Petrolifera continues to achieve excellent year over year financial and operating results in first half of 2007



    CALGARY, Aug. 7 /CNW/ - Petrolifera Petroleum Limited (TSX: PDP)
continued to achieve excellent year over year financial and operating results
in the First Half of 2007, despite difficulties in achieving objectives
previously established for the second quarter 2007. Operating and financial
results in the second quarter, while well above those achieved in 2006, were
lower on a successive quarterly basis. This was due to a number of factors,
ranging from delays in the completion of facilities, removal of the company's
contract operator, some natural and some elective reductions in well
productivity, the late arrival of drilling rigs, increases in inventory which
adversely impacted recorded sales volumes and a stronger Canadian dollar
relative to both the US dollar and the Argentinean Peso. All of the company's
production is in Argentina.

    Highlights are as follows:

    
    -   First Half 2007 sales up 196 percent over 2006 levels to 9,274 boe/d;
        Second Quarter 2007 sales up 65 percent to 6,932 boe/d
    -   First Half 2007 revenue of $75.2 million, up 176 percent over 2006
        levels; Second Quarter 2007 revenue up 49 percent to $28.1 million
    -   First Half 2007 cash flow from operations before working capital
        changes ("cash flow")(1) up 203 percent to $39.1 million from
        $12.9 million in 2006; Second Quarter 2007 cash flow up 53 percent to
        $14.5 million from $9.5 million in 2006
    -   First Half 2007 cash flow per share up 143 percent to $0.85 per
        share; Second Quarter 2007 cash flow per share up 20 percent to
        $0.30 per share
    -   Earnings strong: First Half 2007 earnings of $19.5 million ($0.43 per
        share), up 112 percent over last year despite the Second Quarter 2007
        decline to $4.5 million ($0.09 per share)
    -   Financial condition strong - no debt, $69.7 million working capital,
        including $66.5 million cash as at June 30, 2007
    -   Drilling program accelerating; up to five rigs expected to work for
        much of Second Half 2007, supported by up to four completion rigs; no
        dry holes yet drilled in Argentina

    Summary results

    -------------------------------------------------------------------------
                       Three months ended June 30   Six months ended June 30
    -------------------------------------------------------------------------
                                                %                          %
                           2007     2006   Change     2007     2006   Change
    -------------------------------------------------------------------------
    FINANCIAL
     ($000 except per
     share amounts)
    Total revenue        28,105   18,821       49   75,227   27,273      176
    Cash flow from
     operations before
     working capital
     changes(1)          14,504    9,470       53   39,119   12,905      203
      Per share,
       basic(1)            0.30     0.25       20     0.85     0.35      143
      Per share,
       diluted(1)          0.28     0.19       47     0.77     0.27      185
    Net earnings (loss)
     for the period       4,450    7,685      (42)  19,519    9,228      112
      Per share, basic     0.09     0.21      (57)    0.43     0.25       72
      Per share,
       diluted             0.09     0.16      (44)    0.38     0.19      100
    Capital
     expenditures        19,842    2,310      759   27,356    4,631      491
    Cash on hand                                    66,535   25,941      156
    Working capital                                 69,690   28,913      141
    Indebtedness                                         -        -
    Shareholders'
     equity                                        120,236   40,844      194
    Total assets                                   139,054   52,760      164

    OPERATING
    Daily sales volumes
      Crude oil - bbl/d   6,644    4,006       66    8,976    2,936      206
      Natural gas
       - mcf/d            1,726    1,181       46    1,792    1,211       48
      Barrels of oil
       equivalent
       - boe/d(2)         6,932    4,203       65    9,274    3,138      196
    Average selling
     prices
    Oil - $/bbl           45.17    50.71      (11)   45.34    50.14      (10)
    Natural gas - $/mcf    1.42     1.33        7     1.48     1.25       18
    Barrels of oil
     equivalent
     - $/boe(2)           43.65    48.71      (10)   44.16    47.40       (7)

    Common shares
     outstanding (000s)
    Weighted average
      Basic              47,816   37,399       28   45,835   36,721       25
      Diluted            51,303   48,777        5   50,997   48,112        6
    End of period
      Issued                                        50,084   37,855       32
      Fully diluted                                 53,382   52,172        2
    -------------------------------------------------------------------------
    (1) Cash flow from operations before working capital changes and cash
        flow per share do not have standardized meanings prescribed by
        Canadian generally accepted accounting principles ("GAAP") and
        therefore may not be comparable to similar measures used by other
        companies. Cash flow from operations before working capital changes
        includes all cash flow from operating activities and is calculated
        before changes in non-cash working capital. The most comparable
        measure calculated in accordance with GAAP would be net earnings.
        Cash flow from operations before working capital changes is
        reconciled with net earnings on the Consolidated Statements of Cash
        Flows and in the accompanying Management's Discussion & Analysis.
        Management uses these non-GAAP measurements for its own performance
        measures and to provide its shareholders and investors with a
        measurement of the company's efficiency and its ability to fund a
        portion of its future growth expenditures.
    (2) All references to barrels of oil equivalent (boe) are calculated on
        the basis of 6 mcf : 1bbl. Boes may be misleading, particularly if
        used in isolation. This conversion is based on an energy equivalency
        conversion method primarily applicable at the burner tip and does not
        represent a value equivalency at the wellhead.
    

    Petrolifera continued to make progress during the first half of 2007,
overcoming disappointing successive operating and financial results in the
second quarter of the year. Despite this temporary downturn, year over year
progress was considerable, as evidenced by the highlights and the statistical
table which precedes this letter. Revenue, cash flow and earnings growth was
strong for the first half of the year, buoyed of course by an exceptional and
record first quarter. However, a number of factors converged to make the
second quarter of 2007 difficult and disappointing, thus breaking our string
of successive quarterly growth which, in most categories, stretched back over
most of the past two years.
    Second quarter production and consequent sales declined rather sharply
due to a number of factors. Prominent among the influencing issues was the
late arrival of drilling rigs in Argentina, where all the company's crude oil
and natural gas production occurs on the Puesto Morales Block in the Neuquén
Basin. This delayed our systematic scheduling of both exploratory and infill
wells, upon which we were relying to not only offset normal productivity
declines but also to foster production growth. Additionally, we instituted
some self-imposed curtailment of production at certain wells, especially those
on the northern lobe, due to high gas/oil ratios and for sound reservoir
management purposes until our planned waterflood became operative. Our results
were also affected by unacceptable delays in completion of our field
facilities, which in some cases needed to be reengineered and resulted in the
company assuming full control of field operations from our contract operator. 
Water incursion in one of our best wells (1013) also affected overall
production levels. Also, the timing of sales under Argentinean crude oil
marketing procedures resulted in Petrolifera carrying increased short-run
inventory, thus reducing reported sales, compared to production, by
approximately 600 bbl/d during the second quarter 2007. It is likely the level
of crude oil in inventory will be reduced to more normal levels during the
balance of the year.
    We signaled this downturn to capital markets in July 2007, once we became
aware of the likelihood. Actual results ended up modestly lower than
originally anticipated primarily due to the performance of the 1013 well and
the aforementioned inventory adjustments. It should be noted that with the
exception of two wells, most of the company's wells are still flowing oil
wells and will only be placed on pump after natural flow ceases. In some
cases, productive zones in dual producers remain shut-in until the second zone
stops flowing before artificial lift can be employed. The decline experienced
is not inexorable but in fact is reversible, with over 1,500 bbl/d of
estimated productivity to be reinstated in existing wells during the balance
of the year.
    Despite the challenges, we remain optimistic for the full year. We have
new discoveries at 1028, 1022, 1027 and 1056 at Puesto Morales. The 1028 well
was completed at shallow depths in the Centenario Formation, after having
flowed light gravity (46 degrees API) oil at rates up to 1,500 bbl/d on test. 
Centenario oil was recovered during drilling of the 1027 well, but was not
tested after the Sierras Blancas Formation flowed over 2,400 bbl/d on test. A
shallow twin well to the 1027 producer is scheduled to evaluate the Centenario
during the balance of 2007 and Petrolifera also plans more drilling near the
1028 discovery.
    Disappointing drilling results were obtained from the Sierras Blancas
Formation during the drilling of the RN.PM.Ox-1001 well ("O-1001") on the
southern half of the Puesto Morales Block. While the well tested over
1.8 mmcf/d of natural gas, it was accompanied by water at rates which would
preclude commercial exploitation. The zone was plugged off and uphole testing
of the Loma Montosa or Quintuco Formation for oil and natural gas will proceed
later in the year. These results raise the risks associated with two other
prospective Sierras Blancas structures identified by the late 2006 3D seismic
program and, as noted below, this will impact on our outlook and guidance for
the balance of 2007.
    Perhaps the most important Argentinean development for the company since
our last report was the drilling of wells on the Rinconada Block offsetting an
old previously-suspended well which recovered oil in the 1970's when the lands
were controlled by YPF. Our Rinconada 1001 well, which was drilled to just
over 1,000 meters on a large stratigraphic/structural feature covering up to
90 square kilometers, flowed light gravity 34 degree API crude oil to surface
on test at rates of approximately 690 bbl/d. This was followed up by
successful drilling at the Rinconada 1003 well, which after a frac initially
flowed at similar rates but is being placed on pump. Remedial work also
resulted in recovery of oil from the old Rinconada 6 well.
    A total of 22 new well locations have been licensed on the Rinconada
Block and Petrolifera anticipates assigning one drilling rig (and possibly a
second drilling rig) and one completion rig to this multi-well program for the
balance of 2007. With continued success, this project could result in material
reserve and production additions by year-end 2007 as the company could drill
up to 19 wells before year end 2007.
    To consolidate our land position on this play, Petrolifera was successful
in securing the 253,000 acre Vaca Mahuida Concession at a competitive auction
held by the government of the Province of Rio Negro. This block is contiguous
with Rinconada, thereby providing protection for the continuation of the
shallow Sierras Blancas crude oil play as well as affording new exploration
opportunities. Petrolifera committed to reprocess 560 square kilometers of
existing 3D seismic, secure an additional 1,150 square kilometers over the
block and drill twelve exploratory wells during the ensuing three years,
together with agreeing to pay a 23 percent royalty, higher than the Puesto
Morales/Rinconada contract. Subsequently, a decision was made to farm out a
portion of this commitment to a third party on a two for one basis, thereby
leaving Petrolifera with a 75 percent interest while incurring 50 percent of
the associated commitment. This is in keeping with the company's risk
management strategy.
    Subsequent to the reporting period, Petrolifera bid on the Angostura
Block in Rio Negro Province. This block lies between our existing Puesto
Morales and Rinconada acreage and is of more situational than strategic
importance to the company. Results will not be known until sometime in August
2007. Also, Petrolifera was the sole bidder on another block ("Puesto
Guevara"), situated southeast of and contiguous with Vaca Mahuida. As sole
bidder, the company is awaiting confirmation if this will be awarded to it.
    Petrolifera now owns or controls an interest or pending interest in
approximately 900,000 acres along the eastern edge of Argentina's Neuquén
Basin. The company is extremely well-positioned. To process this acreage and
continue its planned drilling programs as now defined, during the balance of
2007 and into 2008 the company has now committed to four drilling rigs for
much of this period and expects to imminently add a fifth rig under a
short-term arrangement. Also, plans are being finalized to have access to up
to four completion rigs for much of the balance of 2007. As mentioned, this
should enable Petrolifera to drill 19 of the 22 new locations licensed on the
Rinconada block, drill many of the 66 identified Sierras Blancas, Centenario
and Loma Montosa locations on the Puesto Morales Block (including proposed
injectors for the pending waterflood and natural gas wells to deliver
non-associated gas alongside associated volumes through the company's new high
pressure natural gas pipeline to Medanito). Having access to these rigs and
completion rigs also means a major constraint which inhibited Second Quarter
results will be substantially removed for the balance of the year. Three of
the rigs and one of the completion rigs are presently operating under
long-term contracts, so aggressive drilling plans will no longer be
compromised by rig availability.

