TRAFINA Energy Ltd.
TSX VENTURE : TFA.A

TRAFINA Energy Ltd.

November 29, 2007 17:33 ET

TRAFINA Energy Ltd.: Third Quarter Report 2007 for the Three and Nine Months Ended September 30, 2007

CALGARY, ALBERTA--(Marketwire - Nov. 29, 2007) - TRAFINA Energy Ltd. (TSX VENTURE:TFA.A) announces financial and operating highlights for the three and nine months ended September 30, 2007:

- TRAFINA drilled 5 gross (2.2 net) gas wells in the third quarter which are expected to be tied-in in 2008.

- Cash flow from operations(1) for the nine months totaled $797,312, or $0.14 per share, which represents a 56% decrease from the comparative prior period.

- Net loss for the nine months totaled $693,501 compared to net income of $2,824,450 in 2006 due to the $3.5 million gain on sale of assets in 2006.

- Capital expenditures for the nine months totaled $2,480,879, a decrease of 66% compared to 2006.

- TRAFINA had total debt including working capital deficiency of $943,873 at September 30, 2007.

- Oil sales volume increased 165% to 50.8 BOE/d compared to the third quarter of 2006. Total sales of 250.8 BOE/d were down 17% for the third quarter and of 261.8 BOE/d were down 19%, for the nine months ended September 30, 2007 compared to 2006. 83.7% of TRAFINA's total sales volume was represented by natural gas.

OUTLOOK

In our quarterly report for the six months ended June 30, 2007, we indicated that our plan for the remainder of 2007 was to increase production from existing drilled wells, to reduce well operating expenses and to reduce general and administrative expenses. We are continuing with that plan in the fourth quarter, although our success to date has been less than expected.

With respect to production, we had targeted a production rate of approximately 500 BOE/d by the end of 2007. The management plan to achieve this rate experienced unexpected operational delays due to surface issues, AEUB approvals and negative results from one recompletion. Exit production at September 30, 2007 was approximately 317 BOE/d and management expects sales volumes for the fourth quarter to be higher than the third quarter. Further increases in sales volumes are expected when the five non-operated CBM wells drilled in the third quarter have been tied-in. In addition, TRAFINA is still waiting for AEUB licenses in order to commence production from the 16-22 slightly sour oil well. TRAFINA has a working interest of 71.1% (BPO) in this well and is hopeful of commencing production in the first quarter of 2008.

We achieved a degree of reduction in well operating expenses in the third quarter on a BOE basis and we are continuing our efforts in this regard. General and administrative expenses were higher in the third quarter due to severances from staff reductions, which should result in lower general and administrative expenses going forward.

As we move forward to 2008, the operator of our Wetaskiwin, Alberta, Horseshoe Canyon CBM Project has become very ambitious during the third quarter as a consequence a new drilling technique, which had positive testing results from 5.0 gross (2.0 net) CBM gas wells during the third quarter. These results have led our operator to consider an aggressive Horseshoe Canyon CBM drilling program for the year 2008, which could include 12 to 25 CBM wells, and tying these wells in during 2008. TRAFINA currently has a 40% working interest in these properties.

With respect to its own operating activities, with current unfavourable gas prices and attractive oil prices, TRAFINA is currently focusing on pursuing oil play opportunities.

We also indicated in our quarterly report for the six months ended June 30, 2007 that TRAFINA intended to take advantage of new opportunities and would consider any acquisition, disposition or other corporate transaction that was presented to us.

Management has considered opportunities to expand operations into new areas as well as a prospective acquisition, but TRAFINA has not accepted any opportunities to date. TRAFINA will continue to evaluate opportunities on an on-going basis as its resources permit.

Mr. David C. Yu has returned as full-time Vice President, Finance and CFO effective November 1, 2007. Mr. Thomas R. Holland has been appointed as a director effective November 6, 2007. Tom is the President of Writers Oil & Gas Limited, a private oil and gas company, and has been engaged in the oil and gas industry in Canada for over 40 years.

Throughout this quarterly report, TRAFINA references BOEs. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Several statements in this quarterly report including statements regarding future oil and gas production, reserves or other oil and gas activities, are forward looking. These forward-looking statements are based on TRAFINA's current expectations. Because forward-looking statements involve risks and uncertainties, TRAFINA's actual results could differ materially. See "Forward Looking Statements" in the attached Management's Discussion and Analysis.

(1) Cash flow from operations is a Non-GAAP Measure. See "Non-GAAP Measures" in the attached Management's Discussion and Analysis.



FINANCIAL Three months ended Sept 30 Nine months ended Sept 30
HIGHLIGHTS % %
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------
Total gross
revenue
excluding
gain on
sale ($) 1,154,364 1,554,676 -26 3,376,837 5,014,621 -33
Oil and gas
revenue, net
of royalties
($) 1,025,065 1,342,067 -24 2,968,696 4,325,358 -31
Income (loss)
before income
taxes ($) (244,418) (79,382) -208 (896,501) 3,772,244 -124
Net Income
(loss) ($) (248,418) (183,382) -35 (693,501) 2,824,450 -125
Per common
share - basic (0.04) (0.03) -33 (0.12) 0.49 -124
Per common
share -
diluted (0.04) (0.03) -33 (0.12) 0.47 -126
Cash flow from
operations
($)(1) 329,250 571,120 -42 797,312 1,817,494 -56
Per common
share - basic 0.06 0.10 -40 0.14 0.32 -56
Per common
share -
diluted 0.06 0.10 -40 0.14 0.31 -55
Average shares
outstanding -
basic 5,782,472 5,752,935 +1 5,763,103 5,751,250 0
Average shares
outstanding -
diluted 5,782,472 5,948,183 -3 5,763,103 5,946,498 -3
Capital
expenditures
($) 445,104 (3,511) +12,774 2,480,879 7,259,251 -66
Working
capital
(deficiency)
($) (943,873) 1,374,984 -169 (943,873) 1,374,984 -169
-------------------------------------------------------------



