Bonterra Oil & Gas Ltd. Announces Third Quarter 2009 Results

CALGARY, Nov. 12 /CNW/ - Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX: BNE) is pleased to announce its financial and operational results for the three months and nine months ended September 30, 2009.

    
    Highlights

                                  Three months ended       Nine Months Ended
    -------------------------------------------------------------------------
    ($ 000 except $ per         Sept. 30,   Sept. 30,   Sept. 30,   Sept. 30,
     share/unit)                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    FINANCIAL
    Revenue - realized oil
     and gas sales                20,965      34,226      60,766      99,117
    Funds flow(1)                 10,753      21,158      28,909      60,568
      Per share/unit - basic        0.58        1.24        1.62        3.56
      Per share/unit - diluted      0.57        1.22        1.62        3.53
      Payout ratio(2)                76%         77%         75%         70%
    Cash flow from operations      9,350      22,492      25,225      59,234
      Per share/unit - basic        0.50        1.31        1.42        3.48
      Per share/unit - diluted      0.50        1.30        1.42        3.45
      Payout ratio(2)                87%         73%         85%         72%
    Cash dividends per
     share/unit(2)                  0.44        0.96        1.20        2.50
    Net earnings                   5,790      21,125      16,427      44,841
      Per share/unit - basic        0.31        1.23        0.92        2.63
      Per share/unit - diluted      0.31        1.22        0.92        2.61
    Capital expenditures and
     acquisitions                 17,660       6,038      22,616      15,002
    Total assets                                         273,543     150,120
    Working capital deficiency                            14,455      47,499
    Long-term bank debt                                   81,386           -
    Shareholders'/Unitholders'
     equity                                               74,025      57,623
    -------------------------------------------------------------------------
    OPERATIONS(3)
    Oil and NGLs
      - barrels per day            3,084       2,998       3,126       3,053
      - average price
         ($ per barrel)            65.38      103.36       56.90       97.29
    Natural gas - MCF per day     10,881       7,233      11,433       7,215
                - average price
                   ($ per MCF)      3.13        8.20        3.97        8.71
    Total barrels of oil
     equivalent per day (BOE)(4)   4,898       4,204       5,032       4,256
    -------------------------------------------------------------------------
    (1) Funds flow is not a recognized measure under GAAP. For these
        purposes, the Company defines funds flow as funds provided by
        operations before changes in non-cash operating working capital items
        excluding gain on sale of property, restricted cash and asset
        retirement expenditures.
    (2) Cash payments per share/unit are based on payments made in respect of
        production months within the quarter.
    (3) Prior period volumes have been adjusted for prior period adjustments
        related to various 13th month reviews and joint venture audits
        completed during the third quarter. Total 2008 volume adjustments are
        a negative 7,328 barrels of liquids and a negative 6,853 MCF of
        natural gas.
    (4) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
        oil. The conversion is based on an energy equivalency conversion
        method primarily applicable at the burner tip and does not represent
        a value equivalency at the wellhead and as such may be misleading if
        used in isolation.

    The TSX does not accept responsibility for the accuracy of this release.
    

REPORT TO SHAREHOLDERS

Bonterra Oil & Gas Ltd. ("Bonterra" or "the Company") is pleased to report its operating and financial results for the three months and nine months ended September 30, 2009.

Bonterra is committed to a long-term approach in both operating its business and creating additional value for its shareholders. As a result, the Company has continued its strong dividend policy while focusing on maintaining a sustainable pace of development and a conservative capital structure. Bonterra is always looking to develop new long-term growth opportunities and is currently developing the very promising extension of the Pembina Cardium pool using horizontal multi-stage frac technology.

Operations

Bonterra's operations are highly-focused with approximately 83 percent of corporate reserves and approximately 85 percent of production from the Pembina Cardium field, Canada's largest original-oil-in-place pool (17 percent recovered to date). The Company's 2009 capital development program of $35 million is focused on unlocking additional value from the Pembina field and includes a targeted drilling program of horizontal multi stage fractured wells and vertical wells and land and corporate acquisitions.

Bonterra has developed a drilling inventory of over 14 years comprised of 400 primarily oil locations, including 80 to 100 horizontal locations in the Pembina field outside of the traditional producing area and numerous horizontal wells in the existing producing area (the number will be determined when there is a longer history from wells already drilled in this area by other oil companies). To date, Bonterra has drilled five gross (3.409 net) Pembina Cardium horizontal oil wells, all outside of the traditional producing area.

The first well was placed on production in February of this year with cumulative production to the end of October of 39,000 BOE. The second well was placed on production in August of this year with cumulative production of 17,200 BOE, also to the end of October. The two wells are currently producing at a combined rate of approximately 235 BOE per day of clean oil.

The third well came on production in mid-October and is currently producing approximately 40 BOE per day. This well was drilled further from the edge of the main Cardium pool (where the reservoir quality is poorer) as part of a farm-in to earn additional potential lands. Bonterra is currently monitoring the well's productivity to ensure there are no mechanical issues with the well and will be evaluating if remedial work may be required to improve the well's productivity.

The fourth well was completed and tested at significant rates after recovery of all its load oil. This well is expected to produce at rates similar to the first two wells. The well is currently shut-in for a required pressure build-up and tie-in. The well should be on production by mid-November.

The fifth well has been drilled and will be completed in November and placed on production by early December. Initial well information is encouraging. The drilling rig, after a brief weather delay, has commenced drilling the sixth well in early November.

Bonterra has also expanded its land holding in the Pembina field with the acquisition of mineral rights at a cost of approximately $4.8 million. In addition, the acquisition of Cobalt Energy Ltd., effective July 1, 2009, included interest in approximately 11 sections of land with Cardium horizontal potential in the Pembina area and an additional 40 BOE per day of production. The company's current land position totals approximately 150 gross sections in the Pembina area (93 net) of which the Company operates approximately 110 of these sections.

The horizontal development program at Pembina has exceeded Company expectations and as such the Board of Directors and management have approved an acceleration of the program. The Company intends to add a second rig to the project in mid-November. A total of at least 10 additional horizontal wells are planned to be drilled prior to spring break-up.

Subsequent to quarter-end, Bonterra completed a disposition of non-core producing assets in the Shaunavon area of Saskatchewan to Eagle Rock Exploration for $24 million in cash and approximately 30.8 million common shares in Eagle Rock. The disposition consisted of approximately 200 BOE per day of medium gravity oil and 18.5 sections of land. Proceeds from the disposition will be used for the acceleration of the horizontal drill program in the Pembina area.

Production

Bonterra's production volumes have increased approximately 18 percent in the first nine months of 2009 from the same period last year to 5,032 BOE per day. As anticipated, production was slightly lower quarter over quarter due to longer than usual gas plant turnarounds which resulted in over 1,000 MCF per day shut in for a two week period in July. In addition, approximately 400 MCF per day was shut in at the beginning of August due to low natural gas prices. The Company will be reactivating these wells as natural gas prices continue to improve.

Production guidance for the year has been lowered to approximately 5,100 BOE per day from 5,200 BOE per day to reflect the shut-in production mentioned above, deferring of capital expenditures to the second half of the year, the Shaunavon disposition and a net negative adjustment to 2009 resulting from underpayment of joint venture parties in 2008 after the Company completed several 13th month adjustments and joint venture audits. However, this still represents an approximate 20 percent increase in 2009 average daily production rates over the previous year.

Financial

Financial results during the third quarter of 2009 continued to be negatively impacted by the low commodity price environment. Revenue and cash flow from operations in the first nine months of 2009 decreased 39 percent and 57 percent, respectively when compared to the same period in 2008 primarily due to a 42 percent decrease in crude oil prices and a 54 percent decrease in natural gas prices over the same time frame.

However, quarter over quarter revenue and cash flow from operations began to show modest improvements due mainly to the healthier crude oil prices being received. Subsequent to quarter-end, prices continued to increase with WTI crude oil averaging approximately U.S. $76.00 per barrel and AECO natural gas averaging $4.68 per MCF in the month of October.

The nine month 2009 increase in G&A to $2,835,000 from $2,577,000 in the 2008 nine month period is extremely perplexing. Despite reducing G&A costs by approximately $1,000,000, mainly from reductions in compensation paid to employees and consultants, the overall costs increased by $150,000. The $1,150,000 cost is almost entirely attributable to increases in fees for banks and the professional fees needed to deal with changes to financial and regulatory reporting requirements. These costs are out of control and contribute nothing towards Company operations. Individual companies have no control over these types of costs and something needs to be done on a united front to be able to intervene in the annual, very substantial increases that are taking place in these areas.

Bonterra's netbacks have also shown improvements with a 12 percent increase to $23.96 per BOE in the third quarter of 2009 compared with $21.45 per BOE in the second quarter of 2009. Netbacks have been positively impacted by the continued increase in crude oil prices and improving natural gas prices. In addition, Bonterra has decreased both field operating costs and general and administrative costs quarter over quarter which has contributed to the enhanced netback levels.

As a result, Bonterra was able to increase the dividend to shareholders to $0.16 per share beginning with the October 30, 2009 dividend payment (September 2009 production month) from $0.14 per share previously.

Cash payments to shareholders during the second quarter of 2009 totaled $0.44 per share with a payout ratio of 76 percent of fund flow. The Board of directors and management will continue to monitor dividend levels, payout ratios and capital expenditures on a monthly basis and will adjust the payment if necessary.

Outlook

To ensure sustainability, the Company continues to develop new long-term, lower-risk opportunities with a particular focus on the acceleration of its Pembina Cardium horizontal play. The lower pricing environment may still provide opportunities for the Company in acquiring additional land and producing properties or additional corporate acquisitions for further growth of its asset base. As well, Bonterra will continue to seek out opportunities to strengthen its financial position through cost-reduction initiatives, project reviews and the implementation of further operational efficiencies across the company.

Subject to commodity prices and regulatory policies such as the Alberta competition review, Bonterra is projecting 2010 capital expenditures of $40,000,000 to $50,000,000, production volumes of 5,700 BOE per day to 6,000 BOE per day and a debt to cash flow ratio of approximately 1.5 to 1.

