Connacher's nine month cash flow grows 45 percent in 2007; Great Divide Pod One plant commissioned, steaming and bitumen sales underway; strong third quarter and year to date earnings in 2007



    /NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR
    DISSEMINATION IN THE UNITED STATES/

    CALGARY, Nov. 7 /CNW/ - Connacher Oil and Gas Limited (CLL - TSX)
announced today that its cash flow from operations before working capital
adjustments (cash flow(1)) rose 45 percent to $38 million for year to date in
2007 when compared to 2006. This growth in cash flow reflects an expanded
operation and strong US refining margins throughout most of the year, although
some moderation occurred in the third quarter this year. Earnings were very
strong, up 115 percent in the quarter to $15 million ($0.07 per share) and
1,034 percent year to date to $42 million ($0.21 per share), buoyed by the
impact of the strong Canadian dollar on the company's US dollar denominated
indebtedness. A strong capital spending program of $267 million was primarily
related to completion of the Great Divide Pod One facilities and wells at
Connacher's oil sands operations in Alberta.
    Connacher's achievements during the third quarter of 2007 were
considerable. On August 10, 2007 we completed the construction of our Great
Divide Pod One oil sands project in northeastern Alberta. This was
accomplished on time within the 300 day period allotted to the construction
phase. Thereafter, we completed a month of commissioning of the plant and as
scheduled, on September 16, 2007 we commenced steaming of all fifteen well
pairs which had been drilled during the construction period. This included
both the horizontal injector and producer wells which comprise the well pairs.
By mid-October 2007 we were able to report that the steaming was proceeding
effectively and that we had completed our first sale of diluted bitumen
("dilbit") production arising from our steam circulation program. Volumes were
at prevailing market prices to Alberta markets and to our refinery in Montana.
This will enable us to effectively assay the bitumen which will assist our
marketing efforts as our production is ramped up to plant capacity of 10,000
bbl/d during 2008.

    HIGHLIGHTS

    
    -   Pod One plant and facilities completed on time
    -   Commissioning completed on September 16, 2007; steaming starts
    -   First bitumen from Pod One produced and sold
    -   Year to date 2007 record cash flow from operations before working
        capital changes(1)
    -   Record earnings
    -   Bought-deal flow-through share financing underway
    -   Existing debt to be refinanced, new debt capital being raised for
        Algar (the company's second 10,000 bbl/d oil sands project).

    Summary Results

    -------------------------------------------------------------------------
                            Three months ended             Nine months ended
                                  September 30                  September 30
    -------------------------------------------------------------------------
                      2007      2006  % Change      2007      2006  % Change
    -------------------------------------------------------------------------
    FINANCIAL ($000
     except per share
     amounts)
    -------------------------------------------------------------------------
    Revenues, net
     of royalties  101,991   103,108        (1)  261,180   167,984        55
    -------------------------------------------------------------------------
    Cash flow from
     operations(1)  10,025    14,957       (33)   37,882    26,184        45
    -------------------------------------------------------------------------
      Per share,
       basic(1)       0.05      0.08       (38)     0.19      0.15        27
    -------------------------------------------------------------------------
      Per share,
       diluted(1)     0.05      0.08       (38)     0.19      0.14        36
    -------------------------------------------------------------------------
    Net earnings
     (loss) for
     the period     14,589     6,771       115    41,801     3,686     1,034
    -------------------------------------------------------------------------
      Per share,
       basic and
       diluted        0.07      0.03       133      0.21      0.02       950
    -------------------------------------------------------------------------
    Capital
     expenditures
     and
     acquisitions   64,006    41,449        54   267,110   376,564       (29)
    -------------------------------------------------------------------------
    Cash on hand                                     754    14,450       (95)
    -------------------------------------------------------------------------
    Working capital
     (deficit)                                   (19,853)  (39,942)      (50)
    -------------------------------------------------------------------------
    Long term debt                               260,606         -       N/A
    -------------------------------------------------------------------------
    Shareholders' equity                         428,764   378,730        13
    -------------------------------------------------------------------------
    Total assets                                 826,418   527,028        57
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    OPERATING
    -------------------------------------------------------------------------
    PNG daily
     production/
     sales volumes
    -------------------------------------------------------------------------
      Crude oil -
       bbl/d           781     1,084       (28)      805       926       (13)
    -------------------------------------------------------------------------
      Natural gas -
       mcf/d         9,413    13,028       (28)    9,364    10,198        (8)
    -------------------------------------------------------------------------
      Barrels of oil
       equivalent -
       boe/d(2)      2,350     3,256       (28)    2,366     2,626       (10)
    -------------------------------------------------------------------------
    PNG product
     pricing
    -------------------------------------------------------------------------
      Crude oil -
       $/bbl         55.98     62.53       (10)    51.57     56.83        (9)
    -------------------------------------------------------------------------
      Natural gas -
       $/mcf          4.70      5.33       (12)     6.49      5.58        16
    -------------------------------------------------------------------------
      Barrels of
       oil equivalent
       - $/boe(2)    37.43     42.16       (11)    43.22     41.70         4
    -------------------------------------------------------------------------
    Refining
     Throughput
    -------------------------------------------------------------------------
    Crude charged
     (bbl/d)         9,460     9,613        (2)    9,443     8,239        15
    -------------------------------------------------------------------------
    Refinery
     utilization (%)   100%      101%       (1)       99%       92%        8
    -------------------------------------------------------------------------
    Margins (%)       14.7%     14.4%        2      18.2%     12.0%       52
    -------------------------------------------------------------------------

    Common shares
     outstanding (000)
    -------------------------------------------------------------------------
    Weighted
     average
    -------------------------------------------------------------------------
      Basic        199,167   193,587         3   198,539   179,948        10
    -------------------------------------------------------------------------
      Diluted      221,554   200,572        10   210,580   187,135        13
    -------------------------------------------------------------------------
    End of period
    -------------------------------------------------------------------------
      Issued                                     199,447   197,878         1
    -------------------------------------------------------------------------
      Fully diluted                              236,831   213,491        11
    -------------------------------------------------------------------------

    (1) Cash flow from operations before working capital changes ("cash flow
        from operations") and cash flow per share do not have standardized
        meanings prescribed by Canadian generally accepted accounting
        principles ("GAAP") and therefore may not be comparable to similar
        measures used by other companies. Cash flow from operations includes
        all cash flow from operating activities and is calculated before
        changes in non-cash working capital. The most comparable measure
        calculated in accordance with GAAP would be net earnings. Cash flow
        from operations is reconciled with net earnings on the Consolidated
        Statements of Cash Flows and in the accompanying Management's
        Discussion & Analysis. Management uses these non-GAAP measurements
        for its own performance measures and to provide its shareholders and
        investors with a measurement of the company's efficiency and its
        ability to fund a portion of its future growth expenditures.
    (2) All references to barrels of oil equivalent (boe) are calculated on
        the basis of 6 mcf:1 bbl. Boes may be misleading, particularly if
        used in isolation. This conversion is based on an energy equivalency
        conversion method primarily applicable at the burner tip and does not
        represent a value equivalency at the wellhead.
    

    LETTER TO SHAREHOLDERS

    Connacher continued its record of accomplishment during the third quarter
of 2007. As indicated in the lead in to this report, on August 10, 2007 we
completed construction of our Great Divide Pod One facilities, including the
drilling and completion of our 15 horizontal well pairs (one injector, one
producer) and related infrastructure. Following a month of commissioning
activity, on September 16, 2007 we commenced the steaming of our well pairs to
prepare to heat up the area of influence in the reservoir so that following a
scheduled period of 90 days, we could commence regular production, with a view
to ramping up our bitumen production to capacity levels of 10,000 bbl/d, which
is anticipated to occur in 2008. On October 22, 2007 we were able to announce
our first sale of dilbit to our Montana refinery. Processing our dilbit will
assist us in future marketing of our bitumen and we are securing naphtha from
our refinery for diluent purposes. Our integrated strategy is working.
    During the fourth quarter of 2007 we will continue to inject steam into
both our horizontal injector and horizontal producer wellbores in order to
create an effective steam chamber prior to the commencement of regular
production, when steam injection into the producer wellbores will be
terminated. We are fortunate to report that the steaming process has thus far
gone very well, with excellent distribution of steam in the wellbores as
determined by our monitoring procedures. This also reflects the excellent
quality of reservoir we have in Pod One. In the interim, as we conduct our
circulation procedures in the producing wellbores, we are recovering
approximately 300-350 bbl/d of bitumen. It is this bitumen which we are now
selling into the market place.
    We now anticipate we will truck our bitumen to market as we have
determined "putting wheels under our barrels" will likely provide Connacher
with the best available pricing and netback in the short-term. In the mid-term
and longer term, as volumes increase, we will require a pipeline and we have
this project in hand. We will continue to be self-sufficient in our diluent
supply by relying on our Montana refinery until well into 2008 by swapping out
naphtha for other diluent sources in Edmonton. Again we can achieve some
efficiency in our cost structure by backhauling diluent when we decide to move
bitumen or dilbit to Montana. We will likely sell our production at other more
proximate terminals as the volumes ramp up in early 2008.
    Our Great Divide Pod One facility and project are a considerable
accomplishment for a company our size. We have a well-built, efficient plant
with a small footprint from an environmental perspective. We intend to recycle
the water utilized in the production of steam and expect to have in excess of
a 95 percent recycle ratio. It should be noted the water we are using is from
an underground aquifer that is non-potable. In other words, it cannot be used
for agriculture or consumption by human beings or animals. We have hired 38
full-time employees who can run the plant in the field on a 24/7, 365 day
basis with continuous steam injection and production. Of course, we have our
natural gas consumption substantially hedged by the fact we also produce
similar volumes of natural gas from our Marten Creek area. Our involvement in
the downstream business through our Montana refinery keeps us fully in the
value chain and allows our company to achieve higher effective netbacks as a
consequence, thereby hedging the heavy oil market differential to WTI.
    Subsequent to the reporting period, the Government of Alberta announced
revisions to the royalty program for oil sands production. The Government did
not grandfather existing oil sands operations and introduced a price sensitive
sliding scale royalty for bitumen production which, at all price levels for
West Texas Intermediate ("WTI") above US$55.00 per barrel, results in higher
royalties for bitumen production than under the present regime, whether before
or after payout. While we would have preferred to see the existing regime stay
in place, given that this was the basis for our original capital investment
decisions, the emergence of much higher prices for crude oil appears to be the
driving force for the change. Our conclusion is that Connacher is better off
under the proposed regime than it would have been under the recommendations of
the Royalty Review Panel, at least in the pre-payout period. Furthermore, with
the rapid increase in crude oil prices, and assuming the differentials remain
reasonably stable for bitumen, our ultimate netbacks after royalties and
operating costs would be sufficient to generate a respectable and competitive
rate of return for our oil sands business. Furthermore the new policy will not
impair our decision to proceed with continuing evaluation of our oil sands
acreage or with our Algar ("Pod Two") project. As indicated previously, but
for other reasons, we have decided to defer our plans to build a pipeline
connecting our Pod One production to markets until volumes are increased, as
trucking provides a better alternative for economic returns at this time.
    We do note that the Government of Alberta intends to retain the ring
fence concept, which will be more clearly defined. We heartily endorse this
approach to assist companies that have longer-term reinvestment intentions. We
also note there is a plan to conduct a bitumen valuation exercise, which we
also welcome and in which process we intend to participate, if only to ensure
there is not a perverse application of market-driven royalty rates to bitumen
production during periods of high differentials due to market factors, which
could result in improperly high royalties at a time of lower actual netbacks.
Connacher continues to believe reliance on market-driven forces is a more
realistic method of determining fair value rather than values assigned by
administrative fiat.
    Our application to construct our second 10,000 bbl/d plant at Algar is
proceeding through the regulatory and stakeholder consultative process. We
have received our list of supplemental information requests form the EUB and
our technical staff is addressing the issues as raised. We continue to
dialogue with stakeholders in the region, including indigenous peoples and
trappers active in the area. We are proceeding with the confirmation of our
engineering procurement and design firm and have started the process of
costing, introducing new innovations, evaluating our field site and preparing
to pre-order key long-term lead items.
    This winter we will conduct an active core hole drilling program on our
main lease block, over which we now have full 3D seismic coverage. This has
helped us high grade our core hole program to focus on seismically-defined
features which appear to be amenable to developing into new accumulations or
pods for future development, independently or as satellites to our established
plants in the longer run. Contrary to popular opinion, despite the fact our
regions are underlain by oil-bearing sands, there is exploratory risk in
identifying accumulations with the requisite characteristics in achieving
potential exploitation or "pod" status. Our 3D seismic is among the most
expensive in the world and not every lead turns into a project. We anticipate
drilling approximately 120 core holes in the winter drilling season of 2008,
almost doubling our core hole inventory. We hope this will further enhance our
already considerable reserves and resources in the region. To finance this
program, we have announced a fully underwritten $45 million flow-through
common share financing (with a 15 percent green shoe) at a price of $5.00 per
share, which is scheduled to close in November 2007. If the green shoe is
exercised, total proceeds would be $51.75 million.
    At present, Connacher is also investigating alternative new debt
financing arrangements, which may include a new first lien secured revolving
five year term credit facility and the issuance of long-term second lien
senior secured notes. Such new debt arrangements would be structured to
further enhance overall corporate liquidity and would better align Connacher's
capitalization with the long life characteristics of its refining assets and
its crude oil, natural gas and bitumen reserve and resource base and the
associated estimated future net revenue of its reserves and resources, as
determined by Connacher's qualified independent reserves evaluator. It is
anticipated that the second lien senior secured notes would require only
payments of interest at a fixed rate until maturity. This would allow the
Corporation to dedicate its available funds from operations to future capital
expenditure programs without having to amortize or retire long term debt. As
Connacher's bitumen production and sales from Great Divide increase, Connacher
anticipates being increasingly self sufficient in financing its prospective
capital expenditure programs. However, to allow Connacher to retain an
appropriately structured capitalization and also to pursue its growth
objectives, these debt arrangements may in future be supplemented from time to
time with issuances of common equity, if, as and when required, while
simultaneously seeking to limit share dilution.
    There can be no assurance that Connacher will be able to complete its
debt financing arrangements on the general terms and conditions described
above, or on terms and conditions acceptable to Connacher, or at all.
    Connacher's three month and year to date operating and financial results
for the period ended September 30, 2007 are discussed in greater detail in the
MD&A which comprises a significant portion of this report. We would highlight
that the company achieved record revenue, cash flow and earnings during the
year to date period. Results during the third quarter were satisfactory but
below the excellent results of our second quarter as refining margins weakened
during the summer months so that even with higher revenues, our net refining
margin was lower on a successive basis. Nevertheless we are headed towards
record results in 2007 and should start to realize the impact of our growing
oil sands production during 2008.
    Recently, our Board of Directors authorized a firm and contingent capital
plan for 2008 of $373 million, including $271 million for the oil sands
(Algar, seismic and core holes and other); $40 million for conventional
western Canada drilling and facilities, including tieing in 1,000 boe/d of new
already-tested volumes in the Marten Creek region; together with capitalized
and contingent items.
    We recently relocated our head office to Suite 900, 332 6 Avenue SW,
Calgary, Alberta T2P 0B2. The move was required to accommodate our growing
staff as we continue to expand our operations. Our related company,
Petrolifera Petroleum Limited, also relocated to the same building. We
continue to be engaged in and supportive of Petrolifera's business affairs and
are excited about the growth potential in the value of our shareholding.

