Petrolifera Petroleum reports Q2 2008 results and schedules conference call August 7, 2008, 9:00 A.M. MT



    CALGARY, Aug. 6 /CNW/ - Petrolifera Petroleum Limited (TSX: PDP) reports
that it continued to show steady progress during the second quarter and first
half of 2008. Cash flow from operations before working capital changes ("cash
flow")(1) rose for the third successive quarter, including a 13 percent
increase in the second quarter 2008 compared to the prior quarter this year.
Working capital was improved and profitability was expanded during this period
as well.

    
    Highlights are as follows:

    -  Sales on a barrel of oil equivalent basis ("boe") rose for the third
       successive quarter, with second quarter 2008 levels up 15 percent over
       fourth quarter 2007 levels
    -  Crude oil and natural gas prices both increased during the second
       quarter 2008
    -  Puesto Morales waterflood well underway, with measurable response
       beginning to materialize
    -  Two new pool discoveries made at the PME x-1002 well ("Loma Montosa
       Two zone") and at the directionally-drilled PM x-1082 well, a Sierras
       Blancas discovery; offsets are drilling or planned
    -  Balance sheet strengthened with $40 million bought deal equity
       financing completed in second quarter 2008
    -  Long-term credit facility expanded to US$70 million and progress made
       on asset-backed commercial paper ("ABCP") investments
    

    These Q2 2008 results will be subject to a Conference Call event at
9:00 a.m. MT August 7, 2008. To listen to or participate in the live
conference call please dial either (416) 644-3428 or (800) 587-1893. A replay
of the event will be available from August 7, 2008 at 11:00 a.m. MT until
August 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 21278536 followed by the
pound sign.

    
    Summary Results
    -------------------------------------------------------------------------
                        Three months ended June 30   Six months ended June 30
    -------------------------------------------------------------------------
                                              %                          %
                              2008     2007 Change       2008     2007 Change
    -------------------------------------------------------------------------
    FINANCIAL ($000 except
     per share amounts)
    Total revenue           33,622   28,105    20      60,789   75,227   (19)
    Cash flow from
     operations before
     working capital
     changes(1)             13,485   14,504    (7)     25,387   39,119   (35)
      Per share, basic(1)     0.27     0.30   (10)       0.50     0.85   (41)
      Per share, diluted(1)   0.26     0.28    (7)       0.49     0.77   (36)
    Net earnings for the
     period                  3,590    4,450   (19)      5,328   19,519   (73)
      Per share, basic        0.07     0.09   (22)       0.11     0.43   (74)
      Per share, diluted      0.07     0.09   (22)       0.10     0.38   (74)
    Capital expenditures    29,110   19,842    47      60,166   27,356   120
    Cash on hand                                       41,039   66,535   (38)
    Working capital                                    13,295   69,690   (81)
    Long-term debt                                     43,800        -   N/A
    Shareholders' equity                              168,735  120,236    40
    Total assets                                      292,882  139,054   111

    OPERATING
    Daily sales volumes
      Crude oil  and NGL
       - bbl/d               7,111    6,644     7       6,918    8,976   (23)
      Natural gas - mcf/d    5,922    1,726   243       6,483    1,792   262
      Barrels of oil
       equivalent - boe/d(2) 8,098    6,932    17       7,999    9,274   (14)
    Average selling prices
    Oil and Natural gas
     liquids- $/bbl          49.90    45.17    10       46.05    45.34     2
    Natural gas - $/mcf       2.38     1.42    68        2.28     1.48    54
    Barrels of oil
     equivalent - $/boe(2)   45.56    43.65     4       41.68    44.16    (6)

    Common shares
     outstanding (000s)
    Weighted average
      Basic                 50,273   47,816     5      50,356   45,835    10
      Diluted               51,508   51,303     0      51,619   50,997     1
    End of period
      Issued                                           54,798   50,084     9
      Fully diluted                                    58,549   53,382    10
    -------------------------------------------------------------------------
    (1) Cash flow from operations before working capital changes and cash
        flow per share do not have standardized meanings prescribed by
        Canadian generally accepted accounting principles ("GAAP") and
        therefore is unlikely to be comparable to similar measures used by
        other companies. Cash flow from operations before working capital
        changes includes all cash flow from operating activities and is
        calculated before changes in non-cash working capital. The most
        comparable measure calculated in accordance with GAAP would be net
        earnings. Cash flow from operations before working capital changes is
        reconciled with net earnings on the Consolidated Statements of Cash
        Flows and in the accompanying Management's Discussion & Analysis.
        Management uses these non-GAAP measurements for its own performance
        measures and to provide its shareholders and investors with a
        measurement of the company's efficiency and its ability to fund a
        portion of its future growth expenditures.
    (2) All references to barrels of oil equivalent (boe) are calculated on
        the basis of 6 mcf : 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.
    

    LETTER TO SHAREHOLDERS

    Petrolifera experienced steady growth during the second quarter and first
half of 2008. Sales showed solid improvement and have risen 15 percent since
the fourth quarter of 2007. Crude oil sales in the second quarter 2008 also
exceeded levels achieved in the same reporting period in 2007, reinforcing the
positive turnaround being experienced by the company as it completed its new
facilities, initiated its pressure maintenance program and continued infill
drilling programs at Puesto Morales. Second quarter sales were constrained by
adverse weather during the period, resulting in plant shutdowns due to severe
rainstorms which affected the operation of the water treatment plant and the
company's water injection program. Normal operations have been restored.
    Realized prices also showed improvement, especially during the second
quarter 2008 as the impact of higher negotiated prices for crude oil to US$47
per barrel, with some retroactivity, resulted in average crude oil prices for
the period of $49.90 per barrel. Also, natural gas prices continued to
improve, rising to $2.38 per mcf, the highest natural gas price received in
the company's history. While these prices remain well below competitive world
levels, which if received would materially impact on Petrolifera's cash flow,
the directional improvement is welcomed and signals continued upward pressure,
in our opinion.
    The company maintained an active and meaningful capital spending program
during the first half of 2008, with outlays exceeding cash flow, both in
Argentina and overall, with a significant seismic program underway in Peru and
preparations for Colombian drilling requiring capital commitments. In
Argentina, a total of 26 wells were drilled (including two wells started in
2007 and completed in 2008) during the first half of the year, with ten of
these wells during the second quarter 2008. The drilling program resulted in
19 oil wells, one natural gas well, three injectors and two wells were
abandoned, with one well on the Vaca Mahuida block awaiting testing as at
June 30, 2008. This well was cased and subsequently suspended after negative
test results. In addition to injectors drilled, another eight wells were
converted to injector status, bringing to 14 the number of injectors in the
waterflood. Two of these wells continue to produce crude oil from upper zones
while water is being injected in lower zones within the Sierras Blancas
Formation.
    Recently, certain wells in the northern portion of the Puesto Morales
Norte field have shown production increases of approximately 20 percent to
30 percent, confirming waterflood response starting to take effect in the
northern pool. We remain encouraged by this and expect a more broadly based
response to contribute to production growth throughout the balance of 2008 and
into 2009, more than offsetting what would otherwise be normal declines for
the wells in the field. As a consequence of this continuing active capital
program, total indebtedness increased. However, a late second quarter 2008
equity financing, which yielded gross proceeds of $40 million and was sold on
a bought deal basis, was completed to strengthen the company's overall
financial condition. Accordingly, Petrolifera's working capital showed
significant improvement compared to that reported at the end of the first
quarter 2008, benefiting as well from our ability to reclassify a significant
portion of our indebtedness to long term status. We still hold a significant
investment in ABCP, which is now classified as a long-term investment. This
will eventually be sold and converted to cash and a reduction of related
indebtedness.
    This stronger financial position is important as the company prepares to
embark on higher cost drilling programs in Colombia during the second half of
2008. Simultaneously, until economic conditions warrant a stronger investment
profile in Argentina, capital programs will be reduced as only one drilling
rig and one service rig remain under contract to the company and key
facilities are now in place and operational. At the same time, all outstanding
commitments on the company's Vaca Mahuida, Puesto Guevara and Gobernador
Ayalla II blocks will be fulfilled, albeit at a more measured pace than might
otherwise be undertaken. Follow-up drilling on the two new pool crude oil
discoveries at Puesto Morales x-1082 and Puesto Morales Este x-1002 will take
priority to establish the areal extent of these recently-drilled and completed
wells. Recently, the 1082 well produced at a rate of 850 bbl/d of crude oil,
so we are hopeful the 1052 offset will be equally prolific and start to
restore and accelerate our production growth in Argentina. As previously
mentioned, this should be supplemented by ongoing production improvements from
the Puesto Morales Norte field, as the company's waterflood impacts on overall
productivity and sales. It will be recalled we anticipated full impact to
occur sometime around the middle of 2009.
    In Colombia, the company continues its preparations for drilling on the
Sierra Nevada I concession at the La Pinta prospect. Original plans were to
start drilling in August 2008 but delays in receiving environmental approvals
and challenges in securing a suitable rig will likely now delay drilling
startup into September 2008. Another operator in the area had originally
promised Petrolifera use of a drilling rig, but then withdrew the offer. We
believe suitable equipment has now been located and we have worked closely
with ANH, the Colombian authority, to secure all the necessary accommodation
with respect to contract obligations for the license.
    Subsequent to the reporting period, Petrolifera converted its Turpial
Technical Evaluation Agreement ("TEA") into a License Agreement covering
substantially all of the acreage originally contained in the concession and is
in the final stages of conversion of the Sierra Nevada II TEA into the
Magdalena License. These concessions are thus firmly in Petrolifera's control
with a 100 percent interest and we are pleased with the extent and quality of
acreage and opportunities associated with our Colombian exposure. A second
well on the Sierra Nevada I License on the Brillante prospect will likely
follow the La Pinta well, which is anticipated to take between 75 and 90 days
to drill. Accordingly, shareholders will have exposure to high potential
drilling in Colombia for the balance of 2008.
    In Peru, our seismic program of 951 kilometers of 2D coverage on
Block 107 in the Ucayali Basin was completed on July 18, 2008. Processing and
interpretation is proceeding and demobilization of the crew has been
initiated, with plans to move to Maranon Block 106. Based on positive results
indicated on Block 107, we have entered into negotiations with Perupetro, the
Peruvian state agency, for a new license covering an area contiguous with
Block 107. This is anticipated to add approximately one million acres of
Petrolifera's Peruvian holdings; final terms will be disclosed when the
negotiations are completed. It now appears that drilling in Peru on Block 107
may be delayed until as late as May 2009 due to a revised timetable for an
approval of our drilling environmental impact assessment ("EIA") for the
Ucayali license. We continue to work with Perupetro and other interested
parties to accelerate this process even though there is a suspension of the
timetable of the license under this process. If scheduling permits, we intend
to utilize the rig being arranged for our Colombian program for our first
drilling in Peru in 2009 as it is helicopter-transportable.
    During the second quarter 2008 and subsequent thereto, considerable
effort was placed on resolving the ABCP dilemma. It will be recalled the
market for this commercial paper seized up in August 2007 and efforts have
been underway to resolve the loss of liquidity arising in the midst of a more
global credit crisis. To that end, the company has recently agreed to a term
sheet with a Canadian chartered bank whereby, subject to the issuance of new
notes under the reorganization plan for ABCP, which awaits approval by the
Ontario Appeal Court, Petrolifera would receive a loan facility, with an
initial term of two to three years and with four to five one-year renewals,
for an amount equivalent to 75 percent of the face value of its original
investment in ABCP. This facility would be secured by the notes and, in
exchange, Petrolifera would withdraw its participation in litigation to retain
the right to pursue further legal action against the bank. If this agreement
is crystallized, Petrolifera's overall liquidity would be improved and the
company would be positioned to dispose of or otherwise realize on its
investment and repay any advances, with surplus proceeds added to working
capital. In the interim, the company recorded a further pre-tax non-cash
impairment of $2 million during the second quarter, while still retaining
profitability.
    The company has also recently seen its reserve-backed credit facility
expanded to US$70 million, accompanied by a strengthening of the banking
syndicate providing this to Petrolifera. This is important in current markets
where access to credit is increasingly difficult, especially for junior
companies operating in international theaters.
    Subsequent to the reporting period, the company settled a dispute with
the former operator of its Puesto Morales/Rinconada concession, thereby
avoiding further significant legal expenses and distractions associated with
this type of situation.
    We were pleased to announce that on June 4, 2008 Mr. Andy Gustajtis was
appointed to the Board of Directors of the company. Andy brings extensive
capital market experience to the Board and has been appointed to the company's
Audit, Reserves and Human Resources committees. He was associated with the
early financing activity of the company and is familiar with our operations.
    Difficult capital market conditions have hurt the performance of the
company's shares in recent weeks. However, we believe that Petrolifera is on
solid ground with a strong balance sheet, solid and growing production, new
pool discoveries to be developed and high potential drilling ahead of it
during the balance of this year and continuing on into 2009. We have a solid
operating team and qualified explorers in our technical group. We continue to
examine new venture opportunities in various jurisdictions that offer
reasonably favorable terms and stable fiscal and operating regimes within
which to conduct business.

