News Releases

Bonterra Oil & Gas Ltd. Announces Fourth Quarter and Annual 2008 Results

Mar 24, 2009 - 12:00 ET

CALGARY, ALBERTA--(Marketwire - March 24, 2009) - Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX:BNE.UN) is pleased to announce its financial and operational results for the three months and fiscal year ended December 31, 2008.

Reorganization Highlights

Bonterra successfully converted to a corporation in November, 2008. The conversion provides investors with enhanced certainty in regard to Bonterra's ability to remain a high-income generating investment while negating the overhang associated with the Canadian federal government's legislation to tax trusts beginning in 2011. Select benefits of the new corporate structure include:

- The ability to continue to provide income oriented investors with a
substantial cash yield. Bonterra intends to continue with a cash
dividend policy similar to that followed by the Trust;

- Substantial tax pools of approximately $465 million which will
currently allow Bonterra to extend its taxable horizon beyond 2018,
subject to commodity prices;

- Higher after-tax earnings for investors as dividends are taxed at
lower rates than distributions;

- Removal of the growth limitation which currently exists under the
"normal growth" guidelines; and

- The flexibility to increase capital investment over the next several
years with a view to providing enhanced returns to investors.

Financial Highlights

- Net earnings increased substantially to $55.4 million or $3.25 per
share as compared to $30.4 million or $1.79 per unit in 2007;

- Cash flow from operations totaled $69.6 million ($4.07 per share) in

2008, an increase of 35 percent year over year;

- Cash payment per share/unit to investors totaled $3.12, a substantial
increase from the 2007 level of $2.64;

- The payout ratio was 77 percent of cash flow, within the Company's
annual target of 75 to 80 percent and a decrease from the 2007 level
of 87 percent.

Operational Highlights

- Production increased to an all time high of 4,346 barrels of oil
equivalent (BOE) per day as a result of its internal development
program and an acquisition during the year. Fourth quarter production
totaled 4,587 BOE per day, an increase of nine percent over the same
period last year and the 2009 exit rate was 4,950 BOE per day;

- Reserves increased to 24.1 million BOE and 31.2 million BOE on a
proved and a proved plus probable basis, respectively. This
represents an increase of 12.1 percent to the Company's proved
reserves and a 14.4 percent increase to proved plus probable
reserves;

- Reserves per share on a P+P basis increased 13.0 percent to 1.83 boe
per share;

- Bonterra's finding and development costs (F&D costs) including
acquisitions in 2008 continue to be among the lowest in the Canadian
oil and gas industry. F&D average costs for the past three years were
$8.67 per boe on a proved basis and $7.47 per BOE on a proved plus
probable (P+P) basis compared with the previous three year average
(2005-2007) of $14.37 per boe on a proved basis and $11.07 per boe on
a P+P basis.



Annual Highlights
                                                  2008     2007     2006
-------------------------------------------------------------------------
Financial ($000, except $ per share/unit)
-------------------------------------------------------------------------
Revenue - realized oil and gas                 121,730   96,431   88,734
Cash payments per share/unit(1)                   3.12     2.64     2.82
Cash flow from operations                       69,570   51,433   51,944
  Per Share/Unit Basic                            4.07     3.04     3.10
  Per Share/Unit Fully Diluted                    4.06     3.04     3.08
Payout Ratio(1)                                    77%      87%      91%
Net Earnings                                    55,426   30,350   37,250
  Per Share/Unit Basic                            3.25     1.79     2.23
  Per Share/Unit Fully Diluted                    3.23     1.79     2.21
Capital Expenditures and Acquisitions           45,407   19,300   38,348
Working Capital Deficiency                      23,878   58,766   50,187
Long-term Debt                                  79,910        -        -
Shareholders'/Unitholders' Equity               56,777   44,376   53,359
Shares/Units Outstanding                        17,258   16,928   16,875
-------------------------------------------------------------------------
Operations
-------------------------------------------------------------------------
Oil and Liquids (barrels per day)                3,073    3,113    3,040
  Average Price ($ per barrel)                   87.54    70.31    64.69
Natural Gas (MCF per day)                        7,637    6,627    6,014
  Average Price ($ per MCF)                       8.21     6.75     7.55
Total BOE per day (2)                            4,346    4,218    4,042
-------------------------------------------------------------------------
Reserves
-------------------------------------------------------------------------
Oil and Liquids (barrels in 000s)
  Proved Developed Producing (Gross)(3)         15,534   14,468   13,688
  Proved (Gross)                                17,991   17,472   16,758
  Proved plus Probable (Gross)                  22,867   21,910   21,526
Natural Gas (MCF in 000s)
  Proved Developed Producing (Gross)            32,108   19,863   17,011
  Proved (Gross)                                36,571   24,125   22,562
  Proved plus Probable (Gross)                  50,245   32,465   29,700
Reserve Life Index(4) (oil, liquids and
 natural gas at 6:1) (years)
  Proved Developed Producing (Gross)              12.5     11.3     11.0
  Proved (Gross)                                  14.4     13.7     13.6
  Proved plus Probable (Gross)                    18.7     17.4     17.6
Reserves per Weighted Average Outstanding
 Share/Unit (BOE)
  Proved Developed Producing (Gross)              1.22     1.05     0.98
  Proved (Gross)                                  1.41     1.27     1.22
  Proved plus Probable (Gross)                    1.83     1.62     1.57
-------------------------------------------------------------------------


Quarterly Highlights
2008                                      4th      3rd      2nd      1st
-------------------------------------------------------------------------
Financial ($000, except $ per
 share/unit)
Revenue - realized oil and gas sales   22,613   34,226   34,398   30,493
Cash flow from operations              10,336   22,492   20,530   16,212
  Per Share/Unit Basic                   0.59     1.31     1.21     0.96
  Per Share/Unit Fully Diluted           0.59     1.30     1.20     0.96
Cash payments per share/unit(1)          0.62     0.96     0.84     0.70
Payout Ratio(1)                          105%      73%      69%      73%
Net Earnings                           10,585   21,125   12,912   10,804
  Per Share/Unit Basic                   0.62     1.23     0.76     0.64
  Per Share/Unit Fully Diluted           0.62     1.22     0.75     0.64
Capital Expenditures and
 Acquisitions                          30,405    6,038    2,543    6,421
Total Assets                          265,301  150,120  153,247  150,169
Working Capital Deficiency             23,878   47,499   57,148   57,810
Long-term debt                         79,910        -        -        -
Shareholders'/Unitholders' Equity      56,777   57,623   46,612   48,136
-------------------------------------------------------------------------
Operations
Oil and Liquids (barrels per day)       3,105    3,013    3,024    3,153
Natural Gas (MCF per day)               8,892    7,233    7,272    7,139
Total BOE per day                       4,587    4,219    4,236    4,343
-------------------------------------------------------------------------

(1) Cash payments per share/unit are based on payments made in respect of
    production months within the quarter.
(2) Barrels of oil equivalent (BOE) are calculated using a conversion
    ratio of 6 MCF to 1 barrel of oil. The conversion is based on an
    energy equivalency convervsion method primarily applicable at the
    burner tip and does not represent a value equivalency at the wellhead
    and as such may be misleading if used in isolation.
(3) Gross reserves relate to the Company's ownership of reserves
    deducting any royalties.
(4) The reserve life index is calculated by dividing the reserves (BOE)
    by the annualized fourth quarter average production rate (2008 -
    4,587 BOE per day; 2007 - 4,295 BOE per day; 2006 - 4,119).



A Discussion of Financial and Operational Results

This press release is a review of the operations, current financial position, and outlook for Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") and should be read in conjunction with the audited financial statements for the year ended December 31, 2008, together with the notes related thereto.

Forward-looking Information

Certain statements contained in this report include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, statements relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute "forward- looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this report includes, but is not limited to: expected cash provided by continuing operations; dividends; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and demand; expansion and other development trends of the oil and gas industry; business strategy and outlook; expansion and growth of our business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; credit risks; and other such matters.

All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control. The foregoing factors are not exhaustive and are further discussed herein under the heading Business Prospects, Risks and Outlooks as well as in the Company's Annual Information Form filed on SEDAR at www.sedar.com.

Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits will be derived therefrom. Except as required by law, the Company disclaims any intention or obligation to update or revise any forward- looking information, whether as a result of new information, future events or otherwise.

The forward-looking information contained herein is expressly qualified by this cautionary statement.



Production
                            Three months ended       Twelve months ended
                        December September  December  December  December
                        31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
Crude oil and NGLs
 (barrels per day)         3,105     3,013     3,098     3,073     3,113
Natural gas (MCF per day)  8,892     7,233     7,176     7,637     6,627
-------------------------------------------------------------------------
Average BOE per day        4,587     4,219     4,295     4,346     4,218
-------------------------------------------------------------------------



Bonterra's 2008 average production increased three percent on a per BOE basis. Crude oil production decreased by approximately 1.3 percent while gas production increased by approximately 15.2 percent. The decreased crude oil production was due to the timing of Bonterra's 2008 development program in which production came on late in the year and therefore contributed little to 2008 and the 2007 property swap where the Company exchanged its predominantly Saskatchewan oil property for additional production in the Pembina area which had higher natural gas production. The natural gas increase was due to a combination of the successful 2008 development program, the acquisition of Silverwing on November 12, 2008 and the above mentioned property swap.

The Company's fourth quarter production in 2008 saw increases in crude oil (92 barrels per day) and natural gas (1,659 MCF per day) production over Q308 production due to the commencement of production from new wells drilled as well as the completion of the Silverwing acquisition. The Silverwing acquisition, which closed on November 12, 2008, added approximately 650 BOE per day, mainly natural gas. The Company's average production volume for December was approximately 4,950 BOE per day.

Bonterra's overall annual decline rate for 2008 was approximately 8.5 percent. The Company was able to more than offset this decline with its 2008 drill program. Bonterra, along with its partners, drilled 33 gross (22.9 net) Cardium oil wells. This includes 26 gross and 21.9 net Cardium wells drilled directly by the Company. Also the Company drilled 7 gross (5 net) shallow gas wells in 2008 in the Pembina field and 3 gross (2.9 net) Shaunavon oil wells. The Company also participated in one (0.1 net) Cardium natural gas well drilled by one of its partners. Bonterra recorded a 100 percent success rate with its 2008 drilling program. The majority of the wells were drilled in the fourth quarter; 14 (10.2 net) Cardium oil wells, seven gross (five net) shallow Pembina gas wells and all three (2.9 net) of the Shaunavon oil wells. The closing date for the Silverwing acquisition was November 12, 2008 and therefore contributed little to production rates for the full year.

