ProEx Reports Third Quarter Results



    
    Accelerated Expansion of Foothills Lands; Evaluation of New Technologies;
    Maintaining Financial Discipline
    

    CALGARY, Oct. 28 /CNW/ -

    
                                      Three months ended   Nine months ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    HIGHLIGHTS                            2008      2007      2008      2007
    -------------------------------------------------------------------------
    Operations  Production
                  - Natural gas
                     (mcf/d)            62,204    48,082    59,513    44,790
                  - Crude oil (bbls/d)     461       438       457       412
                  - Natural gas liquids
                     (bbls/d)              294       225       314       237
                  - Total production
                     (boe/d)            11,122     8,677    10,690     8,114
                Average realized price
                  - Natural gas
                     ($/mcf)              8.96      5.34      8.91      6.72
                  - Crude oil ($/bbl)   116.98     77.64    107.98     70.47
                  - Natural gas
                     liquids ($/bbl)     99.57     66.98     93.14     64.78

    Financial   ($ thousands, except
                 per share amounts)
                Petroleum and natural
                 gas revenue            61,264    28,231   172,000    94,103
                Funds generated from
                 operations             29,150    15,176    87,087    51,711
                  - Basic per share       0.50      0.31      1.56      1.13
                  - Diluted per share     0.50      0.28      1.51      1.00
                Net earnings            27,747       716    34,927    12,346
                  - Basic per share       0.48      0.01      0.63      0.27
                  - Diluted per share     0.48      0.01      0.61      0.24
                Capital investment      58,678    34,583   142,592   228,670
    -------------------------------------------------------------------------
                Bank debt and working
                 capital deficiency    160,564    59,352   160,564    59,352
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    HIGHLIGHTS

    -   ProEx Energy Ltd. ("ProEx" or the "Company"), in response to the
        recent change in world economic conditions, will conserve capital
        while maximizing our ability to capture future value. We will defer
        some drilling during the balance of 2008 while expanding our land
        base and pursuing our technology initiatives.

    -   We have focused on expansion of our dominant land base in the
        Foothills of northeastern British Columbia. Year to date undeveloped
        lands have added 145,000 net acres through farm-in and land purchases
        from industry competitors and crown land sales. Undeveloped land
        holdings that ProEx owns and controls now total over 560,000 acres.

    -   ProEx has also committed to pursue new technologies and in doing so
        further improve capital efficiencies, as well as, identify
        incremental resources in several stratigraphic horizons.

    -   Horizontal wells utilizing a variety of new completion techniques
        have been tested in three separate formations during 2008. In total,
        six such wells will have been evaluated by year-end.

    -   Production for the three months ended September 30, 2008 (the
        "Quarter"), averaged 11,122 boe per day, up 28 percent, compared to
        8,677 boe per day in the same quarter in 2007. On a diluted share
        basis production has increased 20 percent in the Quarter as
        compared to the same quarter in 2007.

    -   Funds generated from operations for the Quarter increased
        92 percent to $29.2 million compared to $15.2 million for the same
        period in 2007. Funds generated from operations per share were up
        79 percent at $0.50 diluted ($0.50 basic) compared to $0.28 diluted
        ($0.31 basic) in the same period in 2007. The Company reported net
        earnings of $27.7 million for the Quarter compared to $0.7 million
        during the same period in 2007. Net earnings per share were $0.48
        basic ($0.48 diluted) compared to $0.01 basic ($0.01 diluted) in the
        same period in 2007.

    -   ProEx's realized natural gas prices averaged $8.96 per mcf
        during the Quarter ($7.60 per mcf after hedging) compared to $5.34
        per mcf during the same period in 2007. The year to date natural gas
        price was $8.91 per mcf compared to $6.72 per mcf for the same period
        in 2007. AECO gas prices, despite the recent rapid decline, have
        risen approximately 12 percent since the beginning of 2008.

    -   ProEx added two new compressor facilities in the Green and West Beg
        areas bringing total Company processing capacity to approximately
        130 million cubic feet ("mmcf") per day.

    -   The Company ended the Quarter with total debt of $160.6 million on a
        total credit facility of $225 million and is expected to fund its
        capital investment program for 2009 from cash flow.

    OPERATIONS

    -   Twenty one wells (16.4 net) were drilled in the Quarter at an
        86 percent success rate resulting in 18 natural gas wells (14.0 net)
        and three dry holes (2.4 net).

    -   The Company currently has four drilling rigs operating in the B.C.
        Foothills. During the fourth quarter of 2008 a total of 15 (10.7 net)
        natural gas tests are forecasted to be drilled targeting a portfolio
        of vertical and horizontal Halfway opportunities as well as both
        exploration and delineation drilling in the Cretaceous and
        Mississippian horizons.

    -   ProEx has commenced a drilling program to test the applicability of
        horizontal drilling, multi-stage fracture technology in the Triassic
        aged Halfway formation. Four horizontal tests will be conducted
        during 2008. To date, two have been completed and are being
        evaluated, a third awaits completion and the final well is currently
        drilling. The Company believes that this technology has the potential
        to result in material cost savings on future development projects as
        well as adding significant incremental reserves due to improved
        recovery and the capture of resources which are not economic when
        vertically drilled.

    -   Two Mississippian Debolt tests have been drilled, completed and
        tested during the Quarter. One Debolt test is currently drilling in
        the Caribou area and the Company is on track to drill an additional
        two tests before year-end.

    -   At Julienne, the Gething stepout program continues to be very
        successful and has been expanded to the north and south of the
        original pool nucleus. During the Quarter, eight wells (6.4 net) were
        drilled resulting in seven natural gas wells (5.6 net).

    -   One rig continued drilling in the Caribou area during the Quarter
        with three new wells resulting in two successful stepout wells and
        one new pool discovery on a previously untested Halfway feature.
    

    Operations Update

    Production for the Quarter averaged 11,122 boe per day, up 28 percent
compared to 8,677 boe per day in the third quarter of 2007 and 10,449 boe per
day in the second quarter of 2008. Third quarter production was lower than
originally anticipated due to wet field conditions, which delayed completions
and tie-in activities, and unscheduled plant and gathering system downtime at
third-party facilities. The third-party gathering system was down for an
additional nine days beyond our original estimate on September 10, 2008. This
was caused by a land slide and impacted approximately 850 boe per day of our
Caribou/Green production for a period of 25 days. Remediation of this issue is
now complete and production levels have been restored.
    Exit rate production, supported by existing wells in the process of being
tied-in and an active second half drilling program, remains unchanged and is
expected to exceed 14,000 boe per day.
    ProEx has pre-invested in several processing facilities and pipeline
arteries in its operating areas during 2008 and is now positioned to continue
to bring newly discovered natural gas to market on a timely basis. During the
Quarter the Company completed two new compressor, dehydration and gathering
facilities at Green and West Beg North. The Green facility ties in two
(1.0 net) stranded natural gas wells acquired in the Caribou/Bubbles
acquisition in 2007 while the West Beg North facility ties in two new Halfway
wells (1.1 net) drilled in the first quarter of 2008. These facilities have
added an incremental 8 mmcf per day of processing capacity.
    The Company is again partnering with the province of British Columbia on
infrastructure development. ProEx has been approved for the construction of a
new incremental gas gathering pipeline system in the Caribou/Green area. To
date the Company has built approximately 4.5 kilometers of this system and is
awaiting freeze up to complete the remaining four kilometers. This project is
expected to be completed during the fourth quarter of 2008 and will tie in
three new wells.
    The expansion of the third-party owned Caribou facility in the northern
portion of the Foothills is progressing on schedule with completion expected
early in the second quarter of 2009.
    In total, ProEx has 12 plants providing approximately 130 mmcf per day of
natural gas handling capacity in the Foothills.

    Exploration Update

    Twenty one wells (16.4 net) were drilled in the Quarter at an 86 percent
success rate, utilizing five drilling rigs as noted in our September
operations update. At this time, these rigs are expected to maintain a steady
drilling pace through most of the fourth quarter and into the first quarter of
2009 testing a balanced portfolio of pool step-out wells and infill wells
utilizing newly developed drilling and completion technologies and pure
exploration drilling.
    The Halfway formation has been the Company's primary growth driver in the
Foothills of northeast British Columbia. Advances in horizontal drilling and
completions technologies have created the opportunity to investigate full
scale development and delineation of previously discovered Halfway pools.
Commencing in the third quarter, ProEx undertook to test the applicability of
horizontal wells in the Halfway formation. This was to include the drilling of
both mid and lower grade reservoirs positioned on the crests and ultimately on
the flanks of known anticlines as well as accessing reservoirs in areas where
surface topography is not conducive to conventional operations.
    The first "grassroots" horizontal drill in the Halfway formation in the
Foothills was at Dogrib into a lower grade resevoir. This well was drilled out
1,000 meters horizontally into the reservoir with significantly improved
penetration rates over vertical Halfway wells. Seven fracs were successfully
placed along the wellbore with no mechanical or wellbore issues. The well is
currently being evaluated.
    Early in the fourth quarter, the Company's second horizontal well drilled
into a more permeable Halfway sand in a surface topography challenged location
completed drilling on budget at Caribou. The well has been prepared for a
multiple stage fracture stimulation in the next several weeks. This rig, which
is spearheading ProEx's horizontal drilling program, is currently drilling the
next well in the Sasquatch area. This well will test a third type of Halfway
reservoir where the sands are modestly permeable.
    On September 10, 2008 ProEx, along with its working interest partner,
announced that it had completed its first multi-stage fracture stimulation on
an existing horizontal well at Bubbles (40 percent working interest). The
well, originally drilled in 1999, flowed no gas on test from the Halfway, is
now producing approximately 1.6 mmcf per day at high flowing pressures and
remains steady. The approximate 750 meter horizontal portion was completed
with six separate fracture stimulations, tested and then tied-in to production
facilities.
    One rig continued drilling in the Caribou area during the Quarter
resulting in two successful stepout wells and one new pool discovery on a
previously untested Halfway feature. This new discovery intersected several
prospective zones. The deepest horizon has now been completed. Follow-up
drilling locations have been submitted for licensing for the upcoming first
quarter 2009 drilling program. ProEx is currently drilling two exploration
tests at Caribou, one testing a Debolt subthrust and the second situated on an
undrilled Halfway anticline as defined by 3-D seismic shot in the first
quarter of 2008.
    At Julienne, the Gething stepout program continues to be very successful
and we have now expanded to the north and south of the original pool nucleus.
Julienne has grown to the point where it is now the second largest gas pool in
the Company's portfolio. Upcoming tests will attempt to further expand the
Gething pool contours further to the north and to capitalize on a new
discovery made in the summer in another Cretaceous horizon that is now
contributing production to the compressor station. During the Quarter, eight
wells (6.4 net) were drilled in Julienne resulting in seven natural gas wells
(5.6 net).
    Two Bluesky channel sand tests were also successful at West Gundy. These
wells should be online into our Gundy compressor station by the middle of the
fourth quarter.
    The two Mississippian Debolt tests mentioned in the September update have
now been completed and tested. A third Debolt test is currently drilling in
the Caribou area while two additional tests are scheduled before year-end. The
Debolt program is expected to comprise up to ten percent of our drilling
budget for 2009.

    Land & Seismic

    The Company's dominant and contiguous exploration land base continues to
grow with 34,173 net acres of land added via crown land sales during the
Quarter. Crown land sales during the Quarter were $7.0 million with an
additional $8.5 million invested during October, adding 40,295 net acres to
bring the year to date additions to 144,528 net undeveloped acres (before
consumption and expiries). Total undeveloped land in British Columbia is now
approximately 560,580 acres and extends over 175 kilometers from south to
north paralleling the British Columbia Rockies.
    ProEx has permitted various programs approximating 425 square kilometers
of land for seismic data acquisition. Certain of these programs are
anticipated to be shot during 2009. The Company has used 3-D seismic
extensively to define sub-thrust features in the Mississippian and Triassic
sections. In total, the Company currently has over 2,200 square kilometers of
3-D seismic data in the Foothills.

