Petrolifera Petroleum reports Q1 2009 results and schedules Conference Call May 7, 2009, 9:00 a.m. MDT; Company encouraged by drilling results and logs; Testing of La Pinta well in Colombia anticipated to be completed in a timely manner



    CALGARY, May 6 /CNW/ - Petrolifera Petroleum Limited (PDP - TSX) is
pleased to report our first quarter 2009 ("Q1 2009") operating and financial
results to our shareholders, together with comparative information from last
year.
    Petrolifera's high impact drilling program began in January 2009, with
the spudding of its La Pinta No.1 well on the Sierra Nevada License in the
Lower Magdalena Basin onshore Colombia. We also control extensive contiguous
acreage under what was previously the Magdalena Technical Evaluation Agreement
("TEA"), which is in the process of being converted to a License. The La Pinta
well was recently logged and cased after being drilled to a final total depth
of 11,250 feet. Results while drilling have been encouraging and were further
confirmed by logs. A testing program will begin as soon as possible and when
completed, results will be communicated by way of press release.
    On March 2, 2009 Petrolifera announced its intention to commence a
process to sell its Argentinean operations. All of the company's current
production, a significant portion of its reserves and extensive undeveloped
acreage is held in Argentina, where assets continue to hold promise and upside
potential, which is of importance to a prospective purchaser. We retained
Tristone Capital Inc. ("Tristone") to manage the process for the company. Data
rooms are anticipated to open in mid-May 2009 with a view to offers being
submitted for consideration by June 18, 2009. It is our objective to sell our
Argentinean operations as a going concern to maximize continuing employment
opportunities for our in-country employees. It is anticipated the sale will
proceed if suitable and acceptable proposals are forthcoming and all requisite
approvals are obtained. The expressions of interest in the process have been
plentiful and from companies and enterprises operating from a variety of
jurisdictions, including Argentina. If a transaction were completed, funds
would be deployed in our high impact exploration and evaluation programs in
Colombia and in Peru and to discharge related reserve-based indebtedness.
    These Q1 2009 results will be subject to a Conference Call event at 9:00
a.m. MDT May 7, 2009. To listen to or participate in the live conference call
please dial either (416) 644-3434 or (800) 814-4857. A replay of the event
will be available from May 7, 2009 at 11:00 a.m. MT until May 15, 2008 at
11:59 p.m. MT. To listen to the replay please dial either (416) 640-1917 or
877-289-8525 and enter the passcode 21305120 followed by the pound sign.

    
    Highlights for the period were as follows:

    -   Petrolifera announced its intention to enter into a process to sell
        its operations in Argentina
    -   A successful multi-well heavy oil drilling program was initiated on
        the company's 100 percent owned Gobernador Ayala II Concession in La
        Pampa Province, Argentina, which could favorably impact on the sales
        efforts and pricing prospects
    -   High potential drilling commenced in Colombia with La Pinta No.1, now
        an indicated discovery based on results while drilling and logs;
        testing is anticipated to be completed in a timely manner
    -   Seismic programs were completed on Block 106 in Peru and on our
        Turpial Concession in the Middle Magdalena Basin, Colombia
    -   We are nearing completion of the conversion of the Magdalena TEA to
        License status; this extensive land block adjoins the Sierra Nevada
        Concession in the Upper Magdalena Basin of Colombia
    -   Preparations for drilling on Block 107 in the Ucayali Basin, Peru
        were initiated; mandatory acreage relinquishment on Block 107 was
        determined and submitted for approval; new license on Block 133,
        offsetting Block 107 to the west was secured, enhancing Petrolifera's
        landholdings in the region
    -   Solid cash flow, profitability and favorable commodity pricing
        realized in Argentina during Q1 2009
    -   Plan of Arrangement for asset backed commercial paper restructuring
        completed; related line of credit expanded to $28.2 million and
        borrowings reclassified as long term, which improved working capital
        and enhanced liquidity


    SUMMARY RESULTS

    -------------------------------------------------------------------------
    For the Three Months Ended March 31,            2009      2008  % Change
    -------------------------------------------------------------------------
    FINANCIAL ($000, except per share amounts)
    -------------------------------------------------------------------------
    Total revenue including discontinued
     operations                                   26,407    27,167        (3)
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    Cash flow from operations before non-cash
     working capital(1)                           10,804    11,902        (9)
    -------------------------------------------------------------------------
    Per share, basic                                0.20      0.24       (17)
    -------------------------------------------------------------------------
    Per share, diluted                              0.20      0.23       (13)
    -------------------------------------------------------------------------
    Net earnings                                   1,188     1,738       (32)
    -------------------------------------------------------------------------
    Per share, basic                                0.02      0.04       (50)
    -------------------------------------------------------------------------
    Per share, diluted                              0.02      0.03       (33)
    -------------------------------------------------------------------------
    Capital expenditures including
     discontinued operations(1)                   25,612    31,056       (18)
    -------------------------------------------------------------------------
    Cash                                          30,994        11     2,817
    -------------------------------------------------------------------------
    Working capital                               33,768   (51,546)      166
    -------------------------------------------------------------------------
    Long-term debt including discontinued
     operations(1)                               104,649         -         -
    -------------------------------------------------------------------------
    Shareholders' equity                         209,240   127,225        64
    -------------------------------------------------------------------------
    Total assets                                $371,054  $231,278        60
    -------------------------------------------------------------------------
    DISCONTINUED OPERATIONS
    -------------------------------------------------------------------------
    Daily sales volumes
    -------------------------------------------------------------------------
    Crude oil and natural gas liquids - bbl/d      5,245     6,726       (22)
    -------------------------------------------------------------------------
    Natural gas - mcf/d                            6,500     7,044        (8)
    -------------------------------------------------------------------------
    Barrels of oil equivalent - boe/d(2)           6,328     7,900       (20)
    -------------------------------------------------------------------------
    Average selling prices
    -------------------------------------------------------------------------
    Crude oil and natural gas liquids - $/bbl   $  52.17  $  41.99        24
    -------------------------------------------------------------------------
    Natural gas - $/mcf                         $   2.98  $   2.20        35
    -------------------------------------------------------------------------
    Barrels of oil equivalent - $/boe           $  46.30  $  37.72        23
    -------------------------------------------------------------------------
    Common shares outstanding (000s)
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    Weighted average
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    Basic                                         54,948    50,212         9
    -------------------------------------------------------------------------
    Diluted                                       55,195    51,562         7
    -------------------------------------------------------------------------
    End of period                                 54,948    50,353         9
    -------------------------------------------------------------------------
    (1) Cash flow from operations before non-cash working capital changes
        ("cash flow") and cash flow per share do not have standardized
        meanings prescribed by Canadian generally accepted accounting
        principles ("GAAP") and therefore may not be comparable to similar
        measures used by other companies. Cash flow from operations before
        non-cash working capital changes includes all cash flow from
        operating and discontinued operating activities and is calculated
        before changes in non-cash working capital. The most comparable
        measure calculated in accordance with GAAP would be net earnings.
        Cash flow from operations before working capital changes is
        reconciled with net earnings in the accompanying Management's
        Discussion & Analysis ("MD&A"). Management uses these non-GAAP
        measurements for its own performance measures and to provide its
        shareholders and investors with a measurement of the company's
        efficiency and its ability to fund a portion of its future growth
        expenditures. Capital expenditures and long-term debt
        including discontinued operations also do not have standardized
        meanings as prescribed by GAAP. Capital expenditures
        and long-term debt including discontinued operations includes all
        capital expenditures or long-term debt of continuing and
        discontinued operations. The most comparable measure calculated in
        accordance with GAAP would be Capital expenditures and
        long-term debt.  Capital expenditures and long-term
        debt including discontinued operations is reconciled with each of the
        most comparable measures in the accompanying MD&A. Management uses
        these non-GAAP measures to provide a basis of the company's liquidity
        resulting from all of its operations.
    (2) All references to barrels of oil equivalent (boe) are calculated on
        the basis of 6 mcf : 1bbl. Boes may be misleading, particularly if
        used in isolation. This conversion is based on an energy equivalency
        conversion method primarily applicable at the burner tip and does not
        represent a value equivalency at the wellhead.

    ARGENTINA
    

    Petrolifera had a busy and productive first quarter of 2009 in Argentina.
The principal event was the decision taken to initiate a process to dispose of
the company's Argentinean operations. This decision was not taken lightly as
Petrolifera had fared well in Argentina, while clearly being a strong
corporate citizen during an approximate four year period from 2005 to the
present. During this time, the company made a number of significant
discoveries which added considerable reserves, production and sales. These
also resulted in the payment of considerable royalties and income taxes during
this period. We also enhanced shareholder value and our success in Argentina
and strong reinvestment program contributed to job and wealth creation for the
Province of Rio Negro and the Country of Argentina. Nevertheless, with
worldwide capital sources now constrained and numerous prospects of greater
magnitude available to Petrolifera in Peru and Colombia, we determined an exit
was the best alternative at this time, provided a suitable and fair price
could be secured from a purchaser intent on recognizing and realizing the
remaining considerable potential of Petrolifera's holdings in the country.
    We retained Tristone as our advisor in the process and anticipate opening
the data room in mid-May 2009 and receiving proposals on or about June 18,
2009. Thereafter offers will be assessed and with Tristone's assistance, we
will determine which, if any, of the submissions meet our objectives.
    We are hopeful the operations can be sold as a going concern in order to
maximize employment opportunities for our Argentinean staff, both in Buenos
Aires and in the field at Puesto Morales Norte. We also anticipate that our
recent success at Gobernador in identifying what could prove to be a
significant heavy oil resource (approximately 19 degree API crude oil) will
influence the sales process. We have thus far drilled six wells on the
Concession towards the fulfillment of the work commitments which was proposed
at the time the concession was tendered. To date, only two wells have been
placed onstream but during drilling significant oil shows, confirmed by logs,
were identified in the area.
    At Puesto Morales Norte, the process of remediating our waterflood in the
northern lobe of the field was initiated. It will take several months to
determine an appropriate resolution of the identified issues. We remain
confident there will be a resolution, with significant additional reserves and
productivity to be realized in the region, not only at Puesto Morales Norte
but also in the Loma Montosa Zone 10 in the southern portion of the
concession.

    COLOMBIA

    In January 2009 we commenced the drilling of the LaPinta No.1 exploratory
well on the Sierra Nevada License, situated in the Lower Magdalena Basin
onshore Colombia. The well was originally targeted to be drilled to a total
depth of 13,000 feet. However, after encountering some difficulties while
running an intermediate string of casing and then unstable hole conditions
deeper in the wellbore, and with the concurrence of ANH (the Colombian state
agency which administers oil and gas in the country) drilling was stopped at a
final total depth of 11,250 feet. Open hole logs were then run on the bottom
portion of the well below the intermediate casing point and the well was then
successfully cased to total depth. A testing program was being finalized at
this writing. We are extremely encouraged by the results of the drilling of
this well, in terms of hydrocarbon shows both uphole behind the intermediate
string of casing and at depth and based on confirmation from available log
data. Full details of the outcome of testing of La Pinta No.1 will be released
as and when available by way of press release. In the opinion of management,
the prospect has significant potential and a successful test could provide the
catalyst for recovery of the market value of our common shares and growth
thereafter.
    Arrangements are nearing completion to convert the Magdalena TEA into a
License. This large acreage block is contiguous with Sierra Nevada II and will
consolidate and solidify our holdings in this highly prospective region.
    We also have completed both 2D and 3D seismic programs over our Turpial
License in the Middle Magdalena Basin, Colombia. This area is highly
prospective for crude oil accumulations and is offset on two sides by
established large medium and heavy crude oil fields with significant
identified oil in place and a long production history.
    We are pleased with our entry into Colombia and with the apparent outcome
of the La Pinta well, which remains to be confirmed by testing as a
significant discovery. Our next step would be to establish commerciality so we
could proceed to the development and exploitation phase. While the well did
take substantially longer than we first anticipated, at much higher cost than
budgeted, we believe the value of our identified assets in the region warrant
the risks and costs associated with activity to date.

    PERU

    During the reporting period, we completed our 2D seismic program on our
Block 106 in the Maranon Basin, onshore Peru. The program results were
favorable with good data quality and we are proceeding to process and
interpret the data. We are also entertaining farmin discussions on this Block.
    Preparations for drilling in Peru on Ucayali Block 107 are proceeding. We
have established a base camp and anticipate continuing such preparations,
awaiting the receipt of necessary regulatory approvals. We are scheduled to
relinquish approximately one half of the lands which comprise Block 107 in May
2009 and to this end have selected the lands we will retain, supported by the
available seismic data from our earlier seismic program completed in 2008.
Subsequent to the reporting period, we were awarded Block 133, comprised of
approximately one million acres and situated immediately west of and
contiguous with Block 107. We secured this land based on encouragement from
our geological and geophysical work on the southern portion of Block 107. We
were able to secure the License through negotiation, thereby avoiding the
perilous tender process. This approach made more sense as the lands are
difficult to access and Petrolifera had proprietary data to support the
initiative. A limited commitment program was required for the Block in its
earlier stages.
    We are actively in discussions with a number of large, well qualified
international oil companies about a possible joint venture to accelerate
activity on our Peruvian acreage. These discussions have been underway for
some time now and we anticipate receiving proposals from several companies
during June 2009. Thereafter, we can determine the preferred proposals to
assist us in financing our capital program through farmins and joint ventures,
proposed terms of which contemplate recovery of sunken capital in addition to
new work programs, including multi-well drilling campaigns.

