Cadence Energy Inc. (formerly Kereco Energy Ltd.) announces second quarter 2008 results



    CALGARY, Aug. 12 /CNW/ - Cadence Energy Inc. ("Cadence") (formerly Kereco
Energy Ltd. "Kereco") or the ("Company") is pleased to announce operational
and financial results for the second quarter and first half of 2008.

    
    FINANCIAL AND OPERATING HIGHLIGHTS

    -------------------------------------------------------------------------
    FINANCIAL                   Three months               Six months
    ($000s, unless              ended June 30             ended June 30
    otherwise                                   %                          %
    indicated)             2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    Petroleum and
     natural gas sales   33,226   49,522      (33)   62,335   92,557     (33)
    Funds flow from
     operations          14,129   22,299      (36)   26,928   44,273     (39)
      Per share
       - basic ($)         0.24     0.39      (38)     0.46     0.77     (41)
      Per share
       - diluted ($)       0.24     0.38      (37)     0.46     0.76     (40)
    Net earnings (loss) (10,065)   2,547     (495)  (10,334)     613  (1,786)
      Per share
       - basic ($)        (0.17)    0.04     (525)    (0.18)    0.01  (1,900)
      Per share
       - diluted ($)      (0.17)    0.04     (525)    (0.18)    0.01  (1,900)
    Capital expenditures
      Exploration and
       development       10,831   19,374      (44)   30,913   50,421     (39)
      Net acquisitions
       and dispositions
       net of transaction
       costs             (2,719)  30,744     (109) (170,078)  30,744    (653)
    -------------------------------------------------------------------------
      Total               8,112   50,118      (83) (139,165)  81,165    (271)
    -------------------------------------------------------------------------
    Bank debt                 - (151,892)     100         - (151,892)    100
    Cash and short
     term investments    64,941        -      100    64,941        -     100
    Working capital
     surplus(1)           4,184    4,786      (12)    4,184    4,786     (12)
    -------------------------------------------------------------------------
    Total (net debt)/
     cash balance(2)     69,125 (147,106)     147    69,125 (147,106)    147
    -------------------------------------------------------------------------
    Shareholders'
     equity             375,698  512,814      (26)  375,698  512,814     (26)
    Common shares
     outstanding at
     the end of
     period (000s)
      Basic             58,949   57,777         2    58,949   57,777       2
      Diluted           62,966   66,046        (5)   62,966   66,046      (5)
    Weighted average
     common shares
     outstanding (000s)
      Basic             58,418   57,775         1    58,478   57,144       2
      Diluted(3)        58,418   58,820        (1)   58,478   58,170       1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    OPERATING
     HIGHLIGHTS(4)

    Average daily
     production
      Natural gas
       (mcf/day)         5,720   29,396       (81)    7,114   27,355     (74)
      Crude oil and
       NGLs (bbls/day)   2,510    4,617       (46)    2,612    4,418     (41)
      Barrels of oil
       equivalent
       (boe/day)         3,464    9,517       (64)    3,798    8,977     (58)
    Average selling
     prices(5)
      Natural gas
       ($/mcf)           10.96     7.79        41      9.10     7.91      15
      Crude oil and
       NGLs ($/bbl)     118.45    65.82        80    104.17    64.07      63
      Barrels of oil
       equivalent
       ($/boe)          103.94    55.99        86     88.70    55.64      59
    Well events (No.)
      Gross                2.0      6.0       (67)      9.0     19.0     (53)
      Net                  2.0      5.0       (60)      9.0     14.9     (40)
      Success (%)          100       83        20        88       79      11
    Undeveloped land
     (000s of acres)
      Gross                 59      351        (83)      59      351     (83)
      Net                   50      238        (79)      50      238     (79)
    Average working
     interest (%)           85       68         25       85       68      25
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1)    Excluding financial derivative contracts.
    (2)    Net debt - excludes debt associated with the $70 million principal
           amount of convertible debentures issued June 25, 2007.
    (3)    Excludes anti-dilutive incremental options and warrants of 189,560
           for the second quarter 2008 and 176,983 for the first half of
           2008.
    (4)    References in this report to boe refer to barrel of oil equivalent
           whereby natural gas volumes have been converted at a rate of
           six thousand cubic feet of natural gas to one barrel of oil. See
           "Management's Discussion and Analysis" on page four.
    (5)    Average selling prices are net of transportation costs and
           excluding financial derivatives.
    

    MESSAGE TO SHAREHOLDERS

    Cadence Energy Inc. is pleased to provide our operational and financial
results for the second quarter of 2008 as well as to provide an update of
significant events within and subsequent to the end of the quarter. The second
quarter proved to be an eventful one for our Company. After completing the
repositioning process in the first quarter, our energies in the second quarter
were directed primarily towards developing the foundations for our go forward
plan. Included in the plan was the name change from Kereco Energy Ltd. to
Cadence Energy Inc. which did obtain shareholder approval at our May 14, 2008
Annual General Meeting. As well, within the second quarter, part of our plan
was to make an offer to repurchase the outstanding Cadence Convertible
Debentures. The offer was made but did not reach the minimum tender
requirement and the offer expired with no Cadence Debentures purchased by
Cadence under the offer.
    Within the second quarter, Cadence was informally approached from
Daylight Resources Trust with respect to a potential merger transaction. From
early April until May 20, 2008, Management of Cadence and Daylight had several
meetings, conducted reciprocal due diligence and concluded with negotiating
material terms of a possible acquisition of Cadence by Daylight. On May 21,
2008, Cadence and Daylight entered into a Letter of Intent which led to the
papering and signing of an Arrangement Agreement and public announcement of a
proposed transaction on May 26, 2008. As a result of the announced
transaction, Cadence began working closely with Daylight on an integrated
transition and execution plan with the assumption that the transaction would
be proceeding with favourable acceptance from Cadence shareholders.
    We were able to fulfill our operational and financial objectives in the
quarter even though much of our focus was put towards developing an executable
capital and people plan for the future as a result of the pending Daylight
Arrangement proposal. Commodity prices increased substantially during the
quarter and we spent less capital than originally budgeted which served to
even further strengthen our already exceptionally strong balance sheet.
    Subsequent to the end of the second quarter and within 12 days of the
shareholder vote to approve the Daylight Arrangement Agreement, Cadence was
contacted by representatives of Barrick Gold Corporation ("Barrick") at which
time Barrick delivered a conditional acquisition proposal to acquire all of
the outstanding common shares of Cadence. Cadence Management and Board of
Directors together with its financial and legal advisors held numerous
meetings to address the unsolicited proposal, its effect on the Daylight
Arrangement Agreement, and the necessary steps to be taken to ensure
shareholder value was being maximized. On July 17, 2008, Cadence and Barrick
delivered an unconditional offer to enter into a Support Agreement which
provides for the acquisition by Barrick of all outstanding common shares at
$6.75 per common share. Management and the Board of Cadence unanimously
approved entering into the Support Agreement with Barrick and has recommended
the acceptance of same to Cadence shareholders which is open for acceptance
until September 4, 2008.
    The past year for Cadence (formerly Kereco Energy Ltd.) has been filled
with significant change during a time of unprecedented volatility in commodity
price markets. Our staff have not only endured but also maintained their focus
on delivering results through this very tumultuous time and we would like to
thank each of them for their efforts and commitment. As well, we would like to
thank our Board for their time, guidance and assistance in looking to maximize
the interests of both the shareholders and staff through this time.

    OUTLOOK

    We believe the Barrick acquisition to be very good for the shareholders
of both Cadence and Barrick alike as it delivers near term monetization for
Cadence shareholders and provides an exceptional predominately crude oil
platform for assisting with Barrick's initiative to manage rising energy
costs. As our Company proceeds to work in conjunction with Barrick on its
forward plans, we have altered and in some cases curtailed our capital program
pending the closing of the Barrick transaction. As we recommend that Cadence
shareholders approve the Barrick offer that is scheduled to close on
September 4, 2008, on behalf of the Cadence Board and Management, I would like
to express my sincere thanks to all of our stakeholders and shareholders for
your interest and support of Cadence Energy Inc. (formerly Kereco Energy
Ltd.).

    On behalf of the Board of Directors,

    Grant B. Fagerheim
    President and Chief Executive Officer
    August 12, 2008



    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following management's discussion and analysis ("MD&A") should be
read in conjunction with the unaudited consolidated interim financial
statements for the three and six months ended June 30, 2008, and the audited
consolidated financial statements and MD&A for the years ended December 31,
2007 and 2006 contained in the 2007 consolidated financial statements of
Cadence (formerly "Kereco") and is based on information to August 12, 2008.
The reader should be aware that historical results are not necessarily
indicative of future performance. Additional information relating to Cadence
can be found at www.sedar.com.
    Funds flow from operations, which is determined before changes in
non-cash working capital, is used by us as a key measure of performance. Funds
flow from operations does not have a standardized meaning prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may
not be comparable with the calculation of similar measures for other
companies. Funds flow from operations as presented is not intended to
represent operating profits for the period nor should it be viewed as an
alternative to cash provided by operating activities, net earnings or other
measures of financial performance calculated in accordance with GAAP. Funds
flow from operations per share is calculated using the same share bases which
are used in the determination of earnings per share.
    Net debt, which is determined as bank debt and working capital (comprised
of accounts receivable, prepaid expenses and accounts payable and accrued
liabilities) is used by us as a key indicator of the financial position of the
Company. Net debt does not have a standardized meaning prescribed by Canadian
Generally Accepted Accounting Principles ("GAAP") and therefore may not be
comparable with the calculation of similar measures for other companies.
    The financial data contained herein has been prepared in accordance with
GAAP, and unless otherwise indicated, all comments in this report are in
thousands of Canadian dollars. In conformity with Canadian Securities
Administrators National Instrument 51-101, natural gas volumes have been
converted to equivalent barrels of oil ("boe") using a conversion ratio of six
thousand cubic feet ("mcf") to one boe. This ratio is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead. Readers are cautioned that
boes may be misleading, particularly if used in isolation.

    FORWARD-LOOKING INFORMATION

    Certain information set forth in this disclosure, including management's
assessment of the future plans and operations of Cadence, contains
forward-looking statements. By their nature, forward-looking statements are
subject to numerous risks and uncertainties, some of which are beyond our
control, including the impact of general economic conditions, industry
conditions, changes in laws and regulations including the adoption of new
environmental laws and regulations and changes in how they are interpreted and
enforced, volatility of commodity prices, currency fluctuations, interest rate
volatility, imprecision of reserve estimates, environmental risks, competition
from other industry participants, the lack of availability of qualified
personnel or management, stock market volatility and ability to access
sufficient capital from internal and external sources, market valuations with
respect to announced transactions and the final valuations thereof and
obtaining required approvals of regulatory authorities. Readers are cautioned
that the assumptions used in the preparation of such information, although
considered reasonable at the time of preparation, may prove to be imprecise
and, as such, undue reliance should not be placed on forward looking
statements. The actual results, performance or achievement of Cadence could
differ materially from those expressed in, or implied by, these
forward-looking statements and, accordingly, no assurance can be given that
any of the events anticipated by the forward looking statements will transpire
or occur, or if any of them do so, what benefits that Cadence will derive
therefrom. Except as required by law, Cadence disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.

    BASIS OF PRESENTATION

    Cadence Energy Inc. which was renamed from Kereco Energy Ltd. on May 14,
2008, is a Calgary-based intermediate light oil and natural gas exploration,
development and production Company whose key business activities are focused
in north western Alberta. Cadence began operations as an oil and gas
exploration and production Company on January 18, 2005 with the conveyance of
oil and gas properties from Ketch Resources Ltd. ("Ketch"). Our strategy is to
create value primarily through the generation and drilling of exploration and
development prospects as well as through the exploitation and production of
existing reserves, otherwise referred to as organic value added growth. In
addition, we seek strategic acquisitions which add to our production, reserves
and growth potential. We target areas and prospects that we believe can result
in meaningful reserve and production additions on a per share basis.

    SUBSEQUENT EVENT: OFFER FROM BARRICK GOLD CORPORATION

    On July 14, 2008 Cadence received an unsolicited conditional acquisition
proposal from Barrick Gold Corporation ("Barrick") to acquire all of the
issued and outstanding common shares of Cadence ("Cadence Shares") at a cash
price of $6.00 per Cadence Share. On July 17, 2008, following a four day due
diligence process, Cadence had received an unconditional Support Agreement
(the "Support Agreement") providing for the acquisition by Barrick all of the
issued and outstanding common shares of Cadence Shares at an increased cash
price of $6.75 per Cadence Share (the "Barrick Offer"). On July 21, 2008
Cadence announced that it had entered into the previously announced Support
Agreement with Barrick which provides for the acquisition by Barrick of all
the issued and outstanding common shares of Cadence for a price of $6.75 per
share (The "Barrick Offer"). The Board of Directors of Cadence has unanimously
approved the Support Agreement and has unanimously determined that the Barrick
Offer is fair to Cadence shareholders, is in the best interest of Cadence
shareholders and has unanimously recommended that Cadence shareholders accept
the Barrick offer.

