Petrolifera Petroleum Limited reports 2007 year end results and schedules conference call

Petrolifera Petroleum Limited reports 2007 year end results and schedules conference call March 17, 2008, 9:00 A.M. MT

CALGARY, Mar 14, 2008 (Canada NewsWire via COMTEX) -- (Canada NewsWire)

Petrolifera Petroleum Limited (PDP - TSX) had a productive year in 2007. It was in many ways more complicated than prior years, but resulted in your company entering 2008 with more land, more reserves, higher production and sales and the prospect ahead of it of exciting drilling activity in Colombia and Peru. As previously announced, all results for 2006 mentioned herein have been restated. Certain statements contained in this press release contain forward looking information. See "Forward Looking Information".

These year end results will be subject to a Conference Call event. To listen to this Conference Call please enter: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2188560 in your web browser. To participate in the live conference call please dial either (416) 644-3414 or (800) 733-7560. A replay of the event will be available from March 17, 2008 at 11:00 a.m. MT until March 24, 2008 at 11:59 p.m. MT. To listen to the replay please dial either (416) 640-1917 or (877) 289-8525 and enter the passcode 21264784 followed by the pound sign.
Highlights were as follows: Click here for additional information

2007 IN REVIEW

Petrolifera experienced considerable progress and growth during 2007. The company has a meaningful reserves, production and sales base in Argentina. During the year, the company expanded into Colombia and secured three new concessions, thereby increasing to three the number of South American countries in which Petrolifera is active. Our extensive land base provides attractive diversification, risk distribution and exposure to significant resource potential.

In addition to a very successful drilling program during the year in Argentina, field facilities and a high pressure natural gas pipeline were constructed and activated at our Puesto Morales Norte operation in the Neuquén Basin, Argentina. This program was comprised of $97.5 million of capital spending and included the drilling of 47 wells at Puesto Morales and Rinconada.
Rig availability limited Petrolifera's activity during the early part of 2007. We also experienced delays arising from the assumption of direct operatorship and the need to redesign the various facilities required by the company to properly manage its production operations.

Also, equipment shortages and delays in the fabrication of facilities during the year as a result of energy shortages in Argentina, during their winter months, affected overall intrayear production and sales levels. By year end, however, these facilities had been constructed and activated and improved production stability and growth is anticipated as a consequence as the impact of our newly activated waterflood becomes evident.

During 2007, Petrolifera was successful in securing six new concessions, three in Argentina at Vaca Mahuida and Puesto Guevara in the Province of Rio Negro, Argentina and one at Gobernador Ayala II in La Pampa Province, Argentina; and three in the Middle and Upper Magdalena Basins (Sierra Nevada I and II and Turpial) in Colombia. This expanded land base exposes Petrolifera to additional potential and exploration programs will be activated on these blocks during 2008.

Revenue for the year was healthy at $133 million. This was achieved despite the adverse impact of Argentina's export tax on pricing of crude oil in their domestic market, where Petrolifera's light gravity Medanito crude oil production is sold. This tax was further increased in late 2007. The increase in the tax, which had the effect of placing a cap on crude oil prices in Argentina, had a marked adverse impact on investor's attitudes towards the Argentinean oil industry, as the effect of the tax took away the prospect of improving prices as world oil prices rise. It profoundly affected our share price, well in excess of the calculated adverse financial effect, although some recovery has since occurred due to our strong reserve growth and successful completion and activation of our new field facilities.

During 2007, the average price received of $45.51 per barrel of crude oil was five percent below the 2006 price of $47.71 per barrel. By comparison, WTI averaged US$72.31 per barrel during 2007 and late in the year surpassed US$100Â per barrel while averaging over US$90.00 per barrel in the fourth quarter 2007.

Petrolifera's natural gas sales price improved 14 percent in 2007 to $1.55 per mcf from $1.36 per mcf in 2006. As with crude oil, this price in Argentina is well below comparable levels in most regional and global markets, well below comparative energy value and undoubtedly a contributing factor to low reinvestment levels and consequent shortages in local markets.
On an equivalent basis, Petrolifera's selling price in 2007 was $43.94Â per boe, also five percent lower than last year given the significant production weighting to crude oil. More realistic pricing policies will be needed in Argentina to stimulate new investment, especially as the country is approaching the prospective need to import energy to meet its domestic requirements and as other countries in South America enable producers to secure world prices.

In the interim, we will continue a responsible reinvestment program to protect our discoveries, reserve base and revenue stream in Argentina and would expand our activity if improved returns were discernible. Despite these challenges, we have been successful in our programs since 2005.
As a result of inflationary pressures and occasional production curtailments during the construction and startup phases of our new facilities at Puesto Morales, operating costs rose to $6.05 per boe during 2007, still low by worldwide industry standards. Last year when most of our wells were flowing crude oil wells, our operating costs were only $4.49 per boe. We anticipate that as our wells are all tied in, on site treatment occurs and sales are all transported to market through our own pipelines for both crude oil and natural gas, as opposed to trucking significant volumes of crude oil, our operating costs can remain competitive. There is considerable inflationary pressure in Argentina at present which will have to be taken into account in our future planning and budgeting.

Despite the adverse impact of Argentinean price controls, our corporate netback per boe in 2007 was $32.58, representing a significant 74 percent of selling prices. Netbacks do not have a standardized meaning prescribed by Canadian GAAP. It is a calculation used by management as a measurement of efficiency. Boe netbacks are calculated by deducting royalties and operating costs from revenue (including interest income earned) by the number of boe sold in a reporting period. The most comparable measures calculated in accordance with GAAP would be net earnings. Netbacks are reconciled with net earnings in our MD&A.

During 2007, Petrolifera's Argentina finding and development costs, calculated in accordance with the requirements of NI 51-101, were $9.59 per boe for 1P reserves and $20.61 per boe for 2P reserves. This results in a one- year recycle ratio (calculated by dividing the corporate netback per boe by the respective finding and development cost per boe) of 3.4 times for 1P and 1.6 times for 2P reserves. Readers should note that the aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year of the estimated future development costs generally will not reflect total finding and development costs related to reserve additions for that year.

Using three year average finding costs for the period from 2005 to and including 2007, calculated by dividing the sum of annual finding costs calculated in accordance with NI 51-101 for each year, by the number of years so calculated, results in a more reliable indicator of finding and development costs, especially for a project like the discovery and development of Puesto Morales Norte field.


