CONNACHER OIL AND GAS LIMITED MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 OVERVIEW

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1 CONNACHER OIL AND GAS LIMITED MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 This Management s Discussion and Analysis ( MD&A ) for Connacher Oil and Gas Limited ( Connacher or the Company ) is dated November 3, 2015 and should be read in conjunction with Connacher s condensed interim financial statements for the three and nine months ended September 30, 2015 and 2014 and the annual financial statements for the years ended December 31, 2014 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 Annual Information Form for the year ended December 31, 2014 ( AIF ), 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 440 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. FINANCIAL HIGHLIGHTS FINANCIAL (1) Q Q YTD 2015 YTD 2014 Revenue, net of royalties $58,097 $119,432 $183,220 $340,830 Adjusted EBITDA (2) (14,115) 28,786 (30,300) 63,001 Net gain (loss) (289,175) (39,760) 13,737 (112,415) Basic per share (3) (10.21) (70.24) 0.89 (198.88) Diluted per share (3) (10.21) (70.24) 0.19 (198.88) Funds flow (used) (4) (19,346) 5,437 (74,036) (3,680) Capital expenditures ,303 12,004 69,325 Cash on hand 72,898 83,074 Working capital surplus 94,883 84,975 Long-term debt 249,948 1,062,617 Shareholders equity 580, ,084 (1) ($ 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 gain (loss) under Reconciliations of Net Gain (Loss) to EBITDA, Adjusted EBITDA, and Bitumen Netback (3) Basic and diluted earnings per share amounts reflect the 800:1 share consolidation for the three and nine months ended September 30, 2014 and 2015 (4) Funds flow (used) is a non-gaap measure and is defined in the Advisory Section of this MD&A and is reconciled to cash flow from operating activities under Reconciliation of Cash Flow from Operating Activities to Funds Flow (Used) Three months ended September 30, 2015 and 2014 Q revenue, net of royalties, decreased 51% to $58.1 million (Q $119.4 million), substantially due to the decline in crude oil prices, partially offset by higher sales volumes Q blending costs decreased 45% to $17.3 million (Q $31.6 million), primarily due to lower diluent pricing and a reduction in the diluent blend ratio ( DBR ) 1

2 Q adjusted EBITDA decreased to a deficit of $14.1 million (Q $28.8 million), primarily due to lower revenue, net of royalties, partially offset by lower blending costs and lower general and administration ( G&A ) expenses. Due to the Company s termination of its risk management contracts in the first half of 2015, no risk management contract gains or losses were recorded in Q In Q3 2015, the Company generated a net loss of $289.2 million (Q net loss of $39.8 million), primarily due to the recognition of an impairment on property, plant, and equipment ( PP&E ) assets and lower adjusted EBITDA, partially offset by lower finance costs, lower foreign exchange losses, and the recognition of an unrealized gain associated with second lien convertible notes due August 31, 2018 (the Convertible Notes ) Q funds flow used was $19.3 million (Q funds flow of $5.4 million). The decrease in funds flow in Q was primarily due to lower adjusted EBITDA and an increase in non-cash-working capital, partially offset by lower interest on long-term debt as the 2018 and 2019 senior secured second lien notes (the Notes ) were exchanged for common shares as part of the recapitalization transaction which closed on May 8, 2015 (the Recapitalization ) In Q3 2015, capital expenditures totaled $1.0 million (Q $25.3 million). The reduction in capital expenditures was due to the deferral of all discretionary capital in light of the decrease in crude oil pricing Nine months ended September 30, 2015 and 2014 YTD 2015 revenue, net of royalties decreased 46% to $183.2 million (YTD $340.8 million), substantially due to the decline in crude oil prices, partially offset by higher sales volumes YTD 2015 production and operating expenses decreased 26% to $65.7 million (YTD $89.1 million), primarily as a result of lower natural gas costs and the realization of operating cost reduction initiatives YTD 2015 blending costs decreased 36% to $57.5 million (YTD $89.7 million), primarily due to lower diluent pricing, partially offset by higher diluent volumes associated with increased bitumen production YTD 2015 adjusted EBITDA decreased to a deficit of $30.3 million (YTD $63.0 million), primarily due to lower revenue, net of royalties, partially offset by lower blending and operating costs; lower G&A expenses; and lower realized risk management contract losses as all contracts were terminated in the first half of 2015 For YTD 2015, the Company generated net income of $13.7 million (YTD net loss of $112.4 million), primarily due to the net gain on the Recapitalization transaction; recognition of an unrealized gain on the Convertible Notes; lower blending and operating costs; lower G&A expenses; and lower finance charges; offset by the recognition of impairment on PP&E assets and a decrease in revenue, net of royalties YTD 2015 funds flow used was $74.0 million (YTD funds flow used of $3.7 million). The decrease in funds flow for YTD 2015 was primarily due to lower adjusted EBITDA, partially offset by lower interest on long-term debt as the Notes were exchanged for common shares as part of the Recapitalization and a reduction in non-cash working capital YTD 2015 capital expenditures totaled $12.0 million (YTD $69.3 million). The reduction in capital expenditures was due to the deferral of all discretionary capital in light of the decrease in crude oil pricing Connacher closed Q with a cash balance of $72.9 million (Q $94.2 million) 2

