Petrus Resources Ltd. — Interim / Quarterly Report 2021

Aug 12, 2021

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CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Presented in 000’s of Canadian dollars)

As at	June 30, 2021	December 31, 2020
ASSETS
Current
Cash	312	—
Deposits and prepaid expenses	1,489	1,150
Accounts receivable_(note 13)_	12,337	6,278
Risk management asset_(note 8)_	—	934
Total current assets	14,138	8,362
Non-current
Risk management asset_(note 8)_	—	15
Exploration and evaluation assets_(note 4)_	13,080	17,568
Property, plant and equipment_(note 4)_	149,411	151,969
	162,491	169,552
Total assets	176,629	177,914
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness	—	32
Current portion of long term debt_(note 5)_	113,114	114,049
Accounts payable and accrued liabilities_(note 13)_	11,370	7,708
Risk management liability_(note 8)_	8,936	986
Lease obligations_(note 6)_	202	188
Total current liabilities	133,622	122,963
Non-current liabilities
Lease obligations_(note 6)_	716	824
Decommissioning obligation_(note 7)_	40,122	44,456
Risk management liability (note 8)	—	41
Total liabilities	174,460	168,284
Shareholders’ equity
Share capital_(note 9)_	430,157	430,119
Contributed surplus	9,517	9,596
Deficit	(437,505)	(430,085)
Total shareholders' equity	2,169	9,630
Total liabilities and shareholders' equity	176,629	177,914

Going concern (note 2) Commitments (note 17) Subsequent events (note 19) See accompanying notes to the interim consolidated financial statements

Approved by the Board of Directors,

(signed) “Don T. Gray”

(signed) “Donald Cormack”

Don T. Gray Chairman

Donald Cormack

Director

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CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS (UNAUDITED)

(Presented in 000’s of Canadian dollars, except per share amounts)

	Three months	Three months	Six months	Six months
	ended	ended	ended	ended
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
REVENUE
Oil and natural gas revenue(note 18)	19,553	9,041	35,892	23,385
Royaltyexpense	(2,794)	(867)	(4,783)	(2,766)
Net oil and natural gas revenue	16,759	8,174	31,109	20,619
Other income (note 18)	1,018	99	1,041	147
Netgain(loss)on financial derivatives_(note 8)_	(7,336)	(2,676)	(11,916)	10,183
	10,441	5,597	20,234	30,949
EXPENSES
Operating_(note 11)_	3,903	2,543	7,157	5,578
Transportation	1,057	799	1,920	1,502
General and administrative_(note 12)_	1,381	817	2,257	1,715
Share-based compensation_(note 9)_	22	40	112	94
Finance_(note 15)_	2,721	2,064	4,953	4,455
Exploration and evaluation_(note 3)_	62	4	62	4
Depletion and depreciation_(note 4)_	5,972	5,611	11,605	13,351
Gain on sale of assets	(412)	—	(412)	(25)
Impairment_(notes 3 and 4)_	—	—	—	98,000
Total expenses	14,706	11,878	27,654	124,674
NET LOSS AND COMPREHENSIVE LOSS	(4,265)	(6,281)	(7,420)	(93,725)
Net loss per common share
Basic and diluted(note 10)	(0.09)	(0.13)	(0.15)	(1.89)

See accompanying notes to the interim consolidated financial statements

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Presented in 000’s of Canadian dollars)

(Presented in 000’s of Canadian dollars)
	Share	Contributed
	Capital	Surplus	Deficit	Total
Balance, December 31, 2019	430,119	9,112	(332,531)	106,700
Net loss	—	—	(93,725)	(93,725)
Share-based compensation_(note 9)_	—	157	—	157
Balance, June 30, 2020	430,119	9,269	(426,256)	13,132
Balance, December 31, 2020	430,119	9,596	(430,085)	9,630
Net loss	—	—	(7,420)	(7,420)
Deferred Share Unit settlement	—	(223)	—	(223)
Issuance of common shares	38		—	38
Share-based compensation_(note 9)_	—	144	—	144
Balance, June 30, 2021	430,157	9,517	(437,505)	2,169

