Tuscany International Drilling Inc.
TSX : TID

Tuscany International Drilling Inc.

November 12, 2010 07:30 ET

Tuscany International Drilling Inc. Reports Third Quarter Results

CALGARY, ALBERTA--(Marketwire - Nov. 12, 2010) -

THIS PRESS RELEASE IS NOT FOR DISSEMINATION IN THE UNITED STATES OR TO ANY UNITED STATES NEWS SERVICES. ANY FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF U.S. SECURITIES LAWS.

Tuscany International Drilling Inc. (TSX:TID) ("Tuscany" or the "Company") is pleased to announce its financial results for the interim period ending September 30, 2010.

Overview

During the first nine months of 2010 the Company invested heavily in the construction of new drilling and heavy duty workover rigs for South America, and also in the establishment and development of operating centers in Colombia, Brazil, Peru, and to a lesser extent Guyana. Tuscany began fiscal 2010 with six rigs deployed into South America (four in Ecuador and two in Colombia). The Company's 2010 rig construction and deployment program is nearing completion, and once finished Tuscany will have nine rigs in Colombia, four rigs in Ecuador, two rigs in Brazil, one rig in Peru and one rig in Guyana. In order to effectively plan for and support 2011 operating activity associated with the Company's 17 rigs, Tuscany has incurred significant administrative expenditure during 2010 to set up and adequately staff these operating centers, particularly in Colombia and Brazil. To date, expenditures have exceeded revenues from the Company's rig operations during the start up phase. As of November 10, 2010, Tuscany has nine of its 17 rigs contracted, with contracts on the remaining eight rigs in the documentation stage. The Company feels that current staffing levels and associated administrative costs incurred to date provide a stable foundation to properly support the future operation of its 17 rigs, and provides a platform for substantial growth in all areas of operation in the future. In addition to the significant non-recurring investment related to the establishment of operating centers in South America, 2010 has seen Tuscany incur substantial one-time costs related to transitioning the Company to a public enterprise, as well as financing, marketing and travel related expenditures.

During the three month period ended September 30, 2010, the Company recorded a net loss of $3,534,483 ($0.02 per common share) compared to a net loss of $739,511 ($0.01 per common share) for the three month period ended September 30, 2009. During the three months ended September 30, 2010, the Company recorded oilfield services revenue of $6,434,626 and oilfield services revenue net of oilfield services expenses of $1,588,253, compared to revenue of $1,755,457 and revenue net of oilfield services expenses of $483,519 during the three months ended June 30, 2010, reflecting an increase in rig operations during the period. This revenue was offset by significant general and administrative expenses, totaling $2,443,656, depreciation of $1,599,023, interest of $463,353, financing fees of $145,115 and stock based compensation expense of $96,872. For the three months ended September 30, 2010, the Company also recorded current income tax expense of $198,537 and other expenses of $176,180. During the third quarter of 2010, the Company incurred significant professional fees related to tax planning activities and establishing operating centers in Brazil, salaries relating to new operating and administrative offices in Brazil and an increase in salary costs in the Calgary office as the company added three new staff members in the finance department.

During the three months ended September 30, 2010, Tuscany received $46,626,343 from financing activities, comprised primarily of $45,906,648 (net of transaction costs) received in financing from Credit Suisse, an $874,620 short-term advance from Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO, $330,000 in cash from the exercise of share purchase warrants, and received $100,000 previously held in trust at the Company's lawyers relating to a previous share subscription. Funds raised were primarily used to construct drilling equipment and to support administrative and corporate development activities. During the three months ended September 30, 2010, Tuscany incurred $19,059,346 of capital expenditures. Capital expenditures during the three months ended September 30, 2010 were incurred to complete the construction of two 650 HP drilling/heavy duty workover rigs, one 850 HP pad drilling rig and one 1000 HP drilling rig, and to continue construction on two 1500 HP heli-portable drilling rigs. At November 10, 2010, the Company had thirteen rigs deployed in South America and all thirteen rigs are either working on contract or being mobilized to contracts. Two additional rigs have been deployed to Colombia and will be working on contract upon arrival. The two remaining rigs are anticipated to complete construction in November 2010 and be deployed to Brazil upon completion.

During the nine months ended September 30, 2010, the Company recorded a net loss of $6,509,751 ($0.05 per common share) compared to a net loss of $1,438,327 ($0.04 per common share) for the nine month period ended September 30, 2009. During the nine months ended September 30, 2010, the Company recorded oilfield services revenue net of oilfield services expenses of $3,544,165. This income was offset by significant general and administrative expenses, totaling $5,640,555, depreciation of $2,895,898, interest of $720,349, financing fees of $145,115 and stock based compensation expense of $104,279. For the nine months ended September 30, 2010, the Company also recorded current income tax expense of $234,516 and other expenses of $313,204. For the three and nine month period ended September 30, 2009 Tuscany was in a "start-up" phase, with operating activity only commencing in the fourth quarter of 2009. The net loss reported for the three and nine month periods ended September 30, 2009 reflects the administrative cost to the Company during this "start-up" phase.

During the nine months ended September 30, 2010 Tuscany received $148,808,297 from financing activities, which includes $32,821,216 (net) from the issue of common shares pursuant to the exercise of share purchase warrants, the issue of $59,475,408 (net) of special warrants, a $5,000,000 advance on the Company's convertible debenture, and $5,874,620 in short-term advances from Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO. Funds raised were primarily used to construct drilling equipment and to support administrative and corporate development activities. During the nine months ended September 30, 2010, Tuscany incurred $131,268,212 of capital expenditures. Capital expenditures during the nine months ended September 30, 2010 were incurred to complete the construction of two 550/650 HP heli-portable drilling rigs, two 1500 HP drilling rigs, two 650 HP heli-portable drilling rigs, the acquisition of a 2000 HP heli-portable drilling rig, two drilling/heavy duty workover rigs, one 1000 HP drilling rig, one 850 HP pad drilling rig and to continue construction of two 1500 HP heli-portable drilling rigs.


