CONSOLIDATED FINANCIAL STATEMENTS

INDEPENDENT AUDITOR'S REPORT

To the Shareholders and Board of Directors of Caracal Energy Inc.

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of Caracal Energy Inc., which comprise the consolidated statements of financial position as at December 31, 2013 and December 31, 2012, the consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

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

AUDITORS' RESPONSIBILITY

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated 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 consolidated 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 consolidated financial statements present fairly, in all material respects, the consolidated financial position of Caracal Energy Inc. as at December 31, 2013 and December 31, 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.

OTHER REPORTING RESPONSIBILITIES

As required by UK listing rules, we reviewed whether the corporate governance statement reflects the Company's compliance with the nine provisions of the 2010 UK Corporate Governance code specified for our review by those rules, and we report if it does not. We are not required by the terms of our engagement to consider whether the Board's statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures.

Chartered Accountants Calgary, Canada March 28, 2014

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Expressed in US\$ thousands; unless otherwise stated)	NOTE	2013	2012

ASSETS
Current:
Cash and cash equivalents		\$ 179,651	\$ 119,881
Accounts receivable	4	145,395	12,240
Inventory	5	27,159	–
		352,205	132,121
Exploration and evaluation assets	7	74,047	295,747
Property, plant and equipment	8	190,286	3,636
Deferred tax asset	14	329	–
		\$ 616,867	\$ 431,504
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Accounts payable and accrued liabilities	6	\$ 82,870	\$ 42,741
Long term:
Convertible bonds	11	137,883	135,511
Decommissioning obligations	13	2,463	2,079
Share–based compensation liability	10	2,936	–
		226,152	180,331
Shareholders' Equity:
Share capital	9	550,091	328,230
Warrants and agent options	9	8,405	12,683
Equity component of convertible bonds	11	29,395	29,395
Other equity items	10	9,474	3,305
Deficit		(206,650)	(122,440)
		390,715	251,173
Commitments	20
Subsequent events	23
		\$ 616,867	\$ 431,504

CONSOLIDATED STATEMENTS OF OPERATIONS

(Expressed in US\$ thousands; unless otherwise stated)	NOTE	2013	2012
Tariff revenue	18	\$ 80	\$ –
Oil revenue		–	_
Change in oil inventory	5	27,159	–
		27,239	–
Expenses:
Operating expenses		4,249	–
Transportation expenses		2,527	–
Depreciation and depletion		5,823	1,082
Salaries and benefits		21,108	13,122
Share–based compensation	10	11,044	8,564
General and administrative		27,996	30,493
Travel		8,586	7,821
Finance expense	15	28,872	8,083
Foreign exchange loss		1,573	228
		111,778	69,393
Net loss before tax		84,539	69,393
Deferred tax reduction	14	(329)	(5,381)
Net and comprehensive loss		\$ 84,210	\$ 64,012
Loss per share:
Basic and diluted	16	\$ 0.72	\$ 0.59

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Expressed in US\$ thousands; unless otherwise stated)	2013	2012









































Total Shareholders' Equity	\$ 390,715	\$ 251,173

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in US\$ thousands; unless otherwise stated)	NOTE	2013	2012
OPERATING ACTIVITIES
Net loss		\$ (84,210)	\$ (64,012)
Adjustments for:
Change in oil inventory		(27,159)	–
Depreciation		5,823	1,082
Accretion of decommissioning liability obligations		92	85
Share–based compensation		11,044	8,564
Interest on convertible bonds		22,635	8,213
Foreign exchange loss (gain)		1,573	(532)
Deferred tax reduction		(329)	(5,381)
Accretion of accounts receivable		(2,234)	–
Operating cash flow before working capital movements		(72,765)	(51,981)
Changes in non-cash working capital	19	8,366	(3,205)
		(64,399)	(55,186)
INVESTING ACTIVITIES
Advance proceeds	12	150,000	–
Advance repayment	12	(150,000)	–
Exploration and evaluation additions	7	(262,385)	(185,463)
Exploration and evaluation disposals, net of costs	12	355,134	–
Property, plant and equipment additions	8	(155,000)	(2,957)
Changes in non-cash working capital	19	(5,064)	27,121
		(67,315)	(161,299)
FINANCING ACTIVITIES
Net proceeds from issuance of shares and warrants		199,531	116,967
Share repurchase	10	(7,301)	–
Interest received on share purchase loans		102	95
Issue of convertible bond		–	173,600
Convertible bond issue costs		–	(6,547)
		192,332	284,115
Effect of exchange rate changes on cash and cash equivalents		(848)	228
Increase in cash and cash equivalents		59,770	67,858
Cash and cash equivalents, beginning of year		119,881	52,023
Cash and cash equivalents, end of year		\$ 179,651	\$ 119,881
Cash interest paid (received)		8,379	(215)
Taxes paid		–	–

NOTES TO THE CONSOLIDAED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1

REPORTING ENTITY

Caracal Energy Inc. (the "Company" or "Caracal") was incorporated pursuant to the Canada Business Corporations Act. The Company is engaged in oil and gas exploration, development and production activities in the Republic of Chad, which is located in central Africa. Caracal's head office address is #2100–555 4th Avenue SW, Calgary, Alberta, Canada.

(a) Statement of compliance:

These consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards and interpretations (collectively referred to as "IFRS") as issued by the International Accounting Standards Board ("IASB").

These consolidated financial statements were approved by the Board of Directors on March 28, 2014.

(b) Basis of preparation:

These consolidated financial statements have been prepared on the historical cost basis. The Company's accounting policies have been applied consistently to all periods presented in these consolidated financial statements. The Company conducts the majority of its operations with others. These financial statements reflect the Company's proportionate interest in joint operations.

These consolidated financial statements are expressed in United States Dollars ("\$" or "US\$"), which is the functional and presentational currency of the Company and its subsidiaries.

(d) Use of judgments and estimates:

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates and affect the results reported in these consolidated financial statements.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows:

The calculation of deferred income tax assets and liabilities is based on management's interpretation of applicable laws, regulations and relevant court decisions, and in the case of deferred income tax assets, projections of future earnings to be applied against loss carry forward positions.

