Sabretooth Energy Ltd. announces second quarter operational results and additional Northeast British Columbia exploration and development details



    CALGARY, Aug. 6 /CNW/ - Sabretooth Energy Ltd. ("Sabretooth" or the
"Company") (TSX: "SAB") is pleased to provide a financial update on its Second
Quarter 2008 results and additional details on its Northeast British Columbia
activities.

    Second Quarter Results

    In the second quarter of 2008, the Company averaged approximately
2,360 boe/d of production, with a net back price of $40.88 per boe. The
Company also spent approximately $9.5 million on capital projects and land
acquisitions.

    Northeast British Columbia Operational Update

    Sabretooth has finished drilling its first horizontal Montney well at Red
Creek. The completion of this well is scheduled for mid September with initial
completion results expected by middle to late October. Capital expenditures
for the remaining five months of 2008 are projected at $15.0 million and are
expected to include expenditures to drill 4 horizontal and 3 vertical wells
primarily on Sabretooth's existing assets at Red Creek, Mica and
Gunnell/Sahtaneh.
    Sabretooth's existing non-conventional Montney undeveloped land holdings
total approximately 40,000 net acres, with Sabretooth's Northeast British
Columbia Montney land holdings accounting for approximately 84% of that
number. Sabretooth will continue to focus its exploration and development
efforts on its core Montney land holdings which will provide a solid base for
growth for the balance of 2008 and into 2009. Total undeveloped land holdings
will be approximately 119,700 net acres once all contemplated assets
divestitures are closed.

    Asset Rationalization

    The Company successfully closed the sale of its West Central assets on
July 31, 2008 and expects to close the sale of its Fireweed assets by the
middle of August. When the Fireweed asset sale is completed, the Company will
have disposed of approximately 545 boe/d of production for total proceeds of
$22.5 million. Current production after asset rationalization is approximately
1,900 boe/d.

    Credit Facility and Debt

    As a result of the asset rationalization, the Company is in the process
of negotiating a revised credit facility. The revised credit facility is
expected to be approximately $58.0 million and is expected to close by the
middle of August. The Company expects that the 2008 capital program will be
funded through cash flow from operations and bank facilities.

    About Sabretooth Energy

    Sabretooth Energy Ltd. is a public oil and gas exploration and
development company, located in Calgary, Alberta and carrying out operations
in Western Canada. Sabretooth trades on the Toronto Stock Exchange (TSX) under
the symbol "SAB".

    This news release contains forward-looking statements relating to the
Company's plans and other aspects of the Company's anticipated future
operations, strategies, financial and operating results and business
opportunities. Forward-looking statements typically use words such as
"anticipate", "believe", "project", "expect", "plan", "intend" or similar
words suggesting future outcomes, statements that actions, events or
conditions "may", "would", "could" or "will" be taken or occur in the future,
or statements regarding the outlook for petroleum prices, estimated amounts
and timing of capital expenditures, the timing, location and extent of future
drilling operations anticipated timing and results of construction projects
and project tie-ins, estimates of future production, the ability to realize
the timing, on investments in ABCP, the terms of the Corporation's new credit
facility, loans to be received from National Bank of Canada, if any, operating
costs or other expectations, beliefs, plans, objectives, assumptions or
statements about future events or performance. Statements regarding reserves
are also forward-looking statements, as they reflect estimates as to the
expectation that the deposits can be economically exploited in the future.
    These statements are based on certain factors and assumptions regarding
expected growth, results of operations, performance, business prospects and
opportunities, the terms of the Corporation's new credit facility and the
ability of the Company to realize on its investments in ABCP. While we
consider these assumptions to be reasonable based on information currently
available to us, they may prove to be incorrect.
    By their nature, forward-looking statements involve numerous risk and
uncertainties and other factors that contribute to the possibility that the
predicted outcome will not occur, including, without limitation, risks
associated with oil and gas exploration, development, exploitation,
production, marketing and transportation, loss of markets, volatility of
commodity prices, currency fluctuations, imprecision of reserve estimates,
environmental risks, competition from other producers, inability to retain
drilling rigs and other services, incorrect assessment of the value of
acquisitions, failure to realize the anticipated benefits of acquisitions,
delays resulting from or inability to obtain required regulatory approvals,
the ability to realize on investments in ABCP and ability to access sufficient
capital from internal and external sources. Readers are cautioned that the
foregoing list of factors is not exhaustive.
    Although Sabretooth believes that the expectations represented in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. As a consequence, actual results may
differ materially from those anticipated in the forward-looking statements and
you should not unduly rely on forward-looking statements. The forward-looking
statements contained in this news release are made as the date of this new
release 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 may be
required by applicable securities laws.
    The term barrels of oil equivalent or boe may be misleading, particularly
if used in isolation. A conversion ratio for gas of 6 mcf: 1 boe is based on
an energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.

    
    Q2 2008 Highlights
    -------------------------------------------------------------------------
                       Three Months  Six Months   Three Months  Six Months
                           Ended        Ended         Ended        Ended
                          June 30,     June 30,      June 30,     June 30,
                           2008         2008          2007         2007
    -------------------------------------------------------------------------

    Financial ($)
    Production
     revenue          $ 15,559,000  $ 29,782,000  $  4,299,000  $  9,537,000
    Realized gain
     (loss) on hedge  $ (2,331,000) $ (2,411,000) $    215,000  $    270,000
    Unrealized gain
     (loss) on hedge  $ (4,715,000) $(12,698,000) $    634,000  $     17,000
    Net income (loss) $ (2,486,000) $(13,305,000) $    141,000  $  4,055,000
    Funds flow from
     operations       $  6,339,000  $ 14,072,000  $  2,177,000  $  4,664,000
    -------------------------------------------------------------------------

    Production volumes
    Natural gas (mcf/d)     12,422        14,098         5,140         5,781
    Crude oil (bbls/d)         179           229           114           108
    Natural gas liquids
     (bbls/d)                  107           116            24            28
    Total (boe/d)            2,357         2,695           995         1,100

    Sales prices
    Natural gas
     ($/mcf)          $       8.91  $       8.19  $       7.93  $       7.87
    Natural gas, not
     including hedges
     ($/mcf)          $      10.98  $       9.13  $       7.47  $       7.60
    Crude oil ($/bbl) $     125.19  $     102.31  $      63.55  $      64.76
    Natural gas
     liquids ($/bbl)  $     113.55  $      98.73  $      65.86  $      61.45
    Total ($/boe)     $      61.67  $      55.81  $      49.84  $      49.25
    Netbacks, not
     including
     unrealized
     hedges ($/boe)
    Price             $      61.67  $      55.81  $      49.84  $      49.25
    Royalties                (6.29)        (6.98)        (6.38)        (7.90)
    Transportation           (1.53)        (1.38)        (1.54)        (1.57)
    Operating costs         (12.97)       (12.12)       (13.09)       (10.89)
    -------------------------------------------------------------------------
    Total             $      40.88  $      35.33  $      28.83  $      28.89
    -------------------------------------------------------------------------
    Capital
     expenditures ($)
    -------------------------------------------------------------------------

    Total capital
     expenditures     $  9,522,000  $ 22,126,000  $  6,142,000  $ 20,098,000
    -------------------------------------------------------------------------
    Land (net acres)

    Developed               42,035        42,035        10,656        10,656
    Undeveloped            171,619       171,619        49,927        49,927
    -------------------------------------------------------------------------
    Total Land             213,654       213,654        60,583        60,583
    -------------------------------------------------------------------------
    

    Management's Discussion and Analysis
    -------------------------------------------------------------------------

    This Management's Discussion and Analysis ("MD & A") of the financial and
operating results for Sabretooth Energy Limited ("Sabretooth" or the
"Company") should be read in conjunction with the Company's unaudited
consolidated financial statements (the "Financial Statements") and related
notes for the six months ended June 30, 2008 as well as with the audited
consolidated financial statements (the "Annual Financial Statements") for the
year ended December 31, 2007.

    This MD & A is dated August 6, 2008.

    Basis of Presentation

    The financial data presented below has been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and
the measurement currency is the Canadian dollar. For the purpose of
calculating unit costs, natural gas is converted to a barrel equivalent
("boe") using six thousand cubic feet of natural gas equal to one barrel of
oil unless otherwise stated. The term barrels of oil equivalents (BOE) may be
misleading, particularly if used in isolation. A BOE conversion ratio for gas
of 6 mcf:1 boe is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the
wellhead.

    Non-GAAP Measurements

    Within the Management Discussion and Analysis references are made to
terms commonly used in the oil and gas industry. Netback is not defined by
GAAP in Canada and is referred to as a non-GAAP measure. Netbacks equal total
revenue less royalties, operating costs and transportation costs calculated on
a boe basis. Management utilizes this measure to analyze operating
performance. Total boes are calculated by multiplying the daily production by
the number of days in the period.
    Funds flow from operations is a non-GAAP term that represents net income
(loss) adjusted for non-cash items including depletion, depreciation,
accretion, future income taxes, stock-based compensation, unrealized hedge
gains (losses), asset write-downs and gains (losses) on sale of assets and
before adjustments for changes in working capital. The Company evaluates its
performance based on earnings and funds flow from operations. The Company
considers funds flow from operations a key measure as it demonstrates the
Company's ability to generate the cash flow necessary to fund future growth
through capital investment and to repay debt. The Company's calculation of
funds flow from operations may not be comparable to that reported by other
companies. Funds flow from operations per share is calculated using the same
weighted average number of shares outstanding used in the calculation of
income (loss) per share.

    Forward-looking Statements

    Certain statements contained within this MD & A constitute forward-
looking statements. These statements related to future events or our future
performance. All statements other than statements of historical fact may be
forward-looking statements. Forward-looking statements are often, but not
always, identified by the use of words such as "seek", "anticipate", "budget",
"plan", "continue", "estimate", "expect", "forecast", "may", "will",
"project", "predict", "potential", "targeting", "intend", "could", "might",
"should", "believe", and similar expressions. Forward-looking statements in
this MD & A include, but are not limited to, statements with respect to: the
potential impact of implementation of the Alberta Royalty Framework on
Sabretooth's condition and projected 2008 capital investments; its ability to
realize the Company's investments in Asset Backed Commercial Paper ("ABCP") ;
projections with respect to growth of natural gas production; the projected
impact of land access and regulatory issues; projections relating to the
volatility of crude oil prices in 2008 and beyond and reasons therefore; the
Company's projected capital investment levels for 2008 and the source of
funding therefore; the effect of the Company's risk management program,
including the impact of derivative financial instruments; the Company's
defence of lawsuits; the impact of the climate change initiatives on operating
costs; the impact of Western Canada pipeline constraints; projections that the
Company will fully recover from its ABCP. Readers are cautioned not to place
undue reliance on forward-looking statements, as there can be no assurance
that the plans, intentions or expectations upon which they are based will
occur.
    By their nature, forward-looking statements involve numerous assumptions,
known and unknown risks and uncertainties, both general and specific, that
contribute to the possibility that the predictions, forecast, projects and
other forward-looking statements will not occur, which may cause the Company's
actual performance and financial results in future periods to differ
materially from any estimates or projects of future performance or results
expressed or implied by such forward-looking statements. These assumptions,
risks and uncertainties include, among other things: volatility of and
assumptions regarding oil and gas prices; assumptions based upon Sabretooth's
current guidance; fluctuations in currency and interest rates; its ability to
realize the Company's investment in ABCP; product supply and demand; market
competition; risk inherent in the Company's marketing operations, including
credit risks; imprecision of reserves estimates and estimates of recoverable
quantities of oil, natural gas and liquids from resource plays and other
sources not currently classified as proved; the Company's ability to replace
and expand oil and gas reserves; the Company's ability to generate sufficient
cash flow from operations to meet its current and future obligations; the
Company's ability to access external sources of debt and equity capital; the
timing and cost of well and pipeline constructions; the Company's ability to
secure adequate product transportation; changes in royalty, tax, environmental
and other laws or regulations or the interpretations of such laws or
regulations; risks associated with existing and potential future lawsuits and
regulatory actions made against the Company; and other risks and uncertainties
described from time to time in the reports and filings made with securities
regulatory authorities by Sabretooth. Statements relating to "reserves" are
deemed to be forward-looking statements, as they involve the implied
assessment, based on certain estimates and assumptions that the resources and
reserves described can be profitably produced in the future.
    Financial outlook information contained in this MD & A about prospective
results of operations, financial position or cash flows is based on
assumptions about future events, including economic conditions and proposed
courses of action, based on management's assessment of the relevant
information currently available. Readers are cautioned that such financial
outlook information contained in this MD & A should not be used for purposes
other than for which it is disclosed herein.
    Although Sabretooth believes that the expectations represented by such
forward-looking statements are reasonable, there can be no assurance that such
expectation will prove to be correct. Readers are cautioned that the foregoing
list of important factors is not exhaustive. Furthermore, the forward-looking
statements contained in this MD & A are made as of the date of this MD & A,
and except as required by law Sabretooth 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. The
forward-looking statements contained in this MD & A are expressly qualified by
this cautionary statement.