    Peru

    During the reporting period, Petrolifera advanced its high density
airborne gravity/magnetics survey over Ucayali Block 107. A late start caused
by bureaucratic delays in bringing an airplane into Peru placed the program in
a less-preferred weather window, but over 90 percent of the planned activity
has been completed. The company is also well-advanced in its planning to
proceed with its proposed 800 kilometer, $20 million 2D seismic program on
Block 107, which will proceed as soon as the formal approval of its
Environmental Impact Assessment ("EIA") is secured. This is expected
imminently. Once all the data is in hand and interpreted, drilling locations
will be selected and drilling EIA's will be submitted. In the interim,
discussions to secure a drilling rig or rigs for Block 107 and Maranon Block
106 are proceeding.
    Work on Block 106 in the Maranon Basin is also proceeding, albeit at a
somewhat slower pace than for Block 107 in the Ucayali Basin. Again, plans are
being finalized for an exploratory 3D seismic program over lands in proximity
to the Corrientes Field, which Block 106 surrounds. Also, 3D seismic is being
planned for the Concordia prospect in the southeast corner of Block 106. An
extensive 2D seismic program will supplement the 3D programs over near-term
drillable prospects.
    Subject to receipt of all regulatory approvals, drilling in Peru will
initially be conducted initially on Block 107. Specific timing will be
determined by rig availability.

    Colombia

    Petrolifera now holds interests in one license ("Sierra Nevada") and one
Technical Evaluation Agreement ("TEA") at Turpial in the Middle and Upper
Magdalena Basin onshore Colombia. The award of a third block, the Sierra
Nevada II TEA, which covers over 800,000 acres and surrounds much of the
aforementioned license, has been approved by the state agency of Colombia
("ANH") and should be completed in the very near future. This will give
Petrolifera an interest in over 1 million acres of prospective crude oil and
natural gas rights in Colombia. At this stage the company is committed to
modest work programs on the TEA's and plans a 13,000 foot exploratory well on
the Sierra Nevada license in late 2008.

    General and Outlook

    Petrolifera remains optimistic about its full year outlook and also
remains enthusiastic about its growth potential. The impact of the second
quarter, the outcome of the O-1001 well in the southern portion of the Puesto
Morales Block (which increased the risk profile for similar new Sierras
Blancas prospects in this region) and the delay of the impact of the
completions of the company's various facilities and related infrastructure
have resulted in a reworking of outstanding forecasts and guidance. Other
factors include the continuing strength of the Canadian dollar, mitigated by
our enthusiasm for drilling results to date at Rinconada. As a consequence we
now estimate full year crude oil production will average 10,000 bbl/d for
2007, down from our earlier estimate of 12,400 for the full year. On a boe
basis, we now forecast full year rates at 10,800 boe/d compared to our earlier
estimate of 13,300 boe/d. Our fourth quarter average production rate is now
targeted at 15,000 boe/d, compared to our previous guidance of 18,700 boe/d
and our December exit rate is now forecast at 15,000 bbl/d of crude oil and
2,500 boe/d of natural gas, for a total of 17,500 boe/d, compared to previous
guidance of 21,000 boe/d. As a consequence and with strong crude oil markets,
our full year 2007 cash flow is forecast to range between $90-$100 million
with a fourth quarter cash flow forecast at approximately $30-35 million, a
modest decline from our previously published guidance. We will be profitable,
should end the year with positive working capital and with no debt after
conducting our anticipated capital program in Argentina, Colombia and Peru of
up to $145 million, largely back ended for the year. A substantial investment
is being made in Argentina facilities due to continued drilling success.
    Petrolifera is fortunate to control over 7 million acres of petroleum and
natural gas rights in three attractive jurisdictions in South America, namely
Argentina, Peru and Colombia. These countries are generally considered to have
attractive contract terms and opportunities. Your company is certainly not
short of opportunities which can materially affect our future production and
financial results. We remain optimistic we will drill approximately 55 wells
in Argentina during 2007. We have not yet drilled any dry holes (O-1001 tested
3.1 mmcf/d of uphole Loma Montosa natural gas) and we have underutilized
productive capacity and an abundance of prospects, (low to high risk, with
appropriately calculated related potential), to evaluate over the ensuing
three to five years. This balance of risk to reward should serve us well in
managing risk as we move through the decade
    As previously reported during the second quarter we hired Mr. Kristen J.
Bibby and he was appointed Vice President, Finance and Chief Financial
Officer. Mr. Bibby is a Chartered Accountant and has experience with other
international junior oil companies prior to his hire. We welcome him to our
team. Also, we welcome new hires in both Argentina and Peru as we expand our
operations and activity in both countries. Finally, we again thank Mr. Richard
R. Kines, Connacher's Vice President, Finance and Chief Financial Officer, for
his assistance during Petrolifera's development since its formation in
November 2004.

    MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

    The following is dated as of August 7, 2007 and should be read in
conjunction with the unaudited consolidated financial statements of
Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the six
months ended June 30, 2007 as contained in this interim report and the MD&A
and audited financial statements for the years ended December 31, 2006 and
2005 as contained in the company's 2006 Annual Report. Additional information
relating to Petrolifera, including its Annual Information Form for the year
ended December 31, 2006 is on SEDAR at www.sedar.com. The consolidated
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") and are presented in Canadian dollars.
This MD&A provides management's view of the financial condition of the company
and the results of its operations for the reporting periods indicated.
    Information in this report contains forward-looking information based on
current expectations, estimates and projections of future production, capital
expenditures, cash flow, working capital and available sources of financing.
It should be noted forward-looking information involves a number of risks and
uncertainties and actual results may vary materially from those anticipated by
the company. These risks and uncertainties include, but are not limited to,
political and economic conditions in the countries in which the company
operates, changes in market conditions, law or governing policy, operating
conditions and costs, operating performance, demand for crude oil and natural
gas, foreign currency exchange rate fluctuations, currency controls,
commercial negotiations, technical and economic factors and access to
services, equipment and facilities. Readers should review Petrolifera's Annual
Information Form for the year ended December 31, 2006 for a description of the
risk factors affecting Petrolifera. Throughout the MD&A, per barrel of oil
equivalent ("boe") amounts have been calculated using a conversion rate of six
thousand cubic feet of natural gas to one barrel of crude oil (6:1). The
conversion is based on an energy equivalency conversion method primarily
applicable to the burner tip and does not represent a value equivalency at the
wellhead. Boes may be misleading, particularly if used in isolation.

