COMPANIES CREDITORS ARRANGEMENT ACT ( CCAA ) PROCEEDING AND STATUS

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1 CONNACHER OIL AND GAS LIMITED MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2018 This Management s Discussion and Analysis ( MD&A ) for Connacher Oil and Gas Limited ( Connacher or the Company ) is dated May 29, 2018 and should be read in conjunction with Connacher s condensed interim financial statements for the three months ended March 31, 2018 and 2017 and the annual financial statements for the years ended December 31, 2017 and The condensed interim financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Unless otherwise indicated, all references to $ in this MD&A are to Canadian dollars. References to US$ or US dollar herein are to United States dollars. Please read the Advisory Section of this MD&A which provides information on forward looking information, non-gaap measurements, and other information. Additional information relating to Connacher, including Connacher s Form F1 Statement of Reserves Data and Other Oil and Gas Information for the year-ended December 31, 2017 ( Form F1 ), can be found on the System for Electronic Document Analysis and Retrieval ( SEDAR ) at OVERVIEW Connacher is an in situ oil sands developer, producer, and marketer of bitumen. The Company holds a 100% interest in approximately 465 million barrels of proved and probable bitumen reserves and operates two steam-assisted gravity drainage ( SAGD ) facilities located on the Company's Great Divide oil sands leases near Fort McMurray, Alberta. Connacher s two producing projects at Great Divide are known as Pod One and Algar. A total of 23 SAGD well pairs and 13 infill wells are located at Pod One and a total of 18 SAGD well pairs are located at Algar. COMPANIES CREDITORS ARRANGEMENT ACT ( CCAA ) PROCEEDING AND STATUS On March 31, 2016, the Company entered into a forbearance agreement (the Forbearance Agreement ) with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and certain lenders constituting the Required Lenders in respect of US$153.8 million of loans made by the lenders (the Lenders ) under the credit agreement dated as of May 23, 2014 (as amended, restated, supplemented, or otherwise modified from time to time, including as amended pursuant to Amendment No. 1 dated May 8, 2015) (the Amended Term Loan Facility ). Under the terms of the Forbearance Agreement, the Lenders agreed to, among other things, forbear from exercising enforcement rights and remedies arising from the Company s failure to pay the cash interest and principal payments due on March 31, 2016 until the earlier of April 30, 2016; the occurrence of an event of default under the Amended Term Loan Facility, unrelated to the failure to pay principal and interest due on March 31, 2016; or the occurrence of a default or breach of representation by the Company under the Forbearance Agreement. On April 30, 2016, the Company entered into a second forbearance agreement (the Second Forbearance Agreement ) which extended the forbearance period until May 16, On May 17, 2016, the Company sought and obtained creditor protection under the Companies Creditors Arrangement Act ( CCAA ) pursuant to an order (the Initial Order ) granted by the Court of Queen s Bench of Alberta, Judicial Centre of Calgary (the Court ). The Court granted CCAA stay protection for an initial period expiring on June 16, Since the Initial Order, seven Court-ordered stay extensions have been obtained, with the most recent extending the stay of proceedings until and including June 29, 2018 (the CCAA Stay Period ). Under the Initial Order, Ernst & Young Inc. was appointed by the Court as the monitor (the Monitor ). The CCAA is a federal insolvency statute that allows an insolvent company which owes creditors in excess of $5 million to restructure its business and financial affairs and stays creditors and others from enforcing rights against the insolvent company. The Initial Order also approved and authorized the Company and the Monitor to conduct a sale and investment solicitation process (the SISP ), as set out in Schedule A to the Initial Order, to identify one or more purchasers and/or investors in the Company s business and/or property. As authorized and approved by the Initial Order, the Company secured interim financing in the form of a senior secured debtor-in-possession credit facility (the DIP ) established pursuant to a credit arrangement dated as of May 15, 2016 with certain existing lenders (certain of which are or were also significant shareholders of the Company) (the Interim Lenders ) for up to US$20 million (collectively, the Total DIP Commitments ), with initial commitments of up to US$11.5 million (the Initial Commitments ). 1

