Verenex Energy Inc. - Fourth Quarter 2007 Operating and Financial Results



    CALGARY, March 5 /CNW/ - Verenex Energy Inc. ("Verenex" or the "Company")
(TSX - VNX) is pleased to report its unaudited interim operating and financial
results for the three and twelve months ended December 31, 2007.
    Verenex is a Canada-based international exploration and production
company with a world-class exploration portfolio in the Ghadames Basin in
Libya.

    
    Highlights

    Operations - Libya

    -   Drilled and cased five new field wildcat ("NFW") exploration wells
        and two appraisal wells during 2007, increasing the total well count
        to eight by the end of 2007. Seven of these wells have been fully
        flow tested at a maximum aggregate flow rate of greater than
        75,000 barrels of oil per day ("bopd") (gross), as restricted by test
        equipment capability, as shown below:


    -------------------------------------------------------------------------
                                Perforated       Choke
                Well     Depth   Interval        Size           Oil Rate
    Well Name   Type     (feet)  (feet)        (inches)          (bopd)
    -------------------------------------------------------------------------
    A1-47/02     NFW     11,550    174    40/64ths - 128/64ths   12,500
    -------------------------------------------------------------------------
    B1-47/02     NFW     11,030    312    40/64ths - 96/64ths    23,800
    -------------------------------------------------------------------------
    C1-47/02     NFW      9,900    188    32/64ths - 96/64ths    23,570
    -------------------------------------------------------------------------
    D1-47/02     NFW      9,720    157    32/64ths - 80/64ths     7,742
    -------------------------------------------------------------------------
    E1-47/02     NFW      9,639    Tested - awaiting NOC approval to release
    -------------------------------------------------------------------------
    F1-47/02     NFW     10,300     18       96/64ths             7,215
    -------------------------------------------------------------------------
    A2-47/02  Appraisal  10,400    Tested - awaiting NOC approval to release
    -------------------------------------------------------------------------
    D2-47/02  Appraisal   9,850             Awaiting testing
    -------------------------------------------------------------------------


    -   The A2-47/02 appraisal well was drilled to delineate the A1-47/02 oil
        discovery located 5.1 kilometres to the east. As expected, the A2
        well intersected water oil contacts in two basal sands in the Lower
        Acacus Formation, which based on pressure and fluid data, appear to
        be in pressure communication with these same sands in the A1 well. By
        locating the water oil contacts, the A2 well has confirmed the
        possibility of a stratigraphic component to the hydrocarbon trap and
        a potentially large oil accumulation.

    -   Completed the acquisition phase of the 1,225 square kilometre 3D
        seismic survey in the eastern part of Area 47 in December 2007.
        Processing and interpretation of the entire data set is expected to
        be completed by the middle of 2008.

    -   Submitted preliminary appraisal reports to the Area 47 Management
        Committee ("Area 47 MC") and the NOC in for oil discoveries at A1,
        B1, C1, D1 and F1-47/02 as a first step in progressing towards
        commerciality. The Company plans to submit an application to develop
        an early production facility by the third quarter of 2008. This will
        encompass all of the wells drilled to date in the southern area with
        an initial production rate of up to 50,000 bopd (gross) commencing by
        the end of 2009.

    -   Achieved an excellent safety record for the first full year of field
        operations in 2007 that compares favorably with the best of North
        American and international drilling operations experience.

    -   Continued to progress drilling and seismic programs during the first
        two months of 2008:

        -  Completed the drilling phase of a second appraisal well A3-47/02
           on the A1-47/02 oil discovery located 1.5 kilometres to the
           southwest of the discovery well. The A3 well was drilled to a
           final total depth of 10,500 feet. The well found indications of
           hydrocarbons in the Lower Acacus Formation and is expected to be
           cased and flow tested.

        -  Spudded the A1-47/04 NFW exploration well in the northern part of
           Area 47 on March 2, 2008. The planned depth is 10,500 feet with
           the primary target in the Lower Acacus Formation.

        -  Completed 65% of a 2,400 kilometre 2D seismic survey in the
           southern part of Area 47 by the end of February 2007. The
           acquisition phase is expected to be completed by mid-April 2008.

    Financial

    -   Funds flow from operations in the fourth quarter of 2007 was
        $2.8 million compared to $0.4 million for the fourth quarter of 2006.
        The increase is a result of higher interest revenues on invested
        funds offset by reduced production in France as a result of the sale
        of the producing assets in May 2007.

    -   Net income in the fourth quarter of 2007 was $1.8 million compared to
        net income of $0.1 million in the fourth quarter of 2006. The 2007
        income resulted from $1.2 million in interest revenues and a
        $2 million foreign exchange gain on the Company's US dollar cash
        positions due to the strengthening Canadian dollar, offset by reduced
        petroleum revenues from France.

    -   Working capital surplus at December 31, 2007 was $95.4 million
        compared to $40.6 million as at December 31, 2006, including cash
        amounting to $122.5 million (December 31, 2006 - $49.4 million) net
        of restricted cash amounting to $7.9 million (December 31, 2006 -
        $13.6 million). The increase in working capital is due to the
        July 2007 equity financing which provided net proceeds of
        $110.0 million, partially offset by increased operational accruals in
        Libya.


    Highlights

                          Three Months Three Months     Year         Year
                             Ended        Ended        Ended        Ended
                          December 31, December 31, December 31, December 31,
    (unaudited)               2007         2006         2007         2006
    -------------------------------------------------------------------------

    Financial (thousands
     of Cdn $, except share
     and per share amounts)

    Petroleum and natural
     gas revenues (net)           165          594        1,240        3,212
    Funds flow from
     operations (1)             2,800        1,289          809        3,193
    Net income/(loss)           1,833           63      (12,018)      (3,864)
    Capital expenditures       18,640        8,339       62,751       21,096
    Working capital surplus    95,392       40,642       95,392       40,642
    Common shares
     outstanding
      Basic                44,267,891   36,120,891   44,267,891   36,120,891
      Diluted              50,176,391   41,421,391   50,176,391   41,421,391
    Weighted average
     common shares
     outstanding
      Basic                44,267,294   31,410,864   39,556,493   31,020,555
      Diluted              47,584,615   34,027,051   43,140,016   33,698,168
    Share trading
      High                      13.50         6.99        17.43         6.99
      Low                        8.07         4.63         6.00         3.00
      Close                      8.50         6.69         8.50         6.69

    Operations

    Production
      Crude oil (bbls/d)            -           56           21           90
      Natural gas liquids
       (bbls/d)                    11           16           13           16
      Natural gas (mcf/d)         215          365          266          340
      Boe/d (6:1) (*)              47          133           79          163
    Average reference price
      WTI (US$ per bbl)         90.69        60.21        72.34        66.21
      Brent (US$ per bbl)       88.69        59.68        72.52        65.14
      AECO (Cdn$ per mcf)        6.14         6.91         6.45         6.53
    Average selling price
      Crude oil
       (Cdn$ per bbl)               -        73.08        62.61        72.12
      Natural gas liquids
       (Cdn$ per bbl)           68.90        41.39        57.06        50.98
      Natural gas
       (Cdn$ per mcf)            4.82         5.35         5.20         5.58

    Average Operating Netback
     (Cdn$ per BOE @ 6:1)    38.36        46.63        38.36        48.00

     (1)  The above table includes non-GAAP measures, which may not be
          comparable to other companies. See MD&A for further discussion.
    

    Capital Expenditures (Cdn $)

    During the fourth quarter of 2007, the Company invested approximately
$18.6 million. Libya accounted for all of the investment activity level with
approximately $8.8 million in drilling, $4.2 million in testing and
completions, $4.7 million in geological and geophysical costs and $0.9 million
in capitalized General and Administration ("G&A") and office costs. In France,
the Company had a recovery of $0.2 million due to an over accrual relating to
the drilling of the Orca 1 well in the Aquitaine Maritime permit.
Approximately $0.2 million of capitalized G&A and office costs was incurred in
Canada during the fourth quarter.

    Outlook

    The Company currently has two drilling rigs under long term contract
which enables the spudding of up to 11 to 12 wells during 2008. The program
will include a mix of exploration and appraisal wells to support the dual
objectives of aggressively exploring prospective areas of Area 47 to maximize
resource capture prior to the expiry of the exploration phase in March 2010
and to delineate sufficient contingent resources in existing discoveries in
the southern part of Area 47 to underpin an initial commerciality application
in this area in 2008.
    The Company expects to complete the formation evaluation program and to
case the A3-47/02 appraisal well by mid-March. It is also expected that a
third appraisal well A4-47/02 will be spudded in this area with the KCA DEUTAG
T-19 drilling rig before the end of March, subject to NOC approvals.
    The Company expects to complete the drilling and evaluation of the
A1-47/04 well in the northern part of Area 47 in late April utilizing Ensign
Rig 28. A number of other prospects have been identified in this area from the
new East 3D seismic and contingent on results from the A1-47/04 well,
additional drilling could be advanced in this area in the second quarter of
2008.
    The Company is targeting to complete the full interpretation of results
from the 2007 3D seismic program by the middle of 2008 and the 2008 2D program
by the third quarter of 2008.
    A comprehensive third party assessment of contingent (discovered) and
prospective (undiscovered) resources in Area 47 is progressing to support both
corporate valuations and a commerciality application for an initial phase of
production. The Company is in the process of having this resource assessment
prepared, subject to review with the NOC.
    The southern part of Area 47, including the area encompassed by the South
3D seismic and parts of the East 3D seismic, is contemplated as the core for
an initial production phase of up to 50,000 bopd (gross) by the end of 2009.
Verenex has drilled and cased seven potential production wells to date in
these areas and at least an additional two appraisal wells are expected to be
completed by the middle of 2008. It is expected that additional production
phases would be advanced in Area 47 with further exploration success.
    The Company is targeting to award contracts in March 2008 for Front End
Engineering and Design ("FEED") for the gathering lines, export pipeline and
processing facilities for the initial phase of production following Area 47 MC
approval. The results from the FEED work will be incorporated in the
commerciality application.