The recoverability of exploration and evaluation assets and property, plant and equipment is based on numerous assumptions including estimated reserves, forward commodity price forecasts, development plans, political and social uncertainties, discount rates and various other factors. The recoverability of the exploration and evaluation assets and property, plant and equipment is also impacted by the determination of cash generating units (CGU). The CGU determination could impact the amount of impairment as it determines the level at which assets are tested. In addition, the Company is permitted under IFRS to group exploration & evaluation (E&E) assets with various CGUs for purposes of assessing for impairment. The determination of CGUs and the grouping of E&E assets is subject to management judgments. Considerable judgment is necessary to determine if an E&E asset or CGU is required to be tested for impairment ("triggering events").

The fair value of share–based compensation is based on estimates relating to option life, volatility, share price and the outcome of performance conditions.

SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies is set out below.

(a) Basis of consolidation:

Subsidiaries are entities controlled by the Company. Control exists when an entity is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements.

(b) Business combinations:

The acquisition method is used to account for business combinations. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of the exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Company elects on a transaction–by–transaction basis whether to measure noncontrolling interest at its fair value, or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date. The excess of the cost of acquisition over the fair value of the Company's share of the net fair value of the identifiable assets, liabilities and contingent liabilities is recorded as goodwill. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in profit or loss.

Transaction costs that are incurred in connection with a business combination, other than those associated with the issue of debt or equity securities, are recognized in profit or loss.

Transactions in foreign currencies are translated to United States dollars at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to United States dollars at the period end exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are carried at fair value are translated to U.S. dollars at the exchange rate at the date that the fair value was determined. Non-monetary assets held at historical cost are not retranslated subsequent to initial recognition. Foreign currency differences arising on translation are recognized in profit or loss.

(d) Financial instruments:

Non-derivative financial instruments comprise cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and convertible bonds. Non-derivative financial instruments are recognized initially at fair value. Subsequent to initial recognition non-derivative financial instruments are measured as described below.

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

Cash and cash equivalents are comprised of cash on hand, term deposits held with banks, and other short–term highly liquid investments with original maturities of three months or less.

Financial assets at fair value through profit or loss:

An instrument is classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company's risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognized in profit or loss when incurred. Financial instruments are measured at fair value, and changes therein are recognized in profit or loss.

Other:

Other non-derivative financial instruments, such as accounts receivable, accounts payable and accrued liabilities are measured at amortized cost using the effective interest method, less any impairment losses.

Accounts receivable, which are non-derivative financial assets that have fixed or determinable payments that are not quoted in an active market, are classified as loans and receivables. They are included in current assets, except for maturities greater than 12 months after the reporting date, which are classified as noncurrent assets.

The convertible debentures are considered a compound instrument as they can be converted to a fixed number of common shares at the option of the holder. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method.

Equity instruments:

Equity instruments are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects, if any.

(e) Property, plant and equipment and intangible exploration and evaluation assets:

Recognition and measurement

(i) Exploration and evaluation ("E&E") expenditures:

Exploration and evaluation expenditures, including the costs of acquiring licenses, directly attributable general and administrative costs, geological and geophysical costs, other direct costs of exploration (drilling, trenching, sampling and evaluating the technical feasibility and commercial viability of extraction) and evaluation are accumulated and capitalized as exploration and evaluation assets. Interest is not capitalized on E&E assets.

On a quarterly basis, a review of any areas classified and accounted for as E&E assets is performed to determine whether enough information exists to make a determination of the technical feasibility and commercial viability of the area. Where appropriate, review may indicate that an area should be further sub–divided due to a significant portion having been explored whilst a significant undeveloped portion with different traits (i.e. different zone, technical approach, play type, etc.) remains that requires additional E&E activities to arrive at the point where it can be assessed for technical feasibility and commercial viability.

The assessment of technical feasibility and commercial viability is performed on an area level basis unless further sub–division is merited. Depending on the extent and complexity of the prospective play, many wells may need to be drilled and potentially significant E&E costs accumulated prior to obtaining enough information to make the determination of technical feasibility and commercial viability possible.

E&E costs are not amortized prior to the conclusion of appraisal activities. At the completion of appraisal activities, if technical feasibility is demonstrated and commercial reserves are discovered, then, the carrying value of the relevant E&E asset will be reclassified as a development and production asset ("D&P") into the cash generating unit ("CGU") to which it relates, but only after the carrying value of the relevant E&E asset has been assessed for impairment, and where appropriate, its carrying value adjusted. If the Company determines the area is not technically feasible and commercially viable, accumulated E&E costs are expensed.

Gains and losses are not recognized on the disposition of E&E assets. Proceeds on disposition are charged against the net book value.

(ii) Development and production costs ("D&P"):

Property, plant and equipment is stated at cost, less accumulated depletion and depreciation and accumulated impairment losses.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of any decommissioning obligation, if any, and, for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of replacing parts of property, plant and equipment are recognized as oil and natural gas interests only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are recognized in profit or loss as incurred. Such capitalized oil and natural gas interests generally represent costs incurred in developing proved and/or probable reserves and bringing in or enhancing production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount of any replaced or sold component is derecognized. The costs of the day–to–day servicing of property, plant and equipment are recognized in profit or loss as incurred. Where an asset or part of an asset that was separately depreciated is replaced and it is probable that future economic benefits associated with the item will flow to the Company, the expenditure is capitalized and the carrying amount of the replaced asset is derecognized. Inspection costs associated with major maintenance programs are capitalized and amortized over the period to the next inspection. All other maintenance expenditures are expensed as incurred.

The net carrying value of development and production assets is depleted using the unit of production method by reference to the ratio of production in the period to the related proved and probable reserves, taking into account estimated future development costs necessary to bring those reserves into production. Producing assets are generally grouped with other assets that are dedicated to serving the same reserves for depreciation purposes.

Proved and probable reserves are estimated at least annually by independent qualified reserve evaluators and represent the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible.

