ProspEx Announces 2007 Third Quarter Results and Preliminary Assessment of New Alberta Royalty Framework



    (All amounts are in Canadian dollars, unless stated otherwise)

    CALGARY, Nov. 8 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the
"Company") announces its financial and operating results for the three and
nine months ended September 30, 2007.
    "ProspEx continues to achieve strong operational results despite a
challenging business environment," said John Rossall, President and Chief
Executive Officer. "We have completed a preliminary assessment of the impact
of the new Alberta Royalty Framework proposed by the Government of Alberta on
October 25, 2007. At market forward prices, the estimated impacts on ProspEx's
royalty rates, cash flow and net asset value are expected to be relatively
modest. While the impact on investment economics is forecasted to be mixed,
ProspEx has a broad portfolio of investment opportunities and intends to focus
its capital allocation towards projects with superior economic returns under
the new royalty regime."

    
    Highlights

    -   Production for the third quarter was 4,254 barrels of oil equivalent
        ("boe") per day, in line with second quarter of 2007 production of
        4,241 boe per day and an increase of 17% over third quarter 2006
        production of 3,639 boe per day. The Company estimates that it
        currently has approximately 600 boe per day of completed production
        awaiting tie-in in West Central Alberta.
    -   In the third quarter, the Company participated in the drilling of 24
        gross (14.4 net) wells with a 97% net success rate. Highlights of the
        drilling program included two (1.6 net) Cardium wells in West Central
        Alberta that tested at gross rates of 350 and 600 boe per day, a
        Mannville completion (0.25 net) in West Central Alberta that tested
        at a gross rate of 400 boe per day and a well (0.2 net) drilled at
        Granum in Southern Alberta that tested at a gross rate of 600 boe per
        day. A 20 (12.1 net) well drilling program was also executed at
        Medallion in Southern Alberta.
    -   Drilling is currently underway at Garrington in West Central Alberta.
        An exploratory well on a new trend in Granum was cased in early
        November and is awaiting completion.
    -   Drilling has also commenced at the Company's "high impact" (higher
        risk/higher reward) prospect in Salter, with well results expected at
        year end.
    -   A public hearing, the final step in the regulatory process relating
        to the Company's "high impact" exploration prospect at Edson, was
        held in September. A decision with respect to this project is
        expected from the Alberta Energy and Utilities Board ("EUB") by year
        end.
    -   Operating netbacks of $23.79 per boe were in line with the prior
        year.
    -   Third quarter cash flow was $7.9 million, 9% greater than the same
        period last year. Year to date cash flow is $26.6 million. A loss of
        $1.4 million in net earnings was incurred in the period compared to
        net earnings of $0.4 million in the prior year.
    -   Net debt at September 30, 2007 is $43.3 million. The limit on
        ProspEx's existing credit facility is $60 million.
    -   The Company estimates that its overall royalty rate will change from
        19% to 23% at gas prices of $7.00/GJ under Alberta's new royalty
        framework, assuming the current mix of individual well production
        rates and producing depths of the Company remain unchanged. This
        change in royalty rate is estimated to equate to a 6% reduction in
        operating netback.
    -   The Company's independent reserves engineers, GLJ Petroleum
        Consultants Ltd. ("GLJ"), have reassessed the value of the Company's
        Proved plus Probable reserves at December 31, 2006 assuming that the
        new royalty framework comes into effect on January 1, 2009. No other
        assumptions were varied for this evaluation which was run with GLJ
        (2007-01) pricing and showed that the estimated before tax value of
        the Company's Proved plus Probable reserves, discounted at 10%,
        increased by approximately 2% relative to the existing Alberta
        royalty system. These estimated values do not necessarily represent
        fair market value.


    OPERATIONAL REVIEW

    Production (boe/d)   Q3 2007    Q2 2007    Q1 2007    Q4 2006    Q3 2006
    ------------------   -------    -------    -------    -------    -------
    West Central
     Alberta               1,466      1,397      1,167      1,108      1,534
    Deep Basin             1,589      1,713        823        913        991
    Southern Alberta       1,190      1,122      1,162      1,131      1,104
    Other                      9          9         14         12         10
                               -          -         --         --         --

    Total                  4,254      4,241      3,166      3,164      3,639
    

    Production for the third quarter was 4,254 boe per day, an increase of
17% over third quarter 2006 production of 3,639 boe per day, and essentially
unchanged from the second quarter of 2007 production of 4,241 boe per day.
Third quarter production in each of the Company's core areas was relatively
unchanged from second quarter 2007 levels. In the Deep Basin, a third party
compressor failure in July resulted in lost production of approximately 120
boe per day averaged over the quarter.
    In the third quarter, ProspEx participated in 24 (14.4 net) wells with a
97% net success rate. Three wells (2.1 net) were drilled in West Central
Alberta. In Harmattan, the Company drilled a successful 100% working interest
Cardium step-out well of the existing Cardium W Pool wells. In Ricinus, a
Cardium development well (55% working interest) was also successful, with the
first of two zones onstream in late October at a gross rate of 175 boe per day
(100 boe per day net to ProspEx). The second zone in this well has yet to be
completed. A Mannville well (25% interest) in West Central Alberta was also
completed and tested at a gross rate of 400 boe per day. This well is
currently being tied in. A West Central well in Willesden Green (50% working
interest) was abandoned. An exploratory well (50% interest) targeting the
Elkton formation is currently drilling in Garrington.
    In Southern Alberta, the Company drilled 10 (9.6 net) operated wells at
Medallion, in addition to participating in 10 (2.5 net) partner operated
wells. All of the Medallion wells were cased and completion and tie-in is
ongoing. In Granum, the Company participated in one (0.2 net) successful
development well that flow tested at an aggregate rate of 600 (120 net) boe
per day from two zones. In the fourth quarter, an exploration well (100%
interest) drilled to evaluate a new trend was cased at Granum and is awaiting
completion.
    At Salter, a foothills well is currently being drilled pursuant to a
farmout agreement with a larger industry partner. The drilling program for
this well includes a horizontal leg approximately one kilometre long across
the crest of a Mississippian structure defined by a producing vertical gas
well. ProspEx will not pay for any portion of the drilling and completion of
this well, but has retained a 40% interest in any production. Results of this
well are expected around year end.
    In September, the EUB held a public hearing with respect to the Company's
Edson Wabamun drilling prospect. A decision with respect to this "high impact"
exploration project is expected by year end, with drilling expected in the
first quarter of 2008 pending a favourable regulatory decision.

    NEW ALBERTA ROYALTY FRAMEWORK

    ProspEx has completed a preliminary evaluation of the impact of the new
Alberta Royalty Framework proposed by the Alberta Government on October 25,
2007. Approximately 75% of the Company's current production is subject to
Alberta Crown royalties, with the remainder subject to freehold royalty.
    The table below shows the estimated changes to the Company's overall
corporate average royalty rate under the new royalty framework at different
gas prices. This calculation assumes that the current mix of individual well
production rates and producing depths of the Company remain unchanged, and
that wells drilled prior to January 2009 pay a depth dependent royalty.

