Bonterra Energy Corp. Annual Report 2014

FY2014 Annual Report · Bonterra Energy Corp.

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Strong
Foundation

b BONTERRA ENERGY CORP. 2014 ANNUAL REPORT

Bonterra Energy Corp. 2014 Annual Report

01 Proven and Committed Team

Experienced management
A key ingredient of Bonterra’s strong foundation is our team
of committed people. Led by a seasoned Board of Directors,
Bonterra’s dedicated and hard-working Management, staff and
consultants have been instrumental in the successful execution of
the Company’s strategy.

02 High Quality Assets

Large oil-in-place assets offer long reserve life
Bonterra’s large and concentrated asset base is focused in the
Pembina Cardium pool, which has an estimated 10.6 billion barrels of
oil in place with less than 13% produced to date. As one of the largest
operators in the area, Bonterra maintains a low-risk drilling inventory
of over 15 years, and has access to infrastructure which supports the
Company’s growing production of high netback, light oil.

Bonterra is very well positioned for continued acquisition opportunities,
as well as ongoing improvements in operational performance. Against
the backdrop of changing commodity prices, Bonterra will prudently
allocate capital to those opportunities that offer the best results with
the highest economic returns.

10.6 BILLION

Barrels of oil in place estimated
in the Pembina Cardium pool

Strong
Foundation

Bonterra Energy Corp. is a
high-yield, dividend paying
oil and gas company
headquartered in Calgary,
Alberta, Canada with a proven
history of growing funds flow,
production and reserves per share.
Bonterra’s prudent approach
to financial management
combined with a high-quality
asset base and commitment to
operational excellence form our
sustainable model.

Contents

Annual Highlights
Quarterly Highlights
Report to Shareholders
Strong Foundation
Statistical Review

02
03
04
06
08

Management’s Discussion
and Analysis
Financial Statements
Notes to Financial
Statements
Corporate Information

12
31

35
57

Bonterra Energy Corp. 2014 Annual Report

CASH DIVIDENDS/
DISTRIBUTIONS TO INVESTORS
($ per share)

PRODUCTION GROWTH
(boe per day)

P+P RESERVES GROWTH
(mmboe)

2.49

3.04

3.12

3.33

3.54

5,628

6,322

6,703

12,190

13,195

39.4

41.1

45.0

75.0

80.3

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

04 Evolving Operations

Enhancing recoveries and
reducing costs
Bonterra is well positioned to achieve continued
improvements in operational performance and
results over the long term. With over 15 years
of Cardium drilling locations in our inventory,
we continue to explore increased well density
within our land base in order to enhance
recoveries and reduce costs. We currently
anticipate that six to eight wells per section will
likely become the standard for development of
our Cardium assets.

Bonterra’s ongoing drilling activities have
successfully delineated the outer edges of our
Carnwood area, where we have implemented
a pad drilling program. This program involves
drilling multiple horizontal wells from a single
surface location, which reduces the number
of drilling days and therefore costs, improves
on-stream efficiencies, generates a higher
rate of return and ultimately results in a
smaller environmental footprint.

P+P RESERVES PER SHARE
(based on proved + probable reserves)

2.09

2.13

2.28

2.47

2.50

2010

2011

2012

2013

2014

03 Conservative
Approach

Disciplined financial management
risk by maintaining
Bonterra manages
taking a
a strong balance sheet and
financial
to
approach
conservative
management. During 2014, this included
maintaining our net debt to funds flow ratio
in the range of less than 1 to 1.5 times. With
the significant erosion in commodity prices
through the fourth quarter of 2014 and into
2015, this ratio started to rise. In response,
we made a prudent decision to reduce our
2015 capital program plus decrease the
monthly dividend amount to $0.15 per share
from $0.30 per share, both of which help to
preserve the strength of our balance sheet.
We will continue to assess our cash outflows
on an ongoing basis. Given the uncertainty
in the commodity markets, we remain
focused on maintaining financial flexibility
to achieve
while positioning Bonterra
long-term, per share growth and paying out
a sustainable dividend to shareholders.

05 Successful Execution

improved

Acquisitions and drilling
support growth
In addition to pursuing growth through drilling
and
recoveries, Bonterra also
seeks acquisition opportunities to enhance
the quality of our asset base, operations and
overall returns to our shareholders. In February
2015, we acquired a package of producing
assets situated within Bonterra’s existing
Pembina Cardium lands for $172 million.
The assets are complementary to our existing
acreage, are accessible to our infrastructure,
and provide additional inventory of long-term
drilling locations. The low decline rate of
approximately 7% on the acquired assets will
help reduce Bonterra’s corporate production
declines, and along with additional operational
further drive attractive
efficiencies, will
netbacks which support our dividend plus
growth model over time.

Bonterra Energy Corp. 2014 Annual Report

Annual
Highlights

As at and for the year ended ($ 000s except $ per share)

FINANCIAL
Revenue – realized oil and gas sales
Funds flow(3)

Per share – basic

Per share – diluted

Payout ratio

Cash flow from operations

Per share – basic

Per share – diluted

Payout ratio

Cash dividends per share

Net earnings

Per share – basic

Per share – diluted

Capital expenditures and acquisitions, net of dispositions

Total assets

Working capital deficiency

Long-term debt

Shareholders’ equity

OPERATIONS
Oil

– bbl per day

– average price ($ per bbl)

NGLs

– bbl per day

– average price ($ per bbl)

Natural gas – mcf per day

– average price ($ per mcf)

Total barrels of oil equivalent per day (boe)(4)

DECEMBER 31,
2014

December 31,
2013(1)

December 31,
2012

339,694
209,665

6.57

6.54

54%

222,353
6.97

6.94

51%

3.54

38,761

1.21

155,565

1,042,938

53,642

154,723

639,006

8,582

90.61

807

52.26

22,833

4.86
13,195

295,675
181,574

6.01

5.99

55%

173,896

5.76

5.74

58%

3.33

62,758

2.08

2.07
109,227(2)

1,000,531

35,985

156,764

667,641

7,787

89.26

744

52.41

21,954

3.46
12,190

142,770
80,429

4.07

4.06

77%

74,325

3.75

83%

3.12

33,211

1.68

98,130

419,933

29,876

166,808

163,277

4,035

82.04

476

52.18

13,157

2.60
6,703

(1) Annual figures for 2013 include the results of Spartan Oil Corp. (Spartan) for the period of January 25, 2013 to December 31, 2013. Production includes 341 days for

Spartan and 365 days for Bonterra.

(2) Includes the Spartan acquisition that closed on January 25, 2013 that included $10,000,000 of acquired cash that reduced capital expenditures from $121,641,000

excluding dispositions.

(3) Funds flow is not a recognized measure under IFRS. For these purposes, the Company defines funds flow as funds provided by operations including proceeds from
sale of investments and investment income received excluding the effects of changes in non-cash working capital items and decommissioning expenditures settled.

(4) Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy conversion method primarily applicable at the

burner tip and does not represent a value equivalency at the wellhead.

Bonterra Energy Corp. 2014 Annual Report

Quarterly
Highlights

As at and for the periods ended ($ 000s except $ per share)

FINANCIAL
Revenue – realized oil and gas sales
Funds flow(1)

Per share – basic

Per share – diluted

Payout ratio

Cash flow from operations

Per share – basic

Per share – diluted

Payout ratio

Cash dividends per share

Net earnings (loss)

Per share – basic

Per share – diluted

Capital expenditures and acquisitions, net of dispositions

Total assets

Working capital deficiency

Long-term debt

Shareholders’ equity

OPERATIONS
Oil

– bbl per day

– average price ($ per bbl)

NGLs

– bbl per day

– average price ($ per bbl)

Natural gas – mcf per day

– average price ($ per mcf)

Total barrels of oil equivalent per day (boe)(3)

68,940

31,926

0.99

91%

50,465

1.57

57%

0.90
(32,877)(2)
(1.04)

(1.03)

20,605

1,042,938

53,642

154,723

639,006

8,762

71.37

911

37.49

22,883
3.92
13,488

2014

88,959

57,705

1.80

1.79

50%

99,274

65,620

2.06

2.04

42%

82,521

54,414

1.73

1.72

50%

65,705

57,089

49,094

2.05

2.03

44%

0.90

20,983

0.65

41,205

1,080,801

55,047

140,339

697,337

8,874

92.73

818

54.13

21,981

4.54
13,355

1.79

1.78

49%

0.87

27,614

0.87

0.86

39,519

1,066,145

36,399

151,145

699,284

9,109

102.36

775

53.50

24,163

4.85
13,911

1.56

1.55

56%

0.87

23,041

0.73

54,236

1,043,822

62,488

143,103

678,224

7,567

96.53

721

67.81

22,307

6.16
12,006

(1) Funds flow is not a recognized measure under IFRS. For these purposes, the Company defines funds flow as funds provided by operations including proceeds from
sale of investments and investment income received excluding the effects of changes in non-cash working capital items and decommissioning expenditures settled.

(2) Net loss in the fourth quarter of 2014 is primarily due to an increase in deferred tax expense as a result of an agreement with CRA.
(3) Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily

applicable at the burner tip and does not represent a value equivalency at the wellhead.

Bonterra Energy Corp. 2014 Annual Report

Report to
Shareholders

Bonterra is pleased to report its financial
and operational results for the year and to
provide highlights with regard to its recent
$172 million acquisition of additional
properties in the Pembina Alberta oil
field – the largest oil field in Canada.

RESERVES BY COMMODITY
*based on proved plus probable reserves

29%
Natural Gas

2014

FUNDS FLOW
($ per share)

71%
Oil & NGLS

3.95

5.27

4.07

6.01

6.57

During 2014, the resource industry realized some of its best times but also some of its
toughest challenges.

• The first three quarters had a crude oil realized price that averaged

$97.27 per bbl and a natural gas realized price that averaged $5.17 per mcf.

Bonterra’s cash netback averaged $49.28 per barrel of oil equivalent (boe) over the

first nine months of the year; one of the highest netbacks in the Company’s history;

• Q4 was quite a contrast as the crude oil realized price averaged $73.15 per bbl

and natural gas realized prices averaged $3.92 per mcf resulting in a cash netback

average of $34.20 per boe; one of the lowest netbacks Bonterra has realized during

the past five years;

• An agreement was negotiated with Canada Revenue Agency with regard to

tax pools. The agreement resulted in a reduction in certain tax pools and an

increase in deferred tax expense in Q4, but resulted in no cash outlay for the

years 2009 to 2013;

2010

2011

2012

2013

2014

PRODUCTION PER SHARE

0.109

0.119

0.124

0.147

0.150

2010

2011

2012

2013

2014

Bonterra Energy Corp. 2014 Annual Report

Outlook

The future for Bonterra continues to be positive on a long-term basis,
although in the short term low commodity prices are expected to
significantly reduce funds flow. The Pembina asset acquisition has
resulted in the Company temporarily taking on a higher than usual
amount of debt, but this will be rectified in the future. In addition,
the decrease in funds flow has resulted in a 50 percent reduction in
dividend payments and a similar reduction in capital expenditures.
These two items are being monitored on an ongoing basis and will be
modified in the future depending on changes in production volumes
and commodity prices.

The Company holds an enviable amount of light oil properties in the
Cardium formation located in the Pembina and Willesden Green fields
in west central Alberta. Technical advances will continue to revitalize
these fields and over time should enable greater recoveries of the large
resource in place. All of the companies active in the area are testing
different approaches with the view to maximizing results, including
assessing the optimal length of a horizontal lateral; how many wells
should be drilled per section; and completion techniques including
the type and size of frac to use as well as the appropriate spacing.
Bonterra has many years of undrilled locations for future drilling,
and as technological advances continue, the amount of oil and gas
recovered is expected to increase.

A conservative approach will continue to be a key factor in Bonterra’s
corporate culture. Debt levels will be monitored, annual growth will be
assessed and dividend increases will be cautiously monitored.

The Board of Directors wishes to thank the employees for their
contribution to a very successful year and its shareholders for their
continued support.

GEORGE F. FINK
Chief Executive Officer and Chairman of the Board

• The Company continued to grow its production volumes

and reserves on a gross basis by eight and seven percent,

respectively and on a per share basis by two and

1.2 percent, respectively;

• The annual dividend paid to shareholders was increased

to $3.54; an increase of 6 percent over 2013.

• Bonterra’s share price opened the year on January 1, 2014

at $54.15 but fell to $42.72 by December 31, 2014 in

response to the weaker commodity price environment; and

• The Company continued an active drilling program including

65 gross (47.5 net) horizontal wells with a 100 percent

success rate.

2015 Acquisition

On February 19, 2015 Bonterra announced the acquisition of certain
oil and gas assets from a senior oil and gas producer. The assets are
mainly Cardium zone assets in the Pembina area and the production
is complimentary to current Bonterra acreage. The acquisition
highlights include:

• Approximately 1,800 boe per day production (based on seller’s

average volumes for January 2015);

• 86 percent weighted to oil and natural gas liquids; 14 percent

to natural gas;

• 7 percent decline rate;

• 136 net potential undrilled horizontal well locations;

• 66 sections (38 net) gross Cardium acreage;

• $172 million purchase price prior to normal adjustments,

financed mainly through bank debt; and

• April 15, 2015 scheduled closing.

This acquisition strengthens Bonterra’s position as a major owner and
operator in Canada’s largest oil field.

Bonterra Energy Corp. 2014 Annual Report

Strong
Foundation

Bonterra is built on a strong
foundation, comprised of
a high-quality land base
concentrated in the large
Pembina Cardium oil pool,
a conservative approach to
financial management, and
an experienced, committed
team. Collectively, these
elements support our attractive
dividend-plus-growth model.

A SUSTAINABLE FORMULA

Attractive asset base
Bonterra’s concentrated land position is situated on one of Western
Canada’s largest conventional oil pools, featuring very low recoveries
to date. With our current development plan and the acquisition
completed in early 2015, we have more than 15 years of future drilling
inventory in the Cardium.

Operational excellence
The development plan for our Cardium assets continues to evolve to
maximize recoveries, minimize costs and reduce our environmental
footprint. With increased well spacing density and pad drilling across
our acreage, we have realized positive impacts to recoveries, reduced
drilling days which also reduces costs, and improved our overall
on-stream efficiencies.

Conservative balance sheet
Preserving balance sheet strength and exercising conservative
financial management remain key priorities. With our careful approach,
Bonterra has greater flexibility to manage funds flow, capital spending
and debt levels during periods of weaker commodity prices to ensure
long-term sustainability.

Responsible dividend
Since inception, Bonterra has paid a monthly dividend targeted at
50-65% of funds flow. The dividend amount can be adjusted
depending on the commodity price environment and the strength of
our funds flow to ensure our balance sheet remains strong. Bonterra
increased the dividend in mid-2014 during a strong commodity
price environment, and then reduced it to protect the balance sheet
following a price collapse in early 2015.

Bonterra Energy Corp. 2014 Annual Report

EVOLVING DEVELOPMENT

STRATEGY

The implementation of multi-well pad development in 2014 marked
an evolution in Bonterra’s pool exploitation strategy from a more
conventional approach to a development plan typically used in
resource plays. Pad drilling helps lower capital costs because there
is less movement of equipment and reduced drilling times, and it
contributes to lower fixed operating costs on a per boe basis such as
property taxes, labour and other lease operating costs. During periods
of weaker commodity prices and market uncertainty, we will allocate
capital to projects where attractive rates of return are still achievable,
such as workovers and recompletions to add low-cost barrels,
while continuing to seek efficiency improvements across our overall
asset base.

DRILLING ADVANCEMENTS

Bonterra continues to seek ways to add incremental production
from our assets, including through the implementation of a water
flood program in Carnwood, as well as increasing drilling spacing
to expand our inventory of future well locations. Bonterra has over
15 years of drilling opportunities, not including any targets in the Belly
River or other deeper zones in the Pembina field, nor any potential
from our Saskatchewan or British Columbia lands. In addition, we
fully transitioned to cased-hole versus open-hole packers for our
completions in 2014 which allows for pinpointed frac placement.
As a result of the advances in completion technology coupled with
horizontal, multi-well pad drilling, our capital efficiencies have improved.

