Fortress Energy Inc. Announces Third Quarter 2008 Financial and Operating Results

CALGARY, ALBERTA, Nov 14, 2008 (Marketwire via COMTEX) -- Fortress Energy Inc. ("Fortress" or the "Company") (TSX:FEI) announces results for the third quarter ended September 30, 2008.

Corporate Highlights

- Production has increased 44% to 1,478 for the third quarter of 2008 compared to the third quarter 2007. There remains additional production capacity which is constrained by the processing limitations of third party production facilities.

- Cash flow increased 82% for the nine months ended September 2008 to $5,844,000 or $0.22 per share compared to $3,210,000 for the nine month period ended September 30, 2007.

- Achieved net income after tax of $1,070,000 or $0.04 per share for the third quarter of 2008.

- Completed a $16.55 million equity financing resulting in net indebtedness being $18,026,000 for the three months ended September 30, 2008.

- Sold forward 55% of production until March 2010 to realize an average price of $8.41 per mcf.

- Drilling two high impact exploration wells prior to year-end.

Commodity Prices

During the third quarter of 2008 the Company experienced a significant decrease in natural gas prices. Well head spot reference price was pricing was $9.63 per mcf in July, 2008 and decreased to $6.18 per mcf in September, 2008. Although we remain bullish over the long term regarding the fundamentals for natural gas pricing we believe that the natural gas prices over the ensuing year will remain relatively weak. All of our product sales trade in reference to US dollars, a falling Canadian dollar helps mitigate the impact of declining natural gas prices as the majority of our costs are in Canadian dollars.

Hedging Program

Considering the uncertainty over economic conditions and the variations of supply and demand balances, Fortress has undertaken the following forward sale transactions to provide better certainty of cash flow through to March 2010.

In fourth quarter of 2007 the Fortress made a decision to sell forward 5,000 GJ/d being 60% of its production at the equivalent price of $7.16 per mcf until October 30, 2008. This has resulted in an average realized price of $7.69 per mcf compared to an average reference spot price of $8.51 per mcf over the nine months ended September 30, 2008. During the third quarter of 2008, Fortress sold forward 5,000 GJ/d at the equivalent price of $9.44 per mcf from November 1, 2008 until March 31, 2009. Also during the third quarter of 2008, Fortress has sold forward 5,100 GJ/d at the equivalent price of $7.92 per mcf from April 1, 2009 until December 31, 2009. Recently the Company sold forward 2,600 GJ/d at the equivalent price of $9.22 per mcf from January 1, 2010 until March 31, 2010.

The effect of these transactions is that an estimated 55% of Fortress's production is sold forward at an average price of $8.41 per mcf until March 31, 2010.

08/09 Winter Capital Program

The Company remains dedicated to our capital budget philosophy, which is to fund capital programs based on available cash flow from operations. Most of the Fortress's operations are conducted during the winter months from December until mid to late March. Fortress's capital expenditures planned for the 2009/10 winter program will amount to approximately $8.5 million which is expected to be in line with the expected 2009 cash flow.

Development Activity - Square Creek and Ladyfern

Fortress will be pursuing two additional development wells to further delineate the Square Creek Bluesky and Notikewin pools. One of the locations will be drilled and completed as a dual zone, optimizing production and reducing capital deployed. Fortress is working with the owner of the Clear Prairie facility to debottleneck the facility and associated infrastructure, thereby allowing an increase in net production from the current rate of 466 boe per day to 650 boe per day and accommodating additional gas volumes expected from the 2008/2009 winter capital program.

Fortress has over 50 development locations on it properties in the Ladyfern area in which it owns between 60% and 100% working interest. The Company is planning on pursuing a number of development drilling locations as part of the 08/09 winter capital program.

Exploration Activity - Square Creek, Clear Prairie and Pine Creek

During the winter 07/08, Fortress constructed a 41 km pipeline and natural gas processing facility to service the Square Creek area along which the Company owns approximately 40,000 net acres of undeveloped land. Fortress has identified a two new multi zone drilling prospects on it lands from 2D it had acquired and 3D seismic it has access to. One well will be drilled prior to year end offsetting the existing Square Creek Blue Sky and Notikewin pools currently producing 5.8mmcf/d. An additional well will be drilled prior to February 15, 2009 targeting Bluesky, Charlie Lake and Notikewin formations. If either of these wells is successful, it will lead to further multi-well development activity in future years.

Fortress will commence drilling a high-impact exploration well in the Pine Creek area on its 100% owned lands in late November 2008. The drilling location is offsetting a well currently producing 5.0 mmcf/d. If successful, this well can be placed on stream in the first quarter of 2009.

Balance Sheet

Fortress ends the quarter with a net debt of $18.0 million and a line of credit from the Alberta Treasure Branches of $25 million. The Company has no requirements to raise additional financing, despite an aggressive 2008/09 capital spending program being undertaken. In September 2008, the Company re-filed its income tax returns for the 1997 to 1999 tax years to claim additional scientific research and experimental development ("SR&ED") credits related to the bio-technology business of its predecessor company. These additional claims could result a refund of approximately $3.4 million to the Company. The Company has not recorded this refund at September 30, 2008.