Review of Balance Sheet

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Sep Dec Increase Change
2010 2009 (Decrease) %
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Cash and cash
equivalents 11,324,817 2,275,773 9,049,044 398
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The Company increased its cash position by $9,049,044 during the nine month period ended September 30, 2010. During the period, Tuscany received $148,808,297 (net) from financing activities, and includes $59,475,408 (net) from the Company's special warrant financing in February 2010, proceeds of $5,000,000 from the Company's convertible debenture, $5,874,620 in short-term advances from Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO, $32,821,216 (net) from the exercise of share purchase warrants and $45,906,648 (net of transaction costs) from the issuance of long term debt. Cash used in investing activities totaled $138,599,698 and is comprised primarily of capital expenditures and VAT on the importation of drilling equipment into South America, which totaled $136,624,530, and $1,975,168 related to the Company's acquisitions of Cheq-IT Ltd. and 40% of Warrior Rig Ltd. During the nine months ended September 30, 2010 operating activities used $1,159,555 of cash and reflect the operation of five of the Company's rigs working in South America net of significant general and administrative expenses.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Restricted cash 726,038 - 726,038 N/A
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The Company had $726,038 in restricted cash at September 30, 2010. The terms of the Company's senior secured term credit facility require the Company to maintain a debt service reserve account at all times with sufficient cash to fund the quarterly interest payment and principal repayment (beginning in February 2012) due under the terms of the facility, one quarter in advance. The cash held in debt service reserve at September 30, 2010 will be used to pay the loan interest due in the fourth quarter of 2010 and is therefore classified as restricted cash.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Share subscriptions
receivable - 100,000 (100,000) (100)
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At December 31, 2009, Tuscany had $100,000, representing subscriptions for 100,000 units associated with non-brokered financing activities during the fourth quarter of 2009, held in trust with the Company's legal counsel. The funds were received from the Company's legal counsel in 2010.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Accounts receivable 5,761,519 1,936,263 3,825,256 198
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Accounts receivable at September 30, 2010 represent amounts due from the Company's customers in South America related to the operation of five rigs. The large increase reflects the additional rigs working in the third quarter of 2010 compared to the fourth quarter of 2009. Management does not anticipate any collection issues associated with accounts receivable.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Prepaid expenses and
deposits 1,899,751 509,704 1,390,047 273
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The prepaid expenses and deposits balance is comprised of prepaid expenses, primarily insurance, and a deposit related to the acquisition of drill pipe. In February 2010, Tuscany entered into an agreement to purchase $4,575,383 of drill pipe. As part of the agreement Tuscany issued, as a deposit, 1,500,000 units with a value of $2,250,000 (where each unit is comprised on one common share and 1/2 share purchase warrant whereby each full warrant is exercisable into a common share for $1.75). As the Company takes drill pipe from the supplier's yard, they are invoiced and the deposit is applied to the amount due, allocating the deposit used to property and equipment. Of this deposit, $800,418 remains in prepaid expenses and deposits at September 30, 2010. In the third quarter of 2010 a deposit of $570,000 was made towards the purchase of fixed assets.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Foreign VAT recoverable
- current 1,590,205 1,618,110 (27,905) (2)
Foreign VAT recoverable -
non-current 3,958,370 749,771 3,208,599 428
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Foreign Value Added Tax ("VAT") recoverable arises from two areas of operation in South America: VAT paid on administrative and operating expenses and VAT paid related to the importation of drilling and workover equipment. Tuscany is able to recover the foreign VAT from future VAT remittances that would otherwise be paid to the South American tax authorities. The VAT that would otherwise be paid to the South American tax authorities will arise from the collection of VAT on future revenue billings to customers. Total foreign VAT recoverable increased $3,180,694 net of recoveries, and reflects the increase in operating and administration expenses during the period and additional amounts paid related to the importation of drilling equipment into South America. The Company has estimated that $1,590,205 of VAT will be recovered during the next 12 months.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Long-term investments 5,064,064 - 5,064,064 N/A
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Long-term investments represent the Company's equity investment in Warrior Rig Ltd. On May 19, 2010, Tuscany acquired a 40% ownership interest in Warrior by subscribing for 2,000,000 Warrior common shares for $1,902,000 and by issuing 2,398,320 common shares to shareholders of Warrior in exchange for 3,600,000 common shares of Warrior. The Company's share of Warrior earnings has been included in the results of the Company from May 19, 2010, the date of the investment. Equity earnings for the period from May 19, 2010 to September 30, 2010 totaled $197,021. Transaction costs of $72,559 have been netted against equity earnings in the Company's Statement of Operations, Comprehensive Loss and Deficit.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Property and equipment 183,899,088 49,380,122 134,518,966 272
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During the nine months ended September 30, 2010, the Company incurred $137,414,874 (including $6,146,662 of non-cash share consideration) on additions to property and equipment, primarily related to the construction of rigs and related equipment. During the first nine months of 2010, the Company completed the construction of eight drilling rigs and the acquisition of one drilling rig, bringing the Company's rig fleet to 15 at September 30, 2010; thirteen of which are currently located in South America (including three rigs clearing customs) and are either working on contract or moving to contracts as at November 10, 2010. In addition, during the nine months ended September 30, 2010, the Company incurred expenditures related to the fabrication of two 1500 HP heli-portable drilling rigs. All equipment under fabrication is expected to be in the field by the end of the first quarter of 2011.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Accounts payable and
accrued liabilities 10,036,341 5,258,226 4,778,115 91
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Accounts payable and accrued liabilities increased 91% to $10,036,341 at September 30, 2010. The increase in accounts payable from December 31, 2009 reflects the significant rig construction activity during the first three quarters of 2010.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Due to shareholders 6,439,371 547,974 5,891,397 1,075
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Due to shareholders represents unpaid salaries and reimbursable expenses to shareholder employees and $5,874,620 in short-term advances from Perfco Investments Ltd., a corporate shareholder owned by the Company's Chairman and CEO. The short-term advances are unsecured and incur interest at 10% per annum. At September 30, 2010, accrued interest of $356,443 is included in the balance due to shareholders.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Convertible debenture - 164,465 (164,465) (100)
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The balance of the convertible debenture at December 31, 2009 represents unpaid interest due to Perfco Investments Ltd., a corporate shareholder owned by the Company's Chairman and CEO. In September 2010, this obligation was converted into 164,203 common shares. Under the terms of the convertible debenture 164,203 share purchase warrants to acquire common shares at an exercise price of $1.00 per share were also to have been issued, but Perfco Investments Ltd. relinquished them to the Company for cancellation.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Long term debt 44,740,297 - 44,740,297 NA
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On August 13, 2010 Tuscany entered into a definitive financing agreement with Credit Suisse. Under the terms of the financing facility the Company received $50,000,000 in two drawdowns. The term of the loan is five years with quarterly principal repayments commencing in February 2012. Interest on the loan is at 3-month US LIBOR plus 6.5% and is payable quarterly commencing November 2010. Included in long term debt is $4,093,352 of cash transactions costs and $1,311,461 representing the value of warrants issued in conjunction with the financing.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Share capital 147,114,567 42,809,993 104,304,574 244
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The increase in share capital from December 31, 2009 reflects the conversion of the $59,475,408 (net) in special warrants issued during the first quarter of 2010 into common shares and share purchase warrants, the exercise of share purchase warrants for $33,269,571 (at $1.00 per warrant) and the conversion of $5,188,203 of convertible debenture obligation. In addition, Tuscany issued $6,947,079 of common shares (at $1.50 per share) in relation to the acquisition of drilling equipment, issued 598,902 common shares for $64,230 of net assets acquired in the Cheq-IT acquisition and issued $2,965,043 of common shares in connection with the acquisition of 40% of Warrior Rig Ltd. The remainder of the movement from December 31, 2009 relates to $25,696 of accretion related to the convertible debenture, a reduction of $3,075,103 related to the net movement in value attributed to warrant grants (net of value attributed to warrants that were converted), share issue costs of $99,323 and transaction costs of $219,845 related to the Cheq-IT acquisition.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Contributed surplus 1,643,791 - 1,643,791 N/A
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Contributed surplus represents stock based compensation related to the granting of stock options during the second quarter of 2010 and the value attributed to share purchase warrants that expired during the period. During the second and third quarters of 2010, the Company issued 1,650,000 stock options with an exercise prices between $0.96 Cdn and $1.26 Cdn. The value of stock options granted during the period was determined using the Black-Scholes option pricing model. During the second and third quarter 3,327,148 share purchase warrants with an exercise price of $1.00 per warrant and 1,725,000 share purchase warrants with an exercise price of $1.50 per warrant expired. Total value allocated to these warrants was $1,539,512 and was calculated using the Black-Scholes model.



