The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

News Sources

Take control of your investments with the latest investing news and analysis

Press release from Marketwire

Crocotta Energy Inc. Announces Q1 2012 Financial and Operating Results

Wednesday, May 09, 2012

Crocotta Energy Inc. Announces Q1 2012 Financial and Operating Results06:00 EDT Wednesday, May 09, 2012VANCOUVER, BRITISH COLUMBIA--(Marketwire - May 9, 2012) -CROCOTTA ENERGY INC. (TSX:CTA) is pleased to announce its financial and operating results for the three months ended March 31, 2012, including consolidated financial statements, notes to the consolidated financial statements, and Management's Discussion and Analysis. All dollar figures are Canadian dollars unless otherwise noted.HIGHLIGHTSIncreased production 17% to 6,752 boe/d in Q1 2012 from 5,771 boe/d in Q4 2011 Increased funds from operations 7% to $13.0 million in Q1 2012 from $12.1 million in Q4 2011 Decreased production expenses 27% to $5.18/boe in Q1 2012 from $7.05/boe in Q4 2011 Participated in two successful Cardium oil wells at Edson, AB and have identified up to 30 net locations offsetting these first two wells Successfully completed a horizontal Montney well in Northeast BC that tested at 14.0 mmcf/d Drilled an additional 3 (2.4 net) successful wells and 1 (0.6 net) well pending completion at Edson, AB Subsequent to March 31, 2012, increased bank credit facility to $100.0 million from $80.0 million FINANCIAL RESULTSThree Months Ended March 31($000s, except per share amounts)20122011% ChangeOil and natural gas sales20,1407,480169Funds from operations (1)12,9742,014544Per share - basic0.150.03400Per share - diluted0.140.03367Net loss(293)(4,449)(93)Per share - basic and diluted-(0.06)(100)Capital expenditures27,63918,17852Property dispositions-134100Net debt (2)42,58817,610142Common shares outstanding (000s)Weighted average - basic88,09571,59723Weighted average - diluted91,53073,09125End of period - basic88,09580,8749End of period - diluted100,25690,68011(1)Funds from operations and funds from operations per share do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Measures section in the MD&A for more details and the Funds from Operations section in the MD&A for a reconciliation from cash flow from operating activities. (2)Net debt includes current liabilities less current assets. Net debt does not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Measures section in the MD&A for more details.OPERATING RESULTSThree Months Ended March 3120122011% ChangeDaily productionOil and NGLs (bbls/d)2,277586289Natural gas (mcf/d)26,85210,124165Oil equivalent (boe/d)6,7522,274197RevenueOil and NGLs ($/bbl)69.3468.671Natural gas ($/mcf)2.364.23(44)Oil equivalent ($/boe)32.7836.55(10)RoyaltiesOil and NGLs ($/bbl)9.1919.76(53)Natural gas ($/mcf)0.070.27(74)Oil equivalent ($/boe)3.376.29(46)Production expensesOil and NGLs ($/bbl)4.8210.45(54)Natural gas ($/mcf)0.891.63(45)Oil equivalent ($/boe)5.189.95(48)Transportation expensesOil and NGLs ($/bbl)1.120.8729Natural gas ($/mcf)0.180.176Oil equivalent ($/boe)1.100.9812Operating netback (1)Oil and NGLs ($/bbl)54.2137.5944Natural gas ($/mcf)1.222.16(44)Oil equivalent ($/boe)23.1319.3320Depletion and depreciation ($/boe)(14.90)(14.80)1Asset impairment ($/boe)(4.40)(12.95)(66)General and administrative expenses ($/boe)(1.76)(8.12)(78)Share based compensation ($/boe)(1.56)(2.23)(30)Finance expenses ($/boe)(0.45)(2.32)(81)Loss on sale of assets ($/boe)-(0.65)(100)Deferred tax expense ($/boe)(0.53)-100Net loss ($/boe)(0.47)(21.74)(98)(1)Operating netback does not have any standardized meaning prescribed by IFRS 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 Q1 2012 and early Q2 2012, Crocotta has invested approximately $28 million on various capital projects which include the Bluesky and Cardium at Edson and the Montney at Dawson/Sunrise and continues to show strong production growth while maintaining financial discipline.Capital ProjectsCardiumIn Q1 2012, Crocotta participated in a second Cardium horizontal well at Edson (40% WI) that is currently producing approximately 560 boepd at 46% oil and liquids at the end of its first two weeks of production. This well is significantly above Crocotta's type curve for the area that forecasts an initial production rate of 300 boepd. Crocotta's first Cardium horizontal well at Edson is producing 410 boepd (41% oil and liquids) after almost 4 months of production.Crocotta has a contiguous block of 13.5 sections (avg 65% WI) that include the first 2 wells noted above and has plans to aggressively step-out drill to prove up the lands. During Q2 2012 and Q3 2012, Crocotta plans to drill 6 (3.3 net) wells to further prove up approximately 50 (32 net) unbooked Cardium locations on the Edson block. Crocotta also has over 50 sections of additional Cardium lands in the area of varying prospectivity. Pending continued success, Crocotta will continue to drill and test the productivity of additional Cardium trends on its lands.BlueskyIn Q1 2012, Crocotta completed an additional 3 (2.6 net) wells that continue to meet or exceed Crocotta's type curve for Bluesky wells. One (0.6 net) well is drilled and not completed and one well is currently drilling. Crocotta has a large inventory (over 40 net locations) that has been largely proved up over the last two years. MontneyCrocotta previously announced a Montney well at Dawson / Sunrise that tested approximately 14 mmcf/d plus 20 bbls/mmcf of natural gas liquids. Crocotta tied the well into a gathering system owned by a mid-stream entity but has opted not to produce it at this time due to high processing fees.Crocotta has hedged 10 mmcf/d of natural gas for 2013 (see below) and is proceeding with its plans to have its Montney gas on-stream by the end of 2012. Crocotta's Sunrise facility is currently capable of processing 10 mmcf/d and Crocotta will need to construct approximately 5 miles of pipelines and purchase a meter station to bring the gas on-stream at materially lower operating costs.Crocotta's decision to proceed with the additional infrastructure will allow the Company to quickly expand the project as natural gas prices increase. Crocotta has an inventory of over 75 (75.0 net) Montney locations in the Dawson/Sunrise area.ProductionProduction for Q1 2012 was reported at 6,752 boepd (66% gas; 34% light oil and natural gas liquids) with current production estimated at over 7,000 boepd.Crocotta's liquids composition includes approximately 47% light oil and condensate, 18% butane, and 35% propane. With the recent increased volatility between WTI and Edmonton par, Crocotta has tried to isolate as much of its condensate as possible to benefit from the higher condensate pricing. Crocotta estimates that its blend of oil and liquids will receive approximately 73% of WTI pricing for the rest of year after accounting for higher than historical differentials on light oil and propane. In 2011, Crocotta was receiving approximately 80% of WTI for its blend of oil and liquids.FinancialCrocotta estimates current net debt to be approximately $40 million compared to a bank credit facility of $100 million (recently increased from $80 million). As noted