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Press release from Marketwire

Crocotta Energy Announces Q2 2012 Financial and Operating Results

Thursday, August 09, 2012

Crocotta Energy Announces Q2 2012 Financial and Operating Results06:00 EDT Thursday, August 09, 2012CALGARY, ALBERTA--(Marketwire - Aug. 9, 2012) -CROCOTTA ENERGY INC. (TSX:CTA) is pleased to announce its financial and operating results for the three and six months ended June 30, 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 119% to 6,604 boepd in Q2 2012 from 3,012 boepd in Q2 2011 despite an unscheduled plant disruption at Edson, AB that affected the quarter by 600 boepd Increased funds from operations 77% to $12.3 million in Q2 2012 from $6.9 million in Q2 2011 Reduced production expenses 33% to $5.96/boe in Q2 2012 from $8.87/boe in Q2 2011 Increased bank credit facility to $100.0 million from $80.0 million Commenced its 5 (2.7 net) horizontal Cardium drilling program FINANCIAL RESULTSThree Months Ended June 30Six Months Ended June 30($000s, except per share amounts)20122011% Change20122011% ChangeOil and natural gas sales17,51812,2894337,65819,76990Funds from operations (1)12,2756,9277725,2498,941182Per share - basic0.140.09560.290.12142Per share - diluted0.140.08750.280.11155Net earnings (loss)1,065374185772(4,075)119Per share - basic and diluted0.01-1000.01(0.05)120Capital expenditures11,04911,111(1)38,68829,28932Property acquisitions-1,000(100)-1,000(100)Property dispositions-4,387(100)-4,253(100)Net debt (2)41,52518,416125Common shares outstanding (000s)Weighted average - basic88,09580,874988,09576,26016Weighted average - diluted90,23482,644991,00077,92217End of period - basic88,09580,8749End of period - diluted100,27190,74410(1)Funds from operations and funds from operations per share do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Measures section in the MD&A for more details and the Funds from Operations section in the MD&A for a reconciliation from cash flow from operating activities. (2)Net debt includes current liabilities less current assets (excluding the risk management contracts). Net debt does not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Measures section in the MD&A for more details.OPERATING RESULTSThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeDaily productionOil and NGLs (bbls/d)2,0531,039982,165814166Natural gas (mcf/d)27,30911,84313127,08110,988146Oil equivalent (boe/d)6,6043,0121196,6782,645152RevenueOil and NGLs ($/bbl)64.7781.22(20)67.1776.72(12)Natural gas ($/mcf)2.184.28(49)2.274.26(47)Oil equivalent ($/boe)29.1544.83(35)30.9841.29(25)RoyaltiesOil and NGLs ($/bbl)8.7217.11(49)8.9718.06(50)Natural gas ($/mcf)0.200.053000.140.15(7)Oil equivalent ($/boe)3.556.09(42)3.466.17(44)Production expensesOil and NGLs ($/bbl)5.398.09(33)5.098.93(43)Natural gas ($/mcf)1.041.55(33)0.971.59(39)Oil equivalent ($/boe)5.968.87(33)5.579.33(40)Transportation expensesOil and NGLs ($/bbl)0.870.89(2)1.000.8814Natural gas ($/mcf)0.180.16130.180.176Oil equivalent ($/boe)1.000.9551.050.969Operating netback(1)Oil and NGLs ($/bbl)49.7955.13(10)52.1148.857Natural gas ($/mcf)0.762.52(70)0.982.35(58)Oil equivalent ($/boe)18.6428.92(36)20.9024.83(16)Depletion and depreciation ($/boe)(14.56)(15.35)(5)(14.73)(15.12)(3)Asset impairment ($/boe)(0.96)(0.67)43(2.70)(5.92)(54)General and administrative expenses ($/boe)(1.62)(3.30)(51)(1.69)(5.36)(68)Share based compensation ($/boe)(1.87)(2.62)(29)(1.71)(2.45)(30)Finance expenses ($/boe)(0.98)(1.20)(18)(0.72)(1.67)(57)Finance income ($/boe)-0.44(100)-0.25(100)Loss on sale of assets ($/boe)-(4.86)(100)-(3.06)(100)Deferred tax expense ($/boe)(1.77)-100(1.14)-100Realized gain on risk management contracts ($/boe)4.22-1002.09-100Unrealized gain on risk management contracts ($/boe)0.67-1000.33-100Net earnings (loss) ($/boe)1.771.36300.63(8.50)107(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 Q2 2012, Crocotta continued its cautious approach given lower pricing for both oil and gas and increased volatility and uncertainty in the markets. Crocotta spent less than cash flow in the quarter and is focused primarily on proving up additional lands to add to its drilling inventory.ProductionProduction for Q2 2012 was reported at 6,604 boepd (69% gas; 31% light oil and natural gas liquids) despite having nine days of lost production (approximately 54,000 boes) during late June due to an unscheduled plant disruption at Edson. Production would have averaged over 7,200 boepd if the disruption had not occurred. The disruption did cause some additional operating downtime in July but Crocotta is now operating close to full capability into the plant. In the event that there are no further interruptions, we anticipate Q3 production to be 7,200 to 7,400 boepd.Current capability is over 8,000 boepd with additional Cardium wells currently being drilled and completed. As such, Crocotta reaffirms previous exit guidance at 8,500 boepd while maintaining debt at less than 1:1 debt to cash flow.Capital ProjectsCardiumIn Q2 2012, Crocotta started its summer drilling program with 1 (0.5 net) Cardium horizontal well at Edson. Wet weather has delayed progress in the 5 well (2.7 net) Cardium horizontal program, but as of early August, Crocotta has drilled one additional well (0.6 net) and is starting to drill the third well of the program. All wells on production to date have met or exceeded its type curve for the area.The program, if successful, will add approximately 30 net unbooked locations to its drilling inventory and increase the prospectivity of its other Cardium lands in the area (over 30 net sections). Crocotta also plans to start drilling 100% working interest sections in Q4 2012 assuming continued success in the remainder of the summer drilling program.BlueskyIn Q2 2012, Crocotta drilled 1 (1.0 net) Bluesky horizontal