For property, plant and equipment other than development and production assets, the Company provides for depreciation based on the estimated useful lives of the assets.

Depreciation methods, useful lives and residual values are reviewed at each reporting date, and adjusted if appropriate, to ensure that these are consistent with the expected pattern of consumption of the future economic benefit embodied in the asset.

(f) Impairment:
(i) Financial assets:

A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. 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 flows 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 flows 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.

All impairment losses are recognized in profit or loss.

An impairment loss is reversed when there is a significant change in the underlying estimates or other objective evidence. For financial assets measured at amortized cost the reversal is recognized in profit or loss.

(ii) Non-financial assets:

Exploration and evaluation costs are tested for impairment when reclassified to oil and gas properties or whenever facts and circumstances indicate potential impairment. Exploration and evaluation assets are tested separately for impairment or grouped with the relevant CGU or groups of CGUs.

Values of oil and gas properties and other property, plant and equipment are reviewed for impairment when indicators of such impairment exist. If any indication of impairment exists an estimate of the asset's recoverable amount is calculated. Assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets (the cash generating unit or "CGU"). The recoverable amount of an asset or CGU is the greater of its fair value less costs to sell and its value in use. Where the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable amount. An impairment loss is charged to the profit or loss. In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group and are discounted to their present value using a pre–tax discount rate that reflects current market assessments of the time value of money.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company makes an estimate of the recoverable amount. If that is the case the carrying amount of the asset is increased to its recoverable amount but the reversal amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.

(g) Share–based compensation:

The Company uses the fair value method for valuing share– based compensation. Under this method, the compensation cost attributed to stock options and other share–based compensation granted is measured at the fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options that vest. Upon the settlement of the stock options the previously recognized value in contributed surplus is recorded as an increase to shareholders' capital.

(h) Provisions:

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre–tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognized for future operating losses.

(i) Decommissioning obligations:

The Company's activities give rise to dismantling, decommissioning and site disturbance remediation activities. Provision is made for the estimated cost of site restoration and capitalized in the relevant asset category.

Decommissioning obligations are measured at the present value of management's best estimate of the expenditures required to settle the present obligation at the balance sheet date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as finance costs whereas increases/ decreases due to changes in the estimated future cash flows are capitalized. Actual costs incurred upon settlement of asset retirement obligations are charged against the provision to the extent the provision was established.

(j) Revenue:

Revenue from the sale of oil and natural gas is recorded when the significant risks and rewards of ownership of the product are transferred to the buyer which is usually when legal title passes to the external party. Oil revenue will be recognized when the production is offloaded to a tanker ship. The number of off loads in a period will vary and is dependent on the amount of production. Revenue is measured net of discounts, customs duties and royalties and represents the Company's share of liftings in the year.

Tariffs, tolls and fees, if any, charged to other entities for use of pipelines and/or facilities owned by the Company are recognized as revenue as they accrue in accordance with the terms of the related agreements. Where the Company acts as agent on behalf of a third party to transport or process oil and natural gas, any associated fee income is recognized on a net basis.

(k) Oil Inventory:

The Company will accumulate oil inventory in pipeline and various storage facilities until such time as the product can be shipped to market. The amount of inventory will vary and will depend on the timing of off-loading of inventory to tanker ships in relation to the end of the reporting period. Oil inventory will be recorded at net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less selling costs.

(l) Lease payments:

Payments made under operating leases are recognized in profit or loss on a straight–line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense over the term of the lease.

(m) Finance income and expenses:

Finance income comprises interest income and is recognized as it accrues in profit or loss, using the effective interest method.

Finance expense comprises interest expense on borrowings, accretion of the discount on provisions and impairment losses recognized on financial assets.

(n) Income tax:

Income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to a business combination or items recognized directly in equity or other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date and any adjustment in respect of previous years.

Deferred tax is recognized using the balance sheet method, providing for 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 on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. Deferred taxes related to the production service contracts are not recorded in the Republic of Chad as the Company is exempt from tax under the relevant agreements.

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

(o) Earnings (loss) per share ("EPS"):

Basic earnings (loss) per share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. The dilutive effect of options and warrants is calculated using the treasury stock method whereby "in the money" options and warrants are added to the weighted average number of shares outstanding during the period. The dilutive effect of convertible debentures is determined by adjusting the profit or loss attributable to common shareholders to exclude the interest and carrying charges associated with the convertible debentures. The weighted average number of common shares for the period is increased by the number of common shares that would be issued if the convertible debentures were outstanding for the entire period. The impact of the convertible debentures on diluted EPS is excluded if it is anti-dilutive.

(p) Segment reporting:

A segment is a distinguishable component of the Company that is engaged either in providing related products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments. The Company has one reportable segment, which comprises oil and gas exploration, development and production activities within the Republic of Chad.

(q) Accounting policies adopted January 1, 2013:

On January 1, 2013, the Company adopted new standards with respect to consolidations (IFRS 10), joint arrangements (IFRS 11), disclosure of interests in other entities (IFRS 12), fair value measurements (IFRS 13) and amendments to financial instrument disclosures (IFRS 7). The adoption of these standards had no impact on the amounts recorded in the consolidated financial statements as at January 1, 2013 or on the comparative periods.

(r) Accounting standards issued but not yet applied:

The IASB has issued the following standard which has not yet been adopted by the Company. The below standard has been issued but does not have a fixed implementation date. The Company has not yet begun the process of assessing the impact that the new standard will have on its financial statements.

IFRS 9 - Financial Instruments was issued in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where such equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent not clearly representing a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely. Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss would generally be recorded in other comprehensive income.

DETERMINATION OF FAIR VALUES

A number of the Company's accounting policies and disclosures require the determination of fair value, both for financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

The different levels of financial instrument valuation methods have been defined as follows:

Level 1 fair value measurements are based on unadjusted quoted market prices. Level 2 fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted indices. Level 3 fair value measurements are based on unobservable information.

The carrying value of cash and cash equivalents, accounts receivables, and accounts payable and accrued liabilities included in the consolidated statements of financial position approximate fair value due to the short term nature of those instruments.