3 OPERATIONAL HIGHLIGHTS OPERATIONAL Q Q YTD 2015 YTD 2014 Average benchmark prices WTI (US$/bbl) WTI ($/bbl) Heavy oil differential ($/bbl) (17.80) (22.16) (16.89) (23.16) WCS ($/bbl) $/US$ exchange rate Production and sales volumes (1) Daily bitumen production (bbl/d) 14,258 14,163 14,759 13,765 Daily bitumen sales (bbl/d) 14,477 13,976 14,483 13,380 Bitumen netback ($/bbl) (2)(3) Dilbit sales $36.84 $79.27 $38.41 $80.64 Diluent costs (5.86) (6.73) (6.31) (7.61) Realized bitumen sales price Transportation and handling costs (20.16) (16.49) (17.22) (16.54) Net realized bitumen sales price Royalties (0.33) (4.21) (0.30) (4.28) Net bitumen revenue price Production and operating expenses (17.57) (20.55) (16.63) (24.39) Bitumen netback $(7.08) $31.29 $(2.05) $27.82 (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 gain (loss) under Reconciliations of Net Gain (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 and YTD 2015 production increased 1% and 7% to 14,258 bbl/d (Q ,163 bbl/d) and 14,759 bbl/d (YTD ,765 bbl/d), respectively. Production increases were primarily attributable to the Company s seven infill wells at Pod One that were brought on production since Q and improved field and plant optimization at Algar In Q and YTD 2015, the Company railed approximately 64% and 53% (Q %; YTD %), respectively, of its dilbit sales to locations outside of Alberta LIQUIDITY AND CAPITAL RESOURCES At September 30, 2015, the Company had working capital of $94.9 million (December 31, $56.3 million), including $72.9 million of cash on hand (December 31, $94.2 million). Q cash flow from operating activities decreased to $6.1 million (Q cash flow from operations of $16.4 million) due to lower bitumen netbacks, resulting primarily from the decline in crude oil prices, partially offset by lower G&A expenses and an increase in non-cash working capital. YTD 2015 cash flow used in operating activities decreased to $45.1 million (YTD cash flow from operations of $36.9 million) due to lower bitumen netbacks, resulting primarily from the decline in crude oil prices and a reduction in non-cash working capital, partially offset by lower G&A expenses and lower realized risk management contract losses. Q and YTD 2015 cash flow used in investing activities was $3.3 million (Q $25.1 million) and $17.0 million (YTD $59.3 million), respectively. For both periods in 2015, the reduction in capital expenditures was due to the deferral of discretionary capital expenditures in light of the decrease in crude oil pricing. 3

