TUSK Energy Corporation
TSX : TSK

TUSK Energy Corporation

August 10, 2007 08:45 ET

TUSK Announces 2007 Second Quarter Results

CALGARY, ALBERTA--(Marketwire - Aug. 10, 2007) - TUSK Energy Corporation ("TUSK" or the "Corporation") (TSX:TSK) is pleased to announce its financial and operating results for the three and six months ended June 30, 2007.



HIGHLIGHTS

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Three Months Ended Six Months Ended
June 30, June 30,
% %
2007 2006 Change 2007 2006 Change
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($000s, except per share
amounts)
Financial
Oil and gas revenue 20,153 3,348 502 36,352 5,749 532
Funds from operations (1) 10,484 1,446 625 16,619 2,177 664
Per share - basic and
diluted 0.12 0.03 300 0.19 0.05 280
Net income (loss) 866 (683) 227 (1,564) (1,177) (33)
Per share - basic and
diluted 0.01 (0.02) 150 (0.02) (0.03) 33
Capital expenditures 33,043 17,715 76 81,026 41,448 91
Working capital
(deficiency) (47,416) 34,385 (238) (47,416) 34,385 (238)
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Operations
Sales volumes
Oil (bbls/d) 1,623 307 429 1,539 298 416
Natural gas liquids
(bbls/d) 107 11 873 92 13 608
Natural gas (mcf/d) 14,115 2,362 498 12,772 1,780 618
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Combined (boe/d) 4,083 711 473 3,760 608 518
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Operating netbacks
($/boe) (2)
Average selling prices 54.24 51.72 5 53.41 52.24 2
Royalties (11.35) (11.96) 5 (11.16) (11.44) 2
Operating expenses (8.25) (9.77) 16 (9.38) (11.60) 19
Transportation expenses (2.35) (4.55) 48 (2.43) (6.19) 61
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Operating netback 32.29 25.44 27 30.44 23.01 32
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Share Data (000s)
Weighted average
outstanding 88,880 43,148 106 88,880 41,845 112
Equity outstanding
- end of period
Common shares 88,880 51,789 72
Stock options 7,035 3,345 110
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(1) Funds from operations is a non-GAAP measure that represents net income
(loss) before depletion, depreciation and amortization, future taxes and
stock-based compensation. See further discussion under Non-GAAP Measures
in the Management's Discussion and Analysis.

(2) Operating netback is a non-GAAP measure that represents specific revenue
and expenses on a per unit of production basis. Natural gas has been
converted to boe at a ratio of 6 mcf : 1 bbl.


LETTER TO SHAREHOLDERS

The three months ended June 30, 2007 was an excellent financial and operating period for TUSK. During the second quarter, we met our production targets, while materially reducing operating costs and general and administrative expenses. The corporate combination of TUSK and Zenas Energy Corp. is now complete and we are operating as one entity.

Production averaged 4,083 boe/d in the second quarter of 2007, a 19% increase over first quarter volumes of 3,433 boe/d and a 474% improvement over second quarter 2006 production of 711 boe/d. On a boe basis, second quarter 2007 volumes were 58% natural gas and 42% oil and NGLs.

Cash flow from operations for the three months ended June 30, 2007 was $10.5 million, up 71% from the $6.1 million recorded in the first quarter and a six-fold increase from the $1.4 million generated in the second quarter of 2006. On a per share basis, second quarter 2007 cash flow increased 71% to $0.12 per share from $0.07 per share in the first quarter of the year and up 300% from the $0.03 per share recorded in the second quarter of 2006. The 2007 quarter-over-quarter increase in cash flow from operations reflects higher production volumes due to a successful winter drilling program and lower per unit costs. In addition, the year-over-year increases included the operating results of the properties acquired as a result of the Zenas acquisition.

During the second quarter of 2007, TUSK drilled 8 gross (3.3 net) wells, resulting in 4 gross (3.1 net) gas wells and 1 gross (0.2 net) dry hole. Six of the wells were drilled in the Elleh area, all of which are on production.

Capital expenditures totaled $33.0 million in the second quarter of 2007, down from $48.0 million incurred in the first three months of the year. During the second quarter, $18.2 million was spent in the Peace River Arch area (including $6.0 million on geological and geophysical and $9.0 million on the acquisition of additional interests in a Company operated oil property), $9.6 million at Elleh (primarily allocated to drilling and completions and tangible costs to place wells on-stream) and $4.5 million at Mega/Gutah (most of which was allocated to facilities and tie-ins). Corporate assets, including office equipment and capitalized overhead, accounted for $0.7 million in the quarter. During the period, the Corporation disposed of seismic data for proceeds of $1.8 million.

TUSK is currently going through a review of its loan facilities. We have received a non-binding financing proposal that includes a $60.0 million revolving demand loan and a $15.0 million acquisition/development demand loan. These credit facilities, combined with cash flow from operations, provide TUSK with sufficient capital to fund our capital expenditure plans for the next six to 12 months.

I am pleased to report that Mr. Brian Schmidt has joined TUSK's Board of Directors. Brian is an accomplished and experienced oilman and a great addition to our Board. In addition, Norm Holton, TUSK's founder and former CEO, retired as Chairman of the Board of Directors to ensure Board independence and compliance with corporate governance guidelines. Dennis Chorney, an independent director and formerly the lead director of the Corporation, was elected Chairman. Mr. Holton will continue as a director of TUSK.

Outlook

Current daily production is approximately 4,350 boe/d and we expect to continue to average between 4,000 and 4,500 boe/d for the remainder of 2007. As we move into 2008, the results of our fall drilling program at Conroy will come on-stream, at which time we anticipate production levels to exceed 5,000 boe/d.

Natural gas prices weakened significantly during the second quarter, severely impacting the economics of natural gas related capital expenditures. Consequently, TUSK has taken a number of strategic initiatives. First, we have deferred the drilling of certain gas wells that were initially planned for this summer. Second, we have reviewed our property portfolio with the intent to increase spending on oil projects and slowing down our gas development. However, we will continue to invest in our gas projects as needed in order to ensure that when gas prices rebound we are in a position to drill and tie-in wells quickly. All of these initiatives have been undertaken with an eye to maintaining a strong balance sheet in the event natural gas prices remain soft for a prolonged period of time.

Finally, we are very aware that TUSK's common shares are trading at just over three times cash flow per share. We are pleased with our second quarter results and have confidence that we will continue to add fundamental value to our asset base, which in time will be reflected in the stock price.

On behalf of the Board of Directors,

John R. Rooney, Chief Executive Officer

August 9, 2007


MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis of financial condition and results of operations ("MD&A") was prepared by management and reviewed and approved by the Board of Directors of TUSK Energy Corporation ("TUSK" or the "Corporation"). This commentary is based on information available as at August 9, 2007. The discussion and analysis is a review of TUSK's operational and financial results based on Canadian generally accepted accounting principles ("GAAP"). Its focus is primarily a discussion of the operational and financial performance for the three and six months ended June 30, 2007 and 2006 and should be read in conjunction with the unaudited financial statements for the three and six months ended June 30, 2007 and the audited financial statements and related MD&A for the period ended December 31, 2006.

