News Column

EQUAL ENERGY LTD. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 7, 2014

Forward-Looking Statements

The information discussed in this quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, changes in oil and gas production, the number of anticipated wells to be drilled after the date hereof, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as "may," "expect," "estimate," "project," "plan," "believe," "intend," "achievable," "anticipate," "will," "continue," "potential," "should," "could," and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:



- risks and uncertainties associated with the intended offer to repurchase

convertible debentures; - risks associated with drilling oil and natural gas wells; - the volatility of oil and natural gas prices; - uncertainties in estimating oil and natural gas reserves; - the need to replace the oil and natural gas the Company produces;



- the Company's ability to execute its growth strategy by drilling wells as

planned;



- risks and liabilities associated with acquired properties and risks

related to the integration of acquired businesses;



- amount, nature and timing of capital expenditures, including future

development costs, required to develop the Company's undeveloped areas;

- concentration of operations in Central Oklahoma; - inability to retain drilling rigs and other services; - risk of currency fluctuations;

- the potential adverse effect of commodity price declines on the carrying value of the Company's oil and natural gas properties;



- severe or unseasonable weather that may adversely affect production and

drilling; - availability of satisfactory oil and natural gas marketing and transportation; - availability and terms of capital to fund capital expenditures; - amount and timing of proceeds of asset sales and asset monetization;



- limitations on operations resulting from debt restrictions and financial

covenants; - potential financial losses or earnings reductions from commodity derivatives; - potential elimination or limitation of tax incentives; - competition in the oil and natural gas industry; Page 16 of 39



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- general economic conditions, either internationally or domestically or in

the areas where the Company operates; - inability to obtain required regulatory approvals for development activities;



- costs to comply with current and future governmental regulation of the

oil and natural gas industry, including environmental, health and safety

laws and regulations, and regulations with respect to water disposal and

hydraulic fracturing;



- the need to maintain adequate internal control over financial reporting.

Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in the section entitled "Risk Factors" included in our 2013 Annual Report on Form 10-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. The following discussion and analysis addresses material changes in our results of operations and capital resources and uses for the three and six months ended June 30, 2014, compared to the three and six months ended June 30, 2013, and in our financial condition and liquidity since December 31, 2013, and should be read in conjunction with "Item 1. Consolidated Financial Statements" of this report and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 Annual Report on Form 10-K.



In addition, the following discussion is for our continuing operations (U.S. operations) for the three and six months ended June 30, 2014.

Overview

Equal Energy Ltd. is a Calgary, Alberta based company headquartered in Oklahoma City, Oklahoma, engaged in the exploration, acquisition, development and production of petroleum and natural gas in Oklahoma. The Company also reviews new drilling opportunities and potential acquisitions in Oklahoma to supplement its exploration and development activities. The Company averaged approximately 7,125 and 7,049 boe/d of production for the three and six months ended June 30, 2014, respectively, which was comprised of approximately 48% natural gas, 48% NGLs and 4% crude oil. At June 30, 2014, the Company had 146 gross (120 net) producing wells, virtually all of which it operates, and approximately 85,500 gross (58,600 net) acres under lease or held by production. On December 6, 2013, Equal, Petroflow Energy Corporation, a Delaware corporation ("Petroflow"), and Petroflow Canada Acquisition Corp., an Alberta, Canada corporation and wholly-owned subsidiary of Petroflow ("PetroflowSub"), entered into an Arrangement Agreement, pursuant to which Petroflow agreed to acquire, indirectly through PetroflowSub, all of the outstanding common shares of Equal for $5.43 per share in cash, without interest (the "Arrangement"), pursuant to which Equal would become an indirect wholly-owned subsidiary of Petroflow. The Arrangement was completed on July 31, 2014. Common shareholders of Equal who are entitled to receive Arrangement consideration upon completion of the Arrangement will also receive a cash dividend of $0.05 cents per common share (the "Arrangement Dividend") following completion of the Arrangement. In connection with the completion of the Arrangement, Equal entered into option cancellation agreements ("Option Agreements") with each option holder in respect of all options. In addition, at the effective time of the Arrangement, all Equal common shares issuable pursuant to Equal's restricted share and performance share incentive plan were issued and those Equal common shares were converted into the right to receive the Arrangement consideration, less any applicable withholding taxes. Petroflow has agreed that following the effective date of the Arrangement, Petroflow will satisfy or cause Equal to satisfy, all of Equal's obligations regarding its convertible debentures, including that Petroflow will cause Equal to make an offer to purchase all of Equal's outstanding CAD $45 million of convertible debentures within 30 days. In accordance with the terms of the indenture governing the convertible debentures, cash consideration equal to 101% of the face value, plus accrued and unpaid interest, will be offered to holders of the convertible debentures. Page 17 of 39



