FairWest Energy Corporation
TSX : FEC

FairWest Energy Corporation

May 15, 2008 23:42 ET

FairWest Energy Corporation Announces First Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - May 15, 2008) - FairWest Energy Corporation ("FairWest") (TSX:FEC) is pleased to announce its first quarter financial and operations results for the first quarter ended March 31, 2008.

The following discussion is management's discussion and analysis ("MD&A") of FairWest Energy Corporation ("FairWest") operating and financial data for March 31, 2008, as well as estimates of future operating and financial performance based on information currently available. It should be read in conjunction with the audited financial statements of FairWest for the period ended December 31, 2007.

On May 23, 2007, FairWest acquired all of the issued and outstanding shares of Strike Petroleum Ltd. ("Strike"). For the purposes of this MD&A, management has included the operating and financial results of Strike from the period May 23, 2007.

On August 2, 2007, Neuberry Limited Partnership ("NLP") was registered. FairWest is the only limited partner and Neuberry Energy 2007 Ltd. ("Neuberry") is the general partner. FairWest is the sole shareholder of Neuberry. For the purposes of this MD&A the results of NLP are included as being those of FairWest from the period August 2, 2007.

The information contained herein is current as of May 14, 2008.

Basis of Presentation - The Financial Statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). All tabular amounts in the following discussion are in Canadian dollars unless otherwise noted. The reporting and the measurement currency is the Canadian dollar.

Non-GAAP Measurements - This MD&A contains the terms funds flow from operations and operating netback. These terms should not be considered an alternative to, or more meaningful than cash flow from operating activities or net income as determined in accordance with Canadian GAAP as an indicator of FairWest's performance. FairWest's determination of funds flow from operations may not be comparable to that reported by other companies, especially those in other industries. Funds flow from operations represents net earnings adjusted for non-cash items including depletion and depreciation, accretion and stock based compensation. FairWest evaluates its performance based on earnings and funds flow from operations. FairWest considers funds flow from operations and operating netbacks key measures that demonstrate FairWest's ability to generate the funds flow necessary to fund future growth through capital investment and to repay debt.

Operating netback is a non-GAAP measurement that represents profit margins realized by the production and sale of petroleum and natural gas. The reconciliation between operating netback and funds flows from operations can be found in the "Funds Flows from Operations" section of this MD&A.

BOE Presentation - The term barrels of oil equivalent ("BOE") may be misleading particularly if used in isolation. All BOE conversions in this report are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil. A BOE conversion ratio of 6 mcf: 1 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.

Forward-Looking Statements

Statements made throughout this MD&A may contain forward-looking information including expectations of future production, components of cash flow and earnings, expected future events and/or financial results that are forward looking in nature and subject to substantial risks and uncertainties. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. FairWest cautions the readers that actual performance will be affected by a number of factors, as many may respond to changes in economic and political circumstances throughout the world. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of FairWest. These risks include, but are not limited to: the risks associated with the oil and gas industry, commodity prices and exchange rate changes; industry related risks could include, but are not limited to, operational risks in exploration, development and production, delays or changes in plans, risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses.

These external factors beyond FairWest's control may affect the marketability of oil and natural gas produced, industry conditions including changes in laws and regulations, changes in income tax regulations, increased competition, fluctuations in commodity prices, interest rates, and variations in the Canadian/United States dollar exchange rate. The reader is cautioned not to place undue reliance on this forward-looking information.

Statements throughout this MD&A that are not historical facts may be considered "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 FairWest's objectives, goals or future plans are forward looking statements. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated.

Corporate Overview

FairWest is engaged in the exploration for, and the acquisition, development and production of, oil and natural gas reserves in the provinces of Alberta and Saskatchewan.



Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Financial 2008 2007 2007(1)(2) 2007(1)
Highlights (3 Months) (3 Months) (3 Months) (3 Months)
$ $ $ $
----------------------------------------------------------------------------

Revenue
Petroleum and natural gas
sales, net of royalties 3,548,583 2,456,899 2,169,122 1,516,920
Other income 45,305 84,689 634,768 11,278
----------------------------------------------------------------------------
Total revenue 3,593,888 2,541,588 2,803,890 1,528,198
----------------------------------------------------------------------------
Expenses
Depletion, depreciation and
amortization 3,278,885 4,731,659 2,177,154 1,759,940
Operating 1,518,887 1,368,835 1,004,415 575,953
Interest (3) 479,167 524,818 425,679 184,388
General and adminis-
trative (3) 542,070 572,199 394,003 483,752
Stock-based compensation 85,662 74,205 106,066 86,018
Part XII.6 tax 30,655 - 12,927 25,177
Loss on sale asset 3,439 47,477 378,958 -
Future income tax
(recovery) (816,035) 1,529,979 (158,401) (1,122,957)
----------------------------------------------------------------------------
Total expenses 5,122,730 8,849,172 4,340,801 1,992,271
----------------------------------------------------------------------------
Net income (loss) (1,528,842) (6,307,584) (1,536,911) (464,073)
----------------------------------------------------------------------------

Funds flow from operations 1,023,109 75,737 966,866 258,927
----------------------------------------------------------------------------
Capital expenditures (872,871) 4,669,612 7,052,703 21,299,837
----------------------------------------------------------------------------

Basic earnings (loss) per
share (0.016) (0.08) (0.02) (0.007)
Diluted earnings (loss) per
share (0.016) (0.08) (0.02) (0.007)
----------------------------------------------------------------------------

Share Data:
Common shares outstanding 96,742,379 96,742,379 90,242,379 87,038,340
Warrants - - - 2,400,000
Options 8,116,315 7,774,619 7,803,748 6,849,116

Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Highlights of 2008 2007 2007 2007
Operations (3 Months) (3 Months) (3 Months) (3 Months)
----------------------------------------------------------------------------
Natural gas
Natural gas sales before
royalties($) 3,199,477 2,084,996 1,798,413 1,659,913
Volume -- mcf 401,526 320,560 295,157 227,589
Volume -- mcf/day 4,412 3,484 3,208 2,501
$/mcf 7.97 6.50 6.09 7.29
----------------------------------------------------------------------------
Oil and NGLs
Oil and NGL sales before
royalties($) 941,345 938,899 551,680 220,735
Volume - bbl 10,997 13,694 8,295 3,696
Volume - bbl/day 121 149 90 41
$/bbl 85.60 68.56 66.51 59.72
----------------------------------------------------------------------------
Barrel of oil equivalent
Total sales before
royalties($) 4,140,822 3,023,895 2,350,093 1,880,648
Volume - boe 77,918 67,121 57,488 41,628
Volume - boe/day 856 730 625 458
$/boe 53.14 45.05 40.88 45.18
----------------------------------------------------------------------------

Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Financial 2007 2006 2006 2006
Highlights (3 Months) (3 Months) (3 Months) (3 Months)
$ $ $ $
----------------------------------------------------------------------------
Revenue
Petroleum and natural gas
sales, net of royalties 989,140 812,783 1,236,102 1,122,561
Other income 19,747 (1,667) - -
----------------------------------------------------------------------------
Total revenue 1,008,887 811,116 1,236,102 1,122,561
----------------------------------------------------------------------------
Expenses
Depletion, depreciation and
amortization 1,176,388 941,052 714,978 697,487
Operating 472,535 236,658 487,706 473,522
Interest (3) 92,791 70,925 76,230 69,422
General and adminis-
trative (3) 356,309 295,932 46,997 209,433
Stock-based compensation 73,044 100,657 114,418 72,338
Part XII.6 tax 31,861 - 1,281 43,814
Loss on sale asset - - - -
Future income tax
(recovery) (361,103) 380,089 75,027 -
----------------------------------------------------------------------------
Total expenses 1,841,825 2,025,313 1,516,637 1,566,016
----------------------------------------------------------------------------
Net income (loss) (832,938) (1,214,197) (280,535) (443,455)
----------------------------------------------------------------------------

Funds flow from operations 55,391 215,239 623,888 326,370
----------------------------------------------------------------------------
Capital expenditures 2,207,652 5,078,846 4,339,276 895,911
----------------------------------------------------------------------------

Basic earnings (loss) per
share (0.014) (0.022) (0.005) (0.008)
Diluted earnings (loss) per
share (0.014) (0.022) (0.005) (0.008)
----------------------------------------------------------------------------
Share Data:
Common shares outstanding 62,308,307 61,444,307 60,962,044 55,256,144
Warrants 2,400,000 3,000,000 3,000,000 3,000,000
Options 5,399,116 5,899,116 5,899,116 4,674,116

Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Highlights of 2007 2006 2006 2006
Operations (3 Months) (3 Months) (3 Months) (3 Months)
----------------------------------------------------------------------------
Natural gas
Natural gas sales before
royalties($) 1,066,664 712,410 684,720 798,609
Volume -- mcf 139,359 107,425 117,637 124,906
Volume -- mcf/day 1,548 1,168 1,279 1,373
$/mcf 7.65 6.63 5.82 6.39
----------------------------------------------------------------------------
Oil and NGLs
Oil and NGL sales before
royalties($) 167,384 200,811 279,390 339,172
Volume - bbl 3,041 3,541 4,261 5,050
Volume - bbl/day 34 38 46 55
$/bbl 55.04 56.71 65.57 67.16
----------------------------------------------------------------------------
Barrel of oil equivalent
Total sales before
royalties($) 1,234,048 913,221 964,110 1,137,781
Volume - boe 26,268 21,445 23,867 25,868
Volume - boe/day 292 233 259 284
$/boe 46.98 42.58 40.40 43.98
----------------------------------------------------------------------------

(1) Includes operations of Strike from May 23, 2007
(2) Includes operations of NLP from August 2, 2007
(3) June adjusted to reflect current reporting


Petroleum and Natural Gas Sales

The following table represents revenue, sales volumes, and average prices received from the sale of oil and natural gas liquids for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
----------------------------------------------------------------------
Revenue
Natural gas revenue ($) 3,199,477 1,066,664
Oil and natural gas liquids revenue ($) 941,345 167,384
----------------------------------------------------------------------
Petroleum and natural gas sales ($) 4,140,822 1,234,048
Royalty ($) 592,239 244,908
----------------------------------------------------------------------
Petroleum and natural gas sales, net of royalty
expense ($) 3,548,583 989,140
----------------------------------------------------------------------
Petroleum and natural gas sales ($/boe) 53.14 46.98
----------------------------------------------------------------------

Sales Volumes
Natural gas (mcf) 401,526 139,359
Oil and natural gas liquids (bbls) 10,997 3,041
Boe/d 856 292
----------------------------------------------------------------------
Average Sales Price
Natural gas ($/mcf) 7.97 7.65
Oil and natural gas liquids ($/bbl) 85.60 55.04
----------------------------------------------------------------------


Average daily production during the three month period ended March 31, 2008, was 856 boe/d, compared to 292 boe/d for the three month period ended March 31, 2007. Current production is approximately 850 boe/d.