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following is dated as of November 7, 2007 and should be read in
conjunction with the unaudited consolidated financial statements of Connacher
Oil and Gas Limited ("Connacher" or the "company") for the three and nine
months ended September 30, 2007 and 2006 as contained in this interim report
and the MD&A and audited financial statements for the years ended December 31,
2006 and 2005 as contained in the company's 2006 annual report. The
consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") and are presented
in Canadian dollars. This MD&A provides management's view of the financial
condition of the company and the results of its operations for the reporting
periods.
    Additional information relating to Connacher, including Connacher's
Annual Information Form, is available on SEDAR at www.sedar.com.

    FORWARD-LOOKING INFORMATION

    Information in this report contains forward-looking information based on
current expectations, estimates and projections of future production, capital
expenditures and available sources of financing, estimates of reserves,
resources and future net revenues, future exploration and development plans.
The proposed financing initiatives of the company, the implementation of the
new royalty regime by the Government of Alberta and the company's potential
indirect exposure to the short-term asset backed commercial paper security
investments in Canada through its investment in Petrolifera Petroleum Limited.
It should be noted forward-looking information involves a number of risks and
uncertainties and actual results may vary materially from those anticipated by
the company. There can be no assurance that the plans, intentions or
expectations upon which these forward-looking statements are based will occur.
Forward-looking statements are subject to risks, uncertainties and
assumptions, including those discussed in the company's Annual Information
Form for the year ended December 31, 2006, which include, without limitation,
changes in market conditions, law or governing policy, operating conditions
and costs, operating performance, demand for crude oil and natural gas, price
and exchange rate fluctuations, commercial negotiations, regulatory processes
and approvals and technical and economic factors. Although Connacher believes
that the expectations represented in such forward-looking statements are
reasonable, there can be no assurance that such expectations will prove to be
correct. The forward-looking information contained herein is expressly
qualified in its entirety by this cautionary statement. The forward-looking
information included in this MD&A is made as of the date of the MD&A and
Connacher undertakes no obligation to publicly update such forward-looking
information to reflect new information, subsequent events or otherwise unless
so required by applicable securities laws. Throughout the MD&A, per barrel of
oil equivalent (boe) amounts have been calculated using a conversion rate of
six thousand cubic feet of natural gas to one barrel of crude oil (6:1). The
conversion is based on an energy equivalency conversion method primarily
applicable to the burner tip and does not represent a value equivalency at the
wellhead. Boes may be misleading, particularly if used in isolation.

    
    FINANCIAL AND OPERATING REVIEW
    PETROLEUM AND NATURAL GAS ("PNG") PRODUCTION, PRICING AND REVENUE
    -------------------------------------------------------------------------
                            Three months ended             Nine months ended
                                  September 30                  September 30
    -------------------------------------------------------------------------
                      2007      2006  % Change      2007      2006  % Change
    -------------------------------------------------------------------------
    Daily production/
     sales volumes
    -------------------------------------------------------------------------
      Crude oil -
       bbl/d           781     1,084       (28)      805       926       (13)
    -------------------------------------------------------------------------
      Natural gas -
       mcf/d         9,413    13,028       (28)    9,364    10,198        (8)
    -------------------------------------------------------------------------
      Combined -
       boe/d         2,350     3,256       (28)    2,366     2,626       (10)
    -------------------------------------------------------------------------
    Product
     pricing ($)
    -------------------------------------------------------------------------
      Crude oil -
       per bbl       55.98     62.53       (10)    51.57     56.83        (9)
    -------------------------------------------------------------------------
      Natural gas -
       per mcf        4.70      5.33       (12)     6.49      5.58        16
    -------------------------------------------------------------------------
      Combined -
       per boe       37.43     42.16       (11)    43.22     41.70         4
    -------------------------------------------------------------------------
    Revenue ($000)
    -------------------------------------------------------------------------
    PNG revenue -
     gross           8,094    12,325       (34)   27,911    29,892        (7)
    -------------------------------------------------------------------------
    Royalties       (1,368)   (3,134)      (56)   (4,565)   (7,317)      (38)
    -------------------------------------------------------------------------
    PNG revenue -
     net             6,726     9,191       (27)   23,346    22,575         3
    -------------------------------------------------------------------------
    

    In the third quarter of 2007, gross PNG revenues were $8.1 million, a
34 percent decrease from the comparable period of 2006 due mostly to lower
production volumes resulting from production declines and the sale of non-core
properties at the end of 2006. Additionally, product prices were 11 percent
less in the quarter on a per boe basis. The company's sales prices were
negatively impacted by the strengthening Canadian dollar and decreases in
natural gas market prices.
    In the first quarter of 2007, the company entered into a "costless
collar" contract with a third party to sell approximately one half of its of
natural gas production. Mitigating some downside natural gas pricing risk, the
company will receive a minimum of US $7.00 per mmbtu and a maximum of US $9.50
per mmbtu on a notional quantity of 5,000 mmbtu/day of natural gas sold
between April 1, 2007 and October 31, 2007. This transaction was not meant to
speculate on future natural gas prices, but rather to protect the downside
risk to the company's cash flow and the lending value of its reserves-based
line of credit, which is considered important during a period of rapid growth
with significant capital expenditures. Approximately $400,000 in cash has been
realized on the collar through the third quarter and as at September 30, 2007
the fair value of this collar was an asset of $100,000. This amount has been
recorded in accounts receivable on the consolidated balance sheet and the gain
has been included in PNG revenue.

    
    ROYALTIES ON PNG SALES
    -------------------------------------------------------------------------
    For the three months ended                        2007              2006
     September 30                         -----------------------------------
    ($000 except per boe)                   Total  Per boe    Total  Per boe
    -------------------------------------------------------------------------
    Royalties                              $1,368    $6.32   $3,134   $10.72
    -------------------------------------------------------------------------
    As a percentage of PNG revenue                    16.9%             25.4%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    For the nine months ended                         2007              2006
     September 30                         -----------------------------------
    ($000 except per boe)                   Total  Per boe    Total  Per boe
    -------------------------------------------------------------------------
    Royalties                              $4,565    $7.07   $7,317   $10.21
    -------------------------------------------------------------------------
    As a percentage of PNG revenue                    16.4%             24.6%
    -------------------------------------------------------------------------
    

    Royalties represent charges against production or revenue by governments
and landowners. Royalties in the third quarter of 2007 were $1.4 million
($6.32 per boe, or 16.9 percent of petroleum and natural gas revenue) compared
to $3.1 million in 2006 ($10.72 per boe, or 25.4 percent of petroleum and
natural gas revenue). The decrease, which was substantially non-recurring,
occurred primarily due to gas cost allowance credits received relating to
prior year royalties and lower prices and production volumes in 2007. From
year to year, royalties can change based on changes to the weighting in the
product mix which is subject to different royalty rates, and rates usually
escalate with increased product prices.
    On October 25, 2007, the Government of Alberta unveiled a new royalty
regime. The new regime will introduce new royalties for conventional oil,
natural gas and bitumen effective January 1, 2009 that are linked to price and
production levels and will apply to both new and existing oil sands projects
and conventional oil and gas activities. The significant changes to the
royalty regime require new legislation, changes to existing legislation and
regulation and development of proprietary software to support the calculation
and collection of royalties. The impact of the proposed new royalty regime on
the company will be dependent on, among other things, commodity prices,
bitumen valuation (which has yet to be developed), specified allowed costs
that are recoverable in the pre-payout period for oil sands projects and
production volumes.

    
    PNG OPERATING EXPENSES AND NETBACKS
    -------------------------------------------------------------------------
    PNG Netbacks(1)
    -------------------------------------------------------------------------
    For the three months
     ended September 30             2007              2006          % Change
    -------------------------------------------------------------------------
    ($000 except
     per boe)             Total  Per boe    Total  Per boe    Total  Per boe
    -------------------------------------------------------------------------
    Average daily
     production (boe/d)       2,350             3,256
    -------------------------------------------------------------------------
    Gross PNG revenue    $8,094   $37.43   12,325   $41.14      (34)      (9)
    -------------------------------------------------------------------------
    Royalties            (1,368)   (6.32)  (3,134)  (10.72)     (56)     (41)
    -------------------------------------------------------------------------
    Net PNG revenue       6,726    31.11    9,191    30.42      (27)       2
    -------------------------------------------------------------------------
    Operating costs      (1,946)   (9.00)  (2,393)   (7.99)     (19)       13
    -------------------------------------------------------------------------
    PNG netback          $4,780   $22.11   $6,798   $22.43      (30)      (1)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    For the nine months
     ended September 30             2007              2006          % Change
    -------------------------------------------------------------------------
    ($000 except
     per boe)             Total  Per boe    Total  Per boe    Total  Per boe
    -------------------------------------------------------------------------
    Average daily
     production (boe/d)       2,366             2,626
    -------------------------------------------------------------------------
    Gross PNG revenue   $27,911   $43.22  $29,892   $41.70       (7)       4
    -------------------------------------------------------------------------
    Royalties            (4,565)   (7.07)  (7,317)  (10.21)     (38)     (31)
    -------------------------------------------------------------------------
    Net PNG revenue      23,346    36.15   22,575    31.49        3       15
    -------------------------------------------------------------------------
    Operating costs      (6,538)  (10.12)  (5,693)   (7.94)      15       27
    -------------------------------------------------------------------------
    PNG netback         $16,808   $26.03  $16,882   $23.55        0       11
    -------------------------------------------------------------------------
    (1) Calculated by dividing related revenue and costs by total boe
        produced, resulting in an overall combined company netback. Netbacks
        do not have a standardized meaning prescribed by GAAP and, therefore,
        may not be comparable to similar measures used by other companies.
        This non-GAAP measurement is a useful and widely used supplemental
        measure that provides management with performance measures and
        provides shareholders and investors with a measurement of the
        company's efficiency and its ability to fund future growth through
        capital expenditures. Operating netbacks are reconciled to net
        earnings below.

    In the third quarter of 2007 operating costs of $1.9 million were 19
percent lower than in the same prior period, and on a per unit basis,
increased by 13 percent to $9.00 per boe reflecting the higher cost
environment in 2007 in addition to more well workovers completed and higher
power costs. Additionally, unit costs increased as a result of fixed operating
costs considered in relation to lower production volumes in 2007. However,
higher product prices and lower royalties resulted in higher per unit
operating netbacks in 2007 on a year-to-date basis.

    Reconciliation of PNG Netback to Net Earnings(1)
    -------------------------------------------------------------------------
                        Three months ended        Nine months ended
                           September 30              September 30
    -------------------------------------------------------------------------
                              2007              2007              2006
    -------------------------------------------------------------------------
    ($000, except
     per unit amounts)    Total  Per boe    Total  Per boe    Total  Per boe
    -------------------------------------------------------------------------
    PNG netback as above $4,780   $22.11  $16,808   $26.03  $16,882   $23.55
    -------------------------------------------------------------------------
    Interest income         172     0.80      517     0.80      690     0.96
    -------------------------------------------------------------------------
    Refining margin
     - net               13,986    64.69   43,107    66.74   17,373    24.23
    -------------------------------------------------------------------------
    General and
     administrative      (1,584)   (7.33)  (6,832)  (10.58)  (2,780)   (3.88)
    -------------------------------------------------------------------------
    Stock-based
     compensation        (1,383)   (6.40)  (4,437)   (6.87)  (6,334)   (8.84)
    -------------------------------------------------------------------------
    Finance charges      (2,545)  (11.77)  (4,255)   (6.59)  (4,231)   (5.90)
    -------------------------------------------------------------------------
    Foreign exchange
     (loss) gain         13,267    61.36   29,455    45.60     (201)   (0.28)
    -------------------------------------------------------------------------
    Depletion,
     depreciation and
     amortization        (7,682)  (35.53) (22,403)  (34.68) (22,808)  (31.81)
    -------------------------------------------------------------------------
    Income taxes         (5,449)  (25.20) (18,196)  (28.17)  (2,047)   (2.86)
    -------------------------------------------------------------------------
    Equity interest in
     Petrolifera earnings
     and dilution gain    1,027     4.75    8,037    12.44    7,142     9.96
    -------------------------------------------------------------------------
    Net earnings (loss)  14,589    67.48  $41,801   $64.72   $3,686    $5.13
    -------------------------------------------------------------------------
    (1) Certain income and expense items included in this reconciliation
        relate to non-PNG business and, therefore, affect the consolidated
        net earnings (loss) per boe calculations.



