Midnight Oil Exploration Ltd.
TSX : MOX

Midnight Oil Exploration Ltd.

March 19, 2008 03:39 ET

Midnight Oil Provides 2007 Fourth Quarter and Annual Financial and Operating Results

CALGARY, ALBERTA--(Marketwire - March 19, 2008) - Midnight Oil Exploration Ltd. (TSX:MOX) is pleased to announce its financial and operating results for the three month period and year ended December 31, 2007.

PRESIDENT'S MESSAGE

For 2007 Midnight had a very clear strategy: watch our capital and focus on high value oil opportunities. We set the strategy early and stayed the course throughout the year. We used our strong cash flow to pursue an oil focused capital program in Red Earth that included development and exploration drilling and the commencement of a waterflood. We also high-graded our gas opportunities making selected investments in the Peace River Arch and West Central Alberta. As a result, we were able to maintain a solid production base and strong balance sheet while working on growing our high potential prospect inventory.

As is often the case in our industry, 2007 was another dynamic year for junior exploration companies. The year started with an industry wide concern of the overall economics for our business amid the spectre of high service costs and soft natural gas prices. This situation challenged the economic formula in a predominately natural gas basin by both reducing our cash flow and restricting our access to capital. That said, at Midnight we were well positioned with a solid balance sheet, a light oil weighted cash flow stream and a large prospect inventory of both light oil development and exploration and natural gas development opportunities.

Under these circumstances, we decided to pace our capital spending and pursue our more highly valued light sweet oil opportunities in Red Earth. Generally the costs of an oil weighted program are higher compared to gas but the netbacks are also much higher. In the case of Midnight we have enjoyed field operating netbacks of $37 to $56 per barrel from our light oil versus $21 to $33 per boe for our natural gas. In addition, oil weighted programs tend to be longer term investments in order to get full reserve value from third party evaluators. We have commenced and made significant investments for the long term value of our oil holdings and additional reserves will be credited in the future. In consideration of the distinct character of our investment strategy, our results are best evaluated when compared to our corporate three year average finding and development costs of $30.56 per boe which equates to a recycle ratio of 1.5x on our oil projects. This perspective most accurately presents the success of our oil program and is substantiated by our increased reserve value despite a drop in the price forecast used for natural gas. Thus what we sacrificed in higher finding and development costs have been more than made back in higher and stronger netbacks and higher and stronger reserve values. In an environment where many companies suffered weak cash flow we have been able to maintain solid cash flow and a solid balance sheet.

Under our disciplined capital program we were not as active drilling new reserve targets as we reduced our 2007 well count to 21 gross (6.9 net) from 33 gross (17.2 net) wells in 2006. Instead we committed more funds to facilities and road construction. We spent about 50% of our capital at Red Earth in drilling, pipelining, road construction and commenced a significant waterflood. In addition to drilling five gross (4.0 net) total wells consisting of three gross (2.5 net) oil wells, one gross (1.0 net) gas well and one (0.5 net) dry hole, we invested in the long term commitment to this property. This included building water handling facilities and initiating a waterflood for enhanced recovery. Although the initial investment was significant for the size of our company, we will receive long term benefits as we grow the reserves resulting from the waterflood and reduce operating costs. On the natural gas side, we directed our activities towards the Peace River Arch, drilling four gross (2.2 net) wells. In addition, we continued our participation in a gas development program with partners in our West Central area participating in 12 gross (0.6 net) gas wells.

As a result, we were able to maintain our production levels and our cash flow over the year. In the fourth quarter of 2007, our oil and liquids production increased 18% and 10% respectively over the same period in 2006, and oil and liquids pricing also increased by 37% and 32% respectively over the fourth quarter in 2006. Indeed our gas production and revenues declined modestly, but we definitely benefited from our strategy. The strength in oil more than offset the decrease in natural gas production and pricing relative to the fourth quarter of 2006 resulting in an overall increase in sales of 15% and cash flow of 2% in Q4 2007 compared to Q4 2006.

Midnight's production for 2007 averaged 2,098 boe/d and was essentially equivalent to the average production for 2006. Midnight's increase in average daily production of oil and natural gas liquids in 2007 of 26% was offset by a corresponding decrease in natural gas production on a barrel of oil equivalent basis.

In Q4 2007, Midnight's capital expenditures were primarily focused on Red Earth with our exploratory drilling and commencement of construction of an enhanced oil recovery waterflood. In east Red Earth, we drilled 2 exploratory wells (100% interest) with mixed success. We continue to evaluate the results of this program and have started the construction of our pipeline to allow us to produce our highly successful 5-18-87-6w5 discovery well. At the beginning of 2008, Midnight operated the drilling of another oil well discovery in central Red Earth. This well is part of our development and exploitation of the B pool where we are implementing our waterflood. This was an excellent well and validated our reservoir model. Currently, we are restricted in our production to 120 bbls/d, but initial productivity indicates the well is capable of over 250 bbls/d. Based on our waterflood investment, including the conversion of one well to water injection, we have applied to the ERCB for removal of allowable restriction in order to produce the well under Good Production Practices at the unrestricted and capable rate. This success opens up a number of additional locations which Midnight, as operator, will be pursuing later in 2008.

In Q4 2007 in the Red Rock area of the Deep Basin, Midnight completed the pipelining and tie-in of a sweet gas well that we drilled last winter. This multi-zone discovery well has been placed on stream in the first quarter at a restricted rate, averaging 1,000 mcf per day (net 500 mcf/d). Access to the area is seasonally limited but with the new gas pipeline now in place, we have identified additional locations to pursue on our lands (MOX 50-100%).

Also in Q1 2008, in the Elmworth area, we are participating (Midnight 50%) in a horizontal well being drilled into the Cadomin formation. This is a very exciting high potential play in a tight gas sand reservoir. The potential exists for a number of high productivity, large reserve wells to be drilled. Offsetting Cadomin horizontals have produced with initial rates of over 5 mmcf/d. Midnight has a great deal of experience and technical expertise in these tight gas reservoirs. We continue to add to our land and prospect inventory in this general area and have entered into two farm-in arrangements to expand our land holdings.

Midnight's increased investment in the Red Rock area and in Elmworth is a key part of Midnight's strategy to further increase our exposure to sweet natural gas prospects in the high potential Deep Basin. This strategy is set in place in anticipation of stronger natural gas prices, which are currently rising, and also with a longer term view that we will enjoy much higher North America gas prices, likely to settle over $10.00 per mcf. That said we have been served well over the past year with our balanced portfolio of light oil and sweet gas opportunities. Notwithstanding our higher finding costs we have consistently been top decile in the industry for our revenue and netbacks per boe.

In the Pembina area, Midnight has a 37.5% working interest in a high impact exploratory prospect targeting the highly prolific sour Nisku oil reservoir. Our partner has been highly successful with drilling similar prospects in the area. Our partner is the operator and received a drilling licence in Q3 2007 to drill our joint well. However, continued delays in obtaining final approvals from the regulating agency have further delayed the anticipated spud date of this well until later in 2008. This is a high impact exploratory oil prospect that requires significant planning and involves long lead times, but if successful, would add significantly to our light oil production base.

The talent and expertise of our team and the flexibility of our opportunity base are the core strengths of Midnight. Yet however proficient our team of professionals may be, the Canadian federal and Alberta provincial governments continue to mistreat our industry. With the strength of commodities the natural assumption would be that we are enjoying the best of times. However, the Canadian oil industry has not benefited to a degree proportionate to the increase in commodities. In fact, in 2007 while broader Canadian and U.S. markets matched each other in performance, the NYSE Energy index rose 27% while TSX Capped Energy index increased only 8%. Capital is liquid and flows to the best returns and best opportunities and the Canadian governments have added political risk to the assessment of risks and returns. The actions of two levels of our government exasperate this market response. This has also negatively impacted our share price and negatively affected our ability to economically access and deploy capital. Reasonably priced access to capital for small and medium sized conventional energy companies is integral for our success and growth. The New Royalty Framework announced by the Alberta government on October 25, 2007 (NRF) is scheduled to take effect January 1, 2009. Midnight engaged GLJ Petroleum Consultants ("GLJ") to prepare a forward looking analysis of Midnight's estimated 2007 reserves applying the expected NRF effective January 1, 2009. That analysis indicated that the net present value of reserves discounted at 10% decreased by approximately 10% to 13% (using forecasted prices and costs). The value of our existing reserves have been negatively impacted as has the economics of the development of our light-oil property in Red Earth. Notwithstanding the actions of the governments, we have a strong and vibrant company with a large and high potential prospect inventory and are confident we will reward our shareholders for their patience in this environment.

In response to our reduced share price, and in the face of the market's response to the government's initiatives on October 16, 2007 to increase Crown royalties, Midnight announced a normal course issuer bid. During the fourth quarter of 2007, the Company purchased and cancelled 232,700 common shares at an average market price of $1.13 per share reducing the total number of common shares outstanding at year end to 47,595,129. To date in Q1, 2008, the Company purchased and cancelled an additional 172,500 common shares at an average market price of $1.10 per share.

While the conventional oil and gas sector continues to be challenged by high costs, penalizing government initiatives and a lack of access to capital markets, Midnight continues to deliver solid results. We are focused on building our prospect inventory for both light oil and sweet natural gas and bringing on stream those reserves that will add the most value to our shareholders. We have assembled and continue to build a large and highly prospective sweet gas prospect land holding in our Peace River Arch area and selectively participate in a highly successful gas development program with our partners in West Central Alberta. We have a strong balance sheet and a committed staff and we are optimistic about the future of the conventional oil and gas industry in Canada.

Midnight is a top quality junior exploration company with a high end technical team with a proven track record. Our oil weighted production base, a strong balance sheet and a high quality prospect inventory leaves Midnight extremely well positioned for this stage of the cycle. We are moving Midnight towards a larger focus on natural gas and look forward to taking advantage of the opportunities we have created and the opportunities that this stage will afford us.

Shareholders are invited to attend Midnight's 2008 Annual Meeting of Shareholders scheduled for 10:00 AM, Wednesday May 14, 2008 at the Sun Life Conference Centre, located at 140 4th Avenue S.W., Calgary, Alberta.

Signed "Fred Woods"

President and Chief Executive Officer

March 18, 2008

RESERVES

The reserve data set forth below is based on an independent reserves evaluation conducted by GLJ Petroleum Consultants Ltd. ("GLJ") effective December 31, 2007 ("GLJ Report") and prepared in accordance with the definitions set out under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Midnight has a reserves committee comprised of a majority of independent board members who review the qualifications and appointment of the independent reserve evaluators. The committee also reviews the process for providing information to the evaluators and meets with the independent evaluators to discuss the procedures used in the independent report, to review the Company's major properties and to identify and discuss any areas of risk. The GLJ Report was reviewed by the reserves committee of Midnight and was approved by the Company's Board of Directors on March 18, 2008.

The reserve highlights are:

- Company interest proved reserves at December 31, 2007 were 4.23 million boe.

- Company interest proved plus probable reserves at December 31, 2007 were 6.32 million boe.

- Additions to proved reserves replaced 2007 average production by 106%.

- The net present value (before tax discounted at 10%) of total proved plus probable reserves increased 2% to $120.7 million.

Reserves Advisory

- Reserves included herein are stated on a company interest basis where reserves include royalty interest (operating and non-operating) and before royalty burdens.

- Natural gas is converted to barrels of oil equivalent ("boe") at a ratio of six thousand cubic feet to one barrel of oil.

- Boe's may be misleading, particularly if used in isolation. In accordance with NI 51-101, a boe conversion ratio for natural gas of 6 Mcf: 1 bbl has been used which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

- Tables may not add due to rounding.