Operating Costs

Fortress has experience a significant increase in third party charges related to field activities and as a consequence unit operating costs have increased to $14.48/boe for the nine months ended September 30, 2008 compared to $9.21/boe for the nine months ended September 30, 2007. During the third quarter of 2008, Fortress has undertaken a program to reduce operating costs and have acquired rental equipment and will be increasing volumes at Square Creek which will have the effect of allocating the fixed portion of operating costs over a larger volume of production thereby reducing per unit operating costs. The impact of these changes will not be seen until the fourth quarter of 2008 and the first quarter of 2009.

Mr. Bailey said .... "we continue to make progress towards growing production and developing a profitable business even with the uncertainty that surrounds the general market. The forward sale arrangements that are in place through to March 2010 will provide certainty of cash flow and allow us to continue to grow by developing our projects."

Investor Conference Call

Fortress would like to invite interested investors and shareholders to take part in a conference call scheduled for 3:00pm MST (5:00pm EST) Wednesday, November 19th, 2008. To access the call, please dial 416-695-9757 or 866-542-4270 and mention the name Fortress.

Replay of Conference Call

Fortress will also host a replay of the investor call which will be available for a week following the call. For those who are unable to dial in to the scheduled call, the number and passcode below will allow a replay of the call at any time before 11:59 November 27, 2008.

Dial-in number(s): 416-695-5800 / 800-408-3053 Passcode: 3275498

Prompts: Name, Company and Phone Number

FINANCIAL AND OPERATING SUMMARY ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended September 30, 2008 September 30, 2007 ($000's) $/boe ($000's) $/boe ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Petroleum and natural gas sales 6,591 48.44 2,893 30.67 Realized gain (loss) on commodity contracts (1,047) (7.70) 261 2.77 ---------------------------------------------------------------------------- 5,544 40.74 3,154 33.44 Royalties (1,158) (8.51) (380) (4.03) Operating costs (2,139) (15.72) (973) (10.31) ---------------------------------------------------------------------------- Operating netback (1) 2,247 16.51 1,801 19.10 General and administrative expenses (693) (5.09) (848) (8.99) Net interest expense (361) (2.65) (448) (4.75) ---------------------------------------------------------------------------- Funds from operations (1) 1,193 8.77 505 5.36 Unrealized gain (loss) on commodity contracts 4,323 31.77 (35) (0.37) Depletion, depreciation and accretion (3,805) (27.97) (2,536) (26.87) Stock-based compensation expense (77) (0.57) (150) (1.59) Gain (loss) on sale of pipeline asset 124 0.91 - - ---------------------------------------------------------------------------- Income (loss) before income taxes 1,758 12.91 (2,216) (23.47) Future income tax recovery (expense) (688) (5.06) 613 6.50 ---------------------------------------------------------------------------- Net income (loss) 1,070 7.85 (1,603) (16.97) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Sales volume (boe/d) 1,478 1,025 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Nine months ended September 30, 2008 September 30, 2007 ($000's) $/boe ($000's) $/boe ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Petroleum and natural gas sales 20,195 52.55 9,499 38.61 Realized gain (loss) on commodity contracts (2,232) (5.81) 358 1.44 ---------------------------------------------------------------------------- 17,963 46.74 9,857 40.05 Royalties (3,421) (8.90) (1,371) (5.57) Operating costs (5,565) (14.48) (2,268) (9.21) ---------------------------------------------------------------------------- Operating netback (1) 8,977 23.36 6,218 25.27 General and administrative expenses (2,084) (5.42) (2,583) (10.50) Net interest expenses (1,049) (2.73) (425) (1.73) ---------------------------------------------------------------------------- Funds from operations (1) 5,844 15.21 3,210 13.04 Unrealized gain (loss) on commodity contracts 1,333 3.47 73 0.30 Depletion, depreciation and accretion (10,627) (27.65) (6,585) (26.75) Stock-based compensation expense (149) (0.39) (429) (1.74) Gain (loss) on sale of pipeline asset (428) (1.11) - - ---------------------------------------------------------------------------- Income (loss) before income taxes (4,027) (10.47) (3,731) (15.15) Future income tax recovery (expense) 898 2.34 1,203 4.89 ---------------------------------------------------------------------------- Net income (loss) (3,129) (8.13) (2,528) (10.26) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Sales volume (boe/d) 1,403 901 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Non-GAAP measures. See discussion in the following MD&A.

MANAGEMENT'S DISCUSSION AND ANALYSIS

November 14, 2008

Management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements of Fortress Energy Inc. ("Fortress" or the "Company") as at and for the three and nine months ended September 30, 2008 and the audited consolidated financial statements of Fortress Energy Inc. for the year ended December 31, 2007. The interim financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All tabular amounts in the following discussion are in thousands of Canadian dollars unless otherwise noted. Additional information is available on the Company's web site at http://www.fortressenergy.ca/ or under the Company's profile at http://www.sedar.com/.

