Solana Resources Limited ("Solana" or the "Company") - Financial report for the six month period ended June 30, 2008



    CALGARY and LONDON, Aug. 18 /CNW/ - Solana Resources Limited (TSX-V:SOR;
AIM:SORL), the Colombia focused independent oil and gas exploration and
production company, today announces its results for the six month period ended
June 30, 2008. These results should be read in conjunction with the Company's
audited consolidated financial statements for the years ended December 31,
2007 and 2006. All numbers in this report are expressed in US dollars unless
otherwise indicated.
    Solana (www.solanaresources.com) is an international resource company
engaged in the acquisition, exploration, development and production of oil and
natural gas. The Company's properties are located in Colombia, South America
and are held through its wholly owned subsidiary, Solana Petroleum Exploration
(Colombia) Limited. The Company is headquartered in Calgary, Alberta, Canada.
    Additional information (which does not form part of this announcement) is
available on the Company's website at www.solanaresources.com and the SEDAR
website at www.sedar.com.

    
    HIGHLIGHTS

    -  On July 29, 2008, Solana announced that it had entered into a
       definitive agreement providing for the business combination of Gran
       Tierra Energy Inc. and Solana Resources Limited. It is expected that
       the combination of the two companies will not only consolidate 100% of
       the working interest in Costayaco, a premium light oil asset in
       Colombia, but will also launch a substantive, well financed, South
       American focused entity with an outstanding land position and a
       portfolio of opportunities across the risk spectrum.

    -  Record quarterly cash flow from operating activities of $20.5 million
       ($0.16/share) and after tax net income of $19.5 million ($0.16/share)

    -  First half and second quarter 2008 average net of royalty production
       of 2,642 boepd and 3,029 boepd respectively. Second quarter 2008 net
       of royalty exit rate of 3,952 boepd.

    -  First half 2008 cash flow from operating activities of $33.2 million
       ($0.26/share) and after tax net income of $27.2 million ($0.22/share).

    -  No debt and a cash balance of $73.4 million as at June 30, 2008.

    -  First half 2008 capital expenditures of $27.5 million.

    -  The Company drilled the Primavera-1 well during February, 2008. In
       May, this well was successfully tested at a pump constrained 24 hour
       continuous maximum flow rate of 650 barrels of 40 degree API oil per
       day gross, 365 bopd net of royalty to Solana.

    -  During March to May 2008, Costayaco-4D was drilled, logged and cased.
       Initial log interpretations, combined with core samples and
       hydrocarbon shows, indicate reservoir quality sandstones with 16 ft of
       potential oil pay in the Kg sand, 18 ft in the U sand, 38 ft in the T
       sand of the Villeta formation, and 134 ft of potential oil pay in the
       Caballos formation. This is approximately 25% more potential net pay
       than in any of the previous three wells in the field.

    -  Subsequent to Q2, 2008, Costayaco-5 reached a total measured depth of
       8,703 feet on July 27, 2008, encountering the same reservoir sequences
       as the other Costayaco wells with good oil shows in the Rumiyaco Kg
       formation, the Villeta U and T formations and the Upper Caballos
       formation. No definitive oil-water contact is apparent in the Villeta
       T, however testing will be required to confirm whether water is
       present in certain intervals. The Upper Caballos also appears to have
       good oil saturations and thicknesses comparable to previous wells
       drilled in the field. The top of the Villeta T was encountered at a
       shallower depth than expected and oil shows were encountered deeper
       than expected in both the Villeta T and the Upper Caballos reservoirs;
       both results have the potential to add significant reserves to the
       west flank of the field.
    

    OPERATIONAL UPDATE

    LOWER MAGDALENA BASIN

    The Lower Magdalena basin is located in northwest Colombia. It covers an
area of approximately 87,000 km(2) and contains Solana's Magangué block.

    MAGANGUE BLOCK

    The Magangué block is held pursuant to the Magangué Association Contract.
Solana is the operator of the block with a 37.8% working interest and has
partners, Empresa Colombiana de Petroleos SA (Ecopetrol) with a 58% working
interest, and Technopetrol, a Colombian company, with a 4.2% working interest.
    Solana operates the Guepajé gas field on the 84 km(2) Magangué block,
which borders the Pacific Rubiales La Creciente block where there was a
significant gas discovery, in the same productive formation as the Guepajé gas
field, in 2006. The Pacific Rubiales discovery came on production in January
2008, greatly increasing local line pressure and effectively backing out
Guepajé gas production. Guepajé restarted production on June 25, 2008,
producing at market restricted rates into a low pressure line supplying local
needs. Guepajé was producing 520 mcfd gross, 157 mcfd net of royalty to
Solana, on June 30, 2008. A new compressor has been ordered, which will allow
the field to produce at capacity, and is expected to be installed in late Q3,
2008.

    CATATUMBO BASIN

    The Catatumbo Basin is a 7,350 km(2) sub-basin, forming the southwest
flank of Venezuela's prolific Maracaibo Basin. Solana has one block in the
Catatumbo sub-basin.

    CATGUAS BLOCK

    Solana is the operator of the 1,591 km(2) Catguas block with a 100%
working interest. In the southern 70% of the block, Trayectoria Oil and Gas,
Sucursal Colombia, has a 15% beneficial interest, and a 50% beneficial
interest in the remainder. The block is held under an ANH contract.
    Phase 1 (November 17, 2005 to May 17, 2007) commitments were fulfilled by
drilling the relatively shallow Tres Curvas-1 and Cocodrilo-1 wells.
    Tres Curvas-1 tested a combined maximum 180 bopd from two Catatumbo
formation zones and was completed as a new oilfield discovery. The well
resumed production on July 10, 2008 and is currently producing 53 bopd gross,
41 bopd net of royalty to Solana, on a long term test with a progressive
cavity pump.
    During phase 2 (May 17, 2007 to November 17, 2008) Solana must drill one
exploration well and re-enter one existing well. Due to the lack of a suitable
re-entry candidate Solana is planning to drill two wells, testing deeper
targets. A combination of security, infrastructure, topographical, and
environmental challenges has significantly delayed progress on this block such
that these wells are now scheduled for H1 2009. Solana has received verbal
assurances from the requisite Colombian government authorities that the delay
in meeting phase 2 work commitments will not jeopardize Solana's Catguas block
rights. At the end of this phase a certain portion of this block must be
relinquished. In view of the prospectivity of the block and to reduce the
relinquishment area to 15%, the Company has started the acquisition of 132
line-km of 2-D and 50 km(2) 3-D seismic data. The 3-D seismic is designed to
delineate the shallower Tres Curvas channel discovery and the 2-D to assist in
selection of the second well to be drilled from the five prospects identified
on a large anticlinal feature. The Company is receiving full co-operation and
support from all branches of the Colombian government.

    LLANOS BASIN

    The Llanos basin is located northeast of Bogota, the capital of Colombia,
on the east side of the Andes Mountains. This basin covers an area of
approximately 200,000 km(2) and holds Colombia's largest number of oil fields
and proved oil reserves.
    At the beginning of the second quarter of 2008 Solana had working
interests in six blocks in the Llanos Basin, covering an area of 2,015 km(2).
These blocks are from North to South: Guachiria Norte, Colonia, San Pablo,
Guachiria, Guachiria Sur and Garibay and are in the part of the Llanos Basin
where drilling and seismic activity is generally restricted to a four-month
weather window from December to March. During the second quarter, Solana
relinquished the Colonia block.

    GUACHIRIA NORTE BLOCK

    Solana is the Operator of the 412 km(2) Guachiria Norte block with a 100%
working interest. Lewis Energy Colombia has a 30% beneficial interest in this
block. The block is located approximately 250 km northeast of Bogota and is
subject to ANH contract.
    During Phases 3 and 4 (March 21, 2007 to March 21, 2009) Solana is
required to drill two exploration wells and acquire 25 km(2) of 3-D seismic
data.
    Solana is currently reprocessing the existing 157 km(2) Onyx 3-D seismic
survey to optimize the location of the next wells. Within this area is a
significant Carbonera C5 channel target which the Company intends to test. The
Company plans to drill the commitment wells prior to the March 21, 2009
deadline.