On a period to period comparison sales volumes have almost tripled as the acquisitions made in 2007 are being optimized and the wells recompleted and drilled in the last quarter of 2007 come on production. Strong commodity prices have also had an impact on sales revenue, particularly for oil. FairWest has increased its volume of oil sales and has been able to benefit on two fronts, increased volumes and increased price. Management believes that prices for oil and gas will continue to be strong for the balance of 2008.

Royalties

The following table shows royalty expense for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Royalties ($) 592,239 244,908
% of sales 14.30 19.85
$/boe 7.60 9.32
--------------------------------------------------------------------


Royalty as a percentage of sales declined to 14.30% in the three-month period ended March 31, 2008, from 19.85% in the same period in 2007, as FairWest was able to utilize increased crown royalty deductions as compared to the prior period.

The new Alberta royalty regime will be implemented in January 2009. FairWest does not believe the impact will be significant due to the production profile of our wells.

Other Income and Gain on the Disposal of Assets

The following table shows other income and gain on the disposal of assets for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Other income ($) 45,305 19,747
Gain (loss) on disposal of assets ($) (3,439) -
--------------------------------------------------------------------
Total ($) 41,866 19,747
--------------------------------------------------------------------


For the period ended March 31, 2008, other income includes interest income of $39,224 and royalty income of $6,081. For the period ended March 31, 2007, other income is attributable to interest income of $8,547 and miscellaneous income of $11,200.

For the period ended March 31, 2008, the loss on disposal of assets relates to the sale of the Benso mining property in Ghana Africa. This property was acquired as a result of the amalgamation with Fairstar Explorations Inc. ("Fairstar") in 2005 and was disposed of in the fourth quarter of 2007. There were some additional costs of disposition that carried over to 2008.

Operating

The following table shows operating costs for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Operating ($) 1,518,887 472,535
$/boe 19.49 17.99
--------------------------------------------------------------------


FairWest's per unit operating costs have increased primarily due to extreme weather conditions during the first quarter which lowered production levels and increased maintenance costs. FairWest, on a go forward basis, expects per unit costs to decrease through the acquisition of compression facilities and the implementation of a comprehensive cost reduction program in FairWest's core operating areas. Unit operating costs will also decrease as production volumes from drilling and optimization are realized.

Interest

The following table shows interest for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Interest ($) 479,167 92,791
$/boe 6.15 3.53
--------------------------------------------------------------------


The Company uses bank debt to finance a portion of its exploration, development and acquisition activities. The Company plans to finance a portion of its future development activities and expects interest expense will increase in the future.

Part XII.6 Tax

Part XII.6 tax is levied where a company allocates income tax expenditures to a flow-through shareholder prior to the date where the actual expenditures are incurred. A total of $1,281,728 of qualified expenditures was incurred during the period ended March 31, 2008. Flow-through shares sold by FairWest in 2007 require that a further $2,549,606 of qualified expenditures be spent by December 31, 2008. FairWest believes that proposed 2008 capital expenditures will be sufficient to meet the 2007 outstanding flow-through obligations. FairWest expects to sell further flow-through shares in 2008.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Part XII.6 tax ($) 30,655 31,861
$/boe 0.39 1.21
--------------------------------------------------------------------


Funds Flow from Operations

The following table shows funds flow from operations for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Funds flow from operations ($) 1,023,109 55,391
$/boe 13.13 2.11
--------------------------------------------------------------------


Funds flow from operations was significantly higher than those from the three-month period ended March 31, 2007, increasing $11.02/boe to $13.13. This is due to the increase in sales volumes as well as strong commodity prices.

Netbacks



March 31, March 31,
2008 2007
(3 Months) (3 Months)
---------------------------------------------------------------------
Petroleum and natural gas sales 4,140,822 1,234,048
Royalties (592,239) (244,908)
Operating expense (1,518,887) (472,535)
---------------------------------------------------------------------
Operating netback ($) 2,029,696 516,605
---------------------------------------------------------------------

Petroleum and natural gas sales 53.14 46.98
Royalties (7.60) (9.32)
Operating (19.49) (17.99)
---------------------------------------------------------------------
Operating netback ($/boe) 26.05 19.67
---------------------------------------------------------------------


General and Administrative

The following table shows general and administrative expense for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
General and administrative ($) 542,070 356,309
$/boe 6.96 13.56
--------------------------------------------------------------------


In the three-month period ended March 31, 2008, general and administrative costs decreased to $6.96 per boe from $13.56 in the same period in 2007. Administrative expenses have decreased on a per unit basis as production has increased. FairWest expects this trend to continue for 2008. For the three month period ended March 31, 2008, FairWest capitalized $460,786 of overhead expenses, including $42,831 of stock-based compensation.

Stock-based compensation

The following table shows the stock-based compensation expense for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Stock-based compensation ($) 85,662 73,044
$/boe 1.10 2.78
--------------------------------------------------------------------


The stock-based compensation to March 31, 2008, was $128,493. Of this total, $85,662 was expensed and $42,831 was capitalized. The Company uses the Black-Scholes option pricing model to calculate stock-based compensation. The options vest in the period 2006 -- 2013.

Depletion, Depreciation, and Amortization

The following table shows depletion, depreciation, and amortization expense for the periods indicated.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Depletion, depreciation and
amortization ($) 3,278,885 1,176,388
$/boe 42.08 44.78
--------------------------------------------------------------------


Undeveloped land costs and seismic costs of $5,100,133 are excluded in the calculation of depletion and depreciation. Future development costs on proved reserves of $3,066,000 are included in the calculation of depletion and depreciation.

Income tax

Due to the existence of substantial non-capital losses and other tax deductions, FairWest did not incur any current income tax expenses during the periods ended March 31, 2008, and March 31, 2007. For the period ended March 31, 2008, FairWest had a recovery of future income taxes of $816,035. Due to the existence of non-capital losses and income tax pools, FairWest does not expect to be taxable for a minimum of three years. FairWest has estimated that the following tax pools are available at March 31, 2008, to reduce future income. Some of these tax pools include successor costs and as such must be streamed against the income associated with the properties of the company that originally incurred the expenditures.



Tax Pool $
---------------------------------------------------------
COGPE 8,734,065
CDE 8,448,976
CEE 12,381,196
Foreign E&D 6,141,903
UCC -- Oil & Gas Equipment 13,811,396
UCC -- Other Equipment 529,935
Financing Cost 851,907
Non-capital Loss 13,151,537
---------------------------------------------------------
Sub-total 64,050,915
Capital Loss 5,285,585
---------------------------------------------------------
Total $69,336,500
---------------------------------------------------------


Net income (loss)

The net loss for the period ended March 31, 2008 was $1,528,842. A significant item in the income statement was the future income tax recovery of $816,035 (2007 - $361,103). This amount relates to the Company's ability to utilize its significant base of non-capital losses and discretionary income tax pools.




March 31, March 31,
2008 2007
(3 Months) (3 Months)
---------------------------------------------------------------------
Net income (loss) ($) (1,528,842) (832,938)
$/boe (19.62) (31.71)
---------------------------------------------------------------------


Capital expenditures

Net capital expenditures were ($872,871) in the three-month period ending March 31, 2008 (2007 - $2,207,652). Included in this is a disposition of a non-core asset for net proceeds of $2,660,654.



