Birchcliff Energy Ltd.
TSX : BIR

Birchcliff Energy Ltd.

August 13, 2007 00:01 ET

Birchcliff Energy Ltd. Announces Second Quarter Results

CALGARY, ALBERTA--(Marketwire - Aug. 13, 2007) -

THIS PRESS RELEASE IS NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

Birchcliff Energy Ltd. ("Birchcliff") (TSX:BIR) is pleased to announce its financial and operating results for the second quarter of 2007. The full text of Birchcliff's Second Quarter Report containing the Financial Statements for the three month period ended June 30, 2007 and the related Management's Discussion and Analysis is set forth below and are available on SEDAR at www.sedar.com.

Second Quarter Highlights

- Cash flow was $13.6 million or $0.21 per share. Production averaged 5,712 boe per day, essentially flat to the first quarter.

- Maintained a solid production base through spring break-up with July production averaging approximately 6,000 boe per day and a current production rate of approximately 6,300 boe per day.

- Matched capital expenditures to cash flow for the quarter and stayed within $4.5 million of cash flow for the first half of the year.

- Maintained Birchcliff's financial flexibility.

- Continued planning and logistics work for the Montney/Doig horizontal well drilling program commencing in late September, 2007.

- Commenced high impact drilling program.

- Added 14,822 gross acres of land bringing its undeveloped land holdings at June 30, 2007 to 242,059 gross (199,097 net) undeveloped acres.

2007 Outlook

Current production is approximately 6,300 boe per day and Birchcliff expects to exit 2007 at approximately 7,000 boe per day.

Birchcliff Energy Ltd - Second Quarter 2007 Report

The full text of the 2007 Second Quarter Report follows.

President's Message

August 10, 2007

Dear Shareholder:

On behalf of the management team at Birchcliff, I am pleased to provide you with our second quarter results for 2007 which are in line with market expectations and Birchcliff's internal budget. Production has continued to grow from a second quarter 2007 average of 5,712 boe per day to 6,000 boe per day for the month of July to a current production rate of approximately 6,300 boe per day. Birchcliff has enjoyed some recent exploration and development success which over the next several months should lead to incremental production additions. Assuming successful production testing of our new discoveries, Birchcliff will have a significant number of follow up locations.

2007 Second Quarter Results

Production

Production averaged approximately 5,712 boe per day for the second quarter of 2007. This is a 20% increase from the second quarter of 2006 and only slightly below the first quarter of 2007, notwithstanding spring break up. July 2007 production averaged approximately 6,000 boe per day. Current production is approximately 6,300 boe per day. Based on our recent drilling success and assuming we continue our budgeted capital programs we still expect that we will exit 2007 at approximately 7,000 boe per day.

Cash Flow and Earnings

Cash flow was $13.6 million or $0.21 per share for the second quarter 2007, as compared to $11.1 million or $0.19 in the second quarter of 2006. Notwithstanding production has increased 20% from the comparable quarter of 2006, cash flow has only increased by $2.5 million from the second quarter of 2006, as a result of increased interest, operating and general and administrative expenses. Natural gas prices were softer in the second quarter of 2007 than the first quarter of 2007 by 5%, but were stronger by 17% as compared to the second quarter of 2006.

Birchcliff had an earnings loss of $707,000 or $0.01 per share for the second quarter of 2007 as compared to an earnings loss of $1.4 million in the first quarter of 2007 and as compared to net income of $1 million or $0.02 in the second quarter of 2006.

Capital Expenditures and Drilling

During the second quarter, capital spending aggregated $13.7 million. Birchcliff limited its spending to its cash flow in the second quarter, while waiting for industry costs to continue to decline and natural gas prices to increase.

Birchcliff activities during the second quarter included the drilling of 3 (2.6 net) wells which resulted in 2 (1.6 net) natural gas wells, and 1 (1.0 net) dry hole.

Indebtedness

Total indebtedness at June 30, 2007, including working capital deficiency was $92.2 million, flat to the first quarter of 2007. At the end of the second quarter, Birchcliff was drawn to $88.8 million on its $120 million of credit facilities.

Land

Birchcliff has continued to grow its land position in the Peace River Arch, spending $2 million on land during the second quarter. At the end of the second quarter Birchcliff owned 242,059 gross (199,097 net) undeveloped acres.

Operational Activities

I would like to take this opportunity to update you on the important initiatives that Birchcliff has been pursuing since our last report to shareholders which we hope will lead to significant step changes in the growth profile of Birchcliff:

1. Continued momentum in our Montney/Doig resource play including the extension of this resource play to Pouce Coupe south.

2. Recent advances in new technology that are increasing production rates and recovery factors to exploit our Montney/Doig resource play, specifically, application of horizontal drilling and new completion techniques. Birchcliff intends to drill two horizontal wells into the Montney/Doig commencing in late September 2007.

3. Significant advancement of the high impact component of our drilling portfolio including advancing 4 to 6 locations to be drilled in the latter half of 2007 with greater than 500 boe per day of production potential per well. We have recently drilled and cased two of these wells and are optimistic about the results.

Montney/Doig Resource Play

A critical project continues to be our Montney/Doig resource play in the greater Pouce Coupe area. Birchcliff has seen this project mature from a play concept with no production or reserves to now having drilled 21 gross (18.8 net) wells and proving up a significant accumulation of gas with very high original gas in place per section.

During the second quarter Birchcliff drilled our fourth well as part of a previously announced large farm-in in South Pouce Coupe, the south end of our play trend. The well was successful and we are currently tieing the well in. To date we have earned eight sections of highly prospective land (70% WI) by drilling four wells. We are likely to commit to a fifth well under this farm-in, which will further extend our earning phase of this farm-in.

Other developments on the play included significant effort in evaluating and planning the drilling of two horizontal wells. These two horizontals wells are expected to spud in late September.

Currently, we control more than 32 net sections of land on this Montney/Doig play and we have access to the balance of the lands that are associated with the farm-in, which comprises 13 gross (9.1 net) sections.

New Technology

Industry has been making very rapid technical advancements and cost savings on the drilling of horizontal wells and the successful multi stage fracture completion techniques for these horizontal wells. These new completion techniques for horizontal wells are proving to be an excellent application for tight gas reservoirs. Recent operations by various industry participants confirm the Montney and the Doig to be excellent reservoirs for this technology. We are planning to drill our first two Montney/Doig horizontal wells starting in late September.

High Impact Exploration

Birchcliff continues to expand and optimize its high impact exploration portfolio of wells that have the potential to produce more than 500 boe per day. Birchcliff previously stated that it will be drilling 4-6 high impact wells in the later part of 2007. Recently we drilled two of these wells and both wells are cased. We are optimistic about the results of these wells and are waiting for completion results. Currently we have two more high impact exploration wells drilling. One of theses wells is a previously announced farm out in the Puskwa area that is targeting the Beaverhill Lake and is on trend with numerous recent industry discoveries. The second well is in our Pouce Coupe core area and has two high impact targets. Our high impact exploration program is a very good complement to our resource plays that generally have lower productivity but high reserve capture.