4 Q cash flow used in financing activities decreased to $5.5 million (Q $44.5 million) due to the extinguishment of the Notes and associated interest as part of the Recapitalization. YTD 2015 cash flow from financing activities decreased to $35.6 million (YTD $50.1 million) due to the issuance of the original first lien term loan credit agreement in May 2014 (the Original Term Loan Facility ) for total proceeds of approximately of $135.0 million (net of transaction costs) compared to the additional loans provided as part of the amendments to the first lien term loan credit agreement (the Amended Term Loan Facility ) for proceeds of approximately $30.0 million to replace the revolving credit facility (the Credit Facility ). In addition, interest payments associated with the Notes ceased as part of the Recapitalization. GOING CONCERN The condensed interim financial statements have been prepared on a going concern basis, which asserts that the Company has the ability to realize its assets and discharge its liabilities and commitments in the normal course of business. Conversely, if the going concern assumption is not appropriate, adjustments to the carrying amounts of the Company s assets, liabilities, revenues, expenses, and balance sheet classifications may be necessary. Future operations are dependent on the generation of sustainable positive cash flow from operations; the maintenance of existing reserve and production bases; access to capital; and the ability to discharge obligations as they come due. The current economic outlook on global crude oil prices and limited access to available capital may cast significant doubt about the Company s ability to continue as a going concern. SOURCE OF FUNDS As at September 30, 2015 Amount ($ 000) Term Cash and cash equivalents $72,898 Not applicable As part of the Recapitalization, the Company received proceeds of US$35.0 million from the issuance of the Convertible Notes and approximately $30.0 million from increased total commitments associated with the Amended Term Loan Facility, less transaction costs of approximately $23.7 million. As part of the closing of the Recapitalization, the outstanding letters of credit were cancelled and the Credit Facility was terminated. The Amended Term Loan Facility restricts the Company s ability to incur additional indebtedness and grant security. RECAPITALIZATION The closing of the Recapitalization resulted in a reduction of the Company s total debt by approximately $1.0 billion and annual interest expense by approximately $80.0 million. As part of the Recapitalization, accrued and unpaid interest related to the Notes was settled and extinguished for no consideration. In addition, the Recapitalization provided additional liquidity through the issuance of US$35.0 million aggregate principal amount of Convertible Notes due August 31, 2018 and amendments to the Original Term Loan Facility to increase the total commitments to provide for loans in the aggregate principal amount of US$24.8 million (equivalent of approximately $30.0 million). The accounting gain on the Recapitalization recorded in the Company s profit and loss as follows: ($ 000) Gain on settlement of the Notes $420,354 Accrued interest on the Notes extinguished for no consideration 67,166 Fair value of Convertible Notes (net of proceeds of $42.3 million) (249,792) Loss on refinancing of Term Loan Facility (4,217) Estimated transaction costs (23,666) Net gain on the Recapitalization transaction $209,845 At May 8, 2015, the Convertible Notes were recorded at an initial fair value of $292.1 million. For the purposes of the net gain on the Recapitalization transaction, proceeds of $42.3 million reduced the initial fair value of the Convertible Notes. At September 30, 2015, the Convertible Notes were recorded at fair value, which totaled $47.5 million. As a result, the change in fair value yielded a fair value gain of $12.0 million and $244.6 million for the three and nine months ended September 30, 2015, respectively. 4