    
    2008 Third Quarter Drilling Results

                                Gross Wells                 Net Wells
                          ------------------------  -------------------------
                           Gas   Oil   Dry  Total     Gas   Oil   Dry  Total
                          ------------------------  -------------------------
    British Columbia
    - Foothills region      18     -     3     21    14.0     -   2.4   16.4
    - Fort St. John
       Plains region         -     -     -      -       -     -     -      -
                          ------------------------  -------------------------
    Total                   18     -     3     21    14.0     -   2.4   16.4
                          ------------------------  -------------------------
                          ------------------------  -------------------------

    2008 Year to Date Drilling Results

                                Gross Wells                 Net Wells
                          ------------------------  -------------------------
                           Gas   Oil   Dry  Total     Gas   Oil   Dry  Total
                          ------------------------  -------------------------
    British Columbia
    - Foothills region      43     -     3     46    32.1     -   2.4   34.5
    - Fort St. John
       Plains region         1     -     -      1     0.2     -     -    0.2
                          ------------------------  -------------------------
    Total                   44     -     3     47    32.3     -   2.4   34.7
                          ------------------------  -------------------------
                          ------------------------  -------------------------
    

    Outlook

    Over the past two months there have been many changes in the world's
economic outlook. Capital markets with respect to both equities and debt have
tightened significantly. The perception and dynamics of supply and demand for
almost every commodity have shown considerable weakness and volatility.
    Ironically, despite the Nymex natural gas price dropping from a high of
US$13.58 per mmbtu in July of this year, AECO and hence wellhead natural gas
prices reflected in Canadian dollars have in fact increased 20 percent since
this time last year based on local supply and demand fundamentals and aided by
a shrinking basis differential and a falling Canadian dollar.
    In response to the current macro environment we have elected to focus
predominantly on aggressively increasing our hold on prospective undeveloped
lands in our core area of the British Columbia Foothills and at the same time
pursue the evaluation of the application of new drilling and completion
technologies while balancing cash flow generating investments.
    The continuation of a healthy balance sheet will be important in this
environment. ProEx has based its 2008 capital budget on spending cash flow.
While we will continue to monitor capital markets and cash flow to evaluate
the possibility of increasing capital investment levels, we will ensure that
at a minimum we can live within our means. The Company ended the Quarter with
total debt of $160.6 million on a total bank facility of $225 million and is
well positioned going into 2009. Our banking syndicate is comprised of
Canadian banks that remain stable.
    This year we anticipate investing approximately $60 million (32 percent
of forecasted capital) on land, seismic and technology evaluation. These
actions will greatly expand our future opportunity base and maintain strong
momentum and have the potential to significantly increase the asset value of
ProEx.
    With a growing production base and natural gas pricing in line with the
current forward strip, an investment of approximately $150 million could be
supported for 2009 at this time. This level of internal funding will continue
to support production and reserve growth per share through 2009 as well as add
to the Company's inventory for the subsequent years.

    
    On behalf of the Board of Directors,

    (Signed) "David D. Johnson"

    David D. Johnson
    President & Chief Executive Officer
    October 28, 2008
    

    Forward Looking Statements - Certain information regarding ProEx Energy
Ltd. set forth in this document, including management's assessment of ProEx
Energy Ltd.'s future plans and operations, contains forward-looking statements
that involve substantial known and unknown risks and uncertainties. These
forward-looking statements are subject to numerous risks and uncertainties,
certain of which are beyond ProEx Energy Ltd.'s control, including the impact
of general economic conditions, industry conditions, volatility of commodity
prices, currency fluctuations, imprecision of reserve estimates, environmental
risks, competition from other producers, the lack of availability of qualified
personnel or management, stock market volatility and ability to access
sufficient capital from internal and external sources. ProEx Energy Ltd.'s
actual results, performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if any of them do
so, what benefits that ProEx Energy Ltd. will derive therefrom.


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

    The following discussion and analysis as provided by the Management of
ProEx Energy Ltd. ("ProEx" or the "Company") as of October 28, 2008, is to be
read in conjunction with the accompanying unaudited interim financial
statements and related notes for the three and nine months ended September 30,
2008 and ProEx's audited financial statements, related notes and MD&A for the
year ended December 31, 2007. The financial data presented has been prepared
in accordance with Canadian generally accepted accounting principles ("GAAP").
The reporting and the measurement currency is the Canadian dollar.

    Description of Company

    ProEx is a Calgary based, natural gas focused, exploration and
development company, established on July 2, 2004. Primary operating areas
include the northeast British Columbia Foothills and Fort St. John Plains
regions. Shares of ProEx trade on the Toronto Stock Exchange ("TSX") under the
symbol PXE.

    Relationship with Progress Energy Trust

    ProEx was created as part of a Plan of Arrangement effective July 2, 2004
which included the creation of Progress Energy Trust ("Progress"). ProEx has
no ownership interest in Progress and Progress has no ownership interest in
ProEx. ProEx has no employees. Progress provides personnel and services to
ProEx under a technical services agreement ("Technical Service Agreement").
The Technical Services Agreement was put in place to ensure the sharing of
costs of operating both companies using Progress employees. Progress provides
personnel and certain administrative and technical services to ProEx in
connection with the management, development, exploitation and operation of the
assets of ProEx and the marketing of its production. Progress provides these
services in accordance with the Technical Services Agreement entered into with
ProEx as described below.
    ProEx and Progress also share the cost of long-term compensation and
consequently ProEx has granted performance shares and stock options to
Progress executives and employees and common shares under Progress' long term
incentive compensation plan ("LTI") to non-executive employees of Progress in
their capacity as service providers.
    Under the terms of the LTI, non-executive Progress employees in their
capacity as service providers, may be granted LTI awards to be paid in common
shares of the Company. ProEx agreed to contribute to the LTI to ensure that
service providers retain incentives related to the success of ProEx. Awards
granted under the LTI will vest on the second anniversary date of the date of
grant. ProEx has agreed to reimburse Progress for this expense.
    ProEx and Progress have joint interest in certain properties and
undeveloped land in the northeast British Columbia Foothills and Fort St. John
Plains regions. These joint interest properties are governed by standard
industry agreements and in addition the Company has entered into a protocol
arrangement ("Protocol Arrangement") with Progress that specifies how each
company will manage the joint lands in specifically identified areas of
interest. To ensure good governance practices, both ProEx and Progress have
each created independent committees of their Board of Directors to monitor
compliance with the Technical Services Agreement and the Protocol Arrangement.

    Technical Services Agreement - The Technical Services Agreement has no
set termination date and will continue until terminated by either party with
one year prior written notice to the other party or some other date as
mutually agreed. The Company receives services including management,
development, exploitation, operations, administrative, and marketing, as well
as information technology systems from Progress on an expense reimbursement
basis, based on the Company's monthly capital activity and production levels
relative to the combined capital activity and production levels of both ProEx
and Progress.

    Protocol Arrangement - The Protocol Arrangement identifies methods and
processes to be followed on both existing and new lands, joint facilities,
marketing, seismic and surface rights. The Protocol Arrangement also outlines
the practices to be followed in the event either party enters into areas
outside of the identified areas of interest.

    On April 2, 2007, ProEx acquired certain interests in northeast British
Columbia Foothills assets previously acquired by Progress. ProEx's total
consideration, including transaction costs of $0.9 million was $136.4 million.
When considering the bid process for this acquisition, each of Progress and
ProEx identified assets that they were interested in acquiring and values that
they were willing to pay to acquire such assets. Progress made a single bid on
behalf of ProEx and Progress and the ultimate purchase was based on the prices
that each of Progress and ProEx were willing to pay for the assets that they
had selected to acquire. The resale of assets between Progress and ProEx was
based on these allocations. The technical services committee reviewed the
details of the transaction prior to the purchase and sale agreement being
signed. All lands are managed in accordance with the Protocol Arrangement.
    On November 30, 2007, ProEx and Progress jointly acquired certain assets
in the Foothills region of British Columbia. The total cost of the acquisition
of $17.9 million was split in accordance with working interests held in the
surrounding area. As a result, ProEx acquired an 80 percent interest
($14.3 million) and Progress acquired a 20 percent interest in the assets
($3.6 million).

    Non-GAAP Measures

    The MD&A contains the term "funds generated from operations" and "funds
generated from operations per share" which do not have any standardized
meaning prescribed by Canadian GAAP. Management uses funds generated from
operations and funds generated from operations per share to analyze operating
performance and leverage and considers funds generated from operations to be a
key measure as it demonstrates the Company's ability to generate the cash
necessary to fund future capital investments and to repay debt. Funds
generated from operations should not be considered an alternative to, or more
meaningful than cash flow from operating activities as determined in
accordance with Canadian GAAP as an indicator of the Company's performance.
Therefore references to funds generated from operations or funds generated
from operations per share (basic and diluted) may not be comparable with the
calculation of similar measures for other entities. Funds generated from
operations per share is calculated using the basic and diluted weighted
average number of shares for the period. The reconciliation between funds
generated from operations and cash flow from operations after changes in
non-cash working capital for the three and nine months ended September 30,
2008 and 2007 is as follows:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Funds generated from operations     29,150    15,176    87,087    51,711
    Changes in non-cash working
     capital                            (4,006)      562    (1,545)    3,946
    -------------------------------------------------------------------------
    Cash flow from operations after
     changes in non-cash working
     capital                            25,144    15,738    85,542    55,657
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Management uses certain industry benchmarks such as operating netback to
analyze financial and operating performance. This benchmark as presented does
not have any standardized meaning prescribed by Canadian GAAP and therefore
may not be comparable with the calculation of similar measures for other
entities. Management considers netbacks an important measure as it
demonstrates its profitability relative to current commodity prices. The
Company uses this measure to help evaluate its performance.

    Boe Presentation

    Barrels of oil equivalent ("boe") may be misleading, particularly if used
in isolation. A boe conversion ratio of six thousand cubic feet ("mcf") to one
barrel ("bbl") is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the
wellhead. All boe conversions in this report are derived by converting natural
gas to oil in the ratio of six mcf of gas to one barrel of oil.

    Forward-Looking Information

    Forward Looking Statements - Certain information regarding ProEx set
forth in this document, including Management's assessment of the Company's
future plans and operations, contains forward-looking statements that involve
substantial known and unknown risks and uncertainties. The use of any of the
words "anticipate", "continue", "estimate", "expect", "may", "will",
"project", "should", "believe" and similar expressions are intended to
identify forward looking statements. Such statements represent ProEx's
internal projections, estimates or beliefs concerning, among other things, an
outlook on the estimated amounts and timing of capital expenditures,
anticipated future debt, revenues or other expectations, beliefs, plans,
objectives, assumptions, intentions or statements about future events or
performance. These statements are only predictions and actual events or
results may differ materially. Although ProEx believes that the expectations
reflected in the forward-looking statements are reasonable, it cannot
guarantee future results, levels of activity, performance or achievement since
such expectations are inherently subject to significant business, economic,
competitive, political and social uncertainties and contingencies. Many
factors could cause ProEx's actual results to differ materially from those
expressed or implied in any forward-looking statements made by, or on behalf
of, ProEx.
    In particular, forward-looking statements included in this MD&A include,
but are not limited to, statements with respect to the size of, and future net
revenues from, crude oil and natural gas reserves; the focus of capital
expenditures; expectations regarding the ability to raise capital and to
continually add to reserves through acquisitions and development; projections
of market prices and costs; the performance characteristics of the Company's
crude oil and natural gas properties; crude oil and natural gas production
levels; ProEx's future operating and financial results; capital expenditure
programs; supply and demand for crude oil and natural gas; average royalty
rates; grassroots development drilling and development drilling in its
operating regions; amount of general and administrative expenses; and
treatment under governmental regulatory regimes and tax laws. In addition,
statements relating to "reserves" or "resources" are deemed to be forward
looking statements, as they involve the implied assessment, based on certain
estimates and assumptions, that the resources and reserves described can be
profitably produced in the future.
    These forward-looking statements are subject to numerous risks and
uncertainties, certain of which are beyond the Company's control, including
the impact of general economic conditions; volatility in market prices for
crude oil and natural gas; industry conditions; volatility of commodity
prices; currency fluctuation; imprecision of reserve estimates; liabilities
inherent in crude oil and natural gas operations; environmental risks;
incorrect assessments of the value of acquisitions and exploration and
development programs; competition from other producers; the lack of
availability of qualified personnel or management; changes in income tax laws
or changes in tax laws and incentive programs relating to the oil and gas
industry; hazards such as fire, explosion, blowouts, cratering, and spills,
each of which could result in substantial damage to wells, production
facilities, other property and the environment or in personal injury; stock
market volatility; ability to access sufficient capital from internal and
external sources and the other risks considered under "Risk Factors" in our
annual information form for the year ended December 31, 2007 which is
available on www.sedar.com.
    With respect to forward-looking statements contained in this MD&A, ProEx
has made assumptions regarding: current commodity prices and royalty regimes;
availability of skilled labour; north American sulphur prices; timing and
amount of capital expenditures; future exchange rates; the price of oil and
natural gas; the impact of increasing competition; conditions in general
economic and financial markets; availability of drilling and related
equipment; effects of regulation by governmental agencies; royalty rates and
future operating costs.
    Management has included the above summary of assumptions and risks
related to forward-looking information provided in this MD&A in order to
provide Shareholders with a more complete perspective on ProEx's future
operations and such information may not be appropriate for other purposes.
ProEx's actual results, performance or achievement could differ materially
from those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if any of them do
so, what benefits that the Company will derive there from. Readers are
cautioned that the foregoing lists of factors are not exhaustive. These
forward-looking statements are made as of the date of this MD&A and the
Company disclaim any intent or obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or results or otherwise, other than as required by applicable
securities laws.