This MD&A provides management's analysis of Fortress' historical financial and operating performance based on information currently available. Actual results will vary from estimates and variances may be significant. Historical results are not indicative of future performance.

Non-GAAP Measurements

The terms "funds from operations" and "operating netback" used in this MD&A are not recognized measures under GAAP. Management believes that in addition to net income, funds from operations and operating netback are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities before the consideration of how those activities are financed. Investors are cautioned, however, that these measures should not be construed as alternatives to net income determined in accordance with GAAP, as an indication of the Company's performance.

The Company's method of calculating funds from operations may differ from that of other companies, and, accordingly it may not be comparable to measures used by other companies. The Company calculates funds from operations by taking cash flow from operating activities as determined under GAAP before changes in non-cash operating working capital and abandonment expenditures. The statements of cash flows included in the financial statements present the reconciliation between net income (loss) and funds from operations. A summary of this reconciliation is as follows:

---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ($000's) Three months ended Nine months ended September September September September 30, 2008 30, 2007 30, 2008 30, 2007 ---------------------------------------------------------------------------- Cash provided by (used in) operating activities 1,315 (879) 9,893 2,905 Change in non-cash operating working capital (122) 1,384 (4,130) 305 Abandonment expenditures - - 81 - ---------------------------------------------------------------------------- Funds from operations 1,193 505 5,844 3,210 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Funds from operations per share is calculated using the weighted average basic and diluted shares used to calculate earnings per share.

Operating netback is calculated as the average unit sales price less royalties, realized gain (loss) on commodity contracts, and operating expenses. Operating netback represents the cash margin for every barrel of oil equivalent and is a common benchmark used in the oil and gas industry. There is no GAAP measure that is reasonably comparable to operating netback.

BOE Presentation

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

Forward Looking Statements

Statements in this MD&A may contain forward looking information including expectations of future production, components of cash flow and earnings, expected future events and/or financial results that are forward looking in nature and subject to substantial risks and uncertainties. Without limiting the generality of the foregoing, the Company has made materially forward looking statements:

(i) under the heading "Corporate Highlights" and "Share Capital" regarding the use of proceeds of the equity financing for the 2009 capital program and working capital requirements;

(ii) Under the heading "Corporate Highlights" regarding the Pine Creek exploration well and anticipated timing of production; and

(iii) Under the heading "Production" regarding the anticipated resolution of plant capacity issues.

The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The Company cautions the readers that actual performance will be affected by a number of factors, as many may respond to changes in economic and political circumstances throughout the world. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company. These risks include, but are not limited to: the risks associated with the oil and gas industry, commodity prices and exchange rate changes; industry related risks could include, but are not limited to, operational risks in exploration, development and production (applicable to the forward looking statements (i) through (iii) above), delays or changes in plans (applicable to the forward looking statements identified in (i) through (iii) above); risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses. These external factors beyond the Company's control may affect the marketability of oil and natural gas produced, industry conditions including changes in laws and regulations, changes in income tax regulations, increased competition, fluctuations in commodity prices, interest rates, and variations in the Canadian/United States dollar exchange rate. The reader is cautioned not to place undue reliance on this forward looking information.

Statements throughout this MD&A that are not historical facts may be considered "forward looking statements." These forward looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe the Company's objectives, goals or future plans are forward looking statements. Since forward looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to any number of risks including, but not limited to:

(i) Risks associated with the oil and gas industry and regulatory bodies (e.g. operational risks in exploration, development and production, or changes in royalty rates);

(ii) Delays or changes in plans with respect to exploration or development projects or capital expenditures;

(iii) Uncertainty of estimates and projections relating to recoverable reserves, costs and expenses;

(iv) Health, safety and environmental risks; and

(v) Commodity price and exchange rate fluctuations.

In making its forward looking statements, the Company used among other things, the following material factors or assumptions: the 2009 capital program will proceed as anticipated, drilling will result in a commercial discovery and that parties can reach agreement as to expansion of plant capacity.

Forward looking statements contained herein are made as of the date hereof subject to the requirements of applicable securities legislation and except as otherwise required by law, the Company assumes no obligation to update any forward looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, the reader is cautioned not to place undue reliance on forward looking statements.

DESCRIPTION OF THE BUSINESS

Fortress' primary focus is the exploration and development of natural gas reserves in Western Canada. The Company has approximately 93,000 net acres of undeveloped land in the Ladyfern, Velma and Buick Creek areas in NE British Columbia and the Chigwell, Bashaw, Square Creek, Halverson, Mearon and Dahl areas of Alberta.

The Company's strategy is to 'acquire and exploit' properties that are early in their development cycle that offer exploration, appraisal and development drilling opportunities, while maintaining low finding and development costs. Fortress operates most of its production enabling it to have complete control over cost management of its capital programs.

CORPORATE HIGHLIGHTS

The results for the three months ended September 30, 2008 are as follows:

- The Company completed the third closing of a $16.5 million ($14.7 million net of issuance costs) equity financing that was announced in May. The proceeds will be used to fund the Company's 2009 capital program and working capital requirements.

