Petrolifera reports restored sales growth and rise in cash flow for third quarter 2007



    CALGARY, Nov. 6 /CNW/ - Petrolifera Petroleum Limited (TSX: PDP) reports
its sales growth was restored during the third quarter ("Q3") of 2007. As a
consequence, successive period cash flow from operations before changes in
working capital ("cash flow")(1) rose 28 percent to $18.6 million and
year-to-date 2007 cash flow of $57.7 million was 85 percent higher than a year
ago. Higher volumes of both crude oil and natural gas sales were the principal
contributing factors. The company continued to expand its overall exploratory
holdings in both Argentina and Colombia and commenced its seismic program in
Peru.

    
    Highlights are as follows:

    -   Crude oil sales increased eight percent over the second quarter 2007
        ("Q2"), while equivalent volumes rose nine percent as natural gas
        sales rose 26 percent.
    -   Year-over-year crude oil sales rose 91 percent to 8,376 bbl/d while
        equivalent sales rose 90 percent to 8,696 boe/d.
    -   Cash flow was $18.6 million or $0.37 per common share in Q3 2007
        ($18.4 million in 2006) while net earnings declined to $4.9 million
        ($0.10 per common share), from $15.7 million ($0.39 per common
        share), fuelled by the impact of a strong Canadian dollar.
    -   Year-over-year cash flow increased 85 percent to $57.7 million
        ($1.22 per common share) while earnings decreased two percent to
        $24.4 million or $0.52 per common share.
    -   Self-financed capital expenditures thus far in 2007 were
        $53.4 million, primarily for drilling new wells and constructing
        facilities and infrastructure in Argentina.
    -   Working capital was $22.7 million at the end of the reporting period
        as short-term investments were reclassified to long-term after an
        impairment provision.
    -   New concessions were acquired in Argentina and Colombia.
    -   A new US$60 million credit facility was established, ensuring strong
        liquidity.


    Summary Results
    -------------------------------------------------------------------------
                               Three months ended          Nine months ended
                                     September 30               September 30
    -------------------------------------------------------------------------
                           2007     2006 % Change     2007     2006 % Change
    -------------------------------------------------------------------------
    FINANCIAL ($000
     except per share
     amounts)
    Total revenue        31,730   33,157       (4) 106,956   60,430       77
    Cash flow from
     operations before
     working capital
     changes(1)          18,619   18,384        1   57,738   31,289       85
      Per share,
       basic(1)            0.37     0.46      (20)    1.22     0.82       49
      Per share,
       diluted(1)          0.36     0.38       (5)    1.13     0.69       64
    Net earnings (loss)
     for the period       4,919   15,683      (69)  24,438   24,911       (2)
      Per share, basic     0.10     0.39      (74)    0.52     0.65      (20)
      Per share, diluted   0.10     0.32      (69)    0.48     0.55      (13)
    Capital
     expenditures        26,061    9,738      168   53,417   14,368      272
    Cash on hand                                    11,368   36,206      (69)
    Working capital                                 22,742   41,361      (45)
    Indebtedness                                         -        -
    Shareholders' equity                           121,727   61,440       98
    Total assets                                   144,016   81,226       77

    OPERATING
    Daily sales volumes
      Crude oil - bbl/d   7,195    7,202        0    8,376    4,374       91
      Natural gas
       - mcf/d            2,169    1,259       72    1,919    1,223       57
      Barrels of oil
       equivalent
       - boe/d(2)         7,557    7,412        2    8,696    4,578       90
    Average selling
     prices
    Oil - $/bbl           46.99    49.49       (5)   45.82    49.78       (8)
    Natural gas - $/mcf    1.41     1.44       (2)    1.45     1.31       11
    Barrels of oil
     equivalent
     - $/boe(2)           45.15    48.33       (7)   44.45    47.91       (7)

    Common shares
     outstanding (000s)
    Weighted average
      Basic              50,107   40,442       24   47,285   37,975       25
      Diluted            51,800   48,594        7   51,309   45,531       13
    End of period
      Issued                                        50,119   42,817       17
      Fully diluted                                 51,803   52,671       (2)
    -------------------------------------------------------------------------

    (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 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 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 portio n 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

