DONNYBROOK ENERGY INC. Management s Discussion and Analysis Year ended December 31, 2013

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2 This ( MD&A ) of the financial and operating results of Donnybrook Energy Inc. ( Donnybrook, DEI or the Company ), should be read in conjunction with the Company s audited financial statements and related notes for the year ended December 31, 2013 (the Financial Statements ) prepared in accordance with International Financial Reporting Standards or IFRS as issued by the International Accounting Standards Board ( IASB ). The information contained within this MD&A is current to April 10, Q Three months ended March 31, 2013 Q Three months ended June 30, 2013 Q Three months ended September 30, 2013 Q Three months ended December 31, 2013 Q Three months ended March 31, 2012 Q Three months ended June 30, 2012 Q Three months ended September 30, 2012 Q Three months ended December 31, 2012 All dollar amounts are in Canadian Dollars. IDENTIFICATION Donnybrook is a public exploration and production company focused on petroleum and natural gas ( P&NG ) interests at Bigstone and Fir, Alberta. Common shares of the Company are listed and posted for trading on the TSX Venture Exchange ( TSXV ) under the symbol DEI. Donnybrook has offices in Calgary, Alberta, and Vancouver, British Columbia, Canada. The registered office of the Company is Suite 1900, 520 Third Avenue SW, Calgary, Alberta, T2P 0R3, Canada. NON-GAAP MEASURES In this document Funds flow from operations, Funds flow from operations per BOE, Net revenues, Net G&A expense, Net G&A expense per BOE, Total depletion, depreciation and amortization per BOE, Net operating expense per BOE, collectively the Non-GAAP measures, are used and do not have any standardized meanings as prescribed by IFRS. They are used to assist management in measuring the Company s ability to finance capital programs and meet financial obligations. Funds flow from operations refers to cash flows from operating activities before net changes in operating working capital. Non-GAAP measures should not be considered in isolation or construed as alternatives to their most directly comparable measure calculated in accordance with IFRS, or other measures of financial performance calculated in accordance with IFRS. The Non-GAAP measures are unlikely to be comparable to similar measures presented by other issuers. OTHER MEASUREMENTS AND DEFINITIONS bbl barrels bbls/d barrels per day mcf thousand cubic feet mcf/d thousand cubic feet per day mmcf/d million cubic feet per day Page 2 of 24

3 mmscf million standard cubic feet kpa kilopascals psi pounds per square inch NGL natural gas liquids BOE PRESENTATION Where amounts are expressed on a barrel of oil equivalent ( BOE ) basis, natural gas volumes have been converted to oil equivalence at six thousand cubic feet per barrel and sulphur volumes have been converted to oil equivalence at 0.6 long tons per barrel. The term BOE may be misleading, particularly if used in isolation. A BOE conversion ratio of six thousand cubic feet per barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio is based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of oil, utilizing a conversion on a 6:1 basis may be misleading as an indication of value. References to natural gas liquids ( NGLs ) include condensate, pentane, propane, butane and ethane. References to gas in this MD&A include natural gas and sulphur. OVERVIEW Donnybrook s assets are located in west-central Alberta in a predominantly natural gas bearing region with varying natural gas liquid ratios. The Company has rationalized its asset base and is now focused on two areas: Bigstone and Fir. The Company currently holds approximately 21 gross sections 5,376 hectares (7.6 net sections 1,946 net hectares) of P&NG rights at Bigstone and Fir. As of April 15, 2013, the Company disposed of its holdings at its Resthaven and Simonette properties pursuant to an asset exchange agreement with Cequence Energy Ltd. ( Cequence ) and acquired interests in the Fir property (See Asset Exchange Agreement below). On September 3, 2013, management of the Corporation became aware of a proposed class action lawsuit (the proposed lawsuit ) filed in the Alberta Court of Queen s Bench on August 22, 2013 against Donnybrook, Donnycreek Energy Inc. ( Donnycreek ), and certain of their respective directors and officers. The action contains various claims relating to a plan of arrangement pursuant to the Business Corporations Act (Alberta) (the Plan of Arrangement ) involving Donnybrook and Donnycreek completed in November 2011, the transfer of certain assets from Donnybrook to Donnycreek, a related private placement and other related transactions. The proposed lawsuit cannot proceed unless certified by the Court. The Company firmly believes that the allegations in the proposed class action are without merit and the Company will be vigorously defending the proposed lawsuit. At the Company s annual and special meeting of shareholders ( Shareholders ) held on September 6, 2013, Shareholders approved a special resolution to consolidate the issued and outstanding common shares of the Company ( Common Shares ) on the basis of one (1) post-consolidation Common Share for up to every forty-three (43) pre-consolidation Common Shares, or such lesser ratio, if any, that the board of directors of the Company (the Board ), in its sole discretion, may determine to be appropriate (the Consolidation ). Shareholders also approved a special resolution to change the name of the Company to Deca Exploration Inc. or such other name, if any, as the Board may determine to approve (the Name Change ). As the Company is currently in the process of defending the proposed lawsuit, the Board has deferred its previously announced pursuit of strategic alternatives to a future date as yet to be determined, and, at this time, the Company will not be proceeding with the Consolidation and Name Change. Page 3 of 24

