Verenex Energy Inc. - Second Quarter 2009 Operating and Financial Results



    CALGARY, Aug. 10 /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 six months ended June 30, 2009.
    Verenex is a Canada-based international exploration and production
company with a world-class discovered resource base and exploration portfolio
in the Ghadames Basin in Libya.

    
    Second Quarter 2009 Highlights

    -   Continued to seek consent from Libyan authorities for the sale of
        Verenex. Representatives of Verenex and the Libyan authorities are
        actively engaged in discussions to reach an amicable solution to the
        current impasse.

    -   Extended the outside date under the acquisition agreement (the "CNPCI
        Agreement") with CNPC International Ltd. to August 24, 2009 in light
        of the continuing efforts to seek NOC consent.

    -   Drafted potential arbitration claim should pursuit of this legal
        remedy available under the Exploration and Production Sharing
        Agreement for Area 47 prove necessary in the event that Libyan
        authorities fail to approve a sale of Verenex under acceptable terms.

    -   Drilled and cased the N1-47/02 new field wildcat exploration well
        (well No.21) in the northern part of Block 2 to a depth of 10,775
        feet. Formation evaluation results indicated the presence of
        hydrocarbons in the Lower Acacus and Memouniat Formations.

    -   Suspended drilling in Area 47 as at the end of June 2009. Drilling is
        targeted to resume in late 2009 contingent on the resolution of the
        commerciality application for the A1-47/02 field and the Verenex sale
        process.

    Financial

    -   Net loss in the second quarter of 2009 from continuing operations was
        ($1.4 million) compared to net loss of ($2.6 million) in the second
        quarter of 2008.

    -   Funds flow from continuing operations in the second quarter of 2009
        was ($0.7 million) compared to ($0.5 million) for the second quarter
        of 2008.

    -   Working capital surplus at June 30, 2009 was $13.4 million compared
        to $29.8 million as at December 31, 2008, including cash amounting to
        $21.8 million (December 31, 2008 - $55.5 million) net of restricted
        cash amounting to $nil million (December 31, 2008 - $4.1 million).
        The decrease in working capital is due to the ongoing investments in
        the Company's Libya operations.


    Highlights
                                   Three       Three         Six         Six
                                  Months      Months      Months      Months
                                   Ended       Ended       Ended       Ended
                                 June 30,    June 30,    June 30,    June 30,
    (unaudited)                     2009        2008        2009        2008
    -------------------------------------------------------------------------
    Financial (thousands of Cdn $, except share and per share amounts)

    Funds flow from continuing
     operations(1)                  (713)       (530)     (2,606)     (1,653)
    Net (loss) from continuing
     operations                   (1,404)     (2,578)     (5,306)       (587)
    Capital expenditures           6,777      20,944      20,410      36,605
    Working capital surplus       13,393      61,452      13,393      61,452
    Common shares outstanding
      Basic                   44,393,491  44,267,891  44,393,491  44,267,891
      Diluted                 49,851,391  50,063,924  49,851,391  50,063,924
    Weighted average common
     shares outstanding
      Basic                   44,303,711  44,267,891  44,286,797  44,267,891
      Diluted                 44,303,711  47,454,427  47,314,900  47,530,075
    Share trading
      High                          9.25       10.96        9.70       11.24
      Low                           6.00        8.06        6.00        7.25
      Close                         6.00        8.14        6.00        8.14

    Discontinued Operations

    Petroleum and natural
     gas revenues (net)                -         287          (8)        527
    Production
      Crude oil (bbls/d)               -           -           -           -
      Natural gas liquids
       (bbls/d)                        -          11           -          12
      Natural gas (mcf/d)              -         228           -         246
      Boe/d (6:1)(*)                   -          49           -          53
    Average reference price
      WTI (US$ per bbl)                -      123.98           -      110.94
      Brent (US$ per bbl)              -      121.38           -      109.14
      AECO (Cdn$ per mcf)              -       10.21           -        9.06
    Average selling price
      Crude oil
       (Cdn$ per bbl)                  -           -           -           -
      Natural gas liquids
       (Cdn$ per bbl)                  -       74.91           -       72.86
      Natural gas
       (Cdn$ per mcf)                  -       10.17           -        8.23

    Average Operating Netback
     (Cdn$ per BOE @ 6:1)           -       64.06           -       54.71

    (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 second quarter of 2009, the Company invested approximately
$6.8 million. Libya accounted for all of the investment activity level with
approximately $5.3 million in drilling, $0.1 million in facilities and $1.4
million in capitalized General and Administration ("G&A") and office costs.

    Outlook

    The Company is continuing to seek the consent of the Libyan authorities
for the sale of Verenex. Representatives of Verenex are in discussions with
Libyan authorities to seek an amicable solution to the current impasse on
securing sale approvals. Investors are cautioned that there can be no
assurance that consent to the CNPCI Agreement will be received soon from
Libyan authorities, or that a sale transaction will be concluded on the terms
contemplated in the CNPCI Agreement or at all.
    Coincident with the cessation of drilling at the end of June 2009, the
Ensign Drilling Rig 28 has been placed under a low cost suspension mode to the
end of the drilling contract term in September 2009.
    The Company has received written feedback from the NOC on the final
appraisal report and associated commerciality application for the A1-47/02
field. The NOC did not make a final decision on commerciality at this time and
requested further clarification on a number of technical matters. The Company
is preparing a comprehensive response to the NOC feedback. The Company is also
completing Final Appraisal Reports on the B1, C1, D1 and F1-47/02 fields with
the benefit of the feedback from the NOC on the Final Appraisal Report for the
A1-47/02 field. It is expected that these reports will be presented to the NOC
in the third quarter of 2009 together with the Company's response to the NOC
recommendations on the A1-47/02 field report.
    The Company has sufficient cash reserves to fund its ongoing
expenditures.

