TUSK Energy Corporation
TSX : TSK

TUSK Energy Corporation

March 24, 2009 08:30 ET

TUSK Announces Financial and Operating Results for the Three Months and Year Ended December 31, 2008

CALGARY, ALBERTA--(Marketwire - March 24, 2009) - TUSK Energy Corporation ("TUSK" or the "Corporation") (TSX:TSK) is pleased to announce its financial and operating results for the three months and year ended December 31, 2008.



HIGHLIGHTS
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Quarter Ended December 31, Year Ended December 31,
2008 2007 % Change 2008 2007 % Change
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($000s, except per
share amounts)
Financial
Oil and gas revenue 27,467 20,242 36 110,909 77,155 44
Funds from
operations (1) 31,684 6,911 358 77,563 33,950 128
Per share - basic
and diluted 0.35 0.08 338 0.86 0.38 124
Net income (loss) 9,886 (3,990) 348 15,070 (6,528) 331
Per share - basic
and diluted 0.11 (0.04) 375 0.17 (0.07) 343
Capital expenditures 13,925 20,774 (33) 97,303 109,700 (11)
Property
dispositions (7) (832) (99) (14,571) (2,769) 426
Net debt (working
capital
deficiency) 62,089 56,570 10 62,089 56,570 10
Shareholders' equity 239,741 222,536 8 239,741 222,536 8
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Operations
Sales volumes
Oil (bbls/d) 1,548 1,496 3 1,440 1,572 (8)
Natural gas (mcf/d) 24,377 14,004 74 17,576 13,808 27
NGLs (bbls/d) 470 107 340 262 97 170
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Combined (boe/d) 6,081 3,937 54 4,631 3,970 17
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Average selling
prices
Oil ($/bbl) 62.13 84.76 (27) 95.56 74.52 28
Natural gas ($/mcf) 7.32 6.13 19 8.37 6.40 31
NGLs ($/bbl) 51.02 69.38 (26) 69.70 61.30 14
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Combined ($/boe) 49.10 55.89 (12) 65.43 53.25 23
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Operating netbacks
($/boe) (2)
Selling price 49.10 55.89 (12) 65.43 53.25 23
Royalties (6.49) (10.51) (38) (11.50) (10.32) 11
Operating expenses (10.48) (12.56) (17) (11.32) (10.15) 12
Transportation
expenses (2.02) (2.76) (27) (2.17) (2.64) 18
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Operating netbacks 30.11 30.06 - 40.44 30.14 34
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Share Data (000s)
Securities
outstanding - end
of period
Common shares 90,444 90,442 - 90,444 90,442 -
Stock options 8,821 8,482 4 8,821 8,482 4
Weighted average
shares
outstanding
Basic 90,444 88,931 2 90,443 88,931 2
Diluted 90,444 90,442 - 90,518 88,931 2
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(1) Funds from operations is a non-GAAP measure that represents net income
(loss) before depletion, depreciation and accretion, future taxes,
stock-based compensation, gain on investment, unrealized gains or losses
on commodity derivatives and asset retirement obligation expenditures.
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.


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"). 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 months and years ended December 31, 2008 and 2007 and should be read in conjunction with the audited financial statements and accompanying notes for the years then ended. The discussion and analysis has been prepared as of March 19, 2009.

Forward-Looking Statements

The information herein contains forward-looking statements and assumptions, such as those relating but not limited to, risks associated with the oil and gas industry in general (e.g. operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserves estimates; the uncertainty of estimates and projections relating to production, costs and expenses; and health, safety and environmental risks), commodity prices, financing sources and exchange rate fluctuations, and the completion of the acquisition of all the issued and outstanding shares of TUSK by Polar Star Canadian Oil and Gas, Inc. ("Polar Star") by way of a plan of arrangement (the "Arrangement") under the Business Corporations Act (Alberta). 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. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this MD&A include, but are not limited to, the lack of precision around estimates of reserves, performance of the Corporation's oil and gas properties, volatility in market prices for oil and gas, statement relating to the timing or completion of the Arrangement, the reasons upon which the Arrangement may not close, including on account of conditions of closing not being fulfilled or waived, a competing bid or the Arrangement not being approved by TUSK shareholders, the risk that the Arrangement Agreement (as hereinafter defined) may be terminated in circumstances that require the payment of the termination fee or the expense reimbursement fee, estimations of future costs, geological, technical, drilling and processing problems, changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry, and such other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by the Corporation. Readers are cautioned that the foregoing list of important factors is not exhaustive. 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. These statements speak only as of the date of this MD&A. Unless required by law, the Corporation does not undertake any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.

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 its 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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Quarter Ended Year Ended
December 31, December 31,
($000s) 2008 2007 2008 2007
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Cash provided by operating activities
per GAAP) 30,065 4,415 70,632 28,110
Changes in non-cash working capital 1,614 2,045 6,578 5,389
Asset retirement obligation
expenditures 5 451 353 451
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Funds from operations 31,684 6,911 77,563 33,950
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Basis of Presentation

For the purpose of reporting sales volumes information, reserves and calculating unit prices and costs, natural gas volumes have been converted to a barrel of oil equivalent ("boe") using six thousand cubic feet equal to one barrel. A boe conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. This conversion conforms with the Canadian Securities Administrators' National Instrument 51-101 when boes are disclosed. Boes may be misleading, particularly if used in isolation.

ARRANGEMENT AGREEMENT WITH POLAR STAR CANADIAN OIL AND GAS, INC.

On February 10, 2009, TUSK announced that it had entered into an arrangement agreement (the "Arrangement Agreement") with Polar Star Canadian Oil and Gas, Inc. ("Polar Star"), a venture indirectly owned by the Teachers Insurance and Annuity Association of America. Under the terms of the arrangement, Polar Star will acquire all of the issued and outstanding common shares of TUSK for cash consideration of $2.15 per common share by way of a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement"). An information circular (the "Information Circular") regarding the Arrangement was mailed to TUSK shareholders in early March for a special meeting of shareholders to be held on March 31, 2009. Closing of the transaction is anticipated to occur in early to mid-April 2009. For further details regarding the Arrangement Agreement, please see the Information Circular, which may be found on SEDAR at www.sedar.com or on TUSK's website at www.tusk-energy.com.

FINANCIAL STRATEGY IN CURRENT ECONOMIC ENVIRONMENT

The current economic environment is challenging and uncertain amidst a global recession, low commodity prices, volatile financial markets and limited access to capital markets.

In this environment, TUSK is highly focused on the key business objectives of maintaining financial strength, generating significant free cash flow and further optimizing capital investments. This measured capital deployment approach is underpinned by a strong balance sheet with approximately $14,000,000 in available lines of credit. In addition, TUSK has no significant capital commitment, offering it flexibility in the investment of its funds from operations.

TUSK will continue to monitor expenses and capital programs. In light of the current market situation, TUSK has planned a measured, flexible approach to 2009 investment, with a program that has the ability to be quickly adjusted depending on how economic circumstances unfold during the year.

NORTHEASTERN BRITISH COLUMBIA ASSET SWAP

On March 31, 2008, TUSK completed an asset swap regarding two properties located in northeastern British Columbia. In exchange for its 50% non-operated interests in the Elleh area, TUSK received certain interests in the Conroy area and cash of $11,700,000. As of April 1, 2008, TUSK had no interests in the Elleh area. The asset swap resulted in the termination of TUSK's farm-in commitments in the Conroy area.

ACQUISITION OF ZENAS ENERGY CORP. AND CHANGE IN YEAR-END

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.

In connection with the acquisition of Zenas and to align the reporting of its financial and operating results with industry standards, 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, all prior period comparative information conforms to a December 31 year-end.

OVERALL PERFORMANCE - 2008

Sales volumes averaged 4,631 boe/d in 2008, up 17% from 2007 volumes of 3,970 boe/d. This increase was primarily the result of drilling in the Conroy area of northeastern British Columbia and the Clairmont area of Alberta. Compared to 2007, oil and gas revenue increased 44% to $110,909,000 as a result of higher volumes and increases in commodity prices. Royalties were up 30% to $19,490,000 in 2008, primarily as a result of the increase in revenue. The increase in royalties did not keep pace with the increase in revenue due to a decline in TUSK's overall effective royalty rate to 17.6% (2007 - 19.4%). Operating expenses increased 31% compared to 2007 driven by higher sales volumes and a 12% increase in per unit costs. Transportation expenses declined 4% as the affect of higher volumes was more than offset by an 18% decrease in the unit rate. Financing costs were $2,710,000 in 2008, up 50% from amounts incurred in 2007 primarily as a result of higher average debt levels. Compared to 2007, general and administrative expenses declined approximately $1,000,000 to $5,063,000 in 2008. On a year-over-year basis, total personnel costs were higher in 2007 as a result of employee severance and retention costs. TUSK recorded realized gains on commodity derivatives of $16,772,000 in 2008 (2007 - $nil). Of the total, $15,759,000 was generated with respect to a put option contract acquired in May 2008 and sold in December 2008. The remaining $1,013,000 was earned on a put option contract acquired in September 2007 that expired in December 2008.

Stock-based compensation expense was $2,204,000 in 2008, down slightly from $2,346,000 in 2007. The lower expense was caused by a decrease in stock option grants and fewer employee departures in 2008 compared to 2007. Depletion, depreciation and accretion expense ("DD&A") was $55,834,000 in 2008 (2007 - $40,919,000) and reflects higher sales volumes and a higher DD&A unit rate. In 2008, TUSK recorded future tax expense of $4,455,000 on income before taxes of $19,525,000, which compares to a loss before taxes of $9,373,000 and a future tax reduction of $2,845,000 in 2007.

Funds from operations were $77,563,000 in 2008 (2007 - $33,950,000) driven primarily by higher sales volumes, higher commodity prices and realized gains on commodity derivatives. Net income was $15,070,000 ($0.17 per share - basic and diluted) in 2008 compared to a net loss of $6,528,000 ($0.07 per share - basic and diluted) in 2007.

Capital expenditures were $97,303,000 in 2008 and included drilling and completion expenditures of $60,241,000. TUSK drilled 56 gross (51.6 net) wells during the year. Well equipping and facility costs totaled $27,867,000 in 2008. Proceeds on disposals of property and equipment were $14,571,000 in 2008, of which $11,700,000 was received in connection with the northeastern British Columbia asset swap described above.

At December 31, 2008, TUSK had 90,443,888 common shares outstanding (December 31, 2007 - 90,442,222).

TUSK completed 2008 with a strong balance sheet, approximately $14,000,000 of available credit facility, a debt to cash flow (exclusive of realized gains on commodity derivatives) ratio of 1.0 to 1, an inventory of low risk development drilling locations and a number of exploration prospects.



ACTUAL RESULTS COMPARED TO GUIDANCE

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August
2008 2008 %
Actual Guidance Variance
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2008 Sales volumes (boe/d)
Annual 4,631 4,800 - 5,000 (4) - (7)
greater than
Exit (Q4 2008) 6,081 6,500 (6)
2008 Funds from operations ($000s) 77,563 75,000 3
2008 Capital expenditures -- net ($000s) 82,732 85,000 (3)
Pricing
Oil - WTI (US$/bbl) 99.65 115.00 (13)
Gas - AECO (CDN$/mcf) 8.14 8.50 (4)
US/CDN dollar 0.938 1.000 (6)
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On an annual and quarterly basis, sales volumes were down 4% to 7% and 6%, respectively, from guidance issued in August 2008 due to the timing of the wells drilled at Conroy. A strike of employees at a third party operated plant site in the same area contributed to the variance.

Actual prices of commodities were down due to unexpected market conditions that prevailed during the second half of the year.

Although sales volumes and commodity prices were less than expected, funds from operations reached expectations due to the monetization of the two put option contracts in the year.

2008 net capital expenditures were as expected in the guidance issued in August 2008.



FINANCIAL AND OPERATING RESULTS
Sales Volumes

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Quarter Ended December 31, Year Ended December 31,
2008 2007 % Change 2008 2007 % Change
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Oil (bbls/d) 1,548 1,496 3 1,440 1,572 (8)
Natural gas (mcf/d) 24,377 14,004 74 17,576 13,808 27
NGLs (bbls/d) 470 107 340 262 97 170
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Combined (boe/d) 6,081 3,937 54 4,631 3,970 17
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Sales volumes were 4,631 boe/d in 2008, up from 3,970 boe/d in 2007. The increase was due to higher volumes in northeastern British Columbia, partially offset by lower volumes at Mega/Gutah. The northeastern British Columbia asset swap and drilling at Conroy resulted in higher sales volumes in TUSK's northeastern British Columbia core area. Mega/Gutah volumes have experienced a steady decline since 2007, which is reflected in the year-over-year comparative results. Sales volumes from the Peace River Arch area during the year were similar to volumes recorded for the same period of 2007.

Fourth quarter 2008 sales volumes were 6,081 boe/d compared to 3,937 boe/d for the same period in 2007. The increase was primarily the result of higher volumes in the Conroy area. On March 31, 2008, the Elleh property was sold and additional interests in the Conroy property were acquired. Fourth quarter 2008 sales volumes were 39% higher than the 4,364 boe/d experienced in the third quarter of the year. The majority of the quarter-over-quarter increase occurred at Conroy due to the intensive drilling program undertaken in the area.

During the final quarter of 2008, natural gas accounted for 67% of TUSK's sales volumes on a boe basis. TUSK expects 2009 weighting to natural gas to be consistent with the final quarter of 2008.

The table below details TUSK's sales volumes by area and by quarter for the year ended December 31, 2008.



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2008
(boe/d) Year Q4 Q3 Q2 Q1
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Northeastern British Columbia
(Conroy, Thetlaandoa) 2,283 3,558 2,258 1,608 1,695
Peace River Arch, Alberta
(Clair, Gage, Puskwa, Boundary Lake) 2,040 2,318 1,879 1,871 2,090
Northern Alberta (Mega, Gutah) 308 205 227 362 441
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Total 4,631 6,081 4,364 3,841 4,226
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Commodity Prices

Benchmark Prices
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Quarter Ended December 31, Year Ended December 31,
2008 2007 % Change 2008 2007 % Change
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Crude oil
WTI (US$/bbl) 58.75 90.63 (35) 99.65 72.31 38
Edmonton Light
(CDN$/bbl) 63.21 86.39 (27) 102.16 76.35 34
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Natural gas
AECO (CDN$/mcf) (1) 6.56 5.66 16 8.14 6.45 26
AECO (CDN$/GJ) 6.22 5.37 16 7.71 6.11 26
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Foreign exchange rate
CDN/US dollar 1.212 0.982 23 1.066 1.075 1
US/CDN dollar 0.825 1.019 (19) 0.938 0.930 1
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(1) AECO selling price per mcf is based on a conversion factor of 1.055 mcf
per GJ.


