ZARGON ENERGY TRUST
TSX : ZAR.UN

ZARGON ENERGY TRUST
Zargon Oil & Gas Ltd.
TSX : ZAR

Zargon Oil & Gas Ltd.

March 10, 2009 17:01 ET

Zargon Energy Trust Announces 2008 Fourth Quarter and Full Year Results

CALGARY, ALBERTA--(Marketwire - March 10, 2009) - Zargon Energy Trust (TSX:ZAR.UN) (TSX:ZOG.B) ("Zargon" or the "Trust") today announced its operating and financial results for the fourth quarter and year ended December 31, 2008.

Highlights from the fourth quarter and year ended December 31, 2008:

- Fourth quarter 2008 revenue of $41.25 million and funds flow from operating activities of $20.40 million were 38 percent and 31 percent, respectively, lower than the preceding 2008 third quarter levels. Net earnings for the fourth quarter were $28.19 million, a 30 percent decrease from the third quarter of 2008. Revenue for the full year increased by 48 percent to $229.49 million, funds flow from operating activities increased 34 percent to $106.91 million and net earnings increased 178 percent to $68.29 million.

- Production volumes in 2008 increased eight percent to 9,252 barrels of oil equivalent per day compared to 2007. Fourth quarter production of 29.86 million cubic feet per day of natural gas and 4,434 barrels per day of oil and liquids provided Zargon quarterly production volumes of 9,410 barrels of oil equivalent per day, one percent higher than third quarter volumes.

- Net capital expenditures in 2008 were $119.73 million and included $66.04 million for corporate and net property acquisitions and $53.35 million for exploration and development programs. For the year, Zargon drilled 35.9 net wells with a 92 percent success ratio, yielding 17.9 net oil wells, 14.5 net natural gas wells, a 0.5 water injection well and 3.0 net dry holes.

- Cash distributions in 2008 of $2.16 per trust unit were declared and represented 42 percent of the year's $5.18 per diluted trust unit of funds flow from operating activities. Including the effect of the exchangeable shares, which do not receive distributions, the 2008 cash distributions totalled $39.09 million or 37 percent of the year's $106.91 million of funds flow from operating activities. Fourth quarter cash distributions totalled $0.54 per trust unit and represented 56 percent of the 2008 fourth quarter fund flows from operating activities of $0.97 per diluted trust unit.

- Year end debt net of working capital (excluding unrealized risk management assets/liabilities and future income taxes) of $87.71 million is slightly less than 1.1 times annualized fourth quarter funds flow from operating activities. As at December 31, 2008, Zargon had more than $90 million of unused committed credit facilities in addition to more than $36 million of before tax unrealized risk management gains derived from our hedging programs.



Three Months Ended Year Ended
TRUST HIGHLIGHTS December 31, December 31,
Percent Percent
2008 2007 Change 2008 2007 Change
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(unaudited) (unaudited)
FINANCIAL
Income and Investments
($ millions)
Petroleum and
natural gas revenue 41.25 41.13 - 229.49 155.51 48
Funds flow from
operating activities 20.40 20.10 1 106.91 79.84 34
Cash flows from
operating activities 24.84 14.23 75 110.12 76.30 44
Cash distributions 9.96 9.21 8 39.09 36.70 7
Net earnings 28.19 2.20 1,181 68.29 24.55 178
Net capital
expenditures 16.37 18.35 (11) 119.73 66.67 80

Per Unit, Diluted
Funds flow from
operating activities
($/unit) 0.97 1.02 (5) 5.18 4.08 27
Cash flows from
operating activities
($/unit) 1.18 0.72 64 5.34 3.90 37
Net earnings
($/unit) 1.53 0.13 1,077 3.80 1.45 162

Cash Distributions
($/trust unit) 0.54 0.54 - 2.16 2.16 -

Balance Sheet at
Year End ($ millions)
Property and
equipment, net 386.75 313.95 23
Bank debt 77.58 56.87 36
Unitholders' equity 222.54 161.48 38

Total Units
Outstanding at Year
End (millions) 21.15 19.76 7

OPERATING
Average Daily
Production
Oil and liquids
(bbl/d) 4,434 3,666 21 4,306 3,675 17
Natural gas (mmcf/d) 29.86 30.74 (3) 29.68 29.31 1
Equivalent (boe/d) 9,410 8,790 7 9,252 8,560 8
Equivalent per
million trust units
(boe/d) 446 445 - 446 436 2

Average Selling
Price (before the
impact of
financial risk
management
contracts)
Oil and liquids ($/bbl) 53.87 71.29 (24) 89.65 64.71 39
Natural gas ($/mcf) 6.99 5.95 17 8.12 6.40 27

Wells Drilled, Net 13.9 9.0 54 35.9 46.9 (23)

Undeveloped Land at
Year End
(thousand net acres) 419 362 16

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Notes:
Throughout this press release, the calculation of barrels of oil equivalent
("boe") is based on the conversion ratio that six thousand cubic feet of
natural gas is equivalent to one barrel of oil.

For net capital expenditures, amounts include capital expenditures acquired
for cash, equity issuances, acquisition costs and net debt assumed on
corporate acquisitions.

Funds flow from operating activities is a non-GAAP term that represents net
earnings and asset retirement expenditures except for non-cash items.
Total units outstanding include trust units plus exchangeable shares
outstanding at period end. The exchangeable shares are converted at the
exchange ratio at the end of the period.

Average daily production per million trust units is calculated using the
weighted average number of units outstanding during the period, plus the
weighted average number of exchangeable shares outstanding for the period
converted at the average exchange ratio for the period.


2008 HIGHLIGHTS

Increased crude oil and natural gas prices and increased production volumes enabled Zargon to achieve record revenues and funds flow from operating activities in 2008. During 2008, Zargon's 48 percent gain in revenues to $229.49 million came primarily from an eight percent increase in production volumes, a 39 percent gain in oil and liquid prices and a 27 percent increase in natural gas prices. Zargon's 2008 funds flow from operating activities showed a 34 percent increase to $106.91 million. Net earnings for the year were $68.29 million, a 178 percent increase from 2007. The majority of the changes in the net earnings resulted from the above mentioned changes and from the large increases in the non-cash unrealized risk management gains.

Net capital expenditures for 2008 totalled $119.73 million with $53.35 million allocated to field-related activities, $6.19 million to net property acquisitions, $59.85 million to corporate acquisitions and $0.34 million to administrative assets. Compared to the prior year, the 2008 capital program showed an 80 percent increase in overall net expenditures and a 16 percent decrease in field-related expenditures. For the year ended December 31, 2008, Zargon spent $8.14 million to maintain an undeveloped land base of 419 thousand net acres (2007 - 362 thousand net acres); shot or acquired seismic at a cost of $4.44 million; drilled, equipped and tied-in wells for $40.77 million and concluded $66.04 million of corporate and net property acquisitions. Cash distributions to unitholders totalled $39.09 million during the 2008 year (2007 - $36.70 million). All of these activities were funded by the year's funds flow plus an increase in debt net of working capital (excluding the unrealized risk management assets/liabilities and future income taxes) of $23.95 million.



Financial Highlights
($ millions, except for per unit amounts) 2008 2007 2006
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Petroleum and natural gas revenue 229.49 155.51 154.04
Funds flow from operating activities (1) 106.91 79.84 82.89
Per unit - diluted 5.18 4.08 4.31
Cash flows from operating activities 110.12 76.30 83.74
Per unit - diluted 5.34 3.90 4.35
Net earnings 68.29 24.55 44.50
Per unit - diluted 3.80 1.45 2.68
Total assets 447.60 340.19 310.57
Net capital expenditures (2) 119.73 66.67 63.37
Bank debt 77.58 56.87 30.04
Cash distributions 39.09 36.70 35.90
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(1) Throughout this report, funds flow from operating activities is now
calculated inclusive of asset retirement expenditures. All prior period
calculations have been restated to reflect this change.

(2) Amounts include capital expenditures for corporate and property
acquisitions acquired for cash consideration, equity issuances, net debt
assumed and are also inclusive of transaction costs.


Cash Distributions

Cash distributions to unitholders are at the discretion of the Board of Directors and can fluctuate depending on funds flow from operating activities. The Trust's capital program is financed from available funds flow, equity issuances and additional draw downs on the bank facilities, if required. The key drivers of Zargon's funds flow are commodity prices and production volumes. Since the Trust's production is relatively evenly weighted between natural gas (2008 - 53 percent) and oil and liquids (2008 - 47 percent), both commodity prices have a significant effect on its funds flow. In the event that oil and natural gas prices and/or production volumes are higher than anticipated and a cash surplus develops, the surplus may be used to increase distributions, reduce debt, and/or increase the capital program. In the event that oil and natural gas prices and/or production volumes are lower than expected, the Trust may decrease distributions, increase debt and/or decrease the capital program. Zargon regularly reviews its monthly distribution policy in the context of the current commodity price environment, production levels and capital program requirements. Distributions remained constant throughout 2008 at $0.18 per trust unit and have been maintained at this level since November 2005. Cash distributions to unitholders declared for 2008 totalled $39.09 million. For a further discussion, see the "Liquidity and Capital Resources" section of this report.

For Canadian income tax purposes, the 2008 cash distributions are 100 percent taxable income to unitholders.

DETAILED FINANCIAL ANALYSIS

Petroleum and Natural Gas Revenue

Zargon derives its revenue from the production and sale of petroleum (oil, natural gas liquids) and natural gas. Petroleum and natural gas revenue, exclusive of the impact of financial risk management contracts, increased 48 percent to $229.49 million in 2008 from $155.51 million in 2007 primarily due to increased commodity prices throughout the 2008 spring and summer months and an increase in overall production. Compared to the prior year, the relative weighting of production revenue between petroleum and natural gas in 2008 was reallocated due to commodity pricing with 62 percent of the revenues coming from the sale of oil and liquids (56 percent in 2007) and 38 percent coming from the sale of natural gas (44 percent in 2007). Production volumes on a barrel of oil equivalent basis in 2008 increased eight percent to 9,252 barrels of oil equivalent per day from the prior year amount of 8,560 barrels of oil equivalent per day. Specifically, in 2008, natural gas production increased one percent and oil and liquids production increased 17 percent over 2007 levels. Production volume increases in oil and liquids resulted primarily from the 2008 first quarter corporate acquisition of Rival Energy Ltd. ("Rival") more than offsetting natural declines in the Alberta Plains and Williston Basin core areas. Natural gas production increases resulted from the 2008 second quarter additions of volumes related to the corporate acquisitions of Newpact Energy Corp. ("Newpact"), Rival and the ongoing development program in the West Central Alberta core area, offset by natural production declines. The average field price of oil and liquids received by Zargon rose to $89.65 per barrel in 2008, up 39 percent from $64.71 per barrel in 2007. The average Zargon realized field price of natural gas was $8.12 per thousand cubic feet in 2008, a 27 percent increase from $6.40 per thousand cubic feet in 2007.



Pricing
Average for the year 2008 2007 2006
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Natural Gas:
NYMEX average daily spot price ($US/mmbtu) 8.88 6.98 6.75
AECO average daily spot price ($Cdn/mmbtu) 8.16 6.45 6.54
Zargon realized field price before the impact of
financial risk management contracts ($Cdn/mcf) 8.12 6.40 6.82
Zargon realized field price before the impact of
physical and financial risk management
contracts ($Cdn/mcf) 8.06 6.26 6.43
Zargon realized field price after the impact of
physical and financial risk management
contracts ($Cdn/mcf) 8.10 6.82 7.21
Zargon realized natural gas field price
differential/(premium) (1) 0.04 0.05 (0.28)
Crude Oil:
WTI ($US/bbl) 99.65 72.31 66.22
Edmonton par price ($Cdn/bbl) 102.16 76.35 72.77
Zargon realized field price before the impact of
financial risk management contracts ($Cdn/bbl) 89.65 64.71 61.25
Zargon realized field price after the impact of
financial risk management contracts ($Cdn/bbl) 79.82 64.54 58.05
Zargon realized oil field price differential (2) 12.51 11.64 11.52
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(1) Calculated as Zargon's realized field price before the impact of
financial risk management contracts ($Cdn/mcf) as compared to AECO
average daily spot price ($Cdn/mmbtu). Note: premiums may occur as a
result of the realization of fixed price physical contracts and the
impact of Zargon receiving AECO monthly index pricing for a portion of
its natural gas production.

(2) Calculated as Zargon's realized field price before the impact of
financial risk management contracts ($Cdn/bbl) as compared to Edmonton
par price ($Cdn/bbl).


Petroleum (Oil and Natural Gas Liquids) Pricing

Zargon's field oil and natural gas liquids prices are adjusted at the point of sale for transportation charges and oil quality differentials from an Edmonton light sweet crude price that varies with world commodity prices. In 2008, Zargon's average oil and liquids field price, exclusive of the impact of financial risk management contracts, increased 39 percent to $89.65 per barrel from $64.71 per barrel in 2007 and $61.25 per barrel in 2006. The field price differential for Zargon's average blended 30 degree API crude stream was $12.51 per barrel less than the 2008 Edmonton reference crude price, which compares to the 2007 differential of $11.64 per barrel and the 2006 differential of $11.52 per barrel. As the quality and weight of Zargon's crude stream has remained relatively consistent for several years, the movements in Zargon's price differential are derived from the North American refinery supply and demand factors for light and medium crudes. Oil and natural gas liquids transportation expenses are included in production expenses and are defined by the point of legal transfer of the product.

Natural Gas Pricing

The average field natural gas price, exclusive of the impact of financial risk management contracts, for 2008 increased to $8.12 per thousand cubic feet, which is 27 percent higher than the 2007 average of $6.40 per thousand cubic feet and 19 percent higher than the 2006 average of $6.82 per thousand cubic feet. Historically, Zargon's field prices have shown a small discount to the benchmark AECO average daily price due to a lower heating content for Zargon's natural gas and due to legacy aggregator and other contracts, which are based partially on monthly index prices that tend to lag the AECO average daily index price in upward or downward trending markets. The 2008 field price differential for Zargon's natural gas before the impact of physical and financial risk management contracts was a discount of $0.10 per thousand cubic feet. In 2008, the various fixed price physical contracts, which are treated as part of natural gas production revenue and natural gas pricing, created a gain of $0.48 million (2007 - $1.14 million), equivalent to an increase of $0.04 per thousand cubic feet (2007 - $0.11 per thousand cubic feet).

Approximately 18 percent of Zargon's 2008 natural gas production (2007 - 21 percent) was sold under aggregator contracts pursuant to long term contracts. The remainder of Zargon's natural gas production was sold by spot sale contracts and Alberta index prices were received.

Risk Management Activities

Zargon's commodity price risk management policy, which is approved by the Board of Directors, allows the use of forward sales and costless collars for a targeted range of 20 to 30 percent of oil and natural gas working interest production volumes in order to partially offset the effects of large commodity price fluctuations. Because our risk management strategy is protective in nature and is designed to guard the Trust against extreme effects on funds flow from sudden falls in prices and revenues, upward price spikes tend to produce overall losses.

