TUSK Energy Corporation
TSX : TSK

TUSK Energy Corporation

November 09, 2007 08:30 ET

TUSK Announces 2007 Third Quarter Results

CALGARY, ALBERTA--(Marketwire - Nov. 9, 2007) - TUSK Energy Corporation (TSX:TSK) ("TUSK" or the "Corporation") is pleased to announce its financial and operating results for the three and nine months ended September 30, 2007.



HIGHLIGHTS

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Three Months Ended Nine Months Ended
September 30, September 30,
% %
2007 2006 Change 2007 2006 Change
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($000s, except per share
amounts)
Financial
Oil and gas revenue 20,560 4,657 341 56,912 10,406 447
Funds from operations (1) 10,418 2,226 368 27,037 4,402 514
Per share - basic and
diluted 0.12 0.04 200 0.30 0.10 200
Net income (loss) (976) (420) 133 (2,540) (1,597) 59
Per share - basic and
diluted (0.01) (0.01) - (0.03) (0.04) (25)
Capital expenditures (net) 7,899 11,273 (30) 86,990 52,721 65
Working capital
(deficiency) (45,128) 24,724 (283)
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Operations
Sales volumes
Oil (bbls/d) 1,710 491 248 1,597 363 340
Natural gas liquids
(bbls/d) 96 11 773 93 13 615
Natural gas (mcf/d) 15,652 2,493 528 13,742 2,020 580
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Combined (boe/d) 4,415 918 381 3,981 713 458
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Operating netbacks ($/boe)
(2)
Average selling prices 50.62 55.14 (8) 52.37 53.50 (2)
Royalties (8.73) (8.03) 9 (10.25) (9.96) 3
Operating expenses (9.27) (12.90) (28) (9.34) (12.16) (23)
Transportation expenses (2.88) (1.90) 52 (2.60) (4.34) (40)
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Operating netback 29.74 32.31 (8) 30.18 27.04 12
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Share Data (000s)
Weighted average
outstanding 88,880 51,766 72 88,880 45,230 97
Equity outstanding - end of
period
Common shares 88,880 51,637 72
Stock options 8,440 5,045 67
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(1) Funds from operations is a non-GAAP measure that represents net income
(loss) before depletion, depreciation and amortization, future taxes and
stock-based compensation. See further discussion under Non-GAAP Measures
in the Management's Discussion and Analysis.
(2) Operating netback is a non-GAAP measure that represents specific revenue
and expenses on a per unit of production basis. Natural gas has been
converted to boe at a ratio of 6 mcf : 1 bbl.


LETTER TO SHAREHOLDERS

The three months ended September 30, 2007 was another strong quarter for TUSK. We exceeded production targets and maintained cash flow levels despite soft natural gas prices. In addition, we reduced financial leverage by spending less than cash flow for the period.

Production averaged 4,415 boe/d in the third quarter of 2007, up 8% from second quarter volumes of 4,083 boe/d and a 381% increase over third quarter 2006 production of 918 boe/d. On a boe basis, third quarter 2007 production was 41% oil and NGLs and 59% natural gas.

Cash flow from operations was $10.4 million for the 2007 three-month period, essentially flat from the second quarter of the year and a 368% improvement over the $2.2 million recorded in the third quarter of 2006. On a per share basis, third quarter 2007 cash flow from operations was $0.12 per share, unchanged from the second quarter of 2007 and up 200% from $0.04 per share in the third quarter of 2006.

Capital expenditures for the three months ended September 30, 2007 were $7.9 million, which was less than cash flow from operations for the period. The expenditures were directed towards preparations for fall/winter drilling and facilities construction at Conroy, workovers and road building at Mega/Gutah and drilling at Peoria.

As previously announced, TUSK renegotiated its credit facilities, resulting in an increase in our bank lines to $75.0 million from $45.0 million. This increase, combined with cash flow from operations, provides the Corporation with sufficient funding to execute our winter capital spending program.

In late September 2007, TUSK entered into a hedging arrangement that is effectively a floor price of US$65.00 WTI on 1,000 bbls/d of 2008 oil production. The Corporation purchased a put option at a cost of CDN$781,000.

During 2005 and 2006, TUSK contracted for the construction and long-term use of two drilling rigs. These contracts required the Corporation to use the rigs for a minimum number of days per year over a number of years or, alternatively, pay a standby charge. During the fourth quarter of 2007, TUSK agreed to terminate one rig contract and amend the terms of the other at a cost of $2.0 million.

Outlook

Guidance

Average production for the nine months ended September 30, 2007 was 3,981 boe/d. We anticipate achieving average daily production of 4,000 boe/d for 2007, which is in line with our production guidance for the year. In response to low natural gas prices, we slowed capital expenditures during the third quarter. Fourth quarter expenditures will be primarily directed to the Conroy project, which we anticipate bringing on-stream in February 2008. As a consequence, we expect fourth quarter 2007 production to be less than our third quarter volumes. We continue to forecast average production volumes to reach 5,000 boe/d in 2008.

We have been diligent at maintaining a strong balance sheet. At September 30, 2007, TUSK's debt to annualized cash flow from operations was less than 1.1 times. During the fourth quarter of 2007, our leverage will increase as wells are drilled and a new gas processing facility is built at Conroy. We anticipate our debt to reach approximately $65.0 million prior to bringing the Conroy project on-stream in the first quarter of 2008; however, once the gas from this area is on production, TUSK's debt to cash flow ratio should once again be well under 1.5 times.

Estimated Impact of New Alberta Royalty Regime

The Alberta government recently announced a new royalty framework to take effect on January 1, 2009. The new Alberta Royalty Regime would impact 55% of TUSK's current production. However, for the fourth quarter of 2007 and all of 2008, a significant portion of our Corporation's capital investment will be directed outside of Alberta, and as a result, we estimate that only 38% of TUSK's production will be affected by the new rules when they are implemented. The production that is affected by the new rules will be weighted more towards oil than natural gas. Using assumed prices of CDN$71.00/bbl for oil and CDN$7.00/mcf for natural gas in 2009, we estimate that the 38% of our production that will be affected by the new rules will represent 46% of the Corporation's total revenue.

Our analysis indicates that the average royalty on TUSK's Alberta Crown oil production will increase by 86% (to a royalty of 39% of revenue versus the current 21% of revenue), while the average royalty on Alberta Crown natural gas properties will increase to 23% from 21% or about a 10% increment. The overall impact on TUSK's total royalties is estimated to be a 19% increase that corresponds to a 4% decrease in cash flow from operations.

The new Alberta Royalty Regime has added uncertainty to the economics of our Alberta based capital investment opportunities and makes them relatively less competitive when compared to our development opportunities at Conroy and Elleh, which are located in British Columbia where lower royalty rates apply. As a consequence, TUSK's capital expenditure plans for the remainder of 2007 and for 2008 will be directed primarily towards the assets located outside of Alberta.

TUSK is performing well in this very challenging environment for junior oil and gas companies. We are grateful for the ongoing support provided by our shareholders and the dedication of our hard working employees. We look forward to reporting the results of our efforts throughout the remainder of the year and into 2008.

On behalf of the Board of Directors,

John R. Rooney, Chief Executive Officer

November 8, 2007

MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis of financial condition and results of operations ("MD&A") was prepared by management and reviewed and approved by the Board of Directors of TUSK Energy Corporation ("TUSK" or the "Corporation"). This commentary is based on information available as at November 8, 2007. The discussion and analysis is a review of TUSK's operational and financial results based on Canadian generally accepted accounting principles ("GAAP"). Its focus is primarily a discussion of the operational and financial performance for the three and nine months ended September 30, 2007 and 2006 and should be read in conjunction with the unaudited financial statements for the three and nine months ended September 30, 2007 and the audited financial statements and related MD&A for the period ended December 31, 2006.

