West Energy Ltd. - Third Quarter Report & News Release - Q3/07



    CALGARY, Nov. 13 /CNW/ -

    
    Highlights
                                     Three Months             Nine Months
                                  Ended September 30,     Ended September 30,
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
                              (unaudited) (unaudited) (unaudited) (unaudited)
    Operating
    Sales Volumes
      Crude oil (Bbls/d)           1,694       1,778       1,815       1,611
      NGLs (Bbls/d)                  635         753         596         577
      Natural gas (Mcf/d)          3,683       3,224       3,759       3,319
      Barrels of oil equivalent
       (Boe/d @ 6:1)            2,943       3,068       3,038       2,741
    Prices
      Crude oil (per Bbl)      $   79.32   $   78.95   $   70.53   $   77.16
      NGLs (per Bbl)           $   73.20   $   69.28   $   65.37   $   68.08
      Natural gas (per Mcf)    $    5.67   $    6.94   $    7.54   $    7.53
    Revenue (per Boe)          $   68.54   $   70.58   $   64.30   $   68.00
    Royalties (per Boe)        $   16.53   $   15.77   $   15.87   $   14.86
    Operating costs (per Boe)  $   10.41   $   10.35   $   11.93   $   12.31
                               ----------------------------------------------
    Operating netback
     (per Boe)                 $   41.61   $   44.46   $   36.50   $   40.83
    General and administrative
     (per Boe)                 $    3.74   $    2.44   $    3.64   $    2.79
    Interest expense (per Boe) $    0.51   $    0.99   $    1.70   $    0.79
                              -----------------------------------------------
    Corporate netback
     (per Boe)                 $   37.36   $   41.03   $   31.16   $   37.25
                              -----------------------------------------------
                              -----------------------------------------------
    Wells drilled - Gross (net)
      Oil                        4/(2.32)    5/(4.33)    6/(2.80)    8/(6.58)
      Gas                        3/(1.90)     1/(0.0)    7/(3.16)    7/(3.04)
      Service                        -/-         -/-     1/(0.12)    1/(1.00)
      Abandoned                      -/-     1/(0.50)    1/(1.00)    3/(1.58)
                              -----------------------------------------------
      Total                       7(4.22)    7/(4.83)   14/(7.08)  19/(12.20)
      Drilling success rate -
       Gross (net) wells       100%(100%)    86%/90%     93%/84%     84%(87%)
                              -----------------------------------------------
    Financial (000s, except
     per share amounts)
    Oil and gas revenues       $  18,083   $  20,879   $  53,356   $  52,199
    Funds from operations      $   9,641   $  12,529   $  25,847   $  29,120
      Per share - basic        $    0.12   $    0.21   $    0.37   $    0.49
                - diluted      $    0.12   $    0.20   $    0.35   $    0.46
    Cash flow from operating
     activities                $   8,385   $  11,166   $  25,795   $  24,344
      Per share - basic        $    0.11   $    0.19   $    0.37   $    0.41
                - diluted      $    0.10   $    0.17   $    0.35   $    0.38
    Net income (loss)          $  (3,245)  $   3,531   $  (5,522)  $   6,250
      Per share - basic        $   (0.04)  $    0.06   $   (0.08)  $    0.10
                - diluted      $   (0.04)  $    0.06   $   (0.08)  $    0.10
    Working capital
     (deficiency)              $  (4,240)  $ (30,874)  $  (4,240)  $ (30,874)
    Capital expenditures       $  13,990   $  22,948   $  47,598   $  60,317
    Total assets               $ 277,896   $ 211,383   $ 277,896   $ 211,383
    Common shares
      Weighted average - basic    79,381      60,038      70,566      59,569
                       - diluted  82,131      64,019      73,464      63,795
                              -----------------------------------------------
                              -----------------------------------------------
    


    REPORT TO SHAREHOLDERS

    TO THE SHAREHOLDERS OF WEST ENERGY LTD.

    During the third quarter of 2007 the Company completed the new Crossfire
battery, commenced drilling at Puskwa and completed the ground work for a
third core area. West has also strengthened the management team to face the
uncertainties and realize the opportunities of the oil and gas industry in
western Canada today.

    Production

    Third quarter production averaged 2,943 BOEPD and was affected by
operational issues and subsequent plant turnaround with a third party gas
plant that processes all the gas from the Paddy Creek facility. The Company
cannot produce the Nisku oil wells without conserving the sour solution gas
through a third party gas plant. The Crossfire battery started up in October
and the total corporate production is now over 5,000 BOEPD. The fourth quarter
production guidance of over 4,200 BOEPD assumes production will be affected by
potential operational issues with third party sour gas processing facilities
(related to the Paddy Creek battery) and unforeseen issues with operating the
high deliverability wells.

    Exploratory Drilling

    West's 2007 budget had anticipated that it would commence its exploration
program in the Crossfire area, the large northeast extension to the Pembina
Nisku trend discovered by the company in 2006. Obtaining drilling licenses for
the Nisku program is proving very difficult because of a very small number of
landowner objections. During Q3, progress continued with the Crossfire
licensing consultation process and the Company expects to drill three wells in
this area prior to year end. The first Nisku well of the Crossfire program at
11-3-50-6W5 has spudded. The Rocky Rapids area saw West Energy receive
approval for its two well project subject to a number of conditions that the
Company is working to satisfy.
    West anticipates its drilling activity in the fourth quarter will
increase significantly with rigs running in the Puskwa Beaverhill Lake sand
project, Crossfire Nisku fairways and in a new gas core area where the company
is establishing a presence.

    Financial Resources

    In the third quarter revenues were $18.1 million and funds from
operations were $9.6 million; an increase of 12% and 30% respectively above
those of the second quarter. West realized a higher operating netback per boe
of $41.61 versus $37.06 in the second quarter combined with a 10% increase in
production. The Company experienced a loss for the quarter of $3.2 million or
$0.04 per share primarily due to recognition of an impairment in the value of
investments associated with Asset Backed Commercial Paper instruments. The
Company was unable to access its cash invested with several entities upon the
maturity of Asset Backed Commercial Paper instruments held by the company in
mid-August. West is currently working toward a resolution of this matter which
is expected before year end. With recently renegotiated credit facilities
totaling $80 million, a small working capital deficiency, cash flow and no
bank debt, West can easily fund its capital budget.
    The recent share price of the company has been negatively affected by the
Alberta government's announced changes to the royalties payable on all crown
mineral rights owned by the province. The company's production comes from high
rate oil wells whose royalty could increase from 30% to 50% of the gross oil
production. It is important to point out that the government has stated that
"this is a framework for Alberta's new royalty regime". As the government
further develops the new royalty regime, adjustments may be made to ensure
there are no unintended consequences to its decisions. The public and
stakeholders will be consulted should significant adjustment be necessary.
West believes strongly that the proposed royalty framework will cause a
dramatic reduction of exploration drilling in the province which is clearly an
"unintended consequence". The Company is working independently and with other
affected operators to consult with the Alberta government to ensure that
exploration remains a vital component of the oil and gas business in the
province.

    Outlook

    The proposed royalty changes and the ABCP events of the past few months
have shaken a number of energy companies operating in Alberta. With adversity,
opportunity is always created and West is well positioned to take advantage of
the changed environment. With a healthy balance sheet and cash flow, the
enhanced management team has the expertise and ideas to create shareholder
value. During the fourth quarter the Company will drill four high impact
wells, where each success will have a material impact on the company. In the
longer term, the potential changes to the conventional oil crown royalties in
Alberta may reduce the number of wells in the Company's deep, high impact
light oil drilling inventory. Royalty changes as proposed may impact the
Company's ability to access capital, either by way of debt or through share
issues. West's management team is assessing the impact of the royalty changes
and will adjust the Company's strategy accordingly.