For 2008, the total realized risk management loss was $15.72 million; compared to a gain of $4.26 million in 2007 and a loss of $0.57 million in 2006. Of the 2008 loss, $0.23 million (equivalent to a decrease of $0.02 per thousand cubic feet) is related to a loss from natural gas financial risk management transactions and $15.49 million (equivalent to a decrease of $9.83 per barrel) related to losses from oil financial risk management transactions. Oil swaps and collars are settled against the NYMEX WTI pricing index, whereas natural gas swaps, collars and puts are settled against the AECO monthly pricing index. In 2008, NYMEX WTI crude oil prices rose throughout the first half of the year, peaking in July before falling in the second half of the year. AECO natural gas prices followed a similar trend, reaching its yearly high in late June and early July before trending downward. These mid-year upward spikes in both crude oil prices and natural gas prices resulted in overall year-to-date realized risk management losses for 2008.

Zargon's management considers financial risk management contracts to be effective on an economic basis but has decided not to designate these contracts as hedges for accounting purposes, and accordingly, for these contracts, an unrealized gain or loss is recorded based on the fair value (mark-to-market) of the contracts at year end. The 2008 net unrealized risk management gain totalled $44.38 million which compares to a $16.80 million net unrealized risk management loss in 2007 (2006 - $9.55 million gain). Specifically, the 2008 net unrealized risk management gains resulted from financial oil contract gains ($43.38 million), financial natural gas contract gains ($1.44 million) and were offset by financial foreign exchange contract losses ($0.44 million). These unrealized risk management gains or losses are generated by the change over the reporting period in the mark-to-market valuation of Zargon's future financial contracts. Gains or losses on fixed price physical contracts are included in petroleum and natural gas revenue when settled in the statements of earnings and comprehensive income and no mark-to-market valuation is recorded on these contracts.

During the 2008 fourth quarter, Zargon has entered into US/Cdn. foreign currency financial risk management contracts for calendar 2009 and the first half of 2010. The purpose of these financial risk management contracts is to secure future Canadian dollar cash flows on a portion of Zargon's future oil production. The 2009 foreign currency contracts have effectively converted 900 barrels per day of Zargon's 2009 US dollar oil swap contracts from USD$99.73 per barrel of oil to Cdn$120.79 per barrel of oil. Additionally, for the first half of 2010, Zargon's US dollar oil swap contracts (300 barrels per day) have been converted from USD$132.98 per barrel of oil to Cdn$155.79 per barrel of oil. Foreign exchanges options are settled against the Bank of Canada monthly average Daily Noon Rate for United States dollars converted to Canadian dollars.

Royalties

Royalties include payments made to the Crown, freehold owners and third parties. Reported royalties also include the cost of the Saskatchewan Resource Surcharge ("SRC") and the cost of North Dakota state taxes. During 2008, total royalties were $46.64 million, an increase of 42 percent from $32.75 million in 2007. Royalties as a percentage of gross revenue were 20.3 percent in 2008 compared to 21.1 percent in 2007 and 21.7 percent in 2006. On a commodity basis, natural gas royalties averaged 19.7 percent in 2008, a slight decrease from the previous year's average of 20.9 percent, resulting primarily from prior years freehold mineral tax adjustments. Oil royalties averaged 20.7 percent, down slightly from the prior year 2007 rate of 21.2 percent. The decrease in oil royalties is primarily related to initial low royalty rate incentives on certain new oil production wells in Saskatchewan.

During 2008, 58 percent (2007 - 59 percent) of the total royalties were paid to provincial and state governments, with the remainder paid to freehold owners and other third parties. The SRC charges were $1.63 million in 2008, up slightly from $1.10 million in the prior year and from $1.01 million in 2006, reflecting the trend in Saskatchewan oil revenues. North Dakota state taxes increased to $2.47 million in 2008 from $2.01 million in the prior year primarily due to increased sales revenue (higher oil prices received) despite decreased oil production and sales for the US operations. Commencing in 2009, the oil and natural gas royalty structure will change on Alberta related production volumes.

Production Expenses

Zargon's production expenses increased 22 percent to $39.91 million in 2008 from $32.62 million in 2007. On a per unit of production basis, production expenses increased 13 percent to $11.79 per barrel of oil equivalent from $10.44 in 2007 ($8.59 in 2006).

Natural gas production expenses in 2008 rose 18 percent to $1.55 per thousand cubic feet from $1.31 per thousand cubic feet in 2007. The primary reasons for the increase are due to increased third-party gas gathering charges, increased third-party gas processing fees and increased water disposal and water hauling costs. These increased costs reflect the impact of additional natural gas volumes being processed through non-operated third party natural gas gathering and processing facilities.

Oil production expenses also rose in 2008 to $14.63 per barrel, an increase of five percent from $13.89 per barrel in 2007. The primary reasons for the increase are due to increased workovers, and increased repairs and annual maintenance programs that are reflective of a continuing industry-wide trend to higher oil property operating costs, particularly in the Williston Basin.

In 2008, 2007 and 2006, Zargon's costs increased substantially due, in general, to the effect of industry-wide production cost inflation pressures, which may now be somewhat abating due to lower industry activity levels in response to recent oil and natural gas price declines. In particular, operating costs averaged $12.61 per barrel of oil equivalent in the fourth quarter of 2008 up from $12.10 per barrel of oil equivalent in the 2008 third quarter. For 2009, Zargon anticipates that production costs can be stabilized in the $12.50 to $13.00 per barrel of oil equivalent range as general cost inflation pressures subside as a result of the current economic slowdown.

Operating Netbacks

The average oil and liquids price received, after realized risk management losses, in 2008 of $79.82 per barrel was 24 percent higher than the $64.54 per barrel received in 2007, and the average natural gas price received, after realized risk management gains/losses, in 2008 of $8.10 per thousand cubic feet was 19 percent above the $6.82 per thousand cubic feet received in 2007. Operating netbacks increased commensurately. Oil and liquids netbacks rose 26 percent to $46.60 per barrel from $36.93 per barrel in 2007. Natural gas netbacks increased 19 percent to $4.95 per thousand cubic feet from $4.17 per thousand cubic feet in 2007. On a barrel of oil equivalent basis, 2008 operating netbacks increased 24 percent to $37.56 from $30.21 in 2007.



Operating Netbacks
2008 2007
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Oil and Natural Oil and Natural
Liquids Gas Liquids Gas
($/bbl) ($/mcf) ($/bbl) ($/mcf)
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Production revenue 89.65 8.12 64.71 6.40
Realized risk management gain/(loss) (9.83) (0.02) (0.17) 0.42
Royalties (18.59) (1.60) (13.72) (1.34)
Production costs (14.63) (1.55) (13.89) (1.31)
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Operating netbacks 46.60 4.95 36.93 4.17
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General and Administrative Expenses

Gross general and administrative costs increased 18 percent in 2008 to $13.80 million from $11.69 million in 2007. On a per unit of production basis, net general and administrative costs increased 17 percent to $3.08 per barrel of oil equivalent compared to $2.63 per barrel of oil equivalent in 2007 and $2.27 in 2006. Trending upwards from 2006 and 2007, the 2008 increased general and administrative costs on a per unit of production basis were primarily attributed to the expansion of Zargon's technical staff and consultants and additional office lease costs.



General and Administrative Expenses
($ millions, except as noted) 2008 2007 2006
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Gross general and administrative expenses 13.80 11.69 10.25
Overhead recoveries (3.35) (3.48) (3.28)
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Net general and administrative expenses 10.45 8.21 6.97
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Net expense after recoveries ($/boe) 3.08 2.63 2.27
Number of office employees at year end 53 45 43
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Interest and Financing Charges

Zargon's borrowings are through its syndicated bank credit facilities. Interest and financing charges were $4.91 million compared to $3.07 million in 2007 and $1.53 million in 2006. An increase in the average debt level is the primary reason for the increase in interest and financing charges. Zargon's effective interest and financing charge rate was 5.2 percent on an average outstanding bank debt of $95.07 million in 2008, compared to 6.2 percent on an average bank debt of $49.86 million in 2007 and 6.4 percent on an average bank debt of $23.84 million in 2006. At year end 2008, Zargon's bank debt, net of working capital (excluding unrealized risk management assets/liabilities and future income taxes), totalled $87.71 million, up 38 percent from $63.76 million at December 31, 2007, primarily due to net debt acquired and cash consideration paid related to the corporate acquisitions of Rival Energy Ltd. and Newpact Energy Corp. For more information on Zargon's credit facilities, see the Bank Debt section of this report.

Current Income Taxes

Current income taxes for 2008 were $4.05 million compared to $2.14 million in 2007. Of the total, $3.08 million is due to current taxes incurred in the United States compared to $2.04 million in 2007. On a year-over-year comparison, current income taxes have increased due to increased 2008 taxable income in the United States related to higher revenue attributed to higher oil prices in the first half of 2008. Oil prices declined in the latter half of 2008, and provided that they remain at these depressed levels a lower level of United States current income taxes is anticipated in 2009. The remaining current tax amounts relate to withholding taxes on US dividends declared from Zargon's US subsidiary to its parent corporation and Canadian provincial capital taxes, which totalled $0.97 million in 2008 compared to $0.10 million in 2007.

Tax pools as at December 31, 2008 were approximately $188 million, which represents an increase from the comparable $148 million of tax pools available to Zargon at the end of 2007, primarily due to the tax pools acquired in the Rival and Newpact acquisitions. The Trust is a taxable entity under the Income Tax Act (Canada) and is currently only taxable (until 2011) on the income that is not distributed or declared distributable to unitholders. For Canadian income tax purposes, 2008 cash distributions are 100 percent taxable income to unitholders.

Trust Netbacks

Higher oil and natural gas prices and increased production volumes in 2008 resulted in relatively strong revenue netbacks and operating net backs. On a barrel of oil equivalent basis, revenue of $67.77 in 2008 was 36 percent higher than the prior year and operating netbacks, as well as funds flow netbacks both increased 24 percent over the prior year to $37.56 and $31.57 per barrel of oil equivalent, respectively.



Trust Netbacks
($/boe) 2008 2007 2006
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Petroleum and natural gas revenue 67.77 49.77 50.11
Realized risk management gain/(loss) (4.65) 1.36 (0.18)
Royalties (13.77) (10.48) (10.88)
Production costs (11.79) (10.44) (8.59)
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Operating netbacks 37.56 30.21 30.46
General and administrative (3.08) (2.63) (2.27)
Interest and financing charges (1.45) (0.98) (0.50)
Asset retirement expenditures (0.26) (0.36) (0.20)
Current income taxes (1.20) (0.69) (0.52)
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Funds flow netbacks (1) 31.57 25.55 26.97
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(1) Throughout this report, funds flow from operating activities is now
calculated inclusive of asset retirement expenditures. All prior period
calculations have been restated to reflect this change.


Funds Flow from Operating Activities

In 2008, production volume increases of eight percent on a barrel of oil equivalent basis and increased revenue of 36 percent per barrel of oil equivalent more than offset the increase in cash operating costs during the year to produce a 34 percent increase in funds flow from operating activities to $106.91 million, compared to $79.84 million in 2007 and $82.89 million in 2006. The corresponding funds flow per diluted unit was $5.18 in 2008, a 27 percent increase from $4.08 in 2007, and a 20 percent increase from $4.31 in 2006. The diluted per unit statistics reflect a six percent increase in the weighted average outstanding units to 20.63 million in 2008 from 19.55 million in 2007. The 2007 weighted average outstanding units were also two percent higher than the 2006 amount of 19.24 million.

The following table summarizes the variances in funds flow from operating activities between 2007 and 2008. It demonstrates that the variance (increase in funds flow from operating activities) is caused mainly by an increase in overall realized commodity prices and increased production volumes, both of which were partially offset by increased operating expenses, increased royalties and increased realized risk management losses.



$ Per Per Unit
Diluted Percent
$ Million Trust Unit Variance
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Funds flow from operating activities - 2007 79.84 4.08 -
Price variance 56.83 2.76 68
Volume variance 17.16 0.84 21
Realized risk management losses (19.98) (0.97) (24)
Royalties (13.90) (0.67) (16)
Expenses:
Production (7.29) (0.35) (9)
General and administrative (2.24) (0.11) (3)
Interest and financing charges (1.84) (0.09) (2)
Asset retirement expenditures 0.24 0.01 -
Current taxes (1.91) (0.09) (2)
Weighted average trust units - diluted - (0.23) (6)
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Funds flow from operating activities - 2008 106.91 5.18 27
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Depletion and Depreciation

In 2008, Zargon's depletion and depreciation provision increased 23 percent to $59.64 million, compared to $48.41 million in 2007 and $41.14 million in 2006. The higher charges reflect an increase of eight percent in production volumes and a 14 percent increase in the charge on a per barrel of oil equivalent basis. The primary reasons for the year-over-year expense increase on a per barrel of oil equivalent basis are due to the prior year's (2007) increased finding, development and acquisition costs, the financial impact of the conversion of exchangeable shares pursuant to the application of EIC-151 "Exchangeable Securities Issued by Subsidiaries of Income Trusts", increased production volumes and the capital asset additions resulting from the recent Rival and Newpact corporate acquisitions.

Depletion and depreciation charges calculated on a unit of production method are based on total proved reserves with a conversion of six thousand cubic feet of natural gas being equivalent to one barrel of oil. The 2008 depletion calculation includes $10.03 million of future capital expenditures to develop the Trust's reserves, but excludes $24.73 million of unproven properties relating to undeveloped land.

Zargon's depletion and depreciation, on a barrel of oil equivalent basis, increased 14 percent in 2008 to $17.61 from $15.49 in 2007 and $13.38 in 2006.

Accretion of Asset Retirement Obligations

For the year ended December 31, 2008, the non-cash accretion expense for asset retirement obligations was $2.18 million compared to $1.41 million in 2007 and $1.24 million in 2006. The year-over-year increases are due to changes in the estimated future liability for asset retirement obligations as a result of wells added through Zargon's drilling program inclusive of wells acquired/disposed of in the year and wells acquired with the recent Rival and Newpact corporate acquisitions. The significant assumptions used in this calculation are a credit adjusted risk-free rate of 7.5 percent, an inflation rate of two percent and the payments to settle the retirement obligations occurring over the next 40 years with the majority of the costs being incurred after 2018. The estimated net present value of the total asset retirement obligation is $28.59 million as at December 31, 2008, based on a total future liability of $142.42 million.

Unit-Based Compensation

Unit-based compensation was $1.19 million in 2008, $0.52 million lower than the $1.71 million expense in 2007. The Trust generally grants unit rights on a quarterly basis. The decrease in the current year expense is as a result of increased forfeitures of unit rights, a decrease in volume of grants and a general decline in the valuation of new quarterly grants. Zargon will continue to use fair value methodologies for future unit rights grants. These non-cash expenses will be recurring charges in future years if Zargon continues to grant employees and directors trust unit rights.

