ProEx Third Quarter Results - Production up 67% Year over Year, Well Positioned to Continue Capital Program



    CALGARY, Oct. 22 /CNW/ -

    
                                      Three months ended   Nine months ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    HIGHLIGHTS                            2007      2006      2007      2006
    -------------------------------------------------------------------------
    Financial ($ thousands, except
     per share amounts)
      Petroleum and natural gas
       revenue                          28,231    19,419    94,103    60,614
      Funds generated from operations   15,176     8,766    51,711    29,536
        - Basic per share                 0.31      0.24      1.13      0.85
        - Diluted per share               0.28      0.21      1.00      0.72
      Net earnings                         716     2,627    12,346    10,870
        - Basic per share                 0.01      0.07      0.27      0.31
        - Diluted per share               0.01      0.06      0.23      0.26
      Capital investment                34,583    32,442   228,670   108,624
      Bank debt and working capital
       deficiency                       59,352    41,499    59,352    41,499

    Operations
      Production
        - Natural gas (mcf/d)           48,082    28,348    44,790    27,262
        - Crude oil (bbls/d)               438       331       412       332
        - Natural gas liquids (bbls/d)     225       148       237       141
        - Total production (boe/d)       8,677     5,204     8,114     5,017
      Average realized price
        - Natural gas ($/mcf)             5.36      6.19      6.71      6.90
        - Crude oil ($/bbl)              77.64     75.56     70.47     72.18
        - Natural gas liquids ($/bbl)    66.98     71.46     64.78     70.92
      Netback per boe ($)
        Petroleum and natural gas
         revenue                         35.37     40.56     42.48     44.25
        Realized gain on financial
         instruments                      3.89         -      3.02         -
        Royalties                        (7.95)   (10.87)   (10.16)   (12.47)
        Operating expenses               (5.09)    (5.06)    (5.11)    (4.81)
        Transportation Expenses          (4.07)    (3.56)    (4.12)    (3.59)
    -------------------------------------------------------------------------
      Operating netback                  22.15     21.07     26.11     23.38
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    HIGHLIGHTS

    -   ProEx drilled 15 wells (10.3 net) during the three months ended
        September 30, 2007 ("the "Quarter") and invested $34.6 million
        compared to $32.4 million in the same period in 2006. Drilling and
        facility construction activities were curtailed early in the Quarter
        due to continuing wet weather in the Foothills area of northeast
        British Columbia. By September, ProEx had six drilling rigs; three
        service rigs and two pipelining crews working in the Foothills.

    -   Drilling activities were concentrated in the recently acquired
        Bubbles and Buckinghorse properties as well as Julienne, Sasquatch
        and Bernadet.

    -   Pipelining construction projects are now in full swing to bring on
        the wells drilled during the Quarter.

    -   At Buckinghorse, ProEx commenced the construction of a 11.3 kilometer
        sales line in partnership with the British Columbia government to
        facilitate the sales of natural gas from the southern portion of
        its land position. Initial sales from this area are expected to
        commence in early December.

    -   Production for the Quarter averaged 8,677 boe per day, up 67 percent,
        compared to 5,204 boe per day in same quarter in 2006. Production per
        share, diluted was up 30 percent compared to the same period in 2006.

    -   Natural gas price for the Quarter was $5.36 per mcf compared to
        $6.19 per mcf for the same period in 2006. The year to date natural
        gas price was $6.71 per mcf compared to $6.90 per mcf for the same
        period in 2006.

    -   Funds generated from operations for the Quarter was $15.2 million
        compared to $8.8 million in the prior year. Funds generated from
        Operations per share were $0.31 basic ($0.28 diluted) compared to
        $0.24 basic ($0.21 diluted) in the same period in 2006. The Company
        reported net earnings of $0.7 million for the Quarter compared to
        $2.6 million during the same period in 2006.

    -   On August 22, 2007 ProEx Energy Ltd. ("ProEx" or the "Company")
        announced that it had entered into an agreement with a syndicate of
        underwriters to purchase on a bought deal basis, 1,830,000 common
        shares (the "Common Shares") at a price of $13.70 per Common Share
        and 1,420,000 flow-through common shares (at $17.65 per flow-through
        share for aggregate gross proceeds of $50.1 million. The financing
        closed on September 12, 2007.

    -   The Company's credit facility has been expanded and includes the Bank
        of Montreal as lead and the Bank of Nova Scotia. The Company's
        syndicated credit facility has been increased to an aggregate
        $185 million from $150 million providing further financial
        flexibility. The Company ended the Quarter with total debt of
        $59.4 million (including working capital deficit of $5.6 million).

    -   The common share issue and the increased line of credit have
        positioned the Company to continue its capital investment program
        through this period of potentially weak natural gas prices and
        maintain the exploration momentum that has been established.

    -   The Company is not impacted by the proposed royalty changes in the
        province of Alberta as all of its production and lands are in the
        province of British Columbia.
    

    CAPITAL PROGRAM UPDATE

    ProEx's third quarter activities were significantly impacted by continued
wet field conditions resulting from successive Pacific disturbances sweeping
through northeast British Columbia. After a rapid start to the summer season
in early July, drilling and facility activities were muted for much of the
Quarter as the Company chose to delay work that could become unduly costly due
to the wet operating conditions. As a result, ProEx drilled 15 (10.3 net)
wells in the Quarter casing all 15 for potential production.
    The program included pool expansion drilling in the Bernadet block with
four new 100 percent working interest Halfway wells. This liquids rich
discovery is currently producing from two of the new wells and awaiting the
tie-in of the other two wells. Drilling on this property will continue into
the fourth quarter.
    At Sasquatch two wells (average working interest 60 percent) were drilled
during the Quarter where pool boundaries continue to be pushed out along
anticline crests. At Julienne two wells (80 percent working interest) were
drilled on seismically defined Gething permeability trends which have now
extended the pool boundaries. Drilling in these two areas will continue for
the balance of 2007 and the first quarter of 2008.
    The first three Halfway test wells (40 percent working interest) were
drilled on the Bubbles property that was acquired early in the second quarter.
These wells encountered near virgin reservoir pressures and met with internal
expectations as to pay thickness and productivity. Also, three wells were
recompleted/re-activated. Of the six wells, five are tied in as of this date.
A continuous drilling program is expected to be conducted for the foreseeable
future.
    As mentioned in the second quarter release, ProEx has planned the
drilling of two Mississippian aged Debolt tests in the Caribou/Buckinghorse
area on 3-D defined subsurface features. The first of these drills was
completed and tested in the Quarter and first production is anticipated late
in the fourth quarter. The second Debolt test has been cased as a potential
gas well. Further Halfway, Bluesky and Debolt depth drilling will follow as
another rig moves into the area for the winter with operations continuing
until breakup in 2008.
    Lastly, the first well of the 40,000 acre farmin announced in the first
quarter has been cased for production at Green. A further three wells in the
Foothills will be drilled before the end of the year fulfilling the first
earning phase of the farmin.
    ProEx will enter the fourth quarter of the year with six drilling rigs
and three service rigs in the Foothills targeting its traditional Triassic
reservoirs complemented by a sweet gas exploration program in the shallower
Bluesky/Gething sands and deeper Debolt carbonate reservoirs.
    During the Quarter the Company commenced pipeline construction at
Buckinghorse/Caribou that will tie-in a stranded Slave Point well acquired in
the acquisition in the second quarter. This facility, in the southern portion
of its land position, will also form part of the infrastructure that will
gather the recently drilled Debolt well and accommodate future wells planned
for 2007 and 2008. This facility is scheduled to be on stream by early
December 2007. One half of the cost of this pipeline is being funded by
British Columbia Infrastructure Program. One other similar pipeline project in
the northern portion of our land position will be undertaken commencing as
early as December 2007.