    RESULTS OF OPERATIONS

    Second quarter capital expenditures in 2008 amounted to $8.1 million net
of property dispositions of $2.7 million. Cadence's capital program was
reduced in the second quarter of 2008 following the proposed business
combination with Daylight announced in May of 2008. Production over the second
quarter of 2008 averaged 3,464 boe/day (5,720 mcf/day of natural gas and 2,510
bbls/day of crude oil and NGLs) down 64 percent from the 9,517 boe/day (29,396
mcf/day of natural gas and 4,617 bbls/day of crude oil and NGLs) averaged in
the second quarter of 2007. The property dispositions which were completed in
the fourth quarter of 2007 and January 14, 2008 in addition to the reduced
capital program mentioned above resulted in the decreased production volumes
over these two respective periods. Net capital expenditures for the first half
of 2008 was $30.9 million excluding property dispositions, net of transaction
costs, of $170.1 million. The $30.9 million capital program included drilling
nine well events which resulted in one cased gas well, six cased oil wells,
one salt water disposal well, and one dry hole (89 percent success). One gas
well and one oil well were completed in our Peace River arch area in Alberta
and five oil wells and one salt water disposal well were completed in our
Sturgeon area.

    
    Selected Quarterly Information

                                2008                                    2007
    -------------------------------------------------------------------------
    ($000s, except
     per share
     amounts)           Q2        Q1        Q4        Q3        Q2        Q1
    -------------------------------------------------------------------------
    Revenues (net
     of royalties)  26,457    22,660    37,987    33,485    38,051    34,150
    Funds flow
     from
     operations     14,129    12,799    21,560    23,345    22,299    21,974
      Per share -
       basic ($)      0.24      0.22      0.37      0.40      0.39      0.39
      Per share -
       diluted ($)    0.24      0.22      0.37      0.40      0.38      0.38
    -------------------------------------------------------------------------
    Net earnings
     (loss)        (10,065)     (269)   (4,383) (122,643)    2,547    (1,934)
      Per share -
       basic ($)     (0.17)    (0.01)    (0.08)    (2.12)     0.04     (0.03)
      Per share -
       diluted ($)   (0.17)    (0.01)    (0.08)    (2.12)     0.04     (0.03)
    -------------------------------------------------------------------------
    Total assets   530,440   530,890   639,799   697,275   806,637   784,570
    -------------------------------------------------------------------------
    Bank debt            -         -    80,193   150,713   151,892   179,576
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                2006
    ---------------------------------
    ($000s, except
     per share
     amounts)           Q4        Q3
    ---------------------------------
    Revenues (net
     of royalties)  31,461    24,152
    Funds flow
     from
     operations     20,592    17,422
      Per share -
       basic ($)      0.40      0.49
      Per share -
       diluted ($)    0.39      0.48
    ---------------------------------
    Net earnings
     (loss)           (234)    7,006
      Per share -
       basic ($)     (0.01)     0.20
      Per share -
       diluted ($)   (0.01)     0.19
    ---------------------------------
    Total assets   767,411   391,933
    ---------------------------------
    Bank debt       188,673   84,695
    ---------------------------------
    ---------------------------------

    Significant events and variances that have occurred over the last eight
    quarters are as follows:
    1)  On October 19, 2006, Kereco acquired Chamaelo Exploration Ltd.
        ("Chamaelo"), resulting in subsequent increases in revenues and funds
        flow. The acquisition did also result in a significant increase in
        depletion, depreciation and amortization which has negatively
        impacted net earnings since that point.

    2)  During the third quarter of 2007, Kereco's production at Sturgeon
        Lake was down for over one month as a result of a scheduled
        turnaround, resulting in a negative impact on revenues that quarter.
        In addition, the entire balance of goodwill was written off in the
        third quarter of 2007, resulting in a large net loss.

    3)  In the fourth quarter of 2007, Kereco completed three separate
        dispositions of assets for total net proceeds of $71.3 million. These
        proceeds reduced both bank debt and total assets in the quarter.

    4)  On January 14, 2008, Kereco completed an additional disposition of
        assets for proceeds of $166.8 million plus an additional $3.0 million
        in adjustments to March 31, 2008 related to these property
        dispositions. When combined with the fourth quarter 2007
        dispositions, the result is also lower revenues and funds flow from
        operations in the quarter. These proceeds eliminated bank debt and
        reduced total assets in the quarter.

    5)  An increase in commodity prices resulted in increased revenues in the
        second quarter of 2008 and a greater net loss in earnings in the
        second quarter of 2008 as a result of a substantial increase in the
        loss in the mark to market of the financial derivative contracts in
        place.
    

    FUNDS FLOW FROM OPERATIONS

    Funds flow from operations decreased 36 percent in the second quarter of
2008 to $14.1 million, or $0.24 per share on a diluted basis from
$22.3 million, or $0.38 per share on a diluted basis for the second quarter of
2007. Funds flow from operations decreased 39 percent in the second half of
2008 to $26.9 million, or $0.46 per share on a diluted basis from
$44.3 million, or $0.76 per share on a diluted basis for the second half of
2007. Decreases over both periods are largely a result of the lower production
volumes due to the disposal of assets resulting from the repositioning process
which was completed with the final disposition on January 14, 2008 in addition
to the reduced capital program in the second quarter of 2008. Funds flow from
operations is calculated as follows:

    
                                  Three months ended        Six months ended
                                         June 30                 June 30
    ($000s)                         2008        2007        2008        2007
    -------------------------------------------------------------------------
    Cash provided by
     operating activities         10,291      28,691      14,800      53,784
    Change in non-cash
     working capital               3,838      (6,392)     12,128      (9,511)
    -------------------------------------------------------------------------
    Funds flow from
     operations                   14,129      22,299      26,928      44,273
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Net Operating Income

                                  Three months ended        Six months ended
    ($000s, except per share             June 30                 June 30
     amounts)                       2008        2007        2008        2007
    -------------------------------------------------------------------------
    Natural gas sales              5,830      21,329      12,170      40,174
    Crude oil and NGLs sales      27,395      28,193      50,165      52,383
    Transportation                  (462)     (1,033)     (1,032)     (2,152)
    Realized financial
     derivative gain (loss)       (6,412)         77      (9,042)      1,080
    -------------------------------------------------------------------------
    Total net sales               26,351      48,566      52,261      91,485
    Royalty expenses              (6,769)    (11,471)    (13,218)    (20,356)
    Operating expenses            (2,866)     (9,909)     (7,736)    (18,340)
    -------------------------------------------------------------------------
    Net operating income          16,716      27,186      31,307      52,789
    -------------------------------------------------------------------------
      Per share - Basic ($)         0.29        0.47        0.54        0.92
                - Diluted ($)       0.29        0.46        0.54        0.91
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    OPERATING NETBACKS
                                  Three months ended        Six months ended
                                         June 30                 June 30
    -------------------------------------------------------------------------
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Boe netback ($/boe)
      Sales price                 105.41       57.18       90.19       56.96
      Transportation               (1.47)      (1.19)      (1.49)      (1.32)
      Realized gain (loss) on
       financial derivatives      (20.34)       0.09      (13.08)       0.66
    -------------------------------------------------------------------------
      Sales price, net of
       transportation and
       realized gain on
       financial derivatives       83.60       56.08       75.62       56.30
      Royalty expenses
        - ($/boe)                 (21.47)     (13.25)     (19.12)     (12.53)
        - (%)                      20.70       23.70       21.60       22.50
      Operating expenses           (9.09)     (11.44)     (11.19)     (11.29)
    -------------------------------------------------------------------------
      Netback                      53.04       31.39       45.31       32.48
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Natural gas netback
     ($/mcf)
      Sales price                  11.20        7.98        9.40        8.11
      Transportation               (0.24)      (0.19)      (0.30)      (0.20)
      Realized gain (loss) on
       financial derivatives       (0.24)       0.01       (0.10)       0.05
    -------------------------------------------------------------------------
      Sales price, net of
       transportation and
       realized gain on
       financial derivatives       10.72        7.80        9.00        7.96
      Royalty expenses
        - ($/mcf)                  (0.51)      (1.75)      (1.26)      (1.68)
        - (%)                       4.70       22.50       13.80        21.3
      Operating expenses           (1.72)      (1.92)      (1.86)      (1.88)
    -------------------------------------------------------------------------
      Netback                       8.49        4.13        5.88        4.40
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Crude oil and NGL netback
     ($/bbl)
      Sales price                 119.92       67.10      105.53       65.49
      Transportation               (1.47)      (1.28)      (1.36)      (1.42)
      Realized gain (loss) on
       financial derivatives      (27.52)       0.14      (18.76)       1.07
    -------------------------------------------------------------------------
      Sales price, net of
       transportation
       realized gain on
       financial derivatives       90.93       65.96       85.41       65.14
      Royalty expenses
        - ($/bbl)                 (28.46)     (16.08)     (24.37)     (15.04)
        - (%)                      24.00       24.40       23.40       23.50
      Operating expenses           (8.62)     (11.33)     (11.22)     (11.26)
    -------------------------------------------------------------------------
      Netback                      53.85       38.55       49.82       38.84
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    PETROLEUM AND NATURAL GAS SALES

    Production for the second quarter of 2008 averaged 3,464 boe/day and net
realized prices of $103.94/boe resulted in revenues of $33.2 million, a 64
percent decrease in production and an 86 percent increase in realized prices
compared to the second quarter of 2007 which had production of 9,517 boe/day
and net realized prices of $55.99/boe. Production decreases in the second
quarter of 2008 compared to the second quarter of 2007 were a result of the
corporate repositioning process which resulted in four separate asset
dispositions, the final of which closed on January 14, 2008 and the reduction
of the associated sales and production volumes from that point forward in
addition to the reduced capital program in the second quarter of 2008
following the proposed business combination with Daylight announced in May of
2008.
    Average price realizations for the second quarter of 2008, net of
transportation costs, were $103.94/boe ($10.96/mcf for natural gas,
$118.45/bbl for crude oil and NGLs). Comparatively, average price realizations
for the second quarter of 2007, net of transportation costs, were $55.99/boe
($7.79/mcf for natural gas, $65.82/bbl for crude oil & NGLs). The change in
price realizations tracked changes in the underlying commodity prices over
these periods. WTI crude oil averaged U.S. $124.00/bbl for the second quarter
of 2008, ninety-one percent higher than U.S.$65.00/bbl averaged in the second
quarter of 2007. These increases in WTI were mitigated to a degree by the
increased value in the Canadian dollar over these respective periods which
increased to an exchange rate of 1.00 for the second quarter of 2008 compared
to 1.10 for the second quarter of 2007. The average daily index AECO natural
gas price ($Cdn/mcf) was $10.21/mcf for the second quarter of 2008, forty-four
percent higher than $7.07/mcf from the second quarter of 2007, and the average
monthly index AECO natural gas price was $9.35/mcf for the second quarter of
2008, twenty-seven percent higher than $7.37/mcf from the second quarter of
2007. We market a relatively even mix of our natural gas at both AECO daily
index and at AECO monthly index pricing.
    Production for the first half of 2008 averaged 3,798 boe/day and net
realized prices of $88.70/boe resulted in revenues of $62.3 million, a 58
percent decrease in production and a 59 percent increase in realized prices
compared to the first half of 2007 which had production of 8,977 boe/day and
net realized prices of $55.64/boe. Production decreases in the first half of
2008 compared to the first half of 2007 were a result of the corporate
repositioning process which resulted in four separate asset dispositions, the
final of which closed on January 14, 2008.
    Average price realizations for the first half of 2008, net of
transportation costs, were $88.70/boe ($9.10/mcf for natural gas, $104.17/bbl
for crude oil and NGLs). Comparatively, average price realizations for the
first half of 2007, net of transportation costs, were $55.64/boe ($7.91/mcf
for natural gas, $64.07/bbl for crude oil & NGLs). The change in price
realizations also tracked changes in the underlying commodity prices over
these periods. WTI crude oil averaged U.S. $110.97/bbl for the first half of
2008, eighty percent higher than U.S.$61.58/bbl averaged in the first half of
2007. The average daily index AECO natural gas price ($Cdn/mcf) was $9.06/mcf
for the first half of 2008, twenty-five percent higher than $7.22/mcf from the
first half of 2007, and the average monthly index AECO natural gas price was
$8.24/mcf for the first half of 2008, eleven percent higher than $7.42/mcf
from the first half of 2007. We market a relatively even mix of our natural
gas at both AECO daily index and at AECO monthly index pricing.
    Financial derivative contracts in place (see note 11 to the consolidated
financial statements for further details) resulted in realized losses of
$6.4 million ($20.34/boe) for the quarter compared to gains of $0.1 million
($0.09/boe) for the three months ended June 30, 2007. Net realized losses for
the first half of 2008 was $9.0 million ($13.08/boe) compared to a gain of
$1.1 million ($0.66/boe) for the first half of 2007. This increase in losses
is attributable to the crude oil financial derivative contracts which were put
in place in the middle of 2007.
    All of our production is sold within Canada, and revenues are received in
Canadian dollars. The commodities we produce and sell are sensitive to both
worldwide (crude oil) and North American (natural gas) price fluctuations as
well as fluctuations in the Canada/U.S. exchange rate. The commodity price
increases realized in second quarter 2008 compared to second quarter 2007 were
offset somewhat by an increase in the value of the Canadian dollar versus the
U.S. dollar over historical levels, which negatively impacted our price
realizations. The average Canada/U.S. exchange rate remained relatively static
at 1.00 for both the second quarter and first half of 2008 compared to 1.10
and 1.13 for the second quarter of 2007 and the first half of 2007,
respectively.

