Cinch Energy Corp.
TSX : CNH

Cinch Energy Corp.

May 10, 2011 16:43 ET

Cinch Energy Corp. Releases Q1 2011 Results

CALGARY, ALBERTA--(Marketwire - May 10, 2011) -

Cinch Energy Corp. (TSX:CNH) ("Cinch" or "the Company") is pleased to announce its financial and operating results for the first quarter of 2011.

Q1 2011 Highlights

- Average production of 2,795 boe/d, prior to the tie-in of additional volumes in the Dawson area early in the second quarter.

- Completion of the Montney facilities and nine wells tied-in in the Dawson area. Cinch holds a 41.6% working interest in the gathering system, compression and interconnect pipelines and a 20.8% working interest in the refrigeration facility and sales pipeline.

- Three wells, the Kakwa 5-18-61-4 W6M (60% working interest) horizontal Dunvegan liquids rich gas well, the Kakwa 1-26-61-6 W6M (25% working interest) horizontal Falher liquids rich gas well and the Kakwa 12-34-61-6 W6M (20% working interest) vertical well were tied-in. All had been brought on stream by mid April 2011.

Activity Update

As previously announced, Cinch's current production volumes exceed 4,000 boe/d with the additional Montney gas that came on stream in mid April. As expected, early well performance indicates that the initial deliverability will exceed the current facility capacity. Initial discussions are underway to consider doubling the capacity from the area. This would involve additional compression, expansion of the refrigeration plant and the drilling of additional wells. Capital cost estimates and the forecast for the timing of bringing on additional volumes are being developed. Cinch currently has horizontal wells and reserves booked on six of the twenty six sections of land in which it holds rights to the Montney formation. To date, drilling activity has been focussed on the upper Montney zone. Recent activity including completions and flow tests on non-interest lands near Cinch's lands indicates potential in the middle and lower Montney zones which could double the potential in this area. Plans are also being developed to evaluate these resources on Cinch lands.

As a result of recent land sale activity, Cinch now has a 100% working interest in 70 sections of land on four oil plays in West Central and Northern Alberta. These plays continue to be developed with plans to evaluate a number of opportunities in the second half of 2011.

Cinch's credit facilities were reviewed in March 2011, with a credit facility of $50 million approved in April 2011. Net debt of $33 million at the end of the first quarter is expected to be reduced to approximately $20 million with the expected sale of the non-core assets. Availability under the credit facility is expected to be reduced to approximately $45 million after the assets sale.

Additional details about Cinch's 2011 plans and activities are shown in the corporate presentation on the Company's website at www.cinchenergy.com.

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, their impact and expected volatility, timing of expenditures, budgeted capital expenditures, the method of funding thereof and the nature of the expenditures, expected 2011 operating costs and general and administrative expenses, the effect of non-core asset sales on the Corporation's net debt and on availability under the Corporation's credit facility, and 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, the ability to access sufficient capital from internal and external sources, the Corporation's lender reducing or changing availability under the Corporation's credit facility 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 manner; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through development or 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.


HIGHLIGHTS
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                                                Three months ended March 31,
                                                               2011    2010
----------------------------------------------------------------------------
Gross revenues ($000's)                                       6,990   7,482

Sales volumes per day
Natural gas (Mcf/d)                                          15,484  12,660
Natural gas liquids (Bbl/d)                                     214     192
Equivalence at 6:1 (BOE/d)                                    2,795   2,302

Sales Price
Natural gas ($/Mcf)                                            3.81    5.48
Natural gas liquids ($/Bbl)                                   87.05   71.35
Equivalence at 6:1 ($/BOE)                                    27.79   36.11

                                                                  $       $
Funds from operations (000's) (1)                             2,910   2,960
 - per share, basic & diluted (1)                              0.03    0.04

Net loss (000's)                                             (1,139)   (595)
 - per share, basic & diluted                                 (0.01)  (0.01)

Capital expenditures ($000's)                                23,938  15,063

Basic weighted average shares                                
 outstanding (000's)                                         96,830  74,428

Working capital (net debt) (2) ($000's)
 - As at March 31, 2011                                     (33,318)
 - As at December 31, 2010                                  (12,485)

                                                 As at May 10, 2011
Common shares outstanding (000's)                            96,855
Options outstanding (000's)                                   6,780
 - average exercise price                                      1.14
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(1) Funds from operations and funds from operations per share 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) Working capital (net debt) represents the sum of the working capital
    (deficiency), less assets held for sale, plus the outstanding credit
    facility balance.  

MANAGEMENT'S DISCUSSION AND ANALYSIS

May 10, 2011

The following management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim condensed financial statements and related notes for the three month period ended March 31, 2011 and the audited financial statements and related management's discussion and analysis of Cinch Energy Corp.'s ("Cinch" or the "Company") for the year ended December 31, 2010, as disclosure which is unchanged from management's discussion and analysis may not be repeated herein. The unaudited interim condensed financial statements for the three months ended March 31, 2011 have been prepared in accordance with International Financial Reporting Standard 1 - First-time Adoption of International Financial Reporting Standards ("IFRS"), and with International Accounting Standard 34 - Interim Financial Reporting ("IAS 34"), as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its interim and annual financial statements in accordance with Canadian generally accepted accounting principles in effect prior to January 1, 2011 ("Canadian GAAP"). This commentary is based on information available as at, and is dated, May 10, 2011. Additional information relating to Cinch, including Cinch's Annual Information Form, is available on SEDAR at www.sedar.com.

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.

OPERATIONAL UPDATE

During the first quarter of 2011, Cinch focused its capital spending on facility and pipeline construction at Dawson, BC and tieing in production at Kakwa, AB.

At Dawson, facility and pipeline construction continued throughout the first quarter of 2011. Cinch's nine working interest Montney wells that were drilled in 2010 were tied-in, with initial production commencing in April 2011.

At Kakwa, Cinch completed the Kakwa 5-18 Dunvegan liquids-rich gas well (60% working interest) which was brought on stream in February 2011, contributing approximately 200 BOE per day (net) of production to the average production for the first quarter of 2011. The Kakwa 1-26 horizontal Falher gas well (25% working interest) was completed and tied-in by the end of March 2011 but did not come on production until mid April 2011 due to pipeline restrictions.

The increased capital activity in the first quarter of 2011 resulted in a significant increase in the Company's production from an average of 2,795 BOE per day for the first quarter of 2011 to over 4,000 BOE per day by mid April 2011.

ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

On January 1, 2011, Cinch adopted IFRS for financial reporting purposes, using a transition date of January 1, 2010. The unaudited interim condensed financial statements for the three months ended March 31, 2011, including required comparative information, have been prepared in accordance with IAS 34, as issued by the IASB. Except as noted in the Selected Annual and Quarterly Information section of this MD&A, 2010 comparative information has been prepared in accordance with IFRS. Reconciliations between Canadian GAAP and IFRS can be found in Note 17 of the unaudited interim condensed financial statements for the three months ended March 31, 2011.

The adoption of IFRS has not had an impact on the Company's operations, strategic decisions or cash flow. The most significant area of impact was the adoption of the IFRS accounting policies relating to property, plant and equipment, and income taxes. Further information on the impact of converting to IFRS is provided in the Critical Accounting Policies section of this MD&A and in Notes 4 and 17 of the Company's unaudited interim condensed financial statements for the three months ended March 31, 2011.


PRODUCTION

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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                                          %
Natural gas (Mcf/d)                                  15,484 12,660       22
Liquids (Bbl/d)                                         214    192       11
Equivalence (BOE/d)                                   2,795  2,302       21
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Production for the three months ended March 31, 2011 increased 21% compared to the same period of 2010 primarily due to new wells coming on production in the last three quarters of 2010 and during the first part of 2011. Natural gas production volumes in the first quarter of 2011 included new production of approximately 200 BOE per day (net) from the Kakwa 5-18 well, which came on production during February 2011. In addition, 2011 average production included approximately 227 BOE per day (net) from the Dawson 6-30 well, approximately 190 BOE per day (net) from the Dawson 1-22 well, approximately 218 BOE per day (net) from the Dawson 7-25 well, and approximately 190 BOE per day (net) from the Dawson 5-23 well, all of which came on production subsequent to March 31, 2010.

Average production during the first quarter of 2011 decreased 2% from the previous quarter due to two weeks of planned facility down time at Kakwa, as well as natural declines. The decrease in production was partially offset by new production from the Kakwa 5-18 well, which came on production in February 2011.


PRICES

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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                                          %
Natural gas ($/Mcf)                                    3.81   5.48      (30)
Liquids($/Bbl)                                        87.05  71.35       22
Equivalence ($/BOE)                                   27.79  36.11      (23)
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Realized natural gas prices were 30% lower in the first quarter of 2011 compared to the same quarter in 2010 and were 5% higher compared to the fourth quarter of 2010. The Company's natural gas production continues to be unhedged and is marketed in the Alberta and British Columbia spot markets.

Natural gas liquids pricing was 22% higher in the first quarter of 2011 compared to the same period of 2010 and 23% higher than the fourth quarter of 2010. This is consistent with a steady improvement in oil and natural gas liquids pricing during the first three months of 2011. Natural gas liquids represented approximately 8% of the Company's oil and gas production on a BOE basis for the first quarter of 2011. The Company has not hedged any of its liquids production.


GROSS REVENUES

Dollars in thousands, except per unit amounts
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                                                Three months ended March 31,
                                                       2011   2010   Change
----------------------------------------------------------------------------
                                                          $      $        %
Gross revenues                                        6,990  7,482       (7)
Per BOE                                               27.79  36.11      (23)
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Gross revenues (not including transportation costs) for the first quarter of 2011 were 7% lower than the same period of 2010 mainly due to lower realized natural gas prices, partially offset by increased production in 2011. Gross revenues for the three months ended March 31, 2011 increased 2% from the fourth quarter of 2010 due to an increase in realized natural gas prices and increased liquids prices during 2011.


ROYALTIES

Dollars in thousands, except per unit amounts
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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Royalties                                               722  1,359      (47)
Per BOE                                                2.87   6.56      (56)
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Royalties for the first quarter of 2011 were 47% lower compared to the same period of 2010 primarily due to royalty incentives received in the first quarter of 2011. Royalty expense in the first quarter of 2011 is also lower due to the sliding scale structure in Alberta, whereby lower natural gas prices result in lower royalties. The royalty rate (crown royalties and gross overriding royalties as a percentage of gross revenues) for the three months ended March 31, 2011 was 10%, compared to a royalty rate of 18% for the same period of 2010. The royalty rate for 2011 was lower primarily due to royalty holidays on most of the new production in the Dawson area that came on production throughout 2010. As well, new production from the Kakwa 5-18 well has also benefited from reduced royalties under the existing royalty incentive program. Further decreases in royalties during the first three months of 2011 resulted from net drilling credits purchased during the quarter.

