Orleans Energy Ltd.
TSX : OEX

Orleans Energy Ltd.

August 11, 2008 17:00 ET

Orleans Energy Announces Record Second Quarter Results, Expands 2008 Capital Budget and Increases Market Guidance

CALGARY, ALBERTA--(Marketwire - Aug. 11, 2008) - Orleans Energy Ltd. ("Orleans" or the "Company") (TSX:OEX) is pleased to announce record financial and operating results for the three month period ended June 30, 2008.



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Financial Three Months Six Months
Highlights Ended June 30, Ended June 30,
(all amounts in -------------------------- -------------------------------
Cdn $ except share
data)
(6:1 oil equivalent % %
conversion) 2008 2007 Change 2008 2007 Change
---------- ---------- -------- ----------- ---------- -------
Petroleum and
natural gas
revenue (5) 24,673,526 11,635,732 112% 43,709,697 23,823,388 83%
Per share
- basic 0.54 0.36 50% 1.03 0.73 41%
- diluted 0.53 0.35 51% 1.01 0.72 40%
Cash flow
from
operations
(1) 13,565,038 5,143,032 164% 22,947,752 11,209,466 105%
Per share
- basic 0.30 0.16 88% 0.54 0.34 59%
- diluted 0.29 0.15 93% 0.53 0.33 61%
Operating
netback (2)
($/boe) 39.97 28.35 41% 35.63 29.83 19%
Corporate
netback (2)
($/boe) 37.08 22.97 61% 32.31 24.57 32%
Net earnings
(loss) (3) 850,295 (128,025) - (2,731,924) (1,040,792) 162%
Per share
- basic 0.02 - - (0.06) (0.03) 100%
- diluted 0.02 - - (0.06) (0.03) 100%
Net debt (4)
- period
end 20,326,679 53,181,270 (62%) 20,326,679 53,181,270 (62%)
Weighted
average
basic
shares 45,604,668 33,209,828 37% 42,320,300 33,179,413 28%
Weighted
average
diluted
shares 46,575,328 33,833,429 38% 43,075,328 33,769,735 28%
Issued and
outstanding
shares (6) 45,779,706 33,225,889 38% 45,779,706 33,225,889 38%

Operating
Highlights
Average
daily
production:
Natural
gas (mcf/d) 19,377 10,673 82% 18,724 10,669 75%
Liquids
(Oil & NGLs)
(bbls/d) 791 681 16% 782 743 5%
Oil equivalent
(boe/d) 4,020 2,460 63% 3,902 2,521 55%
Average sales
price (5):
Natural gas
($/mcf) 9.81 7.79 26% 8.98 7.90 14%
Liquids
(Oil & NGLs)
($/bbl) 102.59 65.61 56% 92.20 63.70 45%
Oil equivalent
($/boe) 67.44 51.97 30% 61.54 52.21 18%
E&D capital
expenditures
($) 6,804,641 10,837,125 (37%) 21,781,456 21,826,807 -
Total capital
expenditures
($) 6,830,371 10,209,005 (33%) 23,037,037 21,626,673 7%
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Notes:
(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
("GAAP"). Please refer to the enclosed MD&A for definition of cash
flow from operations.
(2) Operating netback represents average sales price less royalties,
operating costs and transportation expenses. Corporate netback
represents operating netback less general and administrative costs and
interest expense. Both measures are not recognized measures under
Canadian GAAP.
(3) Net earnings (loss) includes: (i) non-cash income tax expense or
reductions and (ii) non-cash unrealized hedging gains or losses from
commodity contract settlements. For the six month period ended June 30,
2008, the reported net loss reflects an unrealized loss on commodity
contracts associated with the Company's hedging activities of $6.62
million.
(4) Net debt refers to outstanding bank debt plus working capital deficit
(excludes current unrealized amounts pertaining to risk management
commodity contracts). Net debt is not a recognized measure under
Canadian GAAP.
(5) Petroleum and natural gas revenue and pricing includes realized
hedging gains or losses from commodity contract settlements.
(6) As of August 11, 2008, common shares outstanding are 45,779,706
and stock options outstanding are 3,832,192.


Second Quarter 2008 Achievements

- Record Quarterly Production

Production in the second quarter averaged 4,020 barrels of oil equivalent ("boe") per day, an increase of 63% over the second quarter of 2007 (2,460 boe per day) and a 6% increase over the preceding first quarter of 2008 (3,784 boe per day). Second quarter 2008 marks the fourth consecutive quarter of "internally-generated", production growth.

- Record Revenue and Cash Flow Generation

Generated petroleum and natural gas revenue of $24.67 million in the second quarter of 2008, an increase of 112% over the corresponding quarter in 2007. Cash flow from operations increased by 164% to $13.57 million ($0.29 per fully diluted share).

- Successful "Drill Bit" Activity

Drilled two (1.36 net) Kaybob Montney horizontal wells, on a total exploration and development capital program of $6.8 million.

- Financial Flexibility Maintained

Net debt at June 30, 2008 was $20.33 million, as compared to a credit facility of $65 million.

- TSX Graduation

On June 25, 2008, the Company graduated its common shares listing to the Toronto Stock Exchange ("TSX"). The listing of Orleans' common shares on the TSX provides access to Canada's largest stock exchange while enhancing Orleans' trading liquidity and visibility within North American capital markets.

Operations Update

Please refer to the Company's news release dated July 27, 2008 for commentary on Orleans' operational activities undertaken during the second quarter of 2008.

Revised 2008 Capital Budget and Market Guidance

As a result of Orleans' strong production performance outpacing current market guidance and robust commodity prices realized during the first six months of this year, the Company is expanding its 2008 capital expenditures program and increasing its production market guidance for the second time this year. Orleans' average daily production for fiscal 2008 is now projected to exceed 4,000 boe per day, weighted 80% natural gas and 20% light crude oil and natural gas liquids. This forecasted production level represents a 43% increase over the Company's 2007 average daily production of 2,796 boe per day and a 129% increase over Orleans' 2006 average daily production level of 1,750 boe per day. The Company's year-end 2008 production rate is now anticipated between 4,500 to 4,600 boe per day.

Orleans' Board of Directors approved an increase in its 2008 exploration and development capital expenditure program of approximately $10 million to total $57 million (the "Expanded 2008 Capital Budget"). The Expanded 2008 Capital Budget now encompasses the drilling of 18 (16.3 net) wells, with a 91% working interest, including 12 (10.3 net) horizontal wells at Kaybob targeting the Triassic Montney formation, three (3.0 net) wells at Gilby targeting the Edmonton, Glauconite and Ellerslie formations, and three (3.0 net) wells at Gordondale in pursuit of potentially two new reservoirs. The Expanded 2008 Capital Budget accounts for an increase to the Company's 2008 land acquisition budget of $1.5 million and also allocates capital resources necessary to fund the strategic installation of Orleans' field compression at Kaybob for approximately $2 million. This compression is expected to provide unrestricted production capability for Orleans' West Kaybob lands directly through to the Kaybob Amalgamated Gas Plant.

Cash flow from operations for 2008, assuming an average commodity price for the last six months of 2008 of: US$115.00 per barrel for West Texas Intermediate ("WTI") oil, an AECO gas price of C$8.00 per thousand cubic feet, and an exchange rate of 1C$ = 0.985US$, is now estimated at approximately $47 million or $1.06 per share (basic outstanding). Based on the aforementioned Expanded 2008 Capital Budget and corresponding cash flow projection, Orleans' year-end 2008 net debt balance is projected to approximate $33 million, as compared to the $65 million borrowing capacity on its operating credit facility with a Canadian chartered bank. Moreover, this financial leverage forecast results in a modest year-end net debt-to-2008 cash flow from operations ratio of 70% or 0.7 times. Taking into consideration the estimated, potential financial exposure of approximately $8.6 million associated with the recent SemGroup L.P. bankruptcy filing, as outlined in the Company's July 27, 2008 news release, applying the full potential financial exposure, Orleans' year-end net debt-to-2008 cash flow from operations ratio would remain under one times.

Personnel Update

Orleans also announces the resignation of Ken Woolner as a Director of Orleans, effective immediately. Mr. Woolner is retiring from active Board participation from all Directorship positions he currently holds and intends to pursue personal interests outside of the upstream oil and gas industry. Orleans' would like to extend their utmost appreciation to Mr. Woolner for his valuable contributions made towards the successful growth of the Company since inception in January 2005. Orleans anticipates augmenting its Board of Directors by an additional member in the near future.

Management's Discussion & Analysis ("MD&A")

The following discussion is intended to assist the reader in understanding the business and results of operations and financial condition of Orleans Energy Ltd. (the "Company" or "Orleans"). This MD&A should be read in conjunction with the unaudited interim financial statements for the six month period ended June 30, 2008, and the audited financial statements for the year ended December 31, 2007. Unaudited financial and operating information for the three month period ended June 30, 2008 ("Q208"), in addition to the corresponding comparable quarter ended June 30, 2007 ("Q207"), are presented within this MD&A. Additionally, unaudited financial and operating information for the six month interim period ended June 30, 2008 ("H108"), and the comparable six month period ended June 30, 2007 ("H107"), is disclosed.

In this MD&A, production and reserves data is commonly stated in barrels of oil equivalent ("boe") using a six (6) to one (1) conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one-to-one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of six (6) mcf: one (1) bbl is based on energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

As an indicator of the Company's performance, the term cash flow from operations or operating cash flow contained within the MD&A should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP"). This term does not have a standardized meaning under GAAP and may not be comparable to other companies. Orleans believes that cash flow from operations is a useful supplementary measure as shareholders and/or investors may use this information to analyze operating performance, leverage and liquidity. Cash flow from operations, as disclosed within this MD&A, represents cash flow from operating activities before any asset retirement obligation cash expenditures and before changes in non-cash operating activities working capital. The Company presents cash flow from operations per share whereby per share amounts are calculated consistent with the calculation of earnings per share. Please refer to the table, Reconciliation of Non-GAAP Measures, contained within this MD&A.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, anticipates, guidance or other similar statements that are not statements of fact. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement.

For additional information relating to Orleans, please refer to other filings as filed on SEDAR at www.sedar.com. All amounts are reported in Canadian dollars, unless otherwise stated. This MD&A includes information up to and including August 8, 2008.

Business Overview

Orleans Energy Ltd. is an independent, Alberta-based crude oil and natural gas company actively engaged in the exploration for, development and production of natural gas, crude oil and NGLs reserves within the province of Alberta, Canada. Orleans is incorporated under the laws of Alberta and its common shares are publicly listed and traded on the Toronto Stock Exchange under the trading symbol "OEX". As of August 8, 2008, Orleans' market capitalization was approximately $178 million. Current production is weighted approximately 80% natural gas and 20% light oil and NGLs. The Company's production base is generated from five core producing areas throughout Central Alberta (Gilby and Halkirk/Leo), West Central Alberta (Kaybob and Pine Creek) and the Peace River Arch (Gordondale).



Quarterly Financial Information

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2007 2008
-------------------------------- ----------------
($000s) Q407 Q307 Q207 Q107 Q108 Q208
-------------------------------- ----------------
Petroleum & natural
gas sales (1) 13,413 11,905 11,635 12,188 19,036 24,673
Cash flow from
operations 5,625 4,492 5,143 6,066 9,383 13,565
Net earnings (loss) (2,096) (3,074) (128) (913) (3,582) 850
Total assets -
period end 203,751 201,795 194,076 191,627 214,024 211,051
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2006
----------------------------------------------------------------------------
($000s) Q406 Q306 Q206 Q106
--------------------------------
Petroleum & natural
gas sales (1) 11,038 9,777 5,912 5,720
Cash flow from
operations 5,461 5,219 3,362 3,177
Net earnings (loss) (17,006) (128) (1,346) 642
Total assets -
period end 188,325 192,609 180,598 55,109
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(1) Petroleum & natural gas sales includes realized hedging gains or losses
from commodity contract settlements.