    
    AECO Gas Price ($/GJ)                        $6.00      $7.00      $8.00
    -------------------------------------------------------------------------
    Old Corp. Avg. Royalty (%)                     19%        19%        20%
    New Corp. Avg. Royalty (%)                     20%        23%        25%
    Change in Netback (%)                       (2.5)%     (5.8)%     (8.3)%
    -------------------------------------------------------------------------
    

    The Company's independent reserves engineers, GLJ Petroleum Consultants
Ltd., have reassessed the value of the Company's Proved plus Probable reserves
at December 31, 2006 (the Company's most recent fiscal year end) assuming that
the new royalty framework comes into effect on January 1, 2009. No other
assumptions were varied for this evaluation which was run with GLJ (2007-01)
pricing and showed that the estimated before tax value of the Company's Proved
plus Probable reserves, discounted at 10% increased by approximately 2%
relative to the existing Alberta royalty system. These estimated values do not
necessarily represent fair market value. For clarity, the assumptions
regarding the new royalty framework include an assumption that the existing
deep gas royalty program will terminate on January 1, 2009 but that all wells
will receive the depth adjusted royalty effective January 1, 2009, regardless
of when the wells were drilled.
    ProspEx has also assessed the impact of the new Royalty Framework on its
capital investment opportunities. In general, the Company estimates that,
relative to the existing royalty regime, the new Royalty Framework has the
following impacts on project economics:

    
    -   shallow gas drilling economics in Southern Alberta show modest
        improvement in return on capital under the new royalty framework;
    -   in West Central Alberta, the new royalty framework has a neutral to
        moderately negative impact on rate of return; and
    -   the new royalty framework has a moderately negative impact on rates
        of return of Deep Basin projects.
    

    Reaction to the new royalty framework has tended to focus on the
increased royalties to be levied on higher production rates. Many wells
drilled in Western Canada tend to experience higher rates initially, but
stabilize at lower rates and hence produce a substantial portion of their
reserves at rates that will attract a lower royalty under the new royalty
framework. Full cycle analysis shows that the benefit to be realized by lower
royalties later in the producing life is material, and may actually enhance
the economics of some drilling projects. In particular, the impact of the
"depth adjustment" to royalties for wells producing from depths greater than
2,000 metres may have a pronounced positive effect on project economics.
    Many important transitional and implementation details relating to the
new royalty framework have yet to be released by the Alberta Government, and
ProspEx looks forward to further clarity of these issues.
    ProspEx has a broad portfolio of investment opportunities, and believes
that significant opportunity will exist to pursue economically attractive
projects under the new royalty framework. Capital allocation will be directed
to those projects which the Company believes will deliver economic returns
under the new royalty regime.

    GUIDANCE

    Production at Harmattan was restricted over the third quarter due to
third party gas processing constraints. The Company is negotiating alternative
gas processing options to alleviate these constraints. ProspEx believes that
these alternative options will result in an increase in Harmattan production
by over 500 boe per day early in 2008. This additional production is expected
to come from the tie-in of two recently drilled, 100% working interest wells,
as well as the removal of constraints on production from the five (2.7 net)
wells that are currently on production. In addition to restrictions at
Harmattan, some capital spending was delayed due to wet weather in the Deep
Basin and uncertainty surrounding the proposed changes to Alberta Crown
Royalties. Production in the fourth quarter of 2007 is therefore expected to
be approximately 4,000 to 4,100 boe per day. Accordingly, the Company is
forecasting annual average production marginally less than the previously
announced 4,000 to 4,200 boe per day guidance range.
    Operating costs in the third quarter were $8.42 per boe. These costs were
impacted by a prior year adjustment at a third party facility. The Company now
expects operating costs to average $8.00 per boe in 2007, compared to prior
guidance of $7.75 per boe.
    Guidance with respect to the 2007 capital budget ($52 million), royalties
(17% annual average), G&A expenses ($2.00 per boe) are unchanged from prior
guidance.
    Given the current business environment, ProspEx will continue to be
selective with respect to capital investments. Capital will be allocated to
projects that show the best returns, or that represent the capture of new
opportunities. One exploration well has been drilled and cased to date in the
fourth quarter. The Company expects to drill two to three wells in West
Central Alberta in the fourth quarter, in addition to the well currently
drilling in Garrington. A drilling program in the Deep Basin is also expected
to start later in the quarter. The Company also notes that drilling is
underway at the Salter prospect, with no capital exposure to ProspEx.

    Conference Call and Conference Presentation

    ProspEx will be conducting a conference call at 8:00 a.m. MST (10:00 a.m.
EST) on Friday, November 9, 2007. Callers from the Toronto area may dial
416-915-5650 and all other participants may dial the toll free number
1-800-814-3911 to join the call. A taped recording will be available until
Friday, November 23, 2007 by dialing 416-640-1917 from the Toronto area and
1-877-289-8525 from all other areas. The passcode is 21253141 followed by the
number sign.
    This call will also be broadcast live on the internet and may be accessed
at ProspEx's website at www.psx.ca.
    ProspEx will be presenting at the upcoming FirstEnergy/Société Générale
EnergyGrowth Conference on Wednesday, November 14, 2007. The presentation will
be available via webcast on the ProspEx's website at www.psx.ca at 11:00 a.m.
EST (9:00 a.m. MST) on Wednesday, November 14, 2007.

    Reader's Advisory

    ProspEx is a Calgary based junior oil and gas company focused on
exploration for natural gas in the Western Canadian Sedimentary Basin.
    Certain information regarding ProspEx in this press release including
management's assessment of future plans and operations, constitutes
forward-looking information or statements under applicable securities law and
necessarily involve assumptions regarding factors and risks that could cause
actual results to vary materially, including, without limitation, assumptions
and risks associated with oil and gas exploration, development, exploitation,
production, marketing and transportation, loss of markets, volatility of
commodity prices, currency fluctuations, imprecision of reserve estimates,
environmental risks, competition, incorrect assessment of the value of
acquisitions, failure to realize the anticipated benefits of acquisitions and
ability to access sufficient capital from internal and external sources.
    The reader is cautioned that these factors and risks are difficult to
predict and that the assumptions used in the preparation of such information,
although considered reasonably accurate by ProspEx at the time of preparation,
may prove to be incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein and the
variations may be material. Readers are also cautioned that the foregoing list
of factors is not exhaustive. Additional information on these and other
factors that could affect ProspEx's operations or financial results are
included in ProspEx's reports on file with Canadian securities regulatory
authorities. In particular see ProspEx's MD&A and the Risk Factors and
Industry Conditions sections of ProspEx's Annual Information Form. ProspEx's
reports may be accessed through the SEDAR website (www.sedar.com), at
ProspEx's website (www.psx.ca) or by contacting the Company directly.
Consequently, there is no representation by ProspEx that actual results
achieved will be the same in whole or in part as those set out in the
forward-looking information.
    Furthermore, the forward-looking statements contained in this news
release are made as of the date of this news release, and ProspEx does not
undertake any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. The forward-looking statements
contained herein are expressly qualified by this cautionary statement.
    Boe's may be misleading, particularly if used in isolation. A boe
conversion ratio of six thousand cubic feet to one barrel is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.

