Silverwing Announces 2007 Second Quarter Results



    CALGARY, Aug. 14 /CNW/ - Silverwing Energy Inc. ("Silverwing" or the
"Company") (TSX-SVW, SVW.WT) is pleased to announce its financial and
operating results for the three and six months ended June 30, 2007.

    
    HIGHLIGHTS

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                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    (000s, except
     per share
     amounts)           ($)       ($)       (%)       ($)       ($)       (%)

    Financial
    Oil and gas
     revenue         3,558     1,853        92     7,429     3,733        99
    Cash flow from
     operations(1)  (1,040)      263      (495)      227       778       (71)
      Per share
       - basic and
       diluted       (0.03)     0.02      (250)     0.01      0.06       (83)
    Net loss        (2,675)     (245)      992    (5,529)     (504)      997
      Per share
       - basic and
       diluted       (0.08)    (0.02)      300     (0.16)    (0.04)      300
    Capital
     expenditures    1,371    12,887       (89)    8,466    21,978       (61)
    Bank debt and
     working
     capital
     deficiency     26,909    16,315        65    26,909    16,315        65
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (000s)            (No.)     (No.)       (%)     (No.)     (No.)       (%)

    Share Data
    Total shares
     outstanding
      Basic         37,509    13,518       177    37,509    13,518       177
      Diluted       37,509    14,114       166    37,509    14,114       166

    Weighted
     average
     shares
     outstanding
      Basic         34,770    13,064       166    34,300    13,009       164
      Diluted       34,770    13,660       155    34,300    13,605       152
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                            (%)                           (%)

    Operating
    Average daily
     production
      Crude oil and
       NGLs (bbls/d)    54        36        50        58        36        61
      Natural gas
       (mcf/d)       4,707     2,936        60     4,916     2,706        82
    -------------------------------------------------------------------------
      Total (boe/d)    839       525        60       877       487        80
    -------------------------------------------------------------------------
    Average selling
     prices
      Crude oil and
       NGLs ($/bbl)  60.02     75.47       (20)    61.05     63.18        (3)
      Natural gas
       ($/mcf)        7.62      6.01        27      7.63      6.79        12
    -------------------------------------------------------------------------
      Total ($/boe)  46.62     38.77        20     46.79     42.38        10
    -------------------------------------------------------------------------
    Wells drilled
     - gross (net)
     (No.)
      Gas             - (-)     - (-)     - (-)   4 (0.2)  18 (3.8) -78 (-95)
      Standing/
       untested       - (-)     - (-)     - (-)   2 (1.1)     - (-)     - (-)
      Dry and
       abandoned      - (-)     - (-)     - (-)     - (-)   1 (0.3)     - (-)
    -------------------------------------------------------------------------
      Total           - (-)     - (-)     - (-)   6 (1.3)  19 (4.1) -68 (-68)
      Drilling
       success
       rate (%)       - (-)     - (-)     - (-) 100 (100)   94 (92)     6 (9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Cash flow from operations is defined as cash provided by operations
        before changes in non-cash operating working capital.
    

    LETTER TO SHAREHOLDERS

    I am pleased to present the financial and operating highlights for the
three and six months ended June 30, 2007 and provide an outlook for the
remainder of the year.

    Second Quarter Highlights

    
    -   Increased production 60% to 839 boe/d from the second quarter of
        2006.
    -   Improved oil and gas revenue 92% to $3.6 million.
    -   Reduced quarterly capital expenditures 89%.
    

    Corporate Activities and Financial Highlights

    As a consequence of Silverwing's weakened financial position, during the
first half of 2007 our Board and management took a number of decisive actions
to ensure the Company's survival and allow adequate time to implement a
corporate re-financing, which was deemed to be the optimal strategy to protect
shareholder value. On May 22, 2007, Silverwing announced the conclusion of its
value maximization process, and as at the date of this report the following
actions were successfully completed:

    
    -   re-negotiated the terms of the Tomahawk farm-in agreement, thereby
        securing an extension to December 31, 2007 for the completion of the
        first phase of the project;
    -   secured a 50% joint venture partner for Tomahawk;
    -   secured a credit facility to meet the $11.6 million financial
        commitment to the Tomahawk farm-in for 2007; and
    -   closed an equity financing for gross proceeds of $30.0 million.
    

    These actions have reduced our corporate debt, thereby stabilizing and
improving the Company's overall financial position, provided the ability to
complete our capital program for the balance of 2007 in our highly prospective
core areas of Tomahawk and Prespatou, and fostered a foundation for additional
targeted growth opportunities.
    During the first half of 2007, our net capital program was reduced to
$8.5 million compared to $22.0 million spent in the first six months of 2006.
Our net capital program for the balance of 2007 has been reduced to
$16.6 million, with $11.0 million being allocated to the Tomahawk farm-in.
This overall reduction in our spending for the balance of 2007 will
consequently impact our expected results for fiscal 2007.

    Operations Review

    During the second quarter, corporate production increased 60% to
839 boe/d from 525 boe/d a year ago. However, production decreased 8% from the
916 boe/d average recorded during the first three months of the year due to
the capital spending freeze the Company implemented early in the first quarter
and maintained until the Company completed its equity financing early in
August 2007.
    Silverwing tied in 6 gross (0.3 net) wells at Birley, a Prespatou
subproject area, during the period, thereby adding minor new production to the
Company. At Umbach, we plan to add new significant production from 2 gross
(1.6 net) wells during the third quarter as gathering systems and tie-ins are
completed. No new drilling took place during the second quarter. Due to our
scaled-back capital program at Prespatou, production additions are expected to
be modest in 2007; however, with enhanced access to capital funding and
improved commodity prices, we will be prepared to step-up this area's program
for 2008.
    Throughout the second quarter, there was a significant increase in
competitor activity in the Tomahawk area, including stepped up seismic
activity. There was also an increase in the number of Crown land acquisitions
and the prices paid for these properties, which focus on the highly desirable
Nisku interior patch reef oil trend. This increased interest supports
Silverwing's premise that Tomahawk has excellent potential.
    Silverwing has committed to a 29-well drilling program to earn lands in
the initial phase of the project. In order to manage our capital commitments
and expenditures program at Tomahawk during 2007, we have successfully
re-negotiated the terms of our farm-in agreement such that we now have until
December 31, 2007 (versus May 1, 2007) to drill the first 22 shallow and
intermediate depth wells. Seven of these wells have already been drilled and
cased and completion operations of the optimal zones have commenced, while
drilling of the next 15 wells will be initiated in early August 2007. We
expect to start testing the Nisku potential at Tomahawk and Easyford by the
end of the year. Also during the second quarter, Silverwing successfully
secured a 50% joint venture partner for Tomahawk to share the risk and the
upside of this large project.

    Outlook

    For the remainder of 2007, we expect to return to an active growth
strategy. Our budget for the balance of the year is projected to be
$16.6 million (75% for Tomahawk, 25% for Prespatou). In the Tomahawk area, we
will focus on drilling our inventory of prospective well locations along with
the completion and tie-ins of previously drilled properties commencing in
August. At Prespatou, our focus will be on completing the tie-in of the
initial two wells drilled at Umbach, follow-up drilling at Sirius as well as
continuing our technical evaluation of future opportunities in the Prespatou
area for 2008. With solid financial support, we also expect to evaluate
strategic additions to our land and production base within our core areas by
taking advantage of the current buyers' market for assets. With the
implementation of a clear plan and targeted approach to growth during the
second half of 2007 in each of our core areas, I look forward to reporting on
the progress of our activities as the year progresses.
    The successful conclusion of our value maximization program has set our
Company back on course for a targeted approach for the future. We are grateful
for the patience and support shown by our shareholders and by our many vendors
during this challenging period. We also greatly appreciate the ongoing,
concerted and focused hard work of our employees, directors, strategic
consultants and financial partners that helped to bring Silverwing back to a
solid financial footing and preparing the Company for its next growth phase.
Finally, we would like to extend a warm welcome to our new shareholders.