    This press release contains forward-looking financial and operational
information, including but not limited to drilling operations, proposed
budgets, earnings, funds flow, cash reserves, 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 obtaining regulatory approvals; the uncertainty associated
with negotiating with governments; the risks and uncertainties associated with
Verenex seeking legal remedies available under the EPSA contract such as
arbitration; 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; health, safety and environmental risks;
and, the uncertainty of resource estimates), drilling equipment availability
and efficiency, the ability to attract and retain key personnel, the risk of
commodity price and foreign exchange rate fluctuations 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
August 10, 2009, of the operating and financial results of Verenex Energy Inc.
("Verenex" or the "Company") for the three and six months ended June 30, 2009.
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 unaudited consolidated financial statements for the three
and six months ended June 30, 2009 and the audited consolidated financial
statements for the year ended December 31, 2008, together with the
accompanying notes as contained in the Company's 2008 annual filings.
    Additional information relating to the Company is available on SEDAR at
www.sedar.com.

    PROPOSED TRANSACTION

    On February 26, 2009, the Company announced it had entered into an
acquisition agreement whereby a wholly-owned subsidiary of CNPC International
Ltd. ("CNPCI") had agreed to make an offer to acquire all the outstanding
common shares of the Company by way of a take-over bid for $10.00 per share in
cash. Mailing of the offer to the Company's shareholders is subject to,
amongst other conditions, receipt from the Libyan National Oil Corporation
(the "NOC") of written consent to the acquisition of Verenex by CNPCI and
certain related matters. NOC consent to a change of control of Verenex is
required under the terms of the EPSA contract in Libya; however, under the
terms of the EPSA, such consent cannot be unreasonably withheld.
    In discussions prior to the execution of the CNPCI acquisition agreement,
the NOC had indicated to Verenex that an approval bonus would be required to
be paid to the NOC to obtain its consent to any sale transaction. Based on
indications from the NOC, Verenex estimated this amount to be approximately
Cdn$46.7 million, and the CNPCI acquisition agreement was negotiated on this
basis. The NOC had also indicated that, in consideration of the payment of
such an approval bonus, it would expedite its approval process so as to occur
within a three to four week period from the time its formal consent was
requested.
    Since the execution of the CNPCI acquisition agreement on February 24,
2009, Verenex has actively sought the NOC's consent to the transaction.
However, to date, the NOC has continually failed or refused to provide such
consent. The Chairman of the NOC has publicly stated on several occasions that
the NOC intends to exercise a pre-emptive right to buy all of the outstanding
shares of Verenex at $10 per share. In light of the continuing efforts by
Verenex to actively seek the NOC's consent to the CNPCI offer, Verenex has
sent a letter to CNPCI extending the outside date under the CNPCI Agreement to
August 24, 2009.
    Signing of the acquisition agreement with CNPCI was the culmination of a
process that began in early September 2008 when the Company advised the NOC
and the public that it had initiated a process to review strategic
alternatives including a potential sale of the Company. Guidelines for such a
sale process under the terms of the EPSA were communicated to the Company by
the NOC in early October 2008. Physical data rooms were opened in the offices
of Standard Chartered Bank in London in mid-November for a five-week period
and the data set was reviewed by the NOC. All of the companies that entered
the data room were pre-qualified by the NOC and each signed a confidentiality
agreement that was also endorsed by the NOC. Bids were submitted in late
January 2009 and based on its superior offer an acquisition agreement was
signed with CNPCI on February 24, 2009.
    On behalf of Verenex, the Government of Canada has expressed its concerns
to the Government of Libya respecting the actions, and lack of action, by the
NOC.
    On June 22, 2009, the Company provided an update as to the status of its
discussions with representatives of the NOC and the General People's Committee
(the "GPC") of Libya in relation to obtaining NOC consent to a change of
control of Verenex. The Company indicated that it had received letters from
the General Manager of the NOC on June 11 and June 16, 2009. Collectively, the
two letters advised that legal authorities in Libya are investigating
allegations that Verenex was improperly pre-qualified to bid in the EPSA IV
first bid round in January 2005, under which Verenex acquired its rights to
Area 47 in Libya. The letters further state that the ongoing investigation
does not affect the rights and obligations of Verenex, and likewise does not
affect the plans of the NOC related thereto, and the GPC has not provided its
final decision on the NOC's intention to exercise a pre-emptive right.
    Verenex considers these allegations to be without merit and vigorously
denies them. No specific improprieties or details of the allegations have been
provided to Verenex.
    Verenex is continuing to engage in discussions in good faith with Libyan
authorities to seek an amicable solution to the current impasse on securing
sale approvals. In contrast to the publicly stated position of the NOC, it is
now clear that the GPC is seeking either a reduced purchase price or an
increased approval bonus. At the same time, Verenex is considering and
evaluating all of its options in light of these recent events, including legal
remedies available under the EPSA contract such as arbitration. An arbitration
claim has been drafted in this regard.
    Investors are cautioned that there can be no assurance that consent to
the CNPCI acquisition agreement will be received soon from Libyan authorities,
or that a sale transaction will be concluded on the terms contemplated in the
CNPCI acquisition agreement or at all.

    FORWARD-LOOKING INFORMATION

    This MD&A contains forward-looking financial and operational information,
including but not limited to drilling operations, proposed budgets, earnings,
funds flow, cash reserves, 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 obtaining
regulatory approvals; the uncertainty associated with negotiating with
governments; the risks and uncertainties associated with Verenex seeking legal
remedies available under the EPSA contract such as arbitration; 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; health, safety and environmental risks; and, the uncertainty of
resource estimates), drilling equipment availability and efficiency, the
ability to attract and retain key personnel, the risk of commodity price and
foreign exchange rate fluctuations 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
resources associated with certain wells and the outlook for world prices for
oil and natural gas.