    The maximum combined measured flow rates in each of the tested wells in
Libya contained in this press release are not necessarily indicative of the
ultimate production rate and may be lower in any commercial development, which
will be determined from reservoir engineering studies that constitute part of
the appraisal and development planning activities currently underway.

    This press release also contains forward-looking financial and
operational information, including but not limited to seismic and drilling
operations, proposed budgets, earnings, funds flow, production and capital
investment projections. These projections are based on current expectations
and are subject to a number of risks and uncertainties that could materially
affect the results. These risks include, but are not limited to, risks
associated with the oil and gas industry (e.g. financing; operational risks in
development, exploration and production; delays or changes in plans with
respect to exploration or development projects or capital expenditures; the
uncertainty of estimates and projections in relation to production, costs and
expenses and health, safety and environmental risks), drilling equipment
availability and efficiency, the ability to attract and retain key personnel,
the risk of commodity price and foreign exchange rate fluctuations, the
uncertainty associated with dealing with governments and obtaining regulatory
approvals and the risk associated with international activity. Due to the
risks, uncertainties and assumptions inherent in forward-looking statements,
prospective investors in the company's securities should not place undue
reliance on these forward-looking statements.


    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following is management's discussion and analysis (MD&A), dated
December 31, 2007, of the Company's operating and financial results for the
three and twelve months ended December 31, 2007. The financial data has been
prepared in Canadian dollars in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP") applied consistently with prior periods. This
discussion should be read in conjunction with the Company's interim unaudited
consolidated financial statements for the three and twelve months ended
December 31, 2007 and the restated audited consolidated financial statements
for the year ended December 31, 2006, together with the accompanying notes as
contained in the Company's 2006 Annual Report.
    Additional information relating to the Company is available on SEDAR at
www.sedar.com.

    Forward-Looking Information

    This report contains forward-looking financial and operational
information, including but not limited to seismic and drilling operations,
proposed budgets, earnings, funds flow, production and capital investment
projections. These projections are based on current expectations and are
subject to a number of risks and uncertainties that could materially affect
the results. These risks include, but are not limited to, risks associated
with the oil and gas industry (e.g. financing; operational risks in
development, exploration and production; delays or changes in plans with
respect to exploration or development projects or capital expenditures; the
uncertainty of estimates and projections in relation to production, costs and
expenses; and, health, safety and environmental risks), drilling equipment
availability and efficiency, the ability to attract and retain key personnel,
the risk of commodity price and foreign exchange rate fluctuations, the
uncertainty associated with dealing with governments and obtaining regulatory
approvals and the risk associated with international activity. Due to the
risks, uncertainties and assumptions inherent in forward-looking statements,
prospective investors in the company's securities should not place undue
reliance on these forward-looking statements.

    Non-GAAP Measures

    Included in this report are references to terms commonly used in the oil
and gas industry, such as funds flow and funds flow per share which is
expressed before changes in non-cash working capital and are used by the
Company to analyze operating performance, leverage and liquidity. These terms
are not defined by GAAP. Consequently, these are referred to as non-GAAP
measures.

    Operating Results

    Asset Valuation

    The Company performs a review for asset impairment as required by the
Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent
upon an independent reservoir engineer's assessment of the deliverability and
reserves associated with certain wells and the outlook for world prices for
oil and natural gas.
    During the third quarter, the Company drilled the Orca 1 exploration well
in the Aquitaine Maritime permit in the Bay of Biscay in France. On October 1,
2007 Verenex announced that the well had been abandoned. In addition, the
Company relinquished the St. Valerien exploration permit in the Paris Basin in
France because the Company was unable to define a drillable prospect.
Consequently, the Company completed a review for asset impairment for the
France full cost pool and determined that a $10.0 million non-cash ceiling
test write-down was required in the third quarter to reflect an impairment in
these assets. This includes drilling costs on the Orca 1 well of approximately
$5.1 million which is offset by recoveries of approximately $0.5 million
received under the farm-in agreement.

    Revenues

    Production in the fourth quarter was entirely attributable to the
Bottrel, Alberta gross overriding royalty (the "Bottrel GORR"). Total Company
oil and gas production was 47 barrels of oil equivalent per day ("boepd") in
the fourth quarter of 2007 resulting in oil and gas revenues of $0.2 million,
net of royalties, compared to 133 boepd and revenues of $0.6 million in the
fourth quarter of 2006. The decrease is due to the sale of the Company's
participating interest in the Marvilliers Permit, including the St. Lazare 2H
well, and in two drilling spacing units in the Parentis Concession, including
the Parentis 222H well, located in France in May 2007.
    During the fourth quarter of 2007 the Bottrel GORR provided production of
approximately 47 boepd and revenues of $0.2 million compared to 65 boepd and
$0.2 million for the same period in 2006 and 56 boepd and $0.2 million of
royalty income during the third quarter of 2007. For the twelve months ended
December 31, 2007 the Bottrel GORR provided 58 boepd and revenues of $0.8
million compared to 73 boepd and $1.0 million for the same period in 2006. The
decline in production rates is consistent with the projected decline rates for
the field.
    There were no other unusual cyclical or seasonal factors impacting the
Company's production in 2007.
    Average realized prices for the fourth quarter of 2007 were: oil $nil
(2006 - $73.08); natural gas $4.82 per mcf (2006 - $5.35); and NGL $68.90 per
bbl (2006 - $41.39). These compare to prices of $3.57 per mcf for natural gas
and $60.43 per bbl for NGL during the third quarter of 2007.
    Interest of $1.2 million was earned in the fourth quarter of 2007 (2006 -
$0.2 million) compared to $1.0 million for the third quarter of 2007 on cash
balances invested in excess of expenditure requirements. The increase versus
the 2006 is due to the increased cash balances resulting from the July 2007
financing which provided proceeds of approximately $110.0 million (net of
issue costs).

    Stock Compensation

    For the three and twelve months ended December 31, 2007, non-cash stock
compensation expense related to stock options, performance warrants and Stock
Appreciation Rights ("SAR's") was $0.8 million and $2.4 million respectively
(2006 - $0.7 million and $1.9 million respectively). The increase in costs is
primarily related to the issuance of additional stock options in December 2006
and during 2007.

    General and Administration ("G&A")

    The Company capitalized $1.1 million and $4.0 million of general and
administrative costs relating to exploration and development activities for
the three months and twelve months ended December 31, 2007 respectively (2006
- $0.7 million and $2.5 million respectively). The net G&A amounts that are
expensed represent salaries, employee benefits, office costs, legal and
related party services not directly attributable to ongoing exploration and
development capital projects. The higher net G&A in the fourth quarter of 2007
in comparison with 2006 is due to the timing expenditures and the application
of an overhead recovery against these costs. The overhead recovery is capped
at US $1 million and had been fully applied by July of 2007.

    Effects of Exchange Rate Fluctuations

    The Company's operations are conducted primarily in jurisdictions where
the United States dollar (US$) and the European Euro (euro) are the business
currencies. A large proportion of the Company's costs, assets and liabilities
during the quarter ended December 31, 2007 were denominated in US$. As the
Canadian dollar fluctuates during the period, foreign exchange gains and
losses are reflected in both the earnings and funds flow amounts.

    Depletion and Depreciation

    Depletion and depreciation, of $0.1 million and $1.0 million for the
three and twelve months ended December 31, 2007 respectively (2006 - $0.4
million and $2.0 million respectively) relates to the depletion of the France
producing properties, prior to the closing date of the sale in May 2007, and
the Canadian assets. These amounts exclude a $10.0 million non-cash impairment
write-down related to France in the third quarter of 2007 and a $3.0 million
non-cash impairment write-down related to France in the second quarter of
2006.

