Petrolifera Petroleum reports Q2 2008 results and schedules conference call August 7, 2008, 9:00 A.M. MT

CALGARY, Aug. 6, 2008 (Canada NewsWire via COMTEX) -- PRFPF | Quote | Chart | News | PowerRating -- Petrolifera Petroleum Limited (TSX: PDP | Quote | Chart | News | PowerRating) reports that it continued to show steady progress during the second quarter and first half of 2008. Cash flow from operations before working capital changes ("cash flow")(1) rose for the third successive quarter, including a 13 percent increase in the second quarter 2008 compared to the prior quarter this year. Working capital was improved and profitability was expanded during this period as well.

<< Highlights are as follows: - Sales on a barrel of oil equivalent basis ("boe") rose for the third successive quarter, with second quarter 2008 levels up 15 percent over fourth quarter 2007 levels - Crude oil and natural gas prices both increased during the second quarter 2008 - Puesto Morales waterflood well underway, with measurable response beginning to materialize - Two new pool discoveries made at the PME x-1002 well ("Loma Montosa Two zone") and at the directionally-drilled PM x-1082 well, a Sierras Blancas discovery; offsets are drilling or planned - Balance sheet strengthened with $40 million bought deal equity financing completed in second quarter 2008 - Long-term credit facility expanded to US$70 million and progress made on asset-backed commercial paper ("ABCP") investments >>

These Q2 2008 results will be subject to a Conference Call event at 9:00 a.m. MT August 7, 2008. To listen to or participate in the live conference call please dial either (416) 644-3428 or (800) 587-1893. A replay of the event will be available from August 7, 2008 at 11:00 a.m. MT until August 15, 2008 at 11:59 p.m. MT. To listen to the replay please dial either (416) 640-1917 or 877-289-8525 and enter the passcode 21278536 followed by the pound sign.

<< Summary Results ------------------------------------------------------------------------- Three months ended June 30 Six months ended June 30 ------------------------------------------------------------------------- % % 2008 2007 Change 2008 2007 Change ------------------------------------------------------------------------- FINANCIAL ($000 except per share amounts) Total revenue 33,622 28,105 20 60,789 75,227 (19) Cash flow from operations before working capital changes(1) 13,485 14,504 (7) 25,387 39,119 (35) Per share, basic(1) 0.27 0.30 (10) 0.50 0.85 (41) Per share, diluted(1) 0.26 0.28 (7) 0.49 0.77 (36) Net earnings for the period 3,590 4,450 (19) 5,328 19,519 (73) Per share, basic 0.07 0.09 (22) 0.11 0.43 (74) Per share, diluted 0.07 0.09 (22) 0.10 0.38 (74) Capital expenditures 29,110 19,842 47 60,166 27,356 120 Cash on hand 41,039 66,535 (38) Working capital 13,295 69,690 (81) Long-term debt 43,800 - N/A Shareholders' equity 168,735 120,236 40 Total assets 292,882 139,054 111 OPERATING Daily sales volumes Crude oil and NGL - bbl/d 7,111 6,644 7 6,918 8,976 (23) Natural gas - mcf/d 5,922 1,726 243 6,483 1,792 262 Barrels of oil equivalent - boe/d(2) 8,098 6,932 17 7,999 9,274 (14) Average selling prices Oil and Natural gas liquids- $/bbl 49.90 45.17 10 46.05 45.34 2 Natural gas - $/mcf 2.38 1.42 68 2.28 1.48 54 Barrels of oil equivalent - $/boe(2) 45.56 43.65 4 41.68 44.16 (6) Common shares outstanding (000s) Weighted average Basic 50,273 47,816 5 50,356 45,835 10 Diluted 51,508 51,303 0 51,619 50,997 1 End of period Issued 54,798 50,084 9 Fully diluted 58,549 53,382 10 ------------------------------------------------------------------------- (1) Cash flow from operations before working capital changes and cash flow per share do not have standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore is unlikely to be comparable to similar measures used by other companies. Cash flow from operations before working capital changes includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow from operations before working capital changes is reconciled with net earnings on the Consolidated Statements of Cash Flows and in the accompanying Management's Discussion & Analysis. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures. (2) All references to barrels of oil equivalent (boe) are calculated on the basis of 6 mcf : 1bbl. Boes may be misleading, particularly if used in isolation. This 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. >>

LETTER TO SHAREHOLDERS

Petrolifera experienced steady growth during the second quarter and first half of 2008. Sales showed solid improvement and have risen 15 percent since the fourth quarter of 2007. Crude oil sales in the second quarter 2008 also exceeded levels achieved in the same reporting period in 2007, reinforcing the positive turnaround being experienced by the company as it completed its new facilities, initiated its pressure maintenance program and continued infill drilling programs at Puesto Morales. Second quarter sales were constrained by adverse weather during the period, resulting in plant shutdowns due to severe rainstorms which affected the operation of the water treatment plant and the company's water injection program. Normal operations have been restored.

Realized prices also showed improvement, especially during the second quarter 2008 as the impact of higher negotiated prices for crude oil to US$47 per barrel, with some retroactivity, resulted in average crude oil prices for the period of $49.90 per barrel. Also, natural gas prices continued to improve, rising to $2.38 per mcf, the highest natural gas price received in the company's history. While these prices remain well below competitive world levels, which if received would materially impact on Petrolifera's cash flow, the directional improvement is welcomed and signals continued upward pressure, in our opinion.