Outlook

We are very excited about our recent drilling successes and the future drilling and subsequent production momentum that our drilling success provides Birchcliff. We continue to emphasize the depth of drilling opportunities that exist at Birchcliff, the significant majority of which are high working interest and operated opportunities.

We have made great strides in the development of our Montney/Doig horizontal drilling programs. The drilling of our first two horizontal wells in the fall of 2007 is very exciting and successful results will justify a much larger program in 2008.

Our strategy in the first half of 2007 was to protect our balance sheet and position Birchcliff with the financial flexibility to execute the future development of our asset base.

In light of the current market conditions and our sensitivity to natural gas prices, we are watching the current weakness in natural gas prices carefully. We have not adjusted our capital programs, however, we remain very concerned about low natural gas prices. If natural gas prices remain weak, our fourth quarter spending will have to be reduced accordingly. However, we are committed to drilling the horizontal Montney/Doig gas wells, as the expected production gains and drilling momentum would be significant.

We remain bullish on the longer term outlook for natural gas and the value of our Peace River Arch assets. Our goal remains that of building a focused company in the Peace River Arch that will provide superior returns to our shareholders. As a measure of Birchcliff's depth of opportunities, at the beginning of 2007, Birchcliff had identified a portfolio of 270 gross, 207 net drilling locations on land it owned. I have chosen to highlight a small portion of these opportunities which have the potential to provide significant step changes but Birchcliff's success is not dependant on high risk exploration as our portfolio contains a significant number of development opportunities as well.

I would like to convey a special thanks to all of our employees and service providers who continue to work hard on behalf of Birchcliff shareholders.

On behalf of the Board of Directors and our Management Team,



A. Jeffery Tonken
President and Chief Executive Officer


FINANCIAL AND OPERATIONAL HIGHLIGHTS

Three Three Six Six
Months Months Months Months
ended ended ended ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
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OPERATING
Daily Average Production
Light Oil - barrels 703 742 722 756
Natural Gas - thousands of cubic
feet 28,998 23,242 29,215 24,540
NGLs - barrels 175 144 178 168
Total - barrels of oil equivalent
(6:1) 5,712 4,760 5,770 5,014
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Average Sales Price ($ Canadian)
Light Oil - per barrel 69.92 74.13 66.82 68.12
Natural Gas - per thousand cubic
feet 7.39 6.48 7.59 7.32
NGLs - per barrel 67.93 72.95 66.13 70.00
Total - per barrel of oil equivalent
(6:1) 48.20 45.42 48.82 48.46
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Undeveloped Land
Gross (acres) 242,059 207,539 242,059 207,539
Net (acres) 199,097 161,938 199,097 161,938
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NETBACK AND COST
($ per barrel of oil equivalent
at 6:1)
Petroleum & natural gas revenue 48.99 47.36 49.63 50.10
Royalties, net of ARTC (6.22) (6.51) (7.20) (8.47)
Operating expense (8.64) (7.93) (8.83) (8.12)
Transportation and marketing
expense (1.63) (1.69) (1.63) (1.65)
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Netback 32.50 31.23 31.97 31.86
General & administrative expense (3.39) (3.33) (3.39) (3.09)
Stock-based compensation expense (0.02) (0.21) (0.04) (0.15)
Interest expense (2.61) (2.34) (2.42) (1.78)
Taxes (0.24) 0.19 (0.23) -
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Cash Flow Netback 26.24 25.54 25.89 26.84
Depletion and depreciation (27.60) (21.29) (27.52) (20.31)
Accretion (0.46) (0.47) (0.45) (0.43)
Stock-based compensation expense 0.21 (1.59) (0.53) (1.44)
Future income tax expense 0.25 0.01 0.62 (1.86)
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Net Earnings (1.36) 2.20 (1.99) 2.80
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FINANCIAL
Petroleum & Natural Gas Revenue
($000) 25,462 20,515 51,831 45,473
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Cash Flow from Operations ($000) 13,641 11,068 27,037 24,364
Per share -- basic ($) 0.21 0.19 0.42 0.42
Per share -- diluted ($) 0.21 0.18 0.42 0.40
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Net Earnings ($000) (707) 961 (2,080) 2,542
Per share - basic ($) (0.01) 0.02 (0.03) 0.04
Per share - diluted ($) (0.01) 0.02 (0.03) 0.04
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Common Shares Outstanding
End of Period - Basic 64,189,413 58,167,747 64,189,413 58,167,747
End of Period - Diluted 72,709,078 66,277,414 72,709,078 66,277,414
Weighted Average for Period
- Basic 64,189,413 58,167,747 64,178,916 56,165,648
Weighted Average for Period
- Diluted 65,394,368 61,499,413 65,095,253 61,662,592
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Capital Expenditures ($000) 13,727 24,627 31,456 64,303
Working Capital (Deficiency)
($000) (3,385) (15,022) (3,385) (15,022)
Revolving Credit Facility ($000) 88,833 85,299 88,833 85,299
Total Debt ($000) 92,218 100,321 92,218 100,321
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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, 2007 (the "Reporting Periods") as compared to the three and six month periods ended June 30, 2006 (the "Comparable Prior Periods") is dated August 10, 2007.

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, 2005 and 2006 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 2007 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 2006, 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 (net of ARTC), 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 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.

OVERALL PERFORMANCE

Average production in the second quarter of 2007 was slightly down at 5,712 BOE/d, as compared to 5,829 BOE/d in the first quarter of 2007. This small decrease in production volumes was due to normal production declines, temporary production slow downs associated with spring breakup, turnarounds and the inevitable effect of reduced capital spending initiated in the later part of 2006. As in the prior year the second quarter tends to be the period where Birchcliff's average quarterly production is the lowest for the year.

Drilling operations have continued, but at a slower pace than in the second quarter of 2006 in line with Birchcliff's strategy to spend within its cash flow in the first half of 2007, excluding acquisitions. Birchcliff accomplished this with cash flow of $27.0 million exceeding its capital program of $26.1 million (excluding acquisitions) during the first half of 2007. Birchcliff's financial position remains healthy at the end of the second quarter.

Total debt at June 30, 2007 was $92.2 million as compared to $87.8 million at December 31, 2006. This increase in debt of $4.4 million is due to the minor acquisition of properties within the Peace River Arch ("Arch") core area for approximately $5.4 million. These acquisitions further strengthen Birchcliff's position in the Arch and provide Birchcliff with additional drilling and production opportunities without adding overhead expense. Birchcliff continues to seek this type of targeted acquisition on an on-going basis as a part of its normal business strategy.