Petrolifera's finding and development costs calculated in this manner were $5.37 for 1P reserves and $5.76 for 2P reserves. When compared to our 2007 netback, our calculated recycle ratio is 6.1 times for 1P reserves and 5.7 times for 2P reserves. These are considered to be very favorable ratios.
Cash flow amounted to $68 million ($1.43 per share) in 2007, compared to only $50 million ($1.27 per share) in 2006. This was achieved after provision for $21 million of current taxes during 2007 and $26 million last year.
Capital spending totaled $111 million, mostly in Argentina, where $98Â million was invested in wells, seismic and facilities. The balance of approximately $13 million was spent in Peru and in Colombia. We completed an extensive airborne gravity and magnetic survey of our Ucayali Block 107 during 2007 and also initiated our 2D seismic program on that block. Environmental Impact Assessment ("EIA") and other work continued on Block 106 in the Maranon Basin onshore Peru. We established an office in Colombia and secured three new 100 percent owned onshore concessions in that country.

Earnings were a healthy $29.3 million ($0.61 per share), although lower than in 2006 when earnings were $37.3 million ($0.95 per share). Higher non-cash charges, including a fair value charge against the value of our asset backed commercial paper ("ABCP") investments and charges for stock based compensation due to increased share price volatility, were factors in reducing year over year earnings.

During 2007, our investments in ABCP, in which we had invested successfully since 2006, became illiquid due to the problems which arose in credit markets in Canada and the United States and then worldwide during 2007. Petrolifera had purchased this form of investment with surplus cash, with an emphasis on security of principal. We had restricted such investments to highly rated commercial paper and until mid 2007 had not experienced any problem with this type of investment, rolling over proceeds on maturity into new similarly rated instruments. Furthermore, it was felt that investing our surplus funds in Canada was a prudent decision due to the historical stability of Canadian capital markets.

Unfortunately, liquidity evaporated in mid-2007 and we have been unable to recover our funds and related interest owing since August of last year. Due to this, we provided for an impairment of these investments in the third and fourth quarter of 2007 and reclassified these short term investments to long term, thereby reducing working capital. We and other holders of ABCP are awaiting receipt of a proposal from the Pan-Canadian Committee, formed to resolve the loss of liquidity in the Canadian ABCP money market. As noted in earlier releases, the investments which are now frozen were made through the auspices of the money market desk of the Canadian commercial bank with which we had dealt in Canada since our inception and were rated R-1 High by Dominion Bond Rating Service, the rating agency. We continue to seek solutions to this dilemma with a view to recovering all or substantially all of our invested funds, plus interest if at all possible and we are examining all available alternatives in this regard. Unfortunately, there can be no assurance that such efforts will result in a full or satisfactory recovery of our funds.

Fortuitously, prior to the credit crisis we had made arrangements for a new reserve-backed credit facility with an international bank. This was established at US$100 million with an initial agreed availability of US$60Â million, which amount is currently under review following the tabling of our 2007 reserve report. At this writing and based on the expansion of our 1PÂ reserve base, we anticipate the available facility will be expanded, despite the adverse impact of new Argentinean taxation which was taken into account in the new report and adversely affects economic values. We also established a non-recourse credit facility for up to an additional $18 million with a Canadian chartered bank, with such amount solely secured by our illiquid ABCP holdings.
As our 2007 capital expenditures exceeded our cash flow, we were not self-sufficient during the year. Accordingly, because we could not access our cash balances which were invested in ABCP, we incurred bank debt for the first time in the company's history during the year. We continued to have significant unused credit available at year end and our current debt to 2007 cash flow ratio of 0.4 times, calculated by dividing outstanding debt by 2007 cash flow, is very conservative.

During the year, 6.5 million common shares were issued from treasury upon the exercise of outstanding warrants and options under our Stock Option Plan. Proceeds totaled $18 million and were added to working capital.

As previously reported, Petrolifera's proved reserves ("1P") of crude oil, natural gas liquids and natural gas increased 38 percent during 2007 to reach 17.8 million boe at December 31, 2007. Proved and probable reserves ("2P") improved modestly to 25.6 million boe after record production of approximately three million boe during the year. In 2007, we also had 3P reserves estimated for the first time since 2005, when it was undertaken by a different evaluator. A total of 13.5 million boe of possible reserves were identified, bringing our 3P reserves to a total of 39 million boe. When combined with our production of 2006 and 2007, Petrolifera's Puesto Morales Norte field and surrounding areas appears to be an accumulation with recoverable 3P reserves of approximately 45 million boe, a significant accomplishment in any basin, but particularly so in the Neuquén Basin, as it is considered mature by industry standards. These reserve volumes were estimated by GLJ Petroleum Consultants ("GLJ"), independent engineering consultants of Calgary, Alberta.

Fourth Quarter 2007

Petrolifera's fourth quarter 2007 results were weaker than the third quarter and than the similar period last year. Crude oil sales were 6,565Â bbl/d and natural gas sales were 2.9 mmcf/d, or 7,042 boe/d on an equivalent basis. This is considerably below 2006 levels when flush production was being realized from new prolific wells at Puesto Morales. Also, sales were lower than reported third quarter 2007 results, when equivalent sales were 7,557 boe/d. This trend has now been reversed with the completion of construction of new facilities at Puesto Morales, contributions from new wells and improved stability in field operations.

Revenue in the reporting period was $27 million compared to $31 million in the previous quarter and $45 million in 2006, reflecting lower crude oil prices in Argentina due to the effect of higher export taxes and the strength of the Canadian dollar, which appreciated almost 20 percent against the USÂ dollar during 2007.

The average price received for crude oil sales in the fourth quarter of 2007 was $44.36 per barrel and boe prices were $42.07 per boe, the lowest for the year.

Cash flow was a modest $10.7 million (0.21 per share) due to higher provisions for cash taxes compared to the prior quarter in 2007 and below 2006 due to lower volumes and higher costs. In 2006, fourth quarter cash flow was a record $18.5 million ($0.42 per share).
Earnings in the fourth quarter 2007 were $4.9 million ($0.10 per share), essentially the same as the third quarter earnings but considerably less than in 2006 when fourth quarter net income was $12.4 million ($0.29 per share).

Capital spending in the fourth quarter 2007 was substantial at $57.6Â million as the company operated four rigs in Argentina for much of the period and also completed its field facility construction program.