See accompanying notes to the interim consolidated financial statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Presented in 000’s of Canadian dollars)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Presented in 000’s of Canadian dollars)
	Three months	Three months	Six months	Six months
	ended	ended	ended	ended
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
OPERATING ACTIVITIES
Net loss	(4,265)	(6,281)	(7,420)	(93,725)
Adjust items not affecting cash:
Share-based compensation_(note 9)_	22	41	112	94
Unrealized (gain) loss on financial derivatives (note 8)	5,493	6,332	8,858	(5,353)
Non-cash finance expenses_(note 15)_	312	232	578	536
Non-cash term loan interest payment-in-kind (note 5)	965	—	1,901	—
Depletion and depreciation_(note 4)_	5,972	5,611	11,605	13,351
Impairment_(notes 3 and 4)_	—	—	—	98,000
Exploration and evaluation expense_(note 3)_	62	4	62	4
Gain on sale of assets_(note 4)_	(412)	—	(412)	(25)
Decommissioningexpenditures_(note 7)_	(79)	(84)	(222)	(459)
Funds flow	8,070	5,855	15,062	12,423
Change in operatingnon-cash workingcapital_(note 16)_	(5,040)	(3,158)	(4,822)	3,406
Cash flows from operating activities	3,030	2,697	10,240	15,829
FINANCING ACTIVITIES
Deferred Share Unit payment_(note 9)_	—	—	(59)	—
Repayment of revolving credit facility	(600)	(2,100)	(3,100)	(6,100)
Drawing of bank indebtedness	(1,276)	57	(32)	186
Repayment of lease liabilities_(note 6)_	(48)	(24)	(94)	(46)
Change in financingnon-cash workingcapital_(note 16)_	—	217	—	157
Cash flows used in financing activities	(1,924)	(1,850)	(3,285)	(5,803)
INVESTING ACTIVITIES
Property and equipment dispositions_(note 4)_	128	—	128	—
Exploration and evaluation asset expenditures_(note 3)_	(112)	(50)	(409)	(131)
Petroleum and natural gas property expenditures_(note 4)_	(679)	(255)	(8,299)	(8,827)
Change in investingnon-cash workingcapital_(note 16)_	(131)	(542)	1,937	(1,324)
Cash flows used in investing activities	(794)	(847)	(6,643)	(10,282)
Increase (decrease) in cash	312	—	312	(256)
Cash,beginningofperiod	—	—	—	256
Cash, end ofperiod	312	—	312	—
Cash interestpaid_(note 15)_	1,444	1,831	2,474	3,919

See accompanying notes to the interim consolidated financial statements

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As at June 30, 2021 and for the three and six months ended June 30, 2021 and 2020

1. NATURE OF THE ORGANIZATION

Petrus Resources Ltd. (the “Company” or "Petrus") was incorporated under the laws of the Province of Alberta on November 25, 2015. The principal undertaking of Petrus is the investment in energy business-related assets. The operations of the Company consist of the acquisition, development, exploration and exploitation of these assets. These consolidated financial statements reflect only the Company’s proportionate interest in such activities and are comprised of the Company and its subsidiaries, Petrus Resources Corp. and Petrus Resources Inc.

The Company’s head office is located at 2400, 240 - 4th Avenue SW, Calgary, Alberta, Canada.

These interim consolidated financial statements, for the three and six months ended June 30, 2021 and prior year comparative period, were approved by the Company’s Audit Committee and Board of Directors on August 10, 2021.

2. BASIS OF PRESENTATION

Going Concern

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.

As at June 30, 2021, the Company's revolving credit facility ("RCF") and Term Loan are due on July 14, 2021 and September 14, 2021, respectively. Subsequent to June 30, 2021, the lenders have extended the maturity date of the RCF from July 14 to August 13, 2021. In addition, the Company extended the maturity of the Term Loan from September 14 to October 14, 2021. The borrowings under the RCF and the Term Loan are classified as current liabilities in the June 30, 2021 interim consolidated financial statements. The Company remains in compliance with each financial covenant. However, the classification of the debt instruments resulted in a working capital deficiency (excluding non-cash risk management assets and liabilities, and lease obligations) of $110.3 million as at June 30, 2021.

The Company is actively engaging with the RCF syndicate of lenders and the Term Loan lender to extend the RCF and Term Loan. However, there can be no certainty as to the ability of the Company to successfully extend its RCF and Term Loan. There is a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern. These financial statements do not include adjustments to the recoverability and classification of recorded asset and liabilities and related expenses that might be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and liquidate its liabilities and commitments in other than the normal course of business at amounts different from those in the accompanying consolidated financial statements. Such adjustments could be material.

Statement of Compliance

These condensed interim consolidated financial statements have been prepared by management on a historical basis, except for certain financial instruments that have been measured at fair value. These condensed interim financial statements have been prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting.” Certain information and disclosures normally included in the notes to the annual financial statements have been condensed. Accordingly, these condensed consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2020 which were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The preparation of these condensed interim consolidated financial statements requires the use of certain critical accounting estimates and also requires management to exercise judgment in applying the Company’s accounting policies. In preparing these condensed interim consolidated financial statements, the significant judgments made by management in applying the Company’s accounting policies and key sources of estimation uncertainty were the same as those applied to the financial statements for the year ended December 31, 2020. The condensed interim consolidated financial statements have been prepared following the same accounting policies as the financial statements for the year ended December 31, 2020. These condensed interim consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency, except where otherwise noted.