    Your company experienced the restoration of sales growth in Argentina
during the third quarter of 2007, as work continued on completion of
infrastructure and facilities. This should impact on production, reserves and
recovery factors as they are commissioned and activated. Included in work in
progress, or completed, are the company's waterflood program for pressure
maintenance, its water and crude oil treatment facilities and a new high
pressure natural gas pipeline to transport anticipated growth in volumes to
available industrial markets north of its Puesto Morales operations.
    During the reporting period, the company was able to arrange and secure
additional drilling and service rigs to advance its appraisal of the Puesto
Morales and Rinconada Blocks in Neuquén Province, Argentina. A total of
20 wells were drilled and completed or were drilling at the end of the quarter
and an additional drilling rig with greater depth capacity is now on location
and drilling. This will enable Petrolifera to evaluate some higher potential
projects which have been deferred until the rig's arrival in the region. This
rig will enable the company to drill deviated and deeper wells on prospects
located near the water reservoir which bisects Rinconada and is proximate to
the Puesto Morales area. In large measure, this is required to move the
surface locations away from areas which might be flooded during high water or
rainy periods in the region.
    We continue to be pleased with the overall results of our drilling
program and believe the full impact of our successful drilling will become
more apparent once the waterflood or pressure maintenance program is underway.
We had been attempting to drill injector wells for the northern and central
lobe at Puesto Morales yet continued to encounter considerable oil pay in
certain locations. As a result, we completed these wells as producers to
recover related reserves. This, then, required new injectors to be drilled and
the completed oil wells exhibited lower productivity than is anticipated once
the waterflood is operational. Nevertheless, new drilling enabled Petrolifera
to offset continuing primary declines and grow our production and sales until
our facilities are completed, which will help sustain this improvement.
    At Rinconada, we have now drilled a total of five wells and have
confirmed a thick hydrocarbon column in the order of 150 feet, without yet
having encountered the regional oil/water contact in the Sierras Blancas
Formation. Rinconada wells are shallower than at Puesto Morales, exhibit lower
comparable permeability and productivity, but still provide attractive
economic returns. It appears the main prospect at Rinconada extends over a
broad area, including onto the Vaca Mahuida Block and possibly onto the
recently confirmed but still informally-awarded Puesto Guevara Block in Rio
Negro Province, Argentina. This play could provide us a long-term project with
continuous drilling, leading to the prospect of associated reserve and
production enhancement over several years. To assist in spreading risk in the
area, Petrolifera farmed out one half of its work obligations on the Vaca
Mahuida Block to a third party in exchange for a 25 percent interest therein.
This is viewed as an attractive way to leverage shareholder's participation at
lower cost.
    We continue to await final negotiations to secure our 50 percent interest
in the Salinas Grande I concession in La Pampa Province, Argentina. As our
prospective partners have been unwilling to complete the agreed-upon
transaction to bring Petrolifera in as a 50 percent partner, we have served
notice of our intention to proceed with arbitration to secure our interest in
this large exploratory concession. This is an unfortunate development brought
about by the inaction of our joint venture partners, to the detriment of all
parties, including the government of La Pampa, Argentina.
    In Colombia, Petrolifera was awarded the Sierra Nevada II Technical
Evaluation Agreement over a large land spread offsetting our Sierra Nevada I
License, on which we plan to drill at least one well during 2008. Petrolifera
now holds a 100 percent interest in over one million acres of exploratory
rights in Colombia, which has emerged as one of the most competitive and
attractive regions of South America.
    In Peru, we received approval of our Environmental Impact Assessment
("EIA") for the Ucayali Block 107 situated northwest of the giant Camisea
natural gas and condensate field. Accordingly, we are proceeding with our 2D
seismic program over a number of large structures as identified by our
geological work and extensive and densely-gridded aeromagnetic and gravity
survey of the three million acre license area. We anticipate completing our
seismic acquisition and processing by year end 2007 and Petrolifera is
actively investigating suitable equipment alternatives to be in a position to
commence a multi-well drilling program on the block during the second half of
2008. We remain very enthusiastic about Block 107 and its potential for
natural gas, associated liquids and crude oil accumulations of considerable
size.
    We are completing our EIA for Maranon Block 106 and have decided to
expand our 2D program over a number of attractive prospects and leads on this
two million acre block. Again, we will require approval of our EIA by the
regulators before proceeding with this program, which will likely be
undertaken after the seismic program on Block 107 is completed. Accordingly,
drilling on Block 106 will likely occur later in 2008 or in 2009.
    Petrolifera now holds interests in over seven million acres of lands in
three countries in South America. As its production and sales expand later
this year and into 2008, with continuous drilling and the impact of new
facilities, the company is well positioned to aggressively evaluate its
holdings due to its strong financial condition and liquidity. It appears we
will be able to self-finance our programs this year and will endeavor to do so
next year as well. Our total outlays for 2007 will be lower than originally
anticipated, in part due to the late arrival of newly-constructed rigs.
Nevertheless, we still have an extensive inventory of prospects, plays and
locations to drill for several years and remain optimistic about our growth
prospects.
    As announced during the quarter, Petrolifera has been impacted by the
recent problems in the Canadian asset backed commercial paper ("ABCP") market.
We had invested funds (largely our IPO proceeds from 2005 and our warrant
exercise proceeds from this year) on the advice of our Canadian banker and
through its money market facilities. We made investments in what was rated by
a Canadian bond-rating agency as R-1 High commercial paper. The key message of
this rating was the implied assurance of principal recovery, with limited or
virtually minimal likelihood of default, as liquidity for the issuers was
represented to be supported by access to lender backstop arrangements to
assure the issuers of continuing liquidity even with a mismatch of the
maturities of their assets and liabilities. We were, then, investing prudently
to earn a respectable return but with a primary emphasis on certainty of
capital, until we needed the funds for our programs. Unfortunately, virtually
the entire $35 billion Canadian ABCP market has fallen into a state of
illiquidity or default since August 2007. At that time, Petrolifera had
approximately $37.7 million of its cash invested in ABCP.
    We are awaiting resolution of this situation. Initial efforts are focused
on clearly identifying the assets in the various conduit trusts which issued
the commercial paper. There will then be a determination of the "fair market
value" of the underlying assets held by the conduit trusts who issued the
ABCP. The next step would apparently be to monetize or otherwise securitize
the assets and return all or a portion of the invested funds as cash or
securities. We are also examining all of the legal options which could be
required or exercised to ensure we recover our funds in as timely a manner as
possible, without impairment if possible. At this writing, there can be no
assurance we will be successful in our efforts. We have been verbally assured
by our banker that we will be made "whole" once the valuation process is
completed, but again there can be no assurance this outcome will be obtained.
    In the meantime, we have adequate cash flow and other cash balances to
carry on with our capital programs without delay. Unrelated to the ABCP
developments, we also completed the establishment of an initial US$100 million
revolving reserve-backed credit facility with Standard Bank during the period,
which provides the company with an initial access to $US60 million of
available funds to supplement our internal liquidity. Accordingly, while we
continue to pursue full recovery of our ABCP funds, we can proceed in an
uninhibited manner with our activity due to the preplanning in establishing
this credit facility.
    As previously mentioned, our capital expenditures for the nine months
ended September 20, 2007 were only $53.4 million. We had originally
anticipated an outlay of $76.0 million by this time in our previously
announced plans. As a consequence, we now expect our full year 2007 capital
expenditures will reach $106.5 million, compared to our previous estimate of
$145 million. Some of these expenditures will now occur in 2008.
    Our Board of Directors recently approved a $140 million capital budget
for 2008. We have provided for total outlays by country of $76 million for
Argentina, $56 million in Peru and $8 million in Colombia. We anticipate
drilling 69 wells in Argentina on our Puesto Morales/Rinconada, Vaca Mahuida,
Puesto Guevara and Gobernador Ayala I blocks. One well is anticipated on Block
107 in Peru and we anticipate at least one well in Colombia on our Sierra
Nevada License. The capital program includes approximately $36 million to be
invested in new seismic in all three countries.
    Our company and its shareholders will be exposed to a broad range of
opportunities with our planned 2008 capital program, ranging from infill
deliverability and exploratory wells in Argentina to very high potential
exploratory wells in Peru and Colombia. We believe this cross section of
opportunities balances risk and reward and affords our shareholders the
opportunity to participate in a growing production profile with the potential
for high returns.
    The company's year end results are scheduled to be reported on March 14,
2008. In the interim we will provide timely updates on well results and other
events of consequence as they evolve.
    On October 19, 2007 the Company relocated its head office to Suite 900,
332 - 6 Avenue SW, Calgary AB, T2P 0B2. There is no change to the company's
phone and fax numbers.


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

    The following is dated as of November 6, 2007 and should be read in
conjunction with the unaudited consolidated financial statements of
Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the three
and nine months ended September 30, 2007 as contained in this interim report
and the MD&A and audited financial statements for the years ended December 31,
2006 and 2005 as contained in the company's 2006 Annual Report. Additional
information relating to Petrolifera, including its Annual Information Form for
the year ended December 31, 2006 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 based on
current expectations, estimates and projections of future production, capital
expenditures, cash flow, working capital, available sources of financing, the
anticipated impact to the company of the market disruption on short term asset
backed commercial paper ("ABCP") and third party initiatives to support and
resolve ABCP issues. It should be noted forward-looking information involves a
number of risks and uncertainties and actual results may vary materially from
those anticipated by the company. These risks and uncertainties include, but
are not limited to, political and economic conditions in the countries in
which the company operates, changes in market conditions, law or governing
policy, operating conditions and costs, operating performance, demand for
crude oil and natural gas, foreign currency exchange rate fluctuations,
currency controls, commercial negotiations, technical and economic factors and
access to services, equipment and facilities. In addition, there can be no
assurance that the proposals relating to ABCP will be implemented or restore
liquidity to the ABCP market to facilitate repayment. The timing of repayment
and amount available to satisfy outstanding obligations to the company is
uncertain. Readers should review Petrolifera's Annual Information Form for the
year ended December 31, 2006 for a description of the risk factors affecting
Petrolifera. Throughout the 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       Nine months ended
                                        September 30            September 30
    -------------------------------------------------------------------------
    ($000 except where noted)       2007        2006        2007        2006
    -------------------------------------------------------------------------
    Daily sales volumes
      Oil - bbl/d                  7,195       7,202       8,376       4,374
      Natural gas - mcf/d          2,169       1,259       1,919       1,223
      Total - boe/d                7,557       7,412       8,696       4,578
    Average selling prices
      Crude oil - $ per bbl        46.99       49.49       45.82       49.78
      Natural gas - $ per mcf       1.41        1.44        1.45        1.31
      Revenue per boe              45.15       48.33       44.45       47.91
    West Texas Intermediate
     (WTI) (US$ per bbl)           75.38       70.48       66.19       68.22
    Petroleum and natural gas
     sales ($000)                 31,387      32,954     105,522      59,877
    Interest and other income
     ($000)                          343         203       1,435         552
    -------------------------------------------------------------------------
    Total revenue ($000s)         31,730      33,157     106,957      60,430
    -------------------------------------------------------------------------
    

