Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

November 09, 2007 12:41 ET

Accrete Energy Inc. Announces Third Quarter 2007 Results

CALGARY, ALBERTA--(Marketwire - Nov. 9, 2007) - Accrete Energy Inc. (TSX:GZ) is pleased to announce the operational and financial results for the nine month period ended September 30, 2007.

Accrete Energy Inc. is an aggressive, drill-oriented junior oil and gas exploration company with a focused high quality asset base in Alberta. The Company maintains high working interests and the proven management team operates all but a minor amount of its properties. It has developed a focused inventory of drilling prospects at Harmattan, Claresholm, Edson, Saxon and Pouce Coupe and has production from each of those areas.



Highlights

3 Months 3 Months
$ Thousands except Ending Ending
production/day and common September September
shares information 30, 2007 30, 2006 % Change
----------------------------------------------------------------------------
Total revenue 11,499 9,584 17%

Funds flow from operations (1)
Total 5,428 4,895 11%
Per share basic 0.33 0.32 3%

Net income
Total 677 744 (9)%
Per share basic 0.04 0.05 (20)%
Per share diluted 0.04 0.05 (20)%

Common shares outstanding 16,272 15,250 7%

Debt, net of working capital 57,065 47,366 20%

Operational :
Sales 11,499 9,584 20%
Royalties 2,740 2,390 15%
Operating costs 1,975 1,417 39%
Net Back (2) 6,784 5,777 17%
Net Back/ bbl (2) 21.86 24.13 (9)%

General and administrative 679 440 56%
General and administrative $/bbl 2.19 1.84 19%
Volumes :
Natural gas (mcf/d) 14,390 9,073 59%
Oil (bbl/d) 100 196 (49)%
NGL's (bbl/d) 875 894 (2)%
Total Boe/d 3,373 2,602 30%

Wells Drilled (Gross) :
Oil - 4 n/a
Gas 2 3 (33)%
D&A - 1 n/a
Total 2 8 (75)%

Capital Expenditures 6,590 21,672 (70)%

Notes:
(1)(2) Accrete's definition of funds flow from operations and/or netbacks
may not be comparable to that reported by other companies. See the
caption Non GAAP Measures.


President's Message

Accrete Energy Inc. is pleased to report to shareholders its third quarter financial and operational results.

The Company continued to expand its production and opportunity base in the Claresholm area. Two gas wells were drilled and completed bringing the area total to 6, with 10 productive zones identified. The Company has also agreed to shoot another 3-D seismic program on an adjacent 50% land block to earn an additional 10%. This program should be interpreted by mid-November. Any further success in this area will prompt an evaluation of our existing facilities with a view to expansion.

The Harmattan area continues to be the cash flow engine for the Company. As this property matures, decline rates continue to shrink. At present the property produces on a steady, predictable basis, with declines of approximately 13%. The Company will drill a Viking formation test by the end of November on its 100% lands which, if successful, will be producing by year end.

Future production and reserve growth will come from the Saxon area. An extensive 3-D seismic program will be shot over the northern portion of Accrete's 100% 18 3/4 section land base before year end. The Company intends to drill four wells in this area before spring break up.

The past 12 months have certainly presented some challenges to Accrete. In October of 2006, the federal government announced changes to the taxation of Royalty Income Trusts. This caused a sell off in the market of junior energy producers over liquidity concerns. Capital costs in the oilfield service industry continued to increase, causing significant increases to finding and development costs. A lack of extreme weather in North America caused a surplus of natural gas, which tempered prices. Most recently the Alberta provincial government has proposed increases to resource royalties which will impact virtually all aspects of the oil and gas industry.

Despite these challenges, Accrete has continued to focus on growth by increasing production 26% since the start of the year and building our reserve base by 2.7mmboe or 28% in the same time period. The Company has scrutinized capital projects which has led to reserve additions at less than $12/boe and maintained cost effective operations of about $6/boe.

Most importantly, notwithstanding a significant discount in the share price of the Company, motivation continues to be strong among employees and directors. In the last 12 months, Insiders have purchased almost 360,000 shares, or 2.2% of the Company, bringing total Insider ownership to 28%. This reflects an exceptional display of commitment and belief in the Company as well as an uncanny ability to recognize a bargain.

We thank you for your continued support.

Peter M. Salamon

President


Management Discussion and Analysis

The following discussion and analysis was prepared on November 8, 2007 and is management's assessment of Accrete's historical financial and operating results and should be read in conjunction with the unaudited interim financial statements and related notes for the periods ended September 30, 2007 and 2006 and the audited financial statements, related notes and MD&A for the years ended, December 31, 2006 and 2005.

The financial data presented is based upon financial statements that have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and measurement currency is the Canadian dollar.

Additional information may be found on the Company's web site at www.accrete-energy.com and on the SEDAR web site at www.sedar.ca.

Accrete was established on June 1, 2004 and is a Calgary based, natural gas focused exploitation and development company that operates exclusively in Alberta Canada.

Successful drilling on a focused inventory of prospects has led to production from the Harmattan, Claresholm, Edson, Saxon and Pouce Coupe areas.

Accrete's shares trade on the Toronto Stock Exchange ("TSX") under the symbol GZ.


Business Environment

Moderate weather earlier in the year, increased US production and increased LNG imports led to a build of natural gas in storage during 2007. Storage levels remained high relative to the 5 year average. This oversupply led to relatively low natural gas prices.

The price of oil experienced periodic spikes as a result of geopolitical tension but generally trended upward as a result of strong world wide demand and a weakening US dollar.

The Canadian/US dollar exchange rate moved in favour of the Canadian dollar and this somewhat mollified the effect of rising commodity prices.

A heavy snow pack combined with moderate spring temperatures that produced wet ground conditions caused a protracted spring break up. That forced companies to postpone drilling, tie ins and other field work or alternatively, to pay for the increased costs associated with the difficult conditions.

Weather conditions were much more conducive to field operations in the third quarter.


Financial Information



Financial Information

Net Income Net Income
Total Revenue Net Income (Loss) Basic Diluted
($ thousands) ($ thousands) $/Share $/Share
----------------------------------------------------------------------------
2007
First Quarter 10,647 930 0.06 0.05
Second Quarter 11,149 1,789 0.11 0.11
Third Quarter 11,449 677 0.04 0.04
----------------------------------------------------------------------------
Total 33,295 3,396 0.21 0.20
----------------------------------------------------------------------------

2006
First Quarter 9,821 1,584 0.10 0.10
Second Quarter 9,183 1,389 0.09 0.08
Third Quarter 9,584 744 0.05 0.05
Fourth Quarter 10,734 257 0.02 0.01
----------------------------------------------------------------------------
Total 39,322 3,975 0.26 0.24
----------------------------------------------------------------------------

2005
Fourth Quarter 13,200 2,546 0.17 0.16
----------------------------------------------------------------------------


Over all, revenues have grown as a result of the Company's drilling successes. Drilling and operating costs have been negatively impacted by inflationary increases in the prices of materials and services. Operating expenses have also increased as a result of bulk purchases of supplies, increases in property taxes, start up costs on new wells and as a result of maintenance on wells drilled in prior years. General and administrative expense, before recoveries have been taken into account, has increased with the growth of the Company and a decrease in recoveries.

