Energy SpA — Management Reports 2013

Sep 30, 2013

BASIS OF PRESENTATION

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The following Management's Discussion and Analysis (the "MD&A") dated 7 November 2013. is a review of the results of operations and the liquidity and capital resources of Caracal Energy Inc. (the "Group" or "Caracal") for the nine months ended September 30, 2013 and 2012. The discussion and analysis is a review of the financial results of the Group based upon accounting principles prepared in accordance with International Financial Reporting Standards ("IFRS"). This MD&A should be read in conjunction with the Group's September 30, 2013 interim financial statements, the 2012 annual MD&A and the audited consolidated financial statements for the years ended December 31, 2012, 2011 and 2010. The reporting and functional currency of the Group is the United States dollar ("US\$"). All financial references in this MD&A are in United States Dollars unless otherwise noted.

Readers should also read the "Forward-Looking Statements" section at the end of this document which provides further information on statements throughout this report that are not historical facts and may be considered "forward-looking statements".

Use of Estimates and Critical Accounting Policies

The preparation of the interim 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 interim 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 interim 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 property, plant and equipment and intangible exploration and evaluation assets 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 intangible exploration and evaluation assets is also impacted by the policy election permitted under IFRS as to the level exploration and evaluation assets are tested for impairment.
• A number of the Group's accounting policies and disclosures require the determination of fair value, both for financial and non-financial assets and liabilities.
• When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
• The fair value of share-based compensation is based on estimates relating to option life, volatility, share price and the outcome of performance conditions.

Caracal's BUSINESS, STRATEGY AND OUTLOOK

Caracal's Business

The Group is an independent oil and gas exploration, appraisal and development company with exclusive rights, along with its Joint Venture Partner ("Partner") to explore and develop oil and gas reserves and resources over an area of approximately 26,103 square kilometres (6.4 million acres) in southern Chad. This area is comprised of three Contractual Zones, the rights to which were granted to the Group in 2011 pursuant to production sharing contracts (each, a "PSC") that it entered into with the Government of Chad.

DOB/DOI Contractual Zone (DOB/DOI PSC)

• The DOB/DOI Contractual Zone covers an area of approximately 2,865 square kilometres. It contains two discoveries of commercial interest that the Group is currently developing: the Badila Field and the Mangara Field.
• Exclusive exploitation authorisations (each, an "EXA") to develop and produce from the Badila and Mangara Fields were granted to the Group by the Government of Chad in August 2012 and June 2012, respectively, and cover a combined area of 100 square kilometres. The Group commenced production from the Badila field on September 30, 2013. Having prioritised pre-production development of the Badila Field, the Group is targeting commencement of first production from the Mangara Field in the first half of 2014.

Doseo/Borogop Contractual Zone (Doseo/Borogop PSC)

• The Doseo/Borogop Contractual Zone covers an area of approximately 22,414 square kilometres and contains four discoveries of commercial interest that the Group has identified as development priorities: the Kibea, Maku, Tega and North Sako Fields.
• The Group had an EXA application for the Kibea Field deemed conditionally approved in May 2013, pending approval of an environmental impact assessment.
• The Group is currently undertaking feasibility studies on the Maku, Tega and North Sako Fields. The Group expects to submit an EXA application for the Maku Field in the second half of 2014.

DOH Contractual Zone (DOH PSC)

• The DOH Contractual Zone covers an area of approximately 824 square kilometres.
• The DOH Contractual Zone is subject to further exploration. The two wellbores existing within the DOH Contractual Zone, drilled by previous operators, have evidence of oil, but not in quantities of commercial interest that the Group would intend to develop. The Group intends to drill two exploration wells in the DOH Contractual Zones during 2014.

Strategy

The strategy of the Group is to increase shareholder value through sustained growth in production, cash flow and reserves. The Group intends to lead the development and control of infrastructure in the regions in which it operates. The Group believes that the PSCs offer significant near-term production and long-term exploration opportunities with substantial resource potential. The Group believes that the combination of the Group's existing asset base and technical management team will contribute significantly to the Group's growth and aim of being a leading independent international oil company, while delivering growth in net asset value per common share.

