TUSK Energy Corporation
TSX : TSK

TUSK Energy Corporation

August 08, 2008 08:00 ET

Tusk Energy Corporation: Financial and Operating Results for the Three and Six Months Ended June 30, 2008

CALGARY, ALBERTA--(Marketwire - Aug. 8, 2008) - TUSK Energy Corporation ("TUSK" or the "Corporation") (TSX:TSK) is pleased to announce its financial and operating results for the three and six months ended June 30, 2008.



HIGHLIGHTS

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Three Months Six Months
Ended June 30, Ended June 30,
($000s, except per % %
share amounts) 2008 2007 Change 2008 2007 Change
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Financial
Oil and gas revenue 29,550 20,153 47 55,402 36,352 52
Funds from operations
(1) 16,797 10,484 60 30,499 16,619 84
Per share -
basic and diluted 0.19 0.12 58 0.34 0.19 79
Net income (loss) 2,531 866 192 2,077 (1,564) 233
Per share -
basic and diluted 0.03 0.01 200 0.02 (0.02) 200
Capital expenditures 16,914 33,043 (49) 43,008 81,026 (47)
Property dispositions 350 1,937 (82) 12,051 1,937 522
Net debt (working
capital deficiency) (58,384) (47,416) 23 (58,384) (47,416) 23
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Operations
Sales volumes
Oil (bbls/d) 1,349 1,623 (17) 1,473 1,539 (4)
Natural gas (mcf/d) 14,037 14,115 (1) 14,543 12,772 14
Natural gas liquids
(bbls/d) 153 107 43 137 92 49
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Combined (boe/d) 3,841 4,083 (6) 4,034 3,760 7
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Operating netbacks
($/boe) (2)
Average selling
prices 84.53 54.24 56 75.46 53.41 41
Royalties (16.78) (11.35) 48 (15.08) (11.16) 35
Operating expenses (11.40) (8.25) 38 (10.93) (9.38) 17
Transportation
expenses (2.31) (2.35) (2) (2.46) (2.43) 1
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Operating netback 54.04 32.29 67 46.99 30.44 54
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Share Data (#000s)
Weighted average
outstanding
Basic 90,442 88,880 2 90,442 88,880 2
Diluted 90,942 88,880 2 90,653 88,880 2
Equity outstanding
- end of period
Common shares 90,442 88,880 2
Stock options 8,941 7,035 27
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(1) Funds from operations is a non-GAAP measure that represents net income
(loss) before depletion, depreciation and accretion, future taxes,
stock-based compensation, gain on investment, commodity derivatives and
asset retirement obligation expenditures. 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

Recent drilling success at Clairmont and Conroy and the overall development of the Conroy property has positioned TUSK for high growth for the balance of 2008. We expect fourth quarter 2008 production volumes to be over 50% higher than second quarter volumes. We are very pleased with the Conroy asset that was acquired at the end of the first quarter of the year. This property is the focus of our capital investment plans, is our largest property by reserves and will be the largest production growth property over the next 12 to 18 months.

Second Quarter 2008 Highlights

Sales volumes in the second quarter of 2008 were 3,841 boe/d, with natural gas contributing 61% of the total and oil and NGLs accounting for 39%. By geographic area, the relative volumes were: Peace River Arch - 49%, northeastern British Columbia (Conroy) - 42% and Northern Alberta (Mega/Gutah) - 9%. TUSK's second quarter production levels were below our expectations, however, shortfalls are primarily third party related and a full recovery is expected soon. Furthermore, recent drilling results are better than expected and allows confidence in our growth projection.

Volumes at our Clairmont property in the Peace River Arch area were constrained due to maintenance of a third party pipeline that carries natural gas associated with the oil production from Clairmont to the Sexsmith gas plant. The pipeline repairs were initiated to coincide with a scheduled turn-around of the Sexsmith plant. Unfortunately, the pipeline repairs have taken much longer than planned and has resulted in approximately 800 boe/d curtailment of production at Clairmont. In the meantime, a portion of this pipeline has been brought back into service and we have arranged to connect into a different pipeline that will allow us to increase Clairmont production gradually through the month of August. The recent drilling of four successful wells has increased our expected production from the field, and as a result, we have increased our forecasted production from the Clairmont property to 1,200 boe/d from 800 boe/d once we are back up at full production.

For the second quarter of 2008, higher commodity prices offset lower sales volumes, resulting in a 23% increase in funds from operations over the first quarter. TUSK generated funds from operations of $16,797,000 ($0.19 per share - basic and diluted) in the second quarter compared to $13,702,000 ($0.15 per share - basic and diluted) in the first quarter. TUSK's realized selling price during the second quarter was $84.53/boe, up 26% from first quarter average prices of $67.22/boe.

A combination of higher commodity prices and increased sales volumes for the first half of 2008 resulted in an 84% increase in TUSK's funds from operations over the same period in 2007. For the six months ended June 30, 2008, funds from operations were $30,499,000 ($0.34 per share - basic and diluted) over the $16,619,000 ($0.19 per share - basic and diluted) for the first half of 2007. The Corporation's average realized selling price for the six months ended June 30, 2008 was $75.46/boe, a 41% increase over the average selling price of $53.41/boe for the same period in 2007.

During the second quarter, TUSK drilled 4 gross (4.0 net) wells, 3 in the Clairmont area and 1 at Conroy. For the six months ended June 30, 2008, TUSK drilled 14 gross (13.3 net) wells: 3 gross (3.0 net) at Clairmont, 7 gross (7.0 net) at Conroy and 4.0 gross (3.3 net) at Mega/Gutah. Subsequent to June 30, 2008, one additional well was drilled at Clair and drilling continues at Conroy.

At Conroy, a multi-well development drilling program was started in June. TUSK has licensed 43 wells in the area and expects to drill up to 40 wells before year-end. To date, 14 wells have been drilled, 12 of which are scheduled to be tied in and on-stream in August, and the remaining wells will be tied in and on production in September and October. At this point, we continue to expect average initial production rates of 500 mcf/d of natural gas per well. Recent activity at Conroy also includes the acquisition of additional undeveloped lands. Success at a recent sale of Crown mineral rights and the acquisition of undeveloped land from a competitor added a total of 8,300 net acres and 10 identified drilling locations. TUSK currently holds 167,000 gross (156,000 net) acres of land in the Conroy area. The Conroy property continues to be an exciting growth area for TUSK.

In May 2008, TUSK entered into a financial transaction that effectively acts as a floor price on a portion of our oil production in 2009. TUSK purchased a US$90.00/bbl WTI put option contract on 1,000 bbls/d of oil for the period January 1 to December 31, 2009. TUSK favours this type of financial derivative because it has no affect on our ability to benefit from upward commodity price movements. Furthermore, the arrangement enables TUSK to more confidently forecast funds from operations and is used by TUSK's bankers to determine lending values.

At the end of the second quarter, TUSK had drawn $53.7 million on an available bank facility of $70.0 million. The credit facility and growing funds from operations will provide sufficient capacity to finance TUSK's ongoing capital investment plans.

Outlook

TUSK is entering a very exciting growth phase. Over the next two months, TUSK will bring wells on-stream from successful drilling programs at Clairmont and Conroy. This will result in over 50% growth in production volumes in the fourth quarter compared to the second quarter of 2008.

TUSK's financial report to shareholders for the year ended December 31, 2007, dated March 13, 2008, provided guidance regarding our expectations for results of operations for 2008. TUSK is revising its guidance to reflect lower second quarter 2008 sales volumes and higher commodity prices. Lower second quarter average daily volumes will result in lower than anticipated annual average daily volumes. Funds from operations are expected to be higher as the effect of lower daily volumes will be offset by higher commodity prices. As a result of increased funds from operations and recent drilling success, we have increased our capital expenditure budget. Most of the additional capital will be spent in the Conroy area. The table below summaries the changes to TUSK's guidance.



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March 2008 August 2008
Guidance Guidance
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2008 Production (boe/d)
Annual 5,200 - 5,600 4,800 - 5,000
Exit - greater than 6,500
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2008 Funds from operations ($000s) 65,000 75,000
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2008 Capital expenditures - net ($000s) 70,000 85,000
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Pricing
Oil - WTI (US$/bbl) 90.0 115.00
Gas - AECO (CDN$/mcf) 8.00 8.50
CDN/US ($) 1.00 1.00
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I am very appreciative of the dedication and hard work of our employees and directors. I expect the results of these efforts will soon be reflected in a more valuable stock price.

On behalf of the Board of Directors,

John R. Rooney, Chief Executive Officer

August 8, 2008


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"). 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 six months ended June 30, 2008 and 2007 and should be read in conjunction with the unaudited financial statements for the three and six months ended June 30, 2008 and the audited financial statements and related MD&A for the year ended December 31, 2007. TUSK's audited financial statements and related MD&A for the year ended December 31, 2007 are available on SEDAR at www.sedar.com or on TUSK's website at www.tusk-energy.com. The discussion and analysis has been prepared as of August 8, 2008.

FORWARD-LOOKING STATEMENTS

The information herein contains forward-looking statements and assumptions, such as those relating but not limited to, risks associated with the oil and gas industry in general (e.g. operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserves estimates; the uncertainty of estimates and projections relating to production, costs and expenses; and health, safety and environmental risks), commodity prices, financing sources and exchange rate fluctuations. 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. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this MD&A include, but are not limited to, the lack of precision around estimates of reserves, performance of the Corporation's oil and gas properties, volatility in market prices for oil and gas, estimations of future costs, geological, technical, drilling and processing problems, changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry, and such other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by the Corporation. Readers are cautioned that the foregoing list of important factors is not exhaustive. 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. These statements speak only as of the date of this MD&A. 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. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.

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 and expenditures on asset retirement obligations. 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 Six Months
Ended June 30, Ended June 30,
($000s) 2008 2007 2008 2007
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Cash provided by operating
activities (per GAAP) 13,716 16,797 23,855 24,189
Changes in non-cash working capital 3,065 (6,313) 6,303 (7,570)
Asset retirement obligation
expenditures 16 - 341 -
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Funds from operations 16,797 10,484 30,499 16,619
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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.



OVERVIEW OF THREE MONTHS ENDED JUNE 30, 2008 AND
COMPARISON TO THE THREE MONTHS ENDED MARCH 31, 2008


Second quarter 2008 sales volumes averaged 3,841 boe/d, down 385 boe/d or 9% compared to first quarter volumes of 4,226 boe/d. In the Peace River Arch area, quarter-over-quarter volumes at Clair and Gage experienced temporary declines. At Clair, third party plant and pipeline turn-arounds are taking longer than planned and at Gage, a number of oil wells were shut-in during a workover program. Volumes at Mega/Gutah were also lower in the second quarter where spring break-up restricted water handling. Commodity prices were strong during the second quarter of 2008 with TUSK realizing average selling prices of $117.27/bbl of oil (Q1 2008 - $95.29/bbl) and $10.98/mcf of natural gas (Q1 2008 - $8.17/mcf). On an equivalent unit basis, selling prices increased 26% to $84.53/boe in the second quarter from $67.22/boe in the first quarter. Second quarter 2008 revenue was $29,550,000, up 14% from the first quarter as higher commodity prices overcame lower sales volumes.