above, Crocotta has recently executed a natural gas hedge of 10 mmcf/d for 2013 to ensure certainty of cash flow from the Dawson/Sunrise Montney project and provide a quick payout of its additional capital costs. The natural gas hedge is for 10 mmcf/d at $2.71 per GJ for calendar 2013. Crocotta also executed a hedge for its 2012 liquids production to provide greater cash flow certainty to fund its capital projects. The 2012 hedge is for 800 bbls/d at $US WTI 104.38 for the period from May-December of 2012.Given Crocotta's low debt ratio at less than one times 2012 cash flow (based on current strip pricing) and available bank credit of approximately $60 million, the Company is in a strong financial position to react to opportunities. Such opportunities may include acquisitions, farm-ins or increased drilling activity.Crocotta will closely monitor pricing and cash flow and adjust capital expenditures as necessary to ensure net debt does not exceed normal ratios and leave substantial undrawn credit. That said, current productive capacity is well ahead of budget expectations and Crocotta is comfortable that it will be able to continue on its current growth path while still maintaining its strong balance sheet.MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")May 8, 2012The MD&A should be read in conjunction with the unaudited interim consolidated financial statements and related notes for the three months ended March 31, 2012 and the audited consolidated financial statements and related notes for the year ended December 31, 2011. The unaudited interim consolidated financial statements and financial data contained in the MD&A have been prepared in accordance with International Financial Reporting Standards ("IFRS") in Canadian currency (except where noted as being in another currency).DESCRIPTION OF BUSINESSCrocotta 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. The Company trades on the Toronto Stock Exchange under the symbol "CTA". FREQUENTLY RECURRING TERMSThe Company uses the following frequently recurring industry terms in the MD&A: "bbls" refers to barrels, "mcf" refers to thousand cubic feet, "GJ" refers to gigajoule, and "boe" refers to barrel of oil equivalent. Disclosure provided herein in respect of a 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 equivalent has been used for the calculation of boe amounts in the MD&A. This boe conversion rate 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 MD&A refers to certain financial measures that are not determined in accordance with IFRS (or "GAAP"). This MD&A 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 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 and depreciation, asset impairments, share based compensation, non-cash finance expenses, gains and losses on asset sales, and deferred income taxes) and excludes the change in non-cash working capital related to operating activities and expenditures on decommissioning obligations. 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 from 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 less current assets.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".Q1 2012 HIGHLIGHTSIncreased production 17% to 6,752 boe/d in Q1 2012 from 5,771 boe/d in Q4 2011 Increased funds from operations 7% to $13.0 million in Q1 2012 from $12.1 million in Q4 2011 Decreased production expenses 27% to $5.18/boe in Q1 2012 from $7.05/boe in Q4 2011 Participated in two successful Cardium oil wells at Edson, AB and have identified up to 30 net locations offsetting these first two wells Successfully completed a horizontal Montney well in Northeast BC that tested at 14.0 mmcf/d Drilled an additional 3 (2.4 net) successful wells and 1 (0.6 net) well pending completion at Edson, AB Subsequent to March 31, 2012, increased bank credit facility to $100.0 million from $80.0 million SUMMARY OF FINANCIAL RESULTSThree Months Ended March 31($000s, except per share amounts)20122011% ChangeOil and natural gas sales20,1407,480169Funds from operations12,9742,014544Per share - basic0.150.03400Per share - diluted0.140.03367Net loss(293)(4,449)(93)Per share - basic and diluted-(0.06)(100)Total assets254,405195,04430Total long-term liabilities19,79714,00541Net debt42,58817,610142The Company has experienced significant growth in oil and natural gas sales and funds from operations over the past year. Successful capital activity during the latter half of 2010 and throughout 2011, mainly at Edson, AB, resulted in a significant increase in production which, combined with higher oil and NGLs commodity prices, resulted in increased revenue and funds from operations.PRODUCTIONThree Months Ended March 3120122011% ChangeAverage Daily ProductionOil and NGLs (bbls/d)2,277586289Natural gas (mcf/d)26,85210,124165Combined (boe/d)6,7522,274197Daily production for the three months ended March 31, 2012 increased 197% to 6,752 boe/d compared to 2,274 boe/d for the comparative period in 2011. The significant increase in production was mainly due to successful drilling activity at Edson, AB during 2011 which saw 14 gross (11.7 net) wells drilled at a 100% success rate. Compared to the previous quarter, daily production increased 17% in Q1 2012 from 5,771 boe/d in Q4 2011 as an additional 3 gross (3.0 net) wells at Edson, AB and 2 gross (2.0 net) wells at Sunrise, BC were brought on production during the quarter.Crocotta's production profile for the first quarter of 2012 was comprised of 66% natural gas and 34% oil and NGLs, consistent with the production profile for 2011, which was comprised of 68% natural gas and 32% oil and NGLs.REVENUEThree Months Ended March 31($000s)20122011% ChangeOil and NGLs14,3673,623297Natural gas5,7733,85750Total20,1407,480169Average Sales PriceOil and NGLs ($/bbl)69.3468.671Natural gas ($/mcf)2.364.23(44)Combined ($/boe)32.7836.55(10)Revenue totaled $20.1 million for the first quarter of 2012, up 169% from $7.5 million in the comparative period. The increase in revenue was mainly due to significant increases in production, partially offset by a significant decrease in natural gas commodity prices. The following table outlines the Company's realized wellhead prices and industry benchmarks:Commodity PricingThree Months Ended March 3120122011% ChangeOil and NGLsCorporate price ($CDN/bbl)69.3468.671Edmonton par ($CDN/bbl)92.8188.515West Texas Intermediate ($US/bbl)102.8493.989Natural gasCorporate price ($CDN/mcf)2.364.23(44)AECO price ($CDN/mcf)2.173.70(41)Exchange rateCDN/US dollar average exchange rate0.99861.0142(2)Differences between corporate and benchmark prices can be the result of quality differences (higher or lower API oil and higher or lower heat content natural gas), 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. The Company's corporate average oil and NGLs prices were 74.7% of Edmonton Par price for the three months ended March 31, 2012, consistent with 77.6% for the comparative period in 2011. Corporate average natural gas prices were 108.8% of AECO prices for the three months ended March 31, 2012, consistent with the comparative period results of 114.3%. ROYALTIESThree Months Ended March 31($000s)20122011% ChangeOil and NGLs1,9041,04383Natural gas167244(32)Total2,0711,28761Average