Bonterra remains well-positioned to continue paying a high dividend, maintaining the long-term sustainability of its business and providing superior value to its shareholders.

    
    (signed)                             (signed)
    George F. Fink                       Randy M. Jarock
    Chief Executive Officer and          President and Chief Operating
    Director                             Officer
    

A DISCUSSION OF FINANCIAL AND OPERATIONAL RESULTS

The following press release is a review of the operations and current financial position for Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") and should be read in conjunction with the unaudited financial statements for the nine months ended September 30, 2009, including the notes related thereto, and the audited financial statements for the fiscal year ended December 31, 2008, together with the notes related thereto.

Non-GAAP Measures

Throughout the press release we use the terms "payout ratio" and "cash netback" to analyze operating performance. Payout ratio is calculated by dividing cash distributions/dividends to unitholders/shareholders by cash flow from operating activities both of which are measures prescribed by GAAP which appear on our consolidated statements of cash flows. Cash netback is calculated by dividing various operation and deficit statement items as determined by GAAP by total production on a barrel of oil equivalent basis. The above terms do not have standardized meaning or definition as prescribed by GAAP and therefore may not be comparable with the calculation of similar measures by other entities."

Forward-looking Information

Certain statements contained in this press release include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this press release includes, but is not limited to: expected cash provided by continuing operations; cash dividends; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and demand; expansion and other development trends of the oil and gas industry; business strategy and outlook; expansion and growth of our business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; credit risks; and other such matters.

All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control.

Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do, what benefits will be derived there from. Except as required by law, Bonterra disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.

The forward-looking information contained herein is expressly qualified by this cautionary statement.

    
    Quarterly Comparisons

                                                2009
    -------------------------------------------------------------
    Financial ($ 000 except
     $ per share)                     Q3          Q2          Q1
    -------------------------------------------------------------
    Revenue - realized oil
     and gas sales                20,965      20,501      19,300
    Cash flow from operations      9,350       9,238       6,632
      Per share - basic             0.50        0.52        0.38
      Per share - fully diluted     0.50        0.52        0.38
    Cash payments per share(1)      0.44        0.40        0.36
    Payout Ratio(1)                  87%         77%         94%
    Net earnings                   5,790       4,544       6,093
      Per share - basic             0.32        0.26        0.35
      Per share - fully diluted     0.32        0.26        0.35
    Capital expenditures
     and acquisitions             17,660       2,255       2,696
    Total assets                 273,543     258,393     260,732
    Working capital deficiency    14,455      13,989      14,909
    Long-term bank debt           81,386      71,573      89,383
    Shareholders' equity          74,025      72,332      56,377
    -------------------------------------------------------------
    Operations(2)
    Oil and NGLs
     (barrels per day)             3,084       3,029       3,268
    Natural gas (MCF per day)     10,881      11,551      11,877
    Total BOE per day(3)           4,898       4,954       5,245
    -------------------------------------------------------------


                                                       2008
    -------------------------------------------------------------------------
    Financial ($ 000 except
     $ per share/unit)                Q4          Q3          Q2          Q1
    -------------------------------------------------------------------------
    Revenue - realized oil
     and gas sales                22,613      34,226      34,398      30,493
    Cash flow from operations     10,336      22,492      20,530      16,212
      Per share/unit - basic        0.59        1.31        1.21        0.96
      Per share/unit -
       fully diluted                0.59        1.30        1.20        0.96
    Cash payments per
     share/unit(1)                  0.62        0.96        0.84        0.70
    Payout Ratio(1)                 105%         73%         69%         73%
    Net earnings                  10,585      21,125      12,912      10,804
      Per share/unit - basic        0.62        1.23        0.76        0.64
      Per share/unit -
       fully diluted                0.62        1.22        0.75        0.64
    Capital expenditures
     and acquisitions             30,405       6,038       2,543       6,421
    Total assets                 265,301     150,120     153,247     150,169
    Working capital deficiency    23,878      47,499      57,148      57,810
    Long-term bank debt           79,910           -           -           -
    Shareholders'/unitholders'
     equity                       56,777      57,623      46,612      48,136
    -------------------------------------------------------------------------
    Operations(3)
    Oil and NGLs
     (barrels per day)             3,055       2,998       3,009       3,153
    Natural gas (MCF per day)      8,817       7,233       7,272       7,139
    Total BOE per day(2)           4,525       4,204       4,221       4,343
    -------------------------------------------------------------------------


                                                       2007
    -------------------------------------------------------------------------
    Financial ($ 000 except
     $ per unit)                      Q4          Q3          Q2          Q1
    -------------------------------------------------------------------------
    Revenue - realized oil
     and gas sales                26,573      23,794      23,462      22,602
    Cash flow from operations     13,369      11,886      13,413      12,765
      Per unit - basic              0.79        0.70        0.79        0.76
      Per unit - fully diluted      0.79        0.70        0.79        0.76
    Cash distributions(1)           0.66        0.66        0.66        0.66
    Payout Ratio(1)                  84%         94%         84%         87%
    Net earnings                   8,372       8,945       5,371       7,662
      Per unit - basic              0.49        0.53        0.32        0.45
      Per unit - fully diluted      0.49        0.53        0.32        0.45
    Capital expenditures
     and acquisitions              7,213       2,763       1,699       7,625
    Total assets                 143,239     138,140     139,432     140,926
    Working capital deficiency    58,766      50,041      49,595      49,288
    Long-term bank debt                -           -           -           -
    Unitholders' equity           44,218      50,820      51,920      57,646
    -------------------------------------------------------------------------
    Operations
    Oil and NGLs
     (barrels per day)             3,098       3,054       3,074       3,227
    Natural gas (MCF per day)      7,176       6,196       6,663       6,470
    Total BOE per day(3)           4,295       4,086       4,184       4,305
    -------------------------------------------------------------------------
    (1) Cash payments per share/unit are based on payments made in respect of
        production months within the quarter.
    (2) 2009 and 2008 quarterly volumes have been adjusted for prior period
        adjustments related to various 13th month reviews and joint venture
        audits that were completed during the third quarter of 2009.
    (3) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
        oil. The conversion is based on an energy equivalency conversion
        method primarily applicable at the burner tip and does not represent
        a value equivalency at the wellhead and as such may be misleading if
        used in isolation.


    Production

                           Three months ended             Nine months ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
                        2009        2009        2008        2009        2008
    -------------------------------------------------------------------------

    Crude oil and
     NGLs (barrels
     per day)          3,084       3,029       2,998       3,126       3,053
    Natural gas
     (MCF per day)    10,881      11,551       7,233      11,433       7,215
    -------------------------------------------------------------------------
    Average BOE
     per day           4,898       4,954       4,204       5,032       4,256
    -------------------------------------------------------------------------
    

Barrels of oil equivalent (BOE) are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation.

Production volumes for the first nine months of 2009 were up 18.2 percent over the corresponding 2008 period. Added production related to the Silverwing Energy Inc. (Silverwing) acquisition, Bonterra's 2009 drilling program including the production from the Company's first two Pembina Cardium horizontal wells, new gas wells drilled and optimization of existing wells. These additions more than offset Bonterra's average corporate production decline.

During the third quarter the Company completed several 13th month adjustments and joint venture audits. The result of these audits was a net negative adjustment to 2008 volumes of 7,328 barrels of oil and natural gas liquids and 6,853 MCF of natural gas. These volumes and adjustments to quarters one and two of 2009 have been adjusted to each respective quarter.

Q3 2009 production was down 56 BOE per day from Q2 2009. The modest production declines per day during Q3 2009 compared with Q2 and Q1 2009 is mainly due to the lack of capital expenditures in the first two quarters of 2009 (Q3 2009 - $17,660,000; Q2 2009 - $2,255,000; Q1 2009 - $2,701,000) and reductions in natural gas production resulting from shut-in gas wells due to extensive plant maintenance and shut-in wells due to low gas prices.

The Company did not drill any wells in 2009 before June when it commenced with this year's drill program. Since June, Bonterra has drilled four horizontal wells (net 2.72) and five vertical wells (net 4.75). The Company's first horizontal well was drilled in 2008 and was completed in Q1 2009. All of the drilled wells to date started producing during the latter part of Q3 or in Q4. In November, the Company engaged the serves of a second rig and will continue its horizontal drill program with both rigs for the balance of 2009 and until road bans are imposed in March 2010. Bonterra's first two wells have been producing for 9.5 months and 3.5 months, respectively and the Company is pleased with results to date. The acquisition of Cobalt Energy Ltd. (Cobalt) effective July 1, 2009 resulted in only a modest increase in production but provided the Company with additional ownership in potential horizontal drilling opportunities including the horizontal wells drilled during the third quarter.

Subject to commodity prices and regulatory policies such as the Alberta competition review, Bonterra is projecting 2010 production volumes of 5,700 BOE per day to 6,000 BOE per day.

    
    Revenue

                           Three months ended             Nine Months Ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
    ($)                 2009        2009        2008        2009        2008
    -------------------------------------------------------------------------

    Revenue - oil
     and gas sales
     (000's)          20,965      20,501      34,226      60,766      99,117

    Average Realized
     Prices:
    Crude oil and
     NGLs (per
     barrel)           65.38       59.77      103.36       56.90       97.29
    Natural gas
     (per MCF)          3.13        3.64        8.20        3.97        8.71
    -------------------------------------------------------------------------
    

Revenue from petroleum and natural gas sales decreased $38,351,000 in the first nine months of 2009 from the corresponding period in 2008 primarily due to a 42 percent drop in crude oil prices and a 54 percent drop in natural gas prices. The drop in commodity prices was partially offset with the above mentioned production increases.

Quarter over quarter the Company saw an increase in revenues of $464,000 due to improved crude oil prices offset partially by reduced gas prices and production volumes. Due to the above mentioned production adjustments, third quarter revenues were reduced by $578,000 relating to prior period items.