FORECAST PRICES AND COSTS



Summary of Oil and Gas Reserves - Company Interest Reserves
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Reserves Category Natural gas
Light Oil Natural Gas Liquids 2007 Total 2006 Total
(Mbbls) (MMcf) (Mbbls) (Mboe) (Mboe)
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Proved
Developed
Producing 1,034 11,282 265 3,180 3,483
Developed
Non-Producing 145 2,289 20 546 424
Undeveloped 318 1,064 6 501 272
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Total Proved 1,497 14,635 291 4,227 4,180
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Probable 1,198 4,912 80 2,096 2,306
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Total Proved Plus
Probable 2,695 19,547 371 6,323 6,486
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NET PRESENT VALUE ("NPV") SUMMARY 2007

Midnight's crude oil, natural gas and natural gas liquids reserves were evaluated using GLJ's product price forecasts effective January 1, 2008 prior to provision for income taxes, interest, debt service charges and general and administrative expenses. It should not be assumed that the discounted future net production revenues estimated by GLJ represent the fair market value of the reserves.



Net Present Value of Reserves, before income taxes

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December 31, 2007 (000's) 0% 5% 8% 10% 12% 15%
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Proved Reserves
Developed Producing 109,729 89,297 80,835 76,195 72,164 67,014
Developed
Non-Producing 13,905 10,660 9,275 8,511 7,847 6,999
Undeveloped 13,132 9,123 7,418 6,482 5,671 4,646
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Total Proved 136,767 109,080 97,528 91,188 85,682 78,660
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Probable 75,869 44,041 34,230 29,511 25,751 21,369
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Proved plus Probable 212,636 153,121 131,758 120,698 111,433 100,029
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At December 31, 2007 using a 10% discount factor, the proved producing reserves make up 63% of the proved plus probable value while total proved reserves account for 76% of the proved plus probable value. Midnight's proved non-producing and undeveloped reserves account for 1 million boe of the total proved reserves booked but account for only 16.5% of the value of our proved reserves. The future capital associated with these proved reserves included in the 2007 GLJ Report is approximately $12.3 million and have been subtracted from the future value of the proved reserves.

The GLJ's price forecast utilized in the forecast evaluation is summarized below.



GLJ January 1, 2008 Price Forecast

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West Texas
Intermediate Edmonton Light Natural Gas Foreign
Year Crude Oil Crude Oil at AECO Exchange
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($US/bbl) ($Cdn/bbl) ($Cdn/mmbtu) ($US/$Cdn)
2008 92.00 91.10 6.75 1.00
2009 88.00 87.10 7.55 1.00
2010 84.00 83.10 7.60 1.00
2011 82.00 81.10 7.60 1.00
2012 82.00 81.10 7.60 1.00
2013 82.00 81.10 7.60 1.00
2014 82.00 81.10 7.80 1.00
2015 82.00 81.10 7.97 1.00
2016 82.02 81.12 8.14 1.00
2017 83.66 82.76 8.31 1.00
2018 85.33 84.42 8.48 1.00
2019+ +2.0%/yr +2.0%/yr +2.0%/yr 1.00
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RESERVE RECONCILIATION

Reconciliation of Changes in Company Reserves by Principal Product Type
Forecast Prices and Costs

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Factors Crude Oil Natural
& NGLs Gas Total
--------------------------------------------------------
Proved + Proved + Proved +
Proved Probable Proved Probable Proved Probable
(Mbbls) (Mbbls) (MMcf) (MMcf) (Mboe) (Mboe)
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December 31, 2006 1,773 3,066 14,438 20,522 4,180 6,486
Extensions &
improved
recovery 211 344 3,253 4,473 753 1,089
Technical
Revisions 202 54 (848) (3,240) 61 (486)
Production (398) (398) (2,208) (2,208) (766) (766)
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December 31, 2007 1,788 3,066 14,635 19,547 4,227 6,323
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FINDING, DEVELOPMENT AND ACQUISITION ("FD&A") COSTS

Midnight's capital expenditures on exploration and development totalled $27.3 million in 2007 with no acquisitions in the current year. On a proven reserve basis, the Company's FD&A cost for 2007 excluding future capital was $33.52 per barrel of oil equivalent, down 12% from 2006. The calculation of FD&A cost for proved reserves including future capital of $12.3 million included in the 2007 GLJ Report, and deducting $6.2 million of future capital which was included in the 2006 GLJ Report results in a FD&A cost of $41.04 per boe. On a proven plus probable reserve basis, the Company's FD&A cost for 2007 was $45.25 per boe excluding future capital. The calculation of FD&A cost for proved plus probable reserves including future capital of $24.7 million included in the 2007 GLJ Report, and deducting $19.3 million of future capital which was included in the 2006 GLJ Report results in a FD&A cost of $54.20 per boe.

NI 51-101 requires that FD&A costs be calculated including changes in Future Development Capital ("FDC"). Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities and capital cost estimates that reflect the independent evaluator's best estimate of what it will cost to bring the proved undeveloped and probable reserves on production. The current high level of activity has resulted in increased capital costs throughout the industry that are now reflected in the estimates of future development costs effective December 31, 2007.



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FD&A Costs - Company
Interest Reserves 2007 2006
---------------------------------------------------
Proved plus Proved plus
Proved Probable Proved Probable
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Capital costs ($000's)
Exploration and
Development 27,283 27,283 61,733 61,733
Acquisitions n/a n/a n/a n/a
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27,283 27,283 61,733 61,733
Change in Exploration
and Development FDC 6,124 5,398 (3,715) 906
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33,407 32,681 58,018 62,639
Reserve additions(1)
(Mboe)
Exploration and
Development 814 603 1,617 2,308
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Finding, development
and acquisition
costs ($/boe)
Exploration and
Development Capital
including change
in FDC $41.04 $54.20 $35.88 $27.14
Exploration and
Development Capital
excluding change
in FDC $33.52 $45.25 $38.18 $26.75
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Notes:
(1) Reserve additions include technical revisions.
(2) The aggregate of the exploration and development costs incurred in the
year and the change during the year in estimated future development
costs generally will not reflect total finding and development costs
related to reserves.


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FD&A ($/boe)
Exploration and Development Capital
including change in FDC 2005 2006 2007 3 year
------------------------------------------------------------------------
Proved 27.72 35.88 41.04 34.36
Proved plus Probable 26.09 27.14 54.20 30.56
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Midnight's 2007 netbacks were $44.64/boe for oil, $26.33/boe for NGLs and $26.34/boe for natural gas combining for a total netback of $34.49/boe. With 2007 netback of $34.49/boe, the recycle ratio for the company was 1.0x for proved and 1.1x for proved plus probable.

NET ASSET VALUE

At December 31, 2007, Midnight had an estimated net asset value of $2.53 per basic share discounting the present value of proved and probable reserves at 10% before tax including a provision for undeveloped lands, seismic and excluding net debt. The present value of petroleum and natural gas reserves were determined by GLJ in their year end evaluation. Undeveloped land at December 31, 2007 was internally valued at an average price of $157 per acre based on a previous Seaton and Jordan report, and undeveloped seismic and other assets were internally evaluated based on the lower of cost or market.



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Net Asset Value- Forecast Pricing and Costs
at December 31, 2007
Mboe $/Boe PV ($M) $/Share
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Proved Reserves
Value at 10% BIT 4,227 21.57 91,188 $ 1.92
Probable Reserves
Value at 10% BIT 2,096 14.08 29,510 0.62
----------------------------------------------------
Proved plus Probable
Reserves Value at
10% BIT 6,323 19.09 120,698 $ 2.54

(000's) $/acre
Undeveloped Land 148 acres 157 23,211 0.49
Seismic and Other
Assets 4,894 0.10
Net Debt (28,374) (0.60)
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Total Net Assets $120,429
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Basic Shares
Outstanding 47,595
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NET ASSET VALUE $ 2.53
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At December 31, 2007 there are no material differences between basic and
fully diluted net asset value calculations.

Land Holdings

The following table sets out Midnight's land holdings as at December 31,
2007.

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Developed Undeveloped Total
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Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
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(acres)
Alberta 188,100 31,900 260,400 124,300 448,500 156,200
British
Columbia 1,400 500 32,700 23,400 34,100 23,900
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Total 189,500 32,400 293,100 147,700 482,600 180,100
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Notes:
(1) "Gross" refers to the total acres in which Midnight has an interest.
(2) "Net" refers to the total acres in which Midnight has an interest,
multiplied by the percentage working interest therein owned by
Midnight.


MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis ("MD&A") as provided by the management of Midnight should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes for the years ended December 31, 2007 and 2006. Additional information relating to Midnight, including a detailed reserve analysis, will be included in our Annual Information Form, which may be found on SEDAR at www.sedar.com.

Basis of Presentation - The financial data presented below has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and the measurement currency is the Canadian dollar. For the purpose of calculating unit costs, natural gas is converted to a barrel equivalent ("boe") using six thousand cubic feet of natural gas equal to one barrel of oil unless otherwise stated. The following MD&A compares the results of the year ended December 31, 2007 ("2007") to the year ended December 31, 2006 ("2006") and the results of the three months ended December 31, 2007 ("Q4 2007") to the three months ended December 31, 2006 ("Q4 2006") and the three months ended September 30, 2007 ("Q3 2007").

Non-GAAP Measurements - Within the Management's Discussion and Analysis references are made to terms commonly used in the oil and gas industry. Funds from operations, funds from operations per share and netbacks are not defined by GAAP in Canada and are referred to as non-GAAP measures. Funds from operations per share is calculated based on the weighted average number of common shares outstanding consistent with the calculation of net income per share. Netbacks equal total revenue less royalties and operating and transportation expenses calculated on a per boe basis. Management utilizes these measures to analyze operating performance and leverage. Funds from operations is not intended to represent operating profit for the period nor should it be viewed as an alternative to operating profit, net income, cash flow from operations or other measures of financial performance calculated in accordance with Canadian GAAP. Funds from operations is commonly referred to as cash flow by research analysts and is used to value and compare oil and gas companies and is frequently included in published research when providing investment recommendations. Total boes are calculated by multiplying the daily production by the number of days in the period.

The following table reconciles cash flow from operations to funds from operations which is used in the MD&A:



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($000s) Q4 2007 Q4 2006 Q3 2007 2007 2006
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Cash flow from operations 6,026 8,289 6,510 21,413 25,260
Abandonment expenditures 17 235 12 167 297
Changes in non-cash working
capital (1,145) (3,734) (1,602) (206) (3,558)
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Funds from operations 4,898 4,790 4,920 21,374 21,999
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Forward Looking Statements - Certain statements contained within the Management's Discussion and Analysis, and in certain documents incorporated by reference into this document, constitute forward looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward looking statements. Forward looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "budget", "plan", "continue", "estimate", "expect", "forecast", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward looking statements. We believe the expectations reflected in those forward looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward looking statements included in, or incorporated by reference into, this MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A or as of the date specified in the documents incorporated by reference into this Management's Discussion and Analysis, as the case may be.

In particular, this Management's Discussion and Analysis, and the documents incorporated by reference, contain forward looking statements pertaining to the following:


- the performance characteristics of our oil and natural gas properties;

- oil and natural gas production levels;

- the size of the oil and natural gas reserves;

- projections of market prices and costs;

- supply and demand for oil and natural gas;

- expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development;

- treatment under governmental regulatory regimes and tax laws; and

- capital expenditures programs.

The actual results could differ materially from those anticipated in these forward looking statements as a result of the risk factors set forth below and elsewhere in this Management's Discussion and Analysis:

- volatility in market prices for oil and natural gas;

- liabilities inherent in oil and natural gas operations;

- uncertainties associated with estimating oil and natural gas reserves;

- competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel;

- incorrect assessments of the value of acquisitions;

- geological, technical, drilling and processing problems; and

- changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry.

Statements relating to "reserves" or "resources" are deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future. Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward looking statements contained in this MD&A and the documents incorporated by reference herein are expressly qualified by this cautionary statement. We do not undertake any obligation to publicly update or revise any forward looking statements except as required by securities law.