    RESULTS OF OPERATIONS

    Asset Acquisition

    On April 2, 2007, ProEx acquired certain interests in northeast British
Columbia Foothills assets previously acquired by Progress (the "Asset
Acquisition"). ProEx's total consideration, including transaction costs of
$0.9 million was $136.4 million. The Asset Acquisition was financed through an
equity offering of 8,050,000 common shares of the Company at a price of
$12.45 per share for aggregate gross proceeds of $100.2 million ($95.6 million
net of issue costs). The remainder of the purchase price was financed through
increased bank debt.
    The Asset Acquisition included approximately 2,000 boe per day of
production, 95 percent natural gas and approximately 80,000 net acres of
undeveloped land.

    Production

    The following is a summary of daily production for the periods indicated:

    
                              Three Months Ended         Nine Months Ended
                                  September 30              September 30
    -------------------------------------------------------------------------
                              2008    2007  Change      2008    2007  Change
                                               (%)                       (%)
    -------------------------------------------------------------------------
    Natural gas (mcf/d)     62,204  48,082      29    59,513  44,790      33
    Crude oil (bbls/d)         461     438       5       457     412      11
    Natural gas liquids
     (bbls/d)                  294     225      31       314     237      32
    -------------------------------------------------------------------------
    Total production
     (boe/d)                11,122   8,677      28    10,690   8,114      32
    -------------------------------------------------------------------------
    Sulphur sales (tons/d)      42      37      14        46      42      10
    -------------------------------------------------------------------------
    

    Production for the three months ended September 30, 2008 (the "Quarter")
was negatively impacted by wet field conditions, which delayed completions and
tie-in activities and unscheduled plant and gathering system downtime at
third-party facilities. Exit rate production, supported by existing wells in
the process of being tied-in and an active second half drilling program is
expected to exceed 14,000 boe per day.
    Production for the Quarter of 11,122 boe per day was 28 percent higher
than the 8,677 boe per day recorded in the same period in 2007. Natural gas
production of 62,204 mcf per day during the Quarter was 29 percent higher than
the 48,082 mcf per day recorded for the same period in 2007. Crude oil and
natural gas liquids production for the Quarter increased 14 percent to
755 bbls per day from 663 bbls per day for the same period in 2007. For the
nine months ended September 30, 2008, ProEx's production averaged 10,690 boe
per day, a 32 percent increase over the 8,114 boe per day recorded in the same
period in 2007. Current year to date production consisted of 59,513 mcf per
day of natural gas and 771 bbls per day of oil and natural gas liquids.
Production increases are a result of the Company's successful exploration and
development drilling program in addition to approximately 2,000 boe per day of
production added from the Asset Acquisition beginning in the second quarter of
2007. The Company's production portfolio was weighted 93 percent to natural
gas, four percent to crude oil and three percent to natural gas liquids.
    Natural gas produced in certain areas of the Plains and Foothills region
of northeast British Columbia contain varying levels of hydrogen sulphide. The
processing of this natural gas results in sulphur as a by-product. For the
three and nine months ended September 30, 2008, the Company sold 42 tons per
day and 46 tons per day of sulphur, respectively (2007 - 37 tons per day and
42 tons per day, respectively).

    Pricing and Risk Management

    Natural Gas Markets
    ProEx's realized natural gas price in the Quarter and for the nine months
ended September 30, 2008 was $8.96 and $8.91 per mcf, respectively (2007 -
$5.34 and $6.72, per mcf, respectively) compared to the AECO daily index
average of $7.81 and $8.72 per mcf, and the AECO monthly index average of
$9.33 and $8.66 per mcf, respectively. ProEx markets its natural gas at a mix
of daily and monthly pricing. The higher realization reflects the higher heat
content of ProEx's natural gas stream.
    The Quarter began with record high natural gas prices with AECO opening
the Quarter at $11.24 per gigajoule ("GJ") before falling to $5.81 per GJ by
September 30, 2008. Rising United States ("U.S.") natural gas production and
the absence of weather related demand put continual downward pressure on
prices throughout the Quarter. A relatively active hurricane season was
expected to put upward pressure on prices but it also caused short term demand
destruction as a result of the Texas area refineries being shut-down during
the hurricanes. Since the end of the Quarter, the weakening Canadian dollar
has caused AECO gas prices to rise even while Nymex gas prices have continued
to fall.
    We believe the supply-demand balance for natural gas in North America
remains tight. Although there has been substantial year over year growth in
organic production in the U.S., it has been offset by reduced imports of
liquefied natural gas and natural gas imports from Canada. On the demand side,
there is consistent year over year growth in natural gas demand for electrical
generation and residential and commercial consumption. Natural gas in storage
will again be a critical factor in balancing winter related demand. Natural
gas in storage is expected to be approximately four to five percent lower than
last years record levels but on par with the 5-year average meaning that
colder than normal winter weather will place strong upward pressure on natural
gas prices in North America.

    Oil Markets
    ProEx's realized prices for its liquids stream for the Quarter and for
the nine months ended September 30, 2008 were $116.98 and $107.98 per bbl,
respectively (2007 - $77.64 and $70.47 per bbl, respectively) for crude oil
and $99.57 and $93.14 per bbl, respectively (2007 - $66.98 and $64.78 per bbl,
respectively) for natural gas liquids.
    Crude oil prices began the Quarter with WTI oil hitting a high of $145.29
US per barrel on July 3, 2008. Oil prices began to fall throughout the Quarter
as global demand destruction concerns became more apparent. Prices continued
to fall through September as the credit crisis began to spread globally with
fears of a global recession. WTI oil prices settled at $100 US per barrel by
the end of the Quarter but has since fallen further as a result of the
deepening global credit crises. U.S. and global demand forecasts are being
revised downward which is having a resultant negative impact on prices.

    Sulphur Markets
    ProEx's realized net sulphur price for the Quarter and for the nine
months ended September 30, 2008 was $604.89 and $408.78 per ton, respectively
(2007 - $19.80 net gain and $7.33 net loss per ton, respectively). ProEx
markets its sulphur through an arrangement with a sulphur marketing company
and pays all costs and fees associated with transportation, loading, storage
and marketing of its sulphur.
    North American sulphur prices have dropped sharply over the Quarter.
Depressed by the international credit crisis and dropping end use demand for
the manufacture of fertilizer and nickel smelting, prices have fallen back to
near historical average levels below $100 per ton from the highs seen earlier
this year in the $800 plus range per ton. The market outlook for sulphur
appears to be weak as a majority of the global purchasers hold substantial
inventories which provide minimal demand while the Canadian sulphur supply
continues unrestricted as produced sulphur comes as a by-product from the
production of crude oil and natural gas.

    
                                      Three Months Ended   Nine Months Ended
    Average Benchmark Prices                September 30        September 30
    -------------------------------------------------------------------------
                                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Natural gas - Station No. 2
     ($/mcf daily index)                  7.52      5.26      8.55      6.47
    Natural gas - AECO
     ($/mcf daily index)                  7.81      5.19      8.72      6.60
    Natural gas - AECO
     ($/mcf monthly index)                9.33      5.66      8.66      6.88
    Exchange rate (US$/Cdn$)            1.0418    1.0446    1.0186    1.1048
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                      Three Months Ended   Nine Months Ended
    ProEx Realized Prices                   September 30        September 30
    -------------------------------------------------------------------------
                                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Natural gas ($/mcf)                   8.96      5.34      8.91      6.72
    Crude oil ($/bbl)                   116.98     77.64    107.98     70.47
    Natural gas liquids ($/bbl)          99.57     66.98     93.14     64.78
    Sulphur - net ($/ton)               604.89     19.80    408.78     (7.33)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Risk Management
    The Company has entered into natural gas financial contracts for the
purpose of protecting its funds generated from operations from the volatility
of natural gas prices. For the Quarter, the Company's natural gas price risk
management program had a net realized loss of $4.5 million and $7.8 million
year to date (2007 - $3.1 million and $6.7 million gain, respectively).
    On January 1, 2007 the Company adopted the new accounting standards
regarding the accounting for financial instruments. In addition to the
adoption of the new standards, Management elected not to use hedge accounting
and consequently recognizes the fair value of its natural gas financial
contracts at each reporting period with the change in the fair value being
classified as unrealized gains and losses in the statement of earnings.
    On adoption, the Company recognized a current asset of $7.4 million for
the fair value of its natural gas derivative contracts with a corresponding
increase to accumulated other comprehensive income of $4.9 million (net of tax
of $2.5 million). The $4.9 million in accumulated other comprehensive income
was amortized through other comprehensive income and unrealized gain or loss
on the statement of earnings over the term of the contracts. For the three
months ended September 30, 2007, $0.8 million ($4.7 million year to date) was
amortized through other comprehensive income with a corresponding pre-tax
unrealized gain of $1.2 million ($7.0 million year to date). The balance in
accumulated other comprehensive income was fully amortized at December 31,
2007, therefore requiring no charge to other comprehensive income for the
period ended September 30, 2008.
    The following table reconciles the Company's unrealized gain (loss) on
financial contracts:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Change in fair value of financial
     instruments                        26,833    (1,576)    7,361    (6,132)
    Amortization of accumulated other
     comprehensive income                    -     1,249         -     6,981
    -------------------------------------------------------------------------
    Unrealized gain (loss) on
     financial instruments              26,833      (327)    7,361       849
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The Company's financial derivative trading activities are conducted
pursuant to the Company's Risk Management Policy approved by the Board of
Directors. The Risk Management Policy has the objectives of reducing risk
exposure to budgeted annual funds generated from operations projections
resulting from uncertainty or changes in commodity prices, interest rates or
foreign exchange; limiting financial contract volumes up to a maximum of
50 percent of budgeted production, net of royalties (or higher subject to
Board of Director's approval); and limiting financial derivative trading
activity to counter-parties that provide sufficient collateral in support of
payment or have investment grade credit ratings.
    ProEx's commodity risk management positions are described in Note 8 in
the unaudited interim financial statements. The Company has both summer and
winter financial derivative contracts in place for the current year, all of
which use swaps and bull spreads. The summer contracts for the period April
2008 to October 2008 are for a total of 40,000 GJ's per day with an average
net floor price (net of premiums to be paid) of $6.93 per GJ and an average
net ceiling price of $7.93 per GJ. The winter contracts for the period
November 2008 to March 2009 total 15,000 GJ's per day with an average net
floor price (net of premiums to be paid) of $9.78 per GJ and an average net
ceiling price of $12.68 per GJ.

