Highpine Oil & Gas Limited announces second quarter 2007 financial and operational results



    CALGARY, Aug. 9 /CNW/ - Highpine Oil & Gas Limited (TSX: HPX) ("Highpine"
or the "Company") announces its financial and operational results for the
second quarter ended June 30, 2007 and provides an operational update:

    
    -------------------------------------------------------------------------
                     Three months ended June 30,    Six months ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    ($000s, except per
     share and share
     numbers)

    Financial
    Total revenue(1)  103,769   62,765       65    189,680  127,181       49
    Cash from
     operations(2)     46,869   34,750       35     91,499   66,296       38
      Per share -
       diluted           0.68     0.65        5       1.35     1.29        5
    Net earnings
     (loss)             1,060   10,594      (90)    (5,346)  11,885        -
      Per share -
       diluted           0.02     0.20      (90)     (0.08)    0.23        -
    Net debt(3)       178,170   58,057      207    178,170   58,057      207
    Total assets    1,415,081  920,941       54  1,415,081  920,941       54
    Corporate
     acquisitions(4)        -        -        -          -   89,651     (100)
    Capital
     expenditures(5)   24,670   46,590      (47)   100,492   93,359        8
    Total shares
     outstanding (No.) 67,744   52,796       28     67,744   52,796       28
    Weighted average
     shares
    outstanding (No.)
      Basic            67,688   52,788       28     67,673   50,306       35
      Diluted          68,489   53,741       27     67,673   51,285       32
    -------------------------------------------------------------------------
    Operating
    Average daily
     production
      Crude oil and
       NGLs (bbls/d)   11,025    6,940       59     10,888    7,442       46
      Natural gas
       (mcf/d)         41,449   25,562       62     40,604   23,135       76
    -------------------------------------------------------------------------
      Total (boe/d)    17,933   11,201       60     17,655   11,298       56
    -------------------------------------------------------------------------
    Average selling
     prices(6)
      Crude oil and
       NGLs ($/bbl)     66.57    73.23       (9)     65.01    68.76       (5)
      Natural gas
       ($/mcf)           8.19     6.62       24       8.21     7.36       12
    -------------------------------------------------------------------------
      Total ($/boe)     59.86    60.48       (1)     58.97    60.37       (2)
    -------------------------------------------------------------------------
    Wells drilled -
     gross (net) (No.)
      Oil               1(0.8)   1(1.0)       -      3(2.2)   4(2.8)       -
      Natural Gas       -( - )   2(0.9)       -      9(5.9) 22(11.0)       -
      Abandoned/
       other            1(0.2)   3(1.7)       -      6(4.4)   9(4.6)       -
    -------------------------------------------------------------------------
      Total             2(1.0)   6(3.6)       -    18(12.5) 35(18.4)       -
      Drilling success
       rate (%)            75       67        -         79       78        -
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                   Three months ended June 30,     Six months ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Operating netback
     ($/boe)
      Oil and natural
       gas sales        59.86    60.48       (1)     58.97    60.37       (2)
      Royalties        (16.77)  (17.61)      (5)    (16.92)  (18.56)      (9)
      Operating costs  (10.16)   (7.21)      41      (9.69)   (6.96)      39
      Transportation
       costs            (1.10)   (0.78)      41      (1.06)   (0.64)      66
      Realized hedging
       gain              0.61     1.81      (66)      0.87     1.13      (23)
    -------------------------------------------------------------------------
      Operating
       netback          32.44    36.69      (12)     32.17    35.34       (9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Notes:
    (1) Total revenue includes realized and unrealized hedging losses and
        gains.
    (2) Cash from operations is calculated as cash flow from operating
        activities before the change in non-cash working capital and
        abandonment expenditures.
    (3) Net debt includes working capital excluding unrealized financial
        instruments.
    (4) Corporate acquisitions only include the amounts allocated to
        property, plant and equipment.
    (5) Capital expenditures include property acquisitions and are presented
        net of proceeds of disposals.
    (6) The average selling prices reported are before hedging activities.


    SECOND QUARTER HIGHLIGHTS

    -   Second quarter production averaged 17,933 boe/d consisting of
        11,025 bbls/d of oil and NGL's and 41.45 mmcf/d of gas, compared to
        11,201 boe/d in the second quarter of 2006, an increase of
        60 percent.

    -   Production per diluted share in the second quarter was up 26 percent
        compared to the same period in 2006.

    -   Total revenue before hedging increased 58 percent to $97.7 million
        from $61.6 million in the second quarter of 2006.

    -   Cash from operations increased 35 percent to $46.9 million from
        $34.8 million in the second quarter of 2006. Cash flow per diluted
        share was $0.68. Earnings were $1.1 million ($0.02 per diluted
        share).

    -   Capital expenditures during the quarter were $24.7 million compared
        to $46.6 million during the same period in 2006.

    -   Highpine obtained four (4) critical sour Nisku well licences in the
        Pembina area during the second quarter. Currently, 19 Nisku well
        licence applications are awaiting approval at the Energy Utilities
        Board ("EUB").

    -   During the second quarter, 2 wells were drilled resulting in 1
        (0.8 net) oil well and 1 (0.2 net) dry hole. During the first half of
        2007, 18 (12.5 net) wells were drilled resulting in 3 (2.2 net) oil
        wells 9 (5.9 net) gas wells 2 (1.7 net) service wells and 4 (2.7 net)
        dry holes.

    -   The Company has a drilling inventory of over 325 net locations in
        Pembina and West Central Alberta. At our current pace of 45 to 65 net
        wells per year, this equates to over five years of drilling
        inventory.

    -   Highpine ended the second quarter with total debt (including working
        capital deficiency) of $178.2 million on a credit facility of
        $250 million.
    

    OPERATIONS UPDATE

    During the second quarter, production averaged 17,933 boe/d, despite the
shut-in of our prolific 9-35-48-8 W5M well in the "WW" Pool from April 7, 2007
through the balance of the quarter. Water injection recommenced into the "WW"
Pool June 23, 2007 with the reservoir pressure exceeding MOP (Minimum
Operating Pressure) by mid July and production recommencing July 23, 2007 at
over 2,000 boe/d. Also our 3-34-48-8 W5M "SS" well is scheduled to resume
normal production in the range of 300 boe/d by late August, after installation
of an ESP (electric submersible pump). This well had also been shut-in for the
second quarter.
    Spring breakup normally occurs in the second quarter, reducing drilling
and other field activities and this year was no exception. We participated in
just two wells in the quarter; one oil well and one dry hole.
    In the third quarter to-date, 2 (1.0 net) Rock Creek wells have been
drilled and cased and are scheduled for completion this month. However, three
(3) drilling rigs are currently active on Company operated wells all targeting
the Nisku formation. The Company plans to have 2 to 4 drilling rigs active
targeting the Nisku and Rock Creek horizons operating through the balance of
2007 and into 2008.
    Going forward into the third quarter, we have had several plant issues
arise from third party operated facilities. One of our important but
non-operated sour gas processing facilities went down on July 7, 2007 for four
days of unscheduled plant maintenance and did not resume production until
August 5, 2007. Further, the operator of the "II" and "QQ" Pool shut down
production from these pools from July 15 to July 31 for unscheduled plant
modifications. Compounding all of this has been unusually wet weather in
Pembina, slowing down all field activities. The net result is that our
previous forecasted production increases will likely be deferred until
September, as August had always been a scheduled plant maintenance month for
another major plant which processes our sour gas.
    Highpine has been successful in obtaining four (4) critical sour Nisku
well licences in the Pembina area during the second quarter. We have 19 Nisku
well licence applications filed with the EUB awaiting licencing approval (9 of
which will be going to EUB public hearings). Highpine is working on 16
additional Nisku well licence applications that will be submitted to the EUB
for approval during the third and fourth quarter. The Company has an EUB
public hearing date set for September 17, 2007 for two Nisku wells near the
community of Rocky Rapids and has requested two additional hearings for seven
(7) well locations. Highpine is awaiting the EUB to set public hearing dates.
    Highpine's board of directors has approved an incremental $22 million for
its capital program for the remainder of 2007 to drill an additional twelve
(12) Rock Creek gas wells in the Pembina area. Highpine has identified in
excess of 150 Rock Creek drilling locations on Company lands in Pembina.