2 On October 26, 2016, the Company entered into a Waiver, Approval, and Modification Agreement (the First DIP Amendment Agreement ) with its Interim Lenders related to the DIP. Pursuant to the First DIP Amendment Agreement, the Interim Lenders agreed to waive certain limited defaults under the DIP related to the CCAA SISP timelines and advanced to the Company an additional amount of approximately US$5.0 million of the Total DIP Commitments initially authorized by the Court to support the Company s continuing operations. On December 16, 2016, the Company entered into a further Approval and Modification Agreement (the Second DIP Amendment Agreement ) with the Interim Lenders related to the DIP. The Second DIP Amendment Agreement extended the maturity date under the DIP from May 17, 2017 to December 31, 2017 and amended certain provisions of the DIP in order to provide the Company with greater flexibility to enter into hedging agreements and other long-term contracts. On June 27, 2017, the Company entered into Approval and Modification Agreement #3 (the Third DIP Amendment Agreement ) with the Interim Lenders with respect to the DIP. The Third DIP Amendment Agreement extended the maturity date of the DIP from December 31, 2017 to January 31, On January 30, 2018, the Company received approval from the Court in its proceeding under the CCAA to grant a royalty to Burgess Energy Holdings, L.L.C ( Burgess ) on all of the lands (the Royalty Lands ) containing bitumen together with the oil sands rights and interests owned by the Company (the Royalty ) for cash consideration. Concurrent with the closing of the Royalty transaction, the Company used a portion of the consideration to repay, in full, the US$16.5 million owing under the DIP. Furthermore, the Company obtained an extension of the CCAA stay of proceeding to June 29, On March 28, 2018, the Court approved the Company s entry into a Support Agreement (the Support Agreement ) with certain first lien lenders holding in excess of 75% of the principal amount of debt outstanding under the Amended Term Loan Facility and commencement of a new SISP. The Support Agreement provides the foundation for the Company s exit from CCAA protection by securing majority first lien lender support for the commencement of a new SISP and the implementation of either a: (i) Superior Transaction identified during the new SISP (being a transaction that provides greater than $90 million of cash consideration, excluding existing cash on hand, plus payment of all priority claims and assumption of certain liabilities); or, (ii) pre-negotiated credit bid transaction pursuant to which a newly formed entity on behalf of the first lien lenders ( Newco ) will acquire the assets of the Company (the Credit Bid Transaction ) in the event a Superior Transaction is not identified during the new SISP. The Support Agreement also contains a number of financial and non-financial covenants and restrictions on the Company. The key features of the Credit Bid Transaction include: (i) formation of Newco to acquire all or substantially all of the Company s assets (ii) assumption by Newco of the Company s post-ccaa filing trade payables; (iii) offers of employment being made by Newco to all of the Company s employees; (iv) entry by Newco into a new senior secured facility (the Newco Senior Secured Facility ); and, (v) distribution of the shares of Newco and the obligation under the Newco Senior Secured Facility to the existing first lien lenders on the terms set out in the Support Agreement and related exhibits. The Credit Bid Transaction, if implemented, would not provide a recovery to stakeholders beyond the existing first lien lenders and creditors with claims that rank in priority to the first lien lenders. The Company continues to proceed with the new SISP and the pre-determined milestones as approved by the Court. Further information on the new SISP and the Credit Bid Transaction can be found on the CCAA Monitor s website at The Credit Bid Transaction or any Superior Transaction identified pursuant to the new SISP will be subject to approval of the Court. As at March 31, 2018, in connection with the CCAA proceeding, the Company identified the following obligations subject to potential compromise: (Canadian dollars in thousands) Current and long-term portions of Amended Term Loan Facility $210,438 Interest payable on Amended Term Loan Facility 59,737 Convertible Notes 45,000 Interest payable on Convertible Notes 20,762 Trade and accrued liabilities 18,653 Total liabilities subject to compromise $354,590 2

3 The aforementioned obligations, subject to potential compromise, represent the amounts expected to be resolved through the CCAA proceeding and remain subject to future, potentially material, adjustments. On August 24, 2016, the Court granted a claims procedure order establishing a process for the filing of claims against the Company and its directors and officers by September 26, 2016 (the Claims Bar Date ). The Company received 89 claims by the Claims Bar Date. The liabilities that are not subject to the CCAA proceeding are excluded from the liabilities subject to potential compromise and include certain non-restructuring liabilities incurred subsequent to May 17, FINANCIAL HIGHLIGHTS FINANCIAL (1) Q Q Revenue, net of royalties $33,855 $46,900 Adjusted EBITDA (2) (16,387) 1,901 Net earnings (loss) (57,166) (24,608) Basic per share (2.02) (0.87) Diluted per share (2.02) (0.87) Funds flow (used) (3) (28,775) (9,500) Capital expenditures 5,313 1,708 Cash on hand (4) 54,260 16,834 Working capital deficiency (291,829) (299,967) Long-term debt - - Shareholders equity (deficit) (94,028) 453,576 (1) ($ 000) except per share amounts (2) Adjusted EBITDA is a non-gaap measure and is defined in the Advisory Section of this MD&A and is reconciled to net earnings (loss) under Reconciliations of Net Loss to EBITDA, Adjusted EBITDA, and Bitumen Netback (3) Funds used is a non-gaap measure and is defined in the Advisory Section of this MD&A and is reconciled to cash flow from (used in) operating activities under Reconciliation of Cash Flow From (Used in) Operating Activities to Funds Used (4) Includes $7.1 million of restricted cash, pursuant to the terms of the Initial Order granted in the Company s CCAA proceeding before the Court Q revenue, net of royalties, decreased 28% to $33.9 million (Q $46.9 million), primarily due to unfavourable fixed price sales agreements and increased index exposure to the Western Canadian Select differential, partially offset by higher sales volumes. In Q1 2018, the fixed price sales agreements yielded an unfavourable impact to revenue, net of royalties, of $12.0 million Q adjusted EBITDA decreased to a deficit of $16.4 million (Q $1.9 million), primarily due to lower revenue, net of royalties Q funds used increased to $28.8 million (Q funds used of $9.5 million), primarily due to a lower adjusted EBITDA In Q1 2018, the Company generated a net loss of $57.2 million (Q net loss of $24.6 million). The increase is primarily due to a lower adjusted EBITDA and foreign exchange losses Q capital expenditures totaled $5.3 million (Q $1.7 million) and focused primarily on well servicing in order to restore and maintain production and capital related to drilling of future infill wells The Company closed Q with a cash balance of $54.3 million (including restricted cash of $7.1 million) (Q $43.3 million) 3

