Iteration Energy (ITX) announces June 30, 2009 second quarter results



    CALGARY, Aug. 13 /CNW/ - Iteration Energy Ltd. (TSX-ITX) ("Iteration" or
the "Company") announced today its unaudited financial and operating results
as at and for the three and six months ended June 30, 2009.


    
    CORPORATE SUMMARY

    -------------------------------------------------------------------------
                              Three months ended          Six months ended
    Financial Highlights            June 30,                  June 30,
    ($ thousands, except
     as noted)                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Production revenue
     before royalties         $44,936     $127,175     $103,629     $182,739

    Funds from operations(1)   $5,378      $52,824      $20,278      $81,337
    Per share ($) - basic       $0.03        $0.32        $0.11        $0.63
                  - diluted     $0.03        $0.31        $0.11        $0.62

    Net earnings (loss)      ($22,978)        $672     ($37,253)      $2,362
    Per share ($) - basic      ($0.12)       $0.00       ($0.21)       $0.02
                  - diluted    ($0.12)       $0.00       ($0.21)       $0.02

    Net capital expenditures   $4,196      $31,408      $39,556      $73,181

                                                           As at June 30,
                                                         2009         2008
    -------------------------------------------------------------------------
    Total assets                                       $986,421   $1,236,662
    Bank debt and working capital deficiency           $241,371     $241,519
    Common shares outstanding                       210,985,384  166,020,387
    Stock options outstanding                         9,847,708    8,498,045
    Warrants outstanding                                      -      116,667
    -------------------------------------------------------------------------
    (1) "Funds from operations" and "funds from operations per share" are
        financial measures that are not determined in accordance with GAAP.
        See "Non-GAAP Measures" in the Company's Management Discussion and
        Analysis.



    -------------------------------------------------------------------------
    Operating Highlights      Three months ended          Six months ended
                                    June 30,                  June 30,
                               2009         2008         2009         2008
                          ------------------------- -------------------------
    Production
    Natural gas (mcf/d)        74,650       76,563       76,934       62,180
    Light oil (bbls/d)          3,017        3,840        3,196        2,725
    Heavy oil (bbls/d)            203          168          190          192
    Natural gas liquids
     (bbls/d)                   1,474        1,377        1,431        1,237
                          ------------ ------------ ------------ ------------
    Total production
     (boe/d)                   17,137       18,146       17,640       14,517

    Prices
    Natural gas ($/mcf)         $3.46       $10.50        $4.45        $9.62
    Light oil ($/bbl)          $59.41      $129.54       $54.55      $119.31
    Heavy oil ($/bbl)          $49.32       $89.54       $44.80       $77.47
    Natural gas liquids
     ($/bbl)                   $31.13       $58.68       $33.11       $53.09
                          ------------ ------------ ------------ ------------
    Average price ($/boe)      $28.82       $77.02       $32.46       $69.16

    Operating Netback
     ($/boe)                    $8.58       $47.06       $10.53       $41.60

    Net Undeveloped Land
      ('000acres as at
      June 30)                                              851          748
    -------------------------------------------------------------------------
    

    PRESIDENT'S MESSAGE

    The second quarter of 2009 included some positive milestones for
Iteration; we successfully completed a $57.5 million equity offering, our bank
credit facilities were refinanced and a non-core property disposition program
was initiated with the majority of the transactions closed by the end of July
2009. The operating environment continued to be a challenge in the quarter as
gas prices weakened, while stronger oil prices provided some benefit, and
production expenses increased.
    Capital expenditures were curtailed in the quarter in response to weak
gas prices and limited activity due to spring break-up. Net capital
expenditures were $4.2 million for the quarter, a 90% decrease from the first
quarter of 2009. Approximately $2.2 million of dispositions were completed in
the second quarter.
    Average production for the quarter was 17,137 boed, down six percent from
the first quarter of 2009 as a result of facility maintenance turnarounds,
particularly at Gold Creek in northwest Alberta, and natural declines due to
lack of activity. In addition, approximately 750 boed of production was
shut-in due to low commodity prices in the second quarter of 2009. Of this
amount approximately 300 boed was oil, most of which we expect to bring back
on stream in the last half of the year. However given current gas prices we
are expecting to shut-in an additional 350 boed of gas production.
    Funds from operations for the quarter were $5.4 million ($0.03 per basic
and diluted share), 64% lower than in the first quarter of 2009 primarily due
to a decrease in average commodity prices and a decrease in production.
Production expenses continue to be a concern as prior period costs have
exceeded previous estimates and the fixed cost components of shut-in
production are increasing per unit costs. Initiatives are underway on two
fronts; one is improving the estimation process, and two is pursuing cost
savings with our various service providers in light of the economic
environment. In addition, the SemGroup receivable was written down by a
further $1.8 million to bring the total provision to $15.7 million, which
anticipates a recovery of 4% or $0.7 million of the initial receivable.
Without the additional SemGroup provision, funds from operations would have
been $7.2 million. The net loss for the quarter of $23.0 million ($0.12 per
basic and diluted share) is up from the $14.3 million net loss in the first
quarter and is consistent with the lower funds from operations.
    Progress was made during the quarter to improve the Company's financial
position even though funds from operations decreased. During the second
quarter, Iteration completed a $57.5 million equity financing at $1.28 per
share issuing approximately 45.0 million common shares, the net proceeds of
which were used to repay debt. In May 2009 a new $265 million credit facility
was also put in place to replace the previous $260 million facility. In July
2009 we completed $39.8 million in property dispositions with proceeds used to
reduce bank debt. The dispositions resulted in a $12.5 million reduction to
the borrowing base, which is now $252.5 million. Pro forma the dispositions,
total debt outstanding would have been approximately $200 million at the end
of the second quarter of 2009.
    Total proceeds from the Company's 2009 non-core property disposition
program are approximately $42 million (prior to closing adjustments; $2.2
million completed in the second quarter of 2009 and $39.8 million completed in
July 2009). Approximately 1,000 boed of production and 3.2 million boe of
proved plus probable reserves were disposed of through this initiative.
    Looking forward we have updated our guidance to reflect the property
dispositions, shut-in production, lower capital expenditures, higher
production expenses and changes to commodity prices. These changes result in
forecasted funds from operations for 2009 of approximately $40 million ($0.20
per basic share) based on annual capital expenditures of $65 million (net of
drilling incentive credits) and an average production range for the year of
15,600 to 16,100 boed. Economic parameters used for the last six months of
2009 in this forecast are; AECO gas price of $3.75/mcf, WTI oil price of
US$65.00/bbl and foreign exchange rate of Cdn$0.90 to US$1.00.
    Annual capital expenditures of $65 million have been reduced from our
previous guidance of $75 million due to lower funds from operations. Given the
increase in oil prices and the extension of the Alberta royalty and drilling
credit program we are altering our spending profile on oil prospects and have
cut spending on our remaining gas prospects. The extension of the Alberta
royalty and drilling credit program has allowed us to develop our Manyberries
(southeast Alberta) program in a more efficient manner by delaying part of the
capital program to 2010. This will permit us to drill wells after several of
the waterflood pools have been properly pressured up and still earn the
drilling credits. The higher oil prices have also made the economics on
several other areas more attractive, particularly at Rainbow (northwest
Alberta). Given the limited access to this area we will now shift part of our
capital spending from Manyberries to this area and expect drilling to commence
in October/November 2009. As activities for both Manyberries and Rainbow don't
begin until later in this year, we do not expect to see new production until
the first quarter of 2010.
    Previously we had forecasted funds from operations to exceed capital
expenditures in the second half of the year so that on an annual basis they
would be about equal. However given we have disposed of non-core properties,
we are directing additional capital to our oil prospects in core areas. We now
expect capital expenditures to be slightly higher than funds from operations
for the last half of the year, and as a result, exceed them by $25 million on
a full year basis.
    Our Company possesses a large inventory of gas prospects and a solid
inventory of oil prospects, some of which we are pursuing in the last half of
the year. While gas prices are currently too low to warrant capital
investment; a significant part of our gas inventory does make economic sense
at prices as low as $5.00/mcf at AECO. The forward commodity market currently
gives us the opportunity to establish prices at or in excess of this level.
The majority of our oil inventory is economic at today's prices and similar to
gas, the forward market allows us to lock in these prices. Given the
volatility we have experienced in commodity prices we expect to implement a
hedging program shortly to secure prices by way of either fixed price swaps or
options that meet or exceed our economic criteria. On average we expect to
ultimately hedge up to one third of our base production up to two years
forward. Ideally we will build this hedge portfolio over time and continue to
roll it forward.
    Effective August 12, 2009 Mr. Howard Crone resigned from the Board of
Directors in order to pursue other interests. On behalf of the Company I would
like to thank Howie for his valuable contribution to the Board and wish him
all the best in his future endeavors.
    The current gas operating environment is challenging and we expect it to
continue until a more robust economic recovery increases demand and the effect
of spending cuts starts to have a meaningful impact on supply. The oil
operating environment is more promising and we look forward to developing
these prospects in the second half of the year. We have been active in
improving our financial position and look to further secure that position
through some hedging activities. Our plans for the remainder of the year
provide a balance of capital spending to projected funds from operations.

    
    On behalf of the Board of Directors,

    (Signed) Brian Illing
    President & CEO
    August 12, 2009


    MANAGEMENT'S DISCUSSION AND ANALYSIS
    August 12, 2009
    

    The following is Management's Discussion and Analysis ("MD&A") of
Iteration Energy Ltd.'s (the "Company" or "Iteration") operating and financial
results as at and for the three and six months ended June 30, 2009 as well as
information and estimates concerning the Company's future outlook based on
currently available information. This discussion should be read in conjunction
with Iteration's unaudited interim consolidated financial statements as at and
for the three and six months ended June 30, 2009 and the audited consolidated
financial statements as at and for the years ended December 31, 2008 and 2007,
together with accompanying notes. Readers should also refer to Iteration's
Annual Information Form ("AIF") for the year ended December 31, 2008. All
financial information is reported in Canadian dollars, unless noted otherwise,
and in accordance with Canadian generally accepted accounting principles
("GAAP").
    Natural gas is converted to crude oil equivalent at a ratio of six
thousand cubic feet of natural gas to one barrel of oil equivalent ("boe").
Boe's may be misleading, particularly if used in isolation. A boe conversion
ratio of 6 mcf: 1 boe is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead.
    Additional information about Iteration filed with Canadian securities
commissions, including periodic quarterly and annual reports and the AIF, is
available on-line at www.iterationenergy.com and at www.sedar.com.
    The following MD&A contains forward looking information and statements.
We refer you to the end of the MD&A for our discussion on forward looking
information and statements in the section "ADVISORY - FORWARD LOOKING
INFORMATION".