    OUTLOOK

    Highpine's Pembina drilling inventory continues to expand in both the
Nisku and Rock Creek hydrocarbon horizons. The Company continues to acquire
land and farmin to other operators as we expand our position in West Pembina.
Under a recently secured pooling and farmin agreement, the Company will drill
5 new Nisku reefs defined on 3D seismic to earn 100% working interest in up to
five and one half (5.5) sections of land adjacent to the Company's holdings in
Pembina.
    The Company has the potential to annually drill 25 to 35 net Pembina
Nisku wells and 20 to 30 net Rock Creek wells, for at least the next three
years.
    Highpine will continue to evaluate select strategic acquisitions that
complement and augment "organic" production and reserve growth.
    Given third party operational issues and shutdowns, compositional
gas/condensate/oil phase behavior changes, and the late start to the summer
drilling program, the 2007 average annual guidance is expected to be
18,500 boe/d.

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    This Management's Discussion and Analysis (MD&A) is dated and based on
information at August 8, 2007. This MD&A has been prepared by management and
should be read in conjunction with the unaudited interim consolidated
financial statements for the six months ended June 30, 2007 and audited
consolidated financial statements for the years ended December 31, 2006 and
2005 for a complete understanding of the financial position and results of
operations of Highpine Oil & Gas Limited ("Highpine" or the "Company").

    Certain information set forth in this MD&A contains forward-looking
statements including expectations of future production, procurement of
drilling permits, plans for and results of exploration and development
activities and other operational developments and components of cash flow and
earnings. Readers are cautioned that assumptions used in the preparation of
such statements may prove to be incorrect. Events or circumstances may cause
actual results to differ materially from those predicted, as a result of
numerous known and unknown risks, uncertainties, and other factors, many of
which are beyond the control of the Company. These risks include, but are not
limited to: the risks associated with the oil and natural gas industry,
commodity prices, and exchange rate changes. Industry related risks include,
but are not limited to: operational risks in exploration, development and
production of oil and natural gas and production risks associated with sour
hydrocarbons, dependence on third-party owned and operated production
facilities, availability of skilled personnel and services, failure to obtain
industry partner, regulatory and other third-party consents and approvals,
delays or changes in plans, risks associated with the uncertainty of reserve
estimates, health and safety risks and the uncertainty of estimates and
projections of reserves, production, costs and expenses. The risks outlined
above should not be construed as exhaustive. Readers are cautioned not to
place undue reliance on these statements. The Company undertakes no obligation
to update or revise any forward-looking statements except as required by
applicable securities laws.
    This MD&A uses the terms "cash flow from operations," "cash flow" and
"cash flow per share," which are not recognized measures under Canadian
generally accepted accounting principles (GAAP). Management believes that in
addition to net earnings, cash flow is a useful supplemental measure as it
demonstrates Highpine's ability to generate cash necessary to repay debt or
fund future growth through capital investment. Investors are cautioned,
however, that this measure should not be construed as an alternative to net
earnings determined in accordance with GAAP as an indication of Highpine's
performance. Highpine's method of calculating cash flow may differ from other
companies, especially those in other industries and accordingly may not be
comparable to measures used by other companies. Highpine calculates cash from
operations as cash from operating activities before the change in non-cash
working capital related to operating activities and abandonment expenditures.
    The following table reconciles the cash flow from operating activities to
cash from operations:

    
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                                      Three months           Six months
                                     ended June 30,        ended June 30,
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------
    ($000s)
    Cash flow from operating
     activities                      46,898     45,273     92,643     60,698
    Change in non-cash operating
     working capital                   (258)   (10,569)    (1,889)     5,552
    Abandonment expenditures            229         46        745         46
    -------------------------------------------------------------------------
    Cash from operations             46,869     34,750     91,499     66,296
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Highpine also uses operating netback as an indicator of operating
performance. Operating netback is calculated on a per boe basis taking the
sales price and deducting royalties, operating costs, transportation costs and
realized hedging gains and losses.
    Where amounts are expressed on a barrel of oil equivalent (boe) basis,
natural gas volumes have been converted to equivalent barrels of oil using a
conversion factor of six thousand cubic feet equal to one barrel of oil
equivalent unless otherwise indicated. This conversion ratio of 6:1 is based
on an energy equivalent conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the wellhead. Boe figures
may be misleading, particularly if used in isolation.
    All references to dollar values refer to Canadian dollars unless
otherwise stated.
    Additional information relating to Highpine Oil & Gas Limited, including
the Company's annual information form, is available on SEDAR at www.sedar.com
and on the Company's website at www.highpineog.com.

    
    Financial Results

    Oil and Natural Gas Revenue

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    ($000s)
    Crude oil and
     natural gas liquids
     (NGLs) revenue      66,789   46,251       44  128,123   92,619       38
    Natural gas revenue  30,896   15,393      101   60,313   30,831       96
    -------------------------------------------------------------------------
                         97,685   61,644       58  188,436  123,450       53
    Realized hedging
     gain                 1,000    1,840      (46)   2,795    2,308       21
    Unrealized hedging
     gain (loss)          5,084     (719)       -   (1,551)   1,423        -
    -------------------------------------------------------------------------
    Total oil and
     natural gas
     revenue            103,769   62,765       65  189,680  127,181       49
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the six months ended June 30, 2007 total oil and natural gas revenue
increased to $189.7 million from $127.2 million for the six months ended
June 30, 2006 due to production volume increases.
    For the three months ended June 30, 2007, total oil and gas revenue
increased to $103.8 million from $62.8 million for the three months ended
June 30, 2006 due to production volume increases and a $5.1 million unrealized
hedging gain.

    Production

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Daily Production
    Crude oil and NGLs
     (bbls/d)            11,025    6,940       59   10,888    7,442       46
    Natural gas (mcf/d)  41,449   25,562       62   40,604   23,135       76
    -------------------------------------------------------------------------
    Boe/d                17,933   11,201       60   17,655   11,298       56
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Production Mix
    Crude oil and NGLs      61%      62%       (2)     62%      66%       (6)
    Natural gas             39%      38%        3      38%      34%       12
    -------------------------------------------------------------------------
                           100%     100%        -     100%     100%        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    (boe/d)
    Daily Production by
     Area
    Pembina Nisku
     Fairway             14,166    7,584       87   13,667    8,033       70
    West Central
     Alberta Gas
     Fairway              2,959    2,840        4    3,146    2,389       32
    Bantry/Retlaw           564      460       23      576      478       21
    Other                   244      317      (23)     266      398      (33)
    -------------------------------------------------------------------------
    Total                17,933   11,201       60   17,655   11,298       56
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Production for the six months ended June 30, 2007 increased 56 percent to
17,655 boe/d from 11,298 boe/d for the six months ended June 30, 2006. The
increase is attributable to production from the acquisition of Kick Energy
Corporation ("Kick") on August 1, 2006 and new production from the Company's
drilling program.
    Production for the three months ended June 30, 2007 increased 60 percent
to 17,933 boe/d from 11,201 boe/d for the three months ended June 30, 2006.
The increase in production is a result of bringing new wells from the
Company's drilling program on stream.