    FORWARD-LOOKING INFORMATION:

    This press release, including the Letter to Shareholders and Management's
Discussion and Analysis, contains forward-looking information, including but
not limited to future exploration and development plans, future drilling plans
and the anticipated timing associated therewith, anticipated capital
expenditures and sources of funding in respect thereof, anticipated production
growth from planned capital programs, current production and the recently
activated waterflood, and potential recovery of investments in ABCP.
Forward-looking information is not based on historical facts but rather on
Management 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. Such forward-looking information reflects
Management's current beliefs and assumptions, including but not limited to the
continued existence and operation of existing pipelines, future prices for
crude oil, natural gas and natural gas liquids, future currency and exchange
rates, the regulatory framework representing royalties, taxes and
environmental matters in the countries in which Petrolifera conducts its
business and Petrolifera's ability to obtain qualified staff and equipment in
a timely and cost efficient manner to meet Petrolifera's demand 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 in 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
environmental risks), the risk of commodity price and foreign exchange rate
fluctuations, the uncertainty associated with negotiating with foreign
governments and 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.
    Forecast capital expenditures are based on Petrolifera's current budgets
and development plans which are subject to change based on commodity prices,
market conditions, drilling success and potential timing delays. Petrolifera's
capital budget has been prepared based upon anticipated costs for equipment
and services which are subject to fluctuation based upon market conditions and
availability. Additionally, forecast capital expenditures do not include
capital required to pursue future acquisitions. Anticipated production growth
has been estimated based on the proposed drilling program with a success rate
based upon historical drilling success and an evaluation of the company's
waterflood program. Indicated flow rates from production testing are not
necessarily indicative of sustainable production rates for such wells.
    Recovery of the company's investment in ABCP is dependent on the value of
the underlying assets held by the applicable trusts, the restoration of
liquidity in this market and approval of the proposed restructuring proposal.
There can be no assurance as to the timing or extent of recovery of this
investment.
    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.
Forward-looking information contained in this press release is made as of the
date hereof and is subject to change. The company assumes no obligation to
revise or update forward-looking information to reflect new circumstances,
except as required by law.

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

    The following is dated as of August 6, 2008 and should be read in
conjunction with the unaudited consolidated financial statements of
Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the six
months ended June 30, 2008 as contained in this interim report and the MD&A
and audited financial statements for the years ended December 31, 2007 and
2006 as contained in the company's 2007 Annual Report. Additional information
relating to Petrolifera, including its Annual Information Form for the year
ended December 31, 2007 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 contains forward-looking information including
but not limited to future exploration and development plans, future drilling
plans and the anticipated timing associated therewith, anticipated capital
expenditures and sources of funding in respect thereof, anticipated production
growth from planned capital programs, current production and the recently
activated waterflood, and potential recovery of investments in ABCP. See
"Outlook" for a discussion of the forward-looking information contained in
this MD&A. 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. Boes may be
misleading, particularly if used in isolation.

    
    FINANCIAL AND OPERATING REVIEW
    SALES VOLUMES, PRICING AND REVENUE
    -------------------------------------------------------------------------
                                        Three months ended  Six months ended
                                                   June 30           June 30
    -------------------------------------------------------------------------
    ($000 except where noted)                2008     2007     2008     2007
    -------------------------------------------------------------------------
    Daily sales volumes
      Crude oil and NGL - bbl/d             7,111    6,644    6,918    8,976
      Natural gas - mcf/d                   5,922    1,726    6,483    1,792
      Total - boe/d                         8,098    6,932    7,999    9,274
    Average selling prices
      Crude oil and NGL - $ per bbl         49.90    45.17    46.05    45.34
      Natural gas - $ per mcf                2.38     1.42     2.28     1.48
      Revenue per boe                       45.56    43.65    41.68    44.16
    Petroleum and natural gas sales
     ($000)                                33,569   27,537   60,683   74,135
    Interest and other income ($000)           53      568      106    1,092
    -------------------------------------------------------------------------
    Total revenue ($000)                   33,622   28,105   60,789   75,227
    -------------------------------------------------------------------------
    

    Petroleum and natural gas revenues for the six months ended June 30, 2008
were $60.7 million (six months ended June 30, 2007 - $74.1 million) on sales
volumes of 7,999 boe/d (six months ended June 30, 2007 - 9,274 boe/day), a
year-over-year decrease of 19 percent for revenue and of 14 percent on
volumes. Petroleum and natural gas revenues for the second quarter of 2008
were $33.6 million on sales volumes of 8,098 boe/d, an increase of 22 percent
compared to the second quarter 2007 revenues of $27.5 million, with a sales
volume increase of 17 percent over 6,932 boe/d compared to the second quarter
2007. The substantial increase in revenue compared to the second quarter of
2007 resulted from higher crude oil, natural gas liquids and natural gas
production and increased pricing for the company's sales. All sales were from
the company's Puesto Morales/Riconanda block in Argentina.
    Petroleum and natural gas revenues in the second quarter 2008 were up
24 percent from the first quarter of 2008, due to increased crude oil and
natural gas liquids production volumes and an increase in the price received
for crude oil sales from US$42.00 per barrel to US$47.00 per barrel. The
prices became effective May 1, 2008, with retroactive adjustment for previous
oil sales from $US42.00 per barrel to approximately $US45.00 per barrel.
    Crude oil sales volumes decreased in the first half of 2008 from the
first half of 2007. Natural production declines at Puesto Morales Norte in
Argentina were experienced until the reservoir is re-pressurized with the
waterflood program initiated in January 2008. Even though the production
response from the recently implemented pressure maintenance program was
limited by June 30 2008 new drilling on the Puesto Morales/Rinconada
Concession has contributed to levels above year-end 2007 exit rates.
    For the six months ended June 30, 2008, sales of crude oil represented
86 percent of the company's sales volumes compared to 97 percent for the six
months ended June 30, 2007. The company's realized crude oil price was up two
percent to average $46.05 per barrel for the six months ended June 30, 2008
(six months ended June 30, 2007 - $45.34 per barrel). Second quarter average
realized crude oil prices were up ten percent compared to the second quarter
of 2007. Natural gas prices increased 54 percent to average $2.28 per mcf for
the first six months of 2008, reflecting some relaxation of regulated
Argentinean natural gas prices, which are still substantially below prices
prevailing in North American markets. Second quarter natural gas prices
increased 68 percent to $2.38 per mcf compared to $1.42 per mcf in the second
quarter of 2007. Argentinean crude oil selling prices reflect world prices for
the respective quality of oil, adjusted for the impact of Argentinean export
taxes on domestic sales prices. All of Petrolifera's production is sold in
domestic markets. Natural gas prices have been improving and are expected to
continue improving due to market conditions and new policy initiatives aimed
at market deregulation for industrial sales, although the effect of this
improved pricing has been somewhat offset by the strengthening of the Canadian
dollar relative to the Argentine peso, which reduces the realization expressed
in Canadian dollar terms.
    During the second quarter the company negotiated with a well-established,
investment grade, state-owned oil company to increase its crude oil selling
price from US$42.00 per barrel to US$47.00 per barrel, effective May 1, 2008.
Additionally a retroactive payment for oil previously sold at US$42.00 per
barrel from mid November 2007 to April 30, 2008 was secured. The company also
negotiated an increase to US$2.40/mmbtu per natural gas sales volumes sold to
a local gas marketing compnay during the second quarter 2008.
    Petroleum and natural gas sales for the three months ended June 30, 2008
were up 24 percent from the first quarter 2008, mainly attributable to higher
production, higher realized crude oil and natural gas prices and the
retroactive crude oil pricing agreement.
    Interest and other income was $0.1 million in the six months ended
June 30, 2008 (six months ended June 30, 2007 - $1.1 million) and $0.1 million
for the three months ended June 30, 2008 (three months ended June 30, 2007 -
$0.6 million) related to interest earned on short-term cash deposits.

    ROYALTIES

    Royalties represent charges against production or revenue by governments
and landowners. Included in royalties are revenue taxes levied by provincial
jurisdictions. Royalties in the first six months of 2008 were $8.1 million
($5.53 per boe) or 13 percent of oil and natural gas revenue, compared to
$9.8 million ($5.81 per boe) or 13 percent in the first six months of 2007.
Royalties for the second quarter of 2008 were $4.7 million ($6.33 per boe) or
14 percent of oil and natural gas revenue compared to $3.9 million ($6.19 per
boe) or 14 percent in the second quarter of 2007.

    
    OPERATING COSTS AND NETBACKS
    Company Netbacks(1)
    -------------------------------------------------------------------------
                                         Three months ended June 30
    -------------------------------------------------------------------------
    ($000 except per boe amounts)       2008                    2007
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Average daily production
     (boe/d)                            8,098                   6,932
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 33,569    $  45.55    $ 27,537    $  43.65
    Interest and other income         53        0.07         568        0.90
    Royalties                     (4,666)      (6.33)     (3,906)      (6.19)
    -------------------------------------------------------------------------
    Net revenue                   28,956       39.29      24,199       38.36
    Operating costs               (6,340)      (8.60)     (3,507)      (5.56)
    -------------------------------------------------------------------------
    Corporate netback           $ 22,616    $  30.69    $ 20,692    $  32.80
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                          Six months ended June 30
    -------------------------------------------------------------------------
    ($000 except per boe amounts)       2008                    2007
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Average daily production
     (boe/d)                            7,999                   9,274
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 60,683    $  41.68    $ 74,135    $  44.16
    Interest and other income        106        0.07       1,092        0.65
    Royalties                     (8,050)      (5.53)     (9,761)      (5.81)
    -------------------------------------------------------------------------
    Net revenue                   52,739       36.22      65,466       39.00
    Operating costs              (12,265)      (8.42)     (8,119)      (4.84)
    -------------------------------------------------------------------------
    Corporate netback           $ 40,474    $  27.80    $ 57,347    $  34.16
    -------------------------------------------------------------------------
    (1) Calculated by dividing related revenue and costs by total boe sold,
        resulting in an overall company netback. 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. 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 can be
        found in the Net Earnings table.
    