    
    FINANCIAL AND OPERATING REVIEW
    SALES VOLUMES, PRICING AND REVENUE

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                             June 30                 June 30
    -------------------------------------------------------------------------
    ($000 except where noted)       2007        2006        2007        2006
    -------------------------------------------------------------------------
    Daily sales volumes
      Oil - bbl/d                  6,644       4,006       8,976       2,936
      Natural gas - mcf/d          1,726       1,181       1,792       1,211
      Total - boe/d                6,932       4,203       9,274       3,138
    Average selling prices
      Crude oil - $ per bbl        45.17       50.71       45.34       50.14
      Natural gas - $ per mcf       1.42        1.33        1.48        1.25
      Revenue per boe              43.65       48.71       44.16       47.40
    West Texas Intermediate
     (WTI) (US$ per bbl)           65.03       70.70       61.60       67.09
    Petroleum and natural gas
     sales ($000)                 27,537      18,629      74,135      26,924
    Interest and other income
     ($000)                          568         192       1,092         349
    -------------------------------------------------------------------------
    Total revenue ($000s)         28,105      18,821      75,227      27,273
    -------------------------------------------------------------------------
    

    Petroleum and natural gas revenues for the six months ended June 30, 2007
were $74.1 million (six months ended June 30, 2006 - $26.9 million) on sales
of 9,274 boe/d (2006 - 3,138 boe/day), a year-over-year increase of
175 percent. Petroleum and natural gas revenues for the second quarter of 2007
were $27.5 million on sales of 6,932 boe/d, an increase of 48 percent compared
to the second quarter of 2006 revenues of $18.6 million (4,203 boe/d). The
substantial increases in revenue resulted from higher oil and natural gas
production and resultant sales volumes arising from the company's successful
drilling program. All sales were from the company's Puesto Morales/Riconanda
block in Argentina. Petroleum and natural gas revenues in the second quarter
2007 were down 41 percent from the first quarter of 2007, due to the late
arrival of rigs to drill new wells, a build in the volume of oil in inventory
during the quarter, oil production curtailments awaiting completion of
facilities and some productivity declines in key wells. The company expects to
reverse these declines and experience restored growth in the second half of
the year.
    Crude oil sales volumes increased substantially from the first half of
2006. New discoveries resulted in sales volumes rising to an average of
8,976 bbl/d for the first half of the year compared to 2,936 bbl/d for 2006.
For the six months ended June 30, 2007 sales of crude oil represented 97
percent of the company's sales volumes compared to 94 percent for the six
months ended June 30, 2006. The company's realized crude oil price was down 10
percent to average $45.34 per barrel for the six months ended June 30, 2007
(2006 - $50.14 per barrel). Second quarter average realized crude oil prices
were also down 10 percent compared to the second quarter of 2006. Natural gas
prices increased 18 percent to average $1.48 per mcf for the first six months
of 2007, reflecting some relaxation of regulated Argentinean natural gas
prices, which are still substantially below prices prevailing in North
American markets.  Second quarter natural gas prices increased seven percent
to $1.42 per mcf compared to $1.33 per mcf in the second quarter of 2006.
Argentinean crude oil selling prices reflect world prices for the respective
quality of oil, adjusted for the impact of Argentinean export taxes on
domestic sales prices. All of Petrolifera's production is sold in domestic
markets. Natural gas prices have been improving and are expected to continue
improving due to market conditions and new policy initiatives aimed at market
deregulation for industrial sales, although the effect of this improved
pricing has been  somewhat offset by the strengthening of the Canadian dollar
relative to the Argentine peso, which reduces the realization expressed in
Canadian dollar terms.
    Interest and other income was $1.1 million in the six months ended June
30, 2007 (2006 - $0.3 million) and $0.6 million for the three months ended
June 30, 2007 (2006 - $0.2 million) related to interest earned on short-term
cash deposits.

    ROYALTIES

    Royalties represent charges against production or revenue by governments
and landowners. Included in royalties are revenue taxes levied by provincial
jurisdictions. Royalties in the first six months of 2007 were $9.8 million
($5.81 per boe) or 13 percent of oil and natural gas revenue, compared to
$3.8 million ($6.72 per boe) or 14 percent in the first six months of 2006.
Royalties for the second quarter of 2007 were $3.9 million ($6.19 per boe) or
14 percent of oil and natural gas revenue compared to $2.8 million ($7.20 per
boe) or 15% in the second quarter of 2006.

    OPERATING EXPENSES AND NETBACKS
    Company Netbacks(1)
    
    -------------------------------------------------------------------------
                                        Three months ended  June 30
    -------------------------------------------------------------------------
    ($000 except per boe amounts)       2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Average daily production
     (boe/d)                            6,932                   4,203
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 27,537    $  43.65    $ 18,629    $  48.71
    Interest and other income        568        0.90         192        0.50
    Royalties                     (3,906)      (6.19)     (2,753)      (7.20)
    -------------------------------------------------------------------------
    Net revenue                   24,199       38.36      16,068       42.01
    Operating costs               (3,507)      (5.56)     (1,692)      (4.42)
    -------------------------------------------------------------------------
    Corporate netback           $ 20,692    $  32.80    $ 14,376    $  37.59
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                          Six months ended June 30
    -------------------------------------------------------------------------
    ($000 except per boe amounts)       2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Average daily production
     (boe/d)                            9,274                   3,138
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 74,135    $  44.16    $ 26,924    $  47.40
    Interest and other income      1,092        0.65         349        0.61
    Royalties                     (9,761)      (5.81)     (3,818)      (6.72)
    -------------------------------------------------------------------------
    Net revenue                   65,466       39.00      23,455       41.29
    Operating costs               (8,119)      (4.84)     (2,530)      (4.45)
    -------------------------------------------------------------------------
    Corporate netback           $ 57,347    $  34.16    $ 20,925    $  36.84
    -------------------------------------------------------------------------
    (1) Calculated by dividing related revenue and costs by total boe sold,
        resulting in an overall company netback. Netbacks do not have a
        standardized meaning prescribed by GAAP and therefore may not be
        comparable to similar measures used by other companies. Nevertheless,
        Petrolifera's management uses netbacks as a performance measurement
        of operating efficiency and the prevailing royalty regime. A high
        ratio of netback to selling price is a positive indicator.

    Petrolifera's corporate netbacks were down seven percent over those
recorded in the first six months of 2006 and were down 13 percent for the
second quarter of 2007 compared to the second quarter of 2006. This primarily
reflects a decrease in the selling price of crude oil, and higher operating
expenses, offset by lower royalties and higher interest income. Petrolifera's
calculated unit netback for the first six months of 2007 at $34.16 per boe was
a healthy 77 percent of selling price in 2007 and was 75 percent for the
second quarter of 2007 at $32.80 per boe.

    Operating Netbacks by Product

    Per unit netbacks are calculated by dividing netbacks by sales volumes.

    Operating netbacks by product type are indicated below.

    -------------------------------------------------------------------------
    Three months ended
     June 30, 2007                   Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales             6,644 bbl/d             1,726 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 27,314    $  45.17    $    223    $   1.42
    Royalties                     (3,888)      (6.43)        (18)      (0.11)
    Operating costs               (3,430)      (5.67)        (77)      (0.49)
    -------------------------------------------------------------------------
    Field operating netback     $ 19,996    $  33.07    $    128    $   0.82
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Three months ended
     June 30, 2006                   Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales             4,006 bbl/d             1,181 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 18,486    $  50.71    $    143    $   1.33
    Royalties                     (2,746)      (7.53)         (7)      (0.07)
    Operating costs               (1,655)      (4.54)        (37)      (0.35)
    -------------------------------------------------------------------------
    Field operating netback     $ 14,085    $  38.64    $     99    $   0.91
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Six months ended
     June 30, 2007                   Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales             8,976 bbl/d             1,792 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 73,656    $  45.34    $    479    $   1.48
    Royalties                     (9,720)      (5.98)        (41)      (0.13)
    Operating costs               (8,026)      (4.94)        (93)      (0.29)
    -------------------------------------------------------------------------
    Field operating netback     $ 55,910    $  34.42    $    345    $   1.06
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Six months ended
     June 30, 2006                   Crude oil              Natural gas
    -------------------------------------------------------------------------
    ($000 except per
     boe amounts)                  Total     Per bbl       Total     Per mcf
    -------------------------------------------------------------------------
    Average daily sales             2,936 bbl/d             1,211 mcf/d
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                  $ 26,651    $  50.15    $    273    $   1.25
    Royalties                     (3,794)      (7.14)        (24)      (0.11)
    Operating costs               (2,478)      (4.66)        (52)      (0.24)
    -------------------------------------------------------------------------
    Field operating netback     $ 20,379    $  38.35    $    197    $   0.90
    -------------------------------------------------------------------------
    

    Operating costs in the year to date in 2007 increased on a per unit basis
from 2006 reflecting increased staffing levels needed to operate the larger
field operations compared to the prior year. Petrolifera anticipates operating
cost reductions when its new crude oil processing facilities are fully
functional and its crude oil pipeline is fully utilized.

