Iteration Energy (ITX) announces March 31, 2009 first quarter results



    (All amounts are in Canadian dollars, unless stated otherwise)

    CALGARY, May 15 /CNW/ - Iteration Energy Ltd. (TSX-ITX) ("Iteration" or
the "Company") announced today its unaudited financial and operating results
as at and for the three months ended March 31, 2009.

    
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
                                 May 14, 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 months ended March 31, 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 months ended March 31, 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 and
Umbach in Northeast British Columbia and Gold Creek, Knopcik and Manyberries
in Alberta.

    FINANCIAL AND OPERATIONAL HIGHLIGHTS

    The highlights for the three months ended March 31, 2009 include:

    
    -   Average production for the quarter was 18,165 boed, representing a
        slight increase over fourth quarter 2008 production. Shut-in
        production due to low commodity prices averaged approximately
        150 boed of production.

    -   Drilled 6 (5.6 net) wells with a 100% success record. Drilling
        occurred in northeast BC, west Alberta and east central Alberta.
        Production from 2 (2.0 net) of these wells came on stream by the end
        of the first quarter with the remaining 4 (3.6 net) wells either
        waiting for completion and/or equipping and tie-in activities which
        is scheduled to begin after spring break-up for most of these wells.
        In addition, the Company participated in 4 (0.25 net) non-operated
        wells in the first quarter of 2009.

    -   Capital expenditures on oil and gas properties for the quarter were
        $35.4 million, a 52% decrease from the fourth quarter of 2008.

    -   Funds from operations for the quarter were $14.9 million, a 52%
        decrease from the fourth quarter of 2008 primarily due to a decrease
        in commodity prices and an increase in operating costs.

    -   Subsequent to the end of the quarter, Iteration completed a
        $57.5 million equity financing at $1.28 per share issuing
        approximately 45 million common shares, the proceeds of which were
        used to repay debt. A new $265 million credit facility was also put
        in place to replace the existing $260 million facility.

    -------------------------------------------------------------------------
    Financial Highlights                                Three months ended
    (unaudited)                                              March 31,
    ($thousands, except as noted)                        2009        2008
    -------------------------------------------------------------------------
    Production revenue before royalties                 $58,693      $55,564

    Funds from operations(1)                            $14,900      $28,511
    Per share ($) - basic                                 $0.09        $0.31
                  - diluted                               $0.09        $0.31

    Net earnings (loss)                                $(14,275)      $1,689
    Per share ($) - basic                                $(0.09)       $0.02
                  - diluted                              $(0.09)       $0.02

    Capital expenditures                                $35,360      $41,774


                                                          As at March 31,
                                                         2009        2008
    -------------------------------------------------------------------------
    Total assets                                     $1,022,497   $1,206,693
    Total indebtedness                                 $296,726     $216,959
    Common shares outstanding                       166,020,384  166,020,384
    Stock options outstanding                        10,135,375    6,559,923
    Warrants outstanding                                      -    4,721,667
    -------------------------------------------------------------------------
    Notes:
    (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".

    -------------------------------------------------------------------------
                                                        Three months ended
    Operating Highlights                                     March 31,
                                                         2009        2008
                                                    -------------------------
    Production
    Natural gas (mcf/d)                                  79,000       47,808
    Light oil (bbls/d)                                    3,390        1,609
    Heavy oil (bbls/d)                                      186          216
    Natural gas liquids (bbls/d)                          1,423        1,097
                                                    ------------ ------------
    Total production (boe/d)                             18,165       10,890

    Prices
    Natural gas ($/mcf)                                   $5.39        $8.22
    Light oil ($/bbl)                                    $50.15       $94.89
    Heavy oil ($/bbl)                                    $39.56       $68.11
    Natural gas liquids ($/bbl)                          $35.24       $46.08
                                                    ------------ ------------
    Average price ($/boe)                                $35.93       $94.89

    Net undeveloped land
    (thousands of acres)                                    867          722

    Wells Drilled (net)
      Gas                                                   4.8         19.5
      Oil                                                   1.1          2.9
      Injector                                                -          1.0
      Dry                                                     -          1.7
                                                    ------------ ------------
      Total                                                 5.9         25.1
                                                    ------------ ------------
      Success rate (%)                                    100.0         93.1
    -------------------------------------------------------------------------
    

    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.

    
    -------------------------------------------------------------------------
    ($ thousands)                                Three months ended March 31,
    -------------------------------------------------------------------------
                                                           2009         2008
                                                    -------------------------
    Funds from operations                                14,900       28,511
    Changes in non-cash working capital                   5,909       15,135
                                                    ------------ ------------
    Cash flow from operations                            20,809       43,646
    -------------------------------------------------------------------------
    

    Outlook for 2009

    Iteration is providing guidance for the last nine months of 2009. The
information below presents the Company's expected results for the full year of
2009 including the actual results for the first quarter of 2009 and the
forecast for the balance of the year. On March 23, 2009 Iteration provided
guidance for the first and second quarters of 2009 in its MD&A for the
year-ended December 31, 2008. A reconciliation to previous guidance for the
first quarter of 2009 will be provided in this section of the MD&A, however
second quarter 2009 guidance is superceded by the Company's guidance for 2009.