2007

Not withstanding challenging weather conditions that were encountered particularly during the first half of 2007, the Company drilled a total of 10 wells (8.5 net) to the end of the 3rd quarter 2007. This drilling resulted in the addition of 1(0.9 net) oil well and 9 (7.6) gas wells. A success rate of 100% was achieved.

Various wells in the Harmattan area were shut in the 1st quarter 2007 in order to complete additional zones. As a result revenue and net income were down from the last quarter of 2006.

Production from the Harmattan wells that had been shut in was regained and new production from wells drilled at Claresholm resulted in an increase in average volumes from 2,667 boe/d for the 1st quarter to 2,760 boe/d for the 2nd quarter 2007. Effective royalty rates increased with the announcement of the termination of the ARTC program at the end of 2006 as well as with the addition of production from farm in wells that bear overriding royalties in addition to crown royalties. The effect of this increase, however, was more than offset by the revision of gas cost allowance in respect to prior periods and by the refund of royalties previously paid on Edson production on the approval of the Company's deep gas holiday application.

The weather and ground conditions improved during the third quarter. This enabled the tie in of some of the wells drilled in previous quarters and the completion of maintenance that had been deferred because of poor weather. As a result, average production volumes increased from 2,760 boe/d to 3,373 boe/d. The effect of the gain in volume was offset in part by decreases in oil and natural gas prices and increases in operating costs.

The Company estimates that at September 30, 2007 that it had approximately 350 net barrels of oil equivalent per day behind pipe. This is comprised of 60 barrels at Pouce Coupe, 90 barrels at Edson, 80 barrels at Harmattan, 70 barrels at Ansell and 50 barrels at Claresholm.

Most of the production that is behind pipe should be tied in and on stream by the end of the year.

Prior periods

Sales figures for the 4th quarter of 2005 were very high because severe hurricane activity in the US caused a sharp increase in the sales price of natural gas.




Operational Activities

Production

3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Oil (bbl/d) 100 196 118 183
NGL (bbl/d) 875 894 908 741
----------------------------------------------------------------------------
Total Oil/NGL (bbl/d) 975 1,090 1,026 924
Gas (mcf/d) 14,390 9,073 11,460 8,988
----------------------------------------------------------------------------
Total (boe/d) 3,373 2,602 2,936 2,422
----------------------------------------------------------------------------

Natural Gas Production (mcf/d)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo 51 14 37 26
Boltan - - - 204
Claresholm 6,463 2,958 4,114 3,366
Harmattan 6,065 6,101 6,269 5,392
Edson 1,245 - 700 -
Pouce Coupe 478 - 310 -
Saxon 88 - 30 -
----------------------------------------------------------------------------
Total 14,390 9,073 11,460 8,988
----------------------------------------------------------------------------

Crude Oil Sales (bbl/d)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 100 196 118 183
Edson - - - -
Pouce Coupe - - - -
----------------------------------------------------------------------------
Total 100 196 118 183
----------------------------------------------------------------------------

Natural Gas Liquids Sales (bbl/d)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - 2
Claresholm 81 37 45 47
Harmattan 756 857 844 692
Edson 38 - 18 -
Pouce Coupe 0 - 1 -
----------------------------------------------------------------------------
Total 875 894 908 741
----------------------------------------------------------------------------


Generally speaking, the increase in production levels are a result of the Company's drilling activity at Harmattan, Claresholm, Edson and Pouce Coupe offset in part by natural declines.

Weather conditions in the 3rd quarter 2007 were more favorable to field activity. As a result, wells at Edson, Saxon, Claresholm and Pouce Coupe that had been drilled in previous quarters, were tied in.

Oil production decreased during the period at Harmattan because as that field matures, natural gas is produced preferentially to oil.

A liquids storage facility was added to the Claresholm plant so as to increase its sales capacity. Certain natural gas liquids that formerly were recombined and sold with the natural gas stream are now shipped directly from the facility. Liquids sales at Claresholm increased as a result.
Enough liquids are recombined to maintain the heating content of the Claresholm natural gas stream.

Product Prices



Natural Gas Prices ($/mcf)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo 5.39 7.44 6.27 7.15
Boltan - - - 7.89
Claresholm 5.78 6.62 6.64 7.32
Harmattan 5.30 5.65 6.67 6.36
Edson 5.53 - 6.40 -
Pouce Coupe 5.19 - 6.19 -
Saxon 4.82 - 4.82 -
----------------------------------------------------------------------------
Average Price 5.53 5.97 6.62 6.76
----------------------------------------------------------------------------


Natural gas storage levels began to build late in 2006. A cold snap in February 2007 led to a fairly significant storage drawdown that reduced the storage overhang somewhat but moderate spring and summer temperatures, increased US production and increased LNG imports caused natural gas storage levels to increase to a level that is higher than the five year average. As a result prices weakened significantly during the 3rd quarter of 2007.

During 2007, AECO natural gas daily spot prices averaged $7.33 per mcf for the 1st quarter, $7.37 for the 2nd quarter and $5.68 for the 3rd quarter. That compares to $7.56, $6.01 and $6.04 for the equivalent quarters last year. Accrete made adjustments to its marketing activities in 2007 that improved the prices received but generally followed the trend of the market. The price received for Claresholm and Edson natural gas is higher than from the other areas because liquids are recombined giving the gas a higher heating content.



Crude Oil Sales Prices ($/bbl)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 74.21 80.17 69.94 75.81
Edson - - - -
Pouce Coupe - - - -
----------------------------------------------------------------------------
Average Price 74.21 80.17 69.94 75.81
----------------------------------------------------------------------------


The trend set by world oil prices is reflected in the crude oil price realized by Accrete. World oil prices remained at relatively high levels in response to increasing demand and the fall of the US dollar. This was offset in part by the effect of the rising Canadian dollar.



Natural Gas Liquids (NGL) Sales Prices ($/bbl)

Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - 57.59
Claresholm 69.61 77.22 75.68 72.33
Harmattan 36.86 35.81 37.93 36.88
Edson 63.57 - 60.61 -
Pouce Coupe 137.05 - 75.98 -
Saxon 86.14 - 86.14 -
----------------------------------------------------------------------------
Average Price 41.13 37.54 40.31 39.19
----------------------------------------------------------------------------


NGLs produced at Harmattan comprise a considerable portion of ethane which is relatively low priced. A one time adjustment was made to Pouce Coupe and Claresholm production in the first quarter that was relatively immaterial in absolute dollar value, but that affected the pricing statistics on a unit basis.