    
    FINANCIAL RESULTS AND HIGHLIGHTS

                                          Three months            Six months
                                         ended June 30,        ended June 30,
    $(000's)                           2008       2007       2008       2007
    -------------------------------------------------------------------------
    Revenue, net of royalties     $   4,209  $   3,721  $  26,360  $   7,965
    Funds flow from operations(1) $   6,339  $   2,177  $  14,072  $   4,664
    Net income (loss)             $  (2,486) $     141  $ (13,305) $   4,055
    -------------------------------------------------------------------------

    (1) Funds flow from operations is a non-GAAP term that represents net
        earnings adjusted for non-cash items including depletion and
        depreciation, accretion, future income taxes, stock-based
        compensation, unrealized hedge gains (losses), asset write-downs and
        gains (losses) on sale of assets. The Company evaluates its
        performance based on earnings and funds flow from operations. The
        Company considers funds flow from operations a key measure as it
        demonstrates the Company's ability to generate the cash flow
        necessary to fund future growth through capital investment and to
        repay debt.


    Summary of Funds Flow from Operations

                                          Three months            Six months
                                         ended June 30,        ended June 30,
                                  -------------------------------------------
    $(000's)                           2008       2007       2008       2007
    -------------------------------------------------------------------------
    Cash From Operating
     Activities
    (Add back) deduct:            $   5,254  $    (493) $   9,948  $   2,737
      Net change in non-cash
       working capital               (1,085)    (2,670)    (4,124)    (1,927)
    Funds flow from operations    $   6,339  $   2,177  $  14,072  $   4,664
    -------------------------------------------------------------------------
    

    Revenue

    Gas revenue not including the realized loss on derivatives increased 194%
from $7,954,000 for the six months ended June 30, 2007 to $23,433,000 for the
same period in 2008. The increase in gas sales relates primarily to the 146%
increase in production resulting from the acquisition, the successful drilling
program, along with a slight increase of Sabretooth's natural gas price by 4%.
    Oil sales increased by 236% for the six month period ending June 30, 2008
compared to the same time period in 2007 primarily due to the strengthening of
Sabretooth's oil price by 58%. The increase in the oil price was the result of
the significant increase in the US$ WTI.

    
                                          Three months            Six months
                                         ended June 30,        ended June 30,
                                  -------------------------------------------
    $(000's)                           2008       2007       2008       2007
    -------------------------------------------------------------------------
    Natural gas                   $  12,407  $   3,494  $  23,433  $   7,954
    Realized gain (loss) on
     hedge contracts                 (2,331)       215     (2,411)       270
    -------------------------------------------------------------------------
    Total Natural gas             $  10,076  $   3,709  $  21,022  $   8,224
    Oil                               2,042        660      4,261      1,270
    Natural gas liquids               1,110        145      2,088        313
    -------------------------------------------------------------------------
    Total Revenue                 $  13,228  $   4,514  $  27,371  $   9,807
    -------------------------------------------------------------------------
    

    Pricing

    Both natural gas and crude oil prices rose during the second quarter.
During the first 6 months of 2008 prices at AECO rose 52% from a low of
$6.98/Mcf to a high of $10.60/Mcf. Sabretooth realized an average natural gas
price of $8.91/Mcf during the three months ended June 30, 2008, an increase of
12% from $7.93/Mcf for the same period in 2007. The AECO daily index for the
same time period increased by 44%.
    The selling price for oil for the three months ended June 30, 2008,
increased from $63.55/bbl to $125.19/bbl and increase of 97%, due to the
increase in the US$ WTI benchmark price, partially offset by a stronger
Canadian dollar.

    
                                          Three months            Six months
    Average Selling Price(1)             ended June 30,        ended June 30,
                                  -------------------------------------------
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Natural gas (per mcf)         $    8.91  $    7.93  $     8.19 $    7.87
    Crude Oil (per bbl)           $  125.19  $   63.55  $   102.31 $   64.76
    Natural gas liquids (per bbl) $  113.55  $   65.86  $    98.73 $   61.45
    -------------------------------------------------------------------------
    Per boe                       $   61.67  $   49.84  $    55.81 $   49.25
    -------------------------------------------------------------------------

    (1) The average selling prices reported are after realized derivative
        losses and before transportation costs.

                                          Three months            Six months
                                         ended June 30,        ended June 30,
                                  -------------------------------------------
    Benchmark Pricing                  2008       2007       2008       2007
    -------------------------------------------------------------------------
    AECO natural gas - monthly
     index (CDN$/Mcf)             $    8.83  $    7.07  $    8.24  $    7.03
    AECO natural gas - daily
     index (CDN$/MCF)             $    9.67  $    6.70  $    8.62  $    6.86
    WTI Crude Oil (US$/bbl)       $  123.95  $   64.94  $  110.91  $   61.46
    Edmonton Par Price (CDN$/bbl) $  126.38  $   72.62  $  112.30  $   70.19
    US$/CDN$ exchange rate        $    0.99  $    0.93  $    0.99  $    0.89
    

    Production

    Production increased to 2,357 boe/d in the second quarter of 2008 from
995 boe/d in the second quarter of 2007, primarily due to the 2007 corporate
acquisition of Bear Ridge Resources and the successful drilling program,
offset by natural declines.
    Sabretooth drilled 4 wells (1.8 net) in the second quarter of 2008,
focused primarily in the B.C. resource play. Five new wells came on production
in the second quarter adding 65 boe/d, which was offset by three wells that
paid out in the second quarter decreasing production by 85 boe/d.
    Production volumes for the six months ended June 30, 2008 were 490,461
boe and averaged 2,695 boe/d compared to six months ended June 30, 2007
production volumes were 199,140 boe and averaged 1,100 boe/d.
    Production volumes for the three months ended June 30, 2008 were 2,357
boe/d compared to the first quarter of 2008 which were 3,032 boe/d. The
decrease was due to non-operated plant downtime and natural declines.

    
                                For the three              For the three
                                 months ended               months ended
                                June 30, 2008              June 30, 2007
                      -------------------------------------------------------
                           Total         Per day      Total        Per day
    -------------------------------------------------------------------------
    Natural Gas        1,130,435 mcf  12,422 mcf/d  467,720 mcf  5,140 mcf/d
    Crude Oil            16,313 bbls    179 bbls/d  10,384 bbls   114 bbls/d
    NGLs                  9,771 bbls    107 bbls/d   2,220 bbls    24 bbls/d
    -------------------------------------------------------------------------
    Total                214,502 boe   2,357 boe/d   90,557 boe    995 boe/d
    -------------------------------------------------------------------------

                                 For the six                 For the six
                                 months ended               months ended
                                June 30, 2008              June 30, 2007
                      -------------------------------------------------------
                           Total         Per day      Total        Per day
    -------------------------------------------------------------------------
    Natural Gas        2,565,809 mcf  14,098 mcf/d 1,046,409 mcf  5,781 mcf/d
    Crude Oil            41,645 bbls    229 bbls/d   19,612 bbls   108 bbls/d
    NGLs                 21,154 bbls    116 bbls/d    5,126 bbls    28 bbls/d
    -------------------------------------------------------------------------
    Total                490,461 boe   2,695 boe/d   199,140 boe  1,100 boe/d
    -------------------------------------------------------------------------
    

    Royalty Expense

    Royalty expense in the second quarter of 2008 was $1,350,000 or 10% of
revenue compared to $578,000 or 13% of revenue in the second quarter of 2007.
Royalty expense for the first six months of 2008 was $3,422,000 or 13% of
revenue compared to $1,572,000 or 16% of revenue for the same period in 2007.
Royalty expense as a percentage of revenue is lower in the current quarter
which is primarily due to an additional $800,000 of capital cost recovery
credits compared to the same time period in 2007.

    
                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                  -------------------------------------------
    $(000's)                         2008       2007       2008       2007
    -------------------------------------------------------------------------
    Royalties  ($)                $   1,350  $     578  $   3,422  $   1,572
    -------------------------------------------------------------------------
    As a % of revenue                   10%        13%        13%        16%
    Per Unit of Production
     ($/boe)                      $    6.29  $    6.38  $    6.98  $    7.90
    -------------------------------------------------------------------------

    Transportation

    Transportation costs for the second quarter of 2008 were $329,000 or $1.53
per boe. For the six months ended June 30, 2008 transportation costs were
$675,000 or $1.38 per boe. Transportation costs for the second quarter of 2007
were $140,000 or $1.54 per boe. For the six months ended June 30, 2007
transportation costs were $313,000 or $1.57 per boe. Transportation costs per
boe are relatively flat quarter over quarter.

                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                  -------------------------------------------
    $(000's)                         2008       2007       2008       2007
    -------------------------------------------------------------------------
    Transportation                $     329  $     140  $     675  $     313
    Per Unit of Production
     ($/boe)                      $    1.53  $    1.54  $    1.38  $    1.57
    -------------------------------------------------------------------------
    

    Operating Costs

    Operating costs during the second quarter of 2008 were $2,782,000 or
$12.97 per boe compared to $1,186,000 or $13.09 per boe for the same time
period in 2007. For the six months ended June 30, 2008 operating costs were
$5,945,000 or $12.12 per boe compared to $2,168,000 or $10.89 per boe. For the
six months ended June 30, 2008, operating costs increased by 174% per boe
while production increased 145% per boe/d comparing to the same period in
2007. The increase in operating costs for the second quarter was attributable
to lower production while infrastructure costs remained constant.

    
                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                  -------------------------------------------
    $(000's)                         2008       2007       2008       2007
    -------------------------------------------------------------------------
    Operating Costs ($)           $   2,782  $   1,186  $   5,945  $   2,168
    Per Unit of Production
     ($/boe)                      $   12.97  $   13.09  $   12.12  $   10.89
    -------------------------------------------------------------------------

    Operating Netbacks

    Sabretooth's netback for the second quarter of 2008 increased from $28.83
in 2007 to $40.88. For the six months ended June 30, 2008 was $35.33 compared
to $28.89 in 2007. The increase in the netback for the six months ended
June 30, 2008 is primarily due to the higher average selling prices
attributable to higher market prices, along with lower royalty rates, and
lower transportation costs. Offsetting these increases in the netback were
higher operating costs, and increased derivative losses.

                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                  -------------------------------------------
                                     2008       2007       2008       2007
    -------------------------------------------------------------------------
    Production revenue, including
     realized hedge gains
     (losses)                     $   61.67  $   49.84  $   55.81  $   49.25
    Royalty expense                   (6.29)     (6.38)     (6.98)     (7.90)
    Transportation                    (1.53)     (1.54)     (1.38)     (1.57)
    Operating Costs                  (12.97)    (13.09)    (12.12)    (10.89)
    -------------------------------------------------------------------------
    Netback, $/boe                $   40.88  $   28.83  $   35.33  $   28.89
    -------------------------------------------------------------------------
    

    General and Administrative Expenses

    General and administrative ("G & A") expenses for the second quarter of
2008, net of capitalized amounts and recoveries, were $1,452,000 or $6.77 per
boe, up 191% compared to $500,000 or $5.53 per boe for 2007. For the three and
six months ended June 30, 2008, Sabretooth capitalized approximately $670,000
and $1,161,000 G & A expenses respectively related to exploration and
development. The increase in G & A costs per boe is attributable to increased
personnel costs during the second quarter coupled with decreased production.
    For the six months ended June 30, 2008 G & A expenses were $2,114,000 or
$4.31 per boe compared to $1,078,000 or $5.41 per boe in 2007. Overall G & A
per boe has decreased by 20% compared to 2007.

    
                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                  -------------------------------------------
    $(000's)                         2008       2007       2008       2007
    -------------------------------------------------------------------------
    G & A expense                 $   1,452  $     500  $   2,114  $   1,078
    Per Unit of Production
     ($/boe)                      $    6.77  $    5.53  $    4.31  $    5.41
    -------------------------------------------------------------------------

    Interest Expense

    Interest expense for the second quarter was $757,000 compared to $125,000
in 2007. For the six months ended June 30, 2008 interest expense were
$1,501,000 compared to $214,000 in 2007. The increase in interest expense was
a result of increased bank debt in 2008 due to the Bear Ridge acquisition.

                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                  -------------------------------------------
    $(000's)                         2008       2007       2008       2007
    -------------------------------------------------------------------------
    Interest Expense ($)          $     757  $     125  $   1,501  $     214
    Per Unit of Production
     ($/boe)                      $    3.53  $    1.38  $    3.06  $    1.07
    -------------------------------------------------------------------------
    

    Depletion, Depreciation and Amortization ("DD & A")

    DD & A expense for the second quarter 2008 was $4,991,000 or $23.27 per
boe compared to $2,565,000 or $28.32 in 2007. DD & A expense for the six
months ended June 30, 2008 was $10,924,000 or $22.27 per boe compared to
$5,858,000 or $29.42 for the same time period in 2007.
    The per boe decrease in three months ended 2008 compared to the same
period in 2007 is mainly due to the proved reserves developed through the
Company's capital projects and the Bear Ridge acquisition.
    The depletion rate is impacted by the costs to acquire, explore and
develop reserves of crude oil and natural gas, known as finding, development
and acquisition costs. In the early stages of exploration, capital costs may
be recognized before proved reserves are fully booked leading to higher
initial depletion rates. In addition higher depletion rates also result as new
production often receives lower reserves assignments under National Instrument
51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101") due to
the naturally unpredictable nature of newer production.