    OPERATIONS AND CORPORATE MATTERS

    Our Argentinean operations are now classified under Canadian generally-
accepted accounting principals as "discontinued", so our financial reporting
format had to be changed to reflect this determination. Regardless, we had a
respectable first quarter of 2009, with revenue roughly at parity with revenue
recorded in the same period in 2008. Our cash flow from operations before
changes in non-cash working capital ('cash flow") approximated that recorded
in the first quarter of 2008 and profitability was again achieved. Specific
financial and operating matters are discussed in greater detail in the
attached Management's Discussion and Analysis ("MD&A") for the period.
    Of note, however, is the long-awaited resolution of the ABCP
restructuring and the ensuing completion by Petrolifera of a related long-term
credit facility with a Canadian chartered bank for $28.2 million, resulting in
improved working capital and increased financial flexibility and liquidity for
the company. We finally recovered some of the long-delayed accrued interest
arising from the initial investments made in 2007 and now hold long-term notes
with terms which substantially match the underlying assets. We have already
provided for an approximate 40 percent impairment of this investment and are
hopeful we can recover some of this impairment, over time, as and when
reasonable trading markets emerge for these types of assets. We remain
confident of our future. We believe we have adequate liquidity to proceed with
our business plan during 2009, absent a further deterioration in commodity
prices and capital market conditions and provided we are successful in
bringing new participants into our very high potential but higher risk
projects in Colombia and Peru. This process should favorably leverage our
shareholder interests by reducing drilling risk and minimizing the need to
pursue new capital from capital markets by instead relying on industry
participation. At the same time, a successful sale of our Argentinean
interests at an acceptable price would give us a welcome injection of cash and
working capital to ensure we continue to meet our expectations and obligations
in a timely and constructive manner.
    Mr. Don Barkwell, a well-known and respected Canadian oilman, has been on
our Board of Directors since we made the decision in 2005 to proceed with
attracting new investors to our company. This process ultimately culminated in
Petrolifera going public in November, 2005. Don has been a solid voice of
reason and experience at Board level as Petrolifera has evolved through the
highs and the lows of the oil business since that time. He decided not to
stand for reelection as a member of our slate of nominees for election to the
Board of Directors at our 2009 Annual General Meeting. We will miss his
counsel, sense of humor and insight but he will remain a friend of Petrolifera
and its stakeholders.
    We wish to acknowledge two new Board nominees, Pat DiCapo of Toronto and
Gord Johnston of Calgary. We look forward to working with these gentlemen and
our incumbent directors in the upcoming year, which should be an exciting one
for Petrolifera.

    Forward Looking Information

    This press release contains forward-looking information including, but
not limited, future exploration and development opportunities, current
drilling, testing and completion plans in Colombia, anticipated results from
the La Pinta No.1 well in Colombia and the wells on the Gobernador Ayala II
Concession in Argentina, future drilling plans in Argentina, Colombia and
Peru, anticipated remediation efforts and timing of the full impact of the
company's waterflood program, planned farmout and/or joint ventures
arrangements in Colombia and Peru, anticipated award of the Magdalena License
in Colombia and anticipated acceptance of Petrolifera's relinquishment plan
relating to Block 107 in Peru, planned sale of interests in Argentina and the
process and intended use of proceeds related thereto, recovery of the
company's investment in ABCP and Petrolifera's anticipated financial condition
and liquidity throughout 2009. Forward looking information is not based on
historical facts but rather on Management's expectations regarding the
company's future growth, results of operations, production, future capital and
other expenditures (including the amount, nature and sources of finding
thereof), competitive advantages, plans for and results of drilling activity,
environmental matters, business prospects and opportunities and expectations
with respect to general economic conditions. Such forward looking information
reflects Management's current beliefs and assumptions and is based on
information currently available to Management. Forward looking information
involves significant known and unknown risks and uncertainties. A number of
factors could cause actual results to differ materially from the results
discussed in the forward looking information, including but not limited to,
risks associated with the oil and gas industry (e.g. operational risks in
development, exploration and production, delays or changes to plans with
respect to exploration or development projects or capital expenditures; the
uncertainty of reserve estimates; the uncertainty of estimates and projections
in relation to production, costs and expenses and health, safety and
environment risks), the risk of commodity price and foreign exchange rate
fluctuations, the uncertainty associated with negotiating with foreign
governments and third parties located in foreign jurisdictions and the risk
associated with international activity. Additional risks and uncertainties are
described in the company's Annual Information Form which is filed on SEDAR at
www.sedar.com. There can be no assurance that testing of the wells drilled on
the Sierra Nevada I License or the Gobernador Ayala II Concession will yield
commercial results. The company's ability to complete its capital program is
dependant upon completion of planned farm-out arrangements, access to required
credit and capital and access to services, drilling rigs and equipment. In
addition, the current financial crisis has resulted in severe economic
uncertainty and resulting illiquidity in credit and capital markets which
increases the risk that actual results will vary from forward looking
expectations in this press release and these variations may be material.
Petrolifera may have to bring participants into its acreage holdings and
planned evaluation activities on less attractive terms than might otherwise
have been the case due to the combination of tighter economic conditions and
the influence of contractual commitments and deadlines on the terms of trade.
There can be no assurance that the company will be successful in its efforts
to secure planned farm-outs and/or joint venture arrangements. The company is
in the early stages of its sale process relating to its Argentinean interests
and the timing associated with this process is subject to change. While the
company has received significant interest in its sales process from third
parties, there can be no assurances that the company will receive binding
offers for its Argentinean interests that are on terms acceptable to the
company or at all. As a result, there is a risk that the company may
discontinue its sales process, resulting in the continued ownership and
operation of these properties and the continuing financial obligations
associated therewith. Although the forward looking information contained
herein is based upon assumptions which Management believes to be reasonable,
the company cannot assure investors that actual results will be consistent
with this forward looking information. This forward looking information is
made as of the date hereof and the company assumes no obligation to update or
revise this information to reflect new events or circumstances, except as
required by law. Due to the risks, uncertainties and assumptions inherent in
forward looking information, prospective investors in the company's securities
should not place undue reliance on this forward looking information.

    MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

    The following is dated as of May 6, 2009 and should be read in
conjunction with the unaudited consolidated financial statements of
Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the three
months ended March 31, 2009, as contained in this interim report and the
audited financial statements for the years ended December 31, 2008 and 2007,
as contained in the company's 2008 Annual Report. Additional Information Form
relating to Petrolifera, including its Annual Information for the year ended
December 31, 2008, is on SEDAR at www.sedar.com. The consolidated financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and are presented in Canadian dollars. This
MD&A provides management's view of the financial condition of the company and
the results of its operations for the reporting periods indicated.
    Information in this report, including the letter to shareholders,
contains forward-looking information including but not limited to preliminary
drilling results for the La Pinta No.1 well on the Sierra Nevada License and
new wells on the Gobernador Ayala II Concession, future exploration and
development plans, planned sale of interests in Argentina and the process and
intended use of proceeds related thereto, strategies for reducing the
company's financial exposure to high cost exploration and drilling activities,
future drilling plans and the anticipated timing associated therewith,
anticipated capital expenditures and sources of funding in respect thereof,
current production and anticipated result from the company's waterflood
program, and potential recovery of investments in the non-bank Asset-Backed
Commercial Paper ("ABCP"). See "Forward-Looking Information" for a discussion
of the forward-looking information contained in this MD&A and the risks and
uncertainties associated therewith. Throughout this MD&A, per barrel of oil
equivalent ("boe") amounts have been calculated using a conversion rate of six
thousand cubic feet of natural gas to one barrel of crude oil (6:1). The
conversion is based on an energy equivalency conversion method primarily
applicable to the burner tip and does not represent a value equivalency at the
wellhead. Boe may be misleading, particularly if used in isolation.

    DISCONTINUED OPERATIONS

    Petrolifera announced on March 2, 2009 that its Board of Directors has
authorized the company to initiate a process to dispose of its Argentinean
interests and to enter in to an engagement agreement with Tristone Capital
Inc. ("Tristone"), whereby Tristone will assist Petrolifera in the sale of
Petrolifera's interests in Argentina. These interests are primarily indirectly
held by a wholly-owned Barbadian subsidiary. The company's Argentinean
disposition process is continuing on schedule, which contemplates receiving
proposals for further assessment by mid-June 2009. Petrolifera's Argentinean
interests represent all of its current production, related revenues and
substantially all of its reserves. Accordingly, the company's Argentinean
segment has been reclassified as discontinued operations in the unaudited
consolidated financial statements.
    It is anticipated that Petrolifera would redeploy the proceeds on the
sale of its Argentinean interests to its high-potential exploration activities
in Colombia and Peru, after repaying related reserve-based long-term debt.
While Petrolifera recognizes continuing potential associated with its
extensive Argentinean assets, both from an exploratory and exploitation
perspective, it is the opinion of management and the company's Board of
Directors that on a risk adjusted basis the company's holdings in Colombia and
Peru have greater identified growth potential. Petrolifera's objective is to
sell its Argentinean assets as a going concern, with a view to the purchaser
providing continuing employment to the company's in country managerial,
technical and operating staff to the fullest extent possible. Arrangements are
contemplated to ensure fair and appropriate treatment under prevailing
employment law to both continuing and redundant employees and contractors,
should the prospective purchaser not require all of Petrolifera's current
Argentinean employees and contractors on a continuing basis. Completion of the
sales process is subject to receipt of an acceptable offer and there are
considerable risks and uncertainties relating to the completion of this
process. See "Forward-Looking Information".

    FINANCIAL AND OPERATING REVIEW OF DISCONTINUED OPERATIONS

    The planned sale of the company's Argentina operations to redeploy funds
to its capital programs on prospects in Colombia and Peru and repay debt has
resulted in the company's interests in Argentina being reclassified as
discontinued operations. As a result, the financial and operating review of
the Argentinean operations has been presented separately from the financial
review for the company's continuing operations.

    SALES VOLUMES, PRICING AND REVENUE FROM DISCONTINUED OPERATIONS

    
    -------------------------------------------------------------------------
    Three Months Ended March 31                     2009      2008         %
    -------------------------------------------------------------------------
    Daily sales volumes
    -------------------------------------------------------------------------
    Crude oil and natural gas liquids - bbl/d      5,245     6,726       (22)

    Natural gas - mcf/d                            6,500     7,044        (8)

    Total - boe/d                                  6,328     7,900       (20)
    -------------------------------------------------------------------------

    Average selling prices

    Crude oil and natural gas liquids
     - $ per bbl                                $  52.17  $  41.99        24

    Natural gas - $ per mcf                         2.98      2.20        35

    Revenue per boe                             $  46.30  $  37.72        23

    -------------------------------------------------------------------------
    Petroleum and natural gas sales ($000)      $ 26,371  $ 27,114        (3)

    Interest income ($000)                             5         5         -

    -------------------------------------------------------------------------
    Total revenue ($000)                        $ 26,376  $ 27,119        (3)
    -------------------------------------------------------------------------
    

    Petroleum and natural gas revenues for the first quarter of 2009 were
$26.4 million on sales volumes of 6,328 boe/d, compared to $27.1 million on
sales of 7,900 boe/d during the same period in 2008, a decrease of three
percent for revenue and 20 percent for sales volumes. For the first quarter of
2009, sales of crude oil and natural gas liquids represented 83 percent of the
company's sales volumes, which is comparable to the 85 percent for the same
period in 2008. The relatively flat sales revenue during the first quarter of
2009, compared to the same period in 2008, resulted from higher realized
commodity prices, offset by a reduction in sales volumes of crude oil and
natural gas liquids. This reduction in sales volumes reflects normal declines
in well productivity and on important producing wells, Puesto Morales Norte
("PMN")-1061, and to a lesser extent PMN-1022, being shut-in for workovers for
a period during the month of March. The declines were partially offset by the
impact of production from new 2008 discoveries at Puesto Morales Este and from
the new pool PME-1082 discovery under the Rio Colorado Embalse. Also, the
company experienced certain challenges with the PMN waterflood program
initiated in the latter half of 2008, including evidence of rising water cuts.
These challenges appear to be related to the heterogeneity of the reservoir,
including the presence of highly permeable conglomerate zones which act as a
conduit for water to flow preferentially. Remedial measures are being
evaluated. The company believes that the full positive effect of its
waterflood program to repressurize the reservoir and optimize the ultimate
recovery of crude oil reserves from the PMN Field remains to be realized. All 
of Petrolifera's sales were from its Puesto Morales/Rinconada and Puesto
Morales Este Concessions in Argentina and all of its sales were made to
domestic purchasers.
    The company's realized crude oil price rose 24 percent to average
$52.17/bbl for the first quarter of 2009, compared to $41.99/bbl realized in
the same period in 2008. As, relative to the US dollar, the Canadian dollar
has weakened approximately 23 percent during the first quarter of 2009
compared to the first quarter of 2008, Petrolifera's realized price has
increased. During the first quarter of 2008, Argentinean crude oil selling
prices were capped at US$42.00/bbl which, at that time, was significantly
below world crude oil prices. During the first quarter of 2009, Petrolifera
negotiated a new crude oil sales agreement with a well established multi-
national purchaser and secured an oil price with some exposure to world crude
oil price improvements. During the period the crude oil price realized by
Petrolifera approximated WTI, averaging approximately 99 percent of WTI's
average of US$42.97/bbl.
    Relative to the fourth quarter of 2008, when petroleum and natural gas
revenues were $37.4 million on sales volumes of 7,786 boe/d, lower revenues
(down 29 percent) and sales volumes (down 19 percent) were experienced in the
first quarter of 2009. The reduction of crude oil and natural gas liquids
production during the first quarter of 2009 relative to the fourth quarter of
2008 reflected two important crude oil producers being shut-in for workovers
during March 2009 and also challenges with the company's waterflood program.
An eight percent decrease during the fourth quarter of 2008 from $56.76/bbl
also occurred in realized crude oil and natural gas liquids prices. This was
partially mitigated by a sequential three percent weakening of the Canadian
dollar relative to the US dollar which resulted in Petrolifera's realized
price, as expressed in Canadian dollars, increasing.
    In the first quarter of 2009, natural gas prices increased 35 percent
over the level realized during the first quarter of 2008 to average $2.98/mcf.
This reflected some relaxation of regulated Argentinean natural gas prices in
industrial markets. These prices were still below prices prevalent in some
North American markets. The company successfully negotiated a price increase
for Argentinean winter sales volumes to US$2.40/mcf. This was a 10 percent
improvement relative to the US$2.19/mcf realized during the first quarter of
2008. Natural gas prices are believed to have the potential of further
improvement in the longer term, due to market conditions and new Argentinean
policy initiatives aimed at further market deregulation for industrial sales,
including for power generation.