    On behalf of the Board of Directors

    (signed)
    KEN MCCAGHERTY
    President and CEO

    November 12, 2007



    MD&A

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following discussion and analysis ("Management's Discussion and
Analysis") is dated and based on information at November 7, 2007, and is
provided by the management of West Energy Ltd. ("West" or the "Company") and
prepared in accordance with the requirements of National Instrument 51-102 and
Form 51-102F1. It should be read in conjunction with the unaudited
consolidated financial statements and notes thereto for the nine months ended
September 30, 2007, included in this Interim Report, the Annual Information
Form dated March 30, 2007 and the audited annual financial statements and
Management's Discussion and Analysis of the Company as at and for the year
ended December 31, 2006.
    The Company's financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). The reporting and
the measurement currency is the Canadian dollar.

    Additional Information

    The information contained in this Interim Report represents only a
portion of the current information available on West Energy Ltd. Readers are
encouraged to read West's 2006 Annual Report, Annual Information Form dated
March 30, 2007, and the Management Information Circular. These documents
together with prior annual and quarterly reports, news releases and corporate
presentations are available by visiting the Company's website at
www.westenergy.ca. Additional information regarding the Company, including all
continuous disclosure documents, can be obtained on SEDAR at www.sedar.com. If
you require a hard copy of any of these documents please call the Company's
main office number (403) 265-5202.

    Special Note

    Disclosure provided herein in respect of barrel of oil equivalent ("Boe")
may be misleading, particularly if used in isolation. A Boe conversion ratio
for natural gas of 6 Mcf: 1 Boe has been used which is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalence at the wellhead.

    Non-GAAP Measures

    Management's Discussion and Analysis contains the term "funds from
operations", which should not be considered an alternative to, or more
meaningful than "cash flow from operating activities" as determined in
accordance with GAAP as an indicator of the Company's financial performance.
Funds from operations is determined by adding non-cash expenses to the net
income or loss for the period, deducting asset retirement expenditures and
does not include the change in working capital applicable to operating
activities. Management believes that in addition to cash flow from operating
activities, funds from operations is a useful supplemental measure as it
provides an indication of the results generated by West's principal business
activities before the consideration of how such activities are financed. The
Company's determination of funds from operations may not be comparable to that
reported by other companies. Management's Discussion and Analysis also
contains the terms operating netback and corporate netback, which are not
considered to be GAAP. Operating netbacks are calculated by deducting
royalties and operating costs from revenues and corporate netbacks are
calculated by deducting general and administrative and interest expenses from
operating netbacks. The Company's determination of operating and corporate
netbacks may not be comparable to that reported by other companies.

    Evaluation of Effectiveness of Disclosure Controls and Procedures

    Management has established and maintains disclosure controls and
procedures for the Company in order to provide reasonable assurance that
material information relating to the Company is made known to it in a timely
manner. The Chief Executive Officer and the Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures as of September 30, 2007, and have concluded that the Company's
disclosure controls and procedures provide reasonable assurance that material
information relating to the Company, including its consolidated subsidiaries
and partnership, would be made known to them by others within those entities,
particularly during the period in which this report was being prepared.

    Internal Controls Over Financial Reporting

    Management is responsible for the design of internal controls over
financial reporting within the Company in order to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP.
Management has designed the Company's internal controls and procedures over
financial reporting as of the end of the period covered by this interim filing
and believes the design to be sufficient to provide such reasonable assurance.
The design of the internal controls and procedures by their nature have
inherent limitations and may be restricted due to lack of segregation of
duties, caused by a lack of human resources, and the employees and consultants
the Company utilizes in its operations are not experts in all areas of their
individual responsibility. In addition the Company utilizes the services of
third party experts to evaluate and provide certain data which is integral to
the preparation and reporting of financial information. This information is
reviewed by Company personnel for reasonableness, however there is no
assurance of the accuracy or completeness of the information. There have been
no changes in the Company's internal controls over financial reporting during
the three months ended September 30, 2007, that have materially affected or
are reasonably likely to materially affect the internal controls over
financial reporting.

    Forward-looking Statements

    Certain statements contained in this Interim Report constitute
forward-looking statements. These statements relate to future events or the
Company's future performance. All statements other than statements of
historical fact may be forward-looking statements. Forward-looking statements
are often, but not always, identified by the use of words such as "seek",
"anticipate", "plan", "continue", "estimate", "expect", "may", "will",
"project", "predict", "potential", "targeting", "intend", "could", "might",
"should", "believe" and similar expressions. These statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results or events to differ materially from those anticipated in such
forward-looking statements. The Company believes that the expectations
reflected in those forward-looking statements are reasonable but no assurance
can be given that these expectations will prove to be correct and such
forward-looking statements included in this Interim Report should not be
unduly relied upon. These statements speak only as of the date of this Interim
Report. The Company does not intend, and does not assume any obligation, to
update these forward-looking statements.
    In particular, this Interim Report contains forward-looking statements
pertaining to the following:

    
    -   oil and natural gas production levels;
    -   capital expenditure programs;
    -   market prices and costs;
    -   supply and demand for oil and natural gas;
    -   operating, general and administrative, interest and income tax
        expenses;
    -   operating and corporate netbacks;
    -   expectations regarding the Company's ability to raise capital and to
        continually add to reserves through acquisitions and development; and
    -   treatment under government regulatory and taxation regimes.

    The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risk
factors set forth below and elsewhere in this Interim Report:

    -   volatility in market prices for oil and natural gas;
    -   liabilities and risks inherent in oil and natural gas operations;
    -   uncertainties associated with estimating reserves;
    -   competition for, among other things, capital, acquisitions of
        reserves, undeveloped lands and skilled personnel;
    -   incorrect assessments of the value of acquisitions; and
    -   geological, technical, drilling and processing problems.
    

    FINANCIAL RESULTS

    In the nine months ended September 30, 2007, West recorded a net loss of
$5.5 million ($0.08 per share) compared to net income of $6.3 million
($0.10 per share) for the corresponding period in 2006. Funds from operations
were $25.8 million ($0.37 per share) versus $29.1 million or ($0.49 per
share). Cash flow from operating activities, determined in accordance with
GAAP, was $25.8 million ($0.37 per share) for 2007 and $24.3 million
($0.41 per share) for 2006. The above 2007 per share amounts are based on a
weighted average number of shares outstanding of 70.6 million and for 2006
based on 59.6 million.
    For the three months ended September 30, 2007, the Company recorded a net
loss of $3.2 million ($0.04 per share) and net income of $3.5 million
($0.06 per share) for the similar period in 2006. Funds from operations for
the third quarter of 2007 were $9.6 million ($0.12 per share) compared to the
$12.5 million ($0.21 per share) reported for the third quarter of 2006. Cash
flow from operating activities was $8.4 million ($0.11 per share) for 2007 and
$11.2 million ($0.19 per share) for 2006.