- Fortress announced plans to purchase certain of its common shares by way of a normal course issuer bid through the facilities of the Toronto Stock Exchange (the "TSX"). Fortress may purchase up to a maximum of 1,351,014 common shares, which represents approximately 5% of its current issued and outstanding common shares, during the twelve month term of the issuer bid. As of November 14, 2008, the Company has acquired 45,000 shares at an average price of $0.41 per share.

- Fortress will commence drilling a high-impact exploration well in the Pine Creek area on its 100% owned lands in late November 2008. The drilling location is offsetting a well currently producing 5.0 mmcf/d. If successful, this well will be placed on production in the first quarter of 2009.

DETAILED FINANCIAL ANALYSIS Production ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September September September September 30, 2008 30, 2007 30, 2008 30, 2007 ---------------------------------------------------------------------------- Sales volume: Natural gas (mcf/d) 8,733 6,111 8,272 5,302 Oil and NGL's (bbl/d) 23 7 24 17 Total(boe/d) 1,478 1,025 1,403 901 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Sales volumes for the three months ended September 30, 2008 were 1,478 boe/d compared to 1,025 boe/d for the three months ended September 30, 2007 - an increase of 453 boe/d or 44%. This increase is due to an asset acquisition in the Ladyfern, Mearon and Velma areas in July 2007, the start up of two wells at Velma in late August 2007, and the start up of 5 wells (2.5 net) at Square Creek in late March 2008. The anticipated sales volume on the start up of the Square Creek area was approximately 540 boe/d compared to an actual sales volume for the third quarter of 448 boe/d - an increase of 49 boe/d from the prior quarter. Capacity constraints at the Clear Prairie facility that processes gas from the Square Creek area have resulted in the Company producing the Square Creek area at much lower rates than anticipated. Two wells remain shut-in and others are flowing at reduced rates while the Company works with the third party plant operator to resolve the capacity issues which are currently expected to be resolved in the first quarter of 2009. The Velma wells are tied into the Ladyfern gathering system and the start-up of these wells increased the line pressures and reduced production volumes at Ladyfern resulting in the need for added compression. In the first quarter of 2008 the Company added compression to restore lost production; however, mechanical issues have resulted in substantial down time and with no significant production gains from this area. These compressor issues are on-going and the Company is continuing to work with the manufacturer to resolve the issues.

Sales volumes for the nine months ended September 30, 2008 were 1,403 boe/d compared to 901 boe/d for the nine months ended September 30, 2007. This increase is due to the asset acquisition in July 2007 and the start up of wells in the Velma and Square Creek areas.

Revenue ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September September September September 30, 2008 30, 2007 30, 2008 30, 2007 ---------------------------------------------------------------------------- Petroleum and natural gas sales ($000's) 6,591 2,893 20,195 9,499 ---------------------------------------------------------------------------- Average realized prices: Natural gas ($/mcf) 7.99 5.07 8.66 6.36 Realized gain (loss) on commodity contracts ($/mcf) (1.28) 0.46 (0.97) 0.24 ---------------------------------------------------------------------------- Realized natural gas price ($/mcf) 6.71 5.53 7.69 6.60 Oil and NGLs ($/bbl) 82.29 71.42 86.35 65.29 ---------------------------------------------------------------------------- Total ($/boe) 40.74 33.44 46.74 40.05 ---------------------------------------------------------------------------- Benchmark prices: AECO average price ($/mcf) 7.76 5.12 8.51 6.56 Edmonton par ($/boe) 123.08 80.70 115.95 73.72 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Petroleum and natural gas sales for the three months ended September 30, 2008 were $6,591,000 compared to $2,893,000 for three months ended September 30, 2007. This increase is attributable to a 44% increase in sales volumes and a 22% increase in the price of natural gas realized by the Company.

Petroleum and natural gas sales for the nine months ended September 30, 2008 were $20,195,000 compared to $9,499,000 for the nine months ended September 30, 2007. This increase is due to a 56% increase in sales volumes and 17% increase in sales prices realized in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

The average natural gas price realized by the Company for the third quarter of 2008 was $7.99/mcf (net of transportation costs and before realized losses on commodity contracts) compared to the AECO average price of $7.76/mcf. This compares to the average natural gas price realized in the third quarter of 2007 of $5.07/mcf (net of transportation costs and before realized gains on commodity contracts) and an AECO average price of $5.12/mcf. For the nine months ended September 30, 2008, the Company realized an average price for natural gas of $8.66/mcf (net of transportation costs and before realized losses on commodity contracts) compared to an average AECO price of $8.51/mcf. For the nine months ended September 30, 2007, the Company realized an average natural gas price of $6.36/mcf (net of transportation costs and before realized gains on commodity contracts) compared to an AECO average price of $6.56/mcf.

The Company's current production is approximately 99% natural gas and revenues are reliant on North American natural gas prices. Natural gas prices increased in the second quarter based on bullish sentiment including lower than expected LNG (liquefied natural gas) imports to the United States, lower Canadian production, and an extended outage at the Independence Hub in the Gulf of Mexico resulting in a decline in storage levels. Sentiment changed in July and natural gas prices declined from a high of more than $12/mcf based on fears of a global credit crunch and U.S. recession resulting in reduced demand for natural gas.