The Corporation is always reviewing 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 is continuously 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

The Corporation's $120 million syndicated credit facilities were reviewed in May 2007 and extended until May 2008.

LIQUIDITY AND BANK DEBT

The Corporation's working capital deficit decreased to $3.4 million at June 30, 2007, as compared to $15.0 million at June 30, 2006 due to the significant decrease in operational activity in 2007 as compared to 2006. The Corporation drilled 3 gross wells (2.6 net) in the three month Reporting Period as compared to 9 gross wells (9 net) in the Comparable Prior Period.

At June 30, 2007 the largest component of Birchcliff's current assets (53%) is the cash to be received from its marketers in respect of June 2007 production which was subsequently received in July 2007. In contrast, the current liabilities consist of trade payables (40%); accrued capital and operating costs (32%); 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.

The Corporation's bank debt or revolving credit facilities which have an aggregate limit of $120 million were drawn to $88.8 million at June 30, 2007 as compared to $85.3 million for the Comparable Prior Period. The increase is mainly due to the capital expenditure program exceeding the Corporation's cash flow in late 2006 and early 2007 with the difference being funded through Birchcliff's credit facilities.

At June 30, 2007 the interest rate applicable to the working capital facility was 6% and slightly less for the syndicated facility because banker's 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 Generated by Operations

Cash generated by the Corporation was $13.6 million and $27.0 million for the three and six month Reporting Periods as compared to $11.1 million and $24.4 million for the Comparable Prior Periods.

Future cash flow will be dependent mainly on production levels and natural gas 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, 2006 to June 30, 2007 which are the only class of shares outstanding:



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Common Shares
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Balance at December 31, 2006 64,139,413
Issue of Common Shares upon Exercise of Options 50,000
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Balance at March 31, 2007 64,189,413
-
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Balance at June 30, 2007 64,189,413
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RESULTS OF OPERATIONS

Petroleum and Natural Gas Revenue

Petroleum and natural gas revenues totaled $25.5 million for the three month Reporting Period and $51.8 million for the six month Reporting Period as compared to $20.5 million and $45.5 million for the three and six month Comparable Reporting Period primarily as a result of increased commodity sales. 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, 2007

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 petroleum and natural
gas sales (BOE) 25,053 5,712 100 48.20
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Royalty revenue 409 0.79
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Total petroleum and
natural gas revenue 25,462 48.99
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Three months ended
June 30, 2006

Total Average
Revenue Daily Average
($000's) Production % ($/unit)
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Natural Gas (mcf) 13,708 23,242 81 6.48
Light oil (bbls) 5,003 742 16 74.13
Natural gas liquids (bbls) 963 144 3 72.95
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Total petroleum and
natural gas sales (BOE) 19,674 4,760 100 45.42
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Royalty revenue 841 1.94
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Total petroleum and
natural gas revenue 20,515 47.36
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Six months ended
June 30, 2007

Total Average
Revenue Daily % Average
($000's) Production ($/unit)
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Natural Gas (mcf) 40,113 29,215 84 7.59
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Light oil (bbls) 8,739 722 13 66.82
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Natural gas liquids (bbls) 2,132 178 3 66.13
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Total petroleum and
natural gas sales (BOE) 50,984 5,770 100 48.82
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Royalty revenue 847 0.81
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Total petroleum and
natural gas revenue 51,831 49.63
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Six months ended
June 30, 2006

Total Average
Revenue Daily Average
($000's) Production % ($/unit)
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Natural Gas (mcf) 32,530 24,540 82 7.32
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Light oil (bbls) 9,321 756 15 68.12
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Natural gas liquids (bbls) 2,130 168 3 70.00
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Total petroleum and
natural gas sales (BOE) 43,981 5,014 100 48.46
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Royalty revenue 1,492 1.64
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Total petroleum and
natural gas revenue 45,473 50.10
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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. Birchcliff received an average of $7.39/mcf for its natural gas sales in the three month Reporting Period and $7.59/mcf in the six month Reporting Period as compared to an average price of $6.48/mcf and $7.32/mcf in the Comparable Prior Periods. The AECO daily spot price averaged $7.07/mmbtu in the three month Reporting Period and $7.24/mmbtu in the six month Reporting Period as compared to $6.04/mmbtu and $6.77/mmbtu Comparable Prior Periods. The positive differential from the well head price received by Birchcliff compared to the AECO daily spot price was $0.32/mcf in the three month Reporting Period and $0.35/mcf in the six month Reporting Period as compared to $0.44/mcf and $0.52/mcf in the Comparable Prior Periods.

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.

Royalties and ARTC

Oil and natural gas royalties totaled $3.2 million ($6.22 per BOE) during the three month Reporting Period and $7.5 million ($7.20 per BOE) in the six month Reporting Period as compared to $2.8 million ($6.51 per BOE) and $7.7 million ($8.47 per BOE) in the Comparable Prior Periods. Effective January 1, 2007 the ARTC program was discontinued. Oil and natural gas royalties before ARTC totaled $3.0 million ($6.84 per BOE) and $8.1 million ($8.92 per BOE) in the three and six month Comparable Periods. The overall effective royalty rate in the three and six month Reporting Period was 14% and 18% of the Corporation's total petroleum and natural gas sales as compared to 14% and 17% in the Comparable Prior Periods. In the three and six month Reporting Periods, the 2006 custom processing adjustment, operating cost adjustment and capital cost adjustment accounted for $730,000 ($1.40 per BOE) and $1.4 million ($1.37 per BOE) in credits respectively. Without these prior adjustments, the overall royalty rate for the three and six month reporting periods would have been 16% and 17% respectively. The Corporation will receive these adjustments each year during the second quarter. The adjustments depend mainly on the amount of capital spent on facilities and gathering equipment for natural gas in the prior year.

The proportion of Crown royalties to total royalties in the three and six Reporting Periods was generally consistent with the Comparable Prior Periods at approximately 95% and 94% of total royalties paid respectively. This is expected to remain consistent as most of Birchcliff's new drilling is on Crown land.

