Energy SpA — Management Reports 2014

Mar 31, 2014

MANAGEMENT'S DISCUSSION & ANALYSIS

For the three months ended March 31, 2014 and 2013

Basis of Presentation

The following Management's Discussion and Analysis (the "MD&A") dated May 6, 2014 is a review of the results of operations and the liquidity and capital resources of Caracal Energy Inc. (the "Company" or "Caracal") for the three months ended March 31, 2014 and 2013. The discussion and analysis is a review of the financial results of the Company based upon accounting principles prepared in accordance with International Financial Reporting Standards ("IFRS"). This MD&A should be read in conjunction with the Company's unaudited interim consolidated financial statements for the three months ended March 31, 2014 and 2013, the 2013 annual financial statements and the 2013 annual MD&A. The reporting and functional currency of the Company 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 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 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.
• 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 AND OUTLOOK

Caracal's Business

The Company 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.

Outlook

On April 7, 2014, Caracal announced it signed a \$140 million Reserve Based Senior Secured Facility (the "Facility"). In addition, Caracal has an option to increase the Facility by up to an additional US\$110 million subject to receipt of further lender commitments. The Facility has a final maturity date of March 31, 2017.

On April 14, 2014, GlencoreXstrata plc ("Glencore") and Caracal reached a definitive agreement for a wholly owned subsidiary of Glencore to acquire Caracal for an all cash consideration of £5.50 per common share by way of Plan of Arrangement (the "Arrangement"). The deal is subject to regulatory and shareholder approvals and is expected to close in June 2014.

As a result of the Arrangement, Caracal announced that it has terminated a prior agreement under which it proposed to merge with TransGlobe Energy Corporation ("Transglobe"). Caracal paid TransGlobe a termination fee of US\$9.25 million as required under the terms of the prior agreement.

RESULTS OF OPERATIONS

OPERATING SEGMENTS

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

OIL PRODUCTION AND INVENTORY

Oil Production	VOLUMES (BBL)	(BBLS/D)
Gross Field Production	1,061,890	11,799
Entitlement Production	455,974	5,066

Oil inventory comprises production volumes accumulated in pipeline and storage facilities that have not yet been offloaded and transported to market. As per the Joint Marketing Agreement ("JMA") for the sale of the Company's crude oil, the price formula to value the inventory uses a dated Brent average and certain adjustments, including a discount or premium to Brent for the difference in crude oil quality.

(BBL)	NRV (1) (000s)
264,575	27,159
455,974	44,926
(559,185)	(55,894)
161,364	16,191

(1) Net realizable value

PROFIT AND LOSS

A summary of the revenue and expenses incurred by the Company for the three months ended March 31, 2014 and 2013 is presented in the table below:

	2014	2013
Oil revenue	55,894	–
Change in oil inventory	(10,828)	–
	45,066
Expenses
Operating expenses	4,906	–
Transportation expenses	4,024	–
Depreciation and depletion	8,344	394
Share-based compensation	2,723	2,121
General and administrative	9,084	12,733
Finance expense	6,595	7,765
Foreign exchange loss	733	354
	36,409	23,367
Net income (loss) before tax	8,657	(23,367)
Deferred tax reduction	678	–
Net and comprehensive income (loss)	9,335	(23,367)

REVENUES

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For the three months ended March 31, 2014, Caracal generated revenue of \$55.9 million from one cargo lifting.

Operating and Transportation Expenses	(US\$ '000)	PER BBL (\$)
Gross Operating Costs	8,327	7.84
Caracal's share of operating costs (1)	4,906	10.76
Transportation costs	4,024	8.83

(1) Caracal's share of costs divided by net entitlement bbls

Production commenced September 2013 and as such there was no operating or transportation expense recorded in the comparative period.

Transportation costs include the costs to transport the Company's crude oil through the Export Transportation System ("ETS"). Transportation costs per barrel are anticipated to decrease as additional volumes are transported through the ETS.

DEPRECIATION AND DEPLETION

Depreciation and depletion expense increased by \$8.0 million for the three months ending March 31, 2014. The increase is the result of the recognition of depletion relating production from the Badila field which commenced in September 2013. Prior thereto, depreciation was related primarily to corporate assets.

SHARE-BASED COMPENSATION

The share-based compensation expense for the three months ended March 31, 2014, increased \$0.6 million over the comparative period. The increase is attributed to additional stock options and other long term incentive plans granted to new and existing employees. During the three months ended March 31, 2014, Caracal capitalized \$1.1 million (2013 - \$0.7 million) of share-based compensation associated with exploration and development activities.

GENERAL AND ADMINISTRATIVE

General and administrative costs decreased by \$3.6 million for the three months ended March 31, 2014 compared to March 31, 2013 as a result of certain costs relating to operations being allocated to operating costs. In the comparative quarter these costs were allocated to general and administrative as production had not yet commenced. During the period, the Company capitalized \$2.3 million (2013 - \$1.1 million) of salaries and benefits

FINANCE EXPENSE

Finance expense for the three months ended ending March 31, 2014 decreased by \$1.2 million compared to three months ended March 31, 2013. The decrease is mainly a result of the interest income recorded from the accretion of the farm-in receivable.

