Birchcliff Energy Ltd.
TSX : BIR

Birchcliff Energy Ltd.

May 13, 2008 22:26 ET

Birchcliff Energy Ltd. Announces Strong First Quarter Results, Expanded Capital Program to $150 Million and Increases to Montney/Doig Horizontal Drilling Locations

CALGARY, ALBERTA--(Marketwire - May 13, 2008) -

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 first quarter of 2008. The full text of Birchcliff's First Quarter Report containing the Financial Statements for the three month period ended March 31, 2008 and the related Management's Discussion and Analysis is set forth below and will be available on SEDAR at www.sedar.com.

FIRST QUARTER HIGHLIGHTS:

- Record Average Production, Cash Flow, Cash Flow Per Share and Earnings

- Record Capital Expenditure program: drilled 17 gross (16.0 net) wells

- Two High Impact Natural Gas Discoveries in the Doig (90.1% W.I.) and Kiskatinaw (50% W.I.) formations

- Drilled 4 gross (3.6 net) Horizontal natural gas wells in the Montney/Doig formations

- Drilled two vertical Montney/Doig wells resulting in the significant increase in proven Montney/Doig lands to 37.5 net sections.

- Drilled 7 vertical wells and 2 horizontal wells on the Worsley light oil Property.

- Extended the Worsley light oil pool to the North on 100% working interest lands.

- Expanded and continued the water flood at the Worsley light oil pool

- Completed major pipelining and infrastructure expansion at the Worsley light oil pool notwithstanding severe weather problems

- Increased undeveloped land to 322,830 gross (275,340 net) undeveloped acres all in the Peace River Arch

- Completed $130 million equity issue resulting in extremely strong balance sheet

SECOND QUARTER OPERATIONAL UPDATE:

- Increased to 160 (from 140) potential Montney/Doig horizontal well drilling locations on 40.7 net sections of land (assuming 4 wells per section).

- Increased to 25 net sections (from 20) of unproven land which has high likelihood Montney/Doig potential.

INCREASED CAPITAL EXPENDITURE BUDGET

- Increasing Capital Expenditure Budget (excluding acquisitions) to $150 million from $105 million.

- Drilling 71 (59.4) wells, an increase from 51 (42.6 net)

- Drilling 8 gross (net 6.6) Montney/Doig Horizontal natural gas wells in second half of 2008, bringing the total to 12 (net 10.2) for 2008

- 2008 Exit Production between 12,500 and 13,000 boe per day

Birchcliff Energy Ltd. - First Quarter 2008 Report

The full Text of the 2008 First Quarter Report Follows:

May 13, 2008

Dear Shareholder:

The first quarter of 2008 has been our busiest and most successful quarter since the inception of our Company. Birchcliff enjoyed record average production, cash flow, cash flow per share and earnings. Birchcliff drilled 17 gross wells (16.0 net), including 4 gross (3.6 net) horizontal Montney/Doig gas wells, drilled several exploration discoveries, extended the Worsley pool to the north on 100% owned lands, further expanded our water flood program at Worsley, constructed additional infrastructure, added significant proven and trend land on our Montney/Doig natural gas resource play, and completed a $130 million equity issue.

As a result of our drilling success, depth of drilling opportunities, rising commodity prices and a strong balance sheet, I am pleased to inform you that the Board of Directors has approved an increase to our 2008 capital expenditure program (excluding acquisitions) to $150 million from $105 million, which in today's commodity price environment, is less than our projected cash flow.

2008 First Quarter Results

Production

Production at the beginning of May, immediately prior to shutting down the Worsley plant for a scheduled turnaround, was approximately 10,350 boe/day. Currently there are 10 gross (8.5 net) wells that are in various stages of completion and awaiting tie-in. Production for the first quarter of 2008 averaged 9,470 boe/day. This is a 62% increase from the 1st quarter of 2007 and a 2% increase from the 4th quarter of 2007. Production in the first quarter was impacted by unseasonably cold temperatures and the expected decline of flush production from wells tied-in during late 2007. Production per share was up 5% over the first quarter of 2007.

Cash Flow and Earnings

Cash flow was $27.3 million or $0.28 per share for the first quarter 2008, as compared to $13.4 million or $0.21 per share in the first quarter of 2007. Birchcliff was required to recognize a realized loss from its oil price risk management contracts in the amount of $3.24 million in the first quarter which related to a volume of 2,000 boe/day of light oil. The volume under these oil price risk management contracts decreased on April 1, 2008 to 1,000 boe/ day for the remainder of the year. Birchcliff has no current intention of hedging commodity price on any further production.

Notwithstanding the loss from the oil price risk management contracts, Birchcliff had earnings of $3.8 million or $0.04 per share for the first quarter of 2008 as compared to a loss of $1.4 million or $0.02 per share for the first quarter of 2007.

Capital Expenditures and Drilling

During the first quarter of 2008, capital spending aggregated $51.5 million as compared to $17.8 million for the same period last year. This capital spending represented almost twice our cash flow in the first quarter, however Birchcliff expects capital spending (excluding acquisitions) to be significantly less during the second quarter due to spring break-up. Birchcliff drilled 17 gross wells (16.0 net), with all but one having been cased, yielding a 94% success rate.

The first quarter program consisted of 9 gross (8.1 net) exploration wells, 4 gross (4.0 net) exploration oil wells and 4 gross (3.1 net) exploration natural gas wells, and 8 gross (7.9 net) development wells. One 100% exploration well was dry and abandoned. Of the wells drilled, 53% were light oil and 47% were natural gas. Birchcliff drilled 4 gross (3.6 net) Montney/Doig horizontal natural gas wells. Two of these horizontal wells are now on production and the other two will be tied-in immediately after breakup. In addition Birchcliff drilled two vertical new pool exploration wells which were successful in expanding our Montney/Doig natural gas resource play at Pouce Coupe. Both vertical wells have been drilled on trend acreage that has delineated this play onto Birchcliff lands that were previously not considered proven.

All of the producing Montney/Doig horizontal natural gas well results to date continue to meet or exceed our production expectations.

