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Press release from Marketwire

Crocotta Energy Inc.: Q3 2010 Financial and Operating Results

Tuesday, November 09, 2010

Crocotta Energy Inc.: Q3 2010 Financial and Operating Results06:00 EST Tuesday, November 09, 2010CALGARY, ALBERTA--(Marketwire - Nov. 9, 2010) - CROCOTTA ENERGY INC. (TSX:CTA) is pleased to announce its financial and operating results for the three and nine months ended September 30, 2010, including financial statements, notes to the financial statements, and Management's Discussion and Analysis. All dollar figures are Canadian dollars unless otherwise noted.HIGHLIGHTS- Signed agreement to sell certain oil and natural gas assets for total consideration of $30.0 million, comprised of $28.0 million in cash and drilling credits and warrants with an estimated value of $2.0 million. Proceeds from the disposition has reduced net debt to approximately $27 million and the Company's revolving operating demand loan credit facility was adjusted to $55.0 million.- Completed first horizontal bluesky well at Edson (29% working interest), which is currently producing on a gross basis approximately 215 boe/d oil and natural gas liquids and 2.4 mmcf/d of natural gas (total of 615 boe/d) after being on production for four months. Three Months Ended Nine Months Ended September 30 September 30FINANCIAL 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------($000s, except per share amounts)Oil and natural gas sales 8,574 8,649 (1) 27,256 22,069 24Funds from operations(1) 3,279 1,752 87 9,996 5,353 87 per share - basic and diluted 0.05 0.03 67 0.15 0.11 36Net loss (2,477) (3,919) (37) (6,274) (10,417) (40) per share - basic and diluted (0.04) (0.06) (33) (0.10) (0.22) (55)Capital expenditures 2,701 492 449 14,146 10,755 32Corporate acquisition - 84,315 (100) - 84,315 (100)Property acquisitions - - - - 2,442 (100)Property dispositions (1,400) (696) 101 (22,098) (866) 2,452Net debt(2) 53,296 82,754 (36)Common shares outstanding (000s) weighted average - basic 65,140 54,584 19 65,124 47,557 37 weighted average - diluted 65,488 54,584 20 65,254 47,557 37 end of period - basic 65,142 63,884 2 end of period - diluted 74,219 72,360 3(1) Funds from operations and funds from operations per share do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Measures section in the MD&A for more details and the Funds from Operations section in the MD&A for a reconciliation to cash flow from operating activities.(2) Net debt includes current liabilities (including the revolving credit facility and secured bridge facility) less current assets and excludes the risk management contracts. Net debt does not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Measures section in the MD&A for more details.---------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30OPERATING 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Number of producing days 92 92 273 273Daily production Oil and liquids - (bbls/d) 862 1,000 (14) 779 835 (7) Natural gas - (mcf/d) 10,530 10,005 5 10,663 8,538 25---------------------------------------------------------------------------- Oil equivalent - (boe/d @ 6:1) 2,617 2,668 (2) 2,556 2,258 13Revenue Oil and liquids - ($/bbl) 57.57 60.81 (5) 63.28 55.01 15 Natural gas - ($/mcf) 4.14 3.32 25 4.74 4.09 16---------------------------------------------------------------------------- Oil equivalent - (boe/d @ 6:1) 35.61 35.25 1 39.05 35.80 9Royalties Oil and liquids - ($/bbl) 14.72 21.57 (32) 17.88 17.97 (1) Natural gas - ($/mcf) 0.01 0.11 (91) 0.27 0.13 108---------------------------------------------------------------------------- Oil equivalent - (boe/d @ 6:1) 4.87 8.50 (43) 6.57 7.15 (8)Production expenses Oil and liquids - ($/bbl) 9.73 8.57 14 10.03 8.56 17 Natural gas - ($/mcf) 1.63 1.96 (17) 1.49 2.09 (29)---------------------------------------------------------------------------- Oil equivalent - (boe/d @ 6:1) 9.75 10.56 (8) 9.28 11.06 (16)Transportation expenses Oil and liquids - ($/bbl) 0.87 1.30 (33) 1.26 1.69 (25) Natural gas - ($/mcf) 0.17 0.17 - 0.17 0.18 (6)---------------------------------------------------------------------------- Oil equivalent - (boe/d @ 6:1) 0.96 1.12 (14) 1.11 1.29 (14)Operating netback (1) Oil and liquids - ($/bbl) 32.25 29.37 10 34.11 26.79 27 Natural gas - ($/mcf) 2.33 1.08 116 2.81 1.69 66---------------------------------------------------------------------------- Oil equivalent - (boe/d @ 6:1) 20.03 15.07 33 22.09 16.30 36Realized loss (gain) on risk management contracts - ($/boe) 0.27 (0.02) (1,450) 0.93 (0.01) (9,400)Unrealized loss (gain) on risk management contracts - ($/boe) (1.95) 3.38 (158) (1.60) 1.35 (219)General and administrative expenses - ($/boe) 3.25 4.10 (21) 3.62 5.46 (34)Interest expense - ($/boe) 2.89 3.85 (25) 3.21 2.17 48Depletion, depreciation, and accretion - ($/boe) 25.85 23.68 9 26.07 28.34 (8)Stock-based compensation - ($/boe) 1.17 1.08 8 1.18 1.21 (2)Future income tax recovery - ($/boe) (1.17) (5.04) (77) (2.34) (5.31) (56)----------------------------------------------------------------------------Net loss - ($/boe) (10.28) (15.96) (36) (8.98) (16.91) (47)(1) Operating netback does not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Measures section in the MD&A for more details. Operations UpdateIn the third quarter, Crocotta continued its focus on proving up its core areas in addition to strengthening its financial position.During the quarter, Crocotta signed an agreement to sell properties in the Niton, Chip Lake and Pembina areas of Alberta for approximately $30 million to allow for increased capital spending on its key resource assets - Bluesky assets at Edson and the Montney assets in Northeast British Columbia. On closing of the sale (November 8), Crocotta estimates net debt was reduced to approximately $27 million which, combined with a new bank credit facility of $55 million, will allow Crocotta to fund a capital budget of approximately $50 million for 2011.At Edson, the first horizontal Bluesky well (29% WI), which was placed on production in late June, continues to "clean up" and is now producing over 615 boepd (35% oil and natural gas liquids). Based on the success of the first well, Crocotta has drilled 2 additional horizontal Bluesky wells - one oil well (35% WI) and a second liquids rich gas well (20% WI). The oil well was completed with an 8 stage "slick-water" frac and was recently placed on production. Completion on the second liquids rich gas well is expected in mid-November. Crocotta will release production test data on the wells as they stabilize. Crocotta is currently drilling its third Bluesky well (29%WI) and will then move the rig to 100% working interest lands.Crocotta has also continued to prove up its Montney resource assets in the quarter with successful vertical tests on it lands at Glacier and Dawson East, which will complement the multi-zone area at Edson. Subsequent to quarter end, Crocotta cased a vertical Montney well at Dawson West that will be completed soon.Overall, Crocotta has had tremendous initial success on proving up its key resource assets and will be able to accelerate the development of these assets now that the non-core assets sales are completed.Management's Discussion and Analysis ("MD&A")November 8, 2010Crocotta Energy Inc. ("Crocotta" or the "Company") is an oil and natural gas company, actively engaged in the acquisition, development, exploration, and production of oil and natural gas reserves in Western Canada. On November 15, 2006, Crocotta commenced active oil and natural gas operations with the acquisition of certain oil and natural gas properties. Crocotta commenced trading on the Toronto Stock Exchange ("TSX") on October 17, 2007 under the symbol "CTA".The MD&A should be read in conjunction with the unaudited interim financial statements and notes thereto for the three and nine months ended September 30, 2010 and the audited annual consolidated financial statements and notes thereto for the year ended December 31, 2009. The unaudited interim financial statements and financial data contained in the MD&A have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") in Canadian currency (except where noted as being in another currency).Additional information related to the Company, including the Company's Annual Information Form ("AIF"), may be found on the SEDAR website at www.sedar.com.BOE ConversionsBarrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil (6:1) unless otherwise stated. The term "boe" may be misleading, particularly if used in isolation. A boe conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalence is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.Non-GAAP MeasuresThis document contains the terms "funds from operations", "funds from operations per share", "net debt", and "operating netback" which do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures used by other companies. The Company uses these measures to help evaluate its performance. Management uses funds from operations to analyze performance and considers it a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. Funds from operations is a non-GAAP measure and has been defined by the Company as net earnings (loss) plus non-cash items (depletion, depreciation and accretion, stock-based compensation, unrealized gains and losses on risk management contracts, future income taxes, goodwill impairment, and extraordinary gains and losses) and excludes the change in non-cash working capital related to operating activities and expenditures on asset retirement obligations and reclamation. The Company also presents funds from operations per share whereby amounts per share are calculated using weighted average shares outstanding, consistent with the calculation of earnings per share. Funds from operations is reconciled to cash flow from operating activities under the heading "Funds from Operations". Management uses net debt as a measure to assess the Company's financial position. Net debt includes current liabilities (including the revolving credit facility and secured bridge facility) less current assets and excludes the risk management contracts. Management considers operating netback an important measure as it demonstrates its profitability relative to current commodity prices. Operating netback, which is calculated as average unit sales price less royalties, production expenses, and transportation expenses, represents the cash margin for every barrel of oil equivalent sold. Operating netback per boe is reconciled to net earnings (loss) per boe under the heading "Operating Netback".Crocotta Energy Inc.Management's Discussion & AnalysisThree and Nine Months Ended September 30, 2010Forward-Looking InformationThis document contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "may", "will", "should", "believe", "intends", "forecast", "plans", "guidance" and similar expressions are intended to identify forward-looking statements or information.More particularly and without limitation, this document contains forward looking statements and information relating to the Company's risk management program, oil, NGLs and natural gas production, capital programs, oil, NGLs, and natural gas commodity prices, and debt levels. The forward-looking statements and information are based on certain key expectations and assumptions made by the Company, including expectations and assumptions relating to prevailing commodity prices and exchange rates, applicable royalty rates and tax laws, future well production rates, the performance of existing wells, the success of drilling new wells, the availability of capital to undertake planned activities and the availability and cost of labour and services.Although the Company believes that the expectations reflected in such forward-looking statements and information are reasonable, it can give no assurance that such expectations will prove to be correct. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and gas industry in general such as 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 estimates and projections relating to production rates, costs and expenses, commodity price and exchange rate fluctuations, marketing and transportation, environmental risks, competition, the ability to access sufficient capital from internal and external sources and changes in tax, royalty and environmental legislation. The forward-looking statements and information contained in this document are made as of the date hereof for the purpose of providing the readers with the Company's expectations for the coming year. The forward-looking statements and information may not be appropriate for other purposes. The Company undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. Three Months Ended Nine Months EndedSummary of September 30 September 30 Financial Results 2010 2009 2008 2010 2009 2008----------------------------------------------------------------------------($000s, except per share amounts)Oil and natural gas sales 8,574 8,649 13,547 27,256 22,069 45,739Funds from operations 3,279 1,752 7,724 9,996 5,353 27,144 per share - basic and diluted 0.05 0.03 0.23 0.15 0.11 0.82Net earnings (loss) (2,477) (3,919) 1,232 (6,274) (10,417) 5,486 per share - basic and diluted (0.04) (0.06) 0.04 (0.10) (0.22) 0.17Total assets 229,166 267,408 161,101Net debt 53,296 82,754 19,650Production Three Months Ended Nine Months Ended September 30 September 30 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Average Daily ProductionOil and NGLs (bbls/d) 862 1,000 (14) 779 835 (7)Natural gas (mcf/d) 10,530 10,005 5 10,663 8,538 25----------------------------------------------------------------------------Total (boe/d) 2,617 2,668 (2) 2,556 2,258 13--------------------------------------------------------------------------------------------------------------------------------------------------------Daily production for the three months ended September 30, 2010 decreased 2% to 2,617 boe/d compared to 2,668 boe/d for the comparative period in 2009. Year-to-date, daily production increased 13% to 2,556 boe/d from 2,258 boe/d for the nine months ended September 30, 2009. The year-to-date increase in production was due to the acquisition of Salvo Energy Corporation ("Salvo") in August 2009. Daily production for the three months ended September 30, 2010 increased 7% compared to 2,448 boe/d for the three months ended June 30, 2010, due to the addition of production from successful drilling in the first half of 2010.Crocotta's production profile in the first nine months of 2010 was comprised of 70% natural gas and 30% oil and NGLs. During the year ended December 31, 2009, Crocotta's production profile was comprised of 63% natural gas and 37% oil and NGLs. The change in the production profile was the result of the sale of certain oil weighted assets in the first quarter of 2010. Three Months Ended Nine Months EndedRevenue September 30 September 30($000s) 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Oil and NGLs 4,565 5,593 (18) 13,461 12,538 7Natural gas 4,009 3,056 31 13,795 9,531 45----------------------------------------------------------------------------Total revenue 8,574 8,649 (1) 27,256 22,069 24--------------------------------------------------------------------------------------------------------------------------------------------------------Average Sales Price----------------------------------------------------------------------------Oil and NGLs ($/bbl) 57.57 60.81 (5) 63.28 55.01 15Natural gas ($/mcf) 4.14 3.32 25 4.74 4.09 16----------------------------------------------------------------------------Average sales price ($/boe) 35.61 35.25 1 39.05 35.80 9--------------------------------------------------------------------------------------------------------------------------------------------------------Revenue totaled $8.6 million for the third quarter of 2010, down marginally from the third quarter of 2009. Year-to-date, revenue increased 24% to $27.3 million in 2010 compared to $22.1 million in 2009. The increase was due to a significant increase in production combined with an increase in oil, natural gas, and NGLs commodity prices.The following table outlines the Company's realized wellhead prices and industry benchmarks: Three Months Ended Nine Months Ended September 30 September 30Commodity Pricing 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Oil and NGLsCorporate Price ($Cdn/bbl) 57.57 60.81 (5) 63.28 55.01 15West Texas Intermediate ($US/bbl) 76.06 68.19 12 77.54 56.85 36Edmonton Par ($Cdn/bbl) 74.44 71.71 4 76.73 62.69 22Natural gasCorporate Price ($Cdn/mcf) 4.14 3.32 25 4.74 4.09 16AECO Price ($Cdn/mcf) 3.74 2.94 27 4.31 3.78 14Exchange RatesU.S./Cdn. Dollar Average Exchange Rate 0.9626 0.8784 10 0.9657 0.8580 13--------------------------------------------------------------------------------------------------------------------------------------------------------Corporate average oil and NGLs price were 77.3% and 82.5% of Edmonton Par price for the three and nine months ended September 30, 2010, respectively. Corporate average natural gas prices were 110.7% and 110.0% of AECO prices for the three and nine months ended September 30, 2010, respectively. Differences between corporate and benchmark prices can be a result of quality (higher or lower API, higher or lower heat content), sour content, NGLs included in reporting, and various other factors. Crocotta's differences are mainly the result of lower priced NGLs included in oil price reporting and higher heat content natural gas production that is priced higher than AECO reference prices. Crocotta's average oil and NGLs price for the three months ended September 30, 2010 was down significantly from prior periods as compared to the Edmonton Par price (Q2 2010 - 80.7%; Q1 2010 - 89.0%). The decrease is the result of an increase in the percentage of NGLs volumes produced, which are priced lower than the benchmark oil price. For the three months ended September 30, 2010, NGLs production was 61% of total oil and NGLs production, compared to 56% for Q2 2010 and 45% for Q1 2010.Future prices received from the sale of the products may fluctuate as a result of market factors. Other than noted below, the Company did not hedge any of its oil, NGLs or natural gas production in 2010. Beginning January 1, 2010, the Company entered into hedges in the form of monthly settled puts ("Floors") as detailed below.Product Period Production Floor Price----------------------------------------------------------------------------Oil January 2010 - December 2010 1,000 bbls/d WTI CDN $50.00/bblGas January 2010 - December 2010 10.0 mmcf/d AECO CDN $4.00/mcf--------------------------------------------------------------------------------------------------------------------------------------------------------For the three months ended September 30, 2010, the realized loss on the risk management contracts was $0.1 million and the unrealized gain on the risk management contracts was $0.5 million. Year-to-date, the realized loss on the risk management contracts was $0.6 million and the unrealized gain on the risk management contracts was $1.1 million. The fair value of the risk management contracts at September 30, 2010 was an asset of $0.1 million. Three Months Ended Nine Months EndedRoyalties September 30 September 30($000s) 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Oil and NGLs 1,167 1,984 (41) 3,802 4,097 (7)Natural gas 6 101 (94) 782 311 151----------------------------------------------------------------------------Total royalties 1,173 2,085 (44) 4,584 4,408 4--------------------------------------------------------------------------------------------------------------------------------------------------------Average Royalty Rate (% of sales)----------------------------------------------------------------------------Oil and NGLs 25.6 35.5 (28) 28.2 32.7 (14)Natural gas 0.1 3.3 (97) 5.7 3.3 73----------------------------------------------------------------------------Average royalty rate 13.7 24.1 (43) 16.8 20.0 (16)--------------------------------------------------------------------------------------------------------------------------------------------------------The Company pays royalties to provincial governments (Crown), freeholders, which may be individuals or companies, and other oil and gas companies that own surface or mineral rights. Crown royalties are calculated on a sliding scale based on commodity prices and individual well production rates. Royalty rates can change due to commodity price fluctuations and changes in production volumes on a well-by-well basis, subject to a minimum and maximum rate restriction ascribed by the Crown.For the three months ended September 30, 2010, oil, NGLs, and natural gas royalties decreased 44% to $1.2 million compared to $2.1 million for the comparative period. For the nine months ended September 30, 2010, oil, NGLs, and natural gas royalties increased 4% to $4.6 million compared to $4.4 million for the nine months ended September 30, 2009. The decrease in royalties for the three months ended September 30, 2010 compared to the same period in 2009 was the result of a significant decrease in oil and NGLs royalties, which was due to the disposition of certain oil weighted assets in the first quarter of 2010. Natural gas royalties in Q3 2010 were virtually $nil as a result of a low natural gas commodity price environment combined with increases to the monthly capital cost and processing fee deductions. For the nine months ended September 30, 2010, natural gas royalties increased over prior period as a result of a significant increase in production and an increase in period-over-period commodity prices.The overall effective royalty rate was 13.7% for the three months ended September 30, 2010, compared to 24.1% for the quarter ended September 30, 2009. Year-to-date, the overall effective royalty rate was 16.8% in 2010 compared to 20.0% in 2009. The effective oil and NGLs royalty rate for the three and nine months ended September 30, 2010 decreased as a result of the disposition of certain oil weighted assets in the first quarter of 2010 that had higher associated royalty rates. The effective natural gas royalty rate for the nine months ended September 30, 2010 increased from the comparative period due to an increase in production and natural gas commodity prices. Three Months Ended Nine Months Ended September 30 September 30Production Expenses 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Oil and NGLs ($/bbl) 9.73 8.57 14 10.03 8.56 17Natural gas ($/mcf) 1.63 1.96 (17) 1.49 2.09 (29)----------------------------------------------------------------------------Total ($/boe) 9.75 10.56 (8) 9.28 11.06 (16)--------------------------------------------------------------------------------------------------------------------------------------------------------Per unit production expenses for the