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Sep Dec Increase Change
2010 2009 (Decrease) %
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Warrants 13,406,851 10,331,748 3,075,103 30
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The increase in the warrants from December 31, 2009 reflects the value issued to warrants granted during the period, including warrants that were granted on the conversion of the special warrants, net of the value attributed to warrants that were exercised and the value attributed to warrants that expired during the period. During the nine months ended September 30, 2010, the Company issued 34,965,623 share purchase warrants, 33,269,571 share purchase warrants were exercised and 5,002,148 share purchase warrants expired. All warrants have been valued using the Black-Scholes model.



Review of Income Statement

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Three Months Ended Nine Months Ended
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Sep 30 Sep 30 Change Sep 30 Sep 30 Change
2010 2009 % 2010 2009 %
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Oilfield services
revenue 6,434,626 - N/A 11,570,241 - N/A
Oilfield services (4,846,373) - N/A (8,026,076) - N/A
expenses 1,588,253 - 3,544,165 -
24.6% 30.6%
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Oilfield services revenue during the three and nine months ended September 30, 2010 represents revenue earned from rigs 101, 103 and 109 in Colombia and rig 102 and rig 117 in Ecuador. During the second quarter of 2010, the Company had four rigs in service compared to five rigs in operation during the third quarter of 2010. Revenue generated during the second quarter of 2010 from the four rigs in operation was $1,755,457. The increase in revenue to $6,434,626 for the three months ended September 30, 2010 reflects the commencement of operation of rig 117 (a 2000 HP heliportable drilling rig) and a full three months of operations for rig 109 (a 1500 HP drilling rig). During the third quarter of 2010 the Company had 292 revenue days from the rigs compared to 127 revenue days during the second quarter of 2010 and 250 days during the first quarter. The increase in revenue days resulted as rigs 101 and 102 came back on contract in the quarter, rig 109 worked for the complete quarter and rig 117 began work in the third quarter. During the second quarter of 2010, operation of the four rigs generated oilfield services revenue net of oilfield services expense of $483,519 or 27.5% compared to $1,588,253, or 24.6%, during the third quarter of 2010. The increase in oilfield services revenue net of oilfield services expense during the third quarter of 2010 compared to the second quarter of 2010 is the result of an additional rig working in the quarter and existing rigs being better utilized. The decrease in gross margin percentage was a result of lower margins on rigs 101 and 102.



