Bonterra Energy Corp.

Bonterra Energy Corp.

November 12, 2009 23:59 ET

Bonterra Oil & Gas Ltd. Announces Third Quarter 2009 Results

CALGARY, ALBERTA--(Marketwire - Nov. 12, 2009) - Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX:BNE) is pleased to announce its financial and operational results for the three months and nine months ended September 30, 2009.



Highlights

Three months ended Nine Months Ended
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($ 000 except $ per Sept. 30, Sept. 30, Sept. 30, Sept. 30,
share/unit) 2009 2008 2009 2008
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FINANCIAL

Revenue - realized oil
and gas sales 20,965 34,226 60,766 99,117
Funds flow(1) 10,753 21,158 28,909 60,568
Per share/unit - basic 0.58 1.24 1.62 3.56
Per share/unit - diluted 0.57 1.22 1.62 3.53
Payout ratio(2) 76% 77% 75% 70%
Cash flow from operations 9,350 22,492 25,225 59,234
Per share/unit - basic 0.50 1.31 1.42 3.48
Per share/unit - diluted 0.50 1.30 1.42 3.45
Payout ratio(2) 87% 73% 85% 72%
Cash dividends per
share/unit(2) 0.44 0.96 1.20 2.50
Net earnings 5,790 21,125 16,427 44,841
Per share/unit - basic 0.31 1.23 0.92 2.63
Per share/unit - diluted 0.31 1.22 0.92 2.61
Capital expenditures and
acquisitions 17,660 6,038 22,616 15,002
Total assets 273,543 150,120
Working capital deficiency 14,455 47,499
Long-term bank debt 81,386 -
Shareholders'/Unitholders'
equity 74,025 57,623
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OPERATIONS(3)

Oil and NGLs
- barrels per day 3,084 2,998 3,126 3,053
- average price
($ per barrel) 65.38 103.36 56.90 97.29
Natural gas - MCF per day 10,881 7,233 11,433 7,215
- average price
($ per MCF) 3.13 8.20 3.97 8.71
Total barrels of oil
equivalent per day (BOE)(4) 4,898 4,204 5,032 4,256
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(1) Funds flow is not a recognized measure under GAAP. For these
purposes, the Company defines funds flow as funds provided by
operations before changes in non-cash operating working capital items
excluding gain on sale of property, restricted cash and asset
retirement expenditures.
(2) Cash payments per share/unit are based on payments made in respect of
production months within the quarter.
(3) Prior period volumes have been adjusted for prior period adjustments
related to various 13th month reviews and joint venture audits
completed during the third quarter. Total 2008 volume adjustments are
a negative 7,328 barrels of liquids and a negative 6,853 MCF of
natural gas.
(4) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
oil. The conversion is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead and as such may be misleading if
used in isolation.


The TSX does not accept responsibility for the accuracy of this release.

REPORT TO SHAREHOLDERS

Bonterra Oil & Gas Ltd. ("Bonterra" or "the Company") is pleased to report its operating and financial results for the three months and nine months ended September 30, 2009.

Bonterra is committed to a long-term approach in both operating its business and creating additional value for its shareholders. As a result, the Company has continued its strong dividend policy while focusing on maintaining a sustainable pace of development and a conservative capital structure. Bonterra is always looking to develop new long-term growth opportunities and is currently developing the very promising extension of the Pembina Cardium pool using horizontal multi-stage frac technology.

Operations

Bonterra's operations are highly-focused with approximately 83 percent of corporate reserves and approximately 85 percent of production from the Pembina Cardium field, Canada's largest original-oil-in-place pool (17 percent recovered to date). The Company's 2009 capital development program of $35 million is focused on unlocking additional value from the Pembina field and includes a targeted drilling program of horizontal multi stage fractured wells and vertical wells and land and corporate acquisitions.

Bonterra has developed a drilling inventory of over 14 years comprised of 400 primarily oil locations, including 80 to 100 horizontal locations in the Pembina field outside of the traditional producing area and numerous horizontal wells in the existing producing area (the number will be determined when there is a longer history from wells already drilled in this area by other oil companies). To date, Bonterra has drilled five gross (3.409 net) Pembina Cardium horizontal oil wells, all outside of the traditional producing area.

The first well was placed on production in February of this year with cumulative production to the end of October of 39,000 BOE. The second well was placed on production in August of this year with cumulative production of 17,200 BOE, also to the end of October. The two wells are currently producing at a combined rate of approximately 235 BOE per day of clean oil.

The third well came on production in mid-October and is currently producing approximately 40 BOE per day. This well was drilled further from the edge of the main Cardium pool (where the reservoir quality is poorer) as part of a farm-in to earn additional potential lands. Bonterra is currently monitoring the well's productivity to ensure there are no mechanical issues with the well and will be evaluating if remedial work may be required to improve the well's productivity.

The fourth well was completed and tested at significant rates after recovery of all its load oil. This well is expected to produce at rates similar to the first two wells. The well is currently shut-in for a required pressure build-up and tie-in. The well should be on production by mid-November.

The fifth well has been drilled and will be completed in November and placed on production by early December. Initial well information is encouraging. The drilling rig, after a brief weather delay, has commenced drilling the sixth well in early November.

Bonterra has also expanded its land holding in the Pembina field with the acquisition of mineral rights at a cost of approximately $4.8 million. In addition, the acquisition of Cobalt Energy Ltd., effective July 1, 2009, included interest in approximately 11 sections of land with Cardium horizontal potential in the Pembina area and an additional 40 BOE per day of production. The company's current land position totals approximately 150 gross sections in the Pembina area (93 net) of which the Company operates approximately 110 of these sections.

The horizontal development program at Pembina has exceeded Company expectations and as such the Board of Directors and management have approved an acceleration of the program. The Company intends to add a second rig to the project in mid-November. A total of at least 10 additional horizontal wells are planned to be drilled prior to spring break-up.

Subsequent to quarter-end, Bonterra completed a disposition of non-core producing assets in the Shaunavon area of Saskatchewan to Eagle Rock Exploration for $24 million in cash and approximately 30.8 million common shares in Eagle Rock. The disposition consisted of approximately 200 BOE per day of medium gravity oil and 18.5 sections of land. Proceeds from the disposition will be used for the acceleration of the horizontal drill program in the Pembina area.

Production

Bonterra's production volumes have increased approximately 18 percent in the first nine months of 2009 from the same period last year to 5,032 BOE per day. As anticipated, production was slightly lower quarter over quarter due to longer than usual gas plant turnarounds which resulted in over 1,000 MCF per day shut in for a two week period in July. In addition, approximately 400 MCF per day was shut in at the beginning of August due to low natural gas prices. The Company will be reactivating these wells as natural gas prices continue to improve.

Production guidance for the year has been lowered to approximately 5,100 BOE per day from 5,200 BOE per day to reflect the shut-in production mentioned above, deferring of capital expenditures to the second half of the year, the Shaunavon disposition and a net negative adjustment to 2009 resulting from underpayment of joint venture parties in 2008 after the Company completed several 13th month adjustments and joint venture audits. However, this still represents an approximate 20 percent increase in 2009 average daily production rates over the previous year.

Financial

Financial results during the third quarter of 2009 continued to be negatively impacted by the low commodity price environment. Revenue and cash flow from operations in the first nine months of 2009 decreased 39 percent and 57 percent, respectively when compared to the same period in 2008 primarily due to a 42 percent decrease in crude oil prices and a 54 percent decrease in natural gas prices over the same time frame.

However, quarter over quarter revenue and cash flow from operations began to show modest improvements due mainly to the healthier crude oil prices being received. Subsequent to quarter-end, prices continued to increase with WTI crude oil averaging approximately U.S. $76.00 per barrel and AECO natural gas averaging $4.68 per MCF in the month of October.

The nine month 2009 increase in G&A to $2,835,000 from $2,577,000 in the 2008 nine month period is extremely perplexing. Despite reducing G&A costs by approximately $1,000,000, mainly from reductions in compensation paid to employees and consultants, the overall costs increased by $150,000. The $1,150,000 cost is almost entirely attributable to increases in fees for banks and the professional fees needed to deal with changes to financial and regulatory reporting requirements. These costs are out of control and contribute nothing towards Company operations. Individual companies have no control over these types of costs and something needs to be done on a united front to be able to intervene in the annual, very substantial increases that are taking place in these areas.

Bonterra's netbacks have also shown improvements with a 12 percent increase to $23.96 per BOE in the third quarter of 2009 compared with $21.45 per BOE in the second quarter of 2009. Netbacks have been positively impacted by the continued increase in crude oil prices and improving natural gas prices. In addition, Bonterra has decreased both field operating costs and general and administrative costs quarter over quarter which has contributed to the enhanced netback levels.

As a result, Bonterra was able to increase the dividend to shareholders to $0.16 per share beginning with the October 30, 2009 dividend payment (September 2009 production month) from $0.14 per share previously.