    Revenues

    On January 28, 2009 the Company entered into an arrangement with
Vermilion Resources Ltd. ("Vermilion") to sell the Canadian Bottrel GORR
effective December 31, 2008. All oil and gas revenues for 2009 relate to
differences between accruals for the Bottrel GORR at December 31, 2008 and the
actuals reported in 2009.
    Interest of $21 thousand was earned in the second quarter of 2009 (2008 -
$0.4 million) compared to $81 thousand for the first quarter of 2009 on cash
balances invested in excess of expenditure requirements. The decrease versus
the second quarter of 2008 is due to the decreased cash position and lower
interest rates during the second quarter of 2009.
    The foreign exchange loss for the second quarter of 2009 was $0.7 million
as compared to a loss of $0.9 million for the second quarter of 2008, and a
gain of $11 thousand in the first quarter of 2009. The decrease in the foreign
exchange loss in the second quarter of 2009 compared to the second quarter of
2008 is due to the decline in the US dollar denominated cash balances and the
strengthening of the Canadian dollar versus the US dollar during the period.

    Stock Compensation

    For the three and six months ended June 30, 2009, non-cash stock
compensation expense related to stock options and performance warrants was
$0.5 million and $1.0 million (2008 - $0.8 million and $1.6 million). Stock
compensation expense for the second quarter of 2009 was impacted by the
decline in the Company's closing stock price to $6.00 from $8.93 at the end of
the first quarter of 2009. This reduced the expense required to be recognized
associated with the Stock Appreciation Rights ("SAR's"), Performance Share
Units ("PSU's") and Restricted Share Units ("RSU's") that are directly tied to
stock price. For the three and six months ended June 30, 2009, the stock
compensation liability related to SAR's, PSU's and RSU's first issued in 2008,
was $(0.5) million and $1.2 million (2008 - $0.2 million and $0.1 million).

    General and Administration ("G&A")

    The Company capitalized $1.4 million and $3.0 million of general and
administrative costs relating to exploration and development activities for
the three and six months ended June 30, 2009 (2008 - $1.3 million and $3.1
million). 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.

    Effects of Exchange Rate Fluctuations

    The Company's operations are conducted primarily in jurisdictions where
the United States dollar (US$) is the business currency. A large proportion of
the Company's costs, assets and liabilities during the quarter ended June 30,
2009 were denominated in US$. 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 $0.2 million for the three
and six months ended June 30, 2009 (2008 - $0.1 million and $0.2 million)
relate to the depreciation of the Canadian and Libyan leasehold improvements,
furniture and equipment.

    RELATED PARTY TRANSACTIONS

    On January 28, 2009, the Company entered into an arrangement with
Vermilion and its wholly owned France and Denmark subsidiaries to sell the
Canadian Bottrel GORR and the Verenex Danish and French subsidiaries for $5.0
million resulting in a gain on disposition of $1.3 million. The transaction
closed on February 27, 2009. All oil and gas revenues for 2009 relate to the
differences between accruals for the Bottrel GORR at December 31, 2008 and
actuals reported in 2009. (see note 12)
    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 at June
30, 2009 are comprised of an amount due to VREP of $nil (December 31, 2008 -
$0.1 million).
    Verenex entered into a Technical and Administrative Services Agreement
with Vermilion on June 28, 2004, for the provision of certain financial and
administrative services by Vermilion 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 was
automatically renewed for one-year periods, subject to termination on three
months notice. 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. Effective April 1, 2008 the monthly charge
was reduced to five thousand dollars per month. The Agreement was terminated
effective February 27, 2009. During the six months ended June 30, 2009 Verenex
was billed ten thousand dollars (2008 - forty-five thousand dollars) for
services provided under this Agreement.