Realized Selling Prices
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Quarter Ended December 31, Year Ended December 31,
2008 2007 % Change 2008 2007 % Change
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Oil ($/bbl) 62.13 84.76 (27) 95.56 74.52 28
Natural gas ($/mcf) 7.32 6.13 19 8.37 6.40 31
NGLs ($/bbl) 51.02 69.38 (26) 69.70 61.30 14
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Combined ($/boe) 49.10 55.89 (12) 65.43 53.25 23
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Throughout 2008, TUSK's oil and natural gas sales volumes were sold at posted prices, and therefore, changes to realized selling prices were primarily due to changes in market conditions. Almost all of TUSK's oil production is produced in Alberta, which resulted in a corporate differential to Edmonton posted prices of $1.08/bbl and $6.60/bbl for the three months and year ended December 31, 2008, respectively. TUSK's oil differential narrowed in the fourth quarter as a result of a temporary market imbalance for high quality oil. Buyers looking to fulfill volume requirements bid up the spot price. TUSK's average natural gas selling prices were $7.32/mcf and $8.37/mcf for the quarter and year ended December 31, 2008, respectively. The natural gas prices are above the benchmark AECO daily price primarily due to high quality gas at Conroy, British Columbia, which has more heating value per unit volume and receives a premium price.



Revenue
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Quarter Ended December 31, Year Ended December 31,
($000s) 2008 2007 % Change 2008 2007 % Change
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Oil 8,845 11,666 (24) 50,369 42,747 18
Natural gas 16,414 7,894 108 53,855 32,241 67
NGLs 2,208 682 224 6,685 2,167 208
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Combined 27,467 20,242 36 110,909 77,155 44
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Comparing 2008 to 2007, oil and gas revenue increased 44% to $110,909,000. Oil revenue improved 18% as the 28% increase in average selling prices more than offset an 8% decrease in sales volumes. Natural gas revenue improved 67% to $53,855,000 in 2008 as a 27% increase in sales volumes was complemented by a 31% increase in selling prices.

Fourth quarter 2008 oil and gas revenue increased 36% to $27,467,000 from $20,242,000 in 2007. Oil revenue decreased 24% to $8,845,000 from $11,666,000 in the fourth quarter of 2007 primarily as a result of a 27% decrease in selling prices. Natural gas revenue increased 108% to $16,414,000 in the fourth quarter of 2008 from $7,894,000 during the same period in 2007 due to a 74% increase in sales volumes complemented by a 19% increase in the selling price of this commodity.



Royalties
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Quarter Ended December 31, Year Ended December 31,
($000s) 2008 2007 % Change 2008 2007 % Change
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Crown 3,349 3,385 (1) 17,743 13,310 33
Freehold 213 257 (17) 1,034 766 35
Gross overriding 68 166 (59) 713 875 (19)
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Total 3,630 3,808 (5) 19,490 14,951 30
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Royalties as a %
of revenue 13.2 18.8 (30) 17.6 19.4 (9)
Royalties per boe
($/boe) 6.49 10.51 (38) 11.50 10.32 11
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Royalties were $19,490,000 in 2008, up 30% from $14,951,000 in 2007. The overall increase was primarily due to the increase in revenue. The majority of TUSK's royalty is paid to provincial governments (Crown royalty), which amounted to 91% of total royalties in 2008 (2007 - 89%). TUSK's overall effective royalty rate was 17.6% of revenue in 2008, down from 19.4% in 2007. The majority of this decrease was due to lower Crown royalties levied on production at TUSK's Conroy property, located in northeastern British Columbia.

Fourth quarter 2008 royalties were $3,630,000, down 5% from $3,808,000 recorded in 2007. The year-over-year decline is in contrast to higher revenue and was caused by a lower effective royalty rate. TUSK's fourth quarter 2008 effective royalty rate was 13.2% of revenue (fourth quarter 2007 - 18.8% of revenue). The fourth quarter 2008 effective royalty rate reflects the recognition of refundable Crown royalties on natural gas production at Conroy. Some of the amount recorded in the fourth quarter relates to production from the second and third quarters of 2008. The lower royalties were not recorded earlier because a minimum production history is required to estimate the refund.

In the fall of 2007, the Alberta government announced a New Royalty Framework ("NRF") to take effect January 1, 2009. TUSK's Conroy project area, which is located in northeastern British Columbia, and a small portion of its Alberta production does not attract Alberta Crown royalty, and therefore, not subject to the NRF. TUSK received an independent evaluation of its reserves effective December 31, 2008 that included the estimated effect of the NRF on reserves and reserve values. Based on this report, it is anticipated that over the next two years TUSK's effective royalty rate will be in the 19% to 20% range, slightly higher than the effective rate realized in 2008.

Commodity Derivatives

During 2007 and 2008, TUSK acquired two US$ WTI priced oil put option contracts. A put option is a right and not an obligation and effectively acts as a floor price with no constraint or limitation on upward price movements in the underlying commodity. Because the cost of the contract is paid in full when the arrangement is entered into, there is no ongoing cost or risk of financial loss. The put contracts enabled TUSK to more confidently forecast funds from operations, which are used to finance capital expenditures. In addition, these contracts are used by TUSK's bankers in their determination of lending values.

For accounting purposes, the fair value of the put contracts were recorded as an asset on the balance sheet with changes in fair value included on the statement of operations. A mark-to-market valuation was used to determine fair value.



The following table summarizes the put option contracts that were in place
during 2007 and 2008:

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Purchase Type of Quantity Contract Contract
Date Contract Period Contract Contracted Price Cost
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(bbls/d) ($US/bbl) ($000s)
Sep. 2007 Jan. to Dec. 2008 Oil 1,000 65.00 floor 781
May 2008 Jan. to Dec. 2009 Oil 1,000 90.00 floor 1,249
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In September 2007, TUSK purchased a US$65.00/bbl WTI put on 1,000 bbls/d of oil for the period January 1, 2008 to December 31, 2008 at a cost of $781,000. The contract was valued at $109,000 at December 31, 2007, resulting in an unrealized loss of $672,000 in 2007.

During 2008, the contract acquired in September 2007 generated proceeds of $1,122,000 and expired under its own terms at the close of business on December 31, 2008. This resulted in a realized gain of $1,013,000 in 2008 for this contract.

In May 2008, TUSK paid $1,249,000 to purchase a US$90.00/bbl WTI put option on 1,000 bbls/d of oil for the period January 1, 2009 to December 31, 2009. TUSK held this contract until December 2008 when it was monetized for proceeds of $17,008,000. The monetization resulted in a realized gain on commodity derivatives of $15,759,000 in 2008.



As at December 31, 2008, TUSK had no put option contracts in place.

Operating Expenses
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Quarter Ended December 31, Year Ended December 31,
2008 2007 % Change 2008 2007 % Change
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Total ($000s) 5,861 4,551 29 19,185 14,700 31
Per boe ($/boe) 10.48 12.56 (17) 11.32 10.15 12
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Operating expenses were $19,185,000 in 2008, up 31% from $14,700,000 in 2007. The increase was caused by a 17% growth in sales volumes coupled with a 12% increase in per unit operating costs. Northeastern British Columbia is TUSK's largest producing area. In 2007, most of the production in this area was generated by the Elleh property. In 2008, as a result of the northeastern British Columbia asset swap and drilling at Conroy, most of the production in this area was generated at Conroy. Comparing Conroy to Elleh, per unit operating expenses at Conroy are higher than they were at Elleh, while transportation expenses are lower at Conroy than they were at Elleh. TUSK expects operating expenses at Conroy to decrease with additional economies of scale that result from increased volumes.

Fourth quarter 2008 operating expenses were $5,861,000 ($10.48/boe) compared to $4,551,000 ($12.56/boe) in the same period of 2007. Operating expenses were high in the fourth quarter of 2007 as a result of high water handling costs at Mega/Gutah in northern Alberta. These costs have come down somewhat in 2008 as produced water is now injected into a disposal facility and not trucked to a third party.



Transportation Expenses
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Quarter Ended December 31, Year Ended December 31,
2008 2007 % Change 2008 2007 % Change
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Total ($000s) 1,131 999 13 3,670 3,822 (4)
Per boe ($/boe) 2.02 2.76 (27) 2.17 2.64 (18)
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Oil transportation includes the cost to ship oil from a TUSK property to a terminal or collection facility. The shipped oil typically meets pipeline specifications and is transported by truck and/or third party pipeline. Natural gas transportation includes the cost to ship natural gas from a TUSK property to a sales point through one or more third party pipelines. Transportation includes the cost to move the gas and does not include processing or production related compression fees. TUSK's transportation expenses are almost exclusively variable and related directly to volumes shipped.

Transportation expenses were $3,670,000 ($2.17/boe) in 2008, down from $3,822,000 ($2.64/boe) incurred in 2007. The year-over-year decrease was due to the change in assets in northeastern British Columbia. Transportation costs at Conroy are less than transportation costs charged at Elleh.

Compared to the same period in 2007, fourth quarter 2008 transportation expenses rose 13% to $1,131,000 as the effect of higher sales volumes offset lower per unit rates. Fourth quarter 2008 per unit rates were lower for the reason described above.



General and Administrative ("G&A") Expenses
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Quarter Ended December 31, Year Ended December 31,
($000s) 2008 2007 % Change 2008 2007 % Change
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Total 2,366 1,747 35 8,543 9,766 (13)
Overhead recoveries (520) (262) 98 (1,820) (1,106) 65
Capitalized (511) (330) 55 (1,660) (2,584) (36)
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Expensed 1,335 1,155 16 5,063 6,076 (17)
Expensed per boe
($/boe) 2.39 3.19 (25) 2.99 4.19 (29)
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----------------------------------------------------------------------------


Total G&A costs for 2008 were $8,543,000, down 13% from $9,766,000 in 2007. G&A costs were higher in 2007 primarily as a result of significant one-time severance and retention costs following the business combination with Zenas Energy Corp. In accordance with industry accepted practice, TUSK applies an overhead recovery to company operated capital projects, producing wells and facilities. The overhead recoveries result in a reduction to G&A expenses and an increase to property, plant and equipment (for capital projects) or operating expenses (for producing wells and facilities). Regarding capital projects, these charges relate directly to acquisition, exploration and development activities undertaken by TUSK. In 2008, total overhead recoveries were $1,820,000 (2007 - $1,106,000), of which $1,352,000 (2007 - $794,000) related to capital projects and $468,000 (2007 - $312,000) related to producing wells and facilities. Although year-over-year capital expenditures declined slightly, overhead recoveries on capital projects increased because TUSK operated much more of its capital expenditure program in 2008. Capitalized G&A declined 36% to $1,660,000 for the year ended December 31, 2008. A portion of the retention costs incurred in 2007 were capitalized to oil and gas properties. Expensed G&A costs were $5,063,000 ($2.99/boe) for 2008, down 17% from $6,076,000 ($4.19/boe) for the same period in 2007. The lower unit rate was a result of lower expenses spread over higher volumes.

Total fourth quarter 2008 G&A costs were $2,366,000, up 35% from the $1,747,000 incurred in 2007. Comparing the final quarters of 2008 and 2007, the increase was primarily due to higher personnel costs. Overhead recoveries increased to $520,000 in the fourth quarter of 2008 from $262,000 in 2007 as TUSK operated most of its capital expenditure program. Capitalized G&A was $511,000 in the fourth quarter of 2008, up 55% from the $330,000 in the same period in 2007 primarily as a result of higher personnel costs. G&A costs expensed during the fourth quarter of 2008 were $1,335,000 ($2.39/boe), up 16% from $1,155,000 ($3.19/boe) for the same period last year. The unit rate decreased as the benefit of higher volumes outweighed increased expenses.



Financing Charges
----------------------------------------------------------------------------
Quarter Ended December 31, Year Ended December 31,
2008 2007 % Change 2008 2007 % Change
----------------------------------------------------------------------------
Total ($000s) 598 818 (27) 2,710 1,812 50
Per boe ($/boe) 1.07 2.26 (53) 1.60 1.25 28
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Financing charges are comprised primarily of interest paid on TUSK's credit facility, commitment fees paid to TUSK's bankers when the facility is renewed and guarantee fees for letters of credit issued in connection with project commitments or security deposits. Financing charges in 2008 also included Part XII.6 tax, which is calculated with reference to unspent amounts from the issue of flow-through shares in December 2007. Financing charges were $2,710,000 ($1.60/boe) for the year, 50% higher than the $1,812,000 ($1.25/boe) expended in 2007. Financing charges were higher in 2008 primarily as a result of higher average debt levels. TUSK had no bank debt at the beginning of 2007. For the three months ended December 31, 2008, financing charges were $598,000 ($1.07/boe) and $818,000 ($2.26/boe) for the same period in 2007.

Contract Termination Expense

During the fourth quarter of 2007, TUSK entered into an agreement to reduce its commitments regarding the use of two drilling rigs. The agreement, which included the payment of $2,000,000, allowed TUSK to terminate its obligation with respect to one rig and reduce the obligation regarding the second rig (see "Contractual Obligations - Drilling Rigs").

Stock-Based Compensation Expense

Stock-based compensation was $2,820,000 in 2008 (2007 - $3,678,000), of which $2,204,000 was expensed (2007 - $2,346,000) and $616,000 was capitalized to oil and gas properties (2007 - $1,332,000). Total stock-based compensation was higher in 2007 primarily as a result of the accelerated vesting of options triggered by staff rationalization efforts following the business combination with Zenas Energy Corp. During 2008, 1,702,000 stock options were granted, 870,000 stock options were cancelled, 491,667 options were forfeited and 1,666 options were exercised. At December 31, 2008, TUSK had 8,820,500 stock options outstanding with a weighted average exercise price of $2.60 per share.

Fourth quarter 2008 stock-based compensation expense was $570,000, down from $625,000 recorded in the 2007 three-month period. One of the primary determinants of stock-based compensation expense is the number of stock options granted throughout the year. The magnitude of this change is within the normal operating range of TUSK's stock option plan.

