Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

March 24, 2008 08:00 ET

Accrete Energy Inc. Announces Year End Results

CALGARY, ALBERTA--(Marketwire - March 24, 2008) - Accrete Energy Inc. (TSX:GZ) (the "Corporation") is pleased to announce results of its operations for the year-ended December 31, 2007.



Highlights

Year Year
Ending Ending
$ Thousands except production/day and December 31, December 31,
common shares information 2007 2006 % Change
----------------------------------------------------------------------------

Funds flow (1)
Total 21,170 19,652 8%
Per share basic 1.29 1.28 1%

Net income 5,755 3,975 43%
Total
Per share basic 0.35 0.26 35%
Per share diluted 0.32 0.24 33%

Common shares outstanding 16,271,802 16,497,902 (1%)

Debt, including working capital
deficiency 58,360 40,196 45%

Operational :
Sales plus realized gain on financial
instruments 45,380 39,322 15%
Royalties 11,348 9,664 17%
Operating and transportation costs 6,407 5,089 26%
Net Back (2) 27,626 24,569 12%
Net Back/ bbl (2) 25.58 26.50 (4%)

General and administrative 3,334 3,358 (1%)
General and administrative $/bbl 3.11 3.62 (14%)

Volumes :
Natural gas (mcf/d) 11,596 9,310 25%
Oil (bbl/d) 113 192 (41%)
NGL's (bbl/d) 891 796 12%
Total Boe/d 2,937 2,540 16%

Wells Drilled (Gross) :
Oil 2 10 (80%)
Gas 9 8 13%
D&A - 5 -
Total 11 23 (52%)

Capital Expenditures 38,263 41,927 (7%)

Reserves (P+P) 12,100 mboe 9,797 mboe 24%

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


President' Message

On behalf of the Management and Directors of Accrete Energy Inc., I am pleased to report the Company's financial and operational results for the 3 months and year ended December 31, 2007. As in the past, the Company continues to balance its exploration and development activities so as to provide it with both near, and longer term growth.

In 2007, production and reserves increased on both an aggregate and per share basis. Yearly average production grew by approximately 400 BOE/d and year end reserves increased by 2.3MM BOE's, an increase of 16% and 24%, respectively, from Q4 of 2006.

Despite negative pressure on natural gas prices, and increasing drilling and completion costs, the Company continued its mandate of capital efficient operations. Reserves were added for $14.48/BOE on a proven plus probable basis, and $18.45/BOE on a proven basis including future capital costs.

The Company's core area of Harmattan continues to provide steady cash flow and reserve increases for the year ended 2007 marks the third occasion that our independent engineering evaluators have given a positive reserve revision for this asset. Two wells were drilled in 2007 to maintain the Company's production base and an additional 13 locations have been identified to offset future declines.

The majority of the Company's 2007 operations were focused in its second core area of Claresholm. Two seismic programs were undertaken and 6 wells were drilled and completed. These activities have identified several new exploration and development opportunities. The exploration focus will continue in this area throughout 2008 with plans to fully utilize existing capacity in the Company owned and operated facilities. The production of incremental volumes in this area has almost halved our operating costs to $3.34/BOE.

As previously reported, the Company expects that its longer term growth will come from the Saxon area where it currently owns 25 3/4 sections of 100% working interest lands. One well drilled in 2007 proved gas production from the Montney and Gething formations. In December of last year, the Company shot a combination of 3D and 2D seismic on the northern portion of our land base which defined 13 locations targeting dual zone potential from the Montney and lower Mannville formations.

A combination of lower gas prices, market uncertainty driven by the U.S. economy coupled with the Alberta government's release of the royalty review in 2007 has taken its toll on the stock prices of junior natural gas producers. The Company's stock price has been no exception to these circumstances. The Company does, however, differ from several of its peers by consistently demonstrating lower operating costs in the development and operation of its assets. We are confident that once these economic concerns are mitigated, the market will recognize the true valve of the exceptional reserve base the Company has built.

As mentioned in our Q3, 2007 Report, insider confidence was and still is demonstrated by the significant increase in ownership of Company stock.

We would like to thank our shareholders for their continued support and look forward to the continuation of our 2008 program, by taking advantage of the exciting discoveries made in 2007 which we believe will keep the Company a top tier reserve and production adder within our peer group.

Respectfully,

"Peter Salamon"

President

Management Discussion and Analysis

The following discussion and analysis was prepared on March 19, 2008 and is management's assessment of Accrete's historical financial and operating results and should be read in conjunction with the audited financial statements and related notes for the years ended, December 31, 2007 and 2006.

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

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

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

Accrete has production and a focused inventory of drilling prospects primarily in the Harmattan and Claresholm areas but has some production and an inventory of drilling prospects at Ansell, Edson, and Pouce Coupe areas as well.

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

Forward-Looking Statements

Some of the statements contained herein including, without limitation, financial and business prospects and financial outlooks may be forward-looking statements which reflect management's expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as "may", "will", "should", "could", "anticipate", "believe", "expect", "intend", "plan", "potential", "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risk and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. Readers should refer to the section entitled "Risks" in this Management Discussion and Analysis for further information with regards to operational and business risks that may affect the company's results.

Although the forward-looking statements contained herein are based upon what management believes to be reasonable assumptions, management cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

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

Non GAAP Measures

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

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



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

Year Ended
$ Thousands December 31, December 31,
2007 2006
----------------------------------------------------------------------------
Cash flow provided by operating activities 22,064 17,527
Net changes in non-cash working capital (894) 2,125
----------------------------------------------------------------------------
Cash flow 21,170 19,652
----------------------------------------------------------------------------


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

Year Ended
$ Thousands December 31, December 31,
2007 2006
----------------------------------------------------------------------------
Income before income taxes 6,117 5,865
Depletion, depreciation and accretion 14,346 12,966
Stock based compensation cost 707 821
Interest expense 3,122 1,559
----------------------------------------------------------------------------
Corporate netback 24,292 21,211
General and administrative expenses 3,334 3,358
----------------------------------------------------------------------------
Field netback 27,626 24,569
----------------------------------------------------------------------------


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

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

Business Environment

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

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

Weather conditions were much more conducive to field operations later in the year.

Natural gas prices did not respond to the oil price increases nearly as much as one would expect because the level of natural gas in storage was high relative to the five year average. The high level of natural gas in storage was mainly due to the effect of moderate weather throughout the year however, increased US production and LNG imports further exacerbated the situation.

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

The effect of a strong Canadian dollar negatively affected pricing of all commodities.

The government of Alberta introduced a new Crown Royalty regime in the 4th quarter. Uncertainty surrounds its implementation which is scheduled to occur in 2009.

