Cinch Energy Corp.
TSX : CNH

Cinch Energy Corp.

May 13, 2008 09:00 ET

Cinch Energy Corp. Releases First Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - May 13, 2008) - Cinch Energy Corp (TSX:CNH) ("Cinch" or "the Company") is pleased to report on the Company's activities and financial results for the first quarter of 2008. Highlights are as follows:



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Three Months Ended March 31,
2008 2007
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(Unaudited) (Unaudited)
Petroleum and natural gas sales,
net of transportation ($000's) 8,137 6,116

Sales volumes per day
Natural gas (Mcf/d) 7,901 6,790
Natural gas liquids (Bbl/d) 262 222
Equivalence at 6:1 (BOE/d) 1,579 1,354

Sales Price
Natural gas ($/Mcf) 8.55 8.03
Natural gas liquids ($/Bbl) 83.16 60.54
Equivalence at 6:1 ($/BOE) 56.63 50.21
$ $
Funds from operations (000's) (1) 4,130 3,371
- per share, basic (1) 0.07 0.07
- per share, diluted (1) 0.07 0.06
Net income (loss) (000's) 17 (268)
- per share, basic 0.00 (0.01)
- per share, diluted 0.00 (0.01)
Capital expenditures ($000's) 8,532 6,228
Basic weighted average shares outstanding
(000's) 55,625 51,111

Working capital (net debt) (2) ($000's) $
- As at March 31, 2008 (29,160)
- As at December 31, 2007 (24,758)

As at May 12, 2008

Common Shares outstanding 55,625
Options outstanding 4,900
- average exercise price 1.66
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(1) Funds from operations and funds from operations per share is not a
generally accepted accounting principle ("GAAP") and represent cash
provided by operating activities on the statement of cash flows less the
effect of changes in non-cash working capital related to operating
activities.
(2) Net debt is a non-GAAP measure and represents the sum of the working
capital (deficiency) and the outstanding credit facility balance.


President's Message

PRODUCTION, PRICES, AND COSTS

The Dawson B.C. Kiskatinaw natural gas discovery 1-32, in which Cinch has a 36% working interest, was put on production on April 14th and is producing at rates in excess of 10 mmcf/d and to date shows no signs of decline. This has increased Cinch's production in the month of April to approximately 1900 BOE/d. The Kiskatinaw zone is a very prolific producer and the Company currently has two additional Kiskatinaw zone wells waiting to be completed and connected for production. The Company currently anticipates that production during 2008 should average approximately 1,900-2,100 BOE/d, a significant increase over the 2007 average of 1,340 BOE/d. For the three months ended March 31, 2008, Cinch's production averaged 1,579 BOE/d versus an average of 1,354 BOE/d in the first quarter of 2007 and 1,549 BOE/d in the fourth quarter of 2007.

Prices for the first quarter of 2008 averaged $56.63 per BOE, which is a 23% increase from the 2007 fourth quarter average of $46.22 per BOE. This increase is due to both an increase in the natural gas price and in the price for natural gas liquids. The Company does not have any hedges in place and remains positive about the future natural gas market. Natural gas storage inventories through out the winter season have been drawn down to below the 5 year average and it is projected by natural gas analysts that LNG imports into the United States market will be reduced over those in 2007.

Operating costs in the first quarter of 2008 were $5.92 per BOE, as compared to $6.18 per BOE in the comparable quarter of 2007, and up slightly from $5.87 per BOE in the fourth quarter of 2007. The decrease in operating costs from the same quarter of 2007 is primarily due to additional production volumes coming on stream.

OPERATIONS

During the first quarter of 2008 Cinch participated in the drilling of 5 wells, all of which were cased as potential gas wells.

At Dawson, B.C. Cinch participated in the drilling of three potential natural gas wells. The Dawson 6-6 (40% interest) was cased to a depth of 2508 metres. A completion attempt in the Kiskatinaw zone was unsuccessful, however this well will be deepened during the summer to evaluate a Wabamun prospect at approximately 3,400 metres. The Wabamum zone can be a prolific producer, and in this immediate area, there are several wells that have produced in excess of 20 BCF per section. Cinch will earn an 85% working interest in four sections of land in the horizons below the Kiskatinaw zone by paying the cost of deepening this well. Cinch drilled a farmin well at Dawson 13-11 (50% interest), which resulted in a successful Kiskatinaw gas well. The well was flow tested during completion operations at rates between 4-5 mmcf/d. It is anticipated that this well will be tied in for production during the summer at an initial rate of 2 mmcf/d. In addition, the Dawson 12-27 well (38.2% interest) was drilled offsetting the Dawson 1-32 discovery and was cased as a potential gas well. It is anticipated that this well will be completed after breakup. On the western portion of the Dawson acreage, a 3D seismic program was shot which is currently being interpreted. At the land sale in April, Cinch and its partner were successful in acquiring six additional sections of mineral rights at 50% each.

The Montney zone has become the focus of substantial industry attention at recent B.C. land sales. Cinch considers its Dawson acreage position to be very prospective for the Montney zone and has acquired additional 3D seismic data to assist in the geologic interpretation of it, and other potential natural gas horizons. Cinch holds 44 sections of land in the Dawson Area, with average working interests varying between 20% to 40%. Within this land position, Cinch specifically owns the Montney rights in 25 sections of land averaging a 33% working interest. It is anticipated that Cinch will be participating in a Montney horizontal well to be drilled in the summer.

At Chime, the Company participated in the drilling of the Chime 14-26 well (16% interest), which was completed as a natural gas well. Through a farmout arrangement with a major company, a well in Section 6-61-5W6 is expected to spud prior to July 15th, and will evaluate all horizons down to the Nikanassin zone. This location offsets one of the most prolific Falher B producers in the Company's core area, which came on production October of 2006 at rates in excess of 25 mmcf/d and in January 2008 was still producing at a rate of 8.4 mmcf/d. Cinch will be participating for a 20% interest in the drilling and completion costs of this well, and farming out approximately 60% interest, to retain a 40% working interest.

In the Kakwa E pool, one of our best Dunvegan fields, Cinch was recently successful in obtaining approval from the ERCB to down space its lands to four wells per section. Cinch is now preparing to proceed with the drilling of three Dunvegan development wells. It is expected that the first well in this three well program will spud in July. At Kakwa, Cinch drilled a 100% well in the Kakwa H pool, which is currently producing at 300-400 mcf/d.

The Company has increased its budgeted capital expenditures for 2008 to approximately $25 million, which will be funded from cash flows and its bank credit facility. The Company's credit facility was recently reviewed and set at $34 million, with the possibility to further increase this amount once the Dawson property has some production history. The Company has spent $8.5 million of its budget in the first quarter and expects to spend the greater part of the balance in the third and fourth quarters. A very exciting summer is anticipated for Cinch, as the Montney and Wabamun zones will be tested in the very active Dawson area.

ANNUAL MEETING

Cinch's annual and special meeting of shareholders will be held in The Great Room 3 on the Plus 15 level at the Sandman Hotel, Calgary, 888-7th Avenue S.W. Calgary, Alberta on May 14th at 10:00 a.m. (Calgary time).

We look forward to seeing you at our annual meeting.