well. In Q3 2012, Crocotta will complete the Q2 2012 well and 1 (0.6 net) well that was drilled in Q1 2012. Crocotta has a large inventory (over 40 net locations) that has been largely proved up over the last two years. MontneyCrocotta placed its Sunrise horizontal Montney well on production at a restricted rate of approximately 5 mmcf/d in Q2 2012. The well has exceeded its type curve for the area and Crocotta is working to put its Montney production into the Alliance Pipeline system and receive the benefit of some of the natural gas liquids it is currently not extracting.Crocotta anticipates to have its plans finalized by late 2012 and drilling additional wells in Q4 2012 and/or Q1 2013.FinancialCrocotta has maintained net debt at less than 1:1 ratio relative to cash flow and had over $58 million of undrawn credit as of the end of Q2 2012 ($41.5 million net debt compared to $100 million credit facility). Crocotta will continue to be conservative in its capital program that will focus primarily on proving up additional drilling inventory while evaluating various farm-in and acquisition opportunities that could enhance future shareholder value.MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")August 7, 2012The MD&A should be read in conjunction with the unaudited interim consolidated financial statements and related notes for the three and six months ended June 30, 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. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.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, deferred income taxes, and unrealized gains and losses on risk management contracts) 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 (excluding 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".Q2 2012 HIGHLIGHTSIncreased production 119% to 6,604 boepd in Q2 2012 from 3,012 boepd in Q2 2011 despite an unscheduled plant disruption at Edson, AB that affected the quarter by 600 boepd Increased funds from operations 77% to $12.3 million in Q2 2012 from $6.9 million in Q2 2011 Reduced production expenses 33% to $5.96/boe in Q2 2012 from $8.87/boe in Q2 2011 Increased bank credit facility to $100.0 million from $80.0 million Commenced its 5 (2.7 net) horizontal Cardium drilling program SUMMARY OF FINANCIAL RESULTSThree Months Ended June 30Six Months Ended June 30($000s, except per share amounts)20122011% Change20122011% ChangeOil and natural gas sales17,51812,2894337,65819,76990Funds from operations12,2756,9277725,2498,941182Per share - basic0.140.09560.290.12142Per share - diluted0.140.08750.280.11155Net earnings (loss)1,065374185772(4,075)119Per share - basic and diluted0.01-1000.01(0.05)120Total assets255,954198,14029Total long-term liabilities21,18114,32248Net debt41,52518,416125The Company has experienced significant growth in oil and natural gas sales and funds from operations over the past year. Successful capital activity during the previous two years, mainly at Edson, AB, resulted in a significant increase in production which resulted in increased revenue and funds from operations.PRODUCTIONThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeAverage Daily ProductionOil and NGLs (bbls/d)2,0531,039982,165814166Natural gas (mcf/d)27,30911,84313127,08110,988146Combined (boe/d)6,6043,0121196,6782,645152Daily production for the three months ended June 30, 2012 increased 119% to 6,604 boe/d compared to 3,012 boe/d for the comparative period in 2011. Year-to-date, daily production increased 152% to 6,678 boe/d in 2012 compared to 2,645 boe/d in 2011. The significant increase in production was mainly due to successful drilling activity at Edson, AB during 2011 and the first half of 2012 which saw 20 gross (16.2 net) wells drilled at a 100% success rate. Compared to the previous quarter, daily production decreased marginally in Q2 2012 to 6,604 boe/d from 6,752 boe/d in Q1 2012 due to unexpected downtime at the third party gas plant that processes the Company's production at Edson, AB. The plant was down for nine days during June that accounted for lost production of approximately 54,000 boe (600 boe/d over the quarter). Had the plant downtime not occurred, average production for the second quarter would have been approximately 7,200 boe/d. The plant was back up by the end of the second quarter although full restoration of production was not achieved until late July. Crocotta's production profile for the first half of 2012 was comprised of 68% natural gas and 32% 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 June 30Six Months Ended June 30($000s)20122011% Change20122011% ChangeOil and NGLs12,0987,6775826,46511,300134Natural gas5,4204,6121811,1938,46932Total17,51812,2894337,65819,76990Average Sales PriceOil and NGLs ($/bbl)64.7781.22(20)67.1776.72(12)Natural gas ($/mcf)2.184.28(49)2.274.26(47)Combined ($/boe)29.1544.83(35)30.9841.29(25)Revenue totaled $17.5 million for the second quarter of 2012, up 43% from $12.3 million in the comparative period. For the six months ended June 30, 2012, revenue totaled $37.7 million, an increase of 90% from $19.8 million for the six months ended June 30, 2011. The increase in revenue was due to significant increases in production, partially offset by a significant decrease in oil and natural gas commodity prices. The following table outlines the Company's realized wellhead prices and industry benchmarks:Commodity PricingThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeOil and NGLsCorporate price ($CDN/bbl)64.7781.22(20)67.1776.72(12)Edmonton par ($CDN/bbl)84.39102.63(18)88.5495.57(7)West Texas Intermediate ($US/bbl)93.51102.56(9)98.1598.27-Natural gasCorporate price ($CDN/mcf)2.184.28(49)2.274.26(47)AECO price ($CDN/mcf)1.903.97(52)2.033.84(47)Exchange rateCDN/US dollar average exchange rate0.99061.0365(4)0.99461.0254(3)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 76.8% and 75.9% of Edmonton Par price for the three and six months ended June 30, 2012, down marginally from 79.1% and 80.3% for the comparative period in 2011. Corporate average natural gas prices were 114.7% and 111.8% of AECO prices for the three and six months ended June 30, 2012, up slightly from 107.8% and 110.9% in the comparative period. 