    LIQUIDITY AND CAPITAL RE

SOURCES The Company has completed a review of its 2009 operating and investment programs and, in consultation with its Libya Area 47 partner, Medco International Ventures Limited, reduced its go forward drilling activities and suspended all drilling activities in Area 47 as at the end of June 2009 pending the resolution of the commerciality application for the A1-47/02 field and the Verenex sale process. Verenex has sufficient cash reserves to fund its short-term working capital requirements and capital obligations. The Company issued two letters of credit ("LC's") relating to the signing of two long-term drilling contracts that back-stop early termination provisions, both of which have now expired. The first LC to ODE required cash collateral of US $4.8 million (gross) be put in place by September 30, 2006.The ODE LC expired on November 13, 2008. The second LC to KCA DEUTAG Drilling GmbH required cash collateral of US $7.2 million (gross) in place by June 30, 2006. The KCA LC expired on April 30, 2009. The Company 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 was reflected as restricted cash on the balance sheet. The Company had a working capital surplus of $13.4 million at June 30, 2009 compared to $29.8 million as at December 31, 2008, including cash amounting to $21.8 million (December 31, 2008 - $55.5 million) net of restricted cash amounting to $nil (December 31, 2008 - $4.1 million). The decrease in working capital is due to the ongoing investments in the Company's Libya operations. All accounts receivables have been assessed for credit risk and no allowance for doubtful accounts is necessary at this time. Accounts payable and accrued liabilities have decreased since December 31, 2008 due to the timing of activity levels in Libya. Verenex is listed on the Toronto Stock Exchange under the stock symbol VNX. CRITICAL ACCOUNTING ESTIMATES Depletion and Depreciation 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 resources associated with certain wells and the outlook for world prices for oil and natural gas. Stock-Based Compensation The Company accounts for all employee stock-based compensation pursuant to the amended recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments. The stock-based compensation recorded by the Company is a critical accounting estimate because of the value of compensation recorded and assumptions required to calculate the compensation expense. NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING STANDARDS FOR 2008 AND 2009 On January 1, 2008, the Company adopted the following new Handbook Sections, which were effective for interim periods beginning on or after October 1, 2007 except for amendment on Canadian Institute of Chartered Accountants ("CICA") 1400 which was effective for interim periods beginning on or after January 1, 2008: - Section 3862 - "Financial Instruments - Disclosures", describes the required disclosure for the assessment of the significance of financial instruments for an entity's financial position and performance and of the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. This section and Section 3863, Financial Instruments - Presentation" replaced Section 3861, "Financial Instruments - Disclosure and Presentation". - Section 3863 - "Financial Instruments - Presentation", establishes standards for presentation of financial instruments and non-financial derivatives. - Section 1535 - "Capital Disclosures", establishes standards for disclosing information about an entity's capital and how it is managed. It describes the disclosure requirements of the entity's objectives, policies and processes for managing capital, the quantitative data relating to what the entity regards as capital, whether the entity has complied with capital requirements, and, if it has not complied, the consequences of such non-compliance. - The CICA has amended Section 1400, "General Standards of Financial Statement Presentation", to include requirements to assess and disclose the Company's ability to continue as a going concern. The adoption of this new section did not have an impact on the consolidated financial statements. Goodwill and Intangible Assets In February 2008, the 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 adopted the new standard 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 adoption of this new Section has no material impact on Company's consolidated financial statements at this time. 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 June 30, 2009, 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 National 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. There have been no significant changes in the second quarter of 2009 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. The Company's management, including the CEO and CFO, conducted an evaluation of the effectiveness of its internal controls over financial reporting as of June 30, 2009 and has concluded that the internal controls as of June 30, 2009 were effective. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) On February 13, 2008, the AcSB confirmed that effective for interim and annual financial statements related to fiscal years beginning on or after January 1, 2011, International Financial Reporting Standards (IFRS) will replace Canada's current Generally Accepted Accounting Principles for all publicly accountable profit oriented enterprises. The Company commenced its IFRS conversion project in 2008, which consists of three phases - scoping, evaluation and design, implementation and review. The Company has commenced its first phase of the project, which includes project initiation and awareness, identification of high-level differences between Canadian GAAP and IFRS and project planning and resourcing. A high level scoping exercise has been completed which has identified priority areas and a high-level plan has been prepared. A detailed assessment of the impact of adopting IFRS on the Company's consolidated financial statements, accounting policies, information technology and data systems, internal controls over financial reporting, disclosure controls and procedures has not been completed. The impact of such elements will depend on the particular circumstances prevailing at the adoption date and the IFRS accounting policy choices the Company makes. The Company has not completed its quantification of the effects of adopting IFRS. The financial performance and financial position as disclosed in our Canadian GAAP financial statements may be significantly different when presented in accordance with IFRS. Verenex Energy Inc. Consolidated Balance Sheets (thousands of Cdn $) unaudited June 30, December 31, 2009 2008 ------------------------------------------------------------------------- Assets Current assets Cash $ 21,812 $ 55,522 Accounts receivable 264 402 Prepaid expenses and others 497 753 ------------------------ 22,573 56,677 Restricted cash (Note 11) - 4,144 Capital assets (Note 4) 173,535 156,980 ------------------------ $ 196,108 $ 217,801 ------------------------ ------------------------ Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities $ 5,400 $ 23,950 Joint venture payable 3,780 2,916 Due to related party (Note 5) - 37 ------------------------ 9,180 26,903 Joint venture payables related to restricted cash (Note 11) - 2,072 Stock compensation liability (Note 7) 2,564 1,835 ------------------------ 11,744 30,810 ------------------------ Shareholders' equity Share capital (Note 6) 204,013 203,431 Contributed surplus (Note 6) 10,459 9,646 Deficit (30,108) (26,086) ------------------------ 184,364 186,991 ------------------------ $ 196,108 $ 217,801 ------------------------ ------------------------ See accompanying notes to the Consolidated Financial Statements Verenex Energy Inc. Consolidated Statements of Loss and Comprehensive Loss and Deficit (thousands of Cdn $, except share and per share amounts) unaudited Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Restated Restated (Note 12) (Note 12) ------------------------------------------------ Revenue Interest income $ 21 $ 399 $ 102 $ 1,180 ------------------------------------------------ $ 21 $ 399 $ 102 $ 1,180 ------------------------------------------------ Expenses General and administration $ 629 $ 999 $ 2,281 $ 1,335 Stock based compensation (Note 7) 25 955 2,217 1,710 Depletion and depreciation (Note 4) 79 94 170 188 Foreign exchange loss/(gain) 703 928 692 (1,467) ------------------------------------------------ $ 1,436 $ 2,976 $ 5,360 $ 1,766 ------------------------------------------------ Loss before taxes and discontinued operations (1,415) (2,577) (5,258) (586) Taxes (11) 1 48 1 ------------------------------------------------ Net loss from continuing operations (1,404) (2,578) (5,306) (587) Net income from discontinued operations (Note 12) - 264 1,284 336 ------------------------------------------------ Net loss and comprehensive loss (1,404) (2,314) (4,022) (251) Deficit, beginning of period (28,704) (26,066) (26,086) (28,129) ------------------------------------------------ Deficit, end of period $ (30,108) $ (28,380) $ (30,108) $ (28,380) ------------------------------------------------ ------------------------------------------------ Per share amounts (Note 8) Net loss from continuing operations Basic $ (0.03) $ (0.06) $ (0.12) $ (0.02) Diluted $ (0.03) $ (0.06) $ (0.11) $ (0.02) Net income from discontinued operations Basic and Diluted - $ 0.01 $ 0.03 $ 0.01 Net loss per share Basic and Diluted $ (0.03) $ (0.05) $ (0.09) $ (0.01) Weighted average number of shares outstanding (Note 8): Basic 44,303,711 44,267,891 44,286,797 44,267,891 ------------------------------------------------ ------------------------------------------------ Diluted 44,303,711 47,454,427 47,314,900 47,530,075 ------------------------------------------------ ------------------------------------------------ See accompanying notes to the Consolidated Financial Statements Verenex Energy Inc. Consolidated Statements of Cash Flows (thousands of Cdn $) unaudited Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash (used in) provided by: Operating activities: Net loss from continuing operations $ (1,404) $ (2,578) $ (5,306) $ (587) Items not affecting cash: Stock based compensation 25 955 2,217 1,710 Depletion and depreciation 79 94 170 188 Unrealized foreign exchange gain(loss) 845 968 405 (3,239) ------------------------------------------------ (455) (561) (2,514) (1,928) Cash Settlement - RSU/PSU (487) - (487) - Changes in non-cash operating working capital (Note 10) 229 31 395 275 ------------------------------------------------ Cash used in continuing operations (713) (530) (2,606) (1,653) ------------------------------------------------ Cash provided/(used) by discontinued operations - 277 (32) 499 ------------------------------------------------ Cash used in operations (713) (253) (2,638) (1,154) ------------------------------------------------ Investing activities: Acquisition and expenditures on petroleum and natural gas properties (6,777) (21,003) (20,410) (36,614) Changes in non-cash investing working capital (Note 10) (7,281) (6,075) (17,686) (12,226) Restricted cash 3,647 1,050 4,144 1,891 Joint venture payables related to restricted cash (1,916) (509) (2,072) (856) Discontinued operations (Note 12) - 59 5,000 9 ------------------------------------------------ (12,327) (26,478) (31,024) (47,796) ------------------------------------------------ Financing activities: Issue of common shares for cash 370 - 394 - Changes in non-cash financing working capital (Note 10) - (826) (37) (685) ------------------------------------------------ 370 (826) 357 (685) ------------------------------------------------ Foreign exchange gain/(loss) on cash held in a foreign currency (662) (1,001) (405) 3,061 ------------------------------------------------ Net decrease in cash (13,332) (28,558) (33,710) (46,574) Cash, beginning of period 35,144 104,486 55,522 122,502 ------------------------------------------------ Cash, end of period $ 21,812 $ 75,928 $ 21,812 $ 75,928 ------------------------------------------------ ------------------------------------------------ Cash taxes paid $ (11) $ 1 $ 48 $ 1 ------------------------------------------------ ------------------------------------------------ Cash interest received $ 21 $ 399 $ 102 $ 1,180 ------------------------------------------------ ------------------------------------------------ See accompanying notes to the Consolidated Financial Statements Verenex Energy Inc. Notes to the Consolidated Financial Statements For the Three and Six Months ended June 30, 2009 (thousands of Cdn $, except as noted) unaudited 1. Summary of Significant Accounting Policies and 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. The interim consolidated financial statements have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles on a consistent basis with the audited consolidated financial statements for the year ended December 31, 2008. Certain disclosures in the interim financial statements may not conform in all respects to the requirements of generally accepted accounting principles for annual financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements as at and for the year ended December 31, 2008. 2. Changes in Accounting Policies Goodwill and Intangible Assets In February 2008, the 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 adopted the new standard 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 adoption of this new Section has no material impact on the Company's consolidated financial statements at this time. 3. Financial Risk and Capital Management Financial Risk The Company is exposed to financial risk on its financial instruments including cash, restricted cash, accounts receivable, joint venture receivable/payable, deposits, accounts payable and due to/from related party. The Company manages its exposure to financial risks by operating in a manner that minimizes its exposure to the extent practical. The main financial risks affecting the Company are discussed below: Credit Risk Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the balance sheet date. The Company has policies in place to ensure that transactions are made to parties with an appropriate credit history and monitors on a continuous basis the aging profile of its receivables. Accounts receivables are presented in the balance sheet net of any allowances for doubtful receivables. In addition, when joint operations are conducted on behalf of a joint venture partner relating to capital expenditures, the costs of such operations are paid for in advance to the Company by way of a cash call by the partner of the operations being conducted. The majority of the Company's financial assets are cash. The credit risk on cash is considered by management to be limited because the counterparties are financial institutions with high credit ratings assigned by international credit rating agencies. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. On a quarterly basis, the Company assesses whether there should be any impairment of the financial assets. There are no material financial assets that the Company considers past due and there is no impairment of any financial assets as at June 30, 2009. Market Risk Foreign Exchange Risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognized assets and liabilities are denominated in a currency that is not the Company's measurement currency. The Company is exposed to foreign exchange risk arising from various currency exposures primarily the US dollar in relation to the Canadian dollar. The Company's management monitors the exchange rate fluctuations on a regular basis. The Company operated in three geographic areas and is exposed to foreign currency risk due to changes in foreign currency exchange rates, primarily as measured against the US dollar. The Company does not use currency derivative instruments to manage the Company's exposure to foreign currency fluctuations. At June 30, 2009, the carrying amount of the Company's foreign currency denominated monetary assets was approximately $13.1 million and monetary liabilities were $7.1 million. Assuming all other variables remain constant, a fluctuation of one cent in the exchange rate of the US dollar to the Canadian dollar would result in an increase or decrease on profit or loss of approximately $0.1 million. Interest Rate Risk Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. The Company is exposed to interest rate risk as it maintains significant cash balances in interest bearing bank accounts. The Company monitors these risks on a regular basis. The Company currently does not use interest rate hedges or fixed interest rate contracts to manage the Company's exposure to interest rate fluctuations. Assuming all other variables remain constant, a fluctuation of 1% in the interest rates would result in an annual increase or decrease on profit or loss of approximately $0.2 million. Liquidity Risk Liquidity risk includes the risk that, as a result of the Company's operational liquidity requirements: - The Company will not have sufficient funds to settle a transaction on the due date; - The Company will be forced to sell financial assets at a value which is less than what they are worth; or - The Company may be unable to settle or recover a financial asset at all. The ultimate responsibility for liquidity risk rests with the Board of Directors, which has built a liquidity risk management framework for the management of the Company's short, medium and long-term funding and liquidity management requirements. The Company's cash requirements and balances are projected based on forecasted operations and capital expenditures. The Company plans to meet these requirements through the mix of available funds, equity financing on a required basis, project debt financing and cash, which may be provided by the exercise of warrants and share options in the future. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses. Financial liabilities are comprised of accounts payable, accrued liabilities, joint venture payable, due to related party and stock compensation liability. Accounts payable, accrued liabilities, joint venture payable and due to related party are expected to mature in less than one year. The stock compensation liability is expected to be settled over the periods consistent with the Stock Appreciation Rights, Performance Share Unit and Restricted Share Unit vesting periods. The Stock Appreciation Rights, Performance Share Unit and Restricted Share Unit are valued at the end of each period based on the closing share price. 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. Capital Management The Company manages its capital to ensure that the Company and its subsidiaries will be able to continue as a going concern and to provide a return to shareholders through exploring, appraising and developing its assets. As the Company is in the early stages of these activities, it will meet its capital requirements though the sale of common shares and issuance of debt. The Company defines capital as total equity plus debt, which totals $184.2 million as at June 30, 2009. Total equity is comprised of share capital, contributed surplus and deficit. The Company currently has no debt. The Company is not subject to any externally imposed capital requirements. 4. Capital Assets June 30, 2009 ------------------------------------------------------------------------- Accumulated Depletion, Depreciation & Net Cost Amortization Book Value -------------------------------------------- Petroleum and natural gas properties and equipment $ 172,392 $ - $ 172,392 Furniture and equipment 2,303 1,160 1,143 -------------------------------------------- $ 174,695 $ 1,160 $ 173,535 -------------------------------------------- -------------------------------------------- December 31, 2008 ------------------------------------------------------------------------- Accumulated Depletion, Depreciation & Net Cost Amortization Book Value -------------------------------------------- Petroleum and natural gas properties and equipment $ 168,065 $ 12,393 $ 155,672 Furniture and equipment 2,296 988 1,308 -------------------------------------------- $ 170,361 $ 13,381 $ 156,980 -------------------------------------------- -------------------------------------------- The Company capitalized $1.4 million and $3.0 million of general and administrative costs directly related to exploration and development activities for the three and six months ended June 30, 2009 (2008 - $1.3 million and $3.1 million). On January 28, 2009, the Company entered into an arrangement with Vermilion and its wholly owned France and Denmark subsidiaries to sell the Bottrel GORR and the Verenex Danish and French subsidiaries for $5.0 million. The transaction closed on February 27, 2009. (See Note 12) Depletion and depreciation of $0.1 million and $0.2 million for the three and six months ended June 30, 2009 (2008 - $0.1 million and $0.2 million) relate to the depreciation of the Canadian and Libyan furniture and equipment. The 2008 expense includes depletion on the Bottrel GORR. At June 30, 2009, approximately $172.4 million of undeveloped properties in Libya (December 31, 2008 - $152 million) were excluded from the depletion calculation. 5. Related Party Transactions On January 28, 2009, the Company entered into an arrangement with Vermilion and its wholly owned France and Denmark subsidiaries to sell the Bottrel GORR and the Verenex Danish and French subsidiaries for $5.0 million. The transaction closed on February 27, 2009. All oil and gas revenues for 2009 relate to differences between accruals for the Bottrel GORR at December 31, 2008 and the actuals reported in 2009. (See Note 12) 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 at June 30, 2009 are $nil (December 31, 2008 - $0.1 million). Verenex entered into a Technical and Administrative Services Agreement with Vermilion Resources Limited ("Vermilion") on June 28, 2004, for the provision of certain financial and administrative services by Vermilion. The Agreement was automatically renewed for one-year periods, subject to termination or three months notice. Effective April 1, 2008 the monthly charge was reduced to five thousand dollars per month. During the six months ended June 30, 2009 Verenex was billed ten thousand dollars (June 30, 2008 - forty-five thousand dollars) for services provided under this Agreement. The Agreement was terminated effective February 27, 2009. 