Significant Accounting Policies and Critical Accounting Estimates

The Company’s significant accounting policies and critical accounting estimates can be read in note 3 to the Company’s audited consolidated financial statements as at and for the year ended December 31, 2020.

The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity, revenue and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are continuously reviewed with the financial statement effect being recognized in the reporting period that the changes to estimates are made.

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The rapid outbreak and subsequent measures intended to limit the spread of COVID-19 have contributed to a significant increase in economic uncertainty, with more volatile commodity prices, currency exchange rates and interest rates. The duration and severity of the business disruptions and reduction in consumer activity internationally and

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the resulting financial effect is difficult to reliably estimate. The results of the potential economic downturn and any potential resulting direct or indirect effect on the Company has been considered in management’s estimates at period end; however, there could be a further prospective material effect in future periods.

3. EXPLORATION AND EVALUATION ASSETS

The components of the Company’s exploration and evaluation ("E&E") assets are as follows:

$000s
Balance, December 31, 2019	36,116
Additions	4,590
Property acquisitions	(58)
Exploration and evaluation expense	(18)
Capitalized G&A	279
Capitalized share-based compensation	26
Transfers to property, plant and equipment_(note 4)_	(367)
Impairment loss	(23,000)
Balance, December 31, 2020	17,568
Additions	326
Disposition	(19)
Exploration and evaluation expense	(62)
Capitalized G&A	102
Capitalized share-based compensation_(note 9)_	8
Transfers toproperty, plant and equipment_(note 4)_	(4,843)
Balance, June 30, 2021	13,080

During the three months and six months ended June 30, 2021, the Company incurred exploration and evaluation expenses of $0.1 million which relates to expired and nearly expired undeveloped, non-core land (three and six months ended June 30, 2020 – nil).

During the three months and six months ended June 30, 2021, the Company capitalized $0.05 million and $0.10 million, respectively, of general and administrative expenses (“G&A”) (three and six months ended June 30, 2020 – $0.05 million and $0.13 million) and $0.004 million and $0.008 million of non-cash share-based compensation directly attributable to exploration activities (three and six months ended June 30, 2020 – $0.01 million and $0.02 million).

During the three months ended June 30, 2021, the Company had transferred $4.8 million from E&E assets to PP&E assets, related to the Kakwa CGU that was brought on production during the quarter. Upon transfer of the E&E assets to PP&E, an impairment test was performed on the assets transferred. No impairment was identified upon transfer of the assets from E&E to PP&E.

The Company did not identify any indicators of impairment or impairment reversal for the three months and six months ended June 30, 2021.

During the year ended December 31, 2020, due to the significant decrease in forward benchmark commodity prices in the first quarter, the Company identified indicators of impairment and conducted an impairment test on all of the Company's Cash Generating Units ("CGUs"). No impairment was recorded for the Foothills, Central Alberta and Kakwa CGUs during the year ended December 31, 2020. For the Ferrier CGU, the Company recorded an impairment loss of $23.0 million on its E&E assets for the quarter ended March 31, 2020. The Company had also tested the Ferrier CGU for impairment on December 31, 2020 and did not record any further impairment.

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4. PROPERTY, PLANT AND EQUIPMENT

The components of the Company’s property, plant and equipment ("PP&E") assets are as follows:

$000s	Cost	Accumulated DD&A	Net book value
Balance, December 31, 2019	821,861	(583,383)	238,478
Additions	8,600	—	8,600
Capitalized G&A	838	—	838
Capitalized share based compensation	77	—	77
Transfer from exploration and evaluation assets (note 3)	367	—	367
Depletion & depreciation	—	(25,231)	(25,231)
Increase in decommissioning expenses	3,840	—	3,840
Impairmentprovision	—	(75,000)	(75,000)
Balance, December 31, 2020	835,583	(683,614)	151,969
Additions	7,995	—	7,995
Property dispositions	(14,489)	12,439	(2,050)
Capitalized G&A	304	—	304
Capitalized share-based compensation_(note 9)_	24	—	24
Transfers from exploration and evaluation assets_(note 3)_	4,843	—	4,843
Depletion & depreciation	—	(11,605)	(11,605)
Increase in decommissioning provision_(note 7)_	(2,069)	—	(2,069)
Balance, June 30, 2021	832,191	(682,780)	149,411

(1)Right of use asset pertains to corporate office lease.

At June 30, 2021, estimated future development costs of $252.3 million (December 31, 2020 – $252.3 million) associated with the development of the Company’s proved plus probable undeveloped reserves were included with the costs subject to depletion. During the three months and six months ended June 30, 2021, the Company capitalized $0.04 million and $0.3 million, respectively, of general and administrative expenses (“G&A”) (three and six months ended June 30, 2020 – $0.1 million and $0.4 million) and non-cash share-based compensation of $0.01 million and $0.02 million, respectively (three and six months ended June 30, 2020 – $0.02 million and $0.05 million), directly attributable to development activities.

