shares; expected dividend yield of 0%; option terms to expiry of 5 years, as defined by the option agreements; risk-free rate of return as of the date of the grant of 3.5% to 5.6%, based on five year Canada Bond yields.

8. NOTE PAYABLE

In February 2003, the Company obtained a bank facility for up to $5.0 million to drill 30 new oil wells and upgrade surface transmission and steam injection facilities in the southern expansion of South Midway. The loan is repayable over three years plus interest at 0.50% above the bank’s prime rate or 3.0% over LIBOR, at the option of the Company. The loan is secured by all the Company’s rights and interests in the South Midway properties. The loan balance as at September 30, 2004 is $4.7 million with a six month LIBOR interest rate of 5.25%.

9. ADVANCE PAYABLE

In March 2004, the Company received a $10.0 million advance as part of the $20.0 million up-front payment due from Richfirst for their farm-in to the Dagang oil project (See Note 3). Upon finalization of the farm-in agreement in June 2004, Richfirst elected to apply $10.0 million of the up-front payment due to the Company against the advance.

10. ASSET RETIREMENT OBLIGATION

The undiscounted amount of expected cash flows required to settle the Company’s asset retirement obligations is estimated at $1.2 million to be settled over a twelve-year period starting in 2010. The liability for the expected cash flows, as reflected in the financial statements, has been discounted at 5% to 7%.

11. COMMITMENTS AND CONTINGENCIES

With the signing of the production-sharing contract in September 2002 for the Zitong block, the Company is obligated to conduct a minimum exploration program during the first three years, which will include acquiring seismic data, reprocessing existing seismic and drilling two exploration wells. At the end of the three-year period, if the Company does not complete the minimum exploration program, and elects not to continue, it will be obligated to pay, to PetroChina within 30 days, a cash equivalent of the deficiency in the work program. The remaining cost of the minimum exploration program is estimated to be at least $10.7 million as at September 30, 2004.

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The Company has temporarily abandoned the Northwest Lost Hills #1-22 well pending the identification of one or more partners to share the costs of the testing program. If the well were permanently abandoned, the Company would be obligated for its share of the costs to plug and abandon the well, which is estimated to be $1.1 million. There is no provision in the balance sheet for this contingent obligation.

12. SUBSEQUENT EVENT

In October 2004, the Company signed an agreement with Ensyn Group and Ensyn pursuant to which the Company will pay $1.0 million as consideration for an option to acquire an additional 5% equity interest in Ensyn for $4.0 million. The option expires 15 business days after December 31, 2004.

13. ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP

The consolidated financial statements have been prepared in accordance with Canadian GAAP, which conforms to U.S. GAAP except as below:

Consolidated Balance Sheets

As discussed under “Stock Based Compensation” in Note 7, the Company changed its accounting policy, for Canadian GAAP, to recognize compensation costs using the fair value based method of accounting for stock options granted to employees and directors after January 1, 2002. For U.S. GAAP, the Company continues to apply APB Opinion No. 25, as interpreted by FASB Interpretation No. 44, in accounting for its stock option plan and does not recognize compensation costs in its financial statements for stock options issued to employees and directors. Accordingly, for U.S. GAAP purposes, share capital would be reduced by $0.3 million as at September 30, 2004 and December 31, 2003 related to the employees’ and directors’ exercise of options in 2003; contributed surplus would be reduced by $1.4 million and $0.5 million as at September 30, 2004 and December 31, 2003, respectively, for stock options issued to employees and directors, but not yet exercised; and the deficit as at September 30, 2004 and December 31, 2003 would be reduced by $1.7 million and $0.8 million, respectively, for the amount of stock based compensation expense recognized for Canadian GAAP.

The application of U.S. GAAP has the following effect on oil and gas properties and shareholders’ equity:

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Under U.S. GAAP, the transfer of deficit to share capital, which occurred in 1999, would not be recognized and shareholders’ equity would be presented as follows:

Consolidated Statements of Loss and Deficit

As discussed under “Oil and Gas Properties” in Note 20 of the Company’s December 31, 2003 consolidated financial statements, there is a difference in performing the ceiling test evaluation under full cost accounting between U.S. and Canadian GAAP. Application of the ceiling test evaluation under U.S. GAAP as at December 31, 2001 required an additional $10.0 million provision for impairment with respect to the Company’s China properties. This difference results in a lower depletion rate for U.S. GAAP.