Royalty Rate (% of sales)Oil and NGLs13.328.8(54)Natural gas2.96.3(54)Combined10.317.2(40)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. The provincial government has also enacted various royalty incentive programs that are available for wells that meet certain criteria, such as natural gas deep drilling, which can result in fluctuations in royalty rates. For the three months ended March 31, 2012, oil, NGLs, and natural gas royalties increased 61% to $2.1 million from $1.3 million in the comparative period. This increase stemmed from a significant increase in oil and NGLs revenue in the first quarter of 2012 compared to the first quarter of 2011 mainly due to a significant increase in production. The overall effective royalty rate was 10.3% for the three months ended March 31, 2012 compared to 17.2% for the three months ended March 31, 2011. The effective oil and NGLs royalty rate decreased significantly as a result of royalty incentive rates received on the successful Edson wells brought on production during the quarter and prior year. The effective natural gas royalty rate decreased from the comparative period due to royalty incentive rates received on the successful Edson wells brought on production during the quarter and prior year combined with a decline in natural gas commodity prices. The overall effective royalty rate for the first quarter of 2012 was consistent with the fourth quarter of 2011 which had an overall rate of 9.1%.PRODUCTION EXPENSESThree Months Ended March 3120122011% ChangeOil and NGLs ($/bbl)4.8210.45(54)Natural gas ($/mcf)0.891.63(45)Combined ($/boe)5.189.95(48)Per unit production expenses for the three months ended March 31, 2012 were $5.18/boe, down significantly from $9.95/boe for the comparative period ended March 31, 2011 and from $7.05/boe for the previous quarter ended December 31, 2011. The Company has realized significant decreases in production expenses per boe due to operations at its core Edson, AB area. The Company is the operator and has ownership of the infrastructure at Edson, enabling it to exercise control over operating costs. Control of operations and ownership of the infrastructure combined with significant increases in production over the previous year as a result of successful drilling activities have allowed the Company to realize lower production expenses through economies of scale. The Company continues to focus on opportunities to maintain operational efficiencies to enhance operating netbacks.TRANSPORTATION EXPENSESThree Months Ended March 3120122011% ChangeOil and NGLs ($/bbl)1.120.8729Natural gas ($/mcf)0.180.176Combined ($/boe)1.100.9812Transportation expenses are mainly third-party pipeline tariffs incurred to deliver production to the purchasers at main hubs. For the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011, transportation expenses increased 12% to $1.10/boe from $0.98/boe. The increase in transportation expenses was due to a significant increase in oil and NGLs transportation expenses resulting from a prior period adjustment for NGL transportation costs. The costs were incurred as a result of restrictions at the Edson gas plant where the majority of the Company's production is processed. The restrictions resulted in the plant operator diverting volumes from the plant which resulted in additional unanticipated transportation costs. OPERATING NETBACKThree Months Ended March 3120122011% ChangeOil and NGLs ($/bbl)Revenue69.3468.671Royalties9.1919.76(53)Production expenses4.8210.45(54)Transportation expenses1.120.8729Operating netback54.2137.5944Natural gas ($/mcf)Revenue2.364.23(44)Royalties0.070.27(74)Production expenses0.891.63(45)Transportation expenses0.180.176Operating netback1.222.16(44)Combined ($/boe)Revenue32.7836.55(10)Royalties3.376.29(46)Production expenses5.189.95(48)Transportation expenses1.100.9812Operating netback23.1319.3320During the first quarter of 2012, Crocotta generated an operating netback of $23.13/boe, up 20% from $19.33/boe for the first quarter of 2011. The increase was mainly due to significant decreases in royalties and operating costs in 2012 compared to 2011. Operating netbacks in Q1 2012 were down from operating netbacks of $26.89/boe in Q4 2011 due mainly to a decline in oil, NGLs, and natural gas commodity prices. The following is a reconciliation of operating netback per boe to net loss per boe for the periods noted:Three Months Ended March 31($/boe)20122011% ChangeOperating netback23.1319.3320Depletion and depreciation(14.90)(14.80)1Asset impairment(4.40)(12.95)(66)General and administrative expenses(1.76)(8.12)(78)Share based compensation(1.56)(2.23)(30)Finance expenses(0.45)(2.32)(81)Loss on sale of assets-(0.65)(100)Deferred tax expense(0.53)-100Net loss(0.47)(21.74)(98)DEPLETION AND DEPRECIATIONThree Months Ended March 3120122011% ChangeDepletion and depreciation ($000s)9,1553,029202Depletion and depreciation ($/boe)14.9014.801Depletion and depreciation for the three months ended March 31, 2012 was $14.90/boe, consistent with depletion and depreciation of $14.80/boe for the comparative period ended March 31, 2011 and depletion and depreciation of $14.87/boe for the previous quarter ended December 31, 2011.ASSET IMPAIRMENTThree Months Ended March 3120122011% ChangeAsset impairment ($000s)2,7052,6492Asset impairment ($/boe)4.4012.95(66)Exploration and evaluation assets and property, plant, and equipment are grouped into cash generating units ("CGU") for purposes of impairment testing. Exploration and evaluation assets are assessed for impairment when they are transferred to property, plant, and equipment or if facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For property, plant, and equipment, an impairment is recognized if the carrying value of a CGU exceeds the greater of its fair value less costs to sell or value in use. For the three months ended March 31, 2012, total exploration and evaluation asset impairments of $0.9 million were recognized. Asset impairments of $0.4 million were recognized relating to the determination of certain exploration and evaluation activities in southern Alberta to be uneconomical (CGU - Miscellaneous AB). Additional exploration and evaluation impairments of $0.5 million were recognized relating to the expiry of undeveloped land rights (CGUs - Miscellaneous AB). For the three months ended March 31, 2011, total exploration and evaluation asset impairments of $2.6 million were recognized. Asset impairments of $2.1 million were recognized relating to the determination of certain exploration and evaluation activities in southern Alberta to be uneconomical (CGU - Miscellaneous AB). Additional exploration and evaluation impairments of $0.5 million were recognized relating to the expiry of undeveloped land rights (CGUs - Ferrier AB and Miscellaneous AB).For the three months ended March 31, 2012, the Company recorded property, plant, and equipment impairments of $1.8 million relating to Smoky AB, Lookout Butte AB, Miscellaneous AB, and Saskatchewan CGUs mainly as a result of weakening natural gas prices at March 31, 2012. GENERAL AND ADMINISTRATIVEThree Months Ended March 31($000s)20122011% ChangeG&A expenses (gross)1,4842,129(30)G&A