    Related Party Transactions

    Vermilion REP SAS ("VREP") is a 100% owned subsidiary of Vermilion Energy
Trust ("VET"), which is a significant shareholder in Verenex. VREP, as
contract operator in France, paid for various expenditures on behalf of
Verenex. These transactions were measured at the exchange amount being the
consideration established and agreed to by the related parties. These
transactions were undertaken under the same terms and conditions as
transactions with non-related parties. Amounts due to related parties are
comprised of an amount due to VREP of $1.1 million (2006 - $0.5 million).
    The Bottrel GORR is a gross overriding royalty on VET's share of
production from specific wells at Bottrel, Alberta. The Bottrel GORR provided
$0.2 million and $0.8 million of royalty income during the three and twelve
months ended December 31, 2007 (2006 - $0.2 million and $1.0 million
respectively).
    Verenex entered into a Technical and Administrative Services Agreement
with Vermilion Resources Limited ("Vermilion") on June 28, 2004, whereby
Vermilion provides certain financial and administrative services at a cost of
twenty thousand dollars per month and certain technical, marketing and other
services at cost plus 5%, for a period of eighteen months ending December 31,
2005. The Agreement is automatically renewed for one-year periods, unless one
party provides three months notice not to renew. Effective January 1, 2006,
the monthly charge was amended to eliminate the services provided for the
Canadian financial and administrative services, reducing the monthly charge to
ten thousand dollars per month in support of the France operations. During the
twelve months ended December 31, 2007 Verenex was billed one hundred twenty
thousand dollars (2006 - one hundred twenty thousand dollars) for services
provided under this Agreement.
    On October 12, 2006, the Company's wholly owned subsidiary, Vermilion
Exploration SAS ("VEX"), entered into an agreement with VREP, a French
subsidiary of Vermilion Energy Trust, for the sale of its 95% participating
interest in the Marvilliers Permit, including the St. Lazare 2H well, and in
two drilling spacing units in the Parentis Concession, including the Parentis
222H well, located in France for $3.5 million.

    
    The transaction closed on May 30, 2007. The following table outlines the
final transaction details:

    Proceeds on disposition                                          $ 3,500
    Less purchase price adjustment related to operating results
     between the effective date (July 1, 2006) and closing              (820)
                                                                    ---------

    Adjusted proceeds                                                  2,680

    Net book value of assets disposed                                 (2,690)
    Asset retirement obligation related to assets disposed                37
                                                                    ---------

    Gain on disposition of assets                                    $    27
                                                                    ---------
                                                                    ---------
    

    Liquidity and Capital Resources

    Verenex will continue to rely primarily on equity to fund future working
capital requirements and capital obligations.
    The Company has issued two letters of credit ("LC's") relating to the
signing of two long-term drilling contracts that back-stop early termination
provisions. The terms of the contract call for the LC's to vary over the
period of the contract. The first LC expires on November 13, 2008 and is
exercisable by Oil Drilling & Exploration (Borneo) Pty Limited ("ODE"), a
subsidiary of Ensign Energy Services Inc. based in Calgary, Alberta. The ODE
contract requires that cash collateral of US $4.8 million (gross) be put in
place by September 30, 2006. At December 31, 2007 this had been reduced to US
$3.1 million (gross). The second LC in favour of KCA DEUTAG Drilling GmbH
based in Germany ("KCA DEUTAG"), expires on April 30, 2009 and is supported by
cash collateral of US $7.2 million (gross) as at June 30, 2006. The Company is
required to back-stop the outstanding KCA DEUTAG LC with an equivalent cash
balance. At December 31, 2007 this had been reduced to US $4.8 million. The
Company has received funds from its partner, Medco International Ventures
Limited, for its 50% share of the cash collateral and all cash provided as
support for the LC's has been reflected as restricted cash on the balance
sheet.
    The Company had a working capital surplus of $95.4 million at December
31, 2007 compared to $40.6 million as at December 31, 2006, including cash
amounting to $122.5 million (December 31, 2006 - $49.4 million) net of
restricted cash amounting to $7.9 million (December 31, 2006 - $13.6 million).
The increase in working capital is due to the July 2007 equity financing.
    The majority of the trade receivables relate to amounts associated with
the joint venture operations in France and an accrual for revenues associated
with the Bottrel GORR. All trade receivables have been assessed for credit
risk and no allowance for doubtful accounts is necessary at this time.
    Accounts payable and accrued liabilities have increased since December
31, 2006 due to the addition of the second drilling rig and the timing of
activity levels in Libya.
    On July 31, 2007 the Company completed the sale, on a bought-deal basis,
of 7,935,000 common shares at $14.50 per share resulting in gross proceeds of
$115.1 million and net proceeds of approximately $110.0 million (net of issue
costs).
    The Company has sufficient resources to fulfill its short-term
commitments.
    Verenex is listed on the Toronto Stock Exchange under the stock symbol
VNX.

    Critical Accounting Estimates

    The amounts recorded for depletion and depreciation of property, plant
and equipment are based on estimates. By their nature, these estimates are
subject to measurement uncertainty and the effect on the consolidated
financial statements from changes in such estimates in future years could be
significant.
    The Company performs a review for asset impairment as required by the
Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent
upon an independent reservoir engineer's assessment of the deliverability and
reserves associated with certain wells and the outlook for world prices for
oil and natural gas.

    New Accounting Standards and Changes in Accounting Standards for 2007 and
    2008

    Financial Instruments and Hedging Activities

    Effective January 1, 2007 the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") Section 1530, Comprehensive Income; Section
3251, Equity; Section 3855, Financial Instruments - Recognition and
Measurement; Section 3861, Financial Instruments - Disclosure and Presentation
and Section 3865, Hedges. These standards have been adopted prospectively. See
Note 2 to the Consolidated Financial Statements.
    These new accounting standards for Canadian GAAP converge more closely
with the US GAAP as all financial instruments will be recorded on the balance
sheet at fair value and changes in fair value will be included in earnings,
except for derivative financial instruments designated as hedges, for which
changes in fair value will be included in comprehensive income.

    Accounting Changes

    In July 2006, the CICA issued a revised section 1506, Accounting Changes.
These amendments were made to harmonize section 1506 with current
International Financial Reporting Standards. The changes covered by this
section include changes in accounting policy, changes in accounting estimates
and correction of errors. Under CICA section 1506, voluntary changes in
accounting policy are only permitted if they result in financial statements
that provide more reliable and relevant information. When a change in
accounting policy is made, this change is applied retrospectively unless
impractical to do so. Changes in accounting estimates are generally applied
prospectively and material prior period errors are corrected retrospectively.
This section also outlines additional disclosure requirements when accounting
changes are applied including justification for voluntary changes, complete
description of the policy, primary source of GAAP and detailed effect on
financial statement line items. CICA section 1506 is effective for fiscal
years beginning on or after January 1, 2007.

    Goodwill and intangible assets

    In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Section 3064, Goodwill and intangible assets, replacing
Section 3062, Goodwill and other intangible assets and Section 3450, Research
and development costs. Various changes have been made to other sections of the
CICA Handbook for consistency purposes. The new Section will be applicable to
financial statements relating to fiscal years beginning on or after October 1,
2008. Accordingly, the Company will adopt the new standards for its fiscal
year beginning January 1, 2009. It establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its initial
recognition and of intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the previous
Section 3062. The Company is currently evaluating the impact of the adoption
of this new Section on its consolidated financial statements. The Company does
not expect that the adoption of this new Section will have a material impact
on its consolidated financial statements.

    Disclosure Controls and Procedures Over Financial Reporting

    The Company evaluated the effectiveness and design of its disclosure
controls and procedures for the three months ended December 31, 2007, and
based on this evaluation have determined these controls to be effective.
    The Company's financial reporting procedures and practices have enabled
the certification of Verenex Energy Inc.'s annual filings in compliance with
Multilateral Instrument 52-109 "Certification of Disclosure in Issuer's Annual
and Interim Filings". Management has designed such internal controls over
financial reporting to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements and other
annual filings in accordance with Canadian Generally Accepted Accounting
Principles, except as noted below:

    
    Given the small size of the Company, the evaluation of internal controls
over financial reporting for the Company resulted in the identification of the
following weaknesses:

    -  Management is aware that due to its relatively small scale of
       operations there is a lack of segregation of duties due to the limited
       number of employees dealing with accounting and financial matters.
       Management has concluded that considering the employees involved and
       the control procedures in place, including management and Audit
       Committee oversight, risks associated with such lack of segregation
       are not significant enough to justify the expense associated with
       adding employees to clearly segregate duties.
    -  Management is aware that in-house expertise to deal with complex
       taxation, accounting and reporting issues may not be sufficient. The
       Company requires outside assistance and advice on taxation, new
       accounting pronouncements and complex accounting and reporting issues,
       which is common with companies of a similar size.
    -  Management is aware that in-house expertise to deal with information
       technology and information systems may not be sufficient. The Company
       has engaged a third party to provide the required expertise and
       support.

    There have been no significant changes in the fourth quarter of 2007 to
the Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.