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Three Months Ended Nine Months Ended
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Sep 30 Sep 30 Change Sep 30 Sep 30 Change
2010 2009 % 2010 2009 %
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Depreciation 1,599,023 10,224 15,539 2,895,898 12,888 22,370
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The significant increase in depreciation expense for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009 is a result of depreciation related to rigs and related equipment. Under the Company's depreciation policy, depreciation of rigs and related equipment does not commence until the equipment is put into operation. At September 30, 2009, the Company did not have any rigs operating and as such depreciation during the three and nine months ended September 30, 2009 relates entirely to depreciation of computer equipment. During the first three quarters of 2010, Tuscany recorded depreciation expense on five rigs. Depreciation expense during the second quarter of 2010 was $746,503 and included depreciation of four rigs. The increase in depreciation expense in the third quarter of 2010 compared to the second quarter is a result of rig 109, which commenced operations during the second quarter of 2010, being depreciated for a full quarter and rig 117 which commenced operations in the third quarter of 2010.



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Three Months Ended Nine Months Ended
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Sep 30 Sep 30 Change Sep 30 Sep 30 Change
2010 2009 % 2010 2009 %
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General and
administrative 2,443,656 592,377 313 5,640,555 1,304,260 332
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General and administrative expense during the three and nine months ended September 30, 2010 increased $1,851,279 and $4,336,295, respectively, compared to the three and nine months ended September 30, 2009. Compared to the first three quarters of 2009, the Company has added administrative staff in Canada, Colombia and Ecuador resulting in a substantial increase in salaries and wages. In the third quarter of 2010 the Company began setting up operations in Brazil and incurred significant professional fees and salary expenses in relation to this startup. In addition, the Company incurred significant professional fees, listing fees and travel expenses associated with its efforts to become publicly traded on the Toronto Stock Exchange, which occurred in April 2010, and corporate development activities.



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Three Months Ended Nine Months Ended
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Sep 30 Sep 30 Change Sep 30 Sep 30 Change
2010 2009 % 2010 2009 %
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Stock based
compensation 96,872 - N/A 104,279 - N/A
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Stock based compensation expense for the three and nine months ended September 30, 2010 represents the value, calculated using the Black-Scholes option pricing model, related to the granting of 1,650,000 stock options from June to September 2010. Prior to June 2010 the Company had not granted any stock options.



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Three Months Ended Nine Months Ended
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Sep 30 Sep 30 Change Sep 30 Sep 30 Change
2010 2009 % 2010 2009 %
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Interest expense 463,353 91,410 407 720,349 101,346 611
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Interest expense for the three and nine months ended September 30, 2010 is comprised primarily of interest on the short-term advance from Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO, interest expense on the term loan from Credit Suisse and interest expense on the Company's convertible debenture. Interest expense for the three and nine months ended September 30, 2009 represents interest on the Company's convertible debenture. In June 2009, the Company was advanced $5,000,000 under the convertible debenture and interest expense during the three months ended September 30, 2009 represents interest on this advance. Interest expense of $463,353 in the third quarter of 2010 is related to two items. During 2010, the Company received $5,874,620 of short-term advances from Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO. The short-term advance incurs interest at 10% per annum. On August 13, 2010 Tuscany entered into a definitive financing agreement with Credit Suisse to obtain a $50,000,000 senior secured guaranteed term loan. The loan was drawdown in two tranches, the first drawdown of $20,000,000 was received on August 13, 2010 and the remaining $30,000,000 was received September 10, 2010. Interest is payable at 3-month US Libor plus 6.5% per annum.



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Three Months Ended Nine Months Ended
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Sep 30 Sep 30 Change Sep 30 Sep 30 Change
2010 2009 % 2010 2009 %
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Foreign exchange loss 344,741 52,364 558 417,085 43,528 858
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Tuscany incurs operating expenses and capital expenditures in United States dollars ("$USD"), Colombian pesos, Brazilian reals and Canadian dollars. Foreign exchange gains and losses arise on the settlement of accounts payable invoices denominated in currencies other than the $USD and the collection of accounts receivable invoices in currencies other than the US dollar. The foreign exchange loss in the third quarter of 2010 arises primarily from the settlement of Canadian dollar accounts payable invoices. During the third quarter of 2010, the United States dollar weakened 3.1% relative to the Canadian dollar and also weakened 6.6% relative to the Colombian peso. The large increase in the foreign exchange loss during the third quarter of 2010 compared to the corresponding period of 2009 reflects the significant increase in Canadian dollar accounts payable activity, largely related to the construction of rigs and related equipment, compared to the second quarter of 2009. The foreign exchange loss for the nine months ended September 30, 2010 reflects a 1.7% weakening the value of the United States dollar compared to the Canadian dollar and a 12.7% weakening of the US dollar compared to the Colombian peso.



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Three Months Ended Nine Months Ended
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Sep 30 Sep 30 Change Sep 30 Sep 30 Change
2010 2009 % 2010 2009 %
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Current income tax
expense 198,537 - N/A 234,516 - N/A
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For the three months ended September 30, 2010 the Company recorded a current income tax expense of $198,537 related to operations in Ecuador and Colombia. During 2010 the Company's operations in Ecuador became taxable on a current basis and the Company has recorded current income tax expense of $139,110 for the nine months ended September 30, 2010. The Company's operations in Colombia are not taxable based on earnings, but are subject to an alternative minimum tax based on the net worth of the Company's branch in Colombia. The Company has recorded current income tax expense of $95,423 for the nine months ended September 30, 2010 related to its operations in Colombia. At September 30, 2010, the Company's operations in Canada remain in a tax loss position. The Company has not recorded the benefit of the tax losses in Canada in the consolidated financial statements.