    Pricing

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Selling Prices Before
     Hedges
    Crude oil and NGLs
     ($/bbl)              66.57    73.23       (9)   65.01    68.76       (5)
    Natural gas ($/mcf)    8.19     6.62       24     8.21     7.36       12
    -------------------------------------------------------------------------
    Total combined
     ($/boe)              59.86    60.48       (1)   58.97    60.37       (2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Benchmark Prices
    WTI oil (US$/bbl)     64.94    70.70       (8)   61.46    67.13       (8)
    US$/Cdn$ exchange
     rate                  0.91     0.89        2     0.88     0.88        -
    AECO natural gas
     ($/mcf)               7.09     6.03       18     7.24     6.76        7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    A decrease in the WTI benchmark price for crude oil of 8 percent combined
with a stronger Canadian dollar resulted in a lower realized price for the
three months ended June 30, 2007 compared to the three months ended June 30,
2006. Average AECO prices were 18 percent higher in the second quarter of 2007
compared to the second quarter of 2006 resulting in higher realized natural
gas prices.
    The WTI benchmark price for crude oil was 8 percent lower for the first
six months of 2007 compared to the first six months of 2006. Average AECO
prices were 7 percent higher for the first six months of 2007 compared to the
first six months of 2006.

    Commodity Price Risk Management

    Highpine's ability to execute its business strategy is dependent on
generating cash flow that can be reinvested into its capital program. Highpine
utilizes financial and physical commodity price hedges to protect cash flow
against commodity price volatility. Highpine may enter into commodity price
hedges to a maximum of 50 percent of budgeted production.

    
    -------------------------------------------------------------------------
    Six months ended June 30,                   2007                 2006
                                Crude Oil &    Natural      Total      Total
                                  NGLs (bbl)  Gas (mcf)      (boe)      (boe)
    -------------------------------------------------------------------------
    Average volumes hedged
     (per day)                        5,500     14,583      7,931      3,972
    Percent of production hedged        51%        36%        45%        35%
    Realized hedging gain ($)          1.03       0.10       0.87       1.13
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the six months ended June 30, 2007, Highpine realized a $0.8 million
natural gas hedging gain and a $2.0 million crude oil hedging gain. For the
six months ended June 30, 2006, Highpine realized a $2.5 million natural gas
hedging gain and a $0.2 million crude oil hedging loss.
    For the three months ended June 30, 2007, Highpine realized a $5.1
million unrealized hedging gain. The gain was primarily related to weakening
forward prices for natural gas.

    
    -------------------------------------------------------------------------
    Six months ended June 30,                   2007                 2006
                                  Crude Oil    Natural
                                     & NGLs        Gas      Total      Total
    -------------------------------------------------------------------------
    ($000s)
    Realized hedging gain             2,030        765      2,795      2,308
    Unrealized hedging gain (loss)   (1,644)        93     (1,551)     1,423
    -------------------------------------------------------------------------
    Total hedging gain (loss)           386        858      1,244      3,731
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following contracts were outstanding at June 30, 2007:

    -------------------------------------------------------------------------
    Term                  Contract            Volume              Fixed Price
    -------------------------------------------------------------------------
    Jan 07 to Dec 07  Oil Collar        1,750 bbls/d  US $55.00 to $86.15/bbl
    Jan 07 to Dec 07  Oil Collar        1,750 bbls/d  US $60.00 to $80.70/bbl
    Jan 07 to Dec 07  Oil Swap            500 bbls/d           Cdn $73.00/bbl
    Jan 07 to Dec 07  Oil Swap            500 bbls/d           Cdn $73.70/bbl
    Jan 07 to Dec 07  Oil Swap            500 bbls/d           Cdn $74.70/bbl
    Jan 07 to Dec 07  Oil Swap            500 bbls/d           Cdn $75.82/bbl
    Jan 07 to Dec 07  Natural Gas Swap   2,500 GJs/d             Cdn $7.55/GJ
    Jan 07 to Dec 07  Natural Gas Swap   2,500 GJs/d             Cdn $7.62/GJ
    Feb 07 to Mar 08  Natural Gas Swap   1,250 GJs/d             Cdn $7.68/GJ
    Feb 07 to Mar 08  Natural Gas Swap   1,250 GJs/d             Cdn $7.70/GJ
    Jul 06 to Mar 08  Natural Gas Collar 5,000 GJs/d   Cdn $6.00 to $11.10/GJ
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at June 30, 2007, the unrealized mark-to-market loss on outstanding
crude oil contracts was $0.5 million and the unrealized mark-to-market gain on
outstanding natural gas contracts was $2.2 million.

    Royalty Expense

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Total royalties, net
     of ARTC ($000s)     27,361   17,952       52   54,079   37,946       43
    As a  percent of oil
     and natural gas
     sales (before
     hedging)               28%      29%       (3)     29%      31%       (6)

    $/boe                 16.77    17.61       (5)   16.92    18.56       (9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Royalty rates as a percentage of oil and natural gas sales were slightly
lower in the second quarter of 2007 compared to the second quarter of 2006.
The decrease in royalties as a percentage of revenues is due to certain wells
with gross overriding royalties being shut-in during the quarter combined with
receiving a royalty refund relating to a 2006 Gas Cost Allowance adjustment.
    Royalty rates as a percentage of oil and natural gas sales were lower
during the first six months of 2007 compared to the first six months of 2006
primarily due to wells with gross overriding royalties comprising a lower
proportion of the Company's total production.
    During the year ended December 31, 2006, the Company received $500,000 of
Alberta Royalty Tax credits (ARTC). The ARTC program has been discontinued for
2007.

    Operating Costs

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Operating costs
     ($000s)             16,586    7,348      126   30,960   14,243      117
    $/boe                 10.16     7.21       41     9.69     6.96       39
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the six and three months ended June 30, 2007, operating costs on a per
boe basis increased 39 percent and 41 percent respectively compared to the
comparative 2006 periods. The increases were a result of higher processing
costs on increased Pembina sour production realized in 2007 including higher
processing charges on volumes processed at third party facilities. In
addition, the Company has experienced more work-over costs in 2007.

    Transportation Costs

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Transportation costs
     ($000s)              1,800      794      127    3,392    1,312      159
    $/boe                  1.10     0.78       41     1.06     0.64       66
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the six and three months ended June 30, 2007, transportation costs on
a per boe basis increased 66 percent and 41 percent respectively compared to
the comparative 2006 periods. The increase is attributable to higher sulphur
transportation charges as a result of the increase in sour oil production
combined with railway interruptions during 2007.

    Operating Netback

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    ($/boe)
    Sales price before
     hedging              59.86    60.48       (1)   58.97    60.37       (2)
    Royalties            (16.77)  (17.61)      (5)  (16.92)  (18.56)      (9)
    Operating costs      (10.16)   (7.21)      41    (9.69)   (6.96)      39
    Transportation costs  (1.10)   (0.78)      41    (1.06)   (0.64)      66
    -------------------------------------------------------------------------
    Netback before
     hedges               31.83    34.88       (9)   31.30    34.21       (9)
    Realized hedging
     gain                  0.61     1.81      (66)    0.87     1.13      (23)
    -------------------------------------------------------------------------
    Operating netback     32.44    36.69      (12)   32.17    35.34       (9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Operating netback before realized hedging gains was $31.83/boe for the
three months ended June 30, 2007 compared to $34.88/boe for the three months
ended June 30, 2006. The $3.05/boe decrease is primarily attributable to
higher operating costs as a result of increases in processing costs relating
to increased sour oil production combined with higher work-over expenditures.
    Operating netback before realized hedging gains was $31.30/boe for the six
months ended June 30, 2007 compared to $34.21/boe for the six months ended
June 30, 2006. The 9 percent decrease was due to a combination of lower
commodity prices and higher operating and transportation costs.