The capitalization of development costs permitted under Canadian GAAP in connection with our GTL and EOR prospects is not permitted under U.S. GAAP.

The application of U.S. GAAP has the following effect on net loss and net loss per share:

Stock Based Compensation

Had compensation expense been determined based on the fair value of options issued to employees and directors at the stock option grant date, including those granted prior to January 1, 2002, consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s net loss and net loss per share would have been as follows:

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Impact of New and Pending U.S. GAAP Accounting Standards

In March 2004, the FASB issued an exposure draft “Share-Based Payment”. This exposure draft proposes to revoke the alternative of accounting for employee stock based compensation under the intrinsic value method. As the Company is currently using the provision under SFAS 123 that allow the use of the intrinsic method of accounting for share-based payments, it is anticipated that the adoption of this exposure draft may have a material impact on the Company’s results of operations or financial position. However, at this time the exposure draft has neither been accepted nor rejected by the FASB. If adopted, the application of this policy is expected to be for interim or annual periods beginning after June 15, 2005.

In June 2004, the FASB issued an exposure draft of a proposed statement, “Fair Value Measurements” to provide guidance on how to measure the fair value of financial and non-financial assets and liabilities when required by other authoritative accounting pronouncements. The proposed statement attempts to address concerns about the ability to develop reliable estimates of fair value and inconsistencies in fair value guidance provided by current U.S. GAAP, by creating a framework that clarifies the fair value objective and its application in GAAP. In addition, the proposal expands disclosures required about the use of fair value to re-measure assets and liabilities. The standard would be effective for financial statements issued for fiscal years beginning after June 15, 2005.

In September of 2004, the SEC released Staff Accounting Bulletin No. 106, which provides guidance regarding the interaction of Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations (SFAS 143) with the full cost accounting rules in Article 4-10 of Regulation S-X. This bulletin clarifies the treatment of assets and liabilities resulting from the implementation of SFAS 143 on the full cost ceiling test and the calculation of depletion, depreciation and amortization. The Company is in compliance with the provisions of Staff Accounting Bulletin No. 106.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

With the exception of historical information, certain matters discussed in this Form 10-Q are forward looking statements that involve risks and uncertainties. Certain statements contained in this Form 10-Q, including statements which may contain words such as “could”, “should”, “expect”, “believe”, “will” and similar expressions and statements relating to matters that are not historical facts are forward-looking statements. Such statements involve known and unknown risks and uncertainties which may cause our actual results, performances or achievements to be materially different from any future results, performance or achievements

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expressed or implied by such forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, but are not limited to, our ability to raise capital as and when required, the timing and extent of changes in prices for oil and gas, competition, environmental risks, drilling and operating risks, uncertainties about the estimates of reserves and the potential success of heavy-to-light and gas-to-liquids development technologies, the prices of goods and services, the availability of drilling rigs and other support services, legislative and government regulations, political and economic factors in countries in which we operate and implementation of our capital investment program.

The following should be read in conjunction with the Company’s consolidated financial statements contained herein and in the Form 10-K for the year ended December 31, 2003, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in such Form 10-K. Any terms used but not defined in the following discussion have the same meaning given to them in the Form 10-K.

Results of Operations

For the three-month period ended September 30, 2004, the net loss was $1.0 million ($0.01 per share) compared to a net loss of $1.3 million ($0.01 per share) for the same period in 2003. The net loss for the nine-month period ended September 30, 2004 was $3.5 million ($0.02 per share) compared to a net loss of $7.0 million ($0.05 per share) for the same period in 2003. The net loss for the nine-month period ended September 30, 2003 includes a $3.3 million ($0.02 per share) write down of our investment in the Qatar gas-to-liquids project as a result of the termination of contract negotiations in May 2003.

Cash deficiency from operating activities for the three-month period ended September 30, 2004 was $0.2 million compared to cash deficiency from operating activities of $0.8 million for the same period in 2003. Our cash from operations for the nine-month period ended September 30, 2004 was $1.1 million compared to cash from operations of $0.4 million for the same period in 2003. Our cash position increased $4.1 million for the first nine months of 2004 primarily due to net proceeds of $20.4 million received from private placements in the first quarter of 2004, $20.0 million from Richfirst related to its farm-in to the Dagang oil project development program, $3.7 million in net proceeds from the Wells Fargo loan related to the development of our South Midway field, $1.7 million from the exercise of stock options and $1.1 million of cash from operating activities. This is partially offset by $33.7 million in capital spending for the first nine months of 2004, a $5.8 million reduction in working capital resulting from investing activities related to our China drilling program and $3.2 million related to our investment in Ensyn. Our cash position increased $3.7 million for the comparable period in 2003 primarily due to net proceeds received from private placements of $11.6 million and net loan proceeds of $0.5 million. This is partially offset by $8.9 million of capital spending.