The company maintained an active and meaningful capital spending program during the first half of 2008, with outlays exceeding cash flow, both in Argentina and overall, with a significant seismic program underway in Peru and preparations for Colombian drilling requiring capital commitments. In Argentina, a total of 26 wells were drilled (including two wells started in 2007 and completed in 2008) during the first half of the year, with ten of these wells during the second quarter 2008. The drilling program resulted in 19 oil wells, one natural gas well, three injectors and two wells were abandoned, with one well on the Vaca Mahuida block awaiting testing as at June 30, 2008. This well was cased and subsequently suspended after negative test results. In addition to injectors drilled, another eight wells were converted to injector status, bringing to 14 the number of injectors in the waterflood. Two of these wells continue to produce crude oil from upper zones while water is being injected in lower zones within the Sierras Blancas Formation.

Recently, certain wells in the northern portion of the Puesto Morales Norte field have shown production increases of approximately 20 percent to 30 percent, confirming waterflood response starting to take effect in the northern pool. We remain encouraged by this and expect a more broadly based response to contribute to production growth throughout the balance of 2008 and into 2009, more than offsetting what would otherwise be normal declines for the wells in the field. As a consequence of this continuing active capital program, total indebtedness increased. However, a late second quarter 2008 equity financing, which yielded gross proceeds of $40 million and was sold on a bought deal basis, was completed to strengthen the company's overall financial condition. Accordingly, Petrolifera's working capital showed significant improvement compared to that reported at the end of the first quarter 2008, benefiting as well from our ability to reclassify a significant portion of our indebtedness to long term status. We still hold a significant investment in ABCP, which is now classified as a long-term investment. This will eventually be sold and converted to cash and a reduction of related indebtedness.

This stronger financial position is important as the company prepares to embark on higher cost drilling programs in Colombia during the second half of 2008. Simultaneously, until economic conditions warrant a stronger investment profile in Argentina, capital programs will be reduced as only one drilling rig and one service rig remain under contract to the company and key facilities are now in place and operational. At the same time, all outstanding commitments on the company's Vaca Mahuida, Puesto Guevara and Gobernador Ayalla II blocks will be fulfilled, albeit at a more measured pace than might otherwise be undertaken. Follow-up drilling on the two new pool crude oil discoveries at Puesto Morales x-1082 and Puesto Morales Este x-1002 will take priority to establish the areal extent of these recently-drilled and completed wells. Recently, the 1082 well produced at a rate of 850 bbl/d of crude oil, so we are hopeful the 1052 offset will be equally prolific and start to restore and accelerate our production growth in Argentina. As previously mentioned, this should be supplemented by ongoing production improvements from the Puesto Morales Norte field, as the company's waterflood impacts on overall productivity and sales. It will be recalled we anticipated full impact to occur sometime around the middle of 2009.

In Colombia, the company continues its preparations for drilling on the Sierra Nevada I concession at the La Pinta prospect. Original plans were to start drilling in August 2008 but delays in receiving environmental approvals and challenges in securing a suitable rig will likely now delay drilling startup into September 2008. Another operator in the area had originally promised Petrolifera use of a drilling rig, but then withdrew the offer. We believe suitable equipment has now been located and we have worked closely with ANH, the Colombian authority, to secure all the necessary accommodation with respect to contract obligations for the license.

Subsequent to the reporting period, Petrolifera converted its Turpial Technical Evaluation Agreement ("TEA") into a License Agreement covering substantially all of the acreage originally contained in the concession and is in the final stages of conversion of the Sierra Nevada II TEA into the Magdalena License. These concessions are thus firmly in Petrolifera's control with a 100 percent interest and we are pleased with the extent and quality of acreage and opportunities associated with our Colombian exposure. A second well on the Sierra Nevada I License on the Brillante prospect will likely follow the La Pinta well, which is anticipated to take between 75 and 90 days to drill. Accordingly, shareholders will have exposure to high potential drilling in Colombia for the balance of 2008.

In Peru, our seismic program of 951 kilometers of 2D coverage on Block 107 in the Ucayali Basin was completed on July 18, 2008. Processing and interpretation is proceeding and demobilization of the crew has been initiated, with plans to move to Maranon Block 106. Based on positive results indicated on Block 107, we have entered into negotiations with Perupetro, the Peruvian state agency, for a new license covering an area contiguous with Block 107. This is anticipated to add approximately one million acres of Petrolifera's Peruvian holdings; final terms will be disclosed when the negotiations are completed. It now appears that drilling in Peru on Block 107 may be delayed until as late as May 2009 due to a revised timetable for an approval of our drilling environmental impact assessment ("EIA") for the Ucayali license. We continue to work with Perupetro and other interested parties to accelerate this process even though there is a suspension of the timetable of the license under this process. If scheduling permits, we intend to utilize the rig being arranged for our Colombian program for our first drilling in Peru in 2009 as it is helicopter-transportable.