    ROYALTIES, OPERATING EXPENSES AND NETBACKS FROM DISCONTINUED OPERATIONS

    
    Company Netbacks(1)
    -------------------------------------------------------------------------
    Three Months Ended March 31              2009                2008
    -------------------------------------------------------------------------

    ($000, except per unit amounts)      Total   Per boe     Total   Per boe

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

    -------------------------------------------------------------------------
      Average daily sales (boe/d)            6,328               7,900
    -------------------------------------------------------------------------
    Petroleum and natural gas sales   $ 26,371  $  46.30  $ 27,114  $  37.72

    Interest income                          5      0.01         5      0.01

      Royalties                         (3,429)    (6.02)   (3,384)    (4.71)
    -------------------------------------------------------------------------
    Net revenue                         22,947     40.29    23,735     33.02
    -------------------------------------------------------------------------
      Operating costs                   (5,882)   (10.33)   (5,925)    (8.24)
    -------------------------------------------------------------------------
    Corporate netback                 $ 17,065  $  29.96  $ 17,810  $  24.78
    -------------------------------------------------------------------------
    (1) Calculated by dividing related revenue and costs by total boe sold,
        resulting in a company netback from discontinued operations. Netbacks
        do not have a standardized meaning prescribed by GAAP and therefore
        is unlikely to be comparable to similar measures used by other
        companies. The most comparable measure calculated in accordance with
        GAAP would be net earnings from discontinued operations.
        Nevertheless, Petrolifera's management uses netbacks as a performance
        measurement of operating efficiency and the prevailing royalty
        regime. A high ratio of netback to selling price is a positive
        indicator. A reconciliation of netback to net income from
        discontinued operations can be found in the Net Earnings from
        Discontinued Operations table.
    

    Petrolifera's corporate netback per boe increased by 21 percent during
the first quarter of 2009 over that recorded in the same period in 2008. The
increase in the corporate netback per boe relative to the first quarter of
2008 reflected higher realized commodity pricing, partially offset by higher
operating costs per boe. Petrolifera's calculated unit netback at $29.96/boe
remained a healthy 65 percent of the selling price per boe during the first
quarter of 2009, unchanged relative to the first quarter of 2008.

    OPERATING COSTS

    Total operating costs during the first quarter of 2009 were relatively
unchanged, but on a per boe basis increased 25 percent from the same period in
2008. Lower crude oil and natural gas liquids production volumes, well
servicing costs, and the challenges related to the company's waterflood
program during the first quarter of 2009 resulted in the increase. Additional
fluid handling costs associated with the waterflood program, the additional
number of wells being operated resulting from the active 2008 drilling
program, the number of wells on pump or that require servicing on a more
frequent basis and inflationary pressures also contributed to higher operating
costs per boe during the first quarter of 2009 relative to the same period in
2008. Every effort will be undertaken to control and, if possible, to reduce
operating costs, reflecting more challenging economic conditions.

    ROYALTIES

    Royalties represent charges levied by governments and landowners against
production or revenue. Included in royalties are revenue taxes imposed by
provincial jurisdictions. Royalties in the first quarter of 2009 were $3.4
million ($6.02 per boe) or 13 percent of oil and natural gas revenue, compared
to $3.4 million ($4.71 per boe), or 13 percent of oil and natural gas revenue,
in the same period in 2008. The increase, on a boe basis, is primarily
attributable to the higher realized commodity pricing during the first quarter
of 2009 compared to the same period of 2008.

    NET EARNINGS FROM DISCONTINUED OPERATIONS

    
    -------------------------------------------------------------------------
    Three Months Ended March 31                     2009                2008
    -------------------------------------------------------------------------
    ($000, except per unit amounts)      Total   Per boe     Total   Per boe
    -------------------------------------------------------------------------
    Corporate netback                 $ 17,065  $  29.96  $ 17,810  $  24.78

      General and administrative          (941)    (1.65)     (923)    (1.28)

      Finance charges                   (1,471)    (2.58)     (559)    (0.78)

      Foreign exchange loss             (2,044)    (3.59)      (24)    (0.04)

      Depletion, depreciation and
       accretion                        (6,904)   (12.12)   (4,669)    (6.49)

      Income tax provision                (987)    (1.73)   (3,985)    (5.55)

      Taxes other than income taxes       (409)    (0.72)     (506)    (0.70)
    -------------------------------------------------------------------------
    Net earnings from discontinued
     operations                       $  4,309  $   7.57  $  7,144  $   9.94
    -------------------------------------------------------------------------
    

    For the first quarter in 2009, the company reported net earnings from
discontinued operations of $4.3 million, which equated to $0.08 per weighted
average basic and diluted share, compared to the net earning from discontinued
operations of $7.1 million, which equated to $0.14 per weighted average basic
and diluted share for the same period in 2008. Net earnings from discontinued
operations were lower during the first quarter of 2009 compared to the same
period in 2008, mainly due to lower crude oil and natural gas liquids sales
volumes, the higher cost of estimated production additions, the cost of
infrastructure related to the Argentinean production, a year-end reserve
adjustment, foreign exchange losses and increased financing costs. Due to the
sales process relating to the company's Argentinean interests, depletion,
depreciation and accretion is not comparable on a quarter over quarter basis.
See "Depletion, Depreciation and Accretion".

    GENERAL & ADMINISTRATIVE

    General and administrative ("G&A") expenses were $0.9 million in the
reported periods of 2009 and 2008. These costs primarily consist of management
and administrative salaries, legal and professional fees, insurance, travel
and other administrative expenses. G&A of $0.8 million and $0.5 million was
also capitalized in the first quarter of 2009 and 2008, respectively,
primarily related to drilling and exploration activity in Argentina.

    FINANCE CHARGES

    Included in the finance charges of $1.5 million and $0.6 million for the
first quarters of 2009 and 2008, respectively, was interest paid and accrued
on the company's outstanding long-term bank debt and the deferred financing
charges that are being allocated over the life of the reserve-based credit
facility. The increase in finance charges during the first quarter of 2009
relative to the same period in 2008 reflects higher loan amounts outstanding
on the reserve based credit facility.

    FOREIGN EXCHANGE

    The impact of the weakening of the Argentinean peso relative to the US
dollar on the Argentinean working capital contributed to a foreign exchange
charge of $2.0 million in the first quarter of 2009. The company's main
exposure to foreign currency risk in Argentina relates to the pricing of crude
oil sales, operating costs and capital expenditures which are mainly
denominated in US dollars and Argentinean pesos, partially mitigated by draws
on the reserve-based credit facility, which is denominated in US dollars.

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

    DD&A is calculated using the unit-of-production method based on total
estimated proved reserves. In accordance with Canadian GAAP, depletion and
depreciation has not been recognized for the period subsequent to March 2,
2009 as this was the date of the decision to classify the Argentina operations
as discontinued. Due to the sales process relating to the company's
Argentinean interests, depletion, depreciation and accretion is not comparable
on a quarter over quarter basis.
    DD&A in the first quarter of 2009 totaled $6.9 million or $12.12 per boe
sold during the quarter compared to $4.7 million or $6.49 per boe in the same
period in 2008. Accretion expense which is included in DD&A expense, was $0.2
million for the first quarter of 2009 compared to $0.1 million in the same
period in 2008. Accretion expense will continue at appropriate levels in the
future to accrete the currently booked discounted liability of $10.6 million
(Dec. 31, 2008 - $10.1 million) over the estimated remaining economic life of
the company's oil and gas properties or until such time that these liabilities
are disposed through the sale of Petrolifera's Argentinean operations. Capital
costs of $16.0 million (Dec. 31, 2008 - $14.5 million) incurred for
unevaluated properties in Argentina have been excluded from the depletion and
depreciation expense.
    The increase in DD&A during the first quarter of 2009 relative to same
period in 2008 was mainly due to the higher estimated cost of production
additions and the cost of infrastructure related to the Argentina production,
together with a December 31, 2008 reserve adjustment.

    TAXES

    The current income tax provision of $1.0 million and $2.7 million in the
first quarter of 2009 and 2008, respectively, primarily related to income
taxes payable in Argentina. Additionally, a future income tax provision of
$1.3 million in the first three months of 2008 was recorded to recognize the
differences, at the statutory rate, between the remaining tax pools and
accounting carrying values. The implied effective tax rate from discontinued
operations was 19 percent and 36 percent, respectively, and on earnings from
discontinued operations before taxes of $5.3 million compared to $11.1 million
in the first quarter in 2008. Taxes other than income taxes of $0.4 million
and $0.5 million for the three months ended March 31, 2009 and 2008,
respectively, represent taxes charged on all banking transactions in
Argentina.

    CONTINUING OPERATIONS

    FINANCIAL REVIEW

    As previously discussed, Petrolifera's Argentina operations, which
represents all of the company's current production and related revenues, have
been reclassified as discontinued operations in the unaudited consolidated
financial statements. The continuing, potentially high impact operations in
Colombia and Peru, supported by offices in Canada, Barbados and the U.S.,
constitute Petrolifera's continuing operations. The continuing operations of
Petrolifera are currently in the exploratory phase. There is no current
production or related revenues from reserves in these jurisdictions.

    NET EARNINGS AND SHARES OUTSTANDING

    
    -------------------------------------------------------------------------
    Three Months Ended March 31                               2009      2008
    -------------------------------------------------------------------------
    ($000)
    -------------------------------------------------------------------------
    Interest income                                       $     31  $     48

    Expenses

    General and administrative                                (996)   (1,139)

    Fair value impairment                                        -    (1,490)

    Stock-based compensation                                (1,592)   (2,398)

    Finance charges                                           (106)     (361)

    Foreign exchange loss                                     (401)      (66)

    Future income tax provision                                (57)        -
    -------------------------------------------------------------------------
    Net loss before discontinued operations                 (3,121)   (5,406)
    -------------------------------------------------------------------------
    Net earnings from discontinued operations                4,309     7,144
    -------------------------------------------------------------------------
    Net earnings                                             1,188     1,738
    -------------------------------------------------------------------------
    NET EARNINGS PER SHARE
    -------------------------------------------------------------------------
    Basic                                                 $   0.02  $   0.04
    -------------------------------------------------------------------------
    Diluted                                               $   0.02  $   0.03
    -------------------------------------------------------------------------
    

    The company reported a net loss before discontinued operations of $3.1
million for the first quarter of 2009, compared to a net loss of $5.4 million
in 2008. When combined with discontinued operations, the company reported net
earnings of $1.2 million for the first quarter of 2009 compared to net
earnings of $1.7 million in the first quarter of 2008. This equated to $0.02
per weighted average basic and diluted share compared to $0.04 per weighted
average basic and $0.03 per weighted average diluted share for the same period
in 2008. Net earnings from continued and discontinued operations ("net
earnings") were slightly lower in 2009 relative to the same period in 2008
primarily due to lower net earnings from discontinued operations offset by a
lower net loss from continuing operations due to reduced charges for stock
based compensation and no further provision for impairment of the company's
investment in Asset Backed Commercial Paper ("ABCP").
    During the first quarter of 2009, the weighted average number of common
shares outstanding was 54.9 million compared to 50.2 million during the same
period in 2008. The increase in the number of common shares subsequent to the
first quarter of 2008 reflects the June 2008 equity financing for gross
proceeds of $40.0 million upon the issuance of 4.4 million shares at $9.00 per
common share and the exercise of 150,000 warrants during the third quarter of
2008. In the first quarter of 2009 there were 0.2 million additional shares
included in the diluted earnings per share calculations related to the
weighted average dilutive effect of "in-the-money" options whereas in the same
period in 2008, 1.3 million additional shares were included.
    As at the close of business on May 5, 2009, the company had the following
securities issued and outstanding:

    
    -   54,948,010 common shares; and
    -   2,735,167 stock options.
    