As at December 31, 2008, Bonterra had only one gross (0.25 net) Cardium oil well, no natural gas wells, three gross (2.5 net) coalbed methane (CBM) wells with assigned reserves and three gross (2.9 net) Shaunavon oil wells drilled but not on production. Subsequent to December 31, 2008 and up to the date of this report, the Company has put all of its oil wells on production. The timing for the tie-in of the CBM wells has not yet been determined.



Revenue
                            Three months ended       Twelve months ended
                        December September  December  December  December
($ 000)                 31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
Revenue - oil and gas
 sales (000's) - cash     22,613    34,226    26,573   121,730    96,431
Average Realized Prices:
Crude oil and NGLs (per
 barrel)                   58.91    103.36     77.60     87.54     70.31
Natural gas (per MCF)       7.00      8.20      6.70      8.21      6.75
-------------------------------------------------------------------------



Revenue from petroleum and natural gas sales increased 26 percent in 2008 compared to 2007 due to increased production volumes and an increase in the average price received for crude oil, natural gas liquids and natural gas. The fourth quarter of 2008 saw a substantial decrease in realized revenues over the third quarter of 2008 due to the significant decrease in commodity prices.

Included in revenue is a risk management loss of $7,353,000 (2007 - gain of $621,000) due to lower prices received as a result of commodity risk management agreements. The Company may continue to hedge future production to assist in managing its cash flow. As at December 31, 2008, the Company had no outstanding risk management agreements. The value of the outstanding commodity hedging contracts as of December 31, 2007 was a net liability of $3,085,000.



Royalties
                            Three months ended       Twelve months ended
                        December September  December  December  December
($ 000)                 31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
Crown royalties            2,337     3,523     2,634    13,736     9,209
Freehold royalties, gross
 overriding royalties and
 net carried interests       558     1,134       682     3,479     3,235
-------------------------------------------------------------------------
Total royalty expense      2,895     4,657     3,316    17,215    12,444
-------------------------------------------------------------------------



Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. The majority of the Company's wells are low productivity wells and therefore have low Crown royalty rates. The Company's average Crown royalty rate was approximately 10.6 percent (2007 - 10 percent) and approximately 2.7 percent (2007 - 3 percent) for other royalties before hedging adjustments.

During 2007, the Company was advised by the owner of a gross overriding royalty that a production limit was attained that resulted in an additional gross overriding royalty in respect of certain of its Cardium oil wells. The production limit was triggered by a calculation on a multitude of Cardium wells including many that were not owned by the Company. In addition the exact wells that the production limit was applicable to was not readily known by the Company nor easily determined. In discussions with the payee it was determined that the production limit was reached in late 2005. The royalty was calculated based on this agreed date and the affected wells for the Company and other operators in the area were identified. The approximate amount of the adjustment, net to the Company was $570,000 for periods prior to January 1, 2007. This amount has been included in the 2007 royalty numbers.

Also in 2007 the Company was informed by the operator of its former Dodsland property that it had not been charged a net profit royalty for the years 2004, 2005 and 2006. In reviewing the agreements it was confirmed the claim was accurate and an amount of approximately $150,000 was paid by the Company in 2007 for the net profit royalty. This was also expensed in 2007.

New Alberta Crown Royalty Framework (NRF)

Royalty rates in the fourth quarter averaged approximately 13.4 percent; slightly higher than preceding quarters. The NRF rates vary by prices as well as productivity levels. With the current low prices the new royalty rates should result in a significant reduction in the amount the Company will pay to the Province of Alberta. This combined with the Silvering acquisition (mostly BC production with lower Crown royalty rates) should result in a lower average Crown royalty rate for the Company in 2009.



Production Costs
                            Three months ended       Twelve months ended
                        December September  December  December  December
($ 000)                 31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
Production costs           6,859     6,148     5,535    25,413    24,073
  $ per BOE                16.25     15.84     14.01     15.98     15.64
-------------------------------------------------------------------------



Barrels of oil equivalent (BOE) are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation. Operating costs on the Company's newly acquired British Columbia (BC) properties as well as on the newly drilled wells are lower on a BOE basis than on its older low productivity wells and this may result in lower operating costs per BOE in the future.

Operating costs increased slightly in the fourth quarter of 2008 compared to the prior quarter due primarily to the acquisition of Silverwing and from new wells put on production in the fourth quarter of 2008 and large industry wide increases for oilfield services especially for oil producing properties. Average production costs per BOE increased marginally in Q408 compared with the previous quarter due mainly to winterization programs performed on the Company's wells and facilities.

With the acquisition of Silverwing and the Company's recent drilling success and expected declines in oilfield service costs, the Company anticipates operating costs in the $14 to $15 per BOE range for 2009. The higher operating costs for the Company are substantially offset by lower royalty rates and results in higher cash net backs on a combined basis despite higher than average operating costs.



General and Administrative Expense
                            Three months ended       Twelve months ended
                        December September  December  December  December
($ 000)                 31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
G&A Expense                  824       845       739     3,401     2,603
  $ per BOE                 1.95      2.18      1.69      2.14      1.69
-------------------------------------------------------------------------



General and administrative (G&A) expenses increased 31 percent in 2008 compared to 2007. The Company provides administrative services to Comaplex Minerals Corp. (Comaplex) and Pine Cliff Energy Ltd. (Pine Cliff), companies that share common directors and management. Please refer to discussion under Related Party Transactions for details.

The Company's only significant general and administrative costs are employee compensation and professional services such as legal, engineering and accounting. Employee compensation expense increased by approximately 29 percent ($856,000). The increase is due primarily to the Company's bonus plan which resulted in additional employee compensation of $610,000 (20.7 percent) with the remainder due to increased staffing levels (3.8 percent) and 2008 salary increases (4.5 percent). The Company's bonus plan consists of cash payments equal to three percent of before tax net earnings to be paid to employees and key consultants based on performance throughout the year.

Costs associated with professional services increased by approximately $90,000. Increases in other general and administrative areas have been offset by increased administration recovery charges to capital programs.

The quarter over quarter decrease was primarily due to a lower bonus accrual but was almost fully offset by increased professional fees related to the internal control review and costs related to managing the integration of the Silverwing acquisition and reorganization.



Interest Expense
                            Three months ended       Twelve months ended
                        December September  December  December  December
($ 000)                 31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
Interest Expense             746       545       878     2,740     3,028
-------------------------------------------------------------------------



The decrease in interest expense in 2008 as compared to 2007 was due to much lower borrowing costs, offset partially by increased loan balances resulting from the Company's acquisition of Silverwing and its reorganization. Interest rates during the year on the outstanding debt averaged approximately 4.5 percent (2007 - 5.9 percent). The Company maintained an average outstanding debt balance of approximately $60,600,000 (2007 - $51,600,000). Total debt (including negative working capital) as of December 31, 2008 represents approximately 17.9 months of 2008 annual cash flow from operations or 30.1 months based on annualized 2008 fourth quarter cash flow from operations. The ratio of bank debt only as of December 31, 2008 based on the annualized 2008 Q4 base was 27.1 months. Also in the fourth quarter of 2008 the Company had one time reorganization costs of approximately $1,369,000 reducing cash flow to $10,336,000 from approximately $11,700,000. This one item has significant implications on the ratio of bank debt to cash flow and would reduce the Q4 numbers of 30.1 to 26.6 and 27.1 to 23.9 months.

During the year the Company acquired Silverwing a public oil and gas producer for cash consideration including negative working capital of $28,995,000. In addition, the Trust underwent a reorganization resulting in a cash outlay of $11,257,000 plus reorganization costs of $2,121,000. The Company also experienced a decrease in cash flow due to the rather significant drop in commodity prices during the final four months of 2008.

The Company ended 2008 with a debt to cash flow ratio that is higher than usual even though it is in a range that is normal with its peers at the present time. The main reason for the higher debt level is that early in the third quarter of 2008, when the Company announced its reorganization and Silverwing acquisition, it had various options outstanding that were well in the money for approximately $35 million. At closing of the reorganization on November 12, 2008, the world economy had changed substantially resulting in large reductions in share prices, including Bonterra's and the majority of the outstanding options not being exercised. The debt level is still very manageable for Bonterra but plans for 2009 are to reduce the debt to cash flow ratio that presently exceeds 2 to 1.

Bank debt at December 31, 2008 was $93,235,000 (December 31, 2007 - $57,422,000). The Company's banking arrangements allow it to use Bankers Acceptances (BA's) as part of its loan facility. Interest charges on BA's are generally one half percent lower than that charged on the general loan account. The interest rate on the credit facilities is calculated as follows:



-------------------------------------------------------------------------
Consolidated   Level I  Level II Level III  Level IV   Level V  Level VI
Total Funded   ----------------------------------------------------------
Debt(1) to                  Over      Over      Over      Over
Consolidated     Below  0.5:1 to  1.0:1 to  1.5:1 to  2.0:1 to      Over
Cash flow Ratio 0.50:1     1:0:1     1.5:1     2.0:1     2.5:1     2.5:1
-------------------------------------------------------------------------
Canadian Prime
 Rate Plus          50        75        85       100       125       150
-------------------------------------------------------------------------
Bankers'
 Acceptances
 Rate Plus         150       175       185       200       225       250
-------------------------------------------------------------------------
(1) Consolidated total funded debt excludes related party amounts but
    includes working capital.



Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the third month following the end of each fiscal quarter, except for the end of a fiscal year in respect of which the adjustment shall be made effective as of the first day of the fifth month following the end of such fiscal year, with each such adjustment to be effective until the next such adjustment.

Reorganization Costs

Based on current accounting rules, costs associated with the Trust's reorganization into Bonterra Oil and Gas Ltd. must be expensed. The costs consist of a $1,000,000 finders fee paid to a company that facilitated the reorganization, $931,000 of professional fees, $150,000 stock exchange fees and $40,000 of costs associated with the distribution of the reorganization document. These costs are all one time costs and no further costs are anticipated by the Company in direct relation to the reorganization. Of these total costs of $2,121,000, the Company expensed $1,369,000 in the fourth quarter of 2008 and $752,000 was expensed in the third quarter of 2008.

