Bonterra Energy Corp. Announces Fourth Quarter and Annual 2009 Results

CALGARY, March 11 /CNW/ - Bonterra Energy Corp. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX: BNE) is pleased to announce its financial and operational results for the three months and fiscal year ended December 31, 2009.

    
    Annual Highlights
                                                      2009     2008     2007
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    Financial ($000, except $ per share/unit)
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    Revenue - realized oil and gas                  85,712  121,730   96,431
    Cash flow from operations                       38,893   69,570   51,433
      Per Share/Unit Basic                            2.16     4.07     3.04
      Per Share/Unit Diluted                          2.15     4.06     3.04
      Payout Ratio(1)                                  79%      77%      87%
    Funds Flow(2)                                   66,504   70,448   53,815
      Per Share/Unit Basic                            3.69     4.13     3.18
      Per Share/Unit Diluted                          3.67     4.12     3.18
      Payout Ratio(1)                                  46%      76%      83%
    Cash payments per share/unit(1)                   1.70     3.12     2.64
    Net Earnings                                    68,563   55,426   30,350
      Per Share/Unit Basic                            3.81     3.25     1.79
      Per Share/Unit Diluted                          3.78     3.23     1.79
    Capital Expenditures and Acquisitions
     (net of disposals)                              5,640   45,407   19,300
    Total assets                                   293,987  265,301  142,326
    Working Capital Deficiency                      10,162   23,878   58,766
    Long-term Debt                                  59,823   79,910        -
    Shareholders'/Unitholders' Equity              118,874   56,777   44,376
    Shares/Units Outstanding                        18,620   17,258   16,928
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    Operations
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    Oil and Liquids (barrels per day)                3,141    3,073    3,113
      Average Price ($ per barrel)                   59.82    87.54    70.31
    Natural Gas (MCF per day)                       11,120    7,637    6,627
      Average Price ($ per MCF)                       4.15     8.21     6.75
    Total BOE per day(3)                             4,994    4,346    4,218
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    Reserves
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    Oil and Liquids (barrels in 000s)
      Proved Developed Prducing (Gross)(4)          15,519   15,534   14,468
      Proved (Gross)                                19,220   17,991   17,472
      Proved plus Probable (Gross)                  27,568   22,867   21,910
    Natural Gas (MCF in 000s)
      Proved Developed Prducing (Gross)             32,103   32,108   19,863
      Proved (Gross)                                36,642   36,571   24,125
      Proved plus Probable (Gross)                  49,539   50,245   32,465
    Reserve Life Index(5) (oil, liquids
     and natural gas at 6:1) (years)
      Proved Developed Prducing (Gross)               11.7     12.5     11.3
      Proved (Gross)                                  14.2     14.4     13.7
      Proved plus Probable (Gross)                    20.1     18.7     17.4
    Reserves per Weighted Average Outstanding
     Share/Unit (BOE)
      Proved Developed Prducing (Gross)               1.16     1.22     1.05
      Proved (Gross)                                  1.41     1.41     1.27
      Proved plus Probable (Gross)                    1.99     1.83     1.62
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    Quarterly Highlights

    2009                                      4th      3rd      2nd      1st
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    Financial ($ 000s, except $ per share)
    Revenue - realized oil and gas sales   24,946   20,965   20,501   19,300
    Cash flow from operations              13,673    9,350    9,238    6,632
      Per Share Basic                        0.76     0.50     0.52     0.38
      Per Share Diluted                      0.75     0.50     0.52     0.38
      Payout Ratio(1)                         66%      87%      77%      94%
    Funds Flow(2)                          37,595   10,753    9,780    8,376
      Per Share Basic                        2.07     0.58     0.55     0.49
      Per Share Diluted                      2.06     0.57     0.55     0.49
      Payout Ratio(1)                         24%      76%      73%      74%
    Cash payments per share(1)               0.50     0.44     0.40     0.36
    Net Earnings                           52,136    5,790    4,544    6,093
      Per Share Basic                        2.88     0.32     0.26     0.35
      Per Share Fully Diluted                2.85     0.32     0.26     0.35
    Capital Expenditures and
     Acquisitions                         (16,976)  17,660    2,255    2,701
    Total Assets                          293,987  273,543  258,393  260,732
    Working Capital Deficiency             10,162   14,455   13,989   14,909
    Long-term debt                         59,823   81,136   71,573   89,383
    Shareholders' Equity                  118,874   74,025   72,332   56,377
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    Operations
    Oil and Liquids (barrels per day)       3,182    3,084    3,029    3,268
    Natural Gas (MCF per day)              10,193   10,881   11,551   11,877
    Total BOE per day                       4,881    4,898    4,954    5,245
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    (1) Cash dividend/disbursement payments per share/unit are based on
        payments made in respect of production months as opposed to the month
        paid.
    (2) Funds flow is not a recognized measure under GAAP. For these
        purposes, the Company defines funds flow as funds provided by
        operations before changes in non-cash operating working capital items
        but including gain on sale of property and investment tax credit
        receivable adjustments and excluding restricted cash and asset
        retirement obligations settled.
    (3) Barrels of oil equivalent (BOE) are calculated using a conversion
        ratio of 6 MCF to 1 barrel of oil. The conversion is based on an
        energy equivalency convervsion method primarily applicable at the
        burner tip and does not represent a value equivalency at the wellhead
        and as such may be misleading if used in isolation.
    (4) Gross reserves relate to the Company's ownership of reserves
        deducting any royalties.
    (5) The reserve life index is calculated by dividing the reserves (BOE)
        by the annualized fourth quarter average production rate
        (2009 - 4,881; 2008 - 4,587 BOE per day; 2007 - 4,295 BOE per day).


    Financial Highlights

    -   Revenue and funds flow from operations in 2009 decreased 30 percent
        and 6 percent, respectively when compared to the prior year primarily
        due to a 32 percent decrease in the Company's crude oil average
        realized price and a 50 percent decrease in the Company's natural gas
        average realized price partially offset by production increases and a
        gain on asset sale of $24.2 million in Q4 2009. Commodity prices
        showed improvement during the latter half of the year, mainly in
        crude oil, and the fourth quarter numbers reflected a positive impact
        with a 250 percent increase in funds flow from operations in the
        fourth quarter of 2009 compared with the third quarter of 2009;

    -   In 2009, Bonterra paid cash dividends to shareholders of $1.70 per
        share, a substantial decrease from the 2008 level of $3.12 per share.
        Bonterra had reduced its dividend in early 2009 to maintain its
        balance sheet strength and the financial flexibility necessary to
        continue developing the Pembina Cardium horizontal play. As pricing
        improved, Bonterra was able to increase the dividend twice during the
        year. Subsequent to year-end, Bonterra was able to once again
        increase the dividend to its current level of $0.18 per share which
        began with the dividend paid out in January, 2010;

    -   The payout ratio was 46 percent of funds flow (72 percent without the
        gain on asset sale of $24.2 million and within the Company's annual
        target of 70 to 80 percent);

    -   During the year, Bonterra took several steps towards improving its
        financial position. The Company entered into a new syndicated banking
        facility effective April 29, 2009 consisting of a $100 million
        syndicated revolving credit facility and a $20 million non-syndicated
        revolving credit facility. In addition, Bonterra completed an equity
        offering in May, 2009. The Company issued 1,068,000 common shares at
        a price of $16.85 per share for net proceeds of approximately $17
        million. Funds were used for the Company's capital program and for
        general working capital purposes.

    Operational Highlights

    -   In 2009, Bonterra spent approximately $35.2 million on its capital
        development program of which $22.9 million was spent on its drilling
        and completions program with the remainder spend on land and
        corporate acquisitions in the Pembina area.

    -   Production increased to an all time high of 4,994 barrels of oil
        equivalent (BOE) per day as a result of its internal development
        program and acquisitions during the year. Fourth quarter production
        totaled 4,881 BOE per day, an increase of eight percent over the same
        period last year;

    -   Reserves increased to 25.3 million BOE and 35.8 million BOE on a
        proved and a proved plus probable basis, respectively. This
        represents an increase of 5.2 percent to the Company's proved
        reserves and a 14.7 percent increase to proved plus probable
        reserves;

    -   Reserves per share on a P+P basis increased 8.7 percent to 1.99 BOE
        per share compared to 1.83 BOE per share in 2008 ;

    -   Bonterra's finding, development and acquisition (FD&A) costs in 2009
        continue to be among the lowest in the Canadian oil and gas industry
        at $13.25 per BOE on a total proved basis and $8.93 per BOE on a
        proved plus probable basis.

    -   With an average cash netback of $23.42 per BOE, Bonterra's 2009
        proved plus probable recycle ratio is 2.6 times.

    -   Bonterra completed asset sales in 2009 and in the first quarter of
        2010, obtaining $35.8 million in dispositions from non-core assets in
        Saskatchewan. This included the divestment of approximately 270 BOE
        per day of producing oil and gas properties and an associated 1.4
        million BOE of proved plus probable reserves. The proceeds from these
        sales will assist in accelerating the development of the Cardium
        assets.
    

A Discussion of Financial and Operational Results

This press release is a review of the operations, current financial position, and outlook for Bonterra Energy Corp. ("Bonterra" or the "Company") and should be read in conjunction with the audited financial statements for the year ended December 31, 2009, together with the notes related thereto.

Forward-looking Information

Certain statements contained in this press release include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, statements relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this press release includes, but is not limited to: expected cash provided by continuing operations; dividends; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and demand; expansion and other development trends of the oil and gas industry; business strategy and outlook; expansion and growth of our business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; credit risks; and other such matters.

All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control. The foregoing factors are not exhaustive and are further discussed herein under the heading Business Prospects, Risks and Outlooks as well as in the Company's Annual Information Form filed on SEDAR at www.sedar.com.

Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits will be derived therefrom. Except as required by law, the Company disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.

The forward-looking information contained herein is expressly qualified by this cautionary statement.

    
    Production
                                Three months ended       Twelve months ended
                            December September  December  December  December
                            31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
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    Crude oil and NGLs
     (barrels per day)         3,182     3,084     3,055     3,141     3,073
    Natural gas
     (MCF per day)            10,193    10,881     8,817    11,120     7,637
    -------------------------------------------------------------------------
    Average BOE per day        4,881     4,898     4,525     4,994     4,346
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Barrels of oil equivalent (BOE) are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation.

Bonterra's 2009 average production increased 14.9 percent on a per BOE basis over 2008 despite the sale of the Shaunavon property of 210 BOE per day. Crude oil production increased by 2.2 percent while gas production increased by 45.6 percent. The natural gas increase was due primarily to the acquisition of Silverwing Energy Inc. (Silverwing) on November 12, 2008 which resulted in approximately 3,600 MCF per day being added to production.

On November 6, 2009, the Company disposed of a portion of its Shaunavon property for gross proceeds of $30,191,000. The production from this property was averaging approximately 210 BOE per day consisting entirely of medium grade crude oil.

In 2009, Bonterra drilled seven Pembina Cardium horizontal wells (5.5 net), eight vertical Pembina Cardium wells (6.9 net) and participated in drilling two natural gas wells (0.4 net). Bonterra recorded a 100 percent success rate with its 2009 drilling program. The Company's first horizontal well was drilled in 2008 and was placed on production in Q1 2009. Bonterra has completed and tied in three (2.1 net) horizontal Cardium oil wells and six (4.9 net) vertical oil wells in 2009. The additional four (3.4 net) horizontal Cardium oil wells and two (2.0 net) vertical wells were placed on production in the first week in Q1 2010.

In November, the Company engaged the services of a second drilling rig and in March a third drilling rig was added and will continue its Pembina Cardium horizontal well drilling program with all rigs until road bans are imposed in March 2010. The acquisition of Cobalt Energy Ltd. (Cobalt) effective July 1, 2009 resulted in only a modest increase in production but provided the Company with additional ownership in potential Pembina Cardium horizontal drilling opportunities.

Even with the above mentioned disposition, the company was able to increase its Q4 crude oil production through its 2009 Pembina Cardium horizontal and vertical drill programs. The Company's fourth quarter production in 2009 saw increases in crude oil of 98 barrels per day and a decline in natural gas of 688 MCF per day production over Q309. Exit production for the four (2.73 net) producing Pembina Cardium horizontal wells was approximately 456 (311 net) BOE per day. The Q4 natural gas decline is mainly due to shut in and restricting production of some of the Company's gas wells as well as natural production declines.