OPERATING Three months ended Sept 30 Nine months ended Sept 30
HIGHLIGHTS % %
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------
DAILY SALES
Natural gas
(Mcf/d) 1,190.6 1,680.2 -29 1,314.8 1,708.1 -23
Heavy and light
oil (Bbl/d) 50.8 19.2 +165 39.9 33.3 +20
NGL (Bbl/d) 1.6 4.2 -62 2.7 4.2 -36
Total BOE/d 250.8 303.4 -17 261.8 322.2 -19

AVERAGE PRICE
Natural gas
($/Mcf) 7.77 9.50 -18 7.84 9.51 -18
Heavy and light
oil ($/Bbl) 62.60 34.17 +83 47.91 56.06 -15
NGL ($/Bbl) 76.00 65.84 +15 55.93 60.41 -7
Total $/BOE 50.02 55.69 -10 47.25 57.00 -17
-------------------------------------------------------------


OPERATING ACTIVITY

Production at TRAFINA 12-23 oil well in the Wetaskiwin area has increased from a GOR restricted allowable of 31 - 38 barrels per day gross to the maximum of 69 barrels per day gross. This is due to the effect of good production practices, which resulted in lower GOR's and therefore increased the allowable. Consequently, a gas to generate power option under consideration has been deferred.

DRILLING ACTIVITY

TRAFINA drilled five gross (2.2 net) CBM wells in the third quarter of 2007, which are now awaiting tie-in. TRAFINA also completed one gross (0.4 net before payout) CBM well in the third quarter of 2007, this well was previously drilled in the first quarter of 2005.



Wells Drilled Three months ended Sept 30 Nine months ended Sept 30
2007 2006 2007 2006
-------------------------------------------------------
GROSS NET GROSS NET GROSS NET GROSS NET
-------------------------------------------------------
Natural gas 5 2.2 0 0 6 3.2 5 2.1
Oil 0 0 0 0 0 0 1 0.7
Dry and abandoned 0 0 0 0 1 1(1) 1 0.5
-------------------------------------------------------
Total Wells Drilled 5 2.2 0 0 7 4.2 7 3.3
-------------------------------------------------------
-------------------------------------------------------
(1) 100% working interest before payout and 40% working interest after
payout


CAPITAL EXPENDITURES

Capital expenditures increased to $445,104 in the three months ended September 30, 2007 and decreased to $2,480,879 in the nine months ended September 30, 2007 from ($3,511) and $7,259,251 in the comparable periods of 2006. These increases in the third quarter were largely due to increased drilling and recompletion activity.

SALES VOLUMES

Net sales for the three months ended September 30, 2007 averaged 251 BOE/d, down 17% from 303 BOE/d in the comparable period of 2006 and net sales for the nine months ended September 30, 2007 averaged 262 BOE/d, down 19% from 322 BOE/d in the comparable period in 2006. These decreases were the direct result of the shut-in of one oil well and natural decline on gas wells in the Wetaskiwin area. The oil well was put back on production on May 22, 2007.

Three month natural gas sales were down 29% to 1,190.6 Mcf/d from 1,680.2 Mcf/d in the comparable period of 2006. Three month heavy and light oil sales were up 165% to 50.8 Bbl/d from 19.2 Bbl/d in the comparable period of 2006. Three month NGL sales decreased 62% to 1.6 Bbl/d from 4.2 Bbl/d in the comparable period of 2006. Production on September 30, 2007 was approximately 317 BOE/d.



Sales Volumes by Area (Three months ended September 30)

Natural Gas Oil and NGL Total Volumes
-----------------------------------------------------------------
AREAS 2007 2006 Change 2007 2006 Change 2007 2006 Change
-----------------------------------------------------------------
Mcf/day Mcf/day % Bbl/day Bbl/day % BOE/d BOE/d %
Bindloss 132 140 -5.7 0 0 0 22 23 -4.3
Carson/
Judy Creek 168 159 +6 0 1 -100 28 27 3.7
Jenner 177 180 -1.7 35 19 +84.2 65 49 +32.7
Wetaskiwin 714 1,201 -40.6 17 4 +325 136 204 -33.3
-----------------------------------------------------------------
TOTAL 1,191 1,680 -29.1 52 24 +116.7 251 303 -17.2
-----------------------------------------------------------------
-----------------------------------------------------------------



Sales Volumes by Area (Nine months ended September 30)

Natural Gas Oil and NGL Total Volumes
-----------------------------------------------------------------
AREAS 2007 2006 Change 2007 2006 Change 2007 2006 Change
Mcf/day Mcf/day % Bbl/day Bbl/day % BOE/d BOE/d %
-----------------------------------------------------------------
Bindloss 133 140 -5.3 0 0 0 22 23 -4.3
Carson/
Judy Creek 161 170 -5.2 0 1 -100 27 29 -6.9
Jenner 183 201 -8.9 25 15 +66.7 56 49 +14.3
Wetaskiwin 838 1,197 -30.0 18 22 -18.2 157 221 -29
-----------------------------------------------------------------
TOTAL 1,315 1,708 -23.0 43 38 13.2 262 322 -18.6
-----------------------------------------------------------------
-----------------------------------------------------------------


PRICES

Natural gas prices during the three months ended September 30, 2007 averaged $7.77 per thousand cubic feet, a decrease of 18% over the comparable period of 2006. TRAFINA had fixed gas price contracts at $7.30 per gigajoule for 500 gigajoules per day, and $7.87 per gigajoule for an additional 500 gigajoules per day until October 31, 2007. TRAFINA's average monthly natural gas prices in the third quarter of 2007 were $7.51, $8.01 and $8.56 per thousand cubic feet for July, August and September, respectively. Average heavy and light oil prices for the three months ended September 30, 2007 were up 83% to $62.60 per barrel from $34.17 per barrel in the comparable period of 2006.