2015 Pembina Acquisition
Existing Bonterra Lands

2014

13,195 BOE PER DAY AVERAGE
ANNUAL PRODUCTION

Exceeded forecasted guidance of
12,400 to 12,700 boe per day

71% OIL AND LIQUIDS
WEIGHTED PRODUCTION

Light oil drives
attractive netbacks

43 GROSS (42.6 NET) OPERATED
& 22 GROSS (4.9 NET)
NON-OPERATED

Horizontal wells drilled in 2014
with 100% success rate

Bonterra Energy Corp. 2014 Annual Report

Statistical
Review

CORPORATE RESERVES INFORMATION

the services of Sproule Associates Limited

Bonterra engaged
to prepare a reserves evaluation with an effective date of
December 31, 2014. The reserves are located in the provinces of Alberta, British Columbia and Saskatchewan. The gross reserve figures from
the following tables represent Bonterra’s ownership interest before royalties and before consideration of the Company’s royalty interests. Tables
may not add due to rounding.

Summary of Gross Oil and Gas Reserves as of December 31, 2014

Reserve Category:

PROVED

Developed Producing

Developed Non-Producing

Undeveloped

TOTAL PROVED

PROBABLE

TOTAL PROVED PLUS PROBABLE

Light and
Medium Oil (mbbl)

Natural Gas
(mmcf)

Natural Gas
Liquids (mbbl)

Boe(1)
(mboe)

21,263

796

18,471

40,529

11,190

51,719

54,190

1,432

52,506

108,128

30,759

138,887

2,023

2,158

4,245

1,136

5,381

32,317

1,098

29,380

62,795

17,453

80,248

Reconciliation of Company Gross Reserves by Principal Product Type as of December 31, 2014

Light and Medium Oil
and Natural Gas Liquids

Natural Gas

Boe(1)

Proved
(mbbl)

40,251

1,547

6,281

153

(64)

(3,427)

44,774

Proved plus
Probable
(mbbl)

55,616

1,917

7,992

(5,006)

(31)

(3,427)

57,101

Proved
(mmcf)

83,070

17,829

7,320

8,535

111

(403)

(8,334)

108,128

Proved plus
Probable
(mmcf)

116,190

22,378

9,371

(455)

138

(401)

(8,334)

138,887

Proved
(mboe)

54,096

4,519

7,501

1,575

(131)

(4,816)

62,795

Proved Plus
Probable
(mboe)

74,980

5,647

9,554

(5,082)

(98)

(4,816)

80,248

December 31, 2013

Extension

Improved Recovery

Infills

Technical Revisions

Discoveries

Acquisitions

Dispositions

Economic Factors

Production

DECEMBER 31, 2014

(1) Barrels of Oil Equivalent may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion

method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Bonterra Energy Corp. 2014 Annual Report

Summary of Net Present Values of Future Net Revenue as of December 31, 2014

($000’s)

Reserve Category:

PROVED

Developed Producing

Developed Non-Producing

Undeveloped

TOTAL PROVED

PROBABLE

TOTAL PROVED PLUS PROBABLE

Net Present Value Before Income Taxes Discounted at
(% per Year)

10%

1,306,489

49,521

956,643

2,312,653

913,471

3,226,124

892,760

30,494

515,200

1,438,454

467,586

1,906,040

684,204

22,071

304,571

1,010,846

301,792

1,312,638

Finding, Development and Acquisition (FD&A) Costs

The Company has historically been active in its capital development program. Over three years, Bonterra has incurred the following FD&A(3)
costs excluding Future Development Costs:

Proved Reserve Net Additions

Proved plus Probable Reserve Net Additions

2014 FD&A
Costs per
boe(1)(2)(3)
$11.60

$15.54

2013 FD&A
Costs per
boe(1)(2)(3)
$23.63

$20.12

Over three years, Bonterra has incurred the following FD&A(3) costs including Future Development Costs:

Proved Reserve Net Additions

Proved plus Probable Reserve Net Additions

2014 FD&A
Costs per
boe(1)(2)(3)
$18.93

$22.67

2013 FD&A
Costs per
boe(1)(2)(3)
$24.80

$21.06

2012 FD&A
Costs per
boe(1)(2)(3)
$13.64

$16.05

2012 FD&A
Costs per
boe(1)(2)(3)
$20.91

$21.62

Three Year
Average(4)
$18.52

$18.71

Three Year
Average(4)
$22.47

$21.45

(1) Barrels of Oil Equivalent may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion

method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

(2) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development

costs generally will not reflect total finding and development costs related to reserve additions for that year.

(3) FD&A costs are net of proceeds of disposition and the FD&A costs per boe are based on reserves acquired net of reserves disposed of.
(4) Three year average is calculated using three year total capital costs and reserve additions on both a Proved and Proved plus Probable reserves on a weighted

average basis.

Bonterra Energy Corp. 2014 Annual Report

Commodity Prices Used in the Above Calculations of Reserves are as Follows:

Year

FORECAST

2015

2016

2017

2018

2019

2020

Production

Alberta

Saskatchewan

British Columbia

Edmonton
Par Price
($Cdn per bbl)

Natural Gas
AECO-C Spot
($Cdn per mmbtu)

Butanes
Edmonton
($Cdn per bbl)

Pentanes
Edmonton
($Cdn per bbl)

Inflation
Rate
(% per Yr)

Exchange
Rate
($US/$Cdn)

70.35

87.36

98.28

99.75

101.25

103.85

3.32

3.71

3.90

4.47

5.05

5.13

50.34

62.51

70.32

71.37

72.44

74.31

78.60

97.60

109.80

111.44

113.12

116.02

1.5

0.8500

0.8700

OILS AND NGLS
(BBL PER DAY)

2014
NATURAL GAS
(MCF PER DAY)

TOTAL
(BOE PER DAY)

9,206

169

9,390

21,107

1,685

22,833

12,723

176

296

13,195

Land Holdings

Bonterra’s holdings of petroleum and natural gas leases and rights are as follows:

Alberta

Saskatchewan
British Columbia

2014

2013

GROSS ACRES

NET ACRES

Gross Acres

245,263

9,576
62,045

316,884

150,835

6,509
22,639

179,983

230,885

38,750
62,045

331,680

Net Acres

149,466

36,525
22,639

208,630

Bonterra Energy Corp. 2014 Annual Report

Petroleum and Natural Gas Expenditures

The following table summarizes petroleum and natural gas capital expenditures incurred by Bonterra on acquisitions, land, seismic, exploration
and development drilling and production facilities for the years ended December 31:

($ 000s)

Land

Acquisitions

Dispositions

Exploration and development costs

Net petroleum and natural gas capital expenditures

2014

402

(1,152)

156,315

155,565

2013

(10,000)

(2,414)

121,605

109,227

Drilling History

The following tables summarize Bonterra’s gross and net drilling activity and success:

Crude oil

Natural gas

Dry

Total

Success rate

Crude oil

Natural gas

Dry

Total

Success rate

DEVELOPMENT

GROSS

65.0

100%

Development

Gross

55.0

100%

NET

47.5

100%

Net

35.0

100%

2014

EXPLORATORY

GROSS

NET

2013

Exploratory

Gross

Net

TOTAL

GROSS

65.0

100%

Total

Gross

55.0

100%

NET

47.5

100%

Net

35.0

100%

Bonterra Energy Corp. 2014 Annual Report

Management’s
Discussion and Analysis

The following report dated March 19, 2015 is a review of the operations and current financial position for the year ended December 31, 2014
for Bonterra Energy Corp. (Bonterra or the Company) and should be read in conjunction with the audited financial statements presented under
International Financial Reporting Standards (IFRS), including the notes related thereto.

USE OF NON-IFRS FINANCIAL MEASURES

Throughout this Management’s Discussion and Analysis (MD&A) the Company uses the terms “payout ratio”, “cash netback” and “net debt”
to analyze operating performance, which are not standardized measures recognized under IFRS and do not have a standardized meaning
prescribed by IFRS. These measures are commonly used in the oil and gas industry and are considered informative by management, shareholders
and analysts. These measures may differ from those made by other companies and accordingly may not be comparable to such measures as
reported by other companies.

The Company calculates payout ratio as a percentage by dividing cash dividends paid to shareholders by cash flow from operating activities,
both of which are measures prescribed by IFRS which appear on our statements of cash flows. We calculate cash netback by dividing various
financial statement items as determined by IFRS by total production for the period on a barrel of oil equivalent basis.

FREQUENTLY RECURRING TERMS

Bonterra uses the following frequently recurring terms in this MD&A: “WTI” refers to West Texas Intermediate, a grade of light sweet crude oil
used as benchmark pricing in the United States; “MSW Stream Index” or “Edmonton Par” refers to the mixed sweet blend that is the benchmark
price for conventionally produced light sweet crude oil in Western Canada; “bbl” refers to barrel; “NGL” refers to Natural gas liquids; “mcf” refers
to thousand cubic feet; “mmbtu” refers to million British Thermal Units; and “boe” refers to barrels of oil equivalent. Disclosure provided herein
in respect of a boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy conversion
method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

NUMERICAL AMOUNTS

The reporting and the functional currency of the Company is the Canadian dollar.

Bonterra Energy Corp. 2014 Annual Report

ANNUAL COMPARISONS

As at and for the year ended ($ 000s except $ per share)

FINANCIAL
Revenue – realized oil and gas sales

Cash flow from operations

Per share – basic

Per share – diluted

Payout ratio

Cash dividends per share

Net earnings

Per share – basic

Per share – diluted

Capital expenditures and acquisitions, net of dispositions
Total assets

Working capital deficiency

Long-term debt

Shareholders’ equity

OPERATIONS
Oil

– bbl per day

– average price ($ per bbl)

NGLs

– bbl per day

– average price ($ per bbl)

Natural gas – mcf per day

– average price ($ per mcf)

Total barrels of oil equivalent per day (boe per day)

DECEMBER 31,
2014

December 31,
2013(1)

December 31,
2012

339,694

222,353

6.97

6.94

51%

3.54

38,761

1.21

155,565
1,042,938

53,642

154,723

635,198

8,582

90.61

807

52.26

22,833

4.86

13,195

295,675

173,896

5.76

5.74

58%

3.33

62,758

2.08

2.07
109,227(2)

1,000,531

35,895

156,764

667,641

7,787

89.26

744

52.41

21,954

3.46

12,190

142,770

74,325

3.75

83%

3.12

33,211

1.68

1.68
98,130(3)
419,933

29,876

166,808

163,277

4,035

82.04

476

52.18

13,157

2.60

6,703

(1) Annual figures for 2013 include the results of Spartan Oil Corp. (Spartan), for the period of January 25, 2013 to December 31, 2013. Production includes 341 days for

Spartan and 365 days for Bonterra.

(2) Includes the Spartan Transaction that closed on January 25, 2013 that included $10,000,000 of acquired cash that reduced capital expenditures from

$121,641,000 excluding dispositions.

(3) Includes an acquisition that closed on June 7, 2012 for $17,108,000.

Bonterra Energy Corp. 2014 Annual Report

QUARTERLY COMPARISONS

As at and for the periods ended ($ 000s except $ per share)

FINANCIAL
Revenue – oil and gas sales

Cash flow from operations

Per share – basic

Per share – diluted

Payout ratio

Cash dividends per share

Net earnings (loss)

Per share – basic

Per share – diluted

Capital expenditures and acquisitions, net of dispositions

Total assets

Working capital deficiency

Long-term debt

Shareholders’ equity

OPERATIONS
Oil (bbl per day)

NGLs (bbl per day)

Natural gas (mcf per day)

Total (boe per day)

68,940

50,465

1.57

57%

0.90

(32,877)

(1.04)

(1.03)

20,605
1,042,938

53,642

154,723

635,198

8,762

911

22,883

13,488

2014

88,959

65,705

2.05

2.03

44%

0.90

20,983

0.65

41,205

1,080,801

55,047

140,339

697,337

8,874

818

21,981

13,355

99,274

57,089

1.79

1.78

49%

0.87

27,614

0.87

0.86

39,519

1,066,145

36,399

151,145

699,284

9,109

775

24,163

13,911

82,521

49,094

1.56

1.55

56%

0.87

23,041

0.73

54,236

1,043,822

62,488

143,103

678,224

7,567

721

22,307

12,006

Bonterra Energy Corp. 2014 Annual Report

As at and for the periods ended ($ 000s except $ per share)

FINANCIAL
Revenue – oil and gas sales

Cash flow from operations

Per share – basic

Per share – diluted

Payout ratio

Cash dividends per share

Net earnings

Per share – basic

Per share – diluted

Capital expenditures and acquisitions, net of dispositions

Total assets

Working capital deficiency

Long-term debt

Shareholders’ equity

OPERATIONS
Oil (bbl per day)

NGLs (bbl per day)

Natural gas (mcf per day)

Total (boe per day)

70,917

47,772

1.53

1.52

56%

0.85

15,254

0.50

0.49

25,965

1,000,531

35,895
156,764

667,641

7,964

691

22,802

12,456

2013

Q1(1)

78,946

43,953

1.41

1.40

60%

0.84

19,690

0.63

34,025

1,002,773

43,681

147,189

671,528

7,310

772

22,274

11,794

79,344

41,445

1.35

62%

0.84

15,119

0.49

9,731

987,067

26,824

179,379

648,574

8,414

782

20,554

12,621

66,468

40,726

1.47

1.46

53%

0.80

12,695

0.46

0.46
39,506(2)

1,016,594

31,519

189,509

658,062

7,459

732

22,176

11,887

(1) Quarterly figures for Q1 2013 include the results of Spartan Oil Corp. (Spartan), for the period of January 25, 2013 to March 31, 2013. Production includes 65 days for

Spartan and 90 days for Bonterra.

(2) Includes the Spartan Transaction that closed on January 25, 2013 that included $10,000,000 of acquired cash that reduced capital expenditures from $49,506,000.

BUSINESS ENVIRONMENT AND SENSITIVITIES

Bonterra’s financial results are significantly influenced by fluctuations in commodity prices, including price differentials. The following table depicts
selective market benchmark prices and foreign exchange rates in the last eight quarters to assist in understanding volatility in prices and foreign
exchange rates that have impacted Bonterra’s financial and operating performance. The increases or decreases for Bonterra’s realized price for
oil and natural gas for each of the eight quarters is explained in detail in the following table.

Crude oil
WTI ($US per bbl)
WTI to MSW Stream Index

Differential ($US per bbl)(1)

Foreign exchange
$US to $Cdn

Bonterra average realized
price ($Cdn per bbl)

Natural gas

AECO ($Cdn per mcf)
Bonterra average realized
price ($Cdn per mcf)

Q4-2014

Q3-2014

Q2-2014

Q1-2014

Q4-2013

Q3-2013

Q2-2013

Q1-2013

73.15

97.17

102.99

98.68

97.44

105.82

94.22

94.37

(6.46)

(7.93)

(6.14)

(8.25)

(14.93)

(4.72)

(3.67)

(6.95)

1.1357

1.0893

1.0905

1.1035

1.0498

1.0385

1.0234

1.0089

71.37

92.73

102.36

96.53

80.88

103.30

89.38

84.20

3.58

3.92

4.00

4.54

4.67

4.85

5.69

6.16

3.52

3.85

2.43

2.71

3.52

4.13

3.18

3.21

(1) This differential accounts for the major difference between WTI and Bonterra’s average realized price (before quality adjustments and foreign exchange).