Bonterra expects 2010 production to average between 5,700 and 6,000 BOE per day.

    
    Revenue

                                Three months ended       Twelve months ended
                            December September  December  December  December
    (Cdn $)                 31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
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    Revenue - oil and gas
     sales (000s)             24,946    20,965    22,613    85,712   121,730

    Average Realized
     Prices:
    Crude oil and NGLs
     (per barrel)              68.40     65.38     58.91     59.82     87.54
    Natural gas (per MCF)       4.76      3.13      7.00      4.15      8.21
    -------------------------------------------------------------------------
    

Revenue from petroleum and natural gas sales decreased 29.6 percent in 2009 compared to 2008 primarily due to a 31.7 percent drop in crude oil prices and a 49.5 percent drop in natural gas prices. The drop in commodity prices was partially offset with the above mentioned production increases. During 2009 the Company did not enter into any risk management contracts.

Quarter over quarter the Company saw an increase in revenues of $3,981,000 due to improved crude oil and natural gas prices in the fourth quarter of 2009.

    
    Royalties

                                Three months ended       Twelve months ended
    ($ 000s) except         December September  December  December  December
     $ per BOE              31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
    -------------------------------------------------------------------------

    Crown royalties            1,451     1,248     2,337     4,737    13,736
    Freehold royalties,
     gross overriding
     royalties and net
     carried interests           892       697       558     2,677     3,479
    -------------------------------------------------------------------------
    Total royalty expense      2,343     1,945     2,895     7,414    17,215
    -------------------------------------------------------------------------
    Percentage of Revenue        9.4       9.3      12.8       8.6      14.1
    -------------------------------------------------------------------------
    $ per BOE                   5.22      4.32      6.86      4.07     10.82
    -------------------------------------------------------------------------
    

Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. The majority of the Company's wells are low productivity wells and therefore have lower Crown royalty rates. The Company's average Crown royalty rate was approximately 5.5 percent (2008 - 10.6 percent) and approximately 3.1 percent (2008 - 2.7 percent) for other royalties. The increase in other royalty rates is due to the new horizontal oil wells being drilled on freehold mineral rights land.

The recently announced new Alberta Crown royalty rates vary by prices as well as productivity levels. With lower commodity prices in 2009 compared to 2008 and the Silvering acquisition (mostly BC production with lower Crown royalty rates), the Company has experienced a significant reduction in Crown royalties in 2009.

The fourth quarter royalties have increased $398,000 over third quarter due primarily to higher crude oil and natural gas pricing and an increased proportion of the Company's production coming from the new horizontal oil wells which are subject to freehold royalties at approximately 17 percent compared to a 5 percent royalty rate on Crown wells.

Investment Tax Credit Recovery

As part of the Company's conversion from a trust to a corporation in 2008, Bonterra assumed approximately $27,670,000 of investment tax credits (ITC's) from SRX Post holdings Inc. Due to the depressed commodity prices as of December 31, 2008, the Company was not able to justify the ability to claim these ITC's prior to their expiration. The continued recovery in the price of crude oil as well as the Company's success in its horizontal crude oil development has resulted in significantly higher future anticipated cash flow from Bonterra's oil and gas operations and in the justification that the ITC's are likely to be claimed.

Gain on Sale of Property

On November 6, 2009, the Company closed the sale of a portion of its Shaunavon oil production to Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX). The proceeds of disposition consisted of $23,729,000 cash and 30,769,200 common shares in Eagle Rock (representing approximately 4.2 percent of the outstanding common shares of that company at the time). The closing price of the Eagle Rock common shares on November 6 was $0.21 placing total consideration for the property at $30,191,000. The book value (net of asset retirement provision) of the property to the Company was approximately $5,993,000 resulting in a gain on sale of $24,198,000.

Eagle Rock has since changed its name to Wild Stream Exploration Inc. (Wild Stream) (TSXV: WSX) and consolidated its common shares on a 30:1 basis resulting in Bonterra holding 1,025,640 common shares of Wild Stream.

    
    Production Costs

                                Three months ended       Twelve months ended
    ($ 000s) except         December September  December  December  December
     $ per BOE              31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
    -------------------------------------------------------------------------

    Production costs           6,870     6,585     6,859    27,848    25,413
    $ per BOE                  15.30     15.79     16.25     15.28     15.98
    -------------------------------------------------------------------------
    

Total production costs in 2009 have increased by $2,435,000 over 2008. The increase is due to increased production volumes (see Production). On a per BOE basis, production costs have declined in 2009 compared to 2008 mainly due to field optimization and a general decline in service and material costs resulting from decreased industry demand.

Total operating costs increased slightly in the fourth quarter of 2009 compared to the prior quarter due primarily to the billing of prior year gas processing charge adjustments in 2009 of approximately $200,000 by the operator of several of the Company's non-operated gas plants. On a per-unit-of- production basis, the 2009 rates were $0.49 lower than in 2008.

As discussed above, Bonterra's production comes primarily from low productivity wells. These wells generally result in higher operating costs on a per-unit-of-production basis as costs such as municipal taxes, surface leases, power and personnel costs are not variable with production volumes. The Company is continually examining ways to reduce operating costs.

    
    General and Administrative Expense

                                Three months ended       Twelve months ended
    ($ 000s) except         December September  December  December  December
     $ per BOE              31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
    -------------------------------------------------------------------------

    G&A Expense                1,623       788       824     4,458     3,401
    $ per BOE                   3.61      1.75      1.95      2.45      2.14
    -------------------------------------------------------------------------
    

General and administrative (G&A) expenses increased 31 percent in 2009 compared to 2008. The Company provides administrative services to Comaplex Minerals Corp. (Comaplex) (TSX: CMF) and Pine Cliff Energy Ltd. (Pine Cliff) (TSXV: PNE), companies that share common directors and management. Please refer to discussion under Related Party Transactions for details.

The Company's significant general and administrative costs are employee compensation; professional services such as legal, engineering and accounting; computer services and bank charges. Employee compensation expense decreased by approximately 7 percent ($279,000) in 2009 from 2008 due to a smaller bonus accrual. The Company's bonus plan consists of cash payments equal to three percent of before tax net earnings (excluding the investment tax credit recovery) to be paid to employees and key consultants based on performance throughout the year. Costs associated with professional services increased by approximately $115,000 due to additional accounting (new production accounting software) and engineering services (horizontal well evaluations).

Computer services increased by $367,000 due to significant increases in the cost of new licensing agreements for the Company's engineering and accounting software and the contracting of an external manager of IT. The largest increase to G&A was bank charges of $678,000 relating to the cost of establishing a new bank facility as well as increased standby fees on the unused portion of the Company's credit facility.

The quarter over quarter increase of $835,000 was primarily due to a special bonus accrual of approximately $532,000 on the gain on sale of the Shaunavon property, legal and accounting costs increase of approximately $80,000 associated with the amalgamation of the various Bonterra entities in December of 2009 and $55,000 of engineering costs associated with various horizontal well evaluations.

During the year the Company capitalized $359,000 (2008 - $426,000) of general and administrative costs.

    
    Interest Expense

                                Three months ended       Twelve months ended
    ($ 000s) except         December September  December  December  December
     $ per BOE              31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
    -------------------------------------------------------------------------

    Interest Expense             738       815       746     3,294     2,740
    -------------------------------------------------------------------------
    $ per BOE                   1.64      1.81      1.77      1.81      1.72
    -------------------------------------------------------------------------
    

Bank debt at December 31, 2009 was $59,823,000 (December 31, 2008 - $93,235,000). The Company's banking arrangements allow it to use Bankers Acceptances (BA's) as part of its loan facility. Interest charges on BA's are generally one half percent lower than that charged on the general loan account.

The Company has also borrowed $23,500,000 from two related parties. Please see Related Party Transactions section for further details.

Interest charges increased in 2009 as the average outstanding debt balance (including related party balances) increased by approximately $22 million over 2008. The acquisitions of Silverwing and Cobalt as well as the reorganization costs to change Bonterra into a corporation resulted in approximately $47 million of additional debt. In addition the Company has incurred approximately $28 million in capital expenditures during this period. These increases were partially offset by net proceeds of approximately $17,000,000 from a 2009 second quarter private equity issue and approximately $24 million cash on the sale of the Shaunavon property in November. Offsetting the increased debt balance was an average reduction of 0.3 percent (4.3 percent in 2008 to 4.0 percent in 2009) in interest rates paid on the outstanding debt balances.

Quarter over quarter saw a decrease in interest charges due to reduced debt balances resulting from proceeds of the Shaunavon sale being applied to the bank debt.

Effective April 29, 2009, the Company entered into a new bank facility with new terms and conditions. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility.

The interest rate on the credit facility is calculated as follows:

    
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                     Level I    Level II   Level III    Level IV     Level V
    -------------------------------------------------------------------------
    Consolidated
     Total Funded
     Debt(1) to                     Over        Over        Over
     Consolidated      Under    1.0:1 to    1.5:1 to    2.0:1 to        Over
     Cash flow Ratio   1.0:1       1:5:1       2.0:1       2.5:1       2.5:1
    -------------------------------------------------------------------------
    Canadian Prime
     Rate Plus(2)        125         150         175         200         250
    -------------------------------------------------------------------------
    Bankers'
     Acceptances Rate
     Plus(2)             275         300         325         350         400
    -------------------------------------------------------------------------
    (1) Consolidated total funded debt excludes related party amounts but
        includes working capital.
    (2) Numbers in table represent basis points.
    

Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the next fiscal quarter following the end of each fiscal quarter, with each such adjustment to be effective until the next such adjustment.

As of December 31, 2009 the Company will qualify for the Level I interest rates. The revised rates will apply commencing April 1, 2010 resulting in a reduction of 50 basis points in the cost of the Company's bank borrowings.

Stock-Based Compensation

Stock-based compensation is a statistically calculated value representing the estimated expense of issuing employee stock options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. The Company issued only 33,000 stock options during 2009 resulting in a reduction of stock-based compensation by $296,000.

The 33,000 common share options were issued with an exercise price of $14.90 per share and a fair value of $1.58 per option. The fair value of the options granted has been estimated using the Black-Scholes option pricing model, assuming a weighted risk free interest rate of 1.4 percent (2008 - 2.2 percent), expected weighted average volatility of 33 percent (2008 - 31 percent), expected weighted average life of 3.0 years (2008 - 3.5 years) and an annual dividend/distribution rate based on the dividends paid to the shareholders during the year.

Depletion, Depreciation, Accretion and Dry Hole Costs

The Company follows the successful efforts method of accounting for petroleum and natural gas exploration and development costs. Under this method, the costs associated with dry holes are charged to operations. For intangible capital costs that result in the addition of reserves, the Company depletes its oil and natural gas intangible assets using the unit-of-production basis by field.

For tangible assets such as well equipment, a life span of ten years is estimated and the related tangible costs are depreciated at one tenth of original cost per year. The use of a ten year life span instead of calculating depreciation over the life of reserves was determined to be more representative of actual costs of tangible property. Given the Company's long production life of its wells, the wells generally require replacement of tangible assets more than once during their life time. Most of the Company's wells have been producing since the 1960's and are expected to continue to produce for at least another twenty years.

Provisions are made for asset retirement obligations through the recognition of the fair value of obligations associated with the retirement of tangible long-life assets being recorded in the period the asset is put into use, with a corresponding increase to the carrying amount of the related asset. The obligations recognized are statutory, contractual or legal obligations. The liability is adjusted over time for changes in the value of the liability through accretion charges which are included in depletion, depreciation and accretion expense. The costs capitalized to the related assets are amortized to earnings in a manner consistent with the depletion and depreciation of the underlying asset.

At December 31, 2009, the estimated total undiscounted amount required to settle the asset retirement obligations was $64,482,000 (2008 - $58,903,000). Of the $5,579,000 increase, the majority is due to increases in anticipated costs of abandoning the Company's producing and non producing wells.

These obligations will be settled based on the useful lives of the underlying assets, which extend up to 50 years into the future. This amount has been discounted using a credit-adjusted risk-free interest rate of five percent. The discount rate is reviewed annually and adjusted if considered necessary. A change in the rate would have a significant impact on the amount recorded for asset retirement obligations. Based on the current provision, a one percent increase in the risk adjusted rate would decrease the asset retirement obligation by $2,870,000. While a one percent decrease in the risk adjusted rate would increase the asset retirement obligation by $3,949,000.