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Equal's Properties

The Company's production comes from its Oklahoma based operations. The core area assets are located in Lincoln and Logan counties of Oklahoma. The Company also has an inventory of minor producing assets, minor royalty interests and various exploration and exploitation prospects on undeveloped lands in Oklahoma. [[Image Removed: LOGO]] In Oklahoma, the key producing horizon is the Hunton formation. The Hunton is a carbonate rock formation which has been largely ignored by the industry in areas with high water/hydrocarbon production ratios. Over the last decade, new drilling and production techniques have enabled profitable development of the Hunton formation. Extensive dewatering lowers reservoir pressure, allowing the liberation and mobilization of oil, natural gas and NGLs from smaller rock pores. Typical peak wellhead hydrocarbon production rates average 150 boe/d per horizontal well and are generally observed within six months of production commencement. Average Hunton production for the three months ended June 30, 2014, was approximately 20.2 MMcf/d of natural gas, 3.4 Mbbl/d of NGLs and 0.3 Mbbl/d of oil and for the six months ended June 30, 2014 was approximately 20.1 MMcf/d of natural gas, 3.4 Mbbl/d of NGLs and 0.3 Mbbl/d of oil. At December 31, 2013, the reserve report attributed proved reserves of 280 Mbbl of crude oil, 66 Bcf of natural gas and 12,993 Mbbl of NGLs.



As of June 30, 2014, the Company had approximately 27,000 gross (11,000 net) undeveloped acres of land under leasehold, primarily located in Lincoln and Logan counties of Oklahoma comprising of interests in 84 sections.

Market Conditions

Prices of natural gas, NGLs, and oil that we produce can vary significantly, which impacts our revenues and cash flows. The following table lists average New York Mercantile Exchange ("NYMEX") prices for natural gas, West Texas Intermediate ("WTI") prices for crude oil, and propane prices at Conway, KS for the three and six months ended June 30, 2014 and 2013. Three months ended June 30, 2014 2013 Propane, Conway, KS (US$ per bbl) $ 43.80$ 35.88 NYMEX natural gas (US$ per mcf) $ 4.67 $ 3.88 WTI (US$ per bbl) $ 103.07$ 94.10 Six months ended June 30, 2014 2013 Propane, Conway, KS (US$ per bbl) $ 55.01$ 35.15 NYMEX natural gas (US$ per mcf) $ 4.70 $ 3.63 WTI (US$ per bbl) $ 100.88$ 94.26 Page 18 of 39



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Results of Operations for the three months ended June 30, 2014, and June 30, 2013

For the three months ended June 30, 2014, Equal Energy's production was from the Central Oklahoma properties.

The following table sets forth selected operating data for the periods indicated. Three months ended (in thousands, except for boe/d) Central