Revenue
Total Sales
($ thousands)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Oil 676 1,488 2,242 3,789
NGL 3,311 3,087 9,995 7,926
Gas 7,317 4,986 20,722 16,585
Processing 195 63 336 288
----------------------------------------------------------------------------
Total 11,499 9,584 33,295 28,588
----------------------------------------------------------------------------

Natural Gas Sales Revenue
($ thousands)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo 25 9 63 51
Boltan - 4 - 439
Claresholm 3,434 1,802 7,456 6,728
Harmattan 2,958 3,171 11,417 9,367
Edson 633 - 1,222 -
Pouce Coupe 228 - 525 -
Saxon 39 - 39 -
----------------------------------------------------------------------------
Total 7,317 4,986 20,722 16,585
----------------------------------------------------------------------------

Crude Oil Sales Revenue
($ thousands)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 676 1,448 2,242 3,789
Edson - - - -
Pouce Coupe - - - -
----------------------------------------------------------------------------
Total 676 1,448 2,242 3,789
----------------------------------------------------------------------------

Natural Gas Liquids (NGL) Sales Revenue
($ thousands)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - 31
Claresholm 519 266 934 930
Harmattan 2,560 2,821 8,738 6,965
Edson 224 - 302 -
Pouce Coupe 5 - 18 -
Saxon 3 - 3 -
----------------------------------------------------------------------------
3,311 3,087 9,995 7,926
----------------------------------------------------------------------------

Processing Revenue
($ thousands)
Area 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 87 - 87 -
Harmattan 108 63 249 288
Edson - - -
Pouce Coupe - - -
----------------------------------------------------------------------------
Total 195 63 336 288
----------------------------------------------------------------------------


The increase in revenue has been primarily driven by increases in production volumes from recompletions and from the wells that were tied in. The effect of this was offset in part by natural declines and the decline in oil and natural gas prices.

Processing fees are charged to third parties utilizing Accrete facilities. Last July the Company acquired a partner's working interest in production at Harmattan on which it had earned processing income. The reduction in processing fees that resulted from this was offset by custom processing of production from other operators that tied their wells into the Accrete facility in the period.

At Claresholm, wells were drilled on farm in lands in 2007. The partners' production from these wells were gathered and processed at the Claresholm plant.



Royalties
($ thousands)

3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Area Total Rate Total Rate Total Rate Total Rate
$ $ $ $
----------------------------------------------------------------------------
Atlee-
Buffalo 11 45% 1 11% 6 10% 9 17%
Boltan (25) - - - (25) - 42 9%
Claresholm 988 25% 455 22% 1,883 22% 2,012 26%
Harmattan 1,583 25% 1,934 26% 6,528 29% 5,271 28%
Edson 89 10% - - 74 5% - -
Pouce Coupe 80 34% - - 168 31% - -
Saxon 14 33% - - 14 33% - -
----------------------------------------------------------------------------
Total 2,740 24% 2,390 25% 8,648 26% 7,334 28%
----------------------------------------------------------------------------


Crown royalties were $2,069,000 for the third quarter and $6,374,000 for the year to date. Total gross overriding royalties were $578,000 and $1,940,000 respectively. Freehold royalties totaled $93,000 and $334,000 respectively.

Royalties, in terms of absolute dollars, increased because production increased.

Revisions related to prior period's gas cost allowance were received and booked in the second and third quarter 2007 that offset the effect of the elimination of the ARTC program and the effect of the addition of production from farm in wells that bear overriding royalties in addition to crown royalties.

The Company applied for and received a deep gas royalty holiday for the production from its Edson wells.

The application was approved and the crown royalty that had been paid was refunded in the second quarter of 2007.

Pouce Coupe and Saxon production is subject to crown royalties only and the rate fairly reflects that which is assessed by the provincial authorities.



Production and Transportation Expenses
($ thousands except per boe information)

3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Area Total $/boe Total $/boe Total $/boe Total $/boe
$ $ $ $
----------------------------------------------------------------------------
Atlee-
Buffalo 10 13.24 3 16.19 33 19.72 17 14.37
Boltan 2 - 11 n/a 2 - 189 19.23
Claresholm 386 3.64 327 6.71 648 3.25 982 5.92
Harmattan 1,292 7.52 1,076 5.65 3,595 6.56 2,347 4.85
Edson 222 9.75 - - 381 10.33 - -
Pouce Coupe 50 6.78 - - 157 10.90 - -
Saxon 13 9.02 - - 13 9.02 - -
Minor
properties - - - n/a - - 2 n/a
----------------------------------------------------------------------------
Total 1,975 6.36 1,417 5.92 4,829 6.02 3,537 5.35
----------------------------------------------------------------------------


The purchase prices of materials, supplies and labour continued to climb during the 3rd quarter.

A work over was done on one of the Atlee Buffalo wells. Although the cost was relatively low, production is very small and fluctuations which are relatively small relative to total corporate expenses cause large changes in the rate per barrel.

The relatively high per unit costs in Edson and Pouce Coupe are as a result of start up costs and bulk purchases of supplies.

Last year's unit costs at Claresholm included startup costs on new wells and the gas plant. The lower unit cost this year also occurs because production rates are relatively high on a per well basis and this causes fixed costs to be spread over larger volumes.

The weather improved in the 3rd quarter and this enabled the Company to perform maintenance that it previously had to postpone at Harmattan. Bulk purchases of materials such as methanol were made for that area in the 3rd quarter as well. Property taxes increased significantly at Harmattan as assessments caught up with the development in the area.




Field Netback

Field Netback
($/boe) 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Area September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Atlee-Buffalo 4.45 23.46 14.05 21.26
Boltan - n/a - 24.37
Claresholm 24.90 26.33 29.74 28.09
Harmattan 20.03 23.60 31.90 26.42
Edson 24.29 - 29.13 -
Pouce Coupe 14.07 - 15.26 -
Saxon 11.32 - 11.32 -
----------------------------------------------------------------------------
Field Netback 21.86 24.13 24.72 26.79
----------------------------------------------------------------------------


Field net backs basically reflect the variances in product prices for natural gas, decreased royalty rates and increases in operating costs.




General and Administrative Expense
($ thousands) 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Salary & Benefits 575 436 1,751 1,524
General Office Expenses 309 322 1,197 1,043
----------------------------------------------------------------------------
G & A before recoveries 884 758 2,948 2,567
Recoveries (205) (318) (586) (742)
----------------------------------------------------------------------------
Net G&A Expense 679 440 2,362 1,825
----------------------------------------------------------------------------


The Company has increased staffing levels over the past year and now employs 16 people.

Year on year, office expenses increased with inflationary pressure.

General and administrative expenses are recovered through billings to participants in company operated projects in accordance with standard industry practice. The decrease in recoveries relates to the decrease in capital expended on capital projects.

Interest Expense

Accrete utilized its operating line of credit and funds flow to fund its 2007 capital program. At September 30, 2007, Accrete's bank indebtedness was $53.7 million whereas it was $36.0 million at September 30, 2006. Interest expense of $2,064,000 was incurred in the first three quarters of 2007 versus $982,000 for the equivalent period in 2006 reflecting the increase in debt as well as changes to the prime rate.