Forward-Looking Statements

The information herein contains forward-looking statements and assumptions, such as those relating to results of operations and financial condition, capital spending, financing sources, commodity prices, costs of production and the magnitude of oil and gas reserves. By their nature, forward-looking statements are subject to numerous risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, actual results may differ materially from those predicted. The forward-looking statements contained herein are as of June 30, 2007 and are subject to change after this date. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise, and as such, undue reliance should not be placed on forward-looking statements. The Corporation disclaims any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Measures

This MD&A contains the terms "funds from operations", "funds from operations per share", "operating netback", "cash netback" and "corporate netback". These terms do not have any standardized meaning under GAAP, and therefore, may not be comparable with the calculation of similar measures presented by other issuers. Funds from operations is calculated based on cash provided by operating activities before changes in non-cash working capital. TUSK believes that, in conjunction with results presented in accordance with GAAP, these measures assist in providing a more complete understanding of certain aspects of the Corporation's results of operations and the ability to finance capital expenditures. Funds from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of earnings per share. Funds from operations as presented should not be considered an alternative to, or more meaningful than, cash provided by operating activities as determined in accordance with GAAP as an indicator of the Corporation's performance. The table below reconciles cash provided by operating activities to funds from operations.



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Three Months Ended Six Months Ended
June 30, June 30,
($000s) 2007 2006 2007 2006
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Cash provided by (used in) operating
activities (per GAAP) 16,797 (287) 24,189 628
Changes in non-cash working capital (6,313) 1,733 (7,570) 1,549
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Funds from operations 10,484 1,446 16,619 2,177
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BOE Presentation

Barrels of oil equivalent may be misleading, particularly if used in isolation. The boe conversion ratio of 6 mcf : 1 bbl of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.

Acquisition of Zenas Energy Corp. and Comparison to Prior Periods

Effective December 31, 2006, TUSK entered into a business combination with Zenas Energy Corp. ("Zenas") whereby TUSK acquired all of the issued and outstanding shares of Zenas pursuant to a plan of arrangement. The former shareholders of Zenas received 1.033 shares of TUSK for each outstanding Zenas share. A total of 37,204,118 TUSK shares were issued to complete the transaction. TUSK and Zenas amalgamated on January 1, 2007 and continued as TUSK Energy Corporation. The Zenas acquisition resulted in a 72% increase in the number of shares outstanding and other significant changes. As a result, a comparison of 2007 financial and operating information to 2006 may not be as meaningful as a 2007 quarter-over-quarter comparison.

Change in Year-End

In connection with the acquisition of Zenas and to align the reporting of its financial and operating results with industry standard, TUSK changed its year-end to December 31 from March 31 effective December 31, 2006. This resulted in a nine-month fiscal period ending on December 31, 2006. For the purposes of this MD&A, prior period comparative information conforms to a December 31 year-end.



Financial and Operating Results

Sales Volumes
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2007 2006
6 Months Q2 Q1 6 Months Q2 Q1
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Oil (bbls/d) 1,539 1,623 1,454 298 307 289
NGLs (bbls/d) 92 107 77 13 11 16
Natural gas (mcf/d) 12,772 14,115 11,413 1,780 2,362 1,191
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Combined (boe/d) 3,760 4,083 3,433 608 711 504
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Sales volumes averaged 3,760 boe/d in the first six months of 2007, up from 608 boe/d during the same period in 2006. The six-fold increase was a result of the Zenas acquisition and successful drilling during the second half of 2006 and first half of 2007.

Comparing the second quarter of 2007 to the first quarter of the year, sales volumes increased 19% to 4,083 boe/d. During the second quarter, TUSK placed new wells on-stream at Elleh, Gutah and Gage as well as completed a property acquisition in the Gage area. For the six months ended June 30, 2007, oil and NGLs accounted for 43% and natural gas for 57% of the Corporation's sales volumes. For the balance of 2007, TUSK expects its production profile to remain within the range of the first half of the year.



Selling Prices
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2007 2006
6 Months Q2 Q1 6 Months Q2 Q1
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Oil ($/bbl) 66.86 70.11 63.20 65.14 72.16 57.61
NGLs ($/bbl) 56.23 60.27 50.60 38.95 40.18 38.10
Natural gas ($/mcf) 7.26 7.17 7.37 6.65 6.02 7.90
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Combined ($/boe) 53.41 54.24 52.47 52.24 51.72 52.97
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During the first half of 2007 and 2006, TUSK's sales volumes were sold at daily posted prices, and therefore, changes to realized selling prices reflect market conditions. TUSK produces light oil, which results in a small differential to posted prices. Going forward, TUSK may enter into hedging transactions to limit its exposure to oil and natural gas price fluctuations.



Revenue
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2007 2006
($000s) 6 Months Q2 Q1 6 Months Q2 Q1
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Oil 18,629 10,357 8,273 3,513 2,013 1,500
NGLs 939 586 353 95 40 55
Natural gas 16,784 9,210 7,574 2,141 1,295 846
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Combined 36,352 20,153 16,200 5,749 3,348 2,401
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Oil and gas revenue for the six months ended June 30, 2007 was $36,352,000 compared to $5,749,000 in the same period of 2006 due primarily to an improvement in sales volumes. The small year-over-year increase in oil and natural gas prices had a modest positive effect on revenue.

Second quarter 2007 revenue increased 24% to $20,153,000 from $16,200,000 in the first quarter of the year. Oil revenue improved 25% to $10,357,000 as a result of a 12% increase in volumes and an 11% increase in average selling prices. Quarter-over-quarter natural gas revenue improved 22% to $9,210,000 as a 24% increase in volumes offset a small decrease in selling prices.



Royalties
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2007 2006
($000s) 6 Months Q2 Q1 6 Months Q2 Q1
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Crown (net of ARTC
in 2006) 6,830 3,827 3,003 942 655 287
Freehold 250 150 100 263 61 202
Gross overriding 517 239 278 55 58 (3)
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Total 7,597 4,216 3,381 1,260 774 486
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Royalties as a % of
revenue 20.9 20.9 20.9 21.9 23.1 20.2
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Royalties per boe
($/boe) 11.16 11.35 10.94 11.44 11.96 10.71
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Royalties were $7,597,000 for the six months ended June 30, 2007, up from $1,260,000 in the same period of 2006. The overall increase was due to higher revenue offset slightly by a decline in the effective royalty rate to 20.9% in 2007 from 21.9% in 2006. Royalties in 2006 were reduced by Alberta Royalty Tax Credits ("ARTC"). The Alberta government announced the cancellation of the ARTC program effective January 1, 2007.

Second quarter 2007 royalties were $4,216,000 ($11.35/boe), an increase of 25% from $3,381,000 ($10.94/boe) in the first quarter. TUSK's effective royalty rate remained constant at 20.9% throughout the first half of 2007. The quarter-over-quarter change to the relative weighting of freehold and gross overriding royalties was caused primarily by new production placed on-stream during the second quarter.



