Iteration Energy (ITX) announces third quarter 2009 results

CALGARY, Nov. 12 /CNW/ - Iteration Energy Ltd. (TSX-ITX) ("Iteration" or the "Company") announced today its unaudited financial and operating results as at and for the three and nine months ended September 30, 2009.

CORPORATE SUMMARY

    
    -------------------------------------------------------------------------
    Financial                 Three months ended         Nine months ended
     Highlights                     Sept 30,                  Sept 30,
    ($thousands, except
     as noted)                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Production
     revenue before
     royalties                $42,117     $108,444     $145,746     $291,183

    Funds from
     operations(1)            $10,095      $59,338      $30,373     $140,676
    Per share ($)
      - basic                   $0.05        $0.36        $0.16        $0.99
      - diluted                 $0.05        $0.35        $0.16        $0.97

    Net earnings (loss)      ($16,487)     $26,696     ($53,740)     $29,058
    Per share ($)
      - basic                  ($0.08)       $0.16       ($0.28)       $0.21
      - diluted                ($0.08)       $0.16       ($0.28)       $0.20

    Capital
     expenditures               5,968       32,414       48,239      101,564
    Acquisition/
     (Dispositions)           (38,748)      36,930      (41,126)      41,476
                          ------------ ------------ ------------ ------------
    Net capital
     expenditures            $(32,780)     $69,344       $7,113     $143,040


                                                           As at Sept 30,
                                                         2009         2008
    -------------------------------------------------------------------------
    Total assets                                       $914,266   $1,258,249
    Bank debt and working capital surplus or
     deficiency(2)                                     $198,515     $232,467

    Common shares outstanding                       210,985,384  166,020,387
    Stock options outstanding                        10,706,240    8,635,045
    -------------------------------------------------------------------------
    (1) "Funds from operations" and "funds from operations per share" are
        financial measures that are not determined in accordance with GAAP.
        See "Non-GAAP Measures" in the Company's Management Discussion and
        Analysis.
    (2) Working capital deficiency (surplus), which is the difference between
        current assets and current liabilities, does not include stock based
        compensation payable.



    -------------------------------------------------------------------------
    Operating                 Three months ended         Nine months ended
     Highlights                     Sept 30,                  Sept 30,
                               2009         2008         2009         2008
                          ----------------------- ---------------------------
    Production
    Natural gas (mcf/d)        64,176       75,645       72,634       66,700
    Light oil (bbls/d)          3,030        3,956        3,140        3,138
    Heavy oil (bbls/d)            136          265          172          217
    Natural gas liquids
     (bbls/d)                   1,357        1,678        1,406        1,385
                          ------------ ------------ ------------ ------------
    Total production
     (boe/d)                   15,219       18,507       16,824       15,857

    Prices
    Natural gas ($/mcf)         $3.02        $8.13        $4.01        $9.05
    Light oil ($/bbl)          $68.77      $109.59       $59.17      $115.29
    Heavy oil ($/bbl)          $63.02      $100.38       $42.01       $85.56
    Natural gas liquids
     ($/bbl)                   $34.47       $74.48       $33.55       $61.79
                          ------------ ------------ ------------ ------------
    Average price
     ($/boe)                   $30.08       $64.32       $31.73       $67.28

    Operating Netback
     ($/boe)                   $11.91       $39.22       $10.94       $40.85

    Net Undeveloped Land
     ('000acres as at
     Sept 30)                     802          878          802          878
    -------------------------------------------------------------------------
    

PRESIDENT'S MESSAGE

Since the second quarter of 2009 Iteration has achieved progress on a number of fronts. Highlights include:

    
    -   Funds from operations of $10.1 million ($0.05 per basic share) for
        the third quarter of 2009 approximately doubled second quarter 2009
        results,
    -   Production expenses of $12.36 per boe for the third quarter of 2009
        were approximately 20% lower than the second and first quarters of
        2009,
    -   Third quarter 2009 debt of $199 million was reduced by $43 million
        from the end of second quarter 2009 with proceeds from non-core
        property dispositions and lower capital expenditures,
    -   Subsequent to the end of the quarter the borrowing base was set at
        $225 million by our banking syndicate,
    -   Drilling operations commenced at Manyberries in South Alberta with
        results to date meeting or exceeding expectations,
    -   Third quarter of 2009 production averaged 15,219 boed, down about 5%
        from the second quarter of 2009 after factoring in property
        dispositions (approximately 600 boed on average for the quarter) and
        additional shut-in production. Shut in production is up approximately
        400 boed on average from the second quarter of 2009 and averaged
        1,150 boed for the third quarter of 2009,
    -   Funds from operations for 2009 is expected to improve $7 million from
        our previous forecast to $47 million ($0.24 per basic share) with
        higher commodity prices,
    -   Approved an initial 2010 capital budget of $95 million (after taking
        into account drilling credits of $30 million), which includes an
        expected drilling program of 77 net wells,
    -   Production is expected to rise from approximately 13,000 boed in
        December 2009 to 16,000 boed in December 2010, and
    -   Funds from operations in 2010 are expected to double forecast 2009
        levels to $95 million ($0.45 per basic share).

    2009 Operations and Finances
    ----------------------------
    

Average production for the third quarter of 2009 was 15,219 boed, ahead of our budget for the quarter but down from the second quarter of 2009. Non core property dispositions, shut-in production, and natural declines due to lower activity all reduced production. Additional production of 400 boed was shut-in in the third quarter due to low gas prices. If gas prices hold their recent gains we expect to bring the majority of this production back on stream starting in late 2009.

Capital expenditures were approximately $6 million for the third quarter of 2009 as drilling operations were slow to start due to surface access issues. We drilled 4.3 net wells in the quarter with one well at Manyberries in South Alberta where we discovered an extension to existing pool boundaries. Since the end of the quarter we have drilled an additional 6.5 net wells in this program all of which have met or exceeded our expectations. The Manyberries program has been expanded from six to eleven wells while we have surface access during this drilling season. Drilling is expected to commence shortly at Rainbow in Northeast Alberta and a portion of that six well program will likely be completed in the first quarter of 2010 instead of finishing by year-end 2009 as originally expected. The net result is capital expenditures are expected to increase slightly from our previous forecast for 2009.

Funds from operations for the quarter were $10.1 million ($0.05 per basic and diluted share), almost double the second quarter of 2009 primarily due to lower production expenses and the absence of the bad debt provision for the SemGroup receivable. Costs saving initiatives for production expenses begun earlier in the year were starting to take effect during this quarter and the impact of prior period costs was greatly reduced. Funds from operations for the quarter were essentially at budgeted levels as lower revenue per boe was offset by higher production, lower royalties and lower production expense. Higher G&A costs were offset by lower interest and financing charges. The net loss for the quarter of $16.5 million ($0.08 per basic and diluted share) improved from the $23.0 million net loss in the second quarter and is consistent with higher funds from operations.

With second quarter 2009 results we announced a new hedging philosophy that would see us potentially hedging up to 35% of production two years forward in order to reduce the volatility of funds from operations. This program is being implemented over time and will be built up as a portfolio of transactions. During the third quarter we initiated our first transactions under the program, hedging approximately 7% of fourth quarter 2009 and 2010 production and 2% of our 2011 production. Over time we anticipate adding to the 2010 and 2011 positions.

The balance of our non-core property disposition program was completed in July 2009 with proceeds of $39 million used to further improve our financial position. Total debt, including working capital, has been reduced to $199 million at quarter end. Subsequent to the end of the quarter the semi-annual redetermination of our borrowing base was completed by our bank syndicate and was set at $225 million. As a result no debt repayments are required.

We have updated our guidance for the fourth quarter of 2009 primarily to reflect stronger pricing for both gas and oil, partially offset by a stronger Canadian dollar versus the US dollar. Average production for the year is still expected to be in the range previously forecast of 15,600 to 16,100 boed as we do not anticipate significant new production from our drilling program until 2010. Economic parameters we are using for the last three months of 2009 in this forecast are; AECO gas price of $5.00/mcf, WTI oil price of US$75.00/bbl and foreign exchange rate of US$0.95 to Cdn$1.00. As a result we are now forecasting funds from operations to improve $7 million to $47 million ($0.24 per basic chare) for 2009. Capital expenditures net of drilling incentive credits are expected to increase slightly to $67 million. With increased funds from operations, total debt at the end of the year is now forecast to be approximately $200 million.

    
    2010 Operations and Finances
    ----------------------------
    

The Board of Directors has approved a preliminary capital budget for 2010 of $125 million which is expected to generate drilling incentive credits of $30 million for a net $95 million capital program. The budget is based on an AECO gas price of $5.75/mcf, a WTI oil price of US$75.00/bbl and a foreign exchange rate of US$0.95 to Cdn$1.00. With this capital program we expect production to average between 14,500 to 15,100 boed for the year down about 7% from the average in 2009. However production is expected to increase from approximately 13,000 boed in December 2009 to approximately 16,000 boed in December 2010. Expected funds from operations of $95 million ($0.45 per basic share) are approximately double the forecasted levels for 2009. With net capital expenditures equaling funds from operations for the year, total debt would remain at approximately $200 million or about 2.1 times 2010 funds from operations.

With the 2010 capital program 75 net wells are expected to be drilled. The majority of our first quarter 2010 drilling is planned to target western Alberta oil prospects including 3 wells at Rainbow, 4 wells in Gold Creek and 3 wells in the Gordondale area. There is an 8 well gas program expected at Thornbury in our east central Alberta area. We have elected to farm-out a portion of our Montney acreage at Monias in northeast BC. Under the terms of the agreement we will maintain a 50% working interest and the development of the play will be accelerated. The first well is expected to begin drilling shortly, and we will be able to access infrastructure to allow production from successful wells to come on stream. Second half of the year drilling is expected to be a combination of oil and gas targets depending upon commodity prices. We have multi zone targets in our East and West Alberta core areas as well as Northeast BC. Some of the drilling is expected to be down spacing in the Nikanassin and horizontal wells in the Cretaceous and Triassic zones. This should further establish the resource nature of some of our West Alberta and BC acreage. We expect the next round of Manyberries oil drilling in South Alberta to start in October 2010.

Similar to 2009, our 2010 capital budget will be dependent upon commodity prices and the actual level of funds from operations realized. We anticipate keeping net capital expenditures in line with funds from operations; therefore we will adjust our net capital budget accordingly. As our hedging portfolio is built up over time we expect less variability in our funds from operations and a more predictable capital program. However given that less than 35% of our production is expected to be hedged we will continue to monitor and be prepared to adjust our capital program if circumstances warrant.

Our forecast for the remainder of 2009 and all of 2010 is predicated on there being a swift resolution to the recent moratorium on licensing any wells with H(2)S in Alberta, and that we will be able to proceed with our planned drilling program. We are currently waiting on the ERCB to define potential changes to licensing wells that have the potential for minor amounts of H(2)S.

The third quarter of 2009 represented an improvement in our financial performance and position, and with stronger gas prices we are looking forward to a more active capital program this winter. Forward gas prices have reached a level that makes drilling some of our horizontal opportunities desirable. Our light oil program at Manyberries is progressing as well or better than we expected and we will continue to expand on it in 2010.

We have put forward a preliminary capital budget that would see us double activity levels from 2009 and the resulting funds from operations would place us in solid financial position. To date 2009 has been challenging but we have taken steps to strengthen the Company financially. Having taken these steps, our outlook for 2010 is much improved.

    
    On behalf of the Board of Directors,

    (Signed) Brian Illing
    President & CEO
    November 10, 2009


    MANAGEMENT'S DISCUSSION AND ANALYSIS
                              November 10, 2009
    

The following is Management's Discussion and Analysis ("MD&A") of Iteration Energy Ltd.'s (the "Company" or "Iteration") operating and financial results as at and for the three and nine months ended September 30, 2009 as well as information and estimates concerning the Company's future outlook based on currently available information. This discussion should be read in conjunction with Iteration's unaudited interim consolidated financial statements as at and for the three and nine months ended September 30, 2009 and the audited consolidated financial statements as at and for the years ended December 31, 2008 and 2007, together with accompanying notes. Readers should also refer to Iteration's Annual Information Form ("AIF") for the year ended December 31, 2008. All financial information is reported in Canadian dollars, unless noted otherwise, and in accordance with Canadian generally accepted accounting principles ("GAAP").