Royalties were $5,866,000 (20% of revenue) in the second quarter of 2008, up from $5,204,000 (20% of revenue) in the first quarter. The unit increase in royalties to $16.78/boe in the second quarter from $13.53/boe in the first quarter is consistent with the increase in average selling prices. Operating expenses were $3,986,000 in the second quarter, down 1% from $4,037,000 in the first quarter. The quarter-over-quarter decline in operating expenses did not keep pace with reduced sales volumes as a result of an increase in the unit rate to $11.40/boe (Q1 2008 - $10.49/boe). Operating expenses were higher at Gage in the Peace River Arch area where TUSK is re-working wells. General and administrative ("G&A") costs expensed were $1,381,000 in the second quarter of 2008, up from $1,216,000 in the first quarter. During the second quarter, TUSK incurred higher personnel costs and increased costs associated with reporting to shareholders and regulatory agencies. Expensed G&A was also affected by a reduction in overhead recoveries due to a smaller capital expenditure program in the second quarter. On a per unit basis, G&A costs expensed increased to $3.95/boe in the second quarter from $3.16/boe in the first quarter as a result of higher costs spread over lower volumes. Second quarter 2008 financing charges of $714,000 ($2.04/boe) is only modestly higher than the $690,000 ($1.79/boe) recorded in the first quarter. Higher bank interest in the second quarter more than offset guarantee fees and commitment fees paid in the first quarter.

For the second quarter of 2008, TUSK generated funds from operations of $16,797,000 ($0.19 per share), a 23% improvement over first quarter funds from operations of $13,702,000 ($0.15 per share).

In the second quarter of 2008, TUSK recorded an unrealized loss on commodity derivatives of $272,000, up from $63,000 in the first quarter. These losses are the result of two oil put option contracts that TUSK holds. The increase in the quarter-over-quarter loss is due to two factors. First, as oil prices increase, the fair market value of the put options decrease. Second, TUSK had two contracts in place at the end of the second quarter and one in place at the end of the first quarter.

Stock-based compensation expense increased 29% to $592,000 in the second quarter from $459,000 in the first quarter. During the second quarter of 2008, TUSK recorded a one-time expense regarding the cancellation of outstanding stock options. The grant of stock options during the second quarter was a contributing factor to the increase.

Depletion, depreciation and accretion ("DD&A") expense declined 10% to $12,254,000 in the second quarter of 2008 from $13,627,000 in the first quarter. The decline in DD&A expense was caused primarily by the reduction in sales volumes as the decline in the unit rate to $35.05/boe in the second quarter (Q1 2008 - $35.43/boe) had minimal impact. The quarter-over-quarter decrease in the DD&A unit rate was caused by a small increase in second quarter proved reserves bookings relative to capital expenditures for the period.

TUSK recorded future income taxes of $1,148,000 for the second quarter of 2008 compared to $7,000 in the first quarter. Second quarter 2008 net income of $2,531,000 ($0.03 per share) compares favourably to the first quarter loss of $454,000 ($0.01 per share).

Capital expenditures were $16,914,000 in the second quarter of 2008, which is slightly less than funds from operations. In the Peace River Arch area, 3 gross (3.0 net) wells were drilled at Clair and a fourth was in progress at the end of the quarter. All four wells will be completed and placed on-stream by the end of the summer. At Boundary Lake in the Peace River Arch area, TUSK completed a property acquisition increasing its interest in producing oil wells. At Conroy, TUSK plans an ambitious drilling program that may total 40 wells by late fall 2008. The program has started with one well drilled during the quarter and two wells in progress at quarter-end. During the second quarter of 2008, TUSK realized proceeds of $350,000 on the sale of a non-producing property.

In late May 2008, TUSK purchased a US$90.00/bbl WTI put option contract on 1,000 bbls/d of oil for the period January 1, 2009 to December 31, 2009. The cost to enter into this transaction was $1,250,000, which was paid in full when the contract was entered into. This arrangement is a financial derivative that will effectively act as a floor price on a portion of TUSK's 2009 production. There are no additional costs to this arrangement and the arrangement does not limit or cap selling prices.

Net debt or the working capital deficiency was $58,384,000 at June 30, 2008, which included bank debt of $53,735,000. At March 31, 2008, net debt was $57,649,000 and included bank debt of $36,132,000. During the three months ended June 30, 2008, net debt increased $735,000. During the second quarter of 2008, funds from operations and the minor property sale fully funded TUSK's capital expenditure program.

NORTHEASTERN BRITISH COLUMBIA ASSET SWAP

On March 31, 2008, TUSK completed an asset swap regarding two properties located in northeastern British Columbia. In exchange for its 50% non-operated interests in the Elleh area, TUSK received certain interests in the Conroy area and cash of $11,700,000. As of April 1, 2008, TUSK has no interests in the Elleh area. The asset swap resulted in the termination of TUSK's farm-in commitments in the Conroy area.



FINANCIAL AND OPERATING RESULTS

Sales Volumes

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Three Months Six Months
Ended June 30, Ended June 30,
% %
2008 2007 Change 2008 2007 Change
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Oil (bbls/d) 1,349 1,623 (17) 1,473 1,539 (4)
Natural gas (mcf/d) 14,037 14,115 (1) 14,543 12,772 14
NGLs (bbls/d) 153 107 43 137 92 49
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Combined (boe/d) 3,841 4,083 (6) 4,034 3,760 7
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Sales volumes averaged 3,841 boe/d during the second quarter of 2008, down from 4,083 boe/d during the second quarter of 2007. Comparing the second quarter of 2008 to the same period in 2007, volumes from northeastern British Columbia increased while volumes from Mega/Gutah and the Peace River Arch declined. In 2007, most of TUSK's northeastern British Columbia volumes were generated by the Elleh property. In 2008, TUSK introduced volumes from the Conroy property and at the end of the first quarter of 2008, the Elleh property was sold and additional interests in the Conroy property were acquired. Comparing the two quarters, Conroy volumes were slightly higher than Elleh volumes. At Mega/Gutah, second quarter 2008 volumes have been affected by increasing water cuts, down hole mechanical problems and wet road conditions. TUSK plans to address these issues in the third quarter. In the Peace River Arch area, second quarter 2008 volumes from the Clair property were lower due to third party plant and pipeline turn-arounds.

First half 2008 sales volumes averaged 4,034 boe/d, up from 3,760 boe/d during the first half of 2007. The increase was caused by higher volumes in northeastern British Columbia, partially offset by lower volumes at Mega/Gutah. First half 2008 results include volumes from Elleh and Conroy in the first quarter and only Conroy in the second quarter. Sales volumes from the Peace River Arch area during the first half of 2008 were very similar to volumes recorded for the first half of 2007.

During the first half of 2008, natural gas accounted for 60% and oil and NGLs accounted for 40% of TUSK's sales volumes. TUSK expects its production mix for the balance of 2008 to be in the same range as the first half of the year.

The table below details TUSK's sales volumes by area for the three months ended March 31, 2008 and the three and six-month periods ended June 30, 2008.



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Three Months Three Months Six Months
Ended Ended Ended
March 31, June 30, June 30,
(boe/d) 2008 2008 2008
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Northeastern British Columbia
(Elleh, Conroy, Thetlaandoa) 1,695 1,608 1,652

Peace River Arch, Alberta
(Clair, Gage, Puskwa/Peoria,
Boundary Lake) 2,090 1,871 1,980

Northern Alberta (Mega, Gutah) 441 362 402
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Total 4,226 3,841 4,034
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Commodity Prices and Risk Management

Benchmark Prices

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Three Months Six Months
Ended June 30, Ended June 30,
% %
2008 2007 Change 2008 2007 Change
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Crude oil
WTI (US$/bbl) 123.96 64.93 91 110.94 61.45 81
Edmonton Light
(CDN$/bbl) 126.37 72.60 74 112.34 70.17 60
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Natural gas
(daily spot)
AECO (CDN$/mcf) (1) 10.22 7.07 45 9.06 7.23 25
AECO (CDN$/GJ) 9.68 6.70 44 8.59 6.85 25
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Foreign exchange rate
U.S. dollar to
Canadian dollar 1.0095 1.0991 (8) 1.0070 1.1350 (11)
Canadian dollar
to U.S. dollar 0.9907 0.9104 9 0.9931 0.8822 13
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(1) AECO selling price per mcf is based on a conversion factor of 1 GJ =
0.948 mcf (1 mcf = 1.055 GJ).


Realized Selling Prices

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Three Months Six Months
Ended June 30, Ended June 30,
% %
2008 2007 Change 2008 2007 Change
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Oil ($/bbl) 117.27 70.11 67 105.36 66.86 58
Natural gas ($/mcf) 10.98 7.17 53 9.52 7.26 31
NGLs ($/bbl) 81.54 60.27 35 78.44 56.23 39
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Combined ($/boe) 84.53 54.24 56 75.46 53.41 41
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For 2007 and the first half of 2008, TUSK's oil and natural gas volumes were sold at daily posted prices; therefore, realized selling prices reflect market conditions. Almost all of TUSK's oil production is high quality and produced in Alberta, which resulted in a corporate differential to Edmonton posted prices of approximately $9.00/bbl and $7.00/bbl for the three and six months ended June 30, 2008, respectively. TUSK's average natural gas selling prices were $10.98/mcf and $9.52/mcf for the three and six months ended June 30, 2008, respectively. These prices are above the benchmark AECO daily price primarily due to high quality gas at Conroy, which receives a premium price. Although described in terms of price per unit volume ($/mcf), the selling price of natural gas is actually determined by its energy content or heating value ($/GJ or $/mmbtu). Benchmark prices are based on average heating value natural gas whereas the Conroy property produces natural gas that has approximately 11% more heating value per unit volume.

TUSK holds two put option contracts, which ensures a minimum level of revenue on a portion of its 2008 and 2009 oil production. A put contract is a right and not an obligation and effectively acts as a floor price with no constraint or limitation on upward price movements. Furthermore, because the cost of the contract is paid in full when the arrangement is entered into, there is no ongoing price risk as it relates to the put option. The put contracts enable TUSK to more confidently forecast funds from operations, which are used to finance capital expenditures. In addition, these contracts are used by TUSK's bankers in their determination of lending values.