    
    2007 Third Quarter Drilling Results

                                  Gross Wells               Net Wells
                            ------------------------  -----------------------
                             Gas   Oil   Dry Total     Gas   Oil   Dry Total
                            ------------------------  -----------------------
    British Columbia
    - Foothills region        14     -     -    14    10.1     -     -  10.1
    - Fort St. John Plains
       region                  1     -     -     1     0.2     -     -   0.2
                            ------------------------  -----------------------
    Total                     15     -     -    15    10.3     -     -  10.3
                            ------------------------  -----------------------
                            ------------------------  -----------------------

    2007 Year to Date Drilling Results

                                  Gross Wells               Net Wells
                            ------------------------  -----------------------
                             Gas   Oil   Dry Total     Gas   Oil   Dry Total
                            ------------------------  -----------------------
    British Columbia
    - Foothills region        33     -     5    38    23.2     -   3.3  26.5
    - Fort St. John Plains
       region                  1     -     -     1     0.2     -     -   0.2
                            ------------------------  -----------------------
    Total                     34     -     5    39    23.4     -   3.3  26.7
                            ------------------------  -----------------------
                            ------------------------  -----------------------
    

    NATURAL GAS OUTLOOK

    The North American natural gas market has been hampered by high natural
gas inventories and correspondingly low prices with many analysts calling for
sustained weakness as a result of high levels of drilling in the United States
("U.S.") and LNG imports that have kept the market well supplied through the
early part of the summer. Storage levels in the U.S. are trending behind the
record levels set in 2006 but remain higher than the five year average.
Storage levels are expected to be in the range of 3.4 to 3.6 trillion cubic
feet at the start of the heating season.
    The evidence of reduced Canadian natural gas drilling activity is showing
up in the form of weaker field receipts. Year-to-date field receipts in
Alberta and British Columbia combined are down approximately 300 million cubic
feet per day compared to 2006. Weak drilling activity throughout the second
and third quarters of 2007 is expected to continue to put downward pressure on
production. On the demand side, oil sands development is expected to continue
to increase the demand for natural gas over the next decade.
    In the United States, natural gas drilling activity levels remain
elevated with the gas directed rig count near 1,450 although this is down from
recent levels of over 1,500 gas directed rigs. LNG imports into the U.S. have
continued to fall throughout the summer from the record levels established in
the second quarter of 2007. Electrical generating power demand in the United
Kingdom has helped to keep netbacks in Europe stronger than in the U.S.
    In the short term, natural gas prices will be dictated by high levels of
gas in storage and the impact of weather. Over the longer term, natural gas
will become more integrated into a global market as a result of the growth in
LNG capacity. LNG imports to the U.S. may act as a counterbalance to reduced
natural gas supply flowing from Canada but demand is directly impacted by
Asian Basin demand. The supply/demand balance is expected to remain tight and
relatively volatile with the impact of weather being a key determinant of
demand.

    OUTLOOK

    Our winter program has been laid out with the following strategies in
place: avoid development/harvesting of close-in opportunities; to the extent
that is possible, drill to fill existing compressor stations while maintaining
a reasonable inter-well spacing to maximize returns; capture as much
prospective land as possible through land sales and drill to earn
arrangements; and, target the testing of new on-trend exploration concepts to
expand the future inventory of development opportunities. To that end, during
the Quarter, ProEx continued to expand its footprint in the Foothills of
northeastern British Columbia with the acquisition of an additional
18,000 acres acquired at Crown sales during the Quarter and planning is
underway for another substantial 3D seismic shoot for the upcoming winter
season to further identify drilling opportunities in and around Company
holdings.
    From inception in 2004, our strategy has been to grow our reserves,
production and cash flow per share while maintaining the balance sheet
strength to capitalize on the volatility inherent in the natural gas business.
The focus of our efforts has been entirely on building a dominant position in
an emerging regional tight gas play in the Foothills of northeast British
Columbia by consistently applying the same stringent economic criteria in our
capital investment program each year to generate growth in net asset value per
share. We view periods of weak gas prices as opportunities to grow our asset
base, whether through significant crown land sales, farm-in opportunities on
area producers or potential asset or corporate acquisition candidates.
    As discussed, wet weather delayed field activities during the Quarter.
While we have secured an additional rig in the Foothills and currently have
six rigs operating, the delays have been such that we will not be able to make
up lost ground. Our current drilling schedule estimates that we will be
drilling approximately 20 to 25 net wells during the fourth quarter resulting
in approximately 47 to 52 net wells for 2007. This compares to our estimates
of 55 net wells for the year. Current production is approximately 9,500 boe
per day with 1,800 boe per day behind pipe, of which 1,200 boe per day is
estimated to be coming on stream before year end. In addition, there are eight
recently cased wells waiting on completion operations which are not included
in the behind pipe figure. With current behind pipe volumes, wells that have
not been completed, fourth quarter development drilling and pipeline
construction projects, the year-end exit target of 12,000 boe per day remains
achievable and a high priority.
    The financing and credit facility increase during the Quarter positions
the Company to maintain its investment program momentum through to the end of
the first quarter regardless of the near term weakness in natural gas prices.
Maintaining this drilling momentum is central to a junior exploration
company's ability to deliver consistent, year-over-year production, reserves
and cash flow growth. While natural gas prices will dictate the pace of
capital investment beyond the first quarter, it is our intent to maintain a
balanced paced program throughout 2008. We are currently formulating our 2008
budget and the 2008 capital investment program will be communicated later in
the year. We continue to believe in the long term prospects for natural gas in
North America and will continue to aggressively position the Company's asset
base in the Foothills of British Columbia.

    On behalf of the Board of Directors,

    (Signed) "David D. Johnson"
    David D. Johnson
    President  & Chief Executive Officer
    October 22, 2007

    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 22, 2007, is to be
read in conjunction with the accompanying unaudited interim financial
statements and related notes for the three and nine month periods ended
September 30, 2007 and ProEx's audited financial statements, related notes and
MD&A for the year ended December 31, 2006. 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 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

    The Company receives personnel and certain administrative and technical
services from Progress Energy Trust ("Progress") 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 has granted performance shares, stock options and
Common Shares under a long term incentive compensation plan ("LTI") to
employees of Progress in their capacity as service providers.
    Under the terms of the 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.
    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 Energy Trust (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. Each of Progress and ProEx determined that a single bid was more
likely to be successful than two partial bids. Therefore, Progress made a
single bid. 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 is based on these
allocations.

    Non-GAAP Measures

    The MD&A contains the term "funds generated from operations" and
"operating netbacks" which are non-GAAP terms. The Company uses these measures
to help evaluate its performance. Operating netback is the net result of the
Company's revenue net of realized gains and losses on financial instruments,
and royalty, operating and transportation expenses as found in the
accompanying interim financial statements. Management considers operating
netbacks an important measure as it demonstrates its profitability relative to
current commodity prices. Management uses funds generated from operations 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. The reconciliation between
net earnings, funds generated from operations and cash flow from operations
can be found in the statements of cash flows in the interim unaudited
financial statements. Funds generated from operations per share is calculated
using the basic and diluted weighted average number of shares for the period.

    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

    Certain information regarding the Company set forth in this document,
including Management's assessment of the Company's future plans and
operations, may constitute forward-looking statements under applicable
securities law and necessarily involve risks associated with oil and gas
exploration, production, marketing, and transportation such as loss of market,
volatility of commodity prices, currency fluctuations, imprecision of reserve
estimates, environmental risks, competition from other producers and ability
to access sufficient capital from internal and external sources; as a
consequence, actual results may differ materially from those anticipated in
the forward-looking statements.

    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
    -------------------------------------------------------------------------
                                2007    2006  Change    2007    2006  Change
                                                 (%)                     (%)
    -------------------------------------------------------------------------
    Natural gas (mcf/d)       48,082  28,348      70  44,790  27,262      64
    Crude oil (bbls/d)           438     331      32     412     332      24
    Natural gas liquids
     (bbls/d)                    225     148      52     237     141      68
    -------------------------------------------------------------------------
    Total production (boe/d)   8,677   5,204      67   8,114   5,017      62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Production during the three month period ended September 30, 2007 (the
"Quarter") of 8,677 boe per day was 67 percent higher than the 5,204 boe per
day recorded in the same period in 2006. Natural gas production of 48,082 mcf
per day during the Quarter was 70 percent higher than the 28,348 mcf per day
recorded for the same period in 2006. Crude oil and natural gas liquids
production for the Quarter increased 38 percent to 663 bbls per day from 479
bbls per day for the same period in 2006. For the nine months ended September
30, 2007, ProEx's production averaged 8,114 boe per day, a 62 percent increase
over the 5,017 boe per day recorded in the same period in 2006. Current year
to date production consisted of 44,790 mcf per day of natural gas and 649 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 year to date was weighted 92 percent to natural gas, five percent to
crude oil and three percent to natural gas liquids.

    Pricing and Risk Management

    Natural Gas Markets
    ProEx's realized natural gas price in the Quarter and for the nine months
ended September 30, 2007 was $5.36 and $6.71 per mcf, respectively (2006 -
$6.19 and $6.90, per mcf respectively) compared to the AECO daily index
average of $5.19 and $6.60 per mcf, respectively. The higher realization
reflects the higher heat content of ProEx' natural gas stream.
    The North American natural gas market has been hampered by high natural
gas inventories and correspondingly low prices with many analysts calling for
sustained weakness as a result of high levels of drilling in the United States
("U.S.") and liquefied natural gas ("LNG") imports that have kept the market
well supplied through the early part of the summer. Storage levels in the U.S.
are trending behind the record levels set in 2006 but remain higher than the
five year average. Storage levels are expected to be in the range of 3.4 to
3.6 trillion cubic feet at the start of the heating season.
    The evidence of reduced Canadian natural gas drilling activity is showing
up in the form of weaker field receipts. Year-to-date field receipts in
Alberta and British Columbia combined are down approximately 300 million cubic
feet per day compared to 2006. Weak drilling activity throughout the second
and third quarter of 2007 is expected to continue to put downward pressure on
production. On the demand side, oil sands development is expected to continue
to increase the demand for natural gas over the next decade.
    In the U.S., natural gas drilling activity levels remain elevated with
the natural gas directed rig count near 1,450 although this is down from
recent levels of over 1,500 natural gas directed rigs. LNG imports into the
U.S. have continued to fall throughout the summer from the record levels
established in the second quarter of 2007. Electrical generating power demand
in the United Kingdom has helped to keep netbacks in Europe stronger than in
the U.S.
    In the short term, natural gas prices will be dictated by high levels of
gas in storage and the impact of weather. Over the longer term, natural gas
will become more integrated into a global market as a result of the growth in
LNG capacity. LNG imports to the U.S. are likely to act as a counterbalance to
reduced natural gas supply flowing from Canada. The supply/demand balance is
expected to remain tight and relatively volatile with the impact of weather
being a key determinant of demand.


