ProspEx Announces 2009 First Quarter Results



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

    CALGARY, May 7 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the
"Company") announces its financial and operating results for the three months
ended March 31, 2009.

    
    HIGHLIGHTS

    -   Production for the first quarter averaged 3,807 barrels of oil
        equivalent ("boe") per day, 6% increase compared to the fourth
        quarter of 2008 as new wells were brought on stream in the Kakwa and
        Gold Creek areas, and facility run times improved compared to the
        fourth quarter.
    -   Capital expenditures for exploration and development (before
        acquisitions and dispositions) were $5.6 million during the first
        quarter of 2009, in line with cash flow. The Company participated in
        three (1.5 net) wells, all in the Deep Basin, including a successful
        delineation well on the East Kakwa trend.
    -   Cash flow before changes in non-cash working capital items for the
        quarter was $5.7 million, a decrease of 38% compared to the prior
        year due to lower commodity prices.
    -   Net debt, excluding after tax unrealized financial instrument gains
        or losses was $49.3 million at March 31, 2009. Net debt declined by
        $2 million over the quarter due to the disposition of non-core assets
        in Wapiti.
    

    MESSAGE TO SHAREHOLDERS

    ProspEx is currently operating in an environment of unprecedented
uncertainty and distress in equity, credit and commodity markets. Natural gas
prices remain low, driven by high natural gas storage inventories, strong
production levels in the United States, LNG imports, and reduced demand for
natural gas as a result of the global economic downturn. The Company believes
these factors suggest prices will stay low for the balance of 2009, and
potentially longer. In light of this view, as well as the uncertainty in
credit and equity markets, ProspEx intends to adopt a more conservative
approach in managing the Company's finances, including restricting exploration
and development capital spending to be approximately equal to cash flow.
    The Canadian natural gas industry has always been a very cyclical
business. While the current downturn may be more severe than many in the past,
ProspEx is confident that in time, the cycle will turn. ProspEx will work to
take advantage of opportunities and position the Company to prosper as the
business environment improves, while managing the Company's finances prudently
in the interim.
    ProspEx's capital spending priorities continue to focus on capturing and
proving up new opportunities that are anticipated to generate repeatable
prospect inventory with economies of scale. In the current business
environment drilling to bring new production on stream in the short term is
less attractive than capturing new opportunities, although to the extent
possible the Company will seek to maximize the benefits available under the
royalty incentives announced by the Province of Alberta on March 3, 2009.

    OPERATIONAL REVIEW

    Capital Program

    Capital expenditures for exploration and development (before acquisitions
and dispositions) were $5.6 million during the first quarter of 2009. As
previously disclosed, the Company disposed of certain non-core properties in
the Wapiti area. These properties consist of four (2.0 net) producing wells,
with net production of approximately 30 boe per day and 3,160 net acres of
undeveloped land. The consideration paid to the Company was $2.1 million,
subject to closing adjustments. Including proceeds from this disposition,
total net capital spending in the first quarter was $3.6 million.
    ProspEx participated in three (1.5 net) wells in the first quarter, all
of which were located in the Deep Basin area. At West Kakwa, the Company
drilled a delineation well (100% working interest) four kilometers from an
exploratory well drilled in the fourth quarter of 2008. Both of these wells
encountered a thick but low-porosity Falher channel. Given the better
reservoir quality encountered to date and shallower drilling depths in East
Kakwa, ProspEx's initial focus will be on delineation and horizontal
development of East Kakwa.
    At East Kakwa, ProspEx drilled a successful (0.2 net) well that extended
the East Kakwa trend to the southeast. This well was recently brought on
production at an initial rate of approximately one million cubic feet ("mmcf")
per day (200 thousand cubic feet ("mcf") per day net to ProspEx).
    These Kakwa drilling results continue to advance the Company's efforts to
develop a repeatable drilling program, potentially utilizing horizontal
drilling with multi-stage fracturing techniques. Year end 2008 reserves
bookings for the East Kakwa wells were based on drainage areas of only 80 to
180 acres, indicating the potential for infill drilling in sections where an
initial well has already been drilled. Based on existing wells and
interpretation of 3D seismic, ProspEx has mapped 16 (8 net) incremental
drilling locations (both infill and trend extension) on lands controlled by
the Company, assuming a drilling density of two horizontal wells per section.
The focus of the 2009 program is expected to be on continued delineation of
the trend, along with a pilot test of horizontal drilling utilizing
multi-stage fracturing techniques. ProspEx has received regulatory approval to
drill up to four wells per section in 16 sections of land in the East Kakwa
trend.
    Also in the Deep Basin, one (0.25 net) partner operated well was drilled
in the first quarter of 2009 at Gold Creek. This well came on stream in the
first quarter at an initial rate of one mmcf per day (250 mcf per day net to
ProspEx).

    
    Production

    Production (boe/d)       Q1 2009   Q4 2008   Q3 2008   Q2 2008   Q1 2008
    -------------------------------------------------------------------------
    West Central Alberta       2,099     1,914     1,847     1,904     1,237
    Deep Basin                   985       924     1,150     1,362     1,425
    Southern Alberta             713       743       847     1,009     1,109
    Other                         10         6         6        10        10
    -------------------------------------------------------------------------
    Total                      3,807     3,587     3,850     4,285     3,781
    

    The first quarter production of 3,807 boe per day was an increase of 6%
compared to fourth quarter of 2008 production of 3,587 boe per day. In the
fourth quarter, ProspEx experienced approximately 200 boe per day of lost
production due to facility downtime, which was resolved in the first quarter.
New well tie-ins essentially offset natural production declines between the
fourth quarter of 2008 and the first quarter of 2009.
    At Salter, ProspEx has recently received regulatory approval for the
relicensing of an existing pipeline to accommodate production from the
horizontal well drilled in the first quarter of 2008. Production is expected
to come on stream at a facilities restricted rate of two mmcf per day in May,
2009. ProspEx has a 40% working interest in the production from this well.
    Production in the second quarter of 2009 is forecast to be approximately
3,100 boe per day. This forecast reflects the expected shut down of third
party facilities at Ricinus for the month of June for maintenance. ProspEx has
approximately 1,000 boe per day of production impacted by the Ricinus outage.