    Realized Financial Derivatives

    On an ongoing basis we enter into several financial and physical
commodity contracts to assist in minimizing exposure to commodity prices.
These activities resulted in losses of $9.0 million ($8.9 million on crude oil
and $0.1 million on natural gas) in the second half of 2008 compared to a gain
of $1.1 million ($0.9 million on crude oil and $0.2 million on natural gas) in
the second half of 2007. This increase in losses is attributable to the crude
oil financial derivative contracts which were put in place in the middle of
2007.

    Transportation Costs

    Transportation costs increased to $1.47/boe for second quarter of 2008
compared to $1.19/boe for the second quarter of 2007. Transportation costs
decreased 55 percent to $0.5 million for the second quarter of 2008 compared
to $1.0 million for the second quarter of 2007, based on decreased sales
volumes over the two periods. For the first half of 2008 transportation costs
increased slightly to $1.49/boe compared to compared to $1.32/boe for the
first half of 2007. These increases reflect the transportation costs
associated with the remaining properties following the property dispositions
completed in January of 2008.

    Royalties

    Our royalty burdens are predominantly Crown, along with some overriding,
freehold and net profits interest royalties ("other royalties"). For the
second quarter of 2008, average royalty rates decreased slightly to 20.7
percent (Crown royalties of 18.2 percent and other royalties of 2.5 percent)
compared to 23.7 percent (Crown royalties of 20.6 percent and other royalties
of 3.1 percent) for the second quarter of 2007. The decrease in Crown
royalties recognized the benefit of an increased crown capital cost allowance
deduction realized with the filing of actual period end applications with the
Crown. For the second half of 2008, average royalty rates decreased slightly
to 21.6 percent (Crown royalties of 18.9 percent and other royalties of 2.7
percent) compared to 22.5 percent (Crown royalties of 19.3 percent and other
royalties of 3.2 percent) for the second quarter of 2007 reflecting the
royalty burden of the remaining properties held by Cadence. Cadence's overall
corporate royalty rate is expected to be maintained at a rate between 22.0 to
23.0 throughout the remainder of the year.

    CASH COSTS

    Cash costs (operating, general and administrative and interest) increased
to $17.39/boe in the second quarter of 2008 compared to $16.82/boe in the
second quarter of 2007. Cash costs increased to $17.61/boe in the first half
of 2008 compared to $16.41/boe in the first half of 2007. Higher cash costs
over these two respective periods tracked the reduced interest expense
following the elimination of the draw on the bank line following the property
dispositions on January 14, 2008 offset by an increase in general and
administrative costs which are allocated over a reduced production base in the
periods following the repositioning process. Year to date cash costs are
expected to be maintained at the year to date rate or decrease slightly as
continued cost control initiatives are implemented during 2008.

    Operating Costs

    Operating costs on a per boe basis decreased in the second quarter of
2008 to $9.09/boe ($1.72/mcf for natural gas and $8.62/bbl for crude oil and
NGLs) compared to second quarter of 2007 costs of $11.44/boe ($1.92/mcf for
natural gas and $11.33/bbl for crude oil and NGLs). First half 2008 operating
costs remained relatively static at $11.19/boe ($1.86/mcf for natural gas and
$11.22/bbl for crude oil and NGLs) compared to $11.29/boe ($1.88/mcf for
natural gas and $11.26/bbl for crude oil and NGLs) for the first half of 2007.
Operating costs are largely influenced by power costs, repair and maintenance
at Sturgeon Lake and the ability to attract third party volumes for processing
through our Sturgeon Lake Plant. The decrease in costs per boe over these
respective periods is largely attributable to the higher sulphur recovery
income received in the quarter and increased operational efficiencies which
resulted in lower maintenance costs associated with our Sturgeon Lake property
in the second quarter of 2008. Sulphur sales at Sturgeon Lake, which is a
by-product of the production process, increased in value in the quarter and
$1.0 million in sulphur sales recoveries were netted against operating costs
in the second quarter of 2008. We also continue to have approximately 70
percent of the electrical power load required for Sturgeon Lake fixed at a
rate of $65.50 per KWh for most of 2008. Operating costs are expected to be in
the $12.00/boe range for the remainder of 2008.

    General and Administrative Expenses

    General and Administrative ("G&A") costs increased 339 percent on a boe
basis to $7.25/boe for the second quarter of 2008 from $1.65/boe in the second
quarter of 2007. Total costs increased 60 percent to $2.3 million for the
second quarter of 2008 compared to $1.4 million for the second quarter of
2007. G&A costs increased 235 percent on a boe basis to $5.20/boe for the
first half of 2008 from $1.55/boe in the first half of 2007. Total costs
increased 43 percent to $3.6 million for the first half of 2008 compared to
$2.5 million for the first half of 2007. The second quarter of 2008 realized
additional incentive payments and compliance expenses as well as reduced
recoveries as a result of the reduced capital expenditure program in the
quarter. These factors realized in the second quarter and the fact that we
maintained an adequate level of staff as a result of the repositioning process
earlier in the year to manage the growth of the Company results in the higher
general and administrative cost per boe compared to the second quarter and
first half of 2007. We feel that Cadence is adequately staffed for our 2008
activities.

    Interest Expense

    Interest expense decreased to $1.6 million in the second quarter of 2008
compared to $3.2 million in the second quarter of 2007. First half 2008
interest expense decreased to $3.5 million from $5.8 million. This decrease is
largely the result of the completion of the repositioning process which
eliminated our debt balance as of January 15, 2008. The $3.5 million in first
half 2008 interest expense is comprised of $1.7 million in interest related to
the 4.75% convertible debentures and $1.6 million in non-cash accretion
expense related to the convertible debentures and $0.2 million in bank
interest expense for the period to January 14, 2008. Offsetting this is
$1.0 million in interest income from the short term cash equivalent
investments of $65 million in one month Banker's Acceptances. On a per boe
basis, cash interest expense net of interest income decreased to $1.05/boe in
the second quarter of 2008 compared to $3.73/boe in the second quarter of
2007. Total interest expense for the remainder of the year is dependent upon
our positive cash balance and amount of bank draws for the remainder of the
year.

    NET EARNINGS

    A net loss of $10.1 million ($0.17) per diluted share was realized in the
second quarter of 2008 compared to a net earnings of $2.5 million $0.04 per
diluted share in the second quarter of 2007. A loss of $10.3 million ($0.18)
per diluted share was realized in the first half of 2008 compared to a net
earnings of $0.6 million $0.01 per diluted share in the first half of 2007.
These losses on earnings are largely attributable to the increased depletion,
depreciation and accretion expense and the unrealized loss on financial
derivatives as described below.

    Depletion, Depreciation and Accretion ("DD&A")

    Depletion, depreciation and accretion ("DD&A") amounted to $10.6 million,
or $33.65/boe in the second quarter of 2008 compared to $21.9 million or
$25.29/boe for the second quarter of 2007. DD&A amounted to $22.8 million or
$32.93/boe in the first half of 2008 compared to $41.3 million or $25.40/boe
for the first half of 2007. The DD&A rate increased in the second quarter and
first half of 2008 as a result of adjustments to the depletable capital base
and the associated reserves following the closing of the final property
disposition from the corporate repositioning process in addition to the
capital expenditures added to the depletable asset pool over the quarter,
relative to the proven reserves added. These cumulative additions to the
depletable pools, relative to period end estimated reserves, result in the
increased DD&A rate per boe over the two respective periods. The DD&A rate for
2008 will be approximately $32.00 to $33.00 per boe, prior to incorporating
any 2008 activities.

    Stock-Based Compensation Expense

    Stock-based compensation for the second quarter of 2008 was $0.3 million
compared to $1.3 million in the second quarter of 2007 and $0.2 million for
the first six months of 2008 compared to $2.3 million for the first six months
of 2007. The decrease in stock based compensation in the second quarter and
first half of 2008 is largely a result of the cancellation of 1.9 million
options in the first quarter of 2008, resulting from the staff departures
concurrent with the repositioning process in January 2008, net of the regular
stock based compensation expense that needs to be recognized with the reduced
number of outstanding options over the period. In the second quarter of 2007,
2.4 million options of non-insiders of the Company were cancelled and
1.5 million new options were granted and an additional 2.2 million options
were granted in June of 2007. Stock-based compensation expense continues to be
recognized on the cancelled options over their original life as well as
additional expense for the incremental fair value of the replacement options
granted. See note 9 to the consolidated financial statements for more details.
    The Board of Directors had approved the conditional cancellation of the
currently outstanding options to be replaced with the adoption of a new stock
option plan. The Board of Director's has also approved the conditional
adoption of a share unit plan. The cancellation of the current stock option
plan was not approved at the Company's Annual General Meeting held on May 14,
2008. The adoption of a new share unit plan was approved at the Company's
Annual General Meeting held on May 14, 2008, however no units have currently
been offered under this share unit plan and no share units are outstanding.

    Unrealized (Gains)/ Losses on Financial Instruments

    The effect of financial instruments amounted to an unrealized loss of
$18.1 million in the first half of 2008 compared to an unrealized loss of
$2.6 million for the first half of 2007. These financial instruments include
our financial and physical commodity contracts as well as our electrical power
purchase contract. Any physical commodity contracts and our electrical power
purchase contract were included as financial instruments in accordance with
the new accounting standards for Financial Instruments. The majority of the
gains or losses on financial derivatives are from financial commodity
contracts which are based upon the commodity benchmarks of (WTI) for oil and
(AECO) for natural gas. The losses reflected to date are a result of the
strong WTI oil price increase at the end of June 2008. Accounting standards
require that the change in the fair value ("mark to market") of these
positions be included in earnings on each balance sheet date. See note 11 in
the notes to the consolidated financial statements for additional details.

    Taxes

    Total future income tax recovered at June 30, 2008 for the year to date
was $5.4 million and $3.6 million for the second quarter of 2008. Total income
tax recovered at June 30, 2007 for the year to date was $2.2 million
($2.5 million of future income tax recovery and $0.3 million of current tax
expense) and $0.6 million ($0.9 million of future income tax recovery and
$0.3 million if current tax expense) for the second quarter of 2007. This
results in an effective tax rate of 34 percent year to date in 2008 (2007 -
138 percent), which is largely influenced by a portion of the convertible
debenture interest expense that is non deductible as well as rate differences
between the statutory rate and Cadence's effective rate and adjustments to
actual tax pool balances with the filing of year end 2007 tax returns.