    
    -------------------------------------------------------------------------
                                             2009 Forecast       2008 Actual
    -------------------------------------------------------------------------
    Production (boe/d)
      Annual average                       17,000 - 17,500            16,396

    Capital program
      Expenditures ($ million)                          75               816
      Net wells drilled                               25.0              68.0

    Funds from operations
      Annual ($ million)                                80               172
      Annual per basic share ($)                      0.41              1.16

    Year end net debt ($ million)                      220               276

    Average Pricing:                     (April - Dec 2009)  (Jan - Dec 2008)
      Natural gas - AECO (Cdn$/mcf)                   4.65              8.16
      Oil - WTI (US$/bbl)                            60.00             99.65
      Foreign exchange rate (Cdn$/US$)                0.82              0.94
    -------------------------------------------------------------------------
    

    Given the Company's forecast for commodity prices, capital expenditures
are expected to be slightly below funds from operations for 2009. As a result
production is expected to average between 17,000 to 17,500 boed which
represents about a 5% increase over 2008. The Company currently has
approximately 850 boed of production shut-in due to low commodity prices. With
the recent increase in crude oil prices, the Company will begin to reactivate
some properties with the resulting production expected to be brought back on
stream by the third quarter of 2009. The Company expects to drill
approximately 25.0 net wells in 2009 with a proportionately higher level of
spending directed at oil opportunities in the Manyberries, Lloydminster and
Peace River Arch areas. Capital expenditures for 2008 included approximately
$660 million of acquisitions. Funds from operations are expected to decline
about 55% from 2008 levels, primarily due to lower commodity prices. The
operating netback is expected to fall from 2008 levels due to lower commodity
prices and slightly higher operating costs partially offset by lower royalty
rates. Operating costs are expected to average approximately $12.60 per boe
for 2009 about 10% higher than 2008 levels. The increase in part is due to
prior period costs included in 2009 partially offset by cost reductions.
Operating costs for the last nine months of 2009 are expected to average
approximately $11.50 per boe. Royalty rates are forecasted to be approximately
18% for the year with the third and fourth quarters expected to be at lower
rates (approximately 16%) due to the Alberta royalty incentive program (the
Company expects to be at the 50% royalty credit level based on the 2008
production associated with Alberta crown properties). The average royalty rate
for 2009 would be about a 10% reduction from 2008 levels. G&A expense is
expected to average $1.95 per boe in 2009. Interest expense is expected to be
based on an average interest rate of about 6% due to increased borrowing
costs. Year-end debt is expected to decline to about $225 million as the
proceeds from the equity financing completed May 6, 2009 were all applied to
debt repayment and for the last nine months of 2009, funds from operations are
expected to exceed capital expenditures.
    Should realized commodity 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 annual capital program remains in line with projected funds
from operations.
    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 nine months of
2009 would be approximately $13.9 million. The impact of a US$5.00/bbl
increase in WTI for oil for the last nine months of 2009 would be
approximately $4.1 million. The impact of a 1% weakening of the Canadian
Dollar versus the U.S. dollar for the last nine months of 2009 would be
approximately $1.1 million.

    
    -------------------------------------------------------------------------
                                                        2009 Q1      2009 Q1
                                                         Actual     Previous
                                                                    Guidance
    -------------------------------------------------------------------------
    Production (boed)                                    18,165       18,300

    Capital program
      Expenditures ($ million)                             35.4         26.0
      Net wells drilled                                     5.9          6.0

    Funds from operations
      Quarter ($ million)                                  14.9         19.0
      Quarter per basic share ($)                          0.09         0.11

    Quarter end net debt ($ million)                      296.7          283

    Pricing (Jan - March):
      Natural gas (Cdn$/GJ)                                4.66         5.15
      Light crude oil (Cdn$/bbl)                          50.15        47.00

    Operating netback $/boe                               11.98        15.40
    G&A $/boe                                              1.92         1.70
    -------------------------------------------------------------------------
    

    Production was essentially in line with projected levels, however due to
lower natural gas prices and higher operating expenses, the operating netback
was lower than projected which resulted in lower funds from operations. Net
debt was higher than projected due to lower funds from operations and higher
than expected capital expenditures. Capital expenditures exceeded forecast
levels largely due to cost overruns on projects that were started in the
fourth quarter 2008.

    OPERATING RESULTS

    
    Production

    -------------------------------------------------------------------------
    Daily production                              Three months ended
                                                       March 31,
                                           ----------------------------------
    Average for the period                  2009         2008      % Change
    ----------------------------           ----------------------------------
    Natural gas (mcf/d)                     79,000       47,808           65
    Natural gas liquids (bbls/d)             1,423        1,097           30
    Light oil (bbls/d)                       3,390        1,609          111
    Heavy oil (bbls/d)                         186          216          (14)
    -------------------------------------  ----------------------------------
      Total production (boed)               18,165       10,890           67
    -------------------------------------------------------------------------
    

    Average daily production for the three months ended March 31, 2009 was
18,165 boed, an increase of 7,275 boed from production for the three months
ended March 31, 2008. This 67% increase is primarily due to the inclusion of
production from the Cyries acquisition that closed March 7, 2008, for the
entire quarter ended March 31, 2009. In the previous year, Cyries production
was only included for the period from March 8 to 31, 2008.

    
    Commodity Prices

    -------------------------------------------------------------------------
    Industry benchmarks                           Three months ended
                                                       March 31,
                                           ----------------------------------
    Average for the period                  2009         2008       % Change
    ----------------------------           ----------------------------------
    Natural gas (AECO $/mcf)                 $4.92        $7.70          (36)
    Edmonton Light crude $/bbl              $50.15       $98.22          (49)
    Hardisty Lloyd blend $/bbl              $42.68       $76.38          (44)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Realized commodity prices                     Three months ended
                                                       March 31,
                                           ----------------------------------
    Average for the period                  2009         2008       % Change
    ----------------------------           ----------------------------------
    Natural gas ($/mcf)                      $5.39        $8.22          (34)
    Natural gas liquids ($/bbl)             $35.24       $46.08          (24)
    Light oil ($/bbl)                       $50.15       $94.89          (47)
    Heavy oil ($/bbl)                       $39.56       $68.11          (42)
    -------------------------------------  ----------------------------------
      Total ($/boe)                         $35.93       $56.08          (36)
    -------------------------------------------------------------------------
    

    For natural gas, the realized price for the first quarter of 2009
decreased by 34% as compared to the first quarter of 2008, which is consistent
with the average benchmark price decrease of 36% during the same period. For
light oil, the realized price for the first quarter of 2009 decreased by 47%
as compared to the first quarter of 2008, which is comparable to the 49%
decrease in average benchmark price for the same period.
    The heavy oil realized price decreased by 42% in the first quarter of
2009 as compared to the first quarter of 2008, which is consistent with the
decrease in the benchmark price of 44% for the comparable period. Iteration's
realized price on its natural gas liquids decreased by 24% in the first
quarter of 2009, as compared to the corresponding quarter in 2008. The
Company's price on natural gas liquids fell less than other commodities due to
the shift in the composition of natural gas liquids to higher value products.

