Fairborne Energy Ltd.
TSX : FEL

Fairborne Energy Ltd.

May 06, 2008 00:05 ET

Fairborne Energy Ltd. Reports Record Cash Flow and Current Production

CALGARY, ALBERTA--(Marketwire - May 6, 2008) - Fairborne Energy Ltd. (TSX:FEL):



HIGHLIGHTS

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Three months ended
March 31,
2008 2007 (1) change
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FINANCIAL ($thousands, except per
share amounts)
Petroleum and natural gas sales 70,618 49,666 42%
Funds generated from operations (2) 42,101 26,033 62%
Per share - basic $ 0.50 $ 0.55 (9%)
Per share - diluted $ 0.50 $ 0.48 4%
Cash flow from operations
(including changes in working
capital) 42,857 27,750 54%
Per share - basic $ 0.51 $ 0.59 (14%)
Per share - diluted $ 0.51 $ 0.52 (2%)
Net income 10,145 7,160 42%
Per share - basic $ 0.12 $ 0.15 (20%)
Per share - diluted $ 0.12 $ 0.15 (20%)
Exploration and development
expenditures 57,921 27,868 108%
Acquisitions, net of dispositions 1,189 - -
Working capital surplus (deficit) (27,255) 7,093 n/a
Bank indebtedness 85,634 119,645 (28%)
Convertible debentures 92,977 90,819 2%
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OPERATIONS (Units as noted)
Average production
Natural gas (Mcf per day) 56,813 45,060 26%
Crude oil (bbls per day) 2,413 2,396 1%
Natural gas liquids (bbls per day) 597 402 49%
Sulphur (tonnes per day)(3) 210 - -
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Total (BOE per day) 12,689 10,308 23%
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Average sales price
Natural gas ($ per Mcf) (4) 8.35 8.49 (2%)
Crude oil ($ per bbl) (4) 87.99 64.19 37%
Natural gas liquids ($ per bbl) 58.74 37.91 55%
Sulphur ($ per tonne) 215.37 - -
Netback per BOE ($ per BOE)
Petroleum and natural gas sales (4) 61.09 53.87 13%
Royalties (10.66) (9.48) 12%
Operating expenses (8.16) (9.90) (18%)
Transportation (0.90) (1.08) (17%)
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Operating netback 41.37 33.41 24%
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Wells drilled (gross) 25 27 (7%)
Undeveloped land (net acres) 232,007 168,852 37%
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(1) Amounts shown prior to the effective date of the Reorganization are in
respect of the Trust and per share numbers are per unit.
(2) Funds generated from operations is calculated using cash flow from
operations as presented in the consolidated statement of cash flows
before non-cash working capital and asset retirement expenditures.
(3) A BOE conversion ratio has been calculated using a conversion rate of
one tonne of sulphur to one barrel.
(4) Excludes unrealized gains and losses on financial instruments.


HIGHLIGHTS

- Record funds generated from operations for the first quarter was $42.1 million ($0.50 per share) an increase of 62% over the first quarter of 2007.

- Record current production of 13,600 BOE per day reflects the successful drilling and completion program of the first quarter.

- Significant Wabamun discovery at Peppers 16-16 commenced production in April.

- First quarter average production was 12,689 BOE per day (75% natural gas), an increase of 23% over the first quarter of 2007.

- Capital investment was $59.1 million for the quarter.

- Debt to cash flow of 0.7 times based on first quarter annualized cash flow (1.2 times including convertible debentures).

- Record first quarter netback of $41.37 per BOE.

- Expansion of 2008 capital program to $170 million, excluding the proposed acquisition of Grand Banks Energy Corporation ("Grand Banks").

- Significant reserve and production opportunity at Harlech with planned horizontal drilling.

- Proposed acquisition of Grand Banks with current production of 1,500 BOE per day, 35,000 acres of undeveloped land and December 31, 2007 proven plus probable reserves of 4.9 MMBOE.

PRODUCTION OUTLOOK

First quarter production averaged 12,689 BOE per day, an increase of 23% over the first quarter 2007. First quarter production consisted of 56.8 MMcf per day of natural gas, 3,010 bbls per day of oil and natural gas liquids and 210 BOE per day of sulphur. Compared to the fourth quarter of 2007, production volumes were negatively impacted by production outages associated with two weeks of extreme cold weather in February and with the transition to a corporation beginning at the end of 2007 which delayed the capital spending program until early January. Production from the first quarter drilling program commenced in early March.

Current production is 13,600 BOE per day, 7% higher than the first quarter average, which reflects the active first quarter the Company undertook following its transition from an income trust effective December 19, 2007.

With the proposed acquisition of Grand Banks and strong production volume growth during the winter drilling season, the Company is well positioned to continue the upward trend with 11 gross wells, (5.8 net) drilled and awaiting completion and tie in immediately after spring breakup.

OPERATIONS UPDATE

Fairborne has benefited from the material change in the sulphur market over the past six months resulting in a significant new revenue stream for the Company. We currently produce approximately 150 tonnes of sulphur per day (150 BOE per day) and during the first quarter, realized prices as high as $290 per tonne. The sulphur market is currently indicating an expected increase in prices through the balance of 2008. In addition to ongoing production, the Company also owns approximately 200,000 tonnes of sulphur which is stored in the block at the West Pembina Gas Plant. Fairborne has signed a letter of intent with a large US fertilizer company, Mosaic Fertilizer, to sell its sulphur inventory at the storage block in West Pembina. It is expected that the sales contract will be signed during the second quarter of 2008 with deliveries beginning in July 2008 and ending early in 2010.

Strong commodity prices including sulphur sales contributed to record quarterly cash flow of $42.1 million or $0.50 per share. Operating costs averaged $8.16 per BOE for the quarter, down significantly from the fourth quarter of 2007. The reduction is a result of an ongoing emphasis to lower operating costs, as well as a $0.9 million credit ($0.78 per BOE) received for a 2004 equalization at the West Pembina gas plant.

The Company put a small number of natural gas hedges in place during the first quarter for the remainder of 2008. Total volumes hedged amount to approximately 26% of forecast natural gas production volumes with a floor price of $8.36 per Mcf.

During the first quarter, Fairborne drilled 25 wells (16.1 net) resulting in 17 natural gas wells (9.4 net), four CBM wells (3.2 net) and four oil wells (3.5 net) with a 100% success rate.

COLUMBIA/HARLECH

The first quarter drilling program at Harlech included the drilling of 12 (8.3 net) wells, utilizing three drilling rigs pursuing Viking development and extension targets, Belly River light, sweet oil and Jurassic Nordegg opportunities. This program yielded a 100% success rate.

During the past 12 months the Company has successfully completed Jurassic Nordegg gas zones in two (1.6 net) vertical wells and encountered the zone in five (4.3 net) other wells as these zones were targeted as a secondary deeper target to the main Viking zone uphole. These results have confirmed the presence of the Nordegg sand over Fairborne's extensive land position at Harlech which includes 111 gross (83 net) sections. The Company now intends to drill a horizontal well program utilizing reservoir information obtained through the vertical wells.

During the first quarter the Company also drilled a follow up to our 2006 Belly River oil discovery at Harlech. The follow up well encountered 12m of oil pay and was brought on production during the first quarter at an initial rate of 150 BOE per day (75 BOE per day net). The oil from this pool is 43 degree API, realizing high netbacks. The Company drilled a third well in the immediate vicinity and this third well is currently being tied in. A total of two wells (1.5 net) are planned to follow up this pool in 2008.

Fairborne also undertook a major debottlenecking project at our Harlech gas facility during the first quarter. The main objectives were to increase throughput efficiency, increase natural gas liquids handling capacity and set the facility up for a major expansion anticipated for 2009.

DEEP BASIN

Fairborne's Deep Basin strategy is to pursue lower risk Cretaceous gas zones at Marlboro, Pine Creek and Lambert and to drill exploration wells targeting deep sour gas in the Nisku and Leduc.

The Company drilled a total of six (3.2 net) successful new gas wells as part of our first quarter Cretaceous program. Application of multizone completion and production commingling has yielded very strong results. These wells are all currently on production and the Company plans to drill another nine (6.1 net) wells over the balance of 2008.

