Welton Energy Corporation Announces Third Quarter Operational and Financial Results

Fri. November 14, 2008; Posted: 08:07 PM

Operational and Financial Highlights Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- 2008 2007 % 2008 2007 % ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Average Daily Production ---------------------------------------------------------------------------- Crude oil (bbls/d) ---------------------------------------------------------------------------- Heavy oil 197 298 (34) 223 378 (41) ---------------------------------------------------------------------------- Light oil 35 26 35 36 35 3 ---------------------------------------------------------------------------- Natural gas liquids (bbls/d) 60 59 2 68 62 10 ---------------------------------------------------------------------------- Natural gas (Mcf/d) 825 1,938 (57) 1,351 1,976 (32) ---------------------------------------------------------------------------- Total (boe/d)(2) 429 706 (39) 552 805 (31) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Wells completed (gross/net) ---------------------------------------------------------------------------- Natural Gas - 2/0.4 1/0.5 3/0.7 ---------------------------------------------------------------------------- Oil 1/0.25 4/1.7 1/0.25 6/2.1 ---------------------------------------------------------------------------- Dry 1/0.25 1/1 1/0.25 1/1 ---------------------------------------------------------------------------- Total 2/0.50 7/3.1 3/0.75 10/3.8 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Undeveloped land holdings at September 30, 2008 ---------------------------------------------------------------------------- Gross acres 99,575 121,363 ---------------------------------------------------------------------------- Net acres 52,572 49,199 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Oil and gas revenues ($000s) 3,467 2,774 25 11,621 9,804 19 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Funds flow from operations(1) ($000s) 482 588 (8) 2,654 2,862 (5) ---------------------------------------------------------------------------- Per share - basic ($) 0.01 0.01 - 0.05 0.06 (17) ---------------------------------------------------------------------------- Per share - diluted ($) 0.01 0.01 - 0.05 0.06 (17) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Income (loss) ($000s) (157) (1,053) (91) (15,937) (2,557) 521 ---------------------------------------------------------------------------- Per share - basic ($) - (0.02) - (0.32) (0.06) 433 ---------------------------------------------------------------------------- Per share - diluted ($) - (0.02) - (0.32) (0.06) 433 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures ($000s) (40) 2,433 - 1,436 5,238 (73) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Shares outstanding (000s) ---------------------------------------------------------------------------- Weighted average - basic 49,836 46,527 49,836 44,403 ---------------------------------------------------------------------------- Weighted average - diluted 49,836 46,527 49,836 44,403 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Funds flow as presented (before changes in non-cash working capital) does not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. (2) Boe may be misleading, particularly if used in isolation. In accordance with National Instrument 51-101, a boe conversion rate for natural gas of 6 mcf to 1 bbl has been used. This ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency of the representative commodity at the wellhead.

Message to Shareholders

Herewith is our report on the operations and financial position of Welton Energy Corporation for the quarter ended September 30, 2008.

As previously stated the goal of raising funds to retire debt remains our main objective. All of the previously announced four property dispositions have been closed for total gross proceeds of $ 11.7 million. Administrative costs have been reduced significantly. At this time we have not yet raised sufficient funds to fully retire the debentures on their due date in January, 2009. We are continuing to review alternatives including additional property dispositions and/or corporate merger opportunities. As previously advised, market conditions will have an impact on our ability to satisfactorily execute this plan.

Welton has completed its remaining flow-through share renunciation obligations of approximately $1.4 million.

Third quarter cash flow was $1.6 million compared to $590,000 in the first quarter.

Average daily production for the third quarter was 429 boe per day compared to 624 for the second quarter as previously reported. Current daily production, after sale of the Mantario property is 150 boe per day.

OUTLOOK:

The process of reviewing strategic alternatives with Tristone is continuing with the objective of repaying the debenture obligation which matures on January 15, 2009. There is a significant possibility that we will not be able to raise sufficient capital to fully repay the debentures. As a result, there may be little value remaining for the common shareholders.

Respectfully submitted on behalf of the Board of Directors,

Donald A. Engle, President and C.E.O.

November 13, 2008

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management and reviewed and approved by the Board of Welton Energy Corporation ("Welton", the "Company", or the "Corporation"). The following supplementary information provides a review of the financial results of the Company based, subject to the foregoing, upon accounting principles generally accepted in Canada. Its focus is primarily a comparison of the financial performance for the three and nine month periods ended September 30, 2008 and 2007 and should be read in conjunction with the unaudited financial statements and accompanying notes included in this report and the December 31, 2007 and 2006 audited financial statements and accompanying notes included in the Company's 2007 Annual Report. This discussion and analysis is based on information available to November 6, 2008. All amounts are in thousands of Canadian dollars, except for per share and per boe amounts, or unless otherwise noted.