SUMMARY OF THE THIRD QUARTER FINANCIAL RESULTS

Cash flow in the third quarter of 2007 was $329,250 ($0.06 per share) compared with $571,120 ($0.10 per share) for the same period last year. The major difference between the two periods resulted from a 17% decrease in production due to natural decline in gas wells and a 29% decrease in natural gas prices. 84% of TRAFINA's total sales volume was represented by natural gas. Net loss was also impacted to $248,418 ($0.04 per share) versus $183,382 ($0.03 per share). Bank debt at the quarter end was $519,849 compared to no debt as at December 31, 2006.

On behalf of the Board of Directors:

Roland T. Valentine, Chairman and CEO

MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis (MD&A) is a review of TRAFINA Energy Ltd's (the "Corporation" or "TRAFINA") financial results for the three and nine month periods ended September 30, 2007 and should be read in conjunction with the unaudited interim financial statements for the three and nine month periods ended September 30, 2007 and the audited financial statements and MD&A for the year ended December 31, 2006. The MD&A is dated November 29, 2007. All references to dollar values refer to Canadian dollars, unless otherwise stated.

FORWARD LOOKING STATEMENTS

Certain information set forth in this MD&A contains forward-looking statements. Readers are cautioned that assumptions used in the preparation of such statements may prove to be incorrect. Events or circumstances may cause actual results to differ materially from those predicted, as a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Corporation. These risks include, but are not limited to: the risks associated with the oil and natural gas industry, commodity prices, and exchange rate changes. Industry related risks include, but are not limited to: operational risks in exploration, development and production of oil and natural gas and production risks associated with sour hydrocarbons, dependence on third-party owned and operated production facilities, availability of skilled personnel and services, failure to obtain industry partners, regulatory and other third-party consents and approvals, delays or changes in plans, risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of reserves, production, costs and expenses. The risks outlined above should not be construed as exhaustive. Readers are cautioned not to place undue reliance on these forward-looking statements. The Corporation undertakes no obligation to update or revise any forward-looking statements except as required by applicable securities laws.

NON-GAAP MEASURES

The MD&A uses the term "cash flow from operations", which is not defined under Canadian GAAP and should not be considered an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian GAAP as an indicator of the Corporation's performance. TRAFINA's determination of cash flow from operations may not be comparable to that reported by other companies. Cash flow from operations is cash flow before changes in non-cash working capital. The Corporation also presents cash flows from operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of net income per share.



The following table reconciles the cash flow from operating activities to
cash flow from operations:
----------------------------------------------------------------------------
Three months ended Sept 30 Nine months ended Sept 30

2007 2006 % Change 2007 2006 % Change
------------------------------------------------------------
Cash flow from
operating
activities ($) 329,250 571,120 -41.9 797,312 1,817,494 -56.0
Change in
non-cash
operating
items ($) (524,847) 251,760 -3,085 (1,867,827) (2,424,630) -23.0
------------------------------------------------------------
Cash flow from
(used in)
operations ($) (195,597) 822,880 -1,238 (1,070,515) (607,136) -76.3
----------------------------------------------------------------------------


ALBERTA ROYALTY REVIEW

On Oct 25, 2007 the Alberta government announced changes to the provincial royalty program effective January 1, 2009. The government has introduced dual sliding scale royalties for conventional crude oil and natural gas production that are based on commodity price levels and monthly well production rates. Although royalty rates were reduced for certain low productivity wells in low price environments, most royalties are expected to increase, especially with higher well productivity and commodity prices. The Alberta government expects to increase its royalty revenues by 20% or $1.4 billion by 2010 as a result of this change in the royalty regime.

New royalty rates for natural gas wells will range from 5% to 50% of a market-based reference price, an increase from the current program that ranges from 5% to 35%. In addition, the government has announced a program whereby deep gas wells are less affected by the new royalty regime based on a formula that is sensitive to total drilling distances (both vertical and horizontal) that exceed 2,000 meters. We also expect a more favorable royalty framework is forthcoming (lower royalties and a wider price range than other conventional gas) for coal bed methane, tight gas and shale gas but no specific information with respect to these royalty programs are available from the government.

Furthermore on natural gas, the government announced it will implement "shallow rights reversion" whereby mineral rights to undeveloped shallow gas above zones that are being developed will revert back to the government and made available for resale. TRAFINA is assessing the potential impact of this policy of our reserves and development plans pending further details from the government.

Royalty rates for crude oil wells will increase from the current maximum of 35% to a new maximum of 50% for higher ranging prices and production levels. Most other specialty royalty programs will be eliminated.

Details of the new royalty program can be found on the Alberta government's website at www.gov.ab.ca.

Approximately $198,361 (48.6%) of TRAFINA's total royalties during the nine months ended September 30, 2007 were Alberta crown royalties. We have attempted to estimate the impact of the royalty changes on TRAFINA however this is difficult as details of the revised royalty program have yet to be finalized.