Cash payments to shareholders during the second quarter of 2009 totaled $0.44 per share with a payout ratio of 76 percent of fund flow. The Board of directors and management will continue to monitor dividend levels, payout ratios and capital expenditures on a monthly basis and will adjust the payment if necessary.

Outlook

To ensure sustainability, the Company continues to develop new long-term, lower-risk opportunities with a particular focus on the acceleration of its Pembina Cardium horizontal play. The lower pricing environment may still provide opportunities for the Company in acquiring additional land and producing properties or additional corporate acquisitions for further growth of its asset base. As well, Bonterra will continue to seek out opportunities to strengthen its financial position through cost-reduction initiatives, project reviews and the implementation of further operational efficiencies across the company.

Subject to commodity prices and regulatory policies such as the Alberta competition review, Bonterra is projecting 2010 capital expenditures of $40,000,000 to $50,000,000, production volumes of 5,700 BOE per day to 6,000 BOE per day and a debt to cash flow ratio of approximately 1.5 to 1.

Bonterra remains well-positioned to continue paying a high dividend, maintaining the long-term sustainability of its business and providing superior value to its shareholders.



(signed) (signed)

George F. Fink Randy M. Jarock
Chief Executive Officer and President and Chief Operating
Director Officer


A DISCUSSION OF FINANCIAL AND OPERATIONAL RESULTS

The following press release is a review of the operations and current financial position for Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") and should be read in conjunction with the unaudited financial statements for the nine months ended September 30, 2009, including the notes related thereto, and the audited financial statements for the fiscal year ended December 31, 2008, together with the notes related thereto.

Non-GAAP Measures

Throughout the press release we use the terms "payout ratio" and "cash netback" to analyze operating performance. Payout ratio is calculated by dividing cash distributions/dividends to unitholders/shareholders by cash flow from operating activities both of which are measures prescribed by GAAP which appear on our consolidated statements of cash flows. Cash netback is calculated by dividing various operation and deficit statement items as determined by GAAP by total production on a barrel of oil equivalent basis. The above terms do not have standardized meaning or definition as prescribed by GAAP and therefore may not be comparable with the calculation of similar measures by other entities."

Forward-looking Information

Certain statements contained in this press release include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this press release includes, but is not limited to: expected cash provided by continuing operations; cash dividends; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and demand; expansion and other development trends of the oil and gas industry; business strategy and outlook; expansion and growth of our business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; credit risks; and other such matters.

All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control.

Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do, what benefits will be derived there from. Except as required by law, Bonterra disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.

The forward-looking information contained herein is expressly qualified by this cautionary statement.



Quarterly Comparisons

2009
-------------------------------------------------------------
Financial ($ 000 except
$ per share) Q3 Q2 Q1
-------------------------------------------------------------
Revenue - realized oil
and gas sales 20,965 20,501 19,300
Cash flow from operations 9,350 9,238 6,632
Per share - basic 0.50 0.52 0.38
Per share - fully diluted 0.50 0.52 0.38
Cash payments per share(1) 0.44 0.40 0.36
Payout Ratio(1) 87% 77% 94%
Net earnings 5,790 4,544 6,093
Per share - basic 0.32 0.26 0.35
Per share - fully diluted 0.32 0.26 0.35
Capital expenditures
and acquisitions 17,660 2,255 2,696
Total assets 273,543 258,393 260,732
Working capital deficiency 14,455 13,989 14,909
Long-term bank debt 81,386 71,573 89,383
Shareholders' equity 74,025 72,332 56,377
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Operations(2)
Oil and NGLs
(barrels per day) 3,084 3,029 3,268
Natural gas (MCF per day) 10,881 11,551 11,877
Total BOE per day(3) 4,898 4,954 5,245
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2008
-------------------------------------------------------------------------
Financial ($ 000 except
$ per share/unit) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue - realized oil
and gas sales 22,613 34,226 34,398 30,493
Cash flow from operations 10,336 22,492 20,530 16,212
Per share/unit - basic 0.59 1.31 1.21 0.96
Per share/unit -
fully diluted 0.59 1.30 1.20 0.96
Cash payments per
share/unit(1) 0.62 0.96 0.84 0.70
Payout Ratio(1) 105% 73% 69% 73%
Net earnings 10,585 21,125 12,912 10,804
Per share/unit - basic 0.62 1.23 0.76 0.64
Per share/unit -
fully diluted 0.62 1.22 0.75 0.64
Capital expenditures
and acquisitions 30,405 6,038 2,543 6,421
Total assets 265,301 150,120 153,247 150,169
Working capital deficiency 23,878 47,499 57,148 57,810
Long-term bank debt 79,910 - - -
Shareholders'/unitholders'
equity 56,777 57,623 46,612 48,136
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Operations(3)
Oil and NGLs
(barrels per day) 3,055 2,998 3,009 3,153
Natural gas (MCF per day) 8,817 7,233 7,272 7,139
Total BOE per day(2) 4,525 4,204 4,221 4,343
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2007
-------------------------------------------------------------------------
Financial ($ 000 except
$ per unit) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue - realized oil
and gas sales 26,573 23,794 23,462 22,602
Cash flow from operations 13,369 11,886 13,413 12,765
Per unit - basic 0.79 0.70 0.79 0.76
Per unit - fully diluted 0.79 0.70 0.79 0.76
Cash distributions(1) 0.66 0.66 0.66 0.66
Payout Ratio(1) 84% 94% 84% 87%
Net earnings 8,372 8,945 5,371 7,662
Per unit - basic 0.49 0.53 0.32 0.45
Per unit - fully diluted 0.49 0.53 0.32 0.45
Capital expenditures
and acquisitions 7,213 2,763 1,699 7,625
Total assets 143,239 138,140 139,432 140,926
Working capital deficiency 58,766 50,041 49,595 49,288
Long-term bank debt - - - -
Unitholders' equity 44,218 50,820 51,920 57,646
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Operations
Oil and NGLs
(barrels per day) 3,098 3,054 3,074 3,227
Natural gas (MCF per day) 7,176 6,196 6,663 6,470
Total BOE per day(3) 4,295 4,086 4,184 4,305
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(1) Cash payments per share/unit are based on payments made in respect of
production months within the quarter.
(2) 2009 and 2008 quarterly volumes have been adjusted for prior period
adjustments related to various 13th month reviews and joint venture
audits that were completed during the third quarter of 2009.
(3) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
oil. The conversion is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead and as such may be misleading if
used in isolation.


Production
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Crude oil and
NGLs (barrels
per day) 3,084 3,029 2,998 3,126 3,053
Natural gas
(MCF per day) 10,881 11,551 7,233 11,433 7,215
-------------------------------------------------------------------------
Average BOE
per day 4,898 4,954 4,204 5,032 4,256
-------------------------------------------------------------------------


Barrels of oil equivalent (BOE) are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation.

Production volumes for the first nine months of 2009 were up 18.2 percent over the corresponding 2008 period. Added production related to the Silverwing Energy Inc. (Silverwing) acquisition, Bonterra's 2009 drilling program including the production from the Company's first two Pembina Cardium horizontal wells, new gas wells drilled and optimization of existing wells. These additions more than offset Bonterra's average corporate production decline.

During the third quarter the Company completed several 13th month adjustments and joint venture audits. The result of these audits was a net negative adjustment to 2008 volumes of 7,328 barrels of oil and natural gas liquids and 6,853 MCF of natural gas. These volumes and adjustments to quarters one and two of 2009 have been adjusted to each respective quarter.

Q3 2009 production was down 56 BOE per day from Q2 2009. The modest production declines per day during Q3 2009 compared with Q2 and Q1 2009 is mainly due to the lack of capital expenditures in the first two quarters of 2009 (Q3 2009 - $17,660,000; Q2 2009 - $2,255,000; Q1 2009 - $2,701,000) and reductions in natural gas production resulting from shut-in gas wells due to extensive plant maintenance and shut-in wells due to low gas prices.

The Company did not drill any wells in 2009 before June when it commenced with this year's drill program. Since June, Bonterra has drilled four horizontal wells (net 2.72) and five vertical wells (net 4.75). The Company's first horizontal well was drilled in 2008 and was completed in Q1 2009. All of the drilled wells to date started producing during the latter part of Q3 or in Q4. In November, the Company engaged the serves of a second rig and will continue its horizontal drill program with both rigs for the balance of 2009 and until road bans are imposed in March 2010. Bonterra's first two wells have been producing for 9.5 months and 3.5 months, respectively and the Company is pleased with results to date. The acquisition of Cobalt Energy Ltd. (Cobalt) effective July 1, 2009 resulted in only a modest increase in production but provided the Company with additional ownership in potential horizontal drilling opportunities including the horizontal wells drilled during the third quarter.

Subject to commodity prices and regulatory policies such as the Alberta competition review, Bonterra is projecting 2010 production volumes of 5,700 BOE per day to 6,000 BOE per day.