4 OPERATIONAL HIGHLIGHTS OPERATIONAL Q Q Average benchmark prices WTI (US$/bbl) $62.87 $51.91 WTI ($/bbl) Heavy oil differential (US$/bbl) (24.28) (14.58) WCS ($/bbl) $/US$ exchange rate Production and sales volumes (1) Daily bitumen production (bbl/d) 12,670 12,052 Daily bitumen sales (bbl/d) 12,649 12,054 Bitumen netback ($/bbl) (2)(3) Dilbit sales $25.67 $37.43 Diluent costs (9.96) (6.52) Realized bitumen sales price Transportation and handling costs (8.77) (6.73) Net realized bitumen sales price Royalties (0.17) (0.68) Net bitumen revenue price Production and operating expenses (16.89) (18.32) Bitumen netback $(10.12) $5.18 (1) The Company s bitumen sales and production volumes differ due to changes in inventory and product losses (2) A non-gaap measure which is defined in the Advisory Section of this MD&A. Bitumen netback is reconciled to net loss under Reconciliations of Net Earnings (Loss) to EBITDA, Adjusted EBITDA, and Bitumen Netback. Bitumen netbacks per barrel amounts are calculated by dividing the total amounts presented in the Bitumen Netback table on page 10 by bitumen sold volumes as presented in the Production and Sales Volumes table on page 8, with the exception of dilbit sales (presented as dilbit sales divided by dilbit sales volume) and diluent costs (presented as the cost of diluent in excess of the dilbit selling price) (3) Before risk management contract gains or losses Q production increased 5% to 12,670 bbl/d (Q ,052 bbl/d). The increase in production reflected the completion of the Company s well restart program in Q Q blending costs increased 15% to $16.2 million (Q $14.1 million), primarily due to higher total diluent volumes associated with increased bitumen production and higher diluent pricing Q transportation and handling costs increased 37% to $10.0 million (Q $7.3 million), primarily due to the increase in dilbit sales volumes and lower plant-gate sales in Q compared to the prior period LIQUIDITY AND CAPITAL RESOURCES At March 31, 2018, the Company had a working capital deficiency of $291.8 million (December 31, 2017 $247.0 million), including $54.4 million of cash on hand (restricted cash of $7.1 million) (December 31, $43.3 million). The working capital deficiency is attributable to the classification of the Company s long-term debt balances subject to the CCAA proceeding as current liabilities subject to potential compromise. On January 30, 2018, the Company received approval from the Court in its proceeding under the CCAA to grant the Royalty to Burgess on all of the Royalty Lands containing bitumen together with the oil sands rights and interests owned by the Company for cash consideration of $43.8 million. Concurrent with the closing of the Royalty transaction, the Company used a portion of the consideration to repay, in full, the DIP. The Court-approved Support Agreement, which was approved on March 28, 2018, provides the foundation for the Company s exit from CCAA protection via either a (i) Superior Transaction identified during the new SISP, or (ii) pre-negotiated Credit Bid Transaction pursuant to which Newco will acquire the assets of the Company in the event a Superior Transaction is not identified during the new SISP. The Company continues to proceed with the new SISP and the pre-determined milestones as approved by the Court. During the CCAA proceeding, pursuant to the Initial Order, the Company is not required to pay for obligations which arose prior to May 17, The Company will continue to pay for goods and services received after the filing date, which in certain circumstances, may require prepayment. 4

5 Q cash flow used in operating activities totaled $6.3 million (Q cash flow from operations of $1.2 million). The decrease in cash flow from operations was due to a lower adjusted EBITDA. Q cash flow from investing activities was $39.7 million (Q cash flow used in investing of $1.1 million) and related primarily to the proceeds received from the Royalty Transaction. Q cash flow used in financing activities totaled $22.2 million (Q cash flow used in financing activities of $1.1 million) and related primarily to the repayment and termination of the DIP. In Q1 2018, the Company paid interest of $1.8 million (Q $1.1 million). INTERIM FINANCING CREDIT FACILITY AND LIABILITIES SUBJECT TO COMPROMISE (Canadian dollars in thousands) March 31, 2018 December 31, 2017 Interim Financing Credit Facility $- $20,681 Current portion of Amended Term Loan Facility - principal payments 1,966 1,907 Amended Term Loan Facility, due May 23, 2018 (US$153.8 million face value) 208, ,512 Amended Term Loan Facility interest payable 59,737 50,831 Convertible Notes, 12%, due August 31, 2018 (US$35 million face value) 45,000 44,000 Convertible Notes interest payable 20,762 17,983 Trade and accrued payables 18,653 18,653 Liabilities subject to compromise $354,590 $333,886 On March 31, 2016, the Company entered into the Forbearance Agreement with the Lenders. Under the terms of the Forbearance Agreement, among other things, the Lenders agreed to forbear from exercising enforcement rights and remedies arising from the Company s failure to pay the cash interest and principal payments due on March 31, 2016 until the earlier of April 30, 2016; the occurrence of an event of default under the Amended Term Loan Facility unrelated to the failure to pay principal and interest due on March 31, 2016; or the occurrence of a default or breach of representation by the Company under the Forbearance Agreement. On April 30, 2016, the Company entered into the Second Forbearance Agreement which extended the forbearance period until May 16, On May 17, 2016, the Company sought and obtained creditor protection under the CCAA. Under the CCAA proceeding, borrowings related to the Amended Term Loan Facility and Convertible Notes, including accrued interest up to March 31, 2018, were classified as liabilities subject to potential compromise and classified as current liabilities. At March 31, 2018, the Company had the following cash collateral credit facilities (the Credit Facilities ) available: a facility for letters of credit with borrowings to a maximum of $5 million; a commodity hedge facility to a maximum of $3 million; and a corporate card facility with borrowings up to a maximum of $50 thousand. At March 31, 2018, $3.5 mil had been drawn on the Credit Facilities. AMENDED TERM LOAN FACILITY Due to the commencement of the CCAA proceeding, borrowings, including accrued interest, under the Amended Term Loan Facility, were stayed and classified as current liabilities subject to potential compromise. At March 31, 2018, interest payable on the Amended Term Loan Facility, which is stayed during the CCAA proceeding, totaled $59.7 million (Q $50.8 million). The Amended Term Loan Facility included the following terms: An aggregate principal amount of US$153.8 million, which is comprised of the Original Term Loan Facility principal amount of US$128.4 million and the increased total commitments of US$24.8 million and included interest on a floating basis at either an alternative base rate ( ABR and ABR Loans ) or LIBOR ( Eurodollar Loans ), as selected at the Company s option, plus an applicable margin as follows: May 8, December 31, 2016: ABR Loans - ABR rate plus 7.00% per annum cash interest and 2.00% payment-in-kind ( PIK ) interest Eurodollar Loans - LIBOR (floor of 1.00%) plus 8.00% per annum cash interest and 2.00% PIK interest 5