Non-GAAP Measurements

In the Management's Discussion & Analysis ("MD&A") references are made to terms commonly used in the oil and gas industry that are not defined by generally accepted accounting principles ("GAAP") in Canada and are referred to as non-GAAP measures. Such non-GAAP measures should not be considered an alternative to, or more meaningful than, GAAP measures as indicators of the Company's financial or operating performance. The non-GAAP measures presented are not standardized measures and therefore may not be comparable to the calculation of similar measures for other entities. The following non-GAAP measures are used in this MD&A:

1) "Funds flow from operations" and "funds flow" equal funds flow from operations before changes in non-cash working capital related to operating activities. The reconciliation between net income and funds flow from operations can be found in the Consolidated Statements of Cash Flows. The Corporation also presents "funds flow per share", whereby funds flow from operations is divided by the weighted average number of shares outstanding over the period to determine per share amounts.

2) "Netbacks" equal total revenue per boe less royalties per boe and operating costs per boe.

Natural gas reserves and volumes are converted to barrels of oil equivalent (boe) on the basis of six thousand cubic feet (mcf) of gas to one barrel (bbl) of oil. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

MD&A of financial results and operations is presented by management of Welton Energy Corporation to review operating activities and financial results for the three and nine month periods ended September 30, 2008 with comparisons to the three and nine month periods ended September 30, 2007. The MD&A has been prepared in accordance with GAAP.

Forward-Looking Statements

This report contains certain "forward-looking statements" within the meaning of such statements under applicable securities law. Forward-looking statements are frequently characterized by words such as "plan", "expect", "estimate", "believe" and other similar words, or statements that certain events or conditions "may" or "will" occur. By their nature, forward-looking statements involve assumptions and are subject to a variety of risks and uncertainties, including, but not limited to, those associated with resource definition, the possibility of project cost overruns or unanticipated costs and expenses, regulatory approvals, fluctuating oil and gas prices, and the ability to access sufficient capital to finance future development, reservoir performance and drilling results. Although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements as a result of new information, future events or otherwise, subsequent to the date of this report. The reader is cautioned not to place undue reliance on forward-looking statements.

Additional information relating to the Company can be found on its website at www.weltonenergy.com or through the SEDAR system at www.sedar.com.

Third Quarter 2008

- Major focus during third quarter was the strategic alternatives process;

- Completed and tied in one oil well in Saskatchewan

- Closed three property dispositions for proceeds in excess of $7 million

- Realized average sales prices 105% higher than those in the prior year's third quarter;

- Increased netback to $30.60/boe compared to $18.56/boe for the third quarter of 2007, an increase of 65%

Production

For the third quarter of 2008, the Company produced an average of 429 boe/d compared to 706 boe/d in the same quarter of 2007. Heavy and light crude oil production represents 54% of Welton's total production base, with most oil production coming from its heavy oil field in Mantario, Saskatchewan. Heavy oil production was down 34% due to natural declines in the Mantario field.

Natural gas production was down 57% compared to the same period in 2007. Property dispositions at Chime and Ricinus were responsible for the lower production in the third quarter. Production disruptions at Karr and the shut- in of wells at Majeau in the third quarter also contributed to the production decrease.

For the nine months ended September 30, 2008 production averaged 552 boe/d, a decrease of 31% from production of 805 boe/d for the first nine months of 2007. As discussed above, this decrease is due primarily to property dispositions and lower production due to natural declines from the Company's heavy oil property at Mantario.

The following table sets out the average daily production values.

Three months ended Nine months ended September 30 Change September 30 Change 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Crude oil (bbl/d) ---------------------------------------------------------------------------- Heavy oil 197 298 (34) 223 378 (41) ---------------------------------------------------------------------------- Light oil 35 26 35 36 35 3 ---------------------------------------------------------------------------- Natural gas liquids (bbl/d) 60 59 2 68 62 10 ---------------------------------------------------------------------------- Natural gas (mcf/d) 825 1,938 (57) 1,351 1,976 (32) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total boe/d 429 706 (39) 552 805 (31) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Commodity Prices The following table represents relevant quarterly average commodity price benchmarks: Three months ended Nine months ended September 30 Change September 30 Change 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Crude Oil ---------------------------------------------------------------------------- Hardisty Heavy oil (Cdn$/bbl) 98.07 47.43 107 88.15 44.28 99 ---------------------------------------------------------------------------- West Texas Intermediate ("WTI"US$/bbl) 118.21 75.38 57 113.34 66.07 72 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Natural Gas ---------------------------------------------------------------------------- AECO (Cdn$/Mcf) 7.73 5.25 47 8.63 6.77 27 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Although crude oil prices dropped slightly in August and September, the average WTI price of US$118.21/bbl was 57% above the average in same quarter of 2007. The average price for crude oil in the first nine months of 2008 was up 72% from the previous year. Heavy oil prices were up 99% to $88.15/bbl versus $44.28/bbl in the similar period of the prior year and $44.72/bbl at year-end.