RESULTS OF OPERATIONS

Operating Segments

The Group has one operating segment: oil and gas exploration, development and production activities in the Republic of Chad.

Revenues

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The Group did not generate any operating revenues during the periods ended September 30, 2013 and 2012. Production commenced from the Badila field on September 30, 2013, however, this production was directed to the Group's portion of the required line fill.

Expenses

A summary of the expenses incurred by the Group for the periods ended September 30, 2013 and 2012 is presented in the table below:

		Three months ended September 30	Nine months ended September 30
	2013	2012	2013	2012
Expenses
Salaries and benefits	2,426	3,221	12,933	9,050
Share-based compensation	2,716	1,973	7,455	6,488
Depreciation	431	294	1,315	754
General and administrative	4,986	3,312	14,885	24,970
Travel	1,519	1,638	5,996	4,654
Listing fees	129	–	9,162	–
Finance expense (income)	6,369	920	21,582	837
Foreign exchange loss (gain)	842	(206)	1,713	(246)
Net loss before tax	19,490	11,152	75,041	46,507
Deferred tax reduction	–	(5,381)	–	(5,381)
Net and comprehensive loss	\$ 19,490	\$ 5,771	\$ 75,041	\$ 41,126

Salaries and benefits

Salaries and benefits decreased \$0.8 million for the three months ended September 30, 2013 and increased \$3.9 million for the nine months ended September 30, 2013. During 2013, the Group progressed from planning, development engineering, and procurement to operating two drilling rigs, one service rig and constructing a variety of facilities and infrastructure. With the anticipated high level of activity throughout 2013 and beyond, the Group undertook an aggressive recruiting campaign to attract and retain needed professionals, increasing its headcount from approximately 100 employees at the end of September 30, 2012 to approximately 250 employees at the end of September 30, 2013. Upon closing of the Farm-In Agreement in June 2013, the Group's carrying interest in costs directly attributable to the exploration, appraisal and development of oil & gas assets in the republic of Chad has decreased. As a result of the decrease in carrying interest, salaries and benefits have decreased by \$0.8 million for the three months ended September 30, 2013, compared to the three months ended September 30, 2012. During the quarter and the period, the Group capitalized \$5.0 million (2012 - \$0.8 million) and \$10.6 million (2012 – \$2.1 million) of salaries and benefits respectively.

Share-based compensation

Share-based compensation for the three and nine months ended September 30, 2013 increased \$0.7 million and \$1.0 million respectively. The increase relates to stock options granted to employees as well as the creation of the Long Term Incentive Plan (the "Plan") for officers and other key executives of the Group. A total of 1.1 million performance units were granted under the Plan in the first quarter of 2013. The Plan was introduced to retain, attract and motivate key executives responsible for executing the Group's 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 time and 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 Group against a group of peer companies;
• ii) 37.5% of the award will be subject to targets relating to net asset value of the Group 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 Group at the time of vesting).

The Group 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 Group's common stock.
• b) 75% with performance conditions fair value is based on the underlying value of the Group's common stock adjusted for the probability of satisfying the market and non-market performance conditions.

During the nine months ended September 30, 2013, the Group purchased 917,782 common shares at C\$6.25 per share for a total consideration of \$5.7 million. These shares are held in a trust settled by a third party trustee with the sole purpose of administering the Plan. The shares held in the trust have been granted to participants but not yet vested.

General and administrative

General and administrative costs increased by \$1.7 million for three months ended September 30, 2013 and decreased \$10.1 million for the nine months September 30, 2013. During the period ended September 30, 2012, the Group accrued \$9.5 million to provide for potential penalties and fines to an issue that was resolved in the first quarter of 2013.These expenses are considered to be non-recurring and therefore, after consideration for these, general and administrative costs for the three and nine months ended September 30, 2013 are relatively unchanged from the comparative periods.