    Petroleum and natural gas revenues for the nine months ended
September 30, 2007 were $105.5 million (nine months ended September 30, 2006 -
$60.0 million) on sales of 8,696 boe/d (2006 - 4,578 boe/day), a
year-over-year increase of 76 percent. Petroleum and natural gas revenues for
the third quarter of 2007 were $31.4 million on sales of 7,557 boe/d, a
decrease of five percent compared to the third quarter of 2006 revenues of
$33.0 million (7,412 boe/d). The substantial increases in revenue resulted
from higher oil and natural gas production and resultant sales volumes arising
from the company's successful drilling program. All sales were from the
company's Puesto Morales/Rinconada block in Argentina. Petroleum and natural
gas revenues in the third quarter 2007 were up 14 percent from the second
quarter of 2007, due to the continued successful results from the company's
ongoing drilling campaign. Lower oil prices were prevalent for both reporting
periods in 2007, compared to 2006 levels, but were up modestly on a successive
basis.
    Crude oil sales volumes increased substantially from the first nine
months of 2006. New discoveries resulted in oil sales volumes rising to an
average of 8,376 bbl/d for the first nine months of the year compared to
4,374 bbl/d for the same period in 2006. For the nine months ended
September 30, 2007 and September 30, 2006 sales of crude oil represented
96 percent of the company's sales volumes. The company's realized crude oil
price was down eight percent to average $45.82 per barrel for the nine months
ended September 30, 2007 (2006 - $49.78 per barrel). Third quarter average
realized crude oil prices were also down five percent compared to the third
quarter of 2006. Natural gas prices increased 11 percent to average $1.45 per
mcf for the first nine months of 2007, reflecting some relaxation of regulated
Argentinean natural gas prices, which are still substantially below prices
prevailing in North American markets. Third quarter natural gas prices were
essentially flat at a decrease of two percent compared the third quarter of
2006.
    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. 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 reported realization expressed in
Canadian dollar terms.
    Interest earned on short-term investments and other income was
$1.4 million in the nine months ended September 30, 2007 (2006 - $0.6 million)
and $0.3 million for the three months ended September 30, 2007 (2006 -
$0.2 million).

    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 nine months of 2007 were $13.8 million
($5.80 per boe) or 13 percent of oil and natural gas revenue, compared to
$8.4 million ($6.72 per boe) or 14 percent in the first nine months of 2006.
Royalties for the third quarter of 2007 were $4.0 million ($5.77 per boe) or
13 percent of oil and natural gas revenue compared to $4.6 million ($6.73 per
boe) or 14 percent in the third quarter of 2006. Lower 2007 unit costs for
royalties essentially reflects lower crude oil prices than in 2006.

    
    OPERATING EXPENSES AND NETBACKS
    Company Netbacks(1)

    -------------------------------------------------------------------------
                                       Three months ended September 30
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                       2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Average daily production
     (boe/d)                            7,557                   7,412
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                    31,387       45.15      32,954       48.33
    Interest and other income        343        0.49         203        0.30
    Royalties                     (4,010)      (5.77)     (4,587)      (6.73)
    -------------------------------------------------------------------------
    Net revenue                  (27,720)     (39.87)     28,570       41.90
    Operating costs               (4,836)      (6.96)     (3,553)      (5.21)
    -------------------------------------------------------------------------
    Corporate netback             22,884       32.91      25,017       36.69
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                       Nine months ended September 30
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                       2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Average daily production
     (boe/d)                            8,696                   4,578
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                   105,522       44.45      59,878       47.91
    Interest and other income      1,435        0.60         552        0.44
    Royalties                    (13,771)      (5.80)     (8,405)      (6.72)
    -------------------------------------------------------------------------
    Net revenue                  (93,186)     (39.25)     52,025       41.63
    Operating costs              (12,954)      (5.46)     (6,083)      (4.87)
    -------------------------------------------------------------------------
    Corporate netback             80,232       33.79      45,942       36.76
    -------------------------------------------------------------------------

    (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 may not be
        comparable to similar measures used by other companies. 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 earnings, the most comparable GAAP
        measure, is shown below under "Net Earnings and Shares Outstanding."
    

    Petrolifera's corporate netbacks per boe were down eight percent over
those recorded in the first nine months of 2006 and were down ten percent for
the third quarter of 2007 compared to the third quarter of 2006. This
primarily reflects a decrease in the selling price of crude oil and higher
operating expenses, offset by lower royalties and higher interest income.
Petrolifera's calculated unit netback for the first nine months of 2007 at
$33.79 per boe was a healthy 76 percent of selling price in 2007 and was
73 percent for the third quarter of 2007 at $32.91 per boe. Total netbacks in
2007 were higher due to significant sales volume growth.

    
    Operating Netbacks by Product

    Per unit netbacks are calculated by dividing netbacks by sales volumes.

    Operating netbacks by product type are indicated below.

    -------------------------------------------------------------------------
    Three months ended
     September 30, 2007               Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales               7,195 bbl/d             2,169 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                   $31,105      $46.99        $282       $1.41
    Royalties                     (3,974)      (6.00)        (36)      (0.18)
    Operating costs               (4,767)      (7.20)        (69)      (0.34)
    -------------------------------------------------------------------------
    Field operating netback      $22,364      $33.79        $177       $0.89
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Three months ended
     September 30, 2006               Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales               7,202 bbl/d             1,259 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                   $32,789      $49.49        $165       $1.44
    Royalties                     (4,558)      (6.85)        (29)      (0.26)
    Operating costs               (3,527)      (5.32)        (26)      (0.23)
    -------------------------------------------------------------------------
    Field operating netback      $24,704      $37.29        $110       $0.95
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Nine months ended
     September 30, 2007               Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales               8,376 bbl/d             1,919 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $104,761      $45.82        $761       $1.45
    Royalties                    (13,694)      (5.99)        (76)      (0.15)
    Operating costs              (12,792)      (5.59)       (162)      (0.31)
    -------------------------------------------------------------------------
    Field operating netback      $78,274      $34.23        $522       $1.00
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Nine months ended
     September 30, 2006               Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales               4,374 bbl/d             1,223 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                   $59,440      $49.78        $438       $1.31
    Royalties                     (8,322)      (6.97)        (83)      (0.25)
    Operating costs               (6,039)      (5.06)        (44)      (0.13)
    -------------------------------------------------------------------------
    Field operating netback      $45,079      $37.75        $311       $0.93
    -------------------------------------------------------------------------
    

    Operating costs in the year to date in 2007 increased on a per unit basis
from 2006 reflecting increased staffing levels needed to operate the larger
field operations compared to the prior year. Petrolifera anticipates some
operating cost efficiencies when its new crude oil processing facilities are
fully functional and its crude oil pipeline is increasingly utilized. Also,
with the passage of time, more of the company's Argentinean wells require
artificial lift with attendant higher associated costs.

    GENERAL AND ADMINISTRATIVE EXPENSES

    General and administrative ("G&A") expenses were $4.7 million in the
first nine months of 2007 compared to $2.9 million for the first nine months
of 2006. G&A was $1.5 million in the third quarter of 2007 compared to
$0.8 million for the third quarter of 2006. These costs primarily consist of
salaries, insurance, the cost of independent reserve reports, travel and other
administrative expenses incurred in Canada, Argentina, Peru and Colombia. The
increase from 2006 is primarily attributable to increased staffing related to
expanded activity levels. On a per boe basis, G&A was reduced by 14% to
$1.99 per boe of sales for the first nine months of 2007 compared to
$2.31 per boe in 2006. G&A of $1.8 million was capitalized in the first nine
months of 2007 (2006 - $0.2 million).
    Non-cash stock-based compensation (a non-cash charge) costs of
$5.4 million were recorded in the first nine months of 2007 (2006 -
$2.8 million), reflecting the company's increased share price and its
consequent effect on the determination of the fair value of all stock options
granted and vested in the periods. 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 $6.3 million in the first nine months of 2007 (2006 -
$0.5 million charge) and a charge of $2.3 million for the third quarter of
2007 (third quarter 2006 - $0.1 million charge). The company's main exposure
to foreign currency risk relates to the pricing of crude oil sales, costs and
capital expenditures which are denominated in US dollars and Argentinean
pesos. This is a non-cash charge.