    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 contained in this press release constitutes
forward-looking information or statements including, without limitation,
information and statements respecting: anticipated cash flow, capital
expenditures, production forecasts, production additions and deletions,
reserves and resources additions and deletions, additions to and deletions
from the Company's historical and future capital programs, acquisitions or
dispositions, operating expenses, G&A, royalties, expected timing of the
tie-in of wells, expected timing of the receipt of regulatory approvals and
expected timing of the completion of facilities projects.
    Statements relating to "reserves" and "resources" are forward-looking
information as they involve the implied assessment, based on certain estimates
and assumptions that, among others, the reserves and resources described exist
in the quantities predicted or estimated.
    Forward-looking information and statements are often, but not always,
identified by the use of words such as "anticipate", "seek", "believe",
"expect", "hope", "plan", "intend", "forecast", "target", "project",
"guidance", "may", "might", "will", "should", "could", "estimate", "predict"
or similar words or expressions suggesting future outcomes or language
suggesting an outlook. By their very nature, forward-looking information and
statements involve inherent risks and uncertainties, both general and
specific, and risks that predictions, forecasts, projections and other
forward-looking information and statements will not be achieved. We caution
readers not to place undue reliance on these statements as a number of
important factors could cause the actual results to vary materially from the
forward-looking information or statements. These factors include, but are not
limited to: the volatility of oil and gas prices; production and development
costs and capital expenditures; the imprecision of reserve and resource
estimates and estimates of recoverable quantities of oil, natural gas and
liquids; the Company's ability to replace and expand oil and gas reserves;
environmental claims and liabilities; incorrect assessments of value when
making acquisitions or dispositions; increases in debt service charges; the
loss of key personnel; the marketability of production; defaults by third
party operators; unforeseen title defects; fluctuations in foreign currency
and exchange rates; inadequate insurance coverage; compliance with
environmental laws and regulations; changes in tax and royalty laws; the
Company's ability to access external sources of debt and equity capital; and
the Company's ability to obtain equipment in a timely manner to carry out
development activities. Further information regarding these factors may be
found under the headings "Risk Factors" and "Industry Conditions" in the
Company's most recent Annual Information Form, under the heading "Business
Risks" in the Company's Management's Discussion and Analysis for the year
ended December 31, 2008, and in the Company's most recent consolidated
financial statements, management information circular, quarterly reports,
material change reports and news releases available under the Company's
profile on SEDAR (www.sedar.com). Readers are cautioned that the foregoing
list of factors that may affect future results is not exhaustive. When relying
on our forward-looking statements to make decisions with respect to the
Company, investors and others should also carefully consider information set
forth in the section "Forward-Looking Information" of the Company's most
recent Annual Information Form respecting the assumptions upon which the
Company bases certain forward-looking information and the uncertainties
inherent in such assumptions.
    The Company does not assume responsibility for the accuracy and
completeness of the forward-looking information or statements and such
information and statements should not be taken as guarantees of future
outcomes. Subject to applicable securities laws, the Company does not
undertake any obligation to revise these forward-looking information or
statements to reflect subsequent events or circumstances. Furthermore, the
forward-looking information contained in this press release are made as of the
date of this document and the Company 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 applicable law. The forward-looking information and statements
contained in this press release are expressly qualified by this cautionary
statement.
    For the purposes of this press release, boes have been calculated on the
basis of six thousand cubic feet of gas to one barrel of oil. The term boe 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.
    Netbacks are calculated by subtracting transportation costs, royalties
payable and operating costs from the average price received during the period.


    
    ProspEx Resources Ltd.
    Consolidated Highlights
    For the period ended
                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
    (unaudited)                                            2009         2008
    -------------------------------------------------------------------------
    FINANCIAL ($000's)
    Oil and gas revenue                                  12,765       17,378
    Net earnings (loss)                                  (2,225)      (2,110)
    Cash flow(1)                                          5,720        9,181
    Total assets                                        195,822      196,187
    Total net debt(2)                                    49,267       55,797

    Net earnings (loss) per share
     ($ per share)
      Basic                                              (0.04)        (0.04)
      Diluted                                            (0.04)        (0.04)
    Cash flow per share ($ per share)(1)
      Basic                                               0.10          0.16
      Diluted                                             0.10          0.16
    Weighted average common shares (000's)
      Basic                                             57,385        56,545
      Diluted                                           57,385        58,091

    PRODUCTION VOLUMES
      Natural gas (mcf/d)                               17,561        19,064
      Natural gas liquids (bbls/d)                         811           536
      Oil (bbls/d)                                          69            68
                                                            --            --
      Total (boe/d)                                      3,807         3,781

    SALES PRICES
      Natural gas ($/mcf)                                 6.20          7.98
      Natural gas liquids ($/bbl)                        36.05         60.47
      Oil ($/bbl)                                        53.32         95.44
                                                         -----         -----
      Total ($/boe)                                      37.25         50.50

    NETBACKS ($/boe)
      Price                                              37.25         50.50
      Unrealized financial instrument loss               (2.42)       (13.13)
      Royalties                                          (7.37)        (8.57)
      Operating costs                                    (7.16)       (10.17)
      Transportation                                     (1.04)        (0.96)
      General and administrative                         (2.64)        (2.53)
                                                         ------        ------
      Total                                              16.62         15.14

    CAPITAL ($000's)
      Drilling and completions                           3,586        10,051
      Facilities                                           886         4,712
      Land and lease                                       321         1,559
      Seismic                                               50           264
      Capitalized general and administrative               798           797
                                                           ---           ---
      Total exploration & development                    5,641        17,383
      Net property acquisitions                         (2,078)       11,498
      Other capital assets                                   3            60
                                                             -            --
      Total                                              3,566        28,941

    (1) Cash flow is defined as cash flow from operations before changes in
        operating non-cash working capital.
    (2) Total net debt is defined as long term debt less working capital (or
        plus working capital deficiency) excluding unrealized financial
        instrument gain (loss) and associated future tax assets
        (liabilities).

    Cash flow and total net debt do not have standardized measures prescribed
    by Canadian generally accepted accounting principles and therefore may
    not be comparable with calculation measures for other issuers.
    

    MANAGEMENT DISCUSSION & ANALYSIS

    Management's Discussion and Analysis ("MD&A") is management's assessment
of the financial and operating results of ProspEx Resources Ltd. ("ProspEx" or
the "Company") as well as a prospective view of the Company's activities. The
MD&A is for the three months ended March 31, 2009, and was prepared as at May
7, 2009. The MD&A should be read in conjunction with the audited consolidated
financial statements and MD&A for the year ended December 31, 2008 including
the notes related thereto and the consolidated financial statements for the
three months ended March 31, 2009 together with the notes related thereto. The
reader should be aware that historical results are not necessarily indicative
of future performance.

    RESULTS OF OPERATIONS

    Production for the first quarter averaged 3,807 boe per day, a 6%
increase compared to the fourth quarter of 2008. Cash flow before changes in
non-cash working capital items was $5.7 million in the first quarter, a
decrease of 38% compared to the prior year, due to lower commodity prices.
    Capital expenditures for exploration and development (before acquisitions
and dispositions) were $5.6 million during the first quarter of 2009. The
Company participated in three (1.5 net) wells, all in the Deep Basin,
including a successful delineation well on the East Kakwa trend.
    Net debt, excluding after tax unrealized financial instrument gains or
losses was $49.3 million at March 31, 2009. Net debt declined by $2 million
over the quarter as total capital spending (including acquisitions and
dispositions) was less than cash flow.

    Business environment

    Natural gas prices remain low, driven by high natural gas storage
inventories, strong production levels in the United States, LNG imports, and
reduced demand for natural gas as a result of the global economic downturn.
The Company believes these factors suggest prices will stay low for the
balance of 2009, and potentially longer. In light of this view, as well as the
uncertainty in credit and equity markets, ProspEx intends to adopt a more
conservative approach in managing the Company's finances, including
restricting exploration and development capital spending to be approximately
equal to cash flow.
    The Canadian natural gas industry has always been a very cyclical
business. While the current downturn may be more severe than many in the past,
ProspEx is confident that in time, the cycle will turn. ProspEx will work to
take advantage of opportunities and position the Company to prosper as the
business environment improves, while managing the Company's finances prudently
in the interim.
    ProspEx's capital spending priorities continue to focus on capturing and
proving up new opportunities that are anticipated to generate repeatable
prospect inventory with economies of scale. In the current business
environment drilling to bring new production on stream in the short term is
less attractive than capturing new opportunities, although to the extent
possible the Company will seek to take advantage of the benefits available
under the royalty incentives announced by the Province of Alberta on March 3,
2009.