    ITERATION OVERVIEW

    Iteration is a Canadian oil and gas company with focus areas in Northeast
British Columbia/Northwest Alberta, East Central Alberta and Southern Alberta.
The most significant currently producing properties are Boundary Lake in
Northeast British Columbia and Gold Creek, Knopcik and Manyberries in Alberta.

    NON-GAAP MEASURES

    This MD&A refers to "funds from operations" and "funds from operations
per share" which do not have any standardized meaning prescribed by Canadian
GAAP and therefore they may not be comparable with the calculation of similar
measures for other entities. Management uses "funds from operations" and
"funds from operations per share" (before changes in non-cash working capital)
to analyze operating performance and leverage. Funds from operations as
presented is not intended to represent operating cash flow or income from
operations for the period nor should it be viewed as an alternative to cash
flow from operating activities, net earnings or other measures of financial
performance calculated in accordance with Canadian GAAP. All references to
funds from operations and funds from operations per share throughout this MD&A
are based on cash flow from operating activities before changes in non-cash
working capital. The table below provides a reconciliation between cash flow
from operations and funds from operations.


    
    -------------------------------------------------------------------------
                                Three months ended          Six months ended
    ($ thousands)                          June 30,                  June 30,
                          ------------------------- -------------------------
                                 2009         2008         2009         2008
                          ------------------------- -------------------------
    Funds from operations      $5,378      $52,824      $20,278      $81,337
    Changes in non-cash
     working capital            3,286      (16,114)       9,195         (101)
                          ------------------------- -------------------------
    Cash flow from
     operations                $8,664      $36,710      $29,473      $81,236
    -------------------------------------------------------------------------
    

    OUTLOOK FOR 2009

    Iteration is updating its guidance for 2009 results issued on May 14,
2009 due to property dispositions of approximately 1,000 boed of production,
additional shut-in gas production of approximately 350 boed, changes in
commodity prices and reduced capital expenditures. The information below
presents the Company's expected results for the full year of 2009 (which
incorporates the actual results for the first six months of 2009, and the
forecast for the balance of the year), the May 14, 2009 guidance and the
difference between the two.


    
    -------------------------------------------------------------------------
                        2009 Forecast   2009 Previous May        Change
                                           14 Forecast
    -------------------------------------------------------------------------
    Production
     (boe/d)(1)
      Annual average   15,600 - 16,100    17,000 - 17,500                (8%)

    Capital program(2)
      Expenditures
       ($ million)                  65                 75               (13%)
      Net wells drilled             24                 25                (4%)

    Funds from
     operations(2)
      Annual ($ million)            40                 80               (50%)
      Annual per basic
       share ($)                  0.20               0.41               (51%)

    Year end net debt
     ($ million)                   205                220                (7%)

    Average Pricing:  (July - Dec 2009) (April - Dec 2009)
      Natural gas -
       AECO (Cdn$/mcf)            3.75               4.65               (19%)
      Oil - WTI
       (US$/bbl)                 65.00              60.00                 8%
      Foreign exchange
       rate (Cdn$/US$)            0.90               0.82                10%
    -------------------------------------------------------------------------
    Notes:
    (1) Production guidance reduced by 500 boed or 3% due to property
        dispositions and 175 boed or 1% due to expected additional shut-in
        gas production.
    (2) Previous guidance included Alberta drilling credits as a reduction of
        royalties. This guidance has applied the Alberta drilling credits to
        reduce capital expenditures. The amount of drilling credits included
        in this forecast is $4.7 million ($4.6 million in the previous
        guidance). Funds from operations include a $1.8 million additional
        provision for bad debts related to SemGroup's trade receivables in
        connection with its Companies' Creditors Arrangement Act ("CCAA")
        proceedings.
    

    Gas prices have continued to weaken from our previous forecast and
although WTI crude prices are projected to be higher, the stronger Canadian
dollar has left crude realizations slightly lower. A non-core disposition
program was initiated in the second quarter with the majority of the
transactions occurring in July resulting in approximately $42 million of
dispositions (prior to closing adjustments) consisting of approximately 1,000
boed of production (80% gas) with the proceeds used to repay debt. In addition
the Company expects to shut-in an additional 350 boed of gas production in the
second half of 2009 if current pricing persists.
    Funds from operations are expected to be lower mainly due to lower
production and commodity prices, partially offset by lower interest costs. As
a result, planned capital expenditures have been reduced with cuts to gas
drilling and delaying of some oil drilling at Manyberries in southern Alberta
to 2010. The extension of the Alberta drilling incentives allows Iteration to
follow a more efficient capital plan for this area. The recently announced
B.C. drilling incentives are not expected to affect capital spending plans for
the balance of the year based on our projection for gas prices.
    Royalty rates are forecasted to be approximately 19% for the year (versus
previous guidance of 18%) primarily due to lower commodity prices offset by
removing the Alberta drilling credits and which are now shown as a reduction
of capital expenditures. Production expenses continue to be affected by
non-operated prior period costs and are expected to average approximately
$14.25 per boe for 2009, about 13% higher than the previous forecast.
Production expenses for the last six months of 2009 are expected to average
approximately $13.00 per boe.
    General and Administrative ("G&A") expense is expected to average $2.20
per boe in 2009 versus previous guidance of $1.95 per boe primarily due to
lower production volumes. Interest expense is expected to be based on an
average interest rate of about 6% to reflect increased borrowing costs and
financing charges.
    Year-end debt is expected to decline to about $205 million as the
proceeds from the property dispositions have been applied to debt repayment
and funds from operations are expected to be slightly below capital
expenditures for the last six months of 2009.
    Should realized gas prices strengthen, the Company has an inventory of
drilling opportunities that can be undertaken. However, should realized prices
further weaken, the Company intends to scale back operations to ensure that
the projected capital program remains in line with projected funds from
operations for the last half of the year.
    The impact on the Company's 2009 funds from operations of a $1.00/mcf
increase in average AECO price for natural gas for the last six months of 2009
would be approximately $8.1 million. The impact of a US$5.00/bbl increase in
WTI for oil for the last six months of 2009 would be approximately $2.8
million. The impact of a one cent weakening of the Canadian Dollar versus the
U.S. dollar for the last six months of 2009 would be approximately $0.8
million. Using forward market pricing of $3.90/mcf for AECO gas, US$72.50 for
WTI oil and Canadian/US dollar exchange rate of 0.93, funds from operations
would be $5 million higher or $45 million.


    
    OPERATING RESULTS

    Production
    -------------------------------------------------------------------------
    Daily               Three months ended             Six months ended
     production              June 30,                      June 30,
                  ----------------------------- -----------------------------
    Average for
     the period     2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Natural gas
     (mcf/d)        74,650    76,563        (2)   76,934    62,180        24
    Natural gas
     liquids
     (bbls/d)        1,474     1,377         7     1,431     1,237        16
    Light oil
     (bbls/d)        3,017     3,840       (21)    3,196     2,725        17
    Heavy oil
     (bbls/d)          203       168        21       190       192        (1)
    ------------------------------------------- -----------------------------
      Total
       production
       (boed)       17,137    18,146        (6)   17,640    14,517        25
    -------------------------------------------------------------------------
    

    Average daily production for the three months ended June 30, 2009 was 6%
below the same period in 2008 primarily due to lower drilling activity over
the past six months and natural production declines. Shut-in production due to
low commodity prices averaged approximately 750 boed for the second quarter of
2009. Both periods were impacted by facility maintenance turnarounds.
    Average daily production for the six months ended June 30, 2009 was 25%
higher than the prior year period primarily due to the acquisition of Cyries
Energy Inc. ("Cyries") which was completed March 7, 2008. As a result, the
prior year period only includes approximately 4 months of Cyries production.


    
    Commodity Prices

    -------------------------------------------------------------------------
    Industry            Three months ended             Six months ended
     benchmarks              June 30,                      June 30,
                  ----------------------------- -----------------------------
    Average for
     the period     2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Natural gas
     (AECO $/mcf)    $3.46    $10.22       (66)    $4.21     $9.10       (54)
    Edmonton Light
     crude ($/bbl)  $65.90   $126.07       (48)   $57.78   $111.79       (48)
    Hardisty Lloyd
     blend ($/bbl)  $60.29   $103.05       (41)   $51.27    $89.66       (43)
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Realized
     commodity          Three months ended             Six months ended
     prices                  June 30,                      June 30,
                  ----------------------------- -----------------------------
    Average for
     the period     2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Natural gas
     ($/mcf)         $3.46    $10.50       (67)    $4.45     $9.62       (54)
    Natural gas
     liquids
     ($/bbl)        $31.13    $58.68       (47)   $33.11    $53.09       (38)
    Light oil
     ($/bbl)        $59.41   $129.54       (54)   $54.55   $119.31       (54)
    Heavy oil
     ($/bbl)        $49.32    $89.54       (45)   $44.80    $77.47       (42)
    ------------------------------------------- -----------------------------
    Total ($/boe)   $28.82    $77.02       (63)   $32.46    $69.16       (53)
    -------------------------------------------------------------------------
    

    Natural gas prices realized for the three and six months ended June 30,
2009 decreased 67% and 54% respectively from the same periods in the prior
year, which is consistent with the average benchmark price decreases.
Similarly the light oil realized price for the second quarter and first half
of 2009 decreased by 54% as compared to the same periods of 2008, which is
slightly higher than the 48% decrease in average benchmark prices.