    COLONIA BLOCK

    On June 25, 2007, Solana acquired the 439 km(2) Colonia block, situated
immediately to the west of the Guachiria Norte block. Solana was required to
acquire 55 km(2) of 3-D seismic data and to reprocess the existing 2-D seismic
data during the first phase (June 25, 2007 until June 25, 2008). The
acquisition of the 3-D seismic data was completed and interpretation of the
processed data failed to identify viable prospects. The Block was relinquished
on June 18, 2008.

    SAN PABLO BLOCK

    On June 25, 2007, Solana acquired a 100% interest in the 423 km(2) San
Pablo block, situated immediately to the west of the Guachiria Sur block and
to the south of the Colonia block. During the first phase (June 25, 2007 until
June 25, 2008) Solana had to acquire 50 km(2) of 3-D seismic data. This data
was acquired in December 2007 and has been processed. During Phase 2 (June 25,
2008 until June 25, 2009) the Company has to drill one exploration well with a
similar commitment in each of the subsequent four annual phases. This block is
subject to an ANH contract.
    This seismic clearly indicates the extension of the significant Carbonera
C-5 channel prospect, identified on Guachiria Norte and Guachiria Sur, into
this block. The Ocarro-1 West well is scheduled to be drilled in Q1, 2009.

    GUACHIRIA BLOCK

    Solana is the operator of the 68 km(2) Guachiria block with a 100%
working interest. Lewis Energy Colombia has a 30% beneficial interest in this
block. The block adjoins the Guachiria Norte block immediately to the South.
This block was acquired from Ecopetrol and is subject to a standard ANH
contract plus an additional 13% royalty payable to Ecopetrol.
    The commitment for Phase 4 (June 1, 2007 to June 1, 2008) is to drill one
exploration well. The Company drilled the Primavera-1 well during February,
2008. In May, this well was successfully tested at a pump constrained 24 hour
continuous maximum flow rate of 650 barrels of 40 degree API oil per day,
gross, 365 bopd net of royalty to Solana, from eight feet of perforations,
6,682 to 6,690 ft, in the Carbonera C-7 formation. The well produced with a
stable water cut of approximately 58% during this maximum flow period.
Primavera-1 is scheduled to be put on a long term production test in early
August, 2008.
    Solana has a commitment to drill one exploration well in Phase 5 (June 1,
2008 to June 1, 2009). This commitment will be met with the Los Aceites-1 well
which commenced drilling operations on August 2, 2008. This well is testing a
closed structure that was defined with 3-D seismic and is targeting the
Carbonera C5 and C7 formations. Los Aceites-1 is approximately 3.3 kilometres
south of, roughly 80 feet structurally higher than, and on trend with the
Primavera-1. The well has a projected depth of 7,100 feet and is anticipated
to take 20 days to drill, with testing to follow.
    Solana's Yalea-1 well restarted production on April 12, 2008 and was
producing 18 bopd gross, 10 bopd net of royalty to Solana, on June 30, 2008.

    GUACHIRIA SUR BLOCK

    Solana is the operator of the 366 km(2) Guachiria Sur block with a 100%
working interest. Lewis Energy Colombia has a 30% beneficial interest in this
block. The block is to the west and the south of the Guachiria block and to
the south of the Guachiria Norte block. This block is subject to an ANH
contract.
    The Guachiria Sur Phase 3 (October 25, 2007 to October 25, 2008)
commitment is to drill one exploration well. The Company drilled the
Palmitas-2 well during March, 2008, resulting in a potential Carbonera
structural play discovery. Although good oil shows were observed during
drilling and log analysis indicated potential oil pay in the C-7, the well
tested water. The well is currently shut-in pending a workover.

    GARIBAY BLOCK

    Solana was originally the operator and held a 100% working interest in
the 307 km(2) Garibay block. The block is located approximately 170 km east of
Bogota and is subject to an ANH contract.
    During Phase 3 (October 25, 2007 to October 25, 2008), the Company is
required to drill one exploration well. On November 17, 2007, Solana farmed
out a 50% working interest and operatorship to Cepsa Colombia SA. Pursuant to
this agreement, Solana was fully carried on the Phase 3 commitment well,
Topocho-1, which was drilled and, after extensive testing, was abandoned.

    PUTUMAYO BASIN

    The Putumayo basin is located in southwest Colombia and extends into
Ecuador, where it is called the Oriente (Ecuador)-Maranon (Peru) Basin. It
covers an area of approximately 320,000 km(2) and Solana holds interests in
the Guayuyaco block and the Chaza block totalling 536 km(2) in this basin.

    GUAYUYACO BLOCK

    Solana holds a 35% non-operated net working interest in the 212 km(2)
Guayuyaco block, located approximately 290 km southwest of Bogota. Gran Tierra
Energy Inc. is the operator with a 35% working interest. Ecopetrol has a 30%
working interest in the Guayuyaco field which was producing 502 bopd gross,
162 bopd net of royalty to Solana, on June 30, 2008. All commitments have been
fulfilled and the block is being further developed under an Association
Contract.
    During the first quarter of 2007 Solana participated in drilling the
Juanambu-1 discovery well which was productive in the Caballos, Villeta T and
Rumiyaco Kg formations. The well has been completed with a jet pump and the
tubing string configured to allow for production from selected zones.
Juanambu-1 was producing 985 bopd gross, 317 bopd net of royalty to Solana, on
June 30, 2008.
    Trucking operations have been replaced with a six kilometre six inch
flowline that went into operation on February 29, 2008. The line connects
Juanambu-1 into the nearby Toroyaco facility and from there into existing
infrastructure.

    CHAZA BLOCK

    Solana has a 50% working interest in the 325 km(2) Chaza block,
immediately west of the Guayuyaco block. Gran Tierra, the operator, holds the
other 50% in the block. The block is held under an ANH contract.
    During Phase 2 (June 27, 2006 to June 26, 2007) the partners drilled the
Costayaco-1 discovery well. This well is currently on a long term test and was
producing 3,168 bopd gross, 1,457 bopd net of royalty to Solana, on June 30,
2008. Costayaco-2 was producing 3,308 bopd gross, 1,522 bopd net of royalty to
Solana, on June 30, 2008. Costayaco-3 was producing 971 bopd gross, 447 bopd
net of royalty to Solana, on June 30, 2008. Production is trucked to
facilities at Uchupayaco that were constructed in the second half of 2007. A
ten kilometre, eight inch pipeline, tying into existing infrastructure at
Uchupayaco, is being built to replace trucking operations. This line was
completed on July 29, 2008.
    During March to May 2008, Costayaco-4D was drilled on a crestal location
approximately 540 metres north of Costayaco-2 and was subsequently completed
as an oil well. Cores were obtained from the two primary reservoirs: 60 feet
from the Villeta T sandstones and 30 feet from the Caballos sandstones.
Hydrocarbon shows and lithology similar to Costayaco-1 and Costayaco-2 were
encountered. Initial log interpretations, combined with core samples and
hydrocarbon shows, indicate reservoir quality sandstones with 16 feet of
potential oil pay in the Kg sand, 18 feet in the U sand, 38 feet in the T sand
of the Villeta formation, and 134 feet of potential oil pay in the Caballos
formation. Completion and testing of the well is scheduled for August, 2008.
    Costayaco-5 reached a total measured depth of 8,703 feet on July 27,
2008, encountering the same reservoir sequences as the other Costayaco wells
with good oil shows in the Rumiyaco Kg formation, the Villeta U and T
formations and the Upper Caballos formation.
    Initial log interpretations, combined with cuttings and shows indicate
excellent reservoir with fair to good oil saturations in the primary Villeta T
formation, with thicknesses comparable to previous wells in the field. No
definitive oil-water contact is apparent in the Villeta T however, testing
will be required to confirm whether water is present in certain intervals. The
Upper Caballos also appears to have good oil saturations and thicknesses
comparable to previous wells drilled in the field. The Lower Caballos is well
developed, but appears to be water bearing. The top of the Villeta T was
encountered at a shallower depth than expected and oil shows were encountered
deeper than expected in both the Villeta T and the Upper Caballos reservoirs;
both results have the potential to add significant reserves to the west flank
of the field. Testing operations are expected to commence in mid August and
will take approximately one month to complete.
    A continuous delineation and development drilling campaign in the
Costayaco field is planned for the balance of 2008 and through 2009. The
details of this program will be finalized in the fourth quarter of 2008.
    Work is underway to reduce existing infrastructure production constraints
beyond Uchupayaco. It is currently anticipated that up to 10,000 bopd gross
could be accommodated during the second half of 2008. Additionally, the
opportunity to truck an additional 3,000 to 5,000 bopd north to Neiva is being
investigated. A second stage of infrastructure expansion, to accommodate the
anticipated increase in production from the continuing Costayaco drilling
program, is currently being evaluated.
    Mr. Glenn Van Doorne, Chief Operating Officer of Solana, a Petroleum
Geologist, is the qualified person who has reviewed the technical information
contained in this news release.