    Asset Retirement Obligations

    The Company developed four new assets subject to asset retirement
obligations during the second quarter of 2008, and eleven new assets for the
six months ended June 30, 2008. $64,000 was recognized as an accretion expense
for the second quarter of 2008, and $134,000 for the six months ended June 30,
2008. For the six months period in 2007, the Company acquired ten new assets
subject to asset retirement obligations. The Company recognized accretion
expense of $14,000 for the second quarter of 2007 and $28,000 for the six
months ended June 30, 2007. Total asset retirement obligations recognized at
June 30, 2008 is $4,275,000.

    Stock Based Compensation

    The Company recognizes stock based compensation expense for all stock
options granted. For the three and six months ended June 30, 2008, Sabretooth
recorded $216,000 (2007 - $76,000) and $550,000 (2007 - $145,000) respectively
in stock based compensation expense, with a corresponding increase to
contributed surplus, for stock options granted.

    Common Shares Outstanding

    The number of common voting shares outstanding increased by 48,000 during
the second quarter of 2008.
    In the first quarter of 2008 the Company granted 195,000 stock options
exercisable into voting common shares of the Company. These options vest 25%
the first, second, third and fourth anniversaries of grant and have a weighted
average exercise price of $2.66 per share.
    In the first quarter of 2008, 229,000 vested options were repurchased for
approximately $104,000. The amount paid to repurchase the options was charged
to contributed surplus.
    In the second quarter of 2008 the Company granted 500,000 stock options
exercisable into voting common shares of the Company. These options vest 25%
the first, second, third and fourth anniversaries of grant and have a weighted
average exercise price of $2.28 per share.
    In the second quarter of 2008, 48,000 vested options were exercised for
approximately $100,000. The amount paid to exercise the options was credited
to share capital. $15,000 was charged to contributed surplus related to the
stock based compensation recognized for the above options in previous periods;
the same amount was credited to share capital.

    Income Taxes

    The Company has non-capital loss carry-forwards, investment tax credit
carry-forwards, and Scientific Research and Development expenses available to
reduce future years' income for tax purposes. The Scientific Research and
Development expenses of approximately $22,704,000 available for carry-forward
do not expire. The non-capital loss and investment tax credit carry-forwards
expire as follows:
    
       Year of expiry          Non-capital losses   Investment tax credits
                                   $(000's)               $(000's)
    -------------------------------------------------------------------------
           2010                   $       -             $     930
           2011                           -                 1,280
           2012                           -                   672
           2013                           -                   761
           2014                           -                   338
           2025                       6,168                     -
                              -----------------------------------------------
                                  $   6,168             $   3,981
                              -----------------------------------------------
    
    In addition, the Company has UCC pools of approximately $38,000,000,
COGPE pools of approximately $20,000,000, CEE pools of approximately
$38,000,000, CDE pools of approximately $10,000,000, and share issuance costs
of approximately $4,000,000 which can be used to reduce taxable income in the
future.
    As at June 30, 2008, $7,993,000 has been recognized as a future income
tax asset as the Company believes, based on estimated cash flows from existing
reserves, that it is more likely than not to realize these assets.

    
    Capital Expenditures

                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                    ------------------     -----------------
    $(000's)                         2008       2007       2008       2007
    -------------------------------------------------------------------------
    Land acquisition costs        $   2,889  $     172  $   5,272  $   2,337
    Geological & geophysical             33        634        288      1,557
    Drilling, completions &
     workovers                        4,788      3,262     12,681     11,890
    Tangible equipment                1,103      1,842      2,539      3,921
    Capitalized overhead                673        232      1,309        393
    Office furniture & equipment         36          -         37          -
    -------------------------------------------------------------------------
    Total capital expenditures    $   9,522  $   6,142  $  22,126  $  20,098
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Liquidity and Capital Resources

    The Company has established three credit facilities with a Canadian
chartered bank. Credit Facility A is a $55,000,000 revolving operating demand
loan which bears interest at the bank prime rate plus 0% to 1.5%, depending on
the Company's debt to cash flow ratio. Credit Facility B is a $5,000,000
non-revolving acquisition/development demand loan, which bears interest at the
bank prime rate plus 0.50%. Credit Facility C is a Revolving Demand Credit
Agreement in the face amount of $18,000,000 which bears interest at the bank
prime rate and will be required to be repaid in full upon the liquidation or
refinancing of the Company's Asset Backed Commercial Paper ("ABCP") holdings.
All credit facilities are subject to periodic review by the bank and are
secured by a general assignment of book debts and a $100,000,000 demand
debenture with a first floating charge over all assets of the Company as well
a hypothecation/pledge of ABCP. The Company is authorized to access the credit
facilities with prior approval of the Board of Directors of the Company (the
"Board"). The Company is required to meet certain financial based covenants
under the terms of these facilities. As at June 30, 2008, the Company has
drawn $39,566,000 on Facility A, $ Nil on Facility B, and $18,000,000 on
Facility C. The effective interest rate for the period ended June 30, 2008 was
5.74% (2007 - 5.40%). In the second quarter of 2008, the Company had exceeded
a bank covenant which the bank has waived. The waived covenant states that the
Company should not hedge more than 70% of its production under the lending
agreement. For the three month period ended June 30, 2008, the Company had
hedged approximately 81% of its production.
    The Company holds ABCP that is valued at $18,003,000 at June 30, 2008. As
at June 30, 2008, the Company held Canadian third party ABCP with an original
cost of $24,147,000. At the dates the Company acquired these investments, they
were rated R1 (High) and backed by R1 (High) rated assets and liquidity
agreements. These investments matured during the third quarter of 2007 but, as
a result of the liquidity issues in the ABCP market, did not settle on
maturity.  As a result the Company has classified its ABCP as long-term
investments.
    On August 16, 2007 an announcement was made by a group representing
banks, asset providers and major investors that they had agreed in principle
to a long-term proposal and interim agreement to convert the ABCP's into
long-term floating rate notes maturing no earlier than the scheduled maturity
of the underlying assets. On September 6, 2007, a Pan-Canadian restructuring
committee consisting of major investors was formed. The committee was created
to propose a solution to the liquidity problem affecting the ABCP and has
retained legal and financial advisors to oversee the proposed restructuring
process. On March 17, 2008, a court order was obtained through which a
restructuring of the ABCP is expected to occur.  A meeting of note holders
occurred on April 25, 2008 and the restructuring plan was approved.
    The ABCP in which the Company has invested has not traded in an active
market since mid-August 2007 and there are currently no market quotations
available.
    The valuation technique used by the Company to estimate the fair value of
its investments in ABCP incorporates probability-weighted discounted cash
flows considering the best available public information regarding market
conditions and other factors that a market participant would consider for such
investments. Probability-weighted discount rates of approximately 7.10% and
12.90% were used at June 30, 2008 for the senior AA and subordinated notes
respectively for this estimate and an interest rate of 2.7% was used. This
evaluation resulted in a reduction of $6,144,000 to the original cost of the
ABCP at June 30, 2008. The assumptions used in determining the estimated fair
value reflect the public statements made by the Pan-Canadian restructuring
committee that it expects the ABCP will be converted into senior AA rated and
subordinated unrated long-term floating rate notes with maturities matching
the maturities of the underlying assets and bearing market interest rates
commensurate with the nature of the underlying assets and their associated
cash flows and the credit rating and risk associated with the long-term
floating rate notes. The Company estimates that it will receive 87% of the
senior AA rated notes (Class A-1 and A-2) and 13% of the subordinated unrated
notes (Class B and C). Assumptions have been made as to the long-term interest
rates to be received from the long-term floating rate notes. The term of the
notes is estimated to be approximately 7 years which approximates the maturity
of the assets backing the note. Based on these assumptions, a write-down of
$5,932,000 from the estimated fair value at December 31, 2007 was recognized
during the period ended June 30, 2008.
    The original ABCP in which the Company has invested has an interest rate
of 4.52%. At June 30, 2008 there is $697,000 of interest owing to the Company
after impairment allowance. If the restructuring is successful, interest will
be paid out. A 36% impairment has been used to value the interest receivable.
    Continuing uncertainties regarding the value of the assets which underlie
the ABCP, the amount and timing of cash flows and the outcome of the
restructuring process could give rise to a further change in the value of the
Company's investment in ABCP which would impact the Company's earnings. It is
reasonably possible, based on existing knowledge, that change in future
conditions in the near term could require a material change in the recognized
amount. The reduction from the face value could range from $9,000,000 to
$5,900,000 based on alternative reasonable assumptions, although given the
nature of the information available, the amount ultimately recovered could
vary outside these ranges.
    On June 24, 2008 the Company's bank provided an additional credit
facility to provide liquidity in respect to the ABCP. The Company will receive
Restructuring Notes in exchange for the affected ABCP not backed by ineligible
assets. The credit facility is structured as follows:
    Tranche A: $10,910,339 revolving credit facility, which represents an
amount equal to approximately 45% of the face value of the Restructuring
Notes.
    Tranche B: $7,273,559 revolving credit facility, which represents an
amount equal to approximately 30% of the face value of the Restructuring
Notes.
    The borrowings under the credit facility will be first allocated to
Tranche A and the balance will be allocated to Tranche B. The term is for
three years with an option to extend the term to seven years on a year by year
basis if agreed to by both parties. Interest is payable at the bank prime rate
less 1%. The credit facility is secured by the Restructuring Notes and
guarantees. The credit facility also provides for a put option allowing the
Company to assign to the bank the Restructuring Notes in payment of the
capital under Tranche A. The credit facility will become effective once the
final approval and implementation of the restructuring plan is complete.

    Contractual Obligations

    Sabretooth is committed to various contractual obligations and
commitments in the normal course of operations and financing activities. These
are outlined as follows:

    
    1)  Office Leases - The minimum annual net lease payments, exclusive of
        operating costs are as follows:

                      2008        $  83,000
                      2009          165,000
                      2010          169,000
                      2011          143,000
                      2012          143,000
                      Thereafter        nil
                                 -----------
                                  $ 703,000
                                 -----------

    2)  Asset Retirement Obligations - Sabretooth is the owner of oil and
        natural gas wells and related surface equipments and facilities.
        These assets will have to be abandoned and the surface returned to
        its natural state. As at June 30, 2008, total estimated undiscounted
        future cash flows required to settle these obligations is
        approximately $12,505,000 which is exclusive of salvage values and
        adjusted for expected inflation. This estimate is subject to change
        based on amendments to environmental laws and as new information with
        respect to the Company's operations become available. Sabretooth
        estimates that the salvage value of its field equipments would offset
        a portion of its estimated future asset retirement obligations.
        Sabretooth does not expect to incur significant asset retirement cost
        obligations within the next five years.

    3)  Flow-through Qualifying Expenditures - Sabretooth assumed obligations
        related to the Bear Ridge acquisition from issuance of flow-through
        common shares to incur approximately $24,000,000 of qualifying
        expenditures before December 31, 2008 and $12,300,000 before
        March 31, 2009. Approximately $22,456,000 of qualifying expenditures
        has been incurred to June 30, 2008. The Company also has 1,050,000
        CDE warrants which are exercisable at a price of $3.81 and expire
        March 31, 2009. If they are exercised the Company would have an
        obligation to spend $4,000,000 of CDE expenditures.

    Outstanding Share Data

    As of the date of this MD & A, Sabretooth had the following securities
outstanding:

    1)  39,114,000 common voting shares;
    2)  3,306,000 stock options; and
    3)  1,050,000 warrants.