    
    Royalties

                           Three months ended             Nine Months Ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
    ($ 000)             2009        2009        2008        2009        2008
    -------------------------------------------------------------------------

    Crown royalties    1,248         674       3,523       3,286      11,399
    Freehold
     royalties,
     gross overriding
     royalties and
     net carried
     interests           697         587       1,134       1,785       2,921
    -------------------------------------------------------------------------
    Total royalty
     expense           1,945       1,261       4,657       5,071      14,320
    -------------------------------------------------------------------------
    % of total revenue   9.3         6.2        13.6         8.3        14.4
    -------------------------------------------------------------------------
    

Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. Most of the Company's wells are low productivity wells and therefore have low Crown royalty rates. The Company's average Crown royalty rate is approximately 5.4 percent (2008 - 10.6 percent) of gross revenue and approximately 2.9 percent (2008 - 2.7 percent) for other royalties. The increase in percent of other royalties is due to the new horizontal oil wells being drilled on freehold mineral right lands.

The recently announced new Alberta Crown royalty rates vary by prices as well as productivity levels. With recent declines in commodity prices and the Silverwing acquisition (mostly BC production with lower Crown royalty rates) the Company has experienced a significant reduction in Crown royalties in the first nine months of 2009.

The third quarter royalties have increased $684,000 over second quarter due primarily to higher crude oil pricing and increased production resulting from the Company's new horizontal oil well which has a higher royalty rate.

    
    Production Costs

                           Three months ended             Nine Months Ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
    ($ 000)             2009        2009        2008        2009        2008
    -------------------------------------------------------------------------

    Production costs   6,585       7,355       6,148      20,978      18,554
      $ per BOE(1)     15.79       16.12       15.84       15.66       15.87
    -------------------------------------------------------------------------
    (1) Excludes impact of production adjustments
    

Total production costs in the first nine months of 2009 have increased by $2,424,000 over the first nine months of 2008. The increase is due to increased production volumes (see Production). On a per BOE basis, production costs have declined in the first nine months of 2009 compared to the same period in 2008 mainly due to a general decline in service and material costs resulting from decreased industry demand and field optimization.

During the third quarter, Bonterra recorded a reduction of $531,000 in production costs related to the above mentioned adjustments related to prior period operations.

The Company's production comes primarily from low productivity wells. These wells generally result in higher production costs on a per unit-of-production basis as costs such as municipal taxes, surface leases, power and personnel costs are not variable with production volumes. The higher production costs for the Company are substantially offset by current low royalty rates of 8.3 percent, which is much lower than industry average for conventional production and results in high cash netbacks on a combined basis despite higher than industry average production costs.

    
    General and Administrative (G&A) Expense

                           Three months ended             Nine Months Ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
    ($ 000)             2009        2009        2008        2009        2008
    -------------------------------------------------------------------------

    G&A Expense          788       1,108         845       2,835       2,577
      $ per BOE(1)      1.75        2.43        2.18        2.06        2.20
    -------------------------------------------------------------------------
    (1) Excludes impact of production adjustments
    

The increase in G&A expense in the first nine months of 2009 compared to the first nine months of 2008 was due to increased contract accounting personnel costs ($160,000) related to temporary staffing needs in place of full time personnel; professional service costs ($186,000) related to various legal and accounting services dealing with changes to annual filing requirements, IFRS and internal control reviews; computer services fees ($289,000) related to additional monthly geological software licensing fees, service costs related to new production accounting software, and the contracting of a new IT manager position; bad debt expense ($65,000) due to numerous accounts with small oil and gas organizations which have become delinquent; bank charges ($488,000) related to cancelling the old banking facility and setting up the new banking facility, offset partially by reduced employee compensation ($973,000).

Quarter over quarter saw a decrease of $320,000 related primarily to an increase of $258,000 in administrative charges to capital projects. The balance of the decrease was attributable to reduced costs associated with continuous disclosure and general cost reductions.

    
    Interest Expense

                           Three months ended             Nine Months Ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
    ($ 000)             2009        2009        2008        2009        2008
    -------------------------------------------------------------------------

    Interest Expense     815         915         545       2,556       1,994
    -------------------------------------------------------------------------
    

Interest charges increased in the first nine months of 2009 as the average outstanding debt balance (including related party balances) increased by approximately $49 million over the first nine months of 2008. The acquisitions of Silverwing and Cobalt as well as the reorganization into a corporation resulted in approximately $47 million of additional debt. In addition the Company has incurred approximately $19 million in capital expenditures during this period. These increases were partially offset by net proceeds of $16,985,000 from a 2009 second quarter private equity issue. Offsetting the increased debt balance was an average reduction of one percent (4.5 percent in 2008 to 3.5 percent in 2009) in interest rates paid on the outstanding debt balance. Quarter over quarter saw a marginal decrease in interest charges due to reduced interest on the loan to related parties as well as timing of debt renewals.

Effective April 29, 2009, the Company entered into a new bank facility with new terms and conditions. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility.

The interest rate on the new credit facility is calculated as follows:

    
    -------------------------------------------------------------------------
                         Level I   Level II  Level III   Level IV    Level V
    -------------------------------------------------------------------------
    Consolidated Total
     Funded Debt(1) to                 Over       Over       Over
     Consolidated Cash     Under   1.0:1 to   1.5:1 to   2.0:1 to       Over
     flow Ratio            1.0:1      1.5:1      2.0:1      2.5:1      2.5:1
    -------------------------------------------------------------------------
    Canadian Prime Rate
     Plus(2)                 125        150        175        200        250
    -------------------------------------------------------------------------
    Bankers' Acceptances
     Rate Plus(2)            275        300        325        350        400
    -------------------------------------------------------------------------
    (1) Consolidated total funded debt excludes related party amounts but
        includes working capital.
    (2) Numbers in table represent basis points.
    

Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the next fiscal quarter following the end of each fiscal quarter, with each such adjustment to be effective until the next such adjustment.

The above rate schedule combined with current bank prime and interest rates on the related party debt is expected to result in average borrowing costs of approximately three and a quarter percent for the balance of the fiscal year.

Stock-Based Compensation

Stock-based compensation is a statistically calculated value representing the estimated expense of issuing employee stock options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. Based on currently outstanding options, the Company anticipates that an expense of approximately $210,000 will be recorded for the balance of 2009, $425,000 in 2010 and $160,000 in 2011.

Depletion, Depreciation, Accretion and Dry Hole Costs

Provision for depletion, depreciation and accretion was $14,714,000 and $10,611,000, respectively for the nine month periods ending September 30, 2009 and September 30, 2008. The increase in the depletion amount was due primarily to increased production volumes and an increase in the average cost of reserves resulting from the Silverwing and Cobalt acquisitions.

Depletion, depreciation and accretion expense for Q3 2009 compared to Q2 2009 increased by $282,000 due to the additional capital cost associated with the Cobalt acquisition offset partially by reduced production volumes.

Taxes

On November 12, 2008, the Company converted from a trust to a corporation. Due to the conversion and the acquisition of Silverwing, the Company increased its usable tax pools to approximately $468,000,000. As a result of the reorganization, the Company has recorded a future income tax asset and a corresponding deferred tax credit. These amounts will be amortized into future tax expense as the associated tax pools are consumed.

The current tax provision relates to a resource surcharge of $211,000 payable to the Province of Saskatchewan as well as a capital tax amount of $269,000 payable to the Province of Quebec. The resource surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The resource surcharge rate is three percent in 2009. The capital tax payable to the Province of Quebec is a one-time charge that resulted from the Company's conversion to a corporation.

    
    Net Earnings

                           Three months ended             Nine Months Ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
    ($ 000)             2009        2009        2008        2009        2008
    -------------------------------------------------------------------------

    Net Earnings       5,790       4,544      21,125      16,427      44,841
    -------------------------------------------------------------------------
    

Net earnings decreased in the first nine months of 2009 by $28,414,000 from the corresponding 2008 period. Reduced revenues resulting from decreased commodity prices were the main reason for the reduction. This reduction was partially offset by production volume gains. The Company continues to return in excess of 25 percent of its gross realized revenues in net earnings. The Company's low capital costs per BOE of reserves combined with the Company's low production decline rates should allow for continued positive earnings.

The three months ended September 30, 2009 saw an increase of $1,246,000 in net earnings from the three months ended June 30, 2009. The increase was primarily due to reduced operating and administration costs.

Comprehensive Income

Other comprehensive income for 2009 consists of an unrealized gain on investment in a related party of $1,078,000 (2009 - ($488,000)) due to an increase in the related company's fair value.

    
    Cash Flow from Operations

                           Three months ended             Nine Months Ended
                    Sept. 30,    June 30,   Sept. 30,   Sept. 30,   Sept. 30,
    ($ 000)             2009        2009        2008        2009        2008
    -------------------------------------------------------------------------
    Cash flow from
     operations        9,350       9,238      22,492      25,225      59,234
    -------------------------------------------------------------------------
    

Nine month 2009 cash flow from operations decreased 57 percent compared to first nine months of 2008 mainly due to decreased commodity prices received. Q3 cash flow increased by $112,000 from Q2 due primarily to reduced operating and administration costs offset by the reduction in operating accounts payable.