Stock-Based Compensation

Stock-based compensation is accounted for using the fair value method. Under the fair value method of accounting, this compensation expense is recorded in the earnings statement over the vesting period.

No options were granted during the 2nd and 3rd quarter of 2007 but 50,000 options were granted with an exercise price of $5.26/share and 380,000 options were granted with an exercise price of $5.20/share during the 1st quarter of 2007.

An estimated fair value of $2.14/share was calculated for the $5.26 options and an estimated fair value of $1.88/share was calculated for the $5.20 options as at the dates of the respective grants using the Black-Scholes model. The Company has accounted for its employee stock options granted using the fair value method. The fair value of all options granted to September 30, 2007 was estimated to be $4,509,000 ($2.43 per option granted). This value is charged to stock based compensation cost over the vesting period. A total of $204,000 was charged to expense in the 3rd quarter 2007 ($ 132,000 in the 3rd quarter 2006).

Depletion Depreciation & Accretion

Depletion, depreciation and accretion of the asset retirement obligation for the 3 and 9 month period ended September 30, 2007 totaled $4,210,000 or $13.57/boe and $10,656,000 or $13.30/boe respectively. This compares to 2006 charges of $3,557,000 or $14.72/boe and $9,356,000 and $14.11/boe for the equivalent 3 and 9 month periods in 2006.

Costs of $8,580,000 relating to unproved properties have been excluded from costs subject to depletion for the 9 month period ended September 30, 2007. This included the costs of undeveloped land at Ansell, Saxon and Pouce Coupe that has been purchased at land sales for future exploitation.


Income Taxes

The Company is not liable for any cash taxes and does not expect to incur current income taxes in 2007. The Company's future tax horizon after 2007 will be affected by, among other things, future production volumes, capital expenditures and commodity prices.

The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded.


Funds Flow

Funds flow from operations for the three months ended September 30, 2007 was $5,428,000 ($0.33 per share), and $15,537,000 ($0.95 per share) for the 9 months ended September 30, 2007.


Normal Course Issuer Bid

On March 20, 2007, the Company announced that the Toronto Stock Exchange had approved a normal course issuer bid. The Company may acquire a maximum of 1,000,000 common shares by way of the issuer bid. 226,100 shares were acquired on the open market pursuant to the issuer bid at prices ranging from $3.90 to $5.05. All shares acquired pursuant to the issuer have been cancelled and returned to treasury.




Capital Expenditures

Capital expenditures for the nine months ending September 30, 2007:

($ thousands) 3 Months 3 Months 3 Months 9 Months
Ended Ended Ended Ended
March June September September
31, 2007 30, 2007 30, 2007 30, 2007
$
Drilling and Completions 15,201 2,308 3,066 20,575
Equipping and Tie-Ins 1,526 2,285 1,855 5,666
Land 2,354 1,101 1,669 5,124
Office Equipment 11 1 - 12
----------------------------------------------------------------------------
Total Cash Expenditures 19,092 5,695 6,590 31,377
Allowance for future restoration
expenditures 70 28 43 141
----------------------------------------------------------------------------
Total 19,162 5,723 6,634 31,518
----------------------------------------------------------------------------


The Company drilled 2 (1.4 net) gas wells during the 3rd quarter of 2007 versus a total of 8 (5.3 net) wells during the 3rd quarter of 2006.

For the 9 months ended September 30, 2007, the Company drilled 10 wells (8.5 net), comprising 1 (0.9 net) oil well and 9 (7.6 net) gas wells. A success rate of 100% was achieved.

During the equivalent period of 2006 the Company drilled 19 wells (14.1 net), comprising 11 (8.9 net) oil wells, 7 (5.2 net) gas wells and 1 (0.01 net) dry hole.


Liquidity and Capital Resources

At September 30, 2007 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $60,000,000.

This facility bears interest at bank prime plus one eighth percent and has no specific terms of repayment aside from the bank's right of demand and periodic review.

The capital intensive nature of the Company's activities may create a negative working capital position from time to time.

The banking facility together with projected funds flow should provide adequate funding for the remainder of the Company's 2007 drilling program.




$
(thousands)
-----------
Exploration and development program funding

Cash, Beginning of Year -
Funds flow from operations 15,537
Change in non-cash working capital (387)
Normal Course Issuer Bid, net of recoveries of previously
booked issuance costs (1,070)
Increase in Bank Debt 17,297
Cash, end of period -
-----------
Net capital expenditures 31,377
-----------


Accrete intends to fund its capital expenditure program from internally generated funds flow and debt.

Commodity prices and production volumes have a large impact on the ability of the Company to generate adequate funds flow. A prolonged decrease in commodity prices would negatively affect funds flow from operations and would also likely result in a reduction in the amount of funds flow and bank loan available for investment. This condition may also affect the availability of funds through the public equity market which may be accessed if funds are available on favorable terms.

See the caption entitled "Risks" for further items that could affect liquidity.

Outlook

The Company will maintain sufficient activity to stabilize production at Harmattan and Claresholm and will utilize the funds flow generated to develop its inventory of prospects at Edson, Pouce Coupe and Saxon.

The Company will continue to seek opportunities in new areas so as to provide future development opportunities.

Critical Accounting Estimates

There are no changes from those disclosed in the Management's Discussion and Analysis for the year ended December 31, 2006.

Risks

There are no changes to the risks to which the Company is exposed from those disclosed in the Management's Discussion and Analysis for the year ended December 31, 2006.

Changes in Legislation

Alberta Royalty Review

On October 25, 2007, the Government of Alberta released its New Royalty Framework ("NRF") which is to be the basis of royalty regulations that are to become effective on January 1, 2009. The NRF proposes a regime that would have Alberta Crown Royalty rates based on production rates, well depths and commodity prices. At this time, the detailed and specific information that is necessary to calculate the impact of the proposed regulations is not available and accordingly, the Company cannot thoroughly evaluate the impact on the Company's operations. The actual impact of the NRF will be determined by the actual legislation that will be enacted.

Greenhouse Gas and Air Emissions Legislation

The Federal Government released on April 26, 2007, its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION and which includes the Regulatory Framework for Air Emissions. This Action Plan covers not only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products. Regarding large industry and industry related projects, the Government's Action Plan intends to achieve the following: (i) an absolute reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing mandatory targets; and (ii) air pollution from industry is to be cut in half by 2015 by setting certain targets. New facilities using cleaner fuels and technologies will have a grace period of three years. In order to facilitate companies' compliance with the Action Plan's requirements, while at the same time allowing them to be cost-effective, innovative and adopt cleaner technologies, certain options are provided. These are: (i) in-house reductions; (ii) contributions to technology funds; (iii) trading of emissions with below-target emission companies; (iv) offsets; and (v) access to Kyoto's Clean Development Mechanism.