Forward-Looking Statements

The information herein contains forward-looking statements and assumptions, such as those relating to results of operations and financial condition, capital spending, financing sources, commodity prices, costs of production and the magnitude of oil and gas reserves. By their nature, forward-looking statements are subject to numerous risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, actual results may differ materially from those predicted. The forward-looking statements contained herein are as of September 30, 2007 and are subject to change after this date. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise, and as such, undue reliance should not be placed on forward-looking statements. Unless required by law, the Corporation does not undertake any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Measures

This MD&A contains the terms "funds from operations", "funds from operations per share", "operating netback", "cash netback" and "corporate netback". These terms do not have any standardized meaning under GAAP, and therefore, may not be comparable with the calculation of similar measures presented by other issuers. Funds from operations is calculated based on cash provided by operating activities before changes in non-cash working capital. TUSK believes that, in conjunction with results presented in accordance with GAAP, these measures assist in providing a more complete understanding of certain aspects of the Corporation's results of operations and the ability to finance capital expenditures. Funds from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of earnings per share. Funds from operations as presented should not be considered an alternative to, or more meaningful than, cash provided by operating activities as determined in accordance with GAAP as an indicator of the Corporation's performance. The table below reconciles cash provided by operating activities to funds from operations.



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Three Months Ended Nine Months Ended
September 30, September 30,
($000s) 2007 2006 2007 2006
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Cash provided by (used in) operating
activities (per GAAP) (496) 3,561 23,694 4,189
Changes in non-cash working capital 10,914 (1,335) 3,343 213
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Funds from operations 10,418 2,226 27,037 4,402
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BOE Presentation

Barrels of oil equivalent may be misleading, particularly if used in isolation. The boe conversion ratio of 6 mcf : 1 bbl of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.

Acquisition of Zenas Energy Corp. and Comparison to Prior Periods

Effective December 31, 2006, TUSK entered into a business combination with Zenas Energy Corp. ("Zenas") whereby TUSK acquired all of the issued and outstanding shares of Zenas pursuant to a plan of arrangement. The former shareholders of Zenas received 1.033 shares of TUSK for each outstanding Zenas share. A total of 37,204,118 TUSK shares were issued to complete the transaction. TUSK and Zenas amalgamated on January 1, 2007 and continued as TUSK Energy Corporation. The Zenas acquisition resulted in a 72% increase in the number of shares outstanding and other significant changes. As a result, a comparison of 2007 financial and operating information to 2006 may not be as meaningful as a 2007 quarter-over-quarter comparison.

Change in Year-End

In connection with the acquisition of Zenas and to align the reporting of its financial and operating results with industry standard, TUSK changed its year-end to December 31 from March 31 effective December 31, 2006. This resulted in a nine-month fiscal period ending on December 31, 2006. For the purposes of this MD&A, prior period comparative information conforms to a December 31 year-end.



Financial and Operating Results

Sales Volumes
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2007 2006
9 9
Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Oil (bbls/d) 1,597 1,710 1,623 1,454 363 491 307 289
NGLs (bbls/d) 93 96 107 77 13 11 11 16
Natural gas (mcf/d) 13,742 15,652 14,115 11,413 2,020 2,493 2,362 1,191
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Combined (boe/d) 3,981 4,415 4,083 3,433 713 918 711 504
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Sales volumes averaged 3,981 boe/d during the nine months ended September 30, 2007, up from 713 boe/d during the same period in 2006. The increase was a result of the Zenas acquisition, which added new volumes effective January 1, 2007 and additional volumes from new wells drilled in late 2006 and in 2007.

Comparing the third quarter of 2007 to the second quarter of the year, sales volumes increased 8% to 4,415 boe/d. The additional volumes were primarily due to new wells in the Elleh and Peace River Arch areas and well optimization in the Peace River Arch area. For the nine months ended September 30, 2007, oil and NGLs accounted for 42% and natural gas for 58% of TUSK's sales volumes. For the balance of 2007, TUSK expects its production profile to remain within the range of the first three quarters of the year.



Selling Prices
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2007 2006
9 9
Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Oil ($/bbl) 71.29 79.13 70.11 63.20 65.61 71.23 72.16 57.61
NGLs ($/bbl) 58.17 61.85 60.27 50.60 35.26 55.72 40.18 38.10
Natural gas ($/mcf) 6.49 5.25 7.17 7.37 6.83 6.02 6.02 7.90
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Combined ($/boe) 52.37 50.62 54.24 52.47 53.50 55.14 51.72 52.97
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During the nine months ended September 30, 2007, TUSK's sales volumes were sold at daily posted prices, and therefore, changes to realized selling prices reflect market conditions. TUSK produces light oil, which results in a small differential to posted prices. In late September 2007, TUSK entered into a fixed price contract to protect the selling price on 1,000 bbls/d in 2008. TUSK purchased a US$65.00/bbl put on 1,000 bbls/d for the period January 1 to December 31, 2008. This arrangement is effectively a floor price linked to WTI pricing. TUSK paid $781,000 to enter into this contract. Going forward, TUSK may enter into additional fixed price contracts to limit its exposure to oil and natural gas price fluctuations.



Revenue
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2007 2006
9 9
($000s) Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Oil 31,080 12,450 10,357 8,273 6,733 3,220 2,013 1,501
NGLs 1,484 546 586 353 152 57 40 55
Natural gas 24,348 7,564 9,210 7,574 3,521 1,380 1,295 846
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Combined 56,912 20,560 20,153 16,200 10,406 4,657 3,348 2,402
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Oil and gas revenue for the nine months ended September 30, 2007 was $56,912,000 compared to $10,406,000 in the same period of 2006 as a result of higher sales volumes. The small year-over-year decrease in oil and natural gas prices (comparing $52.37/boe in 2007 to $53.50/boe in 2006) had a modest negative effect on revenue.

Third quarter 2007 revenue increased 2% to $20,560,000 from $20,153,000 in the second quarter of the year. Oil revenue improved 20% to $12,450,000 as a result of a 5% increase in volumes and a 13% increase in average selling prices. Quarter-over-quarter natural gas revenue declined 18% to $7,564,000 as a 27% decrease in average selling prices offset an 11% increase in volumes.



Royalties
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2007 2006
9 9
($000s) Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Crown (net of ARTC
in 2006) 9,925 3,095 3,827 3,003 1,426 484 655 287
Freehold 509 259 150 100 337 74 61 202
Gross overriding 709 192 239 278 175 120 58 (3)
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Total 11,143 3,546 4,216 3,381 1,938 678 774 486
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Royalties as a % of
revenue 19.6 17.2 20.9 20.9 18.6 14.6 23.1 20.2
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Royalties per boe
($/boe) 10.25 8.73 11.35 10.94 9.96 8.03 11.96 10.71
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Royalties were $11,143,000 for the nine months ended September 30, 2007, up from $1,938,000 in the same period of 2006. The overall increase was primarily due to a commensurate increase in revenue. A modest increase in the effective royalty rate to 19.6% in 2007 from 18.6% in 2006 contributed to the year-over-year increase. Royalties in 2006 were reduced by Alberta Royalty Tax Credits ("ARTC"). The Alberta government announced the cancellation of the ARTC program effective January 1, 2007.

Third quarter 2007 royalties were $3,546,000 ($8.73/boe), a decrease from $4,216,000 ($11.35/boe) in the second quarter. TUSK's effective royalty rate declined to 17.2% of revenue in the third quarter of 2007, down from 20.9% in the second quarter. The quarter-over-quarter decline was the result of Alberta Crown royalty adjustments received with respect to prior periods. Most of the adjustments relate to capital costs incurred to bring wells on-stream that attract the royalty. The 2007 quarter-over-quarter increase in the relative weighting of freehold royalties was caused primarily by a property acquisition completed in the second quarter. For the remainder of 2007 and for 2008, TUSK expects its overall effective royalty rate to be approximately 21%.