The following commentary will assist in providing the reader with factors that have caused variations over the aforementioned quarterly results.

Petroleum and Natural Gas Production

During Q208, successful development of Orleans' Kaybob Montney natural gas "resource play" continues to enable the Company to generate strong quarterly production results. For the three months ended June 30, 2008, Orleans achieved corporate average production of 4,020 boe per day, surpassing the preceding quarter's record production yield of 3,784 boe per day. This level of production represents an increase of 63% over 2,460 boe per day attained in the comparable second quarter 2007 and an increase of 6% over the preceding first quarter 2008. The Company's natural gas sales for Q208 averaged 19.377 million cubic feet ("mmcf") per day while crude oil and NGLs production averaged 790 bbls per day, resulting in a commodity weighting of 80% natural gas and 20% percent light gravity crude oil and NGLs. The primary contributor to Orleans' robust production increases in the second quarter of 2008 came from new wells in the Montney formation in the Kaybob field in West Central Alberta. The Company's production from the Montney prospect ramped up to average 2,437 boe per day in Q208, as compared to 452 boe per day produced in the comparable second quarter of 2007.

During the first six months of 2008, Orleans' natural gas production averaged 18.724 mmcf per day and crude oil and NGLs production averaged 782 bbls per day. On a combined barrel of oil equivalent basis, average daily production for this six month 2008 period was 3,902 boe per day (H107: 2,521 boe per day).



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Crude Oil & Oil
Average Daily Production Natural Gas NGLs Equivalent
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(mcf/d) (bbls/d) (boe/d)
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Q105 1,404 325 559
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Q205 2,385 435 832
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Q305 3,231 662 1,200
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Q405 4,160 685 1,378
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Q106 3,426 576 1,147
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Q206 4,334 552 1,274
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Q306 8,349 789 2,181
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Q406 9,428 809 2,380
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Q107 10,665 805 2,583
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Q207 10,673 682 2,460
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Q307 14,002 668 3,002
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Q407 14,655 689 3,132
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Q108 18,070 773 3,784
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Q208 19,377 791 4,020
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Crude Oil & Oil
Q208 Production by Area Natural Gas NGLs Equivalent
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(mcf/d) (bbls/d) (boe/d)
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Halkirk/Leo 1,614 330 599
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Gilby/Medicine River 2,700 104 554
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Pine Creek 1,778 25 321
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Kaybob 12,628 332 2,437
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Pembina 507 - 84
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Gordondale/Grimshaw 152 - 25
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Q208 19,377 791 4,020
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Petroleum and Natural Gas Sales and Commodity Pricing

Orleans' petroleum and natural ("P&NG") gas sales may vary significantly period-to-period as a result of changes in commodity prices and/or production volumes. During Q208, commodity prices continued to propel upwards. Canadian natural gas prices registered were the second highest quarterly level in 10 years and Canadian light oil prices established a new record high quarterly average. Consequently, Orleans' crude oil price, including the effect of realized commodity contract settlements, averaged $95.71 per barrel in the three month period ended June 30, 2008, an increase of 40% from the oil price of $68.54 per barrel realized in Q207. The Company's natural gas price in Q208 was significantly higher than the comparable Q207 of $7.79 per mcf, averaging $9.81 per mcf. The following table highlights Orleans' realized commodity prices as well as market prices:



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Second Quarter First Half
Q208 Q207 % Change H108 H107 % Change
----------------------- --------------------------
Orleans' prices (1):
Natural gas ($/mcf) 9.81 7.79 26 8.98 7.90 14
Crude oil and NGLs
($/bbl) 102.59 65.61 56 92.20 63.70 45
Oil equivalent ($/boe) 67.44 51.97 30 61.54 52.21 18
Industry benchmark prices:
WTI Cushing oil
(US$/bbl) 123.80 64.95 91 111.14 63.40 75
Edmonton Par oil ($/bbl) 126.41 72.69 74 112.26 71.77 56
Nymex Henry Hub
(US$/mmbtu) 11.47 7.65 50 10.14 7.27 39
AECO gas ($/mcf) 10.08 6.94 45 8.96 6.84 31
Exchange rate (US$/C$) 0.9904 0.9111 9 0.9929 0.8818 13
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(1) Orleans' reported prices include realized hedging gains or losses from
commodity contract settlements.


Orleans' P&NG sales for Q208 amounted to $24.67 million (including the effect of realized risk management commodity contract settlements), representing a 112% increase from the corresponding second quarter 2007 sales amount of $11.64 million. A substantial increase in production volumes (63%) in conjunction with robust commodity prices facilitated significantly higher realized revenues in Q208 vis-a-vis Q207.

Orleans' P&NG sales for the six months ended June 30, 2008 amounted to $43.71 million (including the effect of realized risk management commodity contract settlements), representing a 83% increase from the corresponding six month 2007 period amount of $23.82 million.



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Second Quarter First Half
($000s) Q208 Q207 % Change H108 H107 % Change
-------------------------- --------------------------
Crude oil & NGLs (1) 7,382 4,069 81 13,118 8,566 53
Natural gas (1) 17,291 7,567 129 30,591 15,257 101
P&NG sales 24,673 11,636 112 43,709 23,823 83
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(1) Includes realized commodity contract settlements.


Commodity Price Risk Management

The prices the Company receives for its crude oil and natural gas production may have a significant impact on its revenues and cash flow from operations. Any significant price decline in commodity prices would adversely affect the amount of funds available for capital reinvestment purposes. As such, Orleans utilizes a risk management program to partially mitigate that risk and to ensure adequate funds are available for planned capital activities and other commitments. As such, from time-to-time, the Company may employ derivative financial instruments and physical arrangements, primarily commodity price contracts, to manage fluctuations in oil and gas market prices, which are generally put in-place with investment grade counter-parties that Orleans believes present minimal credit risks. The Company does not utilize derivative financial instruments for speculative trading purposes.

Orleans periodically uses swaps and collars to hedge crude oil and natural gas prices. Commodity swaps are settled monthly based on differences between the prices specified in the financial instruments and the settlement prices of futures contracts. Generally, when the applicable settlement price is less than the price specified in the contract, Orleans receives a settlement from the counter-party based on the difference multiplied by the contracted volume. Similarly, when the applicable settlement price exceeds the price specified in the contract, Orleans pays the counter-party based on the difference. The Company generally receives a settlement from the counter-party for collars when the applicable settlement price is less than the floor price specified in the contract and pays a settlement to the counter-party when the settlement price exceeds the cap or ceiling. No settlement occurs when the settlement price falls between the floor and ceiling.

Consequently, Orleans' realized P&NG sales are impacted by the settlement of these transactions. The various commodity hedge contracts in-place in Q208 resulted in a realized net opportunity loss of $2.33 million (Q207: $353 thousand gain), comprised of a $1.56 million decrease in natural gas revenue ($0.89 per mcf) and a $775 thousand decrease in crude oil and NGLs sales ($10.78 per bbl).

The commodity hedge program in-place during the first six months of 2008 resulted in a realized net opportunity loss of $2.65 million (H107: $638 thousand gain), comprised of a $1.57 million decrease in natural gas revenue ($0.46 per mcf) and a $1.08 million decrease in crude oil and NGLs sales ($7.56 per bbl).

As further described in Note 3 to the audited financial statements for the year ended December 31, 2007, the Company recognizes the fair value of its commodity contracts on the balance sheet each reporting period with the change in fair value being recognized as an unrealized gain or loss on the statement of operations. On December 31, 2007, the fair value of the commodity contracts was a liability of $432 thousand. As at June 30, 2008, the fair value of the financial commodity contracts was a liability of $7.05 million, resulting in an unrealized loss in the first six months of 2008 of $6.62 million.

The following table outlines the financial commodity price contracts outstanding during the six months ended June 30, 2008. The Company has not entered into any additional commodity contracts subsequent to June 30, 2008.



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Daily
Contract notional
Commodity Date Type Term Volume Index Price
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Crude Oil Oct. 15, 2007 Swap Jan '08 - 200 bbls W.T.I. US$ 81.56/bbl
Jun '08
Crude Oil Mar. 3, 2008 Collar Jul '08 - 100 bbls W.T.I. US$ 90.00 -
Dec '08 $116.25/bbl
NatGas Oct. 18, 2007 Swap Nov '07 - 1,000 GJs AECO-C C$ 6.545 /GJ
Mar '08
NatGas Oct. 18, 2007 Swap Jan '08 - 1,000 GJs AECO-C C$ 6.71 /GJ
Mar '08
NatGas Oct. 31, 2007 Swap Jan '08 - 1,000 GJs AECO-C C$ 6.67 /GJ
Mar '08
NatGas Dec. 18, 2007 Swap Apr '08 - 2,000 GJs AECO-C C$ 6.55 /GJ
Dec '08
NatGas Jan. 2, 2008 Swap Apr '08 - 2,000 GJs AECO-C C$ 6.81 /GJ
Dec '08
NatGas Jan. 4, 2008 Swap Apr '08 - 1,000 GJs AECO-C C$ 6.61 /GJ
Oct '08
NatGas Jan. 7, 2008 Swap Apr '08 - 1,000 GJs AECO-C C$ 6.72 /GJ
Oct '08
NatGas Jan. 10, 2008 Swap Apr '08 - 1,000 GJs AECO-C C$ 7.01 /GJ
Oct '08
NatGas Feb. 13, 2008 Collar Nov '08 - 2,000 GJs AECO-C C$ 7.00 -
Mar '09 $9.70 /GJ
NatGas Feb 14, 2008 Swap Apr '08 - 1,000 GJs AECO-C C$ 7.52 /GJ
Oct '08
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Petroleum and Natural Gas Royalties

Orleans' petroleum and natural gas royalties for the three month period ended June 30, 2008 amounted to $6.0 million, resulting in a corporate effective royalty rate of 22%. Approximately 71% of the Company's total royalties for this period relate to Alberta Crown royalties with the remaining 29% pertaining to freehold and overriding royalties. In the comparable Q207 period, the Company's total royalties amounted to $2.0 million. The aggregate increase in Q208 of $4.0 million is attributable to both higher production volumes realized in Q208 vis-a-vis Q207 and an increase in the corporate effective royalty rate. The overall increase in Q208 royalties was muted by the year-end 2007 Crown capital and operating cost credit recovery adjustment received in Q208. The corporate effective royalty rate in Q208 was higher than the Q207 rate of 17% due to a higher weighting of production derived from Crown lands vis-a-vis freehold acreage, specifically with regards to the Company's Kaybob asset base. Orleans' P&NG royalties for the six month period ended June 30, 2008 amounted to $10.1 million with a corporate effective royalty rate of 22%. In the corresponding six month period ended June 30, 2007, the Company's total royalties amounted to $4.3 million.



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Second Quarter First Half
($000s) Q208 Q207 % Change H108 H107 % Change
-------------------------- --------------------------
Crown 4,273 1,363 213 7,423 2,871 159
Freehold and overrides 1,737 611 184 2,714 1,391 95
Total Royalties 6,010 1,974 204 10,137 4,262 138
-------------------------- --------------------------
-------------------------- --------------------------

Corporate royalty rate
(%) (1) 22 17 22 18
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(1) Corporate royalty rate based on P&NG sales, excluding realized hedging
gains or losses from risk management commodity contracts settlements.


Operating Expenses

The Company's field operations expenses for the three month period ended June 30, 2008 amounted to $3.83 million. Higher, in aggregate, than the $3.05 million reported in the same quarterly period of 2007, due exclusively to increased production and expanded field operations resulting from a greater number of producing wells.