At Worsley, Birchcliff had excellent drilling results in its Charlie Lake light oil pool. Birchcliff drilled 7 gross (7.0 net) vertical Charlie Lake light oil wells, all of which were cased. Birchcliff also drilled and cased 2 gross (2.0 net) horizontal Charlie Lake light oil wells, which will be tied in and on production after spring break up. With its drilling success, Birchcliff has extended the north end of the Worsley light oil pool on 100% working interest lands, which is restricted to winter access only. As a result Birchcliff is anticipating significant exploration and development drilling next winter in the north end of the pool. Birchcliff also developed additional infrastructure and continued the development and implementation of its water flood program in the central part of the Worsley light oil pool and continues to see positive results.

Birchcliff's high impact exploration program continues to deliver positive results. In the first quarter two significant new gas pools were discovered. The first well is a Triassic Doig gas pool discovery (90.1% WI) that tested at 4.0 MMCF/d. The second well is a Mississippian Kiskatinaw new pool discovery (50.0% WI) that tested at 3.8 MMCF/d. The first well was brought on production on May 1st and had limited effect on current average production. The second well be tied-in shortly after breakup.

Birchcliff operated up to five drilling rigs during the quarter.

Indebtedness and Equity Issue

Total indebtedness at March 31, 2008, including working capital deficiency was $169.6 million. At that date Birchcliff was drawn to $133 million on its $200 million credit facilities. Currently, Birchcliff's credit facilities are under review by its syndicate of banks and we expect the credit limit to be increased.

Birchcliff completed a bought deal financing for $130 million on March 14, 2008. The equity issue consisted of 14,375,000 common shares at a price of $8.00 per share and 1,522,843 flow-through shares at a price of $9.85 per flow through share. Proceeds of the issue were used to retire Birchcliff's $100,000,000 non-revolving Acquisition Credit Facility and to reduce indebtedness under its other revolving credit facilities.

At March 31, 2008 Birchcliff has 111,863,089 shares outstanding.

Land

Birchcliff has continued to grow its undeveloped land base in the Peace River Arch. At March 31, 2008 it owned 322,830 gross undeveloped acres (275,340 net) with an average 85% working interest.

In the first quarter Birchcliff added an additional 7.5 net sections of land to its inventory of proven lands on the Montney/Doig play. This increased the total number of sections of land at March 31, 2008 which we consider proven for the Montney/Doig play to 37.5 net sections from 30 at December 31, 2007.

2008 Second Quarter Activities

Birchcliff has added significant land to its Montney/Doig resource natural gas play since March 31, 2008. Through private acquisitions and crown sales, Birchcliff has added 3.2 net sections to its proven land inventory, and 5 net sections of trend land. These additional lands have increased our Montney/Doig horizontal natural gas well drilling inventory on proven lands of 40.7 net sections to 160 potential drilling locations, (assuming 4 wells/section). The newly acquired 5 net sections of trend land now bring to 25 the number of net undeveloped sections of land where Birchcliff believes that there is a high likelihood of the extension of the Montney/Doig resource natural gas play.

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.

Birchcliff expects average production growth in the second quarter to be tempered by large scale facility turnarounds that are normally scheduled during spring break-up and an extended spring breakup due to late season weather conditions.

Increasing Capital Expenditure Program to $150 million from $105 million

As a result of our drilling success, depth of drilling opportunities, strong balance sheet and strengthening commodity prices the Directors of Birchcliff have approved the expansion of our 2008 capital expenditure program (excluding acquisitions) to $150 million from $105 million. The $150 million capital expenditure program is less than the expected cash flow for 2008 given current commodity prices.

Of the $45 million increase, $30 million will be directed to our Montney/Doig, natural gas program, $10 million to our Worsley light oil program with the remainder to other opportunities. Birchcliff expects to drill approximately 71.0 gross (59.4 net) wells an increase from 51 gross (42.6 net) wells in 2008. Birchcliff anticipates drilling up to 8 gross (6.6 net) horizontal Montney/Doig natural gas wells before year end in addition to the 4 gross (3.6 net) horizontal Montney/Doig natural gas wells it drilled in the first quarter of 2008. This would bring the total number of horizontal Montney/Doig natural gas wells drilled by Birchcliff in the 2007 - 2008 time period to 14 gross (12.2 net).

As a result of this drilling program Birchcliff believes it will exit the year at production levels estimated to be between 12,500 and 13,000 boe per day.

Outlook

We are extremely excited about the continued expansion of our two resource plays, the Worsley light oil and the Montney/Doig natural gas.

We intend to focus our efforts on the long term development of these 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.

The expansion of our 2008 capital expenditure program should result in significantly increased production, reserves additions and cash flow for 2009. Given current commodity prices this should be accomplished within our expected cash flow which would keep our balance sheet in excellent shape.

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
months ended months ended
March 31, 2008 March 31, 2007
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OPERATING
Daily Average Production
Light Oil - barrels 2,827 742
Natural Gas - thousands of cubic feet 37,791 29,434
NGLs - barrels 345 181
Total - barrels of oil equivalent (6:1) 9,470 5,829
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Average Sales Price ($ Canadian)
Light oil - per barrel 94.72 63.86
Natural Gas - per thousand cubic feet 8.35 7.78
NGLs - per barrel 88.76 64.38
Total - per barrel of oil equivalent (6:1) 64.83 49.43
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Undeveloped Land
Gross (acres) 322,830 227,237
Net (acres) 275,340 186,708
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NETBACK AND COST
($ per barrel of oil equivalent at 6:1)
Petroleum & natural gas revenue 65.21 50.27
Royalties (10.10) (8.17)
Operating expense (10.32) (9.02)
Transportation and marketing expense (2.87) (1.63)
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Netback 41.92 31.45
General & administrative expense (1.72) (3.39)
Stock-based compensation expense (0.02) (0.07)
Realized loss on risk management contracts (3.76) -
Realized loss on foreign exchange (0.04) -
Interest expense (4.76) (2.23)
Other income - -
Taxes 0.01 (0.22)
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Cash Flow Netback 31.63 25.54
Depletion and depreciation (24.74) (27.45)
Accretion (0.35) (0.44)
Stock-based compensation expense (1.43) (1.25)
Unrealized gain on risk management contracts 1.10 -
Unrealized gain on foreign exchange 0.24 -
Future income tax recovery (expense) (2.03) 0.99
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Net Earnings (Loss) 4.42 (2.61)
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FINANCIAL
Petroleum & Natural Gas Revenue ($000) 56,192 26,369
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Cash Flow from Operations ($000) 27,264 13,396
Per share - basic ($) 0.28 0.21
Per share - diluted ($) 0.27 0.21
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Net Earnings (Loss) ($000) 3,828 (1,373)
Per share - basic ($) 0.04 (0.02)
Per share - diluted ($) 0.04 (0.02)
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Common Shares Outstanding
End of Period - Basic 111,863,089 64,189,413
End of Period - Diluted 121,175,691 73,709,246
Weighted Average for Period - Basic 98,852,346 64,168,302
Weighted Average for Period - Diluted 102,589,422 64,174,235
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Capital Expenditures ($000) 51,518 17,819
Working Capital (Deficiency) ($000) (36,580)(1) (6,668)
Revolving Credit Facilities ($000) 133,035 85,431
Total Debt ($000) 169,615 92,099
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(1) This amount excludes both the accrued liability for the unrealized loss
on the oil price risk management contracts of $5.6 million and a
related future income tax asset of $1.7 million.