    
                                      Three Months Ended   Nine Months Ended
    Average Benchmark Prices                September 30        September 30
    -------------------------------------------------------------------------
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    Natural gas - Station  No. 2
     ($/mcf daily index)                  5.26      5.52      6.47      6.11
    Natural gas - AECO
     ($/mcf daily index)                  5.19      5.67      6.60      6.44
    Natural gas - AECO
     ($/mcf monthly index)                5.66      6.09      6.88      7.26
    Exchange rate (US$/Cdn$)            1.0446    1.1212    1.1048    1.1327
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                      Three Months Ended   Nine Months Ended
    ProEx Realized Prices                   September 30        September 30
    -------------------------------------------------------------------------
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    Natural gas ($/mcf)                   5.36      6.19      6.71      6.90
    Crude oil ($/bbl)                    77.64     75.56     70.47     72.18
    Natural gas liquids ($/bbl)          66.98     71.46     64.78     70.92
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    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 gain of $3.1 million, $6.7 million year
to date (2006 - nil).
    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 has elected not to use hedge
accounting and consequently records 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.
The accounting for hedging relationships for prior fiscal periods are not
retroactively changed, therefore, there was no restatement of the financial
position or results of operation as at and for the three and nine months ended
September 30, 2006.
    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
will be amortized through other comprehensive income and unrealized gain or
loss on the statement of earnings over the term of the contracts. For the
Quarter, $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) and a charge to future income tax
expense of $0.4 million ($2.3 million year to date).
    At September 30, 2007, the fair value of the natural gas financial
contracts was an asset of $1.3 million. The loss in value from January 1, 2007
to September 30, 2007 of $6.1 million was due to the expiration of nine months
of its current financial contracts. This loss was more than offset by the
recognition of a $7.0 million gain amortized from accumulated other
comprehensive income for a net unrealized gain of $0.8 million year to date.
For the Quarter, the Company had a net unrealized loss on financial
instruments of $1.6 million, offset by a $1.2 million gain amortized from
accumulated other comprehensive income, for a net unrealized loss on financial
instruments of $0.3 million.
    The following table reconciles the Company's unrealized gain (loss) on
financial contracts:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Change in fair value of financial
     instruments                        (1,576)        -    (6,132)        -
    Amortization of accumulated other
     comprehensive income                1,249         -     6,981         -
    -------------------------------------------------------------------------
    Unrealized gain (loss) on financial
     instruments                          (327)        -       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 before royalties; 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's current financial
derivative contract is for the period April 2007 to October 2007 for a total
of 20,000 gigajoules ("gj") per day using call spreads with a net floor price
of $7.01 per gj and a net ceiling price of $8.01 per gj.

    Revenues

    For the Quarter, total revenues increase 45 percent to $28.2 million from
$19.4 million recorded in the same period in 2006. Natural gas revenue
increased 47 percent in the Quarter to $23.7 million from $16.1 million for
the same period in 2006 as a result of exploration and development drilling
success during the past twelve months in addition to the Asset Acquisition.
Production revenue for the Quarter also included $3.1 million from crude oil
sales and $1.4 million from the sale of natural gas liquids, for a combined
increase of 38 percent in liquids sales as compared to the same period in the
prior year. For the nine months ended September 30, 2007, revenues increased
55 percent to $94.1 million from $60.6 million for the same period in 2006 due
to higher production volumes.
    For the three and nine months ended September 30, 2007, petroleum and
natural gas revenue included the following balances compared to the same
periods in 2006:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Natural gas sales                   23,716    16,142    81,986    51,334
    Crude oil sales                      3,131     2,303     7,934     6,550
    Natural gas liquids sales            1,384       974     4,183     2,730
    -------------------------------------------------------------------------
    Petroleum and natural gas revenue   28,231    19,419    94,103    60,614
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Royalties

    Royalty expense consists of royalties paid to provincial governments,
freehold landowners and overriding royalty owners. For the Quarter, royalties
were $6.3 million compared to $5.2 million for the same period in 2006 due to
higher revenues as a result of higher production. The Company's average
royalty rate for the Quarter was 22.5 percent compared to 26.8 percent in
2006. For the nine months ended September 30, 2007, royalties increased to
$22.5 million (23.9 percent average rate) from $17.1 million (28.2 percent
average rate) in 2006 due to higher revenues. The lower royalty rate in the
Quarter and for the nine months ended September 30, 2007 as compared to the
same periods in 2006 is attributable to lower commodity prices in addition to
lower royalty rates on the assets acquired in the Asset Acquisition, which
also included the acquisition of previously GORR payable properties.
Management anticipates, based on current commodity prices, the average royalty
rate for the remainder of 2007 will be approximately 23 to 25 percent.

    Operating Expenses

    Operating expenses during the Quarter were $4.1 million compared to
$2.4 million for the same period in 2006. For the nine months ended
September 30, 2007, operating expenses were $11.3 million compared to
$6.6 million for the same period in 2006. On a boe basis, operating expenses
for the Quarter of $5.09 were consistent with the $5.06 recorded in the same
period in 2006. For the nine months ended September 30, 2007, operating costs
per boe increased six percent to $5.10 from $4.81 recorded in the same period
in 2006. Slightly higher operating costs on the properties acquired in the
Asset Acquisition increased the operating cost per boe year to date as
compared to the same period in 2006. Management anticipates operating expenses
for the remainder of 2007 to be between $5.00 and $5.50 per boe.

    Transportation Expenses

    Transportation expenses were $3.2 million for the Quarter compared to the
$1.7 million recorded in the same period in 2006. For the nine months ended
September 30, 2007, transportation expenses were $9.1 million compared to
$4.9 million for the same period in 2006. On a boe basis, transportation
expenses during the Quarter and for the nine months ended September 30, 2007
were $4.07 and $4.12 respectively compared to $3.56 and $3.59 respectively for
the same periods in 2006. Higher per boe costs in the Quarter and year to date
are due to higher transportation and treatment tolls associated with the Asset
Acquisition completed in the prior quarter including higher treatment tolls
associated with Slave Point production and volumes processed through the
Keyera-owned Caribou gas plant. Although management favorably renegotiated the
transportation and treatment agreement for the Bubbles property Halfway and
Slave Point production, the volumes contractually dedicated to the Caribou
plant are substantially higher which increases the average per unit rate.
Management is currently in negotiation with the intention of securing a
tolling agreement more consistent with fees at other facilities in northeast
British Columbia.
    In British Columbia, there is an infrastructure owned by Spectra Energy
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

    The following table summarizes the operating netbacks for natural gas and
crude oil properties for the Quarter and nine month period ended September 30,
2007 compared to the same periods in 2006:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    Natural gas properties ($/mcf)
    Sales price                           5.62      6.50      6.92      7.17
    Realized gain on financial
     instruments                          0.69         -      0.53         -
    Royalties                            (1.30)    (1.80)    (1.70)    (2.11)
    Operating expenses                   (0.79)    (0.78)    (0.82)    (0.76)
    Transportation expenses              (0.70)    (0.61)    (0.71)    (0.61)
    -------------------------------------------------------------------------
    Operating netback - natural gas
     properties                           3.52      3.31      4.22      3.69
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Crude oil properties ($/bbl)
    Sales price                          61.44     64.45     60.58     65.89
    Royalties                           (10.56)   (11.73)    (9.61)    (9.56)
    Operating expenses                  (10.38)   (11.10)    (8.17)    (9.65)
    Transportation expenses              (1.61)    (2.05)    (1.93)    (2.42)
    -------------------------------------------------------------------------
    Operating netback - crude oil
     properties                          38.89     39.57     40.87     44.26
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    General and Administrative Expenses

