Sabretooth Energy Ltd.
TSX : SAB

Sabretooth Energy Ltd.

May 08, 2008 13:13 ET

Sabretooth Energy Ltd. Announces New Strategic Direction

Sabretooth Energy Provides Operational and Financial Update; Intent to Focus on Montney Exploration and Development

CALGARY, ALBERTA--(Marketwire - May 8, 2008) - Sabretooth Energy Ltd. ("Sabretooth" or the "Company") (TSX:SAB) is pleased to provide an operational and financial update on first quarter 2008 production and drilling success as well as details regarding Sabretooth's new strategic direction and intent to become a Montney-focused exploration and development company.

Operations & Production Update

Sabretooth drilled seven gross (5.4 net) wells in the first quarter of 2008. Drilling was focused mainly in Alberta on the Peace River Arch for the first quarter, before a focus shift into British Columbia for the balance of 2008 to mitigate the effects of the Alberta new royalty framework.

Five wells drilled on the Peace River Arch (four in Alberta) resulted in two oil discoveries (1.8 net) one gas discovery (1 net) and two dry holes (1.6 net). One well (0.5 net) was drilled in central Alberta resulting in an oil discovery. One well (0.5 net) was drilled at Fireweed, British Columbia, resulting in a gas discovery. Subsequent to the quarter end, the first well in a four well (1 net) program, at Gunnell, spudded targeting the Jean Marie.

Work is ongoing on the approximately 785 boe/d tested and awaiting tie-in from nine projects in the Peace River Arch area of Alberta and British Columbia. First production from behind pipe is anticipated to be onstream from the Mica discovery at 250 boe/d by month end. As well, the first of a 4 well infill horizontal drilling program in the Gunnell area is currently drilling and is anticipated to be on-stream by month-end. The initial Gunnell well is projected to add 70 boe/d, after flush volumes, and the project is estimated to add 200 boe/d, after flush volumes, by the end of June. Current production is approximately 2,700 boe/d with additional existing production impacted by break-up conditions. Production in the first quarter of 2008 was adversely affected by the loss of production from three wells at George.

Strategic Direction & Asset Rationalization

The Board of Directors of Sabretooth have unanimously determined that a new, more focused strategic direction for the Company will provide shareholders with the highest possible exposure to near term value creation and unlock the undervalued potential that management and the Board of Directors see reflected in the current share price.

Sabretooth has engaged Tristone Capital Inc. to explore alternatives to sell all or materially all of the Company's conventional asset production and land base, which would enable Sabretooth to focus on, and accelerate exploitation of its significant Montney land spread and harvest the material production and reserve volumes associated with the play.

Montney Asset Base & Impact Drilling Inventory

Sabretooth was recently successful in acquiring 5,280 net acres to further consolidate the Company's strategic asset base at Red Creek, a highly prospective landholding that Sabretooth controls at 100% working interest. Current Sabretooth undeveloped land holdings in the core Montney Fairway of British Columbia total over 35,000 net acres.

Montney technical expertise within the Company dates back to drilling initial successful wells in the Montney in 1996. The Sabretooth technical team has been evaluating Montney opportunities since Company inception and interprets potential recoverable reserves from existing Company lands range from 250 BCF to 500 BCF. This strategic decision allows the Company to focus exclusively on Montney exploitation in the near term.

Licensing is underway on multiple long reach horizontal wells planned for the second and third quarters targeting the Montney Formation in the Red Creek and Oak areas of NEBC. The first Red Creek well will spud in June. Sabretooth now has 8 sections with 100% working interest at Red Creek where offset logs indicate significant pay sections (exceeding 70 meters in thickness) within the Upper Montney. As well, the Company acquired a 10 section 3-D seismic suite over the Red Creek acreage which supports consistent reservoir quality and displays structural elements that have been associated with superior production performance. The initial well location is 100 meters from tie-in to the Spectra McMahon Facility which currently has significant unutilized capacity. In the Oak area Sabretooth has drilled and completed 2 Montney vertical wells and achieved initial rates of 500 mcf\d and 1 mmcf\d. A third well was drilled, cored and cased in the Montney to enable a horizontal leg to be drilled. Core results compared favourably to cored wells in established producing areas of the Montney fairway.

Conventional targets in British Columbia, including follow ups to two oil discoveries, are also being licensed for late Q2 / Q3 drilling. Our updated capital forecast projects spending of $30 million for the balance of 2008 and anticipates drilling 10 wells by the end of Q3 2008.

Bank Line and Working Capital

At March 31 bank debt was $55.5 million (including $24.1MM of Asset Based Commercial Paper) on a line of $78.0 million. Subsequent to quarter end the bank line has increased to $81 million. Working capital deficit is $65.1 million including a $7.1 million mark to market adjustment for the company's commodity contracts. Excluded from working capital is the company's $24.1 million Asset Backed Commercial Paper which is recorded as a non-current asset and recorded with a fair value of $18 and accrued interest from the ABCP which is approximately $0.7 million.

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".

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, the timing, location and extent of future drilling operations anticipated timing and results of construction projects and project tie-ins, estimates of future production, the ability to realize the timing, on investments in ABCP, the terms of loans to be received from National Bank of Canada, if any, 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 ABCP. 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, the ability to realize on investments in ABCP 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.

The term barrels of oil equivalent or boe 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.



Q1 2008 Highlights

Three months ended March 31,
-----------------------------
2008 2007
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Financial ($)
Production revenue $ 14,223,000 $ 5,238,000
Realized gain (loss) on hedge $ (80,000) $ 55,000
Unrealized gain (loss) on hedge $ (7,983,000) $ (617,000)
Net income (loss) $ (10,819,000) $ 3,914,000
Funds flow from operations $ 7,733,000 $ 2,487,000
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Production volumes
Natural gas (mcf/d) 15,773 6,429
Crude oil (bbls/d) 278 103
Natural gas liquids (bbls/d) 125 32
Total (boe/d) (6:1) 3,032 1,206

Sales prices
Natural gas ($/mcf) $ 7.63 $ 7.80
Natural gas, not including hedges ($/mcf) $ 7.68 $ 7.71
Crude oil ($/bbl) $ 87.57 $ 66.14
Natural gas liquids ($/bbl) $ 86.02 $ 57.67
Total ($/boe) $ 51.25 $ 48.75
Netbacks, not including unrealized
hedges ($/boe)
Price $ 51.25 $ 43.07
Royalties (7.51) (9.16)
Transportation (1.25) (1.60)
Operating costs (11.46) (9.05)
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Total $ 31.03 $ 23.26
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Capital expenditures ($)
----------------------------------------------------------------------------

Total capital expenditures $ 12,604,000 $ 13,956,000
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Land (net acres)

Developed 41,703 20,253
Undeveloped 163,823 42,226
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Total Land 205,526 62,479
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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 unaudited consolidated financial statements (the "Financial Statements") and related notes for the three months ended March 31, 2008 as well as with the audited consolidated financial statements (the "Annual Financial Statements") for the year ended December 31, 2007.