6 January 1, May 23, 2018: ABR Loans - ABR rate plus 8.00% per annum cash interest and 3.50% PIK interest Eurodollar Loans - LIBOR (floor of 1.00%) plus 9.00% per annum cash interest and 3.50% PIK interest Subsequent to the CCAA proceeding, interest on the Amended Term Loan Facility was ABR-based, plus a default margin of 2% and applicable margin and PIK interest. For loans advanced as ABR Loans, interest payments occur quarterly in arrears. For loans advanced as Eurodollar Loans, the Company has the option to select an interest period of 1, 2, 3, or 6-months. The Amended Term Loan Facility matures on May 23, In addition, the Amended Term Loan Facility requires quarterly principal payments of US$381 thousand and is secured on a first priority basis by liens on all of the Company s existing and future property. The Amended Term Loan Facility includes various non-financial covenants, including limitations on: additional indebtedness, liens, guarantees, mergers and acquisitions, asset sales, restricted payments, and transactions with affiliates and investments. The Company has the option to repay the loans, in whole or in part, subject to the applicable premium as follows: May 8, May 23, 2016: 0%; May 24, May 23, 2017: 2.00%; and May 24, May 23, 2018: 5.00%. The Amended Term Loan Facility will allow the Company to incur additional debt and grant additional security, on terms fully subordinated to the Amended Term Loan Facility ( Additional Subordinate Financing ), provided that such Additional Subordinate Financing shall not contain: Any scheduled amortization payments; Interest rates higher than those under the Convertible Notes; nor A maturity date on or prior to the maturity date under the Amended Term Loan Facility. CONVERTIBLE NOTES Due to the commencement of the CCAA proceeding, borrowings, including accrued interest, under the Convertible Notes, were stayed and classified as current liabilities subject to potential compromise. At March 31, 2018 interest payable on the Convertible Notes, which is stayed during the CCAA proceeding, totaled $20.8 million (Q $18.0 million). The Convertible Notes included the following terms: Interest is payable quarterly on March 31, June 30, September 30, and December 31 at an annual rate of 12% with cash payable quarterly in arrears. The Company has the right to defer the payment of interest on the Convertible Notes in any quarter, in which case, interest will accrue at an annual rate of 14% for such quarter and will be further compounded at an annual rate of 14% until paid and will be due no later than maturity. The Convertible Notes mature on August 31, 2018 and are convertible into common shares at the option of the holders at a rate of 1,886.8 common shares for each US$1,000 principal amount of Convertible Notes to be converted, subject to adjustment. The conversion option limits holders to not owning greater than 49% of the Company on a post-conversion basis. The Convertible Notes are secured on a second priority basis by liens on all of the Company s existing and future property. At any time, the Company may redeem all or part of the Convertible Notes with notice provided at least 30 days and not more than 60 days before the date set for redemption at which time the Company shall pay the redemption price set below, plus accrued interest applicable at the redemption date. May 8, May 7, 2016: 105.0% May 8, May 7, 2017: 102.5% May 8, August 31, 2018: 100.0% 6

7 SENIOR SECURED DEBTOR-IN-POSSESSION CREDIT FACILITY ( INTERIM FINANCING CREDIT FACILITY OR DIP ) The Company secured interim financing in the form of a senior secured debtor-in-possession credit facility from certain existing lenders for up to US$20 million, with initial commitments of US$11.5 million. On October 26, 2016, the Interim Lenders increased their commitment under the Interim Financing Credit Facility by approximately US$5 million. The usage of the DIP proceeds was subject to an agreed budget, which was approved by the existing lenders. The DIP bore interest, as selected by the Company, at an alternative base rate ( ABR and ABR Loans ) or LIBOR ( Eurodollar Loans ), plus an applicable margin as follows: ABR Loans - ABR plus 9.00% per annum cash interest Eurodollar Loans - LIBOR (floor of 1.00%) plus 10.00% per annum cash interest For loans advanced as ABR Loans, interest payments occur on March 31, June 30, September 30, and December 31. For loans advanced as Eurodollar Loans, the Company had the option to select an interest period of 1, 2, 3, or 6-months. The DIP was payable, in full, on the earlier of: Acceleration of the DIP as a result of the occurrence of any event of default which is continuing and has not been cured; The implementation of a plan of compromise or arrangement within the CCAA proceeding; The closing of a sale within the CCAA proceeding; Conversion of the CCAA proceeding into a proceeding under the Bankruptcy and Insolvency Act (Canada); and January 31, At December 31, 2017, the Company had drawn US$16.5 million of the Interim Credit Facility. On January 30, 2018, the Company repaid the DIP in full and terminated the facility. SHAREHOLDERS EQUITY AND SHARES OUTSTANDING On June 17, 2016, the Toronto Stock Exchange delisted the Company s common shares for failure to meet the continued listing requirements, which is typical for companies which are in a CCAA proceeding. There is no certainty regarding the likelihood of the Company s shares being eligible for relisting. At March 31, 2018, the Company s shareholders equity totaled a deficit of $94.0 million (December 31, 2017 deficit of $36.9 million). In light of the CCAA proceeding, the new SISP, and the Credit Bid Transaction, the Company is uncertain what value, if any, could be ascribed to the Company s outstanding equity securities in any asset sale, corporate sale, and/or implementation of a balance sheet restructuring that is undertaken pursuant to the CCAA proceeding. Accordingly, caution should be exercised with respect to any existing or future investment in any of the Company s outstanding equity securities. At March 31, 2018 and May 29, 2018, the Company had the following securities issued and outstanding: 28,328,658 common shares 1,337,768 stock options 7