    On behalf of the Board of Directors,

    (signed)

    Oleh Wowkodaw
    President & Chief Executive Officer

    August 9, 2007



    MANAGEMENT'S DISCUSSION AND ANALYSIS

    This Management's Discussion and Analysis ("MD&A") has been prepared by
management as of August 9, 2007 and reviewed and approved by the Board of
Directors of Silverwing Energy Inc. ("Silverwing" or the "Company"). This MD&A
is a review of the operational results of the Company with disclosure of oil
and gas activities in accordance with Canadian Securities Regulators National
Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI
51-101") and a review of financial results of the Company based on accounting
principles generally accepted in Canada. Its focus is primarily a comparison
of the operational and financial performance for the three and six months
ended June 30, 2007 and 2006 and should be read in conjunction with the
audited financial statements and accompanying notes for the year ended
December 31, 2006.
    For the purpose of calculating unit costs, natural gas volumes have been
converted to a barrel equivalent ("boe") using six thousand cubic feet equal
to one barrel unless otherwise stated. A boe conversion ratio of 6:1 is based
on an energy equivalency conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the wellhead. This
conversion conforms with NI 51-101. Boes may be misleading, particularly if
used in isolation.
    Cash flow from operations, cash flow from operations per share and
operating netback are terms that do not have a standardized measuring
prescribed by Canadian generally accepted accounting principles ("GAAP").
Management believes that cash flow from operations, cash flow from operations
per share and operating netback are useful supplemental measures as they
demonstrate the Company's ability to generate the cash necessary to repay debt
or fund future growth through capital investment. Investors are cautioned,
however, that these measures should not be construed as an alternative to net
income determined in accordance with GAAP as an indication of the Company's
performance. Silverwing's method of calculating these measures may differ from
other companies, and accordingly, may not be comparable to measures used by
other companies. For these purposes, the Company defines cash flow from
operations as cash provided by operations before changes in non-cash operating
working capital and defines operating netback as revenue less royalties and
operating expenses. The Company also presents cash flow from operations per
share whereby amounts per share are calculated using weighted average shares
outstanding consistent with the calculation of earnings per share. Cash flow
from operations and funds from operations as noted in the financial statements
are terms that are used synonymously.

    Forward-Looking Statements

    Certain statements contained in this report, including statements that
may contain words such as "anticipates," "can," "may," "expect," "believe or
believes" and "will" and similar expressions are forward-looking statements.
These statements may include, but are not limited to, future capital
expenditures, future financial resources, future oil and gas well activity,
outcome of specific events, and trends in the oil and gas industry. These
statements are derived from certain assumptions and analyses made by the
Company based on its experience and interpretation of historical trends,
current conditions and expected future developments, and other factors that it
believes are appropriate in the circumstances. These statements or predictions
are subject to a number of known and unknown risks and uncertainties, which
are discussed previously in this report, that could cause actual results to
differ materially from the Company's expectations. Consequently, all of the
forward-looking statements made in this report are qualified by these
cautionary statements and there can be no assurance that actual results or
developments anticipated by the Company will be realized, or that they will
have the expected consequences or effects on the Company or its business or
operations. The Company assumes no obligation to update publicly any such
forward-looking statements, whether as a result of new information, future
events or otherwise.
    All financial measures presented in this MD&A are expressed in Canadian
dollars unless otherwise indicated.

    General Description of Business

    Silverwing Energy Inc. is a Calgary based crude oil and natural gas
exploration and production company. By implementing its strategic plan in key
focus areas located throughout the Western Canadian Sedimentary Basin,
Silverwing is well positioned to achieve its growth plans for the benefit of
its shareholders. Common shares and share purchase warrants of Silverwing are
listed for trading on the Toronto Stock Exchange ("TSX") under the symbol SVW
and SVW.WT, respectively. A second series of warrants were issued in August
2007 that are expected to be listed for trading on the TSX in November 2007,
with a symbol to be announced at that time.

    Operations Overview - Second Quarter 2007

    During the second quarter of 2007, Silverwing continued the value
maximization process that had begun in the year's first quarter. The result of
this process gave rise to a recapitalization of the Company that concluded in
August 2007, subsequent to quarter-end, that involved a private placement for
gross proceeds of $30.0 million through the issuance of new equity. To
accommodate the timing of this transaction, a bridge loan was entered into in
early June 2007. In addition, the previously announced joint venture partner
of the Tomahawk exploration project has been secured. The equity issuance and
the joint venture partner will give new life to the Company and will allow for
the exploration and development of the Company's core property area at
Tomahawk and maintenance of the existing property base. As a result of the
funds raised, Silverwing's capital program has resumed, thereby bringing the
Company back as a fully viable junior oil and gas company.
    For the remainder of 2007, the Company plans to drill and complete
22 gross (10.8 net) wells, focusing primarily in the Tomahawk area with the
drilling of 21 gross (10.5 net) wells. This will contribute to a capital
budget of $16.6 million for the remainder of the year. Silverwing believes
that by year-end, the locations drilled may include two high impact Nisku
wells.
    As a result of the spending freeze on capital projects that began in
January 2007, production during the second quarter continued to decline to
839 boe/d from the 2006 fourth quarter peak average of 997 boe/d. Capital
expenditures totaled $1.4 million for the three months ended June 30, 2007 and
primarily involved the completion and tie-ins of a number of non-operated
wells drilled in first quarter of 2007 by joint venture partners and the
extension fee paid to the farmors of the Tomahawk area. Production from the
new wells has been partially reflected in the second quarter results.

    
    Financial Results

    Oil and Gas Revenue

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                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    (000s)              ($)       ($)       (%)       ($)       ($)       (%)
    Crude oil and
     NGLs revenue      295       246        20       638       408        56
    Natural gas
     revenue         3,263     1,607       103     6,791     3,325       104
    -------------------------------------------------------------------------
    Total oil and
     gas revenue     3,558     1,853        92     7,429     3,733        99
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company's gross revenue for the three months ended June 30, 2007
totaled $3.6 million compared to $1.9 million a year ago. Total oil and
natural gas revenue for the first half of 2007 was $7.4 million versus
$3.7 million in 2006, an increase of 99%. The increases were attributed to
more wells on production between the respective periods.

    Production

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
                                            (%)                           (%)
    Daily Production
    Crude oil and
     NGLs (bbls/d)      54        36        50        58        36        61
    Natural gas
     (mcf/d)         4,707     2,936        60     4,916     2,706        82
    -------------------------------------------------------------------------
    Boe/d              839       525        60       877       487        80
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                        (%)       (%)       (%)       (%)       (%)       (%)
    Production Mix
    Crude oil and
     NGLs                6         7       (14)        7         7         -
    Natural gas         94        93         1        93        93         -
    -------------------------------------------------------------------------
                       100       100         -       100       100         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Production volumes for the quarter ended June 30, 2007 averaged
839 boe/d, an increase of 60% over the 525 boe/d recorded in 2006. Crude oil
and NGL production rose 50% to 54 boe/d from 36 boe/d in the same period of
2006, while natural gas production jumped 60% to 4,707 mcf/d from 2,936 mcf/d
a year ago. Production for the first six months of 2007 increased 80% to
average 877 boe/d from 487 boe/d in the corresponding period of 2006. These
production improvements were the result of an increased number of wells on
production located primarily in the northeastern British Columbia core area of
Prespatou.

