Cinch Energy Corp.
TSX : CNH

Cinch Energy Corp.

May 07, 2009 08:00 ET

Cinch Energy Corp. Releases First Quarter 2009 Results

CALGARY, ALBERTA--(Marketwire - May 7, 2009) - Cinch Energy Corp. ("Cinch" or "Company") (TSX:CNH) is pleased to report on the Company's activities and financial results for the first quarter of 2009. Highlights are as follows:



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Three Months Ended March 31,
2009 2008
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(Unaudited) (Unaudited)

Petroleum and natural gas sales,
net of transportation ($000's) 6,709 8,137

Sales volumes per day
Natural gas (Mcf/d) 13,280 7,901
Natural gas liquids (Bbl/d) 225 262
Equivalence at 6:1 (BOE/d) 2,438 1,579

Sales Price
Natural gas ($/Mcf) 4.94 8.55
Natural gas liquids ($/Bbl) 40.02 83.16
Equivalence at 6:1 ($/BOE) 30.57 56.63

$ $
Funds from operations (000's) (1) 2,960 4,130
- per share, basic (1) 0.05 0.07
- per share, diluted (1) 0.05 0.07

Net income (loss) (000's) (2,014) 17
- per share, basic (0.04) 0.00
- per share, diluted (0.04) 0.00

Capital expenditures ($000's) 3,673 8,532

Basic weighted average shares outstanding (000's) 55,632 55,625

Working capital (net debt) (2) ($000's) $

- As at March 31, 2009 (36,021)
- As at December 31, 2008 (35,308)

As at May 6, 2009

Common shares outstanding 55,632
Options outstanding 5,367
- average exercise price 1.49
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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

Production for the three months ended March 31, 2009 averaged 2,438 BOE/d versus an average of 1,579 BOE/d, a 54% increase over the first quarter of 2008. The first quarter average production rate of 2,438 BOE/d is a slight 63 BOE/d decrease from the 2,501 BOE/d 2008 fourth quarter production rate. The first quarter production would have been higher had the Dawson 6-6 Wabamun well been brought on production when originally anticipated in early March. Due to land surface issues, the well did not come on production until March 22, 2009. The well is currently producing at an average restricted rate of 5.0 mmcf/d. The well's productive capacity is greater than current production but the production is currently being restricted to approximately 5.0 mmcf/d due to pipeline capacity. As a result of this well, Cinch's current production has increased to approximately 2,800 BOE/d. Cinch has been successful in diversifying its production base whereby 60% of the current production comes from the Dawson area in British Columbia.

Commodity prices in the first quarter of 2009 continued their downward trend from the fourth quarter of 2008, from $42.06 per BOE to $30.57 per BOE. This decrease is due primarily to a drop in natural gas prices from $6.91 per mcf to $4.94 per mcf. Natural gas liquids also decreased from $48.35 per barrel to $40.02 per barrel. The current market uncertainties make it difficult to predict what commodity prices will be in the near future. Most recently we have witnessed a strengthening in the oil and natural gas liquids pricing, however, with natural gas storage capacity exiting the winter at levels higher than the previous five year average and the United States economy still being fairly weak, natural gas prices continue to remain weak. The Company does not have any hedges in place and maintains its liquidity through rigorous control of its capital expenditures.

Operating costs in the first quarter of 2009 were $4.80 per BOE as compared to $5.32 per BOE in the fourth quarter of 2008, primarily due to an increase in the production coming from the Dawson area, which has lower operating costs. Operating expenses per BOE are expected to average approximately $5.50 per BOE for 2009, which is lower than those experienced in 2008.

OPERATIONS

During the first quarter of 2009, Cinch participated in completing two vertical Montney wells, both of which had been previously cased as potential gas wells for deeper horizons. In addition, the Company tied-in the Dawson 6-6 Wabamun well, which came on production at the end of March.

The Dawson 11-26 well (65% working interest) was drilled and cased to the PreCambrian zone at 3,841 metres. This well was initially completed in the Wabamun with marginal results and was subsequently vertically completed in the shallower Montney zone. This completion earned Cinch a 32.5% working interest in the section. The Montney zone was flow tested over a 3.5 day period at a stable rate of approximately 2 mmcf/d (gross).

The Dawson 10-15 well (26% working interest) was cased to the Kiskatinaw formation. The Kiskatinaw completion was unsuccessful and the well was subsequently vertically completed in the Montney zone. The natural gas rate after a 5 day flow period was approximately 600 mcf/d (gross).

Cinch continues to complete vertical wells to de-risk the Montney horizon in its core Dawson area, which is located between the Storm Parkland pool to the northwest and the Arc Dawson pool to the southeast of the Company's land holdings. Currently, Cinch has an interest in 61 sections in the Dawson area including an average working interest of approximately 33% in 26 sections, where Montney mineral rights are held. To date, Cinch and its partners have completed 4 vertical Montney tests between the Parkland and Dawson Montney pools. Cinch is currently reviewing alternatives to bringing its Montney gas on production.

FINANCIAL

The Company has completed its annual line of credit review with its lender. The Company's line of credit has been increased from $40 million to $43 million. Current net debt is estimated at $36 million, which is projected to remain fairly constant through 2009 with the Company projecting capital expenditures to match 2009 estimated cash flows. Cinch's 2009 capital budget remains at $15 million. The capital budget is being closely monitored and may be adjusted accordingly with any further movements in commodity prices.