    INTEREST INCOME

    During the first quarter of 2009, Petrolifera received an interest
payment of $1.0 million on its original ABCP holdings. This amount had been
included in the determination of the fair value of the long-term investment in
ABCP at December 31, 2008 and therefore has already been recognized and did
not have an effect on the Statement of Operations during the first quarter of
2009. See "Restricted Cash and Long-Term Investments" for additional details
including estimates of valuation.

    GENERAL & ADMINISTRATIVE AND STOCK BASED COMPENSATION EXPENSES

    General and administrative ("G&A") expenses were $1.0 million and $1.1
million in the first quarter of 2009 and 2008, respectively. These costs
primarily consist of management and administrative salaries, legal and
professional fees, insurance, travel and other administrative expenses. G&A of
$0.4 million was capitalized in the first quarter of 2009 compared to $0.5
million during the same period in 2008, primarily related to further
exploration and evaluation of the prospects in Colombia and Peru.
    During the three months ended March 31, 2009 a non-cash expense of $0.5
million (2008 - $2.4 million) was recorded as stock-based compensation,
reflecting the amortization of the fair value of stock options over the
vesting period. The reduction in stock-based compensation relative to the same
period in 2008 was mainly attributable to the absence of stock option grants
during the first quarter of 2009. Additionally, during 2009 certain employees,
Officers and non-managerial Directors of the company voluntarily surrendered
1,786,660 options with a weighted average exercise price of $13.79 per option.
In accordance with Canadian GAAP any unvested options that were voluntarily
surrendered were deemed to have become vested, resulting in the recognition of
an additional non-cash stock-based compensation expense of $1.1 million.

    FINANCE CHARGES

    Included in the finance charges of $0.1 million for the first quarter of
2009 (2008 - $0.4 million) was interest paid and accrued on the company's
outstanding ABCP line-of-credit ("ABCP line-of-credit"). Reductions in the
prime rate have resulted in favorable finance charges during the first quarter
of 2009 relative to the same period in 2008.

    FOREIGN EXCHANGE

    The impact of fluctuations in the US dollar relative to the Canadian
dollar, arising from settling foreign-denominated transactions and from
translating foreign-denominated financial statements and operating results of
its integrated foreign operations, resulted in a foreign exchange charge of
$0.4 million in the first quarter of 2009 (2008 - $0.1 million). The company's
main exposure to foreign currency risk relates to general and administration
costs and capital expenditures which are mainly denominated in US dollars and,
to a lesser extent, Colombian Pesos and Peruvian New Soles.

    FAIR VALUE IMPAIRMENT - ABCP

    During the first quarter of 2009 a court-approved plan for restructuring
the ABCP was implemented and the company has received longer-term notes in
exchange for its ABCP holdings. The maturities of the new notes generally
match those of the assets previously contained in the underlying conduits. If
these replacement notes were to become liquid, the company may be able to
substantially reduce its net indebtedness incurred due to lack of access to
these amounts. The basis for the fair value attributable to these investments
is explained under "Restricted Cash and Long-Term Investments."
    In the first quarter of 2008, in recognition of the loss of liquidity in
the company's investment in longer term notes, a non-cash fair value
impairment charge of $1.5 million was recognized. The company did not
recognize any impairment in the first quarter of 2009. The cumulative effect
of prior period impairments represents approximately 40 percent of the face
value of the investment at the time of the loss of liquidity in the Canadian
commercial paper market.