    PNG Operating Netbacks by Product
    -------------------------------------------------------------------------
    For the three months ended
     September 30, 2007                       Crude oil         Natural gas
    -------------------------------------------------------------------------
    ($000, except per unit amounts)         Total  Per bbl    Total  Per mcf
    -------------------------------------------------------------------------
    Average daily production                   781 bbl/d        9,413 mcf/d
    -------------------------------------------------------------------------
    Revenue                                $4,022   $55.98   $4,072    $4.70
    -------------------------------------------------------------------------
    Royalties                                (919)  (12.80)    (449)   (0.52)
    -------------------------------------------------------------------------
    Operating costs                          (967)  (13.46)    (979)   (1.13)
    -------------------------------------------------------------------------
    PNG Netback                            $2,136   $29.72   $2,644    $3.05
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the three months ended
     September 30, 2006                       Crude oil         Natural gas
    -------------------------------------------------------------------------
    ($000, except per unit amounts)         Total  Per bbl    Total  Per mcf
    -------------------------------------------------------------------------
    Average daily production                  1,084 bbl/d      13,028 mcf/d
    -------------------------------------------------------------------------
    Revenue                                $6,095   $62.53   $6,230    $5.33
    -------------------------------------------------------------------------
    Royalties                              (1,806)  (18.10)  (1,328)   (1.11)
    -------------------------------------------------------------------------
    Operating costs                          (659)   (6.61)  (1,734)   (1.45)
    -------------------------------------------------------------------------
    PNG Netback                            $3,630   $37.82   $3,168    $2.77
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the nine months ended
     September 30, 2007                       Crude oil         Natural gas
    -------------------------------------------------------------------------
    ($000, except per unit amounts)         Total  Per bbl    Total  Per mcf
    -------------------------------------------------------------------------
    Average daily production                   805 bbl/d        9,364 mcf/d
    -------------------------------------------------------------------------
    Revenue                               $11,330   $51.57  $16,581    $6.49
    -------------------------------------------------------------------------
    Royalties                              (2,721)  (12.38)  (1,844)   (0.72)
    -------------------------------------------------------------------------
    Operating costs                        (2,654)  (12.08)  (3,884)   (1.52)
    -------------------------------------------------------------------------
    PNG Netback                            $5,955   $27.11  $10,853    $4.25
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the nine months ended
     September 30, 2006                       Crude oil         Natural gas
    -------------------------------------------------------------------------
    ($000, except per unit amounts)         Total  Per bbl    Total  Per mcf
    -------------------------------------------------------------------------
    Average daily production                   926 bbl/d       10,198 mcf/d
    -------------------------------------------------------------------------
    Revenue                               $14,369   $56.83  $15,523    $5.58
    -------------------------------------------------------------------------
    Royalties                              (3,517)  (13.90)  (3,800)   (1.36)
    -------------------------------------------------------------------------
    Operating costs                        (2,008)   (7.95)  (3,685)   (1.32)
    -------------------------------------------------------------------------
    PNG Netback                            $8,844   $34.98   $8,038    $2.90
    -------------------------------------------------------------------------
    

    REFINING REVENUES AND MARGINS

    The quarterly operating results of the Montana refinery are summarized 
below.

    Refining Operations and Sales

    The Montana refinery is subject to a number of seasonal factors which may
cause sales to vary throughout the year. The refinery's primary asphalt market
is paving for road construction which is predominantly a summer demand.
Consequently, prices and volumes for our asphalt trend to be higher in the
summer and lower in the colder seasons. During the winter most of the
refinery's asphalt production is stored in tankage for sale in the subsequent
summer. Seasonal factors also affect gasoline (higher demand in the summer
months) and distillate and diesel (higher winter demand). As a result,
inventory levels, sales volumes and prices can be expected to fluctuate on a
seasonal basis.
    The Montana refinery maintained strong performance throughout the third
quarter 2007 despite pressure on margins experienced by the refinery industry.
Refining sales revenues in the quarter were $95 million up from $85 million
reported in the second quarter of 2007 and up from $94 million reported in the
third quarter of 2006. These revenues have been influenced by increased
domestic (US) prices, which were offset by a strengthening Canadian dollar.
    Crude oil and operating costs were up slightly year over year, rising to
$81 million in the third quarter of 2007 compared to $80 million in the same
quarter of 2006. Costs are up 21% over the second quarter of 2007 due
primarily to rising crude oil costs.
    Refining margins during the quarter were $14 million, an increase from
$13.5 million in third quarter 2006 due to increased sales volumes, and a
decrease from $18 million in the second quarter 2007 due to rising crude oil
costs which have an industry-wide adverse impact on refining margins.
    Year to date total refining revenues, operating costs and margins are not
directly comparable with the 2006 year to date period because the 2006 results
represent only six months of operations since the refinery assets were
acquired on March 31, 2006.
    In the first nine months of 2007, the refinery ran at 99% of capacity and
there was no downtime. The ultralow sulphur diesel project is on track for
completion by end of year 2008. The project has been awarded and site
preparation and civil work for tank construction is underway. Shop
construction of the hydrogen plant is expected to begin in December 2007. The
company has also initiated a project to assess a potential expansion of the
Montana refinery. The project is currently in the conceptual engineering
stage.

    
    -------------------------------------------------------------------------
                                    Three months ended     Nine months ended
                                          September 30          September 30
    -------------------------------------------------------------------------
    Refinery throughput                2007       2006       2007     2006(5)
    -------------------------------------------------------------------------
    Crude charged (bbl/d)(1)          9,460      9,613      9,443      8,239
    -------------------------------------------------------------------------
    Refinery production (bbl/d)(2)   10,478     10,392     10,399      8,662
    -------------------------------------------------------------------------
    Sales of produced refined
     products (bbl/d)                12,906     12,220     10,164      9,243
    -------------------------------------------------------------------------
    Sales of refined products
     (bbl/d)(3)                      13,447     12,680     10,831     10,032
    -------------------------------------------------------------------------
    Refinery utilization (%)(4)         100%       101%        99%        92%
    -------------------------------------------------------------------------
    (1) Crude charged represents the barrels per day of crude oil processed
        at the refinery.
    (2) Refinery production represents the barrels per day of refined
        products yielded from processing crude and other refinery feedstocks.
    (3) Includes refined products purchased for resale.
    (4) Represents crude charged divided by total crude capacity of the
        refinery. Note refining capacity has been increased to 9,500 bbl/d in
        the fourth quarter of 2006.
    (5) From the date of acquisition on March 31, 2006.



    -------------------------------------------------------------------------
                                    Three months ended     Nine months ended
                                          September 30          September 30
    -------------------------------------------------------------------------
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    Feedstocks
    -------------------------------------------------------------------------
    Sour crude oil (%)                   91%        92%        92%        94%
    -------------------------------------------------------------------------
    Other feedstocks and blends (%)       9%         8%         8%         6%
    -------------------------------------------------------------------------
    Total                               100%       100%       100%       100%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Revenues and Margins
    -------------------------------------------------------------------------
    Refining sales revenue ($000s) $ 95,093   $ 93,752   $237,317   $144,719
    -------------------------------------------------------------------------
    Refining - crude oil and
     operating costs ($000s)         81,107     80,242    194,210    127,346
    -------------------------------------------------------------------------
    Refining margin ($000s)        $ 13,986   $ 13,510   $ 43,107   $ 17,373
    -------------------------------------------------------------------------
    Refining margin (%)                14.7%      14.4%      18.2%      12.0%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Sales of Produced Refined
     Products (Volume %)
    -------------------------------------------------------------------------
    Gasolines (%)                        31%        30%        39%        29%
    -------------------------------------------------------------------------
    Diesel fuels (%)                     12%        15%        18%        15%
    -------------------------------------------------------------------------
    Jet fuels (%)                         6%         4%         6%         4%
    -------------------------------------------------------------------------
    Asphalt (%)                          48%        49%        34%        49%
    -------------------------------------------------------------------------
    LPG and other (%)                     3%         2%         3%         3%
    -------------------------------------------------------------------------
    Total                               100%       100%       100%       100%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Averages per Barrel of
     Refined Product Sold
    -------------------------------------------------------------------------
    Refining sales revenue         $  76.87   $  80.37   $  80.26   $  78.83
    -------------------------------------------------------------------------
    Less: refining - crude oil
     purchases and operating costs    65.56      68.78      65.68      69.36
    -------------------------------------------------------------------------
    Refining margin                $  11.31   $  11.59   $  14.58   $   9.47
    -------------------------------------------------------------------------
    

    INTEREST AND OTHER INCOME

    In the third quarter of 2007, the company earned interest of $172,000
(third quarter, 2006 - $165,000) on excess funds invested in secure short-term
investments. None of the company's excess funds is invested in asset backed
commercial paper.

    GENERAL AND ADMINISTRATIVE EXPENSES

    In the third quarter of 2007, general and administrative ("G&A") expenses
were $1.6 million compared to $605,000 in the third quarter of 2006, an
increase of 162 percent and on a year to date basis, was $6.8 million compared
to $2.8 million (a 142 percent increase), reflecting increased costs
associated with the company's significant growth. On a per unit basis, G&A was
$7.33 per boe sold during the quarter ($10.58 per boe sold in the year to
date), reflecting the project nature of the company's main activity, and is
expected to be significantly reduced when bitumen production from Pod One
commences. G&A of $2.2 million was capitalized in the first nine months of
2007 (2006 - $815,000), primarily reflecting costs incurred respecting the oil
sands development in the pre-production stage.
    Non-cash stock-based compensation costs of $2.4 million were recorded in
the third quarter of 2007 (September 30, 2006 - $2.3 million). These charges
reflect the fair value of all stock options granted and vested in the period.
Of this amount, $1.4 million was expensed (2006 - $1.1 million), $100,000
(2006 - $340,000) was charged to refining operating costs, and $600,000 was
capitalized (2006 - $900,000). Charges for the reporting periods are lower in
2007 due to either the timing of awards or lower award volumes in 2007.

    FINANCE CHARGES AND FOREIGN EXCHANGE

    Financing charges in the third quarter of 2007 of $2.5 million (year to
date - $4.3 million) comprise interest paid on funds drawn on the company's
lines of credit, interest accrued on the Convertible Debentures and accretion
booked on the Convertible Debentures. Finance charges in the third quarter of
2006 of $1.0 million (first nine months of 2006 - $4.2 million) comprise
interest on the company's lines of credit, interest on the US $51 million
bridge loan then outstanding and the amortization of deferred financing costs
related to the US $51 million bridge loan facility placed in 2006. Interest on
the oil sands term loan is capitalized during the pre-operating phase.
    The company's main exposure to foreign currency risk relates to the
pricing of its crude oil sales, which are denominated in US dollars, the
translation of the US$180 million oil sands term loan and the translation of
the Montana refinery financial results. On an economic basis, the company's
crude oil and bitumen reserves hedge the company's exposure to foreign
currency fluctuations of its US dollar denominated oil sands term loan.
    As a result of the significant strengthening of the Canadian dollar
(against the US dollar) in 2007, a significant unrealized foreign exchange
gain of $29.5 million has been recorded in the first nine months of 2007
primarily upon translating the US $180 million term loan into Canadian
dollars. This gain is expected to be realized upon its repayment, as
contemplated with the use of proceeds from a planned new debt financing later
in 2007. The actual amount of the foreign exchange gain to be realized will be
dependent on the foreign exchange rate in effect at the date of repayment.

    DEPLETION, DEPRECIATION AND ACCRETION ("DD&A")

    Conventional oil and gas depletion expense is calculated using the
unit-of-production method based on total estimated proved reserves. Refining
properties and other assets are depreciated over their estimated useful lives.
DD&A in the third quarter of 2007 was $7.7 million, a 23 percent decrease from
last year due to decreased production volumes and increased proved
conventional reserves. On a year to date basis, DD&A was unchanged compared to
the same 2006 period. Conventional oil and gas depletion equates to $26.60 per
boe of production on a year-to-date basis compared to $28.00 per boe last
year. Depletion of Pod One's oil sands capital costs will commence when that
project attains commercial production.
    Capital costs of $374.6 million (September 30, 2006 - $94 million)
related to the Great Divide oil sands project, which is in the pre-production
stage, and undeveloped land acquisition costs of $18.7 million (2006 -
$12.7 million) were excluded from the depletion calculation, while future
development costs of $15.4 million (2006 - $1.6 million) for proved
undeveloped reserves were included in the depletion calculation.
    When the first oil sands development project achieves commercial
production, depletion of its accumulated capital costs will commence. This
will increase the total depletion expense to be reported in the future.
However, given the significance of the proved reserves to be added, relative
to its accumulated capital costs, depletion expense on a per-boe basis is
expected to be substantially reduced.
    Included in DD&A is an accretion charge of $659,000 (September 30, 2006 -
$212,000) in respect of the company's estimated asset retirement obligations.
These charges will continue to be necessary in the future to accrete the
currently booked discounted liability of $13.1 million to the estimated total
undiscounted liability of $41.7 million over the remaining economic life of
the company's oil and gas properties.