    Quarterly Information

    Financial                              2008                  2007
    -------------------------------------------------------------------------
    ($ thousands except per share
     data)                            Q2         Q1         Q4         Q3
    -------------------------------------------------------------------------
    Production Revenues (including
     gains (losses) on financial
     commodity contract)          $   8,513  $   6,160  $  12,888  $   8,547
    Royalties                         1,350      2,072      2,246      1,454
    Operating expenses                2,782      3,163      3,647      1,955
    Transportation expenses             329        346        521        244
    Net income (loss)                (2,486)   (10,819)       217       (497)
    Per Share - basic                 (0.06)     (0.28)      0.01      (0.02)
    Per share - diluted               (0.06)     (0.28)      0.01      (0.02)
    Funds flow                        6,339      7,733      5,985      3,875
    Per Share - basic                  0.16       0.19       0.15       0.14
    Per share - diluted                0.16       0.19       0.15       0.13
    Capital  expenditures, net    $   9,522     12,604     12,013      4,112
    Acquisition expenditures, net         -          -          -     24,752
    -------------------------------------------------------------------------
    Total expenditures            $   9,522  $  12,604  $  12,013  $  28,864
    -------------------------------------------------------------------------


    Financial                              2007                  2006
    -------------------------------------------------------------------------
    ($ thousands except per share
     data)                            Q2         Q1         Q4         Q3
    -------------------------------------------------------------------------
    Production Revenues (including
     gains (losses) on financial
     commodity contract)          $   5,150  $   4,686  $   5,369  $   7,485
    Royalties                           578        994      1,290      1,249
    Operating expenses                1,186        982        944        965
    Transportation expenses             140        173        198        223
    Net income (loss)                   141      3,914       (646)       699
    Per Share - basic                  0.01       0.19      (0.03)      0.04
    Per share - diluted                0.01       0.18      (0.03)      0.04
    Funds flow                        2,177      2,487      3,095      3,192
    Per Share - basic                  0.11       0.12       0.16       0.17
    Per share - diluted                0.10       0.12       0.15       0.17
    Capital  expenditures, net    $   6,142     13,956     12,281      8,633
    Acquisition expenditures, net         -          -          -          -
    -------------------------------------------------------------------------
    Total expenditures            $   6,142  $  13,956  $  12,281  $   8,633
    -------------------------------------------------------------------------



    Operations                             2008                  2007
    -------------------------------------------------------------------------

                                      Q2         Q1         Q4         Q3
    -------------------------------------------------------------------------
    Production Volumes
    Natural gas (mcf/day)            12,422     15,773     17,303     10,813
    Oil (bbl/day)                       179        278        325        165
    NGLs (bbl/day)                      107        125        171         36
    Total boe/day                     2,357      3,032      3,380      2,003
    -------------------------------------------------------------------------
    Average selling price
    Natural gas ($/per mcf)       $    8.91  $    7.63  $    6.84  $    7.12
    Oil ($/per bbl)                  125.19      87.57      76.55      80.61
    NGLs ($/per bbl)                 113.55      86.02      75.81      75.89
    -------------------------------------------------------------------------
    Combined ($per boe)           $   61.67  $   51.25  $   46.21  $   46.91
    Royalties ($per boe)               6.29       7.51       7.22       7.89
    Operation expense ($per boe)      12.97      11.46      11.73      10.61
    Transportation ($per boe)          1.53       1.25       1.68       1.32
    -------------------------------------------------------------------------
    Netback ($per boe)            $   40.88  $   31.03  $   25.58  $   27.09
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Operations                             2007                  2006
    -------------------------------------------------------------------------

                                      Q2         Q1         Q4         Q3
    -------------------------------------------------------------------------
    Production Volumes
    Natural gas (mcf/day)             5,140      6,429      8,308      9,418
    Oil (bbl/day)                       114        103         49         10
    NGLs (bbl/day)                       24         32         21         80
    Total boe/day                       995      1,206      1,454      1,659
    -------------------------------------------------------------------------
    Average selling price
    Natural gas ($/per mcf)       $    7.47  $    7.80  $    7.09  $    5.90
    Oil ($/per bbl)                   63.55      66.14      60.42      69.71
    NGLs ($/per bbl)                  65.86      57.67      67.11      65.71
    -------------------------------------------------------------------------
    Combined ($per boe)           $   49.84  $   48.75  $   43.96  $   39.29
    Royalties ($per boe)               6.38       9.16       9.64       8.18
    Operation expense ($per boe)      13.09       9.05       7.07       6.32
    Transportation ($per boe)          1.54       1.60       1.48       1.46
    -------------------------------------------------------------------------
    Netback ($per boe)            $   28.83  $   28.94  $   25.77  $   23.33
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Financial instruments and risk management

    The Company has the following financial instruments:
    Cash and cash equivalents are designated as held-for-trading instruments
and are measured at fair value. Investment in commercial paper is designated
as held-for-trading and is measured at fair value with changes in fair value
recognized in earnings. Accounts receivable and deposits are designated as
loans and receivables and are measured at amortized cost. Accounts payable and
accrued liabilities and bank indebtedness are designated as other financial
liabilities and are measured at amortized cost. All risk management assets and
liabilities are derivative financial instruments and classified as
held-for-trading.
    The Company uses various types of derivative financial instruments to
manage risks associated with natural gas price fluctuations. These instruments
are not used for trading or speculative purposes. Proceeds and costs realized
from holding the related contracts are recognized at the time each transaction
under a contract is settled. For the unrealized portion of such contracts, the
Company utilizes the fair value method of accounting. The fair value is based
on an estimate of the amounts that would have been paid to or received from
counter parties to settle these instruments given future market prices and
other relevant factors. The method requires the fair value of the derivative
financial instruments to be recorded at each balance sheet date with
unrealized gains or losses on those contracts recorded through net earnings.
    An embedded derivative is a component of a contract that affects the
terms in relation to another factor. These hybrid contracts are considered to
consist of a "host" contract plus an embedded derivative. The embedded
derivative is separated from the host contract and accounted for as a
derivative only if certain conditions are met. The Company has not identified
any embedded derivatives which require separate recognition and measurement.
    The nature of these financial instruments and its operations expose the
Company to market risk, credit risk and liquidity risk. The Company manages
its exposure to these risks by operating in a manner that minimizes these
risks. The Board of Directors has overall responsibility for the establishment
and oversight of the Company's risk management framework. The Board has
established policies in setting risk limits and controls and monitors these
risks in relation to market conditions.

    a) 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. These risks are generally
outside the control of the Company. The objective of the Company is to
mitigate market risk exposures within acceptable limits, while maximizing
returns.

    Commodity price risk
    --------------------
    The nature of the Company's operations results in exposure to
fluctuations in commodity prices. Management continuously monitors commodity
prices and initiates instruments to manage exposure to these risks when it
deems appropriate. As a means of managing commodity price volatility, the
Company enters into various derivative financial instrument agreements and
physical contracts. Collars ensure that the commodity prices realized will
fall into a contracted range for a contracted sale volume based on the monthly
index price. Monthly gains and losses are determined based on the differential
between the AECO daily index and the AECO monthly index when the monthly index
price falls in between the floor and the ceiling. Derivative financial
instruments are marked-to-market and are recorded on the consolidated balance
sheet as either an asset or liability with the change in fair value recognized
in net earnings.
    The following information presents all positions for the derivative
financial instruments outstanding as at June 30, 2008.

    
    -------------------------------------------------------------------------
                 Term                        Volume          Price     Basis
    -------------------------------------------------------------------------
    April 1, 2008 to March 31, 2009       3,000 GJ/day  $7.04           AECO
    -------------------------------------------------------------------------
    April 1, 2008 to March 31, 2009       6,000 GJ/day  $7.08           AECO
    -------------------------------------------------------------------------
    January 1, 2008 to December 31, 2008  3,150 GJ/day  $6.50 floor     AECO
                                                        $10.00 ceiling
    -------------------------------------------------------------------------
    

    Realized losses totalling $2,331,000 for the second quarter ending
June 30, 2008 from derivatives was recognized in income (June 30, 2007 -
$215,000 realized gain). For the six months ended June 30, 2008, the Company
realized losses totalling $2,411,000 (June 30, 2007 - $270,000 realized gain).
The fair value of the commodity contracts outstanding at June 30, 2008 were
$(11,855,000) (December 31, 2007 - $843,000; June 30, 2007 - $966,000).
    As at June 30, 2008, if the underlying natural gas price increased by
$0.50/mcf, the fair value of the commodity contracts becomes $(13,075,000)
resulting in an increased loss before tax of $1,220,000 ($872,000 after tax).
    As at June 30, 2008, if the underlying natural gas price decreased by
$0.50/mcf, the fair value of the commodity contracts becomes $(10,636,000)
resulting in a decreased loss before tax of $1,219,000 ($872,000 after tax).

    Foreign exchange risk
    ---------------------
    The Company is exposed to foreign currency fluctuations as crude oil and
natural gas prices are referenced to U.S. dollar denominated prices. As at
June 30, 2008 the Company had no forward, foreign exchange contracts in place,
nor any significant working capital items denominated in foreign currencies.

    Interest rate risk
    ------------------
    The Company is exposed to interest rate risk to the extent that changes
in market interest rates impact its borrowings under the floating rate credit
facilities. The floating rate debt is subject to interest rate cash flow risk,
as the required cash flows to service the debt will fluctuate as a result of
changes in market rates. The Company has no interest rate swaps or financial
contracts in place as at or during the three months ended June 30, 2008.
    As at June 30, 2008, if interest rates had been 1% lower with all other
variables held constant, after tax net earnings for the period would have been
$220,000 higher, due to lower interest expense. An equal opposite impact would
have occurred to net earnings had interest rates been 1% higher.

    b) Credit risk

    The majority of the Company's accounts receivable are due from joint
venture partners in the oil and gas industry and from purchasers of the
Company's petroleum and natural gas production and are subject to the same
industry factors such as commodity price fluctuations and escalating costs.
The Company generally extends unsecured credit to these customers and
therefore, the collection of accounts receivable may be affected by changes in
economic or other conditions. Management believes the risk is mitigated by the
size and reputation of the companies to which they extend credit. The Company
has not experienced any credit loss in the collection of accounts receivable
to date.
    The Company also has credit risk related to its investment in ABCP.
    Receivables from petroleum and natural gas marketers are normally
collected on the twenty-fifth day of the month following production.
Receivables related to the sale of the Company's petroleum and natural gas
production are from major marketing companies with investment grade credit
ratings. The Company historically 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 billings being issued to the partners. The Company
attempts to mitigate the risk from joint venture receivables by obtaining
partner approval of significant capital expenditures prior to expenditure and
issuing cash calls on large capital projects to its partners on capital
projects before they commence. The Company reviews the financial status of
joint venture partners before partner approval is obtained.

    c) 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 that it will have sufficient liquidity to meet its
liabilities when they are due. The nature of the oil and gas industry is very
capital intensive. As a result, the Company prepares annual capital
expenditure budgets and utilizes authorizations for expenditures for projects
to manage capital expenditures.

    d) Fair value of financial instruments

    The Company's cash and cash equivalents, accounts receivable, deposits,
bank indebtedness and accounts payable and accrued liabilities approximate
their carrying value due to their short terms to maturity and the floating
interest rate on the Company's debt.
    The fair value of derivative contracts is determined by discounting the
difference between the contracted price and published forward price curves as
at the balance sheet date, using the remaining contracted petroleum and
natural gas volumes.
    The fair value of the Company's investment in commercial paper is
disclosed under "Liquidity and Capital Resources".

    Off Balance Sheet Arrangements

    The Company does not presently utilize any off-balance sheet arrangements
to enhance its liquidity and capital resource positions, or for any other
purpose. During the period ended June 30, 2008, the Company did not enter into
any off-balance sheet transactions.

    Related Party Transactions

    During the period, the Company entered into commercial business
transactions with the following related parties:

    
    a)  A director of the Company is a partner of a law firm that provides
        legal services to the Company. During the six months ended June 30,
        2008, the Company paid approximately $11,000 (June 30, 2007 -
        $15,000) to this firm for legal fees and disbursements. Additionally,
        $Nil is included in accounts payable and accrued liabilities, due
        under normal credit terms, at June 30, 2008 (December 31, 2007 -
        $2,000) for this firm. These expenses have been included as general
        and administrative expense.

    b)  A director of the Company is the owner of a corporation that provides
        drilling services to the Company. During the six months ended
        June 30, 2008 the Company paid approximately $606,000 (June 30, 2007
        - $688,000) for drilling and services, which has been included in
        property and equipment. Additionally, approximately $Nil is included
        in accounts payable and accrued liabilities, due under normal credit
        terms, at June 30, 2008 (December 31, 2007 - $195,000) for this firm.
    

    These transactions have been recorded at the exchange amount, which is
the amount of consideration established and agreed to by the related parties.

    Asset Sales

    Subsequent to June 30, 2008, the Company has agreed to sell its West
Central conventional assets in Alberta and Saskatchewan as well as its
Fireweed property in North East British Columbia for an aggregate purchase
price of $22,450,000. The sale includes approximately 545 boe/d of production
and approximately 55,000 net acres of undeveloped land. The Purchase and Sale
Agreements were signed on July 25 with the West Central Package closed on
July 31 and the Fireweed Package scheduled to close on August 12, 2008.
Certain of the sale assets totalling approximately $6,700,000 are subject to
rights of first refusal, with such funds to be held in escrow until the first
rights of refusal are either waived or exercised. The applicable periods for
the rights of first refusal range from fifteen to thirty days, with Sabretooth
expecting to receive the funds shortly thereafter.
    As a result of the asset rationalization, the Company is in the process
of negotiating a revised bank line. The revised credit facility will be
approximately $58.0 million and is expected to close in the middle of August.