On March 8, 2007, the Alberta Government introduced Bill 3, the Climate Change and Emissions Management Amendment Act, which intends to reduce greenhouse gas emission intensity from large industries. Bill 3 states that facilities emitting more than 100,000 tonnes of greenhouse gases a year must reduce their emissions intensity by 12% starting July 1, 2007; if such reduction is not initially possible the companies owning the large emitting facilities will be required to pay $15 per tonne for every tonne above the 12% target. These payments will be deposited into an Alberta-based technology fund that will be used to develop infrastructure to reduce emissions or to support research into innovative climate change solutions. As an alternate option, large emitters can invest in projects outside of their operations that reduce or offset emissions on their behalf, provided that these projects are based in Alberta. Prior to investing, the offset reductions offered by a prospective operation must be verified by a third party to ensure that the emission reductions are real. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict the impact of those requirements on the Company and its operations and financial condition. Bill 3 does not currently have an impact on the Company as we do not own any facilities emitting in excess of 100,000 tonnes per year.

Disclosure Controls and Internal Controls Over Financial Reporting

The Chief Executive Officer and Chief Financial Officer of the Company are responsible for designing and maintaining disclosure controls and internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian Generally Accepted Accounting Principles.

The Company has implemented a system of internal controls that it believes adequately protects the assets of the Company and is appropriate for the nature of its business and the size of its operations. These internal controls include disclosure controls and procedures designed to ensure that information required to be disclosed by the Company is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

There are no changes to the disclosure controls and procedures and internal controls over financial reporting from those disclosed in the Management's Discussion and Analysis for the year ended December 31, 2006.

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

Contractual Obligations

During the fourth quarter 2006, the Company issued 1,248,300 common flow through shares at an issuance price of $8.40 per share. The tax deductions related to the flow through shares issued in 2006 were renounced to flow through shareholders and booked to the accounts in March 2007. The Company has spent the $10,486,000 on CEE expenditures that were required to be made to fulfill its flow through obligation.

The Company has committed to a term drilling program with a major drilling contractor. The Company is obligated to utilize the contractor's rig for a period of 200 days for a one year period that commenced August 15, 2007. The base rate for daywork pursuant to the contract is $12,624 per day.

The Company rents a compressor for $26,495 per month on a month to month basis.

The Company has entered into various commitments related to the leasing of office premises and office equipment. The payments due under such leases are as follows:



Contractual
obligations 2007 2008 2009 2010 2011 Thereafter
($ thousands) $ $ $ $ $ $
----------------------------------------------------------------------------

Office Premises 189 345 358 358 441 457
Office equipment 9 2 1 - - -
----------------------------------------------------------------------------
198 347 359 358 441 457
----------------------------------------------------------------------------


The current office lease expires early in 2008. Accordingly, the Company negotiated leases for new office space. The increase in the commitment for office premises reflects the dramatic increase in prices for suitable office space.

At September 30, 2007 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $60,000,000 that bears interest at bank prime plus one eighth percent.

This facility has no specific terms of repayment aside from the bank's right of demand and periodic review and is secured by a general assignment of book debts, a $100,000,000 debenture with a first floating charge over all assets with a negative pledge and an undertaking to provide fixed charges on the Company's major producing reserves at the request of the bank.

Change in Accounting Policies and Recent Accounting Pronouncements

The Company adopted the provisions of CICA Sections 3855, Financial Instruments - Recognition and Measurement, 3861, Financial Instruments - Presentation and Disclosure, 3865 Hedges and 1530 Comprehensive Income, on January 1, 2007, which addresses the classification, recognition and measurement of financial instruments and hedges in the financial statements and the inclusion of other comprehensive income. These sections were adopted on a prospective basis without retrospective restatement of prior periods.

There was no material impact on the Company's financial instruments upon adoption of CICA Sections 3855, 3861 or 1530 on January 1, 2007.

Currently, the Company does not use hedge accounting, and, as a result, the adoption of CICA Section 3865 has no material impact on the financial statements.

The Company has used financial instruments that are derivative contracts classified as "held for trading" to manage fluctuations in commodity prices, as described below. The Company had no such contracts at December 31, 2006 but entered into two "costless collars" during the first quarter of 2007. The Company has marked these contracts to market at September 30, 2007 in accordance with CICA Section 3855. The difference between the market value of these contracts and cost is reflected as an unrealized gain (loss for the period ended March 31, 2007) in the Statement of Income.



The following contracts that are classified as held for trading:

September
30,
2007
Market
Value
Type Amount Term Price ($/GJ) Type (000's $)
----------------------------------------------------------------------------
Collar 2000 Feb 1 - Oct 31, $5.50 - $8.25 at Financial
Gj/d 2007 AECO 31
Collar 2000 Mar 1 - Oct 31, $5.50 - $8.25 At Financial
Gj/d 2007 AECO 31
------------
Unrealized gain during the period 62
Future Income Tax 20
------------
Unrealized gain, net of tax 42
------------


Transactions With Related Parties

The Corporation has not entered into any material transactions with related parties, nor did it have any balances outstanding with related parties at year end.

Off Balance Sheet Arrangements

The Corporation has not entered into any off-balance sheet transactions.

Non GAAP Measures

The forgoing contains the term "funds flow from operations" and "netbacks" which should not be considered an alternative to, or more meaningful than funds flow from operating activities as determined in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") as an indicator of the Company's performance. Accrete's definition of funds flow from operations and/or netbacks may not be comparable to that reported by other companies.

The Company evaluates its performance based on net earnings, net back and funds flow. The Company considers funds flow a key measure as it illustrates the Company's ability to meet obligations necessary to repay debt and fund future growth through capital investment. Funds flow per share is presented in this discussion using the weighted average shares outstanding in a manner consistent with that used to calculate earnings per share.

The following table reconciles funds flow from operating activities, the most comparable GAAP measure to funds flow used in this MD&A:



($ thousands) 3 Months Ended 9 Months
Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Funds flow provided
by operating activities 4,829 6,307 16,117 14,804
Net changes in non-
cash working capital 599 1,412 (580) (106)
----------------------------------------------------------------------------
Funds flow 5,428 4,895 15,537 14,910
----------------------------------------------------------------------------


The following table reconciles field and corporate netback to income before taxes the most comparable GAAP measure:



($ thousands) 3 Months Ended 9 Months
Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
Income before
income taxes 976 1,206 4,405 4,891
Depletion,
depreciation and
accretion 4,210 3,557 10,657 9,356
Stock based
compensation cost 204 132 538 663
Loss on held for
trading derivative
instruments (107) - (208) -
Interest expense 822 442 2,064 982
----------------------------------------------------------------------------
Corporate netback 6,105 5,337 17,456 15,892
----------------------------------------------------------------------------
General and
administrative
expenses 679 440 2,362 1,825
----------------------------------------------------------------------------
Field netback 6,784 5,777 19,818 17,717
----------------------------------------------------------------------------


The reader is cautioned that the use of the term boe's ("barrels of oil equivalent") may be misleading particularly when used in isolation. A boe conversion of 6 mcf to 1 boe may not represent a value equivalency at the wellhead.