Bonterra Energy Corp. 2014 Annual Report

The overall volatility in Bonterra’s average realized commodity pricing can be impacted by numerous events, some of which are:

• Worldwide crude oil supply and demand imbalance;

• Whether there is sufficient take-away capacity leading to increasing or decreasing oil inventory drawdowns;

• Weather dependence; the cold winter across North America has not offset the increased gas production;

• Timing of plant and refinery turnarounds;

• North American production decline management;

• Geo-political events in the middle east countries that affect worldwide crude oil production; and

• The reduced value of the Canadian dollar compared to the US dollar continues to positively affect Bonterra’s realized prices.

In December 2014, WTI decreased to under $60 US per bbl and has dropped further in the first quarter of 2015 primarily due to the worldwide
crude oil supply and demand imbalance partially driven by large production gains in North America. It is difficult to predict future pricing, but the
Company expects crude oil prices to remain low for the remainder of 2015.

The following chart shows the Company’s sensitivity to key commodity price variables. The sensitivity calculations are performed independently
showing the effect of the change of one variable; with all other variables being held constant.

Annualized sensitivity analysis on cash flow, as estimated for 2015(1)
Impact on cash flow

Realized crude oil price ($ per bbl)

Realized natural gas price ($ per mcf)

$US to $Cdn exchange rate

Change ($)

1.00

0.10

0.01

$000s

2,701

743

1,593

$ per share(2)

0.08

0.02

0.05

(1) This analysis uses current royalty rates, annualized estimated average production of 12,800 boe per day and no changes in working capital.
(2) Based on annualized basic weighted average shares outstanding of 32,169,623.

BUSINESS OVERVIEW, STRATEGY AND KEY PERFORMANCE DRIVERS

Bonterra Energy Corp. is an oil and gas company engaged in the exploration, acquisition, development and production of oil and natural
gas reserves in the provinces of Alberta, British Columbia and Saskatchewan. Bonterra’s primary focus is development of the Pembina
Cardium lands with horizontal infill and extension drilling. Bonterra operates 85 percent of its production with an average land working interest
of 77 percent. At December 31, 2014, Bonterra has a drilling inventory of approximately 750 net locations that represents over 15 years of
drilling inventory.

Bonterra spent $156,000,000 on its total capital program, primarily on the drilling of 43 gross (42.6 net) operated wells and completing and tying-in
4 gross (3.9 net) wells that were drilled in 2013. Of the 43 gross operated wells drilled, the Company drilled 10 (9.9 net) wells in the fourth quarter
of 2014 (Q4 2013 – 6 wells, 5.9 net), and followed its strategy to drill the wells but not complete, equip and tie-in until the beginning of the 2015
year. As well, 22 gross (4.9 net) non-operated wells were drilled and placed on production during 2014.

During 2014 Bonterra reactivated a second wholly owned gas plant which increased operated gas processing capacity by 8 mmcf per day. In
addition, the Company expanded, in the Carnwood area, its largest operated battery oil treating capacity to 5,000 bbl of oil production per day.
The two facility expansions are significant since all facility constraints related with the Carnwood area have now been eliminated.

The Company averaged 13,195 boe per day for the year, which exceeded its annual average production guidance of 12,400 to 12,700 boe per
day, primarily due to drilling an additional four wells and higher than anticipated production from the new horizontal wells.

Due to a significant drop in commodity prices during the fourth quarter of 2014 and early 2015, Bonterra and the majority of oil and gas
producing companies have drastically reduced their capital spending programs. Until the Company sees a positive prolonged shift in energy
pricing, the Company anticipates reduced production volumes for 2015 due to less new production to offset natural production declines.
In addition, with the current volatile pricing environment for crude oil, the Company has reduced the monthly dividend from $0.30 per share
to $0.15 per share commencing with the February 2015 dividend.

Bonterra Energy Corp. 2014 Annual Report

On February 19, 2015, the Company entered into a purchase and sale agreement (the Asset Agreement) to acquire certain oil and gas assets
(the Pembina Assets) from a senior oil and gas producer (the Acquisition). The Pembina Assets are Cardium focused in the Pembina Area of
Alberta, including upper zones in the Belly River, with a production base that is complementary to current Bonterra acreage, and which provides
additional inventory of long-term drilling locations. Consideration for the Pembina Assets was $172,000,000, prior to any adjustments, which will
be initially financed by a combination of working capital and an increased debt facility. The purchase price allocation using the acquisition method
for the Pembina Assets is incomplete as of the date of this report. The Acquisition will have an effective date of January 1, 2015 and is presently
expected to close on or before April 15, 2015. Although the Asset Agreement is binding between the parties, completion of the Acquisition is
subject to standard regulatory approvals. The Acquisition adds approximately 1,800 boe per day of production that is 86 percent oil and NGL
weighted with a low decline rate. These Pembina Assets also include 132 net future potential drilling locations and supporting infrastructure. With
the acquisition Bonterra plans to increase its capital budget from $58 million to approximately $70 million.

As a result of the decrease in the Company’s capital program, partially offset by the added production from the Acquisition starting in mid-April,
the Company expects its annual production guidance for 2015 to be between 12,600 to 12,900 boe per day. Due to pricing volatility at the
present time, Bonterra’s annual production guidance and capital budget will be continuously monitored and adjusted according to changing
commodity prices.

On November 14, 2013, the Company received a proposal letter from the Canada Revenue agency (CRA) which stated its intention to
challenge the tax consequences of Bonterra’s reorganization from a trust to a Corporation, which occurred on November 18, 2008. On
November 27, 2014, the Company reached an agreement with CRA (the Agreement) to adjust certain tax pools.

The Agreement resulted in:

• No cash outflow for the Company for the taxation years of 2009 to 2013 and reduced cash outflows for subsequent periods;

• Eliminating years of costly court proceedings;

• Allowing Management to focus full time on the operations of the Company to enhance shareholder value; and

• A current tax provision of $10,505,000 for the 2014 taxation year. The Company utilized $6,645,000 of the federal investment tax credit

receivable to reduce current taxes payable to $3,860,000.

Bonterra’s successful operations are dependent upon several factors, including but not limited to, the price of energy commodity products,
efficiently managing capital spending, its ability to maintain desired levels of production, control over its infrastructure, its efficiency in developing
and operating properties and its ability to control costs. The Company’s key measures of performance with respect to these drivers include, but
are not limited to: average production per day, average realized prices, and average operating costs per unit of production. Disclosure of these
key performance measures can be found in the MD&A and/or previous interim or annual MD&A disclosures.

DRILLING

DECEMBER 31,
2014
NET(2)
9.9

GROSS(1)
10

Three months ended
September 30,
2014
Net(2)
8.9

Gross(1)
9

Year ended

December 31,
2013
Net(2)
5.9

Gross(1)
6

DECEMBER 31,
2014
NET(2)
42.6

GROSS(1)
43

December 31,
2013

Gross(1)
30

Net(2)
29.7

9.9

100%

2.5

11.4

100%

2.6

8.5

100%

4.9

47.5

100%

5.3

35.0

100%

Crude oil horizontal – operated
Crude oil horizontal –
non-operated

Total

Success rate

(1) “Gross” wells means the number of wells in which Bonterra has a working interest.
(2) “Net” wells means the aggregate number of wells obtained by multiplying each gross well by Bonterra’s percentage of working interest.

During 2014, the Company placed four gross (3.9 net) wells on production that were drilled in the later part of 2013, drilled 43 gross (42.6 net)
wells, of which 33 (32.7 net) were placed on production with the remaining 10 wells scheduled to be on production in early 2015. As well,
22 gross (4.9 net) non-operated wells were drilled and placed on production during 2014.

Bonterra Energy Corp. 2014 Annual Report

PRODUCTION

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

Year ended

Crude oil (bbl per day)

NGLs (bbl per day)

Natural gas (mcf per day)

Average (boe per day)

8,762

911

22,883

13,488

8,874

818

21,981

13,355

7,964

691

22,802

12,456

8,582

807

22,833

13,195

(1)

In 2013, average daily production included 365 days of Bonterra production and 341 days of Spartan production.

December 31,
2013 (1)
7,787

744

21,954

12,190

Production volumes during the 2014 year were 13,195 boe per day compared to 12,190 boe per day in 2013, an increase of 8 percent.
The increase was primarily due to an increase in the number of net wells that commenced production in 2014 compared to 2013. In addition,
the Company was able to drill and tie-in new production in Q2 2014, which traditionally is not done during the spring road ban period.

CASH NETBACK

The following table illustrates the calculation of the Company’s cash netback from operations for the periods ended:

$ per boe

Production volumes (boe)

Gross production revenue

Royalties

Field operating costs

Field netback

General and administrative

Interest and other

Cash netback

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

1,240,864

1,228,681

1,145,918

4,816,030

4,449,280

55.56

72.40

(5.87)

(12.50)

(7.90)

(15.17)

37.19

49.33

(1.83)

(1.16)

(2.12)

(1.14)

34.20

46.07

61.89

(7.97)

(12.11)

41.81

(1.85)

(2.12)

37.84

70.53

(7.91)

(13.89)

48.73

(2.22)

(1.12)

45.39

66.45

(8.52)

(12.77)

45.16

(2.35)

(2.23)

40.58

Cash netbacks have increased for 2014 compared to 2013 primarily due to higher production volumes and prices, which were partially offset
by higher operating costs. Quarter over quarter cash netbacks decreased due to lower commodity prices primarily in December which were
partially offset by lower field operating costs.

OIL AND GAS SALES

($ 000s)

Revenue – oil and gas sales

Average Realized Prices ($):

Crude oil (per bbl)

NGLs (per bbl)

Natural gas (per mcf)

Average (per boe)

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

68,940

88,959

70,917

339,694

295,675

71.37
37.49

3.92

55.56

92.73

54.13

4.54

72.40

80.88

56.48

3.85

61.89

90.61
52.26

4.86

70.53

89.26

52.41

3.46

68.04

Bonterra Energy Corp. 2014 Annual Report

Revenue from oil and gas sales increased by $44,019,000 or 15 percent compared to 2013. This increase was due to higher production
volumes and commodity prices.

The quarter over quarter decrease in oil and gas revenues of 23 percent or $20,019,000 was due to decreased oil prices of approximately
42 percent in December.

The Company’s product split on a revenue basis for 2014 is approximately 84 percent weighted towards crude oil and NGLs. This ratio will likely
remain similar in 2015.

ROYALTIES

($ 000s)

Crown royalties

Freehold, gross overriding and other royalties

Total royalties

Crown royalties – percentage of revenue
Freehold, gross overriding and other royalties

– percentage of revenue

Royalties – percentage of revenue

Royalties $ per boe

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

5,021

2,259

7,280

7.3

3.3

10.6

5.87

6,045

3,662

9,707

6.8

4.1

10.9

7.90

4,546

4,583

9,129

6.4

6.5

12.9

7.97

23,779

14,331

38,110

7.0

4.2

11.2

7.91

18,031

19,867

37,898

6.1

6.7

12.8

8.52

Royalties paid by the Company consist of crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. The Company’s
average crown royalty rate is approximately seven percent for 2014 compared to 6.1 percent for 2013. The crown royalty rate increase was
primarily due to increased ratio of crown wells in the Carnwood area and additional crown wells that have reached accumulated production
thresholds and are no longer eligible for the initial five percent crown royalty rate. Increased production volumes, along with the higher crown oil
reference prices are also responsible for the increased crown royalty rates. Quarter over quarter increase in crown royalties as a percentage of
revenue, is primarily due to the Alberta Crown forecasted reference prices used for oil, which trail actual Edmonton Par prices, compared to the
crude oil price Bonterra received in the fourth quarter.

Non-crown royalties decreased for the 2014 year compared to the same period in 2013, primarily due to the Company drilling the majority of its
new wells on crown lands compared to freehold lands.

PRODUCTION COSTS

($ 000s except $ per boe)

Production costs (recurring)
Production costs (non-recurring)(1)
Total production costs

$ per boe (recurring)

$ per boe (total)

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

15,516

12.50

18,643

15.17

13,877

12.11

65,778

1,100

66,878

13.66

13.89

56,810

12.77

(1) Non-recurring production costs relate primarily to a one-time freehold mineral tax re-assessment in the Keystone area.

Production costs (recurring) on a per boe basis for 2014 increased seven percent from the comparable period in 2013. The increase in
production costs on a per boe basis can be attributed to increased costs for oil trucking, water hauling, chemical usage and a higher number of
well work overs and repairs that occurred primarily in the third quarter.

Bonterra Energy Corp. 2014 Annual Report

Water production (primarily load fluid recovery from frac operations) associated with new horizontal wells in a previously water flooded area in
Carnwood has increased in excess of the available water injection facility capacity. The Company is addressing this issue by reactivating old
vertical injectors and by commissioning two horizontal water flood pilots. One pilot injector was commissioned in the middle of August with a
second injector scheduled to start injection in the first quarter of 2015. Chemical usage associated with de-emulsifiers and wax inhibitors has
increased substantially in the Carnwood area due to higher production levels. In the Carnwood area, the Company has installed a new treater
and is evaluating alternative programs for inhibiting wax to reduce costs. The Company also experienced higher than average well work overs
primarily in the Keystone Area. The Company expects the cyclic wear and tear associated with the artificial lift system of the Keystone wells will
decrease due to natural production declines and therefore decrease the frequency of well work overs in this area in the future.

Quarter over quarter the production costs decreased as the Company completed its well work overs, facility maintenance, plant turnarounds
and equalization that generally occur in the third quarter.

OTHER INCOME

($ 000s)

Investment income

Administrative income

Gain on sale of properties

Realized gain on investments

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

933

998

117

135

282

671

1,102

2,111

104

161

217

278

760

In January 2014, the Company sold a portion of its undeveloped land in the Willesden Green area for cash proceeds of $1,000,000. At the time
of disposition, the Company had a carrying value of $419,000 for exploration and evaluation expenditures, resulting in a gain on sale of $581,000.

The market value of the investments held by the Company is $7,966,000 at December 31, 2014 (December 31, 2013 – $6,804,000).
The increase in carrying value is mainly due to investments purchased by the Company in the fourth quarter which is offset by a decrease in
the market value of investments previously held by the Company. During the year the company sold investments for proceeds of $1,539,000,
resulting in a gain on sale of $1,102,000.

The Company receives administrative income by way of management fees from related parties (see related party transactions).

GENERAL AND ADMINISTRATION (G&A) EXPENSE

($ 000s except $ per boe)
Employee compensation expense
Office and administration
expense (recurring)

Office and administration

expense (non-recurring)(1)

Total G&A expense

$ per boe (recurring)

$ per boe (total)

DECEMBER 31,
2014

1,399

877

2,276

1.83

Three months ended
September 30,
2014
1,805

December 31,
2013
1,403

795

2,600

2.12

719

2,122

1.85

Year ended

DECEMBER 31,
2014

7,111

3,559

10,670

2.22

December 31,
2013
5,986

3,125

9,111

1,331

10,442

2.05

2.35

(1) Non-recurring office and administration costs relates to the acquisition of Spartan.

Bonterra Energy Corp. 2014 Annual Report

The increase in employee compensation expense of $1,125,000 for 2014 compared to 2013 is primarily due to an increase in staff because of
growing operations and accrued bonuses that resulted from higher net earnings before income taxes. Quarter over quarter decrease is primarily
due to a decrease in accrued bonuses that resulted from lower net earnings before income taxes primarily as a result of reduced commodity
prices. The Company has a bonus plan in which the bonus pool consists of a range between 2.5 percent to 3.5 percent of earnings before
income taxes. The Company firmly believes that tying employee compensation (including the use of stock options) to the performance of the
Company clearly aligns the interest of the employees with that of the shareholders.

The increase in recurring office and administration expense for 2014 compared to 2013 related to increased computer software costs,
professional fees and general office expenditures. The increase quarter over quarter relates primarily to an increase in professional fees and a
reduction in the allowance for doubtful accounts.