    Revenues

    For the Quarter, total revenues increased 117 percent to $61.3 million
compared to $28.2 million for the same period in 2007. The increase was a
result of increased production from the successful capital program over the
past twelve months, and higher commodity prices. Natural gas revenue for the
Quarter increased 117 percent to $51.3 million from $23.6 million for the same
period in 2007, while crude oil sales increased 58 percent to $5.0 million
compared to $3.1 million in 2007 and natural gas liquids sales increased
94 percent to $2.7 million from $1.4 million for the same period in 2007. For
the nine months ended September 30, 2008, revenues increased 83 percent to
$172.0 million from $94.1 million for the same period in 2007 due to higher
production volumes and higher commodity prices.
    For the three and nine months ended September 30, 2008, petroleum and
natural gas revenue included the following balances compared to the same
periods in 2007:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Natural gas sales                   51,295    23,648   145,301    82,070
    Crude oil sales                      4,958     3,131    13,527     7,934
    Natural gas liquids sales            2,691     1,384     8,003     4,183
    Sulphur sales (net)                  2,320        68     5,169       (84)
    -------------------------------------------------------------------------
    Petroleum and natural gas revenue   61,264    28,231   172,000    94,103
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Royalties

    Royalty expense consists of royalties paid to provincial governments,
freehold landowners and overriding royalty owners. For the Quarter, royalties
increased 108 percent to $13.2 million compared to $6.3 million for the same
period in 2007 due to higher revenues as a result of higher production and
commodity prices. The Company's average royalty rate for the Quarter was
21.5 percent compared to 22.5 percent in 2007. For the nine months ended
September 30, 2008, royalties increased to $36.8 million (21.4 percent average
rate) from $22.5 million (23.9 percent average rate) in 2007 due to higher
revenues. The decrease in the royalty rate is the result of royalty credits
received during the Quarter and the lower royalty rates on the properties
acquired in the Asset Acquisition, which also included wells in which ProEx
previously paid gross over riding royalties. Management anticipates, based on
current commodity prices, the average royalty rate for the remainder of 2008
will be approximately 21 to 23 percent.

    Operating Expenses

    Operating expenses during the Quarter were $6.5 million compared to
$4.1 million for the same period in 2007. For the nine months ended
September 30, 2008, operating expenses were $17.4 million compared to
$11.3 million for the same period in 2007. On a boe basis, operating expenses
for the Quarter increased 26 percent to $6.39 compared to $5.09 for the same
period in 2007. For the nine months ended September 30, 2008, operating costs
per boe increased 16 percent to $5.94 from $5.11 recorded in the same period
in 2007. The increase on a per boe basis for the Quarter was due to additional
repair and maintenance work performed on the Company's facilities during the
period. The Company typically performs routine repair and maintenance on its
facilities during the McMahon plant turnaround. Management anticipates
operating expenses for the remainder of 2008 to be between $5.50 and $6.00 per
boe.

    Transportation Expenses

    Transportation expenses for the Quarter increased 44 percent to
$4.7 million compared to the $3.3 million for the same period in 2007. For the
nine months ended September 30, 2008, transportation expenses were
$13.2 million compared to $9.1 million for the same period in 2007. On a boe
basis, transportation expenses during the Quarter and for the nine months
ended September 30, 2008 were $4.57 and $4.49 respectively compared to $4.07
and $4.12 respectively for the same periods in 2007. To ensure the Company's
near to medium-term production growth volumes can be transported and
processed, the Company has contracted for firm capacity in excess of what the
Company is currently producing.
    In British Columbia, there is an infrastructure owned by mid-stream
processing companies that enables gas producers to avoid facility construction
in exchange for regulated gathering, processing and transmission fees. This
all-in charge is included in transportation expenses.

    Operating Netbacks

    Although many wells produce both crude oil and natural gas, a well is
categorized as a natural gas well or an oil well based upon the higher
proportion of natural gas or crude oil production. The following table
summarizes the operating netbacks for natural gas and crude oil properties for
the Quarter and nine month periods ended September 30, 2008 compared to the
same periods in 2007:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
                                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Natural gas properties ($/mcf)
    Sales price                           9.30      5.62      9.24      6.92
    Realized gain (loss) on financial
     instruments                         (0.76)     0.69     (0.47)     0.53
    Royalties                            (2.01)    (1.30)    (2.02)    (1.70)
    Operating expenses                   (1.02)    (0.79)    (0.96)    (0.82)
    Transportation expenses              (0.79)    (0.70)    (0.77)    (0.71)
    -------------------------------------------------------------------------
    Operating netback - natural gas
     properties                           4.72      3.52      5.02      4.22
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Crude oil properties ($/bbl)
    Sales price                          93.26     61.44     88.57     60.58
    Royalties                           (17.03)   (10.56)   (16.66)    (9.61)
    Operating expenses                  (11.55)   (10.38)   (10.24)    (8.17)
    Transportation expenses              (1.68)    (1.61)    (1.79)    (1.93)
    -------------------------------------------------------------------------
    Operating netback - crude oil
     properties                          63.00     38.89     59.88     40.87
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    General and Administrative Expenses

    For the Quarter, general and administrative expenses net of overhead
recoveries, ("G&A") increased 24 percent to $1.1 million compared to
$0.9 million for the same period in 2007. For the nine months ended
September 30, 2008, G&A expenses were $3.7 million compared to $2.4 million
for the same period in 2007. On a boe basis for the Quarter, G&A was $1.12
compared to $1.16 recorded for the same period in 2007, and for the nine month
period, G&A per boe was $1.26 compared to $1.09 for the same period in 2007.
    The increase in G&A for the Quarter as compared to the same period in
2007 is primarily due to the increased size of the Company and the resulting
technical services fee from Progress. The Company receives services including
management, development, exploitation, operations, administrative, and
marketing, as well as information technology systems from Progress on an
expense reimbursement basis, based on the Company's monthly capital activity
and production levels relative to the combined capital activity and production
levels of both ProEx and Progress. Management anticipates G&A expense to
average between $1.10 per boe and $1.20 per boe for 2008.
    The following table summarizes G&A for the Quarter and nine month periods
ended September 30, 2008 compared to the same periods in 2007:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Direct expenses                        234       233       563       643
    Technical services fee from
     Progress                            2,083     1,561     6,479     4,522
    -------------------------------------------------------------------------
    Gross G&A                            2,317     1,794     7,042     5,165
    Recoveries                            (989)     (623)   (2,659)   (2,097)
    Capitalized expenses                  (179)     (242)     (702)     (655)
    -------------------------------------------------------------------------
    Total G&A                            1,149       929     3,681     2,413
    -------------------------------------------------------------------------
    Total G&A ($boe)                      1.12      1.16      1.26      1.09
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Long Term Incentive Compensation

    For the Quarter, long term incentive compensation expense, relating to
outstanding stock options, Class B Performance Shares and Progress' LTI, was
$1.1 million ($1.05 per boe) compared to $0.9 million ($1.11 per boe) for the
same period in 2007. Year to date compensation expense was $3.0 million
($1.03 per boe) compared to $1.7 million ($0.75 per boe) for the same period
in 2007. The increase in compensation expense per boe for year to date as
compared to the same period in the prior year is the result of the issuance of
1,074,000 stock options during the third quarter of 2007, as well as, the
expense relating to the initial grant of the LTI in May 2007.
    During 2007, Progress' LTI was established for the benefit of Progress
employees. ProEx agreed to contribute to the LTI to ensure that service
providers retain incentives related to the success of ProEx. As at
September 30, 2008, 178,206 common shares of ProEx have been granted to
Progress employees, in their capacity as service providers to ProEx, resulting
in a total compensation cost of $2.5 million. ProEx reimbursed Progress for
this cost, therefore the total compensation cost has been recorded as a
prepaid expense and $2.3 million will be amortized through long term incentive
compensation expense and $0.2 million will be capitalized equally over the two
year vesting period. Awards granted under the LTI will vest on the second
anniversary date of the date of grant.

    Interest and Financing

    For the Quarter, interest and financing charges were $1.7 million
($1.63 per boe) compared to $1.3 million ($1.59 per boe) for the same period
in 2007. For the nine months ended September 30, 2008, interest and financing
expenses were $4.7 million ($1.61 per boe) compared to $3.0 million ($1.35 per
boe) for the same period in 2007. The increase in interest and financing
charges for the Quarter as compared to the same period in the prior year, is a
result of higher debt levels utilized to fund the capital investment program.
Details of ProEx's bank debt are described in Note 4 in the unaudited interim
financial statements.

    Depletion, Depreciation and Accretion

    For the Quarter, depletion and depreciation of property, plant and
equipment and the accretion of the asset retirement obligations ("DD&A") was
$16.1 million compared to $13.0 million for the same period in 2007. For the
nine months ended September 30, 2008, DD&A expense was $45.2 million compared
to $34.1 million for the same period in 2007. The increase is due to higher
production and a larger capital asset balance partially offset by reserve
additions. DD&A per boe for the Quarter was $15.71 per boe compared to
$16.33 per boe recorded for the same period in 2007. DD&A for the nine month
period ended September 30, 2008 was $15.43 per boe compared to $15.41 per boe
for the same period in 2007.

    Future Income Taxes

    The provision for future income taxes for the Quarter was an expense of
$11.5 million compared to a $0.5 million expense for the same period in 2007.
For the nine months ended September 30, 2008, the provision for future income
taxes was an expense of $12.7 million compared to $5.1 million for the same
period in 2007. The higher taxes in the Quarter as compared to the same period
in 2007 is a result of higher pre-tax earnings, which is offset slightly by a
general corporate tax rate reduction in British Columbia from 12 percent to
11.5 percent on January 1, 2008 and a further reduction to 11 percent on
January 1, 2009.

    Net Earnings, Comprehensive Income and Funds Generated from Operations

    The Company recorded net earnings for the Quarter of $27.7 million
compared to net earnings of $0.7 million during the same period in 2007. For
the nine months ended September 30, 2008, net earnings were $34.9 million
compared to $12.3 million for the same period in 2007. Higher earnings are
primarily a result of increased production and higher realized prices, along
with the unrealized gain on financial instruments offset by the realized loss
on financial instruments, as well as, higher expenses.
    Basic and diluted net earnings per share for the Quarter were both $0.48
and $0.48 ($0.01 basic and $0.01 diluted for the same period in 2007) and for
the nine months ended September 30, 2008, net earnings per basic and diluted
share were $0.63 and $0.61 respectively ($0.27 basic and $0.24 diluted for the
same period in 2007). Net earnings for the Quarter includes a $26.8 million
unrealized gain on financial instruments relating to the increase in fair
market value of the Company's financial contracts from the second quarter of
2008.
    Funds generated from operations were $29.2 million for the Quarter
compared to $15.2 million during the same period in 2007, while funds
generated from operations for the nine months ended September 30, 2008 were
$87.1 compared to $51.7 million for the same period in 2007. The increase was
due to higher revenues as a result of higher production and commodity prices.
    Basic and diluted funds generated from operations per share for the
Quarter were $0.50, compared to $0.31 and $0.28, respectively during the same
period in 2007. For the nine month period ended September 30, 2008, basic and
diluted funds generated from operations per share were $1.56 and $1.51
respectively compared to $1.13 and $1.00 respectively during the same period
in 2007. The increase in funds generated from operations for both the Quarter
and year to date as compared to the same periods in the prior year is due to
both the increase in production and natural gas prices.
    The following table summarizes the funds generated from operations and
net earnings on a boe basis for the Quarter and nine month periods ended
September 30, 2008 compared to the same periods in 2007:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($/boe)                               2008      2007      2008      2007
    -------------------------------------------------------------------------
    Petroleum and natural gas
     revenues(1)                         59.87     35.37     58.72     42.48
    Royalties                           (12.88)    (7.95)   (12.55)   (10.16)
    -------------------------------------------------------------------------
                                         46.99     27.42     46.17     32.32
    Realized gain (loss) on financial
     instruments                         (4.36)     3.89     (2.67)     3.02
    -------------------------------------------------------------------------
                                         42.63     31.31     43.50     35.34
    Operating expenses                   (6.39)    (5.09)    (5.94)    (5.11)
    Transportation expenses              (4.57)    (4.07)    (4.49)    (4.12)
    -------------------------------------------------------------------------
    Operating netback                    31.67     22.15     33.07     26.11
    General and administrative expenses  (1.12)    (1.16)    (1.26)    (1.09)
    Long term incentive - cash component (0.30)    (0.32)    (0.29)    (0.20)
    Interest and financing expenses      (1.63)    (1.59)    (1.61)    (1.35)
    Asset retirement expenditures(2)     (0.13)    (0.06)    (0.18)    (0.13)
    -------------------------------------------------------------------------
    Funds generated from operations      28.49     19.02     29.73     23.34
    Asset retirement expenditures(2)      0.13      0.06      0.18      0.13
    Unrealized gain (loss) on
     financial instruments               26.22     (0.41)     2.51      0.38
    Long term incentive compensation
     expense                             (0.75)    (0.79)    (0.74)    (0.55)
    Depletion, depreciation and
     accretion expenses                 (15.71)   (16.33)   (15.43)   (15.41)
    -------------------------------------------------------------------------
    Net earnings before taxes            38.38      1.55     16.25      7.89
    Future income taxes                 (11.26)    (0.65)    (4.33)    (2.32)
    -------------------------------------------------------------------------
    Net earnings                         27.12      0.90     11.92      5.57
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Includes sulphur net revenue with no associated production as no
        conversion exists for tons to boe. On a boe basis for the Quarter and
        for the nine month period, petroleum and natural gas revenues include
        $2.27 per boe and $1.76 per boe of net revenue from sulphur,
        respectively (2007 - $0.09 revenue per boe and $0.04 loss per boe,
        respectively).