This MD & A is dated May 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 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's condition and projected 2008 capital investments; it's ability to realize the Company's investments in Asset Backed Commercial Paper ("ABCP") ; 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 ABCP. 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 assumptions, 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; its ability to realize the Company's investment in ABCP; 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" 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.

Financial outlook information contained in this MD & A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD & A should not be used for purposes other than for which it is disclosed herein.

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 except 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.

RESULTS OF OPERATIONS

Net Income and Funds Flow

The Company incurred a net loss of $10,819,000 for the first quarter of 2008 compared to the net earnings of $3,914,000 for the same quarter in 2007. The decrease in income is primarily attributable to the recognition of an unrealized loss on hedge contracts of $7,983,000 and write-down on investment in commercial paper of $5,932,000. Funds flow from operations was $7,733,000 for the first three months of 2008 compared to $2,487,000 for the corresponding 2007 period. The increase comes from the increased production as a result of drilling success and the Bear Ridge acquisition.



Three months ended March 31,
-----------------------------
$('000s) 2008 2007
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Funds flow from operations $ 7,733 $ 2,487
Net income (loss) $ (10,819) $ 3,914
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Revenue

Production revenue not including the realized loss on hedges was $14,223,000 for the three months ended March 31, 2008, compared to $ 5,238,000 for the same time period in 2007. The increase in production revenue for the first quarter of 2008 compared to 2007 is due to the success through the drill bit and to the acquisition of Bear Ridge. Total production revenue is comprised of natural gas, crude oil and natural gas liquids for the three months ended March 31, 2008 and 2007.


Three months ended March 31,
-----------------------------

$('000s) 2008 2007
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Natural gas $ 11,026 $ 4,460
Realized gain (loss) on hedge contracts (80) 55
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Total Natural gas $ 10,946 $ 4,515
Oil 2,218 610
Natural gas liquids 979 168
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Total Revenue $ 14,143 $ 5,293
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Pricing

Sabretooth's average natural gas price, not including a realized loss on hedges, received during the first quarter of 2007 was $7.68 per mcf compared to the average Alberta Energy Corporation ("AECO") C posted price of $7.45 per mcf during the same period (2007 - $7.71 per mcf compared to the average AECO C posted price of $7.42 per mcf during the same period). The difference is due to the higher heat content the Company's natural gas contains. The Company received a first quarter average crude oil price of $87.57 per bbl as compared to the Edmonton Par price of $98.16 per bbl (2007 - $66.14 per bbl as compared to the Edmonton Par price of $67.74 per bbl during the same period). This variance is due to the quality differential of the oil produced versus Edmonton Par. NGL prices averaged $ 86.02 per bbl during the three month period as compared to the Edmonton pentane reference price of $98.66 per bbl (2007 - $57.67 per bbl as compared to the Edmonton pentane price of $69.74 per bbl during the same period). The Company's NGL prices are lower than the Edmonton pentane price is because the Company has a different product mix.

During the three month period ended March 31, 2008 the Company realized a hedge loss of $80,000 compared to a realized hedge gain of $55,000 for the first quarter of 2007.



Three months ended March 31,
-----------------------------
Average Selling Price 2008 2007
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Natural gas (per Mcf) $7.63 $7.80
Crude Oil (per bbl) $87.57 $66.14
Natural gas liquids (per bbl) $86.02 $57.93
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Per BOE $51.25 $48.75
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Production

Production for the three months ended March 31, 2008 production was 275,945 boe and averaged 3,032 boe/d compared to the first quarter of 2007 where production was 108,580 boe and averaged 1,206 boe/d. The 151% increase in production for the first quarter of 2008 compared to 2007 is primarily due to the acquisition of Bear Ridge in the third quarter of 2007 as well as one year of exploration and development program success.



Three months ended March 31,
------------------------------
2008 2007
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Total Per day Total Per day
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Natural Gas 1,435,374 mcf 15,773 mcf/d 578,654 mcf 6,429 mcf/d
Crude Oil 25,333 bbls 278 bbls/d 9,225 bbls 103 bbls/d
NGLs 11,383 bbls 125 bbls/d 2,913 bbls 32 bbls/d
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Total 275,945 boe 3,032 boe/d 108,580 boe 1,206 boe/d
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Royalty Expense

Royalty expense in the first quarter of 2008 was $2,072,000 or 15% of revenue compared to $994,000 or 19% of revenue in the first quarter of 2007. Royalty expense as a percentage of revenue is lower in the current quarter which is primarily due to an additional $300,000 of capital cost recovery credits compared to the same time period in 2007.



Three months ended March 31,
-----------------------------
$('000s) 2008 2007
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Royalties ($) $2,072 $994
As a % of sales 15% 19%
Per Unit of Production ($/boe) $7.51 $9.16
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Transportation

Transportation costs for the first quarter of 2008 were $346,000 or $1.25 per boe. Transportation costs for the first quarter of 2007 were $173,000 or $1.60 per boe. The decrease per boe is attributable to better utilization of transportation contracts.



Three months ended March 31,
-----------------------------
$('000s) 2008 2007
----------------------------------------------------------------------------
Transportation ($) $346 $173
Per Unit of Production ($/boe) $1.25 $1.60
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Operating Costs

Operating costs during the first quarter of 2008 were $3,163,000 or $11.46 per boe compared to $982,000 or $9.05 per boe for the same time period in 2007. Operating costs increased by 27% per boe while production increased 151% per boe/d. The increase in operating costs were attributable to adding booster compressors to increase production in various areas, severe temperatures increased the chemical use in the early part of 2008 and road maintenance increased due to the heavier snow accumulation.



Three months ended March 31,
-----------------------------
$('000s) 2008 2007
----------------------------------------------------------------------------
Operating Costs ($) $3,163 $982
Per Unit of Production ($/boe) $11.46 $9.05
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Operating Netbacks

Sabretooth's netback per boe for the first quarter of 2008 increased from $23.26 in 2007 to $31.03. The increase in the netback is primarily due to the higher average selling prices, lower royalty rates, and lower transportation costs. Offsetting these increases in the netback were higher operating costs, and the realized loss on hedge contracts.