Stock-Based Compensation

Stock-based compensation is a statistically calculated value representing the estimated expense of issuing employee stock options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. Due to the reorganization, all existing employee unit options vested and were either exercised or were cancelled. This resulted in approximately an additional $195,000 of stock-based compensation being recorded in the fourth quarter on the automatic vesting of outstanding options. Also the Company issued 1,390,500 stock options during 2008 resulting in a further expense of $97,000.

The 1,390,500 common share options were issued at the end of November 2008 with an exercise price of $20.50 per share and a fair value of $1.11 per option. The fair value of the options granted has been estimated using the Black-Scholes option pricing model, assuming a weighted risk free interest rate of 2.2 percent (2007 - 4.7 percent), expected weighted average volatility of 31 percent (2007 - 27 percent), expected weighted average life of 3.5 years (2007 - 2.3 years) and an annual dividend/distribution rate based on the dividends paid to the Shareholders/Unitholders during the year. The future stock-based compensation impact of these options is approximately $225,000 per quarter over the next four quarters.

Depletion, Depreciation, Accretion and Dry Hole Costs

The Company follows the successful efforts method of accounting for petroleum and natural gas exploration and development costs. Under this method, the costs associated with dry holes are charged to operations. For intangible capital costs that result in the addition of reserves, the Company depletes its oil and natural gas intangible assets using the unit-of- production basis by field.

For tangible assets such as well equipment, a life span of ten years is estimated and the related tangible costs are depreciated at one tenth of original cost per year. The use of a ten year life span instead of calculating depreciation over the life of reserves was determined to be more representative of actual costs of tangible property. Given the Company's long production life, wells generally require replacement of tangible assets more than once during their life time. Most of the Company's wells have been producing since the 1960's and are expected to continue to produce for at least another twenty years.

Provisions are made for asset retirement obligations through the recognition of the fair value of obligations associated with the retirement of tangible long-life assets being recorded in the period the asset is put into use, with a corresponding increase to the carrying amount of the related asset. The obligations recognized are statutory, contractual or legal obligations. The liability is adjusted over time for changes in the value of the liability through accretion charges which are included in depletion, depreciation and accretion expense. The costs capitalized to the related assets are amortized to earnings in a manner consistent with the depletion and depreciation of the underlying asset.

At December 31, 2008, the estimated total undiscounted amount required to settle the asset retirement obligations was $58,903,000 (2007 - $54,622,000). Of the $4,281,000 increase, the majority is due to the Silverwing acquisition.

These obligations will be settled based on the useful lives of the underlying assets, which extend up to 50 years into the future. This amount has been discounted using a credit-adjusted risk-free interest rate of five percent. The discount rate is reviewed annually and adjusted if considered necessary. A change in the rate would have a significant impact on the amount recorded for asset retirement obligations. Based on the current provision, a one percent increase in the risk adjusted rate would decrease the asset retirement obligation by $2,706,000. While a one percent decrease in the risk adjusted rate would increase the asset retirement obligation by $3,639,000.

For the fiscal year ending December 31, 2008, the Company expensed $14,749,000 (2007 - $16,675,000) for the above-described items including $Nil (2007 - $3,078,000) for dry hole costs. During 2007 the Company wrote off all costs related to eight wells which no reserves were attributed by the independent third party engineers.

Income Taxes

On November 12, 2008, Bonterra Energy Income Trust converted to a corporation. Due to the conversion and the acquisition of Silverwing, the Company increased its usable tax pools to approximately $468,000,000 (see below). As a result of the reorganization, the Company has recorded a future income tax asset and a corresponding deferred tax credit. These amounts will be amortized into future tax expense as the associated tax pools are consumed.

The current tax provision relates to resource surcharge payable by the Company to the Province of Saskatchewan. The surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The provincial government of Saskatchewan reduced the resource surcharge rate from 3.1 percent to 3.0 percent on July 1, 2008.

The Company has the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:



                                                    Rate of
                                                Utilization
($ 000)                                                   %       Amount
-------------------------------------------------------------------------
Undepreciated capital costs                          20-100    $  23,696
Eligible capital expenditures                             7        1,870
Share issue costs                                        20        4,581
Canadian oil and gas property expenditures               10       25,072
Canadian development expenditures                        30       50,743
Canadian exploration expenditures                       100       10,530
SR&ED expenditures                                      100       80,357
Income tax losses carried forward(1)                    100      271,029
-------------------------------------------------------------------------
                                                               $ 467,878
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Income tax losses carried forward expire in the following years;
    2014 - $1,069,000, 2025 - $3,179,000, 2026 - $109,244,000,
    2027 - $116,787,000, 2028 - $40,750,000.



Prior to becoming a corporation, the Trust paid nine distributions for the 2008 tax year. The Canadian tax breakdown of those distributions is as follows:



                                                 Percentage
                                                 -----------
Taxable Income (Other Income)                         85.16
Return of Capital                                     14.84
                                                ------------
                                                     100.00
                                                ------------



With respect to cash distributions paid during the year to U.S. individual unitholders, 17.71 percent should be reported as a return of capital (to the extent of the Unitholder's U.S. tax basis in their respective units) and 82.29 percent should be reported as qualified dividends.



Net Earnings
                            Three months ended       Twelve months ended
                        December September  December  December  December
($ 000)                 31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
Net Earnings              10,585    21,125     8,372    55,426    30,350



Bonterra's net earnings for the year ended December 31, 2008 represents an 82 percent increase over the Company's 2007 net earnings. The Company recorded net earnings per share on a fully diluted basis in 2008 of $3.23 verses $1.79 in the 2007 year. This represents a return on Shareholders' equity of approximately 97.6 percent (2007 - 68.6 percent) based on year end Shareholders' equity.

Strong crude oil and natural gas prices for most of 2008 along with a three percent increase in production volumes were driving factors behind the increased profit. However, during the fourth quarter and continuing into the first quarter and likely beyond, commodity prices have plunged to under $40 U.S. ($50 Cdn). This along with natural gas prices in the $4 to $5 dollar range will significantly reduce the Company's net earnings. The Company's low capital costs combined with the Company's low production decline rates should allow for continued positive earnings even in the above mentioned price environment.



Cash Flow from Operations
                            Three months ended       Twelve months ended
                        December September  December  December  December
($ 000)                 31, 2008  30, 2008  31, 2007  31, 2008  31, 2007
-------------------------------------------------------------------------
Cash flow from operations 10,336    22,492    13,369    69,570    51,433



Cash flow from operations increased 35 percent year over year, mainly due to increased commodity prices received during the first nine months of 2008. The fourth quarter of 2008 saw significant price declines in all commodity categories. Although the Company was able to increase production in the fourth quarter of 2008 by almost nine percent over the previous quarter, cash flow from operations decreased approximately 54 percent. One time costs of $1,369,000 incurred in Q4 (Q3 - $752,000) related to the reorganization also contributed to the decline.

With the continuing depressed crude oil and natural gas prices, cash flow for 2009 is expected to be significantly negatively affected. The price declines are expected to be partially offset by anticipated production volumes in excess of 5,000 BOE per day for 2009, and anticipated decreases in G&A costs (lower employee compensation) and in corporate resource surcharge (tax on revenues). Also, Bonterra does not expect any further costs associated with the acquisition of Silverwing or the reorganization.



Cash Netbacks

The following table illustrates the Company's cash netback:

$ per Barrel of Oil Equivalent (BOE)                   2008         2007
-------------------------------------------------------------------------
Production volumes (BOE)                          1,590,666    1,539,461
-------------------------------------------------------------------------
Gross production revenue                         $    81.15   $    62.24
Realized gain (loss) on risk management
 contracts                                            (4.62)        0.40
Royalties                                            (10.82)       (8.08)
Field operating                                      (15.98)      (15.64)
-------------------------------------------------------------------------
Field netback                                         49.73        38.92
General and administrative                            (2.14)       (1.69)
Interest and taxes                                    (2.00)       (2.30)
-------------------------------------------------------------------------
Cash netback                                     $    45.59   $    34.93
-------------------------------------------------------------------------



The following table illustrates the Company's cash netback for the three months ended:



                                               December 31, September 30,
$ per Barrel of Oil Equivalent (BOE)                  2008          2008
-------------------------------------------------------------------------
Production volumes (BOE)                            422,008      395,962
-------------------------------------------------------------------------
Gross production revenue                         $    51.27   $    95.80
Realized gain (loss) on risk management
 contracts                                             2.31        (7.60)
Royalties                                             (6.86)      (12.00)
Field operating                                      (16.25)      (15.84)
-------------------------------------------------------------------------
Field netback                                         30.47        60.36
General and administrative                            (1.95)       (2.18)
Interest and taxes                                    (1.90)       (1.73)
-------------------------------------------------------------------------
Cash netback                                     $    26.62   $    56.45
-------------------------------------------------------------------------



Finding and Development Costs (F&D Costs)

The Company has been active in its capital development program over the past three years. Over this time period Bonterra has incurred the following F&D Costs:


-------------------------------------------------------------------------
                  2008 F&D   2007 F&D   2006 F&D   2008 Three  2007 Three
                 Costs per  Costs per  Costs per      Year        Year
                 BOE(1)(2)  BOE(1)(2)  BOE(1)(2)     Average     Average
-------------------------------------------------------------------------
Proved Reserve
 Additions           $8.67      $2.74     $25.51      $12.30      $14.37
-------------------------------------------------------------------------
Proved plus Probable
 Reserve Additions   $7.47      $2.68     $18.21       $9.45      $11.07
-------------------------------------------------------------------------



The above figures have been calculated in accordance with National Instrument 51-101 (NI 51-101) where the F&D Costs equate to the total exploration and development costs incurred by the Company during the year plus the yearly change in estimated future development costs as calculated by Sproule Associates Limited. The following precautionary notes have been provided as required by NI 51-101.

(1) Barrels of Oil Equivalent may be misleading, particularly if used in

isolation. A BOE conversion ratio of 6 MCF:1 bbl is based on an

energy equivalency conversion method primarily applicable at the

burner tip and does not represent a value equivalency at the

wellhead.

(2) The aggregate of the exploration and development costs incurred in

the most recent financial year and the change during that year in

estimated future development costs generally will not reflect total

finding and development costs related to reserve additions for that

year.