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, budgeted capital expenditures and the method of funding thereof and the nature of the expenditures, expected production increases and the timing thereof, expected decline rates of new wells, expected decrease in cash flows for 2009, timing of phases of IFRS conversion project, timing of drilling, completion and tie-in of wells, changes to the Alberta royalty regime and the possible effect thereof on the Company and its allocation of capital, expected royalty rates, operating costs 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. Consequently, the Company's actual results may differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements or information is 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 in which the Company has an interest 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 volumes 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 6, 2009

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, 2009 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, 2008. 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's average production for the first quarter of 2009 was 2,438 BOE/d, a marginal decrease from the 2008 fourth quarter average production of 2,501 BOE/d, attributable to natural declines. The Company's current production of approximately 2,800 BOE/d is a result of the Dawson 6-6 Wabamun well (85% working interest) brought on production on March 22, 2009. The well is currently producing at an average restricted rate of 5.0 mmcf/d (gross), less than the well's productive capacity due to pipeline constraints.

During the first quarter of 2009, the Company completed the Dawson 11-26 well (32.5% working interest) in the Montney zone. The well was flow tested over a 3.5 day period at a stable rate of approximately 2 mmcf/d (gross). The Dawson 10-15 well (26% working interest) was also vertically completed in the Montney zone and the natural gas rate after a 5 day flow period was approximately 600 mcf/d (gross). To date, the Company and its partners have been successful at reducing the risk of the Montney horizon on its acreage by completing 4 vertical Montney tests between the Parkland and Dawson Montney pools. The Company is currently reviewing alternatives to bringing its Montney gas on production.

For the three months ended March 31, 2009, the Company incurred $3.7 million of capital expenditures exiting the quarter with net debt of $36.0 million, $31.4 million of which is drawn on its $40 million demand bank credit facility. In April 2009, the Company completed its annual line of credit review with its lender. The Company's line of credit has been increased from $40 million to $43 million.



PRODUCTION

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Three Months Ended March 31,
2009 2008 Change
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Sales volumes %
Natural gas (Mcf/d) 13,280 7,901 68
Liquids (Bbl/d) 225 262 (14)
Equivalence (BOE/d) 2,438 1,579 54

Sales prices $ $ %
Natural gas ($/Mcf) 4.94 8.55 (42)
Liquids($/Bbl) 40.02 83.16 (52)
Equivalence ($/BOE) 30.57 56.63 (46)
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Sales volumes for the three months ended March 31, 2009 increased 54% compared to the same period of 2008 due to eight additional wells brought on production since March 2008. It is anticipated that the new wells will experience typical Deep Basin decline rates in their first year of production. The Company's production is primarily from deep, tight gas, which normally experiences high decline rates in the first year, with decline rates typically reducing and stabilizing thereafter and providing a strong production base. As the Company continues to build its production base, declines on new production will have a less significant impact.

Natural gas prices were 42% lower for the three months ended March 31, 2009 compared to the same period of 2008. Natural gas prices for the three months ended March 31, 2009 were 28% lower than the fourth quarter of 2008. The Company's natural gas production continues to be unhedged and is marketed in the Alberta spot market.

Natural gas liquids pricing was 52% lower for the three months ended March 31, 2009 compared to the same period of 2008 and 17% lower than the fourth quarter of 2008. Natural gas liquids represent approximately 12% of the Company's oil and gas revenues for the first quarter of 2009. 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,
2009 2008 Change
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$ $ %

Oil and gas sales, net of transportation 6,709 8,137 (18)
Per BOE 30.57 56.63 (46)
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Revenues for the three months ended March 31, 2009 were 18% lower than the same period of 2008 due to significantly lower commodity prices partially offset by increased production. Transportation expense decreased by approximately $0.22 per BOE in the first quarter of 2009 compared to the same period of 2008 primarily due to lower transportation fees in British Columbia, which did not have any producing wells during the first quarter of 2008.

Revenues for the three months ended March 31, 2009 have decreased 31% from the fourth quarter of 2008 as a result of lower commodity prices, as well as slightly lower production.



ROYALTIES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2009 2008 Change
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$ $ %
Royalties 1,610 2,078 (23)
Per BOE 7.34 14.46 (49)
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Royalty expense decreased in the three months ended March 31, 2009 compared to the same period of 2008 primarily due to lower revenues, as well as some additional royalty credits received from drilling incentive programs.

Royalty expense for the first quarter of 2009 decreased over the fourth quarter of 2008 consistent with the lower revenues generated. The royalty rate (royalties as a percentage of oil and gas sales) for the first quarter of 2009 was approximately 24.0%, which is 2.2% lower than the prior quarter rate of approximately 26.3%. The reduced rate can be attributed to royalty credits received relating to a drilling incentive program in British Columbia, as well as lower royalties paid in Alberta due to the low commodity prices experienced during the quarter. The royalty rate is comprised of both crown royalties and gross overriding royalties.

The Company anticipates that its royalty rate for 2009 will be slightly higher than the rate experienced in the first quarter of 2009 due to higher anticipated commodity prices in the latter part of 2009. Anticipated royalty rates can change however, depending upon commodity prices, actual success achieved and the zone in which productive success is achieved.

On March 3, 2009, the Government of Alberta announced a three-point incentive program to stimulate new and continued economic activity in Alberta, which is further discussed in the Business Risks and Risk Management section. The Company is currently reviewing the proposed changes and will continue to monitor any further amendments and update its plans as required.



OPERATING EXPENSES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2009 2008 Change
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$ $ %
Operating 1,053 851 24
Per BOE 4.80 5.92 (19)
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Total operating expenses for the three months ended March 31, 2009 were 24% higher than the same period of 2008. Operating expenses for the first quarter of 2009 compared to the same period of 2008 reflect higher variable costs relating to increased production including higher gas processing fees. The increase in operating expenses was partially offset by a gas processing credit received from the Alberta Government as part of some incentives being offered under the new royalty framework.