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") in respect of the three month period ended March 31, 2008 (the "Reporting Period") as compared to the three month period ended March 31, 2007 (the "Comparable Prior Period") is dated May 13, 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 Period 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 makes 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 appears as a separate line on the Corporation's Statements 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 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

Production in the Reporting Period was 9,470 BOE/d, as compared to 5,829 BOE/d in the Comparable Prior Period and 9,260 BOE/d in the fourth quarter of 2007. While this is only 210 BOE/d or a 2% growth in average production quarter-over-quarter, production in the quarter was significantly hampered by unseasonably cold temperatures and the expected decline of flush production from wells tied-in during late 2007. Management is confident that in time production growth will follow the sizeable reserve base being built for the long-term.

Birchcliff completed a $130 million ($123 million, net) equity issue in the Reporting Period, the purpose of which was to repay its $100 million syndicated non-revolving credit facility drawn during the third quarter of 2007 to complete the Worsley Acquisition. As a result, total debt decreased by 38% to $169.6 million at March 31, 2008 as compared to $272.9 million at December 31, 2007.

During the Reporting Period there was a significant strengthening of commodity prices compared to both the prior quarter (fourth quarter of 2007) and the Comparable Prior Period. AECO daily spot averaged $7.98 per mmbtu in the Reporting Period, while during the prior quarter it averaged $6.15 per mmbtu which is a 30% increase. Canadian Edmonton Par prices averaged $97.50 per barrel in the Reporting Period as compared to $86.42 per barrel during the prior quarter which is a 13% increase. Both of these price increases translate to an operating netback increase of 23% to $41.92 per BOE in the Reporting Period from $34.04 per BOE in the prior quarter.

The AECO daily spot averaged $7.98 per mmbtu in the Reporting Period as compared to $7.41 per mmbtu during the Comparable Prior Period, which is only an 8% increase. However, Canadian Edmonton Par prices averaged $97.50 per barrel in the Reporting Period as compared to just $67.09 per barrel during the Comparable Prior Period for a substantial 45% increase. Both of these price increases translate into an operating netback increase of 33% to $41.92 per BOE in the Reporting Period from $31.45 per BOE in the Comparable Prior Period.

In response to the recent increase in commodity prices, Birchcliff has increased its 2008 capital expenditure program to $150 million from $105 million, excluding acquisitions. The Corporation's capital expenditures totalled $51.5 million in the Reporting Period as compared to $30.3 million in the fourth quarter of 2007 and $17.8 million in the Comparable Prior Period. The significant increase is a result of an increased capital program at the recently acquired Worsley property and continued focus on its horizontal natural gas program at Pouce Coupe. During the Reporting Period this resulted in the drilling of 4 gross (3.6 net) horizontal Montney/Doig natural gas wells at Pouce Coupe and the drilling of 2 horizontal and 7 vertical 100% working interest light oil wells at Worsley, expansion of the water flood program at Worsley and the construction of additional infrastructure.

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 and corporate merger and 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 estimated net proceeds of $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.

LIQUIDITY AND BANK DEBT

Cash flow for the Reporting Period was $27.3 million as compared to $19.9 million and $13.4 million in fourth quarter of 2007 and Comparable Prior Period respectively. With continued commodity price strength the Corporation expects it will be able to fund its $150 million 2008 capital program, excluding acquisitions, out of estimated internally generated cash flow.

The Corporation's bank debt or revolving credit facilities which had an aggregate limit of $300 million at December 31, 2007 were reduced to $200 million as a result of the retirement of the $100 million non-revolving credit facility from the proceeds of the $130 million equity issuance. Birchcliff's credit facilities are currently under review by its syndicate of banks and management expects the credit limit will be increased above the current $200 million limit.

The Corporation was drawn to just over $133.0 million at March 31, 2008 as compared to $85.4 million for the Comparable Prior Period. The increase is mainly due to the increased operational activity in the fourth quarter of 2007 and in the Reporting Period, which follows the Worsley Acquisition. At March 31, 2008 the interest rate applicable to the working capital facility was 5.9% and slightly less for the syndicated facility because bankers' acceptances, which have a lower effective rate of interest, are used in the syndicated facility.

The Corporation's working capital deficit (current assets less current liabilities) increased to $40.6 million at March 31, 2008 which includes $5.6 million of an accrued liability relating to the mark-to-market unrealized loss on oil price risk management contracts and an accrued asset of $1.7 million relating to future income taxes on the unrealized loss in risk management contracts. This is compared to a $6.7 million working capital deficit at March 31, 2007. The increase in working capital deficit corresponds to a significant increase in operational activity. The Corporation drilled just over twice as many net wells in the Reporting Period than in the Comparable Prior Period.

Throughout this MD&A the Corporation has excluded from its working capital deficit the accrued liability for its unrealized loss on oil price risk management contracts ($5.6 million) as 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 (along with the related tax asset) from the working capital deficit calculation is appropriate. Accordingly, the working capital deficit of $40.6 million will be presented as a working capital deficit of $36.6 million, when calculating total debt through-out this MD&A.

