North Peace Energy Announces Operations Update and First Quarter Financial Results



    CALGARY, May 27 /CNW/ - North Peace Energy Corp. ("North Peace" or the
"Company") releases operating and financial results for the three months ended
March 31, 2009.

    First Quarter Operations and Financial Update:

    
    -   Working capital of $5.8 million and no debt as at March 31, 2009
    -   Capital expenditures of $3.4 million in the first quarter

    CSS Pilot Project Operations Update:

    L1 Horizontal Pilot Well

        -  The first steam injection stage was completed in April with a slug
           size of approximately 75,000 barrels of steam (cold water
           equivalent)

        -  The first production stage was initiated in May
           -  Flowed the well without pumping until the well was
              de-pressurized
           -  Installed pumping equipment and commenced pumping operations
           -  As expected, the early period has been dominated by water
              production
           -  Indications of increasing oil cuts have been observed
           -  To date approximately 4,700 barrels of water and 300 barrels of
              oil has been produced
              -  Approximately 6% of the injected steam has been produced

           -  Production has been on an intermittent basis to accommodate,
              soak periods, the installation of the down-hole pump, and
              gather pilot information such as a horizontal temperature
              survey

        -  Continuing to monitor production information from the L1 well

           -  During the summer, after peak production has been reached,
              North Peace expects to be in a position to properly model the
              decline rate and estimate full first cycle production
              information and steam-oil ratios

    L2 Horizontal Pilot Well

        -  The first steam injection stage is underway
           -  Approximately 1/3 of the anticipated 140,000 barrel steam slug
              has been injected to date
           -  Steam injection is expected to continue until July
           -  Steaming will be followed by the production stage of the cycle

    Future Development:

    -   Work continues on engineering for the 3,000 bbl/d pilot expansion
        project
        -  Process design is nearing completion

    Louis Dufresne, President of North Peace, commented "North Peace has
achieved a significant milestone by initiating bitumen production from its
pilot project. This milestone combined with recent improvements in the capital
markets and the strengthening of commodity prices has put North Peace in an
enviable position to capture market momentum and continue to advance
development of the Company."

    Annual Meeting
    --------------
    The Company's Annual General Meeting of Shareholders is scheduled for
10:00 AM on Thursday May 28, 2009 in the Strand/Tivoli Room - Metropolitan
Centre, 333-4th Avenue SW, Calgary, AB.

                   Management's Discussion and Analysis of
                              Financial Results
    

    This Management's Discussion and Analysis for North Peace Energy Corp.
("North Peace" or the "Company") provides analysis of the Company's financial
results for the three month period ended March 31, 2009. The following
information should be read in conjunction with the unaudited interim financial
statements for the three months ended March 31, 2009 and the audited financial
statements for the year ended December 31, 2008.
    Additional information about North Peace filed with Canadian securities
commissions is available on-line at www.sedar.com.

    
    Date of Report     May 26, 2009
    --------------

    Overview
    --------
    

    North Peace has an early stage in-situ oil sands play in northern Alberta
with an estimated 2 to 3.1 billion barrels of Discovered Petroleum
Initially-In-Place. The Company has a 100% working interest in 86,400 acres of
Crown oil sands leases in the Peace River area. The lands have the benefit of
over 300 legacy logs and are surrounded by accessible oil and gas production
infrastructure. The target Bluesky zone is a regional sand, deposited in a
near shore marine environment at approximately 400 metres in depth. The
initial focus area has approximately 22 sections with 10 to 16 metres of oil
bearing thickness, expected to be technically sufficient to advance a 30,000
bbl/d commercial project. North Peace is currently advancing the development
of its resource using a robust and proven in-situ thermal recovery process,
Cyclic Steam Stimulation ("CSS"). A pilot project consisting initially of two
horizontal CSS wells has been built and the facility is currently operating.

    
    Company and Project Overview
    ----------------------------
    During the three months ended March 31, 2009 the Company has completed the
following significant milestones:

    -   Completed construction on the pilot project
    -   Commenced steam injection of the first horizontal pilot well (L1)

    Subsequent to March 31, 2009 the Company has completed the following:

    -   Completed Steam injection on the L1 well at the pilot project
    -   Initiated steaming on the second horizontal pilot well (L2)
    -   Commenced bitumen production from the first horizontal pilot
        well (L1)
    -   Converted the first well (L1) to conventional pumping production


    Financial Results
    -----------------

    Quarterly Financial Information

                            2009       2008       2008       2008       2008
                            Q1($)      Q4($)      Q3($)      Q2($)      Q1($)
    -------------------------------------------------------------------------
    Revenues              26,752    150,963    120,028     39,045     87,905
    Net Loss and
     Comprehensive
     loss                658,380     30,100    571,983    486,924    399,290
    Basic and diluted
     Net Loss Per
     share                 0.012      0.001      0.012      0.013      0.010
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                            2007       2007       2007
                            Q4($)      Q3($)      Q2($)
    ---------------------------------------------------
    Revenues             117,197    128,821     67,297
    Net Loss and
     Comprehensive
     loss                448,481    282,614    363,906
    Basic and diluted
     Net Loss Per
     share                 0.012      0.007      0.012
    ---------------------------------------------------
    ---------------------------------------------------


    The majority of the increase in the first quarter net loss is due to a
future tax reduction relating to the tax effect of the $6 million of flow
through shares that were issued in August 2008 and stock based compensation
expense.


