Birchcliff Energy Ltd.
TSX : BIR

Birchcliff Energy Ltd.

August 12, 2008 18:44 ET

Birchcliff Energy Ltd. Announces Record Second Quarter Financial Results, and Continued Success With Its Montney/Doig Natural Gas Resource Play

CALGARY, ALBERTA--(Marketwire - Aug. 12, 2008) -

NOT FOR DISTRIBUTION TO THE UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES OF AMERICA

Birchcliff Energy Ltd. ("Birchcliff") (TSX: BIR) is pleased to announce its record financial and operating results for the second quarter of 2008. The full text of Birchcliff's Second Quarter Report containing the Financial Statements for the three and six month periods ended June 30, 2008 and the related Management's Discussion and Analysis is set forth below and will be available on SEDAR at www.sedar.com.

SECOND QUARTER HIGHLIGHTS:

- Record average production for the second quarter of 9,583 BOE per day, slightly above first quarter 2008 production and our internal budget

- Cash flow of $41.7 million ($0.37 per share) - an increase of 207% from $13.6 million ($0.21 per share) for the same quarter last year and $14.4 million greater than the first quarter 2008

- Earnings of $9.8 million ($0.09 per share) up from a loss of $707,000 for the same quarter last year and $6 million greater than the first quarter of 2008

- Reduced total debt to $163.4 million

- Increased undeveloped land to 342,830 gross (295,438 net) acres all in the Peace River Arch (an average 86% working interest)

- Our Montney/Doig natural gas resource play continued to meet or exceed Birchcliff's original expectations

- Increased Montney/Doig proven lands by 3.2 net sections, to a total of 40.7 net sections

- Increased Montney/Doig trend lands by 19.3 net sections, to a total of 39.3 net sections

- Increased Montney/Doig potential horizontal well locations to approximately 320 net locations comprised of approximately 160 net locations on proven lands and approximately 160 net locations on trend lands, assuming 4 wells per section

- The Worsley light oil program continued to exceed our original expectations

- Drilled 3 vertical wells and 1 horizontal well on the Worsley light oil Property, all 100%

- Drilled 1 natural gas discovery well (50% WI)

- Birchcliff was included in the Standard & Poor's S&P/TSX Composite Index on June 23, 2008

Birchcliff Energy Ltd. - Second Quarter 2008 Report

The full Text of the 2008 Second Quarter Report Follows:

Dear Shareholder:

Birchcliff enjoyed record production of 9,583 BOE per day, cash flow of $41.7 million ($0.37 per share) and earnings of $9.8 million ($0.09 per share) in the second quarter of 2008. Average second quarter production was slightly ahead of both Birchcliff's internal budget and first quarter average production. Birchcliff was quiet operationally as a result of spring break-up but extremely active planning the execution of its capital program for the summer, fall and winter 2009. I am very pleased to report that Birchcliff continued to add to its undeveloped land position on its Montney/Doig trend primarily through Crown land sales and farm-ins boosting its undeveloped land to 80 net sections. This undeveloped land which Birchcliff considers to be highly prospective for the Montney/Doig resource play, adds to our potential drilling locations, adds significant economies of scale and continues to increase the Birchcliff footprint in the Peace River Arch area of Alberta.

As noted below in our operations update we have significant momentum on our Montney/Doig play which continues to expand as Birchcliff and industry continue to have excellent success as a result of advances in drilling and completion technology, the evaluation of new stratigraphic reservoirs and the expansion of the play geographically.

Our very large, highly concentrated high working interest production and undeveloped land base is surrounded by infrastructure which we operate, control or have access to, which will allow Birchcliff to fully exploit its two resource plays, the Montney/Doig natural gas and its Worsley light oil property in the years to come.

2008 Second Quarter Results

Production

Current production is approximately 10,000 BOE per day. Currently, there are 17 gross (15.4 net) wells that are in various stages of completion and awaiting tie-in. Birchcliff has 4 gross (3.4 net) Montney/Doig horizontal natural gas wells behind pipe which will be brought on production over the next several months. Production for the second quarter of 2008 averaged 9,583 BOE per day. This is a 68% increase from the second quarter of 2007 and slightly ahead of the first quarter of 2008. We are pleased with this production profile which exhibits strong base production and will continue to grow as our Montney/Doig horizontal wells come on production. Average production was still ahead of the first quarter, notwithstanding production in the second quarter was impacted by unseasonably cold temperatures, the expected decline of flush production from wells tied-in during late 2007 and winter 2008, natural declines, spring break-up and the planned scheduled turnaround of various natural gas facilities and the Worsley Light Oil Plant.

Cash Flow and Earnings

Cash flow was a record $41.7 million or $0.37 per share for the second quarter of 2008, as compared to $13.6 million or $0.21 per share for the second quarter of 2007. Cash flow has grown significantly from $27.1 million in the first quarter of 2008.

Birchcliff had earnings of $9.8 million or $0.09 per share for the second quarter of 2008 as compared to a loss of $770,000 or $0.01 per share for the second quarter of 2007. Birchcliff recognized a realized loss from its oil price risk management contract (hedging loss) in the amount of $4.1 million in the second quarter which related to a volume of 1,000 BOE per day of light oil. The volume under this oil price risk management contract is fixed at 1,000 BOE per day for the remainder of the year. Birchcliff has no current intention of hedging any further production.

Capital Expenditures and Drilling

During the second quarter of 2008, capital spending aggregated $37.5 million as compared to $13.7 million for the same period last year. This capital spending, including acquisitions, was less than our cash flow in the second quarter 2008. Details of our capital expenditures are set forth in the Management's Discussion and Analysis portion of the quarterly report.

The Montney/Doig horizontal well natural gas program results to date continued to meet or exceed our original expectations.

Birchcliff was not able to commence its post break-up drilling program until early June, resulting in a limited number of wells drilled in the second quarter. The second quarter program consisted of 5 gross (4.5 net) wells. All wells were cased, representing 100% success for the program. One exploration well (0.5 net) was a successful gas well, the other 4 wells (4.0 net) were oil development wells.

Indebtedness

Total indebtedness at June 30, 2008, including working capital deficiency was $163.4 million down from $169.6 million at the end of the first quarter of 2008. On June 30th Birchcliff was drawn to $148.9 million on its $240 million credit facilities.

Land

Birchcliff has continued to grow its undeveloped land base in the Peace River Arch. At June 30, 2008 it owned 342,830 gross undeveloped acres (295,438 net) with an average 86% working interest.

In the second quarter Birchcliff added an additional 3.2 net sections of land to its inventory of proven lands on the Montney/Doig natural gas resource play, being lands on which the Montney/Doig formations have been penetrated by logged well bores or lands which are adjacent to such penetrations. At June 30, 2008 we had 40.7 net sections which we consider proven lands for the Montney/Doig play, an increase from 37.5 net sections at March 31, 2008.

These additional lands have increased our Montney/Doig horizontal natural gas well drilling inventory on proven lands on 40.7 net sections to approximately 160 potential drilling locations (assuming 4 wells/section).

Birchcliff has also added significant trend land to its Montney/Doig resource natural gas play. Birchcliff believes that its trend land has a high likelihood of extending the Montney/Doig natural gas resource play based on technical information including geological and geophysical data. Through private acquisitions, Crown sales, farm ins, poolings, and drilling, Birchcliff added 19.3 net sections to its trend land inventory during the second quarter, for a total of 39.3 net sections of trend land at June 30, 2008, a significant increase from 20.0 net sections of trend land at March 31, 2008. This represents approximately 160 additional horizontal well locations on its trend lands of 39.3 net sections based on 4 wells per section.

These additions to our drilling inventory continue to add significant depth to our repeatable, sustainable Montney/Doig opportunities which continues to provide Birchcliff with the economies of scale necessary to fully develop these lands. We believe the concentration of high working interest land and the large footprint we have enhances ultimate value of all of our lands and is one of the many reasons Birchcliff's shares trade at a premium value.

OPERATIONAL UPDATE

Birchcliff is currently very active operationally with drilling, completion, and new facility operations. Since break-up we have drilled 4 (3.4 net) horizontal Montney/Doig wells and 1 (0.7 net) vertical Montney/Doig well. Currently, we have 5 rigs working, two are drilling horizontal wells for the Montney/Doig, two are drilling in the Worsley light oil resource play and one rig is working various other projects. Year to date Birchcliff has drilled 35 (32.77 net) wells, 54% were oil wells, 43% were gas wells and 3% (1 net well) was drilled and abandoned.

Continued Success in Montney/Doig Natural Gas

Recently there has been significant industry activity and focus on the Montney/Doig natural gas resource play and Birchcliff continues to be a very active competitor on this play. To date Birchcliff has drilled 25 gross (22.1 net) vertical wells and 10 gross (8.95 net) horizontal wells of which 4 have been drilled since break-up. Currently, 2 more are drilling, one at 100% working interest and one at 70% working interest.

Our land position continues to grow. To date we have 40.7 net sections of proven land and 45.1 net sections of trend land. In total we now control 85.8 net sections of land on the play. At 4 wells per section that represents an inventory in excess of 340 locations (up from 320 at the end of the second quarter), 10 of which have been drilled to date.

Birchcliff now has 6 Montney/Doig horizontal wells on production, one of which was just brought on yesterday and therefore had almost no impact on current production rates. The average of the initial rates of these 6 Montney/Doig horizontal wells was approximately 550 BOE per day. Our Montney/Doig natural gas resource play continues to meet or exceed Birchcliff's original expectations.

Continued Success in Worsley Light Oil

Birchcliff has been extremely active and continues to have success on its Worsley light oil resource play. During 2008, we have drilled 15 infill or delineation vertical wells. We have also drilled 4 light oil horizontal development wells in 2008. Recently, we successfully executed multi-stage fracturing completion techniques on a number of our horizontal wells. The early results are very positive but a longer production history is necessary to properly evaluate the results of these completions.

We recently received approval for our waterflood expansion at Worsley. This is a major milestone for the continued development of our enhanced oil recovery ("EOR") scheme at Worsley. Upon receipt of the EOR approval, Birchcliff immediately initiated the necessary operations to commence the expansion of the waterflood in the Worsley light oil pool.

Outlook

We continue to be extremely excited about the successful expansion of our two resource plays, the Montney/Doig natural gas and the Worsley light oil. The addition of undeveloped land on the Montney/Doig trend strengthens the future of Birchcliff.

We intend to focus our efforts on the long term development of our resource plays. We intend to drill to extend their areal extent, aggressively buy additional lands on the plays, and build out the infrastructure needed to facilitate and control the future development of these plays. This will ultimately add significant reserves and production and enhance the value of the Corporation.

Birchcliff is also now pursuing other resource plays in its focus area and continues to evaluate the potential for the development of shale gas production and reserves on its lands.

Based on our current drilling program, Birchcliff believes it will exit the year at production levels estimated to be between 12,500 and 13,000 BOE per day.

On behalf of our management team and Directors we thank our shareholders for their continued support and our staff for their hard work and dedication.