In September 2007, TUSK paid $781,000 to purchase a US$65.00/bbl WTI put option contract on 1,000 bbls/d of oil for the period January 1, 2008 to December 31, 2008. In May 2008, TUSK paid $1,250,000 to purchase a US$90.00/bbl WTI put option contract on 1,000 bbls/d of oil for the period January 1, 2009 to December 31, 2009. For accounting purposes, the fair value of these contracts is recorded as an asset on the balance sheet with changes in fair value included on the statement of operations. Changes in fair value are charaterized as "unrealized" while the contract is held. Based on a mark-to-market valuation, TUSK would have received $1,024,000 if these contracts were settled at the end of June 2008. Of this amount, $680,000 is recorded as a long-term asset to recognize the portion of the contracts that relate to the period July 1, 2009 to December 31, 2009.

Going forward, TUSK may enter into additional arrangements to reduce its exposure to oil and natural gas price fluctuations.



Revenue

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Three Months Six Months
Ended June 30, Ended June 30,
% %
(000s) 2008 2007 Change 2008 2007 Change
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Oil 14,396 10,357 39 28,239 18,629 52
Natural gas 14,019 9,210 52 25,202 16,784 50
NGLs 1,135 586 94 1,961 939 109
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Combined 29,550 20,153 47 55,402 36,352 52
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Oil and gas revenue for the three months ended June 30, 2008 was $29,550,000 compared to $20,153,000 for the same period of 2007 as higher selling prices overcame lower sales volumes.

First half 2008 oil and gas revenue was $55,402,000 compared to $36,352,000 in the first half of 2007. The increase was due to a combination of higher sales volumes and higher selling prices.



Royalties

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Three Months Six Months
Ended June 30, Ended June 30,
% %
(000s) 2008 2007 Change 2008 2007 Change
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Crown 5,324 3,827 39 10,096 6,830 48
Freehold 272 150 81 506 250 102
Gross overriding 270 239 13 468 517 (9)
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Total 5,866 4,216 39 11,070 7,597 46
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Royalties as a
% of revenue (%) 19.9 20.9 (5) 20.0 20.9 (4)
Royalties per boe
($/boe) 16.78 11.35 48 15.08 11.16 35
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Royalties were $5,866,000 for the second quarter of 2008, up from 4,216,000 for the same period in 2007. The increase was almost exclusively due to higher revenue as the decline in the effective royalty rate to 19.9% in 2008 from 20.9% in 2007 had only a modest impact. The unit rate increase in royalties to $16.78/boe in the second quarter of 2008 from $11.35/boe in the second quarter of 2007 is commensurate with the increase in selling prices per boe.

Comparing the first half of 2008 to the same period in 2007, royalties increased 46% to $11,070,000 almost exclusively as a result of higher revenue. Approximately 90% of TUSK's royalty burden is comprised of amounts paid to provincial Crown agencies with the remaining 10% paid to freehold mineral rights owners and overriding royalty holders. From 2007 to 2008, TUSK experienced an increase in the percentage of freehold royalties and a decrease in overriding royalties relative to total royalties. Most of TUSK's freehold royalty burden is at the Gage property in the Peace River Arch area. TUSK increased its interest in this property in the second quarter of 2007.

In the fall of 2007, the Alberta government announced a New Royalty Framework ("NRF") to take effect on January 1, 2009. TUSK's Conroy project area, which is located in British Columbia, and a small portion of its Alberta production does not attract Alberta Crown royalty and is therefore not subject to the NRF. TUSK estimated the impact on the Corporation's December 31, 2007 before tax net present value of future net revenue discounted at 10% due to the NRF on total proved plus probable reserves to be a reduction of between 5% and 6%. TUSK received an evaluation of its reserves effective March 31, 2008, but did not run sensitivities to the NRF. On April 10, 2008, Alberta's Energy Minister announced new deep resource programs intended to promote high cost oil and gas development. Based on the limited application of these programs to TUSK's current opportunity portfolio and considering the information on these new programs released publicly since that announcement, TUSK anticipates that these programs will not be sufficient to offset the detrimental economic impact of the NRF. TUSK will continue to focus the majority of its capital expenditure plans outside of the Province of Alberta.



Operating Expenses

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Three Months Six Months
Ended June 30, Ended June 30,
% %
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Total ($000s) 3,986 3,064 30 8,023 6,385 26
Per boe ($/boe) 11.40 8.25 38 10.93 9.38 17
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During the second quarter of 2008, TUSK recorded operating expenses of $3,986,000, up 30% from the $3,064,000 incurred in the second quarter of 2007. The overall increase was caused by a 38% increase in the unit rate to $11.40/boe, partially offset by a 6% reduction in sales volumes. Comparing the two periods, TUSK experienced higher per unit operating costs in a number of areas, most notably at Mega/Gutah and the Gage property in the Peace River Arch. Unit costs were higher at Mega/Gutah primarily due to higher water cuts and the fixed portion of expenses spread over lower sales. At Gage, TUSK incurred higher repair and maintenence costs.

Operating expenses were $8,023,000 ($10.93/boe) in the first half of 2008, up from $6,385,000 ($9.38/boe) in the first half of 2007. The overall increase was caused by a 17% increase in the unit rate and a 7% increase in sales volumes. The unit rate increase for the second half of 2008 occurred primarily in the second quarter as described above.

TUSK expects operating expenses to be within a range of $10/boe to $11/boe for the remainder of 2008.



Transportation Expenses

----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
% %
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Total ($000s) 806 873 (8) 1,809 1,652 10
Per boe ($/boe) 2.31 2.35 (2) 2.46 2.43 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Oil transportation includes the cost to ship oil from a TUSK property to a terminal or collection facility. The shipped oil typically meets pipeline specifications and is transported by truck and/or third party pipeline. Natural gas transportation includes the cost to ship natural gas from a TUSK property to a sales point through one or more third party pipelines. Transportation includes the cost to move the gas and does not include processing or production related compression fees. For the second quarter of 2008, TUSK's transportation costs were $806,000 ($2.31/boe), down from $873,000 ($2.35/boe) in the second quarter of 2007. The overall decline is almost exclusively due to the 6% decline in sales volumes for the corresponding periods as the unit rate was very comparable. Similarly, first half 2008 transportation expenses of $1,809,000 ($2.46/boe) increased from $1,652,000 ($2.43/boe) in the same period in 2007, primarily as a result of a commensurate increase in sales volumes.



General and Administrative ("G&A") Expenses

----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
% %
($000s) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Total 2,054 1,924 7 4,076 6,286 (35)
Overhead recoveries (358) (287) 25 (849) (660) 29
Capitalized (315) (520) (39) (630) (1,780) (65)
----------------------------------------------------------------------------
Expensed 1,381 1,117 24 2,597 3,846 (32)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expensed per boe ($/boe) 3.95 3.01 31 3.54 5.65 (37)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Total G&A costs for the second quarter of 2008 were $2,054,000, 7% higher than the $1,924,000 incurred in the second quarter of 2007. Comparing the two periods, TUSK experienced a modest cost increase in most administrative areas in 2008. Although TUSK's capital expenditure program was lower in the second quarter of 2008 than in the same period of 2007, overhead recoveries increased to $358,000 in 2008 from $287,000 in 2007. A large portion of TUSK's second quarter 2007 capital expenditure program did not generate overhead recoveries (e.g. non-operated projects and property acquisitions). Capitalized G&A was $315,000 in the second quarter of 2008, down 40% from $520,000 in the second quarter of 2007, primarily as a result of a more conservative capitalization policy. G&A costs expensed for the second quarter of 2008 were $1,381,000 ($3.95/boe), up from $1,117,000 ($3.01/boe) for the same period last year. The 31% increase in the unit rate was caused by a combination of higher expenses spread over lower sales volumes.

First half 2008 total G&A costs were $4,076,000, down from $6,286,000 incurred in the first half of 2007. G&A costs were higher in 2007 primarily as a result of significant one-time severance and retention costs following the business combination with Zenas Energy Corp. Compared to the first half of 2007, capitalized G&A declined 65% to $630,000 in the second half of 2008. A portion of the retention costs incurred in 2007 were capitalized to oil and gas properties. Expensed G&A costs were $2,597,000 ($3.54/boe) in the first half of 2008, down from $3,846,000 ($5.65/boe) for the same period in 2007. The lower unit rate was caused by lower expenses spread over higher volumes.



Financing Charges
----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
% %
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Total ($000s) 714 408 75 1,404 408 244
Per boe ($/boe) 2.04 1.10 85 1.91 0.60 218
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Financing charges are comprised primarily of interest paid on TUSK's credit facility and also include commitment fees paid to TUSK's bankers when the facility is renewed (typically annually) and guarantee fees for letters of credit issued in connection with project commitments or security deposits. Financing charges in 2008 also includes Part XII.6 Tax, which is calculated with reference to unspent amounts remaining from the issue of flow-through shares in December 2007. Financing charges were $714,000 ($2.04/boe) in the second quarter of 2008, up from $408,000 ($1.10/boe) in the second quarter of 2007. Financing charges were higher in the second quarter of 2008 primarily as a result of higher average debt levels. Comparing the first half of 2008 to the first half of 2007, financing charges increased 244% to $1,404,000. TUSK carried bank debt throughout the first half of 2008, but had no bank debt until the second quarter of 2007.

Stock-Based Compensation

Stock-based compensation totaled $794,000 in the second quarter of 2008 (Q2 2007 - $742,000), of which $592,000 was expensed (Q2 2007 - $537,000) and $202,000 was capitalized to oil and gas properties (Q2 2007 - $205,000). During the second quarter of 2008, 1,672,000 stock options were granted, 870,000 options were cancelled and 33,333 options were forfeited. The options granted vest over three years. Second quarter 2008 stock-based compensation expense includes $160,000 regarding the cancelled options.

For the first half of 2008, stock-based compensation totaled $1,384,000 (first half 2007 - $2,026,000), of which $1,051,000 was expensed (first half 2007 - $1,014,000) and $333,000 was capitalized to oil and gas properties (first half 2007 - $1,012,000). Stock-based compensation was higher in 2007 primarily as a result of the accelerated vesting of options triggered by staff rationalization efforts following the business combination with Zenas Energy Corp. During the first half of 2008, 1,702,000 stock options were granted, 870,000 options were cancelled and 373,333 options were forfeited. At June 30, 2008, TUSK had 8,940,500 stock options outstanding with a weighted average exercise price of $2.61 per share.

Gain on Sale of Investment

On January 1, 2007, TUSK held an investment in a publicly traded oil and gas company with a cost basis of $4,270,000. 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 adjustment was made to increase the carrying value of this investment by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000. At March 31, 2007, the carrying value of the investment was adjusted to fair value resulting in an unrealized loss of $491,000. The investment was sold during the second quarter of 2007 for proceeds of $7,367,000, resulting in a gain of $1,105,000 and $614,000 for the three and six months ended June 30, 2007, respectively.