    
    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
                    (boe/d)   (boe/d)       (%)   (boe/d)   (boe/d)       (%)

    Daily Production
     by Area
    Birley             200       255       (22)      214       260       (18)
    Sirius             288       241        20       310       198        57
    North Buick Creek  115         -         -       131         -         -
    South Beavertail   157         -         -       148         -         -
    Other               79        29       172        74        29       155
    -------------------------------------------------------------------------
    Total              839       525        60       877       487        80
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Pricing

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
                                            (%)                           (%)
    Selling Prices
    Crude oil and
     NGLs ($/bbl)    60.02     75.47       (20)    61.05     63.18        (3)
    Natural gas
     ($/mcf)          7.62      6.01        27      7.63      6.79        12
    -------------------------------------------------------------------------
    Total combined
     ($/boe)         46.62     38.77        20     46.79     42.38        10
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Average crude oil and NGL prices for the second quarter of 2007 decreased
20% to $60.02/bbl compared to $75.47/bbl for the same period in 2006, while
natural gas prices increased 27% to $7.62/mcf from $6.01/mcf a year ago. Sales
prices for the six months ended June 30, 2007 averaged $61.05/bbl for crude
oil and NGLs and $7.63/mcf for natural gas compared to $63.18/bbl and
$6.79/mcf, respectively, in the first half of 2006.

    Royalty Expense

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                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
                                            (%)                           (%)
    Total royalties
     ($000s)           635       247       157     1,584       711       123
    As a % of oil
     and gas sales     18%       13%        38       21%       19%        11
    $/boe             8.32      5.16        61      9.98      8.07        24
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the three months ended June 30, 2007, royalty expense rose 157% to
$0.6 million due to the increase in revenue received in the period. Royalties
as a percentage of production revenue increased from the previous year as a
result of the absence of a significant Crown adjustment. For the first half of
2007, royalty expense jumped 123% to $1.6 million from $0.7 million a year ago
due to an increase in year-over-year revenue.

    Operating Expenses

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
                                            (%)                           (%)

    Operating
     expenses
     ($000s)         1,379       569       142     2,333     1,054       121
    Operating
     expenses
     ($/boe)         18.07     11.91        52     14.69     11.97        23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Operating expenses increased 142% to $1.4 million in the 2007 second
quarter from $0.6 million the prior year due to production growth. Operating
expenses for the first half of 2007 jumped 121% to $2.3 million from $1.1
million in the 2006 six-month period, reflecting the year-over-year increase
in production. On a per boe basis, operating expenses increased 52% in the
second quarter and 23% in the first half of 2007 versus the corresponding
periods in 2006. The increased operating expenses per boe was due to the
expected declines in volumes with the majority of production costs being fixed
in nature. In addition, the Company experienced unusual additional charges
that largely related to outside operated properties.

    
    General and Administrative ("G&A") Expenses

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    (000s)              ($)       ($)       (%)       ($)       ($)       (%)

    Gross expenses     845       869        (3)    1,594     1,497         6
    Capitalized and
     overhead
     recoveries       (146)     (196)      (26)     (472)     (378)       25
    -------------------------------------------------------------------------
    G&A expenses
     before stock-
     based
     compensation      699       673         4     1,122     1,119         -
    Stock-based
     compensation
     expense            42       339       (88)      108       510       (79)
    -------------------------------------------------------------------------
    Total G&A expense  741     1,012       (27)    1,230     1,629       (24)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    $/boe             9.71     21.18       (54)     7.75     18.49       (58)
    % capitalized      14%       12%        17       17%       14%        21
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the three and six-month periods ended June 30, 2007, net G&A
expenses, before stock-based compensation, remained consistent with prior year
periods at $0.7 million and $1.1 million, respectively.
    Stock-based compensation expense decreased 88% to $42,000 from $339,000
in the second quarter of 2006, while for the 2007 six-month period,
stock-based compensation expense dropped 79% to $108,000 from $510,000 a year
ago. These decreases were due to the number of stock options that have become
fully vested between the periods, resulting in less amortization of stock
compensation. No new stock options were issued during the quarter.

    Interest Income and Expense

    Interest income during the first six months of 2007 was $8,000 compared
to $32,000 received in the same period a year ago. This decrease was directly
related to the balance of cash on hand throughout the respective periods.
    Interest expense and financing fees for the six months ended June 30,
2007 was $2.2 million versus $0.1 million in the same period of 2006. The
year-over-year change was due to the $1.1 million in shares and $0.3 million
cash paid as financing fees to secure the bridge loan during the second
quarter along with the greater average debt levels and Part XII.6 corporate
income tax calculated on the balance of the 2006 flow-through share issue that
was not expended in the first half of 2007 further contributed to the greater
interest expense.

    
    Cash Flow and Operating Netbacks

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
                    ($/boe)   ($/boe)       (%)   ($/boe)   ($/boe)       (%)
    Sales price      46.62     38.77        20     46.79     42.38        10
      Royalties      (8.32)    (5.16)       61     (9.98)    (8.07)       24
      Operating     (18.07)   (11.91)       52    (14.69)   (11.97)       23
    -------------------------------------------------------------------------
    Operating
     netback         20.23     21.70        (7)    22.12     22.34        (1)
      G&A (net of
       non-cash
       items)       (10.55)   (14.08)      (25)    (8.40)   (12.70)      (34)
      Interest and
       other (net
       of non-cash
       items)       (10.26)    (2.12)      384     (6.71)    (0.81)      728
    -------------------------------------------------------------------------
    Corporate
     netback (loss)  (0.58)     5.50      (111)     7.01      8.83       (21)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash flow from
     (used in)
     operations
     ($000s)        (1,040)      263      (495)      227       778       (71)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the three months ended June 30, 2007, cash flow from operations
decreased 495% to ($1.0) million from $0.3 million in 2006. For the first six
months of 2007, cash flow from operations decreased 71% to $0.2 million from
$0.8 million a year ago. The decreases were primarily a result of increases in
interest and financing fees along with one-time production costs.

    Depletion, Depreciation and Accretion ("DD&A")

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
                                            (%)                           (%)

    DD&A provision
     ($000s)         2,479     1,120       121     5,219     2,040       156
    DD&A provision
     $/boe           32.49     23.44        39     32.87     23.16        42
    Impairment
     provision for
     oil and gas
     assets ($000s)      -         -         -     2,258         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the second quarter of 2007, DD&A rose 121% to $2.5 million from
$1.1 million in 2006 due to increased production. On a per boe basis, the DD&A
provision increased 39% to $32.49 from $23.44 a year ago. For the six months
ended June 30, 2007, DD&A jumped 156% to $5.2 million from $2.0 million for
the same period in 2006 due to increased production. For the first half of
2007, the DD&A provision per boe increased 42% to $32.87 from $23.16 in 2006
as a result of the increased cost of proved reserves additions.
    At June 30, 2007, the impairment recognition portion of the ceiling test
indicated the estimated undiscounted future cash flows from proved reserves
was less than the carrying amount of producing petroleum and natural gas
properties. In the second stage of the AcG-16 impairment test, the future cash
flows from proved plus probable reserves were discounted at the risk-free rate
and were compared to the carrying amount of the oil and gas properties to
determine a ceiling test write-down. A write-down of $2.3 million was included
in DD&A during the 2007 six-month period that was incurred in the first
quarter of 2007.

    Income Taxes

    Future income tax reduction for the three months ended June 30, 2007
decreased 7% to $0.9 million from $1.0 million in the prior year. For the 2007
six-month period, future income tax reduction increased 44% to $1.8 million
compared to $1.3 million in same period of 2006. The changes in this non-cash
item are the anticipated future tax effect of the periods' activities, after
reconciling recorded net assets with the Company's tax pool assets at the end
of each period. The primary reason for the change was a year-over-year future
tax rate decrease and the impairment of oil and gas assets, which was offset
by the renunciation of the related income tax deductions for eligible
exploration expenses related to the issuance of flow-through shares in 2006.
    As at June 30, 2007, the Company had approximately $60.9 million in tax
pools available to shelter taxable income in future years.