The fair value of the accounts receivable relating to the Farm– in Agreement approximates its carrying value as the discount rate applied to the balance approximates the current market rate applicable to the counter party (level 2). The fair value of stock options and warrants is measured using a Black–Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility based on peer comparisons weighted average expected life of the instruments based on historical experience and general option holder behavior, expected dividends, and the risk–free interest rate.

The fair value of the debt feature of the convertible bond is measured using the discounted principal and interest payments, incorporating the period that interest is capitalized. The discount rate used in calculating the fair value is based on a discount rate for a similar debt instrument with the same terms absent a conversion feature. The fair value of the convertible bond approximates its carrying value at December 31, 2013 and 2012 (level 2).

4 ACCOUNTS RECEIVABLE

	2013	2012
Trade accounts receivable	\$ –	\$ 242
Prepaid expenses	3,118	11,500
Advances and deposits	2,224	350
Joint venture receivable	41,640	–
Farm–in Agreement receivable	97,049	–
Tariff	89	–
Other	1,275	148
Balance, end of year	\$ 145,395	\$ 12,240

In June 2013, as a result of the farm-in transaction (Note 12), the Company recorded a receivable of \$195.5 million from GlencoreXStrata (or "Joint Venture Partner"), comprising of \$100 million to be received between July 1, 2013 and June 30, 2014, and \$100 million to be received subsequent to June 30, 2014. The intent of this receivable, pursuant to the farm-in agreement, is to cover the Company's future expenditures and is in addition to any joint venture billings received from the Joint Venture Partner for its working interest share of expenditures. As at December 31, 2013, the Company had received all funds relating to the farm-in that were due to be received prior to July 1, 2014.

The remaining \$100 million receivable related to the farm-in is expected to be received subsequent to June 30, 2014 and has been discounted at four percent. The receivable is secured by a guarantee from the Joint Venture Partner's parent.

In addition, as at December 31, 2013 the Company had a receivable from its Joint Venture Partner of \$41.6 million relating to the Joint Venture Partner's working interest share of expenditures incurred in December 2013. Accounts payable and accrued liabilities include \$19.7 million relating to the Joint Venture Partner's share of costs incurred on their behalf.

5 INVENTORY

	2013	2012
Balance, beginning of year	\$ –	\$ –
Oil inventory additions during the period	27,159	–
Balance, end of year	\$ 27,159	\$ –

Oil inventory comprises production volumes accumulated in pipeline and storage facilities that have not yet been offloaded and transported to market. The first off load of oil production occurred in March 2014 which resulted in the sale of \$55.9 million of oil.

6 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	2013	2012
Trade payables	\$ 43,810	\$ 18,886
Other payables	104	2,793
Accrued liabilities	38,956	21,062
Balance, end of year	\$ 82,870	\$ 42,741

Trade and other payables are non-interest bearing and are normally settled on 30 to 60 day terms.

7 EXPLORATION AND EVALUATION ASSETS

	NOTE	2013	2012
Balance, beginning of year		\$ 295,747	\$ 108,557
Additions		266,117	187,265
Disposals	12	(450,965)	–
Transfers to property, plant & equipment		(36,790)	–
Changes in decommissioning obligations		(62)	(75)
Balance, end of year		\$ 74,047	\$ 295,747

Included in E&E assets additions is \$3.7 million (2012 - \$1.8 million) relating to capitalized share-based compensation and changes in the decommissioning provision.

8 PROPERTY, PLANT AND EQUIPMENT

		OIL AND GAS		OTHER FIXED ASSETS		TOTAL COST
Cost:
January 1, 2012	\$	–	\$	1,798	\$	1,798
Additions				2,957		2,957
December 31, 2012		–		4,755		4,755
Transfers from E&E assets		36,790		–		36,790
Additions		154,888		733		155,621
December 31, 2013	\$	191,678	\$	5,488	\$	197,166
Depreciation and depletion:

January 1, 2012	\$ –	\$ 112	\$ 112
Additions	–	1,007	1,007
December 31, 2012	–	1,119	1,119
Additions	4,089	1,672	5,761
December 31, 2013	4,089	2,791	6,880
Net book value, December 31, 2012	\$ –	\$ 3,636	\$ 3,636
Net book value, December 31, 2013	\$ 187,589	\$ 2,697	\$ 190,286

The Company commenced recording depreciation and depletion of its oil and gas properties on September 30, 2013 when production commenced.

Included in additions is \$0.6 million (2012 - nil) relating to changes in the decommissioning provision.

SHARE CAPITAL

a) Authorized: unlimited number of common shares
b) Issued and outstanding common shares:

	NOTE	PRICE PER SHARE	SHARES ISSUED (000'S)	AMOUNT
Balance, January 1, 2012			88,009	\$ 204,666
Private Placement	(i)	\$5.61	20,840	116,967
Value ascribed to liquidity warrants	(i)	–	–	(1,255)
Issued on exercise of liquidity warrants	(ii)	–	3,600	2,775
Other	(iii)	–	312	–
Interest on shareholder loans		–	–	98
Deferred tax impact of share issue costs		–	–	4,979
Balance, December 31, 2012			112,761	\$ 328,230
Issue of shares	(iv)	\$7.30	27,863	192,935
Conversion of liquidity warrants into shares	(i)	–	2,084	1,255
Agency options converted into shares	(v)	–	779	5,153
Value ascribed to shares issued to Trust	(iii)	–	–	1,764
Shares issued for payment of convertible bond interest	(iv)	\$6.84	2,964	20,262
Interest on shareholder loans		–	–	95
Exercise of stock options		–	45	397
Balance, December 31, 2013			146,496	\$ 550,091

(i) In connection with the private placement on March 14, 2012, a total of 2.1 million liquidity warrants were issued, which were to be converted to common shares at no additional consideration if a liquidity event did not occur prior to March 14, 2013. If a liquidity event occurred prior to March 14, 2013, the warrants would have expired, unexercised in accordance with their terms.

The fair value ascribed to liquidity warrants of \$1.3 million was included in warrants in shareholders' equity. A liquidity event did not occur prior to March 14, 2013 as such 2.1 million common shares were issued.