    Verenex Energy Inc.
    Consolidated Balance Sheets
    (thousands of Cdn $)
    unaudited

                                                  December 31,   December 31,
                                                      2007           2006
    -------------------------------------------------------------------------

    Assets

    Current assets
      Cash                                        $   122,502    $    49,369
      Accounts receivable                                 474            352
      Joint venture receivable                              -          2,292
      Inventory                                             -             61
      Prepaid expenses and other                          595            136
                                                  ---------------------------
                                                      123,571         52,210

    Restricted cash (Note 16)                           7,890         13,625
    Capital assets (Note 5)                            83,556         31,322
    Assets held for sale (Note 17)                          -          3,117
                                                  ---------------------------
                                                  $   215,017    $   100,274
                                                  ---------------------------
                                                  ---------------------------

    Liabilities and Shareholders' Equity

    Current liabilities
      Accounts payable and accrued liabilities    $    22,611    $    11,049
      Joint venture payable                             4,513              -
      Due to related party (Note 7)                     1,055            519
                                                  ---------------------------
                                                       28,179         11,568

    Joint venture payables related to restricted
     cash (Note 16)                                     3,944          6,812

    Asset retirement obligations (Notes 6 & 17)             -             37
                                                  ---------------------------
                                                       32,123         18,417
                                                  ---------------------------

    Commitments and Contingencies (Note 15)

    Shareholders' equity
      Share capital (Note 9)                          203,431         92,566
      Contributed surplus (Note 9)                      7,592          5,402
      Deficit                                         (28,129)       (16,111)
                                                  ---------------------------
                                                      182,894         81,857
                                                  ---------------------------
                                                  $   215,017    $   100,274

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

    See accompanying notes to the Consolidated Financial Statements



    Verenex Energy Inc.
    Consolidated Statements of Income (Loss) and
    Comprehensive Income (Loss) and Deficit
    (thousands of Cdn $, except share and per share amounts)
    unaudited

                          Three Months Three Months     Year         Year
                             Ended        Ended        Ended        Ended
                          December 31, December 31, December 31, December 31,
                              2007         2006         2007         2006
    -------------------------------------------------------------------------

    Revenue
      Petroleum & natural
       gas, net            $      165   $      594   $    1,240   $    3,212
      Interest income           1,225          227        3,079        1,036
      Lease inducement
       payment                      -            -            -          400
                          ---------------------------------------------------
                           $    1,390   $      821   $    4,319   $    4,648
                          ---------------------------------------------------

    Expenses
      Production           $        -   $       87   $      127   $      373
      Transportation                -           16           11           85
      General and
       administration             642          333        1,649        1,383
      Stock based
       compensation
       (Note 10)                  820          743        2,431        1,948
      Depletion and
       depreciation
       (Note 5)                    76          422          974        1,956
      Impairment (Note 5)           -            -        9,969        2,979
      Gain on assets held
       for sale (Note 17)           -            -          (27)           -
      Foreign exchange
       loss/(gain)             (1,981)        (810)       1,192         (222)
                          ---------------------------------------------------
                           $     (443)  $      791   $   16,326   $    8,502
                          ---------------------------------------------------

    Income/(loss) before
     taxes                      1,833           30      (12,007)      (3,854)
    Taxes (Note 8)                  -          (33)          11           10
                          ---------------------------------------------------

    Net income/(loss) and
     comprehensive income
     (loss)                     1,833           63      (12,018)      (3,864)

    Deficit, beginning of
     period                   (29,962)     (16,174)     (16,111)     (12,247)
                          ---------------------------------------------------

    Deficit, end of period $  (28,129)  $  (16,111)  $  (28,129)  $  (16,111)
                          ---------------------------------------------------
                          ---------------------------------------------------

    Net income/(loss) per
     share basic and
     diluted (Note 11)     $     0.04   $        -   $    (0.30)  $    (0.12)
                          ---------------------------------------------------
                          ---------------------------------------------------

    Weighted average number
     of shares outstanding
     (Note 11):
      Basic                44,267,294   31,410,864   39,556,493   31,020,555
                          ---------------------------------------------------
                          ---------------------------------------------------
      Diluted              47,584,615   34,027,051   43,140,016   33,698,168
                          ---------------------------------------------------
                          ---------------------------------------------------

    See accompanying notes to the Consolidated Financial Statements



    Verenex Energy Inc.
    Consolidated Statements of Cash Flows
    (thousands of Cdn $)
    unaudited

                          Three Months Three Months     Year         Year
                             Ended        Ended        Ended        Ended
                          December 31, December 31, December 31, December 31,
                              2007         2006         2007         2006
                                      (as restated              (as restated
                                         Note 4)                   Note 4)
    -------------------------------------------------------------------------

    Cash provided by
     (used in):

    Operating activities:
      Net income/(loss)    $    1,833   $       63   $  (12,018)  $   (3,864)
      Items not affecting
       cash:
        Stock based
         compensation             820          743        2,431        1,948
        Depletion and
         depreciation              76          422          974        1,956
        Impairment
         write-down                 -            -        9,969        2,979
        Gain on assets
         held for sale              -            -          (27)           -
                          ---------------------------------------------------
                                2,729        1,228        1,329        3,019

      Changes in non-cash
       operating working
       capital                     71           61         (520)         174
                          ---------------------------------------------------
                                2,800        1,289          809        3,193
                          ---------------------------------------------------

    Investing activities:
      Acquisition and
       expenditures on
       petroleum and
       natural gas
       properties             (18,640)      (8,339)     (62,751)     (21,096)
      Changes in non-cash
       investing working
       capital                  6,680        6,751       18,367        7,811
      Restricted cash             973         (235)       5,736      (13,625)
      Joint venture
       payables related to
       restricted cash           (488)         117       (2,868)       6,812
                          ---------------------------------------------------
                              (11,475)      (1,706)     (41,516)     (20,098)
                          ---------------------------------------------------

    Financing activities:
      Issue of common
       shares for cash              4       33,275      115,665       33,461
      Share issue costs            (6)      (1,575)      (5,041)      (1,592)
      Due to related party        525          519          536       (1,141)
      Proceeds from
       disposition of
       assets held for
       sale                         -            -        2,680            -
                          ---------------------------------------------------
                                  523       32,219      113,840       30,728
                          ---------------------------------------------------

    Net increase/(decrease)
     in cash                   (8,152)      31,802       73,133       13,823
    Cash, beginning of
     period                   130,654       17,567       49,369       35,546
                          ---------------------------------------------------

    Cash, end of period    $  122,502   $   49,369   $  122,502   $   49,369
                          ---------------------------------------------------
                          ---------------------------------------------------

    Cash taxes paid        $        -   $      (33)  $       11   $       75
                          ---------------------------------------------------
                          ---------------------------------------------------

    Cash interest received $    1,225   $      227   $    3,079   $    1,036
                          ---------------------------------------------------
                          ---------------------------------------------------

    See accompanying notes to the Consolidated Financial Statements



    Verenex Energy Inc.
    Notes to the Consolidated Financial Statements
    For the year ended December 31, 2007
    (thousands of Cdn $, except as noted)
    unaudited

    1.  Basis of Presentation

        Verenex Energy Inc. (the "Company" or "Verenex") was established on
        June 29, 2004, by way of a "reverse takeover" pursuant to an
        amalgamation agreement dated May 27, 2004. Verenex is a public
        company listed on the Toronto Stock Exchange on April 19, 2005.

    2.  Significant Accounting Policies

        a) Principles of consolidation

        The consolidated financial statements have been prepared in
        accordance with Canadian Generally Accepted Accounting Principles and
        include the accounts of the Company and its subsidiaries, all of
        which are wholly owned, on a consolidated basis. All material
        intercompany accounts and transactions have been eliminated upon
        consolidation.

        The Company conducts most of its exploration, development and
        production activities jointly with others and these financial
        statements reflect only Verenex's proportionate interest.

        b) Cash

        Cash includes monies on deposit at financial institutions.

        c) Petroleum and natural gas operations

        The Company uses the full-cost method of accounting for petroleum and
        natural gas operations and accordingly, capitalizes all exploration
        and development costs into country-by-country cost centers. These
        costs include land acquisition, geological and geophysical costs,
        drilling (including related overhead) on producing and non-producing
        properties and other carrying charges on unproven properties.
        Proceeds of disposition are applied against net costs capitalized
        with no gain or loss recognized except when the disposition results
        in a greater than 20% change in the rate of depletion and
        depreciation.

        The carrying value of the Company's petroleum and natural gas
        properties is limited to the sum of the undiscounted cash flows
        expected to result from the Company's proved reserves using forecast
        prices. If the carrying value is not fully recoverable, the amount of
        impairment is measured by comparing the carrying amounts of the
        capital assets to an amount equal to the estimated net present value
        of future cash flows from proven plus probable reserves. This
        calculation incorporates risks and uncertainties in the expected
        future cash flows, which are discounted using a risk-free rate. Any
        excess carrying value above the net present value of the future cash
        flows would be recorded as a permanent impairment and charged to
        earnings.

        d) Depletion and Depreciation and Impairment

        Cost centers from which there has been no commercial production are
        not subject to depletion until commercial production commences. The
        capitalized costs are periodically evaluated to determine whether it
        is likely such costs will be recovered in the future. To the extent
        there are costs that are unlikely to be recovered in the future, they
        would be recorded as a permanent impairment and charged to earnings.

        Depletion of petroleum and natural gas costs is calculated for each
        cost center on the unit-of-production method based on estimated
        proven reserves, before royalties, as determined by independent
        engineers. The cost of significant unevaluated properties is excluded
        from the calculation of depletion. For purposes of depletion
        calculations, oil and gas reserves are converted to a common unit of
        measure on the basis of their relative energy content based on a
        conversion ratio of six thousand cubic feet of natural gas to a
        barrel of oil.

        Furniture and equipment are recorded at cost and are being amortized
        on a declining-balance basis at rates of 20% to 50% per year.

        e) Asset Retirement Obligations

        The Company records its legal obligations associated with the future
        retirement of property, plant and equipment. These obligations are
        initially measured at fair value determined as the estimated future
        costs discounted to the present value and subsequently adjusted for
        the accretion of the discount factor and any changes in the
        underlying cash flows. The asset retirement cost is capitalized to
        the related asset and amortized into earnings over time.

        f) Revenue recognition

        Revenues associated with the sale of crude oil, natural gas and
        liquids are recorded when title passes to the customer. Oil and gas
        revenues represent Verenex's share and are recorded net of royalty
        payments to governments and other mineral interest owners.

        g) Stock-based compensation plan

        The Company has a stock-based compensation plan for employees,
        directors and officers of the Company and its subsidiaries. The
        Company has also issued performance warrants in conjunction with a
        private placement to certain employees, officers and directors as
        described in Note 10. The fair value of the options and performance
        warrants is estimated using the Black-Scholes option-pricing model
        that takes into account, as of the grant date: exercise price,
        expected life, current price, expected volatility, expected
        dividends, and risk-free interest rates.