    Income Tax Pools

    At June 30, 2008, the Company had the following estimated tax pools and
non-capital losses that can be used to offset otherwise taxable income in
future periods:

    
                                                          As at        As at
                                                        June 30, December 31,
    (millions)                                             2008         2007
    -------------------------------------------------------------------------
    Canadian oil and gas property expense ("COGPE")        58.0        219.4
    Canadian development expense ("CDE")                   85.0        105.2
    Canadian exploration expense ("CEE")                   23.4         29.8
    Undepreciated capital costs ("UCC")                    62.4        101.9
    Non-capital losses carried forward                     48.5         31.9
    -------------------------------------------------------------------------
    Total pools and losses                                277.3        488.2
    -------------------------------------------------------------------------
    Share Issue costs                                      10.1         12.2
    -------------------------------------------------------------------------
    Total pools, losses and share issue costs             287.4        509.4
    -------------------------------------------------------------------------

    The reduction in pools from the fourth quarter of 2007 reflects the $170.1
million in property dispositions, net of transaction costs, and the
distribution of the Kereco partnership income of February 1, 2007 to January
31, 2008 in the year.


    LIQUIDITY AND CAPITAL RE

SOURCES Capital Resources Three months ended Six months ended June 30 June 30 (000s) 2008 2007 2008 2007 ------------------------------------------------------------------------- Funds flow from operations 14,129 22,299 26,928 44,273 Working capital (12,552) (12,016) (24,017) (12,247) Bank debt - (27,684) (80,193) (36,781) Cash and cash equivalents 5,101 - (64,941) - Business combination transaction costs - (71) - (484) Proceeds from property dispositions 2,719 67,475 170,078 67,475 Proceeds from the exercise of options or warrants 2,053 105 4,951 626 Repurchase of Common shares (619) (1,893) Proceeds from share issuances - 10 - 18,303 ------------------------------------------------------------------------- Total capital resources 10,831 50,118 30,913 81,165 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Bank Debt At June 30, 2008 the Company had in place a syndicated committed credit facility, in the amount of $100 million, with two major Canadian Chartered Banks and the Canadian branch of a major international bank. Interest on this facility is charged at monthly rates and borrowings can be made in Canadian or U.S. dollars. Borrowings can also be made by way of prime rate advances or Banker's Acceptances which attract interest at increments to prime based on the Company's debt/cash flow ratio, calculated utilizing the two most recent fiscal quarters. The Company has provided a $500 million demand fixed and floating charge debenture as collateral for the facility. As at June 30, 2008, this banking facility was undrawn. (December 31, 2007, $80.2 million). In January 2008 the entire amount of the outstanding balance was repaid in full, which resulted in the classification of the outstanding amount on the balance sheet as a current liability at December 31, 2007. At June 30, 2008 the Company was in a positive cash position having $65 million invested in one month Banker's Acceptances earning 3.01% interest. In April 2008 the credit facility was renewed at $100 million for another annual period under similar terms and conditions. Working Capital We ended the quarter with a working capital surplus of $4.2 million which is comprised of accounts payable and accrued liabilities of $26.2 million and accounts receivable and prepaid expenses of $30.4 million. Accounts receivable mainly consist of monthly revenue which is predominantly collected on the twenty-fifth day of the month following the month of production as well as joint venture receivables from partners with whom we conduct joint operations. Accounts payable and accrued liabilities consist of payments owing for capital, operating and general and administrative activities. Capital intensive periods will tend to create situations of a working capital deficiency and vice versa. We constantly monitor our working capital position in conjunction with our undrawn bank credit lines. Following the final property disposition which closed on January 14, 2008, the Company was left with a positive cash and short term investments of $70.0 million. This in addition to a reduced capital program relative to the funds flow generated by the Company for the year to date resulted in a positive net debt position at June 30, 2008 of $69.1 million. We anticipate that the expected funds flow for the year and the undrawn banking facility will be more than adequate to fund the upcoming year's expected capital program and operating commitments and convertible debentures without requiring utilization of the undrawn credit facility. We will continue to monitor all aspects and make changes to our plans if required. Convertible Debentures On June 25, 2007, the Company issued $70 million of convertible unsecured subordinated debentures which mature on June 30, 2012 and bear interest at 4.75% (the "Debentures"). The interest is payable semi-annually in arrears on June 30 and December 31 each year. Each debenture can be converted into common shares of the Corporation at the option of the holder at any time prior to the close of business on June 29, 2012 at a conversion price of $10.00 per common share. The Debentures are not redeemable by the Corporation prior to June 30, 2010. On or after June 30, 2010 and prior to June 30, 2012, the Debentures may be redeemed at the option of the Corporation, in whole or in part at a redemption price equal to 100% of the principal amount of the Debentures to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date provided that the Current Market Price (as defined in the Short Form Prospectus filed in conjunction with the offering) is at least 125% of the Conversion Price. The Debentures are classified as debt and equity with the equity portion representing the fair value of the conversion feature of the Debentures. As the Debentures are converted, a portion of the debt and equity amounts are transferred to share capital. The debt balance accretes over the life of the Debentures using the effective interest rate method to the amount owing on maturity and the increases in the debt balance are reflected as non-cash interest expense in the consolidated statement of cash flows. The Debentures are designated as Other Liabilities and the transaction costs associated with the issuance of the Debentures are netted against the carrying value of the Debentures and are accreted over the life of the Debentures using the effective interest rate method. During the first quarter of 2008, the Board of Directors had resolved to make a formal offer to acquire all of the outstanding Debentures at a price of $950 per $1,000 Debenture. Debenture holders were not entitled to receive accrued and unpaid interest on the debentures which is due on June 30, 2008. The offer was mailed on April 29, 2008 and was open to acceptance until June 4, 2008 2:00 pm Eastern Daylight time. The offer was subject to a minimum tender of 90% of the outstanding Debentures and other customary conditions. Less than 41% of the votes from bondholders had voted in favor of the offer. As 90% of the votes were not received the Board of Directors decided to formally withdraw the offer to acquire all of the outstanding Debentures on June 4, 2008. Share Capital Six months ended Year ended June 30, December 31, 2008 2007 ------------------------------------------------------------------------- Weighted average shares outstanding Basic 58,477,869 57,469,293 Options and warrants(1) - - ------------------------------------------------------------------------- Diluted 58,477,869 57,469,293 Common shares outstanding at period end ------------------------------------------------------------------------- Basic 58,948,879 57,839,731 Options and warrants 4,017,370 7,766,452 ------------------------------------------------------------------------- Diluted 62,966,249 65,606,183 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Anti-dilutive incremental options and warrants in the amount of 176,983 for the six months ended June 30 2008 and 808,142 for the twelve months ended December 31, 2007 are excluded from the weighted average diluted shares outstanding. As at August 12, 2008, Cadence had approximately 59,004,273 shares outstanding, reflecting the cancellation of 468,535 common shares following the normal course issuer bid repurchases and the issuance of 1,633,077 common shares due to warrants exercised to date. Normal Course Issuer Bid In January, 2008 the Company announced its intention to initiate a normal course issuer bid ("NCIB") to repurchase up to 5,339,424 of its issued and outstanding common shares (representing approximately 10 percent of the 58,184,217 outstanding common shares as of January 15, 2008, net of 4,789,977 common shares held by insiders) through the facilities of the Toronto Stock Exchange ("TSX"). The bid commenced on January 18, 2008 and will terminate on January 17, 2009 or such earlier time as the bid is completed or terminated at the option of Cadence. 468,535 shares have been purchased up to June 30, 2008 at an average cost of $4.04. Following the original plan of arrangement proposed by Daylight, we suspended our purchases under the normal course issuer bid and no further purchases under the normal course issuer bid have been made to date. CAPITAL EXPENDITURES During the first half of 2008, we incurred $30.9 million in net capital expenditures itemized as follows: Three months ended Six months ended June 30 June 30 ($000s) 2008 2007 2008 2007 ------------------------------------------------------------------------- Land 409 737 966 1,240 Geological and geophysical 56 1,042 429 1,722 Drilling and completions 4,575 8,110 19,745 30,676 Facilities and equipment 5,269 8,843 8,759 13,894 Office and corporate costs 157 171 213 2,147 Capitalized general and administrative costs 365 471 801 742 ------------------------------------------------------------------------- Total exploration and development 10,831 19,374 30,913 50,421 ------------------------------------------------------------------------- Transaction costs - repositioning process - 0 2,458 0 Property acquisitions and dispositions (2,719) 30,744 (172,536) 30,744 ------------------------------------------------------------------------- Total capital expenditures 8,112 50,118 (139,165) 81,165 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net capital expenditures in the second half of 2008 were $30.9 million excluding property dispositions net of transaction costs of $170.1 million. Cadence's capital program was reduced in the second quarter of 2008 following the proposed business combination with Daylight announced in May of 2008. The $30.9 million capital program included drilling nine well events which resulted in one cased gas well, six cased oil wells, one salt water disposal well, and one dry hole (89 percent success). One gas well and one oil well were drilled and completed in our Peace River arch area. Three oil wells and one salt water disposal well were drilled and completed in our Sturgeon area and three wells were entered and recompleted in our Sturgeon area. This amounted to $19.7 million in drilling and completion expenditures for the year to date. Related equipping costs and facility costs amounted to $8.7 million. $1.0 million was also spent on land resulting in an undeveloped land position to 50,126 net undeveloped acres at June 30, 2008. $0.4 million was spent on seismic mainly in the Narrows area. A minor property disposition in our non core Peace River Arch area was closed in the quarter for proceeds of $2.2 million. CONTRACTUAL OBLIGATIONS On February 16, 2007, we issued 2,250,000 flow-through common shares for proceeds of $19.4 million before issue costs of $1.0 million which will require the Company to incur $19.4 million of flow-through share eligible CEE, as defined in the Canadian Income Tax Act, by December 31, 2008. As of June 30, 2008 the Company estimates approximately $18.7 million in qualifying CEE expenditures related to this flow-through share commitment have been incurred. We have also executed separate contracts with two large drilling contractors for the exclusive use of two specific drilling rigs. One contract is a three year contract which commenced in December of 2006 and requires us to utilize the rig for a minimum of 225 days per year. If not utilized we are obligated to pay a minimum $5,800 rate per day. A second drilling contract (which was for two years, commenced June 1, 2007 and required Cadence to utilize the rig for a minimum of 225 days per year for two years with a minimum rate per day of $4,785) was terminated on March 11, 2008 and replaced with a new service rig contract. The new contract commenced on June 1, 2008 and requires us to utilize the rig for a total of 7,200 hours at a rate of $645 per hour. There is no timeframe by which this rig capacity needs to be utilized. If we are unable to utilize the rig, a liability of $200 of per unutilizable hour will result. Therefore the minimum payments under the service rig contract will be $1,440,000. During 2007, the Company signed a nine year office lease which commenced on February 15, 2008. Average annual payments under the lease will be $1.5 million. Cadence has entered into a sub-lease on this nine year office lease starting July 1, 2008. Average annual payments to Cadence under this sublease will average $1.4 million per year for the period July 1, 2008 through to June 30, 2011 and $1.45 million for the period July 1, 2011 through to September 27, 2016. Cadence has also fixed the price on approximately seventy percent of its electricity requirements for a period which commenced on February 1, 2006 and which ends on December 31, 2008. Following are the future minimum payments required under these drilling, office and electrical contracts; net of any prepayments: Office Drilling lease Electrical ($000s) contracts (net) Contract ------------------------------------------------------------------------- 2008 $ 833 $ 311 $ 1,004 2009 $ 1,196 $ 81 $ - 2010-2016 $ - $ 400 $ - Indeterminate $ 1,357 $ - $ - ------------------------------------------------------------------------- Total $ 3,386 $ 792 $ 1,004 ------------------------------------------------------------------------- The Company has other commitments and guarantees in the normal course of business which are not material, and are therefore not disclosed here. RISK MANAGEMENT AND HEDGING We have entered into financial and physical derivative contracts as outlined in note 11 to the consolidated financial statements. These positions were undertaken in order to secure pricing on a portion of our future production and to protect against fluctuations in future commodity prices. We have not designated any of these financial derivative contracts as hedges and they have therefore been recorded on the balance sheet as assets or liabilities with changes in their fair value recorded in net earnings for the applicable periods. As an alternative presentation, if