Benchmark natural gas prices (AECO Hub in Alberta) for the third quarter have risen 47%, from $5.25/mcf in 2007 to $7.73/mcf in 2008.

Average Realized Sales Prices Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Heavy oil ($/bbl) 100.92 43.46 132 86.84 41.53 109 ---------------------------------------------------------------------------- Light oil ($/bbl) 111.84 83.16 34 111.42 71.31 56 ---------------------------------------------------------------------------- Natural gas ($/Mcf) 9.48 5.55 71 9.43 6.93 36 ---------------------------------------------------------------------------- Natural gas liquids ($/bbl) 96.03 70.76 36 88.58 63.78 39 ---------------------------------------------------------------------------- Total ($/boe) 87.02 42.54 105 76.33 44.56 71 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

The Company's average realized sales price increased 105% to $87.02/boe for the third quarter compared to the same period in 2007. The Company did not hedge any of its 2008 production and currently does not have any of its future production hedged.

Revenue Production Revenue Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- ($ thousands) 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Heavy oil 1,828 1,192 53 5,309 4,290 24 ---------------------------------------------------------------------------- Light oil 361 198 82 1,105 691 60 ---------------------------------------------------------------------------- Natural gas 720 990 (27) 3,491 3,736 (7) ---------------------------------------------------------------------------- Natural gas liquids 527 382 38 1,643 1,076 53 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total(1) 3,436 2,762 24 11,548 9,793 18 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Total production revenue excludes sulphur revenue.

For the three months ended September 30, 2008 the Company's production revenue increased 24% to $3,436 versus $2,762 for the same period of 2007. This increase in total revenue, caused by increased commodity pricing, was partially offset by a reduction in the Company's production in the period. The Company realized a netback of $30.60/boe representing a 65% increase over $18.56/boe received during the same period in 2007. This was attributable to commodity prices which increased by 105% compared to the same quarter of 2007 that were partially offset by higher royalty and operating expenses on a per boe basis.

Production revenue for the first nine months of 2008 was $11,548 compared to $9,793 in the same period 2007, an increase of 18%.

Three months ended Nine months ended Netbacks September 30 Change September 30 Change ---------------------------------------------------------------------------- ($/boe) 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Oil, NGL and natural gas revenue 87.02 42.54 105 76.33 44.56 71 ---------------------------------------------------------------------------- Royalty expense (21.74) (9.71) 124 (19.64) (9.79) 101 ---------------------------------------------------------------------------- Production expenses (34.68) (14.27) 143 (25.06) (11.59) 116 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Netback 30.60 18.56 65 31.63 23.18 36 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Royalty as percentage of revenue (%) 25 23 9 26 22 18 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Royalties

Royalties for the Company include all royalties to provincial governments, freeholders and other overriding royalties. As a percentage of revenue, royalties for the third quarter of 2008 are 25% versus 23% in 2007, and overall royalty rates increased during 2008, corresponding with the higher overall commodity prices realized as royalty rates rise with increases in such pricing. Over the first nine months in 2008 royalty rates were 26% compared to 22% in 2007.

Royalty Regime

On October 25, 2007, the Alberta government released the details of a new royalty framework in response to the Alberta Royalty Review Panel's report. Under the proposed changes, the value of the Company's total proved plus probable reserves could be reduced by up to 15%, largely at the Brazeau Waterflood Project.

The effect of the Alberta royalty changes on Welton will be determined based on the actual legislation enacted, the production rates, commodity prices and product mix after January 1, 2009.

Operating expenses

Operating expenses increased from $14.27/boe in the third quarter of 2007 to $34.68/boe in the third quarter of 2008. The majority of this difference relates to increased workovers and replacement of downhole equipment at Mantario and increased trucking costs to sell its Mantario oil production to a better priced market. The increase in revenues more than offsets the higher trucking costs.