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgment. In the opinion of management, the unaudited interim financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized in the financial statements.

Disclaimers

Some of the statements contained herein including, without limitation, financial and business prospects and financial outlooks may be forward-looking statements which reflect management's expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as "may", "will", "should", "could", "anticipate", "believe", "expect", "intend", "plan", "potential", "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risk and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, changes in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based upon what management believes to be reasonable assumptions, management cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Forward-looking statements and other information contained herein concerning the oil and gas industry and Accrete's general expectations concerning this industry are based on estimates prepared by management using data from publicly available industry sources as well as from reserve reports, market research and industry analysis and on assumptions based on data and knowledge of this industry which Accrete believes to be reasonable. However, this data is inherently imprecise, although generally indicative of relative market positions, market shares and performance characteristics. While Accrete is not aware of any misstatements regarding any industry data presented herein, the industry involves risks and uncertainties and is subject to change based on various factors.



Accrete Energy Inc.
Balance Sheets
(Unaudited)

September 30, December 31,
2007 2006
($ Thousands) $ $
----------------------------------------------------------------------------

ASSETS

Current assets
Accounts receivable 5,808 7,421
Prepaid expenses 376 131
Fair value of derivative financial
instruments (notes 2 and 8) 62 -
----------------------------------------------------------------------------
6,246 7,552
Property and equipment (note 3) 116,458 95,506
----------------------------------------------------------------------------
122,704 103,058
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 9,571 11,325
Bank indebtedness (note 4) 53,720 36,423
Future income tax (note 8) 20 -
----------------------------------------------------------------------------
63,311 47,748

Asset retirement obligation (note 6) 1,895 1,663
Future income tax (note 7) 8,807 4,773
----------------------------------------------------------------------------
74,013 54,184
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Share capital (note 5) 36,142 39,718
Contributed surplus (note 5) 3,412 3,414
Accumulated other comprehensive income
(note 2) -
Retained earnings 9,137 5,742
----------------------------------------------------------------------------
48,691 48,874
----------------------------------------------------------------------------
122,704 103,058
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to financial statements

Approved by the Board of Directors

-----------------------------------
P.Salamon

-----------------------------------
B.Mellum


Accrete Energy Inc.
Statements of Income and Retained Earnings
(Unaudited)

Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($ Thousands) 2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue $ $ $ $
Petroleum and
natural gas
revenue 11,499 9,584 33,295 28,588
Royalties (2,740) (2,390) (8,648) (7,334)
Realized gain on
derivative 145 - 145 -
Unrealized gain
on derivative
instruments (38) - 62 -
----------------------------------------------------------------------------
8,866 7,194 24,854 21,254
----------------------------------------------------------------------------

Expenses

Production
expenses 1,765 1,302 4,329 3,239
Transportation
expenses 210 115 500 298
General and
administrative,
net of recoveries 679 440 2,362 1,825
Interest expense 822 442 2,064 982
Stock based
compensation
cost (note 5) 204 132 538 663
Depletion,
depreciation and
accretion 4,210 3,557 10,656 9,356
----------------------------------------------------------------------------
7,890 5,988 20,449 16,363
----------------------------------------------------------------------------
Income before
income taxes 976 1,206 4,405 4,891
Future income
taxes (note 7) (299) (462) (1,009) (1,174)
----------------------------------------------------------------------------
Net income for
the period 677 744 3,396 3,717
Retained Earnings -
beginning of
period 8,460 4,740 5,741 1,767
----------------------------------------------------------------------------
Retained Earnings -
end of period 9,137 5,484 9,137 5,484
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average
number of
shares (note 5) 16,272 15,247 16,422 15,238
Income per
share:
Basic 0.04 0.05 0.21 0.24
Diluted 0.04 0.05 0.20 0.23

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Retained Earnings, Comprehensive Income and Accumulated Other
Comprehensive Income
(Unaudited)


Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($ Thousands) 2007 2006 2007 2006
----------------------------------------------------------------------------
Retained
Earnings: $ $ $ $
Retained
Earnings,
beginning of
period 8,460 4,740 5,741 1,767
Net income for
the period 677 744 3,396 3,717
---------------------------------------------------------
Retained
Earnings, end of
period 9,137 5,484 9,137 5,484
---------------------------------------------------------
---------------------------------------------------------

Comprehensive
Income:
Net income for
the period 677 744 3,396 3,717
Other
comprehensive
income - - - -
---------------------------------------------------------
Comprehensive
income 677 744 3,396 3,717
---------------------------------------------------------
---------------------------------------------------------
Accumulated
other
comprehensive
income:
Accumulated
other
comprehensive
income,
beginning of
period - - - -
Effect of
adoption of new
accounting
standards (Note 2) - - - -
Changes during
the period - - - -
---------------------------------------------------------
Accumulated
other
comprehensive
income, end of
period - - - -
---------------------------------------------------------
---------------------------------------------------------

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Cash Flows
(Unaudited)

Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($ Thousands) 2007 2006 2007 2006
----------------------------------------------------------------------------
Cash provided by
(used in): $ $ $ $
Operating
Activities
Net income for
the period 677 744 3,396 3,717
Items not
affecting cash:
Stock based
compensation
cost 204 132 538 663
Future income
taxes 299 462 1,009 1,174
Unrealized
(gain) loss on
derivative
financial
instruments 38 - (62) -
Depletion,
depreciation and
accretion 4,210 3,557 10,656 9,356
----------------------------------------------------------------------------
5,428 4,895 15,537 14,910
Change in
non-cash working
capital (note 9) (599) 1,412 580 (106)
----------------------------------------------------------------------------
4,829 6,307 16,117 14,804
----------------------------------------------------------------------------
Investing
Activities
Property and
equipment
additions (6,590) (15,629) (31,377) (37,788)
Property
acquisitions and
dispositions - (6,043) - 3,300
Change in
non-cash working
capital (note 9) (1,977) 1,609 (967) (1,765)
----------------------------------------------------------------------------
(8,568) (20,063) (32,344) (36,253)
----------------------------------------------------------------------------
Financing
Activities

Bank debt 4,808 13,682 17,297 21,375
Normal Course
Issuer Bid
Net of share
issuance costs
recovered (note 5) (1,070) - (1,070) -
Proceeds on
Exercise of
Stock Options - 74 - 74
----------------------------------------------------------------------------
3,738 13,756 16,227 21,449
Increase
(decrease) in
cash - - - -
Cash - beginning
of period - - - -
Cash - end of
period - - - -
----------------------------------------------------------------------------

Supplemental
Information :
Interest Paid 822 442 2,064 982
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to financial statements



Accrete Energy Inc.

Notes to the Financial Statements

As at and for the period ended September 30, 2007

(Unaudited)

1. Significant Accounting Policies

Accrete Energy Inc. ("Accrete") is engaged in the exploration, development and production of petroleum and natural gas in Alberta.