capitalized(77)(108)(29)G&A recoveries(329)(359)(8)G&A expenses (net)1,0781,662(35)G&A expenses ($/boe)1.768.12(78)General and administrative expenses ("G&A") decreased significantly to $1.76/boe for the first quarter of 2012 compared to $8.12/boe for the first quarter of 2011 due mainly to a significant increase in production and a reduction in various administrative costs.SHARE BASED COMPENSATIONThree Months Ended March 3120122011% ChangeShare based compensation ($000s)960457110Share based compensation ($/boe)1.562.23(30)The Company grants stock options to officers, directors, employees and consultants and calculates the related share based compensation using the Black-Scholes-Merton option pricing model. The Company recognizes the expense over the individual vesting periods for the graded vesting awards and estimates a forfeiture rate at the date of grant and updates it throughout the vesting period. Share based compensation expense decreased to $1.56/boe for the three months ended March 31, 2012 from $2.23/boe in the comparative period. During the first quarter of 2012, the Company granted 0.7 million options (2011 - 2.5 million). FINANCE EXPENSESThree Months Ended March 31($000s)20122011% ChangeInterest expense156280(44)Accretion of decommissioning obligations123124(1)Realized loss on investments-70(100)Finance expenses279474(41)Finance expenses ($/boe)0.452.32(81)Interest expense relates to interest incurred on amounts drawn from the Company's credit facility. Though the amount drawn on the revolving credit facility was higher at March 31, 2012 than at March 31, 2011 (2012 - $34.1 million; 2011 - $11.2 million), the decrease in interest expense was due to a decrease in the average amount drawn on the credit facility in the first quarter of 2012 compared to the first quarter of 2011.DEFERRED INCOME TAXESDeferred income tax expense on the earnings before taxes was $0.3 million in the first quarter of 2012 (2011 - $nil). This was larger than expected by applying the statutory tax rate to the earnings before taxes due to non-deductible items such as share based compensation. Estimated tax pools at March 31, 2012 total approximately $265.0 million.FUNDS FROM OPERATIONS Funds from operations for the three months ended March 31, 2012 was $13.0 million ($0.14 per diluted share) compared to $2.0 million ($0.03 per diluted share) for the three months ended March 31, 2012. The increase was mainly due to a significant increase in production which resulted in a significant increase in revenue. The following is a reconciliation of cash flow from operating activities to funds from operations for the periods noted:Three Months Ended March 31($000s)20122011% ChangeCash flow from operating activities (GAAP)12,4892,343433Add back:Decommissioning expenditures187-100Change in non-cash working capital298(329)191Funds from operations (non-GAAP)12,9742,014544NET LOSSThe Company had a net loss of $0.3 million ($nil per diluted share) for the three months ended March 31, 2012 compared to a net loss of $4.4 million ($0.06 per diluted share) for the three months ended March 31, 2011. The net loss in 2012 was lower than in 2011 as a result of a significant increase in production.CAPITAL EXPENDITURESThree Months Ended March 31($000s)20122011% ChangeLand1,650503228Drilling, completions, and workovers19,54313,48245Equipment6,3263,85864Geological and geophysical120335(64)Exploration and development27,63918,17852Property dispositions-134(100)Net capital expenditures27,63918,31251For the three months ended March 31, 2012, the Company had net capital expenditures of $27.6 million compared to net capital expenditures of $18.3 million for the three months ended March 31, 2011. The increase in exploration and development expenditures in the first quarter of 2012 was due mainly to a significant increase in capital activity in the Company's core areas of Edson, AB and northeast BC. During the first quarter of 2012, Crocotta drilled a total of 5 (4.0 net) wells, which resulted in 1.0 (0.4 net) oil well, 2 (2.0 net) liquids-rich natural gas wells, and 2 (1.6 net) wells that will be completed in Q2 or Q3 2012.LIQUIDITY AND CAPITAL RESOURCESThe Company had net debt of $42.6 million at March 31, 2012 compared to net debt of $27.7 million at December 31, 2011. The increase of $14.9 million was mainly due to $27.6 million used for the purchase and development of oil and natural gas properties and equipment and $0.2 million for decommissioning expenditures, offset by funds from operations of $13.0 million.At March 31, 2012, the Company had total credit facilities of $80.0 million, consisting of an $80.0 million revolving operating demand loan credit facility with a Canadian chartered bank. The revolving credit facility bears interest at prime plus a range of 0.50% to 2.50% and is secured by a $125 million fixed and floating charge debenture on the assets of the Company. At March 31, 2012, $34.1 million (December 31, 2011 - $5.2 million) had been drawn on the revolving credit facility. In addition, at March 31, 2012, the Company had outstanding letters of guarantee of approximately $1.6 million (December 31, 2011 - $1.0 million). Subsequent to March 31, 2012, the Company signed an agreement to increase the revolving credit facility to $100.0 million. The next review of the revolving credit facility by the bank is scheduled on or before September 30, 2012. 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. Despite the economic downturn and financial market volatility, the Company continued to have access to both debt and equity markets recently. The Company raised gross proceeds of approximately $61.0 million from the issuance of common shares during 2011 and subsequent to March 31, 2012, the Company obtained an increase to its revolving credit facility to $100.0 million. The Company has also maintained a very successful drilling program which has resulted in significant increases in production and funds flow from operations in recent quarters in spite of downward trends and continued pressure on natural gas commodity prices. Management anticipates that the Company will continue to have adequate liquidity to fund budgeted capital investments through a combination of cash flow, equity, and debt. Crocotta's capital program is flexible and can be adjusted as needed based upon the current economic environment. The Company will continue to monitor the economic environment and 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 and commitments at March 31, 2012: Less thanOne toAfter($000s)TotalOne YearThree YearsThree YearsAccounts payable and accrued liabilities20,17920,179--Revolving credit facility34,06334,063--Decommissioning obligations19,1196121918,839Office leases1,280552728-Field equipment leases2,9741,5671,407-Drilling rig1,0201,020--Firm transportation agreements61936222433Capital processing agreements200--200Total contractual obligations79,45457,8042,57819,072In addition to the above commitments, as a result of the issuance of flow-through shares in December 2011, the Company is committed to expend $5.0 million on qualifying exploration expenditures prior to December 31, 2012. As at March 31, 2012, the Company had incurred $0.8 million in connection with this flow-through share commitment.The Company has entered into farm-in agreements to drill and complete one Edson Bluesky well and four Edson Cardium wells. Under the terms of the farm-in agreements, the Company is committed to drill the wells at dates all prior to the end of Q3 2012. The estimated cost to drill and complete the wells is $15.0 million. Subsequent to March 31, 2012, the Company entered into a fixed price financial contract for future natural gas production. The contract period is January 1, 2013 to December 31, 2013 and is for 10,000 GJ/d at a price of $2.705/GJ.OUTSTANDING SHARE DATAThe Company is authorized to issue an unlimited number of voting common shares, an unlimited number of non-voting common shares, Class A preferred shares, issuable in series, 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)March 31, 2012May 7, 2012Voting common shares88,09588,095Stock options8,6408,640Warrants3,5213,521Total100,256100,256SUMMARY OF QUARTERLY RESULTS(1)Q1 2012Q4 2011Q3 2011Q2 2011Q1 2011Q4 2010Q3 2010Q2 2010Average Daily ProductionOil and NGLs (bbls/d)2,2771,8791,3361,039586647862665Natural gas (mcf/d)26,85223,35415,99611,84310,1249,95810,53010,698Combined (boe/d)6,7525,7714,0023,0122,2742,3072,6172,448($000s, except per share amounts)Oil and natural gas sales20,14020,39114,81412,2897,4807,2748,5747,720Funds from operations12,97412,1159,5516,9272,0144,2003,4772,493Per share - basic0.150.150.120.090.030.060.050.04Per share - diluted0.140.140.110.080.030.060.050.04Net earnings (loss)(293)(7,052)5,535374(4,449)656(2,071)(1,347)Per share - basic and diluted-(0.09)0.07-(0.06)0.01(0.03)(0.02)(1)2010 quarterly results have been adjusted to conform to IFRS.A significant increase in oil and NGLs commodity prices combined with a significant increase in production stemming from successful drilling activity during 2011 resulted in an increase in funds from operations in Q2 2011 through Q1 2012 compared to prior quarters. The Company had a net loss in Q1 2012 and Q4 2011 mainly as a result of asset impairments recognized in each quarter.OPERATIONS UPDATEIn Q1 2012 and early Q2 2012, Crocotta has invested approximately $28 million on various capital projects which include the Bluesky and Cardium at Edson and the Montney at Dawson/Sunrise and continues to show strong production growth while maintaining financial discipline.Capital ProjectsCardiumIn Q1 2012, Crocotta participated in a second Cardium horizontal well at Edson (40% WI) that is currently producing approximately 560 boepd at 46% oil and liquids at the end of its first two weeks of production. This well is significantly above Crocotta's type curve for the area that forecasts an initial production rate of 300 boepd. Crocotta's first Cardium horizontal well at Edson is producing 410 boepd (41% oil and liquids) after almost 4 months of production.Crocotta has a contiguous block of 13.5 sections (avg 65% WI) that include the first 2 wells noted above and has plans to aggressively step-out drill to prove up the lands. During Q2 2012 and Q3 2012, Crocotta plans to drill 6 (3.3 net) wells to further prove up approximately 50 (32 net) unbooked Cardium locations on the Edson block. Crocotta also has over 50 sections of additional Cardium lands in the area of varying prospectivity. Pending continued success, Crocotta will continue to drill and test the productivity of additional Cardium trends on its lands.BlueskyIn Q1 2012, Crocotta completed an additional 3 (2.6 net) wells that continue to meet or exceed Crocotta's type curve for Bluesky wells. One (0.6 net) well is drilled and not completed and one well is currently drilling. Crocotta has a large inventory (over 40 net locations) that has been largely proved up over the last two years. MontneyCrocotta previously announced a Montney well at Dawson / Sunrise that tested approximately 14 mmcf/d plus 20 bbls/mmcf of natural gas liquids. Crocotta tied the well into a gathering system owned by a mid-stream entity but has opted not to produce it at this time due to high processing fees.Crocotta has hedged 10 mmcf/d of natural gas for 2013 (see below) and is proceeding with its plans to have its Montney gas on-stream by the end of 2012. Crocotta's Sunrise facility is currently capable of processing 10 mmcf/d and Crocotta will need to construct approximately 5 miles of pipelines and purchase a meter station to bring the gas on-stream at materially lower operating costs.Crocotta's decision to proceed with the additional infrastructure will allow the Company to quickly expand the project as natural gas prices increase. Crocotta has an inventory of over 75 (75.0 net) Montney locations in the Dawson/Sunrise area.ProductionProduction for Q1 2012 was reported at 6,752 boepd (66% gas; 34% light oil and natural gas liquids) with current production estimated at over 7,000 boepd.Crocotta's liquids composition includes approximately 47% light oil and condensate, 18% butane, and 35% propane. With the recent increased volatility between WTI and Edmonton par, Crocotta has tried to isolate as much of its condensate as possible to benefit from the higher condensate pricing. Crocotta estimates that its blend of oil and liquids will receive approximately 73% of WTI pricing for the rest of year after accounting for higher than historical differentials on light oil and propane. In 2011, Crocotta was receiving approximately 80% of WTI for its blend of oil and liquids.FinancialCrocotta estimates current net debt to be approximately $40 million compared to a bank credit facility of $100 million (recently increased from $80 million). As noted above, Crocotta has recently executed a natural gas hedge of 10 mmcf/d for 2013 to ensure certainty of cash flow from the Dawson/Sunrise Montney project and provide a quick payout of its additional capital costs. The natural gas hedge is for 10 mmcf/d at $2.71 per GJ for calendar 2013. Crocotta also executed a hedge for its 2012 liquids production to provide greater cash flow certainty to fund its capital projects. The 2012 hedge is for 800 bbls/d at $US WTI 104.38 for the period from May-December of 2012.Given Crocotta's low debt ratio at less than one times 2012 cash flow (based on current strip pricing) and available bank credit of approximately $60 million, the Company is in a strong financial position to react to opportunities. Such opportunities may include acquisitions, farm-ins or increased drilling activity.Crocotta will closely monitor pricing and cash flow and adjust capital expenditures as necessary to ensure net debt does not exceed normal ratios and leave substantial undrawn credit. That said, current productive capacity is well ahead of budget expectations and Crocotta is comfortable that it will be able to continue on its current growth path while still maintaining its strong balance sheet.CRITICAL ACCOUNTING ESTIMATESManagement is required to make estimates, judgments, and assumptions in the application of IFRS that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. Certain of these estimates may change from period to period resulting in a material impact on the Company's results from operations, financial position, and change in financial position. The Company's significant critical accounting estimates have not changed from the year ended December 31, 2011.FUTURE CHANGES IN ACCOUNTING POLICIESIn May 2011, the IASB issued four new standards and two amendments. Five of these items related to consolidation, while the remaining one addresses fair value measurement. All of the new standards are effective for annual periods beginning on or after January 1, 2013. Early adoption is permitted. The Company is currently evaluating the impact of adopting all of the newly issued and amended standards but does not anticipate a material impact to the Company's financial statements.