A. Jeffery Tonken

President and Chief Executive Officer



FINANCIAL AND OPERATIONAL HIGHLIGHTS

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Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
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OPERATING
Daily Average Production
Light Oil - barrels 2,728 703 2,778 722
Natural Gas - thousands of
cubic feet 38,525 28,998 38,158 29,215
NGLs - barrels 434 175 389 178
Total - barrels of oil
equivalent (6:1) 9,583 5,712 9,526 5,770
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Average Sales Price ($ Canadian)
Light oil - per barrel 121.39 69.92 107.82 66.82
Natural Gas - per thousand
cubic feet 10.93 7.39 9.65 7.59
NGLs - per barrel 112.62 67.93 102.05 66.13
Total - barrels of oil
equivalent (6:1) 83.58 48.20 74.26 48.82
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Undeveloped Land
Gross (acres) 342,830 242,059 342,830 242,059
Net (acres) 295,438 199,097 295,438 199,097
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NETBACK AND COST
($ per barrel of oil equivalent
at 6:1)
Petroleum & natural gas
revenue 84.02 48.99 74.67 49.63
Royalties (13.03) (6.22) (11.57) (7.20)
Operating expense (10.79) (8.64) (10.55) (8.83)
Transportation and
marketing expense (2.69) (1.63) (2.78) (1.63)
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Netback 57.51 32.50 49.77 31.97
General & administrative
expense (2.41) (3.39) (2.07) (3.39)
Stock-based compensation
expense - (0.02) (0.01) (0.04)
Realized loss on risk
management contracts (4.71) - (4.24) -
Realized loss on foreign
exchange (0.13) - (0.09) -
Interest expense (2.48) (2.61) (3.61) (2.42)
Taxes - (0.24) - (0.23)
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Cash Flow Netback 47.78 26.24 39.75 25.89
Depletion and depreciation
expense (24.52) (27.60) (24.62) (27.52)
Accretion expense (0.42) (0.46) (0.39) (0.45)
Stock-based compensation
expense (1.55) 0.21 (1.49) (0.53)
Unrealized loss on risk
management contracts (6.38) - (2.66) -
Unrealized gain on foreign
exchange 0.11 - 0.17 -
Future income tax recovery
(expense) (3.82) 0.25 (2.93) 0.62
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Net Earnings (Loss) 11.20 (1.36) 7.83 (1.99)
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FINANCIAL
Petroleum & Natural Gas
Revenue ($000) 73,273 25,462 129,465 51,831
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Cash Flow from Operations
($000) 41,676 13,641 68,940 27,037
Per share - basic ($) 0.37 0.21 0.65 0.42
Per share - diluted ($) 0.36 0.21 0.63 0.42
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Net Earnings (Loss) ($000) 9,776 (707) 13,604 (2,080)
Per share - basic ($) 0.09 (0.01) 0.13 (0.03)
Per share - diluted ($) 0.08 (0.01) 0.12 (0.03)
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Common Shares Outstanding
End of Period - Basic 112,375,970 64,189,413 112,375,970 64,189,413
End of Period - Diluted 121,270,357 72,709,078 121,270,357 72,709,078
Weighted Average for
Period - Basic 112,234,676 64,189,413 105,543,511 64,178,916
Weighted Average for
Period - Diluted 117,074,630 64,394,368 110,062,054 65,095,253
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Capital Expenditures
($000) 37,487 13,727 89,005 31,546
Working Capital
(Deficiency) ($000) (14,456) (3,385) (14,456) (3,385)
Revolving Credit
Facilities ($000) 148,922 88,833 148,922 88,833
Total Debt ($000) 163,378 92,218 163,378 92,218
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MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") in respect of the three and six month periods ended June 30, 2008 (the "Reporting Periods") as compared to the three and six month periods ended June 30, 2007 (the "Comparable Prior Periods") is dated August 12, 2008.

The following discussion and analysis is management's assessment of the historical financial and operating results of Birchcliff Energy Ltd. (the "Corporation" or "Birchcliff") and should be read in conjunction with the unaudited financial statements of the Corporation for the Reporting Periods and the audited financial statements as at and for the years ended December 31, 2006 and 2007 together with the notes thereto, all of which has been prepared in accordance with Canadian Generally Accepted Accounting Principles.

Additional information relating to the Corporation is available on SEDAR at www.sedar.com. Birchcliff is listed for trading on the Toronto Stock Exchange under the symbol "BIR".

All dollar amounts are stated in Canadian dollars unless otherwise stated.

FORWARD LOOKING STATEMENTS

This disclosure includes forward-looking statements and assumptions respecting the Corporation's strategies, future operations, expected financial results, financing sources, commodity prices, costs of production and quantum of petroleum and natural gas reserves and discusses certain issues, risks and uncertainties that can be expected to impact on any of such matters.

By their nature, forward-looking statements are subject to numerous risks and uncertainties that can significantly affect future results. Actual future results may differ materially from those assumed or described in such forward-looking statements as a result of the impact of issues, risks and uncertainties whether described herein or not, which the Corporation may not be able to control. The reader is therefore cautioned not to place undue reliance on such forward-looking statements.

The Corporation disclaims any intention or obligation to update or revise these forward-looking statements as a result of new information, future events or otherwise, except to the extent required by law.

NON-GAAP MEASURES

This MD&A and the Corporation's Second Quarter Report for 2008 make references to terms commonly used in the petroleum and natural gas industry, such as cash flow or cash generated from operations, cash flow per share, operating netback, netback and cash flow netback.

Cash flow, as discussed in this MD&A and in the Corporation's Annual Report for 2007, appears as a separate line on the Corporation's Statement of Cash Flows above "changes in non-cash working capital" and is reconciled to net earnings or loss. In the Corporation's disclosure, netback and/or operating netback denotes petroleum and natural gas revenue less royalties, less operating expenses and less transportation and marketing expenses. Cash flow netback as used herein denotes net earnings plus future income tax expense (less any recovery), depletion, depreciation and accretion expense, unrealized losses on risk management contracts and foreign exchange (less any unrealized gains thereon) and non-cash stock-based compensation expense.

These terms are not defined by Generally Accepted Accounting Principles and consequently, they are referred to as non-GAAP measures. The reader should be cautioned that these amounts may not be directly comparable to measures for other companies where similar terminology is used.

BOE CONVERSION

Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel and is based on an energy equivalent conversion method primarily applicable at the burner tip and does not necessarily represent an economic value equivalency at the wellhead. This conversion basis conforms to National Instrument 51-101 Standards for Oil and Gas Activities of the Canadian Securities Administrators.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Corporation is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") have evaluated the effectiveness of the Corporation's disclosure controls and procedures as at June 30, 2008 and have concluded that such disclosure controls and procedures were effective as at that date to provide reasonable assurance that material information relating to Birchcliff is made known to them by others within the Corporation possessing such information. It should be noted that while the Corporation's CEO and CFO believe that the Corporation's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

The CEO and CFO of the Corporation are able to certify the design of the Corporation's internal controls over financial reporting as required under Multilateral Instrument 52-109 of the Canadian Securities Administration with no significant weaknesses in design of these internal controls that require commenting on in the MD&A.

For the second quarter of 2008 there were no changes to the design of internal controls over financial reporting.

OVERALL PERFORMANCE

Average production in the second quarter of 2008 increased slightly to 9,583 BOE per day, as compared to 9,470 BOE per day in the first quarter of 2008. This small increase in production volumes was due to minor new production additions, mitigated by normal production declines, temporary production slowdowns associated with spring break-up, and planned facility turnarounds. As in the prior year the second quarter production tends to be fairly consistent with first quarter production due to spring break-up from late March to early June.

The second quarter of 2008 was a period of significant financial growth for the Corporation. First, second quarter revenue increased 30% over the first quarter of 2008 solely on the strength of increasing oil and natural gas prices. These high commodity prices resulted in an earnings before taxes increase, quarter over quarter, of 135% and an earnings after taxes increase, quarter over quarter, of 155%. Cash flow also grew with an increase of 53% over the first quarter of 2008. On a per BOE basis, the Corporation's operating netback increased 37% to $57.51 per BOE compared to the first quarter's operating netback of $41.92 per BOE. The cash flow netback increased 51% to $47.78 per BOE compared to the first quarter's cash flow netback of $31.63 per BOE. This growth comes in a quarter where production grew just over 1%.

Total debt at June 30, 2008 was $163.4 million as compared to $272.9 million at December 31, 2007. This decrease in debt of $109.5 million is primarily due to the repayment and cancellation of the $100 million non-revolving credit facility in the first quarter of 2008 as a result of an equity issue. To June 30, 2008 the Corporation had drawn upon only $148.9 million of its $240 million credit capacity. This allows for maximum flexibility in terms of increasing its capital spending or capitalizing on small acquisitions without issuing further equity.

In late July 2008, SemCanada Crude Company ("SemCanada"), who marketed a very small portion of the Corporation's oil production, obtained an order under the Companies' Creditors Arrangement Act of Canada. The Corporation's exposure to SemCanada is not material in amount and is estimated at less than $75,000 in total relating to production from June 1, 2008 to July 21, 2008. The Corporation is not certain how much will be recovered from SemCanada.

In its usual course of business, the Corporation frequently reviews potential property acquisitions, joint venture opportunities and corporate mergers and acquisitions with the intention of completing such a transaction if acceptable terms can be negotiated. As a result, Birchcliff may often be involved in negotiations with other parties in respect of property acquisitions and corporate merger/acquisition opportunities. Management is confident that in the current environment, the Corporation is capable of raising sufficient equity and/or debt financing to fund one or more of these transactions should it be necessary.

MAJOR TRANSACTIONS AFFECTING FINANCIAL RESULTS

On March 14, 2008, Birchcliff completed a bought deal equity financing whereby it issued 1,522,843 flow-through common shares at a price of $9.85 per flow-through share and 14,375,000 common shares at a price of $8.00 per common share for total gross proceeds of $130 million and net proceeds of approximately $123 million. Proceeds of the offering were used to retire the $100 million syndicated non-revolving credit facility used for the Worsley Acquisition and to reduce the amount outstanding under the Corporation's revolving credit facility.

The Corporation's $200 million syndicated credit facilities were increased to $240 million and extended until May 2009 as a result of the May 2008 annual review.

LIQUIDITY AND BANK DEBT

WORKING CAPITAL

The Corporation's working capital deficit increased to $14.5 million at June 30, 2008, as compared to $3.4 million at June 30, 2007 due to increased capital spending in the first half of 2008 as compared to the first half of 2007. The Corporation drilled 5 gross wells (4.5 net) in the three month Reporting Period and 22 gross wells (20.5 net) in the six month Reporting Period as compared to 3 gross wells (2.6 net) and 12 gross wells (9.7 net) in the three and six month Comparable Prior Periods, respectively.