The above calculation requires an estimation of the amount of the Company's petroleum reserves by field. This figure is calculated annually by an independent engineering firm and is used to calculate depletion. This calculation is to a large extent subjective. Reserve adjustments are affected by economic assumptions as well as estimates of petroleum products in place and methods of recovering those reserves. To the extent reserves are increased or decreased, depletion costs will vary.

For the fiscal year ending December 31, 2009, the Company expensed $19,277,000 (2008 - $14,749,000) for the above-described items. The increase is predominately due to increased production volumes resulting from the Silverwing acquisition and higher per BOE depletion charges on the Company's horizontal Cardium oil wells compared to Bonterra's other production. The higher BOE depletion charges on the horizontal wells are primarily due to lack of production history on these wells resulting in lower proved reserve being assigned but with substantial probable reserves being assigned. The Company's policy is to deplete the cost of the wells based on proved reserves. It is anticipated that as there is more production history on the horizontal wells there will be a conversion of the probable reserves to proven reserves resulting in a reduction of depletion charges per BOE in future years.

The Company continues to have relatively low finding and development costs (see discussion under Finding and Development Costs). Based on year end reserves, the Company's average cost of proved reserves is $6.62 (2008 - $6.40) per BOE.

The Company currently has an estimated reserve life for its proved developed producing reserves of 11.7 (2008 - 12.5) years calculated using the Company's gross reserves (prior to allowance for royalties) based on the third party engineering report dated December 31, 2009 and using fourth quarter 2009 average production rates of 4,879 BOE per day (2008 - 4,587 BOE per day). Based on total proved reserves the Company has a 14.2 (2008 - 14.4) year reserve life and on a proved and probable basis the reserve life increases to 20.1 (2008 - 18.7) years. These figures are some of the longest reserve life indexes (excluding oil sands) in the Canadian oil and gas industry.

Income Taxes

On November 12, 2008, Bonterra Energy Income Trust converted to a corporation. As a result of the reorganization, the Company has recorded a future income tax asset and a corresponding deferred tax credit. These amounts will be amortized into future tax expense as the associated tax pools are consumed.

The current tax provision of $551,000 consists of a resource surcharge of $282,000 payable to the Province of Saskatchewan and a tax amount of $269,000 payable to the Province of Quebec. The resource surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The resource surcharge rate was three percent in 2009. The tax payable to the Province of Quebec is a one-time charge that resulted from the Company's conversion to a corporation.

The Company and its subsidiaries have the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:

    
                                                        Rate of
                                                    Utilization
    ($ 000s)                                                  %       Amount
    -------------------------------------------------------------------------
    Undepreciated capital costs                          20-100    $  21,671
    Eligible capital expenditures                             7        7,363
    Share issue costs                                        20        2,973
    Canadian oil and gas property expenditures               10       26,282
    Canadian development expenditures                        30       59,141
    Canadian exploration expenditures                       100       11,174
    SR&ED expenditures                                      100       80,357
    Income tax losses carried forward(1)                    100      223,629
    -------------------------------------------------------------------------
                                                                   $ 432,590
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Federal income tax losses carried forward expire in the following
        years; 2013 - $1,069,000, 2024 - $3,347,000, 2025 - $7,532,000, 2026
        - $46,670,000, 2027 - $117,189,000, 2028 - $34,726,000, 2029 -
        $13,096,000.
    

The Company has $27,670,000 (2008 - $27,670,000) remaining of investment tax credits that expire in the following years; 2019 - $3,469,000, 2020 - $3,059,000, 2021 - $4,667,000, 2022 - $3,909,000, 2023 - $3,155,000, 2024 - $1,995,000, 2025 - $2,257,000, 2026 - $2,405,000, 2027 - $2,009,000, 2028 - $745,000.

The Company also has $143,061,000 of capital loss carry forwards which can only be claimed against taxable capital gains.

    
    Net Earnings

                                Three months ended       Twelve months ended
    ($ 000s) except         December September  December  December  December
     $ per share            31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
    -------------------------------------------------------------------------

    Net Earnings              52,136     5,790    10,585    68,563    55,426
    -------------------------------------------------------------------------
    $ per share - Basic         2.88      0.32      0.62      3.81      3.25
    -------------------------------------------------------------------------
    $ per share - Fully
     Diluted                    2.85      0.32      0.62      3.78      3.23
    -------------------------------------------------------------------------
    

Bonterra's net earnings for the year ended December 31, 2009 represents a 23.7 percent increase over the Company's 2008 net earnings. The Company recorded net earnings per share in 2009 of $3.81 compared to $3.25 in the 2008 year. This represents a return on Shareholders' equity of approximately 57.7 percent (2008 - 97.6 percent) based on year end Shareholders' equity.

Two significant factors contributing to net earnings were the Company's recordings of the investment tax credit recovery of $27,670,000 and the sale of a portion of the Company's Shaunavon production for a gain of $24,198,000 all of which occurred in the fourth quarter of 2009. Excluding these items (net of 29.15 percent tax effect), 2009 net earnings decreased by $23,611,000 from $55,426,000 in 2008 to an adjusted net earnings of $31,815,000 in 2009. Reduced revenues resulting from decreased commodity prices were the main reason for the reduction. This reduction was partially offset by production volume gains. The Company continues to return in excess of 25 percent of its gross realized oil and gas revenues in net earnings. The Company's low capital costs per BOE of reserves combined with the Company's low production decline rates should allow for continued positive earnings.

Comprehensive Income

Other comprehensive income for 2009 consists of an unrealized gain on investments (including investments in a related party) of $600,000 (2008 loss of $1,611,000) including a fourth quarter loss of $478,000 relating to a reduction in the investments fair value. Other comprehensive income varies from net earnings by changes in the fair value of Bonterra's holdings of investments including the investment in Comaplex.

    
    Cash Flow from Operations

                                Three months ended       Twelve months ended
    ($ 000s) except         December September  December  December  December
     $ per share            31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
    -------------------------------------------------------------------------

    Cash flow from
     operations               13,673     9,350    10,336    38,893    69,570
    -------------------------------------------------------------------------
    $ per share - basic         0.76      0.50      0.59      2.16      4.07
    -------------------------------------------------------------------------
    $ per share - fully
     diluted                    0.75      0.50      0.59      2.15      4.06
    -------------------------------------------------------------------------
    

Cash flow from operations decreased 44 percent year over year, mainly due to decreased commodity prices received in 2009. Fourth quarter cash flow increased by $4,325,000 over Q3 due to recovering commodity prices. The Company has not entered into any risk management agreements and as such is fully exposed to changes in commodity prices and exchange rates.

Cash Netbacks

The following table illustrates the Company's cash netback:

    
    $ per Barrel of Oil Equivalent (BOE)                   2009         2008
    -------------------------------------------------------------------------
    Production volumes (BOE)                          1,822,628    1,590,666
    -------------------------------------------------------------------------
    Gross production revenue                         $    47.04   $    81.15
    Realized gain (loss) on risk management
     contracts                                                -        (4.62)
    Royalties                                             (4.07)      (10.82)
    Production costs                                     (15.28)      (15.98)
    -------------------------------------------------------------------------
    Field netback                                         27.69        49.73
    General and administrative(1)                         (2.16)       (2.14)
    Interest and taxes                                    (2.11)       (2.00)
    -------------------------------------------------------------------------
    Cash netback                                     $    23.42   $    45.59
    -------------------------------------------------------------------------

    The following table illustrates the Company's cash netback for the three
    months ended:

                                                       December    September
    $ per Barrel of Oil Equivalent (BOE)               31, 2009     30, 2009
    -------------------------------------------------------------------------
    Production volumes (BOE)                            448,892      450,616
    -------------------------------------------------------------------------
    Gross production revenue                         $    55.50   $    47.81
    Royalties                                             (5.22)       (4.32)
    Production costs                                     (15.30)      (15.79)
    -------------------------------------------------------------------------
    Field netback                                         34.98        27.70
    General and administrative(1)                         (2.43)       (1.75)
    Interest and taxes                                    (1.80)       (1.99)
    -------------------------------------------------------------------------
    Cash netback                                     $    30.75   $    23.96
    -------------------------------------------------------------------------

    (1) General and administrative costs have been reduced by $532,000
        relating to the bonus payment on the gain on sale of property as the
        benefit has not been included in the above cash net back calculation.
    

Finding and Development Costs (F&D Costs)

The Company has been active in its capital development program over the past three years. Over this time period Bonterra has incurred the following F&D and FD&A(3) Costs:

    
    -------------------------------------------------------------------------
                      2009 F&D   2008 F&D   2007 F&D  2009 Three  2008 Three
                     Costs per  Costs per  Costs per        Year        Year
                     BOE(1)(2)  BOE(1)(2)  BOE(1)(2)     Average     Average
    -------------------------------------------------------------------------
    Proved Reserve
    Additions           $16.23      $7.00      $2.15       $8.46      $11.55
    -------------------------------------------------------------------------
    Proved plus
     Probable Reserve
     Additions          $11.01      $6.82      $2.02       $6.62       $9.02
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                          2009       2008       2007
                          FD&A       FD&A       FD&A  2009 Three  2008 Three
                     Costs per  Costs per  Costs per        Year        Year
                           BOE        BOE        BOE     Average     Average
                     (1)(2)(3)  (1)(2)(3)  (1)(2)(3)
    -------------------------------------------------------------------------
    Proved Reserve
     Net Additions      $13.25      $8.67      $2.74       $8.22      $12.30
    -------------------------------------------------------------------------
    Proved plus
     Probable Reserve
     Net Additions       $8.93      $7.47      $2.68       $6.36       $9.45
    -------------------------------------------------------------------------
    

The above figures have been calculated in accordance with National Instrument 51-101 (NI 51-101) where the 2009 F&D Costs equate to the total exploration and development costs incurred by the Company of $28,726,000 (includes $5,814,000 for undeveloped land) as calculated according to GAAP plus or minus the yearly change in estimated future development costs as calculated by Sproule Associates Limited ($34,960,000 for proved and $51,538,000 for proved and probable). FD&A costs include acquisition costs of $7,105,000 as well as proceeds of disposition of $30,191,000. The following precautionary notes have been provided as required by NI 51-101.

    
    (1) Barrels of Oil Equivalent may be misleading, particularly if used in
        isolation. A BOE conversion ratio of 6MCF:1bbl is based on an energy
        equivalency conversion method primarily applicable at the burner tip
        and does not represent a value equivalency at the wellhead.
    (2) The aggregate of the exploration and development costs incurred in
        the most recent financial year and the change during that year in
        estimated future development costs generally will not reflect total
        finding and development costs related to reserve additions for that
        year.
    (3) FD&A costs are net of proceeds of disposal and the FD&A costs per BOE
        are based on reserves acquired net of reserves disposed of.
    

Results from the Company's Cardium oil drilling program continue to be better than anticipated resulting in an increase in the third party engineering reports estimated recoverable reserves from existing wells but also from future development. Continued low decline rates have also resulted in increased reserves due to technical revisions. Both these factors contributed to an overall F&D cost in 2009 of $11.01 per BOE on a proved plus probable basis.

Related Party Transactions

The Company holds 689,682 (2008 - 689,682) common shares in Comaplex which have a fair market value as of December 31, 2009 of $4,827,000 (2008 - $2,131,000). Comaplex is a publically traded mineral company on the Toronto Stock Exchange. The Company's ownership in Comaplex represents less than one percent of the issued and outstanding common shares of Comaplex. The Company has common directors and management with Comaplex.

Comaplex paid a management fee to the Company of $330,000 (2008 - $330,000). Comaplex also shares office rental costs and reimburses the Company for costs related to employee benefits and office materials. In addition, Comaplex owns 204,633 (December 31, 2008 - 204,633) common shares in the Company. Services provided by the Company include executive services (president and vice president, finance duties), accounting services, oil and gas administration and office administration. In addition, Bonterra allocated $102,000 of drilling tax credits to Comaplex for $51,000. All services performed are charged at estimated fair value. At December 31, 2009, Comaplex owed the Company $105,000 (December 31, 2008 - $56,000).