The Company's 16-16 Peppers well was also tied in and commenced production in April and is currently producing 5 MMcf per day (1.8 MMcf per day net) at over 3,000 psi flowing pressure from the Wabamun formation. The follow up to the 16-16 well targeting a Leduc pinnacle reef at a depth of 4,650m is currently drilling.

OUTLOOK

Commodity prices have strengthened significantly since the fourth quarter of 2007. We made the decision during the fourth quarter of 2007 not to hedge a significant portion of our production as we anticipated an overall tightening in North American gas supplies. Hence, we are currently able to enjoy exposure to the dramatic increase in commodity prices. As a result, the Company is able to expand its 2008 capital program by $30 million to $170 million.

In addition to our drilling based strategy, we continue to look at acquisitions in our core operating areas as well as opportunities in new areas that would provide for accretive production and reserve growth. As always, we continue to add undeveloped land to utilize our strong technical staff for organic growth opportunities. On April 29, 2008, Fairborne announced the proposed acquisition of Grand Banks, a junior exploration and production company with operations focused in southeast Saskatchewan, southwest Manitoba and west central Alberta. Grand Bank's current production is estimated in excess of 1,500 BOE per day, with 35,000 acres of undeveloped land and 4.9 MMBOE of proven plus probable reserves (December 31, 2007). Fairborne believes that the assets held by Grand Banks provide significant development opportunities in addition to establishing a new core operated area in a favorable royalty environment with premium netbacks.

STEVEN R. VANSICKLE

President and CEO

May 5, 2008

The following Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") was prepared at, and is dated, May 5, 2008. This MD&A is provided by the management of Fairborne Energy Ltd. ("Fairborne" or the "Company") to review first quarter 2008 activities and results as compared to the previous year, and should be read in conjunction with the unaudited interim consolidated financial statements including selected notes for the three months ended March 31, 2008 and the audited consolidated financial statements including notes for the year ended December 31, 2007 and 2006. Additional information relating to Fairborne, including Fairborne's annual information form, is available on SEDAR at www.sedar.com.

NATURE OF BUSINESS: Fairborne Energy Ltd. is a growth-oriented exploration and production company resulting from the reorganization of Fairborne Energy Trust (the "Trust") on December 19, 2007 (the "Reorganization"). If the context requires, reference herein to "Fairborne" also includes a reference to the Trust prior to the Reorganization.

The Company maintains its head office in Calgary and is engaged in the business of exploring for, developing, acquiring and producing crude oil and natural gas in Western Canada. Fairborne follows a strategy of balancing risk and reward by focusing on opportunities by geographic area and prospect type. Within these selected areas, the Company develops a portfolio of exploration and development prospects in conjunction with an active acquisition strategy.

FORWARD LOOKING STATEMENTS: This MD&A contains forward-looking statements. Management's assessment of future plans and operations, drilling plans, expected royalty rates and royalty rates, capital expenditures, methods of financing capital expenditures, expected commodity prices, expectations that the Company and its subsidiaries will not pay cash taxes in 2008, the planned sale of the Company's sulphur inventory and the timing thereof and the effects and timing of the acquisition of Grand Banks Energy Corporation 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, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, risks that the sale of the Company's sulphur inventory does not occur or changing the timing thereof, the inability to obtain regulatory approvals or to satisfy the conditions to the offer to acquire Grand Banks Energy Corporation or to fully realize the benefits thereof, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, the Company's actual results may differ materially from those expressed in, or implied by, the forward-looking statements. 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 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.fairborne-energy.com). Furthermore, the forwardlooking statements contained in this MD&A are made as at the date of this MD&A and the Company does not undertake any obligation to update publicly or to revise any of the included forwardlooking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

NON-GAAP TERMS: This document contains the terms "funds generated from operations", "funds generated from operations per share", "cash flow from operations per share" and "netbacks" which are non-GAAP terms. The Company uses these measures to help evaluate its performance. The Company considers corporate netbacks a key measure as it demonstrates its profitability relative to current commodity prices. The Company considers funds generated from operations a key measure as it demonstrates Fairborne's ability to generate funds necessary to repay debt and to fund future growth through capital investment. Funds generated from operations should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian GAAP as an indicator of Fairborne's performance. Fairborne's determination of funds generated from operations may not be comparable to that reported by other companies. The reconciliation between cash flow from operations and funds generated from operations can be found in the statement of cash flows in the consolidated financial statements with funds generated from operations calculated before non-cash working capital and asset retirement expenditures. Fairborne also presents funds generated from operations per share and cash flow from operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of income per share.

BOE CONVERSIONS: Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of one tonne of sulphur to one barrel and six thousand cubic feet of natural gas to one barrel. This conversion ratio of six thousand cubic feet of natural gas to one barrel is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

COMPARATIVE INFORMATION - RESTRUCTURING

On December 19, 2007, Fairborne Energy Trust (the "Trust") converted into Fairborne Energy Ltd. ("Fairborne" or the "Company"), a growth-oriented, exploration and production company (the "Reorganization"). The Reorganization of Fairborne from a trust to a company has been accounted for on a continuity of interest basis and, accordingly, the interim consolidated financial statements for 2007 reflect the financial position, results of operations and cash flows as if the Company had always carried on the business formerly carried on by the Trust. Specifically, the comparative three months ended March 31, 2007 reflect the results of operations and cash flows of the Trust and its subsidiaries prior to the Reorganization (December 19, 2007).

PROPOSED ACQUISITION OF GRAND BANKS ENERGY CORPORATION ("GRAND BANKS")

On April 29, 2008, Fairborne and Grand Banks entered into an agreement pursuant to which Fairborne will, subject to certain conditions, make an offer to acquire all of the issued and outstanding common shares of Grand Banks by way of a takeover bid. Grand Banks is a junior exploration and production company with operations focused in southeast Saskatchewan, southwest Manitoba and west central Alberta. Current production is estimated to be in excess of 1,500 BOE per day (50% oil and 50% gas). The proposed acquisition will result in increased production and cash flow for the Company and will provide the opportunity to establish a new core operated area in a favourable royalty environment, providing premium netbacks.

FIRST QUARTER 2008 FINANCIAL RESULTS



PRODUCTION

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Three months ended
March 31,
2008 2007 change
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Natural gas (Mcf per day) 56,813 45,060 26%
Crude oil (bbls per day) 2,413 2,396 1%
Natural gas liquids (bbls per day) 597 402 49%
Sulphur (tonnes per day)(1) 210 - -
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Total (BOE per day) 12,689 10,308 23%
Natural gas % of production 75% 73% -
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(1) A BOE conversion ratio has been calculated using a conversion rate of
one tonne of sulphur to one barrel.


Fairborne reported average production of 12,689 BOE per day for the first quarter of 2008, 2% lower than the preceding fourth quarter of 2007 (13,005 BOE per day), and 23% higher than the comparative first quarter of 2007 (10,308 BOE per day). Production during the first three months of 2008 was negatively impacted by production outages associated with two weeks of extreme cold weather in February. Production from first quarter drilling commenced late in the quarter due to the Reorganization at the end of 2007 which delayed the capital spending program.

Fairborne's exploration and development activities continue to focus on natural gas properties with 75% of first quarter production from natural gas. Natural gas production during the first quarter of 2008 was 4% lower than the preceding fourth quarter of 2007 (59.2 MMcf per day) primarily due to production outages resulting from adverse weather conditions during February 2008 as well as natural declines. Additional production acquired from Fairquest Energy Limited ("Fairquest") in June 2007 contributed to an overall increase in natural gas production of 26% compared to the first quarter of 2007 (45.1 MMcf per day).

Crude oil and NGL production of 3,010 bbls per day for the first quarter of 2008 reflected natural declines from the preceding fourth quarter of 2007 (3,140 BOE per day). The 8% increase from the comparative first quarter of 2007 (2,798 BOE per day) was attributed to the 2007 Fairquest acquisition as well as 2007 property acquisitions in the Brazeau area.