Based on royalties paid during 2007 and in the context of production and pricing during that period, we would expect Alberta royalties to increase by approximately $40,000 annually or 4% of operating cash flow and total royalties to increase by approximately 7%. Our total consolidated royalty rate would increase from 12% to approximately 13% of total revenues. The moderate increase is a reflection of the new royalty regime's sensitivity to the low natural gas prices experienced this year and TRAFINA's portfolio of lower productivity wells. It is important to know that these estimates have assumed the applicability of deeper well relief to our current wells and that the current "effective corporate" royalty rates used to calculate the Crown's share of capital for gas processing facilities will be similar to the new "facility effective" rates proposed by the government. Also these estimates are based on production and pricing that may not be indicative of the environment in 2009 when these royalty changes come into effect.

Note: In this MD&A, reserves and production are commonly stated in barrels of oil equivalent (BOEs) on the basis that six thousand cubic feet (Mcf) of natural gas is equivalent to one barrel of oil (Bbl). BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf to 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent an equivalency of value at the wellhead.



SELECTED FINANCIAL INFORMATION

----------------------------------------------------------------------------
For the three
months ended
September 30 2007 to 2006 2006 to 2005

2007 % Change 2006 % Change 2005
----------------------------------------------------------------------------
Gross revenue
($) 1,176,605 -26 1,579,596 -7 1,473,746
Royalties net
of ARTC ($) 129,299 -39 212,609 -4 221,457
Oil & gas
revenue, net
of royalties
($) 1,025,065 -24 1,342,067 -9 1,226,453
Operating,
processing,
and
transportation
expenses ($) 350,735 -7 377,456 +41 267,999
Cash flow
from
operations
(1) ($) 329,250 -42 571,120 -17 687,111
per basic
common share
($) .06 -40 .10 -33 0.15
per diluted
common share
($) .06 -40 .10 -33 0.15
Weighted
average basic
shares 5,782,472 +1 5,752,935 +28 4,490,250
Weighted
average
diluted shares 5,782,472 -3 5,948,183 +30 4,579,322
Income (loss)
before income
taxes ($) (244,418) -208 (79,382) -125 322,871
Net income
(loss) ($) (248,418) -35 (183,382) -200 182,875
per basic
common share
($) (0.04) -33 (0.03) -175 0.04
per diluted
common share
($) (0.04) -33 (0.03) -175 0.04
Capital
expenditures
($) 445,104 +12,774 (3,512) -100 1,494,916
Total assets
($) 15,234,828 -4 15,943,198 +70 9,398,453
Bank debt ($) 519,849 +100 0 -100 509,073
Working
capital
(deficiency)
($) (943,873) -169 1,374,984 +185 (1,622,558)

----------------------------------------------------------------------------
For the nine
months ended
September 30 2007 to 2006 2006 to 2005

2007 % Change 2006 % Change 2005
----------------------------------------------------------------------------
Gross revenue
($) 3,474,167 -32 5,122,641 +30 3,925,735
Royalties net
of ARTC ($) 408,141 -41 689,263 +13 610,810
Oil & gas
revenue, net
of royalties
($) 2,968,696 -31 4,325,358 +33 3,259,901

Operating,
processing,
and
transportation
expenses ($) 1,155,472 -2 1,181,846 +35 878,337
Cash flow
from
operations(1)
($) 797,312 -56 1,817,494 +26 1,440,068
per basic
common share
($) 0.14 -56 0.32 0 0.32
per diluted
common share
($) 0.14 -55 0.31 0 0.31
Weighted
average basic
shares 5,763,103 0 5,751,250 +28 4,490,250
Weighted
average
diluted shares 5,763,103 -3 5,946,498 +30 4,579,322
Income (loss)
before income
taxes ($) (896,501) -124 3,772,244 +625 520,114
Net income
(loss) ($) (693,501) -125 2,824,450 +758 329,068
per basic
common share
($) (0.12) -124 0.49 +600 0.07
per diluted
common share
($) (0.12) -126 0.47 +571 0.07
Capital
expenditures
($) 2,480,879 -66 7,259,251 +152 2,886,095
Total assets
($) 15,234,828 -4 15,943,198 +70 9,398,453
Bank debt ($) 519,849 +100 0 -100 509,073
Working
capital
(deficiency)
($) (943,873) -169 1,374,984 +185 (1,622,558)

(1) Cash flow from operations is a Non-GAAP Measure, See "Non-GAAP Measures"
in this Management's Discussion and Analysis.


GROSS REVENUE

Gross revenues in the three and nine months ended September 30, 2007 decreased 26% to $1,176,605 and 32% to $3,474,167 from $1,579,596 and $5,122,641 for the comparable periods in 2006. This decrease was the result of a 10% decrease in average sales price along with a 17% decrease in sales volume for the three months and a 17% decrease in average sales price along with a 19% decrease in sales volume for the nine months ended September 30, 2007 compared to the comparable periods in 2006. These decreases in sales volume were the result of natural production decline from gas wells in the Wetaskiwin area. The decline in gas well volumes and gas prices was partially offset by increased production of oil.

PRICES

TRAFINA's average price per BOE for the third quarter of 2007 was $50.02, which was down 10% from $55.69 in the three months and was $47.25, which was down 17% from $57.00 in the nine months ended September 30, 2007 compared to comparable periods in 2006. TRAFINA's average oil price was 83% higher and 15% lower for the three and nine months ended September 30, 2007 respectively compared to the comparable periods in 2006, while natural gas prices decreased 18% to $7.77 per Mcf from $9.50 per Mcf for the three months and 18% to $7.84 per Mcf from $9.51 per Mcf for the nine months ended September 30, 2007 compared to the comparable periods of 2006.

ROYALTIES

Net royalties decreased to $129,299 ($5.60 per BOE) from $212,609 ($7.62 per BOE) for the three months and decreased to $408,141 ($5.71 per BOE) from $689,263 ($7.84 per BOE) for the nine months ended September 30, 2007 compared to the comparable periods of 2006. The decrease is a direct result of the Corporation's decrease in sales volume and product prices in the three and nine months of 2007 compared to 2006. Effective January 1, 2007, ARTC has been eliminated.