Oklahoma

June 30, 2014 June 30, 2013 Change % Change Net Production per Day: Oil (Bbl) 323 136 187 137 % NGL (Bbl) 3,434 3,079 355 12 % Natural Gas (Mcf) 20,207 18,429 1,778 10 % Total (Boe/d) 7,125 6,287 838 13 % Net Production: Oil (MBbl) 29 12 17 142 % NGL (MBbl) 313 280 33 12 % Natural Gas (MMcf) 1,839 1,677 162 10 % Total (MBoe) 649 572 77 13 % Net Sales: Oil Sales $ 2,938 $ 1,127 $ 1,811 161 % NGL Sales 10,484 8,249 2,235 27 % Natural Gas Sales 6,639 5,372 1,267 24 % $ 20,061$ 14,748$ 5,313 36 % Average Sales Prices: Oil (per Bbl) $ 101.30 $ 90.96 $ 10.34 11 % NGL (per Bbl) 33.49 29.44 4.05 14 % Natural Gas (per Mcf) 3.61 3.20 0.41 13 % Per Boe $ 30.93 $ 25.78 $ 5.15 20 % Operating Expenses: Production Expenses $ 4,205 $ 3,529 $ 676 19 % Production Taxes 683 923 (240 ) -26 % Expenses (per Boe): Production Expenses $ 6.48 $ 6.17 $ 0.31 5 % Production Taxes 1.05 1.61 (0.56 ) -35 % Net Producing Wells at Period End 120 110 10 9 % The following table sets forth selected operating data as reported for the three months ending: June 30, 2014 June 30, 2013 Change % Change Operating Expenses: General and Administrative Expense (Including Share Based Compensation) $ 3,242 $ 3,857 $ (615 ) -16 % Interest Expense 865 926 (61 ) -7 % Depletion of Oil and Gas Properties 4,641 4,117 524 13 % Costs and Expenses (per Boe): General and Administrative Expense (Including Share Based Compensation) $ 5.00 $ 6.74 $ (1.74 ) -26 % Interest Expense 1.33 1.62 (0.29 ) -18 % Depletion of Oil and Gas Properties 7.16 7.20 (0.04 ) -1 % Page 19 of 39



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Oil, Natural Gas and NGL Sales:

Sales in all categories benefited from higher production, as compared to the prior year's quarter. Equal initiated a one-rig program in January 2013 which was originally budgeted to drill 10 wells during the year. Better than anticipated efficiencies allowed the rig to drill 12 wells during the year. Nine of these wells were completed in 2013 and the final three wells were completed in January 2014. All 12 wells proved very successful, and with several being drilled in oilier parts of the play, we saw a significant jump in oil production as compared to the first quarter of 2013.



Oil Sales

Oil revenue was $2.9 million for the second quarter of 2014 as compared to $1.1 million for the same period last year. The $1.8 million increase was primarily a result of a 137% increase in daily production attributable to successful drilling in 2013, in addition to an 11% increase in average price, excluding commodity contracts. Gas Sales Gas revenue for the second quarter of 2014 was $6.6 million as compared to $5.4 million for the same period last year. The $1.2 million increase was primarily due to a 13% increase in average price, excluding commodity contracts, in addition to a 10% increase in daily production attributable to successful drilling in 2013. Price increases were largely consistent with the broad improvement of gas prices in the North American market.



NGL Sales

NGL revenue for the second quarter of 2014 was $10.5 million as compared to $8.2 million for the same period last year. The $2.3 million increase was a result of a 14% increase in average price, excluding commodity contracts, and a 12% increase in daily production. The higher realized prices were largely due to increases in NGL index prices at the Conway, KS hub. The increase in NGL production was attributable to successful drilling in 2013.



Production Expenses

Production expenses were $4.2 million for the second quarter of 2014 compared to $3.5 million for the same period last year. The $0.7 million increase was primarily attributable to the increase in daily production in the current quarter as compared to the same period last year. On a per unit-of-production basis, production expenses per boe increased from $6.17 in the second quarter of 2013 to $6.48 in the second quarter of 2014 primarily due to increased workover expenses. Production Taxes The company normally pays a base rate of 7% in production taxes based on realized oil, NGL and natural gas sales. Production taxes were $0.7 million for the second quarter of 2014 compared to $0.9 million for the same period last year. As a percentage of net sales, our production tax rates averaged 3.4% and 6.3% in the second quarter of 2014 and 2013, respectively. The average production tax rate for the second quarter of 2014 was lower than the same period last year due to new horizontal wells drilled in 2013 qualifying for a 48-month six percent Oklahoma production tax rate reduction. During the three months ended December 31, 2013, prior period errors were identified relating to the recording of tax rebates from the Oklahoma Tax Commission ("OTC") for production activities in 2009, 2010 and 2011, together with the related recognition of deferred income tax assets and expenses. The final settlement with the OTC related to the prior period tax rebates resulted in a $0.4 million decrease of the estimated liability in the second quarter of 2014, which reduced second quarter 2014 production tax expense. Excluding this $0.4 million adjustment, production taxes would have been 5.2% of realized oil, NGL and natural gas sales. Page 20 of 39