In the first quarter of 2008 Fairborne began recording sulphur production as a separate revenue stream. Fairborne has benefited from a material increase in sulphur prices over the past six months. Prior to this dramatic increase in sulphur prices, Fairborne accounted for sulphur as an operating cost with no associated production volumes. This treatment reflected the financial impact of sulphur disposal as a cost to Fairborne. However, with prices reaching $290 per tonne during the first quarter of 2008 and with indications that prices could increase even further, sulphur has become a significant revenue stream for Fairborne. Sulphur sales during the first quarter of 2008 averaged 210 tonnes per day including first quarter production as well as volumes produced in November and December 2007 which were sold in the first quarter of 2008.



COMMODITY PRICES & RISK MANAGEMENT ACTIVITIES

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March 31,
2008 2007 change
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Average Prices
Natural gas ($ per Mcf) (1) 8.35 8.49 (2%)
Crude oil ($ per bbl) (1) 87.99 64.19 37%
Natural gas liquids ($ per bbl) 58.74 37.91 55%
Sulphur ($ per tonne) 215.37 - -
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BOE ($ per BOE) (1) 61.09 53.87 13%
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Benchmark Prices
AECO Daily Index (Cdn$ per Mcf) 7.98 7.41 8%
AECO Monthly Index (Cdn$ per Mcf) 7.13 7.46 (4%)
WTI - Edmonton par (Cdn$ per bbl) 98.13 67.76 45%
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(1) Excludes unrealized gains and losses on derivatives.


Risk Management - Physical Sales Contracts

Fairborne's risk management strategy is based on the following objectives:

- protect shareholder return on investment;

- reduce risk exposure in budgeted annual funds flow projections; and

- help ensure transaction economics on acquisitions.

Natural Gas

Natural gas prices improved during the first quarter of 2008, with average AECO daily prices increasing 30% when compared to the preceding fourth quarter of 2007. Compared to the first quarter of 2007, AECO daily prices were up 8%. The dramatic decrease in liquefied natural gas landing in North America combined with strong weather related demand has brought North American storage levels close to the five year average which is approximately 22% below the levels established at the end of March 2007.

During the first quarter of 2008, Fairborne continued to realize above-average natural gas prices due to the higher heat content of the Company's production and an active risk management program. An average of 20,994 Mcf per day was sold under fixed price physical sales contracts during this quarter representing 37% of the Company's natural gas production. Risk management activities for the first quarter of 2008 increased Fairborne's realized natural gas revenue by $0.5 million which had an effect of increasing the Company's natural gas price by $0.10 per Mcf to $8.35 per Mcf, a 5% premium to the daily AECO index.

The following table summarizes the outstanding fixed price physical sales contracts for natural gas, including contracts outstanding at March 31, 2008 as well as contracts entered into after March 31, 2008:



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Q2/08 Q3/08 Q4/08 Q1/09
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Collars
Volume (Mcf per day) 3,622 3,622 1,220 -
Average floor ($ per Mcf) $ 8.83 $ 8.83 $ 8.83 -
Average ceiling ($ per Mcf) $ 10.60 $ 10.60 $ 10.60 -
Swaps
Volume (Mcf per day) 17,579 12,802 10,400 4,528
Average price ($ per Mcf) $ 8.31 $ 8.20 $ 8.24 $ 8.86
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Total volume (Mcf per day) 21,201 16,424 11,620 4,528
Average floor price ($ per Mcf) $ 8.40 $ 8.34 $ 8.30 $ 9.49
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Conversion factor: 1 Mcf = 1.104 GJ


Fairborne has also locked in the AECO basis on 5,000 mmbtu per day of natural gas at NYMEX less US$0.865 per mmbtu for the third quarter of 2008. This basis swap contract is accounted for as a derivative contract. The mark-to-market value of this contract has been recorded as an asset of $91,000 at March 31, 2008.

Crude oil

Crude oil prices strengthened in the first quarter of 2008, increasing by 13% compared to average market prices in the preceding fourth quarter of 2007. For the first three months of 2008, Fairborne had an average of 1,000 bbls per day of crude oil under fixed price physical sales contracts and derivative contracts representing 41% of crude oil production. Risk management activities, including option costs for puts purchased during the quarter reduced Fairborne's realized crude oil revenue by $2.3 million or $10.32 per bbl for the quarter. Compared to the same period in 2007, the Company's realized crude oil price of $87.99 per bbl for the first quarter of 2008 represented an increase of 37% from $64.19 per bbl in 2007 which reflects the overall increase in average market prices for oil throughout most of 2007 and during the first quarter of 2008.

The following table summarizes the outstanding fixed price physical sales contracts on crude oil, including contracts outstanding at March 31, 2008 as well as contracts entered into after March 31, 2008:



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Q2/08 Q3/08 Q4/08
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Collars
Volume (bbls per day) 500 1,000 1,000
Average floor ($ per bbl) $70.00 $75.00 $75.00
Average ceiling ($ per bbl) $75.60 $87.25 $87.25
Swaps
Volume (bbls per day) 500 - -
Average price ($ per bbl) $70.55 - -
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Total volume (bbls per day) 1,000 1,000 1,000
Average floor price ($ per bbl) $70.28 $75.00 $75.00
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Sulphur

A severe shortage in the world markets has caused the price of sulphur to rise dramatically in the last six months. Contract prices for the second quarter of 2008 are expected to approach close to $600 per tonne (F.O.B. Vancouver). Fairborne has a contract to sell its sulphur at Vancouver F.O.B. contract prices less deductions for forming costs and transportation. These deductions are currently averaging approximately $80 per tonne. In addition to the Vancouver sales markets for formed sulphur, sulphur can also be sold into US markets in liquid form. The US price for the second quarter of 2008 is expected to be approximately $450 per liquid tonne less trucking and rail costs.


PETROLEUM AND NATURAL GAS REVENUE
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March 31,
($thousands except as noted) 2008 2007 change
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Natural gas 43,176 34,420 25%
Crude oil 19,319 13,842 40%
Natural gas liquids 3,193 1,372 133%
Sulphur 4,114 - -
Unrealized gain/(loss) on derivatives 78 (313) 125%
Other income 738 345 114%
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Total 70,618 49,666 42%
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Per BOE $ 61.16 $ 53.53 14%
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Fairborne reported revenue of $70.6 million for the first quarter of 2008, representing an 18% increase when compared to the immediately preceding fourth quarter of 2007 ($59.9 million). First quarter revenue in 2008 reflected stronger commodity prices as well as the addition of sulphur revenue. When compared to the same period in 2007, first quarter revenue in 2008 was 42% higher due to increased production from Fairquest properties, stronger commodity prices and revenues associated with sulphur production.



ROYALTIES

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Three months ended
March 31,
($thousands except as noted) 2008 2007 change
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Crown 10,902 6,672 63%
Freehold and overriding 1,407 2,122 (34%)
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Total 12,309 8,794 40%
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Crown (% of revenue) 15.4% 13.4% 15%
Freehold and overriding (% of revenue) 2.0% 4.3% (53%)
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Total (% of revenue) 17.4% 17.7% (2%)
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Per BOE $10.66 $9.48 12%
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Fairborne reported royalties of $12.3 million for the first quarter of 2008 (Q1 2007 - $8.8 million) representing a royalty rate of 17.4% which is consistent with the prior year first quarter rate of 17.7% and the expected average annual royalty rate between 16% and 18%.



OPERATING COSTS

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Three months ended
March 31,
($thousands except as noted) 2008 2007 change
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Operating costs
Natural gas 7,012 6,736 4%
Oil and NGLs 2,419 2,451 (1%)
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Total 9,431 9,187 3%
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Per BOE $ 8.16 $ 9.90 (18%)
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During the first quarter of 2008, Fairborne recorded operating costs of $9.4 million ($8.16 per BOE). Operating costs in the first three months of 2008 reflected continued efforts to control costs and also included a 2004 equalization adjustment of $0.9 million ($0.78 per BOE) at a third party operated plant on the Company's West Pembina property. Excluding the 2004 equalization adjustment, operating costs of $8.94 were 1% lower than the fourth quarter of 2007 ($9.02 per BOE). In the first quarter of 2007, operating costs included equalization costs of approximately $0.44 per BOE related to the Company's Wild River and Marlboro properties, with $9.46 per BOE of normalized operating costs for the period.