    Disclosure Controls and Procedures

    The Company's Chief Executive Officer and Chief Financial Officer are
responsible for establishing and maintaining the Company's disclosure controls
and procedures, including adherence to the Disclosure Policy adopted by the
Company. The Disclosure Policy requires all staff to keep the Company's Chief
Executive Officer and Chief Financial Officer fully apprised of all material
information affecting the Company so that they may evaluate and discuss this
information and determine the appropriateness and timing for public release.
Access to such material information by the Chief Executive Officer and Chief
Financial Officer is facilitated by the fact that there are so few members of
the Company's senior management and there is frequent and regular
communication among all of them.
    The Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures as of
June 30, 2008, have concluded that the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company would have been known to them. It should be noted that
while the Company's disclosure controls and procedures provide a reasonable
level of assurance that they are effective, they do not expect that the
disclosure controls and procedures or internal control over financial
reporting will prevent all errors or 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 Chief Executive Officer and Chief Financial Officer are also
responsible for designing internal controls over financial reporting or
causing them to be designed under their supervision in order to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
Canadian GAAP.
    Management has designed internal controls over financial reporting as of
June 30, 2008. The relatively small size of the Company makes the
identification and authorization process relatively efficient; however, during
the review of the design of internal controls over financial reporting it was
noted that, due to the limited number of staff at Sabretooth, it is not
feasible to achieve complete segregation of incompatible duties nor does the
Company have a sufficient number of finance personnel with all the technical
accounting knowledge to address all complex and non-routine accounting
transactions that may arise, which may lead to the possibility of inaccuracies
in financial reporting. The Company has employed knowledgeable and competent
accounting staff to ensure that high quality financial reporting and other
internal controls over financial reporting have been designed which provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements. Management and the Board of Directors
work together to mitigate the risk of a material misstatement in financial
reporting; however, 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.

    Changes in Accounting Policies and Practices and Future Accounting
    Pronouncements

    Financial Instruments - Disclosures and Presentation

    Effective January 1, 2008, the Company adopted two new Canadian Institute
of Chartered Accountants ("CICA") standards. Handbook Section 3862, Financial
Instruments - Disclosures and Handbook Section 3863, Financial Instruments -
Presentation. These Handbook sections replaced existing Handbook Section 3861,
Financial Instruments - Presentation and Disclosure. The new disclosure
standard increases the emphasis on the risks associated with both recognized
and unrecognized financial instruments and how those risks are managed.
Specifically, Section 3862 requires disclosure of the significance of
financial instruments on the Company's financial position. In addition, the
guidance outlines revised requirements for the disclosure of qualitative and
quantitative information regarding exposure to risks arising from financial
instruments. The new presentation standard carries forward the former
presentation requirements.

    Capital Disclosures

    Effective January 1, 2008, the Company adopted Handbook Section 1535,
Capital Disclosures which requires companies to disclose their objectives,
policies and processes for managing capital, the nature of externally imposed
capital requirements, how the requirements are incorporated into the Company's
management of capital, whether the requirements have been complied with, or
consequence of noncompliance and an explanation of how the Company is meeting
its objectives for managing capital. In addition, quantitative disclosures
regarding capital are required.
    In addition, the Company has assessed new and revised accounting
pronouncements that have been issued that are not yet effective and determined
that the following may have a significant impact on the Company:

    Goodwill and Intangible Assets

    As of January 1, 2009, the Company will be required to adopt CICA
Handbook Section 3064, Goodwill and Intangible Assets, which will replace
Handbook Section 3062. This new guidance reinforces a principles-based
approach to the recognition of costs as assets in accordance with the
definition of an asset and the criteria for asset recognition under Handbook
Section 1000, Financial Statement Concepts. Section 3064 clarifies the
application of the concept of matching revenues and expenses in Section 1000
to eliminate the current practice of recognizing as asset items that do not
meet the definition and recognition criteria. Under this new guidance, fewer
items meet the criteria for capitalization. The Company is currently
determining the impact of this standard.

    International Financial Reporting Standards

    In January 2006, the CICA Accounting Standards Board adopted a strategic
plan for the direction of accounting standards in Canada. As part of the plan,
accounting standards in Canada for public companies will converge with
International Financial Reporting Standards ("IFRS") on January 1, 2011. The
Company continues to monitor and assess the impact of the convergence of
Canadian GAAP and IFRS.

    Application of Critical Accounting Estimates

    The significant accounting policies used by Sabretooth are disclosed in
note 2 to the Financial Statements for the period ended June 30, 2008 and
notes 3 and 4 to the Annual Financial Statements for the year ended
December 31, 2007. Certain accounting policies require that management make
appropriate decisions with respect to the formulation of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Management reviews its estimates on a regular basis. The
emergence of new information and changed circumstance may result in actual
results or changes to estimate amounts that differ materially from current
estimates. The following discussion identifies the critical accounting
policies and practices of the Company and helps assess the likelihood of
materially different results being reported.

    Reserves

    Under the NI 51-101, "Proved" reserves are defined as those reserves that
can be estimated with a high degree of certainty to be recoverable. The level
of certainty should result in at least a 90% probability that the quantities
actually recovered will equal or exceed the estimated Proved reserves. It does
not mean that there is a 90% probability that the Proved reserves will be
recovered; it means that there must be at least a 90% probability that the
given amount or more will be recovered. "Proved plus Probable" reserves are
the most likely case and are based on a 50% certainty that they will equal or
exceed the reserves estimated.
    These oil and gas reserve estimates are made using all available
geological and reservoir data, as well as historical production data. All of
the Company's reserves were evaluated and reported on by an independent
qualified reserves evaluator. However, revisions can occur as a result of
various factors including: actual reservoir performance, change in price and
cost forecasts or a change in the Company's plans. Reserve changes will impact
the financial results as reserves are used in the calculation of depletion and
are used to assess whether asset impairment occurs. Reserve changes also
affect other non-GAAP measurements such as finding and development costs;
recycle ratios and net asset value calculations.

    Depletion

    The Company follows the full cost method of accounting for oil and
natural gas properties. Under this method, all costs related to the
acquisition of, exploration for, and development of oil and natural gas
reserves are capitalized whether successful or not. Depletion of the
capitalized oil and natural gas properties and depreciation of production
equipment which includes estimated future development costs less estimated
salvage values are calculated using the unit-of-production method, based on
production volumes in relation to estimated proved reserves.
    An increase in estimated proved reserves would result in a reduction in
depletion expense. A decrease in estimated future development costs would also
result in a reduction in depletion expense.

    Unproved Properties

    The cost of acquisition and evaluation of unproved properties are
initially excluded from the depletion calculation. An impairment test is
performed on these assets to determine whether the carrying value exceeds the
fair value. Any excess in carrying value over fair value is impairment. When
proved reserves are assigned or a property is considered to be impaired, the
cost of the property or the amount of the impairment will be added to the
capitalized costs for the calculation of depletion.

    Ceiling Test

    The ceiling test is a cost recovery test intended to identify and measure
potential impairment of assets. An impairment loss is recorded if the sum of
the undiscounted cash flows expected from the production of the proved
reserves and the lower of cost and market of unproved properties does not
exceed the carrying values of the petroleum and natural gas assets. An
impairment loss is recognized to the extent that the carrying value exceeds
the sum of the discounted cash flows expected from the production of proved
and probable reserves and the lower of cost and market of unproved properties.
The cash flows are estimated using the future product prices and costs and are
discounted using the risk free rate. By their nature, these estimates are
subject to measurement uncertainty and the impact on the financial statements
could be material. Any impairment as a result of this ceiling test will be
charged to operation as additional depletion and depreciation expense.

    Asset Retirement Obligations

    The Company records a liability for the fair value of legal obligations
associated with the retirement of petroleum and natural gas assets. The
liability is equal to the discounted fair value of the obligation in the
period in which the asset is recorded with an equal offset to the carrying
amount of the asset. The liability then accretes to its fair value with the
passage of time and the accretion is recognized as an expense in the financial
statements. The total amount of the asset retirement obligation is an estimate
based on the Company's net ownership interest in all wells and facilities, the
estimated costs to abandon and reclaim the wells and facilities and the
estimated timing of the costs to be incurred in future periods. The total
amount of the estimated cash flows required to settle the asset retirement
obligation, the timing of those cash flows and the discount rate used to
calculate the present value of those cash flows are all estimates subject to
measurement uncertainty. Any change in these estimates would impact the asset
retirement liability and the accretion expense.

    Stock Based Compensation

    The Company uses fair value accounting for stock-based compensation.
Under this method, all equity instruments awarded to employees and the cost of
the service received as considerations are measured and recognized based on
the fair value of the equity instruments issued. Compensation expense is
recognized over the period of related employee service, usually the vesting
period of the equity instrument awarded.

    Income Taxes

    The determination of income and other tax liabilities requires
interpretation of complex laws and regulations. All tax filings are subject to
audit and potential reassessment after the lapse of considerable time.
Accordingly, the actual income tax liability may differ significantly from
that estimated and recorded by management.

    Acquisition of Bear Ridge Resources Ltd.

    Management makes various assumptions in determining the fair values of
any acquired company's assets and liabilities in a business combination. The
most significant assumptions and judgments made relate to the estimation of
the fair value of Sabretooth's shares issued in the transaction and the fair
value of the oil and natural gas properties acquired. To determine the fair
value of the oil and gas properties we estimated oil and natural gas reserves
and future prices of oil and natural gas.

    ABCP

    See "Liquidity and Capital Resources" section for an in-depth discussion
of the estimates used to value the ABCP held by the Company.

    Other Estimates

    The accrual method of accounting requires management to incorporate
certain estimates including estimates of revenues, royalties, and operating
costs as at a specific reporting date, but for which actual revenues and costs
have not yet been received. In addition, estimates are made on capital
projects which are in progress or recently completed where actual costs have
not been received by the reporting date. The Company obtains the estimates
from the individuals with the most knowledge of the activities and from all
project documentations received. The estimates are reviewed for reasonableness
and compared to past performance to assess the reliability of the estimates.
Past estimates are compared to actual results in order to make informed
decisions on future estimates.

    Risks and Uncertainties

    The Company is engaged in the exploration, development, production and
acquisition of crude oil and natural gas. This business is inherently risky
and there is no assurance that hydrocarbon reserves will be discovered and
economically produced. Financial risks associated with the petroleum industry
include fluctuations in commodity prices, interest rates, and currency
exchange rates along with the credit risk of the Company's industry partners.
Operational risks include reservoir performance uncertainties, the reliance on
operators of our non-operated properties, competition, environmental and
safety issues, and a complex and changing regulatory environment. Sabretooth
is taking steps to reduce its business risks by increasing the number of core
areas it has and increasing the number of areas it operates. This will spread
the operational risks over several areas, reducing the potential impact on
Sabretooth of unfavourable operational issues that may occur at any one area.
It will also enable Sabretooth to control the timing, direction and costs
related to exploration and development activities.
    Environmental and safety risks are mitigated through compliance with
provincial and federal environmental and safety regulations, by maintaining
adequate insurance, and by adopting appropriate emergency response and safety
procedures. The Company manages commodity pricing uncertainties with a risk
management program that encompasses a variety of financial instruments. These
include forward sales contracts on natural gas production and financial sales
contracts.

    Outlook

    Sabretooth's current production is approximately 1,900 boe/d post asset
divestiture.
    Approximately $21 million has been spent on the Company's capital
programs as of June 30, 2008. Future expenditures are expected to be funded by
bank debt and cash flow. A substantial amount of the Company's spending is
discretionary in nature. The Company generally has a high working interest and
operational control of its major properties. Therefore, timing of expenditures
can be matched to financial resources.
    The Company has access to credit facilities of $78 million subject to
periodic review. As at August 1, 2008, the Company has drawn approximately
$62 million on its operating line of credit, excluding any bank overdraft, and
holds asset backed commercial paper with a face value of approximately
$24.2 million.
    At August 1, 2008 the marked-to-market value of the Company's financial
instruments was $2.9 million unrealized loss. The marked-to-market value at
June 30, 2008 was $11.9 million unrealized loss. The $9.0 million difference
is due to the change in future market AECO price in Canada.



    
                           Sabretooth Energy Ltd.
                  Interim Consolidated Financial Statements
                                June 30, 2008
                                 (Unaudited)



    Sabretooth Energy Ltd.
    Consolidated Balance Sheets
    (expressed in thousands of Canadian dollars)
    (Unaudited)
                                                          June 30,  December
                                                             2008   31, 2007
    -------------------------------------------------------------------------
    Assets
      Current Assets
      Cash and cash equivalents                         $       -  $       -
      Accounts receivable                                   8,247      9,175
      Deposits and prepaid expenses                         1,488      1,920
      Commodity contracts (note 11)                             -        843
                                                       ----------------------
                                                            9,735     11,938

    Investment in commercial paper (note 3)                18,003     23,238
    Property and equipment (note 4)                       140,085    128,563
    Future income taxes                                     7,993      5,871
                                                       ----------------------

                                                        $ 175,816  $ 169,610
                                                       ----------------------
                                                       ----------------------

    Liabilities and Shareholders' Equity
      Current Liabilities
      Bank indebtedness (note 5)                        $  61,925  $  46,256
      Accounts payables and accrued liabilities             8,852     17,126
      Commodity contracts (note 11)                        11,855          -
                                                       ----------------------
                                                           82,632     63,382

    Asset retirement obligations (note 6)                   4,275      4,560
                                                       ----------------------
                                                           86,907     67,942
                                                       ----------------------

    Shareholders' Equity
    Share capital (note 7)                                195,109    194,994
    Warrants (note 7 (c))                                     598        598
    Contributed surplus (note 7 (g))                        3,151      2,720
    Deficit                                              (109,949)   (96,644)
                                                       ----------------------
                                                           88,909    101,668
                                                       ----------------------

                                                        $ 175,816  $ 169,610
                                                       ----------------------
                                                       ----------------------

    Contingency (note 9)
    Commitments (note 10)

    The accompanying notes are an integral part of these unaudited interim
    consolidated financial statements.