Current production in Argentina has recently surpassed 9,700 boe/d and improved financial and operating results are anticipated throughout 2008.
Outlook Petrolifera plans an active and exciting capital program in 2008. It is anticipated this program will be dominated by our anticipated drilling in Peru on Ucayali Block 107, after we complete our 2D seismic program and interpret the data. Early returns are encouraging although a full interpretation will be required. Timing will depend upon rig availability, government EIA approval, scheduling and normal industry factors which can affect operations in a jungle environment. An active 2D seismic program is also planned over selected portions of Maranon Block 106 with a view to drilling in 2009, again subject to the usual conditions and qualifiers related to regulatory approval and rig availability and the timely completion of the planned seismic program. Our Peru budget for 2008 is estimated at approximately $56 million.
In Argentina, we have allocated $76 million for new drilling and seismic at Puesto Morales, Rinconada, Vaca Mahuida, Puesto Guevara and Gobernador Ayala II. With our Puesto Morales facilities now completed, our focus again turns to exploration with a view to finding new pools for future development.
Recently, we completed the excellent PMNa-1081 well, located in proximity to our recently completed and successful Loma Montosa Zone 9 crude oil wells in the northwest portion of the Puesto Morales Norte Field. The 1081 well encountered a previously untapped Sierras Blancas accumulation which, on test at original reservoir pressure, flowed light gravity crude oil at rates in excess of 1,000 bbl/d. At least two follow up locations have initially been identified for drilling.
Based on log analysis and drilling results, up to eight zones in four formations, including the Loma Montosa, in our first exploratory well on the Puesto Morales Este concession have been or are to be evaluated for hydrocarbons by an ongoing testing program. Test results of the Sierras Blancas zone in the well were equivocal as minor amounts of crude oil and uphole natural gas with water were recovered. However, we remain optimistic of the concessions potential based on the results obtained to date, including indications of a common oil/water contact with the Puesto Morales Norte Field.
In Colombia, Petrolifera has already identified three drillable prospects on our Sierra Nevada I license and exploration activity is anticipated for our Sierra Nevada TEA and the Turpial Block. At least one well will be drilled during 2008 to meet contractual obligations on Sierra Nevada I, although programs may be expanded to include the drilling of up to three wells before year end 2008, alone or with partners.
Petrolifera remains strong, is focused and is committed to the principal of enhancing shareholder value through its activities in South America. Readers and shareholders are referred to the company's website at www.petrolifera.ca for occasional updates on activity and to access regularly updated investor presentations.
Petrolifera Petroleum Limited is a public Canadian crude oil and natural gas exploration and production company engaged in drilling production and sales activity in Argentina, Colombia and Peru in South America. The company's current reserve, production and sales derive from its Puesto Morales/Rinconada Concession in the Neuquén Basin, Argentina. Two large licenses comprising 5.2 million acres onshore Peru are also held 100 percent by the company. Petrolfiera recently entered Colombia and holds one license and two technical evaluation agreements in the Lower and Middle Magdalena Basin. Active drilling, facility construction and exploration programs are planned in all three jurisdictions during 2008 with an announced capital budget approximating $140 million.
FORWARD LOOKING INFORMATION
This press release contains forward-looking information, including but not limited to estimated reserves and future net revenues, future exploration and development plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the recently activated waterflood, anticipated productivity of certain recently drilled wells and follow-up potential to the PME x-1001 exploratory well which is presently being tested and potential recovery of investments in ABCP. This information is based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com.
The reserves and future net revenue in this press release represent estimates only. The reserves and future net revenue from the company's properties have been independently evaluated by GLJ with effective date of December 31, 2007. This evaluation includes 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 crude oil and natural gas, operating costs, well abandonment and salvage values, royalties and other government levies that may be imposed during the producing life of the reserves. These assumptions were based on price forecasts in use at December 31, 2007 and many of these assumptions are subject to change and are beyond the control of the company. Actual production, sales and cash flows derived therefrom will vary from the evaluation and such variations could be material. The present value of estimated future net cash flows referred to herein should not be construed as the current market value of estimated crude oil and natural gas reserves attributable to the company's properties. Reference is made to the Company's Annual Information Form for a detailed description of the assumptions utilized in the reserves report prepared by GLJ.
Forecast capital expenditures are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success and potential timing delays. Petrolifera's capital budget has been prepared based upon anticipated costs for equipment and services which are subject to fluctuation based upon market conditions, availability and potential charges or delays in capital expenditures. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production growth has been estimated based on the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the particular wells to be drilled and has been risked, current production and anticipated decline rates and the projected impact of the company's waterflood program.
Recovery of the company's investment in ABCP is dependent on the value of the underlying assets held by the applicable trusts (which is unknown to the company) and the restoration of liquidity in this market. There can be no assurance as to the timing or extent of recovery of this investment.
Due to the risks, uncertainties and assumptions inherent in forward-looking information, prospective investors in the company's securities should not place undue reliance on this forward-looking information. Readers should review the risk-factors set forth in the company's Annual Information Form, available at www.sedar.com, for a detailed description of the risks and uncertainties facing the company. Forward looking information contained in this press release is made as of the date hereof and are subject to change. The company assumes no obligation to revise or update forward looking information to reflect new circumstances, except as required by law.
A barrel of oil equivalent (boe), derived by converting gas to oil in the ratio of six thousand cubic feet of gas to oil, may be misleading, particularly if used in isolation. A boe 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is dated as of March 14, 2008 and should be read in conjunction with the consolidated financial statements of Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the years ended December 31, 2007 and 2006 as contained in this annual report.
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. Information in this report contains forward-looking information based on current expectations, estimates and projections of future production, future commodity prices, capital expenditures and available sources of financing. See "Forward Looking Information". It should be noted forward-looking information involves a number of risks and uncertainties and actual results may vary materially from those anticipated by the company. These risks and uncertainties include, but are not limited to, political and economic conditions in the countries in which the company operates, changes in market conditions, law or governing policy, operating conditions and costs, operating performance, demand for crude oil and natural gas, foreign currency exchange rate fluctuations, currency controls, commercial negotiations and technical and economic factors. Reference should be made to Petrolifera's Annual Information Form for our year-ended December 31, 2007 for a detailed description of the risks and uncertainties facing Petrolifera. Throughout the 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.
SELECTED FINANCIAL INFORMATION Click here for additional information
Since incorporation, Petrolifera's management has concentrated on building a financially strong company. To this end, the company completed three equity financings, two by way of private placement and one by way of initial public offering, pursuant to a prospectus dated October 17, 2005. The company's common shares trade on the Toronto Stock Exchange under the symbol PDP.
Petrolifera conducts its business in Argentina, Colombia and Peru, in South America. Growth to date has been organic, derived from successful exploration and development drilling programs. This has resulted in an expanded crude oil, natural gas liquids ("NGL") and natural gas reserves base with attendant growth in production.
During 2007, Petrolifera completed a $111.0 million capital program. In Argentina, this included the drilling of 47 wells, and the design, construction and activation of the company's infrastructure and production facilities and three new exploratory concessions were acquired. In Peru, work included the completion of an aeromagnetic study, approval of Block 107's seismic EIA and Block 107 seismic acquisition. In Colombia, we established an office and secured three new exploration blocks.