TRANSPORTATION EXPENSES
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2008 2007 change
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Transportation costs ($thousands) 1,037 1,004 3%
Per BOE $ 0.90 $ 1.08 (17%)
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Transportation costs of $1.0 million ($0.90 per BOE) for the first quarter of 2008 include clean oil trucking, trucking of natural gas liquids, certain third party fuel charges and transportation and fuel costs associated with the usage of natural gas pipelines. Fairborne's sulphur sales contracts are currently paid net of transportation, therefore no transportation expense is recorded on the Company's sulphur sales. Compared to the fourth quarter of 2007 ($1.00 per BOE) and the first quarter of 2007 ($1.08 per BOE), transportation costs have decreased due to reduced third party fuel usage at Fairborne's West Pembina property.



OPERATING NETBACKS

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Three months ended
March 31,
($ per BOE) 2008 2007 change
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Petroleum and natural gas sales (1) 60.45 53.50 13%
Other income 0.64 0.37 73%
Royalty expense (10.66) (9.48) 12%
Operating costs (8.16) (9.90) (18%)
Transportation expense (0.90) (1.08) (17%)
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Operating netback 41.37 33.41 24%
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(1) Excludes unrealized gains and losses on derivatives.


Fairborne's operating netback of $41.37 per BOE increased 24% compared to the first quarter of 2007. This increase reflects stronger commodity prices, reduced operating and transportation costs as well as the addition of sulphur revenue in 2008.



GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES

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($thousands except as noted) 2008 2007 change
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G&A expenses, net of recoveries 2,853 1,735 64%
Compensation costs 2,006 1,789 12%
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Total G&A expenses 4,859 3,524 38%
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G&A expenses, per BOE $ 2.47 $ 1.87 32%
Compensation costs, per BOE $ 1.74 $ 1.93 (10%)
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Fairborne recorded $2.9 million (Q1 2007 - $1.7 million) of G&A expenses, net of recoveries, in the first quarter of 2008, representing $2.47 per BOE (Q1 2007 - $1.87 per BOE). G&A expenses, net of recoveries, for the first quarter of 2008 increased 64% from the comparable quarter in 2007 primarily due to the termination of the Technical Services Agreement with Fairquest in June 2007. During the first quarter of 2007, recoveries from Fairquest reduced G&A expenses by $0.7 million (Q1 2008 - nil).

Compensation expense of $2.0 million in the first quarter of 2008 was 12% higher than the $1.8 million recorded during the first quarter of 2007. Compensation expense recorded during the first quarter of 2008 primarily resulted from the new liability based retention award program instituted by the Company following the Reorganization in December 2007. Compensation expense associated with this new compensation plan is recognized in income over the vesting period of the plan based on the intrinsic value of the plan at each reporting period. Included in compensation expense at March 31, 2008 is $1.4 million representing the intrinsic value of vested retention awards. Also included in compensation expense for the first quarter of 2008 is the amortization of remaining Restricted Units and Performance Units for senior officers and directors who waived their accelerated vesting rights at the time of the Reorganization.



INTEREST AND FINANCING COSTS

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Three months ended
March 31,
($thousands except as noted) 2008 2007 change
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Interest expense 2,809 3,226 (13%)
Accretion of convertible debentures 522 517 1%
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Total interest and financing costs 3,331 3,743 (11%)
Per BOE $ 2.89 $ 4.03 (28%)
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Fairborne recorded $3.3 million in interest expense and financing costs in the first quarter of 2008, down from $3.7 million in the first quarter of 2007. The decrease in interest expense reflected a decrease in the Company's debt levels. At March 31, 2008, Fairborne had a total of $178.6 million of debt outstanding (March 31, 2007 - $210.5 million). Also included in interest and financing costs is the accretion of convertible debentures. The costs associated with the debenture offering along with the amount allocated to the conversion feature are included in interest and financing costs over the term of the debentures. Accretion of convertible debentures recorded during the first quarter of 2008 was comparable with the accretion recorded during the first quarter of 2007.



DEPLETION, DEPRECIATION AND ACCRETION (DD&A)

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Three months ended
March 31,
2008 2007 change
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Depletion, depreciation and
accretion ($thousands) 24,956 19,370 29%
Per BOE $ 21.61 $ 20.88 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Fairborne recorded $25.0 million in depletion and depreciation of capital assets and accretion of asset retirement obligations during the first quarter of 2008. On a BOE basis, the 2008 first quarter DD&A rate of $21.61 per BOE was 3% higher than the first quarter 2007 ($20.88 per BOE) and 4% lower than the average DD&A rate for the prior year of $22.56 per BOE.



TAXES

----------------------------------------------------------------------------
Three months ended
March 31,
2008 2007 change
----------------------------------------------------------------------------
Future tax expense (reduction) ($thousands) 4,550 (3,779) n/a
Per BOE $ 3.94 $ (4.07) n/a
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Fairborne recorded future tax expense of $4.6 million in the first quarter of 2008 compared to a future tax recovery of $3.8 million recorded during the first quarter of 2007. Prior to the Reorganization, the future tax recoveries resulted from additional interest deductions associated with Fairborne's previous trust structure. Consistent with completion of the Reorganization, Fairborne is now operating under a corporate structure and, as such, the interest deductions and resulting future tax recoveries are no longer applicable. Fairborne does not anticipate paying cash income taxes in its operating entities in 2008 as these entities have sufficient tax pools to offset taxable income.



NET INCOME AND FUNDS GENERATED FROM OPERATIONS

----------------------------------------------------------------------------
Three months ended
March 31,
($thousands except as noted) 2008 2007(1) change
----------------------------------------------------------------------------
Funds generated from operations 42,101 26,033 62%
Per share - basic $ 0.50 $ 0.55 (9%)
Per share - diluted $ 0.50 $ 0.48 4%
Cash flow from operations (including
changes in working capital) 42,857 27,750 54%
Per share - basic $ 0.51 $ 0.59 (14%)
Per share - diluted $ 0.51 $ 0.52 (2%)
Net Income 10,145 7,160 42%
Per share - basic $ 0.12 $ 0.15 (20%)
Per share - diluted $ 0.12 $ 0.15 (20%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Amounts shown prior to the effective date of the Reorganization are
in respect of the Trust and per share numbers are per unit.


The following table provides a reconciliation between cash flow from operations and funds generated from operations.



----------------------------------------------------------------------------
Three months ended
March 31,
($thousands) 2008 2007
----------------------------------------------------------------------------
Cash flow from operations 42,857 27,750
Change in non-cash working capital (994) (1,907)
Asset retirement expenditures 238 190
----------------------------------------------------------------------------
Funds generated from operations 42,101 26,033
----------------------------------------------------------------------------
----------------------------------------------------------------------------


UNIT ANALYSIS

----------------------------------------------------------------------------
Three months ended March 31,
2008 2007
($thousands) ($ per BOE) ($thousands) ($ per BOE)
----------------------------------------------------------------------------
Petroleum and natural gas
revenue (1) 70,618 61.16 49,666 53.53
Royalties (12,309) (10.66) (8,794) (9.48)
Operating expenses (9,431) (8.16) (9,187) (9.90)
Transportation costs (1,037) (0.90) (1,004) (1.08)
Unrealized gain/loss on
derivatives (78) (0.07) 313 0.34
General & administrative (2) (2,853) (2.47) (1,735) (1.87)
Interest expense (3) (2,809) (2.44) (3,226) (3.47)
----------------------------------------------------------------------------
Funds generated from
operations 42,101 36.46 26,033 28.07
Unrealized gain/loss on
derivatives 78 0.07 (313) (0.34)
Compensation expense (2,006) (1.74) (1,789) (1.93)
Accretion of convertible
debentures (522) (0.45) (517) (0.56)
Depletion, depreciation
and accretion (24,956) (21.61) (19,370) (20.88)
Future tax
(expense)/reduction (4,550) (3.94) 3,779 4.07
Non-controlling interest - - (663) (0.71)
----------------------------------------------------------------------------
Net income 10,145 8.79 7,160 7.72
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) net of unrealized loss on derivatives (non-cash)
(2) net of compensation expense (non-cash)
(3) net of accretion on convertible debentures (non-cash)


Fairborne reported record funds generated from operations of $42.1 million ($36.46 per BOE) for the first quarter of 2008, up 43% from the preceding fourth quarter of 2007 ($29.4 million) and 62% from the first quarter of 2007 ($26.0 million). The record cash flow was achieved with strong commodity prices and high operating netbacks. Net income of $10.1 million ($8.79 per BOE) for the first quarter of 2008 reflected the impact of increased cash flows, partially offset by increased DD&A and the future tax expense associated with the change in the tax structure of the Company following the Reorganization.