        The fair value of the stock based compensation is recognized over the
        vesting period of the stock options granted and the estimated life of
        the performance warrants as a compensation cost with a corresponding
        increase recorded to contributed surplus.

        Upon exercise of the stock options or performance warrants,
        consideration paid together with the amount previously recognized in
        contributed surplus is recorded as an increase to share capital.

        See Note 10 for a description of the plan.

        h) Foreign currency translation

        Foreign currency balances of foreign subsidiaries that are considered
        to be integrated are translated on the following basis:

        -     Monetary assets and liabilities are translated at the rates of
              exchange prevailing at the balance sheet dates;

        -     Non-monetary assets, liabilities and related depreciation and
              depletion expense are translated at historical rates; and

        -     Sales, other revenues, royalties and all other expenses are
              translated at the average rate of exchange during the month in
              which they are recognized.

        Any resulting foreign exchange gains and losses are included in
        earnings in the period.

        i) Income taxes

        Income taxes are calculated using the liability method of accounting
        for income taxes. Under this method, income tax liabilities and
        assets are recognized for the estimated tax consequences attributable
        to differences between the amounts reported in the consolidated
        financial statements of the Company and their respective tax bases,
        using substantively enacted income tax rates and tax laws that will
        be in effect when the differences are expected to reverse. Future
        income tax assets are recognized to the extent it is more likely than
        not that sufficient future taxable income will be available to allow
        the future income tax asset to be realized. The effect of a change in
        income tax rates on future tax liabilities and assets is recognized
        in earnings in the period in which the change occurs.

        j) Measurement uncertainty and use of estimates

        The preparation of financial statements in conformity with generally
        accepted accounting principles requires management to make estimates
        and assumptions that affect the reported amounts of assets,
        liabilities, revenues and expenses including asset retirement
        obligations, depletion, depreciation and the fair value of stock
        options and performance warrants. The ceiling test is based upon
        estimates of fair values of unproved properties, proved reserves,
        petroleum and natural gas prices, future costs and other assumptions.
        These estimates are subject to measurement uncertainty and the effect
        on the consolidated financial statements of changes in such estimates
        could be significant.

        k) Per share amounts

        Net income or loss per share is calculated using the weighted average
        number of shares outstanding during the period. Diluted net income or
        loss per share is calculated using the treasury stock method to
        determine the dilutive effect of stock options and performance
        warrants. The treasury stock method assumes that the proceeds
        received from the exercise of "in the money" stock options and
        performance warrants are used to purchase shares at the average
        market share price during the period.

    3.  Changes in Accounting Policies

        Effective January 1, 2007 the Company adopted the Canadian Institute
        of Chartered Accountants ("CICA") Section 1530, Comprehensive Income;
        Section 3251, Equity; Section 3855, Financial Instruments -
        Recognition and Measurement; Section 3861, Financial Instruments -
        Disclosure and Presentation and Section 3865, Hedges. The Company has
        adopted these standards prospectively and the comparative interim
        consolidated financial statements have not been restated.

        a) Financial instruments

        Under the new standards, financial assets and financial liabilities
        are initially recognized at fair value and are subsequently accounted
        for based on their classification as described below. The
        classification depends on the purpose for which the financial
        instruments were acquired and their characteristics. Except in very
        limited circumstances, the classification is not changed subsequent
        to initial recognition.

        Held-for-trading

        Financial assets that are purchased and incurred with the intention
        of generating profits in the near term are classified as held-for-
        trading. These instruments are accounted for at fair value with the
        change in the fair value recognized in net income during the period.
        Cash and restricted cash are classified as held-for-trading as at
        January 1, 2007.

        Available-for-sale

        Financial assets classified as available-for-sale are carried at fair
        value with the changes in fair value recorded in other comprehensive
        income. When a decline in fair value is determined to be other than
        temporary, the cumulative loss included in accumulated other
        comprehensive income is removed and recognized in net income. Gains
        and losses realized on disposal of available-for-sale securities are
        recognized in other income. There are no financial assets classified
        as available-for-sale.

        Held-to-maturity

        Financial assets that have a fixed maturity date and which the
        Company has the intention and the ability to hold to maturity are
        classified as held-to-maturity and accounted for at amortized cost
        using the effective interest rate method. There were no financial
        assets classified as held-to-maturity.

        Loans and receivables

        Loans and receivables are accounted for at amortized cost. This
        classification is consisent with the classification under the prior
        accounting standards. Accounts receivable and joint venture
        receivable are classified as loans and receivables as at January 1,
        2007.

        Other liabilities

        Other liabilities are accounted for at amortized cost and include all
        liabilities, other than derivatives. This classification is consisent
        with the classification under the prior accounting standards.
        Accounts payable and accrued liabilities, due to related party and
        joint venture payables related to restricted cash are classified as
        other liabilities.

        Embedded derivatives

        Derivatives may be embedded in other financial and non-financial
        instruments or contracts ("host contracts"). Prior to the adoption of
        the new standards, embedded derivatives were not accounted for
        separately from the host contract except in certain circumstances
        which were not applicable to the Company. Under the new standards,
        embedded derivatives are treated as separate derivatives when their
        economic characteristics and risks are not clearly and closely
        related to those of the host contact, the terms of the embedded
        derivative are the same as those of a stand-alone derivative, and the
        combined contract is not designated as held for trading or accounted
        for at fair value. These embedded derivatives are measured at fair
        value with subsequent changes reocognized in the Statements of Loss,
        Deficit and Accumulated Other Comprehensive Income. The Company
        selected June 29, 2004, the date of its establishment, as the
        transition date for embedded derivatives. Contracts or financial
        instruments entered into or modified after the transition date were
        examined for embedded derivatives. As at December 31, 2007 and
        January 1, 2007, the Company did not have any outstanding contracts
        or financial instruments with embedded derivatives.

        Derivative instruments and hedging activities

        The Company does not have any outstanding derivative or hedging
        contracts as at December 31, 2007 and January 1, 2007.

        Determination of fair value

        The fair value of a financial instrument is the amount of
        consideration that would be agreed upon in an arm's length
        transaction between knowledgeable, willing parties who are under no
        compulsion to act. The fair value of a financial instrument on
        initial recognition is the transaction price, which is the fair value
        of the consideration given or received. Subsequent to initial
        recognition, the fair values of financial instruments that are quoted
        in active markets are based on bid prices for financial assets held
        and offer prices for financial liabilities. When independent prices
        are not available, fair values are determined by using valuation
        techniques which refer to observable market data. These include
        comparisons with similar instruments where market observable prices
        exist, discounted cash flow analysis, option pricing models and other
        valuation techniques commonly used by market participants. For
        certain derivatives, fair values may be determined in whole or in
        part from valuation techniques using non-observable market data or
        transaction prices. A number of factors such as bi-offer spread,
        credit profile and model uncertainty are taken into account, as
        appropriate, when values are calculated using valuation techniques.

        Comprehensive income

        Comprehensive income consists of net earnings and other comprehensive
        income. Other comprehensive income comprises the change in fair value
        of the effective portion of the derivatives used as hedging items in
        a cash flow or net investment hedge and the change in fair value of
        any available-for-sale financial instruments. Amounts included in
        other comprehensive income are shown net of tax.

        b) Accounting Changes

        In July 2006, the CICA issued a revised section 1506, Accounting
        Changes.

        The new recommendations permit voluntary changes in accounting policy
        only if they result in financial statements which provide more
        reliable and relevant information. Accounting policy changes are
        applied retrospectively unless it is impractical to determine the
        period or cumulative impact of the change. Corrections of prior
        period errors are applied retrospectively and changes in accounting
        estimates are applied prospectively by including these changes in
        earnings. The guidance was effective for all changes in accounting
        policies, changes in accounting estimates and corrections of prior
        periods errors initiated in periods beginning on or after January 1,
        2007.

        c) Goodwill and intangible assets

        In February 2008, the Canadian Institute of Chartered Accountants
        ("CICA") issued Section 3064, Goodwill and intangible assets,
        replacing Section 3062, Goodwill and other intangible assets and
        Section 3450, Research and development costs. Various changes have
        been made to other sections of the CICA Handbook for consistency
        purposes. The new Section will be applicable to financial statements
        relating to fiscal years beginning on or after October 1, 2008.
        Accordingly, the Company will adopt the new standards for its fiscal
        year beginning January 1, 2009. It establishes standards for the
        recognition, measurement, presentation and disclosure of goodwill
        subsequent to its initial recognition and of intangible assets by
        profit-oriented enterprises. Standards concerning goodwill are
        unchanged from the standards included in the previous Section 3062.
        The Company is currently evaluating the impact of the adoption of
        this new Section on its consolidated financial statements. The
        Company does not expect that the adoption of this new Section will
        have a material impact on its consolidated financial statements.