The trust unit rights incentive plan allows the Trust to issue rights to acquire trust units to directors, officers, employees and other service providers. The Trust is authorized to issue up to 2.36 million unit rights; however, the number of trust units reserved for issuance upon exercise of the rights shall not exceed 10 percent of the aggregate number of issued and outstanding trust units of the Trust. The Plan allows for the holder of rights to either exercise the right based on the original grant price or on a modified price as calculated per the Plan of Arrangement. Unit right grant prices are set at the market closing price for the trust units on the date prior to the unit rights being issued. Trust unit rights granted under the Plan generally vest over a three-year period and expire approximately five years from the grant date.

Unrealized Foreign Exchange

Unrealized foreign exchange gains of $1.96 million in 2008 compare to gains of $0.23 million for 2007. Gains and losses result from translations of Zargon's US subsidiaries into Canadian dollars at rates as determined under the temporal method of converting foreign subsidiaries as required by Canadian GAAP. Relative to recent years, the extreme volatility in the US/Cdn dollar has created large non-cash translation gains as recorded in Zargon's income statement.

Future Income Taxes

The provision for the future tax expense for 2008 was $12.75 million when compared to a future tax recovery of $15.47 million in 2007 and a recovery of $2.82 million in 2006. Effectively, Zargon's future tax obligations are reduced as distributions are made from the Trust and, consequently, it is anticipated that Zargon's effective tax rate will continue to be low through to 2011. The 2007 prior year includes a second quarter recovery and a fourth quarter recovery relating to reductions in future federal and provincial income tax rates substantively enacted during the respective 2007 quarters. Additionally, the increase in future tax expense, when compared to the 2007 prior year, is significantly impacted by the increase in earnings before income taxes for the period as a result of previously mentioned items such as increased unrealized risk management gains.

On October 31, 2006, the Federal Government announced tax proposals pertaining to taxation of distributions paid by trusts and the personal tax treatment of trust distributions. Currently, the Trust does not pay tax on distributions as tax is paid by the unitholders. On June 12, 2007, the Federal Government enacted these tax proposals, which would have resulted in taxation of distributions at the Trust level at a rate of 31.5 percent effective January 1, 2011. Subsequent 2007 fourth quarter legislation has lowered this tax rate to 29.5 percent in 2011 and 28.0 percent beyond 2011 to assimilate recent corporate tax rate changes. Prior to June 2007, the Trust estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes to have a nil effective tax rate. Under the legislation, the Trust now estimates the effective tax rate on the post 2010 reversal of these temporary differences to be approximately 28.0 percent. Until 2011, Zargon's future tax obligations are reduced as distributions are made from the Trust and, consequently, it is anticipated that Zargon's effective tax rate will continue to be low until that time.

Based on its assets and liabilities as at June 30, 2007, the quarter in which the tax proposals were substantively enacted, the Trust had estimated the amount of its temporary differences, which were previously not subject to tax, and had estimated the periods in which these differences will reverse. At June 30, 2007, the Trust estimated that $7.05 million net tax deductible temporary differences will reverse after January 1, 2011, which resulted in a reduction of the future tax liability by $2.22 million in the 2007 second quarter. The taxable temporary differences relate principally to the remaining tax pools attributed to the oil and gas properties being greater than their net book value. The year-over-year increase in the future tax expense reflects these prior year legislated adjustments.

On December 15, 2006, the Canadian Federal Department of Finance stated its intention to allow conversions of specified investment flow through ("SIFT") income trusts to a corporation without any adverse tax consequences to investors. On July 14, 2008, the Department of Finance released the draft legislative proposals to allow the conversion of these SIFT trusts into corporations. Zargon is currently reviewing and assessing this recent legislation, and is considering its potential impact on the organization while Zargon's management develops its strategic plan beyond 2010, which is the effective date of the new SIFT tax rules.

On February 26, 2008, the Federal Government, in its Federal Budget, announced changes to the SIFT tax rules. The provincial component of the SIFT tax will be based on the provincial rates where the SIFT has a permanent establishment rather than using a 13.0 percent flat rate. As the tax rate change has not been substantively enacted, no future income tax rate benefit has been recorded in the financial statements.

Non-Controlling Interest - Exchangeable Shares

According to the January 19, 2005 CICA pronouncement, EIC-151 "Exchangeable Securities Issued by Subsidiaries of Income Trusts", Zargon Energy Trust must reflect the exchangeable securities issued by its subsidiary, Zargon Oil & Gas Ltd. as either a non-controlling interest or debt on the consolidated balance sheet unless they meet certain criteria. The exchangeable shares issued by Zargon Oil & Gas Ltd., a corporate subsidiary of the Trust, are publicly traded and have an expiry term, which could be extended at the option of the Board of Directors. Therefore, these securities are considered, by EIC-151, to be transferable to third parties and to have an indefinite life. EIC-151 states that if these criteria are met, the exchangeable shares should be reflected as a non-controlling interest. Prior to 2005, these exchangeable shares were reflected as a component of unitholders' equity.

Accordingly, the Trust has increased its unitholders' equity and non-controlling interest for 2008 by $12.52 million (2007 - $6.64 million) on the Trust's consolidated balance sheets. Consolidated net earnings for 2008 have been reduced for net earnings attributable to the non-controlling interest by $10.10 million (2007 - $3.81 million). In accordance with EIC-151, and given the circumstances in Zargon's case, each redemption is accounted for as a step-purchase, which for 2008; resulted in an additional increase in property and equipment of $3.39 million (2007 - $8.82 million) and an increase in the future income tax liability of $0.97 million (2007 - $5.99 million). Funds flow from operating activities were not impacted by this change.

The cumulative impact to date of the application of EIC-151 has been to increase gross property and equipment by $55.15 million, (for depletion impact see note 5 in the audited consolidated financial statements), unitholders' equity and non-controlling interest by $65.87 million, future income tax liability by $18.19 million and an allocation of net earnings to exchangeable shareholders of $28.91 million.

Net Earnings

Zargon's 2008 net earnings were $68.29 million, a 178 percent increase from $24.55 million in 2007. The 2006 net earnings were $44.50 million. The net earnings track the funds flow from operating activities for the respective periods modified by asset retirement expenditures and non-cash charges, which in 2008; includes depletion and depreciation, unrealized risk management gains/losses, future income tax expenses/recoveries, unit-based compensation and non-controlling interest. The primary reasons for the increase in net earnings when comparing the year ended 2008 to the 2007 prior year, are the previously mentioned items such as the increase in petroleum and natural gas revenue ($73.98 million) and the change in unrealized risk management gains ($61.17 million), offset by realized risk management losses ($19.98 million), increased depletion and depreciation expenses ($11.23 million), production costs ($7.29 million), royalties ($13.90 million), the related items of future tax expenses ($28.22 million) and increased non-controlling interest ($6.30 million). On a per diluted unit basis, 2008 net earnings were $3.80 compared to $1.45 in 2007 and $2.68 in 2006.

The 2008 net earnings were 64 percent of funds flow from operating activities, primarily reflecting the increase in unrealized risk management gains and the increase in future income tax expenses. The 2007 net earnings represented 31 percent of funds flow from operating activities compared to 54 percent of funds flow from operating activities in 2006.

Capital Expenditures

Total net capital expenditures (including net property acquisitions, cash and equity consideration and net debt assumed for corporate acquisitions) in 2008 of $119.73 million increased 80 percent from $66.67 million in 2007, reflecting the $59.85 million attributed to the corporate acquisitions of Rival and Newpact and $6.19 million attributed to other property acquisitions. Conversely, in 2008, Zargon completed a drilling program of 39 gross (35.9 net) wells compared to 53 gross (46.9 net) wells in 2007 and, as a result, drilling and completion expenditures decreased commensurately by 17 percent to $27.66 million. Of the total 2008 net capital expenditures, $19.68 million were expended on West Central Alberta, $26.03 million on Alberta Plains, $13.83 million on Williston Basin properties, $0.34 million was incurred corporately on leasehold improvements and administrative assets and $59.85 million was attributed to the corporate acquisitions.



Capital Expenditures
($ millions) 2008 2007 2006
----------------------------------------------------------------------------
Undeveloped land 8.14 7.49 5.25
Geological and geophysical (seismic) 4.44 4.41 3.34
Drilling and completion of wells 27.66 33.15 41.80
Well equipment and facilities 13.11 18.49 15.94
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Exploration and development 53.35 63.54 66.33
----------------------------------------------------------------------------
Property acquisitions (1) 6.41 3.04 1.40
Property dispositions (0.22) (1.18) (4.54)
----------------------------------------------------------------------------
Net property acquisitions/(dispositions) (1) 6.19 1.86 (3.14)
----------------------------------------------------------------------------
Corporate acquisitions assigned to property
and equipment (2) 59.85 - -
----------------------------------------------------------------------------
Total net capital expenditures excluding
administrative assets (1) (2) 119.39 65.40 63.19
Administrative assets 0.34 1.27 0.18
----------------------------------------------------------------------------
Total net capital expenditures (1) (2) 119.73 66.67 63.37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Amounts include capital expenditures acquired for cash and equity
issuances.

(2) Amounts include capital expenditures acquired for cash, equity
issuances, acquisition costs and net debt assumed on corporate
acquisitions.


CORPORATE ACQUISITIONS

On January 23, 2008, a subsidiary of the Trust acquired all of the issued and outstanding common shares of Rival Energy Ltd. ("Rival"), a public oil and gas company, for consideration of $30.06 million. Consideration consisted of $16.40 million cash, the issuance of 573,300 Zargon trust units valued at $23.32 per unit and transaction costs of $0.29 million. Net debt of approximately $17.77 million was assumed as part of this acquisition.

The results of operations for Rival have been included in the consolidated financial statements since January 23, 2008.

On May 16, 2008, a subsidiary of the Trust acquired all of the issued and outstanding common shares of Newpact Energy Corp. ("Newpact"), a private oil and gas company, for consideration of $9.54 million. Consideration consisted of the issuance of 425,940 Zargon trust units valued at $22.04 per unit and transaction costs of $0.15 million. Net debt of approximately $2.49 million was assumed as part of this acquisition.

The results of operations for Newpact have been included in the consolidated financial statements since May 16, 2008.

SUBSEQUENT EVENTS

On February 27, 2009, Zargon entered into an Arrangement Agreement pursuant to which Zargon has agreed to make an offer to acquire all the issued and outstanding common shares of Masters Energy Inc. ("Masters") and assume approximately $13.20 million of net debt (including transaction costs) subject to a number of conditions. Pursuant to the Acquisition Agreement, Masters shareholders will have the option of receiving 0.120 Zargon trust units, up to a maximum of 1.49 million trust units, or $1.83 for each Masters common share, up to an aggregate maximum of $5.70 million in cash.

LIQUIDITY AND CAPITAL RESOURCES

In 2008, the summation of the funds outflows pertaining to the net capital expenditure program ($119.73 million) and the cash distributions to unitholders ($39.09 million) exceeded the summation of the funds inflows coming from the funds flow from operating activities ($106.91 million) plus the issuance of trust units ($25.08 million) by $26.83 million.

Zargon's financing philosophy and the three sources of funding are as follows:

- Internally generated funds flow from operating activities provides the basic level of funding for the Trust's annual capital expenditures program and for distributions to unitholders.

- Debt may be utilized for acquisitions or to expand capital programs when it is deemed appropriate. As at December 31, 2008 the Trust had $180 million in syndicated committed credit facilities of which $101.90 million or 57 percent of these facilities are unutilized.

- New equity, if available and if on favourable terms, can be utilized for acquisitions or to expand capital programs.

The volatility of oil and natural gas prices, the uncertainty relating to Alberta royalties and Canadian income trust tax rules and recent global economic concerns have partially restricted the oil and natural gas industry's ability to attract new capital from debt and equity markets. Zargon's historically conservative strategy of maintaining a relatively low cash distribution to funds flow ratio and conservative debt levels should enable Zargon to maintain its capital and distribution programs during periods of limited access to debt and equity capital.



Cash Distributions Analysis
($ millions) 2008 2007 2006
----------------------------------------------------------------------------
Cash flows from operating activities 110.12 76.30 83.74
Net earnings 68.29 24.55 44.50
Actual cash distributions paid or payable
relating to the period (39.09) (36.70) (35.90)
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Excess of cash flows from operating activities
over cash distributions paid 71.03 39.60 47.84
Excess (shortfall) of net earnings over cash
distributions paid 29.20 (12.15) 8.60
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Management monitors the Trust's distribution policy with respect to forecasted net cash flows, debt levels and capital expenditures. Zargon's cash distributions are discretionary to the extent that these distributions do not cause a breach of the financial covenants under Zargon's credit facilities and to the extent the Trust (non-consolidated) is not taxable. As a crude oil and natural gas Trust, Zargon's reserve base is depleted with production and therefore, Zargon, relies on ongoing exploration, development and acquisition activities to replace reserves and to offset production declines. The success of these exploration, development and acquisition capital programs, along with commodity price fluctuations are the main factors influencing the sustainability of the Trust's distributions.

For the year ended December 31, 2008, cash flows from operating activities (after changes in non-cash working capital) of $110.12 million exceeded cash distributions of $39.09 million. This was consistent with the year ended December 31, 2007, in which cash flows from operating activities (after changes in non-cash working capital) of $76.30 million exceeded cash distributions of $36.70 million.

For the year ended December 31, 2008, cash distributions of $39.09 million were exceeded by net earnings of $68.29 million. Net earnings include significant non-cash charges ($39.52 million in 2008) that do not impact cash flows. For the year ended December 31, 2007, cash distributions of $36.70 million exceeded net earnings of $24.55 million. Net earnings also include fluctuations in future income taxes due to changes in tax rates and tax rules. In addition, other non-cash charges such as depletion and depreciation are not a good proxy for the cost of maintaining Zargon's productive capacity given the natural declines associated with crude oil and natural gas assets. In the instances where distributions exceed net earnings, a portion of the cash distribution paid to unitholders may represent an economic return of the unitholders' capital.

For the year ended December 31, 2008, cash distributions and net capital expenditures totalled $158.82 million ($134.91 million excluding the $23.91 million of equity issuances attributed to corporate and property acquisitions), which was $48.70 million higher than the cash flows from operating activities (after changes in non-cash working capital) of $110.12 million. For the year ended December 31, 2007, cash distributions and net capital expenditures totalled $103.37 million, which was $27.06 million higher than the cash flows from operating activities (after changes in non-cash working capital) of $76.30 million. Zargon relies on access to debt and capital markets to the extent cash distributions and net capital expenditures exceed cash flows from operating activities (after changes in non-cash working capital). Over the long term, Zargon expects to fund cash distributions and capital expenditures with its cash flows from operating activities; however, it will continue to fund acquisitions and growth through additional debt and equity issuances. In the crude oil and natural gas industry, because of the nature of reserve reporting, the natural reservoir declines and the risks involved in capital investment, it is not possible to distinguish between capital spent on maintaining productive capacity and capital spent on growth opportunities. Therefore, maintenance capital is not disclosed separately from development capital spending.

During the year ended December 31, 2008, Zargon has maintained a monthly distribution of $0.18 per trust unit.