LIQUIDITY AND CAPITAL RESOURCES

CAPITAL EXPENDITURES

----------------------------------------------------------------------------
Three months ended
March 31,
($thousands) 2008 2007
----------------------------------------------------------------------------
Exploration and development
Land and lease acquisitions 316 423
Drilling, completions and workovers 45,259 16,544
Well equipment and facilities 12,346 10,901
----------------------------------------------------------------------------
57,921 27,868
Property acquisitions, net of dispositions 1,189 -
----------------------------------------------------------------------------
Conversion of exchangeable shares - 4,768
----------------------------------------------------------------------------
Total 59,110 32,636
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the first quarter of 2008, Fairborne's exploration and development expenditures totaled $57.9 million with capital expenditures financed through a combination of bank debt and funds generated from operations.

Fairborne spent $45.3 million on drilling and completion activities in the first quarter of 2008 with a total of 25 wells (16.1 net) drilled resulting in 17 natural gas wells (9.4 net), four coal bed methane ("CBM") wells (3.2 net) and four oil wells (3.5 net) with a 100% success rate. The majority of first quarter drilling activities were focused on Fairborne's Columbia/Harlech, Clive and Deep Basin properties, with 12 wells (8.3 net) drilled in Columbia/Harlech, three wells (2.4 net) drilled on the Company's Clive property and six wells (2.9 net) drilled in the Deep Basin area.

The Company also spent $1.2 million in the first quarter of 2008 on property acquisitions, all of which resulted in increased working interests on existing properties.

WORKING CAPITAL AND BANK INDEBTEDNESS

At March 31, 2008, Fairborne had bank indebtedness of $85.6 million (December 31, 2007 - $86.9 million) and a working capital deficit of $27.3 million (December 31, 2007 - working capital deficit of $7.5 million). During the first quarter of 2008, the Company utilized credit facilities and working capital to finance capital expenditures in excess of cash generated from operations. Fairborne's credit facilities at March 31, 2008 included a $205 million extendible revolving term credit facility and a $15 million demand operating credit facility for a total available facility of $220 million.

Fairborne actively manages its capital structure. The Company's objective when managing capital is to maintain a flexible structure which will allow it to execute on its exploration and development programs, which includes investing in oil and gas activities and completing acquisitions, all with varying degrees of risk. As a result, Fairborne continually strives to balance the proportion of debt and equity in its capital structure to take into account the level of risk being incurred in its capital expenditures.

In order to monitor its capital structure, Fairborne considers various factors including: a debt to funds from operations ratio; the current level of bank credit available from the banking syndicate; the level of bank credit that may be obtainable from the banking syndicate as a result of reserve growth; the availability of other sources of debt with different characteristics than the existing bank debt; the sale of assets; limiting the size of the investment program; and new common equity if available on favorable terms.

CONVERTIBLE DEBENTURES

Fairborne had 100,000 Convertible Unsecured Subordinated Debentures outstanding at March 31, 2008 with a principal amount of $100 million. The Debentures bear interest at a rate of 6.5% per annum, which is payable semi-annually in arrears on December 31 and June 30 of each year. The Debentures mature on December 31, 2011 and can be converted into common shares of Fairborne at any time at the option of the holders at a conversion price of $13.50 per share.

SHAREHOLDERS' EQUITY

The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares, issuable in series.

The following table provides a summary of outstanding common shares, warrants, convertible debentures and shares under Incentive Plans at the dates indicated:



----------------------------------------------------------------------------
April 30, March 31, December 31,
(thousands) 2008 2008 2007
----------------------------------------------------------------------------
Common shares 84,337 84,337 84,282
Warrants (1) 4,627 4,627 4,627
Convertible debentures (2) $ 100,000 $ 100,000 $ 100,000
Incentive plans
Restricted Units (3) 129 129 176
Performance Units (4) 356 356 356
Weighted average common shares
Basic n/a 84,294 58,856
Diluted n/a 84,754 60,729
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Each warrant entitles the holder to acquire 0.39 of a common share at
an exercise price of $8.13 per common share, exercisable until June 1,
2010.
(2) The convertible debentures are convertible into common shares at a
conversion price of $13.50 per share.
(3) The Restricted Units entitle the holders to acquire an aggregate of
157,689 common shares of the Company, subject to vesting in accordance
with the restricted unit and performance unit incentive plan (the
"Incentive Plan").
(4) The Performance Units entitle the holders to acquire an aggregate of
356,275 common shares of the Company, subject to vesting in accordance
with the Incentive Plan.


BUSINESS ENVIRONMENT AND RISK

The business risks the Company is exposed to are those inherent in the oil and gas industry as well as those governed by the individual nature of Fairborne's operations. Geological and engineering risks, the uncertainty of discovering commercial quantities of new reserves, commodity prices, interest rate and foreign exchange risks, competition and government regulations - all of these govern the businesses and influence the controls and management at the Company. Fairborne manages these risks by:

- attracting and retaining a team of highly qualified and motivated professionals who have a vested interest in the success of the Company;

- operating properties in order to maximize opportunities;

- employing risk management instruments to minimize exposure to volatility of commodity prices, interest rate and foreign exchange rates;

- maintaining a strong financial position; and

- maintaining strict environmental, safety and health practices.

Fairborne continues to evaluate the Alberta government's royalty changes and its impact on both the Company's current reserve base and its future opportunities. Fairborne will continue to monitor government announcements and proposal revisions as they become available.

CHANGE IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

FINANCIAL INSTRUMENTS - DISCLOSURES

On January 1, 2008, Fairborne adopted the new Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3862 Financial Instruments - Disclosures which applies to both recognized and unrecognized financial instruments. These disclosures, which include the nature and extent of risks arising from financial instruments, are included in Note 7 of the interim consolidated financial statements.

CAPITAL DISCLOSURES

On January 1, 2008, Fairborne adopted the new recommendations of the CICA, Handbook section 1535, for disclosure of the Company's objectives, policies and processes for managing capital as discussed in Note 6(f) of the interim consolidated financial statements.

INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

On February 13, 2008, Canada's Accounting Standards Board confirmed that the use of IFRS will be required for public companies beginning January 1, 2011. The Company understands that the Canadian Securities Administrators are in the process of examining changes to securities rules as a result of this initiative. Fairborne is in the process of assessing the impact of adopting IFRS in order to formulate an implementation plan for the transition.

CONTROLS AND PROCEDURES

INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

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

It should be noted that a control system, including Fairborne'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.