This Management's Discussion and Analysis is dated as of March 18, 2008.

Selected Annual & Quarterly Information

Set out below is selected annual information for Midnight for the last three years:



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Financial
(000's, except for per
share amounts) 2007 2006 2005
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Petroleum and natural gas sales $ 43,153 $ 39,688 $ 22,989
Funds from operations 21,374 21,999 12,062
Per share - Basic 0.45 0.53 0.44
- Diluted 0.45 0.53 0.43
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Net income (loss) $ (1,219) $45 $ 1,669
Per share - Basic (0.03) 0.00 0.06
- Diluted (0.03) 0.00 0.06
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Petroleum and natural gas additions $ 27,330 $ 61,752 $ 76,507
Net debt 28,374 21,974 16,730
Total assets 164,681 152,833 111,171
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Shares outstanding
Basic 47,595 47,828 38,328
Diluted 52,600 53,548 41,511
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Operations
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Average daily production
Natural gas (mcf/d) 6,050 7,755 4,666
Oil & NGLs (bbls/d) 1,090 866 326
Combined (boe/d) 2,098 2,158 1,104
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Netback ($/boe) $ 34.48 $ 31.79 $ 33.07
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Set out below is selected information by quarter for Midnight for the last
eight quarters:

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Financial 2007 2006
-----------------------------------------------------------
(000's, except
for per
share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
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Petroleum and
natural gas
sales $10,811 $10,439 $11,009 $10,894 $ 9,410 $10,099 $10,988 $ 9,191
Funds from
operations 4,898 4,920 6,069 5,487 4,790 5,479 6,533 5,197
Per share
- Basic 0.10 0.10 0.13 0.11 0.11 0.13 0.16 0.14
- Diluted 0.10 0.10 0.13 0.11 0.11 0.13 0.16 0.13
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Net income
(loss) $ (19)$ (827)$ 51 $ (424)$ (565)$ 320 $ 82 $ 208
Per share
- Basic (0.00) (0.02) 0.00 (0.01) (0.01) 0.01 0.00 0.01
- Diluted (0.00) (0.02) 0.00 (0.01) (0.01) 0.01 0.00 0.01
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Petroleum and
natural
gas
additions $ 8,092 $ 3,217 $ 3,439 $12,582 $ 8,652 $13,670 $ 9,945 $29,485
Net debt 28,374 24,886 26,577 29,170 21,974 33,579 25,297 41,028
Total
assets 164,681 160,573 161,537 159,594 152,833 147,677 138,842 134,452
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Shares
outstanding
Basic 47,595 47,828 47,828 47,828 47,828 42,328 42,328 38,328
Diluted 52,600 52,953 53,168 53,001 53,548 45,914 45,903 41,495
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Operations

Average
daily
production
Natural
gas
(mcf/d) 5,573 5,981 5,769 6,891 7,352 7,637 10,091 5,926
Oil & NGLs
(bbls/d) 1,036 1,050 1,185 1,090 890 841 830 901
Combined
(boe/d) 1,965 2,047 2,146 2,239 2,115 2,114 2,512 1,889
Netback
($/boe) $ 34.39 $ 33.77 $ 37.37 $ 32.45 $ 29.08 $ 33.15 $ 31.68 $ 33.54
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Midnight has a balanced portfolio of light oil and sweet gas production that have delivered solid production and funds from operations. Growth in petroleum and natural gas sales and funds from operations are derived by the combination of increased oil production and strong commodity prices. Midnight commenced operations in December 2004 with production averaging 723 boe/d for the month. During 2005 production grew from a combination of drilling 42 gross (10.8 net) wells and on November 29, 2005, Midnight acquired the Red Earth property increasing our production for Q4 2005 by 303 boe/d. In 2006 production growth continued with the drilling of 33 gross (17.2 net) and in 2007 was substantially maintained with 21 gross (6.9 net) wells. In the last eight quarters, oil prices have remained robust with sales realized in the range of $62.23/bbl for Q4 2006 to $85.23/bbl in Q4 2007. The 17.8% rise in the Canadian dollar ($0.8662 to $1.0200) reduces the impact of the record setting WTI price. Realized natural gas prices have been quite volatile with a high of $7.82/mcf in Q1 2007 to a new low of $5.33/mcf in Q3 2007. Strong U.S. gas supply and an increase in LNG imports have swelled U.S. gas storage to record levels which put downward pressure on the gas price in 2007. During the last eight quarters, Midnight increased its contribution from oil and NGLs with production rising from 48% to 53% in Q4 2007 and corresponding revenues contributing to over 71% to our petroleum and natural gas sales.

Throughout 2006 and 2007 the cost of oilfield services escalated dramatically in Northern Alberta with the increase in demand for these services resulting in reduced margins for most oil and gas exploration and production companies. On October 31, 2006, the Federal Government dramatically altered the investment landscape in the oil and gas sector by announcing a number of negative tax initiatives pertaining to income trusts in the resource sector. These initiatives also impacted the valuations of junior oil and gas exploration companies and accordingly negatively impacted their access to capital markets. Furthermore, on October 25, 2007, the Alberta government announced its intent to increase crown royalties through the New Royalty Framework ("NRF") which is scheduled to take effect January 1, 2009. Substantially all of Midnight's production and reserves are in Alberta and will be subject to the NRF. At December 31, 2007, the province had not introduced the enabling legislation nor had they provided clarity on a number of issues. Although the exact details are not yet known, Midnight has undertaken a preliminary review of the potential impact on our existing asset base assessing royalties, the related impact on operating netbacks and the net present value of reserves. Midnight engaged GLJ Petroleum Consultants ("GLJ") to prepare a "look forward" analysis of Midnight's estimated 2007 reserves applying the expected NRF effective January 1, 2009. This preliminary analysis indicated that the net present value of reserves discounted at 10% decreased by approximately 10% to 13% (forecasted prices and costs) from the high to the low scenarios. The estimated negative impact at our light oil property Red Earth was partially offset by deep sweet natural gas production in the Deep Basin and West Central Alberta.

The analysis is based on GLJ's current commodity price forecast effective January 1, 2008 which includes: AECO natural gas price of $6.75 per mmbtu for 2008 and $7.55 per mmbtu for 2009; a WTI crude oil price of US$92.00 per bbl for 2008 and US$88.00 per bbl for 2009 with a forecast exchange rate of $1 Canadian to $1 U.S. The analysis does not take into account future drilling plans that do not have reserves assigned to them at December 31, 2007 and makes certain assumptions regarding future prices and production which could further alter Midnight's estimated net present value if the NRF is enacted into legislation. Overall the NRF will reduce both the value of our existing oil and gas reserves and reduce the future value of our light oil program and becomes a factor in steering our capital program.

Production

During 2007, Midnight maintained strict financial discipline by controlling capital expenditures. As a result, production was relatively flat, averaging 2,098 boe/d for 2007, a 3% decrease from 2006. Production was comprised of 6,050 mcf/d of natural gas, 911 bbl/d of oil and 179 bbl/d of natural gas liquids ("NGLs"). Light sweet oil production increased 29% from 2006 with substantially all of our oil production coming from our core operating area of Red Earth. Yearly average natural gas production decreased 22% from 2006 as a result of limited capital expenditures allocated to gas projects for the year. Q4 2007 production decreased 7% from Q4 2006 with oil production increasing 18% and gas production decreasing 24% with declines and limited capital directed to gas projects.

Our product mix has changed significantly as we continued to focus on our high-value light oil prospects in the Red Earth area in 2007. Oil and NGLs volumes comprised 53% of our production for Q4 2007 compared to 42% for Q4 2006 and YTD 2007 oil and NGLs comprised 52% of our production compared to 40% for the same period in 2006.

Midnight's production forecast for Q4 2007 had incorporated the success of drilling in the east part of Red Earth. Although we have had mixed results from this program, to date we have not added additional production to our base from the fourth quarter drilling. In addition, our high impact Pembina well which was planned for November 2007 has now been delayed due to regulatory matters until late 2008.

The following table outlines our production volumes for the periods indicated below:



-----------------------------------------------------------------------
Production Q4 Q4 Q3
2007 2006 2007 2007 2006
-----------------------------------------------------------------------
Natural Gas (mcf/d) 5,573 7,352 5,981 6,050 7,755
Oil (bbls/d) 820 694 898 911 706
NGLs (bbls/d) 216 196 152 179 160
-----------------------------------------------------------------------
Total (boe/d) 1,965 2,115 2,047 2,098 2,158
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Pricing

Midnight's natural gas prices are influenced by overall North American supply and demand balance including imports of liquefied natural gas, seasonal changes, storage levels and transportation capacity. The North American gas market is becoming much more influenced by world gas supply as both LNG supply increases worldwide and U.S. capacity to take LNG increases. Midnight markets its natural gas on a daily spot market basis at various delivery points in Alberta and therefore, the average Alberta spot market price in Canadian dollars per mcf is an appropriate benchmark for our gas prices. During 2007, we received a 6% premium to the Alberta spot price compared to a 1% premium in 2006; we expect to continue to receive a premium to the spot price in 2008 and are forecasting a 3% premium to the posted price.

Midnight's realized oil price has a high correlation to the Edmonton Par benchmark price which generally has a strong correlation to the U.S. benchmark West Texas Intermediate at Cushing, Oklahoma ("WTI") price as adjusted by the Canadian to U.S. dollar exchange rate. Canadian light oil prices correlate to refinery postings that adjust WTI for the Canadian to U.S. dollar exchange rate as well as transportation costs and quality adjustments. Midnight's oil price is significantly influenced by global supply and demand. Although oil prices reached historical highs and the WTI price increased 9% from 2006, the strengthening Canadian dollar reduced the impact for Canadian producers with the Edmonton par price only increasing 5% from 2006. Strong oil prices in 2007 helped increase Midnight's overall realized price. Midnight's oil is light, sweet crude which demands a strong price and has tracked appropriately to the Edmonton par benchmark where we received 97% of the benchmark in 2007 and 96% of the benchmark in 2006. For 2008, we are forecasting a continued strong realized price of 97% of the Edmonton par benchmark.

Prices for Natural Gas Liquids have their own market dynamic. NGLs include condensate, pentane, butane and propane. While prices for condensate and pentane have a relatively strong correlation to oil prices, prices for butane and propane trade at varying discounts due to the market conditions of local supply and demand. During 2007, Midnight's realized NGLs price has been approximately 65% - 70% of the Edmonton par oil price, which is down from 78% in 2006 as lower priced products made up a larger percentage of our NGLs volumes in the year.

Midnight did not buy or sell any commodity or currency hedges during the period and did not have any outstanding at December 31, 2007.

Year-over-year and quarter-over-quarter, Midnight's realized price for commodities has tracked with the appropriate benchmark prices.

The following table outlines benchmark prices compared to Midnight's realized prices:



-------------------------------------------------------------------------
Prices and Marketing Q4 Q4 Q3
2007 2006 2007 2007 2006
-------------------------------------------------------------------------
Benchmark Prices
-------------------------------------------------------------------------
Alberta spot ($/mcf) $ 6.01 $ 6.77 $ 5.07 $ 6.32 $ 6.38
WTI oil ($US/bbl) 90.57 59.96 75.22 72.33 66.09
Cdn/US average exchange rate 1.020 0.878 0.956 0.936 0.882
Edmonton Par ($/bbl) $86.89 $64.94 $80.67 $77.00 $73.25
-------------------------------------------------------------------------
Midnight's Realized Price
-------------------------------------------------------------------------
Natural gas ($/mcf) $ 6.17 $ 6.84 $ 5.33 $ 6.68 $ 6.42
Oil ($/bbl) 85.23 62.23 81.23 74.70 70.20
NGLs ($/bbl) 58.26 44.14 53.13 52.36 56.92
Combined oil & NGLs ($/bbl) 79.62 58.25 77.16 71.04 67.75
-------------------------------------------------------------------------
Total ($/boe) $59.81 $48.35 $55.43 $56.34 $50.38
-------------------------------------------------------------------------


Petroleum and Natural Gas Sales

Petroleum and natural gas sales totalled $43.2 million for 2007, up 9% from $39.7 million in 2006. Q4 2007 sales were $10.8 million versus $9.4 million in Q4 2006 and $10.4 million in Q3 2007. The $3.5 million increase in sales from 2006 was due to higher realized prices during the year - sales increased by $4.6 million due to higher realized prices while reduced production volumes accounted for a decrease in sales of $1.1 million. Q4 2007 sales increased 15% from Q4 2006 and 4% from Q3 2007 with a higher realized price accounting for the increase as production in Q4 was down from both of the comparative periods.