    (2) Actual asset retirement costs incurred during the period are
        classified for cash flow purposes as an operating item, however these
        costs are not an expense of the period and are therefore added back
        for purposes of determining net earnings.
    

    The Company's funds generated from operations were $28.49 per boe for the
Quarter compared to $19.02 per boe for the same period in 2007. Net earnings
were $27.12 per boe for the Quarter compared to $0.90 per boe in the same
period in 2007. For the nine month period ended September 30, 2008, funds
generated from operations were $29.73 per boe compared to $23.34 per boe in
the same period in 2007 while net earnings were $11.92 per boe compared to
$5.57 per boe during the same period in 2007. Higher funds generated from
operations for the Quarter and year to date as compared to the same periods in
the prior year is primarily due to the higher commodity prices and increased
production. Higher net earnings for the Quarter as compared to the same period
in the prior year is mainly due to the unrealized gain on the Company's
financial instruments.

    Capital Expenditures

    The following table summarizes the capital investment for the Quarter and
the nine month periods ended September 30, 2008 compared to the same periods
in 2007:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Land acquisitions and retention      6,983     1,225    10,897     4,326
    Geological and geophysical             409     1,424     6,492     7,490
    Drilling and completions            42,869    26,409    85,923    64,457
    Equipping and facilities             8,417     4,934    32,314    14,555
    Net property acquisitions
     (dispositions)                          -       591     6,966   137,842
    -------------------------------------------------------------------------
    Total net capital investment        58,678    34,583   145,592   228,670
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the Quarter ProEx drilled 21 gross natural gas wells (16.4 net)
with a 86 percent success rate. Year-to-date, ProEx has drilled 47 gross wells
(34.7 net) with a 93 percent success rate.
    The Company's 2008 capital investment program was increased from the
previous $150 to $160 million range to between $180 to $190 million based on
the success of the drilling program to date and to position the Company for
the first quarter 2009 activity.

    
    Capitalization and Capital Resources

    Common Share Information (thousands)

                                       September 30, 2008  December 31, 2007
    -------------------------------------------------------------------------
    Nine months ended weighted average
     outstanding Common Shares
    - Basic                                        55,728             47,326
    - Diluted                                      57,529             52,702

    Outstanding Securities
    - Common Shares                                57,852             52,528
    - Common Share options                          1,675              1,934
    - Common Share warrants                             -              4,765
    -------------------------------------------------------------------------
    - Diluted Common Shares outstanding            59,527             59,227
    -------------------------------------------------------------------------
    - Class B Performance Shares                        -                551
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Outstanding Securities at October 27, 2008 (thousands)
    - Common Shares                                57,852
    - Common Share options                          1,675
    ------------------------------------------------------
    - Diluted Common Shares outstanding            59,527
    ------------------------------------------------------
    ------------------------------------------------------
    

    In conjunction with the Asset Acquisition on April 2, 2007, ProEx issued
8,050,000 common shares at a price of $12.45 per share for aggregate gross
proceeds of $100.2 million ($95.6 million net of issue costs).
    On September 12, 2007 ProEx issued 1,830,000 common shares at a price of
$13.70 per common share and 1,420,000 flow-through common shares at a price of
$17.65 per flow-through share. The aggregate proceeds, net of share issue
costs of $2.3 million ($1.6 million net of tax) were $47.8 million. Pursuant
to the flow-through share offering, ProEx will incur $25.1 million of
qualifying resource expenditures prior to December 31, 2008, to satisfy its
flow-through share obligation. ProEx renounced the qualifying resource
expenditures to holders of the flow-through shares effective December 31,
2007. The future income tax effect and reduction to share capital was
accounted for in the first quarter of 2008, the date that the Company filed
the renouncement documents with the tax authorities.
    All outstanding common share warrants and Class B Performance shares
expired on June 28, 2008.

    Total Market Capitalization

    The Company's market capitalization at September 30, 2008 was
$770.0 million.

    
    (thousands, except per
     share amounts)                    September 30, 2008  December 31, 2007
    -------------------------------------------------------------------------
    Common Shares outstanding                      57,852             52,528
    Share price ($)(1)                              13.31              11.83
    -------------------------------------------------------------------------
    Total market capitalization ($)               770,010            621,406
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Represents the closing price on the Toronto Stock Exchange ("TSX").


    Liquidity and Capital Resources

    ($ thousands)                      September 30, 2008  December 31, 2007
    -------------------------------------------------------------------------
    Working capital deficiency (surplus)           19,891             14,105
    Bank debt                                     140,673             96,881
    -------------------------------------------------------------------------
    Total debt                                    160,564            110,986
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    At September 30, 2008 the Company had $140.7 million outstanding on its
credit facilities and a working capital deficit of $19.9 million, resulting in
$160.6 million of total debt. The credit facilities consisted of a
$215 million extendible revolving term credit facility and a $10 million
working capital credit facility with a syndicate of Canadian chartered banks.
The facilities are available on a revolving basis for a period of at least
364 days until April 15, 2009, and such initial term out date may be extended
for further 364 day periods at the request of the Company, subject to approval
by the banks. Following the term out date, the facilities will be available on
a non-revolving basis for a one year term, at which time the facilities would
be due and payable. The facility is a borrowing base facility that is
determined based on, among other things, the Company's current reserve report,
results of operations, current and forecasted commodity prices and the current
economic environment.
    The Company's investing activities in the Quarter consisted primarily of
expenditures on its capital program. As a result of the current international
credit crisis, capital markets with respect to both equities and debt have
tightened significantly. However, the syndicate of Canadian chartered banks
under ProEx's credit facilities have remained stable and Management
anticipates that the Company will have adequate liquidity to fund its current
working capital deficit and budgeted capital expenditures, through a
combination of funds generated from operations and additional debt. Should
natural gas prices weaken for a protracted period, the Company may choose to
reduce budgeted capital expenditures. New equity, if available and on
favorable terms, may be utilized to expand exploration programs.

    QUARTERLY FINANCIAL SUMMARY

    The following table highlights ProEx's performance for the quarterly
reporting periods from October 1, 2006 to September 30, 2008:

    

                                                  2008                 2007
    -------------------------------------------------------------------------
    ($ thousands, except per
     share amounts)                    Sept 30   June 30    Mar 31    Dec 31
    -------------------------------------------------------------------------
    Petroleum and natural gas sales     61,264    61,949    48,787    38,057
    Funds generated from operations     29,150    31,867    26,069    22,098
      - Per share basic                   0.50      0.57      0.49      0.42
      - Per share diluted                 0.50      0.55      0.46      0.39
    Net earnings                        27,747     5,307     1,873     7,725
      - Per share basic                   0.48      0.09      0.04      0.15
      - Per share diluted                 0.48      0.09      0.03      0.14
    Total assets                       659,558   616,652   605,898   549,343
    Bank debt and working capital
     deficiency                        160,564   131,097   147,742   110,986
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                  2007                 2006
    -------------------------------------------------------------------------
    ($ thousands, except per
     share amounts)                    Sept 30   June 30    Mar 31    Dec 31
    -------------------------------------------------------------------------
    Petroleum and natural gas sales     28,231    37,347    28,524    23,386
    Funds generated from operations     15,176    18,628    17,907    13,995
      - Per share basic                   0.31      0.39      0.45      0.37
      - Per share diluted                 0.28      0.35      0.39      0.32
    Net earnings                           716     7,564     4,066     4,293
      - Per share basic                   0.01      0.16      0.10      0.11
      - Per share diluted                 0.01      0.14      0.09      0.10
    Total assets                       484,888   470,906   339,252   290,307
    Bank debt and working capital
     deficiency                         59,352    88,411    69,858    27,838
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Lower petroleum and natural gas revenue, funds generated from operations
and net earnings in the fourth quarter of 2006 and first two quarters of 2007
was due to lower production in those quarters as compared to the current year.
The third quarter of 2007 experienced declines in realized natural gas prices
which was reflected in the lower revenue, funds generated from operations and
net earnings. The four most recently completed quarters experienced higher
realized natural gas prices and production as compared to prior quarters which
was reflected in the higher revenues, and funds generated from operations. Net
earnings in the first and second quarters of 2008 were lower due to unrealized
losses associated with the Company's financial commodity contracts. Future
natural gas prices fell in the third quarter of 2008 causing a large
unrealized gain on the Company's financial commodity contracts and an increase
to net earnings.

    DISCLOSURE CONTROLS AND PROCEDURES

    During the Quarter, national instrument 52-109 was issued and will be
effective for ProEx's 2008 year end reporting. The rule includes the
certification of the operating effectiveness of internal controls over
financial reporting ("ICFR"), requires the use of a control framework to
design and evaluate internal controls, provides specific guidance regarding
the documentation of controls, as well as the documentation on testing and
evaluating controls, and provides clarification regarding the definition of a
material weakness and conclusions on disclosure controls and procedures when
there is a material weakness in ICFR. ProEx has examined the rule and will be
compliant on the effective date.

    INTERNATIONAL FINANCIAL REPORTING STANDARDS

    Early in 2008, the Canadian Accounting Standards Board confirmed the
convergence of Canadian GAAP to International Financial Reporting Standards
("IFRS") effective January 1, 2011. ProEx is assessing the impact of adopting
IFRS and is implementing plans for transition.

    ADDITIONAL INFORMATION

    Additional information relating to the Company is filed on SEDAR and can
be viewed at www.sedar.com. Information can also be obtained by contacting the
Company at ProEx Energy Ltd. 1200, 205 - 5th Avenue S.W., Calgary, Alberta,
Canada T2P 2V7 or by e-mail at ir@proexenergy.com. Information is also
accessible on the Company's web site at www.proexenergy.com.