During the three months June 30, 2021, the Company recorded a gain of $0.4 million on the disposition of certain E&E and PP&E assets in the Foothills CGU for cash consideration of $0.1 million and the assumption of $2.4 million of decommissioning liabilities.

During the three months June 30, 2021, the Company had transferred $4.8 million from E&E assets to PP&E assets, related to the Kakwa CGU that was brought on production during the quarter. The Company did not identify any indicators of impairment in any of the Company's CGUs as at June 30, 2021.

During the year ended December 31, 2020, due to the significant decrease in forward benchmark commodity prices in the first quarter, the Company identified indicators of impairment and conducted an impairment test on all of the Company's CGUs. No impairment was recorded for the Foothills and Central Alberta CGUs during the year ended December 31, 2020. For the Ferrier CGU, the Company recorded an impairment loss of $75 million on its PP&E asset on March 31, 2020, as the carrying amount exceeded the recoverable amount. The Company had also tested the Ferrier CGU for impairment on December 31, 2020 and did not record any further impairment.

No impairment was recorded for the Foothills and Central Alberta CGUs for the three months and six months ended June 30, 2021.

At June 30, 2021, the carrying balance of the right of use asset was $0.9 million.

5. DEBT

Petrus has two debt instruments outstanding. The first is a reserve-based, senior secured revolving credit facility with a syndicate of lenders, which is comprised of an operating facility and a syndicated term-out facility (together, the “Revolving Credit Facility” or “RCF”). The second is a subordinated secured term loan (the “Term Loan”).

(a) Revolving Credit Facility

At June 30, 2021 the RCF was comprised of a $20.0 million operating facility and a $57.5 million syndicated term-out facility with a maturity date of July 14, 2021. The Company has provided collateral by way of a debenture over all of the present and after acquired property of the Company.

At June 30, 2021, the Company had a $0.6 million letter of credit outstanding against the RCF (December 31, 2020 – $0.6 million) and had drawn $74.4 million against the RCF (December 31, 2020 – $77.5 million).

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The amount of the RCF is subject to a borrowing base review performed on a semi-annual basis by the lenders, based primarily on reserves and commodity prices estimated by the lenders as well as other factors. In addition, asset dispositions require unanimous lender consent. A decrease in the borrowing base could result in a reduction to the available credit under the RCF. The next scheduled borrowing base redetermination date for the RCF is on or before November 30, 2021. In the event that the lenders reduce the borrowing base below the amount drawn at the time of redetermination, the Company has 60 days to eliminate any shortfall by repaying amounts in excess of the new re-determined borrowing base.

Subsequent to June 30, 2021, the lenders have extended the maturity date of the RCF from July 14 to August 13, 2021. The Company is actively engaged with the RCF lenders to further extend the maturity date of RCF.

(b) Term Loan

At June 30, 2021 the Company had a $38.7 million Term Loan outstanding (December 31, 2020 – $36.5 million), which is due September 14, 2021. The Company has provided collateral by way of a debenture over all of the present and after acquired property of the Company. The Term Loan bears interest that accrues at a per annum rate of the (three-month) Canadian Dealer Offered Rate plus 975 basis points. All of the interest will be made by way of payment-in-kind ("PIK") and added to the outstanding balance of the Term Loan in lieu of monthly payment of cash interest.

Subsequent to June 30, 2021, the Company extended the maturity of the Term Loan to October 14, 2021. The Company is actively engaged with the Term Loan lenders to further extend the maturity date of Term Loan.

Liquidity

At June 30, 2021, the Company had a working capital deficiency (excluding non-cash risk management assets and liabilities) of $110.3 million due to the classification of the Company's borrowings under its RCF and Term Loan as current liabilities. See note 2. However, the Company remains in compliance with all financial covenants pertaining to its debt, and based on current available information relating to future production volumes, forward commodity pricing, future costs including capital, operating and general and administrative, forward exchange rates, interest rates and taxes, all of which are subject to measurement uncertainty, management expects to comply with all financial covenants during the subsequent 12 month period.

Financial Covenants

The Company's RCF and Term Loan are subject to certain financial covenants. For the financial covenants' definitions and calculation methodology refer to the Company's Audited Consolidated Financial Statements as at and for the year ended December 31, 2020.

The key financial covenants as at June 30, 2021 are summarized in the following table. At June 30, 2021 the Company is in compliance with all financial covenants.