    
    Revenue

    -------------------------------------------------------------------------
    Production revenue before                     Three months ended
    royalties                                          March 31,
                                           ----------------------------------
    ($ thousands)                           2009         2008       % Change
    ----------------------------           ----------------------------------

    Production revenue                     $58,693      $55,564            6
    -------------------------------------------------------------------------
    

    Production revenue was $58.7 million for the three months ended March 31,
2009, as compared to $55.6 million for the corresponding period in 2008.
Although production for the quarter ended March 31, 2009 was 67% higher than
for the quarter ended March 31, 2008, production revenue only increased
slightly due to the 36% decline in realized commodity prices.
    For the three months ended March 31, 2009 and March 31, 2008, natural gas
represented approximately 72% of the Company's production and 65% of the
Company's revenue.

    
    Royalties

    -------------------------------------------------------------------------
                                                  Three months ended
                                                       March 31,
                                           ----------------------------------
    ($ thousands except where
     noted)                                 2009         2008       % Change
    ----------------------------           ----------------------------------

    Royalties                              $12,142      $11,679            4
    Per boe ($/boe)                          $7.43       $11.79          (37)
    Percentage of revenue (%)                   21           21            -
    -------------------------------------------------------------------------
    

    Royalty expense was $12.1 million for the three months ended March 31,
2009, compared with $11.7 million for the corresponding period in 2008.
Royalties represent amounts paid by the Company for crown, freehold and gross
overriding royalties. Royalties remained consistent year over year even though
production increased by 67%, due to the 36% decline in realized commodity
prices. The allocation of the $12.1 million of royalty expense for the first
quarter of 2009 was $10.9 million for crown royalties, which represents a
crown royalty burden of approximately 18.5%, and $1.2 million for freehold and
gross overriding royalties, which represents a rate of approximately 2.1%,
giving a combined royalty burden of approximately 20.6%. For the corresponding
period in 2008, the crown royalty burden was approximately 18.4%, the freehold
and gross overriding royalty burden was 2.6% resulting in a combined royalty
burden of 21.0%.

    
    Production Expenses

    -------------------------------------------------------------------------
    Production expenses                           Three months ended
                                                       March 31,
                                           ----------------------------------
    ($ thousands)                           2009         2008       % Change
    ----------------------------           ----------------------------------

    Field operating costs                  $24,356       $9,943          145
    Allocated general and
     administrative costs                      525          255          106
    ----------------------------           ----------------------------------
    Total production expenses              $24,881      $10,198          144
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Production expenses                           Three months ended
                                                       March 31,
                                           ----------------------------------
    ($ per boe)                             2009         2008       % Change
    ----------------------------           ----------------------------------

    Field operating costs                   $14.91       $10.03           49
    Allocated general and
     administrative costs                     0.32         0.26           24
    ----------------------------           ----------------------------------
    Total production expenses               $15.23       $10.29           48
    -------------------------------------------------------------------------

    Production expenses were $24.9 million or $15.23 per boe for the three
months ended March 31, 2009, compared with $10.2 million or $10.29 per boe for
the corresponding period in 2008. This equates to a 144% increase on a gross
dollar basis and a 48% increase on a per boe basis. The increase in expenses
was due to the following:

    1)  A 67% increase in production for the quarter as compared to the same
        quarter in the previous year primarily due to the Cyries acquisition;

    2)  The shift in the weighting of the Company's sales towards oil, which
        typically has higher operating costs on a per boe basis; and

    3)  Prior period costs of approximately $0.78 per boe on 2008 production
        have been included in the first quarter of 2009. Costs accrued at
        year-end did not reflect late invoices from vendors and higher than
        expected recent charges from partners relating to 2008. These costs
        are attributable to higher than expected labour, workover, fuel and
        processing costs in 2008. Processes and systems are being put in
        place to improve the timeliness of data and analysis relating to
        operating costs. Excluding these costs, operating costs for the first
        quarter of 2009 would have been $12.37 per boe.

    Transportation Expenses

    -------------------------------------------------------------------------
                                                  Three months ended
                                                       March 31,
                                           ----------------------------------
    ($ thousands except where
     noted)                                 2009         2008       % Change
    ----------------------------           ----------------------------------

    Transportation expenses                 $1,434       $1,469           (2)

    Per boe ($/boe daily sales)              $0.88        $1.48          (41)
    -------------------------------------------------------------------------
    

    Transportation expenses for the quarter ended March 31, 2009 were $1.4
million, consistent with transportation expenses of $1.5 million for the three
months ended March 31, 2008. On a per boe basis, transportation expense
decreased by 41% from the rates realized in the first quarter of 2008
primarily as a result of a better allocation of the Company's production
between firm and interruptible transportation contracts. For financial
reporting purposes, transportation costs only relate to natural gas
production. Trucking costs for oil are included in operating costs.

    
    Operating Netback

    -------------------------------------------------------------------------
                                                  Three months ended
                                                       March 31,
                                           ----------------------------------
    ($/boe daily sales)                     2009         2008       % Change
    ----------------------------           ----------------------------------
    Production revenue                      $35.93       $56.08          (36)
    Royalties                                (7.43)      (11.79)         (38)
    Production expenses                     (15.23)      (10.29)          48
    Transportation expenses                  (0.88)       (1.48)         (41)
    ----------------------------           ----------------------------------
      Operating netback                     $12.39       $32.52          (62)
    -------------------------------------------------------------------------

    The operating netback (before general and administrative expenses)
realized for the three months ended March 31, 2009 was $12.39 per boe versus
$32.52 per boe for the corresponding period in 2008, a decrease of 62%. While
the 36% decrease in commodity prices accounted for much of the decrease in
operating netback, significantly higher production expenses also contributed.