Results from the Company's Cardium oil drilling program continue to be better than anticipated resulting in an increase in the third party engineering reports estimated recoverable reserves from existing wells but also from future development. Continued low decline rates have also resulted in increased reserves due to technical revisions. Both these factors contributed to an overall F&D cost in 2008 of $7.47 per BOE on a proved plus probable basis.

Related Party Transactions

The Company holds 689,682 (2007 - 689,682) common shares in Comaplex which have a fair market value as of December 31, 2008 of $2,131,000 (2007 - $4,014,000). Comaplex is a publically traded mineral company on the Toronto Stock Exchange. The Company's ownership in Comaplex represents approximately 1.3 percent of the issued and outstanding common shares of Comaplex. The Company has common directors and management with Comaplex.

Comaplex paid a management fee to the Company of $330,000 (2007 - $300,000). Comaplex also shares office rental costs and reimburses the Company for costs related to employee benefits and office materials. In addition, Comaplex owns 204,633 (December 31, 2007 - 204,633) common shares in the Company. Services provided by the Company include executive services (president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. At December 31, 2008, Comaplex owed the Company $56,000 (December 31, 2007 - $63,000).

In order to facilitate the acquisition of Silverwing, the Company borrowed on a short-term basis $20,000,000 from Comaplex to allow time to finalize documentation for its new bank line of credit. The funds were repaid on November 21, 2008. Total interest paid on the loan was $21,000.

The Company also has a management agreement with Pine Cliff. Pine Cliff has common directors and management with the Company. Pine Cliff trades on the TSX Venture Exchange. Pine Cliff paid a management fee to the Company of $238,000 (2007 - $216,000). Services provided by the Company include executive services (president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. The Company has no share ownership in Pine Cliff. As at December 31, 2008 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2007 - $4,000).

As of December 31, 2008, the Company's CEO and major shareholder had loaned the Company $6,000,000. The loan is unsecured, bears interest at Canadian chartered bank prime less one half of a percent and has no set repayment terms. The loan can only be repaid should the Company have sufficient available borrowing limits within its bank debt. Interest paid on this loan during 2008 was $7,000.

Liquidity and Capital Resources

During 2008, Bonterra participated in drilling 44 gross wells (30.9 net) at a total cost of $29,466,000. Included in the above figure is approximately $1,200,000 of costs associated with the completion and tie-in of wells the Company drilled in 2007 and prior years. As discussed in the Production section, only four gross oil wells (3.2 net) were not on production by December 31, 2008. These wells have subsequently been placed on production at a capital cost of less than $1,000,000 being spent in 2009.

The Company currently has plans to drill approximately 30 gross (18 net) oil and gas wells in 2009 at an estimated budget figure of $15,000,000. The current plan, if Alberta suitably adjusts its royalty structure, includes 18 gross (14 net) Cardium vertical oil wells and two gross (0.65 net) Cardium horizontal oil wells. The balance of the drilling is anticipated to consist of wells in BC and Saskatchewan. The majority of the drilling is anticipated to occur during the third and fourth quarters due in part to the Company's position that it is prudent to wait for the Alberta government to disclose its incentive programs and potential modifications to its high royalty rates so that Alberta will be competitive for certain types of wells.

Bonterra anticipates funding the 2009 capital program out of cash flow and if necessary an increase in the Company's line of credit. Should the need arise, the Company is prepared to raise sufficient equity to complete its planned capital expenditures. However, the current capital budget is predicated on commodity prices recovering to above $50 U.S. for crude oil and $6 per MCF for natural gas and an $0.82 dollar for the last six months of 2009.

Due to the corporate reorganization and acquisition of Silverwing, the Company amended its bank facility to consist of an $80,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated demand credit facility (December 31, 2007 - $69,900,000) (non-syndicated demand facility). The terms of the syndicated revolving credit facility provide that the loan is revolving to May 30, 2010 and is subject to annual review. The revolving credit facility has no fixed payment requirements. The terms of the non-syndicated demand credit facility provide that the loan is due on demand and is subject to annual review and has no fixed repayment terms.

At December 31, 2008 the Company had bank debt of $93,235,000 (2007 - $57,422,000). For the interest rates charged on the facilities please refer to the Interest Expense section of this report.

The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details.



Bonterra Oil & Gas Ltd.

Consolidated Balance Sheets

As at December 31                                    2008           2007
($000)
Assets
Current
  Restricted term deposit (Note 10)             $      20     $        -
  Accounts receivable (Notes 4 & 15)               11,753         10,575
  Crude oil inventory                                 845            792
  Prepaid expenses (Note 4)                         4,222          1,462
  Future income tax asset (Note 11)                 2,669            913
  Investment in related party (Note 6)              2,131          4,014
-------------------------------------------------------------------------
                                                   21,640         17,756
-------------------------------------------------------------------------
Restricted cash (Note 7)                            1,252              -
Future income tax asset (Note 11)                  85,416              -
Property and Equipment (Note 8)
  Petroleum and natural gas properties and
   related equipment                              232,685        187,288
  Accumulated depletion and depreciation          (75,692)       (61,805)
-------------------------------------------------------------------------
                                                  156,993        125,483
-------------------------------------------------------------------------
                                               $  265,301     $  143,239
-------------------------------------------------------------------------
Liabilities
Current
  Distribution payable                         $        -     $    3,724
  Accounts payable and accrued
   liabilities (Note 4)                            23,888         12,291
  Derivative liability (Note 16)                        -          3,085
  Due to related party (Note 9)                     6,000              -
  Deferred credit (Note 11)                         2,305              -
  Short-term bank debt (Note 10)                   13,325         57,422
-------------------------------------------------------------------------
                                                   45,518         76,522
Long-term bank debt (Note 10)                      79,910              -
Future income tax liability (Note 11)                   -          7,595
Deferred credit (Note 11)                          64,758              -
Asset retirement obligations (Note 12)             18,338         14,904
-------------------------------------------------------------------------
                                                  208,524         99,021
-------------------------------------------------------------------------
Commitments, Contingencies and
 Guarantees (Note 17)
Shareholders' Equity (Note 13)
  Share capital                                    99,530              -
  Unit capital                                          -         90,590
  Contributed surplus                               2,542          2,140
-------------------------------------------------------------------------
                                                  102,072         92,730
-------------------------------------------------------------------------
  Deficit                                         (46,715)       (51,543)
  Accumulated other comprehensive
   income (Note 14)                                 1,420          3,031
-------------------------------------------------------------------------
                                                  (45,295)       (48,512)
-------------------------------------------------------------------------
Total Shareholders' Equity                         56,777         44,218
-------------------------------------------------------------------------
                                               $  265,301     $  143,239
-------------------------------------------------------------------------


Bonterra Oil & Gas Ltd.

Consolidated Statements of Shareholders' Equity

For the Years Ended December 31
($000)                                               2008           2007
Unitholders' equity, beginning of year         $   44,218     $   53,359
Comprehensive income for the year                  53,815         31,001
Adjustment of opening accumulated other
 comprehensive income                                   -          2,380
Net capital contributions (Note 13)                 8,135            993
Stock-based compensation                            1,207          1,133
Distributions declared                            (42,660)       (44,648)
-------------------------------------------------------------------------
Unitholders' Equity                                64,715         44,218
Conversion of the Trust to
 a Corporation (Note 4)                                 -        (44,218)
Dividends declared                                 (7,938)             -
-------------------------------------------------------------------------
Shareholders' Equity, End of Year              $   56,777     $        -
-------------------------------------------------------------------------

-------------------------------------------------------------------------


Bonterra Oil & Gas Ltd.

Consolidated Statements of Operations and Deficit

For the Years Ended December 31
($000)                                               2008           2007
Revenue
  Oil and gas sales                            $  129,083     $   95,810
  Gain (loss) on risk management
   contracts - cash                                (7,353)           621
  Gain (loss) on risk management
   contracts - non-cash                             3,085         (3,085)
  Royalties                                       (17,215)       (12,444)
  Interest and other                                   45             44
-------------------------------------------------------------------------
                                                  107,645         80,946
-------------------------------------------------------------------------
Expenses
  Production costs                                 25,413         24,073
  General and administrative                        3,401          2,603
  Interest on debt                                  2,740          3,028
  Reorganization costs (Note 4)                     2,121              -
  Stock-based compensation                          1,207          1,133
  Dry hole costs                                        -          3,078
  Depletion, depreciation and accretion            14,749         13,597
-------------------------------------------------------------------------
                                                   49,631         47,512
-------------------------------------------------------------------------
Earnings Before Taxes                              58,014         33,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Taxes (Note 11)
  Current                                             437            512
  Future                                            2,151          2,572
-------------------------------------------------------------------------
                                                    2,588          3,084
-------------------------------------------------------------------------
Net Earnings for the Year                          55,426         30,350
Deficit, beginning of year                        (51,543)       (37,245)
Distributions declared                            (42,660)       (44,648)
Dividends declared                                 (7,938)             -
-------------------------------------------------------------------------
Deficit, end of year                             ($46,715)      ($51,543)
-------------------------------------------------------------------------
Net Earnings Per Share - Basic (Note 13)       $     3.25     $     1.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings Per Share - Diluted (Note 13)     $     3.23     $     1.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Bonterra Oil & Gas Ltd.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31
($000)                                               2008           2007
Net Earnings for the Period                    $   55,426     $   30,350
-------------------------------------------------------------------------
Other comprehensive income, net of income tax
  Unrealized (loss) gain on investments (net
   of income taxes of $(272), (2007 - $252))       (1,611)         1,465
  Gains and losses on derivatives designated
   as cash flow hedges transferred to net
   earnings (net of income taxes of ($334))             -           (814)
-------------------------------------------------------------------------
Other Comprehensive Income (Loss)                  (1,611)           651
-------------------------------------------------------------------------
Comprehensive Income                           $   53,815     $   31,001
-------------------------------------------------------------------------
Comprehensive Income Per
 Share - Basic (Note 13)                       $     3.15     $     1.83
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive Income Per
 Share - Diluted (Note 13)                     $     3.14     $     1.83
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Bonterra Oil & Gas Ltd.

