Edgar Filing: CHAPARRAL RESOURCES INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended March 31, 2006.

|_| 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 - 7261

CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 84-0630863
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2 Gannett Drive, Suite 418
White Plains, New York 10604
----------------------------
(Address of Principal Executive Offices)

Registrant's telephone number, including area code: (866) 559-3822

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 |_|

Indicate by check mark whether the Registrant is large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|

Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2):

YES |_| NO |X|

As of May 11, 2006 the Registrant had 38,209,502 shares of its common stock, par
value $0.0001 per share, issued and outstanding.

CHAPARRAL RESOURCES, INC.
FORM 10-Q
MARCH 31, 2006
TABLE OF CONTENTS

PAGE
----

PART I. FINANCIAL INFORMATION

Item l. Financial Statements

Consolidated Condensed Balance Sheets as of
March 31, 2006 and December 31, 2005 1

Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 2006 and 2005 3

Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005 4

Notes to Consolidated Condensed Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14

Item 3. Quantitative and Qualitative Disclosures About Market Risk 18

Item 4. Controls and Procedures 19

PART II. OTHER INFORMATION

Item 1. Legal proceedings 20

Item 4. Shareholder matters 20

Item 6. Exhibits 20

Signatures 21

Part I - Financial Information

Item 1 - Financial Statements

Chaparral Resources, Inc.
Consolidated Condensed Balance Sheets

March 31, December 31,
2006 2005
(Unaudited)
--------- ---------

$ 000 $ 000
Assets
Current assets:
Cash and cash equivalents 18,967 20,995
Accounts receivable:
Oil sales receivable 23,132 15,767
VAT receivable 5,211 6,671
Other receivables from affiliates 17 17
Prepaid expenses 4,832 4,716
Income taxes recoverable 35 2,301
Crude oil inventory 117 596

--------- ---------
Total current assets 52,311 51,063

Materials and supplies 12,001 8,082
Other 2,102 2,119
Deferred income tax asset 611 --
Property, plant and equipment:
Oil and gas properties, full cost 188,450 183,505
Other property, plant and equipment 11,993 12,143

--------- ---------
200,443 195,648
Less - accumulated depreciation, depletion and
amortization (94,621) (88,120)

--------- ---------
Property, plant and equipment, net 105,822 107,528

--------- ---------
Total assets 172,847 168,792
========= =========

See accompanying notes.

Chaparral Resources, Inc.
Consolidated Condensed Balance Sheets (continued)

March 31, December 31,
2006 2005
(Unaudited)
--------- ---------

$ 000 $ 000

Liabilities and stockholders' equity
Current liabilities:
Accounts payable 8,438 8,497
Prepaid sales 180 361
Accrued liabilities:
Accrued interest payable 16 106
Other accrued liabilities 6,283 6,000
Current income tax liability 967 62
Current portion of loans payable 12,667 24,679

--------- ---------
Total current liabilities 28,551 39,705

Accrued production bonus 422 395
Loans payable 4,917 7,333
Deferred income tax liability -- 62
Minority interest 41,893 34,164
Asset retirement obligation 1,697 1,624

Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
38,209,502 shares as of March 31, 2006 and
December 31, 2005 4 4
Capital in excess of par value 107,226 107,226
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (11,863) (21,721)

--------- ---------
Total stockholders' equity 95,367 85,509

--------- ---------
Total liabilities and stockholders' equity 172,847 168,792
========= =========

See accompanying notes.

Chaparral Resources, Inc.
Consolidated Condensed Statements of Operations (Unaudited)

For the Three months Ended
March 31, March 31,
2006 2005
----------- -----------
$000 (except share data)

Revenue 53,450 24,327

Costs and expenses:
Transportation costs 6,200 3,487
Operating expenses 4,072 3,826
Excess Profits Tax 4,426 --
Marketing fee 120 122
Depreciation and depletion 7,116 5,018
Management fee 138 193
Accretion expense 42 36
General and administrative 2,942 1,421

----------- -----------
Total costs and expenses 25,056 14,103

Income from operations 28,394 10,224

Other income/(expense):
Interest income 58 86
Interest expense (858) (1,226)
Currency exchange gain 193 8
Minority interest (7,729) (2,822)

----------- -----------
Income before income taxes 20,058 6,270

Income tax expense 10,200 2,436

----------- -----------
Net income available to common Stockholders 9,858 3,834
=========== ===========

Basic earnings per share:
Net income per share $ 0.26 $ 0.10
Weighted average number of shares outstanding (basic) 38,209,502 38,209,502

Diluted earnings per share:
Net income per share $ 0.24 $ 0.10
Weighted average number of shares outstanding (diluted) 40,541,941 39,117,455

See accompanying notes.

Chaparral Resources, Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited)

For the Three months Ended
March 31, March 31,
2006 2005
-------- --------
$ 000 $ 000
Cash flows from operating activities

Net income 9,858 3,834

Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 7,094 5,018
Deferred income taxes (673) (57)
Accretion expense 42 36
Amortization of note discount -- 151
Currency exchange gain (193) (8)
Minority interest 7,729 2,822
Loss on disposal of assets 34 --

Changes in assets and liabilities:
(Increase)/decrease in:
Accounts receivable (3,639) (578)
Prepaid expenses (116) 606
Crude oil inventory 222 (171)
Increase/(decrease) in:
Accounts payable and accrued liabilities 1,380 293
Accrued interest payable (90) (200)
Other liabilities (181) (1,000)

-------- --------
Net cash provided by operating activities 21,467 10,746
-------- --------

Cash flows from investing activities

Additions to property, plant and equipment (220) (58)
Capital expenditures on oil and gas properties (4,945) (5,788)
Other long-term assets (3,902) (42)

-------- --------
Net cash used in investing activities (9,067) (5,888)
-------- --------

Chaparral Resources, Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited) (continued)

For the Three months Ended
March 31, March 31,
2006 2005
-------- --------
$ 000 $ 000

Cash flows from financing activities

Proceeds from loans -- 6,000
Payments on loans (14,428) (10,000)

-------- --------
Net cash used in financing activities (14,428) (4,000)
-------- --------

Net (decrease) / increase in cash and cash equivalents (2,028) 858
Cash and cash equivalents at beginning of period 20,995 9,611

-------- --------
Cash and cash equivalents at end of period 18,967 10,469
======== ========

Supplemental cash flow disclosure

Interest paid 948 1,275
Income taxes paid 7,029 1,947

Supplemental schedule of non-cash investing and
financing activities

Non-cash additions to oil and gas properties 42 79

See accompanying notes.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)

1. General

Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. Chaparral focuses
substantially all of its efforts on the development of the Karakuduk Field, an
oil field located in the Central Asian Republic of Kazakhstan. In 1999,
Chaparral reincorporated from Colorado to Delaware.