    
    Revenue

    -------------------------------------------------------------------------
    Production
     revenue
     before             Three months ended             Six months ended
     royalties               June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)   2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Production
     revenue       $44,936  $127,175       (65) $103,629  $182,739       (43)
    -------------------------------------------------------------------------
    

    Production revenue for the three months ended June 30, 2009 decreased 65%
compared to the corresponding period in 2008 primarily due to the 63% decrease
in realized commodity prices. For the six months ended June 30, 2009
production revenue decreased 43% compared to the same period in 2008 as the
reduction in commodity prices was partially offset by an increase in
production.
    For the three months and six months ended June 30, 2009 and 2008 gas
represented a little over 70% of the Company's production and ranged between
52% and 60% of the Company's revenue.


    
    Royalties

    -------------------------------------------------------------------------
                        Three months ended             Six months ended
                             June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)
     except where
     noted)         2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Royalties       $6,517   $27,199       (76)  $18,659   $38,878       (52)
    Per boe ($/boe)  $4.18    $16.47       (75)    $5.84    $14.71       (60)
    Percentage of
     revenue (%)      14.5      21.4       (32)     18.0      21.3       (15)
    -------------------------------------------------------------------------
    

    Royalty expenses on an absolute, per boe and percentage of revenue basis
all decreased in 2009 compared to the corresponding periods in 2008 primarily
due to lower commodity prices, particularly gas prices, and the new Alberta
Royalty Framework which was enacted in 2009. The new royalty framework is more
sensitive to prices; the average rate dropped from 20.7% in the first quarter
of 2009 to 14.5% in the second quarter of 2009. Royalties represent amounts
paid by the Company for crown, freehold and gross overriding royalties. The
vast majority of the Company's royalty expenses are for crown royalties.


    
    Production Expenses

    -------------------------------------------------------------------------
    Production          Three months ended             Six months ended
     expenses                June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)   2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Total
     production
     expenses      $23,752   $20,291        17   $48,633   $30,488        60

    Per boe
     ($/boe)        $15.23    $12.29        24    $15.23    $11.54        32
    -------------------------------------------------------------------------
    

    Production expenses have increased in 2009 over the 2008 periods due to
higher per unit costs and for the first half of 2009 due to a 25% increase in
production compared to the first half of 2008. Per unit production costs have
increased in the 2009 periods compared to the previous year largely due to the
inclusion of revisions of estimates of prior period costs and the fixed cost
component associated with shut-in production volumes. The Company continues to
experience late charges from vendors and partners particularly for processing,
workover and labour costs. Excluding these costs, operating costs for the
first half of 2009 would have been $12.54 per boe. The implementation of
processes and systems that began earlier this year to improve the timeliness
of data and analysis relating to operating costs is progressing and is
expected to be fully operational by the end of 2009.


    
    Transportation Expenses

    -------------------------------------------------------------------------
                        Three months ended             Six months ended
                             June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)
     except where
     noted)         2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Transportation
     expenses       $1,301    $1,982       (34)   $2,735    $3,451       (21)

    Per boe ($/boe)  $0.83     $1.20       (31)    $0.86     $1.31       (34)
    -------------------------------------------------------------------------

    Transportation expenses for the quarter and six months ended June 30, 2009
were lower compared to the prior year periods on an absolute and per boe basis
primarily as a result of a better allocation of the Company's production
between firm and interruptible transportation contracts.


    Operating Netback

    -------------------------------------------------------------------------
                        Three months ended             Six months ended
                             June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($/boe)         2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    Production
     revenue        $28.82    $77.02       (63)   $32.46    $69.16       (53)
    Royalties        (4.18)   (16.47)      (75)    (5.84)   (14.71)      (60)
    Production
     expenses       (15.23)   (12.29)       24    (15.23)   (11.54)       32
    Transportation
     expenses        (0.83)    (1.20)      (31)    (0.86)    (1.31)      (34)
    ------------------------------------------- -----------------------------
    Operating
     netback         $8.58    $47.06       (82)   $10.53    $41.60       (75)
    -------------------------------------------------------------------------
    

    The operating netback per boe (before general and administrative
expenses) realized for the three and six months ended June 30, 2009 has
decreased significantly compared to the same periods in 2008 largely due to
the drop in commodity prices. Increased production expenses were more than
offset by lower royalties and transportation expenses.


    
    General and Administrative Expenses

    -------------------------------------------------------------------------
                       Three months ended              Six months ended
                             June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)
     except where
     noted)         2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------
    General
     and admin-
     istrative
     costs
     before the
     following:     $4,145    $4,285        (3)   $9,001    $7,390        22
    Capitalized
     overhead       (1,047)   (1,020)        3    (2,707)   (1,790)       51
    Overhead
     recoveries        (35)      (70)      (50)     (105)     (128)      (18)
    ------------------------------------------- -----------------------------
    General and
     administrative
     expense        $3,063    $3,195        (4)   $6,189    $5,472        13
    ------------------------------------------- -----------------------------

    Per boe ($/boe)  $1.96     $1.93         2     $1.94     $2.07       (17)
    -------------------------------------------------------------------------
    

    G&A expenses for the three months ended June 30, 2009 decreased compared
to the corresponding period in 2008 due to the absence of initially higher
costs included in the 2008 period immediately following the acquisition of
Cyries. On a per boe basis the costs are relatively similar between the two
periods.
    For the six months ended June 30, 2009 the absolute G&A costs are higher;
however per boe costs are lower than the prior year period. Costs are higher
because the first quarter of 2008 includes less than one month of Cyries
operations while the entire 2009 period has costs for the combined entity.
However per boe costs are lower in 2009 due to a higher production base.

    SemGroup Receivable

    During the second quarter of 2009 the Company increased the provision for
the un-collectability of the SemCanada and SemCams trade receivables by $1.8
million reflecting an ultimate recovery of 4% or $0.6 million. A provision of
$15.7 million ($13.9 million at December 31, 2008) had been provided for as a
result of these companies filing for CCAA protection.

    Stock Based Compensation Expense

    The Company's stock option plan provides option holders the right to
request, upon exercise, to receive a cash payment in exchange for surrendering
the option, provided the request is accepted by the Company. The cash payment
is equal to the appreciated value of the option, as determined by the
difference between the option's exercise price and the Company's closing share
price on the Toronto Stock Exchange the day prior to surrendering the option.
On June 20, 2008, with the approval of shareholders, the stock option plan was
amended and restated to limit the total number of common shares that may be
issued under the stock option plan to a maximum of 16,000,000. This
represented and continues to represent less than 10% of the then and currently
issued and outstanding common shares of the Company. In June of 2009 the
Company provided employees (excluding officers and directors) the option to
surrender options they held with a strike price above $3.50 per share and in
turn receive 40% of their surrendered number of options with a strike price at
the then prevailing share price of $1.40. As a result 3.4 million options were
surrendered and 1.3 million options were issued. At June 30, 2009 and August
12, 2009, options to purchase 9.8 million common shares were outstanding,
which represents 4.6% of the outstanding common shares of the Company at that
time.
    For the three and six months ended June 30, 2009, $35,000 of stock based
compensation expense was recorded by the Company compared to $13.8 million and
$20.9 million respectively for the corresponding periods in 2008.
    Future fluctuations in the stock based compensation expense or recoveries
are dependent on the movement of the Company's share price and the number of
options vested and outstanding. Based on the June 30, 2008 share price of
$1.17, had all of the 9,847,708 stock options outstanding been vested,
aggregate stock-based compensation expense and a corresponding liability of
$276,000 would have been recognized.

    
    Interest and Financing Expense

    -------------------------------------------------------------------------
                       Three months ended              Six months ended
                            June 30,                       June 30,
                  ----------------------------- -----------------------------
    ($ thousands)
     except where
     noted)         2009      2008    % Change    2009      2008    % Change
    ------------------------------------------- -----------------------------

    Interest and
     financing
     expense        $3,215    $3,067         5    $4,833    $4,179        16

    Per boe ($/boe)  $2.06     $1.86        11     $1.51     $1.58        (4)
    -------------------------------------------------------------------------
    

    Interest and financing expense primarily represents interest on bank debt
but also includes financing charges and expenses related to bank debt.
Interest and financing expense has increased in the 2009 periods compared to
2008 due to overall higher debt levels, partially offset by lower interest
costs. Debt levels have increased as capital expenditures have exceeded funds
from operations, equity financings and property disposition proceeds. The
majority of the Company's bank debt is borrowed by way of Bankers'
Acceptances. The second quarter of 2009 also includes costs related to the
refinancing of the Company's bank debt facility.


    
    Depletion, Depreciation, and Accretion

    -------------------------------------------------------------------------
                        Three months ended             Six months ended
                             June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)
     except where
     noted)          2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------

    Depletion,
     depreciation
     and accretion $36,800   $39,045        (6)  $72,500   $60,600        19

    Per boe ($/boe) $23.60    $23.65        (0)   $22.71    $22.94        (1)
    -------------------------------------------------------------------------

    Depletion, depreciation, and accretion ("DD&A") expense is lower for the
second quarter of 2009 compared to the prior year period primarily due to
lower production. For the first half of 2009 higher production is increasing
DD&A expense compared to the prior year period. On a per boe basis DD&A
expense is within 1% of each other between the 2009 and 2008 periods.