Royalties for the first quarter of 2011 were approximately 37% lower than royalties recorded during the fourth quarter of 2010 due to some drilling credits that were purchased during the first quarter of 2011, recorded as a reduction to crown royalties. In addition, new production from the Kakwa 5-18 well, which came on production in February 2011, was subject to a 5% royalty rate on both natural gas and natural gas liquids production.


OPERATING EXPENSES

Dollars in thousands, except per unit amounts
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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Operating                                             1,579  1,122       41
Per BOE                                                6.28   5.42       16
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Total operating expenses during the first quarter of 2011 increased 41% compared to the same period of 2010 primarily due to increased gas processing fees as a result of the increase in production. In addition, there were also increases in wireline service costs, methanol and chemical costs, and compressor and equipment maintenance costs compared to the same period of the prior year. Operating expenses per BOE for the three months ended March 31, 2011 were higher than the prior year primarily due to these increased costs.

Total operating expenses for the first quarter of 2011 were 49% higher than the operating expenses reported during the fourth quarter of 2010 primarily due to higher gas processing fees related to the Montney wells, which came on late in 2010 and produced for a full quarter in 2011. There were also additional repair and maintenance costs, equipment rentals, property taxes and road lease maintenance costs incurred in the first quarter of 2011. On a per BOE basis, operating expenses during the first quarter of 2011 were 55% higher than operating expenses of $4.05 per BOE during the fourth quarter of 2010.

Operating expenses are not expected to exceed $5.50 per BOE in 2011. The anticipated lower operating costs per BOE when compared to the first quarter costs per BOE reflect increased production for the remainder of 2011. 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
----------------------------------------------------------------------------
                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
General and administrative                            1,628  1,781       (9)
Per BOE                                                6.47   8.60      (25)
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Total general and administrative ("G&A") expenses for the first quarter of 2011 were 9% lower than the same period of the previous year. Higher stock-based compensation costs in 2011 were more than offset by lower salaries and wages. During the first few months of 2010, the Company made some senior management changes and staff additions which resulted in higher salaries and wages due to severance payments. Total general and administrative expenses for the first quarter of 2011 were comparable to the fourth quarter of 2010.

G&A costs per BOE were $6.47 for the quarter ended March 31, 2011 compared to $8.60 in the comparable period of the previous year primarily due to higher production in 2011.

G&A expenses for 2011 are not expected to exceed $4.75 per BOE, due to higher budgeted production volumes expected in 2011. Anticipated costs per BOE can change, however, depending on the Company's actual production levels.


TRANSPORTATION

Dollars in thousands, except per unit amounts
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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Transportation                                          470    367       28
Per BOE                                                1.87   1.77        6
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Transportation expenses increased 28% for the three months ended March 31, 2011 compared to the same period of the prior year primarily due to higher production in the first quarter of 2011. Transportation expenses were approximately $0.10 per BOE higher during the three months ended March 31, 2011 compared to the same period in 2010 as a result of increased transportation costs on the new Montney production.


FINANCE COSTS

Dollars in thousands, except per unit amounts
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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Interest expense                                         62     85      (27)
Accretion expense                                        53     46       15
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Finance costs                                           115    131      (12)
Per BOE                                                0.46   0.63      (27)
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Finance costs, which are comprised of interest expense and accretion of decommissioning liabilities, were 12% lower during the first quarter of 2011 compared to the same period of 2010.

Interest expense was lower during the three months ended March 31, 2011 compared to the same period of 2010 primarily due to lower average debt balances during the first three months of 2011.

Accretion expense was 15% higher during the three months ended March 31, 2011 compared to the same period of 2010 as a result of an increase in the total decommissioning liabilities outstanding at March 31, 2011 when compared to the liabilities outstanding at March 31, 2010. The number of new wells added since March 31, 2010 has increased Cinch's decommissioning liabilities as at March 31, 2011.


EXPLORATION AND EVALUATION EXPENSES

Dollars in thousands, except per unit amounts
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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Exploration & evaluation expenses                        18    519      (97)
Per BOE                                                0.07   2.51      (97)
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During the first quarter of 2011, exploration and evaluation expenses were recorded relating to expired lands. In the first quarter of 2010, exploration and evaluation expenses included $506,000 of expired lands and $13,000 of geological and geophysical costs incurred in relation to the expired lands.


DEPLETION AND DEPRECIATION EXPENSE

Dollars in thousands, except per unit amounts
----------------------------------------------------------------------------
                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Depletion and depreciation                            3,851  2,960       30
Per BOE                                               15.31  14.29        7
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Total depletion and depreciation expense for the three months ended March 31, 2011 was 30% higher than the same period of 2010 due to an increase in the depletable asset base resulting from capital spending, as well as increased production in the first quarter of 2011. On a per BOE basis, depletion and depreciation expense for the three months ended March 31, 2011 increased 7% due to an increase in the depletable asset base partially offset by increased reserves.


TAXES

Dollars in thousands, except per unit amounts
----------------------------------------------------------------------------
                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Deferred income tax recovery                            250    146       71
Per BOE                                                0.99   0.70       41
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A deferred income tax recovery was recorded for the three months ended 
March 31, 2011 consistent with the net loss experienced during the period.

Tax pools at March 31:

Dollars in thousands
----------------------------------------------------------------------------
                                                          2011         2010
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COGPE                                                   19,715       19,542
CDE                                                     38,099       32,544
CEE                                                     51,169       48,713
UCC                                                     26,190       13,025
Non-capital loss carry-forward                           3,860        3,860
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                                                       139,033      117,684
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The Company's tax pools increased during the three months ended March 31, 2011 as a result of capital expenditures of $23.9 million during the quarter, which were higher than the tax pools needed to eliminate taxable income.


NET LOSS AND FUNDS FROM OPERATIONS

In thousands, except per share amounts
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                                                Three months ended March 31,
                                                       2011   2010   Change
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                                                          $      $        %
Net loss                                             (1,139)  (595)      91
 per basic share                                      (0.01) (0.01)       -
 per diluted share                                    (0.01) (0.01)       -
Funds from operations(1)                              2,910  2,960       (2)
 per basic share(1)                                    0.03   0.04      (25)
 per diluted share(1)                                  0.03   0.04      (25)
Weighted average
 shares outstanding                                  96,830 74,428       30
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(1) Funds from operations and funds from operations per share 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.

For the three months ended March 31, 2011, the Company incurred a net loss of $1.1 million, compared to a net loss of $0.6 million for the same period of the prior year. The increase in net loss year over year is primarily due to increased depletion and depreciation and higher operating costs, partially offset by lower royalties and lower G&A expenses. The net loss per basic and diluted share was comparable to the same period in the prior year due to the increase in the weighted average shares outstanding during the latter part of 2010.

The Company's funds from operations for the three months ended March 31, 2011 was comparable to the same period of 2010. Funds from operations per basic and diluted share for the three months ended March 31, 2011 decreased 25% when compared to the same period of 2010 as a result of the increase in the weighted average number of shares outstanding throughout 2010.

The increase in the weighted average number of shares outstanding from the first quarter of the previous year is attributable to the additional shares issued in conjunction with the financing completed in September 2010.


LIQUIDITY AND CAPITAL RESOURCES

Dollars in thousands
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                                              March 31, December 31, Change
                                                  2011         2010
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                                                     $            $       %
Working capital (deficiency), excluding
 credit facility and assets held for sale      (11,390)     (12,485)     (9)
Credit facility                                (21,928)           -    (100)
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Net debt                                       (33,318)     (12,485)    167
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At March 31, 2011, the Company had net debt of $33.3 million, comprised of a working capital deficiency, excluding assets held for sale, of $11.4 million, and $21.9 million outstanding on its available credit facilities of $50.0 million. The $20.8 million increase in net debt from December 31, 2010 is mainly attributed to capital expenditures of $23.9 million during the first quarter of 2011, partially offset by $2.9 million of funds from operations for the period.

In April 2011, Cinch completed its annual line of credit review with its lender at which time the Company's credit facilities were combined, resulting in one credit facility with $50.0 million available. The amount of available credit is unchanged; however, the associated bank charges and interest rates are more favorable under one facility when compared to the fees incurred on the two facilities that existed prior to March 31, 2011. Management continues to closely monitor the balance sheet to ensure it is in compliance with its debt covenants. The next review of the Company's current credit facility is scheduled for April, 2012.


Shareholders' equity:

In thousands
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                                              March 31, December 31, Change
                                                  2011         2010
----------------------------------------------------------------------------
                                                                          %
Shareholders' equity ($)                       126,367      126,934      (0)
Common shares outstanding                       96,855       96,630       0
Stock options outstanding                        7,090        8,150     (13)
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The number of common shares outstanding has increased slightly from December 31, 2010 due to the exercise of stock options during the first quarter of 2011. During the three months ended March 31, 2011, 225 thousand stock options were exercised, 635 thousand options expired, and 200 thousand options were forfeited.

As at March 31, 2011, the Company's outstanding stock options amounted to 7.3% of the outstanding common shares. As at May 10, 2011, there were 96,855,415 common shares and 6,780,168 stock options outstanding.


CAPITAL EXPENDITURES

Additions to property, plant and equipment and exploration and evaluation
assets

Dollars in thousands
----------------------------------------------------------------------------
                                                Three months ended March 31,
                                                             2011      2010
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                                                                $         $
Land and rentals                                              710     6,698
Seismic                                                        40        14
Drilling, completing and equipping                          9,128     8,044
Pipelines and facilities                                   14,060       299
Other assets                                                    -         8
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Total                                                      23,938    15,063
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Capital expenditures include additions to exploration and evaluation assets and property, plant and equipment.

Capital expenditures for the three months ended March 31, 2011 included approximately $0.7 million relating to land acquisitions in Alberta and British Columbia. Capital expenditures of $9.1 million were incurred on drilling, completion and tie-in operations primarily in the Dawson area of British Columbia, as well as an oil prospect in Alberta, and $14.1 million were incurred on pipelines and facilities primarily in British Columbia.

The Company's 2011 capital program is budgeted at approximately $49 million (subject to adjustments based on cash flows generated), and will be focused on liquids rich natural gas and oil opportunities that remain economic in the current commodity price environment.

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 a combination of hiring experienced and knowledgeable personnel and careful evaluation.

The wells the Company drills tend to be deep and are subject to higher drilling costs than those in more shallow areas. Furthermore, most wells require fracture treatment before they are capable of production, which also increases 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 by drilling deep so that the multi-zone potential of the area can be accessed and potentially developed. In addition, the Company monitors capital spending on an ongoing and regular basis in order to maintain liquidity.