Royalties as a percentage of revenue decreased to 11.2% from 13.7% in the three months and 12.1% from 13.7% in the nine months ended September 30, 2007 compared to the comparable periods of 2006.

OPERATING EXPENSE

Operating expenses including processing and transportation costs, on a barrel of oil equivalent basis, decreased to $15.20 per BOE in the three months and increased slightly to $13.52 per BOE in the nine months ended September 30, 2007 from $16.17 per BOE and $13.43 per BOE in the comparable periods of 2006. The increase is largely due to workover costs on five Wetaskiwin wells in the first half of 2007.

NETBACKS

TRAFINA's average operating netback decreased 15% to $29.22 per BOE, for the three months and decreased 29% to $25.37 per BOE, for the nine months ended September 30, 2007, from $34.55 per BOE and $35.74 per BOE for the comparable periods in 2006. This change was primarily due to the decrease in sales volume and product prices and an increase in workover operating expenses.

GENERAL AND ADMINISTRATIVE (G & A) EXPENSE

General and administrative expenses before capitalization ($41,121 in 2007 and $75,970 in 2006) totaled $453,971 or $19.67 per BOE in the three months, and before capitalization ($144,527 in 2007 and $178,582 in 2006) totaled $1,317,087 or $18.43 per BOE in the nine months, ended September 30, 2007 compared to $419,103 or $15.01 per BOE and 1,291,343 or $14.68 per BOE for the comparable periods in 2006. The increase in per BOE G & A expense is mainly due to a 17% and 19% decrease in sales volume, respectively, and an increase in administration expenses due to severance payments in relation to staff reductions.

STOCK BASED COMPENSATION (SBC) EXPENSE

SBC expense totaled $4,000 for the three months and $9,000 for the nine months ended September 30, 2007 compared to $42,000 and $124,000 in the comparable periods of 2006. SBC expense is amortized over the vesting period of the stock options. SBC expense is based on estimated fair value of the options on the grant date in accordance with the fair value of accounting of SBC. The 2007 SBC expense relates to the 30,000 stock options granted in December 2006 and May 2007. The SBC expense has been fully recognized on the options granted in 2004.

DEPLETION, DEPRECIATION, AND ACCRETION

Depletion, depreciation and accretion expense was $556,668 for the three months and $1,618,813 for the nine months ended September 30, 2007 compared to $556,059 and $1,774,609 for the comparable periods in 2006. The average rate for providing depletion, depreciation and accretion of oil and gas assets increased to $24.12 per BOE for the three months and $22.65 per BOE for the nine months ended September 30, 2007 from $19.92 and $20.17 per BOE for the comparable periods in 2006. The increases in per BOE depletion, depreciation, and accretion expense are mainly due to a 17% and 19% decrease in sales volume. In addition, consistent with TRAFINA's accounting policies, the capital expenditures of $2,480,879 incurred in 2007 have been included in the cost of depletion base for purpose of calculating depletion, even though there has been no assessment of any reserve additions resulting from these expenditures.

INCOME TAXES

Income taxes of $4,000 in the three months ended September 30, 2007 and a reduction of $203,000 in the nine months ended September 30, 2007 from an income tax expense of $104,000 and $947,794 for the comparable periods in 2006. This decrease resulted from net loss for the three and nine months ended September 30, 2007.

CASH FLOW FROM OPERATIONS

Cash flows from operations decreased 42% to $329,250 for the three months ended September 30, 2007 and decreased 56% to $797,312 for the nine months ended September 30, 2007 from $571,120 and $1,817,494 in the comparable periods of 2006, largely due to decrease in sales volume and product prices.

NET INCOME (LOSS)

Net income decreased 35% to a net loss of $248,418 for the three months ended September 30, 2007 and decreased 125% to a net loss of $693,501 for the nine months ended September 30, 2007 from a net loss of $183,382 and an income of $2,824,450 in the comparable period of 2006, largely due to the $3.5 million gain on sale of assets recorded in 2006.

BANK DEBT AND LIABILITY

TRAFINA had a working capital deficiency of $943,873 as at September 30, 2007. TRAFINA has a demand revolving operating credit facility with a Canadian chartered bank under which it can borrow up to $4.3 million of which $519,849 was drawndown at September 30, 2007. The facility bears interest at the bank's prime rate plus 0.25 percent per annum. The loan is secured by a floating charge demand debenture in the amount of $10,000,000 over the Corporation's property and equipment and a general assignment of book debts. The revolving operating credit facility revolves until May 31, 2008 at which time the facility may be extended or converted to a term facility with a term, at the bank's discretion, not to exceed five years.

CAPITAL EXPENDITURES

The Board of Directors of TRAFINA approved a capital expenditure budget of $3.1 million for 2007, which at the time included the drilling of nine wells and the recompletion of six wells in the Wetaskiwin area of Alberta. At this time, the Corporation has participated in the drilling of 7 gross (4.2 net) wells in the Wetaskiwin area, consisting of one dry hole and 3.2 net CBM wells that have not yet been put on production. The Corporation has also recompleted 6.0 gross (3.7 net) wells in the Wetaskiwin area.



