Petrolifera reports solid Q3 2008 results; Healthy cash balances and cash flow maintained; High impact drilling upcoming in Colombia; Conference call scheduled for November 12, 2008 AT 9:00 A.M. MST

CALGARY, Nov. 11, 2008 (Canada NewsWire via COMTEX) -- PRFPF | Quote | Chart | News | PowerRating -- Petrolifera Petroleum Limited (PDP - TSX) reports that it achieved solid financial and operating results during the third quarter and first nine months of 2008. The company has now had 16 successive quarters of positive cash flow and 11 successive quarters of meaningful earnings since its formation in late 2004. All of the company's growth has been organic. We ended the period with healthy cash balances, unutilized credit capacity and sustainable cash flow to finance our anticipated capital programs in the remainder of 2008 and throughout 2009. Shortly, we anticipate commencement of our high impact drilling program on our Sierra Nevada License in the Lower Magdalena Basin in Colombia. We are also in the planning stages for drilling on our Ucayali Block 107 in Peru next year.

<< Highlights are as follows: - Solid, stable crude oil and natural gas sales were achieved; waterflood progress continues at Puesto Morales - Fourth successive quarter of cash flow growth, with Q3 2008 cash flow up 17 percent over Q2 2008 and cash flow per basic weighted average common share outstanding ("common share" or "share") of $0.29 - YTD 2008 cash flow of $41 million ($0.79 per share) - Rig for Colombian drilling in country, undergoing final retrofitting for anticipated December startup of drilling at La Pinta prospect on the Sierra Nevada License - Financial discipline established for balance of 2008 and for 2009 >>

These third quarter 2008 and year to date results will be the subject of a Conference Call at 9:00 a.m. MST on November 12, 2008. To listen to or participate in the live conference call please dial either (416) 644.3418 or (800) 732.0232. A replay of the event will be available from Wednesday, November 12, 2008 at 11:00 a.m. MST until 23:59 (11:59 p.m.) MST on Wednesday, November 19, 2008. To listen to the replay please dial either (416) 640-1917 or Toll Free at (877) 289-8525 and enter the passcode 21284984 followed by the number sign.

<< SUMMARY RESULTS ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------------------------------------------------------------- 2008 2007 % Change 2008 2007 % Change ------------------------------------------------------------------------- FINANCIAL ($000 except per share amounts) Total revenue 32,126 31,730 1 92,915 106,956 (13) Cash flow from operations before non-cash working capital changes(1) 15,726 18,619 (16) 41,113 57,738 (29) Per share, basic(1) 0.29 0.37 (22) 0.79 1.22 (35) Per share, diluted(1) 0.28 0.36 (22) 0.78 1.13 (31) Net earnings 3,564 4,919 (28) 8,892 24,438 (64) Per share, basic 0.06 0.10 (40) 0.17 0.52 (41) Per share, diluted 0.06 0.10 (40) 0.17 0.48 (65) Capital expenditures 21,046 26,061 (19) 81,212 53,417 52 Cash and cash equivalents 14,865 11,368 31 Working capital 8,148 22,742 (64) Long-term debt 45,576 - - Shareholders' equity 178,069 121,727 46 Total assets 279,174 144,016 94 OPERATING Daily sales volumes Crude oil and natural gas liquids - bbl/d 6,850 7,195 (5) 6,896 8,376 (18) Natural gas - mcf/d 5,363 2,169 147 6,106 1,919 218 Barrels of oil equivalent - boe/d(2) 7,744 7,557 2 7,913 8,696 (9) Average selling prices Crude oil and natural gas liquids - $/bbl 48.93 46.99 4 47.01 45.82 3 Natural gas - $/mcf 2.58 1.41 83 2.37 1.45 63 Barrels of oil equivalent - $/boe(2) 45.07 45.15 (0) 42.80 44.45 (4) Common shares outstanding (000s) Weighted average Basic 54,884 50,107 10 51,876 47,285 10 Diluted 55,897 51,800 8 53,054 51,309 3 End of period Issued 54,948 50,119 10 Fully diluted 58,675 51,400 14 ------------------------------------------------------------------------- (1) Cash flow from operations before non-cash working capital changes and cash flow per share do not have standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures used by other companies. Cash flow from operations before non-cash 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

Troublesome capital market conditions dominated the third quarter of 2008. Stock markets and all equities suffered as a result of the lingering and expanding credit market turmoil. Fears of a deep and prolonged recession arising therefrom triggered a selloff in commodity prices, including crude oil. As a result, investors sought refuge from markets and sold equities indiscriminately during the latter part of the reporting period. Petrolifera was no exception. Along with other international junior oil companies, we saw our share price devastated by selling pressure. In our opinion, this has resulted in a huge disconnect between stock market prices and reasonable valuations by any normal standard. Despite the precipitous drop in world crude oil prices, our operating and financial results were not adversely affected due to the regulated commodity pricing regime which has been in place in Argentina for 2008. Accordingly, as our relative performance is anticipated to be superior to many of our peers, it seems illogical that our share price would be as adversely affected as it has been.