three months ended September 30, 2010 were $9.75/boe, down from $10.56/boe for the comparative period ended September 30, 2009. Year-to-date, per unit production expenses declined 16% to $9.28/boe in 2010 compared to $11.06/boe in 2009. Per unit production expenses of $9.75/boe in Q3 2010 were consistent with production expenses of $9.64/boe in Q2 2010.Oil and NGLs per unit production expenses increased for the three and nine months ended September 30, 2010 from the comparative periods in 2009 due to the disposition of certain oil weighted assets in the first quarter of 2010 that had lower associated production expenses. Natural gas per unit production expenses declined for the three and nine months ended September 30, 2010 from the comparative periods in 2009 as a result of the acquisition of Salvo and other oil and natural gas assets in 2009 which had lower associated operating costs. The natural gas assets acquired included ownership interests in two separate gas plants that generate processing and gathering income related to joint venture and third party production resulting in a reduction in production expenses. The Company continues to focus on opportunities that will improve operational efficiencies and reduce per boe production expenses to enhance netbacks. Three Months Ended Nine Months Ended September 30 September 30Transportation Expenses 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Oil and NGLs ($/bbl) 0.87 1.30 (33) 1.26 1.69 (25)Natural gas ($/mcf) 0.17 0.17 - 0.17 0.18 (6)----------------------------------------------------------------------------Total ($/boe) 0.96 1.12 (14) 1.11 1.29 (14)--------------------------------------------------------------------------------------------------------------------------------------------------------Transportation expenses are mainly third-party pipeline tariffs incurred to deliver the products to the purchasers at main hubs. For the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009, transportation expenses decreased 14% to $0.96/boe from $1.12/boe. Year-to-date, transportation expenses decreased to $1.11/boe in 2010 from $1.29/boe in 2009. Natural gas transportation expenses were consistent year-over-year, while oil and NGLs transportation expenses decreased significantly. The decrease in oil and NGLs transportation costs in 2010 from 2009 was due to an increase in the percentage of NGLs volumes produced in 2010 combined with a change in marketer and sales point for a significant portion of NGLs volumes produced. Three Months Ended Nine Months Ended September 30 September 30Operating Netback 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Oil and NGLs ($/bbl)Revenue 57.57 60.81 (5) 63.28 55.01 15Royalties 14.72 21.57 (32) 17.88 17.97 (1)Production expenses 9.73 8.57 14 10.03 8.56 17Transportation expenses 0.87 1.30 (33) 1.26 1.69 (25)----------------------------------------------------------------------------Operating netback 32.25 29.37 10 34.11 26.79 27------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Natural gas ($/mcf)Revenue 4.14 3.32 25 4.74 4.09 16Royalties 0.01 0.11 (91) 0.27 0.13 108Production expenses 1.63 1.96 (17) 1.49 2.09 (29)Transportation expenses 0.17 0.17 - 0.17 0.18 (6)----------------------------------------------------------------------------Operating netback 2.33 1.08 116 2.81 1.69 66------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Combined ($/boe) (6:1)Revenue 35.61 35.25 1 39.05 35.80 9Royalties 4.87 8.50 (43) 6.57 7.15 (8)Production expenses 9.75 10.56 (8) 9.28 11.06 (16)Transportation expenses 0.96 1.12 (14) 1.11 1.29 (14)----------------------------------------------------------------------------Operating netback 20.03 15.07 33 22.09 16.30 36--------------------------------------------------------------------------------------------------------------------------------------------------------During the third quarter of 2010, Crocotta generated an operating netback of $20.03/boe, up 33% from $15.07/boe for the third quarter of 2009. Year-to-date, the Company generated an operating netback of $22.09/boe in 2010, up 36% from $16.30/boe in 2009. The increase in the operating netback was mainly due to an increase in oil, NGLs, and natural gas commodity prices and decreases in royalties, production expenses, and transportation expenses.The following is a reconciliation of operating netback per boe to net loss per boe for the periods noted: Three Months Ended Nine Months Ended September 30 September 30($/boe) 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Operating netback 20.03 15.07 33 22.09 16.30 36Realized loss (gain) on risk management contracts 0.27 (0.02) 1,450 0.93 (0.01) 9,400Unrealized loss (gain) on risk management contracts (1.95) 3.38 158 (1.60) 1.35 219General and administrative expenses 3.25 4.10 (21) 3.62 5.46 (34)Interest expense 2.89 3.85 (25) 3.21 2.17 48Depletion, depreciation, and accretion 25.85 23.68 9 26.07 28.34 (8)Stock-based compensation 1.17 1.08 8 1.18 1.21 (2)Future income tax recovery (1.17) (5.04) (77) (2.34) (5.31) (56)----------------------------------------------------------------------------Net loss (10.28) (15.96) (36) (8.98) (16.91) (47)--------------------------------------------------------------------------------------------------------------------------------------------------------General and Administrative Three Months Ended Nine Months Ended Expenses September 30 September 30($000s) 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------G&A expenses (gross) 1,096 1,261 (13) 3,608 4,123 (12)G&A capitalized (114) (169) (33) (434) (567) (23)G&A recoveries (199) (85) 134 (645) (193) 234----------------------------------------------------------------------------G&A expenses (net) 783 1,007 (22) 2,529 3,363 (25)----------------------------------------------------------------------------G&A expenses ($/boe) 3.25 4.10 (21) 3.62 5.46 (34)--------------------------------------------------------------------------------------------------------------------------------------------------------General and administrative expenses ("G&A") decreased to $3.25/boe for the third quarter of 2010 compared to $4.10/boe for the quarter ended September 30, 2009. Year-to-date, G&A expenses decreased 34% to $3.62/boe in 2010 from $5.46/boe in 2009. The decrease per boe was due to an increase in production combined with an increase in G&A recoveries and a decrease in employment costs. Three Months Ended Nine Months EndedInterest September 30 September 30($000s) 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Interest expense 693 946 (27) 2,333 1,372 70Interest income 3 - (100) (90) (33) 173----------------------------------------------------------------------------Net interest expense 696 946 (26) 2,243 1,339 68----------------------------------------------------------------------------Interest expense ($/boe) 2.89 3.85 (25) 3.21 2.17 48--------------------------------------------------------------------------------------------------------------------------------------------------------Interest expense amounts in the first nine months of 2010 relate mainly to interest incurred on amounts drawn from the Company's credit facility. Interest expense also includes interest incurred on a secured bridge facility acquired in conjunction with the acquisition of Salvo in August 2009, which was repaid in full during the first quarter of 2010. Quarter-over-quarter, interest expense decreased as a result of the repayment of the secured bridge facility during 2010. Year-to-date, the increase in interest expense correlates to the increase in amounts drawn on the revolving credit facility in 2010 compared to 2009. Three Months Ended Nine Months EndedDepletion, Depreciation September 30 September 30 and Accretion 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------DD&A ($000s) 6,224 5,811 7 18,193 17,471 4DD&A ($/boe) 25.85 23.68 9 26.07 28.34 (8)--------------------------------------------------------------------------------------------------------------------------------------------------------Depletion, depreciation and accretion ("DD&A") increased 9% to $25.85/boe for the quarter ended September 30, 2010 compared to $23.68/boe for the quarter ended September 30, 2009. Year-to-date, DD&A decreased 8% to $26.07/boe in 2010 from $28.34/boe in 2009 as a result of an increase in production. The provision for DD&A for the three and nine months ended September 30, 2010 includes $0.2 million (2009 - $0.1 million) and $0.5 million (2009 - $0.3 million), respectively, for accretion of asset retirement obligations. Three Months Ended Nine Months Ended September 30 September 30Stock-based Compensation 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Stock-based compensation ($000s) 282 266 6 825 744 11Stock-based compensation ($/boe) 1.17 1.08 8 1.18 1.21 (2)--------------------------------------------------------------------------------------------------------------------------------------------------------The Company grants stock options to officers, directors, employees and consultants and calculates the related stock-based compensation using the Black-Scholes option-pricing model. The Company recognizes the expense over the vesting period of the stock options. Stock-based compensation expense increased to $1.17/boe for the three months ended September 30, 2010 from $1.08/boe in the comparative period. Year-to-date, stock-based compensation decreased to $1.18/boe in 2010 from $1.21/boe in 2009. During the first nine months of 2010, the Company granted 0.2 million options (2009 - 3.0 million), 0.8 million options were forfeited (2009 - nil), and 0.1 million options were exercised (2009 - nil).TaxesAt September 30, 2010, the Company had approximately $217.6 million in effective tax pools, losses, and share issue costs. September 30, September 30, 2010 2009 % Change----------------------------------------------------------------------------($000s)Canadian oil and gas property expense (COGPE) 26,004 51,563 (50)Canadian development expense (CDE) 46,944 45,704 3Canadian exploration expense (CEE) 83,960 83,859 -Undepreciated capital costs (UCC) 30,953 40,704 (24)Non-capital losses carried forward 33,199 27,478 21Capital losses carried forward 1,796 1,796 -Share issue costs 759 2,002 (62)Valuation allowance (5,996) (7,121) (16)----------------------------------------------------------------------------Total pools, losses, and share issue costs 217,619 245,985 (12)--------------------------------------------------------------------------------------------------------------------------------------------------------Funds from OperationsFunds from operations for the three months ended September 30, 2010 was $3.3 million ($0.05 per diluted share) compared to $1.8 million ($0.03 per diluted share) for the three months ended September 30, 2009. Year-to-date, funds from operations was $10.0 million ($0.15 per diluted share) in 2010 compared to $5.4 million ($0.11 per diluted share) in 2009. The increase was a result of higher production and higher oil, NGLs, and natural gas commodity prices in the first nine months of 2010 compared to the first nine months of 2009.The following is a reconciliation of funds from operations to cash flow from operating activities for the periods noted: Three Months Ended Nine Months Ended September 30 September 30 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Funds from operations (non-GAAP) 3,279 1,752 87 9,996 5,353 87Asset