Operating Expenses
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2007 2006
6 Months Q2 Q1 6 Months Q2 Q1
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Total ($000s) 6,385 3,064 3,321 1,276 633 643
Per boe ($/boe) 9.38 8.25 10.74 11.60 9.77 14.20
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Operating expenses were $6,385,000 for the first half of 2007 compared to $1,276,000 during the first half of 2006. The overall increase was caused by higher production volumes offset by a decline in the unit rate to $9.38/boe in 2007 from $11.60/boe in 2006. The year-over-year decline in operating expenses on a per unit basis was primarily due to the completion of the Zenas acquisition, which resulted in an immediate decrease in corporate per unit operating expenses, and new wells brought on-stream since mid-2006 that have been comparatively more efficient to operate.

Although quarter-over-quarter volumes increased, operating expenses declined 8% to $3,064,000 in the second quarter of 2007 from $3,321,000 in the first quarter of the year. Lower expenses were the result of a decline in the unit rate to $8.25/boe in the second quarter from $10.74/boe in the first quarter. TUSK expects operating expenses to average $8.00 to $9.00/boe for the remainder of 2007.



Transportation Expenses
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2007 2006
6 Months Q2 Q1 6 Months Q2 Q1
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Total ($000s) 1,652 873 779 681 295 387
Per boe ($/boe) 2.43 2.35 2.52 6.19 4.55 8.53
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Transportation expenses for the first half of 2007 were $1,652,000 ($2.43/boe) compared to $681,000 ($6.19/boe) for the same period in 2006. The year-over-year increase in total transportation expenses was due to higher production volumes offset by a reduction in the cost per boe. The decrease in transportation expenses per boe was a result of the commissioning of the new battery at Mega, Alberta in August 2006, the addition of new production with lower transportation rates and the addition of Zenas production effective January 1, 2007.

Second quarter 2007 transportation expenses were $873,000, up from $779,000 incurred in the first quarter of the year due primarily to an increase in sales volumes offset by a small change in the rate per boe. Transportation expenses per boe fluctuate in response to changes in TUSK's production profile.



General and Administrative ("G&A") Expenses
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2007 2006
($000s) 6 Months Q2 Q1 6 Months Q2 Q1
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Total 6,287 1,925 4,362 2,317 1,035 1,282
Overhead recoveries (660) (287) (373) (820) (293) (527)
Capitalized (1,781) (521) (1,260) (720) (335) (385)
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Expensed 3,846 1,117 2,729 777 407 370
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Expensed per boe
($/boe) 5.65 3.01 8.83 7.06 6.28 8.16
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Total G&A costs for the six months ended June 30, 2007 were $6,287,000 versus $2,317,000 for the corresponding period of 2006. Compared to 2006, amounts incurred in 2007 reflect a much larger entity. In addition, first quarter 2007 results were burdened with significant one-time severance and retention costs regarding staff rationalization efforts following the merger with Zenas. Expensed G&A costs were $3,846,000 ($5.65/boe) for the first half of 2007 compared to $777,000 ($7.06/boe) for the same period in 2006.

Second quarter 2007 total G&A costs were $1,925,000, down from $4,362,000 incurred in the first quarter of the year. Most of the quarter-over-quarter decrease was caused by the one-time costs incurred in the first quarter described above. G&A costs capitalized to oil and gas properties were $521,000 in the second quarter, or 27% of total costs. G&A costs expensed were $1,117,000 ($3.01/boe) in the second quarter, down from $2,729,000 ($8.83/boe) in the first quarter. For the balance of 2007, TUSK expects the capitalization rate to be in the range of second quarter experience and in the $3.00 to $3.50/boe range for G&A costs expensed.

Financing Charges

Financing charges were $408,000 in the first half of 2007, all of which were incurred in the second quarter. TUSK did not incur financing charges in 2006. Second quarter 2007 financing charges were comprised primarily of interest paid on TUSK's credit facility and guarantee fees for letters of credit issued in connection with project commitments.

Stock-Based Compensation Expense

Stock-based compensation expense for the six months ended June 30, 2007 was $1,014,000, up from $600,000 for the corresponding period in 2006. The increase was primarily due to stock options granted at the end of 2006 in connection with the Zenas/TUSK corporate combination and the vesting of options during the first quarter of 2007 as part of the employee rationalization process.

During the second quarter of 2007, TUSK recorded stock-based compensation expense of $537,000, up 13% from $477,000 recorded in the first quarter.

Gain on Sale of Investment

During the second quarter of 2007, TUSK disposed of its investment in a publicly traded oil and gas company for proceeds of $7,367,000. The shares had an original cost of $4,271,000 and the sale resulted in a gain of $3,097,000. For financial statement purposes, the carrying value of this investment was adjusted to fair value at each balance sheet date and an unrealized gain or loss recorded. This accounting treatment was adopted prospectively effective January 1, 2007, and as a result, an unrealized gain of $2,483,000 (before tax) was recorded as at January 1, 2007 and a realized gain of $614,000 was recorded for the six months ended June 30, 2007.



Depletion, Depreciation and Accretion ("DD&A") Expense
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2007 2006
($000s) 6 Months Q2 Q1 6 Months Q2 Q1
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Depletion and
depreciation of
oil and gas
properties 18,052 9,852 8,200 2,994 1,630 1,364
Accretion of asset
retirement
obligations 128 67 61 17 18 (1)
Depreciation of
office equipment
and leasehold
improvements 70 41 29 - - -
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Total 18,250 9,960 8,290 3,011 1,648 1,363
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Per boe ($/boe) 26.81 26.81 26.82 27.36 25.46 30.07
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DD&A expense for the six months ended June 30, 2007 totaled $18,250,000 ($26.81/boe), up from $3,011,000 ($27.36/boe) during the first six months of 2006. Almost all of TUSK's DD&A expense was comprised of depletion and depreciation of oil and gas properties, which is based on a ratio of production for the period to proved reserve assignments. The year-over-year increase in DD&A expense was primarily as a result of the growth in production volumes.

Second quarter 2007 DD&A expense was $9,960,000 compared to $8,290,000 in the first quarter of the year. The increase was due to higher volumes in the second quarter, as the rate per boe was virtually unchanged. TUSK is in the early stages of exploration and development at its Mega property and has invested substantial capital in infrastructure. Expenditures on infrastructure at the early stages of project development typically result in higher DD&A rates per boe. Conversely, operations in the Elleh area are past the initial phase and TUSK is adding reserves at favourable costs, which will have a positive effect on corporate DD&A rates per boe. Going forward, a reduction in DD&A expense per boe will depend on TUSK's ability to add proved reserves at lower costs.