Financial Covenant Description	Required Ratio	As at June 30, 2021
Working Capital Ratio	Over 0.60	1.47

6. LEASES

The Company's lease obligations are as follows:

The Company's lease obligations are as follows:
$000s
Balance, December 31, 2020	1,012
Finance expense	37
Leasepayments	(131)
Balance, June 30, 2021	918

The Company's future commitments associated with its lease obligations are as follows:

The Company's future commitments associated with its lease obligations are as follows:
$000s
	As at June 30, 2021
Less than 1 year	264
1 to 3years	784
Total lease payments	1,048
Amounts representingfinance expense	(130)
Present value of lease obligation	918
Current portion of lease obligation	202
Non-currentportion of lease obligation	716

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7. DECOMMISSIONING OBLIGATION

The decommissioning liability was estimated based on the Company’s net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The estimated future cash flows have been discounted using an average risk free rate of 1.77 percent and an inflation rate of 1.90 percent (1.1 percent and 1.4 percent, respectively at December 31, 2020). Changes in estimates in 2020 and 2021 are due to the changes in the risk free rate and changes in the estimated future cash flow to reclaim the wells and facilities. The Company has estimated the net present value of the decommissioning obligations to be $40.1 million as at June 30, 2021 ($44.5 million at December 31, 2020). The undiscounted, uninflated total future liability at June 30, 2021 is $38.9 million ($41.4 million at December 31, 2020). The payments are expected to be incurred over the operating lives of the assets.

The following table reconciles the decommissioning liability:

$000s
Balance, December 31, 2019	41,259
Property dispositions	(98)
Other adjustments	(135)
Liabilities incurred	320
Liabilities settled	(904)
Change in estimates	3,520
Accretion expense	494
Balance, December 31, 2020	44,456
Property dispositions	(2,361)
Liabilities incurred	161
Liabilities settled	(222)
Change in estimates	(2,230)
Accretion expense	318
Balance, June 30, 2021	40,122

8. FINANCIAL RISK MANAGEMENT

The Company utilizes commodity contracts as a risk management technique to mitigate exposure to commodity price volatility. The following table summarizes the financial derivative contracts Petrus had outstanding as at June 30, 2021:

Contract Period	Type	Total Daily Volume (GJ)	Average Price (CDN$/GJ)
Natural Gas Swaps
Jul. 1, 2021 to Oct. 31, 2021	Fixed price	14,000	$2.08
Nov. 1, 2021 to Dec. 31, 2021	Fixed price	4,000	$2.75
Nov. 1, 2021 to Mar. 31, 2022	Fixed price	8,000	$2.61
Jan. 1, 2022 to Mar. 31, 2022	Fixed price	2,000	$2.61
Contract Period	Type	Total Daily Volume (Bbl)	Average Price (CDN$/Bbl)
Crude Oil Swaps
Jul. 1, 2021 to Dec. 31, 2021	Fixed price	900	$66.15
Jan. 1, 2022 to Mar. 31, 2022	Fixed price	600	$62.73
Contract Period	Type	Average Rate (%)	Notional Amount (000s CDN$)
Interest Rate Swaps
Jul. 1, 2021 to Dec. 31, 2022	Fixed rate	2.34	$20,000

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Risk management asset and liability:

Risk management asset and liability:
$000s At June 30, 2021	Asset	Liability
Current commodityderivatives	—	8,936
	—	8,936
$000s At December 31, 2020
Current commodity derivatives	934	986
Non-current commodityderivatives	15	41
	949	1,027

Earnings impact of realized and unrealized gains (losses) on financial derivatives:

$000s	Three months ended	Three months ended	Six months ended	Six months ended
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Realized gain on financial derivatives	(1,843)	3,656	(3,058)	4,830
Unrealized gain (loss) on financial derivatives	(5,493)	(6,332)	(8,858)	5,353
Net gain (loss) on financial derivatives	(7,336)	(2,676)	(11,916)	10,183

9. SHARE CAPITAL

Authorized

The authorized share capital consists of an unlimited number of common voting shares without par value and an unlimited number of preferred shares.

Issued and Outstanding

Common shares ($000s)	Number of Shares	Amount
Balance, December 31, 2020	49,469,358	430,119
Common shares issued on exercise of stock options	89,264	38
Balance, June 30, 2021	49,558,622	430,157

SHARE-BASED COMPENSATION

Stock Options

The Company has a stock option plan in place whereby it may issue stock options to employees, consultants and directors of the Company. The aggregate number of shares that may be acquired upon exercise of all options granted pursuant to the plans shall, at any date or time of determination, be equal to ten percent (10%) of the number that is equal to (i) the number of the Company’s basic common shares then issued and outstanding; minus (ii) a number equal to five (5) times the number of common shares that are issuable upon exercise of the then outstanding Performance Warrants, if any, minus (iii) a number equal to fifty percent (50%) of the number of common shares that have previously been issued upon the exercise of Performance Warrants, if any.