    
    Revenue

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
    ($000's)                                               2009         2008
                                                    -------------------------
    Natural gas                                       $   8,485    $  13,739
    Realized gain on financial instruments                1,316          100
                                                    -------------------------
    Total natural gas                                     9,801       13,839
    Oil                                                     330          587
    Natural gas liquids                                   2,634        2,952
                                                    -------------------------
    Oil and gas revenue                                  12,765       17,378
    Unrealized financial instrument loss                   (828)      (4,519)
                                                    -------------------------
    Total revenue                                     $  11,937    $  12,859
                                                    -------------------------
    

    First quarter oil and gas revenue decreased $4.6 million or 27% to $12.8
million in 2009 from $17.4 million in the first quarter of 2008 as a result of
lower average realized prices for some commodities. First quarter 2009 total
revenue of $11.9 million decreased $0.9 million or 7% from $12.9 million in
the same period of 2008 for the reasons mentioned above, offset by a reduction
of $3.7 million in unrealized financial instrument loss.

    
    Production
                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
                                                    -------------------------
    Area (boe/d)
    ------------
    Deep Basin                                              985        1,425
    West Central Alberta                                  2,099        1,237
    Southern Alberta                                        713        1,109
    Other Areas                                              10           10
                                                    ------------ ------------
                                                          3,807        3,781
                                                    -------------------------
    Product
    -------
    Natural gas (mcf/d)                                  17,561       19,064
    Natural gas liquids (bbls/d)                            811          536
    Oil (bbls/d)                                             69           68
                                                    ------------ ------------
    Total (boe/d)                                         3,807        3,781
                                                    -------------------------
    

    The first quarter production of 3,807 boe per day was in line with the
3,781 boe per day recorded in the first quarter of 2008. Over this twelve
month period, production in the Deep Basin dropped by 440 boe per day (31%)
due to natural declines in the Wapiti area, partially offset by favorable
drilling results in Kakwa. West Central Alberta showed production growth of
862 boe per day (70%) due to growth in the Ricinus area through successful
drilling and asset acquisitions. Production in Southern Alberta declined by
36% or 396 boe per day, due to natural declines at Medallion and the
disposition of assets in the Granum area in 2008.
    Production in the first quarter of 2009 increased by 220 boe per day or
6% from 3,587 boe per day in the fourth quarter of 2008. In the fourth
quarter, ProspEx experienced approximately 200 boe per day of lost production
due to facility downtime, which was resolved in the first quarter. New well
tie-ins essentially offset natural production declines between the fourth
quarter of 2008 and the first quarter of 2009.

    
    Commodity Pricing


    ProspEx Average Prices                                Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
                                                    -------------------------
    Natural gas ($/mcf)
      Sales price                                     $    5.37    $    7.92
      Realized gain on financial instrument                0.83         0.06
                                                    -------------------------
                                                           6.20         7.98
    Oil ($/bbl)                                           53.32        95.44
    NGL ($/bbl)                                           36.05        60.47
                                                    -------------------------
    Average realized price ($/boe)                        37.25        50.50
    Unrealized loss on financial instrument
     ($/boe)                                              (2.42)      (13.13)
                                                    -------------------------
    Total average price ($/boe)                       $   34.83    $   37.37
                                                    -------------------------



    Benchmark pricing                                     Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
                                                    -------------------------
    AECO C Spot ($/mcf)                               $    4.92    $    7.90
    Edmonton Par - light oil ($/bbl)                  $   49.66    $   97.50
                                                    -------------------------
    

    Average natural gas sales prices decreased 32% to $5.37 per mcf in the
first quarter of 2009, compared to $7.92 per mcf in the first quarter of 2008.
During the first quarter of 2009, AECO C daily spot prices for natural gas
decreased 38% compared to the first quarter of 2008 and the AECO monthly index
for the same period decreased 21%. The Company divides its gas sales between
the daily and monthly index's and would therefore expect price movements to
fall between these two benchmarks. The overall price decline reflects the
current over supply of natural gas in North American markets.
    Realized natural gas prices for the first quarter of 2009 averaged $6.20
per mcf, a decrease of 22% from $7.98 per mcf realized in the first quarter of
2008. Favorable results from the Company's risk management program resulted in
a gain of $0.83 per mcf in the first quarter of 2009.
    Oil prices received for the first quarter of 2009 were $53.32 per barrel
("bbl"). This is a 44% decrease from the $95.44 per bbl received in the first
quarter of 2008, consistent with the decrease in benchmark pricing. The price
realized for natural gas liquids ("NGLs") in the first quarter of 2009 was
$36.05 per bbl, a decrease of 40% from $60.47 per bbl in the first quarter of
2008. Overall, oil and NGL prices have declined substantially, as the world
wide economic slowdown has reduced demand for commodities.

    Financial Instruments

    For the quarter ended March 31, 2009, the Company's risk management
program resulted in net realized gain of $1.3 million, compared to a $0.1
million net realized gain for the same period in 2008.
    The impact of the changes in the fair values of open financial
instruments during the quarter ended March 31, 2009 was an unrealized loss of
$0.8 million. This compares to an unrealized loss of $4.5 million for the
first quarter of 2008. As of March 31, 2009, there are no financial
instruments open.

    
    Royalty Expenses

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
    ($000's)                                               2009         2008
                                                    -------------------------
    Crown                                             $   2,015    $   2,665
    Freehold and gross overriding                           511          285
                                                            ---          ---
    Total Royalties                                   $   2,526    $   2,950
                                                    -------------------------

    $ per boe                                         $    7.37    $    8.57
    As a percentage of oil and gas revenue                  20%          17%
                                                    -------------------------
    

    In the first quarter of 2009, royalties totaled $2.5 million or 20% of
revenue compared to last year's $3.0 million or 17% of revenue. Overall
royalty payments decreased compared to the same quarter of 2008, reflecting
the decrease in the overall commodity prices received. However, on a
percentage basis the overall royalty rate has increased due to the adoption of
a new royalty framework by the Province of Alberta. In addition, a change in
the methodology on royalty deductions by the Alberta Government has also
contributed to higher overall royalty rates.
    ProspEx is required to pay the Province of Alberta and other royalty
owners for the right to produce minerals owned by them. Such royalty payments
are subject to change and any changes may have an adverse impact on the
profitability of a project.

    
    Operating Costs

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
                                                    -------------------------
    Operating costs ($000's)                          $   2,453    $   3,500
    Operating costs ($/boe)                           $    7.16    $   10.17
                                                    -------------------------
    

    Operating costs for the first quarter were $2.5 million or $7.16 per boe,
compared to $3.5 million or $10.17 per boe in the first quarter of 2008. The
first quarter of 2008 had higher operating costs as a result of additional
spending required to integrate newly acquired properties, the cost to address
operational issues in the Medallion area, and increased costs at Salter.

    
    Transportation Expenses

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
                                                    -------------------------
    Transportation expenses ($000's)                  $     358    $     332
    Transportation expenses ($/boe)                   $    1.04    $    0.96
                                                    -------------------------

    Transportation expense per boe for the first quarter did not change
significantly from the comparable period of 2008.