The unaudited interim financial statements of the Company have been prepared by Management in accordance with Canadian generally accepted accounting principles, following the same accounting policies and methods of computation as the audited financial statements of Accrete Energy Inc. for the year ended December 31, 2006 except as disclosed in Note 2. These unaudited interim financial statements should be read in conjunction with the audited financial statements of Accrete Energy Inc. for the year ended December 31, 2006.

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgement. Actual results may differ from those estimates. In the opinion of management, these financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.

2. Change in Accounting Policy

The Company adopted the required standards regarding the classification, recognition and measurement of financial instruments and hedges in the financial statements and the inclusion of other comprehensive income. These sections were adopted on a prospective basis without retrospective restatement of prior periods.

Prior to adoption of the new standards, physical receipt and delivery contracts were not within the scope of the definition of a financial instrument. On adoption of the new standards, the Company elected to account for its commodity sales contracts as non-financial derivatives.

The Company does not use hedge accounting, and, as a result, the adoption of the required standards had no material impact on the financial statements.

The Company has used financial instruments that are derivative contracts classified as "held for trading" to manage fluctuations in commodity prices, as described in Note 8. The Company had no such contracts at December 31, 2006 but has entered into two "costless collars" during the period ended September 30, 2007. The Company elected to mark these contracts to market at September 30, 2007 in accordance with the required standards. The difference between the market value of these contracts and cost is reflected as an unrealized loss in the Statement of Income.

3. Property and Equipment



($ thousands)
As at As at
September 30, December 31,
2007 2006
----------------------------------
$ $
----------------------------------
Petroleum and natural gas properties and
equipment 145,692 114,186
Furniture, fixtures and other 127 114
----------------------------------
145,819 114,300
Less: Accumulated depletion and
depreciation 29,361 18,794
----------------------------------
116,458 95,506
----------------------------------


At September 30, 2007 costs of $8,580,000 ($4,045,000 at December 31, 2006) with respect to unproved properties have been excluded from costs subject to depletion. Direct salary costs related to geological and geophysical personnel in the amount of $204,000 ($138,000 in 2006) have been capitalized.

4. Bank Indebtedness

At September 30, 2007 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $60,000,000 that bears interest at bank prime plus one eighth percent.

This facility has no specific terms of repayment aside from the bank's right of demand and periodic review and is secured by a general assignment of book debts, a $100,000,000 debenture with a first floating charge over all assets with a negative pledge and an undertaking to provide fixed charges on the Company's major producing reserves at the request of the bank.

5. Share Capital

Authorized:

An unlimited number of common voting shares and an unlimited number of preferred shares issuable in series for which the directors may fix, among other things, the rights, privileges, restrictions, conditions, voting rights, rates, method of calculation and dates of payment of dividends and terms of redemption, purchase and conversion if any, and any other provisions.

Issued and outstanding:



Common Voting Shares Number of Amounts
Shares $ (thousands)
----------------------------------------------------------------------------
Balance, December 31, 2005 15,232,936 29,618
----------------------------------------------------------------------------
Exercise of Stock Options 16,666 74
Issued on private placement - flow through
shares 1,248,300 10,486
Share issuance costs net of tax (460)
----------------------------------------------------------------------------
Balance, December 31, 2006 16,497,902 39,718
Tax effect of flow through shares (3,041)
Normal course issuer bid (226,100) (544)
Share issuance costs net of tax 9
----------------------------------------------------------------------------
Balance, September 30, 2007 16,271,802 36,142
----------------------------------------------------------------------------


The tax deductions related to the flow through shares issued in 2006 were renounced to flow through shareholders and booked to the accounts in March 2007. The Company has spent the $10,486,000 on CEE expenditures that were required to be made to fulfill its flow through obligation.

The following table reconciles the common shares used in calculating net earnings per common share:



September 30,
2007 2006
--------------------------------
Weighted average common voting shares
outstanding basic 16,421,707 15,232,936
Effect of dilutive stock options 1,396,287 1,178,285
--------------------------------
Weighted average common shares outstanding
- diluted 17,807,994 16,411,221
--------------------------------


Stock Options

Under the terms of the Accrete Energy Inc. 2004 Incentive Stock Option Plan, as amended, (the "plan"), directors, officers, employees and consultants (the "Participant(s)") are eligible to be granted options to purchase common shares. The plan provides for granting up to 1,926,394 common shares.

The maximum number of option shares that may be reserved for issuance to any one Participant under the plan cannot exceed 5% of the issued and outstanding common shares.

The exercise price under the plan is defined by the plan to be the closing price on the principal stock exchange on which the common shares are traded on the last business date preceding the date of grant or if the common shares did not trade on that date, the weighted average price for the five trading days preceding the date of grant.

The vesting of stock options is determined by the board of directors and the term, as also determined by the board of directors cannot exceed five years from the date of grant of such options.

A Participant's entitlement under the plan ceases upon ceasing to be a Participant. If such cessation is involuntary, then the vested and unvested options can be exercised for a period of ninety days after such date. Where a Participant is terminated for cause, the Participant may only exercise those options that have become vested. Where a Participant is terminated by the company without cause, the Participant is entitled to exercise stock options that have vested during the notice period or in the event of compensation being paid in lieu of notice, for 21 days after ceasing to be a Participant.

Options granted under the plan are not assignable and no financial assistance is extended to Participants.

The board of directors is empowered to amend the plan. Any amendment to the plan is subject to the receipt of necessary regulatory approvals and any amendment required by applicable law or regulatory policy to be approved by shareholders does not become effective until so approved.

The following table summarizes information about stock options outstanding at September 30, 2007:



Grant Price Options Weighted Number Weighted
Outstanding Average Exercisable Average
Remaining (Vested) Exercise
Contractual Price
Life ($/Share)
----------------------------------------------------------------------------
$ 1.00 (1) 926,845 1.6 Years 926,845 1.00
$ 2.30 (2) 40,000 2.1 Years 26,667 2.30
$ 2.60 (2) 395,000 2.2 Years 263,333 2.60
$ 2.89 (2) 5,000 2.2 Years 3,333 2.89
$ 3.12 (2) 40,000 2.2 Years 26,667 3.12
$ 5.20 (1) 380,000 4.3 Years 126,667 5.20
$ 5.26 (1) 50,000 4.3 Years - 5.26
$ 7.01 (2) 9,000 2.6 Years 6,000 7.01
$ 6.91 (2) 10,000 4.0 Years 3,333 6.91
----------------------------------------------------------------------------
1,855,845 2.8 Years 1,382,845 2.46
----------------------------------------------------------------------------
(1) Five year term, vest equally over a three year period commencing on the
date of grant.
(2) Five year term, vest equally over a three year period commencing on the
first anniversary of the date of grant.