At June 30, 2021, 2,098,325 (December 31, 2020 – 2,276,923) stock options were outstanding. The summary of stock option activity is presented below:

	Number of stock	Weighted average
	options	exerciseprice
Balance, December 31, 2019	2,361,958	$2.87
Granted	1,122,276	$0.23
Cancelled/forfeited	(353,320)	$1.06
Expired	(853,991)	$2.16
Balance, December 31, 2020	2,276,923	$0.40
Granted	750,000	$0.53
Forfeited	(550,735)	$0.37
Expired	(88,480)	$2.33
Exercised for cash	(200,119)	$0.26
Exercised for shares	(89,264)	$0.31
Balance, June 30, 2021	**2,098,325 **	$0.40
Exercisable, June 30, 2021	116,655	$0.83

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The following table summarizes information about the stock options granted since inception:

Range of Exercise Price	Stock	Options Outstanding	Options Outstanding
			Weighted average
		Weighted average	remaining life (years)
	Number granted	exercise price
$0.26 - $0.86	1,157,919	$0.41	2.17
$1.49 -$2.33	279,080	$1.83	1.37
	**1,436,999 **	$0.33	2.63

During the six months ended June 30, 2021, the Company granted options which vest equally over three years, and upon vesting, expire 30 business days thereafter. The weighted average fair value of each option granted during the six months ended June 30, 2021 of $0.11 was estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:

	2021	2020
Risk free interest rate	0.15% - 0.49%	0.20% - 0.29%
Expected life (years)	1.08 - 3.08	1.08 - 3.08
Estimated volatility of underlying common shares (%)	100 %	80% to 100%
Estimated forfeiture rate	30 %	20 %
Expected dividendyield (%)	— %	— %

Petrus estimated the volatility of the underlying common shares by analyzing the Company's volatility as well as the volatility of peer group public companies with similar corporate structure, oil and gas assets and size.

Deferred Share Unit ("DSU") Plan

The Company has a deferred share unit plan in place whereby it may issue deferred share units to directors of the Company. The aggregate number of shares that may be issued from treasury of Petrus pursuant to the plan shall not exceed: (i) five percent (5%) of the number of issued and outstanding common shares of the Company (on a non-diluted basis) at the date of issue; and (ii) ten percent (10%) of the number of issued and outstanding common shares of the Company (on a non-diluted basis) at the date of issue, less the aggregate number of common shares of the Company reserved for issuance under any other share compensation plan.

Each DSU entitles the participants to receive, at the Company's discretion, either shares of the Company or cash equal to the trading price of the equivalent number of shares of the Company. All DSUs granted vest and become payable upon retirement of the director.

The compensation expense was calculated using the fair value method based on the trading price of the Company's shares on the grant date. At June 30, 2021, 1,618,702 DSUs were issued and outstanding (December 2020 – 2,158,270). During the first quarter of 2021, the Company settled 539,568 DSUs for $0.2 million in cash.

	Three months ended	Three months ended	Six months ended	Six months ended
$000s
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Expensed	22	40	112	94
Capitalized to exploration and evaluation assets	4	8	8	17
Capitalized toproperty, plant and equipment	11	20	24	46
Total share-based compensation	37	68	144	157

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10. LOSS PER SHARE

Lossper share amounts are calculated by dividing the net loss for the period attributable to the common shareholders of the Company by the weighted average number of common shares outstanding during the period.

	Three months ended	Three months ended	Six months ended	Six months ended
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Net loss for the period ($000s)	(4,265)	(6,281)	(7,420)	(93,725)
Weighted average number of common shares – basic (000s)	49,513	49,469	49,491	49,472
Weighted average number of common shares – diluted(000s)	49,513	49,469	49,491	49,472
Net loss per common share – basic	($0.09)	($0.13)	($0.15)	($1.89)
Net loss per common share – diluted	($0.09)	($0.13)	($0.15)	($1.89)

In computing diluted loss per share for the three months and six months ended June 30, 2021, 2,098,325 outstanding stock options and 1,618,702 DSUs were considered (December 31, 2020 – 2,276,923 and 2,158,270 respectively), which were excluded from the calculation as their impact was anti-dilutive.