March 31, March 31,
2008 2007
(3 Months) (3 Months)
$ $
----------------------------------------------------------------------
Lease rental 43,062 25,988
Seismic 41,083 9,364
Drilling and completions 772,470 835,025
Equipping and tie-in 436,079 1,062,516
Property dispositions and adjustments (2,660,654) -
Undeveloped land acquisition 25,743 30,000
Other 8,560 22,669
Capitalized overhead 460,786 222,090
----------------------------------------------------------------------
Total ($872,871) $2,207,652
----------------------------------------------------------------------




Liquidity and Capital Resources

March 31, March 31, March 31,
2008 2008 2008
FairWest Strike
Unconsolidated Unconsolidated Total
---------------------------------------------------------------------------
$ $ $
Current assets
Cash 42,547 184,894 227,441
Accounts receivable 3,119,212 1,251,301 4,370,513
Due from related parties 1,303,254 - 1,303,254
Prepaid expenses 223,241 315,366 538,607
Due from Strike 4,591,451 - 4,591,451
---------------------------------------------------------------------------
Total current assets $9,279,705 $1,751,561 $11,031,266
---------------------------------------------------------------------------
Current liabilities
Accounts payable 8,607,345 1,072,044 9,679,389
Arranged creditors - 1,193,985 1,193,985
Bank loans payable 5,574,253 10,678,600 16,252,853
Short term capital lease 93,528 - 93,528
Due to FairWest - 4,591,451 4,591,451
Due to related parties 473,005 118,462 591,467
---------------------------------------------------------------------------
Total current liabilities $14,748,131 $17,654,542 $32,402,673
---------------------------------------------------------------------------

Unconsolidated Working Capital
Deficiency ($5,468,426) ($15,902,981) ($21,371,407)

Inter-company indebtedness (4,591,451) 4,591,451 -

---------------------------------------------------------------------------
Consolidated Working Capital
Deficiency ($10,059,877) ($11,311,530) ($21,371,407)
---------------------------------------------------------------------------


At March 31, 2008, FairWest had $227,441 in cash and cash equivalents and a working capital deficiency of $21,371,407 including $13,740,779 of revolving bank debt and $2,512,074 of non-revolving debt. It is essential to note that the working capital deficiency is made up primarily of revolving bank loans that FairWest does not expect to have to pay down within the next 12 months.

On an unconsolidated basis, Strike is solely responsible for $11,311,530 of this working capital deficiency and there is no recourse against FairWest or its assets. FairWest has acquired $4,591,451 of Strike's unsecured debt. Strike owes another $1.2 million to unsecured creditors.

At March 31, 2008, FairWest had a $3,720,000 revolving reducing demand loan (Credit Facility A) with the National Bank of Canada. Credit Facility A has an interest rate of the banks prime lending rate plus 0.75%. As at March 31, 2008 FairWest has drawn down $3,062,179 on this credit facility. The line of credit was used to assist in acquisition, development and production, and general corporate purposes. This line reduces by $90,000 per month.

In January 2008 the National Bank provided FairWest with a non-revolving acquisition demand loan (Credit Facility B) of $1,000,000. This line reduces by $50,000 per month starting February 2008. Credit Facility B has an interest rate of the banks prime lending rate plus 1.00%. As at March 31, 2008, FairWest has drawn down $900,000 on this credit facility for optimization of wells that were primarily located on Strike lands.

At March 31, 2008, Fair West has not complied with its requirement to maintain a working capital ratio of not less than 1.0 as calculated using the bank compliance certificate form. The working capital ratio at March 31, 2008 was 0.62. The Company has asked the bank for a waiver in respect of this default.

On March 31, 2008, Strike had an $11,100,000 demand revolving operating credit facility with a Canadian chartered bank. The facility bears interest at the bank's prime rate plus 0.375% per annum. At March 31, 2008,

$10,678,600 was drawn on this facility. Strike has pledged as collateral a $20,000,000 first priority floating charge demand debenture over all the assets of Strike. The holder of the Strike credit facilities has no recourse against FairWest's assets. The facility is subject to Strike meeting certain debt covenants. As at March 31, 2008, Strike was in violation of its working capital covenant and its change of control covenant. The debt will be reduced through the realization of $0.4 million of ARTC's receivable and an additional $0.3 million of operating revenue. On April 18, 2008, Strike Petroleum Ltd. received a demand to repay its outstanding indebtedness with its secured lender ("Lender"). The Lender has informed Strike that as of April 17, 2008, Strike owed the Lender $10.63 million of principal and accrued interest of $0.17 million. If the amount due to the Lender is not paid, the Lender has the right to enforce its security. FairWest and Strike are pursuing ongoing negotiations with the Lender to find a satisfactory resolution of this matter.

As at March 31, 2008, FairWest has a $1,612,074 non-revolving bridge loan facility with Tallinn Capital Corporation. This facility has an 18% interest rate and is due on June 30, 2008. The proceeds from this credit facility were used to finance the property acquisition completed in August 2007. It will be repaid through the sale of producing and non-producing properties to a new limited partnership. During the quarter the Company paid a $156,000 deferred financing fee to Tallinn Capital Corporation.

FairWest sold $2.0 million of convertible debentures in 2007. Proceeds were used to decrease the working capital deficiency. The debenture pays interest at 14% annually and is paid monthly. Each debenture is convertible to one common share at $0.45. It is redeemable by FairWest after March 1, 2008, and matures October 31, 2009.



The table below sets out the number of common shares issued by FairWest

Issued Number of shares Amount
----------------------------------------------------------------------------
Balance December 31, 2006 61,444,307 $ 35,050,840
Flow-through shares --@ $0.50 1,074,000 537,000
Shares issued to Strike shareholders --@
$0.40 12,164,550 4,912,886
Cost associated with Strike acquisition - (168,711)
Normal course issuer's bid (a) (20,000) (11,327)
Shares issued to Strike creditors -- part of
Plan of Arrangement 5,631,674 2,815,838
Flow-through shares --@ $0.45 9,947,848 4,476,532
Flow-through shares --@ $0.225 6,500,000 1,462,500
Less: share issuance costs - (431,467)
Plus: tax effect of share issuance costs - 129,500
Less: tax effect of flow-through renunciation (1,685,300)
----------------------------------------------------------------------------
Balance December 31, 2007 96,742,379 $47,088,291
Less: share issuance costs - (39,587)
Plus: tax effect of share issuance costs - 4,749
Less: tax effect of flow-through renunciation - (424,100)
----------------------------------------------------------------------------
Balance March 31, 2008 96,742,379 $46,629,353
----------------------------------------------------------------------------




Changes in the number of options, with weighted average exercise prices are
summarized as follows:

March 31, 2008 December 31, 2007
-----------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
-----------------------------------------
Opening balance 7,774,619 0.487 5,899,116 0.583
Granted 725,000 0.220 3,075,000 0.351
Expired (83,304) (1.143) (149,497) (1.140)
Cancelled (300,000) (0.47) (1,050,000) (0.537)
-----------------------------------------
Closing balance 8,116,315 0.457 7,774,619 0.487
-----------------------------------------

Exercisable 2,866,315 0.594 2,949,619 0.610




As at March 31, 2008, the following options are outstanding:

Number of
common shares Exercise price
under option per option Expiry
141,315 2.319 2009
3,600,000 0.50 2010
725,000 0.51 -- 0.59 2011
2,925,000 0.22 -- 0.42 2012
725,000 0.22 2013


Related Party Transactions

The Company's operating and financial strategy involves being the operator of it core properties and holding up to a 50% working interest position in these properties. Being the operator allows the Company to manage its production base on a timely basis and hence effectively manage the operational risks associated with the business. By holding a working interest of up to 50%, the Company is able to maintain operatorship and reduce its financial risk to its each project that it holds or plans to acquire either through an acquisition or drilling. In order to pursue either an acquisition or a drilling project, the Company must find a third party or parties who does not wish to be the operator and is prepared to assume the risks associated with the remaining 50% working interest position.

Accordingly, an essential part of the Company's business strategy is to create related private companies and limited partnerships who are prepared to jointly participate with the Company in drilling operations and acquisitions. At all times a director of FairWest is also a director of the private companies and the general partner of the limited partnerships. In the case of the private companies, the Company holds a 25% equity interest in the private companies and the private companies farmin on the Company's exploration opportunities. In the case of the limited partnerships, the Company sells oil and gas properties to the limited partnerships at fair market value and the Company and the limited partnership jointly exploit the properties that are acquired. The Company provides management services to the private companies and allocates a portion of its corporate overhead to these parties. After two years from the date of the funding of the private companies and the limited partnerships, the Company holds the right to acquire the private companies and limited partnership interests at fair market value.

(a) ExploreCo Energy Inc.

On January 31, 2006, the Company entered into a joint venture with ExploreCo Energy Inc. ("ExploreCo"). The terms of the joint venture allow ExploreCo to participate in the exploration for and development of defined oil and gas opportunities for up to 25% of FairWest's share of these properties. FairWest's participation is limited by the amount of equity raised by ExploreCo. As at March 31, 2008, FairWest owned 874,000 ExploreCo common shares at a total price of $262,200. The remaining 791,667 options have expired.

ExploreCo owes FairWest $738,303 at March 31, 2008, being amounts owing from joint venture billings, in the normal course of business. This account is paid as the joint venture billings are received by ExploreCo. Interest is charged at prime plus 1.25% .

(b) Petrovest Exploration & Production Corporation

In November 2006, the Company entered into a joint venture with Petrovest Exploration & Production Corporation ("Petrovest"). The terms of the joint venture allow Petrovest to participate in the exploration for and development of defined oil and gas opportunities for up to 25% of FairWest's share of these properties. FairWest's participation is limited by the amount of equity raised by Petrovest.

In November 2006, Petrovest granted the Company the option to acquire 999,000 common shares of Petrovest at a purchase price of $0.30 per share. The options vest at a rate of one option for every $3.00 of third party subscriptions raised by Petrovest and expire 30 days from date of vesting. As at March 31, 2008, 380,001 options vested and were exercised by FairWest at a total price of $114,000. At March 31, 2008, Petrovest is owed by FairWest $181,237. Interest is being charged at prime plus 1.25% .

(c) Bluestone Resources Inc.

Bluestone Resources Inc. ("Bluestone") is a company controlled by Jim Gettis, President & CEO of FairWest. Bluestone is a joint venture partner and a royalty owner. FairWest owes Bluestone $805 at March 31, 2008. Bluestone pays its account as joint venture billings are received.