Capital Sources and Uses
($ millions) 2008 2007 2006
----------------------------------------------------------------------------
Funds flow from operating activities (1) 106.91 79.84 82.89
Change in bank debt 20.71 26.83 19.70
Issuance of trust units 25.08 2.13 4.02
Cash distributions to unitholders (39.09) (36.70) (35.90)
Changes in working capital and other 6.12 (5.43) (7.34)
----------------------------------------------------------------------------
Total capital sources 119.73 66.67 63.37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Throughout the report, funds flow from operating activities is now
calculated inclusive of asset retirement expenditures. All prior period
calculations have been restated to reflect this change.


Funds Flow from Operating Activities

It is anticipated that Zargon's 2009 exploration and development capital budget and cash distributions to unitholders will be financed through the Trust's funds flow from operating activities and its credit facilities. Funds flow is partially influenced by factors that the Trust cannot control, such as commodity prices, the US/Canadian dollar exchange rates and interest rates. Zargon's 2009 estimated sensitivity to moderate fluctuations in these key business parameters is shown in the accompanying table.



Funds Flow Sensitivity Summary

Change in 2009 Funds Flow
($ millions) ($/unit)
----------------------------------------------------------------------------
Change of $1.00 US/bbl in the price of WTI oil 1.01 0.05
Change in oil production of 100 bbl/d 1.99 0.09
Change of $0.10 US/mcf in the price of NYMEX
natural gas 0.66 0.03
Change in natural gas production of one mmcf/d 1.79 0.08
Change of $0.01 in the $US/$Cdn exchange rate 1.42 0.07
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Bank Debt

On January 31, 2008, in conjunction with its corporate acquisition of Rival Energy Ltd., Zargon amended its syndicated committed credit facilities, which resulted in an increase in the available facilities and borrowing base to $150 million from the previous amount of $120 million. On July 28, 2008, Zargon further amended and renewed these syndicated committed credit facilities, which resulted in an increase in the available facilities and borrowing base to $180 million from the previous amount of $150 million. In conjunction with this amendment and renewal, Zargon has added another major Canadian based financial institution to its existing banking syndicate, bringing the syndicate to three major Canadian based institutions. These facilities consist of a $170 million tranche available to the Canadian borrower and a US $8 million tranche available to the US borrower. A $300 million demand debenture on the assets of the subsidiaries of the Trust has been provided as security for these facilities. The facilities are fully revolving for a 364-day period with the provision for an annual extension at the option of the lenders and upon notice from Zargon's management. The next renewal date is July 28, 2009. Should the facilities not be renewed, they convert to one year non-revolving term facilities at the end of the revolving 364-day period. Repayment would not be required until the end of the non-revolving term and, as such, these facilities have been classified as long term debt. These expanded facilities continue to be available for general corporate purposes and the potential acquisition of additional oil and natural gas properties such as those most recently acquired through the corporate acquisitions of Rival Energy Ltd. and Newpact Energy Corp.

At December 31, 2008, bank debt was $77.58 million, an increase of $20.71 million from the prior year end bank debt amount of $56.87 million. The increase in bank debt was primarily attributed to the corporate acquisitions of Rival Energy Ltd. and Newpact Energy Corp. Zargon reviews its compliance with its bank debt covenants on a quarterly basis and has no violations as at December 31, 2008.

Zargon's debt net of working capital (excluding unrealized risk management assets/liabilities and future income taxes) of $87.71 million at December 31, 2008 was equivalent to 82 percent of the 2008 funds flow from operating activities of $106.91 million. At December 31, 2007, the debt net of working capital (excluding unrealized risk management assets/liabilities and future income taxes) was $63.76 million, equivalent to 80 percent of the 2007 funds flow from operating activities of $79.84 million.

Equity

At March 9, 2009, Zargon had 18.591 million trust units and 1.850 million exchangeable shares outstanding. Assuming full conversion of exchangeable shares at the current effective exchange ratio of 1.46953, there would be 21.310 million trust units outstanding at this date. Pursuant to the trust unit rights incentive plan, there are currently an additional 1.520 million trust unit incentive rights issued and outstanding.

During 2008, 15.101 million Zargon trust units traded on The Toronto Stock Exchange with a high trading price of $26.84 per unit, a low of $12.30 per unit and a closing price of $17.44 per unit. The 2008 trading statistics show a 118 percent year-over-year increase in trading volume and a 24 percent decrease in the closing unit price. Zargon's market capitalization (including the market value of exchangeable shares) at year end 2008, was approximately $369 million, compared to approximately $456 million at the end of 2007.

Segmented Geographic Information

During 2008, approximately 88 percent (2007 - 86 percent) of Zargon's combined petroleum and natural gas revenue came from Western Canadian (Alberta, Saskatchewan and Manitoba) properties, with the remaining 12 percent (2007 - 14 percent) of revenues generated in the United States (North Dakota). This shift in weighting is due to additional revenues generated from the Rival and Newpact corporate acquisitions which both were comprised of only Canadian oil and natural gas properties.



SELECTED QUARTERLY INFORMATION


($ millions, except per
unit amounts) 2008 2007
----------------------------------------------------------------------------
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Petroleum and
natural gas
revenue 41.25 66.35 69.66 52.24 41.13 36.64 39.21 38.53
Funds flow from
operating
activities 20.40 29.75 32.02 24.75 20.10 17.38 20.56 21.80
Per unit - diluted 0.97 1.42 1.55 1.23 1.02 0.88 1.05 1.12
Cash flows from
operating
activities 24.84 33.58 36.44 15.27 14.23 24.64 19.09 18.35
Per unit - diluted 1.18 1.60 1.76 0.76 0.72 1.25 0.97 0.94
Net earnings 28.19 40.05 (4.51) 4.56 2.20 5.50 11.63 5.22
Per unit - diluted 1.53 2.20 (0.25) 0.26 0.13 0.32 0.68 0.31
Cash distributions 9.96 9.87 9.71 9.55 9.21 9.19 9.17 9.12
Per unit - diluted 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54
Net capital
expenditures 16.37 17.47 26.28 59.61 18.35 16.43 10.97 20.93
Total assets 447.60 426.63 418.88 396.90 340.19 327.54 324.96 324.31
Bank debt 77.58 74.95 85.45 92.18 56.87 44.10 46.74 37.68
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FOURTH QUARTER 2008 RESULTS

During the fourth quarter of 2008, Zargon's petroleum and natural gas revenues of $41.25 million were 38 percent lower than the previous quarter's revenues. Production for the 2008 fourth quarter of 9,410 barrels of oil equivalent per day was one percent higher than the 2008 third quarter's production of 9,340 barrels of oil equivalent per day. Compared to the previous quarter, oil production increased two percent to 4,434 barrels per day as Williston Basin and Alberta Plains (Taber area) wells were placed on production. Fourth quarter natural gas production remained even with the previous quarter at 29.86 million cubic feet per day as recently drilled West Central Alberta and Alberta Plains natural gas wells were tied-in. Average field prices received during the fourth quarter, before the impact of financial risk management contracts, were $53.87 per barrel for oil and liquids and $6.99 per thousand cubic feet for natural gas, a 51 percent and a 14 percent decrease, respectively, compared to the 2008 third quarter prices. Zargon's field price differential for its blended 30 degree API crude oil stream decreased to a $9.34 per barrel discount to the Edmonton reference crude oil price, a 28 percent decrease from Zargon's average differential of $12.99 per barrel for the first nine months of 2008.

Funds flow from operating activities was $20.40 million in the fourth quarter, a decrease of 31 percent or $9.35 million from the prior quarter. A comparative analysis of the primary factors that caused this quarter-over-quarter increase is as follows:

- Fourth quarter 2008 petroleum and natural gas revenues of $41.25 million were 38 percent lower than the 2008 third quarter revenues of $66.35 million. This revenue decrease was a result of the 38 percent decrease in average realized commodity prices.

- Realized risk management gains were $4.11 million in the fourth quarter of 2008, a $12.13 million change over the prior quarter's $8.02 million of realized risk management losses. The primary reason for the fourth quarter net gain related to gains ($1.08 million) being realized on financial natural gas risk management contracts and gains ($3.03 million) realized on financial oil risk management contracts. Oil and natural gas prices continued to weaken during the 2008 fourth quarter.

- Royalties for the fourth quarter were $8.43 million, a decrease of $5.03 million from the prior quarter. The average royalty rate for the quarter of 20.4 percent was consistent with the 20.3 percent rate from the 2008 third quarter.

- Production expenses were $10.92 million for the quarter, a $0.52 million or five percent increase from the third quarter of 2008. On a per barrel of oil equivalent basis, production expenses increased four percent to $12.61 in the fourth quarter of 2008 compared to $12.10 in the prior quarter. This quarterly incline in per unit costs was due in part to increased levels of workovers and seasonal repairs and maintenance costs.

- General and administrative expenses increased in the fourth quarter by $0.35 million over the third quarter of 2008. This is a 13 percent increase compared to the prior quarter and is primarily due to costs related to the expansion of Zargon's technical staff and consultants.

- Interest and financing charges in the fourth quarter were $0.97 million, a decrease of 23 percent or $0.28 million from the prior quarter. The average debt level for the fourth quarter decreased eight percent to $89.44 million compared to $97.02 million in the third quarter of 2008, resulting in decreased debt servicing charges. Zargon's interest borrowing rates also declined during the quarter as the Bank of Canada lowered rates.

- Current income taxes of $1.41 million were $0.71 million higher than the 2008 third quarter taxes. The increase was primarily due to increased withholding taxes on dividends declared from Zargon's US subsidiary to its parent corporation.

Asset retirement expenditures reflect the actual amounts incurred to abandon and reclaim unutilized non-producing wells. These asset retirement expenditures totalled $0.25 million in the 2008 fourth quarter and increased from the prior quarter amount of $0.15 million. The difference between accretion expenses (as reflected on the income statements) and asset retirement expenditures are a result of the timing differences between the estimating of future expenses and the actual incurrence of actual expenses during the period.

Net earnings for the quarter decreased $11.86 million to $28.19 million, a 30 percent decrease compared to the third quarter 2008 net earnings of $40.05 million. Net earnings track the funds flow from operating activities for the respective periods modified by asset retirement expenditures and non-cash charges, which included the following for the fourth quarter of 2008:

- Unit-based compensation expense increased by $0.03 million during the fourth quarter of 2008 to $0.35 million, a nine percent increase from the third quarter. The increase is a result of additional unit rights granted in the fourth quarter of 2008.

- Depletion and depreciation expense increased by $0.13 million to $15.43 million in the 2008 fourth quarter. The additional expense resulted from the increased production in the fourth quarter and the use of an updated depletion and depreciation rate of $17.82 per barrel of oil equivalent, compared to the prior quarter's $17.80 per barrel of oil equivalent charge.

- Unrealized risk management gains in the 2008 fourth quarter of $34.29 million were 26 percent lower than the third quarter gains of $46.58 million. These unrealized gains result from "marking-to-market" financial risk management contracts at each period end. During the fourth quarter, unrealized risk management gains resulted from weaker commodity pricing at the December 31, 2008 mark-to-market date when compared to the third quarter September 30, 2008 mark-to-market date. In particular, lower year end futures oil pricing resulted in unrealized risk management contract oil gains of $34.87 million slightly offset by natural gas contract losses of $0.14 million and foreign exchange contract losses of $0.44 million. The realization and the expiry of certain financial natural gas and oil contracts also affect the mark-to-market amounts.

- The provision for accretion of asset retirement obligations for the 2008 fourth quarter was $0.58 million, relatively even with the prior quarter expense. The small quarter-over-quarter increase is due to changes in the estimated future liability for asset retirement obligations as a result of wells added through Zargon's drilling program inclusive of wells acquired/disposed of in the quarter and changes resulting from revisions to the timing and the amounts of the original estimates of undiscounted cash flows.

- Unrealized foreign exchange gains of $1.92 million in the 2008 fourth quarter compare to gains of $0.03 million for the prior quarter. Gains and losses result from translations of Zargon's US subsidiaries into Canadian dollars at rates as determined under the temporal method of converting foreign subsidiaries as required by Canadian GAAP. Relative to the closing foreign exchange rates at September 30, 2008 the significant decrease in the value of the Canadian dollar relative to the US dollar has created large non-cash translation gains as recorded in Zargon's income statement for the fourth quarter.

- The future income tax expense was $8.24 million during the quarter compared to a future income tax expense of $14.27 million from the third quarter of 2008. The decreased future income tax expense in the 2008 fourth quarter was due to a significant decrease of earnings before taxes of $41.91 million compared to the third quarter earnings before taxes of $61.03 million. In summary, the fourth quarter decrease in net earnings was primarily a result of lower commodity prices creating lower operating results and also from lower non-cash unrealized risk management contract gains in the quarter.

- Reduction in earnings due to non-controlling interests pertaining to exchangeable shares decreased to $4.07 million in the 2008 fourth quarter from $6.02 million in the third quarter. This was due to a decrease in net earnings before non-controlling interest in the fourth quarter.

Net capital expenditures were $16.37 million during the fourth quarter of 2008, a six percent decrease from the prior quarter amount of $17.47 million (which included $1.14 million of property acquisitions). During the fourth quarter, Zargon completed an extensive field capital program focused on Alberta Plains core area Bellshill Lake oil exploitation wells, West Central Alberta natural gas exploration locations and Williston Basin core area horizontal oil exploitation wells. During the fourth quarter of 2008, 13.9 net wells were drilled compared to 7.7 net wells in the third quarter of 2008.

Cash distributions to unitholders declared for the 2008 fourth quarter totalled $9.96 million ($0.18 per trust unit per month).