At March 31, 2008 the largest component of Birchcliff's current assets (62%) is the cash to be received from its marketers in respect of March 2008 production which was subsequently received in April 2008. In contrast, the current liabilities consist of trade payables (49%); accrued capital and operating costs (36%); and royalties and other minor amounts. Management expects this working capital deficit to continue into the foreseeable future as Birchcliff continues its capital program in the Peace River Arch area.

Overall, the Corporation did not have any liquidity issues with respect to the operations of its petroleum and natural gas business in the Reporting Period 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 $27.3 million for the Reporting Period and $13.4 million for Comparable Prior Period. Future cash flow will be dependent mainly on production levels and commodity prices. The increase is mostly due to an average production increase of 62% due to the Worsley Acquisition and Birchcliff's 2007 drilling success, combined with a 31% increase in the average price received per BOE. Higher operating costs, primarily due to unusually cold temperatures and escalating costs for supplies and services, tempered the increase in cash flow, as did higher interest costs due to the non-revolving credit facility being outstanding for the majority of the Reporting Period but not outstanding in the Comparable Prior Period.

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 March 31, 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 Common Shares 1,522,843
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Balance at March 31, 2008 111,863,089
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RESULTS OF OPERATIONS

Petroleum and Natural Gas Revenue

Petroleum and natural gas revenues totalled $56.2 million for the Reporting Period as compared to $26.4 million for the Comparable Reporting Period primarily as a result of increased product sales and higher commodity prices.

The following table details Birchcliff's petroleum and natural gas revenue, production and sales prices by category for each of the Reporting Period and Comparable Prior Period:



Three months ended Three months ended
March 31, 2008 March 31, 2007
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Total Average Total Average
Revenue Daily Average Revenue Daily Average
($000's) Production % ($/unit) ($000's) Production % ($/unit)
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Natural gas
(mcf) 28,717 37,791 67 8.35 20,617 29,434 84 7.78
Light oil
(bbls) 24,366 2,827 30 94.72 4,263 742 13 63.86
Natural gas
liquids
(bbls) 2,783 345 3 88.76 1,050 181 3 64.38
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Total sales
(BOE) 55,866 9,470 64.83 25,930 5,829 49.43
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Royalty
revenue 326 0.38 439 0.84
Total
revenue 56,192 65.21 26,369 50.27
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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 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 months Three months
ended ended
March 31, 2008 March 31, 2007
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Average Sales Price ($/mcf) 8.35 7.78
Average of the AECO Daily Spot Prices
($/mmbtu)(1) 7.98 7.41
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Positive Differential 0.37 0.37
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(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. Except as described below under "Risk Management Contracts", Birchcliff currently has no fixed commodity price contracts or other hedge type contracts and no current plans to enter into such contracts.



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


The Corporation entered into the above contracts during the month of September 2007 and did not enter into any new contracts during the first quarter of 2008. The Corporation actively monitors the market to determine whether any additional 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 risk management contracts as hedges, Birchcliff does not account for its risk management contracts as hedges in its financial statements. The 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 Reporting Period, the Corporation recorded a realized oil price risk management loss of $3.2 million and an unrealized oil price risk management gain of $952,000 in the first quarter of 2008. Until the third quarter of 2007, Birchcliff had no commodity price risk management contracts in place so the 2007 comparatives are $NIL.

Royalties

Oil and natural gas royalties totaled $8.7 million ($10.10 per BOE) during the Reporting Period as compared to $4.3 million ($8.17 per BOE) in the Comparable Prior Period. The absolute increase is mainly a result of the acquisition of the Worsley property and the per BOE increase is the result of commodity price increases. The overall effective royalty rate was approximately 15% for the Reporting Period and 17% for the Comparable Prior Period; the rate fluctuates due to gas cost allowance adjustments and movement in commodity prices.

The proportion of Crown royalties to total royalties in the Reporting Period was 95% which is fairly consistent as compared to the Comparable Prior Period at approximately 94% of total royalties paid.

Operating Costs

Operating costs were $8.9 million ($10.32 per BOE) for the Reporting Period as compared to $4.7 million ($9.02 per BOE) for the Comparable Prior Period. The $1.30 per BOE increase resulted primarily from an $0.85 per BOE increase in the cost of services and supplies, and a $0.41 per BOE increase in power and fuel costs. Unusually cold weather during most of February and early March hampered production rates and increased operating costs. The following table compares operating costs for the Reporting Period and the Comparable Prior Period:



Three months ended Three months ended
March 31, 2008 March 31, 2007
----------------------------------------------------------------------------
($000's) $/BOE ($000's) $/BOE
Field operating costs 9,418 10.93 4,959 9.45
Recoveries (614) (0.71) (311) (0.59)
----------------------------------------------------------------------------
Field operating costs, net of
recoveries 8,804 10.22 4,648 8.86
Expensed workovers and other 87 0.10 84 0.16
----------------------------------------------------------------------------
Total operating costs 8,891 10.32 4,732 9.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------


One of Birchcliff's strategic objectives is to maximize the use of its facilities in order to bring unit production costs down. 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 $2.5 million ($2.87 per BOE) for the Reporting Period as compared to the Comparable Prior Period of $854,000 ($1.63 per BOE). These costs consist primarily of transportation costs. The aggregate and per unit cost increases are due to the Worsley Acquisition (completed at the end of the third quarter of 2007) where the light oil produced at Worsley is transported by truck a significant distance to a sales terminal.

General and Administrative Expense

Net general and administrative costs in the Reporting Period were $1.5 million ($1.72 per BOE) as compared to the Comparable Prior Period of $1.8 million ($3.39 per BOE). The decrease is a result of economies of scale due to our increased production base and due to significant overhead recoveries as a result of our substantial capital program during the Reporting Period. The components of G&A are as follows:



Three months ended Three months ended
($000's) March 31, 2008 March 31, 2007
----------------------------------------------------------------------------
Salaries, benefits and consultants 1,958 56% 1,567 63%
Other 1,521 44% 905 37%
----------------------------------------------------------------------------
G & A expense, gross 3,479 100% 2,472 100%
Overhead recoveries(1) (1,582) (45%) (390) (16%)
Capitalized overhead (415) (12%) (303) (12%)
----------------------------------------------------------------------------
G & A expense, net 1,482 43% 1,779 72%
----------------------------------------------------------------------------
G & A expense, net per BOE $1.72 $ 3.39
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes amounts recovered from third parties and amounts charged to
capital expenditures for engineering and overhead as per industry
standards.