Travel

The increase in travel during the nine months ended September 30, 2013 is primarily due to increased personnel traveling to Chad commensurate with the increase in activity. The Group's share of travel for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 decreased due to the change in the carrying interest of the Group.

Listing fees

On July 9, 2013, the common shares of Caracal were admitted to listing on the premium listing segment of the Official List and to trading on the London Stock Exchange under the symbol: CRCL. Caracal paid \$9.2 million to legal, financial and accounting advisors in conjunction with the listing. As Caracal did not raise any capital, all fees were expensed.

Finance expense

On September 13, 2012, Caracal completed a financing through the issuance of \$173.6 million unsecured convertible bonds (the "Bonds") with a maturity date of September 30, 2017. Finance expense increased \$20.7 million from the prior period due to interest owing on the Bonds. Interest on the Bonds, initially at a rate of 12 percent per annum, is accrued quarterly and compounded and capitalized semi-annually. See note 9 of the interim consolidated financial statements for further detail.

CAPITAL EXPENDITURES

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Additions to exploration and evaluation assets and property and equipment were as follows:

		Three months ended September 30	Nine months ended September 30
	2013	2012	2013	2012
Studies and Seismic	(344)	474	15,342	6,657
Drilling and Workovers	23,934	8,006	72,846	18,721
Facilities	48,343	24,956	178,723	60,390
Infrastructure, Camps and Land Acquisitions	6,624	7,659	30,266	17,860
Corporate Assets	3,435	868	11,551	4,090
Total Cash Capital Expenditures	81,992	41,963	308,728	107,718
Asset Disposal	(426)	–	(247,784)	–
Net Capital Dispositions	81,566	41,963	60,944	107,718
Decommissioning Liability	101	256	760	640
Depreciation	(415)	(275)	(1,257)	(697)
Capitalized Share Based Compensation	790	529	2,181	1,285
Total	\$ 82,042	\$ 42,473	\$ 62,628	\$ 108,946

During the nine months ended September 30, 2013 the Group completed a 320 square kilometer 3D seismic program encompassing the Badila EXA lands as well as additional exploration targets. Other studies and seismic work is ongoing as the Group continues to analyze pre-existing 2D seismic over all its lands, and prepares to commence another 3D seismic program over the Kibea and Maku discoveries and adjacent prospects in Q4 2013 and the first half of 2014. The Group completed a 3D program over the Mangara EXA lands in 2012 covering about half the size of the land of the Badila EXA shoot.

During the nine months ended September 30, 2013, the Group continued to advance its development drilling program:

• drilled and completed Badila-2 and Badila-3, drilled Mangara-4, Mangara-5, and Badila-4, and completed a workover on Mangara-2 and Badila-1.
• Badila-5 was spud on October 12, 2013.

In September, the Group drilled its first exploration well, Krim. Drilling of Krim is complete, and completion of the wellbore is scheduled for November 2013.

Also included in drilling and workovers are the costs associated with the preparation of future well leases, construction of well pads, and the purchasing of long lead drilling consumables. These costs increased from the previous period due to an increase in activity.

During the nine months ended September 30, 2013, the Group completed the early production facilities, the 16km-12 inch oil sales pipeline, the lease automatic custody transfer unit, hot tap into the third-party-owned and operated pipeline, and the two field camps. Construction continued on the central processing facilities (80% complete), southern processing terminal (82% complete), blending facilities (82% complete) and Mangara sales pipeline (75% complete).

On June 13, 2013, the Group closed the farm-in agreement with Glencore, pursuant to which the Group transferred a one third participating interest in each of its PSCs and a 25% participating interest in the Badila and Mangara EXAs to Glencore. The transaction had an effective date of July 1, 2012 with Glencore 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:

		Amount
Cash consideration	(i)	257,458
Future farm-in commitment	(ii)	195,547
Decommissioning obligation		1,016
Transaction costs		(9,674)
Disposition of Exploration and Evaluation assets	(iii)	\$ 444,347

i. Concurrently with the closing, the Group immediately repaid an advance of \$150.0 million to Glencore.