As of December 31, 2009, Comaplex has loaned the Company $12,000,000 (December 31, 2008 - Nil). The loan is unsecured and it has no set repayment terms. Until June 30, 2009 the Company paid interest at Canadian chartered bank prime plus one quarter of a percent. Effective July 1, 2009, the interest rate was reduced to Canadian chartered bank prime less 0.25 percent. The reduction in rate was due to the lowering of the Company's bank interest rate with its banking syndicate resulting from an improved debt to cash flow ratio (see Interest Expense and Liquidity and Capital Resources sections) and since the benefits of this loan are shared with Comaplex, the interest rate was reduced accordingly.

In 2008, in order to facilitate the acquisition of Silverwing, the Company borrowed on a short-term basis $20,000,000 from Comaplex to allow time to finalize documentation for its new bank line of credit. The funds were repaid on November 21, 2008.

Interest paid on these loans during 2009 and 2008 was $194,000 and $21,000, respectively. The loans result in a substantial benefit to Bonterra and to Comaplex. The interest paid to Comaplex by Bonterra is substantially lower than bank interest and the amount drawn on the bank line of credit is lower reducing the bank interest rate. For Comaplex, the interest earned is substantially higher than Comaplex would receive by investing in bank instruments such as BA's or GIC's.

The Company also has a management agreement with Pine Cliff. Pine Cliff has common directors and management with the Company. Pine Cliff trades on the TSX Venture Exchange. Pine Cliff paid a management fee to the Company of $120,000 (2008 - $238,000). Services provided by the Company include executive services (president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. The Company has no share ownership in Pine Cliff. As at December 31, 2009 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).

As of December 31, 2009, the Company's CEO and major shareholder has loaned the Company $11,500,000 (December 31, 2008 - $6,000,000). The loan is unsecured, bears interest at Canadian chartered bank prime and has no set repayment terms. Effective July 1, 2009, the interest rate was decreased to Canadian chartered bank prime less .25 percent. Interest paid on this loan in 2009 was $209,000 (2008 - $7,000). This loan results in being a substantial benefit to Bonterra and to the CEO. The interest paid to the CEO by Bonterra is substantially lower than bank interest and for the CEO the interest earned is substantially higher than the CEO would receive by investing in bank instruments such as BA's or GIC's.

Commitments

The Company has no contractual obligations that last more than a year other than its office lease agreements which are as follows:

    
    ($ 000s)
    -------------------------
    Lease Obligations
    -------------------------
    Year 1            $  944
    Year 2               932
    Year 3               829
    Year 4               496
    -------------------------
    Total             $3,201
    -------------------------
    

Liquidity and Capital Resources

During 2009, Bonterra participated in drilling 17 gross wells (12.8 net) at a total cost of $22,912,000. Included in the above figure is approximately $1,300,000 of costs associated with the completion and tie-in of wells the Company drilled in 2008. The above capital cost is net of $3,836,000 in drilling tax credits. In addition, Bonterra acquired and paid $5,814,000 for mineral rights in the greater Pembina area of Alberta.

On July 2, 2009, Bonterra completed its acquisition of Cobalt. The Company issued 201,438 common shares and assumed $2,856,000 of negative working capital and incurred approximately $170,000 in acquisition costs for a total calculated accounting cost of $7,105,000. This acquisition resulted in acquiring an additional 40 BOE per day of production as well as increasing the Company's working interest in approximately 11 gross sections of land with potential Cardium horizontal locations in the Pembina area of Alberta.

As previously discussed, the Company closed a purchase and sale agreement to divest of a portion of its Shaunavon oil production to Eagle Rock. The proceeds of disposition included cash of $23,729,000 and 30,769,200 common shares. These funds were used to retire debt and therefore provide additional room in Bonterra's line of credit for additional 2010 drilling. In addition, the common shares received for the Shaunavon properties will provide further funds upon their ultimate sale.

Subsequent to December 31, 2009, the Company entered into a purchase and sale agreement to divest its Southeast Saskatchewan Pinto property. Production from this property was approximately 60 BOE per day consisting primarily of light sweet crude oil. The proceeds of disposition consist of approximately $5,600,000 cash. The disposition closed in February, 2010. The proceeds were applied to the Company's debt.

The government of Alberta announced drilling incentives and royalty reductions in respect of wells drilled after April 1, 2009 and prior to March 31, 2011. The Company is planning to maximize the crown royalty credits available under the new drilling incentive program which will result in a substantial reduction of capital costs on a per well basis. The Company currently has plans to spend between $40,000,000 and $50,000,000 (net of drilling incentives) in 2010 on development of its oil and gas properties. Any land, property or corporate acquisitions will be in addition to this amount.

Bonterra anticipates funding the 2010 capital program from cash flow, the Company's existing line of credit, sale of investments, proceeds from the above mentioned Pinto sale as well as proceeds received on the exercise of employee stock options.

Effective April 29, 2009, the Company entered into a new bank facility. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility. At December 31, 2009, the Company's bank loan was $59,823,000 (December 31, 2008 - $93,235,000). The terms of the new facility provides that the loan is revolving until April 28, 2011, is subject to annual review and has no fixed payment requirements.

The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details.

    
    Bonterra Oil & Gas Ltd.

    Consolidated Balance Sheets

    As at December 31
    ($ 000s)                                              2009          2008
    -------------------------------------------------------------------------
    Assets
    Current
      Restricted term deposit                                -            20
      Accounts receivable (Notes 4 & 15)                14,713        11,753
      Crude oil inventory                                  431           845
      Prepaid expenses (Note 4)                          3,247         4,222
      Future income tax asset (Note 11)                 11,889         2,669
      Investments (Note 8)                               4,462             -
      Investment in related party (Note 6)               4,827         2,131
    -------------------------------------------------------------------------
                                                        39,569        21,640
    -------------------------------------------------------------------------
    Restricted cash (Note 7)                               812         1,252
    Investment tax credit receivable (Note 11)          27,670             -
    Future income tax asset (Note 11)                   58,265        85,416
    Property and Equipment (Note 8)
      Petroleum and natural gas properties
       and related equipment                           255,840       232,685
      Accumulated depletion and depreciation           (88,169)      (75,692)
    -------------------------------------------------------------------------
    Net Property and Equipment                      $  167,671    $  156,993
    -------------------------------------------------------------------------
                                                    $  293,987    $  265,301
    -------------------------------------------------------------------------
    Liabilities
    Current
      Accounts payable and accrued
       liabilities (Note 4)                             18,868        23,888
      Due to related parties (Note 9)                   23,500         6,000
      Deferred credit (Note 11)                          7,363         2,305
      Short-term bank debt (Note 10)                         -        13,325
    -------------------------------------------------------------------------
                                                        49,731        45,518
    Long-term bank debt (Note 10)                       59,823        79,910
    Deferred credit (Note 11)                           47,769        64,758
    Asset retirement obligations (Note 12)              17,790        18,338
    -------------------------------------------------------------------------
                                                       175,113       208,524
    -------------------------------------------------------------------------
    Commitments, Contingencies and
     Guarantees (Note 17)
    Shareholders' Equity (Note 13)
      Share capital                                    121,955        99,530
      Contributed surplus                                3,350         2,542
    -------------------------------------------------------------------------
                                                       125,305       102,072
    -------------------------------------------------------------------------
      Deficit                                           (8,451)      (46,715)
      Accumulated other comprehensive
       income (Note 14)                                  2,020         1,420
    -------------------------------------------------------------------------
                                                        (6,431)      (45,295)
    -------------------------------------------------------------------------
    Total Shareholders' Equity                         118,874        56,777
    -------------------------------------------------------------------------
                                                       293,987       265,301
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See the accompanying notes to the consolidated financial statements



    Bonterra Oil & Gas Ltd.

    Consolidated Statements of Shareholders' Equity

    For the Years Ended December 31
    ($ 000s)                                              2009          2008
    -------------------------------------------------------------------------
    Unitholders' equity, beginning of year                   -        44,218
    Shareholders' equity, beginning of year             56,777             -
    Comprehensive income for the year                   69,163        53,815
    Net capital contributions (Note 13)                 22,322         8,135
    Stock-based compensation                               911         1,207
    Conversion of the Trust to a Corporation (Note 4)        -       (64,715)
    Distributions declared                                   -       (42,660)
    -------------------------------------------------------------------------
    Unitholders' Equity, End of Year                         -             -
    Conversion of the Trust to a Corporation (Note 4)        -        64,715
    Dividends declared                                 (30,299)       (7,938)
    -------------------------------------------------------------------------
    Shareholders' Equity, End of Year                  118,874        56,777
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Bonterra Oil & Gas Ltd.

    Consolidated Statements of Operations and Deficit

    For the Years Ended December 31
    ($ 000s except $ per share)                           2009         2008
    -------------------------------------------------------------------------
    Revenue and Other Income
      Oil and gas sales                                 85,712       129,083
      Loss on risk management contracts - cash               -        (7,353)
      Gain on risk management contracts - non-cash           -         3,085
      Royalties                                         (7,414)      (17,215)
      Investment tax credit recovery (Note 11)          27,670             -
      Gain on sale of property (Note 8)                 24,198             -
      Interest and other                                   158            45
    -------------------------------------------------------------------------
                                                       130,324       107,645
    -------------------------------------------------------------------------
    Expenses
      Production costs                                  27,848        25,413
      General and administrative (Note 8 and 15)         4,458         3,401
      Interest on debt (Notes 9 and 10)                  3,294         2,740
      Reorganization costs (Note 4)                          -         2,121
      Stock-based compensation                             911         1,207
      Depletion, depreciation and accretion             19,277        14,749
    -------------------------------------------------------------------------
                                                        55,788        49,631
    -------------------------------------------------------------------------
    Earnings Before Taxes                               74,536        58,014
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Taxes (Note 11)
      Current                                              551           437
      Future                                             5,422         2,151
    -------------------------------------------------------------------------
                                                         5,973         2,588
    -------------------------------------------------------------------------
    Net Earnings for the Year                           68,563        55,426
    Deficit, beginning of year                         (46,715)      (51,543)
    Distributions declared                                   -       (42,660)
    Dividends declared and paid                        (30,299)       (7,938)
    -------------------------------------------------------------------------
    Deficit, end of year                                (8,451)      (46,715)
    -------------------------------------------------------------------------
    Net Earnings Per Share - Basic (Note 13)              3.81          3.25
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net Earnings Per Share - Diluted (Note 13)            3.78          3.23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See the accompanying notes to the consolidated financial statements



    Bonterra Oil & Gas Ltd.

    Consolidated Statements of Comprehensive Income

    For the Years Ended December 31
    ($ 000s except $ per share)                           2009          2008
    -------------------------------------------------------------------------
    Net Earnings for the Year                           68,563        55,426
    Other comprehensive income, net of income tax
      Unrealized (loss) gain on investments
       (net of income taxes of (97), (2008 - (272))        600        (1,611)
    -------------------------------------------------------------------------
    Other Comprehensive Income (Loss)                      600        (1,611)
    -------------------------------------------------------------------------
    Comprehensive Income                                69,163        53,815
    -------------------------------------------------------------------------
    Comprehensive Income Per Share - Basic (Note 13)      3.84          3.15
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Comprehensive Income Per Share - Diluted (Note 13)    3.81          3.14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See the accompanying notes to the consolidated financial statements



    Bonterra Oil & Gas Ltd.

    Consolidated Statements of Cash Flow

    For the Years Ended December 31
    ($ 000s)                                              2009          2008
    -------------------------------------------------------------------------
    Operating Activities
      Net earnings for the year                         68,563        55,426
      Items not affecting cash
        Gain on risk management contracts - non-cash         -        (3,085)
        Stock-based compensation                           911         1,207
        Depletion, depreciation and accretion           19,277        14,749
        Gain on sale of property                       (24,198)            -
        Future income taxes                              5,422         2,151
    -------------------------------------------------------------------------
                                                        69,975        70,448
    -------------------------------------------------------------------------
      Change in non-cash working capital
        Accounts receivable                                (47)        2,642
        Crude oil inventory                                365           (40)
        Prepaid expenses                                 1,057          (360)
        Accounts payable and accrued liabilities        (4,654)          (57)
      Restricted cash                                      440             -
      Investment tax credit receivable                 (27,670)            -
      Asset retirement obligations settled (Note 12)      (573)       (3,063)
    -------------------------------------------------------------------------
                                                       (31,082)         (878)
    -------------------------------------------------------------------------
    Cash Provided by Operating Activities               38,893        69,570
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Financing Activities
      Increase (decrease) in debt                      (35,613)       20,698
      Due to related parties                            17,500         6,000
      Issue of shares pursuant to private placement     17,996             -
      Share issue costs                                 (1,046)            -
      Stock option proceeds                              1,898         7,935
      Unit distributions                                     -       (46,384)
      Dividends                                        (30,299)       (7,938)
    -------------------------------------------------------------------------
    Cash Used in Financing Activities                  (29,564)      (19,689)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Investing Activities
      Property and equipment expenditures              (28,726)      (30,060)
      Acquisition (Note 5)                                   -       (13,816)
      Disposition of property and equipment (Note 5)    23,729             -
      Reorganization (Note 4)                                -       (11,257)
      Restricted term deposit                               20           (20)
      Change in non-cash working capital
        Accounts receivable                             (3,613)            -
        Accounts payable and accrued liabilities          (739)        5,272
    -------------------------------------------------------------------------
    Cash Used in Investing Activities                   (9,329)      (49,881)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net cash inflow                                          -             -
    Cash, beginning of year                                  -             -
    -------------------------------------------------------------------------
    Cash, End of Year                                        -             -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash Interest Paid                                   3,294         2,740
    Cash Taxes Paid                                        616           582
    -------------------------------------------------------------------------

    See the accompanying notes to the consolidated financial statements



    Bonterra Oil & Gas Ltd.