FINANCE COSTS

($ 000s except $ per boe)

Interest on long-term debt

Other interest

Interest expense

$ per boe
Unwinding of the discounted value of

decommissioning liabilities

Total finance costs

DECEMBER 31,
2014
1,220

251

1,471

1.19

388

1,859

Three months ended
September 30,
2014

December 31,
2013

965

498

1,463

1.19

380

1,843

1,332

261

1,593

1.39

284

1,877

Year ended

DECEMBER 31,
2014
4,282

1,461

5,743

1.19

1,361

7,104

December 31,
2013

6,165

958

7,123

1.60

1,088

8,211

Interest on long-term debt decreased $1,883,000 in 2014 compared to the same period in 2013 as the Company reduced the bank debt
outstanding by $24,656,000 since the end of the second quarter of 2013. The decrease in bank debt was due to increased cash flow, an equity
issue in the third quarter of 2013, an increase in a subordinated promissory note and stock option proceeds received in the first half of 2014.
The Company also experienced lower interest rates on its credit facilities in 2014 due to a lower net debt to cash flow ratio. Interest rates are
determined by net debt to cash flow ratio on a trailing quarterly basis.

Other interest relates to amounts paid to related party (see related party transactions) and a $40,000,000 subordinated promissory note from a
private investor.

A one percent increase (decrease) in the Canadian prime rate would decrease (increase) both annual net earnings and comprehensive income
by approximately $1,250,000.

SHARE-BASED PAYMENTS

($ 000s)

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

947

838

773

2,725

4,155

Share-based payments are a statistically calculated value representing the estimated expense of issuing employee stock options. The Company
records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants.

Share-based payments decreased by $1,430,000 from a year ago due to 1,350,500 options issued prior to Q1 2013 that were fully amortized
prior to Q1 2014. In 2014 the Company granted most of its options in the second and third quarter.

Based on current outstanding options, the Company anticipates that an expense of approximately $2,317,000 will be recorded for 2015,
$598,000 for 2016, and $98,000 for 2017. For more information about options issued and outstanding, refer to Note 14 of the December 31, 2014
audited annual financial statements.

Bonterra Energy Corp. 2014 Annual Report

DEPLETION AND DEPRECIATION, EXPLORATION AND EVALUATION

AND GOODWILL

($ 000s)

Depletion and depreciation

Exploration and evaluation

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

26,975

28,119

24,707

489

106,697

91,779

1,156

Provision for depletion and depreciation increased by $14,918,000 for 2014 compared to 2013. The increase in depletion and depreciation
was mainly the result of higher production volumes and increased property, plant and equipment costs. Quarter over quarter the provision for
depletion and depreciation decreased primarily due to a decrease in decommissioning estimates.

Exploration and evaluation expense related to expired leases.

There were no impairment provisions recorded for the years ended December 31, 2014 and 2013.

TAXES

The Company recorded a current tax expense of $10,505,000 (2013 – $Nil) and a deferred tax expense of $60,327,000 for 2014
(2013 – $22,024,000) for a total tax expense of $70,832,000 (2013 – $22,024,000). The tax expense increase for 2014 compared to 2013 is
related to a reduction in the Company’s tax assets as a result of the Agreement with CRA and an increase in net earnings. The reduction in tax
assets was charged to deferred tax expense in the statement of comprehensive income. The Company also utilized $6,645,000 of the federal
investment tax credit receivable to reduce current taxes payable to $3,860,000.

For additional information regarding income taxes, see Note 13 of the December 31, 2014 annual audited financial statements.

NET EARNINGS (LOSS)

($ 000s except $ per share)

Net earnings (loss)

$ per share – basic

$ per share – diluted

DECEMBER 31,
2014

Three months ended
September 30,
2014

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

Year ended

(32,877)

(1.04)

(1.03)

20,983

0.65

15,254

0.50

0.49

38,761

1.21

62,758

2.08

2.07

Net earnings in 2014 decreased by $23,997,00 compared to 2013. Decreased net earnings resulted primarily from increased tax expense from
the CRA Agreement in the fourth quarter, increased depletion and depreciation and increased production costs, which was partially offset by an
increase in oil and gas sales.

The quarter over quarter decrease in net earnings was mainly due to the increase in tax expense and a decrease in crude oil prices, which were
partially offset by a decrease in production costs.

OTHER COMPREHENSIVE INCOME

Other comprehensive income for 2014 consists of an unrealized gain before tax on investments (including investment in a related party) of
$1,174,000 relating to an increase in the investments’ fair value (December 31, 2013 – unrealized gain of $2,725,000). The Company also
disposed of a portion of these investments in 2014 for a realized gain before tax of $1,102,000 (December 31, 2013 – $278,000). Realized gains
decrease other comprehensive income as these gains are transferred to net earnings. Other comprehensive income varies from net earnings by
unrealized changes in the fair value of Bonterra’s holdings of investments including the investment in related party, net of tax.

Bonterra Energy Corp. 2014 Annual Report

CASH FLOW FROM OPERATIONS

($ 000s except $ per share)

Cash flow from operations

$ per share – basic

$ per share – diluted

DECEMBER 31,
2014

Three months ended
September 30,
2014

50,465

1.57

65,705

2.05

2.03

Year ended

December 31,
2013

DECEMBER 31,
2014

December 31,
2013

47,772

1.53

1.52

222,353

6.97

6.94

173,896

5.76

5.74

In 2014, cash flow from operations increased by $48,457,000 compared to the same period a year ago. This was primarily due to an increase
in oil and gas sales and production and an increase in non-cash working capital, which were partially offset by an increase in production costs.
The quarter over quarter decrease of $15,240,000 was primarily due to a decrease in crude oil prices, which was partially offset by an increase
in non-cash working capital and decreased production costs.

RELATED PARTY TRANSACTIONS

Bonterra holds 1,034,523 (December 31, 2013 – 1,034,523) common shares in Pine Cliff which represents less than one percent ownership
in Pine Cliff’s outstanding common shares. Pine Cliff’s common shares have a fair market value as of December 31, 2014 of $1,738,000
(December 31, 2013 – $1,076,000). Pine Cliff paid a management fee to the Company of $60,000 (December 31, 2013 – $60,000) plus the
reimbursement of certain administrative costs. Services provided by the Company include executive services, oil and gas administration and
office administration. All services performed are charged at estimated fair value. As at December 31, 2014, the Company had an account
receivable from Pine Cliff of $316,000 (December 31, 2013 – $217,000).

As at December 31, 2014, the Company’s CEO, Chairman of the Board and major shareholder has loaned the Company $12,000,000
(December 31, 2013 – $12,000,000). The loan bears interest at Canadian chartered bank prime less 5/8th of a percent and has no set
repayment terms but is payable on demand. Security under the debenture is over all of the Company’s assets and is subordinated to any
and all claims in favour of the syndicate of senior lenders providing credit facilities to the Company. The loan can only be repaid should the
Company have sufficient available borrowing limits under the Company’s credit facility. Interest paid on this loan for 2014 was $285,000
(December 31, 2013 – $285,000). This loan results in a substantial benefit to Bonterra as the interest paid to the CEO by Bonterra is lower
than bank interest.

LIQUIDITY AND CAPITAL RESOURCES

Net Debt to Cash Flow

Bonterra continues to focus on managing its cash flow, capital expenditures and dividend payments. The Company continues to meet its annual
guidance range of 1 to 1 times to 1.5 to 1 times net debt to a 12 month trailing cash flow ratio with a ratio of 0.9 to 1 times. The Company
anticipates that with its low net debt to cash flow ratio and continued successful drilling program, it will allow the Company to sustain future after
tax cash flows that will be sufficient to finance future capital expenditures and dividend payments while still operating within its guidance of debt
to cash flow ratio. With the current oil commodity price environment the Company will be assessing its net debt to cash flow guidance for 2015
on a continuous basis. Due to current prices the Company has significantly reduced planned capital expenditures for 2015 compared to 2014
and has reduced the dividend payments by 50 percent on a monthly basis.

Bonterra Energy Corp. 2014 Annual Report

Working Capital Deficiency

($ 000s)

Working capital deficiency

Long-term bank debt

Net debt

Shareholders’ equity

Total

Net Debt and Working Capital

DECEMBER 31,
2014

December 31,
2013

53,642

154,723

208,365

635,198

843,563

35,895

156,764

192,659

667,641

860,300

Net debt is a combination of long-term bank debt and working capital. Net debt increased compared to the same period in 2013.
This was primarily attributable to the Company’s increased capital spending and dividends paid to shareholders offset partially by
increased cash flow from increased production and higher field netbacks, stock option proceeds and an equity raise in the third
quarter of 2013. In July 2014, the Company raised the monthly dividend from $0.29 per share to $0.30 per share. Subsequently to
December 31, 2014, in order to maintain its financial strength and long-term objectives during this period of extreme market volatility,
the Company reduced the monthly dividend from $0.30 per share to $0.15 per share commencing with the February 2015 dividend.

Working capital is calculated as current liabilities less current assets. The Company finances its working capital deficiency using cash flow from
operations, its long-term bank facility, share issuances, option exercises and sale of non-core assets and investments.

Effective January 17, 2014, the Company increased its Subordinated Promissory Note by an additional $15,000,000, for a total of $40,000,000
under the same terms and conditions. See Note 10 of the December 31, 2014 audited annual financial statements.

The Company has not currently entered into any financial derivative contracts.

Capital Expenditures

During the year ended December 31, 2014, the Company incurred capital costs of $155,566,000 (December 31, 2013 – $119,227,000) net
of proceeds on dispositions of property, plant and equipment. The costs relate primarily to the drilling of 43 gross (42.6 net) Cardium operated
horizontal wells and 22 (4.9 net) non-operated wells, a wholly owned gas plant reactivation, and upgrading facilities and gathering systems.

Long-Term Debt

Long-term debt represents the outstanding draws from the Company’s credit facilities as described in the notes to the Company’s condensed
financial statements. As of December 31, 2014, the Company has bank facilities consisting of a $220,000,000 (December 31, 2013 – $220,000,000)
syndicated revolving credit facility and a $30,000,000 (December 31, 2013 – $30,000,000) non-syndicated revolving credit facility. Amounts
drawn under these facilities at December 31, 2014 totaled $154,723,000 (December 31, 2013 – $156,764,000). The interest rates on the
outstanding debt as of December 31, 2014 were 3.8 percent and 3.0 percent on the Company’s Canadian prime rate loan and Banker’s
Acceptances, respectively. The loan is revolving to April 30, 2015 and with a maturity date of April 30, 2016 and is subject to annual review.
The revolving credit facilities have no fixed terms of repayment.

Advances drawn under the credit facilities are secured by a fixed and floating charge debenture over the assets of the Company. In the event
the credit facilities are not extended or renewed, amounts drawn under the facility would be due and payable on the maturity date. The size of
the committed credit facilities is based primarily on the value of the Company’s producing petroleum and natural gas assets and related tangible
assets as determined by the lenders. For more information see Note 11 of the December 31, 2014 audited annual financial statements.

Bonterra Energy Corp. 2014 Annual Report

Shareholders’ Equity

The Company is authorized to issue an unlimited number of common shares without nominal or par value.

The Company is authorized to issue an unlimited number of Class “A” redeemable Preferred Shares and an unlimited number of Class “B”
Preferred Shares. There are currently no outstanding Class “A” redeemable Preferred Shares or Class “B” Preferred Shares.

DECEMBER 31, 2014

December 31, 2013

Issued and fully paid – common shares

Balance, beginning of year

Acquisition

Share issuance

Share issue costs, net of tax

NUMBER

31,322,171

Issued pursuant to the Company’s share option plan

829,452

Transfer from contributed surplus to share capital

Shares issued for oil and gas properties

Balance, end of year

18,000
32,169,623

AMOUNT
($ 000S)

685,898

37,911

4,021

1,104
728,934

Number

19,909,541

10,711,405

553,725

147,500

Amount
($ 000s)

149,877

502,258

27,603

(996)

6,625

531

31,322,171

685,898

The Company provides a stock option plan for its directors, officers, employees and consultants. Under the plan, the Company may grant
options for up to 3,216,962 (December 31, 2013 – 3,132,217) common shares. The exercise price of each option granted will not be lower than
the market price of the common shares on the date of grant and the option’s maximum term is five years. For additional information regarding
options outstanding, see Note 14 of the December 31, 2014 audited annual financial statements.

As of May 22, 2014, employees may elect to have the Company settle any or all options vested and exercisable using the cashless equity-settled
exercise method. In connection with any such exercise, such employee shall be entitled to receive, without any cash payment (other than the
taxes required to be paid in connection with the exercise), whole shares of the Company. The number of shares under option multiplied by the
difference of the fair value at the time of exercise less the option exercise price, divided by the fair value at the time of exercise determines the
number of whole shares issued.

DIVIDEND POLICY

For the year ended December 31, 2014, Bonterra paid dividends of $113,007,000 ($3.54 per share) compared to $100,180,000
($3.33 per share) in 2013. Bonterra’s dividend policy is regularly monitored and is dependent upon production, commodity prices, funds from
operations, debt levels and capital expenditures. With its large inventory of undrilled locations, Bonterra continues to be well positioned to
provide to its shareholders a combination of sustainable growth and meaningful dividend income.

Bonterra’s dividends to its shareholders are funded by cash flow from operating activities with the remaining cash flow directed towards
capital spending and, where applicable, the repayment of debt. To the extent that the excess cash flow from operations after dividends is not
sufficient to cover capital spending, the shortfall is funded by funds from the exercising of employee stock options, the sale of investments
and by drawdowns from Bonterra’s credit facilities. Bonterra intends to provide dividends to shareholders that are sustainable to the Company
considering its liquidity and its long-term operational strategy. In addition, since the level of dividends is highly dependent upon cash flow
generated from operations, which fluctuates significantly in relation to changes in financial and operational performance, commodity prices,
interest and exchange rates and many other factors, future dividends cannot be assured. Bonterra’s payout ratio based on cash flow from
operations was 51 percent for the year ended December 31, 2014 (58 percent for the year ended December 31, 2013).

Bonterra Energy Corp. 2014 Annual Report

QUARTERLY FINANCIAL INFORMATION

For the periods ended
($ 000s except $ per share)

Revenue – oil and gas sales

Cash flow from operations

Net earnings (loss)

Per share – basic

Per share – diluted

For the periods ended
($ 000s except $ per share)

Revenue – oil and gas sales

Cash flow from operations

Net earnings

Per share – basic

Per share – diluted

68,940

50,465

(32,877)

(1.04)

(1.03)

70,917

47,772

15,254

0.50

0.49

2014

2013

88,959

65,705

20,983

0.65

78,946

43,953

19,690

0.63

99,274

57,089

27,614

0.87

0.86

79,344

41,445

15,119

0.49

82,521

49,094

23,041

0.73

66,468

40,726

12,695

0.46

The fluctuations in the Company’s revenue and net earnings from quarter to quarter are primarily caused by variations in production volumes,
realized oil and natural gas pricing, the related impact on royalties and production costs. Q4 2014 net earnings were lower than the prior quarters
due to the Company’s tax agreement with CRA.

CRITICAL ACCOUNTING ESTIMATES

There have been no changes to the Company’s critical accounting policies and estimates as of the period ended in the financial statements.

FORWARD-LOOKING INFORMATION

Certain statements contained in this MD&A include statements which contain words such as “anticipate”, “could”, “should”, “expect”, “seek”,
“may”, “intend”, “likely”, “will”, “believe” and similar expressions, relating to matters that are not historical facts, and such statements of our
beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute “forward-looking
information” within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us
derived from our experience and perceptions. Forward-looking information in this MD&A includes, but is not limited to: expected cash provided
by continuing operations; cash dividends; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and
demand; expansion and other development trends of the oil and gas industry; business strategy and outlook; expansion and growth of our
business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies;
credit risks; and other such matters.

All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of
historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances.
The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange
fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable
environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil
and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility
of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations
to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other
factors, many of which are beyond our control. The foregoing factors are not exhaustive.