George Ongyerth, President

Forward Looking Statements

Statements throughout this release that are not historical facts may be considered to be "forward looking statements". These forward looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe the Company's objectives, goals, or future plans, including management's assessment of future plans and operations, anticipated commodity prices and their impact, timing of expenditures and renunciation of flow-through expenditures, budgeted capital expenditures and the method of funding thereof, partner risk, anticipated production rates, timing of completion and tie-in of wells, farm-out plans, expected royalty rates and changes to the Alberta royalty regime and the possible effect thereof on the Company and its allocation of capital, expected operating expenses and general and administrative expenses and the expected levels of activities may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, volatility of commodity prices, imprecision of reserve estimates, environmental risks, competition from other producers, incorrect assessment of the value of acquisitions, failure to complete and/or realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources and changes in the regulatory and taxation environment. As a consequence, the Company's actual results may differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect.
Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified in this document, assumptions have been made regarding, among other things: the ability of the Company to obtain equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manor; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through development of exploration; future oil and natural gas prices; interest rates; the regulatory framework regarding royalties, and the ability of the Company to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results are included elsewhere herein and in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), or at the Company's website (www.cinchenergy.com). Furthermore, the forward-looking statements contained in this release are made as at the date of this release and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Barrel of Oil Equivalency

Natural gas reserves and volumes contained herein are converted to barrels of oil equivalent (BOE) on the basis of six thousand cubic feet (mcf) of gas to one barrel (bbl) of oil. The term "barrels of oil equivalent" may be misleading, particularly if used in isolation. A BOE conversion ratio of six mcf to one bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

MANAGEMENT'S DISCUSSION AND ANALYSIS

May 12, 2008

The following management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements and related notes for the three month period ended March 31, 2008 and the audited financial statements and related management discussion and analysis of Cinch Energy Corp. ("Cinch" or the "Company") for the year ended December 31, 2007. Additional information relating to Cinch, including Cinch's Annual Information Form, is available on SEDAR at www.sedar.com.

Non-GAAP Measures

The MD&A contains the term "funds from operations" which should not be considered an alternative to, or more meaningful than, cash provided by operating activities or net income as determined in accordance with Canadian generally accepted accounting principles ("GAAP") as an indicator of the Company's performance. The Company considers funds from operations to be a key measure that demonstrates its ability to generate funds for future growth through capital investment. Funds from operations is calculated by taking cash provided by operating activities on the statement of cash flows less the effect of changes in non-cash working capital related to operating activities. The Company's determination of funds from operations may not be comparable with the calculation of similar measures by other companies. The Company also presents funds from operations per share, where funds from operations are divided by the weighted average number of shares outstanding to determine per share amounts. The Company evaluates its performance based on earnings and funds from operations.

The MD&A contains the term "net debt" which is the sum of the working capital (deficiency) and the outstanding credit facility balance. This number may not be comparable to that reported by other companies.

OPERATIONAL UPDATE

The Company was active in drilling, completing and tieing-in multiple locations in the first quarter of 2008. The Company's average production for the first quarter of 2008 was approximately 1,579 BOE/d, an increase from the 2007 fourth quarter average production of 1,549 BOE/d. The average production for the first quarter of 2008 has exceeded the production of all prior quarters. Although the Company's 2007 exit rate was approximately 1,900 BOE/d, this was comprised of flush production from 4 wells which came on production in October 2007. The production from these wells continues to decline and is expected to stabilize toward the end of 2008. The Kakwa 10-18 well, which came on production in October 2007 continues to produce at approximately 1.3 mmcf/d (net). In the first quarter of 2008, Cinch drilled and tied in an offset to the Kakwa 10-18 well, which did not come on production until the last day of the quarter, resulting in minimal production increases for the current quarter. In April 2008, this well averaged approximately 450 mcf/d (net). The Kakwa 15-12 well, came on production in February 2008 and is producing approximately 100 mcf/d of natural gas and 25 bbl/d of oil (net). In March 2008, the Company purchased one offsetting section in an effort to develop an oil play on these lands.

Subsequent to quarter end, the Dawson 1-32 well, of which Cinch holds a 36% working interest, came on production at an average rate of over 8.0 mmcf/d (gross) for the last half of April 2008. The well is currently producing at rates in excess of 10 mmcf/d (gross). The operator's intentions were to originally limit production to 6 mmcf/d but due to some well freeze up issues, the well continues to produce at higher rates with very little pressure changes.

The Company's funds from operations for the first quarter of 2008 exceeded that of every quarter in 2007, as a result of higher average production in 2008, as well as higher commodity prices.

For the three months ended March 31, 2008, the Company incurred $8.5 million of capital expenditures exiting the quarter with net debt of $29.2 million, $22.8 million of which is drawn on its $33 million demand bank credit facility.

IMPACT OF ALBERTA NEW ROYALTY FRAMEWORK

Management of the Company has reviewed the new proposed Alberta Royalty Framework ("NRF"). Although there are a significant number of prospects in the province of Alberta, management believes that in some cases, the proposed royalty changes have reduced the rate of returns, which are required for the Company's deep gas drilling program in Alberta. Management has already begun to see the impact of the proposed royalty changes through reduced partner willingness to participate in capital projects in Alberta. In April 2008, the government released changes to the proposed NRF due to "unintended consequences", especially as they relate to deep oil and deep gas drilling. These changes resulted in increased deep gas drilling incentives compared to the initial release of the NRF. Under these proposed changes, there will be some deep gas royalty holiday incentives provided, with increased incentives for wells deeper than 4,000 metres. Most of Cinch's wells range in depths from 2,300 to 3,500 metres and the incentives provided for those wells has decreased compared to the current incentives. Based on the current proposed NRF, Cinch intends to allocate a larger portion of its capital spending in the Dawson Area of British Columbia, where royalty rates are more favourable.



PRODUCTION

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Three months ended March 31,
2008 2007 Change
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Sales volumes %
Natural gas (Mcf/d) 7,901 6,790 16
Liquids (Bbl/d) 262 222 18
Equivalence (BOE/d) 1,579 1,354 17

Sales prices $ $ %
Natural gas ($/Mcf) 8.55 8.03 6
Liquids($/Bbl) 83.16 60.54 37
Equivalence ($/BOE) 56.63 50.21 13
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Sales volumes for the three months ended March 31, 2008 increased over the same period of 2007 due to six additional wells brought on production since March 2007.

Natural gas prices were 6% higher for the three months ended March 31, 2008 compared to the same period of 2007. Natural gas prices for the three months ended March 31, 2008 were 29% higher than the fourth quarter of 2007 and continued to remain strong subsequent to the quarter end. The Company's natural gas production continues to be unhedged and is marketed in the Alberta spot market.

Natural gas liquids pricing was 37% higher for the three months ended March 31, 2008 compared to the same period of 2007 and 5% higher than the fourth quarter of 2007. Natural gas liquids represent approximately 24% of the Company's oil and gas revenues. The Company has not hedged any of its liquids production.



REVENUES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
Oil and gas sales, net of
transportation 8,137 6,116 33
Per BOE 56.63 50.21 13
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Revenues for the three months ended March 31, 2008 were 33% higher than the same period of 2007 due to higher production and higher commodity prices, as previously discussed. Transportation expenses increased by approximately $0.20 per BOE in the first quarter of 2008 compared to the same period of 2007 as a result of rate increases.

Revenues for the three months ended March 31, 2008 have increased 24% from the fourth quarter of 2007, as a result of higher commodity prices, as well as slightly higher production.



ROYALTIES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
Royalties 2,078 999 108
Per BOE 14.46 8.20 76
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Royalty expense increased in the three months ended March 31, 2008 compared to the same period of 2007 primarily due to higher commodity prices, higher production and the expiration of royalty holiday on some higher producing wells.

Royalty expense for the first quarter of 2008 increased over the fourth quarter of 2007 mainly due to increased revenues, as well as the expiration of royalty holiday on a higher producing well. The royalty rate for the first quarter of 2008 (royalties as a percentage of oil and gas sales), is higher than the prior quarter at approximately 25.5%. This rate is comprised of both crown royalties and gross overriding royalties.