    For the Quarter, general and administrative expenses net of overhead
recoveries, ("G&A") were $0.9 million compared to $0.4 million for the same
period in 2006. For the nine months ended September 30, 2007, G&A expenses
were $2.4 million compared to $1.3 million for the same period in 2006. On a
boe basis for the Quarter, G&A was $1.16 compared to $0.88 recorded for the
same period in 2006, and for the nine month period, G&A per boe was $1.09
compared to $0.98 for the same period in 2006.
    The increase in G&A for the Quarter and nine month periods ended
September 30, 2007 as compared to the same periods in 2006 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 the remainder of 2007.
    The following table summarizes G&A for the Quarter and nine month periods
ended September 30, 2007 compared to the same periods in 2006:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Direct expenses                        233       305       643       956
    Technical services fee from
     Progress                            1,561       915     4,521     2,861
    -------------------------------------------------------------------------
    Gross G&A                            1,794     1,220     5,164     3,817
    Recoveries                            (623)     (593)   (2,097)   (1,809)
    Capitalized expenses                  (242)     (207)     (655)     (667)
    -------------------------------------------------------------------------
    Total G&A                              929       420     2,412     1,341
    -------------------------------------------------------------------------
    Total G&A ($boe)                      1.16      0.88      1.09      0.98
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Long Term Incentive Compensation

    For the Quarter, long term incentive compensation expense, relating to
outstanding stock options, Class B Performance Shares and the long term
incentive compensation plan (the "LTI"), was $0.9 million ($1.11 per boe)
compared to $0.2 million ($0.41 per boe) for the same period in 2006. Year to
date compensation expense was $1.7 million ($0.75 per boe) compared to
$0.6 million ($0.41 per boe) for the same period in 2006. The increase in
compensation expense per boe in the Quarter and year to date as compared to
the same periods in the prior year is a result of the issuance of 1,074,000
stock options during the Quarter in addition to the expense relating to the
new LTI.
    During the second quarter of 2007, the 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. On
May 3, 2007, Progress granted an award of 173,789 Common Shares of ProEx to
Progress employees, in their capacity as service providers to ProEx, resulting
in a total compensation cost of $2.4 million. ProEx has agreed to reimburse
Progress for this expense, therefore the total compensation expense has been
recorded as a prepaid expense and will be amortized through long term
incentive compensation expense equally over the two year vesting period.
Awards granted under the LTI will vest on the second anniversary date of the
date of grant. During the Quarter, all of the shares required to fulfill the
LTI grant were acquired from the open market by Progress and reimbursed by
ProEx. ProEx's long term incentive compensation plans are described in Note 6
in the unaudited interim financial statements.

    Interest and Financing

    For the Quarter, interest and financing charges were $1.3 million
($1.59 per boe) compared to $0.6 million ($1.24 per boe) for the same period
in 2006. For the nine months ended September 30, 2007, interest and financing
expenses were $3.1 million ($1.38 per boe) compared to $0.8 million ($0.58 per
boe) for the same period in 2006. The increase in interest and financing
charges for the Quarter and nine month periods ended September 30, 2007 as
compared to the same periods in 2006, is a result of higher average debt
levels incurred in the Asset Acquisition during the prior quarter. 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
$13.0 million compared to $4.9 million for the same period in 2006. For the
nine months ended September 30, 2007, DD&A expenses were $34.1 million
compared to $13.9 million for the same period in 2006. DD&A per boe for the
Quarter was $16.33 per boe compared to $10.27 per boe recorded for the same
period in 2006. DD&A for the nine month period ended September 30, 2007 was
$15.41 per boe compared to $10.18 per boe for the same period in 2006. The
increase in DD&A per boe was due primarily to the Asset Acquisition on
April 2, 2007.

    Future Income Taxes

    The provision for future income taxes for the Quarter was an expense of
$0.5 million compared to $1.3 million in same period in 2006. For the nine
months ended September 30, 2007, the provision for future income taxes was an
expense of $5.1 million compared to $4.5 million for the same period in 2006.
The lower taxes in the Quarter as compared to the same period in the prior
year is a result of lower pre-tax earnings, while higher taxes year to date
compared to the same period in the prior year is due to a recovery of
$0.9 million recorded in the prior year, relating to a reduction in future
federal and provincial income tax rates enacted during the second quarter of
2006.

    Net Earnings, Comprehensive Income and Funds Generated from Operations

    The Company recorded net earnings for the Quarter of $0.7 million
compared to net earnings of $2.6 million during the same period in 2006. For
the nine months ended September 30, 2007, net earnings were $12.3 million
compared to $10.9 million for the same period in 2006. Lower net earnings in
the Quarter are primarily a result of lower realized prices and non-cash
charges relating to the declining fair market value of the Company's remaining
financial contracts, while higher net earnings year to date were a result of
higher production volumes in addition to non-cash gains relating to the
increasing fair market value of the Company's financial contracts during the
first and second quarters of 2007.
    Basic and diluted net earnings per share for the Quarter were both $0.01
($0.07 basic and $0.06 diluted for the same period in 2006) and for the nine
months ended September 30, 2007, net earnings per basic and diluted share were
$0.27 and $0.23 respectively ($0.31 basic and $0.26 diluted for the same
period in 2006).
    Net earnings recorded in the Quarter includes a $1.6 million unrealized
loss relating to the Company's financial instruments and for the nine months
ended September 30, 2007 net earnings includes a $1.3 million unrealized gain
from the Company's financial instruments. Other comprehensive income for the
Quarter and for the nine months ended September 30, 2007 includes a charge of
$0.8 million and $4.7 million respectively, for the amortization of the amount
recognized in accumulated other comprehensive income on the adoption of the
new accounting standards for financial instruments (see the "Risk Management"
section above). This resulted in total comprehensive income for the three and
nine months ended September 30, 2007 of $0.1 million and $7.7 million,
respectively (2006 - $2.6 million and $10.9 million, respectively).
    Funds generated from operations were $15.2 million for the Quarter
compared to $8.8 million during the same period in 2006, while funds generated
from operations for the nine months ended September 30, 2007 were
$51.7 million compared to $29.5 million for the same period in 2006. The
increase was due to higher revenues as a result of increased production from
the Asset Acquisition in addition to realized gains generated from the
Company's financial instruments price risk management program.
    Basic and diluted funds generated from operations per share for the
Quarter was $0.31 basic and $0.28 diluted, compared to $0.24 and $0.21
respectively during the same period in 2006. And for the nine month period
ended September 30, 2007, basic and diluted funds generated from operations
per share were $1.13 and $1.00 respectively compared to $0.85 and $0.72
respectively during the same periods in 2006.
    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, 2007 compared to the same periods in 2006:


    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($/boe)                               2007      2006      2007      2006
    -------------------------------------------------------------------------
    Petroleum and natural gas revenues   35.37     40.56     42.48     44.25
    Royalties                            (7.95)   (10.87)   (10.16)   (12.47)
    -------------------------------------------------------------------------
                                         27.42     29.69     32.32     31.78
    Realized gain on financial
     instruments                          3.89         -      3.02         -
    Interest income                          -         -      0.03         -
    -------------------------------------------------------------------------
                                         31.31     29.69     35.37     31.78
    Operating expenses                   (5.09)    (5.06)    (5.11)    (4.81)
    Transportation expenses              (4.07)    (3.56)    (4.12)    (3.59)
    -------------------------------------------------------------------------
    Operating netback                    22.15     21.07     26.14     23.38
    General and administrative expenses  (1.16)    (0.88)    (1.09)    (0.98)
    Long term incentive - cash
     component                           (0.32)        -     (0.20)        -
    Interest and financing expenses      (1.59)    (1.24)    (1.38)    (0.58)
    Asset retirement expenditures(1)     (0.06)    (0.64)    (0.13)    (0.27)
    -------------------------------------------------------------------------
    Funds generated from operations      19.02     18.31     23.34     21.55
    Asset retirement expenditures(1)      0.06      0.64      0.13      0.27
    Unrealized gain/(loss) in financial
     instruments                         (0.41)        -      0.38         -
    Long term incentive compensation
     expense                             (0.79)    (0.41)    (0.55)    (0.41)
    Depletion, depreciation and
     accretion expenses                 (16.33)   (10.27)   (15.41)   (10.18)
    -------------------------------------------------------------------------
    Net earnings before taxes             1.55      8.27      7.89     11.23
    Future income taxes                  (0.65)    (2.79)    (2.32)    (3.31)
    -------------------------------------------------------------------------
    Net earnings                          0.90      5.48      5.57      7.92
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) 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 $19.02 per boe for the
Quarter compared to $18.31 per boe for the same period in 2006. Net earnings
were $0.90 per boe for the Quarter compared to $5.48 per boe in the same
period in 2006. For the nine month period ended September 30, 2007, funds
generated from operations were $23.34 per boe compared to $21.55 per boe in
the same period in 2006 while net earnings were $5.57 per boe compared to
$7.92 per boe during the same period in 2006. 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 realized gains generated from the
Company's financial instruments price risk management program, which more than
offset the lower realized commodity prices. Higher DD&A charges resulting from
the Asset Acquisition was the primary cause for the lower net earnings
recorded for the Quarter and year to date as compared to the same periods in
the prior year.