Throughout this MD&A the Corporation has excluded from its working capital deficit the accrued liability for the mark-to-market unrealized loss on its oil price risk management contracts and the associated future income tax asset because the benefit the Corporation receives from higher oil prices in the future will offset substantially all of this liability. This liability is categorically different than the other current liabilities in that it does not represent indebtedness but rather an opportunity cost when oil prices go beyond the ceiling price in the oil price risk management contracts. In order to estimate this liability, future oil prices were estimated beyond the ceiling of our costless collars, yet there is no offsetting asset recorded for the future value that the same estimated future oil price will provide Birchcliff in increased cash flows. Therefore Birchcliff believes excluding this amount from the working capital deficit calculation is appropriate.

At June 30, 2008 the largest component of Birchcliff's current assets (70%) is the cash to be received from its marketers in respect of June 2008 production which was subsequently received in July 2008, except for the immaterial amount owing from SemCanada. In contrast, the current liabilities consist of trade payables (49%); accrued capital and operating costs (33%); and royalties and other minor amounts. Management expects this working capital deficiency to continue into the foreseeable future as result of its continuing capital program in the Peace River Arch area.

BANK DEBT

The Corporation's bank debt or revolving credit facilities which have an aggregate limit of $240 million were drawn to $148.9 million at June 30, 2008 as compared to $88.8 million at June 30, 2007. In response to higher commodity prices during the first half of 2008, and the Worsley Acquisition in the third quarter of 2007, the Corporation increased its capital program in 2008 as compared to 2007, due to its increased cash flow.

At June 30, 2008 the interest rate applicable to the working capital facility was 5.4% and slightly less for the syndicated facility because bankers' acceptances, which have a lower effective rate of interest, are used in the syndicated facility.

Overall, the Corporation did not have any liquidity issues with respect to the operations of its petroleum and natural gas business in the Reporting Periods nor does it anticipate a liquidity issue in the foreseeable future.

The Corporation intends to finance its oil and natural gas business primarily through cash generated from operations, proceeds from bank debt, and equity financings to the extent required. Management expects to be able to continue to raise additional equity and debt financing sufficient to meet both its short-term and long-term growth requirements in the current environment. Birchcliff is now at such a size that it anticipates it will not require additional equity except to fund a significant acquisition or to significantly increase its capital spending.

CASH FLOW FROM BY OPERATIONS

Cash generated by the Corporation was $41.7 million and $68.9 million for the three and six month Reporting Periods as compared to $13.6 million and $27.0 million for the Comparable Prior Periods. The $28.1 million and $41.9 million increases for the three and six month periods, respectively, were due to increased natural gas production as a result of drilling success, increased oil production resulting from the Worsley Acquisition and much higher commodity prices than in the prior year. However, this was mitigated by higher interest costs in the first three months of 2008 than in the first three months of 2007 due to the Worsley Acquisition and the related $100 million non-revolving credit facility, and the realized loss on oil price risk management contracts. Future cash flow will be dependent mainly on production levels and commodity prices.

OUTSTANDING SHARE DATA

The common shares of Birchcliff began trading on the TSX Exchange on July 21, 2005 under the symbol "BIR" and were at the same time de-listed from the TSX Venture Exchange where they were trading under the same symbol prior to such time. The following table summarizes the common shares issued from December 31, 2007 to June 30, 2008 which are the only class of shares outstanding:



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Common Shares
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Balance at December 31, 2007 94,554,269
Issue of Common Shares upon Exercise of Options and Warrants 1,410,977
Issue of Common Shares 14,375,000
Issue of Flow Through Shares 1,522,843
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Balance at March 31, 2008 111,863,089
Issue of Common Shares upon Exercise of Options 512,881
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Balance at June 30, 2008 112,375,970
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RESULTS OF OPERATIONS

PETROLEUM AND NATURAL GAS REVENUE

Petroleum and natural gas revenues totaled $73.3 million for the three month Reporting Period and $129.5 million for the six month Reporting Period as compared to $25.5 million and $51.8 million for the three and six month Comparable Reporting Periods. The increases were primarily due to additional production volumes associated with the Worsley Acquisition, as well as significantly higher commodity prices in 2008. The following table details Birchcliff's petroleum and natural gas revenue, production and sales prices by category for each of the Reporting Periods and Comparable Prior Periods:



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Three months ended
June 30, 2008
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Total Average
Revenue Daily Average
($000's) Production % ($/unit)
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Natural gas (mcf) 38,304 38,525 67 10.93
Light oil (bbls) 30,141 2,728 28 121.39
Natural gas liquids (bbls) 4,443 434 5 112.62
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Total sales (BOE) 72,888 9,583 100 83.58
Royalty revenue 385 0.44
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Total revenue 73,273 84.02
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Three months ended
June 30, 2007
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Total Average
Revenue Daily Average
($000's) Production % ($/unit)
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Natural gas (mcf) 19,495 28,998 85 7.39
Light oil (bbls) 4,475 703 12 69.92
Natural gas liquids (bbls) 1,083 175 3 67.93
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Total sales (BOE) 25,053 5,712 100 48.20
Royalty revenue 409 0.79
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Total revenue 25,462 48.99
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Six months ended
June 30, 2008
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Total Average
Revenue Daily Average
($000's) Production % ($/unit)
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Natural gas (mcf) 67,021 38,158 67 9.65
Light oil (bbls) 54,507 2,778 29 107.82
Natural gas liquids (bbls) 7,226 389 4 102.05
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Total sales (BOE) 128,754 9,526 100 74.26
Royalty revenue 711 0.41
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Total revenue 129,465 74.67
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Six months ended
June 30, 2007
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Total Average
Revenue Daily Average
($000's) Production % ($/unit)
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Natural gas (mcf) 40,113 29,215 84 7.59
Light oil (bbls) 8,739 722 13 66.82
Natural gas liquids (bbls) 2,132 178 3 66.13
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Total sales (BOE) 50,984 5,770 100 48.82
Royalty revenue 847 0.81
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Total revenue 51,831 49.63
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Commodity Prices

Birchcliff sells virtually all of its natural gas production at the AECO daily spot price. Birchcliff receives premium pricing for its natural gas due to the high heat content of its natural gas. The following table details the average sales price and differential received by Birchcliff:



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Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Sales Price ($/mcf) 10.93 7.39 9.65 7.59
Average of the AECO Daily Spot Prices
($/mmbtu) (1) 10.22 7.07 9.10 7.24
----------------------------------------------------------------------------
Positive Differential 0.71 0.32 0.55 0.35
----------------------------------------------------------------------------
(1) $1.00/mmbtu = $1.00/mcf based on a standard heat value mcf.


The price the Corporation receives for its production depends on a number of factors, including AECO Canadian dollar spot market prices for natural gas, U.S. dollar oil prices, the U.S./Canadian dollar exchange rate, and transportation and product quality differentials. Birchcliff regularly considers managing the risk associated with fluctuating spot market prices for natural gas and U.S. dollar oil prices and the U.S./Canadian dollar exchange rate. Birchcliff currently has no fixed commodity price contracts or other hedge type contracts for its natural gas production, but entered into the following oil price risk management contracts during 2007 for its light oil production for the terms noted below:



RISK MANAGEMENT CONTRACTS

----------------------------------------------------------------------------
WTI Price
Term Type Quantity (USD)(3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 1, 2007 - December 31, 2007 (1) Put 2,500 $ 65.00
November 1, 2007 - December 31, 2007 (1) Call 2,500 $ 81.00
January 1 -March 31, 2008 (2) Put 1,000 $ 67.50
January 1 -March 31, 2008 (2) Call 1,000 $ 81.40
January 1 - Costless $ 67.50 -
December 31, 2008 collar 1,000 $ 79.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Each contract was entered into separately on different dates but the
two contracts essentially form a costless collar.
(2) Each contract was entered into separately on different dates but the
two contracts essentially form a costless collar.
(3) Each contract is settled on the average of the daily NYMEX WTI US$
price.


The Corporation entered into the above contracts during the month of September 2007 and has not entered into any new commodity price risk management contracts since then. The Corporation actively monitors the market to determine whether any additional commodity price risk management contracts are warranted.

GAIN OR LOSS ON OIL PRICE RISK MANAGEMENT CONTRACTS

Due to the significant time and costs required to document the effectiveness of commodity price risk management contracts as hedges, Birchcliff does not account for its risk management contracts as hedges in its financial statements. The commodity price risk management contracts are instead recorded at their fair values (mark to market) at each period end date, and realized and unrealized gains or losses on risk management contracts are shown as a separate category in the statement of income.

As a result of changes in the fair value of its oil price risk management contracts during the three and six month Reporting Periods, the Corporation recorded a realized oil price risk management loss of $4.1 million and $7.3 million and an unrealized oil price risk management loss of $5.6 million and $4.6 million, respectively. Until the third quarter of 2007, Birchcliff had no commodity price risk management contracts in place so the Comparable Prior Periods are $NIL.

ROYALTIES

Oil and natural gas royalties totaled $11.4 million ($13.03 per BOE) for the three month Reporting Period and $20.1 million ($11.57 per BOE) for the six month Reporting Period as compared to $3.2 million ($6.22 per BOE) and $7.5 million ($7.20 per BOE) for the Comparable Prior Periods. The overall effective royalty rate in the three and six month Reporting Periods was 16% and 16% as compared to 13% and 15% in the Comparable Prior Periods.

In the three and six month Reporting Periods, the amounts recorded for Gas Cost Allowance ("GCA") relating to capital cost, custom processing and operating costs were $1.9 million ($2.16 per BOE) and $2.5 million ($1.43 per BOE), respectively. In the three and six month Comparable Prior Periods the amounts recorded for GCA were $730,000 ($1.41 per BOE) and $1.4 million ($1.37 per BOE), respectively. Due to the significant complexity of these GCA adjustments which are calculated by well and by facility, the Corporation does not attempt to estimate the actual amounts thereof but relies on the Government of Alberta calculated estimates. All changes to the estimates used are treated prospectively and all adjustments to prior estimates are recorded in the period received.

Excluding the GCA adjustments relating to prior periods, the overall effective royalty rate would have been 18% for each of the three and six month Reporting Periods. For the three and six month Comparable Prior Periods the overall effective royalty rates on the same basis would have been 16% and 18% respectively.

The proportions of Crown Royalties to total royalties in the three and six month Reporting Periods were approximately 93% and 94%, respectively. This is consistent with the Comparable Prior Periods of approximately 95% and 94%, respectively. This is expected to remain consistent as most of Birchcliff's new drilling is on Crown Land.

OPERATING COSTS

Operating costs were $9.4 million ($10.79 per BOE) for the three month Reporting Period and $18.3 million ($10.55 per BOE) for the six month Reporting Period as compared to $4.5 million ($8.64 per BOE) and $9.2 million ($8.83 per BOE) for the Comparable Prior Periods. The $2.15 per BOE increase in the three month Reporting Period as compared to the three month Comparable Reporting Period was primarily comprised of $0.83 per BOE relating to a planned turnaround at the Worsley facility in May 2008, $0.94 per BOE resulting from generally higher costs of equipment rentals, services and maintenance, and $0.38 per BOE due to reduced recoveries as discussed below.