Operating expenses per BOE for the first quarter of 2009 decreased 19% compared to the same period of 2008 mostly due to increased production. Operating expenses per BOE decreased 10% from the fourth quarter of 2008 mostly attributable to a gas processing credit received in 2009.

Operating expenses in 2009 are not expected to exceed $5.50 per BOE 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,
2009 2008 Change
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$ $ %
General and administrative 988 988 0
Per BOE 4.50 6.87 (34)
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Total general and administrative expenses for the three months ended March 31, 2009 were consistent with the same period of 2008. Lower public company related expenses were offset by higher salaries and wages, and contractors costs. The increased contractor costs were a direct result of the initial work performed on the implementation of international financial reporting standards ('IFRS'), as discussed in the recent accounting pronouncements section below.

As at March 31, 2009, the Company has 5,366,500 options outstanding, amounting to approximately 9.6% of the 55,631,798 outstanding common shares. The Company does not capitalize any indirect general and administrative expenses.

General and administrative expenses per BOE were $2.37/BOE or 34% lower in the first quarter of 2009 compared to the same period of 2008. The decrease can be attributed to higher production volumes in 2009.

General and administrative expenses for 2009 are not expected to exceed $4.75 per BOE for the remainder of the year.



INTEREST EXPENSE

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2009 2008 Change
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$ $ %
Interest expense 236 301 (22)
Per BOE 1.07 2.10 (49)
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Interest expense decreased in the three months ended March 31, 2009 compared to the same period of 2008 due to lower interest rates partially offset by higher draws on the Company's bank credit facility in 2009. In 2009, the Company exited the first quarter with an outstanding credit facility balance of $31.4 million compared to $22.8 million at March 31, 2008. Subsequent to March 31, 2009, the Company increased its revolving demand bank credit facility from $40 million to $43 million. The facility bears interest at the lender's prime rate plus 1.70%. The increase in the credit facility will provide increased flexibility for the Company.



ACCRETION OF ASSET RETIREMENT OBLIGATIONS EXPENSE

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2009 2008 Change
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$ $ %
Accretion expense 55 47 17
Per BOE 0.25 0.33 (24)
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Accretion expense increased in the three months ended March 31, 2009 compared to the same period of 2008 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,
2009 2008 Change
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$ $ %
Depletion and depreciation 5,470 3,817 43
Per BOE 24.93 26.56 (6)
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Total depletion and depreciation expense for the three months ended March 31, 2009 increased compared to the same period of 2008 due to increased production volumes, as well as a larger capital base being depleted, partially offset by reserve additions. Depletion and depreciation expense per BOE for the three months ended March 31, 2009 decreased compared to the same period of 2008 due to positive drilling results resulting in reserve additions.



TAXES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2009 2008 Change
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$ $ %
Current - - -
Future income taxes (recovery) (670) 67 (1,100)
Per BOE (3.05) 0.47 (749)
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A future income tax recovery was recorded in the first quarter of 2009 commensurate with the net loss experienced in the quarter.



Tax pools at March 31:

Dollars in thousands
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2009 2008
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COGPE 15,649 13,678
CDE 23,875 27,524
CEE 30,690 21,741
UCC 18,644 18,513
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88,858 81,456
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The Company's tax pools have increased since March 31, 2008 as a result of capital expenditures which were higher than the tax pools needed to eliminate taxable income.



NET INCOME (LOSS) AND FUNDS FROM OPERATIONS

In thousands, except share and per share figures
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Three Months Ended March 31,
2009 2008 Change
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$ $ %
Net income (loss) (2,014) 17 (11,947)
per basic share (0.04) 0.00 (100)
per diluted share (0.04) 0.00 (100)
Funds from operations 2,960 4,130 (28)
per basic share 0.05 0.07 (29)
per diluted share 0.05 0.07 (29)

Weighted average shares outstanding 55,632 55,625 0
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For the three months ended March 31, 2009, the Company incurred a net loss, primarily attributable to lower commodity prices.

The Company's funds from operations for the three months ended March 31, 2009, decreased by 28% over the same period of 2008. Funds from operations in 2009 were significantly impacted by lower commodity prices partially offset by higher production.



LIQUIDITY AND CAPITAL RESOURCES

Dollars in thousands
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March 31, December 31,
2009 2008 Change
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$ $ %
Working capital deficiency,
excluding credit facility (4,661) (6,950) (33)
Credit facility (31,360) (28,358) 11
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Net debt (36,021) (35,308) 2
Shareholders' equity (82,500) (84,394) (2)
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At March 31, 2009, the Company had net debt of $36.0 million, comprised of a working capital deficiency of $4.6 million and an amount outstanding on its credit facility of $31.4 million. The $700 thousand increase in net debt from December 31, 2008 can be attributed to capital expenditures of $3.7 million partially offset by funds from operations for the three months ended March 31, 2009 of $3.0 million.

Management currently intends to fund the remainder of its 2009 capital program from cash flows generated and will adjust the program depending on commodity prices for the remainder of the year. In response to the deteriorating economic environment, along with unstable commodity prices, management feels it is prudent to project a conservative capital program and continue to monitor the balance sheet until the economic climate shows signs of improvement.

In April 2009, the Company completed its annual line of credit review with its lender. The Company's line of credit was increased from $40 million to $43 million.