On October 25, 2007, the Alberta government announced a new royalty framework to take effect on January 1, 2009. TUSK has two project areas, Elleh and Conroy, that are located in British Columbia and a small portion of its Alberta production that does not attract Alberta Crown royalty. TUSK estimates that 38% of its production will be affected by the new rules when they are implemented. The production that is affected by the new rules will be weighted more to oil than natural gas. Using assumed prices of CDN$71.00/bbl for oil and CDN$7.00/mcf for natural gas in 2009, TUSK estimates that the production that will be affected by the new rules will represent 46% of total revenue. TUSK estimates that the average royalty on the Corporation's Alberta Crown oil production will increase by 86% (to a royalty of 39% of revenue from 21% of revenue), while the average royalty on Alberta Crown natural gas properties will increase to 23% from 21% or about a 10% increment. The overall impact on TUSK's total royalties is estimated to be a 19% increase that corresponds to a 4% decrease in cash flow from operations.



Operating Expenses
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2007 2006
9 9
Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Total ($000s) 10,150 3,765 3,064 3,321 2,366 1,089 633 644
Per boe ($/boe) 9.34 9.27 8.25 10.74 12.16 12.90 9.77 14.20
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Operating expenses were $10,150,000 for the nine months ended September 30, 2007 compared to $2,366,000 during the same period of 2006. The overall increase was caused by higher production volumes offset by a decline in the unit rate to $9.34/boe in 2007 from $12.16/boe in 2006. The year-over-year decline in operating expenses on a per unit basis was primarily due to the completion of the Zenas acquisition, which resulted in an immediate decrease in corporate per unit operating expenses, and new wells brought on-stream since mid-2006 that have been comparatively more efficient to operate.

Quarter-over-quarter operating expenses increased 24% to $3,765,000 in the third quarter of 2007 from $3,064,000 in the second quarter of the year. Higher expenses were caused by an 8% improvement in volumes and an increase in the unit rate to $9.27/boe in the third quarter from $8.25/boe in the second quarter. Third quarter expenses in the Peace River Arch area were higher than the second quarter as a result of scheduled facility repairs and maintenance, costs associated with production optimization initiatives and the payment of annual property taxes. For 2008, TUSK expects operating expenses to be in the $9.00/boe range.



Transportation Expenses
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2007 2006
9 9
Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Total ($000s) 2,823 1,171 873 779 842 161 295 387
Per boe ($/boe) 2.60 2.88 2.35 2.52 4.34 1.90 4.55 8.53
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Transportation expenses for the first nine months of 2007 were $2,823,000 ($2.60/boe) compared to $842,000 ($4.34/boe) for the same period in 2006. The year-over-year increase in total transportation expenses was due to higher production volumes offset by a reduction in the cost per boe. The decrease in transportation expenses per boe was a result of the commissioning of the new battery at Mega, Alberta in the summer of 2006, the addition of new production with lower transportation rates and the addition of Zenas production effective January 1, 2007.

Third quarter 2007 transportation expenses were $1,171,000, up from $873,000 incurred in the second quarter of the year as a result of an increases in sales volumes and the rate per boe. Transportation expenses per boe fluctuate in response to changes in TUSK's production profile.



General and Administrative ("G&A") Expenses
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2007 2006
9 9
($000s) Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Total 8,019 1,732 1,925 4,362 3,709 1,391 1,035 1,282
Overhead recoveries (844) (184) (287) (373)(1,033) (212) (293) (527)
Capitalized (2,254) (473) (521)(1,260)(1,106) (386) (335) (385)
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Expensed 4,921 1,075 1,117 2,729 1,570 793 407 370
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Expensed per boe
($/boe) 4.53 2.65 3.01 8.83 8.07 9.39 6.28 8.16
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Total G&A costs for the nine months ended September 30, 2007 were $8,019,000 versus $3,709,000 for the corresponding period of 2006. Compared to 2006, amounts incurred in 2007 reflect a much larger entity. In addition, first quarter 2007 results were burdened with significant one-time severance and retention costs regarding staff rationalization efforts following the merger with Zenas. Expensed G&A costs were $4,921,000 ($4.53/boe) for the first nine months of 2007 compared to $1,570,000 ($8.07/boe) for the same period in 2006.

Third quarter 2007 total G&A costs were $1,732,000, down from $1,925,000 incurred in the second quarter. The $193,000 decrease was primarily attributable to the natural cycle of costs incurred through the year, where G&A costs are typically lowest in the third quarter. G&A costs capitalized to oil and gas properties were $473,000 in the third quarter, or 27% of total costs. G&A costs expensed were $1,075,000 ($2.65/boe) in the third quarter, down from $1,117,000 ($3.01/boe) in the second quarter. For the balance of 2007, TUSK expects the capitalization rate to be in the range of second and third quarter experience and in the $3.00 to $3.50/boe range for G&A costs expensed.

Financing Charges

Financing charges were $994,000 during the nine months ended September 30, 2007, broken down as to $586,000 in the third quarter, $408,000 in the second quarter and $Nil in the first quarter. Financing charges are comprised primarily of interest paid on TUSK's credit facility and also include bank commitment fees and guarantee fees for letters of credit issued in connection with project commitments. TUSK did not incur financing charges in 2006.

Stock-Based Compensation Expense

Stock-based compensation expense for the nine months ended September 30, 2007 was $1,721,000, up from $1,007,000 for the corresponding period in 2006. The increase was primarily due to stock options granted at the end of 2006 in connection with the Zenas/TUSK corporate combination, the accelerated vesting of options in the first quarter of 2007 as part of the employee rationalization process and additional option grants in the third quarter of 2007.

Stock-based compensation expense was $1,721,000 for the nine months ended September 30, 2007, broken down as to $707,000, $537,000 and $477,000 for the third, second and first quarters, respectively. The quarterly increases were due to additional stock options granted and a decrease in the percentage of total stock-based compensation costs that are capitalized to oil and gas properties.

Gain on Sale of Investment

During the second quarter of 2007, TUSK disposed of its investment in a publicly traded oil and gas company for proceeds of $7,367,000. The shares had an original cost of $4,271,000 and the sale resulted in a gain of $3,097,000. For financial statement purposes, the carrying value of this investment was adjusted to fair value at each balance sheet date and an unrealized gain or loss recorded. This accounting treatment was adopted prospectively effective January 1, 2007, and as a result, an unrealized gain of $2,483,000 (before tax) was recorded as at January 1, 2007 and a realized gain of $614,000 was recorded during the second quarter of 2007.



Depletion, Depreciation and Accretion ("DD&A") Expense
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2007 2006
9 9
($000s) Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Depletion and
depreciation
of oil and gas
properties 28,699 10,647 9,852 8,200 5,096 2,114 1,618 1,364
Accretion of asset
retirement
obligations 202 74 67 61 41 24 18 (1)
Depreciation of
office equipment
and leasehold
improvements 90 20 41 29 28 16 12 -
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Total 28,991 10,741 9,960 8,290 5,165 2,154 1,648 1,363
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Per boe ($/boe) 26.68 26.45 26.81 26.82 26.55 25.50 25.46 30.07
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DD&A expense for the nine months ended September 30, 2007 totaled $28,991,000 ($26.68/boe), up from $5,165,000 ($26.55/boe) during the first nine months of 2006. Almost all of TUSK's DD&A expense was comprised of depletion and depreciation of oil and gas properties, which is based on a ratio of production for the period to proved reserve assignments. The year-over-year increase in DD&A expense was primarily as a result of the growth in production volumes.