The $1.72 per BOE increase in the six month Reporting Period as compared to the six month Comparable Prior Period was comprised of $0.39 per BOE relating to expensed workovers (including the Worsley facility turnaround), $1.19 per BOE resulting from generally higher costs of equipment rentals, services and maintenance, and $0.14 per BOE due to reduced recoveries as discussed below.

Recoveries continue to decrease on a per BOE basis since the Comparable Prior Periods because Birchcliff's production volumes have increased significantly as a result of the Worsley Acquisition in September 2007, without a corresponding increase in third party recoveries and recoveries from third parties in other areas have remained relatively constant on a total dollar basis. Recoveries were $0.38 per BOE lower and $0.14 per BOE lower in the three and six month Reporting Periods, respectively, as compared to the Comparable Prior Periods.

The following table compares operating costs for the Reporting Periods and the Comparable Prior Periods:



----------------------------------------------------------------------------
Three months ended Three months ended
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Total
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Field operating costs 8,968 10.28 4,857 9.34
Recoveries (457) (0.52) (473) (0.90)
----------------------------------------------------------------------------
Field operating costs, net of
recoveries 8,511 9.76 4,384 8.44
Expensed workovers and other 898 1.03 104 0.20
----------------------------------------------------------------------------
Total operating costs 9,409 10.79 4,488 8.64
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six months ended Six months ended
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Total
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Field operating costs 18,385 10.61 9,816 9.40
Recoveries (1,070) (0.62) (784) (0.75)
----------------------------------------------------------------------------
Field operating costs, net of
recoveries 17,315 9.99 9,032 8.65
Expensed workovers and other 985 0.57 188 0.18
----------------------------------------------------------------------------
Total operating costs 18,300 10.55 9,220 8.83
----------------------------------------------------------------------------
----------------------------------------------------------------------------


TRANSPORTATION AND MARKETING EXPENSES

Transportation and marketing expenses were $2.3 million ($2.69 per BOE) and $4.8 million ($2.78 per BOE) for the three and six month Reporting Periods as compared to $848,000 ($1.63 per BOE) and $1.7 million ($1.63 per BOE) in the Comparable Prior Periods. These costs consist primarily of transportation costs. The aggregate and per unit costs for the Reporting Periods are higher than in the Comparable Prior Periods because the light oil produced at Worsley is transported by truck a significant distance to a sales terminal. The Worsley property was not acquired until late 2007 so these additional costs were not in the transportation and marketing expenses for the Comparable Prior Periods.

GENERAL AND ADMINISTRATIVE EXPENSE

Net general and administrative costs ("G&A") in the three and six month Reporting Periods were $2.1 million ($2.41 per BOE) and $3.6 million ($2.07 per BOE) as compared to the Comparable Prior Periods of $1.8 million ($3.39 per BOE) and $3.5 million ($3.39 per BOE).



The components of G&A are as follows:

----------------------------------------------------------------------------
Three months ended Three months ended
($000 s, except for $/BOE amounts) June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Salaries, benefits and consultants 2,256 61% 1,453 63%
Other 1,424 39% 803 37%
----------------------------------------------------------------------------
G & A expense, gross 3,680 100% 2,256 100%
Overhead recoveries (1,249) (34%) (244) (11%)
Capitalized overhead (333) (9%) (249) (11%)
----------------------------------------------------------------------------
G & A expense, net 2,098 57% 1,763 78%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
G & A expense, net per BOE $2.41 $ 3.39
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six months ended Six months ended
($000 s, except for $/BOE amounts) June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Salaries, benefits and consultants 4,214 59% 3,019 64%
Other 2,945 41% 1,709 36%
----------------------------------------------------------------------------
G & A expense, gross 7,159 100% 4,728 100%
Overhead recoveries (2,831) (40%) (633) (13%)
Capitalized overhead (748) (10%) (553) (12%)
----------------------------------------------------------------------------
G & A expense, net 3,580 50% 3,542 75%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
G & A expense, net per BOE $2.07 $ 3.39
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Net G&A expense per BOE has decreased due to additional volumes added via the Worsley Acquisition and drilling success, and due to significant increases in overhead recoveries which is directly attributable to the increased capital spent in the Reporting Periods.

INTEREST EXPENSE

Interest expense for the three and six month Reporting Periods was $2.2 million ($2.48 per BOE) and $6.3 million ($3.61 per BOE). In the Comparable Prior Periods it was $1.4 million ($2.61 per BOE) and $2.5 million ($2.42 per BOE). The increase in aggregate interest expense and interest expense per BOE in the six month Reporting Period was a result of the Corporation maintaining a higher debt level due to the Worsley Acquisition and related non-revolving credit facility that was outstanding for most of the first quarter of 2008, and slightly higher interest rates during the Reporting Period. The Corporation's average bank debt was approximately $201.8 million for the six month Reporting Period as compared to $85.1 million for the Comparable Prior Period, in each case calculated as the simple average of the month end amounts.

DEPLETION, DEPRECIATION AND ACCRETION EXPENSE ("DD&A")

Depletion, depreciation and accretion ("DD&A") expenses in the three and six month Reporting Periods were $21.7 million ($24.94 per BOE) and $43.4 million ($25.01 per BOE) as compared to the three and six month Comparable Prior Periods of $14.6 million ($28.06 per BOE) and $29.2 million ($27.97 per BOE). The DD&A expense on a per BOE basis is 11% lower in the three and six month Reporting Periods than in the Comparable Prior Periods mainly due to the reduced costs of adding proven reserves during the last two quarters and during 2007. The components of DD&A are as follows:



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

Three months ended Three months ended
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Depletion & depreciation 21,379 24.52 14,344 27.60
Accretion 369 0.42 240 0.46
----------------------------------------------------------------------------
21,748 24.94 14,584 28.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

Six months ended Six months ended
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Depletion & depreciation 42,695 24.62 28,744 27.52
Accretion 669 0.39 470 0.45
----------------------------------------------------------------------------
43,364 25.01 29,214 27.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Depletion and depreciation expense is a function of the proved reserve additions and the cost of petroleum and natural gas properties in the full cost pool attributable to those proved reserves. At June 30, 2008, Birchcliff has excluded from its full cost pool $37.0 million (June 30, 2007 - $39.5 million) of costs for undeveloped land acquired by Birchcliff and for unproved properties relating to opportunities in the probable reserve category and the potential drilling, recompletion and workover opportunities which have not yet been assigned any reserves.

PETROLEUM AND NATURAL GAS PROPERTIES IMPAIRMENT TEST

The Corporation follows the full cost method of accounting which requires periodic review of capitalized costs to ensure that they do not exceed the recoverable value of the petroleum and natural gas properties and that they do not exceed the fair value of the assets.

Birchcliff performed an impairment (ceiling) test review at June 30, 2008 on its petroleum and natural gas assets. Based on this review, Birchcliff determined there was no impairment of its petroleum and natural gas assets.

TAXES

Birchcliff recorded a future income tax expense of $3.3 million ($3.82 per BOE) and $5.1 million ($2.93 per BOE) during the three and six month Reporting Periods, as compared to recoveries of $128,000 ($0.25 per BOE) and $648,000 ($0.62 per BOE) during the Comparable Prior Periods. These increases result primarily from the higher net income recorded during the Reporting Periods as compared to the Comparable Prior Periods, mainly as a result of higher commodity prices and lower finding and development costs in 2007 and the first half of 2008.

Birchcliff recovered $NIL and $6,000 of Part XII.6 taxes in the three and six month Reporting Period as a result of the issue of $16,029,000 of flow-through shares in November 2006. During the three and six month Comparable Prior Periods, the Corporation incurred $124,000 and $241,000 of Part XII.6 taxes with respect to the November 2006 flow-through share issuance. Birchcliff will not incur Part XII.6 tax on the flow-through shares it issued in March 2008 until February 2009.

STOCK-BASED COMPENSATION

Birchcliff accounts for its stock-based compensation programs, including performance warrants and stock options, using the fair value method. Under this method, the Corporation records compensation expense related to the stock-based compensation programs in the income statement over the vesting period.

During the three month Reporting Period, the Corporation granted options to purchase 169,000 common shares at a weighted average exercise price of $13.15 per common share. Of these options, at June 30, 2008 there remained outstanding options to purchase 169,000 common shares.

The Corporation recorded a $1.4 million expense ($1.55 per BOE) and a $2.6 million expense ($1.50 per BOE) for stock-based compensation relating to stock options in the three and six month Reporting Periods, as compared to a $98,000 recovery ($0.19 per BOE) and a $595,000 expense ($0.57 per BOE) during the Comparable Prior Periods.

During the three month Reporting Period, the Corporation issued 512,881 shares due to exercise of vested stock options, and stock options in respect of 74,334 common shares were forfeited. In addition, the cancellation of vested stock options resulted in a cash-paid stock-based compensation expense of $NIL and $20,000 in the three and six month Reporting Periods as compared to $10,000 and $44,000 in the Comparable Prior Periods. The cash-paid expense is included in total stock-based compensation expense.

CAPITAL EXPENDITURES AND CAPITAL RESOURCES

Capital expenditures amounted to $37.5 million and $89.0 million during the three and six month Reporting Periods due to increased cash flows as a result of higher commodity prices and the Worsley Acquisition in the third quarter of 2007. In the Comparable Prior Periods, $13.7 million and $31.5 million of capital expenditures were incurred. The increase in expenditures was the result of significant growth in drilling and operational activity in the three and six month Reporting Periods. The Corporation drilled 5 gross (4.5 net) wells and 22 gross (20.5 net) wells in the three and six month Reporting Periods as compared to 3 gross wells (2.6 net) and 12 gross wells (9.7 net) in the three and six month Comparable Prior Periods.