Gain on Sale of Investment

On January 1, 2007, TUSK held an investment in a publically traded oil and gas company with a cost basis of $4,270,000. 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 adjustment was made to increase the carrying value of this investment by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000. At March 31, 2007, the carrying value of the investment was adjusted to fair value, resulting in an unrealized loss of $491,000. In the second quarter of 2007, a gain of $1,105,000 was recorded when the investment was sold for proceeds of $7,367,000. The net gain recorded in 2007 was $614,000.



Depletion, Depreciation and Accretion ("DD&A") Expense
----------------------------------------------------------------------------
Quarter Ended December 31, Year Ended December 31,
($000s) 2008 2007 % Change 2008 2007 % Change
----------------------------------------------------------------------------
Depletion and
depreciation of oil
and gas properties 17,186 11,818 45 55,279 40,517 36
Accretion of asset
retirement obligations 127 82 55 417 284 47
Depreciation of office
equipment and leasehold
improvements 35 28 25 138 118 17
----------------------------------------------------------------------------
Total 17,348 11,928 45 55,834 40,919 36
Per boe ($/boe) 31.01 32.93 (6) 32.94 28.24 17
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Almost all of TUSK's DD&A expense is comprised of depletion and depreciation of oil and gas properties. Cumulative capital expenditures, net of accumulated depletion and depreciation, is expensed based on a ratio of sales volumes for the period to proved reserves assignments. The reserves assignments are determined by an independent third party. As a result, the DD&A rate per boe reflects historical costs and changes in reserves.

DD&A expense for 2008 totaled $55,834,000 ($32.94/boe), up 36% from $40,919,000 ($28.24/boe) in 2007. The year-over-year increase was primarily the result of the 17% growth in sales volumes and the 17% increase in the oil and gas depletion and depreciation unit rate. The unit rate increased in the first quarter of 2008 primarily as a result of the northeastern British Columbia asset swap (see above). The swap resulted in an initial increase in proved plus probable reserves and a decrease in proved reserves. As the Conroy property is developed, probable reserves are converted to proved reserves and the oil and gas depletion and depreciation unit rate declines. During 2008, TUSK's DD&A rate per boe declined from $35.43/boe in the first quarter to $31.01/boe in the fourth quarter.

Accretion of asset retirement obligations ("ARO") increased 47% to $417,000 in 2008 from $284,000 in 2007. This increase reflects higher sales volumes and an increase in the accretion rate per boe. The ARO accretion rate reflects more wells drilled and related infrastructure.

Provision for Income Taxes

For the year and quarter ended December 31, 2008, TUSK recorded a provision in future income taxes of $4,455,000 and $1,905,000, respectively. The provisions were primarily the result of income before taxes for both periods. The changes in this non-cash item are the anticipated future tax effects of the period's activities, after reconciling recorded net assets with TUSK's tax pool assets at the end of each period. The provision for income taxes includes the affects of a reduction in future federal and provincial income tax rates in effect during the period. For 2008, future income tax expense was 23.1% of income before taxes. In 2007, TUSK recorded losses before taxes for the year as well as the fourth quarter and recorded income tax recoveries of $2,845,000 and $2,279,000 for these periods, respectively.

TUSK has approximately $248,636,000 of available income tax deductions and does not expect to incur cash taxes in 2009. The following table summarizes TUSK's available income tax deductions as at December 31, 2008:



Income Tax Deductions
----------------------------------------------------------------------------
Annual
($000s) Amount Rate(%)
----------------------------------------------------------------------------
Non-capital losses 3,787 100
Canadian Exploration Expenses 15,786 100
Canadian Development Expenses 89,101 30
Canadian Oil and Gas Property Expenses 72,323 10
Undepreciated capital costs 63,494 25 - 100
Share issue costs 3,224 20
Cumulative Eligible Capital 921 7
----------------------------------------------------------------------------
248,636
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Funds from Operations

Funds from operations were $77,563,000 in 2008 ($0.86 per share - basic and diluted), up from $33,950,000 ($0.38 per share - basic and diluted) for 2007. The primary reasons for the year-over-year increase include higher oil and gas revenue driven by successful drilling at Conroy and Clairmont and the realized gains on commodity derivatives recorded in 2008. Funds from operations in 2007 were reduced by a contract termination payment totaling $2,000,000 required to amend the terms of two long-term drilling rig contracts.

Fourth quarter 2008 funds from operations were $31,684,000 ($0.35 per share - basic and diluted) compared to $6,911,000 ($0.08 per share - basic and diluted) in the fourth quarter of 2007. Notable differences between the two reporting periods include significantly higher sales volumes (2008 - 6,081 boe/d; 2007 - 3,937 boe/d) and the realized gains on commodity derivatives referred to above. The contract termination payment of $2,000,000 had a negative impact on the fourth quarter of 2007 (see "Contract Termination Expense").



Cash Netbacks
----------------------------------------------------------------------------
Quarter Ended December 31, Year Ended December 31,
($/boe) 2008 2007 % Change 2008 2007 % Change
----------------------------------------------------------------------------
Oil and gas revenue 49.10 55.89 (12) 65.43 53.25 23
Royalties (6.49)(10.51) (38) (11.50) (10.32) 11
Operating expenses (10.48)(12.56) (17) (11.32) (10.15) 12
Transportation expenses (2.02) (2.76) (27) (2.17) (2.64) (18)
----------------------------------------------------------------------------
Operating netback 30.11 30.06 - 40.44 30.14 34
G&A expenses (2.39) (3.19) (25) (2.99) (4.19) (29)
Financing charges (1.07) (2.26) (53) (1.60) (1.25) 28
Interest income - - - - 0.11 (100)
Contract termination - (5.52) - - (1.38) -
Realized gain on
commodity derivatives 30.18 - - 9.96 - -
----------------------------------------------------------------------------
Corporate netback 56.83 19.09 198 45.81 23.43 96
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Comparing 2008 to 2007, operating netbacks increased 34% to $40.44/boe from $30.14/boe primarily as a result of higher commodity prices. Corporate cash netbacks increased 96% to $45.81/boe in 2008 compared to $23.43/boe in 2007. On a per unit basis, year-over-year changes include lower G&A expenses, the absence of a contract termination cost and realized gain on commodity derivatives.

Operating netbacks stayed neutral at $30.11/boe in the fourth quarter of 2008 compared to $30.06/boe in 2007. The reduction in commodity prices in 2008 was offset by an equal reduction in royalties and operating costs on a per unit basis. Corporate netbacks increased 198% to $56.83/boe from $19.09/boe in the final quarter of 2007 due to lower per unit G&A and financing charges, complemented by a significant gain realized on commodity derivatives.

Net Income (Loss)

TUSK recorded net income of $15,070,000 in 2008 ($0.17 per share - basic and diluted), up from a loss of $6,528,000 ($0.07 per share - basic and diluted) for the same period in 2007. The results for 2008 were positively affected by higher operating revenue and realized gains on commodity derivatives and negatively affected by higher DD&A charges and increased future taxes.

TUSK posted net income of $9,886,000 ($0.11 per share - basic and diluted) for the fourth quarter of 2008 compared to a net loss of $3,990,000 ($0.04 per share - basic and diluted) during the same period of 2007. Comparing the two periods, 2008 included higher operating revenue, a realized gain on commodity derivatives, higher DD&A charges and higher income taxes.



Capital Expenditures
----------------------------------------------------------------------------
Quarter Ended December 31, Year Ended December 31,
($000s) 2008 2007 % Change 2008 2007 % Change
----------------------------------------------------------------------------
Land acquisition and
retention 282 78 262 2,174 1,500 45
Geological and
geophysical 72 (316) (123) 2,315 9,837 (76)
Drilling and
completions 8,878 10,814 (18) 60,241 53,181 13
Well equipping and
facilities 4,178 9,882 (58) 27,867 33,228 (16)
Property
acquisitions - - - 3,000 9,044 (67)
Capitalized overhead
511 330 55 1,660 2,584 (36)
Office 4 (14) (125) 46 326 (86)
----------------------------------------------------------------------------
Total 13,925 20,774 (33) 97,303 109,700 (11)
Dispositions (7) (832) (99)(14,571) (2,769) 427
----------------------------------------------------------------------------
Net 13,918 19,942 (30) 82,732 106,931 (23)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The table below details TUSK's capital expenditures by quarter and by area
for the year ended December 31, 2008.

----------------------------------------------------------------------------
2008
($000s) Year Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Northeastern British Columbia
(Conroy, Thetlaandoa) 65,608 9,920 32,102 7,064 16,522
Peace River Arch, Alberta
(Clair, Gage, Puskwa,
Boundary Lake) 17,611 2,848 5,669 8,036 1,058
Northern Alberta
(Mega, Gutah) 12,160 629 2,120 1,362 8,049
Corporate 1,924 528 479 452 465
----------------------------------------------------------------------------
Total 97,303 13,925 40,370 16,914 26,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Capital expenditures totaled $97,303,000 in 2008, down from $109,700,000 in 2007. Expenditures by area in 2008 were as follows: northeastern British Columbia - $65,608,000; Peace River Arch - $17,611,000; Northern Alberta - $12,160,000; capitalized overhead and office - $1,924,000.

During the year ended December 31, 2008, TUSK drilled 56 gross (51.6 net) wells, resulting in 48 gross (44.3 net) gas wells, 7 gross (6.3 net) oil wells and 1 gross (1.0 net) abandonment.

Capital expenditures in northeastern British Columbia included $41,211,000 on drilling and completions (43 wells were drilled) and $21,898,000 on facilities, pipelines and well equipping. Expenditures on seismic and undeveloped mineral rights accounted for most of the remaining $2,499,000. Almost all of the expenditures in northeastern British Columbia were incurred at Conroy. Peace River Arch expenditures included $3,000,000 on a property acquisition, $7,019,000 on drilling and completing 8 gross (5.0 net) wells, $1,298,000 on seismic and $4,453,000 on tangible equipment. Expenditures in the Northern Alberta area were primarily at Mega/Gutah and included $9,467,000 on drilling and completing 4 gross (3.3 net) wells and $1,675,000 on tangible equipment. For the year ended December 31, 2008, proceeds on disposal of property and equipment totaled $14,571,000.

In the fourth quarter of 2008, capital expenditures were $13,925,000. The majority of this was spent at Conroy and included $7,232,000 on drilling and completions and $2,379,000 on tangible equipment. Fourth quarter capital expenditures also included $2,847,000 in the Peace River Arch area where TUSK drilled 3 gross (0.8 net) wells.

OUTLOOK

The current turmoil in world financial markets has negatively affected the oil and gas industry, resulting in lower commodity prices and company valuations. TUSK enters this period in very good financial condition. The Corporation has a strong balance sheet, an inventory of low risk drilling locations and the flexibility to adjust capital spending in response to changing business conditions. Based on fourth quarter 2008 results, TUSK's ratio of net debt to annualized funds from operations (annualized funds from operations is exclusive of realized gains on commodity derivatives) is 1.0 to 1.

On February 10, 2009, TUSK announced that it had entered into an arrangement with Polar Star pursuant to which Polar Star will acquire all of the issued and outstanding shares of TUSK for $2.15 per share (see "Arrangement Agreement with Polar Star Canadian Oil and Gas, Inc." and "Subsequent Event"). A special meeting of shareholders is scheduled for March 31, 2009 and the arrangement is expected to close shortly thereafter.

LIQUIDITY AND CAPITAL RESOURCES

TUSK has a $76,000,000 demand credit facility available through two Canadian chartered banks. The interest rate charged on the facility is based on a pricing grid that is debt to cash flow sensitive. An increase in the Corporation'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 plus 0.25% to prime plus 1.5%. At December 31, 2008, the effective annual interest rate was 4%. The credit facility is secured by a $150,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts. Under the terms of the facility, TUSK has agreed to meet certain financial conditions on an ongoing basis. These conditions include minimum working capital and interest coverage ratios and a maximum debt to annualized cash flow ratio.

In 2008, TUSK's capital expenditure program was financed by funds from operations, an increase in bank debt and proceeds received from the disposition of property and equipment. Net debt at December 31, 2008 was $62,089,000, up from $56,570,000 at December 31, 2007. TUSK anticipates that existing bank lines and funds from operations will be sufficient to finance planned expenditures for 2009. Capital commitments in 2009 and 2010 amount to approximately $1,049,000 and $123,000, respectively, and involve a drilling rig (see "Contractual Obligations - Drilling Rigs"). TUSK has one drilling rig under contract with a 165-day commitment for the contract year ended February 5, 2010. This obligation is expected to be satisfied through planned drilling activity. TUSK will incur non-discretionary expenditures, such as oil and gas well operating expenses, financing charges and G&A costs.

At December 31, 2008, TUSK had a working capital deficiency of $62,089,000, which included bank debt of $55,949,000. With existing bank lines of $76,000,000, TUSK enters 2009 with available liquidity of approximately $14,000,000. Given current market conditions, TUSK expects to fund near-term capital expenditures primarily with funds from operations.

On an ongoing basis, TUSK expects to utilize three sources of funding to finance its capital expenditure 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 the Corporation's cash flow from operations and would also likely result in a reduction in the amount of bank loan available. The cost of debt is anticipated to remain relatively unchanged as the increase in spreads (difference between the rate charged and the prime rate) are offset by the lower prime rates. If TUSK's capital expenditure program does not result in sufficient additional reserves and/or production or if capital markets continue to experience severe negative conditions, the Corporation's ability to raise additional equity would be negatively impacted.

At the present time, there are no capital commitments in place other than a drilling contract anticipated to cost $1,172,000 in 2009 and 2010. As a result, TUSK can be flexible in its capital program going forward. Although ample opportunities exist for growth, future capital expenditures will be commensurate with commodity prices, cash flow and available credit. There are no exploration and development expenditures that are required to maintain TUSK's properties in good standing.

OUTSTANDING SHARE DATA

As of December 31, 2008, TUSK had 90,443,888 common shares and 8,820,500 stock options outstanding. From January 1, 2009 to the date of this MD&A, there were no changes to TUSK's outstanding securities.