Third quarter 2007 DD&A expense was $10,741,000 compared to $9,960,000 in the second quarter of the year. The increase was primarily due to higher volumes in the third quarter, as the small decline in the rate per boe had a modest effect on the overall expense. TUSK is in the early stages of exploration and development at its Mega property and has invested substantial capital in infrastructure. Expenditures on infrastructure at the early stages of project development typically result in higher DD&A rates per boe. Conversely, operations in the Elleh area are past the initial phase and TUSK is adding reserves at favourable costs, which will have a positive effect on corporate DD&A rates per boe. Going forward, a reduction in DD&A expense per boe will depend on TUSK's ability to add proved reserves at lower costs.

Provision for Income Taxes

For the nine-month periods ended September 30, 2007 and 2006, TUSK recorded a reduction in future income taxes of $566,000 and $173,000, respectively. The recoveries were the result of losses before taxes for both periods. The provision for income taxes includes the effects of a reduction in future federal and provincial income tax rates in effect during the period. TUSK did not record a current income tax liability at September 30, 2007 whereas a $28,000 liability was recorded for the same period in 2006. TUSK has approximately $250,000,000 of available income tax deductions and does not expect to incur cash taxes in 2007.

Funds from Operations

Funds from operations for the nine months ended September 30, 2007 were $27,037,000 ($0.30 per share) compared to $4,402,000 ($0.10 per share) for the first nine months of 2006. The year-over-year increase was primarily the result of the Zenas acquisition completed at the end of 2006 and higher average daily production derived through exploration and development.

For the third quarter of 2007, TUSK recorded funds from operations of $10,418,000 ($0.12 per share), almost unchanged from the $10,484,000 ($0.12 per share) recorded for the second quarter of the year. Comparing the two quarters, the benefit of higher third quarter sales volumes was offset by lower natural gas prices and higher per unit operating expenses.



Cash Netbacks
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2007 2006
9 9
($/boe) Months Q3 Q2 Q1 Months Q3 Q2 Q1
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Oil and gas revenue 52.37 50.62 54.24 52.47 53.50 55.14 51.72 52.97
Royalties (net of
ARTC) (10.25) (8.73)(11.35)(10.94) (9.96) (8.03)(11.96)(10.71)
Operating expenses (9.34) (9.27) (8.25)(10.74)(12.16)(12.90) (9.77)(14.20)
Transportation
expenses (2.60) (2.88) (2.35) (2.52) (4.34) (1.90) (4.55) (8.53)
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Operating netback 30.18 29.74 32.29 28.28 27.04 32.31 25.44 19.53
G&A expenses (4.53) (2.65) (3.01) (8.83) (8.07) (9.39) (6.28) (8.16)
Financing charges (0.91) (1.44) (1.10) - - - - -
Interest income 0.14 - 0.03 0.42 3.81 3.77 3.20 4.73
Current income
taxes - - - - (0.15) (0.33) - -
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Corporate netback 24.88 25.65 28.21 19.87 22.63 26.36 22.36 16.10
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Comparing the nine months ended September 30, 2007 to the same period in 2006, operating netbacks increased to $30.18/boe from $27.04/boe primarily as a result of lower operating and transportation expenses. Corporate cash netbacks increased to $24.88/boe in 2007 from $22.63/boe in 2006. On a per unit basis, year-over-year changes include lower general and administrative expenses, decreased interest income and the introduction of financing charges in 2007.

Operating netbacks decreased $2.55/boe to $29.74/boe in the third quarter of 2007 from $32.29/boe in the second quarter as lower natural gas prices and higher operating expenses overcame the benefit of lower royalties. Corporate netbacks declined $2.56/boe to $25.65/boe from $28.21/boe as lower per unit general and administrative expenses was offset by higher financing charges.

Net Income (Loss)

The net loss for the nine months ended September 30, 2007 was $2,540,000 ($0.03 per share) versus a net loss of $1,597,000 ($0.04 per share) for the same period in 2006. Compared to 2006 and adjusting for the increase in sales volumes, the 2007 net loss was increased by the one-time expenses incurred in the first quarter and reduced by the gain on disposition of investment.

TUSK posted a net loss of $976,000 ($0.01 per share) for the third quarter versus net income of $866,000 ($0.01 per share) for the second quarter of 2007. Comparing the two quarters, third quarter results included lower royalties, higher cash expenses, such as operating and transportation, and increased non-cash expenses, including stock-based compensation and DD&A. In addition, the second quarter included a gain on investment of $1,105,000.



Capital Expenditures
----------------------------------------------------------------------------
2007 2006
9 9
($000s) Months Q3 Q2 Q1 Months Q3 Q2 Q1
----------------------------------------------------------------------------
Land acquisition
and retention 1,149 96 525 528 3,421 632 2,209 580
Geological and
geophysical 10,153 482 6,648 3,023 14,354 2,777 9,064 2,513
Drilling and
completions 42,857 2,752 8,695 31,410 28,238 5,381 6,252 16,606
Well equipping and
facilities 23,116 4,216 7,469 11,431 5,402 2,047 (172) 3,527
Property
acquisitions 9,044 (5) 9,020 29 - - - -
Capitalized
overhead 2,254 473 521 1,260 1,106 386 335 385
Office 354 (115) 167 302 200 50 27 122
----------------------------------------------------------------------------
Total 88,927 7,899 33,045 47,983 52,721 11,273 17,715 23,733
Dispositions (1,937) - (1,937) - - - - -
----------------------------------------------------------------------------
Net 86,990 7,899 31,108 47,983 52,721 11,273 17,715 23,733
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Capital expenditures totaled $88,927,000 for the nine months ended September 30, 2007, $7,899,000 of which was incurred in the third quarter. Third quarter 2007 expenditures included $3,056,000 in the Conroy area, $2,853,000 in the Peace River Arch area, $1,095,000 at Mega/Gutah, $537,000 at Elleh and corporate level expenditures of $358,000. TUSK commenced development of the Conroy project in the third quarter. Most of the expenditures in this area consisted preliminary of engineering, surveying, surface acquisition costs and the purchase of tangible equipment. In the Peace River Arch area, TUSK drilled 3 gross (0.5 net) wells and completed wells drilled in the second quarter. During the third quarter, 3 gross (1.5 net) wells drilled during the second quarter in the Elleh area were placed on production. Most of the third quarter investment in the Mega/Gutah area was allocated to well equipping and facilities and the building of an all-weather road.

During the nine months ended September 30, 2007, TUSK drilled 32 gross (15.4 net) wells, resulting in 22 gross (9.2 net) gas wells, 8 gross (5.5 net) oil wells and 2 gross (0.7 net) dry holes.

Outlook

TUSK posted strong third quarter 2007 results, including sales volumes and revenue that grew by 8% and 2%, respectively, over the second quarter of the year. Despite a 27% decline in natural gas prices, TUSK's quarter-over-quarter cash flow from operations remained flat at $0.12 per share. Late in the third quarter, TUSK finalized a new $75,000,000 demand credit facility that will be used to provide additional funding for TUSK's upcoming capital expenditure program, most notably at Conroy. TUSK expects to start producing natural gas from the Conroy area in February 2008. As a result of recent and upcoming capital expenditures and the timing of the Conroy start-up, TUSK anticipates fourth quarter 2007 sales volumes to be less than those recorded in the third quarter, however volumes should be higher in the first quarter of 2008. For the year ended December 31, 2007, TUSK expects average daily corporate production to be in the 4,000 boe/d range with a target for 2008 of 5,000 boe/d.