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

    DD&A is a non-cash charge and calculated using the unit-of-production
method based on total estimated proved reserves. DD&A in the first nine months
of 2007 was $12.4 million (2006 - $3.6 million) or $5.23 per boe (2006 -
$2.86 per boe). DD&A was $3.6 million or $5.16 per boe for the third quarter
of 2007 (third quarter 2006 - $1.9 million or $2.74 per boe). Accretion
expense for the first nine months of 2007 which is included in DD&A expense
was $0.1 million (2006 - $0.02 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
$2.7 million to the estimated total undiscounted liability of $7.5 million
over the estimated remaining economic life of the company's oil and gas
properties. Capital costs of $10.1 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 (2006 - $1.7 million). The increase in both the
three and nine month charges in 2007 is mainly due to the increased cost of
additions and infrastructure related to the Argentina production.

    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 nine months of 2007
or for 2006 as the company has a significant surplus.

    TAXES

    The current income tax provision of $16.4 million for the first nine
months of 2007 (2006 - $11.8 million) primarily relates to income taxes in
Argentina. Additionally, a future income tax provision (another non-cash
charge) of $6.4 million for the nine month period (2006 - recovery of
$0.5 million) was recorded to recognize changes in tax pool balances. Taxes
other than income taxes of $1.3 million (2006 - nil) represent taxes charged
on all banking transactions in Argentina for the nine month periods.
    The current income tax provision for the third quarter of 2007 was
$2.4 million (2006 - $5.8 million) and future income tax provision was
$3.8 million (2006 - nil) for a total income tax provision in the third
quarter of $6.2 million (third quarter of 2006 - $5.8 million). Taxes other
than income taxes were $400,000 (2006 - nil) for the third quarter of 2007.

    
    NET EARNINGS AND SHARES OUTSTANDING

    Reconciliation of netback to net earnings
    -------------------------------------------------------------------------
                                      Three months ended September 30
    -------------------------------------------------------------------------
    ($000 except per boe)               2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Netback                      $22,884      $32.91     $25,017      $36.69
    General & administrative      (1,489)      (2.14)       (849)      (1.25)
    Stock-based compensation      (1,260)      (1.81)       (742)      (1.09)
    Finance charges                  (11)      (0.02)         (6)      (0.01)
    Fair value adjustments
     - ABCP                       (2,787)      (4.01)          -           -
    Foreign exchange gain (loss)  (2,267)      (3.26)        (91)      (0.13)
    Taxes other than income taxes   (360)      (0.52)          -           -
    Depletion, depreciation
     and accretion                (3,586)      (5.16)     (1,868)      (2.74)
    Income tax provision          (6,205)      (8.93)     (5,778)      (8.47)
    -------------------------------------------------------------------------
    Net earnings (loss) for
     the period                   $4,919       $7.06     $15,683      $23.00
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                       Nine months ended September 30
    -------------------------------------------------------------------------
    ($000 except per boe)               2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Netback                      $80,232      $33.79     $45,942      $36.76
    General & administrative      (4,721)      (1.99)     (2,889)      (2.31)
    Stock-based compensation      (5,420)      (2.28)     (2,762)      (2.21)
    Finance charges                  (40)      (0.02)         (9)      (0.01)
    Fair value adjustments
     - ABCP                       (2,787)      (1.17)          -           -
    Foreign exchange gain (loss)  (6,287)      (2.65)       (524)      (0.42)
    Taxes other than income taxes (1,306)      (0.55)          -           -
    Depletion, depreciation
     and accretion               (12,420)      (5.23)     (3,569)      (2.86)
    Income tax provision         (22,813)      (9.61)    (11,278)      (9.02)
    -------------------------------------------------------------------------
    Net earnings (loss) for
     the period                  $24,438      $10.29     $24,911      $19.93
    -------------------------------------------------------------------------

    In the first nine months of 2007 the company reported net earnings of
$24.4 million (2006 - $24.9 million) which equates to $0.52 per weighted
average basic and $0.48 per weighted average diluted share outstanding
compared to $0.65 per weighted average basic and $0.55 per weighted average
diluted share outstanding for the first nine months of 2006. Net earnings for
the third quarter were $4.9 million (2006 - $15.7 million) which equates to
$0.10 per weighted average basic and $0.10 per weighted average diluted share
outstanding compared to $0.39 per weighted average basic and $0.32 per
weighted average diluted share outstanding for the third quarter of 2006. Net
earnings for three months and nine months ended September 30, 2007 were
adversely affected by the impact of an impairment related to the Canadian
ABCP, a strong Canadian dollar relative to the U.S. dollar and the Argentinean
peso, an increase in the future tax provision resulting in significant
non-cash charges against earnings for both periods, as well as by higher cash
operating costs.
    In the first nine months of 2007, the weighted average number of common
shares outstanding was 47.3 million (2006 - 38.0 million). In the first nine
months of 2007, 4.0 million additional shares were included in the diluted
earnings per share calculations related to the potentially dilutive effect of
options and warrants. The weighted average number of common shares outstanding
was 50.1 million (2006 - 40.4 million) for the third quarter of 2007 and an
additional 1.7 million shares were included for the diluted per share
calculations related to the potentially dilutive effect of options and
warrants.

    As at the close of business on November 2, 2007, the company had the
following securities issued and outstanding:

    -  50,120,010 common shares;
    -  165,000 warrants; and
    -  3,230,367 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.