Consolidated Statements of Cash Flow

For the Years Ended December 31
($000's)                                             2008           2007
Operating Activities
  Net earnings for the year                    $   55,426     $   30,350
  Items not affecting cash
    (Gain) loss on risk management
     contracts - non-cash                          (3,085)         3,085
    Stock-based compensation                        1,207          1,133
    Dry hole costs                                      -          3,078
    Depletion, depreciation and accretion          14,749         13,597
    Future income taxes                             2,151          2,572
-------------------------------------------------------------------------
                                                   70,448         53,815
-------------------------------------------------------------------------
  Change in non-cash working capital
    Accounts receivable                             2,642         (1,082)
    Crude oil inventory                               (40)            51
    Prepaid expenses                                 (360)          (262)
    Accounts payable and accrued liabilities          (57)          (269)
  Asset retirement obligations settled             (3,063)          (820)
-------------------------------------------------------------------------
                                                     (878)        (2,382)
-------------------------------------------------------------------------
                                                   69,570         51,433
-------------------------------------------------------------------------
Financing Activities
  Increase in debt                                 20,698         12,043
  Due to related party                              6,000              -
  Stock option proceeds                             7,935            993
  Unit distributions                              (46,384)       (44,974)
  Dividends                                        (7,938)             -
-------------------------------------------------------------------------
                                                  (19,689)       (31,938)
-------------------------------------------------------------------------
Investing Activities
  Property and equipment expenditures             (30,060)       (19,300)
  Acquisition (Note 5)                            (13,816)             -
  Reorganization (Note 4)                         (11,257)             -
  Restricted term deposit                             (20)             -
  Change in non-cash working capital
    Accounts receivable                                 -            993
    Accounts payable and accrued liabilities        5,272         (1,188)
-------------------------------------------------------------------------
                                                  (49,881)       (19,495)
-------------------------------------------------------------------------
Net cash inflow                                         -              -
Cash, beginning of year                                 -              -
-------------------------------------------------------------------------
Cash, End of Year                              $        -     $        -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Interest Paid                             $    2,740     $    3,028
Cash Taxes Paid                                $      582     $      292



Bonterra Oil & Gas Ltd.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2008 and 2007

1. CHANGE OF ORGANIZATION

On November 12, 2008, Bonterra Energy Income Trust (the "Trust") converted to Bonterra Oil & Gas Ltd. (the "Company") through a reverse takeover by the Trust of SRX Post Holdings Inc. (SRX). In conjunction with the reorganization, the Trust acquired all the issued and outstanding shares of Silverwing Energy Inc. (Silverwing). Concurrently, all of the Company's subsidiaries, including Silverwing were amalgamated into Bonterra Energy Corp.

Prior to the Arrangement on November 12, 2008, the consolidated financial statements included the accounts of the Trust and its subsidiaries. After giving effect to the Arrangement, the consolidated financial statements have been prepared on a continuity of interests basis, which recognizes Bonterra Oil & Gas Ltd. as the successor entity to the Trust. The continuity of interest basis requires that the 2007 comparative consolidated financial statement figures are those previously presented by the Trust.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP) as described below.

Consolidation

These consolidated financial statements include the accounts of the "Company", the Trust (wholly owned by the Company) and its wholly owned subsidiary Bonterra Energy Corp. (Bonterra). Inter-company transactions and balances are eliminated upon consolidation.

Measurement Uncertainty

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the balance sheets as well as the reported amounts of revenues, expenses, and cash flows during the periods presented. Such estimates relate primarily to unsettled transactions and events as of the date of the financial statements. Actual results could differ materially from estimated amounts.

Amounts recorded for depletion, depreciation and accretion costs and amounts used for ceiling test calculations are based on estimates of crude oil and natural gas reserves and future costs required to develop those reserves. Stock-based compensation is based upon expected volatility and option life estimates. Asset retirement obligations are based on estimates of abandonment costs, timing of abandonment, inflation and interest rates. The provision for income taxes is based on judgements in applying income tax law and estimates on the timing, likelihood and reversal of temporary differences between the accounting and tax basis of assets and liabilities. These estimates are subject to measurement uncertainty and changes in these estimates could materially impact the financial statements of future periods.

Revenue Recognition

Revenues associated with sales of petroleum and natural gas are recorded when title passes to the customer.

Joint Interest Operations

Significant portions of the Company's oil and gas operations are conducted jointly with other parties and accordingly the financial statements reflect only the Company's proportionate interest in such activities.

Inventories

Inventories consist of crude oil. Crude oil stored in the Company's tanks are valued on a first in first out basis at the lower of cost or net realizable value. Inventory cost for crude oil is determined based on combined average per barrel operating costs, royalties and depletion and depreciation for the year and net realizable value is determined based on sales price in the month preceding year end.

Investments

Investments are carried at fair value. Fair value is determined by multiplying the year end trading price of the investments by the number of common shares held as at period end.

Property and Equipment

Petroleum and Natural Gas Properties and Related Equipment The Company follows the successful efforts method of accounting for petroleum and natural gas properties and related equipment. Costs of exploratory wells are initially capitalized pending determination of proved reserves. Costs of wells which are assigned proved reserves remain capitalized, while costs of unsuccessful wells are charged to earnings. All other exploration costs including geological and geophysical costs are charged to earnings as incurred. Development costs, including the cost of all wells, are capitalized.

Producing properties are assessed annually or more frequently as economic events dictate, for potential impairment. Impairment is assessed by comparing the estimated net undiscounted future cash flows to the carrying value of the asset. If required, the impairment recorded is the amount by which the carrying value of the asset exceeds its fair value. Costs related to undeveloped properties are excluded from the depletion base until it is determined whether or not proved reserves exist or if impairment of such costs has occurred. These properties are assessed at least annually to determine whether impairment has occurred.

Depreciation and depletion of capitalized costs of oil and gas producing properties are calculated using the unit of production method. Development and exploration drilling and equipment costs are depleted over the remaining proved developed reserves. Depreciation of other plant and equipment is provided on the straight line method. Straight line depreciation is based on the estimated service lives of the related assets which is estimated to be ten years.

Furniture, Fixtures and Office Equipment

These assets are recorded at cost and depreciated over a three to ten year period representing their estimated useful lives.

Income Taxes

The Company accounts for income taxes using the liability method. Under this method, the Company records a future income tax asset or liability to reflect any difference between the accounting and tax basis of assets and liabilities, using substantively enacted income tax rates. The effect on future tax assets and liabilities of a change in tax rates is recognized in net earnings in the period in which the change occurs. Future income tax assets are only recognized to the extent it is more likely than not that sufficient future taxable income will be available to allow the future income tax asset to be realized.

Asset Retirement Obligations

The Company recognizes an Asset Retirement Obligation (ARO) in the period in which it is incurred when a reasonable estimate of the fair value can be made. On a periodic basis, management will review these estimates and changes, if any, will be applied prospectively. The fair value of the estimated ARO is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset. The capitalized amount is depleted on a unit-of-production basis over the life of the reserves. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost would also result in an increase or decrease to the ARO. Actual costs incurred upon settlement of the obligations are charged against the ARO to the extent of the liability recorded.

Stock-Based Compensation

The Company accounts for stock based compensation using the fair-value method of accounting for stock options granted to directors, officers, employees and other service providers using the Black-Scholes option pricing model. Stock-based compensation expense is recorded over the vesting period with a corresponding amount reflected in contributed surplus. Stock-based compensation expense is calculated as the estimated fair value of the options at the time of grant, amortized over their vesting period. When stock options are exercised, the associated amounts previously recorded as contributed surplus are reclassified to common share capital. The Company has not incorporated an estimated forfeiture rate for stock options that will not vest, rather, the Company accounts for actual forfeitures as they occur.

Financial Instruments

Financial instruments are measured at fair value on initial recognition of the instrument, into one of the following five categories: held-for trading, loans and receivables, held-to-maturity investments, available-for-sale financial assets or other financial liabilities. Subsequent measurement of financial instruments is based on their initial classification. Held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings. Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized or impaired. The remaining categories of financial instruments are recognized at amortized cost using the effective interest rate method.

All risk management contracts are recorded in the balance sheet at fair value unless they qualify for the normal sale and normal purchase exemption. All changes in their fair value are recorded in net earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income until the underlying hedged transaction is recognized in net earnings. Any hedge ineffectiveness is immediately recognized in net earnings. The Company has elected not to use cash flow hedge accounting on its risk management contracts with financial counterparties resulting in all changes in fair value being recorded in net earnings.

Cash and restricted cash are classified as held-for-trading and are measured at fair value which equals the carrying value and any gains or losses are recognized in earnings in the period they occur. Accounts receivable are classified as loans and receivables which are measured at amortized costs. Investments in related party are classified as available-for-sale which are measured at fair value and any gains or losses are recognized in other comprehensive income in the period they occur. Accounts payable and accrued liabilities and bank debt are classified as other financial liabilities, which are measured at amortized cost.

Risk Management Contracts

The Company is exposed to market risks resulting from fluctuations in commodity prices, foreign currency exchange rates and interest rates in the normal course of its business. The Company may use a variety of instruments to manage these exposures. For transactions where hedge accounting is not applied, the Company accounts for such instruments using the fair value method by initially recording an asset or liability, and recognizing changes in the fair value of the instruments in earnings as unrealized gains or losses on risk management contracts. Fair values of financial instruments are determined from third party quotes or valuations provided by independent third parties. Any realized gains or losses on risk management contracts are recognized in earnings in the period they occur.

The Company may elect to use hedge accounting when there is a high degree of correlation between the price movements in the financial instruments and the items designated as being hedged and has documented the relationship between the instruments and the hedged item as well as its risk management objective and strategy for undertaking hedge transactions. During the year ended December 31, 2008 the Company did not designate any of its financial instruments as hedges. There are no risk management contracts outstanding as at December 31, 2008.

Basic and Diluted per Share (formerly per Unit) Calculations

Basic earnings per share are computed by dividing earnings by the weighted average number of shares outstanding during the year. Diluted per share amounts reflect the potential dilution that could occur if options to purchase shares were exercised. The treasury stock method is used to determine the dilutive effect of common share options, whereby proceeds from the exercise of common share options or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period.

3. NEW ACCOUNTING POLICIES

Capital Disclosures

Effective January 1, 2008, the Company prospectively adopted the Canadian Institute of Chartered Accountants (CICA) Section 1535, "Capital Disclosures" which establishes standards for disclosing information about the Company's capital and how it is managed. It requires disclosures of the Company's objectives, policies and processes for managing capital, the quantitative data about what the Company regards as capital, whether the Company has complied with any capital requirements and if it has not complied, the consequences of such non-compliance. The only effect of adopting this standard is disclosures about the Company's capital and how it is managed (see Note 16).