Petrolifera continues to conduct its business in Argentina, Colombia and Peru in South America. Our entire production base is currently in Argentina, where price controls have limited the appropriate impact of the company's success on the market price for its common shares in recent times. Also, recent policy initiatives and a weak economic framework have dampened investor attitudes towards business activity in Argentina.

We have decided to react to the overall malaise in capital markets worldwide by adopting a very conservative approach to our originally anticipated capital programs in South America over the ensuing five quarters, until we can determine with greater confidence a sense of direction for worldwide stock markets, credit markets and crude oil markets. Accordingly, in early October 2008 we issued a press release detailing our financial integrity as a company while cautioning shareholders and investors that we would curtail, defer or sell down, through joint venture or farmout activity, our participation in various higher risk projects. This was adopted in recognition of the limitations on being able to access new capital for a considerable period of time, until markets exhibit discernible and restored equilibrium.

These types of decisions are never easy for management, the Board of Directors or for shareholders who have invested in the company because of its exposure to the excellent high potential prospects, plays and properties we have accumulated since the company was formed in late 2004. Nevertheless, fiscal and financial prudence is in order in these tumultuous times. Fortunately, we own or control 100 percent of most of our assets and can manage the timing and pace of drilling programs, while meeting our contractual obligations and focusing on production maintenance and the integrity of our assets until stability and the prospect of being able to finance growth reemerge.

Q3 2008 and YTD 2008 Results and Activity

During Q3 2008, we generated $32.1 million of revenue, $15.7 million of cash flow and earnings of $3.6 million. Cash flow in the period was $0.29 per share. Our crude oil sales averaged 6,850 bbl/d as our waterflood program largely offset normal production declines. With only one drilling rig operating and with one service rig under contract, we were unable to accelerate our production base. Our equivalent sales for the quarter were 7,744 boe/d, including 5.4 mmcf/d of natural gas sales. The average price received for our sales was $45.07 per boe, including a crude oil selling price of $48.93 per barrel, aided by a weaker Canadian dollar.

YTD 2008, our revenue reached $92.9 million, resulting in cash flow of $41.1 million and earnings of $8.9 million. Crude oil sales have averaged 6,896 bbl/d this year, while equivalent sales have averaged 7,913 boe/d this year with considerable consistency. Cash flow YTD 2008 has totaled $0.79 per share, while earnings were $0.17 per share. There were more shares outstanding in Q3 2008 and YTD 2008 due to the successful completion of a $40 million capital raise through the sale of shares from treasury at the end of June 2008. This financing allowed us to further strengthen our balance sheet.

At September 30, 2008 we had $14.9 million of cash and over $8 million of working capital, net of $16 million of debt incurred in relation to the company's holdings of asset backed commercial paper ("ABCP"). It is anticipated this indebtedness will be reclassified as long-term debt once the ABCP court-approved restructuring is completed. This is now anticipated for later this year, when it is also anticipated the credit capacity of the company's long-term ABCP holdings will be expanded. The company also had approximately $28.6 million of unused credit capacity related to its reserve-backed credit facility at the end of the reporting period, so has the cash, cash flow and available credit to meet all its anticipated financial and operating obligations without further recourse to capital markets. As mentioned, efforts continue to further reduce the company's financial exposure to new higher cost drilling activity in Colombia and Peru through farmouts or joint ventures. In this way, financial risk will be reduced while retaining meaningful participation in new identified prospects to the potential benefit of shareholders upon success, at limited cost.

In the meantime, we have been busy on our lower impact drilling program in Argentina, while increasing injectivity at Puesto Morales to restore pressure to the reservoir and expand the production base from this asset. Injectivity rates as high as 26,000 bbl/d of water have been achieved as we replace the voidage caused by our significant production of crude oil during the past four years. Operating metrics in the field have remained stable despite increasing inflationary pressures in Argentina. Our field netback per boe sold in Q3 2008 was $29.29/boe, representing a solid 65 percent of the company's average selling price. Our YTD 2008 netback at $28.29 represents 66 percent of our sales price for the year. Operating costs at $8.61 per boe are acceptable for the complexity of the operation at Puesto Morales.