    INCOME TAXES

    The income tax provision of $18.2 million in the first nine months of
2007 includes a current income tax provision of $13.3 million, principally
related to US refinery operations and a future income tax provision of
$4.9 million relating to both Canadian and US operations.
    At September 30, 2007 the company had approximately $37.0 million of
non-capital losses which expire over time to 2027, $451.3 million of
deductible resource pools and $18 million of deductible financing costs.

    EQUITY INTEREST IN PETROLIFERA PETROLEUM LIMITED ("PETROLIFERA") AND
    DILUTION GAIN

    Connacher accounts for its 26 percent equity investment in Petrolifera on
the equity method basis of accounting. Connacher's equity interest share of
Petrolifera's earnings in the first nine months of 2007 was $6.1 million
(September 30, 2006 - $7.1 million).
    In April 2007, the company exercised its right to purchase 1.7 million
additional common shares in Petrolifera for total consideration of
$5.1 million. As a result, the company increased its equity interest. As other
Petrolifera shareholders similarly exercised their right to purchase
additional common shares in Petrolifera on identical terms, the company's
interest decreased to 26 percent, resulting in a dilution gain of
$1.9 million.

    NET EARNINGS

    In the first nine months of 2007, the company reported earnings of
$41.8 million ($0.21 per basic and diluted share outstanding) compared to
earnings of $3.7 million or $0.02 per basic and diluted share for the first
nine months of 2006. In 2007, the refinery contributed significantly to these
results, as did the recorded unrealized foreign exchange gains.

    SECURITIES OUTSTANDING

    For the first nine months of 2007, the weighted average number of common
shares outstanding was 198,539,469 (2006 - 179,947,783) and the weighted
average number of diluted shares outstanding, as calculated by the treasury
stock method, was 210,580,963 (2006 - 187,135,100).

    As at November 6, 2007, the company had the following securities issued
and outstanding:

    
    -   199,446,923 common shares;
    -   17,305,555 share purchase options;
    -   217,950 share units ("SUs") under the share award plan; and
    -   20,010,000 common shares issuable upon conversion of the
        $100,050,000 convertible debentures
    

    Details of the exercise provisions and terms of the outstanding options,
SUs and convertible debentures are noted in the consolidated financial
statements, included in this interim report.