Natural gas is converted to crude oil equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent ("boe"). Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Additional information about Iteration filed with Canadian securities commissions, including periodic quarterly and annual reports and the AIF, is available on-line at www.iterationenergy.com and at www.sedar.com.

The following MD&A contains forward looking information and statements. We refer you to the end of the MD&A for our discussion on forward looking information and statements in the section "ADVISORY - FORWARD LOOKING INFORMATION".

ITERATION OVERVIEW

Iteration is a Canadian oil and gas company with focus areas in Northeast British Columbia/Northwest Alberta, East Central Alberta and Southern Alberta. The most significant currently producing properties are Boundary Lake in Northeast British Columbia and Gold Creek, Knopcik and Manyberries in Alberta.

NON-GAAP MEASURES

This MD&A refers to "funds from operations" and "funds from operations per share" which do not have any standardized meaning prescribed by Canadian GAAP and therefore they may not be comparable with the calculation of similar measures for other entities. Management uses "funds from operations" and "funds from operations per share" (before changes in non-cash working capital) to analyze operating performance and leverage. Funds from operations as presented is not intended to represent operating cash flow or income from operations for the period nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. All references to funds from operations and funds from operations per share throughout this MD&A are based on cash flow from operating activities before changes in non-cash working capital. The table below provides a reconciliation between cash flow from operations and funds from operations.

    
    -------------------------------------------------------------------------
    ($ thousands)     Three months ended Sept 30,  Nine months ended Sept 30,
                      --------------------------- ---------------------------
                               2009         2008         2009         2008
                      --------------------------- ---------------------------
    Funds from
     operations               $10,095      $59,338      $30,373     $140,676
    Changes in non-
     cash working
     capital                    7,240      (13,563)      16,435      (13,664)
                      --------------------------- ---------------------------
    Cash flow from
     operations               $17,335      $45,775      $46,808     $127,012
    -------------------------------------------------------------------------
    

OUTLOOK FOR 2009

Iteration is updating its guidance for 2009 results issued on August 12, 2009 primarily due to higher projected commodity prices. The information below presents the Company's expected results for the full year of 2009 (which incorporates the actual results for the first nine months of 2009, and the forecast for the balance of the year), the August 12, 2009 guidance and the difference between the two.

    
    -------------------------------------------------------------------------
                           2009 Current      2009 Previous
                             Forecast     August 12 Forecast       Change
    -------------------------------------------------------------------------
    Production (boe/d)
      Annual average     15,600 - 16,100   15,600 - 16,100                0%

    Capital program(1)
      Expenditures
      ($ million)                     67                65                3%
      Net wells drilled               24                24                0%

    Funds from operations
      Annual ($ million)              47                40               18%
      Annual per basic
       share ($)                    0.24              0.20               20%

    Year end net debt
     ($ million)                     200               205               (2%)

    Average Pricing:     (Oct - Dec 2009) (July - Dec 2009)
      Natural gas - AECO
       (Cdn$/mcf)                   5.00              3.75               33%
      Oil - WTI (US$/bbl)          75.00             65.00               15%
      Foreign exchange
       rate (US$/Cdn)               0.95              0.90                6%
    -------------------------------------------------------------------------
    Note:
    (1) The Alberta drilling credits are included as a reduction to capital
        expenditures. The amount of drilling credits is forecast to be $3.1
        million ($4.7 million in the previous guidance).
    

Gas prices began to strengthen in the fourth quarter of 2009 and oil prices have also improved since the second quarter of 2009. A stronger Canadian dollar versus the US dollar since the second quarter has offset some of the price increases. In addition, the Company has approximately 1,150 boed of production currently shut-in, most of which is gas. If gas prices remain at current levels the majority of this production is expected to come back on starting in late 2009.

Capital expenditures have remained essentially the same as our previous forecast, however we have altered the wells drilled due to timing of operations. The 6 (6.0 net) well program at Rainbow in North Alberta will be split between the fourth quarter of 2009 and the first quarter of 2010 due to wet surface conditions delaying the start of the program. Manyberries in South Alberta is proceeding and we have added 5 (4.9 net) additional wells to this program based on early success and lower costs.

Funds from operations are expected to be higher than previously forecast mainly due to higher commodity prices. Royalty rates for the year are forecast to be approximately 18% for the year, slightly below the previous forecast of 19%. Lower than expected rates in the third quarter of 2009 will be partially offset by higher rates due to higher expected commodity prices in the fourth quarter. Production expenses of $12.36 per boe were lower than budgeted in the third quarter due to realized cost saving initiatives and are expected to be approximately $14.00 per boe for the year, slightly below our previous forecast of $14.25 per boe.

General and Administrative ("G&A") expense is expected to average $2.25 per boe in 2009 versus previous guidance of $2.20 per boe primarily due to higher consulting expenses. Interest expense is expected to be approximately $1.80 per boe for 2009.

Year-end debt is expected to be approximately $200 million (previous forecast was $205 million) slightly above third quarter of 2009 levels as the expected increase in cash flow is about $2 million less than forecast capital expenditures for the fourth quarter.

The impact on the Company's 2009 funds from operations of a $1.00/mcf increase in average AECO price for natural gas for the last three months of 2009 would be approximately $4 million. The impact of a US$5.00/bbl increase in WTI for oil for the last three months of 2009 would be approximately $1.2 million. The impact of a one cent weakening of the Canadian Dollar versus the U.S. dollar for the last three months of 2009 would be approximately $0.4 million.

OUTLOOK FOR 2010

Iteration is projecting commodity prices for 2010 to improve over expected 2009 levels resulting in significantly higher funds from operations and capital expenditures in 2010. With increased capital expenditures combined with the fourth quarter drilling program and the return of shut-in production, 2010 production is expected to rise throughout the year to approximately 16,000 boed in December 2010. The table below provides the initial guidance for 2010 results along with our latest forecast for 2009 and the change between the two.

    
    -------------------------------------------------------------------------
                               2010         2009 Forecast
                             Forecast        November 10           Change
    -------------------------------------------------------------------------
    Production (boe/d)
      Annual average     14,500 - 15,100   15,600 - 16,100               (7%)

    Capital program(1)
      Expenditures
       ($ million)                    95                67               42%
      Net wells drilled               75                25              200%

    Funds from operations
      Annual ($ million)              95                47              102%
      Annual per basic
       share ($)                    0.45              0.24               88%

    Year end net debt
     ($ million)                     200               200                0%

    Average Pricing:     (Jan - Dec 2010)  (Jan - Dec 2009)
      Natural gas - AECO
       (Cdn$/mcf)                   5.75              4.10               40%
      Oil - WTI (US$/bbl)          75.00             61.50               22%
      Foreign exchange
       rate (US$/Cdn$)              0.95              0.88                8%
    -------------------------------------------------------------------------
    Note:
    (1) The Alberta drilling credits are included as a reduction to capital
        expenditures. The amount of drilling credits included is forecast to
        be $30 million ($3.1 million in the 2009 guidance).
    

Capital expenditures are expected to increase 42% over 2009 levels after taking into account drilling credits. The program will be split approximately 60% to oil opportunities targeting 50 net wells and approximately 40% to gas opportunities targeting 25 net wells. The majority of the oil drilling will be focused at Manyberries in South Alberta, while the gas drilling will be directed toward East Alberta, West Alberta and North East BC.

Funds from operations are expected to double from 2009 levels mainly due to higher commodity prices and lower operating costs despite lower average production levels. Royalty rates for the year are forecast to be approximately 21% for 2010, slightly higher than 2009 levels due to higher forecast commodity prices. Production expenses are expected to average $12.60 per boe in 2010, consistent with levels expected in the last half of 2009 but lower than the average for all of 2009.

G&A expense is expected to average $2.45 per boe in 2010 slightly above expected 2009 levels primarily due to lower average production levels. Interest expense is expected to be approximately $2.00 per boe in 2010. Year-end debt is expected to remain at forecast year-end 2009 levels of $200 million as capital expenditures are expected to equal funds from operations for the year.

The Company's capital budget will be responsive to changes in commodity prices. With rising prices there is a significant inventory of drilling opportunities that can be undertaken. However, should commodity prices be lower than forecast, the Company intends to scale back operations to ensure that the projected capital program remains in line with projected funds from operations. As disclosed in the second quarter 2009 report, the Company has instituted a hedging program. Initial hedges have been put in place affecting about 7% of forecast production and as a result are not expected to materially affect projected funds from operations. The Company intends to enter into additional hedges to build up its portfolio with the goal of having potentially 35% of production hedged up to two years forward. Hedge transactions will be taken into account when determining capital expenditures and funds from operations.

The impact on the Company's 2010 funds from operations of a $1.00/mcf increase in average AECO price for natural gas would be approximately $17 million. The impact of a US$5.00/bbl increase in WTI for oil would be approximately $6 million. The impact of a one cent weakening of the Canadian Dollar versus the U.S. dollar would be approximately $2 million.

The Company's forecast for the remainder of 2009 and all of 2010 is predicated on there being a swift resolution to the recent moratorium on licensing any wells with H2S in Alberta, and that Iteration will be able to proceed with its planned drilling program. Iteration is currently waiting on the ERCB to define potential changes to licensing wells that have the potential for minor amounts of H2S.

OPERATING RESULTS

    
    Production
    -------------------------------------------------------------------------
    Daily             Three months ended             Nine months ended
     production             Sept 30,                      Sept 30,
    Average for   ----------------------------- -----------------------------
     the period      2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Natural gas
     (mcf/d)        64,176    75,645       (15)   72,634    66,700         9
    Natural gas
     liquids
     (bbls/d)        1,357     1,678       (19)    1,406     1,385         2
    Light oil
     (bbls/d)        3,030     3,956       (23)    3,140     3,138         -
    Heavy oil
     (bbls/d)          136       265       (49)      172       217       (21)
    ------------------------------------------- -----------------------------
      Total
       production
       (boed)       15,219    18,507       (18)   16,824    15,857         6
    -------------------------------------------------------------------------
    

Average daily production for the three months ended September 30, 2009 was 18% below the same period in 2008 primarily due to lower drilling activity over the past nine months, property dispositions, shut-in production, and natural production declines. The Company completed its non-core disposition program selling approximately 1,000 boed of production (80% gas) most of which occurred at the end of July 2009. Shut-in production due to low commodity prices averaged approximately 1,150 boed for the third quarter of 2009.

Average daily production for the nine months ended September 30, 2009 was 6% higher than the prior year period primarily due to the acquisition of Cyries Energy Inc. ("Cyries") which was completed March 7, 2008. As a result, the prior year period includes approximately 7 months of Cyries production.

Commodity Prices

    
    -------------------------------------------------------------------------
    Industry          Three months ended             Nine months ended
     benchmarks             Sept 30,                      Sept 30,
    Average for   ----------------------------- -----------------------------
     the period      2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Natural gas
     (AECO $/mcf)    $2.94     $7.73       (62)    $3.79     $8.64       (56)
    Edmonton Light
     crude ($/bbl)  $71.50   $121.85       (41)   $62.35   $115.14       (46)
    Hardisty Lloyd
     blend ($/bbl)  $63.45   $103.57       (39)   $55.33    $94.30       (41)
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Realized
     commodity        Three months ended             Nine months ended
     prices                 Sept 30,                      Sept 30,
    Average for   ----------------------------- -----------------------------
     the period      2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Natural gas
     ($/mcf)         $3.02     $8.13       (63)    $4.02     $9.05       (56)
    Natural gas
     liquids
     ($/bbl)        $34.47    $74.78       (54)   $33.55    $61.79       (46)
    Light oil
     ($/bbl)        $68.77   $109.59       (37)   $59.17   $115.29       (49)
    Heavy oil
     ($/bbl)        $63.02   $100.38       (37)   $49.66    $85.56       (42)
    ------------------------------------------- -----------------------------
    Total ($/boe)   $30.08    $64.32       (53)   $31.73    $67.28       (53)
    -------------------------------------------------------------------------
    

Commodity prices for 2009 continue to be significantly below those experienced in 2008 and as a result the Company's realized price on a per boe basis is over 50% lower for the three and nine months ended September 30, 2009 compared to the prior year periods. The drop in the Company's realized prices is consistent with the drop in the average benchmark prices. On a relative basis gas prices have decreased more than an oil prices in both the three and nine month periods.