    Capital Expenditures

    The following table summarizes the capital investment for the Quarter and
nine month periods ended September 30, 2007 compared to the same periods in
2006:

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Land acquisitions and retention      1,225     2,604     4,326    11,984
    Geological and geophysical           1,424     1,357     7,490     9,105
    Drilling and completions            26,409    23,087    64,456    70,335
    Equipping and facilities             4,934     5,006    14,555    16,561
    Net property acquisitions
     (dispositions)                        591       388   137,842       630
    Corporate assets                         -         -         -         9
    -------------------------------------------------------------------------
    Total net capital investment        34,583    32,442   228,669   108,624
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the Quarter, ProEx drilled 15 gross natural gas wells (10.3 net)
with a 100 percent success rate. Year-to-date, ProEx has drilled 39 gross
wells (26.7 net) with an 88 percent success rate. The year to date program has
yielded 34 gross natural gas wells (23.4 net), including 33 gross wells
(23.2 net) drilled in the northeast British Columbia Foothills region, and one
gross (0.2 net) drilled in the northeast British Columbia Fort St. John Plains
region. Drilling activities during the Quarter were concentrated in the
recently acquired Bubbles and Buckinghorse properties as well as Julienne,
Sasquatch and Bernadet.

    Capitalization and Capital Resources

    Common Share Information                             September  December
     (thousands)                                          30, 2007  31, 2006
    -------------------------------------------------------------------------
    Three months ended weighted average outstanding
     Common Shares
    - Basic                                                 49,318    35,336
    - Diluted                                               54,575    41,749

    Outstanding Securities
    - Common Shares                                         52,362    39,691
    - Common Share options                                   1,808       778
    - Common Share warrants                                  4,917     6,144
    -------------------------------------------------------------------------
    - Diluted Common Shares outstanding                     59,087    46,613
    -------------------------------------------------------------------------
    - Class B Performance Shares                               557       695
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Outstanding Securities at October 19, 2007 (thousands)
    - Common Shares                                         52,422
    - Common Share options                                   1,825
    - Common Share warrants                                  4,867
    ---------------------------------------------------------------
    - Diluted Common Shares outstanding                     59,114
    ---------------------------------------------------------------
    - Class B Performance Shares                               551
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    

    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 ($96.1 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 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
will be accounted for in the first quarter of 2008, the date that the Company
files the renouncement documents with the tax authorities.


    Total Market Capitalization

    The Company's market capitalization at September 30, 2007 was
$740.4 million.

    
                                                         September  December
    (thousands, except per share amounts)                 30, 2007  31, 2006
    -------------------------------------------------------------------------
    Common Shares outstanding                               52,362    39,691
    Share price($)(1)                                        14.14     12.85
    -------------------------------------------------------------------------
    Total market capitalization($)                         740,399   510,029
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Represents the closing price on the Toronto Stock Exchange ("TSX").


    Liquidity and Capital Resources

                                                         September  December
    (thousands)                                           30, 2007  31, 2006
    -------------------------------------------------------------------------
    Working capital deficiency	                              5,575     2,035
    Bank debt                                               53,777    25,803
    -------------------------------------------------------------------------
    Total debt                                              59,352    27,838
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    At September 30, 2007 the Company had $53.8 million outstanding on its
credit facilities and a working capital deficit of $5.6 million, resulting in
$59.4 million of total debt. In June of 2007, the Company amended its existing
credit facilities agreement with its lender from a demand revolving operating
credit facility to an extendable revolving term credit facility. In accordance
with the terms of the new revolving term credit facilities, the Company now
classifies bank debt as a long term liability on its balance sheet. During the
Quarter, the Company increased the credit facility borrowing base from
$150 million to $185 million. The credit facilities consist of a $175 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
June 21, 2008, 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 and costs incurred on the Asset
Acquisition. Management anticipates that the Company will continue to have
adequate liquidity to fund future working capital and budgeted capital
expenditures during 2007 through a combination of cash flow 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, 2005 to September 30, 2007:


    
                           2007                          2006
    -------------------------------------------------------------------------
    ($ thousands,
     except per
     share
     amounts)  Sept 30  June 30   Mar 31   Dec 31  Sept 30  June 30   Mar 31
    -------------------------------------------------------------------------
    Petroleum
     and
     natural
     gas sales  28,231   37,347   28,524   23,386   19,419   20,723   20,472
    Funds
     generated
     from
     operations 15,176   18,628   17,907   13,995    8,766   10,118   10,653
      -Per
       share
       basic      0.31     0.39     0.45     0.37     0.24     0.29     0.32
      -Per share
       diluted    0.28     0.35     0.39     0.32     0.21     0.25     0.26
    Net earnings   716    7,564    4,066    4,293    2,627    3,978    4,265
      -Per share
       basic      0.01     0.16     0.10     0.11     0.07     0.12     0.13
      -Per share
       diluted    0.01     0.14     0.09     0.10     0.06     0.10     0.11
    Total
     assets    484,888  470,906  339,252  290,307  246,227  217,078  192,613
    Bank debt
     and working
     capital
     deficiency 59,352   88,411   69,858   27,838   41,499   18,364   49,126
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                  2005
    -------------------
    ($ thousands,
     except per
     share
     amounts)   Dec 31
    -------------------
    Petroleum
     and
     natural
     gas sales  29,984
    Funds
     generated
     from
     operations 16,501
      -Per
       share
       basic      0.50
      -Per share
       diluted    0.41
    Net earnings 7,775
      -Per share
       basic      0.24
      -Per share
       diluted    0.20
    Total
     assets    150,193
    Bank debt
     and working
     capital
     deficiency  9,275
    -------------------
    -------------------
    

    Lower petroleum and natural gas revenue, funds generated from operations
and net earnings in the first three quarters of 2006 was due to a sharp
decline in natural gas prices, while the following three quarters increased
due to consistent production growth and strengthening natural gas prices. The
most recently completed quarter experienced declines in realized natural gas
prices which was reflected in the lower revenues, funds generated from
operations and net earnings amounts.


    DISCLOSURE CONTROLS AND PROCEDURES

    Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by ProEx is accumulated and communicated
to the Company's Management as appropriate to allow timely decisions regarding
required disclosures. The Company's Chief Executive Officer and Chief
Financial Officer have concluded, based on their evaluation as of the end of
the period covered by the interim filings, that the Company's disclosure
controls and procedures are effective to provide reasonable assurance that
material information related to the issuer, is made known to them by others
within the Company. It should be noted that while the Company's Chief
Executive Officer and Chief Financial Officer believe that the Company's
disclosure controls and procedures provide a reasonable level of assurance
that they are effective, they do not expect that the disclosure controls and
procedures or internal control over financial reporting will prevent all
errors and fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of
the control system are met.

    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

    
                                                         September  December
    ($ thousands)                                         30, 2007  31, 2006
    -------------------------------------------------------------------------
                                                        (unaudited)

    ASSETS
    Current
      Cash and short-term investments                            -         -
      Accounts receivable                                   15,799    22,774
      Prepaid expenses and deposits                          3,896     1,215
      Fair value of financial instruments (Note 2, 8)        1,266         -
    -------------------------------------------------------------------------
                                                            20,961    23,989
    Property, plant and equipment (Note 9)                 463,927   266,318
    -------------------------------------------------------------------------
                                                           484,888   290,307
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Current
      Accounts payable and accrued liabilities              25,270    26,024
      Bank debt (Note 4)                                         -    25,803
    -------------------------------------------------------------------------
                                                            25,270    51,827
    Bank debt (Note 4)                                      53,777         -
    Asset retirement obligations (Note 5)                    4,574     1,791
    Future income taxes                                     20,540    11,291
    -------------------------------------------------------------------------
                                                           104,161    64,909

    SHAREHOLDERS' EQUITY
    Share capital and warrants (Note 6)                    333,573   192,050
    Contributed surplus (Note 6)                             2,634     1,453
    Accumulated other comprehensive income (Note 6)            279         -
    Retained earnings                                       44,241    31,895
    -------------------------------------------------------------------------
                                                           380,727   225,398
    -------------------------------------------------------------------------
                                                           484,888   290,307
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    ($ thousands, except
     per share amounts)                   2007      2006      2007      2006
    -------------------------------------------------------------------------

    REVENUES
      Petroleum and natural gas         28,231    19,419    94,103    60,614
      Royalties                         (6,349)   (5,203)  (22,515)  (17,074)
    -------------------------------------------------------------------------
                                        21,882    14,216    71,588    43,540
      Realized gain on financial
       instruments (Note 2, 8)           3,107         -     6,679         -
      Unrealized gain/(loss) on
       financial instruments
       (Note 2, 8)                        (327)        -       849         -
      Interest                               -         -        64         3
    -------------------------------------------------------------------------
                                        24,662    14,216    79,180    43,543
    -------------------------------------------------------------------------