    Results of Operations
    ---------------------

    Interest Income

                                                  2009       2008       2008
                                          -----------------------------------
                                                    Q1         Q4         Q1
    -------------------------------------------------------------------------
    Interest Income                             26,752    150,963     87,905
    -------------------------------------------------------------------------


    Interest income was $26,752 for the first three months of 2009, with the
majority from redeemable term deposits bearing interest at 0.50%. Interest
income was $150,963 in the fourth quarter of 2008 and $87,905 in the same
period last year. The decrease in interest income from 2008 is due to lower
amounts of cash on deposit following the completion of pilot construction
coupled with lower interest rates.


    Stock-based Compensation

                                                  2009       2008       2008
                                          -----------------------------------
                                                    Q1         Q4         Q1
    -------------------------------------------------------------------------
    Stock-based Compensation                   304,870    241,945    166,376
    -------------------------------------------------------------------------
    

    Stock-based compensation in the first quarter of 2009 was $304,870. The
amount in 2009 consists of additional option grants in the year and
amortization of older option grants. $95,035 related to stock based
compensation was capitalized during the year relating to consultants working
directly on the capital program and pilot project. The average fair value of
the options granted during 2009 was $0.17 per option (2008 - $0.82) assuming
an average volatility of 80% (2008 - 80%) on the underlying shares, a weighted
average exercise price of $0.28 (2008 - $1.46), a risk-free interest rate of
2.11% (2007 - 2.81% - 3.35%), an expected life of 4 years (2008 - 4 years),
and an expected dividend rate of 0% (2008 - 0%).

    
    Administrative Expenses

                                                  2009       2008       2008
                                          -----------------------------------
                                                    Q1         Q4         Q1
    -------------------------------------------------------------------------
    G&A expense
      Salaries, Benefits and Consulting
       Fees                                    201,595    302,266    176,891
      Legal, Accounting and Audit Fees          45,269     33,985     53,621
      Office rent                               64,891     27,297     27,297
      Other G&A                                126,680    193,305     53,074
    -------------------------------------------------------------------------
    Administrative Expenses                    438,435    556,853    310,883
    -------------------------------------------------------------------------
    

    Salaries, Benefits and Consulting Fees

    The decrease from the fourth quarter is a result of the year-end bonuses
that were included in the fourth quarter amount. The increase from the first
quarter from last year is due to increased staffing associated with the pilot
project.

    Legal, Accounting and Audit Fees

    The increase from the fourth quarter 2008 is due to increased legal costs
related to year-end regulatory filings.

    Office Rent

    Office rent for the first quarter of 2009 has increased from fourth
quarter of 2008 and from the same period last year as the Company relocated to
larger office on January 1, 2009.

    
    Depreciation and Accretion

                                                  2009       2008       2008
                                          -----------------------------------
                                                    Q1         Q4         Q1
    -------------------------------------------------------------------------
    Depreciation and Accretion                  17,742     10,935      9,936
    -------------------------------------------------------------------------
    

    The Company had depreciation expense of $17,742 for the first three
months of 2009 compared to $10,935 for the fourth quarter of 2008 and $9,936
for the same period in 2008. The increase is due to additional expense on
other assets and increased accretion expense resulting from additional asset
retirement obligations being recognized and subsequently accreted.

    Future Income Taxes

    The future tax impact related to the tax-effect of the flow-through
shares that were issued in August 2008 was recognized in the quarter.
$1,500,000 was recorded in share capital and $75,915 was recognized on the
income statement as a future income tax reduction. This was offset against the
future tax asset of $557,477 and resulted in a future tax liability of
$898,286 as at March 31, 2009.

    
    Liquidity and Capital Resources
    -------------------------------
    
    As at March 31, 2009 the Company had working capital of $5.8 million and
no debt
    The Company has deferred the reminder of its capital budget including $6
million of costs related to the delineation program. Current working capital
will be sufficient to fund pilot operations and G&A for 2009. The Company will
reassess the capital budget in the second half of 2009 and is currently
exploring various alternatives for obtaining funds to advance future capital
requirements.
    As at December 31, 2008, the payments due under the office lease
commitment are as follows:

    
    (Cdn $)
    -------------------------------------------------------------------------
    2009                                                             144,648
    2010                                                             192,864
    2011                                                             192,864
    Thereafter                                                           Nil
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    On January 1, 2009 the Company entered into a new lease agreement for a
larger office for $192,864 per year. The new lease will expire December 31,
2011.
    As at March 31, 2009 the Company had a flow through share commitment of
$6 million which is to be spent on Canadian Exploration Expenditures ("CEE")
prior to December 31, 2009. As at March 31, 2009 the Company had spent
$400,000 on CEE towards this commitment.

    Capital expenditures were as follows:

    
    (Cdn $)                                       2009       2008       2008
                                          -----------------------------------
                                                    Q1         Q4         Q1
    -------------------------------------------------------------------------
    Land & Lease rentals                        74,984    122,674    120,735
    Drilling and Completion                    204,157  1,490,428  3,538,738
    Geological costs                            14,626      4,810     40,393
    Pilot facilities
      Construction, equipment and
       engineering                           3,253,690  6,320,998    215,803
      Capitalized plant overhead
       and operations                          410,220    289,005          -
    Other                                      191,035    321,775          -
    -------------------------------------------------------------------------
    Total                                    4,148,712  8,549,690  3,915,669
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The Company is a development stage enterprise and therefore capitalizes
revenue, operating costs and depreciation until the Company commences its
planned commercial operations. The Company has capitalized $410,220 for
operating costs and $62,235 and depreciation expense for the three months
ended March 31, 2009.
    Capitalized stock-based compensation and asset retirement obligation
additions are not included in the above table.

