Perpetual Energy : 2021 Q2 Management's Discussion and Analysis

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is management's discussion and analysis ("MD&A") of Perpetual Energy Inc.'s ("Perpetual", the "Company" or the "Corporation") operating and financial results for the three and six months ended June 30, 2021 as well as information and estimates concerning the Corporation's future outlook based on currently available information. This discussion should be read in conjunction with the Corporation's unaudited condensed interim consolidated financial statements and accompanying notes for the three and six months ended June 30, 2021 as well as the audited consolidated financial statements and accompanying notes for the years ended December 31, 2020 and 2019. The MD&A should be read in conjunction with the Corporation's MD&A for the year ended December 31, 2020, as disclosure which is unchanged from the December 31, 2020 MD&A has not been duplicated herein. The Corporation's consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which require publicly accountable enterprises to prepare their financial statements using International Financial Reporting Standards ("IFRS"). Readers are referred to the advisories for additional information regarding forecasts, assumptions and other forward-looking information contained in the "Forward Looking Information and Statements" section of this MD&A. The date of this MD&A is August 12, 2021.

NATURE OF BUSINESS: Perpetual is an oil and natural gas exploration, production and marketing company headquartered in Calgary, Alberta. Perpetual owns a diversified asset portfolio, including liquids-rich conventional natural gas assets in the deep basin of West Central Alberta, heavy crude oil and shallow conventional natural gas in Eastern Alberta, undeveloped bitumen leases in Northern Alberta and prospective undeveloped acreage in the emerging Clearwater play fairway through its wholly owned subsidiary, Rubellite Energy Inc. ("Rubellite"). Additional information on Perpetual, including the most recently filed Annual Information Form, can be accessed at www.sedar.com or from the Corporation's website at www.perpetualenergyinc.com.

ADVISORIES

NON-GAAPMEASURES: The terms "adjusted funds flow", "adjusted funds flow per share", "adjusted funds flow per boe", "available liquidity", "cash costs", "net working capital deficiency", "net debt", "net bank debt", "net debt to adjusted funds flow ratio", "operating netback", "realized revenue", and "enterprise value" used in this MD&A are not recognized under GAAP. Management believes that in addition to net income (loss) and net cash flows from (used in) operating activities as defined by GAAP, these terms are useful supplemental measures to evaluate performance. Users are cautioned however that these measures should not be construed as an alternative to net income (loss) or net cash flows from (used in) operating activities determined in accordance with GAAP as an indication of Perpetual's performance, and may not be comparable with the calculation of similar measurements by other entities.

Adjusted funds flow: Adjusted funds flow is calculated based on cash flows from (used in) operating activities, excluding changes in non- cash working capital and expenditures on decommissioning obligations since Perpetual believes the timing of collection, payment or incurrence of these items is variable. Expenditures on decommissioning obligations may vary from period to period depending on capital programs and the maturity of the Company's operating areas. Expenditures on decommissioning obligations are managed through the capital budgeting process which considers available adjusted funds flow. The Company has added back non-cash oil and natural gas revenue in-kind, equal to retained East Edson royalty obligation payments taken in-kind, to present the equivalent amount of cash revenue generated. The Company has also deducted payments of the gas over bitumen royalty financing from adjusted funds flow to present these payments net of gas over bitumen royalty credits received. These payments are indexed to gas over bitumen royalty credits and are recorded as a reduction to the Corporation's gas over bitumen royalty financing obligation in accordance with IFRS. Additionally, the Company has excluded payments of restructuring costs associated with employee downsizing costs, which management considers to not be related to cash flow from (used in) operating activities. Management uses adjusted funds flow and adjusted funds flow per boe as key measures to assess the ability of the Company to generate the funds necessary to finance capital expenditures, expenditures on decommissioning obligations, and meet its financial obligations.

Adjusted funds flow per share is calculated using the weighted average number of shares outstanding used in calculating net income (loss) per share. Adjusted funds flow is not intended to represent net cash flows from (used in) operating activities calculated in accordance with IFRS.