    Funds from Operations and Net Income/(Loss)

    -------------------------------------------------------------------------
                        Three months ended             Six months ended
                             June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)
     except where
     noted)          2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Funds from
     operations     $5,378   $52,824       (90)  $20,278   $81,337       (75)
      per share -
       basic ($)     $0.03     $0.32       (91)    $0.11     $0.63       (83)
      per share -
       diluted ($)   $0.03     $0.31       (90)    $0.11     $0.62       (82)
      per boe
       ($/boe)       $3.45    $31.99       (89)    $6.35    $30.79       (79)

    Net (Loss)
     /income      ($22,978)     $672    (3,319) ($37,253)   $2,362    (1,677)
      per share -
       basic ($)    ($0.12)    $0.00         -    ($0.21)    $0.02    (1,150)
      per share -
       diluted ($)  ($0.12)    $0.00         -    ($0.21)    $0.02    (1,150)
      per boe
       ($/boe)     ($14.73)    $0.41    (3,692)  ($11.66)    $0.89    (1,410)

    Weighted
     average shares
     outstanding
      basic ('000) 193,197   165,812        17   179,684   129,266        39
      diluted
       ('000)      193,197   168,413        15   179,684   131,242        37
    -------------------------------------------------------------------------
    

    Iteration's funds from operations for the three months ended June 30,
2009 was $5.4 million compared to $52.8 million for the same period in 2008.
For the six months ended June 30, 2009 the Company's funds from operations of
$20.3 million compares to $81.3 million for the prior year period. The
reduction was primarily a result of significantly weaker commodity prices
combined with higher production expense and the additional provision for the
SemGroup receivable partially offset by lower royalties.
    Iteration's net loss for the three months ended June 30, 2009 was $23.0
million, as compared to a net income of $0.7 million for the three months
ended June 30, 2008. For the six months ended June 30, 2009 the Company's net
loss of $37.3 million compares to net income of $2.4 million for the prior
year period. The losses primarily arise as a result of lower funds from
operations and, higher DD&A expense for the six months ended June 30, 2009,
partially offset by a recovery of future income taxes.
    Weighted average shares outstanding in the second quarter of 2009
increased approximately 17% over the prior year period primarily due to the
45.0 million common share equity issue completed in May 2009. For the six
months ended June 30, 2009 weighted average shares outstanding increased over
the prior year period due to the equity issue completed in May 2009 and the
94.0 million shares issued in conjunction with the Cyries acquisition in March
2008 being outstanding for the entire period.


    
    Selected Quarterly Data

    -------------------------------------------------------------------------
                        2009                           2008
    -------------------------------------------------------------------------
    Quarter
     ended        June 30    Mar 31     Dec 31   Sept 30   June 30    Mar 31
    -------------------------------------------------------------------------
    Production
     (boe/d)       17,137    18,165     18,001    18,507    18,146    10,890
    Revenues
     ($000)       $44,936   $58,693    $70,656  $108,444  $127,175   $55,564
    -------------------------------------------------------------------------
    Average
     realized
     prices
     ($/boe)       $28.82    $35.93     $43.08    $64.32    $77.02    $56.08
    Royalties
     ($/boe)        $4.18     $7.43      $7.61    $13.71    $16.47    $11.79
    Production
     expense
     ($/boe)       $15.23    $15.23     $11.02    $10.99    $12.29    $10.29
    Transportation
     expense
     ($/boe)        $0.83     $0.88      $0.71     $0.77     $1.20     $1.48
    Operating
     netback
     ($/boe)        $8.58    $12.39     $23.75    $38.85    $47.06    $32.52
    Net G&A expense
     ($/boe)        $1.96     $1.92      $1.19     $1.62     $1.93     $2.30
    Net interest
     expense
     ($/boe)        $2.06     $0.99      $1.58     $1.48     $1.86     $1.12
    -------------------------------------------------------------------------
    Funds from
     operations
     ($000)        $5,378   $14,900    $31,152   $59,338   $52,824   $28,511
      per boe
       ($/boe)      $3.45     $9.11     $18.81    $34.85    $31.99    $28.77
      per share -
       basic ($)    $0.03     $0.09      $0.19     $0.36     $0.32     $0.31
      per share -
       diluted ($)  $0.03     $0.09      $0.19     $0.35     $0.31     $0.31
    -------------------------------------------------------------------------
    Net income
     (loss)      ($22,978) ($14,275) ($244,894)  $26,696      $672    $1,689
      per boe
       ($/boe)    ($14.73)   ($8.73)  ($147.87)   $15.68     $0.41     $1.70
      per share -
       basic ($)   ($0.12)   ($0.09)    ($1.48)    $0.16     $0.00     $0.02
      per share -
       diluted ($) ($0.12)   ($0.09)    ($1.48)    $0.16     $0.00     $0.02
    -------------------------------------------------------------------------
    Net capital
     expenditures
     ($000)        $4,196   $35,360    $74,043   $68,837   $31,408   $41,774
    -------------------------------------------------------------------------

    Bank debt and
     working
     capital
     deficiency
     ($000)
     as at       $241,652  $296,726   $276,130  $232,467  $222,129  $216,959

    -------------------------------------------------------------------------


    --------------------------------
                        2007
    --------------------------------
    Quarter
     ended         Dec 31   Sept 30
    --------------------------------
    Production
     (boe/d)        7,989     6,304
    Revenues
     ($000)       $29,265   $22,161
    --------------------------------
    Average
     realized
     prices
     ($/boe)       $39.84    $38.21
    Royalties
     ($/boe)        $8.12     $9.29
    Production
     expense
     ($/boe)       $11.97     $6.53
    Transportation
     expense
     ($/boe)        $1.09     $1.29
    Operating
     netback
     ($/boe)       $18.66    $21.10
    Net G&A expense
     ($/boe)        $2.37     $2.19
    Net interest
     expense
     ($/boe)        $1.37     $0.69
    --------------------------------
    Funds from
     operations
     ($000)       $11,103   $10,561
      per boe
       ($/boe)     $15.11    $18.21
      per share -
       basic ($)    $0.16     $0.16
      per share -
       diluted ($)  $0.16     $0.16
    --------------------------------
    Net income
     (loss)       ($3,149)  ($1,985)
      per boe
       ($/boe)     ($4.28)   ($3.42)
      per share -
       basic ($)   ($0.05)   ($0.03)
      per share -
       diluted ($) ($0.05)   ($0.03)
    --------------------------------
    Net capital
     expenditures
     ($000)       $17,610   $71,316

    --------------------------------
    Bank debt and
     working
     capital
     deficiency
     ($000)
     as at        $61,012   $82,938

    --------------------------------
    

    Compared to the immediately preceding quarter Iteration's second quarter
2009 production declined 6% primarily due to facility maintenance turnarounds
and natural declines. Revenues have decreased 23% as commodity prices continue
to fall (down 20% from the preceding quarter) and lower production. With lower
commodity prices, royalties decreased 44% on a per boe basis and fell to 14.5%
from 20.7% on a percentage of revenue basis compared to the first quarter of
2009. Production and transportation expense were relatively flat on a per boe
basis between the first and second quarter of 2009 as prior period costs are
included in both quarters. Operating netback on a per boe basis in the second
quarter of 2009 has fallen 31% compared to the first quarter of 2009 primarily
due to lower commodity prices partially offset by lower royalties. Between the
first and second quarters of 2009 net G&A expense on a per boe basis is
relatively unchanged while net interest expense per boe has increased due to
overall higher borrowing costs and financing charges related to the new
borrowing facility. Funds from operations for the second quarter of 2009 is
64% lower than the first quarter of 2009 due to lower operating netback,
higher net interest expense and an additional $1.8 million provision for the
SemGroup receivable. Similarly the net loss between the periods increased 61%.
Capital expenditures decreased 88% from the first quarter to the second
quarter of 2009 as spring breakup reduced capital activities (traditionally
the second quarter is a slower capital activity period absent acquisitions)
and the Company curtailed expenditures due to lower funds from operations.
Total debt fell $55 million or 19% between the first and second quarters of
2009 as the Company completed an equity issue for net proceeds of
approximately $54 million in the second quarter and funds from operations
exceeded capital expenditures for the quarter.


    
    Capital Expenditures

    -------------------------------------------------------------------------
                        Three months ended             Six months ended
                             June 30,                      June 30,
                  ----------------------------- -----------------------------
    ($ thousands)    2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------

    Acquisition/
     (disposi-
     tions)        ($2,151)   $2,929      (227)  ($2,378)   $4,546      (248)
    Land               874    18,622       (95)    3,798    21,129       (82)
    Seismic            967     1,478       (35)    2,222     4,014       (45)
    Drill, complete
     & facilities    3,459     7,359       (53)   33,207    41,702       (19)
    Capitalized G&A  1,047     1,020         3     2,707     1,790        22
    -------------------------------------------------------------------------
    Total           $4,196   $31,408       (87)  $39,556   $73,181       (46)
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Wells drilled       Three months ended             Six months ended
     (net)                   June 30,                      June 30,
                  ----------------------------- -----------------------------
                     2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------

    Gas                  -       2.1       n/a       4.8      21.6       (78)
    Oil                  -       4.0       n/a       1.1       6.9       (84)
    Injector             -         -       n/a         -       1.0       n/a
    Dry                  -         -       n/a         -       1.7       n/a
    ------------------------------------------- -----------------------------
    Total                -       6.1       n/a       5.9      31.2       (81)
    ------------------------------------------- -----------------------------
    Success rate (%)     -     100.0       n/a     100.0      94.6       (46)
    -------------------------------------------------------------------------
    

    The Company completed $2.2 million of property dispositions in the second
quarter of 2009 compared to $2.9 million of property acquisitions in the same
period of 2008. Land expenditures have decreased significantly in 2009 from
the prior year periods in 2008 as the second quarter of 2008 included
successful land sales in the BC and West Alberta core areas. Lower overall
activity levels have reduced seismic expenditures approximately 20% in 2009
from the prior year periods in 2008. Similarly drill, complete, equip and
facility expenditures were significantly reduced in the second quarter of 2009
compared to the prior year period as the Company did not participate in any
wells in the second quarter compared to 6.1 net wells in the prior year
period. Costs for the second quarter of 2009 primarily relate to complete and
equipping activities from first quarter 2009 activities.