    
    Additional Disclosure for Venture Issuers without Significant Revenues
    ----------------------------------------------------------------------
    The Company has no expensed exploration or research and development costs.
Capitalized exploration costs are related to the purchase of oil sands leases,
the drilling of 17 delineation wells and the related geological assessments.
Capitalized development costs relate to the construction of the Company's CSS
pilot project and the drilling of two horizontal production wells.

    Share Capitalization
    --------------------
    The following table shows the common shares, stock options, purchase
warrants and performance warrants issued and outstanding at March 31, 2009:

                                                              March 31, 2009
    -------------------------------------------------------------------------

    Common shares outstanding                                     55,070,800
    Weighted average number of shares outstanding during
     the quarter                                                  55,070,800
    Stock options outstanding                                      4,110,000
    Performance warrants outstanding                               6,300,000
    $2.00 Warrants outstanding                                     6,666,650
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at May 26, 2009, there were 55,070,800 common shares, 4,110,000 stock
options, 6,300,000 performance warrants and 6,666,650 $2.00 warrants
outstanding.

    Off Balance Sheet Arrangements
    ------------------------------
    There were no off balance sheet arrangements, other than the office lease
commitment.

    Transactions with Related Parties
    ---------------------------------
    As at March 31, 2009, the Company accrued legal costs of $30,000 payable
to a firm in which a director is a partner. These costs were for general legal
services and the majority was related to year-end reporting matters.

    Critical Accounting Estimates
    -----------------------------
    
    The preparation of financial statements requires the Company to make
judgements, assumptions and estimates in the application of generally accepted
accounting principles that have a significant impact on the financial results
of the Company. Actual results could differ from those estimates.

    Impairment of Property and Equipment

    Property costs are reviewed at least annually to consider whether there
are conditions that may indicate impairment. The carrying values of petroleum
and natural gas properties are compared to their net recoverable amount as
estimated by quantifiable evidence of the market value of similar assets or
geological resources. If the carrying value is found to exceed the estimated
net recoverable amount a write down will be recorded.

    Asset Retirement Obligations

    The Company is required to provide for future removal and restoration
costs. The Company must estimate these costs in accordance with existing laws,
contracts or other policies. The fair value of the liability for the Company's
asset retirement obligations is recorded in the period in which it is expected
to be incurred, discounted to its present value using the Company's
risk-adjusted interest rate and expected inflation rate. The offset to the
liability is recorded in the carrying amount of property and equipment. The
liability amount is increased each reporting period due to the passage of time
and the amount of accretion is charged to earnings in the period. Revisions to
the estimated timing of cash flows or to the original estimated undiscounted
cost could also result in an increase or decrease to the obligation. Actual
costs incurred upon settlement of the retirement obligation are charged
against the obligation to the extent of the liability recorded.

    Income Tax Accounting

    The determination of the Company's income and other tax liabilities
requires interpretation of complex laws and regulations. All tax filings are
subject to audit and potential reassessment after the lapse of considerable
time.

    Stock-Based Compensation

    The Company uses the fair value method for valuing stock option grants.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. This model requires the
Company's management to make estimates and assumptions for the following:
dividend yield; expected volatility and risk-free rate. A zero dividend yield
is used as the Company does not pay dividends; the volatility is a calculation
based on a peer company comparison because of our lack of trading history and
the risk-free rate is obtained from the Bank of Canada.

    
    Changes in Accounting Policies (including initial adoption)
    -----------------------------------------------------------
    
    The International Accounting Standards Board ("IASB") has issued an
exposure draft relating to certain amendments to IFRS. One such exemption
relating to full cost oil and gas accounting is expected to result in a
reduced administrative transition from the current AcG-16 to IFRS. The
amendment, if implemented, will permit the Company to apply IFRS prospectively
to its full cost pool, rather than the retrospective assessment of capitalized
exploration and development expenses, with the provision that the ceiling
test, under IFRS standards, is conducted at the transition date. It is
anticipated that this exposure draft will not result in an amended IFRS 1
standard until late 2009.

    
    Financial Instruments and Other Instruments
    -------------------------------------------
    The Company's carrying value of cash and cash equivalents, accounts
receivable and accounts payable and accruals approximates its fair value due
to the immediate or short-term maturity of these instruments.

    Risks and Uncertainties
    -----------------------
    
    North Peace is exposed to operational and regulatory risks and
uncertainties in the normal course of business that can influence its future
financial performance. A summary of certain of these risks is set out below
under "Forward-Looking Statements". Readers are cautioned that these
descriptions are not exhaustive. Certain additional risks and uncertainties
are discussed below.

    Liquidity risk

    Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they are due. The Company's approach to managing
liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and stressed
conditions without incurring unacceptable losses or risking harm to the
Company's reputation.
    The recent downturn in the capital markets may limit the Company's
ability to raise the capital necessary to undertake or complete projects
capital expenditures during 2009 or undertake expanded operations in 2009 if
the capital market conditions do not improve. If debt or equity financing is
available, there is no assurance that it will be on terms acceptable to the
Company. In the second half of 2009, the Company will make an assessment on
its future capital planning, taking into account, among other factors, capital
market conditions at that time.
    The Company prepares periodic capital expenditure budgets, which are
regularly monitored and updated as considered necessary. Further, the Company
utilizes authorizations for expenditures on both operated and non-operated
projects to further manage capital expenditures. The Company does not have a
credit facility.