Price Risk Management

The Company, from time to time, may enter into financial contracts for the purpose of protecting its funds from operations from the volatility of commodity prices. The Company has a general hedging program of potentially having up to 35% of it production hedged up to two years forward. In implementing this program the Company intends to build its hedge position through a portfolio of contracts over time. To that end the Company has hedged approximately 7% of its forecast 2010 production. At September 30, 2009 the fair value of its derivative contracts was a liability of approximately $0.4 million based on the contracts outlined below.

    
    -   1,000 bbl per day fixed price swap for the fourth quarter of 2009 at
        $80 Canadian WTI/bbl

    -   200 bbl per day collar for 2010 with a floor price of $70 Canadian
        WTI/bbl and a ceiling price of $91 Canadian WTI/bbl

    -   200 bbl per day collar for 2010 with a floor price of $70 Canadian
        WTI/bbl and a ceiling price of $97 Canadian WTI/bbl

    -   3,500 GJ per day fixed price swap for November 1, 2009 to October 31,
        2010 at $4.98/GJ

    -   2,000 GJ per day fixed price swap for November 1, 2010 to October 31,
        2011 at $6.00/GJ
    

Revenue

    
    -------------------------------------------------------------------------
    Production
     revenue
     before           Three months ended             Nine months ended
     royalties              Sept 30,                      Sept 30,
                  ----------------------------- -----------------------------
    ($ thousands)    2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Production
     revenue       $42,117  $108,444       (61) $145,746  $291,183       (50)
    -------------------------------------------------------------------------
    

Production revenue for the three months ended September 30, 2009 decreased 61% compared to the corresponding period in 2008 primarily due to the 53% decrease in realized commodity prices and an 18% decrease in production. For the nine months ended September 30, 2009 production revenue decreased 50% compared to the same period in 2008 as the reduction in commodity prices was partially offset by an increase in production.

For the three months and nine months ended September 30, 2009 and 2008 gas represented 42% and 55% respectively of the Company's revenue and approximately 70% of the Company's production.

Royalties

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
    ($ thousands  ----------------------------- -----------------------------
     except where
     noted           2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Royalties       $6,720   $23,115       (71)  $25,379   $61,993       (59)
    Per boe ($/boe)  $4.80    $13.71       (65)    $5.53    $14.32       (61)
    Percentage of
     revenue (%)      15.8      21.3       (26)     17.4      21.3       (18)
    -------------------------------------------------------------------------
    

Royalty expenses on an absolute, per boe and percentage of revenue basis all decreased in 2009 compared to the corresponding periods in 2008 primarily due to lower commodity prices, particularly gas prices, and the new Alberta Royalty Framework which was enacted in 2009. Royalties represent amounts paid by the Company for crown, freehold and gross overriding royalties. The vast majority of the Company's royalty expenses are for crown royalties.

Production Expenses

    
    -------------------------------------------------------------------------
    Production        Three months ended             Nine months ended
     expenses               Sept 30,                      Sept 30,
                  ----------------------------- -----------------------------
    ($ thousands)    2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Total
     production
     expenses      $17,308   $18,080        (4)  $65,941   $47,842        38

    Per boe
     ($/boe)        $12.36    $10.62        16    $14.36    $11.01        30
    -------------------------------------------------------------------------
    Note: Production expenses for the three and nine month periods ended
    September 30, 2008 have been restated by $455 and $1,180 respectively for
    costs previously allocated from general and administrative expenses.
    

For the third quarter of 2009 production expenses decreased compared to the same period in 2008 due to lower production partially offset by higher per unit costs. Per unit production costs have increased as fixed costs associated with shut in production in the 2009 period are still incurred by the Company and spread over a lower production base. For the nine months ended September 30, 2009 both absolute and per unit costs are higher than the 2008 period. Higher production accounts for part of the increase, however late charges from vendors and partners, particularly in the first half of 2009, for prior year periods increased costs.

Transportation Expenses

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
    ($ thousands  ----------------------------- -----------------------------
     except where
     noted           2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Transportation
     expenses       $1,411    $1,290         9    $4,146    $4,741       (13)

    Per boe
     ($/boe)         $1.01     $0.77        31     $0.90     $1.10       (18)
    -------------------------------------------------------------------------
    

Transportation expenses for the third quarter of 2009 increased compared to the prior year period primarily due to higher charges for interruptible gas transportation. For the nine months ended September 30, 2009 transportation expenses decreased compared to the same period in 2008 primarily as a result of a better allocation of the Company's production between firm and interruptible transportation contracts.

Operating Netback

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
                  ----------------------------- -----------------------------
    ($/boe)          2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Production
     revenue        $30.08    $64.32       (53)   $31.73    $67.28       (53)
    Royalties        (4.80)   (13.71)      (65)    (5.53)   (14.32)      (61)
    Production
     expenses       (12.36)   (10.62)       16    (14.36)   (11.01)       30
    Transportation
     expenses        (1.01)    (0.77)       31     (0.90)    (1.10)      (18)
    ------------------------------------------- -----------------------------
    Operating
     netback        $11.91    $39.22       (70)   $10.94    $40.85       (73)
    -------------------------------------------------------------------------
    

The operating netback per boe (before general and administrative expenses) realized for the three and nine months ended September 30, 2009 has decreased significantly compared to the same periods in 2008 largely due to the drop in commodity prices. Increased production expenses were more than offset by lower royalties.

General and Administrative Expenses

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
    ($ thousands  ----------------------------- -----------------------------
     except where
     noted           2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    General and
     administrative
     costs before
     the
     following:     $4,953    $4,282        16   $13,954   $12,397        13
    Capitalized
     overhead       (1,012)   (1,045)       (3)   (3,719)   (2,835)       31
    Overhead
     recoveries       (242)      (30)      707      (347)     (158)      120
    ------------------------------------------- -----------------------------
    General and
     administrative
     expense        $3,699    $3,207        15    $9,888    $9,404         5
    ------------------------------------------- -----------------------------

    Per boe
     ($/boe)         $2.64     $1.88        40     $2.15     $2.16         0
    -------------------------------------------------------------------------
    Note: General and administrative costs prior to any deductions or
    recoveries for the three and nine month periods ended September 30, 2008
    have been restated by $455 and $1,180 respectively for costs previously
    allocated to production expense.
    

G&A expenses for the three and nine months ended September 30, 2009 increased compared to the corresponding periods in 2008. The Company has incurred additional staffing and consulting expenses associated with new systems and processes that have been put in place. Office costs also increased in the third quarter of 2009 as part of its ongoing lease obligation.

Stock-Based Compensation Expense

The Company's stock option plan provides option holders the right to request, upon exercise, receipt of a cash payment in exchange for surrendering the option, provided the request is accepted by the Company. The cash payment is equal to the appreciated value of the option, as determined by the difference between the option's exercise price and the Company's closing share price on the Toronto Stock Exchange the day prior to surrendering the option. On June 20, 2008, with the approval of shareholders, the stock option plan was amended and restated to limit the total number of common shares that may be issued under the stock option plan to a maximum of 16,000,000. This represented and continues to represent less than 10% of the then and currently issued and outstanding common shares of the Company. In June of 2009 the Company provided employees (excluding officers and directors) the option to surrender options they held with a strike price above $3.50 per share and in turn receive 40% of their surrendered number of options with a strike price at the then prevailing share price of $1.40. As a result, 3.4 million options were surrendered and 1.3 million options were issued. At September 30, 2009 and November 10, 2009, options to purchase 10.7 million common shares were outstanding, which represents 5.1% of the outstanding common shares of the Company at such dates.

For the three and nine months ended September 30, 2009, $36,000 and $71,000 of stock-based compensation expense was recorded by the Company compared to a recovery of $16.5 million and expense of $4.4 million respectively for the corresponding periods in 2008.

Future fluctuations in the stock-based compensation expense or recoveries are dependent on the movement of the Company's share price and the number of options vested and outstanding. Based on the September 30, 2009 share price of $1.20, had all of the 10,706,240 stock options outstanding been vested, aggregate stock-based compensation expense and a corresponding liability of $481,000 would have been recognized.

Interest and Financing Expense

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
    ($ thousands  ----------------------------- -----------------------------
     except where
     noted           2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Interest and
     financing
     expense        $2,557    $2,526         1    $7,390    $6,705        10

    Per boe
     ($/boe)         $1.83     $1.48        24     $1.61     $1.54         5
    -------------------------------------------------------------------------
    

Interest and financing expense primarily represents interest on bank debt but also includes financing charges and expenses related to bank debt. For the third quarter of 2009 interest and financing expense has remained relatively flat compared to 2008 as the impact of lower average debt levels between the periods was offset by a higher interest rate. For the nine months ended September 30, 2009 interest and financing expense increased compared to the 2008 period due to higher average debt levels and financing charges which were partially offset by lower interest costs. The majority of the Company's bank debt is borrowed by way of Bankers' Acceptances.

Depletion, Depreciation, and Accretion

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
    ($ thousands  ----------------------------- -----------------------------
     except where
     noted           2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Depletion,
     depreciation
     and
     accretion     $32,335   $40,639       (20) $104,835  $101,239         4

    Per boe
     ($/boe)        $23.09    $23.87        (3)   $22.82    $23.30        (2)
    -------------------------------------------------------------------------
    

Depletion, depreciation, and accretion ("DD&A") expense is lower for the third quarter of 2009 compared to the prior year period primarily due to lower production. For the nine months of 2009 higher production increased DD&A expense slightly compared to the prior year period. On a per boe basis DD&A expense is within 3% of each other between the 2009 and 2008 periods.

Funds from Operations and Net Income/(Loss)

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
    ($ thousands  ----------------------------- -----------------------------
     except where
     noted           2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------
    Funds from
     operations    $10,095   $59,338       (83)  $30,373  $140,676       (78)
      per share
       - basic ($)   $0.05     $0.36       (86)    $0.16     $0.99       (84)
      per share
       - diluted
       ($)           $0.05     $0.35       (86)    $0.16     $0.97       (84)
      per boe
       ($/boe)       $7.21    $34.85       (79)    $6.61    $32.38       (80)

    Net (Loss)/
     income       ($16,487)  $26,696      (162) ($53,740)  $29,058      (285)
      per share
       - basic ($)  ($0.08)    $0.16      (150)   ($0.28)    $0.21      (233)
      per share
       - diluted
       ($)          ($0.08)    $0.16      (150)   ($0.28)    $0.20      (240)
      per boe
       ($/boe)     ($11.78)   $15.68      (175)  ($11.70)    $6.69      (275)

    Weighted
     average
     shares
     outstanding
      basic ('000) 210,985   166,020        27   190,232   141,607        34
      diluted
       ('000)      210,985   168,046        25   190,232   144,693        31
    -------------------------------------------------------------------------
    

The Company's funds from operations for the three and nine months ended September 30, 2009 decreased approximately 80% compared to the same periods in 2008. The reduction was primarily a result of significantly weaker commodity prices combined with higher production expense. This was partially offset by lower royalties.

The Company's net loss for the three months ended September 30, 2009 was $16.5 million, as compared to a net income of $26.7 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009 the Company's net loss of $53.7 million compares to net income of $29.1 million for the prior year period. The losses primarily arise as a result of lower funds from operations partially offset by a recovery of future income taxes.

Weighted average shares outstanding in the third quarter of 2009 increased approximately 27% over the prior year period primarily due to the 45 million common share equity issue completed in May 2009. For the nine months ended September 30, 2009 weighted average shares outstanding increased over the prior year period due to the equity issue completed in May 2009 and the 94 million shares issued in conjunction with the Cyries acquisition in March 2008 being outstanding for the entire period in 2009.