The Company uses commodity contracts to manage its exposure to fluctuations in the price of natural gas. In the third quarter of 2008, the Company realized a loss on commodity contracts of $1,047,000, or $1.28/mcf, and recorded an unrealized gain on commodity contracts of $4,323,000. For the nine months ended September 30, 2008, the Company realized a loss on commodity contracts of $2,232,000, or $0.97/mcf, and an unrealized gain on commodity contracts of $1,333,000. Approximately 54% of the Company's current production is under contract. Contracts in place as of September 30, 2008 are as follows:

---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Type Period Volume (GJ/d) Fixed Price ($/GJ) ---------------------------------------------------------------------------- Swap January 1, 2008 to October 31, 2008 2,000 6.51 Swap January 1, 2008 to October 31, 2008 3,000 6.505 Swap November 1, 2008 to March 31, 2009 1,250 9.58 Swap November 1, 2008 to March 31, 2009 3,750 8.25 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Royalties ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September September September September 30, 2008 30, 2007 30, 2008 30, 2007 ---------------------------------------------------------------------------- Royalties ($000's) 1,158 380 3,421 1,371 $/boe 8.51 4.03 8.90 5.57 Percentage of petroleum and natural gas sales 17.6 12.0 16.9 13.9 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Royalties were $1,158,000 for the three months ended September 30, 2008 compared to $380,000 for the three months ended September 30, 2007. This increase reflects increased volumes and natural gas prices, as noted previously. As a percentage of petroleum and natural gas sales (net of transportation costs and before realized gains/losses on commodity contracts), royalties increased to 17.6% in the third quarter of 2008 compared to 12.0% in the third quarter of 2007. This increase is attributed to increased production volumes from the Company's Velma, Mearon and Square Creek properties which record average royalty rates of 20% to 25%. The Company's wells at Ladyfern qualify for the Ultra-Marginal Royalty Program which assesses a reduced royalty rate for low producing wells in the province of British Columbia, resulting in an effective royalty rate of approximately 8% for these wells.

For the nine months ended September 30, 2008, the Company recorded royalties of $3,421,000 compared to $1,371,000 for the nine months ended September 30, 2007. As a percentage of petroleum and natural gas sales (net of transportation costs and before realized gains/losses on commodity contracts), royalties for the first nine months of 2008 were 16.9% compared to 13.9% for the comparable period in 2007. This increase is due to the change in property mix resulting from the asset acquisition in July 2007 and wells brought onto production since that time which have higher royalty rates than the average royalty rate realized by the Company.

Operating Expenses ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September September September September 30, 2008 30, 2007 30, 2008 30, 2007 ---------------------------------------------------------------------------- Operating expenses ($000's) 2,139 973 5,565 2,268 $/boe 15.72 10.31 14.48 9.21 ---------------------------------------------------------------------------- Operating expenses ($000's) - adjusted for charges related to prior periods 2,031 973 5,457 2,268 $/boe 14.93 10.31 14.20 9.21 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Operating expenses increased in the three months ended September 30, 2008 to $2,139,000 from $973,000 in the third quarter of 2007. This increase is due to higher operating costs being experienced across all fields with the most significant increase from the Square Creek area which recorded operating expenses of approximately $16.41/boe in the third quarter due to higher than anticipated third party plant operating expenses and plant capacity constraints that resulted in lower production levels. In addition, the Company incurred additional compression and processing charges related to its Bashaw field that related to prior periods but were invoiced to Fortress in the third quarter of 2008 and which amounted to $108,000, or $0.79/boe, for the three months ending September 30, 2008.

For the nine months ended September 30, 2008 operating expenses were $5,565,000 compared to $2,268,000 for the nine months ended September 30, 2007. One a per boe basis, operating expenses were $14.48/boe for the nine months ended September 30, 2008 compared to $9.21/boe for the nine months ended September 30, 2007. The largest factors affecting operating expenses are gas processing fees, contract operating fees, chemicals and equipment rentals which account for approximately 75% of the Company's operating expenses.

The Company is taking steps to reduce its operating expenses. On November 1, 2008, the Company acquired the compressor that it had been renting at Square Creek. The Company is also in discussions to acquire other rental equipment to reduce its operating expenses.

General and Administrative Expenses ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- Gross ($000's) 1,027 1,167 3,056 3,605 Partner recoveries ($000's) (112) - (350) - Capitalized ($000's) (222) (319) (622) (1,022) ---------------------------------------------------------------------------- Net ($000's) 693 848 2,084 2,583 $/boe 5.09 8.99 5.42 10.50 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Net general and administrative expenses decreased to $693,000 in the third quarter of 2008 from $848,000 in the third quarter of 2007. Gross general and administrative expenses for the third quarter of 2008 reflect a 12% decrease from the third quarter of 2007 which is mainly attributable to a reduction in consulting fees charged to the Company.