Natural gas drilling activity in Alberta declined towards the end of the year in response to lower prices and uncertainty with respect to Crown Royalty changes. The Company was able to source oilfield equipment, supplies and services more readily as a result of this downturn. Prices for such items remained constant in spite of the down turn in activity.



Financial Information

Net Income Net Income
Total Revenue Net Income (Loss) Diluted
($ thousands) ($ thousands) Basic $/Share $/Share
----------------------------------------------------------------------------
2007
First Quarter 10,647 930 0.06 0.05
Second Quarter 11,149 1,789 0.11 0.11
Third Quarter 11,499 677 0.04 0.04
Fourth Quarter 11,876 2,359 0.14 0.12
Total 45,171 5,755 0.35 0.32

2006
First Quarter 9,821 1,585 0.10 0.10
Second Quarter 9,182 1,390 0.09 0.08
Third Quarter 9,583 743 0.05 0.05
Fourth Quarter 10,736 257 0.02 0.01
Total 39,322 3,975 0.26 0.24


($ thousands except per share,
volume and price information) Year ended Year ended Year ended
and price information) Dec 31, 2007 Dec 31, 2006 Dec 31, 2005
----------------------------------------------------------------------------
Petroleum and natural gas revenue 45,380 39,322 25,845
Funds from operations 21,170 19,652 13,536
Per share - basic 1.29 1.28 0.94
- diluted 1.19 1.19 0.87
Net income 5,755 3,974 3,285
Per share - basic 0.35 0.26 0.23
- diluted 0.32 0.24 0.21
Daily production (boe/day) 2,937 2,540 1,276
Average sale price (boe/day) 42.13 42.41 55.49
Total assets 128,450 103,058 74,368
Working capital deficiency 58,360 40,196 27,862
Bank Indebtedness 55,928 36,423 14,598
Total other long term liabilities - - -
Cash dividends declared - - -


Increased natural gas and natural gas liquid production brought about by drilling successes, increases in oil and natural gas liquids prices, offset by decreases in natural gas prices and oil production resulted in an increase in revenue for Accrete for the year ended December 31, 2007.

The Company achieved a 100% success rate on the 11 (9.5 net) wells drilled in 2007. The exit rate was close to 3,100 Boe/d. The exit rate was higher than the average rate because production that was added from a Harmattan well that was drilled and tied in late in the 4th quarter was included in the exit rate but had little impact on the average for the year. The Company estimates that at December 31, 2007 that it has 343 net barrels of oil equivalent per day behind pipe. This is comprised of 143 barrels at Harmattan, 50 barrels at Claresholm, 90 barrels at Edson and 60 barrels at Pouce Coupe.

Royalties increased because of the increased revenues together with a slight increase in rate. Production expenses increased with volumes and as a result of property tax assessments. Interest expense increased with increased debt.

Field costs increased from $5.49 per bbl equivalent in 2006 to $5.98 per bbl equivalent in 2007. This increase occurred primarily because property tax assessments that were paid in the third quarter caught up with the company's prior development but also because of increases in the costs of field services and supplies.

Field netbacks for the fourth quarter increased from $25.77 in 2006 to $28.09 in 2007 largely because of higher oil and natural gas liquid prices for the fourth quarter 2007 over those received in the fourth quarter of 2006. Field netbacks for fiscal 2007 decreased from $26.50 for 2006 to $25.58 mostly because of lower average natural gas prices and higher field costs as noted above.

Depletion increased as a result of increased volumes but this was offset because increases in oil and gas reserves resulted in a decreased rate.

Payroll costs were lower in 2007 because no performance bonuses were awarded. Recoveries of general and administrative expenses were lower because the company drilled fewer wells. As a result, general and administrative expenses remained relatively constant on a year over year basis. General and administrative expenses decreased from $3.62/bbl to $3.11/bbl because production volumes increased while the expense remained constant.

Corporate netbacks for the fiscal year decreased from $22.87/bbl to $22.66/bbl because of lower annual field net backs, offset in part by lower general administrative expenses.

The provision for future income tax rate decreases led to a decrease in the provision for future income taxes. All of the foregoing led to an increase in net income.



Operational Activities

Production

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Oil (bbl/d) 100 220 113 192
NGL (bbl/d) 840 960 891 796
----------------------------------------------------------------------------
Total Oil/NGL (bbl/d) 940 1,180 1,004 988
Gas (mcf/d) 11,997 10,265 11,596 9,310
----------------------------------------------------------------------------
Total (boe/d) 2,940 2,890 2,937 2,540
----------------------------------------------------------------------------


Natural Gas Production (mcf/d)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31,December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area
Atlee-Buffalo 45 26 39 26
Boltan - - - 153
Claresholm 5,050 2,653 4,350 3,186
Harmattan 5,777 7,206 6,145 5,849
Edson 479 380 644 96
Pouce Coupe 394 - 332 -
Saxon 252 - 86 -
----------------------------------------------------------------------------
Total 11,997 10,265 11,596 9,310
----------------------------------------------------------------------------


Crude Oil Sales (bbl/d)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 100 214 113 191
Edson - 6 - 1
Pouce Coupe - - - -
Saxon - - - -
----------------------------------------------------------------------------
Total 100 220 113 192
----------------------------------------------------------------------------


Natural Gas Liquids Sales (bbl/d)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - 1 - 1
Claresholm 107 10 61 38
Harmattan 714 941 811 755
Edson 17 8 18 2
Pouce Coupe - - 1 -
Saxon 2 - - -
----------------------------------------------------------------------------
Total 840 960 891 796
----------------------------------------------------------------------------


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

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

Enough liquids are recombined, however to maintain the high heating content of the Claresholm natural gas stream.



Product Prices

Natural Gas Prices ($/mcf)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006

Area
Atlee-Buffalo 6.20 5.65 6.25 6.78
Boltan - - - 7.89
Claresholm 6.95 7.60 6.73 7.38
Harmattan 6.31 6.99 6.58 6.56
Edson 6.98 7.83 6.50 7.83
Pouce Coupe 6.43 - 6.26 -
Saxon 7.03 - 6.46 -
----------------------------------------------------------------------------
Average Price 6.62 7.18 6.62 6.88
----------------------------------------------------------------------------


The AECO monthly index price averaged $6.67 for 2007 as compared to $7.05 for 2006. Accrete made adjustments to its marketing activities in 2007 that improved the prices received but generally followed the trend of the market. It should be noted that the price received for Claresholm and Edson natural gas is higher than from the other areas because liquids are recombined prior to sale giving the gas a higher heating content.



Crude Oil Sales Prices ($/bbl)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
Area
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 87.61 53.74 73.86 69.57
Edson - 58.87 - 58.87
Pouce Coupe - - - -
Saxon - - - -
----------------------------------------------------------------------------
Average Price 87.61 53.86 73.86 69.49
----------------------------------------------------------------------------


Crude oil prices moved upwards with world oil prices, offset in part by the increase in the Canadian dollar. This was particularly evident in the fourth quarter.