    LIQUIDITY AND CAPITAL RE

SOURCES 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: ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------------------------------------------------------------- ($000) 2007 2006 2007 2006 ------------------------------------------------------------------------- Net earnings (loss) for the period $4,919 $15,683 $24,438 $24,911 Add (deduct) Stock-based compensation 1,260 742 5,419 2,762 Depletion, depreciation, and accretion 3,586 1,868 12,420 3,569 Fair value adjustments - ABCP 2,787 - 2,787 - Future income tax provision (recovery) 3,800 - 6,387 (477) Foreign exchange (gain) loss 2,267 91 6,287 524 ------------------------------------------------------------------------- Cash flow from operations before working capital changes $18,619 $18,384 $57,738 $31,289 ------------------------------------------------------------------------- Cash flow in the first nine months of 2007 was $57.7 million (2006 - $31.3 million) or $1.22 per weighted average basic share and $1.13 per weighted average diluted share, (2006 - $0.82 per weighted average basic share and $0.69 per weighted average diluted share). Cash flow in the third quarter was $18.6 million (2006 - $18.4 million) which equates to $0.37 per weighted average basic share and $0.36 per weighted average fully diluted share (2006 - $0.46 per weighted average basic share and $0.38 per weighted average fully diluted share). There were more shares outstanding in 2007 than in 2006. Capital expenditures in the nine months of 2007 totaled $53.4 million (2006 - $14.4 million). Of the total, $47.4 million was invested in Argentina, mainly for costs to drill wells, constructing a crude oil treating facility, construction of secondary recovery facilities and construction of a high pressure natural gas sales pipeline in Argentina. In Peru, $5.6 million was invested on EIA advancement and the preparation for field seismic activity in the second half of 2007 and in Colombia, $0.4 million was invested in the establishment of a small startup office and the incurrence of costs related to the acquisition of concessions. Capital expenditures for the three months ended September 30, 2007 were $26.1 million (2006 - $19.8 million). All capital spending year to date 2007 was internally financed from cash flow which exceeded outlays. Petrolifera was in a strong financial position at September 30, 2007 with robust cash flow, $22.7 million of working capital and no debt. The company's 2007 capital program includes expenditures to satisfy work commitments related to the Peruvian license blocks. The company is ahead of schedule in meeting these requirements and in 2007 expects to complete geophysical work prior to drilling wells on each block. Remaining 2007 capital expenditures are discretionary. The company has sufficient working capital and cash flow is being generated in Argentina to fund these planned capital expenditures. Required funds are being moved among Argentina, Barbados, Canada, Colombia and Peru. The company had originally anticipated an outlay of $76.0 million for capital expenditures by this time in our previously announced plans. The company now expects our full year 2007 capital expenditures will be approximately $106.5 million. As previously announced the company has completed the establishment of a reserve-based US$100 million revolving credit facility, with initial available draws established at US$60 million. This further enhances Petrolifera's liquidity and financial capacity to take advantage of new investment opportunities. The company's only financial instruments are cash and cash equivalents, short-term investments, accounts receivable, accounts payable and income taxes payable. It maintains no off-balance sheet financial instruments. LONG-TERM INVESTMENTS As at September 30, 2007, included in long-term investments were third party sponsored asset backed commercial paper ("ABCP") with a par value of $37.7 million. These investments are carried at management's estimate of fair value of $34.9 million. During the quarter the third party ABCP market in Canada experienced severe liquidity problems causing several third party ABCP conduits to default on redemptions of maturing notes. There is currently a proposal which calls for the notes to be converted into longer term floating rate notes which match the maturities of the underlying assets. Petrolifera had maturities originally scheduled for the ABCP between August 14th and August 15th, 2007 which were not repaid. Petrolifera has recorded an impairment charge on the Canadian ABCP of $2.8 million based on the expected recovery of these notes. As there has been no market data available, management has estimated the fair value of these notes based on the probabilistic recovery of principal and interest. The actual timing and amount ultimately recovered from these notes may differ materially from this estimate which would impact the company's earnings. SUBSEQUENT EVENTS Subsequent to the end of the quarter Petrolifera commenced an arbitration procedure with respect to securing its 50 percent interest in the Salinas Grande I concession in La Pampa Province, Argentina. The designated partners have been reluctant to complete the transaction as agreed, necessitating this action. Also, subsequent to the end of the quarter the former contract operator of the Puesto Morales/Rinconada Concession commenced an arbitration procedure against Petrolifera and others claiming wrongful dismissal and seeking financial compensation, including costs and general damages. Petrolifera is of the opinion the action is without merit and intends to respond and counterclaim. Potential damages, if any, are not quantifiable at this time, but in any event are not anticipated to be material to the company. RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS Under the terms of a Management Services Agreement with Connacher Oil and Gas Limited ("Connacher"), which originally expired in May 2007, Connacher provided all management, operational, accounting and general and administrative services necessary or appropriate to manage and administer the company. The fee for this service was $15,000 per month. From time to time Connacher also paid bills on behalf of Petrolifera, for which it is reimbursed. During the second quarter of 2007 this agreement was extended on a month-to-month basis and will be reassessed as Petrolifera achieves increasing independence and managerial capabilities. 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. 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 a 90 percent probability that the quantities actually recovered will equal or exceed the estimated proved reserves. In the case of probable reserves, which are less certain to be recovered than proved reserves, NI 51-101 states that there is a 50 percent probability that the actual remaining quantities recovered will be equal to or greater 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 be equal to or 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, 2007 the company adopted CICA Handbook sections 1530, 3251, 3855, 3861, and 3865 relating to Comprehensive Income, Equity, Financial Instruments - Recognition and Measurement, Financial Statements - Disclosure and Presentation and Hedges, respectively. Under the new standards, additional financial statement disclosure, namely Consolidated Statements of Other Comprehensive Income, has been introduced. This statement identifies certain gains and losses, which in the company's case at this time, include only foreign currency translation adjustments arising from translation of the company's Argentinean business units which are considered to be self-sustaining, that are recorded outside the income statement. Additionally, a separate component of equity, Accumulated Other Comprehensive Income, has been introduced to disclose comprehensive income balances on a cumulative basis. Finally, all financial instruments, including derivatives, are recorded in the company's consolidated balance sheet and measured at their fair values. Under section 3855, the company is required to classify its financial instruments into one of five categories. The company has classified all of its financial instruments as Held for Trading, which requires measurement on the balance sheet at fair value with any changes in fair value recorded in income. This classification has been chosen due to the nature of the company's financial instruments. Transaction costs related to financial instruments classified as held for trading are recorded in income in accordance with the new standards. The adoption of section 3865, "Hedges", has had no effect on the company's consolidated financial statements as the company has no hedging transactions in place at this time. Over the next five 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") over the next five years. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS. The CICA has issued new Canadian accounting recommendations for additional disclosures about financial instruments and capital which will require disclosure and presentation of financial instruments about the nature and extent of risks arising from financial instruments to which the company is exposed. These recommendations are effective beginning January 1, 2008. 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 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 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 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. To date, none have been employed. 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 The company's business plan contemplates continued aggressive growth. To accomplish this, the company expects an active capital program of oil and gas exploration and development drilling in 2007 and 2008 with capital spending for the full year 2007 reaching $106.5 million and capital spending for 2008 being budgeted at $140 million. The company no longer plans to publicly issue formal guidance for operating results due to the difficulties and challenges in forecasting drilling outcomes and timing at its current stage of development. Material drilling results and developments will continue to be reported in our customary manner. The company holds $37.7 million face value of ABCP. This was previously held as a short-term investment but has now been reclassified as a long-term investment (after provision for impairment) on the company's balance sheet. These investments were made in accordance with the company's short-term investment policies which placed a primary emphasis on a high credit rating for the issuer and certainty of capital recovery. Despite the current problems in the Canadian ABCP market, which has become illiquid, the company believes it will recover its investment and is exerting all reasonable efforts to achieve this outcome. Regardless of the outcome of the company's efforts to recover its investment, in the interim, the company has sufficient liquidity derived from its current and anticipated production operations and its remaining financial resources, including other cash balances and a revolving reserve-based credit facility, to fund its planned activities. While efforts will continue to recover the value of the company's original investment in ABCP, there is no assurance of success in this regard. All estimates and statements which are not statements of historical facts are forward-looking statements. These statements involve inherent risks and uncertainties where actual results will differ and such differences could be material. There can be