During the second quarter 2008 and subsequent thereto, considerable effort was placed on resolving the ABCP dilemma. It will be recalled the market for this commercial paper seized up in August 2007 and efforts have been underway to resolve the loss of liquidity arising in the midst of a more global credit crisis. To that end, the company has recently agreed to a term sheet with a Canadian chartered bank whereby, subject to the issuance of new notes under the reorganization plan for ABCP, which awaits approval by the Ontario Appeal Court, Petrolifera would receive a loan facility, with an initial term of two to three years and with four to five one-year renewals, for an amount equivalent to 75 percent of the face value of its original investment in ABCP. This facility would be secured by the notes and, in exchange, Petrolifera would withdraw its participation in litigation to retain the right to pursue further legal action against the bank. If this agreement is crystallized, Petrolifera's overall liquidity would be improved and the company would be positioned to dispose of or otherwise realize on its investment and repay any advances, with surplus proceeds added to working capital. In the interim, the company recorded a further pre-tax non-cash impairment of $2 million during the second quarter, while still retaining profitability.

The company has also recently seen its reserve-backed credit facility expanded to US$70 million, accompanied by a strengthening of the banking syndicate providing this to Petrolifera. This is important in current markets where access to credit is increasingly difficult, especially for junior companies operating in international theaters.

Subsequent to the reporting period, the company settled a dispute with the former operator of its Puesto Morales/Rinconada concession, thereby avoiding further significant legal expenses and distractions associated with this type of situation.

We were pleased to announce that on June 4, 2008 Mr. Andy Gustajtis was appointed to the Board of Directors of the company. Andy brings extensive capital market experience to the Board and has been appointed to the company's Audit, Reserves and Human Resources committees. He was associated with the early financing activity of the company and is familiar with our operations.

Difficult capital market conditions have hurt the performance of the company's shares in recent weeks. However, we believe that Petrolifera is on solid ground with a strong balance sheet, solid and growing production, new pool discoveries to be developed and high potential drilling ahead of it during the balance of this year and continuing on into 2009. We have a solid operating team and qualified explorers in our technical group. We continue to examine new venture opportunities in various jurisdictions that offer reasonably favorable terms and stable fiscal and operating regimes within which to conduct business.

FORWARD-LOOKING INFORMATION:

This press release, including the Letter to Shareholders and Management's Discussion and Analysis, contains forward-looking information, including but not limited to future exploration and development plans, future drilling plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the recently activated waterflood, and potential recovery of investments in ABCP. Forward-looking information is not based on historical facts but rather on Management expectations regarding the company's future growth, results of operations, production, future capital and other expenditures (including the amount, nature and sources of finding thereof), competitive advantages, plans for and results of drilling activity, environmental matters, business prospects and opportunities. Such forward-looking information reflects Management's current beliefs and assumptions, including but not limited to the continued existence and operation of existing pipelines, future prices for crude oil, natural gas and natural gas liquids, future currency and exchange rates, the regulatory framework representing royalties, taxes and environmental matters in the countries in which Petrolifera conducts its business and Petrolifera's ability to obtain qualified staff and equipment in a timely and cost efficient manner to meet Petrolifera's demand and is based on information currently available to Management. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com.

Forecast capital expenditures are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success and potential timing delays. Petrolifera's capital budget has been prepared based upon anticipated costs for equipment and services which are subject to fluctuation based upon market conditions and availability. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production growth has been estimated based on the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the company's waterflood program. Indicated flow rates from production testing are not necessarily indicative of sustainable production rates for such wells.

Recovery of the company's investment in ABCP is dependent on the value of the underlying assets held by the applicable trusts, the restoration of liquidity in this market and approval of the proposed restructuring proposal. There can be no assurance as to the timing or extent of recovery of this investment.

Due to the risks, uncertainties and assumptions inherent in forward-looking information, prospective investors in the company's securities should not place undue reliance on this forward-looking information. Forward-looking information contained in this press release is made as of the date hereof and is subject to change. The company assumes no obligation to revise or update forward-looking information to reflect new circumstances, except as required by law.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

The following is dated as of August 6, 2008 and should be read in conjunction with the unaudited consolidated financial statements of Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the six months ended June 30, 2008 as contained in this interim report and the MD&A and audited financial statements for the years ended December 31, 2007 and 2006 as contained in the company's 2007 Annual Report. Additional information relating to Petrolifera, including its Annual Information Form for the year ended December 31, 2007 is on SEDAR at www.sedar.com. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are presented in Canadian dollars. This MD&A provides management's view of the financial condition of the company and the results of its operations for the reporting periods indicated.

Information in this report contains forward-looking information including but not limited to future exploration and development plans, future drilling plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the recently activated waterflood, and potential recovery of investments in ABCP. See "Outlook" for a discussion of the forward-looking information contained in this MD&A. Throughout this MD&A, per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil (6:1). The conversion is based on an energy equivalency conversion method primarily applicable to the burner tip and does not represent a value equivalency at the wellhead. Boes may be misleading, particularly if used in isolation.