Cash Netback

The following table illustrates the Company's cash netback from operations for the nine month periods ended September 30:

    
    $ per Barrel of Oil Equivalent (BOE)                    2009        2008
    -------------------------------------------------------------------------
    Production volumes (BOE)                           1,373,736   1,166,144
    Gross production revenue                          $    44.65  $    91.94
    Realized gain (loss) on risk management contracts          -       (7.13)
    Royalties                                              (3.69)     (12.25)
    Field operating costs                                 (15.66)     (15.87)
    -------------------------------------------------------------------------
    Field netback                                          25.30       56.69
    General and administrative                             (2.06)      (2.20)
    Interest and taxes                                     (2.21)      (2.03)
    -------------------------------------------------------------------------
    Cash netback                                      $    21.03  $    52.46
    -------------------------------------------------------------------------
    

The following table illustrates the Company's cash netback from operations for the three month periods ended:

    
                                                        Sept. 30,    June 30,
    $ per Barrel of Oil Equivalent (BOE)                    2009        2009
    -------------------------------------------------------------------------
    Production volumes (BOE)                             450,616     450,814
    Gross production revenue                          $    47.81  $    44.93
    Royalties                                              (4.32)      (2.76)
    Field operating costs                                 (15.79)     (16.12)
    -------------------------------------------------------------------------
    Field netback                                          27.70       26.05
    General and administrative                             (1.75)      (2.43)
    Interest and taxes                                     (1.99)      (2.17)
    -------------------------------------------------------------------------
    Cash netback                                      $    23.96  $    21.45
    -------------------------------------------------------------------------
    

Related Party Transactions

The Company owns 689,682 (December 31, 2008 - 689,682) common shares of Comaplex Minerals Corp. ("Comaplex") which have a fair market value as of September 30, 2009 of $3,386,000 (December 31, 2008 - $2,131,000). Comaplex is a publicly traded mineral company on the Toronto Stock Exchange. The Company's ownership in Comaplex represents approximately 1.2 percent of the issued and outstanding common shares of Comaplex. In addition, Comaplex owns 204,633 (December 31, 2008 - 204,633) common shares in the Company. The Company has common directors and management with Comaplex.

Comaplex paid a management fee to the Company of $248,000 (2008 - $248,000). Comaplex also shares office rental costs and reimburses the Company for costs related to employee benefits and office materials. Services provided by the Company include executive services (chief executive officer, president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. At September 30, 2009, Comaplex owed the Company $75,000 (December 31, 2008 - $56,000).

As of September 30, 2009, Comaplex has loaned the Company $12,000,000 (December 31, 2008 - Nil). The loan is unsecured and until June 30, 2009 the Company paid interest at Canadian chartered bank prime plus one quarter of a percent and it has no set repayment terms. Effective July 1, 2009, the interest rate was reduced to Canadian chartered bank prime less .25 percent. The reduction in rate was due to the lowering of the Company's bank interest rate with its banking syndicate resulting from an improved debt to cash flow ratio (see Interest Expense and Liquidity and Capital Resources sections) and since the benefits of this loan are shared with Comaplex, the interest rate was reduced accordingly.

Interest paid on this loan during the first nine months of 2009 was $134,000. This results in being a substantial benefit to Bonterra and to Comaplex. The interest paid to Comaplex by Bonterra is substantially lower than bank interest and for Comaplex the interest earned is substantially higher than Comaplex would receive by investing in bank instruments such as BA's or GIC's.

The Company also has a management agreement with Pine Cliff Energy Ltd. (Pine Cliff). Pine Cliff has common directors and management with the Company. Pine Cliff trades on the TSX Venture Exchange. Pine Cliff paid a management fee to the Company of $90,000 (2008 - $178,000). Services provided by the Company include executive services (CEO, president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. The Company has no share ownership in Pine Cliff. As at September 30, 2009, the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).

As of September 30, 2009, the Company's CEO and major shareholder has loaned the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan is unsecured, bears interest at Canadian chartered bank prime and has no set repayment terms. Effective July 1, 2009, the interest rate was also decreased to Canadian chartered bank prime less .25 percent. Interest paid on this loan during the first nine months of 2009 was $152,000. This loan results in being a substantial benefit to Bonterra and to the CEO. The interest paid to the CEO by Bonterra is substantially lower than bank interest and for the CEO the interest earned is substantially higher than the CEO would receive by investing in bank instruments such as BA's or GIC's. Subsequent to quarter end, the Company's CEO made a further loan of $1,500,000 under the same terms and conditions.

The Company's bank agreement requires that the loans to Comaplex and the Company's CEO can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility.

Liquidity and Capital Resources

During the first nine months of 2009, the Company incurred capital costs of $22,616,000 (2008 - $15,002,000). The Company drilled two (1.36 net) horizontal oil wells, five (4.75 net) vertical Cardium oil wells and commenced drilling of a third (0.68) horizontal oil well for total drilling costs of approximately $6,600,000 net of drilling credits of $1,741,000 million (see below). In addition Bonterra acquired and paid $4,746,000 for mineral rights in the Pembina area of Alberta.

On July 2, 2009, Bonterra completed its acquisition of Cobalt. The Company issued 201,438 common shares and assumed $2,856,000 of negative working capital and incurred approximately $170,000 in acquisition costs for a total calculated accounting cost of $7,105,000. This acquisition resulted in acquiring an additional 40 BOE per day of production as well as increasing the Company's working interest in approximately 11 sections of land with potential Cardium horizontal locations in the Pembina area of Alberta.

During the first nine months of 2009, Bonterra also participated in drilling a number of smaller interest natural gas wells for total costs of approximately $1,000,000 and spent approximately $1,300,000 on completion and tie in costs in respect to wells drilled in Q4 2008. The balance of the capital expenditures related to various capital projects ranging from pipeline tie-ins to maximizing natural gas production to various battery upgrades to enhance overall production from existing wells.

The government of Alberta has recently announced drilling incentives and royalty reductions in respect of wells drilled after April 1, 2009 and prior to March 31, 2011. The Company is planning to maximize the crown royalty credits available under the new drilling incentive program which will result in a substantial reduction of capital costs on a per well basis.

The Company currently has plans to spend an estimated $22,000,000 (net of drilling incentives) in 2009 (approximately $10,000,000 in the fourth quarter) on development of its oil and gas properties. Land acquisitions and property or corporate acquisitions estimated to be $13,000,000 (including the Cobalt acquisition) will bring the total to approximately $35,000,000. With the recent finalizing of the Crown royalty credit program by the Alberta government, the Company plans on contracting a second drill rig in mid November for drilling additional horizontal Pembina Cardium oil wells.

Subsequent to September 30, 2009, the Company entered into a purchase and sale agreement to divest of a portion of its Shaunavon oil production to Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX). The proceeds of disposition consist of $24,000,000 cash and 30,769,200 common shares in Eagle Rock (representing approximately 4.2 percent of the outstanding common shares of the company). The disposition closed on November 6, 2009. These funds will be used to accelerate the development of the Company's horizontal Pembina Cardium oil play.

Bonterra anticipates funding the 2009 capital program out of cash flow, the Company's line of credit, its recent equity issue and proceeds from the above mentioned sale. Effective April 29, 2009, the Company entered into a new bank facility. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility. At September 30, 2009, the Company's bank loan was $81,386,000 (December 31, 2008 - $93,235,000). The terms of the new facility provides that the loan is revolving until April 28, 2011, is subject to annual review and has no fixed payment requirements.

Subject to commodity prices and regulatory policies such as the Alberta competition review, Bonterra is projecting 2010 capital expenditures of $40,000,000 to $50,000,000.

    
    The following is a list of the material bank covenants:

    1)  The Company is required to not exceed $120,000,000 in consolidated
        debt (includes negative working capital but excludes debt to related
        parties). As of September 30, 2009 the Company had consolidated debt
        of $73,841,000.

    2)  Dividends paid in any quarter shall not exceed 80 percent of the
        average of the previous four quarters' cash flow as defined under
        GAAP. During the quarter Bonterra paid $7,781,000 in dividends. This
        compares to $9,839,000 that was allowed under the bank covenant.
        During the third quarter the Company received a waiver of this
        requirement for the fourth quarter and instead is restricted to
        paying no more than the lesser of 80 percent of quarter four cash
        flow or $10,000,000.
    

Additional information relating to the Company may be found on www.sedar.com or visit our website at www.bonterraenergy.com.

The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details.

    
    CONSOLIDATED BALANCE SHEETS

    As at September 30, 2009 and December 31, 2008
    (unaudited)
    ($ 000)                                                 2009        2008
    -------------------------------------------------------------------------
    Assets
    Current
      Restricted term deposit                                  -          20
      Accounts receivable (Note 11)                       11,175      11,753
      Crude oil inventory                                    492         845
      Prepaid expenses                                     3,910       4,222
      Future income tax asset (Note 8)                     9,405       2,669
      Investments in related party (Note 3)                3,386       2,131
    -------------------------------------------------------------------------
                                                          28,368      21,640
    -------------------------------------------------------------------------
    Restricted cash (Note 4)                               1,012       1,252
    Future income tax asset (Note 8)                      78,448      85,416
    Property and Equipment (Note 5)
      Petroleum and natural gas properties
       and related equipment                             255,301     232,685
      Accumulated depletion and depreciation             (89,586)    (75,692)
    -------------------------------------------------------------------------
    Net Property and Equipment                           165,715     156,993
    -------------------------------------------------------------------------
                                                         273,543     265,301
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Current
      Accounts payable and accrued liabilities            12,700      23,888
      Due to related parties (Note 6)                     22,000       6,000
      Deferred credit (Note 8)                             8,123       2,305
      Short-term bank debt (Note 7)                            -      13,325
    -------------------------------------------------------------------------
                                                          42,823      45,518
    Long-term bank debt (Note 7)                          81,386      79,910
    Deferred credit (Note 8)                              56,421      64,758
    Asset retirement obligations                          18,888      18,338
    -------------------------------------------------------------------------
                                                         199,518     208,524
    -------------------------------------------------------------------------
    Shareholders' Equity (Note 9)
      Share capital                                      119,954      99,530
      Contributed surplus                                  3,253       2,542
    -------------------------------------------------------------------------
                                                         123,207     102,072
    -------------------------------------------------------------------------
      Deficit                                            (51,680)    (46,715)
      Accumulated other comprehensive income (Note 10)     2,498       1,420
    -------------------------------------------------------------------------
                                                         (49,182)    (45,295)
    -------------------------------------------------------------------------
    Total Shareholders' Equity                            74,025      56,777
    -------------------------------------------------------------------------
                                                         273,543     265,301
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