8 CONTRACTUAL OBLIGATIONS AND COMMITMENTS At March 31, 2018, the Company is subject to the following commitments: As at (Canadian dollar in thousands) > 2024 Total Operating (1) $223 $8 $- $- $- $- $231 Service and Maintenance (2) 2,400 2,400 2,400 2,400 2,000-11,600 Long-term debt - interest payments (3)(4) 10, ,070 Long-term debt - principal (3)(4) 276, ,339 Total commitments $289,032 $2,408 $2,400 $2,400 $2,000 $- $298,240 (1) Operating commitments relate to information technology (2) Service and maintenance commitments pertain to the Company s facilities and equipment (3) Interest and principal repayments on US dollar-denominated Convertible Notes and Amended Term Loan Facility, which are subject to the Company s CCAA proceeding (4) Balances are translated at US$1 = $ OFF BALANCE SHEET ITEMS At March 31, 2018, management does not believe it has any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on Connacher s financial condition, results of operations, liquidity, or capital expenditures. OPERATING AND FINANCIAL REVIEW OPERATIONAL REVIEW PRODUCTION AND SALES VOLUMES (1) Three months ended March 31, Dilbit sales - bbl/d 14,739 14,141 Diluent used - bbl/d (2,090) (2,087) Bitumen sold - bbl/d 12,649 12,054 Bitumen production volumes - bbl/d (2) 12,670 12,052 (1) Bitumen produced at SAGD projects is mixed with purchased diluent and sold as dilbit. Diluent volumes used have been deducted in calculating bitumen production and sales volumes (2) The Company s bitumen sales and production volumes differ due to changes in inventory and product losses Q production increased 5% to 12,670 bbl/d (Q ,052 bbl/d). The increase in production reflected the completion of the Company s well restart program in Q

9 COMMODITY PRICES Three months ended March 31, Average benchmark prices West Texas Intermediate (WTI) US$/bbl $62.87 $51.91 West Texas Intermediate (WTI) $/bbl Heavy oil differential - $/bbl (1) (30.75) (19.24) Western Canadian Select (WCS) - $/bbl (2) Edmonton C5 - $/bbl (3) Natural gas (Alberta spot) $/GJ at AECO (1) Heavy oil differential refers to the WCS discount to WTI (2) Dilbit typically sells at a discount to WCS primarily due to differences in product quality (3) Edmonton C5 is the benchmark price for diluent Realized bitumen sales price is determined by deducting the diluent cost, including transportation and handling charges for purchased diluent, from dilbit sales. Other factors that influence calculated bitumen prices include: the value of the Canadian dollar relative to the US dollar; the diluent blend ratio ( DBR ); and variations in dilbit selling price. Connacher s dilbit is sold using month-to-month or longer fixed term sales contracts at prices negotiated with Canadian or United States customers, by reference to various benchmark prices, including, but not limited to WTI and WCS market prices. In order to manage risk associated with commodity price volatility, the Company may enter into risk management commodity sales contracts to provide downside commodity price risk protection on a portion of its production. The following table summarizes the net position of the Company s risk management contract: Term Notional Volume Weighted Average Price ($/bbl) Liability WCS swap - sell: (bbl/d) Min Price Max Price (Canadian dollar in thousands) March 31, 2018 December 31, 2017 Jul Sep ,750 C$48.75 C$48.75 $1,010 $- Current liabilities $1,010 $- The following table summarizes the risk management contract amounts recorded in the statements of operations and comprehensive loss: Three months ended March 31, ($000) Unrealized loss $1,010 $- Realized loss - - Loss on risk management contract $1,010 $- Subsequent to March 31, 2018, the Company purchased a WCS fixed price swap for Q at $65.25/bbl for 1,750 bbl/d. As a result, in Q3 2018, the Company will incur realized losses totaling $2.6 million. 9