    (signed)                          (signed)

    -------------------               ----------------
    G. Marshall Abbott                Vincent Chahley
    Director                          Director



    Sabretooth Energy Ltd.
    Consolidated Statements of Operations, Comprehensive Income (Loss) and
    Deficit
    (expressed in thousands of Canadian dollars except per share amounts)
    (Unaudited)

                                    Three months ended     Six months ended
                                         June 30,              June 30,
                                    ------------------     -----------------
                                     2008       2007       2008       2007
    -------------------------------------------------------------------------
    Revenues
      Production revenue          $  15,559  $   4,299  $  29,782  $   9,537
      Royalties                      (1,350)      (578)    (3,422)    (1,572)
      Realized gain (loss) on
       hedge contracts (note 11)     (2,331)       215     (2,411)       270
      Unrealized gain (loss) on
       hedge contracts (note 11)     (4,715)       634    (12,698)        17
      Interest on commercial paper        -          -        697          -
      Interest and other income           -          2          -         12
                                 --------------------------------------------
                                      7,163      4,572     11,948      8,264
                                 --------------------------------------------
    Expenses
      Operating costs                 2,782      1,186      5,945      2,168
      Transportation                    329        140        675        313
      General and administrative      1,452        500      2,114      1,078
      Depletion, depreciation,
       and amortization               4,991      2,565     10,924      5,858
      Accretion expense                  64         14        134         28
      Interest                          757        125      1,501        214
      Stock-based compensation
       (note 7 (e))                     216         76        550        145
      Write-down on investment in
       commercial paper (note 3)          -          -      5,932          -
                                 --------------------------------------------
                                     10,591      4,606     27,775      9,804
                                 --------------------------------------------
    Income (loss) before income
     taxes                           (3,428)       (34)   (15,827)    (1,540)
                                 --------------------------------------------
    Income taxes (recovery)
      Current                             -       (190)         -       (190)
      Future                           (942)        15     (2,522)    (5,405)
                                 --------------------------------------------
                                       (942)      (175)    (2,522)    (5,595)
                                 --------------------------------------------

    Net Income (Loss) and
     Comprehensive Income (Loss)     (2,486)       141    (13,305)     4,055

    Deficit, beginning of period   (107,463)   (96,505)   (96,644)  (100,419)
                                 --------------------------------------------

    Deficit, end of period        $(109,949) $ (96,364) $(109,949) $ (96,364)
                                 --------------------------------------------
    Net income (loss) per share
     (note 7 (f))

    Basic                         $   (0.06) $    0.01  $   (0.34) $    0.20
                                 --------------------------------------------

    Diluted                       $   (0.06) $    0.01  $   (0.34) $    0.19
                                 --------------------------------------------

    The accompanying notes are an integral part of these unaudited interim
    consolidated financial statements.



    Sabretooth Energy Ltd.
    Consolidated Statements of Cash Flows
    (expressed in thousands of Canadian dollars)
    (Unaudited)
    -------------------------------------------------------------------------

                                    Three months ended      Six months ended
                                           June 30,               June 30,
                                   --------------------  --------------------
                                       2008       2007       2008       2007
    Cash flows from (used in)

    Operating activities
    Net income (loss) for the
     period                        $ (2,486)  $    141   $(13,305)  $  4,055
    Items not affecting cash
      Depletion, depreciation,
       and amortization               4,991      2,565     10,924      5,858
      Accretion expense                  64         14        134         28
      Stock-based compensation          216         76        550        145
      Write-down on investment
       in commercial paper
       (note 3)                           -          -      5,932          -
      Unrealized loss (gain) on
       hedge contracts (note 11)      4,715       (634)    12,698        (17)
      Future income taxes              (942)        15     (2,522)    (5,405)
    Asset retirement expenditures      (219)         -       (339)         -
                                   ------------------------------------------
                                      6,339      2,177     14,072      4,664
      Net change in non-cash
       working capital (note 12)     (1,085)    (2,670)    (4,124)    (1,927)
                                   ------------------------------------------
    Cash from (used in) operating
     activities                       5,254       (493)     9,948      2,737
                                   ------------------------------------------
    Investing activities
      Property and equipment
       expenditures                  (9,522)    (6,142)   (22,126)   (20,098)
      Net change in non-cash
       working capital (note 12)     (2,245)     2,395     (3,487)    (1,375)
                                   ------------------------------------------
    Cash used in investing
     activities                     (11,767)    (3,747)   (25,613)   (21,473)
                                   ------------------------------------------

    Financing activities
      Exercise of options for
       common shares (note 7 (d))       100          -        100          -
      Repurchase of stock options
       (note 7 (d))                       -          -       (104)         -
      Proceeds from bank
       indebtedness                   6,413          -     15,669          -
                                   ------------------------------------------
    Cash from financing activities    6,513          -     15,665          -
                                   ------------------------------------------

      Decrease in cash and cash
       equivalents                        -     (4,240)         -    (18,736)
      Cash and cash equivalents,
       beginning of period                -    (10,153)         -      4,343
                                   ------------------------------------------
    Cash and cash equivalents,
     end of period                        -   $(14,393)         -   $(14,393)
                                   ------------------------------------------


    Supplemental cash flows
     disclosure:
      Interest paid                $    757   $     70   $  1,501   $    159
                                   ------------------------------------------
      Income taxes paid
       (recovered)                 $      -   $   (190)  $      -   $   (190)
                                   ------------------------------------------

    The accompanying notes are an integral part of these unaudited interim
    consolidated financial statements.



    Sabretooth Energy Ltd.
    Notes to Unaudited Consolidated Financial Statements
    Six months ended June 30, 2008
    (Unaudited)
    -------------------------------------------------------------------------

    1.  Interim Financial Statements - Basis of Presentation

        The interim consolidated financial statements of Sabretooth Energy
        Ltd. (the "Company") have been prepared by management in accordance
        with Canadian generally accepted accounting principles and follow the
        same accounting policies as the most recent audited annual
        consolidated financial statements, except as noted below. The interim
        consolidated financial statements should be read in conjunction with
        the audited consolidated financial statements and notes thereto for
        the year ended December 31, 2007.

    2.  Changes in Accounting Policies and Practices and Future Accounting
        Pronouncements

        Financial Instruments - Disclosures and Presentation

        Effective January 1, 2008, the Company adopted two new Canadian
        Institute of Chartered Accountants ("CICA") standards. Handbook
        Section 3862, Financial Instruments - Disclosures and Handbook
        Section 3863, Financial Instruments - Presentation. These Handbook
        sections replaced existing Handbook Section 3861, Financial
        Instruments - Presentation and Disclosure. The new disclosure
        standard increases the emphasis on the risks associated with both
        recognized and unrecognized financial instruments and how those risks
        are managed. Specifically, Section 3862 requires disclosure of the
        significance of financial instruments on the Company's financial
        position. In addition, the guidance outlines revised requirements for
        the disclosure of qualitative and quantitative information regarding
        exposure to risks arising from financial instruments. Refer to
        Note 11, "Financial Instruments and Risk Management" for the
        additional disclosures under Section 3862. The new presentation
        standard carries forward the former presentation requirements.

        Capital Disclosures

        Effective January 1, 2008, the Company adopted Handbook Section 1535,
        Capital Disclosures which requires companies to disclose their
        objectives, policies and processes for managing capital, the nature
        of externally imposed capital requirements, how the requirements are
        incorporated into the Company's management of capital, whether the
        requirements have been complied with, or consequence of noncompliance
        and an explanation of how the Company is meeting its objectives for
        managing capital. In addition, quantitative disclosures regarding
        capital are required. Refer to Note 13, "Capital Management".

        In addition, the Company has assessed new and revised accounting
        pronouncements that have been issued that are not yet effective and
        determined that the following may have a significant impact on the
        Company:

        Goodwill and Intangible Assets

        As of January 1, 2009, the Company will be required to adopt CICA
        Handbook Section 3064, Goodwill and Intangible Assets, which will
        replace Handbook Section 3062. This new guidance reinforces a
        principles-based approach to the recognition of costs as assets in
        accordance with the definition of an asset and the criteria for asset
        recognition under Handbook Section 1000, Financial Statement
        Concepts. Section 3064 clarifies the application of the concept of
        matching revenues and expenses in Section 1000 to eliminate the
        current practice of recognizing as asset items that do not meet the
        definition and recognition criteria. Under this new guidance, fewer
        items meet the criteria for capitalization. The Company is currently
        determining the impact of this standard.

        International Financial Reporting Standards

        In January 2006, the CICA Accounting Standards Board adopted a
        strategic plan for the direction of accounting standards in Canada.
        As part of the plan, accounting standards in Canada for public
        companies will converge with International Financial Reporting
        Standards ("IFRS") on January 1, 2011. The Company continues to
        monitor and assess the impact of the convergence of Canadian GAAP and
        IFRS.

    3.  Investment in Commercial Paper

        The Company holds Asset Backed Commercial Paper ("ABCP") that is
        valued at $18,003,000 at June 30, 2008. As at June 30, 2008, the
        Company held Canadian third party ABCP with an original cost of
        $24,147,000. At the dates the Company acquired these investments,
        they were rated R1 (High) and backed by R1 (High) rated assets and
        liquidity agreements. These investments matured during the third
        quarter of 2007 but, as a result of the liquidity issues in the ABCP
        market, did not settle on maturity. As a result the Company has
        classified its ABCP as long-term investments.

        On August 16, 2007 an announcement was made by a group representing
        banks, asset providers and major investors that they had agreed in
        principle to a long-term proposal and interim agreement to convert
        the ABCP's into long-term floating rate notes maturing no earlier
        than the scheduled maturity of the underlying assets. On September 6,
        2007, a Pan-Canadian restructuring committee consisting of major
        investors was formed. The committee was created to propose a solution
        to the liquidity problem affecting the ABCP and has retained legal
        and financial advisors to oversee the proposed restructuring process.
        On March 17, 2008, a court order was obtained through which a
        restructuring of the ABCP is expected to occur. A meeting of note
        holders occurred on April 25, 2008 and the restructuring plan was
        approved.

        The ABCP in which the Company has invested has not traded in an
        active market since mid-August 2007 and there are currently no market
        quotations available.

        The valuation technique used by the Company to estimate the fair
        value of its investments in ABCP incorporates probability-weighted
        discounted cash flows considering the best available public
        information regarding market conditions and other factors that a
        market participant would consider for such investments. Probability-
        weighted discount rates of approximately 7.10% and 12.90% were used
        at June 30, 2008 for the senior AA and subordinated notes
        respectively for this estimate and an interest rate of 2.7% was used.
        This evaluation resulted in a reduction of $6,144,000 to the original
        cost of the ABCP at June 30, 2008. The assumptions used in
        determining the estimated fair value reflect the public statements
        made by the Pan-Canadian restructuring committee that it expects the
        ABCP will be converted into senior AA rated and subordinated unrated
        long-term floating rate notes with maturities matching the maturities
        of the underlying assets and bearing market interest rates
        commensurate with the nature of the underlying assets and their
        associated cash flows and the credit rating and risk associated with
        the long-term floating rate notes. The Company estimates that it will
        receive 87% of the senior AA rated notes (Class A-1 and A-2) and 13%
        of the subordinated unrated notes (Class B and C). Assumptions have
        been made as to the long-term interest rates to be received from the
        long-term floating rate notes. The term of the notes is estimated to
        be approximately 7 years which approximates the maturity of the
        assets backing the note. Based on these assumptions, a write-down of
        $5,932,000 from the estimated fair value at December 31, 2007 was
        recognized during the period ended June 30, 2008.

        The original ABCP in which the Company has invested has an interest
        rate of 4.52%. At June 30, 2008 there is $697,000 of interest owing
        to the Company after impairment allowance. If the restructuring is
        successful, interest will be paid out. A 36% impairment has been used
        to value the interest receivable.

        Continuing uncertainties regarding the value of the assets which
        underlie the ABCP, the amount and timing of cash flows and the
        outcome of the restructuring process could give rise to a further
        change in the value of the Company's investment in ABCP which would
        impact the Company's earnings. It is reasonably possible, based on
        existing knowledge, that change in future conditions in the near term
        could require a material change in the recognized amount. The
        reduction from the face value could range from $9,000,000 to
        $5,900,000 based on alternative reasonable assumptions, although
        given the nature of the information available, the amount ultimately
        recovered could vary outside these ranges.