Commodity price fluctuations pose a significant 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. Natural gas prices are expected to remain volatile for the near future as a result of market uncertainties over the supply and demand of this commodity due to various factors including the current state of the world economies. Reduced natural gas prices directly impact the Company's cash flow and forecasted spending. The financings completed in January 2010 and September 2010, as well as the increase in the credit facilities in August 2010 have enhanced the Company's ability and flexibility in dealing with the current depressed natural gas price environment. To date, the Company has not implemented any hedging instruments.

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 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 longer term by their nature.

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'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.

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.

Royalties

Cinch's production is generated from properties within the provinces of Alberta and British Columbia. As a result, a significant portion of Cinch's production is subject to Crown royalties, which are affected directly by the Alberta and British Columbia government royalty programs. Crown royalty rates are subject to change and a change may have a significant impact on Cinch's cash flow.

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, due to lower commodity pricing, 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 and interim 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 IFRS. The adoption of IFRS impacts Cinch's presentation of financial results and accompanying disclosures. The Company has evaluated the impact of the conversion to IFRS on its processes, controls and financial reporting systems and has made modifications to its control environment, as required.

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, 2011 and ending on March 31, 2011 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. As at March 31, 2011, the Company has the following commitments over the next five years:


Dollars in thousands
----------------------------------------------------------------------------
                                      Total 2011  2012 2013 2014 Thereafter
----------------------------------------------------------------------------
Transportation agreements (i)         3,292  808 1,092  974  265        153
Operating lease (ii)                    910  178   246  254  232          -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Transportation agreements

The Company has committed to firm-service contracts for the transportation of its natural gas. The amounts above are the minimum obligations that the Company is required to pay under the terms of the contracts.

(ii) Office lease

The Company entered into an operating lease for office premises beginning on December 1, 2009 and expiring on November 30, 2014, which requires minimum monthly payments of $19,704 for the first two years of the lease, $20,415 for the third year of the lease, and $21,126 for the last two years of the lease.

CRITICAL ACCOUNTING POLICIES

Adoption of IFRS

The Company has prepared its interim condensed financial statements for the three months ended March 31, 2011 in accordance with IAS 34 and IFRS 1 - First-time Adoption of IFRS. Previously, the Company prepared its financial statements in accordance with Canadian GAAP. The adoption of IFRS has not changed the Company's business activities or actual cash flow, however, it has resulted in adjustments to the Company's financial statements.

The areas that were most impacted by the transition to IFRS are accounting for exploration and evaluation assets, accounting for property, plant and equipment, asset impairment testing, and accounting for income taxes. Refer to Note 4 of the Company's unaudited interim condensed financial statements for the Company's detailed IFRS accounting policies.

In its 2010 annual MD&A, Cinch indicated that the depletion of petroleum and natural gas assets under IFRS would be based on proven reserves. After further consideration and analysis, management determined that the depletion calculation under IFRS will be based on proven and probable reserves.

In order to allow the users of the financial statements to better understand the impact of the change to IFRS, the Company's Canadian GAAP balance sheets at January 1, 2010, March 31, 2010 and December 31, 2010, and the Company's statements of operations and comprehensive loss for the three months ended March 31, 2010 and for the year ended December 31, 2010 have been reconciled to IFRS, with the resulting differences explained. These reconciliations are provided in Note 17 of the Company's interim financial statements.

Recent Accounting Pronouncements

All accounting standards effective for periods beginning on or after January 1, 2011 have been adopted as part of the transition to IFRS. As of January 1, 2013, the Company will be required to adopt IFRS 9 - Financial Instruments, which is the result of the first phase of the IASB's project to replace IAS 39 - Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

CRITICAL ACCOUNTING ESTIMATES

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

Reserves

The estimate of reserves is used in forecasting the recoverability and economic viability of the Company's petroleum and natural gas properties, and in the depletion and impairment calculations. 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 the Company's independent reserve evaluators and quarterly updates to those reserves, if any, are estimated internally. Future development costs are estimated using assumptions as to the number of wells required to produce the commercial reserves, the cost of such wells and associated production facilities and other capital costs.

Carrying value of petroleum and natural gas properties

Petroleum and natural gas properties are depleted using the unit-of-production method over proven and probable petroleum and natural gas reserves. The depletion rate calculated in the current period is not necessarily indicative of the future depletion rate due to the fact that the rate is calculated based on current production and estimated proven and probable petroleum and natural gas reserves. These factors could be significantly different in the future resulting in a different depletion rate.

Impairment indicators

The recoverable amounts of individual assets or groups of assets referred to as a cash-generating unit ("CGU") have been determined based on the higher of value-in-use calculations and fair values less costs to sell. These calculations require the use of estimates and assumptions. It is reasonably possible that the commodity price assumption may change, which may then impact the estimated life of the field and may require a material adjustment to the carrying value of the petroleum and natural gas properties. The Company monitors internal and external indicators of impairment relating to its tangible assets.

Revenue estimates

The Company estimates its petroleum and natural gas production, sales and related costs, based upon information received from field offices, marketing contracts, internal calculations, historical data and industry experience.

Cost estimates

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

Decommissioning costs

The liabilities recorded for decommissioning costs, 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. Cost estimates are based upon internal and third party calculations and historical experience. Future inflation rates are estimated using available economic data. The ultimate decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements, the emergence of new restoration techniques or experience at other production sites. The expected timing and amount of expenditures can also change, for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be significant adjustments to the provisions established which would affect future financial results.

Income taxes

The Company records a deferred tax liability 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. Accordingly, the actual income tax liability may differ significantly from the estimated and recorded amounts.

TREND ANALYSIS

The oil and gas exploration and production industry is cyclical in nature. The Company's financial position, results of operations and cash flows are significantly impacted by commodity price variations, particularly natural gas prices. Commodity price changes can also indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Decreases in commodity prices not only reduce revenues and cash flows available for exploration, they may also challenge the economics of potential capital projects by reducing the quantities of reserves that are commercially recoverable.

Natural gas prices have fluctuated greatly in the past few years directly impacting the Company's revenues and cash flow available to fund the Company's capital program. Global commodity prices declined and remained soft throughout most of 2009, until the fourth quarter, when commodity prices began to stabilize with the first signs of economic recovery. This stabilization continued into the first few months of 2010, but natural gas prices began to decrease again near the end of the first quarter of 2010. Natural gas prices continued to remain weak throughout the first few months of 2011, even though market prices for oil and natural gas liquids steadily increased during this time. Despite the challenges that the Company has faced in the past few years with depressed natural gas prices, the Company continues to work on achieving growth. The Company's average production has gone from 2,374 BOE per day in 2009 to 2,580 BOE per day in 2010 to 2,750 per day in the first quarter of 2011. The increase in production has helped to offset the impact of the weakened natural gas prices over the past few years.

The Company's capital program is dependent on cash flow generated by operations and access to capital markets. In 2010, Cinch completed two financings, generating $55.8 million (net) to the Company, which allowed Cinch to proceed with an active capital program for 2010, totaling $51.0 million of capital spending throughout the year. The Company's capital program for 2011 is currently set at $49.0 million, with $23.9 million spent in the first quarter of the year.


SELECTED ANNUAL AND QUARTERLY INFORMATION

(000's, except per share data, or as indicated)

                                     Q1       Q2       Q3       Q4   Annual
----------------------------------------------------------------------------
2011(1)                               $        $        $        $        $
----------------------------------------------------------------------------
Gross revenues                    6,990
Funds from operations             2,910
 Per share - basic                 0.03
           - diluted               0.03
Net loss                         (1,139)
 Per share - basic                (0.01)
           - diluted              (0.01)
Capital expenditures             23,938
Total assets                    180,027
Working capital (net debt)      (33,318)
----------------------------------------------------------------------------
Average production (BOE/d)        2,795
----------------------------------------------------------------------------
2010(2)                               $        $        $        $        $
----------------------------------------------------------------------------
Petroleum and natural gas sales, 
 net of transportation and 
 before royalties                 7,115    6,431    5,719    6,408   25,673 
Funds from operations             2,960    2,878    2,869    2,998   11,705 
 Per share - basic                 0.04     0.03     0.03     0.03     0.14 
           - diluted               0.04     0.03     0.03     0.03     0.14 
Net loss                         (1,306)  (1,865)  (2,123)  (1,416)  (6,710)
 Per share - basic                (0.02)   (0.02)   (0.02)   (0.01)   (0.08)
           - diluted              (0.02)   (0.02)   (0.02)   (0.01)   (0.08)
Capital expenditures             15,063    5,719   10,029   20,208   51,019 
Total assets                    138,020  138,708  152,481  159,210  159,210 
Working capital (net debt)       (6,503)  (8,941)   4,718  (12,485) (12,485)
----------------------------------------------------------------------------
Average production (BOE/d)        2,302    2,535    2,627    2,850    2,580 
----------------------------------------------------------------------------
2009(2)                               $        $        $        $        $ 
----------------------------------------------------------------------------
Petroleum and natural gas sales, 
 net of transportation and 
 before royalties                 6,709    5,214    4,403    5,815   22,141 
Funds from operations             2,960    2,569    1,854    2,096    9,479 
 Per share - basic                 0.05     0.05     0.03     0.04     0.17 
           - diluted               0.05     0.05     0.03     0.04     0.17 
Net loss                         (2,014)  (2,553)  (2,801)  (1,537)  (8,904)
 Per share - basic                (0.04)   (0.05)   (0.05)   (0.03)   (0.16)
           - diluted              (0.04)   (0.05)   (0.05)   (0.03)   (0.16)
Capital expenditures              3,673     (150)   2,301      518    6,342 
Total assets                    136,450  130,128  126,715  124,872  124,872 
Working capital (net debt)      (36,021) (33,302) (31,040) (29,444) (29,444)
----------------------------------------------------------------------------
Average production (BOE/d)        2,438    2,616    2,381    2,065    2,374
----------------------------------------------------------------------------

(1)  Results reported for 2011 are in accordance with IFRS.

(2)  Results reported for 2010 and 2009 are in accordance with Canadian 
     GAAP and are not to be compared to the results presented in accordance
     with IFRS.

Note: numbers may not cross-add due to rounding

Interim Condensed Financial Statements

Cinch Energy Corp.

March 31, 2011 and 2010

CINCH ENERGY CORP.