The consolidated financial statements include the accounts of Chaparral and its
greater than 50% owned subsidiaries, ZAO Karakudukmunay ("KKM"), Central Asian
Petroleum (Guernsey) Limited ("CAP-G"), Korporatsiya Mangistau Terra
International ("MTI"), Road Runner Services Company ("RRSC"), Chaparral
Acquisition Corporation ("CAC"), and Central Asian Petroleum, Inc. ("CAP-D").
Chaparral owns 80% of the common stock of CAP-G directly and 20% indirectly
through CAP-D. Hereinafter, Chaparral and its subsidiaries are collectively
referred to as the "Company." All significant inter-company transactions have
been eliminated.

Since May 2002 Chaparral has owned an effective 60% interest in KKM, a limited
liability company incorporated in Kazakhstan. KKM was formed to engage in the
exploration, development, and production of oil and gas properties in the
Republic of Kazakhstan. KKM's only significant investment is in the Karakuduk
Field, an onshore oil field in the Mangistau region of the Republic of
Kazakhstan. On August 30, 1995, KKM entered into an agreement with the Ministry
of Oil and Gas Industry for Exploration, Development and Production of Oil in
the Karakuduk Oil Field in the Mangistau Region of the Republic of Kazakhstan
(the "Agreement"). KKM's rights and obligations regarding the exploration,
development, and production of underlying hydrocarbons in the Karakuduk Field
are determined by the Agreement.

KKM's rights to the Karakuduk Field may be terminated under certain conditions
specified in the Agreement. The term of the Agreement is 25 years commencing
from the date of KKM's registration. The Agreement can be extended to a date
agreed between the Ministry of Energy and Mineral Resources and KKM as long as
production of petroleum and/or gas is continued in the Karakuduk Field.

KKM is owned jointly by CAP-G (50%), MTI (10%) and Caspian Investments Resources
Limited ("Caspian") (40%). Caspian acquired its 40% share when it purchased
Nelson Resources Limited ("Nelson") in December 2005. Nelson had acquired its
interest in December 2004 from KazMunayGas JSC ("KMG"), the national petroleum
company of Kazakhstan, owned by the government of the Republic of Kazakhstan.

From May 2004 to December 2005, Nelson owned approximately 60% of the
outstanding common stock of Chaparral. In December 2005 Caspian became the
majority shareholder of Chaparral when it acquired Nelson. The ultimate parent
of Caspian is OAO LUKOIL.

Merger
------

On March 13, 2006 Chaparral announced that it had entered into an agreement with
LUKOIL Overseas Holdings Limited ("LUKOIL") to effect a merger into a wholly
owned subsidiary of LUKOIL. On the effective date of this merger, all issued and
outstanding common stock of Chaparral will be exchanged for $5.80 per share in
cash. The transaction is subject to the approval of a meeting of stockholders
expected to be held in June 2006 and certain other conditions including the
receipt of all regulatory approvals and consents. Further details are contained
within the form 8-K filed by the Company with the SEC on March 14, 2006, which
is incorporated herein by reference.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. Reference should be made to
the relevant notes to the Company's financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005.

The unaudited information furnished herein was taken from the books and records
of the Company. However, such information reflects all adjustments which are, in
the opinion of management, normal recurring adjustments necessary for the fair
statement of the results for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future interim period or for the year.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

1. General (continued)

Use of Estimates

Application of generally accepted accounting principles requires the use of
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The determination of proved oil and gas reserve quantities and the
application of the full cost method of accounting for exploration and production
activities requires management to make numerous estimates and judgments.

2. Recent Accounting Pronouncements

In November 2004 the FASB issued SFAS 151, Inventory Costs, an Amendment of APB
Opinion No. 43, Chapter 4. SFAS 151 clarifies the accounting treatment for
various inventory costs and overhead allocations and is effective for inventory
costs incurred after July 1, 2005. It has not had a material impact on the
Company's financial statements upon adoption.

In December 2004 the FASB issued SFAS 153, Exchanges of Non-monetary Assets, an
Amendment of APB Opinion No. 29. SFAS 153 specifies the criteria required to
record a non-monetary asset exchange using carryover basis and is effective for
non-monetary asset exchanges occurring after July 1, 2005. It has not had a
material impact on the Company's financial statements upon adoption.

In December 2004 the FASB issued SFAS 123 (revised 2004) ("SFAS 123R"), Share
Based Payments. SFAS 123R requires that the cost from all share-based payment
transactions, including stock options, be recognized in the financial statements
at fair value and is effective for public companies in the first interim period
after June 15, 2005. It has not had a material impact on the Company's financial
statements upon adoption.

In May 2005 the FASB issued SFAS 154, Accounting Changes and Error Corrections.
SFAS 154 changes the accounting for and reporting of accounting principle. It
requires retrospective application of a change of accounting principle unless
impracticable. SFAS 154 is effective for fiscal years beginning after December
15, 2005. It has not had a material impact on the Company's financial statements
upon adoption.