Options Outstanding :

Balance, December 31, 2005 1,465,845
Issued during 2006 10,000
Exercised and Forfeited (50,000)
Balance, December 31, 2006 1,425,845
Issued during 2007 430,000
-----------
Balance, September 30, 2007 1,855,845
-----------


The Company has accounted for its employee stock options granted using the fair value method. The fair value of options granted in 2007 was estimate to be $821,400 ($1.91 per option granted). The fair value of all options granted was estimated to be $4,508,693 ($2.43 per option granted). This value is charged to stock based compensation cost over the vesting period. A total of $204,000 was charged in the third quarter 2007 ($132,000 for 2006 third quarter), and $538,000 for the period ended September 30, 2007 (2006, $663,000).

The assumptions used in calculating the fair value include a volatility factor ranging from 31% to 52%, a weighted average risk free interest rate of 3.7% to 4.5%, and a weighted average expected life of the options of 4 to 5 years. The Company has estimated that no options will be forfeited before being fully vested.



Contributed Surplus
($ thousands)
Nine Months Ended Year Ended
September 30, December 31,
2007 2006
---------------------------------------
Balance, beginning of period 3,414 2,593
Stock Based Compensation 538 821
Normal course issuer bid (540) -
---------------------------------------
Balance, end of period 3,412 3,414
---------------------------------------

Normal Course Issuer Bid


On March 20, 2007, the Company announced that the Toronto Stock Exchange had approved a normal course issuer bid (the"NCIB"). The Company may acquire a maximum of 1,000,000 common shares by way of the issuer bid. 226,100 common voting shares have been acquired pursuant to the NCIB during the period ended September 30, 2007 at prices from $3.90 to $5.05. Shares purchased pursuant to the NCIB have been cancelled and returned to treasury.

6. Asset Retirement Obligation

Asset retirement obligation comprises:
($ thousands)



For the Period Year Ended
Ending December
September 30, 31,
---------------------------------------
2007 2006
---------------------------------------
Balance, beginning of year 1,663 1,152
Liabilities incurred 143 494
Liabilities settled - (44)
Dispositions - (47)
Accretion expense 89 108
---------------------------------------
Balance, end of year 1,895 1,663
---------------------------------------


The total future asset retirement obligation was estimated based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows to settle the asset retirement obligation is approximately $3,671,000 ($3,208,000 at December 31, 2006) which will be incurred over the next twenty five years. A credit adjusted risk-free rate of 7% and an inflation rate of 2% were used to calculate the fair value of the obligations.

7. Income Taxes

At September 30, 2007, the Company's exploration and development expenditures and undepreciated capital costs total $81,975,000. These costs may be carried forward indefinitely to reduce future taxable income.

The following reconciles the difference between income tax recorded and the expected income tax expense obtained by applying the expected income tax rate to earnings before taxes:



($ thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
$ $ $ $
----------------------------------------
Income/(Loss) before income taxes 976 1,206 4,405 4,891
Statutory Rate 32.12% 34.12% 32.12% 34.12%
Expected income tax recovery at the
combined federal and provincial
statutory rate 314 411 1,415 1,669
Crown royalties - 214 - 749
Resource allowance - (201) - (596)
Alberta Royalty Tax Credits - - - (60)
Stock based compensation cost 66 45 173 226
Attributed crown royalty income - (10) - (77)
Tax-rate adjustments (81) 1 (579) (744)
Other - 2 - 7
----------------------------------------
Future income tax expense 299 462 1,009 1,174
----------------------------------------


The following table summarizes the tax effect of temporary differences:

($ thousands)
September 30, December 31,
2007 2006
$ $
----------------------------------
Future income tax assets (liabilities):
Carrying value of capital assets in
excess of tax basis (9,825) (5,836)
Asset retirement obligation 539 483
Share issue costs 306 405
Attributed crown royalty income 173 175
Unrealized gain on derivative financial
instruments (20) -
----------------------------------
(8,827) (4,773)
----------------------------------
Current future income tax liability (20) -
Non-current future income tax liability (8,807) (4,773)
----------------------------------
(8,827) (4,773)
----------------------------------


8. Financial Instruments

Financial instruments consist primarily of accounts receivable, accounts payable, accrued liabilities, bank debt and certain financial derivatives used to manage its exposure to fluctuations in commodity prices.

There are no significant differences between the carrying value of other financial instruments and their estimated fair value.

A portion of the Company's accounts receivable are from joint venture partners in the oil and gas business and are subject to normal industry credit risk. Purchasers of the Company's petroleum and natural gas products are subject to an internal credit review designed to mitigate the risk of non-payment and the carrying value reflects management's assessment of the associated credit risks.

The Company is exposed to fluctuations in commodity prices that are based in foreign currency.

The Company did not enter into any contracts during the year that would have reduced its exposure to fluctuations in exchange rates or oil prices.

During the period ended September 30, 2007, the Company entered into the following contracts that are classified as held for trading:



----------------------------------------------------------------------------
September
30, 2007
Market
Value
Type Amount Term Price ($/GJ) Type (000's $)
----------------------------------------------------------------------------
Collar 2,000 February 1 - $ 5.50 - $8.25 at Financial 31
GJ/d October 31, 2007 AECO
----------------------------------------------------------------------------
Collar 2,000 March 1 - $ 5.50 - 9.13 at Financial 31
GJ/d October 31, 2007 AECO
----------------------------------------------------------------------------
Unrealized gain arising during the period 62
Future income tax (20)
-----
Unrealized gain - net of tax 42
-----

9. Supplemental Cash Flow Information

Change in non-cash working capital comprises: ($ thousands)

Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
----------------------------------------------------------------------------
$ $ $ $
Accounts receivable 156 (1,035) (1,613) (1,674)
Prepaid expenses 131 (124) 245 143
Accounts payable and accrued
liabilities 2,290 (1,862) 1,754 3,402
-----------------------------------------
Change in non-cash working capital 2,577 (3,021) 386 1,871
----------------------------------------------------------------------------

Relating to:
Investing activities 1,978 (1,609) 967 1,765
Operating activities 599 (1,412) (581) 106
----------------------------------------------------------------------------
2,577 (3,021) 386 1,871
----------------------------------------------------------------------------


10. Commitments

The Company has committed to a term drilling program with a major drilling contractor. The Company is obligated to utilize the contractor's rig for a period of 200 days for a one year period that commenced August 15, 2007. The base rate for daywork pursuant to the contract is $12,624 per day.

The Company has entered into various commitments related to the leasing of office premises and office equipment. The payments due under such leases are as follows:



Contractual
obligations 2007 2008 2009 2010 2011 Thereafter
($ thousands) $ $ $ $ $ $
----------------------------------------------------------------------------

Office
Premises 189 345 358 358 441 457
Office
equipment 9 2 1 - - -
----------------------------------------------------------------------------
198 347 359 358 441 457
----------------------------------------------------------------------------


Contact Information

  • Accrete Energy Inc.
    Mr. Peter Salamon
    President and CEO
    (403) 269-8846
    or
    Accrete Energy Inc.
    Mr. Tom Dalton
    Vice President Finance
    (403) 269-8846
    or
    Accrete Energy Inc.
    2100, 500 - 4th Avenue SW
    Calgary, Alberta T2P 2V6
    (403) 269-8846
    Email: investor@accrete-energy.com