Working Capital, Funds from Operations and Liquidity

At September 30, 2010, Tuscany had working capital of $4,826,618 compared to $633,650 of working capital at December 31, 2009. The increase in working capital is a result of the Company receiving $45,906,648, net of transaction costs, in financing in the third quarter of 2010. On August 13, 2010 Tuscany entered into a definitive financing agreement with Credit Suisse. Under the terms of the financing facility the Company received $50,000,000 (gross) in two drawdowns. The term of the loan is five years with quarterly principal repayments commencing in February 2012. Interest on the loan is at 3-month US LIBOR plus 6.5% and is payable quarterly commencing November 2010. The funds received are being used to pay obligations incurred in the rig building program and to fund administration activities. To address the Company's need for additional financing to complete its 2010 rig build program, on November 2, 2010 the Company received an additional $30,000,000 (gross) drawdown on the existing financing facility with Credit Suisse. The loan will be repayable on August 13, 2015. Costs associated with the financing include interest at 3-month US LIBOR plus 6.5% per annum, plus associated fees. In addition, in connection with underwriting the facility, the Company has granted the lenders an aggregate of 6,400,000 share purchase warrants. The warrants expire 2.5 years from the date of grant and are exercisable at $1.50 per warrant. Under the terms of the credit facility the Company has $45 million still available to be drawn subject to certain conditions.

For the three months ended September 30, 2010, funds used on operating activities was $5,689,911. After removing the impact on the change in non-cash working capital, funds used in operations totaled $1,858,050 and reflect increased administrative costs and limited rig operations. At September 30, 2010, the Company had five rigs in operation. Subsequent to September 30, 2010, the Company has deployed an additional four rigs to South America with two more rigs to be deployed prior to the end of November 2010. The Company anticipates 13 rigs to be generating cash flow by November 30, 2010.

For the nine months ended September 30, 2010, funds used on operating activities was $1,159,555. After removing the impact on the change in non-cash working capital, funds used in operations totaled $3,479,339 and reflect the limited rig operations during the first three quarters of 2010 and the significant administrative cost incurred by the Company.

At November 10, 2010, the Company had thirteen rigs on, or moving to, contract. The significant factors that may impact the Company's ability to generate funds from operations in future periods are outlined in the "Risks and Uncertainties" section of this MD&A.

Investing Activities

During the three months ended September 30, 2010, Tuscany's spent $33,510,059 on investing activities. All of the investing activity related to the construction of drilling equipment for deployment to South America. Construction activity during the three months ended September 30, 2010 included expenditure on nine drilling and heavy duty workover rigs.

During the nine months ended September 30, 2010, Tuscany's spent $138,599,698 on investing activities. Investing activities during the first nine months of 2010 included $136,624,530 related to the construction and importation of drilling equipment to South America and $1,975,168 related to the Company's acquisition of Cheq-IT Ltd. and investment in Warrior Rig Ltd.

Financing Activities

During the three months ended September 30, 2010, Tuscany received $46,626,343 from financing activities, comprised primarily of $45,906,648 (net), received in financing from Credit Suisse, a $874,620 short-term advance from Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO., $330,000 in cash from the exercise of share purchase warrants, and $100,000 that was held in trust by the Company's legal counsel relating to a previous share subscription. This was offset by $726,038 of restricted cash related to the debt service account under the Credit Suisse credit facility.

During the nine months ended September 30, 2010, Tuscany received $148,808,297 from financing activities, comprised primarily of $32,821,216 from the exercise of share purchase warrants, $59,475,408 (net) from the issue of special warrants, $5,000,000 from an advance on the Company's convertible debenture, and $5,874,620 in short-term advances from Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO.

Related Party Transactions

During the nine month period ended September 30, 2010, the Company entered into the following related party transactions:

a) The Company is party to a sublease agreement for its head office in Calgary, Alberta. The sublease is with a company whose parent has two directors that are also directors of Tuscany. During the nine months ended September 30, 2010, Tuscany paid $CDN 117,600 in occupancy costs associated with this sublease.

b) On January 5, 2010 the Company issued 5,000,000 common shares to Perfco Investments Ltd., a corporate shareholder owned by the Company's Chairman and CEO pursuant to the exercise of share purchase warrants.

c) On April 21, 2010 the Company issued 4,000,000 common shares to a director of the Company pursuant to the exercise of share purchase warrants.

d) On June 29, 2010, the Company issued 164,203 common shares to Perfco Investments Ltd, a corporate shareholder owned by the Company's Chairman and CEO, pursuant to the conversion of accrued interest under the Company's convertible debenture.

e) On June 29, 2010, the Company issued 100,000 common shares to a director of the Company pursuant to the exercise of share purchase warrants. Also on June 29, 2010, the Company issued 120,852 common shares to Perfco Investments Ltd., a corporate shareholder owned by the Company's Chairman and CEO, pursuant to the exercise of share purchase warrants and in settlement of $120,852 of accrued salary and reimbursable expenses due to the Company's Chairman and CEO.

f) During the nine months ended September 30, 2010, the Company purchased $2,666,274 of drilling equipment from Loadcraft Industries Ltd., a company whose President, CEO and majority owner is also a director of Tuscany.

g) During the three months ended September 30, 2010, the Company purchased $1,635,742 of drilling equipment from Warrior Rig Ltd., a company in which Tuscany obtained a 40% ownership interest during the second quarter of 2010.

h) On February 1, 2010 Perfco Investments Ltd., a corporation owned by the Company's Chairman and CEO, advanced the Company $5,000,000. On July 30, 2010 Perfco Investments Ltd. advanced the Company an additional $874,620. The advances are unsecured and bear interest at 10% per annum.