In Q3 2008 we drilled six wells in Argentina, with one well drilling at the end of the period. YTD 2008 we have participated in a total of 32 wells, resulting in 21 crude oil wells, two natural gas wells, one drilling well and one well awaiting completion at September 30, 2008. Most of these wells were of an infill nature designed to offset production declines until the full impact of the waterflood is experienced, anticipated sometime toward the middle of 2009.

Capital spending in the third quarter 2008 aggregated $21.0 million and was financed from cash flow and cash balances. Short term indebtedness declined from levels at June 30, 2008 with the application of proceeds from the June 2008 equity financing. Overall indebtedness declined in the reporting period.

Expenditures in Argentina continued to dominate our capital program, including outlays for geophysical programs and seismic processing for our exploratory blocks at Vaca Mahuida and Puesto Guevara. Costs for drilling site preparations at La Pinta in Colombia and continued outlays for geophysical programs and activity in Peru were also incurred in Q3 2008. YTD 2008 our total capital outlays have aggregated $81.2 million, including $59.8 million in Argentina (drilling, seismic, field facilities, waterflood), $2.5 million in Colombia (preparation for drilling the La Pinta well) and $18.8 million for seismic in Peru.

We were finally able to secure a suitable drilling rig for our Colombian drilling program and prospectively for our Peruvian drilling program during the reporting period. The rig has been transported from the Ecuadorean jungle to Colombia, is being retrofitted and is expected to be on location at La Pinta on our Sierra Nevada license in December 2008. A second well, Brillante, on the same license is anticipated for 2009. Thereafter, it is anticipated the rig will be available for development drilling until it is required for drilling on Ucayali Block 107 in Peru. It is a helicopter-transportable unit so should meet Petrolifera's requirements for jungle drilling after the company receives its drilling Environmental Impact Assessment ("EIA") approval, which is currently anticipated around mid-year 2009.

We were awarded a license over our Turpial Block earlier this year and continue to await the formal award of a license covering our Magdalena Block in Colombia.

In Peru, we are continuing to interpret the 2D seismic shot over our Ucayali Block 107 and we received our EIA for seismic on Maranon Block 106. The seismic crew has been relocated from Block 107 to Block 106 and seismic data acquisition is anticipated to be underway in the near future. A license on Block 133 offsetting our Ucayali Block 107 to the west is anticipated to be awarded sometime prior to year end, although we do not control this timetable. We remain one of the largest landholders in Peru and among the largest acreage owners of all independent companies operating in South America.

We recently announced the hiring of Dr. Robert ("Bob") Erlich as our new Vice President, Exploration and New Ventures. Dr. Erlich brings an impressive academic and business record to our company and will establish a representative office for the company in Houston, Texas. This will facilitate ease of access to South America and other regions of interest to the company, including Central America.

Outlook for 2009

We are cautiously optimistic about our outlook for 2009, assuming some equilibrium is restored to capital and credit markets. We remain concerned about the direction of Argentinean policy and in particular the continuing limitation on the sales prices available for domestic sales of crude oil and natural gas. Nevertheless, we will monitor and manage our principal asset with care during this period of turmoil.

Our Board of Directors has now approved a 2009 capital budget of $30 million, set at a reduced level compared to 2008 to address current uncertain economic conditions. High impact drilling in Colombia will dominate our proposed 2009 program. We also anticipate commencement of drilling activity in Peru on Block 107 during 2009, provided a suitable farmout arrangement can be achieved in a timely manner. Our Argentinean program will focus on production maintenance and the anticipated impact of our continuing water injection at Puesto Morales Norte. With our expanded technical capability, new ventures will continue to be evaluated for future acquisition once more amenable capital market conditions evolve.