    
    Cash Flow and Net Loss

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    (000s, except
     per share
     amounts)           ($)       ($)       (%)       ($)       ($)       (%)

    Cash flow from
     (used in)
     operations     (1,040)      263      (495)      227       778       (71)
      Per share
       - basic and
       diluted       (0.03)     0.02      (250)     0.01      0.06       (83)
    Net loss        (2,675)     (245)      992    (5,529)     (504)      997
      Per share
       - basic and
       diluted       (0.08)    (0.02)      300     (0.16)    (0.04)      300
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Cash flow from operations decreased 495% to ($1.0) million (($0.03) per
basic and diluted share) for the three months ended June 30, 2007 from
$0.3 million ($0.02 per basic and diluted share) in 2006. For the first half
of 2007, cash flow from operations declined 71% to $0.2 million ($0.01 per
basic and diluted share) from $0.8 million ($0.06 per basic and diluted share)
in the prior year. The decreases in the three and six-month periods were
primarily attributed to increases in interest on flow-through share
renouncements from December 31, 2006 that were unexpended in the period and
financing fees incurred to secure the temporary bridge loan received in June
2007. Unexpected unusual additional production costs further contributed to
the decrease.
    During the second quarter of 2007, the Company recorded a net loss of
$2.7 million ($0.08 per basic and diluted share) compared to the $0.2 million
($0.02 per basic and diluted share) net loss a year ago. For the 2007
six-month period, a net loss of $5.5 million ($0.16 per basic and diluted
share) was realized compared to a net loss of $0.5 million ($0.04 per basic
and diluted share) recorded in the corresponding period of 2006. This increase
was primarily due to the first quarter oil and gas asset impairment provision
coupled with the bridge facility financing fees recorded in June 2007.

    
    Liquidity and Capital Resources

    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    (000s)              ($)       ($)       (%)       ($)       ($)       (%)

    Working capital
     (deficiency),
     beginning of
     period        (25,626)   (4,459)      475   (19,817)    3,478      (670)
    Cash flow from
     (used in)
     operations     (1,040)      263      (495)      227       778       (71)
    Issue of
     capital stock
     (net)           1,128       768        47     1,147     1,407       (18)
    Capital
     expenditures
     (net)          (1,371)  (12,887)      (89)   (8,466)  (21,978)      (61)
    -------------------------------------------------------------------------
    Working capital
     (deficiency),
     end of period (26,909)  (16,315)       65   (26,909)  (16,315)       65
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Silverwing opened the second quarter of 2007 with a working capital
deficiency of $25.6 million and ended the period with a working capital
deficit of $26.9 million. The decreases in the quarter came from negative cash
flow from operations of ($1.0) million due to financing costs and $1.4 million
incurred for capital expenditures. Increases in the period involved a new
issue of common shares totaling $1.1 million. On August 2, 2007, the Company
issued new equity that eliminated this working capital deficit.
    In June 2007, the Company obtained a bridge loan financing facility from
an investment corporation in the amount of $13.0 million. The loan was paid
off upon closing of the private equity offering. The funds from this loan were
primarily used to fund the Tomahawk farm-in extension commitment of
$11.1 million and to pay $0.5 million to the farmors of the property as a
commitment penalty with the balance of the proceeds attributed to financing
fees and the reduction of trade payables. The financing fees to secure the
loan involved $0.4 million in professional fees along with 3.7 million common
shares valued at $1.1 million, with the number of shares to be adjusted based
on the equity financing unit price.
    As at June 30, 2007, Silverwing was in breach of a covenant that required
the Company to maintain a positive working capital ratio of 1:1 for the
revolving operating demand loan facility and non-revolving
acquisition/development demand loan facility. Subsequent to June 30, 2007,
Silverwing recapitalized the Company through an equity offering that netted
proceeds of $27.6 million. These funds were used to pay off the financing
bridge loan, pay down the accounts payable balance and resume exploration and
development of the Tomahawk area.
    As at August 9, 2007, Silverwing had outstanding bank debt of
$9.0 million, which is included in the positive working capital position of
approximately $0.5 million.

    Capital Expenditures

    Capital expenditures made during the three and six months ended June 30,
2007 and 2006 are summarized in the following table and do not include non-
cash transactions.


    
    -------------------------------------------------------------------------
                    Three Months Ended June 30,     Six Months Ended June 30,
                      2007      2006    Change      2007      2006    Change
    -------------------------------------------------------------------------
    (000s)              ($)       ($)       (%)       ($)       ($)       (%)

    Land               857        11     7,691       898       694        29
    Seismic              -     1,899         -       108     1,932       (94)
    Drilling and
     completions       585     2,195       (73)    5,329     8,489       (37)
    Facilities and
     equipment        (183)    8,763      (102)    1,910    10,719       (82)
    Property
     acquisitions        -       533         -         -       533         -
    Property
     dispositions        -      (650)        -         -      (650)        -
    Capitalized G&A
     and other         112       136       (18)      221       261       (15)
    -------------------------------------------------------------------------
    Total            1,371    12,887       (89)    8,466    21,978       (61)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the second quarter of 2007, the Company invested $1.4 million in
capital activities compared to $12.9 million in 2006. No new operated or non-
operated wells were drilled by Silverwing during the period. The nominal
investment in the second quarter of 2007 included the Tomahawk extension fee
of $0.5 million paid to the farmors plus lease preparation work in the same
area.
    During the first half of 2007, the Company spent $8.5 million in
exploration and development activities compared to $22.0 million in the
corresponding period of 2006. Land purchases and seismic expenditures of
$0.9 million and $0.1 million, respectively, were incurred during the 2007
period in relation to the Tomahawk farm-in. During the period, drilling and
completion expenditures of $5.3 million were incurred in Tomahawk, South
Beavertail and North Buick Creek areas and involved 5 gross (1.3 net) wells
spud during the first half of the year and a re-entry of one well. A number of
completions were also accomplished relating to wells drilled in previous
quarters. During the six months ended June 30, 2007, facilities and equipping
costs of $1.9 million were incurred to tie-in wells and purchase a compressor
in the Sirius area of northeastern British Columbia.
    Pursuant to flow-through common share issuances completed on August 22,
2006 and December 21, 2006, the Company committed to renounce a total of
$16.5 million of exploration expenditures. As at June 30, 2007, Silverwing had
incurred $9.7 million of eligible expenditures for renouncement, leaving
$6.8 million to be incurred by December 31, 2007. Interest is payable to the
federal government on the unspent portion that began to accrue as of
February 1, 2007 until the amounts are fully expended.
    During 2006, the Company entered into a one-year and a three-year
contract involving two drilling rigs guaranteeing 260 days at a day rate of
$8,500 and 560 days at a day rate of $18,500, respectively. The total
commitment as at August 9, 2007 was $8.6 million for the two drilling rig
contracts, as the 260-day and 560-day guarantees had 99 and 422 days
remaining, respectively. As at July 31, 2007, the Company had received an
extension to the 260-day rig contract to November 30, 2007, thereby allowing
sufficient time to fulfill the remaining 99 days.
    The Tomahawk farm-in agreement stipulates that the Company is to drill
29 wells to earn lands for the Tomahawk project. As at August 9, 2007, 7 wells
were drilled and 22 additional wells are required to be drilled by December
31, 2007, subject to regulatory approvals being in place. As at June 30, 2007,
management estimates that the total maximum contingent liability for
noncompliance of the terms of the farm-in agreement is $10.9 million, being
the non-performance fee associated with the 22 locations remaining to be
drilled and loss in any interest of the properties. As a requirement of the
farm-in extension granted during the second quarter, $11.1 million was paid by
the Company and held in escrow by the farmors to be used for future
exploration and development in the Tomahawk project area. The funds are to be
released to the Company as the capital expenditures are incurred. At the
earlier of the 22 wells being drilled or December 31, 2007, the escrowed funds
will be distributed to the Company less any portion of the commitment
remaining at that time.