Interest Expense

Interest expense for the Reporting Period was $4.1 million ($4.76 per BOE). In the Comparable Prior Period it was $1.2 million ($2.23 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 $100 million non-revolving credit facility was outstanding for all but 16 days in the Reporting Period. The Corporation's average bank debt was approximately $193.9 million for the Reporting Period as compared to $83.4 million for the Comparable Prior Period calculated as the simple average of the month end amounts. Interest expense is expected to decrease for the second quarter because average indebtedness during the second quarter is expected to be less than during the Reporting Period.

Depletion, Depreciation and Accretion Expense ("DD&A")

Depletion, depreciation and accretion ("DD&A") expenses in the Reporting Period were $21.6 million ($25.09 per BOE) as compared to the Comparable Prior Period of $14.6 million ($27.89 per BOE). The DD&A on a per BOE basis is 10% lower in the Reporting Period than in the Comparable Prior Period mainly due to the reduced cost of adding proven reserve additions during the fourth quarter of 2007 and into the Reporting Period. The components of DD&A are as follows:



Three months ended Three months ended
March 31, 2008 March 31, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($000's) $/BOE ($000's) $/BOE
Depletion & depreciation 21,316 24.74 14,400 27.45
Accretion 300 0.35 230 0.44
----------------------------------------------------------------------------
Total DD&A 21,616 25.09 14,630 27.89
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 March 31, 2008, Birchcliff has excluded from its full cost pool $28.6 million (March 31, 2007 - $42.1 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 March 31, 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 $1.7 million ($2.03 per BOE) during the Reporting Period, as compared to a recovery of $520,000 ($0.99 per BOE) during the Comparable Prior Period. Due to higher commodity prices in the Reporting Period, Birchcliff is utilizing its tax pools at a faster rate than its book depletion and depreciation.

During the Comparable Prior Period, the Corporation recorded $117,000 of Part XII.6 taxes relating to its November 2006 flow-through share issue. In the Reporting Period, a credit adjustment of $6,455 was recorded regarding Part XII.6 taxes relating to that same flow-through share issue.

Stock-Based Compensation

Birchcliff accounts for its stock-based compensation programs 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 Reporting Period the Corporation granted options to purchase 1,703,100 common shares at a weighted average exercise price of $7.47 per common share. Of these options, at March 31, 2008 there remained outstanding options to purchase 1,693,100 common shares.

The Corporation recorded $1.3 million ($1.45 per BOE) of stock-based compensation expense relating to stock options in the Reporting Period, as compared to $693,000 ($1.32 per BOE) during the Comparable Prior Period.

During the Reporting Period, Birchcliff issued 601,044 common shares due to exercise of vested stock options, 809,933 common shares due to the exercise of performance warrants by a former officer and stock options in respect of 60,000 common shares were forfeited. In addition, the cancellation of 5,000 vested stock options resulted in a cash-paid stock-based compensation expense of $20,000 in the Reporting Period as compared to $35,000 in the Comparable Prior Period. The cash-paid expense is included in total stock-based compensation expense.

CAPITAL EXPENDITURES AND CAPITAL RESOURCES

Capital expenditures amounted to $51.5 million during the Reporting Period. In the Comparable Prior Period, $17.8 million of capital expenditures were incurred. The following table sets forth a summary of the Corporation's capital expenditures incurred for the Reporting Period and the Comparable Prior Period:



Capital Expenditures


Three Months Ended March 31 (000's) 2008 2007
----------------------------------------------------------------------------
Land 3,036 721
Seismic 861 784
Other 2,608 336
Drilling and completions 34,315 10,758
Well equipment and facilities 9,962 4,901
Capitalized general and administrative expenses 415 316
----------------------------------------------------------------------------
Total Finding & Development Costs 51,197 17,816
Acquisitions 183 (3)
----------------------------------------------------------------------------
Total Finding, Development & Acquisition Costs 51,380 17,813
Administrative assets 138 6
----------------------------------------------------------------------------
Total Capital Expenditures 51,518 17,819
----------------------------------------------------------------------------


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



Capital Resources

Three Months Ended March 31 (000's) 2008 2007
----------------------------------------------------------------------------
Cash generated by operations 27,264 13,396
Changes in working capital from operations (7,820) (2,488)
Equity issues, net of issue costs 127,669 150
Increase (decrease) in revolving credit facility (22,819) 4,127
Decrease in non-revolving credit facility (98,830) -
Asset retirement expenditures (114) (43)
Changes in working capital from investing 26,167 2,678
----------------------------------------------------------------------------
Total Capital Resources 51,517 17,820
----------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION
Quarter Ended
($000's, except share March 31, December 31, September June 30,
and per share amounts) 2008 2007 30, 2007 2007
----------------------------------------------------------------------------
Petroleum and natural gas
production (BOE per day) 9,470 9,260 6,014 5,712
Petroleum and natural gas
commodity price (BOE per
day) 64.83 54.18 40.10 48.20
Natural gas commodity price
at wellhead ($ per mcf) 8.35 6.71 5.48 7.39
Petroleum commodity price
at wellhead ($ per bbl) 94.72 80.94 76.95 69.92

Total petroleum and
natural gas revenue 56,192 46,398 22,467 25,462
Total royalties (8,700) (7,804) (4,007) (3,233)
Total interest and other
revenue 2 8 - -
Total revenues, net 47,494 38,602 18,460 22,229
Capital expenditures 51,518 30,306 288,321 13,727

Net income (loss) 3,828 (6,457) (5,707) (707)
Per share basic 0.04 (0.07) (0.09) (0.01)
Per share diluted 0.04 (0.07) (0.09) (0.01)

Cash generated by
operations 27,264 19,881 9,327 13,641
Per Share basic 0.28 0.21 0.14 0.21
Per share diluted 0.27 0.21 0.14 0.21
Book value of total
assets 699,567 662,252 644,876 359,423

Non-revolving credit
facility - 98,830 97,431 -
Revolving credit
facilities 133,035 155,854 153,360 88,833
Total indebtedness 169,614 272,916 262,557 92,218
Shareholders' equity 475,453 340,756 342,451 240,250

Common shares outstanding
- end of period
Basic 111,863,089 94,554,269 94,472,583 64,189,413
Diluted 121,175,691 103,639,748 103,046,582 72,709,078

Weighted average common
shares outstanding
Basic 98,852,346 94,486,372 65,521,290 64,189,413
Diluted 102,589,422 96,548,884 66,152,795 65,394,368
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the Reporting Period, production grew 2% over that of the fourth quarter of 2007. While this is only 210 BOE/d growth in average production quarter-over-quarter, production in the quarter was significantly hampered by unseasonably cold temperatures, and the expected decline of flush production from wells tied-in during late 2007. In addition, most of the Corporation's successful drilling in the Reporting Period could not be brought online during the Reporting Period due to spring break-up.