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

The following is dated as of November 11, 2008 and should be read in conjunction with the unaudited consolidated financial statements of Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the three and nine months ended September 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, including the letter to shareholders, contains forward-looking information including but not limited to future exploration and development plans, strategies for reducing the company's financial exposure to high cost exploration and drilling activities, 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 company's waterflood program, 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 Nine months ended Sept. 30 Sept. 30 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Daily sales volumes Crude oil and NGL - bbl/d 6,850 7,195 6,896 8,376 Natural gas - mcf/d 5,363 2,169 6,106 1,919 Total - boe/d 7,744 7,557 7,913 8,696 Average selling prices Crude oil and NGL - $ per bbl $48.93 $46.99 $47.01 $45.82 Natural gas - $ per mcf 2.58 1.41 2.37 1.45 Revenue per boe $45.07 $45.15 $42.80 $44.45 Petroleum and natural gas sales ($000) $32,110 $31,387 $92,793 $105,522 Interest and other income ($000) 16 343 122 1,435 ------------------------------------------------------------------------- Total revenue ($000) $32,126 $31,730 $92,915 $106,957 ------------------------------------------------------------------------- >>

Petroleum and natural gas revenues for the third quarter of 2008 were $32.1 million on sales volumes of 7,744 boe/d, an increase of two percent on both sales revenue and sales volumes, compared to the third quarter 2007 revenues of $31.4 million and sales volumes of 7,557 boe/d. The modest increase in revenue, compared to the third quarter of 2007, resulted from higher natural gas production and increased pricing for Petrolifera's sales. All of Petrolifera's sales were from its Puesto Morales/Rinconada Block in Argentina and all of its production is sold to the domestic market in Argentina.

Petroleum and natural gas revenues for the nine months ended September 30, 2008 were $92.8 million (nine months ended September 30, 2007 - $105.5 million) on sales volumes of 7,913 boe/d (nine months ended September 30, 2007 - 8,696 boe/d), a year-over-year decrease of twelve percent for revenue and nine percent for sales volumes. In January 2008 the company activated a waterflood program to re-pressurize the reservoir, increase production volumes and optimize the ultimate recovery of reserves from the Puesto Morales Field. The waterflood program is in its early phases and has only partially re-pressurized the reservoir but an encouraging production response has been recorded in portions of the Field. This production response from the recently implemented pressure maintenance program when combined with the new drilling on the Puesto Morales/Rinconada Concession contributed to production levels above year-end 2007 exit rates.

Petroleum and natural gas revenues in the third quarter 2008 were down four percent from the second quarter of 2008, largely due to lower crude oil and natural gas liquids production and therefore sales volumes. There were some minor crude oil production declines in September 2008 due to optimization programs and adjustments being made to the pumping systems in Puesto Morales Norte Field. It should also be noted that as the Canadian dollar weakened relative to the US dollar and Argentinean peso during the third quarter of 2008, Petrolifera's realized price, as expressed in Canadian dollars, has improved.

For the nine months ended September 30, 2008, sales of crude oil and natural gas liquids represented 87 percent of the company's sales volumes compared to 96 percent for the nine months ended September 30, 2007. The company's realized crude oil price was up three percent to average $47.01 per barrel for the nine months ended September 30, 2008 (nine months ended September 30, 2007 - $45.82 per barrel). Third quarter average realized crude oil and natural gas liquids prices were up four percent compared to the third 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, which have effectively capped the current realized crude oil price at US$47.00 per barrel. Petrolifera's realized crude oil price has been insulated from the adverse impact of the significant decline in world crude oil markets.

Natural gas prices increased 63 percent to average $2.37 per mcf for the first nine months of 2008, reflecting some relaxation of regulated Argentinean natural gas prices. These are still substantially below prices prevailing in North American markets. The company successfully negotiated an increase to US$2.40 per mmbtu for winter sales volumes sold to a local gas marketing company. Third quarter natural gas prices increased 83 percent to $2.58 per mcf compared to $1.41 per mcf in the third quarter of 2007. Natural gas prices have been improving throughout 2008 and are expected to continue improving in the longer term due to market conditions and new policy initiatives aimed at market deregulation for industrial sales. Despite improved average selling prices for crude oil and natural gas for the three months and nine months ended September 30, 2008, the increase in natural gas sales volumes, which are priced considerably lower than the equivalent heating value of crude oil, resulted in an overall reduction in Petrolifera's revenue per boe due to the increased volumes of gas sold at a boe price well below the price for crude oil sales.

Interest and other income was $0.1 million in the nine months ended September 30, 2008 (nine months ended September 30, 2007 - $1.4 million) and $0.02 million for the three months ended September 30, 2008 (three months ended September 30, 2007 - $0.3 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 nine months of 2008 were $12.9 million ($5.95 per boe) or 14 percent of oil and natural gas revenue, compared to $13.8 million ($5.80 per boe) or 13 percent in the first nine months of 2007. Royalties for the third quarter of 2008 were $4.8 million ($6.80 per boe) or 15 percent of oil and natural gas revenue compared to $4.7 million (6.33 per boe) or 14 percent in the second quarter of 2008 and $4.0 million ($5.77 per boe) or 13 percent in the third quarter of 2007.