    Notes to the Consolidated Financial Statements

    For the Years Ended December 31, 2009 and 2008

    1.  CHANGE OF ORGANIZATION

    On November 12, 2008, Bonterra Energy Income Trust (the "Trust") was
    acquired by Bonterra Oil & Gas Ltd. (the "Company") through a reverse
    takeover by the Trust of SRX Post Holdings Inc. (SRX). In conjunction
    with the reorganization, the Trust acquired all the issued and
    outstanding shares of Silverwing Energy Inc. (Silverwing). Concurrently,
    all of the Company's subsidiaries, including Silverwing were amalgamated
    into Bonterra Energy Corp. (a subsidiary of Bonterra Energy Income
    Trust).

    Prior to the reorganization on November 12, 2008, the consolidated
    financial statements included the accounts of the Trust and its
    subsidiaries. After giving effect to the reorganization, the consolidated
    financial statements have been prepared on a continuity of interests
    basis, which recognizes Bonterra Oil & Gas Ltd. as the successor entity
    to the Trust.

    Effective January 1, 2010, the Trust was wound up into Bonterra Oil & Gas
    Ltd. and Bonterra Oil & Gas Ltd. was amalgamated with Bonterra Energy
    Corp. The continuing entity officially changed its name to Bonterra
    Energy Corp. subsequent to finalizing the reorganization.

    2.  SIGNIFICANT ACCOUNTING POLICIES

    Basis of Presentation

    The consolidated financial statements have been prepared by management in
    accordance with Canadian generally accepted accounting principles (GAAP)
    as described below.

    Consolidation

    These consolidated financial statements include the accounts of the
    Company, the Trust (wholly owned by the Company as of December 31, 2009)
    and its wholly owned subsidiary Bonterra Energy Corp. (Bonterra). Inter-
    company transactions and balances are eliminated upon consolidation.

    Measurement Uncertainty

    The preparation of financial statements in accordance with GAAP requires
    management to make estimates and assumptions that affect the reported
    amounts of assets and liabilities and disclosure of contingent assets and
    liabilities as at the date of the balance sheets as well as the reported
    amounts of revenues, expenses, and cash flows during the periods
    presented. Such estimates relate primarily to unsettled transactions and
    events as of the date of the financial statements. Actual results could
    differ materially from estimated amounts.

    Amounts recorded for depletion, depreciation, accretion and amounts used
    for impairment calculations are based on estimates of crude oil and
    natural gas reserves and future costs required to develop those reserves.
    Stock-based compensation is based upon expected volatility and option
    life estimates. Asset retirement obligations are based on estimates of
    abandonment costs, timing of abandonment, inflation and interest rates.
    The provision for income taxes is based on judgements in applying income
    tax law and estimates on the timing, likelihood and reversal of temporary
    differences between the accounting and tax basis of assets and
    liabilities. These estimates are subject to measurement uncertainty and
    changes in these estimates could materially impact the financial
    statements of future periods.

    Revenue Recognition

    Revenues associated with sales of petroleum and natural gas are recorded
    when title passes to the customer.

    Joint Interest Operations

    Significant portions of the Company's oil and gas operations are
    conducted jointly with other parties and accordingly the financial
    statements reflect only the Company's proportionate interest in such
    activities.

    Inventories

    Inventories consist of crude oil. Crude oil stored in the Company's tanks
    are valued on a first in first out basis at the lower of cost or net
    realizable value. Inventory cost for crude oil is determined based on
    combined average per barrel operating costs, royalties and depletion and
    depreciation for the year and net realizable value is determined based on
    estimated sales price less transportation costs.

    Investments

    Investments are carried at fair value. Fair value is determined by
    multiplying the year end trading price of the investments by the number
    of common shares held as at period end.

    Property and Equipment

    Petroleum and Natural Gas Properties and Related Equipment

    The Company follows the successful efforts method of accounting for
    petroleum and natural gas properties and related equipment. Costs of
    exploratory wells are initially capitalized pending determination of
    proved reserves. Costs of wells which are assigned proved reserves remain
    capitalized, while costs of unsuccessful wells are charged to earnings.
    All other exploration costs including geological and geophysical costs
    are charged to earnings as incurred. Development costs, including the
    cost of all wells, are capitalized.

    Producing properties are assessed annually or more frequently as economic
    events dictate, for potential impairment. Impairment is assessed by
    comparing the estimated net undiscounted future cash flows to the
    carrying value of the asset. If required, the impairment recorded is the
    amount by which the carrying value of the asset exceeds its fair value.

    Costs related to undeveloped properties are excluded from the depletion
    base until it is determined whether or not proved reserves exist or if
    impairment of such costs has occurred. These properties are assessed at
    least annually to determine whether impairment has occurred.

    Depreciation and depletion of capitalized costs of oil and gas producing
    properties are calculated using the per-unit-of-production method.
    Development and exploration drilling and equipment costs are depleted
    over the remaining proved developed reserves. Depreciation of other plant
    and equipment is provided on the straight line method. Straight line
    depreciation is based on the estimated service lives of the related
    assets which is estimated to be ten years.

    Furniture, Fixtures and Office Equipment

    These assets are recorded at cost and depreciated over a three to ten
    year period representing their estimated useful lives.

    Income Taxes

    The Company accounts for income taxes using the liability method. Under
    this method, the Company records a future income tax asset or liability
    to reflect any difference between the accounting and tax basis of assets
    and liabilities, using substantively enacted income tax rates. The effect
    on future tax assets and liabilities of a change in tax rates is
    recognized in net earnings in the period in which the change occurs.
    Future income tax assets are only recognized to the extent it is more
    likely than not that sufficient future taxable income will be available
    to allow the future income tax asset to be realized.

    Asset Retirement Obligations

    The Company recognizes an Asset Retirement Obligation (ARO) in the period
    in which it is incurred when a reasonable estimate of the fair value can
    be made. On a periodic basis, management will review these estimates and
    changes, if any, will be applied prospectively. The fair value of the
    estimated ARO is recorded as a long-term liability, with a corresponding
    increase in the carrying amount of the related asset. The capitalized
    amount is depleted on a unit-of-production basis over the life of the
    reserves. The liability amount is increased each reporting period due to
    the passage of time and the amount of accretion is charged to earnings in
    the period. Revisions to the estimated timing of cash flows or to the
    original estimated undiscounted cost would also result in an increase or
    decrease to the ARO. Actual costs incurred upon settlement of the
    obligations are charged against the ARO to the extent of the liability
    recorded.

    Stock-Based Compensation

    The Company accounts for stock based compensation using the fair-value
    method of accounting for stock options granted to directors, officers,
    employees and other service providers using the Black-Scholes option
    pricing model. Stock-based compensation expense is recorded over the
    vesting period with a corresponding amount reflected in contributed
    surplus. Stock-based compensation expense is calculated as the estimated
    fair value of the options at the time of grant, amortized over their
    vesting period. When stock options are exercised, the associated amounts
    previously recorded as contributed surplus are reclassified to common
    share capital. The Company has not incorporated an estimated forfeiture
    rate for stock options that will not vest, rather, the Company accounts
    for actual forfeitures as they occur.

    Financial Instruments

    Financial instruments are measured at fair value on initial recognition
    of the instrument and are classified into one of the following five
    categories: held-for trading, loans and receivables, held-to-maturity
    investments, available-for-sale financial assets or other financial
    liabilities.

    Subsequent measurement of financial instruments is based on their initial
    classification. Held-for-trading financial instruments are measured at
    fair value and changes in fair value are recognized in net earnings.
    Available-for-sale financial instruments are measured at fair value with
    changes in fair value recorded in other comprehensive income until the
    instrument is derecognized or impaired. The remaining categories of
    financial instruments are recognized at amortized cost using the
    effective interest rate method.

    All risk management contracts are recorded in the balance sheet at fair
    value unless they qualify for the normal sale and normal purchase
    exemption. All changes in their fair value are recorded in net earnings
    unless cash flow hedge accounting is used, in which case changes in fair
    value are recorded in other comprehensive income until the underlying
    hedged transaction is recognized in net earnings. Any hedge
    ineffectiveness is immediately recognized in net earnings. The Company
    has elected not to use cash flow hedge accounting on its risk management
    contracts with financial counterparties resulting in all changes in fair
    value being recorded in net earnings.

    Cash and restricted cash are classified as held-for-trading and are
    measured at fair value which equals the carrying value and any gains or
    losses are recognized in earnings in the period they occur. Accounts
    receivable are classified as loans and receivables which are measured at
    amortized cost. Investments are classified as available-for-sale which
    are measured at fair value and any gains or losses are recognized in
    other comprehensive income in the period they occur. Accounts payable and
    accrued liabilities, bank debt and amounts due to related parties are
    classified as other financial liabilities, which are measured at
    amortized cost.

    Risk Management Contracts

    The Company is exposed to market risks resulting from fluctuations in
    commodity prices, foreign currency exchange rates and interest rates in
    the normal course of its business. The Company may use a variety of
    instruments to manage these exposures. For transactions where hedge
    accounting is not applied, the Company accounts for such instruments
    using the fair value method by initially recording an asset or liability,
    and recognizing changes in the fair value of the instruments in earnings
    as unrealized gains or losses on risk management contracts. Fair values
    of financial instruments are based on third party quotes or valuations
    provided by independent third parties. Any realized gains or losses on
    risk management contracts are recognized in earnings in the period they
    occur.

    The Company may elect to use hedge accounting when there is a high degree
    of correlation between the price movements in the financial instruments
    and the items designated as being hedged and the Company has documented
    the relationship between the instruments and the hedged item as well as
    its risk management objective and strategy for undertaking hedge
    transactions. During the years ended December 31, 2009 and December 31,
    2008, the Company did not designate any of its financial instruments as
    hedges. There are no risk management contracts outstanding as at
    December 31, 2009 and December 31, 2008.

    Basic and Diluted per Share Calculations

    Basic earnings per share are computed by dividing earnings by the
    weighted average number of shares outstanding during the year. Diluted
    per share amounts reflect the potential dilution that could occur if
    options to purchase shares were exercised. The treasury stock method is
    used to determine the dilutive effect of common share options, whereby
    proceeds from the exercise of common share options or other dilutive
    instruments are assumed to be used to purchase common shares at the
    average market price during the period.

    3.  CHANGES IN ACCOUNTING POLICIES

    On January 1, 2009, the Company adopted the Canadian Institute of
    Chartered Accountants (CICA) Handbook Section 3064, "Goodwill and
    Intangible Assets". The new section replaces the previous goodwill and
    intangible asset standard and revises the requirement for recognition,
    measurement, presentation and disclosure of intangible assets. The
    adoption of this standard had no impact on the Company's consolidated
    financial statements.

    On January 20, 2009, the Company adopted the CICA's Emerging Issues
    Committee (EIC) EIC-173, "Credit Risk and the Fair Value of Financial
    Assets and Financial Liabilities". EIC-173 provides guidance on how to
    take into account credit risk of an entity and counterparty when
    determining the fair value of financial assets and financial liabilities,
    including derivative instruments. The adoption of EIC-173 did not have a
    material impact on the Company's consolidated financial statements.