<< FINANCIAL AND OPERATING REVIEW SALES VOLUMES, PRICING AND REVENUE ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000 except where noted) 2008 2007 2008 2007 ------------------------------------------------------------------------- Daily sales volumes Crude oil and NGL - bbl/d 7,111 6,644 6,918 8,976 Natural gas - mcf/d 5,922 1,726 6,483 1,792 Total - boe/d 8,098 6,932 7,999 9,274 Average selling prices Crude oil and NGL - $ per bbl 49.90 45.17 46.05 45.34 Natural gas - $ per mcf 2.38 1.42 2.28 1.48 Revenue per boe 45.56 43.65 41.68 44.16 Petroleum and natural gas sales ($000) 33,569 27,537 60,683 74,135 Interest and other income ($000) 53 568 106 1,092 ------------------------------------------------------------------------- Total revenue ($000) 33,622 28,105 60,789 75,227 ------------------------------------------------------------------------- >>

Petroleum and natural gas revenues for the six months ended June 30, 2008 were $60.7 million (six months ended June 30, 2007 - $74.1 million) on sales volumes of 7,999 boe/d (six months ended June 30, 2007 - 9,274 boe/day), a year-over-year decrease of 19 percent for revenue and of 14 percent on volumes. Petroleum and natural gas revenues for the second quarter of 2008 were $33.6 million on sales volumes of 8,098 boe/d, an increase of 22 percent compared to the second quarter 2007 revenues of $27.5 million, with a sales volume increase of 17 percent over 6,932 boe/d compared to the second quarter 2007. The substantial increase in revenue compared to the second quarter of 2007 resulted from higher crude oil, natural gas liquids and natural gas production and increased pricing for the company's sales. All sales were from the company's Puesto Morales/Riconanda block in Argentina.

Petroleum and natural gas revenues in the second quarter 2008 were up 24 percent from the first quarter of 2008, due to increased crude oil and natural gas liquids production volumes and an increase in the price received for crude oil sales from US$42.00 per barrel to US$47.00 per barrel. The prices became effective May 1, 2008, with retroactive adjustment for previous oil sales from $US42.00 per barrel to approximately $US45.00 per barrel.

Crude oil sales volumes decreased in the first half of 2008 from the first half of 2007. Natural production declines at Puesto Morales Norte in Argentina were experienced until the reservoir is re-pressurized with the waterflood program initiated in January 2008. Even though the production response from the recently implemented pressure maintenance program was limited by June 30 2008 new drilling on the Puesto Morales/Rinconada Concession has contributed to levels above year-end 2007 exit rates.

For the six months ended June 30, 2008, sales of crude oil represented 86 percent of the company's sales volumes compared to 97 percent for the six months ended June 30, 2007. The company's realized crude oil price was up two percent to average $46.05 per barrel for the six months ended June 30, 2008 (six months ended June 30, 2007 - $45.34 per barrel). Second quarter average realized crude oil prices were up ten percent compared to the second quarter of 2007. Natural gas prices increased 54 percent to average $2.28 per mcf for the first six months of 2008, reflecting some relaxation of regulated Argentinean natural gas prices, which are still substantially below prices prevailing in North American markets. Second quarter natural gas prices increased 68 percent to $2.38 per mcf compared to $1.42 per mcf in the second quarter of 2007. Argentinean crude oil selling prices reflect world prices for the respective quality of oil, adjusted for the impact of Argentinean export taxes on domestic sales prices. All of Petrolifera's production is sold in domestic markets. Natural gas prices have been improving and are expected to continue improving due to market conditions and new policy initiatives aimed at market deregulation for industrial sales, although the effect of this improved pricing has been somewhat offset by the strengthening of the Canadian dollar relative to the Argentine peso, which reduces the realization expressed in Canadian dollar terms.

During the second quarter the company negotiated with a well-established, investment grade, state-owned oil company to increase its crude oil selling price from US$42.00 per barrel to US$47.00 per barrel, effective May 1, 2008. Additionally a retroactive payment for oil previously sold at US$42.00 per barrel from mid November 2007 to April 30, 2008 was secured. The company also negotiated an increase to US$2.40/mmbtu per natural gas sales volumes sold to a local gas marketing compnay during the second quarter 2008.

Petroleum and natural gas sales for the three months ended June 30, 2008 were up 24 percent from the first quarter 2008, mainly attributable to higher production, higher realized crude oil and natural gas prices and the retroactive crude oil pricing agreement.

Interest and other income was $0.1 million in the six months ended June 30, 2008 (six months ended June 30, 2007 - $1.1 million) and $0.1 million for the three months ended June 30, 2008 (three months ended June 30, 2007 - $0.6 million) related to interest earned on short-term cash deposits.

ROYALTIES

Royalties represent charges against production or revenue by governments and landowners. Included in royalties are revenue taxes levied by provincial jurisdictions. Royalties in the first six months of 2008 were $8.1 million ($5.53 per boe) or 13 percent of oil and natural gas revenue, compared to $9.8 million ($5.81 per boe) or 13 percent in the first six months of 2007. Royalties for the second quarter of 2008 were $4.7 million ($6.33 per boe) or 14 percent of oil and natural gas revenue compared to $3.9 million ($6.19 per boe) or 14 percent in the second quarter of 2007.