    General and Administrative Expenses

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
    ($000's)                                               2009         2008
                                                    -------------------------
    Gross general and administrative                  $   1,948    $   1,935
    Recoveries                                             (245)        (269)
    Capitalized expenses                                   (798)        (797)
                                                           -----        -----
    Net general and administrative
     expenses                                         $     905    $     869
                                                            ---          ---
    Net general and administrative
     expenses ($/boe)                                 $    2.64    $    2.53
                                                    -------------------------
    

    Gross general and administrative costs remained the same compared to the
same period in 2008.

    Interest and Bank Charges

    Interest and bank charges of $0.3 million in the first quarter were
slightly lower compared to the prior year amount of $0.5 million. Although
average debt levels have remained consistent over the past year, interest rate
decreases in the quarter resulted in interest expense reductions.

    
    Depletion, Depreciation and Accretion

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
                                                    -------------------------
    Depletion, depreciation and accretion ($000's)    $   8,741    $   7,375
    Depletion, depreciation and accretion ($/boe)     $   25.51    $   21.43
                                                    -------------------------
    

    Depletion, depreciation and accretion expense per boe in the first
quarter of 2009 was $25.51 per boe. This is a 19% increase from the first
quarter 2008 rate of $21.43 per boe. This rate increase is due to the results
of the activity over the past twelve months where the overall cost to add
proven reserves was higher than the historical average, coupled with revisions
in the proven reserve balance in 2008.

    Stock-Based Compensation

    Stock-based compensation expenses decreased from $0.2 million in the
first quarter of 2008, to $0.1 million in the first quarter of 2009. Costs
have decreased as the initial grant of stock options and special performance
units in 2004 have been fully recognized, and no new options were granted in
the first quarter of 2009.

    Income Taxes

    In the first quarter of 2009, the Company's future income tax recovery of
$1.2 million was greater than the same period in 2008 (a recovery of $0.8
million). This increase in recovery is a result of an increase in the overall
net loss before income taxes compared to the prior period.

    
    Estimated tax pools as at March 31:

    ($000's)                                               2009         2008
    -------------------------------------------------------------------------
    Canadian development expense                      $  35,402    $  35,217
    Canadian exploration expense                         32,833       31,859
    Canadian oil & gas property expense                  36,474       39,010
    Undepreciated capital cost                           43,049       48,013
    Other                                                 4,645        4,735
    -------------------------------------------------------------------------
                                                      $ 152,403    $ 158,834
    -------------------------------------------------------------------------
    

    Net Earnings and Cash Flow

    The Company reported a net loss of $2.2 million, versus the $2.1 million
net loss in the same period of 2008. During the first quarter of 2009 oil and
gas revenue was reduced by $4.6 million or 27% due to a decrease in average
realized prices of 26% compared to the same quarter of 2008. This was offset
by a decrease of $3.7 million in unrealized losses relating to financial
instruments and a reduction in operating costs of $1.0 million compared to
those seen in the first quarter of 2008.
    The Company's cash flow for the first quarter of 2009 was affected by
lower commodity prices, partially offset by lower operating costs. First
quarter 2009 cash flow was $5.7 million, a decrease of 38% or $3.5 million
from the same period of 2008.

    Capital Expenditures

    Net capital expenditures were $3.6 million during the first quarter of
2009, compared to net expenditures of $28.9 million in the first quarter of
2008. Details of these expenditures for the period ended March 31 were as
follows:

    
    ($000's)                                               2009         2008
    -------------------------------------------------------------------------
    Drilling and completions                          $   3,586    $  10,051
    Facilities                                              886        4,712
    Land and lease                                          321        1,559
    Seismic                                                  50          264
    Capitalized G&A                                         798          797
                                                            ---          ---
    Exploration & development capital expenditures        5,641       17,383
    Net property acquisitions (dispositions)             (2,078)      11,498
    Other capital expenditures                                3           60
    -------------------------------------------------------------------------
    Total net capital expenditures                    $   3,566    $  28,941
    -------------------------------------------------------------------------
    

    For the first quarter of 2009, the Company participated in drilling three
(1.5 net) wells, all within the Deep Basin. Of the $5.6 million invested in
exploration and development capital expenditures, $3.5 million was spent in
the Deep Basin, $0.5 million in West Central Alberta, $0.5 million in Southern
Alberta, and $0.9 million on corporate items.
    The Company also disposed of certain non-core properties in the Wapiti
area of Alberta, for proceeds of $2.1 million in the quarter. These properties
consist of four (2.0 net) producing wells, with net production of
approximately 30 boe per day and 3,160 net acres of undeveloped land.

    Liquidity & Capital Resources

    At March 31, 2009, ProspEx had the following financial resources
available to fund its capital expenditure program.

    
    ($000's)
    -------------------------------------------------------------------------
    Working capital deficiency, excluding financial
     instrument gains/losses and related tax                       $ (11,796)
    Long-term debt                                                   (37,471)
    Bank facilities available                                         65,000
    -------------------------------------------------------------------------
    Total capital resources available                              $  15,733
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    ProspEx expects that it will be able to fund its 2009 capital program
from operating cash flow and capital resources noted above.
    As at March 31, 2009 the Company's ratio of net debt to annualized
operating cash flow was 2.2 to 1.0, which exceeds the Company's guidelines on
capital management strategy as a result of the effects of lower commodity
prices on cash flow.
    The Company expects the ratio to decrease by the end of the year through
a combination of improved commodity prices resulting in higher cash flows,
reduced capital expenditures and lower debt levels.

    Bank Debt

    At March 31, 2009 the Company had a $65.0 million credit facility with a
Canadian chartered bank. The facility is available by way of Canadian prime
and US base rate loans, LIBOR advances, bankers' acceptances and letters of
credit. Canadian prime rate loans, US base rate loans, and LIBOR advances bear
interest at Canadian prime, US base rate or LIBOR, as applicable, plus a
margin dependent upon the Company's debt/cash flow ratio as calculated in the
previous quarter. Currently, the Company only utilizes Bankers' Acceptances
within this facility. Stamping fees for bankers' acceptances are based on a
rate adjusted over the term to maturity plus a margin as described above. The
bankers' acceptance and stamping fees varied from 2.37% to 2.96% in the first
quarter of 2009 compared to 4.38% to 5.88% for the same period in 2008. The
credit facility is fully revolving until June 30, 2009 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 repayment is required on July 1, 2010. This
facility is secured by a $200 million demand debenture and a first floating
charge on all petroleum and natural gas assets of ProspEx.
    During the quarter, the semi-annual review of the credit facility was
completed, which resulted in no changes to the $65 million credit facility
limit.

    Share Capital

    As at March 31, 2009, ProspEx had 57,385,162 common shares (2008 -
56,849,312), 2,016,269 warrants (2008 - 2,320,255), and 5,102,887 options
(2008 - 5,267,417) issued and outstanding. Each warrant and option, upon
exercise, entitles the holder to one common share.

    As at May 7, 2009, ProspEx had 57,385,162 common shares, 2,016,269
warrants, and 5,102,887 options issued and outstanding.

    Contractual Obligations

    The Company has committed to certain payments as follows:

    Payments due                                                      There-
    ($000's)               2009     2010     2011     2012     2013    after
    -------------------------------------------------------------------------
    Long-term debt      $     -   37,471        -        -        -  $     -
    Building lease          972    1,298    1,315    1,321    1,321      330
    Process fees            284      379       63        -        -        -
    Transportation          398      121        -        -        -        -
    Other                    12        7        -        -        -        -
    -------------------------------------------------------------------------
    Total               $ 1,666   39,276    1,378    1,321    1,321  $   330
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Off-Balance Sheet Arrangements

    The Company has not entered into any off-Balance Sheet transactions other
than previously discussed.