The above transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Contractual Obligations

In the normal course of business the Company enters into various contractual obligations that will have an impact on future operations. These contractual obligations relate to office leases. At September 30, 2010, the Company had contractual obligations related to office leases of $CDN 12,362 per month (approximately $USD 12,005) for its office in Calgary, Canada, 13,705,000 Colombian pesos per month (approximately $USD 7,667) for its office in Bogota, Colombia, $USD 3,340 per month for its office in Quito, Ecuador, 19,599 Brazilian reals per month (approximately $USD 11,528) for its office in Rio de Janerio, Brazil and 19,734 Brazilian reals (approximately $USD 11,608) for its office in Manaus, Brazil. The office lease in Calgary expires July 31, 2011, the office lease in Colombia expires February 28, 2013, the office lease in Ecuador expires August 14, 2012, the office lease in Rio de Janerio, Brazil expires May 31, 2012 and the office lease in Manaus, Brazil expires September 30, 2013.

As part of the Company's acquisition of 40% of Warrior Rig Ltd., Tuscany will make available to Warrior a $3,000,000 Cdn revolving loan, bearing interest at prime plus 4% per annum and having a term of three years. Warrior has indicated that they do not intend to draw on the loan facility prior to 2011.

The Company is obligated to pay interest on a $50,000,000 loan from Credit Suisse. Interest on the loan is at 3-month US LIBOR plus 6.5% and is payable quarterly commencing November 13, 2010.

Subsequent Events

On November 2, 2010 the Company received an additional $30,000,000 drawdown on the existing financing facility with Credit Suisse. The loan is repayable on August 13, 2015. Costs associated with the financing include interest at 3-month Libor plus 6.5% per annum, plus associated fees. In addition, in connection with underwriting the facility, the Company granted the lenders an aggregate of 2,400,000 share purchase warrants. The warrants expire 2.5 years from the date of grant and are exercisable at $1.50 per warrant.



Summary Quarterly Results
Q3 Q2 Q1 Q4
2010 2010 2010 2009
----------------------------------------------------------------------------
Revenue 6,434,626 1,755,457 3,380,158 2,983,441
Net loss (3,534,483) (1,935,370) (1,039,898) (1,050,326)
Per share (basic and
diluted) (0.02) (0.01) (0.01) (0.02)

Q3 Q2 Q1 Q4
2009 2009 2009 2008
----------------------------------------------------------------------------
Revenue - - - -
Net loss (739,512) (383,841) (314,974) (53,365)
Per share (basic and
diluted) (0.01) (0.01) (0.01) (0.02)


Prior to the fourth quarter of 2009 the Company did not have any operating activity. The net losses recorded prior to the fourth quarter of 2009 reflect the administrative cost to the Company during its start-up phase.

Outstanding Share Data

As at November 10, 2010 Tuscany had 161,388,935 common shares outstanding and 31,082,873 share purchase warrants outstanding representing a total equity value of $160,521,418. As at November 10, 2010, the Company had issued a total of 1,650,000 stock options, 100,000 of which have been forfeited. None of the stock options are currently exercisable.

Critical Accounting Estimates

This MD&A is based on the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the consolidated financial statements requires that certain estimates and judgments be made in regard to the reported amount of revenues and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management's judgment. Anticipating future events involves uncertainty and consequently the estimates used by management in the preparation of the consolidated financial statements may change as future events unfold, additional experience is acquired, or the environment in which the Company operates changes.

The accounting estimates considered to have the greatest impact on the Company's consolidated financial results are as follows:

Depreciation

Depreciation of the Company's property and equipment incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change, both of which could impact the operation of the Company's property and equipment.

Stock Based Compensation

Compensation expense related to options issued under the Company's stock option plan is calculated using the Black-Scholes option pricing model. The Black-Schole option pricing model utilizes estimates surrounding various assumptions such as volatility, annual dividend yield, risk free interest rate and expected life.

Long-lived Assets

The carrying value of the Company's property and equipment is reviewed for impairment periodically or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. This requires the Company to forecast future cash flows to be derived from the utilization of these assets based on assumptions about future operating conditions. These assumptions may change as more experience is obtained or as general market conditions change.

Valuation of Accounts Receivable

The Company is subject to credit risk on accounts receivable balances and assesses the recoverability of accounts receivable balances on an ongoing basis. The Company establishes an allowance for doubtful accounts when accounts receivable balances are deemed impaired and uncollectible. Assessing accounts receivable balances for impairment involves significant judgment and uncertainty, including estimates of future events. Changes in circumstances underlying these estimates may result in adjustments to the allowance for doubtful accounts in future periods.

Foreign VAT Recoverable

The allocation of foreign VAT recoverable between current and non-current is calculated by applying foreign VAT rates to management's estimate of future revenues. Assumptions regarding management's estimate of future revenues may change as contracts for the Company's oilfield services change.

Taxation

The Company follows the liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the consolidated financial statements and their respective tax bases. The Company establishes valuation allowances to offset future income tax assets when utilization of such tax assets is uncertain. Assessing the realization of future income tax assets includes consideration of tax planning arrangements and estimates of future taxable income. Changes in circumstances and assumptions underlying these considerations may require changes to the valuation allowances recorded to date.