Depletion, Depreciation and Accretion ("DD&A") Expense
----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
($000s) % %
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Depletion and
depreciation of
oil and gas
properties 12,113 9,852 23 25,628 18,052 42
Accretion of asset
retirement
obligations 101 67 51 184 128 44
Depreciation of
office equipment
and leasehold
improvements 40 41 (2) 69 70 (1)
----------------------------------------------------------------------------
Total 12,254 9,960 23 25,881 18,250 42
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per boe ($/boe) 35.05 26.81 31 35.25 26.81 31
----------------------------------------------------------------------------
----------------------------------------------------------------------------


DD&A expense was $12,254,000 ($35.05/boe) for the second quarter of 2008 and $25,881,000 ($35.25/boe) for the first half of 2008, representing increases of 23% and 42%, respectively. The increases were caused primarily by a 31% increase in the unit rate for both periods as the impact from differences in sales volumes was minor. Almost all of TUSK's DD&A expense is comprised of depletion and depreciation of oil and gas properties, which is based on a ratio of production volumes for the period to proved reserves assignments at the end of the period. Increasing unit rates are caused when the rate of proved reserves assignments falls relative to the sum of capital expenditures incurred plus estimated future development costs. The unit rate increased in the first quarter of 2008 primarily due to the northeastern British Columbia asset swap (see above). The swap resulted in an increase in proved plus probable reserves and a decrease in proved reserves. As the development of the Conroy property continues, TUSK believes that probable reserves will be converted to proved reserves, causing the oil and gas depletion and depreciation unit rate to decrease. Although there are many other factors that could affect it, the unit rate in the second quarter of 2008 was slightly lower than the rate in the first quarter.

Income Taxes

For the six months ended June 30, 2008, TUSK recorded income before taxes of $3,232,000 and future income taxes of $1,155,000, resulting in an effective tax rate of 35.7%. The effective rate is higher than the current statutory rate primarily as a result of stock-based compensation expense, which is non-deductible for income tax purposes. For the first half of 2007, TUSK recorded a net loss before taxes of $2,031,000 and a future tax reduction of $467,000. TUSK did not pay current income taxes in 2007 and does not expect to incur cash income taxes in 2008. At June 30, 2008, TUSK had approximately $243,257,000 of available income tax deductions, none of which are subject to successor restrictions.

The table below summarizes TUSK's estimated income tax deductions as at June 30, 2008.



----------------------------------------------------------------------------
Amount Annual Rate
----------------------------------------------------------------------------
($000s) (%)
Non-capital losses 3,787 100
Canadian Exploration Expenses 16,054 100
Canadian Development Expenses 78,005 30
Canadian Oil and Gas Property Expenses 76,560 10
Undepreciated capital costs 63,717 25
Share issue costs 4,213 20
Cumulative Eligible Capital 921 7
----------------------------------------------------------------------------
243,257 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Funds from Operations

TUSK generated funds from operations of $16,797,000 ($0.19 per share - basic and diluted) for the second quarter of 2008, up from $10,484,000 ($0.12 per share - basic and diluted) for the second quarter of 2007. The 60% increase in funds from operations was driven by higher commodity prices, partially offset by higher operating expenses, G&A expenses and financing charges.

Funds from operations were $30,499,000 ($0.34 per share - basic and diluted) for the first half of 2008, up from $16,619,000 ($0.19 per share - basic and diluted) in the same period in 2007. Comparing the two periods, funds from operations was positively affected by higher commodity prices and lower G&A expenses and negatively affected by higher operating expenses and higher financing charges. The 79% increase in the per share amounts is the result of strong growth in funds from operations with only a minor increase in the average number of shares outstanding.



Cash Netbacks
----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
% %
($/boe) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Oil and gas revenue 84.53 54.24 56 75.46 53.41 41
Royalties (16.78) (11.35) 48 (15.08) (11.16) 35
Operating expenses (11.40) (8.25) 38 (10.93) (9.38) 17
Transportation
expenses (2.31) (2.35) (2) (2.46) (2.43) 1
----------------------------------------------------------------------------
Operating netback 54.04 32.29 67 46.99 30.44 54
G&A expenses (3.95) (3.01) 31 (3.54) (5.65) (37)
Financing charges (2.04) (1.10) 85 (1.91) (0.60) 218
Interest income - 0.03 (100) - 0.23 (100)
----------------------------------------------------------------------------
Corporate netback 48.05 28.21 70 41.54 24.42 70
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Comparing the second quarter of 2008 to the second quarter of 2007, operating netbacks increased 67% to $54.04/boe primarily as a result of higher commodity prices partially offset by higher royalties and operating expenses. Corporate cash netbacks for the same reporting periods increased 70% to $48.05/boe as the increase in operating netbacks offset higher per unit G&A expenses and financing charges.

Operating netbacks were $46.99/boe in the first half of 2008, up from $30.44/boe in the same period of 2007. The increase was driven by higher commodity prices, reduced by higher royalties and operating expenses. Corporate cash netbacks increased 70% to $41.54/boe in the first half of 2008 assisted by lower G&A expenses and negatively affected by higher financing charges.

Net Income (Loss)

TUSK recorded net income of $2,531,000 ($0.03 per share - basic and diluted) for the six months ended June 30, 2008, up from $866,000 ($0.01 per share - basic and diluted) for the same period in 2007. Comparing the two periods, 2007 included lower DD&A charges and a gain on investment whereas 2008 included higher operating revenue and increased income taxes.

For the six months ended June 30, 2008, net income was $2,077,000 ($0.02 per share - basic and diluted) compared to a loss of $1,564,000 ($0.02 per share - basic and diluted) for the first half of 2007. First half 2008 results were positively affected by higher operating revenue and negatively affected by higher DD&A charges and increased income taxes.



Capital Expenditures
----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
% %
($000s) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Land acquisition
and retention 881 525 68 1,110 1,053 5
Geological and
geophysical 1,184 6,648 (82) 1,555 9,671 (84)
Drilling and
completions 8,321 8,693 (4) 22,275 40,103 (44)
Well equipping,
tie-ins and
facilities 3,188 7,469 (57) 14,400 18,901 (24)
Property
acquisitions 3,000 9,020 (67) 3,000 9,049 (67)
Capitalized
overhead 315 521 (40) 630 1,780 (65)
Office 25 167 (85) 38 469 (92)
----------------------------------------------------------------------------
Total 16,914 33,043 (49) 43,008 81,026 (47)
Property
dispositions (350) (1,937) (82)(12,051) (1,937) 522
----------------------------------------------------------------------------
Net 16,564 31,106 (47) 30,957 79,089 (61)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The table below details TUSK's capital expenditures by area for the three
months ended March 31, 2008 and the three and six-month periods ended June
30, 2008.


----------------------------------------------------------------------------
Three Months Three Months Six Months
Ended Ended Ended
March 31, June 30, June 30,
($000s) 2008 2008 2008
----------------------------------------------------------------------------
Northeastern British Columbia
(Elleh, Conroy, Thetlaandoa) 16,522 7,064 23,586
Peace River Arch, Alberta
(Clair, Gage, Puskwa/Peoria, Boundary Lake) 1,058 8,036 9,094
Northern Alberta (Mega, Gutah) 8,049 1,362 9,411
Corporate 465 452 917
----------------------------------------------------------------------------
Total 26,094 16,914 43,008
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Capital expenditures totaled $43,008,000 for the six months ended June 30, 2008, down from $81,026,000 in the first half of 2007. During the first half of 2008, 55% of expenditures were incurred in northeastern British Columbia, most of which was allocated to the Conroy area. Activity in the Conroy area included the drilling of 6 gross (6.0 net) gas wells in the first quarter and 1 gross (1.0 net) gas well in the second quarter. The first quarter wells were the last wells drilled of the 15-well winter drilling program and the second quarter well is the first well of the summer drilling program. Plans for the summer program include drilling up to 40 wells. First half activity at Conroy also included the construction of two pipelines and a gas processing facility, the completion of a 3D seismic program and the acquisition of additional undeveloped mineral rights.

In the Peace River Arch area, TUSK drilled 3 gross (3.0 net) wells during the second quarter of 2008 and a fourth well was in progress at the end of the quarter. These wells were drilled at Clair and all four wells are expected to be on production in August. At Gage, in the Peace River Arch area, TUSK fractured three wells and completed a 3D seismic program. At Boundary Lake, TUSK completed a property acquisition, increasing its interest in producing oil wells.

At Mega/Gutah in the Northern area, 4 gross (3.3 net) horizontal wells were drilled in the first quarter of 2008, of which 2 gross (2.0 net) wells were placed on production and 2 gross (1.3 net) wells are standing. TUSK plans additional work on one of the producing wells, including the extension of an existing horizontal leg. One of the standing wells is waiting on a workover/stimulation and the second standing well is waiting on the drilling of a second horizontal leg. Certain of these operations will take place in late summer.

During the six months ended June 30, 2008, TUSK drilled 14 gross (13.3 net) wells, resulting in 7 gross (7.0 net) gas wells, 5 gross (5.0 net) oil wells and 2 gross (1.3 net) standing wells.

The results for the first half of 2008 include proceeds on disposition of property and equipment of $12,051,000. Of the total, $11,700,000 relates to the northeastern British Columbia asset swap and the balance relates to the disposition of non-producing assets.

OUTLOOK

TUSK anticipates higher production volumes in the third and fourth quarters of 2008. At Clairmont, four recently drilled wells are expected to be on-stream in August. The summer drilling program at Conroy started in June and TUSK expects to drill up to 40 wells by year-end. These are lower risk development wells, the first of which will be on production in August.

TUSK's MD&A for the year ended December 31, 2007, which was dated March 13, 2008, included guidance regarding management's expectations for results of operations for 2008. TUSK is updating its guidance at this time to reflect lower second quarter average daily sales volumes and higher commodity prices. Lower second quarter sales volumes will result in lower than anticipated annual average daily volumes. Funds from operations are expected to be higher as the effect of lower daily volumes will be offset by higher commodity prices. Higher funds from operations will allow for an expanded capital expenditure program. Most of the additional capital expenditures will be spent in the Conroy area.



Guidance
----------------------------------------------------------------------------
April 2008 August 2008
----------------------------------------------------------------------------
2008 Production (boe/d)
Annual 5,200 - 5,600 4,800 - 5,000
Exit - greater than
6,500
----------------------------------------------------------------------------
2008 Funds from operations ($000s) 65,000 75,000
----------------------------------------------------------------------------
2008 Capital expenditures - net ($000s) 70,000 85,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Pricing
Oil - WTI (US$/bbl) 90.0 115.00
Gas - AECO (CDN$/mcf) 8.00 8.50
CDN/US ($) 1.00 1.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Readers are cautioned that actual results may vary from the above mentioned forward-looking information and the variances may be material. See "Forward-Looking Information".

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2008, TUSK had a $75,000,000 demand credit facility comprised of a $60,000,000 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 June 30, 2008, the effective annual interest rate was 5.00% on the operating line and 5.25% on the acquisition/development line. 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.

In July 2008, the facility was amended to increase the operating line to $70,000,000 and cancel the acquisition/development line.