4 Bigstone, Alberta Donnybrook has 3 (net 1.25) horizontal wells producing liquid rich natural gas from the Montney formation at Bigstone. The three horizontal Montney natural gas wells; 100/ W5M (25% BPO, 50% APO Working Interest), 100/ W5M (50% WI), 100/ W5M (25%WI) produce into the Company s operated gas gathering system and into a third party gas gathering and compression facility before reaching a Mid-Stream Company s gas processing plant at Kaybob, Alberta where the natural gas liquids are recovered from the raw gas stream. The successful drilling and production operations in the Montney by other operators in the Bigstone area has resulted in a shortage of gas processing capacity as well as limited take away capacity in sales pipelines in the area. Over the course of the past year, these constraints have resulted in the Donnybrook wells only being able to produce intermittently. Facility and pipeline expansion projects completed in 2013 and continuing projects in 2014, are expected to relieve these production constraints from the Company s wells. For the year ended December 31, 2013, the Company s P&NG sales volumes from the Bigstone wells averaged approximately 32 BOE per day (127 mcf/d of natural gas, 11 bbls/d of natural gas liquids). Donnybrook has 8 gross (net 3.5) sections of land with P&NG rights in the Montney formation and additional P&NG rights in lower prospective horizons. With current regulatory spacing guidelines, the lands could support up to 13 (net 5.75) additional horizontal Montney wells. Fir, Alberta Donnybrook closed the acquisition of the Fir property on April 15, Through the acquisition, the Company has an average non operated 30% working interest in 14 (net 4.24) natural gas wells. The wells produce raw natural gas into the Shell Cecilia gas plant where it is processed and the sales gas and natural gas liquids are marketed by Shell Canada. The Company s net sales from the Fir property for the year ended December 31, 2013 averaged approximately 225 BOE per day (1,277 mcf/d of natural gas, 12 bbls/d of natural gas liquids). Donnybrook has 13 gross (4.1 net) sections of land with P&NG rights at Fir. Minor Properties The Company also holds minor working interests in non-producing lands and wells in Alberta: 6 gross (2.7 net) sections with 1 gross (0.45 net) well at Pendant D Orielle; 2 gross (0.20 net) wells at Wizard Lake; and 2 gross (0.23 net) sections with 2 gross (0.23 net) wells at Penhold. There are no reserves assigned to these minor properties. Asset Exchange Agreement On February 22, 2013, Donnybrook entered into an asset exchange agreement and an arrangement agreement with Cequence to sell the Company s interest in its Simonette P&NG properties (the Simonette Assets ) and Resthaven properties (the Resthaven Assets ) and collectively, (the Simonette-Resthaven properties ) for consideration consisting of 10.3 million common shares of Cequence ( Cequence Shares ) and Cequence s interest in its Fir oil and gas property (the Cequence Assets ) by way of a plan of arrangement under the Business Corporations Act (Alberta) (the Arrangement ). On April 15, 2013, pursuant to the Arrangement, Donnybrook transferred the Simonette- Resthaven properties to Cequence in exchange for consideration consisting of the Cequence Shares and the Cequence Assets. Pursuant to the Arrangement, Donnybrook shareholders received of a Cequence Share for each common share of Donnybrook outstanding at the effective time of the Arrangement by way of a return of capital, being in the aggregate equal to approximately 5.13 percent of the outstanding Cequence Shares. Page 4 of 24

5 The Simonette Assets transferred to Cequence pursuant to the Arrangement consisted of interests in approximately 33 gross (16.5 net) sections; 8,448 gross (4,224 net) hectares of P&NG rights in this area located in west-central Alberta. The Resthaven Assets transferred to Cequence pursuant to the Arrangement consisted of interests in approximately 5 gross (2.66 net) sections; 1,280 gross (680 net) hectares of P&NG rights in this area which are located 8 kilometers (5 miles) west of the western edge of the Simonette acreage block. There are no reserves attributable to the Resthaven Assets. See note 6 of the financial statements for further details. SELECTED ANNUAL INFORMATION The following selected annual financial data has been prepared in accordance with IFRS and should be read in conjunction with the Company s financial statements. Financial Results Year ended December 31, Petroleum and natural gas revenue $ 2,133,112 $ 2,286,942 $ 1,578,298 Net loss $ 362,307 $ 7,458,384 $ 416,441 Basic and diluted loss per share $ 0.01 $ 0.04 $ 0.01 Financial Position Working capital $ 2,922,201 $ 3,330,918 $ 8,693,711 Total assets $ 10,975,955 $ 29,292,996 $ 48,537,976 Total non-current financial liabilities $ 486,635 $ 367,673 $ 362,796 Share capital $ 14,785,046 $ 32,006,845 $ 31,968,805 Share-based payments reserve $ 1,232,733 $ 2,815,466 $ 2,129,738 Deficit $ 6,543,169 $ 7,786,623 $ 328,239 SELECTED QUARTERLY INFORMATION Basic & Diluted Fiscal December Quarter 31, Ended 2013 $ Net Revenue (1) - $ Interest Income - $ Income (Loss)- Earning/(Loss) $ Per Share - December 31, 2013 $ 472,695 $ 5,403 $ (176,644) $ (0.01) September 30, 2013 $ 509,363 $ 5,012 $ 30,694 $ 0.01 June 30, 2013 $ 628,877 $ 4,833 $ (122,426) $ (0.01) March 31, 2013 $ 444,960 $ 5,632 $ (93,931) $ (0.01) December 31, 2012 $ 542,857 $ 7,267 $ (9,092,356) $ (0.05) September 30, 2012 $ 742,077 $ 9,316 $ (44,685) $ (0.01) June 30, 2012 $ 537,699 $ 29,460 $ (293,794) $ (0.01) March 31, 2012 $ 374,010 $ 40,951 $ 1,972,451 $ 0.01 (1) Net revenues are presented as total petroleum and natural gas revenues less Crown royalty expenses. Page 5 of 24