Orleans' field operating expenses, on an oil-equivalent per unit basis, are generally impacted by the level of well bore maintenance activity, geographic location of the Company's properties, whether oil and gas is produced, and the underlying commodity price levels. Commodity prices directly affect operating cost elements such as power, fuel and chemicals. The remaining primary components, which include among other things, field labour, services and equipment, are indirectly impacted by high price environments, which drive up activity and demand and therefore, increase costs. All elements of operating expenses have been increasing throughout the oil and gas industry for several years due to industry inflationary pressures.

Despite inflationary exposure on Orleans' operating cost structure and the off-lined production at Gordondale for second quarter 2008, the Company's operating costs on a per unit basis were $10.47 per boe in Q208, a 23% decrease from the $13.61 per boe realized in the comparable second quarter of 2007. The Company's operating costs for the six month period ended June 30, 2008 amounted to $7.63 million, or $10.75 per boe. Corporate per unit operating cost improvements continue to be one of the beneficiaries of a higher weighting of corporate production derived from Orleans' Kaybob asset base, where per unit area operating costs are less than $9.00 per boe.



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Second Quarter First Half
Q208 Q207 % Change H108 H107 % Change
-------------------------- --------------------------
Total ($000s) 3,829 3,046 26 7,634 5,424 41
Per unit ($/boe) 10.47 13.61 (23) 10.75 11.89 (10)
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Transportation Expenses

Orleans incurs transportation costs for the crude oil and natural gas it produces once the respective commodity enters a feeder or main pipeline to the title transfer point. The Company's cost of transporting and distributing its crude oil and natural gas production in Q208 amounted to $211 thousand, as compared to Q207 transportation expenses of $269 thousand. On a unit-of-production basis, transportation costs of $0.58 per boe in Q208 represented a per unit decrease of 52% over Q207. Higher natural gas composition of the Company's overall production mix, which is typically burdened to a lesser degree than oil with transportation costs, in addition to prior period transportation expenditures reclassified to operating expenses in Q208, resulted in a lower per unit transportation rate in Q208.

For the six month period ended June 30, 2008, the Company's transportation expenses amounted to $630 thousand, as compared to H107 transportation expenses of $524 thousand. On a unit-of-production basis, transportation costs in H108 were $0.89 per boe as compared to the $1.15 per boe realized in H107.



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Second Quarter First Half
Q208 Q207 % Change H108 H107 % Change
-------------------------- --------------------------
Total ($000s) 211 269 (22) 630 524 20
Per unit ($/boe) 0.58 1.20 (52) 0.89 1.15 (23)
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General & Administrative Expenses

The Company's general and administrative ("G&A") expenses related to its Calgary-based, head office operations (excluding the non-cash stock-based compensation provision), amounted to $870 thousand during the three month period ended June 30, 2008, or $2.38 on an oil-equivalent per-unit basis. Orleans' aggregate G&A costs in Q208 increased $354 thousand or 69% as compared to Q207. Higher G&A expenses in Q208 are primarily related to costs incurred for: the listing fees and related legal services associated with the Company's graduation from the TSX Venture Exchange to the Toronto Stock Exchange effected June 25, 2008 ($216 thousand or $0.59 per boe in Q208), and the additional head office staff necessary to manage Orleans' expanded operations.

Orleans presently employs 15 head office personnel, including eight geological and engineering technical personnel, and engaged the services of three consultants on a part-time, as needed, basis. The Company applies the full cost method of accounting for its oil and gas operations. Accordingly, it capitalized employee G&A and associated direct overhead costs of its technical personnel in the amount of $335 thousand during the three month period ended June 30, 2008 (Q207: $241 thousand).



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Second Quarter First Half
($000s) Q208 Q207 % Change H108 H107 % Change
-------------------------- --------------------------
Gross, net recoveries 1,205 757 59 2,330 1,500 55
Capitalized (335) (241) 39 (752) (445) 69
Expensed 870 516 69 1,578 1,055 50
Per unit ($/boe) 2.38 2.30 3 2.22 2.31 (4)
-------------------------- --------------------------
-------------------------- --------------------------
% Capitalized 28 32 32 30
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Stock-Based Compensation

Orleans utilizes the fair value method for measuring stock-based compensation expenses. Compensation cost is measured at the grant date based on the fair value of the option using a Black-Scholes option pricing model and is recognized over the option vesting period. Some of the inputs to the option valuation model are subjective, including assumptions regarding expected stock price volatility. The Company's stock-based compensation relates entirely to the granting of stock options. During the three month period ended June 30, 2008, the Company recorded stock-based compensation expense of $273 thousand (Q207: $199 thousand), which was charged to general and administration expense and presented as such on the Company's statement of operations. In Q208, the Company capitalized $268 thousand of its stock-based compensation charges (Q207: $175 thousand). As of June 30, 2008, total unrecognized compensation cost of $2.78 million, related to 2.07 million unvested Orleans' stock options, is expected to be recognized in future periods over the remaining vesting terms.



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Second Quarter First Half
----------------------------------------------------------------------------
($000s) Q208 Q207 % Change H108 H107 % Change
----------------------------------------------------------------------------
Stock-based
compensation 273 199 37 516 349 148
----------------------------------------------------------------------------


Interest Charges

During the three month period ended June 30, 2008, the Company incurred $171 thousand in interest charges relating to its outstanding bank indebtedness. For the six month period ended June 30, 2008, bank interest charges amounted to $708 thousand. As at June 30, 2008, Orleans had $18.82 million of bank debt, as compared to $44.14 million of outstanding bank indebtedness at December 31, 2007. Notwithstanding Orleans' exploration and development capital investments for the first half 2008 mirroring cash flow from operations, the Company's bank debt decreased in 2008 as a result of the $28.98 million equity financing undertaken in the spring of 2008. In addition to bank debt servicing costs incurred in H108, the Company accrued for the federal government's levied interest charges related to Orleans' July 2007 flow-through financing exploration expenditure deductions, previously renounced under the "look back" rules. In H108, this interest charge was accrued in the amount of $74 thousand (Q208: $18 thousand) and will be disbursed in the first quarter of 2009.



----------------------------------------------------------------------------
Second Quarter First Half
----------------------------------------------------------------------------
($000s) Q208 Q207 % Change H108 H107 % Change
----------------------------------------------------------------------------
Interest charges 190 688 (72) 782 1,348 (42)
----------------------------------------------------------------------------


Depletion, Depreciation and Accretion

Orleans' depletion and depreciation expense for the three month period ended June 30, 2008 amounted to $9.83 million. On a unit-of-production rate basis, the depletion and depreciation provision for Q208 was $26.86 per boe, as compared to the $29.49 per boe provision recognized in Q207. The Company's depletion and depreciation expense for the six month period ended June 30, 2008 amounted to $19.12 million or $26.92 per boe, as compared to $13.27 million or $29.08 per boe in H107. The depletion and depreciation rate is a useful measure for evaluating finding and development costs on proved reserves basis since the rate generally considers all acquisition, exploration and development capital costs. The rate also considers any additional future development costs associated with proved non-producing reserves. The general limitation with this accounting provision is that it does not include probable reserves captured via ongoing, successful capital expenditures activities. Orleans' ability to efficiently discover and develop proved oil and gas reserves in a cost-effective manner continues to be reflected in its decreasing depletion and deprecation rate provision.

The Company's accretion expense relating to its asset retirement obligations ("ARO") amounted to $120 thousand for the three month period ended June 30, 2008 (Q207: $118 thousand).



----------------------------------------------------------------------------
Second Quarter First Half
----------------------------------------------------------------------------
($000s) Q208 Q207 % Change H108 H107 % Change
----------------------------------------------------------------------------
Depletion &
depreciation (1) 9,826 6,602 49 19,120 13,268 44
----------------------------------------------------------------------------
Per unit ($/boe) 26.86 29.49 (9) 26.92 29.08 (7)
----------------------------------------------------------------------------
ARO accretion (2) 120 118 2 242 234 3
----------------------------------------------------------------------------
Per unit ($/boe) 0.33 0.53 (38) 0.34 0.51 (33)
----------------------------------------------------------------------------
(1) Includes depletion of capitalized portion of ARO which was capitalized
to PP&E balance and depleted over life of Company's proved reserves.
(2) Represents accretion expense on ARO.


Asset Retirement Obligations

As at June 30, 2008, Orleans recorded an ARO of $5.76 million for estimated future costs to abandon the Company's oil and gas wells and to dismantle and remove associated production facilities, as compared to $5.45 million at December 31, 2007. For the six month period ended June 30, 2008, the ARO liability increased by a total of $308 thousand as a result of accretion expense of $242 thousand and $93 thousand in liabilities incurred on development drilling activities, muted by $27 thousand of liabilities released on property dispositions.

Income Taxes

Orleans follows the asset and liability method of accounting for income taxes whereby future income taxes are calculated based on temporary differences arising from the variance between the tax basis of an asset or liability and its property, plant and equipment carrying value. For the six months ended June 30, 2008, the Company recorded a future income tax reduction of $815 thousand, as compared to a $1.02 million income tax reduction in the comparable first six months of 2007. For Q208, the Company recorded a future income tax provision of $270 thousand, as compared to a $849 thousand income tax reduction in the comparable Q207. During the three month and six month periods ended June 30, 2008, respectively, Orleans was not subject to any current corporate income tax due to its significant tax pool balances, which aggregate to approximately $168 million. As a result of Orleans' sizeable tax pool position, the Company does not expect to be subject to corporate cash income tax in the foreseeable future. The following table outlines Orleans' tax pools as at June 30, 2008:



----------------------------------------------------------------------------
Balance
Access Rate ($ millions)
----------------------------------------------------------------------------
Canadian exploration expense (CEE) 100% $ 26.9
----------------------------------------------------------------------------
Canadian development expense (CDE) 30% 60.8
----------------------------------------------------------------------------
Canadian oil and gas property expense (COGPE) 10% 33.9
----------------------------------------------------------------------------
Undepreciated capital cost (UCC) Various 39.7
----------------------------------------------------------------------------
Share issue costs and other 20% 7.0
----------------------------------------------------------------------------
Total $ 168.3
----------------------------------------------------------------------------


Reconciliation of Non-GAAP Measures

----------------------------------------------------------------------------
Second Quarter
----------------------
($000s) Q208 Q207
----------------------------------------------------------------------------
Net earnings (loss) 850 (128)
----------------------------------------------------------------------------
Non-cash items:
----------------------------------------------------------------------------
Depletion & Depreciation 9,826 6,602
----------------------------------------------------------------------------
ARO accretion 120 118
----------------------------------------------------------------------------
Stock-based compensation 273 199
----------------------------------------------------------------------------
Unrealized (gain) loss on commodity
contracts 2,226 (445)
----------------------------------------------------------------------------
Future income taxes (reduction) 270 (849)
----------------------------------------------------------------------------
Cash flow from operations 13,565 5,818
----------------------------------------------------------------------------
First Half
----------------------------------------------------------------------------
($000s) 1H08 H107
----------------------
Net loss (2,732) (1,041)
----------------------------------------------------------------------------
Non-cash items:
----------------------------------------------------------------------------
Depletion & Depreciation 19,120 13,268
----------------------------------------------------------------------------
ARO accretion 242 234
----------------------------------------------------------------------------
Stock-based compensation 516 349
----------------------------------------------------------------------------
Unrealized (gain) loss on commodity
contracts 6,616 (38)
----------------------------------------------------------------------------
Future income taxes (reduction) (815) (1,016)
----------------------------------------------------------------------------
Cash flow from operations 22,947 10,386
----------------------------------------------------------------------------


Operating Cash Flow and Net Earnings

The Company's profitability and cash flow generation is primarily a function of commodity prices, the cost to add reserves through drilling and acquisitions and the cost to produce the Company's reserves. In the three month period ended June 30, 2008, Orleans generated record quarterly cash flow from operations of $13.57 million (Q207: $5.14 million) and realized net earnings of $850 thousand (Q207: $128 thousand net loss). During the second quarter 2008, as a result of rising commodity prices, the Company recognized a non-cash, unrealized loss of $2.23 million on its risk management commodity contracts, thus tempering Orleans' earnings generation capability for the period.