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 2012. The Company has entered into the following commodity price contracts:CommodityPeriodType of ContractQuantity ContractedContract PriceOilMay 1, 2012 - September 30, 2012Financial - Swap800 bbls/dWTI US $104.38/bblNatural GasJuly 1, 2012 - December 31, 2012Financial - Swap5,000 GJ/dAECO CDN $2.400/GJNatural GasAugust 1, 2012 - October 31, 2012Financial - Swap5,000 GJ/dAECO CDN $2.300/GJNatural GasJanuary 1, 2013 - December 31, 2013Financial - Swap10,000 GJ/dAECO CDN $2.705/GJNatural GasJanuary 1, 2013 - December 31, 2013Financial - Call10,000 GJ/dAECO CDN $4.000/GJFor the three months ended June 30, 2012, the realized gain on the oil contract was $2.5 million. During the second quarter, the Company settled a portion of the original oil contract for the period from October 1, 2012 through December 31, 2012. As a result of the settlement, the Company received cash proceeds of $1.7 million, which was included in the realized gain. The fair value of the risk management contracts at June 30, 2012 were allocated to current and non-current assets and liabilities on a contract by contract basis as summarized below: OilNatural GasTotalCurrent asset (liability)1,977(803)1,174Non-current asset (liability)-(774)(774)Net asset (liability)1,977(1,577)400ROYALTIESThree Months Ended June 30Six Months Ended June 30($000s)20122011% Change20122011% ChangeOil and NGLs1,6281,61713,5322,66033Natural gas50352867670296126Total2,1311,669284,2022,95642Average Royalty Rate (% of sales)Oil and NGLs13.521.1(36)13.323.5(43)Natural gas9.31.17456.03.571Combined12.213.6(10)11.215.0(25)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 June 30, 2012, oil, NGLs, and natural gas royalties increased 28% to $2.1 million from $1.7 million in the comparative period. For the six months ended June 30, 2012, oil, NGLs, and natural gas royalties increased 42% to $4.2 million from $3.0 million in 2011. This increase stemmed from a significant increase in revenue in the first half of 2012 compared to the first half of 2011 mainly due to a significant increase in production. Of note, natural gas royalties increased to $0.5 million during the second quarter of 2012 compared to $0.2 million in the first quarter of 2012 due mainly to a prior period adjustment to the annual capital cost and processing fee deductions.The overall effective royalty rate was 12.2% for the three months ended June 30, 2012 compared to 13.6% for the three months ended June 30, 2011. Year-to-date, the overall effective royalty rate was 11.2% in 2012 compared to 15.0% in 2011. The effective oil and NGLs royalty rate decreased significantly as a result of royalty incentive rates received on the successful Edson wells brought on production during the previous and current year. The effective natural gas royalty rate increased as a result of a prior period adjustment to the annual capital costs and processing fee deductions. The overall effective royalty rate for the second quarter of 2012 was up marginally from the first quarter of 2012 which had an overall rate of 10.3%.PRODUCTION EXPENSESThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeOil and NGLs ($/bbl)5.398.09(33)5.098.93(43)Natural gas ($/mcf)1.041.55(33)0.971.59(39)Combined ($/boe)5.968.87(33)5.579.33(40)Per unit production expenses for the three and six months ended June 30, 2012 were $5.96/boe and $5.57/boe, respectively, down significantly from $8.87/boe and $9.33/boe for the comparative periods ended June 30, 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. Compared to the previous quarter, per unit production expenses increased 15% to $5.96/boe in the second quarter of 2012 from $5.18/boe in the first quarter of 2012. The increase was mainly due to property taxes being incurred during the second quarter, which amounted to $0.63/boe for the three months ended June 30, 2012, combined with the nine day disruption at Edson, AB. The Company continues to focus on opportunities to maintain operational efficiencies to enhance operating netbacks.TRANSPORTATION EXPENSESThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeOil and NGLs ($/bbl)0.870.89(2)1.000.8814Natural gas ($/mcf)0.180.16130.180.176Combined ($/boe)1.000.9551.050.969Transportation expenses are mainly third-party pipeline tariffs incurred to deliver production to the purchasers at main hubs. For the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011, transportation expenses increased 5% to $1.00/boe from $0.95/boe. Year-to-date, transportation expenses increased 9% to $1.05/boe in 2012 from $0.96/boe in 2011. The year-to-date increase in transportation expenses was due to an increase in oil and NGLs transportation expenses resulting from a prior period adjustment for NGL transportation costs. The costs were incurred as a result of restrictions at the third party Edson gas plant where the majority of the Company's production is processed. The restrictions resulted in the plant operator diverting volumes from the plant which resulted in additional unanticipated transportation costs. OPERATING NETBACKThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeOil and NGLs ($/bbl)Revenue64.7781.22(20)67.1776.72(12)Royalties8.7217.11(49)8.9718.06(50)Production expenses5.398.09(33)5.098.93(43)Transportation expenses0.870.89(2)1.000.8814Operating netback49.7955.13(10)52.1148.857Natural gas ($/mcf)Revenue2.184.28(49)2.274.26(47)Royalties0.200.053000.140.15(7)Production