CONDENSED BALANCE SHEETS
(Unaudited)

As at                                    March 31,  December 31,  January 1,
                                             2011          2010        2010
----------------------------------------------------------------------------
                                                $             $           $
----------------------------------------------------------------------------
ASSETS (note 8)
Current
Cash (note 15)                                  -        42,704           -
Accounts receivable (note 15)           7,766,533     6,003,942   3,872,925
Prepaid expenses and deposits             813,763       911,143   1,236,359
----------------------------------------------------------------------------
                                        8,580,296     6,957,789   5,109,284
Assets held for sale (note 7)          12,779,098             -           -
----------------------------------------------------------------------------
                                       21,359,394     6,957,789   5,109,284
Exploration and evaluation (note 6)    24,557,147    23,618,928   7,453,385
Property, plant and equipment 
 (note 7)                             134,110,422   127,844,896 102,827,020
----------------------------------------------------------------------------
                                      180,026,963   158,421,613 115,389,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued 
 liabilities (note 15)                 19,969,990    19,443,198   8,034,501
Credit facility (notes 8, 15 and 16)   21,928,005             -  26,519,080
----------------------------------------------------------------------------
                                       41,897,995    19,443,198  34,553,581
Decommissioning liabilities (note 9)    5,934,714     5,967,753   4,595,781
Deferred income taxes (note 10)         5,827,339     6,077,139   5,734,394
----------------------------------------------------------------------------
                                       53,660,048    31,488,090  44,883,756
----------------------------------------------------------------------------
Commitments (note 13)
Shareholders' equity
Share capital (note 12)               160,754,493   160,481,706 103,926,835
Contributed surplus                     5,121,002     4,820,964   3,953,861
Deficit                               (39,508,580)  (38,369,147)(37,374,763)
----------------------------------------------------------------------------
                                      126,366,915   126,933,523  70,505,933
----------------------------------------------------------------------------
                                      180,026,963   158,421,613 115,389,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes

CINCH ENERGY CORP.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)                         

For the three months ended March 31,                       2011        2010
----------------------------------------------------------------------------
                                                              $           $
----------------------------------------------------------------------------
Revenues and other income
Gross revenues                                        6,990,325   7,481,945
Royalties                                              (722,113) (1,359,229)
----------------------------------------------------------------------------
Revenues, net of royalties                            6,268,212   6,122,716
Other income                                              2,346      16,215
----------------------------------------------------------------------------
                                                      6,270,558   6,138,931
----------------------------------------------------------------------------
Expenses
Operating                                             1,578,716   1,122,300
General and administrative                            1,627,653   1,780,576
Transportation                                          469,669     367,007
Finance costs (note 14)                                 115,089     130,938
Exploration and evaluation (note 6)                      17,658     519,061
Depletion and depreciation (note 7)                   3,851,006   2,960,146
----------------------------------------------------------------------------
                                                      7,659,791   6,880,028
----------------------------------------------------------------------------
Loss before income taxes                             (1,389,233)   (741,097)
Taxes (note 10)
Deferred income tax recovery                            249,800     146,274
----------------------------------------------------------------------------
Net loss and comprehensive loss for the period       (1,139,433)   (594,823)
Net loss and comprehensive loss per share, 
 basic and diluted (note 12)                              (0.01)      (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes                                 

CINCH ENERGY CORP.                                                         

CONDENSED STATEMENTS OF CHANGES IN EQUITY                                   
(Unaudited)                                                             

As at                               March 31, 2011       December 31, 2010
----------------------------------------------------------------------------
                              Number             $     Number            $
----------------------------------------------------------------------------
Common shares
Balance, beginning 
 of period                96,630,415   160,481,706 58,860,365  103,926,835
Issued for cash on
 financings (note 12(i))           -             - 37,250,050   58,511,233
Issue costs (note 12(i))           -             -          -   (3,593,255)
Tax effect of issue costs
 (note 12(i))                      -             -          -      908,295
Exercise of stock
 options (note 12(ii))       225,000       272,787    520,000      728,598
----------------------------------------------------------------------------
Share capital, end of
 period                   96,855,415   160,754,493 96,630,415  160,481,706
----------------------------------------------------------------------------
Contributed surplus
Balance, beginning 
 of period                         -     4,820,964          -    3,953,861
Exercise of stock
 options (note 12(ii))             -       (77,787)         -     (231,498)
Stock-based compensation
 expense (note 12)                 -       377,825          -    1,098,601
----------------------------------------------------------------------------
Contributed surplus, end
 of period                         -     5,121,002          -    4,820,964
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deficit
Balance, beginning of period       -   (38,369,147)        -    (37,374,763)
Net loss for the period            -    (1,139,433)        -       (994,384)
----------------------------------------------------------------------------
Deficit, end of period             -   (39,508,580)        -    (38,369,147)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes

As at                                                        March 31, 2010
----------------------------------------------------------------------------
                                                      Number              $
----------------------------------------------------------------------------
Common shares
Balance, beginning of period                      58,860,365    103,926,835
Issued for cash on
 financings (note 12(i))                          22,493,300     37,113,945
Issue costs (note 12(i))                                   -     (2,163,718)
Tax effect of issue costs
 (note 12(i))                                              -        555,452
Exercise of stock
 options (note 12(ii))                                90,000        134,299
----------------------------------------------------------------------------
Share capital, end of
 period                                           81,443,665    139,566,813
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period                               -      3,953,861
Exercise of stock
 options (note 12(ii))                                     -        (41,499)
Stock-based compensation
 expense (note 12)                                         -        176,630
----------------------------------------------------------------------------
Contributed surplus, end
 of period                                                 -      4,088,992
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deficit
Balance, beginning of period                               -    (37,374,763)
Net loss for the period                                    -       (594,823)
----------------------------------------------------------------------------
Deficit, end of period                                     -    (37,969,586)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes

CINCH ENERGY CORP.

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

For the three months ended March 31,                      2011         2010
----------------------------------------------------------------------------
                                                             $            $
----------------------------------------------------------------------------
Operating activities
Net loss for the period                             (1,139,433)    (594,823)
Add (deduct):
 Exploration and evaluation expenditures                17,658      519,061
 Depletion and depreciation                          3,851,006    2,960,146
 Accretion of decommissioning liabilities               53,015       45,537
 Stock-based compensation expense                      377,825      176,630
 Deferred income tax recovery                         (249,800)    (146,274)
----------------------------------------------------------------------------
                                                     2,910,271    2,960,277
Net change in non-cash working capital               1,330,402      654,074
----------------------------------------------------------------------------
Cash provided by operating activities                4,240,673    3,614,351
----------------------------------------------------------------------------
Investing activities
Additions to property, plant and equipment         (23,937,561) (15,062,505)
Net change in non-cash working capital              (2,468,821)    (347,558)
----------------------------------------------------------------------------
Cash used in investing activities                  (26,406,382) (15,410,063)
----------------------------------------------------------------------------
Financing activities
Issue of common shares, net of issue costs 
 (note 12(ii))                                         195,000   35,043,027
----------------------------------------------------------------------------
Cash provided by financing activities                  195,000   35,043,027
----------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents   (21,970,709)  23,247,315
Cash and cash equivalents 
 (draws on credit facility), beginning                  
 of period                                              42,704  (26,519,080)
----------------------------------------------------------------------------
Draws on credit facility, end of period            (21,928,005)  (3,271,765)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information:
Cash taxes paid                                              -            -
Cash interest paid                                      62,074       85,401
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes

CINCH ENERGY CORP.

NOTES TO FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

1. DESCRIPTION OF BUSINESS

Cinch Energy Corp. (the "Company") was incorporated under the laws of the Province of Alberta and commenced operations on December 1, 2001. The Company's activities are comprised of the exploration for and development of petroleum and natural gas properties, primarily in Western Canada.

The unaudited interim condensed financial statements for the three months ended March 31, 2011 were approved and authorized for issuance by the Board of Directors on May 10, 2011.

2. BASIS OF PRESENTATION

Statement of compliance

In conjunction with the Company's annual audited financial statements to be issued under International Financial Reporting Standards ("IFRS") for the year ended December 31, 2011, these unaudited interim condensed financial statements present the Company's initial financial results of operations under IFRS as at and for the three months ended March 31, 2011, including 2010 comparative periods. These unaudited financial statements have been prepared by management in accordance with International Accounting Standard 34 - Interim Financial Reporting ("IAS 34") using accounting policies consistent with IFRS as issued by the International Accounting Standards Board ("IASB") and interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). The disclosures concerning the transition from Canadian Generally Accepted Accounting Principles ("Canadian GAAP") to IFRS are included in Note 17.

The preparation of financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Company's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the interim financial statements are disclosed in Note 3.

Basis of presentation

The preparation of these unaudited interim financial statements is based on accounting policies and practices in accordance with IFRS and should not be compared to those policies used in the preparation of the December 31, 2010 audited annual financial statements, as they were prepared in accordance with Canadian GAAP. These unaudited interim financial statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the respective interim periods presented. These unaudited interim financial statements were prepared on the basis of historical cost and are presented in Canadian dollars, except as otherwise indicated.

3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management's experience and expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes, however, can differ from these estimates.

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

Reserves

The estimate of reserves is used in forecasting the recoverability and economic viability of the Company's petroleum and natural gas properties, and in the depletion and impairment calculations. 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 the Company's independent reserve evaluators and quarterly updates to those reserves, if any, are estimated internally. Future development costs are estimated using assumptions as to the number of wells required to produce the commercial reserves, the cost of such wells and associated production facilities and other capital costs.

Carrying value of petroleum and natural gas properties

Petroleum and natural gas properties are depleted using the unit-of-production method over proven and probable petroleum and natural gas reserves. The depletion rate calculated in the current period is not necessarily indicative of the future depletion rate due to the fact that the rate is calculated based on current production and estimated proven and probable petroleum and natural gas reserves. These factors could be significantly different in the future resulting in a different depletion rate.

Impairment indicators

The recoverable amounts of individual assets or groups of assets referred to as a cash-generating unit ("CGU") have been determined based on the higher of value-in-use calculations and fair values less costs to sell. These calculations require the use of estimates and assumptions. It is reasonably possible that the commodity price assumption may change, which may then impact the estimated life of the field and may require a material adjustment to the carrying value of the petroleum and natural gas properties. The Company monitors internal and external indicators of impairment relating to its tangible assets.

Revenue estimates

The Company estimates its petroleum and natural gas production, sales and related costs, based upon information received from field offices, marketing contracts, internal calculations, historical data and industry experience.

Cost estimates

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

Decommissioning costs

The liabilities recorded for decommissioning costs, 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. Cost estimates are based upon internal and third party calculations and historical experience. Future inflation rates are estimated using available economic data. The ultimate decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements, the emergence of new restoration techniques or experience at other production sites. The expected timing and amount of expenditures can also change, for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be significant adjustments to the provisions established which would affect future financial results.

Income taxes

The Company records a deferred tax liability 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. Accordingly, the actual income tax liability may differ significantly from the estimated and recorded amounts.