Provision for Income Taxes

For the six-month periods ended June 30, 2007 and 2006, TUSK recorded a reduction in future income taxes of $467,000 and $257,000, respectively. The recoveries are the result of losses before taxes for both periods. The provision for income taxes includes the effects of a reduction in future federal and provincial income tax rates in effect during the period. TUSK did not record a current income tax liability at June 30, 2007 and does not expect to incur current income taxes throughout 2007. TUSK has approximately $250,000,000 of available income tax deductions.

Funds from Operations

Funds from operations for the six months ended June 30, 2007 were $16,619,000 ($0.19 per share) compared to $2,177,000 ($0.05 per share) for the first six months of 2006. The year-over-year increase was primarily the result of the Zenas acquisition completed at the end of 2006 and higher average daily production derived through exploration and development.

For the second quarter of 2007, TUSK recorded funds from operations of $10,484,000 ($0.12 per share) compared to $6,136,000 ($0.07 per share) for the first quarter of the year. The quarter-over-quarter improvement in funds from operations was primarily due to the 19% increase in average daily sales volumes and the decline in G&A expenses.



Cash Netbacks
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2007 2006
($/boe) 6 Months Q2 Q1 6 Months Q2 Q1
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Oil and gas revenue 53.41 54.24 52.47 52.24 51.72 52.97
Royalties (net of
ARTC) (11.16) (11.35) (10.94) (11.44) (11.96) (10.71)
Operating expenses (9.38) (8.25) (10.74) (11.60) (9.77) (14.20)
Transportation
expenses (2.43) (2.35) (2.52) (6.19) (4.55) (8.53)
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Operating netback 30.44 32.29 28.28 23.01 25.44 19.53
G&A expenses (5.65) (3.01) (8.83) (7.06) (6.28) (8.16)
Financing charges (0.60) (1.10) - - - -
Interest income 0.23 0.03 0.42 3.83 3.20 4.73
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Corporate netback 24.42 28.21 19.87 19.78 22.36 16.10
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Comparing the six months ended June 30, 2007 to the same period in 2006, operating netbacks increased to $30.44/boe from $23.01/boe primarily as a result of lower operating and transportation expenses. The increase in corporate cash netbacks was not as large ($24.42/boe in 2007 compared to $19.78/boe in 2006) primarily due to interest income in 2006 versus financing charges in 2007.

Operating netbacks increased to $32.29/boe in the second quarter of 2007 from $28.28/boe in the first quarter primarily as a result of lower operating expenses. Corporate netbacks increased to $28.21/boe from $19.87/boe as the drop in G&A expenses overcame the introduction of financing charges.

Net Income (Loss)

The net loss for the six months ended June 30, 2007 was $1,564,000 ($0.02 per share) compared to $1,177,000 ($0.03 per share) for the same period in 2006. Compared to 2006, the 2007 net loss was increased by the one-time expenses incurred in the first quarter and reduced by the gain on disposition of investment.

High first quarter 2007 G&A expenses and the gain on sale of investment recorded in the second quarter caused a swing in quarter-over-quarter results. TUSK posted a loss of $2,430,000 ($0.03 per share) for the first quarter and net income of $866,000 ($0.01 per share) for the second quarter of 2007.



Capital Expenditures
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2007 2006
($000s) 6 Months Q2 Q1 6 Months Q2 Q1
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Land acquisition and
retention 1,053 525 528 2,789 2,209 580
Geological and
geophysical 9,671 6,648 3,023 11,577 9,064 2,513
Drilling and
completions 40,103 8,693 31,410 22,858 6,252 16,606
Well equipping and
facilities 18,901 7,469 11,431 3,355 (172) 3,527
Property
acquisitions 9,049 9,020 29 - - -
Capitalized overhead 1,780 521 1,260 720 335 385
Office 469 167 302 149 27 122
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Total 81,026 33,043 47,983 41,448 17,715 23,733
Dispositions (1,937) (1,937) - - - -
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Net 79,089 31,106 47,983 41,448 17,715 23,733
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Capital expenditures totaled $81,026,000 for the six months ended June 30, 2007, $33,043,000 of which was incurred in the second quarter. Second quarter 2007 expenditures included $18,200,000 in the Peace River Arch area, $9,600,000 in the Elleh area and $4,400,000 at Mega/Gutah. In the Peace River Arch area, TUSK completed a $9,000,000 acquisition of additional interests in a Company operated oil property, drilled 2 gross (0.3 net) wells (one of which was abandoned) and continued investing in infrastructure. Drilling continued in the Elleh area where 6 gross (3.0 net) successful gas wells were drilled, three of which were placed on-stream in June. Most of the second quarter investment in the Mega/Gutah area was allocated to facilities and re-completions. During the second quarter, TUSK received $1,937,000 with respect to the disposition of seismic data.

Outlook

Second quarter 2007 results showed a significant improvement over the first quarter. Cash flow from operations increased as a result of higher average daily sales volumes as well as lower per unit operating expenses and G&A costs. With strong operational and exploratory capability in place, TUSK expects to continue meeting its production and cost targets.

In an environment characterized by fluctuating commodity prices, the ability to re-allocate capital is vitally important. TUSK has three producing operating areas: Elleh, Peace River Arch and Mega/Gutah and a non-producing project at Conroy. Most of TUSK's production as well as its drilling inventory is TUSK operated. The Corporation has an undeveloped land base of approximately 200,000 net acres, which, combined with financial stability, gives TUSK the ability to shift investment strategies quickly in response to changes in commodity prices and/or costs.

Liquidity and Capital Resources

TUSK has a $45,000,000 revolving operating demand facility and a $2,000,000 non-revolving acquisition/development facility with a Canadian chartered bank. The interest rate charged on the operating demand facility is based on a pricing grid that is debt to cash flow sensitive. An increase in TUSK's debt to cash flow ratio will cause an increase in the interest rate. The interest rate is calculated quarterly and ranges from the bank's prime rate to prime plus 1.0%. The non-revolving acquisition/development facility bears interest at the bank's prime rate plus 0.5%. The credit facilities are secured by a $100,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts.

TUSK has received a non-binding indicative financing proposal that includes a $60,000,000 revolving demand loan and a $15,000,000 acquisition/development demand loan. TUSK expects to finalize its borrowing facilities in the near future.

As at June 30, 2007, TUSK had a working capital deficiency of $47,416,000, which includes bank debt of $29,191,000. Under the terms of its revolving operating demand facility, TUSK is required to maintain a working capital ratio, adjusted for actual and available borrowings under the facility, of 1:1. Based on the $45,000,000 facility in place on June 30, 2007, TUSK was in breach of this covenant. The bank has issued a waiver regarding the breach.

On an ongoing basis, TUSK will typically utilize three sources of funding to finance its capital expenditures program: internally generated cash flow from operations, debt, where deemed appropriate, and new equity issues, if available on favourable terms. Commodity prices and production volumes have the largest impact on TUSK's ability to generate adequate cash flow to meet all of its obligations. A prolonged decrease in commodity prices would negatively affect TUSK's cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If TUSK's capital expenditures program does not result in sufficient additional reserves and/or production, it would likely have a negative impact on the Corporation's liquidity.