    CAPITAL AND LIQUIDITY RE

SOURCES The Company's liquidity depends upon cash flow from operations, supplemented as necessary by equity and debt financings, and its new credit facility. As an oil and gas company, the Company has a declining asset base and therefore relies on ongoing exploration, development and acquisitions to replace production and add additional reserves. Future oil and natural gas production and reserves are highly dependent on the success of exploiting the Company's existing asset base and in acquiring additional reserves. To the extent the Company is successful or unsuccessful in these activities, funds from operations could be increased or reduced. The Company currently has budgeted for a drilling and exploration program of $65 million for 2009. Of this amount approximately $40 million has been spent in the first half of 2009. For the balance of the year the Company is forecasting funds from operations of approximately $20 million versus capital expenditures of $25 million. The $5 million of capital expenditures in excess of funds from operations for the last half of the year is expected to be funded through the Company's credit facility. The Company continually monitors its capital spending program in light of the recent volatility with respect to commodity prices and Canadian dollar exchange rates to ensure the Company expects to be able to meet future anticipated obligations incurred from normal ongoing operations with funds from operations and draws on the Company's syndicated facility. The Company's financial position improved during the quarter due to a $57.5 million common share equity financing and the establishment of a new credit facility. As at June 30, 2009, the Company had drawn $246.0 million on its $265 million credit facility. At that time, the Company had a working capital surplus of $4.6 million, for a total net debt of $241.3 million. Subsequent to the quarter end the Company closed $40 million of non-core property dispositions, the proceeds of which were used to repay the credit facility. As a result of the dispositions the Company's borrowing base was reduced by $12.5 million to $252.5 million. On a pro forma basis total net debt at the end of the second quarter would have been approximately $200 million including the net proceeds from the dispositions. Operating Leases The Company has entered into various operating leases with respect to its office space. The leases expire between September 30, 2012, and June 30, 2014, and require the following future minimum lease payments, by calendar year; ------------------------------------------------------------------------- Gross Commitment Sublet Recovery Net Commitment ($000) ($000) ($000) ------------------------------------------------------------------------- 2009 $1,769 ($634) $1,135 2010 $3,537 ($1,268) $2,269 2011 $3,537 ($1,268) $2,269 2012 $3,220 ($951) $2,269 2013 $2,269 - $2,269 2014 $1,135 - $1,135 ------------------------------------------------------------------------- The office space previously occupied by Cyries has been sublet on a full recovery flow through basis commencing June 1, 2008 through to September 30, 2012. Currently the subtenant has been awarded CCAA protection, however the Company continues to receive rent payments on time. Related Party Transactions There were no related party transactions during the three months ended June 30, 2009. Outstanding Common Shares, Warrants and Options As at June 30, 2009 and August 12, 2009, there were 210,985,384 common shares and 9,847,708 million options outstanding. CRITICAL ACCOUNTING ESTIMATES In the application of accounting policies, management is often required to make judgments based on underlying estimates and assumptions about future events and their effects. Underlying estimates and assumptions are based on historical experience and other factors that management believes to be reasonable under the circumstances. These estimates and assumptions are subject to change as new events occur and additional information is obtained. Reference should be made to the MD&A for the year ended December 31, 2008 for a description of the Company's most critical accounting estimates used in determining its financial results. Impact of New Accounting Pronouncements Goodwill and Intangible Assets ------------------------------ Effective January 1, 2009, the Company adopted the Section 3064 Goodwill and Intangible Assets, which converges Canadian GAAP for goodwill and intangible assets with IFRS. The new standard provides more comprehensive guidance on intangible assets, particularly for internally developed intangible assets but had no current impact on the Company's financial reporting. New Accounting Standards issued Subsequent to Year End ------------------------------------------------------ In January 2009, the CICA issued three new accounting standards, Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements and Section 1602 Non controlling interests each of which are effective for fiscal years beginning on or after January 1, 2011 and further align Canadian GAAP with IFRS. Earlier adoption of these recommendations is permitted. International Financial Reporting Standards ("IFRS") ---------------------------------------------------- The Canadian Accounting Standards Board has now confirmed that the use of IFRS will be required in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace current Canadian GAAP followed by the Company. The Company will be required to begin reporting under IFRS effective January 1, 2011 and will be required to provide information following IFRS for the comparative period. The Company is currently developing a changeover plan to complete the transition to IFRS by January 1, 2011, including the preparation of required comparative information. The key elements of the plan include: - determine appropriate changes to accounting policies and required amendments to financial disclosures; - identify and implement changes in associated processes and information systems; - comply with internal control requirements; - educate and train internal and external stakeholders. At June 30, 2009, the Company had completed a diagnostic study of the anticipated impact of the transition to IFRS. The Company is currently analyzing the accounting policy alternatives and identifying implementation options for the corresponding process changes. As IFRS is expected to change prior to 2011, the impact of IFRS on the Company's consolidated financial statements is not reasonably determinable at this time. Disclosure Controls and Procedures and Internal Controls over Financial Reporting The Company has implemented disclosure controls and procedures, as defined in National Instrument 52-109-Certification of Disclosure in Issuer's Annual and Interim Filings ("NI52-109"), to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management, as appropriate, to allow timely decisions regarding required disclosures. Management is also responsible for establishing and maintaining adequate internal control over the Company's financial reporting. The Company's internal control system was designed to provide reasonable assurance that all transactions are accurately recorded, that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company's assets are safeguarded. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedure may deteriorate. The CEO and CFO are required to certify on the effectiveness of the Company's disclosure controls and procedures concurrent with filing its interim financial statements to the first half of 2009 in accordance with NI 52-109. The Company's CEO and CFO, together with management, have concluded, based on their evaluation of the effectiveness of the Company's disclosure controls and procedures as of June 30, 2009, that information required to be disclosed by the Company is (i) recorded, processed, summarized and reported within the time periods specified in Canadian securities legislation and (ii) accumulated and communicated to the Company's management, including its CEO and CFO, to allow timely decisions regarding required disclosure. The CEO and CFO have also assessed the effectiveness of the Company's internal control over financial reporting as at December 31, 2008. In making its assessment, management engaged an external third party to evaluate the operating effectiveness of the internal controls to support their certifications. This evaluation identified certain duties within the accounting and finance department that could not be properly segregated, given the Company's limited staff level. However, none of the segregation of duty deficiencies are believed to have resulted in a misstatement in the financial statements as the Company relies on certain compensating controls, including a substantive periodic review of the financial statements and other financial information by the CEO and the audit committee. This weakness is considered to be a common deficiency for many smaller listed companies in Canada. During the three months ended June 30, 2009, there were no material changes in the Company's disclosure controls and procedures or internal control over financial reporting, other than the addition of senior accounting personnel, including a Controller and Manager of Financial Accounting, which will aid the Company in improving its segregation of duties. In addition a new information management system is being implemented which, once fully functional, will allow management to obtain financial and operational information in a more timely manner. This system is expected to be fully functional prior to the end of 2009. It should be noted that while the Company's CEO and CFO believe that the Company's disclosure controls and procedures and internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal controls over financial reporting will necessarily 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. ADVISORY - FORWARD-LOOKING INFORMATION This MD&A was prepared on August 12, 2009 and is management's assessment of Iteration's historical operating and financial results for the three and six months ended June 30, 2009. The reader should be aware that historical results are not necessarily indicative of future performance. This MD&A contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of Canadian securities laws. All statements other than statements of historical fact are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should"," expects", "projects", "plans", "anticipates" and similar expressions. In particular, this discussion contains forward-looking statements pertaining to the following: - the timing and amount of production; - natural gas, natural gas liquids and crude oil production levels; - commodity prices for natural gas, natural gas liquids and crude oil; - royalties payable and future royalty rates under the New Alberta Royalty Regime; - royalties payable and future royalty rates under the Transitional Alberta Royalty program; - the Alberta royalty incentive program including drilling credits announced on March 3, 2009; - production expenses; - transportation expenses; - operating netbacks; - general and administrative expenses; - interest expenses and interest rates; - Canadian dollar exchange rates; - capital expenditures; - capital and liquidity; - funds from operations; - debt levels; - ratio of debt to funds from operations; - number of net wells; and - outlook for 2009. Certain forward-looking statements may constitute "financial outlooks" as contemplated by National Instrument 51-102 - Disclosure Obligations, which are provided for the purpose of forecasting Iteration's financial position for the last six months of 2009 and as at December 31, 2009. Please note that the financial outlook in this MD&A may not be appropriate for purposes other than as stated above. Forward-looking statements and information are based on the Company's current beliefs as well as assumptions made by, and information currently available to, the Company concerning anticipated financial performance, business prospects, strategies, regulatory developments, future natural gas, natural gas liquids and crude commodity prices, future natural gas, natural gas liquids and crude oil production levels, the ability to obtain equipment in a timely manner to carry out development activities, the ability to market natural gas successfully to current and new customers, the impact of increasing competition, the ability to obtain financing on acceptable terms, and the ability to add production and reserves through development and exploration activities. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. Undue reliance should not be placed on these forward-looking statements, which are based upon management's assumptions and are subject to known and unknown risks and uncertainties, including the business risks discussed below, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Iteration's actual results could differ materially from those anticipated in our forward-looking statements as a result of the risk factors set forth below and noted elsewhere in this MD&A which include but are not limited to: - volatility in market prices for oil and natural gas; - risks inherent in Iteration's operations; - uncertainties associated with estimating reserves; - competition for, among other things: capital, acquisitions of reserves, undeveloped lands and skilled personnel; - incorrect assessments of the value of acquisitions; - geological, technical, drilling and process problems; - general economic conditions including fluctuations in the price of oil and natural gas; - royalties payable in respect of Iteration's production; - governmental regulation of the oil and gas industry, including environmental regulation; - fluctuation in foreign exchange or interest rates; - unanticipated operational events that can reduce production or cause production to be shut-in or delayed; - stock market volatility and market valuations; - counterparty credit risk; - the need to obtain required approvals from regulatory authorities; - environmental risks; - insurance limitations risks; - risks inherent in replacing reserves; - reliance on operators and key employees; - access to funding and issuance of debt; - aboriginal claims; and - availability of drilling equipment, access restrictions and cost inflation. Further information regarding these factors may be found under the heading "Risk Factors" in the AIF. Readers are cautioned that this list of risk factors is not exhaustive. The Company undertakes no obligation, except as required by applicable securities legislation, to update publicly or to revise any of the included forward looking statements, whether as a result of new information, future events or otherwise. The forward looking statements contained herein are expressly qualified by this cautionary statement. Iteration Energy Ltd. Consolidated Balance Sheets (unaudited) As at June 30, December 31, (in thousands of dollars) 2009 2008 ------------------------------------------------------------------------- ASSETS Current Cash $ 139 $ 6,832 Accounts receivable (Note 9(f)) 32,422 43,996 Prepaids and other current assets 12,100 10,846 ------------------------------------------------------------------------- 44,661 61,674 Property, plant and equipment (Note 4) 941,760 973,529 ------------------------------------------------------------------------- $ 986,421 $ 1,035,203 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness (Note 5) $ 246,000 $ 266,800 Accounts payable and accrued liabilities (Note 6) 39,997 71,004 Stock based compensation payable (Note 8(c)) 35 - ------------------------------------------------------------------------- 286,032 337,804 Future income taxes 77,395 92,539 Leasehold inducements 127 193 Asset retirement obligation (Note 7) 43,532 43,323 ------------------------------------------------------------------------- 407,086 473,859 ------------------------------------------------------------------------- Commitments and contingencies (Note 10) Shareholders' equity Share capital (Note 8 (b)) 860,545 805,301 Deficit (281,210) (243,957) ------------------------------------------------------------------------- 579,335 561,344 ------------------------------------------------------------------------- $ 986,421 $ 1,035,203 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the unaudited interim consolidated financial statements. Iteration Energy Ltd. Consolidated Statements of Earnings (Loss), Comprehensive Earnings (Loss) and Deficit (unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, ------------------------------------------------------------------------- (in thousands of dollars, except per share amounts) 2009 2008 2009 2008 ------------------------------------------------------------------------- Revenue Production revenue $ 44,936 $ 127,175 $ 103,629 $ 182,739 Royalties (6,517) (27,199) (18,659) (38,878) Other production revenue 222 629 217 958 ------------------------------------------------------------------------- 38,641 100,605 85,187 144,819 ------------------------------------------------------------------------- Expenses Production 23,752 20,291 48,633 30,488 Transportation 1,301 1,982 2,735 3,451 General and administrative 3,063 3,195 6,189 5,472 Stock based compensation (Note 8(c)) 35 13,799 35 20,908 Interest on debt 3,215 3,067 4,833 4,179 Depletion, depreciation and accretion 36,800 39,045 72,500 60,600 ------------------------------------------------------------------------- 68,166 81,379 134,925 125,098 ------------------------------------------------------------------------- Income (loss) before the following (29,525) 19,226 (49,738) 19,721 Non-cash charge related to warrants - (3,546) - (3,546) Provision for bankruptcy: SemGroup LP (Note 9 (f)) (1,812) (9,348) (1,812) (9,348) Recovery of investment tax credits - - - 1,820 ------------------------------------------------------------------------- Earnings (loss) before income taxes (31,337) 6,332 (51,550) 8,647 ------------------------------------------------------------------------- Income taxes Current income tax expense 1 171 13 671 Future income tax expense (recovery) (8,360) 5,489 (14,310) 5,614 ------------------------------------------------------------------------- (8,359) 5,660 (14,297) 6,285 ------------------------------------------------------------------------- Net earnings (loss) and comprehensive earnings (loss) (22,978) 672 (37,253) 2,362 Deficit, beginning of period $ (258,232) $ (16,716) $ (243,957) $ (18,406) Charge on modification of warrant terms - (10,029) - (10,029) ------------------------------------------------------------------------- Deficit, end of period $ (281,210) $ (26,073) $ (281,210) $ (26,073) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings (loss) per common share (Note 8(d)) $ (0.12) $ - $ (0.21) $ 0.02 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the unaudited interim consolidated financial statements Iteration Energy Ltd. Consolidated Statements of Cash Flows (unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, ------------------------------------------------------------------------- (in thousands of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings (loss) $ (22,978) $ 672 $ (37,253) $ 2,362 Add (deduct) non-cash items: Depletion, depreciation and accretion 36,800 39,045 72,500 60,600 Recovery of investment tax credits - - - (1,820) Future income tax expense (recovery) (8,360) 5,489 (14,310) 5,614 Amortization of leasehold inducements (33) (41) (66) (95) Stock-based compensation expense (Note 8 (c )) 35 4,130 35 11,240 Non-cash charge related to warrants - 3,546 - 3,546 Asset retirement expenditures (86) (17) (628) (110) ------------------------------------------------------------------------- 5,378 52,824 20,278 81,337 Net change in non-cash operating working capital (Note 11) 3,286 (16,114) 9,195 (101) ------------------------------------------------------------------------- 8,664 36,710 29,473 81,236 ------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds on sale of property plant and equipment 2,151 105 2,378 646 Acquisition of subsidiary - (176) - (778) Acquisition of oil and gas properties - (2,858) - (4,414) Additions to oil and gas properties (6,347) (28,479) (41,934) (68,635) Additions to other capital assets (200) (475) (335) (515) Net change in non-cash investing working capital (Note 11) (19,125) (27,286) (29,746) (31,650) ------------------------------------------------------------------------- (23,521) (59,169) (69,637) (105,346) ------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from (repayment of) bank indebtedness (39,545) 78,960 (20,800) 80,630 Common shares issued 57,555 2,900 57,555 2,900 Exercise of warrants - (20,851) - (20,851) Share issue costs (3,146) (4) (3,146) (30) Net change in non-cash financing working capital (Note 11) (146) - (138) - ------------------------------------------------------------------------- 14,718 61,005 33,471 62,649 ------------------------------------------------------------------------- Increase (decrease) in cash (139) 38,546 (6,693) 38,539 Cash, beginning of period 278 1,223 6,832 1,230 ------------------------------------------------------------------------- Cash, end of period 139 39,769 139 39,769 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See Note 11 for supplemental disclosure See accompanying notes to the unaudited interim consolidated financial statements Iteration Energy Ltd. Notes to the Unaudited Interim Consolidated Financial Statements As at and for the Three and Six Months Ended June 30, 2009 and 2008 (Tabular amounts in thousands of dollars, unless otherwise noted) 1. NATURE OF OPERATIONS Iteration Energy Ltd. ("Iteration" or the "Company") is a public company that trades on the Toronto Stock Exchange and is incorporated under the Business Corporations Act (Alberta). Iteration is engaged in the exploration, development and production of petroleum and natural gas in Canada. 2. SIGNIFICANT ACCOUNTING POLICIES The unaudited interim consolidated financial statements of Iteration Energy Ltd. have been prepared in accordance with Canadian generally accepted accounting principles and are consistent with those policies set out in the audited consolidated financial statements for the year ended December 31, 2008, except as disclosed below. These interim consolidated financial statements do not include all disclosures provided in the December 31, 2008 financial statements and should be read in conjunction with those financial statements. The timely preparation of financial statements requires that management make estimates and assumptions, and use judgment regarding assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts. In the three and six months ended June 30, 2009 the Company recorded additional production expenses for 2008 as costs accrued at year-end 2008 did not reflect late invoices from vendors and higher than expected recent charges from partners relating to 2008. In the opinion of management, these unaudited interim consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below. Basis of Consolidation ---------------------- These unaudited interim consolidated financial statements include the accounts of Iteration Energy Ltd., its wholly owned subsidiaries (Cyries Energy Inc, Iteration Energy Inc. and Cyries Wyoming Inc.) and its wholly owned partnerships (Iteration Energy and Iteration Energy Partnership 2007). All inter-company transactions are eliminated on consolidation. Changes in Accounting Policies ------------------------------ Effective January 1, 2009, the Company adopted the new CICA Handbook Section 3064, Goodwill and Intangible Assets, which converges Canadian GAAP for goodwill and intangible assets with International Financial Reporting Standards ("IFRS"). The new standard provides more comprehensive guidance on intangible assets, particularly for internally developed intangible assets. This new standard has no impact on the Company's current financial reporting. Future Accounting Policies -------------------------- The Canadian Accounting Standards Board ("AcSB") has now confirmed that the use of IFRS will be required in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace current Canadian GAAP followed by the Company. The Company will be required to begin reporting under IFRS effective January 1, 2011 and will be required to provide information following IFRS for the comparative period. The Company is currently developing a changeover plan to complete the transition to IFRS by January 1, 2011, including the preparation of required comparative information. The key elements of the plan include: - determine appropriate changes to accounting policies and required amendments to financial disclosures; - identify and implement changes in associated processes and information systems; - comply with internal control requirements; - educate and train internal and external stakeholders. At June 30, 2009, the Company had completed a diagnostic study of the anticipated impact of the transition to IFRS. The Company is currently analyzing the accounting policy alternatives and identifying implementation options for the corresponding process changes. Until this analysis is complete and as IFRS is expected to change prior to 2011, the impact of IFRS on the Company's consolidated financial statements is not reasonably determinable at this time. The Company will continue to monitor standards development as issued by the International Accounting Standards Board ("IASB") and AcSB as well as regulatory developments as issued by the Canadian Security Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS. 3. ACQUISITIONS AND DISPOSITIONS Cyries Acquisition On March 7, 2008, Iteration acquired Cyries Energy Inc. ("Cyries"), by Plan of Arrangement (the "Arrangement"). Under the Arrangement, Iteration issued 93,990,604 Iteration common shares to acquire the issued and outstanding common shares, warrants and performance shares of Cyries. The value attributed to each Iteration common share was $5.99 per share, representing the volume weighted average trading price on the Toronto Stock Exchange for an Iteration common share for the period from February 27, 2008 to March 6, 2008. This period includes the three trading days before and after Iteration's announcement on March 3, 2008 of the increase in the exchange ratio. Upon completion of the Arrangement, Cyries became a wholly owned subsidiary of Iteration with the existing Iteration shareholders, option holders and warrant holders holding approximately 47% of the combined entity. Although Cyries shareholders held 53% of the Iteration Common Shares on a diluted basis following the arrangement, the transaction has been accounted for as an acquisition of Cyries by Iteration, recognizing that Iteration is the surviving legal entity, Iteration paid a premium to acquire Cyries and Iteration's existing management and Board of Directors retained their positions. The financial statements for the six month period ended June 30, 2008 incorporate the operations of Iteration Energy Ltd., Iteration Energy Inc., Iteration Energy and Iteration Energy 2007 Partnership for the period from January 1, 2008 to June 30, 2008 and the operations of Cyries Energy Inc. for the period from March 8, 2008 to June 30, 2008. The acquisition is being accounted for using the purchase method and, the purchase price was allocated as follows: ------------------------------------------------------------------------- ($000's) ------------------------------------------------------------------------- Furniture and equipment $969 Property, plant and equipment 599,448 Goodwill 205,208 Bank Debt (111,223) Working capital deficiency (29,827) Future income tax liability (75,950) Asset retirement obligation (14,275) ------------------------------------------------------------------------- Total purchase price $574,350 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consideration was comprised of: Common shares $563,004 Transaction costs 11,346 ------------------------------------------------------------------------- Total consideration $574,350 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Note: Goodwill was written off at December 31, 2008. 