5 PRODUCTION AND FINANCIAL FORECAST FOR SECOND HALF OF 2015 On February 2, 2015, the Company provided a forecast (the Prior Forecast ) for 2015 in the context of its Recapitalization based on certain assumptions. Due to adjustments to the assumptions, updated guidance for the second half of 2015 (the Revised Forecast ) was provided. The following table compares actual, Revised Forecast, and Prior Forecast relating to such assumptions: Commodity prices For the three months ended September 30, 2015 Actual Revised Forecast Prior Forecast WTI (US$/bbl) WCS ($/bbl) Diluent ($/bbl) AECO 5A ($/GJ) $/US$ exchange rate Diluent blend ratio (%) Transportation costs ($/bbl) Rail usage (%) Production and operating costs ($/bbl) The following table sets forth the Company s actual, Revised Forecast, and Prior Forecast with respect to average sales, bitumen netback, G&A expenses, and capital expenditures for the quarter ended September 30, For the three months ended September 30, 2015 ($ 000) unless otherwise stated Actual Revised Forecast Prior Forecast Sales (bbl/d) 14,477 14,750 13,598 Bitumen netback Dilbit sales 58,531 64,201 58,888 Diluent, transportation and handling costs (44,135) (44,470) (47,196) Net realized bitumen sales 14,396 19,731 11,692 Royalties (434) (432) (175) Net bitumen revenue 13,962 19,299 11,517 Production and operating expenses (23,396) (23,874) (23,757) Bitumen netback (9,434) (4,575) (12,240) G&A expenses 4,681 5,447 8,248 Capital expenditures 953 3,288 7,040 OUTSTANDING DEBT ($ 000) September 30, 2015 December 31, 2014 Second Lien Senior Notes, 8.75%, due August 1, 2018 ($350 million face value) (1) $- $345,772 Second Lien Senior Notes, 8.5%, due August 1, 2019 (US$550 million face value) (1) - 601,463 Amended First Lien Term Loan Facility, due May 23, 2018 (US$153.2 million face value) (2) 204, ,775 Convertible Notes, 12%, due August 31, 2018 (US$35 million face value) (3) 47,500 - Total $251,989 $1,091,010 Less: current portion of long-term debt (2,041) (1,490) Long-term debt $249,948 $1,089,520 (1) As part of the Recapitalization, the Notes were converted into or exchanged for common shares of the Company (2) As part of the Recapitalization, amendments to the Original Term Loan Facility increased the total commitments provided for loans in the aggregate principal amount to US$153.2 million (3) The Convertible Notes are recorded at fair value at each period end 5

6 CREDIT FACILITY As part of the Recapitalization, the Credit Facility was terminated and replaced by new loans under the Amended Term Loan Facility which totaled US$24.8 million (equivalent of approximately $30 million). AMENDED TERM LOAN FACILITY As part of the Recapitalization, the Amended Term Loan Facility included: An aggregate principal amount of US$153.2 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 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 For loans advanced as ABR Loans, interest payments occur as the rate base matures. For loans advanced as Eurodollar Loans, the Company retained 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 substantially different terms associated with the Amended Term Loan Facility, which included: increased aggregate principal amount; increased cash interest; and the introduction of PIK interest, resulted in an extinguishment of the Original Term Loan Facility and the recognition of the Amended Term Loan Facility. The difference between the carrying value of the transferred financial liability (Original Term Loan Facility) and the consideration assumed (Amended Term Loan Facility) is recognized as a loss of $4.2 million. 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 Amended Term Loan Facility is subject to the following covenant: The ratio of the Company s most recent year-end 1P reserve value discounted at 10 percent ( PV-10 ) to aggregate borrowings outstanding at the end of each fiscal quarter under the Amended Term Loan Facility (including all principal amounts converted to Canadian dollars on the date the Amended Term Loan Facility was incurred) must exceed two and one-half times. At September 30, 2015, PV-10 and aggregate borrowings were $868.0 million and $183.6 million respectively, resulting in a multiple of 4.74 times. The Company retained 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% May 24, May 23, 2018: 5.00% At the closing date, the Amended Term Loan Facility was translated into Canadian dollars at an exchange rate of US$1 = $ All transaction costs associated with the Amended Term Loan Facility were recognized in profit and loss as an extinguishment of debt was deemed to have occurred. 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 A maturity date on or prior to the maturity date under the Amended Term Loan Facility 6