In the first half of 2008, TUSK's capital expenditure program was financed primarily by funds from operations and proceeds received from the disposition of property and equipment. Net debt at June 30, 2008 was $58,384,000, up slightly from $56,570,000 at December 31, 2007. TUSK anticipates that existing bank lines and funds from operations will be sufficient to finance planned capital expenditures for the balance of 2008. Bank debt will increase when capital expenditures exceed funds from operations and then will be reduced as new production is placed on-stream. The majority of TUSK's capital expenditure program for the balance of 2008 is discretionary. TUSK will incur non-discretionary expenditures, such as oil and gas well operating expenses, interest expense and G&A costs.

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.

In April 2008, The Toronto Stock Exchange (the "TSX") accepted TUSK's Notice of Intention to Make a Normal Course Issuer Bid (the "Bid"). Under the Bid, TUSK will have the right to purchase for cancellation up to a maximum of 4,522,111 of its common shares, representing approximately 5% of its outstanding common shares. The shares will be acquired through the facilities of the TSX. The Bid will remain in effect until the earlier of April 3, 2009 or until TUSK has purchased the maximum number of shares permitted under the Bid. A daily maximum of 74,534 common shares may be purchased for cancellation pursuant to Normal Course Issuer Bid rules. As at June 30, 2008, no shares were purchased pursuant to the Bid.

A copy of the Notice of Intention to Make a Normal Course Issuer Bid may be obtained, without charge, by writing to the Corporate Secretary of the Corporation at 1900, 700 - 4 Avenue S.W., Calgary, Alberta T2P 3J4.

OUTSTANDING SHARE DATA

As of June 30, 2008 and the date of this MD&A, TUSK had 90,442,222 common shares and 8,940,500 stock options outstanding.

CONTRACTUAL OBLIGATIONS

Drilling Rigs

TUSK is a party to a contract regarding the utilization of a drilling rig. TUSK is obligated to utilize the rig for a minimum of 36 days for the period July 1, 2008 to February 5, 2009 and 165 days for the year ended February 5, 2010. If the utilization falls short of the minimum requirement, TUSK will be required to pay a standby fee of $6,800 per day for each day of the shortfall. TUSK expects to fully utilize the drilling rig and does not anticipate paying the standby fee.

Office Space

TUSK has a lease commitment for office space that expires on January 31, 2013. The annual payments due pursuant to this obligation are as follows: 2008 (6 months) - $260,000; 2009 - $536,000; 2010 to 2012 - $540,000; and 2013 - $44,000.



----------------------------------------------------------------------------
Payment Due by Period
------------------------------------------------
Less Than 1 - 3 4 - 5 After
($000s) Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------
Bank debt 53,735 53,735 - - -
Drilling rigs 1,367 245 1,122 - -
Office space 2,460 260 1,076 1,080 44
----------------------------------------------------------------------------
Total 57,562 54,240 2,198 1,080 44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note: The period less than 1 year is July 1 to December 31, 2008.


CONTINGENCIES

TUSK is involved in litigation matters arising out of the ordinary course and conduct of its business. Claims made against the Corporation total approximately $2,400,000 and the Corporation's counterclaims exceed $6,000,000. The likelihood of contingent liabilities resulting from these matters is not determinable and related potential losses cannot be reasonably estimated. No accrual of loss has been made to the financial statements.

RELATED PARTY TRANSACTIONS

An officer of TUSK is a director and significant shareholder of a private company that provides project management consulting services and systems support to TUSK. For the six months ended June 30, 2008, this company was paid $224,000 (six months ended June 30, 2007 - $70,000). Of this amount, $89,000 was charged to G&A expenses and $135,000 to property and equipment.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. For the six months ended June 30, 2008, royalties of $158,000 were paid to this company (six months ended June 30, 2007 - $77,000). All of the payments made were charged to royalties.

The above-mentioned transactions 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.



SELECTED QUARTERLY INFORMATION

----------------------------------------------------------------------------
2008 2007
(unaudited) Q2 Q1 Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Financial Highlights
($000s, except per share
amounts)
Oil and gas revenue 29,550 25,852 20,242 20,560 20,153 16,200
Royalties (5,866) (5,204) (3,808) (3,546) (4,216) (3,381)
Interest income - - - 1 9 146
Operating (3,986) (4,037) (4,551) (3,765) (3,064) (3,320)
Transportation (806) (1,003) (999) (1,171) (873) (779)
G&A (1,381) (1,216) (1,155) (1,074) (1,117) (2,730)
Financing charges (714) (690) (818) (586) (408) -
Contract termination - - (2,000) - - -
Income taxes-current - - - - - -
----------------------------------------------------------------------------
Funds from operations 16,797 13,702 6,911 10,419 10,484 6,136
Per share
- basic and diluted 0.19 0.15 0.08 0.12 0.12 0.07
Commodity derivatives (272) (63) (627) (45) - -
Stock-based
compensation (592) (459) (625) (707) (537) (477)
Gain (loss) on
investment - - - - 1,105 (491)
DD&A (12,254) (13,627) (11,928) (10,741) (9,960) (8,290)
Future income taxes (1,148) (7) 2,279 99 (226) 693
----------------------------------------------------------------------------
Net income (loss) 2,531 (454) (3,990) (975) 866 (2,429)
Per share
- basic and diluted 0.03 (0.01) (0.04) (0.01) 0.01 (0.03)
----------------------------------------------------------------------------
Issue of shares (net) - - 2,480 - - -
Capital expenditures 16,914 26,094 20,774 7,899 33,045 47,983
Proceeds on disposal (350) (11,701) (832) - (1,937) -
Corporate acquisition - - - - - -
Working capital (58,384) (57,649) (56,570) (45,128) (47,416) (27,899)
Shareholders' equity 225,309 221,984 222,536 229,074 229,172 227,564
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Highlights
Sales volumes
Oil and NGLs (bbls/d) 1,502 1,718 1,603 1,806 1,730 1,531
Natural gas (mcf/d) 14,037 15,049 14,004 15,652 14,115 11,413
Total (boe/d) 3,841 4,226 3,937 4,415 4,083 3,433
----------------------------------------------------------------------------
Selling prices
Oil ($/bbl) 117.27 95.29 84.76 79.13 70.11 63.20
Natural gas ($/mcf) 10.98 8.17 6.13 5.25 7.17 7.37
NGLs ($/bbl) 81.54 74.57 69.38 61.85 60.27 50.60
----------------------------------------------------------------------------
Operating netbacks
($/boe)
Selling price 84.53 67.22 55.89 50.62 54.24 52.48
Royalties (16.78) (13.53) (10.51) (8.73) (11.35) (10.94)
Operating expenses (11.40) (10.49) (12.56) (9.27) (8.25) (10.74)
Transportation expenses (2.31) (2.61) (2.76) (2.88) (2.35) (2.52)
----------------------------------------------------------------------------
Field netbacks 54.04 40.59 30.06 29.74 32.29 28.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Common Shares Outstanding
Weighted average (#000s)90,442 90,442 88,931 88,880 88,880 88,880
Period end (#000s) 90,442 90,442 90,442 88,880 88,880 88,880
----------------------------------------------------------------------------
----------------------------------------------------------------------------


2006
(unaudited) Q4 Q3
----------------------------------------------------------------------------
Financial Highlights
($000s, except per
share amounts)
Oil and gas revenue 6,327 4,657
Royalties (1,258) (678)
Interest income 230 318
Operating (834) (1,089)
Transportation (291) (161)
G&A (1,268) (793)
Financing charges - -
Contract termination - -
Income taxes-current 28 (28)
----------------------------------------------------------------------------
Funds from operations 2,934 2,226
Per share
- basic and diluted 0.06 0.04
Commodity derivatives - -
Stock-based
compensation (1,546) (407)
Gain (loss) on
investment - -
DD&A (4,368) (2,154)
Future income taxes 637 (85)
----------------------------------------------------------------------------
Net income (loss) (2,343) (420)
Per share
- basic and diluted (0.05) (0.01)
----------------------------------------------------------------------------
Issue of shares (net) 98,721 -
Capital expenditures 13,698 11,273
Proceeds on disposal - -
Corporate acquisition 100,140 -
Working capital 11,957 24,724
Shareholders' equity 226,587 127,793
----------------------------------------------------------------------------
Operating Highlights
Sales volumes
Oil and NGLs
(bbls/d) 699 502
Natural gas (mcf/d) 3,636 2,493
Total (boe/d) 1,305 918
Selling prices
Oil ($/bbl) 58.55 71.23
Natural gas ($/mcf) 7.90 6.02
NGLs ($/bbl) 24.77 55.72
Operating netbacks
($/boe)
Selling price 52.68 55.14
Royalties (10.47) (8.03)
Operating expenses (6.94) (12.90)
Transportation
expenses (2.42) (1.90)
----------------------------------------------------------------------------
Field netbacks 32.85 32.31
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Common Shares Outstanding
Weighted average
(#000s) 51,662 51,766
Period end (#000s) 88,880 51,637
----------------------------------------------------------------------------
----------------------------------------------------------------------------


FINANCIAL INSTRUMENTS

Commodity Price Risk Management

As at June 30, 2008, TUSK had the following put option contracts in place:

----------------------------------------------------------------------------
Purchase Type of Quantity Contract Contract
Date Time Period Contract Contracted Price Cost
----------------------------------------------------------------------------
(bbls/d) ($/bbl) ($000s)
Sep. 2007 Jan. to Dec. 2008 Financial/Oil 1,000 65.00 floor 781
May 2008 Jan. to Dec. 2009 Financial/Oil 1,000 90.00 floor 1,250
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Based on a mark-to-market valuation, TUSK would have received $1,024,000 if the contracts were settled at the end of June 2008. Of this amount, $344,000 is recorded as a current asset and the balance is a long-term asset. Changes in the fair value are included in unrealized gain or loss on commodity derivatives in the statement of operations. (See "Commodity Prices and Risk Management - Realized Selling Prices".)

Credit Risk

Credit risk is the risk of financial loss to TUSK if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from TUSK's receivables from joint interest partners and petroleum and natural gas marketers.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. TUSK's policy to mitigate credit risk associated with these balances is to establish marketing relationships with large purchasers. The Corporation historically has not experienced any collection issues with its petroleum and natural gas marketers. Joint interest receivables are typically collected within one to three months of the joint interest bill being issued to the partner. TUSK attempts to mitigate the risk from joint interest receivables by obtaining partner approval of significant capital expenditures prior to expenditure. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors, such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with joint interest partners as disagreements occasionally arise that increase the potential for non-collection. TUSK does not typically obtain collateral from petroleum and natural gas marketers or joint interest partners; however, TUSK does have the ability to withhold production from joint interest partners in the event of non-payment.

TUSK manages the credit exposure related to short-term investments by selecting counterparties based on credit ratings and monitors all investments to ensure a stable return, avoiding complex investment vehicles with higher risk, such as asset-backed commercial paper.