CAPITAL EXPENDITURES

The following table sets forth a summary of the Corporation's capital expenditures incurred during the Reporting Periods and the Comparable Prior Periods:



----------------------------------------------------------------------------
Three Months Ended June 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land 6,704 1,982
Seismic (44) 143
Other 1,479 284
Drilling and Completions 10,807 4,388
Well equipment and facilities 8,407 1,227
Capitalized general and administrative expenses 333 237
----------------------------------------------------------------------------
Total Finding & Development Costs 27,686 8,261
Acquisitions 9,671 5,441
----------------------------------------------------------------------------
Total Finding, Development & Acquisition Costs 37,357 13,702
Administrative assets 130 25
----------------------------------------------------------------------------
Total Capital Expenditures 37,487 13,727
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six Months Ended June 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land 9,741 2,703
Seismic 817 928
Other 4,087 620
Drilling and Completions 45,122 15,146
Well equipment and facilities 18,368 6,128
Capitalized general and administrative expenses 748 553
----------------------------------------------------------------------------
Total Finding & Development Costs 78,883 26,078
Acquisitions 9,855 5,438
----------------------------------------------------------------------------
Total Finding, Development & Acquisition Costs 88,738 31,516
Administrative assets 267 30
----------------------------------------------------------------------------
Total Capital Expenditures 89,005 31,546
----------------------------------------------------------------------------
----------------------------------------------------------------------------


CAPITAL RESOURCES

The following table sets forth a summary of the Corporation's capital resources for the Reporting Periods and the Comparable Prior Periods:



----------------------------------------------------------------------------
Three Months Ended June 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash generated by operations 41,676 13,641
Changes in working capital from operations (592) 926
Equity issues, net of issue costs 2,001 -
Increase in revolving credit facility 15,887 3,401
Asset retirement expenditures 48 (33)
Changes in working capital from investing (21,533) (4,208)
----------------------------------------------------------------------------
Total Capital Resources 37,487 13,727
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six Months Ended June 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash generated by operations 68,940 27,037
Changes in working capital from operations (8,412) (1,562)
Equity issues, net of issue costs 129,670 150
Increase (decrease) in revolving credit facility (6,932) 7,528
Decrease in non-revolving credit facility (98,830) -
Asset retirement expenditures (66) (76)
Changes in working capital from investing 4,634 (1,530)
----------------------------------------------------------------------------
Total Capital Resources 89,004 31,547
----------------------------------------------------------------------------
----------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION

Quarter Ended
($000's, except share
and per share June 30, March 31, December 31, September 30,
amounts) 2008 2008 2007 2007
----------------------------------------------------------------------------
Petroleum and natural
gas production (BOE
per day) 9,583 9,470 9,260 6,014
Petroleum and natural
gas commodity price
(BOE per day) 83.58 64.83 54.18 40.10
Natural gas commodity
price at wellhead
($ per mcf) 10.93 8.35 6.71 5.48
Petroleum commodity
price at wellhead
($ per bbl) 121.39 94.72 80.94 76.95

Total petroleum and
natural gas revenue 73,273 56,192 46,398 22,467
Total royalties (11,361) (8,700) (7,804) (4,007)
Total interest and
other revenue - 2 8 -
Total revenues, net 61,912 47,494 38,602 18,460
Capital expenditures 37,487 51,518 30,306 288,321

Net income (loss) 9,776 3,828 (6,457) (5,707)
Per share - basic $0.09 $0.04 ($0.07) ($0.09)
Per share - diluted $0.08 $0.04 ($0.07) ($0.09)

Cash generated by
operations 41,676 27,264 19,881 9,327
Per share - basic $0.37 $0.28 $0.21 $0.14
Per share - diluted $0.36 $0.27 $0.21 $0.14

Book value of total
assets 719,292 699,567 662,252 644,876
Non revolving credit
facility - - 98,830 97,431
Revolving credit
facilities 148,922 133,035 155,854 153,360
Total indebtedness 163,378 169,614 272,916 262,557
Shareholders' equity 488,579 475,453 340,756 342,451

Common share
outstanding end
of period
Basic 112,375,970 111,863,089 94,554,269 94,472,583
Diluted 121,270,357 121,175,691 103,639,748 103,046,582
Weighted average
common shares
outstanding
Basic 112,234,676 98,852,346 94,486,372 65,521,290
Diluted 117,074,630 102,589,422 96,548,884 66,152,795
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Quarter Ended
($000's, except share June 30, March 31, December 31, September 30,
and per share amounts) 2007 2007 2006 2006
----------------------------------------------------------------------------
Petroleum and natural
gas production (BOE
per day) 5,712 5,829 5,861 5,571
Petroleum and natural
gas commodity price
(BOE per day) 48.20 49.43 46.86 43.11
Natural gas commodity
price at wellhead
($ per mcf) 7.39 7.78 7.33 5.91
Petroleum commodity
price at wellhead
($ per bbl) 69.92 63.86 60.99 74.88

Total petroleum and
natural gas revenue 25,462 26,369 25,750 22,546
Total royalties, net
of ARTC (3,233) (4,288) (4,407) (4,073)
Total interest and
other revenue - 1 28 -
Total revenues, net 22,229 22,082 21,371 18,473
Capital expenditures 13,727 17,819 12,577 25,273

Net loss (707) (1,373) (2,313) (1,342)
Per share - basic ($0.01) ($0.02) ($0.04) ($0.02)
Per share - diluted ($0.01) ($0.02) ($0.04) ($0.02)

Cash generated by
operations 13,641 13,396 11,657 10,666
Per share - basic $0.21 $0.21 $0.19 $0.18
Per share - diluted $0.21 $0.21 $0.19 $0.18

Book value of total
assets 359,423 360,164 362,255 359,073
Revolving credit
facilities 88,833 85,431 81,304 100,127
Total indebtedness 92,218 92,099 87,783 115,100
Shareholders' equity 240,250 241,065 246,399 219,066

Common share
outstanding end
of period
Basic 64,189,413 64,189,413 64,139,413 58,174,413
Diluted 72,709,078 73,709,246 72,168,746 66,383,746

Weighted average
common shares
outstanding
Basic 64,189,413 64,168,302 60,701,424 58,173,508
Diluted 65,394,368 64,174,235 61,347,463 60,681,252
----------------------------------------------------------------------------
----------------------------------------------------------------------------


DISCUSSION OF QUARTERLY RESULTS

Despite the impact of planned facility turnarounds and spring break-up, Birchcliff's production increased slightly by 113 BOE per day in the three month Reporting Period (Q2 2008) from Q1 2008, as compared to a decrease of 117 BOE per day in the Comparable Prior Period (Q2 2007) from Q1 2007.

The most significant impact to the Corporation has been the escalation of commodity prices, quarter-over-quarter, since the September 30, 2007 quarter. The average oil wellhead price has increased 58%, from $76.95 per BOE to $121.39 per BOE, while the average natural gas price has increased 99%, from $5.48 per mcf to $10.93 per mcf. This has resulted in revenues and cash flow increasing substantially from the prior quarters.

Capital spending in the first half of 2008 was significantly higher than in the first half of 2007, in response to stronger commodity prices and as a result of additional projects and cash flow from the September 2007 Worsley Acquisition. The capital program during the second quarter of Q2 2008 was lower than in the first quarter of Q1 2008 mainly due to spring break-up. Management is carefully monitoring commodity prices together with the results of its capital program.

OUTLOOK

With the effect of spring break-up and facility turnarounds behind us, Birchcliff expects its third quarter production to be higher in comparison to the second quarter as several new wells are expected to be brought on production in the third quarter.

Birchcliff expects to continue to develop and expand both its Montney/Doig natural gas resource play and its Worsley light oil resource play.

Management closely monitors the results of Birchcliff's capital spending to ensure its economic resources are deployed efficiently to maximize reserves and production.



BIRCHCLIFF ENERGY LTD.
Balance Sheets
(Unaudited) ($000's)
----------------------------------------------------------------------------
December 31,
June 30, 2008 2007
----------------------------------------------------------------------------

ASSETS
CURRENT
Cash and cash equivalents 65 66
Accounts receivable 31,864 20,036
Prepaid and other 3,677 2,879
Future income tax benefit 3,276 2,004
----------------------------------------------------------------------------
38,882 24,985

Future income tax benefit 1,905 6,287

Petroleum and natural gas properties and
equipment (Note 4) 678,505 630,980
----------------------------------------------------------------------------
719,292 662,252
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES
CURRENT
Accounts payable and accrued liabilities 50,062 41,213
Non-revolving credit facility (Note 5) - 98,830
Risk management contracts (Note 8) 11,106 6,793
----------------------------------------------------------------------------
61,168 146,836

Revolving credit facilities (Note 6) 148,922 155,854
Asset retirement obligations (Note 9) 20,623 18,806

SHAREHOLDERS' EQUITY
Share capital (Note 10) 477,348 342,819

Contributed surplus (Note 11) 10,620 10,930

Retained Earnings (Deficit) 611 (12,993)
----------------------------------------------------------------------------
488,579 340,756
----------------------------------------------------------------------------
719,292 662,252
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Commitments (Note 12)

See accompanying notes to the financial statements.


APPROVED BY THE BOARD
Gordon W. Cameron A. Jeffery Tonken

Director Director


BIRCHCLIFF ENERGY LTD.
Statements of Net Income (Loss), Comprehensive Income (Loss) and Retained
Earnings (Deficit)
(Unaudited) ($000's)
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
REVENUE
Petroleum and natural gas 73,273 25,462 129,465 51,831
Royalties (11,361) (3,233) (20,061) (7,521)
Interest and other - - 2 1
----------------------------------------------------------------------------
61,912 22,229 109,406 44,311
Loss on risk management
contracts (Note 8)
Realized 4,107 - 7,346 -
Unrealized 5,567 - 4,615 -
----------------------------------------------------------------------------
52,238 22,229 97,445 44,311
----------------------------------------------------------------------------

EXPENSES
Production 9,409 4,488 18,300 9,220
Transportation 2,343 848 4,813 1,702
General and
administrative 2,098 1,763 3,580 3,542
Stock-based compensation
(Note 11) 1,350 (98) 2,600 595
Depletion, depreciation
and accretion
(Notes 4 & 9) 21,748 14,584 43,364 29,214
Realized foreign exchange
loss (Note 8) 114 - 148 -
Unrealized foreign
exchange gain (Note 8) (98) - (302) -
Interest 2,165 1,355 6,266 2,525
----------------------------------------------------------------------------
39,129 22,940 78,769 46,798
----------------------------------------------------------------------------

INCOME (LOSS) BEFORE TAXES 13,109 (711) 18,676 (2,487)

TAXES
Other taxes - 124 (7) 241
Future income taxes
(recovery) 3,333 (128) 5,079 (648)
----------------------------------------------------------------------------
3,333 (4) 5,072 (407)
----------------------------------------------------------------------------
NET INCOME (LOSS) AND
COMPREHENSIVE INCOME
(LOSS) 9,776 (707) 13,604 (2,080)

RETAINED EARNINGS
(DEFICIT), BEGINNING OF
PERIOD (9,165) (122) (12,993) 1,251
----------------------------------------------------------------------------

RETAINED EARNINGS
(DEFICIT), END OF PERIOD 611 (829) 611 (829)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income (loss) per
common share
basic $0.09 ($0.01) $0.13 ($0.03)
diluted $0.08 ($0.01) $0.12 ($0.03)

Weighted average common
shares
basic 112,234,676 64,189,413 105,543,511 64,178,916
diluted 117,074,630 64,189,413 110,062,054 64,178,916

See accompanying notes to the financial statements.