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

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
Area
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Boltan - 48.13 - 55.34
Claresholm 70.66 21.54 73.45 69.10
Harmattan 41.52 31.87 38.73 35.30
Edson 70.71 48.41 63.04 48.41
Pouce Coupe 76.68 - 76.03 -
Saxon 79.98 - 81.30 -
----------------------------------------------------------------------------
Average Price 45.92 31.94 41.64 36.98
----------------------------------------------------------------------------


Natural gas liquid prices, except for those for ethane, moved in tune with oil prices. Harmattan natural gas liquids include a significant amount of ethane, which does not receive a very high price relative to other liquids produced.

The Company entered into the following contracts during 2007 in order to manage fluctuations in commodity prices:



Type Amount Term Price ($/GJ) Type
----------------------------------------------------------------------------
February 1 -
Collar 2,000 GJ/d October 31, 2007 $5.50 - $8.25 at AECO Financial
March 1 -
Collar 2,000 GJ/d October 31, 2007 $5.50 - $9.13 at AECO Financial


These financial instruments were derivative contracts that the Company classified as "held for trading". $209,000 was recorded in respect to the gain that was realized during their term.



Revenue Total Sales ($ thousands)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Oil 810 1,089 3,058 4,877
NGL 3,551 2,820 13,540 10,746
Gas 7,311 6,778 28,033 23,363
Processing 205 49 540 336
----------------------------------------------------------------------------
Total 11,877 10,736 45,171 39,322
----------------------------------------------------------------------------


Natural Gas Sales Revenue ($ thousands)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area
Atlee-Buffalo 26 13 89 64
Boltan - - - 439
Claresholm 3,230 1,856 10,686 8,584
Harmattan 3,351 4,636 14,767 14,003
Edson 308 273 1,530 273
Pouce Coupe 233 - 759 -
Saxon 163 - 202 -
----------------------------------------------------------------------------
Total 7,311 6,778 28,033 23,363
----------------------------------------------------------------------------


Crude Oil Sales Revenue ($ thousands)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 810 1,059 3,050 4,848
Edson - 30 7 29
Pouce Coupe - - - -
Saxon - - 1 -
----------------------------------------------------------------------------
Total 810 1,089 3,058 4,877
----------------------------------------------------------------------------

Natural Gas Liquids (NGL) Sales Revenue
($ thousands)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - 8 - 39
Claresholm 698 19 1,632 949
Harmattan 2,728 2,758 11,464 9,723
Edson 112 35 412 35
Pouce Coupe 2 - 19 -
Saxon 11 - 13 -
----------------------------------------------------------------------------
3,551 2,820 13,540 10,746
----------------------------------------------------------------------------


Processing Revenue
($ thousands)

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 131 - 217 -
Harmattan 74 49 323 336
Edson - - - -
Pouce Coupe - - - -
Saxon - - - -
----------------------------------------------------------------------------
Total 205 49 540 336
----------------------------------------------------------------------------

Processing fees are charged to third parties utilizing Accrete facilities.

Royalties
($ thousands)
3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area Total Rate Total Rate Total Rate Total Rate
$ $ $ $
----------------------------------------------------------------------------
Atlee-Buffalo 3 11% 1 6% 9 10% 9 15%
Boltan - - - - (25) - 42 9%
Claresholm 762 19% 248 13% 2,644 21% 2,260 24%
Harmattan 1,795 26% 1,972 23% 8,324 28% 7,244 26%
Edson 43 10% 109 32% 116 6% 109 32%
Pouce Coupe 65 28% - - 233 30% - -
Saxon 33 19% - - 47 22% - -
----------------------------------------------------------------------------
Total 2,701 23% 2,330 22% 11,348 25% 9,664 26%
----------------------------------------------------------------------------


Crown royalties were $1,989,000 for the fourth quarter 2007 and $8,363,000 for the year ended December 31, 2007. Total gross overriding royalties were $598,000 and $2,536,000 respectively, and freehold royalties totaled $114,000 and $449,000 respectively.



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

3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Area $ $/boe $ $/boe $ $/boe $ $/boe
----------------------------------------------------------------------------
Atlee-Buffalo 5 7.35 7 16.73 38 16.07 24 14.95
Boltan - - 9 - 2 - 197 19.76
Claresholm 308 3.52 346 8.34 958 3.34 1,329 6.40
Harmattan 998 6.11 1,087 5.01 4,593 6.46 3,435 4.90
Edson 149 16.66 104 14.79 530 11.56 104 14.79
Pouce Coupe 66 10.94 - - 223 10.91 - -
Saxon 51 12.67 - - 63 11.73 - -
----------------------------------------------------------------------------
Total 1,577 5.83 1,553 5.84 6,407 5.98 5,089 5.49
----------------------------------------------------------------------------


During 2007, the company managed to keep most operating expense in line with those incurred in 2006. The exception to this was property taxes. Property tax assessment values lagged behind the rapid development of the Company's properties. Property tax assessments reflecting the Company's activities were received and paid early in the third quarter of 2007.



Field and Corporate Netbacks
Field Netback
($/boe)
3 Months 3 Months 12 Months 12 Months
Area Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Atlee-Buffalo 25.81 15.07 17.51 19.72
Boltan - - - 23.92
Claresholm 34.37 30.82 31.15 28.64
Harmattan 25.43 25.14 23.46 26.02
Edson 16.66 17.64 11.56 17.64
Pouce Coupe 16.96 - 15.76 -
Saxon 22.69 - 19.78 -
----------------------------------------------------------------------------
Field Netback 28.09 25.77 25.58 26.50
----------------------------------------------------------------------------


Field netbacks for the fourth quarter increased largely because of higher oil and natural gas liquid prices. Field netbacks for the year decreased mostly because of lower average natural gas prices and higher field costs as noted above.



Corporate Netback
($ thousands)
3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Field Netback 7,600 6,851 27,626 24,569
General and
Administrative 972 1,531 3,334 3,358
----------------------------------------------------------------------------
Corporate Netback 6,628 5,320 24,292 21,211
----------------------------------------------------------------------------


Corporate netbacks for the fiscal year decreased from $22.87/bbl to $22.66/bbl because of lower field net backs, offset in part by lower general administrative expenses but increased in absolute terms because of higher volumes.