4. PROPERTY PLANT AND EQUIPMENT ------------------------------------------------------------------------- June 30, December 31, 2009 2008 ($000's) ($000's) ------------------------------------------------------------------------- Oil and gas properties $ 1,329,193 $ 1,290,246 Other 3,260 2,925 ------------------------------------------------------------------------- 1,332,453 1,293,171 Less accumulated depletion and depreciation 390,693 319,642 ------------------------------------------------------------------------- $ 941,760 $ 973,529 ------------------------------------------------------------------------- ------------------------------------------------------------------------- At June 30, 2009, unproved properties and seismic expenditures amounting to $122,032,000 (June 30, 2008: $129,876,000) have been excluded from the depletion calculation. Future development costs on proven undeveloped reserves of $84,800,000 (June 30, 2008: $33,695,000) are included in the depletion calculation. For the three and six months ended June 30, 2009, the Company capitalized $1,047,000 and $2,182,000 (three and six months ended June 30, 2008: $1,020,000 and $1,790,000) of overhead directly related to exploration and development activities. 5. BANK INDEBTEDNESS Bank Indebtedness represents the drawn portion of a syndicated facility, net of any actual cash balances on hand. The credit facility is with a syndicate of lenders, consisting of Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montreal and Alberta Treasury Branch. The borrowing base on this facility was established at $265 million and consists of a $12.5 million operating facility and a $252.5 million extendible revolving term facility. Subsequent to June 30 the Company sold properties and the borrowing base was reduced by $12.5 million (See Note 13 for details). This facility is secured by a $500 million floating charge demand debenture. This facility will mature April 30, 2010, and, at the Company's request, such Credit Facilities may be renewed for a period of not more than 364 days on agreement of the lenders. The pricing on this facility is as follows: a) For Canadian prime based loans or US base rate loans, at applicable prime plus a margin ranging from 175 to 325 basis points, depending on the ratio of consolidated debt to annualized earnings before interest, taxes and depletion/depreciation/accretion for the preceding four quarters; b) For borrowings by way of Bankers' Acceptances or LIBOR loans, at the Bankers' Acceptance or LIBOR rate plus a stamping fee ranging from 275 to 425 basis points, depending on the ratio of consolidated debt to annualized earnings before interest, taxes and depletion/depreciation/accretion for the preceding four quarters, and c) A standby fee on the unutilized portion of the facility of between 82.5 and 127.5 basis points depending on the ratio of consolidated debt to annualized earnings before interest, taxes and depletion/depreciation/accretion for the preceding four quarters. As at June 30, 2009, bank indebtedness was $246 million. The effective interest rate for the six month period ended June 30, 2009 is 3.6%. 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The accounts payable and accrued liabilities consist of the following: June 30, December 31, 2009 2008 ($000's) ($000's) ------------------------------------------------------------------------- Trade accounts payable $ 32,329 $ 57,474 Joint venture accounts payable 3,892 3,790 Royalties payable 3,776 9,740 ------------------------------------------------------------------------- Total $ 39,997 $ 71,004 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. ASSET RETIREMENT OBLIGATION The total future asset retirement obligations were estimated by management based on the Company's net working interest in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. The Company estimates the undiscounted cash flows related to asset retirement obligations, adjusted for inflation, to be incurred over the estimated reserve life of the underlying assets (which is estimated to be from 2009 through 2036) will total approximately $97,073,000 (December 31, 2008: $98,079,000). The book value of the obligation at June 30, 2009 is 43,532,000 (December 31, 2008: $43,323,000) using a discount rate of eight and one half percent for obligations incurred subsequent to September 30, 2008 (six and one half percent prior thereto) and an inflation rate of two percent. As at June 30, 2009, no funds have been set aside to settle this obligation. June 30, December 31, 2009 2008 ($000's) ($000's) ------------------------------------------------------------------------- Balance, beginning of period $ 43,323 $ 18,897 Liabilities incurred on acquisition of properties (note 3) - 19,854 Change in estimate (712) - Increase in liabilities from drilling activity 100 2,848 Accretion expense 1,449 2,271 Settlement of liabilities (628) (547) ------------------------------------------------------------------------- Balance, end of period $ 43,532 $ 43,323 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. SHARE CAPITAL (a) Authorized Unlimited number of voting common shares without par value. Unlimited number of preferred shares issuable in series (b) Common Shares Issued ------------------------------------------------------------------------- Six months ended Year ended June 30, 2009 December 31, 2008 ---------------------------------------------------- Number of Amount Number of Amount Shares ($000's) Shares ($000's) ------------------------------------------------------------------------- Balance, beginning of period 166,020,384 $ 805,301 71,029,780 $ 238,586 Shares issued on public offerings 44,965,000 57,555 - - Shares issued on corporate acquisition (note 3) - - 93,990,604 563,004 Shares issued on exercise of warrants - - 1,000,000 3,733 Share issue costs, net of tax effect of $834 (2008: $9) - (2,311) - (22) ------------------------------------------------------------------------- Balance, end of period 210,985,384 $ 860,545 166,020,384 $ 805,301 ------------------------------------------------------------------------- (c) Stock Options The Company has a stock option plan which provides for the issuance of options to its officers, employees and consultants allowing for the acquisition of up to a fixed maximum of 16,000,000 common shares. The dates on which options vest are set by the Compensation Committee of the Board of Directors at the time of grant. The exercise price of an option granted is the closing price of the Company's stock on the last trading date prior to the grant date. The dates on which options expire are also set by the Compensation Committee of the Board of Directors at the time of grant and cannot exceed ten years. Outstanding stock options to acquire common shares through the stock option plan are as follows: ------------------------------------------------------------------------- Six months ended Year ended June 30, 2009 December 31, 2008 ------------------------------------------------------------------------- Weighted Weighted average average Number of exercise Number of exercise Options price Options price $ $ ------------------------------------------------------------------------- Outstanding, beginning of period 9,782,445 $4.55 6,568,789 $3.49 Granted 3,126,291 1.19 5,343,065 5.47 Granted in conjunction with surrender 1,306,707 1.40 - - Exercised for cash - - (1,642,409) (2.94) Forfeited or cancelled (4,367,735) (4.00) (487,000) (5.70) ------------------------------------------------------------------------- Outstanding, end of period 9,847,708 $2.82 9,782,445 $4.55 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options exercisable, end of period 3,487,430 $3.56 3,759,285 $3.36 ------------------------------------------------------------------------- In June of 2009 the Company provided employees (excluding officers and directors) the option to surrender options they held with a strike price above $3.50 per share and in turn receive 40% of their surrendered number of options with a strike price at the then prevailing share price of $1.40. As a result 3.4 million options were surrendered and 1.3 million options were issued The following table summarizes information about the stock options outstanding at June 30, 2009: ------------------------------------------------------------------------- Weighted average Number remaining Weighted Number Weighted Range of outstanding contractual average exercisable average exercise June 30, life exercise June 30, exercise prices 2009 (years) price $ 2009 price $ ------------------------------------------------------------------------- $0.70 to $2.89 4,650,277 3.80 1.31 - - $2.90 to $4.00 2,977,638 1.02 2.99 2,728,637 2.96 $4.01 to $5.00 422,334 1.88 4.68 141,445 4.57 $5.01 to $9.00 1,797,459 2.74 6.02 617,348 5.99 ------------------------------------------------------------------------- 9,847,708 2.68 2.82 3,487,430 3.56 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company's stock option plan provides stock option holders the right to request, upon exercise, to receive a cash payment in exchange for surrendering the option provided the request is accepted by the Ccompany. The cash payment is equal to the appreciated value of the stock option as determined based on the difference between the option's exercise price and the Company's share price at the time of exercise. For the three and six month periods ended June 30, 2009, stock based compensation expense of $35,000 (2008: $4,065,000 and $11,175,000 respectively), was recognized based on the change in value of the outstanding stock options. Future fluctuations in the stock based compensation expense or recoveries are dependent on the movement of the Company's share price and the number of options vested and outstanding. Based on the June 30, 2008 share price of $1.17, had all of the 9,847,708 stock options outstanding been vested, aggregate stock-based compensation expense and a corresponding liability of $276,000 (December 31, 2008: $nil) would have been recognized. Of this amount, $35,000 has been recognized as stock-based compensation payable at June 30, 2009 (December 31, 2008: $nil). (d) Per Share Amounts ------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Weighted average common shares outstanding 193,197,035 165,811,596 179,683,785 129,265,758 ------------------------------------------------------------------------- Weighted average diluted common shares outstanding 193,197,035 168,412,603 179,683,785 131,241,651 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The options outstanding for the quarter and six months ended June 30, 2009 are not included in the computation of diluted common shares outstanding as the Company realized a net loss during these periods. 