General and Administrative Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- ($ thousands, except per boe amounts) 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- General and administrative 525 542 (3) 1,568 1,519 3 ---------------------------------------------------------------------------- Overhead recoveries and capitalized overhead (46) (87) (47) (193) (219) (12) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net 479 455 5 1,376 1,300 6 ---------------------------------------------------------------------------- Per boe 12.14 7.01 73 9.09 5.91 54 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Stock-based compensation expense (223) 95 (335) (108) 267 (140) ---------------------------------------------------------------------------- Per boe (5.65) 1.46 (487) (0.71) 1.22 (158) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total expense 256 550 (53) 1,268 1,567 (19) ---------------------------------------------------------------------------- Total per boe 6.48 8.47 (23) 8.38 7.12 18 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Gross general and administrative costs (excluding non-cash stock-based compensation expense and overhead recoveries) totaled $525 for the third quarter of 2008 compared to $542 during the same quarter of 2007, a decrease of 3%. This decrease was primarily attributable to a reduction in personnel costs, and was partially offset by increased costs for audit, legal and office rent. Overhead recoveries and capitalized overhead of $46 were recognized in the third quarter of 2008 which is a decrease of 47% (2007 - $87) from the same quarter of the prior year. Capitalized overhead is recognized for technical staff dedicated to the Company's capital program and geological reviews of new core areas.

For the third quarter of 2008, on a per boe basis, general and administrative expenses (excluding non-cash stock based compensation) increased by 73% to $12.14 per boe from $7.01 per boe in 2007 due primarily to lower production volumes in the quarter.

Stock-based compensation expense is the amortization over the vesting period of the fair value of stock options granted to employees, directors and key consultants of the Company. The fair value of all options granted is estimated at the date of grant using the Black-Scholes option pricing model. The non-cash compensation expense for the three months ended September 30, 2008 decreased to a recovery of $223 compared to an increase of $95 for the same period in 2007 as a result of stock option cancellations in the third quarter.

Interest and Financing Charges Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- ($ thousands) 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest and loan fees on bank loans 5 4 25 104 59 76 ---------------------------------------------------------------------------- Interest on debentures 211 212 - 628 628 - ---------------------------------------------------------------------------- Amortization of debenture issue costs 32 32 - 95 95 - ---------------------------------------------------------------------------- Accretion of debentures 38 38 - 112 112 - ---------------------------------------------------------------------------- Interest on flow through shares 58 - - 58 - - ---------------------------------------------------------------------------- Total interest and financing charges 344 286 20 997 894 12 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Interest and financing charges in the third quarter of 2008 increased 20% to $344 compared to the same quarter of 2007 ($286). This increase relates to Part XII.6 tax incurred on the unspent portion of the Company's December 2007 flow through share issuance. For the first nine months of 2008, interest and financing charges increased 12% to $997 from $894 in the same period of 2007. This increase is a result of a higher average outstanding balance drawn on the Company's credit facility throughout 2008 and the flow through share interest described above.

Also included in interest and financing is the amortization of financing charges related to the debenture offering as well as the non-cash accretion of the debt portion of the debentures. This is discussed further in the liquidity and capital resources section of the MD&A.

Depreciation, Depletion and Accretion Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- ($ thousands, except per boe amounts) 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Depletion and depreciation 782 1,839 (57) 4,067 6,105 (33) ---------------------------------------------------------------------------- Per boe 20.05 28.29 (29) 26.93 27.75 (3) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accretion expense 20 34 (41) 89 108 (18) ---------------------------------------------------------------------------- Per boe 0.51 0.52 (2) 0.59 0.49 20 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

For the quarter ending September 30, 2008, depletion and depreciation expense for the Company's oil and gas properties amounted to $782 (2007 - $1,839) or $20.05 (2007 - $28.29) per boe. The overall decrease in depletion expense is attributable to the impairment recorded in the second quarter, and to lower production volumes.

After comparing the proceeds received for properties disposed of under the strategic alternatives initiative with the corresponding values carried in the Company's independently calculated reserve reports, the Company performed a ceiling test in the second quarter of this year. The Company provided for an impairment of its oil and natural gas properties in the amount of $17.9 million and reduced the carrying values of the property, plant and equipment in the second quarter.

Accretion expense for the quarter ended September 30, 2008 was $20 compared to $34 for the same quarter of 2007. At September 30, 2008, the Company has recorded an asset retirement obligation of $1,441, compared to $1,685 at December 31, 2007 (September 30, 2007 - $1,676). This amount is the net present value of the total future asset retirement costs of $2,697, a decrease of $466 from $3,163 at December 31, 2007 (September 30, 2007 - $2,163). The total costs were determined by management based on the Company's working interest in its wells and facilities, estimated costs to abandon and reclaim those wells and facilities and the estimated timing of the costs to be incurred in future periods. The liability has decreased compared to the same period of the prior year due to the removal of the obligations relating to the properties disposed of in the third quarter. This decrease was partially offset by wells added from drilling as well as revisions to the estimated abandonment costs and accretion.