Outstanding Share Data

As of June 30, 2007, TUSK had 88,879,722 common shares and 7,035,167 stock options outstanding. From July 1, 2007 to the date of this MD&A, there were no changes to TUSK's outstanding securities, except for the grant of 1,470,000 options.

Contractual Obligations

Conroy Drilling Commitment

Under a farm-in commitment, TUSK has agreed to drill, complete and tie-in or abandon 40 wells, complete and tie-in or abandon 6 standing wells, construct approximately 6.5 miles of gathering system as well as a gas plant and sales line capable of processing at least 10 mmcf/d of natural gas. Fifteen of the new drill wells and the gathering system must be completed by April 30, 2008, while the gas plant and sales line must be completed by June 30, 2008. The remainder of the commitment must be completed by April 30, 2009. This commitment is secured by a $6.0 million letter of guarantee.

Drilling Rigs

TUSK has made commitments for two drilling rigs as follows:

- 220 days/year for three years starting at rig delivery in December 2005, with an obligation of $6,800/day.

- 250 days/year for four years starting at rig delivery in February 2007, with an obligation of $9,700/day.

Office Space

TUSK has a lease commitment for office space that expires on January 31, 2013, which is summarized in the table below.



----------------------------------------------------------------------------
Year Amount
----------------------------------------------------------------------------
($000s)

2007 218
2008 513
2009 536
2010 540
2011 540
2012 and thereafter 584
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contingencies

In May 2007, TUSK was served with a statement of claim demanding payment of $1,067,000 plus interest. The action is a result of payments TUSK withheld from a contractor responsible for the construction of a capital project that required extensive repairs after its initial completion. The repairs also resulted in lengthy delays before the project could be put in service. In July, TUSK filed a statement of defence and a counterclaim for repair costs incurred and lost revenue totaling $6.8 million. The amounts paid, or received, by TUSK to settle this dispute will be recorded in the period the amounts become known.

Off-Balance Sheet Arrangements

Except for the items discussed under the caption "Contractual Obligations", there were no off-balance sheet arrangements at June 30, 2007.

Related Party Transactions

An officer of TUSK is a director and significant shareholder of a private company that provides computer management system services to TUSK. During the six months ended June 30, 2007, this company was paid $70,000 (six months ended June 30, 2006 - $73,000). These services were provided at commercial rates.

During the six months ended June 30, 2007, a company controlled by an officer of TUSK was paid $77,000 in royalties (six months ended June 30, 2006 - $65,000).



Summary of Quarterly Results
----------------------------------------------------------------------------
2007 2006
(unaudited) Q2 Q1 Q4 Q3
----------------------------------------------------------------------------
Sales volumes
Oil and NGLs (bbls/d) 1,730 1,531 699 502
Natural gas (mcf/d) 14,115 11,413 3,636 2,493
Total (boe/d) 4,083 3,433 1,305 918
----------------------------------------------------------------------------
($000s, except per share amounts)
Oil and gas revenue 20,153 16,200 6,327 4,656
Capital expenditures (net) 31,106 47,983 13,697 11,273
Funds from operations 10,484 6,136 2,934 2,226
Per share - basic 0.12 0.07 0.07 0.04
- diluted 0.12 0.07 0.06 0.04
Net income (loss) 866 (2,430) (2,342) (420)
Per share - basic and diluted 0.01 (0.03) (0.05) (0.02)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
2006 2005
(unaudited) Q2 Q1 Q4 Q3
----------------------------------------------------------------------------
Sales volumes
Oil and NGLs (bbls/d) 318 305 376 331
Natural gas (mcf/d) 2,362 1,191 1,736 1,754
Total (boe/d) 711 504 665 623
----------------------------------------------------------------------------
($000s, except per share amounts)
Oil and gas revenue 3,348 2,402 3,926 3,525
Capital expenditures (net) 17,715 23,733 3,463 8,710
Funds from operations 1,446 730 2,079 1,757
Per share - basic 0.03 0.02 0.06 0.05
- diluted 0.03 0.02 0.06 0.05
Net income (loss) (683) (494) (322) 13
Per share - basic and diluted (0.02) (0.01) (0.01) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Business Risks and Uncertainties

TUSK's production and exploration activities are concentrated in the Western Canadian Sedimentary Basin where activity is highly competitive and includes a variety of different sized companies ranging from smaller junior producers to the much larger integrated petroleum companies. TUSK is subject to the various types of business risks and uncertainties including:

- Finding and developing oil and natural gas reserves at economic costs;

- Production of oil and natural gas in commercial quantities; and

- Marketability of oil and natural gas produced.

In order to reduce exploration risk, TUSK strives to employ highly qualified and motivated professional employees with a demonstrated ability to generate quality proprietary geological and geophysical prospects. To help maximize drilling success, the Corporation combines exploration in areas that afford multi-zone prospect potential, targeting a range of low to moderate risk prospects with some exposure to select high risk with high reward opportunities. TUSK also explores in areas where it has significant drilling experience.

TUSK mitigates its risk related to producing hydrocarbons through the utilization of the most appropriate technology and information systems. In addition, the Corporation seeks to maintain operational control of the majority of its prospects.

Oil and gas exploration and production can involve environmental risks such as pollution of the environment and destruction of natural habitat, as well as safety risks such as personal injury. In order to mitigate such risk, TUSK conducts its operations at high standards and follows safety procedures intended to reduce the potential for personal injury to employees, contractors and the public at large. The Corporation maintains current insurance coverage for general and comprehensive liability as well as limited pollution liability. The amount and terms of this insurance are reviewed on an ongoing basis and adjusted as necessary to reflect changing corporate requirements as well as industry standards and government regulations. TUSK may periodically use financial or physical delivery hedges to reduce its exposure against the potential adverse impact of commodity price volatility, as governed by formal policies approved by senior management subject to controls established by the Board of Directors. At June 30, 2007, there were no hedges in place.

Changes in Accounting Policies

Effective January 1, 2007, TUSK adopted the new Canadian accounting standards for Financial Instruments - Recognition and Measurement, Financial Instruments - Presentation and Disclosures, Hedging and Comprehensive Income. These standards have been applied prospectively. At January 1, 2007, an adjustment was made to increase investments by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000.

Critical Accounting Estimates and Policies

Depletion and Depreciation Expense

TUSK uses the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized, whether successful or not. The aggregate of capitalized costs, net of certain costs related to unproved properties, and estimated future development costs are amortized using the unit-of-production method based on estimated proved reserves. Changes in estimated proved reserves or future development costs have a direct impact on depletion and depreciation expense. Certain costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be assigned, at which point they would be included in the depletion calculation, or for impairment, for which any write-down would be charged to depletion and depreciation expense.

Full Cost Accounting Ceiling Test

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of costs and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment would be charged as additional depletion and depreciation expense.