Petrolifera faces the normal challenges, risks and opportunities of any small independent oil company. We strive to establish a competitive advantage by applying modern exploration techniques, being opportunistic, employing a consistent strategy and hiring national staff with in country expertise in our branch offices in Buenos Aires, Lima and Bogota. We also access professional advisors as required. Where possible it is our goal to operate our concessions with a large working interest acquired on a ground floor basis. In this manner, the company has greater control over its operations and its future business activities.
FINANCIAL AND OPERATING REVIEW
PRODUCTION, PRICING AND REVENUE Click here for additional information
Petroleum and natural gas revenues for 2007 were $132.8 million (2006 - $104.6 million) from crude oil sales of 7,919 bbl/d (2006 - 5,973 bbl/day) and natural gas sales of 2.2 mmcf/d (2006 - 1.2 mmcf/d). The increases in revenue primarily resulted from higher crude oil production volumes. These were derived from the successful development of the Puesto Morales crude oil and natural gas field in the Neuquén basin onshore Argentina, offset by a lower average realized price for crude oil.
Crude oil production increased 33 percent in 2007. New discoveries and development drilling resulted in production rising to an average of 7,919Â bbl/d. The company's boe sales volumes continue to be heavily weighted to crude oil, which represented 96 percent of the company's volumes in 2007 compared to 97 percent in 2006.
Crude oil prices decreased five percent to average $45.51 per barrel throughout the year compared to $47.71 in 2006. Argentinean crude oil prices reflect world prices for the respective quality of oil, adjusted for the impact of an Argentinean export tax on domestic sales prices. All of Petrolifera's production is sold in domestic markets. In November of 2007, the Argentine government announced an increase in the export tax that has the effect of limiting the price of crude oil to a maximum of US$42.00 per barrel, which impacted fourth quarter 2007 prices.
Natural gas prices increased 14 percent to average $1.55 per mcf in 2007 compared to $1.36 per mcf in 2006, reflecting some relaxation of regulated Argentinean natural gas prices, which are still substantially below prices prevailing in North American markets. Natural gas prices have been improving and are expected to continue improving in the future due to market conditions and new policy initiatives of the Argentine government aimed at gradual market deregulation. Late in 2007, the Company began selling natural gas under a new natural gas sales contract and now receives approximately US$2.10 per mcf, a substantial increase from the average of $1.55 per mcf received in 2007.
Interest and other income of $1.4 million was earned in 2007 compared to $1.0 million for 2006, This primarily relates to interest earned on short-term cash deposits and interest on the Company's investments. The company had an investment of $37.7 million face value in non-bank asset backed commercial paper ("ABCP") on which no interest income has been accrued since August 2007, due to the lack of liquidity for these investments. There are also fair value concerns for these investments and they were reclassified as a long term investment during the year. See long-term investments for additional details including estimates of valuation.
ROYALTIES
Royalties represent charges against production or revenue by governments and landowners. Included in royalties are revenue taxes levied by provincial jurisdictions. Royalties in 2007 were $17.5 million ($5.79 per boe), or 13Â percent of crude oil and natural gas revenue compared to $14.8 million ($6.57 per boe), or 14 percent of crude oil and natural gas revenue in 2006.
OPERATING EXPENSES AND NETBACKS
Company Netbacks(1) Click here for additional information
Petrolifera's netbacks decreased nine percent over those recorded in the 2006 reporting period. This primarily reflects a lower average sales price received for crude oil and an increase in operating expenses for the year. Petrolifera's calculated netback at $32.58 per boe is a healthy 74 percent of selling price (2006 - 77 percent).
OPERATING EXPENSES
Operating costs in 2007 increased 81 percent in total and 35 percent per boe from 2006. The overall increase reflects the higher volumes produced. Unit costs rose due to the significant increase in the number of wells that are on pump or require servicing on a more frequent basis, inflationary pressures, and start up costs related to the new field facilities. We anticipate these pressures can be mitigated in 2008 by a reduced dependency on trucking compared to the prior years as most of our Argentinean production is now being treated onsite and being transported through a company owned pipeline. Petrolifera anticipates unit operating costs will be more stable after the permanent field facilities and pipelines are optimally utilized. This is expected to occur during 2008 and 2009.
General and Administrative Expenses
General and administrative ("G&A") expenses were $6.4 million in 2007 (2006 - $3.7 million), comprised of costs incurred in Canada, Argentina, Peru and Colombia. These costs primarily consist of management and administrative salaries, legal and advisory fees, insurance, the cost of independent reserve reports, travel and other administrative expenses. The increase from 2006 is attributable to increased staffing levels to handle the expanded nature of the company's operations and activity levels and increased public company costs. G&A of $2.4 million was capitalized in 2007 (2006 - $0.7 million) mainly related to costs associated with exploration activities in Argentina, Peru and Colombia. Non-cash stock-based compensation costs of $6.8 million were recorded in the year (2006 - $3.6 million) for the calculated value of the stock options issued and vesting during the year. Stock-based compensation increased significantly from the prior year due to an increase in options outstanding and a volatile stock price. This volatility contributes to a higher calculated value per option issued, which value is expensed over the life of the option. Stock-based compensation is a non-cash charge against earnings.
FINANCE CHARGES
Included in the finance charges of $0.4 million for the year are interest paid and accrued on the outstanding debt and the pro-rata portion of the deferred financing charges that are being allocated over the life of the facility. The company did not have any debt outstanding in 2006.
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 Petrolifera's integrated foreign operations resulted in a foreign exchange loss of $2.3 million in 2007 (2006 - $0.4 million loss). The company's main exposure to foreign currency risk relates to the pricing of crude oil sales, costs and capital expenditures and debt, which are largely denominated in US dollars and Argentinean pesos.
FAIR VALUE IMPAIRMENT - ABCP
In recognition of the loss of liquidity in the company's ABCP investment, a charge for a non-cash fair value impairment of $6.2 million was provided for in the financial statements. This represents 16% 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 2007 was $16.9 million (2006 - $9.6Â million) or $5.59 per boe (2006 - $4.27 per boe). This includes a charge of $0.1 million (2006 - $0.03 million) to accrete the company's estimated asset retirement obligation. These charges will continue to be necessary in future to accrete the currently booked discounted liability of $5.6 million to the estimated total undiscounted liability of $11.3 million over the estimated remaining economic life of the company's crude oil and natural gas properties. Additionally, future development costs of $18.6 million for proved undeveloped reserves in Argentina have been included in the depletion calculation. Capital costs of $15.3 million related to unevaluated properties in Argentina, and other assets in the pre-production stage related to Peru and Colombia have been excluded from depletable costs. No proved reserves have yet been assigned to these projects.
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 2007 or in 2006 as a significant surplus exceeding $300 million was calculated pursuant to this test.
TAXES
The current income tax provision of $21.1 million for 2007 (2006 - $26.4Â million), primarily relates to income taxes in Argentina. Additionally, a future tax expense of $6.9 million for 2007 (2006 - recovery of $1.2 million) was recorded to recognize the changes in tax pool balances during the year. The increase in the effective tax rate to 49 percent in 2007 from 40 percent in 2006 is primarily caused by the impairment on the ABCP. Taxes other than income taxes of $2.1 million (2006 - $0.7 million) mainly represent taxes charged at a rate of 0.6 percent on all banking transactions in Argentina.
NET EARNINGS AND SHARES OUTSTANDING Click here for additional information
In 2007 the company reported earnings of $29.3 million (2006 - $37.3Â million), which equates to $0.61 (2006 - $0.95) per basic and $0.57Â (2006 - earnings of $0.75) per weighted average diluted share outstanding.
For 2007, the weighted average number of common shares outstanding was 48.0 million (2006 - 39.1 million). In 2007, 3.4 million additional shares (2006 - 10.8 million) were included in the diluted earnings per share calculations related to the potentially dilutive effect of options and warrants.
As at March 14, 2008, the company had the following securities issued and outstanding:

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Details of the exercise rights and terms of the warrants and options are noted in the Consolidated Financial Statements, included in this Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations before working capital changes ("cash flow"), cash flow per share and cash flow per boe do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow is reconciled with net earnings on the Consolidated Statement of Cash Flows and below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding; cash flow per boe is calculated by dividing cash flow by the quantum of crude oil and natural gas (expressed in boe) sold in the period. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures.
Reconciliation of net earnings to cash flow: Click here for additional information
Cash flow in 2006 was $68.4 million (2006 - $49.8 million) which equates to $1.43 per basic share and $1.33 per diluted share compared to 2006 - $1.27Â per basic share and $1.00 per weighted average diluted share.
Cash flow increased by 37 percent overall due to higher crude oil production, offset by lower prices and higher costs. Cash flow per share increased 13 percent year over year and reflects the above factors and issuance of additional common shares in 2007 for the exercise of outstanding warrants and stock options.
CREDIT FACILITIES
During 2007 the company entered into two separate credit facilities. In September the Company finalized a US$100 million reserve-based revolving credit facility, with initial available draws established at US$60 million. The facility was for three years, bears interest at LIBOR plus a margin, is secured by a pledge of the shares of Petrolifera's subsidiaries and has a provision for a borrowing base adjustment every six months.
In December 2007 the company established an $18 million line of credit with a Canadian Chartered bank to partially restore the liquidity that has been frozen by the current credit crisis for ABCP. This facility pays interest a floating rate and is solely secured by the ABCP notes.
As of December 31, 2007, the reserve based facility had US$20.0 million outstanding and the line of credit facility had $9.9 million outstanding.
Capital Spending Click here for additional information
Capital spending in 2007 totaled $111.0 million, an increase of 205% over the $36.4 million spent in 2006. In Argentina, the company spent $97.5 million on the drilling of 47 wells, design, completion and activation of the crude oil water treatment facilities, and handling facilities associated with a waterflood project and the construction of a high-pressure natural gas pipeline. The Company spent $12.9 million in Peru for the completion of the Block 107 high-resolution airborne gravity-magnetic survey, the Block 107 seismic environmental impact assessment ("EIA"), the commencement of the Block 107 seismic program and further advancing the Block 106 EIA in preparation of a seismic program anticipated in 2008. In Colombia, the company spent $0.6Â million to secure new concessions, open an office and the reprocessing of seismic and on preliminary geological studies in anticipation of drilling during 2008.
At year end Petrolifera had a working capital deficit of $31.8 million, largely a result of reclassifying short term ABCP investments to long term and due to the incurrence of $29.6 million of borrowings from available credit facilities. The company has cash, cash flow and sufficient unused portions of its available credit facilities to fund its planned 2008 capital budget. It is the company's opinion that it has the financial wherewithal to repay its indebtedness pursuant to its terms under current industry conditions. As a public company, Petrolifera can, if it so chooses and if prevailing market conditions are favorable, raise new capital from the sale of equity or alternatives thereto from its treasury.
The company's 2008 approved capital program of $140 million includes expenditures to satisfy work commitments related to the Argentine, Peruvian and Colombian properties. The company has sufficient cash balances and cash flow is being generated in Argentina to fund these capital expenditures and funds are being moved among Canada, Barbados, Argentina, Peru and Colombia as required.
LONG-TERM INVESTMENTS
Due to the early success of the Argentinean drilling program since December 2006, 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 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 December 23, 2007, the Pan-Canadian Committee announced the framework of the restructuring of the conduits in which the company is invested. Under this framework, groups of assets from the trusts that are either wholly or partially represented by synthetic assets ("synthetic pool") will be pooled together and exchanged for two sets of notes, a senior note and a subordinated note. The ratio of the breakdown between senior and subordinated notes for any individual trust will be determined by the relative contribution of value of the assets contributed to the synthetic pool by the trust to the total value of the pool of synthetic assets. Also under the proposed restructuring, certain pools of the assets that do not qualify for the synthetic pool will remain in the trust and new notes will be distributed to the existing noteholders with a term similar to the maturities of the underlying assets ("non-qualifying pool"). Therefore, should the Pan-Canadian committee proposal be adopted it is anticipated that the company would receive three types of notes, synthetic pool senior notes, synthetic pool subordinated notes, and non-qualifying pool notes.
Quoted market values of the ABCP are not available due to the market disruption that is currently paralyzing the ABCP market. Management has therefore estimated the fair value of the owned ABCP based on a probabilistic recovery of principal and interest taking into account all relevant 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 December 31, 2007. 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 recovery factors used for the synthetic pool notes were as follows: from 50 percent to 100 percent with a weighted average recovery of 98 percent for the principal portion of senior notes and from 0 percent to 50 percent with a weighted average recovery of 45 percent for the principal portion of the subordinated notes; from 0 percent to 100 percent with a weighted average recovery of 93Â percent for the interest applicable to senior notes and from 0 percent to 50 percent with a weighted average recovery of 45 percent for the interest applicable to the subordinated notes. The recovery factors used for the non-qualifying pool notes ranged from 0 percent to 100 percent with a weighted average recovery of 70 percent for principal portion and from 0 percent to 100Â with a weighted average recovery of 50 percent for interest applicable to the notes. The term for the synthetic pool notes was between two and nine years and for the non-qualifying pool notes the term was nine years. The fair value of the investment in ABCP is estimated to be $31.4 million which implies an impairment of $6.2 million or approximately 16 percent.
As at December 31, 2007, included in long-term investments were ABCP with a face value of $37.7 million. These investments are classified as Held for Trading and are carried at fair value which is assessed each reporting date. Previously these were classified as current assets and were part of working capital. Petrolifera has taken a non-cash impairment charge of $6.2 million against the carrying value of the notes classified as long term investments.
The theoretical fair value of the company's ABCP could range from $26.0Â million to $34.4 million using the same valuation methodology with alternative reasonably possible assumptions.