7 SENIOR SECURED SECOND LIEN NOTES As part of the closing of the Recapitalization, the Notes were converted into or exchanged for common shares and the accrued interest was settled and extinguished for no consideration. CONVERTIBLE NOTES As part of the Recapitalization, the Company issued US$35 million face value of Convertible Notes to certain participating holders of the Notes. The Convertible Notes included the following terms: Interest is payable quarterly on March 31, June 30, September 30, and December 31 at an annual rate of 12%, cash payable quarterly in arrears. The Company has the right to defer the payment of interest on the Convertible Notes in any quarter, in which case, interest will accrue at an annual rate of 14% for such quarter and will be further compounded at an annual rate of 12% until paid and will be due no later than maturity. In Q3 2015, the Company elected to exercise its right to defer the cash payment of interest payable on September 30, 2015 until December 31, 2015 (or such other interest payment as the Company may subsequently elect). As at September 30, 2015, the Company had incurred interest on the Convertible Notes as follows: ($ 000) Interest Compound Total Incurred Interest Cash interest (12%) $1,374 $- $1,374 Deferred interest (2%) Total $1,606 $- $1,606 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% At the closing date, the Convertible Notes were translated into Canadian dollars at an exchange rate of US$1 = C$ All transaction costs associated with the Convertible Notes were expensed in the period. SHAREHOLDERS EQUITY AND SHARES OUTSTANDING At September 30, 2015, the Company s shareholders equity totaled $580.1 million (December 31, $10.9 million). The increase is attributable to the equity issued in exchange for the Notes of approximately $554.9 million and the $13.7 million net income generated in As part of the closing of the Recapitalization, the outstanding common shares were consolidated on a basis of one new common share for 800 existing common shares and all outstanding stock options and share units were extinguished and cancelled for no consideration. Subsequent to the Recapitalization, 1,675,536 stock options were granted. At September 30, 2015 and November 3, 2015, the Company had the following securities issued and outstanding: 28,309,315 common shares 1,675,536 stock options 7

8 CONTRACTUAL OBLIGATIONS AND COMMITMENTS In the normal course of business, the Company is obligated to make future payments. The obligations represent contracts and other commitments that are known and non-cancellable. As at September 30, 2015, the Company was obligated to make payments within the periods as follows: ($ 000) 1 year 2-3 years 4-5 years Thereafter Total Operating (1) $9,490 $10,634 $- $- $20,124 Service and maintenance commitments (2) 2,400 4,800 4,800 8,000 20,000 Long-term debt - interest (3)(4) 28,119 51, ,505 Long-term debt - principal repayments (3) 2, , ,960 Total $42,050 $313,739 $4,800 $8,000 $368,589 (1) Includes rail, vehicle, information technology, and office leasing costs (2) Service and maintenance commitments pertain to the Company s facilities and equipment. The balance is primarily comprised of costs related to power infrastructure which total $20.0 million (3) Interest and principal payments on US dollar denominated debt are translated at US$1 = $ (4) Interest includes PIK interest on the Amended Term Loan Facility OFF BALANCE SHEET ITEMS As part of the Recapitalization, all letters of credit were cancelled. As at September 30, 2015, 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 September 30, Nine months ended September 30, Dilbit sales - bbl/d 17,271 17,119 17,588 16,191 Diluent used - bbl/d (2,794) (3,143) (3,105) (2,811) Bitumen sold - bbl/d 14,477 13,976 14,483 13,380 Bitumen production volumes - bbl/d (2) 14,258 14,163 14,759 13,765 (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 and YTD 2015 production increased 1% and 7% to 14,258 bbl/d (Q ,163 bbl/d) and 14,759 bbl/d (YTD ,765 bbl/d), respectively. Production increases were primarily attributable to the Company s seven infill wells at Pod One that were brought on production since Q and improved field and plant optimization at Algar. 8

9 COMMODITY PRICES Three months ended September 30, Nine months ended September 30, Average benchmark prices West Texas Intermediate (WTI) US$/bbl West Texas Intermediate (WTI) $/bbl Heavy oil differential - $/bbl (1) (17.80) (22.16) (16.89) (23.16) 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 In order to maximize net realized bitumen sales, Connacher employs a dilbit marketing strategy that accesses multiple markets inside and outside of Alberta. In Q and YTD 2015, the Company railed approximately 64% and 53% (Q %; YTD %), respectively, of its dilbit sales to locations outside of Alberta. 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 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. 9