    CAPITAL RE

SOURCES, CAPITAL EXPENDITURES AND LIQUIDITY Near year-end 2008, the company adopted a very conservative approach to its anticipated 2009 capital expenditure programs in South America, until it could determine with greater confidence a sense of direction for worldwide stock, credit and crude oil markets. Accordingly, the company determined it would, as necessary, curtail, defer, or sell down, through joint venture or farmout arrangements, its participation in various higher risk projects. This approach was adopted in recognition of the limitations on being able to access new or alternative capital sources, until capital markets exhibited discernible and restored equilibrium. Assuming either current Argentinean production levels and pricing, or adequate proceeds realized on a disposition of the Argentinean operations, plus cost recovery proceeds from third party farm-ins or joint ventures, the company anticipates having adequate liquidity during 2009. Under certain circumstances, long-term debt may be reduced, if there is no change in its current banking relationships and market conditions stabilize. Petrolifera may also defer certain expenditures if economic conditions deteriorate further during 2009. The company is well positioned to do so as many of its current commitments have been fulfilled or are of a long-term nature, especially in Peru. Consistent with the company's strategy of achieving positive leveraging for its shareholders and stakeholders, from the significant value-added impact of its early stage geological and geophysical activity, management will attempt to identify industry participants and negotiate transactions whereby other enterprises join with Petrolifera to conduct joint venture activity. Current capital market conditions may make this process more challenging and time consuming, than under more buoyant economic circumstances of worldwide economic growth and stronger demand by the industry for viable drilling prospects with significant reserve potential. The combination of tighter economic conditions and the influence of contractual commitments and deadlines may also adversely impact on the terms of trade. In such circumstances, Petrolifera may have to bring participants into its acreage holdings and planned activities on less attractive terms than might otherwise have been negotiated. There can be no assurances as to the timing or terms of the proposed farm-in or joint venture arrangement. The company anticipates it will have sufficient cash balances, cash flow and available credit to fund its anticipated net 2009 capital expenditures including discontinued operations. Should credit conditions or availability be altered, there may be circumstances where the company would have to reassess its capital programs in favor of debt reduction. The company's announced sale of its Argentinean operations may allow it to more immediately realize on a mature asset at an opportune time. However, the sales process is at an early stage and is subject to certain risks and uncertainties. See "Forward-Looking Information". CASH FLOW Cash flow and cash flow per share do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating and discontinued operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow is reconciled with net earnings below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. RECONCILIATION OF NET EARNINGS TO CASH FLOW FROM CONTINUING AND DISCONTINUED OPERATIONS: ------------------------------------------------------------------------- For the Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Net earnings $ 1,188 $ 1,738 Add non-cash charges: Depletion, depreciation and accretion 6,904 4,669 Fair value adjustments - 1,490 Future income tax provision 80 1,325 Stock-based compensation 1,592 2,398 ------------------------------------------------------------------------- Amortization of deferred finance charges 225 192 Unrealized foreign exchange loss 815 90 ------------------------------------------------------------------------- Cash flow $ 10,804 $ 11,902 ------------------------------------------------------------------------- Per share, basic 0.20 0.24 ------------------------------------------------------------------------- Per share, diluted 0.20 0.23 ------------------------------------------------------------------------- Cash flow from continuing and discontinued operations in the first quarter of 2009 was $10.8 million or $0.20 per weighted average basic and diluted share, compared to $11.9 million or $0.24 per weighted average basic and $0.23 per weighted average diluted share for the same period in 2008. The nine percent decrease during the first quarter of 2009, relative to the same period in 2008, primarily resulted from a reduction in sales volumes and an increase in operating costs per boe, partially offset by an increase in commodity pricing. At current realized commodity pricing and sales levels, the company's Argentinean cash flows are anticipated to be adequate and can be used to reduce outstanding long-term indebtedness or to finance a portion of anticipated high-potential exploration activities in Colombia and Peru. CAPITAL EXPENDITURES ON CONTINUING AND DISCONTINUED OPERATIONS ------------------------------------------------------------------------- For the Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Peru $ 5,960 $ 7,591 ------------------------------------------------------------------------- Colombia 15,005 225 ------------------------------------------------------------------------- Corporate 9 - ------------------------------------------------------------------------- Capital expenditures on continuing operations $ 20,974 $ 7,816 ------------------------------------------------------------------------- Discontinued operations capital expenditures 4,638 23,240 ------------------------------------------------------------------------- Capital expenditures, including discontinued operations $ 25,612 $ 31,056 ------------------------------------------------------------------------- Capital expenditures on continuing operations in the three months ended March 31, 2009 were $21.0 million compared to the first three months ended March 31, 2008 of $7.8 million. Capital spending in 2009 was financed through available cash and cash flow. On Block 107 in Peru, in anticipation of upcoming drilling, expenditures were incurred for preparation of the drilling base camp. On Block 106, in the Maranon Basin, Peru, a 476 km 2D seismic acquisition program was conducted. The company is in the process of conducting data room reviews with a number of qualified and interested third parties, with a view to farming-out interests in both these licenses. On April 16, 2009, subsequent to the end of the reporting period, Petrolifera was awarded a license over Block 133, which is comprised of approximately one million acres and is contiguous with Block 107. This license represents important acreage in relation to the company's anticipated activities on Block 107. In Colombia, significant outlays were incurred, primarily for the 100- percent owned La Pinta exploration well, which spudded on January 23, 2009 on the company's Sierra Nevada License onshore the Lower Magdalena Basin. The well has been drilled to a final depth of approximately 11,250 feet. Petrolifera continues to be encouraged by results encountered during the drilling of the La Pinta No.1 well, based on hydrocarbon shows and logs. The well costs were over original budget as the company experienced certain problems running intermediate casing in the upper section of the wellbore and subsequently encountered challenges arising from instability in the lower section of the well. Both problems were resolved. Further evaluation is anticipated to occur with a near-term testing program. Petrolifera was also in the late stages of completing 2D and 3D seismic programs over its Turpial License in the Middle Magdalena Basin, onshore Colombia at the end of reporting period. In Argentina, capital expenditures in 2009 totaled $4.6 million (2008 - $23.2 million). These are now considered discontinued operations. During March 2009 the company commenced drilling on its 100 percent-owned Gobernador Ayala II Concession, located in La Pampa Province, Argentina. As of late-April 2009, Petrolifera had drilled and completed six wells on this Block and was encouraged by the results to date, based on hydrocarbon shows, limited testing results and early production from two wells. CREDIT FACILITIES During April 2009, the company negotiated an expansion of its line of credit ("ABCP line-of-credit") to a maximum of $28.2 million with a Canadian chartered bank primarily secured by the longer term notes exchanged for the ABCP. Any borrowings from the expanded ABCP line-of-credit are categorized as long-term as the facility's initial term to maturity is April, 2011 and the company can make up to five extension requests where each extension is for an additional one-year period. At December 31, 2008 the prevailing terms of the ABCP line-of-credit had a maximum draw of $18.0 million and was due on demand, resulting in the company categorizing as current its borrowings under the line of credit. The line of credit bears interest at a floating rate. The company has a US$100.0 million reserve-based revolving credit facility with an availability of US$70.0 million based on its crude oil and natural gas reserves as at December 31, 2007. As the Argentina operations have now been reclassified as discontinued operations, the reserve-based debt has also been reclassified as a component of the long-term liabilities of discontinued operations. This facility is scheduled to expire on September 5, 2010, bears interest at LIBOR plus a margin, is secured by the pledge of the shares of Petrolifera's subsidiaries and parent company guarantees and has a provision for a borrowing base adjustment every six months, with the next adjustment to be calculated based on information as at January 1, 2009. Changes in the availability of the reserve-based credit facility are anticipated to occur, from time-to-time, through significant reserve additions, disposals or revisions. As at March 31, 2009, the reserve-based facility had $88.2 million (US$70.0 million) outstanding (2008 - US$63.0 million) and the ABCP line of credit facility had $16.4 million outstanding (2008 - $16.6 million). The company is subject to external restrictions on its reserve-based revolving credit facility. Under this facility, long-term bank debt cannot exceed two times the 12 month trailing EBITDA. Long-term bank debt is a non- GAAP measure and is defined as long-term bank debt from continuing and discontinued operations. EBITDA is a non-GAAP measure as defined by the credit facility agreement as net earnings prior to deduction of finance charges, income taxes, depletion, depreciation and accretion expense, stock-based compensation and unrealized foreign exchange losses including all such charges reclassified as net income from discontinued operations. As at March 31, 2009, long-term bank debt outstanding was $104.6 million and two times EBITDA was $150.2 million, for a ratio of 0.7:1, which is below the imposed limit. With existing realized commodity pricing combined with the company's low-cost structure, Petrolifera anticipates that it will be in compliance with the financial debt to EBITDA ratio covenant during 2009. The calculation of long-term bank debt is as follows: ------------------------------------------------------------------------- As at March 31 2009 ------------------------------------------------------------------------- Per Discon- Per tinued Balance Opera- Sheet tions Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Long-term bank debt $ 16,435 $ 88,214 $104,649 ------------------------------------------------------------------------- Reconciliation of net earnings to EBITDA is as follows: ------------------------------------------------------------------------- For the Year Ended March 31 2009 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Net earnings $ 11,779 Add Interest, income taxes, depletion, depreciation and accretion expense and other non-cash expenses: Stock-based compensation 5,041 Depletion, depreciation, and accretion 31,281 Income tax provisions 11,017 Fair value adjustments 7,392 Foreign exchange loss 2,535 Finance Charges 6,074 ------------------------------------------------------------------------- EBITDA $ 75,119 ------------------------------------------------------------------------- RESTRICTED CASH AND LONG-TERM INVESTMENTS As at March 31, 2009, long-term investments included notes received in exchange for ABCP with a face value of $37.6 million and a carrying value of $21.5 million, while restricted cash included collateral to support issued letters of credit of $2.9 million with terms to maturity of less than one year. As at December 31, 2008, included in long-term investments were ABCP with a face value of $37.7 million and a carrying value of $22.5 million and collateral to support issued letters of credit of $2.9 million. These investments are classified as held for trading and are carried at fair value, which is assessed each reporting date. In January, 2009, the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper announced that the Superior Court of Ontario granted the Plan Implementation Order and that, accordingly, the plan for restructuring ABCP had been fully implemented. In exchange for the shorter-term ABCP, the company has now received the longer term notes with maturities that generally approximate those of the assets previously contained in the underlying conduits. Assuming these replacement notes become liquid and could be sold for cash, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts. During March, 2009, the company received a $1.0 million payment, representing interest that had accrued on the previous holdings of ABCP during the period from mid-August 2007 until August 31, 2008, net of its pro-rata portion of expenses, including legal costs associated with the resolution agreed and approved under the Canada Business Corporations Act and the Companies Creditors' Arrangement Act. It is expected that substantially all of the restructuring costs and reserves were deducted from this first payment and are not expected to have any further impact on future payments to the company, although there may be other deductions related to alternative banking, legal or administrative fees. As no active market for the longer term notes has developed, management has estimated the fair value of the company's investment in the longer term notes at March 31, 2009, based on a probabilistic recovery of principal and interest, after taking into account all available information. Under this valuation method, several different outcomes of the recovery of the principal and interest are estimated, considering the information available as at March 31, 2009. A weighted average recovery is then calculated. This weighted average recovery is used to determine the discounted cash flows that are expected from these investments. The discount rate used to discount the expected cash flows from the longer term notes was an approximation of the risk-free rate for the expected life of the longer term notes to be received. As the rate used for discounting was an approximation of the risk-free rate, all other risks have been incorporated in the estimated probability-adjusted expected outcomes. This methodology applied all risking information into the various scenarios and discounted the fully-risked cash flow stream only for the time value of money. The recovery factors used were as follows: ------------------------------------------------------------------------- Face Risk- Risk- Value adjusted adjusted Capital Interest Class of Notes Capital Interest Weighted Weighted Risk-free of Recovery Recovery Average Average Term Discount Note ($000s) Range Range Recovery Recovery (years) Rate ------------------------------------------------------------------------- A-1 $ 14,014 0 - 80% 0 - 60% 75% 54% 4 - 8 2.40% ------------------------------------------------------------------------- A-2 13,543 0 - 70% 0 - 40% 65% 36% 8 2.40% ------------------------------------------------------------------------- B 2,459 0 - 30% 0% 27% 0% 8 2.40% ------------------------------------------------------------------------- C 928 0% 0% 0% 0% 8 2.40% ------------------------------------------------------------------------- IA Track- ing 6,613 0 - 40% 0% 36% 0% 8 2.40% ------------------------------------------------------------------------- Total $ 37,557 ------------------------------------------------------------------------- Based on the above approach the fair value of the investment in the longer term notes was $21.5 million as at March 31, 2009, compared to $22.5 million as at December 31, 2008. The reduction reflected the receipt of interest totaling $1.0 million in 2009 but incorporated in the determination of fair value as at December 31, 2008. To date, the total impairment at approximately 40 pecent of the original cost of the investment recognized on the longer term notes, including impairments recognized on the ABCP, remains unchanged compared to the amount of impairment recognized at December 31, 2008. The theoretical fair value of the company's longer-term notes could range from $17.1 million to $29.8 million, using the valuation methodology described above, with reasonably possible alternative assumptions. The outcome of the actual timing and amount ultimately recoverable from these notes may differ materially from this estimate, which would impact the company's earnings. IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2009 the company adopted CICA Handbook section 3064, Goodwill and Intangible Assets, which replaced section 3062, Goodwill and Other Intangible Assets and section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. Section 3064 establishes new standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous section 3062. As the company does not carry goodwill or intangible assets, as defined by section 3064, this new standard had no impact on the presentation and disclosures of the company. INTERNATIONAL FINANCIAL REPORTING STANDARDS In February 2008, the Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") in place of GAAP for interim and annual reporting purposes for fiscal years beginning on or after January 1, 2011. Management has commenced its IFRS conversion project which consists of several phases commencing with a review of the company's significant accounting policies relative to current and proposed IFRS. During this preliminary phase, management determined that the differences most likely to have the greatest impact on the company's consolidated financial statements are the accounting for exploration and development activities, assessment of impairment of property and equipment, calculation of asset retirement obligations and the foreign currency translation method of the company's foreign operations. At the present time, the financial impacts of these preliminarily identified accounting policy differences on the company's current financial position and results of operations have yet to be quantified. The impact on the company's disclosure controls, internal controls over financial reporting, contracts and lending agreements will also be determined but have not yet been quantified. In September 2008, the International Accounting Standards Board issued an exposure draft that provides first-time adopters with additional exemptions from the retrospective application of IFRS. This exposure draft, if adopted, would allow full cost oil and gas companies to elect, at the date of transition to IFRS, to measure exploration and evaluation assets at the amount determined under GAAP and to measure oil and gas assets in the development or production phases by allocating the amount determined under GAAP to the underlying assets pro-rata using reserve volumes or reserve values as of that date. Management will consider if this exemption should be applied if the exposure draft is adopted as it continues to monitor the IFRS adoption efforts of the company's peers. COMMITMENTS, CONTINGENCIES, GUARANTEES AND CONTRACTUAL OBLIGATIONS WORK COMMITMENTS In 2005, Petrolifera acquired two significant oil and gas exploration licenses onshore Peru for Blocks 106 and 107, respectively located in the Maranon and Ucayali Basins. During April 2009, Petrolifera was also awarded a license over Block 133, offsetting and contiguous with Block 107 and anticipates relinquishing approximately one half of Block 107 during May 2009. Based on its interpretation of the 950 km 2D seismic program acquired over the acreage by the company in 2007 and 2008, Petrolifera believes it will be retaining the most prospective acreage under Block 107. The Peruvian licenses have negotiated work programs through 