Capital Expenditures

    
    -------------------------------------------------------------------------
                      Three months ended             Nine months ended
                            Sept 30,                      Sept 30,
                  ----------------------------- -----------------------------
    ($ thousands)    2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------

    Land              $117    $3,204       (96)   $3,915   $24,333       (84)
    Seismic            388     2,143       (82)    2,610     6,157       (57)
    Drill,
     complete &
     facilities      4,452    26,082       (83)   37,994    68,299       (45)
    Capitalized
     G&A             1,011       985         3     3,719     2,775        34
    -------------------------------------------------------------------------
    Capital
     Expenditures    5,968    32,414       (82)   48,239   101,564       (53)
    Acquisition/
     (dispositions)(38,748)   36,930      (205)  (41,126)   41,476      (199)
    ------------------------------------------- -----------------------------
    Net Capital
     Expenditures ($32,780)  $69,344      (147)   $7,113  $142,018       (95)
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Wells Drilled     Three months ended             Nine months ended
     (net)                  Sept 30,                      Sept 30,
                  ----------------------------- -----------------------------
                     2009      2008   % Change     2009      2008   % Change
    ------------------------------------------- -----------------------------

    Gas                1.0      13.1       (92)      5.8      34.7       (83)
    Oil                1.0       5.9       (83)      2.1      12.8       (84)
    Injector           0.8       1.0       (20)      0.8       2.0       (60)
    Dry                1.5       2.0       (25)      1.5       3.7       (59)
    ------------------------------------------- -----------------------------
    Total              4.3      22.0       (80)     10.2      53.2       (81)
    ------------------------------------------- -----------------------------
    Success rate
     (%)              65.1      90.9       (28)     85.3      93.0        (8)
    -------------------------------------------------------------------------
    

The Company completed $39 million of non-core property dispositions (primarily in West Central Alberta) in the third quarter of 2009 compared to $43 million of property acquisitions (primarily in South Alberta and the Peace River Arch area) in the same period of 2008. Land expenditures have decreased significantly in 2009 from the prior year periods in 2008 where the majority of the expenditures were spent in the second quarter in the BC and West Alberta core areas. Lower overall activity levels have reduced seismic expenditures approximately 82% in 2009 compared to the prior year periods in 2008. Similarly drill, complete, equip and facility expenditures were significantly reduced in the third quarter and for all of 2009 compared to the prior year periods as the Company has reduced activity levels with lower gas prices. During the third quarter of 2009 the Company commenced drill operations in East Alberta at Lloydminster (dry), Fort Saskatchewan (gas well) and in South Alberta at Grand Forks (water-flood injector). The Manyberries (oil well) in South Alberta followed when access to surface leases was permitted. This program continued in the fourth quarter and another 7 (6.5 net) oil wells have been drilled. In addition, the Company participated in one (0.5 net) non-operated dry hole in the third quarter of 2009. The Company has recorded Alberta drilling incentive credits of $0.5 million in the third quarter of 2009.

Selected Quarterly Data

    
                                2009                                    2008
    -------------------------------------------------------------------------
    Quarter
     ended         Sept 30   June 30    Mar 31    Dec 31   Sept 30   June 30
    -------------------------------------------------------------------------
    Production
     (boe/d)        15,219    17,137    18,165    18,001    18,507    18,146
    Revenues
     ($000)        $42,117   $44,936   $58,693   $70,656  $108,444  $127,175
    -------------------------------------------------------------------------
    Average
     realized
     prices
     ($/boe)        $30.08    $28.82    $35.93    $43.08    $64.32    $77.02
    Royalties
     ($/boe)         $4.80     $4.18     $7.43     $7.61    $13.71    $16.47
    Production
     expense
     ($/boe)        $12.36    $15.23    $15.23    $10.78    $10.62    $12.00
    Transportation
     expense
     ($/boe)         $1.01     $0.83     $0.88     $0.71     $0.77     $1.20
    Operating
     netback
     ($/boe)        $11.91     $8.58    $12.39    $23.56    $39.22    $47.35
    Net G&A
     expense
     ($/boe)         $2.64     $1.96     $1.92     $1.43     $1.88     $2.22
    Net interest
     expense
     ($/boe)         $1.83     $2.06     $0.99     $1.58     $1.48     $1.86
    -------------------------------------------------------------------------
    Funds from
     operations
     ($000)        $10,095    $5,378   $14,900   $31,152   $59,338   $52,824
      per boe
       ($/boe)       $7.21     $3.45     $9.11    $18.81    $34.85    $31.99
      per share
       - basic
       ($)           $0.05     $0.03     $0.09     $0.19     $0.36     $0.32
      per share
       - diluted
       ($)           $0.05     $0.03     $0.09     $0.19     $0.35     $0.31
    -------------------------------------------------------------------------
    Net income
     (loss)       ($16,487) ($22,978) ($14,275)($244,894)  $26,696      $672
      per boe
       ($/boe)     ($11.78)  ($14.73)   ($8.73) ($147.87)   $15.68     $0.41
      per share
       - basic
       ($)          ($0.08)   ($0.12)   ($0.09)   ($1.48)    $0.16     $0.00
      per share
       - diluted
       ($)          ($0.08)   ($0.12)   ($0.09)   ($1.48)    $0.16     $0.00
    -------------------------------------------------------------------------
    Net capital
     expenditures
     ($000)       $(32,780)   $4,196   $35,360   $74,043   $68,837   $31,408

    -------------------------------------------------------------------------
    Bank debt
     and working
     capital
     deficiency
     ($000) as
     at           $198,515  $241,652  $296,726  $276,130  $232,467  $222,129

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


                            ---------
                                2007
    ---------------------------------
    Quarter
     ended          Mar 31    Dec 31
    ---------------------------------
    Production
     (boe/d)        10,890     7,989
    Revenues
     ($000)        $55,564   $29,265
    ---------------------------------
    Average
     realized
     prices
     ($/boe)        $56.08    $39.84
    Royalties
     ($/boe)        $11.79     $8.12
    Production
     expense
     ($/boe)        $10.03    $11.71
    Transportation
     expense
     ($/boe)         $1.48     $1.09
    Operating
     netback
     ($/boe)        $32.78    $18.92
    Net G&A
     expense
     ($/boe)         $2.56     $2.64
    Net interest
     expense
     ($/boe)         $1.12     $1.37
    ---------------------------------
    Funds from
     operations
     ($000)        $28,511   $11,103
      per boe
       ($/boe)      $28.77    $15.11
      per share
       - basic
       ($)           $0.31     $0.16
      per share
       - diluted
       ($)           $0.31     $0.16
    ---------------------------------
    Net income
     (loss)         $1,689   ($3,149)
      per boe
       ($/boe)       $1.70    ($4.28)
      per share
       - basic
       ($)           $0.02    ($0.05)
      per share
       - diluted
       ($)           $0.02    ($0.05)
    ---------------------------------
    Net capital
     expenditures
     ($000)        $41,774   $17,610

    ---------------------------------
    Bank debt
     and working
     capital
     deficiency
     ($000) as
     at           $216,959   $61,012

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

Compared to the immediately preceding quarter, the Company's third quarter 2009 production declined 11% primarily due to the disposition of non-core properties (approximately 600 boed for the quarter), an increase in shut in gas production (on average an additional 400 boed was shut-in for the third quarter over the second quarter) and natural declines. Revenues decreased 5% as the slight improvement in commodity prices was more than offset by lower production. With slightly higher commodity prices and the shut-in of marginal gas production, royalties increased 15% on a per boe basis and from 14.5% to 15.8% on a percentage of revenue basis compared to the second quarter of 2009. Production expense declined 19% on a per boe basis between the second and third quarter of 2009 due to lower prior period costs recorded in the third quarter. Operating netback improved 39% on a per boe basis in the third quarter of 2009 compared to the second quarter of 2009 primarily due to lower production expense.

Between the second and third quarters of 2009 net G&A expense on a per boe basis increased 35% primarily due to higher office costs and lower production. Comparing the same time periods, net interest expense per boe decreased due to lower debt levels.

Funds from operations for the third quarter of 2009 almost doubled the level achieved in the second quarter of 2009 due to higher operating netback and the absence of the $1.8 million bad debt provision booked in the second quarter for the SemGroup receivable. Similarly the net loss between the periods decreased 28%.

Net capital expenditures decreased from the second quarter to the third quarter of 2009 due to $39 million of non core dispositions completed in July 2009. Excluding dispositions, capital expenditures between these periods were relatively flat as the majority of drilling operations didn't start until later in the third quarter due to surface access restrictions.

Bank debt and working capital deficiency fell $43 million or 18% between the second and third quarters of 2009 primarily due to the non core property dispositions completed in July. Bank debt and working capital deficiency has now been reduced $98 million since the end of the first quarter of 2009.

CAPITAL AND LIQUIDITY RESOURCES

The Company's liquidity depends upon cash flow from operations, supplemented as necessary by equity and debt financings, and its new credit facility.

As an oil and gas company, the Company has a declining asset base and therefore relies on ongoing exploration, development and acquisitions to replace production and add additional reserves. Future oil and gas production and reserves are highly dependent on the success of exploiting the Company's existing asset base and in acquiring additional reserves. To the extent the Company is successful or unsuccessful in these activities, funds from operations could be increased or reduced.

The Company currently has budgeted a drilling and exploration program of $67 million for 2009, net of drilling incentive credits. Of this amount approximately $48 million has been spent in the first nine months of 2009. For the fourth quarter of 2009 the Company is forecasting funds from operations of approximately $17 million versus capital expenditures of $19 million. The $2 million of capital expenditures in excess of funds from operations is expected to be funded through the Company's credit facility. The preliminary capital budget for 2010 is $95 million including drilling incentive credits, which is equal to forecast funds from operations. The capital budget tends to be weighted more towards the first and third quarters however the Company's credit facility is expected to be adequate to fund any cash shortfall in these periods. The Company continually monitors its capital spending program in light of the recent volatility with respect to commodity prices and Canadian dollar exchange rates to ensure the Company expects to be able to meet future anticipated obligations incurred from normal ongoing operations with funds from operations and draws on the Company's syndicated facility.

The Company's financial position improved during the quarter due to the $39 million of non-core property dispositions. As at September 30, 2009, the Company had drawn $200 million on its $252.5 million credit facility. At that time, the Company had a working capital surplus of $1.5 million, for a total net debt of $198.5 million.

Subsequent to the quarter end the Company's lending syndicate re-determined the borrowing base as part of its mid year review to $225 million and, as a result, no debt repayments are required. The borrowing base it next scheduled to be reviewed by April 30, 2010.

Operating Leases

The Company has entered into various operating leases with respect to its office space. The leases expire between September 30, 2012, and June 30, 2014, and require the following future minimum lease payments, by calendar year;

    
    -------------------------------------------------------------------------
                            Gross Commitment  Sublet Recovery  Net Commitment
                                 ($000)           ($000)           ($000)
    -------------------------------------------------------------------------
    2009                          $885            ($317)            $568
    2010                        $3,537          ($1,268)          $2,269
    2011                        $3,537          ($1,268)          $2,269
    2012                        $3,220            ($951)          $2,269
    2013                        $2,269                -           $2,269
    2014                        $1,135                -           $1,135
    -------------------------------------------------------------------------
    

The office space previously occupied by Cyries has been sublet on a full recovery flow-through basis commencing June 1, 2008 through to September 30, 2012.

Related Party Transactions

There were no related party transactions during the three months ended September 30, 2009.

Outstanding Common Shares and Options

As at September 30, 2009 and November 10, 2009, there were 210,985,384 common shares and 10,706,240 million options outstanding.

CRITICAL ACCOUNTING ESTIMATES

In the application of accounting policies, management is often required to make judgments based on underlying estimates and assumptions about future events and their effects. Underlying estimates and assumptions are based on historical experience and other factors that management believes to be reasonable under the circumstances. These estimates and assumptions are subject to change as new events occur and additional information is obtained. Reference should be made to the MD&A for the year ended December 31, 2008 for a description of the Company's most critical accounting estimates used in determining its financial results.