<< OPERATING COSTS AND NETBACKS Company Netbacks(1) ------------------------------------------------------------------------- Three months ended June 30 ------------------------------------------------------------------------- ($000 except per boe amounts) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Average daily production (boe/d) 8,098 6,932 ------------------------------------------------------------------------- Petroleum and natural gas sales $ 33,569 $ 45.55 $ 27,537 $ 43.65 Interest and other income 53 0.07 568 0.90 Royalties (4,666) (6.33) (3,906) (6.19) ------------------------------------------------------------------------- Net revenue 28,956 39.29 24,199 38.36 Operating costs (6,340) (8.60) (3,507) (5.56) ------------------------------------------------------------------------- Corporate netback $ 22,616 $ 30.69 $ 20,692 $ 32.80 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months ended June 30 ------------------------------------------------------------------------- ($000 except per boe amounts) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Average daily production (boe/d) 7,999 9,274 ------------------------------------------------------------------------- Petroleum and natural gas sales $ 60,683 $ 41.68 $ 74,135 $ 44.16 Interest and other income 106 0.07 1,092 0.65 Royalties (8,050) (5.53) (9,761) (5.81) ------------------------------------------------------------------------- Net revenue 52,739 36.22 65,466 39.00 Operating costs (12,265) (8.42) (8,119) (4.84) ------------------------------------------------------------------------- Corporate netback $ 40,474 $ 27.80 $ 57,347 $ 34.16 ------------------------------------------------------------------------- (1) Calculated by dividing related revenue and costs by total boe sold, resulting in an overall company netback. Netbacks do not have a standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures used by other companies. The most comparable measure calculated in accordance with GAAP would be net earnings. Nevertheless, Petrolifera's management uses netbacks as a performance measurement of operating efficiency and the prevailing royalty regime. A high ratio of netback to selling price is a positive indicator. A reconciliation of netback to net income can be found in the Net Earnings table. >>

Petrolifera's corporate netbacks were down 19 percent over those recorded in the first six months of 2007 and were down four percent for the second quarter of 2008 compared to the second quarter of 2007. The first half year over year decrease primarily reflects a decrease in the selling price of crude oil, higher operating expenses and lower interest income. The second quarter 2008 over second quarter 2007 decrease primarily reflects an increase in operating expenses offset by an increase in revenue per boe. Petrolifera's calculated unit netback for the second quarter and the first six months of 2008 was a healthy 67 percent of selling price per boe.

Operating costs in the first half of 2008 increased 51 percent in total and 74 percent on a per unit basis from 2007 levels. The increases are mainly attributable to a significant increase in the number of wells being operated and the number of wells on pump or that require servicing on a more frequent basis, inflationary pressures and start-up costs related to new field facilities. Petrolifera anticipates unit operating costs will be more stable after the new field facilities are optimally utilized, which is expected to occur during the remainder of 2008 and throughout 2009.

Operating costs in the second quarter of 2008 increased seven percent in total and four percent on a per unit basis compared to the first quarter of 2008.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative ("G&A") expenses were $4.1 million in the first six months of 2008 compared to $3.2 million for the first six months of 2007. G&A was $2.0 million in the second quarter of 2008 compared to $1.8 million for the second quarter of 2007. These costs primarily consist of management and administrative salaries, legal and professional fees, insurance, travel and other administrative expenses. The increase from 2007 is primarily attributable to increased staffing levels to handle the expanded nature of the company's operations and increased legal costs associated with a dispute subject to an arbitration proceeding. This was resolved subsequent to the reporting period.

On a per boe basis, G&A was $2.81 per boe of sales volume for the first six months of 2008 compared to $1.93 per boe for the first six months of 2007. G&A of $2.5 million was capitalized in the first six months of 2008 (first six months of 2007 - $0.6 million). Non-cash stock-based compensation costs of $3.1 million were recorded in the first six months of 2008 (first six months of 2007 - $4.2 million), reflecting the calculated value of stock options granted and vested during the period, options previously granted that vested during the period and options that were forfeited during the period. The company grants stock options on an annual basis to existing employees and to new hires when employed.

FOREIGN EXCHANGE

The impact of fluctuations in the Argentinean peso and the US dollar relative to the Canadian dollar, arising from settling foreign-denominated transactions and from translating foreign denominated financial statements and operating results of its integrated foreign operations, resulted in a foreign exchange charge of $1.2 million in the first six months of 2008 (first six months of 2007 - $4.0 million charge) and a charge of $1.1 million for the second quarter of 2008 (second quarter 2007 - $3.9 million charge). The company's main exposure to foreign currency risk relates to the pricing of crude oil sales, operating costs and capital expenditures which are denominated in US dollars and Argentinean pesos.

FAIR VALUE IMPAIRMENT - ABCP

In recognition of the loss of liquidity in the company's ABCP investment, provision has been made in the financial statements for a non-cash fair value impairment charge of $3.5 million for the first half of 2008. The cumulative effect of the current year and 2007 impairments represents approximately 26 percent of the face value of the investment at the time of the loss of liquidity in the Canadian commercial paper market. The basis for this charge is explained under "Long-Term Investments." It is not known when or whether these amounts can or will be recovered.

DEPLETION, DEPRECIATION AND ACCRETION ("DD&A")

DD&A is calculated using the unit-of-production method based on total estimated proved reserves. DD&A in the first six months of 2008 was $11.1 million (first six months of 2007 - $8.8 million) or $7.60 per boe (first six months of 2007 - $5.26 per boe). DD&A was $6.4 million or $8.89 per boe for the second quarter of 2008 (second quarter 2007 - $3.4 million or $5.45 per boe). Accretion expense for the first six months of 2008, which is included in DD&A expense, was $0.2 million (2007 - $0.1 million) to accrete the company's estimated asset retirement obligation. These charges will continue at appropriate levels in the future to accrete the currently booked discounted liability of $6.4 million over the estimated remaining economic life of the company's oil and gas properties. Capital costs of $24.5 million related to unevaluated properties in Argentina and for major development projects and other assets in the pre-production stage, principally related to Peruvian assets, have been excluded from depletable costs (2007 - $7.5 million). The increase in both the three and six month comparison periods was mainly due to the higher cost of additions and infrastructure related to the Argentina production. Additionally, estimated future development costs of $8.9 million for proved undeveloped reserves were included in the depletion calculation.