General and Administrative Expense

($ thousands) 3 Months 3 Months 12 Months 12 Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Salary & Benefits 672 1,329 2,423 2,853
General Office
Expenses 456 381 1,653 1,425
----------------------------------------------------------------------------
1,128 1,710 4,076 4,278
Recoveries (156) (179) (742) (920)
----------------------------------------------------------------------------
Total 972 1,531 3,334 3,358
----------------------------------------------------------------------------


Staffing levels remained constant with 2006. Although salaries increased as a result of the normal annual review process, no bonuses were paid out in 2007 and that resulted in lower salary and benefit costs.

Office expenses increased with inflationary pressure.

General and administrative expenses are recovered through billings to participants in company operated projects in accordance with standard industry practice. The decrease in recoveries in 2007 relates to the decreased capital activity in 2007 compared to 2006.

Interest Expense

Accrete utilized its operating line of credit and cash flow to fund its 2007 capital program. As a result, Accrete's bank indebtedness increased from $36,423,000 to $55,928,000. This coupled with an increase in bank prime resulted in an increase in interest expense from $1,559,000 to $3,121,000.

Stock-Based Compensation

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

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

An estimated fair value of $2.14/share was calculated for the $5.26 options and an estimated fair value of $1.88/share was calculated for the $5.20 options as at the dates of the respective grants using the Black-Scholes model. The Company has accounted for its employee stock options granted using the fair value method. The fair value of all options granted to December 31, 2007 was estimated to be $4,486,000 ($2.43 per option granted). This value is charged to stock based compensation cost over the vesting period. A total of $170,000 was charged to expense in the 4th quarter 2007 ($158,000 in the 4th quarter 2006) and $707,000 was charged for the twelve months ended December 31, 2007(821,000 in 2006).

Depletion Depreciation & Accretion

Depletion, depreciation and accretion of the asset retirement obligation for the three and twelve month period ended December 31, 2007 totaled $3,690,000 or $13.49/Boe, and $14,346,000 or $13.38/Boe respectively. This compares to 2006 charges of $3,610,000 or $13.58/boe and $12,966,000 and $13.99/boe for the equivalent 3 and 12 month periods in 2006

Costs of $9,509,000 relating to unproved properties have been excluded from costs subject to depletion for the 12 month period ended December 31, 2007. This included the costs of undeveloped land such as that at Ansell, Saxon and Pouce Coupe that has been purchased at land sales for future exploitation.

Income Taxes

In the fourth quarter of 2007, the company recorded an income tax recovery of $648,000 as compared to an income tax provision of $716,000 for the same period last year. The provision for the fourth quarter of 2007 includes a recovery of $1,300,000 relating to the reduction in future federal income tax rates enacted during the quarter.

Accrete has approximately $83 million of income tax pools at December 31, 2007 and does not anticipate being cash taxable in 2008.

Cash Flow

Cash flow from operations for the three months ended December 31, 2007 was $5,633,000($0.34 per share) and $21,170,000($1.29 per share) for the twelve months ended December 31, 2007.



Capital Expenditures

Capital expenditures for the twelve months ending December 31, 2007:

($ thousands) 12 Months 3 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended Ended
December December September June 30, March 31,
31, 2007 31, 2007 30, 2007 2007 2007
$ $ $ $ $
----------------------------------------------------------------------------
Drilling and Completions 21,654 1,992 2,720 2,052 14,890
Geology and Geophysical 3,926 3,013 346 255 312
Equipping and Tie-Ins 6,629 963 1,855 2,285 1,526
Land 6,177 1,053 1,669 1,101 2,354
Property Acquisitions and
Dispositions (net) (137) (137) - - -
Office Equipment 14 2 - 1 11
---------------------------------------------------------------------------
Total Cash Expenditures 38,263 6,886 6,590 5,694 19,093
Allowance for future
restoration expenditures 197 55 43 29 70
---------------------------------------------------------------------------
Total 38,460 6,941 6,633 5,723 19,163
---------------------------------------------------------------------------


During the fourth quarter the Company drilled 1 well (1.0 net), comprising 1(1.0 net) oil well. A success rate of 100% was achieved. For the year, the Company has drilled 11 wells (9.5 net), comprising 2 (1.9 net) oil wells, and 9 (7.6 net) gas wells.



Liquidity and Capital Resources
$
(thousands)
-------------
2007 Exploration and development program funding

Cash, Beginning of Year -
Cash flow from operations 21,170
Change in non-cash working capital (1,342)
Increase in Bank Debt 19,505
Normal Course Issuer Bid, net of recoveries of previously
booked issuance costs (1,070)
Cash, end of period -
----------------------------------------------------------------------------
Net capital expenditures 38,263
----------------------------------------------------------------------------


Accrete intends to fund its capital expenditure program from internally generated cash flow, debt, and new equity on favorable terms.

At December 31, 2007 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $70,000,000.

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

Success in its focus areas means that additional funds will be raised through additional bank debt or additional share issuances or both to expedite or expand the drilling program.

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

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

Outlook

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

Accrete has assessed its prospects in the Ansell, Edson and Pouce Coupe areas, and has concluded that they rank secondary to those at Claresholm and Saxon and its interests there will most likely be rationalized.

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

The following table illustrates the impact on Cash flows and net earnings as a result of changes in commodity prices and interest rates based on forecast cash flows and capital expenditures of between $26 and $30 Million for 2008:



$ Thousand Cash Flow Net Earnings
----------------------------------------------------------------------------
Impact on the year ended December 31, 2008
Change in Canadian crude oil by $1.00 / bbl 35 25
Change in field gate price of Natural Gas by $1/ mcf 4,718 3,303
Change in Natural Gas Liquids price by $1.00 / bbl 223 156
Change of 1% in prime interest rates 645 452


Critical Accounting Estimates

Oil and Gas Accounting

The Company follows the full-cost method of accounting whereby all costs related to the acquisition, exploration and development of petroleum and natural gas properties, net of government incentives, are capitalized. Such costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling both productive and non-productive wells and related plant and production equipment costs.

Proceeds on disposition of petroleum and natural gas properties are accounted for as a reduction of capitalized costs with no gains or losses recognized unless such disposition results in a change of 20% or more in the depletion rate.

Capitalized costs, together with estimated future capital costs associated with proved reserves are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of oil based on the relative energy content of six thousand cubic feet of natural gas to one barrel of oil. Unproved properties are excluded from the depletion base until it is determined whether proved reserves are attributable to the properties or impairment occurs.

The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the "ceiling test").

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss will be recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost or market value unproved properties. The cash flows are estimated using future product prices and costs and are discounted using the risk free rate.

The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset known as the asset retirement cost which is depleted using the unit-of- production method. The liability is adjusted in each reporting period to reflect the passage of time, with the accretion charged to earnings, and for revisions to the estimated future cash flows.

Income Taxes

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

Other Estimates

The accrual method of accounting requires management to incorporate certain estimates, including estimates of revenues, royalties and production costs at a specific reporting date but for which actual revenues and costs have not yet been received; and estimates on capital projects which are in progress or recently completed where actual costs have not been received at a specific reporting date.