Revenue
Three months ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue - oil
and gas sales
(000's) 20,965 20,501 34,226 60,766 99,117
Average Realized
Prices:
Crude oil and
NGLs (per
barrel) 65.38 59.77 103.36 56.90 97.29
Natural gas
(per MCF) 3.13 3.64 8.20 3.97 8.71
-------------------------------------------------------------------------


Revenue from petroleum and natural gas sales decreased $38,351,000 in the first nine months of 2009 from the corresponding period in 2008 primarily due to a 42 percent drop in crude oil prices and a 54 percent drop in natural gas prices. The drop in commodity prices was partially offset with the above mentioned production increases.

Quarter over quarter the Company saw an increase in revenues of $464,000 due to improved crude oil prices offset partially by reduced gas prices and production volumes. Due to the above mentioned production adjustments, third quarter revenues were reduced by $578,000 relating to prior period items.



Royalties

Three months ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Crown royalties 1,248 674 3,523 3,286 11,399
Freehold
royalties,
gross overriding
royalties and
net carried
interests 697 587 1,134 1,785 2,921
-------------------------------------------------------------------------
Total royalty
expense 1,945 1,261 4,657 5,071 14,320
-------------------------------------------------------------------------
% of total revenue 9.3 6.2 13.6 8.3 14.4
-------------------------------------------------------------------------


Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. Most of the Company's wells are low productivity wells and therefore have low Crown royalty rates. The Company's average Crown royalty rate is approximately 5.4 percent (2008 - 10.6 percent) of gross revenue and approximately 2.9 percent (2008 - 2.7 percent) for other royalties. The increase in percent of other royalties is due to the new horizontal oil wells being drilled on freehold mineral right lands.

The recently announced new Alberta Crown royalty rates vary by prices as well as productivity levels. With recent declines in commodity prices and the Silverwing acquisition (mostly BC production with lower Crown royalty rates) the Company has experienced a significant reduction in Crown royalties in the first nine months of 2009.

The third quarter royalties have increased $684,000 over second quarter due primarily to higher crude oil pricing and increased production resulting from the Company's new horizontal oil well which has a higher royalty rate.



Production Costs

Three months ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Production costs 6,585 7,355 6,148 20,978 18,554
$ per BOE(1) 15.79 16.12 15.84 15.66 15.87
-------------------------------------------------------------------------

(1) Excludes impact of production adjustments


Total production costs in the first nine months of 2009 have increased by $2,424,000 over the first nine months of 2008. The increase is due to increased production volumes (see Production). On a per BOE basis, production costs have declined in the first nine months of 2009 compared to the same period in 2008 mainly due to a general decline in service and material costs resulting from decreased industry demand and field optimization.

During the third quarter, Bonterra recorded a reduction of $531,000 in production costs related to the above mentioned adjustments related to prior period operations.

The Company's production comes primarily from low productivity wells. These wells generally result in higher production costs on a per unit-of-production basis as costs such as municipal taxes, surface leases, power and personnel costs are not variable with production volumes. The higher production costs for the Company are substantially offset by current low royalty rates of 8.3 percent, which is much lower than industry average for conventional production and results in high cash netbacks on a combined basis despite higher than industry average production costs.



General and Administrative (G&A) Expense

Three months ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
G&A Expense 788 1,108 845 2,835 2,577
$ per BOE(1) 1.75 2.43 2.18 2.06 2.20
-------------------------------------------------------------------------

(1) Excludes impact of production adjustments


The increase in G&A expense in the first nine months of 2009 compared to the first nine months of 2008 was due to increased contract accounting personnel costs ($160,000) related to temporary staffing needs in place of full time personnel; professional service costs ($186,000) related to various legal and accounting services dealing with changes to annual filing requirements, IFRS and internal control reviews; computer services fees ($289,000) related to additional monthly geological software licensing fees, service costs related to new production accounting software, and the contracting of a new IT manager position; bad debt expense ($65,000) due to numerous accounts with small oil and gas organizations which have become delinquent; bank charges ($488,000) related to cancelling the old banking facility and setting up the new banking facility, offset partially by reduced employee compensation ($973,000).

Quarter over quarter saw a decrease of $320,000 related primarily to an increase of $258,000 in administrative charges to capital projects. The balance of the decrease was attributable to reduced costs associated with continuous disclosure and general cost reductions.



Interest Expense

Three months ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Interest Expense 815 915 545 2,556 1,994
-------------------------------------------------------------------------


Interest charges increased in the first nine months of 2009 as the average outstanding debt balance (including related party balances) increased by approximately $49 million over the first nine months of 2008. The acquisitions of Silverwing and Cobalt as well as the reorganization into a corporation resulted in approximately $47 million of additional debt. In addition the Company has incurred approximately $19 million in capital expenditures during this period. These increases were partially offset by net proceeds of $16,985,000 from a 2009 second quarter private equity issue. Offsetting the increased debt balance was an average reduction of one percent (4.5 percent in 2008 to 3.5 percent in 2009) in interest rates paid on the outstanding debt balance. Quarter over quarter saw a marginal decrease in interest charges due to reduced interest on the loan to related parties as well as timing of debt renewals.

Effective April 29, 2009, the Company entered into a new bank facility with new terms and conditions. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility. The interest rate on the new credit facility is calculated as follows:



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Level I Level II Level III Level IV Level V
-------------------------------------------------------------------------
Consolidated Total
Funded Debt(1) to Over Over Over
Consolidated Cash Under 1.0:1 to 1.5:1 to 2.0:1 to Over
flow Ratio 1.0:1 1.5:1 2.0:1 2.5:1 2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
Plus(2) 125 150 175 200 250
-------------------------------------------------------------------------
Bankers' Acceptances
Rate Plus(2) 275 300 325 350 400
-------------------------------------------------------------------------

(1) Consolidated total funded debt excludes related party amounts but

includes working capital.

(2) Numbers in table represent basis points.


Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the next fiscal quarter following the end of each fiscal quarter, with each such adjustment to be effective until the next such adjustment.

The above rate schedule combined with current bank prime and interest rates on the related party debt is expected to result in average borrowing costs of approximately three and a quarter percent for the balance of the fiscal year.

Stock-Based Compensation

Stock-based compensation is a statistically calculated value representing the estimated expense of issuing employee stock options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. Based on currently outstanding options, the Company anticipates that an expense of approximately $210,000 will be recorded for the balance of 2009, $425,000 in 2010 and $160,000 in 2011.

Depletion, Depreciation, Accretion and Dry Hole Costs

Provision for depletion, depreciation and accretion was $14,714,000 and $10,611,000, respectively for the nine month periods ending September 30, 2009 and September 30, 2008. The increase in the depletion amount was due primarily to increased production volumes and an increase in the average cost of reserves resulting from the Silverwing and Cobalt acquisitions.

Depletion, depreciation and accretion expense for Q3 2009 compared to Q2 2009 increased by $282,000 due to the additional capital cost associated with the Cobalt acquisition offset partially by reduced production volumes.

Taxes

On November 12, 2008, the Company converted from a trust to a corporation. Due to the conversion and the acquisition of Silverwing, the Company increased its usable tax pools to approximately $468,000,000. As a result of the reorganization, the Company has recorded a future income tax asset and a corresponding deferred tax credit. These amounts will be amortized into future tax expense as the associated tax pools are consumed.

The current tax provision relates to a resource surcharge of $211,000 payable to the Province of Saskatchewan as well as a capital tax amount of $269,000 payable to the Province of Quebec. The resource surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The resource surcharge rate is three percent in 2009. The capital tax payable to the Province of Quebec is a one-time charge that resulted from the Company's conversion to a corporation.



Net Earnings

Three months ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Net Earnings 5,790 4,544 21,125 16,427 44,841
-------------------------------------------------------------------------


Net earnings decreased in the first nine months of 2009 by $28,414,000 from the corresponding 2008 period. Reduced revenues resulting from decreased commodity prices were the main reason for the reduction. This reduction was partially offset by production volume gains. The Company continues to return in excess of 25 percent of its gross realized revenues in net earnings. The Company's low capital costs per BOE of reserves combined with the Company's low production decline rates should allow for continued positive earnings.

The three months ended September 30, 2009 saw an increase of $1,246,000 in net earnings from the three months ended June 30, 2009. The increase was primarily due to reduced operating and administration costs.

Comprehensive Income

Other comprehensive income for 2009 consists of an unrealized gain on investment in a related party of $1,078,000 (2009 - ($488,000)) due to an increase in the related company's fair value.



Cash Flow from Operations

Three months ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flow from
operations 9,350 9,238 22,492 25,225 59,234
-------------------------------------------------------------------------


Nine month 2009 cash flow from operations decreased 57 percent compared to first nine months of 2008 mainly due to decreased commodity prices received. Q3 cash flow increased by $112,000 from Q2 due primarily to reduced operating and administration costs offset by the reduction in operating accounts payable.