In March 2006 the FASB issued SFAS 155, Accounting for Certain Hybrid
Instruments and SFAS 156, Accounting for Servicing of Financial Assets. Neither
of these standards is relevant to the Company's current operations.

3. Prepaid Expenses

The breakdown of Prepaid Expenses is as follows:

March 31, December 31,
2006 2005
------ ------

$ 000 $ 000

Description

Prepaid transportation costs 745 1,787
Advanced payments for materials
and supplies 3,166 1,111
Prepaid insurance 207 486
Deferred financing charges 540 838
Other prepaid expenses 174 494

------ ------
Total prepaid expenses 4,832 4,716
====== ======

Prepaid transportation costs represent prepayments of export tariffs to CJSC
KazTransOil ("KTO"), a 100% subsidiary of KMG, necessary to sell oil on the
export market, which is expensed in the period the related oil revenue is
recognized. Advanced payments for materials and supplies represent prepayments
for general materials and supplies to be used in the development of the
Karakuduk Field.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

4. Asset Retirement Obligation

FASB No. 143 requires entities to record the fair value of the liability for
asset retirement obligations (ARO) in the period in which the liability is
incurred, if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.

Since 1995, the core business of the Company has been the development of the
Karakuduk Field. The Company has developed an asset that is capable of
producing, processing and transporting crude oil to export markets. The field
still requires up to possibly 80 new wells, but the oil processing and
transportation infrastructure, apart from the obligatory gathering lines and up
to four more gathering stations, are in place. However, further infrastructure
development is planned to increase profitability of the operation, utilize gas
and to maximise oil and produced fluid processing. The Company is legally
required under the Agreement to restore the field to its original condition.

The following table shows movements in the Company's asset retirement obligation
liability:

March 31, March 31,
2006 2005
------ ------
$ 000 $ 000

Asset retirement obligation at
beginning of period 1,624 1,232
Accretion expense 42 36
Additional provision for new wells 31 52

------ ------
Asset retirement obligation at end of period 1,697 1,320
====== ======

5. Change in Control

In May 2004, Nelson purchased from Central Asian Industrial Holdings, N.V.
("CAIH") 22,925,701 shares of Chaparral, representing 60% of Chaparral's issued
and outstanding common stock. As part of the transaction, a Stock Purchase
Warrant exercisable for 3,076,923 shares of the Company's common stock
originally issued to CAIH, and a promissory note of the Company payable to CAIH
(the "Note"), with a principal amount of $4 million (see Note 6), were
transferred by CAIH to Nelson. The total purchase price was $23.9 million. On
October 18, 2005 approximately 65% of Nelson was acquired by Caspian Investments
Resources Limited, a wholly owned subsidiary of OAO LUKOIL. On December 5, 2005
Caspian acquired the remaining 35% of the shares of Nelson, Nelson and Caspian
were merged and Nelson ceased to exist.

6. Loans

The Note
--------

In May 2002, the Company received a total equity and debt capital infusion of
$45 million, which was partially utilized to repay a substantial portion of the
Company's loan agreement with Shell Capital, Inc. (the "Shell Capital Loan").
The Company received a total investment of $12 million from CAIH, including $8
million in exchange for 22,925,701 shares, or 60%, of the Company's outstanding
common stock, and $4 million in exchange for a three year note bearing interest
at 12% per annum (the "Note"). Along with the Note, CAIH received a warrant to
purchase 3,076,923 shares of the Company's common stock at $1.30 per share (the
"Warrant"). Additionally, Kazkommertsbank, an affiliate of CAIH, provided KKM
with a credit facility totaling $33 million (the "KKM Credit Facility"),
consisting of $28 million that was used to repay a portion of the Shell Capital
Loan and $5 million that was made available for KKM's working capital
requirements. The Company paid CAIH $1.79 million as a related restructuring
fee.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

6. Loans from Affiliates (continued)

The Note was recorded net of a $2.47 million discount, based on the fair market
value of the Warrant issued in conjunction with the Note. The discount was
amortized using the effective interest rate over the original life of the Note.
The principal balance of the Note was originally due on May 10, 2005 and accrued
interest was payable quarterly. On March 24, 2005, Chaparral and CAP-G signed a
Promissory Note Amendment Agreement pursuant to which a $1million prepayment of
the Note was made on March 31, 2005 and the maturity of the remaining balance of
the Note was extended to May 10, 2006 (see further discussion below).

In June 2002, the Company prepaid $2 million of the $4 million outstanding
principal balance of the Note. As a result, the Company recognized an
extraordinary loss on the early extinguishment of debt of $1.22 million from the
write-off of 50% of the unamortized discount on the Note. The extraordinary loss
was netted against the extraordinary gain from the restructuring of the Shell
Capital Loan. In March 2004, the Company re-borrowed the $2 million.

In May 2004, the CAIH shares, the Warrant and the Note were purchased by Nelson.
On March 24, 2005, Chaparral and CAP-G signed a Promissory Note Amendment
Agreement with Nelson. This provided for a prepayment of $1 million of the $4
million due to be repaid to Nelson on May 10, 2005 under the existing $4 million
loan note and the replacement of the existing loan note with a new loan note for
$3 million on substantially similar terms, but with an increase in the interest
rate from 12% to 14% from May 10, 2005 and an extension of the maturity date of
one year to May 10, 2006. On March 31, 2005 the $1 million prepayment was made,
the existing loan note was cancelled and the new loan note was signed. See Item
2 paragraph 1, General Liquidity Considerations.

KKM Credit Facility
-------------------

As mentioned above, in May 2002, KKM established the KKM Credit Facility, a
five-year, $33 million credit line with Kazkommertsbank. The KKM Credit Facility
consisted of a $30 million non-revolving line and a $3 million revolving line,
both of which were fully borrowed by KKM in May 2002. The Company recognized
$1.13 million of interest expense on the KKM Credit Facility for the three
months ended March 31, 2005.