    Revenues, Production and Prices

    Oil and gas revenues for the first three quarters of 2007, were
$53.4 million compared to the $52.2 million for the corresponding period in
2006. The increase is due to increased volume offset by slightly decreased
crude oil commodity prices. The Company received average prices of $70.53 per
barrel of oil, $65.37 per barrel of NGLs and $7.54 per Mcf of natural gas
during the nine months ended September 30, 2007. For the same period in 2006,
West received an average of $77.16 per barrel of oil and $68.08 per barrel of
NGLs and $7.53 per Mcf of natural gas. Light oil and the high heat content of
gas production from the Pembina fairway attract premium prices in the market
place.
    Sales volumes for the nine months ended September 30, 2007 were
3,038 Boe/d consisting of 1,815 Bbls/d of oil, 596 Bbls/d of NGLs and
3,759 Mcf/d of natural gas. For the corresponding period in 2006 sales volumes
were 1,611 Bbls/d of oil, 577 Bbls/d of NGLs and 3,319 Mcf/d of natural gas
for an equivalent of 2,741 Boe/d. Natural gas has been converted to a barrel
of oil equivalent at a ratio of 6 Mcf to 1 Boe.
    For the quarter ended September 30, 2007, sales volumes were 2,943 Boe/d
consisting of 1,694 Bbls/d of oil, 635 Bbls/d of NGLs and 3,683 Mcf/d of
natural gas and for the three months ended September 30, 2006 volumes were
3,068 Boe/d comprised of 1,778 Bbls/d of oil, 753 Bbls/d of NGLs and
3,224 Mcf/d of natural gas. Corresponding revenues decreased to $18.1 million
for 2007 from $20.9 million in 2006 as certain production was shut-in during
the third quarter and stronger oil and NGL commodity prices were offset by
weaker natural gas prices in the three months ended September 30, 2007. West
received average prices of $79.32 per barrel of oil, $73.20 per barrel of NGLs
and $5.67 per Mcf of natural gas during the three months ended September 30,
2007 and $78.95 per barrel of oil and $69.28 NGLs and $6.94 per Mcf of natural
gas for the corresponding period in 2006.
    The following table provides details of revenues for 2007 and 2006:

    
                                     Three Months             Nine Months
                                  Ended September 30,     Ended September 30,
    (000s)                          2007        2006        2007        2006
    -------------------------------------------------------------------------
    Oil                        $  12,361   $  12,914   $  34,954   $  34,722
    NGLs                           4,279       4,952      10,645       9,340
    Natural gas                    1,920       2,057       7,739       6,822
    GORR                         (477)(*)        956          18       1,315
                               ----------------------------------------------
    Total                      $  18,083   $  20,879   $  53,356   $  52,199
                               ----------------------------------------------
                               ----------------------------------------------
    (*) All third party processing and contract operating revenue for
        nine months of 2007 was reclassified to an offset of operating costs
        in Q3

    In Q4, 2007 the company anticipates volumes to increase due to the
Crossfire facility coming on stream. The production highlights in Q3 included
the following:

    -   Re-established production at 05-35-048-8W5 (W.I. 60%) on July 23 as
        the minimum operating pressure was attained for the reservoir
    -   The SS pool consisting of 3 wells (W.I. 2 @ 100%, 1 @ 15%)
        attaining minimum operating pressure and placed back on production
    -   The crossfire facility (W.I 100%) became operational in October and
        attained production rates greater than 1,400 boe/d
    

    The Company has no control over commodity prices and currency exchange
rates and therefore we cannot predict the prices it will receive for its
future production. The Company does not have any plans to hedge product prices
in 2007/2008.

    Royalties

    Royalties averaged 24.67% of gross revenues or $15.87 per Boe for the
nine months ended September 30, 2007 compared to 21.85% or $14.86 per Boe for
2006. For the third quarter of 2007 royalties averaged 24.74% or $16.53 per
Boe versus 22.34% or $15.77 per Boe for the similar period in 2006. West was
assessed an adjustment to its claim for Custom Processing by the Department of
Energy for the 2004 and 2005 production years in the amount of $0.2 million.
West has a claim of royalty holiday for the 16-32 well in Lodgepole; the
amount and term of royalty holidays is determined by Alberta Energy on a pool
by pool basis. The Company benefited from the Alberta Royalty Tax Credit in
2006, however the program was rescinded after 2006.

    Operating Expenses

    Operating expenses for the first nine months of 2007 were $9.9 million
($11.93 per Boe) compared to $9.2 million ($12.31 per Boe) for the nine months
ended September 30, 2006. For the quarter ended September 30, 2007 operating
expenses were $2.8 million ($10.41 per Boe) versus $2.9 million ($10.35 per
Boe) for the same quarter of 2006. West's third party processing was curtailed
due to plant turnaround, West took the opportunity to shut the Pembina battery
down for turnaround. The impact of this was approximately $0.50 million in
turnaround costs in the month of August. Unutilized capacity at the Company's
battery facility in the Pembina area is expected to decline as additional
production is brought on stream throughout 2007 and expected to reduce the per
Boe rate for operating costs in Q4.

    Netbacks

    During the first three quarters of 2007, operating netbacks (oil and gas
revenues net of royalties and operating costs) averaged $36.50 per Boe versus
$40.83 per Boe for the corresponding period in 2006. For the quarters ended
September 30, 2007 and 2006 operating netbacks were $41.61 per Boe and
$44.46 per Boe respectively. Corporate netbacks (operating netbacks less
general and administrative and interest expenses) were $31.16 for the
nine months ended September 30, 2007 and $37.25 for 2006. For the three month
period ended September 30, 2007 the corporate netback was $37.36 compared to
$41.03 for the same period in 2006. The netback decreases are primarily due to
a decline in natural gas prices. Throughout the balance of 2007 commodity
prices are expected to fluctuate, however operating and corporate netbacks are
expected to increase as additional production comes on stream resulting in
declines in the per Boe rate for operating, general and administrative and
interest expenses.

    General and Administrative Expenses

    General and administrative expenses for the nine months ended
September 30, 2007, net of capitalized costs, were $3.0 million ($3.64 per
Boe) compared to $2.1 million ($2.79 per Boe) for the corresponding period of
2006. Capitalized general and administrative costs related to exploration and
development activities for the three quarters of 2007 and 2006 were
$1.0 million and $0.6 million, respectively. For the quarters ended
September 30, 2007 and 2006 general and administrative expenses were
$1.0 million ($3.74 per Boe) and $0.7 million ($2.44 per Boe) respectively,
net of costs associated with exploration and development activities of
$0.3 million for 2007 and $0.2 million for 2006. West Energy has recruited key
personnel over the quarter. The capitalized costs associated with exploration
and development activities are geological and geophysical costs that are
incurred in the development of future drillable prospects.
    As additional production comes on stream general and administrative
costs, on a per Boe basis, are expected to decline throughout the fourth
quarter of 2007.

    Interest Expense

    West incurred interest expense of $ 1.4 million during the first nine
months of 2007 versus $0.6 million for the similar period in 2006. The cost
relates to draws on the Company's lines of credit to fund capital expenditure
activities and in 2007 interest associated with unexpended flow-through share
proceeds. The Company's lines of credit were unutilized at September 30, 2007.
    The amount of interest expense incurred in the remainder of 2007 will be
dictated by credit facility draw downs to fund future capital expenditures,
interest rates and the time it takes the Company to expend the balance of the
flow-through share proceeds.

    Stock Based Compensation Expense

    Stock based compensation expense represents the amortization of the fair
value of stock options and warrants, issued to employees, directors and
consultants, over the vesting period of the options and warrants. The Company
recorded net stock based compensation expense of $0.8 million in the first
three quarters of 2007 compared to $1.4 million in 2006 and $0.2 million and
$0.5 million respectively, for the third quarter of 2007 and 2006. During the
nine months ended September 30, 2007, the Company capitalized stock based
compensation of $0.9 million compared to $0.2 million for the same period in
2006.

    Depletion, Depreciation and Accretion

    Depletion, depreciation and accretion expense for the nine months ended
September 30, 2007 was $29.2 million ($35.22 per Boe) compared to
$20.5 million ($27.45 per Boe) for 2006. For the quarters ended September 30,
2007 and 2006 the expense was $9.9 million ($36.81 per Boe) and $6.8 million
($24.07 per Boe), respectively. The increase in the depletion and depreciation
rate per Boe is reflective of the rising cost of finding oil and gas reserves
and the substantial infrastructure costs associated with bringing on stream a
new discovery. As the Pembina Nisku fairway and other core areas are
developed, future reserve additions are expected reduce the per Boe rate.