6 The fluctuations in Donnybrook s net revenue from quarter to quarter are caused by variations in production volumes, P&NG prices and the related impact on royalties. Facility constraints at Bigstone have caused, and continue to cause, inconsistent production volumes. In Q4 2013, a decrease in production levels at Bigstone resulted in lower net revenue than Q In Q3 2013, production on a BOE basis increased however lower natural gas prices resulted in lower net revenue than Q In Q2 2013, net revenues and production on a BOE basis increased from Q due to natural gas production from the Fir property acquired in April In Q1 2013, net revenues decreased from Q primarily as a result of lower production levels at Bigstone and Simonette. In Q4 2012, production levels at Simonette and Bigstone were lower than in Q3 2012, resulting in lower net revenues. Net revenues increased from Q through Q due to the commencement of production of 2 wells at Simonette (January 2012 and February 2012), and 2 wells at Bigstone (June 2012 and July 2012). Changes in interest income from quarter to quarter have fluctuated in proportion to the total cash on hand to invest in interest bearing instruments. Income/(loss) has varied from quarter to quarter due to variations in producing and operating expenses, net overriding royalty volumes, general and administration expenses, impairment of assets, disposal of assets, sharebased payments, depletion and depreciation, and estimates of deferred income taxes. In Q4 2013, net income decreased from Q mainly due to the timing of operating expenses received for the Fir property. A significant portion of the total producing and operating expenses for Fir were received subsequent to December 31, 2013 from the operator of the property and an adjustment was made to the Q4 balances. In Q3 2013, net income increased from Q largely due to a reduction in general and administrative expenses and accretion expenses. There were also no transaction costs incurred for the Arrangement with Cequence in Q In Q2 2013, net loss increased compared to Q primarily due to $686,074 of transaction costs incurred for the Arrangement with Cequence. Net loss decreased in Q compared to Q in large part due to a reduction in depletion and depreciation expenses in the quarter. In Q4 2012, producing P&NG properties were determined to be impaired in the amount of $7,174,525 which reduced the asset value of producing P&NG properties subject to depletion. Additionally, there was no impairment loss in Q Net loss increased in Q from Q primarily due to the impairment of P&NG and exploration and evaluation assets in the amount of $8,404,583. Net loss decreased from Q to Q mainly due to a decrease in producing and operating expenses, sharebased payments and depletion and depreciation expenses. Page 6 of 24

7 From Q to Q2 2012, the increase in net loss was largely due to the change in deferred income tax estimates. There was a deferred income tax recovery of $2,245,772 in Q compared to a deferred tax recovery of $84,278 in Q FINANCIAL AND OPERATIONAL RESULTS Production Summary The following information summarizes the Company s P&NG activities for the periods ended December 31: Total volumes (1) References to natural gas liquids include condensate Natural gas (mcf) 120,278 97,109 29, , , ,702 Natural gas liquid production (bbl) (1) 1,488 2,000 1,711 8,365 13,566 6,027 Crude oil (bbl) Total production (boe) 21,534 18,185 6,676 82,074 86,104 37,352 Daily production averages Natural gas (mcf/d) 1, , , , Natural gas liquid (bbl/d) (1) Crude Oil (bbl/d) Boe/d Average prices Three months ended December 31, Year ended December 31, Natural gas selling price ($/mcf) $ 3.85 $ 3.43 $ 3.75 $ 3.44 $ 2.35 $ 3.99 Natural gas liquid selling price ($/bbl) (1) $ $ $ $ $ $ Crude Oil selling price ($/bbl) $ - $ - $ - $ - $ - $ Q total production and daily average production on a BOE basis increased over Q and Q In Q4 2013, production included 3 wells at Bigstone and 13 wells at Fir. In Q4 2012, production included 2 wells at Simonette and 3 wells at Bigstone. In Q4 2011, production was mainly from the Company s first Simonette well. For the year ended December 31, 2013, production from the Fir property together with the reduced production levels at Bigstone and the disposition of the Simonette Assets resulted in higher natural gas production, lower natural gas liquids production and lower overall production on a BOE basis. Total BOE production increased for the year ended December 31, 2012 compared to the year ended December 31, 2011 as a result of the newly producing wells at Bigstone and Simonette. Page 7 of 24

