Leucrotta Exploration : Q4 Financial & Operating Results

Q4 2021 results

FORWARD WITH FORTITUDE

Financial and operating results for the year ended DECEMBER 31, 2021

HIGHLIGHTS

• • Achieved production of 5,000 boe/d in late Q4/21 and exited December 31, 2021 with approximately 4,500 boe/d of production. Estimated production for Q1/22 average is approximately 4,300 boe/d.

• • December 31, 2021 adjusted working capital(2) balance of $30.3 million.

• • Increased adjusted funds flow(1) by 678% to $6.3 million in Q4 2021 from $0.8 million in Q4 2020.

• • Entered into an arrangement agreement whereby Vermilion Energy Inc would acquire all of the issued and outstanding common shares of Leucrotta ("Leucrotta Shares") in exchange for $1.73 cash per Leucrotta Share, 1.0 common share of a new Montney-focused exploration and production company ("ExploreCo"), and 0.1917 of an ExploreCo common share purchase warrant.

• • Entered into gas processing and battery funding agreements with NorthRiver Midstream Inc. ("NRM") to provide 50 mmcf/d of firm processing capacity at NRM's West Doe gas processing facility and provide up to $55 million of capital funding that Leucrotta will use to construct a battery facility at Mica.

FINANCIAL RESULTS

THREE MONTHS ENDED DECEMBER 31

YEAR ENDED DECEMBER 31

($000s, except per share amounts)

2021

2020

% Change

2021

2020

% Change

OIL AND NATURAL GAS SALES

CASH FLOW FROM OPERATING ACTIVITIES

Per share - basic and diluted

ADJUSTED FUNDS FLOW(1)

Per share - basic and diluted

NET EARNINGS (LOSS)

Per share - basic and diluted

CAPITAL EXPENDITURES & ACQUISITIONS (4)

PROCEEDS ON SALE OF PROPERTIES AND EQUIPMENT

ADJUSTED WORKING CAPITAL (DEFICIENCY) (2)

COMMON SHARES OUTSTANDING (000S)

Weighted average - basic

Weighted average - diluted

End of period - basic

End of period - fully diluted

23,586 71

1,187 701

0.01 300

1,355 850

0.01 400

(110,855) (186)

(0.55) (173)

13,716 189 8,206 266

• 30,315 (5,807) (622)

200,525 18

200,525 18

200,525 24

214,132 34

• (1) Adjusted funds flow and adjusted funds flow per share do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable to similar measures used by other companies. Please refer to the "Non-GAAP and Other Financial Measures" section in the MD&A for more details and the "Cash Flow from Operating Activities and Adjusted Funds Flow" section in the MD&A for a reconciliation from cash flow from operating activities.

• (2) Adjusted working capital (deficiency) is a capital management measure calculated as current assets less current liabilities excluding the effects of any current portion of risk management contracts. Please refer to the "Non-GAAP and Other Financial Measures" section in the MD&A for more details.

• (3) Supplemental financial measure. Please refer to the "Non-GAAP and Other Financial Measures" section in the MD&A for more details.

• (4) Capital expenditures and acquisitions does not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Please refer to the "Non-GAAP and Other Financial Measures" section in the MD&A for more details.

OPERATING RESULTS (1)
2021	2020	% Change	2021
Daily production (2)
Oil and condensate (bbls/d)	1,087	551	97	567
Other NGLs (bbls/d)	24	94	(74)	31
Oil and NGLs (bbls/d)	1,111	645	72	598
Natural gas (mcf/d)	13,074	13,508	(3)	11,403
Oil equivalent (boe/d)	3,290	2,897	14	2,498
Oil and natural gas sales
Oil and condensate ($/bbl)	84.77	46.33	83	78.54
Other NGLs ($/bbl)	41.49	23.97	73	32.78
Oil and NGLs ($/bbl)	83.83	43.06	95	76.13
Natural gas ($/mcf)	6.48	3.18	104	5.67
Oil equivalent ($/boe)	54.06	24.44	121	44.11
Royalties
Oil and NGLs ($/bbl)	17.25	3.09	458	12.88
Natural gas ($/mcf)	0.73	0.10	630	0.50
Oil equivalent ($/boe)	8.72	1.14	665	5.36
Net operating expenses (3)
Oil and NGLs ($/bbl)	13.51	10.46	29	11.25
Natural gas ($/mcf)	1.10	1.06	4	0.94
Oil equivalent ($/boe)	8.93	7.29	22	6.97
Transportation and marketing expenses
Oil and NGLs ($/bbl)	0.19	0.37	(49)	0.51
Natural gas ($/mcf)	1.05	1.37	(23)	1.30
Oil equivalent ($/boe)	4.25	6.45	(34)	6.04
Operating netback (3)
Oil and NGLs ($/bbl)	52.88	29.14	81	51.49
Natural gas ($/mcf)	3.60	0.65	454	2.93
Oil equivalent ($/boe)	32.16	9.56	236	25.74
Depletion and depreciation ($/boe)	(8.22)	(7.41)	11	(8.03)
Asset (impairment) reversal ($/boe)	78.38	(50.66)	(255)	98.86
General and administrative expenses ($/boe)	(5.88)	(4.36)	35	(6.60)
Share based compensation ($/boe)	(1.01)	(1.33)	(24)	(2.07)
Gain on sale of assets ($/boe)	-	-	-	-
Loss on onerous contract ($/boe)	-	(7.88)	(100)	-
Finance expense ($/boe)	(0.29)	(1.14)	(75)	(0.48)
Finance income ($/boe)	0.12	-	100	0.23
Other income ($/boe)	0.35	-	100	0.12
Realized loss on risk management contracts ($/boe)	(5.38)	-	100	(3.35)
Unrealized gain (loss) on risk management contracts ($/boe)	5.20	0.55	845	(0.26)
Deferred income tax recovery ($/boe)	-	-	-	0.04
Net earnings (loss) ($/boe)	95.43	(62.67)	(252)	104.20