    Off-Balance Sheet Arrangements

    As at the date of this report, the Company had no off-balance sheet
financing arrangements.

    Transactions with Related Parties

    Included in G&A expenses are amounts for services provided to the Company
through entities affiliated with and/or controlled by the Corporate Secretary
of Silverwing. During the three and six months ended June 30, 2007, the
Company paid to the affiliated entity $58,200 and $102,400, respectively.
There was an outstanding payable balance of $nil (2006 - $31,194) with the
related company at period-end. These amounts are considered to be in the
normal course of operations and approximate the fair values for services
received.
    The Company utilizes the services of a consultant, through his operating
company, who is considered a related party by virtue of significant influence
on the Company's drilling operations. The Company pays the related party's
operating company a management fee and has provided the related party full
time use of offices in its premises at below market rates for rent, granted
the related party stock options and provided the related party an interest
free loan to purchase shares in the Company. For the three and six months
ended June 30, 2007, the net Company transactions were $9,680 received and
$5,120 paid (2006 - $94,427 paid and $532,216 paid), respectively, to the
related party, representing the fair market value for those services. The
outstanding related party balance was $nil at both June 30, 2007 and 2006. The
Company estimates the fair market value of the subsidized rent to be
approximately $11,600 for the period ended June 30, 2007 (2006 - $17,750).
Effective April 15, 2006, this consultant became an employee of Silverwing.
    During the period ended June 30, 2007, the Company utilized the services
of a drilling company of which two directors of Silverwing are officers. The
total purchased services amounted to $18,500 (2006 - $nil) for the three and
six months ended June 30, 2007. The balance owing to the related company was
$116,000 as at June 30, 2007. The transactions are in the normal course of
operations and are measured at the exchange amount that approximates fair
market value of the services.
    The Company granted share purchase loans to employees in 2004 for the
purchase of the Company's flow-through shares at that time. The loans are non-
interest bearing and are to be fully repaid by October 31, 2007 according to
the terms of the agreement. The loan balance from the employees was $30,600 at
June 30, 2007 (2006 - $76,500).

    Subsequent Event

    On August 2, 2007, the Company completed a private placement consisting
of 142,303,000 units and 6,414,166 flow-through common shares, priced at $0.20
and $0.24 per share, respectively. The units were comprised of one common
share and one common share purchase warrant, with each warrant enabling the
holder to purchase one additional common share from the Company at $0.25 per
share that expires on August 2, 2010. Broker warrants totaling 5,205,101 were
issued in connection with the placement with an exercise price of $0.25 per
warrant. The offering raised net proceeds of $27.6 million after underwriters'
commissions of $2.1 million and other costs of issuance estimated to be
$0.3 million. The net proceeds of this offering, together with cash flow from
operations, are to be used to fund the Company's remaining 2007 capital
expenditures program, repaying the bridge loan financing facility and reduce
current liabilities. The common shares were listed on the TSX and the issued
warrants are to be listed on the TSX upon regulatory approval.

    Outstanding Shares

    The Company is authorized to issue an unlimited number of common shares,
of which 188,068,316 common shares were issued and outstanding as fully paid
and non-assessable as at the date of this report. The Company is also
authorized to issue an unlimited number of preferred shares, of which nil
preferred shares were issued and outstanding as at this date. At the date of
this report, warrants to purchase an aggregate of 10,637,500 common shares at
$2.25 per share that expire February 22, 2008 and warrants to purchase an
aggregate of 147,508,101 common shares at $0.25 per share that expire August
2, 2010 were outstanding. In addition, options to purchase an aggregate of
1,527,500 common shares have been granted to directors, officers, employees
and consultants of the Company at an exercise price of $2.00 and $2.10 per
common share. During the second quarter of 2007, performance warrants to
purchase an aggregate of 3,800,000 common shares were outstanding to certain
directors, officers and employees of the Company at an exercise price of $2.20
per common share. These warrants may be exercised only upon a change in
control of the Company.


    
    Summary of Quarterly Results

    -------------------------------------------------------------------------
    Three Months Ended

             Sep.30, Dec.31, Mar.31, Jun.30, Sep.30,  Dec.31, Mar.31, Jun.30,
               2005    2005    2006    2006    2006     2006    2007    2007
    -------------------------------------------------------------------------
    (000s,
     except
     per share
     amounts)    ($)     ($)     ($)     ($)     ($)      ($)     ($)     ($)

    Oil and
     gas
     revenue  1,832   2,743   1,880   1,853   3,300    4,136   3,871   3,558
    Cash flow
     from
     operations 906   1,402     515     263     837    1,740   1,267  (1,040)
      Per share
       - basic
       and
       diluted 0.12    0.11    0.04    0.02    0.03     0.06    0.04   (0.03)
    Net
     earnings
     (loss)      88     152    (259)   (245) (1,063) (10,649) (2,854) (2,675)
      Per share
       - basic
       and
       diluted 0.01    0.01   (0.04)  (0.02)  (0.04)   (0.37)  (0.08)  (0.08)
    Capital
     expendi-
     tures
     (net)    2,015   6,292   9,091  12,887  22,524   18,623   7,095   1,371
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Internal Controls Over Financial Reporting

    There were no changes in internal control over financial reporting from
year-end that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.

    New Accounting Pronouncements

    In 2006, the Canadian Institute of Chartered Accountants issued new
accounting standards concerning financial instruments: "Financial Instruments
- Recognition and Measurement" (Section 3855), "Hedges" (Section 3865) and
"Comprehensive Income" (Section 1530). These standards require prospective
application and became effective during the Company's first quarter of fiscal
2007. The Company applied the new accounting standards at the beginning of its
current fiscal year and their implementation did not have a significant impact
on the Company's results of operations or financial position.

    Financial and Other Instruments

    Currently, Silverwing does not have a hedge or other commodity risk
control strategy in place. Management will consider employing such strategies
once the Company has sufficiently advanced beyond the current production
profile to warrant such measures.

    SEDAR
    Additional information relating to Silverwing, including the Company's
Prospectus document supporting its Initial Public Offering, are available on
the Canadian Securities Administrators' System for Electronic Document
Analysis and Retrieval ("SEDAR") at www.sedar.com.



    
    BALANCE SHEETS
    -------------------------------------------------------------------------
    As at                                              June 30,  December 31,
                                                          2007          2006
    -------------------------------------------------------------------------
    (000s) (unaudited)                                      ($)           ($)
    Assets
    Current assets
      Cash                                                  27           408
      Restricted cash (note 3)                          11,100             -
      Accounts receivable and other assets               2,478         6,103
    -------------------------------------------------------------------------
                                                        13,605         6,511
    Future income taxes                                      -         1,399
    Property, plant and equipment (note 4)              69,466        68,228
    -------------------------------------------------------------------------
                                                        83,071        76,138
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Current liabilities
      Accounts payable and accrued liabilities          14,570        19,297
      Bank debt (note 5)                                12,944         7,031
      Bridge loan (note 6)                              13,000             -
    -------------------------------------------------------------------------
                                                        40,514        26,328
    Asset retirement obligations (note 7)                3,191         2,999
    Future income taxes                                  1,737             -

    Shareholders' Equity
    Common shares (note 8)                              49,348        53,149
    Share purchase warrants                              4,344         4,344
    Contributed surplus (note 8)                         2,887         2,739
    Deficit                                            (18,950)      (13,421)
    -------------------------------------------------------------------------
                                                        37,629        46,811
    Future operations (notes 1 and 5)
    Commitments (note 10)
    Subsequent events (note 11)
    -------------------------------------------------------------------------
                                                        83,071        76,138
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the interim financial statements.