Operating Costs

Operating costs were $4.5 million ($8.64 per BOE) for the three month Reporting Period and $9.2 million ($8.83 per BOE) for the six month Reporting Period as compared to $3.4 million ($7.92 per BOE) and $7.4 million ($8.12 per BOE) for the Comparable Prior Periods. The 9% increase per BOE in both the three month and the six month Reporting Periods resulted from increased gas processing fees in areas where Birchcliff's production additions are processed through third-party gas plants as well as increased labour costs and road and lease maintenance to support additional activity in the quarter. The following table compares operating costs for the Reporting Periods and the Comparable Prior Periods:



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Operating Costs

Three Months Ended Three Months Ended
($000's) June 30, 2007 June 30, 2006
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Total ($000's) $/BOE Total ($000's) $/BOE
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Field operating costs 4,384 8.44 3,108 7.17
Expensed workovers 104 0.20 327 0.75
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Total operating costs 4,488 8.64 3,435 7.92
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Operating Costs

Six Months Ended Six Months Ended
($000's) June 30, 2007 June 30, 2006
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Total ($000's) $/BOE Total ($000's) $/BOE
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Field operating costs 9,032 8.65 6,680 7.36
Expensed workovers 188 0.18 686 0.76
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Total operating costs 9,220 8.83 7,366 8.12
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Operating costs are somewhat mitigated by the impact of third party revenues Birchcliff receives for processing, treating and transporting other producers' production, water disposal fees and other minor recoveries. In the three and six month Reporting Periods, these recoveries reduced operating costs by $0.91 per BOE and $0.74 per BOE respectively as compared to a $1.17 and $1.13 reduction in the Comparable Prior Periods, resulting in $0.26, or 36%, of the $0.72 increase in unit operating costs for the three month reporting and $0.39, or 55%, of the $0.71 increase for the six month reporting period. One of Birchcliff's strategic objectives is to maximize the use of its underutilized facilities in order to bring unit production costs down. This has proved challenging in the current environment because the production of third party wells has declined and few new third party wells have been tied in due to a significant decrease in operational activity during the last three quarters.

Birchcliff continues to implement strategies aimed at lowering its operating costs on a per BOE basis, but these decreases are being offset by rising processing fees at third party plants and general increases in costs of necessary services.

Transportation and Marketing Expenses

Transportation and marketing expenses were $848,000 ($1.63 per BOE) and $1.73 million ($1.63 per BOE) for the three and six Reporting Periods as compared to the Comparable Prior Periods of $731,000 ($1.69) per BOE) and $1.5 million ($1.65 per BOE). These costs consist primarily of transportation costs. Although the aggregate amount of these costs will increase with increased production volumes, Birchcliff does not expect these costs to increase significantly on a per BOE basis.

General and Administrative Expense

Net general and administrative costs in the three and six month Reporting Periods were $1.8 million ($3.39 per BOE) and $3.5 million ($3.39 per BOE) as compared to the Comparable Prior Periods of $1.4 million ($3.33 per BOE) and $2.8 million ($3.09 per BOE).



The components of G&A are as follows:

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General and
Administrative Three Months Ended Three Months Ended
Expense ($000's) June 30, 2007 June 30, 2006
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Salaries, benefits and consultants 1,453 63% 1,320 63%
Other 803 37% 770 37%
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G & A expense, gross 2,256 100% 2,090 100%
Overhead recoveries (244) (11%) (431) (21%)
Capitalized overhead (249) (11%) (218) (10%)
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G & A expense, net 1,763 78% 1,441 69%
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----------------------------------------------------------------------------
G & A expense, net per BOE $ 3.39 $ 3.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
General and
Administrative Six Months Ended Six Months Ended
Expense ($000's) June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Salaries, benefits and consultants 3,019 64% 2,572 62%
Other 1,709 36% 1,564 38%
----------------------------------------------------------------------------
G & A expense, gross 4,728 100% 4,136 100%
Overhead recoveries (633) (13%) (894) (22%)
Capitalized overhead (553) (12%) (441) (10%)
----------------------------------------------------------------------------
G & A expense, net 3,542 75% 2,801 68%
----------------------------------------------------------------------------
G & A expense, net per BOE $ 3.39 $ 3.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Interest Expense

Interest expense for the three and six month Reporting Periods was $1.4 million ($2.61 per BOE) and $2.5 million ($2.42 per BOE). In the Comparable Prior Periods it was $1.0 million ($2.34 per BOE) and $1.6 million ($1.78 per BOE). The increase in aggregate interest expense and interest expense per BOE result directly from the Corporation maintaining a higher debt level and being subject to slightly higher interest rates during the Reporting Period. The Corporation's average bank debt was approximately $88.6 million for the three month Reporting Period as compared to $76.6 million for the Comparable Prior Period 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 $14.6 million ($28.06 per BOE) and $29.2 million ($27.97 per BOE) as compared to the three and six month Comparable Prior Periods of $9.4 million ($21.76 per BOE) and $18.8 million ($20.74 per BOE). The DD&A on a per BOE basis is 29% and 35% higher in the three and six month Reporting Periods than in the Comparable Prior Periods mainly due to the increased cost of services and reduced amount of proven reserve additions for the dollars spent, resulting in higher finding costs, which are ultimately reflected in DD&A over time. The components of DD&A are as follows:



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

DD&A Expense Three Months Ended Three Months Ended
($000's) June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total ($000's) $/BOE Total ($000's) $/BOE
----------------------------------------------------------------------------
Depletion & depreciation 14,344 27.60 9.2 21.29
Accretion 240 0.46 0.2 0.47
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total DD&A 14,584 28.06 9.4 21.76
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

DD&A Expense Six Months Ended Six Months Ended
($000's) June 30, 2007 June 30, 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total ($000's) $/BOE Total ($000's) $/BOE
----------------------------------------------------------------------------
Depletion & depreciation 28,744 27.52 18.4 20.31
Accretion 470 0.45 0.4 0.43
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total DD&A 29,214 27.97 18.8 20.74
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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, 2007, Birchcliff has excluded from its full cost pool $39.5 million (June 30, 2006 - $45.9 million) of costs for undeveloped land acquired by Birchcliff and for unproved properties acquired relating to opportunities in the probable reserve category and the potential drilling, recompletion and workover opportunities which have not yet been assigned any reserves. The Corporation intends that over time it will, for depletion calculation purposes, continue to reduce the cost amount excluded from the full cost pool in respect of unproved properties as those unproved properties are drilled and developed, or have their value confirmed or impaired by new information or circumstances.

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, 2007 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 recovery of $128,000 ($0.25 per BOE) and $648,000 ($0.62 per BOE) during the three and six month Reporting Periods, as compared to a recovery of $6,000 ($0.01 per BOE) and an expense of $1.7 million ($1.86 per BOE) during the Comparable Prior Periods. This change results primarily from the reduced net income recorded during the Reporting Periods as compared to the Comparable Prior Periods.

Birchcliff incurred $124,000 and $241,000 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 did not incur any Part XII.6 taxes. Birchcliff will continue to incur Part XII.6 taxes during 2007 until the full amount of Canadian Exploration Expenditures renounced by Birchcliff have been incurred. At June 30, 2007 Birchcliff had incurred approximately $9.5 million of Canadian Exploration Expenditures.

During the three month Comparable Prior Period, the Corporation recorded a $83,000 recovery of Large Corporation Tax which ceased to be applicable on January 1, 2007.

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 100,000 common shares at a weighted average exercise price of $4.90 per common share. Of these options, at June 30, 2007 there remained outstanding options to purchase 100,000 common shares.