8 Net Revenues and Gross Profit Three months ended December 31, Year ended December 31, Natural gas revenue $ 462,904 $ 333,243 $ 111,864 $ 1,521,721 $ 1,023,445 $ 744,626 Natural gas liquids revenue (1) 105, , , ,082 1,117, ,016 Crude oil revenue ,500 Net overriding royalty income (expense) (46,250) 33,600 49,271 (53,691) 145, ,156 Total petroleum and natural gas revenue 522, , ,252 2,133,112 2,286,942 1,578,298 Crown royalty expense (49,493) (7,280) (38,960) (77,217) (90,299) (132,506) Net revenue 472, , ,292 2,055,895 2,196,643 1,445,792 Producing and operating expenses (518,764) (269,040) (277,723) (1,116,015) (1,301,400) (557,663) Gross Profit $ (46,069) $ 273,817 $ 5,569 $ 939,880 $ 895,243 $ 888,129 (1) References to natural gas liquids include condensate. For the three months and year ended December 31, 2013 and 2012, natural gas revenue has increased since In 2013, production was from Bigstone, Fir (commencing April 15, 2013 upon acquisition), and Simonette (until disposed of on April 15, 2013). In 2012, production was from Simonette and Bigstone. In 2011, production was from Delia-Michichi (until disposed of on November 4, 2011) and Simonette. NGLs revenue decreased for the three months and year ended December 31, 2013 compared to 2012 due to the disposition of the Simonette property together with the reduced production levels at Bigstone and a decline in NGLs prices. NGLs revenue increased for the three months and year ended December 31, 2012 compared to 2011 due to the commencement of production at Bigstone and Simonette, despite a decline in NGLs prices. In 2011, the Company s crude oil production was from Delia-Michichi. The Delia-Michichi property was disposed of in November The Company s net overriding royalty expense averaged approximately 16 BOE per day for Q and approximately 19 BOE per day for the year ended December 31, The Company s net overriding royalty income averaged approximately 12 BOE per day for Q (Q BOE per day) and approximately 12 BOE per day for the year ended December 31, 2012 ( BOE per day). The change in net overriding royalty income/ (expense) is due to higher net overriding royalty volumes payable on the Fir property acquired in Q compared to net overriding royalty volumes received from Bigstone and the previously received net overriding royalty volumes from the Simonette property disposed of in Q Fluctuations in Crown royalty expenses are due to changes in production volumes, P&NG prices, and prior period Crown royalty credits claimed and awarded for eligible gas cost deduction allowances and operating cost deduction allowances. Producing and operating expenses Three months ended December 31, Year ended December 31, ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) Producing and operating expenses $ 518,764 $ $ 269,040 $ $ 277,723 $ $ 1,116,015 $ $ 1,301,400 $ $ 557,663 $ Total producing and operating expenses per BOE increased in Q compared to Q due to the timing of operating expenses received for the Fir property despite increased total BOE production. A significant portion of the Page 8 of 24

9 total producing and operating expenses for Fir were received in Q from the operator of the property. Total producing and operating expenses per BOE decreased in Q compared to Q due to increased total BOE production. For the year ended December 31, 2013, total BOE production decreased compared to 2012, however total producing and operating expenses per BOE decreased due to lower total producing and operating expenses than incurred in the year ended Producing and operating expenses at Bigstone were higher for the year ended December 31, 2012, when the Company incurred start-up costs for the new Bigstone wells. Producing and operating expenses in Q and for the year ended December 31, 2011 were attributable in large to the Company s previously held Delia-Michichi wells. A significant portion of the total producing and operating expenses for Delia- Michichi were incurred in Q resulting in a higher operating expense per BOE on a quarterly basis than for the year ended December 31, General and Administration ( G&A ) Year ended December 31, ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) Gross G&A expenses $ 765,098 $ 9.32 $ 934,538 $ $ 1,223,298 $ Overhead recoveries $ (9,667) $ (0.12) $ (206,822) $ (2.40) $ (188,968) $ (5.06) Capitalized G&A $ (153,000) $ (1.86) $ (103,275) $ (1.20) $ (118,900) $ (3.18) Net G&A expenses $ 602,431 $ 7.34 $ 624,441 $ 7.25 $ 915,430 $ Donnybrook s gross G&A expenses and gross G&A expenses per BOE have decreased since Donnybrook s gross and net G&A expenses decreased for the year ended December 31, 2013 compared to the years ended December 31, 2012 and 2011 due to continued efforts to minimize costs. Net G&A expense per BOE increased for the year ended December 31, 2013 compared to the year ended December 31, 2012 due in part to a decrease in overhead recoveries in 2013 compared to Donnybrook s net G&A expenses and net G&A expenses per BOE decreased for the year ended December 31, 2012 compared to the year ended December 31, 2011 due mainly to lower G&A expenses, increased overhead recoveries and an increase in production with the commencement of production at Bigstone and Simonette. Differences in G&A expenses during 2013 compared to 2012 were as follows: Salaries and wages of $184,128 ( $338,227) were lower by $154,099 in 2013 compared to 2012 due to a decrease in the number of salaried employees. Audit and accounting expenses of $141,359 ( $122,391) were higher by $18,968 in 2013 compared to 2012 due to increases in accounting and financial consulting personnel and the one-time set-up costs for converting to new oil and gas accounting software. Filing and listing fees of $16,342 ( $36,532) were lower by $20,190 in 2013 compared to 2012 largely due to lower annual TSXV sustaining fees. Insurance expenses of $56,619 ( $100,961) were lower by $44,342 in 2013 compared to 2012 due to lower premiums as a result of decreased drilling activity. Investor relations expenses of $13,038 ( $48,447) were lower by $35,049 in 2013 compared to Page 9 of 24

10 Legal fees of $115,095 ( $86,985) were higher by $28,110 in 2013 compared to Costs associated with the class action lawsuit filed against the Company in August 2013 were $31,715 for the year ended December 31, Share-Based Payments There were no options granted during the years ended December 31, 2013 and The fair value of vested share options granted and amended to directors, officers, employees and consultants is broken down as follows: Year ended December 31, Directors, officers and employees $ 109,615 $ 585,500 $ 1,247,440 Consultants 1, , ,258 $ 111,229 $ 698,768 $ 1,445,698 The decrease in share-based payments since 2011 is due to a fewer number of share options vesting during the years ended December 31, 2013 and 2012 and a decrease in the associated fair value of share options since Depletion, depreciation and amortization Year ended December 31, ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) Depletion, depreciation and amortization $ 541,854 $ 6.60 $ 953,053 $ $ 363,804 $ 9.74 Depletion, depreciation and amortization decreased in 2013 from 2012 on a total and per BOE basis due to a decrease in the balance of P&NG assets subject to depletion and an increase in the reserve base used for depletion. Depletion, depreciation and amortization increased in 2012 from 2011 on a total and per BOE basis due to an increase in the balance of P&NG assets subject to depletion relative to the decrease in the reserve base used for depletion. Income Taxes Deferred income taxes arise from differences between the accounting and tax bases of the Company s assets and liabilities, which, substantially, relate to the premium recovered on flow-through shares within the meaning of the Income Tax Act (Canada) ( Flow-Through Shares ). For the year ended December 31, 2013, the Company recognized a deferred tax recovery of $nil compared to a recovery of $2,330,000 for the year ended December 31, IFRS requires that a deferred tax asset be recorded when the tax pools exceeds the book value of assets, to the extent the amount is probable to be realized. As at December 31, 2013 and 2012, the Company has only recorded deferred tax asset balances to the extent of recorded deferred tax liabilities and has not recognized other available loss pools due to the uncertainty of realizing potential tax deductions. The Company has approximately $25,000 of capital losses and $8,021,000 of Canadian resource tax pools and $10,432,000 in foreign resource expenses, which may be deducted against taxable income in future years. These losses and pools can be carried forward indefinitely. Page 10 of 24