<< OPERATING EXPENSES AND NETBACKS Company Netbacks(1) ------------------------------------------------------------------------- Three months ended September 30 ------------------------------------------------------------------------- ($000 except per boe amounts) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Average daily production (boe/d) 7,744 7,557 ------------------------------------------------------------------------- Petroleum and natural gas sales $32,110 $45.07 $31,387 $45.15 Interest and other income 16 0.02 343 0.49 Royalties (4,842) (6.80) (4,010) (5.77) ------------------------------------------------------------------------- Net revenue 27,284 38.29 27,720 39.87 Operating costs (6,410) (9.00) (4,836) (6.96) ------------------------------------------------------------------------- Corporate netback $20,874 $29.29 $22,884 $32.91 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30 ------------------------------------------------------------------------- ($000 except per boe amounts) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Average daily production (boe/d) 7,913 8,696 ------------------------------------------------------------------------- Petroleum and natural gas sales $92,793 $42.80 $105,522 $44.45 Interest and other income 122 0.05 1,435 0.60 Royalties (12,892) (5.95) (13,771) (5.80) ------------------------------------------------------------------------- Net revenue 80,023 36.90 93,186 39.25 Operating costs (18,675) (8.61) (12,955) (5.46) ------------------------------------------------------------------------- Corporate netback $61,348 $28.29 $80,231 $33.79 ------------------------------------------------------------------------- (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 per boe were respectively down 11 and 16 percent over those recorded in the three months and nine months ended September 30, 2007. The year over year change primarily reflects a decreased realized sales price, higher operating expenses and lower interest income. The change between third quarter 2008 over third quarter 2007 primarily reflects higher operating expenses, lower interest income and higher royalties. Petrolifera's third quarter 2008 corporate netback was down five percent over that recorded in the second quarter of 2008. The second quarter's realized pricing included a retroactive receipt for previously sold crude oil. Petrolifera's calculated unit netback for the third quarter and the first nine months of 2008 was respectively a healthy 65 and 66 percent of selling price per boe.

Operating costs in the first nine months of 2008 increased 44 percent in total and 58 percent on a per boe basis from 2007 levels. Operating costs in the third quarter of 2008 increased 33 percent in total and 29 percent on a per boe basis from 2007 levels. The increases are mainly attributable to a significant increase in the number of wells being operated, the number of wells on pump or that require servicing on a more frequent basis in addition to the effect of inflationary pressures and start-up costs related to new field facilities. Operating costs in the third quarter of 2008 were consistent in total but increased five percent on a per boe basis compared to the second quarter of 2008.

GENERAL & ADMINISTRATIVE AND STOCK BASED COMPENSATION EXPENSES

General & administrative ("G&A") expenses were $6.3 million in the first nine months of 2008 compared to $4.7 million for the first nine months of 2007. G&A was $2.2 million in the third quarter of 2008 compared to $1.5 million for the third 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 for both the three and nine month periods 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 that was subject to an arbitration proceeding. The dispute was resolved during the current reporting period.

On a per boe basis, G&A was $2.92 per boe of sales for the first nine months of 2008 compared to $1.99 per boe for the first nine months of 2007. The increase in G&A per boe for the year, relative to 2007, was for the reasons previously mentioned, combined with modestly lower sales volumes. The increase in G&A per boe for the third quarter, relative to the second quarter of 2008, was primarily due to lower sales volumes. G&A of $1.7 million was capitalized in the first nine months of 2008 (first nine months of 2007 - $1.8 million). Non-cash stock-based compensation costs of $4.3 million were recorded in the first nine months of 2008 (first nine months of 2007 - $5.4 million), reflecting the amortization over the vesting period of the fair value of stock options granted during this or a previous reporting period, less the recognized fair value of options, during this or a previous reporting period, that were forfeited during the nine months ended September 30, 2008. The company generally 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 $1.0 million in the first nine months of 2008 (first nine months of 2007 - $6.3 million charge) and a gain of $0.2 million for the third quarter of 2008 (second quarter 2007 - $2.3 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 mainly 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 $5.4 million for the first nine months of 2008. The cumulative effect of the current year and 2007 impairments represents approximately 31 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 nine months of 2008 was $17.7 million (first nine months of 2007 - $12.4 million) or $8.14 per boe (first nine months of 2007 - $5.23 per boe). DD&A was $6.6 million or $9.26 per boe for the third quarter of 2008 (third quarter 2007 - $3.6 million or $5.16 per boe). Accretion expense for the first nine months of 2008, which is included in DD&A expense, was $0.3 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 $6.8 million over the estimated remaining economic life of the company's oil and gas properties. Capital costs of $37.3 million related to unevaluated properties and properties in the pre-production stage in Argentina, Colombia and Peru have been excluded from depletable costs (2007 - $10.1 million). The increase in DD&A in both the three and nine month comparison periods was mainly due to the estimated higher cost of production additions and the cost of infrastructure related to the Argentina production.