Income Taxes

The Company has $28 (2007 - $18) in current income tax expense for the third quarter relating entirely to Saskatchewan resource surcharge. The Company has no other current income taxes because it has the ability to utilize its non-capital loss carry forwards, which as of September 30, 2008 totaled $12,405. A valuation allowance was recorded against some of the loss carry forwards at December 31, 2007 as the Company cannot demonstrate that it is more likely than not that these assets will be realized by the application of these losses to reduce or eliminate taxes on taxable income during the carry forward period. These losses will expire over four years from 2008 to 2011.

As at September 30, 2008, the Company has in addition to its non-capital losses, Canadian exploration expenses of $2,821 available for future deduction, Canadian development expenses of $5,266, Canadian oil and gas property expenses of $813 and undepreciated capital costs of $11,090 available for future deduction.

As a result of a ceiling test write-down in the second quarter, a significant future income tax recovery was determined. The extent to which this recovery was recorded was limited to the balance of the existing future income tax liability and an appropriate increase was made to the valuation allowance. The Company has not recorded a future income tax asset due to the fact that the Company cannot demonstrate that it is more likely than not that such asset will be realized by the application of these losses to reduce or eliminate taxes on taxable income during the loss carry forward period.

Income (Loss)

During the third quarter the Company recorded a net loss of $157, down from a loss in the previous year of $1,053, due primarily to a decrease in depletion expense. For the nine months to September 30, 2008, the recorded loss was $15,937 compared to a loss of $2,557 in the same period of 2007.

Capital Expenditures Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- ($ thousands, except per boe amounts) 2008 2007 % 2008 2007 % ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Exploration drilling (193) 1,383 (114) 693 2,252 (69) ---------------------------------------------------------------------------- Development drilling 178 571 (69) 247 783 (68) ---------------------------------------------------------------------------- Production equipment (103) 295 (135) (35) 1,133 (103) ---------------------------------------------------------------------------- Land and seismic 49 156 (69) 415 990 (58) ---------------------------------------------------------------------------- Property dispositions (6,924) - - (6,924) - - ---------------------------------------------------------------------------- Other 29 28 4 116 80 45 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total (6,964) 2,433 (386) (5,488) 5,238 (205) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Property dispositions at Chime, Ricinus and Kakwa were largely responsible for the large capital recovery in the third quarter of 2008. Spending related to the drilling of two Mantario wells, and recoveries related to revised estimates at Trutch and Mantario also contributed to total recovery amount of $6,964.

Liquidity and Capital Resources

Liquidity

The Company generally relies on operating cash flows and the bank loan to fund capital requirements and provide liquidity. From time to time, the Company accesses capital markets to meet its additional financing needs and to maintain flexibility in funding its capital programs. Future liquidity depends primarily on cash flow generated from operations, existing credit facilities and the ability to access debt and equity markets.

As discussed in Note 1 to the financial statements, Welton does not have the ability to repay the convertible debentures from budgeted cash flows. Consequently, on March 24, 2008, the Company appointed Tristone Capital Inc. with a mandate to act as exclusive financial advisor to assist in exploring strategic alternatives to address the repayment of the Company's convertible debentures. To date, this has resulted in four property dispositions, three of which closed in the third quarter, and one of which closed in the fourth quarter. The Company is continuing to review all options including additional property sales and corporate transactions.

Convertible Debentures

On February 27, 2006, Welton issued to all of its shareholders one right for each share held to acquire 8% Convertible Debentures ("debentures"). For every 3,667 rights, a shareholder was entitled to acquire one debenture in the principal amount and price of one thousand dollars. The total amount of the debenture issue was $10.5 million. The debentures are convertible into common shares at a conversion price of $1.55 per common share. The debentures mature on January 15, 2009, and as such have been reclassified as current. No conversions occurred in 2007 or to date in 2008.

The debentures have been classified as debt, net of the fair value of the conversion feature at the date of issue, which has been classified as part of shareholders' equity. The value of the debt was calculated as the present value of the principal and interest payments with the remainder of the value attributed to the conversion feature and recorded as equity. The debt portion of the debentures is accreted up to its full face value by the end of the debenture term. The accretion is recorded as non-cash interest and financing charges on the statement of operations and deficit. The financing charges related to the debenture offering have been offset against the convertible debenture balance and are being amortized to interest and financing charges over the life of the debentures. As discussed in the liquidity section above, Welton is continuing to review all options including additional property sales and corporate transactions in order to address the repayment of its convertible debentures.

Equity

Common shares of the Company trade on the Toronto Stock Exchange (TSX) under the symbol WLT. As at September 30, 2008, the Company had 49,836 common shares outstanding. The debentures trade on the TSX under the symbol WLT.DB. Up to 6,774 common shares are issuable on the conversion of the $10.5 million of Convertible Debentures.