The Company ensures that the individuals with the most knowledge of the activity are responsible for the estimate. These estimates are then reviewed for reasonableness and past estimates are compared to actual results in order to make informed decisions on future estimates.

Stock Based Compensation

The Company has not incorporated an estimated forfeiture rate for stock options that will not vest and will account for actual forfeitures as they occur. The fair value of each stock option is determined at each grant date using the Black-Scholes model.

Risks

Accrete, in common with other companies participating in the oil and gas business in Canada, is exposed to a number of business risks. These risks can be categorized as operational, financial and regulatory, with some beyond the Company's control.

Operational risks include finding and developing oil and natural gas reserves on an economic basis, reservoir production performance, commodity marketing risk and the risk that employees and contract services can be hired and retained on a cost effective basis.

Accrete has mitigated these risks to the extent possible by employing a team of highly qualified professionals, providing a compensation scheme that will reward above average performance and by maintaining long term relationships with its suppliers.

Accrete also maintains an insurance program that is consistent with industry practice that should protect against the loss of assets through fire, blowout, pollution and other untoward events and the resultant business interruption.

Accrete maintains an inventory of prospects that are within the scope of the Company's key areas and are strategically diverse so as to minimize the Company's exposure to drilling risk. Furthermore, Accrete employs the latest technological methods in that quest.

Commodity prices and production volumes have a large impact on the ability for the Company to generate adequate cash flow to meet its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If the capital expenditure program does not result in sufficient additional reserves and/or production it would likely have a negative impact on the Company's liquidity. A lack of, or restricted access to natural gas processing facilities would have a similar effect. A prolonged decrease in commodity prices would also likely affect the availability of funds through the public equity market.

Financial risks include commodity prices, and to some extent, interest rates and the Canadian/US exchange rate. The Company may employ financial instruments, when prudent, to lessen the effects of such risks, but it has no such contracts in place at this time.

Exploration, Development and Production Risks

Oil and natural gas exploration involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. There is no assurance that expenditures made on future exploration by Accrete will result in new discoveries of oil or natural gas in commercial quantities. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions such as over pressured zones and tools lost in the hole, and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof.

The long-term commercial success of Accrete depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. No assurance can be given that Accrete will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, Accrete may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic.

Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated, and can be expected to adversely affect revenue and cash flow levels to varying degrees.

In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and natural gas properties, including encountering unexpected formations or pressures, premature declines of reservoirs, blow-outs, cratering, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks could have a materially adverse effect on Accrete and its future results of operations, liquidity and financial condition.

Income Taxes

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

Changes in Legislation

Alberta Royalty Review

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

Greenhouse Gas and Air Emissions Legislation

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

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

Disclosure Controls and Internal Controls Over Financial Reporting

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to Accrete's management as appropriate to allow timely decisions regarding required disclosure. Accrete's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filings, that the Company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the Company is made known to them by others within those entities, particularly during the period in which the annual filings are being prepared.

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

Accrete's Chief Executive Officer and Chief Financial Officer are required to cause the Company to disclose herein any change in the Company's internal controls over financial reporting that occurred during the Company's most recent interim period that has materially affected, or is reasonably likely to affect, the Company's internal controls over financial reporting. During 2006 and 2007, Accrete engaged external consultants to assist in documenting and assessing the Company's internal controls over financial reporting.

No material changes in the Company's internal controls were identified during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

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

Management acknowledges that there is a lack of segregation of duties within several of the Company's processes due to its small size. Management has identified the specific functions with the potential to compromise the Company's overall control objectives. Appropriate compensating controls have been implemented to management's satisfaction in response to the identified risks.

Contractual Obligations

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

The Company has committed to a term drilling program with a major drilling contractor. The Company is obligated to utilize the contractor's rig for a period of 200 days for a one year period that commenced August 15, 2007.

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

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



Contractual
obligations 2008 2009 2010 2011 2012 Thereafter
($ thousands) $ $ $ $ $ $
----------------------------------------------------------------------------
Office Premises 562 708 708 741 808 879
Office equipment 9 2 1 - - -
----------------------------------------------------------------------------
571 710 709 741 808 879
----------------------------------------------------------------------------


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

At September 30, 2007 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $70,000,000 that bears interest at bank prime plus one eighth percent.

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

Change in Accounting Policies and Recent Accounting Pronouncements

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

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

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

The Company has used financial instruments that are derivative contracts classified as "held for trading" to manage fluctuations in commodity prices. The Company had no such contracts at December 31, 2006 but entered into two "costless collars" during the first quarter of 2007. The contracts expired on October 31, 2007 and a gain of $209,000 was recorded. There were no such contracts open at December 31, 2007 but subsequent to that, the Company entered into a financial costless collar based 3,000 Gj/d of natural gas for the period from April 1, 2008 to October 31, 2008 with a put price of $6.635/Gj and a call price of $7.365/Gj. The Company will elect to mark-to-market its financial contracts.

In December 2006, the AcSB issued two new sections in relation to financial instruments: Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation, which will replace Section 3861 - Financial Instruments - Disclosure and Presentation. The new disclosure standard will increase the Company's disclosure regarding the risks associated with financial instruments and how those risks are managed and will require additional disclosure as of January 1, 2008.

As of January 1, 2008, the Company will be required to adopt CICA Handbook Section 1535 "Capital Disclosures", which will require the Company to disclose its objectives, policies and processes for managing capital.

As of January 1, 2009, the Company will be required to adopt CICA Handbook Section 3064 "Goodwill and Intangible Assets", which defines the criteria for the recognition of intangible assets.

On February 13, 2008, Canada's Accounting Standards Board confirmed January 1, 20011 as the effective date for the convergence of Canadian GAAP to International Financial Reporting Standards. The Canadian Securities Administrators are in the process of examining changes to securities rules that may occur. Accrete Energy Inc. has not determined the impact of this initiative because it is still in its early stages.