Cash Netback

The following table illustrates the Company's cash netback from operations for the nine month periods ended September 30:



$ per Barrel of Oil Equivalent (BOE) 2009 2008
-------------------------------------------------------------------------
Production volumes (BOE) 1,373,736 1,166,144
Gross production revenue $ 44.65 $ 91.94
Realized gain (loss) on risk management contracts - (7.13)
Royalties (3.69) (12.25)
Field operating costs (15.66) (15.87)
-------------------------------------------------------------------------
Field netback 25.30 56.69
General and administrative (2.06) (2.20)
Interest and taxes (2.21) (2.03)
-------------------------------------------------------------------------
Cash netback $ 21.03 $ 52.46
-------------------------------------------------------------------------


The following table illustrates the Company's cash netback from operations
for the three month periods ended:

Sept. 30, June 30,
$ per Barrel of Oil Equivalent (BOE) 2009 2009
-------------------------------------------------------------------------
Production volumes (BOE) 450,616 450,814
Gross production revenue $ 47.81 $ 44.93
Royalties (4.32) (2.76)
Field operating costs (15.79) (16.12)
-------------------------------------------------------------------------
Field netback 27.70 26.05
General and administrative (1.75) (2.43)
Interest and taxes (1.99) (2.17)
-------------------------------------------------------------------------
Cash netback $ 23.96 $ 21.45
-------------------------------------------------------------------------


Related Party Transactions

The Company owns 689,682 (December 31, 2008 - 689,682) common shares of Comaplex Minerals Corp. ("Comaplex") which have a fair market value as of September 30, 2009 of $3,386,000 (December 31, 2008 - $2,131,000). Comaplex is a publicly traded mineral company on the Toronto Stock Exchange. The Company's ownership in Comaplex represents approximately 1.2 percent of the issued and outstanding common shares of Comaplex. In addition, Comaplex owns 204,633 (December 31, 2008 - 204,633) common shares in the Company. The Company has common directors and management with Comaplex.

Comaplex paid a management fee to the Company of $248,000 (2008 - $248,000). Comaplex also shares office rental costs and reimburses the Company for costs related to employee benefits and office materials. Services provided by the Company include executive services (chief executive officer, president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. At September 30, 2009, Comaplex owed the Company $75,000 (December 31, 2008 - $56,000).

As of September 30, 2009, Comaplex has loaned the Company $12,000,000 (December 31, 2008 - Nil). The loan is unsecured and until June 30, 2009 the Company paid interest at Canadian chartered bank prime plus one quarter of a percent and it has no set repayment terms. Effective July 1, 2009, the interest rate was reduced to Canadian chartered bank prime less .25 percent. The reduction in rate was due to the lowering of the Company's bank interest rate with its banking syndicate resulting from an improved debt to cash flow ratio (see Interest Expense and Liquidity and Capital Resources sections) and since the benefits of this loan are shared with Comaplex, the interest rate was reduced accordingly.

Interest paid on this loan during the first nine months of 2009 was $134,000. This results in being a substantial benefit to Bonterra and to Comaplex. The interest paid to Comaplex by Bonterra is substantially lower than bank interest and for Comaplex the interest earned is substantially higher than Comaplex would receive by investing in bank instruments such as BA's or GIC's.

The Company also has a management agreement with Pine Cliff Energy Ltd. (Pine Cliff). Pine Cliff has common directors and management with the Company. Pine Cliff trades on the TSX Venture Exchange. Pine Cliff paid a management fee to the Company of $90,000 (2008 - $178,000). Services provided by the Company include executive services (CEO, president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. The Company has no share ownership in Pine Cliff. As at September 30, 2009, the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).

As of September 30, 2009, the Company's CEO and major shareholder has loaned the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan is unsecured, bears interest at Canadian chartered bank prime and has no set repayment terms. Effective July 1, 2009, the interest rate was also decreased to Canadian chartered bank prime less .25 percent. Interest paid on this loan during the first nine months of 2009 was $152,000. This loan results in being a substantial benefit to Bonterra and to the CEO. The interest paid to the CEO by Bonterra is substantially lower than bank interest and for the CEO the interest earned is substantially higher than the CEO would receive by investing in bank instruments such as BA's or GIC's. Subsequent to quarter end, the Company's CEO made a further loan of $1,500,000 under the same terms and conditions.

The Company's bank agreement requires that the loans to Comaplex and the Company's CEO can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility.

Liquidity and Capital Resources

During the first nine months of 2009, the Company incurred capital costs of $22,616,000 (2008 - $15,002,000). The Company drilled two (1.36 net) horizontal oil wells, five (4.75 net) vertical Cardium oil wells and commenced drilling of a third (0.68) horizontal oil well for total drilling costs of approximately $6,600,000 net of drilling credits of $1,741,000 million (see below). In addition Bonterra acquired and paid $4,746,000 for mineral rights in the Pembina area of Alberta.

On July 2, 2009, Bonterra completed its acquisition of Cobalt. The Company issued 201,438 common shares and assumed $2,856,000 of negative working capital and incurred approximately $170,000 in acquisition costs for a total calculated accounting cost of $7,105,000. This acquisition resulted in acquiring an additional 40 BOE per day of production as well as increasing the Company's working interest in approximately 11 sections of land with potential Cardium horizontal locations in the Pembina area of Alberta.

During the first nine months of 2009, Bonterra also participated in drilling a number of smaller interest natural gas wells for total costs of approximately $1,000,000 and spent approximately $1,300,000 on completion and tie in costs in respect to wells drilled in Q4 2008. The balance of the capital expenditures related to various capital projects ranging from pipeline tie-ins to maximizing natural gas production to various battery upgrades to enhance overall production from existing wells.

The government of Alberta has recently announced drilling incentives and royalty reductions in respect of wells drilled after April 1, 2009 and prior to March 31, 2011. The Company is planning to maximize the crown royalty credits available under the new drilling incentive program which will result in a substantial reduction of capital costs on a per well basis.

The Company currently has plans to spend an estimated $22,000,000 (net of drilling incentives) in 2009 (approximately $10,000,000 in the fourth quarter) on development of its oil and gas properties. Land acquisitions and property or corporate acquisitions estimated to be $13,000,000 (including the Cobalt acquisition) will bring the total to approximately $35,000,000. With the recent finalizing of the Crown royalty credit program by the Alberta government, the Company plans on contracting a second drill rig in mid November for drilling additional horizontal Pembina Cardium oil wells.

Subsequent to September 30, 2009, the Company entered into a purchase and sale agreement to divest of a portion of its Shaunavon oil production to Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX). The proceeds of disposition consist of $24,000,000 cash and 30,769,200 common shares in Eagle Rock (representing approximately 4.2 percent of the outstanding common shares of the company). The disposition closed on November 6, 2009. These funds will be used to accelerate the development of the Company's horizontal Pembina Cardium oil play.

Bonterra anticipates funding the 2009 capital program out of cash flow, the Company's line of credit, its recent equity issue and proceeds from the above mentioned sale. Effective April 29, 2009, the Company entered into a new bank facility. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility. At September 30, 2009, the Company's bank loan was $81,386,000 (December 31, 2008 - $93,235,000). The terms of the new facility provides that the loan is revolving until April 28, 2011, is subject to annual review and has no fixed payment requirements.

Subject to commodity prices and regulatory policies such as the Alberta competition review, Bonterra is projecting 2010 capital expenditures of $40,000,000 to $50,000,000.



The following is a list of the material bank covenants:

1) The Company is required to not exceed $120,000,000 in consolidated
debt (includes negative working capital but excludes debt to related
parties). As of September 30, 2009 the Company had consolidated debt
of $73,841,000.

2) Dividends paid in any quarter shall not exceed 80 percent of the
average of the previous four quarters' cash flow as defined under
GAAP. During the quarter Bonterra paid $7,781,000 in dividends. This
compares to $9,839,000 that was allowed under the bank covenant.
During the third quarter the Company received a waiver of this
requirement for the fourth quarter and instead is restricted to
paying no more than the lesser of 80 percent of quarter four cash
flow or $10,000,000.


Additional information relating to the Company may be found on www.sedar.com or visit our website at www.bonterraenergy.com.

The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details.