expenses1.041.55(33)0.971.59(39)Transportation expenses0.180.16130.180.176Operating netback0.762.52(70)0.982.35(58)Combined ($/boe)Revenue29.1544.83(35)30.9841.29(25)Royalties3.556.09(42)3.466.17(44)Production expenses5.968.87(33)5.579.33(40)Transportation expenses1.000.9551.050.969Operating netback18.6428.92(36)20.9024.83(16)During the second quarter of 2012, Crocotta generated an operating netback of $18.64/boe, down 36% from $28.92/boe for the second quarter of 2011. During the first half of 2012, Crocotta generated an operating netback of $20.90/boe compared to $24.83/boe in the comparative period. The decrease was mainly due to significant decreases in oil, NGLS, and natural gas commodity prices in 2012 compared to 2011, partially offset by declines in royalties and production expenses. Operating netbacks in Q2 2012 were down from operating netbacks of $23.13/boe in Q1 2012 due mainly to a decline in oil, NGLs, and natural gas commodity prices. The following is a reconciliation of operating netback per boe to net earnings (loss) per boe for the periods noted:Three Months Ended June 30Six Months Ended June 30($/boe)20122011% Change20122011% ChangeOperating netback18.6428.92(36)20.9024.83(16)Depletion and depreciation(14.56)(15.35)(5)(14.73)(15.12)(3)Asset impairment(0.96)(0.67)43(2.70)(5.92)(54)General and administrative expenses(1.62)(3.30)(51)(1.69)(5.36)(68)Share based compensation(1.87)(2.62)(29)(1.71)(2.45)(30)Finance expenses(0.98)(1.20)(18)(0.72)(1.67)(57)Finance income-0.44(100)-0.25(100)Loss on sale of assets-(4.86)(100)-(3.06)(100)Deferred tax expense(1.77)-100(1.14)-100Realized gain on risk management contracts4.22-1002.09-100Unrealized gain on risk management contracts0.67-1000.33-100Net earnings (loss)1.771.36300.63(8.50)107DEPLETION AND DEPRECIATIONThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeDepletion and depreciation ($000s)8,7484,20810817,9037,237147Depletion and depreciation ($/boe)14.5615.35(5)14.7315.12(3)Depletion and depreciation for the three and six months ended June 30, 2012 was $14.56/boe and $14.73/boe, respectively, consistent with depletion and depreciation of $15.35/boe and $15.12/boe for the comparative periods ended June 30, 2011. Depletion and depreciation for the second quarter of 2012 was also consistent with depletion and depreciation of $14.90/boe for the previous quarter ended March 31, 2012.ASSET IMPAIRMENTThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeAsset impairment ($000s)5791852133,2842,83416Asset impairment ($/boe)0.960.67432.705.92(54)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 six months ended June 30, 2012, total exploration and evaluation asset impairments of $1.4 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 $1.0 million were recognized relating to the expiry of undeveloped land rights (CGUs - Smoky AB and Miscellaneous AB). For the comparative period ended June 30, 2011, total exploration and evaluation asset impairments of $2.8 million were recognized. Asset impairments of $2.2 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 $0.6 million were recognized relating to the expiry of undeveloped land rights (CGUs - Ferrier AB and Miscellaneous AB). For the three months ended June 30, 2012, asset impairments of $0.6 million were recognized relating to the expiry of undeveloped land rights (CGUs - Smoky AB, Miscellaneous AB, and Saskatchewan). For the three months ended June 30, 2011, asset impairments of $0.2 million were recognized relating to the expiry of undeveloped land rights (CGUs - Smoky AB and Miscellaneous AB).For the six months ended June 30, 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 during the first quarter. No property, plant, and equipment impairments were recorded for the three months ended June 30, 2012 and June 30, 2011.GENERAL AND ADMINISTRATIVEThree Months Ended June 30Six Months Ended June 30($000s)20122011% Change20122011% ChangeG&A expenses (gross)1,3011,23552,7853,364(17)G&A capitalized(69)(70)(1)(146)(178)(18)G&A recoveries(256)(259)(1)(585)(618)(5)G&A expenses (net)97690682,0542,568(20)G&A expenses ($/boe)1.623.30(51)1.695.36(68)General and administrative expenses ("G&A") decreased significantly to $1.62/boe and $1.69/boe for the three and six months ended June 30, 2012, respectively, compared to $3.30/boe and $5.36/boe for the three and six months ended June 30, 2011. The decrease was mainly due to a significant increase in production and a reduction in various administrative costs.SHARE BASED COMPENSATIONThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeShare based compensation ($000s)1,123717572,0831,17477Share based compensation ($/boe)1.872.62(29)1.712.45(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 $1.87/boe for the three months ended June 30, 2012 from $2.62/boe in the comparative period. Year-to-date, share based compensation expense decreased to $1.71/boe in 2012 from $2.45/boe in 2011. The decrease was a result of a significant increase in production in 2012 compared to 2011. During the first half of 2012, the Company granted 0.7 million options (2011 - 2.6 million). FINANCE EXPENSESThree Months Ended June 30Six Months Ended June 30($000s)20122011% Change20122011% ChangeInterest expense49221612864849631Accretion of decommissioning obligations99103(4)222227(2)Unrealized loss on investments-9(100)-79(100)Finance expenses591328808708028Finance expenses ($/boe)0.981.20(18)0.721.67(57)Interest expense relates to interest incurred on amounts drawn from the Company's credit facility. At June 30, 2012, $39.7 million (2011 - $13.7 million) had been drawn on the Company's credit facility. FINANCE INCOMEThree Months Ended June 30Six Months Ended June 30($000s)20122011% Change20122011% ChangeFinance income-121(100)-121(100)Finance income ($/boe)-0.44(100)-0.25(100)LOSS ON SALE OF ASSETSThree Months Ended June 30Six Months Ended