no assurance that Petrolifera will achieve the drilling results, levels of production, sales, cash flow or working capital, it might assume in developing its internal capital budget and financial plan. In addition, oil and gas prices and foreign exchange are subject to fluctuation and there can be no assurance that the prices assumed for the company's internal plan, or any variation thereof, will be attained. Estimated production, cash flow and working capital are dependant on access to required services and equipment on a timely basis. QUARTERLY RESULTS ------------------------------------------------------------------------- 2005 2006 ------------------------------------------------------------------------- Three months ended Three months ended ------------------------------------------------ Dec 31 Mar 31 June 30 Sept 30 Dec 31 ------------------------------------------------------------------------- Financial results ($000 except per share amounts) - unaudited ------------------------------------------------------------------------- Total revenue 1,485 8,452 18,821 33,157 45,153 ------------------------------------------------------------------------- Cash flow from operations before working capital changes(1) 228 3,435 9,470 18,384 21,077 ------------------------------------------------------------------------- Basic, per share(1) 0.01 0.10 0.25 0.46 0.53 ------------------------------------------------------------------------- Diluted, per share(1) 0.01 0.07 0.19 0.38 0.41 ------------------------------------------------------------------------- Earnings (loss) for the period (184) 1,543 7,685 15,683 14,983 ------------------------------------------------------------------------- Basic, per share (0.01) 0.04 0.21 0.39 0.38 ------------------------------------------------------------------------- Diluted, per share (0.01) 0.03 0.16 0.32 0.29 ------------------------------------------------------------------------- Capital expenditures 4,472 2,321 2,310 9,738 22,031 ------------------------------------------------------------------------- Cash on hand 19,744 21,999 25,941 36,206 51,008 ------------------------------------------------------------------------- Working capital surplus 17,887 21,959 28,913 41,361 43,038 ------------------------------------------------------------------------- Indebtedness - - - - - ------------------------------------------------------------------------- Shareholders' equity 27,060 32,991 40,844 61,440 80,656 ------------------------------------------------------------------------- Total assets 31,581 38,989 52,760 81,226 118,517 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating results ------------------------------------------------------------------------- Sales volumes ------------------------------------------------------------------------- Crude oil - bbl/d 324 1,855 4,006 7,202 10,716 ------------------------------------------------------------------------- Natural gas - mcf/d 1,285 1,243 1,181 1,259 1,101 ------------------------------------------------------------------------- Equivalent - boe/d(2) 538 2,062 4,203 7,412 10,900 ------------------------------------------------------------------------- Pricing ------------------------------------------------------------------------- Crude oil - $/bbl 43.08 48.90 50.71 49.49 45.20 ------------------------------------------------------------------------- Natural gas - $/mcf 0.99 1.17 1.33 1.44 1.50 ------------------------------------------------------------------------- Selected highlights - $/boe(2) ------------------------------------------------------------------------- Weighted average selling price per boe 28.31 44.70 48.71 48.33 44.59 ------------------------------------------------------------------------- Interest and other income 1.67 0.84 0.50 0.30 0.44 ------------------------------------------------------------------------- Royalties 3.85 5.74 7.20 6.73 6.37 ------------------------------------------------------------------------- Operating costs 6.78 4.52 4.42 5.21 4.02 ------------------------------------------------------------------------- Netback(3) 17.78 35.28 37.59 36.69 34.64 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Common share information (000s) ------------------------------------------------------------------------- Shares outstanding at end of period 34,404 37,100 37,855 42,817 43,612 ------------------------------------------------------------------------- Fully diluted 51,118 52,172 52,172 52,671 52,704 ------------------------------------------------------------------------- Weighted average shares outstanding for the period ------------------------------------------------------------------------- Basic 20,721 36,036 37,399 40,442 43,418 ------------------------------------------------------------------------- Diluted 31,803 47,500 48,777 48,594 51,002 ------------------------------------------------------------------------- Volume traded during quarter (000) 26,745 8,697 16,732 18,086 ------------------------------------------------------------------------- Common share price ($) ------------------------------------------------------------------------- High 13.75 12.60 21.95 25.24 ------------------------------------------------------------------------- Low 6.55 8.15 10.92 14.71 ------------------------------------------------------------------------- Close (end of period) 12.25 11.00 20.90 17.65 ------------------------------------------------------------------------- ---------------------------------------------------- 2007 ---------------------------------------------------- Three months ended ---------------------------- Mar 31 June 30 Sept 30 Financial results ($000 except per share amounts) - unaudited ---------------------------------------------------- Total revenue 47,122 28,105 31,730 ---------------------------------------------------- Cash flow from operations before working capital changes(1) 24,615 14,504 18,619 ---------------------------------------------------- Basic, per share(1) 0.56 0.30 0.37 ---------------------------------------------------- Diluted, per share(1) 0.49 0.28 0.36 ---------------------------------------------------- Earnings (loss) for the period 15,069 4,450 4,919 ---------------------------------------------------- Basic, per share 0.34 0.09 0.10 ---------------------------------------------------- Diluted, per share 0.30 0.09 0.10 ---------------------------------------------------- Capital expenditures 7,514 9,842 26,061 ---------------------------------------------------- Cash on hand 59,155 66,535 11,368 ---------------------------------------------------- Working capital surplus 58,811 69,690 22,742 ---------------------------------------------------- Indebtedness - - - ---------------------------------------------------- Shareholders' equity 98,124 120,236 121,727 ---------------------------------------------------- Total assets 137,840 139,054 144,016 ---------------------------------------------------- ---------------------------------------------------- Operating results ---------------------------------------------------- Sales volumes ---------------------------------------------------- Crude oil - bbl/d 11,333 6,644 7,195 ---------------------------------------------------- Natural gas - mcf/d 1,858 1,726 2,169 ---------------------------------------------------- Equivalent - boe/d(2) 11,643 6,932 7,557 ---------------------------------------------------- Pricing ---------------------------------------------------- Crude oil - $/bbl 45.43 45.17 46.99 ---------------------------------------------------- Natural gas - $/mcf 1.53 1.42 1.41 ---------------------------------------------------- Selected highlights - $/boe(2) ---------------------------------------------------- Weighted average selling price per boe 44.47 43.65 45.15 ---------------------------------------------------- Interest and other income 0.50 0.90 0.49 ---------------------------------------------------- Royalties 5.59 6.19 5.77 ---------------------------------------------------- Operating costs 4.40 5.56 6.96 ---------------------------------------------------- Netback(3) 34.98 32.80 32.91 ---------------------------------------------------- ---------------------------------------------------- Common share information (000s) ---------------------------------------------------- Shares outstanding at end of period 44,029 50,084 50,119 ---------------------------------------------------- Fully diluted 53,280 53,382 51,400 ---------------------------------------------------- Weighted average shares outstanding for the period ---------------------------------------------------- Basic 43,800 47,816 50,107 ---------------------------------------------------- Diluted 50,635 51,303 51,800 ---------------------------------------------------- Volume traded during quarter (000) 7,202 6,211 10,921 ---------------------------------------------------- Common share price ($) ---------------------------------------------------- High 20.20 19.29 22.35 ---------------------------------------------------- Low 16.05 16.60 13.18 ---------------------------------------------------- Close (end of period) 19.14 17.04 15.20 ---------------------------------------------------- (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 may not 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 operating netbacks per product and a reconciliation of net backs to net earnings, see "MD&A". CONSOLIDATED BALANCE SHEETS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- September 30, December 31, 2007 2006 ------------------------------------------------------------------------- ($000) Assets Current Cash and cash equivalents $11,368 $51,008 Accounts receivable 24,861 26,868 Prepaid expenses 2,546 302 Inventories 867 374 Due from a related company 56 - ------------------------------------------------------------------------- 39,698 78,552 Long-term investments (Note 5) 34,874 - Future income tax asset - 2,150 Property and equipment 69,444 37,815 ------------------------------------------------------------------------- $144,016 $118,517 ------------------------------------------------------------------------- Liabilities Current Accounts payable and accrued liabilities $14,609 $14,066 Income taxes payable 2,347 21,416 Due to a related company - 32 ------------------------------------------------------------------------- 16,956 35,514 Asset retirement obligations (Note 3) 2,723 2,347 Future income tax liability 2,610 - ------------------------------------------------------------------------- 5,333 2,347 ------------------------------------------------------------------------- Shareholders' equity Share capital, warrants and contributed surplus (Note 4) 63,104 39,275 Accumulated other comprehensive income (loss) (Note 2) (5,529) 1,667 Retained earnings 64,152 39,714 ------------------------------------------------------------------------- 121,727 80,656 ------------------------------------------------------------------------- $144,016 $118,517 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Revenue Petroleum and natural gas sales $31,387 $32,954 $105,522 $59,878 Interest and other income 343 203 1,435 552 ------------------------------------------------------------------------- 31,730 33,157 106,957 60,430 Royalties 4,010 4,587 13,771 8,405 ------------------------------------------------------------------------- 27,720 28,570 93,186 52,025 ------------------------------------------------------------------------- Expenses Operating 4,836 3,553 12,955 6,083 General and administrative 1,489 849 4,721 2,889 