    General and Administrative Expenses

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Gross expenses
     ($000s)              4,195    2,899       45    8,320    5,490       52
    Capitalized ($000s)    (796)    (702)      13   (1,566)  (1,298)      21
    -------------------------------------------------------------------------
    Net expenses ($000s)  3,399    2,197       55    6,754    4,192       61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    $/boe                  2.08     2.16       (4)    2.11     2.05        3
    percent capitalized     19%      24%      (21)     19%      24%      (21)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Gross expenses increased 52 percent to $8.3 million in the first six
months of 2007 from $5.5 million in the first six months of 2006 as a result
of staff increases necessary to manage the growth of the Company and severance
costs incurred. At June 30, 2007, Highpine had 63 Calgary based office
employees compared to 53 at June 30, 2006. On a per boe basis, general and
administrative expenses increased 3 percent to $2.11/boe from $2.05/boe in the
first six months of 2006.

    Stock-Based Compensation

    Stock-based compensation expense totaled $2.0 million in the first six
months of 2007 compared to $3.0 million in the first six months of 2006. The
decrease is attributable to options cancelled in the quarter which resulted in
a recovery of previously recognized stock-based compensation expense.
    On March 21, 2007, 1.9 million stock options which had been granted to
non-officer employees at exercise prices ranging from $14.92 to $23.25 were
repriced to an exercise price of $12.05. The vesting period of all repriced
options was reset such that the repriced options vest as to one-quarter
thereof on each of the first, second, third and fourth anniversaries of the
repricing. An additional $5.1 million of stock based compensation expense will
be recorded over the four year vesting period of the repriced options as a
result of the reprice.

    Interest and Finance Costs

    Interest and finance costs for the first six months of 2007 were $4.5
million versus $1.9 million in the first six months of 2006. This increase was
primarily due to higher average debt levels.

    Depletion, Depreciation and Accretion

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Depletion and
     depreciation
     ($000s)             48,940   29,605       65   94,325   58,647       61
    Accretion of asset
     retirement
     obligation ($000s)     226      150       51      451      268       68
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total DD&A           49,166   29,755       65   94,776   58,915       61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    DD&A rate $/boe       30.13    29.20        3    29.66    28.81        3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The depletion, depreciation, and accretion (DD&A) rate increased to
$30.13/boe in the second quarter of 2007 from $29.20/boe in the second quarter
of 2006. The higher DD&A rate is primarily attributable to the Kick
acquisition for which Highpine recorded a higher proportionate cost per barrel
of proved reserves compared to the Company's existing properties.

    Income Taxes

    The Company did not incur any cash taxes during the first six months of
2007. For 2007 and subsequent years, Crown charges are fully deductible for
income tax purposes. Resource allowance which was intended to compensate
taxpayers for non-deductible Crown charges has also been eliminated.
    Although current tax horizons depend on product prices, production levels
and the nature, magnitude and timing of capital expenditures, the Company
currently believes no cash income tax will be payable in 2007 or 2008.

    Cash From Operations and Net Earnings

    -------------------------------------------------------------------------
                               Three months                Six months
                              ended June 30,             ended June 30,
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    Cash from operations
     ($000s)             46,869   34,750       35   91,499   66,296       38
    Per diluted share
     ($)                   0.68     0.65        5     1.35     1.29        5
    Net earnings(loss)
     ($000s)              1,060   10,594      (90)  (5,346)  11,885        -
    Per diluted share
     ($)                   0.02     0.20      (90)   (0.08)    0.23        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the six months ended June 30, 2007, cash from operations increased
38 percent to $91.5 million from $66.3 million for the six months ended June
30, 2006 due to production increases realized. Cash flow per diluted share
increased 5 percent to $1.35.
    During the first six months of 2007, Highpine incurred a net loss of
$5.3 million, compared to net earnings of $11.9 million for the six months
ended June 30, 2006. Net earnings for the six months ended June 30, 2006
included a $9.1 million non-recurring future tax reduction realized as a
result of enacted Canadian federal and Alberta tax rate reductions.

    Liquidity and Capital Resources

    At June 30, 2007, the Company had a revolving term credit facility of
$230 million and a demand operating credit facility of $20 million with
$172 million drawn against these facilities, thereby providing remaining
credit capacity of $78 million. At June 30, 2007, the Company had a working
capital deficiency of $6 million and net debt of $178 million.

    
    -------------------------------------------------------------------------
    As at                                               June 30, December 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    ($000s)
    Capitalization
    Bank debt                                           171,943      138,890
    Working capital deficiency(1)                         6,227       30,680
    -------------------------------------------------------------------------
    Net debt                                            178,170      169,570
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Shares outstanding (No.)                             67,744       67,648
    Market price at end of period ($)                     14.25        15.70
    Market capitalization                               965,352    1,062,074
    -------------------------------------------------------------------------
    Total capitalization                              1,143,522    1,231,644
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net debt as a percent of total capitalization           16%          14%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Annualized cash from operations                     182,998      127,440
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net debt to annualized cash from operations ratio      0.97         1.33
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Working capital excludes unrealized financial instruments.
    

    On May 3, 2007, the Company's revolving term credit facility was
increased to $230 million and was extended to May 28, 2008 thereby providing a
total available bank line of $250 million to the Company.
    Expenditures to be incurred on Highpine's remaining 2007 capital budget
are expected to be funded from the Company's credit facilities and cash from
operations.
    At August 8, 2007, the Company's bank debt was approximately $160
million.

    Capital Expenditures

    Capital expenditures, excluding corporate acquisitions and property
acquisitions, totaled $100.5 million for the six months ended June 30, 2007
compared to $78.7 million for the six months ended June 30, 2006. The
Company's capital program is heavily weighted to the Pembina Nisku fairway
which accounted for 87 percent of capital expenditures for the six months
ended June 30, 2007.

    
    -------------------------------------------------------------------------
                                               Six months ended June 30,
                                                2007        2006    % Change
    -------------------------------------------------------------------------
    ($000s)
    Land                                       9,566      14,090         (32)
    Geologic and geophysical                   7,304       5,785          26
    Drilling and completions                  55,665      37,591          48
    Facilities and equipment                  26,339      19,761          33
    Capitalized general and administrative     1,566       1,298          21
    Office and other                              52         147         (65)
    -------------------------------------------------------------------------
    Total capital expenditures               100,492      78,672          28
    -------------------------------------------------------------------------
    Property acquisitions                          -      14,687        (100)
    -------------------------------------------------------------------------
    Corporate acquisitions(1)                      -     114,287        (100)
    -------------------------------------------------------------------------
    Total capital expenditures and
     acquisitions                            100,492     207,646         (52)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Represents total consideration for the transactions, including fees,
        but is prior to the related future income tax liability and asset
        retirement obligation.
    

    Outstanding Common Shares

    As at August 8, 2007, the Company had 67.9 million class A common shares
outstanding and had granted options to directors, officers, employees and
consultants to acquire a further 4.8 million class A common shares with an
average exercise price of $10.71 per share.

    Change in Accounting Policies

    Financial Instruments

    Effective January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") section 3855 "Financial Instruments -
Recognition and Measurement," section 1530 "Comprehensive Income," section
3865 "Hedges" and section 3861 "Financial Instruments - Disclosure and
Presentation". The standards deal with the recognition and measurement of
financial instruments and comprehensive income. These standards have been
adopted prospectively. Adoption of these standards did not impact January 1,
2007 opening balances. See Note 2 to the consolidated financial statements.

    Critical Accounting Estimates

    The preparation of the Company's consolidated financial statements
requires management to adopt accounting policies that involve the use of
significant estimates and assumptions. These estimates and assumptions are
developed based on the best available information and are believed by
management to be reasonable under the existing circumstances. New events or
additional information may result in the revision of these estimates over
time.