Share issue costs relating to the private placements amounted to \$8.5 million.

(ii) In connection with the private placements on February 25, 2011, March 3, 2011, and April 19, 2011, 3.6 million liquidity warrants were issued. The terms called for them to be converted to common shares at no additional consideration on January 1, 2012 if a liquidity event did not occur prior there to.
(iii) During the fourth quarter of 2013, the Company transferred 0.3 million shares into the Trust account (Note 10(b)) at a price of \$5.65.
(iv) During the fourth quarter of 2013, a total of 27.9 million common shares were issued at \$7.24 or £4.50 pursuant to the firm placing and open offer ("Offering") for total gross proceeds of \$203.4 million. The weighted average share price was \$7.30. Share issue costs relating to the firm placing and open offer amounted to \$10.5 million.

As a result of the Offering, the Company met the specification of a Qualifying Public Offering and on December 30, 2013, the Company paid \$8.4 million in cash and issued 3.0 million common shares to bondholders as a form of payment for interest of \$20.3 million relating to the convertible bond.

(v) In connection with the private placements dated February 25, 2011 and March 3, 2011, Caracal issued 2.0 million options to the agents, each entitling the holder to acquire one common share. The agent options vested on the date of grant and expired 24 months after such date. The fair value ascribed to agent options was \$3.3 million. At the date of expiry, 0.8 million agent options were exercised, and the remaining agent options expired.
(c) Warrants and agent options:

At December 31, 2013, the following warrants were outstanding:

	NUMBER OF WARRANTS (000'S)	WEIGHTED AVERAGE EXERCISE PRICE	EXPIRATION
Management Performance Warrants	4,400	\$ 5.53	March 12, 2017
Employee Performance Warrants	1,508	\$ 6.04	March 12, 2017
	5,908	\$ 5.66	3.2 years

(i) Management Performance Warrants

In 2012, the Company issued 4.4 million Performance Warrants to management. Each Performance Warrant entitles the holder thereof to purchase one common share of the Company at a price of \$5.53 per share with a five year expiry, subject to vesting. The Performance Warrants shall vest and become exercisable by the holder if the 10 day volume–weighted average trading price of the Company's common shares at any time, on any stock exchange upon which such common shares are listed, meets or exceeds \$15.10 or if a liquidity event (as defined in the certificates representing the Performance Warrants) occurs. The estimated fair value of the Performance Warrants of \$5.7 million was expensed in 2011. The Company used the Black–Scholes pricing model to calculate the fair value of the Performance Warrants. Measurement inputs include the share price on measurement date (\$5.03), exercise price (\$5.53), expected volatility (62.5%), expected life (5 years) and the risk– free interest rate approximately (2.3%). Probabilities of meeting the market conditions were considered in estimating the fair value of the warrants.

(ii) Employee Performance Warrants

In March, 2012, the Company issued 1.7 million Performance Warrants to certain employees, officers and directors. In 2013, 0.2 million Performance Warrants were forfeited. Each Performance Warrant entitles the holder thereof to purchase one common share of the Company at a price of \$6.04 per share with a five year expiry, subject to vesting. The Performance Warrants shall vest in 1/3 increments and become exercisable by the holder if the 10 day volume–weighted average trading price of the Company's common shares at any time, on any stock exchange upon which such common shares are listed, meets or exceeds \$7.54, \$9.06 and \$12.08, or if a change of control occurs. The estimated fair value of the Performance Warrants of \$2.7 million was expensed quarterly during the years ended December 31, 2013 and 2012. The Company used the Black–Scholes pricing model to calculate the fair value of the Performance Warrants. Measurement inputs include the share price on measurement date (\$6.04), exercise price, expected volatility (64.14%), expected life (5 years), forfeiture rate (10%) and the risk–free interest rate (1.61%). Probabilities of meeting the market conditions were considered in estimating the fair value of the warrants.

SHARE-BASED COMPENSATION AND OTHER EQUITY ACCOUNTS

(a) Other equity accounts

	NOTE	CONTRIBUTED SURPLUS	OTHER EQUITY ITEMS	TOTAL
Balance, January 1, 2012		\$ 5,376	\$ (9,621)	\$ (4,245)
Extension of share purchase loans	(d)	1,736	–	1,736
Share-based compensation	(b)(c)	4,319	–	4,319
Share-based compensation – capitalized	(b)(c)	1,802	–	1,802
Interest on loans	(d)	–	(98)	(98)
Interest received on loans	(d)	–	95	95
Foreign exchange	(d)	–	(304)	(304)
Balance, December 31, 2012		\$ 13,233	(9,928)	\$ 3,305
Share-based compensation	(b)(c)	7,874	–	7,874
Share-based compensation – capitalized	(b)(c)	3,046	–	3,046
Exercise of stock options		(157)	–	(157)
Agency options expired	9	1,976	–	1,976
Shares held in trust	(b)	–	(7,301)	(7,301)
Interest on loans	(d)	–	(95)	(95)
Interest received on loans	(d)	–	102	102
Foreign exchange	(d)	–	724	724
Balance, December 31, 2013		\$ 25,972	\$ (16,498)	\$ 9,474

(b) Performance units

On January 9, 2013 the Board of Directors approved a new Long Term Incentive Plan (the "Plan") for officers and other key executives of the Company. A total of 1.1 million performance units were granted under the Plan in 2013 and remain outstanding. The Plan was introduced to retain, attract and motivate key executives responsible for executing the long term business strategy. A participant in the Plan is awarded a notional number of units based on a multiple of salary. Upon vesting, a participant can, at their option, receive common shares or a cash payment of equivalent value. The performance units vest after a three–year period based on specific performance targets. The performance targets are as follows:

(i) 37.5% of the units will be subject to targets relating to the Total Shareholder Return ("TSR") of the Company against a group of peer companies;
(ii) 37.5% of the award will be subject to targets relating to net asset value of the Company per share-based on proven and probable reserves discounted at 10%;
(iii) The remaining 25% vest at the end of three years (subject to the participant being employed by the Company at the time of vesting).