Stock-based compensation 1,260 742 5,419 2,762 Finance charges 11 6 40 9 Fair value adjustments - ABCP (Note 5) 2,787 - 2,787 - Foreign exchange loss 2,267 91 6,287 524 Taxes other than income taxes 360 - 1,306 - Depletion, depreciation and accretion 3,586 1,868 12,420 3,569 ------------------------------------------------------------------------- 16,596 7,109 45,935 15,836 ------------------------------------------------------------------------- Earnings before income taxes 11,124 21,461 47,251 36,189 Current income tax provision 2,405 5,778 16,426 11,755 Future income tax provision (recovery) 3,800 - 6,387 (477) ------------------------------------------------------------------------- 6,205 5,778 22,813 11,278 ------------------------------------------------------------------------- Net Earnings 4,919 15,683 24,438 24,911 Retained earnings (deficit), beginning of period 59,233 9,048 39,714 (180) ------------------------------------------------------------------------- Retained earnings, end of period $64,152 $24,731 $64,152 $24,731 ------------------------------------------------------------------------- Net earnings per share (Note 7) Basic $0.10 $0.39 $0.52 $0.66 Diluted $0.10 $0.32 $0.48 $0.55 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Nine months ended September 30, 2007 September 30, 2007 ------------------------------------------------------------------------- ($000) Net earnings $4,919 $24,438 Foreign currency translation adjustment (net of tax of $1,287) (4,790) (7,196) ------------------------------------------------------------------------- Comprehensive income $129 $17,242 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME AND LOSS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Nine months ended September 30, 2007 September 30, 2007 ------------------------------------------------------------------------- ($000) Balance, beginning of period $(739) $1,667 Foreign currency translation adjustment (net of tax of $1,287) (4,790) (7,196) ------------------------------------------------------------------------- Balance, end of period $(5,529) $(5,529) ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Cash provided by (used in) the following activities: Operating Net earnings $4,919 $15,683 $24,038 $24,911 Items not involving cash: Depletion, depreciation and accretion 3,586 1,868 12,420 3,569 Stock-based compensation 1,260 742 5,419 2,762 Fair value adjustments - ABCP 2,787 - 2,787 - Foreign exchange loss 2,267 91 6,287 524 Future income tax provision (recovery) 3,800 - 6,387 (477) ------------------------------------------------------------------------- Cash flow from operations before working capital changes 18,619 18,384 57,738 31,289 Changes in non-cash working capital (Note 7(b)) (8,874) (4,355) (24,351) (7,795) ------------------------------------------------------------------------- 9,745 14,029 33,387 23,494 ------------------------------------------------------------------------- Financing Issue of common shares, net of share issue costs 102 3,894 18,410 7,530 ------------------------------------------------------------------------- Investing Development of oil and gas properties (26,061) (9,738) (53,417) (14,368) Reclassification to long-term investments (37,661) - (37,661) - Changes in non-cash working capital (Note 7(b)) 655 2,172 5,007 783 ------------------------------------------------------------------------- (63,067) (7,566) (86,071) (13,585) ------------------------------------------------------------------------- ------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53,220) 10,357 (34,274) 17,439 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 66,535 25,941 51,008 17,439 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Impact of foreign exchange on foreign currency denominated cash balances (1,947) (92) (5,366) (977) ------------------------------------------------------------------------- ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD 11,368 36,206 11,368 36,206 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS IS COMPRISED OF: ------------------------------------------------------------------------- Cash in banks $10,302 $13,557 $10,302 $13,557 ------------------------------------------------------------------------- Term deposits 1,066 22,649 1,066 22,649 ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS $11,368 $36,206 $11,368 $36,206 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary cash flow information - Note 7(c) ------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Petrolifera Petroleum Limited Period ended September 30, 2007 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 years ended December 31, 2006 and 2005 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. 2. NEW ACCOUNTING STANDARDS Effective January 1, 2007 the company adopted CICA Handbook sections 1530, 3251, 3855, 3861 and 3865 relating to Comprehensive Income, Equity, Financial Instruments - Recognition and Measurement, Financial Instruments - Disclosure and Presentation and Hedges, respectively. Under the new standards, additional financial statement disclosure, namely the Consolidated Statement of Comprehensive Income, has been introduced. This statement identifies certain gains and losses, which in the company's case at this time include only foreign currency translation adjustments, arising from translation of the company's Argentinean business units which are considered to be self-sustaining, that are recorded outside the income statement. Additionally, a separate component of equity, Accumulated Other Comprehensive Income ("AOCI"), has been introduced in the consolidated balance sheet to record the continuity of other comprehensive income balances on a cumulative basis. The adoption of comprehensive income has been made in accordance with the applicable transitional provisions. Accordingly, the December 31, 2006 year end accumulated foreign currency translation adjustment balance of $1.7 million has been reclassified to AOCI. In addition, the change in the accumulated foreign currency translation adjustment balance for the nine months ended September 30, 2007 of $7.2 million is now included in the Statement of Comprehensive Income (nine months ended September 30, 2006 - nil). Finally, all financial instruments, including derivatives, are recorded in the company's consolidated balance sheet and measured at their fair values. Under section 3855, the company is required to classify its financial instruments into one of five categories. The company has classified all of its financial instruments as Held for Trading, which requires measurement on the balance sheet at fair value with any changes in fair value recorded in income. This classification has been chosen due to the nature of the company's financial instruments, which are of a short-term nature such that there are no material differences between the carrying values and the fair values of these financial statement components. Transaction costs related to financial instruments classified as held for trading are recorded in income in accordance with the new standards. The adoption of section 3865, "Hedges", has had no effect on the company's consolidated financial statements as the company does not account for its derivative financial instruments as hedges at this time. The effects of adopting these new accounting standards on the company's consolidated financial statements as at and for the nine months ended September 30, 2007 are as follows: ------------------------------------------------------------------------- ($000) Increase/(Decrease) ------------------------------------------------------------------------- Other comprehensive income $(7,196) Accumulated other comprehensive income $(7,196) ------------------------------------------------------------------------- Effective January 1, 2007 the company adopted the revised recommendations of CICA Handbook section 1506, Accounting Changes. The new recommendations permit voluntary changes in accounting policy only if they result in financial statements which provide more relevant and reliable financial information. Accounting policy changes must be applied retrospectively unless it is impractical to determine the period or cumulative impact of the change in policy. Additionally, when an entity has not applied a new primary source of GAAP that has been issued but is not yet effective, the entity must disclose that fact along with information relevant to assessing the possible impact that application of the new primary source of GAAP will have on the entity's financial statements in the period of initial application. As of January 1, 2008, the company will be required to adopt two new CICA handbook requirements, section 3862 "Financial Instruments - Disclosures" and section 3863 "Financial Instruments - Presentation" which will replace current section 3861. The new standards require disclosure of the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments, and how those risks are managed. The new presentation standard essentially carries forward the current presentation requirements. The company is assessing the impact of these new standards in its consolidated financial statements and anticipates that the main impact will be in terms of additional disclosures required. As of January 1, 2008 the company will be required to adopt CICA Handbook section 1535, "Capital Disclosures", which requires entities to disclose their objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. The company is assessing the impact of this new standard on its consolidated financial statements and anticipates that the main impact will be in terms of additional disclosures required. 3. ASSET RETIREMENT OBLIGATIONS At September 30, 2007 the estimated total undiscounted amount required to settle the asset retirement obligations was $7.5 million (December 31, 2006 - $6.3 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: ------------------------------------------------------------------------- Nine months ended Year ended September 30, December 31, 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Asset retirement obligations, beginning of period $2,347 $467 Liabilities incurred 266 1,853 Changes in estimates - - Accretion expense 110 27 ------------------------------------------------------------------------- Asset retirement obligations, end of period $2,723 $2,347 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 4. 