CONSOLIDATED BALANCE SHEETS

As at September 30, 2009 and December 31, 2008
(unaudited)

($ 000) 2009 2008
-------------------------------------------------------------------------
Assets
Current
Restricted term deposit - 20
Accounts receivable (Note 11) 11,175 11,753
Crude oil inventory 492 845
Prepaid expenses 3,910 4,222
Future income tax asset (Note 8) 9,405 2,669
Investments in related party (Note 3) 3,386 2,131
-------------------------------------------------------------------------
28,368 21,640
-------------------------------------------------------------------------
Restricted cash (Note 4) 1,012 1,252
Future income tax asset (Note 8) 78,448 85,416
Property and Equipment (Note 5)
Petroleum and natural gas properties
and related equipment 255,301 232,685
Accumulated depletion and depreciation (89,586) (75,692)
-------------------------------------------------------------------------
Net Property and Equipment 165,715 156,993
-------------------------------------------------------------------------
273,543 265,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities 12,700 23,888
Due to related parties (Note 6) 22,000 6,000
Deferred credit (Note 8) 8,123 2,305
Short-term bank debt (Note 7) - 13,325
-------------------------------------------------------------------------
42,823 45,518
Long-term bank debt (Note 7) 81,386 79,910
Deferred credit (Note 8) 56,421 64,758
Asset retirement obligations 18,888 18,338
-------------------------------------------------------------------------
199,518 208,524
-------------------------------------------------------------------------
Shareholders' Equity (Note 9)
Share capital 119,954 99,530
Contributed surplus 3,253 2,542
-------------------------------------------------------------------------
123,207 102,072
-------------------------------------------------------------------------
Deficit (51,680) (46,715)
Accumulated other comprehensive income (Note 10) 2,498 1,420
-------------------------------------------------------------------------
(49,182) (45,295)
-------------------------------------------------------------------------
Total Shareholders' Equity 74,025 56,777
-------------------------------------------------------------------------
273,543 265,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the periods ended
September 30 (unaudited) Three Months Nine Months
($ 000) 2009 2008 2009 2008
-------------------------------------------------------------------------
Unitholders' equity,
beginning of period
(Note 1) - 46,612 - 44,218
Shareholders' equity,
beginning of period
(Note 1) 72,332 - 56,777 -
Comprehensive income
for the period 6,055 20,801 17,505 44,353
Net capital contributions 3,181 903 20,424 5,393
Stock-based compensation 243 273 711 835
Dividends declared (7,781) - (21,392) -
Distributions declared - (10,966) - (37,176)
-------------------------------------------------------------------------
Unitholders' Equity,
End of Period - 57,623 - 57,623
-------------------------------------------------------------------------
Shareholders' Equity,
End of Period 74,025 - 74,025 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

For the periods ended
September 30 (unaudited) Three Months Nine Months
($000, except $ per Share) 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue
Oil and gas sales 20,965 37,174 60,766 107,446
Loss on risk management
contracts - cash - (2,948) - (8,329)
Gain on risk management
contracts - non-cash - 8,066 - 1,041
Royalties (1,945) (4,657) (5,071) (14,320)
Interest and other 3 7 63 29
-------------------------------------------------------------------------
19,023 37,642 55,758 85,867
-------------------------------------------------------------------------
Expenses
Production costs 6,585 6,148 20,978 18,554
General and administrative 788 845 2,835 2,577
Interest on debt 815 545 2,556 1,994
Reorganization costs - 752 - 752
Stock-based compensation 243 273 711 835
Depletion, depreciation
and accretion 5,191 3,601 14,714 10,611
-------------------------------------------------------------------------
13,622 12,164 41,794 35,323
-------------------------------------------------------------------------
Earnings Before Taxes 5,401 25,478 13,964 50,544
-------------------------------------------------------------------------
Taxes (Recovery)
Current 82 128 480 381
Future (471) 4,225 (2,943) 5,322
-------------------------------------------------------------------------
(389) 4,353 (2,463) 5,703
-------------------------------------------------------------------------
Net Earnings for the Period 5,790 21,125 16,427 44,841
Deficit, beginning of
period (49,689) (54,037) (46,715) (51,543)
Dividends declared (7,781) - (21,392) -
Distributions declared - (10,965) - (37,175)
-------------------------------------------------------------------------
Deficit, End of Period (51,680) (43,877) (51,680) (43,877)
-------------------------------------------------------------------------
Net Earnings Per Share
- Basic (Note 9) 0.31 1.23 0.92 2.63
-------------------------------------------------------------------------
Net Earnings Per Share
- Diluted (Note 9) 0.31 1.22 0.92 2.61
-------------------------------------------------------------------------
-------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Periods Ended
September 30 (unaudited) Three Months Nine Months
($ 000, except $ per Share) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net Earnings for the Period 5,790 21,125 16,427 44,841
Unrealized gains and losses
on investments (net of
Income taxes; Three months
ended 2009 - 44, 2008 -
(56); Nine months ended
2009 - 178, 2008 - (78)) 260 (324) 1,078 (488)
-------------------------------------------------------------------------
Other Comprehensive Income
(Loss) 260 (324) 1,078 (488)
-------------------------------------------------------------------------
Comprehensive Income 6,050 21,801 17,505 44,353
-------------------------------------------------------------------------
Comprehensive Income Per
Share - Basic (Note 9) 0.32 1.21 0.98 2.60
-------------------------------------------------------------------------
Comprehensive Income Per
Share - Diluted (Note 9) 0.32 1.21 0.98 2.59
-------------------------------------------------------------------------
-------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS

For the periods ended
September 30 (unaudited) Three Months Nine Months
($000) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating Activities
Net earnings for the
period 5,790 21,125 16,427 44,841
Items not affecting cash
Gain on risk management
contracts - non-cash - (8,066) - (1,041)
Stock-based compensation 243 273 711 835
Depletion, depreciation
and accretion 5,191 3,601 14,714 10,611
Future income taxes (471) 4,225 (2,943) 5,322
-------------------------------------------------------------------------
10,753 21,158 28,909 60,568
-------------------------------------------------------------------------
Change in non-cash
working capital
Accounts receivable 420 2,901 1,620 (1,936)
Crude oil inventory 30 12 329 99
Prepaid expenses 640 76 394 (971)
Accounts payable and
accrued liabilities (2,589) (940) (5,999) 4,102
Restricted cash 235 - 240 -
Asset retirement
obligations settled (139) (715) (268) (2,628)
-------------------------------------------------------------------------
(1,403) 1,334 (3,684) (1,334)
-------------------------------------------------------------------------
Cash Provided by
Operating Activities 9,350 22,492 25,225 59,234
-------------------------------------------------------------------------
Financing Activities
Increase (decrease)
in debt 7,612 (4,135) (14,050) (8,577)
Due to related parties - - 16,000 -
Issue of shares pursuant
to private placement - - 17,996 -
Share issue costs (35) - (1,046) -
Stock option proceeds - 903 - 5,393
Dividends (7,781) - (21,392) -
Unit distributions - (16,439) - (40,899)
-------------------------------------------------------------------------
Cash Used in Financing
Activities (204) (19,671) (2,492) (44,083)
-------------------------------------------------------------------------
Investing Activities
Property and equipment
expenditures (10,501) (6,038) (15,457) (15,002)
Restricted term deposit - - 20 -
Change in non-cash
working capital
Accounts receivable (1,742) - (1,742) -
Accounts payable and
accrued liabilities 3,097 3,217 (5,554) (149)
-------------------------------------------------------------------------
Cash Used in Investing
Activities (9,146) (2,821) (22,733) (15,151)
-------------------------------------------------------------------------
Net Cash Inflow - - - -
Cash, beginning of period - - - -
-------------------------------------------------------------------------
Cash, End of Period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Interest Paid 833 545 2,520 1,994
Cash Taxes Paid 349 109 541 477


NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Periods Ended September 30, 2009 and 2008 (unaudited)

1. CHANGE OF ORGANIZATION

On November 12, 2008, Bonterra Energy Income Trust (the "Trust") converted to Bonterra Oil & Gas Ltd. (the "Company" or the "Trust") through a reverse takeover of the Trust by SRX Post Holdings Inc. (SRX). In conjunction with the reorganization, the Trust acquired all of the issued and outstanding shares of Silverwing Energy Inc. (Silverwing).Concurrently, all of the Company's subsidiaries, including Silverwing were amalgamated into Bonterra Energy Corp., a wholly owned subsidiary of the Company.

Prior to the Arrangement on November 12, 2008, the consolidated financial statements included the accounts of the Trust and its subsidiaries. After giving effect to the Arrangement, the consolidated financial statements have been prepared on a continuity of interests basis, which recognizes Bonterra Oil & Gas Ltd. as the successor entity to the Trust. The continuity of interest basis requires that the 2008 comparative consolidated financial statement figures presented prior to the reorganization are those previously presented by the Trust.

2. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies and methods of application followed in the preparation of the interim consolidated financial statements are the same as those followed in the preparation of Bonterra's 2008 annual consolidated financial statements except as described below. These interim consolidated financial statements do not include all disclosures required for annual consolidated financial statements. The interim consolidated financial statements as presented should be read in conjunction with the 2008 annual consolidated financial statements. In February 2008, the Canadian Institute of Chartered Accountants (CICA) issued Section 3064, "Goodwill and intangible assets", replacing Section 3062, "Goodwill and other intangible assets" and Section 3450, "Research and development costs". Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section is applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company adopted the new standards for its fiscal year beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-orientated enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062.

The adoption of this Standard did not have an impact on the Consolidated Financial Statements. In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities". The EIC provides guidance on how to take into account credit risk of an entity and counterparty when determining the fair value of financial assets and financial liabilities, including derivative instruments. This standard is effective for the Company's fiscal periods ending on or after January 20, 2009 with retrospective application. The application of this EIC did not have a material effect on the Company's Consolidated Financial Statements. In December 2008, the CICA issued Section 1582, "Business Combinations", which will replace former guidance on business combinations. Section 1582 establishes principles and requirements of the acquisition method for business combinations and related disclosures. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011 with earlier adoption permitted. The Company is currently evaluating the impact of this change on its Consolidated Financial Statements.