    In 2009, the CICA issued amendments to CICA Handbook Section 3862,
    "Financial Instruments - Disclosures". The amendments include enhanced
    disclosures related to the fair value of financial instruments and the
    liquidity risk associated with financial instruments. Section 3862 now
    requires that all financial instruments measured at fair value be
    categorized into one of three hierarchy levels. The amendments will be
    effective for annual financial statements for fiscal years ending after
    September 30, 2009. The amendments are consistent with recent amendments
    to financial instrument disclosure standards in IFRS. The Company has
    included these additional disclosures in Note 16.

    Recent Accounting Pronouncements

    In December 2008, the CICA issued Section 1582, "Business Combinations",
    which will replace former guidance on business combinations. Section 1582
    establishes principles and requirements of the acquisition method for
    business combinations and related disclosures. This statement applies
    prospectively to business combinations for which the acquisition date is
    on or after the beginning of the first annual reporting period beginning
    on or after January 1, 2011 with earlier adoption permitted.

    In December 2008, the CICA issued Sections 1601, "Consolidated Financial
    Statements", and 1602, "Non-controlling Interests", which replaces
    existing Section 1600. Section 1601 establishes standards for the
    preparation of consolidated financial statements. Section 1602 provides
    guidance on accounting for a non-controlling interest in a subsidiary in
    consolidated financial statements subsequent to a business combination.
    These standards are effective on or after the beginning of the first
    annual reporting period beginning on or after January 1, 2011 with
    earlier adoption permitted. Section 1602 currently does not impact the
    Company as it has full controlling interest of all of its subsidiaries.

    The Canadian Accounting Standards Board has confirmed that IFRS will
    replace Canadian GAAP effective January 1, 2011, including comparatives
    for 2010, for Canadian publicly accountable enterprises.

    4.  REORGANIZATION

    As part of the 2008 reorganization of the Trust, SRX acquired all the
    issued and outstanding trust units of Bonterra Energy Income Trust on a
    basis of one Trust Unit for one Common Share of SRX. Immediately
    preceding the reorganization, SRX was under the protection of Companies'
    Creditors Arrangement Act (CCAA). Prior to the conversion, the Trust
    advanced $11,257,000 to SRX for settlement of claims pursuant to the CCAA
    proceedings. Upon completion of the CCAA procedures, SRX was owed
    $2,224,000 in outstanding tax and legal claims that have been used by the
    CCAA Monitor to settle secured creditor claims. This amount was recorded
    as an outstanding account receivable by the Company. As of December 31,
    2009 the entire amount has been received.

    In addition, SRX paid an advance of $1,800,000 to the CCAA Monitor for
    costs and payment of the unsecured creditors. This amount was recorded as
    a prepaid expense in the accounts of the Company. As of December 31,
    2009, $791,000 remains unpaid to the unsecured creditors.

    Included in accounts payable is $791,000 (December 31, 2008 - $4,024,000)
    to account for the amount due to the secured and unsecured creditors.

    5.  BUSINESS COMBINATIONS

    On July 2, 2009, the Company acquired all of the issued common shares of
    Cobalt Energy Ltd. (Cobalt) for consideration of 201,438 common shares at
    a value of $15.92 per common share plus the assumption of $2,856,000 of
    negative working capital for total consideration of $6,063,000. Results
    of Cobalt's operations have been included in the consolidated financial
    statements commencing from that date.

    The acquisition was accounted for using the purchase method and the
    purchase price was allocated to the fair value of the assets acquired and
    the liabilities assumed as follows:

    ($ 000s)
    -------------------------------------------
    Cost of acquisition
    -------------------------------------------
      Value of common stock              3,207
      Acquisition costs                    170
    -------------------------------------------
                                         3,377
    -------------------------------------------
    Allocation of purchase price:
      Property and equipment             7,105
      Future income tax liability         (748)
      Working capital deficiency        (2,856)
      Asset retirement obligations        (124)
    -------------------------------------------
                                         3,377
    -------------------------------------------

    On November 12, 2008, the Company acquired all the common shares of
    Silverwing for cash consideration of $13,816,000 (including acquisition
    costs of $334,000) plus the issuance of 7,745 common shares at a value of
    $25.85 per common share plus the assumption of $14,979,000 of negative
    working capital. The results of Silverwing's operations have been
    included in the consolidated financial statements since that date. The
    acquisition was funded through the Company's bank facility (see Note 10).

    The acquisition was accounted for using the purchase method and the
    purchase price was allocated to the fair value of the assets acquired and
    the liabilities assumed as follows:

    ($ 000s)
    -------------------------------------------
    Cost of acquisition
    -------------------------------------------
      Cash paid                         13,482
      Value of common stock                200
      Acquisition costs                     34
    -------------------------------------------
                                        14,016
    -------------------------------------------
    Allocation of purchase price:
      Restricted cash                    1,252
      Future income tax benefit         18,325
      Property and equipment            15,347
      Working capital deficiency       (14,979)
      Asset retirement obligations      (5,929)
    -------------------------------------------
                                        14,016
    -------------------------------------------

    6.  INVESTMENT IN RELATED PARTY

    The investment consists of 689,682 (December 31, 2008 - 689,682) common
    shares in Comaplex Minerals Corp (Comaplex), a company with common
    directors and management with the Company and its subsidiaries. The
    investment is recorded at fair market value. The common shares trade on
    the Toronto Stock Exchange under the symbol CMF. The investment
    represents less than a one percent ownership in the outstanding shares of
    Comaplex.

    7.  RESTRICTED CASH

    An escrow account was held by Silverwing prior to its acquisition by the
    Company. The escrow account was created to support eligible expenditures
    related to a farm-in agreement. The Company may access the funds upon
    completion and tie-in or abandonment and reclamation of 11 (December 31,
    2008 - 21) wells. The funds are administered by the farmors' legal
    counsel. The funds in the escrow account are invested in interest bearing
    term deposits.

    8.  PROPERTY AND EQUIPMENT

                                      2009                       2008
    -------------------------------------------------------------------------
                                      Accumulated                Accumulated
                                        Depletion                  Depletion
                                              and                        and
    ($ 000s)                  Cost   Depreciation        Cost   Depreciation
    -------------------------------------------------------------------------
    Undeveloped land         7,992              -       2,295              -
    Petroleum and natural
     gas properties and
     related equipment     246,387         87,153     229,136         74,844
    Furniture, equipment
     and other               1,461          1,016       1,254            848
    -------------------------------------------------------------------------
                           255,840         88,169     232,685         75,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On November 6, 2009, the Company divested of a portion of its Shaunavon
    oil production to Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX).
    The proceeds of disposition consist of $23,729,000 cash and 30,769,200
    common shares in Eagle Rock (representing approximately 4.2 percent of
    the outstanding common shares of that company). The Eagle Rock common
    shares were trading for $0.21 cents per share on November 6, 2009. The
    Company had a net book value (after effects of asset retirement
    obligations) of $5,993,000 attributable to the assets disposed of
    resulting in a gain on sale of the property of $24,198,000.

    Eagle Rock has since changed its name to Wild Stream Exploration Inc.
    (Wild Stream) (TSXV: WSX) and consolidated its common shares on a 30:1
    basis resulting in Bonterra holding 1,025,640 common shares of Wild
    Stream at December 31, 2009 with a quoted market value of $4,462,000.

    During the year the Company capitalized $359,000 (2008 - $426,000) of
    general and administrative costs.

    9.  DUE TO RELATED PARTIES

    As of December 31, 2009, the Company's CEO and major shareholder has
    loaned the Company $11,500,000 (December 31, 2008 - $6,000,000). The loan
    is unsecured, bore interest at Canadian chartered bank prime less one
    half of a percent and has no set repayment terms but is payable on
    demand. Effective July 1, 2009 the interest rate was adjusted to Canadian
    chartered bank prime less .25 percent. The interest rate was adjusted to
    keep the loan rate at approximately two percent below the Company's bank
    financing rate. Interest paid on this loan during 2009 was $209,000
    (2008 - $7,000).

    As of December 31, 2009, Comaplex has loaned the Company $12,000,000
    (December 31, 2008 - Nil). The loan is unsecured, bore interest at
    Canadian chartered bank prime plus one quarter of a percent and has no
    set repayment terms but is payable on demand. Effective July 1, 2009 the
    interest rate was adjusted to Canadian chartered bank prime less 0.25
    percent. The interest rate was adjusted to keep the loan rate at
    approximately two percent below the Company's bank financing rate.
    Interest paid on this loan during 2009 was $194,000.

    The Company's bank agreement requires that the above loans can only be
    repaid should the Company have sufficient available borrowing limits
    under the Company's credit facility.

    Please refer to Notes 6 and 15 for additional related party transactions.

    10. BANK DEBT

    As of December 31, 2009, the Company has a bank facility consisting of a
    $100,000,000 syndicated and $20,000,000 non-syndicated revolving credit
    facility (December 31, 2008 - $80,000,000 syndicated and $20,000,000 non-
    syndicated demand credit facility). This new facility became effective
    April 29, 2009, when the Company agreed to new terms and conditions.
    Amounts drawn under the facility at December 31, 2009 was $59,823,000
    (December 31, 2008 - $93,235,000). The interest rate on the outstanding
    debt during 2009 was approximately 4.0 percent. The Company at
    December 31, 2009 was in level III (see below) in respect of its various
    borrowing charges. The term of the new facility provides that the loan is
    revolving until April 28, 2011, is subject to annual review and has no
    fixed payment requirements.

    The amount available for borrowing under the credit facility is reduced
    by outstanding letters of credit. Letters of credit totaling $285,000
    were issued at December 31, 2009 (December 31, 2008 - $525,000). Security
    for the credit facilities consists of various fixed and floating demand
    debentures totaling $200,000,000 over all of the Company's assets, and a
    general security agreement with first ranking over all personal and real
    property.

    The interest rate on the credit facility is calculated as follows:

    -------------------------------------------------------------------------
                         Level I   Level II  Level III   Level IV    Level V
    -------------------------------------------------------------------------
    Consolidated Total
     Funded Debt(1)                    Over       Over       Over
     to Consolidated       Under      1.0:1      1.5:1      2.0:1       Over
     Cash flow Ratio       1.0:1   to 1.5:1   to 2.0:1   to 2.5:1      2.5:1
    -------------------------------------------------------------------------
    Canadian Prime Rate
     Plus(2)                 125        150        175        200        250
    -------------------------------------------------------------------------
    Bankers' Acceptances
     Rate Plus(2)            275        300        325        350        400
    -------------------------------------------------------------------------
    (1) Consolidated total funded debt excludes related party amounts but
        includes working capital.
    (2) Numbers in table represent basis points.


    The consolidated total funded debt to consolidated cash flow ratio shall
    be adjusted effective as of the first day of the next fiscal quarter
    following the end of each fiscal quarter, with each such adjustment to be
    effective until the next such adjustment.

    The following is a list of the material covenants:

        -  The Company is required to not exceed $120,000,000 in
           consolidated debt (includes negative working capital but excludes
           debt to related parties).
        -  Dividends paid in any quarter shall not exceed 80 percent of the
           average of the previous four quarters' cash flow as defined under
           GAAP. During the third quarter the Company received a waiver of
           this requirement for the fourth quarter and instead is restricted
           to paying no more than the lesser of 80 percent of quarter four
           cash flow or $10,000,000. In addition the Company received a
           waiver of this requirement for the first quarter of 2010 and
           instead is restricted to paying no more than the lesser of
           80 percent of the first quarter 2010 cash flow or $12,500,000

    At December 31, 2009, the Company is in compliance with all covenants.

    11. INCOME TAXES

    The Company has recorded a future income tax asset related to assets and
    liabilities and related tax amounts:

    ($ 000s)                                             2009           2008
    -------------------------------------------------------------------------
    Future tax liability related to investments:         (824)          (212)
    Future tax liability related to property
     and equipment:                                    (5,855)        (7,097)
    Future tax asset related to asset retirement
     obligations:                                       4,474          4,593
    Future tax asset related to finance costs:            802          1,134
    Future tax asset related to corporate tax
     losses and SR&ED claims                           59,668         86,998
    Future tax asset related to corporate
     capital tax losses                                17,883         17,883
    Valuation adjustment                              (17,883)       (17,883)
    -------------------------------------------------------------------------
    Future Tax Asset - Long-term                       58,265         85,416
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Current portion of future income tax asset
     related to corporate tax losses and
     SR&ED claims:                                     11,889          2,669
    -------------------------------------------------------------------------
    Future Tax Asset - Current                         11,889          2,669
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As a result of the reorganization as described in Note 1 the Company
    recorded a deferred credit of $71,303,000 relating to the difference
    between the future income tax asset generated on the reorganization and
    the amount of the cash payment made to SRX immediately before the
    reorganization. This credit is being amortized (2009 - $12,356,000, 2008 -
    $4,240,000) on the same basis as the related future income tax asset
    (2009 - $14,306,000, 2008 - $4,909,000).