Adjusted funds flow per boe is calculated as adjusted funds flow divided by total production sold in the period.

The following table reconciles net cash flows from (used in) operating activities as reported in the Company's condensed interim consolidated statements of cash flows, to adjusted funds flow:

	Three months ended June 30,	Six months ended June 30,
($ thousands, except per share and per boe amounts)	2021	2020	2021	2020
Net cash flows from (used in) operating activities	2,854	(2,777)	4,536	(5,891)
Change in non-cash working capital	(1,832)	(1,383)	(1,982)	(2,318)
Decommissioning obligations settled (cash)	316	3	431	177
Oil and natural gas revenue in-kind	1,198	650	2,331	650
Payments of gas over bitumen royalty financing	(234)	(152)	(470)	(356)
Payments of restructuring costs	-	331	-	809
Adjusted funds flow	2,302	(3,328)	4,846	(6,929)
Adjusted funds flow per share	0.04	(0.05)	0.08	(0.11)
Adjusted funds flow per boe	4.96	(9.99)	5.19	(6.84)

Available Liquidity: Available Liquidity is defined as Perpetual's reserve-based first lien credit facility (the "Credit Facility") borrowing limit (the "Borrowing Limit"), less borrowings and letters of credit issued under the Credit Facility. Management uses available liquidity to assess the ability of the Company to finance capital expenditures and expenditures on decommissioning obligations, and to meet its financial obligations.

Cash costs: Cash costs are comprised of royalties, production and operating, transportation, general and administrative, and cash finance expense as detailed below. Cash costs per boe is calculated by dividing cash costs by total production sold in the period. Management believes that cash costs assist management and investors in assessing Perpetual's efficiency and overall cost structure.

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	Three months ended June 30,	Six months ended June 30,
($ thousands, except per boe amounts)	2021	2020	2021	2020
Royalties	2,383	794	4,514	3,177
Production and operating	3,552	1,834	6,838	6,002
Transportation	754	782	1,444	2,052
General and administrative	1,994	1,995	4,049	4,220
Cash finance expense	291	1,902	(646)	4,472
Cash costs	8,974	7,307	16,199	19,923
Cash costs per boe	19.34	21.93	17.36	19.65

Realized revenue: Realized revenue is the sum of realized natural gas revenue, realized oil revenue, and realized natural gas liquids ("NGL") revenue which includes realized gains (losses) on financial natural gas, crude oil, NGL, and foreign exchange contracts. Realized revenue is used by management to calculate the Corporation's net realized commodity prices, taking into account the monthly settlements of financial crude oil and natural gas forward sales, collars, basis differentials, and forward foreign exchange sales. These contracts are put in place to protect Perpetual's adjusted funds flow from potential volatility in commodity prices and foreign exchange rates. Any related realized gains or losses are considered part of the Corporation's realized price.

Operating netback: Operating netback is calculated by deducting royalties, production and operating expenses, and transportation costs from realized revenue. Operating netback is also calculated on a per boe basis using total production sold in the period. Operating netback on a per boe basis can vary significantly for each of the Company's operating areas. Perpetual considers operating netback to be an important performance measure as it demonstrates its profitability relative to current commodity prices.

Net working capital deficiency: Net working capital deficiency includes total current assets and current liabilities excluding short-term derivative assets and liabilities related to the Corporation's risk management activities, revolving bank debt, second lien term loan (the "Term Loan"), current portion of royalty obligations, current portion of lease liabilities, and current portion of decommissioning obligations.

Net bank debt, net debt, and net debt to adjusted funds flow ratio: Net bank debt is measured as current and long-termrevolving bank debt, including the net working capital deficiency. Net debt includes the carrying value of net bank debt, the principal amount of the Term Loan, and the principal amount of senior notes. Net debt, net bank debt, and net debt to adjusted funds flow ratios are used by management to assess the Corporation's overall debt position and borrowing capacity. Net debt to adjusted funds flow ratios are calculated on a trailing twelvemonth basis.