    LIQUIDITY AND CAPITAL RE

SOURCES On May 25, 2007 Connacher issued senior unsecured subordinated convertible debentures with a face value of $100,050,000. The debentures mature June 30, 2012 unless converted prior to that date and bear interest at an annual rate of 4.75 percent payable semiannually on June 30 and December 31. The debentures are convertible at any time into common shares at the option of the holder at a conversion price of $5.00 per share. The debentures are redeemable or after June 30, 2010 by the company, in whole or in part at a redemption price equal to 100 percent of the principal amount of the debentures to be redeemed plus accrued and unpaid interest provided that the market price of the company's common shares is at least 120 percent of the conversion price of the debentures. The conversion feature of the debentures has been accounted for as a separate component of equity in the amount of $16,823,000. The remainder of the net proceeds of the debentures of $79,243,000 has been recorded as long-term debt, which will be accreted up to the face value of $100,050,000 over the five-year term of the debentures. Accretion and interest paid are recorded as finance charges on the consolidated statement of operations. If the debentures are converted to common shares, the value of the conversion feature will be reclassified to share capital along with the principal amounts converted. Proceeds of the financing were utilized as follows: ------------------------------------------------------------------------- As stated at the As actually time of financing applied ------------------------------------------------------------------------- ($000s) ------------------------------------------------------------------------- Gross proceeds $ 100,050 $ 100,050 ------------------------------------------------------------------------- Underwriters' commissions and issue costs 3,252 4,040 ------------------------------------------------------------------------- Net proceeds $ 96,798 $ 96,010 ------------------------------------------------------------------------- The net proceeds were used to fund the company's ongoing capital expenditure program in respect of the development of its oil sands projects, its conventional capital program, for operating expenses, and to repay $52.5 million of the company's conventional oil and gas operating line of credit, which had been drawn to temporarily fund some of the aforementioned capital and operating expenditures. In the second quarter of 2007, the company also renewed its revolving conventional oil and gas operating line of credit for one year for a limit of $50 million. At September 30, 2007, the company had a working capital deficiency of $19.9 million, including $754,000 of cash. This deficiency is covered by funds available on the company's credit facilities. In the first nine months of 2007, cash flow from operations was $37.9 million ($0.19 per basic and diluted share), 45 percent higher than the $26.2 million reported ($0.15 per basic and $0.14 diluted share) for the first nine months of 2006. A significant portion of this was contributed by the refinery. As the company's oil sands term loan is denominated in US dollars, there is a foreign exchange risk associated with its repayment using Canadian currency. The company's crude oil selling prices are established in relation to US dollar denominated markets and, therefore, provide a partial hedge to this exposure.The company has entered into an interest rate swap to mitigate some of the interest rate volatility associated with the variable interest rate inherent in the oil sands term loan. The company also entered into a natural gas costless collar to mitigate some downside natural gas pricing risk and, therefore, protect the risk of reduced cash flow from operations and the risk of reductions to the lending value of its conventional banking facilities, which is considered particularly important in a time of rapid growth with significant capital expenditure. This costless collar expired October 31, 2007. In late October 2007 the company announced that it entered into a "bought deal" financing agreement with a syndicate of underwriters to issue nine million common shares at $5.00 per share on a "flow-through" basis and use the proceeds ($45 million) to drill exploratory "core holes" and shoot seismic to assist in the delineation of additional oil sands reserves and resources and renounce to the subscribing investors the income tax benefits of such expenditures before December 31, 2007. The company has until December 31, 2008 to incur these expenditures. The underwriters have an option to purchase an additional 15 percent ("green shoe"). If the green shoe is filled, gross proceeds would be $51.75 million. This financing is expected to close on November 16, 2007. In early November 2007 the company announced that it is working with a syndicate of bankers to raise, on a "best efforts" basis, a five-year first lien secured term revolving credit facility and to issue long-term second lien senior secured notes. Such new debt arrangements would be structured to further enhance overall corporate liquidity and would better align Connacher's capitalization with the long life characteristics of its refining assets and its crude oil, natural gas and bitumen reserve and resource base and the associated estimated future net revenue of its reserves and resources, as determined by Connacher's qualified independent reserves evaluator. Connacher anticipates that the second lien senior secured notes would require only payments of interest at a fixed rate until maturity. This would allow the company to dedicate its available funds from operations to future capital expenditure programs without having to amortize or retire long term debt. As Connacher's bitumen production and sales from Great Divide increase, Connacher anticipates being increasingly self-sufficient in financing its prospective capital expenditure programs. However, to allow Connacher to retain an appropriately structured capitalization and also to pursue its growth objectives, these debt arrangements may in future be supplemented from time to time with issuances of common equity, if, as and when required, while simultaneously seeking to limit share dilution. There can be no assurance that the company will be able to complete the proposed debt financing arrangements as described above, or on terms and conditions acceptable to the company or at all. The company's only financial instruments are cash, accounts receivable and payable, bank debt, the interest rate swap and the natural gas costless collar. The company maintains no off-balance sheet financial instruments. Reconciliation of net earnings to cash flow from operations before working capital changes: ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 2007 2006 2007 2006 ------------------------------------------------------------------------- ($000s) ------------------------------------------------------------------------- Net earnings $ 14,589 $ 6,771 $ 41,801 $ 3,686 Items not involving cash: Depletion, depreciation and accretion 7,682 9,917 22,403 22,808 Stock-based compensation 1,493 1,478 4,772 6,672 Financing charges 810 (398) 1,134 1,910 Future employee benefits 107 128 359 253 Future income tax provision (recovery) (362) 1,414 4,905 (2,159) Foreign exchange (gain) loss (13,267) 163 (29,455) 201 Lease inducement amortization - (15) - (45) Dilution (gain) loss - 49 (1,896) (3) Equity interest in Petrolifera earnings (1,027) (4,550) (6,141) (7,139) ------------------------------------------------------------------------- Cash flow from operations before working capital changes $ 10,025 $ 14,957 $ 37,882 $ 26,184 ------------------------------------------------------------------------- Cash flow from operations before working capital changes ("cash flow"), cash flow per share and cash flow per boe do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow is reconciled with net earnings on the Consolidated Statement of Cash Flows and above. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding; cash flow per boe is calculated by dividing cash flow by the quantum of crude oil and natural gas (expressed in boe) sold in the period. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. CAPITAL EXPENDITURES AND FINANCING ACTIVITIES Capital expenditures totaled $64.0 million in the third quarter of 2007 and $267.1 million year-to-date (third quarter 2006 - $41.4 million; first nine months of 2006 - $376.6 million). A breakdown of these expenditures follows: ------------------------------------------------------------------------- Nine months ended September 30 ($000) 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Acquisition of Luke Energy Ltd. $ - $204,643 Acquisition of the Montana refinery assets - 66,333 Property acquisitions 13,904 7,216 Oil sands expenditures 217,590 83,562 Conventional oil and gas expenditures 25,852 13,862 Refinery expenditures 9,764 948 ------------------------------------------------------------------------- $267,110 $376,564 ------------------------------------------------------------------------- Oil sands expenditures include exploratory core hole drilling, seismic, lease acquisition on Pods One through Six and costs incurred for the development of Pod One. In the first nine months of 2007, 75 exploratory core holes were drilled. In the first nine months of 2006, 20 exploratory core holes were drilled. Conventional oil and gas expenditures include costs of drilling, completing, equipping and working over conventional oil and gas wells as well as undeveloped land acquisition and seismic expenditures. In 2007, 19 (18 net) conventional oil and gas wells were drilled, resulting in eight cased gas wells; one suspended gas well, two suspended oil wells (being evaluated); and eight (seven net) abandoned wells. A significant part of the company's capital program is discretionary and may be expanded or curtailed based on drilling results and the availability of capital. This is reinforced by the fact that Connacher operates most of its wells and holds an average of over 90 percent working interest in its PNG properties and 100% interest in its oil sands properties, providing the company with operational and timing controls. Great Divide Oil Sands Project, Northern Alberta The company holds a 100 percent working interest in approximately 95,000 acres of oil sands leases in northern Alberta. To date, the focus has been on an approximate 1,586 acre tract ("Pod One") on which approximately $300 million has been invested to acquire the oil sands leases, to delineate the oil bearing reservoir and to complete facilities related to Pod One, the company's first 10,000 bbl/d SAGD project. In September 2007 the Pod One facility was commissioned and the company commenced a 90-day plan to inject steam into each of the 15 horizontal well pairs to apply heat to the reservoir prior to placing the wells on production. To date, this operation is proceeding according to schedule and some incidental bitumen is being produced. This is affording the company the opportunity to assay test the quality of the bitumen and test its refining capabilities at its refinery in Montana in advance of committing to the sale of larger volumes, as planned. In June 2007 the company filed its application to regulators for permission to complete a second 10,000 bbl/d oil sands project (Algar) on its Great Divide property. Management plans to focus its attention on developing the Algar facility as soon as it receives regulatory approval. SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING ESTIMATES The significant accounting policies used by the company are described below. Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in these estimates and assumptions may have a material impact on the company's financial results and condition. The following discusses such accounting policies and is included herein to aid the reader in assessing the critical accounting policies and practices of the company and the likelihood of materially different results being reported. Management reviews its estimates and assumptions regularly. The emergence of new information and changed circumstances may result in changes to estimates and assumptions which could be material and the company might realize different results from the application of new accounting standards promulgated, from time to time, by various regulatory rule-making bodies. The following assessment of significant accounting polices is not meant to be exhaustive. Oil and Gas Reserves Under Canadian Securities Regulators' "National Instrument 51-101-Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. In accordance with this definition, the level of certainty should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated reserves. In the case of probable reserves, which are less certain to be recovered than proved reserves, NI 51-101 states that it must be equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. Possible reserves are those reserves less certain to be recovered than probable reserves. There is at least a 10 percent probability that the quantities actually recovered will exceed the sum of proved plus probable plus possible reserves. The company's oil and gas reserve estimates are made by independent reservoir engineers using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, legislation, reservoir performance or a change in the company's plans. The reserve estimates are also used in determining the company's borrowing base for its credit facilities and may impact the same upon revision or changes to the reserve estimates. The effect of changes in proved oil and gas reserves on the financial results and position of the company is described under the heading "Full Cost Accounting for Oil and Gas Activities." Full Cost Accounting for Oil and Gas Activities The company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether successful or not. The aggregate of net capitalized costs and estimated future development costs is depleted using the unit-of-production method based on estimated proved oil and gas reserves. NEW SIGNIFICANT ACCOUNTING POLICIES The company has assessed new and revised accounting pronouncements that have been issued. In 2007 the company has adopted, as necessary, the Canadian Institute of Chartered Accountants ("CICA") Sections 1530, 3251, 3855 and 3865 on "Comprehensive Income", "Equity", "Financial Instruments - Recognition and Measurement", and "Hedges" respectively, all of which were issued in January 2005. Under the new standards additional financial statement disclosure, namely the Consolidated Statement of Other Comprehensive Income, has been introduced which identifies certain gains and losses, including foreign currency translation adjustments and other amounts arising from changes in fair value, to be temporarily recorded outside the income statement. In addition, all financial instruments, including derivatives, are to be included in the company's Consolidated Balance Sheet and measured at fair values. Over the next five years the CICA will adopt its new strategic plan for the direction of accounting standards in Canada, which was ratified in January 2006. As part of the plan, Canadian GAAP for public companies will converge with International Financial Reporting Stands ("IFRS") over the next five years. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS. CONVERTIBLE DEBENTURES The convertible debentures have been recorded as a compound financial instrument in accordance with Section 3861 of the CICA Handbook. The fair value of the liability component has been determined at the date of issue based on the company's incremental borrowing rate for debt with similar terms. The amount of the equity component has been determined as a residual after deducting the amount of the liability component from the face value of the issue. SHARE AWARD PLAN Obligations for payments in cash or common shares under the company's share award plan for non-employee directors are accrued as compensation expense over the vesting period. Fluctuations in the price of the company's common shares change the accrued compensation expense and are recognized when they occur. BUSINESS RISKS Connacher is exposed to certain risks and uncertainties inherent in the oil and gas and refining businesses. Furthermore, it is exposed to financing and other risks which may impair its ability to realize on its assets or to capitalize on opportunities which might become available to it. Additionally, through the company's investment in Petrolifera which operates in foreign jurisdictions, the value of Connacher's investment is subject to political, economic and other uncertainties relating to Petrolifera's activities, including currency fluctuations, price controls and varying forms of fiscal regimes or changes thereto which may impair Petrolifera's ability to conduct profitable operations. The risks arising in the oil and gas industry include price fluctuations for both crude oil and natural gas over which the company has limited control; risks arising from exploration and development activities; production risks associated with the depletion of reservoirs and the ability to market production. Additional risks include environmental and safety concerns. For the Montana refinery, certain strategies could be used to reduce some commodity prices and operational risks. No attempt will be made to eliminate all market risk exposures when it is believed the exposure relating to such risk would not be significant to future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit. The refinery's profitability will depend largely on the spread between market prices for refined products sold and market prices for crude oil purchased. A substantial or prolonged reduction in this spread could have a significant negative effect on earnings, financial condition and cash flows. Petroleum commodity futures contracts could be utilized to reduce exposure to price fluctuations associated with crude oil and refined products. Such contracts could be used principally to help manage the price risk inherent in purchasing crude oil in advance of the delivery date and as a hedge for fixed-price sales contracts of refined products. Commodity price swaps and collar options could also be utilized to help manage the exposure to price volatility relating to forecasted purchases of natural gas. Contracts could also be utilized to provide for the purchase of crude oil and other feedstocks and for the sales of refined products. Certain of these contracts may meet the definition of a hedge and may be subject to hedge accounting. The supply and use of heavy crude oil from the company's Great Divide Oil Sands Project, as a feedstock for the refinery, would provide a physical hedge to this exposure, as planned. The refinery's operations are subject to normal hazards of operations, including fire, explosion and weather-related perils. Various insurance coverages, including business interruption insurance, are maintained in accordance with industry practices. However, the refinery is not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or, in management's judgment, premium costs are prohibitive in relation to the perceived risks. Additionally, Connacher has issued parental guarantees and indemnifications on behalf of the refinery. This is considered to be in the normal course of business. The company will require a significant amount of natural gas in order to generate steam for the SAGD process used at Great Divide. The company is exposed to the risk of changes in the price of natural gas, which could increase operating costs of the Great Divide project. It is anticipated this risk will be substantially mitigated by the production and sale of natural gas from the company's gas properties at Marten Creek acquired with the purchase of Luke Energy Ltd. Additionally, the company is exposed to exchange rate fluctuations since oil prices and its long term debt are denominated in US dollars, while the majority of its operating and capital costs are denominated in Canadian dollars. On an economic basis, the company's crude oil and bitumen reserves hedge the company's exposure to foreign currency fluctuations of its US dollar denominated term debt. Bitumen is generally less marketable than light or medium crude oil, and prices received for bitumen are generally lower than those for crude oil. The company is therefore exposed to the price differential between crude oil and bitumen; fluctuations in this differential could have a material impact on the company's profitability. The purchase of the Montana refinery was meant to help mitigate this risk exposure. The company relies on access to capital markets for new equity to supplement internally generated cash flow and bank borrowings to finance its growth plans. Periodically, these markets may not be receptive to offerings of new equity from treasury, whether by way of private placement or public offerings. This may be further complicated by the limited market liquidity for shares of smaller companies, restricting access to some institutional investors. An increased emphasis on flow-through share financings may accelerate the pace at which junior oil and gas companies become cash-taxable, which could reduce cash flow available for capital expenditures on growth projects. Periodic fluctuations in energy prices may also affect lending policies of the company's banker, whether for existing loans or new borrowings. This in turn could limit growth prospects over the short run or may even require the company to dedicate cash flow, dispose of properties or raise new equity to reduce bank borrowings under circumstances of declining energy prices or disappointing drilling results. The success of the company's capital programs as embodied in its productivity and reserve base could also impact its prospective liquidity and pace of future activities. Control of finding, development, operating and overhead costs per boe is an important criterion in determining company growth, success and access to new capital sources. The company attempts to mitigate its business and operational risk exposures by maintaining comprehensive insurance coverage on its assets and operations, by employing or contracting competent technicians and professionals, by instituting and maintaining operational health, safety and environmental standards and procedures and by maintaining a prudent approach to exploration and development activities. The company also addresses and regularly reports on the impact of risks to its shareholders, writing down the carrying values of assets that may not be recoverable. Furthermore, the company generally relies on equity financing and a bias towards conservative financing of its operations under normal industry