    General and Administrative Expenses

    -------------------------------------------------------------------------
                                                  Three months ended
                                                       March 31,
                                           ----------------------------------
    ($ thousands except where
     noted)                                 2009         2008       % Change
    ----------------------------           ----------------------------------

    General and administrative
     costs before the following:            $4,890       $3,360           46
    Capitalized overhead                    (1,135)        (770)          47
    Allocation to production
     expenses                                 (525)        (255)         106
    Overhead recoveries                        (99)         (58)          71
    ----------------------------           ----------------------------------
    General and administrative
     expense                                $3,131       $2,277           38
    ----------------------------           ----------------------------------

    Per boe ($/boe)                          $1.92        $2.30          (17)
    -------------------------------------------------------------------------
    

    Total general and administrative expenses (before taking into
consideration overhead recoveries, expenses allocated to production expense
and capitalized expenses), increased by 46% to $4.9 million for the three
months ended March 31, 2009, as compared to $3.4 million for the corresponding
period in 2008. The primary reason for the increase was higher costs
associated with staffing, office accommodation and administration expenses
following the Cyries acquisition.
    While general and administrative expenses increased during the first
quarter of 2009 in absolute dollars, on a per boe basis, these costs decreased
by 17% in the first quarter of 2009 as compared to the same period in 2008.
This was the result of efficiency gains and economies of scale associated with
being a larger company.

    Stock Based Compensation Expense

    The Company's stock option plan provides option holders the choice, upon
exercise, to receive a cash payment in exchange for surrendering the option.
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. At
March 31, 2009, options to purchase 10.1 million common shares were
outstanding, which represents 6.1% of the outstanding common shares of the
Company at that time. As at May 14, 2009, there are options outstanding to
purchase 10.6 million common shares representing 5.0% of the Company's issued
common shares.
    For the three months ended March 31, 2009, no stock based compensation
expense was recorded by the Company compared to $7.1 million for the
corresponding period in 2008.
    Future fluctuations in stock based compensation expense or recoveries are
dependent on the movement of the Company's share price and the number of
vested options outstanding, adjusted for any options exercised for cash during
the period. Based on the March 31, 2009 share price of $0.98, there was no
current or future stock based compensation liability associated with any of
the stock options that were outstanding as at March 31, 2009.

    
    Interest Expense

    -------------------------------------------------------------------------
                                                  Three months ended
                                                       March 31,
    ($ thousands except where
     noted)                                 2009         2008       % Change
    ----------------------------           ----------------------------------

    Interest expense                        $1,618       $1,112           46
                                           ----------------------------------

    Per boe ($/boe production)               $0.99        $1.12          (13)
    -------------------------------------------------------------------------
    

    Interest expense on bank debt for the three months ended March 31, 2009
was $1.6 million as compared to $1.1 million for the three months ended March
31, 2008 and is primarily the interest expense associated with Bankers'
Acceptances utilized for financing during the quarter. Interest expense has
increased due to the increase in bank borrowings as capital expenditures
exceeded funds from operations for the quarter. On a per boe basis, interest
expense has decreased 13% in the first quarter of 2009 compared to the same
period in the prior year period due to the increase in Company production.

    
    Depletion, Depreciation, and Accretion

    -------------------------------------------------------------------------
                                                  Three months ended
                                                       March 31,
                                           ----------------------------------
    ($ thousands except where
     noted)                                 2009         2008       % Change
    ----------------------------           ----------------------------------

    Depletion, depreciation and
     accretion                             $35,700      $21,554           66

    Per boe ($/boe production)              $21.84       $21.99           (1)
    -------------------------------------------------------------------------
    

    Depletion, depreciation, and accretion expense was $35.7 million for the
three months ended March 31, 2009 compared to $21.6 million for the
corresponding period in 2008 representing a 66% increase. As depletion,
depreciation and accretion are based on production as a percentage of the
Company's proved reserves, the increase is primarily due to the 67% increase
in production for the first quarter of 2009 as compared to the same period in
the prior year. On a per boe basis, depletion, depreciation and accretion
rates decreased from $21.99 per boe for the three months ended March 31, 2008
to $21.84 per boe for the current reporting period.

    Net Loss

    Iteration's loss for the three months ended March 31, 2009 was $14.3
million, as compared to a net income of $1.7 million for the three months
ended March 31, 2008. The loss arose as a result of significantly weaker
commodity prices combined with the impact of higher production expenses for
the quarter, partially offset by a recovery of future income taxes.

    Funds from Operations

    Iteration's funds from operations for the three months ended March 31,
2009 was $14.9 million compared to $28.5 million for the same period in 2008.
The reduction was primarily a result of significantly weaker commodity prices
combined with the impact of higher production and G&A expenses partially
offset by lower royalties and transportation expense. In addition the Company
had $0.5 million of abandonment costs in the first quarter of 2009 ($0.1
million in the first quarter of 2008) which reduced funds from operations.

    
    Quarterly Financial Data

    ($ thousands except per share data)
    -------------------------------------------------------------------------
                           2009                       2008

                         ----------------------------------------------------
    Quarter ended         Mar 31     Dec 31    Sept 30    June 30     Mar 31
    -------------------------------------------------------------------------

    Revenues             $58,693    $70,656   $108,444   $127,175    $55,564

    Net income (loss)   $(14,275) $(244,894)   $26,696       $672     $1,689
    Net income (loss)
     per common share
     - basic and
     diluted ($)          $(0.09)    $(1.48)     $0.16      $0.00      $0.02

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


    -------------------------------------------------------------------------
                                      2007

                         ------------------------------
    Quarter ended         Dec 31    Sept 30    June 30
    ---------------------------------------------------

    Revenues             $29,265    $22,161    $26,806

    Net income (loss)    $(3,149)   $(1,985)     $(639)
    Net income (loss)
     per common share
     - basic and
     diluted ($)          $(0.05)    $(0.03)    $(0.01)

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


    Capital Expenditures
    -------------------------------------------------------------------------
                                                  Three months ended
                                                       March 31,
                                           ----------------------------------
    ($ thousands)                           2009         2008       % Change
    ----------------------------           ----------------------------------

    Acquisition of oil and gas
     properties, net of
     disposition proceeds                    $(227)      $1,618         (114)