Three Months Ended	Year Ended
December 31	December 31
2020	% Change
624	(9)
232	(87)
856	(30)
13,903	(18)
3,173	(21)
38.92	102
20.53	60
33.94	124
2.55	122
20.31	117
1.79	620
0.06	733
0.75	615
9.98	13
1.01	(7)
7.10	(2)
0.75	(32)
1.51	(14)
6.83	(12)
21.42	140
(0.03)	(9,867)
5.63	357
(8.50)	(6)
(87.31)	(213)
(3.90)	69
(0.54)	283
1.30	(100)
(1.81)	(100)
(0.46)	4
-	100
-	100
-	100
0.13	(300)
-	100
(95.46)	(209)

• (1) "bbls" refers to barrels, "mcf" refers to thousand cubic feet, and "boe" refers to barrel of oil equivalent. Disclosure provided herein in respect of a boe may be misleading, particularly if used in isolation. A boe conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent has been used for the calculation of boe amounts in the MD&A. This boe conversion rate is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

• (2) "Natural gas" refers to shale gas; "Oil and condensate" refers to condensate, light and medium crude oil, and tight oil combined; "Other NGLs" refers to butane, propane and ethane combined; "Oil and NGLs" refers to light and medium crude oil, tight oil, and NGLs combined, "Oil equivalent" refers to the total oil equivalent of shale gas, light and medium crude oil, tight oil, and NGLs combined, using the conversion rate of six thousand cubic feet of shale gas to one barrel of oil equivalent as described above. Readers are referred to the "Product Types" section in the MD&A for a complete breakdown of sales volumes for applicable periods by specific product types of shale gas, light and medium crude oil, tight oil, and NGLs.

• (3) Net operating expenses and operating netback do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Please refer to the "Non-GAAP and Other Financial Measures" section in the MD&A for more details and the "Net Operating Expenses" and "Operating Netback" sections in the MD&A for reconciliations from operating expenses and net earnings (loss) per boe, respectively.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

April 19, 2022

The MD&A should be read in conjunction with the audited financial statements and related notes for the years ended December 31, 2021 and 2020. The audited financial statements and financial data contained in the MD&A have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). All dollar amounts are expressed in Canadian currency, unless otherwise noted.

DESCRIPTION OF BUSINESS

Leucrotta Exploration Inc. ("Leucrotta" or the "Company") is an oil and natural gas company, actively engaged in the acquisition, development, exploration, and production of oil and natural gas reserves in northeastern British Columbia, Canada. The Company trades on the TSX Venture Exchange ("TSXV") under the symbol "LXE".

OIL AND GAS TERMS

The Company uses the following frequently recurring oil and gas industry terms in the MD&A:

Liquids

bbls	Barrels
Bbl/d	Barrels per day
NGLs	Natural gas liquids (includes condensate, pentane, butane, propane, and ethane)
Condensate	Pentane and heavier hydrocarbons
Natural Gas
Mcf	Thousands of cubic feet
Mcf/d	Thousands of cubic feet per day
MMbtu	Million of British thermal units
MMbtu/d	Million of British thermal units per day

Oil Equivalent

Boe Boe/dBarrels of oil equivalent Barrels of oil equivalent per day

Disclosure provided herein in respect of a boe may be misleading, particularly if used in isolation. A boe conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent has been used for the calculation of boe amounts in the MD&A. This boe conversion rate is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

NOTE REGARDING PRODUCT TYPES

The Company uses the following references to sales volumes in the MD&A:

Natural gas refers to shale gas

Oil and condensate refers to condensate, light and medium crude oil, and tight oil combined Other NGLs refers to butane, propane and ethane combined

Oil and NGLs refers to light and medium crude oil, tight oil, and NGLs combined

Oil equivalent refers to the total oil equivalent of shale gas, light and medium crude oil, tight oil, and NGLs combined, using the conversion rate of six thousand cubic feet of shale gas to one barrel of oil equivalent as described above.