CAPITAL EXPENDITURES

Additions to property, plant and equipment

Dollars in thousands
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Three Months Ended March 31,
2009 2008
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Land and rentals 357 491
Seismic (203) 609
Drilling, completing and equipping 2,011 6,182
Pipelines and facilities 1,441 1,219
Other assets 67 31
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Total 3,673 8,532
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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.

Capital expenditures for the three months ended March 31, 2009 include approximately $349 thousand relating to land acquisitions in the Dawson area. The balance of the capital expenditures was incurred on completion and tie-in operations primarily in the Dawson area.

The Company's 2009 capital program is budgeted at approximately $15 million (subject to adjustments based on cash flows generated) based on estimated average commodity prices of $5.00/mcf for natural gas and $50/bbl for natural gas liquids with the majority of the capital expenditures projected for the Dawson area located in British Columbia.

BUSINESS RISKS AND RISK MANAGEMENT

General

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.

Commodity price fluctuations 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. To date, the Company has not implemented any hedging instruments.

The Company has selected the appropriate personnel to monitor operations and has automated field information where possible, so that operational issues can be assessed and dealt with on a timely basis. The Company, however, is not the operator in all cases and therefore not all operational issues are within its 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.

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 affect 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 can have an impact on the Company's activity levels and potentially delay operations.

The Government of Alberta implemented its new royalty framework effective January 1, 2009. The Company will continue to monitor the impact of the new royalty framework on its operations and reassess operational plans as necessary. Currently, 40% of Cinch's production is in Alberta. Given the royalty changes, the majority of Cinch's 2009 capital budget is projected for the Dawson area located in British Columbia.

On March 3, 2009, the Government of Alberta announced a three-point incentive program to stimulate new and continued economic activity in Alberta which included a drilling royalty credit for new conventional oil and natural gas wells and a new well royalty incentive program. Under the drilling royalty credit program a $200 per meter royalty credit will be available on new conventional oil and natural gas wells drilled between April 1, 2009 and March 31, 2010, subject to certain maximum amounts. The maximum credits available will be determined by the Company's production level in 2008 and its drilling activity between April 1, 2009 and March 31, 2010. Based on Cinch's 2008 production, it will be entitled to a maximum credit of 50% of royalties payable in the period April 1, 2009 and March 31, 2010. The new well incentive program will apply to wells beginning production of conventional oil and natural gas between April 1, 2009 and March 31, 2010 and provides for a maximum 5% royalty rate for the first 12 months of production, up to a maximum of 50,000 barrels of oil or 500 Mmcf of natural gas. At this time, the Company has not yet determined whether it will reallocate some of its 2009 capital spending back into Alberta based on this new incentive program. The Company will continue to monitor any changes and will update its plans as required.

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.

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.

Global Financial Crisis

Recent market events and conditions, including disruptions in the international credit markets and other financial systems and the deterioration of global economic conditions, have caused significant volatility to commodity prices. These conditions became evident in the latter part of 2008 and are continuing in 2009, causing a loss of confidence in the broader U.S. and global credit and financial markets. This resulted in the collapse of and government intervention in, major banks, financial institutions and insurers and creating a climate of greater volatility, less liquidity, widening of credit spreads, lack of price transparency, increased credit losses and tighter credit conditions. Notwithstanding various actions by governments, concerns about the general condition of the capital markets, financial instruments, banks, investment banks, insurers and other financial institutions caused the broader credit markets to further deteriorate and stock markets to decline substantially. These factors have negatively impacted company valuations and will impact the performance of the global economy going forward.

Petroleum prices are expected to remain volatile for the near future as a result of market uncertainties over the supply and demand of these commodities due to the current state of the world economies. The reduced commodity prices directly impact the Company's cash flows and forecasted spending for 2009. In April 2009, Cinch secured an increased revolving demand bank credit facility of $43 million (previously $40 million) which will enhance the Company's ability to manage through these uncertain times.

Substantial Capital Requirements

The Company anticipates making substantial capital expenditures for the acquisition, exploration, development and production of oil and natural gas reserves in the future. As the Company's revenues may decline as a result of decreased commodity pricing, it may be required to reduce capital expenditures. In addition, uncertain levels of near term industry activity coupled with the present global credit crisis exposes the Company to additional risk. There can be no assurance that debt or equity financing, or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to the Company. The inability of the Company to access sufficient capital for its operations could have a material adverse effect on the Company's business, financial condition, results of operations and prospects.

Third Party Credit Risk

The Company may be exposed to third party credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its petroleum and natural gas production and other parties. The financial capability of the Company's partners can pose increased risks to the Company, particularly during periods when access to capital is limited and prices are depressed. The Company mitigates the risk of collection by attempting to obtain its partners' share of capital expenditures in advance of a project and by monitoring receivables regularly. The Company also attempts to mitigate risks by cultivating multiple business relationships and obtaining partners when needed and where possible.

In the event that joint venture partners fail to meet their contractual obligations to the Company, such failures may have a material adverse effect on the Company's business, financial condition, results of operations and prospects. In addition, poor credit conditions in the industry and of joint venture partners may impact a joint venture partner's willingness to participate in the Company's ongoing capital program, potentially delaying the program and the results of such program until the Company finds a suitable alternative partner.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company's Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation.

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 to provide reasonable assurance regarding the reliability of the Company's financial reporting and preparation of financial statements for external purposes in accordance with Canadian GAAP.