Cadence had locked in the volumes currently hedged at the June 30, 2008 strip pricing for both crude oil and natural gas, over the term of those hedges, Cadence would actually realize a net $24.7 million cash loss over the term of the hedges from the oil and natural gas contracts in place. The financial and physical derivative contracts entered into up to and including August 12, 2008 and as listed in note 11 to the Consolidated Financial Statements result in the following downside price protection and ceiling prices on future production: 2008 2009 ------------------------------------------------------- Q2 Q3 Q4 Q1 Q2 Q3 Q4 ------------------------------------------------------------------------- Natural Gas Volume (GJ/day) 2,000 2,000 674 - - - - Floor price (AECO CDN $/GJ) 7.63 7.63 7.63 - - - - Ceiling price (AECO CDN $/GJ) 8.23 8.23 8.23 - - - - ------------------------------------------------------------------------- Crude Oil Volume (bbls/day) 1,500 1,500 1,500 500 500 500 500 Floor price (WTI US$/bbl) 61.50 61.50 61.50 77.50 77.50 77.50 77.50 Ceiling Price (WTI US$/bbl) 78.88 78.88 78.88 103.95 103.95 103.95 103.95 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cadence entered into the 2008 crude oil financial derivative contracts in June 2007. NEW ACCOUNTING STANDARDS IN 2007 AND 2008 A) Capital Disclosures As of January 1, 2008 the Company adopted CICA Handbook section 1535, "Capital Disclosures", which requires entities to disclose their objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. B) Inventories As of January 1, 2008 the Company adopted CICA Handbook section 3031, "Inventories" which did not directly impact the Company's financial statements. C) Financial Instruments - Disclosures and Presentation As of January 1, 2008 the Company adopted CICA Handbook section 3862 - "Financial Instruments - Disclosures" which enhances the disclosure around a financial instrument's fair value and the qualitative and quantitative exposure risks around financial instruments. As of January 1, 2008 the Company also adopted CICA Handbook section 3863 - "Financial Instruments - Presentation" which addresses the required disclosures and presentation required for financial instruments. D) General Standards of Financial Statement Presentation The CICA has amended section 1400, "General Standards of Financial Statement Presentation" effective for interim periods beginning on or after January 1, 2008 to include requirements to assess and disclose the Company's ability to continue as a going concern. The adoption of this new section will not have an impact on the financial statements. ACCOUNTING PRONOUNCEMENTS A) Goodwill and Intangible Assets and Research and Development Costs In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Section 3064, "Goodwill and Intangible Assets", replacing Section 3062, "Goodwill and Other Intangible Assets" and Section 3450, Research and Development costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements. The Company does not expect that the adoption of this new Section will have a material impact on its consolidated financial statements. B) Future Accounting Changes On February 13, 2008, Canada's Accounting Standard Board confirmed January 1, 2011 as the effective date for complete convergence of Canadian GAAP to International Financial Reporting Standards ("IFRS"). The Canadian Securities Administrators are in the process of examining changes to securities rules as a result of the initiative. The Company will continue to monitor and assess the impact of the planned convergence of Canadian GAAP with IFRS. RELATED PARTY TRANSACTIONS During 2007 and through to May 2008, Cadence conducted business with a company controlled by a former director of Cadence. These transactions for drilling services were made under normal business terms and conditions at the same rates as with non-related parties. Capital additions to property plant and equipment in the amount of $857,000 were conducted in 2007. There were no amounts incurred or outstanding at June 30, 2008. RISK AND UNCERTAINTY Please refer to the Management's Discussion and Analysis for the year ended 2007 for a discussion of risks and uncertainties Cadence faces. The following developments have been added as items of risk and uncertainty in addition to those stated in the Management's Discussion and Analysis for the year ended December 31, 2007. CRITICAL ESTIMATES Management is required to make judgments and use estimates in the application of generally accepted accounting principals that have a significant impact on the financial results of Cadence. Please refer to the Management's Discussion and Analysis for the year ended 2007 for a discussion outlining these accounting policies and practices which are critical in determining Cadence's financial results. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING There are no changes to the disclosure controls and procedures and internal controls over financial reporting from those disclosed in the Management's Discussion and Analysis for the year ended December 31, 2007. OUTLOOK We believe the Barrick acquisition to be very good for the shareholders of both Cadence and Barrick alike as it delivers near term monetization for Cadence shareholders and provides an exceptional predominately crude oil platform for assisting with Barrick's initiative to manage rising energy costs. As our Company proceeds to work in conjunction with Barrick on its forward plans, we have altered and in some cases curtailed our capital program pending the closing of the Barrick transaction. As we recommend that Cadence shareholders approve the Barrick offer that is scheduled to close on September 4, 2008, on behalf of the Cadence Board and Management, I would like to express my sincere thanks to all of our stakeholders and shareholders for your interest and support of Cadence Energy Inc. (formerly Kereco Energy Ltd.). On behalf of the Board of Directors, Grant B. Fagerheim President and Chief Executive Officer August 12, 2008 CONSOLIDATED BALANCE SHEETS As at As at June 30, December 31, ($000s) (unaudited) 2008 2007 ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents (Note 5) $ 64,941 $ - Accounts receivable 25,860 39,173 Prepaid expenses 4,583 4,092 Future income taxes (Note 7) $ 5,732 $ 2,486 ------------------------------------------------------------------------- 101,116 45,751 Property, plant and equipment, net (Note 4) 427,226 591,918 Future income taxes (Note 7) $ 2,098 $ - ------------------------------------------------------------------------- Deferred charge (Note 4) - 2,130 ------------------------------------------------------------------------- Total assets $ 530,440 $ 639,799 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current Accounts payable and accrued liabilities $ 26,259 $ 48,227 Bank debt (Note 5) - 80,193 Advance payment for property disposition (Note 4) - 17,000 Financial derivative contracts (Note 11) 19,432 8,477 ------------------------------------------------------------------------- 45,691 153,897 ------------------------------------------------------------------------- Asset retirement obligation (Note 8) 11,058 13,827 Convertible debentures (Note 6) 55,192 53,600 Financial derivative contracts (Note 11) 7,111 - Future income taxes (Note 7) 35,690 30,824 ------------------------------------------------------------------------- 109,051 98,251 ------------------------------------------------------------------------- Total liabilities 154,742 252,148 ------------------------------------------------------------------------- Commitments and guarantees (Note 12) Contingencies (Note 13) SHAREHOLDERS' EQUITY Share capital (Note 9) 449,115 451,110 Contributed surplus (Note 9) 10,580 10,204 Convertible debentures (Note 6) 15,704 15,704 Retained earnings (deficit) (99,701) (89,367) ------------------------------------------------------------------------- Total shareholders' equity 375,698 387,651 ------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 530,440 $ 639,799 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes form an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF EARNINGS (LOSS), COMPREHENSIVE INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT) Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000s, except per share amounts) (unaudited) 2008 2007 2008 2007 ------------------------------------------------------------------------- REVENUE Petroleum and natural gas sales $ 33,226 49,522 $ 62,335 92,557 Royalties 6,769 11,471 13,218 20,356 Interest Income 512 - 1,038 - ------------------------------------------------------------------------- 26,969 38,051 50,155 72,201 ------------------------------------------------------------------------- EXPENSES Operating 2,866 9,909 7,736 18,340 Transportation 462 1,033 1,032 2,152 General and administrative 2,287 1,431 3,594 2,521 Interest and bank charges (Notes 5 1,637 3,230 3,472 5,799 & 6) Loss on financial derivatives (Note 11) 22,515 (2,741) 27,109 1,475 Depletion, depreciation and accretion (Notes 4 10,607 21,905 22,758 41,278 & 8) Stock-based compensation expense (Note 9) 276 1,313 218 2,270 ------------------------------------------------------------------------- 40,650 36,080 65,919 73,835 ------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (13,681) 1,971 (15,764) (1,634) ------------------------------------------------------------------------- INCOME TAXES (Note 7) Future income tax recovery (3,616) (882) (5,430) (2,553) Current tax expense - 306 - 306 ------------------------------------------------------------------------- (3,616) (576) (5,430) (2,247) ------------------------------------------------------------------------- NET EARNINGS (LOSS) (10,065) 2,547 (10,334) 613 ------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME - - - - ------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) (10,065) 2,547 (10,334) 613 ------------------------------------------------------------------------- Retained earnings (deficit), beginning of period (89,636) 35,112 (89,367) 37,046 Retained earnings (deficit), end of period $ (99,701) 37,659 $ (99,701) 37,659 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE (Note 9) Basic $ (0.17) 0.04 $ (0.18) 0.01 Diluted $ (0.17) 0.04 $ (0.18) 0.01 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes form an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000s) (unaudited) 2008 2007 2008 2007 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings (loss) $ (10,065) 2,547 $ (10,334) 613 Add items not requiring cash: Depletion, depreciation and accretion 10,607 21,905 22,758 41,278 Future income tax recovery (3,616) (882) (5,430) (2,553) Unrealized loss (gain) on financial derivatives 16,102 (2,665) 18,066 2,555 Employee common share benefit plan expense (Note 9) 29 29 58 58 Non-cash interest expense on convertible debentures (Note 6) 796 52 1,592 52 Stock-based compensation expense (Note 9) 276 1,313 218 2,270 ------------------------------------------------------------------------- 14,129 22,299 26,928 44,273 Change in non- cash working capital (Note 10) (3,838) 6,392 (12,128) 9,511 ------------------------------------------------------------------------- Cash provided by operating activities 10,291 28,691 14,800 53,784 ------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of convertible debentures - net of issue costs (Note 6) - 67,475 - 67,475 Issuance of common shares, net of share issue costs (Note 9) 2,053 115 4,951 18,929 Repurchase of common shares (Note 9) (619) - (1,893) Bank debt (Note 5) - (27,684) (80,193) (36,781) Change in non- cash working capital (Note 10) (33) (153) 106 320 ------------------------------------------------------------------------- Cash provided by (used in) financing activities 1,401 39,753 (77,029) 49,943 ------------------------------------------------------------------------- CASH AVAILABLE FOR INVESTING ACTIVITES 11,692 68,444 (62,229) 103,727 ------------------------------------------------------------------------- INVESTING ACTIVITIES Petroleum and natural gas expenditures (10,831) (19,374) (30,913) (50,421) Property dispositions net of transaction costs (Note 4) 2,719 5,860 170,078 5,860 Property acquisitions - (36,604) - (36,604) Business combination - (71) - (484) Change in non- cash working capital (Note 10) (8,681) (18,255) (11,995) (22,078) ------------------------------------------------------------------------- Cash provided by (used in) investing activities (16,793) (68,444) 127,170 (103,727) ------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS (5,101) - 64,941 - ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 70,042 - - - CASH AND CASH EQUIVALENTS, END OF YEAR $ 64,941 - $ 64,941 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes form an integral part of these consolidated financial statements. Notes to the Consolidated Financial Statements Three and six months ended June 30, 2008 and 2007 (Unless otherwise stated, tabular amounts presented in these notes are in thousands of Canadian dollars.) (unaudited) 1. BASIS OF PRESENTATION On May 14, 2008 Kereco Energy Ltd. formally changed its name to Cadence Energy Inc. The unaudited interim consolidated financial statements of Cadence Energy Inc. (the "Company" or "Cadence") have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and are consistent with the presentation and disclosure in the audited consolidated financial statements and notes thereto for the year ended December 31, 2007 except for the changes described in note 2. "Changes in Accounting Policies". The unaudited interim consolidated financial statements do not conform in all respects to the requirements of GAAP for annual financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007. 2. CHANGES IN ACCOUNTING POLICIES A) Capital Disclosures As of January 1, 2008 the Company adopted the Canadian Institute of Chartered Accountants ("CICA") CICA Handbook Section 1535, "Capital Disclosures", which requires entities to disclose their objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. The adoption of this standard resulted in increased disclosure in the notes to the consolidated financial statements. B) Inventories As of January 1, 2008 the Company adopted CICA Handbook Section 3031, "Inventories" which had no impact on the Company's financial statements. C) Financial Instruments - Disclosures and Presentation As of January 1, 2008 the Company adopted CICA Handbook Section 3862 "Financial Instruments - Disclosures" which enhances the disclosure around a financial instrument's fair value and the qualitative and quantitative exposure risks around financial instruments. As of January 1, 2008 the Company also adopted CICA Handbook Section 3863 "Financial Instruments - Presentation" which addresses the required disclosures and presentation required for financial instruments. The adoption of this standard resulted in increased disclosure in the notes to the consolidated financial statements. D) General Standards of Financial Statement Presentation The CICA has amended Section 1400, "General Standards of Financial Statement Presentation" effective for interim periods beginning on or after January 1, 2008 to include requirements to assess and disclose an entity's ability to continue as a going concern. The adoption of this new section does not have an impact on the financial statements. 3. NEW ACCOUNTING PRONOUNCEMENTS A) Goodwill and Intangible Assets and Research and Development Costs In February 2008, the CICA issued Section 3064, "Goodwill and Intangible Assets", replacing Section 3062, "Goodwill and Other Intangible Assets" and Section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1, 2009. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements. The Company does not expect that the adoption of this new Section will have a material impact on its consolidated financial statements. B) Future Accounting Changes On February 13, 2008, Canada's Accounting Standard Board confirmed January 1, 2011 as the effective date for complete convergence of Canadian GAAP to International Financial Reporting Standards ("IFRS"). The Canadian Securities Administrators are in the process of examining changes to securities rules as a result of the initiative. The Company will continue to monitor and assess the impact of the planned convergence of Canadian GAAP with IFRS. 4. PROPERTY, PLANT AND EQUIPMENT (000's) As at June 30, 2008 --------------------------------------------------------------------- Accumulated Depletion, and Net Book Cost Depreciation Value Petroleum and natural gas properties $ 591,902 $ 167,228 $ 424,674 Office equipment & corporate 3,472 920 $ 2,552 --------------------------------------------------------------------- Total $ 595,374 $ 168,148 $ 427,226 --------------------------------------------------------------------- --------------------------------------------------------------------- (000's) As at December 31, 2007 --------------------------------------------------------------------- Accumulated Depletion, and Net Book Cost Depreciation Value Petroleum and natural gas properties $ 734,411 $ 145,094 $ 589,317 Office equipment & corporate 3,282 681 $ 2,601 --------------------------------------------------------------------- Total $ 737,693 $ 145,775 $ 591,918 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company capitalized $0.8 million of indirect general and administrative overhead for the six months ended 2008 and $0.4 million for the second quarter of 2008. (June 30, 2007 - $0.7 million for the six months ended 2007 and $0.4 million for the second quarter of 2007). $6.2 million of undeveloped land was excluded from the depletion calculation (June 30, 2007- $51.0 million). i) Property Disposition and repositioning process On January 14, 2008 the Company completed the last sale of assets related to the corporate repositioning process it had embarked upon on July 18, 2007 for proceeds of $170.3 million net of adjustments. This includes the original proceeds of $166.8 net of adjustments at closing on January 14, 2008 in addition to $3.5 million in adjustments at the end of June 30, 2008. The Company received an advance payment in the amount of $17.0 million in December 2007 related to this repositioning process which was closed in January 2008. This repositioning process also resulted in the recording of deferred charges in the amount of $2.1 million recorded in December 2007 which were capitalized to transaction costs in the first quarter of 2008. An additional $0.3 million in transaction costs were recognized in the first quarter of 2008 related to the repositioning process. 5. BANK DEBT, CASH AND CASH EQUIVALENTS At June 30, 2008 the Company had in place a syndicated committed credit facility, in the amount of $100 million, with two major Canadian Chartered Banks and the Canadian branch of a major international bank. Interest on this facility is charged at monthly rates and borrowings can be made in Canadian or U.S. dollars. Borrowings can also be made by way of prime rate advances or Banker's Acceptances which attract interest at increments to prime based on the Company's debt/cash flow ratio, calculated utilizing the two most recent fiscal quarters. The Company has provided a $500 million demand fixed and floating charge debenture as collateral for the facility. As at June 30, 2008, this banking facility was undrawn. (December 31, 2007, $80.2 million). In January 2008 the entire amount of the outstanding balance was repaid in full, which resulted in the classification of the outstanding amount on the balance sheet as a current liability at December 31, 2007. At June 30, 2008 the Company was in a positive cash position with $65 million invested in one month Banker's Acceptances earning 3.01% interest. In April 2008 the credit facility was renewed at $100 million for another annual period under similar terms and conditions. 6. CONVERTIBLE DEBENTURES On June 25, 2007, the Company issued $70 million of convertible unsecured subordinated debentures which mature on June 30, 2012 and bear interest at 4.75% (the "Debentures"). The interest is payable semi-annually in arrears on June 30 and December 31 each year. Each debenture can be converted into common shares of the Corporation at the option of the holder at any time prior to the close of business on June 29, 2012 at a conversion price of $10.00 per common share. The Debentures are not redeemable by the Corporation prior to June 30, 2010. On or after June 30, 2010 and prior to June 30, 2012, the Debentures may be redeemed at the option of the Corporation, in whole or in part at a redemption price equal to 100% of the principal amount of the Debentures to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date provided that the Current Market Price (as defined in the Short Form Prospectus filed in conjunction with the offering) is at least 125% of the Conversion Price. The Debentures are classified as debt and equity with the equity portion representing the fair value of the conversion feature of the Debentures. As the Debentures are converted, a portion of the debt and equity amounts are transferred to share capital. The debt balance accretes over the life of the Debentures using the effective interest rate method to the amount owing on maturity and the increases in the debt balance are reflected as non-cash interest expense in the consolidated statement of cash flows. The debentures are designated as Other Liabilities and the transaction costs associated with the issuance of the debentures are netted against the carrying value of the debentures and are accreted over the life of the debentures using the effective interest rate method. Following is a reconciliation of the debt and equity components of the convertible debentures: Convertible debentures - debt Issued on June 25, 2007 $ 70,000 Transaction fees and costs (2,525) Portion allocated to equity - inclusive of transaction costs (15,519) Accretion (non cash interest expense) 1,644 --------------------------------------------------------------------- Debt balance as at December 31, 2007 $ 53,600 --------------------------------------------------------------------- Accretion (non cash interest expense) 1,592 --------------------------------------------------------------------- Debt balance as at June 30, 2008 $ 55,192 --------------------------------------------------------------------- Convertible debentures - equity Issued on June 25, 2007 $ 15,519 Tax effect of transaction fees and costs 185 Conversion of debentures - --------------------------------------------------------------------- Equity balance as at December 31, 2007 and June 30, 2008 $ 15,704 --------------------------------------------------------------------- During the first quarter of 2008, the Board of Directors had resolved to make a formal offer to acquire all of the outstanding Debentures at a price of $950 per $1,000 Debenture. Debenture holders were not entitled to receive accrued and unpaid interest on the debentures which is due on June 30, 2008. The offer was mailed on April 29, 2008 and was open to acceptance until June 4, 2008 2:00 pm Eastern Daylight time. The offer was subject to a minimum tender of 90% of the outstanding Debentures and other customary conditions. Less than 41% of the votes from bondholders voted in favor of the offer. As the minimum 90% of the votes were not received the Board of Directors decided to formally withdraw the offer. 7. INCOME TAXES Total future income tax recovered at June 30, 2008 for the year to date was $ 5.4 million and $3.6 million for the second quarter of 2008. Total income tax recovered at June 30, 2007 for the year to date was $ 2.2 million ($2.5 million of future income tax recovery and $0.3 million of current tax expense) and $0.6 million ($0.9 million of future income tax recovery and $0.3 million of current tax expense) for the second quarter of 2007. This results in an effective tax rate of 34 percent year to date in 2008 (2007 - 138 percent), which is largely influenced by a portion of the convertible debenture interest expense that is non deductible as well as rate differences between the statutory rate and Cadence's effective rate and adjustments to actual tax pool balances with the filing of year end 2007 tax returns. At June 30, 2008, the Company had the following estimated tax pools and non-capital losses that can be used to offset otherwise taxable income in future periods: As at As at June 30, December 31, (millions) 2008 2007 --------------------------------------------------------------------- Canadian oil and gas property expense ("COGPE") 58.0 219.4 Canadian development expense ("CDE") 85.0 105.2 Canadian exploration expense ("CEE") 23.4 29.8 Undepreciated capital costs ("UCC") 62.4 101.9 Non-capital losses carried forward 48.5 31.9 --------------------------------------------------------------------- Total pools and losses 277.3 488.2 The reduction in pools from the December 31, 2007 reflects the $170.1 million in property dispositions, net of transaction costs, and the distribution of the Kereco partnership income of February 1, 2007 to January 31, 2008 in the year. The remaining non-capital losses, after deductions taken to date, amount to $48.5 million and expire as follows: Year of expiry ($millions) --------------------------------------------------------------------- 2010 12.9 2014 4.8 2028 30.8 --------------------------------------------------------------------- 48.5 --------------------------------------------------------------------- --------------------------------------------------------------------- In addition to the above losses and tax pools, the Company also has accumulated capital losses of approximately $21.5 million, (2007 - $21.5 million). On February 16, 2007, the Company issued 2,250,000 flow-through common shares for proceeds of $19.4 million before issue costs of $1.0 million which will require the Company to incur $19.4 million of flow-through share eligible Canadian Exploration Expenditures, as defined in the Canadian Income Tax Act, by December 31, 2008. The Company estimates approximately $18.7 million in qualifying flow- through commitment has been incurred as of June 30, 2008. As of June 30, 2008 the $19.4 million had been renounced to shareholders and the related tax impact of $5.0 has been recorded as a reduction to share capital. 8. ASSET RETIREMENT OBLIGATION The Company has recorded an asset retirement obligation associated with the present value of the estimated future costs to abandon its petroleum and natural gas properties. To determine this obligation, the Company used an inflation rate of two percent and a credit- adjusted risk-free interest rate of seven percent to discount the future estimated cash flows of $42.1 million (December 31, 2007: $50.9 million), which will be paid over a period ranging from two to forty-five years with the majority of costs being incurred between 12 and 16 years. The June 30, 2008 asset retirement obligation is comprised of the following: Balance at December 31, 2007 $ 13,827 --------------------------------------------------------------------- New liabilities added 231 Changes in estimates 59 Accretion of asset retirement obligation 385 Disposition of liabilities (3,444) --------------------------------------------------------------------- Balance at June 30, 2008 $ 11,058 --------------------------------------------------------------------- 9. SHARE CAPITAL i) Issued and Outstanding Common Shares Common Shares Amount Balance at the end of December 31, 2007 57,839,731 $ 451,110 --------------------------------------------------------------------- Exercise of warrants 928,804 2,898 Tax effect of flow through shares - (4,952) Adjustment to share capital for warrants exercised - 892 Shares repurchased through normal course issuer bid (322,700) (2,529) Amortization of common shares held for employee benefit plan - 29 --------------------------------------------------------------------- Balance at the end of March 31, 2008 58,445,835 $ 447,448 --------------------------------------------------------------------- Exercise of warrants 648,879 2,053 Adjustment to share capital for warrants exercised - 597 Shares repurchased through normal course issuer bid (145,835) (1,012) Amortization of common shares held for employee benefit plan - 29 --------------------------------------------------------------------- Balance at the end of June 30, 2008 58,948,879 $ 449,115 --------------------------------------------------------------------- ii) Normal Course Issuer Bid In January, 2008 the Company announced its intention to initiate a normal course issuer bid ("NCIB") to repurchase up to 5,339,424 of its issued and outstanding common shares (representing approximately 10 percent of the 58,184,217 outstanding common shares as of January 15, 2008, net of 4,789,977 common shares held by insiders) through the facilities of the Toronto Stock Exchange ("TSX"). The bid commenced on January 18, 2008 and will terminate on January 17, 2009 or such earlier time as the bid is completed or terminated at the option of Cadence. 468,535 shares have been purchased up to June 30, 2008 at an average cost of $4.04. No further purchases under the normal course issuer bid have been made to date. iii) Flow-through Common Shares On February 16, 2007, the Company issued 2,250,000 flow-through common shares for proceeds of $19.4 million before issue costs of $1.0 million and the future tax impact and related reduction to share capital in the amount of $5.0 was recorded in the first quarter of 2008. iv) Share Purchase Warrants In conjunction with the private placement of non-voting shares to employees, officers and directors on January 18, 2005, each of the 2,507,692 common shares issued carried with them 0.83 share purchase warrants to purchase in the future one common share at a price of $3.12 per share. On issuance, the share purchase warrants were attributed a fair market value totaling $1.8 million that will be recognized as stock-based compensation expense over the vesting period of the warrants. The fair value of $0.96 for each warrant was determined as of the date they were issued using the Black-Scholes method with the following assumptions: risk free interest rate - 3.25 percent, expected life - 4 years and volatility - 33 percent and dividend yield - nil. No estimate has been made for forfeitures as they will be addressed when they occur. At June 30, 2008 a total of 55,395 of these warrants were outstanding which are all exercisable. In conjunction with the Chamaelo acquisition, 3,740,710 warrants held by previous officers, directors and employees of Chamaelo were converted at an exchange rate of 0.51 into 1,907,762 (1,820,175 are outstanding at June 30, 2008) warrants exercisable into Cadence common shares. The weighted average post conversion exercise price of these warrants is $10.37 per warrant. Exercise Contractual Warrants Number of Price Life Exercisable Expiry Date Warrants (000s) ($/share) (years) (000s) --------------------------------------------------------------------- January 18, 2009 56 3.12 0.6 56 May 26, 2009 251 4.12 0.9 251 June 21, 2010 1,569 11.37 2.0 1,569 --------------------------------------------------------------------- 1,876 10.16 1.8 1,876 --------------------------------------------------------------------- --------------------------------------------------------------------- v) Stock-Based Compensation The Company has a stock-based compensation plan under which options to purchase common shares of the Company have been granted to employees, officers and directors. Under the plan, all options awarded have a maximum term of five years, and vest over a three year period at a rate of one-third per year. At June 30, 2008 the plan has 5,894,887 shares reserved for issuance upon the exercise of options, of which 2,141,800 were granted as at June 30, 2008. Weighted Weighted Average Average Number Exercise Contractual Of Options Prices Life (000s) ($/share) (years) --------------------------------------------------------------------- Balance at December 31, 2007 4,307 6.85 3.9 Granted - - - Exercised - - - Expired or cancelled (2,165) 6.78 2.3 --------------------------------------------------------------------- Balance June 30, 2008 2,142 6.91 3.3 --------------------------------------------------------------------- --------------------------------------------------------------------- During 2007, the Company implemented a Stock Appreciation Rights ("SAR") plan under which rights were granted to officers of Cadence. Under the plan, all rights granted have a maximum term of five years, vest over a three year period at a rate of one-third per year and provide for settlement in cash. In late March 2007, 439,875 SARs were granted at a price of $5.79 and in June 2007 853,875 SARs were granted at a price of $5.73. 