Three months Nine months
Capital Expenditures ended Sept 30 ended Sept 30
2007 2006 2007 2006
--------------------------------------------------
($) ($) ($) ($)
Land Acquisitions 0 82,009 (912) (29,427)
Seismic 0 24,618 15,127 94,600
Drilling, Completions and
recompletions 233,826 (490,861) 1,542,215 3,486,834
Production Facilities 135,091 300,660 781,066 3,300,901
Other 76,187 80,063 143,383 406,343
--------------------------------------------------
Total Capital Expenditures 445,104 (3,511) 2,480,879 7,259,251
--------------------------------------------------
--------------------------------------------------


LIQUIDITY AND CAPITAL RESOURCES

TRAFINA is relying upon two sources of funding to support its 2007 capital expenditure program.

These sources are as follows:

1. Internally generated cash flow; and

2. Bank debt to be used when deemed appropriate. TRAFINA has maintained a conservative policy concerning the use of bank debt.

For the first nine months of 2007, TRAFINA financed its gross capital expenditures of $2,480,879 from its cash flow of $797,312, cash in the bank and bank debt. The working capital deficiency at September 30, 2007 was $943,873, including $519,849 of drawdown under its bank line of credit.

OFF-BALANCE SHEET ARRANGEMENT

TRAFINA does not have any off-balance sheet arrangements.

TRANSACTIONS WITH RELATED PARTIES

TRAFINA did not have any transactions with related parties during the third quarter of 2007.

PROPOSED TRANSACTIONS

Although management continues to look at corporate acquisitions and asset acquisitions and dispositions, TRAFINA has not decided to proceed with any proposed transaction to date.

CONTRACTUAL OBLIGATIONS

TRAFINA is committed to operating leases for office space at a cost of $16,000 for 2007 and $62,000 for 2008. As at September 30, 2007, TRAFINA had two fixed price forward sale gas contracts for the period to October 31, 2007 for 500 gigajoule per day each at $7.87 and $7.30 per gigajoule, respectively.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with Canadian GAAP requires management to make certain judgments and estimates. Estimates which are critical and/or significant for TRAFINA include the estimates of reserves, depletion and depreciation, asset retirement obligation, stock-based compensation and the ceiling test. Changes in these estimates could have a material impact on the Corporation's financial results and financial condition.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by TRAFINA is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. The Corporation's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the interim filings that TRAFINA's disclosure controls and procedures are effective to provide reasonable assurance that material information related to TRAFINA is made known to them by others within those entities. It should be noted that while the Corporation's Chief Executive Officer and Chief Financial Officer believe that the disclosure controls and procedures provide a reasonable level of assurance and that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and 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 Chairman and Chief Executive Officer and Chief Financial Officer of TRAFINA are 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. In that regard, management has considered whether there were any changes in TRAFINA's internal controls over financial reporting that occurred during TRAFINA's most recent interim period that have materially affected, or are reasonably likely to materially affect TRAFINA's internal controls over financial reporting. No such changes were made in the internal controls during the most recent interim period. During this process, management identified the following:

- Due to the limited number of staff at TRAFINA, it is not feasible to achieve complete segregation of incompatible duties.

- Due to the size of the Corporation and the limited number of staff, the Corporation does not have optimum complement of financial personnel with the technical accounting knowledge to address all complex and non-routine accounting transactions that may arise.

These weaknesses in TRAFINA's internal controls over financial reporting result in a more than remote likelihood that a material misstatement would not be prevented or detected. Management and the board of directors work to mitigate the risk of a material misstatement in financial reporting; however, there can be no assurance that this risk can be reduced to less than a remote likelihood of a material misstatement. TRAFINA does not intend to remediate these weaknesses at this time.

REVIEW OF INTERIM FINANCIAL STATEMENTS

The unaudited interim financial statements of the Corporation for the three and nine months ended September 30, 2007 have been prepared by and are the responsibility of TRAFINA and its management. The interim financial statements have been reviewed and approved by the audit committee and the board of directors.

The Corporation's independent auditor has not performed a review of the unaudited interim statements of the Corporation for the three and nine month periods ended September 30, 2007.

CHANGE IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

The following standards regarding financial instruments were effective for January 1, 2007; 3855 - "Financial Instruments - Recognition and Measurement", 3861 - "Financial Instruments - Disclosure and Presentation", 1530 - "Comprehensive Income", and 3865 - "Hedges". The standards require all financial instruments other than held-to-maturity investments, loans and receivables, to be included on a corporation's balance sheet at their fair value. Held-to-maturity investments, loans and receivables would be measured at their amortized cost. The standards create a new statement for comprehensive income that will include changes in the fair value of certain derivative financial instruments. There has been no material impact to the financial statements for the three months ended September 30, 2007 as a result of implementing the new standards. For a detailed discussion about the accounting policies adopted, please refer to Note 2 of the interim financial statements for the three and nine months ended September 30, 2007.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

TRAFINA has entered into employment contracts with certain executive officers of TRAFINA on terms and conditions customary for a public company such as TRAFINA. In that regard, executive officers of TRAFINA are entitled to receive an annual salary and bonus as well as other compensation for services provided to TRAFINA.

Directors of TRAFINA are paid a fee of $300 for each board meeting attended, $300 for each audit committee meeting attended, $200 for each information meeting attended and an annual retainer of $2,000. The directors are also entitled to reimbursement for out-of-pocket expenses incurred in connection with attending board meetings, audit committee meetings or information meetings.

During the quarter ended September 30, 2007, $169,678 in aggregate was paid or payable by TRAFINA to executive officers and directors of TRAFINA pursuant to these arrangements. TRAFINA entered into arrangements relating to severance payments to be made to an executive officer and a senior staff member of TRAFINA resulting in payments of $145,700 during the quarter ended September 30, 2007.