The non-revolving portion of the KKM Credit Facility accrued simple interest at
an annual rate of 14% and was repayable over a five-year period with final
maturity in May 2007. Accrued interest was payable quarterly, beginning in
December 2002, and KKM began making quarterly principal repayments in May 2003.
The proceeds of the BNP / KBC loan, described below, were utilized to repay the
KKM Credit Facility in full on July 1, 2005.

The original KKM Credit Facility included repayment terms of three years and
four years for the non-revolving and revolving portions, respectively, with an
option to extend the final maturity date for repayment of the entire KKM Credit
Facility to five years. KKM exercised the option as of May 2002.

BNP / KBC Credit Facility
-------------------------

On March 24, 2005, KKM signed a $40 million Structured Crude Oil Pre-export
Credit Facility Agreement with BNP Paribas (Suisse) SA ("BNP") and KBC Bank N.V.
(the "BNP / KBC Credit Facility"). On June 30, 2005, $32 million was drawn down
from this facility. For six months from 30 June, 2005 the facility was a
revolving credit, after which the amount outstanding became a term loan
repayable in 36 equal monthly installments commencing on December 30, 2005. The
purpose of the loan was to refinance the KKM Credit Facility, fund future
development costs and fund fees related to the facility.

Each year the lenders may propose, but are under no obligation to do so, an
extension of the facility by one year, for an agreed fee, and/or an increase of
the facility amount for an agreed fee. Each month during the term loan period,
KKM may make full or partial prepayments of the facility at no extra cost.
Partial prepayments must be for amounts of $2 million or more. The interest rate
applicable under the facility is LIBOR plus 3.25% in the first year and LIBOR
plus 4.00% thereafter. Interest is payable monthly. Fees paid by KKM include a
1.75% arrangement fee, a 1.65% p.a. commitment fee on the unused commitment
during the revolving credit period, $100,000 for the lenders' legal costs and
$15,000 for agency and technical bank fees. Fees payable include $15,000 per
quarter in advance for agency and technical bank fees. A total of $0.8 million
has been accrued for the arrangement fee and legal costs which is being
amortized over the life of the facility.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

6. Loans (continued)

BNP / KBC Credit Facility (continued)

As part of the BNP/KBC Credit Facility conditions, an Offtake Agreement was
signed in June 2005 with Vitol Central Asia S.A. ("Vitol") whereby KKM is
obligated to sell to Vitol, and Vitol is obligated to buy, all of KKM's crude
oil production available for export at international market prices for five
years from July 1, 2005, with step-in rights in favor of the lenders. In
accordance with the BNP/KBC Credit Facility conditions, accounts receivable from
Vitol are pledged as collateral for the loan. In addition, a performance and
financial guarantee was issued by Nelson (the "Nelson Guarantee") in support of
all amounts owing by KKM under the BNP/KBC Credit Facility. Under a separate
agreement, in consideration for issuing the Nelson Guarantee, KKM will pay
Nelson, annually in advance, a fee of 2.5% p.a. on the facility amount of $40
million for the first six months and on the daily principal amount of the loan
outstanding during the term period. An amount of $1.0 million, which was paid in
July 2005 for the estimated first years guarantee fee was accrued in June 2005
and is being amortized over twelve months.

A further condition of the BNP/KBC Credit Facility is that KKM enter into crude
oil hedging arrangements to the satisfaction of the lending banks. Nelson
entered into such an arrangement with BNP, for the benefit of KKM, in April
2005, and this agreement was subsequently novated in favor of KKM for the period
of April 2005 to December 2005 effectively permitting the Company to guarantee a
minimum receipt of $33.00 per barrel for specified monthly amounts of crude oil.
Nelson paid BNP $267,300 as consideration, equivalent to $0.22 per barrel. There
are no current hedge arrangements in place.

KKM is subject to certain pledges, covenants, and other restrictions under the
BNP/KBC Credit Facility, including, but not limited to, the following:

(i) KKM has signed an Offtake Agreement for 100% of its export production,
with step-in rights in favor of the lenders;

(ii) Nelson has provided a written guarantee to the lenders that it will
repay the BNP/KBC Credit Facility in the event KKM fails to do so;

(iii) KKM may not incur additional indebtedness or pledge its assets to
another party without the written consent of the lenders;

(iv) Subordination of existing loans, including inter-company, and any
additional loans;

(v) KKM may not pay dividends without the written consent of the lenders;

(vi) Nelson to maintain a controlling interest in KKM; and

(vii) A requirement to maintain a minimum credit balance in a "Collection
Account". This balance should always exceed $1.5 million.

The BNP/KBC Credit Facility stipulates certain events of default, including, but
not limited to, KKM's inability to meet the terms of the BNP/KBC Credit Facility
and the Offtake Agreement, default by KKM or Nelson under any other agreements
and material litigation involving Nelson or KKM. If an event of default does
occur and is not waived by the lenders, they can require KKM to immediately
repay the full amount outstanding under the facility and may enforce the Nelson
Guarantee and their step-in rights under the Offtake Agreement.

The maturity schedule of the Company's indebtedness as of March 31, 2006 is as
follows:

Date Principal Amount Due
$000

2006 10,250
2007 7,334
Later -

-------------
Total principal due 17,584
=============

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

6. Loans (continued)

Balances as of March 31, 2006 under the different facilities are as follows:

Principal Amount Due
$000

BNP / KBC Credit Facility (non -
revolving) 14,584
The Note 3,000

------------
Total principal due 17,584
============

7. Income Taxes

Income tax expense, as reported, relates entirely to foreign income taxes
provided on the Company's operations within the Republic of Kazakhstan. KKM's
principal agreement with the government of the Republic of Kazakhstan for the
exploration, development and production of oil in the Karakuduk Field specifies
the income taxes and other taxes applicable to KKM, which is subject to the tax
laws of the Republic of Kazakhstan. The Company has used the best estimates
available to determine its current and deferred tax liabilities within
Kazakhstan. A deferred taxation valuation allowance is made against net
operating losses arising as a result of expenses incurred outside of Kazakhstan,
as any potential reversal of these losses is not likely in the foreseeable
future. This may lead to a significantly higher effective tax rate in certain
periods.