    STATEMENTS OF OPERATIONS AND DEFICIT

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

    Revenues
      Petroleum and natural gas sales    3,558     1,853     7,429     3,733
      Royalties                           (635)     (247)   (1,584)     (711)
    -------------------------------------------------------------------------
                                         2,923     1,606     5,845     3,022
    Interest and other income                3         -         8        32
    -------------------------------------------------------------------------
                                         2,926     1,606     5,853     3,054
    Expenses
      Production                         1,379       569     2,333     1,054
      General and administrative           741     1,012     1,230     1,629
      Interest and financing fees        1,888       101     2,171       103
      Depletion, depreciation and
       accretion                         2,479     1,120     7,477     2,040
    -------------------------------------------------------------------------
                                         6,487     2,802    13,211     4,826
    -------------------------------------------------------------------------
    Loss before income taxes            (3,561)   (1,196)   (7,358)   (1,772)
    Future income tax reduction            886       951     1,829     1,268
    -------------------------------------------------------------------------
    Net loss for the period             (2,675)     (245)   (5,529)     (504)
    Deficit, beginning of period       (16,275)   (1,464)  (13,421)   (1,205)
    -------------------------------------------------------------------------
    Deficit, end of period             (18,950)   (1,709)  (18,950)   (1,709)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net loss per share (note 8)
      Basic and diluted                  (0.08)    (0.02)    (0.16)    (0.04)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the interim financial statements.



    STATEMENTS OF CASH FLOWS

    -------------------------------------------------------------------------
                                      Three Months Ended    Six Months Ended
                                                 June 30,            June 30,
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    (000s) (unaudited)                      ($)       ($)       ($)       ($)

    Cash provided by (used in):
    Operations
      Net loss for the period           (2,675)     (245)   (5,529)     (504)
      Add (subtract) non-cash items:
        Stock-based compensation            42       339       108       510
        Depletion, depreciation and
         accretion                       2,479     1,120     7,477     2,040
        Future income tax reduction       (886)     (951)   (1,829)   (1,268)
    -------------------------------------------------------------------------
                                        (1,040)      263       227       778
      Net change in non-cash working
       capital                             576       228     4,186       154
    -------------------------------------------------------------------------
                                          (464)      491     4,413       932
    -------------------------------------------------------------------------
    Financing
      Issue of common shares and
       warrants                          1,128       771     1,151     1,412
      Share issue costs                      -        (3)       (4)       (5)
      Bank debt                         (1,288)    7,070     5,913     7,070
      Bridge loan                       13,000         -    13,000         -
      Net change in non-cash
       working capital                     (43)     (335)      (43)     (320)
    -------------------------------------------------------------------------
                                        12,797     7,503    20,017     8,157
    -------------------------------------------------------------------------
    Investing
      Property, plant and equipment
       expenditures                     (1,371)  (13,537)   (8,466)  (22,628)
      Proceeds on disposal of property,
       plant and equipment                   -       650         -       650
      Net change in non-cash working
       capital                         (11,288)    4,893   (16,345)    4,418
    -------------------------------------------------------------------------
                                       (12,659)   (7,994)  (24,811)  (17,560)
    -------------------------------------------------------------------------
    Decrease in cash                      (326)        -      (381)   (8,471)
    Cash, beginning of period              353         -       408     8,471
    -------------------------------------------------------------------------
    Cash, end of period                     27         -        27         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Interest paid                          338       101       511       103
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the interim financial statements.



    NOTES TO INTERIM FINANCIAL STATEMENTS

    Six Months Ended June 30, 2007 and 2006
    (unaudited)

    Basis of Presentation

    Silverwing Energy Inc. ("Silverwing" or the "Company") is engaged in the
    exploration, development and production of petroleum and natural gas
    reserves in Western Canada.

    The interim financial statements of Silverwing have been prepared in
    accordance with Canadian generally accepted accounting principles using
    the same accounting policies as the financial statements for the year
    ended December 31, 2006. The disclosures herein are incremental to, and
    should be read in conjunction with those annual financial statements and
    notes.

    1.  Future Operations

        At June 30, 2007, the Company had a working capital deficiency of
        $26.9 million, including the Company's bank debt and bridge loan, and
        had incurred significant losses. In addition, at June 30, 2007 the
        Company was in breach of a debt covenant requirement to maintain an
        adjusted working capital ratio of 1:1 (note 5). The future operation
        of the Company is dependant on its ability to successfully explore,
        develop and produce economically viable reserves and market petroleum
        products from its properties, raise capital to support its activities
        and receiving the continued financial support from its lenders.

        These financial statements have been prepared on the basis that the
        Company will be able to discharge its obligations and realize its
        assets in the normal course of business at the values at which they
        are carried in these financial statements, and that the Company will
        be able to continue its business activities.

        Management believes that the going concern assumption is appropriate
        for these financial statements. If this assumption were not
        appropriate, adjustments to the carrying values of the assets and
        liabilities, revenues and expenses and the balance sheet
        classifications used may be necessary.

        Subsequent to June 30, 2007, the Company raised net proceeds of
        $27.6 million through an equity placement. The placement occurred on
        August 2, 2007, resulting in the Company addressing the breach of the
        working capital covenant requirement with an approximated working
        capital surplus of $0.5 million upon closing of the issue.

    2.  Change in Accounting Policies

        The Company has adopted new accounting standards concerning financial
        instruments: "Financial Instruments - Recognition and Measurement,"
        "Hedges" and "Comprehensive Income." These standards require
        prospective application and became effective January 1, 2007. The
        Company applied the new accounting standards at the beginning of its
        current fiscal year.

        The adoption of these standards has had no material impact on the
        Company's net earnings or cash flows.

        Comprehensive Income

        The new standards introduce comprehensive income, which consists of
        net earnings and other comprehensive income ("OCI"). The cumulative
        changes in OCI are included in the accumulated other comprehensive
        income, which is presented as a new category within shareholders'
        equity in the balance sheet. The adoption of the comprehensive income
        standard has been made in accordance with its transitional
        provisions. A statement of comprehensive income has not been included
        in these financial statements as the Company has no adjustments that
        are required to be reported in OCI.

        Financial Instruments

        The financial instruments standard establishes the recognition and
        measurement criteria for financial assets, financial liabilities and
        derivatives. All financial instruments are required to be measured at
        fair value on initial recognition of the instrument, except for
        certain related party transactions. Measurement in subsequent periods
        depends on whether the financial instrument has been classified as
        "held-for-trading," "available-for-sale," "held-to-maturity," "loans
        and receivables" or "other financial liabilities" as defined by the
        standard.

        Financial assets and financial liabilities "held-for-trading" are
        measured at fair value, with changes in those fair values recognized
        in net earnings. Financial assets "available-for-sale" are measured
        at fair value, with changes in those fair values recognized in OCI.
        Financial assets "held-to-maturity," "loans and receivables" and
        "other financial liabilities" are measured at amortized cost using
        the effective interest method of amortization. The methods used by
        the Company in determining fair value of financial instruments are
        unchanged as a result of implementing the new standard.

        Cash and cash equivalents are designated as "held-for-trading" and
        are measured at carrying value, which approximates fair value due to
        the short-term nature of these instruments. Accounts receivable and
        accrued revenues and the partnership contribution receivable are
        designed as "loans and receivables." Accounts payable and accrued
        liabilities, the partnership contribution payable and long-term debt
        are designated as "other liabilities."

        The adoption of the financial instruments standard has been made in
        accordance with its transitional provisions.

        In addition, two new accounting standards have been issued that will
        require additional disclosure in the Company's financial statements
        commencing January 1, 2008 about the Company's financial instruments
        as well as its capital and how it is managed.

    3.  Restricted Cash

        Restricted cash as at June 30, 2007 consisted of the escrow fund for
        the Tomahawk project. As at December 31, 2006, the restricted funds
        consisted of term deposits held in trust by a national bank to fund
        guarantee commitments of the Company.