    A reconciliation of the deferred credit is as follows:

    ($ 000s)
    -------------------------------------------
    Amount recorded on reorganization   71,303
    Amortized in 2008                   (4,240)
    Rate adjustment                        425
    Amortized in 2009                  (12,356)
    -------------------------------------------
    Balance as of December 31, 2009     55,132
    -------------------------------------------

    Current portion                      7,363
    Long-term portion                   47,769
    -------------------------------------------
                                        55,132
    -------------------------------------------

    Income tax expense varies from the amounts that would be computed by
    applying Canadian federal and provincial income tax rates as follows:

    ($ 000s)                                             2009           2008
    -------------------------------------------------------------------------
    Earnings before income taxes                       74,536         58,014
    Combined federal and provincial income tax rates    29.15%         29.62%
    -------------------------------------------------------------------------
    Income tax provision calculated using
     statutory tax rates                               21,727         17,184
    Increase (decrease) in taxes resulting from:
      Saskatchewan resource surcharge                     282            437
      Quebec tax                                          269              -
      Stock-based compensation                            266            357
      Deferred credit amortization                    (11,931)        (4,240)
      Change in effective tax rate                     (4,708)          (499)
      Trust income allocated to Unitholders
       prior to conversion                                  -        (10,291)
      Others                                               68           (360)
    -------------------------------------------------------------------------
    Income tax expense                                  5,973          2,588
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company and its subsidiaries have the following tax pools, which may
    be used to reduce taxable income in future years, limited to the
    applicable rates of utilization:

                                                      Rate of
                                                  Utilization
    ($ 000s)                                                %         Amount
    -------------------------------------------------------------------------
    Undepreciated capital costs                        20-100         21,671
    Eligible capital expenditures                           7          7,363
    Share issue costs                                      20          2,973
    Canadian oil and gas property expenditures             10         26,282
    Canadian development expenditures                      30         59,141
    Canadian exploration expenditures                     100         11,174
    SR&ED expenditures                                    100         80,357
    Income tax losses carried forward(1)                  100        223,629
    -------------------------------------------------------------------------
                                                                     432,590
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Federal income tax losses carried forward expire in the following
        years; 2013 - $1,069,000, 2024 - $3,347,000, 2025 - $7,532,000,
        2026 - $46,670,000, 2027 - $117,189,000, 2028 - $34,726,000, 2029 -
        $13,096,000.


    The Company has $27,670,000 (2008 - $27,670,000) remaining of investment
    tax credits that expire in the following years; 2019 - $3,469,000, 2020 -
    $3,059,000, 2021 - $4,667,000, 2022 - $3,909,000, 2023 - $3,155,000,
    2024 - $1,995,000, 2025 - $2,257,000, 2026 - $2,405,000, 2027 -
    $2,009,000, 2028 - $745,000.

    The Company also has $143,061,000 of capital loss carry forwards which
    can only be claimed against taxable capital gains.

    The amount and timing of reversals of temporary differences will also
    depend on the Company's future operating results, acquisitions and
    dispositions of assets and liabilities. A significant change in any of
    these assumptions could materially affect the Company's estimate of the
    future income tax asset.

    12. ASSET RETIREMENT OBLIGATIONS

    At December 31, 2009, the estimated total undiscounted amount required to
    settle the asset retirement obligations was $64,482,000 (2008 -
    $58,903,000). Costs for asset retirement have been calculated assuming a
    two percent inflation rate. These obligations will be settled based on
    the useful lives of the underlying assets, which extend up to 50 years
    into the future. This amount has been discounted using a credit-adjusted
    risk-free interest rate of five percent (2008 - five percent).

    Changes to asset retirement obligations were as follows:

    ($ 000s)                                             2009           2008
    -------------------------------------------------------------------------
    Asset retirement obligations, January 1            18,338         14,904
    Adjustment to asset retirement obligations           (138)          (217)
    Adjustment related to asset additions
     (net of disposals)                                  (750)         5,929
    Liabilities settled during the year                  (573)        (3,063)
    Accretion                                             913            785
    -------------------------------------------------------------------------
    Asset retirement obligations, December 31          17,790         18,338
    -------------------------------------------------------------------------

    13. SHAREHOLDERS' EQUITY

    Authorized

    The Company is authorized to issue an unlimited number of common shares
    without nominal or par value. The Company is also authorized to issue an
    unlimited number of Class "A" redeemable Preferred Shares and an
    unlimited number of Class "B" Preferred Shares. There are currently no
    outstanding Class "A" redeemable preferred shares or Class "B" preferred
    shares.

    Issued

                                        2009                    2008
    -------------------------------------------------------------------------
                                 Number      Amount      Number      Amount
                                            ($ 000s)                ($ 000s)
    -------------------------------------------------------------------------
    Common Shares
    Balance, beginning
     of year                  17,257,603      99,530           -           -
    Issued pursuant to
     private placement         1,068,000      17,996           -           -
    Issued on acquisition
     of Cobalt (Note 5)          201,438       3,207           -           -
    Issued pursuant to
     Company share
     option plan                  92,600       1,898           -           -
    Transfer of contributed
     surplus to share capital          -         103           -           -
    Issue costs for private
     placement                         -      (1,046)          -           -
    Future tax effect of
     share issue costs                 -         267           -           -
    Issued on reorganization
     to a corporation                  -           -  17,257,603      99,530
    -------------------------------------------------------------------------
    Balance, end of year      18,619,641     121,955  17,257,603      99,530
    -------------------------------------------------------------------------

                                        2008
    -------------------------------------------------
    Issued                       Number      Amount
                                            ($ 000s)
    -------------------------------------------------
    Trust Units
    Balance, beginning
     of year                  16,928,158      90,590
    Transfer of contributed
     surplus to unit capital           -         805
    Issued pursuant to Trust
     unit option plan            321,700       7,935
    Issued on acquisition
     of Silverwing (Note 5)        7,745         200
    Cancelled on conversion
     to a corporation        (17,257,603)    (99,530)
    -------------------------------------------------
    Balance, end of 2008               -           -
    -------------------------------------------------

    On May 27, 2009, the Company completed a private placement for 1,068,000
    common shares at a price of $16.85 per common share for aggregate
    proceeds of $17,996,000. The Company incurred issue costs of $1,046,000
    in respect of the offering.

    The number of common shares used to calculate diluted net earnings per
    share for the year ended December 31, 2009 of 18,131,085 shares (2008 -
    17,119,517) included the basic weighted average number of common shares
    outstanding of 18,006,320 shares (2008 - 17,075,647) plus 124,765 shares
    (2008 - 43,870) related to the dilutive effect of common share options.

    A summary of the changes of the Company's contributed surplus is
    presented below:

    Contributed surplus
    ($ 000s)                                             2009           2008
    -------------------------------------------------------------------------
    Balance, beginning of year                          2,542          2,140
    Stock-based compensation expensed (non-cash)          911          1,207
    Stock-based options exercised (non-cash)             (103)          (805)
    -------------------------------------------------------------------------
    Balance, end of year                                3,350          2,542
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The deficit balance is composed of the following items:

    ($ 000s)                                             2009           2008
    -------------------------------------------------------------------------
    Accumulated earnings                              276,745        208,182
    Accumulated cash dividends and distributions     (285,196)      (254,897)
    -------------------------------------------------------------------------
    Deficit                                            (8,451)       (46,715)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company provides a stock option plan for its directors, officers,
    employees and consultants. Under the plan, the Company may grant options
    for up to 1,861,964 common shares (2008 - 1,725,760). The exercise price
    of each option granted equals the market price of the common shares on
    the date of grant and the option's maximum term is five years.

    A summary of the status of the Company's stock option plan as of
    December 31, 2009 and 2008, and changes during the years ended on those
    dates is presented below:

                                 December 31, 2009         December 31, 2008
    -------------------------------------------------------------------------
                                          Weighted-                 Weighted-
                                           Average                   Average
                                          Exercise                  Exercise
                              Options        Price      Options        Price
    -------------------------------------------------------------------------
    Outstanding at
     beginning of period    1,390,500      $ 20.50            -      $     -
    Options granted            33,000        14.90    1,390,500        20.50
    Options exercised         (92,600)       20.50            -            -
    -------------------------------------------------------------------------
    Outstanding at end
     of period              1,330,900      $ 20.36    1,390,500      $ 20.50
    -------------------------------------------------------------------------
    Options exercisable
     at end of period         370,900      $ 20.50            -      $     -
    -------------------------------------------------------------------------

    The following table summarizes information about options outstanding at
    December 31, 2009:

                       Options Outstanding             Options Exercisable
    -------------------------------------------------------------------------
                  Number      Weighted-
                     Out-      Average    Weighted-       Number    Weighted-
    Range of    standing     Remaining     Average   Exercisable     Average
    Exercise          At   Contractual    Exercise            at    Exercise
    Prices      12/31/09          Life       Price      12/31/09       Price
    -------------------------------------------------------------------------
    $14.90        33,000     3.1 years     $ 14.90             -     $     -
     20.50     1,297,900     2.9 years       20.50       370,900       20.50
    -------------------------------------------------------------------------
    $14.90-
     20.50     1,330,900     2.9 years     $ 20.36             -     $ 20.50
    -------------------------------------------------------------------------

    The Company records compensation expense over the vesting period based on
    the fair value of options granted to employees, directors and
    consultants. In 2009, the Company granted 33,000 stock options with an
    estimated fair value of $52,000 ($1.58 per option) using the Black-
    Scholes option pricing model with the following key assumptions:

                                                    2009                2008
    -------------------------------------------------------------------------
    Weighted-average risk free interest rate (%)     1.4                 2.2
    Expected life (years)                            3.0                 3.5
    Weighted-average volatility (%)                 33.0                31.3
    Dividend yield 2009 and 2008                  based on the percentage of
                                                  dividends (2008 - dividends
                                                  or distributions) paid
                                                  during the period granted
    -------------------------------------------------------------------------

    14. ACCUMULATED OTHER COMPREHENSIVE INCOME

                                                         Other
                                     January 1,  Comprehensive   December 31,
    ($ 000s)                              2009    Income (Loss)         2009
    -------------------------------------------------------------------------
    Unrealized gains (losses) on
     available for sale financial
     assets                              1,420             600         2,020
    -------------------------------------------------------------------------


                                                         Other
                                     January 1,  Comprehensive   December 31,
    ($ 000s)                              2008    Income (Loss)         2008
    -------------------------------------------------------------------------
    Unrealized gains on available
     for sale financial assets           3,031          (1,611)        1,420
    -------------------------------------------------------------------------

    15. RELATED PARTY TRANSACTIONS

    The Company received a management fee from Comaplex of $330,000 (2008 -
    $330,000) for management services and office administration. This fee has
    been included as a recovery in general and administrative expenses and
    represents the fair value of the services rendered. The Company also
    allocated $102,000 of drilling royalty credits to Comaplex for $51,000.
    As at December 31, 2009, the Company had an account receivable from
    Comaplex of $105,000 (December 31, 2008 - $56,000).

    The Company received a management fee from Pine Cliff Energy Ltd., a
    company with common directors and management with the Company and its
    subsidiaries, of $120,000 (2008 - $238,000) for management services and
    office administration. This fee has been included in general and
    administrative expenses as a recovery and represents the fair value of
    the services rendered. As at December 31, 2009 the Company had an account
    receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).

    These transactions are in the normal course of operations and are
    measured at the exchange amount, which is the amount of consideration
    established and agreed to by the related parties.

    16. FINANCIAL AND CAPITAL RISK MANAGEMENT

    Financial Risk Factors
    ----------------------

    The Company undertakes transactions in a range of financial instruments
    including:

        -  Receivables
        -  Restricted cash
        -  Payables
        -  Common share investments
        -  Due to related parties
        -  Bank loans

    The Company's activities result in exposure to a number of financial
    risks including market risk (commodity price risk, interest rate risk,
    foreign exchange risk), credit risk, and liquidity risk.