During the six month period ended June 30, 2008, Orleans realized $22.95 million in cash flow from operations ($0.54 per basic share) and a net loss of $2.73 million ($0.06 per basic share). For the comparable period in H107, the Company generated $11.21 million in cash flow from operations ($0.34 per basic share) and a $1.04 million net loss ($0.03 per basic share).



----------------------------------------------------------------------------
Second Quarter First Half
----------------------------------------------------------------------------
($000s except share
data) Q208 Q207 % Change H108 H107 % Change
----------------------------------------------------------------------------
Cash flow from
operations (1) 13,565 5,143 164 22,948 11,209 105
----------------------------------------------------------------------------
Per share - basic 0.30 0.16 88 0.54 0.34 59
----------------------------------------------------------------------------
Per share - diluted 0.29 0.15 93 0.53 0.34 56
----------------------------------------------------------------------------
Net earnings (loss) 850 (128) - (2,732) (1,041) 162
----------------------------------------------------------------------------
Per share - basic 0.02 - - (0.06) (0.03) 100
----------------------------------------------------------------------------
Per share - diluted 0.02 - - (0.06) (0.03) 100
----------------------------------------------------------------------------
(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian GAAP and accordingly represents cash flow from
operating activities before any asset retirement obligation cash
expenditures and before changes in non-cash operating activities working
capital. As an indicator of the Company's performance, the term cash
flow from operations or operating cash flow contained within should not
be considered as an alternative to, or more meaningful than, cash flow
from operating activities as determined in accordance with Canadian
GAAP.


Capital Expenditures

The Company's capital investments involve exploration, development and acquisition activities, which generally include the following:

- Drilling and completing new natural gas and oil wells;

- Constructing and installing new field production infrastructure;

- Acquiring and maintaining the Company's lease acreage position and its seismic resources;

- Enhancing existing natural gas and oil wells through well-bore re-completions;

- Acquiring additional natural gas and oil reserves and producing properties; and,

- General and administrative costs directly associated with exploration and development activities, including payroll and other overhead expenses attributable solely to the Company's technical employees.

In the three month period ended June 30, 2008, Orleans' total capital investment expenditures amounted to $6.83 million (Q207: $10.21 million). The Company was able to maintain operational momentum through spring break-up by drilling two (1.36 net) Montney horizontal wells at Kaybob on its western acreage block. Both wells were drilled from a common lease pad allowing for minimal surface lease disturbance and expedited tie-in subsequent to successful application of the "Packers Plus" completion technology. In the first six months of 2008, the Company drilled eight (7.1 net) wells, and incurred $23.04 million in total capital expenditures (H107: $21.63 million). Seven (6.1 net) wells were drilled at Kaybob in exploration and development of the Montney reservoir. Additionally, one (1.0 net) well was drilled at Gilby in West Central Alberta.

In 2008, the Company is presently budgeted to execute an exploration and development capital expenditure program of approximately $57 million, excluding any acquisitions capital. The 2008 capital program encompasses the drilling of a total of 18 (16.3 net) operated wells, with an approximate 91% working interest. This includes 12 (10.3 net) horizontal wells at Kaybob targeting the Triassic Montney formation, three (3.0 net) wells at Gilby targeting the Edmonton, Glauconite and Ellerslie formations, and three (3.0 net) wells at Gordondale potentially encountering two new reservoirs.

Orleans' management closely monitors the exploration and development capital program in relation to estimated cash flow from operations. Actual spending may vary due to a variety of factors, including drilling results, natural gas and oil prices, economic conditions, equipment availability, permitting and any future acquisitions. The timing of most of the Company's capital expenditures is discretionary because Orleans does not have any material capital expenditure commitments. Consequently, the Company has a significant degree of flexibility to adjust the level of it capital investments as circumstances warrant. Additionally, to enhance flexibility of the Company's capital program, Orleans typically does not enter into material long-term obligations with any of its drilling contractors or service providers with respect to its operated natural gas and oil properties.

The breakdown of Orleans' capital programs are outlined below:



----------------------------------------------------------------------------
Second Quarter First Half
----------------------------------------------------------------------------
($000s) Q208 Q207 % Change H108 H107 % Change
----------------------------------------------------------------------------
Land 421 5,691 (93) 498 5,729 (91)
----------------------------------------------------------------------------
Seismic 36 (33) - 93 227 (59)
----------------------------------------------------------------------------
Drilling &
completions 4,520 3,780 20 18,087 10,508 72
----------------------------------------------------------------------------
Facilities & well
equipment 1,828 1,398 31 3,644 5,362 (32)
----------------------------------------------------------------------------
Exploration &
development 6,805 10,836 (37) 22,322 21,826 2
----------------------------------------------------------------------------
Office & Other (1) 625 512 22 1,315 940 40
----------------------------------------------------------------------------
Property purchases (600) (1,139) (47) (600) (1,139) (47)
----------------------------------------------------------------------------
Corporate
acquisitions - - - - - -
----------------------------------------------------------------------------
Total capital
expenditures 6,830 10,209 (33) 23,037 21,627 7
----------------------------------------------------------------------------
(1) Includes capitalized G&A and non-cash capitalized stock-based
compensation.


Financial Resources and Liquidity

At June 30, 2008, the Company was capitalized with a working capital deficit of $1.51 million (December 31, 2007: $4.05 million) and bank debt of $18.82 million (December 31, 2007: $44.14 million), with 45.78 million common shares outstanding with a book capitalization of $163.65 million and a market capitalization of approximately $241 million.



----------------------------------------------------------------------------
June 30, December 31, % Change
($000) 2008 2007
----------------------------------------------------------------------------
Bank debt 18,815 44,137 (57)
----------------------------------------------------------------------------
Working capital deficit(1) 1,511 4,052 (62)
----------------------------------------------------------------------------
Net debt 20,326 48,189 (58)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Book capitalization (2) 163,652 137,732 19
----------------------------------------------------------------------------
Market capitalization (3) 240,801 83,033 190
----------------------------------------------------------------------------
Note 1: Reflects current assets (excluding non-cash risk management asset)
less current liabilities (excluding any outstanding bank debt and
non-cash risk management liability).
Note 2: Reflects the book value of share capital, as reported on the
Company's respective balance sheets.
Note 3: Based on the market closing price of Orleans' stock and the
outstanding number of common shares at period end.


As at June 30, 2008, the Company's revolving demand facility with a major Canadian chartered bank provided for a borrowing base of $65 million (the "Credit Facility"). The borrowing base, which is re-determined semi-annually, represents the amount that can be borrowed from a credit standpoint based on, among other things, the Company's current reserve report, results of operations, current and forecasted commodity prices and the current economic environment, as confirmed by the bank. Based on an annual review of the borrowing base associated with the Credit Facility, the Company's banker increased the borrowing base of the Credit Facility to $65 million, effective May 7, 2008.

At June 30, 2008, the Company had borrowings of $18.82 million (December 31, 2007: $44.14 million) under the aforementioned Credit Facility and was in full compliance with all reporting covenant terms of the credit agreement. The Company's bank debt decreased primarily as a result of the $28.98 million equity financing in March and April 2008, discussed hereafter.

On March 13, 2008, the Company closed a "bought-deal" equity financing (the "2008 Financing"). Pursuant to the terms of the 2008 Financing, the Company issued 7.0 million common shares at a price of $3.60 per share for total gross proceeds of $25.2 million. On April 9, 2008, the Company's over-allotment option associated with the aforementioned 2008 Financing was exercised in full by the underwriters. Pursuant to the 2008 Financing, the Company granted the underwriters an option ("Over-Allotment Option"), exercisable for a period of 30 days following the closing of the 2008 Financing, to purchase an additional 1,050,000 common shares (representing 15% of the common shares issued pursuant to the 2008 Financing) at a price of $3.60 per common share for gross proceeds of $3,780,000. The Company presently has 45.78 million common shares issued and outstanding.

With respect to the asset-backed commercial paper ("ABCP") market liquidity issues, which occurred during the third quarter of 2007 in the global credit markets as a result of the deterioration of the U.S. sub-prime mortgage market and resulted in numerous companies, including those within the oil and gas sector, not being able to access their funds when the ABCP became ordinarily due, the Company has never held funds in, nor does it currently hold, ABCP.

With regards to the potential credit loss associated with the recent bankruptcy filing of SemGroup L.P. ("SEMGroup"), the Company has estimated, potential financial exposure of approximately $8.6 million to SemCAMS ULC ("SemCAMS"), a Canadian subsidiary of SEMGroup, relating to the marketing of a portion of the Company's natural gas and NGLs sales for the month of June 2008 and for 22 days in July 2008. The contract pertaining to the production volumes purchased by SemCAMS has been terminated as of July 22, 2008 and does not represent an ongoing exposure for Orleans. SEMGroup, a U.S. based midstream and marketing company, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware on July 22, 2008. SemCAMS also filed for creditor protection in Canada under The Companies' Creditors Arrangement Act. As of this date, Orleans is not able to neither determine the period within which nor quantify with certainty the portion of the exposure that will be ultimately collected from SemCAMS. However, the monetary exposure amount is not anticipated to impair the Company's ability to fund its remaining 2008 capital expenditures program. As of August 8, 2008, the Company had $21.5 million of bank debt drawn against its available $65 million Credit Facility.

In 2008, as in 2007, the Company expects its cash flow from operations to be its primary source of liquidity to meet operating, general and administrative and interest expenses, and fund planned spending on exploration and development capital projects and undeveloped acreage. The aforementioned $65 million revolving bank Credit Facility will provide another potential source of liquidity. The Company anticipates that public capital markets will serve as the principal source of funds to finance any future substantial corporate acquisitions and/or significant property purchases. Orleans has sold equity securities in the past and the Company expects that this source of capital will be available in the future for acquisition purposes.

Common Share Information



----------------------------------------------------------------------------
2007 Quarterly
Q407 Q307 Q207 Q107
----------------------------------------------------------------------------
Share Price: High $ 3.10 $ 4.00 $ 4.55 $ 4.05
Low $ 2.05 $ 2.54 $ 3.53 $ 2.75
Close $ 2.21 $ 2.74 $ 3.98 $ 3.70
----------------------------------------------------------------------------
Avg. daily trading volume 90,524 49,887 89,663 64,247
Shares outstanding -
period end (1) 37,571,372 37,546,372 33,325,889 33,148,659
Weighted average basic 37,571,100 37,014,430 33,209,828 33,148,659
Weighted average diluted 38,019,052 37,526,046 33,833,429 33,743,616
----------------------------------------------------------------------------


----------------------------------------------------------------------------
2008 Quarterly
----------------------------------------------------------------------------
Q108 Q208
----------------------------------------------------------------------------
Share Price: High $ 3.90 $ 5.81
Low $ 2.20 $ 3.90
Close $ 3.75 $ 5.26
----------------------------------------------------------------------------
Avg. daily trading volume 249,132 293,653
Shares outstanding - period end (1) 44,596,372 45,779,706
Weighted average basic 39,035,932 45,604,668
Weighted average diluted 39,577,174 46,575,328
----------------------------------------------------------------------------

(1) As of the date of this MD&A, total common shares issued and outstanding
are 45,779,706, and total stock options outstanding are 3,832,192 with
an average exercise price of $3.21 per option.