        During the three months ended June 30, 2007, the Company provided
        $11.1 million to establish an escrow account with the farmors of the
        Tomahawk property as a condition for extending the drilling
        commitment. The escrow account has resulted in a prepaid exploration
        and development fund that is administered by the farmors' legal
        counsel to support eligible expenditures related to the Tomahawk
        farm-in agreement. The Company may only access the funds as
        expenditures are incurred in the Tomahawk farm-in project.

    4.  Property, Plant and Equipment

        ---------------------------------------------------------------------
                                                     Accumulated
                                                       Depletion
                                                             and
                                                         Depreci-   Net Book
                                                Cost       ation       Value
        ---------------------------------------------------------------------
        (000s)                                    ($)         ($)         ($)

        June 30, 2007
        Petroleum and natural gas properties  70,335     (21,546)     48,789
        Production equipment                  29,866      (9,282)     20,584
        Office furniture, equipment and other    132         (39)         93
        ---------------------------------------------------------------------
                                             100,333     (30,867)     69,466
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        December 31, 2006
        Petroleum and natural gas properties  63,660     (15,998)     47,662
        Production equipment                  27,957      (7,484)     20,473
        Office furniture, equipment and other    123         (30)         93
        ---------------------------------------------------------------------
                                              91,740     (23,512)     68,228
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the three and six months ended June 30, 2007, the Company
        capitalized $0.1 million (2006 - $0.4 million) and $0.2 million (2006
        - $0.6 million), respectively, of general and administrative expenses
        directly related to exploration and development activities.

        As at June 30, 2007, costs to acquire and evaluate unproved
        properties totaling $13.1 million (2006 - $10.0 million) had been
        excluded from the depletion calculation. As at June 30, 2007, future
        development costs of $6.3 million (2006 - $0.6 million) had been
        included in the depletion calculation.

        The Company incurred a ceiling test write-down of $2.3 million
        related to oil and gas assets subject to the impairment test as at
        March 31, 2007. The write-down was included in the depletion expense
        recorded for the period. There were no material changes in price
        forecasts to determine cash flows from oil and gas properties since
        December 31, 2006.

    5.  Bank Debt

        On March 15, 2007 and subsequently amended on July 23, 2007, the
        Company obtained a non-revolving acquisition/development demand loan
        facility of $1.0 million with a Canadian bank. This demand loan
        facility bears interest at the bank's prime rate plus 0.5% and
        requires monthly principal repayments of $45,000 commencing July 31,
        2007. As at June 30, 2007, the Company had $1.0 million drawn on the
        facility and the interest rate was 6.5%.

        On June 6, 2007 and subsequently on July 23, 2007, the Company
        amended the revolving reducing demand facility to a revolving
        operating demand loan facility of $13.0 million with a Canadian bank.
        This demand loan facility bears interest at the bank's prime rate
        plus 1.25%. As at June 30, 2007, the Company had $12.9 million drawn
        on the facility and the interest rate was 7.25%.

        The non-revolving acquisition/development demand loan facility and
        revolving operating demand loan facility noted above are secured by a
        $50.0 million debenture with a floating charge over all fixed assets
        of the Company.

        As at June 30, 2007, the Company had two Irrevocable Letters of
        Guarantee outstanding totaling $160,000 that expire July 8, 2008. The
        Letters of Guarantee are funded by the revolving operating demand
        loan facility. The Company holds a deposit from a joint interest
        partner in the amount of $41,250 securing the partner's share of this
        obligation.

        As at June 30, 2007, the Company was in breach of a covenant that
        required the Company to maintain a positive adjusted working capital
        ratio of 1:1 for the revolving reducing demand loan facility. The
        ratio is calculated by comparing current assets plus undrawn
        availability on the revolving operating demand loan facility to
        current liabilities. Management has informed the bank of the covenant
        breach. The breach was rectified upon the closing of the private
        equity placement on August 2, 2007 (note 11).

    6.  Bridge Loan

        On June 4, 2007, the Company obtained a bridge loan financing
        facility from an investment corporation in the amount of
        $13.0 million that bears interest at 12% per annum, paid monthly.
        This bridge loan is to be repaid on or prior to November 30, 2007.

        The bridge loan financing facility was secured by a $20.0 million
        debenture with a floating subordinated charge over all fixed assets
        of the Company.

        Subsequent to June 30, 2007, the financing bridge loan facility was
        repaid with proceeds from the August 2, 2007 equity placement
        (note 11).

    7.  Asset Retirement Obligations

        Changes to the asset retirement obligations were as follows:

        ---------------------------------------------------------------------
        As at                                         June 30,   December 31,
                                                         2007           2006
        ---------------------------------------------------------------------
        (000s)                                             ($)            ($)
        Balance - beginning of period                   2,999          1,049
        Liabilities incurred                               70            898
        Revisions                                           -            965
        Accretion                                         122             87
        ---------------------------------------------------------------------
        Balance - end of period                         3,191          2,999
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company's asset retirement obligations result from net ownership
        interests in petroleum and natural gas assets including wellsites,
        gathering systems and processing facilities. At June 30, 2007, the
        Company estimated the total undiscounted amount of cash flows
        required to settle its asset retirement obligations was approximately
        $4.8 million, which will be incurred over the next 16 years. In
        calculating the Company's future asset retirement obligations, an
        annual credit adjusted risk-free interest rate of 8.0% and an annual
        inflation rate of 2.0% were used.

    8.  Share Capital

        (a) Authorized

            Unlimited number of common shares.
            Unlimited number of preferred shares, of which none have been
            issued.

        (b) Issued
            -----------------------------------------------------------------
            As at                          June 30, 2007   December 31, 2006
            -----------------------------------------------------------------
                                          Shares  Amount      Shares  Amount
            -----------------------------------------------------------------
                                            (No.) ($000s)       (No.) ($000s)
            Common Shares
            Balance - beginning of
             period                   33,826,150  53,149  12,746,268  23,676
            Issued on exercise of
             warrants                          -       -     385,835     914
            Issued on exercise of
             special warrants                  -       -     688,000     739
            Issued for cash pursuant
             to private placements             -       -     295,647     621
            Issued on initial
             public offering                   -       -  10,637,500  16,931
            Issued for cash pursuant
             to flow-through share
             placements                        -       -   9,072,900  16,460
            Issued as a financing fee  3,683,333   1,105           -       -
            Tax effect of flow-
             through share
             renunciation                      -  (4,948)          -  (4,438)
            Share issue costs                  -      (4)          -  (2,697)
            Tax benefit of share
             issue costs                       -       -           -     901
            Repayment of share
             purchase loan                     -      46           -      42
            -----------------------------------------------------------------
            Balance - end of period   37,509,483  49,348  33,826,150  53,149
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            In June 2007, the Company completed a bridge loan financing that
            required a non-refundable payment of $1,105,000, paid in the form
            of 3,683,333 shares issued prior to June 30, 2007 and a further
            1,841,667 to be issued in August 2007. The shares were issued at
            $0.20 per share, which was the market price at the final
            measurement date on August 2, 2007.

        (c) Contributed Surplus
            -----------------------------------------------------------------
            As at                                      June 30,  December 31,
                                                          2007          2006
            -----------------------------------------------------------------
            (000s)                                          ($)           ($)
            Balance - beginning of period                2,739           587
            Stock-based compensation expensed              108           573
            Stock-based compensation capitalized            40           218
            Transfer on exercise and expiry of warrants      -         1,361
            -----------------------------------------------------------------
            Balance - end of period                      2,887         2,739
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (d) Stock Option Plan

            The Company has a stock option plan (the "Plan"), which is
            administered by the Board of Directors of the Company. All
            directors, officers, employees and key consultants are eligible
            to participate under the Plan. The aggregate number of shares
            reserved for issuance under the Plan shall not exceed 10% of the
            total number of issued and outstanding shares of the Company.
            Options will vest over a period of two years and expire after
            four years.