BIRCHCLIFF ENERGY LTD.
Statements of Cash Flows
(Unaudited) ($000's)

----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:

OPERATING
Net income (loss) 9,776 (707) 13,604 (2,080)
Adjustments for items not
affecting cash:
Depletion, depreciation and
accretion 21,748 14,584 43,364 29,214
Stock-based compensation 1,350 (108) 2,580 551
Unrealized risk management
contracts loss 5,567 - 4,615 -
Unrealized foreign exchange gain (98) - (302) -
Future income taxes (recovery) 3,333 (128) 5,079 (648)
----------------------------------------------------------------------------
41,676 13,641 68,940 27,037

Changes in non-cash working
capital (Note 13) (592) 926 (8,412) (1,562)
Asset retirement expenditures
incurred 48 (33) (66) (76)
----------------------------------------------------------------------------
41,132 14,534 60,462 25,399

FINANCING
Decrease in non-revolving credit
facility (Note 5) - - (98,830) -
Increase (decrease) in revolving
credit facility (Note 6) 15,887 3,401 (6,932) 7,528
Issuance of share capital, net of
issue costs (Notes 10 & 11) 2,001 - 129,670 150
----------------------------------------------------------------------------
17,888 3,401 23,908 7,678

INVESTING
Purchase of petroleum and natural
gas properties and equipment (9,672) (5,441) (9,855) (5,438)
Development of petroleum and
natural gas properties and
equipment (27,815) (8,286) (79,150) (26,108)
Changes in non-cash investing
working capital (Note 13) (21,533) (4,208) 4,634 (1,530)
----------------------------------------------------------------------------
(59,020) (17,935) (84,371) (33,076)
----------------------------------------------------------------------------

NET INCREASE IN CASH AND CASH
EQUIVALENTS - - (1) 1

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 65 66 66 65

----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD 65 66 65 66
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Cash interest paid 2,165 1,358 6,266 2,524
Cash taxes paid - 6 254 6

See accompanying notes to the financial statements.


BIRCHCLIFF ENERGY LTD.
Notes to the Financial Statements
For the Three and Six Months Ended June 30, 2008
(Unaudited)


1. BASIS OF PRESENTATION

Birchcliff Energy Ltd. ("Birchcliff" or the "Corporation") is engaged in the exploration for and the development, production and acquisition of, petroleum and natural gas reserves in Western Canada. Birchcliff's financial year end is December 31.

The interim financial statements of Birchcliff Energy Ltd. have been prepared by management in accordance with accounting principles generally accepted in Canada and are unaudited. The interim financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the period ended December 31, 2007 except as discussed in Note 2. The disclosure which follows does not include all disclosures required for the annual financial statements. These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2007.

2. CHANGES IN ACCOUNTING POLICIES

On January 1, 2008 the Corporation adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:

Section 1535 Capital Disclosures establishes standards for disclosing information about an entity's capital and how it is managed. It describes the disclosure requirements of the entity's objectives, policies and processes for managing capital; the quantitative data relating to what the entity regards as capital; whether the entity has complied with capital requirements and, if it has not complied, the consequences of such non-compliance. The only effect of adopting this standard is disclosures on the Corporation's capital and how it is managed, as included in Note 7.

Section 3862 Financial Instruments - Disclosures describes the required disclosure for the assessment of the significance of financial instruments for an entity's financial position and performance and of the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. Section 3863 Financial Instruments - Presentation, establishes standards for presentation of financial instruments and non-financial derivatives. These sections replaced Section 3861 Financial Instruments - Disclosure and Presentation. The additional disclosures required under these standards are included in Note 8.

The adoption of Section 3031 Inventories had no impact on the Corporation's financial statements.

Future Accounting Policy Changes

The CICA has amended Section 1400 General Standards of Financial Statement Presentation, which is effective for interim periods beginning on or after October 1, 2008, to include requirements to assess and disclose the Corporation's ability to continue as a going concern. The adoption of this new section will not have an impact on the financial statements.

Effective January 1, 2009 the Corporation will be required to adopt CICA Handbook Section 3064 Goodwill and Intangible Assets, which defines the criteria for the recognition of intangible assets. The adoption of this section is not expected to have a significant impact on the financial statements.

Recent Accounting Pronouncements

The Accounting Standards Board has confirmed the convergence of Canadian GAAP with International Financial Reporting Standards ("IFRS") will be effective January 1, 2011. The Corporation will continue to monitor the transition process but due to the period of time until implementation, Birchcliff cannot assess the impact of IFRS at this time.

3. ACQUISITIONS

On September 27, 2007, Birchcliff acquired certain oil and natural gas assets in the Worsley area ("Worsley Acquisition"), effective July 1, 2007, for $270 million before closing adjustments and related costs.



The following table details the purchase price allocation for the Worsley
Acquisition:

----------------------------------------------------------------------------
Net assets acquired: $ 000's
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Petroleum and natural gas properties and equipment 269,240
Asset retirement costs (5,919)
----------------------------------------------------------------------------
Total net assets acquired 263,321
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Consideration: $ 000's
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Purchase price, net of adjustments, paid in cash 260,808
Costs related to the Worsley Acquisition 2,513
----------------------------------------------------------------------------
Total consideration paid 263,321
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In relation to the Worsley Acquisition, the Corporation has made its best estimate as to the net assets acquired and the consideration given. The final purchase price adjustment has not yet been determined by the Corporation and the vendor, and all costs have not yet been finalized. Therefore, the above amount may be subject to adjustment.

4. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT




----------------------------------------------------------------------------
June 30, 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Depletion and
($000's) Cost Depreciation Net Book Value
----------------------------------------------------------------------------

Petroleum and natural gas
properties and equipment 848,318 (170,514) 677,804
Office and other equipment 1,598 (897) 701
----------------------------------------------------------------------------
849,916 (171,411) 678,505
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
December 31, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Depletion and
($000's) Cost Depreciation Net Book Value
----------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment 758,365 (128,011) 630,354
Office and other equipment 1,331 (705) 626
----------------------------------------------------------------------------
759,696 (128,716) 630,980
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at June 30, 2008, the cost of petroleum and natural gas properties includes $37.0 million (as at December 31, 2007 - $31.8 million) relating to unproved properties which have not been included in costs subject to depletion and depreciation.

Birchcliff has capitalized general and administrative costs of $333,000 in the three month period ended June 30, 2008 (three months ended June 30, 2007 - $249,000) and $748,000 in the six month period ended June 30, 2008 (six months ended June 30, 2007 - $553,000) related to exploration and development activities.

5. NON-REVOLVING CREDIT FACILITY

Birchcliff entered into an Acquisition Credit Agreement with a syndicate of banks on September 4, 2007. The agreement allowed for Birchcliff to make a one time draw of up to $100 million on a non-revolving credit facility for the purpose of closing the Worsley Acquisition. The credit facility was to mature one year from the date of drawdown and had no other terms for extension. The interest applicable to prime loan advances under the agreement was prime plus 2.5% for the first six months and prime plus 3% for the final six months. The interest applicable to advances using bankers' acceptances was the prevailing bankers' acceptance rate at the time plus a 3.5% stamping fee. On September 27, 2007 the Corporation gave notice to draw the entire amount of the credit facility in bankers' acceptances. The drawn amount at December 31, 2007 was $98.8 million with the $1.2 million difference being the discounted value from the $100 million credit facility limit based on the market interest rate at that time for bankers' acceptances. The facility was subordinate to the revolving term credit facilities and was secured by a fixed and floating debenture, an instrument of pledge, and a general security agreement encompassing all of the Corporation's assets. On March 14, 2008 the facility was repaid in full and cancelled, following the completion of the equity financing described in Note 10 (g).

6. REVOLVING CREDIT FACILITY

The Corporation has available to it an extendible revolving term credit facility with an authorized limit of $220 million and an extendible revolving working capital facility with an authorized limit of $20 million, for a total credit limit of $240 million. The $220 million credit facility is provided by a syndicate of four banks (the "Syndicate"). The $20 million working capital facility is provided by the lead bank in the current bank syndicate. As at June 30, 2008, Birchcliff had drawn $148.9 million on the credit facilities. At June 30, 2008 the rate applicable to the working capital facility was 5.4%. The overall effective interest rate applicable to the bankers' acceptances in the revolving credit facility was 4.1% and 4.4% for the three and six month periods ended June 30, 2008 (three and six months ended June 30, 2007 - 4.4% and 4.4%), respectively.

The credit facilities allow for prime rate loans, US base rate loans, bankers' acceptances, letters of credit and LIBOR loans. The interest rates applicable to the drawn loans are based on a pricing grid and will increase as a result of the increased ratio of outstanding indebtedness to earnings before interest, taxes, depreciation and amortization.

The credit facilities are subject to the Syndicate's redetermination of the borrowing base twice a year as of October 31 and the conversion date. Upon any change in or redetermination of the borrowing base limit which results in a borrowing base shortfall, Birchcliff must eliminate the borrowing base shortfall amount. The facility is secured by a fixed and floating charge debenture, an instrument of pledge, and a general security agreement encompassing all of the Corporation's assets.

The syndicated credit facility has a conversion date of May 22, 2009 and a maturity date which is two years after the conversion date. Birchcliff may request an extension of the conversion date with such an extension not exceeding 364 days, in order to maintain the revolving term facility. If the Syndicate does not grant an extension of the conversion date, then upon the expiry of the conversion date, the revolving term facility will convert to a term loan whereby all principal and interest will be required to be repaid at the maturity date.

The working capital facility has a conversion date of May 22, 2009 and a maturity date which is two years after the conversion date. Birchcliff may request an extension of the conversion date with such an extension not exceeding 364 days, in order to maintain the revolving working capital facility. If the Syndicate does not grant an extension of the conversion date, then upon 4 months after the expiry of the conversion date, the revolving working capital facility will convert to a term loan whereby all principal and interest will be required to be repaid at the maturity date.

7. CAPITAL MANAGEMENT

The Corporation's general policy is to maintain a sufficient capital base in order to manage its business in the most effective manner with the goal of increasing the value of its assets and thus its underlying share value. The Corporation's objectives when managing capital are to maintain financial flexibility in order to preserve its ability to meet financial obligations, including potential obligations arising from additional acquisitions; to maintain a capital structure that allows Birchcliff to favor the financing of its growth strategy using internally-generated cash flow and its debt capacity; and to optimize the use of its capital to provide an appropriate investment return to its shareholders.

Birchcliff strives to properly exploit its current asset base and to acquire top quality assets. To that end, the Corporation is not averse to maintaining a high ratio of debt to total capital if management determines the assets it is acquiring or the projects it is drilling are of high quality.

The capital structure of the Corporation is as follows:



----------------------------------------------------------------------------
($000's) June 30, 2008 December 31, 2007 Change %
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total shareholders' equity 488,579 340,756 43%
----------------------------------------------------------------------------
Total shareholders' equity as a %
of total capital 75% 56%
Working capital deficit (1) 14,456 18,232
Non-revolving credit facility - 98,830
Revolving credit facilities 148,922 155,854
----------------------------------------------------------------------------
Total indebtedness 163,378 272,916 (40%)
Total debt as a % of total capital 25% 44%

----------------------------------------------------------------------------
Total capital 651,957 613,672 6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Working capital deficit is defined as current assets (excluding the
current portion of future income tax benefit) less current liabilities
(excluding the risk management contracts).


Shareholders' equity is defined as share capital plus contributed surplus plus retained earnings, less any deficit. During the six months ended June 30, 2008, total equity increased due to the exercise of options and warrants for common shares (Note 10 (f)), due to issuance of common and flow-through shares (Note 10 (g) and (h)), and due to recording stock-based compensation expense (Note 11).

Total indebtedness decreased during the six months ended June 30, 2008 by $109.5 million, primarily due to the repayment and cancellation of the $100 million non-revolving credit facility described in Note 5.