QUARTERLY FINANCIAL INFORMATION

The following is a summary of select financial information for the
quarterly periods indicated:

----------------------------------------------------------------------------
2008 2007 2007(1) 2007(1)
Q1 Q4 Q3 Q2
----------------------------------------------------------------------------
FINANCIAL ($thousands, except per
share amounts)
Petroleum and natural gas sales 70,618 59,976 54,648 49,501
Funds generated from operations 42,101 29,363 27,164 25,547
Per share - basic $0.50 $0.43 $0.41 $0.45
Per share - diluted $0.50 $0.43 $0.38 $0.41
Cash flow from operations (including
changes in working capital) 42,857 36,004 24,159 27,724
Per share - basic $0.51 $0.53 $0.37 $0.47
Per share - diluted $0.51 $0.53 $0.34 $0.43
Net Income (loss) 10,145 (1,136) 2,271 6,739
Per share - basic $0.12 ($0.03) $0.03 $0.11
Per share - diluted $0.12 ($0.03) $0.03 $0.10
Total assets 792,918 749,715 732,276 753,661
Working capital surplus (deficit) (27,255) (7,467) (27,051) 11,594
Bank indebtedness 85,634 86,866 159,834 179,120
Convertible debentures 92,977 92,455 91,933 91,389
----------------------------------------------------------------------------
----------------------------------------------------------------------------

OPERATIONS

Average production
Natural gas (Mcf per day) 56,813 59,194 58,435 48,689
Crude oil (bbls per day) 2,413 2,616 2,600 2,303
Natural gas liquids (bbls per day) 597 524 582 449
Sulphur (tonnes per day) 210 - - -
----------------------------------------------------------------------------
Total (BOE per day) 12,689 13,005 12,921 10,867
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Amounts shown prior to the effective date of the Reorganization are in
respect of the Trust and per share numbers are per unit.


----------------------------------------------------------------------------
2007 2006 2006 2006
Q1 Q4 Q3 Q2
----------------------------------------------------------------------------
FINANCIAL ($thousands, except per
unit amounts)

Petroleum and natural gas sales 49,666 49,581 48,845 50,914
Funds generated from operations 26,033 26,108 27,825 30,340
Per unit - basic $0.55 $0.54 $0.58 $0.65
Per unit - diluted $0.48 $0.43 $0.51 $0.57
Cash flow from operations
(including changes in working
capital) 27,750 10,189 29,969 38,037
Per unit - basic $0.59 $0.21 $0.63 $0.80
Per unit - diluted $0.52 $0.15 $0.55 $0.71
Net Income 7,160 8,900 10,439 13,881
Per unit - basic $0.15 $0.18 $0.22 $0.30
Per unit - diluted $0.15 $0.17 $0.22 $0.28
Total assets 561,906 539,579 514,681 499,826
Working capital surplus (deficit) 7,093 7,158 (2,395) (3,199)
Bank indebtedness 119,645 101,156 177,595 147,202
Convertible debentures 90,819 90,302 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

OPERATIONS

Average production
Natural gas (Mcf per day) 45,060 46,752 45,966 43,441
Crude oil (bbls per day) 2,396 2,522 2,604 2,607
Natural gas liquids (bbls per day) 402 308 376 432
----------------------------------------------------------------------------
Total (BOE per day) 10,308 10,623 10,640 10,280
----------------------------------------------------------------------------
----------------------------------------------------------------------------


INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
----------------------------------------------------------------------------
March 31, December 31,
($thousands) 2008 2007
----------------------------------------------------------------------------

Assets

Current assets
Cash and cash equivalents $ 202 $ 116
Accounts receivable 54,361 45,485
Prepaid expenses and deposits 5,734 6,015
----------------------------------------------------------------------------
60,297 51,616
Petroleum and natural gas properties and
equipment (Note 2) 716,451 681,929
Goodwill 16,170 16,170
----------------------------------------------------------------------------
$ 792,918 $ 749,715
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities $ 87,552 $ 59,083
Bank indebtedness (Note 3) 85,634 86,866
Convertible debentures (Note 4) 92,977 92,455
Asset retirement obligation (Note 5) 9,214 9,084
Future income taxes 49,589 45,039

Shareholders' Equity
Common shares (Note 6) 445,610 445,105
Warrants 2,857 2,857
Equity component of convertible debentures
(Note 4) 5,581 5,581
Contributed surplus (Note 6) 3,408 3,294
Retained earnings 10,496 351
----------------------------------------------------------------------------

Subsequent event (Note 9)
467,952 457,188
----------------------------------------------------------------------------
$ 792,918 $ 749,715
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(DEFICIT)
(Unaudited)

----------------------------------------------------------------------------
For the three months
ended March 31,
($thousands except per share amounts) 2008 2007
----------------------------------------------------------------------------

Revenue
Petroleum and natural gas $ 70,618 $ 49,666
Royalties (12,309) (8,794)
----------------------------------------------------------------------------
58,309 40,872
Expenses
Operating 9,431 9,187
Transportation 1,037 1,004
General and administrative 4,859 3,524
Interest 3,331 3,743
Depletion, depreciation and accretion 24,956 19,370
----------------------------------------------------------------------------
43,614 36,828
----------------------------------------------------------------------------
Income before taxes and non-controlling interest 14,695 4,044
Future taxes (reduction) 4,550 (3,779)
----------------------------------------------------------------------------
Net income before non-controlling interest 10,145 7,823
Non-controlling interest - 663
----------------------------------------------------------------------------
Net income 10,145 7,160
Retained earnings (deficit), beginning of period 351 (26,135)
Retained earnings adjustment, financial
instruments - 404
Distributions declared - (16,785)
----------------------------------------------------------------------------
Retained earnings (deficit), end of period $ 10,496 $ (35,356)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income per share (Note 6)
Basic $ 0.12 $ 0.15
Diluted $ 0.12 $ 0.15
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.


INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

----------------------------------------------------------------------------
For the three months
ended March 31,
($thousands) 2008 2007
----------------------------------------------------------------------------
Cash provided by (used in):

Operating activities
Net income $ 10,145 $ 7,160
Items not involving cash:
Depletion, depreciation and accretion 24,956 19,370
Non-controlling interest - 663
Compensation expense 2,006 1,789
Future taxes (reduction) 4,550 (3,779)
Accretion of convertible debentures 522 517
Unrealized gain on financial instruments (78) 313
Asset retirement expenditures (238) (190)
----------------------------------------------------------------------------
41,863 25,843
Change in non-cash working capital 994 1,907
----------------------------------------------------------------------------
42,857 27,750
----------------------------------------------------------------------------
Financing activities
Distributions to unitholders - (18,616)
Bank indebtedness (1,232) 18,489
----------------------------------------------------------------------------
(1,232) (127)
----------------------------------------------------------------------------
Investing activities
Expenditures on petroleum and natural gas
properties (57,921) (27,868)
Acquisition of petroleum and natural gas
properties (1,189) -
Change in non-cash working capital 17,571 256
----------------------------------------------------------------------------
(41,539) (27,612)
----------------------------------------------------------------------------
Change in cash and cash equivalents 86 11
Cash and cash equivalents, beginning of period 116 764
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 202 $ 775
----------------------------------------------------------------------------

Interest paid $ 788 $ 1,263
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


SELECTED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2008 (unaudited)
(tabular amounts are stated in thousands and thousands of dollars except
per share amounts)


The interim consolidated financial statements of Fairborne Energy Ltd. (the "Company" or "Fairborne") have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the year ended December 31, 2007, except as noted below. The disclosure which follows is incremental to the disclosure included with the annual financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2007.

REORGANIZATION OF FAIRBORNE ENERGY LTD.

Fairborne is a resource-based company engaged in the exploration for and the development and production of natural gas, natural gas liquids and crude oil in Western Canada. The Company resulted from a reorganization effective December 19, 2007 pursuant to a Plan of Arrangement involving, among others, Fairborne Energy Trust (the "Trust"), Fairborne and the unitholders of the Trust ("Reorganization").

Pursuant to the Reorganization, the Trust was restructured from an open-ended unincorporated trust to Fairborne Energy Ltd., a publicly traded exploration and development corporation. Unitholders of the Trust received an equal number of common shares of Fairborne which holds the assets and liabilities previously held, directly or indirectly, by the Trust. Exchangeable shares of the Trust were exchanged for common shares of the Company at the current exchange ratio in effect on December 18, 2007.

The reorganization to a corporation has been accounted for on a continuity of interest basis and accordingly, the interim consolidated financial statements for 2007 reflect the financial position, results of operations and cash flows as if the Company had always carried on the business formerly carried on by the Trust.

1. CHANGES IN ACCOUNTING POLICIES AND PRACTICES

FINANCIAL INSTRUMENTS - DISCLOSURES

On January 1, 2008, Fairborne adopted the new Canadian accounting standards with respect to disclosures of financial instruments which applies to both recognized and unrecognized financial instruments. These disclosures, which include the nature and extent of risk arising from the financial instruments and how Fairborne manages those risks, are included in Note 7.