June 3020122011% Change20122011% ChangeLoss on sale of assets ($000s)-1,331(100)-1,465(100)Loss on sale of assets ($/boe)-4.86(100)-3.06(100)During the first half of 2011, the Company recognized a loss on sale of assets of $1.5 million relating mainly to the disposition of certain non-core oil and natural gas assets. DEFERRED INCOME TAXESDeferred income tax expense on the earnings before taxes for the three and six months ended June 30, 2012 were $1.1 million and $1.4 million, respectively (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 as well as renouncing flow-through shares. Estimated tax pools at June 30, 2012 total approximately $261.1 million.FUNDS FROM OPERATIONS Funds from operations for the three and six months ended June 30, 2012 were $12.3 million ($0.14 per diluted share) and $25.2 million ($0.28 per diluted share), respectively, compared to $6.9 million ($0.08 per diluted share) and $8.9 million ($0.11 per diluted share) for the three and six months ended June 30, 2011. The increase was mainly due to a significant increase in production which resulted in a significant increase in revenue. Of note, included in funds from operations for the three and six months ended June 30, 2012 was $2.5 million in realized gains on risk management contracts.The following is a reconciliation of cash flow from operating activities to funds from operations for the periods noted:Three Months Ended June 30Six Months Ended June 30($000s)20122011% Change20122011% ChangeCash flow from operating activities (GAAP)13,1785,08715925,6677,430245Add back:Decommissioning expenditures163-100350-100Change in non-cash working capital(1,066)1,840(158)(768)1,511(151)Funds from operations (non-GAAP)12,2756,9277725,2498,941182NET EARNINGS (LOSS)The Company had net earnings of $1.1 million ($0.01 per diluted share) for the three months ended June 30, 2012 compared to net earnings of $0.4 million ($nil per diluted share) for the three months ended June 30, 2011. Year-to-date, the Company had net earnings of $0.8 million ($0.01 per diluted share) in 2012 compared to a net loss of $4.1 million ($0.05 per diluted share) in 2011. Net earnings for the three and six months ended June 30, 2012 arose mainly due to a significant increase in production which led to an increase in revenue combined with realized and unrealized gains on risk management contracts.CAPITAL EXPENDITURESThree Months Ended June 30Six Months Ended June 30($000s)20122011% Change20122011% ChangeLand1,4304142453,080917236Drilling, completions, and workovers8,4958,972(5)28,03822,45425Equipment8261,427(42)7,1525,28535Geological and geophysical2982749418609(31)Other-24(100)-24(100)Exploration and development11,04911,111(1)38,68829,28932Property acquisitions-1,000(100)-1,000(100)Property dispositions-(4,387)(100)-(4,253)(100)Net property dispositions-(3,387)(100)-(3,253)(100)Net capital expenditures11,0497,7244338,68826,03649For the three months ended June 30, 2012, the Company had net capital expenditures of $11.0 million compared to net capital expenditures of $7.7 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, the Company had net capital expenditures of $38.7 million compared to $26.0 million for the comparative period in 2011. The increase in exploration and development expenditures in the first half of 2012 was due mainly to an increase in capital activity in the Company's core areas of Edson, AB and northeast BC. During the first six months of 2012, the Company drilled a total of 8 (6.5 net) wells, which resulted in 2.0 (0.9 net) oil wells, 2 (2.0 net) liquids-rich natural gas wells, and 4 (3.6 net) wells that will be completed in the second half of 2012.LIQUIDITY AND CAPITAL RESOURCESThe Company had net debt of $41.5 million at June 30, 2012 compared to net debt of $27.7 million at December 31, 2011. The increase of $13.8 million was mainly due to $38.7 million used for the purchase and development of oil and natural gas properties and equipment and $0.4 million for decommissioning expenditures, offset by funds from operations of $25.2 million.At June 30, 2012, the Company had total credit facilities of $100.0 million, consisting of a $100.0 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 June 30, 2012, $39.7 million (December 31, 2011 - $5.2 million) had been drawn on the revolving credit facility. In addition, at June 30, 2012, the Company had outstanding letters of guarantee of approximately $1.6 million (December 31, 2011 - $1.0 million) which reduce the amount that can be borrowed under the credit facility. 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 during the second quarter of 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 oil and 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 June 30, 2012:Less thanOne toAfter($000s)TotalOne YearThree YearsThree YearsAccounts payable and accrued liabilities12,45412,454--Revolving credit facility39,67839,678--Decommissioning obligations20,180368120,063Office leases1,136529607-Field equipment leases2,5581,4701,088-Drilling rig245245--Firm transportation agreements51229319326Capital processing agreements200--200Total contractual obligations76,96354,7051,96920,289In 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 June 30, 2012, the Company had incurred $3.6 million in connection with this flow-through share commitment.The Company has entered into farm-in agreements to drill and complete three Edson Bluesky wells 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 in total is $15.0 million. The Company has also entered into fixed price financial contracts for future oil and natural gas production as outlined above (see "Revenue" section).