        On June 24, 2008 the Company's bank provided an additional credit
        facility to provide liquidity in respect to the ABCP. The Company
        will receive Restructuring Notes in exchange for the affected ABCP
        not backed by ineligible assets. The credit facility is structured as
        follows:

        Tranche A: $10,910,339 revolving credit facility, which represents an
        amount equal to approximately 45% of the face value of the
        Restructuring Notes.

        Tranche B: $7,273,559 revolving credit facility, which represents an
        amount equal to approximately 30% of the face value of the
        Restructuring Notes.

        The borrowings under the credit facility will be first allocated to
        Tranche A and the balance will be allocated to Tranche B. The term is
        for three years with an option to extend the term to seven years on a
        year by year basis if agreed to by both parties. Interest is payable
        at the bank prime rate less 1%. The credit facility is secured by the
        Restructuring Notes and guarantees. The credit facility also provides
        for a put option allowing the Company to assign to the bank the
        Restructuring Notes in payment of the capital under Tranche A. The
        credit facility will become available and effective only once the
        final approval and implementation of the restructuring plan is
        complete.

    4.  Property and Equipment

                                                       June 30, 2008
                                                         $ (000's)

                                             --------------------------------
                                                          Accum-
                                                          ulated
                                                       Depletion,
                                                         Depreci-
                                                           ation
                                                             and      Net
                                                         Amortiz-     Book
                                               Cost        ation      Value
                                             --------------------------------

        Petroleum & natural gas properties
         including exploration and
         development thereon and production
         equipment                           $ 181,996  $  42,382  $ 139,614

        Office                                     893        422        471
                                             --------------------------------

                                             $ 182,889  $  42,804  $ 140,085
                                             --------------------------------



                                                     December 31, 2007
                                                         $ (000's)
                                             --------------------------------
                                                           Accum-
                                                          ulated
                                                       Depletion,
                                                         Depreci-
                                                           ation
                                                             and      Net
                                                         Amortiz-     Book
                                               Cost        ation      Value
                                             --------------------------------
        Petroleum & natural gas properties
         including exploration and
         development thereon and production
         equipment                           $ 159,587  $  31,586  $ 128,001

        Office                                     855        293        562
                                             --------------------------------

                                             $ 160,442  $  31,879  $ 128,563
                                             --------------------------------

        Unproved properties not subject to depletion amounted to
        approximately $33,673,000 at June 30, 2008 (December 31, 2007 -
        $28,661,000; June 30, 2007 - $11,226,000).

        The Company capitalized general and administrative costs related to
        exploration and development of approximately $1,161,000 for the six
        month period ended June 30, 2008 (June 30, 2007 - $393,000).

    5.  Bank Indebtedness

        The Company has established three credit facilities with a Canadian
        chartered bank. Credit Facility A is a $55,000,000 revolving
        operating demand loan which bears interest at the bank prime rate
        plus 0% to 1.5%, depending on the Company's debt to cash flow ratio.
        Credit Facility B is a $5,000,000 non- revolving
        acquisition/development demand loan, which bears interest at the bank
        prime rate plus 0.50%. Credit Facility C is a Revolving Demand Credit
        Agreement in the face amount of $18,000,000 which bears interest at
        the bank prime rate and will be required to be repaid in full upon
        the liquidation or refinancing of the Company's ABCP holdings. All
        credit facilities are subject to periodic review by the bank and are
        secured by a general assignment of book debts and a $100,000,000
        demand debenture with a first floating charge over all assets of the
        Company as well a hypothecation/pledge of ABCP. The Company is
        authorized to access the credit facilities with prior approval of the
        Board of Directors of the Company (the "Board"). The Company is
        required to meet certain financial based covenants under the terms of
        this facility. The Company is also required to hedge no more than 70%
        of its production under the lending agreement. For the three month
        period ended June 30, 2008, the Company had hedged approximately 81%
        of its production, for which it has obtained a waiver of the
        violation from the bank. As at June 30, 2008, the Company has drawn
        $39,566,000, excluding any bank overdraft, on Facility A, $ Nil on
        Facility B, and $18,000,000 on Facility C. The effective interest
        rate for the period ended June 30, 2008 was 5.74% (2007 - 5.40%).

    6.  Asset Retirement Obligations

        The following table summarizes the changes in asset retirement
        obligations for the period ended June 30, 2008 and December 31, 2007:

                                                             June   December
        $(000's)                                         30, 2008   31, 2007
                                                       ----------------------
        Balance - Beginning of period                   $   4,560  $     879
        Acquired in business combination                        -      3,044
        Accretion expense                                     134        184
        Liabilities incurred                                  140        492
        Abandonment cost incurred                            (339)         -
        Revision in estimated cash flows                     (220)       (39)
                                                       ----------------------
        Balance - End of period                         $   4,275  $   4,560
                                                       ----------------------

        The total estimated, inflated undiscounted cash flows required to
        settle the obligations, before considering salvage, is approximately
        $12,505,000 (December 31, 2007 - $13,495,000) which has been
        discounted using a weighted average credit-adjusted risk-free
        interest rate of 6.25% (December 31, 2007 - 6.25%). The Company
        expects these obligations to be settled in approximately 1 to 19
        years. As at June 30, 2008, no funds have been set aside to settle
        these obligations.

    7.  Share Capital

        a) Authorized:

           Unlimited Common voting shares
           Unlimited Common non-voting shares

        b) Issued:

           Common voting shares
                                                                      Stated
                                                           Number      Value

                                                           (000's)   $(000's)
          -------------------------------------------------------------------
           Balance, beginning of period                    39,066   $194,994
           Exercise of options                                 48        115
                                                          -------------------
           Balance, end of period                          39,114   $195,109
                                                          -------------------

        c) Warrants

           The Company has 1,050,000 warrants outstanding. Each warrant
           entitles the holder to acquire one common share on a CDE
           "flow-through" basis under the Income Tax Act (Canada) at a price
           of $3.81 per share. The
           warrants expire on March 31, 2009.

        d) Stock Option Plan

           The Company has a stock option plan for the purpose of developing
           the interest of directors, officers, employees and consultants of
           the Company and its subsidiaries in the growth and development of
           the Company by providing them with the opportunity, through share
           options, to acquire an increased proprietary interest in the
           Company.

           The Company has established a Stock Option Plan in compliance with
           the requirements of the TSX. The aggregate number of shares which
           may be reserved for issuance under the plan is 10% of the
           Company's issued and outstanding common shares. No one person can
           receive options within a one-year period entitling the person to
           purchase more than 5% of issued common shares. Options typically
           vest over a four year period and expire ten years from the date of
           grant.

           In the first quarter of 2008 the Company granted 195,000 stock
           options exercisable into voting common shares of the Company.
           These options vest 25% the first, second, third and fourth
           anniversaries of grant and have a weighted average exercise price
           of $2.66 per share.

           In the first quarter of 2008, 229,000 vested options were
           repurchased for approximately $104,000. The amount paid to
           repurchase the options was charged to contributed surplus.

           In the second quarter of 2008 the Company granted 500,000 stock
           options exercisable into voting common shares of the Company.
           These options vest 25% the first, second, third and fourth
           anniversaries of grant and have a weighted average exercise price
           of $2.28 per share.

           In the second quarter of 2008, 48,000 vested options were
           exercised for approximately $100,000. The amount paid to exercise
           the options was credited to share capital. $15,000 was charged to
           contributed surplus related to the stock based compensation
           recognized for the above options in previous periods; the same
           amount was credited to share capital.

           A summary of the status of the Company's stock option plan and
           changes during the period then ending are as follows:


                                                            June 30, 2008

                                                       ----------------------
                                                                    Weighted
                                                        Number of    Average
                                                          Options   Exercise
                                                           (000's)     Price
                                                       ----------------------
           Balance, December 31, 2007                       3,091   $   2.16
             Granted                                          695       2.39
             Exercised                                        (48)      2.06
             Repurchased                                     (229)      2.24
             Cancelled                                       (203)      3.01
                                                       ----------------------

           Balance, June 30, 2008                           3,306   $   2.15
                                                       ----------------------


           The following table summarizes information about stock options
           outstanding at June 30, 2008:

        ---------------------------------------------------------------------
                            Options Outstanding          Options Exercisable

        ---------------------------------------------------------------------
                                              Weighted
                                               Average
                        Weighted  Number of  Contractual            Weighted
                         Average    Options     Life     Number of   Average
        Range of        Exercise Outstanding  Remaining   Options   Exercise
        Exercise Price    Price     (000's)    (years)    (000's)     Price
        ---------------------------------------------------------------------
        $2.06              $2.06        398        7.3        299      $2.06
        $2.09              $2.09      2,213        9.4          -          -
        $2.28              $2.28        500        9.9          -          -
        $2.66 to $2.67     $2.66        195        9.7          -          -
                        -----------------------------------------------------
                           $2.15      3,306        9.3        299      $2.06
                        -----------------------------------------------------

        e) Stock-based compensation

           Compensation expense for stock options is recognized using the
           fair value when the options are granted, and are amortized over
           the option's vesting period. During the six months ended
           June 30, 2008, approximately $550,000 (2007 - $145,000) in
           compensation expense related to options granted has been
           recognized in the consolidated statement of operations. The fair
           value of stock options granted during the period was estimated on
           the dates of grant using the Black-Scholes option-pricing model
           with the following weighted average assumptions.

                                         June 30, 2008         June 30, 2007
                                        ---------------       ---------------
           Risk-free interest rate       3.03% to 3.76%         3.75% to 4.0%
           Expected life of options            4 years               5 years
           Expected volatility                      52%                    0%
           Expected dividend rate                    0%                    0%
           Weighted average fair value           $1.05                 $1.13

        f) Net income (loss) per share

           The following table reconciles the denominators used for the basic
           and diluted net income per share calculations:

                                    Three months ended      Six months ended
                                               June 30,              June 30,
                                   ------------------------------------------
           (000's)                     2008       2007       2008       2007
           ------------------------------------------------------------------
           Basic weighted average
            shares                   39,074     20,588     39,070     20,588
           Effect of dilutive
            stock options and
            warrants                      -        483          -        483
           ------------------------------------------------------------------
           Dilutive weighted
            average shares           39,074     21,071     39,070     21,071
           ------------------------------------------------------------------

           No stock options or warrants have been included in the calculation
           of diluted shares outstanding for the period ended June 30, 2008
           as their inclusion would be anti-dilutive.

        g) Contributed surplus


                                                                     $(000's)

                                                                   ----------
           Balance - December 31, 2007                              $  2,720
           Stock-based compensation expensed (note 7 (e))                550
           Stock options exercised                                       (15)
           Repurchase of stock options (note 7 (d))                     (104)
                                                                   ----------
           Balance - June 30, 2008                                  $  3,151
                                                                   ----------

    8.  Related Party Transactions

        a) A director of the Company is a partner of a law firm that provides
           legal services to the Company. During the six months ended
           June 30, 2008, the Company paid approximately $11,000
           (June 30, 2007 - $15,000) to this firm for legal fees and
           disbursements. Additionally, $Nil is included in accounts payable
           and accrued liabilities, due under normal credit terms, at
           June 30, 2008 (December 31, 2007 - $2,000) for this firm.

        b) A director of the Company is the owner of a corporation that
           provides drilling services to the Company. During the six months
           ended June 30, 2008, the Company paid approximately $606,000
           (June 30, 2007 - $688,000) for drilling and services, which has
           been included in property and equipment. Additionally,
           approximately $Nil is included in accounts payable and accrued
           liabilities, due under normal credit terms, at June 30, 2008
           (December 31, 2007 - $195,000) for this firm.

        These transactions have been recorded at the exchange amount, which
        is the amount of consideration established and agreed to by the
        related parties.

    9.  Contingency

        The Bear Ridge Resources Ltd. ("Bear Ridge") acquisition that
        occurred on August 21, 2007 resulted in one dissenting shareholder.
        The shareholder holds 449,358 Bear Ridge shares and 389,435 Bear
        Ridge warrants with a strike price of $1.41. An accrual has been made
        for management's best estimate of the settlement which will be paid
        to this Bear Ridge shareholder. The dispute is currently with the
        courts. The Company does not expect any additional costs to be
        incurred on this matter other than the amount already accrued as part
        of the purchase price of Bear Ridge. The estimated settlement price
        is subject to measurement uncertainty.

    10. Commitments

        a) Pursuant to a flow-through share offering of Bear Ridge, prior to
           its acquisition, the Company is committed to incur a total of
           $24,000,000 in qualifying expenditures by December 31, 2008. As of
           June 30, 2008 approximately $1,544,000 of CDE is still to be
           incurred.

        b) Pursuant to a flow-through share and warrants offering of Bear
           Ridge, prior to its acquisition, the Company is committed to incur
           a total of $12,300,000 in qualifying expenditures by
           March 15, 2009. As of June 30, 2008 the entire $12,300,000 CDE
           commitment remains.