    Exploration and development
     expenditures                          $35,587       40,156          (11)
    ----------------------------           ----------------------------------
    Total                                  $35,360      $41,774          (15)
    -------------------------------------------------------------------------
    

    There were no property acquisitions for the first quarter of 2009
compared to $1.6 million for the same period of 2008. Amounts incurred on
exploration and development capital spending for the three months ended March
31, 2009 were $35.6 million, versus $40.2 million for the three months ended
March 31, 2008. The majority of capital expenditures for the first quarter of
2009 were spent on drilling operations primarily in the northeast BC and west
Alberta areas. While the Company drilled 5.6 net operated wells and
participated in 0.25 net partner operated wells in the first quarter of 2009
compared to 25.1 wells for the same period in 2008, the 2009 activity was
concentrated in higher cost/high impact areas with two of the wells being
multi-frac horizontal wells compared to the vertical well program in 2008. Of
the 2009 activity all the wells are on production by the end of the first
quarter except one well which is expected to be completed after spring
break-up.

    Capital and Liquidity

    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 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 $75 million for 2009. Of this amount approximately half has been spent in
the first quarter of 2009. For the balance of the year the Company is
forecasting funds from operations of $65 million versus capital expenditures
of $40 million. 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.
    As at March 31, 2009, the Company had drawn $285.6 million on its $300
million syndicated credit facilities. At that time, the Company had a working
capital deficit of $11.2 million, for a total net debt of $296.7 million.
    The Company's financial position improved following the quarter end due
to a $57.5 million common share equity financing and the establishment of a
new credit facility. Below is a summary of events that occurred subsequent to
quarter end (please see Note 14 to the unaudited interim consolidated
financial statements for additional details):

    
    1)  On April 30, 2009 the Company extended the maturity date of its
        credit facilities with its syndicate of lenders from April 30, 2009
        to May 29, 2009. At that time the Company's borrowing base was
        established at $260 million (a reduction from $275 million). Higher
        margin pricing was agreed to, and the Company agreed to apply
        proceeds from its announced equity offering to repay and cancel its
        $25 million supplemental credit facility and reduce the revolving
        term facility to cover off any borrowing base shortfall.

    2)  On May 6, 2009 the Company closed a bought deal equity financing of
        39,100,000 common shares plus an over-allotment option of 5,865,000
        common shares all at $1.28 per common share for gross proceeds of
        $57.5 million (net proceeds of approximately $54.4 million). The
        proceeds of the financing were applied to reduce the Company's credit
        facility and repay the Company's supplemental facility, which was
        then cancelled.

    3)  On May 14, 2009 the Company entered into a new credit facility with a
        syndicate of lenders, consisting of Canadian Imperial Bank of
        Commerce, Bank of Nova Scotia, Bank of Montreal and Alberta Treasury
        Branch, to replace the existing credit facility described above. 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. The 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.

    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                      $2,653             ($951)           $1,702
    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
March 31, 2009.

    Outstanding Common Shares, Warrants and Options

    As at March 31, 2009, there were 166,020,384 common shares and 10,135,375
million options outstanding. Subsequent to quarter end, 44,965,000 common
shares were issued at a price of $1.28 per common share in an equity
financing. In addition, 450,000 options with a weighted average exercise price
of $0.98 were issued to new employees of the Company and 71,833 options with a
weighted average price of $5.13 were forfeited due to a resignation. As at May
14, 2009, there were 210,985,384 shares outstanding and 10,513,542 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 March 31, 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 and internal controls over
financial reporting concurrent with filing its interim financial statements to
the first quarter 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
March 31, 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 March 31, 2009, there were no material
changes in the Company's disclosure controls and procedures or internal
control over financial reporting, other than a change in the CFO of the
Company effective March 31, 2009 (the resigning CFO is providing consulting
services to the Company during a transition period) and 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 May 14, 2009 and is management's assessment of
Iteration's historical operating and financial results for the three months
ended March 31, 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 nine 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.

    
    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
             Howard Crone P. Eng.        Independent Businessman
                                         (former director - Cyries)
             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



           Unaudited Interim Consolidated Financial Statements of

                            Iteration Energy Ltd.

                           March 31, 2009 and 2008


    Iteration Energy Ltd.

    Consolidated Balance Sheets (unaudited)

    As at                                              March 31, December 31,
    (in thousands of dollars)                              2009         2008
    -------------------------------------------------------------------------
    ASSETS (Notes 5 and 14)

    Current
      Cash                                                 $278       $6,832
      Accounts receivable (Note 10(d))                   38,911       43,996
      Prepaids and other current assets                   9,887       10,846
    -------------------------------------------------------------------------
                                                         49,076       61,674

    Property, plant and equipment (Note 4)              973,421      973,529

    -------------------------------------------------------------------------
                                                     $1,022,497   $1,035,203
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    ------------------------------------

    Current
      Bank indebtedness (Notes 5 and 14)               $285,545     $266,800
      Accounts payable and accrued
       liabilities (Note 6)                              60,257       71,004
    -------------------------------------------------------------------------
                                                        345,802      337,804

    Future income taxes (Note 9)                         86,589       92,539

    Leasehold inducements                                   160          193

    Asset retirement obligation (Note 7)                 42,877       43,323
    -------------------------------------------------------------------------
                                                        475,428      473,859
    -------------------------------------------------------------------------
    Commitments and contingencies (Note 11)

    Shareholders' equity
      Share capital (Note 8)                            805,301      805,301
      Deficit                                          (258,232)    (243,957)
    -------------------------------------------------------------------------
                                                        547,069      561,344
    -------------------------------------------------------------------------
                                                     $1,022,497   $1,035,203
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Subsequent events (Note 14)
    See accompanying notes to the unaudited interim consolidated financial
    statements.



    Iteration Energy Ltd.