Three months ended March 31,
-----------------------------
($/boe) 2008 2007
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Production revenue, including
realized hedge gains (losses) $51.25 $48.75
Royalty expense (7.51) (9.16)
Transportation (1.25) (1.60)
Operating Costs (11.46) (9.05)
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Netback $31.03 $28.94
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General and Administrative Expenses

General and administrative ('G&A") expenses for the three months ended March 31, 2008 were $662,000, up 15% compared to $578,000 for 2007. On a per boe basis G&A was $2.39 for 2008 compared to 2007 of $5.32. The decrease per boe is attributable to increased production. For the three months ended March 31, 2008 Sabretooth capitalized approximately $491,000 of G&A expenses related to exploration and development.



Three months ended March 31,
-----------------------------
$('000s) 2008 2007
----------------------------------------------------------------------------
G&A Expense ($) $662 $578
Per Unit of Production ($/boe) $2.39 $5.32
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Interest Expense

Interest expense for the three months ended March 31, 2008 were $744,000 compared to $89,000 for the three months ended March 31, 2007. The increase in interest expense was a result of increased bank debt in 2008.



Three months ended March 31,
-----------------------------
$('000s) 2008 2007
----------------------------------------------------------------------------
Interest Expense ($) $744 $89
Per Unit of Production ($/boe) $2.70 $0.82
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Depletion, Deprecation and Amortization ("DD&A")

DD&A expense for the three months ended March 31, 2008 was $5,933,000 or $21.50 per boe. DD&A expense for the three months ended March 31, 2007 was $3,293,000 or $30.33 per boe.

The per boe decrease in three months ended 2008 compared to the same periods in 2007 is mainly due to the proven reserves developed through the Company's capital projects and the Bear Ridge acquisition.

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 National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101") due to the naturally unpredictable nature of newer production.

Asset Retirement Obligations

The Company developed seven new assets subject to asset retirement obligations during the three months ended March 31, 2008. $70,000 was recognized as an accretion expense for the first quarter of 2008. Total asset retirement obligations recognized for March 31, 2008 is $4,230,000.

The Company recognized $1,043,000 of asset retirement obligations at March 31, 2007. $14,000 was recognized as an accretion expense for the three months ended March 31, 2007.

Stock Based Compensation

The Company recognizes stock based compensation expense for all stock options granted. For the three months ended March 31, 2008, Sabretooth recorded $334,000 (2007 - $69,000) in stock based compensation expense, with a corresponding increase to contributed surplus, for stock options granted.

Common Shares Outstanding

There have been no changes to the outstanding number of common voting shares during the period.

In the first quarter of 2008 the Company granted 195,000 stock options exercisable into voting common shares of the company. These options vest 25% the first, second, third and fourth anniversaries of grant and have a weighted average exercise price of $2.66 per share.

In the first quarter of 2008, 229,000 vested options were repurchased for approximately $104,000. The amount paid to repurchase the options was charged to contributed surplus.

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)
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2010 $ - $ 930
2011 - 1,280
2012 - 672
2013 - 761
2014 3,272 338
2025 9,668 -
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$ 12,940 $ 3,981
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In addition, the Company has UCC pools of approximately $37,000,000, COGPE pools of approximately $17,000,000, CEE pools of approximately $34,000,000, CDE pools of approximately $9,000,000, and share issuance costs of approximately $4,000,000 which can be used to reduce taxable income in the future.

As at March 31, 2008, $7,051,000 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 March 31,
-----------------------------
$('000s) 2008 2007
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Land acquisition costs $ 2,383 $ 2,163
Geological & geophysical 255 923
Drilling, completions & workovers 7,893 8,629
Tangible equipment 1,436 2,080
Capitalized overhead 636 161
Office furniture & equipment 1 -
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Total capital expenditures $ 12,604 $ 13,956
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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 and will be required to be repaid in full upon the liquidation or refinancing of the Company's Asset Backed Commercial Paper ("ABCP") holdings. 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 as well a hypothecation/pledge of ABCP. The Company is authorized to access the credit facilities with prior approval of the board of directors of the Company (the "Board"). The Company is required to meet certain financial based covenants under the terms of this facility. As at March 31, 2008, the Company has drawn $37,512,000 on Facility A, $ Nil on Facility B, and $18,000,000 on Facility C. The effective interest rate for the period ended March 31, 2008 was 5.96% (2007 - 5.31%).

The Company holds ABCP that is valued at $18,003,000 at March 31, 2008. As at March 31, 2008, the Company held Canadian third party 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 March 17, 2008, a court order was obtained through which a restructuring of the ABCP is expected to occur. A meeting of note holders occurred on April 25, 2008 and the restructuring plan was approved.

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 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. Probability-weighted discount rates of approximately 7.10% and 12.90% were used at March 31, 2008 for the senior AA and subordinated notes respectively for this estimate and an interest rate of 2.6% was used. This evaluation resulted in a reduction of $6,144,000 to the original cost of the ABCP at March 31, 2008. 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 senior AA rated and subordinated unrated long-term floating rate notes 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 estimates that it will receive 87% of the senior AA rated notes (Class A-1 and A-2) and 13% of the subordinated unrated notes (Class B and C). 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 notes is estimated to be approximately 7 years which approximates the maturity of the assets backing the note. Based on these assumptions, a write-down of $5,932,000 from the estimated fair value at December 31, 2007 was recognized during the period ended March 31, 2008.

The original ABCP in which the Company has invested has an interest rate of 4.52%. At March 31, 2008 there is $697,000 of interest owing to the Company after impairment allowance. If the restructuring is successful, interest will be paid out. A 15% impairment has been used to value the interest receivable.

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 change 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 $8,000,000 to $4,900,000 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 $ 124,000

2009 165,000

2010 169,000

2011 143,000

2012 143,000

Thereafter nil

-----------
$ 744,000
-----------


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 March 31, 2008, total estimated undiscounted future cash flows required to settle these obligations is approximately $12,558,000 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 - 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 $12,300,000 before March 31, 2009. Approximately $20,522,000 of qualifying expenditures has been incurred to March 31, 2008. 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.

4) The Company, as a result of the acquisition of Bear Ridge, has a contract for gathering and processing fees, in the amount of $94,000 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) 2,854,000 stock options; and

3) 1,050,000 warrants.



