WesternZagros 3rd Quarter Results


WesternZagros is a publicly-traded, Calgary-based, international oil and gas company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros holds a PSC with the Kurdistan Regional Government ("KRG") which covers a 2,120 square kilometre exploration block (the "Kalar-Bawanoor Block" or "PSC lands") in the Kurdistan Region of Iraq and it is on trend with, and adjacent to, a number of prolific historic oil and gas discoveries. WesternZagros (operator) holds a 40 percent working interest, the KRG holds a 20 percent working interest (carried by WesternZagros) and a wholly-owned subsidiary of Talisman Energy Inc. ("Talisman") holds the remaining 40 percent working interest.

Basis of Presentation

Reporting and Functional Currency

The reporting and functional currency of the Company is the United States ("U.S.") dollar. All references herein to US$ or to $ are to United States dollars and references herein to Cdn$ are to Canadian dollars.

Going Concern Uncertainty

The financial data presented below has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") on the basis that the Company will continue to operate as a going concern, which implies the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from September 30, 2010.

Since inception and typical with development stage companies, the Company has incurred losses from operations and negative cash flows from operating activities, and has an accumulated deficit at September 30, 2010. During the three months ended September 30, 2010, the Company had expenditures of $0.5 million, before net change in non-cash working capital, for operating activities and $20.5 million for oil and gas property expenditures, and an overall increase in non-cash working capital of $3.0 million. During the nine months ended September 30, 2010, the Company had expenditures of $2.3 million, before net change in non-cash working capital, for operating activities and $49.8 million for oil and gas property expenditures, as well as an overall increase in non-cash working capital of $10.1 million. The Company will require additional funding over time to maintain ongoing exploration programs and property commitments, as well as for administration expenses. This requirement for funding will occur during the fiscal year ending December 31, 2011, with the amount dependent on the level of exploration activities pursued by WesternZagros.

There are material uncertainties that could raise significant doubt about the Company's ability to continue as a going concern, as outlined below:

Kurdamir-1 Operations

The Company has now concluded well control operations at Kurdamir-1 and is testing a portion of the well. However, the Company anticipates it will re-drill the Kurdamir structure subsequent to the drilling of its third PSC commitment well. This re-drill will require additional capital and is dependent on the Company being able to access additional funding.

Insurance Claim Related To Well Control Operations

The Company received confirmation of coverage from its insurers during the second quarter of 2010, which mitigates the uncertainty associated with the additional costs of the well recovery operations at Kurdamir-1. However, any unforeseen delays in payment from the insurers or any change in the determination of insurance coverage could impair the Company's ability to continue funding ongoing activities under the PSC. In addition, the insurance claim provides for coverage of the Company's share of allowable costs up to a maximum of $45 million ($75 million gross), of which approximately $38.2 million, net to WesternZagros, has been incurred up to October 14, 2010.

Continued Participation of the Company's Co-Venturers in the PSC

WesternZagros is currently in active discussions with both Talisman and the Kurdistan Regional Government ("KRG") on future drilling activities on its PSC lands and the timing thereof. As part of these discussions, the Company may be required to initially, or entirely, fund 100% of the costs associated with the third commitment well if Talisman elects not to participate. If these discussions are not successfully concluded, the Company will rely on the force majeure provision of the PSC to guide the timing of future activities.

Other Uncertainties

In general, the Company's ability to continue operations and exploration activities as a going concern is dependent upon its ability to obtain additional funding over time. While the Company has been successful in obtaining its required funding in the past, there is no assurance that sufficient funds will be available to the Company in the future. The Company has no assurance that such financing will be available or be available on favourable terms. Factors that could affect the availability of financing include the continued support of its shareholders; the results of its exploration activities; meeting all commitments under the PSC; the resolution of remaining political disputes in Iraq; progress on the Federal Petroleum Law and the ability to export oil and natural gas from the Kurdistan Region of Iraq in accordance with the economic terms under the PSC; the state of the capital markets and the ability of the Company to obtain financing to develop reserves; and the timely receipt of proceeds from the current insurance claim associated with the Kurdamir-1 well control operations.

The consolidated financial statements, and associated disclosures in this MD&A, do not reflect adjustments in the carrying values of assets and liabilities reported, revenue or expenses, nor the balance sheet classification used that would be necessary if the going concern assumption was not appropriate. Such adjustments could be material.

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