10 BITUMEN NETBACK (1) Three months ended September 30, Nine months ended September 30, ($ 000) Dilbit sales (2) $58,531 $124,843 $184,405 $356,459 Diluent costs (3) (17,279) (31,571) (57,490) (89,681) Realized bitumen sales 41,252 93, , ,778 Transportation and handling costs (26,856) (21,208) (68,074) (60,410) Net realized bitumen sales 14,396 72,064 58, ,368 Royalties (434) (5,411) (1,185) (15,629) Net bitumen revenues 13,962 66,653 57, ,739 Production and operating expenses (23,396) (26,425) (65,756) (89,102) Bitumen netback $(9,434) $40,228 $(8,100) $101,637 (1) A non-gaap measure which is defined in the Advisory Section of this MD&A. Bitumen netback is reconciled to net gain (loss) under Reconciliations of Net Gain (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 In Q3 2015, dilbit sales decreased 53% to $58.5 million (Q $124.8 million) due to a 54% decrease in dilbit sales price, slightly offset by a 4% increase in dilbit sales volumes. YTD 2015 dilbit sales decreased 48% to $184.4 million (YTD $356.5 million) due to a 52% decrease in dilbit sales price, partially offset by a 8% increase in dilbit sales volumes. In Q3 2015, the total cost of diluent decreased by 45% to $17.3 million (Q $31.6 million) due to a 42% reduction in the diluent purchase price, plus an 11% decrease in the amount of diluent volumes used compared to Q The diluent unit price, including diluent transportation and handling, was $67.21 per bbl (Q $ per bbl) of diluent. The DBR decreased to 16% (Q %). For YTD 2015, the total cost of diluent decreased by 36% to $57.5 million (YTD $89.7 million) due to a 43% reduction in the diluent purchase price, partially offset by a 10% increase in diluent volumes associated with increased bitumen production. The diluent unit price, including diluent transportation and handling, was $67.82 per bbl (YTD $ per bbl) of diluent. The YTD 2015 DBR increased slightly to 18% compared to 17% for YTD The table below summarizes information related to oil sands production and operating expenses: Three months ended September 30, Nine months ended September 30, ($ 000) Natural gas costs $6,660 $8,293 $18,619 $30,928 Other production and operating expenses 16,736 18,132 47,137 58,174 Total production and operating expenses $23,396 $26,425 $65,756 $89,102 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 from the Company's cogeneration facility at Algar. Q and YTD 2015 AECO 5A natural gas index quarterly average prices decreased 28% and 42% to $2.75/GJ (Q $3.81/GJ) and $2.62/GJ (YTD $4.55/GJ), respectively. Q and YTD 2015 other production and operating costs decreased 8% and 19% to $16.7 million (Q $18.1 million) and $47.1 million (YTD $58.2 million), respectively. The decrease for both periods in 2015 is primarily due to the realization of operating cost reduction initiatives. 10

11 CORPORATE REVIEW GENERAL AND ADMINISTRATIVE EXPENSES ( G&A ) YTD 2015 G&A expenses decreased 26% to $18.2 million (YTD $24.5 million), primarily due to reductions in employee head-count and compensation. DEPLETION, DEPRECIATION, AMORTIZATION, AND IMPAIRMENT Three months ended September 30, Nine months ended September 30, ($ 000) Oil sands assets $24,856 $24,730 $76,121 $70,429 Corporate assets ,171 Impairment 242, ,400 - Capitalized to inventory 829 (124) (180) (1,182) Total $268,415 $25,027 $319,331 $70,418 Depletion expense is calculated using the unit-of-production method, based on estimated total proved and probable ( 2P ) reserves. Future capital costs estimated to realize production from the Company s 2P reserves are added to the carrying amount of capitalized costs for depletion purposes. Corporate assets are depreciated over their estimated useful lives. The December 31, 2014 reserve volumes and values were evaluated by the Company s independent reserve evaluators. At September 30, 2015, the decline in forecasted oil prices compared to December 31, 2014 was an indicator of potential impairment. In determining the impairment amount, the Company considered various estimates, including: future pricing, timing of capital expenditures, impact of changes in cost structures, and the production profile in 2015 compared to future reserve volumes. At September 30, 2015, the Company estimated the impairment based on proved and probable reserves volumes and values at December 31, 2014, affected for current year activity and forecasted prices discounted at 12%, as follows: WTI crude oil (US$/bbl) WCS (Western Canadian Select) (CA$/bbl) Edmonton C5 (CA$/bbl) Exchange rate ($US/$CA) The impairment recorded at September 30, 2015 of $242.4 million reflects the Company s best estimate based on currently available information. At December 31, 2015, in conjunction with the December 31, 2015 reserve report, the Company will review the aforementioned estimates to determine any future potential impairment or reversal. Consistent with prior years, the December 31, 2015 reserve report will be evaluated by the Company s independent reserve evaluators. FINANCE CHARGES Finance charges for Q decreased 71% to $7.6 million (Q $25.7 million). For Q3 2015, non-cash finance charges totaled $0.4 million (Q $2.4 million) and cash finance charges totaled $7.2 million (Q $23.3 million), respectively. In Q3 2015, total non-cash finance and cash finance charges decreased primarily due to the settlement of the Notes, partially offset by the additional interest associated with the Amended Term Loan Facility s revised contractual terms and the issuance of the Convertible Notes. Non-cash finance charges include amortization of transaction costs related to the Notes, the Original Term Loan Facility and Amended Term Loan Facility, the Credit Facility, and the unwinding of discounts on decommissioning liabilities. Q cash finance charges include interest expense relating to the Original Term Loan Facility, Amended Term Loan Facility, Convertible Notes and bank charges. 11