Bonterra Energy Corp. 2014 Annual Report

Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and,
accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of
them do, what benefits will be derived therefrom. Except as required by law, Bonterra disclaims any intention or obligation to update or revise
any forward-looking information, whether as a result of new information, future events or otherwise.

The forward-looking information contained herein is expressly qualified by this cautionary statement.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures have been designed to ensure the information required to be disclosed by the Company is accumulated
and communicated to the Company’s Management, as appropriate, to allow timely decisions regarding required disclosures. The Company’s
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management, have concluded, based on their evaluation as
of December 31, 2014 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. It should be noted that while the Company’s CEO and
CFO believe that the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not
expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system,
no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objective of the control system is met.

INTERNAL CONTROL UPDATE

The Company’s CEO and CFO are responsible for establishing and maintaining Disclosure Controls and Procedures (DC&P) and adequate
Internal Control over Financial Reporting (ICFR) to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements at December 31, 2014 for external purposes in accordance with International Financial Reporting Standards. The
control framework the Company used to design its ICFR was in accordance with the Committee of Sponsoring Organizations of the Treadway
Commission (COSO 1992). The Company’s CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness
of the Company’s internal control over financial reporting at the financial period end of the Company and concluded that the Company’s internal
control over financial reporting are effective for the foregoing purpose.

No changes were made to the Company’s internal controls over financial reporting during the year ended December 31, 2014 that have
materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

The Company is in the process of reviewing its ICFR to be compliant with the COSO 2013 framework by December 31, 2015.

All internal control systems, no matter how well designed, have inherent limitations. These systems, therefore, provide reasonable but not
absolute assurance that financial information is accurate and complete.

FINANCIAL REPORTING UPDATE

As of January 1, 2014, the Company adopted several new IFRS interpretations and amendments in accordance with the transitional provisions
of each standard. A brief description of each new accounting policy and its impact on the Company’s financial statements are as follows:

IAS 32 “Financial Instruments: Presentation”

Has been amended to clarify certain criteria required to be achieved in order to permit the offsetting of financial assets and financial liabilities.
The retrospective adoption of the amendment does not have any impact on Bonterra’s financial statements.

IAS 36 “Impairment of Assets”

Has been amended to reduce the circumstances in which the recoverable amount of cash generating units “CGUs” is required to be disclosed
and clarify the disclosures required when an impairment loss has been recognized or reversed in a period. The retrospective adoption
of these amendments will only impact Bonterra’s disclosures in the financial statements in periods when an impairment loss or impairment
reversal is recognized.

Bonterra Energy Corp. 2014 Annual Report

IAS 39 “Financial Instruments: Recognition and Measurement”

Has been amended to clarify that there would be no requirement to discontinue hedge accounting if a hedging derivative was novated, provided
certain criteria are met. The retrospective adoption of the amendments does not have any impact on Bonterra’s financial statements.

IFRIC 21 “Levies”

Was developed by the IFRS Interpretations Committee (IFRIC) and is applicable to all levies imposed by governments under legislation, other
than outflows that are within the scope of other standards (e.g., IAS 12 “Income Taxes”) and fines or other penalties for breaches of legislation.
The interpretation clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant
legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of
time, in accordance with the relevant legislation. Lastly, the interpretation clarifies that a liability should not be recognized before the specified
minimum threshold to trigger that levy is reached. The retrospective adoption of this interpretation does not have any impact on Bonterra’s
financial statements.

FUTURE ACCOUNTING PRONOUNCEMENTS

In May 2014, the International Accounting Standards Board (IASB) issued IFRS 15 “Revenue from Contracts with Customers,” which
replaces IAS 18 “Revenue,” IAS 11 “Construction Contracts,” and related interpretations. This standard is required to be adopted either
retrospectively or using a modified transition approach for fiscal years beginning on or after January 1, 2017, with earlier adoption permitted.
The Company has not yet assessed the impact, if any, that the new standard will have on its financial statements or whether to early adopt
this new standard.

In July 2014, the IASB has amended IFRS 9 “Financial Instruments,” which amends its classification and measurement of financial assets and
introduces a new expected loss impairment model. This standard is effective for annual periods beginning on or after January 1, 2018, with early
adoption permitted and shall be applied retrospectively. The Company has not yet assessed the impact, if any, that the new amended standard
will have on its financial statements or whether to early adopt this new requirement.

Additional information relating to the Company may be found on www.sedar.com or visit our website at www.bonterraenergy.com.

Bonterra Energy Corp. 2014 Annual Report

Management’s
Responsibility for
Financial Statements

The information provided in this report, including the financial statements, is the responsibility of management. The timely preparation of the
financial statements requires that management make estimates and use judgment regarding the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses
during the period. Such estimates primarily relate to unsettled transactions and events as at the date of the financial statements. Accordingly,
actual results may differ from estimated amounts as future confirming events occur. Management believes such estimates have been based on
careful judgments and have been properly reflected in the accompanying financial statements.

Management maintains a system of internal controls to provide reasonable assurance that the Company’s assets are safeguarded and to
facilitate the preparation of relevant and timely information.

Deloitte LLP has been appointed by the Shareholders to serve as the Company’s external auditors. They have examined the financial statements
and provided their auditor’s report. The audit committee has reviewed these financial statements with management and the auditors, and has
reported to the Board of Directors. The Board of Directors has approved the financial statements as presented in this annual report.

GEORGE F. FINK
Chief Executive Officer and
Chairman of the Board

March 19, 2015

ROBB D. THOMPSON
Chief Financial Officer

March 19, 2015

Bonterra Energy Corp. 2014 Annual Report

Independent
Auditor’s Report

TO THE SHAREHOLDERS OF BONTERRA ENERGY CORP.

We have audited the accompanying financial statements of Bonterra Energy Corp. (the “Company”), which comprise the statement of financial
position as at December 31, 2014 and 2013, and the statement of comprehensive income, statement of cash flows and statement of changes
in equity for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of Bonterra Energy Corp. as at December 31, 2014
and 2013, and its financial performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.

CHARTERED ACCOUNTANTS

March 19, 2015

Calgary, Canada

Bonterra Energy Corp. 2014 Annual Report

Financial
Statements

STATEMENT OF FINANCIAL POSITION

As at
($ 000s)

ASSETS

CURRENT

Accounts receivable

Crude oil inventory

Prepaid expenses

Investments

Investment in related party

Exploration and evaluation assets

Property, plant and equipment

Investment tax credit receivable

Goodwill

LIABILITIES

CURRENT

Accounts payable and accrued liabilities

Due to related party

Subordinated promissory note

Bank debt

Decommissioning liabilities

Deferred tax liability

COMMITMENTS AND SUBSEQUENT EVENTS

SHAREHOLDERS’ EQUITY

Share capital

Contributed surplus

Accumulated other comprehensive income

Retained earnings (deficit)

See accompanying notes to these financial statements.

On behalf of the Board:

GEORGE F. FINK
Director

RODGER A. TOURIGNY
Director

DECEMBER 31,
2014

Note

December 31,
2013

19, 20

20,314

1,227
2,428

6,228

30,197

1,738

7,629

901,991

8,573

92,810

27,247

749

1,642

5,728

35,366

1,076

7,674

835,935

27,670

92,810

1,042,938

1,000,531

31,839

12,000

40,000

83,839

154,723

53,792

115,386

407,740

728,934

11,495

3,824

(109,055)

635,198

1,042,938

34,261

12,000

25,000

71,261

156,764

37,362

67,503

332,890

685,898

12,791

3,761

(34,809)

667,641

1,000,531

Bonterra Energy Corp. 2014 Annual Report

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31
($ 000s, except $ per share)

REVENUE

Oil and gas sales, net of royalties

Loss on risk management contracts

Other income

EXPENSES

Production

Office and administration

Employee compensation

Finance costs

Share-based payments

Depletion and depreciation

Exploration and evaluation

EARNINGS BEFORE INCOME TAXES

TAXES

Current income taxes

Deferred income taxes

NET EARNINGS FOR THE YEAR

OTHER COMPREHENSIVE INCOME
Unrealized gain on investments

Deferred taxes on unrealized gain on investments

Realized gain on investments transferred to net earnings

Deferred taxes on realized gain on investments transferred to net earnings

OTHER COMPREHENSIVE INCOME FOR THE YEAR

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

NET EARNINGS PER SHARE – BASIC

NET EARNINGS PER SHARE – DILUTED
COMPREHENSIVE INCOME PER SHARE – BASIC

COMPREHENSIVE INCOME PER SHARE – DILUTED

See accompanying notes to these financial statements.

Note

2014

2013

301,584

2,111

303,695

66,878

3,559

7,111

7,104

2,725

106,697

194,102

109,593

10,505

60,327

70,832

38,761

1,174

(147)

(1,102)

138

38,824

1.21

1.21
1.22

1.21

257,777

(1,202)

760

257,335

56,810

4,456

5,986

8,211

4,155

91,779

1,156

172,553

84,782

22,024

62,758

2,725

(341)

(278)

2,141

64,899

2.08

2.07

2.15

2.14

Bonterra Energy Corp. 2014 Annual Report

STATEMENT OF CASH FLOW

FOR THE YEARS ENDED DECEMBER 31
($ 000s)

OPERATING ACTIVITIES
Net earnings
Items not affecting cash

Deferred income taxes
Share-based payments
Depletion and depreciation
Exploration and evaluation
Unrealized gain on risk management contracts
Unwinding of the discount on decommissioning liabilities
Gain on sale of properties
Gain on sale of investments
Investment income
Interest expense

Change in non-cash working capital accounts:

Accounts receivable
Crude oil inventory
Prepaid expenses
Investment tax credit receivable
Accounts payable and accrued liabilities

Decommissioning expenditures
Interest paid
CASH PROVIDED BY OPERATING ACTIVITIES
FINANCING ACTIVITIES

Decrease in bank debt
Subordinated promissory note
Issuance of common shares
Share issue costs
Stock option proceeds
Dividends

CASH USED IN FINANCING ACTIVITIES
INVESTING ACTIVITIES

Investment income received
Exploration and evaluation expenditures
Property, plant and equipment expenditures
Proceeds on sale of properties
Purchase of investments
Proceeds on sale of investments
Cash acquired on acquisition

Change in non-cash working capital accounts:
Accounts payable and accrued liabilities
Accounts receivable

CASH USED IN INVESTING ACTIVITIES
NET CASH INFLOW
Cash, beginning of year
CASH, END OF YEAR

See accompanying notes to these financial statements.

Note

2014

2013

38,761

62,758

6
7

60,327
2,725
106,697
28
-
1,361
(671)
(1,102)
(56)
5,743

8,411
(258)
(786)
6,646
1,922
(1,652)
(5,743)
222,353

(2,041)
15,000
-
-
37,911
(113,007)
(62,137)

56
(402)
(155,262)
1,152
(1,527)
1,539
-

(4,344)
(1,428)
(160,216)
-
-
-

22,024
4,155
91,779
1,156
(1,859)
1,088
(217)
(278)
(104)
7,123

(1,492)
116
909
-
(5,530)
(609)
(7,123)
173,896

(10,044)
10,000
27,603
(1,325)
6,625
(100,180)
(67,321)

104
(36)
(121,605)
2,414
-
968
10,000

(2,408)
3,988
(106,575)
-
-
-

Bonterra Energy Corp. 2014 Annual Report

STATEMENT OF CHANGES IN EQUITY

FOR THE YEARS ENDED
($ 000s, except number of shares outstanding)

JANUARY 1, 2013
Share-based payments

Acquisition

Share issuance

Share issue costs, net of tax

Exercise of options
Transfer to share capital on
exercise of options

Comprehensive income

Dividends

DECEMBER 31, 2013
Share-based payments

Exercise of options
Transfer to share capital on
exercise of options

Accumulated
other
comprehensive
income(2)
1,620

Retained
earnings
(deficit)
2,613

Contributed
surplus(1)
9,167

4,155

Number
of shares
outstanding
(Note 14)

19,909,541

10,711,405

553,725

147,500

Share
capital
(Note 14)

149,877

502,258

27,603

(996)

6,625

531

(531)

31,322,171

685,898

829,452

37,911

4,021

1,104

2,141

3,761

62,758

(100,180)

(34,809)

12,791

2,725

(4,021)

38,761

(113,007)

(109,055)

Total
shareholders’

equity

163,277

4,155

502,258

27,603

(996)

6,625

64,899

(100,180)

667,641

2,725

37,911

1,104

38,824

(113,007)

635,198

Shares issued for oil and gas properties

18,000

Comprehensive income

Dividends

DECEMBER 31, 2014

32,169,623

728,934

11,495

3,824

(1) Contributed surplus is comprised of share-based payments
(2) Accumulated other comprehensive income comprises of unrealized gains and losses on available-for-sale investments

See accompanying notes to these financial statements.

Bonterra Energy Corp. 2014 Annual Report

Notes to the
Financial Statements

As at and for the years ended December 31, 2014 and 2013.

1. NATURE OF BUSINESS AND SEGMENT INFORMATION

Bonterra Energy Corp. (Bonterra or the Company) is a public company listed on the Toronto Stock Exchange and incorporated under
the Business Corporations Act (Alberta). The address of the Company’s registered office is Suite 901, 1015-4th Street SW, Calgary,
Alberta, Canada, T2R 1J4.

Bonterra operates in one industry and has only one reportable segment being the development and production of oil and natural gas in the
Western Canadian Sedimentary Basin.

2. BASIS OF PREPARATION

a) Statement of Compliance

These financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS),
as issued by the International Accounting Standards Board (IASB).

The financial statements were authorized for issuance by the Company’s Board of Directors on March 19, 2015.

b) Basis of Measurement

These financial statements have been prepared on a historical cost basis, except for certain financial instruments and share-based payment
transactions which are measured at fair value.

c) Functional and Presentation Currency

The Company’s functional and presentation currency is the Canadian dollar.

Foreign currency denominated monetary assets and liabilities are translated into Canadian dollars at the rates prevailing on the reporting date.
Non-monetary assets and liabilities are translated into Canadian dollars at the rates prevailing on the transaction dates. Exchange gains and
losses are recorded as income or expense in the period in which they occur.

d) Significant Accounting Estimates and Judgments

The timely preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as at the date of the statement of financial position as well as the reported
amounts of revenues, expenses and cash flows during the periods presented. Such estimates relate primarily to unsettled transactions and
events as of the date of the financial statements. Actual results could differ materially from estimated amounts.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which
the estimates are revised and in any future years affected. The following are the estimates and judgments applied by management that most
significantly affect the Company’s financial statements.

Bonterra Energy Corp. 2014 Annual Report

Exploration and Evaluation Expenditures
Exploration and evaluation costs are initially capitalized with the intent to establish commercially viable reserves. Exploration and evaluation assets
include undeveloped land and costs related to exploratory wells. The Company is required to make estimates and judgments about future events
and circumstances regarding the future economic viability of extracting the underlying resources. Changes to project economics, resource
quantities, expected production techniques, unsuccessful drilling, expired mineral leases, production costs and required capital expenditures are
important factors when making this determination. To the extent a judgment is made, that the underlying reserves are not viable, the exploration
and evaluation costs will be impaired and charged to net earnings.

Impairment of Non-Financial Assets
Property, plant and equipment and goodwill are aggregated into cash generating units (CGUs) based on their ability to generate largely
independent cash flows and are assessed for impairment. CGUs have been determined based on similar geological structure, shared
infrastructure, geographical proximity, commodity type, and similar market risks. Oil and gas prices and other assumptions will change in the
future, which may impact the Company’s recoverable amounts and may therefore require a material adjustment to the carrying value of property,
plant and equipment. The determination of the Company’s CGUs is subject to management’s judgment.

Reserves Estimation
The capitalized costs of oil and gas properties are depleted on a unit-of-production basis at a rate calculated by reference to proved plus
probable developed reserves determined in accordance with National Instrument 51-101 and the Canadian Oil and Gas Evaluation handbook.
Commercial reserves are determined using best estimates of oil and gas in place, recovery factors and future oil and gas prices. Amounts used
for impairment calculations are also based on estimates of crude oil and natural gas reserves and future costs required to develop those reserves.