Financial Instruments Disclosures and Presentation

Effective January 1, 2008, the Company prospectively adopted Section 3862, "Financial Instruments - Disclosures" and Section 3863, "Financial Instruments - Presentation." These new accounting standards replaced Section 3861, "Financial Instruments - Disclosure and Presentation." Section 3862 requires additional information regarding the significance of financial instruments for the entity's financial position and performance, and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. The additional disclosures required under these standards are included in Note 16.

Recent Accounting Pronouncements

In February 2008, the CICA issued Section 3064, "Goodwill and Intangible Assets", replacing Section 3062, "Goodwill and Other Intangible Assets" and Section 3450, "Research and Development Costs". Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. The Company adopted these standards for its fiscal year beginning January 1, 2009 with no impact on its consolidated financial statements.

In January 2009, the CICA issued Section 1582, "Business Combinations", which replaces former guidance on business combinations. Section 1582 establishes principles and requirements of the acquisition method for business combinations and related disclosures. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 2011 with earlier adoption permitted. The Company plans to adopt this standard prospectively effective January 1, 2009 and does not expect the adoption of this statement to have a material impact on the Company's results of operations or financial position.

In January 2009, the CICA issued Sections 1601, "Consolidated Financial Statements", and 1602, "Non-controlling Interests", which replaces existing guidance. 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 are effective on or after the beginning of the first annual reporting period beginning on or after January 2011 with earlier application permitted. The Company plans to adopt these standards effective January 1, 2009 and does not expect the adoption will have a material impact on the results of operations or financial position.

The Accounting Standards Board has confirmed the convergence of Canadian GAAP with International Financial Reporting Standards (IFRS) will be effective January 1, 2011. The Company has performed an initial scoping process in order to ensure successful implementation within the required timeframe. The impact on the Company's consolidated financial statements is not reasonably determinable at this time. Key information will be disclosed as it becomes available during the transition period.

4. REORGANIZATION

As part of the reorganization of the Trust, SRX acquired all the issued and outstanding trust units of Bonterra Energy Income Trust on a basis of one Trust Unit for one Common Share of SRX. Immediately preceding the reorganization, SRX was in receivership. Prior to the conversion, the Trust advanced $11,257,000 to SRX for settlement of claims pursuant to the CCAA proceedings. Upon completion of the CCAA procedures, SRX was owed $2,224,000 in outstanding tax and legal claims that will be used by the CCAA Monitor to settle secured creditor claims. This amount has been recorded as an outstanding account receivable by the Company.

In addition, SRX paid an advance of $1,800,000 to the CCAA Monitor for costs and payment of the unsecured creditors. This amount has been recorded as a prepaid expense in the accounts of the Company. Included in accounts payable is $4,024,000 to account for the amount due to the secured and unsecured creditors.

Of the tax claims, $66,000 had been received and repaid to the Monitor by December 31, 2008. In addition, $99,000 of expense claims had been paid by the Monitor and deducted from the advance.

5. BUSINESS COMBINATION

On November 12, 2008, the Company acquired all the common shares of Silverwing for cash consideration of $13,816,000 (including acquisition costs of $334,000) plus the issuance of 7,745 common shares at a value of $25.85 per common share plus the assumption of $14,979,000 of negative working capital. The results of Silverwing's operations have been included in the consolidated financial statements since that date. The acquisition was funded through the Company's new bank facility (see Note 10).

The acquisition was accounted for using the purchase method and the purchase price was allocated to the fair value of the assets acquired and the liabilities assumed as follows:



Cost of acquisition (000's)

  Cash paid                                                     $ 13,482
  Value of common stock                                              200
  Acquisition costs                                                  334
                                                                ---------
                                                                 $14,016
                                                                ---------
                                                                ---------
Allocation of purchase price:
  Restricted cash                                               $  1,252
  Future income tax benefit                                       18,325
  Property and equipment                                          15,347
  Working capital deficiency                                     (14,979)
  Asset retirement obligations                                    (5,929)
                                                                ---------
                                                                $ 14,016
                                                                ---------
                                                                ---------



6. INVESTMENT IN RELATED PARTY

The investment consists of 689,682 (December 31, 2007 - 689,682) common shares in Comaplex Minerals Corp (Comaplex), a company with common directors and management with the Company and its subsidiaries. The investment is recorded at fair market value. The common shares trade on the Toronto Stock Exchange under the symbol CMF. The investment represents less than a one and a half percent ownership in the outstanding shares of Comaplex.

7. RESTRICTED CASH

An escrow account was held by Silverwing prior to its acquisition by the Company. The escrow account was created to support eligible expenditures related to a farm-in agreement. The Company may access the funds upon completion and tie-in or abandonment and reclamation of 20 wells. The funds are administered by the farmors' legal counsel. The funds in the escrow account are invested in interest bearing term deposits.



8.  PROPERTY AND EQUIPMENT

                             2008                        2007
-------------------------------------------------------------------------
                                Accumulated                 Accumulated
                                 Depletion                   Depletion
                                    and                         and
($000)                   Cost   Depreciation         Cost   Depreciation
-------------------------------------------------------------------------
Undeveloped land    $    2,295    $        -    $      316    $        -
Petroleum and
 natural gas
 properties
 and related
 equipment             229,136        74,844       185,947        61,105
Furniture,
 equipment
 and other               1,254           848         1,025           700
-------------------------------------------------------------------------
                    $  232,685    $   75,692    $  187,288    $   61,805
-------------------------------------------------------------------------
-------------------------------------------------------------------------



9. DUE TO RELATED PARTY

As of December 31, 2008, the Company's CEO and major shareholder has loaned the Company $6,000,000. The loan is unsecured, bears interest at Canadian chartered bank prime less one half of a percent and has no set repayment terms. The loan can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility.

Interest paid on this loan during 2008 was $7,000.

Please refer to note 15 for additional related party transactions.

10. BANK DEBT

Due to the corporate reorganization and acquisition of Silverwing, the Company amended its bank facility to consist of an $80,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated demand credit facility (December 31, 2007 - $69,900,000 (non-syndicated demand facility)). Amounts drawn under these facilities at December 31, 2008 were $93,235,000 (December 31, 2007 - $57,422,000). The interest rates on the outstanding debt as of December 31, 2008 were 4.35 percent and 3.49 percent on the Company's Canadian prime rate loan (short-term debt) and Bankers' Acceptances (long-term debt), respectively. The terms of the syndicated revolving credit facility provide that the loan is revolving to May 30, 2010 and is subject to annual review. The revolving credit facility has no fixed payment requirements. The terms of the non-syndicated demand credit facility provide that the loan is due on demand and is subject to annual review and has no fixed repayment terms.

The amount available for borrowing under the credit facilities is reduced by outstanding letters of credit. Letters of credit totaling $525,000 were issued at December 31, 2008 (December 31, 2007 - $355,000). Of the letters of credit, $20,000 is secured by a restricted term deposit. Security for the credit facilities consists of various fixed and floating demand debentures totaling $200,000,000 over all of the Company's assets, and a general security agreement with first ranking over all personal and real property.



The interest rate on the credit facilities is calculated as follows:

-------------------------------------------------------------------------
                    Level I Level II Level III Level IV Level V Level VI
                   ------------------------------------------------------
Consolidated Total            Over     Over      Over     Over
 Funded Debt(1)               0.5:1    1.0:1     1.5:1    2.0:1
 to Consolidated     Below     to       to        to       to     Over
 Cash flow Ratio     0.50:1   1:0:1    1.5:1     2.0:1    2.5:1   2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
 Plus(2)               50       75       85       100      125     150
-------------------------------------------------------------------------
Bankers' Acceptances
 Rate Plus(2)         150      175      185       200      225     250
-------------------------------------------------------------------------
(1) Consolidated total funded debt excludes related party amounts but
    includes working capital.
(2) Numbers in table represent basis points.



Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the third month following the end of each fiscal quarter, except for the end of a fiscal year in respect of which the adjustment shall be made effective as of the first day of the fifth month following the end of such fiscal year, with each such adjustment to be effective until the next such adjustment: The following is a list of the material covenants:

- The Company as of December 31, 2008 is required to not exceed

$100,000,000 in consolidated debt (includes negative working

capital but excludes debt to related parties).

- Dividends paid in any quarter shall not exceed 80 percent of the

average previous four quarters' cash flow as defined under GAAP.

11. INCOME TAXES

The Company has recorded a future income tax asset related to assets and liabilities and related tax amounts:



($000)                                               2008           2007
-------------------------------------------------------------------------
Future tax liability related to investments:   $     (212)    $     (448)
Future tax liability related to property
 and equipment:                                    (7,097)       (14,828)
Future tax asset related to asset retirement
 obligations:                                       4,593          3,759
Future tax asset related to finance costs:          1,134             79
Future tax asset related to corporate tax
 losses and SR&ED claims                           86,998          3,843
-------------------------------------------------------------------------
Future Tax Asset (Liability) - Long-term       $   85,416     $   (7,595)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current portion of future income tax asset
 related to corporate tax losses and SR&ED
 claims:                                       $    2,669     $        -
Future income tax asset related to current
 portion of derivative liability                        -            913
-------------------------------------------------------------------------
Future Tax Asset - Current                     $    2,669     $      913
-------------------------------------------------------------------------
-------------------------------------------------------------------------



As a result of the reorganization the Company recorded a deferred credit of $71,303,000 relating to the difference between the future income tax asset generated on the reorganization and the amount of the cash payment made to SRX immediately before the reorganization. This credit is being amortized (2008 - $4,240,000) on the same basis as the related future income tax asset (2008 - $4,909,000).