Impact of New Accounting Pronouncements

    
    Goodwill and Intangible Assets
    ------------------------------
    

Effective January 1, 2009, the Company adopted the Section 3064 Goodwill and Intangible Assets, which converges Canadian GAAP for goodwill and intangible assets with IFRS. The new standard provides more comprehensive guidance on intangible assets, particularly for internally developed intangible assets but had no current impact on the Company's financial reporting.

    
    New Accounting Standards issued Subsequent to Year End
    ------------------------------------------------------
    

In January 2009, the CICA issued three new accounting standards, Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements and Section 1602 Non controlling interests each of which are effective for fiscal years beginning on or after January 1, 2011 and further align Canadian GAAP with IFRS. Earlier adoption of these recommendations is permitted.

On January 20, 2009 the CICA issued EIC-173 "Credit Risk and the Fair value of Financial Assets and Financial Liabilities". Under the requirements of EIC-173, an entity's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and liabilities, including derivative instruments. Iteration adopted the requirements of EIC-173 effective January 1, 2009. This has had no material impact on Iteration's financial statements or additional disclosure.

    
    International Financial Reporting Standards ("IFRS")
    ----------------------------------------------------
    

The Canadian Accounting Standards Board has now confirmed that the use of IFRS will be required in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace current Canadian GAAP followed by the Company. The Company will be required to begin reporting under IFRS effective January 1, 2011 and will be required to provide information following IFRS for the comparative period. The Company is currently developing a changeover plan to complete the transition to IFRS by January 1, 2011, including the preparation of required comparative information. The key elements of the plan include:

    
    -   determine appropriate changes to accounting policies and required
        amendments to financial disclosures;

    -   identify and implement changes in associated processes and
        information systems;

    -   comply with internal control requirements;

    -   educate and train internal and external stakeholders.
    

At September 30, 2009, the Company had completed a diagnostic study of the anticipated impact of the transition to IFRS. The Company is currently analyzing the accounting policy alternatives and identifying implementation options for the corresponding process changes. As IFRS is expected to change prior to 2011, the impact of IFRS on the Company's consolidated financial statements is not reasonably determinable at this time.

Disclosure Controls and Procedures and Internal Controls over Financial Reporting

The Company has implemented disclosure controls and procedures, as defined in National Instrument 52-109-Certification of Disclosure in Issuer's Annual and Interim Filings ("NI52-109"), to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management, as appropriate, to allow timely decisions regarding required disclosures.

Management is also responsible for establishing and maintaining adequate internal control over the Company's financial reporting. The Company's internal control system was designed to provide reasonable assurance that all transactions are accurately recorded, that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company's assets are safeguarded. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedure may deteriorate.

The CEO and CFO are required to certify on the effectiveness of the Company's disclosure controls and procedures concurrent with filing its interim financial statements to the first nine months of 2009 in accordance with NI 52-109. The Company's CEO and CFO, together with management, have concluded, based on their evaluation of the effectiveness of the Company's disclosure controls and procedures as of September 30, 2009, that information required to be disclosed by the Company is (i) recorded, processed, summarized and reported within the time periods specified in Canadian securities legislation and (ii) accumulated and communicated to the Company's management, including its CEO and CFO, to allow timely decisions regarding required disclosure.

The CEO and CFO assessed the effectiveness of the Company's internal control over financial reporting as at December 31, 2008. In making its assessment, management engaged an external third party to evaluate the operating effectiveness of the internal controls to support their certifications. This evaluation identified certain duties within the accounting and finance department that could not be properly segregated, given the Company's limited staff level. However, none of the segregation of duty deficiencies was believed to have resulted in a misstatement in the financial statements as the Company relies on certain compensating controls, including a substantive periodic review of the financial statements and other financial information by the CEO and the audit committee. This weakness is considered to be a common deficiency for many smaller listed companies in Canada.

During the three months ended September 30, 2009, there were no material changes in the Company's disclosure controls and procedures or internal control over financial reporting, other than the continued implementation of a new information management system which, once fully functional, will allow management to obtain financial and operational information in a timelier manner. This system is expected to be fully functional prior to the end of 2009.

It should be noted that while the Company's CEO and CFO believe that the Company's disclosure controls and procedures and internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal controls over financial reporting will necessarily prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

ADVISORY - FORWARD-LOOKING INFORMATION

This MD&A was prepared on November 10, 2009 and is management's assessment of Iteration's historical operating and financial results for the three and nine months ended September 30, 2009. The reader should be aware that historical results are not necessarily indicative of future performance. This MD&A contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of Canadian securities laws. All statements other than statements of historical fact are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should"," expects", "projects", "plans", "anticipates" and similar expressions. In particular, this discussion contains forward-looking statements pertaining to the following:

    
    -   the timing and amount of production;
    -   natural gas, natural gas liquids and crude oil production levels;
    -   commodity prices for natural gas, natural gas liquids and crude oil;
    -   royalties payable and future royalty rates under the New Alberta
        Royalty Regime;
    -   royalties payable and future royalty rates under the Transitional
        Alberta Royalty program;
    -   the Alberta royalty incentive program including drilling credits
        announced on March 3, 2009;
    -   production expenses;
    -   transportation expenses;
    -   operating netbacks;
    -   general and administrative expenses;
    -   interest expenses and interest rates;
    -   Canadian dollar exchange rates;
    -   capital expenditures;
    -   capital and liquidity;
    -   funds from operations;
    -   debt levels;
    -   ratio of debt to funds from operations;
    -   number of net wells; and
    -   outlook for 2009 and 2010.
    

Certain forward-looking statements may constitute "financial outlooks" as contemplated by National Instrument 51-102 - Disclosure Obligations, which are provided for the purpose of forecasting Iteration's results and financial position for 2009 and 2010. Please note that the financial outlook in this MD&A may not be appropriate for purposes other than as stated above.

Forward-looking statements and information are based on the Company's current beliefs as well as assumptions made by, and information currently available to, the Company concerning anticipated financial performance, business prospects, strategies, regulatory developments, future natural gas, natural gas liquids and crude commodity prices, future natural gas, natural gas liquids and crude oil production levels, the ability to obtain equipment in a timely manner to carry out development activities, the ability to market natural gas successfully to current and new customers, the impact of increasing competition, the ability to obtain financing on acceptable terms, and the ability to add production and reserves through development and exploration activities. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

Undue reliance should not be placed on these forward-looking statements, which are based upon management's assumptions and are subject to known and unknown risks and uncertainties, including the business risks discussed below, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Iteration's actual results could differ materially from those anticipated in our forward-looking statements as a result of the risk factors set forth below and noted elsewhere in this MD&A which include but are not limited to:

    
    -   volatility in market prices for oil and natural gas;
    -   risks inherent in Iteration's operations;
    -   uncertainties associated with estimating reserves;
    -   competition for, among other things: capital, acquisitions of
        reserves, undeveloped lands and skilled personnel;
    -   incorrect assessments of the value of acquisitions;
    -   geological, technical, drilling and process problems;
    -   general economic conditions including fluctuations in the price of
        oil and natural gas;
    -   royalties payable in respect of Iteration's production;
    -   governmental regulation of the oil and gas industry, including
        environmental regulation;
    -   fluctuation in foreign exchange or interest rates;
    -   unanticipated operational events that can reduce production or cause
        production to be shut-in or delayed;
    -   stock market volatility and market valuations;
    -   counterparty credit risk;
    -   the need to obtain required approvals from regulatory authorities;
    -   environmental risks;
    -   insurance limitations risks;
    -   risks inherent in replacing reserves;
    -   reliance on operators and key employees;
    -   access to funding and issuance of debt;
    -   aboriginal claims; and
    -   availability of drilling equipment, access restrictions and cost
        inflation.
    

Further information regarding these factors may be found under the heading "Risk Factors" in the AIF. Readers are cautioned that this list of risk factors is not exhaustive.

The Company undertakes no obligation, except as required by applicable securities legislation, to update publicly or to revise any of the included forward looking statements, which are made as of November 10, 2009, whether as a result of new information, future events or otherwise. The forward looking statements contained herein are expressly qualified by this cautionary statement.

    
    Iteration Energy Ltd.
    Consolidated Balance Sheets
    (unaudited)

    As at                                          September 30, December 31,
    (in thousands of dollars)                           2009         2008
    -------------------------------------------------------------------------
    Assets

    Current
      Cash                                          $     1,422  $     6,832
      Accounts receivable (Note 9(f))                    27,849       43,996
      Prepaids and other current assets                   8,876       10,846
    -------------------------------------------------------------------------
                                                         38,147       61,674

    Property, plant and equipment (Note 4)              876,119      973,529

    -------------------------------------------------------------------------
                                                    $   914,266  $ 1,035,203
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY

    Current
      Bank indebtedness (Note 5)                    $   200,000  $   266,800
      Accounts payable and accrued liabilities
       (Note 6)                                          36,662       71,004
      Stock-based compensation payable (Note 8(c))           71            -
    -------------------------------------------------------------------------
                                                        236,733      337,804

    Future income taxes                                  72,003       92,539
    Unrealized loss on derivative contracts
     (Note 9(b))                                            399
    Leasehold inducements                                     -          193
    Asset retirement obligation (Note 7)                 42,324       43,323
    -------------------------------------------------------------------------
                                                        351,459      473,859
    -------------------------------------------------------------------------
    Commitments and contingencies (Note 10)

    Shareholders' equity
    Share capital (Note 8 (b))                          860,504      805,301
    Deficit                                            (297,697)    (243,957)
    -------------------------------------------------------------------------
                                                        562,807      561,344
    -------------------------------------------------------------------------
                                                    $   914,266  $ 1,035,203
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the unaudited interim consolidated financial
    statements.



    Iteration Energy Ltd.
    Consolidated Statements of Earnings (Loss), Comprehensive Earnings (Loss)
     and Deficit
    (unaudited)
    -------------------------------------------------------------------------
                              Three months ended         Nine months ended
                                    Sept 30,                  Sept 30,
    -------------------------------------------------------------------------
    (in thousands of
     dollars, except per
     share amounts)            2009         2008         2009         2008
    -------------------------------------------------------------------------
    Revenue
      Production
       revenue             $   42,117  $   108,444   $  145,746  $   291,183
      Unrealized
       loss on
       derivatives
       (Note 9(b))               (399)           -         (399)           -
      Royalties                (6,720)     (23,115)     (25,379)     (61,993)
      Other production
       revenue                    548          950          765        1,908
    -------------------------------------------------------------------------
                               35,546       86,279      120,733      231,098
    -------------------------------------------------------------------------
    Expenses
      Production               17,308       18,080       65,941       47,842
      Transportation            1,411        1,290        4,146        4,741
      General and admin-
       istrative                3,699        3,207        9,888        9,404
      Stock-based
       compensation
       (Note 8(c))                 36      (16,496)          71        4,412
      Interest on debt          2,557        2,526        7,390        6,705
      Depletion, de-
       preciation and
       accretion               32,335       40,639      104,835      101,239
    -------------------------------------------------------------------------
                               57,346       49,246      192,271      174,343
    -------------------------------------------------------------------------
    Income (loss)
     before the
     following                (21,800)      37,033      (71,538)      56,755
      Non-cash charge
       related to
       warrants                     -            -            -       (3,547)
      Provision for
       bankruptcy:
       SemGroup LP
       (Note 9 (f))                         (1,650)      (1,812)     (10,998)
      Recovery of
       investment tax
       credits                      -            -            -        1,820
    -------------------------------------------------------------------------

    Earnings (loss)
     before income
     taxes                    (21,800)      35,383      (73,350)      44,030
    -------------------------------------------------------------------------
    Income taxes
      Current income
       tax expense                 66            -           79          671
      Future income
       tax expense
       (recovery)              (5,379)       8,687      (19,689)      14,301
    -------------------------------------------------------------------------
                               (5,313)       8,687      (19,610)      14,972
    -------------------------------------------------------------------------