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, 2006 43,612,503 $35,662 Issuance of common shares upon exercise of warrants 6,026,507 17,820 Issuance of common shares upon exercise of options 480,000 590 Assigned value of options exercised 248 ------------------------------------------------------------------------- Balance, share capital and warrants, September 30, 2007 50,119,010 54,320 ------------------------------------------------------------------------- Contributed surplus: ------------------------------------------------------------------------- Balance, contributed surplus, December 31, 2006 $3,613 Assigned value of options exercised (248) Stock-based compensation expensed 5,419 ------------------------------------------------------------------------- Balance, contributed surplus, September 30, 2007 8,784 ------------------------------------------------------------------------- Total share capital, warrants and contributed surplus: December 31, 2006 $39,275 September 30, 2007 $63,104 ------------------------------------------------------------------------- (a) Common Share Purchase Warrants For the nine months ended September 30, 2007 and 2006 the company had warrants outstanding to acquire common shares, as follows: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Outstanding, beginning of period 6,194,672 14,351,947 Issued upon exercise of Broker Compensation Warrants - 520,000 Exercised/expired 6,029,672 (7,882,724) ------------------------------------------------------------------------- Outstanding, end of period 165,000 6,989,223 ------------------------------------------------------------------------- As at September 30, 2007, a total of 165,000 Common Share Purchase Warrants exercisable to acquire 165,000 common shares at $0.40 per share until October 17, 2008 were outstanding. (b) Stock Options As at September 30, 2007 and 2006 the company had stock options outstanding to acquire common shares, as follows: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Shares Price Shares Price ------------------------------------------------------------------------- Outstanding, beginning of period 2,896,667 $4.86 2,437,000 $1.04 Granted 701,700 18.89 958,000 11.99 Canceled (10,000) 13.23 - - Exercised (480,000) 1.23 (530,333) (0.95) ------------------------------------------------------------------------- Outstanding, end of period 3,108,367 8.53 2,864,667 4.72 ------------------------------------------------------------------------- Exercisable, end of period 1,671,999 783,666 ------------------------------------------------------------------------- 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. ------------------------------------------------------------------------- Range of Exercise Prices Number Weighted Outstanding Average Remaining Contractual Life at September 30, 2007 ------------------------------------------------------------------------- $0.50 - $2.00 1,442,667 2.8 $8.55 - $20.95 1,665,700 3.9 ------------------------------------------------------------------------- Total 3,108,367 ------------------------------------------------------------------------- In the first nine months of 2007 a compensatory non-cash expense of $5.4 million (2006 - $2.8 million) was recorded as stock-based compensation, reflecting the amortization of the fair value of stock options over the vesting period. The third quarter stock-based compensation expense was $1.3 million (2006 - $0.7 million). The fair value of each option granted in 2007 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 ------------------------------------------------------------------------- 2007 4.1% - 4.7% 4.0 years 70% - 76% 2006 4.1% 4.0 years 43% ------------------------------------------------------------------------- The weighted average fair value at the date of grant of all options granted in 2007 was $10.62 per option (2006 - $4.72 per option) 5. LONG-TERM INVESTMENTS As at September 30, 2007, included in long-term investments were third party sponsored asset backed commercial paper ("ABCP") with a par value of $37.7 million. These investments are carried at management's estimate of fair value of $34.9 million. During the quarter the third party ABCP market in Canada experienced severe liquidity problems causing several third party ABCP to default on redemptions of maturing notes. There is currently a proposal which calls for the notes to be converted into longer term floating rate notes which match the maturities of the underlying assets. Petrolifera had maturities originally scheduled for the ABCP between August 14th and August 15th, 2007 which were not repaid. Petrolifera has recorded an impairment charge on the Canadian ABCP of $2.8 million based on the expected recovery of these notes. As there has been no market data available, management has estimated the fair value of these notes based on the probabilistic recovery of principal and interest. The actual timing and amount ultimately recovered from these notes may differ materially from this estimate which will impact the company's earnings. 6. 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 September 30, 2007 Revenue, gross 188 31,542 - - 31,730 Net earnings (loss) (4,268) 9,450 (263) - 4,919 Property and equipment 302 61,441 7,348 353 69,444 Capital expenditures - 22,721 3,190 150 26,061 Total assets 38,744 94,556 10,323 393 144,016 ------------------------------------------------------------------------- Three months ended September 30, 2006 Revenue, gross 203 32,954 - - 33,157 Net earnings (loss) (613) 16,362 (66) - 15,683 Property and equipment 219 17,293 1,705 - 19,217 Capital expenditures 159 9,145 434 - 9,738 Total assets 25,242 54,072 1,912 - 81,226 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Corporate Argentina Peru Colombia Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Nine months ended September 30, 2007 Revenue, gross 739 106,218 - - 106,957 Net earnings (loss) (10,129) 35,200 (607) (26) 24,438 Property and equipment 302 61,441 7,348 353 69,444 Capital expenditures 35 47,388 5,641 353 53,417 Total assets 38,744 94,556 10,323 393 144,016 ------------------------------------------------------------------------- Nine months ended September 30, 2006 Revenue, gross 552 59,878 - - 60,430 Net earnings (loss) (3,687) 28,658 (60) - 24,911 Property and equipment 219 17,293 1,705 - 19,217 Capital expenditures 219 13,165 934 - 14,368 Total assets 25,242 54,072 1,912 - 81,226 ------------------------------------------------------------------------- 7. SUPPLEMENTARY INFORMATION (a) Per share amounts The following table summarizes the common shares used in the per share calculations. ------------------------------------------------------------------------- Three months ended September 30 2007 2006 ------------------------------------------------------------------------- (000) ------------------------------------------------------------------------- Weighted average common shares outstanding 50,107 40,442 Dilutive effect of all stock options and all stock purchase warrants 1,693 8,152 ------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 51,800 48,594 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30 ------------------------------------------------------------------------- (000) ------------------------------------------------------------------------- Weighted average common shares outstanding 47,261 37,975 ------------------------------------------------------------------------- Dilutive effect of all stock options and all stock purchase warrants 4,048 7,556 ------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 51,309 45,531 ------------------------------------------------------------------------- (b) Net change in non-cash working capital ------------------------------------------------------------------------- Three months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Accounts receivable (6,303) (114) Prepaid expenses (2,320) (72) Accounts payable and accrued liabilities 3,297 690 Inventories (271) - Income taxes payable (2,607) - Due from (to) a related company (15) (242) ------------------------------------------------------------------------- Total (8,219) 2,183 ------------------------------------------------------------------------- Operating (8,874) (4,355) Investing 655 2,172 ------------------------------------------------------------------------- (8,219) (2,183) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Accounts receivable 2,007 (21,792) Prepaid expenses (2,244) (381) Accounts payable and accrued liabilities 543 15,398 Inventories (493) - Income taxes payable (19,069) - Due from (to) a related company (88) (237) ------------------------------------------------------------------------- Total (19,345) (7,012) ------------------------------------------------------------------------- Operating (24,354) (7,795) Investing 5,007 783 ------------------------------------------------------------------------- (19,344) (7,012) ------------------------------------------------------------------------- (c) Supplementary cash flow information ------------------------------------------------------------------------- Three months ended September 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Interest paid - 3 Income taxes paid 4,362 147 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Interest paid - 9 ------------------------------------------------------------------------- Income taxes paid 28,758 525 ------------------------------------------------------------------------- 8. CONTINGENCY The Company has been served with a Notice of Arbitration with respect to its operations in Argentina. The Company is of the opinion that the action is without merit and in any event potential damages are not anticipated to be material. FORWARD LOOKING STATEMENTS This press release contains forward-looking statements, including but not limited to future drilling plans, anticipated capital expenditures, forecast production, Cash-flow and working capital, available sources of funding, recovery of investments as short term asset-backed commercial paper and results of certain arbitration matters. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are 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 commercial parties, risk associated with international activity and the uncertainties associated with timing and amount of recovery of investments in short-term asset backed commercial paper. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com. The company's ability to complete its capital program and potentially increase production volumes and reserves is dependent on access to services, drilling rigs and equipment. Similarly, the company's ability to increase sales of oil and natural gas is dependent on sustained productivity of new and existing wells, maintenance (or reduction) of water cuts and completion of certain infrastructure and transportation systems that are currently under construction. There can be no assurance that the flow rates of newly drilled wells will result in stabilized production at these levels or that the company's new or existing high productivity wells will not incur higher water cuts than that previously reported or reductions in reservoir pressures, resulting in a decision to curtail production pending implementation of the proposed pressure maintenance program or other remedial measures. The timing and amount of recovery of the company's investment in short term asset backed commercial paper is dependent on the creditworthiness of the underlying assets held in such trusts and/or re-establishment of liquidity to the asset backed commercial paper market. These matters are outside of the control of the company and there can be no assurance as to such timing or resolution. Due to the risks, uncertainties and assumptions inherent in forward-looking statements, prospective investors in the company's securities should not place undue reliance on these forward-looking statements. Forward looking statements contained in this press release are made as of the date hereof and are subject to change. The company assumes no obligation to revise or update forward looking statements to reflect new circumstances, except as required by law. A barrel of oil equivalent (boe), derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil, may be misleading, particularly if used in isolation. A boe 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.

For further information:

For further information: Richard A Gusella, Executive Chairman,
Petrolifera Petroleum Limited, Phone: (403) 538-6202, Fax: (403) 538-6225,
inquiries@petrolifera.ca, www.petrolifera.ca

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PETROLIFERA PETROLEUM LIMITED

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