Asset Retirement Obligations

TUSK records a liability for the fair value of legal obligations associated with the retirement of long-lived tangible assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset known as the asset retirement cost. The total future asset retirement obligation is an estimate based on TUSK's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows required to settle the asset retirement obligation is an estimate that is subject to measurement uncertainty and any change would impact the liability.

Income Taxes

The determination of TUSK's income and other tax liabilities require interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded.

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by TUSK is accumulated and communicated to the Corporation's management as appropriate to allow timely decisions regarding required disclosure. TUSK's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the Corporation's annual filings for the most recently completed financial year, that the Corporation's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the Corporation is made known to them by others within the Corporation. It should be noted that while TUSK's Chief Executive Officer and Chief Financial Officer believe that the Corporation's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures 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

TUSK's Chief Executive Officer and Chief Financial Officer have designed or caused to be designed under their supervision internal controls over financial reporting related to the Corporation to provide reasonable assurance regarding the reliability of the Corporation's financial reporting and the preparation of financial statements together with the other financial information for external purposes in accordance with the Canadian GAAP.

TUSK's Chief Executive Officer and Chief Financial Officer are required to cause the Corporation to disclose herein any change in the Corporation's internal control over financial reporting that occurred during the Corporation's most recent interim period that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. TUSK has identified two areas of potential material weakness in the Corporation's internal control over financial reporting during the six months ended June 30, 2007. The areas include (a) Income Taxes and (b) Complex and Non-Routine Transactions, which are both detailed in the Corporation's annual MD&A for the period ended December 31, 2006.

During the six months ended June 30, 2007, in conjunction with the merger with Zenas and related personnel changes, numerous changes were made to the Corporation's policies and procedures that comprise its control over financial reporting. These changes include:

1. Previously, TUSK prepared financial statements on a quarterly basis only. Commencing in 2007, a system of reporting on a monthly basis was implemented.

2. Previously, TUSK's process for capital and operating budget preparation did not include complete reconciliation to the accounting system. Commencing in 2007, a system of budget preparation was implemented to include a complete reconciliation to actual results in the accounting system.

3. TUSK appointed a new Vice President, Finance and Chief Financial Officer commencing June 1, 2007.

It should be noted that a control system, including the Corporation's disclosure and internal controls and procedures, no matter how well conceived can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

Additional Information

Additional information regarding TUSK Energy Corporation is available on SEDAR at www.sedar.com or on TUSK's website at www.tusk-energy.com.



BALANCE SHEETS

----------------------------------------------------------------------------
As at June 30, December 31,
(unaudited) 2007 2006
----------------------------------------------------------------------------
($000s)

Assets

Current
Cash and cash equivalents - 27,187
Investments (note 4) 258 4,528
Accounts receivable 17,501 18,476
Prepaid expenses 579 759
----------------------------------------------------------------------------
18,338 50,950
Property, plant and equipment (note 5) 289,430 226,410
----------------------------------------------------------------------------
307,768 277,360
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities

Current
Accounts payable and accrued liabilities 36,563 38,993
Bank loan (note 6) 29,191 -
----------------------------------------------------------------------------
65,754 38,993
Future income taxes 9,160 8,850
Asset retirement obligations (note 3) 3,682 2,930
Shareholders' equity
Share capital (note 7) 227,078 227,078
Contributed surplus (note 7) 8,310 6,284
Deficit (6,216) (6,775)
----------------------------------------------------------------------------
229,172 226,587
----------------------------------------------------------------------------
307,768 277,360
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and contingencies (note 10)

See accompanying notes.



STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND DEFICIT

----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(unaudited) 2007 2006 2007 2006
----------------------------------------------------------------------------
($000s, except per share amounts)

Revenue
Oil and gas revenue 20,153 3,348 36,352 5,749
Royalties (net of Alberta Royalty Tax
Credit in 2006) (4,216) (774) (7,597) (1,260)
----------------------------------------------------------------------------
15,937 2,574 28,755 4,489
Interest income 9 207 155 422
----------------------------------------------------------------------------
15,946 2,781 28,910 4,911
----------------------------------------------------------------------------
Expenses
Operating 3,064 633 6,385 1,276
Transportation 873 295 1,652 681
General and administrative 1,117 407 3,846 777
Financing charges 408 - 408 -
Stock-based compensation (note 7) 537 396 1,014 600
Gain on investment (note 4) (1,105) - (614) -
Depreciation, depletion and accretion 9,960 1,648 18,250 3,011
----------------------------------------------------------------------------
14,854 3,379 30,941 6,345
----------------------------------------------------------------------------
Income (loss) before taxes 1,092 (598) (2,031) (1,434)
----------------------------------------------------------------------------
Income taxes
Less: future tax expense (reduction) 226 85 (467) (257)
----------------------------------------------------------------------------
Net income (loss) and comprehensive
income (loss) for the period 866 (683) (1,564) (1,177)
----------------------------------------------------------------------------
Deficit, beginning of period (7,082) (3,247) (6,775) (2,753)
Change of accounting policies
(net of tax of $360) (note 2) - - 2,123 -
----------------------------------------------------------------------------
Deficit, end of period (6,216) (3,930) (6,216) (3,930)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share (note 7)
Basic and diluted 0.01 (0.02) (0.02) (0.03)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes.



STATEMENTS OF CASH FLOW

----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(unaudited) 2007 2006 2007 2006
----------------------------------------------------------------------------
($000s)

Operating activities
Net (income) loss for the period 866 (683) (1,564) (1,177)
Add items not requiring cash:
Stock-based compensation 537 396 1,014 600
Gain on investment (1,105) - (614) -
Depreciation, depletion and accretion 9,960 1,648 18,250 3,011
Future tax expense (reduction) 226 85 (467) (257)
----------------------------------------------------------------------------
10,484 1,446 16,619 2,177
Change in non-cash working capital 6,313 (1,733) 7,570 (1,549)
----------------------------------------------------------------------------
16,797 (287) 24,189 628
----------------------------------------------------------------------------
Financing activities
Issue of capital stock - 50,079 - 50,394
Share issue costs - (2,677) - (2,833)
Increase in bank loan 20,490 - 29,191 -
----------------------------------------------------------------------------
20,490 47,402 29,191 47,561
----------------------------------------------------------------------------
Investing activities
Expenditures on property
and equipment (33,043) (17,715) (81,026) (41,448)
Proceeds on disposition of property
and equipment 1,937 - 1,937 -
Proceeds on sale of investment (note 4) 7,367 - 7,367 -
Short-term investments - (6,823) - (9,957)
Change in non-cash working capital (13,548) (23,405) (8,845) 2,260
----------------------------------------------------------------------------
(37,287) (47,943) (80,567) (49,145)
----------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents - (828) (27,187) (956)
Cash and cash equivalents,
beginning of period - 3,488 27,187 3,616
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period - 2,660 - 2,660
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid 408 - 408 28
Taxes paid - - - 9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental disclosure of cash flow information (note 9)

See accompanying notes.