    EXPENSES
      Operating                          4,062     2,421    11,308     6,587
      Transportation                     3,250     1,706     9,117     4,914
      General and administrative           929       420     2,413     1,341
      Long term incentive compensation
       (Note 6)                            884       194     1,664       562
      Interest and financing             1,268       595     3,056       789
      Depletion, depreciation and
       accretion                        13,037     4,916    34,130    13,942
    -------------------------------------------------------------------------
                                        23,430    10,252    61,688    28,135
    -------------------------------------------------------------------------
    Net earnings before taxes            1,232     3,964    17,492    15,408

    TAXES
    Future income taxes                    516     1,337     5,146     4,538
    -------------------------------------------------------------------------
    NET EARNINGS                           716     2,627    12,346    10,870

    OTHER COMPREHENSIVE INCOME
    Amortization of fair value of
     financial instruments (Note 2, 6)    (835)        -    (4,668)        -
    -------------------------------------------------------------------------
    COMPREHENSIVE INCOME/(LOSS)           (119)    2,627     7,678    10,870
    -------------------------------------------------------------------------

    Retained earnings, beginning of
     period                             43,525    24,975    31,895    16,732
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Retained earnings, end of period    44,241    27,602    44,241    27,602
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings per share (Note 6)
      Basic                              $0.01     $0.07     $0.27     $0.31
      Diluted                            $0.01     $0.06     $0.24     $0.26
    -------------------------------------------------------------------------

    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)                         2007      2006      2007      2006
    -------------------------------------------------------------------------

    Cash provided by (used in)
    OPERATING
      Net earnings                         716     2,627    12,346    10,870
      Depletion, depreciation and
       accretion                        13,037     4,916    34,130    13,942
      Unrealized (gain)/loss on
       financial instruments               327         -      (849)        -
      Long term incentive compensation
       (Note 6)                            630       194     1,226       562
      Asset retirement expenditures
       (Note 5)                            (50)     (308)     (288)     (376)
      Future income taxes                  516     1,337     5,146     4,538
    -------------------------------------------------------------------------
      Funds generated from operations   15,176     8,766    51,711    29,536
      Change in non-cash working
       capital (Note 7)                    562     3,166     3,946     3,174
    -------------------------------------------------------------------------
                                        15,738    11,932    55,657    32,710
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    FINANCING
      Increase/(decrease) in
       bank debt                       (41,372)   16,356    27,974    34,865
      Issue of shares and warrants
       (net of share issue costs)
       (Note 6)                         48,466       541   145,444    46,864
      Change in non-cash working
       capital (Note 7)                    156       236      (211)      (80)
    -------------------------------------------------------------------------
                                         7,250    17,133   173,207    81,649
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    INVESTING
      Asset acquisition (Note 9)             -         -  (136,396)        -
      Capital expenditures             (34,583)  (32,442)  (92,274) (108,624)
      Change in non-cash working
       capital (Note 7)                 11,595     3,377      (194)   (6,402)
    -------------------------------------------------------------------------
                                       (22,988)  (29,065) (228,864) (115,026)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Change in cash and short-term
     investments                             -         -         -      (667)
    Cash and short-term investments,
     beginning of period                     -         -         -       667
    -------------------------------------------------------------------------
    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 entered into by Progress Energy Ltd. ("Progress"),
    Cequel Energy Inc., Progress Energy Trust, Cyries Energy Inc. and ProEx.
    Under the Plan of Arrangement various assets of Progress were transferred
    to ProEx. At the time of this transaction, Progress and ProEx were
    related companies resulting in the transfer of assets and related
    liabilities to ProEx from Progress at their carrying value.

    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 Energy Ltd. for the year ended December 31,
    2006 except as disclosed below. 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, 2006.

    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.  CHANGE IN ACCOUNTING POLICY

    Financial Instruments

    On January 1, 2007 ProEx adopted the new accounting standards regarding
    the recognition, measurement, disclosure and presentation of financial
    instruments. In conjunction with the adoption of these new standards, the
    Company elected not to use hedge accounting for its natural gas
    derivative contracts under its risk management program. The fair value of
    the commodity contracts is recognized at each reporting period with the
    change in the fair value being classified as an unrealized gain or loss
    on the statement of earnings. In accordance with the transitional
    provisions of the standards, the accounting for hedging relationships for
    prior periods is not retroactively adjusted, therefore, there has been no
    restatement of the prior period. On adoption, the Company recognized a
    current asset of $7.4 million for the fair value of its natural gas
    derivative contracts and an 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 will be amortized through other
    comprehensive income and unrealized gain or loss on financial instruments
    on the statement of earnings over the term of the contracts. As a result,
    $0.8 million ($4.7 million year to date) was charged to other
    comprehensive income during the Quarter with a corresponding unrealized
    gain on financial instruments of $1.2 million ($7.0 million year to date)
    and a charge to future income tax expense of $0.4 million ($2.3 million
    year to date). The impact of the change in fair value as at
    September 30, 2007 is disclosed in note 8. Certain comparative amounts
    have been reclassified to conform to the presentation adopted in 2007.

    3.  RELATIONSHIP WITH PROGRESS ENERGY TRUST

    A technical services agreement ("Technical Service Agreement") is
    currently in place between ProEx and Progress Energy Trust ("Progress")
    whereby Progress provides personnel and certain administrative and
    technical services in connection with the management, development,
    exploitation and operation of the assets of ProEx and the marketing of
    its production. ProEx has granted performance shares, stock options and
    common shares under a long-term incentive compensation plan to the
    employees of Progress 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, 2007 were $1.6 million and $4.5 million respectively
    (2006- $0.9 million and $2.9 million respectively). As at September 30,
    2007, accounts receivable included $0.9 million (2006 - $2.6 million)
    receivable from Progress which includes standard joint venture amounts.
    These amounts were received subsequent to September 30, 2007.

    On April 2, 2007, ProEx acquired certain interests in northeast British
    Columbia Foothills assets previously acquired by Progress Energy Trust
    (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 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. Each of Progress and
    ProEx determined that a single bid was more likely to be successful than
    two partial bids. Therefore, Progress made a single bid. 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 is based on these
    allocations.

    Under the terms of the long term incentive compensation plan (the "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.

    4.  BANK DEBT

    On June 21, 2007, the Company amended its existing credit facility
    agreement with its lender from a demand revolving operating credit
    facility to an extendable revolving term credit facility. In accordance
    with the terms of the new revolving term credit facility, the Company,
    beginning in the second quarter of 2007, now classifies bank debt as a
    long term liability on its balance sheet. On August 16, 2007, the Company
    increased the credit facility borrowing base from $150 million to
    $185 million. At September 30, 2007, the Company's credit facilities
    consisted of a $175 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 June 21, 2008, 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 $39.9 million which will be
    incurred over the next 43 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)                         2007      2006                2006
    ------------------------------------------------------------------------
    Balance, beginning of period         1,791     1,426               1,426
    Liabilities incurred                   963       267                 606
    Liabilities acquired                 1,899         -                   -
    Liabilities settled                   (288)     (376)               (424)
    Accretion expense                      209       133                 183
    ------------------------------------------------------------------------
    Balance, end of period               4,574     1,450               1,791
    ------------------------------------------------------------------------
    ------------------------------------------------------------------------
    


    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
                                           2007                  2006
    ($ thousands -
     except share amounts)           Number     Amount     Number     Amount
    ------------------------------------------------------------------------
    Common Shares
    Balance, beginning of period 39,690,659    189,820 32,997,815     98,193
      Issued for cash            11,300,000    150,357  3,000,000     48,450
      Issued on exercise
       of options                    21,000        284      3,600         36
      Issued on exercise of
       warrants                   1,226,717      2,144    379,863        665
      Issued on exercise of
       class B performance
       shares                       123,933          1          -          -
      Forfeited                           -          -     (1,198)        (3)
      Flow through share
       renouncement                       -     (6,094)         -          -
      Share issue costs,
       net of tax of
       $2,129 (2006 - $722)                     (4,727)               (1,424)
    -------------------------------------------------------------------------
    Balance, end of period       52,362,309    331,785 36,380,080     145,917
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Warrants
    Balance, beginning of period  6,143,539      2,223  6,584,503      2,381
      Exercised                  (1,226,717)      (441)  (379,863)      (137)
      Forfeited                           -          -     (2,396)         -
    -------------------------------------------------------------------------
    Balance, end of period        4,916,822      1,782  6,202,244      2,244
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Class B Performance Shares
    Balance, beginning of period    694,661          7    694,851          7
      Exercised                    (137,556)        (1)         -          -
      Forfeited                         (95)         -          -          -
    -------------------------------------------------------------------------
    Balance, end of period          557,010          6    694,851          7
    -------------------------------------------------------------------------
    Total share capital and
     warrants at end of period                 333,573               148,168
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Shares issued for cash

    On May 17, 2006, ProEx issued 3,000,000 Common Shares at a price of
    $16.15 per share for aggregate gross proceeds of $48.5 million
    ($46.3 million net of issue costs).