The Company anticipates that its royalty rate for 2008 (royalties as a percentage of oil and gas sales), will be consistent with the rate experienced in the first quarter of 2008. Management further anticipates an increase in the royalty rate effective January 1, 2009 should the proposed Alberta royalty framework be implemented. Anticipated royalty rates can change however, depending upon commodity prices, actual success achieved and the zone in which productive success is achieved.



OPERATING EXPENSES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
Operating 851 753 13
Per BOE 5.92 6.18 (4)
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Total operating expenses for the three months ended March 31, 2008 were 13% higher than the same period of 2007 due to increases in insurance, compressor and equipment maintenance, methanol costs, as well as chemical and oil treating supplies. Operating expenses per BOE decreased due to higher production volumes.

Operating expenses are not expected to exceed $5.25 per BOE in 2008 due to increased forecast production for the remainder of the year. Anticipated costs per BOE can change however, depending on the Company's actual production levels.



GENERAL AND ADMINISTRATIVE EXPENSES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
General and administrative 988 1,071 (8)
Per BOE 6.87 8.79 (22)
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Total general and administrative expenses decreased for the three months ended March 31, 2008 compared to the same period of 2007 mostly due to increased overhead recoveries in 2008 of $73 thousand, thereby reducing total general and administrative expenses. General and administrative expenses also decreased due to the cancellation of stock options in 2008, which resulted in a recovery on non-vested options. Also, in March 2007, there were stock options issued to all employees thereby increasing stock based compensation expense, and there was no such issuance in 2008. The Company does not capitalize indirect general and administrative expenses.

General and administrative expenses per BOE were also lower in the first quarter of 2008 compared to the same period of 2007 due to lower total general and administrative expenses as well as higher production volumes.

General and administrative expenses for 2008 are not expected to exceed $5.75 per BOE as a result of higher forecasted production volumes for the remainder of the year.



INTEREST EXPENSE

Dollars in thousands, except per unit amounts
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Three months ended March 31,
2008 2007 Change
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$ $ %
Interest expense 301 230 31
Per BOE 2.10 1.89 11
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Interest expense increased in the three months ended March 31, 2008 compared to the same period of 2007 due to higher draws on the Company's bank credit facility in 2008, exiting the quarter with an outstanding credit facility balance of $22.8 million. In 2007, the Company exited the first quarter of 2007 with an amount outstanding under its credit facility of $12.8 million.



ACCRETION OF ASSET RETIREMENT OBLIGATIONS EXPENSE

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
Accretion expense 47 41 13
Per BOE 0.33 0.34 (3)
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Accretion expense increased in the three months ended March 31, 2008 compared to the same period of 2007 due to an increased number of wells with asset retirement obligations.



DEPLETION AND DEPRECIATION EXPENSE

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
Depletion and depreciation 3,817 3,306 15
Per BOE 26.56 27.14 (2)
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Total depletion and depreciation expense for the three months ended March 31, 2008 increased compared to the same period of 2007 due to increased production, as well as a larger capital base being depleted. Depletion per BOE for the three months ended March 31, 2008 decreased compared to the same period of 2007 due to positive drilling results resulting in reserve additions.

The depletion and depreciation expense increased in the first quarter of 2008 compared to the fourth quarter of 2007 by approximately $50 thousand or $0.13/BOE due to a larger capital asset balance being depleted partially offset by reserve additions.



TAXES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
Current - - -
Future income taxes 67 9 644
Per BOE 0.47 0.07 571
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A future income tax expense was recorded in the first quarter of 2008 commensurate with the net income experienced in the quarter.



Tax pools at March 31:

Dollars in thousands
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2008 2007
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COGPE 13,678 12,283
CDE 27,524 21,675
CEE 21,741 23,938
UCC 18,513 20,674
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81,456 78,570
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The Company's tax pools have increased since March 31, 2007 as a result of capital expenditures which were higher than the tax pools needed to eliminate taxable income. An equity financing completed on February 21, 2007 included flow-through common shares of $10 million. This amount has been deducted from the above noted tax pools as the flow-through expenditures were renounced in January, 2008, effective December 31, 2007. As at March 31, 2008, approximately $9 million of the required expenditures had been incurred. The Company anticipates no difficulties in incurring the remaining $1 million of expenditures in the remainder of 2008.



NET INCOME (LOSS) AND FUNDS FROM OPERATIONS

In thousands, except share and per share figures
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Three Months Ended March 31,
2008 2007 Change
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$ $ %
Net income (loss) 17 (268) (106)
per basic share 0.00 (0.01) (106)
per diluted share 0.00 (0.01) (106)
Funds from operations 4,130 3,371 23
per basic share 0.07 0.07 -
per diluted share 0.07 0.06 17
Weighted average shares
outstanding 55,625 51,111 9
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For the three months ended March 31, 2008, the Company generated net income, attributable to higher commodity prices and increased production.

The Company's funds from operations increased by 23% over the three months ended March 31, 2007. For the three months ended March 31, 2008, funds from operations are higher primarily due to increased revenues due to higher commodity prices and higher production levels.



LIQUIDITY AND CAPITAL RESOURCES

Dollars in thousands
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March 31, December 31,
2008 2007 Change
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$ $
Working capital deficiency,
excluding credit facility (6,353) (4,168) 52
Credit facility (22,807) (20,589) 11
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Net debt (29,160) (24,757) 18
Shareholders' equity (82,988) (85,315) (3)
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At March 31, 2008, the Company had net debt of $29.2 million, comprised of a working capital deficiency of $6.4 million and an amount outstanding on its credit facility of $22.8 million. The $4.4 million increase in net debt from December 31, 2007 can be attributed to capital expenditures of $8.5 million partially offset by funds from operations for the three months ended March 31, 2008 of $4.1 million.

Management currently intends to fund the remainder of its 2008 capital program with a combination of funds generated from operations and its bank credit facility. Management monitors and updates its forecast to incorporate changes in capital, actual results and changes in commodity market pricing, and has forecast that it has sufficient access to capital to carry out the planned 2008 program. At March 31, 2008, the Company had draws of $22.8 million on its $33.0 million demand bank credit facility. Subsequent to quarter end, Cinch renewed its bank credit facility resulting in an increase to $34.0 million.

The decrease in shareholder's equity at March 31, 2008 from December 31, 2007 is due to the tax effect of $10 million in flow-through share expenditures renounced in January 2008 on flow-through shares issued in February 2007.



CAPITAL EXPENDITURES

Additions to property, plant and equipment

Dollars in thousands
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Three Months Ended March 31,
2008 2007
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Land and rentals 491 25
Seismic 609 36
Drilling, completing and equipping 6,182 5,661
Pipelines and facilities 1,219 484
Other assets 31 22
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Total 8,532 6,228
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The capital additions for the three months ended March 31, 2008, were incurred primarily on drilling, completing, as well as tieing in locations in the Dawson, Kakwa and Chime areas. At March 31, 2008, additional reserves were added through drilling and completion operations in the Kakwa and Dawson areas based on an internal evaluation.

Management's primary strategy is to expend capital on exploration and development drilling and earn land by drilling. The Company may, however, also purchase land or make acquisitions where considered strategic.

BUSINESS RISKS AND RISK MANAGEMENT

The long-term commercial success of the Company depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. Cinch attempts to reduce risk in accomplishing these goals through the combination of hiring experienced and knowledgeable personnel and careful evaluation.