    
    ProspEx Resources Ltd.
    Consolidated Highlights
    For the periods ended
    (unaudited)
                                      Three      Three       Nine       Nine
                                     months     months     months     months
                                      ended      ended      ended      ended
                                  September  September  September  September
                                   30, 2007   30, 2006   30, 2007   30, 2006
    FINANCIAL ($000's)
      Oil and gas revenue            16,004     14,071     47,628     37,964
      Net earnings (loss)            (1,352)       440       (911)     2,937
      Cash flow(1)                    7,912      7,269     26,634     20,321
      Total assets                  169,923    134,140    169,923    134,140
      Net debt(1)                    43,292     26,527     43,292     26,527

    Net earnings (loss) per share
     ($ per share)
      basic                           (0.03)      0.01      (0.02)      0.06
      diluted                         (0.03)      0.01      (0.02)      0.06
    Cash flow per share ($ per
     share)(1)
      basic                            0.14       0.14       0.49       0.41
      diluted                          0.14       0.14       0.47       0.39
    Weighted average common shares
     (000's)
      basic                          53,966     50,204     53,895     49,620
      diluted                        56,247     53,120     56,369     52,243

    PRODUCTION VOLUMES
      Natural gas (mcf/d)            21,743     18,335     19,888     16,741
      Natural gas liquids (bbls/d)      548        515        451        340
      Crude oil (bbls/d)                 82         67        125         64
                                  -------------------------------------------
      Total (boe/d) (6:1)             4,254      3,639      3,891      3,193

    SALES PRICES
      Natural gas ($/mcf)              6.33       6.14       7.20       6.67
      Natural gas liquids ($/bbl)     51.22      67.77      49.60      62.79
      Crude oil ($/bbl)               99.52      79.61      71.60      69.85
                                  -------------------------------------------
      Total ($/boe)                   40.89      42.03      44.83      43.54

    NETBACKS ($/boe)
      Price(2)                        40.89      42.03      44.83      43.54
      Royalties                       (7.79)     (8.46)     (6.96)     (7.96)
      Operating costs                 (8.42)     (8.21)     (7.94)     (6.83)
      Transportation costs            (0.89)     (0.98)     (0.97)     (0.97)
      General and administrative      (2.00)     (1.80)     (2.11)     (2.03)
                                  -------------------------------------------
      Total                           21.79      22.58      26.85      25.75

    CAPITAL ($000's)
      Drilling, completions and
       seismic                       10,666      9,332     22,550     31,586
      Facilities                      1,383      2,215     11,115     10,223
      Land and lease                    300        382      3,857      4,618
      Capitalized general &
       administrative                   704        514      1,938      1,472
                                  -------------------------------------------
      Total exploration &
       development                   13,053     12,443     39,460     47,899
      Property disposition                -    (10,842)         -    (10,842)
                                  -------------------------------------------
      Net exploration & development  13,053      1,601     39,460     37,057
      Other capital assets               49         64        157        251
                                  -------------------------------------------
      Total capital                  13,102      1,665     39,617     37,308

    (1)  Cash flow and net debt do not have a standardized measure prescribed
         by Canadian generally accepted accounting principles and therefore
         may not be comparable with calculations with similar measures for
         other companies. Net debt is defined as long-term debt plus total
         current assets less total current liabilities and cash flow is
         defined as cash flow from operations before changes in non-cash
         working capital to analyze operating results.
    (2)  Price does not include unrealized financial instrument gains/loss.
    

    MANAGEMENT DISCUSSION & ANALYSIS

    Management's Discussion and Analysis ("MD&A") is management's assessment
of the historical financial and operating results of ProspEx Resources Ltd.
("ProspEx" and/or the "Company") as well as a prospective view of the
Company's activities. The MD&A for the three and nine months ended
September 30, 2007, was prepared as at November 8, 2007 and should be read in
conjunction with the audited consolidated financial statements and MD&A for
the year ended December 31, 2006 together with the notes related thereto.
    The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada. Readers are
referred to advisories detailing "Non-GAAP Measures" and "Forward-looking
Statements" contained in the back of this MD&A. Additional information
relating to ProspEx, including our Annual Information Form, can be found at
www.sedar.com.

    HIGHLIGHTS OF THE THIRD QUARTER OF 2007

    The third quarter of 2007 was highlighted by a 17% increase in production
volumes compared to the same period in the prior year. As a result of realized
oil and gas revenues, operating cash flow is up 9% during the third quarter
and 31% for the first nine months of the year compared to the same periods in
the prior year.
    During the quarter, the Company commenced its summer drilling program,
participating in 24 (14.4 net) wells with a 97% net success rate. This summer
drilling program was highlighted by continued success drilling Cardium
opportunities in West Central Alberta, as well as a 10 well operated drilling
program in Medallion.
    The Company continues to maintain a strong balance sheet with net debt at
quarter end of $43.3 million.
    Despite a successful third quarter operating program, the business
environment remains uncertain as natural gas prices continue to be low
relative to both historical levels and oil prices. Concern over excess supply
and high storage levels are expected to hamper any price recovery in the near
future. In addition, the business environment has become unsettled due to the
upcoming changes to the existing royalty rate framework as announced by the
Alberta Government.

    
    RESULTS OF OPERATIONS

    Revenue

    -------------------------------------------------------------------------
                                    Three Months ended     Nine months ended
                                       September 30           September 30
    ($000's)                          2007       2006       2007       2006
    -------------------------------------------------------------------------
    Natural gas sales              $ 12,667   $ 10,363   $ 39,069   $ 30,930
    Oil sales                           753        494      2,444      1,214
    Natural gas liquids sales         2,584      3,214      6,115      5,820
    -------------------------------------------------------------------------
    Oil and gas revenue            $ 16,004   $ 14,071   $ 47,628   $ 37,964
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the three months ended September 30, 2007, oil and gas revenue was
up 14% over the third quarter of 2006 due to a 17% increase in production
offset by a 3% decrease in average prices. Natural gas revenue increased 22%
to $12.7 million from $10.4 million during the same period in 2006 as a result
of a 19% growth in production. Revenues from oil and natural gas liquids
(NGLs) is down slightly to $3.3 million from the third quarter of 2006. An 8%
increase in oil and NGLs production was offset by lower oil and NGLs prices
compared to the same period of 2006.
    For the nine months ended September 30, 2007, oil and gas revenues
increased 25% to $47.6 million from $38.0 million during the same period of
2006.

    Production

    Production for the third quarter of the year averaged 4,254 boe per day,
17% higher than last year's production of 3,639 boe per day and a slight
increase over the previous quarter's average of 4,241 boe per day. Production
was comprised of natural gas volumes of 21,743 thousand cubic feet ("mcf") per
day which increased 19% over the third quarter of 2006 and oil and NGL volumes
which increased 8% to 630 boe per day. For the nine months ended September 30,
2007 production was 3,891 boe per day, up 22% from the same period in 2006.
Production is up from the prior year for both the quarter and the nine months
ended September 30, 2007 as the Company realized the benefit of new production
from wells drilled during the past winter drilling season. The majority of the
new production came from the Company's growth areas in West Central Alberta
and the Deep Basin.
    The Company's production mix for both the third quarter and first nine
months of the year is 85% natural gas and 15% oil and natural gas liquids.