    4.  Correction of an Error

        The Consolidated Statements of Cash Flows for three months and year
        ended December 31, 2006 have been restated. The Company incorrectly
        classified the change in "restricted cash" and "joint venture
        payables related to restricted cash" as financing activities instead
        of investing activities, therefore a restatement is required to
        classify the amounts to the proper category. The correction of the
        error did not impact the Consolidated Balance Sheets or the
        Consolidated Statements of Loss and Deficit.

    5.  Capital Assets

                                                     December 31, 2007
        ---------------------------------------------------------------------
                                                    Accumulated
                                                     Depletion,      Net
                                                   Depreciation &    Book
                                           Cost     Amortization     Value
                                       --------------------------------------
        Petroleum and natural gas
         properties and equipment      $    93,950  $    11,842  $    82,108
        Furniture and equipment              2,069          621        1,448
                                       --------------------------------------
                                       $    96,019  $    12,463  $    83,556
                                       --------------------------------------
                                       --------------------------------------


                                                     December 31, 2006
        ---------------------------------------------------------------------
                                                    Accumulated
                                                     Depletion,      Net
                                                   Depreciation &    Book
                                           Cost     Amortization     Value
                                       --------------------------------------
        Petroleum and natural gas
         properties and equipment      $    31,444  $     1,508  $    29,936
        Furniture and equipment              1,633          247        1,386
                                       --------------------------------------
                                       $    33,077  $     1,755  $    31,322
                                       --------------------------------------
                                       --------------------------------------


        The balances as at December 31, 2006 were adjusted to reflect that
        the Company had segregated assets held for sale. The assets had a
        historical cost value of $15.6 million, associated accumulated
        depletion of $12.5 million and a net book value of $3.1 million.

        The Company capitalized $1.1 million and $4.0 million of general and
        administrative costs directly related to exploration and development
        activities for the three and twelve months ended December 31, 2007
        respectively (2006 - $0.7 million and $2.5 million respectively).

        During the third quarter 2007, the Company drilled the Orca 1
        exploration well in the Aquitaine Maritime permit in the Bay of
        Biscay in France. On October 1, 2007 Verenex announced that the well
        had been abandoned. In addition, the Company relinquished the
        St. Valerien exploration permit in the Paris Basin in France. The
        Company completed a review for asset impairment for the France full
        cost pool and determined that a $10.0 million non-cash ceiling test
        write-down was required to reflect an impairment in these assets.
        This includes drilling costs on the Orca 1 well of approximately
        $5.1 million which is partially offset by recoveries of approximately
        $0.5 million received under the farm-in agreement.

        Depletion and depreciation, of $0.1 million and $1.0 million for the
        three and twelve months ended December 31, 2007 respectively (2006 -
        $0.4 million and $2.0 million respectively) relates to the depletion
        of the France producing properties, prior to the closing date of the
        sale in May 2007, and the Canadian assets. At December 31, 2007
        approximately, $0.1 million of undeveloped properties (2006 -
        $5.6 million) in France and $78.0 million in Libya (2006 -
        $20.0 million) were excluded from the depletion calculation.

        The Company performs an asset impairment test as required by the
        Full Cost Accounting Guideline, AcG-16. The Company applied a ceiling
        test to its oil and gas assets using forecast future market prices
        of:

                                      Foreign
                       WTI Oil     Exchange Rate       Brent      AECO-C Gas
            Year      (US$/bbl)      (US/Cdn$)       (US$/bbl)   (Cdn$/mmbtu)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

            2008        92.00          1.00           90.50          6.75
            2009        88.00          1.00           86.50          7.55
            2010        84.00          1.00           82.50          7.60
            2011        82.00          1.00           80.50          7.60
            2012        82.00          1.00           80.50          7.60
            2013        82.00          1.00           80.50          7.60
            2014        82.00          1.00           80.50          7.80
            2015        82.00          1.00           80.50          7.97
            2016        82.02          1.00           80.52          8.14
            2017        83.66          1.00           82.16          8.31
         Thereafter   +2%/year         1.00         +2%/year       +2%/year

        GLJ Petroleum Consultants Product Price and Market Forecasts for the
        Canadian Oil and Gas Industry as at January 1, 2008

    6.  Asset Retirement Obligations

        The Company records the fair value of legal obligations associated
        with the retirement of all of its long-lived tangible assets,
        including its producing well sites but excluding the assets
        associated with the Bottrel royalty for which the Company has no
        retirement obligations. The estimation of these costs is based on
        engineering estimates using current costs and technology and in
        accordance with current legislation and industry practice. During the
        year, the Company sold its only producing assets in France resulting
        in the elimination of the asset retirement obligations associated
        with these assets.

    7.  Related Party Transactions

        Vermilion REP SAS ("VREP") is a 100% owned subsidiary of
        Vermilion Energy Trust ("VET"), which is a significant shareholder in
        Verenex. VREP, as contract operator in France, paid for various
        expenditures on behalf of Verenex. These transactions were measured
        at the exchange amount being the consideration established and agreed
        to by the related parties. These transactions were undertaken under
        the same terms and conditions as transactions with non-related
        parties. Amounts due to related parties are comprised of an amount
        due to VREP of $1.1 million (2006 - $0.5 million).

        The Bottrel GORR is a gross overriding royalty on VET's share of
        production from specific wells at Bottrel, Alberta. The Bottrel GORR
        provided $0.2 million and $0.8 million of royalty income during the
        three and twelve months ended December 31, 2007 (2006 - $0.2 million
        and $1.0 million respectively).

        Verenex entered into a Technical and Administrative Services
        Agreement with Vermilion Resources Limited ("Vermilion") on June 28,
        2004, whereby Vermilion provides certain financial and administrative
        services and certain technical, marketing and other services. The
        Agreement is automatically renewed for one-year periods, unless one
        party provides three months notice not to renew. During the twelve
        months ended December 31, 2007, Verenex was billed one hundred twenty
        thousand dollars (2006 - one hundred twenty thousand dollars) for
        services provided under this Agreement.

        On October 12, 2006, the Company's wholly owned subsidiary,
        Vermilion Exploration SAS ("VEX"), entered into an agreement with
        VREP for the sale of its 95% participating interest in the
        Marvilliers Permit, including the St. Lazare 2H well, and in
        two drilling spacing units in the Parentis Concession, including the
        Parentis 222H well, located in France for $3.5 million less
        adjustments on closing (see Note 17).

    8.  Taxes

        Taxes relate primarily to capital taxes. The Company has an
        unrecognized future income tax asset and estimated tax loss carry
        forwards. Canadian tax losses expire between 2015 and 2027 and the
        France and Libyan tax losses have no expiry date. No future tax
        benefit has been recorded relating to these tax losses.

                                                  December 31,   December 31,
                                                      2007           2006
        ---------------------------------------------------------------------

        Loss before income taxes                  $    12,007    $     3,854

        Combined federal and provincial income tax
         rate                                            32.1%          34.5%
                                                  ---------------------------

        Expected tax recovery                           3,857          1,330

        Add (deduct) income tax effect of:
          Share issue costs                               622            320
          Stock based compensation                       (781)          (672)
          International tax rate differential             766            493
                                                  ---------------------------
                                                  ---------------------------
                                                        4,464          1,471

        Unrecognized tax benefit                       (4,464)        (1,471)
                                                  ---------------------------

        Future income tax recovery                $         -    $         -
                                                  ---------------------------
                                                  ---------------------------


        The components comprising the future income tax assets are as
        follows:


                                                  December 31,   December 31,
                                                      2007           2006
        ---------------------------------------------------------------------

        Non-capital loss carry forwards           $     8,806    $     5,777
        Share issue costs                               1,511            734
        Capital assets                                 51,141         15,921
                                                  ---------------------------
                                                  ---------------------------
                                                       61,458         22,432

        Less valuation allowance                      (61,458)       (22,432)
                                                  ---------------------------

        Ending balance                            $         -    $         -
                                                  ---------------------------
                                                  ---------------------------


    9.  Share Capital

        Authorized

        Unlimited number of common shares
        Unlimited number of preferred shares

                                                     Number
        Issued                                     of Shares        Amount
        ---------------------------------------------------------------------

        Opening balance as at January 1, 2006      30,830,433    $    60,560

        Issued through financing for cash           5,187,500         33,200
        Issued for cash on warrants and options
         exercised                                    102,958            261
        Share issue costs                                             (1,592)
        Transferred from contributed surplus on
         warrants and options exercised                                  137
                                                  ---------------------------

        Opening balance as at January 1, 2007      36,120,891    $    92,566

        Issued for cash                             7,935,000        115,058
        Issued for cash on warrants and options
         exercised                                    212,000            607
        Share issue costs                                             (5,041)
        Transferred from contributed surplus on
         warrant and option exercise                                     241
                                                  ---------------------------

        Balance as at December 31, 2007            44,267,891    $   203,431
                                                  ---------------------------
                                                  ---------------------------


        Contributed Surplus
                                                  December 31,   December 31,
                                                      2007           2006
        ---------------------------------------------------------------------

        Opening balance                           $     5,402    $     3,592

        Stock compensation expense                      2,431          2,071
        Reversed on cancellation of unvested
         options                                            -            (89)
        Reversed on cancellation of warrants                -            (26)
        Reversed on cancellation of Stock
         Appreciation Rights                                -             (9)
        Transferred to share capital on warrant
         and option exercise                             (241)          (137)
                                                  ---------------------------

        Ending balance                            $     7,592    $     5,402
                                                  ---------------------------
                                                  ---------------------------


    10. Stock Compensation Plans

        a)  The Company has a stock option plan that allows the directors,
            officers and employees of the Company to be granted rights to
            acquire common shares of the Company. Shareholders approved an
            amendment to the Company's Stock Option Plan (the "Plan") at
            the Company's Annual General Meeting on May 4, 2005. Under the
            amendment, the Company adopted a "rolling" stock option plan
            that reserves a maximum of 10% of the aggregate number of
            issued and outstanding common shares. The Plan previously in
            place reserved a fixed number of common shares. Shareholders
            approved an additional amendment to the Plan at the Company's
            Annual General Meeting on May 3, 2006 to authorize the Board of
            Directors to increase the term of option grants to up to ten
            years from five years. The terms of the Plan are otherwise
            unchanged. The current outstanding terms for options has not been
            amended for this change in the Plan.