The company anticipates that it presently has sufficient cash resources and available credit to satisfy obligations as they come due. Assuming the ABCP problems are restructured in 2008 and normal liquidation for cash occurs, the company would be able to substantially reduce its indebtedness incurred from lack of access to these amounts.
The outcome of the restructuring process, actual timing and amount ultimately recoverable from these notes may differ materially from this estimate which would impact the company's earnings.
LEGAL PROCEEDINGS
Petrolifera is a party to an arbitration proceeding initiated by the former contract operator of the Puesto Morales/Rinconada block. The former operator is seeking financial compensation including damages for wrongful dismissal. Petrolifera is of the opinion that the claim is without merit and has filed a counterclaim against the former operator. Potential damages, if any, against the company are not quantifiable at this time, but in any event are not anticipated to be material to the company.
RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS
Under the terms of a Management Services Agreement with Connacher Oil and Gas Limited ("Connacher"), which has been extended on a month-to-month basis since its original term, which expired in May, 2007, Connacher provides some management and general and administrative services to assist in the administration of the company. The fee for this service is $15,000 per month. From time to time Connacher also pays bills on behalf of Petrolifera, for which it is reimbursed at cost. Connacher is also guarantor for Petrolifera in Peru and operator of record on behalf of Petrolifera in Colombia for which Connacher is indemnified by Petrolifera. Petrolifera paid Connacher $0.2Â million in 2007 under the management agreement which is anticipated to be replaced on substantially the same terms by a new agreement effective January 1, 2008.
SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING
ESTIMATES
The significant accounting policies used by the company are described below. 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 Instrument 51-101-Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. In accordance with this definition, the level of certainty should result in a 90 percent probability that the quantities actually recovered will equal or exceed the estimated proved reserves. In the case of probable reserves, which are less certain to be recovered than proved reserves, NI 51-101 states that it is equally likely that the actual remaining quantities recovered will be greater than or less than the sum of the estimated proved plus probable reserves. Possible reserves are those reserves less certain to be recovered than probable reserves. There is at least a 10Â percent probability that the quantities actually recovered will be equal to or exceed the sum of proved plus probable plus possible reserves.
The company's crude oil and natural gas reserve estimates are made by independent reservoir engineers using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, reservoir performance or a change in the company's plans. The reserve estimates are also used in determining the company's borrowing base for its credit facilities and may impact the same upon revision or changes to the reserve estimates. The effect of changes in proved oil and gas reserves on the financial results and position of the company is described under the heading "Full Cost Accounting for Oil and Gas Activities".
Full Cost Accounting for Oil and Gas Activities
The company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether successful or not. The aggregate of net capitalized costs and estimated future development costs is amortized using the unit-of-production method based on estimated proved oil and gas reserves.
Major Development Projects and Unproved Properties
Certain costs related to major development projects and unproved properties are excluded from net capitalized costs subject to depletion until proved reserves have been determined, the project becomes commercial, or their value is impaired. These costs are reviewed quarterly and any impairment is transferred to the costs being depleted or, if the properties are located in a cost centre where there is no reserve base, the impairment is charged directly to income.
Full Cost Accounting Ceiling Test
The company is required to review the carrying value of all property, plant and equipment, including the carrying value of oil and gas assets, for potential impairment. Impairment is indicated if the carrying value of the long-lived asset or oil and gas cost centre is not recoverable by the future undiscounted cash flows. If impairment is indicated, the amount by which the carrying value exceeds the estimated fair value of the long-lived asset is charged to earnings.
The ceiling test is based on estimates of reserves, production rate, petroleum and natural gas prices, future costs and other relevant assumptions. By their nature these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements could be material.
Asset Retirement Obligations
The company is required to provide for future removal and site restoration costs by estimating these costs in accordance with existing laws, contracts or other policies. These estimated costs are charged to earnings and the appropriate liability account over the expected service life of the asset. When the future removal and site restoration costs cannot be reasonably determined, a contingent liability may exist. Contingent liabilities are charged to earnings only when management is able to determine the amount and the likelihood of the future obligation. The company estimates future retirement costs based on current estimates adjusted for inflation and credit risk. These estimates are subject to measurement uncertainty.
Income Taxes
The company follows the liability method of accounting for income taxes. Under this method tax assets are recognized when it is more than likely realization will occur. Tax liabilities are recognized for temporary differences between recorded book values and underlying tax values. Rates used to determine income tax asset and liability amounts are enacted rates expected to be used in future periods when the timing differences change. The period in which a timing difference reverses are impacted by future income and capital expenditures. Rates are also affected by legislation changes.
Stock-Based Compensation
The company uses the fair value method to account for stock options. The determination of the amounts for stock-based compensation is based on assumptions of stock volatility, interest rates and the term of the option. These assumptions by their nature are subject to measurement uncertainty.
Legal, Environment Remediation and Other Contingent Matters
In respect of these matters, the company is required to determine whether a loss is probable based on judgment and interpretation of laws and regulations and determine if such a loss can be estimated. When any such loss is determined, it is charged to earnings. Management continually monitors known and potential contingent matters and makes appropriate provisions by charges to earnings when warranted by circumstance.
Foreign Currency Translation
Business conducted in Colombia and Peru is considered to be an "integrated foreign operation" for accounting purposes and, therefore, its financial statements are translated into Canadian dollars using the temporal method. Under the temporal method, the company translates foreign denominated monetary assets and liabilities at the exchange rate prevailing at year end; non-monetary assets, liabilities and related depletion and depreciation are translated at historic rates; revenues and expenses are translated at the average rate of exchange for the period; and any resulting foreign exchange gains or losses are included in operations.