Readers are referred to the "Product Types" section for a complete breakdown of sales volumes for applicable periods by specific product types of shale gas, light and medium crude oil, tight oil, and NGLs.

NON-GAAP AND OTHER FINANCIAL MEASURES

This MD&A refers to certain measures that are not determined in accordance with IFRS (or "GAAP"). These non-GAAP and other financial measures do not have any standardized meaning prescribed under IFRS and therefore may not be comparable to similar measures presented by other entities. The non-GAAP and other financial measures should not be considered alternatives to, or more meaningful than, financial measures that are determined in accordance with IFRS as indicators of the Company's performance. Management believes that the presentation of these non-GAAP and other financial measures provides useful information to shareholders and investors in understanding and evaluating the Company's ongoing operating performance, and the measures provide increased transparency to better analyze the Company's performance against prior periods on a comparable basis.

Non-GAAP Financial Measures

Adjusted funds flow

Management uses adjusted funds flow to analyze performance and considers it a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and abandonment obligations and to repay debt, if any. Adjusted funds flow is a non-GAAP financial measure and has been defined by the Company as cash flow from operating activities excluding the change in non-cash working capital related to operating activities, expenditures on decommissioning obligations, and transaction costs on property disposition. Management believes the timing of collection, payment or incurrence of these items involves a high degree of discretion and as such may not be useful for evaluating the Company's cash flows. Adjusted funds flow is reconciled from cash flow from operating activities under the heading "Cash Flow from Operations and Adjusted Funds Flow".

Net operating expenses

Net operating expenses is a non-GAAP financial measure, determined by deducting processing revenues primarily generated by processing third party volumes at processing facilities where the Company has an ownership interest. It is common in the industry to earn third party processing revenue on facilities where the entity has a working interest in the infrastructure asset. Where the Company has excess capacity at one of its facilities, it will look to process third party volumes as a means to reduce the cost of operating/owning the facility. As such, third party processing revenue is netted against operating expenses in the MD&A. Refer to the "Net Operating Expenses" section of this MD&A for the calculation.

Operating netback

Management considers operating netback an important measure as it demonstrates its profitability relative to current commodity prices. Operating netback is calculated as oil and natural gas sales less royalties, net operating expenses, and transportation and marketing expenses and is calculated as follows:

2021	2020
Oil and natural gas sales	16,365	6,515	40,219	23,586
Royalties	(2,639)	(304)	(4,884)	(868)
Net operating expenses	(2,703)	(1,942)	(6,357)	(8,249)
Transportation and marketing expenses	(1,285)	(1,720)	(5,508)	(7,935)
Operating netback	9,738	2,549	23,470	6,534
Capital expenditures and acquisitions

Three Months Ended December 31 2021 2020

Year Ended December 31

Leucrotta utilizes capital expenditures and acquisitions as a measure of capital investment on property, plant, and equipment, exploration and evaluation assets and property acquisitions compared to its annual budgeted capital expenditures. Capital expenditures and acquisitions are calculated as follows:

Capital expenditures - property, plant,

and equipment

Capital expenditures - exploration and evaluation assets Property acquisitions

Capital expenditures and acquisitions

Three Months Ended December 31	Year Ended December 31
2021 2020	2021	2020
28,793	6,953
10,266	6,763
608	-
39,667	13,716

16,124 193

4,720 202

608 21,452

- 395

Capital Management Measures

Adjusted working capital (deficiency)

Management uses adjusted working capital (deficiency) as a measure to assess the Company's financial position. Adjusted working capital (deficiency) includes current assets less current liabilities excluding the effects of any current portion of risk management contracts. Adjusted working capital (deficiency) is reconciled to working capital (deficiency) under the heading "Liquidity and Capital Resources".

Non-GAAP Financial Ratios

Adjusted Funds Flow per Share

Adjusted funds flow per share is a non-GAAP financial ratio, calculated using adjusted funds flow and the same weighted average basic and diluted shares used in calculating net earnings (loss) per share.

Net operating expenses per boe

The Company utilizes net operating expenses per boe to assess its operating efficiency of its petroleum and natural gas assets on a per unit of production basis. Net operating expense per boe is calculated as net operating expenses divided by total production for the applicable period.

Operating netback per boe

The Company utilizes operating netback per boe to assess the operating performance of its petroleum and natural gas assets on a per unit of production basis. Operating netback per boe is calculated as operating netback divided by total production for the applicable period. Operating netback per boe is reconciled to net earnings (loss) per boe under the heading "Operating Netback".