    Average Selling Price (excluding unrealized gains or losses)

    Natural gas prices realized have declined steadily throughout 2007,
consistent with market conditions. High natural gas storage inventories and a
quiet hurricane season depressed the market for natural gas. As a result, the
Company's realized gas prices for the third quarter of 2007 averaged $6.33 per
mcf, down 13% from the $7.31 per mcf realized in the second quarter of 2007
but up 3% from last year's third quarter price of $6.14 per mcf.

    Financial Instruments

    In anticipation of an unstable gas price environment, the Company
utilized financial instruments to reduce gas price volatility and to maintain
a more predictable cash flow. The Company entered into natural gas collars for
9,000 GJ per day for the summer of 2007, as well as an additional 4,000 GJ per
day contract for the months of September and October 2007. All of these
contracts are described in the financial instruments and risk management note
to the consolidated financial statements. The realized gain on financial
instruments, which is included in natural gas revenue for 2007, was
$1.5 million for the third quarter and $2.3 million for the first nine months
of the year. Comparatively, in 2006 the realized gain was $0.6 million for the
third quarter and $1.0 million for the first nine months.
    Changes in the estimated fair value of all financial instruments is
recorded as an unrealized gain or loss. As a result, changes in the fair value
of financial instruments due to fluctuating forward natural gas prices,
purchases, or expiration of financial contracts can lead to volatility in net
earnings for the period. At September 30, 2007, the net estimated fair value
of all financial instruments was $1.2 million. The decrease in the estimated
fair value from June 30, 2007 resulted in an unrealized financial instrument
loss of $0.2 million in the third quarter of 2007. The decrease in estimated
fair value from December 31, 2006 resulted in a 2007 year to date loss of
$1.9 million. These losses were mainly the result of a shorter remaining
contract term of existing financial instruments, as gains have been realized
for the portion of the contract which has expired, offset by additional
contracts entered into by the Company.

    Royalty Expense

    Royalty expense totaled $3.0 million or 19% of revenue for the quarter
ended September 30, 2007 versus last year's $2.8 million expense or 20% of
revenue. Royalty expense for the first nine months of 2007 was $7.4 million or
16% of revenue compared to $6.9 million or 18% of revenue in 2006. Year to
date royalty expense is lower due to an additional $1.2 million of capital
cost recovery credits received during the second quarter as a result of
capital expenditures incurred to build production facilities.
    The Company's 2007 royalty rate is expected to be approximately 17% of
revenue.

    Operating Costs

    Operating costs for the third quarter of the year totaled $3.3 million
compared to last year's costs of $2.7 million. On a boe basis, operating costs
for the quarter are up from $8.21 per boe during the third quarter of 2006 to
$8.42 per boe. For the first nine months of the year operating costs were
$8.4 million or $7.94 per boe compared to $6.0 million or $6.83 per boe in
2006. This increase in operating costs is due to increased production in areas
with higher unit operating costs, higher costs associated with general
industry cost pressures and a prior year adjustment at a third party facility.
    Operating costs for the full year 2007 are anticipated to average $8.00
per boe in line with year to date average costs.

    Transportation Expenses

    Transportation expenses for the three months ended September 30, 2007
were consistent with the same period of 2006 at $0.3 million. On a per unit
basis, transportation costs were $0.89 per boe in the quarter down from $0.98
per boe in 2006. Transportation expenses for the first nine months of the year
were $1.0 million or $0.97 per boe in line with $0.8 million or $0.97 per boe
for the same period of 2006.

    
    General and Administrative Expenses

    -------------------------------------------------------------------------
                                     Three months ended    Nine months ended
                                       September 30,         September 30,
    ($000's)                          2007       2006       2007       2006
    -------------------------------------------------------------------------
    Gross general and
     administrative                $  1,653   $  1,297   $  4,896   $  4,087
    Recoveries                         (166)      (180)      (714)      (842)
    Capitalized expenses               (704)      (514)    (1,938)    (1,471)
                                   ------------------------------------------
    Net general and administrative
     expenses                      $    783   $    603   $  2,244   $  1,774
                                   ------------------------------------------
    Net general and administrative
     ($/boe)                       $   2.00   $   1.80   $   2.11   $   2.03
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Net general and administrative costs ("G&A") for the three and nine
months ended September 30, 2007 were $0.8 million and $2.2 million
respectively compared to $0.6 million and $1.8 million for the same periods of
2006. On a boe basis, G&A for the quarter was $2.00 compared to $1.80 in 2006
and was $2.11 for the first nine months of 2007 compared to $2.03 for same
period in 2006.
    Higher G&A in 2007 is a result of the increased staffing levels required
to manage higher production and activity associated with exploration success,
as well as higher salary costs in an increasingly competitive labour market.
    G&A costs are expected to average $2.00 per boe for 2007.

    Interest and Bank Charges

    Interest and bank charges were $0.6 million for the third quarter and
$1.5 million for the first nine months of the current year compared to
$0.3 million and $1.0 million for the comparable periods of 2006. This
increase in costs reflects a higher utilization of the Company's credit
facility in 2007.

    Depletion, Depreciation and Accretion

    Depletion, depreciation and accretion ("DD&A") was $9.3 million for the
third quarter of 2007 and $25.1 million year to date compared to $6.9 million
and $17.1 million for the same periods of 2006. DD&A is higher in the current
year due to production growth and a higher depletion rate. DD&A per boe is up
in the current year as the cost of adding proved reserves over the past twelve
months reflects the higher industry cost environment. It is anticipated that
the depletion rate will continue to increase marginally as the capital program
is executed.

    Stock-Based Compensation

    Stock-based compensation expense for 2007 is consistent with the prior
year at $0.3 million for the third quarter and is down slightly for the first
nine months of 2007 to $0.8 million compared to $0.9 million in 2006. The
Company uses a graded vesting schedule therefore stock-based compensation
decreases over the vesting period. Stock-based compensation is accounted for
using the fair value method of accounting. Under the fair value method of
accounting, this compensation expense is recorded in the earnings statement
over the vesting period and approximately 50% of these costs are capitalized.

    Income Taxes

    A recovery of future income taxes of $0.5 million was recorded for the
quarter compared to an expense of $0.7 million last year. A slight income tax
expense was incurred during the nine months ended September 30, 2007 as
compared to an expense of $2.5 million during the same period of 2006.
    The Company's has an estimated $146.8 million in income tax pools at
September 30, 2007 and does not anticipate being cash taxable for the
remainder of the year.

    Net Earnings (Loss) and Cash Flow

    The Company realized a net loss of $0.9 million for the first nine months
of the year compared to earnings of $2.9 million last year. The Company
realized a loss year to date compared to earnings in the same period of 2006
as the revenue earned from production growth was offset by a higher DD&A rate
and a $1.9 million unrealized financial instrument loss. Net income per share
was $(0.03) for the quarter and $(0.02) for the first nine months of the year,
down from earnings of $0.01 for the third quarter and $0.06 for the first nine
months of 2006.
    Cash flow is up 31% or $6.3 million for the first nine months of 2007
compared to the same period of 2006. For the third quarter of the year, cash
flow increased 9% to $7.9 million from $7.3 million in the prior year. The
increase in cash flow over the prior year can be largely attributed to the
increase in production levels as described earlier in this MD&A.
    Diluted cash flow per share for the third quarter of 2007 of $0.14 is in
line with the same period of 2006. Consistent with the overall increase in
cash flows, diluted cash flow per share for the first nine months of 2007 of
$0.47 is up 21% from the same period of the prior year.