    
    PROEX ENERGY LTD.
    BALANCE SHEETS

    (Unaudited)

                                                  September 30,  December 31,
    ($ thousands)                                         2008          2007
    -------------------------------------------------------------------------

    ASSETS
    Current
      Accounts receivable                               25,071        20,091
      Prepaid expenses and deposits                      2,311         3,473
      Fair value of financial instruments (Note 8)       7,361             -
    -------------------------------------------------------------------------
                                                        34,743        23,564
    Property, plant and equipment                      624,815       525,779
    -------------------------------------------------------------------------
                                                       659,558       549,343
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Current
      Accounts payable and accrued liabilities          47,273        37,669
      Future income taxes                                2,227             -
    -------------------------------------------------------------------------
                                                        49,500        37,669
    Bank debt (Note 4)                                 140,673        96,881
    Asset retirement obligations (Note 5)                6,803         5,691
    Future income taxes                                 36,713        19,752
    -------------------------------------------------------------------------
                                                       233,689       159,993

    SHAREHOLDERS' EQUITY
    Share capital and warrants (Note 6)                334,575       333,861
    Contributed surplus (Note 6)                         4,400         3,522
    Retained earnings                                   86,894        51,967
    -------------------------------------------------------------------------
                                                       425,869       389,350
    -------------------------------------------------------------------------
                                                       659,558       549,343
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the financial statements



    PROEX ENERGY LTD.
    STATEMENTS OF NET EARNINGS, COMPREHENSIVE INCOME
    AND RETAINED EARNINGS

    (Unaudited)

                                      Three Months Ended   Nine Months Ended
    ($ thousands, except per                September 30        September 30
     share amounts)                       2008      2007      2008      2007
    -------------------------------------------------------------------------

    REVENUES
      Petroleum and natural gas         61,264    28,231   172,000    94,103
      Royalties                        (13,178)   (6,349)  (36,773)  (22,515)
    -------------------------------------------------------------------------
                                        48,086    21,882   135,227    71,588
    Realized gain (loss) on
     financial instruments (Note 8)     (4,465)    3,107    (7,810)    6,679
    Unrealized gain (loss) on
     financial instruments (Note 8)     26,833      (327)    7,361       849
    -------------------------------------------------------------------------
                                        70,454    24,662   134,778    79,116
    -------------------------------------------------------------------------

    EXPENSES
      Operating                          6,542     4,062    17,411    11,308
      Transportation                     4,678     3,250    13,154     9,117
      General and administrative         1,149       929     3,681     2,413
      Long term incentive compensation
       (Note 6)                          1,071       884     3,031     1,664
      Interest and financing             1,667     1,268     4,712     2,992
      Depletion, depreciation and
       accretion                        16,074    13,037    45,189    34,130
    -------------------------------------------------------------------------
                                        31,181    23,430    87,178    61,624
    -------------------------------------------------------------------------
    Net earnings before taxes           39,273     1,232    47,600    17,492

    TAXES
    Future income tax expense           11,526       516    12,673     5,146
    -------------------------------------------------------------------------
    NET EARNINGS                        27,747       716    34,927    12,346

    OTHER COMPREHENSIVE INCOME
    Amortization of fair value of
     financial instruments (Note 6)          -      (835)        -    (4,668)
    -------------------------------------------------------------------------
    COMPREHENSIVE INCOME (LOSS)         27,747      (119)   34,927     7,678
    -------------------------------------------------------------------------

    Retained earnings, beginning
     of period                          59,147    43,525    51,967    31,895
    -------------------------------------------------------------------------
    Retained earnings, end of period    86,894    44,241    86,894    44,241
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings per share (Note 6)
      Basic                              $0.48     $0.01     $0.63     $0.27
      Diluted                            $0.48     $0.01     $0.61     $0.24
    -------------------------------------------------------------------------
    See accompanying notes to the financial statements



    PROEX ENERGY LTD.
    STATEMENTS OF CASH FLOWS

    (Unaudited)

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
     ($ thousands)                        2008      2007      2008      2007
    -------------------------------------------------------------------------

    Cash provided by (used in)
    OPERATING
      Net earnings                      27,747       716    34,927    12,346
      Depletion, depreciation and
       accretion                        16,074    13,037    45,189    34,130
      Unrealized loss (gain) on
       financial instruments           (26,833)      327    (7,361)     (849)
      Long term incentive
       compensation (Note 6)               767       630     2,181     1,226
      Asset retirement expenditures
       (Note 5)                           (131)      (50)     (522)     (288)
      Future income taxes               11,526       516    12,673     5,146
    -------------------------------------------------------------------------
                                        29,150    15,176    87,087    51,711
      Change in non-cash working
       capital (Note 7)                 (4,006)      562    (1,545)    3,946
    -------------------------------------------------------------------------
                                        25,144    15,738    85,542    55,657
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    FINANCING
      Increase (decrease) in bank debt     673   (41,372)   43,792    27,974
      Issue of shares (net of share
       issue costs) (Note 6)                62    48,466     5,927   145,444
      Change in non-cash working
       capital (Note 7)                      -       156         -      (211)
    -------------------------------------------------------------------------
                                           735     7,250    49,719   173,207
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    INVESTING
      Asset acquisition (Note 3)             -         -         -  (136,396)
      Capital expenditures             (58,678)  (34,583) (142,592)  (92,274)
      Change in non-cash working
       capital (Note 7)                 25,579    11,595     7,331      (194)
    -------------------------------------------------------------------------
                                       (33,099)  (22,988) (135,261) (228,864)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Change in cash and short-term
     investments                        (7,220)        -         -         -
    Cash and short-term investments,
     beginning of period                 7,220         -         -         -
    -------------------------------------------------------------------------
    Cash and short-term investments,
     end of period                           -         -         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the financial statements



    PROEX ENERGY LTD.
    NOTES TO FINANCIAL STATEMENTS
    (Unaudited)

    ProEx Energy Ltd. ("ProEx" or the "Company") was incorporated on April 8,
    2004 and commenced commercial operations on July 2, 2004 under a Plan of
    Arrangement. Under the Plan of Arrangement various assets of Progress
    Energy Trust ("Progress") were transferred to ProEx.

    1.  SUMMARY OF ACCOUNTING POLICIES

    Nature of Business and Basis of Presentation

    ProEx is involved in the exploration, development and production of
    petroleum and natural gas in British Columbia. The financial statements
    are stated in Canadian dollars and have been prepared in accordance with
    Canadian generally accepted accounting principles ("GAAP").

    The unaudited interim financial statements of the Company have been
    prepared by Management in accordance with Canadian GAAP, following the
    same accounting policies and methods of computation as the audited
    financial statements of ProEx for the year ended December 31, 2007. The
    disclosures provided below are incremental to those included with the
    annual financial statements and certain disclosures which are normally
    required to be included in the notes to the annual financial statements,
    have been condensed or omitted. These unaudited interim financial
    statements should be read in conjunction with the financial statements
    and notes thereto in ProEx's annual report for the year ended
    December 31, 2007.

    The preparation of financial statements in conformity with Canadian GAAP
    requires Management to make estimates and assumptions that affect the
    reported amounts of assets and liabilities and disclosure of contingent
    assets and liabilities at the date of the financial statements and the
    reported amounts of revenues and expenses during the period. Actual
    results may differ from those estimates.

    2.  RELATIONSHIP WITH PROGRESS ENERGY TRUST

    ProEx was created as part of a Plan of Arrangement effective July 2, 2004
    which included the creation of Progress. ProEx has no ownership interest
    in Progress and Progress has no ownership interest in ProEx. ProEx has no
    employees. Progress provides personnel and services to ProEx under a
    technical services agreement ("Technical Service Agreement"). The
    Technical Services Agreement was put in place to ensure the sharing of
    costs of operating both companies using Progress employees. Progress
    provides personnel and certain administrative and technical services to
    ProEx in connection with the management, development, exploitation and
    operation of the assets of ProEx and the marketing of its production.
    Progress provides these services in accordance with the Technical
    Services Agreement entered into with ProEx as described below.

    ProEx and Progress also share the cost of long-term compensation and
    consequently ProEx has granted performance shares and stock options to
    Progress executives and employees and common shares under Progress' long
    term incentive compensation plan ("LTI") to non-executive employees of
    Progress in their capacity as service providers. Progress provides these
    services to ProEx on an expense reimbursement basis, based on ProEx's
    monthly capital activity and production levels relative to the combined
    capital activity and production levels of both Progress and ProEx. Total
    expenses reimbursed by ProEx for the three and nine month periods ended
    September 30, 2008 were $2.1 million and $6.5 million respectively
    (2007 - $1.6 million and $4.5 million respectively). As at September 30,
    2008, accounts receivable included $4.6 million (2007 - $0.9 million)
    receivable from Progress which includes standard joint venture amounts.
    These amounts were received subsequent to September 30, 2008.

    On April 2, 2007, ProEx acquired certain interests in northeast British
    Columbia Foothills assets previously acquired by Progress (the "Asset
    Acquisition"). ProEx's total consideration, including transaction costs
    of $0.9 million was $136.4 million. When considering the bid process for
    the Asset Acquisition, each of Progress and ProEx identified assets that
    they were interested in acquiring and values that they were willing to
    pay to acquire such assets. Progress made a single bid on behalf of ProEx
    and Progress and the ultimate purchase was based on the prices that each
    of Progress and ProEx were willing to pay for the assets that they had
    selected to acquire. The resale of assets from Progress to ProEx was
    based on these allocations. The technical services committee reviewed the
    details of the transaction prior to the purchase and sale agreement being
    signed. All lands are managed in accordance with the Protocol
    Arrangement.

    Under the terms of Progress' LTI, Progress employees in their capacity as
    service providers, may be granted LTI awards to be paid in Common Shares
    of the Company. ProEx agreed to contribute to the LTI to ensure that
    service providers retain incentives related to the success of ProEx.
    Awards granted under the LTI will vest on the second anniversary date of
    the date of grant. ProEx has agreed to reimburse Progress for this
    expense. Refer to note 6 for details of the long term incentive
    compensation plan.

    3.  ASSET ACQUISITION

    On April 2, 2007, ProEx acquired interests in certain northeast British
    Columbia Foothills assets previously acquired by Progress. ProEx's total
    consideration, including transaction costs of $0.9 million was
    $136.4 million. The full cost of the Asset Acquisition was recorded to
    property, plant and equipment (including unproved property value of
    $16.0 million which is excluded from the calculation of depletion and
    depreciation), and in addition, the Company recorded an asset retirement
    obligation on the acquired assets of $1.9 million. The Asset Acquisition
    was financed through an equity offering of 8,050,000 Common Shares of the
    Company at a price of $12.45 per share for aggregate gross proceeds of
    $100.2 million ($95.6 million net of issue costs). The remainder of the
    purchase price was financed through bank debt.

    4.  BANK DEBT

    At September 30, 2008, the Company's credit facilities consisted of a
    $215 million extendible revolving term credit facility and a $10 million
    working capital credit facility with a syndicate of Canadian chartered
    banks. On April 15, 2008, the Company increased the credit facility
    borrowing base from $185 million to $225 million. The facilities are
    available on a revolving basis for a period of at least 364 days until
    April 15, 2009, and such initial term out date may be extended for
    further 364 day periods at the request of the Company, subject to
    approval by the banks. Following the term out date, the facilities will
    be available on a non-revolving basis for a one year term, at which time
    the facilities would be due and payable. Various borrowing options are
    available under the facilities including prime rate based advances and
    banker's acceptance loans. The credit facilities are secured by a
    $500 million fixed and floating charge debenture on the assets of the
    Company. The borrowing base is subject to semi-annual review by the
    banks.

    5.  ASSET RETIREMENT OBLIGATIONS

    The total future asset retirement obligation was estimated based on the
    Company's net ownership interest in all wells and facilities, the
    estimated costs to abandon and reclaim the wells and facilities and the
    estimated timing of the costs to be incurred in future periods. The total
    undiscounted amount of the estimated cash flows required to settle the
    asset retirement obligations is approximately $34.7 million which will be
    incurred over the next 42 years with the majority of costs incurred
    between 2008 and 2020. A credit adjusted risk-free rate of eight percent
    was used to calculate the fair value of the asset retirement obligations.