(d) Garrington Limited Partnership

Garrington Production Corporation ("GPC") is the general partner of the Garrington Limited Partnership ("GLP"). A director of FairWest is a controlling shareholder of GPC. At March 31, 2008, an amount of $242,322 is due from GLP of which $307,798 is a note receivable. The balance due to GLP is their share of revenue net of capital from joint venture billings. Interest on the note payable is charged at 8% and interest on the balance is prime plus 1.25% .

An amount of $500 is due from GPC. This amount relates to an administrative charge.

(e) Gowling LaFleur Henderson LLP ("Gowlings")

An amount of $117,908 is owed to Gowlings, Calgary office in relation to the Strike acquisition. A director of the Company is a partner in the Gowlings Calgary office.

(f) NBC Technologies Inc.

An amount of $226,041 is due to NBC Technologies Inc ("NBC"). and is in the normal course of business. NBC provides drilling, completion and production optimization services to the Company. NBC Technologies Inc. is controlled by a director of FairWest.

(g) Neutral Creek Limited Partnership

Effective November 1, 2007, NLP sold oil and gas properties at fair market value to Neutral Creek Limited Partnership ("NCLP") for $891,293 payable in cash in the amount of $661,293 and an interest bearing promissory note of $230,000. The promissory note bears interest at an annual rate of 7%. The transaction was not in the normal course of operations and was recorded at fair value as determined by an independent evaluation. The note was paid out in January, 2008. Total interest paid by NCLP to NLP was $1,364 (2007 - $2,647). Effective March 31, 2008, NLP sold additional property to NCLP for gross proceeds of $2,900,000. The sale was paid for in cash and an interest bearing note payable of $588,200 remaining. The note was paid out in April, 2008. Any amount due or from NCLP is in the normal course of operations arising from NCLP's participation as a joint venture partner and is measured at the exchange amounts.

Outlook

FairWest drilled two wells in the first quarter. One is being tied in and will be on production in the second quarter. One is still being evaluated. FairWest is continuing with production optimization on the Strike lands and has worked over several wells which have increased production. FairWest is also optimizing production on the properties acquired in the third quarter which has contributed to increased production.

FairWest has made two offers to acquire $3.0 million of oil and gas properties in the Provost areas of Alberta. The acquisitions are expected to close by the end of May 2008. This acquisition will add approximately 85 barrels of oil production per day and 300 thousand cubic feet per day of natural gas production. FairWest has arranged bridge financing to close these acquisitions and expects to sell up to 50% of the properties acquired to a newly created limited partnership and independent third parties. The proceeds from the sales will be used to repay the bridge financing.

The Company's operating and financial strategy involves being the operator of it core properties and holding up to a 50% working interest position in these properties. Being the operator allows the Company to manage its production base on a timely basis and hence effectively manage the operational risks associated with the business. By holding a working interest of up to 50%, the Company is able to maintain operatorship and reduce its financial risk to its each project that it holds or plans to acquire either through an acquisition or drilling. In order to pursue either an acquisition or a drilling project, the Company must find a third party or parties who does not wish to be the operator and is prepared to assume the risks associated with the remaining 50% working interest position.

Accordingly, an essential part of the Company's business strategy is to create related private companies and limited partnerships who are prepared to jointly participate with the Company in drilling operations and acquisitions. At all times a director of FairWest is also a director of the private companies and the general partner of the limited partnerships. In the case of the private companies, the Company holds a 25% equity interest in the private companies and the private companies farmin on the Company's exploration opportunities. In the case of the limited partnerships, the Company sells oil and gas properties to the limited partnerships at fair market value and the Company and the limited partnership jointly exploit the properties that are acquired. The Company provides management services to the private companies and allocates a portion of its corporate overhead to these parties. After two years from the date of the funding of the private companies and the limited partnerships, the Company holds the right to acquire the private companies and limited partnership interests at fair market value.

FairWest's ability to fully exploit and carry out its planned exploration and development program is contingent upon the continuation of favorable commodity prices, the maintenance of its existing reserve and production base and internally generated cash flow from operations. For the year ended December 31, 2008 the Company's external engineering reports call for the expenditure of $3,396,000 to develop its proved resource base and $5,686,000 to develop its proved and probable reserve base. A portion of this capital has been expended in the first quarter of 2008. The cash flow from operations under the expected proved and proved plus probable case together with planned property sales and an increase in our bank line of credit is more than sufficient to cover the anticipated capital expenditures. In the event that there is a material drop in commodity prices or a material reduction in FairWest's reserve and production base, FairWest will either curtail some of its planned exploration and development activities or it will sell a portion of its existing assets to fund its capital expenditure program.

On April 18, 2008, the Company received correspondence from counsel for Strike's secured lender (the "Lender") that constituted a demand for Strike to repay its outstanding indebtedness to the Lender. The Lender informed Strike that as of April 17, 2008, Strike owed the Lender $10.63 million of principal and accrued interest of $0.17 million. The Company has determined that the value of Strike's oil and gas assets is less than the indebtedness to the Lender. The Company, Strike and the Lender are currently in negotiations to settle this matter. If no agreement is reached, the secured lender could exercise its right under the lending agreement to take back Strike's oil and gas assets. The potential affect to the Company would be to decrease the Company's property and equipment assets and decrease the bank loan by $10.6 million.

FairWest believes global, North American and domestic supply and demand factors will result in continuing strong prices for crude oil and natural gas at current levels for 2008. FairWest expects the US$/CDN$ exchange rate to remain volatile. It expects to reduce operating costs on a per unit basis. FairWest's general and administrative expenses will increase on an absolute basis and as production rises it is expected that per unit cost will decrease substantially.

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the President and Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), on a timely basis so that appropriate decisions can be made regarding public disclosure.

An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was conducted as of March 31, 2008, by and under the supervision of management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures as defined by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports filed or submitted under Canadian securities legislation is recorded, processed, summarized and reported within the time period specified in those rules and forms.

Internal Controls over Financial Reporting

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian generally accepted accounting principles ("GAAP"). Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

An evaluation of the Company's internal control over financial reporting was conducted as of March 31, 2008 by and under the supervision of management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that the Company's design of internal control over financial reporting, as defined by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, is sufficient to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP.

There have been no changes in internal control over financial reporting during the quarter ended March 31, 2008, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Critical Accounting Estimates

The reader is advised that the critical accounting estimates, policies, and practices as described in this Management Discussion and Analysis continue to be critical in determining FairWest's financial results.

The reader is further cautioned that the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported amount of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes. Changes in these judgments and estimates could have a material impact on the financial results and financial condition. The following discussion outlines accounting policies and practices that are critical to determining FairWest's financial results:

Changes in Accounting Policies

As disclosed in the December 31, 2007, annual audited Consolidated Financial Statements, on January 1, 2008, the Company adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:

- Financial Instruments -- Presentation"; Section 3863 and "Financial Instruments -- Disclosures", Section 3862. The new disclosure standards increases the Company's disclosure regarding the nature and extent of the risks associated with financial instruments and how those risks are managed (See Note 3). The new presentation standard carries forward the former presentation requirements.

- Capital Disclosures- Section 1535. The new standard requires FairWest to disclose its objectives, policies and processes for managing its capital structure (See Note 4)

- Variable Interest Entities- In fiscal 2008, the Company will be required to follow the guidance in EIC 163 -- Determining the Variability to be Considered in Applying AcG-15. Under the requirements of the EIC, in assessing whether the Company should consolidate a variable interest entity, it will have to analyze the nature of the risk for which an entity was created and the design of the entity to pass along the variability of the risk to interest holders. The Company does not anticipate any impact to its financial statements arising from the adoption of the accounting pronouncement.

- Going Concern-In fiscal 2008, the Company will be required to adopt the additional requirements of the CICA Handbook Section 1400 -- General Standards of Financial Statements. The additional requirements require management to make an assessment of the Company's ability to continue as a going concern, and to disclose any material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern. The Company does not anticipate any impact to its financial statements arising from the adoption of the accounting pronouncement.

Accounting for Petroleum and Natural Gas Operations

FairWest follows the full cost method of accounting whereby all costs relating to the acquisition of, exploration for and development of oil and gas reserves are capitalized in a single Canadian cost center. Such costs include lease acquisition, lease rentals on undeveloped properties, geological and geophysical costs, drilling both productive and non-productive wells, production equipment and overhead charges directly related to acquisition, exploration and development activities.

The application of the full cost method of accounting requires management's judgment to determine the proper designation of a well as either developmental or exploratory, which will ultimately determine the proper income tax treatment of the costs incurred.

Reserve Estimates

Full cost accounting depends on the estimated proven reserves that are believed to be recoverable from FairWest's oil and gas properties. The process of estimating reserves is complex. It requires significant judgments and decisions based on available geological, geophysical, engineering, and economic data. These estimates may change substantially as additional data from ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and costs change. FairWest's reserve estimates are based on current production forecasts, prices and economic conditions. An independent engineering firm, Chapman Petroleum Engineering Ltd., evaluates all of FairWest's reserves.

Reserve estimates are critical to many of the accounting estimates, including:

- Calculating our unit-of-production depletion rates. Proven reserve estimates are used to determine rates that are applied in calculating depletion expense.

- Assessing when necessary, oil and gas assets for possible impairment. Estimated future undiscounted cash flows are determined using proven reserves. The criteria used to assess impairment, including the impact of changes in reserve estimates, are discussed below.

As circumstances change and additional data becomes available, reserve estimates also change, possibly materially impacting net income. Estimates made are reviewed and revised, either upward or downward, as warranted by the new information. Revisions are often required due to changes in well performance, prices, economic conditions and governmental restrictions.