    
    Capital Expenditures

    ($000's)                          Three      Three       Nine       Nine
                                     months     months     months     months
                                      ended      ended      ended      ended
                                  September  September  September  September
                                   30, 2007   30, 2006   30, 2007   30, 2006
                                  -------------------------------------------
    Drilling, completions &
     seismic                       $ 10,666   $  9,332   $ 22,550   $ 31,586
    Facilities                        1,383      2,215     11,115     10,223
    Land and lease                      300        382      3,857      4,618
    Capitalized G&A                     704        514      1,938      1,472
                                  -------------------------------------------
    Total exploration & development
     capital                         13,053     12,443     39,460     47,899
    Property disposition                  -    (10,842)         -    (10,842)
                                  -------------------------------------------
    Net exploration & development
     capital                         13,053      1,601     39,460     37,057
    Other capital assets                 49         64        157        251
                                  -------------------------------------------
    Total capital expenditures     $ 13,102   $  1,665   $ 39,617   $ 37,308
                                  -------------------------------------------
    

    Exploration and development expenditures for the three and nine months
ended September 30, 2007 were $13.1 million and $39.5 million respectively,
compared to $12.4 million and $47.9 million respectively for the same periods
last year (prior to inclusion of proceeds from the property disposition).
During the quarter the Company's capital spending was focused on drilling and
completions as 24 gross (14.4 net) wells were drilled.
    The full year exploration & development capital budget remains at
$52.0 million.

    Liquidity & Capital Resources

    At September 30, 2007, ProspEx had the following resources available to
fund its capital expenditure program.

    
                                                                     ($000's)
    -------------------------------------------------------------------------
    Working capital deficiency                                      $(10,826)
    Long-term debt                                                   (32,466)
    Bank facilities available                                         60,000
    -------------------------------------------------------------------------
    Total resources available                                       $ 16,708
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Accounts receivable are with customers and joint-venture partners in the
oil and gas industry and are subject to normal industry credit risks. Due to
the deterioration of North American gas price fundamentals, industry access to
capital markets may become increasingly difficult, raising the credit risk on
accounts receivable. The Company has not recorded an allowance for doubtful
accounts at September 30, 2007.
    ProspEx expects that it will be able to fund its remaining 2007 capital
program from cash flow from operations and existing capital resources.

    Bank Debt

    In July 2007, the Company expanded its credit facility by $10.0 million
to bring the total credit facility to $60.0 million.
    At September 30, 2007, the Company had a $60.0 million credit facility
with a Canadian chartered bank. The facility is available by way of Canadian
and US dollar prime rate based loans, LIBOR advances, bankers' acceptances and
letters of credit. The credit facility is fully revolving until June 30, 2008
and may be extended at the mutual agreement of ProspEx and its lender for an
additional year. If the credit facility is not extended, a balloon payment is
required on July 1, 2009. This facility is secured by a $200 million demand
debenture and a first floating charge on all petroleum and natural gas assets
of ProspEx.

    Share Capital

    As at September 30, 2007, ProspEx had 53,975,551 common shares, 2,772,218
warrants, 406,131 special performance units and 4,595,917 options issued and
outstanding.
    As at November 8, 2007, ProspEx had 54,280,446 common shares, 2,724,121
warrants, nil special performance units and 4,655,917 options issued and
outstanding.

    Commitments

    The following table summarizes the outstanding contractual obligations of
the Company for the remainder of 2007 and the following years:

    
                                                                       There-
    ($000's)               2007     2008     2009     2010     2011    after
    -------------------------------------------------------------------------
    Long-term debt            -        -   32,465        -        -        -
    Building lease           96      384       32        -        -        -
    Drilling rig
     contract             1,905    3,924        -        -        -        -
    Process fees            126      400      300      225       36        -
    Transportation          233      853      181        -        -        -
    Seismic purchase        100        -        -        -        -        -
    Other                     2        4        -        -        -        -
    -------------------------------------------------------------------------
    Total                 2,462    5,565   32,978      225       36        -
    -------------------------------------------------------------------------
    

    ProspEx has met its commitment to incur $14.6 million in qualifying
expenditures related to the flow-through share financings in 2007.

    Off-Balance Sheet Arrangements
    The Company has not entered into any off-Balance Sheet transactions.

    
    Summary of Quarterly Results

                                                   2007                 2006
                                         Q3         Q2         Q1         Q4
    -------------------------------------------------------------------------
    Financial ($000's, except per
     share amounts)
    Oil and gas revenue              16,004     17,553     14,071     13,536
    Net earnings (loss)              (1,352)     2,235     (1,794)     2,143
      Per share - basic               (0.03)      0.04      (0.03)      0.04
       - diluted                      (0.03)      0.04      (0.03)      0.04

    Average Daily Production
    Oil (bbls/d)                         82        210         83        184
    NGL (bbls/d)                        548        513        290        276
    Natural Gas (mcf/d)              21,743     21,108     16,757     16,221
    Total (boe/d)                     4,254      4,241      3,166      3,164

    Overall Netbacks ($/boe)
    Price(1)                          40.89      45.48      49.38      46.50
    Royalties                         (7.79)     (3.97)     (9.85)     (7.16)
    Operating Cost                    (8.42)     (7.86)     (7.38)     (7.39)
    Transportation Cost               (0.89)     (1.01)     (1.03)     (0.96)
                                      ------     ------     ------     ------
    Operating Netback                 23.79      32.64      31.12      30.99
                                      ------     ------     ------     ------

                                                   2006                 2005
                                         Q3         Q2         Q1         Q4
    -------------------------------------------------------------------------
    Financial ($000's, except per
     share amounts)
    Oil and gas revenue              14,071     12,704     11,190     12,496
    Net earnings (loss)                 440        868      1,629      3,850
      Per share - basic                0.01       0.02       0.03       0.08
       - diluted                       0.01       0.02       0.03       0.08

    Average Daily Production
    Oil (bbls/d)                         67         96         28         28
    NGL (bbls/d)                        515        287        212         91
    Natural Gas (mcf/d)              18,335     17,948     13,890     11,651
    Total (boe/d)                     3,639      3,375      2,555      2,062

    Overall Netbacks ($/boe)
    Price(1)                          42.03      41.37      48.66      66.69
    Royalties                         (8.46)     (7.12)     (8.36)    (10.15)
    Operating Cost                    (8.21)     (5.68)     (6.34)     (6.77)
    Transportation Cost               (0.98)     (1.07)     (0.83)     (0.80)
                                      ------     ------     ------     ------
    Operating Netback                 24.38      27.50      33.13      48.97
                                      ------     ------     ------     ------

    (1) Price does not include unrealized financial instrument loss.

    Non - GAAP Measures

    Within the MD&A references are made to terms commonly used in the oil and
gas industry. The following terms are not defined by GAAP in Canada and are
referred to as non-GAAP measures.