    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 9 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 will be accounted for in
    the first quarter of 2008, the date that the Company files the
    renouncement documents with the tax authorities.

    Warrants

    One Common Share may be issued for each Common Share purchase Warrant
    ("Warrants") at a price of $1.39 per share. All Warrants are exercisable
    and expire on July 2, 2008.

    Class B Performance Shares

    Each Class B Performance Share is 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 are not entitled to any voting
    rights or to receive notice of or attend any meetings of the shareholders
    of the Company, are not entitled to receive any dividends on the
    performance shares and are 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 are
    exercisable and expire on July 2, 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
    -------------------------------------------------------------------------
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    Weighted Average Common
     Shares
    Basic                        49,318,063 36,254,922 45,708,387 34,596,091
    Effect of warrants            4,729,621  5,699,368  5,163,830  5,927,258
    Effect of stock options               -     73,705          -     76,121
    Effect of Class B Performance
     Shares                         526,899    616,599    593,141    616,599
    -------------------------------------------------------------------------
    Diluted                      54,574,583 42,644,594 51,465,358 41,216,069
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Long term incentive compensation

    Stock options

    Under the terms of the stock option plan (the "plan"), directors and
    officers of ProEx and Progress employees in their capacity as service
    providers, may be granted options to purchase Common Shares. The Plan
    provides for the granting of up to 10 percent of the issued and
    outstanding Common Shares of the Company. As at September 30, 2007, the
    Company could grant up to 5,236,231 options. Options granted under the
    plan have a term of five years to expiry and vest equally over a three
    year period starting on the first anniversary date of the grant. 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 stock option plan
    activity for the nine months ended September 30, 2007

    
                                                            Weighted average
                                     Number of options     exercise price ($)
    -------------------------------------------------------------------------
    Balance, beginning of period               778,334                 10.63
    Granted                                  1,074,000                 13.74
    Forfeited                                  (23,333)                13.16
    Exercised                                  (21,000)                11.40
    -------------------------------------------------------------------------
    Balance, end of period                   1,808,001                 12.44
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes stock options outstanding and exercisable
    under the plan at September 30, 2007.

                            Options outstanding       Options exercisable
    -------------------------------------------------------------------------
                                  Weighted
                        Number     average   Weighted      Number   Weighted
    Range of       outstanding   remaining    average exercisable    average
    exercise                at contractual   exercise          at   exercise
    price           period end        life      price  period end      price
    -------------------------------------------------------------------------
    $5.60 to $7.95     228,667        1.85       5.82     216,000       5.74
    $9.08 to $13.40    278,334        2.98      11.28     118,667      10.36
    $14.50 to $16.50 1,301,000        4.59      13.85      36,167      14.75
    -------------------------------------------------------------------------
                     1,808,001        3.97      12.44     370,834       8.09
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    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
    -------------------------------------------------------------------------
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    Risk free interest rate (%)           4.55      3.98      4.52      3.98
    Expected life (years)                 3.00      3.00      3.00      3.00
    Expected volatility (%)                 40        42        40        42
    Weighted average fair value of
     options granted ($)                  5.77      6.27      5.80      5.99
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table reconciles the Company's contributed surplus:

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Balance, beginning of period         2,004     1,004     1,453       637
    Stock based compensation expense
      Stock options                        630       182     1,202       497
      Class B Performance shares             -        12        24        65
    Exercise of stock options                -         -       (45)       (3)
    Redemption of Common Shares              -         -         -         2
    -------------------------------------------------------------------------
    Balance, end of period               2,634     1,198     2,634     1,198
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Long Term Incentive Compensation

    Under the terms of the long term incentive compensation plan (the "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, therefore the total compensation
    expense has been included in prepaid expenses and will be amortized
    through long term incentive compensation expense equally over the two
    year vesting period. On May 3, 2007, ProEx committed to an award of
    173,789 Common Shares of ProEx to Progress employees in their capacity as
    service providers at a total compensation cost of $2.4 million.

    
    Accumulated Other
     Comprehensive Income             Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Balance, beginning of period         1,114         -         -         -
    Fair value of financial
     instruments upon initial
     adoption of new accounting
     standard (net of tax of
     $2.5 million)                           -         -     4,947         -
    Fair value applicable to the
     period, amortized to earnings
     (net of tax of $0.4 million for
     the Quarter and $1.9 million
     year to date)                        (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)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Accounts receivable                  5,622    (1,763)    6,976      (772)
    Prepaid expenses and deposits          557       251    (2,681)     (847)
    Accounts payables and accrued
     liabilities                         6,134     8,291      (754)   (1,689)
    -------------------------------------------------------------------------
    Change in non-cash working capital  12,313     6,779     3,541    (3,308)

    Relating to:
      Financing activities                 156       236      (211)      (80)
      Investing activities              11,595     3,377      (194)   (6,402)
      Operating activities                 562     3,166     3,946     3,174
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Interest and taxes paid

                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Interest received                        -         -        64         3
    Interest paid                        1,170       647     2,884       789
    Income and other taxes paid              -         -         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    8.  FINANCIAL INSTRUMENTS

    Fair value of financial assets

    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.

    Credit risk

    Substantially all of the Company's petroleum and natural gas production
    is marketed under standard industry terms by Progress in accordance with
    the Technical Services Agreement. ProEx monitors the financial condition
    of Progress on a quarterly basis in order to mitigate the concentration
    of credit risk with this counterparty. All other accounts receivable are
    with customers and joint venture partners in the petroleum and natural
    gas business under normal industry sale and payment terms and are subject
    to normal credit risks. The Company routinely assesses the financial
    strength of its customers.

    Interest rate risk

    The Company is exposed to interest rate risk to the extent that changes
    in market interest rates will impact the Company's debts that have a
    floating interest rate. The Company had no interest rate swaps or hedges
    at September 30, 2007.

    Financial Derivative Contracts

    ProEx has entered into derivative natural gas financial instruments 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 gain of $3.1 million
    (2006 - nil) and for the nine months ended September 30, 2007, the
    Company realized a net gain of $6.7 million (2006 - nil). As described in
    note 2, 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. On January 1, 2007 the fair value of the commodity
    price contracts was an asset of $7.4 million and resulted in an increase
    to accumulated other comprehensive income and the future income tax
    liability of $4.9 million and $2.5 million, respectively. The
    $4.9 million recognized in accumulated other comprehensive income will be
    amortized over the term of the contracts through other comprehensive
    income with a corresponding unrealized gain on financial instruments on
    the statements of earnings. As a result, $0.8 million, ($4.7 million year
    to date) net of tax, was charged during the Quarter to other
    comprehensive income with a corresponding unrealized gain on financial
    instruments of $1.2 million ($7.0 million year to date) and a charge to
    future income tax expense of $0.4 million ($2.3 million year to date). At
    September 30, 2007 the fair value was an asset of $1.3 million
    ($2.8 million asset at June 30, 2007), resulting in an unrealized loss
    for the Quarter of $0.3 million, ($0.8 million gain year to date) net of
    the amortization of the accumulated other comprehensive income.

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

    
                                      Three Months Ended   Nine Months Ended
                                            September 30        September 30
    -------------------------------------------------------------------------
    ($ thousands)                         2007      2006      2007      2006
    -------------------------------------------------------------------------
    Change in fair value of financial
     instruments                        (1,576)        -    (6,132)        -
    Amortization of accumulated other
     comprehensive income                1,249         -     6,981         -
    -------------------------------------------------------------------------
    Unrealized gain (loss) on
     financial instruments                (327)        -       849         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Contracts outstanding in respect to financial instruments are as follows:

                                  Pricing  Strike          Cost/
    Natural Gas          Volume    Point    Price ($gj)  Premium        Term
    -------------------------------------------------------------------------
    Swap - call
     spread(1)      20,000 gj/d    AECO     Cdn$7.40-   $0.39/gj   Apr 01/07-
                                            Cdn$8.40               Oct 31/07
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Call spread strike prices indicate minimum floor and maximum ceiling
    

    9.  ASSET ACQUISITION

    On April 2, 2007, ProEx acquired certain interests in northeast British
    Columbia Foothills assets previously acquired by Progress Energy Trust
    (the "Acquisition"). ProEx's total consideration, including transaction
    costs of $0.9 million was $136.4 million. The full purchase cost of the
    asset was recorded to property, plant and equipment (including unproved
    property value of $16 million which is excluded from the calculation of
    depletion and depreciation), in addition, the Company recorded an asset
    retirement obligation on the acquired assets of $1.9 million. The
    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.