Enterprise value: Enterprise value is equal to net debt plus the market value of issued equity, and is used by management to analyze leverage.

VOLUME CONVERSIONS: Barrel of oil equivalent ("boe") may be misleading, particularly if used in isolation. In accordance with National Instrument 51-101, a conversion ratio for conventional natural gas of 6 Mcf:1 bbl has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, utilizing a conversion on a 6 Mcf:1 bbl basis may be misleading as an indicator of value as the value ratio between conventional natural gas and heavy crude oil, based on the current prices of natural gas and crude oil, differ significantly from the energy equivalency of 6 Mcf:1 bbl. A conversion ratio of 1 bbl of heavy crude oil to 1 bbl of NGL has also been used throughout this MD&A. Refer to the "Production" section of this MD&A for details of constituent product components that comprise Perpetual's boe production.

SECOND QUARTER 2021 HIGHLIGHTS

Second quarter production averaged 5,099 boe/d, up 39% from 3,662 boe/d in the comparative period of 2020. The increase was due to production from the first seven (3.5 net) East Edson carried interest wells and the reactivation of heavy crude oil production which was shut-in during the second quarter of 2020 as oil prices recovered and stabilized. As of June 30, 2021, Perpetual had restarted substantially all heavy crude oil production that was initially suspended in late March 2020 in response to extremely low oil prices.

Exploration and development spending in the second quarter of 2021 was $1.6 million and included costs to drill the first of two (1.0 net) Clearwater heavy crude oil wells at Marten Hills. These wells are expected to commence sales in mid-August once all oil-based mud has been recovered. At the 50% owned East Edson Property, spending of $0.7 million included costs to upgrade roads and to maintain and optimize production through well workovers, including the installation of plunger lifts on 25 wells. The eighth and final carried interest well at East Edson was spud July 26, 2021.

Realized revenue was $25.13/boe in the second quarter of 2021, 91% higher than the comparative period of 2020 ($13.15/boe). The increase was due primarily to higher realized natural gas prices of $2.25/Mcf, more than eight times higher than the prior year period (Q2 2020 - $0.28/Mcf). Perpetual's realized gas price was reduced by $0.78/Mcf due to the elimination of the market diversification contract obligations for the November 1, 2021 to March 31, 2022 period, in consideration for the payment of $1.6 million over the term of the associated contract volumes. Perpetual's realized oil price of $55.75/bbl was 17% lower than the second quarter of 2020, due to the absence of realized financial hedging gains which contributed $2.3 million ($44.32/bbl) in the second quarter of 2020. Excluding realized financial hedging gains, Perpetual's realized oil price was $55.75/bbl in the second quarter of 2021, more than two times higher than the prior year period of $23.24/bbl. Perpetual's realized NGL price for the second quarter of 2021 was $55.48/bbl, more than three times higher than the second quarter of 2020 due to an increase in all NGL component prices which tracked the rise in WTI light oil prices.

Cash costs were up 23% to $9.0 million (Q2 2020 - $7.3 million), but down 12% on a unit-of-production basis to $19.34/boe (Q2 2020 - $21.93/boe) due to the impact of the 39% increase in production. Compared to the second quarter of 2020, cash costs increased by $1.7 million, reflecting higher royalties and production and operating expenses following the improvement in commodity prices and the continued reactivation of heavy crude oil production.

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The Company generated net cash flow from operating activities of $2.9 million in the second quarter of 2021, an improvement of $5.6 million from the prior year period (Q2 2020 - cash flow used in operating activities of $2.8 million). The increase was due to significantly higher realized prices for conventional natural gas and NGLs, combined with the 39% increase in production and lower cash finance expense resulting from payment of the second lien term loan and 2025 Senior Note interest in-kind rather than in cash.

Adjusted funds flow in the second quarter of 2021 was $2.3 million ($0.04/share), up $5.6 million from the prior year period of negative $3.3 million ($0.05/share). The increase was due primarily to the $5.6 million increase in cash flow from operating activities. Compared to the first quarter of 2021, adjusted funds flow decreased by $0.2 million (10%), due to the 2% decrease in production combined with slightly higher cash costs per boe.