    Internal Controls Over Financial Reporting

    Internal controls have been designed to provide reasonable assurance
regarding the reliability of the Company's financial reporting and the
preparation of financial statements together with the other financial
information for external purposes in accordance with Canadian GAAP. The
Company's Chief Executive Officer and Chief Financial Officer have designed or
caused to be designed under their supervision internal controls over financial
reporting related to the Company, including its consolidated subsidiaries.
    The Company's Chief Executive Officer and Chief Financial Officer are
required to cause the Company to disclose herein any change in the Company's
internal control over financial reporting that occurred during the Company's
most recent interim period that materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
There were no material changes in the Company's internal controls over
financial reporting during the quarter ended June 30, 2007.
    It should be noted that a control system, including the Company's
disclosure and internal controls and procedures, no matter how well conceived
can provide only reasonable, but not absolute, assurance that the objectives
of the control system will be met and it should not be expected that the
disclosure and internal controls and procedures will prevent all errors or
fraud.

    Business Risks and Uncertainties

    Highpine is exposed to numerous risks and uncertainties associated with
the exploration for and development, production and acquisition of crude oil,
natural gas and NGLs. Primary risks include:

    
    -   Uncertainty associated with obtaining drilling licences and other
        consents and approvals;
    -   Finding and producing reserves economically;
    -   Production risks associated with sour hydrocarbons;
    -   Marketing reserves at acceptable prices; and
    -   Operating with minimal environmental impact.

    Highpine strives to minimize and manage these risks in a number of ways,
including:

    -   Employing qualified professional and technical staff;
    -   Communicating openly with members of the public regarding its
        activities;
    -   Concentrating in a limited number of areas;
    -   Utilizing the latest technology for finding and developing reserves;
    -   Constructing quality, environmentally sensitive, safe production
        facilities;
    -   Maximizing operational control of drilling and producing operations;
        and
    -   Minimizing commodity price risk through strategic hedging.
    

    Environmental Risks

    All phases of the oil and natural gas business present environmental
risks and hazards and are subject to environmental regulation pursuant to a
variety of federal, provincial and local laws and regulations. Compliance with
such legislation can require significant expenditures and a breach may result
in the imposition of fines and penalties, some of which may be material.
Environmental legislation is evolving in a manner expected to result in
stricter standards and enforcement, larger fines and liability and potentially
increased capital expenditures and operating costs. In 2002, the Government of
Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to
reduce its greenhouse gas emissions to specified levels. There has been much
public debate with respect to Canada's ability to meet these targets and the
Government's strategy or alternative strategies with respect to climate change
and the control of greenhouse gases. Implementation of strategies for reducing
greenhouse gases whether to meet the limits required by the Protocol or as
otherwise determined, could have a material impact on the nature of oil and
natural gas operations, including those of the Company. Given the evolving
nature of the debate related to climate change and the control of greenhouse
gases and resulting requirements, it is not possible to predict either the
nature of those requirements or the impact on the Company and its operations
and financial condition.

    
    Selected Annual Information

                                              2006         2005         2004
    -------------------------------------------------------------------------
    Financial
    ($000s, except per share amounts)
    Total revenue(1)                       254,938      141,634       41,025
    Net earnings                             6,953       12,274        3,177
      Per share - basic                       0.12         0.35         0.19
      Per share - diluted                     0.12         0.34         0.19
    Cash from operations                   127,440       74,550       19,773
      Per share - basic                       2.21         2.13         1.18
      Per share - diluted                     2.17         2.09         1.16
    Corporate acquisitions                 379,345      257,314       51,151
    Capital expenditures(2)                222,214      153,606       61,133
    Total assets                         1,392,911      753,690      163,388
    Long-term debt                         138,890            -            -
    -------------------------------------------------------------------------
    Operating
    Average daily production
      Oil and NGLs (bbls/d)                  7,554        3,984        1,578
      Natural Gas (mcf/d)                   25,350       13,823        6,423
      Total (boe/d)                         11,779        6,288        2,648
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Total revenue is after realized and unrealized hedging losses and
        gains.
    (2) Capital expenditures are net of property dispositions.


    Summary of Quarterly Results
    -------------------------------------------------------------------------
                                 2007                       2006
                              Q2         Q1         Q4         Q3         Q2
    -------------------------------------------------------------------------
    Financial
    ($000s, except per
     share amounts)
    Total revenue(1)     103,769     85,911     67,552     60,205     62,765
    Net earnings
     (loss)                1,060     (6,406)    (5,446)       514     10,594
      Per share -
       basic                0.02      (0.09)     (0.08)      0.01       0.20
      Per share -
       diluted              0.02      (0.09)     (0.08)      0.01       0.20
    Cash from
     operations           46,869     44,630     29,973     31,171     34,750
      Per share -
       basic                0.69       0.66       0.44       0.50       0.66
      Per share -
       diluted              0.68       0.66       0.44       0.49       0.65
    Corporate
     acquisitions              -          -          -    289,694          -
    Capital
     expenditures(2)      24,670     75,822     72,711     56,144     46,590
    Total assets       1,415,081  1,421,510  1,392,911  1,361,249    920,941
    Long-term debt       171,943    157,870    138,890    113,287          -
    -------------------------------------------------------------------------
    Operating
    Average daily
     production
      Oil and NGLs
       (bbls/d)           11,025     10,750      8,653      6,675      6,940
      Natural Gas
       (mcf/d)            41,449     39,749     30,221     24,837     25,562
      Total (boe/d)       17,933     17,375     13,690     10,814     11,201
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    ---------------------------------------------------
                            2006            2005
                              Q1         Q4         Q3
    ---------------------------------------------------
    Financial
    ($000s, except per
     share amounts)
    Total revenue(1)      64,416     54,229     51,495
    Net earnings
     (loss)                1,291      4,855      6,683
      Per share -
       basic                0.03       0.11       0.15
      Per share -
       diluted              0.03       0.11       0.15
    Cash from
     operations           31,546     27,957     29,796
      Per share -
       basic                0.66       0.63       0.67
      Per share -
       diluted              0.65       0.62       0.65
    Corporate
     acquisitions         89,651          -          -
    Capital
     expenditures(2)      46,769     50,861     48,149
    Total assets         910,157    753,690    715,360
    Long-term debt             -          -          -
    ---------------------------------------------------
    Operating
    Average daily
     production
      Oil and NGLs
       (bbls/d)            7,950      5,881      5,562
      Natural Gas
       (mcf/d)            20,681     16,006     18,277
      Total (boe/d)       11,397      8,549      8,608
    ---------------------------------------------------
    ---------------------------------------------------
    (1) Total revenue is after realized and unrealized hedging losses and
        gains.
    (2) Capital expenditures are net of property dispositions.



    CONSOLIDATED BALANCE SHEETS

    -------------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    ($000s) (unaudited)

    Assets
    Current assets
      Accounts receivable                                71,706       54,944
      Prepaid expenses and deposits                       3,203        2,928
      Financial instruments (notes 2 and 7)               1,643        3,194
    -------------------------------------------------------------------------
                                                         76,552       61,066
    Property, plant and equipment (note 3)              979,283      972,599
    Long-term investment, at cost (note 2)                1,150        1,150
    Goodwill                                            358,096      358,096
    -------------------------------------------------------------------------
                                                      1,415,081    1,392,911
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities and Shareholders' Equity
    Current liabilities
      Accounts payable and accrued liabilities           81,136       88,552

    Long-term debt (note 4)                             171,943      138,890
    Future income taxes                                 150,374      151,802
    Asset retirement obligations (note 5)                11,305       11,258
    Deferred lease inducements                              366          408

    Shareholders' equity
      Share capital (note 6)                            958,404      957,186
      Contributed surplus (note 6)                       12,046        9,962
      Retained earnings                                  29,507       34,853
    -------------------------------------------------------------------------
                                                        999,957    1,002,001

    -------------------------------------------------------------------------
                                                      1,415,081    1,392,911
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the interim consolidated financial statements.



    CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND RETAINED
    EARNINGS

    -------------------------------------------------------------------------
                                Three months ended          Six months ended
                                           June 30,                  June 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    ($000s, except per share
     amounts) (unaudited)

    Revenues
      Oil and natural gas
       revenues                97,685       61,644      188,436      123,450
      Royalties, net of ARTC  (27,361)     (17,952)     (54,079)     (37,946)
      Financial instruments
       (note 7)
        Realized gains          1,000        1,840        2,795        2,308
        Unrealized (losses)
         gains                  5,084         (719)      (1,551)       1,423
    -------------------------------------------------------------------------
                               76,408       44,813      135,601       89,235

    Expenses
      Operating costs          16,586        7,348       30,960       14,243
      Transportation costs      1,800          794        3,392        1,312
      General and
       administrative           3,399        2,197        6,754        4,192
      Depletion, depreciation
       and accretion           49,166       29,755       94,776       58,915
      Interest and finance
       costs                    2,649          729        4,505        1,854
      Stock-based compensation
       (note 6)                   920        1,435        2,041        2,955
    -------------------------------------------------------------------------
                               74,520       42,258      142,428       83,471
    -------------------------------------------------------------------------
    Earnings (loss) before
     taxes                      1,888        2,555       (6,827)       5,764
    -------------------------------------------------------------------------
    Taxes (reduction)
      Current                       -         (307)           -         (127)
      Future                      828       (7,732)      (1,481)      (5,994)
    -------------------------------------------------------------------------
                                  828       (8,039)      (1,481)      (6,121)
    -------------------------------------------------------------------------
    Net earnings (loss) and
     comprehensive income       1,060       10,594       (5,346)      11,885
    Retained earnings,
     beginning of period       28,447       29,191       34,853       27,900
    -------------------------------------------------------------------------
    Retained earnings,
     end of period             29,507       39,785       29,507       39,785
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings (loss) per
     share (note 6)
      Basic                  $   0.02     $   0.20     $  (0.08)    $   0.24
      Diluted                $   0.02     $   0.20     $  (0.08)    $   0.23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the interim consolidated financial statements.



    CONSOLIDATED STATEMENTS OF CASH FLOWS

    -------------------------------------------------------------------------
                                Three months ended          Six months ended
                                           June 30,                  June 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    ($000s) (unaudited)

    Cash provided by (used in):
    Operating Activities
      Net earnings (loss)       1,060       10,594       (5,346)      11,885
      Items not involving
       cash:
        Depletion,
         depreciation and
         accretion             49,166       29,755       94,776       58,915
        Future income taxes
         (reduction)              828       (7,732)      (1,481)      (5,994)
        Stock-based
         compensation             920        1,435        2,041        2,955
        Unrealized losses
         (gains) on financial
         instruments           (5,084)         719        1,551       (1,423)
        Amortization of
         deferred lease
         inducements              (21)         (21)         (42)         (42)
      Abandonment expenditures   (229)         (46)        (745)         (46)
      Change in non-cash
       operating working
       capital                    258       10,569        1,889       (5,552)
    -------------------------------------------------------------------------
                               46,898       45,273       92,643       60,698
    -------------------------------------------------------------------------
    Financing Activities
      Common shares issued
       for cash                     -            -            -      100,620
      Share issue costs             -           (7)           -       (4,346)
      Proceeds on exercise
       of stock options           962           85        1,138        1,083
      Increase (decrease) in
       bank indebtedness       14,073       26,595       33,053      (48,226)
    -------------------------------------------------------------------------
                               15,035       26,673       34,191       49,131
    -------------------------------------------------------------------------
    Investing Activities
      Property, plant and
       equipment additions    (24,670)     (32,118)    (100,492)     (78,677)
      Property acquisitions         -      (14,472)           -      (14,682)
      Purchase of investments       -            -            -         (150)
      Net cash paid on
       business combination         -            -            -         (527)
      Deferred charges              -            -            -          251
      Change in non-cash
       investing working
       capital                (37,263)     (25,356)     (26,342)     (16,044)
    -------------------------------------------------------------------------
                              (61,933)     (71,946)    (126,834)    (109,829)
    -------------------------------------------------------------------------
    Change in cash                  -            -            -            -
    Cash, beginning of period       -            -            -            -
    -------------------------------------------------------------------------
    Cash, end of period             -            -            -            -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash interest paid          5,279          827        3,072        1,575
    Cash taxes paid                 -           88        1,025          368
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the interim consolidated financial statements.



    NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

    Six months ended June 30, 2007 and 2006
    (tabular amounts in thousands of dollars, unless otherwise noted)

    1.  Significant Accounting Policies

        The interim consolidated financial statements of Highpine Oil & Gas
        Limited (the "Company") have been prepared by management in
        accordance with Canadian generally accepted accounting policies and
        follow the same accounting policies as the most recent audited annual
        consolidated financial statements, except as noted below. Certain
        disclosures normally required to be included in the notes to the
        annual consolidated financial statements have been condensed or
        omitted. The interim consolidated financial statements should be read
        in conjunction with the audited consolidated financial statements and
        the notes thereto for the years ended December 31, 2006 and 2005.

    2.  Change in Accounting Policy

        Effective January 1, 2007, the Company adopted the Canadian Institute
        of Chartered Accountants ("CICA") section 3855, "Financial
        Instruments - Recognition and Measurement," section 1530
        "Comprehensive Income," section 3865 "Hedges" and section 3861
        "Financial Instruments - Disclosure and Presentation." These
        standards have been adopted prospectively. Adoption of these
        standards did not impact January 1, 2007 opening balances.

        i)    Financial instruments

        All financial instruments must initially be recognized at fair value
        on the balance sheet date. The Company has classified each financial
        instrument into the following categories: held for trading financial
        assets and financial liabilities, loans or receivables, held to
        maturity investments, available for sale financial assets, and other
        financial liabilities. Subsequent measurement of the financial
        instruments is based on their classification. Unrealized gains and
        losses on held for trading financial instruments are recognized in
        earnings. Gains and losses on available for sale financial assets are
        recognized in other comprehensive income and are transferred to
        earnings when the asset is derecognized. The other categories of
        financial instruments are recognized at amortized cost using the
        effective interest rate method.

        Upon adoption and with any new financial instrument, an irrevocable
        election is available that allows entities to classify any financial
        asset or financial liability as held for trading, even if the
        financial instrument does not meet the criteria to designate it as
        held for trading. The Company has not elected to classify any
        financial assets or financial liabilities as held for trading unless
        they meet the held for trading criteria. A held for trading financial
        instrument is not a loan or receivable and includes one of the
        following criteria:

        -  it is a derivative, except for those derivatives that have been
           designated as effective hedging instruments;

        -  it has been acquired or incurred principally for the purpose of
           selling or repurchasing in the near future; or

        -  it is part of a portfolio of financial instruments that are
           managed together and for which there is evidence of a recent
           actual pattern of short-term profit taking.

        ii)   Derivative instruments and hedging activities

        The Company may enter into derivative instrument contracts to manage
        its commodity price exposure, foreign exchange exposure and interest
        rate exposure. The Company does not enter into derivative instrument
        contracts for trading or speculative purposes. The Company may choose
        to designate derivative instruments as hedges. Hedge accounting
        continues to be optional.

        iii)  Comprehensive income

        Comprehensive income consists of net earnings and other comprehensive
        income ("OCI"). OCI comprises the change in the fair value of the
        effective portion of the derivatives used as hedging items in a cash
        flow hedge and the change in fair value of any available for sale
        financial instruments. Amounts included in OCI are shown net of tax.
        Accumulated other comprehensive income is a new equity category
        comprised of the cumulative amounts of OCI.