    Income Taxes

    The Company did not incur current taxes in either 2007 or 2006 other than
Large Corporation Tax in 2006, which was later rescinded effective January 1,
2006. Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The impact of
legislated income tax rate reductions has been reflected in the financial
statements. Recent announcements regarding future income tax rate reductions
have not been reflected in these financial statements as they are not
considered to be substantially enacted.

    LIQUIDITY AND CAPITAL RE

SOURCES West had a working capital deficiency of $4.2 million as at September 30, 2007. The Company had a $55.0 million revolving operating demand loan credit facility with a Canadian bank, which bore interest at the bank's prime rate plus 10 basis points per annum. The assets of the Company are pledged as security for amounts drawn on the credit facility under a general security agreement. At September 30, 2007, the Company had not drawn on its revolving operating loan. Subsequent to the end of the quarter, the credit facility was renegotiated to $60.0 million bearing interest at the bank's prime rate plus up to 200 basis points per annum based upon the Company's Debt to Cash Flow ratio. In addition, the Company has a $20.0 million non-revolving acquisition/development demand loan credit facility with a Canadian bank, bearing interest at the bank's prime rate plus 25 basis points per annum. Under the terms of the lending agreement in existence as at September 30, 2007, the Company was required to maintain a working capital ratio of greater than one, using a calculation stipulated by the bank. Under the bank's formula, West's working capital ratio was 3.13 at September 30, 2007. At September 30, 2007, the Company held $29,971 of non-bank sponsored Asset Backed Commercial Paper ("ABCP"). The maturity date of the ABCPs was August 14, 2007. At the dates at which the Company acquired the investments, the non-bank sponsored ABCPs were rated R-1 (High) by DBRS Limited ("DBRS"), the highest credit rating for commercial paper since the ABCPs are issued by conduits that are set up as special purpose entities holding tranches of securities rated AAA. DBRS placed certain of the ABCPs "Under Review with Developing Implications" following the August 16, 2007 announcement that a group representing banks, asset providers and major investors had agreed in principle to a long-term proposal and interim agreement to convert the ABCPs into term floating-rate notes ("FRNs") maturing no earlier than the scheduled termination dates of the underlying assets (the "Montreal Proposal ABCPs."). On September 6, 2007, a Pan Canadian Committee (the "Committee") consisting of a panel of major Montreal Proposal ABCP investors was formed. The Committee subsequently retained Goodmans and JP Morgan Chase as legal and financial advisors, respectively, to oversee the proposed restructuring process. On October 16, 2007, the Chairman of the Committee announced the proposed successful restructuring of the first of 22 conduits, and agreed upon an extension of the standstill agreement until December 14, 2007 at which time the Committee expects to have proposals to restructure all of the remaining conduits. The Montreal Proposal ABCPs last traded in the active market on or about August 13, 2007 and there are currently no market quotations available for the Montreal Proposal ABCPs. The Montreal Proposal ABCPs continue to be rated R-1 (High, Under Review with Developing Implications) by DBRS, except for one conduit, which was rated R-1 (High, Under Review with Negative Implications) by DBRS on October 17, 2007. There is currently no certainty regarding the outcome of the Montreal Proposal and therefore there is a significant amount of uncertainty in estimating the amount and timing of cash flows associated with the Montreal Proposal ABCPs. The Company estimates the fair values of the Montreal Proposal ABCPs using a valuation technique which incorporates a probability weighted approach applied to discounted future cash flows considering the best available data regarding market conditions for such investments as at September 30, 2007. At September 30, 2007, the Company has recognized a potential impairment in the value of the Montreal Proposal ABCPs of $4.0 million ($2.7 million net of tax benefit of $1.3 million). In determining the fair values of the Montreal Proposal ABCPs, the Company assumes the Montreal Proposal ABCPs will be converted to FRNs that will be rated AAA or equivalent and will pay market rates of interest commensurate with the credit rating and risk factors associated with the FRNs and has recorded a reduction in fair values which is included in valuation impairment. Since the fair values of the Montreal Proposal ABCPs are determined using a probability weighted approach and are based on the Company's assessment of market conditions as at September 30, 2007, the fair values reported may change materially in subsequent periods. In addition, the fair value estimates are dependent upon the likelihood, nature and timing of future restructuring under the terms of the Montreal Proposal. As at September 30, 2007, all of the ABCPs held by the Company were Montreal Proposal ABCPs. All of the Montreal Proposal ABCPs are classified as long-term restricted investments. Commitments In November, 2006, the Company issued 4.1 million shares on a flow-through basis for gross proceeds of $30.0 million and effective December 31, 2006, renounced $30.0 million of capital expenditures to the subscribers of the flow-through shares. As at September 30, 2007, the Company had incurred $17.6 million of Canadian exploration expenditures. Capital Expenditures For the nine months ended September 30, 2007, West incurred capital expenditures of $47.6 million. This compares to $60.3 million, during the same period in 2006. West participated in 7 (4.22 net) wells in the first nine months of 2007 compared to 19 (12.2 net) in the corresponding period in 2006. Capital expenditures for the three and nine months ended September 30, 2007 and 2006 were as follows: Three Months Nine Months Ended September 30, Ended September 30, 2007 2006 2007 2006 ------------------------------------------------------------------------- Land $ 216 $ 1,376 $ 5,732 $ 2,744 Seismic 500 434 8,440 778 Drilling and intangibles 7,957 13,660 12,823 31,444 Facilities and equipment 4,600 7,285 18,314 24,666 Capitalized general and administrative 704 191 2,254 631 Furniture and equipment 13 2 35 54 ---------------------------------------------- Total $ 13,990 $ 22,948 $ 47,598 $ 60,317 ---------------------------------------------- ---------------------------------------------- GOODWILL The Company did not incur any impairment to the value of Goodwill of $14.7 million at September 30, 2007 because the Company's market capitalization exceeded the Company's shareholder equity. Subsequent to the end of the quarter, a decline in the quoted market price of the Company's common shares as a result of the announcement by the Province of Alberta related to proposed changes to the Crown Royalty program and the impact on the Company associated with its exposure to Asset Backed Commercial Paper, resulted in a situation where Goodwill would have been impaired to the full extent of its value had this market price decline occurred at September 30, 2007. Dependent upon the Company's quoted market price December 31, 2007 and the results of its independent reserve evaluation, the Company may incur an impairment in some or all of Goodwill at year end. SHARE CAPITAL DATA The Company is authorized to issue an unlimited number of common voting shares. Share capital at September 30, 2007, is detailed in note 6 of the Company's September 30, 2007 consolidated financial statements. On June 12, 2007, the Company completed a public offering of 14,583,400 common shares at $4.80 per share for net proceeds of $65.6 million. A portion of the proceeds were used to eliminate the Company's bank indebtedness and will be used to fund the Company's capital program. As at September 30, 2007 the Company had issued 79,417,373 common shares and had 5,433,333 options outstanding. OFF BALANCE SHEET ARRANGEMENTS The Company does not have any special purpose entities nor is it party to any arrangement that would be excluded from the balance sheet. SELECTED QUARTERLY INFORMATION The following table sets forth selected information of the Company for each financial quarter for the period October 1, 2005 to September 30, 2007. 