    Net earnings (loss)
     and comprehensive
     earnings (loss)       $  (16,487) $    26,696  $   (53,740) $    29,058
    Deficit, beginning
     of period             $ (281,210) $   (26,072) $  (243,957) $   (18,405)
    Charge on mod-
     ification of
     warrant terms                  -          310            -       (9,719)
    -------------------------------------------------------------------------

    Deficit, end of
     period                $ (297,697) $       934  $  (297,697) $       934
    -------------------------------------------------------------------------
    Basic earnings
     (loss) per common
     share (Note 8(d))     $    (0.08) $      0.16  $     (0.28) $      0.21
                          ---------------------------------------------------
    Diluted earnings
     (loss) per common
     share (Note 8(d))     $    (0.08) $      0.16  $     (0.28) $      0.20
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the unaudited interim consolidated financial
    statements



    Iteration Energy Ltd.
    Consolidated Statements of Cash Flows
    (unaudited)
    -------------------------------------------------------------------------
                              Three months ended         Nine months ended
                                    Sept 30,                  Sept 30,
    -------------------------------------------------------------------------
    (in thousands
     of dollars)               2009         2008         2009         2008
    -------------------------------------------------------------------------
    OPERATING ACTIVITIES
    Net earnings
     (loss)                $  (16,487) $    26,696  $   (53,740) $    29,058
    Add (deduct) non-
     cash items:
      Depletion, de-
       preciation and
       accretion               32,335       40,639      104,835      101,239
      Unrealized
       derivative loss
       (Note 9(b))                399            -          399            -
      Recovery of
       investment tax
       credits                      -            -            -       (1,820)
      Future income
       tax expense
       (recovery)              (5,379)       8,687      (19,689)      14,301
      Amortization of
       leasehold
       inducements               (127)         (41)        (193)        (136)
      Stock-based
       compensation
       expense
       (Note 8 (c))                36      (16,496)          71       (5,256)
      Non-cash charge
       related to
       warrants                     -            -            -        3,547
      Asset retirement
       expenditures              (682)        (147)      (1,310)        (257)
    -------------------------------------------------------------------------
                               10,095       59,338       30,373      140,676
    Net change in non-
     cash operating
     working capital
     (Note 11)                  7,254      (13,563)      16,449      (13,664)
    -------------------------------------------------------------------------
                               17,349       45,775       46,822      127,012
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Proceeds on sale of
     property plant and
     equipment                 38,748            -       41,126          646
    Acquisition of
     subsidiary                     -            -            -         (778)
    Acquisition of oil
     and gas properties          (163)     (36,930)        (163)     (41,344)
    Additions to oil
     and gas properties        (5,619)     (31,907)     (47,555)    (100,542)
    Additions to other
     capital assets              (186)        (507)        (521)      (1,022)
    Net change in non-
     cash investing
     working capital
     (Note 11)                 (2,682)      14,918      (32,427)     (16,733)
    -------------------------------------------------------------------------
                               30,098      (54,426)     (39,540)    (159,773)
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Proceeds from
     (repayment of) bank
     indebtedness             (46,000)      (9,000)     (66,800)      71,630
    Common shares issued            -            -       57,555        2,900
    Exercise of warrants            -         (261)           -      (21,112)
    Share issue costs             (55)           -       (3,200)         (30)
    Net change in non-
     cash financing
     working capital
     (Note 11)                   (110)           -         (247)           -
    -------------------------------------------------------------------------
                              (46,165)      (9,261)     (12,692)      53,388
    -------------------------------------------------------------------------

    Increase (decrease)
     in cash                    1,282      (17,912)      (5,410)      20,627
    Cash, beginning of
     period                       140       39,769        6,832        1,230
    -------------------------------------------------------------------------

    Cash, end of period         1,422       21,857        1,422       21,857
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See Note 11 for supplemental disclosure

    See accompanying notes to the unaudited interim consolidated financial
    statements



    Iteration Energy Ltd.

    Notes to the Unaudited Interim Consolidated Financial Statements
    As at and for the Three and Nine Months Ended September 30, 2009 and 2008
    (Tabular amounts in thousands of dollars, unless otherwise noted)

    1.  NATURE OF OPERATIONS

    Iteration Energy Ltd. ("Iteration" or the "Company") is a public company
    that trades on the Toronto Stock Exchange and is incorporated under the
    Business Corporations Act (Alberta).  Iteration is engaged in the
    exploration, development and production of petroleum and natural gas in
    Canada.

    2.  SIGNIFICANT ACCOUNTING POLICIES

    The unaudited interim consolidated financial statements of Iteration
    Energy Ltd. have been prepared in accordance with Canadian generally
    accepted accounting principles and are consistent with those policies set
    out in the audited consolidated financial statements for the year ended
    December 31, 2008, except as disclosed below. These interim consolidated
    financial statements do not include all disclosures provided in the
    December 31, 2008 financial statements and should be read in conjunction
    with those financial statements. The timely preparation of financial
    statements requires that management make estimates and assumptions, and
    use judgment regarding assets, liabilities, revenues and expenses. Such
    estimates primarily relate to unsettled transactions and events as of the
    date of the financial statements.  Accordingly, actual results may differ
    from estimated amounts. In the nine months ended September 30, 2009 the
    Company recorded additional production expenses for 2008 as costs accrued
    at year-end 2008 did not reflect late invoices from vendors and higher
    than expected charges from partners relating to 2008. In the opinion of
    management, these unaudited interim consolidated financial statements
    have been properly prepared within reasonable limits of materiality and
    within the framework of the significant accounting policies summarized
    below.

    Basis of Consolidation
    -----------------------
    These unaudited interim consolidated financial statements include the
    accounts of Iteration Energy Ltd., its wholly owned subsidiaries
    (CyriesEnergy Inc, Iteration Energy Inc. and Cyries Wyoming Inc.) and its
    wholly owned partnerships (Iteration Energy and Iteration Energy
    Partnership 2007). All inter-company transactions are eliminated on
    consolidation.

    Changes in Accounting Policies
    ------------------------------
    Effective January 1, 2009, the Company adopted the new CICA Handbook
    Section 3064, Goodwill and Intangible Assets, which converges Canadian
    GAAP for goodwill and intangible assets with International Financial
    Reporting Standards ("IFRS"). The new standard provides more
    comprehensive guidance on intangible assets, particularly for internally
    developed intangible assets. This new standard has no impact on the
    Company's current financial reporting.

    On January 20, 2009 the CICA issued EIC-173 "Credit Risk and the Fair
    value of Financial Assets and Financial Liabilities". Under the
    requirements of EIC-173, an entity's own credit risk and the credit risk
    of the counterparty should be taken into account in determining the fair
    value of financial assets and liabilities, including derivative
    instruments. Iteration adopted the requirements of EIC-173 effective
    January 1, 2009. This has had no material impact on Iteration's financial
    statements or additional disclosure.

    Future Accounting Policies

    Consolidated Financial Statements

    In January 2009, the CICA issued section 1601, "Consolidated Financial
    Statements," which will replace CICA section 1600 of the same name. This
    guidance requires uniform accounting policies to be consistent throughout
    all consolidated entities, which is not explicitly required under the
    current standard. Section 1601 is effective for Iteration on January 1,
    2011 with early adoption permitted. This standard will have no impact to
    the Company.

    Financial Instruments - Disclosures

    In May 2009, the CICA amended Section 3862, "Financial Instruments -
    Disclosures," to include additional disclosure requirements about fair
    value measurement for financial instruments and liquidity risk
    disclosures. These amendments require a three level hierarchy that
    reflects the significance of the inputs used in making the fair value
    measurements. Fair values of assets and liabilities included in Level 1
    are determined by reference to quoted prices in active markets for
    identical assets and liabilities. Assets and liabilities in Level 2
    include valuations using inputs other than quoted prices for which all
    significant outputs are observable, either directly or indirectly. Level
    3 valuations are based on inputs that are unobservable and significant to
    the overall fair value measurement. These amendments are effective for
    Iteration on December 31, 2009.

    Business Combinations

    In January 2009, the CICA issued section 1582 which establishes
    principles for the measurement of assets, liabilities and contingencies
    acquired at fair value, as well as recognizing acquisition-related and
    reorganization costs separately from the business combination within the
    consolidated statement of income. These recommendations are effective for
    business combinations occurring after January 1, 2011, although early
    adoption is permitted.

    International Financial Reporting Standards

    The Canadian Accounting Standards Board ("AcSB") has now confirmed that
    the use of IFRS will be required in 2011 for publicly accountable,
    profit-oriented enterprises. IFRS will replace current Canadian GAAP
    followed by the Company. The Company will be required to begin reporting
    under IFRS effective January 1, 2011 and will be required to provide
    information following IFRS for the comparative period. The Company is
    currently developing a changeover plan to complete the transition to IFRS
    by January 1, 2011, including the preparation of required comparative
    information. The key elements of the plan include:

        -  determine appropriate changes to accounting policies and required
           amendments to financial disclosures;
        -  identify and implement changes in associated processes and
           information systems;
        -  comply with internal control requirements;
        -  educate and train internal and external stakeholders.

    At September 30, 2009, the Company had completed a diagnostic study of
    the anticipated impact of the transition to IFRS. The Company is
    currently analyzing the accounting policy alternatives and identifying
    implementation options for the corresponding process changes. Until this
    analysis is complete and as IFRS is expected to change prior to 2011, the
    impact of IFRS on the Company's consolidated financial statements is not
    reasonably determinable at this time. The Company will continue to
    monitor standards development as issued by the International Accounting
    Standards Board ("IASB") and AcSB as well as regulatory developments as
    issued by the Canadian Security Administrators, which may affect the
    timing, nature or disclosure of its adoption of IFRS.

    3.  ACQUISITIONS AND DISPOSITIONS

    Cyries Acquisition

    On March 7, 2008, Iteration acquired Cyries Energy Inc. ("Cyries"), by
    Plan of Arrangement (the "Arrangement"). Under the Arrangement, Iteration
    issued 93,990,604 Iteration common shares to acquire the issued and
    outstanding common shares, warrants and performance shares of Cyries. The
    value attributed to each Iteration common share was $5.99 per share,
    representing the volume weighted average trading price on the Toronto
    Stock Exchange for an Iteration common share for the period from February
    27, 2008 to March 6, 2008. This period includes the three trading days
    before and after Iteration's announcement on March 3, 2008 of an increase
    in the exchange ratio.

    Upon completion of the Arrangement, Cyries became a wholly owned
    subsidiary of Iteration with the existing Iteration shareholders, option
    holders and warrant holders holding approximately 47% of the combined
    entity. Although Cyries shareholders held 53% of the Iteration Common
    Shares on a diluted basis following the arrangement, the transaction was
    accounted for as an acquisition of Cyries by Iteration, recognizing that
    Iteration is the surviving legal entity, Iteration paid a premium to
    acquire Cyries and Iteration's existing management and Board of Directors
    retained their positions. The financial statements for the nine month
    period ended September 30, 2008 incorporate the operations of Iteration
    Energy Ltd., Iteration Energy Inc., Iteration Energy and Iteration Energy
    2007 Partnership for the period from January 1, 2008 to September 30,
    2008 and the operations of Cyries Energy Inc. for the period from March
    8, 2008 to September 30, 2008.

    The acquisition is being accounted for using the purchase method and, the
    purchase price was allocated as follows:

    -------------------------------------------------------------------------
                                                                     ($000's)
    -------------------------------------------------------------------------
    Furniture and equipment                                             $969
    Property, plant and equipment                                    599,448
    Goodwill                                                         205,208
    Bank Debt                                                       (111,223)
    Working capital deficiency                                       (29,827)
    Future income tax liability                                      (75,950)
    Asset retirement obligation                                      (14,275)
    -------------------------------------------------------------------------
    Total purchase price                                            $574,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Consideration was comprised of :
      Common shares                                                 $563,004
      Transaction costs                                               11,346
    -------------------------------------------------------------------------
      Total consideration                                           $574,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note: Goodwill was written off at December 31, 2008.