2016. Each work program has a specified minimum financial commitment that must be met for the company to maintain its rights to these licenses. Specifically, the immediate work commitments for Block 133 are primarily comprised of geological field studies and as such are not capital intensive. The first well is required to be drilled per the work programs, and as approved by the local Peruvian authorities, by April 2012 which positions the company to defer the more significant of its work programs while still maintaining these properties in good standing. The company has met, or surpassed, all of its current work commitments for Blocks 106 and 107 in a timely manner. The company has the right to withdraw from the licenses at the end of each period associated with the term of the licenses. In 2007, the company was granted three concessions, comprised of one license and two technical evaluation agreements ("TEA"), in Colombia. Petrolifera has converted the Turpial TEA into a license and has requested that the Sierra Nevada II TEA also be converted into a license, to be renamed Magdalena. Petrolifera is currently drilling the La Pinta No.1 well on the Sierra Nevada I License, which will complete this license's first phase of work commitments, upon approval of an application, submitted by the company to the Colombian Government Agency that regulates such activity, with the well terminating at 11,250 feet rather than the originally planned depth of 13,000 feet. In Argentina, the company has total gross remaining work commitments of US$8.2 million over the next two years related to the Vaca Mahuida, Puesto Guevara and Gobernador Ayala concessions. A portion of the Argentinean work commitments related to the Vaca Mahuida block has been farmed out to a third party. A portion of the Gobernador Ayala work commitments are currently being met through the exploratory drilling program presently underway and the prior completion of 210 km(2) of 3D seismic. CONTRACTUAL COMMITMENTS The company's annual commitments under service contracts for drilling, leases for office premises and other equipment and an administrative services agreement are as follows: ------------------------------------------------------------------------- Subsequent 2009 2010 2011 to 2011 Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Drilling service contracts and other leases $ 21,457 $ 20,899 $ 1,528 $ 252 $ 44,136 ------------------------------------------------------------------------- DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed, summarized and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. The company's Executive Chairman, President and Chief Operating Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the three months covered by this MD&A, that the company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure. Management of the company is also responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with Canadian GAAP. There have been no changes in the company's systems of internal controls over financial reporting that would materially affect, or is reasonably likely to materially affect, the company's internal controls over financial reporting. BUSINESS RISKS Petrolifera is exposed to certain risks and uncertainties inherent in the oil and gas business. Furthermore, being a smaller independent company, it is exposed to financing and other risks which may impair its ability to realize on its assets or to capitalize on opportunities which might become available to it. Additionally, Petrolifera operates in various foreign jurisdictions and is exposed to other risks including currency fluctuations, political risk, price controls and varying forms of fiscal regimes or changes thereto which may impair Petrolifera's ability to conduct profitable operations. The risks arising in the oil and gas industry include price fluctuations for both crude oil and natural gas over which the company has limited control; risks arising from exploration and development activities; production risks associated with the depletion of reservoirs and the ability to market production. Additional risks include environmental and health and safety concerns. The success of the company's capital programs as embodied in its productivity and reserve base, could also impact its prospective liquidity and pace of future activities. Control of finding, development, operating and overhead costs per boe is an important long-term criterion in determining company growth, success and access to new capital sources. To date, the company has utilized debt and equity financing and has had a bias towards conservatively financing its operations under normal industry conditions to offset the inherent risks of international oil and gas exploration, development and production activities. From time to time, the company may have to access capital markets for new equity to supplement internally generated cash flow and bank borrowings to finance its growth plans. Periodically, these markets may not be receptive to offerings of new equity from treasury, whether by way of private placement or public offerings. Access to financing has been impacted by sub-prime mortgage defaults, the liquidity crisis affecting the ABCP and collateralized debt obligation markets and a deterioration in the global economy. Banks have been adversely affected by the worldwide economic crisis and have severely curtailed existing liquidity lines, increased pricing and introduced new and tighter borrowing restrictions to corporate borrowers, with extremely limited access to new facilities or for new borrowers. These factors may impact Petrolifera's ability to obtain equity, debt or bank financing on terms that are commercially reasonable, or at all, and could negatively impact its ability to access liquidity needed for its operations in the longer term. This may be further complicated by the limited market liquidity for shares of smaller companies, restricting access to some institutional investors. Periodic fluctuations in energy prices may also affect lending policies of the company's banker for new borrowings in addition to the semi-annual review of existing availability of indebtedness. This in turn could limit growth prospects over the short run or may even require the company to dedicate cash flow, dispose of properties or raise new equity to reduce bank borrowings under circumstances of declining energy prices or disappointing drilling results. While hedging activities may have opportunity costs when realized prices exceed hedged pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management continuously reviews the need to utilize such financing techniques. The company attempts to mitigate its business and operational risk exposures by maintaining comprehensive insurance coverage on its assets and operations, by employing or contracting competent technicians and professionals, by instituting and maintaining operational health, safety and environmental standards and procedures and by maintaining a prudent approach to exploration and development activities. The company also addresses and regularly reports on the impact of risks to its shareholders, writing down the carrying values of assets that may not be recoverable. In March 2009, the company announced its intention to commence a process to sell its Argentinean interests. The company is in the early stages of its sales process and, based on current expectations, offers for its Argentinean interests are anticipated to be received by the company during June 2009. Given the early stage of the sales process, current economic conditions, current commodity prices and the risks associated with ownership of international oil and gas properties, there can be no assurance that the company will be successful in its efforts to arrange for the divestiture of its Argentinean interests on terms satisfactory to the company or at all. As a result, there is a risk that the company may discontinue its sale process, resulting in the continued ownership and operation of these properties and the continuing financial obligations associated therewith. OUTLOOK Petrolifera's outlook remains exciting and favourable although clouded by the overall weakness in world economies, commodity pricing, economic activity, credit markets and capital markets. As a consequence, there is little short- term optimism of a significant recovery in crude oil prices, although the reduction in commodity prices is setting the groundwork for rapid and steep increases when demand destruction ends and growth is restored through the world. Petrolifera is also headed into a period of higher risk, higher reward drilling activity, if it can secure available industry participation through farmouts. If these cannot be secured on favourable terms, the company may have to reduce its participation in its blocks through farmouts without disproportionate spending by joint venture partners or outright sales to the benefit of the company shareholders. The company announced the initiation of a process for the sale of our Argentinean assets. The company intends to focus on new areas with greater potential or fewer complications related to economic and fiscal policies such as now characterize Argentina. FORWARD-LOOKING INFORMATION This Interim Report contains forward-looking information including, but not limited to, future exploration and development opportunities in Argentina, Colombia and Peru, current drilling, testing and completion plans in Colombia, anticipated results from the La Pinta No.1 well in Colombia and the wells on the Gobernador Ayala II Concession in Argentina, future drilling plans in Argentina, Colombia and Peru, anticipated remediated efforts and timing of the full impact of the company's waterflood program, planned 2009 capital expenditures (including sources of funding and timing thereof), planned farmout and/or joint ventures arrangements, anticipated award of the Magdalena License in Colombia and anticipated acceptance of Petrolifera's relinquishment plan relating to Block 108 in Peru, planned sale of interests in Argentina and the process and intended use of proceeds related thereto, recovery of the company's investment in ABCP and anticipated financial condition and liquidity throughout 2009. Forward looking information is not based on historical facts but rather on Management's expectations regarding the company's future growth, results of operations, production, future capital and other expenditures (including the amount, nature and sources of finding thereof), competitive advantages, plans for and results of drilling activity, environmental matters, business prospects and opportunities and expectations with respect to general economic conditions. Such forward looking information reflects Management's current beliefs and assumptions and is based on information currently available to Management. Forward looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward looking information, including but not limited to, risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production, delays or changes to plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environment risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and third parties located in foreign jurisdictions and the risk associated with international activity. There can be no assurance that testing of the wells drilled on the Sierra Nevada I License or the Gobernador Ayala II Concession will yield commercial results. The company's ability to complete its capital program is dependant upon completion of planned farm-out arrangements, access to required credit and capital and access to services, drilling rigs and equipment. In addition, the current financial crisis has resulted in severe economic uncertainty and resulting illiquidity in credit and capital markets which increases the risk that actual results will vary from forward looking expectations in this report and these variations may be material. Petrolifera may have to bring participants into its acreage holdings and planned evaluation activities on less attractive terms than might otherwise have been the case due to the combination of tighter economic conditions and the influence of contractual commitments and deadlines on the terms of trade. There can be no assurance that the company will be successful in its efforts to secure planned farm-outs and/or joint venture arrangements. The company is in the early stages of its sale process relating to its Argentinean interests. While the company has received significant interest in its sales process from third parties, there can be no assurances that the company will receive binding offers for its Argentinean interest that are on terms acceptable to the company. As a result, there is a risk that the company may discontinue its sales process, resulting in the continued ownership and operation of these properties and the continuing financial obligations associated therewith. Although the forward looking information contained herein is based upon assumptions which Management believes to be reasonable, the company cannot assure investors that actual results will be consistent with this forward looking information. This forward looking information is made as of the date hereof and the company assumes no obligation to update or revise this information to reflect new events or circumstances, except as required by law. Because of the risks, uncertainties and assumptions inherent in forward looking information, prospective investors in the company's securities should not place undue reliance on this forward looking information. Additionally, readers are reminded that cash flow from operations and EBITDA do not have standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures used by other companies. Cash flow from operations and EBITDA are reconciled to net earnings when provided by the company. QUARTERLY RESULTS(4) ------------------------------------------------------- For the Three Months Ended ------------------------------------------------------- 2007 ------------------------------------------------------- June 30 Sept 30 Dec 31 ------------------------------------------------------- FINANCIAL RESULTS ($000, EXCEPT PER SHARE AMOUNTS) - UNAUDITED ------------------------------------------------------- Total revenue including discontinued operations(1) 28,105 31,730 27,266 Cash flow from continued and discontinued operations before non-cash working capital changes(1) 14,504 18,619 10,707 Basic, per share(1) 0.30 0.37 0.21 Diluted, per share(1) 0.28 0.36 0.21 Net loss before discontinued operations (2,224) (4,531) (7,729) Basic or diluted, per share (0.05) (0.09) (0.15) Net earnings 4,450 4,919 4,863 Basic, per share 0.09 0.10 0.10 Diluted, per share 0.09 0.10 0.09 Capital expenditures including discontinued operations(1) 19,842 26,061 57,608 Cash or cash equivalents 66,535 11,368 13,052 Working capital 69,690 22,742 (31,779) Long-term bank debt including discontinued operations(1) - - - Shareholders' equity 120,236 121,727 120,303 Total assets 139,054 144,016 204,227 ------------------------------------------------------- OPERATING RESULTS FROM DISCONTINUED OPERATIONS ------------------------------------------------------- Sales volumes Crude oil and natural gas liquids - bbl/d 6,644 7,195 6,565 Natural gas - mcf/d 1,726 2,169 2,860 Equivalent - boe/d(2) 6,932 7,557 7,042 Pricing Crude oil and natural gas liquids - $/bbl 45.17 46.99 44.36 Natural gas - $/mcf 1.42 1.41 1.76 Selected highlights - $/boe(2) Weighted average selling price per boe 43.65 45.15 42.07 Interest and other income 0.47 0.22 - Royalties 6.19 5.77 5.76 Operating costs 5.56 6.96 8.20 Corporate netback(3) 32.37 32.64 28.11 ------------------------------------------------------- COMMON SHARE INFORMATION (000, EXCEPT SHARE PRICE) ------------------------------------------------------- Shares outstanding at end of period 50,084 50,119 50,127 Weighted average shares outstanding for the period Basic 47,816 50,107 50,123 Diluted 51,303 51,800 51,689 Volume traded during quarter 6,211 10,921 12,223 Common share price ($) High 19.29 22.35 17.10 Low 16.60 13.18 9.14 Close (end of period) 17.04 15.20 9.87 ------------------------------------------------------- ------------------------------------------------------------------------- For the Three Months Ended ------------------------------------------------------------------------- 2008 2009 ------------------------------------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 Mar 31 ------------------------------------------------------------------------- FINANCIAL RESULTS ($000, EXCEPT PER SHARE AMOUNTS) - UNAUDITED ------------------------------------------------------------------------- Total revenue including discontinued operations(1) 27,167 33,622 32,126 37,411 26,407 Cash flow from continued and discontinued operations before non-cash working capital changes(1) 11,902 13,485 15,726 21,689 10,804 Basic, per share(1) 0.24 0.27 0.29 0.39 0.20 Diluted, per share(1) 0.23 0.26 0.28 0.39 0.20 Net loss before discontinued operations (5,406) (4,349) (2,970) (4,719) (3,121) Basic or diluted, per share (0.11) (0.09) (0.05) (0.09) (0.06) Net earnings 1,738 3,590 3,564 2,662 1,188 Basic, per share 0.04 0.07 0.06 0.05 0.02 Diluted, per share 0.03 0.07 0.06 0.05 0.02 Capital expenditures including discontinued operations(1) 31,056 29,110 21,046 35,539 25,612 Cash or cash equivalents 11 41,039 14,865 30,701 30,994 Working capital (51,546) 13,295 8,148 19,956 33,768 Long-term bank debt including discontinued operations(1) - 43,800 45,576 77,150 104,649 Shareholders' equity 127,225 168,735 178,069 202,347 209,240 Total assets 231,278 292,882 279,174 355,658 371,054 ------------------------------------------------------------------------- OPERATING RESULTS FROM DISCONTINUED OPERATIONS ------------------------------------------------------------------------- Sales volumes Crude oil and natural gas liquids - bbl/d 6,726 7,111 6,850 6,877 5,245 Natural gas - mcf/d 7,044 5,922 5,363 5,451 6,500 Equivalent - boe/d(2) 7,900 8,098 7,744 7,786 6,328 Pricing Crude oil and natural gas liquids - $/bbl 41.99 49.90 48.93 56.76 52.17 Natural gas - $/mcf 2.20 2.38 2.58 2.88 2.98 Selected highlights - $/boe(2) Weighted average selling price per boe 37.72 45.56 45.07 52.15 46.30 Interest and other income 0.01 0.07 0.01 0.02 0.01 Royalties 4.71 6.33 6.80 7.66 6.02 Operating costs 8.24 8.60 9.00 10.28 10.33 Corporate netback(3) 24.78 30.70 29.28 34.23 29.96 ------------------------------------------------------------------------- COMMON SHARE INFORMATION (000, EXCEPT SHARE PRICE) ------------------------------------------------------------------------- Shares outstanding at end of period 50,353 54,798 54,948 54,948 54,948 Weighted average shares outstanding for the period Basic 50,212 50,500 54,884 54,948 54,948 Diluted 51,562 51,735 55,897 55,043 55,195 Volume traded during quarter 7,721 4,590 7,884 8,826 10,053 Common share price ($) High 11.96 11.25 8.72 3.99 1.60 Low 6.61 8.25 3.16 0.75 0.80 Close (end of period) 9.10 8.69 3.37 1.05 1.60 ------------------------------------------------------------------------- (1) Cash flow from operations before non-cash working capital changes ("cash flow") and cash flow per share do not have standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures used by other companies. Cash flow from operations before non-cash working capital changes includes all cash flow from operating and discontinued operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow from operations before working capital changes is reconciled with net earnings in the accompanying MD&A and in the MD&A in respect of each quarterly report of the company's prior periods. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. Capital expenditures and long-term debt including discontinued operations also do not have standardized meanings as prescribed by GAAP. Capital expenditures and long-term debt including discontinued operations includes all capital expenditures or long-term debt of continuing and discontinued operations. The most comparable measure calculated in accordance with GAAP would be capital expenditures and long-term debt. Capital expenditures and long-term debt including discontinued operations is reconciled with each of the most comparable measures in the accompanying MD&A. Management uses these non-GAAP measures to provide a basis of the company's liquidity resulting from all of its operations. (2) All references to barrels of oil equivalent (boe) are calculated on the basis of 6 Mcf :1 bbl. Boe may be misleading particularly if used in isolation. This conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalent at the wellhead. (3) Corporate netback is a non-GAAP measure used by management as a measure of operating efficiency and profitability. It is calculated as petroleum and natural gas revenue and other income less royalties and operating costs from discontinued operations. For a reconciliation of net backs to net earnings from discontinued operations, see "MD&A". (4) Fluctuations in results over the previous eight quarters are due principally to variations in oil and gas prices and production volumes. Attributing to fluctuations in working capital is the classification of debt as either current or long-term. Additionally, the decision to initiate a process to dispose of the company's Argentinean interests resulted in the company's Argentinean segment being reclassified as discontinued operations. CONSOLIDATED BALANCE SHEETS PETROLIFERA PETROLEUM LIMITED (UNAUDITED) ------------------------------------------------------------------------- Mar. 31, Dec. 31, As at 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- ASSETS Current Cash $ 30,994 $ 30,701 Accounts receivable 6,859 8,145 Restricted cash (Note 3) 2,929 - Income taxes receivable 54 54 Prepaid expenses 441 257 Discontinued operations (Note 4) 27,407 34,804 ------------------------------------------------------------------------- 68,684 73,961 ------------------------------------------------------------------------- Long-term investments (Note 3) 21,501 25,428 Property and equipment 84,226 62,829 ------------------------------------------------------------------------- Discontinued operations (Note 4) 196,643 193,440 ------------------------------------------------------------------------- $371,054 $355,658 ------------------------------------------------------------------------- LIABILITIES Current Accounts payable and accrued liabilities $ 20,908 $ 19,578 Income taxes payable 5 5 Bank debt (Note 5) - 16,637 Due to a related company 77 42 Discontinued operations (Note 4) 13,926 17,743 ------------------------------------------------------------------------- 34,916 54,005 Long-term bank debt (Note 5) 16,435 - Future income taxes 57 - Discontinued operations (Note 4) 110,406 99,306 ------------------------------------------------------------------------- 161,814 153,311 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital and contributed surplus (Note 6(a)) 109,846 108,254 Accumulated other comprehensive income 20,219 16,106 Retained earnings 79,175 77,987 ------------------------------------------------------------------------- 209,240 202,347 ------------------------------------------------------------------------- $371,054 $355,658 ------------------------------------------------------------------------- Commitments (Note 10) CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS PETROLIFERA PETROLEUM LIMITED (UNAUDITED) ------------------------------------------------------------------------- Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- $000 (except per share amounts) ------------------------------------------------------------------------- REVENUE ------------------------------------------------------------------------- Interest and other income $ 31 $ 48 ------------------------------------------------------------------------- EXPENSES ------------------------------------------------------------------------- General and administrative 996 1,139 ------------------------------------------------------------------------- Fair value impairment (Note 3) - 1,490 ------------------------------------------------------------------------- Stock-based compensation (Note 6(b)) 1,592 2,398 ------------------------------------------------------------------------- Finance charges (Note 5) 106 361 ------------------------------------------------------------------------- Foreign exchange loss 401 66 ------------------------------------------------------------------------- 3,095 5,454 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Loss before income taxes and discontinued operations (3,064) (5,406) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Future income tax provision 57 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net loss before discontinued operations (3,121) (5,406) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings from discontinued operations (Note 4) 4,309 7,144 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET EARNINGS 1,188 1,738 ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF PERIOD 77,987 66,433 ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS, END OF PERIOD $ 79,175 $ 68,171 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net loss before discontinued operations per Share (Note 9(a)) ------------------------------------------------------------------------- Basic and diluted $ (0.06) $ (0.11) ------------------------------------------------------------------------- NET EARNINGS PER SHARE (Note 4 and 9(a)) ------------------------------------------------------------------------- Basic $ 0.02 $ 0.04 ------------------------------------------------------------------------- Diluted $ 0.02 $ 0.03 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME PETROLIFERA PETROLEUM LIMITED (UNAUDITED) ------------------------------------------------------------------------- Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Net earnings $ 1,188 $ 1,738 ------------------------------------------------------------------------- Foreign currency translation adjustment (Note 4) 4,113 2,620 ------------------------------------------------------------------------- Comprehensive income $ 5,301 $ 4,358 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) PETROLIFERA PETROLEUM LIMITED (UNAUDITED) ------------------------------------------------------------------------- Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Balance, beginning of period $ 16,106 $(10,674) ------------------------------------------------------------------------- Foreign currency translation adjustment (Note 4) 4,113 2,620 ------------------------------------------------------------------------- Balance, end of period $ 20,219 $ (8,054) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS PETROLIFERA PETROLEUM LIMITED (UNAUDITED) ------------------------------------------------------------------------- Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Cash provided by (used in) the following activities: ------------------------------------------------------------------------- OPERATING ------------------------------------------------------------------------- Net earnings $ 1,188 $ 1,738 ------------------------------------------------------------------------- Less: ------------------------------------------------------------------------- Net earnings from discontinued operations (4,309) (7,144) ------------------------------------------------------------------------- Net loss before discontinued operations (3,121) (5,406) ------------------------------------------------------------------------- Items not involving cash: ------------------------------------------------------------------------- Stock-based compensation (Note 6(b)) 1,592 2,398 ------------------------------------------------------------------------- Fair value impairment (Note 3) - 1,490 ------------------------------------------------------------------------- Future income taxes 57 - ------------------------------------------------------------------------- Unrealized foreign exchange loss (gain) and other (504) 386 ------------------------------------------------------------------------- Changes in non-cash working capital (Note 9(b)) 896 (1,853) ------------------------------------------------------------------------- (1,080) (2,985) ------------------------------------------------------------------------- Cash provided by (used in) operating activities from discontinued operations 21,538 2,847 ------------------------------------------------------------------------- 20,458 (138) ------------------------------------------------------------------------- ------------------------------------------------------------------------- FINANCING ------------------------------------------------------------------------- Proceeds (repayment) of bank debt or long-term bank debt (202) 7,213 ------------------------------------------------------------------------- Issue of common shares, net of share issue costs - 165 ------------------------------------------------------------------------- (202) 7,378 ------------------------------------------------------------------------- Cash provided by financing activities from discontinued operations 8,716 16,214 ------------------------------------------------------------------------- 8,514 23,592 ------------------------------------------------------------------------- ------------------------------------------------------------------------- INVESTING ------------------------------------------------------------------------- Development of oil and gas properties (20,974) (7,816) ------------------------------------------------------------------------- Receipt of interest on long-term investment (Note 3) 1,081 - ------------------------------------------------------------------------- Changes in non-cash working capital (Note 9(b)) 1,571 1,692 ------------------------------------------------------------------------- (18,322) (6,124) ------------------------------------------------------------------------- Cash used in investing activities from discontinued operations (10,665) (29,592) ------------------------------------------------------------------------- (28,987) (35,716) ------------------------------------------------------------------------- ------------------------------------------------------------------------- DECREASE IN CASH (15) (12,262) ------------------------------------------------------------------------- Effect on cash of foreign currency translation adjustment (Note 4) 308 (779) ------------------------------------------------------------------------- CASH, BEGINNING OF PERIOD 30,701 13,052 ------------------------------------------------------------------------- CASH, END OF PERIOD $ 30,994 $ 11 ------------------------------------------------------------------------- Supplementary cash flow information (Note 9(c)) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PETROLIFERA PETROLEUM LIMITED PERIOD ENDED MARCH 31, 2009 (UNAUDITED) 1. FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES The interim Consolidated Financial Statements include the accounts of Petrolifera Petroleum Limited and its wholly-owned subsidiaries and foreign branches (collectively, "Petrolifera" or the "company") and are presented in Canadian dollars and in accordance with Canadian generally accepted accounting principles. Petrolifera is engaged in petroleum and natural gas exploration, development and production activities in South America. The interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the annual audited Consolidated Financial Statements for the year ended December 31, 2008 except as provided in Note 2. The disclosures provided below do not conform in all respects to those included with the annual audited Consolidated Financial Statements. The interim Consolidated Financial Statements should be read in conjunction with the annual audited Consolidated Financial Statements and the notes thereto. 2. NEW ACCOUNTING STANDARDS Effective January 1, 2009 the company adopted CICA Handbook section 3064, Goodwill and Intangible Assets, which replaced section 3062, Goodwill and Other Intangible Assets and section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. Section 3064 establishes new standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit- oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous section 3062. As the company does not carry goodwill or intangible assets, as defined by section 3064, this new standard had no impact on the presentation and disclosures of the company. In February, 2008, the Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") in place of Canadian generally accepted accounting policies ("GAAP") for interim and annual reporting purposes for fiscal years beginning on or after January 1, 2011. 3. RESTRICTED CASH AND LONG-TERM INVESTMENTS As at March 31, 2009, long-term investments included notes received in exchange for Asset Backed Commercial Paper ("ABCP") with a face value of $37.6 million and a carrying value of $21.5 million, while restricted cash included collateral to support issued letters of credit of $2.9 million with terms to maturity of less than one year. As at December 31, 2008, included in long-term investments were ABCP with a face value of $37.7 million and a carrying value of $22.5 million and collateral to support issued letters of credit of $2.9 million. These investments are classified as held for trading and are carried at fair value, which is assessed each reporting date. In January, 2009, the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper announced that the Superior Court of Ontario granted the Plan Implementation Order and that, accordingly, the plan for restructuring ABCP had been fully implemented. In exchange for the shorter- term ABCP, the company has now received the longer term notes with maturities that generally approximate those of the assets previously contained in the underlying conduits. Assuming these replacement notes become liquid and could be sold for cash, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts. During March, 2009, the company received a $1.0 million payment, representing interest that had accrued on the previous holdings of ABCP during the period from mid-August 2007 until August 31, 2008, net of its pro-rata portion of expenses, including legal costs associated with the resolution agreed and approved under the Canada Business Corporations Act and the Companies Creditors' Arrangement Act. It is expected that substantially all of the restructuring costs and reserves were deducted from this first payment and are not expected to have any further impact on future payments to the company, although there may be other deductions related to alternative banking, legal or administrative fees. As no active market for the longer term notes has developed, management has estimated the fair value of the company's investment in the longer term notes at March 31, 2009, based on a probabilistic recovery of principal and interest, after taking into account all available information. Under this valuation method, several different outcomes of the recovery of the principal and interest are estimated, considering the information available as at March 31, 2009. A weighted average recovery is then calculated. This weighted average recovery is used to determine the discounted cash flows that are expected from these investments. The discount rate used to discount the expected cash flows from the longer term notes was an approximation of the risk-free rate for the expected life of the longer term notes to be received. As the rate used for discounting was an approximation of the risk-free rate, all other risks have been incorporated in the estimated probability-adjusted expected outcomes. This methodology applied all risking information into the various scenarios and discounted the fully-risked cash flow stream only for the time value of money. The recovery factors used were as follows: ------------------------------------------------------------------------- Face Risk- Risk- Value adjusted adjusted Capital Interest Class of Notes Capital Interest Weighted Weighted Risk-free of Recovery Recovery Average Average Term Discount Note ($000s) Range Range Recovery Recovery (years) Rate ------------------------------------------------------------------------- A-1 $ 14,014 0 - 80% 0 - 60% 75% 54% 4 - 8 2.40% ------------------------------------------------------------------------- A-2 13,543 0 - 70% 0 - 40% 65% 36% 8 2.40% ------------------------------------------------------------------------- B 2,459 0 - 30% 0% 27% 0% 8 2.40% ------------------------------------------------------------------------- C 928 0% 0% 0% 0% 8 2.40% ------------------------------------------------------------------------- IA Track- ing 6,613 0 - 40% 0% 36% 0% 8 2.40% ------------------------------------------------------------------------- Total $ 37,557 ------------------------------------------------------------------------- Based on the above approach the fair value of the investment in the longer term notes was $21.5 million as at March 31, 2009 compared to $22.5 million as at December 31, 2008. The reduction reflected the receipt of interest totaling $1.0 million in 2009 but incorporated in the determination of fair value as at December 31, 2008. To date, the total impairment at approximately 40 percent of the original cost of the investment recognized on the longer term notes, including impairments recognized on the ABCP, remains unchanged compared to the amount of impairment recognized at December 31, 2008. The theoretical fair value of the company's longer-term notes could range from $17.1 million to $29.8 million using the valuation methodology described above with reasonably possible alternative assumptions. The outcome of the actual timing and amount ultimately recoverable from these notes may differ materially from this estimate, which would impact the company's earnings. 4. DISCONTINUED OPERATIONS On March 2, 2009, Petrolifera announced that its Board of Directors authorized the sale of the company's interests in Argentina, which are primarily indirectly held through a wholly-owned Barbadian subsidiary. Petrolifera has engaged a third party to actively market and solicit offers from qualifying purchasers. It would be Petrolifera's intention to redeploy the proceeds towards its exploration activities in Colombia and Peru, after discharging related reserve-based long-term bank debt. The anticipated timing of the sale of the company's interest in Argentina is not yet determinable. The carrying amounts of certain classes of assets and liabilities, which are grouped and disclosed on the Consolidated Balance Sheets as discontinued operations, that relate to the company's interests in Argentina are as follows: ------------------------------------------------------------------------- Mar. 31, Dec. 31, As at 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- ASSETS ------------------------------------------------------------------------- Accounts receivable $ 21,204 $ 29,186 ------------------------------------------------------------------------- Income taxes receivable 5,053 4,682 ------------------------------------------------------------------------- Prepaid expenses 508 278 ------------------------------------------------------------------------- Inventory 642 658 ------------------------------------------------------------------------- Discontinued operations - current assets 27,407 34,804 ------------------------------------------------------------------------- Property and equipment 195,230 191,815 ------------------------------------------------------------------------- Deferred financing costs 1,413 1,625 ------------------------------------------------------------------------- Discontinued operations - long-term assets $196,643 $193,440 ------------------------------------------------------------------------- LIABILITIES ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ 12,817 $ 16,304 ------------------------------------------------------------------------- Income taxes payable 1,109 1,439 ------------------------------------------------------------------------- Discontinued operations - current liabilities 13,926 17,743 ------------------------------------------------------------------------- Long-term bank debt 88,214 77,150 ------------------------------------------------------------------------- Asset retirement obligations 10,555 10,106 ------------------------------------------------------------------------- Future income taxes 11,637 12,050 ------------------------------------------------------------------------- Discontinued operations - long-term liabilities $110,406 $ 99,306 ------------------------------------------------------------------------- The amounts of revenue and expenses disclosed on the Consolidated Statements of Operations and Retained Earnings as discontinued operations that relate to the company's interest in Argentina are as follows: ------------------------------------------------------------------------- For the Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- $000 (except per share amounts) ------------------------------------------------------------------------- REVENUE ------------------------------------------------------------------------- Petroleum and natural gas sales $ 26,371 $ 27,114 ------------------------------------------------------------------------- Interest income 5 5 ------------------------------------------------------------------------- 26,376 27,119 ------------------------------------------------------------------------- Royalties (3,429) (3,384) ------------------------------------------------------------------------- 22,947 23,735 ------------------------------------------------------------------------- EXPENSES ------------------------------------------------------------------------- Operating 5,882 5,925 ------------------------------------------------------------------------- General and administrative 941 923 ------------------------------------------------------------------------- Finance charges 1,471 559 ------------------------------------------------------------------------- Taxes other than income taxes 409 506 ------------------------------------------------------------------------- Foreign exchange loss 2,044 24 ------------------------------------------------------------------------- Depletion, depreciation and accretion(1) 6,904 4,669 ------------------------------------------------------------------------- 17,651 12,606 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings from discontinued operations before income taxes 5,296 11,129 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Current income tax provision 964 2,660 ------------------------------------------------------------------------- Future income tax provision 23 1,325 ------------------------------------------------------------------------- 987 3,985 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET EARNINGS FROM DISCONTINUED OPERATIONS 4,309 7,144 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET EARNINGS FROM DISCONTINUED OPERATIONS PER SHARE (Note 9) ------------------------------------------------------------------------- Basic $ 0.08 $ 0.14 ------------------------------------------------------------------------- Diluted $ 0.08 $ 0.14 ------------------------------------------------------------------------- (1) Depletion and depreciation have not been recognized for the period subsequent to March 2, 2009, the date the Argentinean operations were reclassified as discontinued operations. The foreign currency translation adjustments entirely relate to the company's translation of its self-sustaining Argentinean operation's that are translated from US dollars into Canadian dollars using the current rate method, whereby assets and liabilities are translated at the rate of exchange in effect at the balance sheet date; revenues and expenses are translated at the average monthly rates of exchange during the period; and gains or losses on translation are included as a foreign currency translation adjustment in the Consolidated Financial Statements of Comprehensive Income and Accumulated Other Comprehensive Income (Loss). 