    1.  Cash flow is defined as cash flow from operations before the change
        in non-cash working capital. The MD&A contains the term "cash flow"
        which should not be considered an alternative to, or more meaningful
        than "cash flow from operations" as determined in accordance with
        GAAP. The Company considers cash flow to be a key measure as it
        demonstrates the Company's ability to generate the cash necessary to
        fund capital projects and to repay debt. Cash flow presented does not
        have any standardized meaning prescribed by Canadian GAAP and
        therefore it may not be comparable with the calculation of similar
        measures for other entities. Cash flow per share is calculated using
        the same weighted average number of common shares for the period as
        used in calculating the net earnings per share calculation.
    2.  Boe amounts have been calculated using a conversion rate of six mcf
        of gas to one barrel of oil. Boe's may be misleading if used in
        isolation. A boe conversion ratio of one barrel of oil to six mcf of
        gas is based on an energy equivalency conversion method primarily
        applicable at the burner tip and does not represent a value
        equivalency at the well head.
    3.  Netbacks equal total revenue less royalties, operating costs and
        general and administrative costs on a boe basis. Total boes are
        calculated by multiplying the daily production by the number of days
        in the period.
    4.  Royalty rate is calculated by dividing total royalties by oil and gas
        revenue.
    

    Forward-looking statements

    Certain information regarding ProspEx including management's assessment
of future plans and operations, constitutes forward-looking information or
statements under applicable securities law and necessarily involve assumptions
regarding factors and risks that could cause actual results to vary
materially, including, without limitation, assumptions and risks associated
with oil and gas exploration, development, exploitation, production, marketing
and transportation, loss of markets, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental risks,
competition, incorrect assessment of the value of acquisitions, failure to
realize the anticipated benefits of acquisitions and ability to access
sufficient capital from internal and external sources.
    The reader is cautioned that these factors and risks are difficult to
predict and that the assumptions used in the preparation of such information,
although considered reasonably accurate by ProspEx at the time of preparation,
may prove to be incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein and the
variations may be material. Readers are also cautioned that the foregoing list
of factors is not exhaustive. Additional information on these and other
factors that could affect ProspEx's operations or financial results are
included in ProspEx's reports on file with Canadian securities regulatory
authorities. In particular see the Risk Factors and Industry Conditions
sections of ProspEx's Annual Information Form. ProspEx's reports may be
accessed through the SEDAR website (www.sedar.com), at ProspEx's website
(www.psx.ca) or by contacting the Company directly. Consequently, there is no
representation by ProspEx that actual results achieved will be the same in
whole or in part as those set out in the forward looking information.
    Furthermore, the forward-looking statements contained in this MD&A are
made as of the date of this MD&A, and ProspEx does not undertake any
obligation to update publicly or to revise any of the included forward-looking
statements, whether as a result of new information, future events or
otherwise, except as required by law. The forward-looking statements contained
herein are expressly qualified by this cautionary statement.

    
    ProspEx Resources Ltd.
    Consolidated Balance Sheets
    (unaudited)

    (Stated in thousands of dollars)

                                                  September 30,  December 31,
                                                          2007          2006
                                                          ----          ----
    Assets
    Current assets
      Accounts receivable                          $     9,075        13,220
      Prepaid expenses                                     618           746
    Unrealized financial instrument gain                 1,205         3,081
                                                  ---------------------------
                                                        10,898        17,047

    Property, plant and equipment, net                 159,025       142,649
    Asset held for resale (note 2)                           -           937
    Future income tax asset (note 3)                         -         1,103
                                                  ---------------------------

                                                   $   169,923       161,736
                                                  ---------------------------
                                                  ---------------------------

    Liabilities

    Current liabilities
      Accounts payable and accrued liabilities     $    21,724        29,990
                                                  ---------------------------
                                                        21,724        29,990

    Long term debt (note 4)                             32,466        16,766

    Asset retirement obligation (note 5)                 4,522         4,157

    Future income tax liability (note 3)                 3,747             -
                                                  ---------------------------

    Total liabilities                                   62,459        50,913
                                                  ---------------------------

    Shareholders' Equity

    Share capital (note 6)                              83,469        87,459
    Contributed surplus                                  5,890         4,348
    Retained earnings                                   18,105        19,016
                                                  ---------------------------
                                                       107,464       110,823
                                                  ---------------------------
                                                   $   169,923       161,736
                                                  ---------------------------
                                                  ---------------------------

    See accompanying notes to consolidated financial statements



    ProspEx Resources Ltd.
    Consolidated Statements of Earnings (Loss), Comprehensive Earnings
    and Retained Earnings
    (unaudited)

                                   Three       Three        Nine        Nine
                                  months      months      months      months
    (Stated in thousands of        ended       ended       ended       ended
     dollars, except per       September   September   September   September
     share amounts)             30, 2007    30, 2006    30, 2007    30, 2006
    -------------------------------------------------------------------------
    Revenue
      Oil and gas               $ 16,004      14,071      47,628      37,964
      Unrealized financial
       instrument gain (loss)       (175)      1,110      (1,876)      1,919
      Royalties                   (3,051)     (2,833)     (7,391)     (6,940)
                               ----------------------------------------------

                                  12,778      12,348      38,361      32,943
                               ----------------------------------------------

    Expenses
      Depletion, depreciation
       and accretion               9,270       6,926      25,145      17,120
      Operating                    3,298       2,749       8,435       5,952
      Transportation                 349         328       1,032         848
      General and administrative     783         603       2,244       1,774
      Interest and bank charges      585         299       1,541         957
      Stock-based compensation       307         315         828         860
                               ----------------------------------------------

                                  14,592      11,220      39,225      27,511
                               ----------------------------------------------

    Earnings (loss) before
     income taxes                 (1,814)      1,128        (864)      5,432
                               ----------------------------------------------

    Income Tax (note 3)
      Current expense                  -          20           -          20
      Future  expense (recovery)    (462)        668          47       2,475
                               ----------------------------------------------

                                    (462)        688          47       2,495
                               ----------------------------------------------

    Net earnings (loss) and
     comprehensive earnings for
     the period                   (1,352)        440        (911)      2,937

    Retained earnings,
     beginning of period          19,457      16,433      19,016      13,936
                               ----------------------------------------------

    Retained earnings, end of
     period                     $ 18,105      16,873      18,105      16,873
                               ----------------------------------------------
                               ----------------------------------------------

    Net earnings (loss) per
     share
      Basic                     $  (0.03)       0.01       (0.02)       0.06
                               ----------------------------------------------
                               ----------------------------------------------
      Diluted                   $  (0.03)       0.01       (0.02)       0.06
                               ----------------------------------------------
                               ----------------------------------------------

    See accompanying notes to consolidated financial statements.