    4.  PROPERTY PLANT AND EQUIPMENT

    -------------------------------------------------------------------------
                                                   September 30, December 31,
                                                        2009         2008
                                                      ($000's)     ($000's)
    -------------------------------------------------------------------------

    Oil and gas properties                          $ 1,294,966  $ 1,290,246
    Other                                                 3,447        2,925
    -------------------------------------------------------------------------
                                                      1,298,413    1,293,171
    Less accumulated depletion and depreciation         422,294      319,642
    -------------------------------------------------------------------------
                                                    $   876,119  $   973,529
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At September 30, 2009, unproved properties and seismic expenditures
    amounting to $124,901,000 (September 30, 2008: $147,788,000) have been
    excluded from the depletion calculation.  Future development costs on
    proven undeveloped reserves of $89,000,000 (September 30, 2008:
    $33,025,000) are included in the depletion calculation.

    For the three and nine months ended September 30, 2009, the Company
    capitalized $1,012,000 and $3,720,000 (three and nine months ended
    September 30, 2008: $1,045,000 and $2,895,000) of overhead directly
    related to exploration and development activities.

    5.  BANK INDEBTEDNESS

    Bank Indebtedness represents the drawn portion of a syndicated facility,
    net of any actual cash balances on hand. The credit facility is with a
    syndicate of lenders, consisting of Canadian Imperial Bank of Commerce,
    Bank of Nova Scotia, Bank of Montreal and Alberta Treasury Branch. The
    borrowing base on this facility is $252.5 million and consists of a $12.5
    million operating facility and a $240.0 million extendible revolving term
    facility. Subsequent to the end of the quarter the borrowing base was re-
    determined at $225 million in conjunction with the semi-annual review.
    This facility is secured by a $500 million floating charge demand
    debenture. This facility will mature April 30, 2010, and, at the
    Company's request, such Credit Facilities may be renewed for a period of
    not more than 364 days on agreement of the lenders. The pricing on this
    facility is as follows:

        a) For Canadian prime based loans or US base rate loans, at
           applicable prime plus a margin ranging from 175 to 325 basis
           points, depending on the ratio of consolidated debt to earnings
           before interest, taxes and depletion/depreciation/accretion for
           the preceding four quarters;

        b) For borrowings by way of Bankers' Acceptances or LIBOR loans, at
           the Bankers' Acceptance or LIBOR rate plus a stamping fee ranging
           from 275 to 425 basis points, depending on the ratio of
           consolidated debt to earnings before interest, taxes and
           depletion/depreciation/accretion for the preceding four quarters,
           and

        c) A standby fee on the unutilized portion of the facility of between
           82.5 and 127.5 basis points depending on the ratio of consolidated
           debt to earnings before interest, taxes and
           depletion/depreciation/accretion for the preceding four quarters.

    As at September 30, 2009, bank indebtedness was $200.0 million. The
    effective interest rate for the nine month period ended September 30,
    2009 is 3.9%.

    6.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

    The accounts payable and accrued liabilities consist of the following:

                                                   September 30, December 31,
                                                        2009         2008
                                                      ($000's)     ($000's)
    -------------------------------------------------------------------------

    Trade accounts payable                          $    26,748  $    57,474
    Joint venture accounts payable                        4,468        3,790
    Royalties payable                                     5,446        9,740
    -------------------------------------------------------------------------
    Total                                           $    36,662  $    71,004
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    7.  ASSET RETIREMENT OBLIGATION

    The total future asset retirement obligations were estimated by
    management based on the Company's net working interest in all wells and
    facilities, estimated costs to reclaim and abandon wells and facilities
    and the estimated timing of the costs to be incurred in future periods.
    The Company estimates the undiscounted cash flows related to asset
    retirement obligations, adjusted for inflation, to be incurred over the
    estimated reserve life of the underlying assets (which is estimated to be
    from 2009 through 2036) will total approximately $94,812,000 (December
    31, 2008: $98,079,000). The book value of the obligation at September 30,
    2009 is $42,324,000 (December 31, 2008: $43,323,000) using a discount
    rate of eight and one half percent for obligations incurred subsequent to
    September 30, 2008 (six and one half percent prior thereto) and an
    inflation rate of two percent. As at September 30, 2009, no funds have
    been set aside to settle this obligation.

                                                   September 30, December 31,
                                                        2009         2008
                                                      ($000's)     ($000's)
    -------------------------------------------------------------------------

    Balance, beginning of period                    $    43,323  $    18,897
    Liabilities incurred on acquisition of
     properties (note 3)                                      -       19,854
    Change in estimate                                     (712)           -
    Increase in liabilities from drilling activity          100        2,848
    Accretion expense                                     2,183        2,271
    Liabilities reduced on disposition of
     properties                                          (1,260)           -
    Settlement of liabilities                            (1,310)        (547)
    -------------------------------------------------------------------------
    Balance, end of period                          $    42,324  $    43,323
    -------------------------------------------------------------------------

    8.  SHARE CAPITAL

        (a)   Authorized

              Unlimited number of voting common shares without par value.
              Unlimited number of preferred shares issuable in series

        (b)   Common Shares Issued

    -------------------------------------------------------------------------
                             Nine months ended             Year ended
                                 30-Sep-09                  31-Dec-08
                         ----------------------------------------------------
                           Number of      Amount     Number of      Amount
                             Shares      ($000's)      Shares      ($000's)
    -------------------------------------------------------------------------

    Balance, beginning of
     period               166,020,384  $   805,301   71,029,780  $   238,586
    Shares issued on
     public offerings      44,965,000       57,555            -            -
    Shares issued on
     corporate acquisition
     (note 3)                       -            -   93,990,604      563,004
    Shares issued on
     exercise of warrants           -            -    1,000,000        3,733
    Share issue costs,
     net of tax effect of
     $848 (2008: $9)                -       (2,352)           -          (22)
    -------------------------------------------------------------------------
    Balance, end of
     period               210,985,384  $   860,504  166,020,384  $   805,301
    -------------------------------------------------------------------------

        (c)   Stock Options

    The Company has a stock option plan which provides for the issuance of
    options to its officers, employees and consultants allowing for the
    acquisition of up to a fixed maximum of 16,000,000 common shares. The
    dates on which options vest are set by the Compensation Committee of the
    Board of Directors at the time of grant. The exercise price of an option
    granted is the closing price of the Company's stock on the last trading
    date prior to the grant date. The dates on which options expire are also
    set by the Compensation Committee of the Board of Directors at the time
    of grant and cannot exceed ten years. Outstanding stock options to
    acquire common shares through the stock option plan are as follows:


                              September 30, 2009         December 31 ,2008
    -------------------------------------------------------------------------
                                          Weighted                  Weighted
                                           average                   average
                            Number of     exercise    Number of     exercise
                             Options        price      Options        price
                                              $                         $
    -------------------------------------------------------------------------
    Outstanding, beginning
     of period              9,782,445        $4.55    6,568,789        $3.49
    Granted                 4,119,287         1.20    5,343,065         5.47
    Granted in conjunction
     with surrender         1,306,707         1.40            -            -
    Exercised for cash              -            -   (1,642,409)       (2.94)
    Forfeited or cancelled (4,502,199)       (5.06)    (487,000)       (5.70)
    -------------------------------------------------------------------------
    Outstanding, end of
     period                10,706,240        $2.65    9,782,445        $4.55
    -------------------------------------------------------------------------
    Options exercisable,
     end of period          3,455,749        $3.54    3,759,285        $3.36
    -------------------------------------------------------------------------

    In June of 2009 the Company provided employees (excluding officers and
    directors) the option to surrender options they held with a strike price
    above $3.50 per share and in turn receive 40% of their surrendered number
    of options with a strike price at the then prevailing share price of
    $1.40. As a result, 3.4 million options were surrendered and 1.3 million
    options were issued

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

    -------------------------------------------------------------------------
                                Weighted
                                average
                     Number    remaining    Weighted     Number     Weighted
    Range of      outstanding contractual    average  exercisable    average
     exercise    September 30,    life      exercise September 30,  exercise
     prices           2009       (years)     price $      2009       price $
    -------------------------------------------------------------------------
    $0.70 to
     $2.89         5,599,269        3.62        1.27           -           -
    $2.90 to
     $4.00         2,977,638        0.77        2.99   2,728,638        2.96
    $4.01 to
     $5.00           410,000        1.62        4.67     154,000        4.54
    $5.01 to
     $9.00         1,719,333        2.52        6.05     573,111        6.05
    -------------------------------------------------------------------------
                  10,706,240        2.57        2.65   3,455,749        3.54
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company's stock option plan provides stock option holders the right
    to request, upon exercise, to receive a cash payment in exchange for
    surrendering the option provided the request is accepted by the Company.
    The cash payment is equal to the appreciated value of the stock option as
    determined based on the difference between the option's exercise price
    and the Company's share price at the time of exercise. For the three and
    nine month periods ended September 30, 2009, stock-based compensation
    expense of $36,000 and $71,000 respectively (2008: recovery of
    $16,496,000 and expense of $4,412,000 respectively), was recognized based
    on the change in the intrinsic value of outstanding stock options
    prorated over the vesting period. Future fluctuations in stock-based
    compensation expense or recoveries are dependent on the movement of the
    Company's share price and the number of options vested and outstanding.
    Based on the September 30, 2009 share price of $1.20, had all of the
    10,706,240 stock options outstanding been vested, aggregate stock-based
    compensation expense and a corresponding liability of $481,000 (December
    31, 2008: $nil) would have been recognized. Of this amount, $71,000 has
    been recognized as stock-based compensation payable at September 30, 2009
    (December 31, 2008: $nil).

        (d)   Per Share Amounts

    -------------------------------------------------------------------------
                              Three months ended         Nine months ended
                                 September 30,             September 30,
                               2009         2008         2009         2008
    -------------------------------------------------------------------------
    Weighted average
     common shares
     outstanding          210,985,384  166,020,287  190,232,310  141,606,728
    -------------------------------------------------------------------------
    Weighted average
     diluted common
     shares outstanding   210,985,384  168,045,908  190,232,310  144,693,253
    -------------------------------------------------------------------------

    Options outstanding for the quarter and nine months ended September 30,
    2009 are not included in the computation of diluted common shares
    outstanding as the Company realized a net loss during these periods.

    9.  FINANCIAL INSTRUMENTS

    The Company is exposed to a number of different financial risks arising
    from normal course business exposures, as well as the Company's use of
    financial instruments. These risk factors include market risks relating
    to commodity prices and interest rate risk, as well as liquidity risk and
    credit risk.

    a)  Market Risk

    Market risk is the risk or uncertainty arising from possible market price
    movements and their impact on the future performance of the business. The
    market price movements that could adversely affect the value of the
    Company's financial assets, liabilities and expected future cash flows
    include commodity price risk and interest rate risk.

    b)  Commodity Price Risk

    The Company's financial performance is closely linked to oil and natural
    gas prices. A change of $1.00 Cdn/mcf in natural gas prices at the
    wellhead would have changed the net loss for the nine months ended
    September 30, 2009 by approximately $11.9 million. A $5.00/bbl change in
    WTI for oil would have the effect of changing the net loss for the nine
    months ended September 30, 2009 by approximately $3.5 million.