OUTSTANDING SHARE DATA

TRAFINA is authorized to issue an unlimited number of Class A voting common shares, an unlimited number of Class B non-voting common shares and an unlimited number of preferred shares. As at November 29, 2007, 5,782,472 Class A voting common shares, nil Class B non-voting common shares and nil preferred shares were issued and outstanding. TRAFINA has a stock option plan, pursuant to which options to acquire 30,000 Class A voting common shares were issued and outstanding as of November 29, 2007.

HISTORICAL QUARTERLY FINANCIAL INFORMATION

Outlined below is a table of historical quarterly financial information over the last eight quarters:



QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
----------------------------------------------------------------------------
Q3 - 2007 Q2 - 2007 Q1 - 2007 Q4 - 2006
----------------------------------------------------------------------------
Gross Revenue $ 1,176,605 $ 1,164,516 $ 1,133,049 $ 1,417,387
Net Income (loss) $ (248,418) $ (219,302) $ (255,781) $ (43,143)
----------------------------------------------------------------------------
Cash flow per basic
common share $ 0.06 $ 0.05 $ 0.03 $ 0.08
per diluted common
share $ 0.06 $ 0.05 $ 0.03 $ 0.08
Net income per basic
common share $ (0.04) $ (0.04) $ (0.04) $ (0.01)
per diluted common
share $ (0.04) $ (0.04) $ (0.04) $ 0.00
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Q3 - 2006 Q2 - 2006 Q1 - 2006 Q4 - 2005
----------------------------------------------------------------------------
Gross Revenue $ 1,579,596 $ 1,732,284 $ 1,810,761 $ 1,824,904
Net Income $ (183,382) $ 2,957,082 $ 50,750 $ 197,670
----------------------------------------------------------------------------
Cash flow per basic
common share $ 0.10 $ 0.09 $ 0.13 $ 0.17
per diluted common
share $ 0.10 $ 0.08 $ 0.13 $ 0.16
Net income per basic
common share $ (0.03) $ 0.51 $ 0.01 $ 0.04
per diluted common
share $ (0.03) $ 0.49 $ 0.01 $ 0.04
----------------------------------------------------------------------------


SUBSEQUENT EVENTS

Effective November 1, 2007, Mr. David C Yu has been re-appointed as Vice President, Finance of the Corporation. Mr. Yu will continue to act as Chief Financial Officer of the Corporation.

Effective November 6, 2007, Mr. Thomas R. Holland has been appointed as a Director.

OUTLOOK

In our quarterly report for the six months ended June 30, 2007, we indicated that our plan for the remainder of 2007 was to increase production from existing drilled wells, to reduce well operating expenses and to reduce general and administrative expenses. We are continuing with that plan in the fourth quarter, although our success to date has been less than expected.

With respect to production, we had targeted a production rate of approximately 500 BOE/d by the end of 2007. The management plan to achieve this rate experienced unexpected operational delays due to surface issues, AEUB approvals and negative results from one recompletion. Exit production at September 30, 2007 was approximately 317 BOE/d and management expects sales volumes for the fourth quarter to be higher than the third quarter. Further increases in sales volumes are expected when the five non-operated CBM wells drilled in the third quarter have been tied-in. In addition, TRAFINA is still waiting for AEUB licenses in order to commence production from the 16-22 slightly sour oil well. TRAFINA has a working interest of 71.1% (BPO) in this well and is hopeful of commencing production in the first quarter of 2008.

We achieved a degree of reduction in well operating expenses in the third quarter on a BOE basis and we are continuing our efforts in this regard. General and administrative expenses were higher in the third quarter due to severances from staff reductions, which should result in lower general and administrative expenses going forward.

As we move forward to 2008, the operator of our Wetaskiwin, Alberta, Horseshoe Canyon CBM Project has become very ambitious during the third quarter as a consequence a new drilling technique, which had positive testing results from 5.0 gross (2.0 net) CBM gas wells during the third quarter. These results have led our operator to consider an aggressive Horseshoe Canyon CBM drilling program for the year 2008, which could include 12 to 25 CBM wells, and tying these wells in during 2008. TRAFINA currently has a 40% working interest in these properties.

With respect to its own operating activities, with current unfavourable gas prices and attractive oil prices, TRAFINA is currently focusing on pursuing oil play opportunities.

We also indicated in our quarterly report for the six months ended June 30, 2007 that TRAFINA intended to take advantage of new opportunities and would consider any acquisition, disposition or other corporate transaction that was presented to us. Management has considered opportunities to expand operations into new areas as well as a prospective acquisition, but TRAFINA has not accepted any opportunities to date. TRAFINA will continue to evaluate opportunities on an on-going basis as its resources permit.

Mr. David C. Yu has returned as full-time Vice President, Finance and CFO effective November 1, 2007. Mr. Thomas R. Holland has been appointed as a director effective November 6, 2007. Tom is the President of Writers Oil & Gas Limited, a private oil and gas company, and has been engaged in the oil and gas industry in Canada for over 40 years.

ADDITIONAL INFORMATION

Additional information relating to the Corporation, is filed on SEDAR and can be viewed at www.sedar.com. Also, information can be obtained by contacting the Corporation at TRAFINA Energy Ltd. 688, 505 - 3rd Street S.W., Calgary, Alberta, Canada T2P 3E6 or by e-mail at info@TRAFINAenergy.ca.