    GENERAL AND ADMINISTRATIVE EXPENSES

    General and administrative ("G&A") expenses were $3.2 million in the
first six months of 2007 compared to $2.0 million for the first six months of
2006. G&A was $1.8 million in the second quarter of 2007 compared to
$0.9 million for the second quarter of 2006. These costs primarily consist of
salaries, insurance, the cost of independent reserve reports, travel and other
administrative expenses incurred in Canada, Argentina, Peru and Colombia. The
increase from 2006 is primarily attributable to increased staffing related to
expanded activity levels. On a per boe basis, G&A was reduced by 46% to $1.93
per boe of sales for the first six months of 2007 compared to $3.59 per boe in
2006. G&A of $0.6 million was capitalized in the first six months of 2007
(2006 - nil). Non-cash stock-based compensation costs of $4.2 million were
recorded in the first six months of 2007 (2006 - $2.0 million), reflecting the
company's increased share price and its consequent effect on the determination
of the fair value of all stock options granted and vested in the periods. The
company grants stock options on an annual basis to existing employees and to
new hires when employed.

    FOREIGN EXCHANGE

    The impact of fluctuations in the Argentinean peso and the US dollar
relative to the Canadian dollar, arising from settling foreign-denominated
transactions and from translating foreign denominated financial statements and
operating results of its integrated foreign operations, resulted in a foreign
exchange charge of $4.0 million in the first six months of 2007 (2006 -
$0.4 million charge) and a charge of $3.9 million for the second quarter of
2007 (second quarter 2006 - $0.4 million charge). The company's main exposure
to foreign currency risk relates to the pricing of crude oil sales, costs and
capital expenditures which are denominated in US dollars and Argentinean
pesos.

    DEPLETION, DEPRECIATION AND ACCRETION ("DD&A")

    DD&A is calculated using the unit-of-production method based on total
estimated proved reserves. DD&A in the first six months of 2007 was
$8.8 million (2006 - $1.7 million) or $5.26 per boe (2006 - $3.00 per boe). 
DD&A was $3.4 million or $5.45 per boe for the second quarter of 2007 (second
quarter 2006 - $1.1 million or $3.03 per boe). Accretion expense for the first
six months of 2007 which is included in DD&A expense was $0.1 million (2006 -
$0.01 million) to accrete the company's estimated asset retirement obligation.
These charges will continue at appropriate levels in the future to accrete the
currently booked discounted liability of $2.5 million to the estimated total
undiscounted liability of $7.2 million over the estimated remaining economic
life of the company's oil and gas properties. Capital costs of $7.5 million
related to unevaluated properties in Argentina and for major development
projects and other assets in the pre-production stage, principally related to
Peruvian assets, have been excluded from depletable costs (2006 -
$1.0 million). The increase in both the three and six month comparison periods
is mainly due to the increased cost of additions and infrastructure related to
the Argentina production. Additionally, future development costs of
$20.0 million for proved undeveloped reserves were included in the depletion
calculation.

    CEILING TEST

    Oil and gas companies are required to compare the recoverable value of
their oil and gas assets to their recorded carrying value at the end of each
reporting period. Excess carrying values over fair value are to be written off
against earnings. No write-down was required in the first six months of  2007
or for 2006.

    TAXES

    The current income tax provision of $14.0 million for the first six
months of 2007 (2006 - $6.0 million), primarily relates to income taxes in
Argentina. Additionally, a future income tax provision of $2.6 million for the
six month period (2006 - recovery of $0.5 million) was recorded to recognize
changes in tax pool balances. Taxes other than income taxes of $0.9 million
(2006 - nil) represent taxes charged on all banking transactions in Argentina
for the six month periods.
    Current income tax provision for the second quarter of 2007 is
$3.9 million (2006 - $4.0 million) and a future income tax provision of
$1.5 million (2006 - recovery of $0.4 million ) for a total income tax
provision in the second quarter of $5.4 million (second quarter of 2006
-$3.6 million). Taxes other than income taxes were $0.5 million (2006 - nil)
for the second quarter of 2007.

    
    NET EARNINGS AND SHARES OUTSTANDING

    -------------------------------------------------------------------------
                                        Three months ended June 30
    -------------------------------------------------------------------------
    ($000 except per boe)               2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Netback                     $ 20,692    $  32.80    $ 14,376    $  37.59
    General & administrative      (1,811)      (2.87)       (913)      (2.39)
    Stock-based compensation      (1,238)      (1.96)       (667)      (1.74)
    Finance charges                   (6)      (0.01)          -           -
    Foreign exchange gain
     (loss)                       (3,887)      (6.16)       (355)      (0.93)
    Taxes other than income
     taxes                          (508)      (0.81)          -           -
    Depletion, depreciation
     and accretion                (3,438)      (5.45)     (1,159)      (3.03)
    Income tax provision          (5,354)      (8.49)     (3,597)      (9.41)
    -------------------------------------------------------------------------
    Net earnings (loss) for
     the period                 $  4,450    $   7.05    $  7,685    $  20.09
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                          Six months ended June 30
    -------------------------------------------------------------------------
    ($000 except per boe)               2007                    2006
    -------------------------------------------------------------------------
                                   Total     Per boe       Total     Per boe
    -------------------------------------------------------------------------
    Netback                     $ 57,347    $  34.16    $ 20,925    $  36.84
    General & administrative      (3,232)      (1.93)     (2,040)      (3.59)
    Stock-based compensation      (4,159)      (2.48)     (2,019)      (3.55)
    Finance charges                  (29)      (0.02)         (3)      (0.01)
    Foreign exchange gain
     (loss)                       (4,020)      (2.39)       (433)      (0.76)
    Taxes other than income
     taxes                          (946)      (0.56)          -           -
    Depletion, depreciation
     and accretion                (8,834)      (5.26)     (1,702)      (3.00)
    Income tax provision         (16,608)      (9.89)     (5,500)      (9.68)
    -------------------------------------------------------------------------
    Net earnings (loss) for
     the period                 $ 19,519    $  11.63    $  9,228    $  16.25
    -------------------------------------------------------------------------

    In the first six months of 2007 the company reported net earnings of $19.5
million (2006 - $9.2 million), which equates to $0.43 per weighted average
basic and $0.38 per weighted average diluted share outstanding compared to
$0.25 per weighted average basic and $0.19 per weighted average diluted share
outstanding for the first six months of 2006. Net earnings for the second
quarter were $4.5 million (2006 - $7.7 million), which equates to $0.09 per
weighted average basic and $0.09 per weighted average diluted share
outstanding compared to $0.21 per weighted average basic and $0.16 per
weighted average diluted share outstanding for the second quarter of 2006. Net
earnings for three months and six months ended June 30, 2007 were adversely
affected by the impact of a strong Canadian dollar relative to the U.S. dollar
and the Argentinian peso, resulting in a significant non-cash charge against
earnings for both periods.
    In the first six months of 2007, the weighted average number of common
shares outstanding was 45.8 million (2006 - 36.7 million). In the first six
months of 2007, 5.2 million additional shares were included in the diluted
earnings per share calculations related to the potentially dilutive effect of
options and warrants. The weighted average number of common shares outstanding
was 47.8 million (2006 - 37.4 million) for the second quarter of 2007 and an
additional 3.5 million shares were included for the diluted per share
calculations related to the potentially dilutive effect of options and
warrants.

    As at the close of business on August 3, 2007, the company had the
following securities issued and outstanding:

    -   50,114,010 common shares;
    -   165,000 warrants; and
    -   3,102,667 stock options

    Details of the exercise rights and terms of the warrants and options are
noted in the Consolidated Financial Statements, included in this Interim
Report.