Banking Facility

At September 30, 2008, the Company had in place a demand credit facility of $2,100, none of which had been utilized. This demand loan facility bears interest at bank prime rate plus 0.5%, and is collateralized by a $25,000 fixed charge Debenture and a floating charge over all assets of the Company. At September 30, 2008, Welton was in compliance with all of its lending covenants.

Following the closing of the Mantario property disposition, as discussed in Note 16, the available facility was reduced to $1,100 and will bear interest at Prime plus 0.5%.

For the third quarter of 2008 the Company's sources of cash totalled $8,102 versus cash requirements of $2,877, and as of September 30, 2008 the cash on hand was $5,225. The Company intends to finance the remainder of its planned capital program through funds generated from operations and from funds on hand.

Funds Flow Three months ended Nine months ended September 30 Change September 30 Change ---------------------------------------------------------------------------- ($ thousands) 2008 2007 (%) 2008 2007 (%) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Sources ---------------------------------------------------------------------------- Funds flow from operations 482 588 (18) 2,654 2,862 (7) ---------------------------------------------------------------------------- Issuance of flow-through shares, net - - - - 3,707 - ---------------------------------------------------------------------------- Increase in bank loan - 1,855 - - 530 - ---------------------------------------------------------------------------- Oil and natural gas property recoveries 40 - - - - - ---------------------------------------------------------------------------- Proceeds from property dispositions 6,924 - - 6,924 - - ---------------------------------------------------------------------------- Working capital 656 - - - - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 8,102 2,443 232 9,578 7,099 35 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Uses ---------------------------------------------------------------------------- Oil and natural gas property expenditures - 2,433 - 1,436 5,238 (73) ---------------------------------------------------------------------------- Working capital - 1,144 - 2,143 1,861 15 ---------------------------------------------------------------------------- Decrease in bank loan 2,877 - - 774 - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2,877 3,577 (20) 4,353 7,099 (39) ---------------------------------------------------------------------------- (Decrease)/Increase in cash 5,225 (1,134) 561 5,225 - - ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Working Capital

On September 30, 2008, the Company had negative working capital of $7,848 versus negative working capital of $5,571 at December 31, 2007. The increase in the negative position is primarily due to the reclassification of the convertible debentures as current, offset by the property dispositions in the third quarter.

Contractual Obligations

The Company's contractual obligations and commitments as at September 30, 2008 are comprised of the following:

Expected Payment Date ---------------------------------------------------------------------------- ($ thousands) 2008 2009/10 2011/12 2013+ Total ---------------------------------------------------------------------------- Asset retirement obligations 14 737 34 656 1,441 ---------------------------------------------------------------------------- Convertible debentures - 10,500 - - 10,500 ---------------------------------------------------------------------------- Flow-through share obligations 1,412 - - - 1,412 ---------------------------------------------------------------------------- Office Rent 30 121 101 - 282 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1,325 11,516 135 748 13,724 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

The Company has obligations to renounce qualifying tax deductions under the flow-through share agreements it has entered into. The Company has an obligation to incur qualifying expenditures totaling $2,250 during 2008 to meet the flow-through share obligations resulting from its December 2007 flow-through share issuance. As at September 30, 2008 the Company has satisfied $838 of this obligation. As a result, the Company has until the end of 2008 to incur additional qualifying expenditures totaling $1,412 to meet its flow-through share obligations. Subsequent to September 30, the Company drilled one well in Saskatchewan and is completing one well in BC. Both of these activities are eligible expenditures, and will be used to completely satisfy its flow through obligation before the end of the year.

Part XII.6 tax is owed at the government's prescribed rate on any expenditures not incurred before the end of February 2008. For the three and nine months ended September 30, 2008, $58 was accrued relating to the Part XII.6 tax.

As a result of a corporate acquisition in 2005, the Company assumed a commitment for a Net Profits Interest Agreement ("NPI") for the Brazeau River waterflood project. The Company's costs to be deducted from revenues in calculating the NPI include the Corporation's share of capital and operating costs and overhead expenses. Costs not recovered in a period are carried forward to subsequent periods until recovered, plus applicable interest. The NPI is non-recourse and is thus restricted to only net profits from the Brazeau River waterflood property, and no other assets of the Company. The NPI is treated like all other royalties and is not a liability of the Company, but is included in the calculation of reserves.

The Company is not aware of any incident or situation of an environmental nature that could lead to costs of a legal or remedial nature that could have a material impact on the Company's operations or financial situation.