    Petrolifera's corporate netbacks were down 19 percent over those recorded
in the first six months of 2007 and were down four percent for the second
quarter of 2008 compared to the second quarter of 2007. The first half year
over year decrease primarily reflects a decrease in the selling price of crude
oil, higher operating expenses and lower interest income. The second quarter
2008 over second quarter 2007 decrease primarily reflects an increase in
operating expenses offset by an increase in revenue per boe. Petrolifera's
calculated unit netback for the second quarter and the first six months of
2008 was a healthy 67 percent of selling price per boe.
    Operating costs in the first half of 2008 increased 51 percent in total
and 74 percent on a per unit basis from 2007 levels. The increases are mainly
attributable to a significant increase in the number of wells being operated
and the number of wells on pump or that require servicing on a more frequent
basis, inflationary pressures and start-up costs related to new field
facilities. Petrolifera anticipates unit operating costs will be more stable
after the new field facilities are optimally utilized, which is expected to
occur during the remainder of 2008 and throughout 2009.
    Operating costs in the second quarter of 2008 increased seven percent in
total and four percent on a per unit basis compared to the first quarter of
2008.

    GENERAL AND ADMINISTRATIVE EXPENSES

    General and administrative ("G&A") expenses were $4.1 million in the
first six months of 2008 compared to $3.2 million for the first six months of
2007. G&A was $2.0 million in the second quarter of 2008 compared to
$1.8 million for the second quarter of 2007. These costs primarily consist of
management and administrative salaries, legal and professional fees,
insurance, travel and other administrative expenses. The increase from 2007 is
primarily attributable to increased staffing levels to handle the expanded
nature of the company's operations and increased legal costs associated with a
dispute subject to an arbitration proceeding. This was resolved subsequent to
the reporting period.
    On a per boe basis, G&A was $2.81 per boe of sales volume for the first
six months of 2008 compared to $1.93 per boe for the first six months of 2007.
G&A of $2.5 million was capitalized in the first six months of 2008 (first six
months of 2007 - $0.6 million). Non-cash stock-based compensation costs of
$3.1 million were recorded in the first six months of 2008 (first six months
of 2007 - $4.2 million), reflecting the calculated value of stock options
granted and vested during the period, options previously granted that vested
during the period and options that were forfeited during the period. The
company grants stock options on an annual basis to existing employees and to
new hires when employed.

    FOREIGN EXCHANGE

    The impact of fluctuations in the Argentinean peso and 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 $1.2 million in the first six months of 2008 (first six
months of 2007 - $4.0 million charge) and a charge of $1.1 million for the
second quarter of 2008 (second quarter 2007 - $3.9 million charge). The
company's main exposure to foreign currency risk relates to the pricing of
crude oil sales, operating costs and capital expenditures which are
denominated in US dollars and Argentinean pesos.

    FAIR VALUE IMPAIRMENT - ABCP

    In recognition of the loss of liquidity in the company's ABCP investment,
provision has been made in the financial statements for a non-cash fair value
impairment charge of $3.5 million for the first half of 2008. The cumulative
effect of the current year and 2007 impairments represents approximately
26 percent of the face value of the investment at the time of the loss of
liquidity in the Canadian commercial paper market. The basis for this charge
is explained under "Long-Term Investments." It is not known when or whether
these amounts can or will be recovered.

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

    DD&A is calculated using the unit-of-production method based on total
estimated proved reserves. DD&A in the first six months of 2008 was
$11.1 million (first six months of 2007 - $8.8 million) or $7.60 per boe
(first six months of 2007 - $5.26 per boe). DD&A was $6.4 million or $8.89 per
boe for the second quarter of 2008 (second quarter 2007 - $3.4 million or
$5.45 per boe). Accretion expense for the first six months of 2008, which is
included in DD&A expense, was $0.2 million (2007 - $0.1 million) to accrete
the company's estimated asset retirement obligation. These charges will
continue at appropriate levels in the future to accrete the currently booked
discounted liability of $6.4 million over the estimated remaining economic
life of the company's oil and gas properties. Capital costs of $24.5 million
related to unevaluated properties in Argentina and for major development
projects and other assets in the pre-production stage, principally related to
Peruvian assets, have been excluded from depletable costs (2007 - $7.5
million). The increase in both the three and six month comparison periods was
mainly due to the higher cost of additions and infrastructure related to the
Argentina production. Additionally, estimated future development costs of $8.9
million for proved undeveloped reserves were included in the depletion
calculation.

    CEILING TEST

    Oil and gas companies are required to compare the recoverable value of
their oil and gas assets to their recorded carrying value at the end of each
reporting period. Excess carrying values over fair value are to be written off
against earnings. No write-down was required in the first six months of 2008
or for 2007.

    TAXES

    The current income tax provision of $7.8 million for the first six months
of 2008 (first six months of 2007 - $14.0 million), primarily related to
income taxes payable in Argentina. Additionally, a future income tax provision
of $0.8 million for the six month period (2007 - provision of $2.6 million)
was recorded to recognize changes in tax pool balances. The increase in the
effective tax rate to 62 percent for the first half of 2008 compared to 46
percent for the first half of 2007 was primarily due to the tax effect in
Canada of the impairment recorded on the company's investment in ABCP. Taxes
other than income taxes of $1.3 million (2007 - $0.9 million) represent taxes
charged on all banking transactions in Argentina for the six month period.
    Current income tax provision for the second quarter of 2008 was
$5.2 million (second quarter of 2007 - $3.9 million) and a future income tax
recovery of $0.5 million (second quarter of 2007 - provision of $1.5 million)
for a total income tax provision in the second quarter of $4.6 million (second
quarter of 2007 - $5.4 million). Taxes other than income taxes were
$0.8 million (2007 - $0.5 million) for the second quarter of 2008.

    
    NET EARNINGS AND SHARES OUTSTANDING
    -------------------------------------------------------------------------
                                         Three months ended June 30
    -------------------------------------------------------------------------
    ($000 except per boe)               2008                    2007
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Netback                     $ 22,616    $  30.69    $ 20,692    $  32.80
    General & administrative      (2,024)      (2.75)     (1,811)      (2.87)
    Stock-based compensation        (731)      (0.99)     (1,238)      (1.96)
    Finance charges               (1,303)      (1.77)         (6)      (0.01)
    Foreign exchange (loss)       (1,118)      (1.52)     (3,887)      (6.16)
    Fair value impairment - ABCP  (2,002)      (2.72)          -           -
    Taxes other than income
     taxes                          (816)      (1.11)       (508)      (0.81)
    Depletion, depreciation
     and accretion                (6,388)      (8.67)     (3,438)      (5.45)
    Income tax provision          (4,644)      (6.30)     (5,354)      (8.49)
    -------------------------------------------------------------------------
    Net earnings for the period $  3,590    $   4.86    $  4,450    $   7.05
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                          Six months ended June 30
    -------------------------------------------------------------------------
    ($000 except per boe)               2008                    2007
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Netback                     $ 40,474    $  27.80    $ 57,347    $  34.16
    General & administrative      (4,086)      (2.81)     (3,232)      (1.93)
    Stock-based compensation      (3,129)      (2.15)     (4,159)      (2.48)
    Finance charges               (2,223)      (1.53)        (29)      (0.02)
    Foreign exchange (loss)       (1,208)      (0.83)     (4,020)      (2.39)
    Fair value impairment - ABCP  (3,492)      (2.40)          -           -
    Taxes other than income
     taxes                        (1,322)      (0.91)       (946)      (0.56)
    Depletion, depreciation
     and accretion               (11,057)      (7.60)     (8,834)      (5.26)
    Income tax provision          (8,629)      (5.93)    (16,608)      (9.89)
    -------------------------------------------------------------------------
    Net earnings for the period $  5,328    $   3.66    $ 19,519    $  11.63
    -------------------------------------------------------------------------
    

    In the first six months of 2008 the company reported net earnings of
$5.3 million (first six months of 2007 - $19.5 million), which equates to
$0.11 per weighted average basic and $0.10 per weighted average diluted share
outstanding compared to $0.43 per weighted average basic and $0.38 per
weighted average diluted share outstanding for the first six months of 2007.
Net earnings for the second quarter were $3.6 million (first six months of
2007 - $4.5 million), which equates to $0.07 per weighted average basic and
$0.07 per weighted average diluted share outstanding compared to $0.09 per
weighted average basic and $0.09 per weighted average diluted share
outstanding for the second quarter of 2007. Net earnings for three months and
six months ended June 30, 2008 were adversely affected by the charge for the
impairment of the company's investment in ABCP, resulting in a significant
non-cash charge against earnings for both periods and increased financing
charges related to the increased bank debt.
    In the first six months of 2008, the weighted average number of common
shares outstanding was 50.4 million (first six months of 2007 - 45.8 million).
In the first six months of 2008, 1.2 million additional shares were included
in the diluted earnings per share calculations related to the potentially
dilutive effect of outstanding options and warrants. The weighted average
number of common shares outstanding was 50.3 million (2007 - 47.8 million) for
the second quarter of 2008 and an additional 1.2 million shares were included
for the diluted per share calculations related to the potentially dilutive
effect of outstanding options and warrants.
    As at the close of business on August 5, 2008, the company had the
following securities issued and outstanding:

    
    -  54,798,010 common shares;
    -  160,000 warrants; and
    -  3,608,567 stock options
    

    Details of the exercise rights and terms of the warrants and options are
noted in the Consolidated Financial Statements, included in this Interim
Report.