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Commodity Contracts

For the second quarter of 2014, Equal had a net loss on commodity contracts of $0.5 million as compared to a net gain of $3.5 million for the same period last year. The significant decrease in profit is due to higher commodity prices relative to contracted hedges. Equal made cash payments on settled derivatives of $0.7 million in the second quarter of 2014, as compared to $0.1 million for the same period last year. At June 30, 2014, all the derivative contracts were recorded at their fair value, which was a net liability of $1.1 million, an increase of $0.8 million from the $0.3 million of net liability recorded at December 31, 2013.



General and Administrative Expense

General and administrative expense was $3.2 million for the second quarter of 2014 as compared to $3.9 million for the same period last year, excluding discontinued operations. The $0.7 million decrease was due to the decrease in share-based compensation costs due primarily to 2013 forfeitures. On a per unit-of production basis, the general and administrative expense per boe was favorable at $5.00 for the second quarter of 2014 compared to $6.74 for the second quarter of 2013. This reduction in costs per boe is due to increased production and lower costs.



Depletion of Oil and Gas Properties

Depletion of oil and gas properties was $4.6 million, in the second quarter of 2014 as compared to $4.1 million for the same period last year. The $0.5 million increase in expense was attributable to increased production. On a per unit-of production basis, the depletion expense per boe was $7.16 for the second quarter of 2014 compared to $7.20 for the second quarter of 2013.



Interest Expense

Interest expense was $0.9 million for the second quarter of 2014 and for the same period last year, and is comprised of interest on the CAD $45 million, 6.75% convertible debentures and fees associated with the unused CAD $125 million credit facility.

Income Tax Provision

The provision for income tax expense was $1.5 million in the second quarter of 2014 and for the same period last year. The effective income tax rate differs from the statutory rate of 35% due to permanent differences, the change in valuation allowance, and AMT credits. Page 21 of 39



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Results of Operations for the six months ended June 30, 2014, and June 30, 2013

For the six months ended June 30, 2014, Equal Energy's production was from the Central Oklahoma properties.

The following table sets forth selected operating data for the periods indicated: Six months ended (in thousands, except for boe/d) Central



Oklahoma

June 30, 2014 June 30, 2013 Change % Change Net Production per Day: Oil (Bbl) 282 147 135 92 % NGL (Bbl) 3,423 3,083 340 11 % Natural Gas (Mcf) 20,067 18,339 1,728 9 % Total (Boe/d) 7,049 6,286 763 12 % Net Production: Oil (MBbl) 51 27 24 89 % NGL (MBbl) 620 558 62 11 % Natural Gas (MMcf) 3,632 3,319 313 9 % Total (MBoe) 1,276 1,139 137 12 % Net Sales: Oil Sales $ 5,028 $ 2,433 $ 2,595 107 % NGL Sales 22,961 17,391 5,570 32 % Natural Gas Sales 14,218 9,729 4,489 46 % $ 42,207$ 29,553$ 12,654 43 % Average Sales Prices: Oil (per Bbl) $ 98.58 $ 91.58 $ 7.00 8 % NGL (per Bbl) 37.03 31.17 5.86 19 % Natural Gas (per Mcf) 3.91 2.93 0.98 34 % Per Boe $ 33.07 $ 25.98 $ 7.09 27 % Operating Expenses: Production Expenses $ 8,266 $ 6,984 $ 1,282 18 % Production Taxes 1,436 1,849 (413 ) -22 % Expenses (per Boe): Production Expenses $ 6.48 $ 6.14 $ 0.34 5 % Production Taxes 1.13 1.63 (0.50 ) -31 % Net Producing Wells at Period End 120 110 10 9 % The following table sets forth selected operating data as reported for the six months ended: June 30, 2014 June 30, 2013 Change % Change Operating Expenses: General and Administrative Expense (Including Share Based Compensation) $ 6,554 $ 7,010 $ (456 ) -7 % Interest Expense 1,744 1,875 (131 ) -7 % Depletion of Oil and Gas Properties 9,150 8,910 240 3 % Costs and Expenses (per Boe): General and Administrative Expense (Including Share Based Compensation) $ 5.13 $ 6.16 $ (1.03 ) -17 % Interest Expense 1.37 1.65 (0.28 ) -17 % Depletion of Oil and Gas Properties 7.17 7.83 (0.66 ) -8 % Page 22 of 39