The Company is required to account for the performance unit plan as a liability based award whereby the estimated fair value of grants made under the plan is recorded as a liability each period based on the outstanding vested performance units. The change in the fair value of the liability each period is recorded as share-based compensation in the statement of operations.

The fair value of a performance unit is based on the following:

a) 25% with no performance conditions fair value is based on the underlying value of the Company's common stock.
b) 75% with performance conditions fair value is based on the underlying value of the Company's common stock adjusted for the probability of satisfying the market and non-market performance conditions.

During 2013, the Company purchased 1.2 million common shares at \$5.93 per share for a total consideration of \$7.3 million. The shares are held in trust by a third party trustee with the sole purpose of administering the Plan. The shares held in the trust have not been vested to participants.

(c) Stock Options:

The Company has an employee stock option plan under which it may grant options to purchase common shares to employees, directors and consultants of the Company. Options are granted at the market price of the shares on the date of grant have a five– year term and vest in one–third tranches starting on the first anniversary of the grant. The Company uses the Black–Scholes pricing model to calculate the grant date value of options. The grant date fair value of options granted in 2013 was \$6.28 (2012 – \$6.08). Measurement inputs include the share price on measurement date, exercise price, expected volatility 65% (2012 – 67%), expected life 5 years (2012 – 5 years) forfeiture rate 2013 11% (2012 – 10%) and the risk–free interest rate 1.53% (2012 – 1.51%).

	NUMBER OF OPTIONS	WEIGHTED AVERAGE REMAINING LIFE (YEARS)		WEIGHTED AVERAGE EXERCISE PRICE
	(000'S)	(YEARS)	(£)	(US\$)
Outstanding, January 1, 2012	2,478	4.17	3.20	4.94
Granted	4,134	4.64	3.84	6.08
Exercised	(630)	4.21	3.32	5.26
Outstanding, December 31, 2012	5,982	4.24	3.63	5.86
Granted	3,231	4.47	4.02	6.28
Exercised	(45)	3.58	3.37	5.27
Expired or forfeited	(610)	3.90	3.71	5.80
Outstanding, December 31, 2013	8,558	3.83	3.77	6.21
Number exercisable, end of year	2,493	3.08	3.53	5.82

(i) The options are denominated in pounds sterling, the US dollars exercise price is based on the year end exchange rate of 1£ equates to \$1.56 US\$ (2012 – 1£:1.58US\$).

(d) Share purchase loans:

The Company granted share purchase loans to various senior management members. At December 31, 2013, the outstanding share of purchase loans were \$9.2 million (2012 - \$9.9 million). The loans are secured by the respective shares and bear interest at the rate prescribed by Canadian taxation authorities which averaged 1% (2012 -1%). The loans mature in 2016. During 2012, the share purchase loans previously granted by the Company to the Chief Executive Officer and the Chief Financial Officer were extended to July 1, 2016. The Company estimated the compensation cost associated with the loan extensions using a Black-Scholes option pricing model and recognized the estimated cost of \$1.7 million. The Company used the Black-Scholes pricing model to calculate the fair value of the loan extensions. Measurement inputs include the share price on measurement date (\$6.09), exercise price (\$6.09), expected volatility (64.14%), expected life (5 years), forfeiture rate (10%) and the risk-free interest rate (1.61%).

¹¹ CONVERTIBLE BONDS

	DEBT COMPONENT	EQUITY COMPONENT
At January 1, 2012	\$ –	\$ –
Issued on September 13, 2012	132,287	41,313
Less issue costs	(4,989)	(1,558)
Deferred tax impact	–	(10,360)
Interest accrued during the year	5,957	–
Non-cash accretion expense	2,256	–
At December 31, 2012	135,511	29,395
Interest accrued during the year	22,707	–
Interest paid during the year	(28,692)	–
Non-cash accretion expense	8,357	–
At December 31, 2013	\$ 137,883	\$ 29,395

On September 13, 2012, the Company completed a financing through the issuance of \$173.6 million unsecured convertible bonds (the "Bonds") with a maturity date of September 30, 2017, and can be called in September 2015 at par. A summary of certain key terms of the Bonds is set out below.

i. The Bonds are convertible at any time up to 14 days prior to the maturity date (or 14 days prior to any earlier date fixed for redemption of the Bonds) at a conversion price of \$6.07 per common share. The conversion price of the Bonds will be subject to adjustment on or following the occurrence of certain corporate events relating to the share capital of the Company.
ii. The Bonds bore interest at 12% per annum from the date of issue until September 30, 2013. The interest rate increased to 12.5% on October 1, 2013. The interest rate was subject to increases unless qualifying public offering occurred. The qualifying public offering occurred in 2013 and the interest rate is fixed at 12.5% until maturity. Interest on the bonds is paid semi–annually. Prior to the qualifying public offering, interest payments were not required as such the interest was added to the outstanding principal balance. On December 30, 2013, upon completion of the qualifying public offering, the accrued and unpaid interest since issuance of bonds of \$28.7 million was paid in cash and shares.
iii. The Bonds are redeemable by the Company at a redemption price equal to the principal amount plus accrued but unpaid interest, provided that the volume weighted average price of the common shares for 20 out of 30 consecutive dealing days ending not earlier than seven days prior to the date on which notice of redemption is provided is not less than 150 percent of the conversion price.
iv. The Company has the ability to redeem the bonds subsequent to September 30, 2015.

FARM-IN AND ADVANCE AGREEMENTS

On December 12, 2012, the Company entered into a definitive Farm–in Agreement (the "Agreement") in which it agreed to assign a one third working interest, subject to certain closing conditions, in each of its three PCSs and related agreements (the "Transaction").

On February 4, 2013, a Presidential Decree was signed to give effect to the Transaction.

On March 1, 2013, the Company entered into an Advance Agreement (the "Advance") whereby the Company received \$100 million, a portion of the amount due to the Company pursuant to the Agreement on closing.

On May 29, 2013, the Company amended the Advance to increase the amount from \$100 million to \$150 million.