612,500 SARs were cancelled in the first half of 2008 as a result of the corporate repositioning process leaving 681,250 SARs outstanding at June 30, 2008 at an average price of $5.75. Compensation expense for options granted and share purchase warrants issued by the Company is based on the estimated fair values at the time of their grants and is recognized as expense over the vesting periods of the options and share purchase warrants. Compensation expense for SARs is calculated based upon the intrinsic value and is recognized as expense over the vesting periods of the SARs. The Company recognized $0.2 million and $0.3 million in non-cash stock-based compensation expense for the six months and three months ended 2008 compared to $2.3 million and $1.3 million for the six months and three months ended 2007 respectively with an equal amount recorded in contributed surplus. No expense was recognized as stock based compensation expense from the SARs. $1,489,000 was transferred out of contributed surplus to share capital for employee warrants which were exercised for the year to date in 2008. The fair value of each option and share purchase warrant has been determined as at each stock option grant date using a Black- Scholes model. For the options currently outstanding, the average terms used are: risk free interest rate - 2.56 percent, expected life - 4 years, and volatility - 21 percent. The weighted average fair value of the options outstanding is $2.31 per option. No estimate has been made for expected forfeitures as they are addressed when they occur. Additional details on the Company's stock options outstanding at June 30, 2008 are as follows: Weighted Weighted Range of Exercise Average Average Prices Number of Exercise Contractual Options ($/share) Options Price Life Exercisable (000s) ($/share) (years) (000s) --------------------------------------------------------------------- 3.84 - 5.73 1,367 5.53 3.9 438 5.90 - 7.24 174 6.38 3.7 46 8.93 - 9.80 294 9.57 1.60 294 10.50 - 11.20 307 10.83 1.88 290 --------------------------------------------------------------------- 3.84 - 11.20 2,142 6.91 3.3 1,068 --------------------------------------------------------------------- --------------------------------------------------------------------- vi) Employee Benefit Plan During 2005, the Company created an employee benefit plan under which Cadence common shares have and will from time to time be purchased on behalf of certain employees. These shares will be given to certain employees, on the basis of one third per year, over a period not exceeding three years. To date 23,950 common shares have been purchased for the plan at an average price of $14.67 per common share. Of the 23,950 common shares, 14,402 have been issued to certain employees by December 31, 2007 and 9,548 are being held in trust. The purchase of the shares is recorded as a reduction to shareholder's equity at the purchased value of the common shares of $0.4 million and will be amortized to general and administrative expense evenly over the three year vesting period. At June 30, 2008 $58,000 has been expensed and recorded to share capital (June 30, 2007: $58,000). vii) Adoption of a new share unit plan The Board of Directors had approved the conditional cancellation of the currently outstanding options to be replaced with the adoption of a new stock option plan. The Board of Directors has also approved the conditional adoption of a share unit plan. The cancellation of the current stock option plan was not approved at the Company's Annual General Meeting held on May 14, 2008. The adoption of a new share unit plan was approved at the Company's Annual General Meeting held on May 14, 2008, however no units have currently been offered under this share unit plan and no share units are outstanding. vi) Per Share Amounts The calculation of basic and diluted net earnings per share is based on the weighted average number of common shares outstanding as shown in the table below: Three months ended Six months ended June 30 June 30 2008 2007 2008 2007 --------------------------------------------------------------------- Net earnings (loss) $ (10,065) $ 2,547 $ (10,334) $ 613 Net loss per share Basic $ (0.17) $ 0.04 $ (0.18) $ 0.01 Diluted $ (0.17) $ 0.04 $ (0.18) $ 0.01 Weighted average shares outstanding Basic 58,417,527 57,774,838 58,477,869 57,143,506 Options and warrants(1) - 1,044,742 - 1,026,884 --------------------------------------------------------------------- Diluted 58,417,527 58,819,580 58,477,869 58,170,390 Common shares outstanding at period end --------------------------------------------------------------------- Basic 58,948,879 57,777,332 58,948,879 57,777,332 Options and warrants 4,017,370 8,268,850 4,017,370 8,268,850 --------------------------------------------------------------------- Diluted 62,966,249 66,046,182 62,966,249 66,046,182 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Anti-dilutive incremental options and warrants in the amount of 189,560 for the three months ended June 2008 and 176,983 for the six months ended June 30 2008 are excluded from the weighted average diluted shares outstanding. ix) Contributed Surplus Amount Balance at the end of December 31, 2007 $ 10,204 --------------------------------------------------------------------- Stock based compensation expense 333 Stock based compensation expenses - reversals from cancelled options (391) Warrants exercised (892) Shares repurchased through normal course issuer bid 1,255 --------------------------------------------------------------------- Balance at the end of March 31, 2008 $ 10,509 --------------------------------------------------------------------- Stock based compensation expense 276 Warrants exercised (597) Shares repurchased through normal course issuer bid 392 --------------------------------------------------------------------- Balance at the end of June 30, 2008 $ 10,580 --------------------------------------------------------------------- 10. SUPPLEMENTAL CASH FLOW INFORMATION i) Changes in Non-Cash Working Capital Three months ended Six months ended June 30 June 30 2008 2007 2008 2007 --------------------------------------------------------------------- Decrease (increase) in non-cash working capital: Accounts receivable (1,336) $ 10,362 13,312 $ 2,209 Prepaid expenses (727) (1,191) (491) 186 Advance payment for property disposition - (17,000) Deferred charge - 2,130 Accounts payable and accrued liabilities (10,489) (21,187) (21,968) (14,642) --------------------------------------------------------------------- Change in non-cash working capital (12,552) $ (12,016) (24,017) $ (12,247) --------------------------------------------------------------------- Relating to: Operating activities (3,838) 6,392 (12,128) 9,511 Financing activities (33) (153) 106 320 Investing activities (8,681) (18,255) (11,995) (22,078) --------------------------------------------------------------------- Change in non-cash working capital $ (12,552) $ (12,016) $ (24,017) $ (12,247) --------------------------------------------------------------------- --------------------------------------------------------------------- ii) Other Cash Flow Information Three months ended Six months ended June 30 June 30 2007 2007 --------------------------------------------------------------------- Cash taxes paid $ - $ - $ - $ - Cash interest paid $ 841 $ 2,980 $ 1,880 $ 5,549 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS The Company's financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, bank debt, convertible debentures and financial derivative contracts. These financial instruments are valued at their appropriate fair values and are assessed and managed to monitor and control their risk. All of these financial instruments are initially recorded at a carrying value which approximates their fair value. The fair values of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their carrying value due to the short terms to maturity. The Company's bank debt is determined using floating prime rates and therefore approximates its fair value. The financial derivative contracts are recorded each balance sheet date at their fair value using forward curve prices from the financial institutions with which the Company enters into the contracts. The convertible debentures are designated as other liabilities and are recorded at their initial fair values upon inception and subsequently carried at amortized cost. Following are the main financial risks that the Company faces with these financial instruments: Credit Risk Credit risk comes from the exposure the Company faces that counterparty to a financial asset will default on payment resulting in a loss to the Company. Credit risk primarily relates to the Company's sales receivables with third party marketers, account receivables from joint venture partners and as well as counterparties to any financial derivative contracts. The Company generally grants unsecured credit but routinely assesses the financial strength of its customers. The Company sells the majority of its production to large creditworthy petroleum marketers and all payments are made on the 25th day of the month following the month of production. The Company historically has not experienced any collection issues with its petroleum and natural gas marketers and intentionally uses several marketers in order to diversify this risk. Collection of these amounts is verified on the 25th day of each month. Financial derivative contracts are only entered into with credit worthy chartered banks. These payments or receipts are also distributed, at the latest, within the first week following the month of production. Collection of these amounts is verified on the 25th day of each month. Joint venture receivables are generated from conducting joint operating or capital operations with joint venture partners. Collections from these operations are usually paid within three months of the joint venture bill being issued to the partner. Circumstances can arise which extend the terms of collection beyond this period as specific items on these joint venture billings need to be resolved between partners. Smaller partners may be cash called to pay for their share of costs in advance of a project. The Company may also have the ability to take measures such as withholding production volumes as recourse for collections on receivables. The Company monitors receivables accounts and actively pursues collection and payment. If any accounts are considered impaired they will be charged to an allowance for doubtful accounts. In the second quarter of 2008 $0.1 million was expensed to bad debt expense. At June 30, 2008 no further allowance for doubtful accounts was recorded. The Company assesses quarterly if there has been any impairment of the financial assets of the Company. During the three and six month period ended June 30, 2008 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 not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The maximum exposure to credit risk is represented by the carrying amount on the balance sheet. There were joint venture account balances greater than 90 days old outstanding at June 30th 2008 in the amount of approximately $2.9 million. There are no material financial assets that the Company considers past due and at risk of collection. Liquidity Risk Liquidity risk entails the potential risk that the Company may not be able pay for its liabilities including accounts payable, bank debt or convertible debentures. The Company manages this risk by monitoring its cash position on an ongoing basis to ensure that it has the liquidity available to match all of its obligations. The Company is constantly updating its capital and operating forecasts to monitor its cash, working capital and net debt position. The credit facility in place with the banks as discussed in note 5 is also monitored quarterly to ensure that it is maintained within the parameters of the banking facility requirements. Following is a list of the liabilities at June 30, 2008 and their due dates: Current Within Within Within one 1-2 2-5 There- Total year Years Years after --------------------------------------------------------------------- Accounts payable and accrued liabilities 26,259 26,259 - - - --------------------------------------------------------------------- Derivative financial instruments 26,543 19,432 7,111 - - --------------------------------------------------------------------- Convertible debentures 70,000 - - 70,000 - --------------------------------------------------------------------- Total 122,802 45,691 7,111 70,000 - --------------------------------------------------------------------- --------------------------------------------------------------------- Market Risk Worldwide factors and local factors lead to market risk for the Company with aspects such as oil and natural gas commodity prices, interest rates, electrical prices and commodity prices. Changes in these factors will have an impact on the Company's valuation of financial instruments and it will also impact the debt levels of the Company as well as its earnings and funds flow from operations. Power Consumption price risk management The Company has entered into a fixed forward contract to assist in mitigating its exposure to price swings whereby approximately seventy percent of its electricity requirements are fixed to December 31, 2008. This power contract had a fair value gain of $462,000 at June 30, 2008. Following are the terms of the contract: --------------------------------------------------------------------- Period Volume Type Pricing terms --------------------------------------------------------------------- Electricity --------------------------------------------------------------------- Jan 1, 2008 - Dec 31, 2008 3.5 MW Fixed Price $65.50/MWh --------------------------------------------------------------------- Foreign