10 BITUMEN NETBACK (1) Three months ended March 31, ($ 000) Dilbit sales (2) $34,048 $47,633 Diluent costs (3) (16,169) (14,100) Realized bitumen sales 17,879 33,533 Transportation and handling costs (9,979) (7,303) Net realized bitumen sales 7,900 26,230 Royalties (193) (733) Net bitumen revenues 7,707 25,497 Production and operating expenses (19,227) (19,875) Bitumen netback $(11,520) $5,622 (1) A non-gaap measure which is defined in the Advisory Section of this MD&A. Bitumen netback is reconciled to net loss under Reconciliations of Net Earnings (Loss) to EBITDA, Adjusted EBITDA, and Bitumen Netback. Risk management gains or losses are not included (2) Bitumen produced at SAGD projects is mixed with purchased diluent and sold as dilbit. Dilbit sales are presented before royalties. In the condensed interim financial statements, revenues are presented net of royalties (3) The cost of diluent has been deducted from dilbit sales in calculating realized bitumen sales above; whereas, the diluent costs have been included in Blending and costs of product sold in the condensed interim financial statements Q revenue, net of royalties, decreased 28% to $33.9 million (Q $46.9 million), primarily due to unfavourable fixed price sales agreements and increased index exposure to the Western Canadian Select differential, partially offset by higher sales volumes. In Q1 2018, the fixed price sales agreements yielded an unfavourable impact to revenue, net of royalties, of $12.0 million. In Q1 2018, the total cost of diluent decreased by 15% to $16.2 million (Q $14.1 million) due a 15% increase in the diluent unit price. The diluent unit price, including diluent transportation and handling, was $85.97 per bbl (Q $75.06 per bbl) of diluent. The DBR decreased to 14% (Q %). Q transportation and handling costs increased 37% to $10.0 million (Q $7.3 million), primarily due to the increase in dilbit sales volumes and lower plant-gate sales in Q compared to the prior period. The table below summarizes information related to oil sands production and operating expenses: Three months ended March 31, ($ 000) Natural gas costs $5,752 $6,274 Other production and operating expenses 13,475 13,601 Total production and operating expenses $19,227 $19,875 Natural gas is the primary energy input cost for the Company as it is used to generate steam for the SAGD process and to produce electricity for the Company's cogeneration facility at Algar. 10

11 CORPORATE REVIEW RESTRUCTURING EXPENSES Q restructuring expenses increased to $2.2 million (Q $713 thousand) as additional costs were incurred associated with the Royalty transaction, the Support Agreement, Credit Bid Transaction (and related agreements), and the new SISP. The restructuring expenses included the Monitor s fees, and professional fees associated with the CCAA proceeding. ASSETS HELD FOR SALE ( AHFS ) AND ROYALTY SALE As at, (Canadian dollar in thousands) December 31, 2017 $43,750 Disposal (43,750) March 31, 2018 $- During the fourth quarter of 2017, the Company executed a term sheet which resulted in selling the Royalty to Burgess. At December 31, 2017, the Company recorded $43.75 million as assets held for sale related to the Royalty sale. On January 30, 2018, the Company completed the Royalty disposition and received proceeds of $43.75 million. The Company did not record a gain or loss on the transaction. No liabilities were transferred as part of the Royalty transaction. All decommissioning obligations remained with the Company. Under the terms of the Royalty, the Company will pay Burgess a sliding-scale royalty ranging from 0% to 15%. The sliding scale royalty rate, with respect to a particular month, is as follows: Producing Royalty Lands If the Benchmark Reference Price ( BRP ) is: <US$60, the sliding scale royalty rate is 0%; US$60<BRP<US$140, the sliding scale royalty is equal to 2.50% + (0.156%*(BRP $60)); or, >US$140, the sliding scale royalty is 15%. Non-Producing Royalty Lands If the BRP is: <US$70, the sliding scale royalty rate is 0%; US$70<BRP<US$150, the sliding scale royalty is equal to 2.50% + (0.156%*(BRP $70)); or, >US$150, the sliding scale royalty is 15%. The BRP is the sum of: (i) the monthly average daily settlement (US$/bbl) for prompt month NYMEX light sweet crude; and, (ii) the final price at which the prompt month future contract for the Canadian Heavy Crude Oil Index (US$/bbl) as quoted by the CME Group is settled for such applicable month. Burgess retains the ability to receive the Royalty in cash or in-kind. The Royalty does not contain any associated commitments for future development or projects. At March 31, 2018, no amounts were paid nor are currently payable to Burgess in respect of the Royalty. 11

12 DEPLETION, DEPRECIATION, AND IMPAIRMENT Three months ended March 31, ($ 000) Oil sands assets $17,163 $16,130 Corporate assets Total $17,313 $16,310 Depletion expense is calculated using the unit-of-production method, based on estimated total proved and probable ( 2P ) reserves. Future capital costs estimated to realize production from the Company s 2P reserves are added to the carrying amount of capitalized costs for depletion purposes. Corporate assets are depreciated over their estimated useful lives. At March 31, 2018, the recoverable amount approximated the carrying value of the Company s assets (2017 impairment of $428.9 million). To determine the recoverable amount, the Company utilized the reserve volumes and values in the 2017 year-end reserve report as evaluated by the Company s independent reserve evaluators and considered Q economic activity, which included the change in forecasted benchmark pricing. The recoverable amount was calculated as FVLCD, which was determined using a discounted cash flow approach based on the year-end 2017 proved plus probable reserves and a risk adjusted discount rate of before tax of 20.0%. The risk adjusted discount rate contemplated multiple market participant assessments specific to the Company and its assets. The FVLCD are classified as a Level 3 fair value measurement as certain key assumptions are not based on observable market data. The following table reflects the additional impairment (or reversal) of a one percent change in the before tax discount rate and a five percent change in the bitumen wellhead price realized by the Company: (Canadian dollar in thousands) One percent increase in before tax discount rate One percent decrease in before tax discount rate Five percent increase in bitumen wellhead price Five percent decrease in bitumen wellhead price Impairment (reversal) 21,000 (24,000) (61,000) 61,000 The following benchmark reference prices were used by the Company s independent reserve evaluators as a basis for the impairment test at March 31, 2018: WTI crude oil (US$/bbl) WCS (Western Canadian Select) (C$/bbl) Edmonton C5 (C$/bbl) Exchange rate (C$/US$) FINANCE CHARGES Q finance charges increased 9% to $12.8 million (Q $11.8 million), primarily due to higher interest rates associated with the Amended Term Loan Facility and interest associated with the DIP. Interest payable associated with the Amended Term Loan Facility and Convertible Notes remained stayed under the CCAA proceeding. Non-cash finance charges related to the unwinding of discounts on decommissioning liabilities. Cash finance charges include interest expense relating to the Amended Term Loan Facility, Convertible Notes, DIP, and bank charges. FOREIGN EXCHANGE The fluctuation of the value of the Canadian dollar relative to the US dollar has an impact on Connacher s results when settling US dollar denominated transactions, including the sale of a significant portion of the Company s bitumen production as dilbit, and translating US dollar denominated long-term debt and US dollar cash balances into Canadian dollars for financial reporting purposes. For Q1 2018, the Company recorded a foreign exchange loss of $8.5 million (Q gain of $2.0 million). 12