    ProspEx Resources Ltd.
    Consolidated Statements of Cash Flow
    (unaudited)

                                   Three       Three        Nine        Nine
                                  months      months      months      months
                                   ended       ended       ended       ended
    (Stated in thousands       September   September   September   September
     of dollars)                30, 2007    30, 2006    30, 2007    30, 2006
    -------------------------------------------------------------------------

    Operations
    Net earnings (loss) for the
     period                     $ (1,352)        440        (911)      2,937
    Items not involving cash
      Depletion, depreciation
       and accretion               9,270       6,926      25,145      17,120
      Stock-based compensation       307         315         828         860
      Unrealized financial
       instrument loss (gain)        175      (1,080)      1,876      (1,889)
      Future income tax expense
       (recovery)                   (462)        668          47       2,475
    Asset retirement
     expenditures                    (26)          -        (351)     (1,182)
                               ----------------------------------------------
                                   7,912       7,269      26,634      20,321
    Changes in non-cash
     working capital               9,737       6,820        (175)     (4,036)
                               ----------------------------------------------
                                  17,649      14,089      26,459      16,285
                               ----------------------------------------------

    Financing
      Issuance of common shares       28         (34)        338       6,589
      (Decrease) increase in
       long term debt            (10,057)    (19,368)     15,700      12,727
                               ----------------------------------------------
                                 (10,029)    (19,402)     16,038      19,316
                               ----------------------------------------------

    Investments
      Exploration and
       development expenditures  (13,053)    (12,443)    (39,460)    (47,899)
      Property disposition             -      10,842         937      10,842
      Other capital assets           (49)        (64)       (157)       (251)
                               ----------------------------------------------
                                 (13,102)     (1,665)    (38,680)    (37,308)
    Changes in non-cash
     working capital               5,482       6,978      (3,817)      1,707
                               ----------------------------------------------
                                  (7,620)      5,313     (42,497)    (35,601)
                               ----------------------------------------------

    Change in cash                     -           -           -           -

    Cash, beginning of period          -           -           -           -
                               ----------------------------------------------

    Cash, end of period         $      -           -           -           -
                               ----------------------------------------------
                               ----------------------------------------------

    See accompanying notes to consolidated financial statements.
    



    Notes to Consolidated Financial Statements

    For the three and nine months ended September 30, 2007

    The interim unaudited consolidated financial statements of ProspEx
Resources Ltd. ("the Company" and/or "ProspEx") have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP").
The Company is engaged in the acquisition, exploration, development and
production of oil and natural gas in Canada.
    The interim unaudited consolidated financial statements have been
prepared by management following the same accounting policies and methods of
computation as the audited consolidated financial statements for the year
ended December 31, 2006. Preparation of financial statements in conformity
with Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results may differ from these estimates. The disclosures
included below are incremental to those included with the annual consolidated
financial statements. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto in the Company's annual report for the year ended December 31, 2006.

    
    1.  CHANGE IN ACCOUNTING POLICY

    On January 1, 2007, the Company adopted the new accounting standards for
    financial instrument-recognition and measurement, financial instruments-
    presentation and disclosures, hedging and comprehensive income.

    The standards require that financial assets and liabilities be carried at
    fair value on the balance sheet, except for loans and receivables,
    securities designated as held-to-maturity and non-trading financial
    liabilities which are carried at amortized cost unless designated as
    held-for-trading.

    The Company uses derivative financial instruments to manage its exposure
    to volatility in commodity prices. Prior to January 1, 2007 and to date,
    the derivative financial instruments used have not been designated as
    hedges; they were recorded at fair value at inception and unrealized
    gains or losses are reflected in earnings (loss).

    Prior to adoption of the new standards, physical receipt and delivery
    contracts were not within the scope of the definition of a financial
    instrument. On adoption of the new standards, the Company elected to
    account for its commodity sales contracts and other non-financial
    contracts as non-financial derivatives.

    The new standards require a statement of comprehensive income comprised
    of net earnings plus other comprehensive income. The Company does not
    have any other comprehensive income to report on the adoption of the new
    standards.

    The adoption of these new standards on January 1, 2007 did not have a
    material impact on the reported results of operations or net financial
    position of the Company.

    2.  ASSET HELD FOR RESALE

    The Company had $0.9 million of equipment assembled which it intended to
    sell. The Company no longer expects to sell this equipment, as it is
    expected that this equipment will be utilized in the Company's field
    operations.

    3.  FUTURE INCOME TAXES

    The provision for future income taxes differs from the amount computed by
    applying the combined expected Canadian Federal and Provincial tax rates
    to earnings before income taxes. The reasons for these differences are as
    follows:


    ($000's)                     Three       Three        Nine        Nine
                                 months      months      months      months
                                 ended       ended       ended       ended
                               September   September   September   September
                                30, 2007    30, 2006    30, 2007    30, 2006
    -------------------------------------------------------------------------
    Earnings (loss) before
     taxes                     $  (1,814)  $   1,128   $    (864)  $   5,432
    Rate                          32.12%      34.50%      32.12%      34.50%
    -------------------------------------------------------------------------
    Computed expected provision
     for future income taxes        (583)        389        (278)      1,874
    Increase (decrease) in taxes
     resulting from:
      Valuation allowance              -           -           -           -
      Non-deductible crown
       payments                        -         338           -         669
      Resource allowance               -        (233)          -        (675)
      Stock-based compensation        99         218         266         594
      Effect of change in tax rate  (116)         41         (79)        307
      Other                          138         (85)        138        (294)
    -------------------------------------------------------------------------
                                    (462)        668          47       2,475
    Capital taxes                                 20                      20
    -------------------------------------------------------------------------
    Income tax expense
     (recovery)                $    (462)  $     688   $      47   $   2,495
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The components of the future income tax liability at September 30, 2007
    are as follows:

    ($000's)
    -------------------------------------------------------------------------
    Tax assets (liabilities):
      Property, plant and equipment                                $  (3,973)
      Asset retirement obligation                                        495
      Share issue costs                                                  561
      Other                                                             (330)
    -------------------------------------------------------------------------
                                                                      (3,247)
    Valuation allowance                                                 (500)
    -------------------------------------------------------------------------
    Future income tax liability                                    $  (3,747)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At September 30, 2007, the Company had estimated tax deductions available
    to reduce future taxable income of $146.8 million (2006 -
    $125.0 million).

    4.  LONG-TERM DEBT

    At September 30, 2007, the Company had a $60.0 million credit facility
    with a Canadian chartered bank. The facility is available by way of
    Canadian and US dollar prime rate based loans, LIBOR advances, bankers'
    acceptances and letters of credit. The credit facility is fully revolving
    until June 30, 2008 and may be extended at the mutual agreement of
    ProspEx and its lender for an additional year. If the credit facility is
    not extended, a balloon payment is required on July 1, 2009. This
    facility is secured by a $200 million demand debenture and a first
    floating charge on all petroleum and natural gas assets of ProspEx.

    5.  ASSET RETIREMENT OBLIGATION

    The Company has estimated the net present value of its total asset
    retirement obligation at September 30, 2007 to be $4.5 million (2006 -
    $4.1 million) based on a total future liability of $18.4 million (2006 -
    $13.9 million). The total future liability was estimated based on the
    Company's net ownership interest in all wells and facilities, estimated
    costs to reclaim and abandon the wells and facilities and the estimated
    timing of when the costs will be incurred. These payments are expected to
    be made over the next 45 years with the majority of costs incurred
    between 2036 and 2045. A 7% interest rate and 2% inflation rate were used
    to calculate the present value of the asset retirement obligation.