2007 2006 Q3 Q2 Q1 Q4 ------------------------------------------------------------------------- Sales Volumes Oil (Bbls/d) 1,694 1,566 2,192 1,592 NGLs (Bbls/d) 635 595 559 747 Natural gas (Mcf/d) 3,683 3,120 4,482 2,908 Barrels of oil equivalent (Boe/d) 2,943 2,681 3,498 2,791 ----------------------------------------------- Financial (000, except per share amounts) Oil and gas revenues $ 18,083 $ 16,010 $ 19,263 $ 14,730 Funds from operations $ 9,641 $ 7,438 $ 8,770 $ 6,058 Per Share Basic $ 0.12 $ 0.11 $ 0.14 $ 0.10 Diluted $ 0.12 $ 0.11 $ 0.13 $ 0.09 Cash flow from operating activities $ 8,385 $ 15,641 $ 1,769 $ 5,095 Per Share Basic $ 0.11 $ 0.23 $ 0.03 $ 0.08 Diluted $ 0.10 $ 0.22 $ 0.03 $ 0.08 Net income (loss) $ (3,245) $ (777) $ (1,500) $ (1,710) Per Share Basic $ (0.04) $ (0.01) $ (0.02) $ (0.00) Diluted $ (0.04) $ (0.01) $ (0.02) $ (0.00) Capital expenditures $ 13,990 $ 11,192 $ 22,416 $ 21,781 Shares outstanding 79,417 79,307 64,717 64,212 ----------------------------------------------- Per Unit Information Prices Oil and NGLs ($/Bbl) $ 77.65 $ 66.52 $ 64.15 $ 58.84 Natural gas ($/Mcf) $ 5.67 $ 9.53 $ 7.72 $ 7.57 Oil equivalent ($/Boe) $ 68.54 $ 64.71 $ 60.34 $ 56.50 ----------------------------------------------- Operating netback ($/Boe) $ 41.61 $ 37.06 $ 31.67 $ 27.06 ----------------------------------------------- Wells Drilled Gross 7 2 5 7 Net 4.22 1.25 1.61 4.11 Drilling Results Oil 4 1 1 1 Natural gas 3 - 4 2 Service - - - 4 Dry - 1 - - ----------------------------------------------- Total 7 2 5 7 ----------------------------------------------- ----------------------------------------------- 2006 2005 Q3 Q2 Q1 Q4 ------------------------------------------------------------------------- Sales Volumes Oil (Bbls/d) 1,778 1,986 1,062 1,218 NGLs (Bbls/d) 753 495 480 387 Natural gas (Mcf/d) 3,224 4,628 2,093 1,651 Barrels of oil equivalent (Boe/d) 3,068 3,252 1,891 1,880 ----------------------------------------------- Financial (000, except per share amounts) Oil and gas revenues $ 20,879 $ 19,855 $ 11,465 $ 11,960 Funds from operations $ 12,529 $ 10,621 $ 5,970 $ 5,797 Per Share Basic $ 0.21 $ 0.18 $ 0.10 $ 0.11 Diluted $ 0.20 $ 0.17 $ 0.09 $ 0.10 Cash flow from operating activities $ 11,166 $ 10,956 $ 2,221 $ 7,586 Per Share Basic $ 0.19 $ 0.18 $ 0.04 $ 0.15 Diluted $ 0.17 $ 0.17 $ 0.03 $ 0.13 Net income (loss) $ 3,531 $ 2,278 $ 441 $ 1,098 Per Share Basic $ 0.06 $ 0.04 $ 0.01 $ 0.02 Diluted $ 0.06 $ 0.04 $ 0.01 $ 0.02 Capital expenditures $ 22,948 $ 12,033 $ 25,337 $ 36,274 Shares outstanding 60,041 60,021 58,958 58,661 ----------------------------------------------- Per Unit Information Prices Oil and NGLs ($/Bbl) $ 76.94 $ 76.32 $ 64.63 $ 66.83 Natural gas ($/Mcf) $ 6.94 $ 6.49 $ 10.79 $ 12.45 Oil equivalent ($/Boe) $ 70.58 $ 67.45 $ 64.65 $ 67.98 ----------------------------------------------- Operating netback ($/Boe) $ 44.46 $ 39.32 $ 37.42 $ 38.55 ----------------------------------------------- Wells Drilled Gross 7 5 7 4 Net 4.83 2.09 5.42 2.17 Drilling Results Oil 5 1 2 1 Natural gas 1 3 1 2 Service - - 1 - Dry 1 1 3 1 ----------------------------------------------- Total 7 5 7 4 ----------------------------------------------- APPLICATION OF CRITICAL ACCOUNTING ESTIMATES West's consolidated financial statements have been prepared in accordance with Canadian GAAP. Certain of West's accounting policies require that we make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. For a discussion about those accounting policies, please refer to our Management's Discussion and Analysis for the year ended December 31, 2006 and note 2 to our consolidated financial statements for the year ended December 31, 2006 available at www.sedar.com. NEW ACCOUNTING STANDARDS On January 1, 2007, the Corporation adopted the new Canadian accounting standards for financial instruments - recognition and measurement, financial instruments - presentation and disclosures, hedging and comprehensive income. The adoption of these accounting standards had no material impact on the Corporation's net income or cash flows. Financial Instruments - recognition and measurement This new standard requires all financial instruments within its scope, including all derivatives, to be recognized on the balance sheet initially at fair value. Subsequently measurement of all financial assets and liabilities except those held-for-trading and available for sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when derecognized or impaired. Embedded Derivatives The Corporation did not identify any material embedded derivatives which required separate recognition and measurement. Other Comprehensive Income The new standards require a new statement of comprehensive income, which is comprised of net income and other comprehensive income. Comprehensive income is the change in equity of an entity during a period from transactions and other events from non-owner sources. The Corporation currently has no items requiring separate disclosure in a statement of comprehensive income. Two new Canadian accounting standards have been issued which will require additional disclosure in the Corporation's consolidated financial statements commencing January 1, 2008 about the Corporation's financial instruments as well as its capital and how it is managed. BUSINESS RISKS Environmental Regulation and Risk All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial and local laws and regulations. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. In 2002, the Government of Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to reduce its greenhouse gas emissions to specified levels. There has been much public debate with respect to Canada's ability to meet these targets and the Government's strategy or alternative strategies with respect to climate change and the control of greenhouse gases. Implementation of strategies for reducing greenhouse gases whether to meet the limits required by the Protocol or as otherwise determined, could have a material impact on the nature of oil and natural gas operations, including those of the Company. The Federal Government released on April 26, 2007, its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION and which includes the Regulatory Framework for Air Emissions. This Action Plan covers not only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products. Regarding large industry and industry related projects the Government's Action Plan intends to achieve the following: (i) an absolute reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing mandatory targets; and (ii) air pollution from industry is to be cut in half by 2015 by setting certain targets. New facilities using cleaner fuels and technologies will have a grace period of three years. In order to facilitate the companies' compliance of the Action Plan's requirements, while at the same time allowing them to be cost-effective, innovative and adopt cleaner technologies, certain options are provided. These are: (i) in-house reductions; (ii) contributions to technology funds; (iii) trading of emissions with below-target emission companies; (iv) offsets; and (v) access to Kyoto's Clean Development Mechanism. The Climate Change and Emissions Management Amendment Act, which intends to reduce greenhouse gas emission intensity from large industries came into effect on July 1, 2007. Alberta facilities emitting more than 100,000 tonnes of greenhouse gases a year must reduce their emissions intensity by 12% starting July 1, 2007; if such reduction is not initially possible the companies owning the large emitting facilities will be required to pay $15 per tonne for every tonne above the 12% target. These payments will be deposited into an Alberta-based technology fund that will be used to develop infrastructure to reduce emissions or to support research into innovative climate change solutions. As an alternate option, large emitters can invest in projects outside of their operations that reduce or offset emissions on their behalf, provided that these projects are based in Alberta. Prior to investing, the offset reductions, offered by a prospective operation, must be verified by a third party to ensure that the emission reductions are real. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict the impact of those requirements on the Company and its operations and financial condition. Review of Alberta Royalty and Tax Regime On October 25, 2007, the Alberta Government released The New Royalty Framework ("NRF") which summarizes the government's decision on Alberta's new royalty regime pertaining to oil and gas resources, including oil sands, conventional oil and gas and coalbed methane. The NRF was the Alberta government's response to the recommendations recently put forth by the Alberta Royalty Review Panel. The new royalty regime will take effect on January 1, 2009. The Company has reviewed the modifications proposed by the Government of Alberta to its royalty regime and is continuing to assess the impact of the new royalty regime on its operations. While the Company cannot determine the full potential impact of these changes to the royalty rate on its operations at this time, it is able to make the following observations: Future financial performance will be adversely affected. Cash flow will be reduced in the range of 25 to 40 percent depending on prevailing commodity prices. Reserves valuations will also be impacted as a result of higher royalties reducing the net present value of future net revenues. Economic limits will be reached earlier than might previously occurred resulting in lower reserve volumes. Lower net present values of reserves may have an adverse effect on any subsequent full cost pool ceiling tests while lower reserve volumes will cause an increase in the rate of depreciation, depletion and amortization expense. Finally, higher royalty rates may cause currently projected projects to become uneconomic and as a result the timing, extent and nature of future capital projects could be significantly altered. November 12, 2007 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS September December (000s) 30, 2007 31, 2006 ------------------------------------------------------------------------- (unaudited) ASSETS Current assets Cash and cash equivalents $ 2,797 $ - Accounts receivable 15,773 20,037 Prepaid expenses and deposits 1,011 1,305 ----------------------- 19,581 21,342 Property, plant and equipment (note 2) 217,661 197,166 Restricted Cash (note 9) 25,971 - Goodwill 14,683 14,683 ----------------------- $ 277,896 $ 233,191 ----------------------- ----------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Bank indebtedness (note 3) $ - $ 13,599 Accounts payable and accrued liabilities 23,821 26,267 ----------------------- 23,821 39,866 Asset retirement obligation (note 4) 4,241 3,438 Future income taxes 17,492 12,251 ----------------------- 45,554 55,555 ----------------------- Shareholders' equity Share capital (note 6) 224,061 165,497 Contributed surplus (note 6) 5,602 3,938 Retained earnings 2,679 8,201 ----------------------- 232,342 177,636 ----------------------- $ 277,896 $ 233,191 ----------------------- ----------------------- Subsequent event (note 3) Contingency (note 9) Commitments (note 10) See accompanying notes to financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (unaudited) Three Months Nine Months Ended September 30, Ended September 30, (000s) 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue Oil and gas revenues $ 18,083 $ 20,879 $ 53,356 $ 52,199 Royalties 4,474 4,452 13,161 11,117 ----------------------------------------------- 13,609 16,427 40,195 41,082 ----------------------------------------------- Expenses Operating 2,817 2,921 9,898 9,212 General and administrative 1,013 688 3,020 2,086 Interest 138 278 1,406 592 Valuation impairment (note 9) 4,000 - 4,000 - Stock based compensation (note 6) 160 449 844 1,410 Depletion, depreciation and accretion 9,966 6,795 29,215 20,544 ----------------------------------------------- 18,094 11,131 48,383 33,844 ----------------------------------------------- Income (loss) before income taxes (4,485) 5,296 (8,188) 7,238 Future income taxes (reduction) (note 5) (1,240) 1,765 (2,666) 988 ----------------------------------------------- Net income (loss) for the period (3,245) 3,531 (5,522) 6,250 Retained earnings, beginning of period 5,924 4,676 8,201 1,957 ----------------------------------------------- Retained earnings, end of period $ 2,679 $ 8,207 $ 2,679 $ 8,207 ----------------------------------------------- ----------------------------------------------- Net income (loss) per share: Basic $ (0.04) $ 0.06 $ (0.08) $ 0.10 Diluted $ (0.04) $ 0.06 $ (0.08) $ 0.10 Weighted average common shares outstanding 79,381 60,038 70,566 59,569 Diluted shares outstanding 82,131 64,019 73,464 63,795 See accompanying notes to financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Nine Months Ended September 30, Ended September 30, (000s) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating activities Net income (loss) for the period $ (3,245) $ 3,531 $ (5,522) $ 6,250 Items not affecting cash: Depletion, depreciation and accretion 9,966 6,795 29,215 20,544 Valuation Impairment (note 9) 4,000 - 4,000 - Stock based compensation expense 160 449 844 1,410 Future income taxes (reduction) (1,240) 1,765 (2,666) 988 Asset retirement costs incurred (2) (11) (24) (72) ----------------------------------------------- 9,639 12,529 25,847 29,120 Change in non-cash working capital (note 7) (1,254) (1,363) (52) (4,776) ----------------------------------------------- 8,385 11,166 25,795 24,344 ----------------------------------------------- Financing activities Issue of share capital, net of issue costs (76) 35 66,006 1,581 Bank indebtedness - 10,369 (13,599) 21,757 Change in non-cash working capital (note 7) (3) (264) 130 (132) ----------------------------------------------- (79) 10,140 52,537 23,206 ----------------------------------------------- Investing activities Property, plant and equipment (13,990) (22,960) (47,598) (60,317) Proceeds from property dispositions - - - 10,316 Restricted Cash (note 9) (29,971) - (29,971) - Change in non-cash working capital (note 7) 6,768 1,654 2,034 (3,035) ----------------------------------------------- (37,193) (21,306) (75,535) (53,036) ----------------------------------------------- Increase (decrease) in cash and cash equivalents (28,887) - 2,797 (5,486) Cash and cash equivalents, beginning of period 31,684 - - 5,486 ----------------------------------------------- Cash and cash equivalents, end of period $ 2,797 $ - $ 2,797 $ - ----------------------------------------------- ----------------------------------------------- Supplementary information Interest paid $ 101 $ 281 $ 763 $ 599 See accompanying notes to financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2007 - (000s) 1. Basis of presentation (A) ACCOUNTING POLICIES The interim consolidated financial statements of West Energy Ltd. (the "Corporation") have been prepared following the same accounting policies and methods of computation as the consolidated financial statements of the Corporation as at December 31, 2006, except as noted below. The disclosures included below are incremental to those included with the annual consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the Corporation's consolidated financial statements and notes thereto for the year ended December 31, 2006. On January 1, 2007, the Corporation adopted the new Canadian accounting standards for financial instruments - recognition and measurement, financial instruments - presentation and disclosures, hedging and comprehensive income. The adoption of these accounting standards had no material impact on the Corporation's net income or cash flows. Financial Instruments - recognition and measurement This new standard requires all financial instruments within its scope, including all derivatives, to be recognized on the balance sheet initially at fair value. Subsequently measurement of all financial assets and liabilities except those held-for-trading and available for sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when derecognized or impaired. Embedded Derivatives The Corporation did not identify any material embedded derivatives which required separate recognition and measurement. Other Comprehensive Income The new standards require a new statement of comprehensive income, which is comprised of net income and other comprehensive income. Comprehensive income is the change in equity of an entity during a period from transactions and other events from non-owner sources. The Corporation currently has no items requiring separate disclosure in a statement of comprehensive income. Two new Canadian accounting standards have been issued which will require additional disclosure in the Corporation's consolidated financial statements commencing January 1, 2008 about the Corporation's financial instruments as well as its capital and how it is managed. 