A reconciliation of the deferred credit is as follows:

Amount recorded on reorganization                           $ 71,303,000
Amortized in current year                                     (4,240,000)
-------------------------------------------------------------------------
Balance as of December 31, 2008                             $ 67,063,000
-------------------------------------------------------------------------
Current portion                                             $  2,305,000
Long-term portion                                             64,758,000
-------------------------------------------------------------------------
                                                            $ 67,063,000
-------------------------------------------------------------------------



Income tax expense varies from the amounts that would be computed by applying Canadian federal and provincial income tax rates as follows:



($000)                                               2008           2007
-------------------------------------------------------------------------
Earnings before income taxes                   $   58,014     $   33,434
Combined federal and provincial income tax
 rates                                             29.62%         32.27%
-------------------------------------------------------------------------
Income tax provision calculated using
 statutory tax rates                               17,184         10,789
Increase (decrease) in taxes resulting from:
  Saskatchewan resource surcharge                     437            512
  Stock-based compensation                            357            366
  Change in effective tax rate                     (4,739)         4,076
  Trust income allocated to Unitholders
   prior to conversion                            (10,291)       (13,176)
  Others                                             (360)           517
-------------------------------------------------------------------------
Income tax expense                             $    2,588     $    3,084
-------------------------------------------------------------------------
-------------------------------------------------------------------------



The Company and its subsidiaries have the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:



                                                 Rate of
                                               Utilization
($000)                                                %           Amount
-------------------------------------------------------------------------
Undepreciated capital costs                        20-100     $   23,696
Eligible capital expenditures                           7          1,870
Share issue costs                                      20          4,581
Canadian oil and gas property expenditures             10         25,072
Canadian development expenditures                      30         50,743
Canadian exploration expenditures                     100         10,530
SR&ED expenditures                                    100         80,357
Income tax losses carried forward(1)                  100        271,029
-------------------------------------------------------------------------
                                                              $  467,878
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Income tax losses carried forward expire in the following years;
    2014 - $1,069,000, 2025 - $3,179,000, 2026 - $109,244,000,
    2027 - $116,787,000, 2028 - $40,750,000.



The Company has $27,670,000 of investment tax credits (ITC) that expire in the following years; 2009 - $3,469,000, 2010 - $3,059,000, 2011 - $4,667,000, 2012 - $3,909,000, 2013 - $3,155,000, 2014 - $1,995,000, 2015 - $2,257,000, 2016 - $2,405,000, 2017 - $2,009,000, 2018 - $745,000.

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

12. ASSET RETIREMENT OBLIGATIONS

At December 31, 2008, the estimated total undiscounted amount required to settle the asset retirement obligations was $58,903,000 (2007 - $54,622,000). Costs for asset retirement have been calculated assuming a two percent inflation rate. These obligations will be settled based on the useful lives of the underlying assets, which extend up to 50 years into the future. This amount has been discounted using a credit-adjusted risk-free interest rate of five percent (2007 - five percent).



Changes to asset retirement obligations were as follows:

($000)                                               2008           2007
-------------------------------------------------------------------------
Asset retirement obligations, January 1        $   14,904     $   14,819
Adjustment to asset retirement obligations           (217)          (399)
Adjustment related to asset additions
 (net of disposals)                                 5,929            563
Liabilities settled during the year                (3,063)          (820)
Accretion                                             785            741
-------------------------------------------------------------------------
Asset retirement obligations, December 31      $   18,338     $   14,904
-------------------------------------------------------------------------



13. SHAREHOLDERS' EQUITY

Authorized

The Company is authorized to issue an unlimited number of common shares without nominal or par value.



($000)                         2008                        2007
-------------------------------------------------------------------------
Issued                  Number        Amount        Number        Amount
-------------------------------------------------------------------------
Common Shares
Balance, beginning
 of year                     -    $        -             -    $        -
Issued on
 reorganization to
 a corporation      17,257,603        99,530             -             -
-------------------------------------------------------------------------
Balance, end of
 year               17,257,603    $   99,530             -    $        -
-------------------------------------------------------------------------
($000)                         2008                        2007
-------------------------------------------------------------------------
Issued                  Number        Amount        Number        Amount
-------------------------------------------------------------------------
Trust Units
Balance, beginning
 of year            16,928,158    $   90,590    16,874,658    $   89,488
Transfer of
 contributed
 surplus to
 unit capital                -           805             -           109
Issued pursuant to
 Trust unit option
 plan                  321,700         7,935        53,500           993
Issued on
 acquisition of
 Silverwing              7,745           200             -             -
Cancelled on
 conversion
 to a
 corporation       (17,257,603)      (99,530)            -             -
-------------------------------------------------------------------------
Balance, end of
 year                        -    $        -    16,928,158    $   90,590
-------------------------------------------------------------------------



The Company is authorized to issue an unlimited number of Class "A" redeemable Preferred Shares and an unlimited number of Class "B" Preferred Shares. There are currently no outstanding Class "A" redeemable preferred shares or Class "B" preferred shares. The number of common shares (formerly trust units) used to calculate diluted net earnings per share (formerly per unit) for the year ended December 31, 2008 of 17,119,517 shares (2007 - 16,942,036 Units) included the basic weighted average number of common shares outstanding of 17,075,647 shares (2007 - 16,908,266 Units) plus 43,870 shares (2007 - 33,770 Units) related to the dilutive effect of common share options.

A summary of the changes of the Company's contributed surplus is presented below:



Contributed surplus
($000)                                               2008           2007
-------------------------------------------------------------------------
Balance, beginning of year                     $    2,140     $    1,116
Stock-based compensation expensed (non-cash)        1,207          1,133
Stock-based options exercised (non-cash)             (805)          (109)
-------------------------------------------------------------------------
Balance, end of year                            $   2,542      $   2,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The deficit balance is composed of the following items:
($000)                                               2008           2007
-------------------------------------------------------------------------
Accumulated earnings                           $  208,182     $  152,756
Accumulated cash dividends and distributions     (254,897)      (204,299)
-------------------------------------------------------------------------
Deficit                                        $  (46,715)    $  (51,543)
-------------------------------------------------------------------------
-------------------------------------------------------------------------



The Company provides an option plan for its directors, officers, employees and consultants. Under the plan, the Company may grant options for up to 1,725,760 common shares (2007 - 1,692,800 Trust Units). The exercise price of each option granted equals the market price of the common shares on the date of grant and the option's maximum term is five years.

A summary of the status of the Company's stock option plan as of December 31, 2008 and changes during the year is presented below:



                                                           2008
-------------------------------------------------------------------------
                                                                Weighted-
                                                                 Average
                                                                Exercise
                                                    Options       Price
-------------------------------------------------------------------------
Outstanding at beginning of year                          -       $    -
Options granted                                   1,390,500        20.50
-------------------------------------------------------------------------
Outstanding at end of year                        1,390,500       $20.50
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable at end of year                        -       $    -
-------------------------------------------------------------------------
-------------------------------------------------------------------------


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

                    Options Outstanding            Options Exercisable
-------------------------------------------------------------------------
              Number    Weighted-
               Out-      Average      Weighted-     Number      Weighted-
Range of     standing    Remaining     Average    Exercisable    Average
Exercise        At     Contractual    Exercise        At        Exercise
Prices       12/31/08      Life         Price       12/31/08      Price
-------------------------------------------------------------------------
$20.50     1,390,500    3.9 years       $20.50            -       $    -
-------------------------------------------------------------------------
-------------------------------------------------------------------------


A summary of the former unit option plan as of December 31, 2008 and
2007, and changes during the years is presented below:

                                 2008                      2007
-------------------------------------------------------------------------
                                      Weighted-                 Weighted-
                                       Average                   Average
                                      Exercise                  Exercise
                          Options       Price       Options       Price
-------------------------------------------------------------------------
Outstanding at
 beginning of year      1,177,000       $27.59      721,500       $26.55
Options granted            29,000        39.09      553,000        28.11
Options exercised        (321,700)       24.66      (53,500)       18.56
Options cancelled        (884,300)       29.03      (44,000)       27.92
-------------------------------------------------------------------------
Outstanding at end of
 year                           -       $    -    1,177,000       $27.59
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable at
 end of year                    -       $    -      530,000       $26.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------



The Company records compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. The Company granted 1,390,500 stock options with an estimated fair value of $1,548,000 ($1.11 per option) using the Black-Scholes option pricing model with the following key assumptions:



                                              2008   2007
Weighted-average risk free interest rate (%)   2.2    4.7
Expected life (years)                          3.5    2.3
Weighted-average volatility (%)               31.3   27.2
Dividend yield 2008 and 2007                  based on the percentage of
                                              dividends or distributions
                                              paid during the year


14. ACCUMULATED OTHER COMPREHENSIVE INCOME

                                                 Other
                                 January 1,  Comprehensive   December 31,
($000)                               2008    Income (Loss)        2008
-------------------------------------------------------------------------
Unrealized gains (losses) on
 available for sale
 financial assets                  $3,031       ($1,611)        $1,420
                                  --------      --------       --------
                                  --------      --------       --------
                                                 Other
                                 January 1,  Comprehensive   December 31,
($000)                               2007    Income (Loss)        2007
-------------------------------------------------------------------------
Unrealized gains on available
 for sale financial assets         $1,566        $1,465         $3,031
Unrealized gains and losses on
 derivatives designated as
 cash flow hedges                     814          (814)             -
                                  --------      --------       --------
                                   $2,380        $  651         $3,031
                                  --------      --------       --------
                                  --------      --------       --------



15. RELATED PARTY TRANSACTIONS

The Company received a management fee from Comaplex of $330,000 (2007 - $300,000) for management services and office administration. This fee has been included as a recovery in general and administrative expenses and represents the fair value of the services rendered. In order to facilitate the acquisition of Silverwing, the Company borrowed on a short-term basis $20,000,000 from Comaplex to allow time to finalize documentation for its new bank line of credit. The funds were repaid on November 21, 2008. Total interest paid on the loan was $21,000. As at December 31, 2008, the Company had an account receivable from Comaplex of $56,000 (December 31, 2007 - $63,000).

The Company received a management fee from Pine Cliff Energy Ltd., a company with common directors and management with the Company and its subsidiaries, of $238,000 (2007 - $216,000) for management services and office administration. This fee has been included in general and administrative expenses as a recovery and represents the fair value of the services rendered.

As at December 31, 2008 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2007 - $4,000).

16. FINANCIAL AND CAPITAL RISK MANAGEMENT

Financial Risk Factors

----------------------

The Company undertakes transactions in a range of financial instruments including:

- Receivables

- Payables

- Common share investments

- Bank loans

- Derivatives

The Company's activities result in exposure to a number of financial risks including market risk (commodity price risk, interest rate risk, foreign exchange risk, credit risk, and liquidity risk).

The Company's overall risk management program seeks to mitigate these risks and reduce the volatility on the Company's financial performance. Financial risk management is carried out by senior management under the direction of the Directors of the Company.