Liquidity and Capital Resources

TUSK has a $75,000,000 demand credit facility comprised of a $60,000,000 revolving/operating line and a $15,000,000 acquisition/development line. The facility is available through two Canadian chartered banks. The interest rate charged on the facility is based on a pricing grid that is debt to cash flow sensitive. An increase in TUSK's debt to cash flow ratio will cause an increase in the interest rate. The interest rate is calculated quarterly and ranges from the bank's prime rate to prime plus 1.0%. At September 30, 2007, the effective annual interest rate was 6.5%. The credit facility is secured by a $150,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts.

On an ongoing basis, TUSK will typically utilize three sources of funding to finance its capital expenditure program: internally generated cash flow from operations, debt, where deemed appropriate, and new equity issues, if available on favourable terms. Commodity prices and production volumes have the largest impact on TUSK's ability to generate adequate cash flow to meet all of its obligations. A prolonged decrease in commodity prices would negatively affect TUSK's cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If TUSK's capital expenditure program does not result in sufficient additional reserves and/or production, the Corporation's ability to raise additional equity would be negatively impacted.

Outstanding Share Data

As of September 30, 2007, TUSK had 88,879,722 common shares and 8,440,167 stock options outstanding. From October 1, 2007 to the date of this MD&A, there were no changes to TUSK's outstanding securities, except for the grant of 10,000 options.

Contractual Obligations

Conroy Drilling Commitment

Under a farm-in commitment, TUSK has agreed to drill, complete and tie-in or abandon 40 wells, complete and tie-in or abandon 6 standing wells, construct approximately 6.5 miles of gathering system as well as a gas plant and sales line capable of processing at least 10 mmcf/d of natural gas. Fifteen of the new drill wells and the gathering system must be completed by April 30, 2008, while the gas plant and sales line must be completed by June 30, 2008. The remainder of the commitment must be completed by April 30, 2009. This commitment is secured by a $6,000,000 letter of guarantee.

Drilling Rigs

TUSK made commitments for two drilling rigs as follows:

- Rig 1 - 220 days/year for three years starting at rig delivery in December 2005, with an obligation of $6,800/day.

- Rig 2 - 250 days/year for four years starting at rig delivery in February 2007, with an obligation of $9,700/day.

Subsequent to September 30, 2007, TUSK entered into a letter agreement to amend the commitment for Rig 1 to 165 days/year over four years and to terminate the contract regarding Rig 2. Under the terms of the letter agreement, TUSK is required to make a single payment of $2,000,000.

Office Space

TUSK has a lease commitment for office space that expires on January 31, 2013, which is summarized in the table below.



----------------------------------------------------------------------------
Year Amount
----------------------------------------------------------------------------
($000s)
2007 109
2008 513
2009 536
2010 540
2011 540
2012 and thereafter 584
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contingencies

In May 2007, TUSK was served with a statement of claim demanding payment of $1,067,000 plus interest. The action is a result of payments TUSK withheld from a contractor responsible for the construction of a capital project that required extensive repairs after its initial completion. The repairs also resulted in lengthy delays before the project could be put in service. In July, TUSK filed a statement of defence and a counterclaim for repair costs incurred and lost revenue totaling $6.8 million. The amounts paid, or received, by TUSK to settle this dispute will be recorded in the period the amounts become known.

Off-Balance Sheet Arrangements

Except for the items discussed under the caption "Contractual Obligations", there were no off-balance sheet arrangements at September 30, 2007.

Related Party Transactions

An officer of TUSK is a director and significant shareholder of a private company that provides computer management system services to TUSK. For the nine months ended September 30, 2007, this company was paid $164,000 (nine months ended September 30, 2006 - $99,000). Of this amount, $91,000 was charged to general and administrative expenses, $62,000 to operating expenses and $11,000 to property and equipment. September 30, 2007 accounts payable and accrued liabilities includes $40,000 regarding these payments. These services were provided at commercial rates.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. For the nine months ended September 30, 2007, royalties of $149,000 were paid to this company (nine months ended September 30, 2006 - $78,000). All of the payments made in 2007 were charged to royalties. September 30, 2007 accounts payable and accrued liabilities includes $20,000 regarding these royalties.

During the second quarter of 2007, TUSK disposed of its investment in a publicly traded oil and gas company to an unrelated third party for proceeds of $7,368,000. A director of TUSK is also a director of this company. Prior to the disposition, TUSK provided accounting and administrative services to the company for a fee of $6,000 per month and the recovery of certain out-of-pocket costs. For the nine months ended September 30, 2007, TUSK received a total of $50,000 (nine months ended September 30, 2006 - $68,000) from this company, all of which is included in general and administrative expenses.



Summary of Quarterly Results
----------------------------------------------------------------------------
2007 2006 2005
(unaudited) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Sales volumes
Oil and NGLs
(bbls/d) 1,806 1,730 1,531 699 502 318 305 376
Natural gas
(mcf/d) 15,652 14,115 11,413 3,636 2,493 2,362 1,191 1,736
Total (boe/d) 4,415 4,083 3,433 1,305 918 711 504 665
----------------------------------------------------------------------------
($000s, except per
share amounts)
Oil and gas revenue 20,560 20,153 16,200 6,327 4,657 3,348 2,402 3,926
Capital
expenditures (net) 7,899 31,108 47,983 13,697 11,273 17,715 23,733 3,463
Funds from
operations 10,418 10,484 6,136 2,934 2,226 1,446 730 2,079
Per share
- basic and
diluted 0.12 0.12 0.07 0.06 0.04 0.03 0.02 0.06
Net income (loss) (976) 866 (2,430)(2,342) (420) (683) (494) (322)
Per share
- basic and
diluted (0.01) 0.01 (0.03) (0.05) (0.01) (0.02) (0.01) (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Business Risks and Uncertainties

TUSK's production and exploration activities are concentrated in the Western Canadian Sedimentary Basin where activity is highly competitive and includes a variety of different sized companies ranging from smaller junior producers to the much larger integrated petroleum companies. TUSK is subject to the various types of business risks and uncertainties including:

- Finding and developing oil and natural gas reserves at economic costs;

- Production of oil and natural gas in commercial quantities; and

- Marketability of oil and natural gas produced.

In order to reduce exploration risk, TUSK strives to employ highly qualified and motivated professional employees with a demonstrated ability to generate quality proprietary geological and geophysical prospects. To help maximize drilling success, the Corporation combines exploration in areas that afford multi-zone prospect potential, targeting a range of low to moderate risk prospects with some exposure to select high risk with high reward opportunities. TUSK also explores in areas where it has significant drilling experience.

TUSK mitigates its risk related to producing hydrocarbons through the utilization of the most appropriate technology and information systems. In addition, the Corporation seeks to maintain operational control of the majority of its prospects.

Oil and gas exploration and production can involve environmental risks such as pollution of the environment and destruction of natural habitat, as well as safety risks such as personal injury. In order to mitigate such risk, TUSK conducts its operations at high standards and follows safety procedures intended to reduce the potential for personal injury to employees, contractors and the public at large. The Corporation maintains current insurance coverage for general and comprehensive liability as well as limited pollution liability. The amount and terms of this insurance are reviewed on an ongoing basis and adjusted as necessary to reflect changing corporate requirements as well as industry standards and government regulations. TUSK may periodically use financial or physical delivery hedges to reduce its exposure against the potential adverse impact of commodity price volatility, as governed by formal policies approved by senior management subject to controls established by the Board of Directors. At September 30, 2007, TUSK had one fixed price contact in place.

Changes in Accounting Policies

Effective January 1, 2007, TUSK adopted the new Canadian accounting standards for Financial Instruments - Recognition and Measurement, Financial Instruments - Presentation and Disclosures, Hedging and Comprehensive Income. These standards have been applied prospectively. At January 1, 2007, an adjustment was made to increase investments by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000.