Net income for the second quarter of 2021 was $27.0 million ($0.43/share), an improvement of $35.8 million from the prior year period (Q2 2020 - net loss of $8.8 million; $0.15/share) and due primarily to a non-cash impairment reversal of $30.1 million. Excluding the impairment reversal, net income improved by $5.7 million for the same reasons that impacted adjusted funds flow.

FUTURE OPERATIONS

As of June 30, 2021, the Company's Credit Facility had a Borrowing Limit of $20 million under which $15.2 million was borrowed and $1.0 million of letters of credit had been issued. The Credit Facility was set to mature on July 16, 2021. Additionally, the Company's Term Loan had a principal amount owing of $48.7 million set to mature on July 30, 2021. The Company had a net working capital deficiency of $9.6 million (March 31, 2021 - $6.7 million). The Company will require additional financing to refinance the Credit Facility and Term Loan maturities and to fund the net working capital deficiency.

The semi-annual Term Loan interest payment of $1.9 million that was payable June 30, 2021, was deferred by the Company's Term Loan lender and added to the principal amount owing, bringing the principal amount outstanding at June 30, 2021 to $48.7 million. In January 2021, the Company exchanged its $33.6 million 8.75% unsecured senior notes due January 23, 2022 (the "2022 Senior Notes") for new $33.6 million secured 8.75% third lien senior notes due January 23, 2025 (the "2025 Senior Notes"). Interest on the 2025 Senior Notes may be paid-in-kind at the option of the Company by adding the interest payment to the principal amount owing. On January 23, 2021 and on July 23, 2021, the semi-annual interest payments on the 2025 Senior Notes were paid in-kind, increasing the principal amount outstanding to $36.6 million on July 23, 2021.

On July 16, 2021, Perpetual announced the creation of a new wholly owned subsidiary, Rubellite Energy Inc. and the sale of all of Perpetual's Clearwater lands, wells, roads and related facilities in northeast Alberta (the "Clearwater Assets") to Rubellite. Rubellite will pay approximately $60 million (net of $4.1 million initial capitalization Rubellite common shares and $1.2 million of purchase price adjustments), of which $58 million will be paid in cash with the remainder comprised of the issuance of an option to purchase four million Rubellite common shares at a price of $3.00 per share for a period of five years (the "Rubellite Share Purchase Options"). Perpetual also announced a proposed plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement") involving Perpetual, Rubellite, and the shareholders of Perpetual whereby Rubellite will raise a minimum of $73.8 million cash through the sale of its equity to Perpetual shareholders and third-party investors (the "Rubellite Financings"). The Rubellite Financings include:

1. A backstopped arrangement warrant financing whereby Perpetual shareholders will receive Rubellite common shares and arrangement warrants providing an equal opportunity to purchase Rubellite common shares, raising $33.4 million (16.7 million Rubellite common shares) (the "Arrangement Warrant Financing"). Rubellite has entered into a Standby Purchase Agreement with a corporation controlled by Sue Riddell Rose, Perpetual's President and Chief Executive Officer, that ensures that all arrangement warrants are fully exercised to the extent they are not otherwise exercised by other Perpetual shareholders;
2. a non-brokered private placement for a minimum of $10.5 million (5.225 million Rubellite common shares), which may be expanded to up to $20 million (10.0 million Rubellite common shares) (the "Non-Brokered Private Placement"). The Non-Brokered Private Placement is expected to close concurrently with the Arrangement Warrant Financing; and
3. a brokered $30.0 million subscription receipt financing that has closed, with cash held in escrow by a third-party trustee until the earlier of the satisfaction of the escrow release conditions or November 30, 2021. On the satisfaction of the escrow release conditions, which include, among other things, the completion of the Arrangement and the concurrent completion of the Non- Brokered Private Placement and the Arrangement Warrant Financing as well as the listing of Rubellite common shares on the Toronto Stock Exchange, each subscription receipt issued will automatically be exchanged on a one-to-one basis for 15 million common shares of Rubellite concurrent with the other financings.