8. Capital Commitments

On January 16, 2006, the Company's contract with Oil and Gas Drilling and
Exploration of Kracow ("OGEC"), for one development drilling rig operating in
the Karakuduk Field, expired and the rig was demobilised. The Company's other
drilling and operations related contracts can either be cancelled within 30 days
or are on a call-off (as required) basis.

As of March 31, 2006 the Company had made purchase commitments for work
associated with the rail rack and reservoir facilities at the Karakuduk field of
$8.83 million. It had no other significant commitments other than those incurred
during the normal performance of the work program to develop the Karakuduk
Field.

9. Related Party Transactions

In August 2004, the Company approved a two-year agreement with Nelson to provide
corporate administrative services and financial advisory services (the "Service
Agreement") to support its business activities. The Service Agreement is
effective as of June 1, 2004 and can be terminated upon 30 days written notice
by either party. In consideration for these services Nelson will receive a fixed
monthly fee of $20,000 for administrative services and $25,000 for financial
advisory services (the "Management Fee"). As part of the Service Agreement,
Nelson is also required to provide personnel to cover Chaparral's executive and
managerial needs. The cost of executive and managerial personnel will be
allocated on the basis of the cost of personnel involved and on the percentage
of time actually spent by such personnel on matters related to Chaparral, as
mutually agreed by the parties from time to time. In addition, Nelson will use
its greater buying power to obtain more favorable rates for goods and services,
including insurance coverage, for Chaparral. These expenditures will be passed
to Chaparral at cost with a ten percent mark-up. This agreement was acquired by
Caspian upon its merger with Nelson in December 2005. For the three months to
March 31, 2006, the Company has booked $137,562 for the Management Fee, the
executive and managerial cost, insurance coverage and the mark-up under the
Service Agreement.

In June 2004, KKM entered into a three year agency agreement with Nelson (the
"Marketing Agreement"), whereby Nelson becomes the duly authorized, exclusive
agent for the purpose of marketing crude oil, and is empowered to represent the
interests of KKM in relations with governmental authorities and commercial
organizations and also enter into contracts and agreements and any other
documents necessary for and related to the marketing of crude oil. The Marketing
Agreement is effective as of June 1, 2004 and can be terminated upon 90 days
written notice by either party. As consideration for the services provided under
the Marketing Agreement, KKM shall pay Nelson a fixed fee of $20,000 per month
and a variable fee of five US cents per barrel of total production in a
reporting calendar month, if the amount of supplies to the local market in that

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

9. Related Party Transactions (continued)

month is more than 10% of the total amount of production, or eight US cents per
barrel of total production in a reporting calendar month, if the amount of
supplies to the local market in that month is less than 10% of the total amount
of production (the "Marketing Fee"). This agreement was acquired by Caspian upon
its merger with Nelson in December 2005. For the period ending March 31, 2006,
$119,637 was accrued under the Marketing Agreement.

The total amounts of the transactions with related companies for the three
months ended March 31, 2006 and 2005 are as follows:

2006 2005
---- ----
$000 $000

Nelson + 326
Caspian 257 -

+ Nelson was merged into Caspian on December 5, 2005.

Accounts payable balance to affiliates as at March 31, 2006 and December 31,
2005 are as follows:

2006 2005
---- ----
$000 $000

Nelson + 237
Caspian 244 -

---- ----
244 237
==== ====

+ Nelson was merged into Caspian on December 5, 2005.

The loan with Caspian is disclosed in Note 6.

10. Contingencies

Taxation
--------

The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service. Instances of inconsistent opinions between
local, regional and national tax authorities are not unusual.

Basis of Accounting
-------------------

KKM maintains its statutory books and records in accordance with U.S. generally
accepted accounting principles and calculates taxable income or loss using the
existing Kazakh tax legislation in effect on August 30, 1995, the date the
Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

10. Contingencies (continued)

Merger
------

The day following the issuance of the press release announcing the execution of
the merger agreement, the first of three separate complaints were filed in the
Delaware Court of Chancery. Shortly thereafter, an additional complaint was
filed in the Supreme Court of the State of New York, to commence class actions
lawsuits on behalf of our stockholders against LUKOIL, Chaparral and our board
of directors. The complaints in these actions, which purport to be brought on
behalf of all stockholders, generally alleged breaches of fiduciary duty by
Chaparral, our board of directors and LUKOIL and that the merger consideration
offered by LUKOIL is inadequate. These suits generally seek to enjoin the merger
or, in the alternative, damages in an unspecified amount and rescission in the
event a merger occurred pursuant to the merger agreement. These complaints are
fully disclosed as Exhibit 99.2 to the Company's Form 10-K filed with the SEC on
March 23, 2006 and on forms 8-K filed with the SEC on March 23, 2006 and March
27, 2006, which are incorporated herein by reference. On March 31, 2006 the
three law suits filed in the Delaware Court of Chancery were consolidated into
one. The parties have agreed that defendants need not respond, and that
plaintiffs will file a consolidated amended complaint as soon as practical after
the preliminary proxy statement is filed with the Securities and Exchange
Commission. Defendants will respond to the consolidated amended complaint within
thirty days of service. Parties to the New York case have agreed that defendants
have until May 15, 2006 to respond to that suit.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

1. Liquidity and Capital Resources

General Liquidity Considerations
--------------------------------

Going Concern
-------------

Our financial statements have been presented on the basis that the Company is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Due to the 2005 refinancing of the
Company's debt we expect to be able to meet all expenditure and cash flow
requirements as they fall due through the next twelve months.