5. BANK DEBT AND LONG-TERM BANK DEBT During April, 2009, the company negotiated an expansion of its line of credit ("ABCP line-of-credit") to a maximum of $28.2 million with a Canadian chartered bank primarily secured by the longer term notes exchanged for the ABCP. Any borrowings from the expanded ABCP line-of- credit are categorized as long-term as the facility's initial term to maturity is April, 2011 and the company can make up to five extension requests where each extension is for an additional one-year period. At December 31, 2008 the prevailing terms of the ABCP line-of-credit had a maximum draw of $18.0 million and was due on demand, resulting in the company categorizing as current its borrowings under the line- of-credit. The line of credit bears interest at a floating rate. As at March 31, 2009 the outstanding line of credit facility is $16.4 million (2008 - $16.6 million). Interest expense on the line of credit facility for the three months ended March 31, 2009 was $0.1 million (2008 - $0.4 million). The effective interest rate on the company's interest bearing debt was 2.6 percent for the three months ended March 31, 2009 (2008 - 6.6 percent). The unused credit on the prior facility was $1.6 million as at March 31, 2009 but would have been $11.8 million under the revised facility signed subsequent to March 31, 2009 whereas the unused credit on the facility was $1.4 million as at December 31, 2008. 6. SHARE CAPITAL AND CONTRIBUTED SURPLUS (a) Authorized: The authorized share capital is comprised of an unlimited number of common shares. Issued: ------------------------------------------------------------------------- Number of Amount Shares ($000) ------------------------------------------------------------------------- Balances, share capital, beginning and end of period 54,948,010 $ 92,408 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Contributed surplus: ------------------------------------------------------------------------- Balance, contributed surplus, beginning of period 15,846 ------------------------------------------------------------------------- Stock-based compensation recovery (b) 1,592 ------------------------------------------------------------------------- Balance, contributed surplus, end of period 17,438 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Share capital and contributed surplus: ------------------------------------------------------------------------- Balance, share capital and contributed surplus, beginning of period $108,254 ------------------------------------------------------------------------- Balance, share capital and contributed surplus, end of period $109,846 ------------------------------------------------------------------------- (b) Stock Options: As at March 31, 2009 and 2008, the company had stock options outstanding to acquire common shares, as follows: ------------------------------------------------------------------------- As at March 31 2009 2008 ------------------------------------------------------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Options Price Options Price ------------------------------------------------------------------------- Outstanding, beginning of period 4,576,327 $6.85 3,228,867 $8.71 ------------------------------------------------------------------------- Granted - - 619,700 9.94 ------------------------------------------------------------------------- Exercised - - (226,500) (0.73) ------------------------------------------------------------------------- Cancelled (1,841,160) (13.45) - - ------------------------------------------------------------------------- Outstanding, end of period 2,735,167 $2.41 3,622,067 $9.42 ------------------------------------------------------------------------- Exercisable, end of period 1,394,667 $2.41 2,620,999 $7.90 ------------------------------------------------------------------------- Options granted under the plan are generally fully exercisable after two or three years and expire five years after the date granted. The table below summarizes unexercised stock options and the weighted average recurring contractual life by ranges of exercise prices as at March 31, 2009 and 2008: ------------------------------------------------------------------------- Range of Exercise Prices 2009 2008 ------------------------------------------------------------------------- Weighted Weighted Average Average Remaining Remaining Number Contractual Number Contractual Outstanding Life Outstanding Life ------------------------------------------------------------------------- $0.50 - $1.00 787,667 1.2 1,182,667 2.4 ------------------------------------------------------------------------- $1.70 - $1.80 418,000 1.6 - - ------------------------------------------------------------------------- $2.00 - $3.40 1,282,000 4.6 - - ------------------------------------------------------------------------- $5.40 - $9.94 158,500 2.7 719,700 4.6 ------------------------------------------------------------------------- $10.70 - $20.95 89,000 2.1 1,719,700 3.6 ------------------------------------------------------------------------- Total 2,735,167 3.0 3,622,067 3.4 ------------------------------------------------------------------------- During the three months ended March 31, 2009 a non-cash expense of $0.5 million (2008 - $2.4 million) was recorded as stock-based compensation, reflecting the amortization of the fair value of stock options over the vesting period. Additionally, during 2009 certain employees, Officers and non- managerial Directors of the company voluntarily surrendered 1,786,660 options with a weighted average exercise price of $13.79 per option. In accordance with Canadian GAAP any unvested options that were voluntarily surrendered were deemed to have become vested, resulting in the recognition of an additional non-cash stock-based compensation expense of $1.1 million. 7. FINANCIAL INSTRUMENTS Capital Management The company is subject to external restrictions on its reserves-based revolving credit facility. The facility has an overall limit of US$100 million and the current available limit is US$70 million, which is subject to semi- annual review. Bank debt and long-term bank debt outstanding cannot exceed two times the 12 month trailing EBITDA. EBITDA as defined by the credit facility agreement as net earnings prior to deduction of interest, income taxes, depletion, depreciation and accretion expense and other non-cash expenses including all such charges reclassified as net income from discontinued operations (a reconciliation to the nearest GAAP measure is provided in the Managerial Discussion and Analysis). As at March 31, 2009, bank debt and long- term bank debt outstanding was $104.6 million and two times EBITDA was $150.2 million, for a ratio of 0.7:1, which is below the imposed limit. Credit Risk The Company is exposed to credit risk in relation to its cash, accounts receivable, restricted cash and long-term investments in addition to financial instruments classified as a portion of current assets of discontinued operations. Cash and restricted cash are held with highly rated international banks and therefore the company considers these assets to have negligible credit risk. The company's accounts receivable are primarily with local government agencies and mainly pertain to input taxes paid on certain expenditures. Refer to Note 3 for further discussion regarding the credit risk of long-term investments. The company has not experienced any collection problems with its counterparties and does not currently have any overdue amounts. The carrying amounts of cash, accounts receivable, restricted cash and long-term investments in addition to financial instruments classified as a portion of current assets of discontinued operations represent the company's maximum credit exposure. The company does not have an allowance for doubtful accounts and did not write off any receivables for the three months ended March 31, 2009. Liquidity Risk The company manages its risk of not meeting its financial obligations through management of its capital structure, annual budgeting of its revenues, expenditures and cash flows, cash flow forecasting and maintaining an unused credit facility where practicable. Accounts payable and a portion of current liabilities of discontinued operations, as disclosed on the Consolidated Balance Sheet, fall due within the next reporting period and are anticipated to be funded through the company's cash, collections of accounts receivable and the unused credit facility. The company holds a $28.2 million line of credit, of which $16.4 million is drawn at March 31, 2009, that is primarily secured by the longer term notes as exchanged for the ABCP. The line of credit bears interest at a floating rate. Market Risk Changes in interest rates and foreign currency exchange rates can expose the company to fluctuations in its net earnings (loss) before and including discontinued operations and in the fair value of its financial assets and liabilities. Interest Rate Risk Floating rate debt exposes the company to fluctuations in cash flows and net earnings (loss) before and including discontinued operations due to changes in market interest rates. Based on the existing debt balance, a one percent increase (decrease) in the underlying market interest rates would have decreased (increased) net earnings before discontinued operations by approximately $0.2? million for the year. The company continues to be exposed to fluctuations in cash flows and net earnings from discontinued operations due to changes in market interest rates on its reserve-based credit facility. Foreign Currency Exchange Rate Risk Substantially all of the company's operations are conducted in foreign jurisdictions, so the company is exposed to foreign currency exchange rate risk on most of its activities as reported in Canadian dollars (CAD) as incurred in US dollars and to a lesser extent Peruvian Nuevos Soles (PEN) and Colombian Pesos (COP). The table below shows the company's total financial instruments exposure to foreign currencies before discontinued operations: ------------------------------------------------------------------------- Per CAD USD PEN COP Balance --------------------------------------- ($000) Sheet CAD $ equivalent amounts ------------------------------------------------------------------------- Cash $ 30,994 $ 3 $ 27,930 $ 3,032 $ 29 ------------------------------------------------------------------------- Accounts receivable 6,859 114 26 4,683 2,036 ------------------------------------------------------------------------- Restricted cash 2,929 - 2,929 - - ------------------------------------------------------------------------- Long-term investments 21,501 21,501 - - - ------------------------------------------------------------------------- Accounts payable and accrued liabilities (20,908) (322) (5,923) (16) (14,647) ------------------------------------------------------------------------- Long term bank debt (16,435) (16,435) - - - ------------------------------------------------------------------------- Net financial assets (liabilities) $ 24,940 $ 4,861 $ 24,962 $ 7,699 $(12,582) ------------------------------------------------------------------------- The company estimates a 20 percent change in the Canadian Dollar against the above listed foreign currencies could be reasonably possible over a twelve month period. A 20 percent strengthening in the Canadian Dollar would result in a change to earnings before taxes and discontinued operations as follows (an equal but opposite impact to earnings before taxes and discontinued operations would result if the Canadian Dollar weakened by 20 percent): ------------------------------------------------------------------------- USD PEN COP ----------------------------- ($000) CAD $ equivalent amounts ------------------------------------------------------------------------- Increase (decrease) in earnings before taxes and discontinued operations (4,160) (1,283) 2,097 ------------------------------------------------------------------------- The company continues to have exposure to foreign currency exchange risk on its discontinued operations on oil and natural gas sales contracts as denominated in US dollars and settled in Argentine Pesos. Operating and capital expenditures are incurred in US dollars and Argentine Pesos. The revolving credit facility is denominated in US dollars, which partially limits the company's exposure in terms of cash outflows (interest expense) being inversely correlated to cash inflows (oil and gas revenues). Changes in the value of the US dollar and Argentine Pesos relative to the Canadian dollar would impact the value of the financial instruments classified in discontinued operations and would result in changes to other comprehensive income but not to net earnings. 8. SEGMENTED INFORMATION The company has corporate offices in Canada, the U.S. and Barbados (combined to comprise the corporate segment) and exploration activities in Peru and Colombia. The decision to initiate a process to dispose of the company's Argentinean interests resulted in the company's Argentinean segment being reclassified as discontinued operations as discussed in Note 4. Financial information pertaining to these operating segments is presented below. ------------------------------------------------------------------------- Corporate Colombia Peru Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Three Months Ended March 31, 2009 ------------------------------------------------------------------------- Revenue, gross $ 9 $ - $ 22 $ 31 ------------------------------------------------------------------------- Net loss before discontinued operations (3,049) (23) (49) (3,121) ------------------------------------------------------------------------- Property and equipment 276 29,269 54,681 84,226 ------------------------------------------------------------------------- Capital expenditures 9 15,005 5,960 20,974 ------------------------------------------------------------------------- Total assets before discontinued operations $ 53,009 $ 31,352 $ 62,643 $147,004 ------------------------------------------------------------------------- Three Months Ended March 31, 2008 ------------------------------------------------------------------------- Revenue, gross $ 48 $ - $ - $ 48 ------------------------------------------------------------------------- Net earnings (loss) before discontinued operations (5,457) (12) 63 (5,406) ------------------------------------------------------------------------- Property and equipment 302 820 23,025 24,147 ------------------------------------------------------------------------- Capital expenditures - 225 7,591 7,816 ------------------------------------------------------------------------- Total assets before discontinued operations $ 34,310 $ 998 $ 26,595 $ 61,903 ------------------------------------------------------------------------- 9. SUPPLEMENTARY INFORMATION (a) Per share amounts The following table summarizes the common shares used in the per share calculations: ------------------------------------------------------------------------- Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- Weighted average common shares outstanding 54,948,010 50,212,120 ------------------------------------------------------------------------- Dilutive effect of all stock options and all stock purchase warrants 247,234 1,349,398 ------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 55,195,244 51,561,518 ------------------------------------------------------------------------- As the company has recognized net losses before discontinued operations, the dilutive effect of all stock options and all stock purchase warrants became anti-dilutive causing 54,948,010 and 50,212,120 weighted average dilutive common shares outstanding to be used as the denominator in the dilutive per share net loss before discontinued operations calculation for the three months ended March 31, 2009 and 2008, respectively. (b) Net change in non-cash working capital ------------------------------------------------------------------------- For the Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Accounts receivable $ 1,286 $ (1,404) ------------------------------------------------------------------------- Prepaid expenses (184) (192) ------------------------------------------------------------------------- Accounts payable and accrued liabilities 1,330 1,428 ------------------------------------------------------------------------- Due to a related company 35 7 ------------------------------------------------------------------------- $ 2,467 $ (161) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating $ 896 $ (1,853) ------------------------------------------------------------------------- Investing 1,571 1,692 ------------------------------------------------------------------------- $ 2,467 $ (161) ------------------------------------------------------------------------- (c) Supplementary cash flow information ------------------------------------------------------------------------- For the Three Months Ended March 31 2009 2008 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Interest paid $ 106 $ 223 ------------------------------------------------------------------------- Income taxes paid $ - $ - ------------------------------------------------------------------------- 10. COMMITMENTS Contractual Commitments The company's annual commitments under service contracts for drilling, leases for office premises and other equipment and an administrative services agreement are as follows: ------------------------------------------------------------------------- Subsequent 2009 2010 2011 to 2011 Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Drilling service contracts and other leases $ 21,457 $ 20,899 $ 1,528 $ 252 $ 44,136 -------------------------------------------------------------------------

For further information:

For further information: Petrolifera Petroleum Limited: R. A. Gusella,
Executive Chairman, (403) 538-6201; Or Gary D. Wine, President and Chief
Operating Officer, (403) 539-8450; Or Kristen J. Bibby, Vice President Finance
and Chief Financial Officer, (403) 539-8450, Fax: (403) 538-6225,
inquiries@petrolifera.ca, www.petrolifera.ca

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PETROLIFERA PETROLEUM LIMITED

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