The Company's program is exploratory in nature and in areas with deep, tight gas. The wells the Company drills therefore tend to be deep (a substantial portion are deeper than 2,500 meters), and are subject to higher drilling costs than those in more shallow areas. In addition, most wells require fracture treatment before they are capable of production, also increasing costs. The Company mitigates the additional economic pressure that this creates by carefully evaluating risk/reward scenarios for each location, by taking what management considers to be appropriate working interests after considering project risk, by practicing prudent operations so that drilling risk is decreased, by ranking and limiting the zones that the Company is willing to complete, and also by drilling deep so that the multi-zone potential of the area can be accessed and potentially developed. The Company operates the majority of its lands, which provides a measure of control over the timing and location of capital expenditures. In addition, the Company monitors capital spending on an ongoing and regular basis in order to maintain liquidity.

The financial capability of the Company's partners can pose a risk to the Company, particularly during periods when access to capital is more challenging and prices are depressed. The Company mitigates the risk of collection by attempting to obtain the partners share of capital expenditures in advance of a project and by monitoring receivables regularly. The ability of the Company to implement its capital program when the financial wherewithal of a partner is challenged can be more difficult, although the Company attempts to mitigate the risk by cultivating multiple business relationships and obtaining new partners when needed and where possible.

Commodity price fluctuations can pose a risk to the Company, and management monitors these on an ongoing basis. External factors beyond the Company's control may affect the marketability of the natural gas and natural gas liquids produced. The Company has not to date implemented any hedging instruments.

The Company has selected the appropriate personnel to monitor operations and has automated field information where possible, so that difficulties and operational issues can be assessed and dealt with on a timely basis, and so that production can be maximized as much as possible. Not all operational issues; however, are within the Company's control. Management will address them nonetheless, and attempt to implement solutions, which may be by their nature longer term.

Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, and spills, each of which could result in damage to wells, production facilities, other property and the environment or in personal injury. In accordance with industry practice, the Company insures against most of these risks (although not all such risks are insurable). The Company maintains liability insurance in an amount that it considers consistent with industry practice although the nature of these risks is such that liabilities could potentially exceed policy limits. The Company also reduces risk by operating a large percentage of its operations. As such, the Company has control over the quality of work performed and the personnel involved.

The Company anticipates making substantial capital expenditures in the future for the exploration, development, acquisition and production of oil and natural gas reserves. If the Company's revenues or reserves decline, it may have limited ability to expend the capital necessary to undertake or complete future drilling programs. There can be no assurance that debt or equity financing will be available. The Company mitigates this risk by monitoring expenditures, operations and results of operations in order to manage available capital effectively.

Attracting and retaining qualified individuals is crucial to the Company's success. The Company understands the importance of maintaining competitive compensation levels given the competitive environment in which the Company operates. The inability to attract and retain key employees could have a material adverse effect on the Company.

The Company's ability to move heavy equipment in the field is dependent on weather conditions. Rain and snow can impact conditions, and many secondary roads and future oil and gas production sites are incapable of supporting the weight of heavy equipment until the roads are thoroughly dry. The duration of difficult conditions has a direct impact on the Company's activity levels and as a result can delay operations.

The Government of Alberta has announced its new proposed royalty framework, which the Company is thoroughly evaluating. Based on the information provided to date, it is difficult to comment on the total impact of these potential changes to the Company's future operations. Currently, the majority of Cinch's production is in Alberta but given the current proposed royalty changes, Cinch's 2008 capital budget reflects reduced spending in Alberta and increased spending in British Columbia where royalty rates are more favourable.

All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial and local laws and regulations. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. In 2002, the Government of Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to reduce its greenhouse gas emissions to specified levels. There has been much public debate with respect to Canada's ability to meet these targets and the Government's strategy or alternative strategies with respect to climate change and the control of greenhouse gases. The Federal Government has introduced legislation aimed at reducing greenhouse gas emissions using an "intensity based" approach, the specifics of which have yet to be determined. Bill C-288, which is intended to ensure that Canada meets its global climate change obligations under the Kyoto Protocol, was passed by the House of Commons on February 14, 2007.

On April 26, 2007, the Federal Government released its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION which includes the Regulatory Framework for Air Emissions. This Action Plan covers not-only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not currently possible to predict either the nature of those requirements or the impact on the Company and its operations and financial condition. The Company optimizes its operations with respect to compressor fuel usage and natural gas flaring so that a reduction in emissions is realized.

On March 10, 2008, the Government of Canada released "Turning the Corner - Taking Action to Fight Climate Change", (the "Updated Action Plan") which provides some additional guidance with respect to the Government's plan to reduce greenhouse gas emissions by 20% by 2020 and by 60% to 70% by 2050. Details of the Updated Action Plan are provided in the Company's Annual Information Form for the year ended December 31, 2007.

DISCLOSURE CONTROLS AND PROCEDURES

The Company has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Company required to be disclosed is recorded, processed, summarized and reported within the time periods specified by securities regulations and that information required to be disclosed is communicated to management on a timely basis.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

The Company's Chief Executive Officer and Chief Financial Officer are required to cause the Company to disclose any change in the Company's internal controls over financial reporting that occurred during the Company's most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. No material changes in the Company's internal controls over financial reporting were identified during the three months ended March 31, 2008, that have materially affected, or are reasonably likely to affect, the Company's internal controls over financial reporting.

The Chief Executive Officer and Chief Financial Officer have signed form 52-109F2- Certification of Interim Filings, which can be found on SEDAR at www.sedar.com.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND GUARANTEES

The Company has contractual obligations and commitments in the normal course of its operating and financing activities. These obligations and commitments have been considered when assessing the Company's cash requirements in its analysis of future liquidity.



Dollars in thousands
----------------------------------------------------------------------------
Payments
greater
less than than
Total 1 year 1-3 years 4-5 years 5 years
----------------------------------------------------------------------------
Operating lease 345 207 138 - -
----------------------------------------------------------------------------
345 207 138 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On February 21, 2007, the Company issued 7,812,500 flow-through common shares for gross proceeds of $10 million. The Company has renounced $10 million of Canadian exploration expenditures to the flow-through investors effective December 31, 2007, and is required to incur such expenditures on or before December 31, 2008. As at March 31, 2008, approximately $9 million of the required expenditures had been incurred. Management does not anticipate any difficulties in meeting the remainder of this obligation.

CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2008 the Company adopted the CICA Handbook Section 1535, Capital Disclosures, Handbook Section 3862, Financial Instruments - Disclosures, Handbook Section 3863, Financial Instruments - Presentation and Handbook Section 1400, General Standards of Financial Statement Presentation. The adoption of Section 1535 resulted in additional disclosure with regard to the Company's objectives, policies and processes for managing capital. The adoption of Sections 3862 and 3863 did not impact the classification and valuation of the Company's financial instruments due to the nature of the financial instruments recorded on the balance sheet and the contracts to which the Company is a party to. The adoption of Section 1400 did not have an impact on the Company due to the fact that management has always assessed the Company's ability to continue as a going concern. For more information on these policies, see note 2 of the Company's financial statements for the three months ended March 31, 2008.

RECENT ACCOUNTING PRONOUNCEMENTS

The Canadian Institute of Chartered Accountants (CICA) has issued a number of accounting pronouncements, some of which may impact the Company's reported results and financial position in future periods.

On February 13, 2008, the Canadian Accounting Standards Board (AcSB) confirmed the use of International Financial Reporting Standards ("IFRS") for publicly accountable profit-oriented enterprises beginning on January 1, 2011 with appropriate comparative data from the prior year. IFRS will replace Canadian GAAP for those enterprises. These include listed companies and other profit-oriented enterprises that are responsible to large or diverse groups of stakeholders. Under IFRS, the primary audience is capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policies which must be addressed. The impact of these new standards on our financial statements is currently being assessed.

CRITICAL ACCOUNTING ESTIMATES

There are a number of critical estimates underlying the accounting policies the Company applies in preparing its financial statements.