Quarterly Information

Financial 2008 2007
----------------------------------------------------------------------------
($ thousands
except per share data) Q1 Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Production Revenues (including
gains (losses) on financial
commodity contract) $ 6,160 $12,875 $ 8,547 $ 5,150 $ 4,686
Royalties, net of ARTC 2,072 2,246 1,454 578 994
Operating expenses 3,163 3,647 1,955 1,186 982
Transportation expenses 346 521 244 140 173

Net income (loss) (10,819) 217 (497) 141 3,914
Per Share - basic (0.28) 0.01 (0.02) 0.01 0.19
Per share - diluted (0.28) 0.01 (0.02) 0.01 0.18
Funds flow 7,733 5,985 3,875 2,177 2,487
Per Share - basic 0.19 0.15 0.14 0.11 0.12
Per share - diluted 0.19 0.15 0.13 0.10 0.12
Capital expenditures, net 12,604 12,013 4,112 6,142 13,956
Acquisition expenditures, net - - 24,752 - -
----------------------------------------------------------------------------
Total expenditures $12,604 $12,013 $28,864 $ 6,142 $13,956
----------------------------------------------------------------------------

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

Net income (loss) (646) 699 115
Per Share - basic (0.03) 0.04 0.01
Per share - diluted (0.03) 0.04 0.01
Funds flow 3,095 3,192 4,248
Per Share - basic 0.16 0.17 0.23
Per share - diluted 0.15 0.17 0.21
Capital expenditures, net 12,281 8,633 6,066
Acquisition expenditures, net - - -
----------------------------------------------------------------------------
Total expenditures $12,281 $8,633 $6,066
----------------------------------------------------------------------------


2008 2007
----------------------------------------------------------------------------
Operations Q1 Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Production Volumes
Natural gas (mcf/day) 15,773 17,303 10,813 5,140 6,429
Oil (bbl/day) 278 325 165 114 103
NGLs (bbl/day) 125 171 36 24 32
Total boe/day 3,032 3,380 2,003 995 1,206
-------------------------------------------
Average selling price
Natural gas ($per mcf) $7.63 $6.84 $7.12 $7.47 $7.80
Oil ($per bbl) 87.57 76.55 80.61 63.55 66.14
NGLs ($per bbl) 86.02 75.81 75.89 65.86 57.67
-------------------------------------------
Combined ($per boe) $51.25 $46.21 $46.91 $49.84 $48.75
Royalties ($per boe) 7.51 7.22 7.89 6.38 9.16
Operation expense ($per boe) 11.46 11.73 10.61 13.09 9.05
Transportation ($per boe) 1.25 1.68 1.32 1.54 1.60
----------------------------------------------------------------------------

Netback ($per boe) $31.03 $25.58 $27.09 $28.83 $28.94
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2006
----------------------------------------------------------------------------
Operations Q4 Q3 Q2
----------------------------------------------------------------------------
Production Volumes
Natural gas (mcf/day) 8,308 9,418 10,602
Oil (bbl/day) 49 10 3
NGLs (bbl/day) 21 80 148
Total boe/day 1,454 1,659 1,918
--------------------------
Average selling price
Natural gas ($per mcf) $7.09 $5.90 $6.13
Oil ($per bbl) 60.42 69.71 66.21
NGLs ($per bbl) 67.11 65.71 70.94
--------------------------
Combined ($per boe) $43.96 $39.29 $39.00
Royalties ($per boe) 9.64 8.18 5.64
Operation expense ($per boe) 7.07 6.32 4.49
Transportation ($per boe) 1.48 1.46 0.74
----------------------------------------------------------------------------

Netback ($per boe) $25.77 $23.33 $28.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Financial instruments and risk management

The Company has the following financial instruments:

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 deposits are designated as loans and receivables and are measured at amortized cost. Accounts payable and accrued liabilities and bank indebtedness are designated as other financial liabilities and are measured at amortized cost. All risk management assets and liabilities are derivative financial instruments and classified as held-for-trading.

The Company uses 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.

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.

The nature of these financial instruments and its operations expose the Company to market risk, credit risk and liquidity risk. The Company manages its exposure to these risks by operating in a manner that minimizes these risks. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Board has established policies in setting risk limits and controls and monitors these risks in relation to market conditions.

a) Market risk

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

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 March 31, 2008.



----------------------------------------------------------------------------
Term Volume Price Basis
----------------------------------------------------------------------------
April 1, 2008 to 3,000 $7.04 AECO
March 31, 2009 GJ/day
----------------------------------------------------------------------------
April 1, 2008 to 6,000 $7.08 AECO
March 31, 2009 GJ/day
----------------------------------------------------------------------------
January 1, 2008 to 3,150 $6.50 floor AECO
December 31, 2008 GJ/day $10.00 ceiling
----------------------------------------------------------------------------


Realized losses totalling $80,000 for the first quarter ending March 31, 2008 from derivatives was recognized in income (March 31, 2007 - $55,000 realized gain) and the fair value of the costless collars outstanding at March 31, 2008 were $(7,140,000) (December 31, 2007 - $843,000; March 31, 2007 - $333,000).

As at March 31, 2008, if the underlying natural gas price increased by $0.50/mcf, the fair value of the commodity contracts becomes $(8,838,000) resulting in an increased loss before tax of $1,698,000 ($1,214,000 after tax).

As at March 31, 2008, if the underlying natural gas price decreased by $0.50/mcf, the fair value of the commodity contracts becomes $(5,506,000) resulting in a decreased loss before tax of $1,634,000 ($1,168,000 after tax).

Foreign exchange risk

The Company is exposed to foreign currency fluctuations as crude oil and natural gas prices are referenced to U.S. dollar denominated prices. As at March 31, 2008 the Company had no forward, foreign exchange contracts in place, nor any significant working capital items denominated in foreign currencies.

Interest rate risk

The Company is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the floating rate credit facility. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates. The Company has no interest rate swaps or financial contracts in place as at or during the three months ended March 31, 2008.

As at March 31, 2008, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the period would have been $99,000 higher, due to lower interest expense. An equal opposite impact would have occurred to net earnings had interest rates been 1% higher.

b) 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 and are subject to the same industry factors such as commodity price fluctuations and escalating costs. 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.

Receivables from petroleum and natural gas marketers are normally collected on the twenty-fifth day of the month following production. Receivables related to the sale of the Company's petroleum and natural gas production are from major marketing companies with investment grade credit ratings. The Company historically has not experienced any collection issues with its petroleum and natural gas marketers.

Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure and issuing cash calls on large capital projects from its partners on capital projects before they commence. The Company reviews the financial status of joint venture partners before partner approval is obtained.