The Company is required to disclose any change in the Company's internal controls over financial reporting that occurred during the period beginning on January 1, 2009 and ending on March 31, 2009 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 such period that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

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

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
less than greater than
Total 1 year 1-3 years 4-5 years 5 years
----------------------------------------------------------------------------
Operating lease 138 138 - - -
----------------------------------------------------------------------------
138 138 - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2009, the Company adopted the recommendations of the Emerging Issues Committee of the CICA, Abstract 173, "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities". The adoption of abstract 173 did not impact the Company's financial position. For more information on these policies, see note 2 of the Company's financial statements for the three months ended March 31, 2009.

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 enterprises, including 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 that must be addressed. The impact of these new standards on our financial statements is not reasonably determinable or estimable at this time.

The Company commenced its IFRS conversion project in 2008. This project consists of four phases: diagnostic; design and planning; solution development; and integration. The Company had completed the diagnostic phase, which involved a high-level review of the major differences between current Canadian GAAP and IFRS. The Company had determined that the areas of accounting differences with the highest potential impact to the Company are accounting for the exploration and evaluation of oil and gas resources, as well as accounting for property, plant and equipment, asset impairment testing, and income taxes.

During the first quarter of 2009, the Company continued the design and planning phase of the project, which involves documenting the high impact areas identified and evaluating the different accounting policy options available under IFRS. During this phase, the Company will also assess the impact that a conversion to IFRS will have on the policies and procedures, information technology and accounting systems, as well as internal controls. The Company anticipates completing this phase and moving to the solution development phase later this year.

The Company will continue to monitor the development of guidance on how to apply IFRS to oil and gas exploration and development activities, and the IFRS adoption efforts of our peers and will update our plans as necessary.

In December 2008, the CICA issued Handbook Section 1582 "Business Combinations," which will replace CICA Handbook Section 1581 of the same name. Under this guidance, equity consideration of the purchase price used in a business combination is based on the fair value of shares exchanged at their market price at the date of the exchange. Currently, the equity consideration of the purchase price used is based on the market price of the shares for a reasonable period before and after the date the acquisition is agreed upon and announced. This new standard generally requires all acquisition costs to be expensed, which currently are capitalized as part of the purchase price. Contingent liabilities are to be recognized at fair value at the acquisition date and re-measured at fair value through earnings each period until settled. Currently, only contingent liabilities that are resolved and payable are included in the cost to acquire the business. In addition, negative goodwill is required to be recognized immediately in earnings, unlike the current requirement to eliminate it by deducting it from non-current assets in the purchase price allocation. CICA Handbook Section 1582 is effective January 1, 2011. This standard has no current impact on the Company's financial statements.

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

The Company has made great strides on building a stable production base, and continues to work on achieving growth. The Company's current production has increased to approximately 2,800 BOE/d as a result of the Dawson 6-6 Wabamun well (85% working interest) which came on production on March 22, 2009. The well is currently producing at an average restricted rate of 5.0 mmcf/d (gross). In the first quarter of 2009, Cinch completed both the Dawson 11-26 and Dawson 10-15 wells in the Montney zones. The Dawson 11-26 well (working interest 32.5%) was flow tested at a rate of approximately 2 mmcf/d (gross) and the Dawson 10-15 well (26% working interest) was flow tested at a rate of approximately 600 mcf/d (gross).

The Company is affected by commodity price variations not only because of the direct impact on cash flows but commodity price variations can also have a large impact when evaluating the economics of a particular project. At low natural gas prices, many projects are no longer considered to be economic as they do not generate an appropriate rate of return for the Company and its shareholders. The commodity price variations experienced in the past few years have also directly affected 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 half of 2008, commodity prices increased significantly, with natural gas prices at levels that had not been seen since late 2005, and natural gas liquids and oil prices reaching all time highs. In the latter half of 2008, global commodity prices declined resulting in a decrease in revenues, as well as a decrease of cash flows available to fund the Company's capital program. During the first quarter of 2009, the industry has seen a significant reduction in oil and gas activity with the largest factor being the continuous decline in commodity prices and ongoing uncertainties of when they will strengthen. The softening market has affected the Company's 2009 capital budget where cash flows available to fund capital projects will continue to decrease should commodity prices continue to weaken. The Company feels it is prudent to closely monitor the balance sheet until the economic climate, as well as commodity prices, show signs of improvements, which analysts currently do not foresee happening until late 2009 or even into 2010.



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

Q1 Q2 Q3 Q4 Annual
----------------------------------------------------------------------------
2009 $ $ $ $ $
----------------------------------------------------------------------------
Petroleum and natural gas
sales, net of transportation
and before royalties 6,709
Funds from operations 2,960
Per share - basic 0.05
- diluted 0.05
Net income (loss) (2,014)
Per share - basic (0.04)
- diluted (0.04)
Capital expenditures 3,673
Total assets 136,450
Working capital (net debt) (36,021)
----------------------------------------------------------------------------
Production (BOE/d) 2,438
----------------------------------------------------------------------------
2008 $ $ $ $ $
----------------------------------------------------------------------------
Petroleum and natural gas
sales, net of transportation
and before royalties 8,137 12,676 10,132 9,679 40,624
Funds from operations 4,130 7,320 5,635 4,371 21,456
Per share - basic 0.07 0.13 0.10 0.08 0.39
- diluted 0.07 0.13 0.10 0.08 0.38
Net income (loss) 17 1,810 774 (1,435) 1,167
Per share - basic 0.00 0.03 0.01 (0.03) 0.02
- diluted 0.00 0.03 0.01 (0.03) 0.02
Capital expenditures 8,532 4,584 12,212 6,685 32,014
Total assets 130,566 132,156 142,147 141,423 141,423
Working capital (net debt) (29,160) (26,424) (32,994) (35,308) (35,308)
----------------------------------------------------------------------------
Production (BOE/d) 1,579 1,991 2,049 2,501 2,031
----------------------------------------------------------------------------
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 (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) (17,264) (18,673) (24,987) (24,758) (24,758)
----------------------------------------------------------------------------
Production (BOE/d) 1,354 1,249 1,208 1,549 1,340
----------------------------------------------------------------------------
Note: numbers may not cross-add due to rounding


Financial Statements

Cinch Energy Corp.
March 31, 2009
(unaudited)



CINCH ENERGY CORP.