Reserves

The estimate of reserves is used in forecasting what will ultimately be recoverable from the properties and their economic viability and in calculating the Company's depletion and potential impairment of asset carrying costs. The process of estimating reserves is complex and requires significant interpretation and judgment. It is affected by economic conditions, production, operating and development activities, and is performed using available geological, geophysical, engineering and economic data.

Reserves at year end are evaluated by an independent engineering firm and quarterly updates to those reserves are estimated by the Company.

Revenue Estimates

Payment and actual amounts for petroleum and natural gas sales can be received months after production. The Company estimates a portion of its petroleum and natural gas production, sales and related costs, based upon information received from field offices, internal calculations, historical and industry experience.

Cost Estimates

Costs for services performed but not yet billed are estimated based on quotes provided and historical and industry experience.

Asset Retirement Obligations

The liability recorded for asset retirement obligations, an estimate of restoring assets and locations back to environmental and regulatory standards upon future retirement or abandonment, include estimates of restoration costs to be incurred in the future and an estimated future inflation rate. Costs estimated are based upon internal and third party calculations and historical experience and future inflation rates are estimated using historical experience and available economic data.

Income taxes

The Company records future tax liabilities to account for the expected future tax consequences of events that have been recorded in its financial statements. These amounts are estimates; the actual tax consequences may differ from the estimates due to changing tax rates and regimes, as well as changing estimates of cash flows and capital expenditures in current and future periods. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded.

TREND ANALYSIS

In 2008, the Company continued to focus on drilling and completion operations, as well as tieing-in production.

The Company's production for the three months ended March 31, 2008, increased over the prior quarter as well as the same period of 2007 as a result of new wells coming on production. The average production for the current quarter exceeded production of that of any other prior quarter. In the first quarter of 2008, Cinch drilled and tied-in 2 new wells. The Kakwa 13-08 well did not come on production until the last day of the quarter resulting in minimal production increases for the first quarter of 2008. In April 2008, the Dawson 1-32 well, of which Cinch has a 36% working interest, came on production at an average rate of over 8.0 mmcf/d (gross) for the last half of April. The well is currently producing at rates in excess of 10 mmcf/d (gross).

The Company has made strides on building a stable production base and continues to work on achieving growth. There have been 18 new wells brought on production since the beginning of 2006. Consistent with other exploration companies, there will be periods of higher production growth, periods with high initial production on new wells which is then anticipated to decline and stabilize in future periods, with some periods experiencing less growth than others.

The Company is affected by commodity price variations. The volatility in oil and gas prices that we have experienced in the past few years directly impacts the revenues and cash flows generated by the Company. In late 2005, the market experienced high commodity prices resulting in increased activity and strong equity valuations. In 2006, we started seeing a softening of the natural gas market and large decreases in prices when compared to the previous year. The decrease in commodity prices impacts the Company by reducing cash flows available for exploration and challenges the economics of potential capital projects. In 2007, the natural gas market continued to soften until the fourth quarter when natural gas prices strengthened while entering the winter months. During the first quarter of 2008, the market once again started experiencing higher commodity prices but not to the same levels experienced in late 2005. The natural gas and liquids prices realized in the first quarter of 2008 were 6% and 37% higher, respectively, than those realized in the same period in 2007. The increase in commodity prices for the first three months of 2008 directly impacted revenues and cash flows. An increase in commodity prices helps to increase cash flows available to fund the Company's capital program, as well as potentially increase the economics of future projects.

We continue to face challenges as partner willingness to participate in projects has been reduced or delayed as access to capital becomes more difficult. The Company continually monitors capital spending and assesses the risk of each individual project to ensure that funds are prioritized appropriately.



SELECTED ANNUAL AND QUARTERLY INFORMATION
(000's, except per share data)

Q1 Q2 Q3 Q4 Annual
---------------------------------------------------------------------------
2008 $ $ $ $ $
---------------------------------------------------------------------------
Petroleum and natural gas
sales, net of
transportation and before
royalties 8,137
Funds from operations 4,130
Per share - basic 0.07
- diluted 0.07
Net income (loss) 17
Per share - basic 0.00
- diluted 0.00
Capital expenditures 8,532
Total assets 130,566
Working capital
(net debt) (1) (29,160)
---------------------------------------------------------------------------
Production (BOE/d) 1,579
---------------------------------------------------------------------------
2007 $ $ $ $ $
---------------------------------------------------------------------------
Petroleum and natural gas
sales, net of
transportation and before
royalties 6,116 5,582 4,405 6,588 22,691
Funds from operations 3,371 2,589 1,605 3,217 10,782
Per share - basic 0.06 0.05 0.03 0.06 0.20
- diluted 0.06 0.05 0.03 0.06 0.20
Net income (loss) (268) (709) (15,184) 466 (15,695)
Per share - basic (0.01) (0.01) (0.27) 0.01 (0.29)
- diluted (0.01) (0.01) (0.27) 0.01 (0.29)
Capital expenditures 6,228 3,930 7,851 2,917 20,926
Total assets 136,520 134,834 125,730 125,682 125,682
Working capital
(net debt) (1) (17,264) (18,673) (24,987) (24,758) (24,758)
---------------------------------------------------------------------------
Production (BOE/d) 1,354 1,249 1,208 1,549 1,340
---------------------------------------------------------------------------
2006 $ $ $ $ $
---------------------------------------------------------------------------
Petroleum and natural gas
sales, net of
transportation and before
royalties 5,200 4,692 4,487 5,733 20,112
Funds from operations 2,475 2,406 2,115 2,970 9,966
Per share - basic 0.05 0.05 0.05 0.06 0.21
- diluted 0.05 0.05 0.04 0.06 0.20
Net income (131) 879 (576) (488) (317)
Per share - basic (0.00) 0.02 (0.01) (0.01) (0.01)
- diluted (0.00) 0.02 (0.01) (0.01) (0.01)
Capital expenditures 6,696 13,542 7,403 9,324 36,966
Total assets 113,356 121,861 125,894 136,983 136,983
Working capital
(net debt) (1) (820) (11,942) (17,307) (23,745) (23,745)
---------------------------------------------------------------------------
Production (BOE/d) 1,130 1,141 1,135 1,320 1,182
---------------------------------------------------------------------------
Note: numbers may not cross-add due to rounding
(1) Working capital (net debt) excludes the long term financial
liabilities which consists of the long term portion of the capital
lease obligation (March 31, 2008 - $0, December 31, 2007 - $0,
December 31, 2006 - $276,806).


Financial Statements
Cinch Energy Corp.
March 31, 2008
(unaudited)


CINCH ENERGY CORP.

BALANCE SHEETS

(unaudited)

March 31, December 31,
2008 2007
As at $ $
----------------------------------------------------------------------------

ASSETS (notes 4 and 5)

Current
Accounts receivable 4,439,980 4,150,650
Prepaid expenses and deposits 849,799 859,335
----------------------------------------------------------------------------
5,289,779 5,009,985

Property, plant and equipment (note 3) 125,275,863 120,672,360
----------------------------------------------------------------------------

130,565,642 125,682,345
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued liabilities 11,429,767 8,894,185
Credit facility (note 4) 22,806,591 20,589,362
Current portion of capital lease obligation
(note 5) 213,084 284,112
----------------------------------------------------------------------------
34,449,442 29,767,659

Asset retirement obligations (note 6) 3,383,575 3,448,714

Future income taxes (note 7) 9,744,200 7,150,800
----------------------------------------------------------------------------
47,577,217 40,367,173
----------------------------------------------------------------------------

Commitments (notes 9 and 10)

Shareholders' equity
Share capital (note 9) 96,649,434 99,175,434
Contributed surplus (note 9) 3,228,926 3,046,632
Deficit (16,889,935) (16,906,894)
----------------------------------------------------------------------------
82,988,425 85,315,172
----------------------------------------------------------------------------

130,565,642 125,682,345
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes


CINCH ENERGY CORP.

STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND DEFICIT

(unaudited)

2008 2007
For the three months ended March 31, $ $
----------------------------------------------------------------------------

Revenue
Oil and gas sales 8,449,043 6,355,871
Transportation (312,221) (239,521)
Royalties (2,077,835) (998,875)
Other income 29,035 24,327
----------------------------------------------------------------------------
6,088,022 5,141,802
----------------------------------------------------------------------------

Expenses
Operating 851,328 753,064
General and administrative (note 9) 987,729 1,070,515
Interest on credit facility 293,596 222,524
Interest on capital lease (note 5) 7,486 7,266
Accretion of asset retirement obligations (note 6) 46,790 41,468
Depletion and depreciation 3,816,734 3,306,036
----------------------------------------------------------------------------
6,003,663 5,400,873
----------------------------------------------------------------------------

Income (Loss) before income taxes 84,359 (259,071)
----------------------------------------------------------------------------

Taxes (note 7)
Future income taxes 67,400 9,100
----------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss)
for the period 16,959 (268,171)


Deficit, beginning of period (16,906,894) (1,212,074)
----------------------------------------------------------------------------

Deficit, end of period (16,889,935) (1,480,245)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) and comprehensive income
(loss) for the period per share(note 9)
Basic and diluted 0.00 (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes


CINCH ENERGY CORP.

STATEMENTS OF CASH FLOWS

(unaudited)

2008 2007
For the three months ended March 31, $ $
----------------------------------------------------------------------------

Operating activities
Net income (loss) for the period 16,959 (268,171)
Add non-cash items:
Depletion and depreciation 3,816,734 3,306,036
Accretion of asset retirement obligations 46,790 41,468
Non-cash compensation expense (note 9) 182,294 282,161
Future income taxes 67,400 9,100
----------------------------------------------------------------------------
4,130,177 3,370,594
Net change in non-cash working capital 93,871 142,994
----------------------------------------------------------------------------
Cash provided by operating activities 4,224,048 3,513,588
----------------------------------------------------------------------------

Investing activities
Additions to property, plant and equipment (8,532,166) (6,228,227)
Net change in non-cash working capital 2,161,917 (2,267,801)
----------------------------------------------------------------------------
Cash used in investing activities (6,370,249) (8,496,028)
----------------------------------------------------------------------------

Financing activities
Increase (decrease) in credit facility 2,217,229 (4,520,681)
Issue of common shares, net of issue costs - 9,407,889
Payments on capital lease (71,028) (68,948)
Net change in non-cash working capital - 164,180
----------------------------------------------------------------------------
Cash provided by financing activities 2,146,201 4,982,440
----------------------------------------------------------------------------

Change in cash - -

Cash beginning of period - -
----------------------------------------------------------------------------

Cash end of period - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental information:
Cash taxes paid - -
Cash interest paid 296,848 192,241
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes


CINCH ENERGY CORP.

NOTES TO FINANCIAL STATEMENTS

March 31, 2008 and 2007
(Unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

The unaudited interim financial statements of Cinch Energy Corp. (the "Company") have been prepared in accordance with Canadian generally accepted accounting principles, following the same accounting policies and methods of computation as the financial statements of the Company for the year ended December 31, 2007, except as disclosed in note 2 below. These unaudited financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the Company's annual audited financial statements and notes thereto for the year ended December 31, 2007.

2. CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2008, the Company adopted four new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"): Handbook Section 1535 "Capital Disclosures", Section 3862 "Financial Instruments - Disclosures", Section 3863 "Financial Instruments - Presentation", Section 1400 "General Standards of Financial Statement Presentation".

Impact upon adoption of Sections 1535, 3862, 3863 and 1400

The adoption of Section 1535 resulted in additional disclosures with regard to the Company's objectives, policies and processes for managing capital (note 8). The adoption of Sections 3862 and 3863 did not impact the classification and valuation of the Company's financial instruments (note 11) due to the nature of the financial instruments recorded on the balance sheet and the contracts to which the Company is a party to. The adoption of section 1400 had no impact on the Company due to the fact that as part of its overall assessment, management has always evaluated the Company's ability to continue as a going concern.

Capital Disclosures

Section 1535 establishes standards for disclosing information regarding an entity's capital and how it is managed. The section specifies the disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. See note 8.

Financial Instruments - Disclosures and Presentation

Sections 3862 and 3863 replace Handbook Section 3861, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. The objective of Section 3862 is to provide financial statement disclosure to enable users to evaluate the significance of financial instruments for the Company's financial position and performance. The section also requires increased disclosure on the nature and extent of risks arising from financial instruments that the Company is exposed to during the reporting period and the balance sheet date and how the Company is managing those risks. The purpose of Section 3863 is to enhance the financial statement users' understanding of the significance of financial instruments to the Company's financial position, performance and cash flows. See note 11.

General Standards of Financial Statement Presentation

Section 1400 was amended to include requirements for management to assess and disclose an entity's ability to continue as a going concern. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. The adoption of this standard did not have an impact on the Company's financial statements.

Future accounting changes

On February 13, 2008, the Canadian Accounting Standards Board (AcSB) confirmed the use of International Financial Reporting Standards ("IFRS") for publicly accountable profit-oriented enterprises beginning on January 1, 2011 with appropriate comparative data from the prior year. IFRS will replace Canada's current Generally Accepted Accounting Principles (GAAP) for those enterprises. These include listed companies and other profit-oriented enterprises that are responsible to large or diverse groups of stakeholders. Under IFRS, the primary audience is capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policies which must be addressed. The impact of these new standards on our financial statements is currently being assessed.



3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment

March 31, 2008
----------------------------------------------------------------------------
Accumulated
and depletion Net book
Cost depreciation value
$ $ $
----------------------------------------------------------------------------

Petroleum and natural gas
properties 170,885,489 (46,410,511) 124,474,978
Equipment under capital lease 1,020,307 (300,217) 720,090
Office furniture and equipment 318,291 (237,496) 80,795
----------------------------------------------------------------------------

172,224,087 (46,948,224) 125,275,863
----------------------------------------------------------------------------
----------------------------------------------------------------------------


December 31, 2007
----------------------------------------------------------------------------
Accumulated
and depletion Net book
Cost depreciation value
$ $ $
----------------------------------------------------------------------------
Petroleum and natural gas
properties 162,472,330 (42,636,583) 119,835,747
Equipment under capital lease 1,020,307 (277,145) 743,162
Office furniture and equipment 311,213 (217,762) 93,451
----------------------------------------------------------------------------

163,803,850 (43,131,490) 120,672,360
----------------------------------------------------------------------------
----------------------------------------------------------------------------


For the three month period ended March 31, 2008, and for the year ended December 31, 2007, no indirect general and administrative expenditures were capitalized.

As at March 31, 2008, $9,353,708 of costs related to undeveloped lands were excluded from costs subject to depletion (December 31, 2007 - $8,383,314). For the three months ended March 31, 2008, the costs subject to depletion included future development costs of $2,772,500 (December 31, 2007 - $3,226,000).