FINANCIAL STATEMENTS

BALANCE SHEETS (unaudited)

September 30, December 31,
2007 2006
---------------------------------
ASSETS

Current Assets
Cash and cash equivalents $ 0 $ 2,677,545
Accounts receivable 1,959,307 1,330,591
Income taxes receivable 77,868 0
Prepaid expenses 70,314 77,824
---------------------------------
2,107,489 4,085,960
Property and equipment (note 3) 13,127,339 12,211,109
---------------------------------
$ 15,234,828 $ 16,279,069
---------------------------------
---------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable and accrued liabilities $ 2,531,513 $ 3,075,693
Income taxes payable 0 270,573
Bank debt (note 4) 519,849 0
---------------------------------
3,051,362 3,346,266

Asset retirement obligations (note 5) 486,064 431,900
Future income taxes (note 6) 2,214,703 2,351,703
---------------------------------
5,752,129 6,129,869
---------------------------------

Shareholders' Equity
Share capital (note 7) 3,543,627 3,484,627
Contributed surplus (note 7) 274,606 324,606
Retained earnings 5,664,466 6,357,967
---------------------------------
9,482,699 10,167,200
---------------------------------
Commitments (note 10)
$ 15,234,828 $ 16,297,069
---------------------------------
---------------------------------



STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (unaudited)

Three months Nine months
ended Sept 30 ended Sept 30
2007 2006 2007 2006
-------------------------------------------------

REVENUE
Oil and gas $1,154,364 $1,554,676 $3,376,837 $5,014,621
Royalties, net of ARTC (129,299) (212,609) (408,141) (689,263)
-------------------------------------------------
1,025,065 1,342,067 2,968,696 4,325,358
Gain on sale of property
and equipment (note 3) 0 (132,443) 0 3,548,565
Interest and other 22,241 24,920 97,330 108,020
-------------------------------------------------
1,047,306 1,234,544 3,066,026 7,981,943
-------------------------------------------------
EXPENSES
Operating 252,369 239,761 852,593 783,748
Processing and
transportation 98,366 137,695 302,879 398,098
Accretion 6,888 7,052 18,554 22,760
Depletion and depreciation 549,780 549,007 1,600,259 1,751,849
General and administrative 377,784 335,273 1,174,997 1,104,906
Interest 2,537 3,138 4,245 24,338
Stock-based compensation 4,000 42,000 9,000 124,000
-------------------------------------------------
1,291,724 1,313,926 3,962,527 4,209,699
-------------------------------------------------
Income (loss) before income
taxes (244,418) (79,382) (896,501) 3,772,244
-------------------------------------------------

Provision (recovery) for
income taxes
Current (13,000) 80,000 (66,000) 304,794
Future 17,000 24,000 (137,000) 643,000
-------------------------------------------------
4,000 104,000 (203,000) 947,794
-------------------------------------------------

Net income (loss) (248,418) (183,382) (693,501) 2,824,450

Retained earnings,
beginning of period 5,912,884 6,584,492 6,357,967 3,576,660
-------------------------------------------------

Retained earnings, end of
period $5,664,466 $6,401,110 $5,664,466 $6,401,110
-------------------------------------------------

Basic net income (loss)
per common share $ (0.04) $ (0.03) $ (0.12) $ 0.49
-------------------------------------------------
Diluted net income (loss)
per common share $ (0.04) $ (0.03) $ (0.12) $ 0.47
-------------------------------------------------
Weighted average number of
common shares outstanding
(basic) 5,782,472 5,752,935 5,763,103 5,751,250
-------------------------------------------------
-------------------------------------------------
Weighted average number of
common shares outstanding
(diluted) 5,782,472 5,948,183 5,763,103 5,946,498
-------------------------------------------------
-------------------------------------------------



STATEMENTS OF CASH FLOWS (unaudited)

Three months Nine months
ended Sept 30 ended Sept 30
2007 2006 2007 2006
-------------------------------------------------
CASH PROVIDED BY (USED IN):

OPERATIONS
Net income (loss) $ (248,418) $ (183,382) $ (693,501) $2,824,450
Add (deduct) non-cash
items:
Accretion 6,888 7,052 18,554 22,760
Depletion and depreciation 549,780 549,007 1,600,259 1,751,849
Future taxes (reduction) 17,000 24,000 (137,000) 643,000
Stock-based compensation 4,000 42,000 9,000 124,000
Loss (gain) on sale of
property and equipment 0 132,443 0 (3,548,565)
-------------------------------------------------
329,250 571,120 797,312 1,817,494
Change in non-cash
operating working capital
(note 8) (524,847) 251,760 (1,867,827) (2,424,630)
-------------------------------------------------
(195,597) 822,880 (1,070,515) (607,136)
-------------------------------------------------

FINANCING
Issuance of shares 0 16,600 0 16,600
Repurchase and cancellation
of shares 0 (14,650) 0 (14,650)
Increase in bank debt 519,849 0 519,849 0
-------------------------------------------------
519,849 1,950 519,849 1,950
-------------------------------------------------

INVESTMENTS
Proceeds on disposition of
property and equipment 0 (150,000) 0 7,350,000
Additions to property and
equipment (445,104) 3,512 (2,480,879) (7,259,251)
Change in non-cash working
capital (note 8) (420,000) (249,000) 354,000 1,155,000
-------------------------------------------------
(865,104) (395,488) (2,126,879) 1,245,749
-------------------------------------------------

Change in cash and cash
equivalents $ (540,852) $ 429,342 $(2,677,545) $ 640,563
Cash and cash equivalents,
beginning of period 540,852 2,563,656 2,677,545 2,352,435
-------------------------------------------------
Cash and cash equivalents,
end of period $ 0 $2,992,998 $ 0 $2,992,998
-------------------------------------------------
-------------------------------------------------


Notes to financial statements are not included in this press release.

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • TRAFINA Energy Ltd.
    Roland (Rolly) Valentine
    Chairman and CEO
    (403) 263-0800
    or
    TRAFINA Energy Ltd.
    #688, 505 - 3rd Street SW
    Calgary, Alberta T2P 3E6
    (403) 263-0800
    (403) 263-0811 (FAX)
    Email: info@TRAFINAenergy.com