Since 2003 Chaparral has been successful in stabilizing the export sales/local
market deliveries ratio which has significantly improved the average netback per
barrel. For the quarter ended March 31, 2006, Chaparral sold approximately
962,000 barrels of its current quarters production, of which approximately
926,000 barrels, or 96%, have been sold at world market prices and 36,000
barrels, or 4%, have been sold at domestic market prices. During the first
quarter of 2005, exports accounted for 94% of total sales.

On March 24, 2005, KKM signed a $40 million Structured Crude Oil Pre-export
Credit Facility Agreement with BNP Paribas (Suisse) SA and others (the "BNP /
KBC Credit Facility"). Funds from this facility are available for use to cover
any short-term working capital deficiencies and were also used to pay down the
loan with Kazkommertsbank. Amounts borrowed under the BNP / KBC Credit Facility
are repayable in 36 equal monthly installments commencing in December 2005. In
addition, on March 24, 2005, Chaparral and CAP-G signed a Promissory Note
Amendment Agreement with Nelson (the "Amended Note"). This provided for a
prepayment of $1 million of the $4 million due to be repaid to Nelson on May 10,
2005 under the existing $4 million loan note and the replacement of the existing
loan note with a new loan note for $3 million on substantially similar terms,
but with an increase in the interest rate from 12% to 14% from May 10, 2005 and
an extension of the maturity date of one year to May 10, 2006. Together this
refinancing has significantly improved the Company's financial position,
enabling it to meet all its current financial obligations and continue with
field development.

Liquidity and Capital Resources
-------------------------------

We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
water injection facilities, plant and equipment (pumps, transformer sub-stations
etc.) and gas utilization. We have invested approximately $190 million in the
development of the Karakuduk Field and have drilled or re-completed 72 producing
wells by March 31, 2006. Total capital expenditures for the first quarter of
2006 were approximately $5 million. Capital expenditures are estimated to be at
least $170 million from 2006 through 2010, including the drilling of
approximately 60 more wells over this period. We anticipate 2006 capital
expenditures of approximately $53 million.

We expect to finance the continued development of the Karakuduk Field primarily
through cash flows from the sale of crude oil. During the first quarter of 2006,
KKM sold approximately 962,000 barrels of crude oil for $53 million. As
mentioned above, KKM has secured adequate funding for its current capital
investment plans. Current daily oil production is in excess of 11,000 barrels
per day.

During 2006, KKM expects to increase production by drilling 12 new wells using
two rigs, converting further wells to artificial lift and adding further water
injection wells. The Company is currently negotiating terms for the contract to
provide drilling rigs.

In addition, our short and long-term liquidity is impacted by local oil sales
obligations imposed on oil and gas producers within Kazakhstan to supply local
energy needs, and our ability to obtain export quota necessary to sell our crude
oil production on the international market. Under the terms of the Agreement, we
have a right to export, and receive export quota for, 100% of the production
from the Karakuduk Field. The domestic market does not permit world market
prices to be obtained, resulting in approximately $30 lower cash flow per
barrel. Furthermore, the Government has not allocated sufficient export quota to
allow us to sell all of our available crude oil production on the world market.
We continue to attempt to minimize local market obligations and to obtain an
export quota that will enable us to sell all of our crude oil production on the
export market. The Company has determined that it is no longer in the best
interests of the Company to pursue arbitration proceedings in Switzerland for
the breach of the Agreement by the Government of Kazakhstan, instead we intend
to seek an amicable resolution of this matter. If the matter cannot be resolved
in a satisfactory manner, we have, however, reserved our right to commence
formal arbitration proceedings pursuant to our contractual arrangements with the
Government.

No assurances can be provided, however, that an amicable resolution will be
reached, or that if arbitration is instituted, it will be successful or that if
successful, Chaparral will be able to enforce the award in Kazakhstan, or that
we will be able to export 100% or a significant portion of production or that we
will be able to obtain additional cash flow from operations to meet working
capital requirements in the future.

During the first quarter of 2006 the Company continued with the development of
the Karakuduk Field. As of March 31, 2006 the total field well count had risen
to 81 compared to 79 on December 31, 2005. The producing well count at the field
as of March 31, 2006 and December 31, 2005 was 61 wells. There are nine water
injection wells and 11 wells temporarily shut in. The drilling program at the
Karakuduk field is temporarily suspended following the decision of OGEC to
demobilize their rig.

Production for the first quarter of 2006 was 994,000 barrels, equivalent to over
11,000 barrels of oil per day ("bopd"), compared to 1,106,000 barrels, or 12,000
bopd, in the final quarter of 2005 and 8,700 bopd for the first quarter of 2005.
The small reduction in production from the final quarter of 2005 is due, in
part, to the suspension of the drilling program and in part due to reduced water
injection into the reservoir. As previously reported the Company has suspended
drilling activities at the Karakuduk field following OGEC's decision not to
renew their contract with KKM. During the quarter we completed two wells from
2005, completed workovers on four wells, including transfer of one well to
mechanical lift. We have now identified two replacement rigs which we hope will
allow us to recommence drilling at the field during May 2006. The two rig
program means that we can expect to complete a further ten wells with a drilling
program of some 38,400 meters drilled during the year. We are investigating the
possibility of bringing a third rig to the field during July 2006. We hope to
achieve an average production rate of approximately 13,400 bopd at the KKM field
during 2006.

The Company, meanwhile, has continued to invest in the infrastructure at the
field and has plans to modernize the central oil pumping systems, construct
additional water pumping facilities, complete the rail rack started in 2005 and
extend and modernize the staff camp. Investment has fallen approximately 28%
behind budget during the first quarter of 2006 due to the extreme cold weather
in Kazakhstan during January and February 2006. The Company does not expect the
full year investment program to be significantly impacted.

Capital Commitments and Other Contingencies
-------------------------------------------

The Company has no significant capital or operating expenditure commitments
other than those incurred during the normal performance of the work program to
develop the Karakuduk Field other than as disclosed above.

Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given exploration or development project.