    3.  Property, Plant and Equipment
        ---------------------------------------------------------------------
                                     June 30, 2007         December 31, 2006

                                        Accumulated
                                          depletion
                                                and    Net book     Net book
                                 Cost  depreciation       value        value
        ---------------------------------------------------------------------
        Petroleum and
         natural gas
         properties       $ 1,270,949  $   294,373  $   976,576  $   969,784
        Land, buildings
         and leaseholds         2,409          318        2,091        2,170
        Office equipment
         and computers          1,038          422          616          645
        ---------------------------------------------------------------------
                          $ 1,274,396  $   295,113  $   979,283  $   972,599
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        At June 30, 2007, approximately $152.3 million (December 31, 2006 -
        $152.2 million) of unproved property costs and unevaluated seismic
        costs were excluded from the depletion calculation. Future
        development costs of $39.7 million (December 31, 2006 -
        $56.4 million) were included in the depletion calculation. Salvage
        value of $23.9 million (December 31, 2006 - $23.9) was excluded from
        the depletion calculation.

        During the six months ended June 30, 2007, cash general and
        administrative expenses of $1.6 million (six months ended June 30,
        2006 - $1.3 million) were capitalized. The Company also capitalized
        $1.0 million of stock based compensation expense for the six months
        ended June 30, 2007.

    4.  Long-Term Debt

        At June 30, 2007, the Company had available a $230 million revolving
        term credit facility with a syndicate of Canadian financial lenders
        and a $20 million demand operating credit facility with a Canadian
        financial lender.

        The revolving term credit facility has a 364-day extendable revolving
        period plus a one-year maturity. The term date of the revolving term
        credit facility is May 28, 2008. In the event that the term date on
        May 28, 2008 is not extended, the balance under the facility will be
        repayable on May 27, 2009. The revolving term credit facility bears
        interest within a range of the lenders' prime rate to prime plus
        0.25 percent depending on financial ratios of the Company. The demand
        operating facility bears interest at the lenders' prime rate.

        The lenders review the credit facilities semi-annually. The
        facilities are secured by a general security agreement and a first
        floating charge over all of the Company's assets.

        Interest expense includes $4.5 million (six months ended June 30,
        2006 - $1.9 million) in respect of debt repayable for a period
        exceeding one year.

    5.  Asset Retirement Obligations

        At June 30, 2007, the estimated total undiscounted cash flows
        required to settle asset retirement obligations were $17.9 million
        (December 31, 2006 - $17.9 million). Expenditures to settle asset
        retirement obligations will be incurred between 2007 and 2027.
        Estimated cash flows have been discounted using an annual credit-
        adjusted risk-free interest rate of 8.0 percent per annum and have
        been inflated using an inflation rate of 2.0 percent per annum.

        Changes to asset retirement obligations were as follows:

        ---------------------------------------------------------------------
                                                     Six months
                                                          ended   Year ended
                                                        June 30, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------
        Asset retirement obligations, beginning
         of period                                       11,258        5,898
          Liabilities acquired                                -        3,980
          Liabilities incurred                              341        1,069
          Liabilities settled                              (745)        (368)
          Accretion expense                                 451          679
        ---------------------------------------------------------------------
        Asset retirement obligations, end of period      11,305       11,258
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    6.  Share Capital

        Authorized:

          (i)  an unlimited number of class A common shares without par
               value; and
          (ii) an unlimited number of class B common shares without par value
               issuable in series. The class B common shares are non-voting
               and are not entitled to the receipt of dividends.

                                Six months ended             Year ended
                                  June 30, 2007           December 31, 2006
                               Shares       Amount       Shares       Amount
        ---------------------------------------------------------------------
                           (thousands) ($thousands)  (thousands) ($thousands)

        Class A common
         shares
        Balance, beginning
         of period             67,648      957,186       44,250      479,496
          Issued to acquire
           White Fire               -            -        4,089       95,480
          Issued to acquire
           Kick                     -            -       14,831      283,269
          Issued for cash           -            -        4,300      100,620
          Stock options
           exercised               96        1,138          178        1,202
          Contributed surplus
           transferred on
           exercise of stock
           options                  -           80            -          225
          Share issue costs
           less tax effect of
           (2007 - nil;
           2006 - $1,500)           -            -            -       (3,106)
        ---------------------------------------------------------------------
        Balance, end of
         period                67,744      958,404       67,648      957,186
        ---------------------------------------------------------------------


        Per Share Amounts
        ---------------------------------------------------------------------
                                Three months ended          Six months ended
                                           June 30,                  June 30,
                                 2007         2006         2007         2006
                           (thousands)  (thousands)  (thousands)  (thousands)
        ---------------------------------------------------------------------
        Weighted average
         number of common
         shares outstanding
          Basic                67,688       52,788       67,673       50,306
          Dilutive effect
           of stock options       801          953            -          979
        ---------------------------------------------------------------------
        Diluted                68,489       53,741       67,673       51,285
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Stock Options

        The Company has a stock option plan pursuant to which options to
        purchase class A common shares of the Company may be granted to
        directors, officers, employees and consultants. The outstanding stock
        options of the Company are exercisable for a period of six years and
        vest over a period of four years.

        In March 2007, 1,850,500 stock options previously granted to non-
        officer employees at exercise prices ranging from $14.92 to $23.25
        were repriced. The new exercise price was set at $12.05 which was the
        closing price of the Company's class A common shares on the day
        preceding the repricing.

        The vesting period of the repriced stock options, including vested
        stock options, was reset. As a result of the stock options repricing,
        the fair value of the stock options, calculated using the Black-
        Scholes model, increased by $5.1 million. The increase in the fair
        value of the stock options will be amortized over the four year
        vesting period of the repriced options. All other characteristics of
        the repriced options, including the expiry date, remain unchanged.

        A summary of changes is as follows:

        ---------------------------------------------------------------------
                             Six months ended               Year ended
                              June 30, 2007             December 31, 2006
        ---------------------------------------------------------------------
                              Class A                    Class A
                        Common Shares    Weighted  Common Shares    Weighted
                        Issuable Upon     Average  Issuable Upon     Average
                             Exercise    Exercise       Exercise    Exercise
                           of Options       Price     of Options       Price
        ---------------------------------------------------------------------
                           (thousands)   ($/share)    (thousands)   ($/share)
        Balance, beginning
         of period              5,077        15.80        3,652        13.06
          Granted               1,644        12.47        2,016        20.42
          Exercised               (96)      (11.84)        (178)       (6.75)
          Cancelled            (1,637)      (20.02)        (413)      (18.06)
          Repriced             (1,851)      (19.67)           -            -
          Repriced              1,851        12.05            -            -
        ---------------------------------------------------------------------
        Balance, end of
         period                 4,988        10.57        5,077        15.80
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Exercisable, end
         of period              1,146         5.87        1,271         9.44
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Details of the exercise prices and expiry dates of options
        outstanding at June 30, 2007 are as follows:

        ---------------------------------------------------------------------
                                Options Outstanding      Options Exercisable
                                -------------------      -------------------
                                   Weighted   Weighted              Weighted
                           Common   Average    Average      Common   Average
        Range of           Shares  Years to   Exercise      Shares  Exercise
        Exercise price   Issuable    Expiry      Price    Issuable     Price
        ---------------------------------------------------------------------
                       (thousands)   (years)  ($/share) (thousands) ($/share)

        $2.60 - $3.50        552       1.67    $  2.76        511    $  2.72
        $4.50 - $5.00        469       2.91    $  4.76        349    $  4.76
        $8.10 - $9.00        282       3.43    $  8.42        141    $  8.42
        $12.05 - $18.00    3,685       5.58    $ 12.64        145    $ 17.17
        ---------------------------------------------------------------------
                           4,988       4.77    $ 10.57      1,146    $  5.87
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The fair value of stock options granted is estimated using the Black-
        Scholes option pricing model with the following assumptions.