2. Property, plant and equipment September 30, 2007 Accumulated Net Depletion and Book ($000s) Cost Depreciation Value ------------------------------------------------------------------------- Petroleum and natural gas properties and equipment $ 293,931 $ (76,413) $ 217,518 Furniture and equipment 342 (199) 143 -------------------------------------- Total $ 294,273 $ (76,612) $ 217,661 -------------------------------------- -------------------------------------- December 31, 2006 Accumulated Net Depletion and Book ($000s) Cost Depreciation Value ------------------------------------------------------------------------- Petroleum and natural gas properties and equipment $ 244,471 $ (47,459) $ 197,012 Furniture and equipment 307 (153) 154 -------------------------------------- Total $ 244,778 $ (47,612) $ 197,166 -------------------------------------- -------------------------------------- During the nine months ended September 30, 2007, the Corporation capitalized general and administration and stock based compensation costs of $1.9 million (2006 - $0.8 million) in addition to $0.4 million (2006 - nil) for the future income tax effect of capitalizing stock based compensation, which are included in property, plant and equipment. The cost of unproved properties excluded from the depletion base as at September 30, 2007 was $24.2 million (2006 - $16.6 million). In addition, drilling in progress at September 30, 2007 of $5.7 million (2006 - $0.7 million) was excluded from the depletable base. Estimated future development costs associated with proved reserves of $10.2 million (2006 - nil) are included in the depletable base. 3. Bank indebtedness At September 30, 2007, the Corporation had a $55.0 million revolving operating demand loan credit facility with a Canadian bank, bearing interest at the bank's prime rate plus 10 basis points per annum. The assets of the Corporation were pledged as security for amounts drawn on the credit facility under a general security agreement. At September 30, 2007, the Corporation had not drawn on its revolving operating loan. Effective October 2, 2007, the Corporation's credit facility was replaced by a $60.0 million revolving operating demand loan with a Canadian bank, which bears interest at the bank's prime rate plus a prime margin of up to 200 basis points per annum, based on the Corporation's debt to cash flow ratio. Also effective October 2, 2007, the Corporation has a $20.0 million non-revolving acquisition/development demand loan credit facility with a Canadian bank, bearing interest at the bank's prime rate plus 25 basis points per annum. The assets of the Corporation are pledged as security for amounts drawn on the credit facilities under a general security agreement. 4. Asset retirement obligation The following table sets forth the changes in the asset retirement obligation: Nine months Year ended ended September December 30, 2007 31, 2006 ------------------------------------------------------------------------- Balance beginning of period $ 3,438 $ 2,441 Increase in obligation for wells drilled and facilities constructed 612 989 Current period accretion 215 214 Disposed properties - (58) Costs incurred in period (24) (148) ------------------------- Balance end of period $ 4,241 $ 3,438 ------------------------- ------------------------- 5. Future income taxes The provision for income taxes recorded in the financial statements differs from the amount which would be obtained by applying the statutory income tax rate of 32.1% (2006 - 34.5%) to the loss for the periods as follows: Three Months Nine Months Ended September 30, Ended September 30, (000s) 2007 2006 2007 2006 ------------------------------------------------------------------------- Income (loss) before income taxes $ (4,485) $ 5,296 $ (8,188) $ 7,238 ---------------------------------------------- Expected income tax provision (reduction) $ (1,441) $ 1,827 $ (2,630) $ 2,497 Non-deductible crown royalties - 397 - 562 Resource allowance - (388) - (568) Non-deductible stock based compensation expense 51 155 271 486 Enacted rate change and other 150 (226) (307) (1,989) ---------------------------------------------- Future income taxes (reduction) $ (1,240) $ 1,765 $ (2,666) $ 988 ---------------------------------------------- ---------------------------------------------- 6. Share capital (A) COMMON SHARES (i) Authorized Unlimited number of common voting shares. (ii) Issued and outstanding Number of ($000s, except share amounts) Shares Amount ------------------------------------------------------------------------- Balance, December 31, 2006 64,212,473 $ 165,497 Transactions during the period: Public offering for cash 14,583,400 70,000 Exercise of options 121,500 151 Exercise of warrants 500,000 500 Contributed surplus associated with exercise of options and warrants - 88 Share issue costs, net of tax effect of $1,273 - (3,371) Tax effect of flow-through shares - (8,804) ------------------------- Balance September 30, 2007 79,417,373 $ 224,061 ------------------------- ------------------------- On June 12, 2007, the Company completed a public offering of 14,583,400 common shares at $4.80 per share for net proceeds of $65.6 million. Basic earnings per share is computed by dividing the net earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated using the treasury stock method to determine the dilutive effect of stock options. The treasury stock method assumes that the proceeds received from the exercise of "in the money" stock options are used to repurchase common shares at the average market price during the period. At September 30, 2007, 1,224,000 (2006 - 325,000) options were excluded from determining the dilutive effect of stock options as their impact would be anti-dilutive to this calculation. (B) STOCK BASED COMPENSATION PLANS (i) Performance common share purchase warrants The Corporation reserved for issuance performance common share purchase warrants ("performance warrants") to purchase up to 5,000,000 common shares. The Corporation granted 4,500,000 performance warrants in 2003 and 500,000 in 2004. On November 8, 2004, 100% of the performance common share purchase warrants vested. In 2007, nil (2006 - 1,200,000) were exercised. Each performance warrant entitles the holder to acquire one common share at a price of $1.00 until November 7, 2008. The fair value of the 5,000,000 performance warrants granted was $907,200 based on the date of grant. At September 30, 2007, the Corporation had 2,800,000 performance warrants outstanding for which shares have been reserved. (ii) Common share purchase warrants Financing Warrants In January, 2004, the Corporation agreed to grant 500,000 common share purchase warrants to a director of the Corporation in consideration for providing a guarantee in respect of a demand loan bridge facility. Each common share purchase warrant entitles the holder to purchase one common share at a price of $1.00 per share on or before March 3, 2007. The fair value of the common share purchase warrants granted was $36,128 based on the date of grant using the Black-Scholes option pricing model with the following assumptions: average risk-free rate of 2.50%, average expected life of 3 years, expected volatility of 1% and no expected dividends. On March 1, 2007, all 500,000 financing warrants were exercised. (iii) Options The Corporation has a stock option plan for its directors, officers, employees and consultants which provides options to purchase up to a rolling maximum number of common shares equal to 10% of the issued and outstanding shares of the Corporation. In accordance with the Corporation's stock option plan the exercise price of the options is equal to the volume weighted average trading price of the common shares for the five (5) trading days prior to the date of grant and have a maximum term of five years. The vesting provisions of options are determined by the Board of Directors at the time of the grant. The options are generally exercisable one-third on each of the three following anniversary dates of the grant. The fair value of the 1,533,500 options granted in the nine months ended September 30, 2007 is $2,296,451 based on the date of grant using the Black-Scholes option pricing model with the following assumptions: average risk-free rate of 4.17%, expected life of 5 