4. SIGNIFICANT ACCOUNTING POLICIES

Exploration and evaluation costs

Exploration and evaluation costs incurred before the Company has a legal right to explore are charged against income. Once the legal right to explore has been acquired, direct costs of exploration activities are capitalized as intangible exploration and evaluation assets until the assets have been evaluated. Direct costs can include unproved property acquisition costs, geological and geophysical costs, exploratory drilling costs, materials used and contract labour costs. When technical feasibility and commercial viability are demonstrated, the exploration and evaluation costs are then transferred to property, plant and equipment. As long as these assets remain classified as intangible exploration and evaluation assets, they are subject to technical, commercial and management review, as well as a review for indicators of impairment at each reporting period. If there are indicators of impairment, exploration and evaluation assets are tested for impairment at the operating segment level together with property, plant and equipment. Exploration and evaluation assets are derecognized when the legal right to explore has expired or when the asset is no longer expected to generate value.

Petroleum and natural gas properties

Petroleum and natural gas properties are recorded at cost, less accumulated depletion and accumulated impairment losses. All direct costs related to the acquisition, exploration and development of petroleum and natural gas properties are initially capitalized. Costs comprise of the asset's purchase price or construction costs, which can include lease acquisitions, borrowing costs, geological and geophysical costs, equipment costs, drilling, completion and tie-in costs, overhead expenses directly related to development activities and an estimate of costs to decommission the asset.

Petroleum and natural gas properties are depleted using the unit-of-production method based on proven and probable reserves as determined by the Company's independent reserve evaluators, using estimated future prices and costs. The depletion cost base includes total capitalized costs plus the estimated future costs associated with developing proven and probable reserves.

Petroleum and natural gas properties are derecognized on disposal or when no future economic benefits are expected from their use or disposal. The gain or loss arising from the derecognition is included in the statement of operations and comprehensive loss.

Office furniture and equipment

Office furniture and equipment is carried at cost and depreciated on a straight-line basis over the assets' estimated useful lives at a rate of 25% per annum.

Impairment of exploration and evaluation assets and property, plant and equipment

The Company's exploration and evaluation assets and property, plant and equipment are reviewed for indicators of impairment at each reporting date. If indicators of impairment exist, the Company will then perform an impairment test. The test requires that the Company estimate the assets' recoverable amount. The test must be performed at the lowest level of which an asset or a CGU generates cash inflows that are largely independent of those from other assets or other CGU's. If the carrying amount of an asset or CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount.

The recoverable amount is calculated as the greater of an asset or CGU's fair value less costs to sell and its value-in-use. Fair value less costs to sell may be determined using discounted future net cash flows of proven and probable reserves using forecasted market prices and costs. Value-in-use is determined by estimating the present value of the future net cash flows expected to be derived from the continued use of the asset or CGU.

Impairment losses are recognized as a separate line item in the statement of operations and comprehensive loss.

At each reporting date, an assessment is made as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indications exist, the Company estimates the asset or CGU's recoverable amount. An impairment loss is reversed only to the extent that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depletion, had no impairment loss been previously recognized for the asset or CGU. Such reversal is recognized in the statement of operations and comprehensive loss.

Assets held for sale

Non-current assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is met when the sale is highly probable and the asset is available for immediate sale in its present condition.

Non-current assets classified as held for sale are measured at the lower of the carrying amount and fair value less costs to sell, with impairments recognized in profit or loss in the period measured. Non-current assets held for sale are presented as current assets on the balance sheet. Assets held for sale are not depreciated, depleted or amortized.

Leases

Leases are classified as either finance or operating. Finance leases are those that transfer substantially all of the benefits and risks of ownership to the lessee. Assets acquired under finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased asset or at the present value of the minimum lease payments and are depleted over the shorter of the useful life of the asset or the lease term. All other leases are classified as operating leases and the payments are amortized on a straight-line basis over the lease term.

Decommissioning liabilities

The Company recognizes the fair value of a decommissioning liability and a corresponding increase in the carrying value of the related long-lived asset in the period in which it is constructed or acquired. The fair value of the obligation is management's best estimate of the cost to retire the asset based on current legislation and industry practice, discounted to its present value using a risk-free rate. The increase in the carrying value of the asset is amortized on a unit-of-production basis consistent with the method used to record depletion on the Company's petroleum and natural gas properties. The liability is subsequently adjusted for the passage of time, which is recognized as a finance cost in the statement of operations and comprehensive loss. The liability is periodically adjusted for revisions in either the timing or the amount of the original estimated cash flows associated with the obligation. Actual costs incurred upon settlement of the obligations are charged against the liability.

Joint operations

IFRS defines joint control as the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the "venturers"). A jointly controlled operation involves the use of assets and other resources of the Company and other venturers rather than the establishment of a corporation, partnership or other entity. Substantially all of the Company's exploration and development activities are conducted jointly with others and accordingly the financial statements reflect only the Company's proportionate interest in such activities.

Flow-through shares

The Company occasionally finances a portion of its exploration and development activities through the issuance of flow-through shares. Under the terms of a flow-through share issuance, the tax attributes of the related expenditures are renounced to subscribers. The Company allocates the proceeds of flow-though shares between the offering of shares and the sale of the tax benefit. The amount recorded in share capital is based on the market price of the shares at the time of issuance and the difference is recorded as a flow-through share liability. The deferred tax liability is recognized on the effective date of the renunciation, provided there is reasonable assurance that the expenditures will be made. The flow-through share liability is reversed at that time and the difference between the amount of the deferred tax liability and the flow-through share liability is charged to deferred income tax expense.

Income taxes

Current income tax expense is the expected income tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to income tax payable with regards to previous years.

The Company follows the liability method of accounting for income taxes. Under this method, the Company records deferred income taxes for the difference between the financial statement carrying value and the income tax basis of an asset or liability. Deferred income tax assets and liabilities are measured using substantively enacted income tax rates and laws that are expected to apply in the periods in which differences are anticipated to reverse. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the statement of operations and comprehensive loss in the period in which the change is substantively enacted.

A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle on a net basis.

Revenue recognition

Revenue from the sale of petroleum and natural gas and related products is recognized when the significant risks and rewards of ownership have been transferred, which is when title passes. Revenues are recorded based on the Company's working interest.

Share-based payments

The Company has a stock-based compensation plan, which is described in Note 12, whereby employees render services as consideration for equity instruments. The cost of equity settled transactions is recognized, together with a corresponding increase in contributed surplus, over the period in which the service conditions are fulfilled. The fair value of options granted is estimated at the date of grant using the Black-Scholes valuation model and adjusted to reflect the number of awards that are expected to fully vest. Consideration paid by option holders on the exercise of stock options is credited to share capital. At the time of exercise, the related amounts previously credited to contributed surplus are also transferred to share capital. In the event that vested options expire without being exercised, previously recognized compensation costs associated with such stock options are not reversed.

Per share information

Per share information is calculated using the treasury stock method. Under this method, the diluted weighted average number of common shares is calculated assuming that the proceeds from the exercise of outstanding and in-the-money options are used to purchase common shares at the estimated average market price for the period.

Financial instruments

Financial assets and financial liabilities are recognized on the Company's balance sheet when the Company becomes party to the contractual provisions of the instrument. Financial instruments are measured at fair value on initial recognition of the instrument. Measurement in subsequent periods depends on whether the financial instrument has been classified as "fair value through profit or loss", "loans and receivables", "available-for-sale", "held-to-maturity", or "financial liabilities measured at amortized cost" as defined by IFRS.

Financial Assets

Financial assets classified as "loans and receivables" and "held-to-maturity" are measured at amortized cost using the effective interest method of amortization.

Financial assets are assessed for indicators of impairment at each financial reporting date. Financial assets are impaired when there is objective evidence that the estimated future cash flows of the asset have been impacted.

Financial Liabilities

Financial liabilities, excluding derivative instruments, classified as "financial liabilities measured at amortized cost" are measured at amortized cost using the effective interest method of amortization. All derivative instruments are classified as "held for trading".

The Company does not currently use derivative financial instruments to manage its exposure to commodity price fluctuations.

5. CHANGES IN ACCOUNTING POLICIES

As of January 1, 2013, the Company will be required to adopt IFRS 9 - Financial Instruments, which is the result of the first phase of the IASB's project to replace IAS 39 - Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

6. EXPLORATION AND EVALUATION ASSETS

As at March 31, 2011, exploration and evaluation assets are comprised of $15,915,729 in undeveloped land and $8,641,418 in intangible exploration and evaluation assets.


Cost                                                                      $
----------------------------------------------------------------------------
Balance, as at January 1, 2010                                    7,453,385
Additions                                                        18,025,816
Exploration and evaluation expense                               (1,573,089)
Transfers to property, plant and equipment                         (287,184)
----------------------------------------------------------------------------
Balance, as at December 31, 2010                                 23,618,928
Additions                                                         1,358,557
Exploration and evaluation expense                                  (17,658)
Transfers to property, plant and equipment                         (402,680)
----------------------------------------------------------------------------
Balance, as at March 31, 2011                                    24,557,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Accumulated impairment                                                    $
----------------------------------------------------------------------------
Balance, as at January 1, 2010                                            -
Impairment                                                                -
----------------------------------------------------------------------------
Balance, as at December 31, 2010                                          -
Impairment                                                                -
----------------------------------------------------------------------------
Balance, as at March 31, 2011                                             -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Carrying amount                                                           $
----------------------------------------------------------------------------
At January 1, 2010                                                7,453,385
At December 31, 2010                                             23,618,928
At March 31, 2011                                                24,557,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------

As at March 31, 2011, the Company concluded that there were no indicators of impairment with respect to its exploration and evaluation assets (December 31, 2010 - no indicators of impairment).


7. PROPERTY, PLANT AND EQUIPMENT

                                Petroleum and         Office
                                  natural gas      furniture
                                   properties  and equipment          Total
----------------------------------------------------------------------------
Cost                                        $              $              $
----------------------------------------------------------------------------
Balance, as at January 1, 2010    112,307,818        276,308    112,584,126
Additions                          32,967,137         25,916     32,993,053
Transfers from exploration and
 evaluation assets                    287,184              -        287,184
Changes in decommissioning
 liability                          1,179,903              -      1,179,903
----------------------------------------------------------------------------
Balance, as at December 31, 2010  146,742,042        302,224    147,044,266
Additions                          22,579,004              -     22,579,004
Transfers from exploration and
 evaluation assets                    402,680              -        402,680
Transfers to assets held for sale (14,009,926)             -    (14,009,926)
Changes in decommissioning
 liability                            (86,054)             -        (86,054)
----------------------------------------------------------------------------
Balance, as at March 31, 2011     155,627,746        302,224    155,929,970
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Accumulated depletion,
 depreciation and impairment                $              $              $
----------------------------------------------------------------------------
Balance, as at January 1, 2010     (9,482,004)      (275,102)    (9,757,106)
Depletion and depreciation        (12,218,264)        (3,496)   (12,221,760)
Impairment reversal                 2,779,496              -      2,779,496
----------------------------------------------------------------------------
Balance, as at December 31, 2010  (18,920,772)      (278,598)   (19,199,370)
Depletion and depreciation         (3,849,560)        (1,446)    (3,851,006)
Transfers to assets held for sale   1,230,828              -      1,230,828
----------------------------------------------------------------------------
Balance, as at March 31, 2011     (21,539,504)      (280,044)   (21,819,548)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Carrying amount                             $              $              $
----------------------------------------------------------------------------
At January 1, 2010                102,825,814          1,206    102,827,020
At December 31, 2010              127,821,270         23,626    127,844,896
At March 31, 2011                 134,088,242         22,180    134,110,422
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the three months ended March 31, 2011 and 2010, no indirect general and administrative expenditures were capitalized.