Although every reasonable effort is made to ensure that reserve estimates are accurate, reserve estimation is an inferential science. As a result, the subjective decisions, new geological or production information and a changing environment may impact these estimates. Revisions to the reserve estimates can arise from changes in oil and gas prices, and reservoir performance. Such revisions can be either positive or negative.

It would take a very significant decrease in FairWest's proven reserves to limit its ability to borrow money under the existing credit facility.

Impairment of Petroleum and Natural Gas Properties

FairWest reviews its full cost pool for impairment annually. An impairment provision is recorded whenever events or circumstances indicate that the carrying value of FairWest's properties may not be recoverable. The impairment provision is based on the excess of carrying value over fair value. Fair value is defined as the present value of the estimated future net revenues from production of total proved and probable petroleum and natural gas reserves, as estimated by FairWest on the balance sheet date. Reserve estimates, as well as estimates for petroleum and natural gas prices and production costs may change, and there can be no assurance that impairment provisions will not be required in the future.

Management's assessment of, among other things, the results of exploration activities, commodity price outlooks, and planned future development and sales, impacts the amount and timing of impairment provisions.

Asset Retirement Obligation

The asset retirement obligation provision recorded in the consolidated financial statements is based on an estimate for total costs for future site restoration and abandonment of FairWest's petroleum and natural gas properties and equipment. This estimate is based on management's analysis of production structure, reservoir characteristics and depth, market demand for equipment, currently available procedures, and discussions with construction and engineering consultants. Estimating these future costs requires management to make estimates and judgments that are subject to future revisions based on numerous factors, including changing technology, political and regulatory environments.

Income Taxes

FairWest records future tax assets and liabilities to account for the expected future tax consequences of events that have been recorded in its consolidated financial statements and its tax returns. 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. FairWest periodically assesses its ability to realize on its future tax assets. If FairWest concluded that it is not more likely than not that some portion or all of the future tax assets will be realized under accounting standards, the tax asset will be adjusted by a valuation allowance.

Claims and Litigation

FairWest could become involved in various claims and litigation arising in the normal course of business in the future. The outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in FairWest's favor. If the outcome would be unfavorable, it could have a materially adverse impact on FairWest's financial position or results of operations.

The Company has received a statement of claim in the amount of $135,693 from Aero Drilling & Consulting Ltd., in respect of services provided to a subcontractor of Supreme Energy Inc. The Company has reviewed the claim and considers it without merit and no provision has been made with respect to the claim in the consolidated financial statements. The Company is defending the claim.

The Company has received notice of a reassessment from Revenu Quebec for the period ended February 28, 2003, in the amount of $211,243, including interest. This relates to Fairstar Explorations Inc. ("Fairstar"). Fairstar and Western Energy Corporation amalgamated August 18, 2005 to form the Company. The Company has filed a notice of objection, does not believe that the reassessment is valid and has made no provision with respect to the claim in the consolidated financial statements.

The Company has received a statement of claim in the amount of $500,000 from Norex Exploration Service in respect of services provided to Strike. The Company has reviewed the claim and has made a provision of $251,753 in the consolidated financial statements with regards to this claim. The Company is defending the claim.

The Company received a statement of claim form NAL Resources Limited in the amount of $95,730.17 in respect of unpaid revenues. The Company has reviewed the claim and considers it without merit and no provision has been made with respect to the claim in the consolidated financial statements. The Company is defending the claim.

The Company has received a statement of claim from Bidell Equipment Limited Partnership in the amount of $30,671.57 in respect of services provided to Strike. The Company has reviewed the claim and has made a provision of $30,671.57 in the consolidated financial statements with regards to this claim. The Company is defending the claim.

Commitments

(a) The Company's total obligations, under a property lease agreement, exclusive of occupancy costs and net of sublease recoveries, are as follows:



2009 338,013
2010 338,013
2011 324,815
2012 258,825
2013 172,550
-----------------------------------------------------------
Total $ 1,432,216
-----------------------------------------------------------


(b) The Company entered into an option agreement whereby GLP has the option to put the Garrington property (note 5) to the Company at fair value as determined by an independent engineering evaluation, on May 1, 2009. The fair value of the Garrington property has not been determined at this time.

(c) The future obligation under capital lease are:



Imputed
Interest Payment
---------------------
2009 $15,287 $115,993
2010 4,813 103,856
-------------------------------------------------------------------
Total $20,100 $219,849
-------------------------------------------------------------------


(d) FairWest has entered into the following physical contract to manage fluctuations in commodity prices in the normal course of operations.

In April 2008, FairWest entered into a physical contract to sell 1,000 GJ/day for the term of May 1, 2008 to March 31, 2009, inclusive at a rate of $9.02 Cdn/GJ subject to the following terms:

(i) All FairWest and FairWest related contracts are to be maintained in good standing and are non-cancellable for the duration of the fixed price transaction, and

(ii) The fixed price transaction is a firm deal and cannot be converted to cash or collapsed.

In April 2008 FairWest entered into a physical contract to sell 500 GJ/day for the term of May 1, 2008 to March 31, 2009 inclusive with a floor price of $8.50 Cdn/GJ and a ceiling price of $11.75.

Additional information can be found regarding FairWest at www.SEDAR.com.



FairWest Energy Corporation
Consolidated Balance Sheets

As at March 31, December 31,
2008 2007
(unaudited) (audited)
----------------------------
$ $
Assets
Current assets
Cash 227,441 347,235
Accounts receivable 4,370,512 3,580,346
Due from related party (note 5) 1,303,254 963,266
Prepaid expenses 538,607 445,981
----------------------------
6,439,814 5,336,828
----------------------------

Note receivable(note 5) 307,798 307,798

Property and equipment (note 6) 61,015,110 65,109,549

Long term investment (note 7) 376,200 361,200
----------------------------
68,138,922 71,115,375
----------------------------

Liabilities and Shareholder Equity
Current liabilities
Accounts payable 10,873,374 9,841,569
Current portion of capital lease (note 9) 93,528 -
Loans payable (note 8) 16,252,853 18,038,483
Due to related parties (note 11) 591,467 620,508
----------------------------
27,811,222 28,500,560

Debentures payable (note 10) 2,000,000 2,000,000

Capital Lease (note 9) 175,496 -

Asset retirement obligations (note 12) 4,044,670 4,251,309

Future income tax 2,097,537 2,494,221
----------------------------
36,128,925 37,246,090
----------------------------

Shareholders' equity
Share capital
Common shares (note 13) 46,629,353 47,088,291
Contributed surplus (note 14) 1,139,563 1,011,071
Deficit (15,758,919) (14,230,077)
----------------------------
32,009,997 33,869,285
----------------------------
68,138,922 71,115,375
----------------------------

Approved on behalf of the Board

Donald Rowden, Director Randy Kwasnicia, Director

See accompanying notes



FairWest Energy Corporation
Consolidated Statements of Loss and Deficit
March 31, March 31,
2008 2007
(3 Months) (3 Months)
(unaudited) (unaudited)
-------------------------
$ $
Revenue
Petroleum and natural gas 4,140,822 1,234,048
Royalties, net of Alberta Royalty Tax Credit (592,239) (244,908)
-------------------------
3,548,583 989,140
Other income 45,305 19,747
Gain (Loss) on disposal of assets (3,439) -
-------------------------
3,590,449 1,008,887
-------------------------
General and administrative 542,070 356,309
Stock-based compensation (note 13) 85,662 73,044
Operating 1,518,887 472,535
Depletion, depreciation and amortization 3,278,885 1,176,388
Interest 479,167 92,791
Part XII.6 tax 30,655 31,861
-------------------------
5,935,326 2,202,928
-------------------------
(Loss) before income taxes (2,344,877) (1,194,041)

Future income tax recovery (loss) 816,035 361,103

-------------------------
Net income (loss) (1,528,842) (832,938)

Deficit, beginning of period (14,230,077) (5,088,571)
-------------------------

Deficit, end of period (15,758,919) (5,921,509)
-------------------------

Basic earnings (loss) per share (0.016) (0.014)
-------------------------

Diluted earnings (loss) per share (0.016) (0.014)
-------------------------

Basic weighted average number of shares
outstanding 96,742,379 61,463,507
-------------------------

Diluted weighted average number of shares
outstanding 96,742,379 61,463,507
-------------------------

See accompanying notes



FairWest Energy Corporation
Consolidated Statements of Cash Flows
March 31, March 31,
2008 2007
(3 Months) (3 Months)
(unaudited) (unaudited)
-------------------------
$ $
Operating activities
Net income(loss) (1,528,842) (832,938)
Items not affecting cash:
Depletion, depreciation and amortization 3,278,885 1,176,388
Gain (loss) on disposal of assets 3,439 -
Stock based compensation 85,662 73,044
Future income tax recovery (816,035) (361,103)
-------------------------
1,023,109 55,391
Change in non-cash working capital 2,567,048 1,383,022
-------------------------
3,590,157 1,438,413
-------------------------

Investing activities
Expenditures on property and equipment (1,833,412) (2,123,178)
Proceeds on sale of property and equipment 2,657,218 -
Investment in Petrovest (15,000) -
Changes in non-cash working capital
relating to capital expenditures (2,693,538) (987,763)
-------------------------
(1,884,732) (3,110,941)
-------------------------

Financing activities
Issuance of share capital, net of issuance costs (39,588) 394,326
Repayment of loans (2,219,092) 950,225
Proceeds of loans 433,461 313,383
Purchase of shares for cancellation - -
-------------------------
(1,825,219) 1,657,934
-------------------------
Increase (decrease) in cash (119,794) (14,594)


Cash, beginning of period 347,235 14,847

-------------------------
Cash, end of period 227,441 253
-------------------------

See accompanying notes


Notes to Consolidated Financial Statements

As at March 31, 2008 (unaudited) and December 31, 2007
For the three month periods ended March 31, 2008 and March 31, 2007 (unaudited)

1. Nature of operations

The Company is engaged in the acquisition, exploration, development and production of petroleum and natural gas in western Canada.