years, expected volatility of 53% and no expected dividends. During the nine months ended September 30, 2007, 121,500 options were exercised at an average price of $1.25 per option. At September 30, 2007, the Corporation had 5,433,333 stock options outstanding for which shares have been reserved. Weighted Average Exercise Price Quantity ------------------------------------------------------------------------- Balance December 31, 2006 $ 3.98 4,411,500 Issued 4.11 1,533,500 Exercised 1.25 (121,500) Forfeited 4.45 (390,167) ------------ Balance September 30, 2007 $ 3.26 5,433,333 ------------------------- ------------------------- (C) OPTIONS AND WARRANTS OUTSTANDING AT JUNE 30, 2007 Options and Warrants Options and Warrants Outstanding Exercisable Number of Weighted Weighted Options Weighted Average Number of Average and Average Remaining Options and Remaining Exercise Warrants Exercise Contractual Warrants Contractual prices (000) Price ($) Life (years) (000) Life (years) ------------------------------------------------------------------------- Warrants $1.00 2,800 1.00 1.1 2,800 1.1 ------------------------------------------------------------- Options $1.00 150 1.00 1.1 150 1.1 $1.75 670 1.75 1.7 745 1.7 $3.60 60 3.60 4.5 - 4.5 $3.65 174 3.65 4.5 - 4.5 $3.71 100 3.71 5.0 - 5.0 $3.85 36 3.85 4.5 - 4.5 $3.87 228 3.87 5.0 - 5.0 $4.02 221 4.02 5.0 - 5.0 $4.10 500 4.10 2.7 500 2.7 $4.12 450 4.12 5.0 - 5.0 $4.13 1,623 4.13 3.6 672 3.4 $4.52 90 4.52 3.8 30 3.8 $5.02 255 5.02 4.1 - 4.1 $5.06 21 5.06 4.2 - 4.2 $5.22 130 5.22 4.2 - 4.2 $5.54 400 5.54 2.3 267 2.3 $6.15 100 6.15 2.8 67 2.8 $6.70 225 6.70 2.8 150 2.8 ------------------------------------------------------------- 5,433 3.26 3.0 2,581 3.6 ------------------------------------------------------------- Total 8,233 2.49 2.0 5,381 1.9 ------------------------------------------------------------- ------------------------------------------------------------- (D) CONTRIBUTED SURPLUS Amount ------------------------------------------------------------------------- Balance December 31, 2006 $ 3,938 Current period stock based compensation 1,752 Allocated to share capital on exercise of options and warrants (88) ------------ Balance September 30, 2007 $ 5,602 ------------ ------------ 7. Supplemental disclosure of cash flow information Changes in non-cash working capital were comprised of the following: Three Months Nine Months Ended September 30, Ended September 30, (000s) 2007 2006 2007 2006 ------------------------------------------------------------------------- Accounts receivable $ (2,264) $ (2,865) $ 4,264 $ (5,711) Prepaid expenses and deposits 298 289 294 184 Accounts payable and accrued liabilities 7,477 2,603 (2,446) (2,416) ---------------------------------------------- Net Change $ 5,511 $ 27 $ 2,112 $ (7,943) ---------------------------------------------- ---------------------------------------------- Net change by activity: Operating $ (1,254) $ (1,363) $ (52) $ (4,776) Financing (3) (264) 130 (132) Investing 6,768 1,654 2,034 (3,035) ---------------------------------------------- Net Change $ 5,511 $ 27 $ 2,112 $ (7,943) ---------------------------------------------- ---------------------------------------------- 8. Financial Instruments CREDIT RISK MANAGEMENT Accounts receivable include amounts receivable for oil and gas sales, which are generally made to large credit worthy purchasers and amounts receivable from joint venture partners. Accordingly, the Corporation views credit risk on these amounts as normal for the industry. Of the Corporation's production, 75% is sold to one marketer. Included in accounts receivable from this marketer at September 30, 2007 is $4.6 million (2006 - $4.5 million). FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Financial instruments include cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities. The carrying amount of these financial instruments approximate their fair value due to their short term nature or because they bear interest at a floating rate. INTEREST RATE RISK The Corporation is exposed to fluctuations in interest rates on its bank debt. Interest rate risk is mitigated through short-term fixed rate borrowings using bankers' acceptances. COMMODITY PRICE RISK As at September 30, 2007, the Corporation had no fixed price contracts associated with future production FOREIGN CURRENCY EXCHANGE RISK The Corporation is exposed to foreign currency fluctuations as petroleum prices received are referenced in U.S. dollar dominated prices. 9. Contingency RESTRICTED CASH At September 30, 2007 the Company has recognized an investment as Restricted Cash of $25.97 million (2006 - $nil). This investment is associated with $29.97 million of investments in Asset Backed Commercial Paper ("ABCP") held by the Company at that date. At September 30, 2007 the Company has recognized an impairment in the value of these ABCP investments of $4.0 million ($2.7 million net of tax benefit of $1.3 million) (2006 - $nil). The ultimate realization of ABCP is unknown at this time. 10. Commitments The Corporation is committed to office lease payments to the end of May, 2009 in the total amount of $0.5 million In November, 2006, the Corporation issued 4.1 million shares on a flow- through basis for gross proceeds of $30.0 million. As at September 30, 2007, the Corporation had incurred $17.6 million of Canadian exploration expenditures and plans to incur a minimum of $12.4 million of Canadian exploration expenditures by December 31, 2007. 11. Related party transactions During the nine months ended September 30, 2007, the Corporation was charged $92,500 (2006 - $34,954) by a legal firm in which a Director is a partner. This transaction is in the normal course of operations and was recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties. SHAREHOLDER INFORMATION BOARD OF DIRECTORS LEGAL COUNSEL Michael Columbos(1)(3) Burnet Duckworth & Chairman, Palmer LLP Independent Businessman Calgary Ken McCagherty(2) AUDITORS President and Chief Executive Officer KPMG LLP West Energy Ltd. Calgary M. Bruce Chernoff(1)(3) BANKERS President, Caribou Capital Corp. National Bank of Canada Keith MacDonald(2)(3) Calgary President and Chief Executive Officer INDEPENDENT RESERVES Venturian Natural Resources ENGINEERS Limited GLJ Petroleum Consultants Ltd. Larry Evans(1)(2) Calgary Chairman and Chief Executive Officer TRANSFER AGENT 32 Degrees Energy Management CIBC Mellon Trust Company (1) Member of the Audit Committee. STOCK EXCHANGE LISTING (2) Member of the Reserves Committee. The Toronto Stock Exchange (3) Member of the Compensation Symbol: WTL Committee. SUBSIDIARIES OFFICERS West Asset Corporation Ken McCagherty West Energy Corporation President and West Energy Partnership Chief Executive Officer HighWest Acquisition Corp. 665157 BC Ltd Pat Welsh Senior Vice President and CORPORATE OFFICES Chief Operating Officer 600, 333 - 5th Avenue S.W. Calgary, Alberta, Canada Scott Bridge T2P 3B6 Vice President Finance and Phone: (403) 265-5202 Chief Financial Officer Fax: (403) 263-7007 Website: www.westenergy.ca Jack Lane Inquiries: sbridge@westenergy.ca Vice President Operations Chris Bennett Vice President Land and Contracts Graeme Bloy Vice President Exploration Keith Greenfield Corporate Secretary ABBREVIATIONS Oil and Natural Gas Liquids Natural Gas Bbl Barrel Mcf thousand cubic feet Bbls Barrels MMcf million cubic feet Mbbls thousand barrels Mcf/d thousand cubic feet Mmbbls million barrels per day Mstb 1,000 stock tank barrels MMcf/d million cubic feet per day Bbls/d barrels per day Mmbtu million British Thermal BOPD barrels of oil per day Units Boe barrel of oil equivalent Bcf billion cubic feet Mboe thousand barrels of oil GJ Gigajoule equivalent 6 Mcf = 1 Boe Mmboe Million barrels of oil equivalent Boe/d Barrel of oil equivalent per day NGLs natural gas liquids STB standard tank barrels CONVERSIONS To Convert From To Multiply By Mcf Cubic metres 28.174 Cubic metres Cubic feet 35.494 Bbls Cubic metres 0.159 Cubic metres Bbls oil 6.290 Feet Metres 0.305 Metres Feet 3.281 Miles Kilometres 1.609 Kilometres Miles 0.621 Acres Hectares 0.405 Hectares Acres 2.471

For further information:

For further information: 600, 333-5th Avenue S.W., Calgary, Alberta,
Canada, T2P 3B6, Phone: (403) 265-5202, Fax: (403) 263-7007, Website:
www.westenergy.ca, Inquiries: sbridge@westenergy.ca

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WEST ENERGY LTD.

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