CAPITAL EXPENDITURES

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

Decommissioning Liability Capitalized Share Based Compensation	1,458 1,086	370 729
Total Cash Capital Expenditures	82,655	107,578
Corporate Assets	5,846	3,766
Infrastructure, Camps and Land Acquisitions	6,404	12,765
Facilities	30,139	52,950
Drilling and Workovers	24,159	29,538
Studies and Seismic	16,107	8,559
	2014	2013
	THREE MONTHS ENDED MARCH 31

During the three months period ended March 31, 2014, the Company completed 3D seismic over the Kibea and Beche discoveries and 2D seismic over several prospects.

The Company continued to advance its development drilling program by drilling and completing four wells: two in Mangara and two in Badila. 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 three months period ended March 31, 2014, the Company completed the Mangara to Badila pipeline, ordered the long lead items for the Badila and Mangara expansions and completed the Mangara Central Processing Facility and substantially completed the blending facility.

LIQUIDITY AND CAPITAL RESOURCES

Share Capital

The following table summarizes the outstanding common shares, performance warrants, options, performance units and convertible bonds.

OUTSTANDING AS AT MARCH 31	2014	2013
Common shares – basic	146,704	115,624
Performance warrants	5,870	6,117
Stock options	10,418	6,683
Performance share plan units (net of shares purchased)	1,015	1,094
Convertible bonds	28,600	28,600
	192,607	158,118

Available Cash Resources

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Historically, the Company 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 Company's available cash resources as at March 31, 2014 were \$66.1 million compared to \$179.6 million as at March 31, 2013. Pursuant to the Joint Venture Partner farm-in agreement, approximately \$100.0 million of the original \$300 million of carry remains to be used which will reduce future capital requirements.

The Company 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 Company. While there are minimum spending requirements under each of the PSCs, as discussed below, the Company has sufficient resources available to fund those minimum capital commitments.

Cash resources at March 31, 2014, combined with the financial commitments of the Partner pursuant to the farm-in agreement and anticipated cash flow from operations, are estimated to be sufficient to fund the Company's planned work program. Should situations arise that reduce the capital available to the Company, the work program can be modified accordingly.

On April 7, 2014, Caracal announced it signed a \$140 million Reserve Based Senior Secured Facility (the "Facility"). In addition, Caracal has an option to increase the Facility by up to an additional US\$110 million subject to receipt of further lender commitments. The Facility has a final maturity date of March 31, 2017.

SELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATION

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

	MAR 31	DEC 31	SEP 30	JUN 30	MAR 31	DEC 31	SEP 30	JUN 30
THREE MONTHS ENDED	2014	2013	2013	2013	2013	2012	2012	2012
Income statements:
Revenues, including change in oil inventory	45,066	27,239	–	–	–	–	–	–
Expenses	35,732	36,408	19,489	32,185	23,367	22,881	5,771	14,451
Net and comprehensive income (loss)	9,335	(9,169)	(19,489)	(32,185)	(23,367)	(22,881)	(5,771)	(14,451)
Per common share data:
Basic earnings (loss) per share	0.06	(0.17)	(0.17)	(0.28)	(0.21)	(0.20)	(0.06)	(0.14)
Diluted earnings (loss) per share	0.06	(0.17)	(0.17)	(0.28)	(0.21)	(0.20)	(0.06)	(0.14)
Weighted average number of shares outstanding - basic	146,704	123,570	115,658	115,636	115,624	112,761	112,761	112,754
Weighted average number of shares outstanding - diluted	147,057	123,570	115,658	115,636	115,624	112,761	112,761	112,754
Cash flows:
Operating activities	(30,204)	(20,339)	24,182	(91,361)	23,112	(8,645)	(25,152)	(11,726)
Investing activities	(84,664)	(39,340)	(52,573)	86,404	(61,799)	(83,902)	(30,391)	(40,760)
Financing activities	1,790	193,757	(2,935)	(2,389)	3,899	(91)	167,083	(44)
Statement of financial position:
Current assets	265,094	352,204	206,926	220,069	97,424	132,121	216,860	102,765
Non-current assets	342,193	264,811	153,487	178,220	407,687	299,383	218,492	176,294
Total assets	607,287	617,015	360,413	398,289	505,111	431,504	435,352	279,059
Current liabilities	54,441	83,225	15,148	41,860	24,493	42,741	33,509	36,275
Non-current liabilities	147,192	143,282	162,320	153,706	246,076	137,590	130,182	2,037
Total liabilities	201,633	226,507	177,468	195,566	270,569	180,331	163,691	38,312
Total shareholders' equity	405,654	390,508	182,945	202,723	234,542	251,173	271,661	240,747

Internal Control Over Financial Reporting

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

Financial Instruments

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

FORWARD–LOOKING STATEMENTS

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Certain statements contained in this MD&A, including any information as to the Company'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. Forwardlooking 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 Company'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 Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because the Company 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 Company to obtain qualified staff, equipment and services in a timely and cost-efficient manner; the ability of the Company to operate the field in a safe, efficient and effective manner; the ability of the Company 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 Company 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 Company has with the Government; and the ability of the Company 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 Company and described in the forward-looking statements or information. Known and unknown factors could cause actual results to differ materially from those projected in the forwardlooking 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 Company to add production and reserves through acquisition, development and exploration activities; the Company'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 Company'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 Company; uncertainties as to the availability and cost of financing; and financial risks affecting the value of the Company's investments. Readers are cautioned that the foregoing list is not exhaustive of all possible risks and uncertainties.

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