    
    2007 AND 2006 SELECTED QUARTERLY INFORMATION
    ProEx Energy Ltd.

    FINANCIAL HIGHLIGHTS


    ($ thousands except per                     Three months ended
     share amounts)                                    2006
    -------------------------------------------------------------------------
                                      March 31   June 30  Sept. 30   Dec. 31
    -------------------------------------------------------------------------
    Income Statement
    Petroleum and natural gas revenue   20,472    20,723    19,419    23,386
    Funds generated from operations     10,653    10,118     8,766    13,995
      Per share - basic                   0.32      0.29      0.24      0.37
      Per share - diluted                 0.26      0.25      0.21      0.32
    Net earnings                         4,265     3,978     2,627     4,293
      Per share - basic                   0.13      0.12      0.07      0.11
      Per share - diluted                 0.11      0.10      0.06      0.10

    Balance Sheet
    Capital investment
      Land acquisitions and retention    3,487     5,893     2,604     5,162
      Geological and geophysical         4,172     3,577     1,357     1,147
      Drilling and completions          34,876    12,372    23,087    25,578
      Equipping and facilities           7,960     3,603     5,006    11,597
      Net property acquisitions
       (dispositions)                       44       198       388        53
    -------------------------------------------------------------------------
                                        50,539    25,643    32,442    43,537
    -------------------------------------------------------------------------
    Total debt
      Bank debt                         37,003    18,509    34,865    25,803
      Working capital deficiency
       (surplus)                        12,123      (145)    6,634     2,035
    -------------------------------------------------------------------------
                                        49,126    18,364    41,499    27,838
    -------------------------------------------------------------------------
    Shareholders' equity               122,422   173,625   176,968   225,398
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Share Information (thousands,
     except per share amounts)
    Shares outstanding at end
     of period
              -  Common                 33,003    36,021    36,380    39,688
    Weighted average shares
     outstanding for the period
              -  Basic                  33,001    34,497    36,255    37,528
              -  Diluted                40,289    41,151    42,645    43,697
    Volume traded
                                        14,377     7,934     9,894    11,831
    Common share price ($)
              -  High                    16.98     16.64     15.65     14.46
              -  Low                     11.70     12.10     12.00     12.00
              -  Closing                 14.66     13.53     12.81     12.85
    -------------------------------------------------------------------------



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

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

    Share Information (thousands,
     except per share amounts)
    Shares outstanding at end
     of period
              -  Common                 39,829    48,548    52,362
    Weighted average shares
     outstanding for the period
              -  Basic                  39,768    47,940    49,318
              -  Diluted                45,820    53,960    54,575
    Volume traded
                                        13,855    16,492    12,650
    Common share price ($)
              -  High                    15.49     16.74     15.25
              -  Low                     11.83     14.02     12.79
              -  Closing                 15.15     15.00     14.14
    ---------------------------------------------------------------



    2007 AND 2006 SELECTED QUARTERLY INFORMATION
    ProEx Energy Ltd.

    OPERATIONAL HIGHLIGHTS


    ($ thousands except per                     Three months ended
     share amounts)                                    2006
    -------------------------------------------------------------------------
                                      March 31   June 30  Sept. 30   Dec. 31
    -------------------------------------------------------------------------
    Production
      Natural gas (mcf/d)               23,454    29,931    28,348    35,505
      Crude oil (bbls/d)                   314       352       331       343
      Natural gas liquids (bbls/d)         112       163       148       152
      Total production (boe/d) (6:1)     4,335     5,503     5,204     6,080
    Pricing
      Natural gas ($/mcf)                 8.50      6.34      6.19      7.53
      Crude oil ($/bbl)                  65.66     74.72     75.56     60.87
      Natural gas liquids ($/bbl)        68.00     72.41     71.46     56.35
    Highlights
      Petroleum and natural gas
       revenues                          52.47     41.38     40.56     46.32
      Realized gain on financial
       instruments                           -         -         -         -
      Royalties                         (15.50)   (11.63)   (10.87)   (11.38)
      Operating expenses                 (4.65)    (4.69)    (5.06)    (4.62)
      Transportation expenses            (3.70)    (3.52)    (3.56)    (3.64)
    -------------------------------------------------------------------------
      Operating netback                  28.62     21.54     21.07     26.68
      Interest income                     0.01         -         -         -
      General and administrative
       expenses                          (0.97)    (1.08)    (0.88)    (0.65)
      Long term incentive compensation
       expense (cash component)              -         -         -         -
      Interest and financing expenses    (0.23)    (0.21)    (1.24)    (0.93)
      Asset retirement expenditures      (0.02)    (0.12)    (0.64)    (0.09)
      Capital taxes                      (0.10)     0.08         -         -
    -------------------------------------------------------------------------
      Funds generated from operations    27.31     20.21     18.31     25.01
      Unrealized gain/(loss) on
       financial instruments                 -         -         -         -
      Asset retirement expenditures       0.02      0.12      0.64      0.09
      Long term incentive compensation
       expense                           (0.44)    (0.39)    (0.41)    (0.47)
      Depletion, depreciation and
       accretion expenses                (9.70)   (10.47)   (10.27)   (13.59)
    -------------------------------------------------------------------------
      Net earnings before taxes          17.19      9.47      8.27     11.04
      Future income taxes                (6.26)    (1.53)    (2.79)    (3.37)
    -------------------------------------------------------------------------
      Net earnings                       10.93      7.94      5.48      7.67
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross Drilling Results
    Natural gas                             16         5        18        18
    Crude oil                                1         -         2         -
    Dry                                      2         -         1         -
    -------------------------------------------------------------------------
                                            19         5        21        18
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net Drilling Results
    Natural gas                           12.4       4.4      10.5      13.7
    Crude oil                              1.0         -       0.3         -
    Dry                                    1.6         -       0.1         -
    -------------------------------------------------------------------------
                                          15.0       4.4      10.9      13.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Success rate (%)                        89       100        98       100
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    ($ thousands except per                 Three months ended
     share amounts)                                2007
    ---------------------------------------------------------------
                                      March 31   June 30  Sept. 30
    ---------------------------------------------------------------
    Production
      Natural gas (mcf/d)               36,631    49,530    48,082
      Crude oil (bbls/d)                   384       414       438
      Natural gas liquids (bbls/d)         246       239       225
      Total production (boe/d) (6:1)     6,735     8,909     8,677
    Pricing
      Natural gas ($/mcf)                 7.57      7.40      5.36
      Crude oil ($/bbl)                  64.46     68.32     77.64
      Natural gas liquids ($/bbl)        61.24     66.29     66.98
    Highlights
      Petroleum and natural gas
       revenues                          47.06     46.07     35.37
      Realized gain on financial
       instruments                        5.83      0.05      3.89
      Royalties                         (12.47)   (10.62)    (7.95)
      Operating expenses                 (4.80)    (5.35)    (5.09)
      Transportation expenses            (3.68)    (4.48)    (4.07)
    ---------------------------------------------------------------
      Operating netback                  31.94     25.67     22.15
      Interest income                        -      0.08         -
      General and administrative
       expenses                          (1.17)    (0.95)    (1.16)
      Long term incentive compensation
       expense (cash component)              -     (0.23)    (0.32)
      Interest and financing expenses    (0.81)    (1.60)    (1.59)
      Asset retirement expenditures      (0.42)     0.02     (0.06)
      Capital taxes                          -         -         -
    ---------------------------------------------------------------
      Funds generated from operations    29.54     22.99     19.02
      Unrealized gain/(loss) on
       financial instruments             (6.65)     6.43     (0.41)
      Asset retirement expenditures       0.42     (0.02)     0.06
      Long term incentive compensation
       expense                           (0.47)    (0.38)    (0.79)
      Depletion, depreciation and
       accretion expenses               (13.35)   (16.04)   (16.33)
    ---------------------------------------------------------------
      Net earnings before taxes           9.49     12.98      1.55
      Future income taxes                (2.78)    (3.63)    (0.65)
    ---------------------------------------------------------------
      Net earnings                        6.71      9.35      0.90
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Gross Drilling Results
    Natural gas                             19         -        15
    Crude oil                                -         -         -
    Dry                                      5         -         -
    ---------------------------------------------------------------
                                            24         -        15
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Net Drilling Results
    Natural gas                           13.1         -      10.3
    Crude oil                                -         -         -
    Dry                                    3.3         -         -
    ---------------------------------------------------------------
                                          16.4         -      10.3
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Success rate (%)                        80         -       100
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    

    %SEDAR: 00020978E




For further information:

For further information: Information can also be obtained by contacting
Mr. David Johnson, President & Chief Executive Officer; Mr. Greg Kist, Vice
President Investor Relations & Marketing, or Mr. Steven Allaire, Vice
President Finance and Chief Financial Officer, at ProEx Energy Ltd., 1200, 205
- 5th Avenue S.W., Calgary, Alberta, T2P 4B9, Phone: (403) 216-2510, Fax:
(403) 216-2514 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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