11 At December 31, 2012, the Company met its commitment to incur the necessary qualifying Canadian exploration expenses in relation to its Flow-Through Share issuances. The Company does not have any outstanding Flow- Through Share commitments as at December 31, The Company incurred a current tax expense related to the disposal of its Simonette-Resthaven properties and was able to utilize certain tax loss pools to offset any taxes owing. Impairment of Assets The Company performs an impairment test at least annually in accordance with IFRS. The impairment test is performed at the asset or cash generating unit ( CGU ) level. IAS 36 Impairment of Assets ( IAS 36 ) is a one step process for testing and measuring impairment. Under IAS 36, the asset or CGU s carrying value is compared to the higher of: value-in-use and fair value less costs to sell. Value in use is defined as the present value of future cash flows expected to be derived from the continued use of the asset or CGU. For the year ended December 31, 2013, an impairment of $36,204 was determined and recorded for non-producing P&NG assets at Penhold and Wizard Lake. The carrying value of these properties was considered impaired as further exploration in the specific areas is neither budgeted nor planned. For the year ended December 31, 2013, no impairment in producing P&NG assets was identified. For the year ended December 31, 2012, an impairment of $1,230,058 was determined and recorded for nonproducing P&NG assets at Resthaven based on the estimated attributable value in the Asset Exchange Agreement as of December 31, 2012 and an impairment of $7,174,525 was determined and recorded for producing P&NG assets at Bigstone due to decreased natural gas and petroleum prices and a reduction of the estimated reserve volumes. Decommissioning Liabilities The Company has estimated the total discounted amount of future cash flows to settle the liabilities to be $520,699 as at December 31, 2013 ( $367,673; $362,796); of this amount $106,864 is attributable to abandonment and reclamation activities that are expected to be completed in the next 1 to 4 years, and the balance of the payments are expected to be made in the next 12 to 29 years ( to 30 years; to 30 years). The liabilities have increased as a result of the decommissioning liabilities associated with the Fir property acquired in April An average risk free rate of 2.69% ( %; %) and an inflation rate of approximately 1.10% ( %; %) were used to estimate the fair value of the decommissioning liabilities. Page 11 of 24

12 The following table provides a reconciliation of the carrying amount of the liabilities associated with the decommissioning of P&NG properties: Year ended December 31, Balance, beginning of year $ 367,673 $ 362,796 $ 231,890 Aquired on asset exchange 429, Transferred on asset exchange (177,584) - - Discharged on disposal of assets (19,740) - Incurred on development activities - 90, ,834 Disposal on spin-out of Donnycreek - - (47,403) Revision of estimates - (68,443) - Accretion expense (recovery) (79,441) (17,268) 50,475 Balance, end of year $ 520,699 $ 367,673 $ 362,796 Less : current portion 34, $ 486,635 $ 367,673 $ 362,796 LIQUIDITY AND CAPITAL RESOURCES The Company has working capital of $2,922,201 at December 31, 2013 compared to working capital of $3,330,918 at December 31, 2012, a decrease of $408,717. A significant component in the reduction in working capital was transaction costs related to the Arrangement with Cequence totaled $699,329 for financial advisory fees, legal and accounting costs, and filing fees incurred during Q1 and Q Donnybrook continues its efforts to minimize its general and administrative costs. Donnybrook remains debt free as of December 31, As a P&NG business, Donnybrook has a declining asset base and therefore, relies on ongoing development and acquisitions to replace production and add additional reserves. Future P&NG production and reserves are highly dependent on the success of exploiting the Company s existing asset base and in acquiring additional reserves. To the extent Donnybrook is successful or unsuccessful in these activities cash flow could be increased or reduced. Donnybrook remains focused on key business objectives of maintaining financial strength and optimizing capital investments attained through a disciplined approach to capital spending, a flexible investment program and financial stewardship. Natural gas prices are primarily driven by North American supply and demand, with weather being the key factor in the short term. Donnybrook believes that natural gas represents an abundant, secure, long-term supply of energy to meet North American needs. Donnybrook s results are affected by external market and risk factors, such as fluctuations in the prices of P&NG, access to third party infrastructure, access to markets, movements in foreign currency exchange rates and inflationary pressures on service costs. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its underlying assets. The Company considers its capital structure to include shareholders equity. To maintain or adjust the capital structure, the Company may, from time to time, issue shares or adjust its G&A expenses and/or capital spending. There were no changes in the Company s approach to capital management during the year ended December 31, Page 12 of 24