Critical Accounting Estimates and Policies

Depletion and Depreciation Expense

TUSK uses the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized, whether successful or not. The aggregate of capitalized costs, net of certain costs related to unproved properties, and estimated future development costs are amortized using the unit-of-production method based on estimated proved reserves. Changes in estimated proved reserves or future development costs have a direct impact on depletion and depreciation expense. Certain costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be assigned, at which point they would be included in the depletion calculation, or for impairment, for which any write-down would be charged to depletion and depreciation expense.

Full Cost Accounting Ceiling Test

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of costs and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment would be charged as additional depletion and depreciation expense.

Asset Retirement Obligations

TUSK records a liability for the fair value of legal obligations associated with the retirement of long-lived tangible assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset known as the asset retirement cost. The total future asset retirement obligation is an estimate based on TUSK's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows required to settle the asset retirement obligation is an estimate that is subject to measurement uncertainty and any change would impact the liability.

Income Taxes

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

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by TUSK is accumulated and communicated to the Corporation's management as appropriate to allow timely decisions regarding required disclosure. TUSK's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the Corporation's annual filings for the most recently completed financial year, that the Corporation's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the Corporation is made known to them by others within the Corporation. It should be noted that while TUSK's Chief Executive Officer and Chief Financial Officer believe that the Corporation's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Internal Controls Over Financial Reporting

TUSK's Chief Executive Officer and Chief Financial Officer have designed or caused to be designed under their supervision internal controls over financial reporting related to the Corporation to provide reasonable assurance regarding the reliability of the Corporation's financial reporting and the preparation of financial statements together with the other financial information for external purposes in accordance with the Canadian GAAP.

TUSK's Chief Executive Officer and Chief Financial Officer are required to cause the Corporation to disclose herein any change in the Corporation's internal control over financial reporting that occurred during the Corporation's most recent interim period that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. TUSK has identified two areas of potential material weakness in the Corporation's internal control over financial reporting during the nine months ended September 30, 2007. The areas include (a) Income Taxes and (b) Complex and Non-Routine Transactions, which are both detailed in the Corporation's annual MD&A for the period ended December 31, 2006.

During the nine months ended September 30, 2007, in conjunction with the merger with Zenas and related personnel changes, numerous changes were made to the Corporation's policies and procedures that comprise its control over financial reporting. These changes include:

1. Previously, TUSK prepared financial statements on a quarterly basis only. Commencing in 2007, a system of reporting on a monthly basis was implemented.

2. Previously, TUSK's process for capital and operating budget preparation did not include complete reconciliation to the accounting system. Commencing in 2007, a system of budget preparation was implemented to include a complete reconciliation to actual results in the accounting system.

3. TUSK appointed a new Vice President, Finance and Chief Financial Officer commencing June 1, 2007.

It should be noted that a control system, including the Corporation's disclosure and internal controls and procedures, no matter how well conceived can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

Additional Information

Additional information regarding TUSK Energy Corporation is available on SEDAR at www.sedar.com or on TUSK's website at www.tusk-energy.com.



BALANCE SHEETS

----------------------------------------------------------------------------
As at September 30, December 31,
(unaudited) 2007 2006
----------------------------------------------------------------------------
($000s)
Assets
Current
Cash and cash equivalents - 27,187
Investments (note 4) 258 4,528
Accounts receivable 16,022 18,476
Prepaid expenses and deposits 380 759
Commodity derivatives (note 8) 552 -
----------------------------------------------------------------------------
17,212 50,950
Commodity derivatives (note 8) 184 -
Property, plant and equipment (note 5) 287,109 226,410
----------------------------------------------------------------------------
304,505 277,360
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities 22,748 38,993
Bank loan (note 6) 39,592 -
----------------------------------------------------------------------------
62,340 38,993
Future income taxes 9,131 8,850
Asset retirement obligations (note 3) 3,960 2,930
Shareholders' equity
Share capital (note 7) 227,078 227,078
Contributed surplus (note 7) 9,188 6,284
Deficit (7,192) (6,775)
----------------------------------------------------------------------------
229,074 226,587
----------------------------------------------------------------------------
304,505 277,360
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and contingencies (note 10)

See accompanying notes.



STATEMENTS OF OPERATIONS, COMPREHENSIVE LOSS AND DEFICIT

----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited) 2007 2006 2007 2006
----------------------------------------------------------------------------
($000s, except per share amounts)
Revenue
Oil and gas revenue 20,560 4,657 56,912 10,406
Royalties (net of Alberta Royalty Tax
Credit in 2006) (3,546) (678) (11,143) (1,938)
Unrealized loss on commodity
derivatives (note 8) (45) - (45) -
----------------------------------------------------------------------------
16,969 3,979 45,724 8,468
Interest income 1 318 156 740
----------------------------------------------------------------------------
16,970 4,297 45,880 9,208
----------------------------------------------------------------------------
Expenses
Operating 3,765 1,089 10,150 2,366
Transportation 1,171 161 2,823 842
General and administrative 1,075 793 4,921 1,570
Financing charges 586 - 994 -
Stock-based compensation (note 7) 707 407 1,721 1,007
Gain on investment (note 4) - - (614) -
Depreciation, depletion and accretion 10,741 2,154 28,991 5,165
----------------------------------------------------------------------------
18,045 4,604 48,986 10,950
----------------------------------------------------------------------------
Loss before taxes (1,075) (307) (3,106) (1,742)
----------------------------------------------------------------------------
Income taxes
Current - 28 - 28
Future (reduction) (99) 85 (566) (173)
----------------------------------------------------------------------------
(99) 113 (566) (145)
----------------------------------------------------------------------------
Net loss and comprehensive
loss for the period (976) (420) (2,540) (1,597)
----------------------------------------------------------------------------
Deficit, beginning of period (6,216) (3,930) (6,775) (2,753)
Change of accounting policies
(net of tax of $360) (note 2) - - 2,123 -
Normal course issuer bid - (82) - (82)
----------------------------------------------------------------------------
Deficit, end of period (7,192) (4,432) (7,192) (4,432)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share (note 7)
Basic and diluted (0.01) (0.01) (0.03) (0.04)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.



STATEMENTS OF CASH FLOW

----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited) 2007 2006 2007 2006
----------------------------------------------------------------------------
($000s)
Operating activities
Net loss for the period (976) (420) (2,540) (1,597)
Items not involving cash:
Stock-based compensation 707 407 1,721 1,007
Gain on investment - - (614) -
Depreciation, depletion and
accretion 10,741 2,154 28,991 5,165
Commodity derivatives 45 - 45 -
Future tax expense (reduction) (99) 85 (566) (173)
----------------------------------------------------------------------------
10,418 2,226 27,037 4,402
Change in non-cash working capital
capital (note 9) (10,914) 1,335 (3,343) (213)
----------------------------------------------------------------------------
(496) 3,561 23,694 4,189
----------------------------------------------------------------------------
Financing activities
Issue of capital stock - - - 50,394
Share issue costs - (129) - (2,962)
Increase in bank loan 10,401 - 39,592 -
Normal course issuer bid - (484) - (484)
----------------------------------------------------------------------------
10,401 (613) 39,592 46,948
----------------------------------------------------------------------------
Investing activities
Expenditures on property and
equipment (7,899) (11,273) (88,927) (52,721)
Proceeds on disposition of property
and equipment - - 1,937 -
Proceeds on sale of investment
(note 4) - - 7,367 -
Short-term investments - - - (9,957)
Change in non-cash working
capital (note 9) (2,006) 1,887 (10,850) 4,147
----------------------------------------------------------------------------
(9,905) (9,386) (90,473) (58,531)
----------------------------------------------------------------------------
Decrease in cash and cash equivalents - (6,438) (27,187) (7,394)
Cash and cash equivalents,
beginning of period - 37,468 27,187 38,424
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period - 31,030 - 31,030
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid 541 - 949 28
Taxes paid - 28 - 36
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental disclosure of cash flow information (note 9)

See accompanying notes.