    The Company's overall risk management program seeks to mitigate these
    risks and reduce the volatility on the Company's financial performance.
    Financial risk management is carried out by senior management under the
    direction of the Directors of the Company.

    The Company may enter into various risk management contracts in
    accordance with Board approval to manage the Company's exposure to
    commodity price fluctuations. Currently no risk management agreements are
    in place. The Company does not speculatively trade in risk management
    contracts. The Company's risk management contracts are entered into to
    manage the risks relating to commodity prices from its business
    activities.

    Capital Risk Management
    -----------------------

    The Company's objectives when managing capital, which the Company defines
    to include shareholders' equity, debt and working capital balances, are
    to safeguard the Company's ability to continue as a going concern, so
    that it can continue to provide returns to its shareholders and benefits
    for other stakeholders and to maintain an optimal capital structure to
    reduce the cost of capital. In order to maintain or adjust the capital
    structure, the Company may adjust the amount of dividends, debt
    facilities or issue new shares.

    The Company monitors capital on the basis of the ratio of debt to cash
    flow. This ratio is calculated using each quarter end net debt (total
    debt adjusted for working capital) and divided by the preceding twelve
    months cash flow. The Company believes that a debt level of approximately
    one and a half year's cash flow is an appropriate level to allow it to
    take advantage in the future of either acquisition opportunities or to
    provide flexibility to develop its undeveloped resources by horizontal or
    vertical drill programs.

    The following section (a) of this note provides a summary of the
    Company's underlying economic positions as represented by the carrying
    values, fair values and contractual face values of the Company's
    financial assets and financial liabilities. The Company's debt to cash
    flow from operations is also provided.

    The following section (b) addresses in more detail the key financial risk
    factors that arise from the Company's activities including its policies
    for managing these risks.

    The following section (c) provides details of the Company's risk
    management contracts that are used for financial risk management.

        a)  Financial assets, financial liabilities and debt ratio

        The carrying amounts, fair value and face values of the Company's
        financial assets and liabilities are shown in Table 1.

        Table 1

                                               As at December 31, 2009
        ---------------------------------------------------------------------
                                      Carrying           Fair           Face
        ($ 000s)                         Value          Value          Value
        ---------------------------------------------------------------------
        Financial assets
        Accounts receivable             14,713         14,713         14,873
        Investments                      4,462          4,462            N/A
        Investment in related party      4,827          4,827            N/A
        Restricted cash                    812            812            812

        Financial liabilities
        Accounts payable and accrued
         liabilities                    18,868         18,868         18,868
        Due to related parties          23,500         23,500         23,500
        Long-term debt                  59,823         59,823         59,823
        ---------------------------------------------------------------------

        Financial instruments consisting of accounts receivable, accounts
        payable and accrued liabilities, due to related parties and long-term
        debt carried on the consolidated balance sheet are carried at
        amortized cost. Restricted cash, investments, and investments in
        related party are carried at fair value. All of the fair value items
        are transacted in active markets. Bonterra classifies the fair value
        of these transactions according to the following hierarchy based on
        the amount of observable inputs used to value the instrument.

        Level 1 - Quoted prices are available in active markets for identical
        assets or liabilities as of the reporting date. Active markets are
        those in which transactions occur in sufficient frequency and volume
        to provide pricing information on an ongoing basis.

        Level 2 - Pricing inputs are other than quoted prices in active
        markets included in Level 1. Prices in Level 2 are either directly or
        indirectly observable as of the reporting date. Level 2 valuations
        are based on inputs, including quoted forward prices for commodities,
        time value and volatility factors, which can be substantially
        observed or corroborated in the marketplace.

        Level 3 - Valuations in this level are those with inputs for the
        asset or liability that are not based on observable market data.

        Bonterra's restricted cash, investments and investments in related
        party have been assessed on the fair value hierarchy described above
        and are all considered Level 1.

        The net debt and cash flow from operations figures are presented in
        Table 2.

        Table 2

                                                                 December 31
        ($ 000s)                                                        2009
        ---------------------------------------------------------------------
        Long-term debt                                                59,823
        Due to related parties                                        23,500
        Accounts payable and accrued liabilities                      18,868
        Current assets(1)                                            (27,680)
        ---------------------------------------------------------------------
        Net Debt                                                      74,511
        ---------------------------------------------------------------------
        Cash flow from operations(2)                                  38,893
        ---------------------------------------------------------------------
        Net debt to cash flow from operations                           1.92
        ---------------------------------------------------------------------

        (1) Current assets include accounts receivable, crude oil inventory,
            prepaid expenses, investments and investment in related party.
        (2) Cash flow from operations includes annual net earnings less
            adjustment for non-cash (gain) loss on risk management contracts,
            stock-based compensation, depletion, depreciation and accretion,
            gain on sale of property, future income taxes, changes in non-
            cash working capital items, asset retirement obligations settled
            and investment tax credit receivable.

        b)  Risks and mitigations

        Market risk is the risk that the fair value or future cash flow of
        the Company's financial instruments will fluctuate because of changes
        in market prices. Components of market risk to which the Company is
        exposed are discussed below.

        Commodity price risk
        --------------------

        The Company's principal operation is the production and sale of crude
        oil, natural gas and natural gas liquids. Fluctuations in prices of
        these commodities directly impact the Company's performance and
        ability to continue with its dividends.

        The Company has used various risk management contracts to set price
        parameters for a portion of its production. Management, in agreement
        with the Board of Directors, recently decided that at least in the
        near term it will discontinue the use of commodity price agreements.
        The Company will assume full risk in respect of commodity prices.

        Interest rate risk
        ------------------

        Interest rate risk refers to the risk that the value of a financial
        instrument or cash flows associated with the instrument will
        fluctuate due to changes in market interest rates. Interest rate risk
        arises from interest bearing financial assets and liabilities that
        the Company uses. The principal exposure of the Company is on its
        borrowings which have a variable interest rate which gives rise to a
        cash flow interest rate risk.

        The Company's debt facilities consist of a $100,000,000 revolving
        operating line, $20,000,000 demand operating line and $23,500,000 due
        to related parties. The borrowings under these facilities are at bank
        prime plus or minus various percentages as well as by means of
        bankers' acceptances (BA's) within the Company's credit facility. The
        Company manages its exposure to interest rate risk through entering
        into various term lengths on its BA's but in no circumstances do the
        terms exceed six months.

        Sensitivity Analysis

        Based on historic movements and volatilities in the interest rate
        markets and management's current assessment of the financial markets,
        the Company believes that a one percent variation in the Canadian
        prime interest rate is reasonably possible over a 12-month period.

        A one percent increase (decrease) in the Canadian prime rate would
        decrease net earnings and comprehensive income by $591,000 (increase
        by $591,000).

        Foreign exchange risk
        ---------------------

        The Company has no foreign operations and currently sells all its
        product sales in Canadian currency. The Company however is exposed to
        currency risk in that crude oil is priced in U.S. currency then
        converted to Canadian currency. The Company currently has no
        outstanding risk management agreements. Management, in agreement with
        the Board of Directors, decided that at least in the near term it
        will discontinue the use of commodity price agreements. The Company
        will assume full risk in respect of foreign exchange fluctuations.

        Credit risk
        -----------

        Credit risk is the risk that a contracting party will not complete
        its obligations under a financial instrument and cause the Company to
        incur a financial loss. The Company is exposed to credit risk on all
        financial assets included on the balance sheet. To help mitigate this
        risk:

           -  The Company only enters into material agreements with credit
              worthy counterparties. These include major oil and gas
              companies or major Canadian chartered banks;
           -  Agreements for product sales are primarily on 30 day renewal
              terms; and
           -  Investments are generally only with companies that have common
              management with the Company.

        Of the accounts receivable balance of December 31, 2009 ($14,713,000)
        and December 31, 2008 ($11,753,000) over 87 (2008 - 82) percent
        relates to product sales with international oil and gas companies and
        drilling credits receivable from the province of Alberta.

        The Company assesses quarterly, if there has been any impairment of
        the financial assets of the Company. During the year ended
        December 31, 2009, there was no impairment provision required on any
        of the financial assets of the Company due to historical success of
        collecting receivables. The Company does have a credit risk exposure
        as the majority of the Company's accounts receivable are with
        counterparties having similar characteristics. However, payments from
        the Company's largest accounts receivable counterparties have
        consistently been received within 30 days and the sales agreements
        with these parties are cancellable with 30 days notice if payments
        are not received.

        At December 31, 2009, approximately $244,000 or 1.6 percent of the
        Company's total accounts receivable are aged over 120 days and
        considered past due. The majority of these accounts are due from
        various joint venture partners. The Company actively monitors past
        due accounts and takes the necessary actions to expedite collection,
        which can include withholding production or netting payables when the
        accounts are with joint venture partners. Should the Company
        determine that the ultimate collection of a receivable is in doubt,
        it will provide the necessary provision in its allowance for doubtful
        accounts with a corresponding charge to earnings. If the Company
        subsequently determines an account is uncollectable, the account is
        written off with a corresponding charge to the allowance account. The
        Company's allowance for doubtful accounts balance at December 31,
        2009 is $160,000 (December 31, 2008 - $85,000) with the difference
        being included in general and administrative expenses. There were no
        accounts written off during the year.

        The carrying value of accounts receivable approximates their fair
        value due to the relatively short periods to maturity on this
        instrument. The maximum exposure to credit risk is represented by the
        carrying amount on the balance sheet. There are no material financial
        assets that the Company considers past due.

        Liquidity risk
        --------------

        Liquidity risk includes the risk that, as a result of the Company's
        operational liquidity requirements:

           -  The Company will not have sufficient funds to settle a
              transaction on the due date;
           -  The Company will not have sufficient funds to continue with its
              dividends;
           -  The Company will be forced to sell assets at a value which is
              less than what they are worth; or
           -  The Company may be unable to settle or recover a financial
              asset at all.

        To help reduce these risks the Company:

           -  Maintains a portfolio of high-quality, long reserve life oil
              and gas assets.

        The Company has the following maturity schedule for its financial
        liabilities:

                                                    Payments Due By Period

                              Recognized on       Less
                                  Financial       than        1-3        4-5
        ($ 000s)                 Statements     1 year      years      years
        ---------------------------------------------------------------------
        Accounts payable and          Yes -
         accrued liabilities      Liability     18,868          -          -
        Due to related                Yes -
         party                    Liability     23,500          -          -
        Long-term                     Yes -
         bank debt                Liability          -     59,823          -
        Office leases                    No        944      1,761        496
        ---------------------------------------------------------------------
        Total                                   43,312     61,584        496
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        c)  Risk management contracts

        The Company has no outstanding risk management contracts.

    17. COMMITMENTS, CONTINGENCIES AND GUARANTEES

    The Company has no contractual obligations that last more than a year
    other than its office lease agreements which are as follows:

    ($ 000s)
    Lease Obligations
    -------------------------------------------
    Year 1                                 944
    Year 2                                 932
    Year 3                                 829
    Year 4                                 496
    -------------------------------------------
    Total                                3,201
    -------------------------------------------

    18. SUBSEQUENT EVENTS - DIVIDENDS

    Subsequent to December 31, 2009, the Company has declared the following
    dividends:

    Date declared         Record date       $ per share    Date payable
    -------------------------------------------------------------------------
    January 5, 2010       January 15, 2010        $0.18    January 29, 2010
    February 3, 2010      February 16, 2010       $0.18    February 26, 2010
    March 3, 2010         March 15, 2010          $0.18    March 31, 2010


    19. SUBSEQUENT EVENT - DISPOSITION

    Subsequent to December 31, 2009, the Company entered into a purchase and
    sale agreement to divest its Southeast Saskatchewan Pinto property. The
    proceeds of disposition consist of approximately $5,600,000 cash and
    resulted in a gain of approximately $5,800,000. The disposition closed on
    February 23, 2010.

    The TSX does not accept responsibility for the adequacy or accuracy of
    this release.
    

%SEDAR: 00003132E

SOURCE Bonterra Energy Corp.

For further information: For further information: George F. Fink, CEO and Chairman or Randy M. Jarock, President and COO, Garth E. Schultz, Vice President, Finance and CFO or Kirsten Kulyk, Manager, Investor Relations, Telephone: (403) 262-5307, Fax: (403) 265-7488, Email: info@bonterraenergy.com, Website: www.bonterraenergy.com

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Bonterra Energy Corp.

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