On May 23, 2007, FairWest acquired all of the issued and outstanding shares of Strike Petroleum Ltd. ("Strike").

Neuberry Limited Partnership ("NLP") was registered on August 2, 2007. FairWest is the general partner and is the only limited partner of this partnership.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Strike Petroleum Ltd. from the date of acquisition and the wholly owned partnership Neuberry Limited Partnership from the date of registration.

The Company's ability to fully exploit and carry out its planned exploration and development program is contingent upon the continuation of favorable commodity prices, the maintenance of its existing reserve and production base, internally generated cash flow from operations and continued support from its lender and/or the ability to raise equity.

2. Summary of significant accounting policies

The interim consolidated financial statements of FairWest 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 principles and methods of computation as those utilized in the consolidated financial statements for the year ended December 31, 2007, except as disclosed below. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2007. Certain period amounts have been reclassified to conform to current presentation.

Basis of Presentation

The Financial Statements have been prepared in accordance with Canadian GAAP. All tabular amounts in the following discussion are in Canadian dollars unless otherwise noted. The reporting and the measurement currency is the Canadian dollar.

Changes in Accounting Policies and Practices

As disclosed in the December 31, 2007, annual audited Consolidated Financial Statements, on January 1, 2007, the Company adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:

- Financial Instruments - Presentation"; Section 3863 and "Financial Instruments - Disclosures", Section 3862. The new disclosure standards increases the Company's disclosure regarding the nature and extent of the risks associated with financial instruments and how those risks are managed (See Note 3). The new presentation standard carries forward the former presentation requirements.

- Capital Disclosures- Section 1535. The new standard requires FairWest to disclose its objectives, policies and processes for managing its capital structure (See Note 4)

- Variable Interest Entities- In fiscal 2008, the Company is required to follow the guidance in EIC 163 - Determining the Variability to be Considered in Applying AcG-15. Under the requirements of the EIC, in assessing whether the Company should consolidate a variable interest entity, it will have to analyze the nature of the risk for which an entity was created and the design of the entity to pass along the variability of the risk to interest holders. The Company does not anticipate any impact to its financial statements arising from the adoption of the accounting pronouncement.

- Going Concern- In fiscal 2008, the Company is required to adopt the additional requirements of the CICA Handbook Section 1400 - General Standards of Financial Statements. The additional requirements require management to make an assessment of the Company's ability to continue as a going concern, and to disclose any material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern. The Company does not anticipate any impact to its financial statements arising from the adoption of the accounting pronouncement.

3. Financial Instruments

Overview

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

- Credit risk

- Liquidity risk

- Market risk

This note presents information about the Company's exposure to each of the above risks, the Company's objectives, policies and processes for measuring and managing risk and the Company's management of capital. Further quantitative disclosures are included throughout these financial statements.

The Board of Directors has overall responsibility for the establishment of the Company's risk management framework. The Board has implemented and monitors compliance with risk management policies.

The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and adherence to market conditions and the Company's activities.

Credit risk

Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivable from joint venture partners and petroleum and natural gas marketers. As at March 31, 2008, the Company's receivables consisted of $2,566,000 (2007-$2,727,749) from joint venture partners and other trade receivables and, $1,804,512 (2007-$852,597) of receivables from petroleum and natural gas marketers.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. The Company historically has not experienced any collection issues with its petroleum and natural gas marketers. Joint venture receivables are typically collected in one to three months of the joint venture bill being issued to the partner. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to the expenditure. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors such as commodity prices fluctuations, escalating costs and the risk of unsuccessful drilling. In addition, a further risk exists with joint venture partners such as disagreements occasionally arise that increases the potential for non-collection. The Company does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however the Company does have the ability to withhold production from joint venture partners in the event of non-payment.

The carrying amount of accounts receivable represents the maximum credit exposure. The Company does not have an allowance for doubtful accounts as at March 31, 2008 and December 31, 2007, and did not provide for any doubtful accounts.

As at March 31, 2008 and December 31, 2007, the Company considers its receivables to be aged as follows:



March 31, December 31,
Aging 2008 2007
---------------------------
Not past due (less than 90 days) $2,502,701 $2,436,711
Past due (90 days to one year) 1,867,811 1,143,635
----------------------------------------------------------------------------
Total $4,370,512 $3,580,346
----------------------------------------------------------------------------


Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing financial liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking harm to the Company's reputation.

The Company prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary. Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate the capital expenditures program, the Company has a revolving reserve based credit facility, as outlined in note 8 that is at least reviewed annually by the lender. The Company also attempts to match its payment cycle with collection of petroleum and natural gas revenues on the 25th of each month.

Accounts payable are considered due to suppliers in one year or less while bank debt, which is subject to renewal after a 364-day revolving period, could potentially be due within the next year if the facility is not renewed for a further 364-day period.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the Corporation's net earnings or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns.

The Company may utilize financial derivatives contracts to manage market risks. All such transactions are conducted in accordance with the risk management policy that has been approved by the Board of Directors.

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 risks. Although substantially all of the Company's petroleum and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for petroleum and natural gas are impacted by the changes in the exchange rate between the Canadian and United States dollar.

The Company had no forward exchange rate contracts in place as at or during the three months ended March 31, 2008 and 2007.

Commodity price risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted not only by the relationship between Canada and the United States dollar, as outlined above, but also world economic events that dictate the levels of supply and demand.

There are no derivative contracts outstanding as of March 31, 2008 or at March 31, 2007.

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 fluctuations on its bank debt which bears a floating rate of interest. The sensitivity to change in interest rates is higher in 2008 as compared to 2007 because of an increase in outstanding bank debt, slightly offset by a decrease in interest rates.

The Company has no interest rate swap or financial contracts in place as at or during the three months ended March 31, 2008 and 2007.

Fair value of financial instruments

The Company's financial instruments as at March 31, 2008 and December 31, 2007, include accounts receivable, accounts payable and accrued liabilities due to and from related parties and bank debt. The fair value of accounts receivable and accrued liabilities approximate their carrying amounts due to their short-term maturity.

Bank debt bears interest as a floating market rate and accordingly the fair market value approximates the carrying value.

Fair value of the due to and from related parties is discussed under notes 5 and 11.

4. Capital Management

The Company's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying petroleum, and natural gas assets. The Company considers its capital structure to include shareholders equity, bank debt and working capital. In order to maintain or adjust capital structure, the Company 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 quarterly annualized funds flow from operations. In this ratio, net debt is defined as outstanding bank debt plus or minus working capital, divided by funds from operations for the most recent calendar quarter, annualized (multiplied by four). Funds from operations, is defined as cash flow from operating activities before changes in non-cash working capital. The Company's strategy is to maintain a ratio of less than 2 to 1 by the end of the year. 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 expenditures budgets, which are updated as necessary depending on varying factors including current and forecast prices, successful capital deployment and general industry conditions. The annual budgets are approved by the Board of Directors.

As at March 31, 2008 and December 31, 2007, the Company's ratio of net debt to quarterly annualized funds from operations was 5.2 to 1 and 17.1 to 1 respectively which is outside the range established by the Company. The Company's ratio of net debt to quarterly annualized funds from operations decreased at March 31, 2008 compared to December 31, 2007 primarily as a result of an increase in commodity prices and production. Management's plan to decrease this ratio to 2 to 1 by year end includes raising equity, increasing production volumes, selling producing and non producing assets and negotiating a settlement with Strike's Lender to reduce the amount of its bank loan.

The net debt to quarterly annualized funds from operations has been calculated as follows:



March 31, December 31,
2008 2007
----------------------------------------------------------------------------
Working capital deficiency (including bank debt) $21,371,408 $23,163,732


----------------------------------------------------------------------------
Funds from operations 1,023,109
Annualizing factor X4
----------------------------------------------------------------------------

Annualized funds from operations 4,092,436 1,356,921
----------------------------------------------------------------------------

Ratio 5.2 to 1 17.1 to 1
----------------------------------------------------------------------------


The Company's share capital is not subject to external restrictions, however the bank debt facility is based on petroleum and natural gas reserves (see Note 9). The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.

There were no changes in the Corporation's approach to capital management during the period.



5. Due from related parties and note receivable

Due from related parties March 31, 2008 December 31, 2007
$ $
----------------------------------------------------------------------------
ExploreCo Energy Inc. 738,303 657,790
Garrington Production Corporation 500 500
Western Royalty Holdings Corporation 1,273 1,273
Neutral Creek Limited Partnership 562,678 302,703
Neutral Creek Corporation 500 1,000
----------------------------------------------------------------------------
$1,303,254 $963,266
----------------------------------------------------------------------------

Note receivable March 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Garrington Limited Partnership $307,798 $307,798
----------------------------------------------------------------------------


The amount due from ExploreCo Energy Inc. ("ExploreCo") is in the normal course of business arising from their participation as joint venture partners and is measured at their exchange amount. The Company owns 25% of the shares of ExploreCo Energy Inc.

The amounts due from Garrington Production Corporation, Western Royalty Holdings Corporation and Neutral Creek Corporation are administration charges and are measured at their exchange amount. Garrington Production Corporation is controlled by a director of the Company. Western Royalty Holdings Corporation is controlled by a director of the Company. A director of the Company is the controlling shareholder of Neutral Creek Corporation.