NOTES TO THE FINANCIAL STATEMENTS

Three and Six Months Ended June 30, 2007 and 2006
(unaudited)
(tabular amounts in 000s, except share and per share amounts)


Nature of Business and Basis of Presentation

TUSK Energy Corporation ("TUSK" or the "Corporation") is involved in the exploration, development and production of petroleum and natural gas in British Columbia, Alberta and Saskatchewan. The financial statements are stated in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles.

TUSK acquired Zenas Energy Corp. ("Zenas") through a plan of arrangement on December 31, 2006. The balance sheet includes the accounts of Zenas as at December 31, 2006. TUSK and Zenas were amalgamated on January 1, 2007.

1. Significant Accounting Policies

The unaudited interim financial statements have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), using the same accounting policies as those set out in Note 1 to the audited financial statements for the period ended December 31, 2006, except as described in Note 2 below. The interim financial statements contain disclosures which are supplemental to TUSK's December 31, 2006 audited financial statements. Certain disclosures, which are normally required to be included in the notes to the annual audited financial statements, have been condensed or omitted. In the opinion of management, these interim financial statements contain all adjustments of a normal and recurring nature to present fairly TUSK's financial position as at June 30, 2007 and the results of its operations for the three and six months ended June 30, 2007. The interim financial statements should be read in conjunction with TUSK's audited financial statements and notes thereto for the period ended December 31, 2006.

2. Changes in Accounting Policies

(a) Financial Instruments, Hedging and Comprehensive Income

Effective January 1, 2007, TUSK adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instruments - Recognition and Measurement", section 3865, "Hedges" and section 1530, "Comprehensive Income". These new standards have been adopted prospectively. At January 1, 2007, an adjustment was made to increase investments by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000.

Financial Instruments

CICA section 3855 establishes a framework for classifying and measuring financial instruments. Under this section, financial instruments must be initially recognized at their fair value on the balance sheet date. Each financial instrument must be included in one of five categories set out in the standard: financial assets and liabilities held for trading; financial assets held to maturity; loans and receivables; financial assets available for sale; or other financial liabilities. All financial instruments, with the exception of loans and receivables, held to maturity investments and other financial liabilities measured at amortized cost, are reported on the balance sheet at fair value. Subsequent measurement and changes in fair value will depend on their initial classification. Unrealized gains and losses on financial instruments classified as held for trading are recognized in earnings in the period incurred. Gains and losses on assets available for sale are recognized in other comprehensive income, and are charged to earnings when the asset is derecognized.

All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless they qualify for the normal sale and purchase exception. All changes in fair value are included in earnings unless cash flow hedge or net investment accounting is used, in which case changes in fair value are recorded in other comprehensive income, to the extent the hedge is effective, and in earnings, to the extent it is ineffective.

Hedging

Section 3865 establishes standards for when and how hedge accounting may be applied. Hedge accounting continues to be optional. At the inception of a hedge, TUSK must formally document the designation of the hedge, the risk management objectives, the hedging relationships between the hedged items and the hedging items and the methods for testing the effectiveness of the hedge. Assessments are made, both at inception of the hedge and on an ongoing basis, to determine if the derivatives designated as hedges are highly effective in offsetting changes in fair values or cash flows of hedged items.

For cash flow hedges that have been terminated or cease to be effective, prospective gains or losses on the derivative are recognized in earnings. Any gain or loss that has been included in accumulated other comprehensive income at the time the hedge is discontinued continues to be deferred in accumulated other comprehensive income until the original hedged transaction is recognized in earnings. If the likelihood of the original hedged transaction occurring is no longer probable, the entire gain or loss in accumulated other comprehensive income related to this transaction is immediately reclassified to earnings.

Comprehensive Income

Section 1530 establishes standards for reporting and presenting comprehensive income and other comprehensive income. Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources and other comprehensive income comprises revenues, expenses, gains and losses that, in accordance with generally accepted accounting principles, are recognized in comprehensive income but excluded from net income.

(b) Accounting Changes

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

3. Asset Retirement Obligations

TUSK's asset retirement obligations result from net ownership interests in petroleum and natural gas assets, including wellsites, gathering systems and processing facilities. TUSK estimates the net present value of its total asset retirement obligations to be $3,682,000, based on a total undiscounted amount of cash flows required to settle its asset retirement obligations of approximately $6,022,000. A credit-adjusted risk-free rate of 8.0% and an inflation rate of 2.0% was used to calculate the fair value of the asset retirement obligation. These obligations are expected to be incurred between 2007 and 2037 and will be funded from general corporate resources at the time of abandonment. The table below reconciles TUSK's asset retirement obligations.



----------------------------------------------------------------------------
Six Months Ended June 30,
($000s) 2007 2006
----------------------------------------------------------------------------
Balance, beginning of period 2,930 499
Liabilities incurred in period 625 383
Changes in prior period estimates/revisions - 12
Accretion expense 127 16
----------------------------------------------------------------------------
Balance, end of period 3,682 910
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. Investments

During the second quarter of 2007, TUSK disposed of its investment in a publicly traded oil and gas company to an unrelated third party for proceeds of $7,367,000. A director of TUSK is also a director of this company.

TUSK has invested a total of $258,000 in common shares of a private drilling company. The investment is carried at fair value, which approximates cost.



5. Property, Plant and Equipment

----------------------------------------------------------------------------
June 30, December 31,
($000s) 2007 2006
----------------------------------------------------------------------------
Oil and natural gas properties 320,662 239,989
Office equipment and leasehold improvements 771 302
----------------------------------------------------------------------------
321,433 240,291
Accumulated depletion and depreciation (32,003) (13,881)
----------------------------------------------------------------------------
289,430 226,410
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The June 30, 2007 depletion calculation excluded unproved properties of $54,180,000 (December 31, 2006 - $27,500,000, which does not include $22,000,000 of undeveloped land acquired as a result of the Zenas acquisition), and salvage values of $10,656,000 (December 31, 2006 - $13,400,000). For the six months ended June 30, 2007, TUSK capitalized general and administrative expenses of $1,780,000 (six months ended June 30, 2006 - $785,000) to oil and natural gas properties.

TUSK performed a ceiling test calculation as at June 30, 2007, resulting in the undiscounted cash flows from proved reserves and the lower of cost and market of unproved properties exceeding the carrying value of oil and natural gas properties.

6. Bank Loan

TUSK has a $45,000,000 revolving operating demand facility and a $2,000,000 non-revolving acquisition/development facility with a Canadian chartered bank. The interest rate charged on the operating demand facility is based on a pricing grid that is debt to cash flow sensitive. An increase in TUSK's debt to cash flow ratio will cause an increase in the interest rate. The interest rate is calculated quarterly and ranges from the bank's prime rate to prime plus 1.0%. The non-revolving acquisition/development facility bears interest at the bank's prime rate plus 0.5%. The credit facilities are secured by a $100,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts.

TUSK has received a non-binding indicative financing proposal that includes a $60,000,000 revolving demand loan and a $15,000,000 acquisition/development demand loan. TUSK expects to finalize its borrowing facilities in the near future.