The Rubellite Financings are being completed at $2.00 per Rubellite common share equivalent and are expected to close before the end of the third quarter.

On July 15, 2021, Perpetual reached an agreement with its second lien Term Loan lender for the settlement of principal and accrued interest owing on the Term Loan upon closing of the Rubellite Financings, for the payment of approximately $38.5 million in cash, delivery by Perpetual of 680,485 Rubellite common shares, the issuance of a new $2.7 million second lien term loan bearing interest at 8.1% annually and maturing December 31, 2024, and up to a total of $4.5 million in contingent payments over the three year period ended June 30, 2024 in the event that Perpetual's annual average realized crude oil and natural gas prices exceed certain thresholds (the "Second Lien Loan Settlement"). The maturity of the existing Term loan has been extended to November 30, 2021. As part of the Second Lien Loan Settlement, the Term Loan lender has committed to fully exercise the Arrangement Warrants it will receive under the Plan of Arrangement associated with its approximately 4.0% equity ownership of Perpetual. In addition, the Term Loan lender has agreed to subscribe for $4.45 million of the Non-Brokered Private Placement and upon completion of the Transactions is expected to own approximately 9.3% of the Rubellite common shares. The Second Lien Loan Settlement will terminate concurrently upon any termination of the Arrangement or the agreements providing for the Rubellite Financings.

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Upon closing of the Rubellite Financings, Perpetual will receive cash proceeds of approximately $53.2 million, net of transaction costs, the $1.2 million purchase price adjustment and non-cash consideration of 4.0 million Rubellite Share Purchase Options. Perpetual will use the cash proceeds received to satisfy the $38.5 million cash component of the Second Lien Loan Settlement with the remaining cash applied to repay a significant portion of the Credit Facility. Upon closing of the Rubellite Financings and concurrent completion of the Second Lien Loan Settlement, the Credit Facility will have a Borrowing Limit of $17 million, reduced from the existing $20 million Borrowing Limit, with a maturity of May 31, 2023. The next Borrowing Limit redetermination is scheduled on or before November 30, 2021. If the Rubellite Financings or Second Lien Loan Settlement does not close, the Credit Facility will cease to revolve and will mature on November 15, 2021. Upon the completion of the Rubellite Financings and concurrent Second Lien Loan Settlement, the Company's net debt will be reduced by approximately 46% with no debt maturities until May 31, 2023. The Company anticipates that its improved liquidity and forecast cash flows from operating activities will be sufficient to fund its working capital deficiency and capital spending plans.

Subsequent to June 30, 2021, Rubellite has entered into an agreement with a third party whereby it has sold a 3% to 5% gross overriding royalty on certain lands at Figure Lake (the "Figure Lake GORR Financing") for gross proceeds of $7.9 million to be paid in accordance with a drilling commitment agreement. It is expected that 100% of Rubellite's costs for the drilling, completion and equipping of four commitment wells and a portion of the costs for twelve additional wells on the Figure Lake royalty lands will be funded by the Figure Lake GORR Financing. The first of four Figure Lake commitment wells was spud on July 21, 2021.

There can be no assurance that the Arrangement will be completed. In the absence of the completion of the Arrangement, the Rubellite Financings and concurrent Second Lien Loan Settlement, there remains considerable risk around the Company's ability to address its liquidity shortfalls and upcoming maturities. In addition, there continues to be some uncertainty regarding the Statement of Claim (see "Sequoia Litigation Update" on page 14 of this MD&A) which may restrict the Company's ability to manage its capital structure. As a result, there is material uncertainty surrounding the Company's ability to continue as a going concern that creates significant doubt as to the ability of the Company to meet its obligations as they come due. Therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business.

Perpetual's financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Corporation will be able to realize its assets and discharge its liabilities in the normal course of business. These financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. These adjustments could be material.