Related Party Transactions

The Company had no significant related party transactions in the third quarter of 2008.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Accounting Policies and Critical Accounting Estimates

The Company's significant accounting policies are summarized in note 2 to the Company's audited consolidated financial statements for the years ending December 31, 2007 and 2006. Certain of these policies are recognized as critical because in applying these policies, management is required to make judgments, assumptions and estimates that have a significant impact on the financial results of the Company.

Subsequent Event

In October 2008, pursuant to the engagement of Tristone Capital Inc. to explore strategic alternatives, the Company entered into a Purchase and Sale agreement to dispose of the assets of its producing properties at Mantario for gross proceeds of $4.7 million. Following the closing of this disposition, the Company's available bank line was adjusted to $1.1 million.

Full Cost Accounting

Welton follows the Canadian Institute of Chartered Accountants ("CICA") Accounting Guideline 16 on full cost accounting in the oil and gas industry to account for oil and gas properties. Under this method, all costs including internal costs and asset retirement costs, directly associated with the acquisition of, exploration for and development of natural gas and crude oil reserves are capitalized on a cost-centre basis and costs associated with production are expensed. The capitalized costs, including estimated future development costs are depreciated, depleted and amortized using the unit-of-production method based on estimated proved reserves.

Oil and Gas Reserves

Reserves estimates and revisions to those reserves although not reported as part of the Company's financial statements, can have a significant impact on net earnings as a result of their impact on depletion, and depletion rates, asset retirement obligations, asset impairments and purchase price allocations. In adherence with National Instrument 51-101, 100% of the Company's proved and probable oil and gas reserves were evaluated and reported on by independent qualified reserves evaluators appointed by the Board of Directors. However, the process of estimating oil and gas reserves is complex and is subject to uncertainties and interpretations. Estimating reserves requires significant judgments based on available geological and reservoir data, past production and operating performance and forecasted economic and operating conditions. These estimates may change substantially as additional data from ongoing development, testing and production becomes available and due to unforeseen changes in economic conditions which impact oil and gas prices and costs.

Asset Impairment

In accordance with full cost accounting, a ceiling test is performed, on an annual basis, to test for asset impairment. An impairment loss is recorded if the sum of the undiscounted cash flow expected from the production of the proved reserves and the lower of cost and market of unproved properties does not exceed the carrying values of the oil and gas assets. An impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flow expected from the production of proved and probable reserves and the lower of costs (less any impairment) of unproved properties.

The cash flow used in testing for impairment is based on a number of estimates, the most critical being remaining reserves, future prices and future operating costs. The uncertainty in reserves is discussed above.

Unproved Properties

Certain costs related to unproved properties are excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly and any impairment is transferred to the cost being depleted.

Asset Retirement Obligation

The Company records a liability for the legal obligation associated with the retirement of long-lived assets and a corresponding increase in the related asset in accordance with the method outline in the CICA Handbook section 3110. The future liability is comprised of estimates of future costs to abandon and restore well sites, facilities and natural gas processing plants discounted to their present value. The estimation of these costs is based on engineering estimates using current costs and technology and in accordance with current legislation and industry practice. These estimates are reviewed annually. Changes are accounted for prospectively and could impact net earnings.

Income Taxes

Income taxes for the Company are calculated using the liability method, whereby tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between amounts reported in the financial statements and their respective tax base using income tax rates expected to apply when the differences reverse. The effect of change in income tax rates in future tax liabilities and assets is recognized in income in the period in which the change occurs.

The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.

Business Combinations

Historically the Company has grown considerably through combining with other businesses. These transactions were accounted for using the purchase method as per the CICA Handbook. Under the purchase method, the acquiring company includes the fair value of the assets of the acquired entity on its balance sheet. The determination of fair value necessarily involves many assumptions. The valuation of oil and gas properties primarily relies on placing a value on the oil and gas reserves. The valuation of oil and gas reserves entails the process described above in the section Oil and Gas Reserves, which incorporates the use of economic forecasts that estimate future changes in prices and costs. In addition, this methodology is used to value unproved oil and gas reserves. The valuation of these reserves, by their nature, is less certain than the valuation of proved reserves.

Stock Based Compensation

The fair value of options granted is to be charged to earnings over the vesting period. As of August 2005, the Company determines the fair value of options granted using the Black-Scholes option pricing model. This model involves such factors as the volatility of the Company's share price and an estimation of options which will be forfeited. An adjustment in either factor may affect the amount of the fair value determined at the time of grant, resulting in a change to general and administrative expenses and net earnings.

Business Risk Assessment

There are a number of inherent risks associated with oil and gas operations and development. Many of these risks are beyond the control of management. The following outlines some of the principal risks and their impact on the Company.