CONTRACTUAL OBLIGATIONS
----------------------------------------------------------------------------
Payment Due by Period
------------------------------------------------
Less Than 1 - 3 4 - 5 After
($000s) Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------
Bank debt 55,949 55,949 -- -- --
Drilling rigs 1,172 1,049 123 -- --
Office space 1,816 442 1,337 37 --
----------------------------------------------------------------------------
Total 58,937 57,440 1,460 37 --
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Drilling Rigs

TUSK is a party to a contract regarding the utilization of a drilling rig. Under the terms of the contract, TUSK is obligated to use the rig for a minimum number of days in each contract year. The contract anniversary is February 5 and the contract ends on February 5, 2010. TUSK is obligated to utilize the rig for a minimum of 30 days for the period January 1, 2009 to February 5, 2009 and 165 days for the year ended February 5, 2010. If the utilization falls short of the minimum requirement, TUSK will be required to pay the lesser of (i) a standby fee of $6,800 per day for each day of the shortfall, or (ii) the difference between the rig rate paid by a third party and the full contract rate for the unutilized days.

Office Space

TUSK has a lease commitment for office space that expires on January 31, 2013. Approximately 50% of this office space is currently sublet to a third party. The annual payments due pursuant to this obligation are as follows: 2009 - $880,000; 2010 to 2012 - $884,000; and 2013 - $73,000. The net anticipated annual costs for this office space after sublet amounts have been considered are: 2009 - $442,000; 2010 to 2012 - $446,000; and 2013 - $37,000.

CONTINGENCIES

TUSK is involved in litigation matters arising out of the ordinary course and conduct of its business. Claims made against the Corporation total approximately $2,400,000 and the Corporation's counterclaims exceed $6,000,000. The likelihood of liabilities resulting from these matters is not determinable and related potential losses, if any, cannot be reasonably estimated. No accrual of loss has been made to the financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

Except for the items discussed under the caption "Contractual Obligations", there were no off-balance sheet arrangements at December 31, 2008.

RELATED PARTY TRANSACTIONS

An officer of TUSK is a director and significant shareholder of a private company that provides project management and systems support services to TUSK. In 2008, this company was paid $319,000 (2007 - $241,000). Of this amount, $184,000 was charged to general and administrative expenses, $99,000 to operating expenses and $36,000 to property and equipment. December 31, 2008 accounts payable and accrued liabilities includes $28,000 regarding these services.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. In 2008, royalties of $308,000 were paid to this company (2007 - $217,000). All of the payments were charged to royalties. December 31, 2008 accounts payable and accrued liabilities includes $16,000 regarding these royalties.

The above-mentioned transactions were provided at commercial rates and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

SUBSEQUENT EVENT

On February 10, 2009, TUSK announced that it had entered into an Arrangement Agreement with Polar Star pursuant to which Polar Star will acquire all of the issued and outstanding common shares of TUSK for cash consideration of $2.15 per TUSK share, by way of a plan of arrangement under the Business Corporations Act (Alberta). Including the assumption of indebtedness, the aggregate value of the transaction is approximately $257,000,000.

TUSK's Board of Directors unanimously approved the Arrangement and recommended that shareholders vote in favour of the transaction. All of TUSK's directors and executive officers, who collectively own approximately 7.7% of TUSK's outstanding shares, entered into lock-up agreements with Polar Star in respect of the proposed transaction and have committed to vote their TUSK shares in favour of the Arrangement.

The Arrangement is subject to a number of conditions including, but not limited to, the approval of: (a) at least 66 2/3% of the votes cast in person or by proxy at a special meeting of TUSK's shareholders, (b) a majority of the votes cast by minority shareholders, (c) court and regulatory approvals (including pursuant to the Investment Canada Act and the Competition Act) and, (d) other customary conditions. An information circular regarding the Arrangement was mailed to TUSK's shareholders in early March for a meeting to be held on March 31, 2009. The Arrangement is expected to be completed shortly thereafter. This information circular is also available on SEDAR at www.sedar.com and on TUSK's website at www.tusk-energy.com. In accordance with the requirements of the Investment Canada Act, Polar Star filed an application for review with the Director of Investments of Industry Canada on February 24, 2009. An Advanced Ruling Certification in respect of the proposed Arrangement was issued by the Commission of Competition on March 16, 2009.

Under the Arrangement Agreement, TUSK agreed that it would not solicit or initiate any discussions concerning the pursuit of any other acquisition proposals. TUSK has also agreed to pay a termination fee of $7,700,000 to Polar Star in certain circumstances. In addition, Polar Star has the right to match any competing proposal for TUSK in the event such a proposal is made. TUSK and Polar Star have each further agreed to pay the other party an expense reimbursement fee equal to the out-of-pocket expenses incurred in connection with the Arrangement Agreement and the transactions contemplated thereby, up to a maximum of $2,000,000, if the Arrangement Agreement is terminated by such party under certain circumstances.



SELECTED ANNUAL INFORMATION
----------------------------------------------------------------------------
Years Ended December 31,
----------------------------
($000s, except per share amounts) 2008 2007 2006(1)
----------------------------------------------------------------------------
Oil and gas revenue 110,909 77,155 16,733
Funds from operations 77,563 33,950 7,337
Per share - basic and diluted 0.86 0.38 0.16
Net income (loss) 15,070 (6,528) (3,940)
Per share - basic and diluted 0.17 (0.07) (0.08)
Total assets 343,979 311,455 277,360
Total long-term liabilities 25,072 16,883 11,780
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) TUSK changed its fiscal year-end to December 31 from March 31 effective
December 31, 2006. This resulted in a nine-month fiscal period ending
December 31, 2006. For comparative purposes, the information in this
column conforms to a December 31 year-end.


Average daily sales volumes were 4,631 boe/d in 2008, up from 3,970 boe/d in 2007 and 979 boe/d in 2006. Increasing volumes and higher commodity prices resulted in oil and gas revenue growth to $110,909,000 in 2008 from $16,733,000 in 2006. The increase in sales volumes from 2006 to 2007 was primarily due to the TUSK/Zenas business combination, which became effective on December 31, 2006. (see "Acquisition of Zenas Energy Corp. and Change in Year-End"). Sales volumes in 2008 benefited from new production, primarily in northeastern British Columbia. In March 2008, TUSK increased its position in and assumed operatorship of the Conroy project area (see "Northeastern British Columbia Asset Swap"). This was followed up with a successful development program.

Funds from operations increased from $7,337,000 in 2006 ($0.16 per share) to $77,563,000 ($0.86 per share) in 2008. The change over the three years reflects increases in revenue with one notable exception. In 2008, realized gains on commodity derivatives totaled $16,772,000. This amount was generated with respect to two US$ WTI priced oil put option contracts, both of which were fully monetized in 2008. (see "Financial and Operating Results - Commodity Derivatives"").

TUSK recorded a net loss of $3,940,000 ($0.08 per share) in 2006. Although year-over-year revenue increased, the net loss grew to $6,528,000 ($0.07 per share) in 2007. In 2007, TUSK incurred financing charges that it did not incur in 2006. TUSK did not have any bank debt in 2006 or the beginning of 2007. At the end of 2007, bank debt was $40,873,000. The net loss in 2007 also included contract termination costs of $2,000,000 (see "Contract Termination Expense"). In 2008, TUSK recorded net income of $15,070,000 ($0.17 per share), driven primarily by higher sales volumes, higher commodity prices and gains on commodity derivatives.

Expenditures on property and equipment were $66,419,000 in 2006, $109,700,000 in 2007 and $97,303,000 in 2008. In June 2006, TUSK completed a prospectus offering of common shares and flow-through common shares for proceeds of $50,005,000, which provided funding for a large portion of the 2006 capital expenditure program. The 2007 capital expenditure program was funded from cash on hand at the beginning of the year, bank debt and funds from operations. The 2008 capital expenditure program was funded primarily by funds from operations and bank debt. TUSK completed a non-brokered $2,500,000 issue of flow-through common shares in December 2007, which was spent in 2008.

TUSK started 2006 with 40,415,371 common shares outstanding. During 2006, the Corporation issued 11,200,000 shares to complete the prospectus offering described above and 37,204,118 shares to complete the acquisition of Zenas. At December 31, 2006, there were 88,879,722 shares outstanding. The number of outstanding shares did not grow appreciably over the next two years. At December 31, 2007, there were 90,442,222 shares outstanding. The 1,562,500 share increase resulted from the issue of shares at the end of 2007. TUSK ended 2008 with 90,443,888 shares outstanding.



SELECTED QUARTERLY INFORMATION

----------------------------------------------------------------------------
2008
(unaudited) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
($000s, except per share amounts)

Financial Highlights
Oil and gas revenue 27,467 28,040 29,550 25,852
Royalties (3,630) (4,790) (5,866) (5,204)
Realized gain on commodity
derivatives 16,772 - - -
Interest income - - - -
Operating (5,861) (5,301) (3,986) (4,037)
Transportation (1,131) (730) (806) (1,003)
G&A (1,335) (1,131) (1,381) (1,216)
Financing charges (598) (708) (714) (690)
Contract termination - - - -
----------------------------------------------------------------------------
Funds from operations 31,684 15,380 16,797 13,702
Per share
- basic and diluted 0.35 0.17 0.19 0.15
Unrealized gain (loss) on commodity
derivatives (1,975) 2,310 (272) (63)
Stock-based compensation (570) (583) (592) (459)
Gain (loss) on investment - - - -
DD&A (17,348) (12,605) (12,254) (13,627)
Future income taxes (1,905) (1,395) (1,148) (7)
----------------------------------------------------------------------------
Net income (loss) 9,886 3,107 2,531 (454)
Per share
- basic and diluted 0.11 0.03 0.03 (0.01)
----------------------------------------------------------------------------
Issue of shares (net) - 3 - -
Capital expenditures 13,925 40,370 16,914 26,094
Proceeds on disposal (7) (2,513) (350) (11,701)
Working capital (62,089) (78,706) (58,384) (57,649)
Shareholders' equity 239,741 229,142 225,309 221,984
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Highlights
Sales volumes
Oil and NGLs (bbls/d) 2,018 1,568 1,502 1,718
Natural gas (mcf/d) 24,377 16,776 14,037 15,049
Total (boe/d) 6,081 4,364 3,841 4,226
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Selling prices
Oil ($/bbl) 62.13 113.85 117.27 95.29
Natural gas ($/mcf) 7.32 7.93 10.98 8.17
NGLs ($/bbl) 51.02 91.05 81.54 74.57
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Operating netbacks ($/boe)
Selling price 49.10 69.83 84.53 67.22
Royalties (6.49) (11.93) (16.78) (13.53)
Operating expenses (10.48) (13.20) (11.40) (10.49)
Transportation expenses (2.02) (1.82) (2.31) (2.61)
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Operating netbacks 30.11 42.88 54.04 40.59
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SELECTED QUARTERLY INFORMATION

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2007
(unaudited) Q4 Q3 Q2 Q1
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($000s, except per share amounts)

Financial Highlights
Oil and gas revenue 20,242 20,560 20,153 16,200
Royalties (3,808) (3,546) (4,216) (3,381)
Realized gain on commodity
derivatives - - - -
Interest income - 1 9 146
Operating (4,551) (3,765) (3,064) (3,320)
Transportation (999) (1,171) (873) (779)
G&A (1,155) (1,074) (1,117) (2,730)
Financing charges (818) (586) (408) -
Contract termination (2,000) - - -
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Funds from operations 6,911 10,419 10,484 6,136
Per share
- basic and diluted 0.08 0.12 0.12 0.07
Unrealized gain (loss) on commodity
derivatives (627) (45) - -
Stock-based compensation (625) (707) (537) (477)
Gain (loss) on investment - - 1,105 (491)
DD&A (11,928) (10,741) (9,960) (8,290)
Future income taxes 2,279 99 (226) 693
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Net income (loss) (3,990) (975) 866 (2,429)
Per share
- basic and diluted (0.04) (0.01) 0.01 (0.03)
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Issue of shares (net) 2,480 - - -
Capital expenditures 20,774 7,899 33,043 47,984
Proceeds on disposal (832) - (1,937) -
Working capital (56,570) (45,128) (47,416) (27,899)
Shareholders' equity 222,536 229,074 229,172 227,564
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Operating Highlights
Sales volumes
Oil and NGLs (bbls/d) 1,603 1,806 1,730 1,531
Natural gas (mcf/d) 14,004 15,652 14,115 11,413
Total (boe/d) 3,937 4,415 4,083 3,433
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Selling prices
Oil ($/bbl) 84.76 79.13 70.11 63.20
Natural gas ($/mcf) 6.13 5.25 7.17 7.37
NGLs ($/bbl) 69.38 61.85 60.27 50.60
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Operating netbacks ($/boe)
Selling price 55.89 50.62 54.24 52.48
Royalties (10.51) (8.73) (11.35) (10.94)
Operating expenses (12.56) (9.27) (8.25) (10.74)
Transportation expenses (2.76) (2.88) (2.35) (2.52)
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Operating netbacks 30.06 29.74 32.29 28.28
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QUARTERLY REVIEW - 2008

First quarter 2008 sales volumes averaged 4,226 boe/d, up 7% from fourth quarter 2007 volumes. Commodity prices were strong in the quarter, with TUSK realizing average selling prices of $95.29/bbl for oil and $8.17/mcf for natural gas. For the three months ended March 31, 2008, TUSK reported revenue of $25,852,000, up 28% from the previous quarter, due primarily to increased commodity prices. Royalty expense was $5,204,000 or 20% of revenue, consistent with the previous quarter. Operating and transportation expense of $4,037,000 and $1,003,000, respectively, were down favourably due to the installation of a water injection facility in a core area. G&A increased marginally in the period to $1,216,000. Finance costs decreased 16% to $690,000 due to the fluctuating balance of the debt during the period. As a result of the above, funds from operations totaled $13,702,000 for the period. DD&A provision increased to $13,627,000 as a result of production increases. Future taxes were nominal, resulting in a reduction in the net loss to $454,000 for the quarter.

Capital expenditures of $26,094,000 involved the drilling of 10 gross (9.3 net) wells and the installation of a sales pipeline and a processing facility. On March 31, 2008, TUSK completed the swap of its non-operated 50% interest in Elleh for certain interests at Conroy plus $11,700,000. TUSK funded the majority of its first quarter 2008 capital expenditure program with funds from operations and the cash received from the asset swap. As a result, TUSK's net debt at March 31, 2008 of $57,649,000 was only $1,079,000 higher than it was at December 31, 2007.