    LIQUIDITY AND CAPITAL RE

SOURCES Cash flow from operations before working capital changes ("cash flow"), cash flow per share and cash flow per boe do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow is reconciled with net earnings on the Consolidated Statement of Cash Flows and below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding; cash flow per boe is calculated by dividing cash flow by the quantum of crude oil and natural gas (expressed in boe) sold in the period. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. Reconciliation of net earnings to cash flow from operations before working capital changes: ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2007 2006 2007 2006 ------------------------------------------------------------------------- Net earnings (loss) for the period $ 4,450 $ 7,685 $ 19,519 $ 9,228 Add (deduct) Stock-based compensation 1,238 667 4,159 2,019 Depletion, depreciation, and accretion 3,438 1,159 8,834 1,702 Future income tax provision (recovery) 1,491 (396) 2,587 (477) Foreign exchange (gain) loss 3,887 355 4,020 433 ------------------------------------------------------------------------- Cash flow from operations before working capital changes $ 14,504 $ 9,470 $ 39,119 $ 12,905 ------------------------------------------------------------------------- Cash flow in the first six months of 2007 was $39.1 million (2006 - $12.9 million) or $0.85 per weighted average basic share and $0.77 per weighted average diluted share, (2006 - $0.35 per weighted average basic share and $0.27 per weighted average diluted share). Cash flow in the second quarter was $14.5 million (2006 - $9.5 million) which equates to $0.30 per weighted average basic share and $0.28 per weighted average fully diluted share (2006 - $0.25 per weighted average basic share and $0.19 per weighted average fully diluted share). Capital expenditures in the six months of 2007 totaled $27.4 million (2006 - $4.6 million). Of total investments, $24.7 million was invested in Argentina, mainly for costs to drill wells, constructing a crude oil treating facility, construction of secondary recovery facilities and construction of a high pressure natural gas sales pipeline in Argentina, $2.5 million was invested in Peru on EIA advancement and the preparation for field activity in the second half of 2007 and $0.2 million was invested in Colombia on establishing a small startup office and costs related to the acquisition of concessions. Capital expenditures for the three months ended June 30, 2007 were $19.8 million (2006 - $2.3 million). Petrolifera was in a strong financial position at June 30, 2007 with robust cash flow, $66.5 million of cash, $69.7 million of working capital and no debt. The company's 2007 capital program includes expenditures to satisfy work commitments related to the Peruvian license blocks. The company is ahead of schedule in meeting these requirements and in 2007 expects to complete geophysical work prior to drilling wells on each block. The company has sufficient cash balances and cash flow is being generated in Argentina to fund these planned capital expenditures. Required funds are being moved among Argentina, Barbados, Canada, Colombia and Peru. The company is also well-advanced in negotiations and has executed a mandate letter with an international bank for a reserve-based US $100 million revolving credit facility, with initial available draws of approximately US$60 million. This would further enhance Petrolifera's liquidity and financial capacity to take advantage of new investment opportunities. The company's only financial instruments are cash and cash equivalents, accounts receivable, accounts payable and income taxes payable. It maintains no off-balance sheet financial instruments. RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS Under the terms of a Management Services Agreement with Connacher Oil and Gas Limited ("Connacher"), which expired in May 2007, Connacher provided all management, operational, accounting and general and administrative services necessary or appropriate to manage and administer the company. The fee for this service was $15,000 per month. From time to time Connacher also paid bills on behalf of Petrolifera, for which it is reimbursed. During the second quarter this agreement was extended on a month-to-month basis and will be reassessed as Petrolifera achieves increasing independence and managerial capabilities. Connacher also provided certain support and services to Petrolifera in its pursuit of exporation opportunities in Colombia, for which it will be indemnified and reimbursed without further economic interest in the secured opportunities. SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING ESTIMATES Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in these judgments and estimates may have a material impact on the company's financial results and condition. The following discusses such accounting policies and is included in the MD&A to aid the reader in assessing the significant accounting policies and practices of the company and the likelihood of materially different results being reported. Management reviews its estimates regularly. The emergence of new information and changed circumstances may result in changes to estimates which could be material and the company might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies. The following assessment of significant accounting polices is not meant to be exhaustive. Oil and Gas Reserves Under Canadian Securities Regulators' "National Instrument 51-101-Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. In accordance with this definition, the level of certainty should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated proved reserves. In the case of probable reserves, which are less certain to be recovered than proved reserves, NI 51-101 states that it must be equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. Possible reserves are those reserves less certain to be recovered than probable reserves. There is at least a 10 percent probability that the quantities actually recovered will exceed the sum of proved plus probable plus possible reserves. The company's oil and gas reserve estimates are made by independent reservoir engineers using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, reservoir performance or a change in the company's plans. The reserve estimates are also used in determining the company's borrowing base for its credit facilities and may impact the same upon revision or changes to the reserve estimates. The effect of changes in proved oil and gas reserves on the financial results and position of the company is described under the heading "Full Cost Accounting for Oil and Gas Activities". Full Cost Accounting for Oil and Gas Activities The company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether successful or not. The aggregate of net capitalized costs and estimated future development costs is amortized using the unit-of-production method based on estimated proved oil and gas reserves. IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2007 the company adopted CICA Handbook sections 1530, 3251, 3855, and 3865 relating to Comprehensive Income, Equity, Financial Instruments - Recognition and Measurement, and Hedges, respectively. Under the new standards, additional financial statement disclosure, namely Consolidated Statements of Other Comprehensive Income, has been introduced. This statement identifies certain gains and losses, which in the company's case at this time, include only foreign currency translation adjustments arising from translation of the company's Argentinean business units which are considered to be self- sustaining, that are recorded outside the income statement. Additionally, a separate component of equity, Accumulated Other Comprehensive Income, has been introduced to disclose comprehensive income balances on a cumulative basis. Finally, all financial instruments, including derivatives, are recorded in the company's consolidated balance sheet and measured at their fair values. Under section 3855, the company is required to classify its financial instruments into one of five categories. The company has classified all of its financial instruments as Held for Trading, which requires measurement on the balance sheet at fair value with any changes in fair value recorded in income. This classification has been chosen due to the nature of the company's financial instruments. Transaction costs related to financial instruments classified as held for trading are recorded in income in accordance with the new standards. The adoption of section 3865, "Hedges", has had no effect on the company's consolidated financial statements as the company has no hedging transactions in place at this time. Over the next five years the CICA will adopt its new strategic plan for the direction of accounting standards in Canada, which was ratified in January 2006. As part of the plan, Canadian GAAP for public companies will converge with International Financial Reporting Standards ("IFRS") over the next five years. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS. The CICA has issued new Canadian accounting recommendations for additional disclosures about financial instruments and capital which will require disclosure and presentation of financial instruments about the nature and extent of risks arising from financial instruments to which the company is exposed. These recommendations are effective beginning January 1, 2008. DISCLOSURE CONTROLS AND PROCEDURES Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed, summarized and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. The company's Executive Chairman and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this MD&A, that the company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure. INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the company is responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. There have been no changes in the company's system of internal controls over financial reporting that would materially affect, or is reasonably likely to materially affect, the company's internal controls over financial reporting. It should be noted that while the company's Executive Chairman and Chief Financial Officer believe that the company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, and that the internal controls over financial reporting are adequately designed, they do not expect that the financial disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. In reaching a reasonable level of assurance, management necessarily is required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. 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. BUSINESS RISKS Petrolifera is exposed to certain risks and uncertainties inherent in the oil and gas business. Furthermore, being a smaller independent company, it is exposed to financing and other risks which may impair its ability to realize on its assets or to capitalize on opportunities which might become available to it. Additionally, Petrolifera operates in various foreign jurisdictions and is exposed to other risks including currency fluctuations, political risk, price controls and varying forms of fiscal regimes or changes thereto which may impair Petrolifera's ability to conduct profitable operations. The risks arising in the oil and gas industry include price fluctuations for both crude oil and natural gas over which the company has limited control; risks arising from exploration and development activities; production risks associated with the depletion of reservoirs and the ability to market production. Additional risks include environmental and safety concerns. The success of the company's capital programs as embodied in its productivity and reserve base could also impact its prospective liquidity and pace of future activities. Control of finding, development, operating and overhead costs per boe is an important criterion in determining company growth, success and access to new capital sources. To date, the company has utilized equity financing and has had a bias towards conservatively financing its operations under normal industry conditions to offset the inherent risks of international oil and gas exploration, development and production activities. The company is currently negotiating with an international bank for a credit facility that would provide the company with additional financial flexibility to fund its future growth. From time to time, the company may have to access capital markets for new equity to supplement internally generated cash flow and bank borrowings to