NOTES TO THE FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2007 and 2006
(unaudited)
(tabular amounts in 000s, except share and per share amounts)


Nature of Business and Basis of Presentation

TUSK Energy Corporation ("TUSK" or the "Corporation") is involved in the exploration, development and production of petroleum and natural gas in Alberta and British Columbia. The financial statements are stated in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles.

TUSK acquired Zenas Energy Corp. ("Zenas") through a plan of arrangement on December 31, 2006. The balance sheet includes the accounts of Zenas as at December 31, 2006. TUSK and Zenas were amalgamated on January 1, 2007.

1. Significant Accounting Policies

The unaudited interim financial statements have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), using the same accounting policies as those set out in Note 1 to the audited financial statements for the period ended December 31, 2006, except as described in Note 2 below. The interim financial statements contain disclosures which are supplemental to TUSK's December 31, 2006 audited financial statements. Certain disclosures, which are normally required to be included in the notes to the annual audited financial statements, have been condensed or omitted. In the opinion of management, these interim financial statements contain all adjustments of a normal and recurring nature to present fairly TUSK's financial position as at September 30, 2007 and the results of its operations for the three and nine months ended September 30, 2007. The interim financial statements should be read in conjunction with TUSK's audited financial statements and notes thereto for the period ended December 31, 2006.

2. Changes in Accounting Policies

(a) Financial Instruments, Hedging and Comprehensive Income

Effective January 1, 2007, TUSK adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instruments - Recognition and Measurement", section 3865, "Hedges" and section 1530, "Comprehensive Income". These new standards have been adopted prospectively. At January 1, 2007, an adjustment was made to increase investments by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000.

Financial Instruments

CICA section 3855 establishes a framework for classifying and measuring financial instruments. Under this section, financial instruments must be initially recognized at their fair value on the balance sheet date. Each financial instrument must be included in one of five categories set out in the standard: financial assets and liabilities held for trading; financial assets held to maturity; loans and receivables; financial assets available for sale; or other financial liabilities. All financial instruments, with the exception of loans and receivables, held to maturity investments and other financial liabilities measured at amortized cost, are reported on the balance sheet at fair value. Subsequent measurement and changes in fair value will depend on their initial classification. Unrealized gains and losses on financial instruments classified as held for trading are recognized in earnings in the period incurred. Gains and losses on assets available for sale are recognized in other comprehensive income, and are charged to earnings when the asset is derecognized.

All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless they qualify for the normal sale and purchase exception. All changes in fair value are included in earnings unless cash flow hedge or net investment accounting is used, in which case changes in fair value are recorded in other comprehensive income, to the extent the hedge is effective, and in earnings, to the extent it is ineffective.

Hedging

Section 3865 establishes standards for when and how hedge accounting may be applied. Hedge accounting continues to be optional. At the inception of a hedge, TUSK must formally document the designation of the hedge, the risk management objectives, the hedging relationships between the hedged items and the hedging items and the methods for testing the effectiveness of the hedge. Assessments are made, both at inception of the hedge and on an ongoing basis, to determine if the derivatives designated as hedges are highly effective in offsetting changes in fair values or cash flows of hedged items.

For cash flow hedges that have been terminated or cease to be effective, prospective gains or losses on the derivative are recognized in earnings. Any gain or loss that has been included in accumulated other comprehensive income at the time the hedge is discontinued continues to be deferred in accumulated other comprehensive income until the original hedged transaction is recognized in earnings. If the likelihood of the original hedged transaction occurring is no longer probable, the entire gain or loss in accumulated other comprehensive income related to this transaction is immediately reclassified to earnings.

Comprehensive Income

Section 1530 establishes standards for reporting and presenting comprehensive income and other comprehensive income. Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources and other comprehensive income comprises revenues, expenses, gains and losses that, in accordance with generally accepted accounting principles, are recognized in comprehensive income but excluded from net income.

(b) Accounting Changes

Effective January 1, 2007, TUSK adopted the revised recommendations of CICA section 1506, "Accounting Changes". Under the revised standards, voluntary changes in accounting policies are permitted only if they result in financial statements that provide more reliable and relevant information. Accounting policy changes are applied retrospectively unless it is impractical to determine the period or cumulative impact of the change. Corrections of prior period errors are applied retrospectively and changes in accounting estimates are applied prospectively by including these changes in earnings. These standards are effective for all changes in accounting policies, changes in accounting estimates and corrections of prior period errors initiated in periods beginning on or after January 1, 2007.

3. Asset Retirement Obligations

TUSK's asset retirement obligations result from net ownership interests in petroleum and natural gas assets, including wellsites, gathering systems and processing facilities. TUSK estimates the net present value of its total asset retirement obligations to be $3,960,000, based on a total undiscounted amount of cash flows required to settle its asset retirement obligations of approximately $6,893,000. A credit-adjusted risk-free rate of 8.0% and an inflation rate of 2.0% were used to calculate the fair value of the asset retirement obligation. These obligations are expected to be incurred between 2007 and 2037 and will be funded from general corporate resources at the time of abandonment. The table below reconciles TUSK's asset retirement obligations.



---------------------------------------------------------------------------
Nine Months Ended
September 30,
($000s) 2007 2006
---------------------------------------------------------------------------
Balance, beginning of period 2,930 499
Liabilities incurred in period 828 412
Changes in prior period estimates/revisions - 12
Accretion expense 202 40
---------------------------------------------------------------------------
Balance, end of period 3,960 963
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. Investments

During the second quarter of 2007, TUSK disposed of its investment in a publicly traded oil and gas company to an unrelated third party for proceeds of $7,367,000. A director of TUSK is also a director of this company. Prior to the disposition, TUSK provided accounting and administrative services to the company for a fee of $6,000 per month and the recovery of certain out-of-pocket costs. For the nine months ended September 30, 2007, TUSK received a total of $50,000 (nine months ended September 30, 2006 - $68,000) from this company, all of which is included in general and administrative expenses. September 30, 2007 accounts receivable includes $1,000 due from this company. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

TUSK has invested a total of $258,000 in common shares of a private drilling company. The investment is carried at fair value, which approximates cost.



5. Property, Plant and Equipment

---------------------------------------------------------------------------
September 30, December 31,
($000s) 2007 2006
---------------------------------------------------------------------------
Oil and natural gas properties 329,124 239,989
Office equipment and leasehold improvements 655 302
---------------------------------------------------------------------------
329,779 240,291
Accumulated depletion and depreciation (42,670) (13,881)
---------------------------------------------------------------------------
287,109 226,410
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The September 30, 2007 depletion calculation excluded unproved properties of $54,044,000 (December 31, 2006 - $27,500,000, which does not include $22,000,000 of undeveloped land acquired as a result of the Zenas acquisition), and salvage values of $10,998,000 (December 31, 2006 - $13,400,000). The calculation includes future development costs of $13,500,000 (December 31, 2006 - $9,500,000). For the three and nine months ended September 30, 2007, TUSK capitalized general and administrative expenses relating to acquisitions, exploration and development activities of $473,000 (three months ended September 30, 2006 - $386,000) and $2,254,000 (nine months ended September 30, 2006 - $1,106,000), respectively, to oil and natural gas properties.

6. Bank Loan

TUSK has a $75,000,000 demand credit facility comprised of a $60,000,000 revolving/operating line and a $15,000,000 acquisition/development line. The facility is available through two Canadian chartered banks. The interest rate charged on the facility is based on a pricing grid that is debt to cash flow sensitive and is payable monthly. An increase in TUSK's debt to cash flow ratio will cause an increase in the interest rate. The interest rate is calculated quarterly and ranges from the bank's prime rate to prime rate plus 1.0%. At September 30, 2007, the effective annual interest rate was 6.5%. The credit facility is secured by a $150,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts.