    The following reconciles the Company's asset retirement obligations:

                                              Nine Months Ended   Year Ended
                                                   September 30  December 31
    -------------------------------------------------------------------------
    ($ thousands)                             2008         2007         2007
    -------------------------------------------------------------------------
    Balance, beginning of period             5,691        1,791        1,791
    Liabilities incurred                     1,264          963        1,819
    Liabilities acquired                         -        1,899        1,990
    Liabilities settled                       (522)        (288)        (341)
    Accretion expense                          370          209          432
    -------------------------------------------------------------------------
    Balance, end of period                   6,803        4,574        5,691
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  SHARE CAPITAL

    Authorized

    Unlimited number of voting Common Shares, without nominal or par value

    701,300 Class B Performance Shares, without nominal or par value


    Issued                           Nine Months Ended September 30
    ($ thousands - except            2008                      2007
     share amounts)           Number       Amount       Number       Amount
    -------------------------------------------------------------------------
    Common Shares
    Balance, beginning
     of period             52,527,916      332,128   39,690,659      189,820
      Issued for cash               -            -   11,300,000      150,357
      Issued on exercise
       of Options             231,633        3,581       21,000          284
      Issued on exercise
       of Warrants          4,588,658        5,025    1,226,717        2,144
      Issued on exercise
       of Class B
       Performance Shares     503,871          357      123,933            1
      Flow through share
       renouncement                 -       (6,516)           -       (6,094)
      Share issue costs,
       net of tax of $1,423         -            -            -       (4,727)
    -------------------------------------------------------------------------
    Balance, end of
     period                57,852,078      334,575   52,362,309      331,785
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Warrants
      Balance, beginning
       of period            4,765,028        1,727    6,143,539        2,223
      Exercised            (4,760,236)      (1,727)  (1,226,717)        (441)
      Expired                  (4,792)           -            -            -
    -------------------------------------------------------------------------
    Balance, end of period          -            -    4,916,822        1,782
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Class B Performance
     Shares
    Balance, beginning
     of period                551,197            6      694,661            7
      Exercised              (551,197)          (6)    (137,556)          (1)
      Forfeited                     -            -          (95)           -
    -------------------------------------------------------------------------
    Balance, end of period          -            -      557,010            6
    -------------------------------------------------------------------------
    Total share capital
     and warrants, at end
     of period                             334,575                   333,573
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Shares issued for cash

    On April 2, 2007, ProEx issued 8,050,000 Common Shares at a price of
    $12.45 per share for aggregate gross proceeds of $100.2 million
    ($95.6 million net of issue costs) to acquire the northeast British
    Columbia assets. See note 3 for further disclosure on the Asset
    Acquisition.

    On September 12, 2007 ProEx issued 1,830,000 Common Shares at a price of
    $13.70 per Common Share and 1,420,000 flow-through Common Shares at a
    price of $17.65 per flow-through share. The aggregate proceeds, net of
    share issue costs of $2.3 million ($1.6 million net of tax) were
    $47.8 million. Pursuant to the flow-through share offering, ProEx will
    incur $25.1 million of qualifying resource expenditures prior to
    December 31, 2008, to satisfy its flow-through share obligation. ProEx
    will renounce the qualifying resource expenditures to holders of the
    flow-through shares effective on or before December 31, 2007. The future
    income tax effect and reduction to share capital was accounted for in the
    first quarter of 2008, the date that the Company filed the renouncement
    documents with the tax authorities.

    Warrants

    Each Common Share purchase Warrant ("Warrants") entitled the holder to
    purchase one Common Share at a price of $1.39 per share. For the nine
    month period ended September 30, 2008, 4,760,236 Warrants were exercised,
    which resulted in the issue of 4,588,658 shares. The difference between
    the Warrants exercised and shares issued was due to Warrant holders
    exercising their right to receive fewer shares in lieu of payment of the
    exercise price. All unexercised Warrants expired on June 28, 2008.

    Class B Performance Shares

    Each Class B Performance Share was convertible into a percentage of a
    Common Share equal to the closing trading price of the Common Shares on
    the TSX on the trading day prior to such conversion (the "Current Market
    Price") less $1.39, if positive, divided by the Current Market Price.

    Holders of Class B Performance Shares were not entitled to any voting
    rights or to receive notice of or attend any meetings of the shareholders
    of the Company, were not entitled to receive any dividends on the
    performance shares and were not entitled upon any liquidation,
    dissolution or winding-up of the Company to any return of capital other
    than the payment of the redemption price for each performance share in
    preference to the holders of Common Shares. All Class B Performance
    Shares were exercised prior to their expiry on June 28, 2008.

    Earnings per share

    Net earnings per Common Share figures have been calculated using the
    treasury stock method. The following table reconciles the denominators
    used for the basic and diluted earnings per Common Share calculations.

                                  Three Months Ended       Nine Months Ended
                                        September 30            September 30
    -------------------------------------------------------------------------
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Weighted Average
     Common Shares
    Basic                     57,850,911  49,318,063  55,728,345  45,708,387
    Effect of warrants                 -   4,729,621   1,559,938   5,163,830
    Effect of stock options            -           -      67,729           -
    Effect of Class B
     Performance Shares                -     526,899     173,118     593,141
    -------------------------------------------------------------------------
    Diluted                   57,850,911  54,574,583  57,529,130  51,465,358
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Long term incentive compensation

    Stock options

    At the Annual General Meeting held on April 29, 2008, the resolutions
    approving amendments to the Company's stock option plan (the "Plan) and
    the granting of unallocated options were withdrawn and not voted upon by
    shareholders. As a result, no additional options have been granted since
    this date.

    Under the terms of the prior Plan, directors and officers of ProEx and
    Progress employees in their capacity as service providers were granted
    options to purchase Common Shares. Options granted under the Plan have a
    term of five years to expiry and vest over a three year period. The
    exercise price of each option equals the market price of the Company's
    Common Shares on the date of grant.

    The following table sets forth a reconciliation of the Plan activity for
    the nine months ended September 30, 2008.

                                                                    Weighted
                                                                     average
                                                      Number of     exercise
                                                        options     price ($)
    -------------------------------------------------------------------------
    Balance, beginning of period                      1,933,501        12.63
    Granted                                             100,000        15.07
    Forfeited                                          (127,002)       13.95
    Exercised                                          (231,633)       11.35
    -------------------------------------------------------------------------
    Balance, end of period                            1,674,866        12.86
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes stock options outstanding and exercisable
    under the Plan at September 30, 2008.

                         Options outstanding            Options exercisable
    -------------------------------------------------------------------------
                  Number     Weighted
             outstanding      average     Weighted       Number     Weighted
    Range of          at    remaining      average  exercisable      average
    exercise      period  contractual     exercise    at period     exercise
    price            end         life        price          end        price
    -------------------------------------------------------------------------
    $5.60 to
     $7.95       207,000         0.84         5.64      207,000         5.64
    $9.08 to
     $13.40      155,999         2.12        12.52       82,499        12.12
    $13.66 to
     $16.50    1,311,867         3.65        14.04      306,367        13.90
    -------------------------------------------------------------------------
               1,674,866         3.08        12.86      595,866        10.78
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company accounts for its stock based compensation plan using the fair
    value method. Under this method, a compensation cost is charged over the
    vesting period for stock options and Class B Performance Shares granted
    to officers and directors of ProEx and Progress employees in their
    capacity as service providers, with a corresponding increase to
    contributed surplus.

    The fair value of the options granted during the period was estimated on
    the date of grant using the Black-Scholes option pricing model with
    weighted average assumptions and resulting values for grants as follows:

    Assumptions                       Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
                                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Risk free interest rate (%)              -      4.55      3.66      4.52
    Expected life (years)                    -      3.00      3.00      3.00
    Expected volatility (%)                  -        40        38        40
    Weighted average fair value of
     options granted ($)                     -      5.77      5.94      5.80
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Share Appreciation Rights (SARs)

    Commencing in the third quarter of 2008, the Company approved the
    issuance of SARs to certain employees, which entitle the holder to
    receive a cash payment equal to the difference between the stated
    exercise price and the market price of the Company's Common Shares on
    date of surrender. The vesting period and other terms are similar to the
    terms of the Company's prior existing stock option plan. The exercise
    price is based on the market price at the time of grant. For the three
    and nine month periods ended September 30, 2008, 85,000 (2007 - nil) SARs
    have been issued at an exercise price of $13.99. No compensation expense
    relating to the SARs has been recorded for the three and nine month
    periods ended September 30, 2008 (2007 - nil).

    The following table reconciles the Company's contributed surplus:

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Balance, beginning of period         3,659     2,004     3,522     1,453
    Stock based compensation expense
      Stock options                        767       630     2,181     1,157
      Class B Performance shares             -         -         -        24
    Exercise of stock options and
     Class B Performance shares            (26)        -    (1,303)        -
    -------------------------------------------------------------------------
    Balance, end of period               4,400     2,634     4,400     2,634
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Long Term Incentive Compensation

    Under the terms of Progress' long term incentive compensation plan (the
    "LTI"), non-executive Progress employees in their capacity as service
    providers, may be granted LTI awards to be paid in Common Shares of the
    Company. ProEx agreed to contribute to the LTI to ensure that service
    providers retain incentives related to the success of ProEx. Awards
    granted under the LTI will vest on the second anniversary date of the
    date of grant. ProEx has agreed to reimburse Progress for this expense,
    therefore the total compensation expense of $2.5 million has been
    included in prepaid expenses and $2.3 million will be amortized through
    long term incentive compensation expense and $0.2 million will be
    capitalized equally over the two year vesting period. At September 30,
    2008 178,206 Common Shares of ProEx haven been granted to Progress
    employees in their capacity as service providers.

    Accumulated Other                 Three Months Ended   Nine Months Ended
    Comprehensive Income                    September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Balance, beginning of period             -     1,114         -         -
    Fair value of financial
     instruments upon initial adoption
     of new accounting standard              -         -         -     4,947
    Fair value applicable to the
     period, amortized to earnings           -      (835)        -    (4,668)
    -------------------------------------------------------------------------
    Balance, end of period                   -       279         -       279
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    7.  SUPPLEMENTAL CASH FLOW INFORMATION

    Changes in non-cash working capital

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Accounts receivable                 (5,994)    5,622    (4,980)    6,976
    Prepaid expenses and deposits          292       557     1,162    (2,681)
    Accounts payables and accrued
     liabilities                        27,275     6,134     9,604      (754)
    -------------------------------------------------------------------------
    Change in non-cash working capital  21,573    12,313     5,786     3,541

    Relating to:
      Financing activities                   -       156         -      (211)
      Investing activities              25,579    11,595     7,331      (194)
      Operating activities              (4,006)      562    (1,545)    3,946
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Interest and taxes paid

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Interest received                        8         -        27        64
    Interest paid                        1,682     1,170     5,081     2,884
    Income and other taxes paid              -         -         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    8.  FINANCIAL INSTRUMENTS

    Fair value of financial instruments

    The Company's financial instruments recognized in the balance sheet
    consist of cash and short-term investments, accounts receivable, accounts
    payable and accrued liabilities, bank debt and derivative natural gas
    contracts ("financial instruments"). The fair value of these instruments,
    excluding the derivative natural gas contracts, approximate their
    carrying amounts due to their short terms to maturity or the indexed rate
    of interest on the bank debt. The fair value of the natural gas contracts
    is recognized on the balance sheet as described below.

    Financial Derivative Contracts

    ProEx has entered into derivative natural gas financial instruments for
    the purpose of protecting its cash flow from operations (before changes
    in non-cash working capital) from the volatility of natural gas prices.
    For the Quarter, the Company's natural gas price risk management program
    had a net realized loss of $4.5 million (2007 - gain of $3.1 million) and
    for the nine months ended September 30, 2008, the Company realized a net
    loss of $7.8 million (2007 - gain of $6.7 million). The Company
    recognizes the fair value of its commodity price contracts on the balance
    sheet each reporting period with the change in fair value being
    recognized as an unrealized gain or loss on the statement of earnings. At
    September 30, 2008 the fair value was an asset of $7.4 million (2007 -
    $1.3 million asset), resulting in an unrealized gain for the three and
    nine months ended September 30, 2008 of $26.8 million and $7.4 million,
    respectively (2007 - $1.6 million gain and $6.2 million gain,
    respectively).

    At January 1, 2007 ProEx adopted the new accounting standards regarding
    the recognition, measurement, disclosure and presentation of financial
    instruments. The fair value of the derivative natural gas financial
    instruments on adoption was $7.4 million of which $4.9 million was
    included in accumulated other comprehensive income and $2.5 million was
    charged to the future income tax liability. The amount in accumulated
    other comprehensive income was amortized through the unrealized gain or
    loss on financial instruments on the statement of earnings and other
    comprehensive income over the term of the contracts. For the three months
    ended September 30, 2007, $0.8 million ($4.7 million year to date) net of
    tax, was charged to other comprehensive income with a corresponding
    unrealized loss on financial instruments of $0.3 million ($0.8 million
    gain year to date) and a charge to future income tax expense of
    $0.4 million ($2.3 million year to date).