On June 25, 2008, the Company's common shares commenced trading on the Toronto Stock Exchange ("TSX"). The graduation of its common shares listing from the TSX Venture Exchange to the TSX is expected to provide the Company with access to Canada's largest stock exchange while enhancing Orleans' trading liquidity and visibility within the North American capital markets.

Orleans has never paid cash dividends on its common stock. The Company presently intends to retain any earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend upon the results of the Company's operations, capital investment requirements, Orleans' financial condition and such other factors the Company's board of directors may deem relevant. In addition, the Company is restricted under its bank credit facility from paying or declaring cash dividends.

Contractual Obligations and Commitments

In the normal course of business, the Company has entered into various commitments that will have an impact on Orleans' future operations. These commitments primarily relate to debt repayment, and operating leases relating to its head office space and natural gas field equipment. The following table summarizes the Company's various contractual obligations and commitments as at June 30, 2008:



----------------------------------------------------------------------------
($000s) Less than 1 - 3 Years 4 - 5 Years Beyond 5
1 Year Years Total
----------------------------------------------------------------------------
Bank debt (1) 18,815 - - - 18,815
Head office
lease
obligations (2)
325 1,979 1,360 227 3,890
----------------------------------------------------------------------------
Field equipment
operating
leases (3) 105 - - - 105
Total
obligations 19,245 1,979 1,360 227 22,810
----------------------------------------------------------------------------

(1) Demand revolving operating credit facility with Canadian chartered bank.
Refer to Note 6 to interim financial statements for six month period
ended June 30, 2008. This facility has no specific terms of repayment
aside from the bank's right of demand and periodic review.
(2) Pertains to lease payments associated with Company's Calgary, Alberta
head office lease entered into on February 16, 2007, including an
estimate of Company's share of operating, utilities, property taxes and
parking for duration of office lease.
(3) Pertains to various monthly and short-term operating leases for nine
field natural gas compressors and one separator.


In 1996, a lawsuit was filed against the Company's predecessor, Orleans Resources Inc. and the "procureur general du Quebec". Since the Company is of the opinion that this lawsuit against Orleans Resources Inc. is unwarranted and will have no material adverse effect on the Company's financial position or on the results of operations, no provision has been recorded in this respect. If the Company has to pay any amount in this affair, this amount will be paid by issuing reserved common shares, at a price of $6.00 per share. The maximum number of common shares that would have to be issued would be 666,118 shares, representing the full lawsuit value amount of $3.996 million.

Additionally, on July 12, 2007, the Company issued 1,500,000 flow-through common shares on a "bought-deal" basis at a price of $5.45 per share for gross proceeds of $8.18 million. Under the terms of the flow-through share agreement, the Company is committed to spend 100% of the gross proceeds on qualifying Canadian Exploration Expenditures, as defined in the Income tax Act (Canada), prior to December 31, 2008. As at June 30, 2008, the Company had incurred approximately $7.16 million of qualifying expenditures associated with this equity issue with the balance of $1.02 million to be incurred by December 31, 2008.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements, special purpose entities, financing partnerships or guarantees, other than as disclosed in this section. Orleans has certain lease agreements, as disclosed in the aforementioned Contractual Obligations and Commitments table, which were entered into in the normal course of business operations. All leases have been treated as operating leases or rental arrangements whereby the lease payments are included in operating expenses or G&A expenses depending on the nature of the lease. No asset or liability value has been assigned to these leases on the balance sheet as at June 30, 2008.

Related Party Transactions

A director and the corporate secretary of the Company are partners at a law firm that provides legal services to the Company. The services were conducted in the normal course of business operations and are measured at the exchange amount, which is established and agreed to by the related parties based on standard rates, time spent and costs incurred. During the first six months of 2008, Orleans paid and/or accrued a total of $167 thousand to this firm for legal fees and disbursements (H107: $16 thousand).

Disclosure Controls and Procedures and Internal Controls Over Financial Reporting

Orleans' President and Chief Executive Officer ("CEO") and Vice President, Finance and Chief Financial Officer ("CFO") are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting as defined in Multilateral Instrument 52-109. The Company's CEO and CFO have designed disclosure controls and procedures, or caused them to be designed under their supervision, to provide reasonable assurance that information to be disclosed by Orleans is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The CEO and CFO have also designed internal controls over financial reporting, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Please refer to the Management's Discussion and Analysis for the year ended 2007 for a discussion of the Company's internal control weaknesses. During the three month period ended June 30, 2008, there have been no changes to Orleans' internal controls over financial reporting that have materially, or are reasonably likely to, materially affect the internal controls over financial reporting. Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements, error or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute assurance, that the objectives of the control system are met.

Change in Accounting Policies

Effective January 1, 2007, the Company adopted section 3855 "Financial Instruments - Recognition and Measurement", section 3861 "Financial Instruments - Disclosure and Presentation", section 1530 "Comprehensive Income", and section 3865 "Hedges". The standards require all financial instruments other than held-to-maturity investments, loans and receivables to be included on a company's balance sheet at their fair value. Held-to-maturity investments, loans and receivables would be measured at their amortized cost. The standards create a new statement for comprehensive income that will include changes in the fair value of certain financial instruments. As a result of these new standards, the Company records the fair value of its crude oil and natural gas derivative contracts under its risk management program on the Company's balance sheet. No restatement of prior periods occurred as a result of these new standards.

Effective January 1, 2008, the Company adopted section 3862 "Financial Instruments - Disclosures", and section 3863 "Financial Instruments - Presentation". These sections replaced section 3861 "Financial Instruments - Disclosure and Presentation". The objective of section 3862 is to provide users with information to evaluate the significance of the financial instruments on the entity's financial position and performance, the nature and extent of risks arising from financial instruments, and how the entity manages those risks. The provisions of section 3863 deal with the classification of financial instruments, related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. Refer to note 12 to the interim financial statements for the six month period ended June 30, 2008.

Effective January 1, 2008, the Company adopted section 1535, "Capital Disclosures", requiring disclosure of information about an entity's capital and the objectives, policies, and processes for managing capital. Refer to Note 13 to the interim financial statements for the six month interim period ended June 30, 2008.

Effective January 1, 2008, the Company adopted section 3031, "Inventories," which replaced CICA section 3030 of the same name. The new guidance provides additional measurement and disclosure requirements and requires the Company to reverse previous impairment write-downs when there is a change in the situation that caused the impairment. Refer to Note 13 to the interim financial statements for the six month interim period ended June 30, 2008.

Recent Accounting Pronouncements

In January 2006, the AcSB announced its decision to replace Canadian GAAP with International Financial Reporting Standards ("IFRS") for all Canadian Publicly Accountable Enterprises ("PAE"). On February 13, 2008, the AcSB confirmed January 1, 2011 as the official change-over date for PAE's to commence reporting under IFRS. Although IFRS is principles-based and uses a conceptual framework similar to Canadian GAAP, there are significant differences and choices in accounting policies, as well as increased disclosure requirements under IFRS. The Company continues to monitor and assess the impact of IFRS on its financial statements.

In February 2008, the AcSB issued section 3064, "Goodwill and Intangible Assets", and amended section 1000, "Financial Statement Concepts" clarifying the criteria for the recognition of assets, intangible assets and internally developed intangible assets. Items that no longer meet the definition of an asset are no longer recognized with assets. The standard is effective for annual years beginning on or after October 1, 2008 and early adoption is permitted. The Company is presently evaluating the impact these sections will have on its results of operations and/or financial position.

Business Risks and Uncertainties

The Company's exploration and development activities are focused in the Western Canada Sedimentary Basin within the province of Alberta, which is characterized as being highly competitive with competitors varying in size from small junior producers to significantly larger, fully-integrated energy companies and oil and gas royalty trusts possessing greater financial and personnel resources. The Company recognizes certain risks inherent in the oil and gas industry, such as access to oil and gas services, weather-related delays with drilling and operational plans, finding and developing oil and gas reserves at economic costs, drilling risks, producing oil and gas in commercial quantities, environmental and safety risks, and commodity price and political risks and uncertainties. Orleans has engaged professional management and technical personnel with many years of experience in the oil and gas business to address, prudently manage and mitigate these risks.

Additional risks are outlined in the Annual Information Form ("AIF") of the Company. The AIF can be retrieved electronically from the SEDAR system by accessing Orleans' public filings under "Search for Public Company Documents" at www.sedar.com.

New Greenhouse Gas and Air Emissions Legislation

The Alberta Government has introduced legislation that will enable the Province of Alberta to regulate emissions of "greenhouse gases". The regulations require facilities that emit over 100,000 tonnes of greenhouse gases a year to reduce their emissions intensity by 12% starting July 1, 2007 or pay a fee based on emissions in excess of the targeted reductions. The Federal Government has also released its regulatory framework to reduce emissions of both greenhouse gases and four smog-forming pollutants with targets coming into force in 2010 and 2015, respectively. Clarification surrounding the regulations is expected in the next year with the regulations to be finalized by 2010. There are multiple compliance mechanisms under both the Alberta and Federal plans, including making contributions to technology funds, emissions trading and offset credits. The Company is in the process of fully evaluating the impact of these regulations, but Orleans believes that the cost and impact on its operations will be minor.

Application of Critical Accounting Policies and Estimates

Management is required to make judgments and use estimates in the application of generally accepted accounting principals that have a significant impact on the financial results of the Company. Please refer to the Management's Discussion and Analysis for the year ended 2007 for a discussion outlining these accounting policies and practices, which are critical in determining Orleans' financial results.

Orleans' financial statements for the interim period ended June 30, 2008 are enclosed.

Orleans Energy Ltd. is a Calgary, Alberta-based emerging crude oil and natural gas company, with common shares trading on the Toronto Stock Exchange under the symbol "OEX". Orleans is a team of dedicated, experienced professionals focused on the creation of shareholder value via acquisition and development of crude oil and natural gas assets in Alberta.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, anticipations, expectations, intentions, opinions, forecasts, projections, guidance or other similar statements that are not statements of fact. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement.

In this news release, reserves and production data are commonly stated in barrels of oil equivalent ("boe") using a six to one conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one to one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

The term cash flow from operations or operating cash flow contained herein should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP"). This term does not have a standardized meaning under GAAP and may not be comparable to other companies. Orleans believes that cash flow from operations is a useful supplementary measure as investors may use this information to analyze operating performance, leverage and liquidity. Cash flow from operations, as disclosed within this news release, represents funds from operations before any asset retirement obligation cash expenditures and is expressed before changes in non-cash working capital. Additionally, net debt refers to outstanding bank debt plus working capital deficit (excludes current unrealized amounts pertaining to risk management commodity contracts). Net debt is not a recognized measure under Canadian GAAP.



----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Balance Sheets
----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 200 $ 65,564
Accounts receivable and
accrued revenues 12,607,565 9,038,271
Prepaid expenses and deposits 797,914 984,200
----------------------------------
13,405,679 10,088,035
Property, plant and equipment (Note 5) 197,645,429 193,662,669
----------------------------------

$211,051,108 $ 203,750,704
----------------------------------
----------------------------------

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 14,916,884 $ 14,139,553
Commodity risk management (Note 12b) 7,048,425 432,470
Bank loan (Note 6) 18,815,474 44,136,979
----------------------------------

40,780,783 58,709,002

Asset retirement obligations (Note 7) 5,762,093 5,454,294
Future income tax liability 4,745,158 3,708,329
----------------------------------

51,288,034 67,871,625
----------------------------------

SHAREHOLDERS' EQUITY
Share capital (Note 8) 163,652,294 137,732,354
Contributed surplus (Note 9c) 3,509,661 2,813,682
Deficit (7,398,881) (4,666,957)
----------------------------------

159,763,074 135,879,079
----------------------------------

$211,051,108 $ 203,750,704
----------------------------------
----------------------------------

Description of Business and Basis of Presentation (Notes 1 & 2)
Subsequent Event (Note 14)

The accompanying notes to the financial statements are an integral part of
these statements.