    ($000's)
    -------------------------------------------------------------------------
    Balance, at January 1, 2007                                    $   4,157
      Liabilities incurred                                               351
      Liabilities settled                                               (351)
      Change in timing of estimated cashflows                            145
      Accretion expense                                                  220
    -------------------------------------------------------------------------
    Balance, at September 30, 2007                                 $   4,522
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  SHARE CAPITAL

    (a)  Common Shares & Common Share Performance Warrants Issued

                                 September 30, 2007      September 30, 2006
    -------------------------------------------------------------------------
                               Number of               Number of
                                 Shares/                 Shares/
                                Warrants      Amount    Warrants      Amount
                                 (000's)    ($000's)     (000's)    ($000's)
    -------------------------------------------------------------------------
    Common shares
    -------------------------------------------------------------------------
      Balance at the beginning
       of the period              53,790      85,682      48,932      65,214
      Flow-through shares tax
       adjustment                             (4,461)                 (2,048)
      Warrants cancelled                          13
      Shares issued for warrants     114         228          59         120
      Options exercised               72         242           4          12
      Adjustment for contributed
       surplus reclass - option                  114
      Issued for cash as private
       placement - May 5, 2006                             1,220       7,015
      Issue costs, net of future
       tax reduction                             (44)                   (329)
    -------------------------------------------------------------------------
      Balance at the end of
       the period                 53,976      81,774      50,215      69,984
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Common share performance
     warrants
    -------------------------------------------------------------------------
      Balance at the beginning
       of the period               2,908       1,778       3,032       1,853
      Exercised                     (114)        (69)        (59)        (36)
      Cancelled                      (22)        (14)
    -------------------------------------------------------------------------
      Balance at the end of
       the period                  2,772       1,695       2,973       1,817
    -------------------------------------------------------------------------

    Share Capital at end of
     period                                $  83,469               $  71,801
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    (b)  Stock Options and Special Performance Units

    Changes in special performance units during the period ended
    September 30,

    -------------------------------------------------------------------------
    (000's)                                                 2007        2006
    -------------------------------------------------------------------------
    Outstanding at beginning of the period                   436         872
    Cancelled                                                (30)          -
    -------------------------------------------------------------------------
    Outstanding at the end of the period                     406         872
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Changes in outstanding stock options during the period ended
    September 30, are summarized below:

                                        2007                    2006
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                             Average                 Average
                                 Options    Exercise     Options    Exercise
                                  (000s)       Price      (000s)       Price
    -------------------------------------------------------------------------
    Outstanding at  beginning
     of the period                 3,354   $    3.49       2,314   $    3.27
    Granted                        1,575        4.06       1,046        3.94
    Exercised                        (72)       3.38         (24)       3.22
    Cancelled                       (261)       4.03           -           -
    -------------------------------------------------------------------------
    Outstanding at the end of
     the period                    4,596   $    3.65       3,336   $    3.47
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The fair value of options granted during the nine months of 2007 was
    $2.6 million (2006 - $1.7 million) using the Black-Scholes option pricing
    model with the following weighted average assumptions for grants as
    follows:

    -------------------------------------------------------------------------
    Risk free interest rate                                               4%
    Expected life                                                    5 years
    Expected volatility                                                  43%
    Expected dividend yield                                              Nil
    -------------------------------------------------------------------------

    The estimated fair values of the options and the special performance
    units are being amortized to expense over the vesting period.
    $0.8 million (2006 - $0.9 million) of stock and unit-based compensation
    was recorded against income in 2007 and $0.8 million (2006 -
    $0.9 million) was capitalized.

    (c)  Per Share Amounts

    In computing diluted net earnings per share for the quarter ended
    September 30, 2007, 2,281,449 (2006 - 2,916,267) common shares were added
    to the weighted average number of common shares outstanding of 53,965,986
    (2006 - 50,203,981). A total of 2.6 million (2006 - 1.2 million) options
    were excluded from the diluted calculations as they were not dilutive.

    In computing diluted net earnings per share for the nine months ended
    September 30, 2007, 2,473,461 (2006 - 2,622,437) common shares were added
    to the weighted average number of common shares outstanding of 53,895,335
    (2006 - 49,620,335). A total of 2.3 million (2006 - 3.1 million) options
    were excluded from the diluted calculations as they were not dilutive.

    7.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

    The Company uses derivative financial instruments and physical contracts
    to manage its exposure to volatility in commodity prices. These contracts
    are entered into solely for hedging purposes and are not used for trading
    or other speculative purposes. The contracts in place at September 30,
    2007 are summarized below.


    Type      Amount       Term                 Price            Type
    ----      ------       ----                 -----            ----
    Collar    2,000 GJ     April 1 -            $7.00 - $8.05    Financial
                            October 31, 2007     at AECO

    Collar    2,000 GJ     April 1 -            $7.00 - $8.50    Financial
                            October 31, 2007     at AECO

    Collar    2,000 GJ     April 1 -            $7.00 - $9.07    Physical
                            October 31, 2007     at AECO

    Collar    3,000 GJ     April 1 -            $7.00 - $8.27    Physical
                            October 31, 2007     at AECO

    Fixed     2,000 GJ     September 1 -        $5.40 at AECO    Financial
     Price                  October 31, 2007

    Fixed     2,000 GJ     September 1 -        $5.90 at AECO    Financial
     Price                  October 31, 2007

    Collar    2,500 GJ     November 1, 2007 -   $7.00 - $8.40    Physical
                            March 31, 2008       at AECO

    Collar    2,500 MMBTU  November 1, 2007 -   $6.76 - $8.40    Financial
                            March 31, 2008       USD at AECO

    Accounts receivable are with customers and joint-venture partners in the
    oil and gas industry and are subject to normal industry credit risks. Due
    to the deterioration of North American gas price fundamentals, industry
    access to capital markets may become increasingly difficult, raising the
    credit risk on accounts receivable. The Company has not recorded an
    allowance for doubtful accounts at September 30, 2007.

    The Company is exposed to a floating rate of interest on its long-term
    debt. The Company is also exposed to foreign currency fluctuations as oil
    prices received are referenced to US dollar denominated prices and
    natural gas and natural gas liquids prices are influenced by US dollar
    denominated markets. The Company has no financial contracts in place at
    September 30, 2007 to manage the foreign currency and interest rate
    exposure.

    The fair values of the financial instruments, including accounts
    receivable, accounts payable, accrued liabilities and bank loans
    approximate their carrying values.

    8.  ADDITIONAL DISCLOSURES

    Net cash interest paid during the quarter was $0.2 million (2006 -
    $0.1 million). Cash taxes paid during the period were $nil (2006 - $nil).

    9.  RECLASSIFICATION

    Certain amounts disclosed for prior years have been reclassified to
    conform to current period presentation.
    

    %SEDAR: 00021285E




For further information:

For further information: John Rossall, President & CEO, jrossall@psx.ca,
(403) 268-3941 or George Yee, Vice President Finance & Chief Financial
Officer, gyee@psx.ca, (403) 268-3942

Organization Profile

PROSPEX RESOURCES LTD.

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