The Corporation recorded a $98,000 recovery ($0.19 per BOE) and a $595,000 expense ($0.57 per BOE) for stock-based compensation relating to stock options in the three and six month Reporting Periods, as compared to $778,000 ($1.80 per BOE) and $1.4 million ($1.59 per BOE) during the Comparable Prior Periods. As a result of the grant of options during the Reporting Periods, the amount of stock based compensation increased, however the stock based compensation for the three month Reporting Period was offset by the effect of options forfeited by employees in the quarter. As a result of this, a stock option compensation recovery was realized in the quarter.

During the three month Reporting Period, the Corporation issued no shares due to exercise of vested stock options, and stock options in respect of 1,095,168 common shares were forfeited. In addition, the cancellation of vested stock options resulted in a cash-paid stock-based compensation expense of $10,000 and $44,000 in the three and six month Reporting Periods as compared to $91,000 and $137,000 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 $13.7 and $31.5 million during the three and six month Reporting Periods. In the Comparable Prior Periods, $24.6 and $64.3 million of capital expenditures were incurred. The decrease in expenditures was the result of natural gas prices not being high enough to sustain a significantly larger capital program due to the high cost of services. The Corporation drilled 3 gross (2.6 net) wells in the three month Reporting Period as compared to 9 gross wells (9 net) in the Comparable Prior Period.

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



Capital Expenditures

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended June 30 ($000's) 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land 1,982 1,503
Exploration(1) - drilling and completions 1,014 5,407
Exploration (1)- seismic 143 646
Exploration(1) - other 139 275
Development - drilling and completions 3,374 7,149
Development - other 145 1
Well equipment and facilities 1,227 9,310
Capitalized general and administrative expenses 237 206
----------------------------------------------------------------------------
Total Finding & Development Costs 8,261 24,497
Acquisitions 5,441 124
----------------------------------------------------------------------------
Total Finding, Development & Acquisition Costs 13,702 24,621
Administrative assets 25 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Capital Expenditures 13,727 24,627
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months Ended June 30 ($000's) 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land 2,703 10,631
Exploration(1) - drilling and completions 6,607 11,729
Exploration (1)- seismic 928 2,572
Exploration(1) - other 224 431
Development - drilling and completions 8,539 21,404
Development - other 396 6
Well equipment and facilities 6,128 15,559
Capitalized general and administrative expenses 553 441
----------------------------------------------------------------------------
Total Finding & Development Costs 26,078 62,773
Acquisitions 5,438 1,489
----------------------------------------------------------------------------
Total Finding, Development & Acquisition Costs 31,516 64,262
Administrative assets 30 41
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Capital Expenditures 31,546 64,303
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The exploration categorization is based on internal criteria, mainly
utilizing information from the well license and does not necessarily
coincide with the Canadian Exploration Expense classification under the
Income Tax Act.

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

Capital Resources

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended June 30 ($000's) 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash generated by operations 13,641 11,068
Changes in working capital from operations 926 3,696
Equity issues, net of issue costs - (54)
Increase in revolving credit facility 3,401 18,698
Asset retirement expenditures (33) -
Changes in working capital from investing (4,208) (8,781)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total capital resources 13,727 24,627
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months Ended June 30 ($000's) 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash generated by operations 27,037 24,364
Changes in working capital from operations (1,562) 5,063
Equity issues, net of issue costs 150 (37)
Increase in revolving credit facility 7,528 48,685
Asset retirement expenditures (76) -
Changes in working capital from investing (1,530) (13,771)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total capital resources 31,547 64,304
----------------------------------------------------------------------------
----------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION

----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
($ per BOE) 48.20 49.43 46.86 43.11
Natural gas commodity
price at wellhead
($ per mcf) 7.39 7.78 7.33 5.91
Total petroleum and
natural gas revenue 25,462 26,369 25,750 22,546
Total royalties, net of
ARTC(1) (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 income (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
facility (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 shares
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
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
($000's, except share June 30, March 31, December 31, September 30,
and per share amounts) 2006 2006 2005 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Petroleum and natural
gas production
(BOE per day) 4,760 5,271 5,009 4,626
Petroleum and natural
gas commodity price
($ per BOE) 45.42 51.24 72.65 62.20
Natural gas commodity
price at wellhead
($ per mcf) 6.48 8.09 12.23 9.91
Total petroleum and
natural gas revenue 20,515 24,958 34,175 26,843
Total royalties, net of
ARTC(1) (2,820) (4,871) (8,269) (5,711)
Total interest and
other revenue - 3 1 2
Total revenues, net 17,695 20,090 25,907 21,134
Capital expenditures 24,627 39,677 38,485 14,807

Net income (loss) 961 1,581 126 4,336
Per share basic 0.02 0.03 - 0.08
Per share diluted 0.02 0.03 - 0.07

Cash generated by
operations 11,068 13,296 18,112 15,303
Per share basic 0.19 0.23 0.32 0.27
Per share diluted 0.18 0.22 0.30 0.26

Book value of total
assets 345,092 329,632 311,364 276,961
Revolving credit
facility (85,299) (66,601) (36,614) (47,945)
Total indebtedness (100,321) (86,708) (60,344) (53,748)
Shareholders' equity 219,719 218,124 223,894 204,198

Common shares
outstanding - end of
period
Basic 58,167,747 58,167,747 58,147,747 56,365,347
Diluted 66,277,414 66,292,746 65,091,912 63,259,512
Weighted average common
shares outstanding
Basic 58,167,747 58,163,525 56,614,330 56,365,347
Diluted 61,499,413 61,827,830 59,964,046 58,842,965
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) ARTC is not applicable to periods after December 31, 2006.


Discussion of Quarterly Results

Production rates for the three month Reporting Period were approximately the same as the first quarter of 2007 and the fourth quarter of 2006 due to normal production declines, turnarounds and the effect of reduced capital spending initiated in the later part of 2006. The production dip during the three month Reporting Period was not as pronounced as in the second quarter of 2006.

Birchcliff reduced its capital spending and activity levels during the first quarter of 2007 and the fourth quarter of 2006, compared to previous quarters, in response to the high cost of services without correspondingly higher natural gas sales prices. The natural gas prices remained consistent through the last 3 quarters, but as was experienced in the third quarter of 2006, we expect the natural gas price to be lower throughout the third quarter.

Management continues to carefully monitor capital spending to ensure Birchcliff is poised to quickly take advantage of any future increases in natural gas prices.

OUTLOOK

With the effect of spring breakup and turnaround times completed, Birchcliff expects its third quarter production to be higher in comparison to the second quarter as new wells are brought on production. The effect on cash flow maybe muted however due to the reduction in natural gas prices through July which is expected to continue for the next few months.

Birchcliff will continue to develop its natural gas plays at a slower pace but also has some opportunities for light oil plays which it will proceed on in light of the continued high prices.