----------------------------------------------------------------------------
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Operations and Comprehensive Income (Loss)
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three Months Ended, Six Months Ended,
---------------------------------------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------
Revenue
Petroleum and natural gas
sales $27,010,841 $11,282,685 $46,355,067 $23,184,912
Royalties (6,009,702) (1,973,312) (10,137,207) (4,261,724)
---------------------------------------------------
21,001,139 9,309,373 36,217,860 18,923,188
Realized gain (loss) on
commodity contracts
(Note 12b) (2,337,315) 353,047 (2,645,370) 638,476
Unrealized gain (loss) on
commodity contracts
(Note 12b) (2,225,962) 798,660 (6,615,955) 584,863
---------------------------------------------------
16,437,862 10,461,080 26,956,535 20,146,527
---------------------------------------------------
Expenses
Operating 3,828,745 3,046,407 7,634,437 5,424,469
Transportation 210,691 269,200 629,844 524,404
General and
administrative (Note 9b) 1,143,142 714,850 2,094,538 1,404,566
Interest 189,525 688,077 782,263 1,348,019
Depletion, depreciation
and accretion 9,945,695 6,719,919 19,362,076 13,501,460
---------------------------------------------------
$15,317,798 $11,438,453 $30,503,158 $22,202,918
---------------------------------------------------

Earnings (loss) before
taxes 1,120,064 (977,373) (3,546,623) (2,056,391)

Future income taxes
(reduction) 269,769 (849,348) (814,699) (1,015,599)
---------------------------------------------------

Net earnings (loss) $ 850,295 $ (128,025) $(2,731,924) $(1,040,792)

Changes in cash flow
hedges, net of tax - (248,195) - (384,039)
---------------------------------------------------
---------------------------------------------------

Comprehensive income
(loss) $ 850,295 $ (376,220) $(2,731,924) $(1,424,831)
---------------------------------------------------
---------------------------------------------------

Net earnings (loss) per
share (Note 10)
Basic $ 0.02 $ - $ (0.06) $ (0.03)
---------------------------------------------------
---------------------------------------------------

Diluted $ 0.02 $ - $ (0.06) $ (0.03)
---------------------------------------------------
---------------------------------------------------

The accompanying notes to the financial statements are an integral part of
these statements


----------------------------------------------------------------------------
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Retained Earnings (Deficit)
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Three Months Ended, Six Months Ended,
---------------------------------------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------
Retained earnings
(deficit), beginning
of period $(8,249,176) $ 630,399 $(4,666,957) $ 1,543,166
Net earnings (loss) 850,295 (128,025) (2,731,924) (1,040,792)
---------------------------------------------------
Retained earnings
(deficit), end of
period $(7,398,881) $ 502,374 $(7,398,881) $ 502,374
---------------------------------------------------
---------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Accumulated Other Comprehensive Income ("AOCI")
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Three Months Ended, Six Months Ended,
---------------------------------------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------
AOCI, beginning of
period $ - $ 289,561 $ - $ -
Impact of new cash flow
accounting standards
on January 1, 2007
(net of tax) - (353,504) - 71,901
Reclassification to
earnings of net gains
on commodity contracts
(net of tax) - 105,309 - (30,535)
---------------------------------------------------
AOCI, end of period $ - $ 41,366 $ - $ 41,366
---------------------------------------------------
---------------------------------------------------

The accompanying notes to the financial statements are an integral part of
these statements.


----------------------------------------------------------------------------
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Cash Flows (unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended, Six Months Ended,
Cash provided June 30, June 30, June 30, June 30,
from (used in): 2008 2007 2008 2007
Operating
activities
Net earnings (loss) $ 850,295 $ (128,025) $ (2,731,924) $ (1,040,792)
Items not affecting
cash:
Depletion,
depreciation and
accretion 9,945,695 6,719,919 19,362,076 13,501,460
Stock-based
compensation (Note 9) 273,317 199,146 516,344 349,260
Unrealized (gain)
loss on commodity
contracts
(Note 12b) 2,225,962 (798,660) 6,615,955 (584,863)
Future income taxes
(reduction) 269,769 (849,348) (814,699) (1,015,599)
--------------------------------------------------------

13,565,038 5,143,032 22,947,752 11,209,466
Change in non-cash
working capital
(Note 11) (7,821,348) 674,674 (5,006,879) (823,090)
--------------------------------------------------------
5,743,690 5,817,706 17,940,873 10,386,376
--------------------------------------------------------

Financing activities
Increase (decrease)
in bank loan (1,595,175) 5,947,914 (25,321,505) 14,499,332
Exercise of stock
options 336,418 61,284 356,419 61,284
Share issue
proceeds, net of
issue costs 3,492,463 - 27,072,420 -
--------------------------------------------------------
2,233,706 6,009,198 2,107,334 14,560,616
--------------------------------------------------------

Investing activities
Corporate
acquisitions - - - -
Property, plant
and equipment
additions (6,562,242) (9,982,180) (22,514,772) (21,226,175)
Change in non-cash
working capital
(Note 11) (3,723,846) (951,001) 2,401,201 (3,100,241)
--------------------------------------------------------
(10,286,088) (10,933,181) (20,113,571) (24,326,416)
--------------------------------------------------------
Increase
(decrease) in
cash and cash
equivalents (2,308,692) 893,723 (65,364) 620,576

Cash and cash
equivalents,
beginning of period 2,308,892 18 65,564 273,165

--------------------------------------------------------
Cash and cash
equivalents, end
of period $ 200 $ 893,741 $ 200 $ 893,741
--------------------------------------------------------
--------------------------------------------------------

Supplemental Cash Flow Information (Note 11)

See accompanying notes to the unaudited financial statements.


ORLEANS ENERGY LTD.

Notes to the Unaudited Interim Financial Statements

For the six month period ended June 30, 2008

1. Description of Business

Orleans Energy Ltd. (the "Company" or "Orleans") is actively engaged in the exploration for, and development and production of, natural gas, natural gas liquids and crude oil in the Western Canadian Sedimentary Basin. Orleans is incorporated under the laws of Alberta and its common shares are traded on the Toronto Stock Exchange under the trading symbol "OEX".

2. Basis of Presentation

The interim financial statements included herein have been prepared by the Company without audit and include all adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company's interim results. With the exception of changes discussed in Note 3 hereafter, the interim financial statements have been prepared following the same accounting policies and methods of computation as the Company's audited financial statements for the year ended December 31, 2007, and are in accordance with Canadian generally accepted accounting principles ("GAAP"). The unaudited interim financial statements contain disclosures, which are incremental to the Company's audited financial statements for the year ended December 31, 2007. Certain disclosures, which are normally required to be included in the notes to annual financial statements, have been condensed or omitted. The interim financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2007.

The financial statements include the accounts of the Company and any wholly-owned subsidiaries. A portion of the Company's exploration, development and production activities are conducted jointly with others and accordingly the financial statements reflect only the Company's proportionate working interest share in such activities. Additionally, certain of the comparative balances have been reclassified to conform to the current period's presentation.

3. Changes in Accounting Policies

Inventories

Effective January 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") section 3031, "Inventories," which replaced CICA section 3030 of the same name. The new guidance provides additional measurement and disclosure requirements and requires the Company to reverse previous impairment write-downs when there is a change in the situation that caused the impairment. The transitional provisions of section 3031 provided entities with the option of applying this guidance retrospectively and restating prior periods in accordance with section 1506, "Accounting Changes" or adjusting opening retained earnings and not restating prior periods. The adoption of this standard did not have an impact on the Company's financial statements.

Financial Instruments - Disclosure and Presentation

Effective January 1, 2008, the Company adopted CICA section 3862, "Financial Instruments - Disclosures" and CICA section 3863, "Financial Instruments - Presentation," which replaced CICA section 3861, "Financial Instruments - Disclosure and Presentation." Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments. The presentation requirements under section 3863 are relatively unchanged from the former presentation requirements under section 3861. Please refer to Note 12, "Financial Instruments and Risk Management" for the additional disclosures under section 3862.

Capital Disclosures

Effective January 1, 2008, the Company adopted CICA section 1535, "Capital Disclosures." Section 1535 requires disclosure about the Company's objectives, policies and processes for managing capital. These disclosures include a description of what the Company manages as capital, the nature of any externally imposed capital requirements, how the requirements are incorporated into the Company's management of capital, whether the requirements have been complied with, or consequences of non-compliance and an explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Please refer to Note 13, "Capital Disclosures."

4. Recent Accounting Pronouncements

Goodwill and Intangible Assets

In February 2008, the AcSB issued section 3064, "Goodwill and Intangible Assets", and amended section 1000, "Financial Statement Concepts" clarifying the criteria for the recognition of assets, intangible assets and internally developed intangible assets. Items that no longer meet the definition of an asset are no longer recognized with assets. The standard is effective for annual years beginning on or after October 1, 2008 and early adoption is permitted. The Company is presently evaluating the impact these sections will have on its results of operations and/or financial position.

International Financial Reporting Standards

In January 2006, the AcSB announced its decision to replace Canadian GAAP with International Financial Reporting Standards ("IFRS") for all Canadian Publicly Accountable Enterprises ("PAE"). On February 13, 2008, the AcSB confirmed January 1, 2011 as the official change-over date for PAE's to commence reporting under IFRS. Although IFRS is principles-based and uses a conceptual framework similar to Canadian GAAP, there are significant differences and choices in accounting policies, as well as increased disclosure requirements under IFRS. The Company continues to monitor and assess the impact of IFRS on its financial statements.

5. Property, Plant and Equipment



----------------------------------------------------------------------------
June 30, 2008 December 31, 2007
-------------------------------------
Petroleum and natural gas properties $ 268,450,736 $ 245,355,653
Accumulated depletion (70,955,705) (51,851,778)
-------------------------------------
197,495,031 193,503,875
-------------------------------------
Office equipment and other 237,787 230,327
Accumulated depreciation (87,389) (71,533)
-------------------------------------
150,398 158,794
----------------------------------------------------------------------------
Property, plant and equipment $ 197,645,429 $ 193,662,669
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the six month period ended June 30, 2008, certain general and administrative overhead expenses of $1.27 million (June 30, 2007: $846 thousand) directly related to exploration and development activities were capitalized. Included in this amount is capitalized stock-based compensation of $522 thousand (June 30, 2007: $401 thousand), with such amount including the future income tax liability associated with the capitalized stock-based compensation of $144 thousand (June 30, 2007: $104 thousand).

At June 30, 2008, property, plant and equipment included $9.39 million (December 31, 2007: $10.29 million) relating to unproved properties, which have been excluded from the depletion calculation. Future development costs related to proved non-producing reserves of $10.73 million (December 31, 2007: $20.08 million) have been included in the depletion calculation.

6. Bank Facility

As at June 30, 2008, the Company had a demand revolving credit facility of $65 million with a Canadian chartered bank (the "Credit Facility"). The Credit Facility provides that advances may be made by way of direct advances, banker's acceptances, or standby letters of credit/guarantees. Direct advances bear interest at the bank's prime lending rate plus an applicable margin for Canadian dollar advances and at the bank's U.S. base rate plus an applicable margin for U.S. dollar advances. The applicable margin charged by the bank is dependent on the Company's debt-to-trailing cash flow ratio. The banker's acceptances bear interest at the applicable banker's acceptance rate plus a stamping fee, based on the Company's debt-to-trailing cash flow ratio. The Credit Facility is secured by a fixed and floating charge debenture on the assets of the Company. The borrowing base is subject to semi-annual review by the bank. At June 30, 2008, the Company had $18.82 million of bank debt outstanding (December 31, 2007: $44.14 million).