CONSOLIDATED BALANCE SHEETS

As at December 31 ($ thousands) 2008 2007
----------------------------------------------------------------------------
ASSETS (note 6)

Current
Accounts receivable 20,725 21,668
Prepaid expenses and deposits 1,162 1,690
Unrealized risk management asset (note 12) 29,641 1,432
Future income taxes (note 13) - 2,919
----------------------------------------------------------------------------
51,528 27,709
Long term deposit 1,612 1,455
Unrealized risk management asset (note 12) 4,745 -
Goodwill 2,969 -
Property and equipment, net (note 5) 386,746 313,949
----------------------------------------------------------------------------
447,600 343,113
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES

Current
Accounts payable and accrued liabilities 28,687 27,172
Cash distributions payable (note 19) 3,326 3,074
Unrealized risk management liability (note 12) 724 11,127
Future income taxes (note 13) 8,553 -
----------------------------------------------------------------------------
41,290 41,373
Long term debt (note 6) 77,581 56,868
Unrealized risk management liability (note 12) 281 1,303
Asset retirement obligations (note 7) 28,592 21,184
Future income taxes (note 13) 49,704 40,177
----------------------------------------------------------------------------
197,448 160,905
----------------------------------------------------------------------------
Commitments and contingencies
(notes 6, 8, 12, 14 and 15)
NON-CONTROLLING INTEREST
Exchangeable shares (note 9) 27,610 20,730
----------------------------------------------------------------------------

UNITHOLDERS' EQUITY

Unitholders' capital (note 8) 120,650 89,688
Contributed surplus (note 8) 4,617 3,714
Accumulated earnings 257,104 188,819
Accumulated cash distributions (note 19) (159,829) (120,743)
----------------------------------------------------------------------------
222,542 161,478
----------------------------------------------------------------------------
447,600 343,113
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME AND ACCUMULATED
EARNINGS

For the years ended December 31
($ thousands, except per unit amounts) 2008 2007
----------------------------------------------------------------------------
REVENUE
Petroleum and natural gas revenue 229,494 155,512
Unrealized risk management gain/(loss) (note 12) 44,378 (16,796)
Realized risk management gain/(loss) (note 12) (15,722) 4,255
Royalties (46,644) (32,746)
----------------------------------------------------------------------------
211,506 110,225
----------------------------------------------------------------------------
EXPENSES
Production 39,913 32,620
General and administrative 10,447 8,209
Unit-based compensation (note 8) 1,185 1,705
Interest and financing charges (note 6) 4,911 3,071
Unrealized foreign exchange gain (1,958) (226)
Accretion of asset retirement obligations (note 7) 2,183 1,406
Depletion and depreciation 59,638 48,410
----------------------------------------------------------------------------
116,319 95,195
----------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 95,187 15,030
----------------------------------------------------------------------------
INCOME TAXES (note 13)
Current 4,051 2,143
Future (recovery) 12,751 (15,470)
----------------------------------------------------------------------------
16,802 (13,327)
----------------------------------------------------------------------------
EARNINGS BEFORE NON-CONTROLLING INTEREST 78,385 28,357
Non-controlling interest - exchangeable
shares (note 9) (10,100) (3,805)
----------------------------------------------------------------------------
NET EARNINGS AND COMPREHENSIVE INCOME 68,285 24,552
ACCUMULATED EARNINGS, BEGINNING OF YEAR 188,819 164,267
----------------------------------------------------------------------------
ACCUMULATED EARNINGS, END OF YEAR 257,104 188,819
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET EARNINGS PER UNIT (note 10)
Basic 3.79 1.45
Diluted 3.80 1.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ending December 31 ($ thousands) 2008 2007
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings for the year 68,285 24,552
Add (deduct) non-cash items:
Non-controlling interest - exchangeable shares 10,100 3,805
Unrealized risk management (gain)/loss (44,378) 16,796
Depletion and depreciation 59,638 48,410
Accretion of asset retirement obligations 2,183 1,406
Unit-based compensation 1,185 1,705
Unrealized foreign exchange gain (1,958) (226)
Future income taxes (recovery) 12,751 (15,470)
Asset retirement expenditures (897) (1,140)
----------------------------------------------------------------------------
106,909 79,838
Changes in non-cash operating working
capital (note 16) 3,215 (3,535)
----------------------------------------------------------------------------
110,124 76,303
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances of bank debt 3,799 26,831
Cash distributions to unitholders (39,086) (36,695)
Exercise of unit rights 1,166 2,127
Changes in non-cash financing working
capital (note 16) 252 52
----------------------------------------------------------------------------
(33,869) (7,685)
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (58,944) (67,850)
Proceeds on disposal of property and equipment 220 1,181
Corporate acquisitions (cash portion) (16,835) -
Long term deposit (157) -
Changes in non-cash investing working
capital (note 16) (539) (1,949)
----------------------------------------------------------------------------
(76,255) (68,618)
----------------------------------------------------------------------------
NET CHANGE IN CASH DURING THE YEAR AND CASH,
END OF YEAR - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See supplemental cash flow information contained in note 17.

See accompanying notes to the consolidated financial statements.



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 and 2007

All amounts are stated in Canadian dollars unless otherwise noted.

1. STRUCTURE OF THE TRUST

On July 15, 2004, Zargon Oil & Gas Ltd. (the "Company") was reorganized into Zargon Energy Trust (the "Trust" or "Zargon") as part of a Plan of Arrangement (the "Arrangement"). Shareholders of the Company received one trust unit or one exchangeable share for each common share held. The unitholders of the Trust are entitled to receive cash distributions paid by the Trust. Holders of exchangeable shares are not eligible to receive cash distributions paid, but rather, on each payment of a distribution, the number of trust units into which each exchangeable share is exchangeable is increased on a cumulative basis in respect of the distribution. The Trust is an unincorporated open-end investment trust established under the laws of the Province of Alberta and was created pursuant to a trust indenture ("Trust Indenture").

The Trust's principal business activity is the exploration for and development and production of petroleum and natural gas in Canada and the United States ("US").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. Accordingly, actual results could differ materially from those estimates. The consolidated financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the Trust's accounting policies summarized below.

The consolidated financial statements include the accounts of Zargon Energy Trust, all of its subsidiaries and a partnership. All subsidiaries and the partnership are directly or indirectly owned and their operations are fully reflected in the consolidated financial statements.

Revenue Recognition

Revenue associated with the sale of crude oil, natural gas, and natural gas liquids is recognized when title and risks pass to the purchaser, normally at the plant gate which is the pipeline delivery point for natural gas and at the contracted delivery point for crude oil.

Joint Operations

The majority of the petroleum and natural gas operations of the Trust are conducted jointly with others, and accordingly, these consolidated financial statements reflect only the proportionate interests of the Trust in such activities.

Property and Equipment

The Trust follows the full cost method of accounting for its oil and natural gas operations whereby all costs relating to the acquisition, exploration and development of oil and natural gas reserves are capitalized and accumulated in separate cost centres for Canada and the United States. Such costs include land acquisition costs, annual carrying charges of non-producing properties, geological and geophysical costs and costs of drilling and equipping wells.

Depletion and depreciation of petroleum, natural gas properties and equipment is computed using the unit of production method based on the estimated proved reserves of petroleum and natural gas before royalties determined by independent consultants. For purposes of this calculation, reserves are converted to common units on the basis that six thousand cubic feet of natural gas is equivalent to one barrel of oil. A portion of the cost of petroleum and natural gas rights relating to undeveloped properties is excluded from the depletion calculation. Twenty percent of the year end balance of these costs is added to the depletion base each year. Proceeds on the disposal of petroleum and natural gas properties are applied against capitalized costs, with gains or losses not ordinarily recognized, unless such a disposal would result in a change in the depletion rate of 20 percent or more.

Depreciation of office equipment is provided using the declining balance method at an annual rate of 20 percent. Leasehold improvements are depreciated over the term of the lease.

Impairment Test

The Trust applies an impairment test to petroleum, natural gas properties and equipment costs on a quarterly basis or more frequently as events or circumstances dictate. This impairment test is performed on both the Canadian and US cost centres. An impairment loss exists when the carrying amount of the Trust's petroleum, natural gas properties and equipment exceeds the estimated undiscounted future net cash flows associated with the Trust's proved reserves (before royalties). If an impairment loss is determined to exist, the costs carried on the consolidated balance sheets in excess of the fair value of the Trust's proved and probable reserves plus the cost of unproved properties are charged to earnings. Reserves are determined pursuant to evaluation by independent engineers as dictated by National Instrument 51-101.

Goodwill

The Trust must record goodwill relating to a corporate acquisition when the total purchase price exceeds the fair value for accounting purposes of the net identifiable assets and liabilities of the acquired company. The goodwill balance is assessed for impairment annually at year end or as events occur that could result in an indication of impairment. Impairment is recognized based on the fair value of the reporting entity (consolidated Trust) compared to the book value of the reporting entity. If the fair value of the consolidated Trust is less than the book value, impairment is measured by allocating the fair value of the consolidated Trust to the identifiable assets and liabilities as if the Trust had been acquired in a business combination for a purchase price equal to its fair value. The excess of the fair value of the consolidated Trust over the amounts assigned to the identifiable assets and liabilities is the fair value of the goodwill. Any excess of the book value of goodwill over this implied fair value of goodwill is the impairment amount. Impairment is charged to earnings in the period in which it occurs.

Goodwill is stated at cost less impairment and is not amortized.

At December 31, 2008 an impairment test was performed and it was determined that there was no impairment to the goodwill balance.

Asset Retirement Obligations

Zargon recognizes the fair value of an Asset Retirement Obligation ("ARO") in the period in which it is incurred when a reasonable estimate of the fair value can be made. The fair value of the estimated ARO is recorded as a liability, with a corresponding increase in the carrying amount of the related asset. The capitalized amount is depleted on the unit of production method based on proved reserves (before royalties). The liability amount is increased each reporting period due to the passage of time and the amount of accretion is expensed in the period. Actual costs incurred upon the settlement of the ARO are charged against the liability.

Financial Instruments

Effective January 1, 2007, the Trust adopted the accounting requirements for CICA Handbook Sections 3855 "Financial Instruments - Recognition and Measurement" and 3865 "Hedges". Adjustments to the consolidated financial statements for 2007 were made on a prospective basis.

Derivative financial instruments are utilized to reduce commodity price risk associated with the Trust's production of oil and natural gas. The base prices for the commodities are sometimes denominated in US dollars and the Trust may also use such financial instruments to reduce the related foreign currency risk. Financial instruments may also be used from time to time to reduce interest rate risk on outstanding debt. The Trust does not enter into financial instruments for trading or speculative purposes.

The Trust follows a policy of using risk management instruments such as fixed price swaps, forward sales, puts and costless collars. The objective is to partially offset or mitigate the wide price swings commonly encountered in oil and natural gas commodities and in so doing protect a minimum level of cash flow in periods of low commodity prices.

The Trust considers these financial risk management contracts to be effective on an economic basis but has decided not to designate these contracts as hedges for accounting purposes and, accordingly, for outstanding contracts not designated as hedges, an unrealized gain or loss is recorded based on the change in fair value ("mark-to-market") of the contracts at each reporting period end. These instruments have been recorded as unrealized risk management assets/liabilities in the consolidated balance sheets.

In the case of forward sales, the instrument can sometimes be satisfied by physical delivery. In the case of physical delivery, the payment/receipt is recorded as part of the normal revenue stream.

Foreign currency collar and swap agreements are utilized to manage the risk inherent in producing commodities whose price is based directly or indirectly on US dollars, using notional principal amounts equal to the projected monthly revenue from their sale. Payments or charges are calculated and paid according to the terms of the agreement, usually with monthly settlement.

The Trust had no interest rate financial instruments at December 31, 2008 and 2007.

Income Taxes

The Trust follows the liability method of tax allocation in accounting for income taxes. Under this method, the Trust records future income taxes for the effect of any differences between the accounting and income tax basis of an asset or liability using income tax rates expected to apply in the periods in which these temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in earnings in the period in which the change is substantively enacted.

Foreign Currency Translation

The Trust uses the temporal method of foreign currency translation whereby the monetary assets and liabilities recorded in a foreign currency are translated into Canadian dollars at year end exchange rates, and non-monetary assets and liabilities at the exchange rates prevailing when the assets were acquired or liability incurred. Revenues and expenses are translated at the average rate of exchange prevailing during the year. Gains and losses on translation are included in the consolidated statements of earnings and comprehensive income and accumulated earnings.

Trust Unit Rights and Unit-Based Compensation

Under the Trust's unit rights incentive plan (the "Plan"), rights to purchase trust units are allowed to be granted to directors, officers, employees and other service providers at current market prices. The Plan allows for the exercise price of rights to be reduced in future periods by an amount that distributions exceed a stated return on assets. Under the fair value method of accounting for unit-based compensation the cost of the option is charged to earnings with an offsetting amount recorded in contributed surplus, based on an estimate from the fair value model. Forfeiture of rights are recorded as a reduction in expense in the period in which they occur.

Per Unit Amounts

Per unit amounts are calculated using the weighted average number of trust units outstanding during the year. Diluted per unit amounts are calculated using the treasury stock method to determine the dilutive effect of unit-based compensation. The Trust follows the treasury stock method, which assumes that the proceeds received from "in-the-money" trust unit rights and unrecognized future unit-based compensation expense are used to repurchase units at the average market rate during the year. Diluted per unit amounts also include exchangeable shares using the "if-converted" method, whereby it is assumed the conversion of the exchangeable shares occurs at the beginning of the reporting period (or at the time of issuance if later).

Measurement Uncertainty

The amounts recorded for depletion and depreciation of property and equipment and the assessment of these assets for impairment are based on estimates of proved reserves, production rates, petroleum and natural gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements of changes in such estimates in future periods could be material.

Inherent in the fair value calculation of asset retirement obligations are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal and regulatory environments. To the extent future revisions to these assumptions impact the fair value of the existing asset retirement obligation liability, a corresponding adjustment is made to the property and equipment balance.

Cash Distributions

The Trust declares monthly distributions of cash to unitholders of record on the last day of each calendar month. Pursuant to the Trust's policy, it will pay distributions to its unitholders subject to satisfying its financing covenants. Such distributions are recorded as distributions of equity upon declaration of the distribution.

3. CHANGES IN ACCOUNTING POLICIES

On January 1, 2008, the Trust adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3862 "Financial Instruments - Disclosures", Section 3863 "Financial Instruments - Presentation" and Section 1535 "Capital Disclosures". As required by the new standards, prior periods have not been restated.

The adoption of these standards has had no material impact on the Trust's net earnings or cash flows. The other effects of the implementation of the new standards are discussed below.

Capital Disclosures

This new guidance requires disclosure about the Trust's objectives, policies and processes for managing capital. These disclosures include a description of what the Trust manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the Trust's management of capital, whether the requirements have been complied with, or consequence of non-compliance and an explanation of how the Trust is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Refer to note 11 "Capital Disclosures".

Financial Instruments - Disclosure and Presentation

Section 3862 and 3863 establish standards for the disclosure and presentation of financial instruments during the reporting period.

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. This Section requires disclosure of the significance of financial instruments on the Trust's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments.

The presentation requirements under 3863 are relatively unchanged from Section 3861. Refer to note 12, "Financial Instruments and Risk Management Contracts" for the additional disclosures under Section 3862.

Future Accounting Pronouncements

The Trust has identified new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact to the Trust:

In February 2008, the CICA issued Section 3064 "Goodwill and Intangible Assets", replacing Section 3062 "Goodwill and Other Intangible Assets". The new Section will be effective on January 1, 2009. This new guidance requires recognizing all goodwill and intangible assets in accordance with CICA Section 1000, "Financial Statement Concepts". Section 3064 will eliminate the current practice of recognizing items as assets that do not meet the Section 1000 definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to its initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062, as the new Section was only amended for intangible assets. The Trust is currently evaluating the impact of the adoption of this new Section, however does not expect a material impact on its consolidated financial statements.

In December 2008, the CICA issued Section 1582 "Business Combinations", which will replace CICA Section 1581 of the same name. Under this guidance, the purchase price used in a business combination is based on the fair value of shares exchanged at the market price at the date of the exchange. Currently the purchase price used is based on the market price of the shares for a reasonable period before and after the date the acquisition is agreed upon and announced. This new guidance generally requires all acquisition costs to be expensed, which currently are capitalized as part of the purchase price. Contingent liabilities are to be recognized at fair value at the acquisition date and remeasured at fair value through earnings each period until settled. Currently only contingent liabilities that are resolved and payable are included in the cost to acquire the business. In addition, negative goodwill is required to be recognized immediately in earnings, unlike the current requirement to eliminate it by deducting it from the non-current assets in the purchase price allocation. Section 1582 will be effective for the Trust on January 1, 2011, with prospective application. The Trust is currently evaluating the impact of the adoption of the new Section on its consolidated financial statements.