13 INCOME TAXES No income tax provision was recorded in Q (Q $nil) as the Company s available deductions for income taxes exceeded its taxable income in the period. The Company has not recorded any net deferred tax liabilities. ADJUSTED EBITDA, FUNDS FLOW (USED), AND NET EARNINGS (LOSS) Q adjusted EBITDA decreased to a deficit of $16.4 million (Q $1.9 million), primarily due to lower revenue, net of royalties. Q funds used increased to $28.8 million (Q funds used of $9.5 million), primarily due to a lower adjusted EBITDA. For Q1 2018, the Company generated a net loss of $57.2 million (Q net loss of $24.6 million). The increase is primarily due to a lower adjusted EBITDA and foreign exchange losses. CAPITAL EXPENDITURES ACTUAL CAPITAL EXPENDITURES Q capital expenditures totaled $5.3 million (Q $1.7 million) and focused primarily on well servicing in order to restore and maintain production and capital related to future drilling of infill wells. RISK FACTORS AND RISK MANAGEMENT GENERAL Connacher is engaged in the in situ oil sands exploration, development, and production industry. The business is inherently risky and there is no assurance that hydrocarbon reserves will be discovered and economically produced and sold. Operational risks include reservoir performance uncertainties, environmental factors, competition, and regulatory and safety concerns. Financial risks associated with the petroleum industry include fluctuations in commodity prices, interest rates, currency exchange rates, and the cost of goods and services. Connacher s financial and operating performance is potentially affected by a number of factors including, but not limited to, risks associated with the production of bitumen, commodity prices and exchange rates, environmental legislation, changes to royalty and income tax legislation, credit and capital market conditions, credit risk for failure of performance of third parties, and other risks and uncertainties described in more detail in Connacher s AIF filed with securities regulatory authorities. Connacher employs highly qualified people, uses sound operating and business practices, and evaluates all potential and existing projects using the latest applicable technology. The Company complies with government regulations and has in place an up-to-date emergency response program. Connacher adheres to environment and safety policies and standards. Decommissioning liabilities are recognized upon acquisition, construction, and development of the assets. Connacher maintains property and liability insurance coverage. The coverage provides a reasonable amount of protection from risk of loss; however, not all risks are foreseeable or insurable. GOING CONCERN The decision to file for CCAA protection was due to the continued deterioration of crude oil pricing and the restrictive provisions of the Company s long-term debt arrangements, as both factors constrained the Company s ability to generate positive cash flow from operations and to access additional financing. The Company continues to move forward with the CCAA proceeding and the new SISP. Future operations are dependent on the outcome of the new SISP and/or the Credit Bid Transaction and cause significant doubt about the Company s ability to continue as a going concern. The condensed financial statements have been prepared on a basis which asserts that the Company will continue to have the ability to realize its assets and discharge its liabilities and commitments in a planned manner with consideration to expected possible outcomes. Conversely, if the assumption made by management is not appropriate, adjustments to the carrying amounts of the Company s assets, liabilities, revenues, expenses, and balance sheet classifications may be necessary and such adjustments could be material. 13