8. FINANCIAL INSTRUMENTS & FINANCIAL RISK MANAGEMENT

Birchcliff is exposed to credit risk, liquidity risk and market risk as part of its normal course of business. These risks are consistent with risks disclosed in the notes to the audited financial statements for the year ended December 31, 2007. This Note presents information about the Corporation's exposure to each of these risks, as well as Birchcliff's objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these financial statements.

The Board of Directors has overall responsibility for the establishment and oversight of the Corporation's financial risk management framework and periodically reviews the results of all risk management activities and all outstanding positions. Management identifies and analyzes the risks faced by the Corporation and may utilize financial instruments to mitigate these risks.

Credit Risk

A substantial portion of the Corporation's accounts receivable are with customers in the oil industry and are subject to normal industry credit risks. The carrying amount of accounts receivable reflects management's assessment of the credit risk associated with these customers. Typically, Birchcliff's maximum credit exposure to customers is revenue from two months of commodity sales.



The following table illustrates the Corporation's receivables:

----------------------------------------------------------------------------
($000's) June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Marketers 24,999 16,018
Joint venture partners 6,702 3,737
Other 163 281
----------------------------------------------------------------------------
Total 31,864 20,036
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Receivables from marketers are normally collected on the 25th day of the month following production. Birchcliff's policy to mitigate credit risk associated with these balances is to establish marketing relationships with credit worthy purchasers and to obtain guarantees from their ultimate parent companies, as appropriate. The Corporation historically has not experienced any material collection issues with its marketers.

Cash and cash equivalents consist of bank balances and short term deposits maturing in less than 90 days. Historically the Corporation has not carried short term investments. Should this change in the future, counterparties will be selected based on credit ratings and management will monitor all investments to ensure a stable return, and complex investment vehicles with higher risk will be avoided.

The carrying amounts of accounts receivable and cash and cash equivalents represent the maximum credit exposure. The Corporation does not have an allowance for doubtful accounts as at June 30, 2008 and did not provide for any doubtful accounts nor did it write-off any receivables during the three and six months ended June 30, 2008 or for the year ended December 31, 2007.



Birchcliff's accounts receivables are aged as follows:

----------------------------------------------------------------------------
($000's) June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Current (less than 30 days) 28,883 17,120
30 to 60 days 103 1,283
61 to 90 days 945 1,146
Over 90 days 1,933 487
----------------------------------------------------------------------------
TOTAL 31,864 20,036
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Liquidity Risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. Birchcliff's approach to managing liquidity is to ensure, as much as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and unusual conditions without incurring unacceptable losses or risking harm to the Corporation's reputation.

Birchcliff prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary. Petroleum and natural gas production is monitored weekly to provide current cash flow estimates. Further, the Corporation utilizes authorizations for expenditures for projects to manage capital expenditures. To facilitate the capital expenditure program, the Corporation has a revolving reserves-based credit facility, as outlined in Note 6, that is reviewed at least annually by the lender. Birchcliff also attempts to match its payment cycle with collection of petroleum and natural gas revenues.

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



less than 1 1 - 2 2 - 5
Financial Liability ($000's) Year Years Years Thereafter
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accounts payable and accrued
liabilities 50,062 - - -
Risk management liabilities 11,106 - - -
Bank debt - principal - - 148,922 -
----------------------------------------------------------------------------
TOTAL 61,168 - 148,922 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Market Risk

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

Birchcliff may utilize derivative instruments to manage market risk. The Board of Directors periodically reviews the results of all risk management activities and all outstanding positions.

Foreign Currency Risk

Foreign currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign currency exchange rates. Birchcliff is exposed to foreign currency fluctuations with respect to its WTI oil option contracts which are denominated in United States dollars. As at June 30, 2008 if the US dollar had depreciated 10% against the Canadian dollar with all other variables held constant, Birchcliff's net income and other comprehensive income for the three and six months ended June 30, 2008 would have been $547,000 and $1.1 million higher, respectively (2007 - $NIL and $NIL) with respect to the US dollar denominated WTI oil price risk management contracts.

Birchcliff had no forward exchange rate contracts in place as at or during the six months ended June 30, 2008.

Commodity Price Risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Significant changes in commodity prices can materially impact the Corporation's borrowing base under its credit facility. Lower commodity prices can also reduce the Corporation's ability to raise capital. Commodity prices for crude oil are impacted by world economic events that dictate the levels of supply and demand. From time to time the Corporation may attempt to mitigate commodity price risk through the use of financial derivatives.



The Corporation had the following risk management contracts outstanding at
June 30, 2008:

----------------------------------------------------------------------------
Volume Put Call
Term Contract (bbls/d) ($US/bbl) ($US/bbl)
----------------------------------------------------------------------------
July 1 - December 31, 2008 Costless collar 1,000 67.50 79.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------


For the three and six months ended June 30, 2008, the realized and unrealized loss ("total loss") related to the risk management contracts, recognized in net income, was $9.7 million and $12.0 million respectively (2007 - $NIL and $NIL).

Included in the three and six months ended June 30, 2008 is a cash outlay of $4.1 million and $7.3 million (three and six months ended 2007 - $NIL and $NIL) relating to the actual monthly settlements incurred in the period. An unrealized loss of $5.6 million and $4.6 million for the three and six month periods ended June 30, 2008, respectively (three and six months ended 2007 - $NIL and $NIL) is also included within the total loss, identified as "unrealized risk management contracts loss" on the statements of cash flows. The unrealized loss represents the change in the fair value of the contracts related to expected future settlements.

The fair value of these risk management liabilities at June 30, 2008 was $11.1 million (2007 - $NIL). As of June 30, 2008 if WTI crude oil prices had been $1.00 USD higher or lower, with all other variables held constant, the change in the fair value of the risk management contracts would have resulted in net income and other comprehensive income that was $89,000 and $266,000 higher or lower (2007 - $NIL and $NIL) for the three and six month periods, respectively.

Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation is exposed to interest rate cash flow risk on floating interest rate bank debt due to fluctuations in market interest rates. The remainder of Birchcliff's financial assets and liabilities are not exposed to interest rate risk.

As at June 30, 2008 if the interest rate had changed 1% with all other variables held constant, Birchcliff's net income and other comprehensive income for the three and six months ended June 30, 2008 would have changed by $365,000 and $944,000 (2007 - $222,000 and $427,000), respectively. A sensitivity of 1% is considered reasonable given the current level of the bank prime rate and market expectations for future movements. The Corporation considers this risk to be limited and thus does not hedge its interest rate risk.

The Corporation had no interest rate swap or financial contracts in place as at or during the six months ended June 30, 2008.

Fair Value of Financial Instruments

Birchcliff's financial instruments are classified as cash and cash equivalents, accounts receivable and other current assets, accounts payable and accrued liabilities, risk management contracts, and revolving credit facilities on the balance sheet.

The carrying value and fair value of these financial instruments at June 30, 2008 is disclosed below by financial instrument category, as well as any related loss and interest expense for the six months ended June 30, 2008:



Carrying Fair Interest
Financial Instrument Value Value Loss(1) Expense(2)
----------------------------------------------------------------------------
$000's

Assets Held for Trading
Cash and cash equivalents 65 65 - -

Loans and Receivables
Accounts receivable and other current
assets 35,541 35,541 - -

Liabilities Held for Trading
Risk management contracts 11,106 11,106 11,961 -

Other Liabilities
Accounts payable and accrued
liabilities 50,062 50,062 - -
Revolving credit facilities 148,922 148,922 - 6,266

----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Included in the "loss on risk management contracts" on the statements of
net income (loss) and comprehensive income (loss) and retained earnings
(deficit) is an unrealized loss of $4.6 million and a realized loss of
$7.3 million for the six months ended June 30, 2008.

(2) Included in interest expense on the statements of net income (loss) and
comprehensive income (loss) and retained earnings (deficit).


The risk management contracts are recorded at their fair value based on quoted market prices in the futures market on the balance sheet date; accordingly, there is no difference between fair value and carrying value. The revolving credit facilities bear interest at a floating rate and accordingly the fair market value approximates the carrying value before the carrying value is reduced for the remaining deferred financing costs. Due to the short term nature of cash and cash equivalents, accounts receivable and other current assets, accounts payable and accrued liabilities, their carrying values approximate their fair values.

9. ASSET RETIREMENT OBLIGATIONS

The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas properties including well sites, gathering systems and processing facilities. Birchcliff estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations as at June 30, 2008 to be approximately $63.6 million to be incurred between 2008 and 2057. A credit-adjusted risk-free interest rate of 8% and an inflation rate of 2% were used to calculate the fair value of the asset retirement obligation.



A reconciliation of the asset retirement obligations is provided below:

June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Opening Balance, January 1 18,806 11,270
Obligations incurred 946 1,368
Obligations acquired 89 5,919
Changes in estimate 179 (415)
Accretion expense 669 1,252
Actual expenditures (66) (588)
----------------------------------------------------------------------------
Ending Balance 20,623 18,806
----------------------------------------------------------------------------
----------------------------------------------------------------------------

10. SHARE CAPITAL

(a) Authorized:

Unlimited number of voting common shares

Unlimited number of non-voting preferred shares

The preferred shares may be issued in one or more series and the directors
are authorized to fix the number of shares in each series and to determine
the designation, rights, privileges, restrictions and conditions attached to
the shares of each series.

(b) Issued:

Number of
($000's) Common Shares Amount $
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Balance, December 31, 2006 64,139,413 236,157,989

Issued upon exercise of stock options 151,686 681,017
Tax effect of flow-through shares (Note (c)) - (4,770,000)
Issued, net of costs (Note (d)) 30,263,170 108,913,115
Tax effect of shares issue costs (Note (e)) - 1,836,500
----------------------------------------------------------------------------
Balance, December 31, 2007 94,554,269 342,818,621

Issued upon exercise of stock options 601,044 3,074,206
Issued upon exercise of warrants (Note (f)) 809,933 3,596,103
Issued, net of costs (Note (g)) 15,897,843 123,088,169
Tax effect of share issue costs (Note (h)) - 1,970,000
----------------------------------------------------------------------------
Balance, March 31, 2008 111,863,089 474,547,099

Issued upon exercise of stock options 512,881 2,800,991
----------------------------------------------------------------------------
Balance, June 30, 2008 112,375,970 477,348,090
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(c) On November 22, 2006, Birchcliff issued 2,740,000 flow-through shares at a price of $5.85 per share and 3,200,000 common shares at a price of $4.40 per share for total net proceeds of $28,437,352. As at December 31, 2007, the commitment to spend and renounce $16,029,000 of qualified 100% deductible tax pools with respect to the flow-through shares was fulfilled.

(d) On September 27, 2007, Birchcliff issued 30,263,170 common shares at a price of $3.80 per share for total net proceeds of $108,913,115.

(e) Birchcliff recognized a future tax benefit of $1,836,500 in respect of share issue costs of $6,086,931 incurred with respect to the issuance of 30,263,170 common shares on September 27, 2007.