CEILING TEST

Oil and gas companies are required to compare the recoverable value of their oil and gas assets to their recorded carrying value at the end of each reporting period. Excess carrying values over fair value are to be written off against earnings. No write-down was required in the first six months of 2008 or for 2007.

TAXES

The current income tax provision of $7.8 million for the first six months of 2008 (first six months of 2007 - $14.0 million), primarily related to income taxes payable in Argentina. Additionally, a future income tax provision of $0.8 million for the six month period (2007 - provision of $2.6 million) was recorded to recognize changes in tax pool balances. The increase in the effective tax rate to 62 percent for the first half of 2008 compared to 46 percent for the first half of 2007 was primarily due to the tax effect in Canada of the impairment recorded on the company's investment in ABCP. Taxes other than income taxes of $1.3 million (2007 - $0.9 million) represent taxes charged on all banking transactions in Argentina for the six month period.

Current income tax provision for the second quarter of 2008 was $5.2 million (second quarter of 2007 - $3.9 million) and a future income tax recovery of $0.5 million (second quarter of 2007 - provision of $1.5 million) for a total income tax provision in the second quarter of $4.6 million (second quarter of 2007 - $5.4 million). Taxes other than income taxes were $0.8 million (2007 - $0.5 million) for the second quarter of 2008.

<< NET EARNINGS AND SHARES OUTSTANDING ------------------------------------------------------------------------- Three months ended June 30 ------------------------------------------------------------------------- ($000 except per boe) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Netback $ 22,616 $ 30.69 $ 20,692 $ 32.80 General & administrative (2,024) (2.75) (1,811) (2.87) Stock-based compensation (731) (0.99) (1,238) (1.96) Finance charges (1,303) (1.77) (6) (0.01) Foreign exchange (loss) (1,118) (1.52) (3,887) (6.16) Fair value impairment - ABCP (2,002) (2.72) - - Taxes other than income taxes (816) (1.11) (508) (0.81) Depletion, depreciation and accretion (6,388) (8.67) (3,438) (5.45) Income tax provision (4,644) (6.30) (5,354) (8.49) ------------------------------------------------------------------------- Net earnings for the period $ 3,590 $ 4.86 $ 4,450 $ 7.05 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months ended June 30 ------------------------------------------------------------------------- ($000 except per boe) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Netback $ 40,474 $ 27.80 $ 57,347 $ 34.16 General & administrative (4,086) (2.81) (3,232) (1.93) Stock-based compensation (3,129) (2.15) (4,159) (2.48) Finance charges (2,223) (1.53) (29) (0.02) Foreign exchange (loss) (1,208) (0.83) (4,020) (2.39) Fair value impairment - ABCP (3,492) (2.40) - - Taxes other than income taxes (1,322) (0.91) (946) (0.56) Depletion, depreciation and accretion (11,057) (7.60) (8,834) (5.26) Income tax provision (8,629) (5.93) (16,608) (9.89) ------------------------------------------------------------------------- Net earnings for the period $ 5,328 $ 3.66 $ 19,519 $ 11.63 ------------------------------------------------------------------------- >>

In the first six months of 2008 the company reported net earnings of $5.3 million (first six months of 2007 - $19.5 million), which equates to $0.11 per weighted average basic and $0.10 per weighted average diluted share outstanding compared to $0.43 per weighted average basic and $0.38 per weighted average diluted share outstanding for the first six months of 2007. Net earnings for the second quarter were $3.6 million (first six months of 2007 - $4.5 million), which equates to $0.07 per weighted average basic and $0.07 per weighted average diluted share outstanding compared to $0.09 per weighted average basic and $0.09 per weighted average diluted share outstanding for the second quarter of 2007. Net earnings for three months and six months ended June 30, 2008 were adversely affected by the charge for the impairment of the company's investment in ABCP, resulting in a significant non-cash charge against earnings for both periods and increased financing charges related to the increased bank debt.

In the first six months of 2008, the weighted average number of common shares outstanding was 50.4 million (first six months of 2007 - 45.8 million). In the first six months of 2008, 1.2 million additional shares were included in the diluted earnings per share calculations related to the potentially dilutive effect of outstanding options and warrants. The weighted average number of common shares outstanding was 50.3 million (2007 - 47.8 million) for the second quarter of 2008 and an additional 1.2 million shares were included for the diluted per share calculations related to the potentially dilutive effect of outstanding options and warrants.

As at the close of business on August 5, 2008, the company had the following securities issued and outstanding:

<< - 54,798,010 common shares; - 160,000 warrants; and - 3,608,567 stock options >>

Details of the exercise rights and terms of the warrants and options are noted in the Consolidated Financial Statements, included in this Interim Report.

CAPITAL RESOURCES, CAPITAL EXPENDITURES AND LIQUIDITY

Cash flow from operations before working capital changes ("cash flow"), cash flow per share and cash flow per boe do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow is reconciled with net earnings on the Consolidated Statement of Cash Flows and below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding; cash flow per boe is calculated by dividing cash flow by the quantum of crude oil and natural gas (expressed in boe) sold in the period. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures.