Net general and administrative expenses decreased to $2,084,000 for the nine months ended September 30, 2008 from $2,583,000 for the nine months ended September 30, 2007. General and administrative expenses for the nine months ended September 30, 2008 were $5.42/boe compared to $10.50/boe for the nine months ended September 30, 2007. The decrease on a per boe basis is mainly due to an increase in production volumes in 2008 and reduced reliance on the use of consultants.

Partner recoveries reflect the portion of the Company's general and administrative expenses recoverable from partners related to the Company's capital program.

The Company's policy is to capitalize salaries, stock-based compensation, consulting fees and software costs that are directly attributable to exploration and development activities.

Stock-based Compensation Expense ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- Stock-based compensation expense ($000's): Stock options 93 150 125 429 Restricted stock units 35 - 155 - ---------------------------------------------------------------------------- 128 150 280 429 Stock-based compensation capitalized to property, plant and equipment (51) - (131) - ---------------------------------------------------------------------------- Net stock-based compensation expense 77 150 149 429 ---------------------------------------------------------------------------- $/boe 0.57 1.59 0.39 1.74 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

The net stock-based compensation expense for the three months ended September 30, 2008 was $77,000 compared to $150,000 for the three months ended September 30, 2007. The gross stock-based compensation for the three months ended September 30, 2008 was $128,000 of which $93,000 was attributable to stock options and $35,000 to restricted stock units. This compares to $150,000 for the three months ended September 30, 2007 which was attributable to stock options granted in January 2007 that were later cancelled in November 2007. For the three and nine months ended September 30, 2008, the Company capitalized stock-based compensation of $51,000 and $131,000, respectively, directly related to exploration and development activities (three and nine months ended September 30, 2007 - $nil).

The net stock-based compensation expense for the nine months ended September 30, 2008 was $149,000, a decrease of $280,000 from the nine month period ended September 30, 2007. In the nine months ended September 30, 2008, a total of 1,684,633 stock options and 500,000 restricted stock units were granted.

Interest Income and Expense

The Company recorded interest expense of $361,000 for the three months ended September 30, 2008 compared to $448,000 for the three months ended September 30, 2007. The Company recorded interest expense of 1,049,000 for the nine months ended September 30, 2008 compared to net interest expense in the nine months ended September 30, 2007 of $425,000. Interest expense in the first nine months of 2008 reflects interest on the Company's revolving credit facility and interest on unspent flow-through obligations. Net interest income for the nine months ended September 30, 2007 reflects interest earned on commercial paper investments prior to the reorganization of SignalEnergy Inc.

Depletion, Depreciation and Accretion Expense ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- Depletion and depreciation expense ($000's) 3,761 2,504 10,508 6,503 Accretion of asset retirement obligations ($000's) 44 32 119 82 ---------------------------------------------------------------------------- Total ($000's) 3,805 2,536 10,627 6,585 ---------------------------------------------------------------------------- Depletion and depreciation expense ($/boe) 27.65 26.54 27.34 26.42 Accretion of asset retirement obligations ($/boe) 0.32 0.33 0.31 0.33 ---------------------------------------------------------------------------- Total ($/boe) 27.97 26.87 27.65 26.75 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Depletion and depreciation are calculated based on capital expenditures, production rates, and reserves. Depletion and depreciation expense was $3,761,000 for three months ended September 30, 2008 compared to $2,504,000 for the three months ended September 30, 2007. This increase is attributable to increased production volumes in the third quarter of 2008, which have increased 44% from the third quarter of 2007. The depletion and depreciation expense rate for the third quarter of 2008 was $27.65/boe compared to $26.54/boe for the third quarter of 2007. For the nine months ended September 30, 2008, the Company recorded depletion and depreciation expense of $10,508,000 compared to $6,503,000 for the nine months ended September 30, 2007.

Estimated future development costs for proved undeveloped properties included in the calculation of depletion expense at September 30, 2008 decreased to $15,842,000 from $28,600,000 at September 30, 2007. Undeveloped land costs at September 30, 2008 increased to $8,508,000 from $7,371,000 at September 30, 2007 and were excluded from assets subject to depletion. Undeveloped land costs increased with the acquisition of Crown lands at Pine Creek in the third quarter of 2008.

Accretion expense for the three months ended September 30, 2008 was $44,000 compared to $32,000 for the three months ended September 30, 2007. This increase is due to the asset acquisition in the Ladyfern, Mearon and Velma areas in July 2007 and additional wells brought onto production in the first quarter of 2008. For the nine months ended September 30, 2008 the Company recorded accretion expense of $119,000 compared to $82,000 for the nine months ended September 30, 2007. The Company completed the construction of a refrigeration plant and sweetening facilities in the second and third quarters of 2007 and acquired a partners working interest in the Ladyfern North, Mearon North and Velma areas in July 2007, significantly increasing the Company's asset retirement obligation. In addition, the Company added 5 wells (2.5 net) in the first quarter of 2008 including production and gathering facilities at Square Creek which have increased the asset retirement obligation.