    11. Financial Instruments and Risk Management

        The Company has the following financial instruments:

        Cash and cash equivalents are designated as held-for-trading
        instruments and are measured at fair value. Investment in
        commercial paper is designated as held-for-trading and is measured at
        fair value with changes in fair value recognized in earnings.
        Accounts receivable and deposits are designated as loans and
        receivables and are measured at amortized cost. Accounts payable and
        accrued liabilities and bank indebtedness are designated as other
        financial liabilities and are measured at amortized cost. All risk
        management assets and liabilities are derivative financial
        instruments and classified as held-for-trading.

        The Company uses various types of derivative financial instruments to
        manage risks associated with natural gas price fluctuations. These
        instruments are not used for trading or speculative purposes.
        Proceeds and costs realized from holding the related contracts are
        recognized at the time each transaction under a contract is settled.
        For the unrealized portion of such contracts, the Company utilizes
        the fair value method of accounting. The fair value is based on an
        estimate of the amounts that would have been paid to or received from
        counter parties to settle these instruments given future market
        prices and other relevant factors. The method requires the fair value
        of the derivative financial instruments to be recorded at each
        balance sheet date with unrealized gains or losses on those contracts
        recorded through net earnings.

        An embedded derivative is a component of a contract that affects the
        terms in relation to another factor. These hybrid contracts are
        considered to consist of a "host" contract plus an embedded
        derivative. The embedded derivative is separated from the host
        contract and accounted for as a derivative only if certain conditions
        are met. The Company has not identified any embedded derivatives
        which require separate recognition and measurement.

        The nature of these financial instruments and its operations expose
        the Company to market risk, credit risk and liquidity risk. The
        Company manages its exposure to these risks by operating in a manner
        that minimizes these risks. The Board of Directors has overall
        responsibility for the establishment and oversight of the Company's
        risk management framework. The Board has established policies in
        setting risk limits and controls and monitors these risks in relation
        to market conditions.

        a) 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. These risks are generally outside the control of the
        Company. The objective of the Company is to mitigate market risk
        exposures within acceptable limits, while maximizing returns.

        Commodity price risk
        --------------------

        The nature of the Company's operations results in exposure to
        fluctuations in commodity prices. Management continuously monitors
        commodity prices and initiates instruments to manage exposure to
        these risks when it deems appropriate. As a means of managing
        commodity price volatility, the Company enters into various
        derivative financial instrument agreements and physical contracts.
        Collars ensure that the commodity prices realized will fall into a
        contracted range for a contracted sale volume based on the monthly
        index price. Monthly gains and losses are determined based on the
        differential between the AECO daily index and the AECO monthly index
        when the monthly index price falls in between the floor and the
        ceiling. Derivative financial instruments are marked-to-market and
        are recorded on the consolidated balance sheet as either an asset or
        liability with the change in fair value recognized in net earnings.

        The following information presents all positions for the derivative
        financial instruments outstanding as at June 30, 2008.

        ---------------------------------------------------------------------
        Term                      Volume           Price               Basis
        ---------------------------------------------------------------------
        April 1, 2008 to
         March 31, 2009           3,000 GJ/day     $7.04                AECO
        ---------------------------------------------------------------------
        April 1, 2008 to
         March 31, 2009           6,000 GJ/day     $7.08                AECO
        ---------------------------------------------------------------------
        January 1, 2008 to        3,150 GJ/day     $6.50 floor
         December 31, 2008                         $10.00 ceiling       AECO
        ---------------------------------------------------------------------

        Realized losses totalling $2,331,000 for the second quarter ending
        June 30, 2008 from derivatives was recognized in income
        (June 30, 2007 - $215,000 realized gain). For the six months ended
        June 30, 2008, the Company realized losses totalling $2,411,000
        (June 30, 2007 - $270,000 realized gain). The fair value of the
        commodity contracts outstanding at June 30, 2008 were $(11,855,000)
        (December 31, 2007 - $843,000; June 30, 2007 - $966,000).

        As at June 30, 2008, if the underlying natural gas price increased by
        $0.50/mcf, the fair value of the commodity contracts becomes
        $(13,075,000) resulting in an increased loss before tax of $1,220,000
        ($872,000 after tax).

        As at June 30, 2008, if the underlying natural gas price decreased by
        $0.50/mcf, the fair value of the commodity contracts becomes
        $(10,636,000) resulting in a decreased loss before tax of $1,219,000
        ($872,000 after tax).

        Foreign exchange risk
        ---------------------

        The Company is exposed to foreign currency fluctuations as crude oil
        and natural gas prices are referenced to U.S. dollar denominated
        prices. As at June 30, 2008 the Company had no forward, foreign
        exchange contracts in place, nor any significant working capital
        items denominated in foreign currencies.

        Interest rate risk
        ------------------

        The Company is exposed to interest rate risk to the extent that
        changes in market interest rates impact its borrowings under the
        floating rate credit facility. The floating rate debt is subject to
        interest rate cash flow risk, as the required cash flows to service
        the debt will fluctuate as a result of changes in market rates. The
        Company has no interest rate swaps or financial contracts in place as
        at or during the six months ended June 30, 2008.

        As at June 30, 2008, if interest rates had been 1% lower with all
        other variables held constant, after tax net earnings for the period
        would have been $220,000 higher, due to lower interest expense. An
        equal opposite impact would have occurred to net earnings had
        interest rates been 1% higher.

        b) Credit risk

        The majority of the Company's accounts receivable are due from joint
        venture partners in the oil and gas industry and from purchasers of
        the Company's petroleum and natural gas production and are subject to
        the same industry factors such as commodity price fluctuations and
        escalating costs. The Company generally extends unsecured credit to
        these customers and therefore, the collection of accounts receivable
        may be affected by changes in economic or other conditions.
        Management believes the risk is mitigated by the size and reputation
        of the companies to which they extend credit. The Company has not
        experienced any credit loss in the collection of accounts receivable
        to date.

        The Company also has credit risk related to its investment in ABCP
        further described in note 3.

        Receivables from petroleum and natural gas marketers are normally
        collected on the twenty-fifth day of the month following production.
        Receivables related to the sale of the Company's petroleum and
        natural gas production are from major marketing companies with
        investment grade credit ratings. The Company historically 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 billing being issued to the partners. The
        Company attempts to mitigate the risk from joint venture receivables
        by obtaining partner approval of significant capital expenditures
        prior to expenditure and issuing cash calls on large capital projects
        to its partners on capital projects before they commence. The Company
        reviews the financial status of joint venture partners before partner
        approval is obtained.

        c) 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 that it will have sufficient
        liquidity to meet its liabilities when they are due. The nature of
        the oil and gas industry is very capital intensive. As a result, the
        Company prepares annual capital expenditure budgets and utilizes
        authorizations for expenditures for projects to manage capital
        expenditures. Refer to note 13 for disclosure related to the
        management of capital.

        d) Fair value of financial instruments

        The Company's cash and cash equivalents, accounts receivable,
        deposits, bank indebtedness and accounts payable and accrued
        liabilities approximates their carrying value due to their short
        terms to maturity and the floating interest rate on the Company's
        debt.

        The fair value of derivative contracts is determined by discounting
        the difference between the contracted price and published forward
        price curves as at the balance sheet date, using the remaining
        contracted petroleum and natural gas volumes.

        The fair value of the Company's investment in commercial paper is
        disclosed in Note 3.


    12. Change in Non-cash Components of Working Capital

                                    Three months ended      Six months ended
                                               June 30,              June 30,
                                  -------------------------------------------
        $(000's)                       2008       2007       2008       2007
        ---------------------------------------------------------------------
        Accounts receivable        $  1,495   $  6,858   $    928   $  8,543
        Deposits and prepaid
         expenses                       283         43        432         31
        Accounts payable and
         accrued liabilities         (5,108)    (7,176)    (8,274)   (11,876)
        Interest accrued on
         commercial paper                 -          -       (697)         -
        ---------------------------------------------------------------------
                                   $ (3,330)  $   (275)  $ (7,611)  $ (3,302)
        ---------------------------------------------------------------------



        Changes in Non-cash Working Capital Related to

                                    Three months ended      Six months ended
                                               June 30,              June 30,
                                  -------------------------------------------
         $(000's)                      2008       2007       2008       2007
        ---------------------------------------------------------------------
        Operating activities       $ (1,085)  $ (2,670)  $ (4,124)  $ (1,927)
        Investing activities         (2,245)     2,395     (3,487)    (1,375)
        ---------------------------------------------------------------------

                                   $ (3,330)  $   (275)  $ (7,611)  $ (3,302)
        ---------------------------------------------------------------------

    13. Capital Management

        The Company's capital consists of shareholders' equity, bank debt and
        working capital. The Company will adjust its capital structure to
        manage its current and future debt, drilling programs and potential
        corporate acquisitions through the issuance of shares, increasing the
        credit facility line and adjustments to capital spending.

        The Company's objective for managing capital is to maximize long-term
        Shareholder value by:

        -  Ensuring financing capacity for the Company's drilling programs
           that are expected to increase reserves and add value to our
           Shareholders; and
        -  Financing the Company's growth through drilling projects, joint
           venture opportunities and asset/corporate acquisitions.

        The Company monitors capital structure using non-GAAP measures, based
        on the ratio of net debt to annualized funds flow. The Company also
        monitors capital structure by reviewing net asset value and interest
        per barrel of oil equivalent ("boe").

        The Company's strategy is to maintain a net debt to annualized funds
        flow of no greater than 3 : 1 under normal business conditions. This
        ratio may increase at certain times as a result of property or
        corporate acquisitions. However, subsequent equity issues will bring
        the ratio back to the target ratio. To facilitate the management of
        this ratio, the Company prepares annual budgets, which are updated as
        necessary depending on varying factors including current and forecast
        prices, successful drilling results and general industry conditions.
        The annual and updated budgets are approved by the Board of
        Directors.

        As at June 30, 2008, the net debt to adjusted funds flow (annualized)
        is calculated as follows:

                                                                     $(000's)
                                                                   ----------
        Current Assets                                              $  9,735
        Current Liabilities                                          (82,632)
                                                                   ----------
        Net debt                                                    $(72,897)
                                                                   ----------
                                                                   ----------
          $(000's)
          Net income (loss) for the period                          $(13,305)
          Items not affecting cash
            Depletion, depreciation, and amortization                 10,924
            Accretion expense                                            134
            Stock-based compensation                                     550
            Write down on commercial paper                             5,932
            Unrealized loss (gain) on hedge contracts                 12,698
            Future income taxes                                       (2,522)
          Asset retirement expenditures                                 (339)
                                                                   ----------
          Funds flows from operations                               $ 14,072

        Projected annualized funds flows                            $ 28,144
        ---------------------------------------------------------------------
        Net Debt to Annualized Funds Flows                         2.6 : 1.0
                                                                   ---------

        As at June 30, 2008, the Company's ratio of net debt to annualized
        cash flow was 2.6 to 1.0, within the range established by the
        Company.

        As disclosed in Note 5, the Company is bound by certain debt
        covenants. These covenants include to maintain a Working Capital
        Ratio of not less than 1.0 : 1.0 at all times. The Working Capital
        Ratio shall be defined as Current Assets (including the un-drawn
        Availability under the Credit Facility A) to Current Liabilities
        (excluding any current portion of Bank Debt). As at June 30, 2008,
        the Company is not in violation of this covenant.

        The Company's share capital is not subject to external restrictions
        as to how it is utilized nor does it have any financial covenants in
        respect to the bank credit facility related to shareholders' equity.
        The Company has not paid or declared any dividends since the date of
        incorporation, nor are any contemplated in the foreseeable future.

    14. Subsequent Event

        Subsequent to June 30, 2008, the Company has agreed to sell its West
        Central conventional assets in Alberta and Saskatchewan as well as
        its Fireweed property in North East British Columbia for an aggregate
        purchase price of $22,450,000. The sale includes approximately
        545 boe/d of production and approximately 55,000 net acres of
        undeveloped land. The Purchase and Sale Agreements were signed on
        July 25 with the West Central Package closed on July 31 and the
        Fireweed Package scheduled to close on August 12, 2008. Certain of
        the sale assets totalling approximately $6,700,000 are subject to
        rights of first refusal, with such funds to be held in escrow until
        the first rights of refusal are either waived or exercised. The
        applicable periods for the rights of first refusal range from fifteen
        to thirty days, with Sabretooth expecting to receive the funds
        shortly thereafter.

        As a result of the asset rationalization, the Company is in the
        process of negotiating a revised bank line. The revised credit
        facility will be approximately $58.0 million and is expected to close
        in the middle of August.

    15. Comparative Figures

        Certain comparative figures for the six months ended June 30, 2007
        have been reclassified to conform to the current period presentation.
    

    %SEDAR: 00023788E




For further information:

For further information: Sabretooth Energy Ltd., Doug Swartout, Business
Development, (403) 806-4047, Email: doug@sabretooth.ca, Website:
www.sabretooth.ca; Brookline Public Relations, Inc., Shauna MacDonald, Media
and Investor Relations, (403) 538-5645, Email: smacdonald@brooklinepr.com

Organization Profile

SABRETOOTH ENERGY LTD.

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