Transactions With Related Parties

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

Off Balance Sheet Arrangements

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



Accrete Energy Inc.
Balance Sheets

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

ASSETS
Current assets
Accounts receivable 6,912 7,421
Prepaid expenses 1,796 131
----------------------------------------------------------------------------
8,708 7,552

Property and equipment (note 3) 119,742 95,506
----------------------------------------------------------------------------
128,450 103,058
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES


Current liabilities
Accounts payable and accrued liabilities 11,139 11,325
Bank indebtedness (note 4) 55,928 36,423
----------------------------------------------------------------------------
67,067 47,748

Asset retirement obligation (note 6) 1,982 1,663
Future income tax (note 7) 8,181 4,773
----------------------------------------------------------------------------
77,230 54,184
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share capital (note 5) 36,142 39,718
Contributed surplus (note 5) 3,581 3,414
Accumulated other comprehensive income (Note 2) - -
Retained Earnings 11,497 5,742
----------------------------------------------------------------------------
51,220 48,874
----------------------------------------------------------------------------
128,450 103,058
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (note 10)

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Income and Comprehensive Income

Year Year
Ended Ended
December 31, December 31,
($ Thousands) 2007 2006
----------------------------------------------------------------------------
Revenue
Petroleum and natural gas revenue 45,171 39,322
Royalties (11,348) (9,664)
Realized gain on derivative instruments 209 -
----------------------------------------------------------------------------
34,032 29,658
----------------------------------------------------------------------------

Expenses

Production expenses 5,650 4,724
Transportation expenses 757 365
General and administrative, net of recoveries 3,334 3,358
Interest Expense 3,121 1,559
Stock based compensation cost (note 5) 707 821
Depletion, depreciation and accretion 14,346 12,966
----------------------------------------------------------------------------
27,915 23,793
----------------------------------------------------------------------------
Income before income taxes 6,117 5,865
Future income taxes (note 7) (362) (1,890)
----------------------------------------------------------------------------
Net income and comprehensive income 5,755 3,975
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Income per share:
Basic 0.35 0.26
Diluted 0.32 0.24

See accompanying notes to financial statements


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

Year Year
Ended Ended
December 31, December 31,
($ Thousands) 2007 2006
----------------------------------------------------------------------------
Retained Earnings:
Retained Earnings, beginning of year 5,742 1,767
Net income for the period 5,755 3,975
--------------------------------
Retained Earnings, end of year 11,497 5,742
--------------------------------
--------------------------------

Comprehensive Income:
Net income for the period 5,755 3,975
Other comprehensive income - -
--------------------------------
Comprehensive income 5,755 3,975
--------------------------------
--------------------------------

Accumulated other comprehensive income:
Accumulated other comprehensive income,
beginning of year - -
Effect of adoption of new accounting
standards (Note 2) - -

Changes during the period - -
--------------------------------
Accumulated other comprehensive income,
end of year - -
--------------------------------
--------------------------------

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Cash Flows

Year Year
Ended Ended
December 31, December 31,
($ Thousands) 2007 2006
----------------------------------------------------------------------------
Cash provided by (used in):
Operating Activities
Net income for the period 5,755 3,975
Items not affecting cash:
Stock based compensation cost 707 821
Future income taxes 362 1,890
Depletion, depreciation and accretion 14,346 12,966
----------------------------------------------------------------------------
21,170 19,652

Change in non-cash working capital (note 9) 894 (2,125)
----------------------------------------------------------------------------
22,064 17,527
----------------------------------------------------------------------------
Investing Activities
Property and equipment additions (38,400) (45,227)
Property acquisition and disposition 137 3,300
Change in non-cash working capital (note 9) (2,236) (7,317)
----------------------------------------------------------------------------
(40,499) (49,244)
----------------------------------------------------------------------------
Financing Activities
Bank debt 19,505 21,825
Issue of capital stock 10,560
Share issue expense, net of tax - (668)
Normal course issuer bid - Net of
share issuance costs recovered (note 5) (1,070)
----------------------------------------------------------------------------
18,435 31,717

Increase (decrease) in cash - -
Cash - beginning of year - -
----------------------------------------------------------------------------
Cash - end of year - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental Information:
Interest Paid 3,121 1,559
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to financial statements



Accrete Energy Inc.

Notes to the Financial Statements
For the years ended December 31, 2007 and 2006


1. Significant Accounting Policies

The financial data presented has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and measurement currency is the Canadian dollar. As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgement. In the opinion of management, these financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.

Accrete Energy Inc. ("Accrete") commenced operations on June 1, 2004 when it acquired assets under a plan of arrangement entered into by Provident Energy Trust, Provident Energy Ltd., Olympia Energy Inc. and Accrete Energy Inc.

Oil and Gas Operations

Revenues from the sale of petroleum and natural gas are recorded when title passes to an external party.

The Company follows the full-cost method of accounting whereby all costs related to the acquisition, exploration and development of petroleum and natural gas properties, net of government incentives, are capitalized in a cost centre. Such costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling both productive and non-productive wells and related plant and production equipment costs. Costs centres are established for each country. There is only one cost centre for the Company, that being Canada.

Proceeds on disposition of petroleum and natural gas properties are accounted for as a reduction of capitalized costs with no gains or losses recognized unless such disposition results in a change of 20% or more in the depletion rate.

Capitalized costs, together with estimated future capital costs associated with proved reserves are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of oil based on the relative energy content of six thousand cubic feet of natural gas to one barrel of oil. Unproved properties are excluded from the depletion base until it is determined whether proved reserves are attributable to the properties or impairment occurs. A separate impairment test is conducted at least annually on these unproved properties. Impairment tests would be conducted more frequently if events indicate a material change in circumstances from the most recent impairment test.

Office furniture and fixtures are recorded at cost and are depreciated over their useful lives on a declining balance basis at 20% per annum.

The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the "ceiling test").

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are initially assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the costs (less any impairment) of unproved properties exceed the carrying value of the oil and gas assets in the cost centre. The cost centre includes the cost of oil and gas properties being depleted together with unproved properties. If the carrying value of the oil and gas assets is assessed not to be recoverable, an impairment loss will be recognized to the extent that the carrying value of oil and gas properties in the cost centre exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the cost of the unproved properties. Fair value is estimated using the present value approach whereby future cash flows, calculated based on future product prices and expenditures, are discounted using a risk free rate of interest.

The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset, known as the asset retirement cost, which is depleted using the unit-of- production method. The liability is adjusted in each reporting period to reflect the passage of time, with the accretion charged to earnings, and for revisions to the estimated future cash flows.

Joint Operations

A significant portion of the Company's exploration and production activities are conducted jointly with others and the financial statements reflect only the Company's proportionate interest in such activities.

Stock Based Compensation

The Company has an employee stock option plan. The compensation cost in respect of this plan is recognized in the financial statements using the fair market value method and the cost is recognized over the vesting period of the underlying security. The Company has not incorporated an estimated forfeiture rate for stock options that will not vest and will account for actual forfeitures as they occur.

Measurement Uncertainty

Amounts recorded for depreciation and depletion, the provision for asset retirement and abandonment costs, and amounts used for ceiling test calculations are based on estimates of oil and natural gas reserves. The Company's reserve estimates are reviewed annually by an independent engineering firm. By their nature, these estimates of reserves and future cash flows are subject to measurement uncertainty, and the impact on the financial statements of future periods could be material.