• ii. As per the farm-in agreement, Glencore will reimburse up to \$100 million of the Group's share of expenditures on certain of the Group'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 Group 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.

LIQUIDITY AND CAPITAL RESOURCES

The Group does not currently have any revenue from operations and is reliant on its ability to raise funds through the capital markets and/or generating cash flow from its operations in Chad. There can be no assurance that the Group will be successful in raising funds in the future.

Share Capital

The following table summarizes the outstanding common shares, performance warrants, options, performance units and convertible bonds as at September 30, 2013 and 2012.

	2013	2012
Common shares – basic	115,657	112,761
Liquidity warrants	–	2,084
Agent options	–	1,980
Performance warrants	5,967	6,148
Stock options	8,233	4,490
Performance share plan units	1,094	–
Restricted share units	136	–
Convertible bonds	28,600	28,600
	159,687	156,063

As at the date of this MD&A, there have been no significant changes to the number of outstanding equity instruments since September 30, 2013.

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Available Cash Resources

Historically, the Group has financed its capital resource needs through the sale of its common shares, convertible bonds and farm-outs with the objective of the acquiring prospective oil and gas assets and maximizing long-term financial returns to its shareholders. The Group anticipates developing its assets in the Republic of Chad utilizing a combination of existing capital resources, the financial commitments of Glencore pursuant to the farm-in agreement, anticipated future revenues and, if necessary, funds raised from debt and/or equity, if available and on reasonable terms. First production commenced on September 30, 2013, and accordingly the Group expects to generate internal funds to further expand and develop its asset base. In order to maintain or adjust its capital structure in future periods, the Group may pay dividends, return capital to shareholders, enter into joint venture agreements with third parties, incur long-term debt, issue new shares, sell assets, or execute a combination of the aforementioned items.

The Group's available cash resources as at September 30, 2013 and 2012 were \$45.3 million and \$212.0 million respectively. Pursuant to the Glencore farm-in agreement, approximately \$330.8 million was provided in liquidity, which reduces future capital requirements by reducing the Group's working interest in the PSCs.

The Group has set an aggressive development plan, however, the development plan is highly discretionary and can be accelerated or decelerated to match funds available to the Group. While there are minimum spending requirements under each of the PSCs, as discussed below, the Group has sufficient resources available to fund those minimum capital commitments.

Cash resources at September 30, 2013, combined with the financial commitments of Glencore pursuant to the farm-in agreement and anticipated cash flow from operations, are estimated to be sufficient to fund the Group's planned work program. Should situations arise that reduce the capital available to the Group, the work program can be modified accordingly.

FUTURE COMMITMENTS AND CONTINGENCIES

Pursuant to PSCs in the Republic of Chad, the Group and its joint venture partner are required to perform certain minimum exploration activities by the expiry of the terms associated with each of the Group's PSCs, all of which are within the next three years:

Concession Name	Expiry Date	Original Minimum Work Requirement	Remaining Minimum Work Requirement as at September 30, 2013
Doseo/Borogop PSC	January 26, 2016	33,335	25,713
Mangara/Badila PSC	April 24, 2016	33,335	10,271
DOH PSC	August 2, 2016	10,000	9,136
Total		\$ 76,670	\$ 45,120

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

The Group has office lease commitments in N'Djamena, Chad, and Calgary, Alberta. Non-cancellable future operating lease rentals from 2013 to 2015 are approximately \$1.2 million per annum, net to the group.

SELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATION

Below is a summary of selected financial data covering the prior eight quarters.