6. Share Capital Authorized Unlimited number of common shares Unlimited number of preferred shares Issued Number of Shares Amount --------------------------------------------------------------------- Opening balance as at January 1, 2009 44,267,891 $ 203,431 Issued for cash on options exercised 125,600 394 Transferred from Contributed Surplus on option exercise - 188 ----------------------------- Balance as at June 30, 2009 44,393,491 $ 204,013 ----------------------------- Contributed Surplus June 30, December 31, 2009 2008 --------------------------------------------------------------------- Opening balance $ 9,646 $ 7,592 Stock compensation expense related to options and warrants 1,001 2,678 Reversed on forfeiture of options - (624) Transferred to share capital on options exercised (188) - ----------------------------- Ending balance $ 10,459 $ 9,646 ----------------------------- ----------------------------- 7. Stock Compensation Plans 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. The Company has a "rolling" stock option plan that reserves a maximum of 10% of the aggregate number of issued and outstanding common shares. The term of option grants is up to ten years. 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. There were no options granted during 2008 or 2009. The following table summarizes information about the stock option plan: Weighted Average Number of Exercise Stock Options Price --------------------------------------------------------------------- Opening balance, January 1, 2009 3,706,000 $ 4.57 Granted - - Exercised (125,600) 3.14 Forfeited - - ----------------------------- Closing balance, June 30, 2009 3,580,400 $ 4.62 ----------------------------- ----------------------------- The Company has also issued 1,877,500 performance warrants with a weighted average exercise price of $2.55. All of the performance warrants have vested and are exercisable. They expire on June 28, 2011. No performance warrants were issued in 2008 or 2009. On January 29, 2008, the Company repriced the existing stock options granted to non-officers and non-insiders to $8.90 from exercise prices ranging from $12.75 to $14.45 to reflect the market condition and pricing and to retain key employees. No changes were made to the vesting dates of these options. 750,000 options were repriced to $8.90. For the three and six months ended June 30, 2009, non-cash stock compensation expense related to stock options and performance warrants was $0.5 million and $1.0 million (2008 - $0.8 million and $1.6 million). The Company has a Stock Appreciation Rights ("SAR's") Plan for directors, officers, employees and consultants adopted in 2005 with first awards issued in December 2005. The Company issued 495,000 SAR's during the year ended December 31, 2008. Under the terms of the SAR's Plan, the Company will pay a cash amount to any grantee of the cash value of the market appreciation of such SAR's exercised, measured as the difference between the SAR exercise price and the average closing price of the common shares of the Company for the five trading days preceding the date of exercise to a maximum defined price under the SAR's agreement. Compensation expense on unexercised rights is determined based on the market price at the end of each reporting period and is deferred and recognized in income over the vesting period of the rights. For the three and six months ended June 30, 2009, 5,000 and 115,000 SAR's were exercised. As at June 30, 2009, there were 553,334 SAR's outstanding. The Company has a Performance Share Unit Award Incentive Plan for directors, officers, employees and consultants adopted in 2007 with first awards issued in January 2008. The Company issued 71,000 Performance Share Units ("PSU's") during the year ended December 31, 2008. 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 (multiplied by a performance factor which is reviewed on a quarterly basis), 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. Compensation expense on unexercised rights is determined based on the market price at the end of each reporting period and is deferred and recognized in income over the vesting period of the rights. As at June 30, 2009, there were 35,500 PSU's outstanding. The Company has a Restricted Share Unit Award Incentive Plan for directors, officers, employees and consultants adopted in 2008 with first awards issued in October 2008. The Company issued 513,000 Restricted Share Units ("RSU's") during the year ended December 31, 2008. Under the terms of the RSU Plan, the Company will pay a cash amount to any grantee of a Unit Award equal to the aggregate fair market value of an equivalent number of Common Shares on the vesting date multiplied by a performance factor, which is reviewed on a quarterly basis. Compensation expense on unexercised rights is determined based on the market price at the end of each reporting period and is deferred and recognized in income over the vesting period of the rights. As at June 30, 2009, there were 505,500 RSU's outstanding. For the three and six months ended June 30, 2009, the stock compensation expense related to SAR's, PSU's and RSU's was $(0.5) million and $1.2 million (2008 - $0.2 million and $0.1 million). 8. Per Share Amounts For the For the For the For the Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 --------------------------------------------------------------------- Weighted average number of common shares outstanding 44,303,711 44,267,891 44,286,797 44,267,891 Shares issuable pursuant to stock options - 1,837,638 1,715,358 1,897,988 Shares issuable pursuant to performance warrants - 1,348,899 1,312,745 1,364,196 ------------------------------------------------ Weighted average number of diluted common shares outstanding 44,303,711 47,454,427 47,314,900 47,530,075 ------------------------------------------------ ------------------------------------------------ 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 from continuing operations and net loss per share in 2009 as they would be anti-dilutive. 9. Segmented Information The Company operated in three different geographical locations until the sale of assets in the first quarter of 2009 (see Note 12) and previously disclosed key financial data based on those jurisdictions. With the sale of the assets resulting in there being discontinued operations for the Canada and France/Barbados subsidiaries, the historical segmented information has been restated to reflect the Canadian corporate operations separate from the Libyan operations. 