(c ) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to meet its liabilities when due. The nature of the oil and gas industry is very capital intensive. As a result, the Company prepares annual capital expenditure budgets and utilizes authorizations for expenditures for projects to manage capital expenditures.

(d) Fair value of financial instruments

The Company's cash and cash equivalents, accounts receivable, deposits, bank indebtedness and accounts payable and accrued liabilities approximates their carrying value due to their short terms to maturity and the floating interest rate on the Company's debt.

The fair value of derivative contracts is determined by discounting the difference between the contracted price and published forward price curves as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes.

The fair value of the Company's investment in commercial paper is disclosed under "Liquidity and Capital Resources".

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 March 31, 2008, the Company did not enter into any off-balance sheet transactions.

Related Party Transactions

During the period, 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 three months ended March 31, 2008, the Company paid approximately $9,000 (March 31, 2007 - $Nil) to this firm for legal fees and disbursements. Additionally, $Nil is included in accounts payable and accrued liabilities, due under normal credit terms, at March 31, 2008 (December 31, 2007 - $2,000) for this firm.

b) A director of the Company is the owner of a corporation that provides drilling services to the Company. During the three months ended March 31, 2008 the Company paid approximately $603,000 (March 31, 2007 - $466,000) for drilling and services, which has been included in property and equipment. Additionally, approximately $21,000 is included in accounts payable and accrued liabilities, due under normal credit terms, at March 31, 2008 (December 31, 2007 - $195,000) for this firm.

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 Corporation's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining the Corporation's disclosure controls and procedures, including adherence to the Disclosure Policy adopted by the Corporation. The Disclosure Policy requires all staff to keep the Corporation's Chief Executive Officer and Chief Financial Officer fully apprised of all material information affecting the Corporation 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 Corporation'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 Corporation's disclosure controls and procedures as of March 31, 2008, have concluded that the Corporations disclosure controls and procedures were adequate and effective to ensure that material information relating to the Corporation would have been known to them. It should be noted that while the Corporation'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 March 31, 2008. The relatively small size of the Corporation 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 Corporation 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 Corporation 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 and Practices and Future Accounting Pronouncements

Financial Instruments - Disclosures and Presentation

Effective January 1, 2008, the Company adopted two new Canadian Institute of Chartered Accountants ("CICA") standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. These Handbook Sections replaced 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. Specifically, section 3862 requires disclosure of the significance of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments. The new presentation standard carries forward the former presentation requirements.

Capital Disclosures

Effective January 1, 2008, the Company adopted Handbook Section 1535, Capital Disclosures which requires companies to disclose their objectives, policies and processes for managing capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the Company's management of capital, whether the requirements have been complied with, or consequence of noncompliance and an explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required.

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:

Goodwill and Intangible Assets

As of January 1, 2009, the Company will be required to adopt CICA section 3064, "Goodwill and Intangible Assets," which will replace CICA section 3062. This new guidance reinforces a principles-based approach to the recognition of costs as assets in accordance with the definition of an asset and the criteria for asset recognition under CICA section 1000, "Financial Statement Concepts." Section 3064 clarifies the application of the concept of matching revenues and expenses in section 1000 to eliminate the current practice of recognizing as assets items that do not meet the definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. The Company is currently determining the impact of this standard.

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 Company continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.

Application of Critical Accounting Estimates

The significant accounting policies used by Sabretooth are disclosed in note 2 to the Financial Statements for the period ended March 31, 2008 and notes 3 and 4 to the Annual 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.

Reserves

Under the 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 a 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.

ABCP

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

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 2,700 boe/d.

In 2008, the Company has budgeted approximately $55,000,000 for its proposed capital programs of which approximately $12,000,000 has been spent as of March 31, 2008. 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 $78,000,000 subject to periodic review. As at March 31, 2008, the Company has drawn approximately $55,000,000 on its operating line of credit, and holds asset backed commercial paper with a face value of approximately $24,200,000.



Sabretooth Energy Ltd.
Interim Consolidated Financial Statements
March 31, 2008
(Unaudited)


Sabretooth Energy Ltd.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)
(Unaudited)

March 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ - $ -
Accounts receivable 9,742 9,175
Deposits and prepaid expenses 1,771 1,920
Commodity contracts (note 11) - 843
------------------------------------
11,513 11,938

Investment in commercial paper (note 3) 18,003 23,238
Property and equipment (note 4) 135,354 128,563
Future income taxes 7,051 5,871
------------------------------------

$ 171,921 $ 169,610
------------------------------------
------------------------------------

Liabilities and Shareholders' Equity
Current Liabilities
Bank indebtedness (note 5) $ 55,512 $ 46,256
Accounts payables and accrued liabilities 13,960 17,126
Commodity contracts (note 11) 7,140 -
------------------------------------
76,612 63,382

Asset retirement obligations (note 6) 4,230 4,560
------------------------------------
80,842 67,942
------------------------------------
Shareholders' Equity
Share capital (note 7) 194,994 194,994
Warrants (note 7 ( c ) ) 598 598
Contributed surplus (note 7 (g)) 2,950 2,720
Deficit (107,463) (96,644)
------------------------------------
91,079 101,668
------------------------------------

$ 171,921 $ 169,610
------------------------------------
------------------------------------

Contingency (note 9)
Commitments (note 10)

The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.

G. Marshall Abbott Vincent Chahley
Director Director


Sabretooth Energy Ltd.
Consolidated Statements of Operations, Comprehensive Income (Loss)
and Deficit
(expressed in thousands of Canadian dollars except per share amounts)
(Unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three months ended March 31,
--------------------------------

2008 2007
----------------------------------------------------------------------------
Revenues
Production revenue $ 14,223 $ 5,238
Royalties (2,072) (994)
Realized gain (loss) on hedge contracts
(note 11) (80) 55
Unrealized gain (loss) on hedge contracts
(note 11) (7,983) (617)
Interest on commercial paper 697 -
Interest and other income - 10
--------------------------------
4,785 3,692
--------------------------------
Expenses
Operating costs 3,163 982
Transportation 346 173
General and administrative 662 578
Depletion, depreciation, and amortization 5,933 3,293
Accretion expense 70 14
Interest 744 89
Stock-based compensation (note 7 (e)) 334 69
Write-down on investment in commercial
paper (note 3) 5,932 -
--------------------------------
17,184 5,198
--------------------------------
Income (loss) before income taxes (12,399) (1,506)
--------------------------------
Income taxes (recovery)
Current - -
Future (1,580) (5,420)
--------------------------------
(1,580) (5,420)
--------------------------------

Net Income (Loss) and Comprehensive
Income (Loss) (10,819) 3,914

Deficit, beginning of period (96,644) (100,419)
--------------------------------

Deficit, end of period $ (107,463) $ (96,505)
--------------------------------

Net income (loss) per share (note 7 (f))

Basic $ (0.28) $ 0.19
--------------------------------

Diluted $ (0.28) $ 0.19
--------------------------------


The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.