    OPERATING RESULTS

    Selected Quarterly Information

    The following table summarizes selected financial data for Solana for
each of the two most recently completed financial six month periods ended
June 30, 2008 and 2007.
    Unless otherwise noted, all currency amounts are stated in US dollars.

    
                                   June 2008                 June 2007
    -------------------------------------------------------------------------
                              Three         Six         Three         Six
                              months       months       months       months
                              ended        ended        ended        ended
    -------------------------------------------------------------------------
                                $            $            $            $
    -------------------------------------------------------------------------
    Revenue
      Production Revenue,
       net of
        Royalties          31,673,778   47,940,348    1,387,542    2,801,468
        Operating costs     3,757,695    6,051,140      817,675    1,474,253
    -------------------------------------------------------------------------
                           27,916,083   41,889,208      569,867    1,327,215
    -------------------------------------------------------------------------

    Expenses
    General and
     administrative         1,320,953    2,811,552    1,319,363    2,380,667
    Depletion, depreciation
     and accretion          4,174,757    6,478,965      945,635    2,212,543
    Foreign exchange
     loss (gain)             (758,723)    (248,301)     199,233      224,888
    Stock-based
     compensation             872,983    3,480,991    1,207,881    2,825,074
                          ---------------------------------------------------
                            5,609,970   12,523,207    3,672,112    7,643,172

    Other income/(expenses)
      Interest and other      265,071      999,774      339,285      470,399
      Income taxes         (3,053,711)  (3,119,646)     (39,257)     (89,257)
                          ---------------------------------------------------
                           (2,788,640)  (2,119,872)     300,028      381,142

                          ---------------------------------------------------
    Net income (loss)      19,517,473   27,246,129   (2,802,217)  (5,934,815)

    Net income (loss)
     per share, basic            0.16         0.22        (0.03)       (0.06)

    Net income (loss)
     per share, diluted          0.15         0.21        (0.03)       (0.06)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                       June 30,  December 31,
                                                          2008          2007
    -------------------------------------------------------------------------
                                                          $            $

    Share capital                                   197,179,178  187,223,652

    Working capital                                  88,303,377   70,974,442

    Petroleum and natural gas properties            102,929,728   81,963,075

    Total assets                                    211,120,142  166,641,302

    Total current liabilities                        16,639,228    9,307,557

    Shareholders' equity                            192,346,056  155,359,807

    Cash dividends per share                                NIL          NIL
    


    Results of operations for the three and six month periods ending June 30,
    2008

    This consolidated financial information includes the revenue and expenses
of the Company for the six month periods ended June 30, 2008 and 2007. During
the six month period ended June 30, 2008, revenue after royalties from
operations amounted to $47,940,348. In this same period, operating costs were
$6,051,140 resulting in an operating profit of $41,889,208. During the six
month period ended June 30, 2007, the Company generated operating revenue
after royalties of $2,801,468. In this same period operating costs were
$1,474,253 resulting in an operating profit of $1,327,215. This significant
increase in operating profit in the period ending June 30, 2008, is mainly a
consequence of additional production from the Costayaco and Juanambu 2007
discoveries and higher oil prices.
    The Company produced on average 2,642 boepd for the six months ended June
30, 2008 and 468 boepd for the six months ended June 30, 2007.
    The Company's revenue, realized after royalties, operating costs and net
backs for the three and six month periods ended June 30, 2008 and 2007 are as
follows:

    
                                 June 30, 2008             June 30, 2007
    -------------------------------------------------------------------------
                              Three         Six         Three         Six
                              months       months       months       months
                              ended        ended        ended        ended
    Oil

    Bopd - Average              3,029        2,642          242          296
    Revenue, net of
     royalties per barrel     $104.43      $100.02       $52.65       $44.51
    Net operating costs
     per barrel                $13.63       $12.58       $21.15       $19.09

    Gas

    Mscf per day - Average         10           44        1,019        1,034
    Revenue, net of
     royalties per Mscf             -        $2.23        $2.16        $2.22
    Net operating
     costs per Mscf                 -       $19.40        $0.87        $0.89

    


    Gas operating costs for the six months ended June 30, 2008 are unusually
high as the Company Guepaje gas field only produced for the last six days of
the six month period and all fixed operating costs are attributed to this
small volume.
    General and administrative expenses for the three and six month periods
ended June 30, 2008 amounted to $ 1,320,953 and $ 2,811,552, respectively, in
comparison to the three and six month period ended June 30, 2007, which were
to $1,319,363 and $2,380,667, respectively.
    The substantial components of general and administrative expenses are as
follows:

    
                                 June 30, 2008             June 30, 2007
    -------------------------------------------------------------------------
                              Three         Six         Three         Six
                              months       months       months       months
                              ended        ended        ended        ended
                                $            $            $            $

    General office            162,747      291,247      158,482      217,076
    Salaries & benefits       680,821    1,788,829      707,559    1,506,687
    Professional fees         360,171      474,020      135,429      212,503
    Public company cost       107,171      185,831      156,548      202,160
    Consulting fees            10,043       71,625      161,345      242,241
                          ---------------------------------------------------
                            1,320,953    2,811,552    1,319,363    2,380,667
                          ---------------------------------------------------
                          ---------------------------------------------------
    

    Salaries and benefits increased as employees were added in response to a
growing level of activity across the organization. Professional fees and
public company costs are mainly comprised of consultancy and legal expenses,
which increased in accordance with the Company's activity levels.
    Depletion, depreciation and accretion amounted to $4,174,757 and
$6,478,965 for the three and six month periods ended June 30, 2008, compared
to the same periods in 2007, which were $945,635 and $2,212,543 respectively.
The variance is due mainly to the impact of the booking additional reserves
and higher production rates.
    The foreign exchange gain amounted to $758,723 and $248,301 for the three
and six month periods ended June 30, 2008, reflecting variations of the
Canadian dollar against the U.S. dollar during these periods, compared with a
loss of $199,233 and $224,888 for same periods ended June 30, 2007.
    Stock-based compensation amounted to $872,983 and $3,480,991 for the
three and six month period ended June 30 2008, respectively, as compared to
$1,207,881 and $2,825,074 for same periods ended June 30, 2007. The increase
in the first half of 2008, in comparison with the first half of 2007 is mainly
due to the additional stock compensation expense of $763,208 (2007 - $Nil)
related to performance warrants recognized as part of the Breakaway
acquisition (see Note 3 to the financial statements for the years ended
December 31, 2007 and 2006).
    Other income and expenses relate to interest income amounting to $265,071
and $999,774 for the three and six month periods ended June 30, 2008,
respectively, compared to $339,285 and $470,399 for the same periods ended
June 30, 2007. Even though interest rates were lower during first half of 2008
in comparison with the first half of 2007, higher cash balances held
throughout the current period resulted in greater interest income.
    The resulting net income, amounting to $19,517,473 and $27,246,129 for
the three and six month periods ended June 30, 2008, respectively, compared
with losses of $2,802,217 and $5,934,815 for the same periods ended June 30,
2007, are representative of a higher production levels in Colombia and
significantly higher oil prices in the current period.

    Selected Quarterly Financial Information

    The following table sets out selected unaudited quarterly financial
information of Solana and is derived from unaudited quarterly financial
statements prepared by management. Solana's interim financial statements are
prepared in accordance with Canadian generally accepted accounting principles
and are expressed in US dollars.