Income Tax

The Company recorded a future income tax expense for the three months ended September 30, 2008 of $688,000 compared to a recovery of future income taxes of $613,000 for the three months ended September 30, 2007. For the nine months ended September 30, 2008, the Company recorded a recovery of future income taxes of $898,000 compared to $1,203,000 for the first nine months of 2007. Future income tax reflects the difference between the underlying tax value and carrying value of the Company's assets and liabilities. The change in future income taxes reflects capital costs incurred since the third quarter of 2007. Based on current commodity prices and planned capital expenditures, the Company does not expect to be cash taxable in 2008.

The income tax effect of a $5 million flow-through share offering completed in December 2007 was recorded in the first quarter of 2008 with the filing of the renouncement documents to the taxation authorities. The effective date of the renouncement was December 31, 2007 with all expenditures to be incurred by December 31, 2008. As of September 30, 2008, the Company has incurred approximately $1 million of eligible expenditures.

The estimated tax pools of the Company at September 30, 2008 are as follows:

---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ($000's) ---------------------------------------------------------------------------- Canadian Oil and Gas Property Expenses 16,406 Canadian Development Expenses 34,009 Canadian Exploration Expenses 11,383 Undepreciated Capital Cost 30,281 Share Issuance Costs 2,083 Investment Tax Credits 2,367 ---------------------------------------------------------------------------- 96,529 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Income (Loss) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended ($000's except per share and per boe September 30, September 30, amounts) 2008 2007 2008 2007 ---------------------------------------------------------------------------- Net income (loss) 1,070 (1,603) (3,129) (2,528) Net income (loss) per share - basic and diluted 0.04 (0.12) (0.16) (0.19) Net income (loss) per boe 7.85 (16.97) (8.13) (10.26) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

The Company recorded net income of $1,070,000 for the three months ended September 30, 2008 compared to a net loss of $1,603,000 for the three months ended September 30, 2007. This translates into a basic and diluted net income per share of $0.04 for the three months ended September 30, 2008 compared to a basic and diluted net loss per share of $0.12 for the three months ended September 30, 2007. The change in net income in the three months ended September 30, 2008 is attributable to a net gain on commodity contracts of $3,276,000.

The net loss for the nine months ended September 30, 2008 was $3,129,000 compared to $2,528,000 for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, the Company recorded a net loss on commodity contracts of 899,000 and a loss on the sale of a pipeline asset of $428,000.

Funds from Operations ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ($000's except share and per boe Three months ended Nine months ended amounts) September 30, September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- Funds from operations 1,193 505 5,844 3,210 Funds from operations ($/boe) 8.77 5.36 15.21 13.04 Funds from operations per share - basic and diluted 0.04 0.04 0.29 0.24 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Funds from operations for third quarter of 2008 were $1,193,000 compared to $505,000 for the third quarter of 2007. This increase is attributed to increased production volumes and realized prices. The operating netback realized by the Company for the three months ended September 30, 2008 decreased from $19.10/boe in the third quarter of 2007 to $16.51/boe due to an increase in realized losses on commodity contracts.

Funds from operations for the nine months ended September 30, 2008 increased to $5,844,000 from $3,210,000 for the nine months ended September 30, 2007. The increase is due to increased production and prices realized by the Company. The Company's operating netback for the nine months ended September 30, 2008 decreased by $1.91/boe compared to the nine months ended September 30, 2007 mainly due to an increase in operating expenses.

Capital Expenditures ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, ($000's) 2008 2007 2008 2007 ---------------------------------------------------------------------------- Land and seismic 1,578 117 2,161 194 Drilling and completions 48 553 5,089 10,126 Equipment and facilities (194) 4,813 15,801 9,107 Capitalized overhead costs 273 319 753 1,022 Abandonment expenditures - - 81 - Other 32 - 65 1,166 Acquisitions - 12,586 - 12,943 Dispositions - - (8,150) - ---------------------------------------------------------------------------- 1,737 18,388 15,800 34,558 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

The total capital expenditures for the three months ended September 30, 2008 were $1,737,000 compared to additions of $18,388,000 for the three months ended September 30, 2007. The most significant additions in the three months ended September 30, 2008 were the acquisition of the Pine Creek lands and trade seismic data over the Company's Halverson lands. In the third quarter of 2007 the Company completed an asset acquisition in the Ladyfern, Mearon and Velma areas for proceeds of $12,535,000, completed the construction of a refrigeration unit at Ladyfern and an 11 km pipeline at Velma to tie two wells to production facilities. The total capital expenditures for the nine months ended September 30, 2008 were $15,800,000 (net of dispositions) compared to $34,588,000 for the nine months ended September 30, 2007. The capital program for the first quarter of 2008 was focused on the follow-up to the discovery of the Bluesky and Notikewin gas pools from the 2007 winter drilling program and compression and optimization at Ladyfern. Fortress drilled two additional wells in the Bluesky formation and three wells in the Notikewin to better delineate the two structures. The Company also constructed a 10 mmcf/d gathering and production facility to service eight wells it has in the Square Creek area.

The Company completed the construction of a 41 km pipeline to deliver gas to the Clear Prairie gas plant to service the Square Creek area, the corridor along which it owns 41,800 net acres of land opening up a significant exploration area for the Company. The pipeline was completed and commissioned in March 2008 for a total cost of $8,578,000 and was sold to a mid-stream service provider in April for proceeds of $8,150,000 resulting in a loss on the sale of the pipeline asset of $428,000.