New Accounting Policies

During the three and nine months ended September 30, 2010 the Company adopted the following accounting policies:

a) Long-term investments

Investments where the Company exerts significant influence are recorded on the equity basis whereby the investment is originally recorded at cost and the carrying value is adjusted to include the pro-rata share of the investee's earnings less dividends received.

b) Stock based compensation

The Company follows the fair value method of accounting, using the Black-Scholes option pricing model, whereby compensation expense is recognized for the stock options on the day of granting, and amortizing over the options' vesting period.

c) Fair value of financial instruments

The fair value of cash and cash equivalents, accounts receivable, account payable and accrued liabilities approximate their carrying amount due to the short term maturity of the instruments. Long term debt and other non-current liabilities have been recorded at amortized cost using the effective interest rate method. Transaction costs that are directly attributable to the acquisition or issue of a financial liability are added to the fair value amount recorded at initial recognition and subsequently are amortized using the effective interest rate method. This change in accounting policy does not have retrospective impact.

Recent Accounting Pronouncements

The Canadian Institute of Chartered Accountants ("CICA") Accounting Standards Board ("AcSB") confirmed in February 2008 that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP in 2011 for profit-oriented Canadian publically accountable enterprises. Accordingly, the Company will be assessing the potential impacts of this change as well as developing the necessary plans to facilitate the change. When finalized, the Company's plan will encompass project structure and governance, resourcing and training, and an analysis of key differences between IFRS and Canadian GAAP.

The following new accounting recommendations have been issued by the CICA but are not yet required to be adopted by the Company:

As of January 1, 2011, the Company will be required to adopt the following CICA Handbook sections:

CICA Handbook Section 1582 "Business Combinations" will replace the existing business combinations standard. The new standard requires assets and liabilities acquired in a business combination and contingent consideration to be measured at fair value as at the date of the acquisition. Acquisition costs that are currently capitalized as part of the purchase price will be recognized in the consolidated statement of operations. The adoption of this standard will impact the accounting treatment of future business combinations.

CICA Handbook Section 1601 "Consolidated Financial Statements" and Section 1602 "Non-controlling Interests" will replace the former consolidated financial statements standard. These standards establish the requirements for the preparation of consolidated financial statements and the accounting for non-controlling interest (previously referred to as minority interest) in a subsidiary. The new standard requires non-controlling interest to be presented as a separate component of equity and requires net income and other comprehensive income to be attributed to both the parent and non-controlling interest.

International Financial Reporting Standards

In February 2008, the Accounting Standards Board of the Canadian Institute of Chartered Accountants conformed transition timing for publicly accountable enterprises in Canada to adopt International Financial reporting Standards ("IFRS"). Accordingly, the Company will be required to adopt IFRS on January 1, 2011, including reporting for interim periods in fiscal 2011.

The Company is currently developing a transition plan, comprised of three phases:

- Phase 1 - Diagnostic;

- Phase 2 - Development; and

- Phase 3 - Implementation

Corporate governance over the project will involve the establishment of an IFRS committee, comprised of senior management, and will involve regular reporting to the Audit Committee and Board of Directors. The Company currently does not have sufficient internal resources and thus, has engaged external advisors to assist with the transition.

The Company has completed Phase 1 - Diagnostic; which involves a high level review of the major differences between Canadian GAAP and IFRS and the development of a project plan. To date, the Company has determined that the key areas with the highest potential impact to the Company under IFRS financial reporting are:

- Property, plant and equipment

- IFRS 1 - first time adoption of IFRS

- Financial statement presentation and disclosure

Management will assess the impact that IFRS will have on business processes and the internal control environment once the Company completes Phase 2 - Development. The Company has recently implemented a new financial accounting system and IFRS considerations were addressed during the design of this system.

Disclosure Controls and Internal Controls over Financial Reporting Update

The Company is required to comply with National Instrument 52-109 "Certification of Disclosure in Issuer's Annual and Interim Filings". This instrument requires that the Company disclose in the interim MD&A any changes in the Company's internal control over financial reporting that occurred during the most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

During the three months ended September 30, 2010, the Company continued to implement enhancements to its internal controls over financial reporting, comprising the successful implementation of a new financial accounting system and the hiring of an Executive Vice President Finance and Business Development. Outside of these activities, there have been no other changes in the Company's internal controls over financial reporting during the three months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

Risks and Uncertainties

Crude Oil and Natural Gas Prices

One of the most significant factors that can affect the business of the Company is oil and natural gas commodity prices. Commodity prices affect the capital programs of energy exploration and production companies, as the price they receive for the crude oil and natural gas they produce has a direct impact on the cash flow available to them and the subsequent demand for the services provided by the Company. Crude oil and natural gas prices have been volatile in recent years, and may continue to be as weather conditions, government regulation, political and economic environments, pipeline capacity, storage levels and other factors outside of the Company's control continue to influence commodity prices. Demand for the Company's services in the future will continue to be influenced by commodity prices and the resultant impact on the cash flow of its customers, and may not be reflective of historical activity levels.

Foreign Operations

The Company will be providing drilling and workover services in several international onshore drilling areas. Tuscany's operations will be subject to regulations in various jurisdictions and support of the oil and natural gas industry can vary in these jurisdictions. In general, Tuscany negotiates long-term service contracts for drilling and workover services and these contracts usually include clauses for the Company's protection.