Reconciliation of net earnings to cash flow from operations before working capital changes:

<< ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings for the period $ 3,590 $ 4,450 $ 5,328 $ 19,519 Add (deduct) Stock-based compensation 731 1,238 3,129 4,159 Depletion, depreciation, and accretion 6,388 3,438 11,057 8,834 Future income tax provision (recovery) (538) 1,491 787 2,587 Amortization of deferred finance charges 194 - 386 - Foreign exchange (gain) loss 1,118 3,887 1,208 4,020 Fair value impairment - ABCP 2,002 - 3,492 - ------------------------------------------------------------------------- Cash flow from operations before working capital changes $ 13,485 $ 14,504 $ 25,387 $ 39,119 ------------------------------------------------------------------------- >>

Cash flow in the first six months of 2008 was $25.4 million (first six months of 2007 - $39.1 million) or $0.50 per weighted average basic share and $0.49 per weighted average diluted share, (2007 - $0.85 per weighted average basic share and $0.77 per weighted average diluted share). Cash flow in the second quarter was $13.5 million (second quarter 2007 - $14.5 million) which equates to $0.27 per weighted average basic share and $0.26 per weighted average fully diluted share (2007 - $0.30 per weighted average basic share and $0.28 per weighted average fully diluted share).

Equity Financing

On June 11, 2008 the company announced that it entered into a financing agreement with a syndicate of underwriters led by RBC Capital Markets to issue 4,445,000 common shares ("Common Shares") at $9.00 per Common Share, on a "bought deal" basis for gross proceeds of approximately $40 million. The underwriters were granted an over-allotment option to purchase up to an additional 666,750 Common Shares on the same terms and conditions, exercisable in whole or in part up to 30 days following closing. This financing was closed on June 27, 2008 and the over-allotment option was not exercised.

<< Proceeds of the bought deal financing are summarized as follows: ------------------------------------------------------------------------- ($000s) ------------------------------------------------------------------------- Gross proceeds $ 40,005 Underwriter's commissions and issue costs 2,253 ------------------------------------------------------------------------- Net funds available for capital expenditure program 37,752 ------------------------------------------------------------------------- Capital Expenditures ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Argentina $ 21,963 $ 17,805 $45,203 $24,655 Colombia 522 203 747 203 Peru 6,625 1,820 14,216 2,450 Corporate - 14 - 48 ------------------------------------------------------------------------- Total capital expenditures $ 29,110 $ 19,842 $ 60,166 $ 27,356 ------------------------------------------------------------------------- >>

Capital spending exceeded cash flow, resulting in an increase in bank debt compared to December 31, 2007. Nevertheless, Petrolifera was in a strong financial position at June 30, 2008 with significant cash flow, $41.0 million of cash, $13.3 million of working capital and available debt capacity.

Capital expenditures for the six months ended June 30, 2008 totaled $60.2 million (six months ended June 30, 2007 - $27.4 million). In Argentina the company drilled 26 wells (including two wells started in 2007 and completed in 2008) in the first half of the year with 10 of these wells in the second quarter. The drilling program resulted in 19 oil wells, one natural gas well, three injectors and two wells abandoned with one well awaiting testing at June 30, 2008 which was subsequently suspended after negative test results. In Peru the company continued to acquire seismic data on Block 107 and was advancing the Seismic EIA for the planned Block 106 seismic acquisition program scheduled for later this year. In Colombia the company continued preparations for the planned exploration drilling later this year.

The company's remaining 2008 capital program includes exploratory and development drilling in Argentina, exploratory drilling and seismic in Colombia and seismic acquisition and interpretation in Peru.

The company anticipates it has sufficient cash balances, cash flow and available credit to fund these planned capital expenditures. Required funds are being moved among Argentina, Barbados, Canada, Colombia and Peru as needed. The company's only financial instruments are cash and cash equivalents, accounts receivable, accounts payable, debt and income taxes payable. It maintains no off-balance sheet financial instruments.

CREDIT FACILITIES

In 2007 the company entered into a US$100 million reserve-based revolving credit facility with an initial availability of US$60 million. The initial facility term was for three years, bears interest at LIBOR plus a margin, is secured by the pledge of the shares of Petrolifera's subsidiaries and has a provision for a borrowing base adjustment every six months, with the next adjustment to be calculated based on information as at July 1, 2008. Remaining deferred financing costs of $1.8 million related to this facility are being amortized over the remaining term of the facility. During the second quarter of 2008, the availability of the reserve-based facility of this facility was increased to US$70 million based on reserves as at December 31, 2007.

The company classifies drawings under this reserve-based facility that relate to the Argentina operations as long-term debt as repayment is not required within one year under the terms of the facility agreement. Drawings made under this reserve-based facility related to operations outside of Argentina are classified as current bank debt as the facility agreement allows for repayment of the loans and as it is the intention of the company to repay these loans within the next twelve months.

In late 2007, the company established an $18 million line of credit with a Canadian chartered bank. The line of credit bears interest at a floating rate and is secured by the ABCP investments.

As at June 30, 2008 the reserve based facility had $58.9 million outstanding with $43.8 million classified as long-term bank debt and $15.1 million classified as bank debt. The line of credit facility had $16 million outstanding classified as bank debt. Interest expense on the facilities for the six months ended June 30, 2008 was $1.7 million (six months ended June 30, 2007 - Nil) and was $1.0 million for the second quarter of 2008 (second quarter 2007 - Nil). Unused credit facilities as at June 30, 2008 were $14.5 million.