13 Financial Instruments On an ongoing basis, Donnybrook will typically utilize three sources of funding to finance its business activities: funds flow from operations, debt where deemed appropriate and new equity issuances, if available on favourable terms. In addition, Donnybrook may adjust its capital expenditure program depending on the commodity price outlook and competitive nature of the Canadian P&NG industry. Liquidity risk is the risk that Donnybrook will not be able to meet its financial obligations as they fall due. Donnybrook actively manages its liquidity through daily and longer-term cash and equity management strategies. Such strategies encompass, among other factors: estimating future cash generated from operations based on reasonable production and pricing assumptions, analysis of economic risk management opportunities, and maintaining sufficient cash flows. Donnybrook generally relies on access to capital markets to meet its additional financing needs, fund its capital programs and provide liquidity, however, there can be no assurance that future debt or equity financing, or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to Donnybrook. Credit risk is the risk of financial loss to Donnybrook if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Donnybrook s trade receivables from joint venture partners and P&NG marketers. A substantial portion of Donnybrook s accounts receivable are with customers and joint interest partners in the petroleum and natural gas industry and are subject to normal industry credit risks. Donnybrook sells substantially all of its production to purchasers under standard industry sale and payment terms. Purchasers of Donnybrook s natural gas, crude oil and natural gas liquids are subject to periodic internal credit review to minimize the risk of non-payment. Donnybrook has continued to closely monitor and reassess the creditworthiness of its counterparties. This has resulted in Donnybrook reducing or mitigating its exposures to certain counterparties where it is deemed warranted and permitted under contractual terms. Donnybrook may be exposed to third party credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its P&NG production and other parties. In the event such entities fail to meet their contractual obligations to Donnybrook, such failures may have a material adverse effect on the Company s business, financial condition, results of operations and prospects. In addition, poor credit conditions in the industry and of joint venture partners may impact a joint venture partner s willingness to participate in Donnybrook s ongoing capital program, potentially delaying the program and the results of such program until Donnybrook finds a suitable alternative partner. Capital Budget and Business Outlook Donnybrook has not formalized a capital budget for the 2014 fiscal year pending further evaluation of the Company s existing production and infrastructure limitations at Bigstone as well as offsetting drilling results at Bigstone by industry competitors. Donnybrook continually monitors its capital spending program and the financial performance of its properties in light of the recent volatility with respect to commodity prices with the aim of ensuring the Company will be able to meet future anticipated obligations incurred from normal ongoing operations and determine the economic viability of its properties. At the Company s annual and special meeting of Shareholders held on September 6, 2013, Shareholders approved a special resolution to consolidate the issued and outstanding Common Shares on the basis of one (1) post- Page 13 of 24

14 consolidation Common Share for up to every forty-three (43) pre-consolidation Common Shares, or such lesser ratio, if any, that the Board, in its sole discretion, may determine to be appropriate. Shareholders also approved a special resolution to change the name of the Company to Deca Exploration Inc. or such other name, if any, as the Board may determine to approve. The Company is currently in the process of defending the proposed lawsuit. Accordingly, as previously reported, the Board has deferred its previously announced pursuit of strategic alternatives to a future date as yet to be determined, and, at this time, the Company will not be proceeding with the Consolidation and Name Change. Funds Flow from Operations and Funds Flow per BOE Year ended December 31, ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) Petroleum and natural gas revenue $ 2,133,112 $ $ 2,286,942 $ $ 1,578,298 $ Crown royalties $ (77,217) $ (0.94) $ (90,299) $ (1.05) $ (132,506) $ (3.55) Producing and operating expenses $ (1,116,015) $ (13.60) $ (1,301,400) $ (15.11) $ (557,663) $ (14.93) Exploration and evaluation expenditures $ (44,641) $ (0.54) $ (107,044) $ (1.24) $ (52,215) $ (1.40) General and administration $ (602,431) $ (7.34) $ (624,441) $ (7.25) $ (915,430) $ (24.51) Interest income $ 20,880 $ 0.25 $ 86,994 $ 1.01 $ 138,762 $ 3.71 Funds flow from operations $ 313,688 $ 3.82 $ 250,752 $ 2.91 $ 59,246 $ 1.59 The increase in funds flow from operations for the year ended December 31, 2013 compared to year ended December 31, 2012 was the result of increased natural gas sales price and volumes produced, as well as reduced producing and operating expenses and general and administration expenses. The increase in funds flow from operations for the year ended December 31, 2012 compared to year ended December 31, 2011 was the result of the commencement of production at Bigstone and Simonette, a decrease in Crown royalties for the newly commenced production at Bigstone and Simonette, and a decrease in general and administration expenses. Funds Flow from Operations and Net Income per BOE Year ended December 31, ($) ($/BOE) ($) ($/BOE) ($) ($/BOE) Funds flow from operations $ 313,688 $ 3.82 $ 250,752 $ 2.91 $ 59,246 $ 1.59 Depreciation, depletion and amortization $ (541,854) $ (6.60) $ (953,053) $ (11.07) $ (363,804) $ (9.74) Share-based payments $ (111,229) $ (1.36) $ (698,768) $ (8.12) $ (1,445,698) $ (38.70) Accretion recovery (expense) $ 79,441 $ 0.97 $ 17,268 $ 0.20 $ (50,475) $ (1.35) Impairment loss on property and equipment $ - $ - $ (7,174,525) $ (83.32) $ (11,805) $ (0.32) Impairment loss on exploration and evaluation assets $ (36,204) $ (0.44) $ (1,230,058) $ (14.29) $ - $ - Gain on asset exchange $ 528,637 $ 6.44 $ - $ - $ - $ - Gain on disposal of assets $ 104,543 $ 1.27 $ - $ - $ - $ - Transaction costs on asset exchange $ (699,329) $ (8.52) $ - $ - $ - $ - Gain on spin-out of Donnycreek Energy Inc. $ - $ - $ - $ - $ 725,963 $ Deferred taxes recovery $ - $ - $ 2,330,000 $ $ 670,132 $ Net loss $ (362,307) $ (4.41) $ (7,458,384) $ (86.62) $ (416,441) $ (11.15) Page 14 of 24