retirement expenditures (308) (45) 584 (664) (45) 1,376Change in non-cash working capital 263 1,381 (81) (499) 1,315 (138)----------------------------------------------------------------------------Cash flow from operating activities (GAAP) 3,234 3,088 5 8,833 6,623 33--------------------------------------------------------------------------------------------------------------------------------------------------------Net LossThe Company had a net loss of $2.5 million ($0.04 per diluted share) for the three months ended September 30, 2010 compared to a net loss of $3.9 million ($0.06 per diluted share) for the three months ended September 30, 2009. Year-to-date, the Company had a net loss of $6.3 million ($0.10 per diluted share) in 2010 compared to a net loss of $10.4 million ($0.22 per diluted share) in 2009. The decrease in the net loss was mainly a result of higher production and higher oil, NGLs, and natural gas commodity prices in the first nine months of 2010 compared to the first nine months of 2009.Capital ExpendituresFor the three months ended September 30, 2010, the Company had net capital expenditures of $1.3 million compared to $84.1 million for the three months ended September 30, 2009. For the nine months ended September 30, 2010, the Company had net capital dispositions of $8.0 million compared to net capital expenditures of $96.6 million for the nine months ended September 30, 2009. Three Months Ended Nine Months Ended September 30 September 30($000s) 2010 2009 % Change 2010 2009 % Change----------------------------------------------------------------------------Land 472 (73) 747 1,569 785 100Drilling,completions, and workovers 2,015 303 565 8,054 6,804 18Equipment 31 11 182 3,699 2,361 57Geological and geophysical 183 250 (27) 824 785 5Other - 1 (100) - 20 (100)----------------------------------------------------------------------------Total exploration and development 2,701 492 449 14,146 10,755 32Corporate acquisition - 84,315 (100) - 84,315 (100)Property acquisitions - - - - 2,442 (100)Property dispositions (1,400) (696) 101 (22,098) (866) 2,452----------------------------------------------------------------------------Net property acquisitions (dispositions) (1,400) (696) 101 (22,098) 1,576 1,502----------------------------------------------------------------------------Total capital expenditures 1,301 84,111 (98) (7,952) 96,646 (108)--------------------------------------------------------------------------------------------------------------------------------------------------------During the first nine months of 2010, Crocotta drilled 6 (3.3 net) wells, which resulted in 2 (0.6 net) oil wells, 2 (1.3 net) natural gas wells, and 2 (1.4 net) wells anticipated to be completed in Q4 2010.During the first nine months of 2010, the Company sold certain non-core oil and natural gas properties to four unrelated parties for cash proceeds of approximately $22.1 million. Production from these assets totaled approximately 420 boe/d.Liquidity and Capital ResourcesThe Company had net debt of $53.3 million at September 30, 2010 compared to net debt of $70.7 million at December 31, 2009. The decrease of $17.4 million was mainly due to $22.1 million in property dispositions and funds from operations of $10.0 million, which were offset by $14.1 million used for the purchase and development of oil and natural gas properties and equipment and $0.7 million for asset retirement expenditures.At September 30, 2010, the Company had total credit facilities of $65.0 million, consisting of a $65.0 million revolving operating demand loan credit facility with a Canadian chartered bank. The demand loan credit facility bears interest at prime plus a range of 0.75% to 2.50% and is secured by a $235 million fixed and floating charge debenture on the assets of the Company. At September 30, 2010, $51.9 million (December 31, 2009 - $52.4 million) had been drawn on the demand loan credit facility.During the first nine months of 2010, the Company sold certain non-core oil and natural gas properties for approximately $22.1 million. The majority of the proceeds were used to retire the remaining balance on the secured bridge facility during the first quarter of 2010. The secured bridge facility was acquired in conjunction with the acquisition of Salvo in 2009.Subsequent to September 30, 2010, the Company sold certain oil and natural gas assets to an unrelated party for total consideration of $30.0 million, comprised of $28.0 million in cash and drilling credits and warrants with an estimated value of $2.0 million. Production from the assets was approximately 530 boe/d. Proceeds from the disposition has reduced net debt to approximately $27.0 million and the Company's revolving operating demand loan credit facility was adjusted to $55.0 million.The ongoing global economic conditions have continued to impact the liquidity in financial and capital markets, restrict access to financing, and cause significant volatility in commodity prices. Downward trends in commodity prices have resulted in the Company experiencing reduced operating netbacks and funds from operations. Although commodity prices improved during the first nine months of 2010 compared to the same period in 2009, continued pressure on commodity prices would result in the Company experiencing reduced operating netbacks and funds from operations in future periods. The Company has partially mitigated this risk through commodity price hedges on its 2010 production in the form of monthly settled puts ("Floors"). The sale of non-core properties during the latter half of 2009 and throughout 2010, the repayment of the secured bridge facility during the first quarter of 2010, and the availability of the undrawn portion of the Company's $65.0 million revolving operating demand loan credit facility has allowed the Company to strengthen its financial position on a go forward basis and focus capital spending on its two core areas. Crocotta's capital program is flexible and can be adjusted as needed based upon the economic environment. Crocotta has implemented adequate strategies to protect its business as much as possible in the current economic environment, including strategies to balance funds from operations, available credit limits, and capital spending. However, Crocotta is still exposed to the risks associated with the current economic situation. The Company will continue to monitor the possible impact on its business and strategy and will make adjustments as necessary.Contractual ObligationsThe following is a summary of the Company's contractual obligations andcommitments at September 30, 2010: Less than 1-3 After($000s) Total 1 year years 3 years----------------------------------------------------------------------------Revolving credit facility 51,939 51,939 - -Office leases 1,038 692 346 -Field equipment leases 228 227 1 -Firm transportation agreements 904 453 451 -Capital processing agreements 500 - - 500----------------------------------------------------------------------------Total contractual obligations 54,609 53,311 798 500--------------------------------------------------------------------------------------------------------------------------------------------------------Outstanding Share DataThe Company is authorized to issue an unlimited number of voting common shares, an unlimited number of non-voting common shares, and Class A and Class B preferred shares, issuable in series. The voting common shares of the Company commenced trading on the TSX on October 17, 2007 under the symbol "CTA". The following table summarizes the common shares outstanding and the number of shares exercisable into common shares from options, warrants, and other instruments:(000s) September 30, 2010 November 8, 2010----------------------------------------------------------------------------Voting common shares 65,142 65,142Options 5,473 6,483Warrants 3,604 3,604----------------------------------------------------------------------------Total 74,219 75,229--------------------------------------------------------------------------------------------------------------------------------------------------------Summary of Quarterly Results Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 2010 2010 2010 2009 2009 2009 2009 2008----------------------------------------------------------------------------Number of producing days 92 91 90 92 92 91 90 92($000s, except per share amounts)----------------------------------------------------------------------------Oil and natural gas sales 8,574 7,720 10,962 12,130 8,649 6,358 7,062 8,729Funds from operations 3,279 2,597 4,120 3,972 1,752 1,884 1,717 3,463 per share - basic and diluted 0.05 0.04 0.06 0.06 0.03 0.04 0.04 0.09Net (loss) before extraordinary items (2,477) (2,935) (862) (4,155) (3,919) (3,193) (3,305) (2,511)per share - basic and diluted (0.04) (0.05) (0.01) (0.06) (0.06) (0.07) (0.08) (0.07)Net earnings (loss) (2,477) (2,935) (862) 3,276 (3,919) (3,193) (3,305) (2,511)per share - basic and diluted (0.04) (0.05) (0.01) 0.05 (0.06) (0.07) (0.08) (0.07)--------------------------------------------------------------------------------------------------------------------------------------------------------Oil and natural gas sales and funds from operations increased in Q3 2010 from Q2 2010 as a result of an increase in production. Oil and natural gas sales and funds from operations remained lower in Q3 2010 compared to Q1 2010 and Q4 2009, which experienced higher commodity prices when compared to the current quarter. Overall, results from the previous quarters were consistent from period to period, with fluctuations mainly the result of changes in production levels and commodity prices.Critical Accounting PoliciesManagement is required to make judgments, assumptions, and estimates in the application of generally accepted accounting principles that have a significant impact on the financial results of the Company. By their nature, these estimates are subject to change and the effect on the financial statements of changes in such estimates in future periods could be significant. The following summarizes the accounting policies that are critical to determining the Company's financial results.Full Cost Accounting - The Company follows the full cost method of accounting whereby all costs related to the acquisition of, exploration for, and development of oil and natural gas reserves are capitalized and charged against earnings. These costs, together with the estimated future costs to be incurred in developing proved reserves, are depleted or depreciated using the unit-of-production method based on the proved reserves before royalties as estimated by independent petroleum engineers. The costs of undeveloped properties are excluded from the costs subject to depletion and depreciation until it is determined whether proved reserves are attributable to the properties or impairment occurs. Reserve estimates can have a significant impact on earnings, as they are a key component in the calculation of depletion. A downward revision to the reserve estimate could result in higher depletion and thus lower net earnings. In addition, estimated reserves are also used in the calculation of the impairment (ceiling) test. Oil and natural gas properties are evaluated each reporting period through an impairment test to determine the recoverability of capitalized costs. The carrying amount is assessed as recoverable when the sum of the undiscounted