Supplementary Financial Measures

The supplementary financial measures used in this MD&A (primarily average sales price per product type, royalty rates, and certain per boe and per share figures) are either a per unit disclosure of a corresponding GAAP measure, or a component of a corresponding GAAP measure, presented in the financial statements. Supplementary financial measures that are disclosed on a per unit basis are calculated by dividing the aggregate GAAP measure (or component thereof) by the applicable unit for the period. Supplementary financial measures that are disclosed on a component basis of a corresponding GAAP measure are a granular representation of a financial statement line item and are determined in accordance with GAAP.

UPDATE

Gas Processing and Battery Funding Agreements

On March 17, 2022, the Company has entered into a 10-year gas processing agreement with NorthRiver Midstream Inc. ("NRM") to provide 50 mmcf/d of firm processing capacity at NRM's West Doe gas processing facility. The agreement commences after the construction of the Mica Battery (see below) and is subject to a ramp-up period. Leucrotta will also hold certain rights to additional firm processing capacity that, along with Leucrotta's owned 25 mmcf/d processing facility at Doe, will allow Leucrotta to reach 25,000 boe/d in the Mica area. There is no commitment for the Company until it makes a final investment decision.

Concurrent with this agreement, NRM has agreed to provide up to $55 million of capital funding that Leucrotta will use to construct a battery facility at Mica (the "Mica Battery"). The Mica Battery will consist of facilities for in-field processing of oil, gas and water and will deliver gas to NRM's West Doe gas processing facility. The Mica Battery will have an initial capacity of 60 mmcf/d expandable to 90 mmcf/d with added compression.

Proposed Corporate Transaction

On March 28, 2022, the Company announced that it had entered into an arrangement agreement (the "Arrangement") whereby Vermilion Energy Inc. ("Vermilion") would acquire all of the issued and outstanding common shares of Leucrotta ("Leucrotta Shares") in exchange for $1.73 cash per Leucrotta Share, 1.0 common share of a new Montney-focused exploration and production company ("ExploreCo"), and 0.1917 of an ExploreCo common share purchase warrant (one whole warrant being an "ExploreCo Arrangement Warrant"). Each ExploreCo Arrangement Warrant will entitle the holder to acquire one ExploreCo common share at an exercise price of $0.27 per share at any time on or before 30 days following the closing of the Arrangement. The Arrangement is expected to close late May 2022.

Under the terms of the Arrangement, ExploreCo will receive approximately $43.5 million cash, net of transaction costs, and certain oil and gas properties in the Two Rivers, BC area. In addition, ExploreCo plans to raise net proceeds of up to $36.9 million through the exercise of the ExploreCo Arrangement Warrants and two private placement financings. The proceeds of the financings will be used to fund future capital projects.

SUMMARY OF FINANCIAL RESULTS

($000s, except per share amounts)	2021	2020
Oil and natural gas sales	16,365	6,515	40,219	23,586
Cash flow from operating activities	4,367	212	9,509	1,187
Per share - basic and diluted (3)	0.02	-	0.04	0.01
Adjusted funds flow (1)	6,275	807	12,870	1,355
Per share - basic and diluted	0.03	-	0.05	0.01
Net earnings (loss)	28,892	(16,697)	95,012	(110,855)
Per share - basic and diluted	0.12	(0.08)	0.40	(0.55)
Total assets	338,188	208,386
Total long-term liabilities	16,963	15,291
Adjusted working capital (deficiency) (2)	30,315	(5,807)

Year Ended December 31 2021 2020

Three Months Ended December 31

2019 27,645 10,465 0.05 10,266 0.05

(5,529) (0.03)

309,452 12,273

125

• (1) Adjusted funds flow and adjusted funds flow per share do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Please refer to the "Non-GAAP and Other Financial Measures" section for more details and the "Cash Flow from Operating Activities and Adjusted Funds Flow" section for a reconciliation from cash flow from operating activities.

• (2) Adjusted working capital (deficiency) is a capital management measure calculated as current assets less current liabilities excluding the effects of any current portion of risk management contracts. Please refer to the "Non-GAAP and Other Financial Measures" section for more details.

• (3) Supplemental financial measure. Please refer to the "Non-GAAP and Other Financial Measures" section for more details.

The Company experienced a significant increase in oil and natural gas sales, cash flow from operating activities, and adjusted funds flow for the three months and year ended December 31, 2021 compared to the same periods in 2020 mainly due to rising commodity prices throughout 2021 and production increases in Q4 2021 (see discussion below).

The large increase in net earnings for the three months and year ended year ended December 31, 2021 was also due to impairment reversals of $23.7 million and $90.1 million, respectively, compared to impairment charges for the three months and year ended December 31, 2020 of $13.5 million and $101.4 million, respectively.