    CAPITAL RE

SOURCES, CAPITAL EXPENDITURES AND LIQUIDITY Cash flow from operations before working capital changes ("cash flow"), cash flow per share and cash flow per boe do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow is reconciled with net earnings on the Consolidated Statement of Cash Flows and below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding; cash flow per boe is calculated by dividing cash flow by the quantum of crude oil and natural gas (expressed in boe) sold in the period. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. Reconciliation of net earnings to cash flow from operations before working capital changes: ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings for the period $ 3,590 $ 4,450 $ 5,328 $ 19,519 Add (deduct) Stock-based compensation 731 1,238 3,129 4,159 Depletion, depreciation, and accretion 6,388 3,438 11,057 8,834 Future income tax provision (recovery) (538) 1,491 787 2,587 Amortization of deferred finance charges 194 - 386 - Foreign exchange (gain) loss 1,118 3,887 1,208 4,020 Fair value impairment - ABCP 2,002 - 3,492 - ------------------------------------------------------------------------- Cash flow from operations before working capital changes $ 13,485 $ 14,504 $ 25,387 $ 39,119 ------------------------------------------------------------------------- Cash flow in the first six months of 2008 was $25.4 million (first six months of 2007 - $39.1 million) or $0.50 per weighted average basic share and $0.49 per weighted average diluted share, (2007 - $0.85 per weighted average basic share and $0.77 per weighted average diluted share). Cash flow in the second quarter was $13.5 million (second quarter 2007 - $14.5 million) which equates to $0.27 per weighted average basic share and $0.26 per weighted average fully diluted share (2007 - $0.30 per weighted average basic share and $0.28 per weighted average fully diluted share). Equity Financing On June 11, 2008 the company announced that it entered into a financing agreement with a syndicate of underwriters led by RBC Capital Markets to issue 4,445,000 common shares ("Common Shares") at $9.00 per Common Share, on a "bought deal" basis for gross proceeds of approximately $40 million. The underwriters were granted an over-allotment option to purchase up to an additional 666,750 Common Shares on the same terms and conditions, exercisable in whole or in part up to 30 days following closing. This financing was closed on June 27, 2008 and the over-allotment option was not exercised. Proceeds of the bought deal financing are summarized as follows: ------------------------------------------------------------------------- ($000s) ------------------------------------------------------------------------- Gross proceeds $ 40,005 Underwriter's commissions and issue costs 2,253 ------------------------------------------------------------------------- Net funds available for capital expenditure program 37,752 ------------------------------------------------------------------------- Capital Expenditures ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Argentina $ 21,963 $ 17,805 $45,203 $24,655 Colombia 522 203 747 203 Peru 6,625 1,820 14,216 2,450 Corporate - 14 - 48 ------------------------------------------------------------------------- Total capital expenditures $ 29,110 $ 19,842 $ 60,166 $ 27,356 ------------------------------------------------------------------------- Capital spending exceeded cash flow, resulting in an increase in bank debt compared to December 31, 2007. Nevertheless, Petrolifera was in a strong financial position at June 30, 2008 with significant cash flow, $41.0 million of cash, $13.3 million of working capital and available debt capacity. Capital expenditures for the six months ended June 30, 2008 totaled $60.2 million (six months ended June 30, 2007 - $27.4 million). In Argentina the company drilled 26 wells (including two wells started in 2007 and completed in 2008) in the first half of the year with 10 of these wells in the second quarter. The drilling program resulted in 19 oil wells, one natural gas well, three injectors and two wells abandoned with one well awaiting testing at June 30, 2008 which was subsequently suspended after negative test results. In Peru the company continued to acquire seismic data on Block 107 and was advancing the Seismic EIA for the planned Block 106 seismic acquisition program scheduled for later this year. In Colombia the company continued preparations for the planned exploration drilling later this year. The company's remaining 2008 capital program includes exploratory and development drilling in Argentina, exploratory drilling and seismic in Colombia and seismic acquisition and interpretation in Peru. The company anticipates it has sufficient cash balances, cash flow and available credit to fund these planned capital expenditures. Required funds are being moved among Argentina, Barbados, Canada, Colombia and Peru as needed. The company's only financial instruments are cash and cash equivalents, accounts receivable, accounts payable, debt and income taxes payable. It maintains no off-balance sheet financial instruments. CREDIT FACILITIES In 2007 the company entered into a US$100 million reserve-based revolving credit facility with an initial availability of US$60 million. The initial facility term was for three years, bears interest at LIBOR plus a margin, is secured by the pledge of the shares of Petrolifera's subsidiaries and has a provision for a borrowing base adjustment every six months, with the next adjustment to be calculated based on information as at July 1, 2008. Remaining deferred financing costs of $1.8 million related to this facility are being amortized over the remaining term of the facility. During the second quarter of 2008, the availability of the reserve-based facility of this facility was increased to US$70 million based on reserves as at December 31, 2007. The company classifies drawings under this reserve-based facility that relate to the Argentina operations as long-term debt as repayment is not required within one year under the terms of the facility agreement. Drawings made under this reserve-based facility related to operations outside of Argentina are classified as current bank debt as the facility agreement allows for repayment of the loans and as it is the intention of the company to repay these loans within the next twelve months. In late 2007, the company established an $18 million line of credit with a Canadian chartered bank. The line of credit bears interest at a floating rate and is secured by the ABCP investments. As at June 30, 2008 the reserve based facility had $58.9 million outstanding with $43.8 million classified as long-term bank debt and $15.1 million classified as bank debt. The line of credit facility had $16 million outstanding classified as bank debt. Interest expense on the facilities for the six months ended June 30, 2008 was $1.7 million (six months ended June 30, 2007 - Nil) and was $1.0 million for the second quarter of 2008 (second quarter 2007 - Nil). Unused credit facilities as at June 30, 2008 were $14.5 million. Subsequent to June 30, 2008 the company agreed to a term sheet with a Canadian chartered bank, whereby, subject to the issuance of new notes under the reorganization plan for ABCP, which awaits approval by the Ontario Appeal Court (see Long-Term Investments), Petrolifera would receive a loan facility, with an initial term of two to three years with four to five one-year renewals. This facility would be secured by the ABCP notes and in exchange, Petrolifera would withdraw its participation in litigation to retain the rights to pursue further legal action against the bank. LONG-TERM INVESTMENTS Due to the early success of the Argentinean drilling program since December 2005, after the company completed its initial public offering, significant cash balances were retained in Petrolifera's bank accounts. These funds were largely kept in Canada for capital preservation and security. In mid-2006 the company commenced a program to invest its surplus funds in high quality, highly rated, liquid commercial paper with a primary emphasis on security of capital. Investments were made in R-1 High rated ABCP, as rated by Dominion Bond Rating Service, sold to us by the money market facilities of a Canadian chartered bank with whom we held bank accounts. These investments were made in more than one issuing entity, were made for various time periods and were acquired to earn a reasonable return in relation to prevailing market conditions. On maturity, proceeds including earned interest were generally reinvested on a regular basis. In August 2007 the Canadian third-party ABCP market experienced severe liquidity problems. This has caused the conduits that issued the notes to default on the redemption of the notes. As a result, holders could not receive their cash plus interest at maturity. On September 6, 2007 a panel of banks, asset providers, and major investors formed the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper ("Pan-Canadian Committee") to oversee a proposed restructuring process. The proposed restructuring called for the ABCP to be converted into longer term floating rate notes which more closely match the maturities of the underlying assets. On March 17, 2008 the Pan-Canadian Committee made the restructuring proposal by filing a CCAA restructuring proposal whereby the company's notes will be exchanged for several classes of notes with maturities that better match the maturities of the underlying assets. On April 25, 2008, the noteholders voted in favour of the Pan-Canadian Committee restructuring proposal and on June 5, 2008 the court sanctioned the restructuring plan. In late June 2008, the Court of Appeal of Ontario heard motions from various noteholders seeking leave to appeal and an appeal of the sanctioning of the proposed restructuring. Quoted market values of the ABCP are not available due to the market disruption that is currently paralyzing the ABCP market. Management has therefore estimated the fair value of the owned ABCP, which were issued by Apsley Trust and MMAI-I Trust, based on a probabilistic recovery of principal and interest 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 June 30, 2008. 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 ABCP is an approximation of the risk-free rate for the expected life of the ABCP notes to be received. As the rate used for discounting is an approximation of the risk-free rate, all other risks have been incorporated in the estimated probability adjusted expected outcomes. This methodology applies all risking information into the various scenarios and discounts the fully risked cash flow stream only for the time value of money. The recovery factors used were as follows: ------------------------------------------------------------------------- Face Value Capital Interest of Notes Capital Interest Weighted Weighted Dis- Class of Expected Recovery Recovery Average Average Term count Note ($000s) Range Range Recovery Recovery (years) Rate ------------------------------------------------------------------------- A-1 $14,603 0-95% 0-75% 91% 70% 5-8 3.62% ------------------------------------------------------------------------- A-2 13,246 0-90% 0-70% 82% 56% 8 3.62% ------------------------------------------------------------------------- B 2,281 0-75% 0-50% 71% 47% 8 3.62% ------------------------------------------------------------------------- C 932 0-50% 0-50% 46% 39% 8 3.62% ------------------------------------------------------------------------- IA Tracking 6,638 0-75% 0-50% 61% 35% 8 3.62% ------------------------------------------------------------------------- Total $37,700 ------------------------------------------------------------------------- Based on the above approach the fair value of the investment in ABCP is estimated to be $27.9 million which is an impairment of $3.5 million for the six months ended June 30, 2008. For the quarter ended June 30, 2008 the impairment recorded is $2.0 million or approximately 7 percent of the carrying value of the ABCP. This impairment brings the total impairment of the ABCP recorded to date to approximately 26 percent of the original cost of the investment. As at June 30, 2008, included in long-term investments were ABCP with a face value of $37.7 million and a carrying value of $27.9 million. These investments are classified as held for trading and are carried at fair value which is assessed each reporting date. The theoretical fair value of the company's ABCP could range from $21.2 million to $33.4 million using the valuation methodology described above with alternative reasonably possible assumptions. The company anticipates that it presently has sufficient cash resources and available credit to satisfy obligations as they come due. Assuming the ABCP problems are restructured during 2008 and normal liquidation for cash occurs, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts. The outcome of the restructuring process, actual timing and amount ultimately recoverable from these notes may differ materially from this estimate which would impact the company's earnings. LEGAL PROCEEDINGS Petrolifera was a party to an arbitration proceeding initiated by the former contract operator of the Puesto Morales/Rinconada block. The former operator was seeking financial compensation including damages for wrongful dismissal. Subsequent to the end of the quarter, these legal proceedings have been resolved and the consideration paid is not material to the company. RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS Under the terms of an Administrative Agreement with Connacher Oil and Gas Limited ("Connacher"), which was executed during the quarter with effect to January 1, 2008, Connacher will provide certain administrative services necessary or appropriate upon the direction of the company. The fee for this service is $15,000 per month. From time to time Connacher also paid bills on behalf of Petrolifera, for which it is reimbursed. Connacher also provided certain support and services to Petrolifera in its pursuit of exploration opportunities in Colombia, for which it will be indemnified and reimbursed without further economic interest in the secured opportunities. The Executive Chairman of the company is the President and Chief Executive Officer of Connacher. SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING ESTIMATES Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in these judgments and estimates may have a material impact on the company's financial results and condition. The following discusses such accounting policies and is included in the MD&A to aid the reader in assessing the significant accounting policies and practices of the company and the likelihood of materially different results being reported. Management reviews its estimates regularly. The emergence of new information and changed circumstances may result in changes to estimates which could be material and the company might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies. The following assessment of significant accounting polices is not meant to be exhaustive. Oil and Gas Reserves Under Canadian Securities Regulators' "National Instrument 