    Capital Markets

    Based on the current working capital balance the Company currently has
sufficient capital to fund corporate and operational expenses until the end of
2009. However, the recent downturn in the capital markets may limit the
Company's ability to raise the capital necessary to undertake or complete
capital expenditures during 2009 or undertake expanded operations during 2009
if the capital market conditions do not improve. If debt or equity financing
is available, there is no assurance that it will be on terms acceptable to the
Company. In the second half of 2009, the Company will make an assessment on
its future capital planning, taking into account, among other factors, capital
market conditions at that time. The Company has flexibility in timing future
capital expenditures and will investigate all options to obtain the required
funds to grow the Company.

    Oil & Gas Prices

    World prices for crude oil and natural gas have decreased significantly.
The Company's CSS pilot project is preceding notwithstanding the prevailing
commodity price environment as its purpose is to validate the economic and
technical parameters of the commercial project.
    Crude oil prices, while a significant factor, are one of many factors in
the Company's decision to advance a commercial project. The Company will
monitor commodity prices as it is evaluating production performance data from
the pilot project. The Company will utilize this data and then current and
anticipated crude oil and natural gas prices in evaluating the feasibility of
a commercial project.

    New Alberta Royalty Regime

    The Province of Alberta implemented the new Royalty Framework ("NRF") on
January 1, 2009. In the current pricing environment, the implementation of the
NRF is not materially adverse to the economics of the Company's proposed
commercial project. As the commodity price increases, the payments made to the
Province of Alberta under the NRF increase, however, this is partially offset
as the economics of the commercial project also improve with increased
commodity prices.

    
    Project and Company Outlook
    ---------------------------
    
    During the first half of 2009 the Company will focus on pilot operations.
The Company will utilize the data from the pilot in evaluating the feasibility
of commercial operations. The Company is also investigating the possibility of
adding additional wells to the existing pilot. The decision to drill these
additional wells will be based on the remaining capacity of the pilot
facilities, the economic returns from the wells and obtaining the required
regulatory approvals. Capital has also been allocated to advance the front-end
engineering work and the regulatory approval process for a 3,000 bbl/d pilot
expansion. In the current economic conditions, the 3,000 bbl/d expansion is
considered to be a more economically attractive option than proceeding with
the development of a 10,000 bbl/d first phase commercial project. However the
3,000 bbl/d option will still require improvements in the current commodity
price environment to generate sufficient returns to justify the up-front
construction costs. Cash flow from the 3,000 bbl/d expansion can then be used
to fund additional commercial phases.
    Subsequent to initial pilot production from the pilot project the Company
will reassess the capital budget for the remainder of 2009. The revised
capital budget will be tailored to the prevailing economic conditions at that
time.

    
    International Financial Reporting Standards ("IFRS")
    ----------------------------------------------------
    
    In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed
that the changeover to IFRS from Canadian GAAP will be required for publicly
accountable enterprises effective for the interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2011. The
AcSB issued the "omnibus" exposure draft of IFRS with comments due July 31,
2008, wherein early adoption by Canadian entities is also permitted. The
Canadian Securities Administrators ("CSA") has also issued Concept Paper
52-402, which requested feedback on the early adoption of IFRS as well as the
use of US GAAP by domestic issuers.
    The transition from current Canadian GAAP to IFRS is a significant
undertaking that may materially affect the Company's reported financial
position and results of operations.
    The Company has not completed development of its IFRS changeover plan,
which will include project structure governance, resourcing and training,
analysis of key GAAP differences and a phase plan to assess accounting
policies under IFRS as well as potential IFRS 1 ("First Time Adoption of
IFRS") exemptions. The Company will complete its project scoping, which will
include a timetable for assessing the impact on data systems, internal
controls over financial reporting and business activities, such as financing
and compensation arrangements during 2009.

    
    Discovered Petroleum Initially-In-Place
    ---------------------------------------
    Discovered Petroleum Initially-In-Place (equivalent to Discovered
Resources) is that quantity of petroleum that is estimated, as of a given
date, to be contained in known accumulations prior to production. The
recoverable portion of Discovered Petroleum Initially-In-Place includes
production, reserves, and contingent resources. There is no certainty that the
Discovered Petroleum Initially-In-Place will ever be produced.

    Forward-Looking Statements
    --------------------------
    
    Certain statements contained in this MD&A constitute forward-looking
statements that involve known and unknown risks, uncertainties and other
factors that may cause actual results or events to differ materially from
those anticipated in such forward-looking statements.
    In particular, this MD&A contains forward-looking statements pertaining,
directly or indirectly, to the following: business and operations strategies
including the operations at North Peace's pilot project and potential
commencement of a subsequent commercial project.
    The forward-looking statements contained in this MD&A are based on a
number of expectations and assumptions that may prove to be incorrect. In
addition to other assumptions identified in this MD&A, assumptions have been
made regarding, among other things: that North Peace will continue to conduct
its operations in a manner consistent with past operations; the continuance of
existing (and in certain circumstances, proposed) tax and royalty regimes; the
general continuance of current industry conditions; the accuracy of the
estimates of North Peace's resource volumes; the ability of North Peace to
obtain equipment, services and supplies in a timely manner and within budget
to carry out its activities; the timely receipt of required regulatory
approvals; the ability of North Peace to obtain financing on acceptable terms;
future oil and gas prices and future cost assumptions.
    No assurance can be given that these expectations will prove to be
correct and such forward-looking statements included in this MD&A should not
be unduly relied upon. Actual results could differ materially as a result of
changes in North Peace's plans, changes in commodity prices, regulatory
changes, general economic, market and business conditions as well as
production, development and operating performance and other risks associated
with oil and gas operations including anticipated success of resource
prospects and the expected characteristics of resource prospects; anticipated
capital requirements, project rates of return and estimated project life;
estimates of original discovered resource; estimates of recovery factors; lack
of diversification; and overall technical and economic feasibility of the
Company's project. These statements speak only as of the date of this MD&A or
as of the date specified in the documents accompanying this MD&A, as the case
may be.
    The Company undertakes no obligation to publicly update or revise any
forward-looking statements except as expressly required by applicable
securities laws.