conditions to offset the inherent risks of oil and gas exploration, development and production activities. Long-life reserves such as the oil sands now owned by the company may facilitate greater utilization of medium to long-term debt to finance development projects. Occasionally, the company utilizes forward sale, fixed price contracts to mitigate reduced product price risk and foreign exchange risk during periods of price improvement, primarily with a view to assuring the availability of funds for capital programs and to enhance the creditworthiness of its assets with its lenders. While hedging activities may have opportunity costs when realized prices exceed hedged pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management regularly reviews the need to utilize such financing techniques. Long-life reserves such as the oil sands now owned by the company may facilitate greater utilization of medium to long-term debt to finance development projects. Connacher accounts for its 26 percent investment in Petrolifera using the equity method basis of accounting. Accordingly, Connacher's financial results include its 26 percent interest in Petrolifera's earnings or losses. On August 20, 2007, Petrolifera advised the company and other shareholders and market participants of its exposure to short-term asset-backed security investments in Canada. As at July 31, 2007, Petrolifera had approximately $37.7 million of its total cash and cash equivalents invested in notes issued by two separate trusts in the asset-backed security markets. During August 2007 these investments became due and payable and were not repaid. There is no assurance as to the outcome of the crisis in the asset-backed commercial paper market and whether Petrolifera will be able to recover all or some portion of its investment therein. At September 30, 2007, Petrolifera has booked a fair valuation provision in respect of this. To the extent that Petrolifera is unsuccessful in its efforts to recover its investment in full, Petrolifera on a book basis may suffer a loss and Connacher will be required to account for its proportion of such loss in accordance with its accounting policies. In addition, any resultant decrease in the market value of Petrolifera will adversely affect the value of the company's investment in Petrolifera. DISCLOSURE CONTROLS AND PROCEDURES Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed, summarized and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. The company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this MD&A, that the company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure. INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the company is responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. There have been no changes in the company's systems of internal control over financial reporting that would materially affect, or is reasonably likely to materially affect, the company's internal controls over financial reporting. It should be noted that while the company's Chief Executive Officer and Chief Financial Officer believe that the company's disclosure controls and procedures provide a reasonable level of assurance that they are effective and that the internal controls over financial reporting are adequately designed, they do not expect that the financial disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In reaching a reasonable level of assurance, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. OUTLOOK The company's business plan anticipates substantial growth. Emphasis will continue to be on delineating and developing the Great Divide oil sands project in Alberta while continuing to develop the company's recently-expanded conventional production base and profitably operating the Montana refinery. The company is pursuing financing arrangements including the issuance of flow-through common shares, the securing of a five-year term revolving credit facility and the issuance of long-term second lien senior secured notes to further enhance overall corporate liquidity. The company anticipates that the notes would require only payments of interest at a fixed rate until maturity. This would allow the company to dedicate its available funds from operations to future capital expenditure programs without having to amortize or retire long term debt. As the company's bitumen production and sales from Great Divide increase, the company anticipates being increasingly self-sufficient in financing its prospective capital expenditure programs. However, to allow the company to retain an appropriately structured capitalization and also to pursue its growth objectives, these debt arrangements may in future be supplemented from time to time with additional issuances of common equity, if, as and when required, while simultaneously seeking to limit share dilution. In June 2007, the company submitted an application to the AEUB, and other related regulators and the government departments for approval to proceed with the development of Algar, the company's second oil sands project at Great Divide. Subject to receipt of timely approvals, we believe that field work could be initiated by mid-2008 to build related facilities and infrastructure. We are prepared to proceed once the regulatory approval and stakeholder consultation processes are completed. We estimate the cost to complete this project to be approximately $326 million, excluding capitalized interest, general and administrative and pre-operating costs. QUARTERLY RESULTS Fluctuations in results over the previous eight quarters are due principally to variations in oil and gas prices and the acquisitions of Luke Energy and the Montana refinery in 2006, both of which increased revenues substantially. Additionally, operating and general and administrative costs increased due to higher staff levels necessitated by the company's growth. Depletion, depreciation and amortization increased as a result of higher production volumes and additions to capital assets. ------------------------------------------------------------------------- 2005 2006 ------------------------------------------------------------------------- Three months ended Dec 31 Mar 31 Jun 30 Sept 30 Dec 31 ------------------------------------------------------------------------- Financial Highlights ($000 except per share amounts) - Unaudited ------------------------------------------------------------------------- Revenue net of royalties 2,978 3,635 61,239 103,108 76,700 ------------------------------------------------------------------------- Cash flow from operations before working capital changes 1,238 1,725 9,499 14,957 14,015 ------------------------------------------------------------------------- Basic, per share(1) 0.01 0.01 0.05 0.08 0.08 ------------------------------------------------------------------------- Diluted, per share(1) 0.01 0.01 0.05 0.08 0.07 ------------------------------------------------------------------------- Net earnings (loss) 582 (666) (2,419) 6,771 3,267 ------------------------------------------------------------------------- Basic and diluted per share - - (0.01) 0.03 0.02 ------------------------------------------------------------------------- Capital expenditures 2,241 300,836 34,280 41,449 74,960 ------------------------------------------------------------------------- Proceeds on disposal of PNG properties - - - - 10,000 ------------------------------------------------------------------------- Cash on hand 75,511 - 7,505 14,450 142,391 ------------------------------------------------------------------------- Working capital surplus (deficiency) 75,427 (11,061) (42,483) (39,942) 118,626 ------------------------------------------------------------------------- Long term debt - - - - 209,754 ------------------------------------------------------------------------- Shareholders' equity 129,108 337,584 340,639 378,730 385,398 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating Highlights ------------------------------------------------------------------------- Daily production/sales volumes ------------------------------------------------------------------------- Natural gas - mcf/d 86 2,600 15,172 13,028 11,291 ------------------------------------------------------------------------- Crude oil - bbl/d 775 689 1,026 1,084 1,139 ------------------------------------------------------------------------- Equivalent - boe/d(2) 789 1,122 3,554 3,256 3,256 ------------------------------------------------------------------------- Product pricing ------------------------------------------------------------------------- Crude oil - $/bbl 41.54 40.93 61.45 62.53 46.65 ------------------------------------------------------------------------- Natural gas - $/mcf 7.55 6.34 5.66 5.33 6.57 ------------------------------------------------------------------------- Selected Highlights - $/boe(2) ------------------------------------------------------------------------- Weighted average sales price 41.61 39.83 41.88 42.16 42.15 ------------------------------------------------------------------------- Royalties 7.76 8.02 10.43 10.72 9.00 ------------------------------------------------------------------------- Operating costs 8.90 8.24 7.63 7.99 9.27 ------------------------------------------------------------------------- PNG netback(4) 24.95 23.57 23.82 23.45 23.88 ------------------------------------------------------------------------- Common Share Information ------------------------------------------------------------------------- Shares outstanding at end of period (000) 139,940 191,257 191,924 197,878 197,894 ------------------------------------------------------------------------- Basic (000) 136,071 154,152 191,672 193,587 193,884 ------------------------------------------------------------------------- Diluted (000) 142,507 160,574 198,931 200,572 204,028 ------------------------------------------------------------------------- Volume traded during quarter (000) 100,246 148,184 80,347 48,849 46,444 ------------------------------------------------------------------------- Common share price ($) ------------------------------------------------------------------------- High 4.20 6.07 5.05 4.55 4.43 ------------------------------------------------------------------------- Low 1.09 3.47 3.10 3.09 3.17 ------------------------------------------------------------------------- Close (end of period) 3.84 4.95 4.30 3.60 3.49 ------------------------------------------------------------------------- ----------------------------------------------------- 2007 Three months ended Mar 31 Jun 30 Sept 30 ----------------------------------------------------- Financial Highlights ($000 except per share amounts) - Unaudited ----------------------------------------------------- Revenue net of royalties 65,923 93,266 101,991 ----------------------------------------------------- Cash flow from operations before working capital changes 10,980 16,876 10,025 ----------------------------------------------------- Basic, per share(1) 0.06 0.09 0.05 ----------------------------------------------------- Diluted, per share(1) 0.05 0.08 0.05 ----------------------------------------------------- Net earnings (loss) 4,984 22,228 14,589 ----------------------------------------------------- Basic and diluted per share 0.03 0.11 0.07 ----------------------------------------------------- Capital expenditures 109,881 93,223 64,006 ----------------------------------------------------- Proceeds on disposal of PNG properties - - - ----------------------------------------------------- Cash on hand 66,209 25,375 754 ----------------------------------------------------- Working capital surplus (deficiency) 24,027 36,320 (19,853) ----------------------------------------------------- Long term debt 207,828 272,559 260,606 ----------------------------------------------------- Shareholders' equity 384,593 417,793 428,764 ----------------------------------------------------- Operating Highlights ----------------------------------------------------- Daily production/sales volumes ----------------------------------------------------- Natural gas - mcf/d 9,665 9,017 9,413 ----------------------------------------------------- Crude oil - bbl/d 905 731 781 ----------------------------------------------------- Equivalent - boe/d(2) 2,515 2,234 2,350 ----------------------------------------------------- Product pricing ----------------------------------------------------- Crude oil - $/bbl 49.09 49.79 55.98 ----------------------------------------------------- Natural gas - $/mcf 7.76 7.02 4.70 ----------------------------------------------------- Selected Highlights - $/boe(2) ----------------------------------------------------- Weighted average sales price 47.48 44.63 37.43 ----------------------------------------------------- Royalties 11.22 3.23 6.32 ----------------------------------------------------- Operating costs 8.54 13.08 9.00 ----------------------------------------------------- PNG netback(4) 27.72 28.32 22.11 ----------------------------------------------------- Common Share Information ----------------------------------------------------- Shares outstanding at end of period (000) 198,218 198,834 199,447 ----------------------------------------------------- Basic (000) 198,119 198,360 198,539 ----------------------------------------------------- Diluted (000) 200,008 209,088 210,580 ----------------------------------------------------- Volume traded during quarter (000) 55,292 61,162 70,939 ----------------------------------------------------- Common share price ($) ----------------------------------------------------- High 4.13 4.43 4.40 ----------------------------------------------------- Low 3.07 3.07 3.20 ----------------------------------------------------- Close (end of period) 3.86 3.69 4.01 ----------------------------------------------------- (1) Cash flow from operations before working capital changes and cash flow per share do not have standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures used by other companies. Cash flow from operations before working capital changes includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow from operations before working capital changes is reconciled with net earnings on the Consolidated Statement of Cash Flows and in the accompanying Management Discussion & Analysis. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. (2) All references to barrels of oil equivalent (boe) are calculated on the basis of 6 mcf : 1 bbl. Boes may be misleading, particularly if used in isolation. This conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. (3) In the third quarter of 2005, the company discontinued consolidating the financial and operational results of Petrolifera Petroleum Limited. Comparative figures have not been restated. (4) PNG netback is a non-GAAP measure used by management as a measure of operating efficiency and profitability. It is calculated as petroleum and natural gas revenue less royalties and operating costs. Netbacks by product type are disclosed in the accompanying MD&A. CONSOLIDATED BALANCE SHEETS Connacher Oil and Gas Limited (Unaudited) ------------------------------------------------------------------------- September 30, December 31, ($000) 2007 2006 ------------------------------------------------------------------------- ASSETS ------------------------------------------------------------------------- CURRENT ------------------------------------------------------------------------- Cash and cash equivalents $ 754 $ 19,603 ------------------------------------------------------------------------- Restricted cash (Note 11 (c)) - 122,788 ------------------------------------------------------------------------- Accounts receivable 33,297 30,956 ------------------------------------------------------------------------- Inventories (Note 4) 22,886 24,437 ------------------------------------------------------------------------- Prepaid expenses 2,602 1,525 ------------------------------------------------------------------------- Income taxes recoverable 3,089 - ------------------------------------------------------------------------- Due from Petrolifera - 32 ------------------------------------------------------------------------- 62,628 199,341 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Property and equipment 623,101 384,311 ------------------------------------------------------------------------- Goodwill 103,676 103,676 ------------------------------------------------------------------------- Deferred costs 2,236 4,005 ------------------------------------------------------------------------- Investment in Petrolifera 34,777 21,597 ------------------------------------------------------------------------- $ 826,418 $ 712,930 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES ------------------------------------------------------------------------- CURRENT ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ 56,024 $ 57,571 ------------------------------------------------------------------------- Income taxes payable - 3,644 ------------------------------------------------------------------------- Revolving line of credit 26,400 19,500 ------------------------------------------------------------------------- Due to Petrolifera 57 - ------------------------------------------------------------------------- 82,481 80,715 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Asset retirement obligations (Note 5) 13,130 7,322 ------------------------------------------------------------------------- Employee future benefits (Note 11(d)) - 388 ------------------------------------------------------------------------- Long term debt (Note 7) 260,606 209,754 ------------------------------------------------------------------------- Future income taxes 41,437 29,353 ------------------------------------------------------------------------- 397,654 327,532 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY ------------------------------------------------------------------------- Share capital, contributed surplus and equity component (Note 8) 391,917 376,500 ------------------------------------------------------------------------- Accumulated other comprehensive loss (Note 3) (13,982) (130) ------------------------------------------------------------------------- Retained earnings 50,829 9,028 ------------------------------------------------------------------------- 428,764 385,398 ------------------------------------------------------------------------- $ 826,418 $ 712,930 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Connacher Oil and Gas Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------------------------------------------------------------- ($000, except per share amounts) 2007 2006 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- REVENUE ------------------------------------------------------------------------- Petroleum and natural gas revenue, net of royalties $ 6,726 $ 9,191 $ 23,346 $ 22,575 ------------------------------------------------------------------------- Refining and marketing sales 95,093 93,752 237,317 144,719 ------------------------------------------------------------------------- Interest and other income 172 165 517 690 ------------------------------------------------------------------------- 101,991 103,108 261,180 167,984 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EXPENSES ------------------------------------------------------------------------- Petroleum and natural gas operating costs 1,946 2,393 6,538 5,693 ------------------------------------------------------------------------- Refining - crude oil purchases and operating costs 81,107 80,242 194,210 127,346 ------------------------------------------------------------------------- General and administrative 1,584 605 6,832 2,780 ------------------------------------------------------------------------- Stock-based compensation (Note 8) 1,383 1,139 4,437 6,334 ------------------------------------------------------------------------- Finance charges 2,545 993 4,255 4,231 ------------------------------------------------------------------------- Foreign exchange loss (gain) (13,267) 163 (29,455) 201 ------------------------------------------------------------------------- Depletion, depreciation and accretion 7,682 9,917 22,403 22,808 ------------------------------------------------------------------------- 82,980 95,452 209,220 169,393 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings (loss) before income taxes and other items 19,011 7,656 51,960 (1,409) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Current income tax provision 5,811 3,972 13,291 4,206 ------------------------------------------------------------------------- Future income tax provision (recovery) (362) 1,414 4,905 (2,159) ------------------------------------------------------------------------- 5,449 5,386 18,196 2,047 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings (loss) before other items 13,562 2,270 33,764 (3,456) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Equity interest in Petrolifera earnings 1,027 4,550 6,141 7,139 ------------------------------------------------------------------------- Dilution gain (loss) (Note 6) - (49) 1,896 3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET EARNINGS 14,589 6,771 41,801 3,686 ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS (DEFICIT), BEGINNING OF PERIOD 36,240 (1,010) 9,028 2,075 ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS, END OF PERIOD $ 50,829 $ 5,761 $ 50,829 $ 5,761 ------------------------------------------------------------------------- EARNINGS PER SHARE (Note 11(a)) ------------------------------------------------------------------------- Basic $ 0.07 $ 0.03 $ 0.21 $ 0.02 ------------------------------------------------------------------------- Diluted $ 0.07 $ 0.03 $ 0.21 $ 0.02 ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Connacher Oil and Gas Limited Three Months Ended September 30 (Unaudited) ------------------------------------------------------------------------- ($000) 2007 ------------------------------------------------------------------------- Net earnings 14,589 ------------------------------------------------------------------------- Foreign currency translation adjustment (6,305) ------------------------------------------------------------------------- Net comprehensive income $8,284 ------------------------------------------------------------------------- Connacher Oil and Gas Limited Nine Months Ended September 30 (Unaudited) ------------------------------------------------------------------------- ($000) 2007 ------------------------------------------------------------------------- Net earnings 1,801 ------------------------------------------------------------------------- Foreign currency translation adjustment (13,852) ------------------------------------------------------------------------- Net comprehensive income $27,949 ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Connacher Oil and Gas Limited Three Months Ended September 30 (Unaudited) ------------------------------------------------------------------------- ($000) 2007 ------------------------------------------------------------------------- Balance, beginning of period $(7,677) ------------------------------------------------------------------------- Foreign currency translation adjustment (6,305) ------------------------------------------------------------------------- Balance, end of period $(13,982) ------------------------------------------------------------------------- Connacher Oil and Gas Limited Nine Months Ended September 30 (Unaudited) ------------------------------------------------------------------------- ($000) 2007 ------------------------------------------------------------------------- Balance, beginning of period $(130) ------------------------------------------------------------------------- Foreign currency translation adjustment (13,852) ------------------------------------------------------------------------- Balance, end of period $(13,982) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOW Connacher Oil and Gas Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------------------------------------------------------------- ($000) 2007 2006 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash provided by (used in) the following activities: ------------------------------------------------------------------------- ------------------------------------------------------------------------- OPERATING ------------------------------------------------------------------------- Net earnings $ 14,589 $ 6,771 $ 41,801 $ 3,686 ------------------------------------------------------------------------- Items not involving cash: ------------------------------------------------------------------------- Depletion, depreciation and accretion 7,682 9,917 22,403 22,808 ------------------------------------------------------------------------- Stock-based compensation (Note 8(a)) 1,493 1,478 4,772 6,672 ------------------------------------------------------------------------- Financing charges - non-cash portion 810 (398) 1,134 1,910 ------------------------------------------------------------------------- Employee future benefits 107 128 359 253 ------------------------------------------------------------------------- Future income tax provision (recovery) (362) 1,414 4,905 (2,159) ------------------------------------------------------------------------- Foreign exchange loss (gain) (13,267) 163 (29,455) 201 ------------------------------------------------------------------------- Dilution (gain) loss - 49 (1,896) (3) ------------------------------------------------------------------------- Lease inducement amortization - (15) - (45) ------------------------------------------------------------------------- Equity interest in Petrolifera earnings (1,027) (4,550) (6,141) (7,139) ------------------------------------------------------------------------- Cash flow from operations before non-cash working capital changes 10,025 14,957 37,882 26,184 ------------------------------------------------------------------------- Change in non-cash working capital (Note 11(b)) 30,885 8,636 (5,256) (24,335) ------------------------------------------------------------------------- Pension funding (781) - (781) - ------------------------------------------------------------------------- Site restoration expenditures (170) - (170) - ------------------------------------------------------------------------- 39,959 23,593 31,675 1,849 ------------------------------------------------------------------------- ------------------------------------------------------------------------- FINANCING ------------------------------------------------------------------------- Issue of common shares, net of share issue costs 837 28,270 1,355 123,558 ------------------------------------------------------------------------- Increase in bank debt 49,255 - 118,456 62,380 ------------------------------------------------------------------------- Repayment of bank debt (29,560) (7,985) (111,556) - ------------------------------------------------------------------------- Issuance of convertible debenture, net of issue costs (56) - 96,010 - ------------------------------------------------------------------------- Deferred financing costs - 548 - (2,245) ------------------------------------------------------------------------- 20,476 20,833 104,265 183,693 ------------------------------------------------------------------------- ------------------------------------------------------------------------- INVESTING ------------------------------------------------------------------------- Acquisition and development of oil and gas properties (63,423) (41,752) (260,121) (105,589) ------------------------------------------------------------------------- Decrease in restricted cash 4,485 - 122,788 - ------------------------------------------------------------------------- Acquisition of Luke Energy Ltd. - (38) - (92,677) ------------------------------------------------------------------------- Acquisition of refining assets - 767 - (61,273) ------------------------------------------------------------------------- Exercise of Petrolifera warrants (Note 6) - - (5,143) - ------------------------------------------------------------------------- Acquisition of other assets - - - (5,185) ------------------------------------------------------------------------- Change in non-cash working capital (Note 11(b)) (19,472) 3,603 (4,928) 17,294 ------------------------------------------------------------------------- (78,410) (37,420) (147,404) (247,430) ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,975) 7,006 (11,464) (61,888) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Impact of foreign exchange on foreign currency denominated cash balances (2,160) (61) (7,385) 827 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,889 7,505 19,603 75,511 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 754 $ 14,450 $ 754 $ 14,450 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary information - Note 11 ------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Connacher Oil and Gas Limited Period ended September 30, 2007 (Unaudited) 1. FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of Connacher Oil and Gas Limited and its subsidiaries (collectively "Connacher" or the "company") and are presented in accordance with Canadian generally accepted accounting principles. Operating in Canada, and in the U.S. through its subsidiary Montana Refining Company, Inc. ("the refinery"), the company is in the business of exploration and development of bitumen in the oil sands of northern Alberta, and exploring, developing, producing, refining and marketing conventional petroleum and natural gas. 2. SIGNIFICANT ACCOUNTING POLICIES The interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as indicated in the annual audited Consolidated Financial Statements for the year ended December 31, 2006, except as described below and in Note 3. The disclosures provided below do not conform in all respects to those included with the annual audited Consolidated Financial Statements. The interim consolidated Financial Statements should be read in conjunction with the annual audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2006. (a) Convertible debentures The convertible debentures have been classified as long term debt and equity at their fair value at the date of issue. The fair value of the liability component has been determined based on the company's incremental borrowing rate for debt with similar terms. The amount of the equity component has been determined as a residual after deducting the amount of the liability component from the face value of the issue. (b) Share award plan for non-employee directors Obligations for payments in cash or common shares under the company's share award plan for non-employee directors are accrued as compensation expense over the vesting period. Fluctuations in the price of the company's common shares change the accrued compensation expense and are recognized when they occur. 3. NEW ACCOUNTING STANDARDS Effective January 1, 2007 the company adopted CICA Handbook sections 1530, 3251, 3855, 3865 and revised section 3861 relating to Comprehensive Income, Equity, Financial Instruments - Recognition and Measurement, and Hedges, respectively. Under the new standards, additional financial statement disclosure, namely the Consolidated Statement of Comprehensive Income, has been introduced. This statement identifies certain gains and losses, which in the company's case include only foreign currency translation adjustments arising from translation of the company's U.S. refining subsidiary which is considered to be self-sustaining, that are recorded outside the income statement. Additionally, a separate component of equity, Accumulated Other Comprehensive Income ("AOCI"), has been introduced in the consolidated balance sheet to record the continuity of other comprehensive income balances on a cumulative basis. The adoption of comprehensive income has been made in accordance with the applicable transitional provisions. Accordingly, the December 31, 2006 period end accumulated foreign currency translation adjustment balance of $130,000 has been reclassified to AOCI. In addition, the change in the accumulated foreign currency translation adjustment balance for the nine months ended September 30, 2007 of $13,852,000 is now included in the Statement of Comprehensive Income (Loss) (nine months ended September 30, 2006 - nil). Finally, all financial instruments, including derivatives, are recorded in the company's consolidated balance sheet and measured at their fair values, with the exception of the oil sands term loan which is accounted for under the amortized cost method. Under section 3855, the company is required to classify its financial instruments into one of five categories. The company has classified all of its financial instruments, with the exception of the oil sands term loan and the convertible debentures, as Held for Trading, which requires measurement on the balance sheet at fair value with any changes in fair value recorded in income. This classification has been chosen due to the nature of the company's financial instruments, which, except for the oil sands term loan and the convertible debentures, are of a short-term nature such that there are no material differences between the carrying values and the fair values of these financial statement components. Transaction costs related to financial instruments classified as Held for Trading are recorded in income in accordance with the new standards. The US $180 million oil sands term loan and the convertible debentures have been classified as other liabilities (as defined by the accounting standard) and are accounted for on the amortized cost basis. The adoption of section 3865, "Hedges", has had no effect on the company's consolidated financial statements as the company does not account for its derivative financial instruments as hedges. Changes during the period in other comprehensive income and AOCI were as follows: ------------------------------------------------------------------------- Three months Nine months ended ended September 30, September 30, 2007 2007 ------------------------------------------------------------------------- ($000) Increase/ Increase/ (Decrease) (Decrease) ------------------------------------------------------------------------- Other comprehensive income $ (6,305) $ (13,852) ------------------------------------------------------------------------- Accumulated other comprehensive income (loss) $ (6,305) $ (13,852) ------------------------------------------------------------------------- Effective January 1, 2007, the company adopted the revised recommendations of CICA Handbook section 1506, Accounting Changes. The new recommendations permit voluntary changes in accounting policy only if they result in financial statements which provide more relevant and reliable financial information. Accounting policy changes must be applied retrospectively unless it is impractical to determine the period or cumulative impact of the change in policy. Additionally, when an entity has not applied a new primary source of GAAP that has been issued but is not yet effective, the entity must disclose that fact along with information relevant to assessing the possible impact that application of the new primary source of GAAP will have on the entity's financial statements in the period of initial application. As of January 1, 2008, the company will be required to adopt two new CICA Handbook requirements, section 3862, "Financial Instruments - Disclosures" and section 3863, "Financial Instruments - Presentation" which will replace current section 3861. The new standards require disclosure of the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments and how those risks are managed. The new presentation standard essentially carries forward the current presentation requirements. The company is assessing the impact of these new standards on its consolidated financial statements and anticipates that the main impact will be in terms of the additional disclosures required. As of January 1, 2008, the company will be required to adopt 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 company is assessing the impact of this new standard on its consolidated financial statements and anticipates that the main impact will be in terms of the additional disclosures required. 4. INVENTORIES Inventories consist of the following: ------------------------------------------------------------------------- ($000) September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Crude oil $ 4,321 $ 3,520 ------------------------------------------------------------------------- Other raw materials and unfinished products(1) 1,551 1,292 ------------------------------------------------------------------------- Refined products(2) 13,961 17,440 ------------------------------------------------------------------------- Process chemicals(3) 1,053 909 ------------------------------------------------------------------------- Repairs and maintenance supplies and other 2,000 1,276 ------------------------------------------------------------------------- $ 22,886 $ 24,437 ------------------------------------------------------------------------- (1) Other raw materials and unfinished products include feedstocks and blendstocks, other than crude oil. The inventory carrying value includes the costs of the raw materials and transportation. (2) Refined products include gasoline, jet fuels, diesels, asphalts, liquid petroleum gases and residual fuels. The inventory carrying value includes the cost of raw materials including transportation and direct production costs. (3) Process chemicals include catalysts, additives and other chemicals. The inventory carrying value includes the cost of the purchased chemicals and related freight. 5. ASSET RETIREMENT OBLIGATIONS The following table reconciles the beginning and ending aggregate carrying amount of the obligation associated with the company's retirement of its petroleum and natural gas properties and facilities. ------------------------------------------------------------------------- $(000) Nine months ended Year ended September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Asset retirement obligations, beginning of period $ 7,322 $ 3,108 ------------------------------------------------------------------------- Liabilities incurred 5,319 2,384 ------------------------------------------------------------------------- Liabilities acquired - 2,109 ------------------------------------------------------------------------- Liabilities disposed - (864) ------------------------------------------------------------------------- SIte restoration expenditures (170) - ------------------------------------------------------------------------- Change in estimated future cash flows - 237 ------------------------------------------------------------------------- Accretion expense 659 348 ------------------------------------------------------------------------- Asset retirement obligations, end of period $ 13,130 $ 7,322 ------------------------------------------------------------------------- Liabilities incurred in 2007 have been estimated using a discount rate of eight percent to reflect the company's credit-adjusted risk free interest rate given its current capital structure. The company has not recorded an asset retirement obligation for the Montana refinery as it is currently the company's intent to maintain and upgrade the refinery so that it will be operational for the foreseeable future. Consequently, it is not possible at the present time to estimate a date or range of dates for settlement of any asset retirement obligation related to the refinery. 6. RELATED PARTY TRANSACTIONS In April 2007, the company exercised its right to purchase 1.7 million additional common shares in Petrolifera for total consideration of $5.1 million. As a result, the company increased its equity interest. As other Petrolifera shareholders similarly exercised their right to purchase additional common shares in Petrolifera on identical terms, the company's interest decreased to 26 percent, resulting in a dilution gain of $1.9 million. 7. LONG TERM DEBT On May 25, 2007 Connacher issued senior unsecured subordinated convertible debentures with a face value of $100,050,000. The debentures mature June 30, 2012 unless converted prior to that date and bear interest at an annual rate of 4.75 percent payable semiannually on June 30 and December 31. The debentures are convertible at any time into common shares at the option of the holder at a conversion price of $5 per share. The debentures are redeemable or after June 30, 2010 by the company, in whole or in part, at a redemption price equal to 100 percent of the principal amount of the debentures to be redeemed plus accrued and unpaid interest provided that the market price of the company's common shares is at least 120 percent of the conversion price of the debentures. The conversion feature of the debentures has been accounted for as a separate component of equity in the amount of $16,823,000. The remainder of the net proceeds of the debentures of $79,243,000 has been recorded as long-term debt, which will be accreted up to the face value of $100,050,000 over the five-year term of the debentures. Accretion and interest paid are recorded as finance charges on the consolidated statement of operations. If the debentures are converted to common shares, the value of the conversion feature will be reclassified to share capital along with the principal amounts converted. ------------------------------------------------------------------------- Convertible debenture initially recognized, less issue costs of $2.8 million net of income taxes of $1.2 million $80,463 ------------------------------------------------------------------------- Accretion to September 30, 2007 1,079 ------------------------------------------------------------------------- 81,542 ------------------------------------------------------------------------- Oil sands term loan 179,064 ------------------------------------------------------------------------- $260,606 ------------------------------------------------------------------------- During the second quarter of 2007 the company's revolving line of credit, backed by its conventional reserve base, was renewed for $50 million for one year. 8. SHARE CAPITAL, CONTRIBUTED SURPLUS AND EQUITY COMPONENT Authorized The authorized share capital comprises the following: - Unlimited number of common voting shares - Unlimited number of first preferred shares - Unlimited number of second preferred shares Issued Only common shares have been issued by the company. ------------------------------------------------------------------------- Number Amount of Shares ($000) ------------------------------------------------------------------------- Share Capital: ------------------------------------------------------------------------- Balance, December 31, 2006 197,894,015 $ 363,082 ------------------------------------------------------------------------- Issued upon exercise of options(a) 1,443,933 1,399 ------------------------------------------------------------------------- Shares issued to directors as compensation(b) 108,975 392 ------------------------------------------------------------------------- Assigned value of options exercised - 494 ------------------------------------------------------------------------- Tax effect of expenditures renounced pursuant to the issuance of flow-through common shares(c) (9,000) ------------------------------------------------------------------------- Share issue costs (44) ------------------------------------------------------------------------- Balance, Share Capital, September 30, 2007 199,446,923 $ 356,323 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Contributed Surplus: ------------------------------------------------------------------------- Balance, December 31, 2006 $13,418 ------------------------------------------------------------------------- Fair value of share options granted 5,847 ------------------------------------------------------------------------- Assigned value of options exercised (494) ------------------------------------------------------------------------- Balance, Contributed Surplus, September 30, 2007 $ 18,771 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Equity component of convertible debentures, September 30, 2007 $ 16,823 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total Share Capital, Contributed Surplus and equity component: ------------------------------------------------------------------------- December 31, 2006 $ 376,500 ------------------------------------------------------------------------- September 30, 2007 $ 391,917 ------------------------------------------------------------------------- (a) Stock options A summary of the company's outstanding stock options, as at September 30, 2007 and 2006 and changes during those periods is presented below: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Options Price Options Price ------------------------------------------------------------------------- Outstanding, beginning of period 16,212,490 $ 3.31 8,592,600 $ 1.49 ------------------------------------------------------------------------- Granted 3,951,207 3.89 8,002,300 4.91 ------------------------------------------------------------------------- Exercised (1,443,933) 0.97 (982,365) 0.70 ------------------------------------------------------------------------- Expired (1,563,209) 4.02 - - ------------------------------------------------------------------------- Outstanding, end of period 17,156,555 $ 3.58 15,612,535 $ 3.29 ------------------------------------------------------------------------- Exercisable, end of period 9,227,065 $ 3.22 5,626,198 $ 2.47 ------------------------------------------------------------------------- All stock options have been granted for a period of five years. Options granted under the plan are generally fully exercisable after two or three years and expire five years after the date granted. The table below summarizes unexercised stock options. ------------------------------------------------------------------------- Weighted Average Weighted Remaining Average Number Contractual Exercise Range of Exercise Prices Outstanding Life at Price ------------------------------------------------------------------------- $0.20 - $0.99 2,068,302 2.1 $ 0.72 ------------------------------------------------------------------------- $1.00 - $1.99 1,646,000 2.7 1.58 ------------------------------------------------------------------------- $2.00 - $3.99 6,267,720 4.0 3.51 ------------------------------------------------------------------------- $4.00 - $5.56 7,174,533 3.6 4.92 ------------------------------------------------------------------------- 17,156,555 3.58 ------------------------------------------------------------------------- In the first nine months of 2007 a compensatory non-cash expense of $6.5 million (2006 - $9.5 million) was recorded, reflecting the amortization of the fair value of stock options over the vesting period and the fair value of shares granted to directors. Of this amount, $4.4 million (2006 - $6.3 million) was expensed, $335,000 (2006 - $338,000) was charged to refining operating costs, and $1.7 million (2006 - $2.8 million) was capitalized to property and equipment. In the third quarter of 2007 a compensatory non-cash expense of $2.1 million (2006 - $2.4 million) was recorded, reflecting the amortization of the fair value of stock options over the vesting period and the fair value of shares granted to directors. Of this amount, $1.4 million (2006 - $1.1 million) was expensed, $100,000 (2006 - $340,000) was charged to refining operating costs and $600,000 (2006 - $900,000) was capitalized to property and equipment. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with weighted average assumptions for grants as follows: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Risk free interest rate 4.6% 4.1% ------------------------------------------------------------------------- Expected option life (years) 3 3 ------------------------------------------------------------------------- Expected volatility 50% 49% ------------------------------------------------------------------------- The weighted average fair value at the date of grant of all options granted in the first nine months of 2007 was $1.54 per option (2006 - $1.81). (b) Share award plan for non-employee directors Shareholders of the company approved a share award incentive plan for non-employee directors at the company's Annual and Special meeting of Shareholders on May 10, 2007. Under the plan, a total of 326,925 share units were awarded to non-employee directors. In June 2007, 108,975 common shares were issued to directors as compensation under the plan. The remaining 217,950 share units vest one-half on January 1, 2008 and one-half on January 1, 2009. Under the share award plan, share units may be granted to non-employee directors of the company in amounts determined by the Board of Directors on the recommendation of the Governance Committee. Payment under the plan is made by delivering common shares to non-employee directors either through purchases on the TSX or by issuing shares from treasury, subject to certain limitations. The Board of Directors may also elect to pay cash equal to the fair market value of the common shares to be delivered to non-employee directors upon vesting of such share units in lieu of delivering shares. In the three months ended September 30, 2007, $215,000 (nine months ended September 30, 2007 - $607,000) was charged to stock-based compensation expense in respect of awards granted under the share award plan. (c) Flow through shares Effective December 31, 2006, the company renounced $30 million of resource expenditures to flow-through investors. The related tax effect of $9 million of these expenditures was recorded in 2007. The company incurred all of the required expenditures related to these flow-through shares in 2006 and 2007. 9. COMMODITY PRICE RISK MANAGEMENT During the first quarter of 2007 the company entered into a costless collar arrangement whereby the sales price for 5,000 mmbtu per day of the company's natural gas production was fixed within a range of US$7.00 per mmbtu - US$9.50 per mmbtu. The effective date of the arrangement commenced April 1, 2007 and continues until October 31, 2007. At September 30, 2007 the fair value of this collar was an asset of $100,000, which has been recorded in accounts receivable on the consolidated balance sheet and the gain has been included in PNG revenue. 10. SEGMENTED INFORMATION In Canada, the company is in the business of exploring and producing conventional petroleum and natural gas and is engaged in the exploration and development of bitumen in the oil sands of northern Alberta. In the U.S., the company is in the business of refining and marketing petroleum products. The significant aspects of these operating segments are presented below. Included in Canadian administrative assets is the company's carrying value of its investment in Petrolifera. ------------------------------------------------------------------------- Three months ended September 30, 2007 Canada Canada USA ------------------------------------------------------------------------- ($000) Oil and Adminis- Refining Gas trative Total ------------------------------------------------------------------------- Revenues, net of royalties $ 6,726 $ - $ 95,093 $101,819 ------------------------------------------------------------------------- Equity interest in Petrolifera earnings - 1,027 - 1,027 ------------------------------------------------------------------------- Dilution gain - - - - ------------------------------------------------------------------------- Interest and other income 73 - 99 172 ------------------------------------------------------------------------- Crude oil purchases and operating costs 1,946 - 81,107 83,053 ------------------------------------------------------------------------- General and administrative - 1,584 - 1,584 ------------------------------------------------------------------------- Stock-based compensation - 1,383 - 1,383 ------------------------------------------------------------------------- Finance charges - 2,545 - 2,545 ------------------------------------------------------------------------- Foreign exchange loss (gain) (13,267) - - (13,267) ------------------------------------------------------------------------- Depletion, depreciation and accretion 6,426 - 1,256 7,682 ------------------------------------------------------------------------- Tax provision 883 - 4,566 5,449 ------------------------------------------------------------------------- Net earnings (loss) 10,811 (4,485) 8,263 14,589 ------------------------------------------------------------------------- Property and equipment, net 567,117 7,139 48,845 623,101 ------------------------------------------------------------------------- Capital expenditures 55,511 4,575 3,920 64,006 ------------------------------------------------------------------------- Total assets 677,998 41,915 106,505 826,418 ------------------------------------------------------------------------- Three months ended September 30, 2006 ------------------------------------------------------------------------- Revenues, net of royalties $ 9,191 $ - $ 93,752 $102,943 ------------------------------------------------------------------------- Equity interest in Petrolifera earnings - 4,550 - 4,550 ------------------------------------------------------------------------- Dilution gain (loss) - (49) - (49) ------------------------------------------------------------------------- Interest and other income 18 - 147 165 ------------------------------------------------------------------------- Crude oil purchases and operating costs 2,393 - 80,242 82,635 ------------------------------------------------------------------------- General and administrative - 605 - 605 ------------------------------------------------------------------------- Stock-based compensation - 1,139 - 1,139 ------------------------------------------------------------------------- Finance charges - 1,970 (977) 993 ------------------------------------------------------------------------- Foreign exchange loss (gain) 86 104 (27) 163 ------------------------------------------------------------------------- Depletion, depreciation and accretion 8,652 - 1,265 9,917 ------------------------------------------------------------------------- Tax provision 266 - 5,120 5,386 ------------------------------------------------------------------------- Net earnings (loss) (2,188) 683 8,276 6,771 ------------------------------------------------------------------------- Property and equipment, net 286,420 456 43,710 330,586 ------------------------------------------------------------------------- Capital expenditures and acquisitions 40,116 335 998 41,449 ------------------------------------------------------------------------- Total assets 404,256 17,705 105,067 527,028 ------------------------------------------------------------------------- Nine months ended September 30, 2007 Canada Canada USA ------------------------------------------------------------------------- ($000) Oil and Adminis- Refining Gas trative Total ------------------------------------------------------------------------- Revenues, net of royalties $ 23,346 $ - $237,317 $260,663 ------------------------------------------------------------------------- Equity interest in Petrolifera earnings - 6,141 - 6,141 ------------------------------------------------------------------------- Dilution gain - 1,896 - 1,896 ------------------------------------------------------------------------- Interest and other income 197 - 320 517 ------------------------------------------------------------------------- Crude oil purchases and operating costs 6,538 - 194,210 200,748 ------------------------------------------------------------------------- General and administrative - 6,832 - 6,832 ------------------------------------------------------------------------- Stock-based compensation - 4,437 - 4,437 ------------------------------------------------------------------------- Finance charges - 4,255 - 4,255 ------------------------------------------------------------------------- Foreign exchange loss (gain) (29,455) - - (29,455) ------------------------------------------------------------------------- Depletion, depreciation and accretion 18,418 - 3,985 22,403 ------------------------------------------------------------------------- Tax provision (recovery) 4,302 - 13,894 18,196 ------------------------------------------------------------------------- Net earnings (loss) 23,740 (7,487) 25,548 41,801 ------------------------------------------------------------------------- Property and equipment, net 567,117 7,139 48,845 623,101 ------------------------------------------------------------------------- Capital expenditures and acquisitions 250,946 6,400 9,764 267,110 ------------------------------------------------------------------------- Total assets 677,998 41,915 106,505 826,418 ------------------------------------------------------------------------- Nine months ended September 30, 2006 ------------------------------------------------------------------------- Revenues, net of royalties $ 22,575 $ - $144,719 $167,294 ------------------------------------------------------------------------- Equity interest in Petrolifera earnings - 7,139 - 7,139 ------------------------------------------------------------------------- Dilution gain - 3 - 3 ------------------------------------------------------------------------- Interest and other income 431 - 259 690 ------------------------------------------------------------------------- Crude oil purchases and operating costs 5,693 - 127,346 133,039 ------------------------------------------------------------------------- General and administrative - 2,780 - 2,780 ------------------------------------------------------------------------- Stock-based compensation - 6,334 - 6,334 ------------------------------------------------------------------------- Finance charges - 2,277 1,954 4,231 ------------------------------------------------------------------------- Foreign exchange loss (gain) 124 104 (27) 201 ------------------------------------------------------------------------- Depletion, depreciation and accretion 20,689 - 2,119 22,808 ------------------------------------------------------------------------- Tax provision (recovery) (2,888) - 4,935 2,047 ------------------------------------------------------------------------- Net earnings (loss) (612) (4,353) 8,651 3,686 ------------------------------------------------------------------------- Property and equipment, net 286,420 456 43,710 330,586 ------------------------------------------------------------------------- Capital expenditures 308,838 445 67,281 376,564 ------------------------------------------------------------------------- Total assets 404,256 17,705 105,067 527,028 ------------------------------------------------------------------------- 11. SUPPLEMENTARY INFORMATION (a) Per share amounts The following table summarizes the common shares used in per share calculations. ------------------------------------------------------------------------- For the three months ended September 30 2007 2006 ------------------------------------------------------------------------- (000) ------------------------------------------------------------------------- Weighted average common shares outstanding 199,167 193,587 ------------------------------------------------------------------------- Dilutive effect of stock options and deferred share units 2,377 6,985 ------------------------------------------------------------------------- Dilutive effect of convertible debentures 20,010 - ------------------------------------------------------------------------- Weighed average common shares outstanding - diluted 221,554 200,572 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the nine months ended September 30 2007 2006 ------------------------------------------------------------------------- Weighted average common shares outstanding 198,539 179,948 ------------------------------------------------------------------------- Dilutive effect of stock options and deferred share units 2,586 7,187 ------------------------------------------------------------------------- Dilutive effect of convertible debentures 9,455 - ------------------------------------------------------------------------- Weighed average common shares outstanding - diluted 210,580 187,135 ------------------------------------------------------------------------- For the three months ended September 30, 2007, $1.4 million (nine months ended September 30, 2007 - $2 million) of interest and accretion expense on the convertible debentures has been added to net income in the numerator of the diluted earnings per share calculation. (b) Net change in non-cash working capital ------------------------------------------------------------------------- For the three months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Accounts receivable $ 10,191 $ (595) ------------------------------------------------------------------------- Inventories 14,289 9,392 ------------------------------------------------------------------------- Due from Petrolifera 16 248 ------------------------------------------------------------------------- Prepaid expenses (344) 122 ------------------------------------------------------------------------- Accounts payable and accrued liabilities (13,592) 3,072 ------------------------------------------------------------------------- Income taxes payable 853 - ------------------------------------------------------------------------- Total $ 11,413 $ 12,239 ------------------------------------------------------------------------- Summary of working capital changes: ------------------------------------------------------------------------- For the three months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Operations $ 30,885 $ 8,636 Investing (19,472) 3,603 ------------------------------------------------------------------------- $ 11,413 $ 12,239 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the nine months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Accounts receivable $ (2,341) $ (29,802) ------------------------------------------------------------------------- Due from Petrolifera 89 243 ------------------------------------------------------------------------- Prepaid expenses (990) (1,134) ------------------------------------------------------------------------- Inventories 1,551 1,361 ------------------------------------------------------------------------- Accounts payable and accrued liabilities (1,760) 22,291 ------------------------------------------------------------------------- Income taxes payable (6,733) - ------------------------------------------------------------------------- Total $ (10,184) $ (7,041) ------------------------------------------------------------------------- Summary of working capital changes: ------------------------------------------------------------------------- For the nine months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Operations $ (5,256) $ (24,335) ------------------------------------------------------------------------- Investing (4,928) 17,294 ------------------------------------------------------------------------- $ (10,184) $ (7,041) ------------------------------------------------------------------------- (c) Supplementary cash flow information ------------------------------------------------------------------------- For the three months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) $ $ ------------------------------------------------------------------------- Interest paid 6,478 931 ------------------------------------------------------------------------- Income taxes paid 4,600 - ------------------------------------------------------------------------- Stock-based compensation capitalized 612 900 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the nine months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) $ $ ------------------------------------------------------------------------- Interest paid 14,271 2,322 ------------------------------------------------------------------------- Income taxes paid 18,325 - ------------------------------------------------------------------------- Stock-based compensation capitalized 1,680 2,782 ------------------------------------------------------------------------- At September 30, 2007 cash of nil (December 31, 2006 - $122.8 million) was restricted for use in paying expenditures for a designated oil sands project under the terms of the company's financing arrangements for its oil sands project. (d) Defined benefit pension plan In the first nine months of 2007, $359,000 (2006 - $253,000) has been charged to expense in relation to the refinery's defined benefit pension plan. As at September 30, this plan was fully funded. 12. SUBSEQUENT EVENT In late October 2007 the company announced that it entered into a "bought deal" financing agreement with a syndicate of underwriters to issue nine million common shares at $5.00 per share on a "flow-through" basis and renounce to the subscribing investors the income tax benefits of expenditures the company has committed to spend. The company has until December 31, 2008 to incur these expenditures. The underwriters have the option to subscribe for an additional 15 percent to fill any over allotment. This financing is expected to close on November 16, 2007. This press release is not an offer to sell securities or the solicitation of an offer to buy securities in any jurisdiction. Securities may not be offered or sold in the United States absent registration or an applicable exemption from registration. Any public offering of securities to be made in the United States would be made by means of a prospectus that would be obtainable from Connacher and that would contain detailed information about Connacher and management, as well as financial statements. Forward-Looking Statements: This news release contains certain "forward-looking information" within the meaning of applicable securities law including statements regarding the Corporation's exploration and development plans, the proposed restructuring of the Corporation's current debt facilities and, the ability of the Corporation to raise additional debt and equity financing. Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate", "may", "will", "would", "potential", "proposed" and other similar words, or statements that certain events or conditions "may" or "will" occur. These statements are only predictions. Forward-looking information is based on the opinions and estimates of management at the date the information is provided, and is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information. These factors include the inherent risks involved in the exploration and development of oil sands properties, difficulties or delays in start-up operations, the uncertainties involved in interpreting drilling results and other geological data, fluctuating oil prices, the possibility of unanticipated costs and expenses, uncertainties relating to the availability and costs of financing needed in the future and other factors including unforeseen delays. As an oil sands enterprise in the development stage, Connacher faces risks including those associated with exploration, development, start-up, approvals and the ability to access sufficient capital from external sources. For a description of the risks and uncertainties facing Connacher and its business and affairs, readers should refer to Connacher's Annual Information Form for the year ended December 31, 2006. Connacher undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change, unless required by law. The reader is cautioned not to place undue reliance on forward-looking statements.

For further information:

For further information: Richard A. Gusella, President and Chief
Executive Officer, Connacher Oil and Gas Limited, Phone: (403) 538-6201, Fax:
(403) 538-6225, www.connacheroil.com, inquiries@connacheroil.com


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