As at March 31, 2011, there were no costs related to undeveloped properties that were excluded from costs subject to depletion (December 31, 2010 - $nil). At March 31, 2011, $32,597,000 of future development costs were included in costs subject to depletion (December 31, 2010 - $44,512,000).

As at March 31, 2011, the Company concluded that there were no indicators of impairment with respect to its property, plant and equipment (December 31, 2010 - no indicators of impairment).

As at March 31, 2011, $12,779,098 of petroleum and natural gas properties have been reclassified as assets held for sale. It is management's expectation that these assets will be sold within the next twelve months, and management does not expect any impairment on the sale.

At January 1, 2010, the Company tested property, plant and equipment for impairment and recorded an impairment of $9,482,004. The impairment was derived by comparing the Company's carrying amounts by CGU to their recoverable amounts based on fair value less costs to sell. The Company's CGU's are based on assets that are in similar geographical areas.

At December 31, 2010, the Company reversed $2,779,496 of the above noted impairment, as a result of reserve additions in the fourth quarter of 2010.

8. CREDIT FACILITY

As at March 31, 2011, the Company had revolving demand bank credit facilities through ATB Financial totaling $50,000,000 (December 31, 2010 - $43,000,000). The primary facility of $40,000,000 bears interest at the lender's prime rate plus margins ranging from 1.0% to 2.25% based on financial statement ratios. The second facility of $10,000,000 bears interest at the lender's prime rate plus margins ranging from 2.50% to 3.75% based on financial statement ratios. The effective interest rate for the three months ended March 31, 2011 was 2.73% (December 31, 2010 - 3.75%). As at March 31, 2011, there was $21,928,005 outstanding on the credit facilities (December 31, 2010 - $nil). As collateral for the facilities, 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. See Note 16.

9. DECOMMISSIONING LIABILITIES

The total future decommissioning liabilities 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, 2011 is $7,422,733 (December 31, 2010 - $7,275,263) with an average abandonment date of 15 years (December 31, 2010 - 13 years). The liability was determined using a risk-free rate of 3.75% (January 1, 2010 - 4.08%; December 31, 2010 - 3.52%) and an inflation rate of 2% (January 1, 2010 - 2%; December 31, 2010 - 2%).


The Company's decommissioning liabilities changed as follows:

                                                    March 31,   December 31,
                                                        2011           2010
----------------------------------------------------------------------------
                                                           $              $
----------------------------------------------------------------------------
Decommissioning liabilities, beginning of period   5,967,753      4,595,781
Adjustments for abandonment dates and estimated
 costs                                                     -        302,300
Liabilities incurred                                 142,714        582,207
Liabilities settled                                  (56,252)       (70,300)
Change in the discount rate                         (172,516)       365,696
Accretion expense                                     53,015        192,069
----------------------------------------------------------------------------

Decommissioning liabilities, end of period         5,934,714      5,967,753
----------------------------------------------------------------------------
----------------------------------------------------------------------------

10. DEFERRED INCOME TAXES

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


Three months ended March 31,                            2011           2010
----------------------------------------------------------------------------

Net loss before income taxes                      $1,389,233       $741,097
Statutory income tax rate                              26.50%         28.11%

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

Anticipated income tax recovery                      368,147        208,322
Increase (decrease) resulting from:
 Rate adjustment                                     (12,829)       (11,494)
 Stock-based compensation expense                   (100,124)       (49,651)
 Non-deductible items                                 (5,394)          (903)
----------------------------------------------------------------------------

Deferred income tax recovery                         249,800        146,274
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The deferred income tax recovery reflects 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 deferred income tax assets and liabilities are as follows:


                                     March 31,   December 31,     January 1,
                                         2011           2010           2010
----------------------------------------------------------------------------
As at                                       $              $              $
----------------------------------------------------------------------------
Net book value of capital assets in
 excess of tax pools               (9,085,927)    (9,395,860)    (7,076,103)
Non-capital losses                    973,095        972,700              -
Share issue costs                     705,238        757,513         70,082
Decommissioning liability           1,496,141      1,504,431      1,187,550
Other                                  84,114         84,077         84,077
----------------------------------------------------------------------------

Deferred income tax liability      (5,827,339)    (6,077,139)    (5,734,394)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

As at March 31, 2011, the Company had unused non-capital losses of $3,859,957 which expire in 2029 (December 31, 2010 - $3,859,957).

11. 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 the credit facility and shareholders' equity comprised of deficit, contributed surplus 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), excluding assets held for sale, 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 funds from operations. The Company's objective is to maintain a net debt to funds from operations ratio of less than two and a half times. The net debt to funds from operations ratio at March 31, 2011 was 2.86 (December 31, 2010 - 1.07). The ratio at March 31, 2011 is temporarily higher than the Company's targeted ratio, due to significant capital spending in the first quarter of 2011, as well as the impact of lower commodity prices on funds generated from operations. Management anticipates that the ratio will be rectified during the second quarter with funds received from the assets held for sale.

The net debt to funds from operations ratio may increase or decrease at certain times as a result of significant events such as acquisitions or dispositions, share issuances, or 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 varying factors such as general market conditions and successful capital deployment. The annual budget is approved by the Board of Directors and reviewed as required.

The Company has various banking reporting requirements with respect to its credit facilities that the Company has complied with for the three months ended March 31, 2011. In addition, the bank credit facilities contain a financial covenant requiring that the Company's ratio of current assets, excluding assets held for sale, plus the undrawn balance on the credit facilities to the current liabilities less the balance outstanding on the credit facilities not fall below 1:1. As at March 31, 2011, this ratio was 1.83:1, thereby satisfying the financial covenant. As collateral for the bank credit facilities, 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. See Note 16 for renewal terms.

Other than the restrictions imposed by the bank credit facilities, 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.

12. SHARE CAPITAL

Authorized - Unlimited number of common shares without par value

(i) Financings

On January 28, 2010, the Company issued a total of 22,493,300 common shares at $1.65 per share for proceeds of $37,113,945. Share issue costs were $2,163,718, with a tax impact of $555,452. Net proceeds from the offering were used to fund the Company's exploration and development program and for general corporate purposes.

On September 2, 2010, the Company issued a total of 11,896,750 common shares at $1.45 per share and 2,860,000 common shares issued on a flow-through basis at $1.75 per share for total proceeds of $22,255,288 before total issue costs of $1,429,537, with a tax impact of $352,843. Total proceeds from the flow through share issuance included $858,000, which represented the liability to shareholders and, therefore, was not included in the statement of changes in equity for the year ended December 31, 2010. Net proceeds from the offering were used primarily to fund the Company's ongoing exploration and development program. As a result of the issuance of flow-through shares, the Company had a commitment to spend $5.0 million on qualifying Canadian exploration expenditures on or before December 31, 2011. The expenditures were renounced to investors in January 2011, with an effective date of renunciation of December 31, 2010. As at December 31, 2010, the Company had satisfied the obligation.

(ii) Exercise of Options

During the three months ended March 31, 2011, 225,000 stock options were exercised for a total cash consideration of $195,000 (225,000 stock options at an average price of $0.87) which was recorded as an increase to share capital. Due to the exercise of the stock options, $77,787 was transferred out of contributed surplus into share capital. This amount reflects the stock-based compensation expense that was previously recorded attributable to these options.

During the year ended December 31, 2010, 520,000 stock options were exercised for a total cash consideration of $497,100 (520,000 stock options at an average price of $0.96) which was recorded as an increase to share capital. Due to the exercise of the stock options, $231,498 was transferred out of contributed surplus to share capital. This amount reflects the stock-based compensation expense that was previously recorded attributable to these options.

During the three months ended March 31, 2010, 90,000 stock options were exercised for a total cash consideration of $92,800 (90,000 stock options at an average price of $0.97) which was recorded as an increase to share capital. Due to the exercise of the stock options, $41,499 was transferred out of contributed surplus into share capital. This amount reflects the stock-based compensation expense that was previously recorded attributable to these options.

During the three months ended March 31, 2011, a total of $272,787 was recorded in share capital as a result of stock options exercised (December 31, 2010 - $728,598; March 31, 2010 - $134,299).

(iii) Stock Options

Stock-based compensation expense recorded in general and administrative expenses 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 period of 96,830,415 (March 31, 2010 - 74,428,304). As at March 31, 2011, all of the stock options are anti-dilutive and therefore not included in the determination of dilutive per share amounts.

Stock-based compensation plan

The Company has a stock-based compensation 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 common shares provided the number of outstanding options at any time is limited to ten percent of the total issued and outstanding shares of the Company. The aggregate number of outstanding 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 not less than the closing price of the common shares on the last trading day immediately prior to 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:


                                         As at March 31,  As at December 31,
                                                   2011                2010
----------------------------------------------------------------------------
                                               Weighted            Weighted
                                                average             average
                                               exercise            exercise
                                    Number of     price Number of     price
                                      options         $   options         $
----------------------------------------------------------------------------
Stock options
 outstanding, beginning of period   8,149,501      1.23 5,749,500      1.34
Granted                                     -         - 3,865,000      1.32
Expired                              (635,000)     2.24  (715,000)     2.60
Forfeited                            (200,000)     1.52  (229,999)     1.86
Exercised                            (225,000)     0.87  (520,000)     0.96
----------------------------------------------------------------------------
Stock options outstanding, end of
 period                             7,089,501      1.14 8,149,501      1.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock options outstanding as at March 31, 2011 are comprised of the
following:

                                                                   Weighted
                                           Weighted                 average
                                            average                price of
                                          remaining   Number of exercisable
Exercise price                  Number of      life exercisable     options
                                  options    (years)    options           
----------------------------------------------------------------------------
$                                                                         $
----------------------------------------------------------------------------
0.70-0.90                       1,531,667      3.11     730,002        0.75
0.91-1.10                       1,072,834      1.22   1,072,834        0.97
1.11-1.30                       2,760,000      3.77     595,000        1.24
1.31-1.50                       1,150,000      3.79     400,000        1.50
1.51-1.67                         575,000      4.14     100,000        1.67
----------------------------------------------------------------------------
1.14                            7,089,501      3.27   2,897,836        1.07
----------------------------------------------------------------------------
----------------------------------------------------------------------------

There were no options granted to employees, directors or consultants during the three months ended March 31, 2011. The fair value of stock options granted to employees, directors, and consultants during the year ended December 31, 2010 was estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions: dividend yield of zero percent, expected volatility of 75.44 percent, risk-free interest rate of 2.03 percent, and an expected life of four years. Options granted during the year ended December 31, 2010 had an estimated weighted average fair value of $0.75 per option and an expected forfeiture rate of 10%, for a total estimated value of $2,605,949. For the three months ended March 31, 2011, a total of $377,825 (March 31, 2010 - $176,630) has been recognized as stock-based compensation expense in general and administrative expenses with an offsetting credit to contributed surplus.


