Operational Review

Capital Program

Capital expenditures for exploration and development (before acquisitions and dispositions) were $5.6 million during the first quarter of 2009. As previously announced, ProspEx Resources disposed of certain non-core properties in the Wapiti region. These properties comprises of four (two net) producing wells, with net production of about 30 boe per day and 3,160 net acres of undeveloped land. The consideration paid to the company was $2.1 million, subject to closing adjustments. Including proceeds from this disposition, total net capital spending in the first quarter was $3.6 million.

ProspEx Resources participated in three (1.5 net) wells in the first quarter of 2009, all of which were situated in the Deep Basin region. At West Kakwa, the company drilled a delineation well (100% working interest) four kilometers from an exploratory well drilled in the fourth quarter of 2008. Both of these wells found a thick but low-porosity Falher channel. Given the better reservoir quality encountered to date and shallower drilling depths in East Kakwa, ProspEx Resources’ initial focus will be on delineation and horizontal development of East Kakwa.

At East Kakwa, ProspEx Resources drilled a successful (0.2 net) well that extended the East Kakwa trend to the southeast. This well was recently placed onto production at an initial rate of about one million cubic feet (mmcf) per day (200 thousand cubic feet (mcf) per day net to ProspEx Resources). These Kakwa drilling results continue to advance the company’s efforts to develop a repeatable drilling program, potentially utilizing horizontal drilling with multi-stage fracturing techniques. Year end 2008 reserves bookings for the East Kakwa wells were based on drainage areas of only 80 to 180 acres, indicating the potential for infill drilling in sections where an initial well has already been drilled. Based on existing wells and interpretation of 3D seismic, ProspEx Resources has mapped 16 (eight net) incremental drilling sites (both infill and trend extension) on lands controlled by the company, assuming a drilling density of two horizontal wells per section.

The focus of the 2009 program is anticipated to be on continued delineation of the trend, along with a pilot test of horizontal drilling utilizing multi-stage fracturing techniques. ProspEx Resources has obtained regulatory approval to drill up to four wells per section in 16 sections of land in the East Kakwa trend.

Also in the Deep basin, one (0.25 net) partner operated well was drilled in the first quarter of 2009 at Gold Creek. This well came on stream in the first quarter at an initial rate of one mmcf per day (250 mcf per day net to ProspEx Resources).

The first quarter 2009 production of 3,807 boe per day was an increase of 6% compared with fourth quarter of 2008 production of 3,587 boe per day. In the fourth quarter, ProspEx Resources experienced around 200 boe per day of lost production due to facility downtime, which was resolved in the first quarter. New well tie-ins essentially offset natural production declines between the fourth quarter of 2008 and the first quarter of 2009.

At Salter, ProspEx Resources has recently obtained regulatory approval for the relicensing of an existing pipeline to accommodate production from the horizontal well drilled in the first quarter of 2008. Production is estimated to come on stream at a facilities restricted rate of two mmcf per day in May, 2009. ProspEx Resources has a 40% working interest in the production from this well.

Production in the second quarter of 2009 is predicted to be around 3,100 boe per day. This forecast reflects the expected closing of third party facilities at Ricinus for the month of June for maintenance. ProspEx Resources has around 1,000 boe per day of production impacted by the Ricinus outage.

Production for the first quarter of 2009 averaged 3,807 boe per day, up 6%, compared with the fourth quarter of 2008. Cash flow before changes in non-cash working capital items was $5.7 million in the first quarter, a decrease of 38% compared to the prior year, because of lower commodity prices.

Capital expenditures for exploration and development (before acquisitions and dispositions) were $5.6 million during the first quarter of 2009. The company took part in three (1.5 net) wells, all in the Deep basin, including a successful delineation well on the East Kakwa trend.

Net debt, excluding after tax unrealized financial instrument gains or losses was $49.3 million at March 31, 2009. Net debt decreased by $2 million over the quarter as total capital spending (including acquisitions and dispositions) was less than cash flow.

Business environment

Natural gas prices remain low, driven by high natural gas storage inventories, strong production levels in the United States, LNG imports, and reduced demand for natural gas as a result of the global economic downturn.

The company believes these factors suggest prices will stay low for the balance of 2009, and potentially longer. In light of this view, as well as the doubt in credit and equity markets, ProspEx Resources plans to adopt a more conservative approach in managing the company’s finances, including restricting exploration and development capital spending to be around equal to cash flow.

The Canadian natural gas industry has always been a cyclical business. While the present downturn may be more severe than many in the past, ProspEx Resources is confident that in time, the cycle will turn. ProspEx Resources will work to take benefit of opportunities and position the company to prosper as the business environment improves, while managing the company’s finances prudently in the interim.

ProspEx Resources’ capital spending priorities persists to focus on capturing and proving up new opportunities that are anticipated to generate repeatable prospect inventory with economies of scale. In the present business environment drilling to bring new production on stream in the short term is less attractive than capturing new opportunities, although to the extent possible the company will seek to take advantage of the benefits available under the royalty incentives announced by the Province of Alberta on March 3, 2009.

The first quarter production of 3,807 boe a day was in line with the 3,781 boe pear day recorded in the first quarter of 2008. Over this twelve month period, production in the Deep basin reduced by 440 boe a day (31%) because of natural declines in the Wapiti region, partially offset by favorable drilling results in Kakwa. West Central Alberta showed production growth of 862 boe per day (70%) due to growth in the Ricinus area through successful drilling and asset acquisitions. Production in Southern Alberta declined by 36% or 396 boe a day, because of natural declines at Medallion and the disposition of assets in the Granum area in 2008.

Production in the first quarter of 2009 increased by 220 boe a day or 6% from 3,587 boe a day in the fourth quarter of 2008. In the fourth quarter of 2009, ProspEx Resources experienced about 200 boe per day of lost production due to facility downtime, which was resolved in the first quarter. New well tie-ins essentially offset natural production declines between the fourth quarter of 2008 and the first quarter of 2009.

Average natural gas sales prices decreased by 32% to $5.37 per mcf in the first quarter of 2009, compared with $7.92 per mcf in the first quarter of 2008. During the first quarter of 2009, AECO C daily spot prices for natural gas decreased 38% compared with the first quarter of 2008 and the AECO monthly index for the same period decreased 21%. The company divides its gas sales between the daily and monthly indexes and would therefore expect price movements to fall between these two benchmarks. The overall price decline reflects the current over supply of natural gas in North American markets.