The following table outlines our production sales for the periods indicated below:



--------------------------------------------------------------------------
Petroleum and Natural Gas Sales
(000's) Q4 Q4 Q3
2007 2006 2007 2007 2006
--------------------------------------------------------------------------
Natural Gas $ 3,165 $ 4,628 $ 2,933 $14,740 $18,169
Oil 6,432 3,975 6,713 24,852 18,079
NGLs 1,156 795 743 3,414 3,324
Royalty income 58 12 50 147 116
--------------------------------------------------------------------------
Total $10,811 $ 9,410 $10,439 $43,153 $39,688
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Royalties

Royalty payments are made by producers of oil and gas to the owners of the mineral rights on our leases which include provincial governments (Crown) and freehold landowners as well as to other third parties by way of contractual overriding royalties.

In Alberta, royalties on natural gas and NGLs are charged by the government based on an established monthly Reference Price which is meant to reflect the average price for gas and NGLs in Alberta. The appropriate crown rate is then applied less established deductions to calculate the crown royalties. Gas cost allowance, custom processing credits, and other incentive programs reduce the effective royalty rate.

Oil royalty rates are generally a function of production rates on a per well basis and market prices. Oil royalty rates may also be subject to certain reductions and incentives. Crown royalties in Alberta are generally satisfied by delivering the required amount of oil to the Crown.

For the year 2007, royalties decreased to 15.9% of revenue from 17.8% of revenue for 2006 due to the sharp reduction in natural gas royalties for the year. Natural gas royalties as a percentage of revenue have decreased with increased gas cost allowance ("GCA") in the year from our ownership interest in facilities in Sheldon, Red Earth and West Central Alberta. Gas royalties averaged approximately 22% of gas revenue for 2007 before the impact of GCA. We will continue to receive GCA credits in 2008, but do not expect them to have as large of an impact. We are forecasting gas royalties to average 22% on our base production in 2008 before the impact of GCA credits, but this may increase with new production additions in the Deep Basin. We are forecasting GCA credits to be approximately $250,000 to $300,000 per quarter in 2008. Q4 2007 gas royalty rates were a credit of 1.6% of revenue which is consistent with Q3 2007 credit of 1.0% and a large decrease from the Q4 2006 rate of 15.0% due to the impact of GCA credits.

Oil royalty rates increased to 20% of revenue in 2007 compared to 16% of revenue in 2006. The rates increased as the impact of Third Tier Exploratory Royalty Exemptions decreased in the year and as we brought on wells that were subject to higher royalty rates. We expect our oil royalty rate to continue in the 20% - 25% range for 2008. Q4 2007 oil royalty rates of 21% were consistent with Q3 2007 and increased from 16% in Q4 2006. NGLs royalty rates have remained consistent at approximately 30% of NGL revenues.

For 2007 royalty rates as a percentage of revenue have decreased overall largely due to the impact of GCA credits in the year. Without the impact of GCA and ARTC, our royalty rates would have been similar with the 2007 rate being 21.3% compared to 21.6% in 2006.

The following tables outline our royalties by type and by commodity:



-----------------------------------------------------------------------
Q4 Q4 Q3
Royalties by Type (000's) 2007 2006 2007 2007 2006
-----------------------------------------------------------------------
Crown $1,403 $1,461 $1,425 $6,036 $6,840
Gross overriding 246 126 172 818 711
ARTC - (125) - - (500)
-----------------------------------------------------------------------
Total $1,649 $1,462 $1,597 $6,854 $7,051
-----------------------------------------------------------------------
-----------------------------------------------------------------------
$/boe $ 9.12 $ 7.51 $ 8.48 $ 8.95 $ 8.95
-----------------------------------------------------------------------
% of revenue 15.3 15.5 15.3 15.9 17.8
-----------------------------------------------------------------------


-----------------------------------------------------------------------
Royalties by Commodity
(excluding ARTC) Q4 Q4 Q3
2007 2006 2007 2007 2006
-----------------------------------------------------------------------
Natural Gas
000's $ (50) $ 695 $ (27) $ 923 $3,711
% of revenue (1.6) 15.0 (1.0) 6.3 20.4
-----------------------------------------------------------------------
Oil
000's $1,350 $ 627 $1,407 $4,961 $2,891
% of revenue 21.0 15.8 21.0 20.0 16.0
-----------------------------------------------------------------------
NGLs
000's $ 349 $ 265 $ 217 $ 970 $ 949
% of revenue 30.2 33.3 29.2 28.4 28.5
-----------------------------------------------------------------------


The current proposed NRF, as previously discussed under the heading titled "Selected Annual and Quarterly Information", will have a negative impact on 2009 royalty rates. Based on the current GLJ price forecast, and the assumptions included in their calculation, our overall corporate royalty rate will increase from 21.2% of revenue to a range of 31.1% to 32.5% of revenue in 2009. This increase includes many assumptions including price forecast, production assumptions and capital deployment decisions which are all subject to change.

Operating and Transportation Expenses

Operating and transportation expenses totalled $9.9 million ($12.91/boe) in 2007 compared to $7.6 million ($9.64/boe) in 2006. The Company classifies transportation expenses with operating costs. Transportation expenses include the cost of delivering production to the custody transfer point including trucking of emulsion from the well site to processing facilities. Operating costs for the year increased over 2006 largely due to the following: strong industry wide demand for materials and services drove increased maintenance charges, higher labour costs, accruals for a new processing fee schedule and processing charges for previously unbilled fees on non-operated properties. The transportation component of operating expenses increased to $956,000 in 2007 from $742,000 in 2006. This increase is due to new production from our Red Earth area where production is trucked to batteries until the well is tied into the existing infrastructure. In Q1 2008, the Company has completed construction of facilities to tie in existing production and to handle additional water that will either be disposed or injected in a waterflood scheme. Once operational, this facility is expected to reduce operating and transportation costs in this area by reducing processing, water disposal, equipment rentals and trucking charges.

Q4 2007 operating and transportation costs increased to $2.9 million from $2.3 million in Q4 2006 and $2.5 million in Q3 2007. The Company has increased its accrual on certain gas processing charges on third party facilities that have not been billed during the year which accounted for part of the increase. Additionally, the Company had a negative adjustment to 2006 operating costs relating to facilities in West Central Alberta. The stand alone operating costs relating solely to Q4 2007 averaged $11.14/boe which provides a reasonable indication of the anticipated operating costs on a go forward basis. With the additional cost savings from our Red Earth water facilities, Midnight expects operating costs to decline below $11/boe.



-------------------------------------------------------------------------
Operating and Transportation
Expenses (000's) Q4 Q4 Q3
2007 2006 2007 2007 2006
-------------------------------------------------------------------------
Operating $2,746 $2,072 $2,227 $8,930 $6,845
Transportation 200 216 255 956 742
-------------------------------------------------------------------------
Total $2,946 $2,288 $2,482 $9,886 $7,587
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating ($/boe) $15.19 $10.65 $11.82 $11.66 $8.69
Transportation ($/boe) 1.11 1.11 1.36 1.25 0.95
-------------------------------------------------------------------------
Total ($/boe) $16.30 $11.76 $13.18 $12.91 $9.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Interest Expense

The 2007 interest expense totalled $1,573,000 with $1,325,000 of the interest incurred on bank debt and $248,000 incurred on charges related to our flow through share obligation. The effective interest rate on our bank debt in 2007 was 5.8%. During 2006, interest expense totalled $1,019,000 representing an effective interest rate of 5.4%. Interest expense increased in the year with the increase in average bank debt and higher interest rates. Our credit facility bears interest at the bank's prime rate or at Bankers' Acceptance rates plus a stamping fee based on the Company's debt to cash flow ratio as defined in the credit facility. The effective interest rate on our bank debt has fluctuated with the changes in the Bank of Canada rates. For 2008 we expect our bank debt to be higher and the effective interest rate is expected to fluctuate with the changes in the Bank of Canada rates and our net debt to cash flow ratio.

General and Administration Expenses

During the year ended 2007, cash general and administration ("G&A") expenses totalled $3.6 million ($4.76/boe) compared to $2.2 million ($2.74/boe) for 2006. In 2006, Midnight's general and administration expenses were allocated based on an Administrative and Technical Service Agreement ("TSA") with Daylight Energy Ltd. ("Daylight"). Under the agreement, Daylight had been the employer on behalf of the parties and received payment or reimbursement from Midnight for certain technical and administrative services provided to Midnight. The Company was charged for its direct activities and for its proportionate share of overhead based on production and capital spending. With the termination of the TSA on December 31, 2006, Midnight is responsible for its own activities with Daylight still providing certain administrative and other non-competitive services through an agreed upon monthly fee. Thus Midnight expanded in certain technical areas including engineering and operations and as a result direct G&A charges in 2007 increased substantially over 2006. Including the TSA charges for 2006, Midnight's gross G&A increased $1.3 million with increased staffing levels, office premises and other charges necessary to operate as an independent entity. Cash G&A increased with the increase in the gross G&A and lower operating recoveries in 2007.

Q4 2007 cash G&A totalled $1,128,000 an increase of $127,000 over Q3 2007 and $548,000 over Q4 2006. Q4 2007 G&A includes Midnight's matched employee donations of $55,000 to Habitat for Humanity to assist in building affordable housing in our community; Midnight also contributes to this cause by providing manpower on a volunteer basis on certain designated work days. Additional charges in Q4 2007 also included directors' fees and healthcare benefits. As a result of a tight labour market, the costs of retaining employees have risen, we have kept salaries within 2% of the 2006 level and bonuses were limited to 8% corporately. Midnight's Q4 2007 total capitalized G&A and operating recoveries also decreased resulting in a higher cash G&A from Q3 2007.

For 2008, Midnight is projecting gross G&A to total approximately $7 million. The largest portion of our cash G&A is comprised of salaries and benefits and as such, Midnight's cash G&A will depend on the staffing levels in 2008 and any changes to salaries and bonuses.

The components of general and administration expense are as follows:



------------------------------------------------------------------------
General and Administration
Expenses (000's) Q4 Q4 Q3
2007 2006 2007 2007 2006
------------------------------------------------------------------------
Direct G&A $1,796 $ 896 $1,767 $6,414 $1,377
Technical service fee from
Daylight - 713 - - 3,749
Overhead recoveries (58) (238) (26) (181) (649)
Capitalized G&A (610) (791) (740) (2,588) (2,317)
------------------------------------------------------------------------
Cash G&A $1,128 $ 580 $1,001 $3,645 $2,160
Stock-based compensation 153 101 160 565 348
------------------------------------------------------------------------
Net G&A $1,281 $ 681 $1,161 $4,210 $2,508
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash G&A ($/boe) $ 6.24 $ 2.98 $ 5.32 $ 4.76 $ 2.74
Stock-based compensation
($/boe) 0.85 0.52 0.85 0.74 0.44
------------------------------------------------------------------------
Net G&A ($/boe) $ 7.09 $ 3.50 $ 6.17 $ 5.50 $ 3.18
------------------------------------------------------------------------
------------------------------------------------------------------------


Stock-Based Compensation

The Company applies the fair value method for valuing stock option grants and warrants. Under this method, compensation costs attributable to all share options granted and warrants issued are measured at fair value at the grant and issuance date and expensed over the vesting period with a corresponding increase to contributed surplus. The Company capitalizes the related stock-based compensation associated with employee salaries that are capitalized. Midnight recognized stock-based compensation expense of $930,000 for 2007 of which $365,000 was capitalized compared to $765,000 in 2006 with $417,000 capitalized. Stock-based compensation increased in 2007 as 2.2 million options were granted in Q4 2006 and the related expense is recognized for the full year of 2007. During 2007, Midnight granted 309,500 options with a weighted average fair value of $0.69 per option and 954,300 options were forfeited. Midnight's unamortized portion of stock-based compensation is $1.6 million at December 31, 2007.

Depletion, Depreciation and Accretion

For 2007, depletion, depreciation and accretion ("DD&A") was $23.7 million versus $21.7 million for 2006. The increase is a result of higher production and a larger capital base being depleted as well as depleting at a higher rate from higher finding and development costs. On a boe basis, the 2007 charge for DD&A increased to $30.95 from $27.51 in 2006.

For Q4 and Q3 2007, DD&A was $5.9 million while DD&A was $5.7 million for Q4 2006. On a boe basis, Q4 2007 DD&A was $32.64 versus Q3 2007 DD&A charge of $31.13 and Q4 2006 of $29.34.

Taxes

For 2007, a future tax reduction of $1,681,000 (2006 - $60,000) was recognized. During Q4 2007, Federal Bill C-28 was enacted reducing the general federal corporate tax rate to 15% by 2012 from the 2007 rate of 22.12%. The reductions will be phased in from 2008 until 2012 with the combined federal and Alberta provincial tax rate of 25% by 2012. During 2007, Midnight recorded a reduction to its future taxes of $962,000 due to changes in enacted tax rates. The difference in the expected rate of 32.1% and the effective rate for 2007 relates primarily to the future corporate income tax rate reductions and from permanent differences from stock-based compensation.

In Q1 2007, Midnight renounced its flow-through share expenditures and accordingly recorded a $6.2 million future tax liability for the estimated cost of the renounced tax deductions.

Midnight does not expect to become taxable on an income tax basis in 2008 and has approximately $131 million in tax pools to shelter taxable income in the future as detailed below:



---------------------------------------------------------------
Tax Pools (000's) 2007
---------------------------------------------------------------
Canadian exploration expense $27,500
Canadian development expense 20,000
Canadian oil and gas property expense 52,300
Undepreciated capital cost 28,600
Share issue costs 2,700
---------------------------------------------------------------
Total $131,100
---------------------------------------------------------------
---------------------------------------------------------------


Funds from Operations and Net Income

For 2007, funds from operations totalled $21.4 million or $0.45 per basic and diluted share. Funds from operations for 2006 totalled $22.0 million or $0.53 per basic and diluted share. For Q4 2007, funds from operations totalled $4.9 million or $0.10 per basic and diluted share. Funds from operations totalled $4.9 million for Q3 2007 and $4.8 million for Q4 2006. The net loss for 2007 totalled $1,219,000 (($0.03) per basic and diluted share) versus net income of $45,000 ($0.00 per basic and diluted share) for 2006. Net loss for Q4 2007 totalled $19,000 versus a loss of $565,000 for the comparative period in 2006.

The following table summarizes the net income on a barrel of oil equivalent basis for the periods indicated.



-----------------------------------------------------------------------
($/boe) Q4 Q4 Q3
2007 2006 2007 2007 2006
-----------------------------------------------------------------------
Sales price $59.81 $48.35 $55.43 $56.34 $50.38
Royalties 9.12 7.51 8.48 8.95 8.95
Operating expenses 15.19 10.65 11.82 11.66 8.69
Transportation expenses 1.11 1.11 1.36 1.25 0.95
-----------------------------------------------------------------------
Operating netback $34.39 $29.08 $33.77 $34.48 $31.79
General and administration 6.24 2.98 5.32 4.76 2.74
Interest 2.04 1.49 2.33 2.05 1.29
Other income (0.99) - - (0.23) (0.16)
-----------------------------------------------------------------------
Cash flow netback $27.10 $24.61 $26.12 $27.90 $27.92
Depletion, depreciation
and accretion 32.64 29.34 31.13 30.95 27.51
Stock-based compensation 0.85 0.52 0.85 0.74 0.44
Future tax reduction (6.28) (2.35) (1.47) (2.19) (0.08)
-----------------------------------------------------------------------
Net income (loss) $(0.11) $(2.90) $(4.39) $(1.60) $ 0.05
-----------------------------------------------------------------------
-----------------------------------------------------------------------


The following table provides reconciliations to the change in funds from
operations and net income (loss) for Q4 2007 to Q4 2006 and for the year
2007 to 2006.

-------------------------------------------------------------------------
Change in Funds from Q4 2007 to Q4 2006 Year 2007 to Year 2006
------------------------------------------------
Operations and Funds from Net Income Funds from Net Income
Net Income Operations (Loss) Operations (Loss)
(Loss) (000's)
-------------------------------------------------------------------------
Comparative period $ 4,790 $ (565) $21,999 $ 45
Increase (decrease)
in revenue:
Change in
production volumes (670) (670) (1,099) (1,099)
Change in prices 2,071 2,071 4,564 4,564
Change in royalties (187) (187) 197 197
Change in other
income 179 179 51 51

(Increase) decrease
in expenses:
Operating (674) (674) (2,085) (2,085)
Transportation 16 16 (214) (214)
Interest (79) (79) (554) (554)
Cash general and
administration (548) (548) (1,485) (1,485)
Stock-based
compensation - (52) - (217)
Depletion,
depreciation and
accretion - (189) - (2,043)
Taxes - 679 - 1,621
-------------------------------------------------------------------------
Current period $ 4,898 $ (19) $21,374 $ (1,219)
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Capital Expenditures

During 2007, Midnight's capital program had expenditures of $27.3 million compared to 2006 expenditures of $61.8 million. The Company reduced its capital program to ensure it maintained financial flexibility with limited access to capital markets.

During the year, the Company drilled 21 gross (6.9 net) wells comprised of 17 gross (3.9 net) gas wells, 3 gross (2.5 net) oil wells and 1 (0.5 net) dry holes. This compares to 2006, when the Company drilled 33 gross (17.2 net) wells. Our capital expenditures continued to focus in Red Earth which accounted for 50% of our spending during the year, with 35% spent in the Peace River Arch and 15% spent in West Central. Drilling costs accounted for 49% of our capital spending with completions and facility expenditures accounting for 43%. During Q3 2007, Midnight entered into a transaction that provided for the sale of certain exploratory lands for $2.0 million and then offset the sale through a participation in the exploration project with a two well commitment retaining a 50% interest in these lands. Geological and geophysical expenditures of $3.4 million include capitalized G&A of $2.6 million.

Midnight has approximately 148,000 net acres of undeveloped land at December 31, 2007. Based on lower cost or market, a value of $19.2 million or $130 per acre for undeveloped land and $4.9 million for undeveloped seismic have been excluded from the depletion calculation in the quarter. In 2008, approximately 40,000 acres of Midnight's net undeveloped acreage will be subject to expiry. The number of acres that actually expire may be reduced through drilling on or adjacent to the expiring lands. We anticipate approximately 18,000 acres will be continued through submission of continuation applications and additional drilling. In Q1 2008, our farm-in activities have added approximately 16,000 acres to our net land position.

In addition to the cash capital expenditures above, we have capitalized $365,000 of stock-based compensation and the related future tax liability of $123,000 for 2007 consistent with the exploration salaries that we have added to our property base.

The following table highlights the breakdown of expenditures by category for the periods indicated:



-------------------------------------------------------------------------
Capital Expenditures (000's) Q4 Q4 Q3
2007 2006 2007 2007 2006
-------------------------------------------------------------------------
Land $ 352 $ 99 $ 146 $ 625 $ 4,997
Geological and geophysical 629 3,371 830 3,379 6,078
Drilling 4,299 1,726 2,404 13,437 25,865
Completions 1,821 1,619 1,119 6,154 10,316
Facilities, pipelines and
equipment 985 1,837 714 5,684 14,477
Other 6 - - 47 19
-------------------------------------------------------------------------
Total expenditures $ 8,092 $ 8,652 $ 5,213 $29,326 $61,752
Land disposition - - (1,996) (1,996) -
-------------------------------------------------------------------------
Total net expenditures $ 8,092 $ 8,652 $ 3,217 $27,330 $61,752
-------------------------------------------------------------------------
-------------------------------------------------------------------------


For the first half of 2008, we have budgeted capital expenditures of $13.5 million. Given the seasonal access of some of our lands and/or timing of certain farm-in opportunities and commitments, we have chosen to aggressively pursue the gas plays in the Deep Basin. We are planning to drill 8 gas targets and 1 oil target in Q1 2008. We will re-evaluate our results for the first quarter and set our budget for the remainder of the year after this time.

Equity

During YTD 2007, Midnight issued 309,500 options to employees and 954,300 options were forfeited during the same period. No options were exercised during 2007. At December 31, 2007 the Company had 2,992,000 options outstanding at an average exercise price of $2.56. Of these, 985,834 have vested and are exercisable at an average price of $2.70. The year end closing price of the Midnight common shares on the TSX was $1.08 per share and no options were in the money.

At December 31, 2007, the Company had 2,013,333 warrants outstanding exercisable into one common share at an exercise price of $3.00 per share. The warrants are fully vested and expire on November 29, 2008.

On October 15, 2007, Midnight filed a notice with the TSX to make a normal course issuer bid to purchase its outstanding common shares on the open market. The TSX has authorized Midnight to purchase up to 4,320,826 common shares representing approximately 9% of its issued and outstanding common shares during the period from October 17, 2007 to October 16, 2008 or until such time that the bid is either completed or terminated at Midnight's option. Any shares Midnight purchases under this bid will be purchased on the open market through the facilities of the TSX at the prevailing market price. Shares acquired under the bid will be cancelled. During the fourth quarter of 2007, the Company purchased and cancelled 232,700 common shares at an average market price of $1.13 per share reducing the total number of common shares outstanding at year end to 47,595,129. To date in Q1, 2008 the Company purchased and cancelled an additional 172,500 common shares at an average market price of $1.10 per share.

On November 7, 2006, the Company closed a bought deal financing with a syndicate of underwriters and issued 5.5 million common shares at a price of $3.05 per common share to raise gross proceeds of approximately $16.8 million which includes 500,000 common shares issued pursuant to the over-allotment option granted to the underwriters at the same price. Management participated in this issue, acquiring 114,000 shares at $3.05 per share. The offering was done by way of short form prospectus.

On May 17, 2006 Midnight closed a bought deal financing and issued 4 million flow-through common shares at a price of $5.10 per flow-through common share to raise gross proceeds of $20.4 million. Management and service providers participated in this issue acquiring 343,000 shares at $5.10 per flow-through common share. The future tax effect of this issue was recorded in Q1 2007 when the Company renounced the expenditures. The Company incurred all the required qualifying expenditures prior to December 31, 2007.

At March 18, 2008 the Company had outstanding 47,422,629 common shares, 2,994,500 stock options and 2,013,333 warrants. The average exercise price of the stock options outstanding is $2.55 per share.



-----------------------------------------------------------------------
Share Information (000's) Q4 Q4 Q3
2007 2006 2007 2007 2006
-----------------------------------------------------------------------
Shares outstanding
Basic 47,595 47,828 47,828 47,595 47,828
Diluted 52,600 53,548 52,953 52,600 53,548
Weighted average shares
outstanding
Basic 47,754 45,556 47,828 47,809 41,640
Diluted 47,754 45,556 47,828 47,809 41,894
-----------------------------------------------------------------------


Liquidity and Capital Resources

Midnight Oil Exploration Ltd. is listed as a senior issuer on the Toronto Stock Exchange trading under the symbol "MOX". The Company's market capitalization at December 31, 2007 was $51 million.



-------------------------------------------------------------------------
Trading History on the TSX Q4 Q4 Q3
2007 2006 2007 2007 2006
-------------------------------------------------------------------------
High $ 1.45 $ 3.38 $ 1.89 $ 2.39 $ 4.70
Low $ 0.92 $ 2.26 $ 1.31 $ 0.92 $ 2.26
Close $ 1.08 $ 2.37 $ 1.46 $ 1.08 $ 2.37
Volume (000's) 9,987 4,505 615 22,336 13,429
-------------------------------------------------------------------------


At December 31, 2007, Midnight had drawn $28.9 million on its $37.5 million credit facility and had a working capital surplus of $0.5 million for a net debt position of $28.4 million. On May 31, 2007, Midnight increased its credit facility to $35 million from $30 million. On December 17, 2007, Midnight further increased its credit facility to $37.5 million. Midnight's credit facility is available on a revolving basis until May 31, 2008. On this date and at the Company's discretion, the facility is available on a non-revolving basis for a period of 366 days, at which time the facility would be due and payable. Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the bank. On this basis, the bank debt is considered Long Term debt for financial reporting purposes. The credit facility bears interest at the bank's prime rate or Bankers' Acceptances plus a stamp based on the Company's net debt/cash flow ratio, calculated using the two most recent fiscal quarters. The credit facility is based solely on the drawn amount and does not have a covenant relating to the company's net debt which includes working capital. The facility is secured by a $50 million first floating charge debenture and a general securities agreement.

Midnight anticipates that it will have adequate liquidity to fund future working capital and forecasted capital expenditures during 2008 through a combination of cash flow and additional drawing on its existing credit facility.

Off Balance Sheet Transactions

There were no off balance sheet transactions entered into during the year, nor are there any outstanding as of the date of this MD&A.

Contractual Obligations

The contractual obligations for which the Company is responsible are as follows:



---------------------------------------------------------------------------
Less
than 1-3 4-5 After 5
Contractual Obligations (000's) Total 1 Year Years Years Years
---------------------------------------------------------------------------
Long-term debt $28,934 $ - $28,934 $ - $ -
Asset retirement obligations 5,790 241 236 232 5,081
---------------------------------------------------------------------------
Total Contractual Obligations' $34,724 $ 241 $29,170 $ 232 $ 5,081
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Midnight enters into many contractual obligations in the course of conducting its day to day business. Material contractual obligations consist of our long-term debt with a major bank and our asset retirement obligation. The payment terms on the asset retirement obligation is based on an estimated timing of expenditures to be made in future periods, actual expenditures and when they may occur may differ materially than presented above. Midnight has not entered into any firm transportation commitments to date.

Relationship with Daylight Energy Ltd. ("Daylight")

Prior to December 31, 2006, Midnight and Daylight Energy Ltd. established and operated under an Administrative and Technical Services Agreement, which provided for the shared services, required to manage the activities of Midnight and Daylight and governed the allocation of general and administrative expenses between the entities. Under this agreement, Daylight Energy was the employer on behalf of the parties and received payment for certain technical and administrative services provided to MOX. The Administrative and Technical Services Agreement was terminated effective December 31, 2006. Certain administrative services which provide reasonable economy and do not involve competitive issues continue to be provided to Midnight by Daylight on a fixed fee basis which has been negotiated by the parties and may be cancelled by either party.

Although the TSA has been terminated, Midnight and Daylight continue to be considered related, as Daylight's Chairman is a director and officer of Midnight. In addition, a director and officer of Daylight is also a director of Midnight. Although this relationship exists, Midnight operates independently from Daylight. Operating, financing and investing decisions are conducted independently without the advice or influence of the other party and each company's strategic direction is set by their respective Boards, both of which have a majority of independent directors. Midnight and Daylight remain joint venture partners in certain properties, and as a result, revenues and costs related to these properties are allocated to each partner under standard joint venture billing arrangements. Each partner's costs and revenues are based on the exchange amounts which reflect actual third party costs incurred and revenue received. All transactions are conducted under standard business terms and are considered within the normal course of Midnight's business activities and operations. See Note 9 to the Consolidated Financial Statements.

Outlook for 2008

Midnight's 2008 capital program will focus on adding value to its existing reserve base and exploring and developing its prospect inventory. Midnight plans to increase its operated gas program by concentrating our efforts on identified projects in the Deep Basin. This is an area where Midnight has significant experience and expertise and an area where we expect to achieve significant growth. Midnight expects continued volatility in commodity prices throughout 2008. Although we believe that crude oil prices will remain strong, we have a more favourable outlook for natural gas prices in the longer term due to the improving supply/demand fundamentals and the relative valuation of natural gas compared to crude oil. By focusing more on deep gas prospects Midnight will be positioned more favourably for the New Royalty Framework set to take effect in 2009.

Towards this, Midnight has entered into a number of arrangements to establish and build a substantial land position in the Deep Basin to explore for its traditional Deep Basin prospects as well as deeper Cadomin resource-type prospects. Early in Q1 2008, Midnight has already entered into two farm-in agreements to earn 100% interest in a large undeveloped land block subject to the payment of non-convertible royalties. Also in Q1 2008, Midnight is participating (50% WI) in a Cadomin horizontal well in Elmworth. We are currently drilling this development well and expect it to be on stream in April 2008.

At Red Earth, Midnight will continue to develop and pursue its light oil prospects. In Q1 2008, the Company drilled a development oil well (25% WI) in central Red Earth. The well encountered the Keg River zone at the structurally highest point in the pool to date and is initially producing over 120 bbls/d at a controlled rate. This well is located within an approved waterflood area and upon approval of Good Production Practise ("GPP") by the ERCB, production will be increased to its capability of over 250 bbls/d. This well opens up a number of additional locations which Midnight, as operator, can pursue later in the year. In Q1 2008, Midnight completed the construction of a water handling and injection facility as part of its waterflood plan for central Red Earth. The facility was commissioned on March 4, 2008 and water is now being injected into this pool. In addition to enhancing recoverable reserves, the facility will reduce operating costs by eliminating the need to truck effluent and pay water disposal fees at non-operated facilities. The wells within the waterflood area also have GPP which allows them to be produced at their capability rather than being allowable restricted. Midnight has a large inventory of oil projects that can be pursued to provide a commodity balance to our gas opportunities.

Early in 2008, the Board of Directors approved a $13.5 million capital program for the first half of 2008. As part of this program, we will drill 10 gross (3 net) wells in Q1 of 2008 and have now completed the construction of our water injection and handling facility at Red Earth. We anticipate having a 2008 capital program of $30 to $35 million which will be financed by funds from operations for the year and our available bank line. This capital program should enable us to double our gas production from approximately 5,100 mcf/d in Q1 2008 to exit 2008 at approximately 10,000 mcf/d and grow our light oil and NGLs from approximately 850 bbls/d in Q1 2008 to exit 2008 at approximately 1,100 bbls/d. The ultimate amount of capital expenditures and production will be dependent on the success of the capital program and the ability to fund additional projects by internally generated cash flows, existing credit facilities and issuing equity should terms be favourable.

Additional Information

Additional information relating to Midnight and a full copy of the Management's Discussion and Analysis is filed on SEDAR and can be viewed at www.sedar.com. Information can also be obtained by contacting the Company at Midnight Oil Exploration Ltd., 2100, 144 4th Ave S.W., Calgary, Alberta T2P 3N4 or by email to ir@midnightoil.ca or by accessing our website at www.midnightoil.ca.



Consolidated Balance Sheets
As at December 31,

(000's)
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------

Assets
Current assets:
Accounts receivable $ 13,213 $ 5,928
Deposits and prepaid expenses 695 189
-----------------------------------------------------------------------
13,908 6,117

Future taxes (note 7) - 391

Petroleum and natural gas assets (note 3) 150,773 146,325

-------------------------------------------------------------------------
$ 164,681 $ 152,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 13,348 $ 10,153

Long-term debt (note 4) 28,934 17,938

Future taxes (note 7) 4,273 -

Asset retirement obligations (note 5) 2,102 1,930

Shareholders' equity:
Share capital (note 6) 113,032 119,807
Warrants (note 6) 40 42
Contributed surplus (note 6) 2,442 1,234
Retained earnings 510 1,729
-----------------------------------------------------------------------
116,024 122,812
Commitments (note 10)
-------------------------------------------------------------------------
$ 164,681 $ 152,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



Consolidated Statements of Income (Loss), Comprehensive Income (Loss) and
Retained Earnings
Years ended December 31,

(000's, except per share amounts)
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Revenues:
Petroleum and natural gas sales $ 43,153 $ 39,688
Royalties (6,854) (7,051)
Other income 179 128
------------------------------------------------------------------------
36,478 32,765

Expenses:
Operating and transportation 9,886 7,587
Interest 1,573 1,019
General and administration (note 6 (f)) 4,210 2,508
Depletion, depreciation and accretion 23,709 21,666
------------------------------------------------------------------------
39,378 32,780

-------------------------------------------------------------------------
Loss before taxes (2,900) (15)

Future tax reduction (note 7) (1,681) (60)
-------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) (1,219) 45

Retained earnings, beginning of year 1,729 1,684

-------------------------------------------------------------------------
Retained earnings, end of year $ 510 $ 1,729
-------------------------------------------------------------------------
Income (loss) per share: (note 6)
Basic $ (0.03) $ -
Diluted $ (0.03) $ -
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



Consolidated Statements of Cash Flows
Years Ended December 31,

(000's)
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Cash provided by (used in):

Operations:
Net income (loss) $ (1,219) $ 45
Items not involving cash:
Depletion, depreciation and accretion 23,709 21,666
Stock-based compensation 565 348
Future tax reduction (1,681) (60)
Abandonment expenditures (167) (297)
Changes in non-cash working capital 206 3,558
------------------------------------------------------------------------
Cash flow from operations 21,413 25,260

Financing:
Issue of common shares - 37,175
Share issue costs - (2,369)
Increase in long-term debt 10,996 5,965
Repurchase of common shares (277) -
Changes in non-cash working capital (162) 77
------------------------------------------------------------------------
Cash flow from financing 10,557 40,848

Investing:
Petroleum and natural gas additions (27,330) (61,752)
Changes in non-cash working capital (4,640) (4,356)
------------------------------------------------------------------------
Cash flow from investing (31,970) (66,108)

-------------------------------------------------------------------------
Changes in cash - -
Cash, beginning of year - -
-------------------------------------------------------------------------
Cash, end of year $ - $ -
-------------------------------------------------------------------------

Taxes paid $ - $ 88
Interest paid $ 1,380 $ 1,016
-------------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to consolidated financial statements.



Notes to Consolidated Financial Statements

For the years ended December 31, 2007 and 2006
(Tabular amounts are stated in thousands of dollars except share and per
share amounts)
-------------------------------------------------------------------------


Nature of operations

The principal business of the Company is the exploration for, exploitation, development and production of oil and natural gas reserves. All activity is conducted in Western Canada and comprises a single business segment.

Certain prior period figures have been reclassified to conform with current period presentation.

1. Significant accounting policies

The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimated.

Specifically, the amounts recorded for depletion and depreciation of petroleum and natural gas assets and accretion of asset retirement obligations are based on estimates. The ceiling test is based on estimates of reserves, production rates, oil and gas prices, future costs and other relevant assumptions. The amounts for stock-based compensation are based on estimates of risk-free rates, expected option life and volatility. Future income taxes are based on estimates as to the timing of the reversal of temporary differences and tax rates currently substantively enacted. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.

(a) Consolidation:

The consolidated financial statements include the accounts of Midnight Oil Exploration Ltd. and its wholly owned subsidiary, Midnight Oil Resources Ltd. and a partnership, Midnight Oil Exploration Partnership. All interentity transactions and balances have been eliminated.

(b) Cash and cash equivalents:

Cash and cash equivalents are comprised of cash and all investments with a maturity date of three months or less.

(c) Petroleum and natural gas assets:

(i) Capitalized costs:

The Company follows the full cost method of accounting for petroleum and natural gas assets. Under this method, all costs related to the acquisition of, exploration for and development of petroleum and natural gas reserves are capitalized. These costs include land acquisition costs, geological and geophysical expenditures, rentals and other carrying charges on undeveloped properties, costs of drilling both productive and non-productive wells, oil and gas production equipment and facilities, asset retirement costs and administration expenses directly related to the acquisition, exploration and development activities. Proceeds from the disposition of oil and natural gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized, unless such disposition would result in a change greater than 20% in the depletion or depreciation.

(ii) Depletion and depreciation:

Depletion of petroleum and natural gas assets and depreciation of production equipment are calculated using the unit-of-production method, based on production volumes before royalties in relation to estimated proven reserves as determined by an independent petroleum engineering firm. Natural gas reserves and production are converted to equivalent barrels of oil based upon the relative energy content of six thousand cubic feet of gas to one barrel of oil.

The cost of acquisition and evaluation of unproved properties are initially excluded from the depletion calculation. A separate impairment test is performed on these assets to determine whether the carrying value exceeds the fair value. Any excess in carrying value over fair value is an impairment. When proved reserves are assigned or a property is considered to be impaired, the cost of the property or the amount of the impairment will be added to the capitalized costs for the calculation of depletion.

Other assets are depreciated on a declining balance basis at rates ranging from 20% to 35%.

(iii) Ceiling test:

Petroleum and natural gas assets are evaluated in each reporting period to determine that the carrying amount is recoverable and does not exceed the fair value of the properties.

The carrying amounts are assessed to be recoverable when the sum of the undiscounted cash flows expected from the production of proved reserves, the lower of cost and market of unproved properties and the cost of major development projects exceeds the carrying amount of the cost centre. When the carrying amount is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying amount of the cost centre exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves, the lower of cost and market of unproved properties and the cost of major development projects of the cost centre. The cash flows are estimated using expected future product prices and costs and are discounted using a risk-free interest rate.

(d) Asset retirement obligations:

The Company recognizes the asset retirement obligations for the future cost associated with removal, site restoration and asset retirement costs. The fair value of the liability for the Company's asset retirement obligation is recorded in the period in which it is incurred, discounted to its present value using the Company's credit adjusted risk-free interest rate and the corresponding amount recognized by increasing the carrying amount of petroleum and natural gas assets. The asset recorded is depleted on a unit of production basis over the life of the reserves. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded.

(e) Joint interest operations:

Substantially all of the Company's exploration, development and production activities related to oil and gas operations are conducted jointly with others and accordingly the accounts reflect only the Company's proportionate interest in such activities.

(f) Revenue recognition:

Revenue from the sale of petroleum and natural gas is recognized during the month when title passes to a third party.

(g) Income taxes:

The Company uses the asset and liability method of tax allocation accounting. Under this method, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse.

(h) Flow-through shares:

The resource expenditure deductions for income tax purposes related to exploratory activities funded by flow-through shares are renounced to investors in accordance with tax legislation. Future tax liabilities and share capital are adjusted by the estimated cost of the renounced tax deductions when the expenditures are renounced.

(i) Stock-based compensation plans:

The Company applies the fair value method for valuing stock option grants and warrants. Under this method, compensation cost attributable to all share options granted and warrants issued are measured at fair value at the grant and issuance date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon the exercise of the stock options and warrants, consideration received together with the amount previously recognized in contributed surplus is recorded as an increase to share capital.

(j) Per share information:

Basic per share information is computed by dividing income by the weighted average number of common shares outstanding for the period. The treasury stock method is used to determine the diluted per share amounts, whereby any proceeds from the stock options, warrants or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period. The weighted average number of shares outstanding is then adjusted by the net change.

(k) Financial instruments:

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Upon initial recognition all financial instruments, including all derivatives, are recognized on the balance sheet at fair value. Subsequent measurement is then based on the financial instruments being classified into one of five categories: held for trading, held to maturity, loans and receivables, available for sale and other liabilities. The Company has designated its cash and cash equivalents as held for trading which are measured at fair value. Accounts receivable are classified as loans and receivables which are measured at amortized cost. Accounts payable and accrued liabilities and long term debt are classified as other liabilities which are measured at amortized cost, which is determined using the effective interest method.

The Company is exposed to market risks resulting from fluctuations in commodity prices, foreign exchange rates and interest rates in the normal course of operations. A variety of derivative instruments may be used by the Company to reduce its exposure to fluctuations in commodity prices, foreign exchange rates, and interest rates. The Company does not use these derivative instruments for trading or speculative purposes. The Company considers all of these transactions to be economic hedges, however, the majority of the Company's contracts do not qualify or have not been designated as hedges for accounting purposes. As a result, all derivative contracts are classified as held for trading and are recorded on the balance sheet at fair value, with changes in the fair value recognized in net income, unless specific hedge criteria are met. The fair values of these derivative instruments are based on an estimate of the amounts that would have been received or paid to settle these instruments prior to maturity given future market prices and other relevant factors. Proceeds and costs realized from holding the derivative contracts are recognized in net income at the time each transaction under a contract is settled.

The Company has elected to account for its physical delivery sales contracts, which were entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements as executory contracts on an accrual basis rather than as non-financial derivatives. The Company measures and recognizes embedded derivatives separately from the host contracts when the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, when it meets the definition of a derivative and when the entire contract is not measured at fair value. Embedded derivatives are recorded at fair value.

The Company immediately expenses all transaction costs incurred in relation to the acquisition of a financial asset or liability.

The Company applies trade-date accounting for the recognition of a purchase or sale of cash equivalents and derivative contracts.

2. Changes in accounting policy

On January 1, 2007, the Company adopted the new Canadian accounting standards for financial instruments - recognition and measurement, financial instruments - presentations and disclosures, hedging and comprehensive income. Adopting these standards had no impact on the measurement of existing financial assets and liabilities.

Effective January 1, 2008, the Company will be required to adopt three new accounting standards: Section 1535, Capital Disclosures, Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. Section 1535, requires disclosure of an entity's objectives, policies and processes for managing capital, including: quantitative data about what the entity considers capital, whether the entity has complied with any capital requirements and the consequences of non-compliance if the entity has not complied. Sections 3862 and 3863 specify standards of presentation and enhanced disclosures on financial instruments. Although the Company is currently assessing the impact of these standards on its financial statements, it is not anticipated that the adoption of these new standards will impact the amounts reported in the Company's financial statements as they primarily related to disclosures.

3. Petroleum and natural gas assets



--------------------------------------------------------------
2007 2006
--------------------------------------------------------------

Cost $204,555 $176,594
Accumulated depletion and depreciation (53,782) (30,269)
--------------------------------------------------------------
$150,773 $146,325
--------------------------------------------------------------
--------------------------------------------------------------


During the year ended December 31, 2007, the Company capitalized $2,953,000 (2006 - $2,733,000) of general and administration expenses related to exploration and development activities. Included in this amount is the non-cash related stock-based compensation of $365,000 (2006 - $417,000). In addition, the future tax liability of $123,000 (2006 - $179,000) associated with the capitalized stock-based compensation has been capitalized.

The cost of unproven properties at December 31, 2007 of $24,095,000 (2006 - $27,905,000) has been excluded from the depletion and depreciation calculation. Future development costs of proven reserves of $12,321,000 (2006 - $6,197,000) have been included in the depletion and depreciation calculation.

At December 31, 2007, the Company applied a ceiling test to its petroleum and natural gas assets using expected future market prices of:



---------------------------------------------------------------
WTI Oil AECO Gas USD$/CAD$
Year ($US/bbl) (CDN$/mmbtu) Exchange Rates
---------------------------------------------------------------
2008 92.00 6.75 1.00
2009 88.00 7.55 1.00
2010 84.00 7.60 1.00
2011 82.00 7.60 1.00
2012 82.00 7.60 1.00
2013 82.00 7.60 1.00
2014 82.00 7.80 1.00
2015 82.00 7.97 1.00
2016 82.02 8.14 1.00
2017 83.66 8.31 1.00
2018 85.33 8.48 1.00
Thereafter +2.0% +2.0% 1.00
---------------------------------------------------------------


4. Long-term debt

Midnight has a revolving term credit facility available up to $37.5 million with a Canadian chartered bank. The facility is available on a revolving basis until May 31, 2008. On May 31, 2008, at the Company's discretion, the facility is available on a non-revolving basis for a period of 366 days, at which time the facility would be due and payable. Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the bank. The credit facility bears interest at the bank's prime rate or at Bankers' Acceptance rates plus a stamping fee based on the Company's debt to cash flow ratio, calculated using the two most recent fiscal quarters. The facility is secured by a $50 million first floating charge debenture and a general securities agreement. At December 31, 2007, $28,934,000 (2006 - $17,938,000) was drawn on this facility. The effective interest rate for the bank debt was 5.8% (2006 - 5.4%) for the year ended December 31, 2007. The $37.5 million borrowing base is subject to a semi-annual and annual review by the bank.

5. Asset retirement obligations

The Company's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Company estimates the total undiscounted amount of cash flow required to settle its asset retirement obligations is approximately $5,790,000 (2006 - $5,463,000) which will be incurred from 2008 to 2054. The majority of the costs will be incurred between 2015 and 2030. An inflation factor of 2% has been applied to the estimated asset retirement cost at December 31, 2007 and December 31, 2006. A credit-adjusted risk-free rate of 8% was used to calculate the fair value of the asset retirement obligations at December 31, 2007 and December 31, 2006.

A reconciliation of the asset retirement obligations is provided below:



--------------------------------------------------------------
2007 2006
--------------------------------------------------------------

Balance, beginning of year $ 1,930 $ 1,416
Liabilities incurred 143 679
Liabilities settled (167) (297)
Accretion expense 196 132
--------------------------------------------------------------
Balance, end of year $ 2,102 $ 1,930
--------------------------------------------------------------
--------------------------------------------------------------


6. Share capital

(a) Authorized:

The authorized share capital consists of an unlimited number of common shares without par value.



(b) Issued and outstanding:

----------------------------------------------------------------------------
Number of
Shares Amount
----------------------------------------------------------------------------

Common shares:
Balance, December 31, 2005 38,327,829 $ 84,262
Issued pursuant to private placement 4,000,000 20,400
Issued pursuant to short form prospectus 5,500,000 16,775
Share issue costs (net of tax of $739) - (1,630)
----------------------------------------------------------------------------
Balance, December 31, 2006 47,827,829 $119,807
Tax effect of flow-through shares issued in 2006 (6,222)
Shares repurchased (232,700) (553)
----------------------------------------------------------------------------
Balance, December 31, 2007 47,595,129 $113,032
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On October 15, 2007, Midnight filed notice with the Toronto Stock Exchange (the "TSX") to make a normal course issuer bid to purchase its outstanding common shares on the open market. The TSX has authorized Midnight to purchase up to 4,320,826 common shares representing approximately 9% of its issued and outstanding common shares during the period from October 17, 2007 to October 16, 2008 or until such time that the bid is either completed or terminated at Midnight's option. Any shares Midnight purchases under this bid will be purchased on the openmarket through the facilities of the TSX at the prevailing market price. Shares acquired under the bid will be cancelled. During the year ended December 31, 2007 the Company purchased and cancelled 232,700 common shares for total consideration of $277,000. The excess of the average book value over the market price paid is recorded as contributed surplus.

On November 7, 2006 the Company issued 5,500,000 Common Shares at a price of $3.05 per share. The proceeds, net of share issue cost of $1.1 million ($0.7 million net of tax), were $15.7 million.