Birchcliff will continue to restrict its capital spending to preserve its debt capacity until natural gas prices become stronger. Birchcliff also continues, on an ongoing basis, to evaluate available merger and acquisition opportunities to strengthen its position and provide value for its shareholders.



BIRCHCLIFF ENERGY LTD.
Balance Sheets
(Unaudited) ($000's)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

June 30, 2007 December 31, 2006
---------------------------------

ASSETS
CURRENT
Cash and cash equivalents 66 65
Accounts receivable 11,952 13,498
Prepaid and other 2,908 3,240
---------------------------------
14,926 16,803

Future income tax asset 2,567 6,689

Petroleum and natural gas properties and
equipment (Note 3) 341,930 338,763
---------------------------------
359,423 362,255
---------------------------------
---------------------------------

LIABILITIES
CURRENT
Accounts payable and accrued liabilities 18,311 23,282
---------------------------------
18,311 23,282
---------------------------------

Revolving credit facility (Note 4) 88,833 81,304
Asset retirement obligations (Note 5) 12,029 11,270

SHAREHOLDERS' EQUITY
Share capital (Note 6) 231,610 236,158

Contributed surplus (Note 7) 9,469 8,990
Retained earnings (deficit) (829) 1,251
---------------------------------
240,250 246,399
---------------------------------
359,423 362,255
---------------------------------
---------------------------------


See accompanying notes to the financial statements.

APPROVED BY THE BOARD

"Larry A. Shaw"
Larry A. Shaw, Director

"A. Jeffery Tonken"
A. Jeffery Tonken, Director


BIRCHCLIFF ENERGY LTD.
Statements of Net Income (Loss), Comprehensive Income and Retained Earnings
(Deficit)
(Unaudited) ($000's)
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
--------------------------------------------------

REVENUE
Petroleum and natural
gas 25,462 20,515 51,831 45,473
Royalties (3,233) (2,820) (7,521) (7,691)
Interest and other - - 1 3
--------------------------------------------------
22,229 17,695 44,311 37,785
--------------------------------------------------

EXPENSES
Production 4,488 3,435 9,220 7,366
Transportation 848 731 1,702 1,501
General and
administrative 1,763 1,441 3,542 2,801
Stock-based
compensation (98) 778 595 1,447
Depletion, depreciation
and accretion 14,584 9,426 29,214 18,823
Interest 1,355 1,012 2,525 1,616
--------------------------------------------------
22,940 16,823 46,798 33,554
--------------------------------------------------
INCOME (LOSS) BEFORE
TAXES (711) 872 (2,487) 4,231

TAXES
Capital and other taxes 124 (83) 241 -
Future income taxes
(recovery) (128) (6) (648) 1,689
--------------------------------------------------
(4) (89) (407) 1,689
--------------------------------------------------
NET INCOME (LOSS) AND
COMPREHENSIVE INCOME (707) 961 (2,080) 2,542

RETAINED EARNINGS
(DEFICIT), BEGINNING OF
PERIOD (122) 3,945 1,251 2,364
--------------------------------------------------

RETAINED EARNINGS
(DEFICIT), END OF
PERIOD (829) 4,906 (829) 4,906
--------------------------------------------------
--------------------------------------------------

Net income (loss) per
common share
basic and diluted (0.01) $0.02 (0.03) $0.04

Weighted average common
shares
basic 64,189,413 58,167,747 64,178,916 58,165,648
diluted 64,189,413 61,499,413 64,178,916 61,662,592

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
2007 2006 2007 2006
--------------------------------------------------

CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:

OPERATING
Net income (loss) (707) 961 (2,080) 2,542
Adjustments for items not
affecting cash:
Depletion, depreciation
and accretion 14,584 9,426 29,214 18,823
Stock-based compensation
(Note 7) (108) 687 551 1,310
Future income tax
(recovery) (128) (6) (648) 1,689
--------------------------------------------------
13,641 11,068 27,037 24,364
Changes in non-cash
working capital (Note 9) 926 3,696 (1,562) 5,063
Asset retirement
expenditures incurred (33) - (76) -
--------------------------------------------------
14,534 14,764 25,399 29,427
--------------------------------------------------

FINANCING
Increase in revolving
credit facility 3,401 18,698 7,528 48,685
Issuance of share capital,
net of issue costs
(Note 7) - (54) 150 (37)
--------------------------------------------------
3,401 18,644 7,678 48,648
--------------------------------------------------

INVESTING
Purchase of petroleum and
natural gas properties and
equipment (5,441) (124) (5,438) (1,489)
Development of petroleum
and natural gas properties
and equipment (8,286) (24,502) (26,108) (62,814)
Changes in non-cash
investing working capital
(Note 9) (4,208) (8,781) (1,530) (13,771)
--------------------------------------------------
(17,935) (33,407) (33,076) (78,074)
--------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS - 1 1 1

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 66 64 65 64
--------------------------------------------------

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

Cash interest paid 1,358 1,012 2,524 1,616

Cash taxes paid 6 - 6 60

See accompanying notes to the financial statements.


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, 2006 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, 2006.

2. CHANGES IN ACCOUNTING POLICIES

Financial Instruments - Recognition and Measurement

Effective January 1, 2007, the Corporation adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3855 - Financial Instruments - Recognition and Measurement and Section 3861 - Financial Instruments - Presentation and Disclosure. These sections establish the standards for recognizing and measuring financial instruments in the balance sheet and the standards for reporting gains and losses relating to financial instruments in the financial statements. All financial instruments are classified into specific categories; financial assets available for sale, assets and liabilities held for trading, loans and receivables, investments held to maturity and other financial liabilities. Financial instruments are measured at fair value with subsequent measurement based on initial classification. Non-exempt derivative and embedded derivative financial instruments, part of a hedging relationship or not, have to be measured at fair value. All changes in their fair value are recorded in net income unless hedge accounting is utilized, which then requires any changes in fair value to be recorded in other comprehensive income until such time as the underlying hedged transaction is recognized in net income. If a hedge ceases to be effective it is immediately recognized in net income.

The Corporation has made the following classifications:

a) Cash and cash equivalents are classified as financial assets held for trading and are measured at fair value. Gains and losses from revaluation are recognized in net income.

b) Accounts receivable are classified as loans and receivables and are initially measured at fair value. Subsequent revaluations are recorded at amortized cost using the effective interest rate method.

c) Revolving credit facilities, accounts payable and accrued liabilities are classified as other liabilities and are initially measured at fair value. Subsequent revaluations are recorded at amortized cost using the effective interest rate method.

The Corporation has adopted these sections retroactively without restatement and has therefore not restated prior periods. Further, because the Corporation does not currently utilize hedges or other derivative financial instruments, the adoption of these sections has had no material impact on the Corporation's net earnings, cash flows or retained earnings at January 1, 2007.