    Consolidated Statements of Income (Loss), Comprehensive Income (Loss) and
    -------------------------------------------------------------------------
    Deficit (unaudited)
    -------------------

    -------------------------------------------------------------------------
                                                 Three months ended March 31
    -------------------------------------------------------------------------
    (in thousands of dollars,
     except per share amounts)                             2009         2008
    -------------------------------------------------------------------------

    Revenue
      Production revenue                                $58,693      $55,564
      Royalties                                         (12,142)     (11,679)
    -------------------------------------------------------------------------
                                                         46,551       43,885
      Other production revenue                                -          329
    -------------------------------------------------------------------------
                                                         46,551       44,214
    -------------------------------------------------------------------------
    Expenses
      Production                                         24,881       10,198
      Transportation                                      1,434        1,469
      General and administrative                          3,131        2,277
      Stock based compensation expense (Note 8(c))            -        7,110
      Interest on current debt                            1,618        1,112
      Depletion, depreciation and accretion              35,700       21,554
      Recovery of investment tax credits                      -       (1,820)
    -------------------------------------------------------------------------
                                                         66,764       41,900
    -------------------------------------------------------------------------

    Income (loss) before income taxes                   (20,213)       2,314
    Income taxes (Note 9)
    ---------------------
      Current income tax expense                             12          500
    ----------------------------
      Future income tax expense (recovery)               (5,950)         125
    --------------------------------------
    -------------------------------------------------------------------------
                                                         (5,938)         625
    -------------------------------------------------------------------------

    Net income (loss) and
     comprehensive income (loss)                        (14,275)       1,689

    Deficit, beginning of period                       (243,957)     (18,405)

    -------------------------------------------------------------------------
    Deficit, end of period                            $(258,232)    $(16,716)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted income (loss)
     per common share (Note 8(d))                        $(0.09)       $0.02
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to the unaudited interim consolidated financial
    statements



    Iteration Energy Ltd.

    Consolidated Statements of Cash Flows (unaudited)
    -------------------------------------------------

    -------------------------------------------------------------------------
                                                 Three months ended March 31
    -------------------------------------------------------------------------
    (in thousands of dollars)                              2009         2008
    -------------------------------------------------------------------------

    OPERATING ACTIVITIES
    Net income (loss)                                  $(14,275)      $1,689
    Add (deduct) non-cash items:
      Depletion, depreciation and accretion              35,700       21,554
      Recovery of investment tax credits                      -       (1,820)
      Future income tax expense (recovery)               (5,950)         125
      Amortization of leasehold inducements                 (33)         (54)
      Stock-based compensation expense                        -        7,110
      Asset retirement expenditures (note 7)               (542)         (93)
    -------------------------------------------------------------------------
                                                         14,900       28,511
    Net change in non-cash operating
     working capital (Note 12)                            5,909       15,135
    -------------------------------------------------------------------------
                                                         20,809       43,646
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Proceeds on sale of property,
     plant and equipment                                    227          (62)
    Acquisition of oil and gas properties                     -       (1,556)
    Additions to oil and gas properties                 (35,587)     (40,156)
    Additions to other capital assets                      (135)         (40)
    Net change in non-cash investing
     working capital (Note 12)                          (10,621)      (3,483)
    -------------------------------------------------------------------------
                                                        (46,116)     (45,297)
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Proceeds from bank indebtedness                      18,745        1,670
    Share issue costs (Note 8(b))                             -          (26)
    Net change in non-cash financing
     working capital (Note 12)                                8            -
    -------------------------------------------------------------------------
                                                         18,753        1,644
    -------------------------------------------------------------------------

    Decrease in cash                                     (6,554)          (7)

    Cash, beginning of period                             6,832        1,230
    -------------------------------------------------------------------------

    Cash, end of period                                    $278       $1,223
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See Note 12 for supplemental disclosure

    See accompanying notes to the unaudited interim consolidated financial
    statements



    Iteration Energy Ltd.

    Notes to the Unaudited Interim Consolidated Financial Statements
    Period ended March 31, 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.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    The unaudited interim consolidated financial statements of Iteration have
    been prepared in accordance with Canadian generally accepted accounting
    principles ("GAAP") and are consistent with those policies set out in the
    audited consolidated financial statements of the Company for the year
    ended December 31, 2008, except as disclosed below. These unaudited
    interim consolidated financial statements do not include all the
    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 quarter ended March 31, 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 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 financial reporting.

    Future Accounting Policies
    --------------------------
    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 International Financial Reporting
    Standards ("IFRS"). Earlier adoption of these recommendations is
    permitted.

    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 March 31, 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. 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 Energy Inc.

    On March 7, 2008, Iteration acquired Cyries Energy Inc. ("Cyries"), by
    Plan of Arrangement (the "Arrangement"). Under the Arrangement, Iteration
    issued 93,990,604 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 an increase
    in the exchange ratio for the acquisition.

    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 period ending
    March 31, 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 March 31, 2008 and the
    operations of Cyries and its subsidiaries for the period from March 8,
    2008 to March 31, 2008.

    The acquisition was 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

    -------------------------------------------------------------------------
                                                       March 31,   December
                                                         2009      31, 2008
                                                       ($000's)    ($000's)
    -------------------------------------------------------------------------

    Oil and gas properties                           $1,324,995   $1,290,246
    Other                                                 3,060        2,925
    -------------------------------------------------------------------------
                                                      1,328,055    1,293,171
    Less accumulated depletion and depreciation         354,634      319,642
    -------------------------------------------------------------------------
                                                       $973,421     $973,529
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At March 31, 2009, unproved properties and seismic expenditures amounting
    to $139,936,000 (March 31, 2008: $111,475,000) have been excluded from
    the depletion calculation. Future development costs on proven undeveloped
    reserves of $75,142,000 (March 31, 2008: $35,540,000) are included in the
    depletion calculation.

    For the three months ended March 31, 2009, the Company capitalized
    $1,135,000 (three months ended March 31, 2008: $770,000) of overhead
    directly related to exploration and development activities.

    5.  BANK INDEBTEDNESS (see also note 14)

    Bank indebtedness represents the drawn portion of a syndicated facility.
    As at March 31, 2009, the syndicated facility provided for maximum
    borrowings of $300 million. There were three components to the syndicated
    facility. The first was a $260 million term facility which could be used
    to fund the Company's capital program. The second component was a
    $15 million working capital revolving facility, which was payable on
    demand. The third component was a supplemental facility for $25 million
    which matured on April 30, 2009.