cash flows expected from proved reserves plus the cost of unproved interests, net of impairments, exceeds the carrying amount. When the carrying amount is assessed not to be recoverable, an impairment loss is recognized to the extent that the carrying amount exceeds the sum of the discounted cash flows from proved and probable reserves plus the cost of unproved interests, net of impairments. The cash flows are estimated using expected future prices and costs and are discounted using a risk-free interest rate.Proceeds from the sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would result in a change in the depletion rate of 20% or more.Oil and Natural Gas Reserves - The Company's oil and natural gas reserves are evaluated and reported on by independent petroleum engineers. The estimates of reserves is a very subjective process as forecasts are based on engineering data, projected future rates of production, estimated future commodity prices and the timing of future expenditures, which are all subject to uncertainty and interpretation.Asset Retirement Obligations - The Company is required to provide for future abandonment and site restoration costs. These costs are estimated based on existing laws, contracts or other policies. The obligations are initially measured at fair value and subsequently adjusted each reporting period for the passage of time, with the accretion charged to earnings, and for revisions to the estimated future cash flows. The asset retirement cost is capitalized to oil and natural gas properties and equipment and amortized into earnings on a basis consistent with depletion and depreciation. The estimate of future abandonment and site restoration costs involves estimates relating to the timing of abandonment, the economic life of the asset and the costs associated with abandonment and site restoration which are all subject to uncertainty and interpretation.Recent Accounting PronouncementsBusiness CombinationsThe CICA issued Handbook Section 1582, Business Combinations, which replaces the previous business combinations standard. Under this guidance, the purchase price used in a business combination is based on the fair value of shares exchanged at the market price at acquisition date. Under the current standard, the purchase price used is based on the market price of shares for a reasonable period before and after the date the acquisition is agreed upon and announced. In addition, the guidance generally requires all acquisition costs to be expensed. Current standards allow for the capitalization of these costs as part of the purchase price. This new Section also addresses contingent liabilities, which will be required to be recognized at fair value on acquisition, and subsequently re-measured at each reporting period until settled. Currently, standards require only contingent liabilities that are payable to be recognized. The new guidance requires negative goodwill to be recognized in earnings rather than the current standard of deducting from non-current assets in the purchase price allocation. This standard applies prospectively to business combinations on or after January 1, 2011 with earlier application permitted. The Company is currently assessing the impact of the standard on potential future business combinations.International Financial Reporting Standards (IFRS)The Canadian Accounting Standards Board has confirmed that the use of IFRS will be required in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace current Canadian GAAP. The Company will be required to begin reporting under IFRS effective January 1, 2011 and will be required to provide information following IFRS for the comparative period. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policies which must be addressed.The Company has completed the diagnostic assessment phase of IFRS by comparing the differences between Canadian GAAP and IFRS. This assessment has provided insight into what are anticipated to be the most significant differences applicable to the Company. The Company is currently performing an in-depth review of the significant differences, identified during the preliminary assessment, in order to identify all specific Canadian GAAP and IFRS differences and select ongoing IFRS policies. The Company's external auditors have been and will continue to be involved throughout the process to ensure the Company's policies are in accordance with IFRS. The Company has determined that accounting for property, plant and equipment, impairment testing, asset retirement obligations, business combinations, stock-based compensation, and income taxes will be impacted by the conversion to IFRS. The impact of IFRS on the Company's consolidated financial statements is not reasonably determinable at this time. The Company plans to maintain both Canadian GAAP and IFRS compliant financial statements in 2010.In July 2009 an amendment to IFRS 1 First Time Adoption of International Reporting Standards was issued that applies to oil and gas assets. The amendment allows an entity that used full cost accounting under its previous GAAP to elect to measure oil and gas assets, including exploration and evaluation assets and development and production assets, at values determined under their previous GAAP with development and production assets being allocated pro rata values using reserve volumes or reserve values as of the date of adoption, providing that all assets are tested for impairment on adoption. The Company expects that it will use this exemption.Risk AssessmentThe acquisition, exploration, and development of oil and natural gas properties involves many risks common to all participants in the oil and natural gas industry. Crocotta's exploration and development activities are subject to various business risks such as unstable commodity prices, interest rate and foreign exchange fluctuations, the uncertainty of replacing production and reserves on an economic basis, government regulations, taxes and safety and environmental concerns. While the management of Crocotta realizes these risks cannot be eliminated, they are committed to monitoring and mitigating these risks.Reserves and Reserve ReplacementThe recovery and reserve estimates on Crocotta's properties are estimates only and the actual reserves may be materially different from that estimated. The estimates of reserve values are based on a number of variables including price forecasts, projected production volumes and future production and capital costs. All of these factors may cause estimates to vary from actual results.Crocotta's future oil and natural gas reserves, production, and funds from operations to be derived therefrom are highly dependent on Crocotta successfully acquiring or discovering new reserves. Without the continual addition of new reserves, any existing reserves Crocotta may have at any particular time and the production therefrom will decline over time as such existing reserves are exploited. A future increase in Crocotta's reserves will depend on its abilities to acquire suitable prospects or properties and discover new reserves.To mitigate this risk, Crocotta has assembled a team of experienced technical professionals who have expertise operating and exploring in areas which Crocotta has identified as being the most prospective for increasing Crocotta's reserves on an economic basis. To further mitigate reserve replacement risk, Crocotta has targeted a majority of its prospects in areas which have multi-zone potential, year-round access and lower drilling costs and employs advanced geological and geophysical techniques to increase the likelihood of finding additional reserves.Operational RisksCrocotta's operations are subject to the risks normally incidental to the operation and development of oil and natural gas properties and the drilling of oil and natural gas wells. Continuing production from a property, and to some extent the marketing of production therefrom, are largely dependent upon the ability of the operator of the property.Market riskMarket risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of foreign currency risk, interest rate risk, and other price risk, such as commodity price risk. The objective of market risk management is to manage and control market price exposures within acceptable limits, while maximizing returns.Foreign exchange riskThe prices received by the Company for the production of crude oil, natural gas, and NGLs are primarily determined in reference to U.S. dollars, but are settled with the Company in Canadian dollars. The Company's cash flow from commodity sales will therefore be impacted by fluctuations in foreign exchange rates. The Company currently does not have any foreign exchange contracts in place.Interest rate riskThe Company is exposed to interest rate risk as it borrows funds at floating interest rates. In addition, the Company may at times issue shares on a flow-through basis. This results in the Company being exposed to interest rate risk to the Canada Revenue Agency for interest on unexpended funds on the Company's flow-through share obligations. The Company currently does not use interest rate hedges or fixed interest rate contracts to manage the Company's exposure to interest rate fluctuations.Commodity price riskThe Company's oil, natural gas, and NGLs production is marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. The Company's cash flow from product sales will therefore be impacted by fluctuations in commodity prices. From time to time the Company may attempt to mitigate commodity price risk through the use of financial derivatives. Commencing January 2010, the Company entered into commodity price hedges in the form of monthly settled puts ("Floors"), as previously outlined.Safety and Environmental RisksThe oil and natural gas business is subject to extensive regulation pursuant to various municipal, provincial, national, and international conventions 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. Crocotta is committed to meeting and exceeding its environmental and safety responsibilities. Crocotta has implemented an environmental and safety policy that is designed, at a minimum, to comply with current governmental regulations set for the oil and natural gas industry. Changes to governmental regulations are monitored to ensure compliance. Environmental reviews are completed as part of the due diligence process when evaluating acquisitions. Environmental and safety updates are presented and discussed at each Board of Directors meeting. Crocotta maintains adequate insurance commensurate with industry standards to cover reasonable risks and potential liabilities associated with its activities as well as insurance coverage for officers and directors executing their corporate duties. To the knowledge of management, there are no legal proceedings to which Crocotta is a party or of which any of its property is the subject matter, nor are any such proceedings known to Crocotta to be contemplated.Disclosure Controls and Procedures and Internal Controls over Financial ReportingThe Company's President and Chief Executive Officer ("CEO") and Vice President Finance and Chief Financial Officer ("CFO") are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting as defined in Multilateral Instrument 52-109 of the Canadian Securities Administrators.Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Company evaluated its disclosure controls and procedures for the year ended December 31, 2009. The Company's CEO and CFO have concluded that, based on their evaluation, the Company's disclosure controls and procedures are effective to provide reasonable assurance that all material or potentially material information related to the Company is made known to them and is disclosed in a timely manner if required.Internal controls over financial reporting have been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Company's internal controls over financial reporting includes those policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and disposition of the assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of assets are being made only in accordance with authorizations of management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.The Company evaluated the effectiveness of our internal controls over financial reporting as of December 31, 2009. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. The Company's CEO and CFO have concluded that, based on their evaluation, the Company's internal controls over financial reporting were effective as of December 31, 2009. No material changes in the Company's internal controls over financial reporting were identified during the most recent reporting period that have materially affected, or are likely to material affect, the Company's internal controls over financial reporting.Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements, errors, or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met.Crocotta Energy Inc. Balance Sheets(unaudited) As at As at September 30, 2010 December 31, 2009----------------------------------------------------------------------------($000s) ----------------------------------------------------------------------------AssetsCurrent assets: Cash and cash equivalents - 1,854 Accounts receivable 6,158 5,042 Prepaid expenses and deposits 811 1,443 Risk management contracts (note 8(b)) 75 ----------------------------------------------------------------------------- 7,044 8,339Oil and natural gas properties and equipment (note 3) 220,281 245,562Future income tax asset 1,841 255---------------------------------------------------------------------------- 229,166 254,156--------------------------------------------------------------------------------------------------------------------------------------------------------Liabilities and Shareholders' EquityCurrent liabilities: Accounts payable and accrued liabilities 8,326 6,397 Revolving credit facility (note 4) 51,939 52,355 Secured bridge facility (note 4) - 20,243 Risk management contracts (note 8(b)) - 1,042---------------------------------------------------------------------------- 60,265 80,037Asset retirement obligations (note 5) 10,102 10,084Shareholders' equity: Capital stock (note 6) 166,758 166,632 Contributed surplus (note 6(c)) 4,626 3,714 Deficit (12,585) (6,311)---------------------------------------------------------------------------- 158,799 164,035Subsequent events (notes 4 and 9)---------------------------------------------------------------------------- 229,166 254,156--------------------------------------------------------------------------------------------------------------------------------------------------------See accompanying notes to the financial statementsApproved by the Board of Directors:Director, Rob Zakresky Director, Larry MoellerThe interim financial statements of the Company have not been reviewed bythe Company's auditors.Crocotta Energy Inc.Statements of Operations, Comprehensive Loss, and Retained Earnings(Deficit) Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009----------------------------------------------------------------------------($000s, except per share amounts)----------------------------------------------------------------------------Revenue: Oil and natural gas sales 8,574 8,649 27,256 22,069 Royalties (1,173) (2,085) (4,584) (4,408)---------------------------------------------------------------------------- 7,401 6,564 22,672 17,661 Realized gain (loss) on risk management contracts (note 8(b)) (66) 6 (649) 6 Unrealized gain (loss) on risk management contracts (note 8(b)) 469 (830) 1,117 (830)---------------------------------------------------------------------------- 7,804 5,740 23,140 16,837Expenses: Production 2,347 2,590 6,480 6,818 Transportation 230 275 775 794 General and administrative 783 1,007 2,529 3,363 Interest 696 946 2,243 1,339 Depletion, depreciation and accretion 6,224 5,811 18,193 17,471 Stock-based compensation 282 266 825 744---------------------------------------------------------------------------- 10,562 10,895 31,045 30,529----------------------------------------------------------------------------Loss before income taxes (2,758) (5,155) (7,905) (13,692)Income Taxes: Future income tax recovery (281) (1,236) (1,631) (3,275)----------------------------------------------------------------------------Net loss and comprehensive loss (2,477) (3,919) (6,274) (10,417)Retained earnings (deficit), beginning of period (10,108) (5,668) (6,311) 830----------------------------------------------------------------------------Deficit, end of period (12,585) (9,587) (12,585) (9,587)--------------------------------------------------------------------------------------------------------------------------------------------------------Net loss per share: Basic and diluted (0.04) (0.06) (0.10) (0.22)--------------------------------------------------------------------------------------------------------------------------------------------------------See accompanying notes to the financial statementsCrocotta Energy Inc. Statements of Cash Flows Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009----------------------------------------------------------------------------($000s) ----------------------------------------------------------------------------Cash provided by (used in):Operating: Net loss (2,477) (3,919) (6,274) (10,417) Items not affecting cash: Depletion, depreciation and accretion 6,224 5,811 18,193 17,471 Stock-based compensation 282 266 825 744 Unrealized loss (gain) on risk management contracts (note 8(b)) (469) 830 (1,117) 830 Future income tax recovery (281) (1,236) (1,631) (3,275)---------------------------------------------------------------------------- 3,279 1,752 9,996 5,353Asset retirement expenditures (308) (45) (664) (45)Net change in non-cash working capital 263 1,381 (499) 1,315---------------------------------------------------------------------------- 3,234 3,088 8,833 6,623----------------------------------------------------------------------------Financing: Issuance of capital stock 10 - 75 - Share issue costs - (34) - (34) Revolving credit facility (1,431) (2,488) (416) 12,955 Secured bridge facility - (357) (20,243) (357) Capital lease payments - (60) - (175)---------------------------------------------------------------------------- (1,421) (2,939) (20,584) 12,389--------------------------------------------------------------------------------------------------------------------------------------------------------Investing: Purchase and development of oil and natural gas properties and equipment (2,701) (492) (14,146) (13,197) Disposition of oil and natural gas properties and equipment (note 2) 1,400 696 22,098 866 Business combinations - (408) - (408) Net change in non-cash investing working capital (876) 499 1,945 (5,829)---------------------------------------------------------------------------- (2,177) 295 9,897 (18,568)--------------------------------------------------------------------------------------------------------------------------------------------------------Change in cash and cash equivalents (364) 444 (1,854) 444Cash and cash equivalents, beginning of period 364 - 1,854 -----------------------------------------------------------------------------Cash and cash equivalents, end of period - 444 - 444--------------------------------------------------------------------------------------------------------------------------------------------------------See accompanying notes to the financial statementsCrocotta Energy Inc.Notes to the Financial StatementsThree and Nine Months Ended September 30, 2010(Tabular amounts in 000s, unless otherwise stated)Crocotta Energy Inc. ("Crocotta" or the "Company") is an oil and natural gas company actively engaged in the acquisition, development, exploration, and production of oil and natural gas reserves in Western Canada. On November 15, 2006, Crocotta commenced active oil and natural gas operations with the acquisition of certain oil and natural gas properties. Crocotta commenced trading on the Toronto Stock Exchange ("TSX") on October 17, 2007 under the symbol "CTA".1. SIGNIFICANT ACCOUNTING POLICIESa) Basis of presentationThe interim financial statements of Crocotta have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). The interim financial statements have been prepared following the same accounting policies and methods of computation as the audited consolidated financial statements for the year ended December 31, 2009. The disclosures provided below are incremental to those included with the audited annual consolidated financial statements. The interim financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2009.b) Recent accounting pronouncementsBusiness CombinationsThe CICA issued Handbook Section 1582, Business Combinations, which replaces the previous business combinations standard. Under this guidance, the purchase price used in a business combination is based on the fair value of shares exchanged at the market price at acquisition date. Under the current standard, the purchase price used is based on the market price of shares for a reasonable period before and after the date the acquisition is agreed upon and announced. In addition, the guidance generally requires all acquisition costs to be expensed. Current standards allow for the capitalization of these costs as part of the purchase price. This new Section also addresses contingent liabilities, which will be required to be recognized at fair value on acquisition, and subsequently re-measured at each reporting period until settled. Currently, standards require only contingent liabilities that are payable to be recognized. The new guidance requires negative goodwill to be recognized in earnings rather than the current standard of deducting from non-current assets in the purchase price allocation. This standard applies prospectively to business combinations on or after January 1, 2011 with earlier application permitted. The Company is currently assessing the impact of the standard on potential future business combinations.International Financial Reporting Standards (IFRS)The Canadian Accounting Standards Board has confirmed that the use of IFRS will be required in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace current Canadian GAAP. The Company will be required to begin reporting under IFRS effective January 1, 2011 and will be required to provide information following IFRS for the comparative period.2. PROPERTY DISPOSITIONSDuring the nine months ended September 30, 2010, the Company sold certain oil and natural gas properties to four unrelated parties for cash proceeds of approximately $22.1 million. The following table details the allocation of the proceeds on disposition:Net assets disposed Amount---------------------------------------------------------------------------- Oil and natural gas properties 22,572 Asset retirement obligation (474)---------------------------------------------------------------------------- 22,098--------------------------------------------------------------------------------------------------------------------------------------------------------3. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT September December 30, 2010 31, 2009----------------------------------------------------------------------------Oil and natural gas properties 294,473 302,070Office and other equipment 347 347---------------------------------------------------------------------------- 294,820 302,417Accumulated depletion and depreciation (74,539) (56,855)----------------------------------------------------------------------------Net book value 220,281 245,562--------------------------------------------------------------------------------------------------------------------------------------------------------As at September 30, 2010, the cost of oil and natural gas properties includes approximately $34.1 million (December 31, 2009 - $36.4 million) relating to properties from which there is no production and no reserves assigned and which have been excluded from costs subject to depletion and depreciation. During the three and nine months ended September 30, 2010, the provision for depletion, depreciation and accretion includes $0.2 million (2009 - $0.1 million) and $0.5 million (2009 - $0.3 million), respectively, for accretion of asset retirement obligations. During the three and nine months ended September 30, 2010, the Company capitalized $0.1 million (2009 - $0.2 million) and $0.4 million (2009 - $0.6 million), respectively, of general and administrative costs and $0.1 million (2009 - $0.1 million) and $0.1 million (2009 - $0.2 million), respectively, of stock-based compensation.The Company performed an impairment test calculation at September 30, 2010 to assess the recoverable value of the oil and natural gas properties. The oil and natural gas future prices are based on October 1, 2010 commodity price forecasts of the Company's independent reserve evaluators. These prices have been adjusted for commodity price differentials specific to the Company. The following table summarizes the benchmark prices used in the impairment test calculation. Based on these assumptions, there was no impairment at September 30, 2010. Foreign Edmonton Light WTI Oil Exchange Crude Oil AECO GasYear ($US/bbl) Rate ($Cdn/bbl) ($Cdn/mmbtu)--------------------------------------------------------------------------------------------------------------------------------------------------------2010 80.00 0.950 83.26 4.002011 83.00 0.950 86.42 4.372012 86.00 0.950 89.58 5.052013 89.00 0.950 92.74 5.742014 92.00 0.950 95.90 6.322015 93.84 0.950 97.84 6.792016 95.72 0.950 99.81 7.162017 97.64 0.950 101.83 7.472018 99.59 0.950 103.88 7.632019 101.58 0.950 105.98 7.81EscalateThereafter 2.0% per year 2.0% per year 2.0% per year--------------------------------------------------------------------------------------------------------------------------------------------------------4. CREDIT FACILITIESAt September 30, 2010, the Company had total credit facilities of $65.0 million, consisting of a $65.0 million revolving operating demand loan credit facility with a Canadian chartered bank. The demand loan credit facility bears interest at prime plus a range of 0.75% to 2.50% and is secured by a $235 million fixed and floating charge debenture on the assets of the Company. At September 30, 2010, $51.9 million (December 31, 2009 - $52.4 million) had been drawn on the demand loan credit facility. In conjunction with the disposition of certain oil and natural gas assets subsequent to September 30, 2010 (note 9), the demand loan credit facility was reduced to $55.0 million. The next review of the demand loan credit facility by the bank is scheduled on or before March 31, 2011.During the first nine months of 2010, the Company sold certain non-core oil and natural gas properties for approximately $22.1 million (note 2). The majority of the proceeds were used to retire the remaining balance on the secured bridge facility during the first quarter of 2010. The secured bridge facility was acquired in conjunction with the acquisition of Salvo Energy Corporation in August 2009.5. ASSET RETIREMENT OBLIGATIONSThe Company's asset retirement obligations result from net ownership interests in oil and natural gas properties including well sites, gathering systems, and processing facilities. The Company estimates the total undiscounted amount of cash flows (adjusted for inflation at 2% per year) required to settle its asset retirement obligations is approximately $26.7 million which is estimated to be incurred between 2010 and 2039. A credit-adjusted risk-free rate of 7% was used to calculate the fair value of the asset retirement obligations.A reconciliation of the asset retirement obligations is provided below: Nine Months Year Ended Ended September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------Balance, beginning of period 10,084 4,158Liabilities acquired upon business combination - 6,531Liabilities incurred in period 94 135Liabilities disposed through property dispositions (note 2) (474) (1,146)Liabilities settled in period (111) (62)Accretion expense 509 468--------------------------------------------------------------------------------------------------------------------------------------------------------Balance, end of period 10,102 10,084--------------------------------------------------------------------------------------------------------------------------------------------------------6. SHARE CAPITALa) AuthorizedUnlimited number of voting common shares.Unlimited number of non-voting common shares.Class A preferred shares, issuable in series.Class B preferred shares, issuable in series.b) Issued and outstanding Number Amount----------------------------------------------------------------------------Voting common sharesBalance at December 31, 2009 65,084 166,632 Exercise of stock options 58 126--------------------------------------------------------------------------------------------------------------------------------------------------------Balance at September 30, 2010 65,142 166,758--------------------------------------------------------------------------------------------------------------------------------------------------------c) Contributed surplus Nine Months Ended Year Ended September December 30, 2010 31, 2009----------------------------------------------------------------------------Balance, beginning of period 3,714 1,002 Stock-based compensation - expensed 825 2,403 Stock-based compensation - capitalized 138 309 Exercise of stock options (51) -----------------------------------------------------------------------------Balance, end of period 4,626 3,714--------------------------------------------------------------------------------------------------------------------------------------------------------d) WarrantsThe Company has an arrangement that allows warrants to be issued to directors, officers, and employees. The maximum number of common shares that may be issued, and that have been reserved for issuance under this arrangement, is 2.4 million. Warrants granted under this arrangement vest over three years and have exercise prices ranging from $3.75 per share to $6.75 per share. During the year ended December 31, 2007, the Company issued 2.4 million warrants under this arrangement. The fair value of the warrants granted under this arrangement at the date of issue was determined to be $nil using the minimum value method as they were issued prior to the Company becoming publicly traded. During 2009, approval was obtained to extend the expiry date of the warrants to December 23, 2012.On October 29, 2009, the Company issued an additional 1.2 million warrants at an exercise price of $1.40 per share in conjunction with a private placement share issuance.The Company had the following warrants outstanding at September 30, 2010: Exercisable Number Weighted at of Average September Warrants Price ($) 30, 2010 Expiry Date----------------------------------------------------------------------------Warrants - issued at $1.40 per share 1,200 1.40 1,200 October 29, 2012 - issued at $3.75 per share 747 3.75 747 December 23, 2012 - issued at $4.05 per share 21 4.05 21 December 23, 2012 - issued at $4.50 per share 781 4.50 781 December 23, 2012 - issued at $5.25 per share 54 5.25 54 December 23, 2012 - issued at $6.00 per share 747 6.00 747 December 23, 2012 - issued at $6.75 per share 54 6.75 54 December 23, 2012-------------------------------------------------------------------------------------------------------------------------------------------------------- 3,604 3.67 3,604--------------------------------------------------------------------------------------------------------------------------------------------------------e) Stock optionsThe Company has authorized and reserved for issuance 6.5 million common shares under a stock option plan enabling certain officers, directors, employees, and consultants to purchase common shares. The Company will not issue options exceeding 10% of the shares outstanding at the time of the option grants. Under the plan, the exercise price of each option equals the market price of the Company's shares on the date of the grant. The options vest over a period of 3 years and an option's maximum term is 5 years. As at September 30, 2010, 5.5 million options have been granted and are outstanding at prices ranging from $1.10 to $3.75 per share with expiry dates ranging from January 23, 2012 to April 22, 2015.The Company had the following stock options outstanding at September 30, 2010: Weighted Number of Average Options Price ($)----------------------------------------------------------------------------Balance at December 31, 2009 6,072 2.08 Granted 225 1.58 Exercised (58) 1.31 Forfeited (766) 2.19--------------------------------------------------------------------------------------------------------------------------------------------------------Balance at September 30, 2010 5,473 2.06--------------------------------------------------------------------------------------------------------------------------------------------------------Exercisable at September 30, 2010 2,961 2.43--------------------------------------------------------------------------------------------------------------------------------------------------------f) Stock-based compensationThe compensation cost charged to earnings during the three and nine months ended September 30, 2010 for the stock option plan was $0.3 million (2009 - $0.3 million) and $0.8 million (2009 - $0.7 million), respectively.The Company did not grant any options during the three months ended September 30, 2010 (2009 - 2.0 million). For the nine months ended September 30, 2010, the Company granted 0.2 million options (2009 - 3.0 million). The fair value of each option granted during the nine months ended September 30, 2010 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions: Nine Months Ended September 30, 2010----------------------------------------------------------------------------Fair value per option $ 0.83Risk-free rate 2.0%Expected life 4.0 yearsExpected volatility 73.1%Dividend yield ---------------------------------------------------------------------------------------------------------------------------------------------------------g) Per