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

                         SUMMARY OF QUARTERLY RESULTS
                               QUARTERS ENDED

                            June 30,      Mar 31,      Dec 31,      Sep 30,
                              2008         2008         2007         2007
                                $            $            $            $

    Additions to
     Petroleum and Natural
     Gas properties        14,046,819   13,255,246    8,336,394    7,191,743

    Total revenues         31,938,849   17,001,273   12,768,179    3,345,664

    General and
     administrative
     expenses               1,320,953    1,490,599    1,582,711    1,165,775

    Depletion, depreciation
     and accretion          4,174,757  2,304,208(1)   1,558,115    2,018,435

    Foreign exchange
     (income) loss           (758,723)     510,421     (385,373)     237,775

    Stock-based
     compensation             872,983    2,608,009    9,512,159    1,302,779

    Income (loss)
     after taxes           19,517,473  7,728,656(1)    (999,906)  (2,348,505)

    Income (loss)
     per share, basic            0.16       0.06(1)       (0.01)       (0.02)

    Income (loss)
     per share, diluted          0.15       0.06(1)       (0.01)       (0.02)

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

                            June 30,      Mar 31,      Dec 31,      Sep 30,
                              2007         2007         2006         2006
                                $            $            $            $

    Additions to
     Petroleum and Natural
     gas properties        10,486,480    7,274,457    7,902,112    4,402,811

    Total revenues          1,726,827    1,545,040    2,049,754    3,652,608

    General and
     administrative
     expenses               1,319,363    1,061,304    2,042,166      423,640

    Depletion, depreciation
     and accretion            945,635    1,266,908    2,441,325      886,985

    Impairment                      -            -   29,822,544            -

    Foreign exchange
     (income) loss            199,233       25,655      160,105   (3,424,333)

    Stock-based
     compensation           1,207,881    1,617,193    2,300,703      209,875

    Income (loss)
     after taxes           (2,802,217)  (3,132,598) (31,076,705)   4,989,157

    Income (loss) per share,
     basic and diluted          (0.03)       (0.03)       (0.34)        0.05

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

    (1) Amounts have been amended to correct an over depletion in the quarter
    ended March 31, 2008 of $1.2 million.
    

    LIQUIDITY

    Solana's working capital increased from $70,974,442 at March 31, 2008, to
$88,303,377 at June 30, 2008, largely due to the increase in accounts
receivable corresponding to crude sales from the Costayaco and Juanambu
fields.
    The Company's cash balances at June 30, 2008, amounting to $73,401,767
are committed to the Company's planned capital expenditure program in
Colombia. The Company does not currently require additional financing in order
to fund its ongoing exploration, appraisal and development programs.
    The Company does not have any long term debt.

    SUMMARY OF CASH INFLOWS AND OUTFLOWS

    The company incurred cash inflows from operations amounting to
$20,563,410 and $33,204,066 for the three and six month periods ended June 30,
2008, compared to the same periods in 2007 which incurred cash outflows
amounting to $696,437 and $804,160. This difference is substantially due to
the impact of higher production and higher oil prices.
    Solana's net cash inflow from financing activities amounted to $6,259,129
for the six month period ended June 30, 2007, relating to proceeds obtained
from stock option and warrant exercises in May and June 2008, compared to $Nil
for the six month period ended June 30, 2007.
    The Company incurred cash outflows from its investing activities of
$8,245,527 and $28,076,989 for the three and six month periods ended June 30,
2008 as compared to $8,642,779 and $12,571,659 for the three and six month
periods ended June 30, 2007. The bulk of the cash outflow for the six month
period ended June 30, 2008 was attributable to expenditures on petroleum and
natural gas properties of $27,302,065.

    RELATED PARTY TRANSACTIONS

    The Company paid $30,169 (2007 - $28,158) in service fees in the current
six month period ended June 30, 2008, to a company controlled by a director of
the Company. During this period $3,640 (2007 - Nil) was also paid to a
director for consulting services in Colombia. These fees are included in
general and administrative expense.

    CAPITALIZATION

    Authorized share capital consists of an unlimited number of common
shares.

    
    Continuity of common shares                       Number of     Amount
                                                        Shares         $
    ------------------------------------------------------------------------
    Balance, December 31, 2007                      123,176,792  187,223,652
    Shares in escrow earned in period                         -    1,123,917
    Exercise of performance warrants                  2,500,000    6,621,780
    Exercise of stock options                           750,000    2,209,829
    ------------------------------------------------------------------------
    Balance, June 30, 2008                          126,426,792  197,179,178
    ------------------------------------------------------------------------


    Continuity of warrants                                          Number

    ------------------------------------------------------------------------
    Balance, December 31, 2007                                    10,000,000
    Exercised in period                                           (2,500,000)
    -------------------------------------------------------------------------
    Balance, June 30, 2008                                         7,500,000
    -------------------------------------------------------------------------


    Continuity of stock options                                    Weighted
                                                      Number of     Average
                                                       Options     Exercise
                                                                     Price
                                                                       $
    -------------------------------------------------------------------------
    Balance, December 31, 2007                        4,625,000         1.75
    -------------------------------------------------------------------------
    Issued in period                                    230,000         4.01
    Exercised in period                                (750,000)        1.67
    Expired in period                                   (60,000)        2.33
    -------------------------------------------------------------------------
    Balance, June 30, 2008                            4,045,000         1.89
    -------------------------------------------------------------------------


    Performance warrant terms

    -------------------------------------------------------------------------
    Strike price                                              Cdn$2.00/share
    Expiry                                                     April 4, 2010


    All performance warrants are fully vested as the Company shares have
    traded at a weighted average price exceeding Cdn$2.75 per share for a
    45 consecutive day period.
    

    SUBSEQUENT EVENT

    On July 29, 2008, Solana announced that it had entered into a definitive
agreement providing for a business combination with Gran Tierra Energy Inc. It
is expected that the combination of the two companies will not only
consolidate 100% of the working interest in Costayaco, a premium light oil
asset in Colombia, but will also launch a substantive, well financed, South
American focused entity with an enviable land position and a portfolio of
opportunities across the risk spectrum. Management of the two companies
expects that the combination will provide many benefits, including:

    
    -  Creation of a stronger South American oil producer with significant
       producing assets in Colombia;
    -  Significant exploration portfolio properties in each of Colombia,
       Argentina and Peru;
    -  Consolidation of 100% of the working interest in the Costayaco field
       (95% economic interest excluding government royalties), a major light
       oil discovery made in Colombia in 2007, currently under delineation
       and development;
    -  An entity with a pro-forma enterprise value of approximately $1.35
       billion based on Gran Tierra's stock price on July 28, 2008, which is
       expected to result in enhanced liquidity and a more competitive cost
       of capital; and
    -  Strong pro-forma cash flows which are expected to allow the combined
       entity to internally finance the exploration and development of the
       Costayaco field, pursue other exploration opportunities on the
       combined company's large undeveloped land base in Colombia, Argentina
       and Peru, and pursue additional new venture growth opportunities.
    

    A summary of the transaction can be found in Note 14 to the second
quarter 2008 financial statements.

    BUSINESS RISK AND UNCERTAINTIES

    The Company's business is subject to risks inherent in oil and gas
exploration and development operations. In addition, there are risks
associated with the foreign jurisdiction in which the Company operates. The
Company has identified certain risks pertinent to its business, including:
exploration and reserve risks, drilling and operating risks, costs and
availability of materials and services, capital markets and the requirement
for additional capital, loss of or changes to production sharing, joint
venture or related agreements, economic and sovereign risks, possibly less
developed legal systems, reliance on strategic relationships, market risk,
volatility of future oil and gas prices and foreign currency risk.
    Solana attempts to monitor, assess and mitigate certain of these risks by
retaining an experienced team of professionals and using modern technology.
Further, the Company has focused its activities in known hydrocarbon basins in
a jurisdiction that has previously established long-term oil and gas ventures
with foreign oil and gas companies, existing infrastructure of services and
oil and gas transportation facilities, and reasonable proximity to markets.
The Company also retains consultants resident in Colombia to monitor economic
and political developments and to assist with operating, administrative and
legal matters. There are certain risks, however, over which the Company has
little or no control.