As at June 30, 2007, TUSK had a working capital deficiency of $47,416,000, which included bank debt of $29,191,000. TUSK also had a $6,000,000 letter of guarantee outstanding at June 30, 2007. Under the terms of its revolving operating demand facility, TUSK is required to maintain a working capital ratio, adjusted for actual and available borrowings under the facility, of one to one. Based on the $45,000,000 facility in place as at June 30, 2007, TUSK is in breach of this covenant. The bank has issued a waiver regarding the breach.



7. Share Capital

(a) Shares Outstanding

As at June 30, 2007, TUSK had 88,879,722 common shares outstanding. There
were no changes to TUSK's outstanding share capital during the six months
ended June 30, 2007.

(b) Stock Options

The following table sets forth a reconciliation of TUSK's stock option plan
for the six months ended June 30, 2007:

----------------------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
----------------------------------------------------------------------------
($/share)
Outstanding, beginning of period 8,866,000 3.20
Granted 512,500 2.02
Forfeitures (520,000) 2.98
Expires (1,823,333) 3.19
----------------------------------------------------------------------------
Outstanding, end of period 7,035,167 3.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The table below summarizes information regarding stock options outstanding
at June 30, 2007.

----------------------------------------------------------------------------
Weighted
Weighted Number of Average Number of
Average Options Remaining Options
Exercise Price Outstanding Contractual Life Exercisable
----------------------------------------------------------------------------
($/share) (years)
2.25 1,080,000 2.3 1,080,000
4.10 - 4.95 1,506,667 3.4 945,556
3.07 - 3.79 750,000 4.1 126,666
2.00 - 2.97 3,698,500 4.5 1,062,000
----------------------------------------------------------------------------
3.12 7,035,167 3.9 3,214,222
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The fair value of each option granted was estimated on the date of grant
using the Black-Scholes options pricing model. The weighted average fair
value of the options granted and the assumptions used in the model are set
forth in the table below.

----------------------------------------------------------------------------
Fair value of options granted ($/share) 0.91
Risk-free interest rate (%) 3.3
Expected life (years) 4.0
Expected volatility (%) 55
Expected dividend yield (%) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(c) Per Share Amounts

The table below summarizes the weighted average number of common shares
used in calculating net earnings (loss) per share.

----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Weighted average number
of common shares
outstanding
- basic and diluted 88,879,722 43,147,679 88,879,722 41,845,426
----------------------------------------------------------------------------
----------------------------------------------------------------------------

No shares were added in calculating diluted earnings per share as all
options and warrants outstanding are anti-dilutive.

(d) Contributed Surplus

The following table reconciles TUSK's contributed surplus:

----------------------------------------------------------------------------
Six Months Ended June 30,
($000s) 2007 2006
----------------------------------------------------------------------------
Balance, beginning of period 6,284 2,872
Stock-based compensation expensed 1,014 600
Stock-based compensation capitalized 1,012 -
Transfer to share capital on exercise of options - (147)
----------------------------------------------------------------------------
Balance, end of period 8,310 3,325
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. Financial Instruments

(a) Credit Risk

The Corporation's accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal credit risks. To mitigate this risk, the Corporation sells substantially all of its production to two primary purchasers under normal industry sale and payment terms.

(b) Foreign Currency Exchange Risk

The Corporation is exposed to foreign currency fluctuations as crude oil prices received are referenced in U.S. dollar denominated prices.

(c) Fair Value of Financial Instruments

The Corporation's financial instruments recognized in the balance sheet consist of accounts receivable, accounts payable and bank indebtedness. The fair value of these financial instruments approximates their carrying amounts due to their short terms to maturity or the indexed rate of interest on the bank indebtedness.

(d) Interest Rate Risk

Interest rate risk exists principally with respect to TUSK's bank loan that bears interest at floating rates.



9. Cash Flow Information

Changes in non-cash working capital were as follows:

----------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
($000s) 2007 2006 2007 2006
----------------------------------------------------------------------------
Changes in non-cash working
capital balances
Accounts receivable 4,785 3,140 975 1,809
Prepaid expenses and deposits 236 999 180 (91)
Accounts payable and accrued
liabilities (12,256) (29,277) (2,430) (1,007)
----------------------------------------------------------------------------
(7,235) (25,138) (1,275) 711
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Changes in non-cash working
capital related to
Operating activities 6,313 (1,733) 7,570 (1,549)
Financing activities - - - -
Investing activities (13,548) (23,405) (8,845) 2,260
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(7,235) (25,138) (1,275) 711
----------------------------------------------------------------------------
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10. Commitments and Contingencies

(a) Conroy Drilling Commitment

Under a farm-in commitment, TUSK has agreed to drill, complete and tie-in or abandon 40 wells, complete and tie-in or abandon 6 standing wells, construct approximately 6.5 miles of gathering system as well as a gas plant and sales line capable of processing at least 10 mmcf/d. Fifteen of the new drill wells and the gathering system must be completed by April 30, 2008, while the gas plant and sales line must be completed by June 30, 2008. The remainder of the commitment must be completed by April 30, 2009. This commitment is secured by a letter of guarantee for $6,000,000 as at June 30, 2007.

(b) Drilling Rigs

The Corporation has made commitments for two drilling rigs as follows:

- 220 days/year for three years starting at rig delivery in December 2005, with an obligation of $6,800/day.

- 250 days/year for four years starting at rig delivery in February 2007, with an obligation of $9,700/day.



(c) Office Space

TUSK has a lease commitment for office space that expires on January 31,
2013, which is summarized in the table below.

----------------------------------------------------------------------------
Year Amount
----------------------------------------------------------------------------
($000s)
2007 218
2008 513
2009 536
2010 540
2011 540
2012 and thereafter 584
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(d) Dispute

In May 2007, TUSK was served with a statement of claim demanding payment of $1,067,000 plus interest. The action is a result of payments TUSK withheld from a contractor responsible for the construction of a capital project that required extensive repairs after its initial completion. The repairs also resulted in lengthy delays before the project could be put in service. In July, TUSK filed a statement of defence and a counterclaim for repair costs incurred and lost revenue totaling $6.8 million. The amounts paid, or received, by TUSK to settle this dispute will be recorded in the period the amounts become known.

11. Related Party Transactions

An officer of TUSK is a director and significant shareholder of a private company that provides computer management system services to TUSK. For the six months ended June 30, 2007, this company was paid $70,000 (six months ended June 30, 2006 - $73,000). These services were provided at commercial rates.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. For the six months ended June 30, 2007, royalties of $77,000 were paid to this company (six months ended June 30, 2006 - $65,000). June 30, 2007 accounts payable and accrued liabilities includes $20,000 regarding these payments.

Contact Information

  • TUSK Energy Corporation
    John Rooney
    Chief Executive Officer
    (403) 264-8875
    or
    TUSK Energy Corporation
    Michael Makinson
    Vice President, Finance
    (403) 264-8875
    Website: www.tusk-energy.com