7. Asset Retirement Obligations

Orleans' asset retirement obligations are based on the Company's net ownership in wells and facilities and Management's estimate of the timing and expected future costs associated with site reclamation, facilities dismantlement and the plugging and abandonment of wells.

At June 30, 2008, the estimated present value of the total amount required to settle the Company's asset retirement obligations was $5.76 million (December 31, 2007: $5.45 million), based on a total undiscounted future liability amount of $13.45 million (inflation adjusted) (December 31, 2007: $13.09 million). These obligations are to be settled based on the economic lives of the underlying assets, which is currently projected to be up to 48 years. The Company used a credit-adjusted risk free rate of 10 percent and an inflation rate of 1.5 percent to calculate the present value of the asset retirement obligations (December 31, 2007: credit-adjusted risk free rate of 10 percent and an inflation rate of 1.5 percent).



June 30, December 31,
2008 2007
---------------------------------
Asset retirement obligations - beginning $ 5,454,294 $ 5,023,743
Liabilities incurred on development
activities 92,419 185,255
Liabilities released on property
dispositions (26,914) (186,031)
Liabilities settled - (33,368)
Accretion expense 242,294 464,695
---------------------------------
Asset retirement obligations - ending $ 5,762,093 $ 5,454,294
---------------------------------
---------------------------------


During the six month period ended June 30, 2008, the Company recognized depletion expense related to its asset retirement cost of $286 thousand (June 30, 2007: $244 thousand).

8. Share Capital

a) Authorized - Unlimited number of voting common shares.

The Company has neither declared nor paid any dividends on its common shares. The Company intends to retain its earnings to finance growth and expand its operations and does not anticipate paying any dividends on its common shares in the foreseeable future.

b) Issued and outstanding



----------------------------------------------------------------------------
Total Number
of Common Shares Amount
----------------------------------------------------------------------------
Balance, December 31, 2006 33,148,659 $ 122,736,373
Issued on flow-through financing 1,500,000 8,175,000
Issued on equity financing 2,800,000 12,040,000
Combined issue costs, net tax effect of $379,373 - (870,026)
Exercise of stock options 122,713 156,000
Flow through shares tax adjustment - (4,504,993)
----------------------------------------------------------------------------
Balance, December 31, 2007 37,571,372 $ 137,732,354
Issued on equity financing 8,050,000 28,980,000
Issue costs, net tax effect of $548,047 - (1,359,533)
Exercise of stock options 158,334 554,956
Flow through shares tax adjustment - (2,255,483)
----------------------------------------------------------------------------
Balance, June 30, 2008 45,779,706 $ 163,652,294
----------------------------------------------------------------------------
----------------------------------------------------------------------------


c) Flow-through shares

On July 12, 2007, the Company issued 1,500,000 flow-through common shares on a "bought-deal" basis at a price of $5.45 per share for gross proceeds of $8.18 million. Under the terms of the flow-through share agreement, the Company is committed to spend 100 percent of the gross proceeds on qualifying exploration expenditures prior to December 31, 2008. As at June 30, 2008, the Company had incurred approximately $7.16 million of qualifying expenditures associated with this equity issue with the balance of $1.02 million to be incurred by December 31, 2008.

9. Stock-Based Compensation

a) Outstanding stock options

The Company has a stock option plan for the benefit of its directors, officers, employees and certain consultants. The Company has granted options to purchase common shares, whereby each option permits the holder to purchase one share of the Company at the stated exercise price. The options vest over a two-to-three year term and are exercisable on a cumulative basis over five years. At June 30, 2008, 3,939,692 options with a weighted average exercise price of $3.20 were outstanding and exercisable at various dates through to May 5, 2013.

The following table summarizes outstanding stock options as at June 30, 2008:



----------------------------------------------------------------------------
Weighted Avg.
Number Exercise Price
---------- ---------------
Outstanding - December 31, 2006 2,698,739 $ 3.40
Granted 917,500 3.33
Exercised (122,713) 0.80
Forfeited (375,500) 4.91
----------------------------------------------------------------------------
Outstanding - December 31, 2007 3,118,026 $ 3.30
Granted 993,500 2.74
Exercised (158,334) 2.25
Forfeited (13,500) 2.66
----------------------------------------------------------------------------
Outstanding - June 30, 2008 3,939,692 $ 3.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable - June 30, 2008 1,865,489 $ 3.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------


b) Exercise price range for options outstanding as at June 30, 2008:

----------------------------------------------------------------------------
Outstanding Exercisable
Options Options
----------------------------------------------------------------------------
Weighted Weighted
Avg. Weighted Avg. Avg.
Price Range Number Price Remaining Life Number Price
----------------------------------------------------------------------------
$ 0.80 - 2.21 1,233,271 $ 1.53 3.09 years 595,271 $ 0.80
$ 2.30 - 3.75 1,783,921 $ 3.33 3.41 years 695,224 $ 3.23
$ 3.90 - 5.87 922,500 $ 5.19 3.05 years 574,994 $ 5.27
----------------------------------------------------------------------------
Total 3,939,692 $ 3.20 3.23 years 1,865,489 $ 3.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Company recorded stock-based compensation expense (net of capitalization) of $516 thousand for the six month period ended June 30, 2008 (June 30, 2007: $349 thousand), which was charged to general and administration expense and presented as such on the Company's statement of operations.

The Company determined the fair value of stock options granted during the six month period ended June 30, 2008 using the modified Black-Scholes evaluation stock option pricing model under the following assumptions:



----------------------------------------------------------------------------
June 30, 2008 June 30, 2007
-------------- ---------------
Weighted-average fair value ($/option) 1.27 1.70
Risk-free interest rate (%) 3.16 4.12
Estimated hold period prior to exercise (years) 5 5
Volatility in the price of Orleans shares (%) 48.8 50.2
Dividend yield (%) Nil Nil
----------------------------------------------------------------------------


c) Contributed surplus

----------------------------------------------------------------------------
Contributed surplus - December 31, 2006 $ 1,502,963
Stock-based compensation, before capitalization 1,368,549
Exercise of stock options (57,830)
----------------------------------------------------------------------------
Contributed surplus - December 31, 2007 2,813,682
Stock-based compensation, before capitalization 894,516
Exercise of stock options (198,537)
----------------------------------------------------------------------------
Contributed surplus - June 30, 2008 $ 3,509,661
----------------------------------------------------------------------------
----------------------------------------------------------------------------


10. Per Share Amounts

In the calculation of diluted per share amounts, options under the Company's stock option plan are assumed to have been converted or exercised on the later of the beginning of the year and the date granted. The treasury stock method is used to determine the dilutive effect of stock options. The treasury stock method assumes that proceeds received from the exercise of in-the-money stock options in addition to the unrecognised stock-based compensation expense are used to repurchase common shares at the average market price.

For the six month period ended June 30, 2008, 2.15 million stock options (June 30, 2007: 1.96 million) were excluded in calculating the weighted average number of diluted common shares outstanding, as they were determined to be anti-dilutive.



----------------------------------------------------------------------------
Three Months Ended, Six Months Ended,
-------------------- ------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------- --------- --------- ---------
Weighted average
shares:
Basic 45,604,668 33,209,828 42,320,300 33,179,413
Diluted 46,575,328 33,833,429 43,075,328 33,769,735
----------------------------------------------------------------------------


11.Supplemental Cash Flow Information

a) Increase (decrease) in non-cash working capital items



----------------------------------------------------------------------------
Three Months Ended, Six Months Ended,
-------------------- ------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------- --------- --------- ---------
Change in non-cash
working capital:
Accounts receivable
and other current
assets $ (2,345,050) $ 2,311,172 $ (3,383,008) $ 3,732,117
Accounts payable
and accrued
liabilities (9,200,144) (2,587,499) 777,330 (7,655,448)
--------------------------------------------------------
$ (11,545,194) $ (276,327) $ (2,605,678) $ (3,923,331)
--------------------------------------------------------
--------------------------------------------------------
Changes in non-cash
working capital
related to:
Operating
activities $ (7,821,348) $ 674,674 $ (5,006,879) $ (823,090)
Investing
activities (3,723,846) (951,001) 2,401,201 (3,100,241)
--------------------------------------------------------
$ (11,545,194) $ (276,327) $ (2,605,678) $ (3,923,331)
--------------------------------------------------------
--------------------------------------------------------


b) Other cash flow information


----------------------------------------------------------------------------
Three Months Ended, Six Months Ended,
-------------------- ------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------- --------- --------- ---------
Cash paid on:
Interest (net of
interest income) $ 171,178 $ 593,575 $ 708,041 $ 1,182,848
Income and other
taxes - - - -
----------------------------------------------------------------------------


12. Financial Instruments and Risk Management

The Company's financial assets and liabilities are comprised of cash and cash equivalents, accounts receivable and accrued revenues, accounts payable and accrued liabilities, commodity risk management assets and liabilities, and current bank loan. Commodity risk management assets and liabilities arise from the use of derivative financial instruments. Fair values of financial assets and liabilities, summarized information related to commodity risk management positions, and discussion of risks associated with financial assets and liabilities are presented as follows:

a) Fair Value of Financial Assets and Liabilities

The fair values of cash and cash equivalents, accounts receivable and accrued revenues, and accounts payable and accrued liabilities and current bank loan approximate their carrying amount due to the short-term maturity of those instruments. Commodity risk management assets and liabilities are considered to be held-for-trading and as such are recorded at their estimated fair value based on the mark-to-market method of accounting, using quoted market prices or, in their absence, third-party market indications and forecasts. Additional information regarding the aforementioned is disclosed in Note 3 to the Company's audited financial statements for the year ended December 31, 2007.

The fair value of financial assets and liabilities were as follows:



----------------------------------------------------------------------------
As at June 30, 2008 As at December 31, 2007
--------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- ---------- -------
Financial Assets
-----------------
Held-for-Trading:
Cash and cash
equivalents $ 200 $ 200 $ 65,564 $ 65,564
Loans and Receivables:
Accounts receivable and
accrued revenues 12,607,565 12,607,565 9,038,271 9,038,271

Financial Liabilities
----------------------
Held-for-Trading:
Commodity risk
management 7,048,425 7,048,425 432,470 432,470
Other Financial
Liabilities:
Accounts payable and
accrued liabilities 14,916,884 14,916,884 14,139,553 14,139,553
Bank loan 18,815,474 18,815,474 44,136,979 44,136,979
----------------------------------------------------------------------------


b) Commodity Risk Management Assets and Liabilities

The Company recognizes the fair value of its commodity contracts on the balance sheet each reporting period with the change in fair value being recognized as an unrealized gain or loss on the statement of operations. As at June 30, 2008 the fair value of the financial commodity contracts was a liability of approximately $7.05 million (December 31, 2007: $433 thousand liability), resulting in an unrealized loss for the six month period ended June 30, 2008 of $6.62 million.



Summary of Unrealized
Commodity
Risk Management Positions As at June 30, 2008 As at December 31, 2007
-------------------------- --------------------- -------------------------
Asset Liability Asset Liability
------- ----------- ------- -----------
Commodity Prices:
Natural gas $ - $ 6,544,646 $ 32,416 $ -
Crude oil - 503,779 - 464,886
----------------------------------------------------------------------------
Total Fair Value $ - $ 7,048,425 $ 32,416 $ 464,886
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following table outlines the commodity agreements that were outstanding as at June 30, 2008 and their respective fair market valuations as determined based on the mark-to-market method of accounting using quoted market prices. The Company has not entered into any additional commodity contracts subsequent to June 30, 2008.