The two highlights of the Reporting Period are the strengthening of commodity prices and the equity financing occurring late in the Reporting Period.

First, since the third quarter of 2007 when natural gas prices were significantly depressed and Birchcliff received $5.48 per mcf at the wellhead, prices have continuously increased as evidenced by the increase in Birchcliff's wellhead price per BOE which went from $40.10 per BOE in the third quarter of 2007 to $54.18 per BOE (a 35% increase) during the fourth quarter of 2007 to $64.83 per BOE which is a further increase of 20% from the fourth quarter of 2007 and a total increase of 62% from the third quarter of 2007. This results in a 37% increase in cash flow in the Reporting Period compared to the prior quarter and a 159% increase in net earnings.

Second, Birchcliff completed a $130 million bought deal financing in March of 2008. The net proceeds of this financing were used to retire the Corporation's $100 million non-revolving credit facility and to reduce the amount outstanding under the Corporation's revolving credit facility.



Quarter Ended
($000's, except share and March 31, December September June 30,
per share amounts) 2007 31, 2006 30, 2006 2006
----------------------------------------------------------------------------

Petroleum and natural gas
production (BOE per day) 5,829 5,861 5,571 4,760
Petroleum and natural gas
commodity price ($ per BOE) 49.43 46.86 43.11 45.42
Natural gas commodity price
at wellhead ($ per mcf) 7.78 7.33 5.91 6.48
Petroleum commodity price
at wellhead ($ per bbl) 63.86 60.99 74.88 74.13

Total petroleum and natural
gas revenue 26,369 25,750 22,546 20,515
Total royalties, net of
ARTC(1) (4,288) (4,407) (4,073) (2,820)
Total interest and other
revenue 1 28 - -
Total revenues, net 22,082 21,371 18,473 17,695
Capital expenditures 17,819 12,577 25,273 24,627

Net income (loss) (1,373) (2,313) (1,342) 961
Per share basic (0.02) (0.04) (0.02) 0.02
Per share diluted (0.02) (0.04) (0.02) 0.02

Cash generated by operations 13,396 11,657 10,666 11,068
Per Share basic 0.21 0.19 0.18 0.19
Per share diluted 0.21 0.19 0.18 0.18

Book value of total assets 360,164 362,255 359,073 345,092
Non-revolving credit
facility - - - -
Revolving credit
facilities 85,431 81,304 100,127 85,299
Total indebtedness 92,099 87,783 115,100 100,321
Shareholders' equity 241,065 246,399 219,066 219,719

Common shares outstanding
- end of period
Basic 64,189,413 64,139,413 58,174,413 58,167,747
Diluted 73,709,246 72,168,746 66,383,746 66,277,414
Weighted average common
shares outstanding
Basic 64,168,302 60,701,424 58,173,508 58,167,747
Diluted 64,174,235 61,347,463 60,681,252 61,499,413
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) ARTC is not applicable to periods after December 31, 2006.


OUTLOOK

Birchcliff continues to focus on the long term development of its two resource plays using its competitive advantage in its core areas that results from its technical expertise and knowledge base. We intend to aggressively buy additional lands on the plays, drill to extend the areal extent of these 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.

As such, Birchcliff continues to use a portion of its cash resources for the acquisition of additional lands on these resource plays, both at Crown land sales and through minor acquisitions. This strategy, in the short term, diverts cash away from production opportunities. However, Birchcliff is confident that over time this will result in reserve additions, production growth and increased value.

Overall, Management continues to take a long term view to adding shareholder value rather than focusing on short term production gains.



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


ASSETS
CURRENT
Cash and cash equivalents 65 66
Accounts receivable 25,956 20,036
Prepaid and other 3,364 2,879
Future income tax benefit 1,663 2,004
-----------------------------------
31,048 24,985
Future income tax benefit 6,852 6,287

Petroleum and natural gas properties and
equipment (Note 4) 661,667 630,980
-----------------------------------
699,567 662,252
-----------------------------------
-----------------------------------

LIABILITIES
CURRENT
Accounts payable and accrued liabilities 65,966 41,213
Non-revolving credit facility (Note 5) - 98,830
Risk management contracts (Note 8) 5,637 6,793
-----------------------------------
71,603 146,836

Revolving credit facilities (Note 6) 133,035 155,854
Asset retirement obligations (Note 9) 19,476 18,806

SHAREHOLDERS' EQUITY
Share capital (Note 10) 474,547 342,819

Contributed surplus (Note 11) 10,071 10,930

Deficit (9,165) (12,993)

-----------------------------------
475,453 340,756
-----------------------------------
699,567 662,252
-----------------------------------
-----------------------------------

Commitments (Note 12)

See accompanying notes to the financial statements.