14 COMMODITY PRICE AND EXCHANGE RATE RISKS Connacher s future financial performance remains closely linked to crude oil and natural gas prices which may be influenced by many factors, including: global and regional supply and demand, seasonality, political events, and weather. These factors can cause a high degree of price volatility. Historically, the Company has mitigated some of the risk associated with changes in commodity prices through the use of hedges and other derivative financial instruments. The Company entered into fixed price arrangements on a portion of its dilbit sales to reduce exposure to price fluctuations. Dilbit sales and diluent purchase prices are primarily based on US dollar benchmarks that result in realized prices being influenced by the US- Canadian dollar exchange rate, thereby creating another element of uncertainty. Should the Canadian dollar strengthen compared to the US dollar, the resulting negative effect on revenue would be partially offset with exchange gains on translating US dollar denominated debt and associated interest payments thereon. The opposite would occur should the Canadian dollar weaken compared to the US dollar. Refer to Liquidity and Capital Resources above. REGULATORY APPROVAL RISKS Before proceeding with most major development projects, Connacher must obtain regulatory approvals. These approvals must be maintained in good standing during the duration of the particular project. The regulatory approval process involves stakeholder consultation, environmental impact assessments and public hearings, among other factors. Failure to obtain regulatory approvals, or failure to obtain them on a timely basis, could result in delays, abandonment, or restructuring of projects and increased costs, all of which could negatively impact future earnings and cash flow. Failure to maintain approvals, licenses, permits, and authorizations in good standing could result in the imposition of fines, production limitations or suspension orders. PERFORMANCE Connacher s financial and operating performance is potentially affected by a number of factors, including, but not limited to the following: Connacher s ability to reliably operate its oil sands facilities is important in meeting production targets Production and operating expenses could be impacted by inflationary pressures on labor, volatile pricing for natural gas used as an energy source in oil sands processes, and planned and unplanned maintenance. The Company continues to address these risks through such strategies as application of technologies; an increased focus on regular preventative maintenance; and from time to time, the use of derivative financial instruments such as natural gas hedges Production and operating expenses are also impacted by the introduction of, or increase in, government levies or taxes relating to environmental and aboriginal matters applicable to oil sands companies While the fiscal regime in Alberta, Canada is generally stable relative to many global jurisdictions, royalty and tax treatments are subject to periodic review, the outcome of which is not predictable and could result in changes to the Company s planned investments and rates of return on existing investments Extreme volatility in heavy oil differentials and benchmarks on which the Company s contracts are based increases marketing risks and impacts the Company s overall profitability There are certain risks associated with the execution of capital projects, including the risk of cost overruns and delays. Numerous risks and uncertainties can affect construction and other capital project schedules, including the availability of labor and other impacts of competing projects drawing on the same resources during the same time period Covenants and restrictions contained in the Support Agreement CAPITAL REQUIREMENTS As the Company s revenues decline due to decreased production and/or commodity pricing, it may be required to reduce capital expenditures. In addition, uncertain levels of near-term industry activity, coupled with the global economic situation, exposes the Company to additional access to capital risk. There can be no assurance that 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 the Company. In addition, the Support Agreement contains certain restrictions on the Company s ability to incur additional debt. The inability of the Company to access sufficient capital for its operations and growth could have a material adverse effect on the Company s business, financial condition, results of operations, and prospects. 14

15 THIRD PARTY CREDIT RISK Credit risk is a risk of failure of performance by counterparties. The Company attempts to mitigate this credit risk before contract initiation by ensuring product sales are made with well-known and financially strong crude dilbit purchasers. The Company may be exposed to third party credit risk through its contractual arrangements with its current counterparties. In the event such entities fail to meet their contractual obligations to the Company, such failures may have a material adverse effect on the Company s business, financial condition, results of operations and prospects. ENVIRONMENTAL All phases of the in situ oil sands business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial, and local laws and regulations. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability, and potentially increased capital expenditures and production and operating expenses. There has been much public debate with respect to Canada s alternative strategies with respect to climate change and the control of greenhouse gases. Implementation of strategies for reducing greenhouse gases could have a material impact on the nature of in situ oil sands operations, including those of the Company. Given the evolving nature of the issues related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict either the nature of those requirements or the impact on the Company and its operations and financial condition. The Company may be subject to remedial environmental and litigation costs resulting from potential unknown and unforeseeable environmental impacts arising from the Company s operations. While these costs have not been material to the Company in the past, there is no guarantee that this will continue to be the case in the future as the Company carries on with development of technologies. The in situ oil sands business is closely regulated with respect to land disturbance, water usage, and greenhouse gas emission. To meet these requirements, operations personnel closely follow established environmental policies and procedures and regularly report to regulators. ACCOUNTING ESTIMATES AND POLICIES With the exception of the accounting pronouncements adopted discussed below, no alterations to the Company s accounting estimates and policies occurred in Q1 2018, except for the items discussed below. Further information on the critical accounting estimates and policies can be found in the notes to the annual financial statements for the year-end December 31, ACCOUNTING PRONOUNCEMENTS ADOPTED IFRS 9 - Financial Instruments ( IFRS 9 ) Effective January 1, 2018, the Company adopted IFRS 9 using the retrospective method. The adoption of IFRS 9 did not yield any adjustments to the amounts recognized in the Company s annual financial statement for the year-ended December 31, IFRS 9 includes three initial classification categories for financial assets: amortized cost, fair value through other comprehensive income ( FVTOCI ), and fair value through profit or loss ( FVTPL ). Previously, IAS 39 included held-to-maturity, loans and receivables, and available for sale classifications all of which have been eliminated. Classification is dependent on the Company s objective for the financial asset and the contractual cash flow characteristics of the financial asset. A financial asset is classified as amortized cost if the asset is held with the objective to collect contractual cash flows that are solely payments of principal and interest on principal amounts outstanding. A financial asset is classified as FVTOCI if the financial asset is held with the objective to both collect contractual cash flows and sell the financial asset. All other financial assets are classified as FVTPL. IFRS 9 includes a new model for impairment of financial assets based on an expected credit loss model. Under the new model, adopted as a practical expedient, the Company s trade and accrued receivables are considered collectible within one year or less; therefore, these financial assets are not deemed to have a significant financing component and a lifetime expected credit loss is measured at the date of initial recognition of trade receivables. Financial liabilities are measured at amortized cost or FVTPL. A financial liability is measured at FVTPL if it is considered held-for-trading, a derivative, or designated as FVTPL at initial recognition. For financial liabilities measured at FVTPL, any change in value resulting from a change in the Company s credit-risk is recorded through other comprehensive income or loss, rather than net earnings (loss). 15