            The following table summarizes the number of options outstanding
            and the exercise price:

            -----------------------------------------------------------------
                                                                    Weighted
                                                                     Average
                                                                    Exercise
                                                        Options        Price
            -----------------------------------------------------------------
                                                           (No.)   ($/option)
            Outstanding at December 31, 2006          1,540,000         2.06
            Forfeited                                   (12,500)        2.04
            -----------------------------------------------------------------
            Outstanding at June 30, 2007              1,527,500         2.06
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            As at June 30, 2007, the weighted average remaining life of the
            options outstanding was 1.64 years (December 31, 2006 -
            2.14 years).

            As at June 30, 2007, 1,527,500 (December 31, 2006 - 924,000)
            options were exercisable between $2.10 and $2.00 per share with a
            weighted average exercise price of $2.06 per share (2006 - $2.05
            per share).

        (e) Per Share Amounts

            Per share amounts have been calculated based on the weighted
            average number of common shares issued and outstanding, which for
            the three and six months ended June 30, 2007 totaled 34,769,557
            and 34,300,459 (2006 - 13,063,839 and 13,009,114), respectively.

            In calculating the diluted loss per share for the six months
            ended June 30, 2007, nil (2006 - 596,066) shares were added to
            the weighted average number of common shares outstanding for the
            dilutive effect of the special warrants and stock options.

            In calculating the net loss per share, options and warrants
            totaling 15,965,000 (2006 - 750,934) were excluded from the
            dilution calculation, as they were anti-dilutive. No adjustments
            were required to net loss in computing diluted per share amounts.

    9.  Related Party Transactions

        Included in general and administrative expenses are amounts for
        services provided to the Company through entities affiliated with
        and/or controlled by the Corporate Secretary of the Company. During
        the three and six months ended June 30, 2007, the Company paid to the
        affiliated entity $58,200 and $102,400 (2006 - $21,233 and $34,311),
        respectively, representing the fair market value for services
        received. There was an outstanding payable balance of $nil (2006 -
        $31,194) with the related company at June 30, 2007.

        The Company utilizes the services of a consultant, through his
        operating company, who is considered a related party by virtue of
        significant influence on the Company's drilling operations. The
        Company pays the related party's operating company a management fee,
        has provided the related party full time use of offices in its
        premises at below market rates for rent, granted the related party
        stock options and provided the related party an interest free loan to
        purchase shares in the Company. For the three and six months ended
        June 30, 2007, the net Company transactions were $9,680 received and
        $5,120 paid (2006 - $94,127 paid and $532,216 paid), respectively, to
        the related party, representing the fair market value for services
        received. The outstanding related party balance was $nil at June 30,
        2007 (2006 - $nil). The Company estimates the fair market value of
        the subsidized rent to be approximately $11,600 for the period ended
        June 30, 2007 (2006 - $17,750). Effective April 15, 2006, this
        consultant became an employee of Silverwing.

        During the three and six months ended June 30, 2007, the Company
        utilized the services of a drilling company of which two directors of
        Silverwing are officers. The total purchased services amounted to
        $18,500 (2006 - $nil) for the six-month period and $nil for the
        three-month period. The balance owing to the related company was
        $116,000 as at June 30, 2007 (2006 - $nil). The transactions are in
        the normal course of operations and are measured at the exchange
        amount that approximates fair market value of the services.

        The Company granted share purchase loans to employees in 2004 for the
        purchase of the Company's flow-through shares at that time. The loans
        are non-interest bearing and are to be fully repaid by October 31,
        2007. The loan balance from the employees was $30,600 at June 30,
        2007 (2006 - $76,500).

    10. Commitments

        (a) Flow-Through Shares

            In the fourth quarter of 2006, the Company committed to renounce
            $7.0 million of exploration expenditures pursuant to a flow-
            through common share issue completed on December 21, 2006.
            Silverwing has until December 31, 2007 to incur these exploration
            expenditures. As at June 30, 2007, $6.8 million of the obligation
            remained outstanding.

        (b) As at June 30, 2007, the Company had the following annual rental
            commitments on a sublease for office premises and equipment as
            follows:

            -----------------------------------------------------------------
            (000s)                                                        ($)
            2007                                                          46
            2008                                                           8
            2009                                                           8
            2010                                                           2
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            Subsequent to June 30, 2007, additional office rental commitments
            of $113,000 for 2007, $300,000 for 2008, 2009 and 2010 and
            $322,000 for 2011 were made.

        (c) Drilling Contracts

            During 2006, the Company entered into a one-year and a three-year
            drilling contract. In the one-year contract, Silverwing is
            committed to a 260-day guarantee within a 365-day period
            commencing June 1, 2006 with 99 days remaining at June 30, 2007.
            Subsequent to June 30, 2007, the 260-day contract was given an
            extension to November 30, 2007 to fulfill the remaining 99 days.
            In the three-year contract, Silverwing is committed to a 560-day
            guarantee within an 830-day period commencing October 14, 2006
            with 422 days remaining at June 30, 2007. If the Company is
            unable to fulfill the operating day commitment, a shortfall
            penalty of $8,500 and $18,500 for each day or portion thereof for
            each contract, respectively, will be charged to Silverwing upon
            completion of the term.

            If Silverwing does not require the use of each rig during the
            duration of the contract term, the drilling contractor will put
            forth best efforts to contract the rig to another party. Should
            the drilling contractor be successful, any days worked for the
            other party during the contract term will be credited towards
            Silverwing's guaranteed day contract commitment on a prorated
            basis equal to each day worked for the other party. The combined
            drilling commitment for the rigs as at June 30, 2007 was
            $8.6 million. On July 31, 2007, Silverwing negotiated an
            extension of the one-year contract to November 30, 2007.

        (d) Farm-In Agreement Contingency

            The Company has a farm-in agreement to drill 29 wells to earn
            lands in the Tomahawk project area of central Alberta. As at
            June 30, 2007, 7 of these wells have been drilled with 22
            remaining to be drilled by December 31, 2007, subject to securing
            regulatory approvals. As at June 30, 2007, management estimates
            that the total maximum contingent liability for noncompliance of
            the terms of the farm-in agreement is $10.9 million, being the
            non-performance fee associated with the 22 locations remaining to
            be drilled. Upon payment of this fee, the commitment will be met
            and the Company would have a minimum of two years to earn the
            lands by drilling the remaining wells, subject to regulatory
            approvals. If this payment is not met, the Company will forfeit
            any interest earned in these properties with respect to costs
            incurred to date.

            The Company secured an extension of the farm-in agreement to
            December 31, 2007, which included a fee of $0.5 million and a
            deposit of $11.1 million paid to the farmors. The deposit is
            being held in trust and will be subsequently drawn down to
            fulfill the farm-in agreement obligations as costs are incurred.
            As at June 30, 2007, the deposit balance was $11.1 million and is
            presented as restricted cash on the balance sheet.

    11. Subsequent Events

        The Company completed a private placement on August 2, 2007 for net
        proceeds of $27.6 million. The placement consisted of 142,303,000
        units and 6,414,166 flow-through common shares, priced at $0.20 and
        $0.24 per share, respectively. The units were comprised of one common
        share and one common share purchase warrant, with each warrant
        enabling the holder to purchase one additional share from the Company
        at $0.25 per share that expire on August 2, 2010. In addition,
        5,205,101 broker warrants were issued at an exercise price of $0.25
        per warrant. Upon closing of the private placement, the Company
        repaid the $13.0 million bridge loan in full.
    




For further information:

For further information: Oleh Wowkodaw, President and Chief Executive
Officer; Martin D. Rude, Vice President, Finance and CFO, Silverwing Energy
Inc., 1250, 635 - 8th Avenue SW, Calgary, Alberta, T2P 3M3, Phone: (403)
263-5555, Fax: (403) 263-5549

Organization Profile

SILVERWING ENERGY INC.

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