4. CREDIT FACILITY

At March 31, 2008, the Company had a demand, bank credit facility of $33,000,000 (December 31, 2007 - $33,000,000). The facility bears interest at the lender's prime rate. The effective interest rate at March 31, 2008 was 5.5% (March 31, 2007 - 5.6%). The interest rate realized in the first three months of 2008 is lower than the prime rate due to drawings on guaranteed notes, which bear interest at a lower rate. At March 31, 2008, there was $22,806,591 drawn on the credit facility (December 31, 2007 - $20,589,362). As collateral for the facility, the Company has provided a general security agreement with the lender constituting a first ranking security interest in all Company property and a first ranking floating charge on all real property of the Company subject only to a subordination agreement to another bank for the amount of, and as security for, a capital lease (see note 5). Subsequent to March 31, 2008, the Company increased its revolving, demand bank credit facility to $34,000,000 from $33,000,000. The facility bears interest at the lender's prime rate.

5. CAPITAL LEASE OBLIGATION

The Company is committed to annual minimum payments under a capital lease agreement as follows:



$
----------------------------------------------------------------------------
Total minimum lease payments
for the year ending December 31, 2008 235,541

Less amounts representing interest at 5.12% (22,457)
----------------------------------------------------------------------------
Present value of minimum lease payments 213,084

Less current portion (213,084)
----------------------------------------------------------------------------

Long term portion of capital lease obligation at March 31, 2008 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the three months periods ended March 31, 2008, there was $7,486 (March 31, 2007 - $7,266) recorded in interest expense relating to capital leases. There is a first charge on the Company's assets as security for the capital lease obligation.

6. ASSET RETIREMENT OBLIGATIONS

The total future asset retirement obligations result from the Company's net ownership interest in wells and facilities. Management estimates the total undiscounted amount of future cash flows required to reclaim and abandon wells and facilities as at March 31, 2008 is approximately $5,800,000 (December 31, 2007 - $5,870,000) with a weighted average abandonment date of 17 years. The Company used a credit adjusted, risk-free rate ranging from 5% to 7.5% and an inflation rate of 2% to arrive at the recorded liability of $3,383,575 at March 31, 2008 (December 31, 2007 - $3,448,714). In the first quarter of 2008, the estimated abandonment dates of some of the wells were revised and extended to better reflect the economic life of the wells, thereby reducing the present value of the liability when compared to December 31, 2007.



The Company's asset retirement obligations changed as follows:

$
----------------------------------------------------------------------------
Asset retirement obligations, as at December 31, 2007 3,448,714
Adjustment to abandonment date (111,929)
Liabilities incurred -
Accretion expense 46,790
----------------------------------------------------------------------------

Asset retirement obligations, as at March 31, 2008 3,383,575
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. FUTURE INCOME TAXES

Income tax expense differs from the amount that would be computed by applying the Federal and Provincial statutory income tax rates to income (loss) before income taxes. The reasons for the differences are as follows:



March 31, 2008 March 31, 2007
----------------------------------------------------------------------------
Statutory income tax rate 29.50% 32.12%
$ $
Anticipated income tax expense (recovery) 24,886 (83,214)
Increase/(decrease) resulting from:
Stock based compensation expense 53,777 90,630
Other (11,263) 1,684
----------------------------------------------------------------------------

Future income tax expense 67,400 9,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The components of the Company's future income tax assets and liabilities are as follows:



March 31, 2008 December 31, 2007
$ $
----------------------------------------------------------------------------
Net book value of capital
assets in excess of tax pools (11,042,103) (8,527,115)
Share issue costs 359,227 421,141
Asset retirement obligations 854,691 871,145
Other 83,985 84,029
----------------------------------------------------------------------------

Future income tax liability (9,744,200) (7,150,800)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. CAPITAL DISCLOSURES

The Company's primary capital management objective is to maintain a strong balance sheet through the optimization of the debt and equity balance affording the Company financial flexibility to achieve goals of continued growth and access to capital. The capital structure of the Company consists of capital lease, debt and shareholders' equity comprised of retained earnings and share capital.

The basis for the Company's capital structure is dependent on the Company's expected business growth and changes in the business environment. The Company manages its capital structure and makes adjustments according to market conditions to maintain flexibility while achieving the objectives stated above. To manage the capital structure, the Company may adjust capital spending, issue new shares, issue new debt or repay existing debt.

The Company monitors its capital structure based on the current and projected ratios of net debt to funds from operations, and net debt to net debt and shareholders' equity. Net debt is the sum of the working capital (deficiency) and the outstanding credit facility balance. Net debt to funds from operations is calculated as net debt divided by the most recent quarter's annualized funds from operations. The Company's objective is to maintain a net debt to funds from operations ratio of less than two and half times. The net debt to funds from operations ratio at March 31, 2008 is 1.77 based on annualized cash flow (2.20 at December 31, 2007). The ratio may increase or decrease at certain times as a result of significant events such as acquisitions or dispositions, as well as large fluctuations in commodity prices. Efforts are made by management after a period of variation to bring the measure back in line. To facilitate the management of this ratio, the Company prepares annual budgets and monthly forecasts, which are updated depending on varying factors such as general market conditions and successful capital deployment. The annual budget is approved by the Board of Directors.

The Company does have some externally imposed capital requirements, which consist of positive, non-financial covenants on its credit facility that the Company has complied with for the three months ended March 31, 2008. As collateral for the bank credit facility, the Company has provided a general security agreement with the lender constituting a first ranking security interest in all Company property and a first ranking floating charge on all real property of the Company subject only to a subordination agreement to another bank for the amount of, and as security for a capital lease.

On February 21, 2007, the Company issued 7,812,500 flow-through common shares. The Company has renounced $10,000,000 of Canadian exploration expenditures to the flow through investors effective December 31, 2007 and is required to incur such expenditures on or before December 31, 2008. As at March 31, 2008 the Company has incurred $9 million and anticipates no difficulties in meeting the remainder of this obligation.

Other than the restrictions imposed for the capital lease, bank credit facility and flow-through shares, the Company is not subject to any externally imposed capital requirements.

The Company's capital management objectives, evaluation measures and targets remain unchanged from the previous year.



9. SHARE CAPITAL

Authorized - Unlimited number of common voting shares with no par value

----------------------------------------------------------------------------
Issued Number $
----------------------------------------------------------------------------
Common shares
Balance, as at December 31, 2007 55,625,132 99,175,434
Tax effect of flow-through shares (i) (2,526,000)
----------------------------------------------------------------------------
Share capital, as at March 31, 2008 55,625,132 96,649,434
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed surplus
Balance, as at December 31, 2007 3,046,632
Non cash compensation expense (ii) 182,294
----------------------------------------------------------------------------
Contributed surplus, as at March 31, 2008 3,228,926
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Common Shares

(i) Private Placement

On February 21, 2007, the Company issued under private placement a total of 7,812,500 flow-through common shares at $1.28 per share for proceeds of $10,000,000 before total issue costs of $592,112. The Company is required to incur such expenditures on or before December 31, 2008. As at March 31, 2008 the Company has incurred $9 million and anticipates no difficulties in meeting the remainder of this obligation. The tax benefit of the flow-through shares was renounced in its entirety in January 2008.

(ii) Stock options

Non-cash compensation expense is comprised of the stock option benefit for all outstanding options amortized over the vesting period of the options.

Per share amounts

Basic per share amounts have been calculated using the weighted average number of common shares outstanding during the three months ended March 31, 2008 of 55,625,132 (March 31, 2007 - 51,111,243). As at March 31, 2008, all of the stock options are anti-dilutive and therefore not included in the determination of dilutive per share amounts.