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Oil, Natural Gas and NGL Sales:

Sales in all categories benefited from higher production, as compared to the prior year's quarters. Equal initiated a one-rig program in January 2013 which was originally budgeted to drill 10 wells during the year. Better than anticipated efficiencies allowed the rig to drill 12 wells during the year. Nine of these wells were completed in 2013 and the final three wells were completed in January 2014. All 12 wells proved very successful, and with several being drilled in oilier parts of the play, we saw a significant jump in oil production as compared to the first half of 2013.



Oil Sales

Oil revenue was $5.0 million for the first half of 2014 as compared to $2.4 million for the same period last year. The $2.6 million increase was primarily a result of a 92% increase in daily production attributable to successful drilling in 2013, in addition to an 8% increase in average price, excluding commodity contracts. Gas Sales Gas revenue for the first half of 2014 was $14.2 million as compared to $9.7 million for the same period last year. The $4.5 million increase was primarily due to a 34% increase in average price, excluding commodity contracts, in addition to a 9% increase in daily production attributable to successful drilling in 2013. Price increases were largely consistent with the broad improvement of gas prices in the North American market.



NGL Sales

NGL revenue for the first half of 2014 was $23.0 million as compared to $17.4 million for the same period last year. The $5.6 million increase was a result of a 19% increase in average price, excluding commodity contracts, in addition to an 11% increase in daily production. The higher realized prices were largely due to increases in NGL index prices at the Conway, KS hub. The increase in NGL production was attributable to successful drilling in 2013.



Production Expenses

Production expenses were $8.3 million for the first half of 2014 compared to $7.0 million for the same period last year. The $1.3 million increase was due primarily to a 12% increase in daily production in the current year as compared to the same period last year. On a per unit-of-production basis, production expenses per boe increased from $6.14 in the first half of 2013 to $6.48 in the first half of 2014 primarily due to increased workover expenses.



Production Taxes

The company normally pays a base rate of 7% in production taxes based on realized oil, NGL and natural gas sales. Production taxes were $1.4 million for the first half of 2014 compared to $1.8 million for the same period last year. As a percentage of net sales, our production tax rates averaged 3.4% and 6.3% in the first half of 2014 and 2013, respectively. The average production tax rate for the first half of 2014 was lower than the same period last year due to new horizontal wells drilled in 2013 qualifying for a 48-month six percent Oklahoma production tax rate reduction. During the three months ended December 31, 2013, prior period errors were identified relating to the recording of tax rebates from the Oklahoma Tax Commission for production activities in 2009, 2010 and 2011, together with the related recognition of deferred income tax assets and expenses. The final settlement with the OTC related to the prior period tax rebates resulted in a $0.8 million decrease of the estimated liability in the first half of 2014, which reduced 2014 production tax expense. Excluding this $0.8 million adjustment, production taxes would have been 5.2% of realized oil, NGL and natural gas sales.



Commodity Contracts

For the first half of 2014, Equal had a net loss on commodity contracts of $2.6 million as compared to a net gain of $0.2 million for the same period last year. The significant decrease in profit is due to higher commodity prices relative to contracted hedges. Equal made cash payments on settled derivatives of $1.8 million in the first half of 2014, as compared to $0.1 million for the same period last year. At June 30, 2014, all the derivative contracts were recorded at their fair value, which was a net liability of $1.1 million, an increase of $0.8 million from the $0.3 million of net liability recorded at December 31, 2013.