The Company enters into various risk management contracts in accordance with Board approval to manage the Company's exposure to commodity price fluctuations. Currently no risk management agreements are in place in respect of interest rate risk. The Company does not speculatively trade in risk management contracts. The Company's risk management contracts are entered into to manage the risks relating to commodity prices from its business activities.

Capital Risk Management

-----------------------

The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns to its shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends or issue new shares. The Company monitors capital on the basis of the ratio of debt to cash flow. During the year the Company acquired Silverwing, a public oil and gas producer, for cash consideration including negative working capital of $28,795,000. In addition, the Trust underwent a reorganization resulting in a cash outlay of $11,257,000 plus reorganization costs of $2,121,000. The Company has also experienced a decrease in cash flow due to the rather significant drop in commodity prices during the final four months of 2008.

The following section (a) of this note provides a summary of the Company's underlying economic positions as represented by the carrying values, fair values and contractual face values of the Company's financial assets and financial liabilities. The Company's debt to cash flow from operations is also provided.

The following section (b) addresses in more detail the key financial risk factors that arise from the Company's activities including its policies for managing these risks.

The following section (c) provides details of the Company's risk management contracts that are used for financial risk management.

a) Financial assets, financial liabilities and debt ratio

The carrying amounts, fair value and face values of the Company's

financial assets and liabilities are shown in Table 1.



    Table 1
                                                 As at December 31, 2008
    ---------------------------------------------------------------------
                                              Carrying     Fair     Face
    ($000)                                       Value    Value    Value
    Financial assets
    Restricted term deposit                         20       20       20
    Accounts receivable                         11,753   11,753   11,838
    Investment in related party                  2,131    2,131      N/A
    Financial liabilities
    Accounts payable and accrued liabilities    23,888   23,888   23,888
    Due to related party                         6,000    6,000    6,000
    Short-term debt                             13,325   13,325   13,325
    Long-term debt                              79,910   79,910   79,910
    The net debt and cash flow from operations figures are presented in
    Table 2.
    Table 2


                                                             December 31
    ($000)                                                          2008
    ---------------------------------------------------------------------
    Short-term debt                                               13,325
    Long-term debt                                                79,910
    Due to related party                                           6,000
    Accounts payable and accrued liabilities                      23,888
    Current assets(1)                                           (18,971)
    ---------------------------------------------------------------------
    Net Debt                                                     104,152
    ---------------------------------------------------------------------
    Cash flow from operations(2)                                  69,570
    ---------------------------------------------------------------------
    Net debt to cash flow from operations                           1.50
    ---------------------------------------------------------------------
    (1)   Current assets include restricted term deposit, accounts
          receivable, crude oil inventory, prepaid expenses and
          investment in related party.
    (2)   Cash flow from operations includes annual net earnings less
          adjustment for non-cash (gain) loss on risk management
          contracts, stock-based compensation, depletion, depreciation
          and accretion, future income taxes, changes in non-cash working
          capital items and asset retirement obligations settled.



b) Risks and mitigations

Market risk is the risk that the fair value or future cash flow of the Company's financial instruments will fluctuate because of changes in market prices. Components of market risk to which the Company is exposed are discussed below.

Commodity price risk

--------------------

The Company's principal operation is the production and sale of crude oil, natural gas and natural gas liquids. Fluctuations in prices of these commodities directly impact the Company's performance and ability to continue with its dividends.

The Company has used various risk management contracts to set price parameters for a portion of its production. Management, in agreement with the Board of Directors, recently decided that at least in the near term it will discontinue the use of commodity price agreements. The Company will assume full risk in respect of commodity prices.

Sensitivity Analysis

Commodity prices have fluctuated significantly over the recent past. The following table updates the cash flow sensitivity for movements in the commodity prices of $1 U.S. WTI per barrel for crude oil, $0.10 per MCF AECO for natural gas and $0.01 fluctuation in exchange rates.



($000)                                                     Cash Flow
---------------------------------------------------------------------
U.S. $1.00 per barrel                                       $870,000
Canadian $0.10 per MCF                                      $289,000
Change of Canadian $0.01/U.S. $ exchange rate               $593,000
---------------------------------------------------------------------



Interest rate risk

------------------

Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities that the Company uses. The principal exposure of the Company is on its bank borrowings which have a variable interest rate which gives rise to a cash flow interest rate risk.

The Company's debt consists of an $80,000,000 revolving operating line, $20,000,000 demand operating line and $6,000,000 due to the Company's CEO and major shareholder. The borrowings under these facilities are at bank prime plus or minor various percentages as well as by means of bankers' acceptances (BA's). The Company manages its exposure to interest rate risk through entering into various term lengths on its BA's but in no circumstances do the terms exceed six months.

Sensitivity Analysis

Based on historic movements and volatilities in the interest rate markets and management's current assessment of the financial markets, the Company believes that a one percent variation in the Canadian prime interest rate is reasonably possible over a 12-month period. No income tax effect has been calculated as the Company has sufficient tax pools such that it will not be taxable in the near future. A one percent increase (decrease) in the Canadian prime rate would decrease cash flow by $992,000 (increase by $992,000).

Foreign exchange risk

---------------------

The Company has no foreign operations and currently sells all its product sales in Canadian currency. The Company however is exposed to currency risk in that crude oil is priced in U.S. currency then converted to Canadian currency. The Company currently has no outstanding risk management agreements. Management, in agreement with the Board of Directors, recently decided that at least in the near term it will discontinue the use of commodity price agreements. The Company will assume full risk in respect of foreign exchange fluctuations.

Credit risk

-----------

Credit risk is the risk that a contracting party will not complete its obligations under a financial instrument and cause the Company to incur a financial loss. The Company is exposed to credit risk on all financial assets included on the balance sheet. To help mitigate this risk:

- The Company only enters into material agreements with credit
worthy counterparties. These include major oil and gas
companies or major Canadian chartered banks;

- Agreements for product sales are primarily on 30 day renewal
terms; and

- Investments are generally only with companies that have common
management with the Company.

Of the accounts receivable balance of December 31, 2008 ($11,753,000) and December 31, 2007 ($10,575,000) over 82 (2007 - 90) percent relates to product sales with international oil and gas companies, tax receivables from the Canadian Government or risk contract payments from the Company's principal banker.

The Company assesses quarterly, if there has been any impairment of the financial assets of the Company. During the year ended December 31, 2008, there was no impairment provision required on any of the financial assets of the Company due to historical success of collecting receivables. The Company does have a credit risk exposure as the majority of the Company's accounts receivable are with counterparties having similar characteristics. However, payments from the Company's largest accounts receivable counterparties have consistently been received within 30 days and the sales agreements with these parties are cancellable with 30 days notice if payments are not received.

At December 31, 2008 approximately $99,000 or 0.8 percent of the Company's total accounts receivable are aged over 120 days and considered past due. The majority of these accounts are due from various joint venture partners. The Company actively monitors past due accounts and takes the necessary actions to expedite collection, which can include withholding production or net paying when the accounts are with joint venture partners. Should the Company determine that the ultimate collection of a receivable is in doubt, it will provide the necessary provision in its allowance for doubtful accounts with a corresponding charge to earnings. If the Company subsequently determines an account is uncollectable, the account is written off with a corresponding charge to the allowance account. The Company's allowance for doubtful accounts balance at December 31, 2008 is $85,000. There were no accounts written off during the year. The carrying value of accounts receivable approximates their fair value due to the relatively short periods to maturity on this instrument. The maximum exposure to credit risk is represented by the carrying amount on the balance sheet. There are no material financial assets that the Company considers past due.

Liquidity risk

--------------

Liquidity risk includes the risk that, as a result of Company's operational liquidity requirements:

- The Company will not have sufficient funds to settle a
transaction on the due date;

- The Company will not have sufficient funds to continue with its
dividends;

- The Company will be forced to sell assets at a value which is
less than what they are worth; or

- The Company may be unable to settle or recover a financial
asset at all.

To help reduce these risks the Company:

- Maintains a portfolio of high-quality, long reserve life oil
and gas assets.

The Company has the following maturity schedule for its financial liabilities:



                    Recognized on           Payments Due By Period
                        Financial    Less than
($000)                 Statements       1 year  1-3 years  4-5 years
---------------------------------------------------------------------
Accounts payable
 and accrued
 liabilities      Yes - Liability       23,888          -          -
Due to related
 party            Yes - Liability        6,000          -          -
Short-term bank
 debt             Yes - Liability       13,325          -          -
Long-term bank
 debt             Yes - Liability            -     79,910          -
Office leases     No                       589      1,238      1,080
---------------------------------------------------------------------
Total                                   43,802     81,148      1,080
---------------------------------------------------------------------
---------------------------------------------------------------------



c) Risk management contracts

The Company currently has no outstanding risk management contracts:

As of December 31, 2007, the fair value of the outstanding commodity risk management contracts was a net liability of $3,085,000.

17. COMMITMENTS, CONTINGENCIES AND GUARANTEES

The Company has no contractual obligations that last more than a year other than its office lease agreements which are as follows:



Contract Obligations                                Less
                                                    than   1 - 3   4 - 5
($000)                                     Total  1 year   years   years
-------------------------------------------------------------------------
Office leases(1)                          $2,907    $589  $1,238  $1,080
(1) Includes Silverwing's former office space which is being sublet at a
    rate that approximates the rates charged to the Company. The funds
    received on the sublease have not been offset against the contractual
    liability.


18. SUBSEQUENT EVENTS - DIVIDENDS

Subsequent to December 31, 2008, the Company has declared the following dividends:

Date declared       Record date         $ per share         Date payable
-------------------------------------------------------------------------
January 6, 2009     January 15, 2009       $0.16        January 30, 2009
February 9, 2009    February 18, 2009      $0.12       February 27, 2009
March 5, 2009       March 16, 2009         $0.12          March 31, 2009




FOR FURTHER INFORMATION PLEASE CONTACT:

Bonterra Oil & Gas Ltd.
George F. Fink
CEO
(403) 262-5307
Fax: (403) 265-7488

Or

Bonterra Oil & Gas Ltd.
Garth E. Schultz
Vice President, Finance and CFO
(403) 262-5307
Fax: (403) 265-7488

Or

Bonterra Oil & Gas Ltd.
Kirsten Kulyk
Manager, Investor Relations
info@bonterraenergy.com
www.bonterraenergy.com

 

 
© 2018 Bonterra