Second quarter 2008 sales volumes averaged 3,841 boe/d, down 9% compared to first quarter volumes. Commodity prices were strong during the second quarter of 2008, with TUSK realizing average selling prices of $117.27/bbl for oil and $10.98/mcf for natural gas. Second quarter 2008 revenue was $29,550,000, up 14% from the first quarter as higher commodity prices overcame lower sales volumes. Royalties of $5,866,000 were consistent at 20% of revenue. Operating and transportation costs of $3,986,000 and $806,000, respectively, were marginally down, while G&A and financing charges were consistent with the previous quarter at $1,131,000 and $714,000, respectively. As a result of the above, TUSK generated funds from operations of $16,797,000, 23% higher than the previous quarter. DD&A expense declined 10% to $12,254,000 in the second quarter of 2008 commensurate with production decreases. TUSK recorded future income taxes of $1,148,000 for the second quarter of 2008 compared to $7,000 in the first quarter. Second quarter 2008 net income of $2,531,000 ($0.03 per share) compares favourably to the first quarter loss of $454,000 ($0.01 per share). For the most part, increasing revenue caused by higher commodity prices overcame increases in expenses.

Capital expenditures of $16,914,000 incurred in the second quarter of 2008 involved drilling 4 gross (4.0 net) wells and a property acquisition costing $3,000,000. In late May 2008, TUSK purchased a US$90.00/bbl WTI put option contract on 1,000 bbls/d of oil for the period January 1, 2009 to December 31, 2009. Net debt or the working capital deficiency was $58,384,000 at June 30, 2008, which included bank debt of $53,735,000.

Third quarter 2008 sales volumes averaged 4,364 boe/d, up 14% compared to second quarter volumes of 3,841 boe/d. The quarter-over-quarter increase was primarily due to new production at Conroy in northeastern British Columbia. Third quarter 2008 commodity prices softened compared to the second quarter, with TUSK realizing average selling prices of $113.85/bbl for oil and $7.93/mcf for natural gas. Third quarter 2008 revenue was $24,080,000, down 5% from the second quarter as lower commodity prices overcame higher sales volumes. Royalties were $4,790,000 or 17% of revenue, down from 20% of revenue in the second quarter due to favourable Crown royalty adjustments regarding prior periods. Operating expenses were $5,301,000 in the third quarter, up 33% from the second quarter due to higher volumes and an increase in the unit rate to $13.20/boe. G&A costs were $1,131,000 in the third quarter of 2008, down from $1,381,000 in the second quarter due to higher overhead recoveries and capitalized overhead caused by high capital expenditures in the quarter. Higher third quarter 2008 financing charges of $708,000 were similar to the second quarter expense. As a result, TUSK generated funds from operations of $15,380,000, an 8% decrease compared to the second quarter. DD&A expense increased 3% to $12,605,000 in the third quarter due to an increase in sales volumes. TUSK recorded future income taxes of $1,395,000 for the third quarter of 2008, resulting in a net income of $3,107,000 for the period.

Capital expenditures of $40,370,000 incurred in the third quarter involved drilling 33 gross (31.5 net) wells, the majority of which were in the Conroy area. TUSK realized proceeds of $2,500,000 on the sale of undeveloped mineral rights. Net debt or working capital deficiency was $78,706,000 at September 30, 2008, which included bank debt of $56,958,000. During the three months ended September 30, 2008, net debt increased $20,322,000 primarily due to the Conroy drilling program.

Fourth quarter 2008 sales volumes of 6,081 boe/d were 39% higher than the third quarter. The quarter-over-quarter increase was the result of the drilling program in the Conroy area of northeastern British Columbia. For the most part, the new wells at Conroy came on-stream shortly after they were drilled. Fourth quarter 2008 revenue was $27,467,000, down modestly from the third quarter as lower commodity prices all but overcame higher volumes. Funds from operations totaled $31,684,000 ($0.35 per share) and the net income was $9,886,000 ($0.11 per share). Compared to the third quarter, fourth quarter results were affected by lower royalties, higher realized commodity derivative gains (explained below) and increased DD&A expense. Lower royalties were primarily caused by Crown royalty rate adjustments. The high commodity derivative hedge gains were the result of the monetization of contracts in December 2008 and increased DD&A expenses were the result of increased production quarter-over-quarter.

Net capital expenditures in the fourth quarter of 2008 totaled $13,918,000 and included the drilling of 9 gross (6.8 net) wells, of which 6 gross (6.0 net) wells were drilled in the Conroy area and 3 gross (0.8 net) in the Peace River Arch area. In addition, costs for pipeline and facilities construction were incurred. Late in the fourth quarter, TUSK monetized the calendar 2009 commodities contract for net proceeds of $17,008,000, resulting in a realized gain of $15,759,000. The calendar 2008 commodities contract expired under its own terms and resulted in realized gains of $1,013,000 during the period.

QUARTERLY REVIEW - 2007

The TUSK/Zenas Energy Corp. business combination was effective at the beginning of the year, and the three months ended March 31, 2007 was the first reporting period of the combined entity. Sales volumes for the three months ended March 31, 2007 were 3,433 boe/d, oil and gas revenue was $16,200,000 and funds from operations totaled $6,136,000 ($0.07 per share). G&A costs in the quarter included severance and retention payments made in connection with the integration of TUSK and Zenas Energy Corp. First quarter 2007 capital expenditures were $47,983,000 and included the drilling of 21 gross (11.5 net) wells. Drilling by area was as follows: Northern (Mega\Gutah) - 8 gross (6.2 net) wells; Elleh - 7 gross (3.5 net) wells; and Peace River Arch - 6 gross (1.8 net) wells. In addition to drilling, first quarter capital expenditures included approximately $7,000,000 spent on facilities and infrastructure (mostly in the Northern area at Mega/Gutah) and approximately $3,000,000 on seismic (primarily at Elleh). Capital expenditures for the first quarter of 2007 were financed primarily with cash on hand and debt.

Second quarter 2007 sales volumes averaged 4,083 boe/d, oil and gas revenue was $20,153,000, funds from operations totaled $10,484,000 ($0.12 per share) and net income was $866,000 ($0.01 per share). Compared to the first quarter of 2007, operating expenses declined to $8.25/boe (first quarter 2007 - $10.74/boe) and G&A expenses were consistent with expectations. Results for the second quarter of 2007 also benefited from a gain on investment of $1,105,000. Second quarter capital expenditures were $33,045,000 and included the drilling of 8 gross (3.4 net) wells, 6 gross (3.0 net) wells at Elleh and 2 gross (0.4 net) wells in the Peace River Arch area. During the second quarter of 2007, TUSK completed a $9,000,000 acquisition of additional interests in an oil property located at Gage in the Peace River Arch area. TUSK did not drill any wells in the Northern area during the second quarter but did spend $4,400,000 in the area, primarily on facilities and re-completions. TUSK received $1,937,000 regarding the sale of minor oil and gas properties during the second quarter. Second quarter 2007 capital expenditures were financed primarily by debt, funds from operations and the proceeds on the sale of investment.

Sales volumes averaged 4,415 boe/d in the third quarter of 2007 with new wells coming on-stream in the Elleh and Peace River Arch areas. Oil and gas revenue was $20,560,000 for the third quarter, which reflected softening natural gas prices compared to the second quarter. Third quarter funds from operations totaled $10,419,000 ($0.12 per share) and the net loss was $975,000 ($0.01 per share). During the third quarter, TUSK purchased a US$65.00/bbl put option on 1,000 bbls/d of oil for the period January 1, 2008 to December 31, 2008. The cost of the contract was $781,000 and was effectively a floor price linked to WTI pricing. The contract was fair valued (mark-to-market) at the end of the quarter, resulting in a charge to earnings of $45,000. Capital expenditures in the third quarter of 2007 were $7,899,000, somewhat less than funds from operations. TUSK drilled 3 gross (0.5 net) wells during the quarter, all in the Peace River Arch area. TUSK commenced development of the Conroy area during the third quarter, spending $3,056,000 on preliminary engineering, surveying, surface costs and tangible equipment. Third quarter capital expenditures also included ongoing work on the all-weather road in the Northern area.

Fourth quarter 2007 sales volumes of 3,937 boe/d were 11% lower than the third quarter. The quarter-over-quarter decline was caused by lower volumes in the Elleh and Northern areas and a lack of new wells placed on production. At Elleh, new wells placed on-stream earlier in the year came off flush production, while in the Northern area, facility issues affected volumes. Growth in production volumes is typically driven by capital expenditures. Commencing in the third quarter and throughout the fourth quarter, a large portion of TUSK's capital expenditure program was directed to the Conroy area. For the most part, new wells at Conroy came on-stream in early 2008 and the results were as expected. Fourth quarter 2007 revenue was $20,242,000, down modestly from the third quarter as higher commodity prices all but overcame lower volumes. Funds from operations totaled $6,911,000 ($0.08 per share) and the net loss was $3,990,000 ($0.04 per share). Compared to the third quarter, fourth quarter results were affected by higher operating expenses and financing charges, increased commodity derivatives charges and contract termination costs. Higher operating expenses were caused primarily by third party water handling charges in the Northern area and increased financing charges were caused by higher debt levels. The mark-to-market valuation of the put contract described in the preceding paragraph resulted in an unrealized loss on commodity derivatives of $627,000 in the fourth quarter, up from $45,000 in the third quarter. During the fourth quarter, TUSK entered into an agreement to reduce its obligation with respect to the contractual commitment on the use of two drilling rigs. The Corporation paid $2,000,000 to eliminate the commitment for one rig and reduce the commitment for the second. Capital expenditures in the fourth quarter of 2007 were $20,774,000 and included the drilling of 12 gross (5.2 net) wells, of which 10 gross (5.0 net) wells were drilled in the Conroy area and 2 gross (0.2 net) in the Peace River Arch area. Over 80% of fourth quarter capital expenditures were spent in the Conroy area and, in addition to drilling and completions, included costs for pipeline and facilities construction. Proceeds on disposal of minor oil and natural gas properties were $832,000 in the fourth quarter. Late in the fourth quarter of 2007, TUSK raised $2,500,000 through the issuance of 1,562,500 flow-through common shares at $1.60 per share.

Credit Risk

Credit risk is the risk of financial loss to TUSK if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from TUSK's receivables from joint interest partners and petroleum and natural gas marketers.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. TUSK's policy to mitigate credit risk associated with these balances is to establish marketing relationships with large purchasers. The Corporation historically has not experienced any collection issues with its petroleum and natural gas marketers. Joint interest receivables are typically collected within one to three months of the joint interest bill being issued to the partner. TUSK attempts to mitigate the risk from joint interest receivables by obtaining partner approval of significant capital expenditures prior to expenditure. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors, such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with joint interest partners as disagreements occasionally arise that increases the potential for non-collection. TUSK does not typically obtain collateral from petroleum and natural gas marketers or joint interest partners; however, TUSK does have the ability to withhold production from joint interest partners in the event of non-payment.

TUSK manages the credit exposure related to short-term investments by selecting counterparties based on credit ratings and monitors all investments to ensure a stable return, avoiding complex investment vehicles with higher risk, such as asset-backed commercial paper.

The carrying amount of accounts receivable represents the maximum credit exposure. For the year ended December 31, 2008, accounts receivable written off were minor. At December 31, 2008, TUSK had an allowance for doubtful accounts of $100,000. TUSK did not have an allowance for doubtful accounts at December 31, 2007.

Foreign Currency Exchange Risk

Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. Although substantially all of TUSK's petroleum and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for petroleum and natural gas are impacted by changes in the exchange rate between the Canadian and United States dollar. TUSK had no forward exchange rate contracts in place as at or during the year ended December 31, 2008.

Fair Value of Financial Instruments

TUSK's financial instruments as at December 31, 2008 and 2007 include accounts receivable, derivative contracts, accounts payable and accrued liabilities, and bank debt. The fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to their short terms to maturity. The fair value of derivative contracts is determined using the mark-to-market method, which assumes the contract is closed out in the open market at the balance sheet date. Bank debt bears interest at a floating market rate, and accordingly, the fair market value approximates the carrying value.

Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. TUSK is exposed to interest rate fluctuations on its bank debt, which bears a floating rate of interest. TUSK had no interest rate swap or financial contracts in place as at or during the year ended December 31, 2008.

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 companies ranging from smaller junior producers to the much larger integrated petroleum companies. The Corporation is subject to 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

- Marketability of oil and natural gas produced

- Substantial capital requirements and access to capital markets

- Environmental risks

- Insurance

- Reliance on operators and key employees

- Third party credit risk

- Changes in legislation and incentive programs

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, 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 December 31, 2008, TUSK had no fixed price contracts in place.

SAFETY, ENVIRONMENTAL AND REGULATORY

The Corporation is committed to safety in its operations and with high regard for the environment and stakeholders, including regulators. These risks are managed by executing policies and standards that are designed to comply with or exceed government regulations and industry standards. In addition, TUSK maintains a system that identifies, assesses and controls safety, security and environmental risk and requires regular reporting to management and the Board of Directors. The Technical Committee of TUSK's Board of Directors is presented with a quarterly review of environmental, health and safety policies and procedures to ensure that the Corporation is in compliance with government laws and regulations. Monitoring and reporting programs for environmental, health and safety performance in day-to-day operations, as well as inspections and assessments, are designed to provide assurance that environmental and regulatory standards are met. Contingency plans are in place for a timely response to an environmental event and remediation/reclamation strategies are utilized to restore the environment.

Regulatory and legal risks are identified by the operating divisions and corporate groups, and TUSK's compliance with the required laws and regulations is monitored by management, which stays abreast of new developments and changes in laws and regulations to ensure that TUSK continues to comply with prescribed laws and regulations. For further information, refer to the Annual Information Form for the year ended December 31, 2008, "Environmental Regulation" section.

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.

(b) Financial Instruments - Disclosures and Presentation

In December 2006, the Accounting Standards Board ("AcSB") issued CICA section 3862, "Financial Instruments - Disclosure and Presentation". Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments for a company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments.

Sections 3862 and 3863 became effective and were adopted by TUSK on January 1, 2008.