finance its growth plans. Periodically, these markets may not be receptive to offerings of new equity from treasury, whether by way of private placement or public offerings. This may be further complicated by the limited market liquidity for shares of smaller companies, restricting access to some institutional investors. Periodic fluctuations in energy prices may also affect lending policies of the company's banker for new borrowings. This in turn could limit growth prospects over the short run or may even require the company to dedicate cash flow, dispose of properties or raise new equity to reduce bank borrowings under circumstances of declining energy prices or disappointing drilling results. While hedging activities may have opportunity costs when realized prices exceed hedged pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management continuously reviews the need to utilize such financing techniques. The company attempts to mitigate its business and operational risk exposures by maintaining comprehensive insurance coverage on its assets and operations, by employing or contracting competent technicians and professionals, by instituting and maintaining operational health, safety and environmental standards and procedures and by maintaining a prudent approach to exploration and development activities. The company also addresses and regularly reports on the impact of risks to its shareholders, writing down the carrying values of assets that may not be recoverable. OUTLOOK The company's business plan contemplates continued aggressive growth. To accomplish this, the company expects an active capital program of oil and gas exploration and development drilling in 2007. Forecast operating cash flow from growing production and available cash should be sufficient to finance Petrolifera's expected 2007 capital spending program. Petrolifera's capital program expenditures are largely discretionary, except for a total of US$4.6 million for which the company is obligated between the years 2007 and 2009, pursuant to the terms of the Peruvian exploration licenses and certain work obligations in both Argentina and Colombia which may entail seismic reprocessing, seismic acquisition and drilling obligations over periods of up to three years. Some of these obligations will be discharged within the 2007 capital budget. The company reserves the right to alter or amend its guidance throughout the year and all amendments replace and supersede prior estimations and projections. As contained in the Letter to Shareholders, Petrolifera has reduced its forecast production, revenue, cash flow from operations and capital budget for 2007 due primarily to late arrival of drilling rigs. Revised guidance as contained in the Letter to Shareholders will be issued to the public in the press release for quarterly results, posted on our website and on www.sedar.com. All estimates and statements which are not statements of historical facts are forward-looking statements. These statements involve inherent risks and uncertainties where actual results will differ and such differences could be material. There can be no assurance that Petrolifera will achieve the drilling results, levels of production, sales, cash flow or working capital, it might assume in developing its internal capital budget and financial plan. In addition, oil and gas prices are subject to fluctuation and there can be no assurance that the prices assumed for the company's internal plan, or any variation thereof, will be attained. Estimated production, cash flow and working capital are dependant on access to required services and equipment on a timely basis. QUARTERLY RESULTS ------------------------------------------------------------------------- 2005 2006 ------------------------------------------------------------------------- Three months ended Three months ended ------------------------------------------------------------------------- Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31 ------------------------------------------------------------------------- Financial results ($000 except per share amounts) - unaudited ------------------------------------------------------------------------- Total revenue 517 1,485 8,452 18,821 33,157 45,153 ------------------------------------------------------------------------- Cash flow from operations before working capital changes(1) 56 228 3,435 9,470 18,384 21,077 ------------------------------------------------------------------------- Basic, per share(1) - 0.01 0.10 0.25 0.46 0.53 ------------------------------------------------------------------------- Diluted, per share(1) - 0.01 0.07 0.19 0.38 0.41 ------------------------------------------------------------------------- Earnings (loss) for the period 5 (184) 1,543 7,685 15,683 14,983 ------------------------------------------------------------------------- Basic, per share - (0.01) 0.04 0.21 0.39 0.38 ------------------------------------------------------------------------- Diluted, per share - (0.01) 0.03 0.16 0.32 0.29 ------------------------------------------------------------------------- Capital expenditures 650 4,472 2,321 2,310 9,738 22,031 ------------------------------------------------------------------------- Cash on hand 2,315 19,744 21,999 25,941 36,206 51,008 ------------------------------------------------------------------------- Working capital surplus 44 17,887 21,959 28,913 41,361 43,038 ------------------------------------------------------------------------- Indebtedness 750 - - - - - ------------------------------------------------------------------------- Shareholders' equity 6,766 27,060 32,991 40,844 61,440 80,656 ------------------------------------------------------------------------- Total assets 9,251 31,581 38,989 52,760 81,226 118,517 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating results ------------------------------------------------------------------------- Sales volumes ------------------------------------------------------------------------- Crude oil - bbl/d 84 324 1,855 4,006 7,202 10,716 ------------------------------------------------------------------------- Natural gas - mcf/d 1,273 1,285 1,243 1,181 1,259 1,101 ------------------------------------------------------------------------- Equivalent - boe/d(2) 296 538 2,062 4,203 7,412 10,900 ------------------------------------------------------------------------- Pricing ------------------------------------------------------------------------- Crude oil - $/bbl 48.01 43.08 48.90 50.71 49.49 45.20 ------------------------------------------------------------------------- Natural gas - $/mcf 1.12 0.99 1.17 1.33 1.44 1.50 ------------------------------------------------------------------------- Selected highlights - $/boe(2) ------------------------------------------------------------------------- Weighted average selling price per boe 18.46 28.31 44.70 48.71 48.33 44.59 ------------------------------------------------------------------------- Interest and other income 0.51 1.67 0.84 0.50 0.30 0.44 ------------------------------------------------------------------------- Royalties 2.22 3.85 5.74 7.20 6.73 6.37 ------------------------------------------------------------------------- Operating costs 6.20 6.78 4.52 4.42 5.21 4.02 ------------------------------------------------------------------------- Netback(3) 10.57 17.78 35.28 37.59 36.69 34.64 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Common share information (000s) ------------------------------------------------------------------------- Shares outstanding at end of period 20,000 34,404 37,100 37,855 42,817 43,612 ------------------------------------------------------------------------- Fully diluted 31,080 51,118 52,172 52,172 52,671 52,704 ------------------------------------------------------------------------- Weighted average shares outstanding for the period ------------------------------------------------------------------------- Basic 20,000 20,721 36,036 37,399 40,442 43,418 ------------------------------------------------------------------------- Diluted 23,676 31,803 47,500 48,777 48,594 51,002 ------------------------------------------------------------------------- Volume traded during quarter (000) 26,745 8,697 16,732 18,086 ------------------------------------------------------------------------- Common share price ($) ------------------------------------------------------------------------- High 13.75 12.60 21.95 25.24 ------------------------------------------------------------------------- Low 6.55 8.15 10.92 14.71 ------------------------------------------------------------------------- Close (end of period) 12.25 11.00 20.90 17.65 ------------------------------------------------------------------------- QUARTERLY RESULTS ------------------------------------- 2007 ------------------------------------- Three months ended ------------------------------------- Mar 31 June 30 ------------------------------------- Financial results ($000 except per share amounts) - unaudited ------------------------------------- Total revenue 47,122 28,105 ------------------------------------- Cash flow from operations before working capital changes(1) 24,615 14,504 ------------------------------------- Basic, per share(1) 0.56 0.30 ------------------------------------- Diluted, per share(1) 0.49 0.28 ------------------------------------- Earnings (loss) for the period 15,069 4,450 ------------------------------------- Basic, per share 0.34 0.09 ------------------------------------- Diluted, per share 0.30 0.09 ------------------------------------- Capital expenditures 7,514 19,842 ------------------------------------- Cash on hand 59,155 66,535 ------------------------------------- Working capital surplus 58,811 69,690 ------------------------------------- Indebtedness - - ------------------------------------- Shareholders' equity 98,124 120,236 ------------------------------------- Total assets 137,840 139,054 ------------------------------------- ------------------------------------- Operating results ------------------------------------- Sales volumes ------------------------------------- Crude oil - bbl/d 11,333 6,644 ------------------------------------- Natural gas - mcf/d 1,858 1,726 ------------------------------------- Equivalent - boe/d(2) 11,643 6,932 ------------------------------------- Pricing ------------------------------------- Crude oil - $/bbl 45.43 45.17 ------------------------------------- Natural gas - $/mcf 1.53 1.42 ------------------------------------- Selected highlights - $/boe(2) ------------------------------------- Weighted average selling price per boe 44.47 43.65 ------------------------------------- Interest and other income 0.50 0.90 ------------------------------------- Royalties 5.59 6.19 ------------------------------------- Operating costs 4.40 5.56 ------------------------------------- Netback(3) 34.98 32.80 ------------------------------------- ------------------------------------- Common share information (000s) ------------------------------------- Shares outstanding at end of period 44,029 50,084 ------------------------------------- Fully diluted 53,280 53,382 ------------------------------------- Weighted average shares outstanding for the period ------------------------------------- Basic 43,800 47,816 ------------------------------------- Diluted 50,635 51,303 ------------------------------------- Volume traded during quarter (000) 7,202 6,211 ------------------------------------- Common share price ($) ------------------------------------- High 20.20 19.29 ------------------------------------- Low 16.05 16.60 ------------------------------------- Close (end of period) 19.14 17.04 ------------------------------------- (1) Cash flow from operations before working capital changes ("cash flow") and cash flow per share do not have standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures used by other companies. Cash flow from operations before working capital changes includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow from operations before working capital changes is reconciled with net earnings on the Consolidated Statement of Cash Flows and in the accompanying Management's Discussion & Analysis. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. (2) All references to barrels of oil equivalent (boe) are calculated on the basis of 6 mcf : 1 bbl. Boe may be misleading particularly if used in isolation. This conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalent at the wellhead. (3) Netback is a non-GAAP measure used by management as a measure of operating efficiency and profitability. It is calculated as petroleum and natural gas revenue and other income less royalties and operating costs. For operating netbacks per product and a reconsiliation of net backs to net income, see "MD&A". CONSOLIDATED BALANCE SHEETS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- June 30, December 31, 2007 2006 ------------------------------------------------------------------------- ($000) Assets Current Cash and cash equivalents $ 66,535 $ 51,008 Accounts receivable 18,557 26,868 Prepaid expenses 226 302 Inventories 596 374 Due from a related company 41 - ------------------------------------------------------------------------- 85,955 78,552 Future income tax asset 674 2,150 Property and equipment 52,425 37,815 ------------------------------------------------------------------------- $ 139,054 $ 118,517 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities Current Accounts payable and accrued liabilities $ 11,312 $ 14,066 Income taxes payable 4,953 21,416 Due to a related company - 32 ------------------------------------------------------------------------- 16,265 35,514 Asset retirement obligations (Note 3) 2,553 2,347 ------------------------------------------------------------------------- 18,818 37,861 ------------------------------------------------------------------------- Shareholders' equity Share capital, warrants and contributed surplus (Note 4) 61,742 39,275 Accumulated other comprehensive income (Note 2) (739) 1,667 Retained earnings 59,233 39,714 ------------------------------------------------------------------------- 120,236 80,656 ------------------------------------------------------------------------- $ 139,054 $ 118,517 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Revenue Petroleum and natural gas sales $ 27,537 $ 18,629 $ 74,135 $ 26,924 Interest and other income 568 192 1,092 349 ------------------------------------------------------------------------- 28,105 18,821 75,227 27,273 Royalties 3,906 2,753 9,761 3,818 ------------------------------------------------------------------------- 24,199 16,068 65,466 23,455 ------------------------------------------------------------------------- Expenses Operating 3,507 1,692 8,119 2,530 General and administrative 1,811 913 3,232 2,040 Stock-based compensation 1,238 667 4,159 2,019 Finance charges 6 - 29 3 Foreign exchange loss 3,887 355 4,020 433 Taxes other than income taxes 508 - 946 - Depletion, depreciation and accretion 3,438 1,159 8,834 1,702 ------------------------------------------------------------------------- 14,395 4,786 29,339 8,727 ------------------------------------------------------------------------- Earnings before income taxes 9,804 11,282 36,127 14,728 Current income tax provision 3,863 3,993 14,021 5,977 Future income tax provision (recovery) 1,491 (396) 2,587 (477) ------------------------------------------------------------------------- 5,354 3,597 16,608 5,500 ------------------------------------------------------------------------- Net Earnings 4,450 7,685 19,519 9,228 Retained earnings (deficit), beginning of period 54,783 1,363 39,714 (180) ------------------------------------------------------------------------- Retained earnings, end of period $ 59,233 $ 9,048 $ 59,233 $ 9,048 ------------------------------------------------------------------------- Net earnings per share (Note 6) Basic $ 0.09 $ 0.21 $ 0.43 $ 0.25 Diluted $ 0.09 $ 0.16 $ 0.38 $ 0.19 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND LOSS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months Six months ended ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2007 2007 Net earnings $ 4,450 $ 19,519 Foreign currency translation adjustment (net of tax) (1,450) (2,406) ------------------------------------------------------------------------- Comprehensive income $ 3,000 $ 17,113 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME AND LOSS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months Six months ended ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2007 2007 ------------------------------------------------------------------------- Balance, beginning of period $ 711 $ 1,667 Foreign currency translation adjustment (net of tax) (1,450) (2,406) ------------------------------------------------------------------------- Balance, end of period $ (739) $ (739) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Petrolifera Petroleum Limited (Unaudited) ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Cash provided by (used in) the following activities: Operating Net earnings $ 4,450 $ 7,685 $ 19,519 $ 9,228 Items not involving cash: Depletion, depreciation and accretion 3,438 1,159 8,834 1,702 Stock-based compensation 1,238 667 4,159 2,019 Foreign exchange loss 3,887 355 4,020 433 Future income tax provision (recovery) 1,491 (396) 2,587 (477) ------------------------------------------------------------------------- Cash flow from operations before working capital changes 14,504 9,470 39,119 12,905 Changes in non-cash working capital (Note 6(b)) (5,549) (2,956) (15,477) (3,818) ------------------------------------------------------------------------- 8,955 6,514 23,642 9,087 ------------------------------------------------------------------------- Financing Issue of common shares, net of share issue costs 17,874 678 18,308 3,636 ------------------------------------------------------------------------- Investing Development of oil and gas properties (19,842) (2,310) (27,356) (4,631) Changes in non-cash working capital (Note 6(b)) 2,050 (56) 4,352 (1,011) ------------------------------------------------------------------------- (17,792) (2,366) (23,004) (5,642) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Increase in cash and cash equivalents 9,037 4,826 18,946 7,081 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents, beginning of period 59,155 21,999 51,008 19,744 ------------------------------------------------------------------------- Impact of foreign exchange on foreign currency denominated cash balances (1,657) (884) (3,419) (884) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 66,535 $ 25,941 $ 66,535 $ 25,941 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents is comprised of: ------------------------------------------------------------------------- Cash in banks $ 11,569 $ 6,112 $ 11,569 $ 6,112 ------------------------------------------------------------------------- Term deposits 54,966 19,829 54,966 19,829 ------------------------------------------------------------------------- Cash and cash equivalents $ 66,535 $ 25,941 $ 66,535 $ 25,941 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary cash flow information - Note 6(c) ------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Petrolifera Petroleum Limited Period ended June 30, 2007 1. FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES The interim Consolidated Financial Statements include the accounts of Petrolifera Petroleum Limited and its wholly-owned subsidiaries (collectively, "Petrolifera" or the "company"), and are presented in accordance with Canadian generally accepted accounting principles. Through subsidiaries and foreign branches, Petrolifera is engaged in petroleum and natural gas exploration, development and production activities in South America. The interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the annual audited Consolidated Financial Statements for the years ended December 31, 2006 and 2005 except as provided below. The disclosures provided below do not conform in all respects to those included with the annual audited Consolidated Financial Statements. The interim Consolidated Financial Statements should be read in conjunction with the annual audited Consolidated Financial Statements and the notes thereto. 2. NEW ACCOUNTING STANDARDS Effective January 1, 2007 the company adopted CICA Handbook sections 1530, 3251, 3855 and 3865 relating to Comprehensive Income, Equity, Financial Instruments - Recognition and Measurement, and Hedges, respectively. Under the new standards, additional financial statement disclosure, namely the Consolidated Statement of Comprehensive Income, has been introduced. This statement identifies certain gains and losses, which in the company's case at this time include only foreign currency translation adjustments arising from translation of the company's Argentinean business units which are considered to be self-sustaining that are recorded outside the income statement. Additionally, a separate component of equity, Accumulated Other Comprehensive Income ("AOCI"), has been introduced in the consolidated balance sheet to record the continuity of other comprehensive income balances on a cumulative basis. The adoption of comprehensive income has been made in accordance with the applicable transitional provisions. Accordingly, the December 31, 2006 year end accumulated foreign currency translation adjustment balance of $1.7 million has been reclassified to AOCI. In addition, the change in the accumulated foreign currency translation adjustment balance for the six months ended June 30, 2007 of $2.4 million is now included in the Statement of Comprehensive Income (six months ended June 30, 2006 - nil). Finally, all financial instruments, including derivatives, are recorded in the company's consolidated balance sheet and measured at their fair values. Under section 3855, the company is required to classify its financial instruments into one of five categories. The company has classified all of its financial instruments as Held for Trading, which requires measurement on the balance sheet at fair value with any changes in fair value recorded in income. This classification has been chosen due to the nature of the company's financial instruments, which are of a short-term nature such that there are no material differences between the carrying values and the fair values of these financial statement components. Transaction costs related to financial instruments classified as held for trading are recorded in income in accordance with the new standards. The adoption of section 3865, "Hedges", has had no effect on the company's consolidated financial statements as the company does not account for its derivative financial instruments as hedges at this time. The effects of adopting these new accounting standards on the company's consolidated financial statements for the six months ended June 30, 2007 are as follows: ------------------------------------------------------------------------- Increase/(Decrease) ------------------------------------------------------------------------- Other comprehensive income $ (2,406) Accumulated other comprehensive income $ (2,406) ------------------------------------------------------------------------- Effective January 1, 2007 the company adopted the revised recommendations of CICA Handbook section 1506, Accounting Changes. The new recommendations permit voluntary changes in accounting policy only if they result in financial statements which provide more relevant and reliable financial information. Accounting policy changes must be applied retrospectively unless it is impractical to determine the period or cumulative impact of the change in policy. Additionally, when an entity has not applied a new primary source of GAAP that has been issued but is not yet effective, the entity must disclose that fact along with information relevant to assessing the possible impact that application of the new primary source of GAAP will have on the entity's financial statements in the period of initial application. As of January 1, 2008, the company will be required to adopt two new CICA handbook requirements, section 3862 "Financial Instruments - Disclosures" and section 3863 "Financial Instruments - Presentation" which will replace current section 3861. The new standards require disclosure of the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments, and how those risks are managed. The new presentation standard essentially carries forward the current presentation requirements. The company is assessing the impact of these new standards in its consolidated financial statements and anticipates that the main impact will be in terms of additional disclosures required. As of January 1, 2008 the company will be required to adopt CICA Handbook section 1535, "Capital Disclosures", which requires entities to disclose their objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. The company is assessing the impact of this new standard on its consolidated financial statements and anticipates that the main impact will be in terms of additional disclosures required. 