During 2006, the company determined its Argentinean activities comprise a self-sustaining operation. Prior to this determination, the Argentinean operations were considered to be integrated with the Canadian operations and were translated using the temporal method described above. As a self-sustaining foreign operation, the Argentinean financial statements are translated into Canadian dollars using the current rate method, whereby assets and liabilities are translated at the rate of exchange in effect at the balance sheet date; revenues and expenses are translated at the average monthly rates of exchange during the period and gains or losses on translation are included as a foreign currency translation adjustment in the consolidated statement of comprehensive income and accumulated other comprehensive income (loss).
IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2007 the company adopted CICA Handbook sections 1530, 3251, 3855, 3861 and 3865 relating to Comprehensive Income, Equity, Financial Instruments - Recognition and Measurement, Financial Instruments - Disclosure and Presentation, and Hedges, respectively. Under the new standards, additional financial statement disclosure, namely Consolidated Statements of Comprehensive Income, has been introduced. This statement identifies certain gains and losses, which in the company's case at this time, include only foreign currency translation adjustments arising from translation of the company's Argentinean business unit, that are recorded outside the income statement. Additionally, a separate component of equity, Accumulated Other Comprehensive Income, has been introduced to disclose other comprehensive income balances on a cumulative basis. Finally, all financial instruments, including derivatives, are recorded in the company's consolidated balance sheet and measured at their fair values.
Under section 3855, the company is required to classify its financial instruments into one of five categories. The company has classified all of its financial instruments, with the exception of the revolving bank debt facility, as Held for Trading, which requires measurement on the balance sheet at fair value with any changes in fair value recorded in earnings. This classification has been chosen due to the nature of the company's financial instruments. Transaction costs related to financial instruments classified as held for trading are recorded in earnings in accordance with the new standards.
The revolving bank debt facility has been classified as "other financial liabilities".
The adoption of section 3865, "Hedges", has had no effect on the company's consolidated financial statements as the company has no hedging transactions in place at this time.
Effective January 1, 2007, the company adopted the revised recommendations of CICA Handbook section 1506, Accounting Changes. The new recommendations permit voluntary changes in accounting policy only if they result in financial statements which provide more relevant and reliable financial information. Accounting policy changes must be applied retrospectively unless it is impractical to determine the period or cumulative impact of the change in policy. Additionally, when an entity has not applied a new primary source of GAAP that has been issued but is not yet effective, the entity must disclose that fact along with information relevant to assessing the possible impact that the application of the new primary source of GAAP will have on the entity's financial statements in the period of initial application.
As of January 1, 2008, the company will be required to adopt two new CICA Handbook requirements, section 3862, "Financial Instruments - Disclosures" and section 3863, "Financial Instruments - Presentation" which will replace current section 3861. The new standards require disclosure of the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments and how those risks are managed. The new presentation standard essentially carries forward the current presentation requirements. The company is assessing the impact of these new standards.
As of January 1, 2008, the company will be required to adopt CICA Handbook section 1535, "Capital Disclosures" which requires entities to disclose their objectives, policies and processes for managing capital and, in addition, whether the entity has complied with any externally imposed capital requirements. The company is assessing the impact of this new standard.
As of January 1, 2008, Petrolifera is required to adopt the CICA Handbook Section 3031, "Inventories," which will replace the existing inventories standard. The new standard requires inventory to be valued on a first-in, first-out or weighted average basis, which is consistent with Petrolifera's current treatment. The adoption of this standard should not have a material impact on Petrolifera's Consolidated Financial Statements.
In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, replacing Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the company will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The company is currently evaluating the impact of the adoption of this new Section.
Over the next three years the CICA will adopt its new strategic plan for the direction of accounting standards in Canada, which was ratified in January 2006. As part of the plan, Canadian GAAP for public companies will converge with International Financial Reporting Standards ("IFRS") over the next three years. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS.
Commitments, Contingencies, Guarantees, Contractual Obligations and Off
Balance Sheet Arrangements
In 2005 Petrolifera acquired two significant oil and gas exploration licenses in Peru. The licenses have a total US$41.8 million financial commitment to complete negotiated work programs on the two licenses over seven years. The company has the right to withdraw from the licenses at the end of each period associated with the term of the licenses. The first license term for Block 106 ended in 2007 and the company has met its commitment and is currently in the second license term with a commitment to invest a minimum of US$1.6 million in this term. These expenditures are budgeted to be fully discharged in 2008. In Block 107, the company is in the first term of the license and expects to complete all the required work commitments for the term during 2008. The company has issued letters of credit in the total amount of US$2.3 million to secure the capital expenditure requirements associated with the two exploration licenses in Peru.
In 2007 the Company was granted three concessions in Colombia with a total work commitment of US$5.7 million over a two year period. These work commitments are budgeted to be completed during 2008. The company has issued letters of credit in the total amount of US$0.6 million in support of these work commitments.
In Argentina the company has total work commitments of US$54.0 million over the next three years related to the Vaca Mahuida, Puesto Guevara and Gobernador Ayala II blocks.
Additionally, the company has various guarantees and indemnifications in place in the ordinary course of business, none of which are expected to have a significant impact on the company's financial statements or operations.
The company's annual commitments under service contracts for drilling, leases for office premises, various operating costs, software license agreements and other equipment are as follows: Click here for additional information