Sabretooth Energy Ltd.
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars)
(Unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three months ended March 31,

2008 2007
----------------------------------------------------------------------------
Cash flows from (used in)

Operating activities
Net income (loss) for the period $ (10,819) $ 3,914
Items not affecting cash
Depletion, depreciation, and amortization 5,933 3,293
Accretion expense 70 14
Stock-based compensation 334 69
Write-down on investment in
commercial paper (note 3) 5,932 -
Unrealized loss (gain) on hedge
contracts (note 11) 7,983 617
Future income taxes (1,580) (5,420)
Asset retirement expenditures (120) -
--------------------------------
7,733 2,487
Net change in non-cash working
capital (note 12) (3,039) 743
--------------------------------
Cash from operating activities 4,694 3,230
--------------------------------

Investing activities
Property and equipment expenditures (12,604) (13,956)
Net change in non-cash working
capital (note 12) (1,242) (3,770)
--------------------------------
Cash used in investing activities (13,846) (17,726)
--------------------------------

Financing activities
Repurchase of stock options (note 7 (d) ) (104) -
Proceeds from bank loan 9,256 10,153
--------------------------------
Cash from financing activities 9,152 10,153
--------------------------------

Decrease in cash and cash equivalents - (4,343)
Cash and cash equivalents, beginning
of period - 4,343
--------------------------------

Cash and cash equivalents, end of period $ - $ -
--------------------------------

Supplemental cash flows disclosure:
Interest paid $ 744 $ 89
--------------------------------
Income taxes paid (recovered) $ - $ -
--------------------------------

The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.


Sabretooth Energy Ltd.
Notes to Unaudited Consolidated Financial Statements
Three months ended March 31, 2008
(Unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


1. Interim Financial Statements - Basis of Presentation

The interim consolidated financial statements of Sabretooth Energy Ltd. (the "Company") have been prepared by management in accordance with Canadian generally accepted accounting principles and follow the same accounting policies as the most recent audited annual consolidated financial statements, except as noted below. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007.

2. Changes in Accounting Policies and Practices and Future Accounting Pronouncements

Financial Instruments - Disclosures and Presentation

Effective January 1, 2008, the Company adopted two new Canadian Institute of Chartered Accountants ("CICA") standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. These Handbook Sections replaced 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. Specifically, section 3862 requires disclosure of the significance of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments. Refer to Note 11, "Financial Instruments and Risk Management" for the additional disclosures under section 3862. The new presentation standard carries forward the former presentation requirements.

Capital Disclosures

Effective January 1, 2008, the Company adopted Handbook Section 1535, Capital Disclosures which requires companies to disclose their objectives, policies and processes for managing capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the Company's management of capital, whether the requirements have been complied with, or consequence of noncompliance and an explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Refer to Note 13, "Capital Disclosures."

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:

Goodwill and Intangible Assets

As of January 1, 2009, the Company will be required to adopt CICA section 3064, "Goodwill and Intangible Assets," which will replace CICA section 3062. This new guidance reinforces a principles-based approach to the recognition of costs as assets in accordance with the definition of an asset and the criteria for asset recognition under CICA section 1000, "Financial Statement Concepts." Section 3064 clarifies the application of the concept of matching revenues and expenses in section 1000 to eliminate the current practice of recognizing as assets items that do not meet the definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. The Company is currently determining the impact of this standard.

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 Company continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.

3. Investment in Commercial Paper

The Company holds Asset Backed Commercial Paper ("ABCP") that is valued at $18,003,000 at March 31, 2008. As at March 31, 2008, the Company held Canadian third party 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 March 17, 2008, a court order was obtained through which a restructuring of the ABCP is expected to occur. A meeting of note holders occurred on April 25, 2008 and the restructuring plan was approved.

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 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. Probability-weighted discount rates of approximately 7.10% and 12.90% were used at March 31, 2008 for the senior AA and subordinated notes respectively for this estimate and an interest rate of 2.6% was used. This evaluation resulted in a reduction of $6,144,000 to the original cost of the ABCP at March 31, 2008. 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 senior AA rated and subordinated unrated long-term floating rate notes 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 estimates that it will receive 87% of the senior AA rated notes (Class A-1 and A-2) and 13% of the subordinated unrated notes (Class B and C). 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 notes is estimated to be approximately 7 years which approximates the maturity of the assets backing the note. Based on these assumptions, a write-down of $5,932,000 from the estimated fair value at December 31, 2007 was recognized during the period ended March 31, 2008.

The original ABCP in which the Company has invested has an interest rate of 4.52%. At March 31, 2008 there is $697,000 of interest owing to the Company after impairment allowance. If the restructuring is successful, interest will be paid out. A 15% impairment has been used to value the interest receivable.

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 change 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 $8,000,000 to $4,900,000 based on alternative reasonable assumptions, although given the nature of the information available, the amount ultimately recovered could vary outside these ranges.



4. Property and Equipment

March 31, 2008
$ ('000s)

-------------------------------------
Accumulated
Depletion,
Depreciation
and Net Book
Cost Amortization Value
-------------------------------------
Petroleum & natural gas properties
including exploration and development
thereon and production equipment $ 172,308 $ 37,453 $ 134,855

Office 858 359 499
-------------------------------------
$ 173,166 $ 37,812 $ 135,354
-------------------------------------


December 31, 2007
$ ('000s)

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

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


Unproved properties not subject to depletion amounted to approximately $30,793,000 at March 31, 2008 (December 31, 2007 - $28,661,000; March 31, 2007 - $9,193,000).

The Company capitalized general and administrative costs related to exploration and development of approximately $491,000 for the period ended March 31, 2008 (March 31, 2007 - $161,000).

5. Bank Indebtedness

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 and will be required to be repaid in full upon the liquidation or refinancing of the Company's ABCP holdings. 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 as well a hypothecation/pledge of ABCP. The Company is authorized to access the credit facilities with prior approval of the board of directors of the Company (the "Board"). The Company is required to meet certain financial based covenants under the terms of this facility. As at March 31, 2008, the Company has drawn $37,512,000 on Facility A, $ Nil on Facility B, and $18,000,000 on Facility C. The effective interest rate for the period ended March 31, 2008 was 5.96% (2007 - 5.31%).