    CRITICAL ACCOUNTING POLICIES AND ESTIMATES

    Petroleum and Natural Gas Operations

    The Company follows the full cost method of accounting for petroleum and
natural gas operations, whereby all costs of exploring for and developing
petroleum and natural gas reserves are capitalized in country-by-country cost
centres. Such costs include land acquisition costs, geological and geophysical
costs, carrying charges on non-producing properties, costs of drilling both
productive and non-productive wells, interest costs on major development
projects and overhead charges directly related to acquisition, exploration and
development activities.
    The costs (including exploratory dry holes) in cost centres from which
there has been no commercial production are not subject to depletion until
commercial production commences. The capitalized costs are assessed to
determine whether it is likely such costs will be recovered in the future. To
the extent there are costs which are not likely to be recovered in the future,
they are written-off.
    The costs in cost centres from which there is production, together with
the cost of production equipment, are depleted and depreciated on the
unit-of-production method, based on the estimated proved reserves after
royalties. Petroleum and natural gas reserves and production are converted
into equivalent units, based upon estimated relative energy content. Costs of
acquiring and evaluating significant unproved properties are excluded from the
depletion calculations. These unproved properties are assessed to determine
whether impairment has occurred. When proved reserves are assigned or the
carrying value of the property is considered to be impaired, the cost of the
property or the amount of the impairment is added to costs subject to
depletion.
    Petroleum and natural gas properties are subject to a ceiling test in
each reporting period to determine that the costs are not impaired and do not
exceed the fair value of the properties. The costs are assessed to be not
impaired if the sum of the undiscounted cash flows expected from the
production of proved reserves and the cost of unproved properties, net of
impairment allowances of unproved properties exceed the carrying value of the
petroleum and natural gas properties. If the carrying value of the petroleum
and natural gas properties is determined to be impaired, an impairment loss is
recognized to the extent that the carrying value exceeds an estimated fair
value. The fair value estimate is normally based on the sum of the discounted
cash flows expected from the production of proved and probable reserves plus
the cost of unproved properties, net of impairment allowances. The cash flows
are estimated using forecast product prices and costs and are discounted using
a risk-free interest rate.
    Proceeds from the sale of petroleum and natural gas properties are
applied against capitalized costs, with no gain or loss recognized, unless
such a sale would alter the depletion rate by more than 20%.

    ADVISORY REGARDING FORWARD-LOOKING STATEMENTS

    Certain statements contained in this MD&A may constitute forward-looking
statements. These statements relate to future events or the Company's 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", "plan",
"continue", "estimate", "expect", "may", "will", "project", "predict",
"propose", "potential", "targeting", "intend", "could", "might", "should",
"believe" and similar expressions. These statements involve known and unknown
risks, uncertainties and other factors that may cause actual results or events
to differ materially from those anticipated in such forward-looking
statements. The Company believes that the expectations reflected in those
forward-looking statements are reasonable but no assurance can be given that
these expectations will prove to be correct and such forward-looking
statements included in this MD&A should not be unduly relied upon by investors
as actual results may vary. These statements speak only as of the date of this
MD&A and are expressly qualified, in their entirety, by this cautionary
statement.
    
    In particular, this MD&A contains forward-looking statements, pertaining
to the following:
    -  capital expenditure programs;
    -  development of resources;
    -  treatment under governmental regulatory and taxation regimes;
    -  expectations regarding the Company's ability to raise capital;
    -  expenditures to be made by the Company to meet certain work
       commitments; and
    -  work plans to be conducted by the Company.

    With respect to forward-looking statements listed above and contained in
this MD&A, the Company has made assumptions regarding, among other things:
    -  the legislative and regulatory environment;
    -  the impact of increasing competition;
    -  unpredictable changes to the market prices for oil and natural gas;
    -  that costs related to development of the oil and gas properties will
       remain consistent with historical experiences;
    -  anticipated results of exploration activities; and
    -  the Company's ability to obtain additional financing on satisfactory
       terms.

    The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risk
factors set forth below and elsewhere in this MD&A:
    -  volatility in the market prices for oil and natural gas;
    -  uncertainties associated with estimating resources;
    -  geological, technical, drilling and processing problems;
    -  liabilities and risks, including environmental liabilities and risks,
       inherent in oil and natural gas operations;
    -  fluctuations in currency and interest rates;
    -  incorrect assessments of the value of acquisitions;
    -  unanticipated results of exploration activities;
    -  competition for, among other things, capital, acquisitions of
       reserves, undeveloped lands and skilled personnel;
    -  lack of availability of additional financing and farm-in or joint
       venture partners; and
    -  unpredictable weather conditions.
    

    The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of these risk
factors set forth above.

    August 18, 2008


    
                          SOLANA RE

SOURCES LIMITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the Three and Six-Month Periods Ended June 30, 2008, and 2007 (Unaudited) SOLANA RE

SOURCES LIMITED INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) Expressed in US dollars June 30, December 31, 2008 2007 ------------ ------------ $ $ Assets Current Cash and cash equivalents 73,401,767 71,537,827 Accounts receivable 27,138,494 7,954,162 Future income tax asset (Note 11) 4,000,375 - Prepaid expenses 401,969 790,010 ------------ ------------ 104,942,605 80,281,999 Deposits (Note 3) 1,178,750 3,156,750 Petroleum and natural gas properties 102,929,728 81,963,075 Other capital assets 964,670 877,051 Other receivables 725,753 - Investment (Note 4) 378,636 362,427 ------------ ------------ 211,120,142 166,641,302 ------------ ------------ ------------ ------------ Liabilities Current: Accounts payable and accrued liabilities 9,519,207 9,307,557 Income tax payable 7,120,021 - ------------ ------------ 16,639,228 9,307,557 Asset retirement obligations (Note 5) 2,134,858 1,973,938 ------------ ------------ 18,774,086 11,281,495 ------------ ------------ Shareholders'equity Share capital (Note 6) 197,179,178 187,223,652 Contributed surplus (Note 6) 11,547,195 11,762,601 Accumulated other comprehensive income 5,791,923 5,791,923 Deficit (22,172,240) (49,418,369) ------------ ------------ (16,380,317) (43,626,446) ------------ ------------ 192,346,056 155,359,807 ------------ ------------ 211,120,142 166,641,302 ------------ ------------ ------------ ------------ SOLANA RE

SOURCES LIMITED INTERIM CONSOLIDATED STATEMENT OF INCOME (LOSS), COMPREHENSIVE INCOME (LOSS) AND DEFICIT (Unaudited) Expressed in US Dollars June 30, 2008 June 30, 2007 Three months Six months Three months Six months ended ended ended ended $ $ $ $ ------------ ------------ ------------ ------------ Revenue Oil and gas revenues, net of royalties 31,673,778 47,940,348 1,387,542 2,801,468 Interest 265,071 999,774 339,285 470,399 ------------ ------------ ------------ ------------ 31,938,849 48,940,122 1,726,827 3,271,867 ------------ ------------ ------------ ------------ Expenses Operating 3,757,695 6,051,140 817,675 1,474,253 General and administrative 1,320,953 2,811,552 1,319,363 2,380,667 Depletion, depreciation and accretion 4,174,757 6,478,965 945,635 2,212,543 Foreign exchange loss (gain) (758,723) (248,301) 199,233 224,888 Stock-based compensation (Note 6) 872,983 3,480,991 1,207,881 2,825,074 ------------ ------------ ------------ ------------ 9,367,665 18,574,347 4,489,787 9,117,425 ------------ ------------ ------------ ------------ Income (loss) before income taxes 22,571,184 30,365,775 (2,762,960) (5,845,558) Income taxes (Note 11) - Current 7,054,086 7,120,021 39,257 89,257 - Future (4,000,375) (4,000,375) - - ------------ ------------ ------------ ------------ 3,053,711 3,119,646 39,257 89,257 ------------ ------------ ------------ ------------ Net income (loss) and comprehensive income (loss) 19,517,473 27,246,129 (2,802,217) (5,934,815) Deficit, beginning of period (41,689,713) (49,418,369) (43,267,742) (40,135,144) ------------ ------------ ------------ ------------ Deficit, end of period (22,172,240) (22,172,240) (46,069,959) (46,069,959) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) per share, basic (Note 7) 0.16 0.22 (0.03) (0.06) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) per share, diluted (Note 7) 0.15 0.21 (0.03) (0.06) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ SOLANA RE