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 management 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 the Company successfully acquiring or discovering new reserves. Without the continual addition of new reserves, any existing reserves the Company 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 the Company has identified as being the most prospective for increasing 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. The Company may use financial derivatives or physical delivery sales contracts to manage market risks. All such transactions are conducted within risk management tolerances that are reviewed by the Board of Directors.Foreign exchange riskThe prices received by the Company for the production of crude oil, natural gas, and NGLs are primarily determined in reference to US 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 riskOil and natural gas prices are impacted by not only the relationship between the Canadian and US dollar but also by world economic events that dictate the levels of supply and demand. The 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. Subsequent to March 31, 2012, the Company entered into fixed price financial contracts for future oil and natural gas production as follows:PeriodCommodityType of ContractQuantity ContractedContract PriceMay 1, 2012 - December 31, 2012OilFinancial800 bbls/dWTI US $104.38/bblJanuary 1, 2013 - December 31, 2013Natural GasFinancial10,000 GJ/dAECO CDN $2.705/GJSafety 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 President and Chief Executive Officer ("CEO") and the Vice President Finance and Chief Financial Officer ("CFO") have designed, or caused to be designed under their supervision, disclosure controls and procedures ("DC&P) and internal controls over financial reporting ("ICOFR") as defined in National Instrument 52-109 Certification of Disclosure in Issuer's Annual and Interim Filings in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with IFRS.The DC&P have been designed to provide reasonable assurance that material information relating to the Company is made known to the CEO and CFO by others and that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by the Company under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. The Company's CEO and CFO have concluded based on their evaluation as of the end of the period covered by the interim filings that the Company's disclosure controls and procedures are effective to provide reasonable assurance that material information related to the issuer is made known to them by others within the Company.The CEO and CFO are required to cause the Company to disclose any change in the Company's ICOFR that occurred during the most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company's ICOFR. No changes in ICOFR were identified during such period that have materially affected or are reasonably likely to materially affect, the Company's ICOFR. There were no changes to ICOFR as a result of the transition to IFRS.It should be noted a control system, including the Company's DC&P and ICOFR, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objective of the control system will be met and it should not be expected that DC&P and ICOFR will prevent all errors or fraud.FORWARD-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 MD&A 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.ADDITIONAL INFORMATIONAdditional information related to the Company, including the Company's Annual Information Form (AIF), may be found on the SEDAR website at www.sedar.com.Crocotta Energy Inc.Condensed Consolidated Statements of Financial Position(unaudited)March 31December 31($000s)Note20122011AssetsCurrent assetsAccounts receivable10,34511,298Prepaid expenses and deposits1,30984011,65412,138Property, plant, and equipment(5)205,900192,332Exploration and evaluation assets(4)22,86720,641Deferred income taxes13,98414,443254,405239,554LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities20,17934,692Revolving credit facility(6)34,0635,18254,24239,874Flow-through share premium678813Decommissioning obligations(7)19,11919,25074,03959,937Shareholders' EquityShareholders' capital225,848225,848Contributed surplus9,9698,927Deficit(55,451)(55,158)180,366179,617Subsequent events(6,8,13)254,405239,554The accompanying notes are an integral part of these condensed interim consolidated financial statements.Crocotta Energy Inc.Condensed Consolidated Statements of Operations and Comprehensive Loss(unaudited)Three Months Ended March 31($000s, except per share amounts)Note20122011RevenueOil and natual gas sales20,1407,480Royalties(2,071)(1,287)18,0696,193ExpensesProduction3,1862,037Transportation675200Depletion and depreciation(5)9,1553,029Asset impairment(4,5)2,7052,649General and administrative1,0781,662Share based compensation(8)96045717,75910,034Operating earnings (loss)310(3,841)Other ExpensesFinance expense(10)279474Loss on sale of assets-134279608Earnings (loss) before taxes31(4,449)TaxesDeferred income tax expense324-Net loss and comprehensive loss(293)(4,449)Net loss per shareBasic and diluted-(0.06)The accompanying notes are an integral part of these condensed interim consolidated financial statements.Crocotta Energy Inc.Condensed Consolidated Statements of Shareholders' Equity(unaudited)Three Months Ended March 31($000s)20122011Shareholders' CapitalBalance, beginning of period225,848168,164Issue of shares (net of share issue costs and flow-through share premium)-33,844Issued on exercise of stock options-114Share based compensation - exercised-79Balance, end of period225,848202,201Contributed SurplusBalance, beginning of period8,9275,515Share based compensation - expensed960457Share based compensation - capitalized8229Share based compensation - exercised-(79)Balance, end of period9,9695,922DeficitBalance, beginning of period(55,158)(49,566)Net loss(293)(4,449)Balance, end of period(55,451)(54,015)Total Shareholders' Equity180,366154,108The accompanying notes are an integral part of these condensed interim consolidated financial statements.Crocotta Energy Inc.Condensed Consolidated Statements of Cash Flows(unaudited)Three Months Ended March 31($000s)Note20122011Operating ActivitiesNet loss(293)(4,449)Depletion and depreciation(5)9,1553,029Asset impairment(4,5)2,7052,649Share based compensation(8)960457Finance expense(10)279474Interest paid(156)(280)Loss on sale of assets-134Deferred income tax expense324-Decommissioning expenditures(7)(187)-Change in non-cash working capital(11)(298)32912,4892,343Financing ActivitiesRevolving