6. Asset Retirement Obligations

The following table summarizes the changes in asset retirement obligations
for the period ended March 31, 2008 and December 31, 2007:

March 31, December 31,
$(000's) 2008 2007
--------------------------
Balance - Beginning of period $ 4,560 $ 879
Acquired in business combination - 3,044
Accretion expense 70 184
Liabilities incurred 118 492
Abandonment cost incurred (120) -
Revision in estimated cash flows (398) (39)
--------------------------
Balance - End of period $ 4,230 $ 4,560
--------------------------


The total estimated, inflated undiscounted cash flows required to settle the obligations, before considering salvage, is approximately $12,558,000 (December 31, 2007 - $13,495,000) which has been discounted using a weighted average credit-adjusted risk-free interest rate of 6.25% (December 31, 2007 - 6.25%). The Company expects these obligations to be settled in approximately 1 to 19 years. As at March 31, 2008, no funds have been set aside to settle these obligations.



7. Share Capital

a) Authorized:

Unlimited Common voting shares

Unlimited Common non-voting shares

b) Issued:

Common voting shares Stated
Number Value
('000s) ('000s)
----------------------------------------------------------------------------

Balance, beginning and end of period 39,066 $ 194,994
-------- -----------
-------- -----------


c) Warrants

The Company has 1,050,000 warrants outstanding. 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 2008 the Company granted 195,000 stock options exercisable into voting common shares of the Company. These options vest 25% the first, second, third and fourth anniversaries of grant and have a weighted average exercise price of $2.66 per share.

In the first quarter of 2008, 229,000 vested options were repurchased for approximately $104,000. The amount paid to repurchase the options was charged to contributed surplus.



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

March 31, 2008
---------------------------
Weighted
Number of Average
Options Exercise
('000s) Price

Balance, December 31, 2007 3,091 $ 2.16

Granted 195 2.66

Exercised - -

Repurchased (229) 2.24

Cancelled (203) 3.01
---------------------------

Balance, March 31, 2008 2,854 $ 2.12
---------------------------


The following table summarizes information about stock options outstanding
at March 31, 2008:

----------------------------------------------------------------------------
Options Outstanding Options Exercisable

----------------------------------------------------------------------------
Weighted Number of Weighted
Average Options Average
Weighted Number of Contractual Weighted
Average Options Life Average
Range of Exercise Outstanding Remaining Number of Exercise
Exercise Price Price (years) Options Price
----------------------------------------------------------------------------
$2.06 $2.06 446 7.5 347 $2.06
$2.09 $2.09 2,213 9.6 - -
$2.66 to $2.67 $2.66 195 9.9 - -
---------------------------------------------------------
$2.12 2,854 9.3 347 $2.06
---------------------------------------------------------


e) Stock-based Compensation

Compensation expense for stock options is recognized using the fair value when the options are granted, and are amortized over the option's vesting period. During the three months ended March 31, 2008, approximately $334,000 (2007 - $69,000) 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 period was estimated on the dates of grant using the Black-Scholes option-pricing model with the following weighted average assumptions.



March 31, 2008
----------------

Risk-free interest rate 3.76%

Expected life of options 4 years

Expected volatility 52%

Expected dividend rate 0%

Weighted average fair value $1.19


f) Income (loss) per share

The following table reconciles the denominators used for the basic and
diluted net income per share calculations:

March 31, March 31,
2008 2007
('000's) ('000's)
---------------------------
Basic weighted average shares 39,066 20,588
Effect of dilutive stock options and warrants - 485
---------------------------
Dilutive weighted average shares 39,066 21,073
---------------------------
---------------------------

No stock options or warrants have been included in the calculation of
diluted shares outstanding for the period ended March 31, 2008 as their
inclusion would be anti-dilutive.

g) Contributed surplus

$ (000's)
----------------
Balance - December 31, 2007 $ 2,720
Stock-based compensation expensed (note 7 (e)) 334
Repurchase of stock options (note 7 (d)) (104)
----------------
Balance - March 31, 2008 $ 2,950
----------------


8. Related Party Transactions

a) A director of the Company is a partner of a law firm that provides legal services to the Company. During the three months ended March 31, 2008, the Company paid approximately $9,000 (March 31, 2007 - $Nil) to this firm for legal fees and disbursements. Additionally, $Nil is included in accounts payable and accrued liabilities, due under normal credit terms, at March 31, 2008 (December 31, 2007 - $2,000) for this firm.

b) A director of the Company is the owner of a corporation that provides drilling services to the Company. During the three months ended March 31, 2008, the Company paid approximately $603,000 (March 31, 2007 - $466,000) for drilling and services, which has been included in property and equipment. Additionally, approximately $21,000 is included in accounts payable and accrued liabilities, due under normal credit terms, at March 31, 2008 (December 31, 2007 - $195,000) for this firm.

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

9. Contingency

The Bear Ridge Resources Ltd. ("Bear Ridge") acquisition that occurred on August 21, 2007 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.

10. Commitments

a) Pursuant to a flow-through share offering of Bear Ridge, prior to its acquisition, the Company is committed to incur a total of $24,000,000 in qualifying expenditures by December 31, 2008. As of March 31, 2008 approximately $3,478,000 is still to be incurred.

b) Pursuant to a flow-through share and warrants offering of Bear Ridge, prior to its acquisition, the Company is committed to incur a total of $12,300,000 in qualifying expenditures by March 15, 2009. As of March 31, 2008 the entire $12,300,000 commitment remains.

11. Financial instruments and risk management

The Company has the following financial instruments:

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 deposits are designated as loans and receivables and are measured at amortized cost. Accounts payable and accrued liabilities and bank indebtedness are designated as other financial liabilities and are measured at amortized cost. All risk management assets and liabilities are derivative financial instruments and classified as held-for-trading.

The Company uses 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.

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.

The nature of these financial instruments and its operations expose the Company to market risk, credit risk and liquidity risk. The Company manages its exposure to these risks by operating in a manner that minimizes these risks. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Board has established policies in setting risk limits and controls and monitors these risks in relation to market conditions.

a) Market risk

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

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 March 31, 2008.