    For the periods ended
     September 30 (unaudited)         Three Months            Nine Months
    ($ 000)                         2009        2008        2009        2008
    -------------------------------------------------------------------------
    Unitholders' equity,
     beginning of period
     (Note 1)                          -      46,612           -      44,218
    Shareholders' equity,
     beginning of period
     (Note 1)                     72,332           -      56,777           -
    Comprehensive income
     for the period                6,055      20,801      17,505      44,353
    Net capital contributions      3,181         903      20,424       5,393
    Stock-based compensation         243         273         711         835
    Dividends declared            (7,781)          -     (21,392)          -
    Distributions declared             -     (10,966)          -     (37,176)
    -------------------------------------------------------------------------
    Unitholders' Equity,
     End of Period                     -      57,623           -      57,623
    -------------------------------------------------------------------------
    Shareholders' Equity,
     End of Period                74,025           -      74,025           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

    For the periods ended
     September 30 (unaudited)         Three Months            Nine Months
    ($000, except $ per Share)      2009        2008        2009        2008
    -------------------------------------------------------------------------
    Revenue
      Oil and gas sales           20,965      37,174      60,766     107,446
      Loss on risk management
       contracts - cash                -      (2,948)          -      (8,329)
      Gain on risk management
       contracts - non-cash            -       8,066           -       1,041
      Royalties                   (1,945)     (4,657)     (5,071)    (14,320)
      Interest and other               3           7          63          29
    -------------------------------------------------------------------------
                                  19,023      37,642      55,758      85,867
    -------------------------------------------------------------------------
    Expenses
      Production costs             6,585       6,148      20,978      18,554
      General and administrative     788         845       2,835       2,577
      Interest on debt               815         545       2,556       1,994
      Reorganization costs             -         752           -         752
      Stock-based compensation       243         273         711         835
      Depletion, depreciation
       and accretion               5,191       3,601      14,714      10,611
    -------------------------------------------------------------------------
                                  13,622      12,164      41,794      35,323
    -------------------------------------------------------------------------
    Earnings Before Taxes          5,401      25,478      13,964      50,544
    -------------------------------------------------------------------------
    Taxes (Recovery)
      Current                         82         128         480         381
      Future                        (471)      4,225      (2,943)      5,322
    -------------------------------------------------------------------------
                                    (389)      4,353      (2,463)      5,703
    -------------------------------------------------------------------------
    Net Earnings for the Period    5,790      21,125      16,427      44,841
    Deficit, beginning of
     period                      (49,689)    (54,037)    (46,715)    (51,543)
    Dividends declared            (7,781)          -     (21,392)          -
    Distributions declared             -     (10,965)          -     (37,175)
    -------------------------------------------------------------------------
    Deficit, End of Period       (51,680)    (43,877)    (51,680)    (43,877)
    -------------------------------------------------------------------------
    Net Earnings Per Share
     - Basic (Note 9)               0.31        1.23        0.92        2.63
    -------------------------------------------------------------------------
    Net Earnings Per Share
     - Diluted (Note 9)             0.31        1.22        0.92        2.61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

    For the Periods Ended
     September 30 (unaudited)         Three Months            Nine Months
    ($ 000, except $ per Share)     2009        2008        2009        2008
    -------------------------------------------------------------------------

    Net Earnings for the Period    5,790      21,125      16,427      44,841
    Unrealized gains and losses
     on investments (net of
     Income taxes; Three months
     ended 2009 - 44, 2008 -
     (56); Nine months ended
     2009 - 178, 2008 - (78))        260        (324)      1,078        (488)
    -------------------------------------------------------------------------
    Other Comprehensive Income
     (Loss)                          260        (324)      1,078        (488)
    -------------------------------------------------------------------------
    Comprehensive Income           6,050      21,801      17,505      44,353
    -------------------------------------------------------------------------
    Comprehensive Income Per
     Share - Basic (Note 9)         0.32        1.21        0.98        2.60
    -------------------------------------------------------------------------
    Comprehensive Income Per
     Share - Diluted (Note 9)       0.32        1.21        0.98        2.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS

    For the periods ended
     September 30 (unaudited)         Three Months            Nine Months
    ($000)                          2009        2008        2009        2008
    -------------------------------------------------------------------------
    Operating Activities
      Net earnings for the
       period                      5,790      21,125      16,427      44,841
      Items not affecting cash
        Gain on risk management
         contracts - non-cash          -      (8,066)          -      (1,041)
        Stock-based compensation     243         273         711         835
        Depletion, depreciation
         and accretion             5,191       3,601      14,714      10,611
        Future income taxes         (471)      4,225      (2,943)      5,322
    -------------------------------------------------------------------------
                                  10,753      21,158      28,909      60,568
    -------------------------------------------------------------------------
      Change in non-cash
       working capital
        Accounts receivable          420       2,901       1,620      (1,936)
        Crude oil inventory           30          12         329          99
        Prepaid expenses             640          76         394        (971)
        Accounts payable and
         accrued liabilities      (2,589)       (940)     (5,999)      4,102
      Restricted cash                235           -         240           -
      Asset retirement
       obligations settled          (139)       (715)       (268)     (2,628)
    -------------------------------------------------------------------------
                                  (1,403)      1,334      (3,684)     (1,334)
    -------------------------------------------------------------------------
    Cash Provided by
     Operating Activities          9,350      22,492      25,225      59,234
    -------------------------------------------------------------------------
    Financing Activities
      Increase (decrease)
       in debt                     7,612      (4,135)    (14,050)     (8,577)
      Due to related parties           -           -      16,000           -
      Issue of shares pursuant
       to private placement            -           -      17,996           -
      Share issue costs              (35)          -      (1,046)          -
      Stock option proceeds            -         903           -       5,393
      Dividends                   (7,781)          -     (21,392)          -
      Unit distributions               -     (16,439)          -     (40,899)
    -------------------------------------------------------------------------
    Cash Used in Financing
     Activities                     (204)    (19,671)     (2,492)    (44,083)
    -------------------------------------------------------------------------
    Investing Activities
      Property and equipment
       expenditures              (10,501)     (6,038)    (15,457)    (15,002)
      Restricted term deposit          -           -          20           -
      Change in non-cash
       working capital
        Accounts receivable       (1,742)          -      (1,742)          -
        Accounts payable and
         accrued liabilities       3,097       3,217      (5,554)       (149)
    -------------------------------------------------------------------------
    Cash Used in Investing
     Activities                   (9,146)     (2,821)    (22,733)    (15,151)
    -------------------------------------------------------------------------
    Net Cash Inflow                    -           -           -           -
    Cash, beginning of period          -           -           -           -
    -------------------------------------------------------------------------
    Cash, End of Period                -           -           -           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash Interest Paid               833         545       2,520       1,994
    Cash Taxes Paid                  349         109         541         477
    

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Periods Ended September 30, 2009 and 2008 (unaudited)

    
    1.  CHANGE OF ORGANIZATION

    On November 12, 2008, Bonterra Energy Income Trust (the "Trust")
    converted to Bonterra Oil & Gas Ltd. (the "Company" or the "Trust")
    through a reverse takeover of the Trust by SRX Post Holdings Inc. (SRX).
    In conjunction with the reorganization, the Trust acquired all of the
    issued and outstanding shares of Silverwing Energy Inc. (Silverwing).
    Concurrently, all of the Company's subsidiaries, including Silverwing
    were amalgamated into Bonterra Energy Corp., a wholly owned subsidiary of
    the Company.

    Prior to the Arrangement on November 12, 2008, the consolidated financial
    statements included the accounts of the Trust and its subsidiaries. After
    giving effect to the Arrangement, the consolidated financial statements
    have been prepared on a continuity of interests basis, which recognizes
    Bonterra Oil & Gas Ltd. as the successor entity to the Trust. The
    continuity of interest basis requires that the 2008 comparative
    consolidated financial statement figures presented prior to the
    reorganization are those previously presented by the Trust.

    2.  SIGNIFICANT ACCOUNTING POLICIES

    The accounting policies and methods of application followed in the
    preparation of the interim consolidated financial statements are the same
    as those followed in the preparation of Bonterra's 2008 annual
    consolidated financial statements except as described below. These
    interim consolidated financial statements do not include all disclosures
    required for annual consolidated financial statements. The interim
    consolidated financial statements as presented should be read in
    conjunction with the 2008 annual consolidated financial statements.

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

    In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
    of Financial Assets and Financial Liabilities". The EIC provides guidance
    on how to take into account credit risk of an entity and counterparty
    when determining the fair value of financial assets and financial
    liabilities, including derivative instruments. This standard is effective
    for the Company's fiscal periods ending on or after January 20, 2009 with
    retrospective application. The application of this EIC did not have a
    material effect on the Company's Consolidated Financial Statements.

    In December 2008, the CICA issued Section 1582, "Business Combinations",
    which will replace former guidance on business combinations. Section 1582
    establishes principles and requirements of the acquisition method for
    business combinations and related disclosures. This statement applies
    prospectively to business combinations for which the acquisition date is
    on or after the beginning of the first annual reporting period beginning
    on or after January 1, 2011 with earlier adoption permitted. The Company
    is currently evaluating the impact of this change on its Consolidated
    Financial Statements.

    In December 2008, the CICA issued Sections 1601, "Consolidated Financial
    Statements", and 1602, "Non-controlling Interests", which replaces
    existing Section 1600. Section 1601 establishes standards for the
    preparation of consolidated financial statements. Section 1602 provides
    guidance on accounting for a non-controlling interest in a subsidiary in
    consolidated financial statements subsequent to a business combination.
    These standards are effective on or after the beginning of the first
    annual reporting period beginning on or after January 2011 with earlier
    adoption permitted. These standards currently do not impact the Company
    as it has full controlling interest of all of its subsidiaries.

    Recent Accounting Pronouncements

    The Accounting Standards Board has confirmed that the convergence of
    Canadian GAAP with International Financial Reporting Standards (IFRS)
    will be effective January 1, 2011. The Company has performed an initial
    scoping process in order to ensure successful implementation within the
    required timeframe. The impact on the Company's consolidated financial
    statements is not reasonably determinable at this time. Key information
    will be disclosed as it becomes available during the transition period.