CAPITAL DISCLOSURES

On January 1, 2008, Fairborne adopted the new Canadian accounting standards with respect to disclosures regarding the Company's objectives, policies and processes for managing capital. These disclosures are included in Note 6(f).



2. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

----------------------------------------------------------------------------
March 31, December 31,
2008 2007
----------------------------------------------------------------------------
Petroleum and natural gas properties
and equipment $ 1,034,061 $ 974,780
Accumulated depletion and depreciation (319,497) (294,701)
Corporate assets 3,672 3,672
Accumulated depreciation (1,785) (1,822)
----------------------------------------------------------------------------
$ 716,451 $ 681,929
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at March 31, 2008, future development costs of $111.4 million (December 31, 2007 - $126.0 million) were included in the depletion calculation and costs of acquiring unproved properties in the amount of $45.1 million (December 31, 2007 - $50.0 million) were excluded from the depletion calculation. Included in Fairborne's petroleum and natural gas properties and equipment balance is $5.2 million (December 31, 2007 - $5.4 million) relating to asset retirement obligation, net of accumulated depletion.

3. BANK INDEBTEDNESS

At March 31, 2008, the Company had a $205 million extendible revolving term credit facility and a $15 million demand operating credit facility available from a syndicate of Canadian chartered banks, subject to the banks' semi-annual valuation of the Company's petroleum and natural gas properties. The extendible revolving term facility is available on a revolving basis until May 30, 2008 (364 day facility) at which time it may be extended, at the lenders option. If the revolving period is not extended, the undrawn portion of the facility will be cancelled and the amount outstanding will convert to a 365 day non-revolving term facility. The amounts outstanding under the non-revolving term facility are required to be repaid at the end of the term facility being May 30, 2009. Interest payable on amounts drawn under the facilities is at the prevailing bankers' acceptance rates plus stamping fees, lenders' prime rate or LIBOR rates plus applicable margins, depending on the form of borrowing by the Company. The margins and stamping fees vary from 0% to 1.5% depending on financial statement ratios and the form of borrowing. The credit facilities are secured by a general security agreement and a first ranking floating charge on the assets of the Company. At March 31, 2008, letters of credit totaling $0.6 million were outstanding.

4. CONVERTIBLE DEBENTURES

The following table sets forth a reconciliation of the convertible debentures for the three months ended March 31, 2008:



----------------------------------------------------------------------------
Number of Debt Equity
Debentures component component
----------------------------------------------------------------------------
Balance, beginning of period 100,000 $ 92,455 $ 5,581
Accretion - 522 -
----------------------------------------------------------------------------
Balance, end of period 100,000 $ 92,977 $ 5,581
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. ASSET RETIREMENT OBLIGATION

The following table sets forth a reconciliation of the asset retirement
obligation for the three months ended March 31, 2008:

----------------------------------------------------------------------------
Balance, beginning of period $ 9,084
Liabilities incurred 171
Liabilities settled (238)
Accretion expense 197
----------------------------------------------------------------------------
Balance, end of period $ 9,214
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. SHAREHOLDERS' EQUITY

The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares, issuable in series.

a) COMMON SHARES

The following table sets forth a reconciliation of the common shares issued and outstanding for the three months ended March 31, 2008:



----------------------------------------------------------------------------
Number
of Shares Amount
----------------------------------------------------------------------------
Balance, beginning of period 84,282 $ 445,105
Issued on vesting of Restricted Units 55 505
----------------------------------------------------------------------------
Balance, end of period 84,337 $ 445,610
----------------------------------------------------------------------------
----------------------------------------------------------------------------


b) PER SHARE AMOUNTS

The following table summarizes the weighted average common shares and, prior
to December 19, 2007, trust units used in calculating net income per share:

----------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
----------------------------------------------------------------------------
Numerator
Net income - basic $ 10,145 $ 7,160
Non-controlling interest - 663
----------------------------------------------------------------------------
Numerator for diluted net income per share $ 10,145 $ 7,823
----------------------------------------------------------------------------
Denominator
Weighted average shares - basic 84,294 47,349
Exchangeable shares - 4,587
Restricted Units 132 849
Performance Units 328 951
----------------------------------------------------------------------------
Denominator for diluted net income per share 84,754 53,736
----------------------------------------------------------------------------
Basic net income per share $ 0.12 $ 0.15
Diluted net income per share $ 0.12 $ 0.15
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Excluded from the diluted number of shares for the three months ended March 31, 2008 and March 31, 2007 is the effect of convertible debentures (7.4 million shares) which are anti-dilutive to net income.

c) INCENTIVE PLAN

The following table sets forth a reconciliation of the equity based incentive plan activity for the three months ended March 31, 2008.



----------------------------------------------------------------------------
Number of Number of
Restricted Performance
Units Units Total
----------------------------------------------------------------------------
Balance, beginning of period 176 356 532
Exercised (47) - (47)
----------------------------------------------------------------------------
Balance, end of period 129 356 485
----------------------------------------------------------------------------
Exercisable, end of period - - -
----------------------------------------------------------------------------
Equivalent common shares, end of period (1) 158 328 486
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) including additional common shares to be issued for accumulated
distributions earned prior to the Reorganization and adjusted for the
performance factor set in connection with the Reorganization.


d) RETENTION AWARD PLAN

The following table sets forth a reconciliation of the retention reward plan activity for the three months ended March 31, 2008:



----------------------------------------------------------------------------
Number Weighted
of average
Awards exercise price
----------------------------------------------------------------------------
Balance, beginning of period 7,420 $ 5.75
Granted 760 6.17
Forfeited (180) 5.75
----------------------------------------------------------------------------
Balance, end of period 8,000 $ 5.79
----------------------------------------------------------------------------
----------------------------------------------------------------------------


e) CONTRIBUTED SURPLUS

The following table sets forth a reconciliation of the contributed surplus for the three months ended March 31, 2008:



----------------------------------------------------------------------------
Balance, beginning of period $ 3,294
Trust unit based compensation 619
Restricted Units exercised (505)
----------------------------------------------------------------------------
Balance, end of period $ 3,408
----------------------------------------------------------------------------
----------------------------------------------------------------------------


f) MANAGEMENT OF CAPITAL STRUCTURE

Fairborne actively manages its capital structure which includes shareholders' equity, bank debt, convertible debentures and working capital. In order to maintain or adjust the capital structure, Fairborne considers the following: incremental investment and acquisition opportunities; the current level of bank credit available from the banking syndicate; the level of bank credit that may be obtainable from the banking syndicate as a result of reserve growth; the availability of other sources of debt with different characteristics than the existing bank debt; the sale of assets; limiting the size of the investment program; and new share issuances if available on favorable terms. The Company's objective is to maintain a flexible structure that will allow it to execute its investment program, including exploration and development of its oil and gas properties and acquisition and disposition transactions which all carry varying amounts of risk. Fairborne continually strives to balance the proportion of debt and equity in its capital structure to take into account the level of risk being incurred in its investment program. Fairborne may from time to time issue shares and adjust its capital spending to manage current and projected debt levels.

The Company monitors capital based on the ratio of net debt to annualized cash flow. This ratio is calculated as net debt, defined as outstanding bank debt plus or minus working capital, divided by annualized cash flow from operations before changes in non-cash working capital and asset retirement expenditures. Fairborne's current strategy is to maintain a ratio of no more than 1 to 1, excluding convertible debentures. This ratio may increase at certain times as a result of acquisitions. In order to facilitate the management of this ratio, the Company prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors including current and forecast prices, successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors. As at March 31, 2008, Fairborne's ratio of net debt to annualized cash flow was 0.7 to 1, which is within the range established by the Company.

7. FINANCIAL INSTRUMENTS

The Company has exposure to the following risks from its use of financial instruments:

- Credit risk

- Liquidity risk

- Market risk

a) CREDIT RISK:

Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation and arises principally from joint venture partners and natural gas marketers. Virtually all of Fairborne's accounts receivable are from counterparties in the oil and gas industry and are subject to normal industry credit risks. As at March 31, 2008, the Company's accounts receivable consisted of $26.1 million from joint venture partners, $27.6 million from petroleum and natural gas marketers and $0.7 million of other trade receivables.