----------------------------------------------------------------------------
Term Volume Price Basis
----------------------------------------------------------------------------
April 1, 2008 to 3,000 $ 7.04 AECO
March 31, 2009 GJ/day
----------------------------------------------------------------------------
April 1, 2008 to 6,000 $ 7.08 AECO
March 31, 2009 GJ/day
----------------------------------------------------------------------------
January 1, 2008 to 3,150 $6.50 floor AECO
December 31, 2008 J/day $10.00 ceiling
----------------------------------------------------------------------------



Realized losses totalling $80,000 for the first quarter ending March 31, 2008 from derivatives was recognized in income (March 31, 2007 - $55,000 realized gain) and the fair value of the costless collars outstanding at March 31, 2008 were $(7,140,000) (December 31, 2007 - $843,000; March 31, 2007 - $333,000).

As at March 31, 2008, if the underlying natural gas price increased by $0.50/mcf, the fair value of the commodity contracts becomes $(8,838,000) resulting in an increased loss before tax of $1,698,000 ($1,214,000 after tax).

As at March 31, 2008, if the underlying natural gas price decreased by $0.50/mcf, the fair value of the commodity contracts becomes $(5,506,000) resulting in a decreased loss before tax of $1,634,000 ($1,168,000 after tax).

Foreign exchange risk

The Company is exposed to foreign currency fluctuations as crude oil and natural gas prices are referenced to U.S. dollar denominated prices. As at March 31, 2008 the Company had no forward, foreign exchange contracts in place, nor any significant working capital items denominated in foreign currencies.

Interest rate risk

The Company is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the floating rate credit facility. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates. The Company has no interest rate swaps or financial contracts in place as at or during the three months ended March 31, 2008.

As at March 31, 2008, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the period would have been $99,000 higher, due to lower interest expense. An equal opposite impact would have occurred to net earnings had interest rates been 1% higher.

b) 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 and are subject to the same industry factors such as commodity price fluctuations and escalating costs. 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 3.

Receivables from petroleum and natural gas marketers are normally collected on the twenty-fifth day of the month following production. Receivables related to the sale of the Company's petroleum and natural gas production are from major marketing companies with investment grade credit ratings. The Company historically has not experienced any collection issues with its petroleum and natural gas marketers.

Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure and issuing cash calls on large capital projects from its partners on capital projects before they commence. The Company reviews the financial status of joint venture partners before partner approval is obtained.

(c) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to meet its liabilities when due. The nature of the oil and gas industry is very capital intensive. As a result, the Company prepares annual capital expenditure budgets and utilizes authorizations for expenditures for projects to manage capital expenditures. Refer to note 13 for disclosure related to the management of capital.

(d) Fair value of financial instruments

The Company's cash and cash equivalents, accounts receivable, deposits, bank indebtedness and accounts payable and accrued liabilities approximates their carrying value due to their short terms to maturity and the floating interest rate on the Company's debt.

The fair value of derivative contracts is determined by discounting the difference between the contracted price and published forward price curves as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes.

The fair value of the Company's investment in commercial paper is disclosed in Note 3.



12. Change in non-cash component of working capital

Period ended Period ended
March 31, 2008 March 31, 2007
('000's) ('000's)
----------------------------------------------------------------------------
Accounts receivable $ (567) $ 1,685
Deposits and prepaid expenses
Accounts payable and accrued
liabilities (3,166) (4,700)
Interest accrued on commercial paper
----------------------------------------------------------------------------

$ (4,281) $ (3,027)
----------------------------------------------------------------------------


Changes in Non-cash Working Capital Related to

Period ended Period ended
March 31, 2008 March 31, 2007
('000's) ('000's)
---------------------------------
Operating activities $ (3,039) $ 743
Investing activities (1,242) (3,770)
---------------------------------

$ (4,281) $ (3,027)
---------------------------------


13. Capital management

The Company's capital consists of shareholders' equity, bank debt and working capital. The Company will adjust its capital structure to manage its current and future debt, drilling programs and potential corporate acquisitions through the issuance of shares, increasing the credit facility line and adjustments to capital spending.

The Company's objective for managing capital is to maximize long-term Shareholder value by:

- Ensuring financing capacity for the Company's drilling programs that are expected to increase reserves and add value to our Shareholders; and

- Financing the Company's growth through drilling projects, joint venture opportunities and asset/corporate acquisitions.

The Company monitors capital structure using non-GAAP measures, based on the ratio of net debt to annualized funds flow. The Company also monitors capital structure by reviewing net asset value and interest per barrel of oil equivalent ("boe").

The Company's strategy is to maintain a net debt to annualized funds flow of no greater than 3 : 1 under normal business conditions. This ratio may increase at certain times as a result of property or corporate acquisitions. However, subsequent equity issues will bring the ratio back to the target ratio. To facilitate the management of this ratio, the Company prepares annual budgets, which are updated as necessary depending on varying factors including current and forecast prices, successful drilling results and general industry conditions. The annual and updated budgets are approved by the Board of Directors.



As at March 31, 2008, the net debt to adjusted funds flow (annualized) is
calculated as follows:

000's
-------------

Current Assets $ 11,513

Current Liabilities (76,612)
-------------

Net debt $ (65,099)
-------------
-------------
$(000's)
Net income (loss) for the period $ (8,210)
Items not affecting cash
Depletion, depreciation, and amortization 5,933
Accretion expense 70
Stock-based compensation 334
Write down on commercial paper 3,323
Unrealized loss (gain) on hedge contracts 7,983
Future income taxes (1,580)
Asset retirement expenditures (120)
Funds flows from operations $ 7,733
-------------


Projected annualized funds flows $ 30,932
----------------------------------------------------------------------------

Net Debt to Annualized Funds Flows 2.1 : 1.0
-------------
-------------


As at March 31, 2008, the Company's ratio of net debt to annualized cash flow was 2.1 to 1.0, within the range established by the Company.

As disclosed in Note 5, the Company is bound by certain debt covenants. These covenants include to maintain a Working Capital Ratio of not less than 1.0 : 1.0 at all times. The Working Capital ratio shall be defined as Current Assets (including the un-drawn Availability under the Credit Facility A) to Current Liabilities (excluding any current portion of Bank Debt). As at March 31, 2008, the Company is not in violation of any bank covenants.

The Company has hedges on contract crude oil, natural gas liquids, or natural gas, on a fixed price basis, not exceeding 70% of actual production volumes.

The Company's share capital is not subject to external restrictions as to how it is utilized nor does it have any financial covenants in respect to the bank credit facility related to shareholders' equity. The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.

14. Comparative Figures

Certain comparative figures for the three months ended March 31, 2007 have been reclassified to conform to the current period presentation.

Contact Information