Per Share Amounts

The Company uses the treasury stock method to determine the dilutive effect of stock options and other dilutive instruments. This method assumes that proceeds received from the exercise of in-the-money stock options and other dilutive instruments are used to purchase common shares at the average market price during the year.

Flow through Shares

The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow through share arrangements are renounced to investors in accordance with income tax legislation. Future income tax liabilities and share capital are adjusted by the estimated cost of the renounced income tax deductions when the related flow through expenditures are renounced to investors.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Temporary differences arising from the differences between the carrying amounts of assets and liabilities and their tax bases are used to calculate future income tax assets or liabilities. Future income tax assets or liabilities are calculated using the rates that are anticipated to be in effect in the periods that the temporary differences are expected to reverse. The effect on future tax assets and liabilities of a change in income tax rates is recognized in net earnings in the period in which the change occurs. Future income tax assets are limited to the amount that is more likely than not to be realized in future periods.

Financial Instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Upon initial recognition all financial instruments, including all derivatives, are recognized on the balance sheet at fair value. Subsequent measurement is then based on the financial instruments being classified into one of five categories: held for trading, held to maturity, loans and receivables, available for sale and other liabilities. The Company has designated its cash and cash equivalents as held for trading which are measured at fair value. Accounts receivable are classified as loans and receivables which are measured at amortized cost. Accounts payable, accrued liabilities and bank debt are classified as other liabilities which are measured at amortized cost, which is determined using the effective interest method.

The Company is exposed to market risks resulting from fluctuations in commodity prices and interest rates in the normal course of operations. A variety of derivative instruments may be used by the Company to reduce its exposure to fluctuations in commodity prices and interest rates. The Company does not use these derivative instruments for trading or speculative purposes. The Company considers all of these transactions to be economic hedges, however, the majority of the Company's contracts do not qualify or have not been designated as hedges for accounting purposes. As a result, all derivative contracts are classified as held for trading and are recorded on the balance sheet at fair value, with changes in the fair value recognized in net income, unless specific hedge criteria are met. The fair values of these derivative instruments are based on an estimate of the amounts that would have been received or paid to settle these instruments prior to maturity given future market prices and other relevant factors. Proceeds and costs realized from holding the derivative contracts are recognized in net income at the time each transaction under a contract is settled.

The Company has elected to account for its physical delivery sales contracts as non-financial derivatives.

The Company measures and recognizes embedded derivatives separately from host contracts when the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, when it meets the definition of a derivative and when the entire contract is not measured at fair value. Embedded derivatives are recorded at fair value. The Company immediately expenses all transaction costs incurred in relation to the acquisition of a financial asset or liability.

The Company applies trade-date accounting for the recognition of a purchase or sale of cash equivalents and derivative contracts.

Financial instruments consist primarily of accounts receivable, prepaid expenses, accounts payable and accrued liabilities and bank debt. There are no significant differences between the carrying value of these instruments and their estimated fair value.

2. Change In Accounting Policy

On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3855, "Financial Instruments - Recognition and Measurement", Handbook Section 3865, "Hedges", and Handbook Section 1530, "Comprehensive Income".

The adoption of these standards had no material impact on the Company's net earnings or cash flows.

New Accounting Pronouncements

Financial Instruments

In December 2006, the AcSB issued two new sections in relation to financial instruments: Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation, which will replace Section 3861 - Financial Instruments - Disclosure and Presentation. The new disclosure standard will increase the Company's disclosure regarding the risks associated with financial instruments and how those risks are managed and will require additional disclosure as of January 1, 2008.

Capital Disclosures

As of January 1, 2008, the Company will be required to adopt CICA Handbook Section 1535 "Capital Disclosures", which will require the Company to disclose its objectives, policies and processes for managing capital.

Goodwill

As of January 1, 2009, the Company will be required to adopt CICA Handbook Section 3064 "Goodwill and Intangible Assets", which defines the criteria for the recognition of intangible assets.

International Financial Reporting Standards

On February 13, 2008, Canada's Accounting Standards Board confirmed January 1, 2011 as the effective date for the convergence of Canadian GAAP to International Financial Reporting Standards. The Canadian Securities Administrators are in the process of examining changes to securities rules as a result of this initiative. We continue to monitor and assess the impact of these convergence efforts.



3. Property and Equipment

As At As at
December 31, December 31,
2007 2006
($ thousands) $ $
----------------------------------------------------------------------------

Petroleum and natural gas properties and equipment 152,631 114,186
Furniture, fixtures and other 129 114
----------------------------------------------------------------------------
152,760 114,300
Less: Accumulated depletion and depreciation 33,018 18,794
----------------------------------------------------------------------------
119,742 95,506
----------------------------------------------------------------------------


At December 31, 2007 costs of $9,509,000 ($4,044,889 at December 31, 2006) with respect to unproved properties have been excluded from costs subject to depletion. At December 31, 2007 a total of $2,700,000 of future development costs were included in the depletion calculation (2006 - $3,300,000). Direct salary costs related to geological and geophysical personnel in the amount of $271,000 ($172,000 in 2006) have been charged to petroleum and gas properties during the year. No other salary or overhead charges have been capitalized.

4. Bank Indebtedness

At December 31, 2007 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $70,000,000 that bears interest at bank prime plus one eighth percent.

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

5. Share Capital

Authorized:

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



Issued and outstanding:

Number of
Common Voting Shares Shares $ Thousands
----------------------------------------------------------------------------

Balance, December 31, 2005 15,232,936 29,618
Exercise of Stock Options 16,666 74
Issued on private placement - flow through shares 1,248,300 10,486
Share issuance costs, net of tax (460)
----------------------------------------------------------------------------
Balance, December 31, 2006 16,497,902 39,718
Normal Course Issuer Bid (226,100) (544)
Tax effect of flow through shares (3,041)
Share issuance costs, net of tax 9
----------------------------------------------------------------------------
Balance, December 31, 2007 16,271,802 36,142
----------------------------------------------------------------------------


The tax deductions related to the $10,486,000 of flow through shares issued in 2006 were renounced to flow through shareholders and booked to the accounts in February 2007.