SOURCES LIMITED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Expressed in US Dollars June 30, 2008 June 30, 2007 Three months Six months Three months Six months ended ended ended ended $ $ $ $ ------------ ------------ ------------ ------------ Operating activities Net Income (loss) 19,517,473 27,246,129 (2,802,217) (5,934,815) Items not involving cash: Unrealized foreign exchange loss (gain) (1,428) (1,644) (47,736) 93,038 Depletion, depreciation and accretion 4,174,757 6,478,965 945,635 2,212,543 Future income tax (4,000,375) (4,000,375) - - Stock-based compensation 872,983 3,480,991 1,207,881 2,825,074 ------------ ------------ ------------ ------------ 20,563,410 33,204,066 (696,437) (804,160) Changes in non-cash working capital (7,600,857) (9,523,910) (769,540) (680,556) ------------ ------------ ------------ ------------ 12,962,553 23,680,156 (1,465,977) (1,484,716) ------------ ------------ ------------ ------------ Financing activities Proceeds from the exercise of options 1,259,166 1,259,166 - - Proceeds from the exercise of warrants 4,999,963 4,999,963 - - ------------ ------------ ------------ ------------ 6,259,129 6,259,129 - - ------------ ------------ ------------ ------------ Investing activities Additions to petroleum and natural gas properties (14,046,819) (27,302,065) (10,486,480) (17,907,040) Additions to investments 13,215 (16,209) (91,794) (91,794) Additions to capital assets (173,796) (231,172) (349,834) (340,723) Sale of capital assets - - 23,711 23,711 Deposits - 1,978,000 (5,241) (5,241) Changes in non-cash working capital 5,961,873 (2,505,543) 2,266,859 5,749,428 ------------ ------------ ------------ ------------ (8,245,527) (28,076,989) (8,642,779) (12,571,659 ----------- ------------ ------------ ------------ Foreign exchange on cash balances 1,427 1,644 58,626 58,156 ------------ ------------ ------------ ------------ Net increase (decrease) in cash 10,977,582 1,863,940 (10,050,130) (13,998,219) Cash and cash equivalents, beginning of period 62,424,185 71,537,827 29,235,341 33,183,430 ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period (Note 9) 73,401,767 73,401,767 19,185,211 19,185,211 ------------ ------------ ------------ ------------ SOLANA RE