In December 2008, the CICA issued Sections 1601 "Consolidated Financial Statements", and 1602 "Non-controlling Interests", which replaces existing guidance under Section 1600 "Consolidated Financial Statements". Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards will be effective for the Trust on January 1, 2011. The Trust is currently evaluating the impact of the adoption of these new Sections on its consolidated financial statements.

In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, the AcSB confirmed in February 2008 that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP in 2011 for profit-oriented Canadian publicly accountable enterprises. The Trust is currently reviewing the standards to determine the potential impact on its consolidated financial statements. The Trust, with the assistance of an independent consulting firm, has performed a diagnostic analysis that identifies differences between the Trust's current accounting policies and IFRS. At this time, the Trust is evaluating the impact of these differences and assessing the need for amendments to existing accounting policies in order to comply with IFRS.

4. ACQUISITIONS

Rival Energy Ltd.

On January 23, 2008, a subsidiary of the Trust acquired all of the outstanding shares of Rival Energy Ltd. ("Rival"), a public oil and gas company, for consideration of $30.06 million. Consideration consisted of $16.40 million cash, the issuance of 573,300 Zargon trust units valued at $23.32 per unit and acquisition costs of $0.29 million.

The results of operations for Rival have been included in the consolidated financial statements since January 23, 2008.

The acquisition was accounted for by the purchase method and the purchase price allocation is as follows:



Net Assets Acquired

($ thousands)
----------------------------------------------------------------------------
Property and equipment 54,065
Goodwill 2,969
Working capital deficiency (854)
Long term debt (16,914)
Future income tax liability (5,443)
Asset retirement obligations (3,767)
----------------------------------------------------------------------------
Total net assets acquired 30,056
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Consideration
($ thousands)
----------------------------------------------------------------------------
Cash 16,400
Trust units issued 13,369
Acquisition costs 287
----------------------------------------------------------------------------
Total purchase price 30,056
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Newpact Energy Corp.

On May 16, 2008, a subsidiary of the Trust acquired all of the outstanding shares of Newpact Energy Corp. ("Newpact"), a private oil and gas company, for consideration of $9.54 million. Consideration consisted of the issuance of 425,940 Zargon trust units valued at $22.04 per unit and acquisition costs of $0.15 million.

The results of operations for Newpact have been included in the consolidated financial statements since May 16, 2008.

The acquisition was accounted for by the purchase method and the purchase price allocation is as follows:



Net Assets Acquired
($ thousands)
----------------------------------------------------------------------------
Property and equipment 13,925
Working capital deficiency (2,491)
Future income tax liability (922)
Asset retirement obligations (976)
----------------------------------------------------------------------------
Total net assets acquired 9,536
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Consideration
($ thousands)
----------------------------------------------------------------------------
Trust units issued 9,388
Acquisition costs 148
----------------------------------------------------------------------------
Total purchase price 9,536
----------------------------------------------------------------------------
----------------------------------------------------------------------------

5. PROPERTY AND EQUIPMENT

December 31, 2008
----------------------------------------------------------------------------
Accumulated
Depletion and Net Book
($ thousands) Cost Depreciation Value
----------------------------------------------------------------------------
Petroleum, natural gas properties and
other equipment (1) 667,944 282,949 384,995
Leasehold improvements and office
equipment 3,380 1,629 1,751
----------------------------------------------------------------------------
671,324 284,578 386,746
----------------------------------------------------------------------------
----------------------------------------------------------------------------

December 31, 2007
----------------------------------------------------------------------------
Accumulated
Depletion and Net Book
($ thousands) Cost Depreciation Value
----------------------------------------------------------------------------
Petroleum, natural gas properties and
other equipment (1) 535,850 223,780 312,070
Leasehold improvements and office
equipment 3,107 1,228 1,879
----------------------------------------------------------------------------
538,957 225,008 313,949
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) As a result of shareholders redeeming exchangeable shares, property and
equipment has cumulatively increased $55.15 million, $3.39 million
relating to 2008, $8.82 million relating to 2007 and $42.94 million
relating to prior years. The effect of these increases has resulted in
additional depletion and depreciation expense of approximately $22.31
million, $5.59 million relating to 2008, $6.16 million relating to 2007
and $10.56 million relating to prior years.


At December 31, 2008, petroleum, natural gas properties and equipment include $24.73 million (2007 - $22.78 million) relating to undeveloped properties that have been excluded from the depletion calculation.

An impairment test calculation was performed on the Trust's petroleum, natural gas properties and equipment at December 31, 2008 in which the estimated undiscounted future net cash flows associated with the proved reserves exceeded the carrying amount of the Trust's petroleum, natural gas properties and equipment; consequently an impairment provision was not recorded. This impairment calculation was performed separately on both the Canadian and US cost centres.



The following table outlines benchmark prices used in the impairment test at
December 31, 2008:
WTI Crude Oil Exchange Rate WTI Crude Oil AECO Gas
Year ($US/bbl) ($US/$Cdn) ($Cdn/bbl) ($Cdn/gj)
----------------------------------------------------------------------------
2009 55.57 0.84 66.15 6.31
2010 64.77 0.84 77.11 7.28
2011 69.16 0.84 82.33 7.50
2012 70.62 0.84 84.07 7.39
2013 72.04 0.84 85.76 7.27
----------------------------------------------------------------------------
Thereafter (inflation %) 2.0% 0.84 2.0% 2.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Actual prices used in the impairment test were adjusted for commodity price differentials specific to Zargon.

6. LONG TERM DEBT

On July 28, 2008, Zargon amended and renewed its syndicated committed credit facilities, the result of which is an increase in the available facilities and borrowing base to $180 million. These facilities consist of a $170 million tranche available to the Canadian borrower and a US $8 million tranche available to the US borrower. A $300 million demand debenture on the assets of the subsidiaries of the Trust has been provided as security for these facilities. The facilities are fully revolving for a 364-day period with the provision for an annual extension at the option of the lenders and upon notice from Zargon's management. The next renewal date is July 28, 2009. Should the facilities not be renewed, they convert to one-year non-revolving term facilities at the end of the revolving 364-day period. Repayment would not be required until the end of the non-revolving term, and as such, these facilities have been classified as long term debt.

Interest rates fluctuate under the syndicated facilities with Canadian prime, US prime, and US base rates plus an applicable margin between zero basis points and 32.5 basis points, as well as with Canadian banker's acceptance and LIBOR rates plus an applicable margin between 97.5 basis points and 157.5 basis points. At December 31, 2008, $77.58 million (2007 - $56.87 million) had been drawn on the syndicated committed credit facilities bearing interest at Canadian prime (December 31, 2008 - 3.5 percent; December 31, 2007 - 6.0 percent) with any unused amounts subject to standby fees. In the normal course of operations Zargon enters into various letters of credit. At December 31, 2008, the approximate value of outstanding letters of credit totalled $0.52 million (2007 - $0.44 million). The letters of credit reduce the amount of Zargon's available credit facilities to $101.90 million at December 31, 2008 (2007 - $62.69 million).

7. ASSET RETIREMENT OBLIGATIONS

The total future asset retirement obligation was estimated by management based on Zargon's net working interest in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. Zargon has estimated the net present value of its total asset retirement obligations to be $28.59 million as at December 31, 2008 (2007 - $21.18 million), based on a total future liability of $142.52 million (2007 - $101.88 million). These payments are expected to be made over the next 40 years with the majority of the costs being incurred after 2018. Commencing July 1, 2005, incremental asset retirement obligations are calculated using a revised credit adjusted risk-free rate of 7.5 percent. Asset retirement obligations prior to this period were calculated using a credit adjusted risk-free rate of 8.5 percent. An inflation rate of two percent used in the calculation of the present value of the asset retirement obligation remains unchanged. The following table reconciles Zargon's asset retirement obligations:



Year Ended December 31,
----------------------------------------------------------------------------
($ thousands) 2008 2007
----------------------------------------------------------------------------
Balance, beginning of year 21,184 17,307
Adjustment to asset retirement obligations - 2,911
Net liabilities incurred/acquired 5,920 851
Liabilities settled (897) (1,140)
Accretion expense 2,183 1,406
Foreign exchange 202 (151)
----------------------------------------------------------------------------
Balance, end of year 28,592 21,184
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. UNITHOLDERS' EQUITY

Pursuant to the Plan of Arrangement on July 15, 2004, 14.87 million units of the Trust and 3.66 million exchangeable shares (see note 9) of the Company were issued in exchange for all of the outstanding shares of the Company on a one-for-one basis.

The Trust is authorized to issue an unlimited number of voting trust units.



Trust Units

December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Number of Amount Number of Amount
(thousands) Units ($) Units ($)
----------------------------------------------------------------------------
Balance, beginning of year 17,076 89,688 16,789 82,868
Unit rights exercised for cash 69 1,166 120 2,127
Unit-based compensation recognized
on exercise of unit rights - 246 - 466
Issued on corporate and property
acquisitions 1,045 23,910 - -
Issued on conversion of
exchangeable shares 289 5,640 167 4,227
----------------------------------------------------------------------------
Balance, end of year 18,479 120,650 17,076 89,688
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Trust Unit Rights Incentive Plan

The Trust has a unit rights incentive plan (the "Plan") that allows the Trust to issue rights to acquire trust units to directors, officers, employees and other service providers. The Trust is authorized to issue up to 2.36 million unit rights; however, the number of trust units reserved for issuance upon exercise of the rights shall not at any time exceed 10 percent of the aggregate number of the total outstanding units, including units issuable upon exchange of exchangeable shares of Zargon and other fully paid securities of Zargon entities exchangeable into units, which are the economic equivalent of units including full voting rights. At the time of grant, unit right exercise prices approximate the market price for the trust units. At the time of exercise, the rights holder has the option of exercising at the original grant price or the exercise price as calculated under the Plan (the "modified price"). The modified price is calculated by deducting from the grant price the amount by which monthly distributions, on a per unit basis, made by the Trust after the grant date exceed a monthly return of 0.833 percent of the Trust's recorded net book value of oil and natural gas properties. Rights granted under the Plan generally vest over a three-year period and expire approximately five years from the grant date. Zargon uses a fair value methodology to value the unit rights grants.



The following table summarizes information about the Trust's unit rights:

December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Price Exercise Price
Number of Initial and Number of Initial and
Unit Rights Modified Unit Rights Modified
(thousands) ($/unit right) (thousands) ($/unit right)
----------------------------------------------------------------------------
Outstanding at
beginning of year 1,488 26.41 / 24.60 1,208 26.32 / 24.73
Unit rights
granted 445 22.65 522 25.36
Unit rights
exercised (69) 16.92 (120) 17.73
Unit rights
cancelled (210) 27.22 (122) 28.75
----------------------------------------------------------------------------
Outstanding at end
of year 1,654 25.57 / 23.63 1,488 26.41 / 24.60
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unit rights
exercisable at
year end 839 26.51 / 23.57 559 25.51 / 22.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following tables summarize information about unit rights outstanding and
exercisable at December 31, 2008:

At the initial grant price:

Unit Rights Outstanding Unit Rights Exercisable
----------------------------------------------------------------------------
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Range of Number Remaining Price Number Price
Exercise Prices Outstanding Contractual ($/unit Exercisable ($/unit
($/unit right) (thousands) Life right) (thousands) right)
----------------------------------------------------------------------------
13.00 - 19.25 118 0.9 years 17.07 93 17.82
21.10 - 25.06 686 3.0 years 22.81 247 23.21
26.00 - 27.40 358 2.8 years 26.68 158 27.22
27.91 - 33.05 492 2.0 years 30.65 341 30.96
---------------------------- -----------------------------------
1,654 25.57 839 26.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------


At the modified price:

Unit Rights Outstanding Unit Rights Exercisable
----------------------------------------------------------------------------
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Range of Number Remaining Price Number Price
Exercise Prices Outstanding Contractual ($/unit Exercisable ($/unit
($/unit right) (thousands) Life right) (thousands) right)
----------------------------------------------------------------------------
12.94 - 14.72 118 0.9 years 13.39 93 13.17
18.03 - 23.11 686 3.0 years 21.42 247 20.59
23.65 - 25.78 358 2.8 years 24.96 158 24.13
26.63 - 30.97 492 2.0 years 28.22 341 28.31
---------------------------- -----------------------------------
1,654 23.63 839 23.57
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Unit-Based Compensation

The weighted average assumptions used for unit rights granted in 2008 include a volatility factor of expected market price of 26.9 percent, a risk-free interest rate of 3.2 percent, a dividend yield of 9.7 percent and an expected life of the unit rights of four years. These unit rights, together with the continued vesting of unit rights granted in prior years, resulted in unit-based compensation expense in 2008 of $1.19 million (2007 - $1.71 million).

Compensation expense associated with unit rights granted under the Plan is recognized in earnings over the vesting period of the Plan with a corresponding increase in contributed surplus. The exercise of trust unit rights is recorded as an increase in trust units with a corresponding reduction in contributed surplus. Forfeiture of rights are recorded as a reduction in expenses in the period in which they occur.

The following table summarizes information about the Trust's contributed surplus account:



Contributed Surplus
($ thousands)
----------------------------------------------------------------------------
Balance, December 31, 2006 2,475
Unit-based compensation expense 1,705
Unit-based compensation recognized on exercise of unit rights (466)
----------------------------------------------------------------------------
Balance, December 31, 2007 3,714
Unit-based compensation expense (1) 1,149
Unit-based compensation recognized on exercise of unit rights (246)
----------------------------------------------------------------------------
Balance, December 31, 2008 4,617
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) During the fourth quarter of 2008, the Trust issued 10,000 unit
appreciation rights ("UARS") with an intrinsic value of $0.04 million at
December 31, 2008. These UARS are awards entitling the recipients to
receive cash in an amount equivalent to any excess of the market value
of a stated number of units over a stated price. UARS are included in
unit-based compensation expense; however rewards settled in cash are
liabilities and therefore are not included in contributed surplus.


Trust Unit Redemption

Under the terms of the Trust Indenture, unitholders may require the Trust to redeem all or any part of the trust units at a price and under certain terms and conditions as specified in the Trust Indenture. The redemption price per trust unit will be equal to the lesser of: (i) 90 percent of the "market price" of the trust units on the principal market on which the trust units are quoted for trading during the 10 trading day period commencing immediately after the date on which the trust units are tendered to Zargon for redemption; and (ii) the closing market price on the principal market on which the trust units are quoted for trading on the date that the trust units are so tendered for redemption. Trust units tendered for redemption in any calendar month shall be paid on the last day of the third following month by, at the Trust's option: (i) a cash payment; or (ii) a distribution of notes and/or redemption notes. It is anticipated that this redemption right will not be the primary mechanism for holders of trust units to dispose of their trust units. Notes or redemption notes which may be distributed in specie to unitholders in connection with a redemption will not be listed on any stock exchange and no market is expected to develop for such notes or redemption notes. Notes or redemption notes may not be qualified investments for trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and registered education savings plans. To date, no trust units have been tendered for redemption.