The carrying amount of accounts receivable represents the maximum credit exposure. TUSK did not have an allowance for doubtful accounts as at June 30, 2008 and 2007 and did not provide for any doubtful accounts nor was it required to write-off any receivables during the six months ended June 30, 2008 and 2007.

Foreign Currency Exchange Risk

Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. Although substantially all of TUSK's petroleum and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for petroleum and natural gas are impacted by changes in the exchange rate between the Canadian and United States dollar. TUSK had no forward exchange rate contracts in place as at or during the six months ended June 30, 2008.

Fair Value of Financial Instruments

TUSK's financial instruments as at June 30, 2008 and December 31, 2007 include accounts receivable, derivative contracts, accounts payable and accrued liabilities, and bank debt. The fair value of accounts receivable and accounts payable and accrued liabilities approximate their carrying amounts due to their short terms to maturity. The fair value of derivative contracts is determined using the mark-to-market method, which assumes the contract is closed out in the open market at the balance sheet date. Bank debt bears interest at a floating market rate, and accordingly, the fair market value approximates the carrying value.

Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. TUSK is exposed to interest rate fluctuations on its bank debt, which bears a floating rate of interest. TUSK had no interest rate swap or financial contracts in place as at or during the six months ended June 30, 2008.

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

- Marketability of oil and natural gas produced

- Substantial capital requirements and access to capital markets

- Environmental risks

- Insurance

- Reliance on operators and key employees

- Third party credit risk

- Changes in legislation and incentive programs

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.

CHANGES IN ACCOUNTING POLICIES

(a) Financial Instruments - Disclosures and Presentation

In December 2006, the Accounting Standards Board ("AcSB") issued CICA section 3862, "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 for a 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.

Sections 3862 and 3863 became effective and were adopted by TUSK on January 1, 2008.

(b) Capital Disclosures

In December 2006, the AcSB issued new CICA section 1535, "Capital Disclosures" requiring disclosures regarding an entity's objectives, policies and processes for managing capital. These disclosures include a description of what TUSK manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into TUSK's management of capital, whether the requirements have been complied with, or consequences of non-compliance and an explanation of how TUSK is meeting its objective for managing capital. In addition, quantitative data about capital and whether TUSK has complied with all capital requirements are also required.

Section 1535 became effective and was adopted by TUSK on January 1, 2008.

(c) International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards of Canada are to converge with IFRS. The AcSB has indicated that Canadian entities will need to begin reporting under IFRS by the first quarter of 2011 with appropriate comparative data from the prior year. Under IFRS, the primary audience is capital markets, and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy that must be addressed.

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The AcSB issued the "omnibus" exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the (continued) use of U.S. GAAP by domestic issuers. The eventual changeover to IFRS represents changes due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company's reported financial position and results of operations.

TUSK has not completed development of its IFRS changeover plan, which will include project structure and governance, resourcing and training, analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS as well as potential IFRS 1 exemptions. TUSK expects to complete its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements, by December 31, 2008.

The International Accounting Standards Board has stated that it plans to issue an exposure draft relating to certain amendments to IFRS 1 in order to make it more useful to Canadian entities adopting IFRS for the first time. One such exemption relating to full cost oil and gas accounting is expected to result in a reduced administrative transition from the current Canadian AcG-16 to IFRS. It is anticipated that this exposure draft will not result in an amended IFRS 1 standard until late in 2009. The amendment will potentially permit the Company to apply IFRS prospectively to their full cost pool, rather than the retrospective assessment of capitalised exploration and development expenses, with the proviso that a ceiling test, under IFRS standards, be conducted at the transition date.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Other than described above (see "Changes in Accounting Policies"), there has been no change in TUSK's accounting estimates and policies since December 31, 2007. A summary of TUSK's significant accounting policies can be found in note 1 to the December 31, 2007 audited financial statements.

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 ("CEO") and Chief Financial Officer ("CFO") have concluded, based on their evaluation as of the end of the period covered by the Corporation's interim filings for the most recently completed interim period, 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 CEO and CFO 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 CEO and CFO are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Management has designed internal controls over financial reporting as at June 30, 2008.

In addition, National Instrument 52-109 requires CEOs and CFOs to certify that they have designed internal controls over financial reporting, or caused it to be designed under their supervision.

There is substantial overlap in systems and controls between the definition of disclosure controls and procedures and internal control over financial reporting. TUSK has designed controls for this process and has conducted an evaluation that has identified several potential weaknesses in its controls. Based on management's ongoing assessment and review of the design of internal controls over financial reporting, it was noted that due to the limited number of staff at TUSK, it is not feasible to achieve complete segregation of incompatible duties. The limited number of staff has also led the Corporation to identify a weakness with respect to accounting for complex and non-routine accounting transactions as TUSK does not have sufficient number of finance personnel with technical accounting knowledge to address all complex and non-routine accounting matters that may arise. Neither of these weaknesses has resulted in a misstatement in TUSK's interim or annual financial statements; however, as there is no guarantee that a material misstatement would not be prevented or detected, these items have been classified as material weaknesses.

Several internal controls over financial reporting have been designed, which provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Management and Board of Director reviews are utilized to mitigate the risk of material misstatement in financial reporting and to ensure internal controls remain effective.

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, including its Annual Information Form, is available on SEDAR at www.sedar.com or on TUSK's website at www.tusk-energy.com.



FINANCIAL STATEMENTS

BALANCE SHEETS

----------------------------------------------------------------------------
As at June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
(unaudited) ($000s)
Assets
Current
Investments (note 3) 258 258
Accounts receivable 14,322 14,504
Prepaid expenses and deposits 590 595
Commodity derivatives (note 9) 344 109
----------------------------------------------------------------------------
15,514 15,466

Commodity derivatives (note 9) 680 -

Property, plant and equipment (note 4) 303,149 295,989
----------------------------------------------------------------------------
319,343 311,455
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities 20,163 31,163
Bank loan (note 5) 53,735 40,873
----------------------------------------------------------------------------
73,898 72,036
Future income taxes (note 6) 14,696 12,717
Asset retirement obligations (note 7) 5,440 4,166
----------------------------------------------------------------------------
94,034 88,919
----------------------------------------------------------------------------
Shareholders' equity
Share capital (note 8) 223,066 223,754
Contributed surplus (note 8) 11,346 9,962
Deficit (9,103) (11,180)
----------------------------------------------------------------------------
225,309 222,536
----------------------------------------------------------------------------
319,343 311,455
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent event (note 5)
Commitments and contingencies (note 11)

See accompanying notes.


STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND DEFICIT

----------------------------------------------------------------------------
Three Months Six Months
(unaudited) ($000s, except Ended June 30, Ended June 30,
per share amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue
Oil and gas revenue 29,550 20,153 55,402 36,352
Royalties (5,866) (4,216) (11,070) (7,597)
Unrealized loss on
commodity derivatives
(note 9) (272) - (335) -
----------------------------------------------------------------------------
23,412 15,937 43,997 28,755
Interest income - 9 - 155
----------------------------------------------------------------------------
23,412 15,946 43,997 28,910
----------------------------------------------------------------------------
Expenses
Operating 3,986 3,064 8,023 6,385
Transportation 806 873 1,809 1,652
General and administrative 1,381 1,117 2,597 3,846
Financing charges 714 408 1,404 408
Stock-based compensation
(note 8) 592 537 1,051 1,014
Gain on investment (note 3) - (1,105) - (614)
Depreciation, depletion and
accretion 12,254 9,960 25,881 18,250
----------------------------------------------------------------------------
19,733 14,854 40,765 30,941
----------------------------------------------------------------------------
Income (loss) before taxes 3,679 1,092 3,232 (2,031)
Income taxes (note 6)
Future (reduction) 1,148 226 1,155 (467)
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) for the period 2,531 866 2,077 (1,564)
----------------------------------------------------------------------------
Deficit, beginning of period (11,634) (7,082) (11,180) (6,775)
Change of accounting policies
(net of tax of $360) (note 3) - - - 2,123
----------------------------------------------------------------------------
Deficit, end of period (9,103) (6,216) (9,103) (6,216)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per
share (note 8)
Basic and diluted 0.03 0.01 0.02 (0.02)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes.


STATEMENTS OF CASH FLOWS

----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
(unaudited) ($000s) 2008 2007 2008 2007
----------------------------------------------------------------------------
Operating activities
Net income (loss) for
the period 2,531 866 2,077 (1,564)
Items not involving cash:
Stock-based compensation 592 537 1,051 1,014
Gain on investment - (1,105) - (614)
Depreciation, depletion
and accretion 12,254 9,960 25,881 18,250
Commodity derivatives 272 - 335 -
Future tax expense
(reduction) 1,148 226 1,155 (467)
Asset retirement
obligation expenditures (16) - (341) -
----------------------------------------------------------------------------
16,781 10,484 30,158 16,619
Change in non-cash working
capital (note 10) (3,065) 6,313 (6,303) 7,570
----------------------------------------------------------------------------
13,716 16,797 23,855 24,189
----------------------------------------------------------------------------
Financing activities
Increase in bank loan 13,459 20,490 12,862 29,191
Change in non-cash working
capital (note 10) - - (10) -
----------------------------------------------------------------------------
13,459 20,490 12,852 29,191
----------------------------------------------------------------------------
Investing activities
Expenditures on property
and equipment (16,914) (33,043) (43,008) (81,026)
Proceeds on disposition of
property and equipment 350 1,937 12,051 1,937
Proceeds on sale of
investment (note 3) - 7,367 - 7,367
Change in non-cash working
capital (note 10) (10,611) (13,548) (5,750) (8,845)
----------------------------------------------------------------------------
(27,175) (37,287) (36,707) (80,567)
----------------------------------------------------------------------------
Decrease in cash and cash
equivalents - - - (27,187)
Cash and cash equivalents,
beginning of period - - - 27,187
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period - - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid 464 408 1,075 408
Taxes paid - - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental disclosure of cash flow information (note 10)

See accompanying notes.


NOTES TO FINANCIAL STATEMENTS

Three and Six Months Ended June 30, 2008 and 2007
(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. TUSK was incorporated on September 24, 2004 and commenced operations on November 2, 2004.

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 year ended December 31, 2007, except as described in note 2 below. The interim financial statements contain disclosures that are supplemental to TUSK's December 31, 2007 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 June 30, 2008 and the results of its operations for the three and six months ended June 30, 2008. The interim financial statements should be read in conjunction with TUSK's audited financial statements and notes thereto for the year ended December 31, 2007.

2. CHANGES IN ACCOUNTING POLICIES

(a) Financial Instruments - Disclosures and Presentation

In December 2006, the Accounting Standards Board ("AcSB") issued CICA section 3862, "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 for a 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.

Section 3862 was effective for TUSK on January 1, 2008 (see note 9).