    
    NORTH PEACE ENERGY CORP.
    (A Development Stage Company)

    Balance Sheets, as at
    (unaudited)
    -------------------------------------------------------------------------
                                                     March 31,   December 31,
                                                         2009           2008
    (Cdn $)
    -------------------------------------------------------------------------
    Assets

    Current assets
      Cash and cash equivalents (note 4)         $  6,775,282   $ 18,119,752
      Accounts receivable                             348,335        922,537
      Prepaid expenses                                 61,759         86,290
    -------------------------------------------------------------------------
                                                    7,185,376     19,128,579

    Oil and gas properties (note 5)                59,207,762     54,875,482
    Other assets                                       52,579         48,097
    Future income tax asset                                 -        557,477
    -------------------------------------------------------------------------
                                                 $ 66,445,717   $ 74,609,635
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current liabilities
      Accounts payable and accruals              $  1,418,808   $  8,788,438

    Asset retirement obligations (note 6)             509,465        442,303
    Future income tax liability                       898,286              -
    -------------------------------------------------------------------------
                                                    2,826,559      9,230,741
    -------------------------------------------------------------------------

    Shareholders' equity
      Equity Instruments (note 7)                  65,657,185     67,158,445
      Contributed surplus (note 8)                  3,213,826      2,813,922
      Deficit                                      (5,251,853)    (4,593,473)
    -------------------------------------------------------------------------
                                                   63,619,158     65,378,894

    -------------------------------------------------------------------------
                                                 $ 66,445,717   $ 74,609,635
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Future Operations (note 1)
    Commitments (note 10)

    Signed on behalf of the Board:

    "Ian Robertson", Director

    "Don Garner", Director



    NORTH PEACE ENERGY CORP.
    (A Development Stage Company)

    Statements of Loss, Comprehensive Loss and Deficit
    (unaudited)
    -------------------------------------------------------------------------
                                                          Three months ended
                                                                    March 31,
    (Cdn $)                                              2009           2008
    -------------------------------------------------------------------------

    Revenue
      Interest income                            $     26,752   $     87,905
    -------------------------------------------------------------------------
                                                       26,752         87,905
    -------------------------------------------------------------------------

    Operating expenses
      General and administrative                      438,435        310,883
      Stock-based compensation                        304,870        166,376
      Depletion, depreciation and accretion            17,742          9,936
    -------------------------------------------------------------------------
                                                      761,047        487,195
    -------------------------------------------------------------------------

    Net Loss before taxes                             734,295        399,290

    Future Income Tax Expense (reduction)             (75,915)             -
    -------------------------------------------------------------------------

    Net Loss and Comprehensive Loss              $    658,380   $    399,290

    Deficit at beginning of period                  4,593,473      3,105,176
    -------------------------------------------------------------------------

    Deficit at end of period                     $  5,251,853   $  3,504,466
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net Loss per share (note 11)
      Basic and Diluted                          $      0.012   $      0.010
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    NORTH PEACE ENERGY CORP.
    (A Development Stage Company)

    Statements of Cash Flows
    (unaudited)
    -------------------------------------------------------------------------
                                                          Three months ended
                                                                    March 31,
    (Cdn $)                                              2009           2008
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operating Activities
      Net Loss                                   $   (658,380)  $   (399,290)
      Non-cash charges to earnings
        Depletion, depreciation and accretion          17,742          9,936
        Stock-based compensation                      304,870        166,376
        Future income tax expense(reduction)          (75,915)             -
    -------------------------------------------------------------------------
                                                     (411,683)      (222,978)
      Net change in non cash working capital
        Accounts receivable                           378,702          5,914
        Prepaid expenses                               24,531         12,236
        Accounts payable and accruals                (126,947)       (90,967)
    -------------------------------------------------------------------------
                                                     (135,397)      (295,795)
    -------------------------------------------------------------------------
    Investing Activities
      Additions to oil and gas properties          (4,148,712)    (3,915,669)
      Other assets                                    (11,918)        (4,974)
      Net change in non cash working capital
        Accounts receivable                           195,500        (71,449)
        Accounts payable and accruals              (7,242,683)     1,197,272
    -------------------------------------------------------------------------
                                                  (11,207,813)    (2,794,820)
    -------------------------------------------------------------------------
    Financing Activities
      Net Proceeds on issue of common shares           (1,260)             -
      Net change in non cash working capital
        Accounts payable and accruals                       -              -
    -------------------------------------------------------------------------
                                                       (1,260)             -
    -------------------------------------------------------------------------

    Decrease in cash and cash equivalents         (11,344,470)    (3,090,615)

    Cash and cash equivalents, beginning of
     period                                        18,119,752      9,964,393
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of period     $  6,775,282   $  6,873,778
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental disclosure:
      Interest received                          $    101,297   $     62,138
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    NORTH PEACE ENERGY CORP.
    (A Development Stage Company)

    Notes to Financial Statements
    As at March 31, 2009 (unaudited), as at December 31, 2008
    -------------------------------------------------------------------------

    1.  Nature of operation and future operation

        North Peace Energy Corp. (the "Company" or "North Peace") resulted
        from the amalgamation of Juno Capital Corp. and North Peace Energy
        Inc. pursuant to the provisions of the Business Corporations Act
        (Alberta) on February 6, 2007. The Company's principal business
        activity is the exploration, exploitation and development and
        production of petroleum and natural gas resources in the Province of
        Alberta.