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 nine months of 2008 or for 2007.

TAXES

The current income tax provision of $9.1 million for the first nine months of 2008 (first nine months of 2007 - $16.4 million) primarily related to income taxes payable in Argentina. Additionally, a future income tax provision of $3.4 million for the nine month period (2007 - provision of $6.4 million) was recorded to recognize changes in tax pool balances. The increase in the effective tax rate to 58 percent for the first nine months of 2008 compared to 48 percent for the first nine months 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 $1.8 million (2007 - $1.3 million) represent taxes charged on all banking transactions in Argentina for the nine month period.

Current income tax provision for the third quarter of 2008 was $1.3 million (third quarter of 2007 - $2.4 million) and a future income tax expense of $2.6 million (third quarter of 2007 - provision of $3.8 million) for a total income tax provision in the third quarter of $3.9 million (third quarter of 2007 - $6.2 million). Taxes other than income taxes were $0.5 million (2007 - $0.4 million) for the third quarter of 2008.

<< NET EARNINGS AND SHARES OUTSTANDING ------------------------------------------------------------------------- Three months ended Sept. 30 ------------------------------------------------------------------------- ($000 except per boe) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Netback $20,874 $29.29 $22,884 $32.91 General & administrative (2,240) (3.15) (1,489) (2.14) Stock-based compensation (1,123) (1.57) (1,260) (1.81) Finance charges (1,361) (1.91) (11) (0.02) Foreign exchange gain (loss) 239 0.34 (2,267) (3.26) Fair value adjustments - ABCP (1,885) (2.65) (2,787) (4.01) Taxes other than income taxes (486) (0.68) (360) (0.52) Depletion, depreciation and accretion (6,599) (9.26) (3,586) (5.16) Income tax provision (3,855) (5.41) (6,205) (8.93) ------------------------------------------------------------------------- Net earnings for the period $3,564 $5.00 $4,919 $7.06 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended Sept. 30 ------------------------------------------------------------------------- ($000 except per boe) 2008 2007 ------------------------------------------------------------------------- Total Per boe Total Per boe ------------------------------------------------------------------------- Netback $61,348 $28.29 $80,232 $33.79 General & administrative (6,326) (2.92) (4,721) (1.99) Stock-based compensation (4,252) (1.96) (5,420) (2.28) Finance charges (3,584) (1.65) (40) (0.02) Foreign exchange gain (loss) (969) (0.45) (6,287) (2.65) Fair value adjustments - ABCP (5,377) (2.48) (2,787) (1.17) Taxes other than income taxes (1,808) (0.83) (1,306) (0.55) Depletion, depreciation and accretion (17,656) (8.14) (12,420) (5.23) Income tax provision (12,484) (5.76) (22,813) (9.61) ------------------------------------------------------------------------- Net earnings for the period $8,892 $4.10 $24,438 $10.29 ------------------------------------------------------------------------- >>

In the first nine months of 2008 the company reported net earnings of $8.9 million (first nine months of 2007 - $24.4 million), which equates to $0.17 per weighted average basic and diluted share compared to $0.52 per weighted average basic and $0.48 per weighted average diluted share for the first nine months of 2007. Net earnings for the third quarter were $3.6 million (third quarter 2007 - $4.9 million), which equates to $0.06 per weighted average basic and diluted share (third quarter 2007 - $0.10 per weighted average basic and diluted share). Net earnings for the nine months ended September 30, 2008 were lower than the nine month period in 2007 mainly due to lower sales volumes, reduced pricing on a boe basis, cost inflation, fair value adjustments to ABCP and increased financing costs.