(c) Capital Disclosures

In December 2006, the AcSB issued new CICA section 1535, "Capital Disclosures" requiring disclosures regarding an entity's objectives, policies and processes for managing capital. These disclosures include a description of what TUSK manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into TUSK's management of capital, whether the requirements have been complied with, or consequences of non-compliance and an explanation of how TUSK is meeting its objective for managing capital. In addition, quantitative data about capital and whether TUSK has complied with all capital requirements are also required.

Section 1535 became effective and was adopted by TUSK on January 1, 2008.

(d) International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards of Canada are to converge with IFRS. The AcSB has indicated that Canadian entities will need to begin reporting under IFRS by the first quarter of 2011 with appropriate comparative data from the prior year. Under IFRS, the primary audience is capital markets, and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy that must be addressed.

In February 2008, the AcSB confirmed the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The AcSB issued the "omnibus" exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the (continued) use of U.S. GAAP by domestic issuers. The eventual changeover to IFRS represents changes due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company's reported financial position and results of operations.

TUSK has not completed development of its IFRS changeover plan, which will include project structure and governance, resourcing and training, analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS as well as potential IFRS 1 exemptions. TUSK expects to complete its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements, by the end of the second quarter of 2009.

The International Accounting Standards Board has stated that it plans to issue an exposure draft relating to certain amendments to IFRS 1 in order to make it more useful to Canadian entities adopting IFRS for the first time. One such exemption relating to full cost oil and gas accounting is expected to result in a reduced administrative transition from the current Canadian AcG-16 to IFRS. It is anticipated that this exposure draft will not result in an amended IFRS 1 standard until late in 2009. The amendment will potentially permit the Corporation to apply IFRS prospectively to its full cost pool, rather than the retrospective assessment of capitalized exploration and development expenses, with the proviso that a ceiling test, under IFRS standards, be conducted at the transition date.

(e) 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.

(f) 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.

(g) 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.

(h) 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.

PENDING ACCOUNTING PROUNCEMENTS

Goodwill and Intangible Assets

As of January 1, 2009, the Corporation will be required to adopt CICA section 3064, "Goodwill and Intangible Assets", replacing section 3062, "Goodwill and Other Intangible Assets" and section 3450, "Research and Development Costs". Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous section 3062. The Corporation is currently evaluating the effect of the adoption of the new section on its financial statements.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Other than described above (see "Changes in Accounting Policies"), there has been no change in TUSK's accounting estimates and policies since December 31, 2007. A summary of TUSK's significant accounting policies can be found in note 1 to the December 31, 2008 audited financial statements.

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 are designed to provide reasonable assurance that all relevant information is gathered and reported on a timely basis to senior management so that appropriate decisions can be made regarding public disclosure. As at December 31, 2008, senior management evaluated the design and effectiveness of the Corporation's disclosure controls and procedures as required by Canadian securities laws.

Based on that evaluation, senior management determined that the disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed in the Corporation's annual filings and interim filings (as such terms are defined under National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109")) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws, and that material information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. However, as a result of an internal control weakness noted below, management has concluded that the disclosure controls are not effective. The material weakness identified has not resulted (either individually or collectively) in any adjustments to TUSK's interim or annual financial statements.

INTERNAL CONTROLS AND PROCEDURES

The senior management of the Corporation is responsible for establishing and maintaining internal control over financial reporting ("ICFR"), as such term is defined in NI 52-109. Senior management has, as at December 31, 2008, designed such ICFR, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP, except as noted below. The control framework used to design ICFR is the Internal Control - Integrated Framework ("COSO Framework") published by the Committee of Sponsoring Organizations of the Treadway Commission.

Under the supervision of senior management, TUSK conducted an evaluation of the effectiveness of the ICFR as at December 31, 2008. Based on management's review, it was noted that due to the limited number of staff at TUSK, it is not feasible to achieve complete segregation of incompatible duties. The limited number of staff has led the Corporation to identify a weakness with respect to accounting for complex and non-routine accounting transactions as TUSK does not have sufficient number of finance personnel with technical accounting knowledge to address all complex and non-routine accounting matters that may arise. Based on this evaluation, senior management concluded that as of December 31, 2008, the Corporation's ICFR is not effective. Neither of these weaknesses has resulted in a misstatement in TUSK's interim or annual financial statements; however, as there is no guarantee that a material misstatement would not be prevented or detected, these items have been classified as material weaknesses. These weaknesses and their related risks are not uncommon in smaller companies with a limited number of employees.

Management is continuing to analyze these weaknesses and is modifying procedures and improving controls where possible to improve the segregation of duties. While these measures may reduce the likelihood of a material misstatement or untimely disclosure in financial reporting, there is no assurance that a material misstatement will not occur.

ADDITIONAL INFORMATION

Additional information regarding TUSK Energy Corporation, including its Annual Information Form, is available on SEDAR at www.sedar.com or on TUSK's website at www.tusk-energy.com.



BALANCE SHEETS

----------------------------------------------------------------------------
As at December 31, 2008 2007
($000s)
----------------------------------------------------------------------------
Assets
Current
Investments (note 3) 258 258
Accounts receivable (note 9) 16,143 14,504
Prepaid expenses and deposits 676 595
Commodity derivatives (note 9) -- 109
----------------------------------------------------------------------------
17,077 15,466
Property, plant and equipment (note 4) 326,902 295,989
----------------------------------------------------------------------------
343,979 311,455
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities 23,217 31,163
Bank loan (note 5) 55,949 40,873
----------------------------------------------------------------------------
79,166 72,036
Future income taxes (note 6) 18,112 12,717
Asset retirement obligations (note 7) 6,960 4,166
----------------------------------------------------------------------------
104,238 88,919
----------------------------------------------------------------------------
Shareholders' equity
Share capital (note 8) 223,070 223,754
Contributed surplus (note 8) 12,781 9,962
Retained earnings (deficit) 3,890 (11,180)
----------------------------------------------------------------------------
239,741 222,536
----------------------------------------------------------------------------
343,979 311,455
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and contingencies (note 11)
Subsequent event (note 13)
See accompanying notes.


STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND
RETAINED EARNINGS (DEFICIT)


----------------------------------------------------------------------------
Year Ended December 31, 2008 2007
($000s, except per share amounts)
----------------------------------------------------------------------------
Revenue
Oil and gas revenue 110,909 77,155
Royalties (19,490) (14,951)
Realized gain on commodity derivatives (note 9) 16,772 -
Unrealized loss on commodity derivatives (note 9) - (672)
----------------------------------------------------------------------------
108,191 61,532
Interest income - 156
----------------------------------------------------------------------------
108,191 61,688
----------------------------------------------------------------------------
Expenses
Operating 19,185 14,700
Transportation 3,670 3,822
General and administrative 5,063 6,076
Financing charges 2,710 1,812
Contract termination (note 11) - 2,000
Stock-based compensation (note 8) 2,204 2,346
Gain on sale of investment (note 2) - (614)
Depletion, depreciation and accretion 55,834 40,919
----------------------------------------------------------------------------
88,666 71,061
----------------------------------------------------------------------------
Income (loss) before taxes 19,525 (9,373)
----------------------------------------------------------------------------
Income taxes
Current - -
Future (reduction) (note 6) 4,455 (2,845)
----------------------------------------------------------------------------
4,455 (2,845)
----------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) 15,070 (6,528)
Deficit, beginning of year (11,180) (6,775)
Change of accounting policies (net of tax of $360)
(note 2) - 2,123
----------------------------------------------------------------------------
Retained earnings (deficit), end of year 3,890 (11,180)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share (note 8)
Basic 0.17 (0.07)
Diluted 0.17 (0.07)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.


STATEMENTS OF CASH FLOWS

----------------------------------------------------------------------------
Year Ended December 31, 2008 2007
($000s)
----------------------------------------------------------------------------
Operating activities
Net income (loss) for the year 15,070 (6,528)
Items not involving cash:
Commodity derivatives - 672
Stock-based compensation 2,204 2,346
Gain on sale of investment - (614)
Depletion, depreciation and accretion 55,834 40,919
Future tax expense (reduction) 4,455 (2,845)
Asset retirement obligation expenditures (353) (451)
----------------------------------------------------------------------------
77,210 33,499
Change in non-cash working capital (note 10) (6,578) (5,389)
----------------------------------------------------------------------------
70,632 28,110
----------------------------------------------------------------------------
Financing activities
Increase in bank loan 15,076 40,873
Issue of share capital 3 2,500
Share issue costs - (20)
Change in non-cash working capital (note 10) (10) 20
----------------------------------------------------------------------------
15,069 43,373
----------------------------------------------------------------------------
Investing activities
Expenditures on property and equipment (97,303) (109,700)
Proceeds on disposition of property and equipment 14,571 2,769
Proceeds on sale of investment (note 2) - 7,367
Change in non-cash working capital (note 10) (2,969) 894
----------------------------------------------------------------------------
(85,701) (98,670)
----------------------------------------------------------------------------
Decrease in cash and cash equivalents - (27,187)
Cash and cash equivalents, beginning of year - 27,187
----------------------------------------------------------------------------
Cash and cash equivalents, end of year - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid 2,390 1,572
Taxes paid - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.


NOTES TO FINANCIAL STATEMENTS

Year Ended December 31, 2008 and 2007
(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 Alberta and British Columbia. TUSK was incorporated on September 24, 2004 and commenced operations on November 2, 2004 pursuant to a Plan of Arrangement among TUSK Energy Inc., TKE Energy Trust and TUSK. Under the Plan of Arrangement, certain assets of TUSK Energy Inc. were transferred to TUSK.

TUSK acquired Zenas Energy Corp. ("Zenas") through a Plan of Arrangement on December 31, 2006. TUSK and Zenas were amalgamated on January 1, 2007.

The financial statements are stated in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles.

1. Summary of Significant Accounting Policies

(a) Oil and Natural Gas Operations

Capitalized Costs

TUSK follows the full cost method of accounting for oil and natural gas operations, whereby all costs of acquiring, exploring for and developing oil and natural gas reserves are capitalized and accumulated in one cost centre. Such costs include those related to lease acquisition, geological and geophysical activities, rentals on non-producing mineral leases, drilling of productive and non-productive wells, tangible production equipment, asset retirement costs and that portion of general and administrative expenses directly attributable to exploration and development activities.

Proceeds from the disposition of oil and natural gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such disposition would alter the depletion and depreciation rate by 20% or more.

Depletion and Depreciation

Depletion and depreciation of oil and natural gas properties is calculated using the unit-of-production method based on production volumes, before royalties, in relation to total proved reserves as estimated by independent engineers. Natural gas volumes are converted to equivalent oil volumes based on a relative energy content of six thousand cubic feet of natural gas to one barrel of oil. In determining costs subject to depletion, TUSK includes estimated future costs to be incurred in developing proved reserves and excludes estimated salvage values. The cost of undeveloped properties is excluded from costs subject to depletion until it is determined that proved reserves are attributable to the property or impairment has occurred.

Ceiling Test

Petroleum and natural gas properties are evaluated at least annually to determine whether the carrying amount in each cost centre is recoverable and that it does not exceed the fair value of the properties in the cost centre.

The carrying amounts are assessed to be recoverable when the sum of the undiscounted cash flows expected from the production of proved reserves plus the lower of cost and market of unproved properties exceeds the carrying amount of the cost centre. When the carrying amount is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying amount of the cost centre exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties that contain no probable reserves. The cash flows are estimated using expected future product prices and costs and are discounted using a risk-free interest rate.

Asset Retirement Obligations

Asset retirement obligations include the abandonment of oil and natural gas wells, the dismantling and removal of tangible equipment such as oil batteries and natural gas facilities and returning the land to its original condition. TUSK recognizes an asset retirement obligation ("ARO") in the period in which it is identified and a reasonable estimate of the fair value can be made. Fair value is estimated based on the present value of the estimated future cash outflows to abandon the asset, discounted at TUSK's credit-adjusted risk-free interest rate. The fair value of the estimated ARO is recorded as a long-term liability with a corresponding amount capitalized to oil and natural gas properties. The amount capitalized is charged to earnings through the depletion and depreciation of oil and gas properties. The ARO liability is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings. Revisions to the original estimated cost or the timing of the cash outflows may result in a change to the ARO. Actual costs incurred to settle an ARO reduce the long-term liability.

Joint Interest

Substantially all of TUSK's exploration and production activities are conducted jointly with other companies. These financial statements reflect only TUSK's proportionate interest in such activities.

(b) Depreciation

Depreciation of office equipment and leasehold improvements is provided for on a declining balance basis at a rate of 30% per annum. One-half of this rate is applied in the year of purchase.

(c) Income Taxes

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

(d) Flow-Through Shares

Flow-through shares are issued at a fixed price and the proceeds are used to fund qualifying exploration and development expenditures within a defined period. The qualifying deductions funded by the flow-through arrangements are renounced to investors in accordance with Canadian tax legislation. To recognize the foregone tax benefits of flow-through shares, share capital is reduced and a future income tax liability is recorded for the estimated future tax cost of the renounced expenditures, when the expenditures are renounced.

(e) Revenue Recognition

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

(f) Stock-Based Compensation

Stock-based compensation expense for stock options granted to employees, officers, directors and consultants is accounted for using the fair value method. Under this method, stock-based compensation expense is recorded over the vesting period of the option, based on the fair value of the option on the date of grant. The fair value of each option granted is estimated using the Black-Scholes option pricing model that takes into account on the date of grant the exercise price and expected life of the option, the price of the underlying security, the expected volatility and dividends (if any) on the underlying security and the risk-free interest rate. Options granted to consultants, to the extent unvested, are fair valued on subsequent reporting dates.

Stock-based compensation expense is recorded with a corresponding increase in contributed surplus. Consideration received on the exercise of an option, together with the amount previously charged to contributed surplus, is recorded as an increase in share capital. Stock option forfeitures will be accounted for as they occur.

(g) Per Share Information

Basic per share information is calculated using the weighted average number of common shares outstanding during the year. Diluted per share information is calculated using the treasury stock method, which recognizes the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common shares. The treasury stock method assumes that any proceeds received by TUSK upon the exercise of in-the-money stock options plus the unamortized portion of stock-based compensation would be used to buy back common shares at the average market price for the period. The weighted average number of shares outstanding is then adjusted by the net change.

(h) Measurement Uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingencies. Such estimates primarily relate to unsettled transactions and events at the balance sheet date. Actual results could differ from those estimated.