    Summary of Quarterly Results

    The following table summarizes the quarterly operating statistics of the
Company.

    
                                             2009               2008
                                               Q1       Q4       Q3       Q2
    -------------------------------------------------------------------------
    Financial ($000's, except per
     share amounts)

    Oil and gas revenue                    12,765   15,046   19,714   24,567
    Net earnings (loss)                    (2,225)     487    6,923    2,261
      Per share - basic                     (0.04)    0.01     0.12     0.04
                - diluted                   (0.04)    0.01     0.12     0.04

    Average Daily Production
    Oil (bbls/d)                               69       57       65      108
    NGL (bbls/d)                              811      719      722      851
    Natural Gas (mcf/d)                    17,561   16,868   18,379   19,957
                                           ------   ------   ------   ------
    Total (boe/d)                           3,807    3,587    3,850    4,285

    Operating Netbacks ($/boe)
    Price(1)                                37.25    45.59    55.65    63.00
    Royalties                               (7.37)   (8.18)  (12.98)  (11.97)
    Transportation                          (1.04)   (1.00)   (0.91)   (1.00)
    Operating Cost                          (7.16)   (4.58)   (7.76)   (8.39)
                                            ------   ------   ------   ------
    Operating Netback                       21.68    31.83    34.00    41.64
                                         ------------------------------------


                                             2008               2007
                                               Q1       Q4       Q3       Q2
    -------------------------------------------------------------------------
    Financial ($000's, except per
     share amounts)

    Oil and gas revenue                    17,378   15,906   16,004   17,553
    Net earnings (loss)                    (2,110)    (180)  (1,352)   2,235
      Per share - basic                     (0.04)    0.00    (0.03)    0.04
                - diluted                   (0.04)    0.00    (0.03)    0.04

    Average Daily Production
    Oil (bbls/d)                               68      125       82      210
    NGL (bbls/d)                              536      515      548      513
    Natural Gas (mcf/d)                    19,064   19,690   21,743   21,108
                                           ------   ------   ------   ------
    Total (boe/d)                           3,781    3,922    4,254    4,241

    Operating Netbacks ($/boe)
    Price(1)                                50.50    44.09    40.89    45.48
    Royalties                               (8.57)   (5.41)   (7.79)   (3.97)
    Transportation                          (0.96)   (0.86)   (0.89)   (1.01)
    Operating Cost                         (10.17)   (8.06)   (8.42)   (7.86)
                                           -------   ------   ------   ------
    Operating Netback                       30.80    29.76    23.79    32.64
                                         ------------------------------------

    (1) Price excludes unrealized financial instrument gain or loss.
    

    Quarter to quarter results are influenced by many factors. The three main
drivers are capital spending, production and commodity prices.
    Capital spending is typically more heavily weighted to the winter
drilling months, and therefore the fourth and first quarters of the year
usually represent approximately 60 percent of the exploration and development
budgets. The second quarter of each year usually has minimal capital spending,
reflecting surface access restrictions due to spring break up conditions.
Production additions typically lag capital spending by one or two quarters,
resulting in production peaks in the second quarter of each year.
    As previously mentioned, production is a key driver of overall quarterly
results. Production is not only influenced by additions as a result of capital
programs, but also by natural declines as production from existing wells
diminishes over time. With respect to the Company's overall quarterly
production profile, production tends to peak in the second quarter of each
year, reflecting new additions from the winter drilling programs, and the
subsequent quarters reflect declining production as natural decline rates come
into play.
    World-wide commodity price environments have a significant influence on
the overall Company's quarterly results. The Company is an overall price-taker
in the oil & gas industry and as a result, world prices drive overall Company
revenues. Natural gas prices are currently low, driven by high natural gas
storage inventories, strong domestic production levels in the United States,
and reduced demand for natural gas as a result of the global economic
downturn. In the face of this uncertainty, the Company has adopted a
conservative approach by restricting exploration and development capital
spending and as a consequence total net oil and gas revenues may not follow
traditional quarterly cyclical trends in 2009.

    NEW ACCOUNTING PRONOUNCEMENTS

    Accounting Standards Adopted and Recent Pronouncements
    Convergence with International Reporting Standards - On February 13,
2008, the Canadian Accounting Standards Board confirmed that the effective
date for the convergence of Canadian Generally Accepted Accounting Standards
for publicly accountable entities to International Financial Reporting
Standards ("IFRS") will be January 1, 2011. Although IFRS is principle based
and uses a conceptual framework similar to Canadian GAAP, there are
significant differences and choices in accounting policies, as well as
increased disclosure requirements under IFRS. The Company is currently engaged
in preparing for this transition and continues to monitor the developments and
assess the impact of these prospective changes to the financial statements.

    Disclosure Controls and Policies

    Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Company is accumulated and
communicated to the Company's management as appropriate to allow timely
decisions regarding required disclosure. The Company's CEO and CFO have
concluded, based on their evaluation as of March 31, 2009, that the Company's
disclosure controls and procedures as of the end of such period are effective
to provide reasonable assurance that material information related to the
Company, including its consolidated subsidiary, is made known to them by
others within those entities. It should be noted that while the Company's CEO
and CFO 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 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.

    Internal Controls over Financial Reporting

    The CEO and CFO of the Company are able to certify the design of the
Company's internal controls over financial reporting as required under
Multilateral Instrument 52-109 of the Canadian Securities Administration with
no significant weaknesses in design of these internal controls that require
commenting on in the MD&A.
    For the first quarter of 2009 there were no changes to the design of
internal controls over financial reporting.

    ADVISORIES

    Within the MD&A references are made to terms commonly used in the oil and
gas industry. "Cash flow" is not defined by GAAP in Canada and is referred to
as a non-GAAP measure. For the purposes thereof, "cash flow" is defined as
cash flow from operations before the change in operating 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.
    The following table provides a reconciliation between cash flow from
operations and cash flow:

    
    ($000s)                                                2009         2008
    -------------------------------------------------------------------------
    Cash flow from operating activities                   8,978       11,107
    Change in non-cash working capital                   (3,258)      (1,926)
                                                         -------      -------
    Cash flow                                             5,720        9,181
    -------------------------------------------------------------------------
    

    Boe amounts have been calculated using a conversion rate of six mcf of
gas to one barrel of oil. The term boe 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.
    "Netbacks" are calculated by subtracting transportation costs, royalties
payable, and operating costs from the average price received during the
period.

    Forward-looking Information

    Certain information regarding ProspEx including, without limitation,
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, royalty rates, imprecision of reserve
estimates, environmental risks, competition, incorrect assessment of the value
of acquisitions or dispositions, 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 reasonable 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 assumptions, factors and risks is not exhaustive. Additional information on
the foregoing assumptions, risks and other factors that could affect ProspEx's
operations or financial results are included in ProspEx's public disclosure
documents on file with Canadian securities regulatory authorities. In
particular see the Risk Factors and Industry Conditions sections of ProspEx's
most recent 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 information and 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 information and
statements contained herein are expressly qualified by this cautionary
statement.