Need to Replace and Grow Reserves

The future oil and natural gas production of Welton, and therefore, future cash flows, are highly dependent upon ongoing success in exploring on the Company's current and future undeveloped land base, exploiting the current producing properties and acquiring or discovering additional reserves. Without reserve additions through exploration, acquisition or development activities, reserves and production will decline over time as reserves are depleted. There can be no assurance that Welton will be able to replace and grow production at acceptable costs.

Exploration, Development and Production Risk

Exploration and development drilling has significant risk that the desired outcome will not be achieved. The probable outcome of most exploration drilling is an unsuccessful well. Welton attempts to mitigate drilling risk by having a diversified portfolio of prospects with many prospects having multi-zone potential.

Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but also from wells that are productive, but do not produce sufficient net revenues to return a profit after drilling, operating and other costs.

Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations. Losses resulting from the occurrence of any of these risks could have a materially adverse effect on future results of operations, liquidity and financial condition.

Reserve Estimates

The production forecast and recoverable estimates contained in the Welton engineering report are only estimates and actual production and ultimate recoverable reserves from the properties may be greater or less than the estimates made by the independent engineers.

There are numerous uncertainties inherent in estimating quantities of reserves and cash flows to be derived there from, including many factors that are beyond the control of Welton. The reserve and cash flow information set forth herein represent estimates only. The reserves and estimated future net cash flow from the assets of Welton have been independently evaluated effective December 31, 2007. These evaluations include a number of assumptions relating to factors such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of production, future prices of oil and natural gas, operating costs and royalties and other government levies that may be imposed over the producing life of the reserves. These assumptions were based on production forecasts in use at the date the relevant evaluations were prepared and many of these assumptions are subject to change and are beyond the control of Welton. Actual production and cash flows derived there from will vary from these evaluations, and such variations could be material. The foregoing evaluations are based in part on assumed success of exploitation activities intended to be undertaken in future years. The reserves and estimated cash flows to be derived therefrom contained in such evaluations will be reduced to the extent exploitation activities do not achieve the level of success assumed in the evaluations.

Financial and Liquidity Risks - Additional Funding Requirements

Based on its current forecasted cash flow, Welton expects to be able to fund its planned 2008 capital program through ongoing cash flow. Welton's remaining capital budget for 2008 is fairly conservative and should not require any additional sources of funding.

If Welton's cash flow from operations is not sufficient to satisfy its capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or be available on acceptable terms.

Reliance on Joint Venture Operators

The Company does not operate all of its development and exploration projects. As a result, the Company has significantly less control over the timing and cost efficiency of these programs. The Company attempts to mitigate this risk by maintaining a close and active relationship with its operating partners.

Competitive Industry Conditions

The western Canadian oil and natural gas industry has become a very competitive industry for oil and gas properties, undeveloped land, drillable prospects and oil and natural gas industry professionals. Also, the supply of service and production equipment at competitive prices is critical to the ability to add reserves at a competitive cost and produce these reserves in an economic and timely fashion. In periods of increased activity, these services and supplies can become difficult to obtain. Welton competes in these and all other aspects of its operations with a substantial number of other organizations, many of which may have much greater technical and financial resources than does Welton.

Regulatory

Oil and natural gas operations (exploration, production, pricing, marketing and transportation) are subject to extensive controls and regulations imposed by various levels of government that may be amended from time to time. Welton may require licenses from various governmental authorities. There can be no assurance that the Company will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development at its projects.

Volatility of Oil and Natural Gas Prices

The Company's oil and gas prices are affected by a variety of factors such as supply and demand for the commodity, quality, exchange rates and transportation accessibility. Commodity prices have fluctuated dramatically over the past year. The Company does not currently have any commodity price hedges in place.

Exchange Rates

The importance of exchange rates to Welton's profitability is underscored by the fact that crude oil is sold against the US dollar, while the majority of operating costs are denominated in Canadian dollars.

Environmental

All phases of the oil and gas business present environmental risks and hazards and are subject to environmental protection regulation pursuant to a variety of federal, provincial and local laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach of applicable environmental legislation may result in the imposition of fines and penalties, some of which may be material.

The Company is responsible for its share of environmental, abandonment and reclamation costs of its wells and facilities. The Company maintains insurance for environmental risks such as the accidental discharge of liquid or gaseous petroleum substances, fire or explosion. There can be no guarantee that the coverage will be sufficient to cover all environmental claims, and as such, a shortfall could have a material impact on the operations or financial affairs of the Company.

Environmental Protection

Effective Environmental Protection Requirements

Welton is committed to meeting its responsibilities to protect the environment wherever it operates. Although it is not expected that the costs of complying with environmental legislation will have a material adverse effect on the Corporation's financial

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