Production and Operations

Oil and gas revenues for the three-month and nine-month periods ended September 30, 2004 were $4.9 million and $11.6 million, respectively. These represent increases of $2.5 million and $4.4 million from the comparable periods in 2003. Half of the increase in revenue for the three-month period ended September 30, 2004 is due to a 38% or $9.92 per boe increase in oil and gas prices from the comparable period in 2003. Increases in production volumes account for the remaining 50% increase in revenues. The increase in production is a result of additional development programs initiated in 2003 at the Dagang, South Midway and Daqing fields and the start up of production in 2004 at our Citrus and Knights Landing fields. Net production volumes from the Dagang field development, initiated at the end of 2003, increased 49% during the three-month period ended September 30, 2004 from the

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comparable period in 2003 after giving effect to the 40% farm-in by Richfirst in the second quarter of 2004. The Dagang field achieved two sales records during the third quarter of 2004 by posting its first million-dollar month in gross oil sales of $1.2 million and topping one-million-barrels of cumulative oil sales. The increase in revenues for the nine-month period ended September 30, 2004 was mainly due to increases in production volumes, which contributed 54% or $2.3 million to the increase in total revenues for the period. Increases in production volume from the Dagang and Daqing fields contributed $1.4 million to the increase in total revenues for the period in addition to increases in production from the southern expansion of our South Midway field and the start up of production operations at our Citrus and Knights Landing fields in 2004. Additionally, a 24% or $6.46 per boe increase in oil and gas prices contributed to the remaining 46% increase in revenues for the nine-month period ended September 30, 2004.

Operating costs decreased 18% or $1.53 per boe for the three-month period ended September 30, 2004 compared to the same period in 2003. Operating costs in China decreased 43% or $3.81 per boe for the third quarter of 2004 due mainly to an increase in production from the Dagang field in relation to the level of fixed operating costs required to operate the field and reduced well workover and power costs during the third quarter 2004. Operating costs in the U.S. increased 5% or $0.38 per boe for the third quarter of 2004 as compared to the same period in 2003 due mainly to the start up of production operations at our Knights Landing and Sledge Hamar fields in the second quarter of 2004 as well as increased costs to treat the hydrogen sulfide levels in the gas produced from the South Midway field. For the nine-month period ended September 30, 2004, operating costs per boe decreased slightly compared to the same period in 2003. Operating costs in China decreased 22% or $1.81 per boe due mainly to an increase in production from the Dagang field in relation to the level of fixed operating costs required to operate the field and a reduction in well workovers and decreased power costs during 2004. Operating costs in the U.S. increased 18% or $1.29 per boe for the nine-month period ended September 30, 2004 due mainly to an increase in fuel costs incurred for the cyclic steam operations in the southern expansion of South Midway, increased costs to treat the hydrogen sulfide levels in the gas produced from the South Midway field and the start up of production operations at our Citrus, Knights Landing, and Sledge Hamar fields. This is partially offset by a reduction in workover costs at our Spraberry field from the comparable period in 2003.

Our depletion rate increased $6.97 and $5.37 per boe for the three-month and nine-month periods ended September 30, 2004, respectively, compared to the same periods in 2003. The depletion rate in China increased $2.34 and $2.07 per boe for the three-month and nine-month periods ended September 30, 2004, respectively, due mainly to anticipated increases in Dagang future development costs. The depletion rate in the U.S. increased $11.11 and $8.11 per boe for the three-month and nine-month periods ended September 30, 2004, respectively, due mainly to an increase in the carrying costs of our evaluated U.S. oil and gas assets primarily in Northwest Lost Hills, East Texas and North South Forty. In addition, the increase in the U.S. depletion rate for the three-month and nine month periods ended September 30, 2004 is due to an increase in Knights Landing exploration costs and a decrease in estimated reserves for Knights Landing as a result of reduced success in the current exploration drilling program as six dry holes had been drilled as at September 30, 2004.

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Production and operating information are detailed below: