Sabretooth Energy Ltd.
TSX : SAB

Sabretooth Energy Ltd.

March 11, 2008 08:45 ET

Sabretooth Energy Announces 2007 Financial and Operations Results

CALGARY, ALBERTA--(Marketwire - March 11, 2008) - Sabretooth Energy Ltd. (TSX:SAB) ("Sabretooth" or "the company") is pleased to announce financial and operational results for 2007 and an operational update on current activity.

2007 Highlights

- Increased average production in Q4 2007 to 3,380 boe/d, a 132% increase over Q4 2006.

- Tripled reserves with successful drilling and an accretive acquisition. Sabretooth Company Interest reserves are 8.341 million boe Proved + Probable (P+P). P+P Reserve Life Index increased to 6.5 years.

- Reserve replacement increased to 374% on a P+P basis as calculated by reserve additions divided by 2007 production.

- Acquired Bear Ridge Resources on August 21, 2007 through a plan of arrangement which saw Sabretooth begin trading on the TSX under the stock symbol SAB.

- Made significant multi-zone natural gas discoveries at George, Blueberry, Earring and Royce on the Alberta side of the Peace River Arch in 2007 which are in various stages of tie-in and development.

- Followed up an extensive 3D seismic shoot with two new pool natural gas discoveries in the Fireweed Area of British Columbia.

- Made a new pool oil discovery in the Oak area of North East British Columbia (NE B.C.). Additional development is planned for 2008.

- Continued development of the Jean-Marie formation at Gunnell in NE B.C. with 5 (1.6 net) wells. Further identified 20 (6 net) drilling locations on the play. Six additional wells are planned for 2008.

- 2007 FD&A costs were $12.31/boe P+P and $14.47/boe P+P with full development. Since Inception in October, 2005 FD&A costs were $13.12/boe P+P and $14.50/boe P+P with full development costs included.

- Tripled Company undeveloped land position to 155,000 net acres - grew the Company Montney land position successfully in NE B.C. and Alberta to 40 net sections within the Montney tight gas fairway.

- Proved viable gas production from the Montney from 2 vertical wells in the Oak area, pre cursors to horizontal development planned for 2008.

2008 Operational Update

Production

With continued successful drilling and completions in the first quarter of 2008, Sabretooth has 700 boe/d behind pipe and awaiting tie-in. Current production is approximately 3,300 boe/d. Tested production is expected to be on-stream by the end of April 2008. As well, 3 additional development wells are expected to be drilled, tested and on-stream by the end of April 2008. Sabretooth plans to expend $14MM in the first quarter within an approved capital budget for 2008 of $55MM. The bulk of the remaining budget is primarily drilling.

Drilling

Sabretooth has drilled five successful wells in 2008. The first was an exploration well in Blueberry in early February with multiple pay zones. The well has successfully tested over 250 boe/d from the initial completion. This zone has been temporarily suspended pending the resolution of sour gas infrastructure bottlenecks in the area, expected in the next few months. Uphole zones are expected to be completed and tied in prior to spring breakup.

A successful development well was drilled for a Cretaceous target in the Earring area and placed on production at over 1 MMCF/d late in February.

An exploration well was cased in late February in the George area for multiple prospective horizons and the completion is underway.

A development well was drilled in Watelet and the well is now on production at 85 boe/d net to the company.

The first Gunnell development well of 2008 was drilled and was placed on production.

Fireweed, British Columbia:

The tie in of two wells drilled at Fireweed in Q4 of 2007 is now in progress and an additional well is cased in the area. Five additional wells are planned after break-up.

Oak, British Columbia, Montney:

Three long reach horizontals targeting the Montney in B.C. are expected to be drilled after break-up. These development wells will further evaluate 26,000 net acres that Sabretooth holds within the prolific Upper and Middle Montney fairway in NEBC and Alberta.

Short Term Investments - Expects no Material Adverse Effect on Company

The Pan-Canadian Investors Committee for Third-Party Structured Asset Back Commercial Paper led by Purdy Crawford has announced on December 23, 2007 that an agreement in principle to restructure the ABCP issue has been approved with closing still expected to be April 30, 2008. At that time it is anticipated that liquidity will return to Sabretooth's $24.2 million asset backed commercial paper investment. Sabretooth does not anticipate any impact on our 2008 capital spending program as a result of continuing to hold this investment at this time.

Reserves

Sabretooth's reserves were evaluated at December 31, 2007 by GLJ Petroleum Consultants ("GLJ"), an independent engineering firm. GLJ's evaluation was conducted in accordance with standard's set out in the Canadian Oil and Gas Evaluation Handbook and is compliant with National Instrument 51-101 ("NI 51-101").



Gas Oil NGL's Total
2007 Reserves (before royalties) mmcf mbbls mbbls mboe
--------------------------------------------------------------------------

December 31, 2007
Proved producing 18,112 545 167 3,731
Proved developed non-producing 6,923 0 84 1,237
Proved undeveloped 2,705 0 16 467
--------------------------------------------------------------------------
Total Proved 27,740 545 267 5,435
Probable 14,816 229 149 2,848
--------------------------------------------------------------------------
Total Proved plus Probable 42,556 775 416 8,283
--------------------------------------------------------------------------

Note: Columns may not add due to rounding


Finding and Development Costs

During 2007 Sabretooth spent approximately $36.2 million on exploration and development with $2.1 million on land and $62.9 million on Bear Ridge property and equipment with $21.5 million assigned to Bear Ridge land.



FD&A Costs Excluding Future 2007 2006 2005 Since
Development Capital (1) Inception
--------------------------------------------------------------------------
F&D - Exploration and Development -
Proved $ 19.57 $ 25.89 n/a n/a
--------------------------------------------------------------------------
F&D - Exploration and Development -
Proved and Probable $ 13.43 $ 31.62 n/a n/a
--------------------------------------------------------------------------
FD&A - Total - Proved $ 16.91 $ 25.89 $ 18.96 $ 18.64
--------------------------------------------------------------------------
FD&A - Total - Proved and Probable $ 12.31 $ 31.62 $ 9.19 $ 13.12
--------------------------------------------------------------------------
FD&A Costs Including Future
Development Capital
--------------------------------------------------------------------------
F&D - Exploration and Development -
Proved $ 31.11 $ 26.19 n/a n/a
F&D - Exploration and Development -
Proved and Probable $ 23.69 $ 29.16 n/a n/a
--------------------------------------------------------------------------
FD&A - Total - Proved $ 18.98 $ 26.19 $ 20.13 $ 20.01
--------------------------------------------------------------------------
FD&A - Total - Proved and Probable $ 14.47 $ 29.16 $ 11.29 $ 14.50
--------------------------------------------------------------------------

(1) Began operations on October 27, 2005


FD&A calculations include all reserve additions from exploration drilling, development drilling and acquisitions as well as capital from all of these activities.

The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserve additions for that year.

About Sabretooth Energy

Sabretooth Energy Ltd. is a public oil and gas exploration and development company, located in Calgary, Alberta and carrying out operations in Western Canada. Sabretooth trades on the Toronto Stock Exchange (TSX) under the symbol "SAB".

Our mandate is to grow through a balanced approach of drill bit adds, accretive acquisitions, and aggressive exploitation of upside.

This news release contains forward-looking statements relating to the Company's plans and other aspects of the Company's anticipated future operations, strategies, financial and operating results and business opportunities. Forward-looking statements typically use words such as "anticipate", "believe", "project", "expect", "plan", "intend" or similar words suggesting future outcomes, statements that actions, events or conditions "may", "would", "could" or "will" be taken or occur in the future, or statements regarding the outlook for petroleum prices, estimated amounts and timing of capital expenditures, anticipated results of construction projects, estimates of future production, the ability to realize on investments in asset backed commercial paper, operating costs or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance. Statements regarding reserves are also forward-looking statements, as they reflect estimates as to the expectation that the deposits can be economically exploited in the future.

These statements are based on certain factors and assumptions regarding expected growth, results of operations, performance, business prospects and opportunities and the ability of the Company to realize on its investments in asset backed commercial paper. While we consider these assumptions to be reasonable based on information currently available to us, they may prove to be incorrect.

By their nature, forward-looking statements involve numerous risk and uncertainties and other factors that contribute to the possibility that the predicted outcome will not occur, including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. Readers are cautioned that the foregoing list of factors is not exhaustive.

Although Sabretooth believes that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements and you should not unduly rely on forward-looking statements. The forward-looking statements contained in this news release are made as the date of this new release and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Finding and development costs: with respect to disclosure of finding and development costs disclosed above:

(a) The amounts of 2007 finding and development and/or acquisition costs contained in the table set forth above are calculated by dividing the total of the particular costs noted in each line incurred during 2007 by the amounts of additions to proved reserves and proved and probable reserves during 2007 that resulted from the expenditures of such costs during 2007 which are based upon the GLJ Evaluation and Sabretooth's internal estimates of the proven and probable reserves attributed to the Bear Ridge acquisition.

(b) In calculating the amounts of finding and development and/or acquisition costs, the change during the year in estimated future development costs is based upon the evaluation of Sabretooth's reserves prepared by GLJ Petroleum Consultants effective December 31, 2006 and 2007.

(c) In calculating the amounts of finding and development and/or acquisition costs with respect to the Bear Ridge properties at the time of the acquisition is based on Sabretooth's internal estimate of future development costs for the Bear Ridge properties at August 21, 2007.

(d) National Instruments 51-101 requires the inclusion of the following warning statement:

The aggregate of the exploration and development costs incorrect in the most recent financial yean and any change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserve additions for that year.

The term barrels of oil equivalent may be misleading, particularly if used in isolation. A conversion ratio for gas of 6 mcf : 1 boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.



2007 Highlights
Three months ended December 31, Year ended December 31,

2007 2006 2007 2006
--------------------------------------------------------------------------
Financial ($)
Production revenue $13,535,000 $5,821,000 $30,121,000 $27,613,000
Realized gain (loss)
on hedge $834,000 $62,000 $2,700,000 $316,000
Unrealized gain
(loss) on hedge $(1,481,000) $(534,000) $(1,563,000) $950,000
Net income (loss) $217,000 $(646,000) $3,775,000 $2,312,000
Funds flow from
Operations $5,985,000 $3,095,000 $14,524,000 $15,922,000
--------------------------------------------------------------------------
Production volumes
Natural gas (mcf/d) 17,303 8,308 9,664 10,018
Crude oil (bbls/d) 325 49 181 16
Natural gas liquids
(bbls/d) 171 21 73 104
Total (boe/d) (6:1) 3,380 1,454 1,865 1,790

Sales prices
Natural gas ($/mcf) $6.84 $7.09 $7.45 $ 6.70
Natural gas, not
Including hedges ($/mcf) $6.32 $7.17 $6.69 $6.78
Crude oil ($/bbl) $76.55 $60.42 $72.16 $62.10
Natural gas liquids
($/bbl) $75.81 $67.11 $66.31 $72.41
Total ($/boe) $46.21 $43.96 $48.22 $42.74
Netbacks, not
including
unrealized
hedges ($/boe)
Price $46.21 $43.96 $48.22 $42.74
Royalties, net of
ARTC $(7.22) $(9.64) $(7.74) $(9.44)
Transportation $(1.68) $(1.48) $(1.58) $(1.05)
Operating costs $(11.73) $(7.07) $(11.41) $(5.25)
---------------------------------------------------------------------------
Total $25.58 $25.77 $27.49 $27.00
---------------------------------------------------------------------------
Total Capital
expenditures
(excluding Bear
Ridge
acquisition) $12,013,000 $ 12,257,000 $36,223,000 $35,733,000
---------------------------------------------------------------------------
Land (net acres)
Developed 53,806 19,759
Undeveloped 153,188 32,282
--------------------------------------------------------------------------
Total Land 206,994 52,041
--------------------------------------------------------------------------
Reserves (boe)
--------------------------------------------------------------------------
Proved 5,466,000 1,647,500
Proved plus probable 8,341,000 2,829,000
--------------------------------------------------------------------------


Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD & A") of the financial and operating results for Sabretooth Energy Limited. ("Sabretooth" or the "Company") should be read in conjunction with the Company's audited consolidated financial statements and related notes for the years ended December 31, 2007 and 2006.

This MD & A is dated March 7, 2008.

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 term barrels of oil equivalents (BOE) may be misleading, particularly if used in isolation. A BOE conversion ratio for gas of 6 mcf:1 boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Non-GAAP Measurements

Within the Management Discussion and Analysis references are made to terms commonly used in the oil and gas industry. Netback is not defined by GAAP in Canada and is referred to as a non-GAAP measure. Netbacks equal total revenue less royalties, operating costs and transportation costs calculated on a boe basis. Management utilizes this measure to analyze operating performance. Total boes are calculated by multiplying the daily production by the number of days in the period.

Funds flow from operations is a non-GAAP term that represents net income (loss) adjusted for non-cash items including depletion, depreciation, accretion, future income taxes, stock-based compensation, unrealized hedge gains (losses), asset write-downs and gains (losses) on sale of assets and before adjustments for changes in working capital. The Company evaluates its performance based on earnings and funds flow from operations. The Company considers funds flow from operations a key measure as it demonstrates the Company's ability to generate the cash flow necessary to fund future growth through capital investment and to repay debt. The Company's calculation of funds flow from operations may not be comparable to that reported by other companies. Funds flow from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of income (loss) per share.

Forward-looking Statements

Certain statements contained within this MD & A, and in certain documents incorporated by reference into this document, constitute forward-looking statements. These statements related 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. Forward-looking statements in this MD & A include, but are not limited to, statements with respect to: the potential impact of implementation of the Alberta Royalty Framework on Sabretooth condition and projected 2008 capital investments; projections with respect to growth of natural gas production; the projected impact of land access and regulatory issues: projections relating to the volatility of crude oil prices in 2008 and beyond and reasons therefore; the Company's projected capital investment levels for 2008 and the source of funding therefore; the effect of the Company's risk management program, including the impact of derivative financial instruments; the Company's defence of lawsuits; the impact of the climate change initiatives on operating costs; the impact of Western Canada pipeline constraints; projections that the Company will fully recover from its Asset Backed Commercial Paper. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur.

By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecast, projects and other forward-looking statements will not occur, which may cause the Company's actual performance and financial results in future periods to differ materially from any estimates or projects of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things: volatility of and assumptions regarding oil and gas prices; assumptions based upon Sabretooth's current guidance; fluctuations in currency and interest rates; product supply and demand; market competition; risk inherent in the Company's marketing operations, including credit risks; imprecision of reserves estimates and estimates of recoverable quantities of oil, natural gas and liquids from resource plays and other sources not currently classified as proved; the Company's ability to replace and expand oil and gas reserves; the Company's ability to generate sufficient cash flow from operations to meet its current and future obligations; the Company's ability to access external sources of debt and equity capital; the timing and cost of well and pipeline constructions; the Company's ability to secure adequate product transportation; changes in royalty, tax, environmental and other laws or regulations or the interpretations of such laws or regulations; risks associated with existing and potential future lawsuits and regulatory actions made against the Company; and other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by Sabretooth. 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.

Although Sabretooth believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectation will prove to be correct. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this MD & A are made as of the date of this MD & A, and excepts as required by law Sabretooth does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD & A are expressly qualified by this cautionary statement.

Selected Annual Information



Year ended Year ended Year ended
December 31, December 31, December 31,
$(000's) 2007 2006 2005
------------------------------------------------------------------------
Total Production Revenue $30,121 $27,613 $7,596
Net Income (Loss) $3,775 $2,312 $768
Per share - basic 0.14 0.12 0.02
Per share - diluted 0.14 0.12 0.02
Total Assets $ 169,610 $68,065 $45,867
------------------------------------------------------------------------


Business Acquisition

On August 21, 2007 the Company acquired all of the issued and outstanding shares of Bear Ridge Resources Ltd. ("Bear Ridge"), an Alberta-based oil & gas company whose shares were listed on the TSX, for 18,477,506 common voting shares and 1,050,000 warrants and approximately $59,013,000 in cash including transaction costs. The transaction was accounted for using the purchase method whereby the assets acquired and liabilities assumed are recorded at their fair value. The accounts of the Company include the results of Bear Ridge effective August 21, 2007.

The purchase price equation is as follows:



$(000's)
--------------------------------------------------------------------------
Cost of Acquisition
--------------------------------------------------------------------------

Cash $56,813
Common shares (18,477,506 at $2.81 per share) 51,927
Warrants (1,050,000 at $0.57 per warrant) 598
Transaction costs 2,200
--------------------------------------------------------------------------
Total $111,538
--------------------------------------------------------------------------
$(000's)
--------------------------------------------------------------------------
The Fair Value of the Assets and Liabilities Acquired
Have Been Allocated as Follows:
--------------------------------------------------------------------------

Cash and cash equivalents $34,261
Accounts receivable 6,362
Deposits and prepaid expenses 94
Commodity contracts 1,456
Investment in commercial paper 21,760
Property and equipment 63,370
Future tax liability, net of previously unrecognized
tax assets of the Company (1,322)
Accounts payable and accrued liabilities (11,399)
Asset retirement obligations (3,044)
---------------------------------------------------------------------------
Total $111,538
---------------------------------------------------------------------------


The attributed values of the common shares and warrants issued have been excluded from the consolidated statement of cash flows as non-cash transactions.
Each warrant entitles the holder to acquire one common share on a "flow-through" basis under the Income Tax Act (Canada) at a price of $3.81 per share. The warrants expire on March 31, 2009.

The Bear Ridge acquisition resulted in one dissenting shareholder. The shareholder holds 449,358 Bear Ridge shares and 389,435 Bear Ridge warrants with a strike price of $1.41. An accrual has been made for management's best estimate of the settlement which will be paid to this Bear Ridge shareholder. The dispute is currently with the courts. The Company does not expect any additional costs to be incurred on this matter other than the amount already accrued as part of the purchase price of Bear Ridge. The estimated settlement price is subject to measurement uncertainty and the effect of the changes to the estimate when resolved will be applied against the purchase price of Bear Ridge.

Bear Ridge Resources Inc. and its wholly owned subsidiary Bear Ridge Exploration Ltd. were amalgamated and have been renamed to Sabretooth Resources Ltd., a wholly owned subsidiary of Sabretooth Energy Ltd.

The acquisition of Bear Ridge created a natural gas leveraged company with high working interests and an extensive suite of drillable locations on a large prospective undeveloped land base. The combined entity has a strong presence in its core areas in the Peace River Arch and will provide significant economies of scale with its existing infrastructure and compatible land base.

Financial Results and Highlights



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------
$('000s) 2007 2006 2007 2006
---------------------------------------------------------------------------
Revenue, net of
royalties $11,289 $4,531 $24,849 $21,446
Funds flow from
operations (1) $5,985 $3,095 $14,524 $15,922
Net income (loss) $217 $(646) $3,775 $2,312
---------------------------------------------------------------------------

(1) Funds flow from operations is a non-GAAP term that represents net
earnings adjusted for non-cash items including depletion and
depreciation, accretion, future income taxes, stock-based
compensation, unrealized hedge gains (losses), asset write-downs
and gains (losses) on sale of assets. The Company evaluates its
performance based on earnings and funds flow from operations. The
Company considers funds flow from operations a key measure as it
demonstrates the Company's ability to generate the cash flow
necessary to fund future growth through capital investment and to
repay debt.


Revenue

Production revenue was $30,121,000 for the year ended December 31, 2007, compared to $27,613,000 for the same time period in 2006. Production revenue was $13,535,000 for the three months ended December 31, 2007, compared with $5,821,000 for the three months ended December 31, 2006.

Total production revenue is comprised of natural gas, crude oil and natural gas liquids for the twelve and three months ended December 31, 2007 and 2006. Production revenue increased due to increase in volume from the Bear Ridge Acquisition which was offset by lower natural gas prices in 2007.

Pricing

Sabretooth's average natural gas price, not including realized gain on hedges, received during the fourth quarter of 2007 was $6.32 per mcf compared to the average AECO C posted price of $5.81 per mcf during the same period (2006 - $7.17 per mcf compared to the average AECO C posted price of $6.91 per mcf during the same period). The difference is due to the higher heat content the Company's gas contains. The Company received a fourth quarter average crude oil price of $76.55 per bbl as compared to the Edmonton Par price of $65.23 per bbl (2006 - $60.42 per bbl as compared to the Edmonton Par price of $65.12 per bbl during the same period). This variance is due to the quality differential of the oil produced versus Edmonton Par. NGL prices averaged $ 75.81 per bbl during the three month period as compared to the Edmonton pentane reference price of $89.23 per bbl (2006 - $67.11 per bbl as compared to the Edmonton pentane price of $67.86 per bbl during the same period).

Sabretooth's average natural gas price, not including realized gain on hedges, received during 2007 was $6.69 per mcf compared to the average AECO C posted price of $ 6.12 per mcf during the same period (2006 - $ 6.78 per mcf compared to the average AECO C posted price of $6.32 per mcf during the same period). The difference is due to the higher heat content the Company's gas contains. The Company received an average crude oil price of $72.16 per bbl as compared to the Edmonton Par price of $73.66 per bbl for the twelve months of 2007 (2006 - $62.10 per bbl as compared to the Edmonton Par price of $73.34 per bbl during the same period). This variance is due to the quality differential of the oil produced versus Edmonton Par. NGL prices averaged $66.31 per bbl during the year ended December 31, 2007 as compared to the Edmonton pentane reference price of $77.33 per bbl (2006 - $72.41 per bbl as compared to the Edmonton pentane price of $ 75.05 per bbl during the same period).

During the three months ended December 31, 2007 Sabretooth realized a hedge gain of $834,000 and for the full year ended December 31, 2007 Sabretooth had realized hedge gain of $2,700,000. During the three month period and twelve month period ended December 31, 2006, Sabretooth realized gains on hedges of $62,000 and $316,000 respectively.



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------
Average Selling 2007 2006 2007 2006
Price (not-
including
unrealized
hedges)
--------------------------------------------------------------------------
Natural gas (per Mcf) $6.84 $7.09 $7.45 $6.70
Crude Oil (per bbl)
$76.55 $60.42 $72.16 $62.10
Natural gas liquids (per
bbl) $75.81 $67.11 $66.31 $72.41
--------------------------------------------------------------------------
Per BOE $46.21 $43.96 $48.22 $42.74
--------------------------------------------------------------------------


Production

Production for the fourth quarter of 2007 was 310,927 boe and averaged 3,380 boe/d. For the year ended December 31, 2007, production averaged 1,865 boe/d for a total of 680,637 boe. For the three and twelve months ended December 31, 2006 production was 133,806 boe and averaged 1,454 boe/d and 653,405 boe and averaged 1,790 boe/d respectively.

The production increased of 1,926 boe/d in the fourth quarter of 2007compared to 2006 is attributable to the acquisition of Bear Ridge in the third quarter and the successful 2007 drilling results.



Three months ended December 31,
-------------------------------
2007 2006
-----------------------------------------------------
Total Per day Total Per day
---------------------------------------------------------------------------
Natural Gas 1,591,960 mcf 17,303 mcf/d 764,302 mcf 8,308 mcf/d
Crude Oil 29,911 bbls 325 bbls/d 4,522 bbls 49 bbls/d
NGLs 15,687 bbls 171 bbls/d 1,900 bbls 21 bbls/d
---------------------------------------------------------------------------
Total 310,927 boe 3,380 boe/d 133,806 boe 1,454 boe/d
---------------------------------------------------------------------------



Year ended December 31,
-----------------------
2007 2006
-----------------------------------------------------------
Total Per day Total Per day

-------------------------------------------------------------------------
Natural Gas 3,527,253 mcf 9,664 mcf/d 3,656,676 mcf 10,018 mcf/d

Crude Oil 66,242 bbls 181 bbls/d 5,975 bbls 16 bbls/d

NGLs 26,520 bbls 73 bbls/d 37,984 bbls 104 bbls/d
-------------------------------------------------------------------------
Total 680,637 boe 1,865 boe/d 653,405 boe 1,790 boe/d
-------------------------------------------------------------------------


Royalty Expense

Royalties were 18 percent of revenue in 2007 compared with 22 percent of revenue for 2006. The decrease in royalties is attributable to the royalty holiday some of our BC properties have.

Royalties are calculated and paid based on commodity revenue net of applicable costs and any realized financial gains or losses.



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------

$('000s) 2007 2006 2007 2006
--------------------------------------------------------------------------
Royalties ($) $2,246 $1,290 $5,272 $6,167
--------------------------------------------------------------------------
As a % of sales 16.5% 22.2% 17.5% 22.3%
Per Unit of
Production
($/boe @ 6:1) $7.22 $9.64 $7.74 $9.44
--------------------------------------------------------------------------


Transportation

Transportation costs for the fourth quarter of 2007 were $521,000 or $1.68 per boe. For the year ended December 31, 2007 transportation costs were $1,078,000 or $1.58 per boe. Transportation costs for the fourth quarter of 2006 were $198,000 or $1.48 per boe. For the year ended December 31, 2006 transportation costs were $686,000 or $1.05 per boe. The increase in transportation costs in 2007 as compared to 2006 was mainly due to switching to a firm service contract from an interruptible service contract, which is more expensive but guarantees our natural gas transportation.



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------
$('000s) 2007 2006 2007 2006
---------------------------------------------------------------------------
Transportation ($) $521 $198 $1,078 $686
Per Unit of
Production
($/boe @ 6:1) $1.68 $1.48 $1.58 $1.05
---------------------------------------------------------------------------


Operating Costs

Operating costs during the fourth quarter of 2007 were $3,647,000 or $11.73 per boe compared to $944,000 or $7.07 per boe for the same time period in 2006. For the year ended December 31, 2007 operating costs were $7,770,000 or $11.41 per boe compared to the year ended December 31, 2006 operating costs were $3,429,000 or $5.25 per boe.

Operating costs increased in the fourth quarter of 2007 by $4.66/boe as a result of higher operating costs associated with the properties acquired in the third quarter. Operating costs are expected to decrease in 2008 as Sabretooth continues to remove rental equipment and streamline operations in the field.



Three months ended December 31, Year ended December 31,
------------------------------- -----------------------
$('000s) 2007 2006 2007 2006
----------------------------------------------------------------------------
Operating Costs ($) $3,647 $944 $7,770 $3,429
Per Unit of
Production
($/boe @ 6:1) $11.73 $7.07 $ 11.41 $5.25
----------------------------------------------------------------------------


Operating Netbacks

Sabretooth's netback for the fourth quarter of 2007 was $25.58 compared to $25.77 for the fourth quarter of 2006. For the year ending December 31, 2007, the netback was $27.49 compared to $27.00 for the same period in 2006. These netbacks per boe are comprised of the following:



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------

2007 2006 2007 2006
---------------------------------------------------------------------------
Production revenue,
including realized hedge
gains (losses) $46.21 $43.96 $48.22 $42.74
Royalty expense, net of
ARTC (7.22) (9.64) (7.74) (9.44)
Transportation (1.68) (1.48) (1.58) (1.05)
Operating Costs (11.73) (7.07) (11.41) (5.25)
---------------------------------------------------------------------------
Netback, $/boe @ 6:1 $25.58 $25.77 $27.49 $27.00
---------------------------------------------------------------------------


General and Administrative Expenses

General and administrative ('G&A") expenses for the year ended December 31, 2007 were $2,970,000 or $4.36 per boe. For the fourth quarter of 2007, G&A expenses were $997,000 or $ 3.21 per boe. For the three and twelve months ended December 31, 2007 Sabretooth capitalized approximately $303,000 and $1,048,00 of G&A expenses related to exploration and development respectively.

For the year ended December 31, 2006, G&A expenses were $1,475,000 or $2.26 per boe. For the fourth quarter of 2006, G&A expenses were $338,000 or $2.53 per boe.

The increase in G&A expense on a per boe basis in 2007, as compared to the same periods in 2006, is mainly attributable to the overall growth of Sabretooth.



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------

$('000s) 2007 2006 2007 2006
--------------------------------------------------------------------------
G&A Expense ($) $997 $338 $2,970 $1,475
Per Unit of
Production
($/boe @6:1) $3.21 $2.53 $4.36 $2.26
--------------------------------------------------------------------------


Interest Expense

Interest expense for the three months ended December 31, 2007 was $973,000 compared to $37,000 for the three months ended December 31, 2006. Interest expense for the year ended December 31, 2007 was $1,410,000 compared to $120,000 for the same period in 2006. The increase is attributable to higher average debt levels as a result of Sabretooth's growth over the past year as well as a result of increased bank debt in 2007.



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------

$('000s) 2007 2006 2007 2006
---------------------------------------------------------------------------
Interest Expense ($) $973 $37 $1,410 $120
Per Unit of
Production
($/boe @6:1) $3.13 $0.28 $2.07 $0.18
---------------------------------------------------------------------------


Depletion, Deprecation and Accretion ("DD&A")

DD&A expense for the three months ended December 31, 2007 was $6,309,000. DD&A expense for the year ended December 31, 2007 was $16,500,000. On a unit of production basis, depletion expense was $20.29 and $24.24 per boe for the three months and year respectively.

DD&A expense for the three months ended December 31, 2006 was $3,071,000. DD&A expense for the year ended December 31, 2006 was $13,463,000. On a unit of production basis, depletion expense was $22.95 and $20.60 per boe for the three months and year respectively.

The per boe increase in the three months and year ended 2007 compared to the same periods in 2006 is mainly due to significant investment in capital projects without a corresponding increase in proven reserves.

The depletion rate is impacted by the costs to acquire, explore and develop reserves of crude oil and natural gas, known as finding, development and acquisition costs. In the early stages of exploration, capital costs may be recognized before proven reserves are fully booked leading to higher initial depletion rates. In addition higher depletion rates also result as new production often receives lower reserves assignments under NI 51-101 due to the naturally unpredictable nature of newer production.

Asset Retirement Obligations

The Company acquired 299 (net 150) new assets subject to retirement obligations during the year ended December 31, 2007. The Bear Ridge acquisition added 267 new assets to our base. $110,000 was recognized as an accretion expense for the fourth quarter of 2007 and $184,000 for the year ended December 31, 2007, resulting in an increase in asset retirement obligations of $3,681,000 for the year.

The Company acquired eight new assets subject to retirement obligations during the year ended December 31, 2006. $14,000 was recognized as an accretion expense for the fourth quarter of 2006 and $38,000 for the year ended December 31, 2006.

Stock Based Compensation

The Company recognizes stock based compensation expense for all stock options granted. For the three and twelve months ended December 31, 2007, Sabretooth recorded $20,000 and $242,000 respectively in stock based compensation expense, with a corresponding increase to contributed surplus, for stock options issued.

For the three and twelve months ended December 31, 2006, Sabretooth recorded $31,000 and $270,000 respectively in stock based compensation expense, with a corresponding increase to contributed surplus, for stock and performance options issued.

Common Shares Outstanding

On November 9, 2006, the Company completed a private placement of 8,000,000 common voting shares at an issue price of $2.00 for gross proceeds of $16,000,000 on a flow-through basis. In accordance with the terms of the offering and pursuant to certain provisions of the Income Tax Act (Canada), the Company renounced, for income tax purposes, exploration expenditures of $16,000,000 to the holders of the flow-through common shares effective December 31, 2006. Future tax cost of approximately $5,000,000 associated with renouncing the expenditures was recorded on the date of renunciation in the first quarter of 2007. As at December 31, 2007, the Company has incurred the full $16,000,000 of qualifying expenditures. Transaction costs were $1,062,000 including fees paid to underwriters.

On March 9, 2007, the shareholders approved the exchange of Common non-voting shares for Common voting shares on a 1- for -1 basis and then to consolidate the Common voting shares on a 4-for-1 basis.

On August 21, 2007 the company issued 18,477,506 common shares at a deemed value of $2.81 per share for total deemed proceeds of approximately $51,927,000 as part of the acquisition of Bear Ridge.

On August 21, 2007 the company issued 1,050,000 warrants at a deemed value of $0.57 per warrant for total deemed proceeds of approximately $598,000 as part of the acquisition of Bear Ridge. Each warrant entitles the holder to acquire one common share on a "flow-through" CDE basis under the Income Tax Act (Canada) at a price of $3.81 pre share. The warrants expire on March 31, 2009.

At December 31, 2007, there are 39,066,000 common shares outstanding.

Income Taxes

The Company has non-capital loss carry-forwards, investment tax credit carry-forwards and Scientific and Experimental Development expenses available to reduce future years' income for tax purposes. The Scientific Research and Development expenses of approximately $22,704,000 available for carry-forward do not expire. The non-capital loss and investment tax credit carry-forwards expire as follows:



Non-capital losses Investment tax credits
Year of expiry $('000s) $('000s)
--------------------------------------- -------------------------
2009 $ 1,904 $ -
2010 - 930
2011 - 1,280
2012 - 672
2013 684 761
2014 3,293 338
2025 9,668
-------------------------------------------------
$ 21,676 $ 3,981
-------------------------------------------------


In addition, the Company has UCC pools of approximately $35,000,000, COGPE pools of approximately $15,000,000, CEE pools of approximately $26,000,000, CDE pools of approximately $6,000,000, and share issuance costs of approximately $4,000,000 which can be used to reduce taxable income in the future.

As at December 31, 2007, $5,871,000 has been recognized as a future income tax asset as the Company believes, based on estimated cash flows from existing reserves, that it is more likely than not to realize these assets.

Capital Expenditures



Three months ended December 31, Year ended December 31,
------------------------------ -----------------------
$('000s) 2007 2006 2007 2006
---------------------------------------------------------------------------
Land acquisition costs $190 $264 $2,058 $4,850
Geological & geophysical $66 $21 $1,812 $1,784
Drilling, completions &
workovers $8,639 $8,383 $23,176 $17,030
Tangible equipment $2,708 $3,294 $7,935 $11,324
Capitalized overhead $363 $319 $1,049 $698
Office furniture &
equipment $47 - $193 $47
---------------------------------------------------------------------------
Total capital
expenditures $12,013 $12,281 $36,223 $35,733
---------------------------------------------------------------------------


Liquidity and Capital Resources

The Company has established three credit facilities with a Canadian chartered bank. Credit facility A is a $55,000,000 revolving operating demand loan which bears interest at the bank prime rate plus 0% to 1.5%, depending on the Company's debt to cash flow ratio. Credit facility B is a $5,000,000 non-revolving acquisition/development demand loan, which bears interest at the bank prime rate plus 0.50%. Credit Facility C is a Revolving Demand Credit Agreement in the face amount of $18,000,000 which bears interest at the bank prime rate. All Credit Facilities are subject to periodic review by the bank and are secured by a general assignment of book debts and a $100,000,000 demand debenture with a first floating charge over all assets of the Company. The Company is authorized to access the credit facilities with prior approval of the Board. The Company is required to meet certain financial based covenants under the terms of this facility. As at December 31, 2007, the Company has drawn $46,256,000 on Facility A, Nil on Facility B, and Nil on Facility C.

The Company holds Asset Backed Commercial Paper which it acquired as part of the Bear Ridge transaction that it has valued at $23,238,000. As at December 31, 2007, the Company held Canadian third party asset-backed commercial paper ("ABCP") with an original cost of $24,147,000. At the dates the Company acquired these investments they were rated R1 (High) and backed by R1 (High) rated assets, and liquidity agreements. These investments matured during the third quarter of 2007 but, as a result of the liquidity issues in the ABCP market, did not settle on maturity. As a result the Company has classified its ABCP as long-term investments.

On August 16, 2007 an announcement was made by a group representing banks, asset providers and major investors that they had agreed in principle to a long-term proposal and interim agreement to convert the ABCP's into long-term floating rate notes maturing no earlier than the scheduled maturity of the underlying assets. On September 6, 2007, a pan-Canadian restructuring committee consisting of major investors was formed. The committee was created to propose a solution to the liquidity problem affecting the ABCP and has retained legal and financial advisors to oversee the proposed restructuring process. On October 16, 2007, it was announced that the committee expected that the restructuring would be completed on or before December 14, 2007. Through to December 14, 2007, by means of Extraordinary Resolutions of the various trusts that had issued ABCP, trading of the ABCP has ceased and investors have committed not to take any action that would precipitate an event of default. On February 29, 2008 it was announced that finalization of the Restructuring Plan was continuing and that details of the approval process will be made available before March 14, 2008. A meeting of note holders is expected to occur in mid April with closing towards the end of April 2008.

The ABCP in which the Company has invested has not traded in an active market since mid-August 2007 and there are currently no market quotations available. The ABCP in which the Company has invested continues to be rated R1 (High, Under Review with Developing implications) by Dominion Bond Rating Service ("DBRS").

The valuation technique used by the Company to estimate the fair value of its investments in ABCP incorporates probability-weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. Discount rates from 11.0% to 8.5% were used for this estimate and an interest rate of 6.25% was used. This evaluation resulted in a reduction of $909,000 to the estimated fair value of the ABCP upon the Company's acquisition of BER (note 5). A recovery of $1,478,000 from the original allowance made in the third quarter was recognized in the fourth quarter due to the increased certainty that the Pan-Canadian restructuring committee will be able to successfully restructure the ABCP and current market conditions. The assumptions used in determining the estimated fair value reflect the public statements made by the Pan-Canadian restructuring committee that it expects the ABCP will be converted into long-term floating rate notes, senior AAA rated and subordinated unrated, with maturities matching the maturities of the underlying assets and bearing market interest rates commensurate with the nature of the underlying assets and their associated cash flows and the credit rating and risk associated with the long-term floating rate notes. The Company has assumed that it will receive 80% of the senior AAA rated notes and 20% of the subordinated unrated notes. The Company has assumed that 100% of the senior AAA rated notes will be recovered and 81% of the subordinated notes will be recovered. Assumptions have been made as to the long-term interest rates to be received from the long-term floating rate notes. The term of the subordinated notes is estimated to be 7 years which approximates the maturity of the assets backing the note.

The ABCP in which the Company has invested has an interest rate of 4.52%. At December 31, 2007 there is $517,000 of interest owing to the Company. Because of the uncertainty regarding receipt of the interest the Company has not accrued this interest income in 2007.

Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a further change in the value of the Company's investment in ABCP which would impact the Company's earnings. It is reasonably possible, based on existing knowledge, that changes in future conditions in the near term could require a material change in the recognized amount. The reduction from the face value could range from $1,050,000 to $500,000 based on alternative reasonable assumptions, although given the nature of the information available, the amount ultimately recovered could vary outside these ranges.

Contractual Obligations

Sabretooth is committed to various contractual obligations and commitments in the normal course of operations and financing activities. These are outlined as follows:

1) Office Leases - The minimum annual net lease payments, exclusive of operating costs are as follows:



2008 164,000
2009 164,000
2010 168,000
2011 143,000
2012 143,000
---------
Thereafter nil
---------
$ 782,000


2) Asset Retirement Obligations - Sabretooth is the owner of oil and natural gas wells and related surface equipment and facilities. These assets will have to be abandoned and the surface returned to its natural state. As at December 31, 2007, total estimated undiscounted future cash flows required to settle these obligations is approximately $13,495,000 which is exclusive of salvage values and adjusted for expected inflation. This estimate is subject to change based on amendments to environmental laws and as new information with respect to the Company's operations become available. Sabretooth estimates that the salvage value of its field equipment would offset a portion of its estimated future asset retirement obligation. Sabretooth does not expect to incur significant asset retirement cost obligations within the next five years.

3) Flow-through Qualifying Expenditures - At December 31, 2006, Sabretooth had an obligation related to the issuance of flow-through common shares to incur approximately $16,000,000 of qualifying expenditures before December 31, 2007. This amount has been fully expended as at December 31, 2007.

4) Flow-through Qualifying Expenditures - Sabretooth assumed obligations related to the Bear Ridge acquisition from issuance of flow-through common shares to incur approximately $24,000,000 of qualifying expenditures before December 31, 2008 and $11,295,000 before March 15, 2009. Approximately $17,100,000 of qualifying expenditures has been incurred to December 31, 2007, with $18,200,000 still to be incurred. The Company also has 1,050,000 CDE warrants which are exercisable at a price of $3.81 and expire March 31, 2009. If they are exercised the Company would have an obligation to spend $4,000,000 of CDE expenditures.

5) The Company, as a result of the acquisition of Bear Ridge, has a contract for gathering and processing fees in the amount of $374,000 for the fiscal year 2008.

Outstanding Share Data

As of the date of this MD&A, Sabretooth had the following securities outstanding:

1) 39,066,000 common voting shares;

2) 3,161,000 stock options.; and

3) 1,050,000 warrants.

Quarterly Information



Financial 2007
----------------------------------------------------------------------------

($ thousands except per share data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenues (including gains (losses)
on financial commodity contract) $14,369 $ 8,547 $ 5,150 $ 4,686
Royalties, net of ARTC 2,246 1,454 578 994
Operating expenses 3,647 1,955 1,186 982
Transportation expenses 521 244 140 173

Net income (loss) 217 (497) 141 3,914
Per Share - basic 0.01 (0.02) 0.01 0.19
Per share - diluted 0.01 (0.02) 0.01 0.18
Funds flow 5,985 3,875 2,177 2,487
Per Share - basic 0.15 0.14 0.11 0.12
Per share - diluted 0.15 0.13 0.10 0.12

Capital expenditures, net 12,013 4,112 6,142 13,956
Acquisition expenditures, net - 24,752 - -
----------------------------------------------------------------------------
Total expenditures $12,013 $28,864 $ 6,142 $13,956
----------------------------------------------------------------------------


Financial 2006
----------------------------------------------------------------------------
($ thousands except per share data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenues (including gains (losses)
on financial commodity contract) $ 5,369 $ 7,485 $ 6,928 $ 9,272
Royalties, net of ARTC 1,290 1,249 983 2,645
Operating expenses 944 965 783 736
Transportation expenses 198 223 130 135

Net income (loss) (646) 699 115 2,144
Per Share - basic (0.03) 0.04 0.01 0.12
Per share - diluted (0.03) 0.04 0.01 0.11
Funds flow 3,094 3,192 4,248 5,388
Per Share - basic 0.16 0.17 0.23 0.29
Per share - diluted 0.15 0.17 0.21 0.27

Capital expenditures, net 12,281 8,633 6,066 8,753
Acquisition expenditures, net - - - -
----------------------------------------------------------------------------
Total expenditures $12,281 $ 8,633 $ 6,066 $ 8,753
----------------------------------------------------------------------------


----------------------------------------------------------------------------
2007 2006
Operations Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Production Volumes
Natural gas (mcf/day) 17,303 10,813 5,140 6,429 8,308 9,418 10,602 11,776
Oil (bbl/day) 325 165 114 103 49 10 3 3
NGLs (bbl/day) 171 36 24 32 21 80 148 178
Total boe/day 3,380 2,003 995 1,206 1,454 1,659 1,918 2,144
-----------------------------------------------------
Average selling price
Natural gas ($per mcf) 6.84 7.12 7.47 7.71 7.09 5.90 6.13 7.58
Oil ($per bbl) 76.55 80.61 63.55 66.14 60.42 69.71 66.21 60.83
NGLs ($per bbl) 75.81 75.89 65.86 57.93 67.11 65.71 70.94 74.25
-----------------------------------------------------
Combined ($per boe) 46.21 46.91 49.84 43.07 43.96 39.29 39.00 47.91
Royalties ($per boe) 7.22 7.89 6.38 9.16 9.64 8.18 5.64 13.71
Operation expense
($per boe) 11.73 10.61 13.09 9.05 7.07 6.32 4.49 3.83
Transportation ($per
boe) 1.68 1.32 1.54 1.60 1.48 1.46 0.74 0.7
----------------------------------------------------------------------------
Netback ($per boe) 25.58 27.09 28.83 23.26 25.77 23.33 28.13 29.67
----------------------------------------------------------------------------


Financial Instruments

The nature of the Company's operations results in exposure to fluctuations in commodity prices. Management continuously monitors commodity prices and initiates instruments to manage exposure to these risks when it deems appropriate. As a means of managing commodity price volatility, the Company enters into various derivative financial instrument agreements and physical contracts. Collars ensure that the commodity prices realized will fall into a contracted range for a contracted sale volume based on the monthly index price. Monthly gains and losses are determined based on the differential between the AECO daily index and the AECO monthly index when the monthly index price falls in between the floor and the ceiling. Derivative financial instruments are mark-to-market and are recorded on the consolidated balance sheet as either an asset or liability with the change in fair value recognized in net earnings.

The following information presents all positions for the derivative financial instruments outstanding as at December 31, 2007.



----------------------------------------------------
Term Volume Price Basis
----------------------------------------------------
November 1, 2007 3,000 $7.75 floor AECO
to March 31, 2008 GJ/day $10.00 ceiling
----------------------------------------------------
January 1, 2008 to 3,150 $6.50 floor AECO
December 31, 2008 GJ/day $10.00 ceiling
----------------------------------------------------


Subsequent to year end, the Company entered into a swap to sell 3,000 GJ/day of natural gas for the period of April 1, 2008 to March 31, 2009 with a price of $7.04/GJ based on AECO.

Subsequent to year end, the Company entered into a second swap to sell 6,000 GJ/day of natural gas for the period of April 1, 2008 to March 31, 2009 with a price of $7.08/GJ based on AECO.

Realized gains totalling $834,000 for the three months ending and $2,700,000 for the year ended December 31, 2007 (December 31, 2006 - $316,000) respectively, from the derivatives was recognized in income and the fair value of the swap plus costless collars outstanding at December 31, 2007 was approximately $843,000.

Off Balance Sheet Arrangements

The Company does not presently utilize any off-balance sheet arrangements to enhance its liquidity and capital resource positions, or for any other purpose. During the period ended December 31, 2007, Sabretooth Energy Ltd. did not enter into any off-balance sheet transactions.

Related Party Transactions

During 2007, Sabretooth entered into commercial business transactions with the following related parties:

a) A director of the Company is a partner of a law firm that provides legal services to the Company. During the period ended December 31, 2007, the Company paid a total of $56,000 (December 31, 2006 - $13,000) to this firm for legal fees and disbursements, of which $2,000 is included in accounts payable and accrued liabilities at December 31, 2007 (December 31, 2006 - $2,000). Of the total amount paid $29,000 has been included as transaction costs of Bear Ridge, and the remaining amount of $27,000 has been included as general and administrative expense.

b) A director of the Company was the Chairman of a corporation that provides drilling services to the Company. During the year ended December 31, 2007, the Company paid a total of $1,980,000 for drilling services, which has been included in property and equipment (December 31, 2006 - $1,682,000). Of this amount, $nil is included in accounts payable and accrued liabilities at December 31, 2007 (December 31, 2006 - $250,000). The corporation ceased to be a related party at December 31, 2007.

c) A director of the Company was a owner of a corporation that provides drilling services to the Company. During the year ended December 31, 2007, the Company paid a total of $1,010,000 for drilling services, which has been included in property and equipment (December 31, 2006 - $18,000). Of this amount, $195,000 is included in accounts payable and accrued liabilities at December 31, 2007 (December 31, 2006 - $Nil).

These transactions have been recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Disclosure Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining the Company's disclosure controls and procedures, including adherence to the Disclosure Policy adopted by the Corporation. The Disclosure Policy requires all staff to keep the Company's Chief Executive Officer and Chief Financial Officer fully apprised of all material information affecting the Company so that they may evaluate and discuss this information and determine the appropriateness and timing for public release. Access to such material information by the Chief Executive Officer and Chief Financial Officer is facilitated by the fact that there are so few members of the Company's senior management and there is frequent and regular communication among all of them.

The Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as of December 31, 2007, have concluded that the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would have been made known to them. It should be noted that while the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Internal Controls over Financial Reporting

The Chief Executive Officer and Chief Financial Officer are also responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.

Management has designed internal controls over financial reporting as of December 31, 2007. The relatively small size of the Company makes the identification and authorization process relatively efficient; however, during the review of the design of internal controls over financial reporting it was noted that, due to the limited number of staff at Sabretooth, it is not feasible to achieve complete segregation of incompatible duties nor does the Company have a sufficient number of finance personnel with all the technical accounting knowledge to address all complex and non-routine accounting transactions that may arise, which may lead to the possibility of inaccuracies in financial reporting. The Company has employed knowledgeable and competent accounting staff to ensure that high-quality financial reporting and other internal controls over financial reporting have been designed which provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Management and the Board of Directors work to mitigate the risk of a material misstatement in financial reporting; however, a control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Changes in Accounting Policies

Financial Instruments

Effective January 1, 2007, the Company adopted a series of new standards released by the Canadian Institute of Chartered Accountants, which establish guidance for the recognition and measurement of financial instruments. Section 1530 "Comprehensive Income", Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation" and Section 3865 "Hedges" were released in April 2005 and are effective for interim and annual financial statement years beginning on or after October 1, 2006. To accommodate these new sections, there have been a number of amendments to other existing accounting standards. These policies provide comprehensive requirements for the recognition and measurement of financial instruments, introduce a new component of equity referred to as accumulated other comprehensive income ("AOCI"), and a Statement of Comprehensive Income. In accordance with the transitional provision of these policies, comparative interim financial statements are not to be restated.

Under these new standards, all financial instruments, including derivatives, are to be recognized on the balance sheet. Derivatives are to be measured at fair value and unrealized gains and losses reported in the statement of operations unless the "normal sale and purchase" exemption is utilized or the derivatives are designated as cash flow or net investment hedges. All changes in fair value are included in earnings unless cash flow hedge or net investment accounting is used, in which case, changes in fair value are recorded in other comprehensive income to the extent the hedge is effective, and in earnings to the extent it is ineffective. The Company has not identified any material embedded derivatives in any of its financial instruments. The Company has elected to account for its commodity sales contracts and other non-financial contracts, held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements on an accrual basis. The Company's other financial instruments (accounts receivable and accounts payable) are measured at amortized cost using the effective interest rate method. Transaction costs are added to the amount of the associated financial instrument and amortized accordingly.

Section 3865 established standards for when and how hedge accounting may be applied. Hedge accounting continues to be optional and the Company does not currently apply hedge accounting.

There has been no impact on the financial statements by adopting the new requirements.

Accounting Changes

Effective January 1, 2007 the Company adopted the revised recommendations of the CICA Handbook Section 1506, Accounting Changes. Under the revised standards, voluntary changes in accounting policies are permitted only if they result in financial statements which provide more reliable and relevant information. Accounting policy changes are applied retrospectively unless it is impractical to determine the period or cumulative impact of the change. Corrections of prior period errors are applied retrospectively and changes in accounting estimates are applied prospectively by including these changes in earnings. These standards are effective for all changes in accounting policies, changes in accounting estimates and corrections of prior period errors initiated in periods beginning on or after January 1, 2007.

In addition, the Company has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Company:

a) Financial Instruments - Disclosures and Presentation

As of January 1, 2008, the Company will be required to adopt two new CICA standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. These Handbook Sections will replace existing Handbook Section 3861, Financial Instruments - Presentation and Disclosure. The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements.

b) Capital Disclosures

Also as of January 1, 2008, the Company will be required to adopt Handbook Section 1535, Capital Disclosures which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements.

Both new standards were issued in December 2006, and the Company is assessing the impact on its financial statements.

Convergence of Canadian GAAP with International Financial Reporting Standards

In 2006, Canada's Accounting Standards Board (AcSB) issued a strategic plan that will result in Canadian GAAP, as it applies to publicly accountable entities, being converged with International Financial Reporting Standards over a transitional period. The AcSB is expected to develop and release a detailed implementation plan with a transition period initially indicated to be five years. The Corporation will consider the effect that this implementation plan might have on the financial statements during the transition period.

Application of Critical Accounting Estimates

The significant accounting policies used by Sabretooth are disclosed in note 3 to the Audited Consolidated Financial Statements for the year ended December 31, 2007. Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates on a regular basis. The emergence of new information and changed circumstance may result in actual results or changes to estimate amounts that differ materially from current estimates. The following discussion identifies the critical accounting policies and practices of the Company and helps assess the likelihood of materially different results being reported.

Application of Critical Accounting Estimates

Reserves

Under the National Instrument 51-101 (NI 51-101) "Proved" reserves are defined as those reserves that can be estimated with a high degree of certainty to be recoverable. The level of certainty should result in at least a 90% probability that the quantities actually recovered will equal or exceed the estimated Proved reserves. It does not mean that there is a 90% probability that the Proved reserves will be recovered; it means that there must be at least a 90% probability that the given amount or more will be recovered. "Proved plus Probable" reserves are the most likely case and are based on a 50% certainty that they will equal or exceed the reserves estimated.

These oil and gas reserve estimates are made using all available geological and reservoir data, as well as historical production data. All of the Company's reserves were evaluated and reported on by an independent qualified reserves evaluator. However, revisions can occur as a result of various factors including: actual reservoir performance, change in price and cost forecasts or a change in the Company's plans. Reserve changes will impact the financial results as reserves are used in the calculation of depletion and are used to assess whether asset impairment occurs. Reserve changes also affect other Non-GAAP measurements such as finding and development costs; recycle ratios and net asset value calculations.

Depletion

The Company follows the full cost method of accounting for oil and natural gas properties. Under this method, all costs related to the acquisition of, exploration for and development of oil and natural gas reserves are capitalized whether successful or not. Depletion of the capitalized oil and natural gas properties and depreciation of production equipment which includes estimated future development costs less estimated salvage values are calculated using the unit-of-production method, based on production volumes in relation to estimated proven reserves.

An increase in estimated proved reserves would result in reduction in depletion expense. A decrease in estimated future development costs would also result in a reduction in depletion expense.

Unproved Properties

The cost of acquisition and evaluation of unproved properties are initially excluded from the depletion calculation. An 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 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.

Ceiling Test

The ceiling test is a cost recovery test intended to identify and measure potential impairment of assets. An impairment loss is recorded if the sum of the undiscounted cash flows expected from the production of the proved reserves and the lower of cost and market of unproved properties does not exceed the carrying values of the petroleum and natural gas assets. An impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk free rate. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment as a result of this ceiling test will be charged to operation as additional depletion and depreciation expense.

Asset Retirement Obligations

The Company records a liability for the fair value of legal obligations associated with the retirement of petroleum and natural gas assets. The liability is equal to the discounted fair value of the obligation in the period in which the asset is recorded with an equal offset to the carrying amount of the asset. The liability then accretes to its fair value with the passage of time and the accretion is recognized as an expense in the financial statements. The total amount of the asset retirement obligation is an estimate based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total amount of the estimated cash flows required to settle the asset retirement obligation, the timing of those cash flows and the discount rate used to calculate the present value of those cash flows are all estimates subject to measurement uncertainty. Any change in these estimated would impact the asset retirement liability and the accretion expense.

Stock Based Compensation

The Company uses fair value accounting for stock-based compensation. Under this method, all equity instruments awarded to employees and the cost of the service received as considerations are measured and recognized based on the fair value of the equity instruments issued. Compensation expense is recognized over the period of related employee service, usually the vesting period of the equity instrument awarded.

Income Taxes

The determination of income and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.

Acquisition of Bear Ridge Resources Ltd.

Management makes various assumptions in determining the fair values of any acquired company's assets and liabilities in a business combination. The most significant assumptions and judgments made relate to the estimation of the fair value of Sabretooth's shares issued in the transaction and the fair value of the oil and natural gas properties acquired. To determine the fair value of the oil and gas properties we estimated oil and natural gas reserves and future prices of oil and natural gas.

Asset Backed Commercial Paper ("ABCP")

See "Liquidity and Capital Resources" section for an in-depth discussion of the estimates used to value the ABCP.

Other Estimates

The accrual method of accounting requires management to incorporate certain estimates including estimates of revenues, royalties and operating costs as at a specific reporting date, but for which actual revenues and costs have not yet been received. In addition, estimates are made on capital projects which are in progress or recently completed where actual costs have not been received by the reporting date. The Company obtains the estimates from the individuals with the most knowledge of the activity and from all project documentation received. The estimates are reviewed for reasonableness and compared to past performance to assess the reliability of the estimates. Past estimates are compared to actual results in order to make informed decisions on future estimates.

Risks and Uncertainties

The Company is engaged in the exploration, development, production and acquisition of crude oil and natural gas. This business is inherently risky and there is no assurance that hydrocarbon reserves will be discovered and economically produced. Financial risks associated with the petroleum industry include fluctuations in commodity prices, interest rates and currency exchange rates along with the credit risk of the Company's industry partners. Operational risks include reservoir performance uncertainties, the reliance on operators of our non-operated properties, competition, environmental and safety issues, and a complex and changing regulatory environment. Sabretooth is taking steps to reduce its business risks by increasing the number of core areas it has and increasing the number of areas it operates. This will spread the operational risks over several areas, reducing the potential impact on Sabretooth of unfavourable operational issues that may occur at any one area. It will also enable Sabretooth to control the timing, direction and costs related to exploration and development activities.

Environmental and safety risks are mitigated through compliance with provincial and federal environmental and safety regulations, by maintaining adequate insurance, and by adopting appropriate emergency response and safety procedures. The Company manages commodity pricing uncertainties with a risk management program that encompasses a variety of financial instruments. These include forward sales contracts on natural gas production and financial sales contracts.

Outlook

Sabretooth's current production is approximately 3,300 boe/d.

In 2008, the Company has budgeted approximately $55 million for its proposed capital programs. These expenditures are expected to be funded by bank debt and cash flow. A substantial amount of the Company's spending is discretionary in nature. The Company generally has a high working interest and operational control of its major properties. Therefore, timing of expenditures can be matched to financial resources.

The Company has access to credit facilities of $78 million subject to periodic review. As at February 29, 2008, the Company has drawn approximately $48.3 million on its operating line of credit, and holds asset backed commercial paper with a face value of approximately $24.2 million.

Sabretooth Energy Ltd.

Consolidated Financial Statements

December 31, 2007 and 2006

Management's Responsibility Report

The management of Sabretooth Energy Ltd. is responsible for the financial information and operating data presented in this annual report.

The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise as they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Financial information presented elsewhere in this annual report has been prepared on a basis consistent with that in the financial statements.

Sabretooth Energy Ltd. maintains systems of internal accounting and administrative controls. These systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Company's assets are properly accounted for and adequately safeguarded.

The Board of Directors is responsible for reviewing and approving the financial statements and ensures that management fulfills its responsibilities for financial reporting.

The Board of Directors meets regularly with management and the external auditors to discuss internal controls and reporting issues and to satisfy itself that each party is properly discharging its responsibilities. It reviews the financial statements and the external auditors' report. The Board of Directors also considers, for approval by the shareholders, the engagement or re-appointment of the external auditors.

Collins Barrow Calgary LLP, the external auditors, have audited the financial statements in accordance with Canadian generally accepted auditing standards on behalf of the shareholders. Collins Barrow Calgary LLP has full and free access to the Board of Directors.



(signed) (signed)
Marshall Abbott Joe McFarlane
Chairman Chief Financial Officer
Chief Executive Officer
February 29, 2008


Auditors' Report

To the Shareholders Sabretooth Energy Ltd.

We have audited the consolidated balance sheets of Sabretooth Energy Ltd. as at December 31, 2007 and 2006 and the consolidated statements of operations, comprehensive income and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.



(signed)
CHARTERED ACCOUNTANTS

Calgary, Alberta
February 29, 2008



Sabretooth Energy Ltd.
Consolidated Balance Sheets
December 31, 2007 and 2006
(expressed in thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2007 2006
----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ - $ 4,343
Accounts receivable 9,175 11,556
Deposits and prepaid expenses 1,920 277
Commodity contracts (note 17(b)) 843 950
---------------------------------
11,938 17,126

Investment in commercial paper (note 6) 23,238 -
Property and equipment (note 7) 128,563 45,017
Future income taxes (note 10(a)) 5,871 5,922
---------------------------------

$ 169,610 $ 68,065
---------------------------------
---------------------------------

Liabilities and Shareholders' Equity
Current Liabilities
Bank indebtedness (note 8) $ 46,256 $ -
Accounts payables and accrued liabilities 17,126 17,039

---------------------------------
63,382 17,039

Asset retirement obligations (note 9) 4,560 879
---------------------------------
67,942 17,918
---------------------------------

Shareholders' Equity
Share capital (note 11) 194,994 148,088
Warrants (note 11( c ) ) 598 -
Contributed surplus (note 12) 2,720 2,478
Deficit (96,644) (100,419)
---------------------------------
101,668 50,147
---------------------------------

$ 169,610 $ 68,065
---------------------------------
---------------------------------

Contingency and Commitments (notes 15 and 16)

(signed) (signed)
G. Marshall Abbott S. Wil VanLoh Jr.
Director Director

The accompanying notes are an integral part of these financial statements

Sabretooth Energy Ltd.
Consolidated Statements of Operations, Comprehensive Income and Deficit
For the years ended December 31, 2007 and 2006
(expressed in thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2007 2006

----------------------------------------------------------------------------
Revenues
Production revenue $ 30,121 $ 27,613
Royalties, net of ARTC (5,272) (6,167)
Realized gain on hedge contracts (note 17(b)) 2,700 316
Unrealized gain (loss) on commodity
contracts (note 17(b)) (1,563) 950
Interest and other income 13 175
-------------------------------

25,999 22,887
-------------------------------

Expenses
Operating costs 7,770 3,429
Transportation 1,078 686
General and administrative, net of recoveries 2,970 1,475
Depletion, depreciation, and amortization 16,500 13,463
Accretion expense 184 38
Interest 1,410 120
Stock-based compensation (note 11(e)) 242 270
Recovery of valuation allowance on investment
in commercial paper (note 6) (1,478) -
-------------------------------

28,676 19,481
-------------------------------
Income (loss) before income taxes
(2,677) 3,406
-------------------------------

Income taxes (note 10(b))
Current tax (recovery) (190) 305
Future tax (recovery) (6,262) 789
-------------------------------
(6,452) 1,094
-------------------------------

Net income and comprehensive income 3,775 2,312
Deficit, beginning of year (100,419) (100,243)

Excess of cost of shares acquired over
stated value (note 11(b)(iv)) - (2,488)
-------------------------------

Deficit, end of year $ (96,644) $ (100,419)
-------------------------------
-------------------------------

Net income per share (note 11(f))

Basic $ 0.14 $ 0.12
Diluted $ 0.14 $ 0.12

The accompanying notes are an integral part of these financial statements



Sabretooth Energy Ltd.
Consolidated Statements of Cash Flows
For the years ended December 31, 2007 and 2006
(expressed in thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2007 2006
----------------------------------------------------------------------------
Cash flows from (used in)

Operating activities
Net income (loss) for the year $ 3,775 $ 2,312
Items not affecting cash
Depletion, depreciation, and amortization 16,500 13,463
Accretion expense 184 38
Stock-based compensation 242 270
Unrealized loss (gain) on commodity
contracts 1,563 (950)
Recovery of valuation allowance on
investment in commercial paper (note 6) (1,478) -
Future income taxes (recovery) (6,262) 789
-------------------------------
14,524 15,922
Net change in non-cash working capital
(note 13) (2,435) 1,508
-------------------------------

12,089 17,430
-------------------------------

Investing activities
Acquisition of Bear Ridge, net of cash
acquired (note 5) (24,752) -
Property and equipment expenditures, net (36,223) (35,733)
Proceeds from note receivable - 115
Net change in non-cash working capital
(note 13) (1,683) 3,622
-------------------------------

(62,650) (31,996)
-------------------------------

Financing activities
Exercise of options for common shares - 4,647
Proceeds from bank indebtedness, net 46,256 -
Repurchase of common shares including
transaction costs - (19,304)
Proceeds from issuance of common
shares, net of issuance costs (30) 24,421
-------------------------------

46,226 9,764
-------------------------------


Decrease in cash and cash equivalents (4,343) (4,802)

Cash and cash equivalents beginning
of year 4,343 9,145
-------------------------------
Cash and cash equivalents end of year $ - $ 4,343
-------------------------------
-------------------------------

Supplemental cash flows disclosure:
Interest paid $ 1,410 $ 120
-------------------------------
Taxes paid (recovered) $ (190) $ 305
-------------------------------

The accompanying notes are an integral part of these financial statements


Sabretooth Energy Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007 and 2006

1. Nature of operations

Sabretooth Energy Ltd. is engaged in the acquisition, exploration, development and production of petroleum and natural gas reserves on Western Canada.

2. Basis of presentation

These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). These statements include all assets, liabilities, revenues and expenses of Sabretooth Energy Ltd. and its wholly-owned subsidiaries, 1175043 Alberta Ltd. and Bear Ridge Resources Ltd. collectively referred to as the "Company" or "Sabretooth". On January 1, 2008 Bear Ridge Resources Ltd. was amalgamated into Sabretooth.

3. Significant accounting policies

Cash equivalents

Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are defined as highly liquid investments with terms to maturity at acquisition of three months or less.

Financial Instruments and Derivatives

Cash and cash equivalents are designated as held-for-trading instruments and are measured at carrying value, which approximates fair value due to the short-term nature of these instruments. Investment in commercial paper is designated as held-for-trading and is measured at fair value with changes in fair value recognized in earnings. Accounts receivable and accrued revenues are designated as loans and receivables. Accounts payable and accrued liabilities and bank indebtedness are designated as other financial liabilities. All risk management assets and liabilities are derivative financial instruments and classified as held-for-trading.

The Company may use various types of derivative financial instruments to manage risks associated with natural gas price fluctuations. These instruments are not used for trading or speculative purposes. Proceeds and costs realized from holding the related contracts are recognized at the time each transaction under a contract is settled. For the unrealized portion of such contracts, the Company utilizes the fair value method of accounting. The fair value is based on an estimate of the amounts that would have been paid to or received from counter parties to settle these instruments given future market prices and other relevant factors. The method requires the fair value of the derivative financial instruments to be recorded at each balance sheet date with unrealized gains or losses on those contracts recorded through net earnings. Transaction costs, if any, are added to the amounts of the associated financial instruments and amortized accordingly.

An embedded derivative is a component of a contract that affects the terms in relation to another factor. These hybrid contracts are considered to consist of a "host" contract plus an embedded derivative. The embedded derivative is separated from the host contract and accounted for as a derivative only if certain conditions are met. The Company has not identified any embedded derivatives which require separate recognition and measurement.

Property and equipment

Cost

The Company follows the full cost method of accounting whereby all costs relating to the acquisition of, the exploration for and development of petroleum and natural gas reserves are initially capitalized and accumulated in cost centers by country. Costs capitalized include land acquisition costs, geological and geophysical expenditures, rentals on undeveloped properties, costs of drilling productive and non-productive wells, lease and well equipment and that portion of general and administrative expenses directly related to exploration and development activities.

Gains and losses on disposals of petroleum and natural gas properties are recognized only when crediting the proceeds to the full cost pool would result in a change of 20% or more in the depletion and depreciation rate.

Other property and equipment are recorded at cost.

Depletion, depreciation and amortization

Capitalized costs of petroleum and natural gas properties and related equipment are depleted and depreciated using the unit-of-production method based on the Company's share of gross proved petroleum and natural gas reserves as determined by independent engineers. For the purpose of this calculation, production and reserves of petroleum and natural gas are converted to a common unit of measurement on the basis of their relative energy content, where six thousand cubic feet of natural gas equates to one barrel of oil.

Costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion and depreciation until it is determined that proved reserves are attributable to the properties or impairment occurs.

Other property and equipment are amortized over 3 to 5 years on a straight line basis.

Impairment (Ceiling Test)

Petroleum and natural gas assets are evaluated in each reporting period to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of all petroleum and natural gas assets. If the carrying value of the petroleum and natural gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using future prices and costs and are discounted using a risk-free interest rate.

Asset retirement obligations

The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred and records a corresponding increase in the carrying value of the related long-lived asset. The fair value is determined through a review of engineering studies, industry guidelines, and management's estimates on a site-by-site basis. The liability is subsequently adjusted for the passage of time, and is recognized as an accretion expense in the statement of operations. The liability is also adjusted due to revisions in either the timing or the amount of the original estimated cash flows associated with the liability. The increase in the carrying value of the asset is depleted using the unit of production method based on estimated gross proved reserves as determined by independent engineers.

Flow-through shares

The Company, from time to time, issues flow-through shares to finance a portion of its capital expenditure program. Pursuant to the terms of the flow-through share agreements, the tax deductions associated with the expenditures are renounced to the subscribers. Accordingly, share capital is reduced and a future tax liability is recorded equal to the estimated amount of future income taxes payable by the Company as a result of the renunciations, when the expenditures are renounced.

Per share amounts

Basic per share amounts are computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted per share amounts are calculated giving effect to the potential dilution that would occur if stock options and warrants were exercised. The treasury stock method is used to determine the dilutive effect of stock options and warrants. The treasury stock method assumes that proceeds received from the exercise of options and warrants for which the exercise price is less then market price plus the unamortized portion of stock based compensation are used to repurchase common shares at the average market price for the period.

Revenue recognition

Revenue from the sale of petroleum and natural gas is recognized based on volumes delivered to customers at contractual delivery points and rates. The costs associated with the delivery, including operating and maintenance costs, transportation and production-based royalty expenses are recognized in the same period in which the related revenue is earned and recorded.

Transportation expense

Transportation costs are presented as an expense in the consolidated statements of operations and deficit. In British Columbia, there is an infrastructure in place that enables natural gas producers to avoid facility construction in exchange for regulated gathering, processing and transmission fees. This all-in charge is included in transportation expense.

Joint venture accounting

Substantially all of the Company's exploration, development and production activities are conducted jointly with others. These financial statements reflect only the Company's proportionate interest in such activities.

Stock-based compensation

The Company has a stock option plan as described in note 11(d). The Company issues stock options and performance options to directors, officers, employees and other service providers. Compensation costs, attributable to stock options and performance options granted, is measured at fair value at the date of grant and expensed over the vesting period with a corresponding increase in contributed surplus. When stock options are exercised, the cash proceeds together with the amount previously recorded as contributed surplus is recorded as share capital. The Company does not incorporate an estimated forfeiture rate for stock options and performance options that will not vest, but accounts for forfeitures as they occur.

Income taxes

Future income taxes are accounted for using the liability method of income tax allocation. Under the liability method, income tax assets and liabilities are recorded to recognize future tax inflows and outflows arising from the settlement or recovery of assets and liabilities at the carrying values. Income tax assets are also recognized for the benefits from tax losses and deductions that cannot be identified with particular assets or liabilities, provided those liabilities are more likely than not to be realized. Future income tax assets and liabilities are determined based on the substantially enacted tax laws and rates that are anticipated to apply in the periods of realization.

Measurement uncertainty

The preparation of financial statements in conformity with Canadian generally accepted accounting principles 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 dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates relate primarily to unsettled transactions and events as of the date of the consolidated financial statements. Actual results could differ from these estimates.

The amounts recorded for depletion, depreciation and amortization of property and equipment, the provision for asset retirement obligations and the valuation of property and equipment are based on estimates of proved reserves, production rates, future petroleum and natural gas prices, future costs and the remaining lives and period of future benefit of the related assets.

The amounts recorded relating to the fair value of stock options and issued and the resulting income effect (note 11(e)) are based on estimates of the future volatility of the Company's share price, expected lives of the options, expected dividends and other relevant assumptions.

The amount recorded relating to the fair value of investment in commercial paper is based on a variety of estimates as further described in Note 6.

The amounts recorded for future income tax assets and future tax expense (recovery) are based on estimates of the probability of the Company utilizing certain tax pools and assets which, in turn, is dependent on estimates of proved and probable reserves, production rates and future petroleum and natural gas prices.

The value assigned to common shares and warrants issued to acquire Bear Ridge Resources Ltd. ("Bear Ridge"), and the allocation of the purchase price to the net assets of Bear Ridge at the acquisition dates are based on estimates of numerous factors affecting valuation including discount rates, proved and probable reserves and other factors.

The fair value of commodity contracts, and the resultant unrealized gain (loss) on commodity contracts is based on estimates of future natural gas price.

By their nature, these estimates are subject to measurement uncertainty and the effect of changes in such estimates on the financial statements of future periods could be significant.

4. Changes in Accounting Policies

Financial Instruments

Effective January 1, 2007, the Company adopted the following new Canadian Institute of Chartered Accountants ("CICA") Handbook sections: 3855 Financial Instruments - Recognition and Measurement, 1530 Comprehensive Income, 3861 Financial Instruments - Disclosure and Presentation and 3865 Hedges.

These policies provide comprehensive requirements for the recognition and measurement of financial instruments, introduce a new component of equity referred to as accumulated other comprehensive income ("AOCI"), and a Statement of Comprehensive Income. In accordance with the transitional provision of these policies, comparative financial statements are not to be restated.

Section 3855 prescribes when a financial asset, financial liability or non-financial derivative is to be recognized on the balance sheet and at what amount, requiring fair value of cost-based measures under different circumstances. All financial instruments must be classified as one of the following five categories: held-for-trading; held-to-maturity instruments; loans and receivables; available-for-sale financial assets; or other financial liabilities. All financial instruments, with the exception of loans and receivables, held-to-maturity investments and other financial liabilities measured at amortized cost, are reported on the balance sheet at fair value. Subsequent measurement and changes in fair value will depend on their initial classification. Available-for-sale financial assets are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in earnings.

Section 1530 established standards for the reporting and presenting of comprehensive income and other comprehensive income. Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources and other comprehensive income comprises revenue, expenses, gains and losses that are recognized in comprehensive income but excluded from net income.

Derivatives are to be measured at fair value and unrealized gains and losses reported in the statement of operations unless the "normal sale and purchase" exemption is utilized or the derivatives are designated as cash flow or net investment hedges. All changes in fair value are included in earnings unless cash flow hedge or net investment accounting is used, in which case, changes in fair value are recorded in other comprehensive income to the extent the hedge is effective, and in earnings to the extent it is ineffective. The Company has not identified any material embedded derivatives in any of its financial instruments.

Section 3865 established standards for when and how hedge accounting may be applied. Hedge accounting continues to be optional and the Company does not currently apply hedge accounting.

There has been no impact on the financial statements by adopting the new policies. There were no items that needed to be recognized in AOCI for the year ended December 31, 2007.

Accounting Changes

Effective January 1, 2007 the Company adopted the revised recommendations of the CICA Handbook Section 1506, Accounting Changes. Under the revised standards, voluntary changes in accounting policies are permitted only if they result in financial statements which provide more reliable and relevant information. Accounting policy changes are applied retrospectively unless it is impractical to determine the period or cumulative impact of the change. Corrections of prior period errors are applied retrospectively and changes in accounting estimates are applied prospectively by including these changes in earnings. These standards are effective for all changes in accounting policies, changes in accounting estimates and corrections of prior period errors initiated in periods beginning on or after January 1, 2007.

In addition, the Company has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Company:

i) Financial Instruments - Disclosures and Presentation

As of January 1, 2008, the Company will be required to adopt two new CICA standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. These Handbook Sections will replace existing Handbook Section 3861, Financial Instruments - Presentation and Disclosure. The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements.

ii) Capital Disclosures

Also as of January 1, 2008, the Company will be required to adopt Handbook Section 1535, Capital Disclosures which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements.

Both new standards were issued in December 2006 and the Company is assessing the impact on its financial statements.

iii) International Financial Reporting Standards

In January 2006, the CICA Accounting Standards Board adopted a strategic plan for the direction of accounting standards in Canada. As part of the plan, accounting standards in Canada for public companies will converge with International Financial Reporting Standards ("IFRS") on January 1, 2011. The Corporation continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.

5. Business Combination

On August 21, 2007 the Company acquired all of the issued and outstanding shares of Bear Ridge, an Alberta-based oil & gas company whose shares were listed on the TSX, for 18,477,506 common voting shares and 1,050,000 warrants and approximately $59,013,000 in cash including transaction costs. The transaction was accounted for using the purchase method whereby the assets acquired and liabilities assumed are recorded at their fair value. The accounts of the Company include the results of Bear Ridge effective August 21, 2007.

The purchase price equation is as follows:



$(000's)
----------------------------------------------------------------------------
Cost of Acquisition
----------------------------------------------------------------------------

Cash $ 56,813
Common shares (18,477,506 at $2.81 per share) 51,927
Warrants (1,050,000 at $0.57 per warrant) 598
Transaction costs 2,200
----------------------------------------------------------------------------
Total $ 111,538
----------------------------------------------------------------------------


$(000's)
----------------------------------------------------------------------------
The Fair Value of the Assets and Liabilities
Acquired Have Been Allocated as Follows:
----------------------------------------------------------------------------

Cash and cash equivalents $ 34,261
Accounts receivable 6,362
Deposits and prepaid expenses 94
Commodity contracts 1,456
Investment in commercial paper (note 6) 21,760
Property and equipment 63,370
Future tax liability, net of previously unrecognized tax
assets of the Company (1,322)
Accounts payable and accrued liabilities (11,399)
Asset retirement obligations (3,044)
----------------------------------------------------------------------------
Total $ 111,538
----------------------------------------------------------------------------


The attributed values of the common shares and warrants issued have been excluded from the consolidated statement of cash flows as non-cash transactions.

Each warrant entitles the holder to acquire one common share on a "flow-through" basis under the Income Tax Act (Canada) at a price of $3.81 per share. The warrants expire on March 31, 2009.

There is one dissenting shareholder to the Bear Ridge transaction (note 15).

6. Investment in Commercial Paper

The Company holds Asset Backed Commercial Paper which it acquired as part of the Bear Ridge transaction (note 5) that it has valued at $23,238,000 at December 31, 2007. As at December 31, 2007, the Company held Canadian third party asset-backed commercial paper ("ABCP") with an original cost of $24,147,000. At the dates the Company acquired these investments they were rated R1 (High) and backed by R1 (High) rated assets, and liquidity agreements. These investments matured during the third quarter of 2007 but, as a result of the liquidity issues in the ABCP market, did not settle on maturity. As a result the Company has classified its ABCP as long-term investments.

On August 16, 2007 an announcement was made by a group representing banks, asset providers and major investors that they had agreed in principle to a long-term proposal and interim agreement to convert the ABCP's into long-term floating rate notes maturing no earlier than the scheduled maturity of the underlying assets. On September 6, 2007, a Pan-Canadian restructuring committee consisting of major investors was formed. The committee was created to propose a solution to the liquidity problem affecting the ABCP and has retained legal and financial advisors to oversee the proposed restructuring process. On October 16, 2007, it was announced that the committee expected that the restructuring would be completed on or before December 14, 2007. Through to December 14, 2007, by means of Extraordinary Resolutions of the various trusts that had issued ABCP, trading of the ABCP has ceased and investors have committed not to take any action that would precipitate an event of default. On February 29, 2008 it was announced that finalization of the Restructuring Plan was continuing and that details of the approval process will be made available before March 14, 2008. A meeting of note holders is expected to occur in mid April with closing towards the end of April 2008.

The ABCP in which the Company has invested has not traded in an active market since mid-August 2007 and there are currently no market quotations available. The ABCP in which the Company has invested continues to be rated R1 (High, Under Review with Developing implications) by Dominion Bond Rating Service ("DBRS").

The valuation technique used by the Company to estimate the fair value of its investments in ABCP incorporates probability-weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. Discount rates from 11.0% to 8.5%, which are not based on observed market prices or rates, were used for this estimate and an interest rate of 6.25% was assumed. This evaluation resulted in a fair value of $909,000 below the face value of the ABCP. A recovery of $1,478,000 from the original allowance made in the third quarter upon the acquisition of Bear Ridge (note 5) was recognized in the fourth quarter due to the increased certainty that the Pan-Canadian restructuring committee will be able to successfully restructure the ABCP and current market conditions. The assumptions used in determining the estimated fair value reflect the public statements made by the Pan-Canadian restructuring committee that it expects the ABCP will be converted into long-term floating rate notes, senior AAA rated and subordinated unrated, with maturities matching the maturities of the underlying assets and bearing market interest rates commensurate with the nature of the underlying assets and their associated cash flows and the credit rating and risk associated with the long-term floating rate notes. The Company has assumed that it will receive 80% of the senior AAA rated notes and 20% of the subordinated unrated notes. The Company has assumed that 100% of the senior AAA rated notes will be recovered and 81% of the subordinated notes will be recovered. Assumptions have been made as to the long-term interest rates to be received from the long-term floating rate notes. The term of the subordinated notes is estimated to be 7 years which approximates the maturity of the assets backing the note.

The ABCP in which the Company has invested has an interest rate of 4.52% . At December 31, 2007 there is $517,000 of interest owing to the Company. Because of the uncertainty regarding receipt of the interest the Company has not accrued this interest income in 2007.

Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a further change in the value of the Company's investment in ABCP which would impact the Company's earnings. It is reasonably possible, based on existing knowledge, that changes in future conditions in the near term, could require a material change in the recognized amount. The reduction from the face value could range from $1,050,000 to $500,000 based on alternative reasonable assumptions, although given the nature of the information available, the amount ultimately recovered could vary outside these ranges.

7. Property and Equipment



2007
('000's)
------------------------------------
Accumulated
Depletion,
Depreciation Net
and Book
Cost Amortization Value
------------------------------------
Petroleum & natural gas properties
including exploration and development
thereon and production equipment $ 159,587 $ 31,586 $ 128,001

Other 855 293 562
------------------------------------
$ 160,442 $ 31,879 $ 128,563
------------------------------------


2006
('000's)
------------------------------------
Accumulated
Depletion,
Depreciation Net
and Book
Cost Amortization Value
------------------------------------
Petroleum & natural gas properties
including exploration and development
thereon and production equipment $ 60,225 $ 15,327 $ 44,898

Other 171 52 119
------------------------------------
$ 60,396 $ 15,379 $ 45,017


The benchmark and Company escalated prices on which the December 31, 2007 ceiling test is based, are as follows:



Natural Gas Condensate Crude Oil
------------------- ----------------------- -------------------
AECO Spot Edmonton Pentanes Plus Edmonton Par
Benchmark Company Benchmark Company Benchmark Company
($/mmbtu) ($/mcf) ($/bbl) ($/bbl) ($/bbl) ($/bbl)
2008 6.75 6.66 92.92 88.65 91.10 82.24
2009 7.55 7.47 88.84 84.80 87.10 78.19
2010 7.60 7.53 84.76 80.31 83.10 73.61
2011 7.60 7.54 82.72 78.15 81.10 71.01
2012 7.60 7.54 82.72 78.15 81.10 70.29
2013 7.60 7.53 82.72 78.09 81.10 69.85
2014 7.80 7.73 82.72 78.09 81.10 69.12
2015 7.97 7.89 82.72 77.97 81.10 68.28
2016 8.14 8.06 82.74 77.84 81.12 67.03
2017 8.31 8.23 84.42 79.52 82.76 67.23


Prices increase at a rate of approximately 2.0% per year for natural gas, condensate and crude oil after 2017. Adjustments were made to the benchmark prices, for purposes of the ceiling test, to reflect varied delivery points and quality differentials in the products delivered.

Unproved properties not subject to depletion amounted to $28,661,000 at December 31, 2007 (December 31, 2006 - $8,184,000).

The Company capitalized general and administrative costs related to exploration and development of $1,048,000 for 2007 (December 31, 2006 - $668,000).

8. Bank indebtedness

The Company has established two credit facilities with a Canadian chartered bank. Credit facility A is a $50,000,000 revolving operating demand loan, which bears interest at the bank prime rate plus 0 to 1.5% per annum depending on the Company's debt to cash flow ratio determined quarterly on a grid system, with the grid ranging from debt to cash flow ranges of lower than 1.5:1 to greater than 3.0:1. Credit facility B is a $5,000,000 non-revolving acquisition/development demand loan, which bears interest at the bank prime rate plus 0.5% per annum. Both Credit Facilities A and B are subject to periodic review by the bank and are secured by a general assignment of book debts and a $100 million demand debenture with a first floating charge over all assets of the Company. The Company is authorized to access the credit facilities with prior approval of the Board. The Company is required to meet certain financial based covenants under the terms of this facility.

9. Asset Retirement Obligations

The following table summarizes the changes in asset retirement obligations for the years ended December 31, 2007 and 2006:



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

Balance, beginning of year $ 879 $ 646
Acquired in business combination (note 5) 3,044 -
Accretion expense 184 38
Liabilities incurred 492 276
Revisions in estimated cash flows (39) (81)
-------------------------------
Balance, end of year $ 4,560 $ 879
-------------------------------


The total estimated, inflated undiscounted cash flows required to settle the obligations, before considering salvage, is $13,495,000, (2006 - $2,394,000) which has been discounted using a weighted average credit-adjusted risk-free interest rate of approximately 6.25%. The Company expects these obligations to be settled in approximately 1 to 30 years. As at December 31, 2007, no funds have been set aside to settle these obligations.

10. Income taxes

a) The following table sets forth the components of the Company's future income tax asset at December 31, 2007 and 2006:



2007 2006
-------------------------
$ ('000's) $ ('000's)
-------------------------
Excess of net book value of property and
equipment and assets retirement obligations
over related tax pools $ (11,288) $ (638)
Unrealized gain on financial instrument (240) (297)
Non capital loss carry forwards 6,179 11,868
Scientific research and development expenses
and investment tax credits 9,317 9,832
Other tax assets 1,903 526
-------------------------
Total tax assets 5,871 21,291
Valuation allowance - (15,369)
-------------------------
Net tax assets $ 5,871 $ 5,922
-------------------------


b) Income tax expense differs from that which would be expected from applying the effective Canadian federal and provincial tax rates of 32.12% (2006 - 34.12%) to income (loss) before income taxes as follows:



Year ended Year ended
-------------------------------------
December 31, 2007 December 31, 2006
-------------------------------------
$ ('000's) $ ('000's)
-------------------------------------

Expected income taxes (recovery) $ (860) $ 1,162
Non-deductible crown payments, net ARTC - 819
Effect of stock-based compensation 78 92

Effect of resource allowance - (865)
Change in effective tax rate applied 143 549
Future income tax valuation allowance
reduction (5,448) (987)
Repayment (receipt) of prior year tax
reassessment (190) 305

Other (175) 19
-------------------------------------
Income tax expense (recovery) $ (6,452) $ 1,094
-------------------------------------


Corporate tax returns are subject to audit and reassessment by the Canada Revenue Agency. The results of any reassessment will be accounted for in the year in which they are determined.

c) The Company has non-capital loss carry-forwards, investment tax credit carry-forwards and Scientific Research and Experimental Development expenses available to reduce future years' income for tax purposes. The Scientific Research and Development expenses of approximately $22,704,000 available for carry-forward do not expire. The non-capital loss and investment tax credit carry-forwards expire as follows:



Non-capital losses Investment tax credits
Year of expiry $ ('000's) $ ('000's)
---------------------------------------------------------------------
2009 $ 1,904 $ -
2010 930
2011 - 1,280
2012 - 672
2013 684 761
2014 3,293 338
2025 9,668 -
-----------------------------------------------------
$ 21,676 $ 3,981
-----------------------------------------------------


11. Share Capital

a) Authorized:

Unlimited Common voting shares

Unlimited Common non-voting shares

b) Issued:



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

Stated Stated
Common voting shares Number Value Number Value
------------------------------------
Balance, beginning of year 16,067 $111,684 5,022 $ 98,164
Issued on private placement - - 3,59 5,026
Repurchase of shares (iv) - - (545) (6,444)
Issue of flow-through shares (ii) - - 8,000 16,000
Future income tax on renouncing
expenditures for flow-through
shares (ii) - (5,000) - (1,062)
Conversion of common non-voting
to common voting shares (i) 66,284 37,652 - -
Consolidation of common shares on
a 4-for-1 basis (i) (61,763) - - -
Issued on Acquisition of Bear
Ridge (note 5) 18,478 51,927 - -
--------------------------------------

39,066 196,263 16,067 111,684
--------------------------------------

Common non-voting shares
------------------------------------
Balance, beginning of year 66,284 37,652 67,021 34,532
Issued on private placement - - 3,590 5,026
Exercise of stock options and
performance options - - 9,840 4,647
Repurchase of shares (iv) - - (14,167) (7,946)
Transfer from contributed surplus
on exercise of options - - - 1,393
Conversion of common non-voting
to common voting shares (i) (66,284) (37,652) - -
--------------------------------------

- - 66,284 37,652
--------------------------------------

Share issue costs net of $611
(December 31, 2006 - $601)
taxes (1,269) (1,248)
----------- ----------
Balance end of year $194,994 $148,088
----------- ----------


(i) On March 9, 2007, the shareholders approved the exchange of the Common non-voting shares for Common voting shares on a 1- for -1 basis and then to consolidate the Common voting shares on a 4-for-1 basis.

(ii) On November 9, 2006, the Company completed a private placement of 8,000,000 common shares at an issue price of $2.00 for gross proceeds of $16,000,000 on a flow-through basis. In accordance with the terms of the offering and pursuant to certain provisions of the Income Tax Act (Canada), the Company renounced, for income tax purposes, exploration expenditures of $16,000,000 to the holders of the flow-through common shares effective December 31, 2006.

Future tax cost of approximately $5,000,000 associated with renouncing the expenditures was recorded on the date of renunciation in the first quarter of 2007. The Company is required to incur the qualifying exploration expenditures before December 31, 2007. The Company has incurred the $16,000,000 of qualifying expenditures as of December 31, 2007.

(iii) On August 21, 2007, the Company completed the acquisition of Bear Ridge (note 5) and issued 18,477,506 common voting shares with a deemed value of $2.81 per share for total deemed proceeds of $51,927,000.

(iv) On June 30, 2006, the Company, through its wholly-owned subsidiary 1243533 Alberta Ltd., repurchased 545,000 voting common shares with a stated value of $11.82 per share and 14,167,000 non-voting common shares with a stated value of $0.56 per share. The purchase price was $1.30 per share with gross costs totalling $19,126,000. Transaction costs were $178,000. The net excess of the cost of shares acquired over the stated value of the shares and contributed surplus reduction, being $2,488,000, was charged to deficit.

c) Warrants

On August 21, 2007, the Company completed the acquisition of Bear Ridge (note 5) and issued 1,050,000 warrants with a deemed value of $0.57 per warrant calculated using the Black-Scholes option-pricing model. Each warrant entitles the holder to acquire one common share on a CDE "flow-through" basis under the Income Tax Act (Canada) at a price of $3.81 per share. The warrants expire on March 31, 2009.

d) Stock Option Plan

The Company has a stock option plan for the purpose of developing the interest of directors, officers, employees and consultants of the Company and its subsidiaries in the growth and development of the Company by providing them with the opportunity, through share options, to acquire an increased proprietary interest in the Company.

The Company has established a Stock Option Plan in compliance with the requirements of the TSX. The aggregate number of shares which may be reserved for issuance under the plan is 10% of the Company's issued and outstanding common shares. No one person can receive options within a one-year period entitling the person to purchase more than 5% of issued common shares. Options typically vest over a five year period and expire ten years from the date of grant.

In the first quarter of 2007 the Company issued 450,000 stock options exercisable into voting common shares of the company (prior to the 4-for-1 share consolidation). These options vest 20% the first, second, third, fourth and fifth anniversaries of grant and have an exercise price of $1.60 pre-consolidation ($6.40 post consolidation) per share.

In the second quarter of 2007 the Company issued 70,000 stock options (post-consolidation) exercisable into voting common shares of the Company. These options vest 20% the first, second, third, fourth and fifth anniversaries of grant and have an exercise price of $6.40 per share.

In the fourth quarter of 2007 the Company issued 2,339,225 stock options (post-consolidation) exercisable into voting common shares of the Company. These options vest 25% the first, second, third, and fourth anniversaries of grant and have an exercise price of $2.09 per share.

In the fourth quarter of 2007 the Company cancelled the following stock options (post-consolidation):



Number of options Strike Price Vesting Term
---------------------------------------------
792,137 $ 5.20 5 years
---------------------------------------------
295,000 $ 6.40 5 years
---------------------------------------------
46,250 $ 4.00 5 years
---------------------------------------------


All options vest immediately upon the occurrence of certain liquidity events or upon a change in control of the Company.

All unexercised options outstanding as at March 9, 2007 were adjusted for the 4-for-1 share consolidation (note 11(b)(i)).

A summary of the status of the Company's stock option plan and changes during the years then ending are as follows:



December 31, 2007 December 31, 2006
------------------------------------------------
Weighted Weighted
Number of Average Number of Average
Options Exercise Options Exercise
('000's) Price ('000's) Price
Outstanding, beginning
of year 6,981 $ 1.008 10,950 $ 0.547
4-for-1 consolidation (5,236) 3.024 - -
Granted 2,522 2.400 4,315 1.319
Exercised - - (8,184) 0.566
Cancelled (1,176) 5.470 (100) 1.180
------------------------------------------------
Outstanding, end of year 3,091 $ 2.160 6,981 $ 1.008
------------------------------------------------


The following table summarizes information about stock options outstanding at December 31, 2007 after the 4-for-1 share consolidation:



-------------------------------------------------------------------------
December 31, 2007
-------------------------------------------------------------------------
Exercise Number of Options Weighted Number of Options
Price Outstanding Average Exercisable
per Share ('000's) Contractual ('000's)
Life (years)
-------------------------------------------------------------------------
$2.238 229 3.50 229
$2.061 462 7.70 347
$5.20 61 8.40 20
$2.090 2,339 9.80 -
----------------------------------------------------------
3,091 8.99 596
-------------------------------------------------------------------------


As at December 31, 2007, approximately 596,000 options are exercisable at a weighted average exercise price of $2.23.

e) Stock-based Compensation

Compensation expense for stock options and performance options is recognized using the fair value when the options are granted, and are amortized over the option's vesting period. During the year ended December 31, 2007, approximately $242,000 in compensation expense related to options granted has been recognized in the consolidated statement of operations. The fair value of stock options granted during the periods was estimated on the dates of grant using the Black-Scholes option-pricing model with the following weighted average assumptions.



December 31, 2007 December 31, 2006
--------------------------------------------------------------------------

Risk-free interest rate 4.19% 3.75% to 4.00%

Expected life of options 4 years 5 years
Expected volatility - prior to
Business combination
(private company) 0% 0%

Expected volatility - after business NA
combination (note 5) 52%

Expected dividend rate 0% 0%

Weighted average fair value $0.93 $0.28


f) Income per share

Net income per share has been calculated based on the weighted average number of common shares outstanding during the year of 27,270,000 (2006 - 18,766,000) which have been adjusted to reflect the four to one share consolidation that occurred on 2007.

A reconciliation of the denominators for the per share calculations is outlined below:



December 31, 2007 December 31, 2006
('000's) ('000's)
---------------------------------------------------------------------------
Basic weighted average shares 27,270 18,766
Effect of dilutive stock options and
warrants 127 921
---------------------------------------------------------------------------
Dilutive weighted average shares 27,397 19,687
---------------------------------------------------------------------------


There is no change in the numerator in the calculation of diluted net income per share for either year.

All options that were anti-dilutive and excluded from the calculation of income per share were cancelled in 2007 (note 11(d)).

12. Contributed Surplus



2007 2006


('000's) ('000's)
-------------------
Opening balance $ 2,478 5,849
Transfer to share capital on exercise of stock &
Performance options - (1,393)
Stock-based compensation expense (note 11(e)) 242 270
Excess of cost of shares acquired over stated value
(note 11(b)(iv)) - (2,248)
-------------------
Ending balance 2,720 2,478
-------------------


13. Change in non-cash component of working capital



Year ended Year ended
December 31, 2007 December 31, 2006
('000's) ('000's)
---------------------------------------
Accounts receivables $ 8,743 $ (4,899)
Deposits and prepaid expenses (1,549) (51)
Accounts payable and accrued
liabilities (11,312) 10,080
---------------------------------------
$ (4,118) $ 5,130
---------------------------------------

Changes in Non-cash Working Capital Related to



Year ended Year ended
December 31, 2007 December 31, 2006
('000's) ('000's)
-------------------------------------------
Operating activities $ (2435) $ 1,508
Investing activities (1,683) 3,622
-------------------------------------------
$ (4,118) $ 5,130
-------------------------------------------


14. Related party transactions

d) A director of the Company is a partner of a law firm that provides legal services to the Company. During the period ended December 31, 2007, the Company paid a total of $56,000 (December 31, 2006 - $13,000) to this firm for legal fees and disbursements, of which $2,000 is included in accounts payable and accrued liabilities at December 31, 2007 (December 31, 2006 - $2,000). Of the total amount paid $29,000 (2006 - Nil) has been included as transaction costs of Bear Ridge (note 5), and the remaining amount of $27,000 (2006 - $13,000) has been included as general and administrative expense.

e) A director of the Company was the Chairman of a corporation that provides drilling services to the Company. During the year ended December 31, 2007, the Company paid a total of $1,980,000 for drilling services, which has been included in property and equipment (December 31, 2006 - $1,682,000). Of this amount, $nil is included in accounts payable and accrued liabilities at December 31, 2007 (December 31, 2006 - $250,000). The corporation ceased to be a related party at December 31, 2007.

f) A director of the Company was an owner of a corporation that provides drilling services to the Company. During the year ended December 31, 2007, the Company paid a total of $1,010,000 for drilling services, which has been included in property and equipment (December 31, 2006 - $18,000). Of this amount, $195,000 is included in accounts payable and accrued liabilities at December 31, 2007 (December 31, 2006 - $Nil).

These transactions have been recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

15. Contingency

The Bear Ridge acquisition resulted in one dissenting shareholder. The shareholder holds 449,358 Bear Ridge shares and 389,435 Bear Ridge warrants with a strike price of $1.41. An accrual has been made for management's best estimate of the settlement which will be paid to this Bear Ridge shareholder. The dispute is currently with the courts. The Company does not expect any additional costs to be incurred on this matter other than the amount already accrued as part of the purchase price of Bear Ridge. The estimated settlement price is subject to measurement uncertainty and the effect of the changes to the estimate, when resolved, will be applied against the purchase price of Bear Ridge.

16. Commitments

a) The Company has lease agreement for office premises with minimum annual net lease payments, exclusive of operating costs, as follows:


2008 $ 163,832
2009 163,832
2010 167,632
2011 143,152
2012 143,152
Thereafter nil
------------
$ 781,600
------------

b) Pursuant to a flow-through share offering of BER on December 19, 2006, the Company is committed to incur a total of $24,000,000 in qualifying expenditures by December 31, 2008. As of December 31, 2007, approximately $6,895,000 is still to be incurred.

c) Pursuant to a flow-through share offering of BER on March 15, 2007, the Company is committed to incur a total of $11,300,000 million in qualifying expenditures by March 15, 2009. As of December 31, 2007 approximately $11,300,000 is still to be incurred.

d) The Company, as a result of the acquisition of Bear Ridge, has a contract for gathering and processing fees on a fiscal year basis for 2008 of $374,000.

17. Financial instruments

a) Credit risk

The majority of the Company's accounts receivable are due from joint venture partners in the oil and gas industry and from purchasers of the Company's petroleum and natural gas production. The Company generally extends unsecured credit to these customers and therefore, the collection of accounts receivable may be affected by changes in economic or other conditions. Management believes the risk is mitigated by the size and reputation of the companies to which they extend credit. The Company has not experienced any credit loss in the collection of accounts receivable to date.

The Company also has credit risk related to its investment in ABCP further described in note 6.

b) Commodity price risk

The nature of the Company's operations results in exposure to fluctuations in commodity prices. Management continuously monitors commodity prices and initiates instruments to manage exposure to these risks when it deems appropriate. As a means of managing commodity price volatility, the Company enters into various derivative financial instrument agreements and physical contracts. Collars ensure that the commodity prices realized will fall into a contracted range for a contracted sale volume based on the monthly index price. Monthly gains and losses are determined based on the differential between the AECO daily index and the AECO monthly index when the monthly index price falls in between the floor and the ceiling. Derivative financial instruments are marked-to-market and are recorded on the consolidated balance sheet as either an asset or liability with the change in fair value recognized in net earnings.

The following information presents all positions for the derivative financial instruments outstanding as at December 31, 2007.



------------------------------------------------------------------------
Term Volume Price Basis
------------------------------------------------------------------------
November 1, 2007 3,000 $7.75 floor AECO
to March 31, 2008 GJ/day $10.00 ceiling
------------------------------------------------------------------------
January 1, 2008 to 3,150 $6.50 floor AECO
December 31, 2008 GJ/day $10.00 ceiling
------------------------------------------------------------------------


Realized gains totalling $2,700,000 for the year ending December 31, 2007 from derivatives was recognized in income (December 31, 2006 - $316,000) and the fair value of the costless collars outstanding at December 31, 2007 were $843,000 (December 31, 2006 - $950,000).

Subsequent to year end, the Company entered into a swap to sell 3,000 GJ/day of natural gas for the period of April 1, 2008 to March 31, 2009 with a price of $7.04/GJ based on AECO.

Subsequent to year end, the Company entered into a second swap to sell 6,000 GJ/day of natural gas for the period of April 1, 2008 to March 31, 2009 with a price of $7.08/GJ based on AECO.

18. Subsequent Events

a) Subsequent to year end, the Company received approval for a normal course issuer bid. Under this normal course issuer bid Sabretooth may purchase up to 1,959,604 of the common shares of Sabretooth, representing approximately 5% of the issued and outstanding common shares of Sabretooth and Sabretooth's maximum daily purchases will be limited to 21,089 common shares. Purchases of common shares may commence on January 31, 2008 and will terminate on January 30, 2009, or on such earlier date as Sabretooth may complete its purchases pursuant to the Notice. Purchases will be made in the open market through the facilities of the TSX in accordance with its rules and policies. The price that Sabretooth will pay for any such common shares will be the market price of such common shares at the time of acquisition. Common shares purchased will be cancelled.

b) Subsequent to year end, the Company increased its previous credit line (note 8) to a $55,000,000 revolving operating demand loan facility, a $5,000,000 non-revolving development loan and a $18,000,000 separate revolving operating demand loan.

c) January 1, 2008 Sabretooth Energy Ltd. and its 100% owned subsidiary, Sabretooth Resources Inc. amalgamated.

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