(f) In January 2008, 809,933 common shares were issued to a former officer in exchange for 809,933 performance warrants with an exercise price of $3.00 for gross proceeds to the Corporation of $2,429,799. In addition, $1,166,304 of non-cash costs attributable to these warrants, which was previously recorded to contributed surplus, was reclassified from contributed surplus to share capital.

(g) On March 14, 2008, Birchcliff issued 1,522,843 flow-through shares at a price of $9.85 per share and 14,375,000 common shares at a price of $8.00 per share for total net proceeds of $123,088,169. Birchcliff is thus committed to spend and renounce $15 million of qualified 100% deductible tax pools with respect to the flow-through shares by December 31, 2009.

(h) Birchcliff recognized a future income tax benefit of $1,970,000 in respect of share issue costs of $6,911,832 incurred with respect to the issuance of 15,897,843 shares on March 14, 2008.

11. STOCK-BASED COMPENSATION

The Corporation has established a stock-based compensation plan whereby officers, employees, directors and consultants may be granted options to purchase one common share for each option granted, at a fixed price not less than the fair market value of the stock at the time of grant, subject to certain conditions being met. Stock options granted under this plan vest over a three year period at the rate of one-third on each anniversary date of the stock option grant. All stock options granted are for a five year term.

In order to calculate the compensation expense, the fair value of the stock options is estimated using the Black-Scholes option-pricing model that takes into account, as of the grant date: exercise price, expected life, current price, expected volatility, expected dividends, and risk-free interest rates.

Stock Options

For the three and six months ended June 30, 2008, the Corporation recorded $1.4 million and $2.6 million (three and six months ended June 30, 2007 - $108,000 recovery and $551,000 expense) of non-cash stock-based compensation expense and a corresponding increase to contributed surplus related to the issuance of stock options and forfeiture of unvested options during the period. During the three and six months ended June 30, 2008 the Corporation also recorded cash stock-based compensation expense of $NIL and $20,000 (three and six months ended June 30, 2007 - $10,000 and $44,000).

Using the fair value method, the weighted average fair value of stock options granted during the three and six months ended June 30, 2008 was $8.29 per share and $4.83 per share under option, respectively.

At June 30, 2008, the Corporation's Amended and Restated Stock Option Plan permitted the grant of options in respect of 11,237,597 common shares. At June 30, 2008, there remained available for grant options in respect of 5,282,942 common shares.



A summary of the changes during the six months ended June 30, 2008 is
presented below:

Weighted average
Number Exercise Price $
----------------------------------------------------------------------------

Outstanding, December 31, 2007 5,335,814 4.00

Granted 1,703,100 7.47
Exercised (601,044) (3.58)
Forfeited (60,000) (4.72)
Cancelled (5,000) (3.75)
----------------------------------------------------------------------------

Outstanding, March 31, 2008 6,372,870 4.96

Granted 169,000 13.15
Exercised (512,881) (3.90)
Forfeited (74,334) (4.86)
----------------------------------------------------------------------------

Outstanding, June 30, 2008 5,954,655 5.29
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The fair value of each option was determined on the date of the grant using the Black-Scholes option-pricing model. The weighted average assumptions used in the calculating the fair values are set forth below:



2008 2007
----------------------------------------------------------------------------
Risk-free interest rate 3.3% 4.0%
Expected maturity (years) 5.0 5.0
Expected volatility 70.5% 55.0%
Dividend yield 0% 0%
----------------------------------------------------------------------------


A summary of the stock options outstanding and exercisable under the plan at June 30, 2008 is presented below:



Weighted
Number Average Weighted Number
Outstanding Remaining Average Exercisable Weighted
at June 30, Contractual Exercise at June 30, Exercise
Date of Grant 2008 Life Price ($) 2008 Price ($)
----------------------------------------------------------------------------
Dec. 3, 2004 (1) 935,334 1.6 3.00 935,334 3.00
Apr. 20 to Jun. 22,
2005 519,501 1.9 3.77 519,501 3.77
Jul. 4 to Sept. 9,
2005 35,168 2.1 4.40 9,000 4.49
Oct. 6 to Nov. 28,
2005 35,000 2.4 6.13 30,000 6.17
Jan. 11 to Mar. 6,
2006 75,467 2.5 7.15 52,130 7.14
Apr. 11 to Apr. 25,
2006 5,000 2.8 6.86 3,333 6.86
Aug. 14 to Sept. 26,
2006 73,000 3.1 5.45 18,332 5.70
Oct. 23, 2006 14,980 3.3 4.12 4,980 4.12
Jan. 23 to Mar. 31,
2007 1,507,638 3.6 3.89 412,622 3.89
May 1 to May 15,
2007 75,467 3.9 4.88 8,799 4.76
Jul. 16 to Sept. 27,
2007 227,000 4.2 4.34 - -
Oct. 9 to Dec. 14,
2007 610,000 4.4 5.59 - -
Jan. 2 to Mar. 18,
2008 1,672,100 4.6 7.47 - -
May 26 to Jun. 16,
2008 169,000 4.9 13.15 - -
----------------------------------------------------------------------------
5,954,655 3.5 5.29 1,994,031 3.59
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) All options granted under the stock-based compensation plan vest as to
one-third on each anniversary date of their grant except for the initial
options granted. These options vest one-third on January 1 in each of
the years 2006, 2007 and 2008.


Performance Warrants

In January 2005, as part of the Corporation's initial restructuring to become a public entity, the Corporation issued performance warrants with an exercise price of $3.00 to members of its management team as a long term incentive. Each performance warrant entitles the holder to purchase one common share at the exercise price. At June 30, 2008, there were 2,939,732 performance warrants outstanding.

In order to calculate the compensation expense, the fair value of the performance warrants was estimated using the Black-Scholes option-pricing model that takes into account, as of the grant date: exercise price, expected life, current price, expected volatility, expected dividends, and risk-free interest rates. For the three and six months ended June 30, 2008, the Corporation recorded $NIL and $NIL (three and six months ended June 30, 2007 - $NIL and $NIL) compensation expense in the statements of net income (loss), comprehensive income (loss) and retained earnings (deficit) relating to stock-based compensation for the performance warrants.

A summary of the changes during the three and six months ended June 30, 2008 and the Corporation's outstanding performance warrants as at June 30, 2008 is presented below:



Weighted
Average
Exercise
Number Price $
----------------------------------------------------------------------------
Outstanding, December 31, 2007 3,749,665 3.00
Issued - -
Exercised (809,933) 3.00
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Outstanding, March 31 and June 30, 2008 2,939,732 3.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Number Number
Outstanding at Exercise Exercisable at
Date of Grant June 30, 2008 Date of Expiry Price June 30, 2008
----------------------------------------------------------------------------
January 14, 2005 2,939,732 January 31, 2010 $3.00 2,939,732
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----------------------------------------------------------------------------


Contributed Surplus Continuity

($000's) ($000's)
----------------------------------------------------------------------------
Balance, December 31, 2006 8,990
Stock based compensation expense - stock options 3,340
Stock based compensation expense - forfeiture of
stock options (1,112)
Stock based compensation expense - cancellation of
stock options (21)
-------------------------------------------------------------
Stock based compensation expense 2,207

Exercise of stock options (213)
Cancellation of stock options (54)
----------------------------------------------------------------------------
Balance, December 31, 2007 10,930
Stock based compensation expense - stock options 1,269
Stock based compensation expense - forfeiture of
unvested stock options (33)
Stock based compensation expense - cancellation of
stock options 14
-------------------------------------------------------------
Stock based compensation expense 1,250

Exercise of stock options (2,089)
Cancellation of stock options (20)
----------------------------------------------------------------------------
Balance, March 31, 2008 10,071
Stock based compensation expense - stock options 1,405
Stock based compensation expense - forfeiture of
unvested stock options (55)
-------------------------------------------------------------
Stock based compensation expense 1,350

Exercise of stock options (801)
----------------------------------------------------------------------------
Balance, June 30, 2008 10,620
----------------------------------------------------------------------------
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COMMITMENTS

Office Premises

The Corporation is committed under an operating lease which expires on November 30, 2017. Birchcliff will not use all of the space and has sublet the excess space to an arms' length party on a basis that recovers approximately 50% of the rental costs for the first five years. The Corporation is committed to the following aggregate minimum lease payments (not reduced by rents receivable by the Corporation):



Year ($000's)
----------------------------------------------------------------------------
2008 1,510
2009 3,020
2010 3,020
2011 3,020
2012 3,029
Thereafter 15,424
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----------------------------------------------------------------------------


It is also committed to March 29, 2011 under an operating lease for another premises that it does not use and has sublet to an arms' length party on a basis that recovers all of its rental costs.

Flow-Through Shares

In the first quarter of 2008, the Corporation committed to renounce $15 million of exploration expenses pursuant to a flow-through share issue completed on March 14, 2008. Birchcliff has until December 31, 2009 to incur these exploration expenditures. The Corporation will be subject to a Part XII.6 tax based on the prescribed rate and the balance of exploration expenditures not yet incurred at the end of each month subsequent to January 31, 2009. As at June 30, 2008 the Corporation had incurred approximately $578,000 of these costs.

Reclamation Costs

During September 2007, a reclamation event occurred at one of Birchcliff's non-operated facilities. Birchcliff believes the bulk of the costs will be covered under its insurance policies. The total net cost to Birchcliff is currently estimated to be $357,000. There is a risk that the estimated reclamation costs may be materially understated due to the nature of this type of salt water spill. The Corporation has provided its best estimate at this point in time. Birchcliff has recorded only its $100,000 insurance deductible to date. Should the costs of this reclamation event not be covered under Birchcliff's insurance policies then the full amount of the actual reclamation costs will be charged to operating expenses in future periods. The insurers are currently in the process of reviewing the matter to determine whether the costs will be covered under the Corporation's existing insurance policies.

12. SUPPLEMENTARY CASH FLOW INFORMATION

The following table details the components of non-cash working capital:



Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
($000's) 2008 2007 2008 2007
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Provided by (used in)
Accounts receivable (5,908) (204) (11,828) 1,546
Prepaid and other (314) 600 (799) 332
Accounts payable and accrued
liabilities (15,903) (3,678) 8,849 (4,970)
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(22,125) (3,282) (3,778) (3,092)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Operating (592) 926 (8,412) (1,562)
Investing (21,533) (4,208) 4,634 (1,530)
----------------------------------------------------------------------------
(22,125) (3,282) (3,778) (3,092)
----------------------------------------------------------------------------
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FORWARD LOOKING STATEMENTS

Certain information set forth in this press release contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Birchcliff's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the competition for qualified personnel and management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be incorrect and, as such, undue reliance should not be placed on forward-looking statements. Birchcliff's actual results, performance or achievement could differ materially from those expressed in or implied by these forward-looking statements, and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits will derive therefrom. Except as required by law, Birchcliff disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Birchcliff is a publicly traded company that trades on the TSX Exchange under the symbol "BIR".

The TSX Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Birchcliff Energy Ltd.
    Jeff Tonken
    President and Chief Executive Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Bruno Geremia
    Vice President and Chief Financial Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Jim Surbey
    Vice President, Corporate Development
    (403) 261-6401
    (403) 261-6424 (FAX)