SOURCES LIMITED Notes to the Interim Consolidated Financial Statements For the Three and Six Month Periods Ended June 30, 2008 and 2007 (Unaudited) Note 1. Basis of presentation The interim consolidated financial statements of Solana Resources Limited ("Solana" or the "Company") for the three and six month periods ended June 30, 2008 and 2007 have been prepared by management in accordance with accounting principles generally accepted in Canada on the same basis as the audited consolidated financial statements as at and for the year ended December 31, 2007 except for new standards adopted as described in Note 2. These unaudited interim consolidated financial statements do not include all of the disclosures required by Canadian generally accepted accounting principles applicable to the annual consolidated financial statements; therefore, they should be read in conjunction with the December 31, 2007 audited consolidated financial statements. Note 2. Changes in accounting policies Effective January 1, 2008, the Company adopted the new Canadian Institute of Chartered Accountants ("CICA") standards related to Section 3251, "Equity" and Section 1506, "Accounting Changes." Section 3251 replaces Section 3250, "Surplus," and describes standards for the presentation of equity and changes in equity for reporting periods as a result of the application of Section 1530, "Comprehensive Income." The only impact of Section 1506, "Accounting Changes," on Solana's financial statements is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. On January 1, 2008, the Company also adopted standards related to Section 3862, "Financial Instruments-Disclosures", Section 3863, "Financial Instruments-Presentations" and Section 1535, "Capital Disclosures". Sections 3862 and 3863 require additional disclosures regarding the significance of financial instruments to the entity's financial position and performance; and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. Section 1535 establishes standards for disclosing information about the Company's capital and how it is managed. It requires disclosures of the Company's objectives, policies and processes for managing capital, the quantitative data about what the Company regards as capital, whether the Company has complied with any capital requirements and if it has not complied, the consequences of such non-compliance. The disclosures required pursuant to the adoption of these sections are included in Note 13. Note 3. Deposits The Company had funds on deposit totaling $1,178,750 as of June 30, 2008, and $3,156,750 as of December 31, 2007, equal to 10% of work commitments on the Company's Agencia Nacional de Hidrocarburos ("ANH") acreage. These funds will be returned to the Company upon completion of the work commitments on the Guachiria Norte, Catguas, Guachiria Sur, Garibay, Colonia and San Pablo blocks. The average interest rate income on these deposits is 4.5% pa. Note 4. Investment The Company has invested, as at the end of June 2008, $378,636 (2007 - $362,427) in the Colombian Hydrocarbon Investment Fund ("Fund"), and expects to invest a maximum amount of $500,000. The Fund is managed by a US based fund manager who specializes in South American natural resources sector investments. The Fund is expected to have an investment period of four years. After this period, it is expected that the Fund will be wound up, and any remaining capital and any earned profits will be distributed to the investors over a maximum period of seven years. Note 5. Asset retirement obligations The following table represents the reconciliation of the Company's obligations associated with the retirement of oil and gas properties: ------------------------------------------------------------------------- Asset retirement obligations, December 31, 2007 $1,973,938 Liabilities incurred during period 119,401 Liabilities settled during period - Accretion 41,519 ------------------------------------------------------------------------- Asset retirement obligations, June 30, 2008 $2,134,858 ------------------------------------------------------------------------- These obligations will be settled at the end of the useful lives of the underlying assets, which currently extend up to 7 years into the future. This amount has been computed using a credit-adjusted risk-free discount rate of 10% per annum and an inflation rate of 2.5% per annum. Note 6. Share capital Authorized share capital consists of an unlimited number of common shares. Continuity of common shares Number of Amount Shares $ ------------------------------------------------------------------------- Balance, December 31, 2007 123,176,792 187,223,652 Shares in escrow earned in period - 1,123,917 Exercise of performance warrants 2,500,000 6,621,780 Exercise of stock options 750,000 2,209,829 ------------------------------------------------------------------------- Balance, June 30, 2008 126,426,792 197,179,178 ------------------------------------------------------------------------- Continuity of warrants Number ------------------------------------------------------------------------- Balance, December 31, 2007 10,000,000 Exercised in period (2,500,000) ------------------------------------------------------------------------- Balance, June 30, 2008 7,500,000 ------------------------------------------------------------------------- Warrant terms ------------------------------------------------------------------------- Strike price Cdn$2.00/share Expiry April 4, 2010 All warrants are fully vested as the Company's shares traded at a weighted average price greater than Cdn$2.75 per share for a 45 consecutive day period in the first quarter of 2008. Contributed surplus: Balance, December 31, 2007 11,762,601 Stock-based compensation expense - stock options 1,593,866 Performance warrants earned in period 763,208 Stock options exercised in period (950,663) Performance warrants exercised in period (1,621,817) ------------------------------------------------------------------------- Balance, June 30, 2008 11,547,195 ------------------------------------------------------------------------- Stock-based compensation June 30, 2008 December 31, 2007 Number of Weighted Number of Weighted Options Average Price Options Average Price (Cdn$ Per (Cdn$ Per Option) Option) Outstanding, beginning period 4,625,000 1.75 4,350,000 1.64 Granted during period 230,000 4.01 1,965,000 2.14 Exercised during period (750,000) 1.67 - - Expired or cancelled during period (60,000) 2.33 (1,690,000) 1.92 ----------- ----------- Outstanding, end of period 4,045,000 1.89 4,625,000 1.75 ----------- ----------- Exercisable, end of period 1,423,330 1.59 1,873,333 1.55 ----------- ----------- June 30, 2008 Exercise Number of Weighted Number of Weighted Price (Cdn$) Options Average Options Average Outstanding Remaining Exercisable Exercisable Contractual Option Price Life (years) (Cdn$) 4.13 200,000 4.92 66,666 3.03 3.25 30,000 4.76 - - 2.75 290,000 1.42 290,000 2.14 2.50 75,000 4.32 - - 2.25 1,565,000 4.45 - - 2.11 30,000 2.78 20,000 1.65 1.70 25,000 4.12 - - 1.67 300,000 2.16 199,998 1.30 1.19 200,000 3.72 100,000 0.90 1.15 1,050,000 3.29 466,666 0.86 0.60 280,000 0.43 280,000 0.46 ------------------------------------------------------------------------- 1.89 4,045,000 3.46 1,423,330 1.59 ------------------------------------------------------------------------- For the first half of 2008, stock based compensation expense of $1,593,866 (2007 - $528,958) related to options has been recorded in the Consolidated Statement of Income (Loss). Additional stock-based compensation expense of $1,123,917 (2007 - $2,296,116) related to shares in escrow and $763,208 (2007 - Nil) related to performance warrants recognized as part of the Breakaway acquisition was recognised. The fair values of all common share options and warrants granted are estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of options granted and the assumptions used in their determination are: Six months Six months ended ended June 30, June 30, 2008 2007 ------------------------ Risk-free interest rate (percent) 2.98% 3.99% Expected life (years) 5 5 Volatility (percent) 93% 96% Weighted average fair value of options granted 1.43 1.07 Expected annual dividend per share - - Note 7. Per-Share Amounts The weighted average number of common shares outstanding used for the computation of per-share amounts is: June 30, 2008 June 30, 2007 For the For the For the For the three three three six months months months months ended ended ended ended --------------------------------------------------- Weighted average number of common shares outstanding 124,444,014 123,806,902 95,876,792 95,876,792 Shares issuable pursuant to stock options 1,300,124 1,131,563 1,879,999 189,091 Shares issuable pursuant to performance warrants 5,034,724 4,223,836 - - --------------------------------------------------- Weighted average number of diluted common shares outstanding 130,778,862 129,162,301 97,756,791 96,065,883 --------------------------------------------------- --------------------------------------------------- Note 8. Segmented Information Three month period ended June 30, 2008 Canada Colombia Total $ $ $ -------------------------------------- Revenue - 31,673,778 31,673,778 Operating costs - (3,757,695) (3,757,695) -------------------------------------- - 27,916,083 27,916,083 -------------------------------------- General and administrative expenses 879,969 440,984 1,320,953 Depletion, depreciation, and accretion 20,349 4,154,408 4,174,757 Foreign exchange gain (132,113) (626,610) (758,723) Stock-based compensation 872,983 - 872,983 Interest income (186,580) (78,491) (265,071) -------------------------------------- 1,454,608 3,890,291 5,344,899 -------------------------------------- Income (loss) before taxes (1,454,608) 24,025,792 22,571,184 Income taxes - 3,053,711 3,053,711 -------------------------------------- Net income (loss) (1,454,608) 20,972,081 19,517,473 -------------------------------------- -------------------------------------- Identifiable assets 123,401,972 87,718,170 211,120,142 -------------------------------------- -------------------------------------- Capital expenditures - 14,220,615 14,220,615 -------------------------------------- -------------------------------------- Six month period ended June 30, 2008 Canada Colombia Total $ $ $ -------------------------------------- Revenue - 47,940,348 47,940,348 Operating costs - (6,051,140) (6,051,140) -------------------------------------- - 41,889,208 41,889,208 -------------------------------------- General and administrative expenses 1,483,999 1,327,553 2,811,552 Depletion, depreciation, and accretion 24,271 6,454,694 6,478,965 Foreign exchange gain (133,064) (115,237) (248,301) Stock-based compensation 3,480,991 - 3,480,991 Interest income (716,723) (283,051) (999,774) -------------------------------------- 4,139,474 7,383,959 11,523,433 -------------------------------------- Income (loss) before taxes (4,139,474) 34,505,249 30,365,775 Income taxes - 3,119,646 3,119,646 -------------------------------------- Net income (loss) (4,139,474) 31,385,603 27,246,129 -------------------------------------- -------------------------------------- Identifiable assets 123,401,972 87,718,170 211,120,142 -------------------------------------- -------------------------------------- Capital expenditures - 27,533,237 27,533,237 -------------------------------------- -------------------------------------- Three month period ended June 30, 2007 Canada Colombia Total $ $ $ -------------------------------------- Revenue - 1,387,542 1,387,542 Operating costs - 817,675 817,675 -------------------------------------- - 569,867 569,867 -------------------------------------- General and administrative expenses 259,262 1,060,101 1,319,363 Depletion, depreciation, and accretion 3,359 942,276 945,635 Foreign exchange loss 3,101 196,132 199,233 Stock-based compensation 1,207,881 - 1,207,881 Interest income (328,744) (10,541) (339,285) -------------------------------------- 1,144,859 2,187,968 3,332,827 -------------------------------------- Loss before taxes (1,144,859) (1,618,101) (2,762,960) Income taxes - 39,257 39,257 -------------------------------------- Net loss (1,144,859) (1,657,358) (2,802,217) -------------------------------------- -------------------------------------- Identifiable assets 38,583,413 59,301,348 97,884,761 Capital expenditures - 10,836,314 10,836,314 -------------------------------------- -------------------------------------- Six month period ended June 30, 2007 Canada Colombia Total $ $ $ -------------------------------------- Revenue - 2,801,468 2,801,468 Operating costs - 1,474,253 1,474,253 -------------------------------------- - 