Effective November 1, 2007, NLP sold property to Neutral Creek Limited Partnership ("NCLP") for $891,293 payable in cash in the amount of $661,293 and an interest bearing promissory note of $230,000. The promissory note bears interest at an annual rate of 7%. The note was paid out January 31, 2008. The transaction was not in the normal course of operations and was recorded at fair value as determined by an independent evaluation. Total interest paid by NCLP to NLP was $1,364 (2007 - $2,647). Effective March 31, 2008, NLP sold additional property to NCLP for gross proceeds of $2,900,000. The sale was paid for in cash with a receivable of $588,200 which has all been repaid subsequent to March 31, 2008.

The fair value of the receivables from ExploreCo, GPC, Western, NCLP, and NCC as discussed above approximate the carrying amount due to their short-term maturity.

The note receivable relates to a long term demand note from the Garrington Limited Partnership ("GLP") arising from its purchase of the Garrington property, which closed May 4, 2007. The note bears interest at 8% to be paid quarterly and is due May 1, 2009 or before. Garrington Production Corporation ("GPC") is the general partner of the GLP. The total net proceeds of the Garrington property to GLP was $1,820,833 which was the fair value as determined by an independent evaluation. It was not in the normal course of business and has been recorded at the exchange amount. The Company entered into an option agreement whereby GLP has the option to put this asset to the Company at fair value as determined by an independent engineering evaluation, on May 1, 2009.

The note receivable bears interest that approximates a market rate and accordingly the fair market value approximates the carrying value.



6. Property and equipment

March 31, December 31,
2008 2007
Accumulated
Cost Depletion Net Net
----------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment 80,032,486 19,246,617 60,785,869 $64,862,019
Office & field equipment 347,895 137,522 210,373 224,850
Truck 38,118 19,250 18,868 22,680
----------------------------------------------------------------------------
80,418,499 19,403,389 61,015,110 $65,109,549
----------------------------------------------------------------------------


Undeveloped land costs and seismic costs of $5,100,132 are excluded in the calculation of depletion and depreciation. Future development costs on proved reserves of $3,066,000 as at March 31, 2008, are included in the calculation of depletion and depreciation. During the three month period ended March 31, 2008, the Company has capitalized $460,786 of general and administrative costs and a $156,000 financing fee and has not capitalized any interest.

7. Long term investments

ExploreCo Energy Inc.

The Company entered into a joint venture agreement with ExploreCo, dated January 31, 2006. The joint venture agreement allows ExploreCo to participate in the exploration for and development of defined oil and gas opportunities for up to 25% of FairWest's share of these properties. FairWest's participation is limited by the amount of equity raised by ExploreCo.

The joint venture agreement provides the Company the option to acquire 1,665,667 common shares of ExploreCo at a purchase price of $0.30 per share.

The options vest at a rate of one option for every $3.00 of third party subscriptions raised by ExploreCo and expire 30 days from date of vesting. As at March 31, 2008, 874,000 options vested (2007 - 874,000) and were exercised by FairWest at a total price of $262,200 (2007 - $262,200).

During 2008 ExploreCo has made no payment (2007-$207,200) to FairWest in respect of geological and seismic work carried out on the joint venture areas of interest. This transaction was not in the normal course of operations and has been measured at the carrying amount.

The Company's share of income for 2008 and 2007 was determined to be nominal.

Petrovest Exploration & Production Corporation

The Company entered into a joint venture agreement with Petrovest Exploration & Production Corporation ("Petrovest"), dated November 23, 2006. The joint venture agreement allows Petrovest to participate in the exploration for and development of defined oil and gas opportunities for up to 25% of FairWest's share of these properties. FairWest's participation is limited by the amount of equity raised by Petrovest.

The joint venture provides the Company the option to acquire 999,000 common shares of Petrovest at a purchase price of $0.30 per share.

The options vest at a rate of one option for every $3.00 of third party subscriptions raised by Petrovest and expire 30 days from date of vesting. As at March 31, 2008, 380,001 options vested (2007 - 330,001) and were exercised by FairWest at a total price of $114,000. The fair value of the options on March 31, 2008, was determined to be nil.

During 2008 Petrovest has paid $15,000 to FairWest in respect of geological and seismic work carried out on the joint venture areas of interest. This transaction was not in the normal course of operations and has been measured at the carrying amount.

The Company's share of income for 2008 and 2007 was determined to be nominal.

8. Loans payable

(a) FairWest Credit Facilities

FairWest has a revolving operating demand loan facility of $3,720,000 that bears interest at the bank prime lending rate plus 0.75%. This loan facility is reducing by $90,000 per month effective February 1, 2008. FairWest also has a non-revolving acquisition/development demand loan facility of $1,000,000 that bears interest at the bank prime lending rate plus 1.0 % and is reducing by $150,000 per month effective February 1, 2008. The loan facilities are secured by a $10,000,000 demand debenture with a floating charge over the FairWest's assets. At March 31, 2008, there was $3,062,179 drawn on the revolving operating demand loan facility, and $900,000 was drawn down on the non-revolving demand loan. At March 31, 2008, the bank prime rate was 5.25 %.

At March 31, 2008, Fair West has not complied with its requirement to maintain a working capital ratio of not less than 1.0 as calculated using the banks compliance certificate form. The Company has asked the bank for a waiver in respect of this default.

(b) Strike Credit Facilities

On March 31 2008, Strike had an $11,100,000 demand revolving operating credit facility with a Canadian chartered bank. The facility bears interest at the bank's prime rate plus 0.375% per annum. At March 31 2008, $10,678,600 was drawn on this facility. Strike has pledged as collateral a $20,000,000 first priority floating charge demand debenture over all the assets of Strike. The holder of the Strike credit facilities has no recourse against FairWest's assets. The facility is subject to Strike meeting certain debt covenants. As at March 31, 2008, Strike was in violation of its working capital covenant and its change of control covenant.

On April 18, 2008, Strike received a demand to repay its outstanding indebtedness with its secured lender ("Lender"). The Lender has informed Strike that as of April 17, 2008, Strike owed the Lender $10.80 million of principal and accrued interest. FairWest and Strike are pursuing ongoing negotiations with the Lender to find a satisfactory solution for all parties.

On an unconsolidated basis Strike has a working capital deficiency of $15,902,981 including $4,591,451 of unsecured debt acquired by the Company. Strike is solely responsible for this working capital deficiency and the secured and unsecured creditors do not have any recourse against the Company or its assets.

(c) FairWest Bridge Financing

As at March 31, 2008, FairWest has a $1,612,074 non-revolving bridge loan facility with Tallinn Capital Corporation. This facility has an 18% interest rate and is due on June 30, 2008. The proceeds from this credit facility were used to finance the property acquisition completed in August 2007. It will be repaid through the sale of producing and non-producing assets to a new limited partnership. The Company paid $156,000 as a deferred financing fee.

9. Capital lease

The Company has entered into a capital lease for the use of compression equipment. The lease expires December 31, 2010 and bears interest at 9.9%. At the end of the lease, the Company has the option to purchase the asset for $1.00.

10. Debentures payable

In 2007, the Company issued 2,000 debenture units, each with a principal amount of $1,000, for total proceeds of $2,000,000. The debentures bear interest at 14% per annum, maturing October 31, 2009. Interest is paid monthly commencing December 31, 2007. The debentures are redeemable by the Company commencing March 1, 2008. The debentures are convertible to common shares at $0.45 per common share. The equity component of the debentures were calculated and found to be immaterial.

11. Due to related party



March 31, December 31,
Due to related parties 2008 2007
----------------------------------------------------------------------------
Bluestone Resources Inc. $805 $15,338
Petrovest Production Corporation 181,237 213,106
Garrington Limited Partnership 65,476 28,774
Gowling LaFleur Henderson LLP 117,908 184,100
NBC Technologies Inc. 226,041 179,190
----------------------------------------------------------------------------
$591,467 $620,508
----------------------------------------------------------------------------


The amounts due to Bluestone Resources Inc. ("Bluestone") are in the normal course of business and are measured at their exchange amounts. Bluestone is controlled by a director of the Company.

The amounts due to Petrovest and GLP are in the normal course of business arising from their participation as joint venture partners and are measured at their exchange amounts. These companies are controlled by a director of the Company.

The amount due to Gowling LaFleur Henderson LLP ("Gowlings") is in the normal course if business relating to various legal matters associated with Strike. A director of the Company is a partner in Gowlings. In 2008 Gowlings charged the Company $1,121 (2007 - $103,142) for services rendered. During the period, the Company paid Gowlings $67,313 (2007 - $59,416 in cash and issued 90,469 shares valued at $0.50 per share to settle current and past charges). The shares were valued based on the exchange amount of the services rendered and the market value of the Company's shares at the time of the governing Arrangement Agreement.

The amounts due to NBC Technologies Inc. ("NBC") are in the normal course of business arising from their supervision of the Company's drilling programs and are measured at their exchange amount. A director of the Company controls NBC. During the period, the Company was billed $82,338 (2007 - $315,043) by NBC. The Company has paid NBC $35,487 (2007 - $135,853).

The fair value of the payables to Bluestone, Petrovest, GLP, Gowlings, and NBC as discussed above approximate the carrying value due to their short-term maturity.

12. Asset retirement obligations

The Company's asset retirement obligations result from net ownership interests in petroleum and natural gas assets. The total estimated undiscounted cash flows, adjusted for inflation, required to settle the asset retirement obligations is approximately $8,177,814 (2007 - $8,683,921). The Company estimates that the settlement of these obligations will occur between 2008 and 2030. A credit-adjusted risk-free rate of 5.75% and an inflation rate of 1.5 % were used to calculate the carrying amount.



March 31, December 31,
2008 2007
----------------------------------------------------------------------------
Balance, beginning of year $4,251,309 $1,375,459
Change in estimates (53,606) (70,997)
Increase in liabilities 46,289 3,383,082
Decrease on dispositions (142,256) (655,706)
Costs incurred (114,384) -
Accretion expense 57,318 219,471
----------------------------------------------------------------------------
Balance, end of year $4,044,670 $4,251,309
----------------------------------------------------------------------------



13. Share capital
Authorized
Unlimited number of Class A Common voting shares
Unlimited number of Class B Common non-voting shares

Issued Number of shares Amount
----------------------------------------------------------------------------
Balance December 31, 2006 61,444,307 $35,050,840
Flow-through shares -@ $0.50 1,074,000 537,000
Shares issued to Strike shareholders -@
$0.40 12,164,550 4,912,886
Cost associated with Strike acquisition - (168,711)

Normal course issuer's bid (a) (20,000) (11,327)
Shares issued to Strike creditors -
part of Plan of Arrangement 5,631,674 2,815,838
Flow-through shares -@ $0.45 9,947,848 4,476,532
Flow-through shares -@ $0.225 6,500,000 1,462,500
Less: share issuance costs - (431,467)
Plus: tax effect of share issuance
costs - 129,500
Less: tax effect of flow-through
renunciation (1,685,300)
----------------------------------------------------------------------------
Balance December 31, 2007 96,742,379 $47,088,291
Less: share issuance costs - (39,587)
Plus: tax effect of share issuance
costs - 4,749
Less: tax effect of flow-through
renunciation - (424,100)
----------------------------------------------------------------------------
Balance March 31, 2008 96,742,379 $46,629,353
----------------------------------------------------------------------------

No shares were held in escrow at March 31, 2008 and December 31, 2007.

(a) During 2007, the Company purchased and cancelled 20,000 shares for a
total consideration of $7,900 during the Normal course issuer bid.


Stock options

The Stock Option Plan (the "Plan") was adopted in order to offer directors and officers of FairWest, its affiliates and persons and companies providing ongoing services to FairWest and its affiliates the opportunity, through share options, to acquire a proprietary interest in FairWest, thereby providing an additional incentive to the persons and companies contemplated above to promote the best interests of FairWest and to provide the means to FairWest to attract qualified persons. The Plan was given shareholder approval at the annual and special shareholder meeting held April 26, 2006. The Board of Directors administers the Plan.

Changes in the number of options, with weighted average exercise prices are summarized as follows:



March 31, 2008 December 31, 2007
--------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
--------------------------------------------------
Opening balance 7,774,619 0.487 5,899,116 0.583
Granted 725,000 0.220 3,075,000 0.351
Expired (83,304) (1.143) (149,497) (1.140)
Cancelled (300,000) (0.47) (1,050,000) (0.537)
--------------------------------------------------
Closing balance 8,116,315 0.457 7,774,619 0.487
--------------------------------------------------

Exercisable 2,866,315 0.594 2,949,619 0.610

As at March 31, 2008, the following options are outstanding:

Number of
common shares Exercise price
under option per option Expiry
141,315 2.319 2009
3,600,000 0.50 2010
725,000 0.51 - 0.59 2011
2,925,000 0.22 - 0.42 2012
725,000 0.22 2013


Stock based compensation

The quarterly prorated fair value of stock options granted to directors and employees that will vest during 2008, in the amount of $128,493 has been included in the contributed surplus account. The fair value of stock options granted in the period was calculated using the Black-Scholes option pricing model with the following assumptions:



Risk-free interest rate 3.04%
Expected dividend yield -
Expected stock price volatility 68.81%
Expected option life in years 5
Weighted average grant date fair value $0.22/share


Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company's stock options.

All of the above stock options are potentially dilutive but were not included in the calculation of diluted earnings per share for the quarter because to do so would be anti-dilutive.



14. Contributed surplus

March 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Balance beginning of the year $1,011,071 $498,645
Stock based compensation 128,492 508,999
NCIB - 3,427
----------------------------------------------------------------------------
Total $1,139,563 $1,011,071
----------------------------------------------------------------------------

No stock options were settled during the period ended March 31, 2008.


15. Contingent Liabilities

(a) The Company has received a statement of claim in the amount of $135,693 from Aero Drilling & Consulting Ltd., in respect of services provided to a subcontractor of Supreme Energy Inc. The Company has reviewed the claim and considers it without merit and no provision has been made with respect to the claim in the consolidated financial statements. The Company is defending the claim.

(b) The Company has received notice of a reassessment from Revenu Quebec for the period ended February 28, 2003, in the amount of $211,243, including interest. This relates to Fairstar Explorations Inc. ("Fairstar"). Fairstar and Western Energy Corporation amalgamated August 18, 2005 to form the Company. The Company has filed a notice of objection, does not believe that the reassessment is valid and has made no provision with respect to the claim in the consolidated financial statements.

(c) The Company has received a statement of claim in the amount of $500,000 from Norex Exploration Service in respect of services provided to Strike. The Company has reviewed the claim and has made a provision of $251,753 in the consolidated financial statements with regards to this claim. The Company is defending the claim.

(d) The Company received a statement of claim form NAL Resources Limited in the amount of $95,730.17 in respect of unpaid revenues. The Company has reviewed the claim and considers it without merit and no provision has been made with respect to the claim in the consolidated financial statements. The Company is defending the claim.

(e) The Company has received a statement of claim from Bidell Equipment Limited Partnership in the amount of $30,671.57 in respect of services provided to Strike. The Company has reviewed the claim and has made a provision of $30,671.57 in the consolidated financial statements with regards to this claim. The Company is defending the claim.

16. Contractual obligations

(a) The Company's total obligations, under a property lease agreement, exclusive of occupancy costs and net of sublease recoveries, are as follows:



2009 $338,013
2010 338,013
2011 324,815
2012 258,825
2013 172,550
----------------------------------------------------------------------------
Total $ 1,432,216
----------------------------------------------------------------------------


(b) The Company entered into an option agreement whereby GLP has the option to put the Garrington property (note 5) to the Company at fair value as determined by an independent engineering evaluation, on May 1, 2009. The fair value of the Garrington property has not been determined at this time.

(c) The future obligation under capital lease are:



Imputed
Interest Payment
-------------------------
2009 $15,287 $115,993
2010 4,813 103,856
----------------------------------------------------------------------------
Total $20,100 $219,849
----------------------------------------------------------------------------



17. Subsequent Events

(a) On April 18, 2008, Strike Petroleum Ltd ("Strike"), a 100% subsidiary of FairWest Energy Corporation received a demand to repay its outstanding indebtedness with its secured lender ("Lender"). The Lender has informed Strike that as of April 17, 2008, Strike owed the Lender $10.63 million of principal and accrued interest of $0.17 million.

Strike is a wholly owned subsidiary of FairWest and is solely responsible for its secured debt with the Lender. FairWest has determined that the value of Strike's oil and gas assets is less than the indebtedness to the Lender. FairWest and Strike are pursuing ongoing negotiations with the Lender to find a satisfactory resolution of this matter. If we are unable to make a deal, FairWest and Strike will cooperate with the Lender to permit an orderly liquidation of the Strike assets.

The FairWest management team and board of directors anticipate that in the event the Strike assets are liquidated the result will be a reduction of $10.6 million to the current debt component of FairWest's consolidated balance sheet and a 20% reduction in production volumes.

(b) On April 16, 2008, the Company signed a purchase and sale agreement to purchase assets in the Provost area for $2,500,000. This purchase should close approximately June 1, 2008. Bridge financing has been arranged for this purchase.

(c) In April the Company made an offer to purchase another asset in the Provost area for $500,000. This purchase is expected to close in June 2008. Bridge financing has been arranged for this purchase.

(d) The Company has entered into a physical contract to sell 1,000 GJ/day for the term of May 1, 2008 to March 31, 2009 inclusive, at a rate of $9.02/GJ. This contract is non-cancellable and cannot be converted to cash or collapsed.

(e) The Company has entered into a physical contract to sell 500 GJ/day using a costless collar of $8.50 to $11.75/GJ for the term of May 1, 2008 to March 31, 2009 inclusive.

18. Future Accounting Changes

Goodwill and Intangible Assets

In fiscal 2009, the Company will be required to adopt the CICA Handbook Section 3064 - Goodwill and Intangible Assets. The new Section is a replacement of the CICA Handbook Section 3062 and 3450. The new Section does not substantively change the requirement pertaining to goodwill. The change in requirements pertaining to intangible assets primarily relate to recognition criteria for purchased and internally developed assets. The recognition criteria include that the asset is identifiable separate from goodwill, the entity has the power to obtain, and it is probable that it will receive, the future economic benefits flowing from it and the cost of the asset can be measured reliably. The Company is currently reviewing the new standard but is unable to assess the impact on its financial statements.

Convergence with International Financial Reporting Standards
A decision of the CICA Accounting Standards Board (the "AcSB") will require the Company to report under International Financial Reporting Standards in fiscal 2011 though specific requirements of the transition, including confirmation of the implementation date, continue to be under review by the AcSB. The Company is monitoring the requirements but is unable to assess the impact on its financial statements.

Contact Information

  • FairWest Energy Corporation
    James G. Gettis
    President and Chief Executive Officer
    (403) 264-4949
    (403) 269-1761 (FAX)
    or
    FairWest Energy Corporation
    Marion D. Mackie
    Chief Financial Officer
    (403) 264-4949
    (403) 269-1761 (FAX)