The carrying amount of accounts receivable and cash and cash equivalents represents the maximum credit exposure. Fairborne does not have an allowance for doubtful accounts as at March 31, 2008 and did not provide for any doubtful accounts nor was it required to write-off any accounts receivable during the three months ended March 31, 2008. The amounts outstanding for more than 90 days are predominantly due from large well established joint venture partners.

As at March 31, 2008, the Company considers its accounts receivable to be aged as follows:



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Aging
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Current (less than 90 days) $ 47,200
Past due (more than 90 days) 7,161
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Total $ 54,361
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b) LIQUIDITY RISK:

Liquidity risk relates to the risk that a company will not be able to meet its financial obligations as they become due. Fairborne's financial liabilities on the balance sheet consist of accounts payable, bank debt and convertible debentures. The Company expects to satisfy obligations under accounts payable in less than one year. Fairborne has a revolving reserve based credit facility and demand loan facility as outlined in Note 3. The credit facility is available on a revolving basis which converts to a 365 day facility if not extended by the lenders and the convertible debentures mature on December 31, 2011. Fairborne anticipates it will have adequate liquidity to fund its financial liabilities as they come due. The Company has no defaults or breaches on its bank debt or any of its financial liabilities.

c) MARKET RISK:

Market risk is the risk that fluctuations in currency rates, interest rates and commodity prices will affect a Company's income or the value of its financial assets and liabilities.

Foreign currency exchange rate risk

Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. The underlying market prices in Canada for petroleum and natural gas are impacted by changes in the exchange rate between the Canadian and United States dollar. In general, while the underlying foreign exchange rate affects oil and natural gas prices, Fairborne does not sell a significant amount of oil or natural gas denominated in U.S. dollars. Settlement of fixed price physical sales contracts denominated in U.S. dollars would have been directly impacted by changes in the foreign exchange rate. If the foreign exchange rate had changed by $0.10 during the first quarter of 2008, after tax net earnings would have changed by $0.2 million as a result of the impact on the settlement of these contracts. Currency risk has no significant impact on the value of financial assets and liabilities on the balance sheet at March 31, 2008 as the majority of the Company's financial instruments are denominated in Canadian dollars.

Commodity price risk

Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by not only the relationship between the Canadian dollar and United States dollar, as outlined above, but also world economic events that dictate the levels of supply and demand. Fairborne has attempted to mitigate commodity price risk through the use of various financial derivatives and physical delivery sales contracts as outlined in Note 8. The commodity contracts recorded at fair value resulted in unrealized gains of $78,000 for the three months ended March 31, 2008 which have been included in petroleum and natural gas sales. In addition, fixed price physical delivery contracts for oil and natural gas that settled during the quarter ended March 31, 2008 resulted in settlement gains of $0.5 million for the natural gas contracts and settlement losses of $2.3 million for the oil contracts. As at March 31, 2008, a one dollar change to the price per barrel of oil would have had an impact to net earnings of approximately $0.2 million for the first quarter of 2008 and a $0.25 change to the price per thousand cubic feet of natural gas would have had an impact to first quarter net earnings of approximately $0.9 million.

Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate risk on its bank debt which has a floating interest rate. The convertible debentures do not bear interest rate risk as they are at a fixed rate. An increase in interest rates of 1% would reduce net income and cash flows from operations for the three months ended March 31, 2008 by approximately $0.7 million based on the average amount of bank debt outstanding during the quarter. An opposite impact would have occurred to net income and cash flows had interest rates decreased 1%. The Company had no interest rate hedges or swaps outstanding at March 31, 2008.

d) FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying value of Fairborne's financial instruments, other than bank indebtedness and the convertible debentures, approximate their fair value due to their short maturity. The fair value of the bank indebtedness approximates its carrying value as it bears interest at a floating rate. The fair value of the convertible debentures at March 31, 2008 was $96.0 million.

8. COMMODITY CONTRACTS

Fairborne has a risk management program whereby the Company sells forward a portion of its future production through fixed price physical sales contracts with customers.

a) COMMODITY CONTRACTS RECORDED AT FAIR VALUE:

At March 31, 2008 the following natural gas contract has been recorded at its estimated fair value as a $91,000 asset. The corresponding amount has been recorded in petroleum and natural gas sales as an unrealized gain on financial instruments for the three months ended March 31, 2008.



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Volume Price
Remaining Term (mmbtu/day) (US$ per mmbtu) Settlement Index
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Swaps
Jul 1, 2008 - Sep 30, 2008 5,000 NYMEX-$0.865 US NYMEX LD
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b) COMMODITY CONTRACTS NOT RECORDED AT FAIR VALUE:

The following crude oil and natural gas fixed price physical sales contracts outstanding at March 31, 2008 have been entered into for the purpose of physical delivery of a non-financial item; therefore, the physical delivery contracts are not fair valued. Settlements on these contracts are included in petroleum and natural gas revenue as they settle.



OIL:
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Volume Price
Remaining Term (bbls per day) (US$ per bbl) Settlement Index
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Swaps
Apr 1, 2008 - Jun 30, 2008 500 70.55 WTI
Collars
Jan 1, 2008 - Jun 30, 2008 500 70.00 - 75.60 WTI
Jul 1, 2008 - Dec 31, 2008 500 70.00 - 74.00 WTI
Jul 1, 2008 - Dec 31, 2008 500 80.00 - 100.50 WTI
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NATURAL GAS:
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Volume Price
Remaining Term (GJ per day) (CDN$ per GJ) Settlement Index
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AECO Collars
Apr 1, 2008 - Oct 31, 2008 2,000 8.00 - 10.05 AECO C Daily
Apr 1, 2008 - Oct 31, 2008 2,000 8.00 - 9.15 AECO C Daily
AECO Swaps
Apr 1, 2008 - Jun 30, 2008 5,275 7.81 AECO C Monthly
Apr 1, 2008 - Oct 31, 2008 2,000 8.05 AECO C Monthly
Apr 1, 2008 - Oct 31, 2008 2,000 8.04 AECO C Monthly
Apr 1, 2008 - Oct 31, 2008 2,000 7.39 AECO C Monthly
Jan 1, 2008 - Dec 31, 2008 1,000 7.53 AECO C Monthly
Jan 1, 2008 - Dec 31, 2008 1,500 6.52 AECO C Monthly
Jan 1, 2008 - Dec 31, 2008 2,638 7.015 AECO C Monthly
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9. SUBSEQUENT EVENT

On April 29, 2008, Fairborne and Grand Banks Energy Corporation ("Grand Banks") entered into an agreement pursuant to which Fairborne will, subject to certain conditions, make an offer ("the Offer") to acquire all of the issued and outstanding common shares of Grand Banks by way of a takeover bid. Under the terms of the bid, Fairborne will pay $2.90 cash per share and assume Grand Banks' existing debt for an estimated purchase price of $112.0 million. The Offer will be subject to certain conditions, including the deposit of not less than 66 2/3% of the outstanding common shares of Grand Banks (on a fully diluted basis), receipt of regulatory approvals and other customary conditions.

CORPORATE GOVERNANCE

A system of corporate governance for Fairborne has been established to provide the Board of Directors, management and shareholders of the Company with effective governance.

A more detailed discussion of corporate governance is available in the Information Circular for the Annual and Special Meeting of Shareholders.

GENERAL INFORMATION

Shareholders and interested investors are encouraged to visit our web site: http://www.fairborne-energy.com

Historical public documents, corporate information, latest presentation material and press releases are all available. Filings also available at: www.sedar.com

ANNUAL MEETING ANNOUNCEMENT

The Annual and Special Meeting of the Shareholders of Fairborne Energy Ltd. will be held at 3:00 pm, on Thursday May 29, 2008 in the McMurray Room of the Calgary Petroleum Club, 319 - 5th Avenue S.W. Calgary, Alberta.

Contact Information