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)June 30, 2012August 7, 2012Voting common shares88,09588,095Stock options8,6558,604Warrants3,5213,521Total100,271100,220SUMMARY OF QUARTERLY RESULTS(1)Q2 2012Q1 2012Q4 2011Q3 2011Q2 2011Q1 2011Q4 2010Q3 2010Average Daily ProductionOil and NGLs (bbls/d)2,0532,2771,8791,3361,039586647862Natural gas (mcf/d)27,30926,85223,35415,99611,84310,1249,95810,530Combined (boe/d)6,6046,7525,7714,0023,0122,2742,3072,617($000s, except per share amounts)Oil and natural gas sales17,51820,14020,39114,81412,2897,4807,2748,574Funds from operations12,27512,97412,1159,5516,9272,0144,2003,477Per share - basic0.140.150.150.120.090.030.060.05Per share - diluted0.140.140.140.110.080.030.060.05Net earnings (loss)1,065(293)(7,052)5,535374(4,449)656(2,071)Per share - basic and diluted0.01-(0.09)0.07-(0.06)0.01(0.03)(1)2010 quarterly results have been adjusted to conform to IFRS.A significant increase in production stemming from successful drilling activity during the previous two years resulted in an increase in funds from operations in Q2 2011 through Q2 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 Q2 2012, Crocotta continued its cautious approach given lower pricing for both oil and gas and increased volatility and uncertainty in the markets. Crocotta spent less than cash flow in the quarter and is focused primarily on proving up additional lands to add to its drilling inventory.ProductionProduction for Q2 2012 was reported at 6,604 boepd (69% gas; 31% light oil and natural gas liquids) despite having nine days of lost production (approximately 54,000 boes) during late June due to an unscheduled plant disruption at Edson. Production would have averaged over 7,200 boepd if the disruption had not occurred. The disruption did cause some additional operating downtime in July but Crocotta is now operating close to full capability into the plant. In the event that there are no further interruptions, we anticipate Q3 production to be 7,200 to 7,400 boepd.Current capability is over 8,000 boepd with additional Cardium wells currently being drilled and completed. As such, Crocotta reaffirms previous exit guidance at 8,500 boepd while maintaining debt at less than 1:1 debt to cash flow.Capital ProjectsCardiumIn Q2 2012, Crocotta started its summer drilling program with 1 (0.5 net) Cardium horizontal well at Edson. Wet weather has delayed progress in the 5 well (2.7 net) Cardium horizontal program, but as of early August, Crocotta has drilled one additional well (0.6 net) and is starting to drill the third well of the program. All wells on production to date have met or exceeded its type curve for the area.The program, if successful, will add approximately 30 net unbooked locations to its drilling inventory and increase the prospectivity of its other Cardium lands in the area (over 30 net sections). Crocotta also plans to start drilling 100% working interest sections in Q4 2012 assuming continued success in the remainder of the summer drilling program.BlueskyIn Q2 2012, Crocotta drilled 1 (1.0 net) Bluesky horizontal well. In Q3 2012, Crocotta will complete the Q2 2012 well and 1 (0.6 net) well that was drilled in Q1 2012. Crocotta has a large inventory (over 40 net locations) that has been largely proved up over the last two years. MontneyCrocotta placed its Sunrise horizontal Montney well on production at a restricted rate of approximately 5 mmcf/d in Q2 2012. The well has exceeded its type curve for the area and Crocotta is working to put its Montney production into the Alliance Pipeline system and receive the benefit of some of the natural gas liquids it is currently not extracting.Crocotta anticipates to have its plans finalized by late 2012 and drilling additional wells in Q4 2012 and/or Q1 2013.FinancialCrocotta has maintained net debt at less than 1:1 ratio relative to cash flow and had over $58 million of undrawn credit as of the end of Q2 2012 ($41.5 million net debt compared to $100 million credit facility). Crocotta will continue to be conservative in its capital program that will focus primarily on proving up additional drilling inventory while evaluating various farm-in and acquisition opportunities that could enhance future shareholder value.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 risk The 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 risk The 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 risk Oil 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. The Company has entered into the following commodity price contracts:CommodityPeriodType of ContractQuantity ContractedContract Price OilMay 1, 2012 - September 30, 2012Financial - Swap800 bbls/dWTI US $104.38/bblNatural GasJuly 1, 2012 - December 31, 2012Financial - Swap5,000 GJ/dAECO CDN $2.400/GJNatural GasAugust 1, 2012 - October 31, 2012Financial - Swap5,000 GJ/dAECO CDN $2.300/GJNatural GasJanuary 1, 2013 - December 31, 2013Financial - Swap10,000 GJ/dAECO CDN $2.705/GJNatural GasJanuary 1, 2013 - December 31, 2013Financial - Call10,000 GJ/dAECO CDN $4.000/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)June 30December 31($000s)Note20122011AssetsCurrent assetsAccounts receivable9,74311,298Prepaid expenses and deposits864840Risk management contracts(10)1,174-11,78112,138Property, plant, and equipment(5)203,298192,332Exploration and evaluation assets(4)28,40320,641Deferred income taxes12,47214,443255,954239,554LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities12,45434,692Revolving credit facility(6)39,6785,18252,13239,874Flow-through share premium227813Decommissioning obligations(7)20,18019,250Risk management contracts(10)774-73,31359,937Shareholders' EquityShareholders' capital225,848225,848Contributed surplus11,1798,927Deficit(54,386)(55,158)182,641179,617255,954239,554The accompanying notes are an integral part of these condensed interim consolidated financial statements.Crocotta Energy Inc.Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss)(unaudited)Three Months Ended June 30Six Months Ended June 30($000s, except per share amounts)Note2012201120122011RevenueOil and natual gas sales17,51812,28937,65819,769Royalties(2,131)(1,669)(4,202)(2,956)15,38710,62033,45616,813Realized gain on risk management contracts(10)2,536-2,536-Unrealized gain on risk management contracts(10)400-400-18,32310,62036,39216,813ExpensesProduction3,5792,4326,7654,469Transportation6012601,276460Depletion and depreciation(5)8,7484,20817,9037,237Asset impairment(4,5)5791853,2842,834General and administrative9769062,0542,568Share based compensation(8)1,1237172,0831,17415,6068,70833,36518,742Operating earnings (loss)2,7171,9123,027(1,929)Other ExpensesFinance expense591328870802Finance income-(121)-(121)Loss on sale of assets-1,331-1,4655911,5388702,146Earnings (loss) before taxes2,1263742,157(4,075)TaxesDeferred income tax expense1,061-1,385-Net earnings (loss) and comprehensive earnings (loss)1,065374772(4,075)Net earnings (loss) per shareBasic and diluted0.01-0.01(0.05)The accompanying notes are an integral part of these condensed interim consolidated financial statements.Crocotta Energy Inc.Condensed Consolidated Statements of Shareholders' Equity(unaudited)Six Months Ended June 30($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 - expensed2,0831,174Share based compensation - capitalized16991Share based compensation - exercised-(79)Balance, end of period11,1796,701DeficitBalance, beginning of period(55,158)(49,566)Net earnings (loss)772(4,075)Balance, end of period(54,386)(53,641)Total Shareholders' Equity182,641155,261The 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 June 30Six Months Ended June 30($000s)Note2012201120122011Operating ActivitiesNet earnings (loss)1,065374772(4,075)Depletion and depreciation(5)8,7484,20817,9037,237Asset impairment(4,5)5791853,2842,834Share based compensation(8)1,1237172,0831,174Finance expense591328870802Interest paid(492)(216)(648)(496)Loss on sale of assets-1,331-1,465Deferred income tax expense1,061-1,385-Unrealized gain on risk management contracts(10)(400)-(400)-Decommissioning expenditures(7)(163)-(350)-Change in non-cash working capital1,066(1,840)768(1,511)13,1785,08725,6677,430Financing ActivitiesRevolving credit facility(6)5,6152,55334,496(21,669)Issuance of shares---36,074Share issue costs---(2,116)5,6152,55334,49612,289Investing ActivitiesCapital expenditures - property, plant, and equipment(5)(4,934)(11,313)(29,482)(28,338)Capital expenditures - exploration and evaluation assets(4)(6,115)(798)(9,206)(1,951)Asset dispositions-4,387-4,253Change in non-cash working capital(7,744)84(21,475)6,317(18,793)(7,640)(60,163)(19,719)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 and Six Months Ended June 30, 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 August 7, 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, and derivative financial instruments, which are measured at their estimated fair value (note 10). (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, 201120,641Additions9,206Impairment(1,444)Balance, June 30, 201228,403Exploration 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 $9.2 million of additions during the six months ended June 30, 2012 were additions of $2.8 million related to the Edson AB CGU and $5.9 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 six months ended June 30, 2012, total exploration and evaluation asset impairments of $1.4 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 $1.0 million were recognized relating to the expiry of undeveloped land rights (CGUs - Smoky AB and Miscellaneous AB).5. PROPERTY, PLANT, AND EQUIPMENTCostTotalBalance, December 31, 2011236,846Additions29,482Change in decommissioning obligation estimates1,058Capitalized share based compensation169Balance, June 30, 2012267,555Accumulated Depletion, Depreciation, and ImpairmentTotalBalance, December 31, 201144,514Depletion and depreciation17,903Impairment1,840Balance, June 30, 201264,257Net Book ValueTotalDecember 31, 2011192,332June 30, 2012203,298During the three and six months ended June 30, 2012, approximately $0.1 million (2011 - $0.1 million) and $0.1 million (2011 - $0.2 million), respectively, 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 June 30, 2012 included an estimated $177.4 million (2011 - $60.8 million) for future development costs associated with proved plus probable undeveloped reserves and excluded approximately $9.0 million (2011 - $7.8 million) for the estimated salvage value of production equipment and facilities. ImpairmentsAn impairment test was not performed at June 30, 2012 as there were no indicators of impairment. For the six months ended June 30, 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 during the first quarter. 6. CREDIT FACILITIESAt June 30, 2012, the Company had total credit facilities of $100.0 million, consisting of a $100.0 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 June 30, 2012, $39.7 million (December 31, 2011 - $5.2 million) had been drawn on the revolving credit facility. In addition, at June 30, 2012, the Company had outstanding letters of guarantee of approximately $1.6 million (December 31, 2011 - $1.0 million) which reduce the amount that can be borrowed under the credit facility. 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 $27.6 million which is estimated to be incurred between 2012 and 2041. At June 30, 2012, a risk-free rate of 2.2% (December 31, 2011 - 2.4%) was used to calculate the net present value of the decommissioning obligations. Six Months EndedJune 30, 2012Balance, beginning of period19,250Provisions incurred402Provisions disposed-Provisions settled(350)Revisions656Accretion222Balance, end of period20,1808. 