In December 2008, the CICA issued Sections 1601, "Consolidated Financial Statements", and 1602, "Non-controlling Interests", which replaces existing Section 1600. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards are effective on or after the beginning of the first annual reporting period beginning on or after January 2011 with earlier adoption permitted. These standards currently do not impact the Company as it has full controlling interest of all of its subsidiaries.

Recent Accounting Pronouncements

The Accounting Standards Board has confirmed that the convergence of Canadian GAAP with International Financial Reporting Standards (IFRS) will be effective January 1, 2011. The Company has performed an initial scoping process in order to ensure successful implementation within the required timeframe. The impact on the Company's consolidated financial statements is not reasonably determinable at this time. Key information will be disclosed as it becomes available during the transition period. In June 2009, the CICA issued amendments to CICA Handbook Section 3862, "Financial Instruments - Disclosures". The amendments include enhanced disclosures related to the fair value of financial instruments and the liquidity risk associated with financial instruments. The amendments will be effective for annual financial statements for fiscal years ending after September 30, 2009. The amendments are consistent with recent amendments to financial instrument disclosure standards in IFRS. The Company will include these additional disclosures in its annual consolidated financial statements for the year ending December 31, 2009.

3. INVESTMENT IN RELATED PARTY

The investment consists of 689,682 (December 31, 2008 - 689,682) common shares of Comaplex Minerals Corp. (Comaplex), a company with common directors and management with the Company and its subsidiaries. The investment is recorded at fair market value. The common shares trade on the Toronto Stock Exchange under the symbol CMF. The investment represents less than one and a half percent ownership in the outstanding shares of Comaplex.

4. RESTRICTED CASH

An escrow account was held by Silverwing prior to its acquisition by the Company. The escrow account was created to support eligible expenditures related to a farm-in agreement. The Company may access the funds upon completion and tie-in or abandonment and reclamation of 22 wells. The funds are administered by the farmors' legal counsel. The funds in the escrow account are invested in interest bearing term deposits. During the third quarter the Company applied for a $250,000 reduction in the escrow account due to the abandonment of 5 wells. This amount is included in accounts receivable and was received subsequent to the end of the quarter.



5. PROPERTY AND EQUIPMENT

September 30, 2009 December 31, 2008
-------------------------------------------------------------------------
Accumulated Accumulated
Depletion Depletion
and and
($ 000) Cost Depreciation Cost Depreciation
-------------------------------------------------------------------------
Undeveloped land 7,288 - 2,295 -
Petroleum and natural
gas properties and
related equipment 246,566 88,606 229,136 74,844
Furniture, equipment
and other 1,447 980 1,254 848
-------------------------------------------------------------------------
255,301 89,586 232,685 75,692
-------------------------------------------------------------------------


On July 2, 2009, the Company acquired all of the issued common shares of Cobalt Energy Ltd. (Cobalt) for consideration of 201,438 common shares at a value of $15.92 per common share plus the assumption of $2,856,000 of negative working capital for total consideration of $6,063,000. Results of Cobalt's operations have been included in the consolidated financial statements commencing from that date. The acquisition was accounted for using the purchase method and the purchase price was allocated to the fair value of the assets acquired and the liabilities assumed as follows:



Cost of acquisition (000's)
Value of common stock $3,207
Acquisition costs 170
--------
$3,377
--------
--------
Allocation of purchase price:
Property and equipment $7,105
Future income tax liability (748)
Working capital deficiency (2,856)
Asset retirement obligations (124)
--------
$3,377
--------
--------


6. DUE TO RELATED PARTIES

As of September 30, 2009, the Company's CEO and major shareholder has loaned the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan is unsecured, bears interest at Canadian chartered bank prime and has no set repayment terms but is payable on demand. Effective July 1, 2009 the interest rate was decreased to Canadian chartered bank prime less .25 percent. The interest rate was decreased to keep the loan rate at approximately two percent below the Company's bank financing rate. Interest paid on this loan during the nine months of 2009 was $152,000. Subsequent to quarter end, the Company's CEO made a further loan of $1,500,000 under the same terms and conditions.

As of September 30, 2009, Comaplex has loaned the Company $12,000,000 (December 31, 2008 - Nil). The loan is unsecured, bears interest at Canadian chartered bank prime plus one quarter of a percent and has no set repayment terms but is payable on demand. Effective July 1, 2009 the interest rate was decreased to Canadian chartered bank prime less .25 percent. The interest rate was decreased to keep the loan rate at approximately two percent below the Company's bank financing rate. Interest paid on this loan during the nine months of 2009 was $134,000. The Company's bank agreement requires that the above loans can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility.

Please refer to notes 3 and 11 for additional related party transactions.

7. BANK DEBT

As of September 30, 2009, the Company has a bank facility consisting of a $100,000,000 syndicated and $20,000,000 non-syndicated revolving credit facility (December 31, 2008 - $80,000,000 syndicated and $20,000,000 non-syndicated demand credit facility). This new facility became effective April 29, 2009, when the Company agreed to new terms and conditions. Amounts drawn under the facility at September 30, 2009 was $81,386,000 (December 31, 2008 - $93,235,000). The interest rate on the outstanding debt as of September 30, 2009 was 4.25 percent on the Company's Canadian prime rate loan. Effective October 1, 2009 the interest was reduced to 4.00 percent due to the improvement in the Company's debt to cash flow ratio (see below). The term of the new facility provides that the loan is revolving until April 28, 2011, is subject to annual review and has no fixed payment requirements.

The amount available for borrowing under the credit facilities is reduced by outstanding letters of credit. Letters of credit totaling $285,000 were issued at September 30, 2009 (December 31, 2008 - $525,000). Security for the credit facilities consists of various fixed and floating demand debentures totaling $200,000,000 over all of the Company's assets, and a general security agreement with first ranking over all personal and real property.



The interest rate on the new credit facility is calculated as follows:

-------------------------------------------------------------------------
Level I Level II Level III Level IV Level V
-------------------------------------------------------------------------
Consolidated Total
Funded Debt(1) to Over Over Over
Consolidated Cash Under 1.0:1 to 1.5:1 to 2.0:1 to Over
flow Ratio 1.0:1 1.5:1 2.0:1 2.5:1 2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
Plus(2) 125 150 175 200 250
-------------------------------------------------------------------------
Bankers' Acceptances
Rate Plus(2) 275 300 325 350 400
-------------------------------------------------------------------------
(1) Consolidated total funded debt excludes related party amounts but
includes working capital.
(2) Numbers in table represent basis points.


The consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the next fiscal quarter following the end of each fiscal quarter, with each such adjustment to be effective until the next such adjustment.



The following is a list of the material covenants:

- The Company is required to not exceed $120,000,000 in consolidated
debt (includes negative working capital but excludes debt to related
parties).
- Dividends paid in any quarter shall not exceed 80 percent of the
average of the previous four quarters' cash flow as defined under
GAAP. During the third quarter the Company received a waiver of this
requirement for the fourth quarter and instead is restricted to
paying no more than the lesser of 80 percent of quarter four cash
flow or $10,000,000.


8. TAXES

The Company has recorded a future income tax asset related to assets and
liabilities and related tax amounts:

September 30 December 31
($ 000) 2009 2008
-------------------------------------------------------------------------
Future tax liability related to investments: (369) (212)
Future tax liability related to property
and equipment: (6,193) (7,097)
Future tax asset related to asset retirement
obligations: 4,751 4,593
Futures tax asset related to finance costs: 1,012 1,134
Future tax asset related to corporate tax
losses and SR&ED claims: 79,247 86,998
-------------------------------------------------------------------------
Future Tax Asset - Long-term 78,448 85,416
-------------------------------------------------------------------------
Current portion of future income tax asset
related to corporate Tax losses and SR& ED claims: 9,405 2,669
-------------------------------------------------------------------------
Future Tax Asset - Current 9,405 2,669
-------------------------------------------------------------------------


As a result of the reorganization, the Company recorded a deferred credit relating to the difference between the future income tax asset generated on the reorganization and the amount of the cash payment made to SRX immediately before the reorganization. This credit is being amortized on the same basis as the related future income tax asset.



A reconciliation of the deferred credit is as follows:

($ 000)
-------------------------------------------------------------------------
Amount recorded on reorganization 71,303
Amortized in 2008 (4,240)
-------------------------------------------------------------------------
Balance as of December 31, 2008 67,063
Amortized in first nine months of 2009 (2,518)
-------------------------------------------------------------------------
Balance as of September 30, 2009 64,545
-------------------------------------------------------------------------
Current portion 8,123
Long-term portion 56,421
-------------------------------------------------------------------------
64,545
-------------------------------------------------------------------------


The Company and its subsidiaries have the following federal tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:



($ 000) Rate of Utilization (%) Amount
-------------------------------------------------------------------------
Undepreciated capital costs 20-100 22,638
Eligible capital expenditures 7 7,501
Share issue costs 20 4,064
Canadian oil and gas property expenditures 10 29,180
Canadian development expenditures 30 54,112
Canadian exploration expenditures 100 11,390
SR&ED expenditures 100 80,357
Income tax losses carried forward(1) 100 278,163
-------------------------------------------------------------------------
487,405
-------------------------------------------------------------------------

(1) Income tax losses carried forward expire in the following years;
2013 - $1,069,000, 2024 - $3,347,000, 2025 - $7,532,000, 2026 -
$104,019,000, 2027 - $117,436,000, 2028 - $34,726,000, 2029 -
$10,034,000. The Company has used $28,346,000 of its 2026 provincial
tax loss to shelter provincial income.