2021 OUTLOOK

On July 16, 2021, Perpetual announced the creation of Rubellite Energy Inc., approximately $73 million in equity financings, the settlement of the majority of its second lien Term Loan, and new Credit Facilities (the "Rubellite Transactions"). The management information circular (the "Information Circular") with respect to the Plan of Arrangement involving Rubellite has been filed on SEDAR at www.sedar.com. The Special Meeting of Shareholders to consider the Plan of Arrangement is scheduled to be held on August 31, 2021. Perpetual shareholders are encouraged to carefully review the Information Circular as it contains important deadlines and information with respect to the exercise of warrants to be received by Perpetual shareholders in connection with the Plan of Arrangement and for Perpetual shareholders to participate in the equity financings.

The Rubellite Transactions offer a "full capital solution" for Perpetual by reducing Perpetual's net debt, normalizing the balance sheet leverage ratios and surfacing incremental value from the development of its assets. Perpetual believes that the Rubellite Transactions will materially improve its liquidity, ensure its ongoing solvency and significantly improve both its ability to operate as a going concern and meet its obligations as they become due, including the flexibility to make cash payments of second lien and third lien interest which has recently been paid in-kind. At the same time, completion of the Rubellite Transactions will enhance Perpetual's ability to capture the inherent value in its asset base by funding investment opportunities to grow and sustain production and adjusted funds flow.

Perpetual will realize net cash proceeds from the Rubellite Transactions of approximately $53.2 million which it will use to reduce net debt. The maturity of the Company's Credit Facility has been extended to May 31, 2023, subject to the completion of the Rubellite Transactions at which time Perpetual expects to be less than 25% drawn on the new $17 million Credit Facility. As part of the Second Lien Loan Settlement, the maturity of the New Second Lien Term Loan, which will be reduced to $2.7 million, has been extended to December 31, 2024. Net debt will decline by 46% from $110.0 million at June 30, 2021 to approximately $59 million estimated at closing of the Rubellite Transactions, inclusive of estimated capital spending at Edson and other forecast corporate revenues and expenses during the third quarter of 2021. Interest cost savings alone will improve Perpetual's adjusted funds flow by approximately $4 million annually. The general and administrative cost recoveries under the management services agreement with Rubellite will further enhance Perpetual's liquidity by approximately $2 to $3 million annually.

The Rubellite Transactions create the appropriate capital structure to fund the exploration and development activities for the Clearwater Assets, while at the same time establishing liquidity to meet Perpetual's debt maturities and other obligations as they become due and fund Perpetual's value adding opportunities at Edson and Mannville along with other new ventures, and will enhance value for the shareholders in the short and long term. Other Perpetual stakeholders, including secured and unsecured creditors, will benefit from Perpetual's enhanced creditworthiness, improved liquidity, and the eventual removal of going concern considerations. Additionally, the Rubellite Share Purchase Options to be received by Perpetual provide an opportunity for Perpetual to participate in value creation from the Clearwater Assets in Rubellite over the next five years.

Following completion of the Rubellite Transactions, Perpetual is expected to have sufficient liquidity to invest capital in its assets to grow production and adjusted funds flow and convert proved and probable undeveloped reserves to proved developed producing reserves which serves to support the Company's borrowing capacity, increases the fair market value of Perpetual's assets, and generally enhances the Company's ability to meet its obligations as they become due. In addition, with the committed maturity extension to the first lien Credit Facility, Perpetual anticipates it will have increased capability to enter into risk management contracts to mitigate commodity price risk.

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Operationally, Perpetual and Rubellite are expected to have active capital programs over the balance of the year. At Perpetual's 50% working interest East Edson property, the last of the 8-well carried interest commitment was spud on July 26, 2021 and the joint venture partner is expected to keep that rig working with an additional six (3.0 net) wells drilled prior to year-end. At Rubellite's Figure Lake property, the first of four (4.0 net) wells was spud on July 21, 2021. This program is expected to be 100% financed by the GORR financing announced as part of the Rubellite Transactions. An additional eight Clearwater multi-lateral wells are expected to be drilled in the Ukalta area by Rubellite following the closing of the Rubellite Financings.