In the first nine months of 2008, the weighted average number of common shares outstanding was 51.9 million (first nine months of 2007 - 47.3 million). In the first nine 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 54.9 million (2007 - 50.1 million) for the third quarter of 2008 and an additional 1.0 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 November 10, 2008, the company had the following securities issued and outstanding:

<< - 54,948,010 common shares; and - 3,941,867 stock options >>

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

CAPITAL RESOURCES, CAPITAL EXPENDITURES AND LIQUIDITY

Cash flow from operations before non-cash 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 Statements 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, natural gas liquids 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 Nine months ended Sept. 30 Sept. 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings for the period $3,564 $4,919 $8,892 $24,438 Add (deduct) Stock-based compensation 1,123 1,260 4,252 5,419 Depletion, depreciation, and accretion 6,599 3,586 17,656 12,420 Future income tax provision 2,573 3,800 3,360 6,387 Amortization of deferred finance charges 221 - 607 - Foreign exchange (gain) loss (239) 2,267 969 6,287 Fair value adjustments - ABCP 1,885 2,787 5,377 2,787 ------------------------------------------------------------------------- Cash flow from operations before non-cash working capital changes $15,726 $18,619 $41,113 $57,738 ------------------------------------------------------------------------- >>

Cash flow in the first nine months of 2008 was $41.1 million (first nine months of 2007 - $57.7 million) or $0.79 per weighted average basic and $0.78 per weighted average diluted share, (2007 - $1.22 per weighted average basic and $1.13 per weighted average diluted share). Cash flow in the third quarter was $15.7 million (second quarter of 2007 - $18.6 million) which equates to $0.29 per weighted average basic and $0.28 per weighted average fully diluted share (2007 - $0.37 per weighted average basic and $0.36 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 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 $40.0 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.

For the three months ended September 30, 2008, the net proceeds of the financing have been partially used to fund a portion of Petrolifera's 2008 capital expenditure programs in Argentina, Colombia and Peru as described under "Capital Expenditures". Until such time that Petrolifera applies all of the net proceeds of the financing to its remaining 2008 capital expenditure programs, a portion of the net proceeds were used to repay $11.5 million of indebtedness incurred outside of Argentina pursuant to the reserve-based credit facility. This reserve-based credit facility was previously utilized to fund a portion of the capital expenditures and general working capital given the loss of liquidity experienced in connection with the investment in ABCP (see "Long-Term Investments").

Proceeds of the financing are summarized as follows:

<< ------------------------------------------------------------------------- ($000s) ------------------------------------------------------------------------- Gross proceeds $40,005 Underwriter's commissions and issue costs 2,240 ------------------------------------------------------------------------- Net funds available for capital expenditure program $37,765 ------------------------------------------------------------------------- Capital Expenditures ------------------------------------------------------------------------- Three months ended Nine months ended Sept. 30 Sept. 30 ------------------------------------------------------------------------- ($000) 2008 2007 2008 2007 ------------------------------------------------------------------------- Argentina $14,628 $22,721 $59,831 $47,388 Colombia 1,765 150 2,512 353 Peru 4,623 3,190 18,838 5,641 Corporate 31 - 31 35 ------------------------------------------------------------------------- Total capital expenditures $21,046 $26,061 $81,212 $53,417 ------------------------------------------------------------------------- >>

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 September 30, 2008 with significant cash flow, $14.9 million of cash and established and available borrowing capacity of $30.6 million. Petrolifera is striving to reduce future cash outlays to be more aligned with cash flow to maintain its balance sheet strength and financial flexibility as it prepares for increased activity in Colombia and Peru. Some commitments may also be reduced through anticipated farmouts and joint ventures.

Capital expenditures for the nine months ended September 30, 2008 totaled $81.2 million (nine months ended September 30, 2007 - $53.4 million). In Argentina the company drilled 32 wells (including two wells started in 2007 and completed in 2008) in the first nine months of the year with six of these wells drilled in the third quarter. The drilling program resulted in 21 oil wells, two natural gas wells, four injectors, four wells abandoned and one well awaiting completion as at September 30, 2008. In Peru on Block 107 the company completed the seismic data acquisition and continued to interpret and evaluate the results and was preparing for the seismic acquisition program on Block 106 following receipt of approval of the Environmental Impact Assessment. The anticipated award of Block 133, offsetting Block 107, is awaiting Peruvian Presidential decree. In Colombia, the company continued preparations for the planned La Pinta exploration well that is scheduled to commence drilling this year on the Sierra Nevada I License in the Lower Magdalena Basin.

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. Reductions in the company's financial exposure to new higher cost drilling planned for the remainder of 2008 in Colombia and 2009 in Colombia and Peru are being pursued through farmouts or joint ventures while retaining meaningful participation in these new prospects.