The Company has $22,284,000 of investment tax credits (ITC) that expire in the following years; 2010 - $1,142,000, 2011 - $4,667,000, 2012 - $3,909,000, 2013 - $3,155,000, 2014 - $1,995,000, 2015 - $2,257,000, 2016 - $2,405,000, 2017 - $2,009,000, 2018 - $745,000. The current tax provision incorporates the claim of $5,386,000 ITC's against federal taxes payable.

The amount and timing of reversals of temporary differences will also depend on the Company's future operating results, and acquisitions and dispositions of assets and liabilities. A significant change in any of the preceding assumptions could materially affect the Company's estimate of the future income tax asset.

9. SHAREHOLDERS' EQUITY

Authorized

The Company is authorized to issue an unlimited number of common shares
without nominal or par value.



Amount
Issued Number ($ 000)
-------------------------------------------------------------------------
Common Shares
Balance, January 1, 2009 17,257,603 99,530
Issued pursuant to private placement 1,068,000 17,996
Issued on acquisition of Cobalt 201,438 3,207
Issue costs for private placement - (1,046)
Future tax effect of share issue costs - 267
-------------------------------------------------------------------------
Balance, September 30, 2009 18,527,041 119,954
-------------------------------------------------------------------------


The Company is authorized to issue an unlimited number of Class "A" redeemable Preferred Shares and an unlimited number of Class "B" Preferred Shares. There are currently no outstanding Class "A" redeemable preferred shares or Class "B" preferred shares.

On May 27, 2009, the Company completed a private placement for 1,068,000 common shares at a price of $16.85 per common share for aggregate proceeds of $17,996,000. The Company paid a commission of five percent of the gross proceeds ($900,000) plus additional share issue costs of $111,000.

On July 2, 2009, the Company acquired all of the issued common shares of Cobalt Energy Ltd. (Cobalt) for consideration of 201,438 common shares at a value of $15.92 per common share. The Company incurred costs of $35,000 in relation to the issuance of these shares.

The number of common shares (2008 numbers based on units) used to calculate diluted net earnings per share (2008 earnings per unit) for the three and nine month periods ended September 30 is as follows:



Three Months Nine Months
2009 2008 2009 2008
-------------------------------------------------------------------------
Basic shares/units
outstanding 18,524,851 17,025,803 17,821,584 16,982,068
Dilutive effect of
share/unit options 217,416 185,533 5,270 102,363
-------------------------------------------------------------------------
Diluted shares/units
outstanding 18,742,267 17,211,336 17,826,854 17,084,431
-------------------------------------------------------------------------


A summary of the changes during the first nine months of the Company's
contributed surplus is presented below:

Contributed surplus ($ 000) 2009 2008
-------------------------------------------------------------------------
Balance, beginning of period 2,542 2,140
Stock-based compensation expensed (non-cash) 711 562
Stock-based options exercised (non-cash) - (448)
-------------------------------------------------------------------------
Balance, end of period 3,253 2,254
-------------------------------------------------------------------------


The deficit balance is composed of the following items:

September 30, September 30,
($ 000) 2009 2008
-------------------------------------------------------------------------
Accumulated earnings 224,609 197,597
Accumulated cash dividends/distributions (276,289) (241,474)
-------------------------------------------------------------------------
Deficit (51,680) (43,877)
-------------------------------------------------------------------------


The Company provides an option plan for its directors, officers, employees and consultants. Under the plan, the Company may grant options for up to 1,852,704 (December 31, 2008 - 1,725,760) common shares. The exercise price of each option granted equals the market price of the common shares on the date of grant and the option's maximum term is five years.

A summary of the status of the Company's stock option plan as of September 30, 2009 and December 31, 2008, and changes during the nine month and twelve month periods ended on those dates is presented below:



September 30, 2009 December 31, 2008
-------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,390,500 $ 20.50 - $ -
Options granted 33,000 14.90 1,390,500 20.50
-------------------------------------------------------------------------
Outstanding at end of
period 1,423,500 $ 20.37 1,390,500 $ 20.50
-------------------------------------------------------------------------
Options exercisable at
end of period - $ - - $ -
-------------------------------------------------------------------------


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

Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 9/30/09 Life Price at 9/30/09 Price
-------------------------------------------------------------------------
$14.90 33,000 3.3 years $14.90 - $ -
20.50 1,390,500 3.1 years 20.50 - -
-------------------------------------------------------------------------
$14.90-20.50 1,423,500 3.1 years $20.37 - $ -
-------------------------------------------------------------------------


The Company records compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. The Company granted 33,000 stock options with an estimated fair value of $52,000 ($1.56 per option) using the Black-Scholes option pricing model with the following key assumptions:



2009 2008
-------------------------------------------------------------------------
Weighted-average risk free interest rate (%) 1.4 2.2
Expected life (years) 3.0 3.5
Weighted-average volatility (%) 33.0 31.3
Dividend yield 2009 and 2008 based on the percentage of
dividends or distributions
paid during the period
granted
-------------------------------------------------------------------------


10. ACCUMULATED OTHER COMPREHENSIVE INCOME
Other
Compre-
January 1, hensive September
($ 000) 2009 Income 30, 2009
-------------------------------------------------------------------------
Unrealized gains on available-for-
sale financial assets (net of tax) 1,420 1,078 2,498
-------------------------------------------------------------------------
Other
Compre-
hensive
January 1, Income December
($ 000) 2008 (Loss) 31, 2008
-------------------------------------------------------------------------
Unrealized gains (losses) on
available-for-sale financial
assets (net of tax) 3,031 (1,611) 1,420
-------------------------------------------------------------------------


11. RELATED PARTY TRANSACTIONS

The Company received a management fee from Comaplex of $248,000 (2008 - $248,000) for management services and office administration. This fee has been included as a recovery in general and administrative expenses. As at September 30, 2009, the Company had an account receivable from Comaplex of $75,000 (December 31, 2008 - $56,000).

The Company received a management fee from Pine Cliff Energy Ltd. (Pine Cliff) of $90,000 (2008 - $178,000) for management services and office administration. This fee has been included as a recovery in general and administrative expenses. As at September 30, 2009 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).



12. FINANCIAL AND CAPITAL RISK MANAGEMENT

Financial Risk Factors
----------------------

The Company undertakes transactions in a range of financial instruments
including:
- Receivables
- Payables
- Common share investments
- Due to related parties
- Bank loans
- Derivatives


The Company's activities result in exposure to a number of financial risks including market risk (commodity price risk, interest rate risk, foreign exchange risk, credit risk, and liquidity risk). The Company's overall risk management program seeks to mitigate these risks and reduce the volatility on the Company's financial performance. Financial risk management is carried out by senior management under the direction of the Directors of the Company. The Company enters into various risk management contracts in accordance with Board approval to manage the Company's exposure to commodity price fluctuations. Currently no risk management agreements are in place. The Company does not speculatively trade in risk management contracts. The Company's risk management contracts are entered into to manage the risks relating to commodity prices from its business activities.

Capital Risk Management

The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns to its shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends, the percentage of return of capital or issue new shares.

The Company monitors capital on the basis of the ratio of debt to cash flow. This ratio is calculated using each quarter end net debt (total debt adjusted for working capital) and divided by the preceding twelve months cash flow. The combination of the Trust reorganization and the acquisitions of Silverwing in 2008 and Cobalt in 2009 resulted in the Company increasing its debt resulting in an increased debt to cash flow ratio. During the second quarter of 2009, the Company completed a private placement for net proceeds of $16,985,000 thereby reducing its level of indebtedness. The Company has also entered into a purchase and sale agreement for the disposal of certain non-core producing assets which closed subsequent to quarter end (see Note 14) that will provide additional cash proceeds of $24,000,000. The Company believes that a debt level of approximately one and a half year's cash flow is an appropriate level to allow it to take advantage in the future of either acquisition opportunities or to provide flexibility to develop its undeveloped resources by horizontal or vertical drill programs.

The following section (a) of this note provides a summary of the Company's underlying economic positions as represented by the carrying values, fair values and contractual face values of the Company's financial assets and financial liabilities. The Company's debt to cash flow is also provided. The following section (b) addresses in more detail the key financial risk factors that arise from the Company's activities including its policies for managing these risks.

The following section (c) provides details of the Company's risk management contracts that are used for financial risk management.



a) Financial assets, financial liabilities and debt ratio
The carrying amounts, fair value and face values of the Company's
financial assets and liabilities are shown in Table 1.