The amounts recorded for the provision for depletion, depreciation and accretion (including any ceiling test write-down), asset retirement obligation costs and the valuation of undeveloped property costs are based on commodity prices, future costs, management's future development plans and other relevant assumptions. The amounts recorded for stock-based compensation are based on estimates of the expected volatility of TUSK's share price, expected lives of the options, expected future dividend rates and TUSK's risk-free interest rate. The amounts recorded for commodity derivatives are based on expected future commodity prices and volatility. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.

(i)Cash and Cash Equivalents

Cash and cash equivalents consist of cash in the bank, less outstanding cheques and cash equivalents with an original maturity of less than three months.

(j) Investments

TUSK classifies its investments as either held-for-trading or available for sale. Held-for-trading investments are fair valued at each balance sheet date with changes in fair value recognized in earnings. Available for sale investments are fair valued at each balance sheet date with changes in fair value recognized in other comprehensive income. As at December 31, 2008, TUSK's investment was classified as held-for-trading.

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 December 31, 2006, TUSK held an investment in a publicly traded oil and gas company with a cost basis of $4,270,000. At January 1, 2007, an adjustment was made to increase the carrying value of this investment by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000. The investment was sold in 2007 for proceeds of $7,367,000, resulting in a net gain of $614,000.

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.

At January 1, 2007, TUSK designated its investments as held-for-trading. Accounts receivable were designated as loans and receivables. Accounts payable and accrued liabilities and the bank loan were designated as other financial liabilities. TUSK did not have any available for sale or held-to-maturity instruments for the years ended December 31, 2008 and 2007.

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.

(c) Financial Instruments - Disclosures and Presentation

In December 2006, the Accounting Standards Board ("AcSB") issued CICA section 3862, "Financial Instruments - Disclosure and Presentation." Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments for a company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments.

Section 3862 was effective for TUSK on January 1, 2008.

(d) Capital Disclosures

In December 2006, the AcSB issued new CICA section 1535, "Capital Disclosures" requiring disclosures regarding an entity's objectives, policies and processes for managing capital. These disclosures include a description of what TUSK manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into TUSK's management of capital, whether the requirements have been complied with, or consequences of non-compliance and an explanation of how TUSK is meeting is objective for managing capital. In addition, quantitative data about capital and whether TUSK has complied with all capital requirements are also required.

Section 1535 was effective for TUSK on January 1, 2008.

(e) International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards in Canada are to converge with IFRS. In February 2008, the AcSB confirmed the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, with appropriate comparative information for the prior year. The changeover to IFRS represents changes due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the TUSK's reported financial position and results of operations.

3. Investments

In 2006, TUSK invested $258,000 in the common shares of a private drilling company. The investment is carried at fair value, which approximates cost.



4. Property, Plant and Equipment

---------------------------------------------------------------------------
($000s) 2008 2007
---------------------------------------------------------------------------
Oil and natural gas properties 436,155 349,878
Office equipment and leasehold improvements 679 627
---------------------------------------------------------------------------
436,834 350,505
Accumulated depletion and depreciation (109,932) (54,516)
---------------------------------------------------------------------------
326,902 295,989
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The 2008 depletion and depreciation calculation excluded unproved properties of $29,061,000 (2007 - $39,619,000) and salvage values of $9,414,000 (2007 - $6,064,000). The calculation includes future development costs of $37,220,000 (2007 - $42,258,000).

In 2008, general and administrative costs of $3,012,000 (2007 - $3,378,000) were capitalized to oil and natural gas properties. In 2008, TUSK also capitalized to oil and natural gas properties a total of $868,000 (2007 - $1,880,000) comprised of $616,000 (2007 - $1,332,000) of stock-based compensation and the related future income taxes of $252,000 (2007 - $548,000).

TUSK performed a ceiling test calculation at December 31, 2008, resulting in the future cash flows from proved plus probable reserves and the lower of cost and market of unproved properties exceeding the carrying value of oil and gas assets.

The following table summarizes the future benchmark prices used in the ceiling test:



---------------------------------------------------------------------------
Crude Oil Natural Gas
--------------------------------------------
West Texas Edmonton AECO
Year (US$/bbl) (CDN$/bbl) (CDN$/mmbtu)
---------------------------------------------------------------------------
2009 57.50 68.61 7.58
2010 68.00 78.94 7.94
2011 74.00 83.54 8.34
2012 85.00 90.92 8.70
2013 92.01 95.91 8.95
2014 93.85 97.84 9.14
2015 95.73 99.82 9.34
2016 97.64 101.83 9.54
2017 99.69 103.89 9.75
2018 101.59 105.99 9.95
Thereafter (2)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1)Future prices incorporate a US/CDN exchange rate of $0.825 for 2009,
$0.850 for 2010, $0.875 for 2011, $0.925 for 2012 and $0.950 thereafter.
(2)Escalated at 2% per year thereafter.


5. Bank Loan

TUSK has a $76,000,000 demand credit facility available through two Canadian chartered banks. The interest rate charged on the facility is payable monthly and 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 a minimum of the bank's prime rate plus 0.25% to a maximum of the bank's prime rate plus 1.50%. At December 31, 2008, the effective annual interest rate was 4%. The credit facility is secured by a $150,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts. Under the terms of the facility, TUSK has agreed to meet certain financial conditions on an ongoing basis. These conditions include minimum working capital and interest coverage ratios and a maximum debt to annualized cash flow ratio.

6. Future Income Taxes

(a) Tax Expense

The provision for income tax differs from the result that would be obtained by applying the combined Canadian federal and provincial tax rate to the net loss before income taxes. The principal reasons for this difference are as follows:



---------------------------------------------------------------------------
($000s) 2008 2007
---------------------------------------------------------------------------
Income (loss) before taxes 19,525 (9,373)
Corporate tax rate 29.50% 32.12%
---------------------------------------------------------------------------
Expected income tax expense (reduction) 5,760 (3,011)
Add (deduct):
Non-deductible stock-based compensation 650 754
Tax rate change (1,943) (878)
Pool differences -- 358
Non-taxable portion of capital gains -- (99)
Other (12) 31
---------------------------------------------------------------------------
Future tax expense (reduction) 4,455 (2,845)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(b) Future Income Taxes

Future income taxes consist of the following temporary differences:

---------------------------------------------------------------------------
($000s) 2008 2007
---------------------------------------------------------------------------
Net book value in excess of tax basis of oil and
natural gas properties (22,071) (16,950)
Asset retirement obligations 1,740 1,146
Non-capital losses 1,060 1,041
Share issue costs 919 1,588
Commodity derivative -- 185
Other 240 273
---------------------------------------------------------------------------
Future income tax liability (18,112) (12,717)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At December 31, 2008, TUSK had cumulative income tax deductions of approximately $249,000,000 available to reduce future taxable income, including non-capital losses of approximately $3,800,000 that expire in the years 2015 and 2026.

7. 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 $6,960,000, based on a total undiscounted amount of cash flows required to settle its asset retirement obligations of approximately $19,203,000. A credit-adjusted risk-free rate of 6% to 7% and an inflation rate of 2.5% were used to calculate the fair value of the asset retirement obligation. These obligations are expected to be paid between 2009 and 2037 and will be funded from general corporate resources at the time of abandonment. The following table reconciles TUSK's asset retirement obligations:



---------------------------------------------------------------------------
($000s) 2008 2007
---------------------------------------------------------------------------
Balance, beginning of year 4,166 2,930
Liabilities acquired 1,439 331
Liabilities incurred 1,586 650
Liabilities disposed (633) --
Obligations settled (353) (451)
Changes in prior period estimates/revisions 338 422
Accretion expense 417 284
---------------------------------------------------------------------------
Balance, end of year 6,960 4,166
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. Share Capital

(a) Authorized

An unlimited number of common shares and preferred shares without nominal
or par value.

(b) Issued and Outstanding
---------------------------------------------------------------------------
Number of
Shares Amount
---------------------------------------------------------------------------
($000s)
Balance, January 1, 2007 88,879,722 227,078
Issued of flow-through common shares 1,562,500 2,500
Share issue costs -- (20)
Income tax effect of share issue costs -- 6
Income tax effect of flow-through shares -- (5,810)
---------------------------------------------------------------------------
Balance, December 31, 2007 90,442,222 223,754
Exercise of stock options 1,666 3
Income tax effect of flow-through shares -- (688)
Transfer from Contributed Surplus
on exercise of options -- 1
---------------------------------------------------------------------------
Balance, December 31, 2008 90,443,888 223,070
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(c) Share Capital Offering

In December 2007, TUSK completed a non-brokered private placement of 1,562,500 flow-through common shares at a price of $1.60 per share for proceeds of $2,500,000. Pursuant to the terms of the offering, TUSK committed to incur $2,500,000 on expenditures that qualify as Canadian Exploration Expense ("CEE") for income tax purposes and to renounce the CEE to the flow-through share subscribers effective December 31, 2007. The related estimated future tax cost of $688,000 was recorded on the date of renouncement, which occurred during the first quarter of 2008. All of the qualifying expenditures were incurred in 2008.

(d) Per Share Amounts

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



---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
Weighted average basic 90,442,873 88,931,092
Dilutive stock options 75,495 --
---------------------------------------------------------------------------
Weighted average diluted 90,518,368 88,931,092
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(e) Stock Options

TUSK has a stock option plan (the "Plan") whereby options to purchase common shares may be granted to directors, officers, employees and certain other persons providing consulting services to TUSK on an ongoing basis. All options granted will be in compliance with the requirements of any stock exchange on which TUSK's shares are listed. Options granted under the Plan will have an exercise price that is not less than the price allowed by regulatory authorities, will be non-transferable and will be exercisable for a period not to exceed 10 years. The maximum number of common shares reserved for issuance under the Plan, from time to time, cannot exceed 10% of the common shares then outstanding. The number of common shares reserved for issuance to any individual director, officer or employee cannot exceed 5% of the issued and outstanding common shares. Options may be exercised no later than 90 days following cessation of the optionee's position with TUSK, provided that the cessation was by reason other than voluntary resignation, termination for cause or death. If the cessation of the optionee's position with TUSK was by reason of voluntary termination or termination for cause, the options will expire and terminate on the effective date or notice of termination of employment. If the cessation of the optionee's position with TUSK is by reason of death, the option may be exercised up to 12 months after such death, subject to the expiry date of the options. The vesting of outstanding options will accelerate in certain circumstances, including a reorganization of the Corporation or a transaction involving a change of control of the Corporation.

The following table sets forth a reconciliation of TUSK's stock option plan for the years ended December 31, 2008 and 2007:



---------------------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
---------------------------------------------------------------------------
($/share)
Outstanding, January 1, 2007 8,866,000 3.20
Granted 2,177,500 1.63
Forfeited (2,561,667) 3.15
---------------------------------------------------------------------------
Outstanding, December 31, 2007 8,481,833 2.81
Granted 1,702,000 2.53
Forfeited (491,667) 2.97
Cancelled (870,000) 4.30
Exercised (1,666) 1.50
---------------------------------------------------------------------------
Outstanding, December 31, 2008 8,820,500 2.60
---------------------------------------------------------------------------
Exercisable, December 31, 2008 5,542,643 2.82
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The following table summarizes stock options outstanding at December
31, 2008:

---------------------------------------------------------------------------
Weighted
Weighted Number of Average Number of
Average Options Remaining Options
Exercise Price Outstanding Contractual Life Exercisable
---------------------------------------------------------------------------
($/share) (years)
1.50 - 2.00 2,045,000 3.6 714,981
2.01 - 3.00 5,555,500 3.0 3,894,333
3.01 - 4.00 650,000 2.6 433,329
4.01 - 4.95 570,000 1.9 500,000
---------------------------------------------------------------------------
8,820,500 3.0 5,542,643
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(f) Stock-Based Compensation

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.



---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
Fair value of options granted ($/share) 1.19 0.68
Risk-free interest rate (%) 2.9 3.4
Expected life (years) 4.0 4.0
Expected volatility (%) 58 54
Expected dividend yield (%) -- --
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(g) Contributed Surplus

The following table reconciles TUSK's contributed surplus:

---------------------------------------------------------------------------
($000s) 2008 2007
---------------------------------------------------------------------------
Balance, beginning of year 9,962 6,284
Stock-based compensation expensed 2,204 2,346
Stock-based compensation capitalized 616 1,332
Transfer to share capital on exercise of options (1) --
---------------------------------------------------------------------------
Balance, end of year 12,781 9,962
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(h) Normal Course Issuer Bid

In April 2008, The Toronto Stock Exchange (the "TSX") accepted TUSK's Notice of Intention to Make a Normal Course Issuer Bid (the "Bid"). Under the Bid, TUSK will have the right to purchase for cancellation up to a maximum of 4,522,111 of its common shares, representing approximately 5% of its outstanding common shares. The shares will be acquired through the facilities of the TSX. The Bid will remain in effect until the earlier of April 3, 2009 or until TUSK has purchased the maximum number of shares permitted under the Bid. A daily maximum of 74,534 common shares may be purchased for cancellation pursuant to Normal Course Issuer Bid rules. As at December 31, 2008, no shares were purchased pursuant to the Bid.

9. Financial Risk Management

Overview

TUSK has exposure to the following risks from its use of financial instruments:

- Credit risk

- Liquidity risk

- Market risk

This note presents information about TUSK's exposure to each of the above risks, the Corporation's objectives, policies and processes for measuring and managing risk, and the Corporation's management of capital. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Corporation's risk management framework. The Board has implemented and monitors compliance with risk management policies. TUSK's risk management policies are established to identify and analyze the risks faced by the Corporation, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Corporation's activities.

Credit Risk

Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from TUSK's receivables from joint interest partners and petroleum and natural gas marketers. As at December 31, 2008, TUSK's receivables consisted of $8,296,000 from petroleum and natural gas marketers, $3,189,000 in drilling incentive credits from the British Columbia government, $2,584,000 from joint interest partners, $1,200,000 in refundable Crown royalties from the British Columbia government and $874,000 of other receivables.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. TUSK's policy to mitigate credit risk associated with these balances is to establish marketing relationships with large purchasers. The Corporation historically has not experienced any collection issues with its petroleum and natural gas marketers. Joint interest receivables are typically collected within one to three months of the joint interest bill being issued to the partner. TUSK attempts to mitigate the risk from joint interest receivables by obtaining partner approval of significant capital expenditures prior to expenditure. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors, such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with joint interest partners as disagreements occasionally arise that increase the potential for non-collection. TUSK does not typically obtain collateral from petroleum and natural gas marketers or joint interest partners; however, TUSK has the ability to withhold production from joint interest partners in the event of non-payment.