(b) Capital Disclosures

In December 2006, the AcSB issued new CICA section 1535, "Capital Disclosures" requiring disclosures regarding an entity's objectives, policies and processes for managing capital. These disclosures include a description of what TUSK manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into TUSK's management of capital, whether the requirements have been complied with, or consequences of non-compliance and an explanation of how TUSK is meeting its objective for managing capital. In addition, quantitative data about capital and whether TUSK has complied with all capital requirements are also required.

Section 1535 was effective for TUSK on January 1, 2008 (see note 9).

2. CHANGES IN ACCOUNTING POLICIES (CONTINUED)

(c) International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards of Canada are to converge with IFRS. The AcSB has indicated that Canadian entities will need to begin reporting under IFRS by the first quarter of 2011 with appropriate comparative data from the prior year. Under IFRS, the primary audience are the capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policies that must be addressed.

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The AcSB issued the "omnibus" exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the (continued) use of U.S. GAAP by domestic issuers. The eventual changeover to IFRS represents changes due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company's reported financial position and results of operations.

TUSK has not completed development of its IFRS changeover plan, which will include project structure and governance, resourcing and training, analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS as well as potential IFRS 1 exemptions. TUSK expects to complete its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements, by December 31, 2008.

The International Accounting Standards Board has stated that it plans to issue an exposure draft relating to certain amendments to IFRS 1 in order to make it more useful to Canadian entities adopting IFRS for the first time. One such exemption relating to full cost oil and gas accounting is expected to result in a reduced administrative transition from the current Canadian AcG-16 to IFRS. It is anticipated that this exposure draft will not result in an amended IFRS 1 standard until late in 2009. The amendment will potentially permit the Company to apply IFRS prospectively to their full cost pool, rather than the retrospective assessment of capitalised exploration and development expenses, with the proviso that a ceiling test, under IFRS standards, be conducted at the transition date.

3. INVESTMENTS

Effective January 1, 2007, TUSK adopted the CICA's section 3855, "Financial Instruments - Recognition and Impairment". The new standard was adopted prospectively. At December 31, 2006, TUSK held an investment in a publicly traded oil and gas company with a cost basis of $4,270,000. At January 1, 2007, an adjustment was made to increase the carrying value of this investment by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000. This investment was sold during the second quarter of 2007 for proceeds of $7,367,000, resulting in a gain of $1,105,000 and $614,000 for the three and six months ended June 30, 2007, respectively.

During the year ended December 31, 2006, TUSK acquired $258,000 of common shares of a private drilling company. The investment is carried at fair value, which approximates cost.



4. PROPERTY, PLANT AND EQUIPMENT

----------------------------------------------------------------------------
($000s) June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Oil and natural gas properties 382,697 349,878
Office equipment and leasehold
improvements 664 627
----------------------------------------------------------------------------
383,361 350,505
Accumulated depletion and depreciation (80,212) (54,516)
----------------------------------------------------------------------------
303,149 295,989
----------------------------------------------------------------------------
----------------------------------------------------------------------------


For the three and six months ended June 30, 2008, TUSK capitalized general and administrative expenses of $315,000 and $630,000, respectively, (three and six months ended June 30, 2007 - $520,000 and $1,780,000, respectively) to oil and natural gas properties.

For the three months ended June 30, 2008, stock-based compensation of $202,000 (three months ended June 30, 2007 - $205,000) and related future income taxes of $83,000 (three months ended June 30, 2007 - $87,000) were capitalized to oil and gas properties.

For the six months ended June 30, 2008, stock-based compensation of $333,000 (six months ended June 30, 2007 - $1,012,000) and related future income taxes of $136,000 (six months ended June 30, 2007 - $417,000) were capitalized to oil and gas properties.

The June 30, 2008 depletion and depreciation calculation excluded unproved properties of $37,021,000 (December 31, 2007 - $39,619,000) and salvage values of $9,414,000 (December 31, 2007 - $6,064,000). The calculation includes future development costs of $41,258,000 (December 31, 2007 - $42,258,000).

On March 31, 2008, TUSK completed an asset swap regarding two properties located in northeastern British Columbia. In exchange for its 50% non-operated interests in the Elleh area, TUSK received certain interests in the Conroy area and cash of $11,700,000. As a result of this transaction, a farm-in agreement that obligated TUSK to complete a work commitment in the Conroy area was cancelled.

5. BANK LOAN

At June 30, 2008, TUSK had a $75,000,000 demand credit facility comprised of a $60,000,000 operating line and a $15,000,000 acquisition/development line. The facility is available through two Canadian chartered banks. The interest charged on the facility is payable monthly and the rate 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 rate plus 1.0%. At June 30, 2008, the effective annual interest rate was 5.00% on the operating line and 5.25% on the acquisition/development line. 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.

In July 2008, the facility was amended to increase the operating line to $70,000,000 and cancel the acquisition/development line.

6. FUTURE INCOME TAXES

(a) Tax Expense

The provision for income tax differs from the result that would be obtained by applying the combined Canadian federal and provincial tax rate to the net income (loss) before income taxes. The principal reasons for this difference are as follows:



----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
($000s) 2008 2007 2008 2007
----------------------------------------------------------------------------
Income (loss) before taxes 3,679 1,092 3,232 (2,031)
Corporate tax rate 29.5% 32.1% 29.5% 32.1%
----------------------------------------------------------------------------
Expected income tax expense
(reduction) 1,085 351 953 (652)
Add (deduct):
Non-deductible stock-based
compensation 175 172 310 321
Tax rate change (93) (116) (93) (44)
Non-taxable portion of capital gain - (184) - (99)
Non-deductible expense 1 3 5 7
Other (20) - (20) -
----------------------------------------------------------------------------
Tax expense (reduction) 1,148 226 1,155 (467)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b) Future Income Taxes

Future income taxes consist of the following temporary differences:

----------------------------------------------------------------------------
($000s) June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Net book value in excess of tax basis of
oil and natural gas properties (18,924) (16,950)
Asset retirement obligations 1,496 1,146
Non-capital losses 1,041 1,041
Share issue costs 1,159 1,588
Commodity derivative 277 185
Other 255 273
----------------------------------------------------------------------------
Future income tax liability (14,696) (12,717)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. 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 $5,440,000 based on a total undiscounted amount of cash flows required to settle its asset retirement obligations of approximately $14,184,000. A credit-adjusted risk-free rate of 7.0% to 10.0% and an inflation rate of 3.0% were used to calculate the fair value of the asset retirement obligation. These obligations are expected to be incurred between 2008 and 2037 and will be funded from general corporate resources at the time of abandonment.

The table below reconciles TUSK's asset retirement obligations.



----------------------------------------------------------------------------
Six Months Ended Year Ended
($000s) June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Balance, beginning of period 4,166 2,930
Liabilities acquired 1,439 331
Liabilities incurred 298 650
Liabilities disposed (632) --
Obligations settled (341) (451)
Changes in estimates/revisions 326 422
Accretion expense 184 284
----------------------------------------------------------------------------
Balance, end of period 5,440 4,166
----------------------------------------------------------------------------
----------------------------------------------------------------------------

8. SHARE CAPITAL

(a) Issued and Outstanding

----------------------------------------------------------------------------
Number of
Shares Amount
----------------------------------------------------------------------------
($000s)
Balance, January 1, 2008 90,442,222 223,754
Income tax effect of flow-through shares - (688)
----------------------------------------------------------------------------
Balance, June 30, 2008 90,442,222 223,066
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b) 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 Six Months Ended
June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Weighted average number of
common shares outstanding
- Basic 90,442,222 88,879,722 90,442,222 88,879,722
- Diluted 90,942,141 88,879,722 90,653,261 88,879,722
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The weighted average number of shares outstanding for the three and six months ended June 30, 2007 was not increased for outstanding stock options for purposes of calculating diluted loss per share as the effect would be anti-dilutive.

(c) Stock Options

The table below sets forth a reconciliation of TUSK's stock option plan for the six months ended June 30, 2008.



----------------------------------------------------------------------------
Number of Weighted Average
Options Exercise Price
($/share)
----------------------------------------------------------------------------
Outstanding, beginning of period 8,481,833 2.81
Granted 1,702,000 2.53
Forfeited (373,333) 3.00
Cancelled (870,000) 4.30
----------------------------------------------------------------------------
Outstanding, end of period 8,940,500 2.61
----------------------------------------------------------------------------
Exercisable, end of period 3,952,316 2.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The table below summarizes information regarding stock options outstanding
at June 30, 2008.

----------------------------------------------------------------------------
Weighted Number of Weighted Average Number of
Average Options Remaining Options
Exercise Price Outstanding Contractual Life Exercisable
----------------------------------------------------------------------------
($/share) (years)
1.50 - 2.00 2,055,000 4.1 149,996
2.01 - 3.00 5,625,500 3.5 2,965,658
3.01 - 4.00 690,000 3.1 336,662
4.01 - 4.95 570,000 2.4 500,000
----------------------------------------------------------------------------
8,940,500 3.5 3,952,316
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair value of the options granted and the assumptions used in the model are set forth in the table below.



----------------------------------------------------------------------------
Six Months Ended June 30, 2008 2007
----------------------------------------------------------------------------
Fair value of options granted ($/share) 1.18 0.91
Risk-free interest rate (%) 2.9 3.3
Expected life (years) 4.0 4.0
Expected volatility (%) 58 55
Expected dividend yield (%) -- --

(d) Contributed Surplus

The table below reconciles TUSK's contributed surplus.

----------------------------------------------------------------------------
Six Months Ended Year Ended
($000s) June 30, 3008 December 31, 2007
----------------------------------------------------------------------------
Balance, beginning of period 9,962 6,284
Stock-based compensation expensed 1,051 2,346
Stock-based compensation capitalized 333 1,332
----------------------------------------------------------------------------
Balance, end of period 11,346 9,962
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(e) Normal Course Issuer Bid

In April 2008, The Toronto Stock Exchange (the "TSX") accepted TUSK's Notice of Intention to Make a Normal Course Issuer Bid (the "Bid"). Under the Bid, TUSK will have the right to purchase for cancellation up to a maximum of 4,522,111 of its common shares, representing approximately 5% of its outstanding common shares. The shares will be acquired through the facilities of the TSX. The Bid will remain in effect until the earlier of April 3, 2009 or until TUSK has purchased the maximum number of shares permitted under the Bid. A daily maximum of 74,534 common shares may be purchased for cancellation pursuant to Normal Course Issuer Bid rules. As at June 30, 2008, no shares were purchased pursuant to the Bid.

9. FINANCIAL RISK MANAGEMENT

Overview

TUSK has exposure to the following risks from its use of financial instruments:

- Credit risk

- Liquidity risk

- Market risk

This note presents information about TUSK's exposure to each of the above risks, the Corporation's objectives, policies and processes for measuring and managing risk, and the Corporation's management of capital. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Corporation's risk management framework. The Board has implemented and monitors compliance with risk management policies. TUSK's risk management policies are established to identify and analyze the risks faced by the Corporation, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Corporation's activities.