General and Administrative Expense

General and administrative expense was $6.6 million for the first half of 2014 as compared to $7.0 million for the same period last year, excluding discontinued operations. The $0.4 million decrease was due primarily to the decrease in share-based compensation costs due to 2013 forfeitures. On a per unit-of production basis, the general and administrative expense per boe was favorable at $5.13 for the first half of 2014 compared to $6.16 for the first half of 2013. This reduction in costs per boe is due to increased production and lower costs. Page 23 of 39



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Depletion of Oil and Gas Properties

Depletion of oil and gas properties was $9.2 million, in the first half of 2014 as compared to $8.9 million for the same period last year. The $0.3 million decrease in depletion expense was attributable to increased production. On a per unit-of production basis, the depletion expense per boe was $7.17 for the first half of 2014 compared to $7.83 for the same period last year.



Interest Expense

Interest expense was $1.7 million for the first half of 2014 as compared to $1.9 million for the same period last year, and is comprised of interest on the CAD $45 million, 6.75% convertible debentures and fees associated with the unused CAD $125 million credit facility.



Income Tax Provision

The provision for income tax expense was $3.3 million in the first half of 2014 as compared to $0.7 million for the same period last year. The increase in income tax expense relates primarily to increased earnings during the current period compared to the same period in the previous year. The effective income tax rate differs from the statutory rate of 35% due to permanent differences, the change in valuation allowance, and AMT credits.



LIQUIDITY & CAPITAL RESOURCES

Development activities and acquisitions may be funded internally through cash flow from operations or through external sources such as debt or the issuance of equity. The Company finances its operations and capital activities primarily with funds generated from operating activities, but also through the issuance of shares, debentures and borrowing from its credit facility. The Company believes its sources of cash, including bank debt and funds from operations, will be sufficient to fund its operations and capital expenditure program as projected for 2014. However, Equal's ability to fund its operations will also depend upon operating performance and is subject to commodity prices and other economic conditions which may be beyond its control. Therefore, the Company will closely monitor commodity prices and adjust the 2014 capital expenditure program accordingly. The Company operates substantially all of its drilling programs and as a result, can control the pace and targets of its capital spending to react quickly to changes in cash flow to ensure ongoing financial flexibility. See Note 13, Subsequent Events, for discussion regarding the acquisition of all of the Company's issued and outstanding common shares on July 31, 2014, which also resulted in the cancellation of the bank credit facility and unwinding of all of the company's crude oil and natural gas commodity derivative contracts, among other significant changes.



Equal's capital structure at June 30, 2014, was as follows:

June 30, 2014 Capitalization (in thousands, except percentages) Amount % Adjusted working capital surplus (1) $ (25,243 )



-12 %

Convertible debentures 42,174



20 %

Shares issued, at market (2) 195,636

92 % Total capitalization $ 212,568 100 % (1) See working capital discussion below



(2) The market price of Equal's shares on June 30, 2014 was $5.42 per share.

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-------------------------------------------------------------------------------- Table of Contents Cash Flow from Operating, Investing and Financing Activities (in thousands)



Six months ended June 30,

2014 2013 Cash provided by operating activities - continuing operations $ 22,373$ 18,301 Cash used in operating activities - discontinued operations (287 ) (2,756 ) Cash provided by operating activities



$ 22,086$ 15,545

Cash used in investing activities



$ (10,329 )$ (14,644 )

Cash used in financing activities



$ (1,805 )$ (3,559 )

The $6.5 million increase in cash provided by operating activities was primarily due to a $4.3 million increase in net income from continuing operations. The $4.3 million decrease in cash used in investing activities was primarily due to the decrease in drilling activity, as compared to the same period last year. The $1.8 million decrease in cash used in financing activities was due to cash dividends paid in each of the first two quarters of 2013, for which there was only one dividend payment during the current year.



Long-term Debt

Other than the convertible debentures described below under "Convertible Debentures," Equal had no outstanding long-term debt at June 30, 2014. The Company's syndicated bank credit facility is CAD $125.0 million and is comprised of a CAD $105.0 million revolving credit facility and a CAD $20.0 million operating credit facility, all of which are secured against the borrowing base of the Oklahoma assets and can be borrowed against in either Canadian dollars or the United States dollar equivalent.