            Stock option exercise prices are equal to the market price for
            the common shares on the date immediately prior to the date the
            stock option is granted. Stock options currently granted vest
            over three years and expire five years after the grant date.

            The fair value of the options granted during 2007 is $5.81
            (2006 - $2.74).

        The following table summarizes information about the stock option
        plan:

        ---------------------------------------------------------------------
                                                   Number of      Weighted
                                                     Stock        Average
                                                    Options    Exercise Price
                                                  ---------------------------

        Opening balance, January 1, 2006            2,587,000    $      2.99

        Granted                                     1,198,000           5.62
        Exercised                                     (53,333)          2.55
        Cancelled                                    (308,667)          3.59
                                                  ---------------------------

        Opening balance, January 1, 2007            3,423,000    $      3.87

        Granted                                       820,000          12.31
        Exercised                                    (212,000)          2.86
                                                  ---------------------------
                                                  ---------------------------

        Closing balance, December 31, 2007          4,031,000    $      5.64
                                                  ---------------------------
                                                  ---------------------------


        The following table summarizes information about options outstanding
        and exercisable as at December 31, 2007:

                                       Remaining                   Remaining
          Exercise                   Contractual                 Contractual
           Price         Options          Life       Exercisable        Life
            ($)        Outstanding       (Years)       Options        (Years)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

          2.50 - 5.00   2,508,000          2.3        1,376,063          2.3
          5.01 - 7.50     773,000          4.2                -            -
        10.01 - 12.50     160,000          4.9                -            -
        12.51 - 15.00     590,000          4.7                -            -

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

         2.50 - 15.00   4,031,000          3.2        1,376,063          2.3

        b)  The Company has also issued performance warrants. All of the
            performance warrants have vested and are exercisable. They expire
            at the close of business on June 28, 2011.

            There were no performance warrants issued in 2006 or 2007.

        The following table summarizes information about the performance
        warrants:

        ---------------------------------------------------------------------
                                                   Number of      Weighted
                                                  Performance      Average
                                                    Warrants   Exercise Price
                                                  ---------------------------

        Opening balance, January 1, 2006            1,946,750    $      2.55

        Exercised in 2006                             (49,625)          2.52
        Cancelled in 2006                             (19,625)          2.55
                                                  ---------------------------

        Balance, January 1, 2007 and December 31,
         2007                                       1,877,500    $      2.55
                                                  ---------------------------
                                                  ---------------------------

        The following table summarizes information about performance warrants
        outstanding and exercisable as at December 31, 2007:

                                       Remaining                  Remaining
          Exercise     Performance    Contractual   Exercisable  Contractual
           Price        Warrants         Life       Performance     Life
            ($)        Outstanding      (Years)      Warrants      (Years)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        2.50 - 3.00     1,765,000          3.5      1,765,000          3.5
        3.01 - 3.50       112,500          4.0        112,500          4.0
        ---------------------------------------------------------------------

        2.50 - 3.50     1,877,500          3.5      1,877,500          3.5
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        For three months and year ended December 31, 2007, non-cash stock
        compensation expense related to stock options, performance warrants
        and Stock Appreciation Rights ("SAR's") was $0.8 million and
        $2.4 million respectively (2006 - $0.7 million and $1.9 million
        respectively). The increase in expense is primarily related to the
        issuance of stock options in 2006 and 2007.

        The fair value of the options and performance warrants is determined
        using the Black-Scholes option-pricing model that takes into account,
        as of the grant date: exercise price, expected life, current price,
        expected volatility, expected dividends, and risk-free interest
        rates.

        At the Annual General Meeting on May 2, 2007, shareholders approved
        implementation of a Performance Share Unit Plan ("PSU") to supplement
        the Option Plan. Common Shares reserved for issuance from time to
        time pursuant to Unit Awards may not exceed 5% of the aggregate
        number of outstanding Common Shares. The vesting date for the
        Performance Share Units issued under the Unit Award shall be
        determined at the discretion of the Board. Under the terms of the
        PSU Plan, the Board may elect, in its sole discretion, to pay to any
        grantee of a Unit Award in lieu of delivering all or any part of the
        Common Shares that would be otherwise delivered to the grantee on
        such vesting date, a cash amount equal to the aggregate fair market
        value of such Common Shares that would otherwise be issued on such
        vesting date in consideration for surrender by the grantee to the
        Corporation of the right to receive all or any part of the Common
        Shares under such Unit Award. No Units were issued under this Plan in
        2007.

        The assumptions used in the computation of the fair value of the
        stock options granted in 2007 and 2006 are as follows:

                                                      Stock
                                                      Options
        Risk free interest rate                          4.5%
        Expected dividends                               nil
        Expected life                                5 years
        Volatility                                        50%

    11. Per Share Amounts

                        For the Three For the Three For the Year For the Year
                         Months Ended  Months Ended    Ended        Ended
                          December 31, December 31, December 31, December 31,
                              2007         2006         2007         2006
        ---------------------------------------------------------------------

        Weighted average
         number of
         common shares
         outstanding       44,267,294   31,410,864   39,556,493   31,020,555

        Shares issuable
         pursuant to stock
         options            1,930,510    1,445,055    2,129,465    1,490,769

        Shares issuable
         pursuant to
         performance
         warrants           1,386,811    1,171,132    1,454,058    1,186,844
                          ---------------------------------------------------

        Weighted average
         number of diluted
         common shares
         outstanding       47,584,615   34,027,051   43,140,016   33,698,168
                          ---------------------------------------------------
                          ---------------------------------------------------


        The weighted average diluted shares outstanding include all stock
        options in the money from the date of grant or the beginning of the
        period. The weighted average diluted shares include the performance
        warrants which are treated as contingently issuable shares and are
        included from the beginning of the period that all of the conditions
        for issue were satisfied.

        The impact of options and performance warrants is not included in the
        calculation of net loss per share as they would be anti-dilutive.


    12. Segmented Information

        The Company operates in three different geographical locations and
        has chosen to disclose key financial data based on those
        jurisdictions. Where not specifically identified, income statement
        line items, such as interest revenue, relate to Canada. Any
        allocations of costs between segments are done at cost and based on
        time allocated to the various projects.

                        For the Three For the Three For the Year For the Year
                         Months Ended  Months Ended    Ended        Ended
                          December 31, December 31, December 31, December 31,
                              2007         2006         2007         2006
        ---------------------------------------------------------------------

        Petroleum & natural
         gas revenues, net:
          Canada          $       165  $       244  $       784  $       987
          France                    -          350          456        2,225
                          ---------------------------------------------------
                          $       165  $       594  $     1,240  $     3,212
                          ---------------------------------------------------
                          ---------------------------------------------------

        Interest Income:
          Canada          $     1,082  $       132  $     2,553  $       754
          France                    -           (3)          56            6
          Libya                   143           98          470          276
                          ---------------------------------------------------
                          $     1,225  $       227  $     3,079  $     1,036
                          ---------------------------------------------------
                          ---------------------------------------------------

        Depletion &
         depreciation:
          Canada          $       166  $       251  $       774  $       826
          France                 (171)         159       10,033        4,061
          Libya                    81           12          136           48
                          ---------------------------------------------------
                          $        76  $       422  $    10,943  $     4,935
                          ---------------------------------------------------
                          ---------------------------------------------------

        Foreign exchange
         loss/(gain):
          Canada          $    (2,100) $      (246) $       267  $       163
          France                  125          (69)         279         (235)
          Libya                    (6)        (495)         646         (150)
                          ---------------------------------------------------
                          $    (1,981) $      (810) $     1,192  $      (222)
                          ---------------------------------------------------
                          ---------------------------------------------------

        Net income/(loss):
          Canada          $     1,772  $      (380) $    (1,410) $    (1,931)
          France                  (23)          91      (10,273)      (2,285)
          Libya                    84          352         (335)         352
                          ---------------------------------------------------
                          $     1,833  $        63  $   (12,018) $    (3,864)
                          ---------------------------------------------------
                          ---------------------------------------------------


        Cash flows generated
         from (used in)
         operations:
          Canada          $     2,696  $       589  $     1,708  $       839
          France                 (200)         265         (198)       1,780
          Libya                   304          435         (701)         574
                          ---------------------------------------------------
                          $     2,800  $     1,289  $       809  $     3,193
                          ---------------------------------------------------
                          ---------------------------------------------------

        Capital expenditures:
          Canada          $       176  $      (128) $       204  $     1,168
          France                 (173)         656        4,043          614
          Libya                18,637        7,811       58,504       19,314
                          ---------------------------------------------------
                          $    18,640  $     8,339  $    62,751  $    21,096
                          ---------------------------------------------------
                          ---------------------------------------------------


        All costs related to production, transportation and non-cash
        impairment write-downs relate to the France properties.