12 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. In Q and YTD 2015, the Company recorded a foreign exchange loss of $10.6 million (Q $33.0 million) and $43.4 million (YTD loss of $33.3 million), respectively. 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 recorded no net deferred tax liabilities. ADJUSTED EBITDA, FUNDS FLOW (USED), AND NET GAIN/LOSS Q adjusted EBITDA decreased to a deficit of $14.1 million (Q $28.8 million), primarily due to lower revenue, net of royalties, partially offset by lower blending costs and lower G&A expenses. Due to the Company s termination of its risk management contracts in the first half of 2015, no risk management contract gains or losses were recorded in Q YTD 2015 adjusted EBITDA decreased to a deficit of $30.3 million (YTD $63.0 million), primarily due to lower revenue, net of royalties, partially offset by lower blending and operating costs; lower G&A expenses; and lower realized risk management contract losses as all contracts were terminated in the first half of Refer to Non-GAAP Measurements on page 16 of this MD&A. Q funds flow used was $19.3 million (Q funds flow of $5.4 million). The decrease in funds flow in Q was primarily due to lower adjusted EBITDA and an increase in non-cash-working capital, partially offset by lower interest on long-term debt as the Notes were exchanged for common shares as part of the Recapitalization. YTD 2015 funds flow used was $74.0 million (YTD funds flow used of $3.7 million). The decrease in funds flow for YTD 2015 was primarily due to lower adjusted EBITDA, partially offset by lower interest on long-term debt as the Notes were exchanged for common shares as part of the Recapitalization and a reduction in non-cash working capital. In Q3 2015, the Company generated a net loss of $289.2 million (Q net loss of $39.8 million), primarily due to the recognition of an impairment on PP&E assets and lower adjusted EBITDA, partially offset by lower finance costs, lower foreign exchange losses, and the recognition of an unrealized gain associated with the Convertible Notes For YTD 2015, the Company generated net income of $13.7 million (YTD net loss of $112.4 million), primarily due to the net gain on the Recapitalization transaction; recognition of an unrealized gain on the Convertible Notes; lower blending and operating costs; lower G&A expenses; and lower finance charges; offset by the recognition of impairment on PP&E assets and a decrease in revenue, net of royalties. CAPITAL EXPENDITURES ACTUAL CAPITAL EXPENDITURES Q and YTD 2015 cash capital expenditures were $1.0 million (Q $25.3 million) and $12.0 million (YTD $69.3 million), respectively. The reduction in capital expenditures was due to the deferral of all discretionary capital in light of the decrease in crude oil pricing. 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. 12