11. OPERATING EXPENSES

The Company’s operating expenses consisted of the following expenditures:

	Three months ended	Three months ended	Six months ended	Six months ended
$000s
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Fixed and variable operating expenses	3,422	2,074	6,425	4,659
Processing, gathering and compression charges	720	671	1,207	1,352
Total gross operating expenses	4,142	2,745	7,632	6,011
Overhead recoveries	(239)	(202)	(475)	(433)
Total net operating expenses	3,903	2,543	7,157	5,578

12. GENERAL AND ADMINISTRATIVE EXPENSES

The Company’s general and administrative expenses consisted of the following expenditures:

	Three months ended	Three months ended	Six months ended	Six months ended
$000s
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Gross general and administrative expense	1,621	1,085	2,950	2,646
Capitalized general and administrative expense	(198)	(199)	(406)	(525)
Overhead recoveries	(42)	(69)	(287)	(406)
General and administrative expense	1,381	817	2,257	1,715

13. FINANCIAL INSTRUMENTS

Risks associated with financial instruments

Credit risk

The Company’s accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal credit risk. Concentration of credit risk is mitigated by marketing the majority of the Company’s production to reputable and financially sound purchasers under normal industry sale and payment terms. As is common in the petroleum and natural gas industry in western Canada, Petrus’ receivables relating to the sale of petroleum and natural gas are received on or about the 25th day of the following month. Of the $12.3 million of accounts receivable outstanding at June 30, 2021 (December 31, 2020 – $6.3 million), $8.8 million is owed from 4 parties (December 31, 2020 – $4.7 million from 3 parties), and the balances were received subsequent to June 30, 2021. The Company considers accounts receivable outstanding past 120 days to be 'past due'. At June 30, 2021, the Company had an allowance for doubtful accounts of $0.5 million (December 31, 2020 – $0.5 million). At June 30, 2021, 96% of Petrus’ accounts receivable were aged less than 120 days and 4% of Petrus' accounts receivable were aged greater than 120 days. The Company does not anticipate any material collection issues.

The Company’s risk management assets and cash are with chartered Canadian banks and the Company does not consider these assets to carry material credit risk.

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Liquidity risk

At June 30, 2021, the Company had a $77.5 million RCF, on which $74.4 million was drawn (December 31, 2020 – $77.5 million). While the Company is exposed to the risk of reductions to the borrowing base of the RCF, the Company anticipates it will continue to have adequate liquidity to fund its financial liabilities through funds flow and available credit capacity from its RCF. See additional discussion in note 5.

The following are the contractual maturities of financial liabilities as at June 30, 2021:

$000s	Total	< 1 year	1-5 years
Accounts payable and accrued liabilities	11,370	11,370	—
Risk management liability	8,936	8,936	—
Bank indebtedness and current portion of long term debt(1)	113,114	113,114	—
Lease obligations	918	202	716
Total	134,338	133,622	716

(1)Excludes deferred finance fees.

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 Company’s cash, bank indebtedness and accounts receivable are not exposed to significant interest rate risk. The RCF and Term Loan are exposed to interest rate cash flow risk as the instruments are priced on a floating interest rate subject to fluctuations in market interest rates. The remainder of Petrus’ financial assets and liabilities are not exposed to interest rate risk. To manage exposure to interest rate volatility, the Company entered into interest rate swap contracts (note 8). A 1% increase in the Canadian prime interest rate during the three months and six months ended June 30, 2021 would have increased net loss by approximately $0.9 million per year, which relates to interest expense on the average outstanding RCF and Term Loan, net of any interest rate swaps to fix the interest rate on loans, during the period assuming that all other variables remain constant (June 30, 2020 – $1.0 million). A 1% decrease in the Canadian prime interest rate during the year would result in an opposite impact on net loss.

Commodity Price Risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. A significant change in commodity prices can materially impact the Company’s borrowing base limit under its Revolving Credit Facility and may reduce the Company’s ability to raise capital. Commodity prices for petroleum and natural gas are not only influenced by Canadian and United States demand, but also by world events that dictate the levels of supply and demand.

The Company manages the risks associated with changes in commodity prices by entering into a variety of financial derivative contracts (see note 8). The Company assesses the effects of movement in commodity prices on net loss. When assessing the potential impact of these commodity price changes, the Company believes a $5/CDN WTI/bbl change in the price of oil and a $0.25/GJ change in the price of natural gas are reasonable measures.

As at June 30, 2021, it was estimated that a $0.25/GJ decrease in the price of natural gas would have decreased net loss by $1.3 million (June 30, 2020 – $1.6 million). An opposite change in commodity prices would result in an opposite impact on net loss. As at June 30, 2021, it was estimated that a $5.00/ CDN WTI/bbl decrease in the price of oil would have decreased net loss by $1.5 million (June 30, 2020 – $1.1 million). An opposite change in commodity prices would result in an opposite impact on net loss.

14. CAPITAL MANAGEMENT

The Company’s general capital management policy is to maintain a sufficient capital base in order to manage its business to enable the Company to increase the value of its assets and therefore its underlying share value. In the management of capital, the Company includes share capital and total net debt, which is made up of debt and working capital (current assets less current liabilities). The Company manages its capital structure and makes adjustments in light of economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, Petrus may issue new equity, increase or decrease debt, adjust capital expenditures and acquire or dispose of assets.