51-101-Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. In accordance with this definition, the level of certainty should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated reserves. In the case of probable reserves, which are less certain to be recovered than proved reserves, NI 51-101 states that it must be equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. Possible reserves are those reserves less certain to be recovered than probable reserves. There is at least a 10 percent probability that the quantities actually recovered will exceed the sum of proved plus probable plus possible reserves. The company's oil and gas reserve estimates are made by independent reservoir engineers using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, reservoir performance or a change in the company's plans. The reserve estimates are also used in determining the company's borrowing base for its credit facilities and may impact the same upon revision or changes to the reserve estimates. The effect of changes in proved oil and gas reserves on the financial results and position of the company is described under the heading "Full Cost Accounting for Oil and Gas Activities". Full Cost Accounting for Oil and Gas Activities The company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether successful or not. The aggregate of net capitalized costs and estimated future development costs is amortized using the unit-of-production method based on estimated proved oil and gas reserves. IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2008, the company adopted CICA Handbook sections 1535, 3031, 3862 and 3863 relating to Capital Disclosures, Inventories, Financial Instruments - Disclosures and Financial Instruments - Presentation, respectively. Under section 1535, the company is required to disclose its objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. Note 5 contains further disclosures with respect to this standard. Under section 3031, the measurement of cost and cost formulas for inventories have been revised, along with additional disclosure requirements. The adoption of this section has had no impact on the company's consolidated financial statements, as inventories were already being measured in a manner permitted under the new standard. Under section 3862, the company is required to disclose the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments, and how those risks are managed. Note 5 contains further disclosures with respect to this standard. Under section 3863, further guidance is provided on the classification of financial instruments as liabilities vs. equity, and when netting of financial assets and financial liabilities is appropriate. As of January 1, 2009, the company will be required to adopt CICA Handbook section 3064, Goodwill and Intangible Assets, replacing 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. The new standard establishes 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. The company is currently evaluating the impact of the adoption of this new section. Over the next three years the CICA will adopt its new strategic plan for the direction of accounting standards in Canada, which was ratified in January 2006. As part of the plan, Canadian GAAP for public companies will converge with International Financial Reporting Standards ("IFRS") , with an expected effective date of January 1, 2011. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS. COMMITMENTS, CONTINGINCIES, GUARANTEES, CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS In 2005 Petrolifera acquired two significant oil and gas exploration licenses in Peru. The licenses have a total US$51.9 million financial commitment to complete negotiated work programs on the two licenses over seven years. The company has the right to withdraw from the licenses at the end of each period associated with the term of the licenses. The first license term for Block 106 ended in 2007 and the company has met its commitment and is currently in the second license term with a commitment to invest a minimum of US$1.6 million in this term. These expenditures are budgeted to be fully discharged in 2008. In Block 107, the company is in the first term of the license and expects to complete all the required work commitments for the term during 2008. The company has issued letters of credit in the total amount of US$2.3 million to secure the capital expenditure requirements associated with the two exploration licenses in Peru. In 2007 the Company was granted three concessions comprised of one license and two technical evaluation agreements (TEA) in Colombia with a total work commitment of US$5.7 million over a two year period. These work commitments are budgeted to be completed during 2008. The company has issued letters of credit in the total amount of US$0.6 million in support of these work commitments. In Argentina the company has total gross work commitments of US$54.0 million over the next three years related to the Vaca Mahuida, Puesto Guevara and Gobernador Ayala II blocks. A portion of the Argentinean work commitments related to the Vaca Mahuida block has been farmed out to a third party. Additionally, the company has various guarantees and indemnifications in place in the ordinary course of business, none of which are expected to have a significant impact on the company's financial statements or operations. The company's annual commitments under service contracts for drilling, leases for office premises, various operating costs, software license agreements and other equipment are as follows: ------------------------------------------------------------------------- Contractual Subsequent Obligations 2008 2009-2011 2012-2013 to 2013 Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Service contracts and other $ 7,138 $12,173 $ - $ - $19,311 ------------------------------------------------------------------------- Total $ 7,138 $12,173 $ - $ - $19,311 ------------------------------------------------------------------------- The company has no off balance sheet financing arrangements. DISCLOSURE CONTROLS AND PROCEDURES Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed, summarized and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. The company's Executive Chairman, President and Chief Operating Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this MD&A, that the company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure. INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the company is responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. There have been no changes in the company's system 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. It should be noted that while the company's Executive Chairman, President and Chief Operating Officer and Chief Financial Officer believe that the company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, and that the internal controls over financial reporting are adequately designed, they do not expect that the financial disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. In reaching a reasonable level of assurance, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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 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 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. 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. 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 OUTLOOK We believe that Petrolifera is on solid ground with a solid balance sheet, solid and growing production, new pool discoveries to be developed and high potential drilling ahead of it during the balance of the year and throughout 2009. Petrolifera does not disclose proforma guidance although it discloses planned capital budgets. The company's revised budget now totals approximately $108 million, with approximately $65 million being allocated to Argentina, $10 million being allocated to Colombia, and $33 million being allocated to Peru. Forecast operating cash flow from operations, available credit and the proceeds from the recently completed bought deal financing are anticipated to be sufficient to finance the remaining 2008 capital spending program. This MD&A contains forward-looking information, including but not limited to future exploration and development plans, future drilling plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the recently activated waterflood, and potential recovery of investments in ABCP. Forward-looking information is not based on historical facts but rather on management 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. Such forward-looking information reflects management's current beliefs and assumptions, including but not limited to the continued existence and operation of existing pipelines, future prices for crude oil, natural gas and natural gas liquids, future currency and exchange rates, the regulatory framework representing royalties, taxes and environmental matters in the countries in which Petrolifera conducts its business and Petrolifera's ability to obtain qualified staff and equipment in a timely and cost efficient manner to meet Petrolifera's demand 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 in 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 environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and 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. Forecast capital expenditures are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success and potential timing delays. Petrolifera's capital budget has been prepared based upon anticipated costs for equipment and services which are subject to fluctuation based upon market conditions and availability. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production growth has been estimated based on the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the company's waterflood program. Indicated flow rates from production testing are not necessarily indicative of sustainable production rates for such wells. Recovery of the company's investment in ABCP is dependent on the value of the underlying assets held by the applicable trusts, the restoration of liquidity in this market and approval of the proposed restructuring proposal. There can be no assurance as to the timing or extent of recovery of this investment. 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. Forward-looking information contained in this press release is made as of the date hereof and is subject to change. The company assumes no obligation to revise or update forward-looking information to reflect new circumstances, except as required by law. QUARTERLY RESULTS(4) ------------------------------------------------------------------------- 2006 2007 ------------------------------------------------------------------------- Three months ended Three months ended ------------------------------------------------------------------------- Sept 30 Dec 31 Mar 31 Jun 30 Sept 30 Dec 31 ------------------------------------------------------------------------- Financial results ($000 except per share amounts) - unaudited ------------------------------------------------------------------------- Total revenue 33,157 45,153 47,122 28,105 31,730 27,266 ------------------------------------------------------------------------- Cash flow from operations before working capital changes(1) 18,384 18,495 24,615 14,504 18,619 10,707 ------------------------------------------------------------------------- Basic, per share(1) 0.46 0.42 0.56 0.30 0.37 0.21 ------------------------------------------------------------------------- Diluted, per share(1) 0.38 0.35 0.49 0.28 0.36 0.21 ------------------------------------------------------------------------- Earnings (loss) for the period 15,683 12,401 15,069 4,450 4,919 4,863 ------------------------------------------------------------------------- Basic, per share 0.39 0.28 0.34 0.09 0.10 0.10 ------------------------------------------------------------------------- Diluted, per share 0.32 0.24 0.30 0.09 0.10 0.09 ------------------------------------------------------------------------- Capital expenditures 9,738 22,031 7,514 19,842 26,061 57,608 ------------------------------------------------------------------------- Cash on hand 36,206 51,008 59,155 66,535 11,368 13,052 ------------------------------------------------------------------------- Working capital surplus 41,361 43,038 58,811 69,690 22,742 (31,779) ------------------------------------------------------------------------- Long-term bank debt - - - - - - ------------------------------------------------------------------------- Shareholders' equity 61,440 80,656 98,124 120,236 121,727 120,303 ------------------------------------------------------------------------- Total assets 81,226 118,517 137,840 139,054 144,016 204,227 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating results ------------------------------------------------------------------------- Sales volumes ------------------------------------------------------------------------- Crude oil - bbl/d 7,202 10,716 11,333 6,644 7,195 6,565 ------------------------------------------------------------------------- Natural gas - mcf/d 1,259 1,101 1,858 1,726 2,169 2,860 ------------------------------------------------------------------------- Equivalent - boe/d(2) 7,412 10,900 11,643 6,932 7,557 7,042 ------------------------------------------------------------------------- Pricing ------------------------------------------------------------------------- Crude oil - $/bbl 49.49 45.20 45.43 45.17 46.99 44.36 ------------------------------------------------------------------------- Natural gas - $/mcf 1.44 1.50 1.53 1.42 1.41 1.76 ------------------------------------------------------------------------- Selected highlights - $/boe(2) ------------------------------------------------------------------------- Weighted average selling price per boe 48.33 44.59 44.47 43.65 45.65 42.07 ------------------------------------------------------------------------- Interest and other income 0.30 0.44 0.50 0.90 0.49 0.01 ------------------------------------------------------------------------- Royalties 6.73 6.37 5.59 6.19 5.77 5.76 ------------------------------------------------------------------------- Operating costs 5.21 4.02 4.40 5.56 6.96 8.20 ------------------------------------------------------------------------- Netback(3) 36.69 34.64 34.98 32.80 32.91 28.12 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Common share information (000) ------------------------------------------------------------------------- Shares outstanding at end of period 42,817 43,612 44,029 50,084 50,119 50,127 ------------------------------------------------------------------------- Fully diluted 52,671 52,704 53,280 53,382 51,803 51,670 ------------------------------------------------------------------------- Weighted average shares outstanding for the period ------------------------------------------------------------------------- Basic 40,442 43,418 43,800 47,816 50,107 50,123 ------------------------------------------------------------------------- Diluted 48,594 51,002 50,635 51,303 51,800 51,689 ------------------------------------------------------------------------- Volume traded during quarter (000) 16,732 18,086 7,202 6,211 10,921 12,223 ------------------------------------------------------------------------- Common share price ($) ------------------------------------------------------------------------- High 21.95 25.24 20.20 19.29 22.35 17.10 ------------------------------------------------------------------------- Low 10.92 14.71 16.05 16.60 13.18 9.14 ------------------------------------------------------------------------- Close (end of period) 20.90 17.65 19.14 17.04 15.20 9.87 ------------------------------------------------------------------------- ------------------------------------- 2008 ------------------------------------- Three months ended ------------------------------------- Mar 31 Jun 30 ------------------------------------- Financial results ($000 except per share amounts) - unaudited ------------------------------------- Total revenue 27,167 33,622 ------------------------------------- Cash flow from operations before working capital changes(1) 11,902 13,485 ------------------------------------- Basic, per share(1) 0.24 0.27 ------------------------------------- Diluted, per share(1) 0.23 0.26 ------------------------------------- Earnings (loss) for the period 1,738 3,590 ------------------------------------- Basic, per share 0.04 0.07 ------------------------------------- Diluted, per share 0.03 0.07 ------------------------------------- Capital expenditures 31,056 29,110 ------------------------------------- Cash on hand 11 41,039 ------------------------------------- Working capital surplus (51,546) 13,295 ------------------------------------- Long-term bank debt - 43,800 ------------------------------------- Shareholders' equity 127,225 168,735 ------------------------------------- Total assets 231,278 292,882 ------------------------------------- ------------------------------------- Operating results ------------------------------------- Sales volumes ------------------------------------- Crude oil - bbl/d 6,726 7,111 ------------------------------------- Natural gas - mcf/d 7,044 5,922 ------------------------------------- Equivalent - boe/d(2) 7,900 8,098 ------------------------------------- Pricing ------------------------------------- Crude oil - $/bbl 41.99 49.90 ------------------------------------- Natural gas - $/mcf 2.20 2.38 ------------------------------------- Selected highlights - $/boe(2) ------------------------------------- Weighted average selling price per boe 37.72 45.56 ------------------------------------- Interest and other income 0.07 0.07 ------------------------------------- Royalties 4.71 6.33 ------------------------------------- Operating costs 8.24 8.60 ------------------------------------- Netback(3) 24.84 30.69 ------------------------------------- ------------------------------------- Common share information (000) ------------------------------------- Shares outstanding at end of period 50,353 54,798 ------------------------------------- Fully diluted 54,105 58,590 ------------------------------------- Weighted average shares outstanding for the period ------------------------------------- Basic 50,212 50,273 ------------------------------------- Diluted 51,562 51,508 ------------------------------------- Volume traded during quarter (000) 7,721 4,590 ------------------------------------- Common share price ($) ------------------------------------- High 11.96 11.25 ------------------------------------- Low 6.61 8.25 ------------------------------------- Close (end of period) 9.10 8.69 ------------------------------------- (1) Cash flow from operations before 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 are unlikely to be comparable to similar measures used by other companies. Cash flow from operations before working capital changes includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow from operations before working capital changes is reconciled with net earnings on the Consolidated Statement of Cash Flows and in the accompanying Management's Discussion & Analysis. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. (2) All references to barrels of oil equivalent (boe) are calculated on the basis of 6 mcf : 1 bbl. 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) 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. For a reconciliation of netbacks to net income, 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. CONSOLIDATED BALANCE SHEETS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- June December 30, 2008 31, 2007 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Assets Current Cash and cash equivalents $ 41,039 $ 13,052 Accounts receivable 38,600 27,512 Prepaid expenses 376 468 Inventories (Note 3) 1,362 854 Due from a related company 37 - ------------------------------------------------------------------------- 81,414 41,886 Deferred financing costs 1,785 2,089 Long-term investments (Note 4) 29,947 33,378 Property and equipment 179,736 126,874 ------------------------------------------------------------------------- $ 292,882 $ 204,227 ------------------------------------------------------------------------- Liabilities Current Accounts payable and accrued liabilities $ 29,612 $ 37,963 Income taxes payable 7,432 6,090 Bank debt (Note 6) 31,075 29,612 ------------------------------------------------------------------------- 68,119 73,665 Asset retirement obligations (Note 7) 6,402 5,639 Long-term bank debt (Note 6) 43,800 - Future income taxes 5,826 4,620 ------------------------------------------------------------------------- 124,147 83,924 ------------------------------------------------------------------------- Shareholders' equity Share capital, warrants and contributed surplus (Note 8) 105,590 64,544 Accumulated other comprehensive loss (8,616) (10,674) Retained earnings 71,761 66,433 ------------------------------------------------------------------------- 168,735 120,303 ------------------------------------------------------------------------- $ 292,882 $ 204,227 ------------------------------------------------------------------------- Commitments, contingencies and guarantees (Note 11) CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Revenue Petroleum and natural gas sales $ 33,569 $ 27,537 $ 60,683 $ 74,135 Interest and other income 53 568 106 1,092 ------------------------------------------------------------------------- 33,622 28,105 60,789 75,227 Royalties 4,666 3,906 8,050 9,761 ------------------------------------------------------------------------- 28,956 24,199 52,739 65,466 ------------------------------------------------------------------------- Expenses Operating 6,340 3,507 12,265 8,119 General and administrative 2,024 1,811 4,086 3,232 Stock-based compensation 731 1,238 3,129 4,159 Finance charges 1,303 6 2,223 29 Foreign exchange loss 1,118 3,887 1,208 4,020 Fair value impairment - ABCP (Note 4) 2,002 - 3,492 - Taxes other than income taxes 816 508 1,322 946 Depletion, depreciation and accretion 6,388 3,438 11,057 8,834 ------------------------------------------------------------------------- 20,722 14,395 38,782 29,339 ------------------------------------------------------------------------- Earnings before income taxes 8,234 9,804 13,957 36,127 Current income tax provision 5,182 3,863 7,842 14,021 Future income tax provision (recovery) (538) 1,491 787 2,587 ------------------------------------------------------------------------- 4,644 5,354 8,629 16,608 ------------------------------------------------------------------------- Net earnings 3,590 4,450 5,328 19,519 Retained earnings, beginning of period 68,171 54,783 66,433 39,714 ------------------------------------------------------------------------- Retained earnings, end of period $ 71,761 $ 59,233 $ 71,761 $ 59,233 ------------------------------------------------------------------------- Net earnings per share (Note 10(a)) Basic $ 0.07 $ 0.09 $ 0.11 $ 0.43 Diluted $ 0.07 $ 0.09 $ 0.10 $ 0.38 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings $ 3,590 $ 4,450 $ 5,328 $ 19,519 Foreign currency translation adjustment (562) (1,450) 2,058 (2,406) ------------------------------------------------------------------------- Comprehensive income $ 3,028 $ 3,000 $ 7,386 $ 17,113 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Balance, beginning of period $ (8,054) $ 711 $ (10,674) $ 1,667 Foreign currency translation adjustment (562) (1,450) 2,058 (2,406) ------------------------------------------------------------------------- Balance, end of period $ (8,616) $ (739) $ (8,616) $ (739) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Cash provided by (used in) the following activities: Operating Net earnings $ 3,590 $ 4,450 $ 5,328 $ 19,519 Items not involving cash: Depletion, depreciation and accretion 6,388 3,438 11,057 8,834 Stock-based compensation 731 1,238 3,129 4,159 Amortization of deferred charges 194 - 386 - Foreign exchange loss 1,118 3,887 1,208 4,020 Fair value impairment - ABCP 2,002 - 3,492 - Future income tax provision (recovery) (538) 1,491 787 2,587 ------------------------------------------------------------------------- Cash flow from operations before working capital changes 13,485 14,504 25,387 39,119 Changes in non-cash working capital (Note 10(b)) 3,868 (5,549) (8,172) (15,477) ------------------------------------------------------------------------- 17,353 8,955 17,215 23,642 ------------------------------------------------------------------------- Financing Proceeds from bank debt 20,787 - 44,214 - Issue of common shares, net of share issue costs 37,752 17,874 37,917 18,308 ------------------------------------------------------------------------- 58,539 17,874 82,131 18,308 Investing Development of oil and gas properties (29,110) (19,842) (60,166) (27,356) Changes in non-cash working capital (Note 10(b)) (5,724) 2,050 (10,384) 4,352 ------------------------------------------------------------------------- (34,834) (17,792) (70,550) (23,004) ------------------------------------------------------------------------- Increase in cash and cash equivalents 41,058 9,037 28,796 18,946 ------------------------------------------------------------------------- Cash and cash equivalents, beginning of period 11 59,155 13,052 51,008 ------------------------------------------------------------------------- Impact of foreign exchange on foreign currency denominated cash balances (30) (1,657) (809) (3,419) ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 41,039 $ 66,535 $ 41,039 $ 66,535 ------------------------------------------------------------------------- Cash and cash equivalents comprises: Cash in banks $ 41,039 $ 11,569 $ 41,039 $ 11,569 Term deposits - 54,966 - 54,966 ------------------------------------------------------------------------- Cash and cash equivalents $ 41,039 $ 66,535 $ 41,039 $ 66,535 ------------------------------------------------------------------------- Supplementary cash flow information - (Note 10(c)) ------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Petrolifera Petroleum Limited Period ended June 30, 2008 (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 (collectively, "Petrolifera" or the "company"), and are presented in accordance with Canadian generally accepted accounting principles. Through subsidiaries and foreign branches, 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, 2007 except as provided below. 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. Financial instruments Financial instruments are recognized initially at fair value on the balance sheet, and include cash and cash equivalents, accounts receivable, long-term investments, accounts payable and accrued liabilities due from a related company, bank debt and long-term bank debt. The company has classified all of its financial instruments as held for trading, with the exception of the bank debt, which is classified as other liabilities. Held for trading instruments are measured at fair value, while other liabilities are measured at amortized cost. The company has not entered into any financial derivative contracts, does not enter into these contracts for speculative purposes, and has not recorded any assets or liabilities as a result of embedded derivatives. The carrying value of held for trading instruments approximate their fair value due to the short term nature of these instruments, except for long term investments, which is discussed in Note 4. The fair value of the bank debt and long-term bank debt approximates the carrying value as the debt has a floating market rate of interest. 2. NEW ACCOUNTING STANDARDS Effective January 1, 2008, the company adopted CICA Handbook sections 1535, 3031, 3862 and 3863 relating to Capital Disclosures, Inventories, Financial Instruments - Disclosures and Financial Instruments - Presentation, respectively. Under section 1535, the company is required to disclose its objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. Note 5 contains further disclosures with respect to this standard. Under section 3031, the measurement of cost and cost formulas for inventories have been revised, along with additional disclosure requirements. The adoption of this section has had no impact on the company's consolidated financial statements, as inventories were already being measured in a manner permitted under the new standard. Under section 3862, the company is required to disclose the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments, and how those risks are managed. Note 5 contains further disclosures with respect to this standard. Under section 3863, further guidance is provided on the classification of financial instruments as liabilities vs. equity, and when netting of financial assets and financial liabilities is appropriate. As of January 1, 2009, the company will be required to adopt CICA Handbook section 3064, Goodwill and Intangible Assets, replacing 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. The new standard establishes 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. The company is currently evaluating the impact of the adoption of this new section. Over the next three years the CICA will adopt its new strategic plan for the direction of accounting standards in Canada, which was ratified in January 2006. As part of the plan, Canadian GAAP for public companies will converge with International Financial Reporting Standards ("IFRS"), with an effective date of January 1, 2011. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS. 3. INVENTORIES The company maintains inventory as a consequence of the sales process for its products, whereby crude oil which has been produced is not delivered to customers for periods of up to several days, during which time it must be stored. ------------------------------------------------------------------------- June December 30, 2008 31, 2007 ------------------------------------------------------------------------- ($000) Crude oil and natural gas liquids $ 1,362 $ 854 ------------------------------------------------------------------------- At June 30, 2008 and December 31, 2007, inventory is composed of crude oil and natural gas liquids held in storage at the company's facilities and in transportation pipelines. Crude oil and natural gas liquids are carried at the lower of cost and market. 