share informationThe weighted average number of shares outstanding for the determination of basic and diluted per share amounts are as follows: Three Months Nine Months Ended Ended September September 30, 2010 30, 2010----------------------------------------------------------------------------Basic 65,140 65,124Diluted 65,488 65,254--------------------------------------------------------------------------------------------------------------------------------------------------------7. CAPITAL DISCLOSURESThe Company's objectives when managing capital are to maintain a flexible capital structure, which optimizes the cost of capital at an acceptable risk, and to maintain investor, creditor, and market confidence to sustain future development of the business.The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Company considers its capital structure to include shareholders' equity and net debt (current liabilities, including the revolving credit facility and secured bridge facility and excluding the risk management contracts, less current assets). To maintain or adjust the capital structure, the Company may, from time to time, issue shares, raise debt, and/or adjust its capital spending to manage its current and projected debt levels. September December 30, 2010 31, 2009----------------------------------------------------------------------------Shareholders' equity 158,799 164,035Net debt 53,296 70,656--------------------------------------------------------------------------------------------------------------------------------------------------------In addition, management prepares annual, quarterly, and monthly budgets, which are updated depending on varying factors such as general market conditions and successful capital deployment.The Company's share capital is not subject to external restrictions; however, the Company's revolving operating demand loan credit facility includes a covenant requiring the Company to maintain a working capital ratio of not less than one-to-one. The working capital ratio, as defined by its creditor, is calculated as current assets plus any undrawn amounts available on its credit facilities less current liabilities excluding any current portion drawn on the credit facility. The Company was fully compliant with this covenant at September 30, 2010.There were no changes in the Company's approach to capital management from the previous year.8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENTThe Company is exposed to market risks related to the volatility of commodity prices, foreign exchange rates, and interest rates. The Company employs risk management strategies and policies to ensure that any exposure to risk is in compliance with the Company's business objectives and risk tolerance levels. Risk management is ultimately established by the Board of Directors and is implemented by management.a) Fair value of financial instrumentsThe Company's financial assets and financial liabilities are comprised of cash and cash equivalents, accounts receivable, prepaid expenses and deposits, accounts payable and accrued liabilities, risk management contracts, and amounts drawn on the revolving credit facility (note 4). The fair values of the Company's financial assets and financial liabilities approximate their carrying amount due to the short-term maturity of these instruments.b) Market riskMarket risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of foreign currency risk, interest rate risk, and other price risk, such as commodity price risk. The objective of market risk management is to manage and control market price exposures within acceptable limits, while maximizing returns.Foreign exchange riskThe prices received by the Company for the production of crude oil, natural gas, and NGLs are primarily determined in reference to U.S. dollars, but are settled with the Company in Canadian dollars. The Company's cash flow from commodity sales will therefore be impacted by fluctuations in foreign exchange rates. A $0.01 increase or decrease in the Canadian/U.S. dollar exchange rate would have impacted net earnings and other comprehensive income by approximately $0.1 million for the three months ended September 30, 2010 and $0.2 million for the nine months ended September 30, 2010.Interest rate riskThe Company is exposed to interest rate risk as it borrows funds at floating interest rates (note 4). In addition, the Company may at times issue shares on a flow-through basis. This results in the Company being exposed to interest rate risk to the Canada Revenue Agency for interest on unexpended funds on the Company's flow-through share obligations. The Company currently does not use interest rate hedges or fixed interest rate contracts to manage the Company's exposure to interest rate fluctuations. A 100 basis point increase or decrease in interest rates would have impacted net earnings and other comprehensive income by approximately $0.1 million for the three months ended September 30, 2010 and $0.4 million for the nine months ended September 30, 2010.Commodity price riskThe Company's oil, natural gas, and NGLs production is marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. The Company's cash flow from product sales will therefore be impacted by fluctuations in commodity prices. From time to time the Company may attempt to mitigate commodity price risk through the use of financial derivatives.At September 30, 2010, the Company had the following risk management contracts outstanding:Product Period Production Floor Price----------------------------------------------------------------------------Oil January 2010 - December 2010 1,000 bbls/d WTI CDN $50.00/bblGas January 2010 - December 2010 10.0 mmcf/d AECO CDN $4.00/mcf--------------------------------------------------------------------------------------------------------------------------------------------------------For the three months ended September 30, 2010, the realized loss on the risk management contracts was $0.1 million and the unrealized gain on the risk management contracts was $0.5 million. Year-to-date, the realized loss on the risk management contracts was $0.6 million and the unrealized gain on the risk management contracts was $1.1 million. The fair value of the risk management contracts at September 30, 2010 was an asset of $0.1 million. The fair value of the risk management contracts has been determined using information classified as level two. Level two valuations are based on inputs, including quoted forward prices for commodities, time value, and volatility factors, which can be substantially observed or corroborated in the marketplace.A $1.00/boe increase or decrease in commodity prices would have impacted net earnings and other comprehensive income by approximately $0.2 million for the three months ended September 30, 2010 and $0.4 million for the nine months ended September 30, 2010.c) Credit riskCredit risk represents the financial loss that the Company would suffer if the Company's counterparties to a financial instrument, in owing an amount to the Company, fail to meet or discharge their obligation to the Company. A substantial portion of the Company's accounts receivable and deposits are with customers and joint venture partners in the oil and natural gas industry and are subject to normal industry credit risks. The Company generally grants unsecured credit but routinely assesses the financial strength of its customers and joint venture partners.The Company sells the majority of its production to three petroleum and natural gas marketers and therefore is subject to concentration risk. Historically, the Company has not experienced any collection issues with its petroleum and natural gas marketers. Joint venture receivables are typically collected within one to three months of the joint venture invoice being issued to the partner. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval for significant capital expenditures prior to the expenditure being incurred. The Company does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however, in certain circumstances, the Company may cash call a partner in advance of expenditures being incurred.The maximum exposure to credit risk is represented by the carrying amount on the balance sheet. At September 30, 2010, there are no material financial assets that the Company considers impaired.d) Liquidity riskLiquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company's processes for managing liquidity risk include ensuring, to the extent possible, that it will have sufficient liquidity to meet its liabilities when they become due. The Company prepares annual, quarterly, and monthly capital expenditure budgets, which are monitored and updated as required, and requires authorizations for expenditures on projects to assist with the management of capital. In managing liquidity risk, the Company ensures that it has access to additional financing, including potential equity issuances and additional debt financing. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses.The following are the contractual maturities of financial liabilities at September 30, 2010: 1 to less Less than thanFinancial Liability 1 Year 2 Years Thereafter Total----------------------------------------------------------------------------Accounts payable and accrued liabilities 8,326 - - 8,326Revolving credit facility 51,939 - - 51,939---------------------------------------------------------------------------- 60,265 - - 60,265--------------------------------------------------------------------------------------------------------------------------------------------------------9. SUBSEQUENT EVENTSubsequent to September 30, 2010, the Company sold certain oil and natural gas assets to an unrelated party for total consideration of $30.0 million, comprised of $28.0 million in cash and drilling credits and warrants with an estimated value of $2.0 million. Production from the assets was approximately 530 boe/d. Proceeds from the disposition has reduced net debt to approximately $27.0 million and the Company's revolving operating demand loan credit facility was adjusted to $55.0 million (note 4).CORPORATE INFORMATIONOFFICERS AND DIRECTORSRobert J. Zakresky, CA BANKPresident, CEO & Director National Bank of Canada 2700, 530 - 8th Avenue SWNolan Chicoine, MPAcc, CA Calgary, Alberta T2P 3S8VP Finance & CFOTerry L. Trudeau, P.Eng.VP Operations & COO TRANSFER AGENT Valiant Trust CompanyWeldon Dueck, BSc., P.Eng. 310, 606 - 4th Street SWVP Business Development Calgary, Alberta T2P 1T1R.D. (Rick) Sereda, M.Sc., P.Geol.VP Exploration LEGAL COUNSELHelmut R. Eckert, P.Land Gowling Lafleur Henderson LLPVP Land 1400, 700 - 2nd Street SW Calgary, Alberta T2P 4V5Kevin KeithVP ProductionLarry G. Moeller, CA, CBV AUDITORSChairman of the Board KPMG LLP 2700, 205 - 5th Avenue SWDaryl H. Gilbert, P.Eng. Calgary, Alberta T2P 4B9DirectorDon CowieDirector INDEPENDENT ENGINEERS GLJ Petroleum Consultants Ltd.Brian Krausert 4100, 400 - 3rd Avenue SWDirector Calgary, Alberta T2P 4H2Gary W. BurnsDirectorDon D. Copeland, P.Eng.DirectorBrian BoulangerDirectorPatricia PhillipsDirectorFOR FURTHER INFORMATION PLEASE CONTACT: Robert J. ZakreskyCrocotta Energy Inc.President & CEO(403) 538-3736ORNolan ChicoineCrocotta Energy Inc.VP Finance & CFO(403) 538-3738ORSuite 700, 639 - 5th Avenue SWCrocotta Energy Inc.Calgary, Alberta T2P 0M9(403) 538-3737(403) 538-3735 (FAX)www.crocotta.ca