        North Peace is a development stage enterprise whose principle focus
        is the creation of shareholder value through the production of heavy
        oil from its oil sands leases at its Red Earth project. Production
        from its pilot project has commenced in the first half of 2009,
        however production of commercial quantities is not expected for 2 to
        3 years.

        The Company's Red Earth project contains of a 100% working interest
        in 86,400 acres of Crown oil sands leases in the Peace River area.
        The target geological zone is the Bluesky formation which is a
        regional sand, deposited in a near shore marine environment at
        approximately 400 metres depth. North Peace is currently advancing
        the development of its resource using Cyclic Steam Stimulation
        ("CSS"). A pilot project consisting initially of two horizontal CSS
        wells has been built and the facility is currently operating.

        These financial statements are prepared on the assumption that the
        Company will continue as a going concern and realize its assets and
        discharge its liabilities in the normal course of business. If the
        going concern assumption was not appropriate for these financial
        statements, adjustments might be necessary to the carrying value of
        assets and liabilities, the reported revenues and expenses and the
        balance sheet classifications used.

        The recoverability of the amounts shown for petroleum and natural gas
        assets is dependent upon the discovery of economically recoverable
        oil and gas resources and the ability of the Company to obtain
        financing necessary to complete the exploration and development and
        the success of future operations. Recent market events, including
        disruption of credit markets and other financial systems and the
        deterioration of global economic conditions have resulted in
        significant declines in commodity prices and made completing
        financings more difficult. As at March 31, 2009 the Company had
        working capital of $5.8 million and no debt. In an effort to conserve
        working capital the Company has deferred the remainder of the capital
        budget, other than completion of the pilot project, including
        $6 million of costs related to the delineation program. The Company
        has a flow through commitment of $6 million to be spent on Canadian
        Exploration Expenditures ("CEE") prior to December 31, 2009. As at
        March 31, 2009 the Company had spent $400,000 towards this
        commitment. The Company is currently exploring various alternatives
        for raising funds to advance future capital requirements but has
        flexibility in the timing of any future expenditures.

        Liquidity risk

        Liquidity risk is the risk that the Company will not be able to meet
        its financial obligations as they are due. The Company's approach to
        managing liquidity is to ensure, as far as possible, that it will
        have sufficient liquidity to meet its liabilities when due, under
        both normal and stressed conditions without incurring unacceptable
        losses or risking harm to the Company's reputation.

        The recent downturn in the capital markets may limit the Company's
        ability to raise the capital necessary to undertake or complete
        projects capital expenditures during 2009 or undertake expanded
        operations in 2009 if the capital market conditions do not improve.
        If debt or equity financing is available, there is no assurance that
        it will be on terms acceptable to the Company. In the second half of
        2009, the Company will make an assessment on its future capital
        planning, taking into account, among other factors, capital market
        conditions at that time.

        The Company prepares periodic capital expenditure budgets, which are
        regularly monitored and updated as considered necessary. Further, the
        Company utilizes authorizations for expenditures on both operated and
        non-operated projects to further manage capital expenditures. The
        Company does not have a credit facility.

    2.  Adoption of new accounting policies

        The International Accounting Standards Board ("IASB") has issued an
        exposure draft relating to certain amendments to IFRS. One such
        exemption relating to full cost oil and gas accounting is expected to
        result in a reduced administrative transition from the current AcG-16
        to IFRS. The amendment, if implemented, will permit the Company to
        apply IFRS prospectively to its full cost pool, rather than the
        retrospective assessment of capitalized exploration and development
        expenses, with the provision that the ceiling test, under IFRS
        standards, is conducted at the transition date. It is anticipated
        that this exposure draft will not result in an amended IFRS 1
        standard until late 2009.

        The Company is currently assessing which accounting policies will be
        affected by the change to IFRS and the potential impact of these
        changes on its financial position and results of operations.

    3.  Basis of presentation

        These interim financial statements have been prepared following the
        same accounting policies and methods used in the financial statements
        for the year ended December 31, 2008 except as noted. These financial
        statements should be read in conjunction with the audited year-end
        financial statements for North Peace Energy Corp.

    4.  Cash and cash equivalents

        Included in cash and cash equivalents is a redeemable term variable
        rate deposit totaling $7.7 million which currently bears interest at
        0.50 % and matures on August 7, 2009. The term deposits are fully
        redeemable, without penalty, 30 days after the date of investment and
        therefore classified as cash and cash equivalents.

    5.  Oil and gas properties


                                                     March 31,   December 31,
        (Cdn $)                                          2009           2008
        ---------------------------------------------------------------------
        Oil and gas interests                    $ 42,446,759   $ 42,442,785
        Pilot Project
          Equipment and construction               15,903,285     12,432,697
          Startup costs                               125,002              -
          Capitalized operations                      732,716              -
        ---------------------------------------------------------------------
                                                 $ 59,207,762   $ 54,875,482
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        The Company is advancing a Cyclic Steam Stimulation ("CSS") project
        on its land holdings. A pilot project consisting initially of two
        horizontal CSS wells has been built and is currently operating. At
        March 31, 2009, the Company has no reserves or production.
        Accordingly, no provision for depletion expense has been made.