13 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 condensed interim financial statements have been prepared on a going concern basis, which asserts that the Company has the ability to realize its assets and discharge its liabilities and commitments in the normal course of business. Conversely, if the going concern assumption is not appropriate, adjustments to the carrying amounts of the Company s assets, liabilities, revenues, expenses, and balance sheet classifications may be necessary. Future operations are dependent on the generation of sustainable positive cash flow from operations; the maintenance of existing reserve and production bases; access to capital; and the ability to discharge obligations as they come due. The current economic outlook on global crude oil prices and limited access to available capital may cast significant doubt about the Company s ability to continue as a going concern. 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. At September 30, 2015, the Company does not have any risk management contracts in place. 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. The Government of Alberta has announced that it will conduct a review of existing royalty legislation, the outcome of which has not been determined 13

14 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 CAPITAL REQUIREMENTS As the Company s revenues may decline as a result of 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 Amended Term Loan Facility contains certain restrictions on the Company s ability to incur additional debt. See Amended Term Loan Facility. 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. 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. For a more detailed discussion of the business risk factors affecting the Company, refer to Connacher s AIF for the year ended December 31, 2014 available on ACCOUNTING ESTIMATES AND POLICIES There have been no changes to the Company s critical accounting estimates and polices in YTD 2015, with the exception of the Convertible Notes discussed below. Further information on our critical accounting estimates and policies can be found in the notes to the annual financial statements and MD&A for the year ended December 31,

15 Fair value of Convertible Notes As part of the Recapitalization, the Company issued US dollar denominated Convertible Notes. As required by IFRS, when an entity becomes party to a hybrid (combined) instrument that contains one or more embedded derivatives, the entity is required to identify any embedded derivative; assess whether it is required to be separated from the host contract; and, for those that are required to be separated, measure the derivatives at fair value at initial recognition and subsequent measurement. Alternatively, the Company can measure the entire instrument at fair value at inception with changes in fair value recorded through the statement of operations and comprehensive gain (loss). At inception, the Company valued the Convertible Notes at fair value with fair value changes being recorded through the statement of operations and comprehensive gain (loss). The calculation of fair value of the Company s financial instruments requires judgement around expected outcomes and is based on multiple variables, including, but not limited to credit spreads and interest rate spreads. The calculations are complex and require significant judgement around the market inputs, which are subject to factors outside of management s control. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED The Company intends to adopt the following standards and interpretations, if applicable, when they become effective. IFRS 9 - Financial Instruments ( IFRS 9 ) IFRS 9 is intended to replace IAS 39 - Financial Instruments: Recognition and Measurement. IFRS 9 will address: the classification and measurement requirements for financial assets and liabilities; a new hedge accounting model; and the impairment of financial instruments. IFRS 9 will be effective for annual periods beginning on or after January 1, 2018; however, early adoption is available. The extent and impact of the adoption of IFRS 9 has not yet been determined. IFRS 15 - Revenue from Contract with Customers ( IFRS 15 ) IFRS 15 will replace IAS 18 - Revenue, IAS 11 - Construction Contracts, and related interpretations. IFRS 15 is required to be adopted either retrospectively or using a modified transition approach for fiscal years beginning on or after January 1, The extent and impact of the adoption of IFRS 15 has not been determined. INTERNAL CONTROLS AND PROCEDURES The Company s Chief Executive Officer and Chief Financial Officer are required to cause the Company to disclose any change in the Company s internal controls over financial reporting during the Company s most recent interim period that has materially affected, or are reasonably likely to materially affect, the Company s controls over financial reporting. There were no changes in the Company s internal control over financial reporting during the period beginning July 1, 2015 and ended September 30, 2015 that have materially affected, or are reasonably likely to have materially affected, internal control over financial reporting. ADVISORY SECTION FORWARD LOOKING INFORMATION This MD&A contains forward looking information including but not limited to expectations relating to future capital expenditures and funding thereof; expectations regarding the Company's ability to meet contractual and other commitments; expectations regarding future commodity prices, foreign exchange rate, diluent blend ratio, transportation costs, rail costs, rail usage, and production and operating costs in future periods; expectations regarding sales and production, bitumen netback, G&A expenses, and capital expenditures in future periods; the Company s reserves; and general operational and financial performance in future periods. 15

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