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 For the For the For the Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 --------------------------------------------------------------------- Interest Income: Canada $ 21 $ 337 $ 92 $ 980 Libya - 62 10 200 ------------------------------------------------ $ 21 $ 399 $ 102 $ 1,180 ------------------------------------------------ ------------------------------------------------ Depletion & depreciation: Canada $ 47 $ 54 $ 98 $ 106 Libya 32 40 72 82 ------------------------------------------------ $ 79 $ 94 $ 170 $ 188 ------------------------------------------------ ------------------------------------------------ For the For the For the For the Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 Foreign exchange (gain)/loss: Canada $ 65 $ 999 $ 3 $ (974) Barbados 13 296 25 320 Libya 625 (367) 664 (813) ------------------------------------------------ $ 703 $ 928 $ 692 $ (1,467) ------------------------------------------------ ------------------------------------------------ Net income/(loss): Canada $ (723) $ (2,644) $ (4,444) $ (1,148) Barbados (7) (327) (134) (368) Libya (674) 393 (728) 929 ------------------------------------------------ $ (1,404) $ (2,578) $ (5,306) $ (587) ------------------------------------------------ ------------------------------------------------ Cash flows generated (used in) from operations: Canada $ (882) $ (1,045) $ (2,208) $ (744) Barbados 17 (303) (124) (422) Libya 152 818 (274) (487) ------------------------------------------------ $ (713) $ (530) $ (2,606) $ (1,653) ------------------------------------------------ ------------------------------------------------ Capital expenditures: Canada $ - $ 87 $ - $ 87 Libya 6,777 20,916 20,410 36,527 ------------------------------------------------ $ 6,777 $ 21,003 $ 20,410 $ 36,614 ------------------------------------------------ ------------------------------------------------ All costs related to production, transportation and impairment write- downs relate to the France properties. June 30, December 31, 2009 2008 --------------------------------------------------------------------- Identifiable assets: Canada $ 8,727 $ 28,856 France/Barbados - 1,512 Libya 187,381 187,433 ------------------------ $ 196,108 $ 217,801 ------------------------ ------------------------ 10. Statements of Cash Flow Changes in non-cash working capital: Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 Accounts receivable $ 127 $ (5) $ 138 $ 80 Prepaid expenses and other 103 36 257 195 Joint venture receivable/payable (916) (6,147) 864 (5,274) Accounts payable and accrued liabilities (6,366) 72 (18,550) (6,952) Due to related party - (826) (37) (685) ------------------------------------------------ $ (7,052) $ (6,870) $ (17,328) $ (12,636) ------------------------------------------------ Changes in non-cash working capital relating to: Operating activities $ 229 $ 31 $ 395 $ 275 Investing activities (7,281) (6,075) (17,686) (12,226) Financing activities - (826) (37) (685) ------------------------------------------------ $ (7,052) $ (6,870) $ (17,328) $ (12,636) ------------------------------------------------ 11. Restricted Cash The Company issued two letters of credit ("LC's") relating to the signing of two long-term drilling contracts that back-stop early termination provisions, both of which have now expired. The first LC to ODE required cash collateral of US $4.8 million (gross) be put in place by September 30, 2006.The ODE LC expired on November 13, 2008. The second LC to KCA DEUTAG Drilling GmbH required cash collaterial of US $7.2 million (gross) in place by June 30, 2006. The KCA LC expired on April 30, 2009. The Company 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 was reflected as restricted cash on the balance sheet. 12. Discontinued Operations On January 28, 2009, the Company entered into an arrangement with Vermilion and its wholly owned France and Denmark subsidiaries to sell the Bottrel GORR and the Verenex Danish and French subsidiaries for $5.0 million. The transaction closed on February 27, 2009. The following tables outline the final transaction details: 1) Canadian Bottrel GORR --------------------- Proceeds on disposition $ 4,500 Net book value of assets disposed (3,657) ------------ Gain on disposition of assets $ 843 ------------ 2) Danish and French Subsidiaries ------------------------------ Proceeds on disposition $ 500 Net book value of assets disposed (27) ------------ Gain on disposition of assets $ 473 ------------ Total Gain on disposition of assets $ 1,316 ------------ ------------ Income from discontinued operations Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 Revenue Petroleum & natural gas, net $ - $ 287 $ (8) $ 527 ------------------------------------------------ $ - $ 287 $ (8) $ 527 Expenses General and administration $ - $ 10 $ 24 28 Depletion and depreciation (Note 4) - 13 - 163 Disposal of fixed assets gain - - (1,316) - ------------------------------------------------ $ - $ 23 $ (1,292) $ 191 ------------------------------------------------ Income from discontinued operations $ - $ 264 $ 1,284 $ 336 ------------------------------------------------ 13. Proposed Transaction On February 24, 2009, the Company entered into a definitive agreement (the "Acquisition Agreement") whereby a wholly-owned subsidiary of CNPC International Ltd. ("CNPCI") has agreed, subject to the terms of the Acquisition Agreement, to make an offer to acquire all the outstanding Shares by way of a take-over bid (the "Offer") for $10.00 per share in cash. Mailing of the Offer to Verenex shareholders is subject to the fulfillment of certain conditions for the benefit of CNPCI which, if not satisfied, will result in the Offer not proceeding. The primary condition precedent to the mailing of the Offer is the receipt from the NOC of written consent to the acquisition of Verenex by CNPCI in the form contemplated by the Acquisition Agreement. In order for the transaction to proceed, consent from the NOC is required under the terms of the EPSA; however, under the terms of the EPSA, such consent cannot be unreasonably withheld. Since the execution of the Acquisition Agreement, the Company has actively sought the NOC's consent to the transaction and, to date, the NOC has continually failed or refused to provide such consent. However, the Chairman of the NOC has publicly stated that the NOC intends to exercise a pre-emptive right to buy all of the outstanding shares of Verenex at $10 per share. On June 11, 2009, Verenex received a letter from the General Manager of the NOC, the meaning of which was clarified by a subsequent letter on June 16, 2009 in response to strong concerns expressed by Verenex. Collectively, the two letters advise that legal authorities in Libya are investigating allegations that Verenex was improperly pre- qualified to bid in the EPSA IV first bid round in January 2005, under which Verenex acquired its rights to Area 47 in Libya. The letters further state that the ongoing investigation does not affect the rights and obligations of Verenex, and likewise does not affect the plans of the NOC related thereto, and the GPC has not provided its final decision on the NOC's intention to exercise a pre-emptive right. Verenex considers these allegations to be without merit and vigorously denies them. No specific improprieties or details of the allegations have been provided to Verenex. Verenex is continuing to engage in discussions in good faith with Libyan authorities to seek an amicable solution to the current impasse on securing sale approvals. At the same time, Verenex is considering and evaluating all of its options in light of these recent events, including legal remedies available under the EPSA contract such as arbitration. No assurance can be given that consent to the Acquisition Agreement will be received soon from Libyan authorities, or that a sale transaction will be concluded on the terms contemplated in the Acquisition Agreement or at all.

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

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VERENEX ENERGY INC.

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