Subject to completion of the Rubellite Financings, Perpetual's Board of Directors has approved exploration and development capital spending for Perpetual's remaining assets for the second half of 2021 of $14 to $17 million to be funded from proceeds from the Rubellite Transactions and adjusted funds flow. The majority of the expenditures will be directed to the East Edson property in West Central Alberta to participate for Perpetual's 50% working interest share in the drilling, completion and tie-in of the six (3.0 net) wells developing liquids-rich conventional natural gas reserves in the Wilrich formation. The six well drilling program will follow immediately upon the completion of the drilling of the eighth and final carried interest well that formed part of the consideration when the Company sold a 50% working interest in the East Edson property in April 2020. The Company expects the final carried interest well to be completed and brought onstream late in the third quarter. The remaining six wells are expected to be extended reach horizontal wells and are forecast to come onstream in two tranches midway through the fourth quarter and late in the fourth quarter of 2021. The second half 2021 drilling program is targeting to fill the West Wolf gas plant to maximize natural gas and NGL sales through next winter. Activity in Mannville in Eastern Alberta will be focused on waterflood optimization and battery consolidation projects.

Total spending for the second half of 2021 on Rubellite's Clearwater Assets is forecast to be $18 - $20 million. The fully-funded four well Figure Lake drilling program is underway and a $12 to $14 million drilling program at Ukalta is expected to begin upon closing of the Rubellite Financings.

The table below summarizes anticipated capital spending and drilling activities for Perpetual and Rubellite for the first and second half of 2021.

2021 Exploration and Development Forecast Capital Expenditures

	H1 2021	# of wells	H2 2021	# of wells
	($ millions)	(gross/net)	($ millions)	(gross/net)
West Central(1)	0.7	2/1.0	$14 - $16	7/3.5
Eastern Alberta(2)	0.9	1/0.5	0 - $1	1/0.5
Rubellite Clearwater Assets	-	-	$18 - $20	12/12.0
Total(3)	1.6	3/1.5	$32 - $37	20/16.0

1. Production from West Central is primarily liquids-rich conventional natural gas. The two (1.0 net) wells drilled in H1 2021 and the first well drilled in H2 2021 represent the final three wells of the eight well carried interest drilling commitment.
2. Drilling in Eastern Alberta was at Marten Hills, with one (0.5 net) well rig released in H1 2021 and the second well in July 2021. This activity was funded by Perpetual and the wells form part of the Rubellite Transactions. Production from Eastern Alberta is primarily heavy crude oil.
3. Excludes budgeted abandonment and reclamation spending of $2.4 million ($1.2 million of which is expected to be funded by the SRP and recorded as other income).

Perpetual continues its environmental, social, and corporate governance ("ESG") focus, with total abandonment and reclamation expenditures of up to $2.4 million planned in 2021, with an estimated $1.2 million to be funded through Alberta's Site Rehabilitation Program ("SRP"). The remaining $1.2 million will more than satisfy the Company's annual area-based closure spending requirements of $1.0 million.

SECOND QUARTER FINANCIAL AND OPERATING RESULTS

Capital expenditures
	Three months ended June 30,	Six months ended June 30,
($ thousands)	2021	2020	2021	2020
Exploration and development	1,554	30	1,555	5,260
Corporate assets	-	(41)	2	(38)
Capital expenditures	1,554	(11)	1,557	5,222
Acquisitions	-	89	625	89
Net proceeds on dispositions	(46)	(34,750)	(202)	(34,750)
Total	1,508	(34,672)	1,980	(29,439)
Exploration and development spending by area
	Three months ended June 30,	Six months ended June 30,
($ thousands)	2021	2020	2021	2020
West Central	660	(200)	661	(67)
Eastern Alberta	894	230	894	5,327
Total	1,554	30	1,555	5,260

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