9. NON-CONTROLLING INTEREST - EXCHANGEABLE SHARES

Zargon Oil & Gas Ltd. is authorized to issue an unlimited number of exchangeable shares. The exchangeable shares are convertible into trust units at the option of the shareholder, based on the exchange ratio, which is adjusted monthly to reflect the distribution paid on the trust units. Cash distributions are not paid on the exchangeable shares. During the year, a total of 0.21 million (2007 - 0.14 million) exchangeable shares were converted into 0.29 million (2007 - 0.17 million) trust units based on the exchange ratio at the time of conversion. At December 31, 2008, the exchange ratio was 1.43643 (December 31, 2007 - 1.29611) trust units per exchangeable share. As set out in the Arrangement, the exchangeable shares are entitled to vote equally to the number of trust units for which each exchangeable share is convertible into a trust unit on the record date. The Board of Directors of Zargon Oil & Gas Ltd. hold the option to redeem all outstanding exchangeable shares for trust units on or before July 15, 2014. At such time, should the Board of Directors not extend the term of the exchangeable shares, there would be no remaining non-controlling interest.

Pursuant to EIC-151 "Exchangeable Securities Issued by a Subsidiary of an Income Trust", if certain conditions are met, the exchangeable shares issued by a subsidiary must be reflected as non-controlling interest on the consolidated balance sheets and in turn, net earnings must be reduced by the amount of net earnings attributed to the non-controlling interest.

The non-controlling interest on the consolidated balance sheets consists of the book value of exchangeable shares at the time of the Plan of Arrangement, plus net earnings attributable to the exchangeable shareholders, less exchangeable shares (and related cumulative earnings) redeemed. The net earnings attributable to the non-controlling interest on the consolidated statements of earnings and comprehensive income represents the cumulative share of net earnings attributable to the non-controlling interest based on the trust units issuable for exchangeable shares in proportion to total trust units issued and issuable each year end.



Non-Controlling Interest - Exchangeable Shares

December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
(thousands, except exchange Number of Number of
ratio) Shares Amount ($) Shares Amount ($)
----------------------------------------------------------------------------
Balance, beginning of year 2,071 20,730 2,207 18,319
Exchanged for trust units at
book value and including
earnings attributed during
the period (209) (3,220) (136) (1,394)
Earnings attributable to
non-controlling interest - 10,100 - 3,805
----------------------------------------------------------------------------
Balance, end of year 1,862 27,610 2,071 20,730
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exchange ratio, end of period 1.43643 1.29611
Trust units issuable upon
conversion of exchangeable
shares, end of year 2,675 2,684
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The proforma total units outstanding at December 31, 2008, including trust units outstanding, and trust units issuable upon conversion of exchangeable shares and after giving rise to the exchange ratio at the end of the year, is 21.15 million units (2007 - 19.76 million units).



The effect of EIC-151 on Zargon's unitholders' capital and exchangeable
shares is as follows:

Zargon Zargon Oil
Energy & Gas Ltd.
Trust Exchangeable
($ thousands) Units Shares Total
----------------------------------------------------------------------------
Balance at December 31, 2006 82,868 18,319 101,187
Issued on redemption of exchangeable shares at
book value 330 (330) -
Effect of EIC-151 3,897 2,741 6,638
Unit-based compensation recognized on exercise
of unit rights 466 - 466
Unit rights exercised for cash 2,127 - 2,127
----------------------------------------------------------------------------
Balance at December 31, 2007 89,688 20,730 110,418
Issued on redemption of exchangeable shares at
book value 508 (508) -
Effect of EIC-151 5,132 7,388 12,520
Unit-based compensation recognized on exercise
of unit rights 246 - 246
Issued on corporate and property acquisitions 23,910 - 23,910
Unit rights exercised for cash 1,166 - 1,166
----------------------------------------------------------------------------
Balance at December 31, 2008 120,650 27,610 148,260
----------------------------------------------------------------------------
----------------------------------------------------------------------------


EIC-151 "Exchangeable Securities Issued by Subsidiaries of Income Trusts" states that exchangeable securities issued by a subsidiary of an Income Trust should be reflected as either a non-controlling interest or debt on the consolidated balance sheets unless they meet certain criteria. The exchangeable shares issued by Zargon Oil & Gas Ltd., a corporate subsidiary of the Trust, are publicly traded and have an expiry term, which could be extended at the option of the Board of Directors. Therefore, these securities are considered, by EIC-151, to be transferable to third parties and to have an indefinite life. EIC-151 states that if these criteria are met, the exchangeable shares should be reflected as a non-controlling interest.

As a result of EIC-151, the Trust has increased its unitholders' equity and non-controlling interest for 2008 by $12.52 million (2007 - $6.64 million) on the Trust's consolidated balance sheets. Consolidated net earnings for 2008 have been reduced for net earnings attributable to the non-controlling interest by $10.10 million (2007 - $3.81 million). In accordance with EIC-151 and given the circumstances in Zargon's case, each redemption is accounted for as a step-purchase, which for 2008 additionally resulted in an increase in property and equipment of $3.39 million (2007 - $8.82 million), and an increase in future income tax liability of $0.97 million (2007 - $5.99 million). Funds flow from operating activities were not impacted by this change.

The cumulative impact to date of the application of EIC-151 has been to increase gross property and equipment by $55.15 million (for depletion impact see note 5), unitholders' equity and non-controlling interest by $65.87 million, future income tax liability by $18.19 million and an allocation of net earnings to exchangeable shareholders of $28.91 million.



10. WEIGHTED AVERAGE NUMBER OF TOTAL UNITS

(thousands of units) 2008 2007
----------------------------------------------------------------------------
Basic 18,021 16,975
Diluted 20,632 19,551
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Dilution amounts of 2.61 million units (2007 - 2.58 million) were added to the weighted average number of units outstanding during the year in the calculation of diluted per unit amounts. These unit additions represent the dilutive effect of unit rights according to the treasury stock method and also include exchangeable shares using the "if-converted" method. Due to the fact that at the time of exercise, the rights holder has the option of exercising at the original grant price or a modified price as calculated under the Plan, the prices used in the treasury stock calculation are the lower prices calculated under the Plan. An adjustment to the numerator amount was required in the diluted calculation to provide for the earnings of $10.10 million (2007 - $3.81 million) attributable to the non-controlling interest pertaining to the exchangeable shareholders.

11. CAPITAL DISLOSURES

The Trust's capital structure is comprised of unitholders' equity plus long term debt. The Trust's objectives when managing its capital structure are to:

i) maintain financial flexibility so as to preserve Zargon's access to capital markets and its ability to meet its financial obligations; and

ii) finance internally generated growth as well as acquisitions.

The Trust monitors its capital structure and short term financing requirements using the non-GAAP financial metric of debt net of working capital ("net debt") to funds flow from operating activities. Net debt, as used by the Trust, is calculated as bank debt and any working capital deficit excluding the current portion of unrealized risk management assets and liabilities and future income taxes. Funds flow from operating activities represents net earnings/losses and asset retirement expenditures except for non-cash items. The metric is used to steward the Trust's overall debt position as a measure of the Trust's overall financial strength and is calculated as follows:



December 31, December 31,
($ thousands, except ratio) 2008 2007
----------------------------------------------------------------------------
Net debt 87,707 63,756
Funds flow from operating activities 106,909 79,838
----------------------------------------------------------------------------
Net debt to funds flow from operating activities
ratio 0.8 0.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Zargon's net debt to funds flow from operating activities ratio was 0.8, unchanged from the 0.8 at December 31, 2007, primarily due to the strong funds flow from operating activities being offset by cash consideration and net debt assumed related to the acquisitions of Rival and Newpact.

To manage its capital structure, the Trust may adjust capital spending, adjust distributions paid to unitholders, issue new units, issue new debt or repay existing debt.

The Trust's capital management objectives, evaluation measures, definitions and targets have remained unchanged over the periods presented. Zargon is subject to certain financial covenants in its credit facility agreements and is in compliance with all financial covenants.

12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT CONTRACTS

All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as "held-for-trading", "available-for-sale", "held-to-maturity", "loans and receivables", or "other financial liabilities" as defined by CICA Section 3855.

Financial assets and financial liabilities classified as "held-for-trading" are measured at fair value with changes in fair value recognized in earnings. Financial assets classified as "available-for-sale" are measured at fair value, with changes in fair value recognized in other comprehensive income ("OCI") until the asset is removed from the consolidated balance sheets. Financial assets classified as "held-to-maturity", "loans and receivables" and "other financial liabilities" are measured at amortized cost using the effective interest method of amortization.

Fair Value of Financial Assets and Liabilities

Zargon's financial assets and liabilities are comprised of accounts receivable, deposits, accounts payable, cash distributions payable, unrealized risk management assets and liabilities and long term debt. Fair values of financial assets and liabilities, summarized information related to risk management positions and discussion of risks associated with financial assets and liabilities are presented as follows:

A) Fair Value of Financial Assets and Liabilities

Accounts receivable are designated as "loans and receivables". Accounts payable and accrued liabilities, cash distributions payable and long term debt are designated as "other liabilities". The fair values of these accounts approximate their carrying amounts.

Risk management assets and liabilities are derivative financial instruments classified as "held-for-trading". These accounts are recorded at their estimated fair value based on the current mark-to-market method of accounting, using quoted market prices.

B) Risk Management Assets and Liabilities

The Trust is a party to certain financial instruments that have fixed the price of a portion of its oil and natural gas production and foreign exchange conversion rates. The Trust enters into these contracts for risk management purposes only, in order to protect a portion of its future cash flow from the volatility of oil and natural gas commodity prices and foreign exchange rates. For financial risk management contracts, the Trust considers these contracts to be effective on an economic basis but has decided not to designate these contracts as hedges for accounting purposes and accordingly, any unrealized gains or losses are recorded based on the fair value (mark-to-market) of the contracts at year end. The unrealized gain on the statement of earnings for 2008 was $44.38 million and the unrealized loss for 2007 was $16.80 million. As at December 31, 2008, the Trust had the following outstanding commodity and foreign currency risk management contracts:



Commodity Financial Risk Management Contracts:

Fair Market
Weighted Value Gain
Rate Average Price Range of Terms ($ thousands)
----------------------------------------------------------------------------
Oil swaps 500 bbl/d $72.74 US/bbl Jan. 1/09 - Mar. 31/09 1,321
500 bbl/d $87.58 US/bbl Jan. 1/09 - Jun. 30/09 4,039
300 bbl/d $107.40 US/bbl Jan. 1/09 - Sep. 30/09 5,462
500 bbl/d $114.97 US/bbl Apr. 1/09 - Dec. 31/09 9,873
500 bbl/d $85.30 US/bbl Jul. 1/09 - Dec. 31/09 3,103
300 bbl/d $132.98 US/bbl Oct. 1/09 - Jun. 30/10 7,157
Natural gas
swaps 4,000 gj/d $9.71/gj Jan. 1/09 - Mar. 31/09 1,396
2,000 gj/d $9.60/gj Apr. 1/09 - Oct. 31/09 1,471
----------------------------------------------------------------------------
Total Fair Market Value, Commodity Price Financial Contracts 33,822
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Oil swaps are settled against the NYMEX WTI pricing index, whereas natural
gas swaps are settled against the AECO pricing index.

Foreign Exchange Financial Risk Management Contracts:

Average Fair Market
Monthly US Foreign Value
Dollar Exchange Rate Gain/(Loss)
Volume (Cdn./US) Range of Terms ($ thousands)
----------------------------------------------------------------------------
Foreign
exchange
forwards $1,517,000 1.1760 Jan. 1/09 - Dec. 31/09 (724)
$1,213,000 1.2550 Jan. 1/09 - Dec. 31/09 564
$1,203,000 1.1715 Jan. 1/10 - Jun. 30/10 (281)
----------------------------------------------------------------------------
Total Fair Market Value, Foreign Exchange Financial Contracts (441)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The contracts are settled based on the average daily noon close rate for US
dollars converted to Canadian dollars as published by the Bank of Canada.

Physical Risk Management Contracts:

Fair Market
Weighted Value Gain
Rate Average Price Range of Terms ($ thousands)
----------------------------------------------------------------------------
Natural gas
fixed price 5,000 gj/d $8.99/gj Jan. 1/09 - Mar. 31/09 1,307
3,000 gj/d $8.47/gj Apr. 1/09 - Oct. 31/09 1,481
----------------------------------------------------------------------------
Total Fair Market Value, Physical Contracts 2,788
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contracts settled by way of physical delivery are recognized as part of the normal revenue stream. These instruments have no book values recorded in the consolidated financial statements.

Commodity Price Sensitivities

The following table summarizes the sensitivity of the fair value of the Trust's risk management positions to fluctuations in commodity prices, with all other variables held constant. When assessing the potential impact of these commodity price changes, the Trust believes 10 percent volatility is a reasonable long term measure.

Fluctuations in commodity prices could have resulted in unrealized gains/(losses) on risk management contracts impacting net earnings as follows:



Year Ended December 31, 2008
----------------------------------------------------------------------------
($ thousands) 10% Increase 10% Decrease
----------------------------------------------------------------------------
Natural gas price (474) 474
Crude oil price (3,584) 3,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------


C) Risks Associated with Financial Assets and Liabilities

The Trust is exposed to financial risks arising from its financial assets and liabilities. The financial risks include market risk (commodity prices, interest rates and foreign exchange rates) credit risk and liquidity risk.

- Market Risk

Market risk is the risk that the fair value or future cash flows of financial assets or liabilities will fluctuate due to movements in market prices, is comprised of the following:

- Commodity Price Risk

As a means of mitigating exposure to commodity price risk volatility, the Trust has entered into various derivative agreements. The use of derivative instruments is governed under formal policies and is subject to limits established by the Board of Directors. The Trust's policy is to not use derivative financial instruments for speculative purposes.

Natural Gas - To partially mitigate the natural gas commodity price risk, the Trust enters into swaps, which fix the Canadian dollar AECO prices.

Crude Oil - The Trust has partially mitigated its exposure to the WTI NYMEX price with fixed price swaps.

- Interest Rate Risk

Borrowings under bank credit facilities are market rate based (variable interest rates); thus, carrying values approximate fair values.

At December 31, 2008, and at existing debt pricing levels, the increase or decrease in net earnings for each one percent change in interest rates would amount to $0.83 million for the year ended December 31, 2008.

- Foreign Exchange Risk

As Zargon operates in North America, fluctuations in the exchange rate between the US/Canadian dollar can have a significant effect on the Trust's reported results. A $0.01 change in the US to Canadian dollar exchange rate would have resulted in a $1.16 million increase or decrease in net earnings for the year ended December 31, 2008. In order to mitigate the Trust's exposure to foreign exchange fluctuations, the Trust entered into foreign exchange derivative agreements in the fourth quarter of 2008.

- Credit Risk

Credit risk is the risk that the counterparty to a financial asset will default, resulting in the Trust incurring a financial loss. This credit exposure is mitigated with credit practices that limit transactions according to counterparties' credit quality. A substantial portion of the Trust's accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks.