    
    ProspEx Resources Ltd.
    Consolidated Balance Sheets
    (unaudited)
                                                       March 31, December 31,
    (Stated in thousands of dollars)                       2009         2008
    -------------------------------------------------------------------------
    Assets

    Current assets
      Accounts receivable                             $   8,053       10,770
      Prepaid expenses                                      944          693
      Unrealized financial instrument gain                    -          828
                                              -------------------------------
                                                          8,997       12,291

    Property, plant and equipment, net                  186,825      190,693

                                              -------------------------------

                                                      $ 195,822      202,984
                                              -------------------------------
                                              -------------------------------

    Liabilities

    Current liabilities
      Accounts payable and accrued liabilities        $  20,793       22,078
      Future income tax liability (note 2)                    -          240
                                              -------------------------------
                                                         20,793       22,318

    Long-term debt (note 1)                              37,471       40,807

    Asset retirement obligation                           7,142        6,462

    Future income tax liability (note 2)                  8,156        9,119
                                              -------------------------------

    Total liabilities                                    73,562       78,706
                                              -------------------------------

    Shareholders' Equity
    Common shares (note 3)                               90,802       90,802
    Common share performance warrants (note 3)            1,233        1,233
    Contributed surplus (note 3)                          6,965        6,758
    Retained earnings                                    23,260       25,485
                                              -------------------------------
    Total shareholders' equity                          122,260      124,278
                                              -------------------------------

                                                      $ 195,822      202,984
                                              -------------------------------
                                              -------------------------------

    See accompanying notes to consolidated financial statements



    ProspEx Resources Ltd.
    Consolidated Statements of Loss, Comprehensive Loss and Retained Earnings
    For the three months ended March 31,
    (unaudited)

    (Stated in thousands of dollars,
     except per share amounts)                             2009         2008
    -------------------------------------------------------------------------

    Revenue
      Oil and gas                                     $  12,765       17,378
      Unrealized financial instrument loss                 (828)      (4,519)
      Royalties                                          (2,526)      (2,950)
                                              -------------------------------

                                                          9,411        9,909
                                              -------------------------------

    Expenses
      Depletion, depreciation and accretion               8,741        7,375
      Operating                                           2,453        3,500
      Transportation                                        358          332
      General and administrative                            905          869
      Interest and bank charges                             316          510
      Stock-based compensation                              103          195
                                              -------------------------------

                                                         12,876       12,781
                                              -------------------------------

    Loss before income taxes                             (3,465)      (2,872)

    Income taxes (note 2)
      Future reduction                                   (1,240)        (762)
                                              -------------------------------

    Net loss and comprehensive loss for the
     period                                              (2,225)      (2,110)

    Retained earnings, beginning of period               25,485       17,925
                                              -------------------------------

    Retained earnings, end of period                  $  23,260       15,815
                                              -------------------------------
                                              -------------------------------

    Net loss per share
      Basic                                           $   (0.04)       (0.04)
                                              -------------------------------
                                              -------------------------------
      Diluted                                         $   (0.04)       (0.04)
                                              -------------------------------
                                              -------------------------------

    See accompanying notes to consolidated financial statements



    ProspEx Resources Ltd.
    Consolidated Statements of Cash Flows
    For the three months ended March 31,
    (unaudited)

    (Stated in thousands of dollars)                       2009         2008
    -------------------------------------------------------------------------

    Operations
    Net loss for the period                           $  (2,225)      (2,110)
    Items not involving cash
      Depletion, depreciation and accretion               8,741        7,375
      Stock-based compensation                              103          195
      Future income taxes (reduction)                    (1,240)        (762)
      Unrealized financial instrument loss                  828        4,519
    Asset retirement expenditures                          (487)         (36)
                                              -------------------------------
                                                          5,720        9,181
    Changes in non-cash working capital                   3,258        1,926
                                              -------------------------------
                                                          8,978       11,107
                                              -------------------------------

    Financing
      Increase (decrease) in long-term debt              (3,336)      10,579
      Issuance of common shares                               -          506
                                              -------------------------------
                                                         (3,336)      11,085
                                              -------------------------------

    Investments
      Exploration and development expenditures           (5,641)     (17,383)
      Proceeds on property disposal                       2,078            -
      Property acquisition                                    -      (11,498)
      Deposit on property acquisition                         -        1,175
      Other capital expenditures                             (3)         (60)
                                              -------------------------------
                                                         (3,566)     (27,766)
    Changes in non-cash working capital                  (2,076)       5,574
                                              -------------------------------
                                                         (5,642)     (22,192)
                                              -------------------------------

    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 months ended March 31, 2009
    (unaudited)

    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
    period ended December 31, 2008 except as described below. 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. In the opinion of management,
    these interim consolidated financial statements contain all adjustments
    of a normal and recurring nature to present fairly the Company's
    financial position as at March 31, 2009 and the results of its operations
    and cash flows for the three months ended March 31, 2009. The disclosures
    included below are incremental to those included with the annual
    consolidated financial statements except as disclosed below. 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, 2008.

    1.  LONG TERM DEBT

    At March 31, 2009 the Company had a $65.0 million credit facility with a
    Canadian chartered bank. The facility is available by way of Canadian
    prime and US base rate loans, LIBOR advances, bankers' acceptances and
    letters of credit. Canadian prime rate loans, US base rate loans, and
    LIBOR advances bear interest at Canadian prime, US base rate or LIBOR, as
    applicable, plus a margin dependent upon the Company's debt/cash flow
    ratio as calculated in the previous quarter. Currently, the Company only
    utilizes Bankers' Acceptances within this facility. Stamping fees for
    bankers' acceptances are based on a rate adjusted over the term to
    maturity plus a margin as described above. The bankers' acceptance and
    stamping fees varied from 2.37% to 2.96% in the first quarter of 2009
    compared to 4.38% to 5.88% for the same period in 2008. The credit
    facility is fully revolving until June 30, 2009 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 repayment is required on July 1,
    2010. This facility is secured by a $200 million demand debenture and a
    first floating charge on all petroleum and natural gas assets of ProspEx.

    During the quarter, the semi-annual review of the credit facility was
    completed, which resulted in no changes to the $65 million credit
    facility limit.

    2.  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:


                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
    ($000's)                                               2009         2008
    -------------------------------------------------------------------------
    Loss before taxes                                 $  (3,465)   $  (2,872)
    Rate (%)                                               29.0%        29.5%
    -------------------------------------------------------------------------
    Computed expected reduction for future
     income taxes                                        (1,005)        (847)
    Increase (decrease) in taxes resulting from:
      Stock-based compensation expensed                      30           58
      Effect of change in tax rate                         (279)          27
      Other                                                  14            -
    -------------------------------------------------------------------------
    Income tax reduction                              $  (1,240)   $    (762)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The current future income tax liability at March 31, 2009 of $nil
    (December 31, 2008 - $0.2 million) results from the future tax impact of
    the unrealized financial instrument gain.

    The components of the long term future income tax liability are as
    follows:

                                                       March 31, December 31,
    ($000's)                                               2009         2008
    -------------------------------------------------------------------------
      Property, plant and equipment                   $  (9,801)   $ (10,697)
      Asset retirement obligation                         1,887        1,773
      Share issue costs                                     258          305
    -------------------------------------------------------------------------
                                                         (7,656)      (8,619)
    Valuation allowance                                    (500)        (500)
    -------------------------------------------------------------------------
    Future income tax liability                       $  (8,156)   $  (9,119)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At March 31, 2009, the Company had estimated tax pools available to
    reduce future taxable income of $152.4 million (December 31, 2008 -
    $154.6 million).