All regulations are subject to future changes by legislative and administrative
action and by judicial decisions. Such changes could adversely affect the
petroleum industry in general and us in particular. It is impossible to predict
the effect that any current or future proposals or changes in existing laws or
regulations may have on our operations.

2. Results of Operations

Results of Operations for the Three Months Ended March 31, 2006 Compared to the
Three Months Ended March 31, 2005
-------------------------------------------------------------------------------

Our operations for the three months ended March 31, 2006 resulted in a net
income of $9.86 million compared to a net income of $3.83 million for the three
months ended March 31, 2005. The $6.03 million increase in our net income is
primarily a result of higher crude prices and increased sales partially offset
by higher minority interests and increased income taxes and excess profits tax
as a result of the increased operating profit.

Revenues. Revenues were $53.45 million for the first quarter of 2006 compared
with $24.33 million for the first quarter of 2005. The $29.12 million increase
is the result of higher crude prices achieved during the first quarter of 2006
as compared to the same period of 2005 and higher sales volumes. During the
first quarter of 2006, we sold approximately 962,000 barrels of crude oil,
recognizing $53.45 million in revenue, or $55.56 per barrel after quality
differential losses. Comparably, we sold approximately 679,000 barrels of crude
oil, recognizing $24.33 million in revenue, or $35.82 per barrel, for the first
quarter of 2005. The result is a positive price variance of $18.98 million and a
favorable volume variance of $10.14 million.

Transportation and Operating Expenses. Transportation costs for the first
quarter of 2006 were $6.20 million, or $6.44 per barrel sold, and operating
costs associated with sales were $4.07 million, or $4.23 per barrel.
Comparatively, transportation costs for the first quarter of 2005 were $3.49
million, or $5.14 per barrel, and operating costs associated with sales were
$3.83 million, or $5.63 per barrel. Transportation costs have risen due to
demurrage charges incurred during the period ended March 31, 2006 of $0.86
million or $0.90 per barrel. There was no corresponding charge in the period
ended March 31, 2005. The main reason for the decrease in operating cost per
barrel is the Company's continuing efforts to improve tariffs by using a smaller
number of preferred suppliers and increasing supervision of expenditure at the
field.

Excess Profits Tax. Under KKM's Agreement with the Ministry of Energy and
Natural Resources for the Exploration, Development and Production of Oil in the
Karakuduk Field a charge for Excess Profits Tax becomes payable when the total
cumulative return on cash flows at the field exceeds certain levels, and is
levied at various rates. In the quarter ended March 31, 2006 the charge for
Excess Profits Tax amounted to $4.43 million. There was no corresponding charge
in the quarter ended March 31, 2005 as the cumulative return was still below the
minimum thresholds.

Depreciation and Depletion. Depreciation and depletion expense was $7.12 million
for the first quarter of 2006 compared with $5.02 million for the first quarter
of 2005. The $2.10 million increase is mainly attributable to higher production
figures. During the first quarter of 2006, the Company recognized a total
depletion expense of $6.87 million or $6.91 per barrel produced, compared to
$4.83 million or $6.20 per barrel for the first quarter of 2005.

Estimates of our proved oil and gas reserves are prepared by an independent
engineering company in accordance with guidelines established by the Securities
and Exchange Commission ("SEC"). Those guidelines require that reserve estimates
be prepared under existing economic and operating conditions with no provisions
for increases in commodity prices, except by contractual arrangement. Estimation
of oil and gas reserve quantities is inherently difficult and is subject to
numerous uncertainties. Such uncertainties include the projection of future
rates of production, export allocation, and the timing of development
expenditures. The accuracy of the estimates depends on the quality of available
geological and geophysical data and requires interpretation and judgment.
Estimates may be revised either upward or downward by results of future
drilling, testing or production. In addition, estimates of volumes considered to
be commercially recoverable fluctuate with changes in commodity prices and
operating costs. Our estimates of reserves are expected to change as additional
information becomes available. A material change in the estimated volumes of
reserves could have an impact on the depletion rate calculation and the
financial statements.

Interest Expense. Interest expense was $0.86 million for the first quarter of
2006 compared to $1.23 million in 2005. The reduction in interest payable is
attributable to the reduction in average loan balances outstanding in 2006
following the prepayment of $12 million of amounts outstanding under the BNP /
KBC Credit Facility in January 2006.

General and Administrative Expense. General and administrative costs increased
to $2.94 million for the three months ended March 31, 2006 from $1.42 million
for the three months ended March 31, 2005. The increase of $1.52 million is
primarily the result of costs incurred by the Company in connection with the
proposed merger with LUKOIL discussed in note 10 above.

Income Tax Expense. Income tax expense increased from $2.44 million for the
three months ended March 31, 2005 to $10.20 million for the three months ended
March 31, 2006, representing 27% and 32% respectively of pre-tax income
excluding minority interests and Excess Profits Tax. Excess Profits Tax does not
attract tax relief under the taxation regulations of the Republic of Kazakhstan.
The tax charge has increased as income has increased. The effective tax rate has
increased largely because of higher administrative costs in the parent
undertaking which are not eligible for tax relief and a reassessment of the
method of calculation of taxable profits in 2006.

3. Commodity Prices for Oil and Gas

Our revenues, profitability, growth and value are highly dependent upon the
price of oil. Market conditions make it difficult to estimate prices of oil or
the impact of inflation on such prices. Oil prices have been volatile, and it is
likely they will continue to fluctuate in the future. Various factors beyond our
control affect prices for oil, including supplies of oil available worldwide and
in Kazakhstan, the ability of OPEC to agree to maintain oil prices and
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.