    In June 2009, the CICA issued amendments to CICA Handbook Section 3862,
    "Financial Instruments - Disclosures". The amendments include enhanced
    disclosures related to the fair value of financial instruments and the
    liquidity risk associated with financial instruments. The amendments will
    be effective for annual financial statements for fiscal years ending
    after September 30, 2009. The amendments are consistent with recent
    amendments to financial instrument disclosure standards in IFRS. The
    Company will include these additional disclosures in its annual
    consolidated financial statements for the year ending December 31, 2009.

    3.  INVESTMENT IN RELATED PARTY

    The investment consists of 689,682 (December 31, 2008 - 689,682) common
    shares of Comaplex Minerals Corp. (Comaplex), a company with common
    directors and management with the Company and its subsidiaries. The
    investment is recorded at fair market value. The common shares trade on
    the Toronto Stock Exchange under the symbol CMF. The investment
    represents less than one and a half percent ownership in the outstanding
    shares of Comaplex.

    4.  RESTRICTED CASH

    An escrow account was held by Silverwing prior to its acquisition by the
    Company. The escrow account was created to support eligible expenditures
    related to a farm-in agreement. The Company may access the funds upon
    completion and tie-in or abandonment and reclamation of 22 wells. The
    funds are administered by the farmors' legal counsel. The funds in the
    escrow account are invested in interest bearing term deposits.

    During the third quarter the Company applied for a $250,000 reduction in
    the escrow account due to the abandonment of 5 wells. This amount is
    included in accounts receivable and was received subsequent to the end of
    the quarter.

    5.  PROPERTY AND EQUIPMENT

                                September 30, 2009         December 31, 2008
    -------------------------------------------------------------------------
                                       Accumulated               Accumulated
                                         Depletion                 Depletion
                                               and                       and
    ($ 000)                    Cost   Depreciation       Cost   Depreciation
    -------------------------------------------------------------------------
    Undeveloped land          7,288              -      2,295              -
    Petroleum and natural
     gas properties and
     related equipment      246,566         88,606    229,136         74,844
    Furniture, equipment
     and other                1,447            980      1,254            848
    -------------------------------------------------------------------------
                            255,301         89,586    232,685         75,692
    -------------------------------------------------------------------------

    On July 2, 2009, the Company acquired all of the issued common shares of
    Cobalt Energy Ltd. (Cobalt) for consideration of 201,438 common shares at
    a value of $15.92 per common share plus the assumption of $2,856,000 of
    negative working capital for total consideration of $6,063,000. Results
    of Cobalt's operations have been included in the consolidated financial
    statements commencing from that date.

    The acquisition was accounted for using the purchase method and the
    purchase price was allocated to the fair value of the assets acquired and
    the liabilities assumed as follows:

    Cost of acquisition (000's)
      Value of common stock                 $3,207
      Acquisition costs                        170
                                           --------
                                            $3,377
                                           --------
                                           --------
    Allocation of purchase price:
      Property and equipment                $7,105
      Future income tax liability             (748)
      Working capital deficiency            (2,856)
      Asset retirement obligations            (124)
                                           --------
                                            $3,377
                                           --------
                                           --------

    6.  DUE TO RELATED PARTIES

    As of September 30, 2009, the Company's CEO and major shareholder has
    loaned the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan
    is unsecured, bears interest at Canadian chartered bank prime and has no
    set repayment terms but is payable on demand. Effective July 1, 2009 the
    interest rate was decreased to Canadian chartered bank prime less
    .25 percent. The interest rate was decreased to keep the loan rate at
    approximately two percent below the Company's bank financing rate.
    Interest paid on this loan during the nine months of 2009 was $152,000.
    Subsequent to quarter end, the Company's CEO made a further loan of
    $1,500,000 under the same terms and conditions.

    As of September 30, 2009, Comaplex has loaned the Company $12,000,000
    (December 31, 2008 - Nil). The loan is unsecured, bears interest at
    Canadian chartered bank prime plus one quarter of a percent and has no
    set repayment terms but is payable on demand. Effective July 1, 2009 the
    interest rate was decreased to Canadian chartered bank prime less
    .25 percent. The interest rate was decreased to keep the loan rate at
    approximately two percent below the Company's bank financing rate.
    Interest paid on this loan during the nine months of 2009 was $134,000.

    The Company's bank agreement requires that the above loans can only be
    repaid should the Company have sufficient available borrowing limits
    under the Company's credit facility.

    Please refer to notes 3 and 11 for additional related party transactions.

    7.  BANK DEBT

    As of September 30, 2009, the Company has a bank facility consisting of a
    $100,000,000 syndicated and $20,000,000 non-syndicated revolving credit
    facility (December 31, 2008 - $80,000,000 syndicated and $20,000,000 non-
    syndicated demand credit facility). This new facility became effective
    April 29, 2009, when the Company agreed to new terms and conditions.
    Amounts drawn under the facility at September 30, 2009 was $81,386,000
    (December 31, 2008 - $93,235,000). The interest rate on the outstanding
    debt as of September 30, 2009 was 4.25 percent on the Company's Canadian
    prime rate loan. Effective October 1, 2009 the interest was reduced to
    4.00 percent due to the improvement in the Company's debt to cash flow
    ratio (see below). The term of the new facility provides that the loan is
    revolving until April 28, 2011, is subject to annual review and has no
    fixed payment requirements.

    The amount available for borrowing under the credit facilities is reduced
    by outstanding letters of credit. Letters of credit totaling $285,000
    were issued at September 30, 2009 (December 31, 2008 - $525,000).
    Security for the credit facilities consists of various fixed and floating
    demand debentures totaling $200,000,000 over all of the Company's assets,
    and a general security agreement with first ranking over all personal and
    real property.

    The interest rate on the new credit facility is calculated as follows:

    -------------------------------------------------------------------------
                         Level I   Level II  Level III   Level IV    Level V
    -------------------------------------------------------------------------
    Consolidated Total
     Funded Debt(1) to                 Over       Over       Over
     Consolidated Cash     Under   1.0:1 to   1.5:1 to   2.0:1 to       Over
     flow Ratio            1.0:1      1.5:1      2.0:1      2.5:1      2.5:1
    -------------------------------------------------------------------------
    Canadian Prime Rate
     Plus(2)                 125        150        175        200        250
    -------------------------------------------------------------------------
    Bankers' Acceptances
     Rate Plus(2)            275        300        325        350        400
    -------------------------------------------------------------------------
    (1) Consolidated total funded debt excludes related party amounts but
        includes working capital.
    (2) Numbers in table represent basis points.

    The consolidated total funded debt to consolidated cash flow ratio shall
    be adjusted effective as of the first day of the next fiscal quarter
    following the end of each fiscal quarter, with each such adjustment to be
    effective until the next such adjustment.

    The following is a list of the material covenants:

    -   The Company is required to not exceed $120,000,000 in consolidated
        debt (includes negative working capital but excludes debt to related
        parties).

    -   Dividends paid in any quarter shall not exceed 80 percent of the
        average of the previous four quarters' cash flow as defined under
        GAAP. During the third quarter the Company received a waiver of this
        requirement for the fourth quarter and instead is restricted to
        paying no more than the lesser of 80 percent of quarter four cash
        flow or $10,000,000.

    8.  TAXES

    The Company has recorded a future income tax asset related to assets and
    liabilities and related tax amounts:

                                                   September 30  December 31
    ($ 000)                                                2009         2008
    -------------------------------------------------------------------------
    Future tax liability related to investments:           (369)        (212)
    Future tax liability related to property
     and equipment:                                      (6,193)      (7,097)
    Future tax asset related to asset retirement
     obligations:                                         4,751        4,593
    Futures tax asset related to finance costs:           1,012        1,134
    Future tax asset related to corporate tax
     losses and SR&ED claims:                            79,247       86,998
    -------------------------------------------------------------------------
    Future Tax Asset - Long-term                         78,448       85,416
    -------------------------------------------------------------------------

    Current portion of future income tax asset
     related to corporate Tax losses and SR& ED claims:   9,405        2,669
    -------------------------------------------------------------------------
    Future Tax Asset - Current                            9,405        2,669
    -------------------------------------------------------------------------

    As a result of the reorganization, the Company recorded a deferred credit
    relating to the difference between the future income tax asset generated
    on the reorganization and the amount of the cash payment made to SRX
    immediately before the reorganization. This credit is being amortized on
    the same basis as the related future income tax asset.

    A reconciliation of the deferred credit is as follows:

    ($ 000)
    -------------------------------------------------------------------------
    Amount recorded on reorganization                                 71,303
    Amortized in 2008                                                 (4,240)
    -------------------------------------------------------------------------
    Balance as of December 31, 2008                                   67,063
    Amortized in first nine months of 2009                            (2,518)
    -------------------------------------------------------------------------
    Balance as of September 30, 2009                                  64,545
    -------------------------------------------------------------------------

    Current portion                                                    8,123
    Long-term portion                                                 56,421
    -------------------------------------------------------------------------
                                                                      64,545
    -------------------------------------------------------------------------

    The Company and its subsidiaries have the following federal tax pools,
    which may be used to reduce taxable income in future years, limited to
    the applicable rates of utilization:

    ($ 000)                               Rate of Utilization (%)     Amount
    -------------------------------------------------------------------------
    Undepreciated capital costs                           20-100      22,638
    Eligible capital expenditures                              7       7,501
    Share issue costs                                         20       4,064
    Canadian oil and gas property expenditures                10      29,180
    Canadian development expenditures                         30      54,112
    Canadian exploration expenditures                        100      11,390
    SR&ED expenditures                                       100      80,357
    Income tax losses carried forward(1)                     100     278,163
    -------------------------------------------------------------------------
                                                                     487,405
    -------------------------------------------------------------------------
    (1) Income tax losses carried forward expire in the following years;
        2013 - $1,069,000, 2024 - $3,347,000, 2025 - $7,532,000, 2026 -
        $104,019,000, 2027 - $117,436,000, 2028 - $34,726,000, 2029 -
        $10,034,000. The Company has used $28,346,000 of its 2026 provincial
        tax loss to shelter provincial income.