        Stock-based compensation for consultants of $95,034 was capitalized
        during the months ended March 31, 2009 (2008 - $93,864 recovery).

        Deposits with the Energy Resources and Conservation Board of $365,982
        (2008 - $126,782) were included in oil and gas properties as at
        March 31, 2009.

    6.  Asset retirement obligations

        The following table represents the reconciliation of the carrying
        amount of the obligation associated with the retirement of the
        Company's petroleum and gas interests.


                                                     March 31,   December 31,
        (Cdn $)                                          2009           2008
        ---------------------------------------------------------------------

        Asset retirement obligations, beginning
         of period                               $    442,303   $    215,820
        Additions                                      64,506        212,296
        Accretion                                      10,306         17,120
        Change in estimates                            (7,650)        (2,933)
        ---------------------------------------------------------------------

        Asset retirement obligations, end of
         period                                  $    509,465   $    442,303
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The total undiscounted amount of cash flows required to settle the
        obligations as measured at March 31, 2009 is estimated to be
        $1,273,486 (2008 - $1,121,365). These obligations will be settled
        based on the useful lives of the underlying assets, which ranges from
        one to ten years. The credit-adjusted risk free rate at which the
        estimated cash flows were discounted was 8-10% (2008 - 8%) and the
        estimated inflation rate used to project future costs was 2%
        (2008 - 2%).

    7.  Share Capital

        (a)   Authorized

              Unlimited number of common shares
              Unlimited number of first preferred shares issuable in series
              Unlimited number of second preferred shares issuable in series

        (b)   Issued
                                                       Number
                                                    of Shares         Amount
        ---------------------------------------------------------------------
        Common Shares

        Balance December 31, 2007                  38,050,640   $ 42,037,961
        Tax effect on previously incurred share
         issue costs                                        -        364,971
        Stock Options exercised                        50,500         50,500
        Equity financing(i)                        16,969,660     22,999,951
        Share issue costs(ii)                               -     (1,774,667)
          Tax effect of share issue costs                   -        479,736
        ---------------------------------------------------------------------
        Balance December 31, 2008                  55,070,800   $ 64,158,452
        Adjustment to share issue costs                     -         (1,260)
        Tax effect of flow through shares                   -     (1,500,000)
        ---------------------------------------------------------------------
        Balance March 31, 2009                     55,070,800   $ 62,657,192

                                                       Number
                                                  of Warrants         Amount
        $2.00 Share Purchase Warrants

        Balance December 31, 2007                           -   $          -
        Equity financing(i)                         6,666,650      2,999,993
        ---------------------------------------------------------------------
        Balance December 31, 2008 and March 31,
         2009                                       6,666,650   $  2,999,993

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

        Total Equity Instruments                                $ 65,657,185
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

           i.    On August 7, 2008 the Company completed a private placement
                 equity offering, issuing a total of 13,333,300 units
                 ("Units"), at a price of $1.50 per Unit and 3,636,360 flow-
                 through common shares ("Flow-Through Shares"), at a price of
                 $1.65 per Flow-Through Share for gross proceeds of
                 approximately $26 million. Each Unit consists of one common
                 share and half of one common share purchase warrant. Each
                 full warrant entitles the holder to acquire one common share
                 at an exercise price of $2.00 per share until February 7,
                 2010.
                 The fair value of the warrants is $0.45 per warrant assuming
                 a volatility of 80% on the underlying shares, a risk-free
                 interest rate of 2.75%, an expected life of 1.5 years and an
                 expected dividend rate of 0%.

           ii.   Share issue costs relate to the costs incurred for the
                 equity issuance on August 7, 2008.

        (c)   Stock options

        Changes in the number of shares issuable under outstanding options
        were as follows:

                                                                    Weighted
                                                     Range of        Average
                                        Number       Exercise       Exercise
                                    of options         Prices          Price
        ---------------------------------------------------------------------
        Balance, December 31, 2007   2,280,500   $1.00 - 2.62   $       1.43
        Options exercised              (50,500)          1.00           1.00
        Option Granted               1,830,000    1.18 - 1.50           1.46
        ---------------------------------------------------------------------
        Balance, December 31, 2008   4,060,000   $1.00 - 2.62   $       1.45
        Option Granted                  50,000           0.28           0.28
        Balance, March 31, 2009      4,110,000   $0.28 - 2.62   $       1.44
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The average fair value of the options granted during 2009 was $0.17
        per option (2008 - $0.82) assuming an average volatility of 80%
        (2008 - 80%) on the underlying shares, a weighted average exercise
        price of $0.28 (2008 - $1.46), a risk-free interest rate of 2.11%
        (2007 - 2.81% - 3.35%), an expected life of 4 years (2008 - 4 years),
        and an expected dividend rate of 0% (2008 - 0%).

        Stock options issued to employees vest 1/3 per year on the first,
        second and third anniversary of the date of the grant. Options issued
        to consultants vest at equal amounts at 6 months, 18 months and 30
        months after the date of grant. All options expire 5 years after the
        initial grant date.

        The Company has recognized stock-based compensation of $304,870
        during the three months ended March 31, 2009 and $95,034 was
        capitalized to oil and gas properties.

        In 2008, the Company granted 1,830,000 stock options at a weighted
        average exercise price of $1.46 per share to management, employees,
        consultants and directors. 475,000 of the stock options granted to
        management will be exercisable only when the Company's previously
        announced cyclic steam pilot project demonstrates first oil
        production, these options have the same vesting terms as existing
        options and vest 1/3 per year on the first, second and third
        anniversary of the date of the grant.