On June 13, 2013, the Company closed the Agreement with its Joint Venture Partner, pursuant to which the Company transferred a one third participating interest in each of its PSCs and a 25% participating interest in the Badila and Mangara EXA. The transaction had an effective date of July 1, 2012 with the Joint Venture Partner being responsible to pay their working share of expenditures from that date upon closing. The following is a reconciliation of the consideration and the value of the assets disposed of:

	NOTE	AMOUNT
Cash consideration	(i)	\$ 257,458
Future farm–in commitment	(ii)	195,547
Decommissioning obligation		1,016
Transaction costs		(10,238)
Infrastructure assets sold	(iv)	7,182
Disposition of exploration and evaluation assets	(iii)	\$ 450,965

(i) Concurrently with the closing the Company immediately repaid an advance of \$150.0 million to the Joint Venture Partner.

(ii) As per the Agreement, the Joint Venture Partner will reimburse up to \$100 million of the Company's share of expenditures on certain of the Company's assets from July 1, 2013 to June 30, 2014 and up to an additional \$100 million from July 1, 2014 to June 30, 2016.
(iii) The Company has elected not to record gains/losses on properties in the exploration and evaluation stage. As such, this gain on disposition reduces the carrying value of the exploration and evaluation assets.
(iv) In addition, in September 2013, the Company sold to the Joint Venture Partner its proportionate share of certain infrastructure assets related to the PSCs for \$7.2 million.

13 DECOMMISSIONING OBLIGATIONS

The decommissioning obligations relate to wells drilled on the lands within the Doseo/Borogop, Mangara/Badila and DOH production sharing contracts and roads and pipeline construction. The decommissioning obligation calculated by management is based on estimated costs to abandon and reclaim the properties and the estimated timing of the costs to be incurred in future periods. As at December 31, 2013, the estimated total undiscounted decommissioning obligations were \$5.9 million (2012 – \$5.4 million). These obligations will be settled based on the useful lives of the underlying assets, the majority of which are expected to be settled within the next 25 years, primarily between 2027 and 2036.

The discounted future decommissioning liabilities were calculated using a risk free discount rate of 4% (2012 – 4%) and an expected inflation rate of 2% (2012 – 2%).

14

INCOME TAXES

(a) Provision for deferred income taxes:

	2013	2012
Loss before income taxes	\$ (84,539)	\$ (69,393)
Canadian statutory income tax rate	25%	25%
Expected tax recovery	(21,135)	(17,348)
Adjustments:
Share–based compensation	2,760	2,141
Change in unrecognized deferred taxes	8,042	2,311
Foreign exchange	–	57
Expenses incurred with no recognized tax benefit	3,343	4,906
Change in income tax rates and other	6,661	2,552
Deferred tax recovery	\$ (329)	\$ (5,381)

(b) Deferred tax balances:

The Company has Canadian non-capital losses of \$86.3 million that will begin to expire in 2029. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits.

During the year the Company incurred a non-capital loss of \$0.3 million generated on pipeline operations in one of its Chadian subsidiaries which may be carried forward and applied against taxable income of future years and if not used, will expire in 2019. The tax rate applicable to this entity is 40% based on the corporate income tax rate in Chad.

In 2012, recording the equity component of the convertible debenture resulted in the recognition of a \$10.4 million deferred income tax liability. This deferred tax liability was recorded as part of the equity component of the convertible bonds. The Company recorded previously unrecognized deferred tax assets to offset this deferred tax liability. Share capital was reduced by \$5.0 million and a deferred income tax recovery of \$5.4 million was recorded relating to the previously unrecognized tax benefits of share issue costs and non-capital losses, respectively.

The Company does not incur tax in Chad on oil and gas sales under the terms of the PSCs.

¹⁵

FINANCE EXPENSE (INCOME)

	2013	2012
Interest accrued on convertible bond	\$ 22,707	\$ 5,957
Accretion of convertible bond	8,357	2,256
Accretion of decommissioning obligation	92	85
Accretion of accounts receivable	(2,235)	–
Other interest income	(49)	(215)
	\$ 28,872	\$ 8,083

16

LOSS PER SHARE

	2013	2012
Net and comprehensive loss:	\$ 84,210	\$ 64,012
Weighted average number of shares	117,102	108,458
Loss per share – basic and diluted	\$ 0.72	\$ 0.59

17 FINANCIAL INSTRUMENTS

The Company's activities expose it to a variety of financial risks that arise as a result of its exploration, development, production and financial activities such as:

(a) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. On entering into any business contract, the extent to which the arrangement exposes the Company to credit risk is considered.

The Company's policy to mitigate credit risk associated with these balances is to establish relationships with reputable counterparties including highly rated financial institutions.

The majority of the Company's cash is held in operating accounts with a publicly traded, international bank therefore the Company considers these assets to have negligible credit risk The Company does not hold significant cash in Chad.

As at December 31, 2013, the Company had share purchase loans outstanding from officers of the Company in the amount of \$9.1 million. The Company considers the share purchase loans to have negligible credit risk given the security on the loans and the holders of the loans.

At December 31, 2013, the Company had approximately \$139 million receivable from its Joint Venture Partner (Note 4). Management has assessed the credit risk of this counterparty to be low given its size, credit ratings and payment history. In addition, all of the Company's production from Chad will be sold to this entity. The Company's maximum exposure to credit risk in respect of accounts receivable is \$145.4 million.

An aging analysis of accounts receivable is noted in the table below:

Less than 30 days	\$ 45,101
31 to 90 days	2,207
Greater than 90 days
(Deposits, farm–in receivable)	98,086
Total	\$ 145,395

(b) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity is to ensure it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation.

Typically the Company will ensure that it has sufficient cash on demand to meet expected operational expenses for a period of 60 days, including the servicing of financial obligations. To achieve this objective, the Company prepares a cash flow forecast, which is regularly monitored and updated as warranted.

The contractual maturities of all accounts payable and accrued liabilities are less than 1 year. The convertible bonds which bear interest at 12.5%, mature in 2017.