Risk Management Contracts
The Company accounts for such instruments using the fair value method by initially recording an asset or liability, and recognizing changes in the
fair value of the instruments in net earnings as unrealized gains or losses on risk management contracts. Fair values of financial instruments are
based on third party futures quotes for commodities. Any realized gains or losses on risk management contracts are recognized in net earnings
in the period they occur.

Share-Based Payments
The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date
they are granted. Estimating the fair value requires the determination of the most appropriate valuation model for a grant, which is dependent on
the terms and conditions of the grant. This also requires the determination of the most appropriate inputs to the valuation model including the
expected life of the option, risk free interest rates, volatility and dividend yield.

Decommissioning and Restoration Costs
Decommissioning and restoration costs will be incurred by the Company at the end of the operating lives of the Company’s oil and gas
properties. Provisions for decommissioning liabilities are based on cost estimates which can vary in response to many factors including timing
of abandonment, inflation, changes in legal requirements, new restoration techniques and interest rates.

Income Taxes
The Company recognizes the net deferred tax benefit or expense related to deferred income tax assets or liabilities to the extent that it is probable
that the deductible temporary differences will reverse in the foreseeable future. Assessing the recoverability of investment tax credit receivable
requires the Company to make significant estimates related to expectations of future taxable income. The provision for income taxes is based on
judgments in applying income tax law and estimates of the timing, likelihood and reversal of temporary differences between the accounting and
tax basis of assets and liabilities. The ability to realize on the deferred tax assets and investment tax credit receivable recorded on the balance
sheet may be compromised to the extent that any interpretation of tax law is challenged or taxable income differs significantly from estimates.

Further details regarding accounting estimates and judgments are disclosed in Note 3.

Bonterra Energy Corp. 2014 Annual Report

e) Adopted Accounting Pronouncements

IAS 32 “Financial Instruments: Presentation”
Has been amended to clarify certain criteria required to be achieved in order to permit the offsetting of financial assets and financial liabilities.
The retrospective adoption of the amendment does not have any impact on Bonterra’s financial statements.

IAS 36 “Impairment of Assets”
Has been amended to reduce the circumstances in which the recoverable amount of cash generating units (“CGUs”) is required to be disclosed
and clarify the disclosures required when an impairment loss has been recognized or reversed in a period. The retrospective adoption of
these amendments will only impact Bonterra’s disclosures in the financial statements in periods when an impairment loss or impairment
reversal is recognized.

IAS 39 “Financial Instruments: Recognition and Measurement”
Has been amended to clarify that there would be no requirement to discontinue hedge accounting if a hedging derivative was novated, provided
certain criteria are met. The retrospective adoption of the amendment does not have any impact on Bonterra’s financial statements.

IFRIC 21 “Levies”
Was developed by the IFRS Interpretations Committee (IFRIC) and is applicable to all levies imposed by governments under legislation,
other than outflows that are within the scope of other standards (e.g., IAS 12 “Income Taxes”) and fines or other penalties for breaches of
legislation. The interpretation clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the
relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a
period of time, in accordance with the relevant legislation. Lastly, the interpretation clarifies that a liability should not be recognized before the
specified minimum threshold to trigger that levy is reached. The retrospective adoption of this interpretation does not have any impact on
Bonterra’s financial statements.

f) Future Accounting Pronouncements

In May 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers,” which replaces IAS 18 “Revenue,” IAS 11 “Construction
Contracts,” and related interpretations. This standard is required to be adopted either retrospectively or using a modified transition approach
for fiscal years beginning on or after January 1, 2017, with earlier adoption permitted. The Company has not yet assessed the impact, if any,
that the new amended standard will have on its financial statements or whether to early adopt this new requirement.

In July 2014, the IASB has amended IFRS 9 “Financial Instruments”, which amends its classification and measurement of financial assets and
introduces a new expected loss impairment model. This standard is effective for annual periods beginning on or after January 1, 2018, with early
adoption permitted and shall be applied retrospectively. The Company has not yet assessed the impact, if any, that the new standard will have
on its financial statements or whether to early adopt this new standard.

Bonterra Energy Corp. 2014 Annual Report

3. SIGNIFICANT ACCOUNTING POLICIES

a) Revenue Recognition

Revenues from the sale of petroleum and natural gas are recorded when the significant risks and rewards of ownership have been transferred
to the customer. This generally occurs when the product is physically transferred into a third-party pipeline or when the delivery truck arrives at
a customer’s receiving location. Items such as royalties for crown, freehold, gross overriding (GORR) and Saskatchewan surcharge are netted
against revenue. These items are netted to reflect the deduction for other parties’ proportionate share of the revenue.

Administration fee income is recorded when management services and office administration are provided (see related parties disclosure
Notes 9 and 16).

b) Joint Arrangements

Certain exploration, development and production activities are conducted jointly with others. These financial statements reflect only the
Company’s interests in such activities. A jointly controlled operation involves the use of assets and other resources of the Company and those
of other venturers through contractual arrangements rather than through the establishment of a corporation, partnership or other entity. The
Company has no interests in jointly controlled entities. The Company recognizes in its financial statements its interest in assets that it owns, the
liabilities and expenses that it incurs and its share of income earned by the joint arrangement.

c) Inventories

Inventories consist of crude oil. Crude oil stored in the Company’s tanks is valued on a first in first out basis at the lower of cost or net realizable
value. Inventory cost for crude oil is determined based on combined average per barrel operating costs, depletion and depreciation for the period
and net realizable value is determined based on estimated sales price less transportation costs.

d) Investments and Investment in Related Party

Investments and investment in related party consist of equity securities classified on initial recognition as available-for-sale and are carried at
fair value through other comprehensive income. Fair value is determined by multiplying the period end trading price of the investments by the
number of common shares held as at period end. Unrealized holding gains and losses are recognized in other comprehensive income. Net gains
and losses arising on dispositions are recognized in net earnings.

e) Exploration and Evaluation Assets

General exploration and evaluation (E&E) expenditures incurred prior to acquiring the legal right to explore are charged to expense as incurred.

E&E expenditures represent undeveloped land costs, licenses and exploration well costs.

Undeveloped land costs, licenses and exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient
reserves to justify commercial production, are charged to expense. E&E assets continue to be capitalized as long as sufficient progress is
being made to assess the reserves and economic viability of the asset. Once technical feasibility and commercial viability has been established,
E&E assets are transferred to property, plant and equipment (PP&E). E&E assets are assessed for impairment annually, upon transfer to PP&E
assets or whenever indications of impairment exist to ensure they are not at amounts above their recoverable amounts.

Bonterra Energy Corp. 2014 Annual Report

f) Property, Plant and Equipment

PP&E assets include transferred-in E&E costs, development drilling and other subsurface expenditures. PP&E assets are carried at cost less
depletion and depreciation of all development expenditures and include all other expenditures associated with PP&E assets.

When commercial production in an area has commenced, PP&E properties, excluding surface costs are depleted using the unit-of-production
method over their total developed reserve life. Total developed reserves are determined annually by qualified independent reserve engineers.
Changes in factors such as estimates of total developed reserves that affect unit-of-production calculations are accounted for on a prospective
basis. Surface costs such as production facilities and furniture, fixtures and other equipment are depreciated over their estimated useful lives.

Oil and Gas Properties
The initial cost of an asset is comprised of its purchase price or construction cost, including expenditures such as drilling costs, the present value
of the initial and changes in the estimate of any decommissioning obligation associated with the asset and finance charges on qualifying assets,
that are directly attributable to bringing the asset into operation in its present location.

Production Facilities
Production facilities are comprised of costs related to petroleum and natural gas plant and production equipment.

Depletion and Depreciation
Depletion and depreciation is recognized in the statement of comprehensive income. Production facilities, furniture, fixtures and other equipment
are depreciated over the individual assets’ estimated economic lives, less estimated salvage value of the assets at the end of their useful lives.

These assets are depreciated on a declining balance method as follows:

Production facilities

Furniture, fixtures and other equipment

10 percent per year

10 percent to 20 percent per year

g) Business Combinations and Goodwill

The purchase price used in a business combination is based on the fair value at the date of acquisition. The business combination is
accounted for based on the fair value of the assets acquired and liabilities assumed. All acquisition costs are expensed as incurred. Contingent
liabilities are recognized at fair value at the date of the acquisition, and subsequently re-measured at each reporting period until settled.
The excess of cost over fair value of the net assets and liabilities acquired is recorded as goodwill. Goodwill is allocated to the CGU expected
to benefit from the synergies of the combination.

Bonterra Energy Corp. 2014 Annual Report

h) Impairment of Assets

Impairment of Financial Assets
A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated
future cash flow of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference
between its carrying amount and the present value of the estimated future cash flow discounted at the original effective interest rate. Individually
significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups
that share similar credit risk characteristics. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its
current fair value.

All impairment losses are recognized in net earnings. An impairment loss is reversed if there is an indicator that the impairment reversal can be
related objectively to an event occurring after the impairment loss was recognized. Any subsequent recovery of an impairment loss in respect of
an investment in an equity instrument classified as available-for-sale is reversed through other comprehensive income instead of net earnings.
For financial assets measured at amortized cost, the reversal is recognized in net earnings.

Impairment of Non-Financial Assets
The carrying amounts of the Company’s non-financial assets are reviewed at the end of each reporting period to determine whether there is any
indication of impairment. If such indication exists, then the assets’ carrying amounts are assessed for impairment.

For the purpose of impairment testing, assets (which include E&E, PP&E and Goodwill) are grouped together into the smallest group of
assets that generates cash flows from continuing use that are largely independent of the cash flow of other assets or groups of assets
(the cash-generating unit or CGU). The recoverable amount of an asset or a CGU is the greater of its value-in-use (VIU) and its fair value less
costs to sell (FVLCS).

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses are recognized
in the statement of comprehensive income. Impairment losses recognized in respect of a CGU are allocated first to reduce the carrying amount
of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets of the CGU on a pro-rata basis.

In respect of assets other than goodwill, impairment losses recognized in prior periods are assessed at each reporting date for any indications
that the impairment loss has reversed. If the amount of the impairment loss reverses in a subsequent period and the reversal can be objectively
related to an event occurring after the impairment was recognized, the impairment loss is reversed only to the extent that the asset’s carrying
amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation, if no impairment loss had
been recognized and recorded in the statement of comprehensive income. An impairment loss in respect of goodwill cannot be reversed.
There was no impairment loss recorded in the statement of comprehensive income for the years ended December 31, 2014 and 2013.

i) Decommissioning Liabilities

The fair value of the statutory, contractual, constructive or legal liabilities associated with the retirement and reclamation of oil and gas
properties is recorded when incurred, with a corresponding increase to the carrying amount of the related PP&E. The amount recognized is
the estimated cost of decommissioning, discounted to its present value using the Company’s risk free rate. Changes in the estimated timing of
decommissioning or decommissioning cost estimates and changes to the risk free rates are dealt with prospectively by recording an adjustment
to the decommissioning liability and a corresponding adjustment to property, plant and equipment. The unwinding of the discount on the
decommissioning provision is charged to net earnings as a finance cost.

The Company recognizes a decommissioning liability in the period in which it is incurred when a reasonable estimate of the liability can be
made. On a periodic basis, management will review these estimates and changes and if there are any, they will be applied prospectively. The fair
value of the estimated provision is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset.
The capitalized amount is depleted on a unit-of-production basis over the life of the proved plus probable developed reserves. The liability
amount is increased each reporting period due to the passage of time and this amount is charged to earnings in the period. Actual costs incurred
upon settlement of the obligations are charged against the provision to the extent of the liability recorded and any remaining balance of actual
costs is recorded in the statement of comprehensive income.

Bonterra Energy Corp. 2014 Annual Report

Income Taxes

Tax expense comprises current and deferred taxes. Tax is recognized in the statement of comprehensive income or directly in equity.

Current tax expense is based on the results for the period as adjusted for items that are not taxable or not deductible. Current tax is calculated
using tax rates and laws that are substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in
tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate
on the basis of amounts expected to be paid to the tax authorities.

Deferred tax is recognized using the liability method, providing for unused tax losses, unused tax credits and temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is
not recognized for the following temporary differences: the initial recognition of assets and liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they
are unlikely to be reversed in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary
differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which unused tax losses,
unused tax credits and temporary differences can be utilized. Deferred tax assets are reviewed at each balance date and are reduced to the
extent that it is no longer probable that the related tax benefit will be realized.

The amount and timing of reversals of temporary differences will also depend on the Company’s future operating results, and acquisitions and
dispositions of assets and liabilities. A significant change in any of the preceding assumptions could materially affect the Company’s estimate of
the deferred income tax asset or liability.

k) Share-Based Payments

The Company accounts for share-based payments using the fair-value method of accounting for stock options granted to directors, officers,
employees and other service providers using the Black-Scholes option pricing model. Share-based payments are recognized through the
statement of comprehensive income over the vesting period with a corresponding amount reflected in contributed surplus in equity. For awards
issued in tranches that vest at different times, the fair value of each tranche is recognized over its respective vesting period.

At the grant date and at the end of each reporting period, the Company assesses and re-assesses for subsequent periods its estimates
of the number of awards that are expected to vest and recognizes the impact of the revisions in the statement of comprehensive income.
Upon exercise of share-based options, the proceeds received net of any transaction costs and the fair value of the exercised share-based
options is credited to share capital.

Employees may elect to have the Company settle any or all options vested and exercisable using a cashless equity settlement.
In connection with any such exercise, an employee shall be entitled to receive, without any cash payment (other than the taxes required to
be paid in connection with the exercise), whole shares of the Company. The number of shares under option multiplied by the difference of
the fair value at the time of exercise less the option exercise price, divided by the fair value at the time of exercise, determines the number of
whole shares issued.

Bonterra Energy Corp. 2014 Annual Report

l) Financial Instruments

Financial instruments are measured at fair value on initial recognition of the instrument and are classified into one of the following five categories:
fair-value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets and financial liabilities
at amortized cost.

Subsequent measurement of financial instruments is based on their initial classification. Fair-value through profit or loss financial instruments
are measured at fair value and changes in fair value are recognized in the statement of comprehensive income. Available-for-sale financial
instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized
or impaired. The remaining categories of financial instruments are recognized at amortized cost using the effective interest rate method.

Cash is classified as fair-value through profit and loss. Accounts receivable are classified as loans and receivables which are measured at
amortized cost. Investments are classified as available-for-sale which is measured at fair value and any gains or losses are recognized in other
comprehensive income in the period they occur. Accounts payable and accrued liabilities, bank debt, subordinated promissory note and
amounts due to related party are classified as financial liabilities at amortized cost.

Bank debt, subordinated promissory note and due to related party are classified as current liabilities unless the Company has an unconditional
right to defer settlement of the liability for at least 12 months after the reporting date.

m) Risk Management Contracts

The Company is exposed to market risks resulting from fluctuations in commodity prices, foreign currency exchange rates and interest rates in
the normal course of its business. The Company may use a variety of instruments to manage these exposures. For transactions where hedge
accounting is not applied, the Company accounts for such instruments using the fair value method by initially recording an asset or liability, and
recognizing changes in the fair value of the instruments in earnings as unrealized gains or losses on risk management contracts. Fair values of
financial instruments are based on third party quotes or valuations provided by independent third parties. Any realized gains or losses on risk
management contracts are recognized in net earnings in the period they occur.

n) Net Earnings and Comprehensive Income Per Share

Per share amounts are calculated by dividing the net earnings or comprehensive income attributable to common shareholders of the Company
by the weighted average number of common shares outstanding during the reporting period.