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

December 31,
2007 2006
----------------------------------------------------------------------------
Weighted average common voting shares outstanding
- basic 16,383,923 15,325,924
Effect of dilutive stock options 1,420,251 1,121,132
----------------------------------------------------------------------------
Weighted average common shares outstanding -
diluted 17,804,174 16,447,056
----------------------------------------------------------------------------


Stock Options

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

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

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

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

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

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

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



The following table summarizes information about stock options outstanding
at December 31, 2007:

Grant Price Options Remaining Number Weighted
Outstanding Contractual Exercisable Average
Life (Vested) Exercise
Price
($/Share)
----------------------------------------------------------------------------
$1.00 (1) 926,845 1.4 Years 926,845 .50
$2.30 (2) 40,000 1.8 Years 40,000 .05
$2.60 (2) 395,000 1.9 Years 395,000 .56
$2.89 (2) 5,000 1.9 Years 5,000 .01
$3.12 (2) 40,000 1.9 Years 40,000 .07
$5.20 (1) 375,000 4.2 Years 126,667 1.05
$5.26 (1) 50,000 4.0 Years - .14
$6.91 (2) 10,000 3.8 Years 3,333 .04
$7.01 (2) 5,000 2.4 Years 3,333 .02
----------------------------------------------------------------------------
1,846,845 2.6 Years 1,540,178 2.44
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(1) Five year term, vest equally over a three year period commencing on the
date of grant.
(2) Five year term, vest equally over a three year period commencing on the
first anniversary of the date of grant.

Options outstanding:

Balance, December 31, 2005 1,465,845
Granted 10,000
Exercised and Forfeited (50,000)
----------------------------------------------------------------------------
Balance, December 31, 2006 1,425,845
Granted 430,000
Forfeited (9,000)
----------------------------------------------------------------------------
Balance, December 31, 2007 1,846,845
----------------------------------------------------------------------------


During the year ended December 31, 2007, 380,000 options were granted with an exercise price of $5.20/share and 50,000 options were granted were granted with an exercise price of $5.26/share . An estimated fair value of $2.14/share was calculated for the $5.20 options and an estimated fair value of $1.88 was calculated for the $5.26 options as at the date of their respective grant using the Black-Scholes model.

The Company has accounted for its employee stock options granted using the fair value method. The fair value of all options granted to December 31, 2007 was estimated to be $4,486,000 ($2.43 per option granted). This value is charged to stock based compensation cost over the vesting period. A total of $170,000 (2006, $158,000) was charged in the fourth quarter and $707,000 (2006, $821,000) for the year ended December 31, 2007.

The assumptions used in calculating the fair value include a volatility factor ranging from 31% to 52%, a weighted average risk free interest rate of 3.7% to 4.5%, and a weighted average expected life of the options of 4 to 5 years.



Contributed Surplus

Year Ended
December 31,
($ thousands) 2007 2006
----------------------------------------------------------------------------
Balance, beginning of year 3,414 2,593
Stock Based Compensation 707 821
Normal Course Issuer Bid (540)
----------------------------------------------------------------------------
Balance, end of year 3,581 3,414
----------------------------------------------------------------------------


Normal Course Issuer Bid

On March 27, 2007, the Company announced that the Toronto Stock Exchange had approved a normal course issuer bid (the "NCIB) whereby the Company may acquire a maximum of 1,000,000 common voting shares by way of the NCIB prior to its expiry on March 22, 2008.

A total of 226,100 common voting shares have been acquired during 2007 at prices ranging from $3.90 to $5.05 per share. Shares purchased pursuant to the NCIB have been cancelled and returned to treasury.



6. Asset Retirement Obligation

Asset retirement obligation comprises:

Year Ended
December 31,
($ thousands) 2007 2006
----------------------------------------------------------------------------
Balance, beginning of year 1,663 1,152
Liabilities incurred 197 494
Liabilities settled - (44)
Dispositions - (47)
Accretion expense 122 108
----------------------------------------------------------------------------
Balance, end of year 1,982 1,663
----------------------------------------------------------------------------


The total future asset retirement obligation was estimated based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows to settle the asset retirement obligation is approximately $3,742,000 (2006 $3,207,945) which will be incurred over the next twenty five years. A credit adjusted risk-free rate of 7% (2006 7%) and an inflation rate of 2% (2006 2%) was used to calculate the fair value of the obligations.

7. Income Taxes

At December 31, 2007, the Company's exploration and development expenditures and undepreciated capital costs total $83,294,000. These costs may be carried forward indefinitely to reduce future taxable income.

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



Year Ended December 31,
($ thousands) 2007 2006
----------------------------------------------------------------------------
Income/(Loss) before income taxes 6,117 5,865
Statutory Rate 32.12% 34.12%
Expected income tax expense at the combined federal
and provincial statutory rate 1,965 2,001
Crown royalties - 927
Resource allowance - (895)
Alberta Royalty Tax Credits - (60)
Stock based compensation cost 227 280
True Up Prior Year Provision - 136
Attributed crown royalty income - (71)
Tax-rate adjustments (1,835) (435)
Other 5 7
------------------------
Future income tax expense 362 1,890
------------------------

The following table summarizes the tax effect of temporary differences:

($ thousands) December 31,
2007 2006
----------------------------------------------------------------------------
Future income tax assets (liabilities):
Carrying value of capital assets in excess of
tax basis (9,112) (5,836)
Asset retirement obligation 495 483
Share issue costs 263 405
Attributed crown royalty income 173 175
----------------------------------------------------------------------------
(8,181) (4,773)
----------------------------------------------------------------------------


8. Financial Instruments

Financial instruments consist primarily of accounts receivable, accounts payable and accrued liabilities and bank debt. There are no significant differences between the carrying value of these instruments and their estimated fair value.

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

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

The Company did not enter into any such contracts that would have mitigated its exposure to foreign currency but it did enter into various contracts that were intended to reduce its exposure to fluctuations in commodity prices during 2007. These were derivative contracts classified as "held for trading".

These contracts expired on October 31, 2007. The realized gain for 2007 from these collars was $209,000.

There were no such contracts open at December 31, 2007 but subsequent to that, the Company entered into a financial costless collar based 3,000 Gj/d of natural gas for the period from April 1, 2008 to October 31, 2008 with a put price of $6.635/Gj and a call price of $7.365.



9. Supplemental Cash Flow Information

Change in non-cash working capital comprises:

December 31,
($ thousands) 2007 2006
----------------------------------------------------------------------------

Accounts receivable (881) 800
Prepaid expenses (275) (67)
Accounts payable and accrued liabilities (186) (10,175)
----------------------------------------------------------------------------
Change in non-cash working capital (1,342) (9,442)
----------------------------------------------------------------------------

Relating to:
Investing activities (2,236) (7,317)
Operating activities 894 (2,125)
----------------------------------------------------------------------------
(1,342) (9,442)
----------------------------------------------------------------------------


10. Commitments

The Company has entered into an agreement with a major drilling contractor. The Company is obligated to utilize the contractor's rig for a period of 200 days during the one year term of the agreement that commenced August 15, 2007.

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



Contractual obligations
($ thousands) 2008 2009 2010 2011 2012 Thereafter

----------------------------------------------------------------------------

Office Premises 562 708 708 741 808 879

Office equipment 9 2 1 - - -
----------------------------------------------------------------------------
571 710 709 741 808 879

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