----------------------------------------------------------------------------
June 30,
Daily 2008 Fair
Contract notional Market
Commodity Date Type Term Volume Index Price Value (C$)
----------------------------------------------------------------------------
Crude Oil Mar. 3, Collar Jul '08- 100 bbls W.T.I. US$ 90.00 - (503,779)
2008 Dec '08 116.25/bbl
----------------------------------------------------------------------------
NatGas Dec. 18, Swap Apr '08- 2,000 GJs AECO- C$ 6.55 /GJ (1,816,969)
2007 Dec '08 C
----------------------------------------------------------------------------
NatGas Jan. 2, Swap Apr '08- 2,000 GJs AECO- C$ 6.81 /GJ (1,722,457)
2008 Dec '08 C
----------------------------------------------------------------------------
NatGas Jan. 4, Swap Apr '08- 1,000 GJs AECO- C$ 6.61 /GJ (571,941)
2008 Oct '08 C
----------------------------------------------------------------------------
NatGas Jan. 7, Swap Apr '08- 1,000 GJs AECO- C$ 6.72 /GJ (558,541)
2008 Oct '08 C
----------------------------------------------------------------------------
NatGas Jan. 10, Swap Apr '08- 1,000 GJs AECO- C$ 7.01 /GJ (523,214)
2008 Oct '08 C
----------------------------------------------------------------------------
NatGas Feb. 13, Collar Nov '08- 2,000 GJs AECO- C$ 7.00 - (891,924)
2008 Mar '09 C 9.70/GJ
----------------------------------------------------------------------------
NatGas Feb 14, Swap Apr '08- 1,000 GJs AECO- C$ 7.52/GJ (459,600)
2008 Oct '08 C
----------------------------------------------------------------------------
Total Unrealized Loss on Commodity Risk Management Contracts (7,048,425)
----------------------------------------------------------------------------


c) Risks Associated with Financial Assets and Liabilities

The Company is exposed to financial risks arising from its financial assets and liabilities. The financial risks include credit risk, liquidity risk and market risk relating to commodity prices, interest rates and foreign exchange rates. Market risk is the risk that the fair value (for assets or liabilities considered to be held-for-trading and available for sale) or future cash flows (for assets or liabilities considered to be held-to-maturity, other financial liabilities, and loans and receivables) of a financial instrument will fluctuate due to movements in market prices. The objective of market risk management is to manage and control material market price exposures within acceptable limits, while maximizing returns. The Company's market risk, credit risk, and liquidity risk exposures is outlined as follows:

Commodity Price Risk

The prices the Company receives for its crude oil and natural gas production may have a significant impact on its revenues and cash provided from operating activities. Any significant price decline in commodity prices would adversely affect the amount of funds available for capital reinvestment purposes. As such, the Company utilizes a risk management program to partially mitigate that risk and to ensure adequate funds are available for planned capital activities and other commitments. From time-to-time, the Company may employ financial instruments to manage fluctuations in oil and gas market prices. The use of derivative financial instruments is governed under formal policies and is subject to limits established by the Company's Board of Directors. The Company does not utilize derivative financial instruments for speculative purposes.

With respect to the Company's commodity risk management contracts, as at June 30, 2008, if crude oil prices had been US $1 per barrel and natural gas prices $0.10 per gigajoule lower, with all other variables held constant, net earnings for the six month period would have been approximately $130 thousand higher. An equal and opposite impact would have occurred to net earnings had oil and natural gas prices been US $1 per barrel and $0.10 per gigajoule higher.

Interest Rate Risk

Interest rate risk is the risk that cash flow from operating activities (before changes in non-cash working capital from operating activities) will fluctuate as a result of changes in market interest rates. The Company's exposure to interest rate risk relates to its bank Credit Facility, which bears a floating interest rate. As at or during the six month period ended June 30, 2008, the Company had no interest rate contracts in-place to mitigate exposure to interest rate changes. For the six months ended June 30, 2008, a one percent change in interest rates on its floating rate bank debt would change net earnings by an estimated $113 thousand, assuming all other variables remain constant.

Foreign Exchange Risk

The Company's financial results are affected by the exchange rate between the Canadian and U.S. dollar. Although all of the Company's petroleum and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for oil and natural gas are impacted by changes in the exchange rate between the Canadian and U.S. dollar. An increase in the value of the Canadian dollar relative to the U.S. dollar will decrease the revenues received from the sale of oil and gas commodities. Correspondingly, a decrease in the value of the Canadian dollar relative to the U.S. dollar will increase the revenues received from the sale of oil and gas commodities. The impact of such exchange rate fluctuations cannot be accurately quantified. All of the Company's operating and capital expenditures are in Canadian dollars. The Company had no foreign exchange rate contracts in-place at or during the six month period ended June 30, 2008.

Credit Risk

Credit risk represents the financial loss that the Company would suffer if the Company's counterparties to a financial instrument, in owing an amount to the Company, fail to meet or discharge their obligation to the Company. The primary source of credit risk for the Company arises from its accounts receivables from joint venture partners, petroleum and natural gas marketers and commodity risk management contract counterparties. The Company sells the majority of its production to three petroleum and natural gas marketers and is therefore subject to concentration risk. The Company will assess the financial strength of petroleum and natural gas marketers prior to entering into sales contracts and has not experienced any collection issues with its current petroleum and natural gas marketers, except as noted in the subsequent paragraph. The Company mitigates credit risk from risk management commodity contract counterparties by primarily dealing with major financial institutions, investment grade-rated entities and/or credit-worthy parties.

Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. Collection of outstanding joint venture receivables is dependent on industry factors including commodity price fluctuations, escalating costs and disagreements with partners. The Company mitigates the risk from joint venture receivables by obtaining partner approval before significant capital expenditures are incurred. Additionally, the Company does have the ability to withhold production from joint venture partners in the event of non-payment.

The Company monitors the age of and investigates issues behind its receivables that have been past due. As at June 30, 2008, the Company's receivables outstanding for more than 90 days amounted to approximately $2.0 million. As at June 30, 2008, except as noted in the subsequent paragraph, the Company has no financial assets that are impaired due to credit risk related defaults. The maximum credit risk exposure associated with accounts receivable and accrued revenues and commodity risk management asset is the total carrying value. The carrying value of accounts receivable reflects Management's current assessment of the credit risk associated with these customers.

The Company has not had any credit losses in the past. However, the Company has potential financial exposure of approximately $8.6 million to SemCAMS ULC ("SemCAMS"), a Canadian subsidiary of SemGroup L.P. ("SEMGroup"), relating to the marketing of a portion of the Company's natural gas and natural gas liquids ("NGLs") sales for the month of June 2008 and for 22 days in July 2008. The contract pertaining to the production volumes purchased by SemCAMS has been terminated as of July 22, 2008 and does not represent an ongoing exposure for Orleans. SEMGroup, a U.S. based midstream and marketing company, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. SemCAMS also filed for creditor protection in Canada under The Companies' Creditors Arrangement Act ("CCAA"). After reviewing the facts and sequence of events regarding this matter, the Company's Management has concluded that these events could not have been detected, or detected earlier, by a standard credit risk program.

As of this date, Orleans is not able to neither determine the period within which nor quantify with certainty the portion of the exposure that will be ultimately collected from SemCAMS. However, the monetary exposure amount is not considered material to Orleans' overall financial position nor is it anticipated to impair the Company's ability to fund its remaining 2008 capital expenditures program. As of June 30, 2008, the Company had $18.82 million of bank debt drawn against its available $65 million Credit Facility.

The Company's objectives, processes and policies for managing credit risk have not changed since December 31, 2007.

Liquidity Risk

Liquidity risk is the risk the Company will encounter difficulties in meeting its financial liability obligations. The Company's financial liabilities are comprised of accounts payable and accrued liabilities, bank loan and commodity risk management liabilities. The Company manages its liquidity risk through cash and debt management. The Company frequently assesses its liquidity position and obligations under its financial liabilities by preparing annual and quarterly financial business plan forecasts. As disclosed in Note 13, the Company targets a debt to annualized cash flow from operations ratio of less than two times in order to steward the Company's overall debt position.

Since the Company operates in the upstream oil and gas industry, it requires sufficient cash to fund capital programs necessary to maintain or increase production, to develop reserves and to acquire strategic oil and gas assets. The Company's capital programs are funded primarily through cash provided from operating activities. However, during times of low oil and gas prices, a portion of capital programs can generally be deferred. However, due to the long cycle times and the importance to future cash flow in maintaining the Company's production, it may be necessary to utilize alternative sources of capital to continue the Company's strategic investment plan during periods of low commodity prices. As a result, the Company frequently evaluates the options available with respect to sources of long and short-term capital resources. Occasionally, the Company will hedge a portion of its production to protect cash flow in the event of commodity price declines. As at June 30, 2008, the Company had available an unused bank Credit Facility in the amount of $46.18 million (refer to Note 6). The Company believes it has sufficient funding through the use of these facilities to meet foreseeable borrowing requirements.

The following are the contractual maturities of financial liabilities as at June 30, 2008:



Less than 1 to less 2 to less
Financial Liabilities 1 year than 2 Years Than 3 Years Thereafter
------------------------- ------------ ------------ ------------ -----------
Accounts payable and
accrued liabilities $ 14,916,884 - - -
Commodity risk management 7,048,425 - - -
Bank loan 18,815,474 - - -
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Total $ 40,780,783 - - -
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13. Capital Disclosures

The Company's objectives when managing capital are: (i) to maintain a flexible capital structure, which optimizes the cost of capital at acceptable risk; and (ii) to maintain investor, creditor and market confidence in order to sustain the future development of the business.

The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of our underlying assets. The Company considers its capital structure to include shareholders' equity, debt and working capital. To maintain or adjust the capital structure, the Company may from time-to-time, issue shares, raise debt and/or adjust its capital spending to manage its current and projected debt levels.

The Company monitors its capital structure based on the current and projected ratio of total debt (adjusted for unrealized gains or losses on risk management commodity contracts) to annualized cash flow (before changes in non-cash working capital from operating activities). The Company's objective is to maintain a debt to annualized cash flow from operations ratio of less than two times. The ratio may increase at certain times as a result of acquisitions. To facilitate the management of this ratio, the Company prepares annual and quarterly capital budgets and business plan forecasts, which are updated depending on varying factors such as general market conditions and successful capital deployment. The annual capital budget is approved by the Company's Board of Directors. To adjust its capital structure, the Company may adjust capital spending, issue new common shares, issue new debt or repay existing debt. As at June 30, 2008, the Company's total debt to annualized cash flow was 44% or 0.44 times.

The Company's share capital is not subject to external restrictions. The Company is not subject to any financial covenants in its Credit Facility agreement.

There were no changes in the Company's approach to capital management since December 31, 2007.

14. Subsequent Event

Subsequent to June 30, 2008, on July 22, 2008, SemGroup L.P. ("SEMGroup"), a U.S. based midstream and marketing company, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. SemCAMS ULC ("SemCAMS"), a Canadian subsidiary of SEMGroup, also filed for creditor protection in Canada under The Companies' Creditors Arrangement Act ("CCAA"). The Company has potential financial exposure of approximately $8.6 million to SemCAMS relating to the marketing of a portion of the Company's natural gas and NGLs sales for the month of June 2008 and for 22 days in July 2008.

As of this date, Orleans is not able to neither determine the period within which nor quantify with certainty the portion of the exposure that will be ultimately collected from SemCAMS. However, the monetary exposure amount is not considered material to Orleans' overall financial position nor is it anticipated to impair the Company's ability to fund its remaining 2008 capital expenditures program. As of June 30, 2008, the Company had $18.82 million of bank debt drawn against its available $65 million Credit Facility.

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