4. LONG-TERM INVESTMENTS Due to the early success of the Argentinean drilling program since December 2005, after the company completed its initial public offering, significant cash balances were retained in Petrolifera's bank accounts. These funds were largely kept in Canada for capital preservation and security. In mid-2006 the company commenced a program to invest its surplus funds in high quality, highly rated, liquid commercial paper with a primary emphasis on security of capital. Investments were made in R-1 High rated ABCP, as rated by Dominion Bond Rating Service, sold to us by a Canadian chartered bank with whom we held bank accounts. These investments were made in more than one issuing entity, were made for various time periods and were acquired to earn a reasonable return in relation to prevailing market conditions. On maturity, proceeds including earned interest were generally reinvested on a regular basis. In August 2007 the Canadian third-party ABCP market experienced severe liquidity problems. This has caused the conduits that issued the notes to default on the redemption of the notes. As a result, holders could not receive their cash plus interest at maturity. On September 6, 2007 a panel of banks, asset providers, and major investors formed the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper ("Pan-Canadian Committee") to oversee a proposed restructuring process. The proposed restructuring called for the ABCP to be converted into longer term floating rate notes which more closely match the maturities of the underlying assets. On March 17, 2008 the Pan-Canadian Committee made the restructuring proposal by filing a CCAA restructuring proposal whereby the company's notes will be exchanged for several classes of notes with maturities that better match the maturities of the underlying assets. On April 25, 2008, the noteholders voted in favour of the Pan-Canadian Committee restructuring proposal and on June 5, 2008 the court sanctioned the restructuring plan. In late June 2008, the Court of Appeal of Ontario heard motions from various noteholders seeking leave to appeal and an appeal of the sanctioning of the proposed restructuring. Quoted market values of the ABCP are not available due to the market disruption that is currently paralyzing the ABCP market. Management has therefore estimated the fair value of the owned ABCP, which were issued by Apsley Trust and MMAI-I Trust, based on a probabilistic recovery of principal and interest 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 June 30, 2008. 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 ABCP is an approximation of the risk-free rate for the expected life of the ABCP notes to be received. As the rate used for discounting is an approximation of the risk-free rate, all other risks have been incorporated in the estimated probability adjusted expected outcomes. This methodology applies all risking information into the various scenarios and discounts the fully risked cash flow stream only for the time value of money. The recovery factors used were as follows: Face Value Capital Interest of Notes Capital Interest Weighted Weighted Dis- Class of Expected Recovery Recovery Average Average Term count Note ($000s) Range Range Recovery Recovery (years) Rate ------------------------------------------------------------------------- A-1 $14,603 0-95% 0-75% 91% 70% 5-8 3.62% ------------------------------------------------------------------------- A-2 13,246 0-90% 0-70% 82% 56% 8 3.62% ------------------------------------------------------------------------- B 2,281 0-75% 0-50% 71% 47% 8 3.62% ------------------------------------------------------------------------- C 932 0-50% 0-50% 46% 39% 8 3.62% ------------------------------------------------------------------------- IA Tracking 6,638 0-75% 0-50% 61% 35% 8 3.62% ------------------------------------------------------------------------- Total $37,700 ------------------------------------------------------------------------- Based on the above approach the fair value of the investment in ABCP is estimated to be $27.9 million which is an impairment of $3.5 million for the six months ended June 30, 2008. For the quarter ended June 30, 2008 the impairment recorded is $2.0 million or approximately seven percent of the carrying value of the ABCP. This impairment brings the total impairment of the ABCP recorded to date to approximately 26 percent of the original cost of the investment. As at June 30, 2008, included in long-term investments were ABCP with a face value of $37.7 million and a carrying value of $27.9 million. These investments are classified as held for trading and are carried at fair value which is assessed each reporting date. The theoretical fair value of the company's ABCP could range from $21.2 million to $33.4 million using the valuation methodology described above with alternative reasonably possible assumptions. The company anticipates that it presently has sufficient cash resources and available credit to satisfy obligations as they come due. Assuming the ABCP problems are restructured during 2008 and normal liquidation for cash occurs, the company would be able to substantially reduce its net indebtedness incurred as a result of lack of access to these amounts. The outcome of the restructuring process, actual timing and amount ultimately recoverable from these notes may differ materially from this estimate which would impact the company's earnings in future periods. 5. FINANCIAL RISK MANAGEMENT Summary The company is exposed to various risks that arise from its business environment and the financial instruments it holds. The Audit Committee of the Board of Directors reviews the adequacy of the risk management framework in relation to these risks. The following outlines the company's risk exposures, quantifies these risks, and explains how these risks and its capital structure are managed. Capital Management The company's objective is to maintain a strong capital position in order to execute its business plans and maximize value to shareholders. The company defines its capital as shareholders' equity, bank debt and long- term debt. Changes to the relative weighting of the capital structure is driven by the company's business plans, changes in economic conditions and risks inherent in the global oil and gas industry. There have been no material changes to the company's processes and objectives related to capital management compared to prior periods. Methods to adjust the company's capital structure could include any or all of the following activities: - Repurchase shares pursuant to a normal course issuer bid; - Issue new shares through a public offering or private placement; such as occurred in Q2/08; - Raise fixed or floating rate debt; and - Refinance existing debt facilities to change amounts or terms The company periodically reviews certain quantitative measures of its capital structure, in order to understand its position relative to industry peers. These measures include calculations such as return on equity, return on capital employed and the debt to equity ratio. The company does not set certain limits or ranges with respect to these quantitative measures. The company is subject to external restrictions on its reserves based, revolving debt 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. Debt outstanding cannot exceed two times the 12 month trailing EBITDA. EBITDA is defined as net earnings prior to deduction of interest, income taxes, depletion, depreciation and accretion expense and other non-cash expenses. As at June 30, 2008, total debt outstanding under this facility was $59 million and two times EBITDA was $144.8 million, for a ratio of 0.4:1, which is well below the imposed limit. Credit Risk The Company is exposed to credit risk in relation to its cash and cash equivalents, long-term investments and accounts receivable. Cash and cash equivalents are held with highly rated international banks and therefore the company considers these assets to have negligible credit risk. Refer to Note 4 for further discussion regarding the credit risk of long-term investments. The company's accounts receivable are primarily with joint venture partners, oil and gas marketers and local government agencies. The company conducts a small minority of its business through joint ventures, so its overall exposure to credit risk from joint venture partners is considered to be low. The company's production base is entirely located in Argentina, and is heavily weighted to oil. It sells its oil production to a well-established, investment grade, state-owned oil company, and its gas production to a reputable local gas marketing company. Receivables with local governments pertain to input taxes paid on certain expenditures. The company has not experienced any collection problems with its counterparties and does not currently have any overdue amounts. The carrying amounts of cash and cash equivalents and accounts receivable represents the company's maximum credit exposure. The company does not have an allowance for doubtful accounts, and did not write off any receivables in the three or six month periods ended June 30, 2008. 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 unused credit facilities where practicable. Accounts payable and income taxes payable, as disclosed on the Consolidated Balance Sheet, fall due within the next reporting period. The revolving debt facility has a current available limit of US$70 million, of which US$12 million is undrawn at June 30, 2008. This facility expires on September 5, 2010. The company also holds an $18 million line of credit, of which $2 million is undrawn at June 30, 2008, that is secured solely by the company's long-term investments. This line of credit is due on demand. The company believes it has adequate cash flows and unused credit facilities to discharge its financial obligations. Market Risk Changes in commodity prices, interest rates and foreign currency exchange rates can expose the company to fluctuations in its net earnings and in the fair value of its financial assets and liabilities. Commodity Price Risk Price fluctuations for both crude oil and natural gas are a risk to the company over which the company has little influence. Due to pricing controls present in Argentina, the company's selling price for oil is limited to approximately US$47.00 per barrel when the world posted price (WTI) for crude oil is in excess of US$60.90 per barrel. Natural gas prices are controlled by the Argentine government and local demand with historic prices at low levels compared to world prices. Interest Rate Risk Floating rate bank debt exposes the company to fluctuations in cash flows and net earnings due to changes in market interest rates. Based on the current debt balance, a one percent increase (decrease) in the underlying market rates would have decreased (increased) after tax earnings by approximately $0.1 million for the quarter. The company may enter into derivative interest swap contracts to manage this risk, but has not done so to date. 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. Oil and natural gas sales contracts are denominated in US Dollars (USD) and paid in Argentine Pesos (ARS). Operating and capital expenditures are incurred in US Dollars and Argentine Pesos, and to a lesser extent in Peruvian Nuevos Soles (PEN) and Colombian Pesos (COP). 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). The company may enter into derivative forward exchange rate contracts to manage this risk, but has not done so to date. The table below shows the company's exposure to foreign currencies on the balance sheet for its financial instruments: ------------------------------------------------------------------------- ($000) Per CAD USD ARS PEN COP Balance $ ----------------------------------- Sheet CAD $ equivalent amounts ------------------------------------------------------------------------- Cash and cash equivalents 41,039 36,585 105 975 440 2,934 Accounts receivable 38,600 218 18,893 15,271 3,383 835 Accounts payable and accrued liabilities (29,612) (838) (8,465) (20,174) (7) (128) Income taxes payable (7,432) (264) - (7,168) - - Bank debt (31,075) (16,000) (15,075) - - - Long term debt (43,800) - (43,800) - - - ------------------------------------------------------------------------- Balance sheet exposure (32,280) 19,701 (48,342) (11,096) 3,816 3,641 ------------------------------------------------------------------------- The company estimates a three percent change in the Canadian Dollar against the above foreign currencies could be reasonably possible over a three month period. A three percent strengthening in the Canadian Dollar would result in a change to after tax net earnings and other comprehensive income as follows (an equal but opposite impact to net earnings and other comprehensive income would result if the Canadian Dollar weakened by three percent): ------------------------------------------------------------------------- ($000) USD ARS PEN COP ----------------------------------- CAD $ equivalent amounts ------------------------------------------------------------------------- Increase (decrease) in after tax earnings 480 - (78) (74) ------------------------------------------------------------------------- Increase (decrease) in other comprehensive income 1,047 - - - ------------------------------------------------------------------------- 6. CREDIT FACILITIES In 2007 the company entered into a US$100 million reserve-based revolving credit facility with an initial availability of US$60 million. The initial facility term was for three years, bears interest at LIBOR plus a margin, is secured by the pledge of the shares of Petrolifera's subsidiaries and has a provision for a borrowing base adjustment every six months, with the next adjustment to be calculated based on information as at July 1, 2008. Deferred financing costs of $1.8 million related to this facility are being amortized over the remaining term of the facility. During the second quarter of 2008 the availability of the reserve-based facility was increased to US$70 million based on reserves as at December 31, 2007. The company classifies drawings under this reserve-based facility that relate to the Argentina operations as long-term debt as repayment is not required within one year under the terms of the facility agreement. Drawings made under this reserve-based facility related to operations outside of Argentina are classified as current bank debt as the facility agreement allows for repayment of the loans and as it is the intention of the company to repay these loans within the next twelve months. In late 2007, the company established an $18 million line of credit with a Canadian chartered bank. The line of credit bears interest at a floating rate and is secured by the ABCP investments. As at June 30, 2008 the reserve based facility had $58.9 million outstanding with $43.8 million classified as long-term debt and $15.1 million classified as bank indebtedness. The line of credit facility had $16 million outstanding classified as bank indebtedness. Interest expense on the facilities for the six months ended June 30, 2008 was $1.7 million (2007 - Nil) and was $1.0 million for the second quarter of 2008 (second quarter 2007 - Nil). The effective interest rate on the company's interest bearing debt was 8.5 percent for the six months ended June 30, 2008 and 8.1 