                                                  December 31,   December 31,
                                                      2007           2006
        ---------------------------------------------------------------------
        Identifiable assets:
          Canada                                  $    92,906    $    46,142
          France                                        1,388         10,048
          Libya                                       120,723         44,084
                                                  ---------------------------
                                                  $   215,017    $   100,274
                                                  ---------------------------
                                                  ---------------------------


    13. Financial Instruments

        As described in Note 3, on January 1, 2007, the Company adopted the
        new CICA requirements relating to financial instruments.

        The oil and gas industry is subject to risks including fluctuations
        in foreign exchange rates and commodity prices. The Company's
        operating results and financial condition will be dependent on the
        prices it receives for oil and natural gas production. Oil and
        natural gas prices have fluctuated during recent years and are
        determined by supply and demand factors, including weather and
        general economic conditions as well as conditions in other oil and
        natural gas regions. While Verenex manages its operations in order to
        minimize exposure to these risks, the Company has not entered into
        any derivatives or contracts to hedge or otherwise mitigate these
        fluctuations.

    14. Statements of Cash Flow

        Changes in non-cash working capital:

                                                   Year ended     Year ended
                                                  December 31,   December 31,
                                                      2007           2006
        ---------------------------------------------------------------------
        Accounts receivable                       $      (122)   $       359
        Inventory                                          61             13
        Prepaid expenses and other                       (459)          (123)
        Joint venture receivable/payable                6,805         (2,292)
        Accounts payable and accrued liabilities       11,562         10,101
        Due to related party                              536         (1,141)
        Taxes payable                                       -            (73)
                                                  ---------------------------
                                                  $    18,383    $     6,844
                                                  ---------------------------
                                                  ---------------------------


        Changes in non-cash working capital
         relating to:
          Operating activities                    $      (520)   $       174
          Investing activities                         18,367          7,811
          Financing activities                            536         (1,141)
                                                  ---------------------------
                                                  $    18,383    $     6,844
                                                  ---------------------------
                                                  ---------------------------


    15. Commitments and Contingencies

                                       Payments Due by Period
        ---------------------------------------------------------------------
        Contractual                                  Thirteen to  More than
          Obligations                    Next 12     Thirty-six   Thirty-six
                              Total       Months       Months       Months
        ---------------------------------------------------------------------
        Operating Leases  $     1,376  $       532  $       698  $       146
                          ---------------------------------------------------

        Total Contractual
         Obligations      $     1,376  $       532  $       698  $       146
                          ---------------------------------------------------
                          ---------------------------------------------------


        Office leases

        Verenex Energy Area 47 Libya Limited, a 100% owned subsidiary,
        entered into a two-year contract effective July 1, 2007 to sublease
        office space in Tripoli, Libya at a cost of approximately fifteen
        thousand, two hundred dollars per month, one year payable in advance.
        The Company has the option to extend the term of the lease for an
        additional term under the same terms and conditions subject to the
        Landlord's ability to increase the rent by no more than ten percent.
        Under the terms of the Joint Operating Agreement with Medco
        International Ventures Limited ("Medco"), 50% of these costs are
        expected to be recoverable.

        Effective May 1, 2005, the Company agreed to sublease additional
        floor space in Calgary from Vermilion. The terms of the amended
        agreement provide office space at a cost of six thousand, three
        hundred and thirty-nine dollars per month plus a monthly operating
        cost charge of six thousand, one hundred and twelve dollars per
        month. This agreement was to expire on October 30, 2007.

        The Company completed negotiations with Vermilion in the second
        quarter of 2006 for the early termination of its current office lease
        in Calgary. In return for a lease buy-out, the Company received a
        lump sum payment of $0.4 million in June 2006. Effective March 14,
        2006, the Company agreed to lease floor space in Calgary commencing
        June 1, 2006. The terms of the agreement provide office space at a
        cost of nineteen thousand, nine hundred and twenty-eight dollars per
        month plus a monthly operating cost charge of nine thousand, one
        hundred and seventy-five dollars per month.

        Libya

        On January 30, 2005 the Company announced it had been selected as a
        successful bidder in Libya's Bid Round 1 for an Exploration and
        Production Sharing Agreement ("EPSA"). The EPSA sets out the required
        minimum work program during the initial 5-year exploration and
        appraisal period.

        Under the terms of the EPSA for Area 47, Verenex and Medco (the
        "contractor group") are required to acquire new seismic, including
        1,000 kilometers of 2-D and 200 square kilometers of 3-D, and drill
        three exploration wells during the 5-year exploration and appraisal
        period. All exploration and appraisal costs during this period,
        including the minimum commitment program and any additional seismic
        and drilling, will be borne 100% by Verenex and Medco. If the minimum
        commitment program is not carried out, the contractor group will be
        liable for a specified unit cost for seismic and wells which in
        aggregate is a maximum of approximately US $20 million
        (US $10 million net to Verenex). As of May 2007, the Company had
        fulfilled all of the minimum work program commitments.

        The Contractor group awarded a Canadian equivalent US $7.5 million
        (gross) (Cdn $3.8 million net to Verenex) contract for its 2007/2008
        seismic program and work began in October 2007. In addition,
        contracts have been awarded to purchase casing, tubulars and wellhead
        equipment in advance of the 2008 drilling program in the amount of
        $8.0 million (US $8.0 million) (gross) (Cdn $4.0 million net to
        Verenex). As at the end of December 2007, approximately
        US $1.0 million (gross) (Cdn. $0.5 million net to Verenex) of the
        seismic program had been completed and $0.5 million (gross)
        ($0.25 million net to Verenex) of the inventory had been shipped to
        Libya.

        On August 24, 2006 the Company entered into a long term contract with
        I.L.I. Corporation, a subsidiary of KCA DEUTAG Drilling GmbH ("KCA
        DEUTAG") for Service Rig 32 to complete and test new wells, drill
        shallow water wells and to carry out other well work. The initial
        one-year term of the contract commenced effective later than
        January 1, 2007. The contract can be extended at the option of the
        Company for three additional one year periods, subject to 60 days
        notice prior to the start of each one year period.

    16. Restricted Cash

        On April 11, 2006, the Company announced it had executed contracts
        for two drilling rigs for its operations in Area 47 in Libya. The
        first rig ODE Rig 28 spudded the Company's first well on
        September 29, 2006. The Company's second contracted drilling rig,
        KCA DEUTAG Rig T-19, arrived in Libya in January 2007 and was sub-
        contracted to a third party for approximately eight months. It
        commenced drilling in Area 47 on October 7, 2007.

        Both contracts include an initial two-year term, with two one-year
        extension options exercisable by the Company. Under the contract
        terms, the Company retains the ability to assign the rigs to third
        parties, with the approval of the contractor, if circumstances
        warrant. Maximum early termination exposure under the two contracts
        in aggregate was US $12.0 million (net Verenex 50% share
        Cdn $6.8 million) at the respective spud dates for each rig.

        The contracts require that Letters of Credit ("LC's") be entered into
        in support of maximum termination amounts, which vary over the life
        of the contract. As a result, the Company has issued two letters of
        credit ("LC's") relating to the signing of the drilling contracts
        that back-stop early termination provisions. The terms of the
        contract call for the LC's to vary over the period of the contract.
        The first LC expires on November 13, 2008 and requires that cash
        collateral of US $4.8 million (gross) be put in place as at
        September 30, 2006. At December 31, 2007 this had reduced to
        US $3.1 million (gross). The second LC expires on April 30, 2009 and
        is supported by cash collateral of US $7.2 million (gross) as at
        December 31, 2006. At December 31, 2007 this had reduced to
        US $4.8 million (gross).

        The Company has received funds from its partner, Medco, for its 50%
        share of the cash collateral and the total amount of cash provided as
        support for the LC's, in the amount of $7.9 million, has been
        reflected as restricted cash on the balance sheet. The joint venture
        payable related to restricted cash amounting to $3.9 million due to
        Medco has also been segregated on the balance sheet.

    17. Assets Held for Sale

        On October 12, 2006, the Company's wholly owned subsidiary, VEX,
        entered into an agreement with VREP for the sale of the Company's 95%
        participating interest in the Marvilliers Permit, including the
        St. Lazare 2H well, and in two drilling spacing units in the
        Parentis Concession, including the Parentis 222H well, located in
        France for $3.5 million, less adjustments on closing.

        The transaction closed on May 30, 2007. The following table outlines
        the final transaction details:

        Proceeds on disposition                                  $     2,680

        Net book value of assets disposed                             (2,690)
        Asset retirement obligation related to assets disposed            37
                                                                 ------------

        Gain on disposition                                      $        27
                                                                 ------------
                                                                 ------------
    

    %SEDAR: 00020996E




For further information:

For further information: Jim McFarland, President & CEO, Verenex Energy
Inc., Telephone: (403) 536-8009; Or Ken Hillier, Chief Financial Officer,
Verenex Energy Inc., Telephone: (403) 536-8005; www.verenexenergy.com

Organization Profile

VERENEX ENERGY INC.

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