    Capitalized stock based compensation resulted in an increase to future
    tax liabilities of $0.1 million during the quarter (2008 - $0.1 million).

    3.  SHAREHOLDERS' EQUITY

    (a)    Common Shares & Common Share Performance Warrants Issued

                                    Three months ended    Three months ended
                                      March 31, 2009        March 31, 2008
    -------------------------------------------------------------------------
                                  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                    57,385   $ 90,802     56,453   $ 90,543
      Flow-through shares tax
       adjustment                         -          -          -     (2,219)
      Shares issued on exercise
       of warrants                        -          -        396        796
      Issue costs, net of future
       tax reduction                      -          -          -        (34)
    -------------------------------------------------------------------------
      Balance at the end of
       the period                    57,385   $ 90,802     56,849   $ 89,086
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Common share performance warrants
      Balance at the beginning of
       the period                     2,016   $  1,233      2,716   $  1,661
      Exercised                           -          -       (396)      (242)
    -------------------------------------------------------------------------
      Balance at the end of
       the period                     2,016   $  1,233      2,320   $  1,419
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    All outstanding performance warrants entitle the holder to acquire a
    common share at a price of $1.40 and expire on October 1, 2009.

    (b)    Contributed Surplus

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
    ($000's)                                               2009         2008
    -------------------------------------------------------------------------
    Balance at the beginning of the period            $   6,758    $   5,614
    Stock-based compensation                                207          390
    Exercise of stock options                                 -            -
    -------------------------------------------------------------------------
    Balance at the end of the period                  $   6,965    $   6,004
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (c)    Stock Options

    Changes in outstanding stock options are summarized below:

                                    Three months ended    Three months ended
                                      March 31, 2009        March 31, 2008
    -------------------------------------------------------------------------
                                              Weighted              Weighted
                                               Average               Average
                                    Options   Exercise    Options   Exercise
                                     (000's)     Price     (000's)     Price
    -------------------------------------------------------------------------
    Outstanding at beginning of
     period                           5,160   $   3.44      4,656   $   3.62
    Granted                               -          -        611       3.32
    Forfeited                           (57)      3.36          -          -
    -------------------------------------------------------------------------
    Outstanding at end of period      5,103       3.45      5,267   $   3.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes stock options outstanding and exercisable
    at March 31, 2009:

                          Options outstanding           Options exercisable
    -------------------------------------------------------------------------
                   Number of    Weighted
                 outstanding     average                  Number
                          at   remaining    Weighted exercisable    Weighted
    Range of          period contractual     average   at period     average
    exercise             end        life    exercise         end    exercise
    price             (000's)     (years)      price      (000's)      price
    -------------------------------------------------------------------------
    $ 1.25 -
     $ 2.32              286         4.6  $     1.25         n/a         n/a
    $ 2.33 -
     $ 3.39            2,291         1.3  $     3.21       1,931  $     3.22
    $ 3.40 -
     $ 4.46            2,526         2.7  $     3.91       1,671  $     3.90
    -------------------------------------------------------------------------
                       5,103         2.2  $     3.45       3,602  $     3.54
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    No options were granted during the first quarter of 2009. The fair value
    of options granted during the first quarter of 2008 was $0.8 million. The
    fair value is determined using the Black-Scholes option pricing model,
    with weighted average assumptions for grants as follows:

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
    -------------------------------------------------------------------------
    Risk free interest rate                                 n/a          3.2%
    Expected life                                           n/a      5 years
    Expected volatility                                     n/a           47%
    Expected dividend yield                                 n/a          Nil
    Forfeiture rate                                         n/a            5%
    -------------------------------------------------------------------------

    The estimated fair values of the options are being amortized against
    earnings and capitalized to property, plant and equipment over the
    vesting period. During the three months ended March 31, 2009, a total of
    $0.1 million (2008 - $0.2 million) of stock-based compensation was
    recorded against income and $0.1 million (2008 - $0.2 million) was
    capitalized.

    (d)    Per Share Amounts

                                                          Three        Three
                                                         months       months
                                                          ended        ended
                                                       March 31,    March 31,
                                                           2009         2008
    -------------------------------------------------------------------------
    Weighted average common shares basic             57,385,162   56,545,317
    Dilutive securities:
      Stock options                                           -      153,914
      Performance warrants                                    -    1,392,110
    -------------------------------------------------------------------------
    Diluted                                          57,385,162   58,091,341
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the three months ended March 31, 2009, all options outstanding
    (2008 - 3,284,500) were excluded from the diluted calculations as they
    were anti- dilutive.

    4. FINANCIAL INSTRUMENTS, RISK MANAGEMENT AND CAPITAL MANAGEMENT STRATEGY

    Overview

    The Company has exposure to a number of risks from its use of financial
    instruments including:

        -   Credit risk
        -   Liquidity risk
        -   Market risk

    This note presents information about the Company's exposure to each of
    the above risks and the Company's objectives, policies and processes for
    measuring and managing risk, and the Company's management of capital.
    Further quantitative disclosures are included throughout these financial
    statements.

    The Board of Directors has overall responsibility for the establishment
    and oversight of the Company's risk management framework. The Board has
    implemented and monitors compliance with risk management policies.

    The Company's risk management policies are established to identify and
    analyze the risks faced by the Company, to set appropriate risk limits
    and controls, and to monitor risks and adherence to market conditions and
    the Company's activities.

    Credit Risk

    Credit risk relates to the Company's receivables from joint venture
    partners and petroleum and natural gas marketers and the risk of
    financial loss if a customer, partner or counterparty to a financial
    instrument fails to meet its contractual obligations. A substantial
    portion of the Company's accounts receivable are with customers in the
    energy industry and are subject to normal industry credit risk. The
    Company generally grants unsecured credit but routinely assesses the
    financial strength of its partners and marketers.

    Receivables from petroleum and natural gas marketers are normally
    collected on the 25th day of the month following production. The Company
    sells the majority of its production to two petroleum and natural gas
    marketers therefore is subject to concentration risk. To date the Company
    has not experienced any collection issues with its petroleum and natural
    gas marketers. Joint venture receivables are typically collected within
    one to three months of the joint venture bill being issued to the
    partner. The Company attempts to mitigate the risk from joint venture
    receivables by obtaining joint venturer approval of significant capital
    expenditures prior to expenditure. The Company does not typically obtain
    collateral from petroleum and natural gas marketers or joint venturers;
    however in certain circumstances, it may elect to cash call a joint
    venturer in advance of the work.

    As at March 31, 2009 the Company's receivables consisted of $2.9 million
    (December 31, 2008 - $4.3 million) from joint venturers, $3.2 million
    (December 31, 2008 - $4.2 million) of receivables from petroleum and
    natural gas marketers and $2.0 million (December 31, 2008 - $2.3 million)
    of other receivables.

    The carrying amount of accounts receivable and cash and cash equivalents
    represents the maximum credit exposure. The Company does not have an
    allowance for doubtful accounts as at March 31, 2009 and did not provide
    for any doubtful accounts nor was it required to write-off any
    receivables during the quarter ended March 31, 2009.

    Liquidity risk

    Liquidity risk is the risk that the Company will not be able to meet its
    financial obligations as they are due. The Company's approach to managing
    liquidity is to ensure, as far as possible, that it will have sufficient
    liquidity to meet its liabilities when due, under both normal and
    stressed conditions without incurring unacceptable losses or risking harm
    to the Company's reputation.