    Under the terms of the first two components of the facility, the Company
    borrowed primarily by either Bankers' Acceptances which carried a margin
    of 165 to 275 basis points or by prime rate loans which carried a margin
    of 65 to 175 basis points, each depending on the ratio of funded debt to
    trailing cash flow.

    Under the terms of the $25 million supplemental facility, the Company
    borrowed primarily by either Bankers' Acceptances which carried a margin
    of 275 to 400 basis points or by prime rate loans which carried a margin
    of 175 to 300 basis points each, depending on the ratio of funded debt to
    trailing cash flow.

    On May 14, 2009 the Company entered into a new bank agreement. See note
    14 for details.

    6.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

    The accounts payable and accrued liabilities consist of the following:

                                                       March 31,   December
                                                         2009      31, 2008
                                                       ($000's)    ($000's)
    -------------------------------------------------------------------------
    Trade accounts payable                              $47,647      $57,474
    Joint venture accounts payable                        4,281        3,790
    Royalties payable                                     8,329        9,740
    -------------------------------------------------------------------------
    Total                                               $60,257      $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 (from 2009 through 2036)
    will total approximately $97,736,000 (December 31, 2008: $98,079,000).
    The book value of the obligation at March 31, 2009 is $42,877,000
    (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 per
    cent. As at March 31, 2009, no funds have been set aside to settle this
    obligation.

                                                    Three months
                                                        ended     Year ended
                                                      March 31,     December
                                                         2009       31, 2008
                                                         ----       --------
                                                       ($000's)     ($000's)
    -------------------------------------------------------------------------

    Balance, beginning of period                        $43,323      $18,897
    Liabilities incurred on acquisition of properties         -       19,854
    Change in estimate                                     (712)           -
    Increase in liabilities from drilling activity          100        2,848
    Accretion expense                                       708        2,271
    Settlement of liabilities                              (542)        (547)
    -------------------------------------------------------------------------
    Balance, end of period                              $42,877      $43,323
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company calculates the asset retirement obligation based on estimates
    of the date of abandonment, abandonment costs, and inflation. These
    amounts are then discounted to a present value amount.

    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

    -------------------------------------------------------------------------
                             Three months ended          Year ended
                               March 31, 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
     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 $nil,
     (2008: $9)                     -            -            -          (22)
    -------------------------------------------------------------------------
    Balance, end of
     period               166,020,384     $805,301  166,020,384     $805,301
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See note 14 with respect to equity issued subsequent to the quarter on
    May 6, 2009.

        (c) Stock Options

    The Company has a stock option plan which that 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:

    -------------------------------------------------------------------------
                              Three months ended           Year ended
                                March 31, 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                   955,591         0.95    5,343,065         5.47
    Exercised for cash              -            -   (1,642,409)       (2.94)
    Forfeited                (602,661)       (4.77)    (487,000)       (5.70)
    -------------------------------------------------------------------------
    Outstanding, end
     of period             10,135,375        $4.20    9,782,445        $4.55
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Options exercisable,
     end of period          3,846,754        $3.39    3,759,285        $3.36
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes information about the stock options
    outstanding at March 31, 2009:

    -------------------------------------------------- ----------------------
                                  Weighted
                                  average
                       Number    remaining   Weighted     Number    Weighted
                    outstanding  contractual average    exercisable  average
       Range of       March 31,    life      exercise    March 31,  exercise
    exercise prices     2009      (years)     price $      2009      price $
    -------------------------------------------------- ----------------------
    $0.70 to $2.89    1,210,132     3.97     $1.23              -        $-
    $2.90 to $4.00    3,549,037     1.95      3.12      2,779,636      2.97
    $4.01 to $5.00    1,869,598     2.49      4.54        955,377      4.40
    $5.01 to $9.00    3,506,608     3.25      6.14        111,741      5.16
    -------------------------------------------------- ----------------------
                     10,135,375     2.74     $4.20      3,846,754     $3.39
    -------------------------------------------------- ----------------------
    -------------------------------------------------- ----------------------

    The Company's stock option plan provides stock option holders the choice,
    upon exercise, to receive a cash payment in exchange for surrendering the
    option. 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 period ended March 31, 2009, stock based compensation expense of $nil
    (March 31, 2008: $7,110,000), was recognized based on the change in value
    of the outstanding stock options. The current period amounts were
    determined using the March 31, 2009 closing share price, as compared to
    the closing share price at December 31, 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
    outstanding. Based on the March 31, 2009 closing share price of $0.98,
    had all of the outstanding stock options to acquire 10,135,375 common
    shares been vested, there would be no aggregate stock based compensation
    expense or corresponding liability recognized (December 31, 2008: $nil).
    At March 31, 2009 and December 31, 2008, there has been no amount
    recognized as stock based compensation payable. Subsequent to quarter
    end, 450,000 options with a weighted average exercise price of $0.98 were
    issued to new employees of the Company and 71,833 options with a weighted
    average price of $5.13 were forfeited due to resignations.

        (d) Per Share Amounts

    -------------------------------------------------------------------------
                                                        Three months ended
                                                             March 31,
                                                         2009         2008
    -------------------------------------------------------------------------
    Weighted average common shares outstanding      166,020,387   90,572,381
    Weighted average diluted common shares
     outstanding                                    166,020,387   95,066,572
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    9.  INCOME TAXES

    The provision for income taxes recorded in the financial statements
    differs from the amount that would be obtained by applying the statutory
    income tax rate to the income (loss) before tax as follows:

    -------------------------------------------------------------------------
                                                        Three months ended
                                                             March 31,
    ($000's)                                             2009         2008
    -------------------------------------------------------------------------
    Income (loss) before tax                           $(20,213)      $2,314
    Statutory Canadian corporate tax rate                29.20%       29.50%
    -------------------------------------------------------------------------
    Anticipated tax expense (recovery)                  $(5,900)        $683
    Rate adjustment                                        (220)         (81)
    Other                                                   182           23
    -------------------------------------------------------------------------
    Income tax expense (recovery)                       $(5,938)        $625
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company's future income tax liability at March 31, 2009 and
    December 31, 2008 is comprised of the following:

                                                       March 31, December 31,
    ($000's)                                             2009         2008
    -------------------------------------------------------------------------
    Income tax rate (%)                                   26.50        26.70
    Property, plant and equipment, having different
     income tax and accounting basis                    $98,575      $72,392
    Deferred partnership income                           2,736       46,449
    Non-capital loss carry forwards                           -      (13,136)
    Share issue costs                                    (3,767)      (4,162)
    Asset retirement obligation                         (11,362)     (11,567)
    Unamortized leasehold inducements                       (42)         (52)
    Other                                                   449        2,615
    -------------------------------------------------------------------------
    Future income tax liability                         $86,589      $92,539
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    10. 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.