The company has no off balance sheet financing arrangements.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed and reported to the company's management as appropriate to allow timely decisions regarding disclosure. The company's Executive Chairman and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this MD&A, that the company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the company is responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Management assessed the design of the company's internal controls over financial reporting as of December 31, 2007 and based on that assessment, determined that the company's internal controls over financial reporting were adequately designed.
It should be noted that while the company's Executive Chairman and Chief Financial Officer believe that the company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, and that the internal controls over financial reporting are adequately designed, they do not expect that the financial disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. In reaching a reasonable level of assurance, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
BUSINESS RISKS
Petrolifera is exposed to certain risks and uncertainties inherent in the crude oil and natural gas business. Furthermore, being a smaller independent company, it is exposed to financing and other risks which may impair its ability to realize on its assets or to capitalize on opportunities which might become available to it. Additionally, Petrolifera operates in various foreign jurisdictions and is exposed to other risks including currency fluctuations, political risk, price controls and varying forms of fiscal regimes or changes thereto which may impair Petrolifera's ability to conduct profitable operations.
The risks arising in the crude oil and natural gas industry include price fluctuations for both crude oil and natural gas over which the company has limited control; risks arising from exploration and development activities; production risks associated with the depletion of reservoirs and the ability to market production. Additional risks include environmental and safety concerns.
The success of the company's capital programs as embodied in its productivity and reserve base could also impact its prospective liquidity and pace of future activities. Control of finding, development, operating and overhead costs per boe is an important criterion in determining company growth, success and access to new capital sources.
To date, the company has utilized equity financing and reserve based revolving debt facilities and investment backed lines of credit and has had a bias towards conservatively financing its operations under normal industry conditions to offset the inherent risks of domestic and international oil and gas exploration, development and production activities.
From time to time, the company may have to access capital markets for new equity to supplement internally generated cash flow and bank borrowings to finance its growth plans. Periodically, these markets may not be receptive to offerings of new equity from treasury, whether by way of private placement or public offerings. This may be further complicated by the smaller market capitalization and limited market liquidity for shares of smaller companies, restricting access to some institutional investors.
Periodic fluctuations in energy prices may also affect lending policies of the company's bankers, for new borrowings. This in turn could limit growth prospects over the short run or may even require the company to dedicate cash flow, dispose of properties or raise new equity to reduce bank borrowings under circumstances of declining energy prices or disappointing drilling results.
While hedging activities may have opportunity costs when realized prices exceed hedged pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management continuously reviews the need to utilize such financing techniques.
The company attempts to mitigate its business and operational risk exposures by maintaining comprehensive insurance coverage on its assets and operations, by employing or contracting competent technicians and professionals, by instituting and maintaining operational health, safety and environmental standards and procedures and by maintaining a prudent approach to exploration and development activities. The company also addresses and regularly reports on the impact of risks to its shareholders, writing down the carrying values of assets that may not be recoverable.
OUTLOOK
Petrolifera plans an active and exciting capital program in 2008. It is anticipated this program will be dominated by our anticipated drilling in Peru on Ucayali Block 107, after we complete our 2D seismic program and interpret the data. Early returns are encouraging although a full interpretation will be required. Timing will depend upon rig availability, government EIA approval, scheduling and normal industry factors which can affect operations in a jungle environment. An active 2D seismic program is also planned over selected portions of Maranon Block 106 with a view to drilling in 2009, again subject to the usual conditions and qualifiers related to regulatory approval and rig availability and the timely completion of the planned seismic program. Our Peru budget for 2008 is estimated at approximately $56 million.
In Argentina, we have allocated $76 million for new drilling and seismic at Puesto Morales, Rinconada, Vaca Mahuida, Puesto Guevara and Gobernador Ayala II. With our Puesto Morales facilities now completed, our focus again turns to exploration with a view to finding new pools for future development.
In Colombia, Petrolifera has already identified three drillable prospects on our Sierra Nevada I license and exploration activity is anticipated for our Sierra Nevada TEA and the Turpial Block. At least one well will be drilled during 2008 to meet contractual obligations on Sierra Nevada I, although programs may be expanded to include the drilling of up to three wells before year end 2008, alone or with partners.
FOURTH QUARTER 2007
Petrolifera's fourth quarter 2007 results were weaker than the third quarter and than the similar period last year. Crude oil sales were 6,565Â bbl/d and natural gas sales were 2.9 mmcf/d, or 7,042 boe/d on an equivalent basis. This is considerably below 2006 levels when flush production was being realized from new prolific wells at Puesto Morales. Also, sales were lower than reported third quarter 2007 results, when equivalent sales were 7,557 boe/d. This trend has now been reversed with the completion of construction of new facilities at Puesto Morales, contributions from new wells and improved stability in field operations.
Revenue in the reporting period was $27 million compared to $31 million in the previous quarter and $45 million in 2006, reflecting lower crude oil prices in Argentina due to the effect of higher export taxes and the strength of the Canadian dollar, which appreciated almost 20 percent against the US dollar during 2007.
The average price received for crude oil sales in the fourth quarter of 2007 was $44.36 per barrel and boe prices were $42.07 per boe, the lowest for the year.
Cash flow was a modest $10.7 million ($0.21 per share) due to higher provisions for cash taxes compared to the prior quarter in 2007 and below 2006 due to lower volumes and higher costs. In 2006, fourth quarter cash flow was a record $18.5 million ($0.42 per share).
Earnings in the fourth quarter 2007 were $4.9 million ($0.10 per share), essentially the same as the third quarter earnings but considerably less than in 2006 when fourth quarter net income was $12.4 million ($0.29 per share).
Capital spending in the fourth quarter 2007 was substantial at $57.6 million as the company operated four rigs in Argentina for much of the period and also completed its field facility construction program. Click here for additional information
SOURCE: Petrolifera Petroleum Limited

Richard A Gusella, Executive Chairman, Petrolifera Petroleum Limited, Phone: (403) 538-6201, Fax: (403) 538-6225, inquiries@petrolifera.ca, www.petrolifera.ca
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