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 June 30, 2012, 8.7 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, 20117,9421.97Granted7133.43Balance, June 30, 20128,6552.09Exercisable at June 30, 20123,3141.54The following table summarizes the stock options outstanding and exercisable at June 30, 2012:Options OutstandingOptions ExercisableExercise PriceNumberWeighted AverageRemaining LifeWeighted AverageExercise PriceNumberWeighted AverageExercise Price$1.10 to $2.003,6602.41.242,3461.21$2.01 to $3.004,2973.72.599682.34$3.01 to $3.466984.63.46--8,6553.22.093,3141.54Share based compensationThe Company accounts for its share based compensation plans using the fair value method. Under this method, compensation cost is charged to earnings over the vesting period for stock options and warrants granted to officers, directors, employees, and consultants with a corresponding increase to contributed surplus. The fair value of the stock options granted were estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions: Three Months EndedSix Months EndedJune 30, 2012June 30, 2012Risk-free interest rate (%)1.11.3Expected life (years)4.04.0Expected volatility (%)77.577.2Expected dividend yield (%)--Forfeiture rate (%)6.87.4Weighted average fair value of options granted ($ per option)1.131.96WarrantsAt June 30, 2012, 3.5 million warrants were outstanding at a weighted average exercise price of $3.64 per warrant. At the annual and special meeting of shareholders held on May 2, 2012, approval was obtained to extend the expiry date of 2.3 million warrants issued in 2007 priced between $3.75 and $6.75 to December 23, 2013. The resulting compensation cost charged to earnings in relation to the extension of the warrants was $0.2 million during the three months ended June 30, 2012. The fair value of each warrant extended during the period was estimated using the Black-Scholes-Merton option pricing model with the following weighted average assumptions: Three Months EndedSix Months EndedJune 30, 2012June 30, 2012Risk-free interest rate (%)1.31.3Expected life (years)1.01.0Expected volatility (%)54.454.4Expected dividend yield (%)--Forfeiture rate (%)--Weighted average fair value of warrants extended ($ per warrant)0.090.099. 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 EndedSix Months EndedJune 30, 2012June 30, 2012Weighted average number of shares - basic88,09588,095Dilutive effect of share based compensation plans2,1392,905Weighted average number of shares - diluted90,23491,00010. FINANCIAL INSTRUMENTSThe fair value of the risk management contracts at June 30, 2012 are measured using significant observable inputs, other than quoted market prices (level 2). There were no transfers between level 1, level 2, and level 3 classified assets and liabilities during the six months period ended June 30, 2012.Risk management contracts are recorded on the statement of financial position at fair value each reporting period with the change in fair value being recorded as an unrealized gain or loss in earnings or loss. The estimated fair value of the financial contracts has been determined on the amounts that the Company would receive or pay to terminate the contracts. The fair value of risk management contracts is determined by discounting the difference between the contracted price and published forward curves as at the statement of financial position date, using the remaining contracted volumes.The Company has entered into the following commodity price contracts:CommodityPeriodType of ContractQuantity ContractedContract PriceOilMay 1, 2012 - September 30, 2012Financial - Swap800 bbls/dWTI US $104.38/bblNatural GasJuly 1, 2012 - December 31, 2012Financial - Swap5,000 GJ/dAECO CDN $2.400/GJNatural GasAugust 1, 2012 - October 31, 2012Financial - Swap5,000 GJ/dAECO CDN $2.300/GJNatural GasJanuary 1, 2013 - December 31, 2013Financial - Swap10,000 GJ/dAECO CDN $2.705/GJNatural GasJanuary 1, 2013 - December 31, 2013Financial - Call10,000 GJ/dAECO CDN $4.000/GJFor the three months ended June 30, 2012, the realized gain on the oil contract was $2.5 million. During the second quarter, the Company settled a portion of the original oil contract for the period from October 1, 2012 through December 31, 2012. As a result of the settlement, the Company received cash proceeds of $1.7 million, which was included in the realized gain. The fair value of the risk management contracts at June 30, 2012 were allocated to current and non-current assets and liabilities on a contract by contract basis as summarized below: OilNatural GasTotalCurrent asset (liability)1,977(803)1,174Non-current asset (liability)-(774)(774)Total asset (liability)1,977(1,577)40011. 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 June 30, 2012, the Company had incurred $3.6 million in connection with this flow-through share commitment.The Company has entered into farm-in agreements to drill and complete three Edson Bluesky wells 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. The Company has also entered into fixed price financial contracts for future oil and natural gas production as outlined in note 10.CORPORATE INFORMATIONOFFICERS AND DIRECTORSRobert J. Zakresky, CAPresident, CEO & DirectorBANKNational Bank of Canada1800, 311 - 6th Avenue SWNolan Chicoine, MPAcc, CAVP Finance & CFOCalgary, Alberta T2P 3H2Terry L. Trudeau, P.Eng.VP Operations & COO TRANSFER AGENTValiant Trust CompanyWeldon Dueck, BSc., P.Eng.VP Business Development310, 606 - 4th Street SW Calgary, Alberta T2P 1T1R.D. (Rick) Sereda, M.Sc., P.Geol.VP ExplorationLEGAL COUNSELHelmut R. Eckert, P.LandVP LandGowling Lafleur Henderson LLP 1400, 700 - 2nd Street SWCalgary, Alberta T2P 4V5Kevin KeithVP ProductionLarry G. Moeller, CA, CBVChairman of the BoardAUDITORS KPMG LLP2700, 205 - 5th Avenue SWDaryl H. Gilbert, P.Eng.DirectorCalgary, Alberta T2P 4B9Don CowieDirectorINDEPENDENT ENGINEERSGLJ Petroleum Consultants Ltd.Brian KrausertDirector4100, 400 - 3rd Avenue SW 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