Table 1
As at September 30, 2009 As at December 31, 2008
---------------------------------------------------------------------
Carrying Fair Face Carrying Fair Face
($ 000) Value Value Value Value Value Value
---------------------------------------------------------------------
Financial assets
Restricted term
deposit - - - 20 20 20
Accounts
receivable 11,175 11,175 11,340 11,753 11,753 11,838
Investments in
related party 3,386 3,386 N/A 2,131 2,131 N/A
Financial
liabilities
Accounts payable
and accrued
liabilities 12,700 12,700 12,700 23,888 23,888 23,888
Due to related
parties 22,000 22,000 22,000 6,000 6,000 6,000
Short-term bank
debt - - - 13,325 13,325 13,325
Long-term bank
debt 81,386 81,386 81,386 79,910 79,910 79,910
---------------------------------------------------------------------
The net debt and cash flow figures as of September 30, 2009 are
presented in Table 2.


Table 2
($ 000) September 30, 2009
---------------------------------------------------------------------
Long-term bank debt 81,386
Accounts payable and accrued liabilities 12,700
Due to related parties 22,000
Current assets(1) (18,963)
---------------------------------------------------------------------
Net Debt 97,123
---------------------------------------------------------------------
Cash flow from operations(2) 35,561
---------------------------------------------------------------------
Net debt to cash flow from operations 2.73
---------------------------------------------------------------------
(1) Current assets include accounts receivable, crude oil inventory,
prepaid expenses and investment in related party.
(2) Cash flow from operations includes net earnings over the past
twelve months less adjustment for non-cash (gain) loss on risk
management contracts, stock-based compensation, depletion,
depreciation and accretion, future income taxes, changes in non-
cash working capital items, restricted cash recovered and asset
retirement obligations settled.


b) Risks and mitigations
Market risk is the risk that the fair value or future cash flow of
the Company's financial instruments will fluctuate because of changes
in market prices. Components of market risk to which the Company is
exposed are discussed below.


Commodity price risk
--------------------
The Company's principal operation is the production and sale of crude
oil, natural gas and natural gas liquids. Fluctuations in prices of
these commodities directly impact the Company's performance and
ability to continue with its dividends.

The Company had used various risk management contracts to set price
parameters for a portion of its production. The Board of Directors
and management decided that at least in the near term it will
discontinue the use of commodity price agreements. The Company will
assume full risk in respect of commodity prices.

Sensitivity Analysis

Commodity prices have fluctuated significantly over the recent past.
The following table updates the annual cash flow sensitivity for
movements in the commodity prices of $1 U.S. WTI for crude oil, $0.10
per MCF AECO for natural gas and $0.01 fluctuation in exchange rates.

Cash Flow
---------------------------------------------------------------------
U.S. $1.00 per barrel $ 870,000
Canadian $0.10 per MCF $ 289,000
Change of Canadian $0.01/U.S. $ exchange rate $ 593,000
---------------------------------------------------------------------

Interest rate risk
------------------

Interest rate risk refers to the risk that the value of a financial
instrument or cash flows associated with the instrument will
fluctuate due to changes in market interest rates. Interest rate risk
arises from interest bearing financial assets and liabilities that
the Company uses. The principal exposure of the Company is on its
bank borrowings and related party debts which have variable interest
rates which gives rise to a cash flow interest rate risk.
The Company's debt includes a bank credit facility of $120,000,000
consisting of a revolving line of credit and $22,000,000 due to
related parties. The borrowings under these facilities are at bank
prime plus or minus various percentages as well as by means of
bankers' acceptances (BA's) within Bonterra's credit facility. The
Company manages its exposure to interest rate risk through entering
into various term lengths on its BA's but in no circumstances do the
terms exceed six months.

Sensitivity Analysis

Based on historic movements and volatilities in the interest rate
markets and management's current assessment of the financial markets,
the Company believes that a one percent variation in the Canadian
prime interest rate is reasonably possible over a 12-month period. No
income tax effect has been calculated as the Company is expected to
be non-taxable until January 1, 2018.

A one percent change in the Canadian prime rate would increase or
decrease annual cash flow by $1,034,000.

Foreign exchange risk
---------------------

The Company has no foreign operations and currently sells all its
product sales in Canadian currency. The Company however is exposed to
currency risk in that crude oil is priced in U.S. currency then
converted to Canadian currency. The Company currently has no
outstanding currency risk management agreements. The Board of
Directors and management recently decided that at least in the near
term it will not enter into any currency price agreements. The
Company will assume full risk in respect of foreign exchange
fluctuations.

Credit risk
-----------

Credit risk is the risk that a contracting party will not complete
its obligations under a financial instrument and cause the Company to
incur a financial loss. The Company is exposed to credit risk on the
carrying value of all financial assets included on the balance sheet.
To help mitigate this risk:

- The Company only enters into material agreements with credit
worthy counterparties. These include major oil and gas
companies or major Canadian chartered banks;
- Agreements for product sales are primarily on 30 day renewal
terms; and
- Investments are generally only with companies that have common
management with the Company.

Of the accounts receivable balance at September 30, 2009
($11,175,000) and December 31, 2008 ($11,753,000), 87 (2008 - 82)
percent relates to product sales with international oil and gas
companies or receivables from the Canadian Federal or Provincial
Governments.

The Company assesses quarterly if there has been any impairment of
the financial assets of the Company. During the quarter ended
September 30, 2009, there was no impairment provision required on any
of the financial assets other than certain accounts receivable (see
below). The Company does have a credit risk exposure as the majority
of the Company's accounts receivable are with counterparties having
similar characteristics. Payments from the Company's largest accounts
receivable counterparties have consistently been received within 30
days. The Sales agreements with these parties are cancellable with 30
days notice.

At September 30, 2009, approximately $345,000 or 3.1 percent of the
Company's total accounts receivable are aged over 120 days and
considered past due. The majority of these accounts are due from
various joint venture partners. The Company actively monitors past
due accounts and takes the necessary actions to expedite collection,
which can include withholding production or net paying when the
accounts are with joint venture partners. Should the Company
determine that the ultimate collection of a receivable is in doubt,
it will provide the necessary provision in its allowance for doubtful
accounts with a corresponding charge to earnings. If the Company
subsequently determines an account is uncollectable, the account is
written off with a corresponding charge to the allowance account. The
Company's allowance for doubtful accounts balance at September 30,
2009 is $165,000 (December 31, 2008 - $85,000). There were no
accounts written off during the period.

The carrying value of accounts receivable approximates their fair
value due to the relatively short periods to maturity on this
instrument. The maximum exposure to credit risk is represented by the
carrying amount on the balance sheet. There are no material financial
assets that the Company considers past due.

Liquidity risk
--------------
Liquidity risk includes the risk that, as a result of Company's
operational liquidity requirements:
- The Company will not have sufficient funds to settle a
transaction on the due date;
- The Company will not have sufficient funds to continue with its
dividends;
- The Company will be forced to sell assets at a value which is
less than what they are worth; or
- The Company may be unable to settle or recover a financial
asset at all.
To help reduce these risks the Company:
- Maintains a portfolio of high-quality, long reserve life oil
and gas assets.
The Company has the following maturity schedule for its financial
liabilities:

Payments Due by Period
---------------------------------------------------------------------
Recognized on Less
Financial than 2-3 4-5
($ 000) Statements 1 year years years
---------------------------------------------------------------------
Accounts payable and Yes -
accrued liabilities Liability 12,700 - -
Due to related Yes -
parties Liability 22,000 - -
Long-term Yes -
bank debt Liability - 81,386 -
Office leases No 792 1,451 594
---------------------------------------------------------------------
Total 35,492 82,837 594
---------------------------------------------------------------------
c) Risk management contracts
The Company currently has no outstanding risk management contracts:

13. SUBSEQUENT EVENT - DIVIDENDS

Subsequent to September 30, 2009, the Company declared a dividend of
$0.16 per common share payable on October 30, 2009 to shareholders
of record on October 15, 2009 and a dividend of $0.16 per common share
payable on November 30, 2009 to shareholders of record on November 16,
2009.

14. SUBSEQUENT EVENT - DISPOSITION
Subsequent to September 30, 2009, the Company entered into a purchase and
sale agreement to divest of a portion of its Shaunavon oil production to
Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX). The proceeds of
disposition consist of $24,000,000 cash and 30,769,200 common shares in
Eagle Rock (representing approximately 4.2 percent of the outstanding
common shares of that company). The disposition closed on November 6.


%SEDAR: 00003132E

Contact Information

  • Bonterra Oil & Gas Ltd.
    George F. Fink
    CEO
    (403) 262-5307
    (403) 265-7488


    Bonterra Oil & Gas Ltd.
    Garth E. Schultz
    Vice President, Finance and CFO
    (403) 262-5307
    (403) 265-7488

    Bonterra Oil & Gas Ltd.
    Kirsten Kulyk
    Manager, Investor Relations
    (403) 262-5307
    (403) 265-7488
    info@bonterraenergy.com
    www.bonterraenergy.com