percent for the three months ended June 30, 2008. Unused credit facilities as at June 30, 2008 were $14.5 million. Subsequent to June 30, 2008 the company agreed to a term sheet with a Canadian chartered bank, whereby, subject to the issuance of new notes under the reorganization plan for ABCP, which awaits approval by the Ontario Appeal Court (see Note 4), Petrolifera would receive a loan facility, with an initial term of two to three years with four to five one-year renewals. This facility would be primarily secure by the ABCP notes and in exchange, Petrolifera would withdraw its participation in litigation to retain the rights to pursue further legal action against the bank. 7. ASSET RETIREMENT OBLIGATIONS At June 30, 2008 the estimated total undiscounted amount required to settle the asset retirement obligations was $12.1 million (December 31, 2007 - $11.3 million). These obligations are expected to be settled over the useful lives of the underlying assets, which currently extend up to 20 years into the future. This amount has been discounted using a credit- adjusted risk-free interest rate of six percent and an annual inflation rate of two percent. Changes to asset retirement obligations were as follows: ------------------------------------------------------------------------- Six months ended Year ended June 30, December 31, 2008 2007 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Asset retirement obligations, beginning of period $ 5,639 $ 2,347 Liabilities incurred 584 2,678 Changes in estimates - 490 Accretion expense 179 124 ------------------------------------------------------------------------- Asset retirement obligations, end of period $ 6,402 $ 5,639 ------------------------------------------------------------------------- 8. SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS Authorized The authorized share capital is comprised of an unlimited number of common shares. Issued: ------------------------------------------------------------------------- Number Amount of Shares ($000) ------------------------------------------------------------------------- Share capital and warrants: Balance, share capital and warrants, December 31, 2007 50,126,510 $ 54,356 Issued upon exercise of options 226,500 165 Assigned value of options exercised - 39 Issuance of common shares (net of tax - effected issue costs) 4,445,000 37,752 ------------------------------------------------------------------------- Balance, share capital and warrants, June 30, 2008 54,798,010 92,312 ------------------------------------------------------------------------- Contributed surplus: ------------------------------------------------------------------------- Balance, contributed surplus, December 31, 2007 $ 10,188 Assigned value of options exercised (39) Stock-based compensation expensed 3,129 ------------------------------------------------------------------------- Balance, contributed surplus, June 30, 2008 13,278 ------------------------------------------------------------------------- Total share capital, warrants and contributed surplus: December 31, 2007 $ 64,544 June 30, 2008 $ 105,590 ------------------------------------------------------------------------- (a) Common Share Purchase Warrants As at June 30, 2008, there were 160,000 Common Share Purchase Warrants outstanding to acquire 160,000 common shares at $0.40 per share until October 17, 2008. (b) Equity Financing On June 11, 2008 the company announced that it entered into a financing agreement with a syndicate of underwriters led by RBC Capital Markets to issue 4,445,000 common shares ("Common Shares") at $9.00 per Common Share, on a "bought deal" basis for gross proceeds of approximately $40 million. The underwriters have an over-allotment option to purchase up to an additional 666,750 Common Shares on the same terms and conditions, exercisable in whole or in part up to 30 days following closing. This financing was closed on June 27, 2008 and the over- allotment option was not exercised subsequent to the closing. Proceeds of the bought deal financing were as follows: ------------------------------------------------------------------------- ($000s) As actually applied ------------------------------------------------------------------------- Gross proceeds $ 40,005 Underwriters' commissions and issue costs 2,253 ------------------------------------------------------------------------- Net proceeds 37,752 ------------------------------------------------------------------------- (c) Stock Options As at June 30, 2008 and 2007 the company had stock options outstanding to acquire common shares, as follows: ------------------------------------------------------------------------- 2008 2007 ------------------------------------------------------------------------- Weighted Weighted Number of Average Number of Average Shares Exercise Shares Exercise Price Price ------------------------------------------------------------------------- Outstanding, beginning of period 3,228,867 $ 8.71 2,896,667 $ 4.86 Granted 687,500 10.02 681,000 18.89 Exercised (226,500) 0.73 (445,000) 1.10 Forfeited/ cancelled (99,300) 14.78 - - ------------------------------------------------------------------------- Outstanding, end of period 3,590,567 $ 9.38 3,132,667 8.44 ------------------------------------------------------------------------- Exercisable, end of period 1,406,416 $ 12.91 1,383,666 $ 7.95 ------------------------------------------------------------------------- All options have been granted for a period of five years. Options granted under the plan are generally fully exercisable after two or three years and expire five years after the date granted. The table below summarizes unexercised stock options. ------------------------------------------------------------------------- 2008 2007 ------------------------------------------------------------------------- Weighted Weighted Average Average Range of Number Remaining Number Remaining Exercise Prices Outstanding Contractual Outstanding Contractual Life at Life at June 30 June 30 ------------------------------------------------------------------------- $0.50-$5.00 1,215,667 2.1 1,466,667 3.1 ------------------------------------------------------------------------- $5.01-$10.00 717,600 3.6 100,000 3.6 ------------------------------------------------------------------------- $10.01-$15.00 803,800 2.8 801,000 3.1 ------------------------------------------------------------------------- $15.01-$20.00 838,500 3.8 750,000 4.7 ------------------------------------------------------------------------- $20.01-$20.95 15,000 2.7 15,000 3.7 ------------------------------------------------------------------------- Total 3,590,567 3.0 3,132,667 3.6 ------------------------------------------------------------------------- In the first six months of 2008 a compensatory non-cash expense of $3.1 million (2007 - $4.2 million) was recorded as stock-based compensation, reflecting the amortization of the fair value of stock options over the vesting period. The second quarter stock-based compensation expense was $0.7 million (2007 - $1.2 million). The fair value of each option granted in 2008 is estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for grants as follows: ------------------------------------------------------------------------- Risk free Expected Expected interest rate life volatility ------------------------------------------------------------------------- 2008 2.9%-3.1% 4 years 89%-91% 2007 4.1-4.7% 4 years 70%-72% ------------------------------------------------------------------------- The weighted average fair value at the date of grant of all options granted in 2008 was $6.49 per option (2007 - $10.61 per option) 9. SEGMENTED INFORMATION The company has corporate offices in Canada and Barbados (combined to comprise the corporate segment), petroleum and natural gas operations in Argentina and exploration activities in Peru and Colombia. Financial information pertaining to these operating segments is presented below. ------------------------------------------------------------------------- Corporate Argentina Peru Colombia Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Three months ended June 30, 2008 Revenue, gross - 33,622 - - 33,622 Net earnings (loss) (4,365) 7,939 (3) 19 3,590 Property and equipment 302 147,936 29,648 1,850 179,736 Capital expenditures - 21,963 6,625 522 29,110 Total assets 68,794 184,962 33,501 5,625 292,882 ------------------------------------------------------------------------- Three months ended June 30, 2007 Revenue, gross 271 27,834 - - 28,105 Net earnings (loss) (1,929) 6,694 (290) (25) 4,450 Property and equipment 316 47,198 4,708 203 52,425 Capital expenditures 14 17,805 1,820 203 19,842 Total assets 42,877 89,942 5,986 249 139,054 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Corporate Argentina Peru Colombia Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Six months ended June 30, 2008 Revenue, gross 47 60,742 - - 60,789 Net earnings (loss) (9,821) 15,083 60 6 5,328 Property and equipment 302 147,936 29,648 1,850 179,736 Capital expenditures - 45,203 14,216 747 60,166 Total assets 68,794 184,962 33,501 5,625 292,882 ------------------------------------------------------------------------- Six months ended June 30, 2007 Revenue, gross 552 74,675 - - 75,227 Net earnings (loss) (5,861) 25,750 (345) (25) 19,519 Property and equipment 316 47,198 4,708 203 52,425 Capital expenditures 48 24,655 2,450 203 27,356 Total assets 42,877 89,942 5,986 249 139,054 ------------------------------------------------------------------------- 10. SUPPLEMENTARY INFORMATION (a) Per share amounts The following table summarizes the common shares used in the per share calculations. ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- (000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Weighted average common shares outstanding 50,500 47,816 50,356 45,835 Dilutive effect of all stock options and all stock purchase warrants 1,235 3,487 1,263 5,162 Weighted average common shares outstanding - diluted 51,735 51,303 51,619 50,997 ------------------------------------------------------------------------- (b) Net change in non-cash working capital ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- ($000) Accounts receivable $ (312) $ 17,649 $ (11,087) $ 8,311 Prepaid expenses 168 111 91 76 Accounts payable and accrued liabilities (3,154) 4,925 (8,346) (2,754) Inventories (118) (255) (508) (222) Income taxes payable 1,604 (25,965) 1,330 (16,463) Due from (to) a related company (44) 36 (36) (73) ------------------------------------------------------------------------- Total $ (1,856) $ (3,499) $ (18,556) $ (11,125) ------------------------------------------------------------------------- Operating $ 3,868 $ (5,549) $ (8,172) $ (15,477) Investing (5,724) 2,050 (10,384) 4,352 ------------------------------------------------------------------------- $ (1,856) $ (3,499) $ (18,556) $ (11,125) ------------------------------------------------------------------------- (c) Supplementary cash flow information ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- ($000) Interest paid $ 927 $ - $ 1,498 $ - Income taxes paid 542 23,987 3,112 24,396 ------------------------------------------------------------------------- 11. COMMITMENTS, CONTINGENCIES AND GUARANTEES Work Commitments In 2005 Petrolifera acquired two significant oil and gas exploration licenses in Peru. The licenses have a total US$51.9 million financial commitment to complete negotiated work programs on the two licenses over seven years. The company has the right to withdraw from the licenses at the end of each period associated with the term of the licenses. The first license term for Block 106 ended in 2007 and the company has met its commitment and is currently in the second license term with a commitment to invest a minimum of US$1.6 million in this next term. In Block 107, the company is in the first term of the license and expects to complete all the required work commitments for the term during 2008. The company has issued letters of credit in the total amount of US$2.3 million to secure the capital expenditure requirements associated with the two exploration licenses in Peru. The company has issued letters of credit in the total amount of US$2.3 million to secure the capital expenditure requirements associated with the two exploration licenses in Peru. In 2007 the Company was granted three concessions in Colombia with a total work commitment of US$5.7 million over a two year period. The company has issued letters of credit in the total amount of US$0.6 million in support of these work commitments. In Argentina the company has total work commitments of gross US$54.0 million over the next three years related to the Vaca Mahuida, Puesto Guevara and Gobernador Ayala II blocks. A portion of the Argentinean work commitments related to the Vaca Mahuida block has been farmed out to a third party. Contractual Commitments The company's annual commitments under service contracts for drilling, leases for office premises, various operating costs, software license agreements and other equipment are as follows: ------------------------------------------------------------------------- Contractual Subsequent Obligations 2008 2009-2011 2012-2013 to 2013 Total ------------------------------------------------------------------------- ($000) Service contracts and other $ 7,138 $12,173 $ - $ - $19,311 ------------------------------------------------------------------------- Total $ 7,138 $12,173 $ - $ - $19,311 ------------------------------------------------------------------------- Contingencies Petrolifera was a party to an arbitration proceeding initiated by the former contract operator of the Puesto Morales/Rinconada block. The former operator was seeking financial compensation including damages for wrongful dismissal. Subsequent to the end of the quarter ended June 30, 2008 the arbitration proceeding was mutually ended by both parties and the consideration paid was not material to the company. Additionally, the company has various guarantees and indemnifications in place in the ordinary course of business, none of which are expected to have a significant impact on the company's financial statements or operations. 12. RELATED PARTY TRANSACTIONS Under the terms of an Administrative Agreement with Connacher Oil and Gas Limited ("Connacher"), which was executed during the quarter with effect to January 1, 2008, Connacher will provide certain administrative services necessary or appropriate upon the direction of the company. The fee for this service is $15,000 per month. From time to time Connacher also paid bills on behalf of Petrolifera, for which it is reimbursed. Connacher also provided certain support and services to Petrolifera in its pursuit of exploration opportunities in Colombia, for which it will be indemnified and reimbursed without further economic interest in the secured opportunities.

For further information:

For further information: Richard A Gusella, Executive Chairman,
Petrolifera Petroleum Limited, Phone: (403) 538-6201, Fax: (403) 538-6225,
inquiries@petrolifera.ca, www.petrolifera.ca

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PETROLIFERA PETROLEUM LIMITED

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