At September 30, 2007, TUSK had a $6,000,000 letter of guarantee outstanding.



7. Share Capital

(a) Shares Outstanding

As at September 30, 2007, TUSK had 88,879,722 common shares outstanding.
There were no changes to TUSK's outstanding share capital during the nine
months ended September 30, 2007.

(b) Stock Options

The following table sets forth a reconciliation of TUSK's stock option plan
for the nine months ended September 30, 2007:

---------------------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
---------------------------------------------------------------------------
($/share)
Outstanding, beginning of period 8,866,000 3.20
Granted 1,992,500 1.63
Forfeited (520,000) 3.19
Expired (1,898,333) 3.18
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Outstanding, end of period 8,440,167 2.84
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Exercisable, end of period 3,319,222 3.20
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The table below summarizes information regarding stock options outstanding
at September 30, 2007.

---------------------------------------------------------------------------
Weighted
Weighted Number of Average Number of
Average Options Remaining Options
Exercise Price Outstanding Contractual Life Exercisable
---------------------------------------------------------------------------
($/share) (years)
1.50 - 2.00 1,980,000 4.75 -
2.01 - 2.50 4,203,500 3.73 2,117,000
2.50 - 4.00 750,000 3.86 216,666
4.00 - 4.95 1,506,667 3.18 985,556
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8,440,167 3.89 3,319,222
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The fair value of each option granted was estimated on the date of grant
using the Black-Scholes options pricing model. The weighted average fair
value of the options granted during the nine months ended September 30,
2007 and the assumptions used in the model are set forth in the table
below.

---------------------------------------------------------------------------
Fair value of options granted ($/share) 0.69
Risk-free interest rate (%) 3.42
Expected life (years) 4.0
Expected volatility (%) 54
Expected dividend yield (%) -
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---------------------------------------------------------------------------

(c) Per Share Amounts

The table below summarizes the weighted average number of common shares
used in calculating net earnings (loss) per share.

---------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------
Weighted average number
of common shares
outstanding
- basic and diluted 88,879,722 51,765,740 88,879,722 45,230,196
---------------------------------------------------------------------------
---------------------------------------------------------------------------

No shares were added in calculating diluted earnings per share as all
options and warrants outstanding are anti-dilutive.

(d) Contributed Surplus

The following table reconciles TUSK's contributed surplus:

---------------------------------------------------------------------------
Nine Months Ended
September 30,
($000s) 2007 2006
---------------------------------------------------------------------------
Balance, beginning of period 6,284 2,872
Stock-based compensation expensed 1,721 1,007
Stock-based compensation capitalized 1,183 170
Transfer to share capital on exercise
of options - (152)
---------------------------------------------------------------------------
Balance, end of period 9,188 3,897
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8. Financial Instruments

(a) Commodity Price Risk Management

In September 2007, TUSK entered into a crude oil hedging transaction for 1,000 bbls/d for the period January 1 to December 31, 2008. This transaction consisted of the purchase of a US$65.00/bbl put option at a cost of $781,000. TUSK would have received $736,000 if the contract was settled at the end of September 2007. This amount has been recorded on the balance sheet, a portion of which is in long-term assets.

(b) Credit Risk

The Corporation's accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal credit risks. To mitigate this risk, the Corporation sells substantially all of its production to two primary purchasers under normal industry sale and payment terms.

(c) Foreign Currency Exchange Risk

The Corporation is exposed to foreign currency fluctuations as crude oil prices received are referenced in U.S. dollar denominated prices.

(d) Fair Value of Financial Instruments

The Corporation's financial instruments recognized in the balance sheet consist of accounts receivable, accounts payable and accrued liabilities and bank indebtedness. The fair value of these financial instruments approximates their carrying amounts due to their short terms to maturity or the indexed rate of interest on the bank indebtedness.

(e) Interest Rate Risk

Interest rate risk exists principally with respect to TUSK's bank loan that bears interest at floating rates.



9. Cash Flow Information

Changes in non-cash working capital were as follows:

---------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
($000s) 2007 2006 2007 2006
---------------------------------------------------------------------------
Changes in non-cash working
capital balances
Accounts receivable 1,479 (1,407) 2,454 402
Prepaid expenses and deposits 199 62 379 (28)
Cash paid for commodity
derivative (781) - (781) -
Accounts payable and accrued
liabilities (13,817) 4,567 (16,245) 3,560
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(12,920) 3,222 (14,193) 3,934
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Changes in non-cash working
capital related to
Operating activities (10,914) 1,335 (3,343) (213)
Financing activities - - - -
Investing activities (2,006) 1,887 (10,850) 4,147
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(12,920) 3,222 (14,193) 3,934
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10. Commitments and Contingencies

(a) Conroy Drilling Commitment

Under a farm-in commitment, TUSK has agreed to drill, complete and tie-in or abandon 40 wells, complete and tie-in or abandon 6 standing wells, construct approximately 6.5 miles of gathering system as well as a gas plant and sales line capable of processing at least 10 mmcf/d. Fifteen of the new drill wells and the gathering system are required to be completed by April 30, 2008, while the gas plant and sales line must be completed by June 30, 2008. The remainder of the commitment is required to be completed by April 30, 2009. This commitment is secured by a letter of guarantee for $6,000,000 as at September 30, 2007 (see note 6).

(b) Drilling Rigs

The Corporation made commitments for two drilling rigs as follows:

- Rig 1 - 220 days/year for three years starting at rig delivery in December 2005, with an obligation of $6,800/day.

- Rig 2 - 250 days/year for four years starting at rig delivery in February 2007, with an obligation of $9,700/day.

Subsequent to September 30, 2007, TUSK entered into a letter agreement to amend the commitment for Rig 1 to 165 days/year over four years and to terminate the contract regarding Rig 2. Under the terms of the letter agreement, TUSK is required to make a single payment of $2,000,000.



(c) Office Space

TUSK has a lease commitment for office space that expires on January 31,
2013, which is summarized in the table below.

---------------------------------------------------------------------------
Year Amount
---------------------------------------------------------------------------
($000s)

2007 109
2008 513
2009 536
2010 540
2011 540
2012 and thereafter 584
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(d) Dispute

In May 2007, TUSK was served with a statement of claim demanding payment of $1,067,000 plus interest. The action is a result of payments TUSK withheld from a contractor responsible for the construction of a capital project that required extensive repairs after its initial completion. The repairs also resulted in lengthy delays before the project could be put in service. In July, TUSK filed a statement of defence and a counterclaim for repair costs incurred and lost revenue totaling $6.8 million. The amounts paid, or received, by TUSK to settle this dispute will be recorded in the period the amounts become known.

11. Related Party Transactions

An officer of TUSK is a director and significant shareholder of a private company that provides project management and systems support services to TUSK. For the nine months ended September 30, 2007, this company was paid $164,000 (nine months ended September 30, 2006 - $99,000). Of this amount, $91,000 was charged to general and administrative expenses, $62,000 to operating expenses and $11,000 to property and equipment. September 30, 2007 accounts payable and accrued liabilities includes $40,000 regarding these services. These services were provided at commercial rates and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. For the nine months ended September 30, 2007, royalties of $149,000 were paid to this company (nine months ended September 30, 2006 - $78,000). All of the payments made in 2007 were charged to royalties. September 30, 2007 accounts payable and accrued liabilities includes $20,000 regarding these royalties.

Contact Information

  • TUSK Energy Corporation
    John Rooney
    CEO
    (403) 264-8875
    or
    TUSK Energy Corporation
    Michael Makinson
    CFO
    (403) 264-8875
    Website: www.tusk-energy.com