    The following table reconciles the Company's unrealized gain (loss) on
    financial contracts:

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Change in fair value of
     financial instruments              26,833    (1,576)    7,361    (6,132)
    Amortization of accumulated
     other comprehensive income              -     1,249         -     6,981
    -------------------------------------------------------------------------
    Unrealized gain (loss) on
     financial instruments              26,833      (327)    7,361       849
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Contracts outstanding in respect to financial instruments are as follows:


                                Pricing    Strike      Cost/
    Natural Gas       Volume     Point   Price ($gj)  Premium        Term
    -------------------------------------------------------------------------
    Swap - call                          Cdn$7.02-                Apr 01/08 -
     spread(1)     10,000 gj/d    AECO    Cdn$8.02    $0.37/gj     Oct 31/08
    Swap - call                          Cdn$7.12-                Apr 01/08 -
     spread(1)     10,000 gj/d    AECO    Cdn$8.12    $0.37/gj     Oct 31/08
    Swap - call                          Cdn$7.22-                Apr 01/08 -
     spread(1)     10,000 gj/d    AECO    Cdn$8.22    $0.37/gj     Oct 31/08
    Swap - call                          Cdn$7.83-                Apr 01/08 -
     spread(1)     10,000 gj/d    AECO    Cdn$8.83    $0.38/gj     Oct 31/08
    Swap - call                          Cdn$10.38-               Nov 01/08 -
     spread(1)      5,000 gj/d    AECO    Cdn$13.38   $0.95/gj     Mar 31/09
    Swap - call                          Cdn$10.54-               Nov 01/08 -
     spread(1)      5,000 gj/d    AECO    Cdn$13.54   $0.94/gj     Mar 31/09
    Swap - call                          Cdn$10.90-               Nov 01/08 -
     spread(1)      5,000 gj/d    AECO    Cdn$13.90   $0.90/gj     Mar 31/09
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Call spread strike prices indicate minimum floor and maximum ceiling



    2008 AND 2007 SELECTED QUARTERLY INFORMATION
    ProEx Energy Ltd.

    FINANCIAL HIGHLIGHTS

    ($ thousands except per                     Three months ended
     share amounts)                                    2007
    -------------------------------------------------------------------------
                                      March 31   June 30  Sept. 30   Dec. 31
    -------------------------------------------------------------------------
    Income Statement
    Petroleum and natural gas revenue   28,524    37,347    28,231    38,057
    Funds generated from operations     17,907    18,628    15,176    22,098
      Per share - basic                   0.45      0.39      0.31      0.42
      Per share - diluted                 0.39      0.35      0.28      0.39
    Net earnings                         4,066     7,564       716     7,725
      Per share - basic                   0.10      0.16      0.01      0.15
      Per share - diluted                 0.09      0.14      0.01      0.14

    Balance Sheet
    Capital investment
      Land acquisitions and retention    2,811       290     1,225     1,940
      Geological and geophysical         4,885     1,181     1,424     3,686
      Drilling and completions          34,660     3,387    26,409    45,483
      Equipping and facilities           7,888     1,733     4,934     8,232
      Net property acquisitions
       (dispositions)                      244   137,007       591    14,681
    -------------------------------------------------------------------------
                                        50,488   143,598    34,583    74,022
    -------------------------------------------------------------------------
    Total debt
      Bank debt                         59,772    95,149    53,777    96,881
      Working capital deficiency
       (surplus)                        10,086    (6,738)    5,575    14,105
    -------------------------------------------------------------------------
                                        69,858    88,411    59,352   110,986
    -------------------------------------------------------------------------
    Shareholders' equity               225,865   331,090   380,727   389,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Shares outstanding at end
     of period
      - Common                          39,829    48,548    52,362    52,528
    Weighted average shares
     outstanding for the period
      - Basic                           39,768    47,940    49,318    52,121
      - Diluted                         45,820    53,960    54,575    56,776

    Volume traded                       13,855    16,492    12,650    10,157
    Common share price ($)
      - High                             15.49     16.74     15.25     14.91
      - Low                              11.83     14.02     12.79     11.10
      - Closing                          15.15     15.00     14.14     11.83
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    ($ thousands except per                Three months ended
     share amounts)                               2008
    ---------------------------------------------------------------
                                      March 31   June 30  Sept. 30
    ---------------------------------------------------------------
    Income Statement
    Petroleum and natural gas revenue   48,787    61,949    61,264
    Funds generated from operations     26,069    31,867    29,150
      Per share - basic                   0.49      0.57      0.50
      Per share - diluted                 0.46      0.55      0.50
    Net earnings                         1,873     5,307    27,747
      Per share - basic                   0.04      0.09      0.48
      Per share - diluted                 0.03      0.09      0.48

    Balance Sheet
    Capital investment
      Land acquisitions and retention    2,249     1,665     6,983
      Geological and geophysical         4,857     1,227       409
      Drilling and completions          38,167     4,889    42,869
      Equipping and facilities          19,487     4,410     8,417
      Net property acquisitions
       (dispositions)                        -     6,964         -
    ---------------------------------------------------------------
                                        64,760    19,155    58,678
    ---------------------------------------------------------------
    Total debt
      Bank debt                        129,398   140,000   140,673
      Working capital deficiency
       (surplus)                        18,344    (8,903)   19,891
    ---------------------------------------------------------------
                                       147,742   131,097   160,564
    ---------------------------------------------------------------
    Shareholders' equity               387,230   397,294   425,869
    ---------------------------------------------------------------
    ---------------------------------------------------------------

    Shares outstanding at end
     of period
      - Common                          53,951    57,847    57,852
    Weighted average shares
     outstanding for the period
      - Basic                           52,931    56,376    57,851
      - Diluted                         57,204    57,467    57,851

    Volume traded                       20,540    28,581    20,833
    Common share price ($)
      - High                             16.97     24.20     23.05
      - Low                              11.57     15.41     13.05
      - Closing                          16.50     22.99     13.31
    ---------------------------------------------------------------
    ---------------------------------------------------------------



    2008 AND 2007 SELECTED QUARTERLY INFORMATION
    ProEx Energy Ltd.

    OPERATIONAL HIGHLIGHTS

                                                Three Months Ended
                                                       2007
    -------------------------------------------------------------------------
                                      March 31   June 30  Sept. 30   Dec. 31
    -------------------------------------------------------------------------
    Production
      Natural gas (mcf/d)               36,631    49,530    48,082    52,917
      Crude oil (bbls/d)                   384       414       438       590
      Natural gas liquids (bbls/d)         246       239       225       270
      Total production (boe/d) (6:1)     6,735     8,909     8,677     9,680
    Pricing
      Natural gas ($/mcf)                 7.59      7.42      5.34      6.43
      Crude oil ($/bbl)                  64.46     68.32     77.64     83.77
      Natural gas liquids ($/bbl)        61.24     66.29     66.98     78.11
    Highlights ($/boe)
      Petroleum and natural gas
       revenues(1)                       47.06     46.07     35.37     42.73
      Realized gain (loss) on
       financial instruments              5.83      0.05      3.89      1.41
      Royalties                         (12.47)   (10.62)    (7.95)    (7.89)
      Operating expenses                 (4.80)    (5.35)    (5.09)    (5.07)
      Transportation expenses            (3.68)    (4.48)    (4.07)    (4.06)
    -------------------------------------------------------------------------
      Operating netback                  31.94     25.67     22.15     27.12
      General and administrative
       expenses                          (1.17)    (0.95)    (1.16)    (0.54)
      Long term incentive compensation
       expense (cash component)              -     (0.23)    (0.32)    (0.34)
      Interest and financing expenses    (0.81)    (1.52)    (1.59)    (1.37)
      Asset retirement expenditures      (0.42)     0.02     (0.06)    (0.06)
    -------------------------------------------------------------------------
      Funds generated from operations    29.54     22.99     19.02     24.81
      Unrealized gain (loss) on
       financial instruments             (6.65)     6.43     (0.41)    (0.95)
      Asset retirement expenditures       0.42     (0.02)     0.06      0.06
      Long term incentive
       compensation expense              (0.47)    (0.38)    (0.79)    (1.00)
      Depletion, depreciation and
       accretion expenses               (13.35)   (16.04)   (16.33)   (14.98)
    -------------------------------------------------------------------------
      Net earnings before taxes           9.49     12.98      1.55      7.94
      Future income taxes recovery
       (expense)                         (2.78)    (3.63)    (0.65)    (0.73)
    -------------------------------------------------------------------------
      Net earnings                        6.71      9.35      0.90      8.67
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Includes sulphur net revenue with no associated production as
        there is no conversion of tons to boe.


    Gross Drilling Results (No. of wells)
    Natural gas                             19         -        15        30
    Crude oil                                -         -         -         -
    Dry                                      5         -         -         1
    -------------------------------------------------------------------------
                                            24         -        15        31
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net Drilling Results (No. of wells)
    Natural gas                           12.8         -      10.3      19.2
    Crude oil                                -         -         -         -
    Dry                                    2.4         -         -       0.8
    -------------------------------------------------------------------------
                                          15.2         -      10.3      20.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Success rate (%)                        84         -       100        96
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                           Three Months ended
                                                  2008
    ---------------------------------------------------------------
                                      March 31   June 30  Sept. 30
    ---------------------------------------------------------------
    Production
      Natural gas (mcf/d)               57,880    58,426    62,204
      Crude oil (bbls/d)                   506       405       461
      Natural gas liquids (bbls/d)         341       307       294
      Total production (boe/d) (6:1)    10,493    10,449    11,122
    Pricing
      Natural gas ($/mcf)                 7.84      9.92      8.96
      Crude oil ($/bbl)                  92.41    117.08    116.98
      Natural gas liquids ($/bbl)        81.34    100.01     99.57
    Highlights ($/boe)
      Petroleum and natural gas
       revenues(1)                       51.09     65.14     59.87
      Realized gain (loss) on
       financial instruments                 -     (3.52)    (4.36)
      Royalties                         (11.13)   (13.63)   (12.88)
      Operating expenses                 (5.58)    (5.82)    (6.39)
      Transportation expenses            (3.88)    (5.02)    (4.57)
    ---------------------------------------------------------------
      Operating netback                  30.50     37.15     31.67
      General and administrative
       expenses                          (1.29)    (1.36)    (1.12)
      Long term incentive compensation
       expense (cash component)          (0.27)    (0.31)    (0.30)
      Interest and financing expenses    (1.45)    (1.75)    (1.63)
      Asset retirement expenditures      (0.19)    (0.22)    (0.13)
    ---------------------------------------------------------------
      Funds generated from operations    27.30     33.51     28.49
      Unrealized gain (loss) on
       financial instruments            (10.28)   (10.16)    26.22
      Asset retirement expenditures       0.19      0.22      0.13
      Long term incentive
       compensation expense              (0.61)    (0.87)    (0.75)
      Depletion, depreciation and
       accretion expenses               (15.12)   (15.43)   (15.71)
    ---------------------------------------------------------------
      Net earnings before taxes           1.48      7.27     38.38
      Future income taxes recovery
       (expense)                          0.48     (1.69)   (11.26)
    ---------------------------------------------------------------
      Net earnings                        1.96      5.58     27.12
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    (1) Includes sulphur net revenue with no associated production
        as there is no conversion of tons to boe.


    Gross Drilling Results (No. of wells)
    Natural gas                             26         -        18
    Crude oil                                -         -         -
    Dry                                      -         -         3
    ---------------------------------------------------------------
                                            26         -        21
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Net Drilling Results (No. of wells)
    Natural gas                           18.3         -      14.0
    Crude oil                                -         -         -
    Dry                                      -         -       2.4
    ---------------------------------------------------------------
                                          18.3         -      16.4
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Success rate (%)                       100       n/a        86
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    





For further information:

For further information: Additional information relating to the Company
is filed on SEDAR and can be viewed at www.sedar.com; Information can also be
obtained by contacting the Company at ProEx Energy Ltd., 1200, 205 - 5th
Avenue S.W., Calgary, Alberta, Canada, T2P 2V7 or by e-mail at
ir@proexenergy.com; Information is also accessible on the Company's web site
at www.proexenergy.com

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PROEX ENERGY LTD.

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