BALANCE SHEETS
(unaudited)

As at March 31, December 31,
2009 2008
$ $
----------------------------------------------------------------------------
ASSETS (note 4)

Current
Accounts receivable (note 10) 2,922,650 5,902,432
Prepaid expenses and deposits 1,004,871 1,088,325
----------------------------------------------------------------------------
3,927,521 6,990,757

Property, plant and equipment (note 3) 132,522,175 134,339,477
----------------------------------------------------------------------------

136,449,696 141,330,234
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued liabilities
(note 10) 8,588,501 13,940,693
Credit facility (note 4) 31,359,906 28,358,033
----------------------------------------------------------------------------
39,948,407 42,298,726

Asset retirement obligations (note 5) 3,872,372 3,838,337

Future income taxes (note 6) 10,128,700 10,798,800
----------------------------------------------------------------------------

53,949,479 56,935,863
----------------------------------------------------------------------------

Commitments (notes 8 and 9)

Shareholders' equity
Share capital (note 8) 96,560,099 96,560,099
Contributed surplus (note 8) 3,694,460 3,574,439
Deficit (17,754,342) (15,740,167)
----------------------------------------------------------------------------

82,500,217 84,394,371
----------------------------------------------------------------------------

136,449,696 141,330,234
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes



CINCH ENERGY CORP.

STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND DEFICIT
(unaudited)

For the three months ended March 31, 2009 2008
$ $
----------------------------------------------------------------------------

Revenue
Oil and gas sales 7,135,654 8,449,043
Transportation (426,883) (312,221)
Royalties (1,610,466) (2,077,835)
Other income 18,182 29,035
----------------------------------------------------------------------------

5,116,487 6,088,022
----------------------------------------------------------------------------

Expenses
Operating 1,052,594 851,328
General and administrative (note 8) 988,124 987,729
Interest on credit facility 235,618 293,596
Interest on capital lease - 7,486
Accretion of asset retirement obligations (note 5) 54,849 46,790
Depletion and depreciation 5,469,577 3,816,734
----------------------------------------------------------------------------

7,800,762 6,003,663
----------------------------------------------------------------------------

Income (Loss) before income taxes (2,684,275) 84,359
----------------------------------------------------------------------------

Taxes (note 6)
Future income tax expense (recovery) (670,100) 67,400
----------------------------------------------------------------------------

Net income (loss) and comprehensive income
(loss) for the period (2,014,175) 16,959

Deficit, beginning of period (15,740,167) (16,906,894)
----------------------------------------------------------------------------

Deficit, end of period (17,754,342) (16,889,935)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) and comprehensive income
(loss) for the period per share (note 8)
Basic and diluted (0.04) 0.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes



CINCH ENERGY CORP.

STATEMENTS OF CASH FLOWS
(unaudited)

For the three months ended March 31, 2009 2008
$ $
----------------------------------------------------------------------------
Operating activities
Net income (loss) for the period (2,014,175) 16,959
Add non-cash items:
Depletion and depreciation 5,469,577 3,816,734
Accretion of asset retirement obligations 54,849 46,790
Non-cash compensation expense (note 8) 120,021 182,294
Future income tax expense (recovery) (670,100) 67,400
----------------------------------------------------------------------------

2,960,172 4,130,177
Net change in non-cash working capital (225,664) 93,871
----------------------------------------------------------------------------
Cash provided by operating activities 2,734,508 4,224,048
----------------------------------------------------------------------------

Investing activities
Additions to property, plant and equipment (3,673,089) (8,532,166)
Net change in non-cash working capital (2,063,292) 2,161,917
----------------------------------------------------------------------------
Cash used in investing activities (5,736,381) (6,370,249)
----------------------------------------------------------------------------

Financing activities
Increase in credit facility 3,001,873 2,217,229
Payments on capital lease - (71,028)
----------------------------------------------------------------------------
Cash provided by financing activities 3,001,873 2,146,201
----------------------------------------------------------------------------

Change in cash - -

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

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

Supplemental information:
Cash taxes paid - -
Cash interest paid 235,618 296,848
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes



CINCH ENERGY CORP.

NOTES TO FINANCIAL STATEMENTS

March 31, 2009 and 2008
(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 ("GAAP"), following the same accounting policies and methods of computation as the financial statements of the Company for the year ended December 31, 2008, 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, 2008.

2. CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2009, the Company adopted the recommendations of the Emerging Issues Committee ("EIC") of the Canadian Institute of Chartered Accountants ("CICA"), Abstract 173, "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities".

Credit risk and fair value of financial assets and financial liabilities

EIC Abstract 173, "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities" establishes standards concerning the measurement of financial assets and financial liabilities. There has been diversity in practice as to whether an entity's own credit risk and the credit risk of the counterparty are taken into account in determining the fair value of financial instruments. The Committee reached a consensus that these risks should be taken into account in the measurement of financial assets and financial liabilities. The adoption of Abstract 173 did not impact the Company's financial position.

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 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 that must be addressed.