Stock option plan

The Company has a stock option plan authorizing the grant of options to purchase shares to designated participants, being directors, officers, employees or consultants. Under the terms of the plan, the Company may grant options to purchase shares equal to a maximum of ten percent of the total issued and outstanding shares of the Company. The aggregate number of options that may be granted to any one individual must not exceed five percent of the total issued and outstanding shares. Options are granted at exercise prices equal to the estimated fair value of the shares at the date of grant and may not exceed a ten year term. The vesting for options granted occurs over a three year period, with one third of the number granted vesting on each of the first, second, and third anniversary dates of the grant unless otherwise specified by the Board of Directors at the time of grant.



The following is a continuity of stock options for which shares have been
reserved:

March 31, March 31,
2008 2007

Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------

$ $
Stock options outstanding,
beginning of period 5,365,834 1.69 4,071,334 1.96
Granted 60,000 0.98 1,047,500 1.00
Cancelled (526,001) 1.88 (8,334) 2.70
----------------------------------------------------------------------------

Stock options outstanding, end
of period 4,899,833 1.66 5,110,500 1.76
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock options outstanding at the end of the period are comprised of the
following:


March 31, 2008 March 31, 2007
----------------------------------------------------------------------------

Exercisable options Exercisable options
--------------------- ---------------------
Number Number Weighted Weighted
Exercise of of average Exercise Number of Number of average
Price Options Options price Price Options Options price
----------------------------------------------------------------------------
$ $ $ $
0.50 0.50
-1.00 1,504,500 312,498 1.00 -1.00 1,047,500 - -
1.01 1.01
-1.50 798,333 259,998 1.24 -1.50 895,000 - -
1.51 1.51
-2.00 947,000 800,334 1.84 -2.00 1,338,000 888,998 1.87
2.01 2.01
-2.50 1,020,000 704,994 1.34 -2.50 1,125,000 398,330 2.23
2.51 2.51
-3.00 505,000 475,334 1.73 -3.00 580,000 351,997 2.53
3.01 3.01
-3.50 125,000 83,334 3.30 -3.50 125,000 41,667 3.30
----------------------------------------------------------------------------

1.66 4,899,833 2,636,492 1.46 1.76 5,110,500 1,680,992 2.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The options outstanding at March 31, 2008 have a weighted average remaining contractual life of 3.1 years (March 31, 2007 - 3.7 years).

The fair value of stock options granted to employees, directors and consultants during the three month periods ended March 31, 2007 and 2008, was estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions: dividend yield of zero% (2007 - zero%), expected volatility of 57% (2007 - 50%), risk-free interest rate of 3.43% (2007 - 3.91%), and an expected life of four years (2007 - four years). Outstanding options granted during the three month period ended March 31, 2008 had an estimated weighted average fair value of $0.46 per option (2007 - $0.43 per option), for a total estimated value of $27,600 (2007 - $450,425). For the three month period ended March 31, 2008, a total of $182,294 (2007 - $282,161) has been recognized as stock compensation expense in general and administrative expenses with an offsetting credit to contributed surplus.

10. COMMITMENTS

The Company has entered into an operating lease for office premises expiring on November 30, 2009, which requires minimum monthly payments of $17,262 for the remainder of the lease.

The Company has entered into a capital lease obligation, as more fully described in note 5.

11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Analysis of financial assets and liabilities by measurement basis

Financial assets and financial liabilities are measured on an ongoing basis at cost, fair value or amortized cost. The following analyzes the carrying amounts of the financial assets and liabilities by category as defined by Section 3855 of the CICA Handbook:



Carrying value of financial instruments as at March 31, 2008:

----------------------------------------------------------------------------
Other financial Total carrying
Receivables liabilities value
----------------------------------------------------------------------------
$ $ $

Financial assets
Accounts receivable 4,439,980 4,439,980
----------------------------------------------------------------------------
Financial liabilities
Accounts payable and
accrued liabilities 11,429,767 11,429,767
Credit facility 22,806,591 22,806,591
Capital lease obligation 213,084 213,084
----------------------------------------------------------------------------


Carrying value of financial instruments as at December 31, 2007

----------------------------------------------------------------------------
Other financial Total carrying
Receivables liabilities value
----------------------------------------------------------------------------
$ $ $
Financial assets
Accounts receivable 4,150,650 4,150,650
----------------------------------------------------------------------------
Financial liabilities
Accounts payable and
accrued liabilities 8,894,185 8,894,185
Credit facility 20,589,362 20,589,362
Capital lease obligation 284,112 284,112
----------------------------------------------------------------------------


Fair value of financial instruments

The fair value of a financial instrument is the amount that would be agreed on in an arm's-length transaction between knowledgeable, willing parties who are under no obligation to act. Fair values can be determined by reference to prices for a financial instrument in active markets in which the Company has access to. In the absence of an active market, the Company determines fair values based on valuation models or by reference to other similar products in active markets.

Financial instruments recognized on the balance sheet consist of accounts receivable, accounts payable, credit facility and capital lease obligations. As at March 31, 2008, there was no significant difference between the carrying amounts of these financial instruments reported on the balance sheet and their estimated fair values.

Financial risk factors

The company is exposed to a number of different financial risks arising from the normal course of business exposures, as well as the Company's use of financial instruments. These risk factors include market risks relating to commodity prices, and interest rates, as well as liquidity risk and credit risk.

Market risk

Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future performance of the Company. The market price movements that could adversely affect the value of the Company's financial assets, liabilities and expected future cash flows include commodity price risk and interest rate risk.

Commodity price risk

The Company is exposed to commodity price risk since its revenues are dependent on the price of natural gas and to a lesser extent natural gas liquids and crude oil. An increase of CDN$1.00/mcf in the price of natural gas would increase annualized earnings before tax by $2.2 million based on annualized first quarter production. A similar decrease in commodity prices would have the opposite impact. As of March 31, 2008, the Company's natural gas and liquids production continues to be unhedged and is marketed in the Alberta spot market.

As at March 31, 2008, the Company had no fixed price contracts associated with future production.

Interest rate risk

The Company is exposed to interest rate risk which arises primarily from its variable rate credit facility. The credit facility has a floating interest rate that will fluctuate based on prevailing market conditions. As at March 31, 2008, $22.8 million is subject to movements in floating interest rates. If interest rates on the floating credit facility decreased by 1%, it is estimated that earnings before tax for the year would increase by approximately $210 thousand, assuming all other variables remained constant. A similar increase in the interest rate would have the opposite impact.

The objective of the Company's interest rate management activities is to minimize the amount of interest paid on the credit facility. In order to manage this risk, the Company has purchased guaranteed notes which bear interest at a lower rate.

Credit risk

Credit risk arises from credit exposure to partners including accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The objective of managing the counter party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the partners, taking into account their financial position, past experience and other factors. The Company mitigates the risk of collection by attempting to obtain the partners share of capital expenditures in advance of a project and by monitoring receivables regularly. As at March 31, 2008, the Company held capital advances of $996 thousand. As at March 31, 2008, no receivable balance has been deemed uncollectible or written off for the period.

As at March 31, 2008, 94% of the Company's accounts receivable is due from 5 customers, compared to 92% from 4 customers at December 31, 2007. These customers are significant companies in the exploration and production industry and are considered to have high credit worthiness.

Liquidity risk

Liquidity risk arises through excess financial obligations over available financial assets due at any point in time. The Company's objective in managing liquidity risk is to maintain sufficient available reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by managing its capital spending and maintaining sufficient funds in its credit facility. As at March 31, 2008, the Company has drawn $22.8 million from its $33.0 million credit facility.

Contractual obligations, commitments and guarantees are presented in the March 31, 2008 MD&A.

12. BASIS OF PRESENTATION

Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current year.

13. SUBSEQUENT EVENTS

Subsequent to March 31, 2008, the Company increased its revolving, demand bank credit facility to $34,000,000 from $33,000,000. The facility bears interest at the lender's prime rate.

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