APPROVED BY THE BOARD
"Larry A. Shaw" "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 Three months
ended ended
March 31 March 31

2008 2007
-----------------------------

REVENUE
Petroleum and natural gas 56,192 26,369
Royalties (8,700) (4,288)
Interest and other 2 1
-----------------------------
47,494 22,082
Loss (gain) on risk management
contracts (Note 8)
Realized 3,239 -
Unrealized (952) -
-----------------------------
45,207 22,082
EXPENSES
Production 8,891 4,732
Transportation and marketing 2,470 854
General and administrative 1,482 1,779
Stock-based compensation (Note 11) 1,250 693
Depletion, depreciation and accretion
(Notes 4 & 9) 21,616 14,630
Interest 4,101 1,170
Realized foreign exchange loss (Note 8) (204) -
Unrealized foreign exchange gain (Note 8) 34 -
-----------------------------
39,640 23,858
-----------------------------
INCOME (LOSS) BEFORE TAXES 5,567 (1,776)

TAXES
Other taxes (7) 117
Future income taxes (recovery) 1,746 (520)
-----------------------------
1,739 (403)
-----------------------------
NET INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS) 3,828 (1,373)

RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD (12,993) 1,251

RETAINED EARNINGS (DEFICIT), END OF
PERIOD (9,165) (122)
-----------------------------
-----------------------------


Net income (loss) per common share
Basic and diluted 0.04 (0.02)
Weighted average common shares
Basic 98,852,346 64,168,302
Diluted 102,589,422 64,168,302


See accompanying notes to the financial statements



BIRCHCLIFF ENERGY LTD.
Statements of Cash Flows
(Unaudited) (000's)
----------------------------------------------------------------------------
Three months Three months
ended ended
March 31 March 31


2008 2007
-----------------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:

OPERATING
Net income (loss) 3,828 (1,373)
Adjustments for items not affecting cash:
Depletion, depreciation and accretion 21,616 14,630
Stock-based compensation 1,230 659
Unrealized risk management contracts gain (952) -
Unrealized foreign exchange gain (204) -
Future income taxes (recovery) 1,746 (520)
----------------------------------------------------------------------------
27,264 13,396
Changes in non-cash working capital (Note 13) (7,820) (2,488)
Asset retirement expenditures incurred (114) (43)
----------------------------------------------------------------------------
19,330 10,865
-----------------------------
FINANCING
Decrease in non-revolving credit facility
(Note 5) (98,830) -
Increase (decrease) in revolving credit
facility (Note 6) (22,819) 4,127
Issuance of share capital, net of issue
costs (Note 10) 127,669 150
----------------------------------------------------------------------------
6,020 4,277
-----------------------------

INVESTING
Purchase of petroleum and natural gas
properties and equipment (183) 3
Development of petroleum and natural gas
properties and equipment (51,335) (17,822)
Changes in non-cash investing working
capital (Note 13) 26,167 2,678
----------------------------------------------------------------------------
(25,351) (15,141)
NET INCREASE IN CASH AND CASH
EQUIVALENTS (1) 1
CASH AND CASH EQUIVALANTS, BEGINNING OF
PERIOD 66 65
----------------------------------------------------------------------------
-----------------------------
CASH AND CASH EQUIVALANTS, END OF PERIOD 65 66
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Cash interest paid 4,101 1,166
Cash taxes paid 254 -


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 disclosures which follow do 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

March 31, 2008
---------------------------------------------------------------------------
Accumulated
Depletion and Net Book
Cost Depreciation Value
$000's $000's $000's
---------------------------------------------------------------------------
Petroleum and natural gas assets 810,231 (149,235) 660,996
Office and other equipment 1,468 (797) 671
---------------------------------------------------------------------------
811,699 (150,032) 661,667
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


As at March 31, 2008, the cost of petroleum and natural gas properties includes $28.6 million (as at December 31, 2007 - $31.8 million) relating to unproved properties which have been excluded from costs subject to depletion and depreciation.

Birchcliff capitalized general and administrative costs of $415,000 in the three month period ended March 31, 2008 and $303,000 in the three month period ended March 31, 2007 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 $180 million and an extendible revolving working capital facility with an authorized limit of $20 million. The $180 million credit facility is provided by a syndicate of three banks (the "Syndicate"). The $20 million working capital facility is provided by the lead bank in the current back syndicate. As at March 31, 2008, Birchcliff had drawn just over $133.0 million on the credit facilities. At March 31, 2008 the rate applicable to the working capital facility was 5.9%.

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 23, 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 working capital facility has a conversion date of May 23, 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.

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 March 31, December 31, Change
2008 2007 %
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total shareholders' equity 475,453 340,756 40%
-----------------------------------------------------------------
Total shareholders' equity as
a % of total capital 74% 56%

Working capital deficit (1) 36,579 18,232
Non-revolving credit facility - 98,830
Revolving credit facilities 133,035 155,854
-----------------------------------------------------------------
Total indebtedness 169,614 272,916 (38%)
Total debt as a % of total capital 26% 44%
-----------------------------------------------------------------

Total capital 645,067 613,672 5%
-----------------------------------------------------------------
-----------------------------------------------------------------
(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 three months ended March 31, 2008, total equity increased due to the issuance of common shares and flow-through common shares (Note 10(f), (g), and (h)) and due to recording stock-based compensation expense (Note 11).

Total indebtedness decreased during the three months ended March 31, 2008 by $103.3 million, primarily due to the retirement of the $100 million non-revolving credit facility and repayment of a portion of the revolving credit facility.

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 sales.

The following table illustrates the Corporation's receivables:



$000's March 31, 2008 December 31, 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Marketers 18,359 16,018
Joint venture partners 6,576 3,737
Other 1,021 281
---------------------------------------------------------------------------
Total 25,956 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. The Corporation historically has not experienced any 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 March 31, 2008 and did not provide for any doubtful accounts nor did it write-off any receivables during the three months ended March 31, 2008 or for the year ended December 31, 2007.

Birchcliff's accounts receivables are aged as follows:



$000's March 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Current (less than 30 days) 21,795 17,120
30 to 60 days 2,715 1,283
61 to 90 days 112 1,146
Over 90 days 1,334 487
---------------------------------------------------------------------------
TOTAL 25,956 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 March 31, 2008:



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

Accounts payable and
accrued liabilities 65,966 - - -
Risk management liabilities 5,637 - - -
Bank debt - principal - - 133,035 -
---------------------------------------------------------------------------
TOTAL 71,603 - 133,035 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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 as its WTI oil option contracts are denominated in United States dollars. As at March 31, 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 months would have been $564,000 higher (2007 - $NIL) due 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 three months ended March 31, 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 March 31, 2008:



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


For the three months ended March 31, 2008, the loss recognized in net income was $2.3 million (2007 - $NIL). Included in the loss is a cost to the Corporation of $3.2 million (2007 - $NIL) relating to actual monthly settlements incurred during the period. A gain of just under $1.0 million (2007 - $NIL) is also included within the loss, identified as unrealized gain on risk management contracts on the statement of cash flow. This unrealized gain represents the change in fair value of the contracts related to expected future settlements. The fair value of these risk management liabilities at March 31, 2008 was $5.6 million (2007 - $NIL). As of March 31, 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 $177,300 higher or lower (2007 - $NIL) for the period.