credit facility(6)28,881(24,222)Issuance of shares-36,074Share issue costs-(2,116)28,8819,736Investing ActivitiesCapital expenditures - property, plant, and equipment(5)(24,548)(17,025)Capital expenditures - exploration and evaluation assets(4)(3,091)(1,153)Asset dispositions-(134)Change in non-cash working capital(11)(13,731)6,233(41,370)(12,079)Change in cash and cash equivalents--Cash and cash equivalents, beginning of period--Cash and cash equivalents, end of period--The accompanying notes are an integral part of these condensed interim consolidated financial statements.Crocotta Energy Inc.Notes to the Condensed Interim Consolidated Financial StatementsThree Months Ended March 31, 2012(Tabular amounts in 000s, unless otherwise stated)1. REPORTING ENTITYCrocotta 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. The Company conducts many of its activities jointly with others and these condensed interim consolidated financial statements reflect only the Company's proportionate interest in such activities. The Company currently has one wholly-owned subsidiary.The Company's place of business is located at 700, 639 - 5th Avenue SW, Calgary, Alberta, Canada, T2P 0M9.2. BASIS OF PRESENTATION(a) Statement of complianceThese condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting and accordingly do not include all of the information required in the preparation of annual consolidated financial statements. The condensed interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2011.The condensed interim consolidated financial statements were authorized for issuance by the Board of Directors on May 8, 2012.(b) Basis of measurementThe condensed interim consolidated financial statements have been prepared on the historical cost basis except for held for trading financial assets, which are measured at fair value with changes in fair value recorded in earnings. (c) Functional and presentation currencyThe condensed interim consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency.(d) Use of estimates and judgmentsThe preparation of the condensed interim consolidated financial statements in conformity with IFRS requires management to make estimates and use judgment regarding the reported amounts of assets and liabilities as at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future periods could require a material change in the interim consolidated financial statements. Accordingly, actual results may differ from the estimated amounts as future confirming events occur. The significant estimates and judgments made by management in the preparation of these condensed interim consolidated financial statements were consistent with those applied to the consolidated financial statements as at and for the year ended December 31, 2011. 3. SIGNIFICANT ACCOUNTING POLICIESThe condensed interim consolidated financial statements have been prepared following the same accounting policies as the audited consolidated financial statements for the year ended December 31, 2011. The accounting policies have been applied consistently by the Company to all periods presented in these interim consolidated financial statements.4. EXPLORATION AND EVALUATION ASSETSTotalBalance, December 31, 201031,405Additions31,644Transfer to property, plant, and equipment(24,153)Transfer to property, plant, and equipment, held for sale(479)Dispositions(4,109)Impairment(13,667)Balance, December 31, 201120,641Additions3,091Impairment(865)Balance, March 31, 201222,867Exploration and evaluation assets consist of the Company's exploration projects which are pending the determination of proved or probable reserves. Additions represent the Company's share of costs incurred on exploration and evaluation assets during the period, consisting primarily of undeveloped land and drilling costs until the drilling of the well is complete and the results have been evaluated. Included in the $3.1 million of additions during the three months ended March 31, 2012 were additions of $0.5 million related to the Edson AB CGU and $2.5 million related to the Miscellaneous AB CGU.ImpairmentsExploration and evaluation assets are assessed for impairment when they are transferred to property, plant, and equipment or if facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For the three months ended March 31, 2012, total exploration and evaluation asset impairments of $0.9 million were recognized. Asset impairments of $0.4 million were recognized relating to the determination of certain exploration and evaluation activities in southern Alberta to be uneconomical (CGU - Miscellaneous AB). Additional exploration and evaluation impairments of $0.5 million were recognized relating to the expiry of undeveloped land rights (CGU - Miscellaneous AB).5. PROPERTY, PLANT, AND EQUIPMENTCost or Deemed CostTotalBalance, December 31, 2010164,459Additions63,567Transfer from exploration and evaluation assets24,153Transfer from property, plant, and equipment, held for sale1,879Transfer to property, plant, and equipment, held for sale(1,076)Dispositions(21,410)Change in decommissioning obligation estimates4,939Capitalized share based compensation335Balance, December 31, 2011236,846Additions24,548Change in decommissioning obligation estimates(67)Capitalized share based compensation82Balance, March 31, 2012261,409Accumulated Depletion, Depreciation, and ImpairmentTotalBalance, December 31, 201029,544Depletion and depreciation20,729Impairment2,960Transfer to property, plant, and equipment, held for sale(441)Dispositions(8,278)Balance, December 31, 201144,514Depletion and depreciation9,155Impairment1,840Balance, March 31, 201255,509Net Book ValueTotalDecember 31, 2010134,915December 31, 2011192,332March 31, 2012205,900During the three months ended March 31, 2012, approximately $0.1 million (2011 - $0.1 million) of directly attributable general and administrative costs were capitalized as expenditures on property, plant, and equipment.Depletion and depreciationThe calculation of depletion and depreciation expense for the three months ended March 31, 2012 included an estimated $185.0 million (2011 - $82.4 million) for future development costs associated with proved plus probable undeveloped reserves and excluded approximately $8.2 million (2011 - $7.8 million) for the estimated salvage value of production equipment and facilities. ImpairmentsThe impairment tests at March 31, 2012 were primarily based on the net present value of cash flows from oil and natural gas reserves of each CGU at discount rates of 10 percent to 20 percent. Consideration was also given to acquisition metrics of recent transactions on similar assets. For the three months ended March 31, 2012, the Company recorded property, plant, and equipment impairments of $1.8 million relating to Smoky AB, Lookout Butte AB, Miscellaneous AB, and Saskatchewan CGUs mainly as a result of weakening natural gas prices at March 31, 2012. 