Three months ended (unaudited)	Sep 30 2013	June 30 2013	Mar 31 2013	Dec 31 2012	Sep 30 2012	Jun 30 2012	Mar 31 2012	Dec 31 2011
Income statements:
Revenues	–	–	–	–	–	–	–	–
Expenses	19,490	32,185	23,367	22,887	5,771	14,451	20,903	9,796
Net loss and comprehensive loss	19,490	32,185	23,367	22,887	5,771	14,451	20,903	9,796
Per common share data:
Basic and diluted net loss per share	0.17	0.28	0.21	0.20	0.06	0.14	0.22	0.18
Weighted average number of shares outstanding – basic and diluted	115,657	115,636	115,624	112,761	112,761	112,754	95,462	88,009
Cash flows:
Operating activities	24,181	(91,361)	23,112	(8,645)	(25,152)	(11,726)	(9,663)	(6,842)
Investing activities	(52,570)	86,404	(61,799)	(83,902)	(30,391)	(40,760)	(6,246)	(10,320)
Financing activities	(2,933)	(2,389)	3,899	(91)	167,083	(44)	117,167	995
Statement of financial position:
Current assets	206,926	220,069	97,424	132,121	216,860	102,765	154,664	52,909
Non-current assets	153,487	178,220	407,687	299,383	218,492	176,294	129,072	110,243
Total assets	360,413	398,289	505,111	431,504	435,352	279,059	283,736	163,152
Current liabilities	15,148	41,860	24,493	42,741	33,509	36,275	29,045	7,471
Non-current liabilities	162,320	153,706	246,076	137,590	130,182	2,037	2,015	1,995
Total liabilities	177,468	195,566	270,569	180,331	163,691	38,312	31,060	9,466
Total shareholders' equity	182,945	202,723	234,542	251,173	271,661	240,747	252,676	153,686

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recent accounting pronouncements

On January 1, 2013, the Group 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.

Financial Instruments

The financial instruments entered into by the Group consist predominately of cash, convertible bonds and accounts receivable. The majority of the Group`s cash is held outside of Chad in a major international financial institution.

forward-looking Statements

Certain statements contained in this MD&A, including any information as to the Group's strategy, market position, plans or future financial or operating performance, constitute forward-looking statements or forward-looking information. Readers are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements may, and often do, differ materially from actual results. Forward-looking statements or information typically contain statements with words such as "anticipate", "will", "showed", "target", "believe", "expect", "plan", "intend", "estimate", "propose", "project" or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking statements or information in this MD&A include, but are not limited to, statements or information with respect to: business strategy and objectives; the development potential of the Group's assets; development plans; exploration plans; acquisition and disposition plans and the timing thereof; future production levels; capital expenditures; net revenue; operating and other costs; royalty rates and taxes.

Forward-looking statements or information are based on a number of factors and assumptions that have been used to develop such statements and information but may prove to be incorrect. Although the Group believes that the expectations reflected in such forwardlooking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because the Group can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions that may be identified in this MD&A, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in the Republic of Chad ("Chad"); the timely receipt of any required regulatory approvals; the ability of the Group to obtain qualified staff, equipment and services in a timely and cost-efficient manner; the ability of the Group to operate the field in a safe, efficient and effective manner; the ability of the Group to obtain financing on acceptable terms, if any; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Group to secure adequate product transportation; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in Chad; sanctity of the production sharing contracts the Group has with the Government; and the ability of the Group to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions that may have been used.

Forward-looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the Group and described in the forwardlooking statements or information. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. The risks and uncertainties that may cause actual results to differ materially from the forward-looking statements or information include, among other things: the ability of Management to execute its business plan; general economic and business conditions; the risk of war or instability affecting Chad; the risks of the oil and natural gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas; market demand; the possibility that government policies or laws may change or governmental approvals may be delayed or withheld; risks and uncertainties involving geology of oil and natural gas deposits; the uncertainty of reserves estimates and reserves life; the ability of the Group to add production and reserves through acquisition, development and exploration activities; the Group's ability to enter into or renew production sharing concession; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of estimates and projections relating to production (including decline rates), costs and expenses; fluctuations in oil and natural gas prices, foreign currency, exchange, and interest rates; risks inherent in the Group's marketing operations, including credit risk; uncertainty in amounts and timing of oil revenue payments; health, safety and environmental risks; risks associated with existing and potential future law suits and regulatory actions against the Group; uncertainties as to the availability and cost of financing; and financial risks affecting the value of the Group's investments. Readers are cautioned that the foregoing list is not exhaustive of all possible risks and uncertainties.

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