15 Working Capital The Company has working capital of $2,922,201 at December 31, 2013 compared to working capital of $3,330,918 at December 31, The Company s primary sources of cash during the year ended December 31, 2013 were: 1) P&NG revenues of $2,133,112; and 2) interest income of $20,880. The P&NG industry has a pre-arranged monthly clearing day for payment of revenues from all buyers of P&NG. This occurs on the 25 th day following the month of sale. As a result, the Company s production revenues are collected in an orderly fashion. Donnybrook monitors its revenue counterparty credit positions to mitigate any potential credit losses. To the extent that the Company has joint venture partners in its activities, it must collect the partners share of capital expenditures and operating expense on a monthly basis. Exceptions are in the event that the partners share of a capital project is a significant amount. In this case, Donnybrook will collect such amounts from its partners in advance of expenditures taking place in accordance with standard industry operating procedures. At December 31, 2013, the Company did not have any material accounts receivable that were deemed uncollectible. Accounts payable and accrued liabilities consist of amounts payable to suppliers relating to head office, accrued salaries and field operating and investing activities. These invoices are processed within the Company s normal payment period. Donnybrook actively manages the pace of its capital spending program by monitoring forecasted production and commodity prices and resulting cash flows. Should circumstances affect cash flow in a detrimental way, the Company is capable of reducing capital investment levels. Capital Expenditures Donnybrook s total capital expenditures for the years ended December 31, are summarized as follows: Property and equipment Land and property acquisitions $ - $ - $ 22,179 Geological and geophysical 24,000 1,990 1,342 Drilling and completions 12, ,751 4,210,375 Facilities and equipment 38, , ,005 Other equipment - 12,309 14,455 Exploration and evaluation assets Year ended December 31, $ 75,159 $ 545,813 $ 4,750,356 Land and property acquisitions $ - $ - $ 2,373,939 Geological and geophysical 198, , ,958 Drilling and completions - 8,625,287 10,395,415 Facilities and equipment - 2,273, ,931 $ 198,656 $ 11,121,564 $ 13,557,243 Total capital expenditures $ 273,815 $ 11,667,377 $ 18,307,599 Page 15 of 24

16 Exploration and evaluation ( E&E ) costs are those expenditures incurred for which technical feasibility and commercial viability have not been determined. E&E costs are initially capitalized as either tangible or intangible E&E assets according to the nature of the assets acquired. These costs include acquisition of rights to explore, exploration drilling, carrying costs, and any other activities relating to evaluation of technical feasibility and commercial viability of extracting P&NG resources. The Company expenses items that are not directly attributable to the E&E asset. The assessment of technical feasibility and commercial viability is based upon estimates of the recoverability of capitalized costs by future exploitation or sale and where the activities have reached a stage which permits a reasonable assessment of the existence of proved reserves. This policy requires management to make certain estimates and assumptions as to future events and circumstances, in particular whether an economically viable extraction operation can be established. Any such estimates and assumptions may change as new information becomes available. When technical feasibility and commercial viability of a well is determinable based on management s assessment of current information, the E&E assets attributable to that well are first tested for impairment and then reclassified from E&E assets to property and equipment. OUTSTANDING SHARE DATA The Company is authorized to issue an unlimited number of common shares without par value and an unlimited number of preferred shares. As at December 31, 2013, and April 10, 2014 the Company had the following securities issued and outstanding: Number Exercise Price Expiry Date Common shares 195,436,066 n/a n/a Share options 3,990,000 $0.50 July 27, 2014 Fully Diluted 199,426,066 At the Company s annual and special meeting of Shareholders held on September 6, 2013, Shareholders approved a special resolution to consolidate the issued and outstanding Common Shares of the Company on the basis of one (1) post-consolidation Common Share for up to every forty-three (43) pre-consolidation Common Shares, or such lesser ratio, if any that the Board, in its sole discretion, may determine to be appropriate. The maximum consolidation ratio of 43 pre-consolidation Common Shares for each post-consolidation Common Share, would result in there being approximately 4,545,024 Common Shares issued and outstanding. On December 16, 2013, the Company reported that the Board has determined that, at this time, the Company will not be proceeding with the Consolidation of its Common Shares. Page 16 of 24