        ---------------------------------------------------------------------
                                                            Six months ended
                                                               June 30, 2007
        ---------------------------------------------------------------------
        Weighted average expected volatility (%)                          51
        Risk-free rate of return (%)                                     4.2
        Expected option life (years)                                       4
        Weighted average fair value ($/share)                           5.54
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company does not anticipate paying any dividends during the
        expected life of the options.


        Contributed Surplus
        ---------------------------------------------------------------------
                                                     Six months
                                                          ended   Year ended
                                                        June 30, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------

        Balance, beginning of period                      9,962        3,627
          Stock-based compensation expense, net of
           recovery                                       2,041        5,677
          Capitalized stock-based compensation expense      982          883
          Recovery of capitalized stock-based
           compensation expense                            (859)           -
          Transferred to share capital on exercise of
           stock options                                    (80)        (225)
        ---------------------------------------------------------------------
        Balance, end of period                           12,046        9,962
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Deferred Share Units Plan

        In 2006, the Company implemented a deferred share unit ("DSU") plan
        for non-management directors. Under the terms of the plan, DSUs
        awarded will vest immediately and will be settled with cash in the
        amount equal to the closing price of the Company's class A common
        shares on the date the Director specifies upon tendering their
        resignation from the Board.

        The Company has recorded a liability of $163,000 relating to
        11,400 DSUs outstanding at June 30, 2007.

    7.  Commodity Price Risk Management

        The Company uses a variety of derivative instruments to reduce its
        exposure to fluctuations in commodity prices. Derivative instruments
        are classified as held for trading and recorded at fair value on the
        consolidated balance sheet. No derivative instruments were designated
        as hedges during the six months ended June 30, 2007.

        Realized Financial Instrument Gain

        The realized hedging gain of $2.8 million for the six months ended
        June 30, 2007 relates to the cash settlement of derivative
        instruments.

        Unrealized Financial Instrument Gain (Loss)

        The unrealized financial instrument loss of $1.6 million for the six
        months ended June 30, 2007 represents the change in fair value of the
        Company's financial risk management agreements from December 31, 2006
        to June 30, 2007. The loss is calculated as follows:

        ---------------------------------------------------------------------
                                                                  Six months
                                                               ended June 30,
                                                                        2007
        ---------------------------------------------------------------------
        Balance, beginning of period                                   3,194
        Change in fair value of derivative instrument contracts       (1,551)
        ---------------------------------------------------------------------
        Balance, end of period                                         1,643
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The following commodity price risk management agreements were in
        place as at June 30, 2007.

        Financial WTI Crude Oil Contracts
        ---------------------------------------------------------------------
                                                                  Unrealized
                                                                  Gain (Loss)
                                                                       as at
                                                                     June 30,
        Term               Contract   Volume      Fixed Price           2007
                                     (bbls/d)       ($/bbl)       (CDN $000s)
        ---------------------------------------------------------------------
        Jan 07 to Dec 07     Collar   1,750   US $55.00 to $86.15        (65)
        Jan 07 to Dec 07     Collar   1,750   US $60.00 to $80.70        (99)
        Jan 07 to Dec 07     Swap       500         Cdn $73.00          (232)
        Jan 07 to Dec 07     Swap       500         Cdn $73.70          (158)
        Jan 07 to Dec 07     Swap       500         Cdn $74.70           (53)
        Jan 07 to Dec 07     Swap       500         Cdn $75.82            65
        ---------------------------------------------------------------------


        Financial AECO Natural Gas Contracts
        ---------------------------------------------------------------------
                                                                  Unrealized
                                                                  Gain (Loss)
                                                                       as at
                                                                     June 30,
        Term               Contract   Volume      Fixed Price           2007
                                      (GJs/d)        ($/GJ)       (CDN $000s)
        ---------------------------------------------------------------------
        Jul 06 to Mar 08     Collar   5,000   Cdn $6.00 to $11.10        361
        Jan 07 to Dec 07     Swap     2,500         Cdn $7.55            553
        Jan 07 to Dec 07     Swap     2,500         Cdn $7.62            584
        Feb 07 to Mar 08     Swap     1,250         Cdn $7.68            302
        Feb 07 to Mar 08     Swap     1,250         Cdn $7.70            385
        ---------------------------------------------------------------------
    

    READER ADVISORY

    Boes may be misleading, particularly if used in isolation. A boe
conversion ratio of six mcf to one bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
    Statements in this news release contain forward-looking information
including expectations of future production, procurement of drilling permits,
plans for and results of exploration and development activities and other
operational developments and components of cash flow and earnings. Readers are
cautioned that assumptions used in the preparation of such information may
prove to be incorrect. Events or circumstances may cause actual results to
differ materially from those predicted, as a result of numerous known and
unknown risks, uncertainties, and other factors, many of which are beyond the
control of the Company. These risks include, but are not limited to; the risks
associated with the oil and gas industry, commodity prices, and exchange rate
changes. Industry related risks include, but are not limited to; operational
risks in exploration, development and production of oil and gas and production
risks associated with sour hydrocarbons, dependence on third party owned and
operated production facilities, availability of skilled personnel and
services, failure to obtain industry partner, regulatory and other third party
consents and approvals, delays or changes in plans, risks associated with the
uncertainty of reserve estimates, health and safety risks and the uncertainty
of estimates and projections of reserves, production, costs and expenses. The
risks outlined above should not be construed as exhaustive. Readers are
cautioned not to place undue reliance on this forward-looking information. The
Company undertakes no obligation to update or revise any forward-looking
statements except as required by applicable securities laws.
    Readers are further cautioned that the preparation of financial
statements in accordance with Canadian generally accepted accounting
principles ("GAAP") requires management to make certain judgments and
estimates that affect the reported amounts of assets, liabilities, revenues
and expenses. Estimating reserves is also critical to several accounting
estimates and requires judgments and decisions based upon available
geological, geophysical, engineering and economic data. These estimates may
change, having either a negative or positive effect on net earnings as further
information becomes available, and as the economic environment changes.
    The terms Cash flow from operations "cash flow", and "cash flow per
share" and "operating netbacks" are not recognized measures under GAAP.
Management believes that in addition to net earnings, cash flow is a useful
supplemental measure as it provides an indication of the results generated by
Highpine's principal business activities before the consideration of how these
activities are financed or how the results are taxed. Investors are cautioned,
however, that this measure should not be construed as an alternative to net
earnings determined in accordance with GAAP as an indication of Highpine's
performance. Highpine's method of calculating cash flow may differ from other
companies, especially those in other industries and accordingly may not be
comparable to measures used by other companies. Highpine calculates cash from
operations as cash from operating activities before the change in non-cash
working capital related to operating activities. Highpine also uses operating
netback as an indicator of operating performance. Operating netback is
calculated on a per boe basis taking the sales price and deducting royalties,
operating costs, transportation costs and realized hedging gains and losses.

    Highpine is a Calgary-based oil and natural gas Company engaged in
exploration for and the acquisition, development and production of natural gas
and crude oil in western Canada. Highpine's current exploration and
development efforts are focused in the Pembina Nisku and West Central Alberta
Gas Fairways, both located in Central Alberta. The Company's class "A" common
shares trade on the Toronto Stock Exchange under the symbol "HPX".

    The Toronto Stock Exchange has neither approved nor disapproved the
    information contained herein.





For further information:

For further information: A. Gordon Stollery, President and Chief
Executive Officer, Bob Rosine, Executive Vice President, Corporate
Development, Harry Cupric, Vice President, Finance and Chief Financial
Officer, Telephone: (403) 265-3333, Facsimile: (403) 265-3362; Media Contact:
Shauna MacDonald, (403) 538-5645

Organization Profile

Highpine Oil & Gas Limited

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