The Company is assessing the effects of the adoption of IFRS by comparing differences between Canadian GAAP and IFRS. It has determined that the areas of highest potential impact will be the accounting for exploration and evaluation of oil and gas resources, accounting for property, plant, and equipment, as well as asset impairment testing and income taxes. The conversion to IFRS could also result in other impacts, some of which may be significant in nature. At this time, the impact of these changes to the Company's financial position and results of operations cannot be reasonably determined or estimated for any of the IFRS conversion impacts identified. The Company will continue to monitor any changes in the adoption of IFRS, as well as continue to assess the impact of these new standards on its financial statements.

In December 2008, the CICA issued Handbook Section 1582 "Business Combinations," which will replace CICA Handbook Section 1581 of the same name. Under this guidance, the purchase price used in a business combination is based on the fair value of shares exchanged at their market price at the date of the exchange. Currently, the purchase price used is based on the market price of the shares for a reasonable period before and after the date of the acquisition is agreed upon and announced. This new standard generally requires all acquisition costs to be expensed, which currently are capitalized as part of the purchase price. Contingent liabilities are to be recognized at fair value at the acquisition date and re-measured at fair value through earnings each period until settled. Currently, only contingent liabilities that are resolved and payable are included in the cost to acquire the business. In addition, negative goodwill is required to be recognized immediately in earnings, unlike the current requirement to eliminate it by deducting it from non-current assets in the purchase price allocation. CICA Handbook Section 1582 is effective January 1, 2011.



3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment

March 31, 2009
----------------------------------------------------------------------------
Accumulated
depletion and Net
Cost depreciation book value
$ $ $
----------------------------------------------------------------------------

Petroleum and natural gas
properties 199,361,530 (66,839,728) 132,521,802
Office furniture and equipment 269,386 (269,013) 373
----------------------------------------------------------------------------

199,630,916 (67,108,741) 132,522,175
----------------------------------------------------------------------------
----------------------------------------------------------------------------


December 31, 2008
----------------------------------------------------------------------------
Accumulated
depletion and Net
Cost depreciation book value
$ $ $
----------------------------------------------------------------------------
Petroleum and natural gas
properties 195,709,255 (61,376,728) 134,332,527
Office furniture and equipment 269,387 (262,437) 6,950
----------------------------------------------------------------------------

195,978,642 (61,639,165) 134,339,477
----------------------------------------------------------------------------
----------------------------------------------------------------------------


For the three month period ended March 31, 2009, and for the year ended December 31, 2008, no indirect general and administrative expenditures were capitalized.

As at March 31, 2009, $9,807,115 of costs related to undeveloped lands were excluded from costs subject to depletion (December 31, 2008 - $10,597,987). For the three months ended March 31, 2009, the costs subject to depletion included future development costs of $4,190,500 (December 31, 2008 - $5,575,000).

4. CREDIT FACILITY

At March 31, 2009, the Company had a revolving, demand bank credit facility through ATB Financial of $40,000,000 (December 31, 2008 - $40,000,000). The facility bears interest at the lender's prime rate plus one quarter to one-half percent depending on the Company's net debt to funds from operations ratio. Net debt is defined as the sum of working capital (deficiency) and the outstanding credit facility balance. Funds from operations represents 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 effective interest rate at March 31, 2009 was 3.2% (March 31, 2008 - 5.5%). At March 31, 2009, there was $31,359,906 drawn on the credit facility (December 31, 2008 - $28,358,033). 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. Subsequent to March 31, 2009, the Company increased its revolving, demand bank credit facility to $43,000,000 from $40,000,000. The renewed facility bears interest at the lender's prime rate plus 1.70%.

5. 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, 2009 is approximately $6,352,000 (December 31, 2008 - $6,352,000) with a weighted average abandonment date of 16 years (2008 - 17 years). The Company used a credit adjusted, risk-free rate ranging from 5% to 10% and an inflation rate of 2% to arrive at the recorded liability of $3,872,372 at March 31, 2009 (December 31, 2008 - $3,838,337). In the first quarter of 2009, 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, 2008.



The Company's asset retirement obligations changed as follows:

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

Asset retirement obligations, as at December 31, 2008 3,838,337
Adjustment to abandonment date (20,814)
Accretion expense 54,849
----------------------------------------------------------------------------

Asset retirement obligations, as at March 31, 2009 3,872,372
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. 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, 2009 March 31, 2008
----------------------------------------------------------------------------
Statutory income tax rate 29.11% 29.50%
$ $
Anticipated income tax expense (recovery) (781,392) 24,886
Increase/(decrease) resulting from:
Stock based compensation expense 34,938 53,777
Other 76,354 (11,263)
----------------------------------------------------------------------------

Future income tax expense (recovery) (670,100) 67,400
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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, 2009 December 31, 2008
$ $
----------------------------------------------------------------------------
Net book value of capital assets in
excess of tax pools (11,384,064) (12,070,395)
Share issue costs 154,405 179,629
Asset retirement obligations 1,016,885 1,007,947
Other 84,074 84,019
----------------------------------------------------------------------------

Future income tax liability (10,128,700) (10,798,800)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. 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 credit facility 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. Net debt is the sum of the working capital (deficiency) and the outstanding credit facility balance. Funds from operations represents 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. 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, 2009 is 3.04 based on annualized cash flows (1.65 at December 31, 2008). The net debt to funds from operations ratio was significantly impacted by the reduced cash flows generated in the first quarter of 2009. The reduced cash flows are a direct result of the current economic downturn and weakened commodity prices experienced during the quarter.