(c) Market risk

Market risk is the risk that changes in market prices, such as commodity prices, foreign exchange rates and interest rates will affect the Company's income or the value of the financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.

The Company may use both financial derivatives and physical delivery sales contracts to manage market risks. All such transactions will be conducted within risk management tolerances that are reviewed by the Board of Directors.

(i) Commodity price risk

Price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for oil and natural gas are impacted by not only the relationship between the United States dollar and other currencies but also world economic events that impact the perceived levels of supply and demand. The Company expects to sell its production based on a discount to Brent oil prices. No fixed price commodity contracts have been entered into to mitigate fluctuations in commodity prices.

(ii) Foreign currency risk

Currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. The reporting and functional currency of the Company is United States dollars ("US\$"). Substantially all of the Company's capital expenditures and major service contracts related to the exploration and development in Chad are denominated in US\$, and as such the Company holds substantially all of its cash in US in order to mitigate against foreign currency risk

The Company's operations are in foreign jurisdictions, therefore the Company is exposed to foreign currency exchange rate risk on some of its activities. General and administrative expenses, are denominated in currencies other than US\$ including the Canadian dollars (C\$), the Great British Pound (GBP), and the Central African Franc (CFA). The Company also settles certain capital expenditures in Euro (EUR), Canadian dollars (C\$) and CFA. To match the foreign currency on the trade payables related to these activities the Company may hold cash in the currency of the transaction.

The following table contains an analysis of US\$ equivalent cash balances and trade payables denominated in each currency:

As at December 31, 2013	CASH	TRADE PAYABLES
Denominated in USD	\$ 140,986	\$ 75,257
Denominated in GBP	31,730	2,186
Denominated in CFA	4,073	84
Denominated in CAD	2,862	5,343
	\$ 179,651	\$ 82,870

Predominantly all of the accounts receivable are denominated in US\$.

(iii) Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The convertible bonds bear interest at the prescribed rate in the debenture agreements. The effect of interest rate fluctuations would not have had a significant effect on the Company's reported net loss for the years ended December 31, 2013 and 2012.

REVENUE

(a) Crude Oil Lifting

For the year ended December 31, 2013, the Company earned no revenues from the sale of crude oil.

(b) Tariff revenue

During the year ended December 31, 2013, the Company has earned \$0.1 million in pipeline tariffs.

19 SUPPLEMENTARY CASH FLOW INFORMATION

	2013	2012
Non-cash changes in working capital:
Accounts receivable	\$ (36,105)	\$ (11,354)
Accounts payable	39,407	35,270
	\$ 3,302	\$ 23,916
Allocated to:
Operating activities	\$ 8,366	\$ (3,205)
Investing activities	(5,064)	27,121
	\$ 3,302	\$ 23,916

COMMITMENTS

Pursuant to PSCs in the Republic of Chad, the Company and its Joint Venture Partner are required to perform certain minimum exploration activities by the expiry of the terms associated with each of the Company's PSCs, all of which are within the next three years. The Company's share of the minimum exploration activities are as follows:

CONCESSION NAME	EXPIRY DATE	ORIGINAL MINIMUM WORK REQUIREMENT		MINIMUM WORK REQUIREMENT AS AT DEC. 31, 2013
Doseo/Borogop PSC	January 26, 2016	\$	33,335	\$ 22,428
Mangara/Badila PSC	April 24, 2016		33,335	–
DOH PSC	August 2, 2016		10,000	9,051
Total		\$	76,670	\$ 31,479

Pursuant to PCSs in the Republic of Chad ("State"), the Company is required to pay certain prescribed amounts relating to the training of Chadian Nationals and employees of the Energy Ministry, audits of the State, and the presentation of annual reports to the State. These prescribed amounts under the terms of the PCSs are approximately \$2.5 million per annum, net to the Company.

The Company has office and accommodation lease commitments in N'Djamena, Chad, and office lease commitment in Calgary, Alberta. Non-cancellable future operating lease rentals from 2014 to 2016 are approximately \$2.8 million (\$2.1 million net to the Company) per annum.

On November 28, 2013, the Company signed a three year drilling and rig service contact for four drilling and two completion rigs. The approximate cost of the contract is approximately \$104.8 million (\$62.9 million net to the Company) per annum.

Subsequent to year end, the Company has awarded several contracts for various operation services such as well services, drilling recoding system, and waste management with a total value of \$205 million (\$123 million net to the Company) per annum. The contracts have a three year term.

21 RELATED PARTY TRANSACTIONS

(i) Directors' remuneration:

		2013	2012
	Fees to non-executive directors	\$ 1,009	\$ 301
	Share–based compensation	2,816	1,087
		\$ 3,825	\$ 1,388
(ii)	Compensation of key management personnel:
		2013	2012
	Salaries and other benefits	\$ 3,056	\$ 2,043
	Bonuses	2,868	270

Share–based compensation 3,363 4,688

\$ 9,287 \$ 7,001

22 SUBSIDIARIES AND JURISDICTIONS

The Company has established the following material subsidiaries for the purpose of carrying out its oil and gas operations:

	COUNTRY OF			% EQUITY INTEREST
	INCORPORATION	PSC	2013	2012
i. Griffiths Energy Holdings Limited	Bermuda;	n/a	100%	100%
ii. PetroChad (Mangara) Limited	Bermuda;	Mangara/Badila	100%	100%
iii. Griffiths Energy (Chad) Ltd	Bermuda;	Doseo/Borogop	100%	100%
iv. Griffiths Energy (DOH) Limited	Bermuda;	DOH	100%	100%

23 SUBSEQUENT EVENTS

On March 15, 2014 Caracal announced they have entered into an agreement to merge with TransGlobe Energy Corporation (TSX:TGL)(NASDAQ:TGA) ("TransGlobe") by way of an exchange of shares pursuant to a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement"). Pursuant to the Arrangement, each TransGlobe shareholder will receive 1.23 new common shares of Caracal in exchange for each TransGlobe common share. After completion of the Arrangement the merged company will have approximately 238,503,645 shares issued and outstanding. The Arrangement is subject to required approvals, including but not limited to, regulatory and by shareholder of both companies.