Credit Risk

Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from TUSK's receivables from joint interest partners and petroleum and natural gas marketers. As at June 30, 2008, TUSK's receivables consisted of $2,556,000 from joint interest partners, $9,572,000 of receivables from petroleum and natural gas marketers and $2,194,000 of other receivables.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. TUSK's policy to mitigate credit risk associated with these balances is to establish marketing relationships with large purchasers. The Corporation historically has not experienced any collection issues with its petroleum and natural gas marketers. Joint interest receivables are typically collected within one to three months of the joint interest bill being issued to the partner. TUSK attempts to mitigate the risk from joint interest receivables by obtaining partner approval of significant capital expenditures prior to expenditure. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors, such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with joint interest partners as disagreements occasionally arise that increase the potential for non-collection. TUSK does not typically obtain collateral from petroleum and natural gas marketers or joint interest partners; however, TUSK has the ability to withhold production from joint interest partners in the event of non-payment.

The carrying amount of accounts receivable represents the maximum credit exposure. TUSK did not have an allowance for doubtful accounts as at June 30, 2008 and 2007 and did not provide for any doubtful accounts nor was it required to write-off any receivables during the six months ended June 30, 2008 and year ended December 31, 2007. TUSK reviews its outstanding receivables on an ongoing basis and will make a provision for doubtful accounts or write-off any receivables that are considered uncollectible.



As at June 30, 2008 and December 31, 2007, TUSK considers its
receivables to be aged as follows:

----------------------------------------------------------------------------
($000s) June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Not passed due (less than 90 days) 12,797 11,910
Past due (91 - 120 days) 482 816
Past due (121 - 365 days) 64 1,343
Past due (over 1 year) 989 435
----------------------------------------------------------------------------
14,322 14,504
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note: The majority of the receivables outstanding for more than 1 year are
with respect to Alberta Royalty Tax Credits.


Liquidity Risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they are due. TUSK's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking harm to the Corporation's reputation. TUSK prepares annual capital expenditure budgets, which are regularly monitored and updated as necessary. Further, the Corporation utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate the capital expenditure program, TUSK has a revolving reserve based credit facility, as outlined in note 5, that is reviewed at least annually by the lender.

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices and interest rates, will affect the Corporation's net earnings or the value of its financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns.

The Corporation may utilize both financial derivatives and physical delivery sales contracts to manage market risks. All such transactions are conducted in accordance with the risk management policy that has been approved by the Board of Directors.

(a) Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. Although substantially all of TUSK's oil and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for oil and natural gas are denominated in United States dollars, and therefore, are impacted by changes in the exchange rate between the Canadian and U.S. dollar. The Corporation had no forward exchange rate contracts in place as at or during the six months ended June 30, 2008.

(b) Commodity Price Risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by numerous factors, including supply and demand, the relationship between the Canadian and U.S. dollar as noted above, the political climate and other market forces.

The Corporation will attempt to mitigate commodity price risk through the use of various financial derivatives, including put option contracts. A put option contract is an arrangement that ensures a minimum level of revenue with no limitation on upward commodity price movements. The cost of the contract is paid in full at the outset of the arrangement; therefore, TUSK is not exposed to any ongoing market risk related to the put option contract.



As at June 30, 2008, TUSK had the following put option contracts in place:

----------------------------------------------------------------------------
Purchase Type of Quantity Contract Contract
Date Time Period Contract Contracted Price Cost
----------------------------------------------------------------------------
(bbls/d) ($/bbl) ($000s)
Sep. 2007 Jan. to Dec. 2008 Financial/Oil 1,000 65.00 floor 781
May 2008 Jan. to Dec. 2009 Financial/Oil 1,000 90.00 floor 1,250
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Based on a mark-to-market valuation, TUSK would have received $1,024,000 if the contracts were settled at the end of June 2008. Of this amount, $344,000 is recorded as a current asset and the balance is a long-term asset. Changes in the fair value are included in unrealized gain or loss on commodity derivatives in the statement of operations. These financial instruments are not used for trading or speculative purposes.

(c) Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. TUSK is exposed to interest rate fluctuations on its bank debt, which bears a floating rate of interest. For the six months ended June 30, 2008, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the period would have been $164,000 higher due to lower interest expense. An equal and opposite impact would have occurred to net earnings had interest rates been 1% higher. The Corporation had no interest rate swap or financial contracts in place during the six months ended June 30, 2008.

Capital Management

TUSK's policy is to maintain a strong capital base to sustain the future development of the business and to maintain investor, creditor and market confidence.

TUSK manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets. The Corporation considers its capital structure to include shareholders' equity, bank debt and working capital. In order to maintain or adjust the capital structure, the Corporation may, from time to time, issue shares and adjust its capital spending to manage current and projected debt levels.

TUSK monitors capital based on the ratio of net debt to annualized funds from operations. This ratio is calculated as net debt, defined as outstanding bank debt plus or minus working capital, divided by funds from operations before changes in non-cash working capital for the most recent calendar quarter, annualized (multiplied by four) and future expected cash flows on a running 12-month basis. Funds from operations is calculated based on cash provided by operating activities before changes in non-cash working capital and expenditures on asset retirement obligations. The Corporation's strategy is to maintain a ratio of net debt to annualized funds from operations of 1.5 to 1 or lower. This ratio may increase at certain times as a result of acquisitions and/or large capital projects. In order to facilitate the management of this ratio, the Corporation prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors, including current and forecast prices, successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors.

As at June 30, 2008, TUSK's ratio of net debt to annualized cash flow was 0.9 to 1, which is within the range established by the Corporation. TUSK anticipates that the ratio will remain within the target range through 2008.

The Corporation's share capital is not subject to external restrictions; however, the bank debt facility is based on oil and natural gas reserves (see note 5). The Corporation has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.

There were no changes in TUSK's approach to capital management during the six months ended June 30, 2008.

Fair Value of Financial Instruments

TUSK's financial instruments as at June 30, 2008 and December 31, 2007 include accounts receivable, derivative contracts, accounts payable and accrued liabilities, and bank debt. The fair value of accounts receivable and accounts payable and accrued liabilities approximate their carrying amounts due to their short terms to maturity. The fair value of derivative contracts is determined using the mark-to-market method, which assumes the contract is closed out in the open market at the balance sheet date. Bank debt is payable on demand and bears interest at a floating market rate, and accordingly, the fair market value approximates the carrying value.

10. CASH FLOW INFORMATION

Changes in non-cash working capital were as follows:



----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
($000s) 2008 2007 2008 2007
----------------------------------------------------------------------------
Changes in non-cash working capital
balances
Accounts receivable 3,635 4,785 182 975
Prepaid expenses and deposits (92) 236 5 180
Cash paid for commodity derivative (1,250) - (1,250) -
Accounts payable and accrued
liabilities (15,969) (12,256) (11,000) (2,430)
----------------------------------------------------------------------------
(13,676) (7,235) (12,063) (1,275)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in non-cash working capital
related to
Operating activities (3,065) 6,313 (6,303) 7,570
Financing activities - - (10) -
Investing activities (10,611) (13,548) (5,750) (8,845)
----------------------------------------------------------------------------
(13,676) (7,235) (12,063) (1,275)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


11. COMMITMENTS AND CONTINGENCIES

(a) Drilling Rigs

TUSK is a party to a contract regarding the utilization of a drilling rig. TUSK is obligated to utilize the rig for a minimum of 36 days for the period July 1, 2008 to February 5, 2009 and 165 days for the year ended February 5, 2010. If the utilization falls short of the minimum requirement, TUSK will be required to pay a standby fee of $6,800 per day for each day of the shortfall.

(b) Dispute

TUSK is involved in litigation matters arising out of the ordinary course and conduct of its business. Claims made against the Corporation total approximately $2,400,000 and the Corporation's counterclaims exceed $6,000,000. The likelihood of liabilities resulting from these matters is not determinable and related potential losses, if any, cannot be reasonably estimated. No accrual of loss has been made to the financial statements.

12. RELATED PARTY TRANSACTIONS

An officer of TUSK is a director and significant shareholder of a private company that provides project management consulting services and systems support to TUSK. For the six months ended June 30, 2008, this company was paid $224,000 (six months ended June 30, 2007 - $70,000). Of this amount, $89,000 was charged to general and administrative expenses and $135,000 to property and equipment. June 30, 2008 accounts payable and accrued liabilities included $17,000 regarding these payments.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. For the six months ended June 30, 2008, royalties of $158,000 were paid to this company (six months ended June 30, 2007 - $77,000). All of the payments made were charged to royalties. June 30, 2008 accounts payable and accrued liabilities includes $28,000 regarding these royalties.

The above-mentioned transactions 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.



Industry Abbreviations
----------------------------------------------------------------------------
Crude Oil and Natural Gas Liquids Natural Gas
----------------------------------------------------------------------------
bbl One barrel equaling 34.972 mcf Thousand cubic feet
Imperial gallons or 42 U.S.
bbls/d gallons Barrels per day mcf/d Thousand cubic feet per day
mbbls Thousand barrels mmcf Million cubic feet
mmbbls Million barrels bcf Billion cubic feet
boe Barrels of oil equivalent mcf Thousand cubic feet
boe/d Barrels of oil equivalent mmbtu Million British thermal units
per day
mboe Thousand barrels of oil GJ/d Gigajoules per day
equivalent
NGLs Natural gas liquids, consisting
of any one or more of propane,
butane and condensate
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Equivalencies
----------------------------------------------------------------------------
To Convert From To Multiply By
----------------------------------------------------------------------------
Thousand cubic feet Cubic metres 28.328
Cubic metres Cubic feet 35.301
Barrels Cubic metres 0.159
Cubic metres Barrels 6.292
Feet Metres 0.305
Metres Feet 3.281
Miles Kilometres 1.609
Kilometres Miles 0.621
Acres Hectares 0.405
Hectares Acres 2.471
Gigajoules Thousand cubic feet 0.948
Thousand cubic feet Gigajoules 1.055
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In addition to the forward-looking statements contained in the Management's Discussion and Analysis, this news release contains forward-looking statements with respect to TUSK and its operations and may contain reserves, resources and cash flow estimates, drilling plans, debt levels, production expectations, finding and development objectives, opinions, forecasts, projections, guidance and other statements that are not statements of fact. Although the Corporation believes that the expectations reflected in such forward-looking statements are reasonable, it can provide 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. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this release include, but are not limited to, the lack of precision around estimates of reserves, performance of the Corporation's oil and gas properties, volatility in market prices for oil and gas, estimations of future costs, geological, technical, drilling and processing problems, changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry, and such other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by the Corporation, including in the Management's Discussion and Analysis and the Annual Information Form. The reader is cautioned that the foregoing list of important factors is not exhaustive. These statements speak only as of the date of this news release and the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, other than as required by law. The forward-looking statements contained in this release are expressly qualified by this cautionary statement.

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