Diluted per share amounts are calculated similar to basic per share amounts except that the weighted average common shares outstanding
are increased to include additional common shares from the assumed exercise of dilutive share options. The number of additional outstanding
common shares is calculated by assuming that the outstanding in-the-money share options were exercised and that the proceeds from such
exercises were used to acquire common shares at the average market price during the reporting period.

Bonterra Energy Corp. 2014 Annual Report

4. FINANCE COSTS

A breakdown of finance costs for the years ended.

($ 000s)

Interest expense on bank debt

Interest expense on amounts owing to related party

Interest expense on subordinated promissory note and other

Unwinding of the fair value of decommissioning liabilities

DECEMBER 31,
2014

December 31,
2013

4,283

285

1,175

1,361

7,104

6,165

285

673

1,088

8,211

5. INVESTMENT IN RELATED PARTY

The investment consists of 1,034,523 (December 31, 2013 – 1,034,523) common shares in Pine Cliff Energy Ltd. (Pine Cliff), a company
with some common directors and some common management with Bonterra. The investment in Pine Cliff represents less than one
percent ownership in the outstanding common shares of Pine Cliff and is recorded at fair value through other comprehensive income.
The common shares of Pine Cliff trade on the TSX Venture Exchange under the symbol PNE.

In addition, Geomark Exploration Ltd. (a wholly owned subsidiary of Pine Cliff) owns 204,633 (December 31, 2013 – 204,633) common
shares in Bonterra.

6. EXPLORATION AND EVALUATION ASSETS

($ 000s)

COST AND CARRYING AMOUNT
Balance at January 1, 2013

Acquisition (Note 18)

Additions

Dispositions

Transfers to property, plant and equipment

Expiry of exploration and evaluation assets

BALANCE AT DECEMBER 31, 2013
Additions

Dispositions

Expiry of exploration and evaluation assets

BALANCE AT DECEMBER 31, 2014

1,982

8,830

(1,373)

(645)

(1,156)

7,674
402

(419)

(28)

7,629

In January 2014, the Company sold a portion of its undeveloped land in the Willesden Green area for cash proceeds of $1,000,000. At the
time of disposition, the Company had a carrying value of $419,000 for these exploration and evaluation expenditures, resulting in a gain on
sale of $581,000.

Bonterra Energy Corp. 2014 Annual Report

7. PROPERTY, PLANT AND EQUIPMENT

COST
($ 000s)

Balance at January 1, 2013

Additions
Adjustment to decommissioning liabilities (1)
Dispositions

Transfers from exploration and evaluation assets

Acquisition (Note 18)

BALANCE AT DECEMBER 31, 2013
Additions
Adjustment to decommissioning liabilities (1)
Dispositions

BALANCE AT DECEMBER 31, 2014

ACCUMULATED DEPLETION AND DEPRECIATION
($ 000s)

Balance at January 1, 2013

Depletion and depreciation

Dispositions and other

BALANCE AT DECEMBER 31, 2013
Depletion and depreciation

Dispositions and other

BALANCE AT DECEMBER 31, 2014

CARRYING AMOUNTS AS AT:
($ 000s)

December 31, 2013

DECEMBER 31, 2014

OIL AND GAS
PROPERTIES
427,241

PRODUCTION
FACILITIES
94,902

92,492
(6,100)

(797)

645

378,685

892,166

119,635

16,721

(2)

28,799
-

(205)

92,454

215,950

36,633

(62)

FURNITURE,
FIXTURES
& OTHER
EQUIPMENT
1,661

314
-

(35)

1,940

TOTAL
PROPERTY,
PLANT &
EQUIPMENT
523,804

121,605
(6,100)

(1,037)

645

471,139

1,110,056

156,315

16,721

(64)

1,028,520

252,521

1,987

1,283,028

OIL AND GAS
PROPERTIES
(143,607)

PRODUCTION
FACILITIES
(37,521)

(73,885)

(30)

(217,522)

(88,001)

(219)

(305,742)

(17,766)

(55,278)

(18,588)

(73,866)

FURNITURE,
FIXTURES
& OTHER
EQUIPMENT
(1,224)

(128)

(1,321)

(108)

(1,429)

TOTAL
PROPERTY,
PLANT &
EQUIPMENT
(182,352)

(91,779)

(274,121)

(106,697)

(219)

(381,037)

674,644

722,778

160,672

178,655

619

558

835,935

901,991

(1) Adjustment to decommissioning liabilities is due to a decrease in the risk free rate and a change in estimate on decommissioning costs (see Note 12).

Bonterra Energy Corp. 2014 Annual Report

Impairment

As part of its annual impairment analysis, the Company assessed its PP&E assets, production facilities, furniture and other equipment by CGU
for possible impairment.

The assessment for impairment has been determined based on the value-in-use (VIU) method. VIU was determined on the basis of the discounted
expected future cash flows based on the Company’s plans to continue to produce total proved and probable reserves.

Projected estimates of cash flows from the CGUs have been determined based on the economic life of the reserves using an inflation rate
of 1.5 percent (2013 – 1.5 percent). The pre-tax discount rate applied to the cash flows for the Company’s total proved and probable assets
is ten percent.

There were no impairment provisions recorded for the years ended December 31, 2014 and 2013.

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

($ 000s)

Accounts payable

Accrued liabilities

DECEMBER 31,
2014

December 31,
2013

15,170

16,669

31,839

18,966

15,295

34,261

9. TRANSACTIONS WITH RELATED PARTIES

As at December 31, 2014, the Company’s CEO, Chairman of the Board and major shareholder has loaned the Company $12,000,000
(December 31, 2013 – $12,000,000). The loan bears interest at Canadian chartered bank prime less 5/8th of a percent and has no set
repayment terms but is payable on demand. Security under the debenture is over all of the Company’s assets and is subordinated to any
and all claims in favour of the syndicate of senior lenders providing credit facilities to the Company. The loan can only be repaid should the
Company have sufficient available borrowing limits under the Company’s credit facility. Interest paid on this loan during the year was $285,000
(December 31, 2013 – $285,000).

The Company received a management fee of $60,000 plus the reimbursement of certain administrative costs for the year ended
December 31, 2014 (December 31, 2013 – $60,000) for management services and office administration from Pine Cliff. This fee has been
included in other income. As at December 31, 2014, the Company had an account receivable from Pine Cliff for these management fees and
the reimbursement of certain administration costs of $316,000 (December 31, 2013 – $217,000).

Compensation for Key Management Personnel

($ 000s)

Compensation

Share-based payments

Total compensation

DECEMBER 31,
2014

December 31,
2013

2,272

1,120

3,392

1,542

1,876

3,418

Key management personnel are those persons, including all directors, having authority and responsibility for planning, directing and controlling
the activities of the Company.

Bonterra Energy Corp. 2014 Annual Report

10. SUBORDINATED PROMISSORY NOTE

As at December 31, 2014, Bonterra borrowed $40,000,000 (December 31, 2013 – $25,000,000) from a private investor, in exchange for a
subordinated promissory note. The terms of the subordinated promissory note are that it bears interest at three percent and is repayable after
thirty days written notice by either party. Security consists of a floating demand debenture totaling $40,000,000 over all of the Company’s assets
and is subordinated to any and all claims in favor of the syndicate of senior lenders providing credit facilities to the Company. Interest paid on the
subordinated promissory note during the year was $1,175,000 (December 31, 2013 – $673,000).

The Company’s bank agreement requires that the above loan can only be repaid should the Company have sufficient available borrowing limits
under the Company’s credit facility.

11. BANK DEBT

As at December 31, 2014, the Company has bank facilities consisting of a $220,000,000 (December 31, 2013 – $220,000,000) syndicated
revolving credit facility and a $30,000,000 (December 31, 2013 – $30,000,000) non-syndicated revolving credit facility, for total facilities of
$250,000,000. Amounts drawn under the credit facilities at December 31, 2014 were $154,723,000 (December 31, 2013 – $156,764,000).
Amounts borrowed under the credit facilities bear interest at a floating rate based on the applicable Canadian prime rate or Banker’s Acceptance
rate, plus between 0.75 percent and 3.50 percent, depending on the type of borrowing and the Company’s consolidated total funded debt to
consolidated cash flow. The terms of the revolving credit facilities provided that the loan is revolving to April 30, 2015 and with a maturity date of
April 30, 2016 and is subject to annual review. The revolving credit facilities have no fixed terms of repayment.

The amount available for borrowing under the credit facilities is reduced by outstanding letters of credit. Letters of credit totaling $700,000
were issued as at December 31, 2014 (December 31, 2013 – $700,000). Security for credit facilities consists of various and floating demand
debentures totaling $400,000,000 (December 31, 2013 – $400,000,000) over all of the Company’s assets and a general security agreement
with first ranking over all personal and real property.

The following is a list of the material covenants on the banking facility:

• The Company cannot exceed $250,000,000 in consolidated debt (includes working capital but excludes amounts due to related parties

and the subordinated promissory note).

• Dividends paid in the current quarter shall not exceed 80 percent of the average available cash flow for the preceding four fiscal quarters.

Available cash flow is defined to be cash provided by operating activities excluding gains on sale of property and investments, the change in
non-cash working capital and decommissioning liabilities settled and including all net proceeds of dispositions included in cash used in investing
activities. At December 31, 2014, the Company is in compliance with all covenants.

Bonterra Energy Corp. 2014 Annual Report

12. DECOMMISSIONING LIABILITIES

At December 31, 2014, the estimated total undiscounted amount required to settle the decommissioning liabilities was $177,441,000
(December 31, 2013 – $134,265,000). The provision has been calculated assuming a 1.5 percent inflation rate (December 31, 2013 – 1.5 percent
inflation rate). These obligations will be settled at the end of the useful lives of the underlying assets, which extend up to 50 years into the future.
This amount has been discounted using a risk-free interest rate of 2.9 percent (December 31, 2013 – 3.2 percent).

Changes to decommissioning liabilities were as follows:

($ 000s)

Decommissioning liabilities, January 1
Adjustment to decommissioning liabilities(1)
Acquisition (Note 18)

Dispositions

Liabilities settled during the year

Unwinding of the discount on decommissioning liabilities

Decommissioning liabilities, end of year

(1) Adjustment to decommissioning liabilities is due to a change in the discount rate and estimates.

13. INCOME TAXES

($ 000s)

Deferred tax asset (liability) related to:

Investments

Exploration and evaluation assets and property, plant and equipment

Investment tax credits

Decommissioning liabilities

Corporate tax losses carried forward

Share issue costs

Corporate capital tax losses carried forward

Unrecorded benefit of capital tax losses carried forward

Deferred tax asset (liability)

DECEMBER 31,
2014

December 31,
2013

37,362

16,721

(1,652)

1,361

53,792

34,246

(6,100)

8,870

(133)

(609)

1,088

37,362

DECEMBER 31,
2014

December 31,
2013

(566)

(126,199)

(3,808)

13,459

1,162

8,617

(8,051)

(115,386)

(572)

(114,027)

(6,923)

9,348

42,582

1,517

16,880

(16,308)

(67,503)

Income tax expense varies from the amounts that would be computed by applying Canadian federal and provincial income tax rates as follows:

($ 000s)

Earnings before taxes

Combined federal and provincial income tax rates

Income tax provision calculated using statutory tax rates

Increase (decrease) in taxes resulting from:

Share-based payments

Unrecorded benefit of capital tax losses

Change in estimates

Effect of Agreement

Other

Income tax expense

DECEMBER 31,
2014

December 31,
2013

109,593

25.02%

27,420

682

-
(578)

43,503

(195)

70,832

84,782

25.02%

21,212

1,040

(354)

207

(81)

22,024

Bonterra Energy Corp. 2014 Annual Report

The Company has the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:

($ 000s)

Undepreciated capital costs

Eligible capital expenditures

Share issue costs

Canadian oil and gas property expenditures

Canadian development expenditures

Canadian exploration expenditures

Rate of
Utilization (%)

20-100

100

Amount

91,847

3,364

4,643

61,936

238,391

8,063

408,244

The Company has $8,573,000 (December 31, 2013 – $27,670,000) of investment tax credits that expire in the following years; 2021 – $1,662,000;
2022 – $1,735,000; 2023 – $1,097,000; 2024 – $1,241,000; 2025 – $1,323,000; 2026 – $1,105,000; and 2027 – $410,000.

The Company has $68,881,000 (December 31, 2013 – $134,938,000) of capital losses carried forward which can only be claimed against
taxable capital gains.

On November 14, 2013, the Company received a proposal letter from the Canada Revenue Agency (CRA) which stated its intention
to challenge the tax consequences of Bonterra’s reorganization from a trust to a Corporation, which occurred on November 18, 2008.
On November 27, 2014, the Company reached an agreement with CRA (the Agreement) to adjust certain tax pools, resulting in a $43,503,000
reduction in the Company’s deferred tax assets and investment tax credit receivable. The reduction was charged to deferred tax expense in the
statement of comprehensive income. Of the $10,505,000 current tax provision, $6,645,000 of the federal investment tax credit receivable was
used to reduce current taxes payable to $3,860,000.

14. SHAREHOLDERS’ EQUITY

Authorized

The Company is authorized to issue an unlimited number of common shares without nominal or par value.

DECEMBER 31, 2014

December 31, 2013

Issued and fully paid – common shares

Balance, beginning of year

Acquisition

Share issuance

Share issue costs, net of tax

NUMBER

31,322,171

Issued pursuant to the Company’s share option plan

829,452

Transfer from contributed surplus to share capital

Shares issued for oil and gas properties

Balance, end of year

18,000

32,169,623

AMOUNT
($ 000S)

685,898

37,911

4,021

1,104

728,934

Number

19,909,541

10,711,405

553,725

147,500

Amount
($ 000s)

149,877

502,258

27,603

(996)

6,625

531

31,322,171

685,898

Bonterra Energy Corp. 2014 Annual Report

The weighted average common shares used to calculate basic and diluted net earnings per share for the year ended December 31 is as follows:

Basic shares outstanding
Dilutive effect of share options(1)
Diluted shares outstanding

2014

31,921,623

114,022

32,035,645

2013

30,210,710

108,315

30,319,025

(1) The Company did not include 1,100,000 share options (December 31, 2013 – 226,000) in the dilutive effect of share options calculation as these share options were

anti-dilutive.

For the year ended December 31, 2014, the Company declared and paid dividends of $113,007,000 ($3.54 per share)
(December 31, 2013 – $100,180,000 ($3.33 per share)).

The Company provides an equity settled option plan for its directors, officers, employees and consultants. Under the plan, the Company may
grant options for up to 3,216,962 (December 31, 2013 – 3,132,217) common shares. The exercise price of each option granted cannot be lower
than the market price of the common shares on the date of grant and the option’s maximum term is five years.

A summary of the status of the Company’s stock option plan as of December 31, 2014, and changes during the period ended on those dates
is presented below:

At January 1, 2013

Options granted

Options exercised

Options cancelled

Options forfeited

At December 31, 2013

Options granted

Options exercised

Options forfeited

Options expired

AT DECEMBER 31, 2014

The following table summarizes information about options outstanding at December 31, 2014:

Range of exercise prices

$ 40.00 – $ 50.00

50.01 – 60.00

60.01 – 65.00

$ 40.00 – $ 65.00

Number
outstanding at
December 31,
2014

326,000

986,500

799,000

2,111,500

Options Outstanding

Weighted-
average
remaining
contractual life

Weighted-
average
exercise
price

Number
exercisable at
December 31,
2014

1.0 years

1.8 years

1.3 years

46.16

52.76

61.21

54.83

103,000

81,500

184,500

48.22

NUMBER
OF OPTIONS
1,902,000

WEIGHTED
AVERAGE
EXERCISE PRICE
49.99
$

365,000

(147,500)

(380,000)

(89,000)

1,650,500

1,769,000

(904,000)

(194,000)

(210,000)

2,111,500

48.68

44.91

57.76

51.00

48.31

56.48

47.09

49.09

55.01

54.94

Options Exercisable

Weighted-
average
exercise
price

44.51

52.91

Bonterra Energy Corp. 2014 Annual Report

The Company records compensation expense over the vesting period, which ranges between one to three years, based on the fair value of
options granted to employees, directors and consultants. In 2014, the Company granted 1,769,000 stock options with an estimated fair value
of $4,989,000 or $2.82 per option using the Black-Scholes option pricing model with the following key assumptions:

Weighted-average risk free interest rate (%)(1)
Expected life (years)
Weighted-average volatility (%)(2)
Forfeiture rate (%)

Weighted average dividend yield (%)

DECEMBER 31,
2014
1.04

December 31,
2013
1.15

1.5

17.63

5.0

5.66

1.88

26.61

6.91

(1) Risk-free interest rate is based on the weighted average Government of Canada benchmark bond yields for one, two, and three year terms to match corresponding

vesting periods.