Currency Exchange Risk The prices received by the Company for the production of crude oil, natural gas and natural gas liquids are primarily determined in reference to U.S. dollars but are settled with the Company in Canadian dollars. The Company's cash flow from commodity sales will therefore be impacted by fluctuations in foreign exchange rates. Foreign currency exchange rate risk is the risk that the funds flow or the fair value of financial instruments will fluctuate as a result of changes in foreign exchange rates. Sensitivities to foreign exchange rate risk are monitored by management through its ongoing forecasting and budgeting practices. The Company had no forward exchange rate contracts in place as at or during the three and six months ended June 30, 2008. Commodity Price Risk Most all the Company's revenue is from commodity sales. There is risk that the associated revenue streams of these commodities will impact related funds flows as well as the valuation of any commodity based financial derivative contracts. Sensitivities to commodity price risk are also monitored by management through its ongoing forecasting and budgeting practices and monthly mark to market statements. Commodity price risk is mitigated through the use of financial derivative sales contracts. The Company's contracts in place as of June 30, 2008 are as follows: Oil and Natural Gas Price Risk Management Period Volume Type Pricing terms(1) --------------------------------------------------------------------- Natural Gas July 1, 2008 - $7.25 - $8.45 Oct 31, 2008 1,000 GJ/day Financial Collar (AECO CDN$/GJ) July 1, 2008 - $8.01 Oct 31, 2008 1,000 GJ/day Fixed Collar (AECO CDN$/GJ) Crude Oil July 1, 2008 - $61.50 - $78.88 Dec 31, 2008 1,500 bbls/day Financial Collar (WTI US$/BBL) Jan 1, 2009 - $77.50 - $103.95 Dec 31, 2009 500 bbls/day Financial Collar (WTI US$/BBL) --------------------------------------------------------------------- (1) Collar price indicates minimum floor and maximum ceiling. These contracts have a fair value in the amount of a loss of $27,005,000 as of June 30, 2008. Interest Rate Risk Interest rate risk is the risk that future funds flows will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate fluctuation on its bank debt which bears a floating rate of interest based upon prime lending rates. The Company is also exposed to interest rate fluctuations on its cash balances which interest income is based upon. The Company had no interest rate swap or financial contracts in place as at or during the three and six months ended June 30, 2008. Sensitivity Analysis The following table illustrates the estimated impact that would have resulted, for the six months ended June 30, 2008, to net earnings before tax from changes to commodity prices, interest rates, and electrical prices as specified from our financial instruments. Management uses increments of these percentage or dollar amount changes internally when assessing and reporting on risk as an assessment of risk from the reasonably possible changes in these risk factors. Following is the increase (decrease) in net earnings before tax at June 30, 2008: --------------------------------------------------------------------- ($000s) Six months ended June 30 2008 --------------------------------------------------------------------- $0.10/GJ increase in AECO price (24) --------------------------------------------------------------------- $0.10/GJ decrease in AECO price 24 --------------------------------------------------------------------- $1.00 increase in WTI oil prices (432) --------------------------------------------------------------------- $1.00 weakening in WTI oil prices 432 --------------------------------------------------------------------- 1.0 % increase in interest rates 325 --------------------------------------------------------------------- 1.0 % decrease in interest rates (325) --------------------------------------------------------------------- $1.00 increase in the electricity price per mwh 155 --------------------------------------------------------------------- $1.00 decrease in the electricity price per mwh (155) --------------------------------------------------------------------- --------------------------------------------------------------------- Capital Management The Company sets appropriate growth targets through investment in operating and capital projects with the aim of providing value added growth for shareholders. These objectives are pursued within the context of a flexible capital structure. The Company's capital structure is comprised of shareholder's equity, bank debt, convertible debentures, cash and cash equivalents and working capital. Consideration will be given to raising equity, buying back shares, and adjusting its operating or capital expenditure programs to manage its debt position. A key measure that the Company constantly monitors its overall net debt and the ratio of its net debt to funds flow from operations. Net debt and Funds Flow from operations are non GAAP financial measures which are determined as follows: Funds flow from operations, which is determined as cash provided by operating activities before changes in non-cash working capital, is used by us as a key measure of performance. Funds flow from operations does not have a standardized meaning prescribed by Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable with the calculation of similar measures for other companies. Net debt, which is determined as bank debt and working capital (comprised of cash and cash equivalents, accounts receivable, prepaid expenses and accounts payable and accrued liabilities) is used by management us as a key indicator of the financial position of the Company. Net debt does not have a standardized meaning prescribed by Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable with the calculation of similar measures for other companies. The Company maintains an adequate capital structure to ensure it can meet all future expenditures and to provide flexibility for its forthcoming capital and operational programs The bank facility is based upon the net present value of petroleum reserves which are assessed twice annually, the most recent having been as of December 31, 2007. As at June 30, 2008 the Company is in a position of having a positive cash balance and an undrawn bank facility of $100,000,000. Management has an internal target of maintaining a net debt to annualized funds flow from operations ratio of under 1:5 - 1:0. The Company has met this ratio given the Company has at June 30, 2008, no debt, excluding the convertible debentures, and a positive cash and cash equivalent balance of $65.0 million. At June 30, 2008 this ratio is nil. 12. COMMITMENTS AND GUARANTEES On February 16, 2007, the Company issued 2,250,000 flow-through common shares for proceeds of $19.4 million before issue costs of $1.0 million which will require Cadence to incur $19.4 million of flow-through share eligible CEE, as defined in the Canadian Income Tax Act, by December 31, 2008. As of June 30, 2008 the Company estimates approximately $18.7 million in qualifying CEE expenditures related to this flow-through share commitment have been incurred. The Company also executed separate contracts with two large drilling contractors for the exclusive use of two specific drilling rigs. One contract is a three year contract which commenced in December of 2006 and requires us to utilize the rig for a minimum of 225 days per year. If not utilized we are obligated to pay a minimum $5,800 rate per day. A second drilling contract (which was for two years, commenced June 1, 2007 and required Cadence to utilize the rig for a minimum of 225 days per year for two years with a minimum rate per day of $4,785) was terminated on March 11, 2008 and replaced with a new service rig contract. The new contract commenced on June 1, 2008 and requires us to utilize the rig for a total of 7,200 hours at a rate of $645 per hour. There is no timeframe by which this rig capacity needs to be utilized by. If we are unable to utilize the rig, a liability of $200 of per unutilizable hour will result. Therefore the minimum payments under the service rig contract will be $1,440,000. During 2007, the Company signed a nine year office lease which commenced on February 15, 2008. Average annual payments under the lease will be $1.5 million. Cadence has entered into a sub-lease on this nine year office lease starting July 1, 2008. Average annual payments to Cadence under this sublease will average $1.4 million per year for the period July 1, 2008 through to June 30, 2011 and $1.45 million for the period July 1, 2011 through to September 27, 2016. Cadence has also fixed the price on approximately seventy percent of its electricity requirements for a period which commenced on February 1, 2006 and which ends on December 31, 2008. Following are the future minimum payments required under these drilling, office and electrical contracts; net of any prepayments: Drilling Office lease Electrical ($000s) contracts (net) Contract --------------------------------------------------------------------- 2008 $ 833 $ 311 $ 1,004 2009 $ 1,196 $ 81 $ - 2010-2016 $ - $ 400 $ - Indeterminate $ 1,357 $ - $ - --------------------------------------------------------------------- Total $ 3,386 $ 792 $ 1,004 --------------------------------------------------------------------- The Company has other commitments and guarantees in the normal course of business which are not material, and are therefore not disclosed here. 13. CONTINGENCIES The Company has been served with two related statements of claim totaling $2.6 million. The Company has not provided for these claims in the financial statements as it is believed the Company will be successful in defending both of them. In the unlikely circumstance that the Company is not successful in defending these claims, there is in place adequate insurance coverage to mitigate any losses which may result. In the second quarter of 2008, the Company reached a favorable settlement in the amount of $40,000 with respect to a former claim filed in the amount of $1.0 million. In connection with the Plan of Arrangement dated June 20, 2008 between Daylight Resources Trust ("Daylight") and Cadence, which has now been terminated, Cadence and Daylight agreed with an ad hoc committee of certain debenture holders to seek a judicial determination as to whether Cadence was required to make an offer to purchase all of the issued and outstanding debentures as a result of the Plan of Arrangement. Trial proceedings had begun and have now been adjourned. Cadence may incur legal costs estimated to be approximately $250,000 in connection with this legal proceeding, subsequent to June 30, 2008. 14. RELATED PARTY TRANSACTIONS During 2007 and through to May 2008, Cadence conducted business with a company controlled by a former a director of Cadence. These transactions for drilling services were made under normal business terms and conditions at the same rates as with non-related parties. Capital additions to property plant and equipment in the amount of $857,000 were conducted in 2007. There were no amounts incurred or outstanding at June 30, 2008. 15. SUBSEQUENT EVENTS On July 14, 2008 Cadence received an unsolicited conditional acquisition proposal from Barrick Gold Corporation ("Barrick") to acquire all of the issued and outstanding common shares of Cadence ("Cadence Shares") at a cash price of $6.00 per Cadence Share. On July 17, 2008 Cadence had received an unconditional Support Agreement (the "Support Agreement') providing for the acquisition by Barrick all of the issued and outstanding shares of Cadence Shares at an increased cash price of $6.75 per Cadence Share (the "Barrick Offer"). On July 21, 2008 Cadence announced that it had entered into the previously announced Support Agreement with Barrick which provides for the acquisition by Barrick of all the issued and outstanding common shares of Cadence for a price of $6.75 per share (The "Barrick Offer"). The board of director's of Cadence has unanimously approved the Support Agreement and has unanimously determined that the Barrick Offer is fair to Cadence shareholders, is in the best interest of Cadence shareholders and has unanimously recommended that Cadence shareholders accept the Barrick offer. On July 21, 2008 Cadence also announced that it was terminating the arrangement agreement ('Arrangement Agreement") dated and effective May 25, 2008, it was entered into with Daylight Resources Trust ("Daylight"). The Arrangement Agreement provided for a business combination amongst the two entities. Daylight was to acquire all of the outstanding shares of Cadence, under which Cadence shareholders would receive 0.47 of a Daylight Trust unit for each common share of Cadence or, subject to certain conditions, Cadence shareholders could have elected to receive cash in an aggregate amount of no more than $30,000,000 which would be prorated among holders of Cadence who have made such an election. A break fee payment to Daylight in the amount of $9,000,000 was paid to Daylight on July 21, 2008 upon termination of the Arrangement Agreement. CORPORATE INFORMATION Cadence Energy Inc. is a Canadian energy company engaged in the exploration, development and production of natural gas and crude oil. The Company's common shares are listed on the Toronto Stock Exchange under the trading symbol "CDS". OFFICERS ENGINEERING CONSULTANTS Darren W. Dittmer Controller GLJ Petroleum Consultants Ltd. Calgary, Alberta Grant B. Fagerheim President and Chief Executive Officer LEGAL COUNSEL Nathan R. MacBey Vice President, Negotiations Burnet Duckworth & Palmer LLP Calgary, Alberta David M. Mombourquette Vice-President, Business Development REGISTRAR AND TRANSFER AGENT Kirby J. Wanner Chief Operating Officer Computershare Trust Company of Canada Calgary, Alberta DIRECTORS WARRANT AGENT Daryl E. Birnie Valiant Trust Company Calgary, Alberta J. Paul Charron STOCK EXCHANGE LISTING Grant B. Fagerheim Toronto Stock Exchange Daryl H. Gilbert Trading Symbol "CDS" Gerry A. Romanzin HEAD OFFICE Grant A. Zawalsky 1100, 530 - 8th Avenue SW Calgary, Alberta T2P 3S8 AUDITORS Deloitte & Touche LLP Telephone: (403) 290-3400 Chartered Accountants Facsimile: (403) 290-3447 Calgary, Alberta Email: info@cadence-energy.com Website: www.cadence-energy.com BANKERS Bank of Montreal Calgary, Alberta Canadian Imperial Bank of Commerce Calgary, Alberta Société Générale (Canada Branch) Calgary, Alberta ABBREVIATIONS AECO Alberta Energy Company Mcf thousand cubic feet interconnect with the Nova mcf/day thousand cubic feet per System day ARTC Alberta Royalty Tax Credit mmbbls million barrels Bbls barrels mmboe million barrels of oil bbls/day barrels per day equivalent Bcf billion cubic feet mmbtu million British thermal Boe barrels of oil equivalent units (6mcf = 1bbl) mmcf million cubic feet boe/day barrels of oil equivalent mmcf/day million cubic feet per per day day GJ gigajoule MWh Mega watt hour GJ/day gigajoule per day NGLs natural gas liquids kWh Kilo watt hour NI Canadian Securities mbbls thousand barrels Administrator's National mboe thousand barrels of oil Instrument equivalent WI Working Interest Mboe/day thousand barrels of oil WTI West Texas Intermediate equivalent per day %SEDAR: 00021661E

For further information:

For further information: Grant B. Fagerheim, President and Chief
Executive Officer, Telephone: (403) 290-3401

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Barrick Energy Inc.

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