        The following table sets forth information about stock options
        outstanding as at March 31, 2009.

                                                         Options Exercisable
                            Options Outstanding                      Weighted
                                 Weighted                             Average
        Range of                 Average      Remaining                Price
        Exercise   Number of      Price      Contractual   Options     Per
        Price      Options      Per Share     Life (yrs) Exercisable   Share
        ---------------------------------------------------------------------
        $0.28 -
         $1.00     1,465,000      $0.98         2.90      876,668      $1.00
        $1.01 -
         $2.00     2,245,000      $1.53         4.18      165,000      $1.76
        $2.00 -
         $3.00       400,000      $2.62         3.17      150,001      $2.62
        ---------------------------------------------------------------------
                   4,110,000      $1.44         3.57    1,191,669      $1.31
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (d)   Performance Warrants

                                                    Number of       Exercise
                                                     Warrants          Price
        ---------------------------------------------------------------------
        Balance, December 31, 2007                  6,300,000   $       0.50
        ---------------------------------------------------------------------
        Balance, December 31, 2008 and March 31,
         2009                                       6,300,000   $       0.50
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Exercisable, March 31, 2009                         -   $          -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The performance warrants may be exercised the earlier of: (a)
        immediately following a liquidity event whereby the Board of the
        Company determines to liquidate all or substantially all of the
        assets of the Company, (b) immediately following an offer to purchase
        at least 66 2/3% of the outstanding common shares for cash or similar
        consideration (other than pursuant to a reverse take-over) that is
        received and taken up and paid for by the offeror, or (c) December
        31, 2010, otherwise they expire.

        The performance warrants vest immediately if (a) or (b) above occurs,
        or after the shares are listed on a recognized stock exchange and all
        of the following performance criteria are satisfied; (i) the Company
        has a market capitalization of at least $30,000,000; (ii) at least
        32,000,000 equity shares are outstanding; and (iii) the Company meets
        or exceeds the minimum listing requirements of a Tier 1 Issuer as
        defined in the policies of the TSX Venture Exchange (collectively the
        "Performance Criteria"). If the Performance Criteria are met, the
        warrants vest as follows: 2,700,000 performance warrants upon
        achieving a share price of $1.00 per share, 1,800,000 performance
        warrants upon achieving a share price of $1.50 per share and
        1,800,000 performance warrants upon achieving a share price of $2.00
        per share. Share prices are calculated based on the ten day weighted
        average trading price per share of the Company.

        As at March 31, 2009 all performance criteria related to the Company
        have been satisfied except the minimum listing requirements for a
        Tier 1 Issuer on the TSX Venture Exchange.

        The fair value of the performance warrants was estimated at
        $1,466,550 using the Black-Scholes option pricing model assuming
        expected volatility of 90% and an expected life of between one and
        three years with corresponding risk-free rates of 4.07% to 4.16%.
        During 2006, all the substantive criteria were considered probable
        and the $1,466,550 was expensed.

        The remaining contractual life of the outstanding and exercisable
        performance warrants is 1.75 years.

    8.  Contributed surplus

                                                     March 31,   December 31,
        (Cdn $)                                          2009           2008
        ---------------------------------------------------------------------

        Balance, beginning of period             $  2,813,922   $  2,131,653
        Stock-based compensation
          Expensed                                    259,793        794,233
          Capitalized                                  61,477        183,983
          Increase/(Decrease) in fair value of
           non-employee options
            Expensed                                   45,077        (18,100)
            Capitalized                                33,557       (277,847)
        ---------------------------------------------------------------------
        Balance, end of period                   $  3,213,826   $  2,813,922
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    9.  Related party transactions

        As at March 31, 2009, the Company accrued legal costs of $30,000
        payable to a firm in which a director is a partner. These costs were
        for general legal services and the majority was related to year-end
        reporting matters. All related party transactions are in the normal
        course of operations, related party transactions entered into by the
        Company have been measured at the exchange amount established and
        agreed to by the related parties.

    10. Commitments

        As at January 1, 2009, the Company was committed under a lease for
        office premises, requiring future minimum rental payments of $192,864
        per annum (2007 - $82,246), expiring December 31, 2011.

        The Company has a flow through share commitment of $6 million which
        is to be spent on Canadian Exploration Expenditures ("CEE") prior to
        December 31, 2009. As at March 31, 2009 the Company had spent
        $400,000 of CEE towards this commitment.

    11. Loss per Share

        The following is a reconciliation of basic and diluted loss per
        share.

                                                         Three months ended
                                                               March 31,
                                                 ----------------------------
                                                         2009           2008
        ---------------------------------------------------------------------

        Net Loss (Cdn $)                         $    658,380        399,290
        Weighted average number of shares
         outstanding                               55,070,800     38,050,640
        Basic and Diluted loss per share         $      0.012          0.010
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company is in a loss position for the period and all options are
        out of the money, therefore all dilutive instruments are anti-
        dilutive in nature.
    





For further information:

For further information: Louis Dufresne, President & CEO, James
Glessing, Vice President, Finance & CFO, North Peace Energy Corp., 630, 505 -
3rd Street SW, Calgary, Alberta, T2P 3E6, Telephone (403) 262-6024, Facsimile:
(403) 262-6072, E-mail: info@northpec.com, www.northpec.com; Or Stephanie K
Mesher, Bryan Mills Iradesso, (403) 503-0144 ext. 216, smesher@bmir.com

Organization Profile

NORTH PEACE ENERGY CORP.

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