13. COMMITMENTS

As at March 31, 2011, the Company has the following commitments:

                                        Total     2011 2012-2015 Thereafter
                                            $        $         $          $
----------------------------------------------------------------------------

Transportation agreements (i)       3,291,582  808,190 2,483,392          -
----------------------------------------------------------------------------

Office lease (ii)                     909,639  178,049   731,590          -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(i) Transportation agreements

The Company has committed to firm-service contracts for the transportation of its natural gas. The amounts above are the minimum obligations that the Company is required to pay under the terms of the contracts.

(ii) Office lease

The Company entered into an operating lease for office premises beginning on December 1, 2009 and expiring on November 30, 2014, which requires minimum monthly payments of $19,704 for the first two years of the lease, $20,415 for the third year of the lease, and $21,126 for the last two years of the lease.


14. FINANCE COSTS

For the three months ended March 31,                    2011           2010
----------------------------------------------------------------------------
                                                           $              $
----------------------------------------------------------------------------

Interest on credit facilities                         62,074         85,401
Accretion of decommissioning liabilities              53,015         45,537
----------------------------------------------------------------------------

                                                     115,089        130,938
----------------------------------------------------------------------------
----------------------------------------------------------------------------

15. FINANCIAL INSTRUMENTS

Analysis of financial assets and liabilities by measurement basis

Financial assets and financial liabilities are measured on an ongoing basis at amortized cost. The following table analyzes the carrying amounts of the financial assets and liabilities by category:


                                     March 31,   December 31,     January 1,
                                         2011           2010           2010
As at                                       $              $              $
----------------------------------------------------------------------------
Loans and other receivables
 Cash                                       -         42,704              -
 Accounts receivable                7,766,533      6,003,942      3,872,925
----------------------------------------------------------------------------

Financial liabilities measured at
 amortized cost
 Accounts payable and accrued
  liabilities                      19,969,990     19,443,198      8,034,501
 Credit facility                   21,928,005              -     26,519,080
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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 value can be determined by reference to prices for a financial instrument in active markets to which the Company has access. In the absence of an active market, the Company determines fair value based on valuation models or by reference to other similar products in active markets. As at January 1, 2010, March 31, 2011 and December 31, 2010, the Company did not have any financial instruments measured at fair value.

Financial instruments recognized on the balance sheet consist of cash, accounts receivable, accounts payable and accrued liabilities, and the credit facility. As at March 31, 2011 and December 31, 2010, 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 risk 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 its 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 $5.3 million based on earnings generated in the first three months of 2011 (March 31, 2010 - $3.7 million). A similar decrease in commodity prices would have the opposite impact. As at March 31, 2011, the Company's natural gas and liquids production continues to be unhedged and is marketed in the Alberta and British Columbia spot markets.

As at March 31, 2011, 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 facilities. The credit facilities have floating interest rates which fluctuate based on prevailing market conditions. As at March 31 2011, $21.9 million (January 1, 2010 - $26.5 million; December 31, 2010 - $nil) is subject to movements in floating interest rates. If interest rates on the floating credit facilities were 1% lower, it is estimated that annualized earnings before tax would increase by approximately $219 thousand (March 31, 2010 - $33 thousand), assuming all other variables remained constant. A similar increase in the interest rate would have the opposite impact.

Credit risk

The Company is 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 Company generally extends unsecured credit to these companies, and therefore, the collection of accounts receivable may be affected by changes in economic or other conditions and may accordingly impact the Company's overall credit risk. Management believes the risk is mitigated by the size, reputation and diversified nature of the companies to which they extend credit. In the event such entities fail to meet their contractual obligations to the Company, such failures may have a material adverse effect on the Company's business, financial condition, and results of operations. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

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 the partners' share of capital expenditures in advance of a project and by monitoring accounts receivable on a semi-monthly basis. As at March 31, 2011, the Company held capital advances of $nil (January 1, 2010 - $130 thousand; December 31, 2010 - $62 thousand).

The Company has not previously experienced any material credit losses on the collection of receivables. As at March 31, 2011, December 31, 2010 and January 1, 2010, no receivable balance has been deemed uncollectible or written off during the period. As at March 31, 2011, approximately 94% of accounts receivable was less than 60 days outstanding.

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 facilities. As at March 31, 2011, the Company had $21.9 million outstanding against its available credit facilities of $50.0 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.

16. SUBSEQUENT EVENT

In April 2011, the Company completed its annual line of credit review with its lender at which time the Company's credit facilities were combined, resulting in one credit facility with $50.0 million available. The amount of available credit is unchanged; however, the associated bank charges and interest rates are more favorable under one facility when compared to the fees incurred on the two facilities that existed at March 31, 2011. The current facility bears interest at the lender's prime rate plus margins ranging from 1.0% to 2.25% based on financial statement ratios.

17. FIRST TIME ADOPTION OF IFRS

The Company adopted IFRS on January 1, 2011 with a transition date of January 1, 2010 (the "transition date"). Under IFRS 1 - First-time Adoption of International Financial Reporting Standards ("IFRS 1"), the standards are applied retrospectively at the transition date with all adjustments to assets and liabilities taken to retained earnings unless certain exemptions are applied. The Company has applied the following exemptions to its opening IFRS balance sheet:

- The Company applied the amendment to IFRS 1 which allows full cost accounting companies to elect to measure exploration and evaluation assets at the amount determined under the entity's previous GAAP (Canadian GAAP) at the transition date. The amendment also permits full cost accounting companies to measure oil and gas assets in the development and production phase using the total value determined under the entity's previous GAAP and allocating that value to each asset based on the Company's reserve volumes or reserve values as of the transition date; the Company determined to allocate based on reserve values. Under this exemption, companies are required to measure decommissioning, restoration and similar liabilities as at the transition date in accordance with IAS 37 - Provisions, Contingent Liabilities and Contingent Assets ("IAS 37"), and recognize directly in retained earnings any difference between that amount and the carrying amount of those liabilities under Canadian GAAP.

- IFRS 3 - Business Combinations was not applied to acquisitions of subsidiaries or of interests in associates and joint ventures that occurred before January 1, 2010, the Company's transition date.

- IFRS 2 - Share-based Payment was not applied to equity instruments granted after November 7, 2002 that vested before January 1, 2010.

- The Company applied the transitional provision in IFRIC 4 - Determining whether an Arrangement contains a Lease and assessed all arrangements as at the transition date that had not been previously assessed under Canadian GAAP.

IFRS employs a conceptual framework that is similar to Canadian GAAP; however, significant differences exist in certain matters of recognition, measurement and disclosure. While the adoption of IFRS has not changed the Company's business activities or actual cash flow, it has resulted in changes to the Company's balance sheets and statements of operations and comprehensive loss. In order to allow the users of the financial statements to better understand these changes, the Company's Canadian GAAP balance sheets at January 1, 2010, March 31, 2010 and December 31, 2010, and the Company's statements of operations and comprehensive loss for the three months ended March 31, 2010 and for the year ended December 31, 2010 have been reconciled to IFRS, with the resulting differences explained.

The following statements have been prepared in accordance with the presentation used under Canadian GAAP. Certain of the comparative figures have been reclassified in the current financial statements to conform with the presentation required under IFRS.


Company balance sheet reconciliation as at January 1, 2010

                                Canadian GAAP    Adjustments           IFRS
                         Notes              $              $              $
----------------------------------------------------------------------------

ASSETS

Current
Accounts receivable                 3,872,925              -      3,872,925
Prepaid expenses and
 deposits                           1,236,359              -      1,236,359
----------------------------------------------------------------------------
                                    5,109,284              -      5,109,284

Exploration and evaluation   1              -      7,453,385      7,453,385

Property, plant and
 equipment                 1,2    119,762,409    (16,935,389)   102,827,020
----------------------------------------------------------------------------

                                  124,871,693     (9,482,004)   115,389,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND
 SHAREHOLDERS' EQUITY

Current
Accounts payable and
 accrued liabilities                8,034,501              -      8,034,501
Credit facility                    26,519,080              -     26,519,080
----------------------------------------------------------------------------
                                   34,553,581              -     34,553,581

Decommissioning liabilities  3      4,035,866        559,915      4,595,781

Deferred income taxes        4      7,623,800     (1,889,406)     5,734,394
----------------------------------------------------------------------------

                                   46,213,247     (1,329,491)    44,883,756
----------------------------------------------------------------------------
Commitments

Shareholders' equity
Share capital                4     99,299,173      4,627,662    103,926,835
Contributed surplus          5      4,003,427        (49,566)     3,953,861
Deficit                  2,3,4    (24,644,154)   (12,730,609)   (37,374,763)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   78,658,446     (8,152,513)    70,505,933
----------------------------------------------------------------------------
                                  124,871,693     (9,482,004)   115,389,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes


Company balance sheet reconciliation as at March 31, 2010

                         Notes Canadian GAAP     Adjustments           IFRS
                                           $               $              $
----------------------------------------------------------------------------

ASSETS

Current
Accounts receivable                6,069,959               -      6,069,959
Prepaid expenses and
 deposits                          1,182,922               -      1,182,922
----------------------------------------------------------------------------
                                   7,252,881               -      7,252,881
Exploration and
 evaluation                  1             -      13,645,573     13,645,573
Property, plant and
 equipment           1,2,3,6,7   130,767,156     (22,143,444)   108,623,712
----------------------------------------------------------------------------

                                 138,020,037      (8,497,871)   129,522,166
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND
 SHAREHOLDERS' EQUITY