On May 17, 2006 the Company issued 4,000,000 flow-through Common Shares at a price of $5.10 per share. The proceeds, net of share issue costs of $1.3 million ($0.9 million net of tax), were $19.1 million. Pursuant to the flow-through Common Share offering, the Company renounced $20.4 million of qualifying oil and natural gas expenditures effective December 31, 2006. The future income tax effect and reduction to share capital of $6.2 million was recorded in the first quarter of 2007, the period in which the Company filed the renouncement documents with the tax authorities.

(c) Per share amounts:

The following summarizes the common shares used in calculating per share amounts:



----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 47,809,160 41,640,158
Diluted 47,809,160 41,893,925
----------------------------------------------------------------------------


The reconciling items between basic and diluted average common shares outstanding are stock options and warrants. At December 31, 2007 there were 2,992,000 (2006-1,606,800) options that were anti-dilutive and 2,013,333 (2006 - nil) warrants that were anti-dilutive.

(d) Stock options:

The Company has a stock option plan whereby up to 10% of the issued and outstanding common shares may be granted under option to employees, directors and other persons who provide ongoing management or consulting services to the Company. Stock options are granted for a term up to five years and vest over three years from the date granted. The exercise price of each option equals the market price of the Company's common shares on the date of the grant.

The summary of stock option activity is presented below:



----------------------------------------------------------------------------
Number of Weighted average
options exercise price
----------------------------------------------------------------------------

Balance, December 31, 2005 1,099,800 $ 3.50
Granted 2,590,000 2.56
Forfeited (53,000) 3.49
----------------------------------------------------------------------------
Balance, December 31, 2006 3,636,800 $ 2.83
Granted 309,500 1.87
Forfeited (954,300) 3.38
----------------------------------------------------------------------------
Balance, December 31, 2007 2,992,000 $ 2.56
----------------------------------------------------------------------------

Exercisable at December 31, 2007 985,834 $ 2.70
----------------------------------------------------------------------------

The following table summarizes information about the stock options
outstanding at December 31, 2007:

----------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Weighted average Weighted
Range of average remaining average
exercise Number exercise contractual Number exercise
price outstanding price life (years) exercisable price
----------------------------------------------------------------------------
$ 1.00-1.99 234,500 $ 1.81 4.4 - $ -
$ 2.00-2.99 2,102,500 2.36 3.9 682,500 2.37
$ 3.00-3.99 655,000 3.45 3.0 303,334 3.45
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2,992,000 $ 2.56 3.8 985,834 $ 2.70
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(e) Warrants:

----------------------------------------------------------------------------
Number of
Warrants Amount
----------------------------------------------------------------------------
Warrants:
Balance, December 31, 2005 and 2006 2,083,333 $ 42
Forfeited (70,000) (2)
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Balance December 31, 2007 2,013,333 $ 40
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Each warrant is exercisable into one common share of the Company at a price of $3.00 per share. The warrants vest equally over three years and expire on November 29, 2008. All of the warrants have vested and are exercisable at December 31, 2007.

(f) Stock-based compensation:

Midnight accounts for its stock-based compensation plan using the fair value method. Under this method, a compensation cost is charged over the vesting period for warrants and options granted to employees, officers, directors and other service providers.

Midnight has not incorporated an estimated forfeiture rate for stock options that will not vest, rather the Company accounts for actual forfeitures as they occur.

The fair value of options and warrants granted were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and resulting values:



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2007 2006
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Fair value of options granted $ 0.69 $ 0.95
Risk free interest 4.1% 4.0%
Estimated hold period prior to exercise 4 years 4 years
Expected volatility 40% 40%
Dividend per share $ 0.00 $ 0.00
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(g) Contributed surplus:

The following table reconciles Midnight's contributed surplus:

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2007 2006
----------------------------------------------------------------------------
Balance, beginning of year $ 1,234 $ 469
Stock-based compensation 930 765
Forfeiture of warrants 2 -
Repurchase of common shares 276
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Balance, end of year $ 2,442 $ 1,234
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7. Taxes

The provision for taxes in the consolidated statements of income (loss) differs from the result that would have been obtained by applying the combined federal and provincial tax rate to the Company's loss before taxes. The difference results from the following items:



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2007 2006
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Loss before taxes $ (2,900) $ (15)
Combined federal and provincial tax rate 32.1% 34.5%
Computed "expected" tax recovery $ (931) $ (5)
Increase (decrease) in taxes resulting from:
Non-deductible crown charges - 765
Resource allowance - (889)
Stock-based compensation 181 120
Other 31 (77)
Effect of change in tax rate (962) 26
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Future tax reduction $ (1,681) $ (60)
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The future tax liability (asset) at December 31 is comprised of the tax
effect of temporary differences as follows:

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2007 2006
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Petroleum and natural gas assets $ 5,649 $ 1,397
Asset retirement obligations (525) (560)
Attributed Canadian Royalty Income (79) (79)
Share issue costs (772) (1,149)
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Balance, end of year $ 4,273 $ (391)
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8. Risk management

(a) Credit risk:

Portions of the Company's accounts receivable are with joint venture partners in the oil and gas industry and are subject to normal industry credit risks. Purchasers of the Company's oil and natural gas products are subject to an internal credit review designed to mitigate the risk of non-payment.

(b) Commodity price risk:

There were no financial instruments in place to manage commodity prices during the years ended December 31, 2007 and 2006.

(c) Foreign currency:

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

(d) Fair value of financial instruments:

Financial instruments comprise cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities. The fair values of these financial instruments approximate their carrying amounts due to their short-term maturities. The Company's long-term debt bears interest at a floating market rate and accordingly the fair market value approximates the carrying value.

(e) Interest rate risk:

The Company is exposed to interest rate risk to the extent that changes in market interest rates will impact the Company's cash and cash equivalents that have a floating interest rate. The bank facility is also based on a floating interest rate. The Company had no interest rate swaps or hedges at December 31, 2007.

9. Related Party

Prior to December 31, 2006, Midnight and Daylight Energy Ltd. ("Daylight") established and operated under an Administrative and Technical Services Agreement, which provided for the shared services, required to manage the activities of Midnight and Daylight and governed the allocation of general and administrative expenses between the entities. Under this agreement, Daylight Energy was the employer on behalf of the parties and received payment for certain technical and administrative services provided to MOX. The Administrative and Technical Services Agreement was terminated effective December 31, 2006. Certain administrative services which provide reasonable economy and do not involve competitive issues continue to be provided to Midnight by Daylight on a fixed fee basis which has been negotiated by the parties and may be cancelled by either party.

Although the Administrative and Technical Services Agreement has been terminated, Daylight and Midnight continue to be considered related, as a director and officer of Midnight is Daylight's Chairman. In addition, a director and officer of Daylight is also a director of Midnight. Midnight and Daylight are joint venture partners in certain properties, and as a result, revenues and costs related to these properties are allocated to each partner under standard joint venture billing arrangements. Each partner's costs and revenues are based on the exchange amounts which reflect actual third party costs incurred and revenue received. All transactions are conducted under standard business terms and are considered within the normal course of Daylight's business activities and operations.

Pursuant to the Administrative and Technical Services Agreement, Daylight charged Midnight $3.7 million for the year ended December 31, 2006 and Midnight had a payable balance of approximately $2.1 million due to Daylight at December 31, 2006. For the year ended December 31, 2007, Daylight charged Midnight $1.4 million for administrative services and premises costs. At December 31, 2007 Midnight had a receivable balance, which includes joint venture and commodity marketing amounts of approximately $4.7 million due from Daylight.

10. Commitments

The Company renounced $20.4 million of qualifying oil and natural gas expenditures effective December 31, 2006 pursuant to the flow-through share offering which closed on May 17, 2006. As at December 31, 2007 the Company had incurred all (2006 - $10.3 million) of the required qualifying expenditures.



Selected Quarterly Information

2007
Q4 Q3 Q2 Q1
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Financial
(000's, except for per share
amounts)
Petroleum and natural
gas sales $ 10,811 $ 10,439 $ 11,009 $ 10,894
Royalties 1,649 1,597 1,618 1,990
Operating expenses 2,746 2,227 1,781 2,176
Transportation expenses 200 255 312 189
------------------------------------------------
Netback $ 6,216 $ 6,360 $ 7,298 $ 6,539
G&A - cash charge 1,128 1,001 803 713
Interest 369 439 426 339
Other income (179) - - -
Capital tax - - - -
------------------------------------------------
Funds from operations $ 4,898 $ 4,920 $ 6,069 $ 5,487
Per share - Basic 0.10 0.10 0.13 0.11
- Diluted 0.10 0.10 0.13 0.11
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Net income (loss) $ (19) $ (827) $ 51 $ (424)
Per share - Basic (0.00) (0.02) 0.00 (0.01)
- Diluted (0.00) (0.02) 0.00 (0.01)
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Petroleum and natural gas
additions $ 8,092 $ 3,217 $ 3,439 $ 12,582
Net debt 28,374 24,886 26,577 29,170
Total assets 164,681 160,573 161,537 159,594
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Shares outstanding
Basic 47,595 47,828 47,828 47,828
Diluted 52,600 52,953 53,168 53,001
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Operations

Average daily production
Natural gas (mcf/d) 5,573 5,981 5,769 6,891
Oil & NGLs (bbls/d) 1,036 1,050 1,185 1,090
Combined (boe/d) 1,965 2,047 2,146 2,239
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Average prices received
Natural gas ($/mcf) $ 6.17 $ 5.33 $ 7.22 $ 7.82
Oil & NGLs ($/bbl) 79.62 77.16 66.76 61.39
------------------------------------------------
Combined ($/boe) $ 59.81 $ 55.43 $ 56.37 $ 54.06
Royalties 9.12 8.48 8.29 9.88
Operating expenses 15.19 11.82 9.12 10.80
Transportation expenses 1.11 1.36 1.59 0.93
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Netback received ($/boe) $ 34.39 $ 33.77 $ 37.37 $ 32.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------


2006
Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Financial
(000's, except for per share
amounts)
Petroleum and natural
gas sales $ 9,410 $ 10,099 $ 10,988 $ 9,191
Royalties 1,462 1,966 1,969 1,654
Operating expenses 2,072 1,518 1,610 1,645
Transportation expenses 216 167 168 191
------------------------------------------------
Netback $ 5,660 $ 6,448 $ 7,241 $ 5,701
G&A - cash charge 580 645 499 436
Interest 290 324 235 170
Other income - - (9) (119)
Capital tax - - (17) 17
------------------------------------------------
Funds from operations $ 4,790 $ 5,479 $ 6,533 $ 5,197
Per share - Basic 0.11 0.13 0.16 0.14
- Diluted 0.11 0.13 0.16 0.13
----------------------------------------------------------------------------
Net income (loss) $ (565) $ 320 $ 82 $ 208
Per share - Basic (0.01) 0.01 0.00 0.01
- Diluted (0.01) 0.01 0.00 0.01
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Petroleum and natural gas
additions $ 8,652 $ 13,670 $ 9,945 $ 29,485
Net debt 21,974 33,579 25,297 41,028
Total assets 152,833 147,677 138,842 134,452
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Shares outstanding
Basic 47,828 42,328 42,328 38,328
Diluted 53,548 45,914 45,903 41,495
----------------------------------------------------------------------------
Operations

Average daily production
Natural gas (mcf/d) 7,352 7,637 10,091 5,926
Oil & NGLs (bbls/d) 890 841 830 901
Combined (boe/d) 2,115 2,114 2,512 1,889
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Average prices received
Natural gas ($/mcf) $ 6.84 $ 5.85 $ 5.98 $ 7.39
Oil & NGLs ($/bbl) 58.25 77.01 72.38 64.17
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Combined ($/boe) $ 48.35 $ 51.92 $ 48.07 $ 54.07
Royalties 7.51 10.11 8.61 9.73
Operating expenses 10.65 7.80 7.04 9.68
Transportation expenses 1.11 0.86 0.74 1.12
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Netback received ($/boe) $ 29.08 $ 33.15 $ 31.68 $ 33.54
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