The net debt to funds from operations ratio may increase or decrease at certain times because of significant events such as acquisitions or dispositions, as well as large fluctuations in commodity prices. To facilitate the management of this ratio, the Company prepares annual budgets and monthly forecasts, which are updated depending on various factors such as general market conditions and successful capital deployment. The annual budget is approved by the Board of Directors.

The Company has some bank reporting requirements with respect to its credit facility that the Company has complied with for the three months ended March 31, 2009. 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.

Other than the restrictions imposed for the bank credit facility, 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.



8. SHARE CAPITAL

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

----------------------------------------------------------------------------
Issued Number $
----------------------------------------------------------------------------
Common shares
Balance, as at December 31, 2008 55,631,798 96,560,099
----------------------------------------------------------------------------
Share capital, as at March 31, 2009 55,631,798 96,560,099
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed surplus
Balance, as at December 31, 2008 3,574,439
Non cash compensation expense (i) 120,021
----------------------------------------------------------------------------
Contributed surplus, as at March 31, 2009 3,694,460
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contributed Surplus

(i) 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, 2009 of 55,631,798 (March 31, 2008 - 55,625,132). As at March 31, 2009, 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,
2009 2008
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
$ $
Stock options outstanding,
beginning of period 5,509,833 1.51 5,365,834 1.69
Granted - - 60,000 0.98
Forfeited (143,333) 1.97 (526,001) 1.88
----------------------------------------------------------------------------

Stock options outstanding, end of
period 5,366,500 1.49 4,899,833 1.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

March 31, 2009
----------------------------------------------------------------------------
Exercisable Options
---------------------
Weighted
Average
Remaining Number of
Number of Life Exercisable Weighted
Exercise Price Options (years) Options Average Price
----------------------------------------------------------------------------
$ $
0.70 - 1.00 2,309,500 3.78 790,664 0.98
1.01 - 1.50 760,000 2.51 514,997 1.24
1.51 - 2.00 787,000 0.95 720,334 1.81
2.01 - 2.50 890,000 1.81 1,006,666 2.23
2.51 - 3.00 495,000 1.09 495,000 2.54
3.01 - 3.50 125,000 1.42 125,000 3.30
----------------------------------------------------------------------------
1.49 5,366,500 2.56 3,652,661 1.81
----------------------------------------------------------------------------
----------------------------------------------------------------------------


No new options were granted to employees, directors, or consultants during the three month period ended March 31, 2009.

For the three month period ended March 31, 2009, a total of $120,021 (March 31, 2008 - $182,294) has been recognized as stock compensation expense in general and administrative expenses with an offsetting credit to contributed surplus.

9. 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.

10. FINANCIAL INSTRUMENTS

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, 2009:

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

Financial assets
Accounts receivable 2,922,650 2,922,650
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Financial liabilities
Accounts payable and accrued
liabilities 8,588,501 8,588,501
Credit facility 31,359,906 31,359,906
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Carrying value of financial instruments as at December 31, 2008:

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Other
financial Total carrying
Receivables liabilities value
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$ $ $
Financial assets
Accounts receivable 5,902,432 5,902,432
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Financial liabilities
Accounts payable and accrued
liabilities 13,940,693 13,940,693
Credit facility 28,358,033 28,358,033
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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. 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 and accrued liabilities, and credit facility. As at March 31, 2009, there was no significant difference between the carrying amounts of these financial instruments reported on the balance sheet and their estimated fair values given their short terms to maturity.

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 $3.7 million (March 31, 2008 - $2.2 million) based on annualized first quarter production. A similar decrease in commodity prices would have the opposite impact. As of March 31, 2009, the Company's natural gas and liquids production continues to be unhedged and is marketed in the Alberta spot market.

As at March 31, 2009, 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 which fluctuates based on prevailing market conditions. As at March 31, 2009, $31.4 million (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 $292 thousand (March 31, 2008 - $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 may utilize short-term (less than 90 days) guaranteed notes that bear interest at a lower rate.

Credit risk

Credit risk arises from credit exposure to joint venture partners and marketers included in accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The Company manages exposure to credit risk by adopting credit risk guidelines approved by senior management that limit transactions according to counterparty creditworthiness. The Company routinely assesses the financial strength of its joint venture partners and customers, in accordance with the credit risk guidelines.

The objective of managing the third party credit risk is to minimize 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 its partners' share of capital expenditures in advance of a project and by monitoring accounts receivables on a semi-monthly basis. As at March 31, 2009, the Company held capital advances of $685 thousand (March 31, 2008 - $996 thousand). As at March 31, 2009, no receivable balance has been deemed uncollectible or written off for the period.

As at March 31, 2009, 87% of the Company's accounts receivable is due from 4 customers, compared to 91% from 5 customers at December 31, 2008. 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, 2009, the Company has drawn $31.4 million from its $40.0 million credit facility. Subsequent to March 31, 2009, the Company increased its revolving, demand bank credit facility to $43.0 million from $40.0 million.

The Company's operating cash requirements, including amounts projected to complete its existing capital expenditure program, are continuously monitored and adjusted depending on cash flows generated. There are, however, inherent liquidity risks, including the possibility that additional financing may not be available to the Company, or that actual capital expenditures may exceed those planned. In an effort to mitigate these risks, the Company intends to closely monitor the balance sheet and adjust its forecasted spending accordingly.

11. SUBSEQUENT EVENT

Subsequent to March 31, 2009, the Company increased its revolving, demand bank credit facility to $43,000,000 from $40,000,000. The facility bears interest at the lender's prime rate plus 1.70%.

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