(2) The expected volatility is measured as the standard deviation of expected share price returns based on statistical analysis of historical weekly share prices for a

representative period.

The weighted average share price when the options were exercised in 2014 were $56.41 (2013 – $53.86)

15. OIL AND GAS SALES, NET OF ROYALTIES

($ 000s)

Oil and gas sales

Less:

Crown royalties

Freehold, gross overriding royalties and other

Oil and gas sales, net of royalties

16. OTHER INCOME

($ 000s)

Investment income

Administrative income

Gain on sale of properties

Realized gain on investments

Other income

DECEMBER 31,
2014

December 31,
2013

339,694

295,675

(23,779)

(14,331)

301,584

(18,031)

(19,867)

257,777

DECEMBER 31,
2014

December 31,
2013

282

671

1,102

2,111

104

161

217

278

760

Bonterra Energy Corp. 2014 Annual Report

17. FINANCIAL AND CAPITAL RISK MANAGEMENT

Financial Risk Factors

The Company undertakes transactions in a range of financial instruments including:

• Accounts receivable

• Accounts payable and accrued liabilities

• Common share investments

• Due to related party

• Bank debt

• Subordinated promissory note

The Company’s activities result in exposure to a number of financial risks including market risk (commodity price risk, interest rate risk, and
foreign exchange risk), credit risk, liquidity risk and equity price risk.

The Company’s overall risk management program seeks to mitigate these risks and reduce the volatility on the Company’s financial performance.
Financial risk is managed by senior management under the direction of the Board of Directors.

The Company may enter into various risk management contracts to manage the Company’s exposure to commodity price fluctuations. Currently
no risk management agreements are in place. The Company does not speculatively trade in risk management contracts. The Company’s risk
management contracts are entered into to manage the risks relating to commodity prices from its business activities.

Capital Risk Management

The Company’s objectives when managing capital, which the Company defines to include shareholders’ equity, debt and working capital
balances, are to safeguard the Company’s ability to continue as a going concern, so that it can continue to provide returns to its shareholders
and benefits for other stakeholders and to maintain a capital structure that provides a low cost of capital. In order to maintain or adjust the capital
structure, the Company may adjust the amount of dividends, debt facilities or issue new shares.

The Company monitors capital on the basis of the ratio of net debt (total debt adjusted for working capital) to cash flow. This ratio is calculated
using each quarter end net debt and divided by the preceding twelve months cash flow. Management believes that a net debt level as high
as one and a half year’s cash flow is still an appropriate level to allow it to take advantage in the future of either acquisition opportunities or to
provide flexibility to develop its undeveloped resources by horizontal or vertical drill programs. During the current year the Company achieved a
net debt to annual cash flow level of 0.9:1.

Section (a) of this note provides a summary of the Company’s underlying economic positions as represented by the carrying values, fair
values and contractual face values of the Company’s financial assets and financial liabilities. The Company’s debt to cash flow from operations
is also provided.

Section (b) addresses in more detail the key financial risk factors that arise from the Company’s activities including its policies for managing
these risks.

Section (c) provides details of the Company’s risk management contracts that are used for financial risk management.

Bonterra Energy Corp. 2014 Annual Report

a) Financial assets, financial liabilities and net debt ratio
The carrying amounts and fair values of the Company’s financial assets and liabilities are shown in the table as follows.

($ 000s)

FINANCIAL ASSETS
Accounts receivable

Investments

Investments in related party

FINANCIAL LIABILITIES
Accounts payable and accrued liabilities

Due to related party

Subordinated promissory note

Bank debt

AS AT DECEMBER 31, 2014

As at December 31, 2013

CARRYING
VALUE

20,314

6,228

1,738

31,839

12,000

40,000

154,723

FAIR
VALUE

20,314

6,228

1,738

31,839

12,000

40,000

154,723

Carrying
Value

27,247

5,728

1,076

34,261

12,000

25,000

156,764

Fair
Value

27,247

5,728

1,076

34,261

12,000

25,000

156,764

Financial instruments consisting of accounts receivable, accounts payable and accrued liabilities, due to related parties, subordinated promissory
note and bank debt on the statement of financial position are carried at amortized cost. Investments and investments in related party are carried
at fair value. All of the investments are transacted in active markets. Bonterra determines the fair value of these transactions according to the
following hierarchy based on the amount of observable inputs used to value the instrument.

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which
transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly
observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and
volatility factors, which can be substantially observed or corroborated in the marketplace.

Level 3 – Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.

Bonterra’s investments and investments in related party have been assessed on the fair value hierarchy described above and are all
considered Level 1.

The net debt and cash flow amounts as of December 31, 2014 are as follows:

($ 000s)

Bank debt

Accounts payable and accrued liabilities

Due to related parties

Subordinated promissory note

Current assets

Net debt

Cash flow from operations

Net debt to annual cash flow from operations

154,723

31,839

12,000

40,000

(30,197)

208,365

222,353

0.9

Bonterra Energy Corp. 2014 Annual Report

b) Risks and mitigation
Market risk is the risk that the fair value or future cash flow of the Company’s financial instruments will fluctuate because of changes in market
prices. Components of market risk to which the Company is exposed are discussed below.

Commodity Price Risk

The Company’s principal operation is the production and sale of crude oil, natural gas and natural gas liquids. Fluctuations in prices of these
commodities directly impact the Company’s performance and ability to continue with its dividends.

The Company has used various risk management contracts to set price parameters for a portion of its production. Management, in agreement
with the Board of Directors, decided that at least in the near term it will discontinue the use of commodity price agreements. The Company will
assume full risk in respect of commodity prices.

Interest Rate Risk

Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes
in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities that the Company uses. The principal exposure
of the Company is on its borrowings which have a variable interest rate which gives rise to a cash flow interest rate risk.

The Company’s debt facilities consist of a $220,000,000 syndicated revolving operating line, $30,000,000 non-syndicated operating line,
$12,000,000 due to a related party and a $40,000,000 subordinated promissory note. The borrowings under these facilities, except for the
subordinated promissory note, are at bank prime plus or minus various percentages as well as by means of banker’s acceptances (BAs) within
the Company’s credit facility. The subordinated promissory note is at a fixed interest rate of three percent. The Company manages its exposure
to interest rate risk on its floating interest rate debt through entering into various term lengths on its BAs but in no circumstances do the terms
exceed six months.

Sensitivity Analysis

Based on historic movements and volatilities in the interest rate markets and management’s current assessment of the financial markets, the
Company believes that a one percent variation in the Canadian prime interest rate is reasonably possible over a 12-month period.

A one percent increase (decrease) in the Canadian prime rate would decrease (increase) both annual net earnings and comprehensive income
by $1,250,000.

Equity Price Risk

Equity price risk refers to the risk that the fair value of the investments and investment in related party will fluctuate due to changes in equity
markets. Equity price risk arises from the realizable value of the investments that the Company holds which are subject to variable equity market
prices which on disposition gives rise to a cash flow equity price risk. The Company will assume full risk in respect of equity price fluctuations.

Foreign Exchange Risk

The Company has no foreign operations and currently sells all of its product sales in Canadian currency. The Company however is exposed
to currency risk in that crude oil is priced in US currency, then converted to Canadian currency. The Company currently has no outstanding
risk management agreements. Management, in agreement with the Board of Directors, decided that at least in the near term it will not use
commodity price agreements. The Company will assume full risk in respect of foreign exchange fluctuations.

Bonterra Energy Corp. 2014 Annual Report

Credit Risk

Credit risk is the risk that a contracting party will not complete its obligations under a financial instrument and cause the Company to
incur a financial loss. The Company is exposed to credit risk on all financial assets included on the statement of financial position. To help mitigate
this risk:

• The Company only enters into material agreements with credit worthy counterparties. These include major oil and gas companies or

major Canadian chartered banks; and

• Agreements for product sales are primarily on 30 day renewal terms.

Of the $20,314,000 accounts receivable balance at December 31, 2014 (December 31, 2013 – $27,247,000) over 80 percent (2013 – 85 percent)
relates to product sales with national and international oil and gas companies.

The Company assesses quarterly if there has been any impairment of the financial assets of the Company. During the year ended
December 31, 2014, there was no material impairment provision required on any of the financial assets of the Company. The Company does have a
credit risk exposure as the majority of the Company’s accounts receivable are with counterparties having similar characteristics. However, payments
from the Company’s largest accounts receivable counterparties have consistently been received within 30 days and the sales agreements with these
parties are cancellable with 30 days notice if payments are not received.

At December 31, 2014, approximately $2,948,000 or 14.5 percent of the Company’s total accounts receivable are aged over 90 days
and considered past due (December 31, 2013 – $3,869,000 or 14.2 percent). The majority of these accounts are due from various joint
arrangement partners. The Company actively monitors past due accounts and takes the necessary actions to expedite collection, which can
include withholding production or netting payables when the accounts are with joint arrangement partners. Should the Company determine
that the ultimate collection of a receivable is in doubt, it will provide the necessary provision in its allowance for doubtful accounts with a
corresponding charge to earnings. If the Company subsequently determines an account is uncollectable, the account is written off with a
corresponding charge to the allowance account. The Company’s allowance for doubtful accounts balance at December 31, 2014 is $308,000
(December 31, 2013 – $414,000) with the expense being included in general and administrative expenses. There were no material accounts
written off during the period.

The maximum exposure to credit risk is represented by the carrying amounts of accounts receivable. There are no material financial assets that
the Company considers past due.

Liquidity Risk

Liquidity risk includes the risk that, as a result of the Company’s operational liquidity requirements:

• The Company will not have sufficient funds to settle a transaction on the due date;

• The Company will not have sufficient funds to continue with its dividends;

• The Company will be forced to sell assets at a value which is less than what they are worth; or

• The Company may be unable to settle or recover a financial asset at all.

To help reduce these risks the Company maintains bank facilities determined by a portfolio of high-quality, long reserve life oil and gas assets.

The Company has the following maturity schedule for its financial liabilities and commitments:

($ 000s)

Accounts payable and accrued liabilities

Due to related parties

Subordinated promissory note

Bank debt

Office lease commitments

Total

Recognized
on Financial
Statements

Yes – Liability

Less than
1 year

Over 1 year
to 3 years

31,839

12,000

40,000

957

84,796

154,723

1,858

156,581

4 to 5
years

307

Bonterra Energy Corp. 2014 Annual Report

c) Risk management contracts

($ 000s)

Risk management contract

Realized loss

Unrealized gain

Other income

DECEMBER 31,
2014

December 31,
2013

(3,061)

1,859

(1,202)

The Company did not enter into any risk management contracts for the 2014 fiscal year.

18. ACQUISITION

On January 25, 2013, Bonterra acquired 100 percent of the issued and outstanding common shares of Spartan Oil Corp. (Spartan) pursuant
to an arrangement agreement (Spartan Transaction). Spartan was a public oil and gas company with properties in Alberta and Saskatchewan.
Consideration for Spartan shares was 0.1169 voting common shares of Bonterra, which amounted to the issuance of 10,711,405 Bonterra
shares valued at $502,258,000, using the closing share price of $46.89 per share on the date of the Spartan Transaction. The exchange ratio
for the transaction represents a deemed price of $5.03 per Spartan Share. The Spartan assets contributed revenue (primarily oil and gas
sales, net of royalties) of $92,214,000 and operating and administrative expenses of $11,949,000 for the period from January 25, 2013 to
December 31, 2013. If the acquisition had occurred on January 1, 2013, total revenue (primarily oil and gas sales, net of royalties) would
have been approximately $99,788,000 and operating and administrative expenses would have been $14,747,000 for the year ended
December 31, 2013. The Spartan Transaction was accounted for as a business combination with Bonterra identified as the acquirer.

The purchase price allocation using the acquisition method was allocated to the assets acquired and the liabilities assumed as follows:

NET ASSETS ACQUIRED:
Exploration and evaluation assets

Property, plant and equipment
Goodwill(1)
Working capital

Cash

Accounts receivable

Prepaid expense

Accounts payable and accrued liabilities

Risk management contract

Decommissioning liabilities

Deferred tax liability

Total

CONSIDERATION AND TOTAL PURCHASE PRICE:
Bonterra shares (10,711,405 shares at $46.89)

(1) The amount recorded as goodwill has all been allocated to the primary CGU, Alberta, Canada. Goodwill is recorded at cost and is not amortized.

On March 1, 2013, Spartan was amalgamated with Bonterra.

($ 000s)

8,830

471,139

92,810

10,000

10,585

915

(13,597)

(1,859)

(8,870)

(67,695)

502,258

Bonterra Energy Corp. 2014 Annual Report

19. COMMITMENTS

The Company has entered into leases for buildings and office equipment. These leases have an average life of 3.3 years. There are no restrictions
placed upon the lessee by entering into these leases. Future minimum lease payments under non-cancellable operating leases as at December
31, 2014 are as follows:

($ 000s)

Within one year

After one year but not more than five years

Total

20. SUBSEQUENT EVENTS

957

2,165

3,122

i) Dividends

Subsequent to December 31, 2014, the Company declared the following dividends:

Date declared

January 2, 2015

February 2, 2015

March 2, 2015

Record date

$ per share

January 15, 2015

February 13, 2015

March 16, 2015

0.30

0.15

Date payable

January 30, 2015

February 27, 2015

March 31, 2015

ii)

Acquisition of Pembina Alberta Oil and Gas Assets

On February 19, 2015, the Company entered into a purchase and sale agreement to acquire Cardium focused oil and gas assets in the Pembina
area of Alberta, including upper zones in the Belly River (the Pembina Assets). Consideration for the Pembina Assets is $172,000,000, prior to
any adjustments, which will be initially financed by a combination of working capital and an increased debt facility. The purchase price allocation
using the acquisition method for the Pembina Assets is incomplete as of March 19, 2015.

Bonterra Energy Corp. 2014 Annual Report

Corporate
Information

BOARD OF DIRECTORS

G. F. Fink
G. J. Drummond
R. M. Jarock
C. R. Jonsson
R. A. Tourigny

OFFICERS

G. F. Fink, CEO and Chairman of the Board
R. D. Thompson, CFO and Corporate Secretary
A. Neumann, Chief Operating Officer
B. A. Curtis, Vice President, Business Development

REGISTRAR AND TRANSFER AGENT

Computershare Trust Company of Canada, Calgary, Alberta

AUDITORS

Deloitte LLP, Calgary, Alberta

SOLICITORS

Borden Ladner Gervais LLP, Calgary, Alberta

BANKERS

CIBC, Calgary, Alberta
National Bank of Canada, Calgary, Alberta
J.P. Morgan, Calgary, Alberta
TD Securities, Calgary, Alberta
Alberta Treasury Branch, Calgary, Alberta

HEAD OFFICE

901, 1015 – 4th Street SW
Calgary, Alberta T2R 1J4
Telephone: 403.262.5307
Fax: 403.265.7488
Email: info@bonterraenergy.com

WEBSITE

www.bonterraenergy.com

Bonterra
Energy Corp.

901, 1015 - 4th Street SW
Calgary, Alberta, T2R 1J4

403.262.5307
Tel
Fax 403.265.7488

info@bonterraenergy.com
bonterraenergy.com