The maximum credit risk exposure associated with accounts receivable, accrued revenues and risk management assets is the total carrying value. The Trust monitors these balances monthly to limit the risk associated with collection. Of Zargon's accounts receivable at December 31, 2008, approximately 37 percent was owing from two companies and Zargon anticipates full collection.

- Liquidity Risk

Liquidity risk is the risk the Trust will encounter difficulties in meeting its financial liability obligations. The Trust manages its liquidity risk through cash and debt management. See note 11 for a more detailed discussion.

As at December 31, 2008, Zargon had available unused committed bank credit facilities of approximately $101.90 million. The Trust believes it has sufficient funding through the use of these facilities to meet foreseeable borrowing requirements.

The timing of cash outflows relating to financial liabilities are outlined in the table below:



($ thousands) 1 year 2-3 years Total
----------------------------------------------------------------------------
Accounts payable and accrued liabilities 28,687 - 28,687
Cash distributions payable 3,326 - 3,326
Risk management liabilities (1) 724 281 1,005
Long term debt (2) - 77,581 77,581
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See the section titled "Foreign Exchange Risk" in this note for a better
understanding of the volatility around these amounts.
(2) See note 6 for the details on the credit facilities.


13. INCOME TAXES

The Trust is a taxable entity under the Income Tax Act (Canada) and, until 2011, is taxable only on income that is not distributed or distributable to the unitholders. As the Trust allocates all of its Canadian taxable income to the unitholders in accordance with the Trust Indenture, and meets the requirements of the Income Tax Act (Canada) applicable to the Trust, no current tax provision for Canadian income tax expense has been incurred by the Trust. Withholding taxes, provincial capital taxes and US income taxes are provided for under current income tax expense.

In the Trust's structure, payments are made between the Company and the Trust that result in the transferring of taxable income from the Company to individual unitholders. These payments may reduce future income tax liabilities previously recorded by the Company that would be recognized as a recovery of income tax in the period incurred.

On October 31, 2006, the Federal Government announced tax proposals pertaining to taxation of distributions paid by trusts and the personal tax treatment of trust distributions. Currently, the Trust does not pay tax on distributions as tax is paid by the unitholders. On June 12, 2007, the Federal Government enacted these tax proposals, which will result in taxation of distributions at the Trust level at a rate of 31.5 percent effective January 1, 2011. Subsequent 2007 fourth quarter legislation has lowered this tax rate to 29.5 percent in 2011 and 28.0 percent beyond 2011 to assimilate recent corporate tax rate changes. Prior to June 2007, the Trust estimated the future income tax on certain temporary differences between amounts recorded on its consolidated balance sheets for book and tax purposes to have a nil effective tax rate. Under the legislation, the Trust now estimates the effective tax rate on the post 2010 reversal of these temporary differences to be approximately 28.0 percent. Until 2011, Zargon's future tax obligations are reduced as distributions are made from the Trust and, consequently, it is anticipated that Zargon's effective tax rate will continue to be low until that time.

Based on its assets and liabilities as at June 30, 2007, the quarter in which the tax proposals were substantively enacted, the Trust had estimated the amount of its temporary differences, which were previously not subject to tax and had estimated the periods in which these differences will reverse. The Trust estimated that $7.05 million of net tax deductible temporary differences will reverse after January 1, 2011, which resulted in a reduction of the future tax liability of $2.22 million in the 2007 second quarter. The taxable temporary differences relate principally to the remaining tax pools attributed to the oil and gas properties being greater than their net book value. The year-over-year increase in the future tax recovery reflects these legislated adjustments.

On February 26, 2008, the Federal Government, in its Federal Budget, announced changes to the Specified Investment Flow-Through ("SIFT") tax rules. The provincial component of the SIFT tax will be based on the provincial rates where the SIFT has a permanent establishment rather than using a 13.0 percent flat rate. For Zargon, the SIFT tax rate applicable in 2012 is expected to fall from 28.0 percent to 25.0 percent. As the tax rate change has not been substantively enacted, no future income tax rate benefit has been recorded in the financial statements.

The amount and timing of reversals of temporary differences will also depend on the Trust's future operating results, acquisitions and dispositions of assets and liabilities, and distributions. A significant change in any of the preceding assumptions could materially affect management's estimate of the future tax liability.

Income taxes differ from the amounts which would be obtained by applying the statutory income tax rates to earnings before income taxes as follows:



($ thousands) 2008 2007
----------------------------------------------------------------------------
Statutory income tax rates 30.08% 33.03%
Expected income taxes 28,632 4,964
Add (deduct) income tax effect of:
Rate adjustments (1,225) (5,775)
Impact of changes in tax rates relating to income
trusts after 2010 - (2,220)
Cash distributions (11,757) (12,120)
Capital taxes and withholding taxes 969 2,143
Other 183 (319)
----------------------------------------------------------------------------
16,802 (13,327)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The 2008 and 2007 years include recoveries relating to reductions in future federal and provincial income tax rates substantively enacted during the respective years.

Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The components of Zargon's net future income tax liability are as follows:



($ thousands) 2008 2007
----------------------------------------------------------------------------
Net book value of property and equipment in excess of
tax pools 49,829 43,469
Deferred partnership earnings 7,494 4,762
Asset retirement obligations (7,525) (7,051)
Current unrealized risk management (asset)/liability 8,553 (2,919)
Long-term unrealized risk management
(asset)/liability 1,321 (714)
Non-capital losses (1,046) -
Share issue costs (31) (57)
Other (338) (232)
----------------------------------------------------------------------------
58,257 37,258
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at December 31, 2008, Zargon's estimated tax pools are as follows:

December 31, December 31,
($ thousands) 2008 2007
----------------------------------------------------------------------------
Canadian oil and gas property expenses in the
Trust 33,992 37,772
Canadian oil and gas property expenses in other
entities 29,846 7,821
Canadian development expenses 36,224 27,224
Canadian exploration expenses 39,332 45,125
Capital cost allowance 51,218 40,441
US tax pools 3,185 4,440
Partnership deferral (8,312) (15,815)
Other 2,474 1,248
----------------------------------------------------------------------------
187,959 148,256
----------------------------------------------------------------------------
----------------------------------------------------------------------------


14. COMMITMENTS

The Trust is committed to future minimum payments for natural gas transportation sales commitments in addition to operating leases for office space, office equipment, vehicles and field equipment. Payments required under these commitments for each of the next five years are: 2009 - $2.19 million; 2010 - $1.73 million; 2011 - $1.31 million; 2012 - $0.76 million; 2013 - $nil; thereafter - $nil.

15. CONTINGENCIES AND GUARANTEES

In the normal course of operations, Zargon executes agreements that provide for indemnification and guarantees to counterparties in transactions such as the sale of assets and operating leases.

These indemnifications and guarantees may require compensation to counterparties for costs and losses incurred as a result of various events, including breaches of representations and warranties, loss of or damages to property, environmental liabilities or as a result of litigation that may be suffered by counterparties.

Certain indemnifications can extend for an unlimited period and generally do not provide for any limit on the maximum potential amount. The nature of substantially all of the indemnifications prevents the Trust from making a reasonable estimate of the maximum potential amount that might be required to pay counterparties as the agreements do not specify a maximum amount, and the amounts depend on the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time.

The Trust indemnifies its directors and officers against any and all claims or losses reasonably incurred in the performance of their services to the Trust to the extent permitted by law. The Trust has acquired and maintains liability insurance for its directors and officers. The Trust is party to various legal claims associated with the ordinary conduct of business. The Trust does not anticipate that these claims will have a material impact on its financial position.



16. CHANGES IN NON-CASH WORKING CAPITAL

Year Ended December 31,
----------------------------------------------------------------------------
($ thousands) 2008 2007
----------------------------------------------------------------------------
Changes in non-cash working capital items:
Accounts receivable 943 (3,306)
Prepaid expenses and deposits 528 136
Accounts payable and accrued liabilities 1,515 (1,238)
Cash distributions payable 252 52
Working capital acquired from corporate acquisitions (3,345) -
Foreign exchange and other 3,035 (1,076)
----------------------------------------------------------------------------
2,928 (5,432)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes relating to operating activities 3,215 (3,535)
Changes relating to financing activities 252 52
Changes relating to investing activities (539) (1,949)
----------------------------------------------------------------------------
2,928 (5,432)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


17. SUPPLEMENTAL CASH FLOW INFORMATION

($ thousands) 2008 2007
----------------------------------------------------------------------------
Cash interest paid 4,121 3,259
Cash taxes paid 4,973 2,972
----------------------------------------------------------------------------
----------------------------------------------------------------------------


18. SEGMENTED INFORMATION

Zargon's entire operating activities are related to exploration, development
and production of oil and natural gas in the geographic regions of Canada
and the US.

2008
----------------------------------------------------------------------------
($ thousands) Canada United States Combined
----------------------------------------------------------------------------
Petroleum and natural gas revenue 202,146 27,348 229,494
Earnings before income taxes 82,647 12,540 95,187
Property and equipment, net 353,174 33,572 386,746
Total assets 428,968 18,632 447,600
Goodwill 2,969 - 2,969
Net capital expenditures 57,744 980 58,724
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2007
----------------------------------------------------------------------------
($ thousands) Canada United States Combined
----------------------------------------------------------------------------
Petroleum and natural gas revenue 133,473 22,039 155,512
Earnings before income taxes 5,703 9,327 15,030
Property and equipment, net 278,444 35,505 313,949
Total assets 301,643 38,551 340,194
Goodwill - - -
Net capital expenditures 63,591 3,078 66,669
----------------------------------------------------------------------------
----------------------------------------------------------------------------


19. CASH DISTRIBUTIONS

During the year, the Trust declared distributions to the unitholders in the
aggregate amount of $39.09 million (2007 - $36.70 million) in accordance
with the following schedule:

2008 Distributions Record Date Distribution Date Per Trust Unit
----------------------------------------------------------------------------
January January 31, 2008 February 15, 2008 $ 0.18
February February 29, 2008 March 17, 2008 $ 0.18
March March 31, 2008 April 15, 2008 $ 0.18
April April 30, 2008 May 15, 2008 $ 0.18
May May 31, 2008 June 16, 2008 $ 0.18
June June 30, 2008 July 15, 2008 $ 0.18
July July 31, 2008 August 15, 2008 $ 0.18
August August 31, 2008 September 15, 2008 $ 0.18
September September 30, 2008 October 15, 2008 $ 0.18
October October 31, 2008 November 17, 2008 $ 0.18
November November 30, 2008 December 15, 2008 $ 0.18
December December 31, 2008 January 15, 2009 $ 0.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2007 Distributions Record Date Distribution Date Per Trust Unit
----------------------------------------------------------------------------
January January 31, 2007 February 15, 2007 $ 0.18
February February 28, 2007 March 15, 2007 $ 0.18
March March 31, 2007 April 16, 2007 $ 0.18
April April 30, 2007 May 15, 2007 $ 0.18
May May 31, 2007 June 15, 2007 $ 0.18
June June 30, 2007 July 16, 2007 $ 0.18
July July 31, 2007 August 15, 2007 $ 0.18
August August 31, 2007 September 17, 2007 $ 0.18
September September 30, 2007 October 15, 2007 $ 0.18
October October 31, 2007 November 15, 2007 $ 0.18
November November 30, 2007 December 17, 2007 $ 0.18
December December 31, 2007 January 15, 2008 $ 0.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------


20. RELATED PARTY TRANSACTIONS

Zargon paid $0.05 million (2007 - $0.05 million) for vehicle leases to a company owned by a Board member and $0.23 million (2007 - $0.07 million) for legal services to a law firm of which a Board member is a partner. These payments were in the normal course of operations, were made on commercial terms, and therefore were recorded at their exchange amounts.

21. SUBSEQUENT EVENTS

On February 27, 2009, Zargon entered into an Arrangement Agreement pursuant to which Zargon has agreed to make an offer to acquire all the issued and outstanding common shares of Masters Energy Inc. ("Masters") and assume approximately $13.20 million of net debt (including transaction costs) subject to a number of conditions. Pursuant to the Acquisition Agreement, Masters shareholders will have the option of receiving 0.120 Zargon trust units, up to a maximum of 1.49 million trust units, or $1.83 for each Masters common share, up to an aggregate maximum of $5.70 million in cash.

22. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform with the current year's financial statement presentation.




Forward-Looking Statements - This press release offers our assessment of Zargon's future plans and operations as at March 9, 2009, and contains forward-looking statements including:

- our expectations for production costs referred to under the heading "Production Expenses";

- our expectations for taxes referred to under the headings "Current Income Taxes" and "Future Income Taxes";

- our expected sources of funds for distributions and capital expenditures referred to under the heading "Liquidity and Capital Resources";

- our distribution policy referred to under the headings "Cash Distributions" and "Liquidity and Capital Resources".

Such statements are generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "forecast", "may", "will", "project", "should", "plan", "intend", "believe" and similar expressions (including the negatives thereof). By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control, including such as those relating to results of operations and financial condition, general economic conditions, industry conditions, changes in regulatory and taxation regimes, volatility of commodity prices, escalation of operating and capital costs, currency fluctuations, the availability of services, imprecision of reserve estimates, geological, technical, drilling and processing problems, environmental risks, weather, the lack of availability of qualified personnel or management, stock market volatility, the ability to access sufficient capital from internal and external sources and competition from other industry participants for, among other things, capital, services, acquisitions of reserves, undeveloped lands and skilled personnel. Risks are described in more detail in our Annual Information Form, which is available on our website and at www.sedar.com. Forward-looking statements are provided to allow investors to have a greater understanding of our business.

You are cautioned that the assumptions, including among other things, future oil and natural gas prices; future capital expenditure levels; future production levels; future exchange rates; the cost of developing and expanding our assets; our ability to obtain equipment in a timely manner to carry out development activities; our ability to market our oil and natural gas successfully to current and new customers; the impact of increasing competition; our ability to obtain financing on acceptable terms; and our ability to add production and reserves through our development and acquisition activities 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. Our actual results, performance, or achievement could differ materially from those expressed in, or implied by, these forward-looking statements. We can give no assurance that any of the events anticipated will transpire or occur, or if any of them do, what benefits we will derive from them. The forward-looking information contained in this document is expressly qualified by this cautionary statement. Our policy for updating forward-looking statements is that Zargon disclaims, except as required by law, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Barrels of Oil Equivalent - Barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Based in Calgary, Alberta, Zargon is a sustainable energy trust with oil and natural gas operations in Alberta, Saskatchewan, Manitoba and North Dakota. Zargon's securities trade on the Toronto Stock Exchange.

In order to learn more about Zargon, we encourage you to visit Zargon's website at www.zargon.ca where you will find a current unitholder presentation, financial reports and historical news releases.

Contact Information

  • Zargon Energy Trust
    C.H. Hansen
    President and Chief Executive Officer
    (403) 264-9992
    or
    B.C. Heagy
    Executive Vice President and Chief Financial Officer
    (403) 264-9992
    Email: zargon@zargon.ca
    Website: www.zargon.ca