Share Capital ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- Weighted average common shares outstanding - basic 26,964,795 13,266,288 19,937,734 13,263,711 Weighted average common shares outstanding - diluted 27,004,567 13,266,288 19,937,734 13,263,711 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Outstanding securities ---------------------------------------------------------------------------- Common shares 27,020,288 Warrants 5,516,700 Stock options 2,081,635 ---------------------------------------------------------------------------- Total outstanding securities at September 30, 2008 34,618,623 Common shares acquired under normal course issuer bid (45,000) ---------------------------------------------------------------------------- Total outstanding securities at November 14, 2008 34,573,623 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

On December 21, 2007, the Company closed a public offering of 2,703,000 flow-through common shares at $1.85 per share for total gross proceeds of $5,000,550 ($4,395,000 net of share issuance costs). The full expenditure commitment was renounced to subscribers effective December 31, 2007 with all expenditures to be incurred by December 31, 2008. As of September 30, 2008, the Company has incurred eligible expenditures of approximately $1,000,000.

The Company closed a public offering of 11,033,400 units ("Units") on June 20, 2008, June 27, 2008 and July 4, 2008, for gross proceeds of $16,550,100 ($14,737,000 net of issuance costs). Each Unit consists of one common share of the Company and one-half of one common share purchase warrant. The warrants are exercisable on or before September 20, 2011 subject to the right of the Company to accelerate the expiry time on not less than 30 days notice to the warrant holders, if the aggregate sales price of the common shares during a period of 20 consecutive days divided by the aggregate number of common shares sold is at least $3.00. Each whole warrant entitles the holder to purchase one common share an at exercise price of $2.00. The proceeds of the financing will be used to fund the Company's 2009 capital program and working capital requirements.

Liquidity and Capital Resources

The Company has a $25,000,000 revolving, demand credit facility with its bank (the "Bank"), bearing interest at the Bank's prime lending rate plus 0.25% (effective interest rate for the three and nine months ended September 30, 2008 of 5.00% and 5.25% respectively, and for the three and nine months ended September 30, 2007 - 6.5%) and collateralized by an interest over all present and after acquired property of the Company. The authorized limit is subject to annual review and re-determination of the Company's borrowing base by the Bank. The Company has a $1,000,000 letter of credit which reduces its borrowing capacity on the revolving operating loan.

The credit facility has a covenant that requires the Company to maintain its working capital ratio at 1:1 or greater while the credit facility is outstanding. The working capital ratio is defined as current assets plus the unutilized portion of the credit facility divided by current liabilities less the balance drawn against the credit facility. The Company is in compliance with the working capital covenant at September 30, 2008.

Cash provided by operating activities was $1,315,000 for the third quarter of 2008 compared to cash used in operating activities of $879,000 for the third quarter of 2007. This increase is due to an increase in non-cash working capital balances and funds from operations in the three months ended September 30, 2008. Cash provided by operating activities for the nine months ended September 30, 2008 was $9,893,000 compared to $2,905,000 for the nine months ended September 30, 2007. This increase is due to increased funds from operations and changes in non-cash working capital balances. Funds from operations were $5,844,000 for the nine months ended September 30, 2008 compared to $3,210,000 for the nine months ended September 30, 2007.

Cash provided by financing activities for the three months ended September 30, 2008 was $3,363,000 compared to $17,630,000 for the three months ended September 30, 2007. On July 4, 2008, the Company completed the third closing of a $16,550,100 financing that was announced in May. The net proceeds received on the July 4 closing was $2,024,000. Cash provided by financing activities for the three months ended September 30, 2007 consisted of an increase in the Company's operating loan resulting from the asset acquisition completed in July 2007. Cash provided by financing activities for the nine months ended September 30, 2008 was $11,968,000 compared to cash used in financing activities for the nine months ended September 30, 2007 of $6,216,000. In the first quarter of 2007, the Company redeemed 23,076,923 common shares as part of its reorganization of Signal for $30,471,000 and in July secured a $24,000,000 bank operating loan.

Cash used in investing activities for the third quarter of 2008 was $4,680,000 compared to $16,758,000 for the third quarter of 2007. The Company's capital expenditures were $1,737,000 in the third quarter of 2008 compared to $18,388,000 in the third quarter of 2007. Cash used in investing activities for the nine months ended September 30, 2008 was $21,869,000 compared to $33,392,000 for the nine months ended September 30, 2007. In the second quarter of 2008, the Company recorded the sale of a 41 km pipeline connecting the Square Creek area to processing facilities for $8,150,000.

Related Party Transactions

(a) In the three and nine months ended September 30, 2008, the Company was charged $218,000 and $794,000 respectively (three and nine months ended September 30, 2007 - $81,000), in legal fees by a law firm where a director of the Company is a partner, of which $123,000 is included in accounts payable and accrued liabilities at September 30, 2008.

(b) In the three and nine months ended September 30, 2008, the Company was charged $25,000 (three and nine)

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