1,327,215 1,327,215 -------------------------------------- General and administrative expenses 723,215 1,657,452 2,380,667 Depletion, depreciation, and accretion 7,644 2,204,899 2,212,543 Foreign exchange loss 35,994 188,894 224,888 Stock-based compensation 2,825,074 - 2,825,074 Interest income (448,122) (22,277) (470,399) -------------------------------------- 3,143,805 4,028,968 7,172,773 -------------------------------------- Loss before taxes (3,143,805) (2,701,753) (5,845,558) Income taxes - 89,257 89,257 -------------------------------------- Net loss (3,143,805) (2,791,010) (5,934,815) -------------------------------------- -------------------------------------- Identifiable assets 38,583,413 59,301,348 97,884,761 Capital expenditures - 18,247,763 18,247,763 -------------------------------------- -------------------------------------- Note 9. Supplemental cash flow information At June 30, 2008, cash and cash equivalents includes $68,699,701 (2007 - $13,468,735) in term deposits earning an average interest rate of 2.22% (2007 - 4.34%). Six months Six months ended ended June 30, June 30, 2008 2007 Cash interest paid - - ----------- ----------- Cash taxes paid - - ----------- ----------- Note 10. Related party transactions In the six month period ended June 30, 2008, service fees in the amount of $30,169 (2007 - $28,158) were paid to a company controlled by a director of the Company and are included in general and administrative expenses. Additionally $3,640 (2007 - Nil) was paid to a director for consulting services in Colombia. These fees are for services rendered in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Note 11. Income taxes Subject to confirmation by taxation authorities, the Company has approximately Cdn$10.2 million ($9.94 million) of Canadian non-capital loss carry forwards which are available to be carried forward and which expire between 2008 and 2027. The consolidated financial statements do not reflect the potential tax benefit of these losses, as they do not meet the "more likely than not" criteria for recognition. Subject to confirmation by taxation authorities, the Company has approximately Col$98 billion ($49.6 million) of Colombian loss carry forwards which have no expiration term and are available to offset future taxable income. The consolidated financial statements reflect the potential tax benefit of these losses, as with the currently expected taxable income they meet the "more likely than not" criteria. Accordingly, a future tax asset of $4,000,375 was recognized at June 30, 2008. Note 12. Commitments The Company estimates remaining 2008 commitments are $27,308,750 which relate mainly to the drilling of two exploration wells and three development wells. Note 13. Financial and capital risk management The Company undertakes transactions in a range of financial instruments including the following categories: June 30, December 31, 2008 2007 $ $ Held for trading (a): Cash and cash equivalents 73,401,767 71,537,827 Loans & receivables (b): Accounts receivable 27,138,494 7,954,162 Deposits 1,178,750 3,156,750 Other receivables 725,753 - Available for sale (c): Investment 378,636 362,427 Other financial liabilities (b): Accounts payable 9,519,207 9,307,557 (a) Measured at fair value which equals the carrying value. (b) Measured at amortized cost using the effective interest method which is not significantly different from the fair values due to the short term to maturity of these financial instruments. (c) Measured at cost as the fair value is not readily available (Note 4). The Company's activities result in exposure to a number of financial risks, including the following: Credit risk A substantial portion of the Company's accounts receivable are with the Colombian state oil company, Ecopetrol. Crude oil production is sold to Ecopetrol as determined by market based prices which are denominated in U.S. dollars and adjusted for quality differentials. Typically, the Company's maximum credit exposure is revenue from two months' sales. The Company monitors on a continuous basis the ageing profile of its receivables. The credit risk on cash is considered by management to be limited because the counterparties are financial institutions with high credit ratings assigned by international credit rating agencies. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. On a quarterly basis, the Company assesses if there should be any impairment of the financial assets. There are no material financial assets that the Company considers past due and there is no impairment of financial assets as at June 30, 2008. Market risk Foreign currency exchange risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognized assets and liabilities are denominated in a currency that is not the Company's measurement currency. The Company is exposed to foreign exchange risk mainly with respect to its certain expenditures and expenses from various currencies primarily the Colombian pesos and Canadian dollars in relation to the U.S. dollars. However, the revenues received by the Company for the production of crude oil are primarily in U.S. dollars thereby the Company's cash flow from commodity sales would not be materially impacted by fluctuations in foreign currency. The Company's management monitors the exchange rate fluctuations on a regular basis and does not use currency derivative instruments to manage the Company's exposure to foreign currency fluctuations. At June 30, 2008, the carrying amount of the Company's foreign currency denominated net monetary assets was approximately $6 million and net monetary liabilities were $1.4 million. Assuming all other variables remain constant, a fluctuation of one cent in the exchange rate of the Canadian dollar to the US dollar would result in a change in income of approximately $60 thousand dollars. As well, a fluctuation of one cent in the exchange rate of the Colombian peso to the US dollar would result in a change in income of approximately $14 thousand dollars. Liquidity Risk Liquidity risk is the risk that Solana will not be able to meet its financial obligations as they come due. The Company's cash requirements and balances are projected based on forecasted operations and capital expenditures. The Company plans to meet these requirements through the mix of available funds, equity financing on a required basis, project debt financing and cash to be provided by the exercise of warrants and share options in the future. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses. Interest rate risk Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. The Company does not have any debt nor has it drawn on its credit facility as at June 30, 2008. The Company believes that it has no significant concentration of interest risk related to its cash equivalents as most of these are invested in financial institutions with high credit ratings. Capital risk The Company considers its capital structure to include shareholder's equity, bank debt and working capital. In order to maintain or adjust its capital structure, the Company may from time to time issue shares and adjust its capital spending to manage current and projected debt levels targeted at maximum of 30% at a given period. As at June 30, 2008, the Company has an available cash of $73.4 million to fund its current and future operations and an undrawn credit facility of $100 million. The Company is not subject to any externally imposed capital requirements other than the covenants on its credit facility with its lender to maintain its ratio of current assets to current liabilities (working capital) at a 1.0:1.0 level. The Company is currently in compliance with all its financial covenants as at June 30, 2008. Note 14. Subsequent events On July 29, 2008, Solana announced that it had entered into a definitive agreement providing for the business combination of Gran Tierra Energy Inc. ("Gran Tierra") and Solana. Under the terms of the Agreement, each Solana shareholder will receive either (i) 0.9527918 of a common share of Gran Tierra or; (ii) 0.9527918 of a common share of a Canadian subsidiary of Gran Tierra (an "Exchangeable Share") for each common share of Solana held, which represents a premium of approximately 14.1% to the 20 day weighted average trading price to July 28, 2008 of the Solana shares on the TSX Venture Exchange and Gran Tierra's July 28, 2008 closing price on the Toronto Stock Exchange of CAD $5.73. The shares of the Canadian subsidiary of Gran Tierra: (i) will have the same voting rights, dividend entitlements and other attributes as Gran Tierra common stock; (ii) will be exchangeable, at each shareholder's option, on a one-for-one basis, into Gran Tierra common stock; and (iii) subject to compliance with the listing requirements of the Toronto Stock Exchange, will be listed on the Toronto Stock Exchange. The Exchangeable Shares will automatically be exchanged for Gran Tierra common shares five years from closing, and in certain other events. The transaction will be completed as an "arrangement" pursuant to the Business Corporations Act (Alberta). Upon completion of the transaction, Solana will become an indirect wholly-owned subsidiary of Gran Tierra. The plan of arrangement will be accomplished on a tax-deferred basis in Canada, but may be a taxable transaction for non-Canadian holders of Solana securities. On a fully diluted basis, upon the closing of the plan of arrangement, Solana securityholders will own approximately 49% of the combined company and Gran Tierra securityholders will own approximately 51% of the combined company. The proposed transaction is subject to regulatory, stock exchange, court and shareholder approvals. Gran Tierra and Solana expect to hold shareholder meetings in October 2008. A joint proxy statement and management information circular is expected to be mailed to shareholders of the companies in September 2008. The parties have agreed to pay each other a termination fee of $21 million in certain circumstances and an expense reimbursement fee of $1.5 million in certain other circumstances. Abbreviations Cdn Canadian U.S. United States Col. Colombian Pesos WTI West Texas Intermediate bbl barrel bopd barrels of oil per day mbbls thousand barrels mmbbls million barrels mcf thousand cubic feet mcfpd thousand cubic feet per day mmcf million cubic feet mmcfpd million cubic feet per day boe (*)barrel of oil equivalent boepd (*)barrel of oil equivalent per day NGL natural gas liquids $mm million dollars TSX-V TSX Venture Exchange LSE London Stock Exchange AIM Alternative Investment Market Of the London Stock Exchange MD&A Management's Discussion and Analysis GAAP Generally Accepted Accounting Principles G&A General and Administrative Expenses (*) A boe conversion ratio of 6 mcf = 1 bbl has been used. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Corporate Information Directors Nominated Adviser Raymond P. Antony, Chair(1)(2)(4) Ambrian Capital plc Luis Miguel Morelli, Director(3)(4) Grant Howard, Director(1)(2)(4) UK Broker Roy H. Hudson, Director(3)(4) Tristone Capital Limited Keith J. Jackson, Director(1)(4) J. Scott Price, Director, President & CEO(2)(3)(4) (1) Audit Committee (2) Reserves Committee (3) Corporate Governance and Compensation Committee (4) Health, Environment and Safety Committee Management J. Scott Price, President & CEO Glenn Van Doorne, COO Ricardo Montes, CFO Trading Symbols TSX-V: SOR LSE (AIM): SORL Transfer Agents Valiant Trust Company Auditor Deloitte & Touche LLP Legal Counsel Davis LLP Banker Royal Bank of Canada Offices Head Office: Subsidiary: Suite 100, 522 - 11th Avenue S.W. Solana Petroleum Exploration Calgary, Alberta, T2R OC8 (Colombia) Limited Canada Regatta Office Park, West Bay Road, Tel.: 403-770-1822 P.O.Box 1106 Fax.: 403-770-1826 Gran Cayman, KYl-1205, Cayman Islands Fax: 345-945-7566 Tel.: 345-949-3977 Branch: Solana Petroleum Exploration Colombia Limited Calle 113 No. 7-21, Of 706 Torre A, Edificio Teleport Bogota, D.C. Colombia Tel: 011 571 629 1636 Fax: 011 571 629 1704 www.solanaresources.com

For further information:

For further information: Solana Resources Limited: Scott Price,
jsp@solanaresources.com, (403) 770-1822; Ricardo Montes,
rmontes@solanaresources.com, (403) 770-1822; Nabarro Wells & Co. Limited
(Nominated Adviser): Marc Cramsie, marccramsie@ambrian.com, +44 20 7634 4705;
Tristone Capital Limited (UK Broker): Nick Morgan,
nmorgan@tristonecapital.com, +44 207 355 5800; Pelham Public Relations: Philip
Dennis, philip.dennis@pelhampr.com, +44 207 743 6363; James MacFarlane,
james.macfarlane@pelhampr.com, +44 207 743 6375

Organization Profile

SOLANA RESOURCES LIMITED

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890