Comprehensive Income

Effective January 1, 2007, the Corporation adopted the CICA Handbook Section 1530 --Comprehensive Income. This section describes reporting and disclosure recommendations with respect to comprehensive income and its components. Comprehensive income is the change in shareholders' equity resulting from transactions and events from sources other than the Corporation's shareholders. These transactions and events include changes in currency translation adjustments and unrealized gains and losses resulting from changes in fair value of certain financial instruments. The adoption of this Section requires the Corporation to present a statement of comprehensive income as part of the financial statements. The adoption of this section has had no impact on Birchcliff's retained earnings at January 1, 2007.

Equity

Effective January 1, 2007, the Corporation adopted the CICA Handbook Section 3251 - Equity. This section establishes the standards for presentation of equity and recognizing changes in equity occurring in the reporting period as a result of the adoption and application of Section 1530 - Comprehensive Income discussed above.

Accounting Changes

Effective January 1, 2007 the Corporation also adopted Section 1506 - Accounting Changes, the only effect of which is to provide disclosure and the resulting impact to the Corporation when an entity has not applied a new source of Generally Accepted Accounting Principles ("GAAP") that has been issued but is not yet effective.

This applies to Section 1535 - Capital Disclosures which is required to be adopted for fiscal years beginning on or after October 1, 2007. Birchcliff intends to adopt these standards on January 1, 2008 and requires disclosure regarding the Corporation's definition of capital and its objectives, policies and processing for managing capital. In addition, the section requires disclosure as to whether the Corporation has complied with externally imposed capital requirements. The adoption of this section will have no impact on the financial amounts the Corporation reports in its financial statements.

This applies to Section 3862 - Financial Instruments Disclosures and Section 3863 - Financial Instruments Presentations which are required to be adopted for fiscal years beginning on or after October 1, 2007. Birchcliff intends to adopt these standards on January 1, 2008 and it is expected the only effect on the Corporation will be incremental disclosures regarding the significance of financial instruments for the entity's financial position and performance; and the nature, extent and management of risks to which the entity is exposed arising from financial instruments.



3. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2007

Accumulated
Depletion and
Cost Depreciation Net Book Value
$000's $000's $000's
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Petroleum and natural gas properties
and equipment 433,506 (92,081) 341,425
Office and other equipment 1,058 (553) 505
----------------------------------------------------------------------------
434,564 (92,634) 341,930
----------------------------------------------------------------------------
----------------------------------------------------------------------------

December 31, 2006

Accumulated
Depletion and
Cost Depreciation Net Book Value
$000's $000's $000's
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Petroleum and natural gas properties
and equipment 401,626 (63,468) 338,158
Office and other equipment 1,027 (422) 605
----------------------------------------------------------------------------
402,653 (63,890) 338,763
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at June 30, 2007, the cost of petroleum and natural gas properties includes $39.5 million (as at December 31, 2006 - $48.3 million) relating to unproved properties which have been excluded from costs subject to depletion and depreciation. The majority of these costs relate to unproved properties acquired in the Corporation's significant acquisition in June of 2005.

Birchcliff capitalized general and administrative costs of $553,000 in the six month period ended June 30, 2007 (six months ended June 30, 2006 - $441,000) and $249,000 in the three month period ended June 30, 2007 (three months ended June 30, 2006 - $206,000) related to exploration and development activities.

4. REVOLVING CREDIT FACILITY

The Corporation has available to it an extendible revolving term credit facility with an authorized limit of $105 million and an extendible revolving working capital facility with an authorized limit of $15 million. The $120 million of credit facilities are provided by a syndicate of two Canadian chartered banks (the "Syndicate"). As at June 30, 2007, Birchcliff had drawn $88.8 million on the credit facilities. At June 30, 2007, the rate applicable to the working capital facility was 6%.

The credit facilities allow for prime rate loans, US base rate loans, bankers' acceptances, letters of credit and LIBOR loans. The credit facilities bear interest at varying rates depending on the instrument utilized and the debt to EBITDA ratio, where EBITDA equals net earnings after income taxes, plus interest expense, future income taxes and non-cash items deducted in determining net earnings.

The revolving term facility has a conversion date of May 22, 2008 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 revolving working capital facility has a conversion date of May 22, 2008 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.

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.

5. 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, 2007 to be approximately $33 million to be incurred between 2007 and 2056. 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:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
($000's) June 30, December 31,
2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Opening Balance 11,270 9,251
Obligations incurred 365 1,387
Changes in estimate - 389
Accretion expense 470 813
Actual expenditures incurred (76) (570)
----------------------------------------------------------------------------
Ending Balance 12,029 11,270
----------------------------------------------------------------------------


6. 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 Amount
Common Shares $
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Balance, December 31, 2005 58,147,747 214,951,344

Issued upon exercise of stock options 51,666 245,614
Tax effect of flow-through shares (Note (c) and (d)) - (7,997,000)
Share issue costs (Note (e)) - (19,321)
Tax effect of share issue costs (Note (e)) - 6,500
Issued, net of costs (Note (f)) 5,940,000 28,437,352
Tax effect of share issue costs (Note (g)) - 533,500

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

Issued upon exercise of stock options 50,000 222,000
Tax effect of flow-through shares (Note (f)) - (4,770,000)
----------------------------------------------------------------------------
Balance, March 31, 2007 64,189,413 231,609,989
- -

----------------------------------------------------------------------------
Balance, June 30, 2007 64,189,413 231,609,989
----------------------------------------------------------------------------


(c) On June 2, 2005, Birchcliff issued 2,000,000 flow-through shares at $5.00 per common share in exchange for flow-through share commitments made by Veracel Inc. prior to completion of a Plan of Arrangement, for net proceeds of $9,473,920. As at December 31, 2005 the commitment to spend and renounce $10,000,000 of qualified tax pools with respect to these flow-through shares was fulfilled.

(d) On December 20, 2005, Birchcliff issued 1,482,400 flow-through shares at a price of $9.12 per share for net proceeds of $12,876,768. As at December 31, 2005 Birchcliff renounced $13,519,488 of qualified tax pools with respect to these flow-through shares. As at December 31, 2006 the commitment to spend and renounce $13,519,488 of qualified tax pools with respect to these flow-through shares was fulfilled.

(e) Birchcliff recognized a future tax benefit of $6,500 in respect of share issue costs of $19,321 recorded in 2006 relating to the issuance of flow-through shares on December 20, 2005.

(f) 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. In February 2007, the Corporation filed the necessary forms to renounce $16,029,000 of qualified tax pools, effective December 31, 2006, with respect to the flow-through shares. Birchcliff has incurred approximately $9.5 million of these costs to June 30, 2007.

(g) Birchcliff recognized a future tax benefit of $533,500 in respect of share issue costs of $1,671,649 incurred with respect to the issuance of 5,940,000 shares on November 22, 2006.