Foreign Exchange Exposure

The Company's consolidated financial statements are presented in United States dollars and as such operations in Canada, Colombia and Brazil result in foreign exchange risk to the Company. At the present time, the principal foreign exchange risk relates to the conversion of Colombian peso and Canadian dollar denominated activity to United States dollars. The Colombian peso/United States dollar exchange rate at September 30, 2010 was 1,788 compared to 1,914 at June 30, 2010 and 2,048 at December 31, 2009. The Canadian/United States dollar exchange rate at September 30, 2010 was 0.9718 compared to 0.9429 at June 30, 2010 and 0.9555 at December 31, 2009. Under Tuscany's current operating structure, its Colombian operations are considered to be integrated for foreign currency translation purposes. Fluctuations in future exchange rates will impact the United States dollar equivalent of the results reported by the Company's foreign subsidiary and branches.

Changes in Laws and Regulations

The Company and its customers are subject to numerous laws and regulations governing their operations and the exploration and development of crude oil and natural gas, including environmental regulation. Existing and expected environmental legislation and regulations may increase the costs associated with providing drilling and workover services, and Tuscany may be required to incur additional operating costs or capital expenditures in order to comply with any new regulations. The costs of complying with increased environmental and other regulatory changes in the future may also have an adverse effect on the cash flows of the Company's customers and may reduce the demand for services provided by the Company.

Operating Risks and Insurance

The Company's operations will be subject to risks inherent in the oilfield services industry. The Company carries insurance to cover risks to its equipment and people and will review the level of insurance on a regular basis to ensure it is adequate. Although the Company believes its level of insurance coverage is adequate, there can be no assurance that the level of insurance carried by the Company will be sufficient to cover all potential liabilities.

Outlook

Tuscany has had a robust year of rig building and deployment activity. During the past year the Company has been aggressively constructing new drilling and workover rigs, deploying these newly constructed rigs to South America and actively marketing these rigs in various South American markets. Tuscany began the year with six drilling and heavy duty workover rigs deployed into South America. As of November 10, 2010, the Company has thirteen rigs deployed into South America (seven in Colombia, four in Ecuador, one in Guyana and one in Peru). In addition, two rigs have been shipped from Houston on route to Colombia within the past week, and once through customs Tuscany will have fifteen rigs deployed into South America. The construction of the two drilling rigs scheduled for deployment to Brazil is nearing completion, and these rigs are expected to be through Brazil customs in mid-January 2011.

In addition to construction and deployment activity, Tuscany has been actively marketing its newly constructed drilling equipment. To date the Company has seven of its fifteen rigs in South America under contract, with terms averaging between one and three years (including rollover provisions). The two drilling rigs destined for Brazil are contracted for four years (plus rollover provisions) and contracts on the remaining eight rigs are in various stages of documentation.

To date, fiscal 2010 has seen the Company incur significant general and administrative expense. Much of this expenditure can be considered non-recurring in nature. During 2010, Tuscany has incurred substantial expenditures related to establishing operations in multiple jurisdictions (Colombia, Ecuador, Brazil, Guyana and Peru); transitioning Tuscany into a public company; and financing, marketing and travel related expenses.

About Tuscany

Tuscany, a corporation headquartered in Calgary, Alberta, is engaged in the business of providing contract drilling and work-over services along with equipment rentals to the oil and gas industry. Tuscany is currently focused on providing services to oil and natural gas operators in South America. Tuscany has operating centers in Colombia, Ecuador, Brazil and Peru.

READER ADVISORY

Statements in this press release contain forward-looking information including, without limitation, components of cash flow and earnings. Readers are cautioned that assumptions used in the preparation of such information may prove to be incorrect. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of Tuscany. These risks include, but are not limited to: the risks associated with the oil and gas industry, commodity prices and exchange rate changes, regulatory changes, successful exploitation and integration of technology, customer acceptance of technology, changes in drilling activity and general global economic, political and business conditions. Industry related risks could include, but are not limited to; operational risks, delays or changes in plans, health and safety risks and the uncertainty of estimates and projections of costs and expenses and access to capital. The risks outlined above should not be construed as exhaustive. The reader is cautioned not to place undue reliance on this forward-looking information. Tuscany does not undertake any obligation to update or revise any forward-looking statements except as expressly required by applicable securities laws.

Readers are further cautioned that the preparation of financial statements in accordance with Canadian generally accepted accounting principles ("GAAP") requires management to make certain judgements and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes.

Cash flow from operations are not recognized measures under GAAP. Management of Tuscany believes that, in addition to net income, cash flow from operations is a useful supplemental measure as it demonstrates an ability to generate the cash necessary to repay debt or fund future growth through capital investment. Readers are cautioned, however, that these measures should not be construed as an alternative to net income determined in accordance with GAAP as an indication of Tuscany's performance. Tuscany's method of calculating these measures may differ from other companies and, accordingly, they may not be comparable to measures used by other companies. For these purposes, Tuscany defines cash flow from operations as cash provided by operations before changes in non-cash operating working capital.

This press release does not constitute an offer to sell or a solicitation of an offer to buy any of the securities described herein. The securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), or any state securities laws and may not be offered or sold within the United States or to United States Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available.

Contact Information

  • Tuscany International Drilling Inc.
    Walter Dawson
    Chairman and CEO
    (403) 265-8258
    (403) 265-8793 (FAX)
    or
    Tuscany International Drilling Inc.
    Reg Greenslade
    President
    (403) 265-8258
    (403) 265-8793 (FAX)
    or
    Tuscany International Drilling Inc.
    Matt Moorman
    Executive Vice President Finance and Business Development
    (403) 265-8258
    (403) 265-8793 (FAX)
    or
    Tuscany International Drilling Inc.
    Bruce Moyes
    CFO
    (403) 265-8258
    (403) 265-8793 (FAX)
    or
    Tuscany International Drilling Inc.
    100, 522-11th Avenue S.W.
    Calgary, Alberta