    The Company has $22,284,000 of investment tax credits (ITC) that expire
    in the following years; 2010 - $1,142,000, 2011 - $4,667,000, 2012 -
    $3,909,000, 2013 - $3,155,000, 2014 - $1,995,000, 2015 - $2,257,000,
    2016 - $2,405,000, 2017 - $2,009,000, 2018 - $745,000. The current tax
    provision incorporates the claim of $5,386,000 ITC's against federal
    taxes payable.

    The amount and timing of reversals of temporary differences will also
    depend on the Company's future operating results, and acquisitions and
    dispositions of assets and liabilities. A significant change in any of
    the preceding assumptions could materially affect the Company's estimate
    of the future income tax asset.

    9.  SHAREHOLDERS' EQUITY

    Authorized

    The Company is authorized to issue an unlimited number of common shares
    without nominal or par value.

                                                                      Amount
    Issued                                                Number      ($ 000)
    -------------------------------------------------------------------------
    Common Shares
    Balance, January 1, 2009                          17,257,603      99,530
    Issued pursuant to private placement               1,068,000      17,996
    Issued on acquisition of Cobalt                      201,438       3,207
    Issue costs for private placement                          -      (1,046)
    Future tax effect of share issue costs                     -         267
    -------------------------------------------------------------------------
    Balance, September 30, 2009                       18,527,041     119,954
    -------------------------------------------------------------------------

    The Company is authorized to issue an unlimited number of Class "A"
    redeemable Preferred Shares and an unlimited number of Class "B"
    Preferred Shares. There are currently no outstanding Class "A" redeemable
    preferred shares or Class "B" preferred shares.

    On May 27, 2009, the Company completed a private placement for 1,068,000
    common shares at a price of $16.85 per common share for aggregate
    proceeds of $17,996,000. The Company paid a commission of five percent of
    the gross proceeds ($900,000) plus additional share issue costs of
    $111,000.

    On July 2, 2009, the Company acquired all of the issued common shares of
    Cobalt Energy Ltd. (Cobalt) for consideration of 201,438 common shares at
    a value of $15.92 per common share. The Company incurred costs of $35,000
    in relation to the issuance of these shares.

    The number of common shares (2008 numbers based on units) used to
    calculate diluted net earnings per share (2008 earnings per unit) for the
    three and nine month periods ended September 30 is as follows:

                                      Three Months            Nine Months
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Basic shares/units
     outstanding              18,524,851  17,025,803  17,821,584  16,982,068
    Dilutive effect of
     share/unit options          217,416     185,533       5,270     102,363
    -------------------------------------------------------------------------
    Diluted shares/units
     outstanding              18,742,267  17,211,336  17,826,854  17,084,431
    -------------------------------------------------------------------------

    A summary of the changes during the first nine months of the Company's
    contributed surplus is presented below:

    Contributed surplus ($ 000)                          2009           2008
    -------------------------------------------------------------------------
    Balance, beginning of period                        2,542          2,140
    Stock-based compensation expensed (non-cash)          711            562
    Stock-based options exercised (non-cash)                -           (448)
    -------------------------------------------------------------------------
    Balance, end of period                              3,253          2,254
    -------------------------------------------------------------------------

    The deficit balance is composed of the following items:

                                                 September 30,  September 30,
    ($ 000)                                              2009           2008
    -------------------------------------------------------------------------
    Accumulated earnings                              224,609        197,597
    Accumulated cash dividends/distributions         (276,289)      (241,474)
    -------------------------------------------------------------------------
    Deficit                                           (51,680)       (43,877)
    -------------------------------------------------------------------------

    The Company provides an option plan for its directors, officers,
    employees and consultants. Under the plan, the Company may grant options
    for up to 1,852,704 (December 31, 2008 - 1,725,760) common shares. The
    exercise price of each option granted equals the market price of the
    common shares on the date of grant and the option's maximum term is five
    years.

    A summary of the status of the Company's stock option plan as of
    September 30, 2009 and December 31, 2008, and changes during the nine
    month and twelve month periods ended on those dates is presented below:

                                  September 30, 2009       December 31, 2008
    -------------------------------------------------------------------------
                                            Weighted-               Weighted-
                                             Average                 Average
                                            Exercise                Exercise
                                 Options       Price     Options       Price
    -------------------------------------------------------------------------
    Outstanding at beginning
     of period                 1,390,500    $  20.50           -    $      -
    Options granted               33,000       14.90   1,390,500       20.50
    -------------------------------------------------------------------------
    Outstanding at end of
     period                    1,423,500    $  20.37   1,390,500    $  20.50
    -------------------------------------------------------------------------
    Options exercisable at
     end of period                     -    $      -           -    $      -
    -------------------------------------------------------------------------

    The following table summarizes information about options outstanding at
    September 30, 2009:

                            Options Outstanding         Options Exercisable
    -------------------------------------------------------------------------
                                  Weighted-
                                   Average   Weighted-              Weighted-
    Range of           Number    Remaining    Average       Number   Average
    Exercise      Outstanding  Contractual   Exercise  Exercisable  Exercise
    Prices         At 9/30/09         Life      Price   at 9/30/09     Price
    -------------------------------------------------------------------------
    $14.90             33,000    3.3 years     $14.90            -     $   -
     20.50          1,390,500    3.1 years      20.50            -         -
    -------------------------------------------------------------------------
    $14.90-20.50    1,423,500    3.1 years     $20.37            -     $   -
    -------------------------------------------------------------------------

    The Company records compensation expense over the vesting period based on
    the fair value of options granted to employees, directors and
    consultants. The Company granted 33,000 stock options with an estimated
    fair value of $52,000 ($1.56 per option) using the Black-Scholes option
    pricing model with the following key assumptions:

                                                            2009        2008
    -------------------------------------------------------------------------
    Weighted-average risk free interest rate (%)             1.4         2.2
    Expected life (years)                                    3.0         3.5
    Weighted-average volatility (%)                         33.0        31.3
    Dividend yield 2009 and 2008                  based on the percentage of
                                                  dividends or distributions
                                                  paid during the period
                                                  granted
    -------------------------------------------------------------------------

    10. ACCUMULATED OTHER COMPREHENSIVE INCOME

                                                           Other
                                                          Compre-
                                           January 1,    hensive   September
    ($ 000)                                     2009      Income    30, 2009
    -------------------------------------------------------------------------
    Unrealized gains on available-for-
     sale financial assets (net of tax)        1,420       1,078       2,498
    -------------------------------------------------------------------------


                                                           Other
                                                          Compre-
                                                         hensive
                                           January 1,     Income    December
    ($ 000)                                     2008       (Loss)   31, 2008
    -------------------------------------------------------------------------
    Unrealized gains (losses) on
     available-for-sale financial
     assets (net of tax)                       3,031      (1,611)      1,420
    -------------------------------------------------------------------------

    11. RELATED PARTY TRANSACTIONS

    The Company received a management fee from Comaplex of $248,000 (2008 -
    $248,000) for management services and office administration. This fee has
    been included as a recovery in general and administrative expenses. As at
    September 30, 2009, the Company had an account receivable from Comaplex
    of $75,000 (December 31, 2008 - $56,000).

    The Company received a management fee from Pine Cliff Energy Ltd. (Pine
    Cliff) of $90,000 (2008 - $178,000) for management services and office
    administration. This fee has been included as a recovery in general and
    administrative expenses. As at September 30, 2009 the Company had an
    account receivable from Pine Cliff of $1,000 (December 31, 2008 -
    $1,000).

    12. FINANCIAL AND CAPITAL RISK MANAGEMENT

    Financial Risk Factors
    ----------------------

    The Company undertakes transactions in a range of financial instruments
    including:

    -   Receivables
    -   Payables
    -   Common share investments
    -   Due to related parties
    -   Bank loans
    -   Derivatives

    The Company's activities result in exposure to a number of financial
    risks including market risk (commodity price risk, interest rate risk,
    foreign exchange risk, credit risk, and liquidity risk).

    The Company's overall risk management program seeks to mitigate these
    risks and reduce the volatility on the Company's financial performance.
    Financial risk management is carried out by senior management under the
    direction of the Directors of the Company.

    The Company enters into various risk management contracts in accordance
    with Board approval to manage the Company's exposure to commodity price
    fluctuations. Currently no risk management agreements are in place. The
    Company does not speculatively trade in risk management contracts. The
    Company's risk management contracts are entered into to manage the risks
    relating to commodity prices from its business activities.

    Capital Risk Management
    -----------------------

    The Company's objectives when managing capital are to safeguard the
    Company's ability to continue as a going concern, so that it can continue
    to provide returns to its shareholders and benefits for other
    stakeholders and to maintain an optimal capital structure to reduce the
    cost of capital. In order to maintain or adjust the capital structure,
    the Company may adjust the amount of dividends, the percentage of return
    of capital or issue new shares.

    The Company monitors capital on the basis of the ratio of debt to cash
    flow. This ratio is calculated using each quarter end net debt (total
    debt adjusted for working capital) and divided by the preceding twelve
    months cash flow.

    The combination of the Trust reorganization and the acquisitions of
    Silverwing in 2008 and Cobalt in 2009 resulted in the Company increasing
    its debt resulting in an increased debt to cash flow ratio. During the
    second quarter of 2009, the Company completed a private placement for net
    proceeds of $16,985,000 thereby reducing its level of indebtedness. The
    Company has also entered into a purchase and sale agreement for the
    disposal of certain non-core producing assets which closed subsequent to
    quarter end (see Note 14) that will provide additional cash proceeds of
    $24,000,000. The Company believes that a debt level of approximately one
    and a half year's cash flow is an appropriate level to allow it to take
    advantage in the future of either acquisition opportunities or to provide
    flexibility to develop its undeveloped resources by horizontal or
    vertical drill programs.