    The Company prepares annual capital expenditure budgets, which are
    regularly monitored and updated as considered necessary. Further, the
    Company utilizes authorizations for expenditures on both operated and
    non-operated projects to further manage capital expenditures. To
    facilitate the capital expenditure program, the Company has a revolving
    reserve based credit facility, as outlined in note 1. The Company also
    attempts to match its payment cycle with collection of petroleum and
    natural gas revenues on the 25th day of each month.

    The following are the contractual maturities of financial liabilities and
    associated interest payments due as at March 31, 2009:

    -------------------------------------------------------------------------
    Financial
     Liability
     ($000's)      (less than) 1 year  1 - 2 years  2 - 5 years   Thereafter
    -------------------------------------------------------------------------
    Accounts payable and
     accrued liabilities   $   20,793            -            -            -
    Long-term debt                  -       37,471            -            -
    -------------------------------------------------------------------------
    Total                  $   20,793       37,471            -            -
    -------------------------------------------------------------------------

    Market risk

    Market risk is the risk that changes in market prices, such as foreign
    exchange rates, commodity prices, and interest rates will affect the
    Company's net earnings or the value of financial instruments. The
    objective of market risk management is to manage and control market risk
    exposures within acceptable limits, while maximizing returns.

    The Company utilizes both financial derivatives and physical delivery
    sales contracts to manage market risks. All such transactions are
    conducted in accordance with the risk management policy that has been
    approved by the Board of Directors.

    Foreign Currency Exchange Risk

    Foreign currency exchange rate risk is the risk that the fair value of
    financial instruments or future cash flows will fluctuate as a result of
    changes in foreign exchange rates. Although substantially all of the
    Company's petroleum and natural gas sales are denominated in Canadian
    dollars, the underlying market prices in Canada for petroleum and natural
    gas are impacted by changes in the exchange rate between the Canadian and
    United States dollars. Given that changes in exchange rate have an
    indirect influence, the impact of changing exchange rates can not be
    accurately quantified. The Company had no forward exchange rate contracts
    in place as at or during the three months ended March 31, 2009.

    Commodity Price Risk

    Commodity price risk is the risk that the fair value of financial
    instruments or future cash flows will fluctuate as a result of changes in
    commodity prices. Commodity prices for petroleum and natural gas are
    impacted by world economic events that dictate the levels of supply and
    demand. The Company attempts to mitigate commodity price risk through the
    use of financial derivative sales contracts. There were no contracts in
    place as of March 31, 2009.

    The contracts in place during the three months ended March 31, 2009
    resulted in an unrealized loss of $0.8 million (March 31, 2008 -
    $4.5 million loss) and a realized gain of $1.3 million (March 31, 2008 -
    $0.1 million gain).

    With respect to commodity prices, during the three months ended March 31,
    2009, a one dollar increase in the price per GJ of natural gas relevant
    only to the Company's production dedicated to derivative financial
    instruments would have resulted in a net earnings decrease of
    $0.1 million (2008 - increase of $0.2 million). A one dollar decrease in
    the price per GJ of natural gas on the same production would have
    increased net earnings after taxes for the three months ended March 31,
    2009 by $0.1 million (2008 - $nil). This excludes any impact relating to
    unrealized financial instrument gains/losses.

    Interest Rate Risk

    Interest rate risk is the risk that future cash flows will fluctuate as a
    result of changes in market interest rates. The Company is exposed to
    interest rate fluctuations on its credit facility which bears a floating
    rate of interest. The Company had no interest rate swaps or financial
    contracts in place as at or during the three months ended March 31, 2009.
    For the three months ended March 31, 2009, a difference in the interest
    rate of 1% would change net earnings after tax by an estimated $0.1
    million (2008 - $0.1 million), assuming all other variables are constant.

    Capital Management Strategy

    The Company's policy on capital management is to maintain a prudent
    capital structure to allow the Company to fund future development. The
    Company considers its capital structure to include shareholders' equity,
    bank debt, and working capital.

                                                       March 31, December 31,
    ($000's)                                               2009         2008
    -------------------------------------------------------------------------
    Shareholders' equity                              $ 122,260    $ 124,278
    Long-term debt                                       37,471       40,807

    Working capital deficiency excluding unrealized
     financial instrument gain or losses and
     associated future tax assets or liabilities         11,796       10,615
    -------------------------------------------------------------------------

    The Company manages its capital programs in order to maintain a prudent
    capital structure as changes in economic conditions occur. The Company
    may and has from time to time issued shares and adjusted spending to
    manage current or projected operating cash flows and debt levels.

    The Company monitors its capital base using the ratio of net debt to
    annualized operating cash flow. This ratio is calculated as net debt, as
    defined as long term debt less working capital (or plus working capital
    deficiency) excluding unrealized financial instrument gain (loss) and
    associated future tax assets (liabilities); divided by annualized cash
    flow from operations before changes in non-cash working capital (based on
    the most recent operating quarter). The Company's guideline is to
    maintain a ratio of approximately 1.0 to 1.0, not exceeding 2.0 to 1.0.
    This ratio will fluctuate depending on fluctuations of the commodity and
    business cycles. The Company prepares annual capital expenditure budgets
    which are updated periodically to monitor this ratio. The annual budget
    is approved by the Board of Directors with updates reviewed by the Board
    throughout the year.

    As at March 31, 2009 the Company's ratio of net debt to annualized
    operating cash flow was 2.2 to 1.0, and compares to the ratio of 1.2 to
    1.0 for the year ended December 31, 2008.

    The Company's share capital is not subject to any external restrictions.
    The bank debt facility has no restrictions other than the limitation of
    borrowing under the facility on an annual basis. As at March 31, 2009,
    the Company is in compliance with all flow-through share expenditure
    requirements as well as all bank facility requirements.

    There have been no changes to the Company's capital management strategy
    during the quarter ended March 31, 2009.

    5.  ADDITIONAL DISCLOSURES

    (a)    Interest and Taxes Paid

    Net cash interest paid during the quarter was $0.5 million (2008 -
    $0.4 million). Cash taxes paid during the period was $nil (2008 - $nil).

    (b)    Asset Retirement Obligation

    For the quarter ended March 31, 2009, asset retirement obligation
    increased by $1.1 million (March 31, 2008 - $0.1 million), with a
    corresponding increase to Property, Plant and Equipment.

    6.  COMMITMENTS

    The Company has committed to certain future payments as follows:

    Payments due                                                      There-
    ($000's)               2009     2010     2011     2012     2013    after
    -------------------------------------------------------------------------
    Long-term debt      $     -   37,471        -        -        -  $     -
    Building lease          972    1,298    1,315    1,321    1,321      330
    Process fees            284      379       63        -        -        -
    Transportation          398      121        -        -        -        -
    Other                    12        7        -        -        -        -
    -------------------------------------------------------------------------
    Total               $ 1,666   39,276    1,378    1,321    1,321  $   330
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    %SEDAR: 00021285E




For further information:

For further information: John Rossall, President & CEO, jrossall@psx.ca,
(403) 268-3940; or George Yee, Vice President Finance & Chief Financial
Officer, gyee@psx.ca, (403) 268-3940

Organization Profile

PROSPEX RESOURCES LTD.

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