As further described in Note 13, Subsequent Events, on July 31, 2014, the Company was acquired by and became a wholly owned subsidiary of Petroflow Energy Corporation. See Note 13, Subsequent Events, for further information.

Working Capital

The adjusted working capital and net debt (debt less adjusted working capital), was $16.9 million and $29.5 million at June 30, 2014 and December 31, 2013, respectively. This increase in adjusted working capital was primarily due to cash provided by operations. Adjusted Working Capital (in thousands) June 30, 2014 December 31, 2013 Current assets $ (38,786 ) $ (30,263 ) Current liabilities 14,637 17,753 Current liability related to commodity contracts (1,094 ) (341 ) Adjusted working capital (25,243 ) (12,851 ) Convertible debentures 42,174 42,309 Net debt (debt less adjusted working capital) $ 16,931 $ 29,458 Convertible Debentures As of June 30, 2014, Equal had CAD $45.0 million or US $42.2 million of 6.75% convertible debentures (EQU.DB.B) outstanding. The 6.75% convertible debentures are convertible into common shares of Equal and had a conversion price of CAD $8.47 per common share as of June 30, 2014. Each CAD $1,000 principal amount of EQU.DB.B debentures is convertible into Equal common shares. The total outstanding amount is convertible into approximately 5.3 million Equal common shares and matures on March 31, 2016. Page 25 of 39



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Stockholders' Equity

Equal's capital structure is comprised of common shares and convertible debt. Equal also has common shares outstanding under its stock option plan and restricted share plan. The following table outlines the outstanding equity instruments:

Outstanding Equity Data (in thousands) June 30, 2014 December 31, 2013 Shares 36,095 35,806 Share options 289 289 Restricted shares 674 981 6.75% convertible debentures (CAD$1,000 per debenture) $ 42,174 $ 42,309



As a result of voting at the Company's shareholders meeting in May 2013, no shares are currently available for future grants under the Company's equity plans for its employees.

As further described in Note 13, Subsequent Events, on July 31, 2014, the Company was acquired by and became a wholly owned subsidiary of Petroflow Energy Corporation. See Note 13, Subsequent Events, for further information.

OUTLOOK

Equal increased its capital program in mid-May and incurred incremental general and administrative costs in accordance with the Arrangement Agreement through July 31, 2014. Although Equal has pursued selective drilling during this period, we have maintained cost discipline and a strong balance sheet. We believe our sources of cash, including cash on hand, cash flow and our undrawn credit facility will be sufficient to fund our operations and capital expenditures for at least the next 12 months.



Commitments and Contingencies

For a discussion of our commitments and contingencies, please refer to Note 11 - Contingencies under Item 1 in this Quarterly Report, which is incorporated herein by reference.

Off Balance Sheet Arrangements

The Company did not have any off balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K at June 30, 2014, and December 31, 2013.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Certain of the Company's accounting policies are considered critical, as these policies are the most important to the depiction of the Company's financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain. A summary of the Company's significant accounting policies is included in Note 2 to the Company's consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2013, as well as in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in such Form 10-K, which summary is qualified by the updates set forth below. The updated disclosures set forth below have been included solely to clarify our actual treatment with respect to the applicable topics and do not reflect any change in accounting treatment relating thereto.



Impairment of Oil and Gas Properties

Under the full cost method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income taxes, may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves plus the cost of unproved properties not subject to amortization. Should capitalized costs exceed this ceiling, impairment is recognized. If natural gas or NGL prices decrease from current levels, we may incur full-cost ceiling write-downs, or additional DD&A, related to our oil and gas properties in future periods



Wells in Progress

Wells in progress represent the costs associated with wells that have not reached total depth or been completed as of period end. These costs are related to wells that are classified as both proved and unproved. Costs related to wells that are classified as proved are included in the depletion base. Costs associated with wells that are classified as unproved are excluded from the depletion base. The costs for unproved wells are then transferred to proved property when proved reserves are determined. Such costs then become subject to depletion. Page 26 of 39



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