    The following section (a) of this note provides a summary of the
    Company's underlying economic positions as represented by the carrying
    values, fair values and contractual face values of the Company's
    financial assets and financial liabilities. The Company's debt to cash
    flow is also provided.

    The following section (b) addresses in more detail the key financial risk
    factors that arise from the Company's activities including its policies
    for managing these risks.

    The following section (c) provides details of the Company's risk
    management contracts that are used for financial risk management.

        a)  Financial assets, financial liabilities and debt ratio

        The carrying amounts, fair value and face values of the Company's
        financial assets and liabilities are shown in Table 1.

        Table 1

                          As at September 30, 2009   As at December 31, 2008
        ---------------------------------------------------------------------
                          Carrying    Fair    Face  Carrying    Fair    Face
        ($ 000)              Value   Value   Value     Value   Value   Value
        ---------------------------------------------------------------------
        Financial assets
        Restricted term
         deposit                 -       -       -        20      20      20
        Accounts
         receivable         11,175  11,175  11,340    11,753  11,753  11,838
        Investments in
         related party       3,386   3,386     N/A     2,131   2,131     N/A

        Financial
         liabilities
        Accounts payable
         and accrued
         liabilities        12,700  12,700  12,700    23,888  23,888  23,888
        Due to related
         parties            22,000  22,000  22,000     6,000   6,000   6,000
        Short-term bank
         debt                    -       -       -    13,325  13,325  13,325
        Long-term bank
         debt               81,386  81,386  81,386    79,910  79,910  79,910
        ---------------------------------------------------------------------

        The net debt and cash flow figures as of September 30, 2009 are
        presented in Table 2.

        Table 2

        ($ 000)                                           September 30, 2009
        ---------------------------------------------------------------------
        Long-term bank debt                                           81,386
        Accounts payable and accrued liabilities                      12,700
        Due to related parties                                        22,000
        Current assets(1)                                            (18,963)
        ---------------------------------------------------------------------
        Net Debt                                                      97,123
        ---------------------------------------------------------------------
        Cash flow from operations(2)                                  35,561
        ---------------------------------------------------------------------
        Net debt to cash flow from operations                           2.73
        ---------------------------------------------------------------------
        (1) Current assets include accounts receivable, crude oil inventory,
            prepaid expenses and investment in related party.
        (2) Cash flow from operations includes net earnings over the past
            twelve months less adjustment for non-cash (gain) loss on risk
            management contracts, stock-based compensation, depletion,
            depreciation and accretion, future income taxes, changes in non-
            cash working capital items, restricted cash recovered and asset
            retirement obligations settled.

        b)  Risks and mitigations

        Market risk is the risk that the fair value or future cash flow of
        the Company's financial instruments will fluctuate because of changes
        in market prices. Components of market risk to which the Company is
        exposed are discussed below.

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

        The Company's principal operation is the production and sale of crude
        oil, natural gas and natural gas liquids. Fluctuations in prices of
        these commodities directly impact the Company's performance and
        ability to continue with its dividends.

        The Company had used various risk management contracts to set price
        parameters for a portion of its production. The Board of Directors
        and management decided that at least in the near term it will
        discontinue the use of commodity price agreements. The Company will
        assume full risk in respect of commodity prices.

        Sensitivity Analysis

        Commodity prices have fluctuated significantly over the recent past.
        The following table updates the annual cash flow sensitivity for
        movements in the commodity prices of $1 U.S. WTI for crude oil, $0.10
        per MCF AECO for natural gas and $0.01 fluctuation in exchange rates.

                                                                   Cash Flow
        ---------------------------------------------------------------------
        U.S. $1.00 per barrel                                      $ 870,000
        Canadian $0.10 per MCF                                     $ 289,000
        Change of Canadian $0.01/U.S. $ exchange rate              $ 593,000
        ---------------------------------------------------------------------

        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. Interest rate risk
        arises from interest bearing financial assets and liabilities that
        the Company uses. The principal exposure of the Company is on its
        bank borrowings and related party debts which have variable interest
        rates which gives rise to a cash flow interest rate risk.

        The Company's debt includes a bank credit facility of $120,000,000
        consisting of a revolving line of credit and $22,000,000 due to
        related parties. The borrowings under these facilities are at bank
        prime plus or minus various percentages as well as by means of
        bankers' acceptances (BA's) within Bonterra's credit facility. The
        Company manages its exposure to interest rate risk through entering
        into various term lengths on its BA's but in no circumstances do the
        terms exceed six months.

        Sensitivity Analysis

        Based on historic movements and volatilities in the interest rate
        markets and management's current assessment of the financial markets,
        the Company believes that a one percent variation in the Canadian
        prime interest rate is reasonably possible over a 12-month period. No
        income tax effect has been calculated as the Company is expected to
        be non-taxable until January 1, 2018.

        A one percent change in the Canadian prime rate would increase or
        decrease annual cash flow by $1,034,000.

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

        The Company has no foreign operations and currently sells all its
        product sales in Canadian currency. The Company however is exposed to
        currency risk in that crude oil is priced in U.S. currency then
        converted to Canadian currency. The Company currently has no
        outstanding currency risk management agreements. The Board of
        Directors and management recently decided that at least in the near
        term it will not enter into any currency price agreements. The
        Company will assume full risk in respect of foreign exchange
        fluctuations.

        Credit risk
        -----------

        Credit risk is the risk that a contracting party will not complete
        its obligations under a financial instrument and cause the Company to
        incur a financial loss. The Company is exposed to credit risk on the
        carrying value of all financial assets included on the balance sheet.
        To help mitigate this risk:

           -  The Company only enters into material agreements with credit
              worthy counterparties. These include major oil and gas
              companies or major Canadian chartered banks;
           -  Agreements for product sales are primarily on 30 day renewal
              terms; and
           -  Investments are generally only with companies that have common
              management with the Company.

        Of the accounts receivable balance at September 30, 2009
        ($11,175,000) and December 31, 2008 ($11,753,000), 87 (2008 - 82)
        percent relates to product sales with international oil and gas
        companies or receivables from the Canadian Federal or Provincial
        Governments.

        The Company assesses quarterly if there has been any impairment of
        the financial assets of the Company. During the quarter ended
        September 30, 2009, there was no impairment provision required on any
        of the financial assets other than certain accounts receivable (see
        below). The Company does have a credit risk exposure as the majority
        of the Company's accounts receivable are with counterparties having
        similar characteristics. Payments from the Company's largest accounts
        receivable counterparties have consistently been received within 30
        days. The Sales agreements with these parties are cancellable with 30
        days notice.

        At September 30, 2009, approximately $345,000 or 3.1 percent of the
        Company's total accounts receivable are aged over 120 days and
        considered past due. The majority of these accounts are due from
        various joint venture partners. The Company actively monitors past
        due accounts and takes the necessary actions to expedite collection,
        which can include withholding production or net paying when the
        accounts are with joint venture partners. Should the Company
        determine that the ultimate collection of a receivable is in doubt,
        it will provide the necessary provision in its allowance for doubtful
        accounts with a corresponding charge to earnings. If the Company
        subsequently determines an account is uncollectable, the account is
        written off with a corresponding charge to the allowance account. The
        Company's allowance for doubtful accounts balance at September 30,
        2009 is $165,000 (December 31, 2008 - $85,000). There were no
        accounts written off during the period.

        The carrying value of accounts receivable approximates their fair
        value due to the relatively short periods to maturity on this
        instrument. The maximum exposure to credit risk is represented by the
        carrying amount on the balance sheet. There are no material financial
        assets that the Company considers past due.

        Liquidity risk
        --------------

        Liquidity risk includes the risk that, as a result of Company's
        operational liquidity requirements:

           -  The Company will not have sufficient funds to settle a
              transaction on the due date;
           -  The Company will not have sufficient funds to continue with its
              dividends;
           -  The Company will be forced to sell 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.

        To help reduce these risks the Company:

           -  Maintains a portfolio of high-quality, long reserve life oil
              and gas assets.

        The Company has the following maturity schedule for its financial
        liabilities:

                                                   Payments Due by Period
        ---------------------------------------------------------------------
                             Recognized on        Less
                                 Financial        than        2-3        4-5
        ($ 000)                 Statements      1 year      years      years
        ---------------------------------------------------------------------
        Accounts payable and         Yes -
         accrued liabilities     Liability      12,700          -          -
        Due to related               Yes -
         parties                 Liability      22,000          -          -
        Long-term                    Yes -
         bank debt               Liability           -     81,386          -
        Office leases                   No         792      1,451        594
        ---------------------------------------------------------------------
        Total                                   35,492     82,837        594
        ---------------------------------------------------------------------

        c)  Risk management contracts

        The Company currently has no outstanding risk management contracts:

    13. SUBSEQUENT EVENT - DIVIDENDS

    Subsequent to September 30, 2009, the Company declared a dividend of
    $0.16 per common share payable on October 30, 2009 to shareholders
    of record on October 15, 2009 and a dividend of $0.16 per common share
    payable on November 30, 2009 to shareholders of record on November 16,
    2009.

    14. SUBSEQUENT EVENT - DISPOSITION

    Subsequent to September 30, 2009, the Company entered into a purchase and
    sale agreement to divest of a portion of its Shaunavon oil production to
    Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX). The proceeds of
    disposition consist of $24,000,000 cash and 30,769,200 common shares in
    Eagle Rock (representing approximately 4.2 percent of the outstanding
    common shares of that company). The disposition closed on November 6.
    

%SEDAR: 00003132E

SOURCE Bonterra Energy Corp.

For further information: For further information: George F. Fink, CEO or Garth E. Schultz, Vice President, Finance and CFO or Kirsten Kulyk, Manager, Investor Relations, Telephone: (403) 262-5307, Fax: (403) 265-7488, Email: info@bonterraenergy.com, Website: www.bonterraenergy.com

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Bonterra Energy Corp.

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