The carrying amount of accounts receivable represents the maximum credit exposure. TUSK reviews its outstanding receivables on an ongoing basis and records a provision for doubtful accounts or writes off receivables that it considers uncollectible. For 2008 and 2007, accounts receivable written off were minor. At December 31, 2008, TUSK had an allowance for doubtful accounts of $100,000. TUSK did not have an allowance for doubtful accounts at December 31, 2007.

TUSK considers its receivables to be aged as follows:



---------------------------------------------------------------------------
($000s) December 31, 2008 December 31, 2007
---------------------------------------------------------------------------
Not passed due (up to 90 days) 15,320 11,910
Past due (91 - 120 days) 8 816
Past due (121 - 365 days) 794 1,343
Past due (over 1 year) 21 435
---------------------------------------------------------------------------
16,143 14,504
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Liquidity Risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they are due. TUSK's approach to managing liquidity is to ensure, to the extent possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking harm to the Corporation's reputation. TUSK prepares annual capital expenditure budgets, which are regularly monitored and updated as necessary. Further, the Corporation utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate the capital expenditure program, TUSK has a revolving reserve based credit facility, as outlined in note 5, that is reviewed at least annually by the lender.

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices and interest rates, will affect the Corporation's net earnings or the value of its financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns.

The Corporation may utilize both financial derivatives and physical delivery sales contracts to manage market risks. All such transactions are conducted in accordance with the risk management policy that has been approved by the Board of Directors.

(a) Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. Although substantially all of TUSK's oil and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for oil and natural gas are denominated in United States dollars, and therefore, are impacted by changes in the exchange rate between the Canadian and U.S. dollar. The Corporation had no forward exchange rate contracts in place as at or during the year ended December 31, 2008.

(b) Commodity Price Risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by numerous factors, including supply and demand, the relationship between the Canadian and U.S. dollar as noted above, the political climate and other market forces.

The Corporation will attempt to mitigate commodity price risk through the use of various financial derivatives, including put option contracts. A put option contract is an arrangement that ensures a minimum level of revenue with no limitation on upward commodity price movements. The cost of the contract is paid in full at the outset of the arrangement; therefore, TUSK is not exposed to any ongoing market risk related to the put option contract.

During 2008 and 2007, TUSK was a party to two put option contracts that are summarized in the table below. These financial instruments are not used for trading or speculative purposes.



---------------------------------------------------------------------------
Purchase Type of Quantity Contract Contract
Date Term Contract Contracted Price Cost
---------------------------------------------------------------------------
(bbls/d) (US$/bbl) (CAD$000s)
Sep. 2007 Jan.-Dec. 2008 Oil - WTI 1,000 65.00 floor 781
May 2008 Jan.-Dec. 2009 Oil - WTI 1,000 90.00 floor 1,249
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In September 2007, TUSK purchased a US$65.00/bbl WTI put on 1,000 bbls/d of oil for the period January 1, 2008 to December 31, 2008 at a cost of $781,000. The contract was valued at $109,000 at December 31, 2007, resulting in an unrealized loss of $672,000 in 2007.

During 2008, the contract acquired in September 2007 generated proceeds of $1,122,000 and expired under its own terms at the close of business on December 31, 2008. This resulted in a realized gain of $1,013,000 in 2008 for this contract.

In May 2008, TUSK paid $1,249,000 to purchase a US$90.00/bbl WTI put option on 1,000 bbls/d of oil for the period January 1, 2009 to December 31, 2009. TUSK held this contract until December 31, 2008 when it was monetized for proceeds of $17,008,000. The monetization resulted in a realized gain on commodity derivatives of $15,759,000 in 2008.

At December 31, 2008, TUSK did not hold any put option contracts.

(c) Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. TUSK is exposed to interest rate fluctuations on its bank debt, which bears a floating rate of interest. For the year ended December 31, 2008, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the period would have been approximately $400,000 higher due to lower interest expense. An equal and opposite impact would have occurred to net earnings had interest rates been 1% higher. The Corporation had no interest rate swap or financial contracts in place 2008.

Capital Management

TUSK's policy is to maintain a strong capital base to sustain the future development of the business and to maintain investor, creditor and market confidence.

TUSK manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets. The Corporation considers its capital structure to include shareholders' equity, bank debt and working capital. In order to maintain or adjust the capital structure, the Corporation may, from time to time, issue shares and adjust its capital spending to manage current and projected debt levels.

TUSK monitors capital based on the ratio of net debt to annualized funds from operations. This ratio is calculated as net debt, defined as outstanding bank debt plus or minus working capital, divided by funds from operations before changes in non-cash working capital for the most recent calendar quarter, annualized (multiplied by four) and future expected cash flows on a running 12-month basis. Funds from operations is calculated based on cash provided by operating activities before changes in non-cash working capital and expenditures on asset retirement obligations. The Corporation's strategy is to maintain a ratio of net debt to annualized funds from operations of 1.5 to 1 or lower. This ratio may increase at certain times as a result of acquisitions and/or large capital projects. In order to facilitate the management of this ratio, the Corporation prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors, including current and forecast prices, successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors.

At December 31, 2008, based on fourth quarter results exclusive of commodity derivatives transactions, TUSK's ratio of net debt to annualized cash flow was 1.0 to 1, which is within the range established by the Corporation. TUSK anticipates that the ratio will remain within the target range through 2009.

The Corporation's share capital is not subject to external restrictions; however, the bank debt facility is based on oil and natural gas reserves (see note 5). The Corporation has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.

There were no changes in TUSK's approach to capital management during 2008.

Fair Value of Financial Instruments

TUSK's financial instruments as at December 31, 2008 and 2007 include accounts receivable, derivative contracts, accounts payable and accrued liabilities, and bank debt. The fair value of accounts receivable and accounts payable and accrued liabilities approximate their carrying amounts due to their short terms to maturity. The fair value of derivative contracts is determined using the mark-to-market method, which assumes the contract is closed out in the open market at the balance sheet date. Bank debt is payable on demand and bears interest at a floating market rate, and accordingly, the fair market value approximates the carrying value.

10. Cash Flow Information

Changes in non-cash working capital were as follows:



---------------------------------------------------------------------------
($000s) 2008 2007
---------------------------------------------------------------------------
Changes in non-cash working capital balances:
Accounts receivable (1,639) 3,972
Prepaid expenses and deposits (81) 164
Commodity derivatives 109 (781)
Accounts payable and accrued liabilities (7,946) (7,830)
---------------------------------------------------------------------------
(9,557) (4,475)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Changes in non-cash working capital related to:
Operating activities (6,578) (5,389)
Financing activities (10) 20
Investing activities (2,969) 894
---------------------------------------------------------------------------
(9,557) (4,475)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


11. Commitments and Contingencies

(a) Drilling Rigs

TUSK is a party to a contract regarding the utilization of a drilling rig. Under the terms of the contract, TUSK is obligated to use the rig for a minimum number of days in each contract year. The contract anniversary is February 5 and the contract ends on February 5, 2010. TUSK is obligated to utilize the rig for a minimum of 30 days for the period January 1, 2009 to February 5, 2009 and 165 days for the year ended February 5, 2010. If the utilization falls short of the minimum requirement, TUSK will be required to pay the lesser of (i) a standby fee of $6,800 per day for each day of the shortfall, or (ii) the difference between the rig rate paid by a third party and the full contract rate for the unutilized days.

During the fourth quarter of 2007, TUSK entered into an agreement to reduce its commitment regarding the use of two drilling rigs. The agreement, which included the payment of $2,000,000, allowed TUSK to terminate its obligation with respect to one rig and reduce the obligation regarding the second rig (see above).

(b) Office Space

TUSK has a lease commitment for office space that expires on January 31, 2013. Currently, approximately 50% of this office space is sublet to a third party. The annual lease payments due pursuant to this obligation are as follows: 2009 - $880,000; 2010 to 2012 - $884,000; and 2013 - $73,000. The annual sublet receipts due to TUSK pursuant to this office space are approximately $438,000 per year for each of 2009 to 2012 and $36,000 for 2013.

(c) Dispute

TUSK is involved in litigation matters arising out of the ordinary course and conduct of its business. Claims made against the Corporation total approximately $2,400,000 and the Corporation's counterclaims exceed $6,000,000. The likelihood of liabilities resulting from these matters is not determinable and related potential losses, if any, cannot be reasonably estimated. No accrual of loss has been made to the financial statements.

12. Related Party Transactions

An officer of TUSK is a director and significant shareholder of a private company that provides project management and systems support services to TUSK. In 2008, this company was paid $319,000 (2007 - $241,000). Of this amount, $184,000 was charged to general and administrative expenses, $99,000 to operating expenses and $36,000 to property and equipment. December 31, 2008 accounts payable and accrued liabilities includes $28,000 regarding these services.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. In 2008, royalties of $308,000 were paid to this company (2007 - $217,000). All of the payments were charged to royalties. December 31, 2008 accounts payable and accrued liabilities includes $16,000 regarding these royalties.

The above-mentioned transactions were provided at commercial rates and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

13. Subsequent Event

On February 10, 2009, TUSK announced that it had entered into an arrangement agreement (the "Arrangement Agreement") with Polar Star Canadian Oil and Gas, Inc. ("Polar Star"), a venture indirectly owned by the Teachers Insurance and Annuity Association of America. Under the terms of the Arrangement Agreement, Polar Star will acquire all of the issued and outstanding common shares of TUSK for cash consideration of $2.15 per TUSK share, by way of a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement").

TUSK's Board of Directors unanimously approved the Arrangement and recommended that shareholders vote in favour of the transaction. All of TUSK directors and executive officers, who collectively own approximately 7.7% of TUSK's outstanding shares, entered into lock-up agreements with Polar Star in respect of the proposed transaction and have committed to vote their TUSK shares in favour of the Arrangement.

The Arrangement is subject to a number of conditions including, but not limited to, the approval of: (a) at least 66 2/3% of the votes cast in person or by proxy at a special meeting of TUSK's shareholders, and (b) a majority of the votes cast by minority shareholders, as well as court and regulatory approvals (including pursuant to the Investment Canada Act) and other customary conditions. An information circular regarding the Arrangement was mailed to TUSK's shareholders in early March for a meeting to be held on March 31, 2009. The Arrangement is expected to be completed shortly thereafter.

Under the Arrangement Agreement, TUSK agreed that it would not solicit or initiate any discussions concerning the pursuit of any other acquisition proposals. TUSK has also agreed to pay a termination fee of $7,700,000 to Polar Star in certain circumstances. In addition, Polar Star has the right to match any competing proposal for TUSK in the event such a proposal is made. TUSK and Polar Star have each further agreed to pay the other party an expense reimbursement fee equal to the out-of-pocket expenses incurred in connection with the Arrangement Agreement and the transactions contemplated thereby, up to a maximum of $2,000,000, if the Arrangement Agreement is terminated by such party under certain circumstances.



Industry Abbreviations

---------------------------------------------------------------------------
Crude Oil and Natural Gas Liquids Natural Gas
---------------------------------------------------------------------------
bbl One barrel equaling 34.972 mcf Thousand cubic feet
Imperial gallons or
42 U.S. gallons
bbls/d Barrels per day mcf/d Thousand cubic feet per day
mbbls Thousand barrels mmcf Million cubic feet
mmbbls Million barrels bcf Billion cubic feet
boe Barrels of oil equivalent mcf Thousand cubic feet
boe/d Barrels of oil equivalent mmbtu Million British thermal units
per day
mboe Thousand barrels of GJ/d Gigajoules per day
oil equivalent
NGLs Natural gas liquids,
consisting of any one or
more of propane,
butane and condensate
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Equivalencies

---------------------------------------------------------------------------
To Convert From To Multiply By
---------------------------------------------------------------------------
Thousand cubic feet Cubic metres 28.328
Cubic metres Cubic feet 35.301
Barrels Cubic metres 0.159
Cubic metres Barrels 6.292
Feet Metres 0.305
Metres Feet 3.281
Miles Kilometres 1.609
Kilometres Miles 0.621
Acres Hectares 0.405
Hectares Acres 2.471
Gigajoules Thousand cubic feet 0.948
Thousand cubic feet Gigajoules 1.055
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In addition to the forward-looking statements contained in the Management's Discussion and Analysis, this news release contains forward-looking statements with respect to TUSK and its operations and relating to matters that are not historical facts including, but not limited to, the completion of the acquisition of all of the issued and outstanding shares of TUSK by Polar Star Canadian Oil and Gas, Inc. by way of a plan of arrangement (the "Arrangement") under the Business Corporations Act (Alberta), risks associated with the oil and gas industry in general (e.g. operational risks in development, exploration and production, delays or changes in plans with respect to exploration or development projects or capital expenditures and health, safety and environmental risks), commodity prices, financing sources and exchange rate fluctuations, and may contain reserves, resources and cash flow estimates, drilling plans, debt levels, production expectations, finding and development objectives, opinions, forecasts, projections, guidance and other statements that are not statements of fact. Although the Corporation believes that the expectations reflected in such forward-looking statements are reasonable, it can provide no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this release include, but are not limited to statements related to the timing and completion of the Arrangement, the various reasons upon which the Arrangement may not close including, on account of conditions of closing not being fulfilled or waived, a competing bid or the Arrangement not being approved by shareholders, the risk that the Arrangement Agreement may be terminated in circumstances that require the payment of the termination fee or the expense reimbursement fee, the lack of precision around estimates of reserves and resources, performance of the Corporation's oil and gas properties, volatility in market prices for oil and gas, estimations of future costs, geological, technical, drilling and processing problems, changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry, and such other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by the Corporation, including in the Management's Discussion and Analysis and the Annual Information Form.
The reader is cautioned that the foregoing list of important factors is not exhaustive. These statements speak only as of the date of this news release and the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, other than as required by law. The forward-looking statements contained in this release are expressly qualified by this cautionary statement.

Contact Information

  • TUSK Energy Corporation
    John Rooney
    CEO
    (403) 264-8875
    or
    TUSK Energy Corporation
    Michael Makinson
    CFO
    (403) 264-8875
    Website: www.tusk-energy.com