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, income taxes payable, bank debt and long-term bank debt. 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, bore interest at LIBOR plus a margin, was secured by the pledge of the shares of Petrolifera's subsidiaries and had a provision for a borrowing base adjustment every six months. During the second quarter of 2008, the availability of the reserve-based credit facility was increased to US$70 million based on reserves as at December 31, 2007. The next adjustment is to be calculated based on information as at January 1, 2009. Remaining deferred financing costs of $1.8 million related to this facility are being amortized over the remaining term of the facility.

Any drawings made under this reserve-based credit facility related to operations outside of Argentina would be classified as current bank debt as the facility agreement allows for repayment of such drawings and it would be the intention of the company to repay any of these drawings within 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. The company is in final negotiations for the line of credit secured by its ABCP investments to be increased to an approximately $28.3 million long-term credit facility, with an initial term of two to three years with four to five one-year renewals.

As at September 30, 2008 the reserve-based credit facility had $45.6 million (US$43.0 million) outstanding, all classified as long-term bank debt. The line of credit facility had $16 million outstanding classified as current bank debt. Interest expense on the facilities for the nine months ended September 30, 2008 was $3.0 million (nine months ended September 30, 2007 - Nil) and was $1.1 million for the third quarter of 2008 (third quarter 2007 - Nil). Unused credit facilities as at September 30, 2008 were $30.6 million.

The company is in final negotiations for the line of credit to be converted to a long-term facility and increased to approximately $28.3 million, and with an initial term of two to three years with four to five one-year renewals secured by the ABCP investments.

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. In August 2008, the lower courts original decision was upheld by the Court of Appeal of Ontario. In September 2008, the Supreme Court of Canada declined to hear any further noteholders appeal. It has been recently announced by the Pan-Canadian Committee chairman that it is anticipated that the plan of arrangement will be implemented by the end of 2008.

Quoted market values of the ABCP are not available due to the market disruption that has frozen 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 September 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 Class of Notes Capital Interest Weighted Weighted of Expected Recovery Recovery Average Average Term Discount Note ($000s) Range Range Recovery Recovery (years) Rate ------------------------------------------------------------------------- A-1 $14,603 0 - 93% 0 - 73% 88% 68% 5 - 8 3.50% ------------------------------------------------------------------------- A-2 13,246 0 - 87% 0 - 67% 79% 54% 8 3.50% ------------------------------------------------------------------------- B 2,281 0 - 45% 0 - 20% 42% 19% 8 3.50% ------------------------------------------------------------------------- C 932 0 - 20% 0 - 20% 18% 13% 8 3.50% ------------------------------------------------------------------------- IA Tracking 6,638 0 - 73% 0 - 48% 58% 3% 8 3.50% ------------------------------------------------------------------------- Total $37,700 ------------------------------------------------------------------------- >>

Based on the above approach the fair value of the investment in ABCP is estimated to be $26.0 million which is an impairment of $5.4 million for the nine months ended September 30, 2008. For the quarter ended September 30, 2008 the impairment recorded is $1.9 million or approximately 5 percent of the carrying value of the ABCP. This impairment brings the total impairment of the ABCP recorded to date to approximately 31 percent of the original cost of the investment.

As at September 30, 2008, included in long-term investments were ABCP with a face value of $37.7 million and a carrying value of $26.0 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 $18.5 million to $32.8 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 replacement notes for the ABCP become liquid, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts. The outcome of the actual timing and amount ultimately recoverable from these notes may differ materially from this estimate which would impact the company's earnings.

RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS

Under the terms of an Administrative Agreement with Connacher Oil and Gas Limited ("Connacher"), in effect from January 1, 2008, Connacher provided certain administrative services necessary or appropriate upon the direction of the company. The fee for this service is $15,000 per month. From time to time Connacher also paid bills on behalf of Petrolifera, for which it is reimbursed. Connacher also provided certain support and services to Petrolifera in its pursuit of exploration opportunities in Colombia, for which it will be indemnified and reimbursed without further economic interest in the secured opportunities. The Executive Chairman of the company is the President and Chief Executive Officer of Connacher.

<< SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING ESTIMATES >>

Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in these judgments and estimates may have a material impact on the company's financial results and condition. The following discusses such accounting policies and is included in the MD&A to aid the reader in assessing the significant accounting policies and practices of the company and the likelihood of materially different results being reported. Management reviews its estimates regularly. The emergence of new information and changed circumstances may result in changes to estimates which could be material and the company might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.

The following assessment of significant accounting polices is not meant to be exhaustive.

Oil and Gas Reserves

Under Canadian Securities Regulators' "National In

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