3. ASSET RETIREMENT OBLIGATIONS At June 30, 2007 the estimated total undiscounted amount required to settle the asset retirement obligations was $7.2 million (December 31, 2006 - $6.3 million). These obligations are expected to be settled over the useful lives of the underlying assets, which currently extend up to 20 years into the future. This amount has been discounted using a credit- adjusted risk-free interest rate of six percent and an annual inflation rate of two percent. Changes to asset retirement obligations were as follows: ------------------------------------------------------------------------- Six months ended Year ended June 30, December 31, 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Asset retirement obligations, beginning of period $ 2,347 $ 467 Liabilities incurred 133 1,853 Changes in estimates - - Accretion expense 73 27 ------------------------------------------------------------------------- Asset retirement obligations, end of period $ 2,553 $ 2,347 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 4. SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS Authorized The authorized share capital is comprised of an unlimited number of common shares. Issued: ------------------------------------------------------------------------- Number Amount of Shares ($000) ------------------------------------------------------------------------- Share capital and warrants: Balance, share capital and warrants, December 31, 2006 43,612,503 $ 35,662 Issuance of common shares upon exercise of warrants 6,026,507 17,820 Issuance of common shares upon exercise of options 445,000 488 Assigned value of options exercised 169 ------------------------------------------------------------------------- Balance, share capital and warrants, June 30, 2007 50,084,010 $ 54,139 ------------------------------------------------------------------------- Contributed surplus: ------------------------------------------------------------------------- Balance, contributed surplus, December 31, 2006 $ 3,613 Assigned value of options exercised (169) Stock-based compensation expensed 4,159 ------------------------------------------------------------------------- Balance, contributed surplus, June 30, 2007 $ 7,603 ------------------------------------------------------------------------- Total share capital, warrants and contributed surplus: December 31, 2006 $ 39,275 June 30, 2007 $ 61,742 ------------------------------------------------------------------------- (a) Common Share Purchase Warrants For the six months ended June 30, 2007 and 2006 the company had warrants outstanding to acquire common shares, as follows: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Outstanding, beginning of period 6,194,672 14,351,947 Issued upon exercise of Broker Compensation Warrants - 72,000 Exercised/expired 6,029,672 (3,132,841) ------------------------------------------------------------------------- Outstanding, end of period 165,000 11,291,106 ------------------------------------------------------------------------- As at June 30, 2007, a total of 165,000 Common Share Purchase Warrants exercisable to acquire 165,000 common shares at $0.40 per share until October 17, 2008 were outstanding. (b) Stock Options As at June 30, 2007 and 2006 the company had stock options outstanding to acquire common shares, as follows: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Shares Price Shares Price ------------------------------------------------------------------------- Outstanding, beginning of period 2,896,667 $ 4.86 2,437,000 $ 1.04 Granted 681,000 18.89 907,000 11.57 Exercised (445,000) (1.10) (318,750) (0.90) ------------------------------------------------------------------------- Outstanding, end of period 3,132,667 8.44 3,025,250 4.21 ------------------------------------------------------------------------- Exercisable, end of period 1,383,666 $ 7.95 681,916 $ 4.53 ------------------------------------------------------------------------- All options have been granted for a period of five years. Options granted under the plan are generally fully exercisable after two or three years and expire five years after the date granted. The table below summarizes unexercised stock options. ------------------------------------------------------------------------- Range of Exercise Prices Number Weighted Outstanding Average Remaining Contractual Life at June 30, 2007 ------------------------------------------------------------------------- $0.50 - $2.00 1,466,667 3.0 $8.55 - $20.95 1,666,000 4.2 ------------------------------------------------------------------------- Total 3,132,667 ------------------------------------------------------------------------- In the first six months of 2007 a compensatory non-cash expense of $4.2 million (2006 - $2.0 million) was recorded as stock-based compensation, reflecting the amortization of the fair value of stock options over the vesting period. The second quarter stock-based compensation expense was $1.2 million (2006 - $0.7 million). The fair value of each option granted in 2007 is estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for grants as follows: ------------------------------------------------------------------------- Risk free Expected Expected interest rate life Volatility ------------------------------------------------------------------------- 2007 4.1 - 4.7% 4 years 70% - 72% 2006 4.1% 3 years 43% - 66% ------------------------------------------------------------------------- The weighted average fair value at the date of grant of all options granted in 2007 was $10.61 per option (2006 - $4.48 per option) 5. SEGMENTED INFORMATION The company has corporate offices in Canada and Barbados (combined to comprise the corporate segment), petroleum and natural gas operations in Argentina and exploration activities in Peru and Colombia. Financial information pertaining to these operating segments is presented below. ------------------------------------------------------------------------- Corporate Argentina Peru Colombia Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Three months ended June 30, 2007 Revenue, gross 271 27,834 - - 28,105 Net earnings (loss) (1,929) 6,694 (290) (25) 4,450 Property and equipment 316 47,198 4,708 203 52,425 Capital expenditures 14 17,805 1,820 203 19,842 Total assets 42,877 89,943 5,986 249 139,054 ------------------------------------------------------------------------- Three months ended June 30, 2006 Revenue, gross 192 18,629 - - 18,821 Net earnings (loss) (994) 8,679 - - 7,685 Property and equipment 60 9,628 1,311 - 10,999 Capital expenditures 64 2,014 232 - 2,310 Total assets 21,996 28,986 1,778 - 52,760 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Corporate Argentina Peru Colombia Total ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Six months ended June 30, 2007 Revenue, gross 552 74,675 - - 75,227 Net earnings (loss) (5,861) 25,750 (345) (25) 19,519 Property and equipment 316 47,198 4,708 203 52,425 Capital expenditures 48 24,655 2,450 203 27,356 Total assets 42,877 89,943 5,986 249 139,054 ------------------------------------------------------------------------- Six months ended June 30, 2006 Revenue, gross 349 26,924 - - 27,273 Net earnings (loss) (3,149) 12,377 - - 9,228 Property and equipment 66 9,628 1,311 - 10,999 Capital expenditures 64 4,010 557 - 4,631 Total assets 21,996 28,986 1,778 - 52,760 ------------------------------------------------------------------------- 6. SUPPLEMENTARY INFORMATION (a) Per share amounts The following table summarizes the common shares used in the per share calculations. ------------------------------------------------------------------------- Three months ended June 30 2007 2006 ------------------------------------------------------------------------- (000) ------------------------------------------------------------------------- Weighted average common shares outstanding 47,816 37,399 Dilutive effect of all stock options and all stock purchase warrants 3,487 11,378 ------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 51,303 48,777 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months ended June 30 ------------------------------------------------------------------------- (000) ------------------------------------------------------------------------- Weighted average common shares outstanding 45,835 36,721 ------------------------------------------------------------------------- Dilutive effect of all stock options and all stock purchase warrants 5,162 11,391 ------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 50,997 48,112 ------------------------------------------------------------------------- (b) Net change in non-cash working capital ------------------------------------------------------------------------- Three months ended June 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Accounts receivable $ 17,649 $ (8,836) Prepaid expenses 111 (78) Accounts payable and accrued liabilities 4,925 6,066 Inventories (255) - Income taxes payable (25,965) - Due from (to) a related company 36 (164) ------------------------------------------------------------------------- Total $ (3,499) $ (3,012) ------------------------------------------------------------------------- Operating $ (5,549) $ (2,956) Investing 2,050 (56) ------------------------------------------------------------------------- $ (3,499) $ (3,012) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months ended June 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Accounts receivable $ 8,311 $ (12,143) Prepaid expenses 76 (63) Accounts payable and accrued liabilities (2,754) 7,372 Inventories (222) - Income taxes payable (16,463) - Due from (to) a related company (73) 5 ------------------------------------------------------------------------- Total $ (11,125) $ (4,829) ------------------------------------------------------------------------- Operating $ (15,477) $ (3,818) Investing 4,352 (1,011) ------------------------------------------------------------------------- $ (11,125) $ (4,829) ------------------------------------------------------------------------- (c) Supplementary cash flow information ------------------------------------------------------------------------- Three months ended June 30 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Interest paid - - Income taxes paid 23,987 378 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months ended June 30 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Interest paid - 3 ------------------------------------------------------------------------- Income taxes paid 24,396 378 ------------------------------------------------------------------------- Forward-Looking Statements This press release contains forward-looking statements, including but not limited to future exploration and development plans, anticipated capital expenditures and sources of funding in respect thereof, forecast cash flow, production and year end working capital. All information regarding 2007 guidance constitutes forward-looking statements. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production, delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com. Forecast capital expenditures are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success and potential timing delays. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production has been estimated based on the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the particular wells to be drilled and has been risked. Forecast cash flow has been estimated based on anticipated revenue (which is dependent upon forecast production, commodity prices and exchange rates), anticipated royalty rates (which is based upon the continuation of existing legislation and contractual obligations) and forecast operating costs and general and administrative expenses (which are based on assumptions including, without limitation, the costs of services and equipment and foreign exchange rates). Due to the risks, uncertainties and assumptions inherent in forward- looking statements, prospective investors in the company's securities should not place undue reliance on these forward-looking statements. Forward looking statements contained in this press release are made as of the date hereof and are subject to change. The company assumes no obligation to revise or update forward looking statements to reflect new circumstances, except as required by law.

For further information:

For further information: Richard A Gusella, Executive Chairman,
Petrolifera Petroleum Limited, Phone: (403) 538-6202, Fax: (403) 538-6225,
inquiries@petrolifera.ca, www.petrolifera.ca

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PETROLIFERA PETROLEUM LIMITED

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