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 March 31, 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 months would have changed by $579,000 (2007 - $205,000). A sensitivity of 1% is considered reasonable given the current level of the bank prime rate and market expectations for future movements. The company 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 three months ended March 31, 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 March 31, 2008 is disclosed below by financial instrument category, as well as any related loss and interest expense for the three months ended March 31, 2008:



Carrying Fair Interest
Financial Instrument Value Value Loss Expense
---------------------------------------------------------------------------
$000's

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

Loans and Receivables
Accounts receivable and
other current assets 29,320 29,320 - -

Liabilities Held for Trading
Risk management contracts 5,637 5,637 2,287 (1)

Other Liabilities
Accounts payable and
accrued liabilities 65,966 65,966 - -
Revolving credit facilities 133,035 135,115 - 4,101 (2)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Included in loss on risk management contracts on the statements of net
income and comprehensive income and retained earnings. An unrealized
gain of $952,000 representing the change in fair value of the contracts
is included on the statement of cash flows.
(2) Included in interest expense on the statements of net income and
comprehensive income and retained earnings.


The risk management contracts are recorded at their fair value based on quoted market prices in the future 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 March 31, 2008 to be approximately $46.8 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:



---------------------------------------------------------------------------
(000's) March 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Opening Balance, January 1 18,806 11,270
Obligations incurred 352 1,368
Obligations acquired - 5,919
Changes in estimate 132 (415)
Accretion expense 300 1,252
Actual expenditures incurred (114) (588)
---------------------------------------------------------------------------

Ending Balance 19,476 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
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 share 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
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(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 common shares at a fixed price not less than the fair market value of the common shares 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 months ended March 31, 2008, the Corporation recorded approximately $1.2 million (2007 - $658,000) 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 three months ended March 31, 2008, the Corporation also recorded cash stock-based compensation expense of $20,000 (three months ended March 31, 2007 - $35,000).

Using the fair value method, the weighted average fair value of stock options granted during the three months ended March 31, 2008 was $4.49 per share under option.

At March 31, 2008, the Corporation's Amended and Restated Stock Option Plan permitted the grant of options in respect of 11,186,308 common shares. At March 31, 2008, there remained available for grant options in respect of 4,813,438 common shares.

A summary of the changes during the three months ended March 31, 2008 is presented below:



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


A summary of the stock options outstanding and exercisable under the plan at March 31, 2008 is presented below:



Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at March 31, Contractual Exercise at March 31, Exercise
Date of Grant 2008 Life Price ($) 2008 Price ($)
---------------------------------------------------------------------------
Dec. 3, 2004(1) 1,043,334 1.8 3.00 1,043,334 3.00(1)
Apr. to
Jun. 22, 2005 754,835 2.1 3.79 460,335 3.79
Jul. 4 to
Sept. 9, 2005 35,168 2.3 4.40 9,001 4.49
Oct. 6 to
Nov. 28, 2005 55,000 2.3 6.16 10,000 5.90
Jan. 11 to
Mar. 6, 2006 85,333 2.8 7.14 53,667 7.14
Apr. 11 to
Apr. 25, 2006 5,000 3.0 6.86 1,667 6.86
Aug. 14 to
Sept. 26, 2006 77,000 3.4 5.46 22,333 5.67
Oct. 23, 2006 14,980 3.6 4.12 4,980 4.12
Jan. 23 to
Mar. 31, 2007 1,672,120 3.8 3.89 523,787 3.89
May 1 to
May 14, 2007 100,000 4.1 4.90 - -
Jul. 16 to
Sept. 27, 2007 227,000 4.4 4.34 - -
Oct. 9 to
Dec. 14, 2007 610,000 4.6 5.59 - -
Jan. 1 to
Mar. 31, 2008 1,693,100 4.8 7.46 - -
---------------------------------------------------------------------------
6,372,870 3.6 4.96 2,129,104 3.55
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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 March 31, 2008, there were 2,939,732 of these performance warrants remaining 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 months ended March 31, 2008, the Corporation recorded $NIL (three months ended March 31, 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 three months ended March 31, 2008 and the Corporation's outstanding performance warrants as at March 31, 2008 is presented below:



Weighted Average
Number Exercise Price $
---------------------------------------------------------------------------
Outstanding, December 31, 2007 3,749,665 3.00
Issued - -
Exercised (809,933) 3.00
---------------------------------------------------------------------------
Outstanding, March 31, 2008(1) 2,939,732 3.00
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) In early 2008 a former officer exercised 809,933 performance warrants.



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


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 calculating the fair values are set forth below:



2008 2007
---------------------------------------------------------------------------
Risk-free interest rate 3.3% 4.1%
Expected maturity (years) 5.0 5.0
Expected volatility 70.0% 58.6%
Dividend yield 0% 0%
---------------------------------------------------------------------------



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 - total 2006 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 - total
2008 year to date 1,250

Exercise of stock options (2,089)
Cancellation of stock options (20)
---------------------------------------------------------------------------
Balance, March 31, 2008 10,071
---------------------------------------------------------------------------
---------------------------------------------------------------------------


12. COMMITMENTS

Office Premises

The Corporation is committed under an operating lease beginning December 1, 2007 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 2,265
2009 3,020
2010 3,020
2011 3,020
2012 3,029
Thereafter 15,424
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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 arm's length party on a basis that recovers all of its rental 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.

13. SUPPLEMENTARY CASH FLOW INFORMATION

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



Three months ended Three months ended
$000's March 31, 2008 March 31, 2007
---------------------------------------------------------------------------
Provided by (used in)
Accounts receivable (5,920) 1,750
Prepaid and other (485) (268)
Accounts payable and accrued liabilities 24,752 (1,292)
---------------------------------------------------------------------------
18,347 190
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating (7,820) (2,488)
Investing 26,167 2,678
---------------------------------------------------------------------------
18,347 190
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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)