6. CREDIT FACILITIESAt March 31, 2012, the Company had total credit facilities of $80.0 million, consisting of an $80.0 million revolving operating demand loan credit facility with a Canadian chartered bank. The revolving credit facility bears interest at prime plus a range of 0.50% to 2.50% and is secured by a $125 million fixed and floating charge debenture on the assets of the Company. At March 31, 2012, $34.1 million (December 31, 2011 - $5.2 million) had been drawn on the revolving credit facility. In addition, at March 31, 2012, the Company had outstanding letters of guarantee of approximately $1.6 million (December 31, 2011 - $1.0 million). Subsequent to March 31, 2012, the Company signed an agreement to increase the revolving credit facility to $100.0 million. The next review of the revolving credit facility by the bank is scheduled on or before September 30, 2012. 7. PROVISIONS - DECOMMISSIONING OBLIGATIONSThe Company's decommissioning obligations result from its ownership interest in oil and natural gas assets including well sites and gathering systems. The total decommissioning obligation is estimated based on the Company's net ownership interest in all wells and facilities, estimated costs to abandon and reclaim the wells and facilities, and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows (adjusted for inflation at 2% per year) required to settle the decommissioning obligations is approximately $27.2 million which is estimated to be incurred between 2012 and 2041. At March 31, 2012, a risk-free rate of 2.6% (December 31, 2011 - 2.4%) was used to calculate the net present value of the decommissioning obligations. Three Months EndedYear EndedMarch 31, 2012December 31, 2011Balance, beginning of period19,25015,099Provisions incurred1731,534Provisions disposed-(941)Provisions settled(187)(363)Revisions(240)3,405Accretion123516Balance, end of period19,11919,250Provisions, held for sale--Provisions19,25019,25019,25019,2508. SHARE BASED COMPENSATION PLANSStock optionsThe Company has authorized and reserved for issuance 8.8 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 three years and an option's maximum term is 5 years. At March 31, 2012, 8.6 million options are outstanding at exercise prices ranging from $1.10 to $3.46 per share.The number and weighted average exercise price of stock options are as follows:Number ofOptionsWeighted AverageExercise Price ($)Balance, December 31, 20103,8771.26Granted4,1972.60Exercised(97)1.18Forfeited(35)1.53Cancelled--Balance, December 31, 20117,9421.97Granted6983.46Balance, March 31, 20128,6402.09Exercisable at March 31, 20123,2931.53The following table summarizes the stock options outstanding and exercisable at March 31, 2012:Options OutstandingOptions ExercisableExercise PriceNumberWeighted AverageRemaining LifeWeighted AverageExercise PriceNumberWeighted AverageExercise Price$1.10 to $2.003,6452.61.242,3461.21$2.01 to $3.004,2974.02.599472.34$3.01 to $3.466984.93.46--8,6403.52.093,2931.53WarrantsThe 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. 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 warrants vested immediately and have an expiry date of October 29, 2012. The number and weighted average exercise price of warrants are as follows:Number of WarrantsWeighted AverageExercise PriceBalance, December 31, 2011, and March 31, 20123,5213.64Exercisable at March 31, 20123,5213.64The following table summarizes the warrants outstanding and exercisable at March 31, 2012:Warrants Outstanding and ExercisableExercise PriceNumberWeighted AverageRemaining LifeWeighted AverageExercise Price$1.401,2000.61.40$3.75 to $4.057400.83.76$4.50 to $5.258070.84.55$6.00 to $6.757740.86.053,5210.73.64At the annual and special meeting of shareholders held on May 2, 2012, approval was obtained to extend the expiry date of the warrants issued in 2007 priced between $3.75 and $6.75 to December 23, 2013.Share based compensationThe Company accounts for its share based compensation plans using the fair value method. Under this method, compensation cost is charged to earnings over the vesting period for stock options and warrants granted to officers, directors, employees, and consultants with a corresponding increase to contributed surplus. The fair value of the stock options granted were estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions: Three Months Ended March 3120122011Risk-free interest rate (%)1.32.5Expected life (years)4.04.0Expected volatility (%)77.284.2Expected dividend yield (%)--Forfeiture rate (%)7.49.8Weighted average fair value of options granted ($ per option)1.981.479. PER SHARE AMOUNTSThe following table summarizes the weighted average number of shares used in the basic and diluted net loss per share calculations:Three Months Ended March 3120122011Weighted average number of shares - basic and diluted88,09571,597For the three months ended March 31, 2012 and 2011, the stock options and warrants outstanding were anti-dilutive and were not included in the diluted loss per share calculation.10. FINANCE EXPENSESFinance expenses include the following:Three Months Ended March 3120122011Interest expense (note 6)156280Accretion of decommissioning obligations (note 7)123124Realized loss on investments-70Finance expenses27947411. SUPPLEMENTAL CASH FLOW INFORMATIONThree Months Ended March 3120122011Accounts receivable9532,785Prepaid expenses and deposits(469)4Accounts payable and accrued liabilities(14,513)3,773Change in non-cash working capital(14,029)6,562Relating to:Investing(13,731)6,233Operating(298)329Change in non-cash working capital(14,029)6,56212. COMMITMENTSAs a result of the issuance of flow-through shares in December 2011, the Company is committed to expend $5.0 million on qualifying exploration expenditures prior to December 31, 2012. As at March 31, 2012, the Company had incurred $0.8 million in connection with this flow-through share commitment.The Company has entered into farm-in agreements to drill and complete one Edson Bluesky well and four Edson Cardium wells. Under the terms of the farm-in agreements, the Company is committed to drill the wells at dates all prior to the end of Q3 2012. The estimated cost to drill and complete the wells is $15.0 million. 13. SUBSEQUENT EVENTSubsequent to March 31, 2012, the Company entered into fixed price financial contracts for future oil and natural gas production as follows:PeriodCommodityType of ContractQuantity ContractedContract Price May 1, 2012 - December 31, 2012OilFinancial800 bbls/dWTI US $104.38/bblJanuary 1, 2013 - December 31, 2013Natural GasFinancial10,000 GJ/dAECO CDN $2.705/GJCORPORATE INFORMATIONOFFICERS AND DIRECTORSRobert J. Zakresky, CABANKPresident, CEO & DirectorNational Bank of Canada1800, 311 - 6th Avenue SWNolan Chicoine, MPAcc, CACalgary, Alberta T2P 3H2VP Finance & CFOTerry L. Trudeau, P.Eng.VP Operations & COO TRANSFER AGENTValiant Trust CompanyWeldon Dueck, BSc., P.Eng.310, 606 - 4th Street SWVP Business DevelopmentCalgary, Alberta T2P 1T1R.D. (Rick) Sereda, M.Sc., P.Geol.VP ExplorationLEGAL COUNSELHelmut R. Eckert, P.LandGowling Lafleur Henderson LLPVP Land1400, 700 - 2nd Street SWCalgary, Alberta T2P 4V5Kevin KeithVP ProductionLarry G. Moeller, CA, CBVAUDITORSChairman of the BoardKPMG LLP2700, 205 - 5th Avenue SWDaryl H. Gilbert, P.Eng.Calgary, Alberta T2P 4B9DirectorDon CowieDirectorINDEPENDENT ENGINEERSGLJ Petroleum Consultants Ltd.Brian Krausert4100, 400 - 3rd Avenue SW DirectorCalgary, 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