4. Inflation and Exchange Rates

We cannot control prices received from our oil sales and to the extent we are
unable to pass on increases in operating costs, we may be affected by inflation.
The devaluation of the Tenge, the currency of the Republic of Kazakhstan, can
significantly decrease the value of the monetary assets that we hold in
Kazakhstan as well as our assets in that country that are based on the Tenge.
KKM retains the majority of its cash and cash equivalents in U.S. dollars, but
KKM's statutory tax basis in its assets, tax loss carry-forwards, and VAT
receivables are all denominated in Tenge and subject to the effects of
devaluation. Local tax laws allow basis adjustments to offset the impact of
inflation on statutory tax basis assets, but there is no assurance that any
adjustments will be sufficient to offset the effects of inflation in whole or in
part. If not, KKM may be subject to much higher income tax liabilities within
Kazakhstan due to inflation or devaluation of the local currency. Additionally,
devaluation may create uncertainty with respect to the future business climate
in Kazakhstan and to our investment in that country. As of March 31, 2006, the
exchange rate was 128.45 Tenge per U.S. dollar compared to 133.77 as of December
31, 2005.

5. Critical Accounting Policies

The preparation of the Company's consolidated financial statements requires
management to make estimates, assumptions and judgments that affect the
Company's assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. Management bases these estimates and
assumptions on historical data and trends, current fact patterns, expectations
and other sources of information it believes are reasonable. Actual results may
differ from these estimates under different conditions. For a full description
of the Company's critical accounting policies, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's 2005 Annual Report on Form 10-K.

6. Special Note Regarding Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements." Forward-looking statements relate to future events
or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "estimates," "believes," "predicts," "potential," "likely,"
or "continue," or by the negative of such terms or comparable terminology.
Forward-looking statements are predictions based on current expectations that
involve a number of risks and uncertainties. Actual events may differ
materially. In evaluating forward-looking statements, you should consider
various factors, including the risks discussed above. These factors may cause
our actual results to differ materially from any forward-looking statement.

Although we believe that these statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements, and you are
encouraged to exercise caution in considering such forward-looking statements.
Unless otherwise required by law, we are not under any duty to update any of the
forward-looking statements after the date of this Quarterly Report on Form 10-Q
to conform these statements to actual results.

Item 3 - Quantitative and Qualitative Disclosures About Market Risks

Foreign Currency

The functional currency is the U.S. dollar. All transactions arising in
currencies other than U.S. dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded in U.S. dollars using the
exchange rate in effect on the date of the transaction.

Cash and other monetary assets held and liabilities denominated in currencies
other than U.S. dollars are translated at exchange rates prevailing as of the
balance sheet date (128.45 and 133.77 Tenge per U.S. dollar as of March 31, 2006
and December 31, 2005, respectively). Non-monetary assets and liabilities
denominated in currencies other than U.S. dollars have been translated at the
estimated historical exchange rate prevailing on the date of the transaction.
Exchange gains and losses arising from translation of non-U.S. dollar amounts at
the balance sheet date are recognized as an increase or decrease in income for
the period. See Item 2 section 4 for discussion on inflation and exchange rate
risks.

The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate Chaparral could realize or settle these assets and
liabilities in U.S. dollars.

Commodity Prices for Oil

In addition, under the terms of our Agreement with the government of the
Republic of Kazakhstan, the Company has the right to export, and receive export
quota for, 100% of the production from the Karakuduk Field. However, oil
producers within Kazakhstan are required to supply a portion of their crude oil
production to the local market to meet domestic energy needs. Local market oil
prices are significantly lower than prices obtainable on the export market. For
the three months ended March 31, 2006, the Company sold 36,000 barrels of crude
oil, or 4% of its total oil sales, to the local market, compared to 36,000
barrels, or 6%, during the three months ended March 31, 2005. Local market
prices obtained by the Company are up to $30 per barrel below export market
prices, net of transportation costs. We have attempted, in accordance with our
Agreement, to effect the 100% export of all hydrocarbons produced from the
Karakuduk Field, through discussions with the government of the Republic of
Kazakhstan. We plan to continue to work with the government to increase our
export quota and minimize or eliminate future local sales requirements. In
addition, we entered into an agency agreement with Nelson to assist in reducing
our local market obligation (see Note 9 to the interim financial statements
presented in Item 1). However, no assurances can be provided that we will be
able to export a higher portion of our production and that our cash flow from
operations will be sufficient to meet working capital requirements in the
future.

Credit risk

During 2005 we sold all of our crude oil for export to Vitol Central Asia S.A.
("Vitol"). This accounted for approximately 98% of the Company's revenues during
that year. KKM has a five year crude oil sales agreement in place with Vitol.
Under this agreement the price for each month's delivery of crude oil is agreed
in advance between the off-taker and KKM. KKM has the absolute right, at its own
discretion, to sell its oil to a third party if a price cannot be agreed. Crude
oil is a fungible product and, as such, a ready market is available subject to
the discussion above concerning commodity price risk. All sales to Vitol are
covered by an irrevocable letter of credit issued by an international bank
having a long term credit rating of no less than 'A'.

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in the periodic reports we
file with the SEC is recorded, processed, summarized and reported within the
time periods specified in the rules of the SEC. The Company carried out an
evaluation as of March 31, 2006, under the supervision and the participation of
our management, including our chief executive officer and chief financial
officer, of the design and operation of these disclosure controls and procedures
pursuant to Rules 13a-15(e) under the Securities Exchange Act of 1934. Based
upon that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC filings.

Changes in Internal Controls over Financial Reporting

As a result of the evaluation referred to in the preceding paragraph, there were
no changes that materially affected or are reasonably likely to materially
affect our internal control over financial reporting during the quarter ended
March 31, 2006.

Part II- Other Information

Item 1 - Legal proceedings

See Contingencies in Note 10 to our consolidated financial statements included
in Item 1, Financial Statements of this Report for information on legal
proceedings.

Item 4 - Shareholder matters

Item 6 - Exhibits

*31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

*31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

*32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

*32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

* Filed herewith.

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.

Dated: May 11, 2006

Chaparral Resources, Inc.

By: /s/ Boris Zilbermints
--------------------------------------------
Boris Zilbermints
Chief Executive Officer

By: /s/ Charles Talbot
--------------------------------------------
Charles Talbot
VP Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)