17 RELATED PARTY TRANSACTIONS The following is a summary of the related party transactions that occurred throughout the years ended December 31, 2013 and 2012: 1. Donnycreek Energy Inc. As part of a plan of arrangement pursuant to the Business Corporations Act (Alberta) with Donnycreek, a company with common directors, Donnycreek had a right to purchase certain P&NG rights from the Company for a purchase price equal to the costs incurred to the Company for those rights which Donnycreek exercised on February 1, 2012, for a purchase price of $2,307, Trading transactions i. Rent and various office expenses of $30,470 ( $47,800) was paid or accrued to Briggs Farms Inc., a private company controlled by Malcolm Todd and Robert Todd. This agreement was terminated effective February 28, ii. Rent and various office expenses of $14,562 ( $11,763) was paid or accrued to Clearview Resources Ltd., a private company of which, until February 27, 2014, Murray Scalf was a director and officer of and, commencing February 27, 2014, Randy Kwasnicia is a director of. 3. Compensation of key management and personnel The remuneration of directors and other members of key management personnel during the years ended December 31, 2013 and 2012 were as follows: Salaries general and administration $ 153,000 $ 183,275 Salaries capitalized 153, ,275 Share-based payment 108, ,004 $ 414,078 $ 859,554 i. Share-based payments represent the fair value of share options granted to key management personnel, which vested during the year. ii. Key management personnel were not paid post-employment benefits, termination benefits or other longterm benefits during the years ended December 31, 2013 and All related party amounts are without significant terms or conditions. CONTRACTUAL OBLIGATIONS From time to time and in the normal course of business, the Company enters into agreements to transport and market P&NG production. In addition, the Company has entered into agreements with third parties that provides employees with access to specialized computer software and information including production and reserves data, geological data, accounting systems, and land management systems. At present, the Company s only obligations with terms longer than 12 months are for rent. In Calgary, the Company has an obligation for rent which commenced June 1, 2012 and ends May 31, 2015 at a gross rate of $559 plus Page 17 of 24

18 applicable taxes per month. In Vancouver, the Company has an obligation for rent which commenced March 1, 2014 and ends February 28, 2017 at a gross rate of $1,245 plus applicable taxes per month. Contingent Liability - Proposed Class Action Lawsuit On September 3, 2013, management of the Corporation became aware of a proposed class action lawsuit (the proposed lawsuit ) filed in the Alberta Court of Queen s Bench on August 22, 2013 against Donnybrook, Donnycreek Energy Inc. ( Donnycreek ), and certain of their respective directors and officers. The action contains various claims relating to the Plan of Arrangement involving Donnybrook and Donnycreek completed in November 2011, the transfer of certain assets from Donnybrook to Donnycreek, a related private placement and other related transactions. The proposed class action cannot proceed unless certified by the Court. The Company firmly believes the allegations in the proposed class action lawsuit are without merit and the Company will be vigorously defending the claims. It is not possible at this time to assess the Company s potential liability, if any. OFF-BALANCE SHEET TRANSACTIONS Donnybrook was not involved in any off-balance sheet transactions during the years ended December 31, 2013 and The Company has certain fixed term lease agreements, including office space leases, which were entered into in the normal course of operations. All leases have been treated as operating leases whereby the lease payments are included in operating expenses or G&A expenses depending on the nature of the lease. The lease agreements do not provide for early termination. No asset or liability value has been assigned to these leases in the statement of financial position as of December 31, FINANCIAL REPORTING UPDATE Accounting Policy Changes The Company had no accounting policy changes during year ended December 31, New Standards and Interpretations Not Yet Adopted The Company will be required to adopt the following standards and amendments issued by the IASB as described below. Financial instruments The IASB intends to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety with IFRS 9 Financial Instruments in three main phases. IFRS 9 will be the new standard for the financial reporting of financial instruments that is principles-based and less complex than IAS 39. In November 2009 and October 2010, phase 1 of IFRS 9 was issued and amended, respectively, which addressed the classification and measurement of financial assets and financial liabilities. IFRS 9 requires that all financial assets be classified as subsequently measured at amortized cost or at fair value based on the Company s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified as subsequently measured at amortized cost, except for financial liabilities classified as at FVTPL, financial guarantees and certain other exceptions. In response to delays to the completion of the remaining phases of the project, the IASB issued amendments to IFRS 9 and has indefinitely postponed the adoption of this standard. The amendments also provided relief from the requirement to restate comparative financial statements for the effects of applying IFRS 9. Page 18 of 24

19 Impairment of Assets The IASB amended IAS 36 Impairment of Assets to reduce the circumstances in which the recoverable amount of assets or cash-generating units is required to be disclosed, clarify the disclosures required, and to introduce an explicit requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount (based on fair value less costs of disposal) is determined using a present value technique. The Company has not early-adopted the revised standards and is currently assessing the impact that the standards will have on the financial statements. CRITICAL ACCOUNTING ESTIMATES The reader is advised that the critical accounting estimates, policies, and practices as described herein continue to be critical in determining Donnybrook s financial results. The reader is cautioned that the preparation of financial statements in accordance with IFRS requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are reviewed and for any future years affected. The emergence of new information and changed circumstances may result in actual results or changes to estimates that differ materially from current estimates. For the year ended December 31, 2013, the significant judgments made by management in applying the Company s accounting policies and the key sources of estimation uncertainty and assumptions were the same as those that applied to the audited financial statements of the Company for the year ended December 31, BUSINESS RISKS Donnybrook s exploration and production activities are concentrated in the Western Canadian Sedimentary Basin where activity is highly competitive and includes a variety of different sized companies ranging from smaller junior producers, intermediate and senior producers, to the much larger integrated petroleum companies. The Company s principal activity of P&NG exploration and development is considered to be inherently risky. Donnybrook is subject to a number of risks which are also common to other organizations involved in the P&NG industry. Such risks include finding and developing P&NG reserves of economic costs, estimating amounts of recoverable reserves, production of P&NG in commercial quantities, marketability of P&NG produced, fluctuations in commodity prices, financial and liquidity risks and environmental and safety risks. Some of the most significant risks being: 1. Substantial expenditures are required to explore for P&NG reserves and there is no assurance that the Company will discover economic reserves; 2. The junior resource market, where the Company raises funds, is extremely volatile and there is no guarantee that the Company will be able to raise funds as it requires them; 3. Although the Company has taken steps to verify title to the P&NG properties it has an interest in or is earning into, there is no guarantee that the property will not be subject to title disputes or undetected defects; Page 19 of 24