Current
Accounts payable and
 accrued liabilities              10,484,614               -     10,484,614
Credit facility                    3,271,765               -      3,271,765
----------------------------------------------------------------------------
                                  13,756,379               -     13,756,379
Decommissioning
 liabilities                 3     4,443,683         603,217      5,046,900
Deferred income taxes        4     7,338,700      (2,306,032)     5,032,668
----------------------------------------------------------------------------

                                  25,538,762      (1,702,815)    23,835,947
----------------------------------------------------------------------------
Commitments

Shareholders' equity
Share capital                4   134,238,199       5,328,614    139,566,813
Contributed surplus          5     4,193,326        (104,334)     4,088,992
Deficit                  2,3,4   (25,950,250)    (12,019,336)   (37,969,586)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                 112,481,275      (6,795,056)   105,686,219
----------------------------------------------------------------------------
                                 138,020,037      (8,497,871)   129,522,166
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes


Company balance sheet reconciliation as at December 31, 2010

                         Notes  Canadian GAAP    Adjustments           IFRS
                                            $              $              $
----------------------------------------------------------------------------
----------------------------------------------------------------------------

ASSETS

Current
Cash                                   42,704              -         42,704
Accounts receivable                 6,003,942              -      6,003,942
Prepaid expenses and
 deposits                             911,143              -        911,143
----------------------------------------------------------------------------
                                    6,957,789              -      6,957,789

Exploration and
 evaluation                  1              -     23,618,928     23,618,928
Property, plant and
 equipment           1,2,3,6,7    152,252,106    (24,407,210)   127,844,896
----------------------------------------------------------------------------

                                  159,209,895       (788,282)   158,421,613
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND
 SHAREHOLDERS' EQUITY

Current
Accounts payable and
 accrued liabilities               19,443,198              -     19,443,198
Credit facility                             -              -              -
----------------------------------------------------------------------------
                                   19,443,198              -     19,443,198

Decommissioning
 liabilities                 3      4,873,169      1,094,584      5,967,753

Deferred income
 taxes                       4      5,289,000        788,139      6,077,139
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                   29,605,367      1,882,723     31,488,090
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments

Shareholders' equity
Share capital                4    156,021,449      4,460,257    160,481,706
Contributed surplus          5      4,937,330       (116,366)     4,820,964
Deficit                  2,3,4    (31,354,251)    (7,014,896)   (38,369,147)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                  129,604,528     (2,671,005)   126,933,523
----------------------------------------------------------------------------
                                  159,209,895       (788,282)   158,421,613
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes


Company reconciliation of comprehensive loss for the three months ended
March 31, 2010

                                Canadian GAAP    Adjustments           IFRS
                         Notes              $              $              $
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenue
Oil and gas sales                   7,481,945              -      7,481,945
Transportation                       (367,007)             -       (367,007)
Royalties                   10     (1,557,700)       198,471     (1,359,229)
Other income                           16,215              -         16,215
----------------------------------------------------------------------------
                                    5,573,453        198,471      5,771,924
----------------------------------------------------------------------------

Expenses
Operating                   10        923,829        198,471      1,122,300
General and administrative   5      1,835,344        (54,768)     1,780,576
Finance                      3         85,401         45,537        130,938
Accretion of asset
 retirement obligations      3         59,338        (59,338)             -
Exploration and
 evaluation                  6              -        519,061        519,061
Depletion and
 depreciation                7      4,406,237     (1,446,091)     2,960,146
----------------------------------------------------------------------------
                                    7,310,149       (797,128)     6,513,021
----------------------------------------------------------------------------

Loss before income taxes           (1,736,696)       995,599       (741,097)

Taxes
Deferred income tax
 recovery                    8        430,600       (284,326)       146,274
----------------------------------------------------------------------------

Net loss and comprehensive
 loss for the period               (1,306,096)       711,273       (594,823)

Deficit, beginning of year        (24,644,154)   (12,730,609)   (37,374,763)
----------------------------------------------------------------------------

Deficit, end of year              (25,950,250)   (12,019,336)   (37,969,586)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss and comprehensive
 loss for the period per share

Basic and diluted                       (0.02)                        (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes


Company reconciliation of comprehensive loss for the year ended December 31,
2010

                         Notes  Canadian GAAP    Adjustments           IFRS
                                            $              $              $
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenue
Oil and gas sales                  27,237,148              -     27,237,148
Transportation                     (1,564,598)             -     (1,564,598)
Royalties                          (4,611,343)             -     (4,611,343)
Other income                           75,558              -         75,558
----------------------------------------------------------------------------
                                   21,136,765              -     21,136,765
----------------------------------------------------------------------------

Expenses
Operating                           4,183,120              -      4,183,120
General and administrative   5      6,221,910        (66,800)     6,155,110
Finance                      3        192,457        192,069        384,526
Accretion of asset
 retirement obligations      3        262,979       (262,979)             -
Exploration and evaluation   6              -      1,573,089      1,573,089
Depletion and depreciation   7     19,103,496     (6,881,736)    12,221,760
Impairment reversal          2              -     (2,779,496)    (2,779,496)
----------------------------------------------------------------------------
                                   29,963,962     (8,225,853)    21,738,109
----------------------------------------------------------------------------

Loss before income taxes           (8,827,197)     8,225,853       (601,344)

Taxes
Deferred income tax
 recovery (expense)          8      2,117,100     (2,510,140)      (393,040)
----------------------------------------------------------------------------
                                    2,117,100     (2,510,140)      (393,040)

Net loss and comprehensive
 loss for the period               (6,710,097)     5,715,713       (994,384)

Deficit, beginning of year        (24,644,154)   (12,730,609)   (37,374,763)
----------------------------------------------------------------------------
Deficit, end of year              (31,354,251)    (7,014,896)   (38,369,147)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss and comprehensive
 loss for the period per share

Basic and diluted                       (0.08)                        (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes

Notes to the reconciliations

1. Exploration and evaluation assets

Under IFRS, exploration and evaluation costs are shown as a separate class of assets. At January 1, 2010, $7,453,385 of undeveloped land and unproven properties were reclassified from property, plant and equipment to exploration and evaluation assets ($13,645,573 at March 31, 2010 and $23,618,928 at December 31, 2010).

2. Property, plant and equipment

As required under IFRS 1, due to the use of the full cost exemption, the Company tested property, plant and equipment for impairment at the transition date and recorded an impairment of $9,482,004. The impairment was derived by comparing the Company's carrying value by CGU to the recoverable amounts based on fair value less costs to sell. The Company's CGU's are based on assets that are within similar geographical areas.

At March 31, 2010, there were no indicators of impairment.

At December 31, 2010, the Company reversed $2,779,496 of the above noted impairment. The reversal was primarily the result of reserve additions in 2010.

3. Decommissioning liabilities

Under Canadian GAAP, provisions to abandon and reclaim assets were discounted using a credit-adjusted risk-free rate. The Company's policy under IFRS is to discount its provision using a current risk-free rate, resulting in an increase to the decommissioning liabilities of $559,915 at January 1, 2010, $603,217 at March 31, 2010 and $1,094,584 at December 31, 2010. The new policy also resulted in an increase in the carrying value of the related long-lived assets of $57,103 at March 31, 2010 and $605,578 at December 31, 2010.

The change in the discount rate resulted in a decrease in the accretion expense of $13,801 for the three months ended March 31, 2010 (year ended December 31, 2010 - $70,910). Under IFRS, the accretion of decommissioning costs has been reclassified to finance costs on the statement of operations and comprehensive loss.

4. Deferred income taxes

At January 1, 2010, the Company reclassified $4,627,662 from deficit to share capital as a result of the re-measurement of the tax effect of share issue costs and differences in accounting for flow-through shares (March 31, 2010 - $5,328,614; December 31, 2010 - $4,460,257). The Company also recorded an adjustment to deferred income taxes of $1,889,406 as a result of the IFRS transition adjustments relating to the carrying value of property, plant and equipment and decommissioning liabilities (March 31, 2010 - $2,306,032; December 31, 2010 - $788,139).

5. Stock-based compensation expense

As at January 1, 2010, contributed surplus was reduced by $49,566 as a result of differences in accounting for stock options due to the requirement to estimate potential forfeitures. The offset was recorded to the deficit.

The differences in the accounting treatments for stock options resulted in a decrease to the stock-based compensation expense of $54,768 for the three months ended March 31, 2010 (year ended December 31, 2010 - $66,800).

6. Exploration and evaluation expense

For the three months ended March 31, 2010, the Company expensed $13,324 in pre-licence costs and $505,737 of relinquished license costs (December 31, 2010 - $132,264 and $1,440,825, respectively). These costs were capitalized under Canadian GAAP, and previously included in property, plant and equipment.

7. Depletion and depreciation

Under Canadian GAAP, petroleum and natural gas properties were depleted on a unit-of-production basis over proven reserves. The Company's policy under IFRS is to deplete developed and producing petroleum and natural gas properties on a unit-of-production basis using estimated proven plus probable reserves. As a result, the depletion and depreciation expense was $1,446,091 lower for the three months ended March 31, 2010 (year ended December 31, 2010 - $6,881,736), thereby increasing the respective values of property, plant and equipment by the same amounts.

8. Deferred income tax recovery

For the three months ended March 31, 2010, the Company decreased its deferred income tax recovery by $284,326 primarily as a result of the IFRS adjustments to depletion and depreciation expense and exploration and evaluation expense.

For the year ended December 31, 2010, the Company decreased its deferred income tax recovery by $2,510,140, resulting in a deferred tax expense under IFRS. The change was a result of the IFRS adjustments to depletion and depreciation, exploration and evaluation and impairment expense, as well as the tax effect of the renunciation of the flow-through shares.

9. Cash flow statement

Under IFRS, the credit facility is included as part of cash and cash equivalents as it forms an integral part of the Company's cash management. As a result, cash provided by financing activities under IFRS no longer includes changes in the Company's credit facility. The transition to IFRS did not impact the Company's cash provided by operating activities and cash used in investing activities for the three months ended March 31, 2010 and for the year ended December 31, 2010.

10. Reclassification under Canadian GAAP

In the second quarter of 2010, the Company changed the classification of gas processing credits received from the Government of Alberta under the New Royalty Framework, which was implemented January 1, 2009. These credits were previously presented as a reduction to operating expenses and are now presented as a reduction to royalties. There is no impact on the reported net loss for the three months ended March 31, 2010. The effect of these changes for the three months ended March 31, 2010 is as follows:


                                          Three months ended March 31, 2010
----------------------------------------------------------------------------
                                As previously
                                   classified     Adjustment   Reclassified
                                            $              $              $
----------------------------------------------------------------------------

Royalties                          (1,557,700)       198,471     (1,359,229)
Operating                             923,829        198,471      1,122,300
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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