    From time to time, the Company employs the use of various financial
    instruments to manage these commodity price exposures. At September 30,
    2009 the Company had financial instruments outstanding as follows:

    -------------------------------------------------------------------------
                       Daily              Contract                   Mark to
    Transaction Type  Volume     Units      Price         Term        Market
    -------------------------------------------------------------------------
                                                                     ($000's)
                                                      Oct 1/09 to
    AECO Gas Swap      1,000   Bbl/day   CDN $80.00     Dec 31/09        358
                                         CDN $70.00-  Jan 1/10 to
    WTI Oil Collar       200   Bbl/day   CDN $91.00     Dec 31/10         26
                                         CDN $70.00-  Jan 1/10 to
    WTI Oil Collar       200   Bbl/day   CDN $97.00     Dec 31/10        134
                                                      Nov 1/09 to
    AECO Gas Swap      3,500    GJ/day    CDN $4.98     Oct 31/10       (705)
                                                      Nov 1/10 to
    AECO Gas Swap      2,000    GJ/day    CDN $6.00     Oct 31/11       (212)
                                                                       ------
                                                                        (399)
    -------------------------------------------------------------------------

    c)  Interest Rate Risk

    The Company is exposed to interest rate risk as changes in interest rates
    may affect future cash flows and the fair value of its financial
    instruments. The Company's primary debt facility has a floating interest
    rate that will fluctuate based on prevailing market conditions and the
    Company's ratio of funded debt to trailing earnings before interest,
    taxes, and depletion/depreciation/accretion. Cash flows are sensitive
    to changes in interest rates on this instrument. Given the amount of debt
    employed, the Company's strategy is to manage interest rate risk within
    the current economic environment framework. If interest rates on the
    floating instrument were to change by 1.0%, it is estimated that net loss
    for the nine months ended September 30, 2009 would change by
    approximately $1.4 million.

    d)  Liquidity Risk

    Liquidity risk is the risk that an entity will encounter difficulty in
    meeting obligations associated with financial liabilities. The Company
    believes that it has access to sufficient capital through internally
    generated cashflows and external equity sources, as well as undrawn
    committed borrowing facilities to meet current spending forecasts. All of
    the trade liabilities mature in 2009 and the Company's bank loan is due
    on April 30, 2010.

    Scheduled reviews of the credit facility focus on the borrowing base
    supporting lending limits and are influenced by the lenders' willingness
    to lend in general, commodity price forecasts used to determine the
    lending base, lenders interest in particular business sectors, such as
    energy and the relative strength of the borrower. Given these
    constraints, there is no assurance that Iteration will be able to sustain
    its current borrowing base and may be required to reduce its outstanding
    loans. Should there be a requirement of the Company to reduce its
    outstanding loans, there are a number of options available including, but
    not limited to:

        1) Issuance of additional equity;
        2) Negotiation of incremental borrowings with subordinated lenders;
        3) Divestiture of assets; and
        4) Dedication of funds from operations.

    e)  Foreign Exchange Risk

    Foreign exchange risk is the risk that the fair value of the future cash
    flows will fluctuate because of changes in foreign exchange rates. The
    benchmark pricing for most natural gas and crude oil is based on US
    Dollars. Changes in the exchange rate of the Canadian dollar relative to
    the US dollar will indirectly impact the Canadian dollar commodity price
    realized by the Company and, as a result, cash flow. If foreign exchange
    rates were to change by 1% over the course of the quarter, it is
    estimated that net loss for the quarter would change by approximately
    $0.9 million.

    f)  Counterparty Credit Risk

    Counterparty credit risk is the risk that a customer or counterparty will
    fail to perform an obligation or fail to pay amounts due causing a
    financial loss. The Company's accounts receivable are with customers and
    joint venture partners in the oil and gas industry and are subject to
    normal credit risks. A small portion of the Company's production is
    currently sold through a joint venture partner to purchasers under normal
    industry sale and payment terms; the balance is sold to twenty five
    marketers also under normal industry terms. Of these twenty five
    marketers, sales to four account for approximately 80% of the Company's
    production revenue.

    As at September 30, 2009, the Company had an allowance for doubtful
    accounts of $17.0 million (December 31, 2008 $15.4 million) including a
    provision of $15.8 million relating to the filing for CCAA protection by
    SemCanada and SemCAMS, on trade accounts receivable that in the
    estimation of the Company may be impaired.

    As at September 30, 2009, the aging analysis of trade receivables, net of
    the allowance for doubtful accounts, is as follows:

    -------------------------------------------------------------------------
                                                                     ($000's)
                                                                 ------------
    Current                                                       $   16,929
    30 - 60 days                                                       2,846
    60 - 90 days                                                       1,175
    Greater than 90 days                                              23,932
                                                                 ------------
    Total                                                             44,882
      Less allowance for doubtful accounts                           (17,033)
                                                                 ------------
    Total                                                         $   27,849
    -------------------------------------------------------------------------
    Note: Greater than 90 days includes amounts receivable from for SemCanada
          and SemCAMS.

    g)  Fair Value of Financial Instruments

    Section 3855 of the CICA Handbook requires the initial measurement of all
    financial instruments at fair value with classification into one of five
    categories: loans and receivables, assets held to maturity, assets
    available for sale, other financial liabilities, and held for trading.

    Derivative instruments are classified as held-for trading and are
    recorded on the balance sheet at fair value with actual amounts received,
    or paid, on the settlement of the derivative financial instrument
    recorded in revenue. There were no financial assets on the balance sheet
    which were designated as available-for-sale.

    The fair value of a financial instrument is the amount of consideration
    that would be agreed upon in an arm's length transaction between
    knowledgeable, willing parties who are under no compulsion to act. Fair
    values for commodity price derivatives are provided by the financial
    intermediary with whom the transactions were completed and tested by the
    Company for reasonableness based on comparative market prices and the
    fixed prices of the contracts. In determining fair values, the Company
    uses quoted prices for identically traded commodities obtained from
    active exchanges such as the New York Mercantile Exchange and the Natural
    Gas Exchange, or obtained directly from brokers, or other publicly
    available market data providers.

    The Company has elected to classify its financial instruments as follows:

    -------------------------------------------------------------------------
                                 September 30, 2009       December 31, 2008
                               Carrying    Estimated   Carrying    Estimated
    ($000's)                      Value   Fair Value      Value   Fair Value
    -------------------------------------------------------------------------
    Loans and receivables
    Accounts receivable          27,849       27,849     43,996       43,996
    Other financial
     liabilities
    Bank indebtedness           200,000      200,000    266,800      266,800
    Accounts payable and
     accrued liabilities         36,662       36,662     71,004       71,004
    Stock-based compensation
     payable                         71           71          -            -
    Unrealized loss on
     derivative contracts           399          399          -            -
    -------------------------------------------------------------------------

    The carrying value of financial instruments included in current assets
    and current liabilities approximate their fair value, reflecting the
    short term maturity, normal trade credit terms, and/or the nature of
    these instruments.

    10. CONTINGENCIES

    Pursuant to a purchase and sale agreement, the Company has indemnified
    the purchaser of a former subsidiary company for up to $1,000,000 of
    income tax and legal expenses incurred with respect to specifically
    identified income tax returns. The Company accrued this obligation in the
    first quarter of 2008 and correspondingly increased the purchase price of
    related property, plant and equipment acquired as part of a series of
    transactions which occurred in conjunction with the disposition of the
    former subsidiary.

    11. SUPPLEMENTAL DISCLOSURE ON CONSOLIDATED STATEMENTS OF CASH FLOWS

    Changes in non-cash working capital were comprised of the following:


                              Three months ended         Nine months ended
                                  September 30,             September 30,
    (000's)                    2009         2008         2009         2008
    -------------------------------------------------------------------------

    Accounts receivable   $     4,573  $    (4,456) $    16,147  $     5,795
    Prepaids and other
     current assets             3,224         (492)       1,970       (1,253)
    Accounts payable and
     accrued liabilities       (3,335)       6,303      (34,342)     (34,939)
                         ----------------------------------------------------
    Net change            $     4,462  $     1,355  $   (16,225) $   (30,397)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                              Three months ended         Nine months ended
                                  September 30,             September 30,
    (000's)                    2009         2008         2009         2008
    -------------------------------------------------------------------------

    Net change by activity:
    Operating             $     7,254  $   (13,563) $    16,449  $   (13,664)
    Investing                  (2,682)      14,918      (32,427)     (16,733)
    Financing                    (110)           -         (247)           -
    -------------------------------------------------------------------------
    Net change            $     4,462  $     1,355  $   (16,225) $   (30,397)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Additional information:
    -------------------------------------------------------------------------
                              Three months ended         Nine months ended
                                  September 30,             September 30,
    (000's)                    2009         2008         2009         2008
    -------------------------------------------------------------------------

    Cash interest paid    $     2,401  $     2,503  $     7,425  $     6,784
                         ----------------------------------------------------
    Cash taxes paid       $        66            -  $        79  $       671
                         ----------------------------------------------------

    Included in cash interest paid during the three and nine month period
    ended September 30, 2009 are initial commitment fees of $752,000 related
    to the syndicated facility.

    12. CAPITAL MANAGEMENT

    The Company's principal business of the exploration, exploitation and
    development of oil and gas requires ongoing access to capital in order to
    allow the Company to successfully implement its growth strategy; and to
    provide adequate returns for shareholders and benefits for other
    stakeholders.

    The Company defines capital as share capital and bank indebtedness, net
    of cash and cash equivalents. The consolidated capital structure of the
    Company is as follows:

    -------------------------------------------------------------------------
                          As at September 30, 2009   As At December 31, 2008
                             ($000's)        %         ($000's)        %
    ----------------------------------------------- -------------------------
    Bank indebtedness     $   198,578         18.8      259,968         24.4
    Share capital             860,504         81.2      805,301         75.6
                         -------------------------- -------------------------
    Total                 $ 1,059,082        100.0  $ 1,065,269        100.0
    -------------------------------------------------------------------------

    As at September 30, 2009, the Company had a bank credit facility that
    contained covenants which limit the amount of debt that can be incurred
    by the Company. Throughout the periods presented, the Company has met
    those covenants.

    The Company actively manages its capital structure with the objective of
    maintaining sufficient flexibility to allow it to execute on its capital
    investment program, including investing in oil and gas acquisitions,
    exploration and development, which may or may not be successful. For this
    objective to be achieved, the Company continually strives to balance the
    proportion of debt to equity in its capital structure to take into
    account the level of risk being incurred through capital expenditures.

    In order to maintain or adjust the capital structure, the Company
    considers various factors including, but not limited to:

        a) projected debt to projected funds from operations ratio while
           attempting to finance an acceptable investment program, including
           incremental investment and acquisition opportunities;
        b) the current level of bank credit available from the banking
           syndicate;
        c) the level of bank credit that may be available from the banking
           syndicate as a result of anticipated changes in reserves;
        d) the availability of other sources of debt with different
           characteristics from the existing bank debt;
        e) the sale of assets;
        f) limiting the size of the investment or capital program; and
        g) issuing new common equity, if available, on favorable terms.

    13. COMPARATIVE AMOUNTS

    Certain amounts in 2008 have been reclassified to conform with the
    presentation for 2009.

    Directors, Officers and Auditors

    Current Officers and Directors of the Company are as follows;

    Officers
    --------
        Brian Illing               President and CEO
        Mark Ariss                 VP Exploration East
        Jane Mactaggart            VP Exploitation
        Carmen McKay-Illing        VP Corporate Affairs
        Myron Rak                  VP Production
        Peter Scott                VP Finance and CFO
        Kevin Stromquist           VP Exploration West

    Directors
    ---------
        Don Archibald (Chairman)   Independent Businessman (former Chairman &
                                    CEO - Cyries)
        Pat Breen P. Eng.          President - Foremost Income Fund
        Dallas Droppo Q.C.         Partner - Blake, Cassels and Graydon LLP
        Jim Grenon                 President - TOM Capital Associates
        Michael Hibberd            President - MJH Services Inc.
        Brian Illing P. Geol       President and CEO - Iteration Energy Ltd.
        Garry Peddle               Independent Businessman (former VP
                                    Corporate - Cyries)
        Robert Waters, CA          Senior VP and CFO - Enerplus Resources
                                    Fund

    Corporate Secretary
    -------------------
        Tony Grenon                Managing Director - TOM Capital Associates

    Auditors
    --------
        Ernst & Young LLP

    Corporate Counsel
    -----------------
        Bennett Jones LLP
    

Additional Information on the Company

The TSX has not reviewed this press release and does not accept responsibility for the accuracy of any of the data presented here-in.

Other information about the Company, including the AIF, is available through the internet on the Company's website at www.iterationenergy.com and on the Company's SEDAR profile at www.sedar.com.

%SEDAR: 00002576E

For further information: For further information: Mr. Brian Illing, President and CEO, or Mr. Peter Scott, VP Finance and CFO, at (403) 261-6883

Organization Profile

ITERATION ENERGY LTD.

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