7. STOCK-BASED COMPENSATION

The Corporation has established a stock-based compensation plan whereby officers, employees, directors and consultants may be granted options or performance warrants to purchase one common share for each option or performance warrant 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 or performance warrants 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 six months ended June 30, 2007, the Corporation recorded an expense $551,000 (2006 - $1.3 million) and for the three months ended June 30, 2007 a recovery of approximately $108,000 (2006 - $677,000) 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 six months ended June 30, 2007, the Corporation also recorded cash stock-based compensation expense of $44,000 (six months ended June 30, 2006 - $137,000). During the three months ended June 30, 2007, the Corporation recorded cash stock-based compensation expense of $10,000 (three months ended June 30, 2006 - $91,000).

Using the fair value method, the weighted average fair value of stock options granted during the six months ended June 30, 2007 was $2.03 per share under option.

At June 30, 2007, the Corporation's Amended and Restated Stock Option Plan permitted the grant of options in respect of 4,770,000 common shares. At June 30, 2007, there remained available for grant options in respect of 1,648,941 common shares.



A summary of the changes during the six months ended June 30, 2007 is
presented below:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
Exercise
Average
Number Price $
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Outstanding, December 31, 2006 4,279,668 4.66

Granted 1,908,000 3.89
Exercised (50,000) (3.00)
Forfeited (322,501) (5.56)
Cancelled (44,999) (3.33)
----------------------------------------------------------------------------

Outstanding, March 31, 2007 5,770,168 4.37

Granted 100,000 4.90
Forfeited (1,095,168) (6.93)
Cancelled (5,000) (3.00)
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding, June 30, 2007 4,770,000 3.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------

A summary of the stock options outstanding and exercisable under the plan at
June 30, 2007 is presented below:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options outstanding Options exercisable
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at June Contractual Exercise at June Exercise
Date of Grant 30, 2007 Life Price ($) 30, 2007 Price ($)
----------------------------------------------------------------------------
December 3, 2004 (1) 1,453,334 2.6 3.00 955,000 3.00
Apr 20 to Jun 22, 2005 901,834 2.9 3.79 599,000 3.79
Jul 4 to Sep 9, 2005 78,500 3.1 4.35 26,167 4.35
Oct 6 to Nov 28, 2005 95,000 3.4 6.24 45,000 6.26
Jan 11 to Mar 6, 2006 111,666 3.6 7.08 40,000 7.08
Apr 11 to Apr 25, 2006 23,000 3.8 7.05 7,667 7.05
Aug 14 to Sep 26, 2006 93,666 4.2 5.41 - -
Oct 23, 2006 15,000 4.3 4.12 - -
Jan 23 to Mar 31, 2007 1,898,000 4.6 3.89 - -
May 1 to May 14, 2007 100,000 4.9 4.90
----------------------------------------------------------------------------
----------------------------------------------------------------------------

4,770,000 3.6 3.80 1,672,834 3.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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

At June 30, 2007, there were 3,749,665 performance warrants outstanding with an exercise price of $3.00. Each performance warrant entitles the holder to purchase one common share at the exercise price.

For the six months ended June 30, 2007, the Corporation recorded $NIL (six months ended June 30, 2007 - $NIL) compensation expense in the statement of net income (loss) relating to stock based compensation for the performance warrants.



A summary of the changes during the six months ended June 30, 2007 and the
Corporation's outstanding performance warrants as at June 30, 2007 is
presented below:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
Average
Exercise
Number Price $
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding, December 31, 2006 3,749,665 3.00
Issued - -
Exercised - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding, March 31 and June 30, 2007(1) 3,749,665 3.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) No additional performance warrants have been issued and none have been
exercised.

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number Number
Outstanding at Exercise Exercisable at
Date of Grant June 30, 2007 Date of Expiry Price June 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------

January 14, 2005 3,749,665 January 31, 2010 $ 3.00 3,749,665
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Risk-free interest rate 4.0% 4.0%
Expected maturity (years) 5.0 5.0
Expected volatility 55.00% 40.09%
Dividend yield 0% 0%


Contributed Surplus Continuity

----------------------------------------------------------------------------
----------------------------------------------------------------------------
$000's $000's
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, December 31, 2005 6,579
Stock-based compensation expense - stock options 2,707
Stock-based compensation expense - forfeiture of stock
options (153)
Stock-based compensation expense - cancellation of stock
options 137
--------
Stock-based compensation expense - total 2006 2,691

Exercise of stock options (66)
Cancellation of stock options (214)
--------
Balance, December 31, 2006 8,990
Stock-based compensation expense - stock options 858
Stock-based compensation expense - forfeiture of stock
options (141)
Stock-based compensation expense - cancellation of stock
options (24)
--------
Stock-based compensation expense - Q1 2007 693

Exercise of stock options (71)
Cancellation of stock options (35)
--------
Balance, March 31, 2007 9,577

Stock-based compensation expense - stock options 796
Stock-based compensation expense - forfeiture of stock
options (897)
Stock-based compensation expense - cancellation of stock
options 3
--------
Stock-based compensation expense - Q2 2007 (98)

Cancellation of stock options (10)
--------

Balance, June 30, 2007 9,469
--------
--------


8. COMMITMENTS

Office Premises

The Corporation is committed under an operating lease for its current office premises which expires on September 30, 2008. It is also committed to March 29, 2011 under an operating lease for some other premises that it does not use and has sublet to an arm's length party on a basis that recovers all of its rental costs. The Corporation is committed to the following aggregate minimum lease payments (not reduced by rents receivable by the Corporation):



---------
$
---------

2007 456,000
2008 787,000
2009 202,000
2010 202,000
2011 50,000


Flow-Through Shares

In the fourth quarter of 2006, the Corporation committed to renounce $16,029,000 of exploration expenses pursuant to a flow-through share issue completed on November 22, 2006. Birchcliff has until December 31, 2007 to incur these exploration expenditures. The Corporation is 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, 2007. As at June 30, 2007 the Corporation had incurred approximately $9.5 million of these costs.



9. SUPPLEMENTARY CASH FLOW INFORMATION

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$000's $000's $000's $000's
----------------------------------------------------------------------------
Provided by (used in)
Accounts receivable (204) 2,289 1,546 5,734
Prepaid and other 600 (1,962) 332 (1,956)
Accounts payable and
accrued liabilities (3,678) (5,412) (4,970) (12,486)
----------------------------------------------------------------------------
(3,282) (5,085) (3,092) (8,708)
----------------------------------------------------------------------------

Operating 926 3,696 (1,562) 5,063
Investing (4,208) (8,781) (1,530) (13,771)
----------------------------------------------------------------------------
(3,282) (5,085) (3,092) (8,708)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Advisory

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.

BOE Conversions: The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent ("6:1"). A boe conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

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)