Subsequent to June 30, 2008 the company agreed to a term sheet with a Canadian chartered bank, whereby, subject to the issuance of new notes under the reorganization plan for ABCP, which awaits approval by the Ontario Appeal Court (see Long-Term Investments), Petrolifera would receive a loan facility, with an initial term of two to three years with four to five one-year renewals. This facility would be secured by the ABCP notes and in exchange, Petrolifera would withdraw its participation in litigation to retain the rights to pursue further legal action against the bank.

LONG-TERM INVESTMENTS

Due to the early success of the Argentinean drilling program since December 2005, after the company completed its initial public offering, significant cash balances were retained in Petrolifera's bank accounts. These funds were largely kept in Canada for capital preservation and security. In mid-2006 the company commenced a program to invest its surplus funds in high quality, highly rated, liquid commercial paper with a primary emphasis on security of capital. Investments were made in R-1 High rated ABCP, as rated by Dominion Bond Rating Service, sold to us by the money market facilities of a Canadian chartered bank with whom we held bank accounts. These investments were made in more than one issuing entity, were made for various time periods and were acquired to earn a reasonable return in relation to prevailing market conditions. On maturity, proceeds including earned interest were generally reinvested on a regular basis. In August 2007 the Canadian third-party ABCP market experienced severe liquidity problems. This has caused the conduits that issued the notes to default on the redemption of the notes. As a result, holders could not receive their cash plus interest at maturity. On September 6, 2007 a panel of banks, asset providers, and major investors formed the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper ("Pan-Canadian Committee") to oversee a proposed restructuring process. The proposed restructuring called for the ABCP to be converted into longer term floating rate notes which more closely match the maturities of the underlying assets. On March 17, 2008 the Pan-Canadian Committee made the restructuring proposal by filing a CCAA restructuring proposal whereby the company's notes will be exchanged for several classes of notes with maturities that better match the maturities of the underlying assets. On April 25, 2008, the noteholders voted in favour of the Pan-Canadian Committee restructuring proposal and on June 5, 2008 the court sanctioned the restructuring plan. In late June 2008, the Court of Appeal of Ontario heard motions from various noteholders seeking leave to appeal and an appeal of the sanctioning of the proposed restructuring.

Quoted market values of the ABCP are not available due to the market disruption that is currently paralyzing the ABCP market. Management has therefore estimated the fair value of the owned ABCP, which were issued by Apsley Trust and MMAI-I Trust, based on a probabilistic recovery of principal and interest taking into account all available information. Under this valuation method, several different outcomes of the recovery of the principal and interest are estimated considering the information available as at June 30, 2008. A weighted average recovery is then calculated. This weighted average recovery is used to determine the discounted cash flows that are expected from these investments. The discount rate used to discount the expected cash flows from the ABCP is an approximation of the risk-free rate for the expected life of the ABCP notes to be received. As the rate used for discounting is an approximation of the risk-free rate, all other risks have been incorporated in the estimated probability adjusted expected outcomes. This methodology applies all risking information into the various scenarios and discounts the fully risked cash flow stream only for the time value of money. The recovery factors used were as follows:

<< ------------------------------------------------------------------------- Face Value Capital Interest of Notes Capital Interest Weighted Weighted Dis- Class of Expected Recovery Recovery Average Average Term count Note ($000s) Range Range Recovery Recovery (years) Rate ------------------------------------------------------------------------- A-1 $14,603 0-95% 0-75% 91% 70% 5-8 3.62% ------------------------------------------------------------------------- A-2 13,246 0-90% 0-70% 82% 56% 8 3.62% ------------------------------------------------------------------------- B 2,281 0-75% 0-50% 71% 47% 8 3.62% ------------------------------------------------------------------------- C 932 0-50% 0-50% 46% 39% 8 3.62% ------------------------------------------------------------------------- IA Tracking 6,638 0-75% 0-50% 61% 35% 8 3.62% ------------------------------------------------------------------------- Total $37,700 ------------------------------------------------------------------------- >>

Based on the above approach the fair value of the investment in ABCP is estimated to be $27.9 million which is an impairment of $3.5 million for the six months ended June 30, 2008. For the quarter ended June 30, 2008 the impairment recorded is $2.0 million or approximately 7 percent of the carrying value of the ABCP. This impairment brings the total impairment of the ABCP recorded to date to approximately 26 percent of the original cost of the investment.

As at June 30, 2008, included in long-term investments were ABCP with a face value of $37.7 million and a carrying value of $27.9 million. These investments are classified as held for trading and are carried at fair value which is assessed each reporting date. The theoretical fair value of the company's ABCP could range from $21.2 million to $33.4 million using the valuation methodology described above with alternative reasonably possible assumptions. The company anticipates that it presently has sufficient cash resources and available credit to satisfy obligations as they come due. Assuming the ABCP problems are restructured during 2008 and normal liquidation for cash occurs, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts. The outcome of the restructuring process, actual timing and amount ultimately recoverable from these notes may differ materially from this estimate which would impact the company's earnings.

LEGAL PROCEEDINGS

Petrolifera was a party to an arbitration proceeding initiated by the former contract operator of the Puesto Morales/Rinconada block. The former operator was seeking financial compensation including damages for wrongful dismissal. Subsequent to the end of the quarter, these legal proceedings have been resolved and the consideration paid is not material

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