9. FINANCIAL INSTRUMENTS The Company is exposed to a number of different financial risks arising from normal course business exposures, as well as the Company's use of financial instruments. These risk factors include market risks relating to commodity prices and interest rate risk, as well as liquidity risk and credit risk. a) Market Risk Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future performance of the business. The market price movements that could adversely affect the value of the Company's financial assets, liabilities and expected future cash flows include commodity price risk and interest rate risk. b) Commodity Price Risk The Company's financial performance is closely linked to oil and natural gas prices. A change of $1.00 Cdn/mcf in natural gas prices at the wellhead would have changed the net loss for the six months ended June 30, 2009 by approximately $8.2 million. A $5.00/bbl change in WTI for oil would have the effect of changing the net loss for the six months ended June 30, 2009 by approximately $1.8 million. From time to time, the Company employs the use of various financial instruments to manage these price exposures, and at this time, has not entered into any financial instruments. c) Interest Rate Risk The Company is exposed to interest rate risk as changes in interest rates may affect future cash flows and the fair value of its financial instruments. The Company's primary debt facility has a floating interest rate that will fluctuate based on prevailing market conditions and the Company's ratio of funded debt to trailing earnings before interest, taxes, and depletion/depreciation/accretion. Cash flows are sensitive to changes in interest rates on this instrument. Given the amount of debt employed, the Company's strategy is to manage interest rate risk within the current economic environment framework. If interest rates on the floating instrument were to change by 1.0% it is estimated that net loss for the six months ended June 30, 2009 would change by approximately $0.8 million. d) Liquidity Risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Company believes that it has access to sufficient capital through internally generated cashflows and external equity sources, as well as undrawn committed borrowing facilities to meet current spending forecasts. All of the trade liabilities mature in 2009 and the Company's bank loan is due on April 30, 2010. Scheduled reviews of the credit facility focus on the borrowing base supporting lending limits and are influenced by the lenders' willingness to lend in general, commodity price forecasts used to determine the lending base, lenders interest in particular business sectors, such as energy and the relative strength of the borrower. Given these constraints, there is no assurance that Iteration will be able to sustain its current borrowing base and may be required to reduce its outstanding loans. Should there be a requirement of the Company to reduce its outstanding loans, there are a number of options available including, but not limited to: 1) Issuance of additional equity; 2) Negotiation of incremental borrowings with subordinated lenders; 3) Divestiture of assets: and 4) Dedication of funds from operations. e) Foreign Exchange Risk Foreign exchange risk is the risk that the fair value of the future cash flows will fluctuate because of changes in foreign exchange rates. The benchmark pricing for most natural gas and crude oil is based on US Dollars. Changes in the exchange rate of the Canadian dollar relative to the US dollar will indirectly impact the Canadian dollar commodity price realized by the Company and, as a result, cash flow. If foreign exchange rates were to change by 1% over the course of the quarter, it is estimated that net loss for the quarter would change by approximately $0.6 million. f) Counterparty Credit Risk Counterparty credit risk is the risk that a customer or counterparty will fail to perform an obligation or fail to pay amounts due causing a financial loss. The Company's accounts receivable are with customers and joint venture partners in the oil and gas industry and are subject to normal credit risks. A small portion of the Company's production is currently sold through a joint venture partner to purchasers under normal industry sale and payment terms; the balance is sold to twenty five marketers also under normal industry terms. Of these twenty five marketers, sales to four account for approximately 80% of the Company's production revenue. As at June 30, 2009, the Company had an allowance for doubtful accounts of $17.3 million (December 31, 2008 $15.4 million) including a provision of $15.7 million relating to the filing for CCAA protection by SemCanada and SemCAMS), on trade accounts receivable that in the estimation of the Company may be impaired. As at June 30, 2009, the aging analysis of trade receivables, net of the allowance for doubtful accounts, is as follows: ------------------------------------------------------------------------- ($000's) ------------- Current $ 18,690 30 - 60 days 2,579 60 - 90 days 797 Greater than 90 days 27,687 ------------- Total 49,753 Less allowance for doubtful accounts (17,331) ------------- Total $ 32,422 ------------------------------------------------------------------------- Note: Greater than 90 days includes amounts receivable from for SemCanada and SemCAMS. g) Fair Value of Financial Instruments Section 3855 of the CICA Handbook requires the initial measurement of all financial instruments at fair value with classification into one of five categories: loans and receivables, assets held to maturity, assets available for sale, other financial liabilities, and held for trading. The Company has elected to classify its financial instruments as follows: ------------------------------------------------------------------------- June 30, December 31, 2009 2008 Carrying Estimated Carrying Estimated ($000's) Value Fair Value Value Fair Value ------------------------------------------------------------------------- Loans and receivables Accounts receivable 32,422 32,422 43,996 43,996 Other financial liabilities Bank indebtedness 246,000 246,000 266,800 266,800 Accounts payable and accrued liabilities 39,997 39,997 71,004 71,004 ------------------------------------------------------------------------- The carrying value of financial instruments included in current assets and current liabilities approximate their fair value, reflecting the short term maturity, normal trade credit terms, and/or the nature of these instruments. 10. CONTINGENCIES The Company is party to various lawsuits as at June 30, 2009. It is management's opinion that, based on the best currently available information, the amount of any potential exposure and the outcome of these law suits is not determinable at this time. As a result, no provisions for these items have been recorded in these financial statements. Pursuant to a purchase and sale agreement, the Company has indemnified the purchaser of a former subsidiary company for up to $1,000,000 of income tax and legal expenses incurred with respect to specifically identified income tax returns. The Company accrued this obligation in the first quarter of 2008 and correspondingly increased the purchase price of related property, plant and equipment acquired as part of a series of transactions which occurred in conjunction with the disposition of the former subsidiary. The Company indemnifies its directors and officers against any and all claims or losses reasonably incurred in the performance of their service to the Company to the extent permitted by law. The Company has acquired and maintains liability insurance for its directors and officers. 11. SUPPLEMENTAL DISCLOSURE ON CONSOLIDATED STATEMENTS OF CASH FLOWS Changes in non-cash working capital were comprised of the following: ------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, ($000's) 2009 2008 2009 2008 ------------------------------------------------------------------------- Accounts receivable $ 6,488 $ 15,849 $ 11,553 $ 9,792 Prepaids and other current assets (2,213) (1,748) (1,245) (761) Accounts payable and accrued liabilities (20,260) (57,671) (30,996) (41,240) Income taxes payable - 170 - 458 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net change $ (15,985) $ (43,400) $ (20,688) $ (31,751) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, ($000's) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net change by activity: Operating $ 3,286 $ (16,114) $ 9,195 $ (101) Investing (19,125) (27,286) (29,746) (31,650) Financing (146) - (138) - Net change $ (15,985) $ (43,400) $ (20,690) $ (31,751) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Additional information: ------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, ($000's) 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash interest paid $ 3,215 $ 3,067 $ 4,833 $ 4,179 ---------------------------------------------------- Cash taxes paid 1 171 13 671 ---------------------------------------------------- Included in cash interest paid during the three month period ended June 30, 2009 are initial commitment fees of $347,000 related to the syndicated facility. 12. CAPITAL MANAGEMENT The Company's principal business of the exploration, exploitation and development of oil and gas requires ongoing access to capital in order to allow the Company to successfully implement its growth strategy; and to provide adequate returns for shareholders and benefits for other stakeholders. The Company defines capital as share capital and bank indebtedness, net of cash and cash equivalents. The consolidated capital structure of the Company is as follows: ------------------------------------------------------------------------- As at As at June 30, 2009 December 31, 2008 ($000's) % ($000's) % ----------------------------------------------- ------------------------- Bank indebtedness $ 245,861 22.2 259,968 24.4 Share capital 860,545 77.8 805,301 75.6 -------------------------- ------------------------- Total $ 1,106,406 100.0 $ 1,065,269 100.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at June 30, 2009, the Company had a bank credit facility that contained covenants which limit the amount of debt that can be incurred by the Company. Throughout the periods presented, the Company has met those covenants. The Company actively manages its capital structure with the objective of maintaining sufficient flexibility to allow it to execute on its capital investment program, including investing in oil and gas acquisitions, exploration and development, which may or may not be successful. For this objective to be achieved, the Company continually strives to balance the proportion of debt to equity in its capital structure to take into account the level of risk being incurred through capital expenditures. In order to maintain or adjust the capital structure, the Company considers various factors including, but not limited to: a) projected debt to projected funds from operations ratio while attempting to finance an acceptable investment program, including incremental investment and acquisition opportunities; b) the current level of bank credit available from the banking syndicate; c) the level of bank credit that may be available from the banking syndicate as a result of anticipated changes in reserves; d) the availability of other sources of debt with different characteristics from the existing bank debt; e) the sale of assets; f) limiting the size of the investment or capital program; and g) issuing new common equity if available on favorable terms. 13. SUBSEQUENT EVENTS In July 2009, the Company disposed of oil and gas properties for proceeds of $39.8 million, prior to closing adjustments. These proceeds were applied against bank debt. Accordingly, the bank borrowing base was decreased by $12.5 million to $252.5 million. Directors, Officers and Auditors Current Officers and Directors of the Company are as follows; Officers --------- Brian Illing President and CEO Mark Ariss VP Exploration East Jane Mactaggart VP Exploitation Carmen McKay-Illing VP Corporate Affairs Myron Rak VP Production Tony Sabelli VP Drilling & Completions Peter Scott VP Finance and CFO Kevin Stromquist VP Exploration West Directors --------- Don Archibald (Chairman) Independent Businessman (former Chairman & CEO - Cyries) Pat Breen P. Eng. President - Foremost Income Fund Dallas Droppo Q.C. Partner - Blake, Cassels and Graydon LLP Jim Grenon President - TOM Capital Associates Michael Hibberd President - MJH Services Inc. Brian Illing P. Geol President and CEO- Iteration Energy Ltd. Garry Peddle Independent Businessman (former VP Corporate - Cyries) Robert Waters, CA Senior VP and CFO - Enerplus Resources Fund Corporate Secretary ------------------- Tony Grenon Managing Director - TOM Capital Associates Auditors -------- Ernst & Young LLP Corporate Counsel ----------------- Bennett Jones LLP Additional Information The TSX has not reviewed this press release and does not accept responsibility for the accuracy of any of the data presented here-in. Other information about the Company, including the AIF, is available through the internet on the Company's website at www.iterationenergy.com and on the Company's SEDAR profile at www.sedar.com. %SEDAR: 00002576E

For further information:

For further information: Mr. Brian Illing, President and CEO, or Mr.
Peter Scott, Vice President, Finance and CFO, at (403) 261-6883

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ITERATION ENERGY LTD.

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