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15. FINANCE EXPENSES

The components of finance expenses are as follows:

	Three months ended	Three months ended	Six months ended	Six months ended
$000s
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Cash:
Total cash finance expenses	1,444	1,831	2,474	3,919
Non-cash:
Deferred financing costs	116	123	260	244
Non-cash term loan interest payment-in-kind	965	—	1,901	—
Accretion on decommissioningobligations_(note 7)_	196	110	318	292
Total non-cash finance expenses	1,277	233	2,479	536
Total finance expenses	2,721	2,064	4,953	4,455

16. SUPPLEMENTAL CASH FLOW INFORMATION

The following table reconciles the changes in non-cash working capital as disclosed in the statements of cash flows:

	Three months ended	Three months ended	Six months ended	Six months ended
$000s
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Source (use) in non-cash working capital:
Deposits and prepaid expenses	(181)	73	(340)	(25)
Transaction costs on debt	14	(41)	(148)	(78)
Accounts receivable	(4,719)	2,017	(6,059)	7,104
Accountspayable and accrued liabilities	(285)	(5,533)	3,662	(4,762)
	(5,171)	(3,484)	(2,885)	2,239
Operating activities	(5,040)	(3,158)	(4,822)	3,406
Financing activities	—	217	—	157
Investingactivities	(131)	(542)	1,937	(1,324)

The following table reconciles the changes in liability resulting from financing activities:

$000s	Bank Indebtedness	Revolving Credit Facility	Term Loan	Total Liabilities from Financing Activities
Balance, December 31, 2020	32	77,484	36,565	114,081
Cash flows	(32)	(3,100)	—	(3,132)
Payment-in-kind	—	—	1,901	1,901
Non-cash changes	—	264	—	264
Balance, June 30, 2021	—	74,648	38,466	113,114

17. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The commitments for which the Company is responsible are as follows:

$000s	Total	< 1 year	1-5 years	> 5 years
Firm service transportation	12,482	2,045	9,309	1,128

CONTINGENCIES

In the normal course of Petrus’ operations, the Company may become involved in, named as a party to, or be the subject of, various legal proceedings. The outcome of outstanding, pending or future proceedings cannot be predicted with certainty. Petrus does not anticipate that these claims will have a material impact on its financial position.

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18. REVENUE

The following table presents Petrus' oil and natural gas revenue disaggregated by product type:

	Three months ended	Three months ended	Six months ended	Six months ended
$000s
	Jun. 30, 2021	Jun. 30, 2020	Jun. 30, 2021	Jun. 30, 2020
Production Revenue
Oil and condensate sales	8,397	2,143	13,929	7,304
Natural gas sales	7,261	5,903	14,150	12,593
Naturalgas liquids sales	3,784	959	7,620	3,255
Total oil and natural gas production revenue	19,442	9,005	35,699	23,152
Royaltyrevenue	111	36	193	233
Total oil and naturalgas revenue	19,553	9,041	35,892	23,385

During the second quarter of 2021, the Company recorded $1 million as other income. This amount relates to the settlement of an outstanding dispute associated with the transportation and marketing of its Ferrier area condensate volume.

19. SUBSEQUENT EVENTS

Revolving Credit Facility

Subsequent to June 30, 2021, the lenders have extended the maturity date of the RCF from July 14 to August 13, 2021.

Term Loan

Subsequent to June 30, 2021, the Company extended the maturity of the Term Loan from September 14 to October 14, 2021.

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CORPORATE INFORMATION

OFFICER & VICE PRESIDENT

Ken Gray, P.Eng President and Chief Executive Officer

Mathew Wong, CPA, CFA, CPA (WA, USA) Vice President, Finance

DIRECTORS

Don T. Gray Chairman Scottsdale, Arizona

Ken Gray Calgary, Alberta

SOLICITOR

Burnet, Duckworth & Palmer LLP Calgary, Alberta

AUDITOR

Ernst & Young LLP Chartered Professional Accountants Calgary, Alberta

Patrick Arnell Calgary, Alberta

Donald Cormack Calgary, Alberta

Peter Verburg Calgary, Alberta

INDEPENDENT RESERVE EVALUATORS

Sproule and Associates Calgary, Alberta

BANKERS

TD Securities (Syndicate Lead Agent) Calgary, Alberta

Blue Oak Partners (Canada) Inc. Singapore

TRANSFER AGENT

Odyssey Trust Company Calgary, Alberta

HEAD OFFICE

2400, 240 – 4th Avenue S.W. Calgary, Alberta T2P 4H4 Phone: 403-984-9014 Fax: 403-984-2717

WEBSITE

www.petrusresources.com

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