    -   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 the effect of changing net loss for the quarter by
    approximately $4.3 million. A US $5.00/bbl change in WTI for oil would
    have the effect of changing net loss for the quarter by approximately
    $1.2 million.

    -   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 cash flow. 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% for the quarter,
    it is estimated that net loss for the quarter would change by
    approximately $0.2 million.

    b)  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 currently has access to sufficient capital through
    internally generated cash flows 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. See subsequent events note 14.

    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.

    c)  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
    $0.3 million.

    d)  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 four
    marketers also under normal industry terms. Of these twenty four
    marketers, sales to four account for approximately 80% of the Company's
    production revenue.

    As at March 31, 2009, the Company had an allowance for doubtful accounts
    of $15.7 million (December 31, 2008 $15.4 million, including a provision
    of $13.9 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 March 31, 2009, the aging analysis of trade receivables is as
    follows:

    -------------------------------------------------------------------------
                                                                   ($000's)
                                                                 ------------
    Current                                                           24,144
    30 - 60 days                                                       4,135
    60 - 90 days                                                       2,712
    Greater than 90 days                                              23,595
                                                                 ------------
    Total                                                             54,586
    Less allowance for doubtful accounts                             (15,675)
                                                                 ------------
    Total                                                             38,911
    -------------------------------------------------------------------------
    Note: Greater than 90 days includes amounts receivable from for SemCanada
    -------------------------------------------------------------------------
    and SemCAMS.
    ------------

    e)  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:

    -------------------------------------------------------------------------
                                March 31, 2009          December 31, 2008
                            Carrying    Estimated     Carrying    Estimated
    ($000's)                  Value     Fair Value      Value     Fair Value
    -------------------------------------------------------------------------
    Loans and receivables
    Accounts receivable       $38,911      $38,911      $43,996      $43,996
    Other financial
     liabilities
    Bank indebtedness         285,545      285,545      266,800      266,800
    Accounts payable and
     accrued liabilities       60,257       60,257       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.

    11. CONTINGENCIES

    The Company is party to various lawsuits as at March 31, 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 lawsuits 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.

    12. SUPPLEMENTAL DISCLOSURE ON CONSOLIDATED STATEMENTS OF CASH FLOWS

    Changes in non-cash working capital were comprised of the following:

                                                        Three months ended
                                                             March 31,
    ($000's)                                             2009         2008
    -------------------------------------------------------------------------
    Accounts receivable                                  $5,561      $(5,993)
    Prepaids and other current assets                       470          986
    Accounts payable and accrued liabilities            (10,735)      16,659
    -------------------------------------------------------------------------
    Net change                                          $(4,704)     $11,652
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                        Three months ended
                                                             March 31,
    ($000's)                                             2009         2008
    -------------------------------------------------------------------------
    Net change by activity:
    Operating                                            $5,909      $15,135
    Investing                                           (10,621)      (3,483)
    Financing                                                 8            -
    -------------------------------------------------------------------------
    Net change                                          $(4,704)     $11,652
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Additional information:

                                                        Three months ended
                                                             March 31,
    ($000's)                                             2009         2008
    -------------------------------------------------------------------------

    Cash interest paid                                   $1,618       $1,112
    Cash taxes paid                                         $12         $500

    13. 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 business 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. The consolidated capital structure of the Company is as follows:

    -------------------------------------------------------------------------
                           As at March 31, 2009     As at December 31, 2008
                            ($000's)        %         ($000's)        %
    -------------------------------------------------------------------------
    Bank indebtedness (net
     of cash)                 285,267         26.2      259,968         24.4
    Share capital             805,301         73.8      805,301         75.6
                          ------------------------- -------------------------
    Total                  $1,090,568        100.0   $1,065,629        100.0
    -------------------------------------------------------------------------

    As at March 31, 2009, the Company had a borrowing base 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.

    14. SUBSEQUENT EVENTS

    The following events occurred subsequent to quarter end;

    1)  On April 30, 2009 the Company extended its credit facility with its
        syndicate of lenders to May 29, 2009. The borrowing base was
        established at $260 million and proceeds from the Company's announced
        equity financing (see Note 14 (2) below) were used to repay any
        borrowing base shortfall.

        On April 30, 2009, the Company also extended the maturity date of the
        supplemental facility to May 29, 2009. Proceeds from the Company's
        announced equity financing (see Note 14 (2) below) were used to repay
        this facility and the facility was cancelled.

    2)  On May 6, 2009 the Company closed a bought deal equity financing of
        39,100,000 common shares plus an over-allotment option of 5,865,000
        common shares all at $1.28 per common share for gross proceeds of
        $57.5 million (net proceeds of approximately $54.4 million). The
        proceeds of the financing were applied to reduce the Company's credit
        facility and repay the Company's supplemental facility, which was
        then cancelled.

    3)  On May 14, 2009 the Company entered into a new credit facility with a
        syndicate of lenders, consisting of Canadian Imperial Bank of
        Commerce, Bank of Nova Scotia, Bank of Montreal and Alberta Treasury
        Branch, to replace the existing credit facility described in Notes 5
        and 14 (1) above. The borrowing base on this new facility was
        established at $265 million and consists of a $12.5 million operating
        facility and a $252.5 million extendible revolving term facility.
        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.

    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

Organization Profile

ITERATION ENERGY LTD.

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